Registration No. 333-76435
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 7
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 8
(Exact names of registrants as
specified in governing instruments)
3158 Redhill Avenue, Suite 120, Costa Mesa, California 92626-3416
(714) 662-5565
(Address and telephone number of principal executive offices)
DAVID N. SHAFER, ESQ.
WNC & Associates, Inc.
3158 Redhill Avenue, Suite 120, Costa Mesa, California 92626-3416
(714) 662-5565
(Name, address and telephone number of agent for service)
Copy to:
PAUL G. DANNHAUSER, ESQ.
Derenthal & Dannhauser
One Post Street, Suite 575, San Francisco, California 94104
(415) 981-4844
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
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 a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. ------
If this Form is a 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. ------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. ------
CALCULATION OF REGISTRATION FEE
<TABLE>
Proposed Proposed
Amount maximum maximum Amount of
Title of securities being offering aggregate registration
being registered registered price per unit offering price fee
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units of Limited
Partnership Interest.......50,000 Units $1,000 $50,000,000 $13,900
Fund Manager Guarantee of
Escrow Interest............ (1) (1) (1) (1)
- ----------------------------------------------------------------------------------------------------
<FN>
(1) The Fund Manager may guarantee that until $1,400,000 in subscription
proceeds are received, the subscribers will receive at least a 10% per annum
return on their subscription funds held in escrow. There is no separate payment
required of investors for this guarantee; the offering price and registration
fee are included in the amounts set forth for the Units of Limited Partnership
Interest being registered concurrently.
</FN>
</TABLE>
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SUBJECT TO COMPLETION
WNC HOUSING TAX CREDIT FUND VI, L.P.,
SERIES 7 and SERIES 8
Units of Limited Partnership Interest ("Units")
WNC Housing Tax Credit Fund VI, L.P., Series 7 and Series 8 will invest in
other entities owning low income apartment complexes. Federal tax law provides
tax credits to investors in low income apartment complexes. Investors in Units
can use these tax credits to reduce their own Federal income tax liabilities.
A purchase of Units involves risks (see "Risk Factors" on page ___),
including the following:
o The tax credit rules are complicated.
o The use of tax credits is limited.
o The tax credits may be the only material benefit from the Units.
o The transferability of the Units is limited. A market for Units probably
will not develop.
o WNC & Associates, Inc. alone will make all management decisions.
o Each apartment complex will be subject to mortgage indebtedness. If
mortgage payments are not made, the lender could foreclose on the
apartment complex.
o A Series will invest in a limited number of apartment complexes if the
Series does not raise much capital.
o WNC & Associates, Inc. will receive significant benefits regardless of how
well the Series perform.
================================================================================
Selling Commissions and
Price to Public Dealer Manager Fee Proceeds to Series
- --------------------------------------------------------------------------------
Per Unit......... $ 1,000 $ 90 $ 910
Total Minimum..... 1,400,000 126,000 1,274,000
Total Maximum.... 50,000,000 4,500,000 45,500,000
================================================================================
The Units are offered in two series by WNC Capital Corporation. WNC Capital
Corporation in turn is offering the Units through other broker-dealers which are
members of the NASD. The broker-dealers are not required to sell any specific
number of Units, but will use their best efforts to sell the Units.
Series 7 commenced its offering on the date of this Prospectus. Series 8
will commence its offering on a date to be identified in a supplement to this
Prospectus. No Units in a Series will be sold unless a minimum of $1,400,000 in
cash is received within one year from the start of the Series' offering. Each
Series will deposit its subscriptions in an escrow account with Southern
California Bank.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATIONS TO
THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY
OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN
INVESTMENT IN THIS PROGRAM IS NOT PERMITTED.
The information in this prospectus 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 is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of this Prospectus is __________, 1999
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TABLE OF CONTENTS
SUMMARY OF THE OFFERING........................................................9
The Series.................................................................9
The Fund Manager...........................................................9
Investment Objectives and Policies.........................................9
The Low Income Housing Tax Credit.........................................11
Risk Factors..............................................................13
Who Should Invest; Limitations on Use of Credits and Losses...............14
Estimated Use of Proceeds.................................................15
Management Compensation...................................................15
Conflicts of Interest.....................................................16
Fiduciary Responsibility..................................................17
Investment Protection Policies............................................17
Prior Performance Summary.................................................19
Federal Income Tax Considerations.........................................19
Profits and Losses, Tax Credits and Cash Distributions....................19
Summary of Certain Provisions of the Partnership Agreement................20
Transferability of Units..................................................21
Terms of the Offering and Plan of Distribution............................22
RISK FACTORS..................................................................23
Risks Related to Tax Credits..............................................23
Uncertainties as to Availability of Low Income Housing Tax Credits.......23
Possible Recapture of Low Income Housing Tax Credits ....................23
Limitations on Sales of Apartment Complexes..............................24
Limitations on Use of Low Income Housing Tax Credits.....................24
Availability and Recapture of Historic Tax Credits.......................25
Investment Risks..........................................................25
Risks of Government-Subsidized Housing Projects..........................25
Keen Competition for Investments.........................................26
Risks of Apartment Complexes Without Financing or Operating Subsidies....27
Risk of Unspecified Investments..........................................27
Risks Associated with Use of Leverage....................................28
Risks of Limited Diversification.........................................28
Lack of Series Control; Reliance on Local General Partners...............29
Net Worth of Local General Partners......................................29
Risks of Real Estate Ownership...........................................29
Risks of Purchase of Properties Under Construction.......................30
Risks of Investments Before the Sale of Units............................30
Risks of Loss of Loans Made to Local Limited Partnerships................30
Risks of Joint Investments...............................................30
Possibility of Uninsured Losses..........................................30
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Other Tax Risks...........................................................31
No Opinion of Counsel as to Certain Matters..............................31
No Ruling as to Tax Status of the Local Limited Partnerships.............32
Limitation on Losses from Passive Activities.............................32
Applicability of At Risk Rules...........................................32
Tax Liability on Sale of Apartment Complex...............................33
Alternative Minimum Tax Liability........................................33
Possibility of Audit.....................................................33
Possibility of Challenge to Tax Allocations of the Series and the Local
Limited Partnerships.................................................34
Possible Tax Liabilities in Later Years..................................34
Possibility of Challenge to Tax Treatment of Certain Expenditures........34
Changes in Tax Law Which Might Affect the Value of Tax Credits...........35
Possible Administrative or Judicial Interpretations of the Law...........35
State Income Tax Risks...................................................35
Series-Related Risks......................................................36
Lack of Liquidity of Investment..........................................36
Lack of Investor Control; Reliance on Fund Manager.......................36
Risks Related to Exercise of Investor Voting Rights......................36
Limitations on Fund Manager's Liability..................................36
Issuance of Units in Series..............................................37
Obligations for Capital Contributions....................................37
Possible Delays in Obtaining Financial Data..............................38
Lack of Operating History................................................38
Year 2000 Issues ........................................................38
WHO SHOULD INVEST;
LIMITATIONS ON USE OF CREDITS AND LOSSES......................................39
All Investors.............................................................39
Individual Investors......................................................39
Corporate and Other Entity Investors......................................41
Minimum State Suitability Requirements....................................43
Alabama, Alaska, Arizona, Arkansas, Indiana, Kansas, Kentucky,
Michigan, Mississippi, Missouri, New Hampshire, New Mexico, North
Carolina, North Dakota, Oklahoma, Oregon, Tennessee, Texas,
Vermont, Virginia and Wisconsin Requirements.........................44
Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia,
Hawaii, Idaho, Illinois, Louisiana, Maryland, Montana, Nevada, New
Jersey, Rhode Island, South Carolina, Utah, West Virginia and
Wyoming..............................................................44
California and Washington Requirements...................................44
Iowa, Massachusetts, Minnesota and South Dakota Requirements.............44
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Maine Requirements.......................................................44
Nebraska and Ohio Requirements...........................................45
Pennsylvania Requirements................................................45
ESTIMATED USE OF PROCEEDS.....................................................46
Deferred Installments.....................................................48
Business Development Plan................................................49
Prepayments and Temporary Investments....................................50
Policies as to Pledges of Promissory Notes...............................50
MANAGEMENT COMPENSATION.......................................................51
CONFLICTS OF INTEREST.........................................................57
Receipt of Fees and Other Compensation by the Fund Manager and its
Affiliates...............................................................57
Other Business Activities of the Fund Manager and its Affiliates..........57
Competition with the Fund Manager and its Affiliates with Respect to the
Purchase or Ownership of Properties......................................58
Other Transactions with Developers, Local General Partners, Lenders and
Joint Venturers..........................................................59
Representation in Tax Audit Proceedings...................................59
Distribution of Units.....................................................59
Joint Investments.........................................................59
Resolution of Conflicts of Interest.......................................60
Lack of Separate Representation...........................................60
Organizational Diagram....................................................61
FIDUCIARY RESPONSIBILITY......................................................61
INVESTMENT OBJECTIVES AND POLICIES............................................64
Principal Investment Objectives...........................................64
Investment Policies.......................................................67
Investment Criteria......................................................67
Eligibility for Low Income Housing Tax Credits...........................69
Historic Tax Credits.....................................................69
Types of Properties......................................................69
Location of Properties...................................................70
Number of Investments....................................................70
Timing of Investments....................................................70
Payment for Investments..................................................71
The Local General Partners................................................72
Financial Condition and Experience of Local General Partners.............72
Compensation of Local General Partners...................................73
Withdrawal of Local General Partners.....................................74
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Terms of the Local Limited Partnership Agreements.........................74
Construction Obligation..................................................74
Operating Guarantees.....................................................74
Protection Against Reduction or Loss of Tax Credits......................74
Rights of Limited Partner................................................75
Role of SLP Affiliate....................................................76
Interests in Profits, Losses and Distributions...........................77
Joint Investments.........................................................78
Use of Leverage...........................................................78
Sale or Other Disposition of Investments..................................80
Reserves..................................................................81
Other Policies............................................................81
THE LOW INCOME HOUSING TAX CREDIT.............................................83
Summary...................................................................83
Qualified Properties......................................................86
Maximum Amount of Credit..................................................91
Credits Subject to State Allocation.......................................92
Utilization of the Low Income Housing Tax Credit .........................96
Recapture of Low Income Housing Tax Credits...............................97
State Low Income Housing Tax Credits......................................99
OTHER GOVERNMENT ASSISTANCE PROGRAMS..........................................99
RD Financing and Rural Rental Assistance Programs........................100
HOME Program.............................................................101
State and Local Bond Programs............................................102
HUD Section 8 Rental Assistance Programs.................................104
MANAGEMENT...................................................................105
The Fund Manager.........................................................105
Statement of Purpose....................................................108
Syndicated Partnerships.................................................109
Change in Management.....................................................110
WNC Capital Corporation..................................................111
WNC Management, Inc......................................................111
PRIOR PERFORMANCE SUMMARY....................................................112
Public Programs Sponsored................................................113
Private Programs Sponsored...............................................117
Additional Information...................................................120
FEDERAL INCOME TAX CONSIDERATIONS............................................122
Introduction.............................................................122
Summary..................................................................122
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Opinion of Counsel......................................................122
Classification as a Partnership.........................................122
Tax Treatment of Investors..............................................122
Historic Tax Credits and Recapture......................................123
Series Allocations......................................................123
Series Deductions.......................................................124
Sale of Apartment Complexes.............................................124
Transfers of Units......................................................124
Liquidation.............................................................125
Section 754 Election....................................................125
Opinion of Counsel.......................................................125
Classification as a Partnership..........................................128
Investment in Local Limited Partnerships.................................130
Tax Treatment of Investors...............................................131
Limitations on Losses and Credits from Passive Activities................132
A. General Limitations.................................................132
B. Exception for Low Income Housing Tax Credits and Historic
Tax Credits.........................................................134
1. Individuals................................................134
2. Other Investors............................................139
Historic Tax Credit......................................................140
Historic Tax Credit Recapture............................................141
General Business Tax Credit Limitations..................................142
Tax Basis for the Units..................................................143
Application of At Risk Limitations.......................................144
Series Allocations.......................................................145
Allocations Before Admission.............................................148
Basis of Local Limited Partnerships in Their Apartment Complexes.........149
Depreciation.............................................................150
Deductibility of Fees....................................................150
A. Development Fees and Acquisition and Investment Management Fees.....150
B. Ongoing Management Fees.............................................151
Organization and Offering Expenses.......................................151
Start-Up Expenditures....................................................152
Sales or Exchanges of Local Limited Partnership Property; Depreciation
Recapture...............................................................152
Tax Liabilities in Later Years...........................................153
Treatment of Mortgage Loans..............................................154
Sales or Exchanges of Units and Local Limited Partnership Interests;
Transfers by Gift or at Death...........................................155
Dissolution and Liquidation of a Series or Local Limited Partnership.....156
Elections................................................................156
Transferability - Termination of a Series................................157
Profit Motive............................................................157
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Other Important Tax Considerations.......................................157
A. Tax Rates...........................................................158
B. Alternative Minimum Tax.............................................160
C. Deduction of Investment Interest....................................163
Tax Returns and Tax Information..........................................164
A. Audit and Assessment Procedure......................................164
B. Imposition of Penalties.............................................164
Document and Information Return Penalties...........................164
Accuracy-Related and Fraud Penalties................................165
Tax Shelter Registration.................................................166
Changes in Tax Law.......................................................167
STATE AND LOCAL TAX CONSIDERATIONS...........................................167
PROFITS AND LOSSES, TAX CREDITS
AND CASH DISTRIBUTIONS.......................................................168
Tiered Investment........................................................168
Cash Available for Distribution..........................................168
Sale or Refinancing Proceeds.............................................169
Capital Accounts.........................................................169
Allocations of Profits and Losses and Tax Credits........................170
Determination of Distributions and Allocations Among Investors...........173
Allocations for Community Reinvestment Act Purposes......................173
SUMMARY OF CERTAIN PROVISIONS OF THE
PARTNERSHIP AGREEMENT........................................................173
Default by Investor in Payment of the Deferred Capital Contribution......173
Liability of Investors to Third Parties..................................175
Dissolution and Liquidation..............................................175
Removal of WNC & Associates, Inc.........................................175
Voting Rights............................................................176
Meetings.................................................................177
Books and Records........................................................177
TRANSFERABILITY OF UNITS.....................................................178
Transfer of Units by or to California Residents..........................180
REPORTS......................................................................181
TERMS OF THE OFFERING AND PLAN OF DISTRIBUTION...............................182
Issuance of Units in Series..............................................183
Underwriting Arrangements................................................183
Volume Discounts.........................................................185
Purchases by Affiliates and Designated Investors.........................186
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How To Subscribe.........................................................188
Escrow Arrangements......................................................189
SALES MATERIAL...............................................................190
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION.......................................................190
Year 2000 Issues.........................................................192
Business Computer Systems...............................................192
Outside Vendors.........................................................193
Personal Computers......................................................193
LEGAL MATTERS................................................................193
EXPERTS......................................................................193
FURTHER INFORMATION..........................................................194
GLOSSARY.....................................................................194
Financial Statements........................................................FS-i
Exhibit A - Prior Performance Tables.........................................A-1
Exhibit B - Partnership Agreement............................................B-1
Exhibit C - Investor Form....................................................C-1
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SUMMARY OF THE OFFERING
THIS SUMMARY OUTLINES THE MAIN POINTS OF THE OFFERING. THIS SUMMARY DOES
NOT REPLACE A FULL AND CAREFUL READING OF THE PROSPECTUS. THIS SUMMARY IS
QUALIFIED BY THE REMAINDER OF THE PROSPECTUS. ALL PROSPECTIVE INVESTORS SHOULD
READ THE PROSPECTUS IN ITS ENTIRETY.
The Series
WNC Housing Tax Credit Fund VI, L.P., Series 7 and Series 8 are California
limited partnerships. Series 7 and Series 8 have been organized as limited
partnerships because that structure permits the pass through of tax benefits to
investors. The principal place of business of Series 7 and Series 8 is that of
the Fund Manager: 3158 Redhill Avenue, Suite 120, Costa Mesa, CA 92626.
The telephone number is 714-662-5565.
The Fund Manager
The Fund Manager is WNC & Associates, Inc., a California corporation. WNC &
Associates, Inc.'s address is 3158 Redhill Avenue, Suite 120, Costa Mesa,
California 92626. The telephone number is 714-662- 5565. Management of WNC &
Associates, Inc. will be responsible for the management of each Series. A
description of those people is included under "Management." The financial
statements of WNC & Associates, Inc. are included under "Financial Statements."
Investment Objectives and Policies
Each Series' principal investment objective is to generate tax credits for its
investors over a period of 10 to 12 years. To do this each Series will acquire
interests in apartment complexes which qualify for low income housing tax
credits under Section 42 of the Internal Revenue Code. Some apartment complexes
may qualify for historic tax credits under Section 47 of the Code.
The Series will not directly purchase apartment complexes. Rather, each Series
will invest in other limited partnerships or limited liability companies ("Local
Limited Partnerships") owning apartment complexes. The developers of the
apartment complexes will not be affiliates of WNC & Associates, Inc.
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Generally, the developer or an affiliated company will be the general partner
(the "Local General Partner") of the Local Limited Partnership.
Each Series will try to invest in a geographically-diversified portfolio of
apartment complexes. The apartment complexes will be located in small cities and
suburban communities or in some cases in larger urban areas. Some of the
properties will be rented only to senior citizens, and the balance of the
properties will be rented to a mix of senior citizens, families and others. None
of the apartment complexes has been selected yet.
A Local Limited Partnership generally will borrow between 30% and 80% of the
acquisition and development cost of its apartment complex. The Local Limited
Partnership will use most of its funds to pay construction costs and to
establish working capital reserves. The Local Limited Partnership will use the
balance of its funds to pay development fees to the Local General Partner. Some
of the Local Limited Partnerships will benefit from additional government
subsidy programs such as mortgage financing or rental assistance, and some will
not.
The low income housing tax credit rules impose penalties if apartment complexes
are sold before the sixteenth year. Consequently, it is hard to tell when or
whether a Series will be able to sell an apartment complex. The rules of other
government subsidy programs also can limit the sale of apartment complexes. And
it can be hard to sell buildings like the apartment complexes. Each Series will
try to liquidate its investments after 15 years, but whether it can and for how
much is impossible to predict.
See "Investment Objectives and Policies."
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The Low Income Housing Tax Credit
Congress added Section 42 to the Internal Revenue Code when it passed the Tax
Reform Act of 1986. Section 42 awards valuable low income housing tax credits to
investors in low income housing. These tax credits are designed to attract
private capital to build and preserve low income housing. They are an integral
element of the nation's low income housing program.
The Federal government has provided tax benefits to investors in low income
housing for more than three decades. Tax credits are the latest component of
that policy. Code Section 42 gives taxpayers an alternative to paying Federal
income taxes. Taxpayers can invest in a Series and receive tax credits which
will directly reduce their taxes each year for 10 to 12 years.
Code Section 42 and the rules the IRS has adopted to administer these tax
credits are extremely complicated. The most important of the laws and rules
define:
o which apartment complexes qualify for low income
housing tax credits,
o the total amount of low income housing tax credits
each state can allocate,
o how each state allocates the low income housing tax
credits among the developers who apply for them,
o which tenants can live in the apartment complexes,
o what rents can be charged to those tenants, and
o which costs of construction or rehabilitation of the apartment complexes
can generate low income housing tax credits.
These laws and rules are described in the section of this Prospectus entitled
"The Low Income Housing Tax Credit." WNC & Associates, Inc. is experienced in
working with these laws and rules, and will do its best to follow them. However,
no one is guaranteeing that a Series will comply with all of the laws and rules.
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Other rules govern the investors' ability to claim tax credits on their
individual tax returns. For example, natural persons generally can only use tax
credits to shelter:
o income from other limited partnerships and other similar sources, and
o up to $25,000 of other income.
See "Who Should Invest; Limitations on Use of Credits and Losses" and "Federal
Income Tax Considerations."
The low income housing tax credit rules include a complicated concept called
"recapture." Congress created this concept to ensure that apartment complexes
are rented as low income housing for at least 15 years, even though the tax
credits are claimed over 10 years. Recapture applies to the accelerated
portion of the low income housing tax credits, as follows:
Year of Event Giving Portion
Rise to Recapture Recaptured
-------------------- ----------
1-11 5/15
12 4/15
13 3/15
14 2/15
15 1/15
Interest is also imposed on the amount recaptured. The dollar amount recaptured
will be additional taxes owed in the year of recapture.
See "The Low Income Housing Tax Credit."
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Risk Factors
An investment in the Series involves risks. The "Risk Factors" section of this
Prospectus contains a detailed discussion of the most important risks. Please
refer to that section of the Prospectus for a discussion of:
o Risks Related to Low Income Housing Tax Credits:
* The low income housing tax credit rules are extremely complicated.
Noncompliance with these rules results in the loss of future tax credits and the
fractional recapture of tax credits already taken.
* The use of tax credits by investors can be limited.
* The Local Limited Partnerships may be unable to sell the apartment
complexes at a profit. Accordingly, a Series may be unable to distribute any
cash to its investors. Tax credits may be the only benefit from an investment in
a Series.
o Investment Risks:
* If a Series does not raise much capital it will invest in a limited number
of apartment complexes. Such limited diversity means that each apartment complex
will have a great impact on the Series' ability to satisfy its investment
objectives.
* Each Series will be competing with other purchasers for apartment
complexes.
* Each apartment complex will be subject to mortgage indebtedness. If a
Local Limited Partnership failed to pay its mortgage it could lose its apartment
complex in foreclosure. Foreclosure would result in (i) a loss of future tax
credits (if the foreclosure occurred during the first 10 years), (ii) a
fractional recapture of prior tax credits (if the foreclosure occurred during
the first 15 years), and (iii) a loss of the Series' investment in the apartment
complex.
* A Series will be a limited partner or non- managing member of each Local
Limited Partnership.
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Accordingly, each Series will have very limited rights with respect to
management of the Local Limited Partnerships. Each Series will rely totally on
the managers of the Local Limited Partnerships.
o Other Tax Risks:
* The IRS may audit a Series or a Local Limited Partnership and challenge
the tax treatment of various tax items. The amount of tax credits and tax losses
allocated to the investors could be reduced if the IRS were successful in such a
challenge.
o Series-Related Risks:
* No trading market for the Units will develop. Investors may be unable to
sell their Units and should consider their Units to be a long-term investment.
* WNC & Associates, Inc. will exercise all management rights of each
Series. The investors will not participate in the management of the Series.
Who Should Invest;
Limitations
on Use of Credits
and Losses
Natural persons should invest in a Series only if they have Federal income tax
liabilities against which the tax credits can be applied. In most cases, the
annual amount of tax credits that a natural person can use is limited to the tax
liability due on the person's last $25,000 of taxable income. For example, a
person in the 36% Federal tax bracket could use up to a maximum annual amount of
$9,000 in tax credits ($25,000 x 36% = $9,000). Generally, a natural person can
claim a Series' tax losses only in very limited circumstances.
Closely-held and personal service corporations are subject to other limits on
the use of tax credits and tax losses.
For all investors:
o Tax credits cannot be used to reduce the Federal alternative minimum tax.
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o Tax credits are subject to the general limitations on the use of all
business tax credits.
An IRA, Keogh or other retirement plan cannot buy Units.
See "Who Should Invest; Limitations on Use of Credits and Losses."
Estimated Use of Proceeds
Each Series will invest approximately 75% of its capital in Local Limited
Partnerships, will hold 3% in working capital reserves (i.e., amounts set aside
for contingencies and to pay administrative expenses), and will use the balance
to pay fees and expenses to WNC & Associates, Inc., its affiliates and others.
See "Estimated Use of Proceeds."
Management Compensation
WNC & Associates, Inc. will manage the business of each Series. Each Series will
pay WNC & Associates, Inc. and its affiliates compensation for various
management services. The section of this Prospectus entitled "Management
Compensation" details the exact terms of each item of compensation. The
following are the most significant items:
o WNC Capital Corporation will receive a dealer manager fee of up to 2% of the
capital raised and selling commissions of up to 7% of the capital raised.
All or almost all of this compensation will be reallowed to non-affiliated
broker-dealers.
o WNC & Associates, Inc. will receive a fee of up to 7% of the capital raised
for acquisition and investment management services. WNC & Associates, Inc.
will receive (i) a 4% fee in exchange for its agreement to pay all of the
"organizational and offering expenses" (i.e., expenses in connection with
the formation of each Series and the sale of the Units) and (ii) a 2%
fee in exchange for its agreement to pay all of the "acquisition expenses"
(i.e., expenses related to the selection and acquisition of Local Limited
Partnerships).
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o WNC & Associates, Inc. will receive an annual fee of up to 0.2% of
"invested assets" (i.e., the sum of a Series' cash investments in Local
Limited Partnerships plus the mortgage debt encumbering the apartment
complexes).
o WNC & Associates, Inc. will receive 0.1% of the tax credits.
There are a number of other, smaller items of compensation and reimbursement
which WNC & Associates, Inc. and its affiliates may receive. See "Management
Compensation."
Conflicts of Interest
WNC & Associates, Inc. and its affiliates have conflicts of interest in their
organization and management of the Series. The "Conflicts of Interest" section
of the Prospectus contains a discussion of the most important conflicts. Please
see that section of the Prospectus for a discussion of:
o The compensation to WNC & Associates, Inc. and its affiliates is not the
result of arm's-length negotiations. The manner in which the Series'
investments are purchased, managed and sold will determine the amount of
some compensation. As a result, a Series (i) might make investments which
are less desirable to the investors but more desirable to WNC & Associates,
Inc. and its affiliates, or (ii) might retain an investment at a time when
a sale of the investment could generate distributions to the investors.
o WNC & Associates, Inc. and its affiliates must allocate their time between
the activities of each Series and the other activities of WNC & Associates,
Inc. and its affiliates. Although not anticipated, WNC & Associates, Inc.
and its affiliates might be unable to fully discharge their duties to each
Series.
o WNC & Associates, Inc. and its affiliates have some interests that are
inconsistent with those of the investors. For example, WNC & Associates,
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Inc. can engage in activities without providing the benefits of such
activities to the Series. As a result, an affiliate might purchase an
investment which is suitable for purchase by a Series.
Fiduciary Responsibility
WNC & Associates, Inc. is a fiduciary to each Series. This means that WNC &
Associates, Inc. owes the investors the utmost good faith and loyalty. However,
each Series will exculpate WNC & Associates, Inc. from liability and will
indemnify WNC & Associates, Inc. for its actions, provided the actions:
o did not constitute negligence or misconduct, and
o were the result of a course of conduct which WNC & Associates, Inc.
determined was in the best interests of the Series.
As a result an investor's ability to pursue an action against WNC &
Associates, Inc. or its affiliates is diminished. See "Fiduciary
Responsibility."
Investment Protection Policies
Each Series will try to protect its investments in a number of ways. See
"Investment Objectives and Policies" for a further discussion of these policies:
o Staged Pay-In. The most uncertain stages of an apartment complex occur
during construction and rent-up. Each Series will stage its capital
payments to each Local Limited Partnership. Capital payments will be due
when certain conditions regarding construction or rental of apartments are
satisfied. In this way the Series will risk as little capital as is
possible in the most uncertain stages of an apartment complex.
o Construction Obligations. The Local General Partners will agree to complete
construction in a timely manner. The Local General Partners will also agree
to provide all funds needed through completion of construction, after
applying mortgage loan proceeds and the Series' capital contribution.
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o Credit "Adjuster". In the event the tax credits actually allocated to a
Series are less than the amount agreed to by the Series and the Local
General Partners, (i) the Local Limited Partnership will reduce the Series'
capital contribution or (ii) the Local General Partners will make a payment
to the Series.
o Operating Deficit Guarantees. The Local General Partners will fund any
operating deficits for a minimum of three years following completion of
construction. Generally, the limit on this guarantee will be one year's
operating expenses, plus debt payments.
o Voting Rights. The Series will have the right to approve or disapprove
the sale or refinancing of the apartment complexes.
o Repurchase of Local Limited Partnership Interest. The Local General
Partners will repurchase the Series' interest in a Local Limited Partnership
if the Local Limited Partnership fails to: (i) receive an allocation of low
income housing tax credits; (ii) place the apartment complex in service in a
timely manner; (iii) obtain permanent mortgage loan financing; or (iv)
remain eligible for low income housing tax credits during the period when
the Series is required to make its capital contributions.
WNC & Associates, Inc. intends to include these provisions in the
partnership agreement of each Local Limited Partnership. However, WNC &
Associates, Inc. may agree to eliminate one or more of these provisions. There
can be no guarantee that these policies will protect a Series's investment.
Protection of a Series' investment depends on the financial strength of the
Local General Partners and the liquidity of their net worth. See "Risk Factors -
Investment Risks - Net Worth of Local General Partners." If any Local General
Partner fails to meet his obligations, the remedy of a Series might be limited
to removing the Local General Partner as general partner of the Local Limited
Partnership.
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Prior Performance Summary
Through December 31, 1998 WNC & Associates, Inc. and its affiliates have raised
equity as follows:
o more than 13,200 investors,
o more than 560 properties,
o more than 22,000 apartment units located in 40 states and the U.S. Virgin
Islands,
o more than $960,000,000 in aggregate acquisition costs.
The sections of this Prospectus entitled "Prior Performance Summary" and
"Management" contain discussions of all of the prior real estate investment
programs in which WNC & Associates, Inc. and its affiliates have been involved.
The Prior Performance Tables included as Exhibit A to this Prospectus contain
statistical data regarding the performance of the more recent of these prior
investment programs.
Federal
Income Tax
Considerations
The section of this Prospectus entitled "Federal Income Tax Considerations"
includes a discussion of numerous Federal income tax issues pertinent to the
Series. That section also contains a description of the Federal income tax legal
opinions that the Series will receive.
Profits and Losses,
Tax Credits and
Cash Distributions
Generally, 99.9% of the tax credits, profits and losses of a Series are
allocated to its investors and 0.1% to WNC & Associates, Inc. A Series' cash
available for distribution (which generally is the difference between the
Series' cash receipts from the on-going rental operations of its investments and
the Series' expenses), if any, will be distributed 99.9% to its investors and
0.1% to WNC & Associates, Inc. A Series' sale or refinancing proceeds (which
generally means the proceeds that the Series receives from the liquidation of
its investments, after the payment of the related expenses) will be distributed
entirely to its investors until they receive:
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(i) to the extent not already provided by any distributions of sale or
refinancing proceeds, a return of their investment in the Series, and
(ii) to the extent not already provided by tax credits and distributions, an
annual, cumulative, non-compounded return on their unreturned investment equal
to 11% through December 31, 2010, and 6% for the balance of the Series' term.
The balance may be used to pay a 1% sales fee to WNC & Associates, Inc., and
then distributed 90% to the investors and 10% to WNC & Associates, Inc.
The section of this Prospectus entitled "Profits and Losses, Tax Credits and
Cash Distributions" contains further detail regarding the Series's allocation
and distribution policies. For a description of the expected allocation and
distribution policies of the Local Limited Partnerships, see "Investment
Objectives and Policies Terms of the Local Limited Partnership Agreements."
Summary of
Certain Provisions
of the Partnership
Agreement
The First Amended and Restated Agreement of Limited Partnership included as
Exhibit B is the governing document for each Series. That Partnership Agreement
governs the relationship between the investors and WNC & Associates, Inc. It is
a complex legal document. Portions of the Partnership Agreement are summarized
throughout the Prospectus, particularly under "Summary of Certain Provisions of
the Partnership Agreement," "Transferability of Units" and "Reports."
Investors should particularly be aware of the following terms of the Partnership
Agreement:
o Investors owning more than 50% of the Units in a Series can take the
following actions with respect to the Series:
* amend the Partnership Agreement,
* remove WNC & Associates, Inc. and elect its replacement,
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* approve or disapprove the sale of all or substantially all of the
assets of the Series other than in connection with a dissolution of the
Series, and
* approve the dissolution of the Series.
Decisions made by the majority of investors will bind all investors.
o Each Series is organized as a separate California limited partnership.
o In the opinion of WNC & Associates, Inc., the merger or combination of the
Series with another entity is inappropriate. The Partnership Agreement
imposes strict limitations on the ability of a Series to be merged or
combined with another entity.
o No investor will have any control over the business of his Series or any
right to act in the Series name.
o The books and records of each Series are kept at the Series' principal
office (3158 Redhill Avenue, Suite 120, Costa Mesa, California). An investor
may examine his Series' books and records at any and all
reasonable times.
Transferability of Units
Investors may transfer their Units, except where the transfer would result in
adverse tax consequences. Investors may not transfer Units to a foreign person
or a tax-exempt entity. No market will exist for the Units. No one can say
whether an investor who wishes to sell his Units will be able to find someone to
purchase them or whether the price will be acceptable to the seller.
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Terms of the
Offering and Plan
of Distribution
The Units are offered in two Series on an all-or-none minimum, best-efforts
maximum basis, which means that:
o no one is guaranteeing that any specified amount of capital will be raised,
o no Units in a Series will be sold unless at least $1,400,000 in cash is
raised, and
o as much as $25,000,000 in Units may be sold by each Series.
WNC & Associates, Inc. will decide in its discretion when to terminate Series 7
and commence Series 8. See "Terms of the Offering and Plan of Distribution."
Each Series will place subscription funds in an escrow account until $1,400,000
in cash is raised by the Series. After $1,400,000 in cash is raised by a Series,
the Series will admit subscribers as limited partners every month or so until
the offering ends. The last possible offering date is two years from the date of
this Prospectus.
Most investors must purchase a minimum of five Units ($5,000). Some investors
may purchase a minimum of two Units ($2,000). After an investor has purchased
the required minimum number of Units in a Series, he may make investments in
increments of $1,000 in the same or the other Series.
See "Terms of the Offering and Plan of Distribution."
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RISK FACTORS
The purchase of Units involves a number of significant risk factors. Some of
the risk factors that prospective purchasers should consider are:
Risks Related to Tax Credits
EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY READ AND UNDERSTAND THIS SECTION
AND THE SECTION ENTITLED "THE LOW INCOME HOUSING CREDIT" TO DETERMINE WHETHER AN
INVESTMENT IN THE FUND IS SUITABLE FOR HIM.
Uncertainties as to Availability of Low Income Housing Tax Credits. Each
Series will acquire an interest in apartment complexes to be rented to low
income tenants. Each Series expects to claim low income housing tax credits for
each apartment complex. However, if an apartment complex does not satisfy the
requirements of Internal Revenue Code Section 42, then (i) the apartment complex
will not be eligible for tax credits, or (ii) the available tax credits will be
less than expected. See "The Low Income Housing Tax Credit."
An apartment complex cannot comply with Code Section 42 until it is placed
in service. In many instances a Series will acquire an apartment complex which
is still under construction. If so, the Series would be relying only upon
guarantees and representations of the Local General Partners that the apartment
complex will satisfy the Code Section 42 requirements. If it ultimately did not,
the Series would not receive low income housing tax credits from the investment.
The Local General Partners will calculate the amount of the low income
housing tax credits. No opinion of counsel will cover the calculation of the
amount of tax credits. The IRS could challenge the amount of the tax credits
claimed for any apartment complex. See "The Low Income Housing Tax Credit." A
successful challenge by the IRS would decrease the amount of the tax credits
from the amount paid for by the Series.
A delay in the completion of an apartment complex might cause a reduction in
anticipated low income housing tax credits.
Possible Recapture of Low Income Housing Tax Credits. Apartment complexes
must comply with Code Section 42 for a 15-year compliance period. Tax credits
will be recaptured (with interest) to the extent that an apartment complex is
not rented as low income housing or in some other way does not satisfy the
requirements of Code Section 42 during the 15-year compliance period. For
example, recapture (with interest) would occur if:
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o a Local Limited Partnership disposed of its interest in an apartment
complex (including a disposition through foreclosure) during the
15-year compliance period, or
o a Series disposed of its interest in a Local Limited Partnership during
the 15- year compliance period. See "The Low Income Housing Tax Credit
Recapture of Low Income Housing Tax Credits." There can be no assurance
that recapture will not occur.
Limitations on Sales of Apartment Complexes. Each Local Limited Partnership
will execute an extended low income housing commitment with the state in which
the apartment complex is located. The extended low income housing commitment
will state the number of years that the Local Limited Partnership and any
subsequent owners must rent the apartment complex as low income housing. Under
Federal law the commitment must be for at least 30 years. The commitment
actually imposed by any state may be significantly longer than 30 years. On any
sale of the apartment complex during the commitment period, the purchaser would
have to agree to continue to rent the apartment complex as low income housing.
This requirement reduces the potential market, and possibly the sales price, for
the apartment complexes. The sale of an apartment complex may be subject to
other restrictions. See "Risks of Government-Subsidized Housing Projects" below
in this section and "Investment Objectives and Policies." Accordingly, there can
be no assurance that a Local Limited Partnership will be able to sell its
apartment complex. Even if it does so, there can be no assurance that any
significant amount of cash will be distributed to the investors. As a result, a
material portion of the low income housing tax credits may represent a return of
the money originally invested in the Series.
Limitations on Use of Low Income Housing Tax Credits. The ability of an
individual or other non-corporate investor to claim low income housing tax
credits on his individual tax return is limited. For example, an individual
investor can use low income housing tax credits to reduce his tax liability on:
o an unlimited amount of "passive" income, which is income from entities such
as the Series, and
o $25,000 in income from other sources.
However, the use of low income housing tax credits by an individual against
these types of income is subject to ordering rules, which may further limit the
use of low income housing tax credits. Non-corporate investors and certain
corporate investors are subject to similar and other limitations. See the
material under the captions "The Low Income Housing Tax Credit" and "Federal
Income Tax Considerations Limitations on Losses and Credits from Passive
Activities." Any portion of a low income housing tax credit which is allowed to
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an investor under those rules is then aggregated with all of the investor's
other business credits. The aggregate is then subject to the general
limitation on all business credits. That limitation provides that an investor
can use business credits to offset the investor's annual tax liability equal
to $25,000 plus 75% of the investor's tax liability in excess of $25,000.
However, business credits may not be used to offset any alternative minimum
tax. All of these concepts are extremely complicated. Investors should
read the sections cited above and "Federal Income Tax Considerations -
General Business Tax Credit Limitations" and "- Other Important Tax
Considerations - Alternative Minimum Tax," for examples.
Availability and Recapture of Historic Tax Credits. In addition to low
income housing tax credits, the Internal Revenue Code also grants tax credits
for the rehabilitation of historic buildings. It is possible that a Series will
invest in a Local Limited Partnership intending to obtain historic tax credits.
In order for an apartment complex to be eligible for historic tax credits, it
must:
o meet certain statutory requirements, and
o be certified by the Department of the Interior. There can be no assurance
that an apartment complex will meet these requirements. Even if it does,
the IRS may challenge the calculation of the historic tax credit. The Local
General Partners will calculate the amount of the historic tax credit. That
calculation will not be the subject of an opinion of counsel. See "Federal
Income Tax Considerations - Historic Tax Credit."
An investor must recapture historic tax credits if (i) the Local Limited
Partnership sells the apartment complex during the first five years of
operation, or (ii) the Series sells the interest in the Local Limited
Partnership during the first five years of operation, or (iii) the investor
sells his Units during the first five years of operation. See "Federal Income
Tax Considerations - Historic Tax Credit Recapture."
Investment Risks
Risks of Government-Subsidized Housing Projects. It is anticipated that a
substantial number of the apartment complexes will receive government financing
or operating subsidies in addition to the tax credits. See "Investment
Objectives and Policies - Investment Policies" and "Other Government Assistance
Programs." The following are risks associated with some such subsidy programs:
o Difficulties in Obtaining Tenants for the Apartment Complexes. Government
regulations generally limit the types of people who can rent subsidized
housing. These regulations may make it more difficult to rent the
residential units in the apartment complexes.
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o Difficulties in Obtaining Rent Increases. In many cases rents could only be
increased with the prior approval of the subsidizing agency.
o Limitations on Cash Distributions. The amount of cash that may be
distributed to owners of subsidized apartment complexes is generally less
than the amount that could be earned by the owners of non-subsidized
apartment complexes.
o Limitations on Sale or Refinancing of the Apartment Complexes. A Local
Limited Partnership may be unable to sell its apartment complex or to
refinance its mortgage loan without the prior approval of the subsidizer.
The subsidizer may withhold such approval in the discretion of the
subsidizer. Approval may be subject to various conditions. In addition, any
prepayment of a mortgage may result in the assessment of a prepayment
penalty.
o Limitations on Transfers of Interests in Local Limited Partnerships. A
Series may be unable to sell its interest in a Local Limited Partnership
without the prior approval of the subsidizer. The subsidizer may withhold
such approval in the discretion of the subsidizer. Approval may be subject
to various conditions.
o Limitations on Removal and Admission of Local General Partners. A Series may
be unable to remove a Local General Partner from a Local Limited Partnership
except "for cause," such as the violation of the rules of the subsidizer.
Regulations may prohibit the removal of a Local General Partner or permit
removal only with the prior approval of the subsidizer. Regulations may also
require approval of the admission of a successor local general partner even
upon the death or other disability of a Local General Partner.
o Limitations on Subsidy Payments. Certain subsidy payments may be fixed in
amount and subject to annual legislative appropriations. The rental revenues
of an apartment complex, when combined with the maximum committed subsidy,
may be insufficient to meet obligations. Congress or the state legislature,
as the case may be, may fail to appropriate or increase the necessary
subsidy. In those events, the mortgage lender could foreclose on the
property unless a "workout" arrangement could be negotiated.
o Possible Changes in Applicable Regulations. Legislation may be enacted which
substantially and adversely revises provisions of outstanding mortgage
loans. Such legislation has been enacted in the past.
See "Other Government Assistance Programs."
Keen Competition for Investments. Each Series will compete for investments
with other entities. Such other entities include limited partnerships, limited
liability companies and other entities engaged in real estate investment
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activities, and may include the other Series and other affiliates of WNC &
Associates, Inc. (see "Conflicts of Interest").
The availability of such investments is limited in that there is a maximum
amount of low income housing tax credits that may be allocated each year. See
"The Low Income Housing Tax Credit - Credits Subject to State Allocation." Other
factors may also limit availability of investments. Consequently, competition
for desirable investments may be particularly keen. The purchase prices paid for
such investments could increase as a result. In this connection, a state's
allocation plan for low income housing tax credits must:
o give preference to applicants with the lowest percentage of costs
attributable to intermediaries, such as syndicators,
o give preference to applicants serving the lowest income tenants,
o give preference to applicants serving qualified tenants for the longest
periods,
o allocate no more tax credits to an applicant than is necessary for its
project's financial feasibility and viability. The state may reduce the
amount of the low income housing tax credits below the amounts for which
the applicant would otherwise be eligible, if the state believes that the
full amounts are not necessary in light of other sources of assistance
that are available to the applicant.
In the recent past, heightened demand for apartment complexes has increased
the purchase prices thereof. Further increases would reduce the return to
investors and hamper a Series' ability to satisfy its principal investment
objective.
Risks of Apartment Complexes Without Financing or Operating Subsidies. Some
of the Local Limited Partnerships may own apartment complexes which are not
subsidized. Those apartment complexes will not have the benefit of below-market-
interest-rate financing or operating subsidies which often are important to the
feasibility of low income housing. Those apartment complexes will have to rely
solely on rents to pay expenses. However, in order for any apartment complex to
be eligible for low income housing tax credits, it must restrict the rent which
may be charged to tenants. See "The Low Income Housing Tax Credit." Over time,
the expenses of an apartment complex will increase. If a Local Limited
Partnership cannot increase its rents, it may be unable to pay increased
operating expenses.
Risk of Unspecified Investments. Except as otherwise set forth in a
supplement to this Prospectus, the Series have not identified any of the
apartment complexes in which they will invest. Accordingly, investors may not
have the opportunity to evaluate for themselves the Series' investments. An
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investor who acquires his Units later in the offering period may have more
information available concerning specific apartment complexes than the earlier
purchaser.
There can be no assurance that any apartment complexes in which a Series
invests will actually meet the investment objectives of the Series.
Risks Associated with Use of Leverage. Each Local Limited Partnership will
leverage a Series' investment therein by incurring mortgage debt. See
"Investment Objectives and Policies - Use of Leverage." Mortgage debt may:
o have either fixed or variable interest rates,
o be repayable in a self-amortizing series of equal installments or with a
substantial ("balloon") final payment,
o mature before or after the expiration of the Series' anticipated holding
period for the investment.
If a Local Limited Partnership's revenues are less than its debt payments and
taxes and other operating costs, the Local Limited Partnership would have to use
working capital reserves, seek additional funds, or suffer a foreclosure of its
apartment complex. The same results would occur if government subsidies ceased
(see "Risks of Government - Subsidized Housing Projects" above in this section).
As a result of the use of leverage, a relatively slight decrease in the rental
revenues of an apartment complex may adversely affect the Local Limited
Partnership's ability to pay its debt service requirements. In addition,
variable rate loans create the risk that debt service could rise substantially
during periods of high interest rates. There can be no assurance that additional
funds will be available to any Local Limited Partnership if needed on acceptable
terms or at all.
Risks of Limited Diversification. Geographic and other diversification of a
Series' investments will depend upon the amount of capital raised by the Series.
The less capital received by the Series, the fewer number of investments
purchased by the Series. The risks of limited diversification will exist if any
Series (i) invests in a few Local Limited Partnerships owning large apartment
complexes rather than a greater number of Local Limited Partnerships owning
smaller apartment complexes, (ii) invests in Local Limited Partnerships which
have the same or affiliated Local General Partner, or (iii) invests in Local
Limited Partnerships which own apartment complexes located in the same area. If
a Series' investments are not diversified then any single apartment complex
experiencing poor operating performance, impairment of value or recapture of low
income housing tax credits would have a significant impact upon the Series as a
whole.
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Lack of Series Control; Reliance on Local General Partners. The Local
General Partners will make all management decisions for the Local Limited
Partnerships and the apartment complexes. Each Series will have very limited
rights with respect to management of the Local Limited Partnership. Neither
Series will be able to exercise any control with respect to its business
decisions and operations. Consequently, the success of each Series will depend
on the abilities of the Local General Partners. Investors may not have the
opportunity to judge the Local General Partners for themselves.
Net Worth of Local General Partners. WNC & Associates, Inc. has not
established a minimum net worth requirement for the Local General Partners.
Rather, each Local General Partner must demonstrate a net worth which WNC &
Associates, Inc. believes is appropriate under the circumstances. The assets of
the Local General Partners are likely to consist primarily of real estate
holdings and similar assets. The fair market value of these types of assets is
difficult to estimate. These types of assets cannot be readily liquidated to
satisfy the financial guarantees and commitments which the Local General
Partners will make to a Series. See "Investment Objectives and Policies -
Investment Policies." Moreover, other creditors may have claims on these assets.
Thus, there is a risk that the Local General Partners would be unable to perform
their obligations to the Series. No escrow accounts or other security
arrangements will be established to ensure performance of their obligations. The
cost to enforce a Local General Partner's obligations may be high. If a Local
General Partner does not satisfy its obligations the Series may have no remedy,
or the remedy may be limited to removing the Local General Partner as general
partner of the Local Limited Partnership.
Risks of Real Estate Ownership. Any investment in real estate is subject to
risks from fluctuating economic conditions. These conditions can adversely
affect an investor's ability to realize a profit or even to recover his invested
capital. Among these conditions are:
o the general and local job market,
o the availability and cost of mortgage financing,
o monetary inflation,
o tax, environmental, land use and zoning policies,
o the supply of and demand for similar properties,
o neighborhood conditions,
o the availability and cost of utilities and water.
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Risks of Purchase of Properties Under Construction. A Series may invest in
apartment complexes which are under construction. In general, investment in an
uncompleted apartment complex involves more risk than the purchase of a
completed property. The Local General Partners' ability to complete construction
may be affected by conditions beyond their control. Furthermore, a decision to
invest in an uncompleted apartment complex is made based on projections of
rental income and expenses. Whether the property will operate at such projected
income and expense levels cannot be known.
Risks of Investments Before the Sale of Units. A Series may invest in
apartment complexes at a time before the commencement or completion of its
offering of Units. Such investments would be made in anticipation of the receipt
of offering proceeds. The Series may borrow funds from WNC & Associates, Inc.,
or its affiliates or others for such purposes. The Series ultimately may be
unable to pay its obligations with respect to such investments. If a Series
didn't pay its obligations to a Local Limited Partnership, the Local Limited
Partnership could reduce or terminate the Series' interest without returning the
amounts paid by the Series. The Local Limited Partnership could sue the Series
to require performance of such obligations. If tax credits had already been
claimed by the Series, the credits could be recaptured. See "The Low Income
Housing Tax Credit - Recapture of Low Income Housing Tax Credits."
Risks of Loss of Loans Made to Local Limited Partnerships. A Series may make
a loan to a Local Limited Partnership before the Series' acquisition of an
interest therein. See "Investment Objectives and Policies - Investment
Policies." If the Series didn't invest in the Local Limited Partnership, the
Local Limited Partnership might not repay the loan. If the Local Limited
Partnership didn't repay the loan, the amount of capital available for
investment in Local Limited Partnerships would be reduced.
Risks of Joint Investments. A Series may invest in Local Limited
Partnerships jointly with the other Series or other limited partnerships. Any
such joint investment must satisfy the conditions set forth under "Investment
Objectives and Policies - Joint Investments." There is a risk that a Series may
not acquire a controlling interest in a joint investment. There is also a risk
of impasse on decisions if the Series and its joint venture partner acquire
equal interests in the joint venture.
Possibility of Uninsured Losses. There are certain types of losses which are
either uninsurable or not economically insurable. These include earthquakes,
floods, wars and losses relating to hazardous materials or environmental
matters. If an apartment complex experienced an uninsured loss, a Series could
lose both its invested capital and anticipated profits in such property. Even if
the casualty were an insured loss, the Local Limited Partnership might be unable
to rebuild the destroyed property. A portion of prior tax credits could be
recaptured and future tax credits could be lost if the apartment complex were
not restored within a reasonable period of time. See
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"The Low Income Housing Tax Credit - Recapture of Low Income Housing Tax
Credits." And liability judgments against the Local Limited Partnership could
exceed available insurance proceeds or otherwise materially and adversely affect
the Local Limited Partnership. The cost of liability and casualty insurance has
substantially increased in recent years. Certain types of insurance have become
more difficult to obtain or require substantial deductible amounts.
Other Tax Risks
In addition to the risks pertaining specifically to tax credits, there are
other Federal income tax risks associated with an investment in Units. Neither
Series will request rulings on any income tax matters from the IRS. Rather, they
will rely on certain opinions of Derenthal & Dannhauser, counsel to the Series,
WNC & Associates, Inc. and their affiliates, and certain opinions of counsel to
the Local Limited Partnerships. Unlike a ruling from the IRS, an opinion of
counsel has no binding effect or official status of any kind. No assurance can
be given that the IRS will not contest any conclusions reached in an opinion.
The income tax issues as to which counsel has rendered or will render opinions,
and the issues as to which counsel has not rendered and will not render
opinions, are discussed in "Federal Income Tax Considerations" and "The Low
Income Housing Tax Credit."
These additional Federal income tax risks associated with the ownership of
Units and the operations of the Series and the Local Limited Partnerships
include, but are not limited to, the following:
No Opinion of Counsel as to Certain Matters. No legal opinion will be
obtained regarding certain determinations and matters because, among other
reasons (i) the determination depends on future factual circumstances, (ii) the
matters are peculiar to certain investors, or (iii) opinions are not customarily
rendered regarding such matters. The more significant of such determinations and
matters include:
o allocating purchase price among various components of a property,
particularly as between buildings and fixtures, the cost of which is
depreciable, and the underlying land, the cost of which is not depreciable;
o characterizing expenses and payments made to or by a Series or a Local
Limited Partnership (for example, the extent to which such payments
represent deductible fees or interest);
o identifying the portion of the costs of any apartment complex which qualify
for historic tax credits;
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o applying to any specific investor the limitation on the use of tax credits
and tax losses. Investors must determine for themselves the extent to
which they can use tax credits and tax losses; and
o the application of the alternative minimum tax to any specific investor, or
the calculation of the alternative minimum tax by any investor. The
alternative minimum tax could reduce the tax benefits from an investment in
a Series.
There can be no assurance, therefore, that the IRS will not challenge some
of the tax positions adopted by a Series. There can be no assurance that the
courts will not sustain an IRS challenge. An IRS challenge, if successful, could
have a detrimental effect on a Series' ability to realize its investment
objectives.
No Ruling as to Tax Status of the Local Limited Partnerships. Counsel has
rendered its opinion that each Series will be classified as a partnership and
not as an association taxable as a corporation for Federal income tax purposes.
The Series will obtain an opinion of Derenthal & Dannhauser or counsel to the
Local Limited Partnership that each Local Limited Partnership will be classified
as a partnership for Federal income tax purposes. If a Local Limited Partnership
were classified as a corporation material adverse tax consequences would result.
For example, the Series would be unable to pass through to its investors the tax
credits and tax losses. See "Federal Income Tax Considerations - Classification
as a Partnership."
Limitation on Losses from Passive Activities. The Code imposes limits on the
ability of most investors to claim losses from investments in real estate. In
general, an investor may claim these so-called "passive losses" only as an
offset to income from investments in real estate or rental activities. An
investor may not claim passive losses as an offset against other types of
income, such as salaries, wages, dividends and interest. These "passive
activity" rules will restrict the ability of most investors to use losses from a
Series as an offset of non-passive income.
A Series may earn interest income on its reserves and loans. The passive
activity rules generally will categorize interest as portfolio income, and not
passive income. Passive losses cannot be used as an offset to portfolio income.
Consequently, an investor in a Series could pay tax liability on portfolio
income from the Series.
Applicability of At Risk Rules. The "at risk" rules of the Code generally
limit an investor's ability to deduct Series losses to the sum of (i) the amount
of cash the investor invests in the Series, and (ii) the investor's share of
Series "qualified nonrecourse financing." See "Federal Income Tax Considerations
- - Application of At Risk Limitations" and "The Low Income Housing Tax Credit."
Each Series will structure its investments so that a significant portion of the
financing used to purchase apartment complexes will consist of "qualified
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<PAGE>
nonrecourse financing." However, there can be no assurance that the "at risk"
rules will not materially limit an investor's ability to claim Series losses.
Tax Liability on Sale of Apartment Complex. When a Local Limited Partnership
sells an apartment complex it generally will recognize gain. Such gain is equal
to the difference between the (i) the sales proceeds plus the amount of
indebtedness secured by the apartment complex, and (ii) the adjusted basis for
the apartment complex. The adjusted basis for an apartment complex is its
original cost, plus capital expenditures, minus depreciation. Similarly, when a
Series sells an interest in a Local Limited Partnership the Series generally
will recognize gain. Such gain is equal to the difference between the (i) the
sales proceeds plus the Series' share of the amount of indebtedness secured by
the apartment complex, and (ii) the adjusted basis for the interest. The
adjusted basis for an interest in a Local Limited Partnership is the amount paid
for the interest, plus income allocations and cash distributions, less loss
allocations. Accordingly, gain will be increased by the depreciation deductions
taken during the holding period for the apartment complex. In some cases, an
investor could have a tax liability from a sale greater than the cash
distributed to the investor from the sale. See "Federal Income Tax
Considerations - Sales or Exchanges of Local Limited Partnership Property;
Depreciation Recapture" and " - Treatment of Mortgage Loans."
Alternative Minimum Tax Liability. If an investor pays alternative minimum
tax, the investor could suffer a reduction in benefits from an investment in a
Series. The application of the alternative minimum tax is personal to each
investor. Accordingly, each investor should consult his own tax adviser
regarding how the alternative minimum tax will impact his investment in Units.
Tax credits may not be utilized to reduce alternative minimum tax liability. See
"Federal Income Tax Considerations Other Important Tax Considerations -
Alternative Minimum Tax."
Possibility of Audit. The IRS can audit a Series or a Local Limited
Partnership at the entity level with regard to issues affecting the entity. The
IRS does not have to audit each investor in order to challenge a position taken
by a Series or a Local Limited Partnership. Similarly, only one judicial
proceeding can be filed to contest an IRS determination. A contest by the Series
of any IRS determination might result in substantial legal fees.
An audit of a Series or a Local Limited Partnership also could result in an
audit of an investor. An audit of an investor's tax returns could result in
adjustments both to items that are related to the investor's Series and to
unrelated items. The investor could then be required to file amended tax returns
and pay additional tax plus interest and penalties.
See "Federal Income Tax Considerations - Tax Returns and Tax Information."
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<PAGE>
Each Series must register under the tax shelter registration provisions.
Under those provisions, the IRS assigns a registration number to each Series.
The investors must enter that number on their tax returns. An investor could be
subject to a penalty if the investor does not enter the registration number on
the investor's tax return. It is uncertain whether registration as a tax shelter
materially increases the risk of IRS audit. Registration does not imply that the
IRS has reviewed, examined or approved the investment or the claimed benefits of
the investment. See "Federal Income Tax Considerations - Tax Shelter
Registration."
Possibility of Challenge to Tax Allocations of the Series and the Local
Limited Partnerships. Under the Internal Revenue Code, a partnership's
allocation of income, gains, deductions, losses and tax credits must have
substantial economic effect. Substantial economic effect is a highly-technical
concept which is explained under "Federal Income Tax Considerations - Series
Allocations." If a partnership's allocations do not have substantial economic
effect, then the partnership's tax items are allocated in accordance with each
partner's interest in the partnership. That is another highly-technical concept
which is explained under "Federal Income Tax Considerations - Series
Allocations." The IRS might challenge the allocations made by a Series (i)
between its investors and WNC & Associates, Inc., (ii) among its investors, or
(iii) between the Series and a Local General Partner. If any allocations were
successfully challenged, a greater share of the income or gain or a lesser share
of the losses or tax credits might be allocated to the investors. This would
increase the tax liability or reduce the tax benefits to the investors. See
"Profits and Losses, Tax Credits and Cash Distributions" and "Federal Income Tax
Considerations - Series Allocations."
Possible Tax Liabilities in Later Years. After a period of years following
commencement of operations by a Local Limited Partnership, the Local Limited
Partnership may generate profits rather than losses. An investor would have tax
liability on his share of such profits unless he could offset the income with
(i) unused passive losses from his Series or other investments or (ii) current
passive losses from other investments. See "Federal Income Tax Considerations -
Limitations on Losses and Credits from Passive Activities." In such
circumstances the investor would not receive a cash distribution from his Series
with which to pay any tax liability.
Possibility of Challenge to Tax Treatment of Certain Expenditures. The IRS
may contend that certain fees and payments of a Series or a Local Limited
Partnership:
o should be deductible over a longer period of time or in a later year,
o are excessive and may not be capitalized or deducted in full,
o should be capitalized and not deducted, or
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<PAGE>
o may not be included as part of the basis for computing tax credits.
If the IRS were successful in any such contention, the anticipated tax credits
and losses of the Series would be reduced, perhaps substantially. See "The Low
Income Housing Tax Credit" and "Federal Income Tax Considerations - Basis of
Local Limited Partnerships in Their Apartment Complexes," " - Depreciation," "-
Deductibility of Fees," "- Organization and Offering Expenses" and "- Start-Up
Expenditures."
Changes in Tax Law Which Might Affect the Value of Tax Credits. Although all
low income housing tax credits are allocated to an apartment complex at
commencement of the 10-year credit period, there can be no assurance that future
legislation may not adversely affect an investment in a Series. For example,
legislation could reduce or eliminate the value of tax credits. In this regard,
before 1986, the principal tax benefit of an investment in low income housing
was tax losses. These tax losses generally were used to reduce an investor's
income from all sources on a dollar-for-dollar basis. Investments in low income
housing were made in reliance on the availability of such tax benefits. However,
tax legislation enacted in 1986 severely curtailed deduction of such losses. It
is unlikely that the "pre-enactment" limited partnerships (including certain
partnerships sponsored by WNC & Associates, Inc.) will provide their investors
with all of the tax benefits expected at the commencement of their respective
syndications.
Possible Administrative or Judicial Interpretations of the Law. Many of the
provisions of the Internal Revenue Code related to low income housing and real
estate investments have not been interpreted by the IRS in regulations, rulings
or public announcements, or by the courts. In future, these provisions may be
interpreted or clarified by the IRS or the courts in a manner adverse to the
Series or the Local Limited Partnerships. The IRS constantly reviews the Federal
tax rules, and can revise its interpretations of established concepts. Any such
revisions could reduce or eliminate tax benefits associated with an investment
in a Series.
State Income Tax Risks. An investor may be required to file income tax
returns and be subject to tax and withholding in each state or local taxing
jurisdiction in which:
o an apartment complex is located,
o the investor's Series or a Local Limited Partnership engages in business
activities, or
o the investor is a resident.
Corporate investors may be required to pay state franchise taxes.
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<PAGE>
The tax treatment of particular items under state or local income tax laws
may vary materially from the Federal income tax treatment of such items.
Nonetheless, many of the Federal income tax risks associated with an investment
in a Series may also obtain under state or local income tax law. A Series may be
required to withhold state taxes from distributions or income allocations to
investors in some instances. In deciding whether to invest in a Series,
prospective investors should consider the additional cost of preparing various
state and local tax returns, as well as the additional state and local taxes
which may be payable. This Prospectus makes no attempt to summarize the state
and local tax consequences to an investor in any state or locality. Accordingly,
prospective investors are urged to consult their tax advisers in this regard.
Series-Related Risks
Lack of Liquidity of Investment. It is unlikely that a public market will
develop for the purchase and sale of Units. Accordingly, investors may not be
able to sell their Units promptly or at a reasonable price. Units should be
considered as a long- term investment. See "Transferability of Units."
Lack of Investor Control; Reliance on Fund Manager. WNC & Associates, Inc.
will make all management decisions for each Series. Management decisions include
selecting apartment complexes, selecting the date on which a Series will
terminate its offering, and exercising powers granted to a Series by a Local
Limited Partnership. Investors have no right or power to take part in their
Series' management. Accordingly, a person should not purchase Units if he is
unwilling to entrust all aspects of management to WNC & Associates, Inc.
Risks Related to Exercise of Investor Voting Rights. The Partnership
Agreement of each Series grants to investors owning more than 50% of the Units
in the Series the right to:
o remove WNC & Associates, Inc. and elect a replacement fund manager,
o amend the Series' agreement of limited partnership, and
o terminate the Series.
Accordingly, a majority-in-interest of the investors in a Series could
cause any such events to occur, even if investors owning 49% of the Units in the
Series opposed such action. See "Summary of Certain Provisions of the
Partnership Agreement - Voting Rights."
Limitations on Fund Manager's Liability. Under California law, WNC &
Associates, Inc. is a fiduciary to the investors of each Series. A fiduciary is
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<PAGE>
required to exercise good faith and loyalty. Accordingly, WNC & Associates,
Inc. is required under California law to exercise good faith and loyalty in
handling the affairs of each Series. However, the Partnership Agreement of each
Series limits the liability of WNC & Associates, Inc. and its affiliates to the
investors. WNC & Associates, Inc. and its affiliates will not be liable to the
investors for acts and omissions:
o performed or omitted in good faith, and
o performed or omitted in a manner which WNC & Associates, Inc. reasonably
believed to be within the scope of its authority and in the best interest of
the investors,
provided
o such conduct did not constitute negligence or misconduct.
Therefore, investors may be less able to sue WNC & Associates, Inc. and its
affiliates than would be the case if such provisions were not included in the
Partnership Agreement. See "Fiduciary Responsibility."
Issuance of Units in Series. Each Series has been formed as a separate
partnership under California law. Each Series will invest in its own Local
Limited Partnerships. Therefore, investors in one Series may receive different
yields than investors in the other Series. Investors in one Series may be
subject to different risks regarding its investments than investors in the other
Series.
Obligations for Capital Contributions. Each investor who subscribes for 20
or more Units may elect to pay one-half of the purchase price of his Units upon
subscription and the balance in accordance with a promissory note. See
"Estimated Use of Proceeds - Deferred Installments." If an electing investor
fails to pay the deferred installment when due, he will face serious
consequences. These consequences include the foreclosure and sale of his Units,
and the recapture of tax credits previously claimed by the investor. The Series
may impose late charges. The investor may also be liable for attorneys' fees and
other costs of collection incurred by the Series. See "Summary of Certain
Provisions of the Partnership Agreement."
A Series may be at risk if its investors fail to pay their promissory notes.
The Series may be unable to meet its obligations to Local Limited Partnerships,
and could suffer a dilution or termination of its interest in a Local Limited
Partnership. That could cause (i) recapture and loss of tax credits, and (ii)
legal actions by the Local General Partners to require performance and to
recover damages and costs. Therefore, defaulting investors could adversely
affect non-defaulting investors.
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Possible Delays in Obtaining Financial Data. Each Local General Partner is
required to retain independent public accountants and to report tax data and
financial information to the Series in a timely manner. There cannot be any
assurance that the Local General Partners will satisfy these obligations. If
not, a Series might be unable to provide to its investors in a timely manner its
Federal income tax information, financial statements and other reports as
described herein (see "Reports").
Lack of Operating History. Neither Series has an operating history. No
assurance can be given that operations will be successful or that a Series will
meet its stated investment objectives.
Year 2000 Issues. Throughout the world there is a question as to whether or
not computer systems will function beyond 1999. WNC & Associates, Inc. believes
that its computer systems are "Y2K" compliant. WNC & Associates, Inc. has been
informed by its utilities suppliers and banks that their critical systems are
"Y2K" compliant. However, because WNC & Associates, Inc. has no authority over
those entities, there can be no assurance that such information is correct. If
not, there could be disruptions in the business of the Series, which could cost
the Series money. The Local General Partners have not yet been identified.
Accordingly, there is no way to tell if their computer systems or the computer
systems of their suppliers are "Y2K" compliant. If not, there could be
disruptions in the business of a Local Limited Partnership. Investors could
suffer a loss or a delay in receipt of their tax benefits as a result of such
disruptions.
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<PAGE>
WHO SHOULD INVEST;
LIMITATIONS ON USE OF CREDITS AND LOSSES
All Investors
An investor should invest in a Series only if he:
o reasonably expects to have Federal tax liabilities which can be offset by
tax credits during the next 10 to 12 years, and
o has adequate financial means to bear the risks associated with the Units.
See "Risk Factors."
An investment in Units is not suitable for tax-exempt entities, including
pension or profit-sharing plans, Keogh plans and Individual Retirement Accounts.
Accordingly, SUCH ENTITIES CANNOT INVEST IN A SERIES.
The alternative minimum tax may limit the benefit of tax credits to an
investor. The alternative minimum tax is a complex concept which is discussed
under "Federal Income Tax Considerations - Other Important Tax Considerations -
Alternative Minimum Tax." The Internal Revenue Code imposes an alternative
minimum tax if a taxpayer's alternative minimum tax liability exceeds his
regular tax liability. Tax credits cannot be used to reduce alternative minimum
tax liability. Even where a taxpayer does not have alternative minimum tax
liability (because his regular tax exceeds his alternative minimum tax), the
taxpayer cannot use tax credits to reduce his regular tax liability to an amount
less than his alternative minimum tax liability. Accordingly, investors must
consult their tax advisers to determine whether the alternative minimum tax
limits their ability to benefit from tax credits.
The broker-dealers selling the Units have agreed to ask prospective
investors whether an investment in Units is suitable for them. The
broker-dealers have agreed to maintain records of their suitability
determinations. Each broker-dealer has agreed to make every reasonable effort to
assure that an investment in Units is suitable and appropriate for a potential
investor, based on information provided by the potential investor as to his
financial situation and investment objectives.
Individual Investors
Low income housing tax credits and, possibly, historic tax credits are the
principal benefits from an investment in Units. The extent to which a
prospective investor can use these tax benefits will help determine whether or
not he is a suitable investor.
With respect to natural persons, Federal tax law imposes limitations on the
utilization of credits from "passive activities" and "general business" credits.
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Each of those categories includes low income housing tax credits and
historic tax credits. A Series will generate tax credits over a period of 10 to
12 years. Accordingly, an investment in a Series is not suitable for a
prospective investor unless for the next 12 years he will be able to utilize his
share of tax credits under (i) the passive activity rules and the general
business credit rules (discussed below), and (ii) the alternative minimum tax
rules (referred to above).
The Internal Revenue Code sorts income into several categories. Income can be
o active, such as salaries and wages,
o portfolio, such as interest and dividends,
o passive, such as income from limited partnerships, or
o the result of material participation in real estate activities, such as the
income of a landlord who invests significant amounts of time managing his
property.
Prospective non-corporate investors can use an unlimited amount of low income
housing tax credits and historic tax credits against income taxes due on passive
income. They can also use tax credits against income taxes due on a maximum of
$25,000 of active or portfolio income each year if they do not materially
participate in rental real estate activities. This is known as the "$25,000
deduction equivalent" rule. However, a natural person can use historic tax
credits in this manner only to the extent his adjusted gross income does not
exceed $200,000. A natural person's ability to use historic tax credits is
phased out if his gross income is between $200,000 and $250,000, and eliminated
if his gross income exceeds $250,000.
In general, a natural person can use losses from a Series only to the extent
he has passive income.
Investors should read the entire discussion under "Federal Income Tax
Considerations - Limitations on Losses and Credits from Passive Activities" and
"- General Business Tax Credit Limitations." That section includes more
information regarding the principal limitations on the use of tax credits and
losses from an investment in Units.
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Corporate and Other Entity Investors
Trusts and Estates. A trust other than a grantor trust is a taxable entity
and should consider an investment in a Series only if it will have passive
income against which the Series' tax credits and losses can be used. There is no
$25,000 deduction equivalent for non-grantor trusts.
A grantor trust is not a taxable entity. The grantor of a grantor trust
includes the tax items of the trust in his tax return. Therefore, a grantor
trust should consider an investment only if the grantor meets the criteria
applicable to it.
Generally, an estate has no $25,000 deduction equivalent. A limited
exception permits estates to use the $25,000 deduction equivalent in a tax year
ending less than two years after the decedent's death.
Corporations. The passive activity rules do not apply to regular
corporations. A regular corporation should consider an investment in a Series
only if it will have during the next 12 years sufficient income from all sources
to use the Series' tax credits and losses. Regular corporations are corporations
which (i) have not elected to be subject to Subchapter S under the Internal
Revenue Code, (ii) are not closely-held, and (iii) are not personal service
corporations. A corporation is closely-held for these purposes if more than 50%
of the corporation is owned, directly or indirectly, by five or fewer
shareholders at any time during the last half of its relevant tax year. A
corporation is a personal service corporation if it performs services in the
fields of health, law, engineering, architecture, accounting, actuarial science,
performing arts or consulting.
Special rules apply to all types of corporations other than regular
corporations. A corporation other than a regular corporation should consider an
investment in a Series only as follows:
o A personal service corporation must have during the next 12 years sufficient
passive income to use the Series' tax credits and losses;
o A corporation which has elected to be subject to Subchapter S of the
Internal Revenue Code must have shareholders who meet the criteria
applicable to such shareholders.
o A closely-held corporation which is not a personal service corporation and
which has not elected to be subject to Subchapter S of the Internal Revenue
Code must have during the next 12 years sufficient passive income and active
income to use the Series' tax credits and losses;
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Partnerships. A partnership should consider an investment only if each of
its partners meets the investment criteria applicable to the partner.
See "Federal Income Tax Considerations - Limitations on Losses and Credits
from Passive Activities."
Entity Financial Reports. An entity investor should also consider the
effect of an investment in a Series on the entity's financial reports.
The actual effect on an entity investor's net income for financial reporting
purposes will depend upon the results of Series' operations and the method of
accounting adopted by the investor to record its investment in the Series. The
Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board
has been examining the methods of accounting used by entities investing in low
income housing through limited partnerships. In general, as of the date hereof,
the EITF has determined that the permissible methods used to account for such
investments are the modified cost method, the equity method, the effective yield
method and the full consolidation method.
Under the modified cost method, an entity investor initially capitalizes the
cost of its investment in the limited partnership, and then amortizes the
difference between the carrying cost and the aggregate estimated residual value
of the limited partnership's property portfolio over the tax credit period of
such portfolio. The estimated residual value of a property is its estimated
residual value at the end of the last period in which tax credits are allocated
to the investor and will not reflect anticipated inflation.
Under the equity method, an entity investor initially capitalizes the cost
of its investment in the limited partnership, and then reduces (but not below
zero) or increases the carrying value by the investor's allocable share of
losses or income, respectively, from the limited partnership.
Under the effective yield method, an entity investor initially capitalizes
the cost of its investment in the limited partnership, and then amortizes the
cost to provide a constant effective yield over the period that the tax credits
are allocated to the investor. The effective yield is the internal rate of
return on the investment, based on the cost of the investment and the tax
credits allocated to the investor. Any expected residual value of the investment
is excluded from the effective yield calculation.
Under the full consolidation method, the low income housing properties
themselves, and the results of operations therefrom (rather than the investment
in the limited partnership) are included in the entity investor's financial
statements.
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Regardless of the method selected, the EITF has not changed the requirement
that an investment be reviewed periodically to determine impairment of value.
With the exception of the effective yield method, the method of accounting
to be used by an entity investor in a low income housing program generally is
not elective but rather is determined by the level of the entity's investment in
the limited partnership and/or the ability of the investor to control the
limited partnership. The effective yield method may be elected if (i) the tax
credits allocable to the investor are guaranteed by a creditworthy entity, (ii)
the investor's yield based solely on the cash flows from the guaranteed tax
credits is positive, and (iii) the investor is a limited partner for legal and
tax purposes and the investor's liability is limited to its capital investment.
If the investor is unable to or does not elect to use the effective yield
method, the appropriate method will be (i) the modified cost method, if the
investor's interest in the limited partnership is so minor as to give the
investor virtually no influence over partnership operating and financial
policies; (ii) the equity method, if the investor owns less than 50% of the
limited partnership and has no significant control over partnership policies; or
(iii) the full consolidation method, if the investor owns 50% or more of the
limited partnership unless the investor has no significant control over
partnership policies, in which event the equity method is to be used. To date,
the EITF has provided no "bright-line" ownership test for use in determining
when an investor's interest is so minor as to give the investor "virtually no
influence over partnership operating and financial policies." The staff of the
SEC, however, understands that accounting practice generally has viewed
investments of more than 3% to 5% to be more than minor.
It is anticipated that entity investors in a Series will use either the
modified cost method or the equity method. As indicated above, under the equity
method (but not under the modified cost method) an investor will actually report
its share of Series' losses or income. In this regard, for financial reporting
purposes each Series is expected to use the equity method, which will result in
recognition by the Series of its share of losses or income from the limited
partnerships in which it invests.
Minimum State Suitability Requirements
The foregoing standards are subjective standards applied to all investors.
Each state has established objective standards for natural persons which also
must be satisfied. These standards are set forth below. A natural person must
satisfy the standard for his state of residency before he can consider an
investment in Units. In the case of sales to fiduciary accounts, these minimum
suitability standards must be met by the beneficiary, the fiduciary account, or
by the donor or grantor who directly or indirectly supplies the funds to
purchase the Units if the donor or grantor is one of the fiduciaries.
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The Units may be offered and sold only in those jurisdictions in which they
(i) have been registered or qualified for sale or (ii) are exempt from the
registration or qualification requirement.
Set forth below are the minimum suitability standards for residents of the
District of Columbia and of each state in which the Series have applied to have
the Units registered or qualified for sale or in which the sale of Units is
exempt from registration. For these purposes, net worth is exclusive of home,
furnishings and automobiles.
Alabama, Alaska, Arizona, Arkansas, Indiana, Kansas, Kentucky, Michigan,
Mississippi, Missouri, New Hampshire, New Mexico, North Carolina, North Dakota,
Oklahoma, Oregon, Tennessee, Texas, Vermont, Virginia and Wisconsin
Requirements. Each investor in Alabama, Alaska, Arizona, Arkansas, Indiana,
Kansas, Kentucky, Michigan, Mississippi, Missouri, New Hampshire, New Mexico,
North Carolina, North Dakota, Oklahoma, Oregon, Tennessee, Texas, Vermont,
Virginia or Wisconsin must have (i) an annual gross income of at least $45,000
and a net worth of at least $45,000 or (ii) a net worth of at least $150,000.
Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia,
Hawaii, Idaho, Illinois, Louisiana, Maryland, Montana, Nevada, New Jersey, Rhode
Island, South Carolina, Utah, West Virginia and Wyoming. Each investor in
Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii,
Idaho, Illinois, Louisiana, Maryland, Montana, Nevada, New Jersey, Rhode Island,
South Carolina, Utah, West Virginia or Wyoming must have (i) an annual gross
income of at least $35,000 and a net worth of at least $35,000 or (ii) a net
worth of at least $75,000.
California and Washington Requirements. Each investor in California or
Washington must have (i) an annual gross income of at least $50,000 and a net
worth of at least $65,000 or (ii) a net worth of at least $200,000.
Iowa, Massachusetts, Minnesota and South Dakota Requirements. Each investor
in Iowa, Massachusetts, Minnesota or South Dakota who purchases his Units
entirely with cash must have (i) an annual gross income of at least $45,000 and
a net worth of at least $45,000 or (ii) a net worth of at least $150,000. Each
investor in Iowa, Massachusetts, Minnesota or South Dakota who purchases his
Units with a promissory note must have (i) an annual gross income of at least
$60,000 and a net worth of at least $60,000 or (ii) a net worth of at least
$225,000.
Maine Requirements. Each investor in Maine must have (i) an annual gross
income of at least $50,000 and a net worth of at least $50,000 or (ii) a net
worth of at least $200,000. No investor in Maine may purchase Units with a
promissory note; each investor in Maine must purchase his Units on an all-cash
basis.
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Nebraska and Ohio Requirements. Each investor in Nebraska or Ohio must have
(i) an annual gross income of at least $45,000 and a net worth of at least
$45,000 or (ii) a net worth of at least $150,000. No investor in Ohio may invest
more than 10% of his net worth in a Series.
Pennsylvania Requirements. Each investor in Pennsylvania must have (i) an
annual gross income of at least $45,000 and a net worth of at least $45,000 or
(ii) a net worth of at least $150,000. No investor in Pennsylvania may invest
more than 10% of his net worth in a Series. Because the minimum closing amount
for each Series is less than $2,500,000, the amount suggested by Pennsylvania
regulations, prospective investors who are Pennsylvania residents are cautioned
to carefully evaluate the ability of the Series to accomplish its stated
objectives and to inquire as to the current dollar volume of Series
subscriptions.
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ESTIMATED USE OF PROCEEDS
The following table sets forth the estimated use of the proceeds from the
sale of the Units. As indicated herein, approximately 75% of the total proceeds
will be invested in Local Limited Partnerships. The amounts in the table
represent WNC & Associates, Inc.'s present estimates and the actual amounts may
be different.
Percentage Percentage
Minimum of Gross Maximum of Gross
Proceeds Proceeds Proceeds Proceeds
-------- ---------- -------- ----------
Gross Offering Proceeds (1).... $1,400,000 100.00% $50,000,000 100.00%
Less Public Offering Expenses:
Selling Commissions (2)........ 98,000 7.00% 3,500,000 7.00%
Dealer Manager Fee (3)......... 28,000 2.00% 1,000,000 2.00%
Other Organizational and
Offering Expenses (3)........ 56,000 4.00% 2,000,000 4.00%
------ ----- --------- -----
Public Offering Expenses (4)... 182,000 13.00% 6,500,000 13.00%
Amount Available for Investment $1,218,000 87.00% $43,500,000 87.00%
========== ====== =========== ======
Acquisition Expenses (4)(5).... 28,000 2.00% 1,000,000 2.00%
Acquisition and Investment
Management Fees (4)(5)......... 98,000 7.00% 3,500,000 7.00%
Working Capital Reserves (6)... 42,000 3.00% 1,500,000 3.00%
------ ----- --------- ------
Proceeds Invested (7)(8)....... $1,050,000 75.00% $37,500,000 75.00%
========== ====== =========== ======
- ---------
(1) Excludes one Unit purchased by the initial limited partner in
connection with the organization of the Series. Also excludes interest
due under the investors' promissory notes. See "Terms of the Offering
and Plan of Distribution." The amount of that interest to be received
cannot be estimated. It will depend on the amounts and dates of
payment of the investor promissory notes. Any such interest will
constitute "Cash Flow" under the Partnership Agreement. As such it may
be used to pay administrative costs, or to increase reserves.
(2) See "Terms of the Offering and Plan of Distribution" for information
concerning underwriting compensation payable by the Series. As is
discussed in that section of this Prospectus, some investors may
purchase Units with a reduced selling commission. For the purposes of
this table, it has been assumed that the maximum selling commissions
will be paid on all purchases of Units.
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(3) See "Management Compensation" and "Terms of the Offering and Plan of
Distribution."
(4) The portion of Public Offering Expenses, Acquisition Expenses and
Acquisition and Investment Management Fees payable from investor
promissory note installments will only be paid when the installments
are received.
(5) See "Management Compensation."
(6) See "Investment Objectives and Policies - Reserves."
(7) Proceeds Invested represents amounts to be paid (i) to acquire
interests in Local Limited Partnerships, and (ii) possibly, to repay
loans (including interest and carrying costs) incurred to acquire such
interests. A Series may have the opportunity to acquire an interest in
one or more Local Limited Partnerships in advance of the receipt of
Gross Offering Proceeds. See "Investment Objectives and Policies -
Investment Policies." If so, the Series may use a loan to make the
acquisition. A Series might obtain a loan from institutional lenders
or from WNC & Associates, Inc. or its affiliates.
Proceeds Invested in Local Limited Partnerships will be used by the
Local Limited Partnerships to pay or reimburse construction and
acquisition costs, to fund reserves, and to pay fees to the Local
General Partners. These costs will consist of the cost of the land (and
building shell in the case of a rehabilitation), construction costs,
construction interest and taxes, financing fees and developmental and
organizational expenses. The manner in which a Local Limited
Partnership will use Proceeds Invested will be negotiated in each case.
It is anticipated that the Local General Partners will be paid
approximately 10% to 30% (although in some cases it may be as much as
40%) of the cost of the apartment complex. See "Investment Objectives
and Policies - Investment Policies."
(8) At a minimum, each Series must invest in Local Limited Partnerships and
in Reserves the greater of (i) 80% of the Gross Offering Proceeds
reduced by 0.1625% for each 1% of the Series' share of the mortgage
financing encumbering the apartment complexes or (ii) 70% of the Gross
Offering Proceeds. Assuming that a Series share of the financing
encumbering apartment complexes is 40%, the calculation is: 40 x .1625%
= 6.5%; 80% - 6.5% = 73.5%. If the Series's share of financing is
61.75%, the calculation is: 61.75 x .1625% = 10%; 80% - 10% = 70%. In
performing this calculation, there is a limit on the amount which may
be invested in Reserves. No more than 5% of Gross Offering Proceeds
may be considered as Reserves at the Series level, and no more than 5%
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of Gross Offering Proceeds may be considered as Reserves at the Local
Limited Partnership level.
Deferred Installments
Units are being offered at a price of $1,000 per Unit. Investors subscribing
for fewer than 20 Units must pay the full amount of the purchase price in cash
upon subscription. Investors subscribing for 20 Units or more in any one Series
may elect to pay 50% of the purchase price in cash upon subscription and the
remaining 50% by the delivery of a promissory note. The investor's promissory
note will be due in a single payment of principal and interest on:
o January 31, 2001, if the investor subscribes between the date hereof and
June 30, 2000,
o June 30, 2001, if the investor subscribes between July 1, 2000 and December
31, 2000, or
o the later of the date of subscription or January 31, 2002, if the investor
subscribes after December 31, 2000.
These due dates may be changed for certain corporate investors. See "Terms of
the Offering and Plan of Distribution."
An investor promissory note will be (i) prepayable at any time in full (but
not in partial prepayments), without penalty or premium, (ii) secured by the
investor's interest in the Series, and (iii) a full recourse obligation of the
investor. If an investor doesn't make the required payment on a promissory note,
among other things the Series would have the right to
o recover by legal proceedings the unpaid amount,
o foreclose on the Units under the Series' security interest in the Units,
o cause a resale of the Units, or
o offset distributions allocable to the Units.
See "Summary of Certain Provisions of the Partnership Agreement." An investor's
obligation to pay his promissory note is unconditional and involves certain
risks. See "Risk Factors - Series-Related Risks - Obligations for Capital
Contributions."
WNC & Associates, Inc. has substantial experience with respect to the
collection and application of deferred investor payments in its prior limited
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partnrships. See "Management" and "Prior Performance Summary." Based on
this experience, WNC & Associates, Inc. believes that the Series' deferred
payment arrangements can offer significant benefits to investors. The deferred
payment arrangement more effectively utilizes offering proceeds by minimizing
the time during which unneeded investor funds are held by the Series. Rather
than holding investor funds idle, or investing them in low-yielding short-term
government securities, it is more efficient to match payments from investors
with the Series' actual needs for capital. This allows investors to retain the
use of their funds until needed by the Series. However, there are administrative
costs involved in processing and collecting investor promissory notes. Based on
these costs, WNC & Associates, Inc. has concluded that installment payment
arrangements should only be available to purchasers of 20 Units ($20,000) or
more in the case of the Series.
Business Development Plan. Each Series has adopted a business development
plan for the use of initial and deferred investor payments. This plan takes into
account the historical patterns of deferred installment payments made to local
limited partnerships by prior programs sponsored by WNC & Associates, Inc.
Neither Series will defer committing to Local Limited Partnership investments
until receipt of payments on the investor promissory notes. Rather, each Series
will seek to make its investment commitments at the earliest possible date.
However, as discussed below under "Investment Objectives and Policies -
Investment Policies," each Series will make its capital contributions to Local
Limited Partnerships in stages over a period of one to two years. A Series will
make each contribution when certain conditions regarding construction or leasing
of the apartment complex have been fulfilled.
For example (and solely for illustrative purposes), a Series' contribution
could be made over a one- to two-year period subject to satisfaction of some or
all of the following requirements:
o reservation of low income housing tax credits and receipt of IRS Form 8609
(Low Income Housing Credit Allocation Certification);
o admission of the Series as a limited partner to the Local Limited
Partnership;
o substantial completion of the apartment complex;
o construction loan closing or receipt of a construction loan commitment;
o permanent loan closing or receipt of a permanent loan commitment;
o occupancy by qualified tenants.
There cannot be any assurance that payments required under investor
promissory notes will be made when due. If not, and if the unpaid amount is
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<PAGE>
material, WNC & Associates, Inc. may attempt to renegotiate the obligations
of the Series or to obtain financing from institutional or other lenders. The
inability of a Series to perform its obligations to a Local Limited Partnership
could result in the dilution or termination of an interest in a Local Limited
Partnership. In turn, this could result in the (i) recapture of
previously-claimed tax credits and the loss of future tax credits, and (ii)
legal actions by the Local General Partners to require performance of such
obligations and to recover their damages and costs.
The portion of selling commissions, dealer manager fees, the nonaccountable
o&o expense reimbursement, acquisition and investment management fees and the
nonaccountable acquisition expense reimbursement payable from the payments to be
received on the investor promissory notes may only be paid as the payments are
actually received on the promissory notes. See "Management Compensation."
Prepayments and Temporary Investments. Many investors will not subscribe for
a sufficient number of Units to qualify for the use of the installment payment
arrangement described above. Some investors who do qualify will pay for their
Units in full upon subscription or later prepay their promissory notes to avoid
or reduce interest costs or for other reasons. WNC & Associates, Inc. cannot
predict the percentage of equity which will be paid upon subscription, the
percentage which will be paid in deferred installments, or the percentage which
will be prepaid. The Series' business development plan contemplates that any
prepayments will be applied in the following order of priority: (i) to fund
related amounts of front-end fees which have been deferred as described in the
preceding paragraph, and (ii) to make temporary investments and applied as soon
as practicable to Local Limited Partnership investments and other deferred
costs.
Policies as to Pledges of Promissory Notes. Generally, the Series may not
sell investor promissory notes before maturity. A Series may sell the promissory
notes made by corporations with credit ratings by Standard & Poor's of A or
better. Each Series may pledge and grant security interests in any promissory
notes as security for any obligation. A Series may grant security interests in
promissory notes to secure its obligations to pay the deferred portions of its
capital contribution to the Local Limited Partnerships.
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MANAGEMENT COMPENSATION
The following table summarizes the types and estimated amounts of
compensation to be paid to WNC & Associates, Inc. and its affiliates. Such
compensation was not determined by arm's-length negotiations. Investment and
management decisions which such persons make for the Series will affect the
amount of the compensation actually to be received. For example, one of the
limits on the asset management fee is based on the number of apartment complexes
purchased. This could cause a conflict of interest because it could encourage
WNC & Associates, Inc. to maximize the number of apartment complexes acquired.
See "Conflicts of Interest." Other than as set forth herein, no compensation is
to be paid to WNC & Associates, Inc. or its affiliates. Such compensation cannot
be increased by reclassifying into different categories fees or reimbursements
which are in excess of the limitations set forth herein.
Type of
Compensation Estimated Maximum Amount
and Recipient of Compensation
- ------------- ---------------
Organizational and Offering Stage
---------------------------------
Selling commissions Up to 7%of the capital contributions ($98,000 if 1,400
payable to WNC Units are sold; $3,500,000 if all of the Units are sold).
Capital Corporation (1)
Dealer manager fees Up to 2% of the capital contributions ($28,000 if 1,400
payable to WNC Units are sold; $1,000,000 if all of the Units are sold).
Capital Corporation (1)
Nonaccountable 4% of the capital contributions, in exchange for which
o & o expense WNC & Associates, Inc. will pay all organizational and
reimbursement offering expenses, with the exception of the 7% selling
payable to WNC & commissions, the 2% dealer manager fee, and the 4%
Associates, Inc. nonaccountable o&o expense reimbursement ($56,000 if
1,400 Units are sold; $2,000,000 if all of the Units are
sold). (1)(2)
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Acquisition Stage (3)
---------------------
Acquisition and Up to 7% of the capital contributions (up to $98,000 if
investment 1,400 Units are sold; up to $3,500,000 if all of the Units
management fees are sold). (4)
payable to WNC &
Associates, Inc.
Nonaccountable 2% of the capital contributions, in exchange for which
acquisition expense WNC & Associates, Inc. will pay all acquisition expenses
reimbursement ($28,000 if 1,400 Units are sold; $1,000,000 if all of the
payable to WNC & Units are sold). (5)
Associates, Inc.
Operating Stage
---------------
Asset management An annual fee in an amount not to exceed 0.2% of invested
fees payable to assets in Local Limited Partnerships which are subsidized
WNC & Associates, under one or more Federal, state or local government
Inc. programs. Actual amounts will depend on the amount of
invested assets and are not determinable at this time;
however, assuming the Apartment Complexes are 65% leveraged
and all the Units offered hereby are sold, invested
assets would be approximately $107,000,000 and the annual
asset management fee would be approximately $214,000.(6)
Property management WNC Management, Inc. may act as the management and leasing
fees payable to agent for some of the Local Limited Partnerships. Actual
WNC Management, Inc. amounts are not determinable at this time, but would be at
competitive rates for comparable services, not to exceed
5% of gross property revenues plus a fee for the one-time
initial rent-up or leasing-up of a newly-constructed or
totally-rehabilitated apartment complex.
Reimbursement of WNC & Associates, Inc. will be reimbursed for the actual
operating cash amount of any of a Series's operating cash expenses
expenses paid by advanced by it. In no event will reimbursements be
WNC Associates, permitted for (i) services for which WNC & Associates, Inc.
Inc. is entitled to compensation by way of a separate fee, (ii)
rent, depreciation or other such administrative items, or
(iii) salaries, fringe benefits or travel expenses of a
controlling person of WNC & Associates, Inc. Actual
amounts are not determinable at this time.(7)
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WNC & 0.1% of cash available for distribution. Actual amounts
Associates, will depend upon results of operations of the Series and
Inc. share of are not determinable at this time. (8)
cash available
for distribution
SLP Affiliate's Up to 0.1% of all allocations by Local Limited Partnerships
share of allocations of profits, losses and tax credits and up to 1% of
and operating cash distributions from operating cash flow. Actual amounts
distributions of will depend upon (i) the terms of the partnership
Local Limited agreements of the Local Limited Partnerships and (ii) the
Partnerships results of the Local Limited Partnership's operations and
are not determinable at this time. (9)(10)
Local General If the SLP Affiliate or another affiliate of WNC &
Partner's share of Associates, Inc. becomes the Local General Partner of a
allocations and Local Limited Partnership, such affiliate may receive
operating cash allocations from the Local Limited Partnership of profits,
distributions of any losses and tax credits and distributions from operating
Local Limited cash flow. Actual amounts will depend upon (i) the terms
Partnership if an of the partnership agreement of the Local Limited
affiliate of WNC Partnership and (ii) the results of the Local Limited
& Associates, Inc. Partnership's operations and are not determinable at this
becomes the Local time. (9)(10)
General Partner of
such Local Limited
Partnership
Liquidation Stage (11)
----------------------
Subordinated Subject to payment of preferred distributions to the
disposition fee investors, a Series may pay WNC & Associates, Inc.
payable to WNC & from the sale proceeds of apartment complexes a
Associates, Inc. subordinated disposition fee equal to 1% of the sales price
of the apartment complexes. Actual amount will depend
upon results of the sale and are not determinable at this
time. (12)
WNC & After (i) a Series' investors have received sale or
Associates, Inc.'s refinancing proceeds equal to the amounts of their capital
share of sale or contributions and their preferred return, and (ii) WNC &
refinancing Associates, Inc. has received sale or refinancing
proceeds proceeds equal to the amount of its capital contributions
and any subordinated disposition fee, the Series will
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distribute any additional sale or refinancing proceeds 90%
to its investors and 10% to WNC & Associates, Inc. Actual
amounts will depend upon the amount of sale or
refinancing proceeds received from Local Limited
Partnerships and are not determinable at this time.(10)(13)
Local General If the special limited partner or another affiliate of WNC
Partner's share of & Associates, Inc. becomes the Local General Partner of
distributions from a Local LImited Partnership, such affiliate may receive
a sale, financing distributions from the sale, financing or refinancing of
or refinancing the apartment complex. Actual amounts will depend upon (i)
transaction by any the terms of the partnership agreement of the Local
Local Limited Limited Partnership and (ii) the results of the Local
Partnership if an Limited Partnership's operations and are not determinable
affiliate of WNC at this time. (9)(10)
& Associates, Inc.
becomes the Local
General Partner of
such Local Limited
Partnership
Interest in Series (14)
-----------------------
WNC & Generally, 0.1% of profits, losses and tax credits,
Associates, Inc.'s except that in the case of profits from a sale or
allocations of refinancing, the percentage may be increased to as much
profits, losses and as 10%. Actual amounts allocable to WNC & Associates, Inc.
tax credits will depend upon results of operations of the Series and
the Local Limited Partnerships and are not determinable
at this time.
(1) All or a portion of these amounts will be reallowed to participating
broker-dealers.
(2) Organizational and offering expenses include all expenses incurred in
connection with the formation of a Series, the registration and
qualification of its Units under Federal and state securities laws and
its offering, including selling commissions, dealer manager fees, the
nonaccountable o&o expense reimbursement and all advertising expenses.
(3) In addition, WNC & Associates, Inc. or its affiliates may receive
interest on short-term loans to a Series. See "Investment Objectives
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and Policies - Use of Leverage." Interest cannot exceed the prime rate
of Southern California Bank plus 2% per annum.
In a limited number of circumstances a Local Limited Partnership may
generate federal tax credits and state tax credits. If so, WNC &
Associates, Inc. may syndicate an investment in the state tax credits
to another entity. See "Investment Objectives and Policies - Terms of
the Local Limited Partnership Agreements - Interests in Profits, Losses
and Distributions." WNC & Associates, Inc. would receive compensation
from the other entity in connection with such syndication.
(4) Acquisition and investment management fees are subject to reduction if
the Units are sold at a discount, as discussed under "Terms of the
Offering and Plan of Distribution." WNC & Associates, Inc. also may
reduce acquisition and investment management fees from time to time as
it deems appropriate in its sole discretion.
(5) Acquisition expenses include legal fees and expenses, travel and
communications expenses, costs of appraisals, non-refundable option
payments on property not acquired, accounting fees and expenses, title
insurance and miscellaneous expenses related to the selection and
acquisition of Local Limited Partnerships and apartment complexes.
(6) "Invested assets" means the sum of a Series' investment in Local
Limited Partnerships and the Series' allocable share of the amount of
the mortgage loans on, and other debts related to, the apartment
complexes owned by such Local Limited Partnerships.
(7) Operating cash expenses include expenses for management, on-site
property personnel, utilities, repair and maintenance, insurance,
investor communications, legal, accounting, statistical and bookkeeping
services, use of computing or accounting equipment, travel and
telephone expenses, salaries and direct expenses of Series employees
while engaged in Series business, and any other operational and
administrative expenses necessary for the prudent operation of the
Series. Without limiting the generality of the foregoing, operating
cash expenses include the actual cost of goods, materials and
administrative services used for or by the Series, whether incurred by
WNC & Associates, Inc. or a non-affiliated person. As used in
the preceding sentence, (i) actual cost of goods and materials means
the actual cost of goods and materials used for or by the Series and
obtained from entities not affiliated with WNC & Associates, Inc., and
(ii) actual cost of administrative services means the pro rata cost of
personnel (as if such persons were employees of the Series), but in no
event to exceed a competitive amount.
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(8) "Cash available for distribution" means, with respect to any period,
cash flow less any amounts added to reserves. "Cash flow" means (i) the
Series's cash distributions from the Local Limited Partnerships
(exclusive of any cash derived from the sale, financing or refinancing
of apartment complexes) plus (ii) all cash funds generated by the
Series (such as interest), after deducting cash funds used to pay
expenses, debt service and capital expenditures.
(9) WNC Housing, L.P., an affiliate of WNC & Associates, Inc., will be the
special limited partner (the "SLP Affiliate") of the Local Limited
Partnerships. For a discussion of the role of the special limited
partner in the Local Limited Partnerships, see "Investment Objectives
and Policies - Terms of the Local Limited Partnership Agreements - Role
of SLP Affiliate."
(10) Despite the information in the tables, the interest of WNC &
Associates, Inc. and each of its affiliates in cash to be distributed
by the Series from cash available for distribution and sale or
refinancing proceeds, and from similar sources in the case of the Local
Limited Partnerships, will not exceed, in the case of cash available
for distribution, 10% of total cash available for distribution and, in
the case of sale or refinancing proceeds (after required payments to
the investors), 15% of remaining sale or refinancing proceeds.
For a discussion of the required payments to investors, see "Profits
and Losses, Tax Credits and Cash Distributions."
(11) Liquidation Stage includes liquidations of investments in apartment
complexes.
(12) In compliance with the "blue sky" laws of certain states in which the
Units will be offered, a subordinated disposition fee will be paid only
if WNC & Associates, Inc. or an affiliate provides a substantial amount
of services in the sales effort. The Partnership Agreement does not
specify the extent of the services required. WNC & Associates, Inc.
will cause a fee to be paid when it believes that it is appropriate to
do so.
(13) "Sale or refinancing proceeds" means the Series' cash distributions
from a Local Limited Partnership's sale, financing or refinancing of an
apartment complex, less (i) the expenses of the sale, financing or
refinancing, (ii) amounts paid to retire indebtedness and other
obligations, and (iii) any reserves funded with such proceeds. The
investor's preferred return is an annual, cumulative, but not
compounded, return to the Series' investors on their capital
contributions equal to 11% through December 31, 2010, and 6% for the
balance of the Series' term.
(14) See "Profits and Losses, Tax Credits and Cash Distributions."
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CONFLICTS OF INTEREST
The interests of WNC & Associates, Inc. and its affiliates may conflict
with the interests of the investors in various ways. These conflicts include:
Receipt of Fees and Other Compensation by WNC & Associates, Inc. and its
Affiliates
WNC & Associates, Inc. will decide which investments will be made by the
Series, and in what manner the acquisitions will occur. WNC & Associates, Inc.
will also decide how the investment will be managed, and when the investments
will be sold. As a result of these transactions, WNC & Associates, Inc. and its
affiliates will receive fees, compensation and other income. See "Investment
Objectives and Policies," "Management Compensation" and "Summary of Certain
Provisions of the Partnership Agreement." Such compensation arrangements were
not negotiated at arm's length and may create conflicts between the interests of
WNC & Associates, Inc. and its affiliates and those of the investors.
For example, the consent of a Series may be necessary in connection with the
sale of an apartment complex by a Local Limited Partnership. WNC & Associates,
Inc. may face a conflict in these circumstances because its share of fees and
cash distributions from the transaction may be more or less than its expected
share of fees if the apartment complex were not sold. And in its negotiations
with Local General Partners over the terms of the Series' investments, WNC &
Associates, Inc. may request that WNC Management, Inc. serve as the property
manager for the apartment complex. As property manager, WNC Management, Inc.
would earn property management fees from the Local Limited Partnerships. The
result of these conflicts could be that a Series may make investments which are
less desirable, or on terms which are less favorable, to the Series than might
otherwise be the case.
Other Business Activities of WNC & Associates, Inc. and its Affiliates
WNC & Associates, Inc. and its affiliates have formed and are serving as
general partners of other public and private real estate limited partnerships.
They also are providing administrative and consulting services for other real
estate limited partnerships of which they were not the original managing general
partners. See "Management" and "Prior Performance Summary." In addition, WNC &
Associates, Inc. and its affiliates may become general partners of other public
or private real estate limited partnerships and may become involved in other
business activities unrelated to the business of the Series.
Under the Partnership Agreement, WNC & Associates, Inc. is required to
devote to Series' affairs only such time as is necessary for the proper
performance of its duties to the Series. The officers, directors and employees
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<PAGE>
of WNC & Associates, Inc. will perform its duties. None of them will devote
their full time to the performance of such duties. Therefore, conflicts may
arise in the allocation of the time of such people among the activities of each
Series and the other activities of WNC & Associates, Inc. WNC & Associates, Inc.
believes that it has sufficient personnel to fully discharge its duties to the
Series and to all other entities to which it is responsible. See "Management."
Competition with WNC & Associates, Inc. and its Affiliates with Respect to the
Purchase or Ownership of Properties
As noted above, WNC & Associates, Inc. and its affiliates are also general
partners of a substantial number of other real estate limited partnerships and
will form and manage additional real estate entities. The other existing
partnerships have, and it is expected that any entities to be organized in the
future will have, the same or similar investment objectives as the Series.
WNC & Associates, Inc. might be presented with an investment opportunity
which is appropriate for a Series and one or more other entities (including the
other Series) managed by WNC & Associates, Inc. WNC & Associates, Inc. will
decide which entity will make the investment. That decision will be based upon
such factors as:
o the effect of the acquisition on the diversification of each entity's
portfolio,
o the estimated income tax effects of the purchase on each entity,
o the amount of funds of each entity available for investment, and
o the length of time funds have been available for investment.
If a particular investment is determined to be suitable for more than one
entity, the entity having uninvested funds for the longest period of time will
have priority over the other entities. However, if an investment generates
federal and state low income housing tax credits, then an entity formed to
provide federal and state tax credits to its investors will have priority over
each Series and other entities which are not formed to provide such state tax
credits.
WNC & Associates, Inc., the Local General Partners and their affiliates may
own or acquire interests in properties near or adjacent to the apartment
complexes in which a Series may invest. It is possible that the value of such
persons' properties may be enhanced by their proximity to the Series' apartment
complexes. It is also possible that such properties may be in competition with
the Series' apartment complexes for prospective tenants or purchasers. As a
result, the interests of WNC & Associates, Inc., the Local General Partners and
their affiliates may conflict with those of a series.
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Other Transactions with Developers, Local General Partners, Lenders and Joint
Venturers
Certain persons controlling or having business dealings with some of the
Local Limited Partnerships, such as general partners, developers and lenders,
will be persons with whom WNC & Associates, Inc. and its affiliates do business.
WNC & Associates, Inc. may receive substantial compensation, profits or other
benefits in connection with such other transactions. As a result, conflicts may
arise between their interests and the interests of the Series. For example, WNC
& Associates, Inc. generally is entitled to remove a Local General Partner
without the consent of the investors. If WNC & Associates, Inc. has other
business dealings with the Local General Partner, WNC & Associates, Inc. might
be reluctant to remove the Local General Partner under circumstances which
otherwise would warrant removal.
Representation in Tax Audit Proceedings
WNC & Associates, Inc. has been designated the "Tax Matters Partner" of each
Series. As such, it is authorized and directed to represent each Series and its
investors at the expense of the Series in connection with all examinations of
the Series' affairs by tax authorities, including any resulting administrative
or judicial proceedings. Such proceedings may involve or affect the other Series
and other partnerships and limited liability companies managed by WNC &
Associates, Inc. In such situations, the positions taken by WNC & Associates,
Inc. with respect to the Series may have differing effects on the Series and the
other entities.
Distribution of Units
The Series have not engaged an independent managing underwriter for the
distribution of the Units. WNC Capital Corporation, as the dealer manager for
the offering of Units, may sell Units and will perform wholesaling services for
the Series, WNC Capital Corporation may not perform due diligence in the same
manner as an independent broker-dealer.
Joint Investments
A Series may invest in Local Limited Partnerships jointly with the other
Series or with other limited partnerships (including other limited partnerships
sponsored by WNC & Associates, Inc.) if the conditions set forth under
"Investment Objectives and Policies - Joint Investments" are met. There is
always a risk that joint venture partners will reach an impasse respecting the
activities of the joint venture. For example, it may be in the best interest of
a Series to sell a jointly-held Local Limited Partnership at a time when it is
in the best interest of its co-venturer to retain such investment. In such
event, the Series may be unable to sell the Local Limited Partnership interest.
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Resolution of Conflicts of Interest
Except as set forth above, the Series have not developed any formal process
for resolving conflicts of interest. However, WNC & Associates, Inc. is subject
to a fiduciary duty to exercise good faith and integrity in handling the affairs
of each Series, and that duty will govern its actions in all such matters (see
"Fiduciary Responsibility"). Furthermore, the manner in which the Series can
make investments and the manner in which the Series can operate are subject to
restrictions contained in the Partnership Agreement. See "Investment Objectives
and Policies."
Nonetheless, the foregoing conflicts could result in materially adverse
effects on the investors.
Lack of Separate Representation
The Series, WNC & Associates, Inc. and its affiliates, and the investors are
not represented by separate counsel. See "Legal Matters." All of the attorneys,
accountants and other experts performing services for the Series also perform
services for WNC & Associates, Inc. and its affiliates. Following the
termination of the offering, if any controversy arises in which the interests of
a Series appear to be in conflict with those of (i) the other Series, (ii) WNC &
Associates, Inc. or its affiliates, or (iii) a Local Limited Partnership, other
counsel would be retained for one or more of the parties.
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Organizational Diagram
The following diagram illustrates the relationships among the Series, WNC &
Associates, Inc., certain of its affiliates, and certain other parties:
Owner of WNC & Associates, Inc.
WNC Capital Corporation Fund Manager
of
Owner of WNC Housing Tax Credit
Fund VI, L.P.,
Series 7 and Series 8
WNC Management, Inc.
Limited Partners
of
Local Limited
Partnerships
In addition to the foregoing relationships, WNC & Associates, Inc. and its
affiliates have sponsored and are serving as general partners of other real
estate limited partnerships. See "Management" and "Prior Performance Summary."
FIDUCIARY RESPONSIBILITY
WNC & Associates, Inc. is accountable to each Series as a fiduciary. The
Series have been advised by counsel that the laws of the State of California
govern the fiduciary obligations of WNC & Associates, Inc. to each Series and
its investors. Under such laws, a general partner owes its partners the utmost
good faith and loyalty. The Partnership Agreement does not modify these
fiduciary obligations provided under California law. Rather, the Partnership
Agreement expressly provides that WNC & Associates, Inc.:
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o has fiduciary responsibility for the safekeeping and use of all funds and
assets of each Series, whether or not in its immediate possession or
control;
o may not employ or permit another to employ such funds or assets in any
manner except for the exclusive benefit of the Series;
o may not contract away its fiduciary duty; and
o may engage in other business activities independent of the Series provided
that the right to engage in such activities does not relieve it of its
general fiduciary obligation to the Series.
Under California law and subject to certain conditions, a limited partner
may institute legal action on behalf of a partnership (a partnership derivative
action) to recover damages from third parties or to recover damages for a breach
by a general partner of its fiduciary duty. In addition, a limited partner may
institute a legal action on behalf of himself and all other similarly situated
limited partners (a class action) to recover damages for a breach by a general
partner of its fiduciary duties, subject to California rules applying to class
actions. In any such action, WNC & Associates, Inc. could assert defenses based
on the exculpation provisions in the Partnership Agreement (described in the
following paragraph). If WNC & Associates, Inc. satisfied the standards for
exculpation, it would be deemed not to have breached its fiduciary obligation.
This area of the law is changing and developing and investors who have questions
concerning the fiduciary duties of WNC & Associates, Inc. should consult with
their counsel.
The Partnership Agreement exculpates WNC & Associates, Inc. and its
affiliates from liability for acts or omissions that any of them performs:
o in good faith, and
o in a manner which WNC & Associates, Inc. reasonably believes to be within
the scope of authority granted to it and in the best interest of the Series,
provided
o the acts or omissions did not constitute negligence or misconduct.
The Partnership Agreement also indemnifies WNC & Associates, Inc. and its
affiliates against liabilities for losses to a Series resulting from errors in
judgment or other acts or omissions, whether or not disclosed, provided such
conduct did not constitute negligence or misconduct and was the result of a
course of conduct which WNC & Associates, Inc., in good faith, determined was in
the best interests of the Series. See Section 5.8 of the Partnership Agreement.
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As a result of these exculpation and indemnification provisions, an
investor may have a more limited right of action than he would otherwise have
had in the absence of such provisions. In the opinion of the Securities and
Exchange Commission, indemnification for liabilities arising under the
Securities Act of 1933 is against public policy and therefore unenforceable.
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INVESTMENT OBJECTIVES AND POLICIES
Principal Investment Objectives
Each Series' principal investment objective is to provide tax benefits in
the form of:
(a) A predictable stream of tax credits which investors may use to
offset their Federal income tax liabilities, subject to
certain specific limitations.
(b) Tax losses which (i) some corporations may use to offset any
type of income, and (ii) other corporations and individuals
may use to offset only certain types of income. See "Federal
Income Tax Considerations - Limitations on Losses and Credits
from Passive Activities."
In addition each Series will seek, to the extent feasible, to preserve and
protect its invested capital and to return such capital through cash
distributions resulting from sale or refinancing transactions. See "Sale or
Other Disposition of Investments" below.
The Series will not seek to provide cash distributions from operations.
THERE CAN BE NO ASSURANCE THAT THESE INVESTMENT OBJECTIVES WILL BE
ACHIEVED. IN ADDITION, THE DEGREE TO WHICH EACH SERIES ACHIEVES ITS OBJECTIVES
MAY VARY.
This Prospectus will be supplemented to identify a specific investment when
WNC & Associates, Inc. believes a reasonable probability exists that the
investment will be acquired. Any such supplement will set forth available data
with respect to the investment, including the proposed terms of purchase, a
description of the apartment complex and Local General Partners, and other
information considered appropriate for an understanding of the transaction. The
consummation of any pending acquisition will be subject to further negotiation
with the Local General Partner and execution of a final agreement. Such final
agreement may differ in material respects from prior understandings or
agreements between the Local General Partner and the Series. And the acquisition
or retention of each investment will be subject to various terms and conditions
of closing. Accordingly, there can be no assurance that any potential investment
initially disclosed in a supplement to this Prospectus will ultimately be
acquired, or that the terms of any acquisition will not differ substantially
from those which were initially disclosed.
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Low income housing tax credits are available for an apartment complex over
a 10- year period commencing with the date that the property is placed in
service and otherwise meets the requirements for the credit. It is expected that
investors will be allocated low income housing tax credits beginning in the year
they are admitted to the Series or the next year. It is also expected that the
amount of low income housing tax credits available to investors will be higher
in later years because of the time that is necessary (i) to identify the Local
Limited Partnerships in which a Series will invest and (ii) for such Local
Limited Partnerships to complete construction of their respective apartment
complexes. Any reduction in low income housing tax credits in the first and
second years of a Series should result in additional low income housing tax
credits in the eleventh and twelfth years of a Series.
WNC & Associates, Inc. believes that each Series will be able to acquire a
sufficient number of investments at a purchase price which will enable the
Series to provide the amounts of tax credits anticipated at commencement of the
Series' offering. This belief is based upon the general knowledge that the
management personnel of WNC & Associates, Inc. have with respect to the current
and past purchase prices for tax credit properties. In negotiating the purchase
price to be paid by a Series for its interest in a Local Limited Partnership,
WNC & Associates, Inc. will determine the portion of the Series capital that can
be paid for such interest which will enable the investors to receive the
anticipated amount of tax credits. WNC & Associates, Inc. will take into
consideration the possibility that a Local Limited Partnership will not provide
all of the tax credits that are expected. To the extent a Series does not make
distributions in respect of a Unit equal to the $1,000 purchase price of the
Unit, the tax credits generated by the Series would in effect represent a return
of (and not a return on) the investor's investment in the Series.
Among other things, WNC & Associates, Inc.'s estimate of the amount of tax
credits that will be provided by each Series is based upon the assumption that
demand for tax credit properties does not increase the price for such
properties. In the past, heightened demand for interests in Local Limited
Partnerships increased the purchase price for such interests. Further increases
could impair the ability of a Series to provide investors with the anticipated
amount of tax credits. See "Risk Factors - Investment Risks - Keen Competition
for Investments."
WNC & Associates, Inc.'s estimate of the amount of the tax credits that
will be provided by each Series is based upon additional assumptions, including,
that:
o no tax laws or regulations (or court interpretations thereof) will be
enacted or adopted which would adversely affect the Series;
o the apartment complexes will qualify for the anticipated tax credits at
the appropriate times;
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o 100% of the cost of the low income residential units in each apartment
complex (excluding land) will qualify for the low income housing tax
credits;
o the low income residential units in each apartment complex will be rented
to eligible tenants;
o the qualified basis of each apartment complex used to calculate the tax
credits will not decrease during the 15-year compliance period;
o each Local Limited Partnership will continually meet the rental and
occupancy tests for the low income residential units during the 15-year
compliance period;
o development fees to the Local General Partners or their affiliates will be
included in the qualified basis of each apartment complex used to calculate
the tax credits; and
o in the case of an existing apartment complex, the acquisition thereof will
constitute a "purchase" for purposes of Code Section 42.
See "The Low Income Housing Tax Credit."
Events occurring after the acquisition of interests in local limited
partnerships could materially affect a Series' ability to provide all of the
anticipated tax credits. For example, the amount of tax credits for a property
depends, in part, on the costs to construct the property. If the costs to
construct are less than anticipated, the amount of the tax credits will be less
than anticipated. Also, the amount of tax credits is based, in part on current
interests rates. If there is a change in interest rates from the time a Series'
agrees to acquire a property and the time the property is placed in service, the
tax credits will be less or more than anticipated. The amount of tax credits
could also be materially and adversely affected by the failure of any other of
the assumptions listed above. See "Risk Factors - Risks Related to Tax Credits."
However, as discussed below in this section under "Terms of the Local Limited
Partnership Agreements," the partnership agreements of the Local Limited
Partnerships will include various "adjuster" and other provisions intended to
reduce the adverse consequences to a Series discussed herein.
The foregoing investment objectives are set forth in the Partnership
Agreement of each Series and can only be changed by an amendment to the
Partnership Agreement.
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Investment Policies
Investment Criteria. In selecting Apartment Complexes WNC & Associates,
Inc. will evaluate, among other factors:
o the amount of low income housing tax credits which are anticipated;
o the amount of cash flow from operations, if any, which is anticipated;
o the location of the apartment complex;
o general rental market conditions in the area of the apartment complex,
including vacancy rates and information as to the numbers of eligible
tenants in the area;
o the expenses, rental rates and costs of construction of the apartment
complex and comparable apartment complexes;
o the data supplied to the agency providing government financing subsidies or
other lender;
o the financial strength of the Local General Partners;
o the prior performance of the Local General Partners;
o the experience and prior performance of the property manager;
o the types of guarantees which can be obtained from the Local General
Partners and other sellers and developers;
o the prior experience and reputation of the builder and architect of the
apartment complex.
The criteria for selecting a particular investment for a Series will
include the following:
o The apartment complex must be completed, under development or in the
process of being rehabilitated.
o In the case of a newly constructed or rehabilitated apartment complex, no
substantial part of the Series' investment can be made before receipt of a
commitment for the construction loan and no more than 75% of the Series'
investment can be made before receipt of a commitment for the permanent
loan.
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o The Local General Partners must represent that a specified percentage of
the residential units comprising the apartment complex will be set aside
for low income tenants.
o The Local Limited Partnership must agree to provide the Series with a
specific amount of tax credits.
o In no case shall the Series invest in any Local Limited Partnership if, at
the date of initial investment, WNC & Associates, Inc. or any of its
affiliates is a Local General Partner or an affiliate of a Local General
Partner, or otherwise has an interest therein, except as provided in
Sections 5.2.2(vii), 5.3.2(i) and/or Section 5.3.1(viii) of the Partnership
Agreement.
o An experienced real estate developer must agree to supervise management of
the apartment complex or to serve as the Local General Partner for a period
of time acceptable to WNC & Associates, Inc.
WNC & Associates, Inc. will seek to ascertain the status of certain matters
with respect to a Local Limited Partnership as a condition to a Series becoming
a limited partner or member of the Local Limited Partnership. These matters are
expected to include (i) assurance that the Local Limited Partnership has title
to its apartment complex, (ii) assurance that the Local Limited Partnership is
duly formed as a limited partnership or limited liability company under the laws
of its state of origin, and (iii) receipt of an opinion of counsel for the Local
Limited Partnership as to the limited liability of the Series as a limited
partner or member thereof. Such counsel's opinion will also include, or permit
the Series counsel to render, an opinion that (i) the Local Limited Partnership
is a partnership for Federal income tax purposes, (ii) the allocation provisions
of the partnership agreement of the Local Limited Partnership will not be
significantly modified by the IRS and, (iii) based on the assumption that the
Local Limited Partnership will operate as represented by the Local General
Partners, that the apartment complex will qualify for the anticipated tax
credits.
A Series will not acquire an interest in a Local Limited Partnership unless
the Series has received, with respect to the apartment complex of such Local
Limited Partnership, either (i) an appraisal prepared by a competent,
independent appraiser or (ii) a form of a state or other governmental agency
setting forth estimates with respect to construction and mortgage financing
costs and initial rental income and operating expenses. These forms may include:
o Forms 1924-13 (estimate and certificate of actual cost) and 1930-7
(statement of budget, income and expense) of the U.S. Department of
Agriculture, Rural Development ("RD"),
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o Form 2264 (project cost and budget analysis) of the U.S. Department of
Housing and Urban Development ("HUD"),
o a comparable form of any successor of RD or HUD,
o or a form of any applicable tax credit allocation agency.
In any case the appraisal or form will be maintained in the Series' records
for at least five years, and will be available for inspection and duplication by
any investor.
Each Series intends to invest only in Local Limited Partnerships which will
arrange for comprehensive insurance coverage for their apartment complexes,
including liability, fire and extended coverage, of the type which is
customarily obtained for similar properties. See, however, "Risk Factors -
Investment Risks - Possibility of Uninsured Losses."
Eligibility for Low Income Housing Tax Credits. Each Series will invest in
Local Limited Partnerships which own and operate apartment complexes to be
eligible for low income housing tax credits and/or historic tax credits. With
respect to apartment complexes which will generate low income housing tax
credits, at a minimum, at least (i) 40% of the residential units in each
apartment complex, and (ii) 70% of the total number of residential units in all
of the apartment complexes, will be expected to be set aside for low income
tenants.
Historic Tax Credits. Some of the Local Limited Partnerships in which a
Series invests may own apartment complexes which qualify for historic tax
credits in addition to, or instead of, low income housing tax credits. Historic
tax credits are available for certain rehabilitation expenditures incurred in
improving certified historic structures. The historic tax credit is generally
equal to 20% of the qualified rehabilitation expenditures. Unlike low income
housing tax credits, the full amount of the historic tax credit is claimed in
the year in which the rehabilitated structure is placed in service. The historic
tax credit is more fully discussed in "Federal Income Tax Considerations -
Historic Tax Credit" and "- Historic Tax Credit Recapture."
Types of Properties. Each Series might invest in two basic types of
apartment complexes. The first type consists of newly-constructed or
substantially rehabilitated apartment complexes comprised of one or a number of
buildings generally containing a total of from 15 to 200 apartment units. These
projects will be financed either by (i) the U.S. Department of Agriculture,
Rural Development (formerly, the Farmers Home Administration of the U.S.
Department of Agriculture), (ii) under the Home Investment Partnership program,
(iii) with the proceeds of tax-exempt bonds or of state and local bonds which
are not tax-exempt, or (iv) with other below-market- interest-rate indebtedness.
These properties may also receive rental assistance. The second type consists of
newly-constructed or substantially rehabilitated apartment
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complexes without Federal or state government subsidies, but which
otherwise qualify for tax credits, including single-room occupancy complexes.
Location of Properties. The apartment complexes may be located in any of
the United States, territories, or possessions of the United States. Apartment
complexes assisted by the U.S. Department of Agriculture, Rural Development will
be located in towns with a population of less than 50,000. Apartment complexes
assisted by the U.S. Department of Housing and Urban Development will be located
in cities with medium to large populations. Other apartment complexes may be
located in urban, suburban or rural areas. WNC & Associates, Inc. will seek as
much diversity as is reasonably possible in the locations of the apartment
complexes. However, a Series' ability to provide such diversification will be
substantially influenced by the amount of the proceeds it receives from its
offering and the purchase prices of its investments. See "Number of Investments"
below and "Risk Factors - Investment Risks - Risks of Limited Diversification"
and "- Keen Competition for Investments." The Series do not intend to invest in
any distressed low income areas with a high risk of property deterioration and
neighborhood instability, but may invest in renewal areas where WNC &
Associates, Inc. believes there is a strong probability of economic success.
Number of Investments. The number of apartment complexes in which a Series
invests will depend on the amount of the proceeds from its offering and the
purchase prices of its investments. If a Series receives only the minimum
proceeds of $1,400,000, it is expected that the Series would invest in three to
five apartment complexes. If a Series receives the maximum proceeds of
$25,000,000, the number of the Series' apartment complexes would be
substantially greater. A Series has no policy or limitation as to the amount or
percentage of its proceeds which may be invested in any one Local Limited
Partnership or group of Local Limited Partnerships or Local Limited Partnerships
with which any person or group of persons is affiliated.
Timing of Investments. Subject to the limitations discussed below, a Series
may make or commit to make investments in apartment complexes at any time,
including atime before the completion of its offering. There are risks involved
in making or committing to make investments before the receipt of offering
proceeds. See "Risk Factors - Investment Risks - Risks of Investments Before the
Sale of Units." WNC & Associates, Inc. will attempt to mitigate the risks by
limiting such investments and commitments and by attempting to negotiate certain
protective provisions in the related agreements or commitments. Such provisions
may include extensions of the due dates for payment, releases from commitments
if proceeds are not available, or reduction of an interest in a Local Limited
Partnership.
Any portion of a Series' capital contributions which has not been invested
or committed to investment in Local Limited Partnerships or reserves within the
later of (i) 24 months from the date of commencement of the Series' offering or
(ii) 12 months after termination of the offering, will be returned by the Series
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to its investors. No interest will be payable to the investors if
uninvested funds are returned to them. WNC & Associates, Inc. will not receive
any fees from capital returned to investors. For these purposes, capital will be
deemed committed to an investment no later than the date a Series executes a
written agreement in principle, commitment letter, letter of intent or
understanding, option agreement or other similar understanding or contract with
respect to such investment. Once capital is treated as committed under that
policy it need not later be returned to the investors even if the identified
investment is not consummated. Rather, such capital could be used for another
investment.
Until required by a Series for use in connection with its business and
operations as described in this Prospectus, all funds received by a Series from
its offering will be held by the Series in (i) United States government
securities, (ii) securities issued or fully guaranteed by United States
government agencies, (iii) certificates of deposit and time or demand deposits
in, or repurchase agreements constituting obligations of, commercial banks with
deposits insured by the Federal Deposit Insurance Corporation or (iv) other
short-term, highly-liquid investments. The rate of return on such types of
investments has been relatively low in recent years and may be significantly
less than that obtainable from investments in apartment complexes.
Payment for Investments. A Series will normally make its capital
contributions to a Local Limited Partnership in stages over a period of from one
to two years, with each contribution due when certain conditions regarding
construction or operation of the apartment complex have been fulfilled. For
example (and solely for illustrative purposes), the Series' contribution could
be made over a one- to two-year period subject to satisfaction of some or all of
the following requirements:
o reservation of low income housing credits and receipt of IRS Form 8609
(Low Income Credit Allocation Certification);
o admission of the Series as a limited partner or member in the Local
Limited Partnership;
o receipt of a commitment for or closing of the construction loan;
o substantial completion of the apartment complex;
o receipt of a commitment for or closing of the permanent loan; or
o occupancy by qualified tenants.
In connection with the acquisition of an interest in a Local Limited
Partnership owning a completed project, a Series may make its capital
contribution in stages, as described above, or in full at the time of
acquisition.
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In general, each of the Series' payments to a Local Limited Partnership
will be made only after receipt of representations and warranties of the Local
General Partners to the effect that there is no material default by the Local
Limited Partnership under any mortgage loan or under any other material
agreements. See "Terms of the Local Limited Partnership Agreements" below in
this section.
Once an investment has been selected, the asset management personnel of WNC
& Associates, Inc. will monitor the apartment complex monthly to determine
compliance with construction and rent-up schedules. After stabilized occupancy
has been achieved, quarterly reviews and regular on-site visits will be
conducted to monitor building maintenance, occupancy and other operations and
maintenance of reserves.
In determining whether or not to acquire an interest in a Local Limited
Partnership, a Series may make a loan to the Local Limited Partnership before
acquiring the interest. Any such loan must be on a short-term basis (not to
exceed one year) and must, unless earlier repaid, be repaid from the Series'
initial capital contribution to the Local Limited Partnership. The amount of any
such loan may not exceed 50% of the total capital contribution to be made to the
Local Limited Partnership. If a Series does not make an investment in the Local
Limited Partnership and the Local Limited Partnership does not repay the loan,
the amount of capital the Series has available for investment in other Local
Limited Partnerships would be reduced. See "Risk Factors - Investment Risks -
Risks of Loss of Loans Made to Local Limited Partnerships."
The Local General Partners
The Local General Partners will operate and control the business of the
Local Limited Partnerships. The role of a Series in a Local Limited Partnership
will be limited to that of a limited partner or non-managing member. Hence, the
experience and the financial condition of the Local General Partners will be
crucial to the success of any apartment complex.
Financial Condition and Experience of Local General Partners. Before any
investment in a Local Limited Partnership, WNC & Associates, Inc. will obtain
financial statements (which may be unaudited) from the Local General Partners.
WNC & Associates, Inc. will also obtain information and representations with
respect to the prior real estate and tax credit experience of the Local General
Partners. Except in the case of non-profit organizations, the Local General
Partners and any affiliate guaranteeing the obligations of any Local General
Partner generally will be required to demonstrate an aggregate net worth:
o which is in an amount deemed appropriate by WNC & Associates, Inc., and
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o which is sufficiently liquid or otherwise readily available to be
able to protect the Local Limited Partnership in view of:
* the size and scope of the apartment complex,
* the obligations of the Local General Partners and their affiliates to
the Local Limited Partnership,
* any security or other assurances or measures taken to perform such
obligations, and
* the material contingent liabilities of the Local General Partners.
A Series may invest in a Local Limited Partnership whose Local General
Partner does not satisfy the foregoing standard if WNC & Associates, Inc.
determines that there are adequate alternative forms of assurance protecting
the Local Limited Partnership. Despite the preceding, there cannot be any
assurance that full disclosure will be made by Local General Partners of their
financial condition, or that their financial condition will not change during
the term of the Series' investment in the Local Limited Partnership.
Except in the case of non-profit organizations, the Local General Partners
generally will be individuals or closely-held entities which depend, for their
successful management and operation, on one or a very limited number of
principal owners. In a typical apartment complex the principal owners will,
directly or through various entities controlled by them, provide rent-up,
property management and other services related to ownership of the apartment
complex, and may also construct the apartment complex. For purposes of this
Prospectus, the term "Local General Partners" may include the various
individuals and entities comprising the development organization which has
organized and is operating the respective Local Limited Partnership.
Compensation of Local General Partners. The Local General Partners will
receive fees from the Local Limited Partnership in consideration of:
o the construction and development of the apartment complex,
o management of the Local Limited Partnership and the apartment complex,
o their agreement to fund certain deficits (as discussed below),
o the initial rent-up of the apartment complex,
o the sale of the apartment complex, and
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o for other services.
See "Estimated Use of Proceeds."
Withdrawal of Local General Partners. A Local General Partner will not be
permitted to withdraw from the Local Limited Partnership without the consent of
the Series, unless (i) a designated successor acceptable to the Series is
admitted in its place, or (ii) a successor meeting certain specified criteria
established in the partnership agreement of the Local Limited Partnership is
admitted in its place.
Terms of the Local Limited Partnership Agreements
Through the partnership agreement of each Local Limited Partnership, WNC &
Associates, Inc. will impose significant responsibilities on the Local General
Partners. The precise terms of such responsibilities, and the limitations
thereon, will be subject to negotiation. However WNC & Associates, Inc.
anticipates that the terms of the partnership agreement of each Local Limited
Partnership may include the provisions described below.
Construction Obligation. In the case of a newly constructed or
rehabilitated property, the Local General Partners will agree to provide all
funds needed through the completion of construction or rehabilitation and the
closing of the permanent mortgage financing, after applying mortgage loan
proceeds and the Series' capital contribution (net of fees payable to the Local
General Partners and their affiliates). The Local General Partners may or may
not be entitled to reimbursement of such funds by the Local Limited Partnership.
Operating Guarantees. The Local General Partners generally will agree to
provide funds to the Local Limited Partnership to defray any operating deficits
for a minimum of three years following the completion of the construction or
rehabilitation of the apartment complex. The Local General Partners may or may
not be entitled to reimbursement of such funds by the Local Limited Partnership.
Protection Against Reduction or Loss of Tax Credits. It is possible that
the amount of tax credits actually allocated to a Series could be less than the
amount expected when the investment was made (a "Shortfall"). To reduce the
adverse consequences from a Shortfall, the partnership agreements of the Local
Limited Partnerships will include so-called "adjuster" provisions. These
adjuster provisions are designed to provide the Series with a substantially
similar aggregate return on investment as would have been received had there
been no Shortfall. Such provisions may adjust any one or more of the following:
o the Series' capital contribution,
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o the Local General Partners' share of cash distributions, or
o the Series' share of distributions from a sale or refinancing of the
apartment complex.
If the adjuster provisions do not provide the Series with a similar
aggregate return on investment during the first five years of operation of the
apartment complex, the Local General Partner may be obligated to pay to the
Series the unreturned Shortfall.
Each Local General Partner will agree to take no action which would (i)
terminate or discontinue the qualification of an apartment complex as a low
income housing project under Internal Revenue Code Section 42(g)(1) or (ii)
cause the recapture of any tax credit. If the Internal Revenue Service audits a
Local Limited Partnership, it is possible that the qualified basis of the
apartment complex could be reduced and that tax credits could be recaptured. If
so, the Local General Partner might be obligated to pay to the Series an amount
equal to any tax deficiency plus interest or penalties.
In general, WNC & Associates, Inc. intends to require the obligations and
guarantees described in the preceding paragraphs in the partnership agreement of
each Local Limited Partnership. However, such provisions will not be included if
WNC & Associates, Inc. considers one or more of them to be unnecessary for the
protection of the Series or if it determines that it is otherwise in the
interest of the Series to modify or eliminate such provisions. For example, such
provisions may be eliminated in connection with the acquisition of an interest
in a completed apartment complex.
To the extent WNC & Associates, Inc. successfully negotiates the
obligations and guarantees described in the preceding paragraphs or otherwise,
the price paid by a Series for the investment may be marginally higher than
would otherwise be the case.
Rights of Limited Partner. As a limited partner or non-managing member of a
Local Limited Partnership, a Series will have no right to manage its operations.
However, the Series will have certain voting rights, including the rights:
o to replace the Local General Partner on the basis of the performance and
discharge of the Local General Partner's obligations,
o to approve or disapprove a sale or refinancing of the apartment complex,
o to approve or disapprove the dissolution of the Local Limited Partnership,
and
o to approve or disapprove amendments to the partnership agreement of the
Local Limited Partnership.
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However, in the case of an apartment complex which is government assisted,
the ability of the Series to take such actions may be subject to the prior
approval of the government agency providing the assistance. See "Other
Government Assistance Programs" and "Risk Factors - Investment Risks - Risks of
Government-Subsidized Housing Projects."
The partnership agreement of each Local Limited Partnership will provide
the Series with certain other rights, including rights relating to the calling
of meetings, reports and access to records comparable to those granted to the
investors by each Series. See "Summary of Certain Provisions of the Partnership
Agreement." Generally, WNC & Associates, Inc. or an affiliate will exercise each
of the foregoing voting and other rights on behalf of the Series, and investors
will not have any right to participate therein. See "Conflicts of Interest."
However, if WNC & Associates, Inc. or one of its affiliates serves as a Local
General Partner of a Local Limited , Partnership, then the Series' voting and
other rights will be exercisable by the Series' investors.
Role of SLP Affiliate. It is anticipated that WNC Housing, L.P. (the "SLP
Affiliate") will be a special limited partner of most of the Local Limited
Partnerships and will be granted one or more of the following rights:
o to assume the duties and receive the benefits of the Local General
Partner upon the removal or withdrawal of the Local General Partner;
o to approve the selection of, and/or dismiss, any manager of the apartment
complex;
o to approve the selection of, and/or dismiss, the accountants for the Local
Limited Partnership;
o to direct the decisions of the "tax matters partner" of the Local Limited
Partnership, including the right to bring and defend administrative and
judicial actions and make tax elections;
o to compel the Local General Partner to locate a buyer for the
apartment complex or the Series' interest in the Local Limited
Partnership; and
o to approve or disapprove certain transactions outside of the ordinary
course of business proposed by the Local Limited Partnership.
In the case of an apartment complex which is government assisted, the
ability of the special limited partner to take such actions may be subject to
the prior approval of the government agency providing such assistance. See
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"Other Government Assistance Programs" and "Risk Factors - Investment Risks -
Risks of Government-Subsidized Housing Projects."
Interests in Profits, Losses and Distributions. Each Series will normally
acquire at least a 90% interest in the profits, losses and tax credits of each
Local Limited Partnership, with the balance remaining with the Local General
Partners and the special limited partner (the SLP Affiliate), and, in certain
instances, with another special limited partner which may be an affiliate of the
Local General Partners. However, in certain cases a Series may acquire a lesser
interest (but normally at least a 50% interest) in the profits, losses and tax
credits of a Local Limited Partnership. See, for example, "Joint Investments"
below in this section. It is possible that a Local Limited Partnership may
generate state low income housing tax credits as well as federal low income
housing tax credits. If so, the state tax credits may be allocated entirely to
the Local General Partners or to a special or other limited partner which may or
may not be an affiliate of the Local General Partners or WNC & Associates, Inc.
If the special or other limited partner were an affiliate of WNC & Associates,
Inc., WNC & Associates, Inc. would receive compensation from the affiliate for
arranging the transaction.
The Local General Partners will generally receive reimbursements of
expenses from cash flow from operations and distributions of a portion of such
cash flow as management fees and/or partnership participations. The Series will
receive 95% to 100% of distributions of sale or refinancing proceeds from an
apartment complex until it has received a full return of its investment in the
Local Limited Partnership (which may be reduced by any cash flow distributions
previously received). The Series will receive from 10% to 50% of the remaining
sale or refinancing proceeds. The sharing arrangements for all cash
distributions will depend upon:
o the competition for interests in apartment complexes,
o the proportion of residential units in the apartment complex eligible for
low income housing tax credits,
o the amount invested in the apartment complex by the Series relative to the
other sources of financing,
o the percentage interest in the profits and losses of the Local Limited
Partnership acquired by the Series relative to the interests held by other
parties, and
o the amounts of cash flow and appreciation anticipated.
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Joint Investments
A Series may invest in a Local Limited Partnership jointly with the other
Series or another limited partnership (including another limited partnership
sponsored by WNC & Associates, Inc.) provided that:
o the two partnerships have similar investment objectives,
o there are no duplicate property management or other fees,
o the compensation to the sponsors of each partnership is substantially
similar,
o each partnership will have a right of first refusal if the other partnership
wishes to sell its interest in the Local Limited Partnership (although there
is a risk that a partnership may not have sufficient resources to make such
a purchase),
o the investment of each partnership is on substantially the same terms and
conditions, and
o if the other limited partnership is (i) controlled by WNC & Associates,
Inc., then the other limited partnership must be publicly registered under
the Securities Act of 1933, or (ii) is not controlled by WNC & Associates,
Inc., then the Series must acquire a controlling interest in the joint
venture.
See "Risk Factors - Investment Risks - Risks of Joint Investments" and
"Conflicts of Interest." A Series cannot engage in activities through a joint
venture that it could not undertake alone.
Use of Leverage
The Series may borrow funds to make initial investments in Local Limited
Partnerships before the sale of Units. Otherwise, the Series do not anticipate
borrowing funds, although they have full authority to borrow money as deemed
necessary or appropriate to achieving the Series' investment objectives.
WNC & Associates, Inc. or its affiliates may advance funds from time to
time to a Series so that the Series may make initial investments (including
loans and deposits) in Local Limited Partnerships before the sale of the
Series's Units. Such advances, together with interest thereon, will be repaid
from the proceeds of the offering. See "Estimated Use of Proceeds." Loans
provided by WNC & Associates, Inc. or an affiliate must:
o be on a short-term basis;
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o not be subject to any prepayment charge or penalty; and
o not bear any interest, charges or fees in excess of the amounts which
would be charged by unrelated lending institutions on comparable loans for
the same purpose in the same locality.
In no event may interest be more than the prime rate of Southern California
Bank (i.e., the rate charged by it on short-term unsecured loans to its most
creditworthy customers) plus 2% per annum.
The ability of a Series to generate tax credits in the amounts anticipated
will depend in part on the use of leverage by the Local Limited Partnerships.
Accordingly, WNC & Associates, Inc. expects that the Local Limited Partnerships
will use debt to finance approximately 30% to 80% of the acquisition and
development costs of their apartment complexes. Financing may include loans
made, guaranteed or subsidized by agencies of Federal, state or local
governments, including:
o state or local government bond financing,
o mortgages requiring balloon payments after 15 years (i.e., loans which are
not amortized over their terms but which require large payments on
maturity) or providing for other deferral of principal payments,
o loans providing for variable interest rates after 15 years,
o loans with renegotiable interest rates, and
o loans from non-profit organizations.
See "Other Government Assistance Programs" and "Risk Factors - Investment
Risks - Risks Associated With Use of Leverage." The Series will not impose any
limitation on the indebtedness which may be incurred by any Local Limited
Partnership. However, following the termination of its offering, a Series' share
of indebtedness may not exceed:
o with respect to non-subsidized apartment complexes, the sum of 85% of the
aggregate purchase price of all apartment complexes which have not been
refinanced, and 85% of the aggregate fair market value of all apartment
complexes which have been refinanced, and
o with respect to subsidized apartment complexes, the sum of 100% of the
aggregate purchase price of all apartment complexes which have not been
refinanced, and
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100% of the aggregate fair market value of all apartment complexes
which have been refinanced.
Sale or Other Disposition of Investments
In general, the sale of an apartment complex or the sale of a Series'
interest in a Local Limited Partnership will be subject to various restrictions.
These restrictions will require that the investments be held for substantial
periods. A Series will hold its investments for at least 15 years in order to
avoid recapture of tax credits (see "The Low Income Housing Tax Credit").
Subject to the restrictions discussed below, after the fifteenth year a Series
will attempt to sell its investments with the objective of returning to its
investors, at a minimum, their invested capital. However, WNC & Associates, Inc.
may cause a Series to sell or refinance any investments at an earlier or later
time if it decides that it is in the best interests of the Series to do so under
all of the then applicable circumstances.
The low income residential units in an apartment complex generally must be
rented as low income housing for at least 30 years and, possibly, of up to 55
years or longer. As a result, any sale of an apartment complex during that
period must be to a purchaser who agrees to maintain the apartment complex as
low income housing for the duration of such period.
Additional restrictions on sale will be imposed on apartment complexes
receiving government financing or operating subsidies. For example, current
regulations of the United States Department of Agriculture, Rural Development
("RD") permit the sale of a property which is financed by RD only with the
approval of RD. Mortgage loans funded by RD cannot be prepaid at any time during
their terms. Similarly, current regulations of the U.S. Department of Housing
and Urban Development ("HUD") require that HUD must approve the sale of more
than 50% of the interests in any limited partnership or limited liability
company which owns a property receiving some form of HUD subsidies.
However, consistent with the foregoing and other applicable regulatory
restrictions, WNC & Associates, Inc. believes that the Local Limited
Partnerships should be able to sell the apartment complexes after a 15 to
20-year holding period to:
o an entity similar to the Series or the Local Limited Partnership which
would agree to continue to operate the apartment complex as low income
housing for the balance of the required period. Such a sale would be
likely only if at the time of sale the Internal Revenue Code offered
benefits to the owners of existing low income housing; or
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o certain other types of purchasers which may have incentives to acquire and
operate the low income housing, such as an organization formed on behalf of
the tenants or a state agency or non-profit organization.
Reserves
Each Series initially will set aside at least 3% of the offering proceeds
as reserves for contingencies and to pay expenses. WNC & Associates, Inc. will
increase or decrease the reserve balance from time to time as it deems
appropriate. The reserves may be used to cure any problems of the apartment
complexes, although most apartment complexes will have their own reserves. A
Series may also use its reserves to pay its expenses, including the annual asset
management fee, to the extent cash flow is insufficient for such purposes.
Other Policies
Until required by a Series for use in connection with its business and
operations as described in this Prospectus, all funds received by a Series from
its offering will be held in:
o United States government securities,
o securities issued or fully guaranteed by United States government
agencies,
o certificates of deposit and time or demand deposits in, or repurchase
agreements constituting obligations of, commercial banks with
deposits insured by the Federal Deposit Insurance Corporation, or
o other short-term, highly-liquid investments.
No Series will lend funds, except that a Series may (i) make loans to, or
post letters of credit for, a Local Limited Partnership, and (ii) may make
temporary investments of the type described in the preceding paragraph.
No Series will underwrite securities of other issuers, offer securities in
exchange for property or, except in connection with the investments of funds in
Local Limited Partnerships, invest in securities of other issuers, other than in
temporary investments as described above.
No Series will:
o utilize cash from operations to acquire interests in Local Limited
Partnerships, or
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o reinvest proceeds from a sale or refinancing transaction unless the
Series distributes to each investor an amount equal to the Federal, state
and local income tax liability of the investor arising from the sale or
refinancing transaction.
In computing tax liability for these purposes the Series will assume that
each investor is in a combined Federal, state and local marginal income tax
bracket of 30%. In no event will sale or refinancing proceeds be reinvested
following the second anniversary of the termination of the Series' offering.
After the conclusion of its offering a Series may repurchase Units upon the
written request of an investor. No Series is obligated to repurchase any Units
at any time, and there is no assurance that a Series will in fact ever
repurchase any Units. No Units will be repurchased from WNC & Associates, Inc.
or any of its affiliates.
Neither Series is a real estate investment trust and, therefore, neither is
subject to the restrictions imposed on such entities by the Internal Revenue
Code. Each Series will use its best efforts to conduct its operations so as not
to be required to register as an investment company under the Investment Company
Act of 1940.
Neither Series will engage in any transaction which would result in the
receipt by WNC & Associates, Inc. or any affiliate of any undisclosed "rebate"
or "give-up." Neither Series will engage in any reciprocal business arrangement
which would result in the circumvention of the restrictions contained in its
Partnership Agreement.
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THE LOW INCOME HOUSING TAX CREDIT
Summary
Section 42 of the Internal Revenue Code provides low income housing tax
credits to investors in low income housing. Following is a summary of some
provisions of Code Section 42 and its interrelation with other Code provisions.
Each of these provisions is discussed in greater detail in the subsections below
and under "Federal Income Tax Considerations."
Low income housing tax credits are indirect Federal subsidies of low income
housing. They are being used by individuals, small businesses and large
corporations. Low income housing tax credits offset tax liability
dollar-for-dollar regardless of a taxpayer's tax bracket because they are tax
credits and not tax deductions. Therefore, tax credits are more valuable than
tax deductions or tax deferrals. Taxes are one of the largest expenses faced by
taxpayers and one of the greatest barriers to retaining earned income. According
to a report issued by the Tax Foundation, in 1998 the average American had to
work two hours and 50 minutes of each eight-hour workday to pay all taxes.
Federal taxes used one hour and 55 minutes of earnings, and state and local
taxes used 55 minutes of earnings. The report states that American workers
utilized a greater portion of the workday to pay taxes than to pay for food and
tobacco, clothing, and housing and household operations. An investment in low
income housing tax credits reduces Federal tax liability and thereby can
increase after-tax spendable income.
As stated above, low income housing tax credits are tax credits rather than
the more familiar tax deductions. Tax credits offset tax liability
dollar-for-dollar. For example, a married couple filing jointly with taxable
income of $125,000 in 1999 would be subject to Federal income tax liability in
the amount of approximately $30,000, or approximately 24% of taxable income.
(The tax liability for later years could be different due to changes in the
tax rates resulting from inflation adjustments or amendments to the tax laws.
See "Federal Income Tax Considerations - Other Important Tax Considerations -
Tax Rates" and "- Changes in Tax Law.")
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If the couple had $7,750 in low income housing tax credits (the maximum
permissible amount under the so-called $25,000 deduction equivalent, as
discussed under "Federal Income Tax Considerations - Limitations on Losses and
Credits from Passive Activities - Exception for Low Income Housing Tax Credits
and Historic Tax Credits"), their Federal tax liability of $30,000 would be
reduced by $7,750 to $22,250.
These pie charts are intended to display that low income housing tax credits
reduce income taxes dollar-for-dollar. They are not, nor should they be
interpreted as, predictions of low income housing tax credits to be allocated to
an investor. The absolute and/or relative percentage reduction in Federal income
taxes to be realized by any investor will depend on his actual tax liabilities
and his actual low income housing tax credits.
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Low income housing tax credits account for the construction of approximately
120,000 housing units annually. Nonetheless, the availability of quality low
income housing has declined. According to the Joint Center of Housing Studies of
Harvard University, "[t]he national goal of decent and affordable housing for
all Americans remains out of reach because of two broad trends: the persistence
of poverty and the loss of low-cost rental units from the housing inventory."
According to another study (In Search of Shelter, Center On Budget and Policy
Priorities, based on information from the American Housing Survey through 1995),
the shortage of affordable rental housing is not a new problem, but one that
dates back to the early 1970's. Since 1970, the number of low rent or affordable
units has continued to fall in relation to the number of people in need of these
units. This persistent decline has created a shortage of 4.4 million affordable
rental units nationwide. Among the problems the nation faces is the loss of
low-cost rental units that provide shelter for families, the elderly and other
citizens of modest means.
Low income housing tax credits are designed to subsidize either 70% or 30%
of the costs of the low income residential units in an apartment complex.
Accordingly, the amount of low income housing tax credits is based on the cost
of a property, rather than the operations of the property, and are
pre-determined when the property is placed in service. The subsidy is realized
by claiming low income housing tax credits every year for 10 years. This results
in a steady and predictable stream of tax credits. Unlike other investments,
once determined, the amount of tax credits does not fluctuate.
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In exchange for the right to claim low income housing tax credits, the owner
of the apartment complex must:
o itself rent the low income residential units to low income individuals at
reduced rental rates for at least 15 years, and
o grant the state in which the property is located the power to require that
the property be rented as low income housing for a total period of 30 or
more years.
Failure to comply with the first requirement results in ineligibility for the
low income housing tax credits not yet claimed and the recapture of credits
previously claimed.
Low income housing tax credits are allocated by the state in which the
housing is located. Code Section 42 authorizes a fixed amount of low income
housing tax credits which any state may allocate in any year.
Most taxpayers are not able to claim low income housing tax credits in
unlimited amounts. Rather, the ability to use tax credits is limited by the
provisions of the Internal Revenue Code known as the "passive activity" rules,
the "at risk" rules, the overall limitation on "general business" credits, and
the alternative minimum tax rules. Each of these rules is discussed in greater
detail under "Federal Income Tax Considerations."
The low income housing tax credit program is extremely technical in nature.
The U.S. Department of the Treasury has issued Regulations with regard to a
portion of the program's rules, but not with regard to other important portions,
and there can be no assurance that the provisions of Section 42 will be
interpreted in a manner consistent with the description set forth below.
Furthermore, the discussion that follows is general in nature. Because the
Series have not yet identified any of the Local Limited Partnerships in which
they will invest, it is impossible to predict how certain specific provisions of
the low income housing tax credit program will apply to the apartment complexes.
Qualified Properties
Qualified Low Income Projects. Low income housing tax credits are available
only for "qualified low income housing projects." "Qualified low income housing
projects" are residential rental properties in which:
o 20% or more of the residential rental units are occupied by individuals with
incomes of 50% or less of area median income, as adjusted for family size
(the "20-50 set-aside test"), or
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o 40% or more of the aggregate residential rental units are occupied by
individuals with incomes of 60% or less of area median income, as adjusted
for family size (the "40-60 set-aside test").
This requirement, referred to as the minimum set-aside, must be met in order for
any portion of an apartment complex to be eligible for low income housing tax
credits. Additional residential rental units in an apartment complex beyond the
minimum set-aside also can qualify for low income housing tax credits.
Set-Aside Income Computation
----------------------------
Applicable Set-Aside X Area Median = Allowable
Percentage Gross Income Household
(50% or 60%) (Based on Actual Income
Number of Persons)
Additionally, the gross rent charged to low income tenants cannot exceed 30%
of the applicable set-aside income (i.e., 50% or 60% of area median income).
This test uses a statutory assumption that, in the case of a unit which does not
have a separate bedroom, the unit is occupied by one individual, and, in all
other cases, that the unit is occupied by one and one-half individuals per
separate bedroom (the "rent restriction test"). Gross rent for this purpose
includes the cost of any utilities, other than telephone, and any mandatory
costs for services such as meals and social services. Federal, state and local
rental assistance payments are not included in gross rent. Thus an owner may
receive a rental subsidy payment in addition to the amount paid by the tenant.
Rent Restriction Computation
----------------------------
1. Number of X 1.5 = Imputed
bedrooms Household*
2. Imputed X Applicable = Imputed
Household Set-Aside Income
Percentage
50% or 60%
3. Imputed Income X .30 = Maximum
Gross Rent
*Imputed household =1 if studio apartment.
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Units which satisfy both the set-aside test and the rent restriction test
are low income residential units. To qualify for tax credits low income
residential units cannot be used on a transient basis.
Under Internal Revenue Code Section 42(g)(3) an apartment complex must meet
the minimum set-aside requirements as well as the rent restriction test not
later than the close of the first year of the 15-year compliance period for the
property. The owner may elect which of the minimum set-aside tests (i.e., the
20-50 set-aside test or the 40-60 set-aside test) it proposes to meet but, once
made, the election is irrevocable. In order to avoid tax credit recapture, the
apartment complex must remain in compliance with the rules governing the low
income housing tax credit program for the 15-year compliance period.
Eligible Basis. The "qualified basis" of an apartment complex with respect
to which low income housing tax credits are computed is generally the
"applicable fraction" of the "eligible basis" in a building attributable to the
low income residential units.
In general, the "eligible basis" of a building is its adjusted basis for
Federal income tax purposes. Eligible basis is determined as of the close of the
first year of the 15- year compliance period. For a newly constructed building,
eligible basis is the cost of construction, including all direct costs and
various related "soft" costs, such as construction period interest, developer's
and architects' fees, other compensation, insurance and general and
administrative expenses related to construction. For a substantially
rehabilitated building, eligible basis is comprised of the rehabilitation costs
aggregated over a 24-month period. Acquisition costs may only be included in
eligible basis to the extent they satisfy the principles for inclusion discussed
below under "Maximum Amount of Credit." Land costs may not be included in
eligible basis. Because only the adjusted basis of a building may be included in
eligible basis, an owner must take into account the adjustments to basis
described in Section 1016 of the Internal Revenue Code, except for depreciation.
For example, a reduction in basis equal to any historic tax credit allowed with
respect to a property would be taken into account. As indicated in "Federal
Income Tax Considerations - Basis of Local Limited Partnerships in Their
Apartment Complexes" and " - Depreciation," no opinion of counsel will be
rendered with respect to the calculation of an apartment complex's adjusted
basis.
It is likely that the IRS will give careful attention to the calculation of
eligible basis if the IRS audits the owner of a low income housing property. In
particular, the IRS may review the inclusion of developer's fees in eligible
basis. In the recent past the IRS has taken the position that developer's fees
were paid for more than developer's services. Depending on the circumstances,
the IRS has asserted that the fee also covered land acquisition activities,
syndication activities and organization activities. Fees for those types of
activities are not properly included in eligible basis. The IRS
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could also take adverse positions concerning developer's fees paid with a
promissory note. The IRS could contend that fees paid with a promissory note:
o cannot be included in eligible basis at all (see "Federal Income Tax
Considerations - Basis of Local Limited Partnerships in Their Apartment
Complexes"),
o must be allocated to the general partners of the owner and not the limited
partners (see "Profits and Losses, Tax Credits and Cash Distributions -
Allocations of Profits and Losses - Special Allocations"), or
o do not satisfy the "at risk" rules (see "Utilization of the Low Income
Housing Tax Credit - Low Income Housing Tax Credit 'At Risk' Rules").
The eligible basis of any building is reduced by the portion of the adjusted
basis of the building which is attributable to residential rental units in the
building which:
o are not low income residential units, and
o which are above the average quality standard of the low income residential
units. However, at the election of the taxpayer, the cost of a residential
unit that would otherwise be excluded from eligible basis under this rule
may be included in eligible basis if:
o the excess of the cost of such unit over the average cost of the low income
residential units does not exceed 15% of the average cost of the low income
residential units, and
o the excess cost is excluded from eligible basis.
For all types of buildings, eligible basis includes not only the adjusted
basis of the residential rental units (subject to the limitations discussed
above) but also the adjusted basis of property used in common areas and
amenities (such as major appliances) used by the tenants. The costs of amenities
in the non-low income residential units may only be included if the amenities
are comparable to the costs of amenities in the low income residential units.
Also, the allocable costs of tenant facilities such as swimming pools or other
recreational facilities and parking areas may be included provided there is not
a separate fee for use of these facilities and they are available on a
comparable basis to all tenants.
Residential rental property may qualify for low income housing tax credits
even though a portion of the building is available for commercial use. However,
no portion of the cost of such nonresidential property may be included in
eligible basis.
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Eligible basis may not include the amount of any Federal grant, whether or
not such grant is includable in gross income. A Federal grant for such purpose
(as opposed to a Federal loan or rental subsidy) includes any grant to the
extent it is Federally funded.
The eligible basis of a building located in an area designated by the U.S.
Department of Housing and Urban Development ("HUD") as a "qualified census
tract" or as "difficult to develop" will be deemed to be 130% of the eligible
basis determined under the principles outlined above. A "qualified census tract"
means a census tract or an enumeration district designated by HUD in which 50%
or more of the households have an income which is less than 60% of the area
median gross income. An area is treated as "difficult to develop" if it has high
construction, land and utility costs relative to area median gross income.
Determination of Eligible Basis
-------------------------------
Eligible Basis Can Include: Eligible Bases Excludes:
- -------------------------- -----------------------
o Construction and rehabilitation o Depreciation
costs
o Acquisition costs o Land
o Site improvements o Historic tax credits claimed
o Developer's and architects' fees o Federal grants
o Comparable non-low income o Non-comparable non-low income
residential units residential units
o Common facilities available to all o Commercial portion of
if no separate fee mixed-use properties
o Personal property
Qualified Basis. The qualified basis of an apartment complex with respect to
which low income housing tax credits are computed is generally the "applicable
fraction" of the eligible basis in the building attributable to the low income
residential units.
The "applicable fraction" is the lesser of (i) the proportion of occupied
low income residential units to all residential rental units (whether or not
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occupied), or (ii) the proportion of floor space in the occupied low income
residential units to the total floor space of all residential rental units
(whether or not occupied).
Qualified Basis Computation
---------------------------
Eligible Unit Applicable Fraction Qualified
Basis X or = Basis
Floor Space Applicable Fraction
Maximum Amount of Credit
Under Internal Revenue Code Section 42, an owner of low income housing
receives tax credits for a 10-year credit period. The ceiling on tax credits
limits the present value of the 10-year stream of credits to 70% or 30% of the
qualified basis of the housing. The present value percentage is determined
primarily by long-term interest rates at the outset of the 10-year credit
period, and does not fluctuate with stock or bond prices. There are two basic
credit categories:
1. Properties which are not Federally subsidized and which are newly
constructed or substantially rehabilitated receive a maximum credit which will
yield a present value of 70% of the qualified basis of the property. Congress
determined that for 1987 a 9% annual credit would have a present value of 70%;
thus 9% was the "applicable percentage" for 1987. For years after 1987, each
month the Treasury Department redetermines the appropriate yearly "applicable
percentage" that will yield a 70% present value over 10 years utilizing a
prescribed discounting methodology. For properties placed in service in May
1999, the yearly percentage is 8.27%.
2. Properties which are Federally subsidized and which are newly constructed
or substantially rehabilitated receive a maximum credit which will yield a
present value of 30% of the qualified basis of the property. Congress determined
that for 1987 a 4% annual credit would have a present value of 30%; thus 4% was
the "applicable percentage" for 1987. For years after 1987, the Treasury
Department makes monthly redeterminations in a manner corresponding to that
described for the 70% present value credit. For properties placed in service in
May 1999, the yearly "applicable percentage" is 3.54%.
For purposes of the low income housing tax credit program, Federal subsidies
include only tax-exempt financing and below-market-interest-rate Federal loans.
See the material below under the caption "Other Government Assistance Programs"
for a discussion of whether certain loan programs which may be used by Local
Limited Partnerships are considered "Federal subsidies" for these purposes. An
owner has the option of excluding Federally subsidized loans from qualified
basis and then using the 70% present value credit against the remaining
qualified basis.
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Calculation of Low Income Housing Tax Credit
--------------------------------------------
Qualified x Applicable = Low Income
Basis Percentage Housing Tax Credit
"Substantial rehabilitation" is defined as capital expenditures (other than
acquisition costs) incurred in connection with the rehabilitation of a property
aggregated over a 24-month period in an amount equal to at least the greater of
10% of adjusted basis or $3,000 per low income residential unit.
The acquisition costs of existing buildings will only be eligible for a
credit if the buildings are subject to substantial rehabilitation (as defined
above). If the substantial rehabilitation test is satisfied the acquisition
costs are eligible for the 30% present value credit. However, acquisition costs
are not available for the 30% present value credit if the property was last
transferred, or if it underwent certain rehabilitation work, during the prior 10
years, although the Secretary of the Treasury may waive this rule in certain
defined instances.
The applicable percentage for a property is determined in the earlier of:
o the month in which the property is placed in service, or
o at the election of the owner, the month in which the owner and the state
housing credit agency enter into an agreement to allocate low income housing
tax credits to the property.
Credits Subject to State Allocation
The Internal Revenue Code limits the amounts of low income housing tax
credits which can be allocated in any year. Low income housing tax credits are
allocated by the states. In most cases, a state directly allocates low income
housing tax credits to properties. A state can allocate a maximum of $1.25 per
resident of the state in tax credits per year. If a state fails to allocate its
maximum tax credits in a year, the Code permits a one-year carry forward of the
unused amount by that state. If the unused amount is not used by the state
during the carryforward period, it is reallocated to other states through a
national pool.
In other cases, a state indirectly allocates tax credits by authorizing the
issuance of tax-exempt bonds, the proceeds of which are used to finance the
construction of low income housing. The ability of a state to issue tax-exempt
bonds is subject to a ceiling included in the Internal Revenue Code.
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Once tax credits are allocated to an apartment complex, the development does
not have to reapply for tax credits in later years. Accordingly, all low income
housing tax credits to be claimed by investors over the 10-year credit period
are allocated at the outset of the 10-year period.
Generally, a building must be placed in service during the year for which
the low income housing tax credits are allocated by the housing credit agency.
There are exceptions to this general rule, the most important of which is the
"10% carryover rule." Under this exception, a building can be placed in service
not later than the close of the second calendar year following the calendar year
in which the allocation is made. This exception is available if the taxpayer's
basis in the building as of the close of the calendar year in which the
allocation is made is more than 10% of the taxpayer's reasonably expected basis
in such building as of the close of such second calendar year. For this purpose
only, basis includes the cost of land.
Low income housing tax credits may not be allocated to any property unless
the owner and the state execute an "extended low income housing commitment" for
the apartment complex. In general, the extended low income housing commitment
will require that the building be rented as low income housing for the period
agreed to by the owner and the state. The period cannot be less than 30 years,
and might be substantially longer. The extended low income housing commitment
does not prevent the sale of the building to a new owner. It only requires that
the new owner continue to rent the building as low income housing.
The extended low income housing commitment must be:
o binding on all successors of the owner,
o grant all individuals meeting the income limitation applicable to the
building the right to enforce its terms in state court,
o be recorded as a restrictive covenant,
o prohibit any increase in the gross rent for a low income residential unit
not otherwise permitted by Code Section 42,
o prohibit the refusal to lease to a holder of a Section 8 voucher or
certificate of eligibility (see "Other Government Assistance Programs"
below) because of the status of the prospective tenant as such a holder,
and
o prohibit the disposition to any person of any portion of the low income
residential units unless all of the low income residential units are
disposed of to such person.
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After a period of 14 years, the owner may make a request that the state find
someone to buy the building. The state will have one year to locate a buyer at a
price no less than:
o with respect to the portion of the building which does not constitute low
income residential units, the fair market value thereof, and
o with respect to the low income residential units, the applicable fraction of
* the outstanding indebtedness secured by the building, plus
* the adjusted investor equity in the building (i.e., the aggregate amount
of cash invested in the building increased by a cost of living
adjustment), minus
* cash distributions (or available distributions) from the building.
Price for Low Income Residential Units
--------------------------------------
Step 1. Debt + Adjusted Investor Equity - Distributions
Step 2. Unit Applicable
Fraction
or
Floor Space X Result of Step 1
Applicable
Fraction
If no buyer is located the building may be converted to market-rate use. Low
income tenants may not be evicted for a three-year period.
Despite the preceding, the "one-year notice" provision outlined above will
not apply to the extent more stringent requirements are imposed under the
extended low income housing commitment or state law.
Code Section 42(m) imposes requirements on the state agencies which allocate
low income housing tax credits. In general, an allocating agency must develop
and follow a qualified allocation plan which ranks the various developments
applying for tax credits. The selection criteria must address:
* location factors (e.g., broad geographic distribution, designated target
areas such as inner cities, Community Development Block Grant neighborhoods,
distressed communities, pockets of poverty and rural areas),
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* housing needs characteristics (e.g., low vacancy rate, income mix of
tenants within the development and meeting state, regional or local housing
needs and priorities),
* development characteristics (e.g., whether the development increases the
stock of low-income housing, whether substantial rehabilitation expenditures
are needed by the development, energy conservation, quality of units and
type of financing),
* sponsor characteristics (e.g., nonprofit sponsorship and minority
participation in development and management),
* tenant populations with special housing needs (e.g., elderly, handicapped,
disabled, homeless, large families and the displaced), and
* public housing waiting lists.
Once the agency has selected its developments, it must allocate tax credits
by giving preference to developments serving the lowest income tenants and
developments obligated to serve tenants for the longest periods. Further, an
allocating agency must use good faith efforts to allocate no more tax credits to
a development than are necessary for the development's financial feasibility and
viability as low income housing through the 10-year credit period. In making
this determination the agency must consider:
o the sources and uses of funds,
o the available Federal, state and local subsidies committed to the
development,
o the total financing planned for the development,
o the proceeds or receipts expected to be generated by reason of tax benefits,
o the percentage of the tax credits to be used for project costs other than
the cost of intermediaries, and
o the reasonableness of the developmental and operational costs.
The allocating state agency may reduce the tax credits for which the development
would otherwise be eligible if the agency believes that the full amounts are not
necessary in light of other sources of assistance that are available to the
development.
At least 10% of a state's annual tax credits must be allocated to properties
in which a qualified nonprofit organization (i) has an ownership interest and
(ii) materially participates in the development and operation.
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Each state is required to monitor all developments for non-compliance with
the provisions of the Internal Revenue Code. Each state must report
non-compliance to the Internal Revenue Service.
Utilization of the Low Income Housing Tax Credit
Reduction for Partial Year of Operations. Low income housing tax credits are
claimed over a 10-year credit period. In the first year, the allowable credit
amount is based on the number of months the low income residential units were
occupied by low income individuals. This determination uses an averaging
convention. For example, if half of the low income residential units were first
occupied in October and the remaining half were first occupied in December, a
calendar year taxpayer would adjust the amount of his tax credits to reflect
that the units were occupied on average only 2 months, or 1/6 of the year. To
the extent that there is a reduction of tax credits in the first year, there is
an addition to tax credits in the eleventh year.
Low Income Housing Tax Credit "At Risk" Rules. In order to fully utilize low
income housing tax credits, a taxpayer who is:
o an individual,
o an S Corporation (i.e., a corporation which elects to be subject to
Subchapter S under the Internal Revenue Code), or
o a closely-held corporation (i.e, one in which five or fewer shareholders
directly or indirectly own more than 50% of the stock at any time during the
last half of its relevant fiscal year),
must be "at risk" with respect to the investment in the low income housing.
Generally, the qualified basis to such a taxpayer for the low income housing is
reduced for "at risk" purposes by the amount of any "non-qualified nonrecourse
financing." "Qualified commercial financing" is not considered non-qualified
nonrecourse financing. Therefore, a taxpayer will be considered to be "at risk"
for purposes of low income housing tax credits with respect to qualified
commercial financing. Qualified commercial financing is financing with respect
to any property if the taxpayer acquires the property from an unrelated person,
and the financing is borrowed from:
o any Federal, state or local government,
o a person who is actively and regularly engaged in the business of lending
money and who is not (i) a person from whom the taxpayer acquired the
property, or (ii) a person who receives a fee with respect to the taxpayer's
investment in the property, or
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o a nonprofit organization which (i) is not affiliated with or controlled by a
for-profit organization, (ii) has the purpose of fostering low-income
housing, and (iii) does not receive a fee with respect to the taxpayer's
investment in the property. This type of financing is qualified commercial
financing if the financing is:
* not in excess of 60% of the eligible basis of the apartment complex,
* secured by the building, and
* fully repaid on or before the earliest of (a) the maturity date, (b) 90
days after the close of the 15-year compliance period, or (c) the date the
building is sold or the loan is refinanced. If the nonprofit organization or
an affiliate did not sell the property to the taxpayer, clause (b) is
extended to 90 days after the earlier of (a) the date the apartment complex
ceases to be a qualified low income project, or (b) the date which is 15
years after the close of the 15-year compliance period.
WNC & Associates, Inc. does not anticipate that the amount of low income
housing tax credits allowable to investors will be limited under the "at risk"
rules because each Series intends to invest in Local Limited Partnerships that
obtain qualified commercial financing as described above. However, counsel has
rendered no opinion on this issue because it depends upon the specific nature of
each apartment complex and its financing.
Other Limitations. Most investors are limited in their use of low income
housing tax credits. Generally, individuals who have no "passive income" can
only use low income housing tax credits and historic tax credits to shelter up
to the equivalent of $25,000 of "active" or "portfolio" income. The allowance of
tax credits is subject to other limitations. For a more complete discussion of
these limitations see "Federal Income Tax Considerations - Limitations on Losses
and Credits from Passive Activities," "- General Business Tax Credit
Limitations" and " - Other Important Tax Considerations - Alternative Minimum
Tax."
Recapture of Low Income Housing Tax Credits
During each year of the 15-year compliance period the owner must certify to
the Secretary of the Treasury that its apartment complex has complied throughout
the year with the requirements for the tax credits. The owner must also report
(i) the qualified basis of the development and (ii) the maximum applicable
percentage and qualified basis taken into account by the state allocating
agency.
A Series will lose unclaimed tax credits and the investors will be required
to recapture (with interest) a portion of any tax credits previously taken if,
during the 15- year compliance period, any of the following events occur:
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o an apartment complex is sold;
o an interest in a Local Limited Partnership is sold;
o the qualified basis of the apartment complex is reduced. Events causing a
reduction in qualified basis can include casualty losses and the failure to
meet the minimum set-aside test or the rent restriction test.
The Internal Revenue Code provides certain rules for avoiding recapture
penalties. For example, no recapture applies if the failure to satisfy the
minimum set-aside requirement is (i) a de minimis error and (ii) the failure is
waived by the Secretary of the Treasury. No recapture occurs if the reduction in
qualified basis is corrected within a "reasonable period," although the term
"reasonable" is not defined in the Code. A tenant's income may rise by as much
as 140% over the qualifying income for that unit and the unit may still be
considered a low income residential unit if it continues to be rent-restricted.
Even if the tenant's income increases by more than that 140% amount, no
recapture results unless any vacant unit of comparable or smaller size in the
development is rented to a non-qualifying tenant.
A Local Limited Partnership or a Series can avoid recapture upon change of
ownership by posting a bond with the Secretary of the Treasury, but only if it
can be expected that the development will be operated as a qualified low income
project for the remainder of the 15-year compliance period. As an alternative to
posting a bond, a Local Limited Partnership may establish a "Treasury Direct
Account." To do so, the Local Limited Partnership would pledge Treasury
securities to the IRS as security for the continued use of the development as a
"qualified low-income project."
There is no recapture of low income housing tax credits if a casualty loss
causes a reduction in qualified basis and the loss is restored by reconstruction
or replacement within a reasonable period of time.
The amount of recapture is the "accelerated" portion of the low income
housing tax credits on the project for all prior years. In addition, interest
will be charged on the recapture amount. Interest is calculated from the due
date for the return for the year the recapture amount was originally claimed.
For example, if the recapture amount was originally claimed in 1995 and the
investor is a natural person, interest will be calculated from April 15, 1996.
The "accelerated" portion of low income housing tax credits in any year is
the amount of the credit determined for the year less the amount which would
have been determined for the year if all credits had been allowable ratably over
the 15-year compliance period rather than the 10-year credit period.
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Year of Event Giving
Rise to Recapture Portion Recaptured
-------------------- ------------------
1-11 5/15
12 4/15
13 3/15
14 2/15
15 1/15
After Year 15 0
State Low Income Housing Tax Credits
A few states offer tax credits for low income housing located within the
respective state. However, WNC & Associates, Inc. does not expect that a
significant number, if any, of the Series' investments will qualify for a state
tax credit. For those that do, the state tax credits may be allocated to a
partner or member of the Local Limited Partnership other than the Series. See
"Investment Objectives and Policies - Terms of the Local Limited Partnership
Agreements - Interests in Profits, Losses and Distributions."
OTHER GOVERNMENT ASSISTANCE PROGRAMS
THE DISCUSSION WHICH FOLLOWS DESCRIBES VARIOUS FEDERAL AND STATE GOVERNMENT
FINANCING SUBSIDY PROGRAMS AND OPERATING SUBSIDY PROGRAMS. SOME OF A SERIES'
APARTMENT COMPLEXES MAY USE THESE PROGRAMS. THE DISCUSSION IS NOT ALL-
INCLUSIVE. THERE CAN BE NO ASSURANCE THAT THE TERMS OF THE PROGRAMS DISCUSSED
BELOW WILL REMAIN THE SAME. WNC & Associates, Inc. cannot predict which of these
programs will be used by the Local Limited Partnerships, or the percentage of
apartment complexes which will receive any government financing subsidies or
operating subsidies.
WNC & Associates, Inc. expects that some of the apartment complexes will not
have subsidies, and will be financed by private lenders. Low income housing tax
credits can be available for projects that receive financing subsidies or
operating subsidies, as well as those that do not receive such subsidies. If a
financing subsidy constitutes a "Federal subsidy" under Internal Revenue Code
Section 42, only the 30% present value tax credit can be available.
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RD Financing and Rural Rental Assistance Programs
Section 515 of the Housing Act of 1949 authorizes the U.S. Department of
Agriculture, Rural Development ("RD") (formerly, the Farmers Home Administration
of the U.S. Department of Agriculture) to provide direct
below-market-interest-rate mortgage loans for rural rental housing. Such loans
are in amounts of up to 95% of costs and for terms of up to 50 years. In
addition, RD may provide an owner with mortgage interest subsidies, which
effectively lower the interest rate of the loan to 1% per annum after the
completion of the apartment complex. The owner must pass the benefits of the
reduced interest rate on to tenants in the form of lower rents. A Section
515-financed apartment complex may be eligible for low income housing tax
credits. However, if the financing is a below-market-interest-rate loan, the
apartment complex would be considered Federally subsidized and thus eligible
only for the 30% present value credit. See "The Low Income Housing Tax Credit."
RD regulations govern the operation of Section 515-financed apartment
complexes. Failure of an owner to operate its apartment complex in compliance
with RD regulations could result in termination of RD assistance.
RD regulations limit owners' cash distributions to a maximum cumulative
return of 8% per annum on their equity investments. RD also requires monthly
payments to a reserve account until 10% of the total construction cost of the
apartment complex has been set aside. Among other things, RD must approve:
o the management agent,
o the management agreement,
o any rent increases,
o a transfer or encumbrance of the apartment complex,
o the admission or removal of a general partner to a partnership owner or a
manager to a limited liability company owner, and
o the reduction of a general partner's interest in a partnership owner.
Prepayment of an RD mortgage loan is prohibited.
In its application to RD for interest credit subsidies, the owner of an
apartment complex must submit budgets for "market rents" (rents required to
operate on a limited profit basis with mortgage payments based on the interest
rate provided in the RD mortgage loan) and budgets for "basic rents" (rents
required to operate on a limited profit basis assuming a mortgage bearing
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interest at 1% per annum). The owner will have the option of charging basic
rent or rent equal to 30% of a tenant's monthly adjusted income less a utility
allowance. In neither case would the tenant be charged more than the market rent
or less than the basic rent. Utilities are not included in either the basic rent
or market rent. The owner will receive interest subsidies so that the amount
which it must pay for debt service is the same as if the interest rate on its RD
mortgage loan were 1% per annum (rather than the actual interest rate on the RD
mortgage loan), plus the amount of "overage" for the month (if any). Overage is
the amount by which 30% of one-twelfth of a tenant's adjusted gross annual
income exceeds the basic rent for his unit.
RD also provides rent subsidies ("Rental Assistance Payments"). In order to
obtain Rental Assistance Payments for a newly constructed or substantially
rehabilitated apartment complex, the owner must execute a rental assistance
agreement with RD for a term of up to 20 years. However, some contracts may have
only a five-year term. Upon expiration of the term of the agreement, a new
agreement may be executed for a period of up to five years. Additional units in
the apartment complex may later be eligible if funds are available.
HOME Program
The Home Investment Partnership program ("HOME") was authorized under Title
II of the Cranston-Gonzalez National Affordable Housing Act, enacted into law in
1990. HOME is a Federal housing program intended to support a wide variety of
state and local affordable housing programs.
HOME funds are allocated by the U.S. Department of Housing and Urban
Development ("HUD") on a formula basis to participating state and local
governments. HOME funds can be used to expand the supply of affordable housing
and to increase the number of households served by assisted housing programs.
Funds can be used for acquisition, construction, moderate or substantial
rehabilitation activities or for tenant-based rental assistance programs.
State and local jurisdictions are statutorily required to meet matching
requirements in order to qualify for HOME funding. This requires a 30% match for
new construction activities and a 25% match for rehabilitation activities.
Participating jurisdictions are allowed to use funds for:
o equity investments,
o interest-bearing or non-interest-bearing loans,
o advances,
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o interest subsidies, or
o other forms of assistance that HUD finds to be consistent with the purpose
of the program.
Apartment complexes which are assisted with HOME funds must be occupied by
low income families (those whose incomes do not exceed 80% of area median
income, adjusted for family size). At least 20% of the dwelling units must be
occupied by very low income families (those whose incomes do not exceed 50% of
the area median income, adjusted for family size) who pay rent equal to no more
than:
o 30% of their adjusted income, or
o the amount permitted under the low income housing tax credit program.
The other 80% of the dwelling units must be rented at amounts which do not
exceed the lesser of:
o the existing fair market rent under the HUD Section 8 program, or
o 30% of the adjusted income of a family whose income is 65% of the area
median income, adjusted for family size.
Accordingly, the rents allowed for the other 80% of the dwelling units may
exceed the amounts permitted under the low income housing tax credit program.
If an apartment complex receives a HOME loan having a below-market-interest-
rate, the apartment complex would be eligible only for the 30% present value low
income housing tax credit because the apartment complex would be considered to
be Federally subsidized.
State and Local Bond Programs
A number of states and some local jurisdictions have established housing
finance agencies ("HFAs") to assist in the development and financing of low and
moderate income housing. HFAs are empowered to issue their own obligations which
may exempt from Federal income tax. If so, the HFAs sell the obligations in the
tax-exempt municipal bond market at interest costs below conventional money
market rates. The HFAs then use the proceeds of the sale of their obligations to
make or purchase mortgage loans for low and moderate income apartment complexes.
Generally, in cases where the mortgage loans of HFAs are also insured by the
U.S. Department of Housing and Urban Development ("HUD"), the HUD underwriting
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and regulatory standards and procedures are employed without any
substantial additional requirements.
When an HFA provides direct construction and permanent mortgage loans for
multi-family housing without HUD mortgage insurance, the HFA itself generally
determines the
o economic feasibility of,
o market need for,
o demand for, and
o architectural construction characteristics of,
the apartment complex. In such cases, the HFA generally also monitors the
progress of construction, marketing, rent-up and management of the completed
apartment complex.
Although HFAs' criteria and requirements for non-HUD-insured direct mortgage
loans vary, generally such loans are available in an amount of up to 90% of an
HFA's estimate of the total development cost of the apartment complex for terms
of up to 40 years. Generally, the owner must accept a limit on the amount of
operating income which may be distributed annually. The HFAs' direct loan
programs frequently include requirements as to operating assurances, escrow,
working capital and other deposits.
In order to maintain the tax-exempt nature of obligations issued by HFAs,
o 20% of the units in an apartment complex must be rented to households at 50%
of the area median income (or 40% at 60% of area median income) as adjusted
for family size, and
o tenants may not pay more than 30% of their adjusted incomes for rent.
These tenant qualification requirements must be satisfied annually based on
income earned each year by tenants over the term of the qualified project
period. This period extends until the latest of:
o 15 years from the date 50% of the units are occupied;
o redemption of the bonds; or
o termination of any Section 8 rental assistance.
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Typically, a mortgage loan financed with the proceeds of tax-exempt bonds
may not be prepaid during the qualified project period. Thereafter, it may be
prepaid only upon payment of amounts necessary to redeem the HFAs obligations,
including the payment of premiums for early redemption. HFAs' direct mortgage
loan programs also impose limitations on the sale, refinancing or change in use
of the apartment complex. They may also require that a restrictive covenant be
placed on record prohibiting the use of the apartment complex for anything other
than rental housing. Further, they may require approval of the sale of an
interest in a partnership or limited liability company owner.
Apartment complexes financed by tax-exempt bonds issued by HFAs may be
eligible for low income housing tax credits. HFA-financed apartment complexes
typically are not allocated low income housing tax credits from a state's
general pool (i.e., $1.25 per resident of the state). Rather, the Internal
Revenue Code imposes a ceiling on the amount of tax-exempt bond authority
available to a state or local agency. HFA-financed apartment complexes are
considered to be Federally subsidized for purposes of low income housing tax
credits, and thus eligible only for the 30% present value credit. See "The Low
Income Housing Tax Credit."
HUD Section 8 Rental Assistance Programs
The U.S. Department of Housing and Urban Development ("HUD") administers
the Existing Housing Program under Section 8 of the National Housing Act. Under
the Existing Housing Program low income tenants are given housing vouchers
through a local housing authority. Tenants can use these vouchers to pay a
significant portion of the rents for housing available in the private market,
but only in projects approved by HUD on the basis of housing quality and
suitability standards.
The definition of "Federally subsidized" for purposes of the low income
housing tax credits excludes all of the Section 8 programs except for the
Moderate Rehabilitation Section 8 program (other than funds disbursed under the
Stewart B. McKinney Homeless Assistance Act of 1988), so that units receiving
such assistance may be eligible for the 70% present value credit.
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MANAGEMENT
The Fund Manager
The Fund Manager is WNC & Associates, Inc. WNC & Associates, Inc. has
significant experience in acquiring and managing investments in affordable
rental housing. The Fund Manager has the shareholder's equity reflected in its
audited balance sheet (see "Financial Statements"). The Fund Manager will be
responsible for all aspects of the operations of the Series. The Acquisition
Committee of the Fund Manager must approve each Local Limited Partnership before
its acquisition. The Fund Manager will provide executive supervisory and certain
administrative services for the operations of the Series. Property management
will be provided at the expense of each Local Limited Partnership by agents,
which may include WNC Management, Inc., an affiliate of the Fund Manager. See
"Management Compensation." The services provided by the Fund Manager will
include exercising all of the rights of the Series under the partnership
agreements of the Local Limited Partnerships. Investors will have no right to
participate in the management of their Series.
The Fund Manager and its affiliates are serving as the general partners of
the limited partnerships described below under "Prior Performance Summary" and
may serve as general partners for other real estate limited partnerships in the
future. It is anticipated that the officers of the Fund Manager will initially
devote approximately 5% to 50% of their time to the Series. These individuals
will spend significantly less time devoted to the Series after the investment of
the Series capital in Local Limited Partnerships. See "Conflicts of Interest."
The Fund Manager is a California corporation which was organized in 1971.
Its officers and significant employees are:
Wilfred N. Cooper, Sr............. Chief Executive Officer
John B. Lester, Jr................ President, Chief Operating
Officer and Secretary
Wilfred N. Cooper, Jr............. Executive Vice President
David N. Shafer, Esq.............. Senior Vice President and
General Counsel
Michael L. Dickenson, CPA......... Vice President - Chief Financial Officer
Thomas J. Riha.................... Vice President - Asset Management
Sy P. Garban...................... Vice President - National Sales
N. Paul Buckland.................. Vice President - Acquisitions
David T. Turek.................... Vice President - Originations
The directors of WNC & Associates, Inc. are Wilfred N. Cooper, Sr., who
serves as Chairman of the Board, John B. Lester, Jr., David N. Shafer, Wilfred
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N. Cooper, Jr. and Kay L. Cooper. The principal shareholders of WNC &
Associates, Inc. are Wilfred N. Cooper, Sr. and John B. Lester, Jr.
Wilfred N. Cooper, Sr., age 68, is the founder, Chief Executive Officer and
a Director of WNC & Associates, Inc., a Director of WNC Capital Corporation, and
a general partner in some of the programs previously sponsored by WNC &
Associates, Inc. Mr. Cooper has been actively involved in the affordable housing
industry since 1968. Previously, during 1970 and 1971, he was founder and a
principal of Creative Equity Development Corporation, a predecessor of WNC &
Associates, Inc., and of Creative Equity Corporation, a real estate investment
firm. For 12 years before that, Mr. Cooper was employed by Rockwell
International Corporation, last serving as its manager of housing and urban
developments where he had responsibility for factory-built housing evaluation
and project management in urban planning and development. Mr. Cooper is a
Director of the National Association of Home Builders (NAHB) and a National
Trustee for NAHB's Political Action Committee, a Director of the National
Housing Conference (NHC) and a member of NHC's Executive Committee, and a
Director of the National Multi- Housing Council (NMHC). Mr. Cooper graduated
from Pomona College in 1956 with a Bachelor of Arts degree.
John B. Lester, Jr., age 65, is President, a Director, Secretary and a
member of the Acquisition Committee of WNC & Associates, Inc., and a Director of
WNC Capital Corporation. He has 27 years of experience in engineering and
construction and has been involved with real estate investments since 1986 when
he joined WNC & Associates, Inc. Previously, he was the Chairman of the Board
and Vice President or President of E & L Associates, Inc., a provider of
engineering and construction services to the oil refinery and petrochemical
industries which he co-founded in 1973. Mr. Lester graduated from the University
of Southern California in 1956 with a Bachelor of Science degree in Mechanical
Engineering.
Wilfred N. Cooper, Jr., age 36, is Executive Vice President, a Director and
a member of the Acquisition Committee of WNC & Associates, Inc. He is President
of, and a registered principal with, WNC Capital Corporation, a member firm of
the NASD, and is a Director of WNC Management, Inc. He has been involved in real
estate investment and acquisition activities since 1988 when he joined WNC &
Associates, Inc. Previously, he served as a Government Affairs Assistant with
Honda North America in Washington, D.C. Mr. Cooper is a member of the Advisory
Board for LIHC Monthly Report, a Director of NMHC and an Alternate Director of
NAHB. He graduated from The American University in 1985 with a Bachelor of Arts
degree.
David N. Shafer, age 47, is Senior Vice President, a Director, General
Counsel, and a member of the Acquisition Committee of WNC & Associates, Inc.,
and a Director and Secretary of WNC Management, Inc. Mr. Shafer has been active
in the real estate industry since 1984. Before joining WNC & Associates, Inc. in
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1990, he was engaged as an attorney in the private practice of law with a
specialty in real estate and taxation. Mr. Shafer is a Director and President of
the California Council of Affordable Housing, and a member of the State Bar of
California. Mr. Shafer graduated from the University of California at Santa
Barbara in 1978 with a Bachelor of Arts degree, from the New England School of
Law in 1983 with a Juris Doctor degree (cum laude) and from the University of
San Diego in 1986 with a Master of Law degree in Taxation.
Michael L. Dickenson, age 42, is Vice President - Chief Financial Officer
and a member of the Acquisition Committee of WNC & Associates, Inc. and Chief
Financial Officer of WNC Management, Inc. His experience in real estate
activities began in 1985. Before joining WNC & Associates, Inc. in March 1999,
he was the Director of Financial Reporting at TrizeeHahn Centers Inc., a
developer and operator of commercial real estate, from 1995 to 1999, a Senior
Manager with E&Y Kenneth Leventhal Real Estate Group, Ernst & Young, LLP, from
1988 to 1995, and Vice President of Finance with Great Southwest Companies, a
commercial and residential real estate developer, from 1985 to 1988. Mr.
Dickenson is a member of the Financial Accounting Standards Committee for the
National Association of Real Estate Companies, and the American Institute of
Certified Public Accountants, and a Director of HomeAid Southern California, a
charitable organization affiliated with the building industry. He graduated from
Texas Tech University in 1978 with a Bachelor of Business Administration -
Accounting degree, and is a Certified Public Accountant.
Thomas J. Riha, age 44, is Vice President - Asset Management and a member of
the Acquisition Committee of WNC & Associates, Inc. and a Director and Chief
Executive Officer of WNC Management, Inc. He has been involved in real estate
acquisition and investment activities since 1979. Before joining WNC &
Associates, Inc. in 1994, Mr. Riha was employed by Trust Realty Advisor, a real
estate acquisition and management company, last serving as Vice President -
Operations. Mr. Riha graduated from the California State University, Fullerton
in 1977 with a Bachelor of Arts degree (cum laude) in Business Administration
with a concentration in Accounting and is a Certified Public Accountant and a
member of the American Institute of Certified Public Accountants.
Sy P. Garban, age 53, is Vice President - National Sales of WNC &
Associates, Inc. Mr. Garban has been involved in real estate investment
activities since 1978. Before joining WNC & Associates, Inc. in 1989, he served
as Executive Vice President with MRW, Inc., a real estate development and
management firm. Mr. Garban is a member of the International Association of
Financial Planners. He graduated from Michigan State University in 1967 with a
Bachelor of Science degree in Business Administration.
N. Paul Buckland, age 36, is Vice President - Acquisitions of WNC &
Associates, Inc. He has been involved in real estate acquisitions and
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investments since 1986 and has been employed by WNC & Associates, Inc. since
1994. Before that, he served on the development team of the Bixby Ranch which
constructed apartment units and "Class A" office space in California and
neighboring states, and as a land acquisition coordinator with Lincoln Property
Company where he identified and analyzed multi-family developments. Mr. Buckland
graduated from the California State University, Fullerton in 1992 with a
Bachelor of Science degree in Business Finance.
David T. Turek, age 44, is Vice President - Originations of WNC &
Associates, Inc. His experience with real estate investments and finance has
continued in various capacities since 1976, and he has been employed by WNC &
Associates, Inc. since 1996. Previously, from 1995 to 1996, Mr. Turek served as
a consultant for a national Tax Credit sponsor where he was responsible for
on-site feasibility studies and due diligence analyses of tax credit properties,
from 1992 to 1995 he served as Executive Vice President for Levcor, Inc., a
multi-family development company, and from 1990 to 1992 he served as Vice
President for the Paragon Group where he was responsible for tax credit
development activities. Mr. Turek graduated from Southern Methodist University
in 1976 with a Bachelor of Business Administration degree.
Kay L. Cooper, age 62, is a Director of WNC & Associates, Inc. Mrs. Cooper
was the sole proprietor of Agate 108, a manufacturer and retailer of home
accessory products, from 1975 until its sale in 1998. She is the wife of Wilfred
N. Cooper, Sr., the mother of Wilfred N. Cooper, Jr. and the sister of John B.
Lester, Jr. Ms. Cooper graduated from the University of Southern California in
1958 with a Bachelor of Science degree.
Statement of Purpose. Since its organization in 1971, WNC & Associates, Inc.
has specialized in providing quality investment opportunities exclusively in the
field of affordable housing. WNC & Associates, Inc. has a time-honored tradition
of prudent investing and is one of the nation's oldest sponsors of tax credit
investments. Its officers believe that WNC & Associates, Inc. has developed an
insight into the affordable housing business based upon the fundamental
principles of diversification and market need that few other companies can
match. Using a disciplined selection process it evaluates all investment
properties for value and location, placing particular emphasis on long-term
economic stability and rental demand.
Before 1982 WNC & Associates, Inc. structured and sponsored private
placements of equity securities in limited partnerships organized to develop and
operate residential rental properties benefitting from government assistance.
WNC & Associates, Inc. has since monitored the investments made by such
partnerships and provided certain administrative services to the investors.
These partnerships are discussed in this section under "Syndicated
Partnerships."
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In addition to such Syndicated Partnerships, through December 31, 1999 WNC
& Associates, Inc. and/or its affiliates had sponsored 16 public and 51
non-public real estate programs as managing general partner. See "Prior
Performance Summary."
Syndicated Partnerships. WNC & Associates, Inc. structured for independent
real estate developers 57 private placements of partnerships formed to own real
estate projects ("Syndicated Partnerships"). In such transactions, investors
paid an aggregate of approximately $15,825,000 in equity capital contributions
to limited partnerships. The limited partnerships owned projects having an
aggregate acquisition cost estimated at approximately $82,000,000. Estimates of
acquisition costs of a project are equal to equity contributions and debt
financing. These investment programs invested in 57 apartment properties, all of
which benefit from government assistance, in the following jurisdictions:
Arizona (2) Ohio (6)
California (29) Texas (4)
Colorado (1) Utah (1)
Florida (6) Virginia (1)
Kansas (1) Washington (1)
Kentucky (1) West Virginia (3)
New Mexico (1)
As of March 31, 1999, nine of the Syndicated Partnerships had either sold,
resyndicated (to affiliates) or refinanced their properties, returning to their
investors between approximately 100% and 200% of their invested capital in
addition to providing tax deductions averaging in excess of 200% of their
invested capital.
In connection with the Syndicated Partnerships, WNC & Associates, Inc. (i)
provided structuring and consulting services to developers, (ii) arranged for
preparation of partnership agreements and other requisite documents for the
projects, including legal opinions as to Federal income tax and organizational
matters, and (iii) arranged for the placement of securities, typically in
accordance with Regulation D under the Securities Act of 1933. It relied on
independent broker-dealers to place such securities.
WNC & Associates, Inc., as an investor service agent, has also provided
certain on-going partnership administrative services to the Syndicated
Partnerships. In this role, it has (i) gathered and evaluated information, (ii)
handled all communications between the partnerships and investors, including the
forwarding of financial statements and tax reporting forms, and (iii) served as
the initial channel for investor inquiries.
In cases where projects have failed to perform as expected, WNC &
Associates, Inc. has (i) intensified its monitoring operations, (ii) visited the
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projects, (iii) attempted to organize the interests of the investors, (iv)
attempted to provide general advice to the partners, and (iv) attempted to help
seek a resolution of pending problems. With respect to five of the Syndicated
Partnerships, each of which owned a single property, WNC & Associates, Inc.
became the successor managing general partner after the original managing
general partners misappropriated partnership accounts. With respect to three of
those Syndicated Partnerships (which had the same original managing general
partner), WNC & Associates, Inc. became the successor managing general partner
in 1986. Thereafter, the three Syndicated Partnerships sold their respective
properties to three other partnerships. After the general partner of those three
other partnerships obtained tax credits for the properties, a partnership
sponsored by WNC & Associates, Inc. (see "Prior Performance Summary") purchased
the limited partnership interests therein. With respect to the other two
Syndicated Partnerships, WNC & Associates, Inc. became successor managing
general partner in 1989. Thereafter, using government loans, the partnerships
substantially rehabilitated their properties and continue to own and operate
them.
Change in Management
The management and control of WNC & Associates, Inc. may be changed at any
time in accordance with its organizational documents, without the consent or
approval of the investors. In addition, the Partnership Agreements of the Series
provide for the admission of one or more additional or successor fund managers
to a Series in certain circumstances.
First, with the consent of any other fund managers of the Series and a
majority-in-interest of the investors, WNC & Associates, Inc. may designate one
or more persons to be successor or additional fund managers to the Series. In
addition, WNC & Associates, Inc. may, without the consent of any other fund
manager or the investors:
o substitute in its stead as fund manager any entity which has, by merger,
consolidation or otherwise, acquired substantially all of its assets, stock
or other evidence of equity interest and continued its business, or
o cause to be admitted to the Series an additional fund manager if it deems
such admission to be necessary or desirable for classification of the Series
as a partnership for Federal income tax purposes.
Finally, a majority-in-interest of the investors may at any time remove WNC &
Associates, Inc. and elect a successor fund manager. If at any time a Series
does not have a fund manager which is an affiliate of WNC & Associates, Inc.,
the Series cannot include the initials "WNC"in its name.
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WNC Capital Corporation
WNC Capital Corporation, a California corporation which is wholly-owned by
WNC & Associates, Inc., was organized in 1994 principally to facilitate the
distribution of securities of partnerships sponsored by WNC & Associates, Inc.
WNC Capital Corporation is a member firm with the NASD, and is registered as a
broker-dealer with the Securities and Exchange Commission, the California
Department of Corporations and regulatory agencies of certain other states.
WNC Management, Inc.
WNC Management, Inc., a California corporation which is wholly-owned by WNC
& Associates, Inc., was organized in 1997 to manage properties, principally
those owned by local limited partnerships invested in by WNC partnerships.
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PRIOR PERFORMANCE SUMMARY
WNC & Associates, Inc. directly and through its affiliates has had
significant experience in the syndication and management of real estate
programs. From its formation through December 31, 1998, WNC & Associates, Inc.
and its affiliates have raised equity from more than 13,200 investors to acquire
interests in more than 560 properties located in 40 states and one territory,
and representing more than $960,000,000 in aggregate acquisition costs. The
information which follows and the section of this Prospectus entitled
"Management" contain discussions as of December 31, 1998 of all of the prior
real estate investment programs in which WNC & Associates, Inc. and its
affiliates have been involved.
In addition to the Syndicated Partnerships discussed above under
"Management," as of December 31, 1998 WNC & Associates, Inc. and its affiliates
have sponsored a total of 16 public and 50 non-public real estate programs
(excluding the Series). As of December 31, 1998, these 66 partnerships had
raised an aggregate of approximately $364,600,000 from more than 12,700
investors, and had invested in a total of 509 apartment properties at an
aggregate acquisition cost of approximately $885,500,000 in the following
jurisdictions:
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Alabama 18 Nebraska 8
Arizona 9 Nevada 3
Arkansas 17 New Mexico 16
California 107 New York 3
Florida 8 North Carolina 32
Georgia 6 Ohio 4
Idaho 2 Oklahoma 13
Illinois 16 Oregon 5
Indiana 4 Pennsylvania 3
Iowa 10 South Carolina 18
Kansas 3 South Dakota 1
Kentucky 3 Tennessee 28
Louisiana 15 Texas 90
Maryland 2 U. S. Virgin Islands 1
Michigan 3 Virginia 5
Minnesota 2 Washington 1
Mississippi 12 West Virginia 1
Missouri 20 Wisconsin 18
Montana 1 Wyoming 1
Of these 66 programs, 14 public and 22 private real estate programs
commenced their offerings during the period between January 1, 1989 and December
31, 1998 (the "Prior Programs"). See "Public Programs Sponsored" and "Private
Programs Sponsored" below. The Prior Programs were organized to invest in
apartment complexes (by acquiring limited partnership interests in other limited
partnerships which owned the apartment complexes) benefitting from Low Income
Housing Tax Credits and, in most instances, one or more other forms of
government assistance. See "Other Government Assistance Programs." The general
partners of the local limited partnerships manage and control the properties in
which the Prior Programs have invested.
Public Programs Sponsored
The 14 public Prior Programs are WNC Housing Tax Credit Fund, L.P.
("HTCF"), WNC California Housing Tax Credits, L.P. ("CHTC"), WNC Housing Tax
Credit Fund II, L.P. ("HTCFII"), WNC California Housing Tax Credits II, L.P.
("CHTCII"), WNC Housing Tax Credit Fund III, L.P. ("HTCFIII"), WNC California
Housing Tax Credits III, L.P. ("CHTCIII"), WNC Housing Tax Credit Fund IV, L.P.,
Series 1 ("HTCFIV Series 1"), WNC Housing Tax Credit Fund IV, L.P., Series 2
("HTCFIV Series 2"), WNC California Housing Tax Credits IV,
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L.P., Series 4 ("CHTCIV Series 4"), WNC California Housing Tax Credits IV, L.P.,
Series 5 ("CHTCIV Series 5"), WNC Housing Tax Credit Fund V, L.P., Series 3
("HTCFV Series 3"), WNC Housing Tax Credit Fund V, L.P., Series 4 ("HTCFV Series
4"), WNC Housing Tax Credit Fund VI, L.P., Series 5 ("HTCFVI Series 5") and WNC
Housing Tax Credit Fund VI, L.P., Series 6 ("HTCFVI Series 6"). With the
exception of HTCFVI Series 6, each of the public Prior Programs had completed
its offering as of December 31, 1998.
Through December 31, 1998, the 14 public Prior Programs had raised an
aggregate of approximately $183,900,000 in capital contributions from an
aggregate of approximately 11,100 investors and invested in a total of 239
apartment properties located in the following jurisdictions:
Alabama 16 Mississippi 7
Arizona 4 Missouri 9
Arkansas 8 Nebraska 7
California 49 New Mexico 8
Florida 2 New York 3
Georgia 2 North Carolina 16
Idaho 1 Ohio 4
Illinois 8 Oklahoma 4
Indiana 4 Oregon 3
Iowa 8 South Carolina 2
Kansas 2 South Dakota 1
Kentucky 1 Tennessee 9
Louisiana 3 Texas 41
Maryland 1 Virginia 4
Michigan 1 Wisconsin 11
The aggregate mortgage debt encumbering the properties was approximately
$284,900,000 and the aggregate acquisition cost of the properties was
approximately $426,700,000. At the times of the Prior Programs' investments
therein 81 of the properties were existing apartment complexes and 158 were
under development or construction by the local partnerships which own them.
All of the public Prior Programs have as their principal investment
objective providing Federal low income housing tax credits to their investors.
CHTC, CHTCII, CHTCIII, CHTCIV Series 4, and CHTCIV Series 5 have the additional
objective of providing California low income housing tax credits.
Certain information with regard to the public Prior Programs is set forth in
the tables which follow:
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<TABLE>
Federal Credit Programs
Offering Credits Received Per $10,000 Investment Federal
Commence- Partnership Credit Years
ment Name Total 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Remaining(1)
- ---- ---- ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 HTCF $12,990 $1,410 $1,410 $1,410 $1,410 $1,410 $1,410 $1,410 $1,400 $1,640 $80 3
1990 HTCFII 11,480 1,020 1,450 1,450 1,450 1,460 1,380 1,210 1,300 760 -- 5
1992 HTCFIII 8,140 1,570 1,570 1,570 1,520 1,190 680 40 -- -- -- 7
1993 HTCFIV
Series 1 5,540 1,420 1,430 1,360 1,010 320 -- -- -- -- -- 8
1994 HTCFIV
Series 2 4,330 1,240 1,130 1,050 700 210 -- -- -- -- -- 8
1995 HTCFV
Series 3 2,790 1,300 840 620 30 -- -- -- -- -- -- 9
1996 HTCFV
Series 4 1,130 800 190 140 -- -- -- -- -- -- -- 10(2)
1997 HTCFVI
Series 5 200 200 -- -- -- -- -- -- -- -- -- 11
1998 HTCFVI
Series 6 -- -- -- -- -- -- -- -- -- -- -- --
</TABLE>
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<TABLE>
Federal and California Credit Programs
Offering Credits Received Per $10,000 Investment Federal
Commence- Partnership Credit Years
ment Name Total 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Remaining(1)
- ---- ---- ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 CHTC $15,640 $ 990 $ 990 $ 990 $ 990 $1,180 $1,720 $2,360 $2,590 $2,270 $1,560 3
1991 CHTCII 12,460 1,250 1,440 1,530 2,060 1,940 1,780 1,810 650 -- -- 2(2)
1993 CHTCIII 7,720 1,300 1,790 1,970 1,800 800 60 -- -- -- -- 8
1994 CHTCIV
Series 4 5,480 1,660 1,770 1,340 710 -- -- -- -- -- -- 8
1995 CHTCIV
Series 5 2,410 1,430 980 -- -- -- -- -- -- -- -- 9
<FN>
(1) As of December 31, 1998.
(2) These Prior Programs will generate a small amount of low income housing tax
credits for four years beyond the stated number of years due to increases in
qualified basis.
</FN>
</TABLE>
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Private Programs Sponsored
As of December 31, 1998, the 22 private Prior Programs involved an aggregate
of approximately $145,400,000 in commitments for capital contributions payable
in installments from an aggregate of approximately 908 investors. These private
Prior Programs invested in a total of 182 apartment properties located in the
following jurisdictions:
Alabama 2 Missouri 8
Arizona 4 Montana 1
Arkansas 7 Nebraska 1
California 25 Nevada 3
Florida 3 New Mexico 7
Georgia 3 North Carolina 13
Idaho 1 Oklahoma 4
Illinois 7 Oregon 2
Iowa 2 Pennsylvania 3
Kentucky 2 South Carolina 9
Louisiana 9 Tennessee 9
Maryland 1 Texas 42
Michigan 1 Virginia 1
Minnesota 2 Wisconsin 3
Mississippi 5 Wyoming 1
The aggregate mortgage debt encumbering the properties was approximately
$212,200,000 and the aggregate acquisition cost of the properties was
approximately $327,500,000.
All of the 22 private Prior Programs have as their principal investment
objective providing Federal low income housing tax credits to their investors.
Five of the 22 programs have the additional objective of providing California
low income housing tax credits.
Certain additional information with regard to the 22 private Prior Programs
and the 14 private programs organized prior to January 1, 1989 and formed to
provide low income housing tax credits is set forth in the tables which follow:
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<TABLE>
Federal Credit Programs
Offering Federal
Commence- Partnership Credits Received Per $10,000 Investment(1) Credit Years
ment Name Total 1998 1997 1996 1995 1994 1993 1992 1991 1990(3) 1989 1988 1987 Remaining(2)
- ---- ---- ----- ---- ---- ---- ---- ---- ---- ---- ---- ------- ---- ---- ---- ------------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 Pepper Tree (4) $15,660 $ 660 $1,350 1,470 1,470 $1,470 $1,470 $1,470 $1,470 $2,370 $1,530 $ 900 $ 30 0
1987 East Bay 14,320 -- 380 1,360 1,350 1,360 1,360 1,360 1,360 1,670 1,700 1,400 1,020 0
1987 Sequoia Manor 14,990 160 1,390 1,370 1,370 1,370 1,370 1,350 1,380 2,220 1,460 1,340 210 0
1987 Bayou 13,890 -- 1,000 1,290 1,290 1,290 1,290 1,290 1,290 2,110 1,400 1,330 310 0
1987 Laurel Hill 15,130 1,180 1,180 1,320 1,320 1,320 1,320 1,320 1,300 2,090 1,320 1,230 230 0(5)
1988 Ridgetop 14,980 1,280 1,390 1,390 1,390 1,390 1,390 1,390 1,390 2,250 1,500 220 -- 0(6)
1989 Alta Mesa 13,050 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,950 540 -- -- 2
1990 WNC-90 11,450 1,400 1,400 1,400 1,400 1,400 1,400 1,400 1,400 250 -- -- -- 2
1991 Shelter Resource
XIX 10,780 1,420 1,440 1,440 1,440 1,440 1,440 1,440 720 -- -- -- -- 3
1991 WNC Tax Credits
XX 11,130 1,430 1,460 1,460 1,460 1,460 1,460 1,460 940 -- -- -- -- 3
1991 WNC Tax Credits
XXI 9,240 1,360 1,360 1,360 1,360 1,360 1,360 1,030 50 -- -- -- -- 4
1992 WNC Tax Credits
XXII 9,550 1,410 1,410 1,410 1,410 1,410 1,410 1,090 -- -- -- -- -- 4
1992 WNC Tax Credits
XXIII 9,240 1,400 1,400 1,400 1,400 1,400 1,370 870 -- -- -- -- -- 4
1992 WNC Tax Credits
XXV 7,820 1,380 1,380 1,380 1,380 1,280 870 150 -- -- -- -- -- 6
1993 WNC Tax Credits
XXVI 7,480 1,330 1,330 1,330 1,330 1,320 840 -- -- -- -- -- -- 5
1993 WNC Tax Credits
XXVIII 5,950 1,300 1,300 1,300 1,300 640 110 -- -- -- -- -- -- 6
1993 WNC Tax Credits
XXIX 5,840 1,310 1,310 1,290 1,110 790 30 -- -- -- -- -- -- 7
1994 WNC Tax Credits
XXX 4,790 1,230 1,230 1,220 1,000 110 -- -- -- -- -- -- -- 7
1994 ITC I 5,910 1,520 1,530 1,670 780 410 -- -- -- -- -- -- -- 8
1995 ITC II 3,420 1,470 1,290 590 70 -- -- -- -- -- -- -- -- 9
1996 ITC III 1,380 1,000 380 -- -- -- -- -- -- -- -- -- -- 11
1997 ITC V 680 660 20 -- -- -- -- -- -- -- -- -- -- 11
1998 ITC VI 220 220 -- -- -- -- -- -- -- -- -- -- -- 12
</TABLE>
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<TABLE>
Federal and California Credit Programs
Offering Federal
Commence- Partnership Credits Received Per $10,000 Investment(1) Credit Years
ment Name Total 1998 1997 1996 1995 1994 1993 1992 1991 1990(3) 1989 1988 1987 Remaining(2)
- ---- ---- ----- ---- ---- ---- ---- ---- ---- ---- ---- ------- ---- ---- ---- ------------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 Beech Villa $18,610 $ -- $860 $1,360 $1,360 $1,350 $1,350 $1,350 $1,350 $2,670 $3,210 $3,210 $540 0
1988 Elmwood Villa 18,590 570 990 990 990 990 990 1,330 2,610 4,010 3,460 1,660 -- 1
1988 Poplar Villa 18,150 530 970 970 970 970 970 970 2,280 3,420 3,410 2,690 -- 0
1988 Olive Tree 18,220 760 970 970 970 970 970 970 1,620 3,990 3,310 2,720 -- 0
1988 Pine Rock 17,410 940 940 940 940 940 880 1,220 3,280 3,810 3,240 280 -- 1
1988 Mesa Verde 17,030 970 1,030 1,020 1,030 1,030 1,030 1,870 1,690 3,610 2,760 990 -- 1
1988 Sunfield 16,790 1,140 1,340 1,340 1,340 1,340 1,340 1,340 1,650 3,090 2,080 790 -- 1
1988 Foxglove 14,600 1,360 1,360 1,360 1,360 1,360 1,550 2,020 2,020 1,920 290 -- -- 2
1989 Elliot Place 16,500 1,140 1,200 1,200 1,200 1,200 1,200 1,670 2,460 3,200 2,030 -- -- 2
1990 Wheatridge 13,120 1,120 1,120 1,120 1,120 1,120 1,480 2,240 2,230 1,570 -- -- -- 3
1992 WNC Tax Credits
XXIV 11,110 1,260 1,260 1,260 1,740 2,180 2,180 1,230 -- -- -- -- -- 4
1993 WNC Tax Credits
XXVII 8,630 1.270 1,290 1,560 1,750 1,740 1,020 -- -- -- -- -- -- 6
1997 CTC 1,080 870 210 -- -- -- -- -- -- -- -- -- -- 11
<FN>
(1) Represents the return received by investors utilizing deferred payment
purchase plans. In many instances the respective returns to cash investors
were higher than those listed above because the use of
deferred payment purchase notes entailed the payment of interest.
(2) As of December 31, 1998.
(3) In 1990 certain partnerships were permitted to, and did, elect to utilize
150% of the Federal low income housing tax credit otherwise allowable for
1990.
(4) Pepper Tree originally offered Federal low income housing tax credits only.
After the investors were admitted to the Prior Program, the Local General
Partners obtained California low income housing tax credits as well, which
are not reflected in this chart.
(5) These Prior Programs will generate a small amount of low income housing tax
credits for five years beyond the stated number of years due to increases
in qualified basis.
(6) These Prior Programs will generate a small amount of low income housing tax
credits for four years beyond the stated number of years due to increases
in qualified basis.
</FN>
</TABLE>
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Additional Information
o In a private program sponsored in 1996, WNC & Associates, Inc. removed a
Local General Partner in 1997 after construction defects were discovered and
the Local General Partner declared bankruptcy. The prior program purchased
the bridge loan at its face value upon maturity thereof. The Local Limited
Partnership completed construction using other funds loaned by WNC &
Associates, Inc. and the prior program. Thereafter, the prior program sold
its interest in the Local Limited Partnership.
o In a public program sponsored in 1993, WNC & Associates, Inc. removed a
Local General Partner in 1997 after the Local General Partner violated
provisions of the Local Limited Partnership's partnership agreement. The
remaining Local General Partner, an agency of the county in which the
property is located, has been replaced by an experienced non-profit entity.
o In 1997 the IRS issued notices of adjustment regarding five properties owned
by four prior private programs and developed by the same Local General
Partner. The IRS claimed that development fees paid to the Local General
Partner were not properly includable in the depreciable and eligible bases
of the respective properties. After filing a petition for readjustment
before the United States Tax Court, each of the Local Limited Partnerships
and the prior private programs reached a settlement with the IRS in 1998
which provided that, for each property,
* the depreciable basis thereof was unchanged,
* the eligible basis thereof was reduced by a portion of the development
fees,
* a portion of the reduction in eligible basis was eligible for
amortization as organization expenses, and
* the actual deficiency for 1993 to 1996, in an immaterial amount on a per
unit basis for each prior program, was assessed for 1996 and was equal to
the (i) reduction of tax credits resulting from the reduction in eligible
basis, less (ii) the deduction resulting from the amortization of the
reclassified organization expenses.
Tax credits for 1997 and all years thereafter are reduced in an immaterial
amount on a per unit basis as a result of the reduction in eligible basis.
Unless prohibited by law WNC & Associates, Inc. will pay the deficiencies
for 1996 and 1997.
o Also in 1997, the Local General Partner of three Local Limited Partnerships
which were invested in by a prior private program sponsored in 1984
transferred the properties of the Local Limited Partnerships to the same
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transferree without seeking the approval of the prior program. The transfers
were made in consideration of relief of indebtedness owed by the Local
General Partner. Each of the Local Limited Partnerships has brought an
action to have the transfer set aside and to remove the Local General
Partner. As the properties are located in three states, three lawsuits have
been commenced. In two of those actions the court ruled to remove the Local
General Partner and to declare null and void the transfer. The third action
has not been resolved.
Tables I, II, III, IV and V which comprise Exhibit A to this Prospectus
contain additional information with regard to certain of the Prior Programs.
Reference also is made to Table VI included in the Registration Statement which
describes in greater detail the properties in which these Prior Programs have
invested.
WNC & Associates, Inc. will send to any prospective investor upon request
and without charge, copies of Table VI and of the most recent report on Form
10-K filed by any of the public programs with the SEC which have done so, and
will send upon request, for a reasonable fee, the exhibits to such Form 10-K.
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FEDERAL INCOME TAX CONSIDERATIONS
Introduction
The following discussion summarizes the material Federal income tax aspects
of the purchase, ownership and disposition of Units. It also summarizes the
Federal income tax opinion of Derenthal & Dannhauser, counsel to the Series, WNC
& Associates, Inc. and their affiliates ("Counsel"). The low income housing tax
credits are not discussed below, but are discussed under "The Low Income Housing
Tax Credit." This discussion, Counsel's opinion and the discussion of the low
income housing tax credits are based on the Internal Revenue Code, Treasury
Regulations thereunder, published administrative rulings, and judicial decisions
in effect on the date of this Prospectus. Legislation enacted in various years
since 1986 has substantially altered the Federal income tax system, particularly
as it relates to the tax consequences of investments by limited partnerships in
real estate. Consequently, significant uncertainty exists regarding various
aspects of the taxation of limited partnerships. Furthermore, IRS regulations
and interpretations in this area have not yet been written or are under
continuing review. No assurance can be given that future legislative or
administrative changes or court decisions will not significantly modify the
statements and opinions expressed in this Prospectus. If such changes had a
retroactive effect, they could adversely affect an investment in the Units.
Summary
The following is a summary of, and is qualified by, the more extensive
discussion of the Federal income tax consequences set forth below in this
section.
Opinion of Counsel. In connection with its preparation of the following
discussion Derenthal & Dannhauser has rendered its opinion as to certain of the
material Federal income tax issues. With regard to certain other matters Counsel
is unable to render an opinion. See "Opinions of Counsel." The Series will not
apply for a ruling from the IRS with respect to any Federal income tax matters.
Classification as a Partnership. As indicated throughout this Prospectus,
the low income housing tax credits will be the primary tax benefit to investors
in Units. However, the low income housing tax credits will only be available to
investors in a Series if, among other things, the Series is classified as a
partnership for Federal income tax purposes. As indicated below, Derenthal &
Dannhauser has rendered its opinion that each Series will be classified as a
partnership in this regard. See "Classification as a Partnership."
Tax Treatment of Investors. The Series themselves will not be subject to
Federal income tax. See "Tax Treatment of Investors." Rather, each investor will
report on his own income tax return his share of his Series' taxable income, tax
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losses and tax credits, which includes his share of the Series' share of
such items from the Local Limited Partnerships. See "Investment in Local Limited
Partnerships."
An investor's share of cash from the sale of an apartment complex will not
ordinarily equal his share of taxable income from the sale. Therefore, an
investor may have taxable income for a year in an amount which exceeds his
distributions for the year. See "Tax Treatment of Investors," "Tax Liabilities
in Later Years," "Sales or Exchanges of Local Limited Partnership Property;
Depreciation Recapture" and "Sales or Exchanges of Units and Local Limited
Partnership Interests; Transfers by Gift or at Death."
An investor's ability to claim his tax credits and to deduct tax losses is
limited. For example, because the Series' credits and losses will be classified
as from a "passive activity" for most investors, an investor might need income
from other sources to fully use his tax credits. In most instances he will need
income from other sources to deduct his tax losses. See "Limitations on Losses
and Credits from Passive Activities" and "General Business Tax Credit
Limitations." In addition:
o An investor may not deduct tax losses in excess of his basis in his Units.
See "Tax Basis for the Units."
o An investor may not deduct tax losses in excess of his amount "at risk" in
his Series' activities. See "Application of At Risk Limitation."
o An investor may not claim low income housing tax credits in excess of the
amount he has "at risk" with respect to expenditures qualifying for the
tax credits. See "The Low Income Housing Tax Credit - Utilization of the
Low Income Housing Tax Credit."
o An investor may not claim tax losses if his investment in his Series and/or
the Series' activities are "not engaged in for profit." See
"Profit Motive."
Historic Tax Credits and Recapture. In addition to low income housing tax
credits, historic tax credits generally are available for certain rehabilitation
expenditures incurred in improving certified historic structures and certain
other buildings originally placed in service before 1936. If an expenditure
respecting such a building is a qualified expenditure, 20% of the expenditure
will give rise to an historic tax credit. See "Federal Income Tax Considerations
- - Historic Tax Credit."
Historic tax credits are subject to recapture in the event of early
disposition of the building. See "Federal Income Tax Considerations - Historic
Tax Credit Recapture."
Series Allocations. The Internal Revenue Code and Treasury Regulations
include highly-technical and complex rules regarding the tax allocations
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provisions which are included in a partnership agreement. WNC & Associates,
Inc. has drafted the Partnership Agreement of each Series in an attempt to
comply with such rules. For a discussion of the rules see "Series Allocations."
The Internal Revenue Code also prohibits the allocation to a partner of
partnership items incurred before the admission of the partner as a partner. See
"Allocations Before Admission."
Series Deductions. In general, the Internal Revenue Code requires that the
Series use the accrual method of accounting rather than the cash method of
accounting. However, the Code provides special rules for the treatment of such
items as
o depreciation,
o costs and expenses of capital assets,
o fees to partners,
o organization expenses,
o syndication expenses, and
o other items.
See "Basis of Local Limited Partnerships in Their Apartment Complexes,"
"Depreciation," "Deductibility of Fees," "Organization and Offering Expenses"
and "Start-Up Expenditures."
Sale of Apartment Complexes. Gain or loss on the sale of an apartment
complex will equal the amount of consideration received (including the amount of
any liability to which the apartment complex was subject), minus the Local
Limited Partnership's basis in the apartment complex. This rule applies to all
dispositions of an apartment complex, including a foreclosure, so that the tax
liability on a disposition may exceed the cash received therefor. The manner in
which the Local Limited Partnership held the property will determine the
character of gain or loss as ordinary or capital, and as passive or portfolio.
See "Sales or Exchanges of Local Limited Partnership Property; Depreciation
Recapture."
Transfers of Units. On a sale of his Units, an investor will recognize
taxable gain in an amount equal to the excess, if any, of the consideration
received for the Units (including his share of Series or Local Limited
Partnership nonrecourse liabilities), over his basis in the Units. The tax
consequences of a transfer of Units as a gift or upon the death of an investor
will depend upon, among other things, the investor's
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particular circumstances. See "Sales or Exchanges of Units and Local Limited
Partnership Interests; Transfers by Gift or at Death."
Liquidation. Upon liquidation of his Series, an investor will recognize
gain if the cash received by him (including his share of Series or Local Limited
Partnership nonrecourse liabilities) exceeds his basis in his Units. See
"Dissolution and Liquidation of a Series or Local Limited Partnership."
Section 754 Election. No Series is expected to file an election under
Section 754 of the Internal Revenue Code. The absence of an election may have an
adverse effect on the marketability and sales price of Units. See "Elections."
These and other Federal income tax issues are discussed below. However, the
following discussion does not deal with Federal income tax consequences
applicable to all categories of investors, some of which may be subject to
special rules. The following discussion is not a substitute for careful tax
planning and should not be used as one. Prospective investors should and are
urged to consult their own tax advisers, attorneys or accountants with specific
reference to their own tax situations and the effect thereon of an investment in
the Units.
Opinion of Counsel
Derenthal & Dannhauser has reviewed the sections of this Prospectus entitled
"Federal Income Tax Considerations," "Risk Factors - Risks Related to Tax
Credits" and " - Other Tax Risks" and "The Low Income Housing Tax Credit."
Derenthal & Dannhauser has rendered its opinion that, to the extent the
summaries of Federal income tax consequences to the investors set forth in those
sections involve matters of law,
o such statements are accurate in all material respects under the Internal
Revenue Code, Treasury Regulations and existing interpretations thereof, and
o such statements address fairly the principal aspects of each material
Federal income tax issue relating to an investment in the Series.
Based on the assumptions and representations described herein, Derenthal &
Dannhauser is of the opinion that, for Federal income tax purposes:
o each Series is classified as a partnership and not as an association taxable
as a corporation;
o upon admission, an investor will be a limited partner of his Series;
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o each investor will include in his tax basis of his Units his share of bona
fide nonrecourse liabilities of his Series, including his Series' share of
bona fide nonrecourse liabilities of each Local Limited Partnership;
o the IRS will not significantly modify the allocations of taxable income, tax
losses and tax credits provided for in the Partnership Agreement;
o taxable income, tax losses and tax credits of the Series (other than the
portion thereof classified as portfolio income) will be treated as derived
from a passive activity; and
o no Series will be considered a "publicly traded" partnership within the
meaning of Section 7704 of the Internal Revenue Code.
Despite the foregoing, no Series has yet acquired any interest in a Local
Limited Partnership. Tax benefits to the investors depend in large part upon the
characteristics of the Series' particular investments. Derenthal & Dannhauser is
unable to render an opinion at this time regarding the application of the
Federal income tax laws to such investments. However, as a condition to its
investment in a Local Limited Partnership, a Series will obtain an opinion of
counsel (which may or may not be Derenthal & Dannhauser) substantially to the
effect that for Federal income tax purposes:
o the Local Limited Partnership is classified as a partnership and not as an
association taxable as a corporation;
o the Local Limited Partnership is the owner of the relevant apartment
complex;
o upon admission, the Series will be a limited partner of the Local Limited
Partnership;
o the IRS will not significantly modify the allocations of taxable income, tax
losses and tax credits contained in the partnership agreement of the Local
Limited Partnership;
o for purposes of determining its tax basis and amount "at risk" (under
Internal Revenue Code Sections 42 and 465) for the Local Limited
Partnership, the Series will be permitted to take into account its share of
such Local Limited Partnership's nonrecourse liabilities;
o the apartment complex will qualify for tax credits; and
o the Local Limited Partnership will not be considered a "publicly traded"
partnership within the meaning of Section 7704 of the Internal Revenue Code.
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Any such opinion may be based on assumptions and on representations from WNC &
Associates, Inc. and the Local General Partners. In addition to reaching the
foregoing conclusions, such opinion will conclude that the Series will realize
substantially more than half of the material Federal income tax benefits
anticipated from such investment.
No legal opinion has been obtained, and WNC & Associates, Inc. does not
anticipate that an opinion will be obtained, regarding (i) determinations, the
correctness of which depends in significant part on future factual
circumstances, (ii) matters peculiar to certain investors, or (iii) matters in
which opinions are not customarily obtained. Such determinations and matters
include:
o the allocation of basis among various components of a property, particularly
as between buildings, the cost of which is depreciable, and the underlying
land, the cost of which is not depreciable;
o the estimated useful lives for depreciation purposes of properties
ineligible for the cost recovery methods of the Internal Revenue Code;
o the characterization of various expenses and payments made to or by a Series
or a Local Limited Partnership (for example, the extent to which such
payments represent deductible fees or interest);
o the portion of the cost of any apartment complex that qualifies for tax
credits (but see the discussion of so-called "adjuster" provisions and other
guarantees in "Investment Objectives and Policies - Investment Policies");
o the application to any specific investor of the limitation on the use of
passive activity losses and credits. Investors must determine for themselves
the extent to which they may claim tax credits and tax losses;
o the classification of any Series as a dealer in interests in Local Limited
Partnerships or of any Local Limited Partnership as a dealer in apartment
complexes; and
o the application of the alternative minimum tax to, or the calculation
thereof by, any investor.
There can be no assurance, therefore, that the IRS will not challenge some
of the deductions to be claimed by a Series, or the allocation of its items of
taxable income, tax losses and tax credits among its partners. Such challenge,
if successful, could have a detrimental effect on the ability of a Series to
realize its investment objectives. See also "Risk Factors - Other Tax Risks."
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Classification as a Partnership
Neither Series will apply for an IRS ruling regarding the classification of
the Series for Federal income tax purposes. WNC & Associates, Inc. has
represented that neither Series will elect to be treated as a corporation for
Federal income tax purposes under the Internal Revenue Code Section 7701
Treasury Regulations. Derenthal & Dannhauser has rendered its opinion that each
Series will be classified as a partnership and will not be treated as an
association taxable as a corporation for Federal income tax purposes. Counsel's
opinion is based upon the foregoing representation of WNC & Associates, Inc. and
the continued effectiveness of the Treasury Regulations. If the Treasury
Department were to amend its Regulations, it is possible that the Series would
not qualify as partnerships under the amended regulations.
Under Section 7704 of the Internal Revenue Code, a partnership will be
treated as a corporation for Federal income tax purposes if the partnership is
publicly traded.
A partnership is publicly traded if its interests are:
o traded on an established securities market, or
o readily tradable on a secondary market (or the substantial equivalent
thereof).
An established securities market includes a securities exchange as well as a
regular over-the-counter market.
Treasury Regulations under Code Section 7704 state that a secondary market
for interests generally is indicated:
o by the existence of a person standing ready to make a market in the
interests, or
o where a holder of the interests has a readily available, regular and ongoing
opportunity to sell or exchange his interests.
The participation of the partnership is relevant. A partnership will be treated
as participating in trading when trading in its interests actually occurs and
the partnership agreement imposes no meaningful limit on transfer of interests.
A partnership's right to refuse to recognize transfers is not meaningful unless
the right is actually exercised.
The Partnership Agreement provides that a Series will not recognize a
transfer of a Unit unless the transferor represents that the transfer will not
occur:
o through a market maker in the Units, or
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o through a broker-dealer that provides a readily available, regular, and
ongoing opportunity to Unit holders to sell or exchange their Units.
The Partnership Agreement also provides that a Series will not recognize a
transfer of a Unit if in the opinion of counsel such transfer would cause the
Series to be considered publicly traded. Furthermore, the Partnership Agreement
provides that any transfer of a Unit will be void if:
o the transfer is not made for investment but for resale, and
o the transferee is a person who makes a market in securities.
Finally, WNC & Associates, Inc. can amend the Partnership Agreement to the
extent necessary to prevent a Series from being treated as an association
taxable as a corporation. Based on these provisions of the Partnership Agreement
and on representations that these provisions will be enforced according to their
terms, Derenthal & Dannhauser is of the opinion that the Series will not be
"publicly traded" within the meaning of Section 7704 of the Code.
Even if a Series is treated as publicly traded under Section 7704 of the
Internal Revenue Code, it will not be classified as a corporation if 90% or more
of its income for the taxable year is "qualifying income." "Qualifying income"
includes interest, dividends, real property rents and gain from the sale or
other disposition of real property. WNC & Associates, Inc. has represented that
90% or more of the gross income of each Series will consist of such interest,
dividends, real property rents and gains from the sale or other disposition of
real property. Accordingly, based on this representation, Derenthal & Dannhauser
is of the opinion that the Series will not be treated as associations taxable as
corporations for Federal income tax purposes under Section 7704 of the Code even
if the Series were to be considered publicly traded. However, see "Limitations
on Losses and Credits from Passive Activities" for a discussion of additional
restrictions that may be imposed if the Series were considered publicly traded.
If, for any reason, a Series were treated for Federal income tax purposes as
a corporation in any taxable year, income, gain, loss, deductions, tax credits
and tax preferences of the Series would be reflected only on its own tax return
rather than being passed through to the partners. In that event, an investor
could not claim the low income housing tax credits, historic tax credits and tax
losses to reduce his tax liability. In addition, the Series would be required to
pay Federal income tax at corporate rates on its net income. All or a portion of
any distributions to investors could be treated as dividends, taxable as
ordinary income to the extent of the current and accumulated earnings and
profits of the Series. Distributions in excess of earnings and profits would be
treated as a return of capital to the extent of the recipient's basis (which
would not include the investor's share of any nonrecourse
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liabilities of the Series), while the remainder would be treated as capital gain
(assuming the investor's Units qualified as capital assets). In addition, a
change in the Series' status for tax purposes could be a taxable event, in which
case the investors could have a tax liability under circumstances where they
would not receive a cash distribution from the Series.
Investment in Local Limited Partnerships
The Series will not invest directly in the apartment complexes. Rather, the
Series will invest in Local Limited Partnerships each of which will own an
apartment complex. The availability of tax benefits to investors is dependent,
in the first instance, on the following general principles of partnership
taxation:
o Each of the Local Limited Partnerships must be classified as a partnership
for Federal income tax purposes, and not as an association taxable as a
corporation.
o Each Local Limited Partnership's allocation of income, gain, loss,
deduction, and tax credit to the Series must have substantial economic
effect or otherwise be in accordance with the Series' interest in such Local
Limited Partnership.
o The Series' tax basis in each of the Local Limited Partnerships must exceed
the amounts of losses allocated to the Series from such Local Limited
Partnership.
o The Series' amount "at risk" in each of the Local Limited Partnerships must
exceed the amount of losses and deductions allocated to the Series from such
Local Limited Partnership.
o The Series' amount "at risk" with respect to expenditures of each Local
Limited Partnership that qualify for low income housing tax credits must
exceed the amount of such expenditures allocated to the Series.
The application of these general principles of Federal income taxation to
any investment by a Series in a Local Limited Partnership will depend on the
specific facts associated with that investment, including the provisions of the
partnership agreement of such Local Limited Partnership and the nature of the
debts incurred by such Local Limited Partnership to finance its investment in
its apartment complex.
As indicated above in "Opinion of Counsel," a Series will obtain an opinion
of counsel regarding its investment in each Local Limited Partnership. The
discussion set forth below and opinions of counsel described herein assume that
the Series will obtain such opinions regarding each of their investments, and
rely on the accuracy of each of such opinions. An opinion of counsel is not
binding on the IRS and has no official status of any kind. WNC & Associates,
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Inc. will not seek a ruling from the IRS regarding any of the tax
consequences of an investment by a Series in any Local Limited Partnership.
The IRS has rendered several published rulings regarding the Federal income
tax consequences of an investment by a partnership in another partnership.
Although such rulings have not addressed every Federal income tax consequence of
such an investment, they have addressed the material consequences expected to be
relevant to the Series. Based on such rulings and general principles of
partnership taxation, except as specifically noted below, the discussion of the
Federal income tax consequences of an investment in the Units is equally
applicable to an investment by a Series as a limited partner or non-managing
member in each Local Limited Partnership.
Tax Treatment of Investors
A Series itself will not be subject to Federal income tax (subject to the
matters discussed under "Classification as a Partnership" above), although it is
possible that a Series will be subject to income tax in one or more states or
local tax jurisdictions. Instead, each investor will report on his own income
tax return his share of the Series' taxable income, tax losses and tax credits.
An investor's share of his Series tax items is based (i) first, on the
application to the Local Limited Partnerships of the principles of Federal
income taxation discussed above under the heading "Investment in Local Limited
Partnerships," and (ii), thereafter, the following principles which apply in the
order summarized below:
o The allocation provisions contained in Article 4 of the Partnership
Agreement must have substantial economic effect or otherwise be in
accordance with the investor's interest in a Series.
o The investor's tax basis in his Units must exceed his share of tax losses.
o The investor's amount "at risk" in his Units must exceed his share of tax
losses.
o The investor's amount "at risk" with respect to expenditures of each Local
Limited Partnership that qualify for low income housing tax credits must
exceed the amount of his share of such expenditures.
To the extent that the allocation of any Series tax item to an investor is
disallowed as a result of any of the principles set forth above, the investor
will not be permitted to take such allocation into account in determining his
Federal income tax liability unless and until that principle and each of the
principles stated thereafter has been satisfied. Each of these principles is
described in greater detail below.
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In addition to and after satisfying the foregoing principles, the ability of
an investor to take advantage of any tax credits and tax losses allocated to him
with respect to his Units may be limited by the passive activity rules described
below in "Limitations on Losses and Credits from Passive Activities," by the
overall limitation on business credits described below under "General Business
Tax Credit Limitations," by the limitations on miscellaneous itemized deductions
described below in "Other Important Tax Considerations - Tax Rates," and by the
alternative minimum tax described below under "Other Important Tax
Considerations Alternative Minimum Tax."
An investor's share of his Series tax items in any year will not ordinarily
be the same as his share of cash distributions, if any. Accordingly, in a
particular year an investor might be allocated taxable income without receiving
a cash distribution. See "Tax Liabilities in Later Years." Conversely, an
investor might receive a cash distribution in a year when he is allocated a tax
loss. See "Series Allocations" below.
An investor's receipt of cash distributions from a Series generally will not
result in taxable income to the investor but, rather, will reduce his basis in
his Units. However, a distribution in excess of an investor's adjusted basis in
his Units will result in the recognition of taxable income to the extent of the
excess. Any such taxable income generally will be treated as capital gain. The
gain realized in a non-pro rata distribution may be taxed to investors as
ordinary income to the extent attributable to the investor's share of unrealized
receivables and inventory that has substantially appreciated in value. See
"Sales or Exchanges of Units and Local Limited Partnership Interests; Transfers
by Gift or at Death" below.
Low income housing tax credits are the most significant Federal income tax
benefits to be derived from an investment in Units. The Internal Revenue Code
imposes substantial restrictions on the ability of individuals, trusts, estates
and certain corporations to take advantage of tax credits (and tax losses)
generated from so-called passive activities. The rules relating to tax credits
and tax losses from passive activities are to be applied after the application
of the rules relating to tax basis and amounts "at risk" (see "Tax Basis for the
Units" and "Application of At Risk Limitations" below). However, the rules
applicable to passive activity credits and losses will be described first due to
their importance in evaluating the advisability of an investment in a Series.
Limitations on Losses and Credits from Passive Activities
A. General Limitations
In the case of individuals, trusts, estates and certain corporations (as
discussed below), Code Section 469 imposes limits on the ability of such
taxpayers to use losses and credits from so-called "passive activities." A
passive activity includes:
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o an activity which involves the conduct of a trade or business in which the
taxpayer does not materially participate, or
o any rental activity, regardless of the level of the taxpayer's
participation.
Generally, a limited partner does not materially participate in his limited
partnership's activities. Through the Local Limited Partnerships each Series
will be engaged in rental activities. Accordingly, Derenthal & Dannhauser is of
the opinion that an investor's share of tax items from a Series will be treated
as derived from a passive activity, except to the extent such items constitute
portfolio income. Counsel's opinion is based on the anticipated activities of
the Series and current Treasury Regulations.
Generally, a taxpayer's deductions and credits from passive activities may
be used to reduce his tax liability to the extent such liability arises from
passive activities. In determining the amount of income from passive activities
in any taxable year, a taxpayer must exclude "portfolio income," that is,
o any income from the activity that is derived from interest, dividends,
annuities or royalties, unless such income is derived in the ordinary course
of a trade or business; less
o expenses (other than interest) directly and clearly allocable to such
income; and
o interest expenses properly allocable to such income.
A Series will generate portfolio income from the investment of reserves and may
generate portfolio income from interest earned on loans to Local Limited
Partnerships. Portfolio income also includes any gain or loss from the
disposition of property that produces portfolio income or that is held for
investment. Prospective investors should note that portfolio income must be
reported as taxable income, without reduction for any expenses (other than those
described above). Each investor will be required to pay Federal income tax on
his share of such portfolio income, even if no corresponding cash distribution
is made and regardless of the fact that overall operations of his Series result
in tax losses.
To the extent that a taxpayer's aggregate losses from all passive activities
exceed his aggregate income from all such activities in a taxable year, the
taxpayer has a "passive activity loss" for such year. Similarly, a "passive
activity credit" arises in any year to the extent that the taxpayer's tax
credits (with certain limited exceptions) arising from all passive activities
exceed his tax liabilities allocable to all passive activities. Such a loss or
credit may be carried forward to successive taxable years until fully utilized
against income from passive activities in such years. Unused passive activity
losses and credits may not be carried back to prior years.
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Treasury Regulations generally provide that gain on the disposition of
property used in an activity will be treated as passive if the activity in which
the property was used in the year of disposition was a passive activity.
In the event a taxpayer disposes of his entire interest in a passive
activity to an unrelated party in a transaction in which all of the gain or loss
realized on such disposition is recognized:
o any loss (but not a credit) from the activity that was disallowed by the
passive activity rules will cease to be treated as a passive activity loss,
and
o any loss on such disposition will not be treated as arising from a passive
activity.
Such losses will be allowed as deductions against income in the following order:
o gain recognized on the disposition;
o net income or gain for the taxable year from all passive activities; and
o any other income or gain.
Suspended tax credits are not made available as a result of a disposition of a
taxpayer's interest in an activity. Rather, to the extent not subject to
recapture, tax credits are carried forward to later tax years.
Special rules apply to dispositions by gift or by death and to certain
installment sales.
Counsel has rendered no opinion regarding the manner in which the passive
activity rules (including exceptions thereto discussed below) will apply to any
particular investor. The general rules and the exceptions are applied at the
investor level rather than the Series level and depend on the particular
circumstances of each investor. Each investor should consult his own tax adviser
as to how these rules:
o will limit his use of his Series' tax credits and tax losses, or
o will result in tax liability on his share of his Series' portfolio income.
B. Exception for Low Income Housing Tax Credits and Historic Tax Credits
1. Individuals. An exception to the general rules discussed above permits
certain taxpayers to shelter up to $25,000 of nonpassive income with:
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o losses from certain rental real estate activities in which they actively
participate, and
o low income housing tax credits and historic tax credits.
The exception is commonly referred to as the "$25,000 deduction equivalent."
It is available to individuals and, in limited circumstances as discussed below,
estates.
Special rules apply to married individuals as follows:
o in the case of married individuals filing jointly, the full $25,000
deduction equivalent is available,
o in the case of married individuals filing separately who have lived apart
for the entire taxable year, the deduction equivalent for each individual is
$12,500, and
o in the case of married individuals filing separately who have not lived
apart for the entire taxable year, no deduction equivalent is available.
There are several important ordering rules that determine whether and to
what extent the $25,000 deduction equivalent will be available to an investor.
First, the investor must offset losses from passive activities (which include
losses from rental real estate activities in which the taxpayer actively, as
opposed to materially, participates), by income from passive activities. The
$25,000 deduction equivalent is then used, in the following order, against:
o the remaining passive activity losses generated from the rental real estate
activities in which the taxpayer actively participates,
o the passive activity credits generated from rental real estate activities in
which the taxpayer actively participates,
o the historic tax credits (subject to the phase-out rules discussed below)
from passive activities other than rental real estate activities in which
the taxpayer actively participates; and
o the low income housing tax credits from passive activities other than rental
real estate activities in which the taxpayer actively participates.
In this regard, it is unlikely that investors will be treated as actively
participating in the Series' rental real estate activities.
The Series will not seek to determine the extent to which potential
investors have losses (including losses from rental real estate activities in
which potential investors actively participate) or credits from passive
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activities. Further, the Series have no limit on the number of Units which
may be purchased by a single investor. Accordingly, each potential individual
investor should consult with his own tax advisers as to whether he may fully use
any low income housing tax credits or historic tax credits of the Series under
the ordering rules set forth above.
Assuming that a prospective individual investor (i) does not have passive
activity losses generated from rental real estate activities in which he
actively participates (or that such losses are not allowable under the phase-out
rules discussed below) and (ii) does not have passive activity income for the
taxable year, such investor could use up to:
o $7,000 of tax credits a year based on a 28% marginal tax rate,
o $7,750 a year based on a 31% marginal tax rate,
o $9,000 a year based on a 36% marginal tax rate, and
o $9,900 a year based on a 39.6% marginal tax rate.
See "Other Important Tax Considerations - Tax Rates." In each instance, because
Federal income tax is imposed at marginal rates, the maximum amount of credits
could be used only if the investor has at least $25,000 in income subject to the
marginal rate.
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Maximum Annual Tax Credits
--------------------------
Federal Maximum Annual
Tax Bracket Income Federal Credit
----------- ------ --------------
15% x $25,000 = $3,750
28% x $25,000 = $7,000
31% x $25,000 = $7,750
36% x $25,000 = $9,000
39.6% x $25,000 = $9,900
Most taxpayers pay a substantial portion of their Federal annual tax
liability by way of:
o regular employer withholding from their salaries, and/or
o estimated Federal tax payments due on the April 15, June 15, September 15
and January 15 preceding the filing date of the taxpayers' annual Federal
income tax returns.
To the extent that an individual taxpayer has tax credits which are
otherwise allowable for a year, the taxpayer may use the tax credits to reduce
his regular withholding amounts or to reduce his estimated tax payments. For
example, a married couple filing jointly with a taxable income of $75,000 in
1999 would be subject to Federal tax liability before tax credits in the amount
of approximately $16,000. (The tax liability for later years could be different
due to changes in the tax rates resulting from inflation adjustments or
amendments to the tax laws. See "Other Important Tax Considerations - Tax
Rates.") If the couple had $7,000 in tax credits for 1999 (the maximum
permissible amount under the $25,000 deduction equivalent), and the couple would
otherwise make estimated tax payments of their Federal tax liability in the
amount of $4,000 each, the couple could reduce each estimated tax payment by
$1,750, for a net payment of $2,250. If a taxpayer does not adjust his
withholding or estimated tax payments for allowable tax credits, his annual tax
refund will be increased or his annual tax liability will be reduced. Under the
$25,000 deduction equivalent tax credits can be used to reduce tax liability
from all sources, including taxable income arising from wages, self-employment
income, retirement account withdrawals, and capital gains from the sale of stock
and other investments.
If an investor is able to use tax credits under the passive activity rules
and the other deduction limits discussed below, the tax credits would be claimed
on the investor's individual IRS Form 1040 as follows:
o The investor enters all taxable income and subtracts all available
deductions and exemptions to compute taxable income.
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o The tax imposed on taxable income is entered on line 40 of the Form 1040.
o The investor's utilizable tax credits are entered on line 47 and are
subtracted, on a dollar-for-dollar basis, from the taxes which appear on
line 40.
Under Section 469(k) of the Internal Revenue Code the limitations on losses
from passive activities will be applied separately to investments in publicly
traded partnerships. There is no $25,000 deduction equivalent available for
losses from investments in publicly traded partnerships. Section 469(k) does not
apply to low income housing tax credits and historic tax credits. As discussed
under the heading "Classification as a Partnership," Derenthal & Dannhauser is
of the opinion that the Series will not be treated as publicly traded
partnerships. If any Series were to be treated as a publicly traded partnership,
investors could not use the Series' tax losses, but could use tax credits
generated by the Series to offset tax liability from all other sources to the
extent of the $25,000 deduction equivalent (subject to the ordering rules
discussed above).
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Reference is made above to a phase-out of the $25,000 deduction equivalent
in certain circumstances. For:
o all rental real estate losses in which the taxpayer actively participates,
and
o historic tax credits,
the $25,000 deduction equivalent ($12,500 in the case of a married person filing
a separate return) is reduced in the event the adjusted gross income of the
taxpayer (including the taxpayer's spouse where a joint return is filed) exceeds
certain limits.
o In the case of losses from rental real estate activities in which the
taxpayer actively participates, the maximum deduction equivalent is reduced
by one-half of the amount by which the taxpayers' adjusted gross income
exceeds $100,000 ($50,000 in the case of a married individual filing a
separate return).
o In the case of historic tax credits, the maximum deduction equivalent is
reduced by one-half of the amount by which the taxpayer's adjusted gross
income exceeds $200,000 ($100,000 in the case of a married individual filing
a separate return).
Adjusted gross income for this purpose is determined without regard to
contributions to Individual Retirement Accounts, taxable social security
benefits and passive activity losses, but is otherwise determined in accordance
with Section 62 of the Internal Revenue Code.
2. Other Investors. As noted above, the limitations on the use of passive
losses and credits apply to all individuals and, subject to certain additional
limitations, to all trusts and estates. In the case of a grantor trust, the
provisions apply at the grantor rather than the trust level. Generally, neither
a nongrantor trust nor an estate can take advantage of the $25,000 deduction
equivalent. A limited exception is provided to allow an estate to take advantage
of the $25,000 deduction equivalent in any taxable year ending less than two
years after the death of the decedent.
Certain corporations are also subject to limitations on their use of passive
losses and credits. The corporations subject to these rules are:
o closely-held corporations which have not elected to be subject to Subchapter
S of the Internal Revenue Code. A corporation is closely-held for this
purpose if more than 50% of the corporation is owned, by value, directly or
indirectly, by five or fewer individuals at any time during the last half of
the relevant tax year.
o personal service corporations. A personal service corporation is a
corporation whose principal purpose is the performance of personal services
in the fields of health, law, engineering, architecture, accounting,
actuarial science, performing
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arts, or consulting, when such services are performed by any employee who
owns, on any day during the year, any of the outstanding shares of such
corporation. Stock held by related parties is taken into account under
special attribution rules.
Closely-held corporations, but not personal service corporations, are
allowed to use their passive activity losses and their passive activity credits
to offset their taxable income and tax liabilities from all income other than
portfolio income. However, if a Series were to be treated as a publicly traded
partnership, the Series' losses could not be used to offset income from other
sources.
Personal service corporations are only allowed to use passive losses and
credits to shelter passive income, subject to the provisions of Code Section
469(k) regarding publicly traded partnerships.
The passive activity rules are applied to the shareholders of a corporation
which has elected to be subject to Subchapter S of the Internal Revenue Code,
and not the corporation. Similarly, the passive activity rules are applied to
the partners of a general partnership, and not the partnership.
Historic Tax Credit
In addition to the low income housing tax credit, a tax credit is available
for qualified rehabilitation expenditures incurred in improving certified
historic structures and certain other buildings originally placed in service
before 1936. Internal Revenue Code Section 47 provides for a historic tax credit
equal to 20% of the qualified rehabilitation expenditures. Qualification of an
expenditure depends upon the approval by the Department of Interior of the plans
and completed rehabilitation work. The historic structure generally must:
o be left in place, and
o be rehabilitated in a manner consistent with history.
The rehabilitation expenditures during a 24-month period must exceed the greater
of:
o $5,000, or
o the adjusted basis of the building.
In the case of certain nonresidential buildings placed in service before 1936
(other than certified historic structures), a 10% credit is allowed. The tax
basis of property on which a historic tax credit is claimed is reduced by 100%
of the tax credit.
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Therefore, the gain upon disposition of such a property is increased by 100% of
the tax credit. See "Depreciation."
A taxpayer must satisfy "at risk" requirements with regard to any investment
which generates a historic tax credit. These requirements are generally the same
as the "at risk" rules applicable to low income housing tax credits. See "The
Low Income Housing Tax Credit." In addition, the amount of all nonrecourse
financing (which is defined very broadly for this purpose) must not exceed 80%
of the credit base of the qualified rehabilitation expenditures.
A Series may invest in a Local Limited Partnership that incurs
rehabilitation expenditures qualifying for the historic tax credit. If so, the
tax credit would be allocated to the investors. An investor's ability to use the
historic tax credits may be restricted by the passive activity rules, the
limitation on general business credits, and the alternative minimum tax rules.
See "Limitations on Losses and Credits from Passive Activities," "General
Business Tax Credit Limitations" and "Other Important Tax Considerations -
Alternative Minimum Tax." Counsel has rendered no opinion regarding the
qualification of any expenditures for the historic tax credit or the application
of the related "at risk" rules.
Historic Tax Credit Recapture
Historic tax credits are subject to recapture in the event of early
disposition of the property. If a Local Limited Partnership disposes of a
historic tax credit property within five years after the property is placed in
service, investors will suffer recapture. Each investor's tax liability for the
year of disposition will be increased by an amount equal to the historic tax
credit claimed by the investor multiplied by a "recapture percentage." The
holding period for the property determines the recapture percentage, as follows:
o 100% recapture if the property is disposed of less than one year after the
property is first placed in service;
o 80% recapture after one year;
o 60% after two years;
o 40% after three years;
o 20% after four years; and
o no recapture after five years.
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Recapture will also result if an investor sells or disposes of his entire
interest in a Series within five years after the date a historic tax credit
property was placed in service. Additionally, if an investor's interest in the
profits of his Series is reduced to less than 66 2/3% of what it was when the
historic tax credit property was placed in service, the reduction will be
treated as a proportional disposition of the property by the investor. For
example, if an investor disposes of 50% of his partnership interest in the first
year in which a historic tax credit is claimed, then 50% of the historic tax
credit will be recaptured.
General Business Tax Credit Limitations
The ability of taxpayers to use low income housing tax credits and historic
tax credits is subject to an annual limitation on the allowance of aggregate
general business tax credits. In addition to low income housing tax credits and
historic tax credits, general business tax credits include:
o any other investment tax credit,
o the targeted jobs credit,
o the alcohol fuels credit,
o the research credit,
o the enhanced oil recovery credit,
o the disabled access credit,
o the renewable electricity production credit,
o the empowerment zone employment credit,
o the Indian employment credit, and
o the employer social security credit.
The annual limitation is equal to the first $25,000 of tax liability
($12,500 for married persons filing separately) plus 75% of tax liability in
excess of that amount.
However,
o business tax credits may not be used to offset any applicable alternative
minimum tax, and
o even if no alternative minimum tax is imposed in a particular year (because
regular tax liability exceeds the amount which would have been imposed under
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the alternative minimum tax rules), business tax credits may not be used to
reduce regular tax liability below the amount which would be imposed under
the alternative minimum tax rules.
See "Other Important Tax Considerations - Alternative Minimum Tax." Business tax
credits limited by this rule are first carried back one year and then forward 20
years. For purposes of determining which of a taxpayer's general business tax
credits exceed the limit in any year, low income housing tax credits are treated
as being used only after all of the other general business tax credits.
Any tax credit that is allowable in any year under the passive activity
rules, but is disallowed as a result of the limitation on general business
credits, ceases to be subject to the passive activity rules for purposes of any
carryback or carryforward of such tax credit.
Tax Basis for the Units
An investor's tax basis for his Units generally will be equal to his capital
contribution plus his share of his Series' nonrecourse liabilities (to the
extent that they do not exceed the fair market value of the assets subject
thereto). From time to time such tax basis will be (a) increased by the amount
of profits allocated to him, and (b) decreased by the amount of losses allocated
to him and by the amount of cash distributed to him.
In the opinion of Derenthal & Dannhauser, a Series' nonrecourse liabilities
will include its share of the nonrecourse liabilities of each Local Limited
Partnership, to the extent that such liabilities do not exceed the fair market
value of the property securing the liabilities. In the opinion of Counsel, each
investor will include in his tax basis of his Units his share of the nonrecourse
liabilities of his Series, as so determined.
Each investor may deduct, on his own Federal income tax return, his share of
his Series' losses to the extent that he has tax basis in his Units. Any losses
in excess of an investor's tax basis may be carried over indefinitely and
deducted in future years to the extent that the investor's basis has increased
above zero. WNC & Associates, Inc. anticipates that substantially all of the
liabilities of the Local Limited Partnerships will constitute nonrecourse
liabilities. Consequently, WNC & Associates, Inc. anticipates that each investor
will have sufficient basis in his Units to claim his allocable share of tax
losses. See, however, "Tax Treatment of Investors," "Application of At Risk
Limitations," and "Limitations on Losses and Credits from Passive Activities"
for other limitations on an investor's ability to claim tax losses.
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A decrease in an investor's share of Series' nonrecourse liabilities is
treated for tax purposes as though it were a cash distribution. Such a
constructive cash distribution reduces an investor's tax basis in his Units (but
not below zero), and any remaining portion is taxable to him as though it were
gain on the sale or exchange of his Units. See "Sales or Exchanges of Units and
Local Limited Partnership Interests; Transfers by Gift or at Death" below. A
decrease in an investor's share of Series' nonrecourse liabilities could occur
when:
o a Local Limited Partnership pays a mortgage in whole or in part, or
o a Local Limited Partnership sells an apartment complex subject to a
mortgage, or
o a Local Limited Partnership refinances nonrecourse debt with recourse debt.
Application of At Risk Limitations
Individuals and closely-held corporations are subject to the "at risk" rules
of Internal Revenue Code Section 465. A corporation is closely-held if more than
50% of the corporation is owned, directly or indirectly, by five or fewer
shareholders at any time during the last half of the relevant tax year. In the
case of a partnership, the "at risk" limitations are applied at the partner
level. In the case of a corporation which has elected to be subject to
Subchapter S of the Internal Revenue Code, the limitations are applied at the
shareholder level.
Under the "at risk" rules, an investor can deduct his share of Series'
losses (otherwise allowable for the year in question) to the amount he has "at
risk" in the Series at the close of the tax year. An investor will be at risk to
the extent of the cash he contributes to his Series. In addition, an investor
will be at risk with respect to any "qualified nonrecourse financing" that is
secured by a Local Limited Partnership's apartment complex. In general,
"qualified nonrecourse financing" is non-convertible, nonrecourse debt which is
borrowed from:
o a government or an instrumentality thereof (or is guaranteed by a
government), or
o any person actively and regularly engaged in the business of lending money,
other than (i) the person from whom the taxpayer acquired the property, (ii)
a person receiving a fee with respect to the taxpayer's investment in the
property, or (iii) a person related to either of such persons.
However, if the lender is related to the taxpayer, the loan will qualify as
qualified nonrecourse financing only if the loan is commercially reasonable and
on substantially the same terms as loans involving unrelated persons.
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If a taxpayer's amount at risk is reduced below zero, the taxpayer must
recapture the deficit amount and include it in gross income. The amount
recaptured is treated in future years as if it were a deduction suspended by the
at risk provisions. To the extent that the taxpayer's amount at risk is
increased above zero in a later year, an additional deduction may be allowable
at that time.
WNC & Associates, Inc. believes that the at risk rules should not limit the
amount of an investor's deductions, because a substantial portion of the
financing secured by the apartment complexes should consist of qualified
nonrecourse financing. WNC & Associates, Inc. expects that an opinion of counsel
will be rendered on this issue as a condition to a Series' investment in a Local
Limited Partnership. See "Opinion of Counsel" above.
Series Allocations
Generally, a partner's distributive share of income, gain, loss, deduction
or credit of a partnership is determined in accordance with the partnership
agreement. However, Section 704 of the Internal Revenue Code provides that an
allocation to a partner under a partnership agreement will not be respected
unless such allocation has "substantial economic effect." If an allocation does
not have substantial economic effect, the partner's distributive share of
income, gain, loss, deduction or credit is determined in accordance with the
partner's interest in the partnership, by taking into account all facts and
circumstances.
Treasury Regulations have been issued governing the interpretation of
Section 704 of the Code. The Regulations in general provide that an allocation
does not have "economic effect" unless:
o (i) a capital account is maintained for each partner in accordance with
Federal income tax accounting principles;
o (ii) allocations of income, gain, loss and deduction are reflected by
appropriate increases, or decreases, to the partners' capital accounts;
o (iii) liquidation proceeds are to be distributed in accordance with the
partners' capital account balances; and
o (iv) any partner with a deficit in his capital account following the
distribution of liquidation proceeds is required to restore ("makeup") such
deficit amount to the partnership. The restored amount is to be distributed
to the other partners in accordance with their positive capital account
balances or paid to creditors.
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The Regulations provide an alternative to the fourth requirement. Under the
alternative an allocation will have economic effect:
o to the extent it does not create a deficit or increase an existing deficit
in any partner's capital account balance, and
o the partnership agreement has provisions allocating income and gain to
partners who do have deficit capital account balances.
The Partnership Agreement provides for allocations of taxable income, tax
losses and tax credits as described under "Profits and Losses, Tax Credits and
Cash Distributions." Derenthal & Dannhauser has advised the Series that the
Partnership Agreement contains provisions which, if followed throughout the
existence of the Series, substantially comply with requirements (i), (ii) and
(iii) above and the alternative test to requirement (iv).
An allocation which has economic effect nevertheless may be disregarded by
the IRS if the effect of the allocation is not "substantial." The IRS may assert
that the effect of certain allocations provided in the Partnership Agreement is
not substantial. If at any time the allocations of a Series do not have economic
effect or are not substantial, allocations will be made in accordance with the
interests of the Series' partners. The Regulations indicate that the
determination of a partner's interest in a partnership is made by taking into
account all facts and circumstances relating to the economic arrangement of the
partners.
The Treasury Regulations state that an allocation of an item of loss or
deduction attributable to nonrecourse debt secured by a partnership property
(such as depreciation) cannot have substantial economic effect. However, such an
allocation is deemed to be made in accordance with the partners' interests in
the partnership:
o if requirements (i), (ii) and (iii) of the economic effect test set forth
above are satisfied,
o allocations of nonrecourse deductions are made among the partners in a
manner which is reasonably consistent with allocations of some other
significant partnership item related to the property securing the
nonrecourse debt, provided such other allocations have substantial economic
effect,
o the partnership agreement contains a "minimum gain chargeback" provision
(i.e., a provision requiring chargeback of income or gain to partners who
have been allocated nonrecourse deductions and who have deficit capital
account balances) and
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o all other material allocations and capital account adjustments under the
partnership agreement are recognized under the Regulations.
The Partnership Agreement contains provisions designed to comply with the
requirements of these Regulations. If not, the allocations of items of income,
gain, loss and deduction attributable to nonrecourse indebtedness would be made
in accordance with the overall economic interests of the partners in the
partnership.
The Regulations provide that because allocations of tax credits and
recapture do not give rise to adjustments to partners' capital accounts, they
cannot have economic effect. Accordingly, tax credits and recapture must be
allocated in accordance with the partners' interests in the partnership. In the
case of low income housing tax credits, the Regulations provide that allocations
will be deemed to be in accordance with the partners' interests in the
partnership if made in the ratio in which the partners share the expenditures
giving rise to the credits. In the case of historic tax credits, they should be
allocated in accordance with the ratio in which partners share the general
profits of the partnership. The Partnership Agreement contains provisions which
are intended to comply with these provisions of the Regulations.
It is possible that the Treasury Department may modify the existing
Regulations under Section 704(b) of the Internal Revenue Code. If so, WNC &
Associates, Inc. is authorized to amend the Partnership Agreement to the minimum
extent necessary to preserve the plan of allocation provided in the Partnership
Agreement.
Despite the possibility of challenge by the IRS, provided that the
Partnership Agreement is followed throughout the entire term of a Series in:
o allocating and making distributions,
o maintaining capital accounts,
o allocating profits and losses (and items thereof) and tax credits, and
o determining the rights and obligations of the investors and WNC & Associates,
Inc. upon dissolution and liquidation of the Series, then
Derenthal & Dannhauser is of the opinion that the investors would not be
allocated significantly more profits or less losses or tax credits than is
allocated to them under the Partnership Agreement if the allocations were fully
litigated in court. However, there can be no assurance that the IRS will not
challenge the allocations in the Partnership Agreement on the ground that they
lack substantial economic effect or do not reflect an investor's interest in his
Series. If such a challenge were successful, all profits, losses and tax credits
of the Series would be reallocated to its investors
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and WNC & Associates, Inc. in accordance with their respective interests in the
Series.
Each Series will enter into a partnership agreement for each Local Limited
Partnership. As a condition to entering into a partnership agreement, the Series
will obtain an opinion of tax counsel regarding its investment in the Local
Limited Partnership, including an opinion that the allocation provisions of such
partnership agreement will not be substantially modified by the IRS. See
"Opinion of Counsel" above. Derenthal & Dannhauser's opinion stated above
regarding the allocation provisions of the Partnership Agreement assumes and is
conditioned on the receipt and accuracy of such an opinion of tax counsel.
It is possible that the IRS will seek to recharacterize the relationship
between a Local Limited Partnership and other parties. Such recharacterization
could adversely affect the tax treatment of a Local Limited Partnership and the
investors. For example, the IRS might contend that a lender to a Local Limited
Partnership is actually a partner, because the lender (i) is entitled to
interest measured in whole or in part by the income or (ii) made a subordinated
nonrecourse loan the repayment of which is subject to an equity-type risk. In
that event, some or all of the payments to the lender would be partnership
distributions. The Local Limited Partnership would be denied an interest
deduction for such payments, and the lender might be allocated a share of the
deductions of the Local Limited Partnership attributable to the property.
Other IRS challenges could affect allocations. For example, a Local Limited
Partnership might pay a Local General Partner or an affiliate fees for services.
The IRS might contend that such fees are not deductible expenses, but are
actually partnership distributions, and that the general partner should be
allocated a larger percentage of the Local Limited Partnership's taxable income
or tax loss.
Whether the IRS would be successful in any attempted recharacterization
would depend upon all the facts and circumstances of the transaction, including,
in the case of fees, the nature of the services for which the fees actually are
being paid. Because such facts and circumstances are unknown at present, counsel
has rendered no opinion with respect thereto.
Allocations Before Admission
Items of partnership income, gain, loss, deduction or credit are allocable
to a partner only if realized, paid or incurred by the partnership during the
portion of the year in which the partner is a member of the partnership. Items
realized, paid or incurred during periods before the partner's admission may not
be allocated retroactively to the partner. In this regard, the Partnership
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Agreement provides that the items of income, gain, loss deduction or credit
accrued during each month are allocated among persons who are partners of the
Series at the end of that month.
The Tax Reform Act of 1984 authorized the Treasury Department to issue
regulations concerning allocations to partners whose interests in a partnership
vary during the partnership's tax year. The General Explanation of the Tax
Reform Act of 1986 indicated that Congress intended that these regulations apply
to the allocation of tax credits. The General Explanation of the Tax Reform Act
of 1984 indicates that until such Treasury Regulations are issued any reasonable
convention will be permissible. As of the date of this Prospectus, Treasury
Regulations have not been issued. Consequently, Derenthal & Dannhauser is of the
opinion that the method of allocation set forth in the Partnership Agreement is
proper. However, Treasury Regulations, when issued, may require that some other
method of allocation be used.
Basis of Local Limited Partnerships in Their Apartment Complexes
Section 1012 of the Internal Revenue Code provides that the basis of
property acquired by purchase is its cost. This cost includes cash paid to
acquire property and certain purchase transaction costs such as real estate
commissions, attorneys' fees and appraisal costs. The basis of property is
increased to the extent of the cost of the property's capital improvements.
Where property is acquired or improved with proceeds of the owner's note,
the owner's basis in the property includes the principal amount of the note
regardless of whether the owner is personally liable for payment of the note.
The foregoing rule has been applied in cases where little or no downpayment has
been made, where payments of principal are not made currently and where the note
itself is payable partially or entirely from the proceeds realized from the
property acquired.
The principal amount of a nonrecourse note may not, however, be included in
the basis of acquired property unless it is recognized for tax purposes as a
bona fide liability. The rule adopted by the courts which is most often asserted
by the IRS in attacking the bona fide nature of a nonrecourse liability is that
the principal amount of a nonrecourse liability may not be included in the basis
of property unless the fair market value of such property is at least equal to
the face amount of the nonrecourse note. (See Wilman v. Commissioner, 78 T.C.
943 (1982); Narver v. Commissioner, 75 T.C. 53 (1980).) Additionally, in Hager
v. Commissioner, 76 T.C. 759 (1981), the Tax Court stated that in a transaction
involving a large amount of nonrecourse debt incurred in the purchase of a
property at an inflated price, the entire sale may be disregarded. Thus, the IRS
will closely scrutinize any transaction involving nonrecourse liability to
determine whether the principal amount of the liability approximates the value
of the property purchased.
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Basis is important because it determines the amount of tax credits, cost
recovery deductions, and interest deductions.
Nonrecourse liabilities will exist only at the Local Limited Partnership
level. If the IRS successfully challenges the inclusion of any nonrecourse
liability in basis, an investor's share of tax credits, cost recovery deductions
and interest deductions would be reduced. The investor's basis in his Units
would also be reduced. WNC & Associates, Inc. expects that an opinion of counsel
regarding inclusion of liabilities in basis will be rendered as a condition to a
Series' investment in a Local Limited Partnership. See "Opinion of Counsel"
above.
Depreciation
In determining profits and losses for tax purposes, a partnership's income
for any year is reduced by deductions representing depreciation or cost recovery
of the partnership's assets. The larger the depreciation or cost recovery
deductions, the lesser partnership's income or greater the partnership's loss.
Code Section 168 provides rules for determining the manner in which the
costs of tangible assets are to be recovered. Subject to certain transitional
rules that may apply to one or more apartment complexes, residential rental
property may be depreciated over a 27.5-year period or a 40-year period using
the straight-line method. Personal property is depreciated over recovery periods
of three, five, seven, ten, 15 or 20 years using an accelerated method.
Residential rental property is not subject to depreciation recapture upon
disposition. Prior depreciation for all personal property will result in
recapture when the property is disposed of at a gain.
The development and construction cost or the purchase price of an apartment
complex must be allocated between depreciable assets (such as improvements on
real estate and personal property) and nondepreciable items (such as land). Such
allocations are questions of fact which will not be subject to counsel's review
or opinion. IRS reallocations of purchase price would result in decreased tax
loss and tax credits or increased taxable income.
Deductibility of Fees
A. Development Fees and Acquisition and Investment Management Fees
Each Local Limited Partnership will pay its Local General Partners a fee for
services in connection with the development of its apartment complex. Each
Series will pay acquisition and investment management fees to WNC & Associates,
Inc. for services in connection with the investigation of Local Limited
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Partnerships and for services in connection with the organization and/or
start-up of Local Limited Partnerships. Each Local Limited Partnership will
capitalize its development fees as part of the basis of its apartment complex
and will recover the cost thereof through depreciation deductions to the extent
applicable to depreciable property. Similarly, each Series will capitalize
acquisition and investment management fees. Depending on the facts and
circumstances of the investment in each Local Limited Partnership, acquisition
and investment management fees may be:
o allocated to depreciable property and deducted over the useful life of such
property,
o treated as organization or start-up expenses that may be amortized over a
60-month period,
o amortized over the life of the Local Limited Partnership,
o or treated as nondeductible until the termination of the Local Limited
Partnership.
Counsel has rendered no opinion regarding the proper treatment of any
development fees or acquisition and investment management fees due to the
inherently factual nature of the issues involved.
B. Ongoing Management Fees
Each Local Limited Partnership intends to claim a deduction for certain fees
paid to its Local General Partners or their affiliates, including fees paid for
property management services. Similarly, each Series intends to deduct asset
management fees paid to WNC & Associates, Inc. WNC & Associates, Inc. believes
that such fees should be deductible as ordinary and necessary business expenses.
Counsel has rendered no opinion regarding the proper treatment of any
management fees due to the inherently factual nature of the issues involved.
Organization and Offering Expenses
Each Series will incur expenses in connection with its organization and
offering. See "Estimated Use of Proceeds." The Internal Revenue Code requires
that such expenses be capitalized. Each Series will amortize over 60 months the
portion of these expenditures which qualify as "organizational expenses" under
Section 709(b)(2) of the Code. Offering and syndication expenses will be
capitalized permanently, and no deduction will be obtained by a Series with
respect to such expenses. The IRS may challenge the amount of expenses that a
Series treats as "organizational expenses." The IRS also may attempt to
recharacterize other payments, including a portion of the fees described in the
preceding section, as nondeductible offering or
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syndication expenses. Counsel has rendered no opinion on this issue because
of its inherently factual nature.
Start-Up Expenditures
Section 195 of the Internal Revenue Code provides that a taxpayer may elect
to amortize certain "start-up expenditures" of a business ratably over a period
of not less than 60 months beginning with the month in which the business
begins. If no election is made, "start-up expenditures" must be capitalized
permanently. "Start-up expenditures" include costs incurred before entering into
an active trade or business which would have been deductible if incurred in
connection with the expansion of an existing trade or business in the same field
as that entered by the taxpayer. Start-up expenditures do not include amounts
allocable to the acquisition of interests in Local Limited Partnerships or the
organization or syndication of a Series as discussed above. The determination of
whether an item is a start-up expenditure is based on the facts and
circumstances in each case.
A Local Limited Partnership may deduct certain expenses incurred by it
before the date that it completes the construction of its apartment complex or
before the date it generates rental income. If so, a Series will deduct its
allocable share of such expenses. The IRS may disallow any such deductions as
not having been incurred in connection with a trade or business. If the IRS were
successful, the disallowed expenses would be available as deductions, if at all,
only through amortization. Due to the inherently factual nature of the issues
involved, counsel is unable to render an opinion regarding the manner in which
Section 195 may apply to any Series or any Local Limited Partnership.
Sales or Exchanges of Local Limited Partnership Property; Depreciation
Recapture
A Local Limited Partnership's gain on sale of its apartment complex will
equal the difference between the sale proceeds (including the amount of any
indebtedness to which the property is subject) and the adjusted basis of the
apartment complex. The amount of tax payable by an investor on his share of such
gain may in some cases exceed his share of the cash proceeds distributed to him.
In the event of a foreclosure of an apartment complex, a Series would realize
gain equal to the excess of the indebtedness secured by the mortgage or trust
deed over the adjusted basis of the apartment complex. In that event, an
investor would realize taxable income without the receipt of any cash
distributions as a result of the foreclosure.
In other instances a disposition of an apartment complex might result in the
investors receiving less cash than the tax liability generated by the
disposition. They include: (i) the retention of the sale proceeds by the Local
Limited Partnership or the Series to support its remaining operations, and (ii)
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the sale of the apartment complex for illiquid assets, such as promissory
notes of the purchaser. See "Treatment of Mortgage Loans."
Each apartment complex will most likely be considered to be "a Section 1231
asset," i.e., real property and depreciable assets:
o used in a trade or business,
o held for more than one year, and
o not held for sale to customers in the ordinary course of business.
If so, an investor's share of gain or loss from the sale of an apartment complex
would be combined with any other Section 1231 gains or losses incurred by him in
that year and:
o his net Section 1231 gains would constitute capital gains, or
o his net Section 1231 losses would constitute ordinary losses.
Despite the above, to the extent net Section 1231 losses are treated as ordinary
losses in any taxable year, net Section 1231 gains recognized during the next
five years will be treated as ordinary income.
If an apartment complex is held for sale to customers in the ordinary course
of business ("dealer property"), all gain on the disposition thereof will
constitute ordinary income. Because the determination as to whether any
apartment complex is dealer property depends on future facts, counsel expresses
no opinion as to that issue. Further, gain realized by a Local Limited
Partnership on a disposition of an apartment complex will be ordinary income to
the extent of depreciation recapture. See "Depreciation" above. In addition, the
sale of an apartment complex may give rise to the recapture of tax credits. See
"Historic Tax Credit Recapture" above and "The Low Income Housing Tax Credit -
Recapture of Low Income Housing Tax Credits."
For a discussion of the income tax consequences attendant to a sale of an
apartment complex on the installment basis, see "Treatment of Mortgage Loans"
below.
Tax Liabilities in Later Years
After a period of years following its commencement of operations, a Local
Limited Partnership may generate taxable income rather than tax losses. In
earlier years, depreciation deductions are expected to result in tax losses.
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However, in later years, as the portion of debt service payments
attributable to deductible interest decreases and the portion attributable to
non-deductible principal amortization increases, net operating income of a Local
Limited Partnership might exceed depreciation. An investor's share of such
taxable income would constitute passive income taxable at ordinary income rates
unless the investor had unused "suspended" passive losses from his Series, or
current or suspended passive losses from other investments. See "Limitations on
Losses and Credits from Passive Activities" above. In such circumstances the
investor would not receive a cash distribution from his Series with which to pay
any tax liability resulting from the allocation of taxable income. The tax
liability would require a nondeductible out-of-pocket payment of tax by such
investor.
Treatment of Mortgage Loans
A Local Limited Partnership may take back promissory notes as part of the
consideration received upon sale of an apartment complex. WNC & Associates, Inc.
anticipates that any such sale would qualify as an "installment sale" for
Federal income tax purposes. Taxable income from an installment sale generally
is recognized during the periods in which payments are received. However, any
depreciation or other ordinary income recapture is denied installment sale
treatment and must be recognized in the year of the sale.
A taxpayer who disposes of property on an installment basis may be required
to pay interest on the portion of his tax liability deferred by use of the
installment method. This rule applies if the aggregate face amount of all
installment obligations arising in any one year and outstanding at the end of
that year exceeds $5,000,000. Interest is payable each year at the rate
specified by the Internal Revenue Code for underpayments of tax (the short-term
Federal rate plus three percentage points) in effect for the month in which the
tax year ends. In determining the application of this rule, all taxpayers under
common control within the meaning of Section 52 of the Code are treated as a
single taxpayer. It is likely that a Series and each Local Limited Partnership
will be treated as under common control.
The Internal Revenue Code provides for recognition of gain on installment
obligations that are pledged to secure indebtedness of the taxpayer. The
proceeds of the secured indebtedness are treated as payments on the pledged
installment obligation.
A sale or exchange of dealer property is not eligible for installment sale
treatment. Accordingly, if a Local Limited Partnership disposes of an apartment
complex on an installment basis and the Local Limited Partnership sold the
apartment complex in the ordinary course of business, all gain on the sale would
be recognized in the year of sale. Tax liability would be payable as a result of
such sale even though no proceeds of the sale had yet been received.
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WNC & Associates, Inc. will take into account the application of these rules
in determining whether to approve the sale of an apartment complex in return for
a purchase money mortgage.
WNC & Associates, Inc. anticipates that any purchase money promissory notes
held by a Local Limited Partnership as a result of an installment sale will be
secured by mortgages or deeds of trust. If the "stated redemption price at
maturity" of such notes exceeds the "issue price," the difference is treated as
original issue discount ("OID"). In the case of purchase money financing, the
"issue price" is determined by discounting all future payments of principal and
interest to present value utilizing specified rates that are intended to reflect
market conditions at the time of the sale. The "stated redemption price" at
maturity generally consists of the face amount of the notes, plus deferred
interest and other amounts payable at maturity. If OID is present, the Local
Limited Partnership will be required to accrue each year a ratable portion of
the OID.
Sales or Exchanges of Units and Local Limited Partnership Interests; Transfers
by Gift or at Death
WNC & Associates, Inc. will prohibit the development of a public trading
market in the Units. Accordingly an investor may not be able to sell his Units.
See "Transferability of Units." However, an investor may be able to sell his
Units in some cases. Any gain realized on a sale of Units by an investor who is
not a "dealer" in Units or other similar securities generally will be capital
gain, except as set forth below. However, as a result of the sale of Units, an
investor may be subject to the recapture of tax credits. See "Historic Tax
Credit Recapture" above and "The Low Income Housing Tax Credit - Recapture of
Low Income Housing Tax Credits."
In determining the amount received upon the sale or exchange of a Unit, the
seller must include, among other things, his allocable share of all Local
Limited Partnerships' nonrecourse indebtedness. Because of the rules regarding
nonrecourse indebtedness, it is possible that the gain realized upon the sale of
a Unit or an interest in a Local Limited Partnership may exceed the cash
proceeds of such sale. In some cases the income taxes payable with respect to
such sale may exceed such cash proceeds. See, however, "Limitations on Losses
and Credits from Passive Activities" above regarding the allowance of previously
suspended passive activity losses and passive activity credits upon the
disposition of a taxpayer's entire interest in a passive activity.
An investor's share of gain on the sale of Units will not be capital gain to
the extent the gain is allocable to "unrealized receivables" or inventory items
of the Series, if any. "Unrealized receivables" is defined in Section 751 of the
Internal Revenue Code to include unrecognized depreciation recapture.
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Similar rules will apply in the case of a sale or exchange by a Series of
its interest in a Local Limited Partnership.
A gift of a Unit may result in Federal or state income tax (as well as
Federal or state gift tax) liabilities to the donor. The IRS will take the view
that an investor who makes a gift of a Unit is relieved of his share of
nonrecourse indebtedness. Therefore, the investor will realize gain on the gift
to the extent his share of such liabilities exceeds the tax basis for his Units.
Gain on a gift of Units is taxable in the same manner as gain on the sale of a
Unit. The donor is not entitled to use suspended passive activity losses on the
gift of his Units. Rather the donee's tax basis for the Units is increased by
the suspended passive activity losses. See "Limitations on Losses and Credits
from Passive Activities" above.
If an investor dies, the fair market value of his Units at death (or, if
elected, at the alternative valuation date) will be subject to Federal estate
taxation. The basis of a Unit inherited from a decedent generally is "stepped
up" or "stepped down" to its fair market value for Federal estate tax purposes.
Dissolution and Liquidation of a Series or Local Limited Partnership
Generally, upon liquidation or termination of his Series, an investor will
recognize income only to the extent that the sum of the cash distributed to him
and his share of nonrecourse liabilities exceeds his adjusted basis in his Units
at the date of distribution. Similar rules will apply in the event of the
dissolution or liquidation of a Local Limited Partnership.
Elections
Section 754 of the Internal Revenue Code permits a partnership to elect to
adjust the basis of partnership property:
o on the transfer of an interest in the partnership, or
o on the distribution of property by the partnership to a partner.
If a Series were to make such an election, then transferees of Units would be
treated, for purposes of depreciation and taxable gain, as though they had
acquired a direct interest in the Series' assets. As a result of the
complexities of the tax accounting required, WNC & Associates, Inc. does not
presently intend to make a Section 754 election, although it is empowered to do
so by the Partnership Agreement. The absence of any such election may, in some
circumstances, reduce the value of Units to a potential purchaser.
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Transferability - Termination of a Series
The Internal Revenue Code provides that if 50% or more of the capital and
profits interests in a partnership are sold or exchanged within a single
12-month period, the partnership will terminate for Federal income tax purposes.
Under the Partnership Agreement, 50% or more of the Units may not be sold or
exchanged within a single 12-month period. However, if a termination should
nonetheless occur, it could cause recapture of tax credits.
Profit Motive
Under Section 183 of the Internal Revenue Code, certain expenses from
activities not engaged in for profit are disallowed as deductions from other
income. Low income housing typically does not generate a profit from operations.
Nonetheless, the Treasury Department has issued Regulations stating that Code
Section 183 will not be applied to apartment complexes which qualify for the low
income housing tax credit if:
o the investment in such properties is bona fide, and
o the investment is not an economic sham.
Based on these Regulations Derenthal & Dannhauser is of the opinion that it is
more likely than not that Section 183 will not be applied to disallow deductions
arising from the ownership of the apartment complexes.
Other Important Tax Considerations
In addition to the provisions of the Internal Revenue Code relevant to
investments in limited partnerships or in real property, investors should be
aware of other important Code provisions that are applicable to investments in
general, or that may, depending upon the facts and circumstances, be applicable
to certain taxpayers. While a detailed discussion of such general tax aspects is
beyond the scope of this Prospectus, investors should be aware of the following
matters, among others, and should consult their own tax advisers for more
details if further information is desired.
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A. Tax Rates
The Code includes five marginal tax rates for individuals, as set forth in
the following tables:
Filing Marginal
Status Income Tax
- ------ ------ --------
Married up to $43,050 15%
Filing between $43,050 and $104,050 28%
Jointly between $104,050 and $158,550 31%
between $158,550 and $283,150 36%
over $283,150 39.6%
Head up to $34,550 15%
of between $34,550 and $89,150 28%
household between $89,150 and $144,400 31%
between $144,400 and $283,150 36%
over $283,150 39.6%
Single up to $25,750 15%
between $25,750 and $62,450 28%
between $62,450 and $130,250 31%
between $130,250 and $283,150 36%
over $283,150 39.6%
Married up to $21,525 15%
Filing between $21,525 and $52,025 28%
Separate between $52,025 and $79,275 31%
between $79,275 and $141,575 36%
over $141,575 39.6%
The dollar amounts set forth above apply to 1999 and will be adjusted for
inflation in each year thereafter.
Despite the preceding, the maximum tax rate on capital gains is
o 28% for most assets held for more than 12 but less than 18 months, and
o 20% for most assets held for more than 18 months,
provided
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o that capital gains equal to depreciation recapture on real property held for
more than 18 months will be taxed at a maximum rate of 25%.
Capital losses are deductible to the extent of capital gains plus $3,000
($1,500 in the case of a married individual filing a separate return) of
ordinary income. The remainder is carried forward.
The personal exemption amount, established at $2,000 for 1989, is indexed
for inflation after 1989 ($2,750 for 1999). The personal exemption is phased out
by 2% (4% for a married person filing a separate return) for each $2,500 by
which a taxpayer's adjusted gross income exceeds certain threshold amounts.
Under Internal Revenue Code Section 67, noncorporate investors may claim
most miscellaneous itemized deductions only to the extent such expenses exceed
2% of adjusted gross income. Itemized deductions include expenses paid or
incurred:
o for the production or collection of income,
o for management, conservation, or maintenance of property held for the
production of income,
o in connection with the determination, collection or refund of a tax, or
o for the trade or business of being an employee.
Code Section 68 imposes a limit on an individual's aggregate itemized
deductions, other than (i) medical expenses under Section 213, (ii) investment
interest under Section 163 and (iii) casualty, theft and wagering losses under
Section 165. For an individual whose adjusted gross income exceeds the
"applicable amount," the amount of the itemized deductions will be reduced by
the lesser of:
o 3% of the excess of the adjusted gross income over the "applicable amount,"
or
o 80% of the itemized deductions otherwise allowable for the taxable year.
For these purposes, the "applicable amount" means $100,000 ($50,000 in the case
of a married person filing a separate return). The applicable amount is adjusted
for inflation in tax years beginning after December 31, 1991 ($126,600 for
1999). Code Section 68 is to be applied after the application of any other Code
limitation on the allowance of itemized deductions.
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With respect to corporations, other than personal service corporations, the
Code imposes the following tax rates:
o 5% of so much of the taxable income as does not exceed $50,000;
o 25% of so much of the taxable income as exceeds $50,000 but does not exceed
$75,000;
o 34% of so much of the taxable income as exceeds $75,000 but does not exceed
$10,000,000; and
o 35% of so much of the taxable income as exceeds $10,000,000.
In the case of a corporation which has taxable income in excess of
$15,000,000, the amount of the tax determined under the foregoing provisions is
increased by an additional amount equal to the lesser of (i) 3% of such excess,
or (ii) $100,000.
With respect to personal service corporations, the Internal Revenue Code
imposes a single rate of tax equal to 35%.
B. Alternative Minimum Tax
In addition to the regular income tax, the Internal Revenue Code includes an
alternative minimum tax for noncorporate and corporate taxpayers. In 1986, the
alternative minimum tax base was significantly broadened. That base is equal to
a:
o taxpayer's taxable income,
o subject to certain adjustments,
o increased by items of tax preference, and
o reduced by an exemption, all as described below.
Under the alternative minimum tax, depreciation deductions on personal
property are computed using the 150% declining balance method rather than the
200% declining balance method. A less favorable net operating loss deduction is
used in lieu of the regular tax net operating loss deduction.
The itemized deductions allowable in computing alternative minimum taxable
income include the following:
o charitable contributions,
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o medical deductions in excess of 10% of adjusted gross income,
o casualty losses,
o certain interest on personal housing, and
o other interest to the extent of net investment income.
No standard deduction is allowed, but an exemption amount is available as
discussed below.
The Code eliminates an incentive for married taxpayers to file separate
returns by increasing the amount of alternative minimum taxable income by the
lesser of (i) 25% of the excess of alternative minimum taxable income over
$165,000, or (ii) $22,500.
For corporations, the Code requires an addition to taxable income of 75% of
the amount by which adjusted current earnings exceeds alternative minimum
taxable income.
In addition to the adjustments described above, alternative minimum taxable
income is increased by the amount of "items of tax preference." Tax preferences
include certain excess depletion deductions, excess intangible drilling costs,
certain tax-exempt interest, and the difference between the fair market value
and the exercise price of stock acquired by exercise of an incentive stock
option. No deduction is allowed for losses from a tax shelter farm activity.
Tax credits cannot be used to offset alternative minimum tax. Rather, tax
credits may only be utilized to the extent they do not exceed the excess of the
taxpayer's income tax liability over the greater of (i) his tentative minimum
tax liability, or (ii) 25% of his regular tax liability in excess of $25,000.
Any "excess" tax credits are first carried back one year and then forward 20
years. For example, if an investor's regular tax liability is $120,000, and his
tentative minimum tax is $80,000, the limit under clause (ii) is calculated as
follows:
$120,000 - $25,000 = $95,000
$95,000 x 25%= $23,750
$120,000 - $80,000 = $40,000
The alternative minimum tax for individuals is equal to:
o 26% of so much of the "taxable excess" as does not exceed $175,000, plus
o 28% of so much of the "taxable excess" as exceeds $175,000.
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For this purpose, "taxable excess" means the amount by which alternative minimum
taxable income exceeds the exemption amount. The exemption amount is
o $45,000 for a married couple filing a joint return or a surviving spouse,
o $33,750 for a single individual, and
o $22,500 for a married individual filing a separate return or for an estate or
trust.
However, the exemption is reduced (but not below zero) by 25% of the amount
by which the alternative minimum taxable income exceeds
o $150,000 in the case of a married couple filing a joint return,
o $112,500 in the case of a single individual, and
o $75,000 in the case of a married individual filing a separate return or for
an estate or trust.
The corporate alternative minimum tax is the amount, if any, by which:
o 20% of the excess of
* the corporation's alternative minimum taxable income, over
* the exemption amount, exceeds
o the corporation's regular tax for the year.
The corporate exemption amount is $40,000. However, this exemption is reduced by
25% of the amount by which alternative minimum taxable income exceeds $150,000.
The corporate alternative minimum tax does not apply to corporations which have
elected to be subject to Subchapter S of the Internal Revenue Code. Rather, the
alternative minimum tax applies to the shareholders of an S corporation.
The corporate alternative minimum tax has been repealed for small business
corporations. A corporation that had average annual gross receipts of less than
$5,000,000 for the three-year period beginning after December 31, 1993 is a
small business corporation for its first taxable year beginning after December
31, 1997. A corporation that meets the $5,000,000 gross receipts test will
continue to be treated as a small business corporation so long as its average
gross receipts do not exceed $7,500,000.
Because the impact of the alternative minimum tax is dependent upon each
investor's particular tax situation, each prospective investor must consult his
own tax adviser as to the effect an investment in a Series will have on the
calculation of his alternative minimum tax liability.
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C. Deduction of Investment Interest
The Internal Revenue Code imposes substantial limitations upon the
deductibility of interest on funds borrowed by an investor to purchase or to
carry investment assets. Code Section 163(d) provides that an individual may
take a deduction for such "investment interest" only to the extent of such
individual's "net investment income" (see the next paragraph) for the taxable
year. Investment interest is interest on indebtedness incurred to purchase or
carry investment property. Investment interest includes:
o interest expense allocable to portfolio income, and
o investment and interest expense allocable to an activity in which the
taxpayer does not materially participate, if such activity is not treated as
a passive activity under the passive loss rules.
Investment interest does not include any interest that is taken into account in
determining a taxpayer's income or loss from a passive activity or a rental
activity in which a taxpayer actively participates. See "Limitations on Losses
and Credits from Passive Activities."
Net investment income consists of the excess of investment income over
investment expenses. Investment income generally includes:
o gross income (other than gain on disposition) from property held for
investment,
o gain (excluding gain treated as capital gain) attributable to property
held for investment, and
o amounts treated as portfolio income under the passive loss rules.
Investment income does not include income taken into account in computing gain
or loss from a passive activity.
Investment expenses are deductible expenses (other than interest) directly
connected with the production of investment income. Generally, in calculating
investment expenses, only those expenses in excess of 2% of adjusted gross
income are included. See "Other Important Tax Considerations - Tax Rates."
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Tax Returns and Tax Information
A. Audit and Assessment Procedure
The IRS could audit the tax information returns filed by a Series or a Local
Limited Partnership. Any such audit could result in the audit of an investor's
tax return. An audit of an investor's return could result in adjustments to
items related to the Series as well as items not related to the Series.
Under the Internal Revenue Code the IRS treats a partnership as a separate
entity for purposes of audit, settlement and judicial review. Thus, the IRS may
audit and make a single determination of the propriety of a partnership's
treatment of partnership tax items at the partnership level. In general, a
partnership's "tax matters partner" represents the partnership and its partners
in the event of an audit of the partnership's tax returns. WNC & Associates,
Inc. is the tax matters partner for each Series. All partners are nevertheless
entitled to participate in an audit and each partner may enter into a settlement
agreement on his own behalf with the IRS.
Partners must report partnership items consistently with the position
reported by the partnership on its tax returns or file a statement identifying
the inconsistency. If an inconsistency statement is not filed, the IRS may treat
an inconsistency as a computational error on the partner's return and assess any
deficiency resulting from such inconsistency. The IRS can also assess negligence
penalties for failure to comply with the statute.
If the IRS proposes any adjustments to the tax returns filed by a Series, a
Local Limited Partnership or an investor, substantial legal and accounting
expenses and deficiency interest and penalties may be incurred. A Series will
not bear any expense that may be incurred by an investor in connection with:
o the investor's participation in an audit of the Series,
o the audit of his tax returns, or
o the determination or redetermination of his tax liability even though
resulting solely from adjustments to the Series' or a Local Limited
Partnership's tax returns.
B. Imposition of Penalties
Document and Information Return Penalties. Three separate and distinct
categories of penalties apply to information returns and payee statements, as
follows:
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o a penalty for failing to file an information return or to include correct
information therein (e.g., Form 8308, which a partnership must file upon a
transfer of its partnership interests);
o a penalty for failing to file a payee statement or to include correct
information on a payee statement (e.g., Schedule K-1, which a partnership
must provide annually to each partner); and
o a penalty for failure to comply with other information reporting
requirements (e.g., the requirement that a transferor must give notice to a
partnership concerning the exchange of an interest in the partnership).
The penalties in this category differ in amount. Under certain
circumstances, a filer may reduce or avoid some of the penalties by filing
corrected returns within specific time limits, or if the omissions and
inaccuracies are inconsequential. On the other hand, the penalties may be
increased if the failure to comply is due to intentional disregard.
Accuracy-Related and Fraud Penalties. The penalty for an inaccurate tax
return is equal to 20% of the portion of an underpayment resulting from one or
more of the following:
o negligence or disregard of the rules and regulations;
o any substantial understatement of income tax;
o any substantial valuation overstatement;
o any substantial overstatement of pension liabilities; and
o any substantial estate or gift tax valuation understatement.
A substantial understatement of income tax exists if the amount of the
understatement exceeds the greater of (i) 10% of the tax required to be shown,
or (ii) $5,000 ($10,000 in the case of most corporations).
A substantial valuation overstatement exists if (i) the value or adjusted
basis of any property is 200% or more of the amount determined to be the correct
value or adjusted basis, or (ii) the price for services or property in
transactions between certain affiliated entities is 200% or more of the current
price. In the case of a gross overstatement (i.e., where the value or adjusted
basis or price is 400% or more of the correct amount), the penalty is increased
to 40%. In no event will a penalty be imposed unless the underpayment exceeds
$5,000 ($10,000 in the case of most corporations).
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Any portion of an understatement which is attributable to fraud is subject
to a penalty at the rate of 75% of the understatement. The 20% accuracy-related
penalty will not apply to any portion of an understatement subject to the fraud
penalty.
Tax Shelter Registration
Tax shelter organizers are required to register their tax shelters with the
IRS. Furthermore, tax shelter organizers are required to maintain lists of
investors in the tax shelter. The lists must be turned over to the IRS upon
request. Both of these requirements have enhanced the ability of the IRS to
audit tax shelters.
Each Series has applied to the IRS for a tax shelter registration number.
The registration number and the taxpayer identification number to be assigned to
a Series will be provided to the investors. EACH INVESTOR MUST REPORT THIS
REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF HE CLAIMS ANY DEDUCTION,
LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORTS ANY INCOME BY REASON OF HIS
INVESTMENT IN A SERIES.
Each investor must report the registration number (as well as the name and
taxpayer identification number of his Series) on Form 8271.
FORM 8271 MUST BE ATTACHED TO THE RETURN ON WHICH AN INVESTOR CLAIMS THE
DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORTS ANY INCOME.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THE INVESTMENT
DESCRIBED HEREIN OR THAT THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED
OR APPROVED BY THE INTERNAL REVENUE SERVICE.
A Local Limited Partnership may be required to register as a tax shelter. If
such is the case, each investor may be required to report the registration
number of such Local Limited Partnership to the IRS on Form 8271.
If an investor fails to include a required registration number on his
individual tax returns he is subject to a maximum penalty of $250 for each such
failure.
Investors are required to provide the Series' tax shelter registration
number to transferees of their Units. If an investor fails to notify his
transferee of the registration number, he is subject to a maximum penalty of
$100 for each such failure.
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Changes in Tax Law
Many of the amendments to the Internal Revenue Code enacted since 1980 have
not been interpreted by corresponding amendments to the Treasury Regulations.
Also, few judicial decisions or administrative rulings with regard thereto exist
as of the date of this Prospectus. Accordingly, certain of the Code provisions
described above may be further amended, modified or clarified by Congress, the
IRS or the courts so as to have an adverse effect on the Series.
STATE AND LOCAL TAX CONSIDERATIONS
In addition to the Federal income tax considerations described above,
prospective investors should consider potential state and local tax consequences
of an investment in a Series. An investor's share of Series tax items must be
included for state or local tax purposes in his jurisdiction of residency.
Moreover, California and other states in which a Series may do business impose
taxes on nonresident investors, determined with reference to their shares of
income and gain derived from such states. Losses from a Series' operations in
one state may not be available to offset income from the Series or other sources
taxable in a different state. Personal exemptions, computed in various ways, are
allowed by some states but not others. A Series may be required to withhold
state taxes from distributions or allocations to investors in some instances.
To the extent that an investor who is not a resident of a state pays tax to
that state by virtue of Series operations within that state, he may be entitled
to a deduction or credit against tax owed to his state of residency with respect
to the same income. Investors should consult their own tax advisers in that
regard.
Tax benefits that are available for Federal income tax purposes may not be
available for state income tax purposes. For example, certain states have not
adopted the Federal cost recovery rules and the Federal installment sale rules.
Thus, it is possible that investors in some states will be required to recognize
more or less income or loss from operations, or gain from the sale of Series
investments, for state tax purposes than for Federal tax purposes.
Investors may be subject to estate or inheritance taxes in the states in
which the Series conducts business, as well as in their own states of residency.
Corporate investors may be liable for minimum state franchise taxes in such
states. Each prospective investor should consult his own personal tax adviser
concerning his individual tax situation and the state and local tax aspects of
investing in a Series.
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PROFITS AND LOSSES, TAX CREDITS
AND CASH DISTRIBUTIONS
Set forth below in this section of the Prospectus is a discussion of the
allocation and distribution provisions of the Partnership Agreement.
Tiered Investment
An investment in a Series represents a tiered investment. In the upper tier,
investors will contribute capital to the Series. In the lower tier, the Series
will contribute the capital received from the investors, net of certain fees and
expenses, to a number of Local Limited Partnerships. The Local Limited
Partnerships will actually own the apartment complexes.
Profits, losses, tax credits and cash generated by an apartment complex will
initially be accounted for by the Local Limited Partnership which owns the
apartment complex. The Local Limited Partnership will allocate and distribute
these items among its partners. The general partners or managing members of a
Local Limited Partnership will be the Local General Partners, and the limited
partners or non- managing members will be the Partnership, the SLP Affiliate
and, possibly, an affiliate of the Local General Partners and/or a joint
venturer.
Consequently, the primary source of profits, losses, tax credits and cash of
a Series will be the allocations and distributions it receives from the Local
Limited Partnerships. In addition, each Series will have a certain level of
income and expense at the Series' level. The Partnership will account for all
profits, losses, tax credits and cash, from all sources, and then allocate such
items between the investors and WNC & Associates, Inc.
The manner in which each Series will make its allocations and distributions
is summarized below and is set forth in its entirety in the Partnership
Agreement incorporated into this Prospectus as Exhibit B.
Cash Available for Distribution
A Series' "Cash Available for Distribution" means "Cash Flow" less any
amounts set aside from "Cash Flow" for the restoration or creation of reserves.
"Cash Flow" means:
o all cash distributions made to the Series by the Local Limited
Partnerships, minus
o any such cash distributions resulting from the sale or refinancing of the
apartment complexes, plus
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o all cash funds from Series operations (e.g., interest) after deducting cash
funds used to pay expenses, fees, debt service and capital expenditures
WNC & Associates, Inc. does not anticipate that there will be any
significant distributions of Cash Available for Distribution. Any such
distributions will be paid 99.9% to the investors and 0.1% to WNC & Associates,
Inc.
Sale or Refinancing Proceeds
Sale Proceeds will consist of net cash receipts arising from sales or other
dispositions of apartment complexes. Refinancing Proceeds will consist of net
cash receipts arising from any mortgage financing, refinancing or other
borrowing secured by the apartment complexes. Sale or Refinancing Proceeds will
not include any amounts necessary for the payment of debt or the funding of
reserves.
A portion of a Series's Sale or Refinancing Proceeds may be reinvested in
Local Limited Partnerships during the two-year period following the termination
of a Series' offering. Otherwise, Sale or Refinancing Proceeds will be
distributed by a Series in the following order:
o to the investors until each investor has received an amount equal to:
* a return of his capital contribution to the Series, to the extent not
previously returned by distributions of Sale or Refinancing Proceeds,
plus
* to the extent not already provided by distributions and tax credits, an
annual, cumulative, but not compounded, return on their unreturned
capital contributions equal to 11% through December 31, 2010, and 6%
for the balance of the Series' term;
o to WNC & Associates, Inc. until it has received a return of its capital
contribution to the Series plus any subordinated disposition fees (see
"Management Compensation"); and
o the balance 90% to its investors and 10% to WNC & Associates, Inc.
Distributions made in connection with the liquidation of a Series will be
distributed in accordance with the positive capital account balances of its
partners.
Capital Accounts
Each Series will maintain a capital account for each investor. The
Partnership Agreement provides that an investor's capital account will equal:
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o the investor's capital contribution, minus
o the amount of losses allocated to the investor, minus
o the amount of cash distributed to the investor, plus
o the amount of income allocated to the investor.
For this purpose, income and loss includes items in the nature of income and
loss but which are not subject to tax or tax deductible. Selling commissions are
items in the nature of losses which are not deductible for tax purposes.
Capital accounts are important because they (i) determine the manner in
which liquidation proceeds are distributed, and (ii) support the validity of a
partnership's allocations under Treasury Regulations. See "Federal Income Tax
Considerations - Series Allocations."
Allocations of Profits and Losses and Tax Credits
General Allocations. Low income housing tax credits of a Series will be
allocated among its investors and WNC & Associates, Inc. in the same manner as
cost recovery deductions. Historic tax credits of a Series will be allocated
among its investors and WNC & Associates, Inc. in the manner in which profits
are or would be allocated for the year in which the historic tax credit property
is placed in service. In accordance with these rules, WNC & Associates, Inc.
anticipates that low income housing tax credits and historic tax credits of each
Series will be allocated 99.9% to the Series' investors and 0.1% to WNC &
Associates, Inc.
The Partnership Agreement uses the defined terms "Profits" and "Losses" to
allocate tax items (other than tax credits) among the investors and WNC &
Associates, Inc. Due to the requirements of the Internal Revenue Code, these
definitions and the corresponding allocation provisions are extraordinarily
technical and complex and cannot be easily explained. See "Federal Income Tax
Considerations - Series Allocations." Primarily, these provisions have been
drafted in an attempt to comply with Code and Treasury Regulations requirements
so as to allocate all tax credits in the ratio of 99.9% to the investors and
0.1% to WNC & Associates, Inc.
Profits and Losses are not the same as cash distributions. Profits and
Losses are determined on a tax accounting basis for use by the investors in the
preparation of their income tax returns and/or for the proper maintenance of
capital accounts. Because of the effect of certain deductions allowable for
Federal income tax purposes, the amount of income taxable to each investor may
be greater or less than the amount of cash distributable to him from his Series.
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Accordingly, the Partnership Agreement provides separately for allocations
of Profits and Losses on the one hand and cash distributions on the other.
A Series "Profits" and "Losses" for a period means:
o an amount equal to the Series' taxable income or tax loss for the period
determined in accordance with Section 703(a) of the Internal Revenue Code
(for this purpose all items of income, gain, loss or deduction required to
be stated separately under Section 703(a)(1) of the Code are included in
taxable income or tax loss), minus
o any expenditures of the Series described in Section 705(a)(2)(B) of the Code
or treated as such under Treasury Regulation Section 1.704-1(b)(2)(iv)(i)
(such as selling commissions), excluding
o any items that are specially allocated under Section 4.4 of the Partnership
Agreement (which are discussed below under "Special Allocations").
Other adjustments are included in the definition of Profits and Losses. These
other adjustments are not expected to be relevant to the Series and are not
discussed herein.
Losses generally will be allocated 99.9% to the investors and 0.1% to WNC &
Associates, Inc. However, no person may receive any allocation of losses if the
allocation would cause or increase a deficit in such person's capital account.
Profits generally will be allocated:
o first, if the investors have an aggregate positive capital account balance
and WNC & Associates, Inc. has a negative capital account balance, or vice
versa, to the class of partners with and to the extent of such negative
balance;
o second, to the extent of the aggregate negative capital account balances of
the partners, to the investors and WNC & Associates, Inc. in such manner and
amount as is necessary to cause the negative capital account balances to be
in the ratio of 99.9% to the investors and 0.1% to WNC & Associates, Inc.;
and
o third, to the investors and WNC & Associates, Inc. in such manner and amount
as is necessary to cause the positive capital account balances of the
partners to be equal to their "deemed liquidation distributions." A person's
deemed liquidation distribution generally is the amount that would be
distributed to him if his Series were dissolved and liquidated and (i) the
Series' assets were sold for their Federal adjusted tax basis; (ii) the
Series' liabilities were paid; and (iii) the Series remaining cash were
distributed in accordance with the provisions applicable to Sale or
Refinancing Proceeds arising other than in liquidation of the Series.
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Special Allocations. The Partnership Agreement includes a number of special
allocations, most of which are required under the Internal Revenue Code or
Treasury Regulations. WNC & Associates, Inc. anticipates that several of those
provisions will not affect the Series based on their intended operations. The
provisions which are likely to affect the Series and their investors follow.
o Partnership Minimum Gain. Partnership minimum gain generally is the excess
of the principal amounts of a partnership's nonrecourse debts (debts as to
which no partner or related person bears the economic risk of loss) over its
bases in the properties securing the debts. If, in any year, there is a
decrease in the aggregate amount of a Series' minimum gain, the Series would
allocate to each investor an amount of income equal to the investor's share
of the decrease in Series' minimum gain. It is likely that after several
years of operation each Series will have minimum gain.
o Partner Nonrecourse Debt. Partner nonrecourse debt is nonrecourse debt of a
partnership as to which a partner or related party bears the economic risk
of loss. All deductions attributable to partner nonrecourse debt must be
allocated to the partner with the economic risk of loss. If WNC &
Associates, Inc. makes a nonrecourse loan to a Series the loan will most
likely be a partner nonrecourse debt to WNC & Associates, Inc.
o Partner Nonrecourse Debt Minimum Gain. Partner nonrecourse debt minimum
gain is calculated in the same manner as partnership minimum gain, except
that only partner nonrecourse debts and the related properties are included
in the calculation. If, in any year, there is a decrease in the minimum
gain for any partner nonrecourse debt, the partnership must allocate income
to each partner who shares in the partner nonrecourse debt minimum gain an
amount of income equal to the partner's share of the decrease in the partner
nonrecourse debt minimum gain.
o Qualified Income Offset. Under the Treasury Regulations, the deficit make-up
requirement is waived if the partnership agreement includes a qualified
income offset and an allocation does not cause or increase a deficit balance
in a partner's capital account balance. See "Federal Income Tax
Considerations - Series Allocations." The qualified income offset requires
that the capital accounts must be specially adjusted for this purpose by
three items. The most important adjustment for investors in a Series is the
adjustment for reasonably anticipated distributions. Generally, this
adjustment would require capital account reductions for the amount of
distributions of sale proceeds which are reasonably anticipated.
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o Negative Capital Account Balances. No loss can be allocated to an investor
to the extent it would cause a negative balance in the investor's capital
account to exceed the investor's share of his Series minimum gain and
partner nonrecourse debt minimum gain.
o Interest Income. Any interest income recognized by a Series in connection
with the payment to the Series of a capital contribution (or portion
thereof) will be allocated to the investor making the payment.
Prospective investors are urged to read Article 4 of the Partnership
Agreement in its entirety for a full description of the provisions summarized
above.
Determination of Distributions and Allocations Among Investors
A Series' cash distributions and general allocations of income and losses
will be made among its investors in proportion to the number of Units owned by
each of them.
Allocations for Community Reinvestment Act Purposes
Each Series may allocate specific properties among its investors which are
banks strictly for Community Reinvestment Act regulatory purposes or related
requirements only. The Partnership Agreement grants each Series the power to do
so. All of the investors will continue to participate in all of the
Partnership's properties for Federal income tax purposes.
SUMMARY OF CERTAIN PROVISIONS OF THE
PARTNERSHIP AGREEMENT
The Partnership Agreement (attached hereto as Exhibit B) is the governing
instrument establishing the rights and obligations of the investors and WNC &
Associates, Inc. in each Series. Each prospective investor should therefore read
the Partnership Agreement in full. Many of the principal provisions of the
Partnership Agreement have been summarized elsewhere in this Prospectus under
various headings. Certain other provisions of the Partnership Agreement are
summarized below, but for complete information reference should be made to the
Partnership Agreement.
Default by an Investor in Payment of the Deferred Capital Contribution
Certain investors may elect to pay for one-half of the purchase price of
their Units with promissory notes. See "Terms of the Offering and Plan of
Distribution" below. Under a promissory note, an "Event of Default" will occur
if:
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o the investor fails to make any payment due under his promissory note within
30 days after the due date (a "Payment Default"),
o the investor makes a material misrepresentation in connection with his
purchase of Units,
o the investor files a proceeding under the Federal bankruptcy laws or an
involuntary proceeding is filed against the investor,
o the investor makes an assignment for the benefit of creditors, or
o a receiver or trustee is appointed for all or any part of the investor's
assets.
In the event of a Payment Default, the investor will have a right to cure
the Payment Default. A defaulting investor can cure a Payment Default by paying
the amount due with late charges. The right to cure will terminate on the date
which is 30 days after notice of the Payment Default and intent to foreclose
have been given to the investor. During that 30-day period the investor will not
suffer any reduction in interest in the Series and the Series may not commence
proceedings to enforce its security interest in the defaulting investor's Units.
If an Event of Default occurs, the Series may declare the entire unpaid
balance of the promissory note due and payable. The promissory note will
continue to bear interest until paid. The Series will impose a late charge of 5%
on any late payment. In addition, any distributions of cash to which the
investor is entitled will instead be offset against amounts due under the
promissory note. Each investor issuing a promissory note will grant a security
interest in his Units to his Series under Section 3.4.1 of the Partnership
Agreement. Therefore, upon an Event of Default a Series also will be entitled to
the remedies available under the Uniform Commercial Code. Under the UCC, the
Series could foreclosure on the Units and bring a proceeding directly against
the investor. The Series may sell the Units of a defaulting investor to the
nondefaulting investors or to others for the highest price which the Series can
obtain in a commercially reasonable sale. WNC & Associates, Inc. and its
affiliates may (but are not obligated to) purchase any such Units, but only if
such Units have first been offered to the nondefaulting investors. Sale proceeds
are first applied to the amount due to the Series and the expenses of the sale.
Accordingly, the defaulting investor might not receive any cash from the forced
sale of his Units. See "Risk Factors - Series-Related Risks - Obligations for
Capital Contributions."
A Series may pledge its investor promissory notes as collateral to secure
Series debt. A Series may sell promissory notes of corporations with a credit
rating by Standard & Poor's of A or better. If the maker of a promissory note
which is sold or pledged defaults under the promissory note, a subsequent holder
of the promissory note will have the rights of the Series as described above.
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Liability of Investors to Third Parties
Under California law, an investor is not personally liable for the debts,
liabilities and obligations of his Series in excess of his capital contribution,
except for the payments due under his promissory note, if any, unless he takes
part in the management and control of his Series.
Dissolution and Liquidation
Each Series is self-liquidating and will be dissolved no later than December
31, 2060, or earlier upon the prior occurrence of certain events, including:
o the Series' disposition of all interests in Local Limited Partnerships and
other assets of the Series;
o the vote by investors owning more than 50% of the Series' Units to dissolve
the Series; or
o unless the business of the Series is continued by the Series or a
reconstituted partnership under Section 8.1 of the Partnership Agreement,
the removal, bankruptcy or dissolution (or death or adjudication of
incompetence in the case of an individual) of a sole remaining general
partner. WNC & Associates, Inc. has agreed not to retire or withdraw
voluntarily from the Series.
Upon dissolution of a Series, unless its business is continued in accordance
with the Partnership Agreement, the Series will be liquidated. The Series will
apply liquidation proceeds first to the payment of its obligations and the
expenses of its liquidation, and to the setting up of any reserves for
contingencies which WNC & Associates, Inc. considers necessary. Any remaining
proceeds of liquidation and any other funds or properties of the Series will
then be distributed in the manner described under "Profits and Losses, Tax
Credits and Cash Distributions - Sale or Refinancing Proceeds."
Removal of WNC & Associates, Inc.
The Partnership Agreement provides that investors owning more than 50% of
the Units in a Series may remove WNC & Associates, Inc. as the fund manager of
the Series and elect a new fund manager. If WNC & Associates, Inc. is removed or
withdraws, the fair market value of its interest in the Series will be
determined by agreement of WNC & Associates, Inc. and the Series or, if they
cannot agree, by arbitration. The Series will deliver a promissory note to WNC &
Associates, Inc. for such fair market value payable in no less than five equal
consecutive annual installments commencing on the first anniversary of the date
of such note. Payments required under such promissory note could result in the
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Series having to sell one or more of its interests in Local Limited
Partnerships. Such promissory note will bear simple interest payable on the last
day of each calendar quarter in arrears at the prime rate of Southern California
Bank (i.e., the prime or reference rate of interest charged by the Bank on
short-term unsecured loans to its most creditworthy customers). Despite the
preceding, if the note is delivered following a voluntary withdrawal of WNC &
Associates, Inc., then:
o such note will neither be secured nor bear interest, and
o the principal payable will be limited in amount and date of payment to
distributions which WNC & Associates, Inc. would have received under the
Partnership Agreement had it not withdrawn.
Within 120 days after the determination of the fair market value of WNC &
Associates, Inc.'s interest, the Series may, with the consent of a majority of
its investors, sell such interest to one or more persons at a purchase price
equal to its fair market value. The Series may admit the purchaser or purchasers
as a substitute fund manager or fund managers.
Voting Rights
Investors owning more than 50% of the Units in a Series may amend the
Partnership Agreement of the Series at any time. However, an amendment which
would adversely affect the limited liability of an investor or the rights,
powers, duties or compensation of WNC & Associates, Inc. or any of its
affiliates will also require the consent of such person. WNC & Associates, Inc.
may unilaterally amend the Partnership Agreement (i) to admit transferees of
Units as described in this Prospectus and (ii) for the benefit of (or not
adverse to) the interests of the investors as specified in Section 12.1.2 of the
Partnership Agreement.
In certain circumstances investors owning more than 50% of the Units in a
Series must approve the removal of WNC & Associates, Inc. and the admission of a
successor or additional fund manager. See "Removal of WNC & Associates, Inc."
above in this section and "Management."
WNC & Associates, Inc. may not, without the consent of investors owning more
than 50% of the Units in the Series:
o sell all or substantially all the assets of the Series at one time, except
in connection with the liquidation and winding up of the Series business
upon its dissolution;
o cause the merger or other reorganization of the Series; or
o elect to dissolve the Series.
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However, Section 10.3 of the Partnership Agreement imposes strict
limitations on the ability of a Series to propose or participate in a roll-up. A
roll-up is a transaction involving the acquisition, merger, conversion or
consolidation of a Series and the issuance of securities of another entity.
Investors owning more than 50% of the Units in a Series could vote to revise or
eliminate these limitations. Nonetheless, in addition to these limitations, the
California Revised Limited Partnership Act, which governs each Series, gives
limited partners who dissent to a roll-up the right to require that their
limited partnership repurchase their interests at a price equal to their fair
market value.
Meetings
There will be no annual or other periodic meetings of the investors.
However, WNC & Associates, Inc.:
o may call a meeting at any time, and
o must call a meeting upon written request of investors in a Series owning 10%
or more of the Units in the Series. In addition, WNC & Associates, Inc. may,
and upon request of investors owning 10% or more of the Units in a Series,
must submit any matter (upon which they are entitled to vote) to the
investors in the Series for a vote without a meeting.
Books and Records
Each Series will maintain its books and records at the principal office of
WNC & Associates, Inc. Currently, the address is 3158 Redhill Avenue, Costa
Mesa, California 92626. The investors of a Series may inspect, reproduce and
examine the Series' books and records at all reasonable times. Upon request, WNC
& Associates, Inc. will promptly deliver to an investor of a Series a copy of
the following books and records of the Series:
o the Certificate of Limited Partnership and all amendments thereto;
o the Partnership Agreement, and all amendments thereto; and
o a current list of the full name and last known address of each partner in
the Series. If such a list is requested, WNC & Associates, Inc. is required
to provide it within 10 days of the receipt of the request. The list must
be arranged in alphabetical order, on white paper and in a readily readable
form. Under California law, if WNC & Associates, Inc. fails to provide the
list of partners and a court finds that the failure to do so was without
justification, the court may award, in addition to any actual damages
suffered, an amount sufficient to reimburse the investor plaintiffs for
reasonable expenses.
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TRANSFERABILITY OF UNITS
Article 7 of the Partnership Agreement imposes restrictions on the transfer
of Units. To transfer Units, a written instrument of assignment must be signed
by both the transferor and the transferee and returned to the Series, together
with payment of all reasonable legal fees and filing costs in connection with
the transfer, but not to exceed $100. WNC & Associates, Inc. may request:
o additional documentation to evidence the authority of the parties to the
assignment and compliance of the assignment with the terms of the
Partnership Agreement; and
o the consent, if required, of the Commissioner of Corporations of the State
of California or of any other state official who asserts jurisdiction over
such assignment.
The Series will not issue any certificates representing the Units.
An assignment will not take effect for any purpose until it has been
registered on the books of the Series. Similarly, a pledge or other encumbrance
of a Unit will not be effective unless so registered.
On the death of an investor, his executor or administrator will have all
rights of the investor for the purpose of settling his estate, including the
same power as the decedent had to assign his interest to another party.
WNC & Associates, Inc. does not intend or anticipate that a public market
will develop for the purchase and sale of Units. Therefore, investors may be
unable to sell their Units promptly or at a reasonable price. The Units should
only be considered as a long-term investment. See "Risk Factors - Series-Related
Risks - Lack of Liquidity of Investment."
If an investor is able to negotiate a sale, exchange or other transfer of
his Units, WNC & Associates, Inc. may deny or defer the effectiveness of the
transfer if necessary, in the opinion of counsel, to avoid:
o the premature termination of the Series for tax purposes;
o the disqualification of the Series for low income housing tax credits under
Code Section 42(j)(5)(B);
o the classification of the Series as a publicly-traded partnership or as an
association taxable as a corporation for Federal income tax purposes; or
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o the recapture of tax credits.
In addition, no transfers may be made to tax-exempt or foreign entities, or
through a securities market or a secondary market (or the substantial equivalent
thereof).
Section 7 of the Partnership Agreement gives WNC & Associates, Inc. broad
powers to enforce or modify these provisions. WNC & Associates, Inc. will review
from time to time the restrictions on transfer of Units. It will modify such
restrictions to make them less restrictive if the Series receives an opinion of
counsel stating that such modification may be made without material adverse tax
consequences.
WNC & Associates, Inc. will not recognize a transfer (except for a transfer
by gift, inheritance, bequest or family dissolution, or a transfer to an
affiliate of the transferor) if, immediately thereafter, any transferor or
transferee would hold a fraction of a Unit.
A Series will recognize transfers as of the first day of the fiscal quarter
following the fiscal quarter in which the Series receives appropriate
documentation relating to the transfer, together with the payment described
above. Cash Available for Distribution (i.e. distributions of cash other than
cash resulting from a sale or refinancing), if any, will be allocated to the
persons recognized as Unit holders on the last day of each fiscal quarter.
Except as provided in the next sentence, taxable income, tax loss and tax
credits will be allocated between a transferor and a transferee based upon the
number of quarterly periods that each was recognized as the holder of a Unit.
Proceeds from a sale or refinancing, if any, will be distributed, and all
related taxable income and tax loss will be allocated, to the persons recognized
as the holders of Units on the date on which the sale or refinancing occurred.
For this purpose, transfers will be recognized as of the date specified by the
transferor and the transferee in the instrument of assignment or, if no date is
specified, the first day of the fiscal quarter following the fiscal quarter in
which the Series receives the instrument of assignment.
Adverse Federal income tax consequences may result from any transfer of
Units. Investors are advised to consult their tax advisers before any such
transfer. See "Federal Income Tax Considerations."
A transferee may be admitted to a Series and thereby become entitled to all
the rights of a limited partner, by:
o obtaining the consent of WNC & Associates, Inc., and
o signing the Partnership Agreement and otherwise complying with the document-
execution requirements of Section 13.3 of the Partnership Agreement.
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WNC & Associates, Inc. may only withhold its consent to substitution for the
purpose of preserving the Partnership's tax status or to avoid adverse legal
consequences to the Partnership. The rights of an assignee who does not become a
limited partner will be limited to the right to receive allocations of tax items
and cash distributions, and will not include other rights, such as the voting
rights described in "Summary of Certain Provisions of the Partnership
Agreement."
Transfer of Units by or to California Residents
In connection with state securities laws restrictions on transfer, Section
260.141.11 of the Rules of the California Commissioner of Corporations
(Commissioner") states:
"(a) The issuer of any security upon which a restriction on transfer
has been imposed pursuant to Sections 260.141.10 or 260.534 shall cause
a copy of this section to be delivered to each issuee or transferee of
such security at the time the certificate evidencing the security is
delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the
prior written consent of the Commissioner (until this condition is
removed pursuant to Section 260.141.12 of these rules), except: (1) to
the issuer; (2) pursuant to the order or process of any court; (3) to
any person described in Subdivision (i) of Section 25102 of the Code or
Section 260.105.14 of these rules; (4) to the transferor's ancestors,
descendants, or spouse, or any custodian or trustee for the account of
the transferor or the transferor's ancestors, descendants, or spouse;
or to a transferee by a trustee or custodian for the account of the
transferee or the transferee's ancestors, descendants, or spouse; (5)
to holders of securities of the same class of the same issuer; (6) by
way of gift or donation inter vivos or on death; (7) by or through a
broker-dealer licensed under the Code (either acting as such or as a
finder) to a resident of a foreign state, territory, or country who is
neither domiciled in this state to the knowledge of the broker-dealer,
nor actually present in this state if the sale of such securities is
not in violation of any securities law of the foreign state, territory,
or country concerned; (8) to a broker-dealer licensed under the Code in
a principal transaction, or as an underwriter or member of an
underwriting syndicate or selling group; (9) if the interest sold or
transferred is a pledge or other lien given by the purchaser to the
seller upon a sale of the security for which the Commissioner's written
consent is obtained or is not required; (10) by way of a sale qualified
under Section 25111, 25112, 25113, or 25121 of the Code, of the
securities to be transferred, provided that no order under Section
25140 or subdivision (a) of Section 25143 of the Code is in effect with
respect to such qualification;
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(11) by a corporation to a wholly-owned subsidiary of such corporation,
or by a wholly-owned subsidiary of a corporation to such corporation;
(12) by way of an exchange qualified under Section 25111, 25112, or
25113 of the Code, provided that no order under Section 25140 or
subdivision (a) of Section 25143 of the Code is in effect with respect
to such qualification; (13) between residents of foreign states,
territories, or countries who are neither domiciled nor actually
present in this state; (14) to the State Controller pursuant to the
Unclaimed Property Law or to the administrator of the unclaimed
property law of another state; or (15) by the State Controller pursuant
to the Unclaimed Property Law or by the administrator of the unclaimed
property law of another state if, in either such case, such person (i)
discloses to potential purchasers at the sale that transfer of the
securities is restricted under this rule, (ii) delivers to each
purchaser a copy of this rule, and (iii) advises the Commissioner of
the name of each purchaser; (16) by a trustee to a successor trustee
when such transfer does not involve a change in the beneficial
ownership of the securities; or (17) by way of an offer and sale of
outstanding securities in an issuer transaction that is subject to the
qualification requirement of Section 25110 of the Code but exempt from
that qualification requirement by subdivision (f) of Section 25102;
provided that any such transfer is on the condition that any
certificate evidencing the security issued to such transferee shall
contain the legend required by this section.
(c) The certificates representing such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any
transfer thereof, shall bear on their face a legend, prominently
stamped or printed thereon in capital letters of not less than 10-point
size, reading as follows:
'IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OR THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT
THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE
STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.'"
The Series will not issue certificates representing the Units.
REPORTS
Within 120 days after the end of each year, each Series will distribute to
its investors:
o financial statements of the Series for such year, which will include a
balance sheet and statements of operations, partners' equity and cash flows
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prepared on an accrual basis in accordance with generally accepted
accounting principles and accompanied by an auditor's report containing an
opinion of an independent accountant;
o a report of any distributions made during the year; and
o a report of the Series' significant activities during such year.
In addition, each Series will distribute to its investors unaudited
quarterly financial statements for each of the first three quarters of each
year, together with a report of the Series' activities during such quarter.
Quarterly financial statements will consist of a balance sheet and statements of
operations, partners' equity and cash flows.
Within 75 days after the end of each year, each Series will distribute to
its investors such tax information as is necessary for the preparation of their
Federal and state income tax returns.
Until the proceeds of its offering are fully invested or returned to its
investors, each Series will also furnish to its investors, at least quarterly, a
report concerning the investments of the Series.
Within 60 days after the end of each of the first three quarters of each
year, each Series will distribute to its investors a detailed statement
describing any fees and other compensation paid by the Series or a Local Limited
Partnership during such quarter to WNC & Associates, Inc. or its affiliates. In
addition, each Series will send to its investors within 120 days after the end
of each year a detailed statement of any transactions between the Series or a
Local Limited Partnership and WNC & Associates, Inc. or its affiliates and of
the fees, commissions, compensation and other benefits paid or accrued to them
for the year.
WNC & Associates, Inc. expects that reporting requirements similar to those
set forth above will be included in the partnership agreement of each Local
Limited Partnership so that each Series will be able to prepare the reports set
forth above. WNC & Associates, Inc. will, to the extent it deems it appropriate,
transmit to the investors copies of all reports received by the Series from the
Local Limited Partnerships.
TERMS OF THE OFFERING AND PLAN OF DISTRIBUTION
Each Series is offering 25,000 Units for sale to the public. WNC &
Associates, Inc. will determine in its discretion when the Series 7 offering
will terminate and the Series 8 offering will begin. No Units in a Series will
be sold unless the Series receives and accepts at least $1,400,000 in cash
subscriptions before termination of its offering. See "Escrow Arrangements"
below. In no event will any offering be
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conducted more than two years from the date of this Prospectus. All Units will
be sold at a price of $1,000 per Unit (except as discussed below under "Volume
Discounts" and "Purchases by Affiliates and Designated Investors"), payable in
cash upon subscription (except as discussed below under "How to Subscribe").
Issuance of Units in Series
As indicated above, the Units are being offered in two Series. Each Series
is organized as a separate California limited partnership. Except as set forth
below, each Series will account for its Units separately, and will issue
information with respect to its Units separately. Organizational and offering
expenses may be higher for one Series than for the other Series. If so, one
Series will reimburse the other in such a manner so that the pro rata portion of
organizational and offering expenses borne by each Series is the same, except to
the extent the difference is attributable to volume discounts or purchases by
affiliates or Designated Investors (as discussed below). With respect to
operating cash expenses:
o those expenses allocable to an interest in a Local Limited Partnership will
be borne by the Series which owns such interest, and
o those expenses not so allocable will be apportioned among and borne by the
two Series based upon the advice of the Series' accountants.
Underwriting Arrangements
Units are being offered on an all-or-nothing minimum, best-efforts maximum,
basis which means that no one is guaranteeing that any number of Units will be
sold. The Units are being offered through WNC Capital Corporation, as the
"Dealer Manager," and through other broker-dealer members firms of the NASD
selected by the Dealer Manager. WNC Capital Corporation will manage the selling
group and provide certain wholesaling services, and may participate in the
offering. WNC Capital Corporation is a wholly-owned subsidiary of WNC &
Associates, Inc. formed to participate in offerings sponsored by WNC &
Associates, Inc. See "Conflicts of Interest" and "Management."
As discussed under "Management Compensation," WNC Capital Corporation will
receive as compensation:
o retail selling commissions in an amount of up to 7% of the capital
contributions, and
o dealer manager fees in an amount of up to 2% of the capital contributions.
WNC & Associates, Inc. will receive a nonaccountable o&o expense reimbursement
in an amount equal to 4% of the capital contributions. From the nonaccountable
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o&o expense reimbursement, WNC & Associates, Inc. may pay to WNC Capital
Corporation:
o up to 1% of the capital contributions as additional underwriting
compensation, and
o up to 0.5% of the capital contributions for accountable, bona fide due
diligence activities.
WNC Capital Corporation may reallow any portion of its underwriting compensation
(in the maximum amount of 10% of capital contributions, plus 0.5% of capital
contributions for due diligence expenses, as aforesaid) to the NASD-member firms
participating in the offering:
o proportionately in accordance with the number of Units sold by them in
payment for retailing and wholesaling activities,
o in reimbursement of selling and due diligence activities, and
o subject to the requirements set forth hereinafter, in payment of cash or
noncash sales incentive programs.
Subject to the prior approval of the NASD and compliance with the NASD's Conduct
Rules, a Series may establish cash or noncash sales incentive programs. The
aggregate value of any noncash incentive awards paid to individual registered
representatives during any year cannot exceed $100. Sales incentives with a
value in excess of $100, if any, must consist of cash and must be paid directly
to the NASD-member firm. In that case the NASD-member firm will have sole
discretion as to how such incentives will be distributed to their individual
registered representatives.
In no event will the aggregate of all underwriting compensation paid to WNC
Capital Corporation and the NASD-member firms participating in the offering
exceed 10% of the capital contributions, plus a maximum of 0.5% of capital
contributions for expenses incurred for accountable, bona fide due diligence
purposes.
Underwriting compensation of any form payable with respect to proceeds
represented by investor promissory notes will be payable only when the
promissory notes are paid in cash.
Each Series has agreed to indemnify WNC Capital Corporation and the other
broker-dealer firms participating in the offering against certain liabilities
resulting from untrue statements of material facts (or the omission to state
material facts) in this Prospectus, the Registration Statement or supplemental
sales literature authorized for use by the Series. These liabilities include
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liabilities under the Securities Act of 1933. In the opinion of the SEC,
indemnification for liabilities arising out of the Securities Act of 1933 is
against public policy and therefore unenforceable.
Volume Discounts
As indicated above in this section and under "Management Compensation," each
Series will usually pay up to 7% of capital contributions as retail selling
commissions. Each Series also will up to 2% of capital contributions as dealer
manager fees and up to 7% of capital contributions as acquisition and investment
management fees. However, in connection with subscriptions for 100 or more of
the Units in one or more Series or other real estate syndications sponsored by
WNC & Associates, Inc., retail selling commissions will be determined in
accordance with the following schedule:
Amount of Units Subscribed Maximum Retail Selling
to by Any "Purchaser" Commissions Per Unit Price Per Unit
- --------------------- -------------------- --------------
Up to 99 7.0% ($70) $1,000
100 to 199 5.5% ($55) $ 985
200 to 299 4.5% ($45) $ 975
300 to 399 3.5% ($35) $ 965
400 to 499 2.5% ($25) $ 955
500 and over (1) 1.5% ($15) $ 945
- ----------------
(1) A Series may further reduce the retail selling commission with respect to
subscriptions to 500 Units and over, but any such reduction must be the same for
investors making investments of substantially the same size.
Reductions in retail selling commissions apply in a graduated manner. For
example, in connection with a purchase of 299 Units:
o retail selling commissions of $70 per Unit will be payable in connection
with the first 99 Units
o retail selling commissions of $55 per Unit will be payable in connection
with the next 100 Units
o retail selling commissions of $45 per Unit will be payable in connection
with the remaining 100 Units.
With respect to acquisition and investment management fees payable to WNC &
Associates, Inc. and dealer manager fees payable to WNC Capital Corporation, WNC
& Associates, Inc. and WNC Capital Corporation have reserved the right to agree
upon lower fees in connection with subscriptions to a significant number of
Units in one or more Series or other real estate syndications sponsored by WNC &
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Associates, Inc. All such discounts will be the same for investors making
investments of substantially the same size.
Subscriptions to one or more Series or other real estate syndications
sponsored by WNC & Associates, Inc. may be combined for the purpose of
determining the amounts reimbursable in the case of subscriptions made by any
"Purchaser" (as that term is defined below.) Any request to combine more than
one subscription must be made in writing on a form which can be obtained from
WNC & Associates, Inc. If all of the information required in the form, including
an indication that subscriptions are to be combined, is not provided, the Series
will not be responsible for failing to properly combine subscriptions. Any
request to combine subscriptions will be subject to verification by the Series
that all such subscriptions were made by a single "Purchaser" as defined below.
If a "Purchaser" subscribes for additional Units after his initial purchase
of Units, no reimbursement will be made with respect to any commissions or fees
paid or payable in connection with the prior subscription(s).
For the foregoing purposes, the term "Purchaser" includes:
o an individual, his or her spouse and their children under the age of 21, who
purchase the Units for his or her or their own account,
o a corporation, partnership, association, joint-stock company, trust, fund or
any organized group of persons, whether incorporated or not, provided that
any such entity must have been in existence for at least six months before
purchasing the Units,
o investors whose funds are managed by a single professional investment
adviser registered under the Investment Advisers Act of 1940, and
o investors for whom a designated bank, insurance company, trust company or
other designated entity exercises discretionary investment responsibility.
Any reduction in commissions or fees will be prorated among the separate
subscribers considered part of a "Purchaser."
Purchases by Affiliates and Designated Investors
Affiliates. Before this offering John B. Lester, Jr., a shareholder,
officer and director of WNC & Associates, Inc., purchased one Unit in Series 7
at a price of $1,000. Similarly, Mr. Lester or another affiliate of WNC &
Associates, Inc. will purchase one Unit at a price of $1,000 in Series 8 before
commencement of that Series' offering. Neither WNC & Associates, Inc. nor its
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affiliates presently intend to purchase additional Units. They are
permitted to purchase an unlimited number of Units for any reason. Any Units
acquired by WNC & Associates, Inc. and its affiliates will not be applied to the
requirement that a minimum of $1,400,000 in subscription funds be received for a
Series. WNC & Associates, Inc. and its affiliates will hold all Units which they
acquire for investment and not for distribution. Any purchase of Units by WNC &
Associates, Inc. and its affiliates:
o will be for the same price and subject to the same terms as all other Units
issued by the Series,
o will be fully disclosed to all investors, and
o will provide the purchaser with the same rights as other purchasers of
Units, except that neither WNC & Associates, Inc. nor any of its affiliates
generally will have any right to vote such Units.
Designated Investors. The NASD-member firms participating in the offering,
and their employees (collectively referred to herein as "Designated Investors"),
may purchase Units on the same terms and conditions as other purchasers, except
that they will not pay the 7% retail selling commission. "Designated Investors"
also will include:
o clients of an investment adviser who have been advised by such adviser on an
ongoing basis regarding investments other than investments in the Units,
o who are not being charged by such adviser or its affiliates, through the
payment of commissions or otherwise, for the advice rendered by such adviser
in connection with the purchase of Units,
provided, such adviser
o is registered under the Investment Advisers Act of 1940, as amended,
o is registered as a broker-dealer under the Securities Exchange Act of 1934,
and
o has executed a Soliciting Dealer Agreement with WNC Capital Corporation.
In connection with any purchases by Designated Investors, the proceeds to
the Series, net of retail selling commissions and any reductions thereof, will
be the same. Neither WNC & Associates, Inc. nor its affiliates may be a
Designated Investor.
Investors who qualify as Designated Investors are urged to consider the
provisions of the Tax Reform Act of 1984 relating to the tax status of certain
fringe benefits, including employee discounts.
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How To Subscribe
In order to purchase Units, the subscriber must complete and execute the
Investor Form accompanying this Prospectus and deliver it to his account
executive. A specimen of the Investor Form is attached as part of Exhibit C to
the Prospectus. Execution copies of the Investor Form may be obtained from
NASD-member firms participating in the offering. Certain NASD-member firms may
use alternative investor forms.
The minimum investment is five Units ($5,000). Employees of WNC &
Associates, Inc. and its affiliates and investors in limited partnerships
previously sponsored by WNC & Associates, Inc. may purchase a minimum of two
Units ($2,000). After an investor has purchased the required minimum number of
Units in any Series, he may make investments in increments of $1,000 in the same
or any later series. Subscriptions for fewer than 20 Units must be accompanied
by a check for $1,000 per Unit payable to "Southern California Bank -
WNC/HTCFVI." Investors who subscribe for 20 Units ($20,000) or more in any one
Series may elect to utilize an installment payment method. Under the installment
payment method, subscriptions need be accompanied by a check for only $500 per
Unit, with the other $500 represented by a promissory note. The promissory note
will be payable with interest in a single installment on:
o January 31, 2001, if the investor subscribes between the date hereof and
June 30, 2000,
o June 30, 2001, if the investor subscribes between July 1, 2000 and December
31, 2000, or
o the later of the date of subscription or January 31, 2002, if the investor
subscribes after December 31, 2000.
Each promissory note will be a full recourse obligation of the investor and will
bear interest at a fixed rate equal to the one-year Treasury Bill rate, such
rate to be determined quarterly. See "Risk Factors - Series-Related Risks -
Obligations for Capital Contributions."
Despite the preceding, WNC & Associates, Inc. may permit an investor who
subscribes for 500 or more Units in any one Series to schedule payment of the
deferred portion beyond the foregoing dates and/or to pay the deferred portion
in more than one deferred installment. However, the total purchase price due
from such investor must be paid within two years following the earlier of (i)
the completion of the Series' offering, or (ii) one year following the effective
date of the Series' offering. WNC & Associates, Inc. may agree to a lower
interest rate than aforesaid on a promissory note for investors (i) that
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purchase 500 or more Units in any one Series and (ii) that are corporations
with a credit rating by Standards & Poor's of A or better. In no event may the
interest rate be lower than 3% per annum.
Completed Investor Forms and checks should be sent to Southern California
Bank, the escrow agent, at the following address:
Southern California Bank
4100 Newport Place, Suite 100
Newport Beach, CA 92660
Attention: WNC Escrow Manager
Each investor whose subscription is accepted will receive a letter of
welcome from WNC & Associates, Inc. stating the amount of the investment and the
number of Units purchased. No sale will be deemed complete until at least five
business days after the investor has received a Prospectus.
Escrow Arrangements
Each Series will place all subscribers' funds and promissory notes it
receives in an escrow account established by the Series with Southern California
Bank, Newport Beach, California, at the Series' expense. Under the Escrow
Agreement the Bank, as escrow agent, will deposit escrowed funds in accordance
with instructions from WNC & Associates, Inc. in short-term U.S. government
securities, securities issued or guaranteed by the U.S. government, certificates
of deposit or time or demand deposits in commercial banks.
Upon receipt by a Series of a minimum of $1,400,000 in cash capital
contributions, the Series will admit the subscribers for such Units. Southern
California Bank will release to the Series all cash and promissory notes which
it then holds. Promptly after the release to a Series of the subscribers' cash
and promissory notes, Southern California Bank will pay to the subscribers any
interest earned on the cash held in escrow. Cash and promissory notes received
from later subscribers to the Series will continue to be placed in escrow. The
Series will admit additional subscribers on a monthly (or more frequent) basis
until the termination of the Series' offering.
Cash and promissory notes of investors whose subscriptions are rejected will
be returned to them promptly after rejection, together with any interest
actually earned on the cash portion of the subscription while held in escrow.
A subscriber may not terminate his subscription. If a Series does not
receive a minimum of $1,400,000 in cash capital contributions within one year
from the commencement of its offering, the Series will cancel all its existing
subscriptions. All funds and promissory notes held in escrow will be released
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<PAGE>
from escrow and returned promptly to the subscribers together with all
interest earned on the cash portion of the subscription proceeds while in
escrow.
Pending the receipt of the initial $1,400,000 of cash capital contributions,
a Series may borrow funds from any source to pay all or a portion of the
commissions, fees and reimbursements to which NASD-member firms would become
entitled after the receipt of the initial $1,400,000 of cash capital
contributions. The recipient must agree to return all amounts received by it in
the event the Series does not receive the initial $1,400,000 of cash capital
contributions. The Series would repay the borrowed funds only after the receipt
of the initial $1,400,000 of cash capital contributions.
SALES MATERIAL
Each Series may use certain materials in addition to this Prospectus in
connection with its offering of Units. Such material may consist of sales
brochures which the Series will distribute together with this Prospectus,
"tombstone" advertisements, invitations to seminars, prospecting letters,
videotapes and slide presentations.
The Series have not authorized the use of sales material other than that
described above. The offerings of Units are made only by means of this
Prospectus. Although the information contained in the Series' sales material is
believed not to conflict with any of the information contained in this
Prospectus, such material does not purport to be complete and should not be
considered as part of this Prospectus, as being incorporated in this Prospectus
by reference or as forming the basis of the offering of the Units.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
Each Series has only nominal funds as it has not yet commenced operations
and the capital anticipated to be raised through its public offering of Units
has not yet become available.
Each Series plans to raise equity capital from investors by means of its
public offering, and then to apply such funds, including the installment
payments on the investor promissory notes as received, to the purchase price and
acquisition fees and costs of Local Limited Partnerships, reserves and expenses
of the offering.
It is not expected that any of the Local Limited Partnerships will generate
cash from operations sufficient to provide distributions to investors in any
significant amount. Cash from operations, if any, would first be used to meet
operating expenses of the Series, including the payment of the asset management
fee. See "Management Compensation."
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Investments in Local Limited Partnerships will not be readily marketable and
may be affected by adverse general economic conditions which, in turn, could
substantially increase the risk of operating losses for the apartment complexes,
the Local Limited Partnerships and the Series. These problems may result from a
number of factors, many of which cannot be controlled. See "Risk Factors -
Investment Risks - Risks of Real Estate Ownership." Nevertheless, WNC &
Associates, Inc. anticipates that capital raised from the sale of the Units will
be sufficient to fund the Series' future investment commitments and proposed
operations.
Each Series will establish working capital reserves of at least 3% of its
capital contributions. WNC & Associates, Inc. believes this amount will be
sufficient to pay the operating costs and administrative expenses of the Series,
which include:
o the asset management fee to WNC & Associates, Inc.,
o expenses attendant to the preparation of tax returns,
o expenses attendant to the preparation and dissemination of reports to the
investors, and
o other investor servicing obligations of the Series.
Liquidity would, however, be adversely affected by unanticipated or greater than
anticipated operating costs. Defaults or delays in payment of investor
promissory notes could also affect liquidity. Such payments are expected to fund
a portion of the working capital reserves. To the extent that working capital
reserves are insufficient to satisfy the cash requirements of a Series,
additional funds would be sought through bank loans or other institutional
financing. A Series may also use any cash distributions received from the Local
Limited Partnerships to pay operating or administrative expenses or to replenish
or increase working capital reserves.
Neither Series has the ability to assess its investors to provide additional
capital if needed by the Series or its Local Limited Partnerships. Accordingly,
if circumstances arise that cause a Series' Local Limited Partnerships to
require capital in addition to that contributed by the Series and any equity of
the Local General Partners, the only possible sources of such capital will be:
o the limited reserves of the Series,
o third-party debt financing (which may not be available as the apartment
complexes already will be substantially leveraged),
o advances of the Local General Partners,
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o advances of WNC & Associates, Inc.,
o other equity sources (which could adversely affect the Series' interest in
tax credits and cash distributions and result in adverse tax consequences to
the investors), or
o the sale of the apartment complexes (which could have the same adverse
effects as discussed in the preceding bullet).
There can be no assurance that funds from any of such sources would be
readily available in sufficient amounts to fund the capital requirements of the
Local Limited Partnerships in question. If such funds are not available, the
Local Limited Partnerships would risk foreclosure on their apartment complexes.
See "Risk Factors - Investment Risks - Risks Associated With Use of Leverage"
and "Investment Objectives and Policies - Use of Leverage."
The capital needs and resources of each Series are expected to undergo major
changes during its first several years of operations as a result of the
completion of its offering of Units and its acquisition of investments.
Thereafter, a Series' capital needs and resources are expected to be relatively
stable. See, however, "Risk Factors - Investment Risks - Risks of Real Estate
Ownership."
Year 2000 Issues
WNC & Associates, Inc. has assessed the Series' exposure to date-sensitive
computer systems that may not be operative after 1999. As a result of this
assessment, WNC & Associates, Inc. has executed a plan to minimize the Series'
exposure to financial loss and/or disruption of normal business operations that
may occur as a result of Year 2000 non-compliant computer systems.
Business Computer Systems. These systems include both computer hardware and
computer software applications relating to operations such as financial
reporting. The Series do not maintain their own computer systems. The Series
utilize the computer systems of WNC & Associates, Inc. WNC & Associates, Inc.
developed a compliance plan for each of its business computer systems, with
particular attention given to critical systems. WNC & Associates, Inc.
contracted with an outside vendor to evaluate, test and repair such systems. The
assessment consisted of determining whether critical computer hardware and
software was compliant with Year 2000. Incidences of non-compliance were found
with respect to computer software applications and were corrected. The vendor
found no instances of non-compliance with respect to computer hardware.
The Local General Partners or property managers maintain the business
computer systems that relate to the operations of the Local Limited
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Partnerships. The Local Limited Partnerships have not been identified.
Accordingly, there is no way to tell if the computer systems of the Local
General Partners or the property managers are Year 2000-compliant. WNC &
Associates, Inc. will obtain completed questionnaires from the Local General
Partners and property managers as the Local Limited Partnerships are identified
in order to assess their Year 2000-readiness. WNC & Associates, Inc. will
identify those Local General Partners and property managers that have systems
critical to the operations of the Local Limited Partnerships that are not Year
2000-compliant. WNC & Associates, Inc. will develop contingency plans (which may
include changing property managers) for those Local General Partners and
property managers:
o which have business computer systems which will not be Year 2000-compliant
before January 1, 2000, and
o where the lack of such compliance is determined to have a potential material
effect on the Series' financial condition and results of operations.
Outside Vendors. WNC & Associates, Inc. has obtained assurances from its
suppliers of electrical power and banking and telecommunication services that
their critical systems are all Year 2000-compliant. However, because WNC &
Associates, Inc. has no authority over those entities, there can be no assurance
that such information is correct. Therefore, each Series remains susceptible to
the consequences of third-party critical computer systems being non-compliant.
Personal Computers. WNC & Associates, Inc. has determined that its personal
computers and related software critical to the operations of the Series are Year
2000- compliant.
LEGAL MATTERS
Derenthal & Dannhauser, San Francisco, California, counsel for each Series,
will pass upon the legality of the Units offered hereby and certain Federal
income tax matters.
EXPERTS
The balance sheet of WNC Housing Tax Credit Fund VI, L.P., Series 7 as of
April 9, 1999 which is included in this Prospectus and in the Registration
Statement has been audited by BDO Seidman, LLP, independent certified public
accountants, as set forth in their report thereon appearing elsewhere herein and
in the Registration Statement and is included in reliance upon such report given
upon the authority of said firm as an expert in accounting and auditing.
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The balance sheet of WNC & Associates, Inc. as of August 31, 1998 which is
included in this Prospectus and in the Registration Statement has been audited
by Corbin & Wertz, independent certified public accountants, as set forth in
their report thereon appearing elsewhere herein and in the Registration
Statement and is included in reliance upon such report given upon the authority
of said firm as an expert in accounting and auditing.
The matters of law discussed in the section entitled "Federal Income Tax
Considerations" and under the captions "Risks Related to Tax Credits" and "Other
Tax Risks" in the section entitled "Risk Factors" and in the section entitled
"The Low Income Housing Tax Credit" as they relate to Federal income tax matters
have been reviewed by Derenthal & Dannhauser and are included herein in reliance
upon the authority of such firm as experts.
FURTHER INFORMATION
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits relating thereto which the Series have
filed with the Securities and Exchange Commission under the Securities Act of
1933, and to which reference is hereby made. Copies of the Registration
Statement and exhibits relating thereto are on file at the principal office of
the Securities and Exchange Commission at 450 Fifth Street, Northwest,
Washington, D.C. 20549, and may be obtained, upon payment of the fee prescribed
by the Commission, or may be examined without charge, at the offices of the
Commission. The Commission also maintains a website on the Internet
(http://www.sec.gov) that contains all filings respecting the Series.
GLOSSARY
In keeping with the requirements for the preparation of this Prospectus,
defined terms are used sparingly. Only the most common defined terms are used
throughout the Prospectus without definition when they are used. The definitions
of those terms are:
"Code" means the Internal Revenue Code of 1986, as amended, or any
corresponding provision or provisions of succeeding law.
"Fund Manager" means WNC & Associates, Inc.
"Local General Partners" means the persons who are general partners (or
managers in the case of a limited liability company) of a Local Limited
Partnership. Where reference is made to Local General Partners in respect of any
guarantees or undertakings provided to a Series, "Local General Partners" means
the persons actually providing such guarantees and undertakings.
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"Local Limited Partnership" means a limited partnership or a limited
liability company which owns or is developing or rehabilitating one or more low
income housing apartment complexes.
"Prospectus" means the prospectus contained in the registration statement
filed with the SEC with respect to the Units:
o in the final form in which said prospectus is filed with the SEC, and
o as thereafter supplemented by supplements filed with the SEC.
"SLP Affiliate" means WNC Housing, L.P. or another affiliate of WNC &
Associates, Inc. in its capacity as a special limited partner or member of a
Local Limited Partnership.
"Series" means WNC Housing Tax Credit Fund VI, L.P., Series 7, and/or WNC
Housing Tax Credit Fund VI, L.P., Series 8. "Series 7" means WNC Housing Tax
Credit Fund VI, L.P., Series 7. "Series 8" means WNC Housing Tax Credit Fund VI,
L.P., Series 8.
"Treasury Regulations" or "Regulations" means the Income Tax Regulations
promulgated under the Code, as such regulations may be amended from time to time
(including corresponding provisions of succeeding regulations).
"Unit" means an interest in a Series attributable to a capital contribution
of $1,000 (determined without regard to any discounts).
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INDEX TO FINANCIAL STATEMENTS
Page
WNC Housing Tax Credit Fund VI, L.P., Series 7
Report of Independent Certified Public Accountants (1)................FS-1
Balance Sheet, April 9, 1999..........................................FS-2
Notes to Balance Sheet................................................FS-3
WNC & Associates, Inc.
Independent Auditors' Report (1)......................................FS-7
Consolidated Balance Sheets, February 28, 1999 (Unaudited)
and August 31, 1998.................................................FS-8
Notes to Consolidated Balance Sheet...................................FS-9
- ------------
(1) TO BE PROVIDED BY AMENDMENT
FS-i
<PAGE>
TO BE PROVIDED BY AMENDMENT
FS-1
<PAGE>
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 7
(A California Limited Partnership)
(A Development-Stage Enterprise)
BALANCE SHEET
April 9, 1999
ASSETS
Cash $ 1,100
----------
$ 1,100
==========
LIABILITIES AND PARTNERS' EQUITY
Commitments and contingencies (Note 2)
Partners' equity (Note 1):
General partner $ 100
Original limited partner 1,000
----------
Total partners' equity 1,100
----------
$ 1,100
===========
See accompanying notes to balance sheet
FS-2
<PAGE>
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 7
(A California Limited Partnership)
(A Development-Stage Enterprise)
NOTES TO BALANCE SHEET
April 9, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
WNC Housing Tax Credit Fund VI, L.P., Series 7, (a California Limited
Partnership) (the "Partnership") was formed on June 16, 1997 under the laws of
the state of California and has not commenced operations. The Partnership was
formed to invest primarily in other limited partnerships (the "Local Limited
Partnerships") which own and operate multi-family housing complexes (the
"Housing Complexes") that are eligible for low income housing tax credits. The
local general partners (the "Local General Partners") of each Local Limited
Partnership will retain responsibility for maintaining, operating and managing
the Housing Complex.
The general partner is WNC & Associates, Inc. (the "General Partner").
Wilfred N. Cooper, Sr., through the Cooper Revocable Trust, owns just less than
66.8% of the outstanding stock of WNC & Associates, Inc. John B. Lester, Jr. is
the initial limited partner of the Partnership and owns, through the Lester
Family Trust, just less than 28.6% of the outstanding stock of WNC & Associates,
Inc. (see Note 2).
The balance sheet includes only activity relating to the business of the
Partnership, and does not give effect to any assets that the partners may have
outside of their interests in the Partnership, or to any obligations, including
income taxes, of the partners.
Allocations under the Terms of the Partnership Agreement
The General Partner has a 0.1% interest in operating profits and losses, taxable
income and losses and cash available for distribution from the Partnership. The
limited partners will be allocated the remaining 99.9% of these items in
proportion to their respective investments.
After the limited partners have received proceeds from a sale or refinancing
equal to their capital contributions and their return on investment (as defined
in the Partnership's First Amended and Restated Agreement of Limited
Partnership) and the General Partner has received a subordinated disposition fee
(as described in Note 2), any additional sale or refinancing proceeds will be
distributed 90% to the limited partners (in proportion to their respective
investments) and 10% to the General Partner.
Risks and Uncertainties
The Partnership's investments in Local Limited Partnerships are subject to
the risks incident to the management and ownership of low-income housing and to
the management and ownership of multi-unit residential real estate. Some of
these risks are that the low income housing credit could be recaptured and that
neither the Partnership's investments nor the Housing Complexes owned by the
Local Limited Partnerships will be readily marketable. To the extent the Housing
FS-3
<PAGE>
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 7
(A California Limited Partnership)
(A Development-Stage Enterprise)
NOTES TO BALANCE SHEET - CONTINUED
April 9, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Complexes receive government financing or operating subsidies, they may be
subject to one or more of the following risks: difficulties in obtaining tenants
for the Housing Complexes: difficulties in obtaining rent increases; limitations
on cash distributions; limitations on sales or refinancing of Housing Complexes;
limitations on transfers of Local Limited Partnership Interests: limitations on
removal of Local General Partners; limitations on subsidy programs; and possible
changes in applicable regulations. The Housing Complexes are or will be subject
to mortgage indebtedness. If a Local Limited Partnership does not makes its
mortgage payments, the lender could foreclose resulting in a loss of the Housing
Complex and low income housing credits. As a limited partner of the Local
Limited Partnerships, the Partnership will have very limited rights with respect
to management of the Local Limited Partnerships, and will rely totally on the
Local General Partners of the Local Limited Partnerships for management of the
Local Limited Partnerships. The value of the Partnership's investments will be
subject to changes in national and local economic conditions, including
unemployment conditions, which could adversely impact vacancy levels, rental
payment defaults and operating expenses. This, in turn, could substantially
increase the risk of operating losses for the Housing Complexes and the
Partnership. In addition, each Local Limited Partnership is subject to risks
relating to environmental hazards and natural disasters which might be
uninsurable. Because the Partnership's operations will depend on these and other
factors beyond the control of the General Partner and the Local General
Partners, there can be no assurance that the anticipated low income housing
credits will be available to Limited Partners.
In addition Limited Partners are subject to risks in that the rules governing
the low income housing credit are complicated, and the use of credits can be
limited. The only material benefit from an investment in Units may be the low
income housing credits. There are limits in the transferability of Units, and it
is unlikely that a market for Units will develop. All management decisions will
be made by the General Partner.
Method of Accounting for Investments in Limited Partnerships
The Partnership intends to account for its investments in limited partnerships
using the equity method of accounting, whereby the Partnership will adjust its
investment balance for its share of the Local Limited Partnership's results of
operations and for any distributions received. The accounting policies of the
Local Limited Partnerships are expected to be consistent with those of the
Partnership. Costs incurred by the Partnership in acquiring the investments will
be capitalized as part of the investment and amortized over 15 years (see Note
2).
FS-4
<PAGE>
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 7
(A California Limited Partnership)
(A Development-Stage Enterprise)
NOTES TO BALANCE SHEET - CONTINUED
April 9, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Losses from Local Limited Partnerships allocated to the Partnership will not be
recognized to the extent that the investment balance would be adjusted below
zero.
Offering Expenses
Offering expenses are expected to consist of underwriting commissions, legal
fees, printing, filing and recordation fees, and other costs incurred in
connection with the selling of limited partnership interests in the Partnership.
The General Partner is obligated to pay all offering and organization costs
inclusive of selling commissions and dealer manager fees, in excess of 13% of
the total offering proceeds. Offering expenses will be reflected as a reduction
of limited partners' capital.
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, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could materially differ from those estimates.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
The Partnership is offering up to 25,000 limited partnership units at $1,000 per
unit (the "Units"). The balance sheet does not include certain Partnership
legal, accounting, and other organization and offering costs paid and to be paid
by the General Partner and/or affiliates of the General Partner. If the minimum
offering amount of $1,400,000 is raised, the Partnership will be required to
reimburse the General Partner and/or its affiliates for such fees out of the
proceeds of the offering, up to certain maximum levels set forth below. In the
event the Partnership is unable to raise the minimum offering amount, the
General Partner will absorb all organization and offering costs.
The reader of this financial statement should refer to the WNC Housing Tax
Credit Fund VI, L.P., Series 7 and Series 8 prospectus dated May ___, 1999, for
a more thorough description of the Partnership, and the terms and provisions
thereunder.
The Units are being offered by WNC Capital Corporation, a wholly owned
subsidiary of the General Partner.
FS-5
<PAGE>
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 7
(A California Limited Partnership)
(A Development-Stage Enterprise)
NOTES TO BALANCE SHEET - CONTINUED
April 9, 1999
NOTE 2 - COMMITMENTS AND CONTINGENCIES, continued
If the minimum offering amount of $1,400,000 is raised, the Partnership will be
obligated to the General Partner or affiliates for certain acquisition,
management and other fees as set forth below:
Acquisition and investment management fees up to 7%, as defined, of the
gross proceeds from the sale of the Units as compensation for services
rendered in connection with the acquisition of Local Limited
Partnerships.
A non-accountable acquisition expense reimbursement equal to 2% of the
gross proceeds from the sale of the Units.
Payment of a non-accountable organization and offering expense
reimbursement, and reimbursement for dealer manager and selling
expenses advanced by the General Partner or affiliates on behalf of the
Partnership. These reimbursements plus all other organizational and
offering expenses, inclusive of sales commissions and dealer manager
fees, are not to exceed 13% of the gross proceeds from the sale of
Units.
An annual management fee equal to 0.2% of the invested assets of the
Local Limited Partnerships, as defined.
A subordinated disposition fee in an amount equal to 1% of the sales
price of real estate sold by the Local Limited Partnerships. Payment of
this fee is subordinated to the limited partners receiving
distributions equal to their capital contributions and their return on
investment (as defined in the Partnership's First Amended and Restated
Agreement of Limited Partnership) and is payable only if services are
rendered in the sales effort.
NOTE 3 - INCOME TAXES
No provision for income taxes will be recorded in the financial statements as
any liability for income taxes is the obligation of the partners of the
Partnership.
FS-6
<PAGE>
TO BE PROVIDED BY AMENDMENT
FS-7
<PAGE>
WNC & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, 1999 (unaudited) and August 31, 1998
<TABLE>
February 28, 1999 August 31, 1998
ASSETS (unaudited)
----------------- ---------------
<S> <C> <C>
Cash $ 244,976 $ 398,233
Fees receivable 1,624,195 2,350,122
Loans to property developers 531,486 544,108
Offering costs advanced 49,279 54,698
Due from partnerships 3,659,134 2,220,896
Advances to partnerships 284,278 383,420
Deferred income taxes - 15,751
Property and equipment, net 331,973 359,720
Other assets 621,793 326,072
---------------- ---------------
$ 7,347,114 $ 6,653,020
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable $ 2,728,000 $ 1,400,000
Accounts payable and accrued expenses 96,956 227,471
Income taxes payable 26,250 252,733
Interest payable - 12,351
Due to partnerships - 115,007
Deferred revenue 142,608 596,058
Accumulated losses of partnerships in
excess of investments 788,169 738,169
Deferred income taxes 104,340 -
Capitalized lease obligations 39,363 50,642
----------------- ---------------
Total liabilities 3,925,686 3,392,431
----------------- ---------------
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value, 1,000,000 shares
authorized, none issued - -
Common stock, no par value, 1,000,000 shares
authorized, 104,750 issued and outstanding 177,677 177,677
Due from officers and stockholders (137,000) (132,000)
Retained earnings 3,380,751 3,214,912
-----------------
Total stockholders' equity 3,421,428 3,260,589
----------------- ---------------
$ 7,347,114 $ 6,653,020
================= ================
</TABLE>
See accompanying notes to consolidated
balance sheets
FS-8
<PAGE>
WNC & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
February 28, 1999 (unaudited) and August 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
WNC & Associates, Inc., a California corporation, (the "Company"), acts as a
corporate general partner and syndicator of both public and private placement
real estate partnerships (the "Partnerships") which invest (either directly or
indirectly through other partnership interests) in multi-family housing
complexes throughout the United States. The majority of the multi-family housing
complexes qualify for low income housing tax credits and are subsidized through
various governmental housing assistance programs. The Company's interest in the
profits and losses of each Partnership, as general partner, varies between
one-tenth and five percent.
Principles of Consolidation
The consolidated balance sheets includes the accounts of the Company and its
wholly owned subsidiaries, WNC Capital Corporation and WNC Management, Inc. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
WNC Capital Corporation, a California corporation ("WNC Capital"), is registered
with the Securities and Exchange Commission as a broker/dealer in securities.
WNC Capital does not carry customer accounts or hold securities for the accounts
of its customers. WNC Capital provides wholesaling services to affiliates of the
Company. WNC Management, Inc., a California corporation ("WNC Management"), is
in the business of providing property management services to government assisted
multi-family housing complexes. WNC Management provides property management
services to certain affiliates of the Company.
Use of Estimates
The preparation of the consolidated balance sheets in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, as well
as disclosure of contingent assets and liabilities at the date of the
consolidated balance sheets. Areas that include significant estimates made by
management include, but are not limited to, the collectibility of fees
receivable, loans to property developers, offering costs advanced, amounts due
from partnerships, advances to partnerships and the determination of deferred
revenue and deferred income taxes. Actual results could materially differ from
those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, which are reflected in the consolidated
balance sheets at their historical cost basis, consist of cash, fees receivable,
loans to property developers, offering costs advanced, due from and advances to
Partnerships, notes payable, accounts payable and accrued expenses, and due to
Partnerships. The estimated fair market values of such instruments could differ
from the historical cost basis. Management believes that the carrying amounts of
FS-9
<PAGE>
WNC & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
February 28, 1999 (unaudited) and August 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(continued)
the Company's financial instruments generally approximate their fair market
values at February 28, 1999 (unaudited). In the case of certain financial
instruments that are non-interest bearing, it was not practical to determine
fair values due to the lack of a market for such financial instruments.
Concentration of Credit Risk
- ----------------------------
The Company, at times, maintains cash balances at certain financial institutions
in excess of federally insured amounts.
Risks and Uncertainties
- -----------------------
WNC Capital
Net Capital Requirements. WNC Capital, as a broker-dealer, is required
under provisions of Rule 15c-1 of the Securities and Exchange Act of 1934 to
maintain a ratio of aggregate indebtedness to net capital, as defined, not to
exceed 15 to 1. The basic concept of the rule is liquidity, its objective being
to require a broker/dealer to have, at all times, liquid assets sufficient to
cover its current indebtedness. WNC Capital is also required to maintain a
minimum net capital of $5,000 or 6-2/3% of aggregate indebtedness, as defined,
whichever is greater. At February 28, 1999, WNC Capital had net capital of
$22,738 (unaudited) ($21,269 at August 31, 1998) and a ratio of aggregate
indebtedness to net capital, as defined, of 2.68 to 1 (unaudited) (8.56 to 1 at
August 31, 1998).
Registration. WNC Capital must register with state departments that govern
compliance with securities laws in which WNC Capital does business, as well as
comply with each state's rules and regulations. Because of the various
compliance laws, there is a risk that one or more regulatory authorities could
determine that WNC Capital has not complied with securities laws necessary for
it to conduct business in a given state. Regulatory actions, if ever taken,
could have a material adverse effect on WNC Capital's financial condition.
Impact of Year 2000
The Company has assessed its exposure to date-sensitive computer systems
that may not be operative subsequent to 1999. As a result of this assessment,
the Company has executed a plan to minimize the exposure to financial loss
and/or disruption of normal business operations that may occur as a result of
Year 2000 non-compliant computer systems.
FS-10
<PAGE>
WNC & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
February 28, 1999 (unaudited) and August 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(continued)
Business Computer Systems. These systems include both computer hardware and
software applications relating to operations such as financial reporting. The
Company developed a compliance plan for each of its business computer systems,
with particular attention given to critical systems. The Company contracted with
an outside vendor to evaluate, test and repair such systems. The assessment
consisted of determining the compliance with Year 2000 of critical computer
software and hardware. Incidences of non-compliance were found with respect to
computer software applications and were corrected. The vendor found no instances
of non-compliance with respect to computer hardware.
Either local developers/general partners or property management companies
maintain the computer systems supporting the operations of the Partnerships and
multi-family housing complexes. The Company is in the process of obtaining
completed questionnaires from such affiliated entities to assess their
respective Year 2000 readiness. The Company intends to identify those entities
having systems critical to the operations of the multi-family housing complexes
that are not Year 2000 compliant. For such entities having business computer
systems which will not be Year 2000 compliant and where the lack of such
compliance is determined to have a potential material effect on the Company's
financial condition, the Company intends to develop contingency plans which may
include changing property management companies.
Outside Vendors. The Company has obtained assurances from its suppliers of
electrical power and banking and telecommunication services that their critical
systems are all Year 2000 compliant. There exists, however, inherent uncertainty
that all systems of outside vendors or other third parties on which the Company,
or local general partners and property management companies, rely will be Year
2000 compliant. Therefore, the Company remains susceptible to the consequences
of third party critical computer systems being non-compliant.
Personal Computers. The Company has determined that its personal computers
and related software critical to its operations are Year 2000 compliant.
Fees Receivable
- ---------------
Fees receivable consist primarily of syndication fees due from various
Partnerships in which the Company acts as general partner. Syndication fees are
received as the limited partners make their capital contributions to the
Partnerships. Fees receivable also include property management fees earned and
uncollected, and a receivable relating to the sale of the Company's interest in
certain low income housing tax credits (see Note 2).
FS-11
<PAGE>
WNC & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
February 28, 1999 (unaudited) and August 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(continued)
Loans to Property Developers
- ----------------------------
Loans to property developers are comprised of amounts loaned to, or
deposits made on behalf of, the general partners of limited partnerships in
which the Partnerships have or are expected to have an equity interest. All such
loans receivable are secured by the respective general partner's interest in the
limited partnerships. In the event a property is not acquired, deposits may not
be refunded to the Company. At the time management determines that a property
will not be acquired and associated deposit will not be recovered, such deposits
are written off.
Offering Costs Advanced
- -----------------------
Offering costs advanced represent amounts that the Company advances to the
Partnerships for certain costs and expenses to produce public and private
offering materials and to qualify the partnership interests for sale under
various state and federal securities laws. Such advances are repaid to the
Company from the Partnerships' initial capital proceeds and may be subject to
limitations, as defined, in the individual partnership agreements.
Due from Partnerships
- ---------------------
Due from Partnerships consists primarily of non-interest bearing amounts
advanced to Partnerships. Such amounts are invested by the Partnerships in
multi-family housing complexes as capital contributions pursuant to partnership
agreements and are due upon the Partnerships' collection of proceeds from sales
of Partnership units (see Note 4).
Property and Equipment
- ----------------------
Property and equipment and improvements that extend the economic life of
assets are recorded at cost and are depreciated using the straight-line method
over the estimated useful life of the related asset, generally from three to
five years. Leasehold improvements and capitalized leases are amortized over the
shorter of the life of the lease or estimated useful life of the related asset.
Investments in Partnerships
- ---------------------------
The Company records its investment in the Partnerships using the equity
method, which recognizes the Company's proportionate share of income or loss as
an increase or decrease in the investment in the Partnership. As the Company
acts as the General Partner, for those Partnerships where recourse losses have
occurred in excess of the Company's investment, amounts are recorded as
accumulated losses of Partnerships in excess of investments.
FS-12
<PAGE>
WNC & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
February 28, 1999 (unaudited) and August 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(continued)
Revenue Recognition
- -------------------
Syndication fees, which represent fees for selecting, evaluating,
structuring, negotiating and closing Partnership investments in multi-family
housing complexes, are recognized as income ratably as the Partnerships invest
in multi-family housing complexes under the provisions of Statement of Position
92-1 "Accounting for Real Estate Syndication Income." Syndication fees which are
collectible, pursuant to the terms of the partnership agreements, which have not
been recognized as fee income are deferred. As of February 28, 1999 and August
31, 1998, the amounts of deferred revenue were $0 (unaudited) and $596,058,
respectively. Syndication fees from certain private partnerships that were
scheduled to be collected more than one year from the Company's year end were
discounted to reflect their present value.
Commission revenue earned and related expenses associated with the operations of
WNC Capital are recorded when the related services are performed.
Asset management fees, which represent an annual fee for providing
administrative and management services for Partnerships and their investments,
are recognized as earned and to the extent that such fees are deemed to be
collectible, generally on a cash basis. Management fees, which represent WNC
Management's property management services, are recorded when earned.
Income Taxes
- ------------
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting For Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized as income in the period that
includes the enactment date (see Note 8).
NOTE 2 - FEES RECEIVABLE
Fees receivable from two Partnerships represented 48% (unaudited) and 47%
of total fees receivable as of February 28, 1999 and August 31, 1998,
respectively. As of August 31, 1998, fees receivable included $1,097,555 of fees
due from a Partnership from the sale of tax credits related to the Company's
general partnership interests in certain limited partnerships. Such fees were
collected in the subsequent period.
FS-13
<PAGE>
WNC & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
February 28, 1999 (unaudited) and August 31, 1998
NOTE 3 - LOANS TO PROPERTY DEVELOPERS
Loans to property developers consist of the following:
<TABLE>
February 28, 1999 August 31, 1998
(unaudited)
----------------- ---------------
<S> <C> <C>
Notes receivable due and collected
April 1999, bearing interest at
the Company's borrowing rate (8.0%
at February 28, 1999), secured by
the borrowers interest in the
properties to be constructed for
which amounts are borrowed $ 199,978 $ 95,100
Notes receivable due and collected
September 1998, bearing interest
at the Company's borrowing rate
secured by the borrowers interest
in the properties to be constructed
for which amounts are borrowed - 95,000
Notes receivable past due and in
the process of being extended,
generally bearing interest at the
Company's borrowing rate secured
by the borrowers interest in the
properties to be constructed for
which amounts are borrowed, net of
provisions for uncollectible amounts
approximating $ 699,000 331,508 354,008
--------------- --------------
$ 531,486 $ 544,108
=============== ==============
</TABLE>
NOTE 4 - DUE FROM PARTNERSHIPS
Due from Partnerships includes amounts advanced to Partnerships, which
invest in multi-family housing complexes in advance of limited partner
contributions. Amounts due from two Partnerships represented 95% (unaudited) and
67% of the total due from Partnerships as of February 28, 1999 and August 31,
1998, respectively. The Company had collected reimbursements totaling $2,257,085
(unaudited) through March 31, 1999.
Through August 31, 1998 (and February 28, 1999 - unaudited), the Company
loaned an aggregate $ 1,678,151 to a Partnership which invested the funds into a
property in Mississippi (the "Property"). The loan proceeds were used to
complete the repair of structural defects identified by the Company during 1997.
The Property was completed in 1998 and sold to an affiliated Partnership. During
1998, the Company received $700,000 as a partial repayment on the loan from
proceeds of the sale. Management estimate an additional $279,000 will be repaid
during 1999, in connection with a re-financing of the Property. The balance of
the loan was determined to be impaired and was written down in prior periods.
FS-14
<PAGE>
WNC & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
February 28, 1999 (unaudited) and August 31, 1998
NOTE 4 - DUE FROM PARTNERSHIPS (continued)
In connection with the partial repayment, the Company was required to
establish an escrow account for outstanding mechanics liens totaling $265,682,
which is included in due from Partnerships in the consolidated balance sheets.
Management has determined the estimated possible legal expenses related to the
settlement of outstanding mechanics liens to be $140,000, which have been fully
provided for in prior periods (see Note 9).
Due from partnerships also includes commissions and various expense
reimbursements due to WNC Capital of $32,301 (unaudited) and $51,581 as of
February 28, 1999 and August 31, 1998, respectively.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
February 28, 1999 August 31, 1998
(unaudited)
----------------- ---------------
<S> <C> <C>
Furniture, fixtures and computer
software $ 535,070 $ 516,617
Leasehold improvements 38,803 38,803
Equipment under capital leases 219,017 219,017
(Note 9) ----------------- ---------------
792,890 774,437
Less: accumulated depreciation
and amortization (460,917) (414,717)
----------------- ---------------
$ 331,973 $ 359,720
================= ===============
NOTE 6 - OTHER ASSETS
Other assets consist of the following:
February 28, 1999 August 31, 1998
----------------- ---------------
(unaudited)
Real estate joint venture costs $ 106,991 $ 106,991
Deposit on purchase of general
partner interests 175,000 200,000
Deposits, advances and other 189,802 19,081
Deferred acquisition costs 150,000 -
$ 621,793 $ 326,072
================= ===============
</TABLE>
FS-15
<PAGE>
WNC & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
February 28, 1999 (unaudited) and August 31, 1998
NOTE 6 - OTHER ASSETS (continued)
The Company assesses the recoverability of other assets by determining
whether the balance can be recovered from projected future cash flows that have
not been discounted. The amount of impairment, if any, is measured based on fair
value and charged to operations in the period determined by management.
Management has determined that the recoverability of real estate joint venture
costs and deposits on purchase of general partner interests as of February 28,
1999 (unaudited) and August 31, 1998 to be impaired by $85,236. Such amounts
were provided for in prior periods.
NOTE 7 - NOTES PAYABLE
The Company has two lines-of-credit with a bank. Line One allows for
borrowings of up to $1,500,000 at the bank's index rate plus 0.25% (8.0% at
February 28, 1999 - unaudited) and is unsecured. There were borrowings of
$828,000 (unaudited) and $1,400,000 outstanding under Line One as of February
28, 1999 and August 31, 1998, respectively. Line Two allows for borrowings of up
to $2,500,000 at the bank's index rate plus 0.25% (8.0% at February 28, 1999 -
unaudited). Line Two is collateralized by assignments of the Company's interests
in Partnership properties to be acquired for which amounts are borrowed.
Outstanding balances under Line Two were $1,900,000 ( unaudited) and $0 as of
February 28, 1999 and August 31, 1998, respectively.
Outstanding borrowings under the two lines of credit were repaid in full by
March 12, 1999 (unaudited), from collection of amounts due from partnerships and
fees receivable. The lines of credit are personally guaranteed by the majority
stockholder of the Company and mature on April 15, 1999. The lines of credit
require the Company to satisfy certain financial covenants and ratios. As of
February 28, 1999, the Company was in compliance (unaudited) with all such
covenants and ratios.
NOTE 8 - INCOME TAXES
The tax effect of significant temporary differences that give rise to the
Company's deferred tax liability as of August 31, 1998 are as follows:
Deferred tax assets:
Deferred revenue $ 132,436
Write-down of investments 41,215
Reserve for estimating legal costs 59,976
Alternative minimum tax credits 223,956
Low-income housing tax credits 86,773
State taxes 4,043
---------
548,399
FS-16
<PAGE>
WNC & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
February 28, 1999 (unaudited) and August 31, 1998
NOTE 8 - INCOME TAXES (continued)
Deferred tax liabilities:
Installment sale accounting
from the sale of tax credits (470,193)
Partnership's taxable income (61,645)
Other (810)
-----------
(532,648)
Deferred income taxes $ 15,751
=================
As of August 31, 1998, the Company has alternative minimum tax credits
available to offset future tax liabilities for federal and state purposes of
approximately $171,000 and $53,000, respectively. As of August 31, 1998, the
Company has low-income housing tax credits available to offset future tax
liabilities for federal and state purposes of approximately $81,000 and $6,000,
respectively, expiring through August 2013.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space, automobiles and furniture under operating
leases expiring through February 2002, and certain equipment under capital
leases expiring through January 2002. Monthly capital lease payments are
approximately $ 3,700. The leases are non-cancelable and require future minimum
lease payments as follows:
<TABLE>
Years ending Capital Operating
August 31, leases leases
<S> <C> <C>
1999 $ 30,504 $ 163,095
2000 14,059 71,961
2001 12,564 34,972
2002 5,235 14,707
Total minimum lease payments 62,362 $ 284,735
============
Less: amounts representing interest
at rates ranging from 9.3% to 12.5% (11,720)
--------
Present value of future minimum
capital lease obligations $ 50,642
============
</TABLE>
FS-17
<PAGE>
WNC & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
February 28, 1999 (unaudited) and August 31, 1998
NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)
Guarantees
- ----------
The Company is a guarantor of certain bank loans made to the Partnerships.
There were no amounts outstanding on such loans as of February 28, 1999
(unaudited) and August 31, 1998. These loans are repaid by the Partnerships as
the limited partners make their capital contributions to the respective
Partnerships.
Guarantees
- ----------
The Company serves as a limited and general partner to a certain limited
partnership. The developed property incurred significant cost overruns due to
defects in construction. As a result of such defects, the Company removed and
replaced the local general partner. In this capacity, the Company completed
construction of the property (see Note 4) and loaned the limited partnership
$1,678,151. The limited partnership has filed suit against the architects and
contractors. There have been various claims an counterclaims filed against the
limited partnership and certain liens placed on the property.
The ultimate outcome of the aforementioned actions is unknown at this time.
The Company has reserved an aggregate $839,151 of its due from Partnerships
which includes the estimated outcome of various claims filed. Management of the
Company does not believe that the additional effect on the consolidated balance
sheets upon the ultimate disposition of the aforementioned actions will be
material.
Equity Participation Agreement
- ---------------------------------
The Company has an equity participation agreement with a key officer of the
Company and his spouse. This agreement provided for an investment of $80,000 by
the Company to acquire a 50% interest in certain property, which was later
converted into real property for rental purposes, owned by the key officer and
his spouse. Pursuant to terms of this agreement, all income and losses arising
from the operations of the rental property, including the allocation of income
and losses upon a sale or refinancing, shall be allocated 50% to the Company and
50% to the key officer and his spouse.
Due from Officers and Stockholders
- ----------------------------------
The Company's majority stockholder, who is also an officer, has borrowed a
total of $95,000 from the Company under a 1993 note bearing interest at 7.5% per
annum. An officer and minority stockholder of the Company has borrowed $25,000
from the Company under a 1994 note bearing interest at 7.5% per annum. The
maturity date of the notes has been extended annually along with accrued
interest to March 31, 2000 (unaudited). The notes, together with accrued
interest, are reflected as a reduction of stockholders' equity in the
consolidated balance sheets.
FS-18
<PAGE>
EXHIBIT A
PRIOR PERFORMANCE TABLES
The tables set forth below present financial information with respect
to programs which were sponsored by the Sponsor. Each of these programs is
considered to have investment objectives similar to those of the Fund in that
they each own interests in local limited partnerships which own properties
generating low income housing credits or, in the case of the prior programs
included in Table IV and Table V, benefiting from some other form of Government
Assistance. However, the principal investment objective of the prior programs
included in Table IV and Table V was to provide income tax losses which its
investors could use to offset taxable income from other sources. None of these
tables are covered by the reports of independent public accountants set forth in
this document.
For additional information as to the investment objectives and policies
of such prior programs see "Prior Performance Summary." Additional information
concerning prior performance is included in Part II of the Registration
Statement of the Fund and in the Form 10-K annual reports for the public
programs which file such reports. Copies of these 10-K Forms are available to
any investor upon request to the Sponsor. Any such request should be directed to
the attention of Michael L. Dickenson, WNC & Associates, Inc. 3158 Redhill
Avenue, Suite 120, Costa Mesa, California 92626.
The purpose of the tables is to provide information on the prior
performance of these partnerships so as to permit a prospective purchaser of the
Units to evaluate the experience of the Sponsor in sponsoring such limited
partnerships. The tables consist of:
Table I Experience in Raising and Investing Funds
Table II Compensation to Sponsor
Table III Operating Results of Prior Programs
Table IV Results of Completed Programs
Table V Sales or Disposals of Properties
Definitions
The following terms used in the prior performance tables have the following
meanings:
A-1
<PAGE>
"Acquisition Cost" includes all costs related to the acquisition of local
limited partnership interests, including equity contributions, acquisition and
selection fees payable to the general partners and other fees and expenses
incident to the acquisition of local limited partnership interests.
"Capital Contributions" represents the contributions by investors in the prior
partnerships.
"GAAP" means generally accepted accounting principles as promulgated in the
United States.
"Months to Invest 90% of Amount Available for Investment" means the length of
time, in months, from the offering date to the date of the closing of
acquisitions of local limited partnerships which, in the aggregate, represented
the investment commitment of 90% of the amount available for investment.
"Percent leverage" means mortgage financing divided by total acquisition costs.
IT SHOULD NOT BE ASSUMED THAT INVESTORS IN THIS OFFERING WILL
EXPERIENCE RETURNS, IF ANY, COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN THE
PARTNERSHIPS DESCRIBED IN THE FOLLOWING TABLES. INVESTORS WILL NOT HAVE ANY
INTEREST IN ANY OF THE PARTNERSHIPS DESCRIBED IN THE TABLES OR IN ANY OF THE
PROPERTIES OWNED BY THE LOCAL LIMITED PARTNERSHIPS IN WHICH THOSE PARTNERSHIPS
HAVE INVESTED AS A RESULT OF THE ACQUISITION OF UNITS.
A-2
<PAGE>
TABLE I
TABLE I provides information regarding the raising and investing of funds by
partnerships sponsored by the Sponsor which raised funds during the three-year
period ended December 31, 1998. The table presents the aggregate dollar amount
of the offering, the percentage of dollars raised which were used to pay
offering costs, establish reserves and acquire investments, as well as
information regarding the percent of leverage and the timing for both raising
and investing funds. The information concerns investor capital contributions as
the sole source of funds for investment and excludes the nominal capital
contributions by the general partners.
A-3
<PAGE>
<TABLE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
(January 1, 1996 - December 31, 1998)
PUBLIC OFERINGS
HTCF V-3 % HTCF V-4 (a) % CHTC IV-5 (a) %
<S> <C> <C> <C>
Dollar amount offered $25,000,000 $25,000,000 $25,000,000
========== ========== ==========
Dollar amount raised $17,554,600 100.0 $21,920,450 100.0 $ 6,254,800 100.0
Less offering expenses:
Selling commissions & discounts
paid to non-affiliates (b) 1,064,500 6.1 1,590,100 7.3 297,600 4.8
Organizational expenses (c) 1,074,100 6.1 1,349,700 6.2 428,500 6.8
Reserves 539,100 3.1 1,916,450 8.7 727,600 11.6
---------- --- --------- --- ------- ----
Percent invested as of
close of offering $14,876,900 84.7 $17,064,200 77.8 $4,801,100 76.8
========== ==== ========== ==== ========= ====
Acquisition costs:
Prepaid items and fees
related to purchase of
local limited partnership
interest $ 97,200 0.5 $ 167,500 0.7 $ 8,700 0.1
Cash down payments (d) 13,813,700 78.7 15,325,100 69.9 4,431,100 70.9
Acquisition fees 966,000 5.5 1,571,600 7.2 361,300 5.8
Other - -.- - -.- - -.-
--------------- --- ----------------- --- --------------- ------
Total acquisition cost $14,876,900 84.7 $17,064,200 77.8 $4,801,100 76.8
=========== ==== ========== ==== ========= ====
Percentage leverage (mortgage
financing divided by total
acquisition cost) 69% 54% 47%
Date offering commenced 7/95 7/96 11/95
Length of offering (months) 11 13 7
Months to invest 90% of
amount available for
investment (measured from
beginning of offering) 21 12 22
- -------------------------------
<FN>
(a) Not all properties have been identified as of December 31, 1998. Therefore
uninvested amounts are included in reserves.
(b) Selling commissions were first paid to an affiliated broker-dealer which
reallowed all selling commissions to non-affiliates.
(c) Consists of estimated legal, accounting, printing and other organization
and offering expenses paid by the partnership directly or indirectly through
the sponsor.
(d) Represents the capital contributions of the partnership paid or the required
payments to be paid to the local limited partnerships.
</FN>
</TABLE>
A-4
UNAUDITED
<PAGE>
<TABLE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
(January 1, 1996 - December 31, 1998)
PUBLIC OFFERINGS
HTCF VI-5 (a) % HTCF VI-6(a) %
<S> <C> <C>
Dollar amount offered $25,000,000 $25,000,000
========== ==========
Dollar amount raised $24,945,400 100.0 $ 6,944,000 100.0
Less offering expenses:
Selling commissions & discounts
paid to non-affiliates (b) 1,710,300 6.9 464,600 6.7
Organizational expenses (c) 1,500,000 6.0 404,000 5.8
Reserves 1,617,700 6.5 - -.-
--------- --- ------------ ---
Percent invested as of
close of offering $20,117,400 80.6 $ 6,075,400 83.1
========== ==== ========= ====
Acquisition costs:
Prepaid items and fees
related to purchase of
local limited partnership interest $ 169,000 0.7 $ 28,800 0.4
Cash down payments (d) 18,277,600 73.3 5,889,900 84.8
Acquisition fees 1,670,800 6.7 464,500 6.7
Other - -.- - -.-
----------------- --- ---------------- ---
Total acquisition cost $20,117,400 80.6 $ 6,383,200 91.9
==== ========= ====
Percentage leverage (mortgage
financing divided by total
acquisition cost)
Date offering commenced 6/97 7/98
Length of offering (months) 13 (e)
Months to invest 90% of
amount available for
investment (measured from
beginning of offering) 14 (e)
- -------------------------------
<FN>
(a) Not all properties have been identified as of December 31, 1998. Therefore
uninvested amounts are included in reserves.
(b) Selling commissions were first paid to an affiliated broker-dealer which
reallowed all selling commissions to non-affiliates.
(c) Consists of estimated legal, accounting, printing and other organization and
offering expenses paid by the partnership directly or indirectly through
the sponsor.
(d) Represents the capital contributions of the partnership paid or the required
payments to be paid to the local limited partnerships.
(e) The offering was continuing as of December 31, 1998. Amounts have been
invested in excess of amounts raised.
</FN>
</TABLE>
A-5
UNAUDITED
<PAGE>
<TABLE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
(January 1, 1996 - December 31, 1998)
P R I V A T E O F F E R I N G S
Three Partnerships One Partnership
Organized in Organized in
1997(a) % 1998(a) %
__________________ _____ _______________ _____
<S> <C> <C>
Dollar amount offered $67,000,000 $20,000,000
========== ==========
Dollar amount raised $69,563,300 100.0 $19,566,500 100.0
Less offering expenses:
Selling commissions & discounts
paid to non-affiliates (b) 1,534,500 2.2 - 0.0
Organizational expenses (c) 1,092,800 1.6 440,200 2.3
Reserves 8,261,600 11.9 2,480,300 12.7
--------- ---- --------- ----
Percent invested as of
close of offering $58,674,400 84.3 $16,646,000 85.0
========== ==== ========== ====
Acquisition costs:
Prepaid items and fees
related to purchase of
local limited partnership interest $ 823,000 1.2 $ 339,700 1.7
Cash down payments (d) 54,260,400 78.0 15,281,600 78.1
Acquisition fees 2,217,700 3.2 782,700 4.0
Other 1,373,300 2.0 242,000 1.2
--------- --- ------- ---
Total acquisition cost $58,674,400 84.3 $16,646,000 85.0
========== ==== ========== ====
Percent leverage (mortgage
financing divided by total
acquisition cost) 55% 49%
Date offering commenced Various 5/1/98
Length of offering (months) Various 2
Months to invest 90% of
amount available for
investment (measured from
beginning of offering) Various N/A
- ------------------------------
<FN>
(a) Not all properties have been identified as of December 31, 1998. Therefore
uninvested amounts are included in reserves.
(b) Selling commissions were first paid to an affiliated broker-dealer which
reallowed all selling commissions to non-affiliates.
(c) Consists of estimated legal, accounting, printing and other organization and
offering expenses paid by the partnership directly or indirectly through
the sponsor.
(d) Represents the capital contributions of the partnership paid or the required
payments to be paid to the local limited partnerships.
</FN>
</TABLE>
A-6
UNAUDITED
<PAGE>
TABLE II
TABLE II presents information concerning the cumulative compensation paid to the
Sponsor for the period from January 1, 1996 to December 31, 1998 with respect to
programs presented in TABLE I and on an aggregate basis with respect to all
other programs which have been sponsored by the Sponsor.
A-7
<PAGE>
<TABLE>
TABLE II
COMPENSATION TO SPONSOR
(January 1, 1996 - December 31, 1998)
PUBLIC OFFERINGS
________________
HTCF V-3 HTCF V-4 CHTC IV-5
________ ________ _________
<S> <C> <C> <C>
Date offering commenced 7/95 7/96 11/95
Dollar amount raised 7,554,600 $21,920,450 $6,253,000
Amount paid to sponsor from
proceeds of offering: (a)
Underwriting fees - - -
Acquisition fees 966,000 1,571,600 361,300
Syndication fee - - -
Other - 440,000 130,140
Dollar amount of cash generated
from operations before
deducting payments to sponsor 67,206 399,836 178,308
Amount paid to sponsor from operations:
Property management fees - - -
Asset management fees 110,000 30,000 10,000
Reimbursements - - -
Leasing commissions - - -
Dollar amount of property sales
and refinancing before deducting
payments to sponsor:
Cash - - -
Notes - - -
Amount paid to sponsor from property
sales and refinancing:
Real estate commissions - - -
Subordinated disposition fee - - -
Other - - -
- ------------------------------------
<FN>
(a) Represents amounts paid to sponsor which were not reallowed to
non-affiliates.
</FN>
</TABLE>
A-8
UNAUDITED
<PAGE>
<TABLE>
TABLE II
COMPENSATION TO SPONSOR
(January 1, 1996 - December 31, 1998)
PUBLIC OFFERINGS
HTCF VI-5 HTCF VI-6(a) Ten Other Public
Programs
_________ ____________ _______________
<S> <C> <C> <C>
Date offering commenced 6/97 7/98 1995 and prior
Dollar amount raised $24,945,400 $6,944,000 $110,287,500
Amount paid to sponsor from
proceeds of offering: (b)
Underwriting fees - -
Acquisition fees 1,670,800 464,500 -
Syndication fee - -
Other 750,000 199,095 87,169
Dollar amount of cash generated
From operations before
Deducting payments to sponsor 256,294 1,554 765,004
Amount paid to sponsor from
operations:
Property management fees - - -
Partnership management fees (c) - - 1,136,716
Reimbursements - - -
Leasing commissions - - -
Dollar amount of property sales and
refinancing before deducting
payments to sponsor:
Cash - - 51,407
Notes - - -
Amount paid to sponsor from
property sales and refinancing:
Real estate commissions - - -
Incentive fee - - -
Other - - -
- ------------------------------------
<FN>
(a) The offering was continuing as of December 31, 1998.
(b) Represents amounts paid to sponsor which were not reallowed to
non-affiliates.
(c) Partnership management fees were paid from partnership reserves in the
instances where amounts paid to sponsor from operations exceed dollar amount
of cash generated from operations.
</FN>
</TABLE>
A-9
UNAUDITED
<PAGE>
<TABLE>
TABLE II
COMPENSATION TO SPONSOR
(January 1, 1996 - December 31, 1998)
PRIVATE OFFERINGS
Three Partnerships One Partnership Forty-six Other
Organized in Organized in Private
1997 1998 Partnerships
------------------ --------------- ---------------
<S> <C> <C>
Date offering commenced Various 5/98 1995 & prior
Dollar amount raised $66,859,433 $19,566,500 N/A
Amount paid to sponsor from
proceeds of offering: (a)
Underwriting fees - - -
Acquisition fees 2,217,700 782,661 -
Syndication fee - - -
Other 540,544 440,247 -
Dollar amount of cash generated
from (used in) operations before
deducting payments to sponsor 133,869 6,947 N/A
Amount paid to sponsor from operations:
Property management fees - - -
Partnership management fees (b) 133,869 - 266,812
Reimbursements - - -
Leasing commissions - - -
Dollar amount of property sales and
refinancing before deducting payments
to sponsor:
Cash - - -
Notes - - -
Amount paid to sponsor from property sales
and refinancing:
Real estate commissions - - -
Incentive fee - - -
Other - - -
- ------------------------------------
<FN>
(a) Represents amounts paid to sponsor which were not reallowed to
non-affiliates.
(b) Partnership management fees were paid from partnership reserves in the
instances where amounts paid to sponsor from operations exceed dollar
amount of cash generated from operations.
</FN>
</TABLE>
A-10
UNAUDITED
<PAGE>
TABLE III
TABLE III presents the operating results for all partnerships sponsored by the
Sponsor which closed during the five years ended December 31, 1998. The prior
partnerships are structured as investment partnerships acquiring interests in
operating partnerships. The investment partnerships account for such investments
using the equity method of accounting which recognizes each of such
partnership's pro rata share of the operating partnership's total income or
loss. Revenues generated by the investment partnerships consist substantially of
interest on short-term investments. This interest income generally decreases
after the initial two years of operations as funds available for investment
decrease. This decrease in funds arises from the investment partnership's
payments of capital contributions due.
All of the prior public partnerships, one of the prior private partnerships that
closed in 1994 and all of the other prior private partnerships report on a
GAAP basis and, accordingly, "Cash generated from (used in) operations" is per
each program's Statement of Cash Flows. The remaining prior private programs
maintain their books and records on the tax basis of accounting and not on a
GAAP basis, and "Cash generated from(used in) operations" for such programs is
per their respective books and records. The significant difference is that
depreciation expense on a tax basis as compared to a GAAP basis is greater in
the early years of operations.
Other information included in TABLE III includes data on cash generated from
operations and tax and cash distribution information per $1,000 invested,
including Tax Credit allocations.
A-11
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
CHTC III
1994 1995 1996 1997 1998
---- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Gross revenue $ 156,271 $ 145,959 $ 74,947 $ 57,279 $ 26,577
Less:
Operating expenses 86,306 193,916 214,737 204,259 215,744
Interest - - - - -
Depreciation and amortization 41,757 57,466 57,933 58,596 60,464
Equity in losses of local limited
partnerships 352,511 1,155,114 1,132,216 1,028,617 918,787
------- --------- --------- --------- -------
Net income (loss) - GAAP basis $(324,303) $(1,260,537) $(1,329,939) $(1,234,193) $(1,168,418)
======== =========== =========== =========== ===========
Taxable income (loss) from operations $(388,247) $(1,279,818) $(1,523,381) $(1,307,843) $(1,365,735)
========= =========== =========== =========== ===========
Taxable income (loss) from sale $ - $ - $ - $ - $ -
========= =========== =========== =========== ===========
Cash generated from(used in) operations $(225,005) $ 437,400 $ (143,337) $ (6,960) $ 4,243
Cash generated from sales - - - - -
Cash generated from refinancing - - - - -
Less: Cash distributions to investors - - - - 900,000
----------- ----------- ----------- ---------- ----------
Cash generated (deficiency) after cash
distributions and special items $(225,005) $ 437,400 $ (143,337) $ (6,960) $ (895,067)
======== ======= ========== ======= =========
TAX AND DISTRIBUTION DATA PER $1,000 INVESTED
Federal income tax results
Ordinary income (loss)
From operations (a) $(28) $(70) $(84) $(72) $(75)
From recapture - - - - -
Capital gain (loss) - - - -
Federal tax credits (a) 32 95 112 113 113
California tax credits (a) 48 85 85 66 17
Cash distributions to investors
Source (on GAAP basis)
Investment income - - - - -
Return of capital
Price adjusters - - - - 35
Balance of uninvested assets - - - - 15
Source (on cash basis)
Sales - - - - -
Refinancing - - - - -
Operations - - - - -
Other
Price adjusters - - - - 35
Balance of uninvested assets - - - - 15
Amount (in percentage terms)
Remaining invested in program
local limited partnerships at end
of year (original total
acquisition costs of investments
retained divided by total original
acquisition costs of all
properties) 100% 100% 100% 100% 100%
- --------------------------------
<FN>
(a) Tax losses and tax credits allocated to an investor in the first two years
are dependent upon an investor's entry date. Amount shown is that
allocated to initial investors.
</FN>
</TABLE>
A-12
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
HTCF IV-1
1994(a) 1995 1996 1997 1998
------- -------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Gross revenue $ 85,261 $ 68,682 $ 51,654 $ 25,676 $ 27,708
Less:
Operating expenses 47,149 55,573 51,467 57,228 123,062
Interest - - - - -
Depreciation and amortization 20,797 30,926 31,032 31,416 31,369
Equity in losses in local partnerships 413,316 727,986 1,023,557 764,430 728,078
------- ------- --------- ------- -------
Net income (loss) - GAAP basis $(396,001) $(745,803) $(1,054,402) $ (827,398) $ (854,801)
======== ======== =========== ========= =========
Taxable income (loss) from operations $(417,185) $(874,044) $ (982,635) $(1,094,717) $(1,110,938)
========= ========= ========= =========== ===========
Cash generated (used) from operations $ 27,511 $ 55,437 $ 22,420 $ (51,546) $ (55,354)
Cash generated from sales - - - - -
Cash generated from refinancing - - - - -
Less: Cash distributions to investors - - - - -
---------- ---------- ---------- ---------- ---------- -
Cash generated (deficiency) after cash
distributions and special items $ 46,649 $ 55,437 $ 22,420 $ (51,546) $ (55,354)
====== ====== ====== ========= ========
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b) $(59) $(87) $(97) $(108) $(110)
From recapture - - - - -
Capital gain(loss) - - - - -
Federal tax credits (b) 32 101 136 143 142
California tax credits - - - - -
Cash distributions to investors - - - - -
Amount (in percentage terms)
remaining invested in program
properties at end of year
(original total acquisition costs
of properties retained divided
by total original acquisition
costs of all properties) 100% 100% 100% 100% 100%
- --------------------------------
<FN>
(a) Partial year of operations.
(b) Tax losses and tax credits allocated to an investor in the first year
are dependent upon an investor's entry date. Amount shown is that
allocated to initial investor.
</FN>
</TABLE>
A-13
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
HTCT IV-2
1994(a) 1995 1996 1997 1998
------- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Gross revenue $ 3,475 $ 179,927 $ 161,610 $ 74,571 $ 47,017
Less:
Operating expenses 16,096 57,965 60,777 65,717 65,402
Interest 11,173 39,148 5,350 - -
Depreciation and amortization 1,638 26,208 40,109 40,823 32,099
Equity in losses in local partnerships 239,118 628,521 628,631 737,115 658,728
------- ------- ------- ------- -------
Net income (loss) - GAAP basis $(264,550) $(571,915) $(573,257) $(769,084) $(709,212)
======== ========= ========= ========= =========
Taxable income (loss)from operations $(228,979) $(702,048) $(641,050) $(928,847) $(895,194)
========= ========= ========= ========= =========
Cash generated (used)from operations $ (25,518) $ 54,970 $ 60,895 $ 52,765 $ 26,255
Cash generated from sales - - - - -
Cash generated from refinancing - - - - -
Less: Cash distributions to investors - - - - -
---------- ---------- ---------- ---------- ---------
Cash generated (deficiency) after
cash distributions and special items $ (25,518) $ 54,970 $ 60,895 $ 52,765 $ 26,255
======= ====== ====== ====== ======
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b) $(82) (b) $(58) $(41) $(59) $(57)
From recapture - - - - -
Capital gain (loss) - - - - -
Federal tax credits (b) 21 (b) 70 105 113 124
California tax credits - - - - -
Cash distributions to investors - - - - -
Amount (in percentage terms)
remaining invested in program
properties at end of year
(original total acquisition costs of
properties retained divided by
total original acquisition costs
of all properties) 100% 100% 100% 100% 100%
--------------------------------
<FN>
(a) Partial year of operations.
(b) Tax losses and tax credits allocated to an investor in the first two
years are dependent upon an investor's entry date. Amount shown is that
allocated to initial investor.
</FN>
</TABLE>
A-14
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
CHTC IV-4
1994(a) 1995 1996 1997 1998
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Gross revenue $ 1,613 $160,888 $ 147,254 $ 65,307 $ 46,032
Less:
Operating expenses 12 41,325 51,488 45,130 49,409
Interest 13,387 79,853 - - -
Depreciation and amortization - 16,056 24,865 25,419 25,561
Equity in (income) losses in local
partnerships (2,212) 100,224 528,288 806,639 750,114
------- ------- ------- ------- -------
Net income (loss) - GAAP basis $ (9,574) $(76,570) $(457,387) $(811,881) $(779,052)
======= ======== ========= ========= =========
Taxable income (loss) from operations $(11,786) $(60,108) $(566,147) $(778,340) $(837,679)
======== ======== ========= ========= =========
Cash generated (used) from operations $ 1,602 $ 26,322 $ 95,766 $ 110,356 $ 84,603
Cash generated from sales - - - - -
Cash generated from refinancing - - - - -
Less: Cash distributions to investors - - - - -
-------- --------- --------- ---------- ----------
Cash generated (deficiency) after
cash distributions and special items $ 1,602 $ 26,322 $ 95,766 $ 110,356 $ 84,603
===== ====== ====== ======= ======
TAX AND DISTRIBUTION DATA PER $1,000 INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b) $(12) (b) $(9) $(49) $(69) $(72)
From recapture - - - - -
Capital gain (loss) - - - - -
Federal tax credits - (b) 18 64 86 99
California tax credits - (b) 53 70 91 67
Cash distributions to investors - - - - -
Amount (in percentage terms)
remaining invested in program
properties at end of year (original
total acquisition costs of
properties retained divided by
total original acquisition costs
of all properties) 100% 100% 100% 100% 100%
--------------------------------
<FN>
(a) Partial year of operations.
(b) Tax losses and tax credits allocated to an investor in the first two
years are dependent upon an investor's entry date. Amount shown is that
allocated to initial investors.
</FN>
</TABLE>
A-15
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
HTCF V-3
1995(a) 1996 1997 1998(d)
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Gross revenue $ 3,487 $ 209,940 $ 121,703 $ 55,326
Less:
Operating expenses 12,379 69,130 66,884 71,627
Interest - - -
Depreciation and amortization 454 23,436 34,605 35,765
Equity in losses in local partnerships 343 185,071 789,697 1,201,184
---- ------- ------- ---------
Net income (loss) - GAAP basis $ 9,689 $ (67,697) $ (769,483) $(1,253,250)
====== ======== ========= ===========
Taxable income (loss) from operations $ 2,522 $ (128,969) $(1,060,301) $(1,409,234)
===== ======== =========== ===========
Cash generated (used) from operations $ 3,402 $ (205,999) $ 102,215 $ 60,990
Cash generated from sales - - - -
Cash generated from refinancing - - - -
Less: Cash distributions to investors - - - -
-------- --------- --------- ---------
Cash generated (deficiency) after
cash distributions and special items $ 3,402 $ (205,999) $ 102,215 $ 60,990
===== ========= ======= =======
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b) $2 (b) $(26) $(58) $(78)
From recapture - - - -
Capital gain (loss) - - - -
Federal tax credits (b) 3 (b) 62 84 130
California tax credits - - - -
Cash distributions to investors
Source (on GAAP basis)
Investment income - - - -
Return of capital - - - -
Source (on cash basis)
Sales - - - -
Refinancing - - - -
Operations - - - -
Other (c) 5 - - -
Amount (in percentage terms) remaining
invested in program properties at end of
year (original total acquisition costs of
properties retained divided by total
original acquisition costs of all
properties) 100% 100% 100% 100%
--------------------------------
<FN>
(a) Partial year of operations.
(b) Tax income (losses) and tax credits allocated to an investor in the
first two years are dependent upon an investor's entry date.
Amount shown is that allocated to initial investors.
(c) This amount was distributed in 1995 by the general partner and not by
the partnership.
(d) Based on unaudited information as final audit not yet
completed.
</FN>
</TABLE>
A-16
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
HTCF V-4
1996(a) 1997 1998(c)
------- --------- ----------
<S> <C> <C> <C>
Gross revenue $ 15,529 $ 225,609 $ 231,113
Less:
Operating expenses 30,183 86,206 79,139
Interest - - -
Depreciation and amortization 2,851 42,034 56,694
Equity in losses (income) in local
partnerships 29,329 334,756 1,004,237
------ ------- ---------
Net income (loss) - GAAP basis $(46,834) $ (109,688) $ (908,957)
======== =========== =========
Taxable income (loss) from operations $(23,166) $(237,387) $ (1,154,795)
======== ========= ===========
Cash generated (used) from operations $ 4,010 $ 94,732 $ 271,094
Cash generated from sales - - -
Cash generated from refinancing - - -
Less: Cash distributions to investors - - -
-------- -------- --------- -
Cash generated (deficiency) after
cash distributions and special items $ 4,010 $ 94,732 $ 271,094
====== ====== =======
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b) $5 (b) $(4) $(52)
From recapture - - -
Capital gain (loss) - - -
Federal tax credits (b) 14 19 80
California tax credits - - -
Cash distributions to investors - - -
Amount (in percentage terms)
remaining invested in program
properties at end of year
(original total acquisition costs
of properties retained divided by
total original acquisition costs
of all properties) 100% 100% 100%
--------------------------------
<FN>
(a) Partial year of operations.
(b) Tax income (losses) and tax credits allocated to an investor in the
first two years are dependent upon an investor's entry date.
Amount shown is that allocated to initial investors.
(c) Based on unaudited information as final audit not yet completed.
</FN>
</TABLE>
A-17
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
CHTC IV-5
1996(a) 1997 1998(c)
------- -------- --------
<S> <C> <C> <C>
Gross revenue $ 54,573 $ 78,454 $ 65,634
Less:
Operating expenses 1,393 25,517 31,241
Interest - - -
Depreciation and amortization 7,753 11,352 12,319
Equity in losses (income) in local
partnerships (15) 146,305 119,048
------ -------- -------
Net income (loss) - GAAP basis $ 45,442 $(104,720) $ (96,974)
====== ========= ========
Taxable income (loss) from operations $ 45,427 $ (84,003) $(198,375)
====== ======== =========
Cash generated (used) from operations $159,328 $ (39,216) $ 48,196
Cash generated from sales - - -
Cash generated from refinancing - - -
Less: Cash distributions to investors - - -
--------- ---------- ---------
Cash generated (deficiency) after
cash distributions and special items $159,328 $ (39,216) $ 48,196
======= ======== ======
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b) $10 $(13) $(30)
From recapture - - -
Capital gain (loss) - - -
Federal tax credits - 31 76
California tax credits - 67 67
Cash distributions to investors - - -
Amount (in percentage terms)
remaining invested in program
properties at end of year (original
total acquisition costs of
properties retained divided by total
original acquisition costs of all
properties) 100% 100% 100%
- --------------------------------
<FN>
(a) Partial year of operations.
(b) Tax income (losses) and tax credits allocated to an investor in the
first year are dependent upon an investor's entry date.
Amount shown is that allocated to initial investors.
(c) Based on unaudited information as final audit not yet completed.
</FN>
</TABLE>
A-18
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
HTCF VI-5 HTCF VI-6
1997(a) 1998(c) 1998(a)(c)
------- ------- ----------
<S> <C> <C> <C>
Gross revenue $ 10,012 286,006 $ 6,003
Less:
Operating expenses 7,843 75,782 4,449
Interest - 16 -
Depreciation and amortization 2,256 47,350 3,055
Equity in losses (income) in local
partnerships (2,395) 76,506 (60,610)
------- ------ --------
Net income (loss) - GAAP basis $ 2,308 $ 86,352 $(59,109)
===== ====== ========
Taxable income (loss) from operations $ 9,308 $(78,171) $ (1,501)
===== ======== =======
Cash generated (used) from operations $(2,873) $ 259,167 $ 48,196
Cash generated from sales - - -
Cash generated from refinancing - - -
Less: Cash distributions to investors - - -
----------- ----------- ---------
Cash generated (deficiency) after cash
distributions and special items $(2,873) $259,167 $ 48,196
======= ======= ======
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b) $1 (b) $(4) (b) $(1)
From recapture - - -
Capital gain (loss) - - -
Federal tax credits - (b) 20 -
California tax credits - - -
Cash distributions to investors - - -
Amount (in percentage terms) remaining
invested in program properties at end of
year (original total acquisition costs
of properties retained divided by total
original acquisition costs of all
properties) 100% 100% 100%
- --------------------------------
<FN>
(a) Partial year of operations.
(b) Tax income (losses) and tax credits allocated to an investor in the
first two years are dependent upon an investor's entry date.
Amount shown is that allocated to initial investors.
(c) Based on unaudited information as final audit not yet completed.
</FN>
</TABLE>
A-19
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
TWO PRIVATE
OFFERINGS CLOSED DURING 1994
1994(a) 1995 1996 1997 1998(b)
------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Gross revenue $ 7,619 $ 60,739 $ 67,700 $ 23,771 $ 29,577
Less:
Operating expenses 111,523 89,405 53,699 55,471 51,172
Interest - - - - -
Depreciation and amortization 1,305 26,141 37,940 37,490 32,908
Equity in losses in local partnerships 129,171 562,915 1,071,626 1,002,071 949,514
------- ------- --------- - --------- -------
Net income (loss) - Tax basis for WNC Tax
Credits XXX; GAAP basis for ITC I $(234,380) $(617,722) $(1,095,565) $(1,071,261) $(1,004,017)
========= ========= =========== =========== ===========
Taxable income (loss) from operations $(234,066) $(797,292) $(1,310,142) $(1,299,282) $(1,235,714)
========= ======== =========== =========== ===========
Cash generated (used) from operations $(103,904) $ (31,420) $ 36,501 $ (47,895) $ (33,689)
Cash generated from sales - - - - -
Cash generated from refinancing - - - - -
Less: Cash distributions to investors - - - - -
Cash generated (deficiency) after cash
distributions and special items $(103,904) $ (31,420) $ 36,501 $ (47,895) $ (33,689)
========= ======== ====== ======== ========
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations $(23) $(61) $(99) $(96) $(93)
From recapture - - - - -
Capital gain (loss) - - - - -
Federal tax credits (c) 3 69 130 149 149
Federal historic rehabilitation credits (c) 31 24 - - -
California tax credits (c) - - - - -
Cash distributions to investors - - - - -
Amount (in percentage terms) remaining
invested in program properties at end of
year (original total acquisition costs
of properties retained divided by total
original acquisition costs of all properties) 100% 100% 100% 100% 100%
- --------------------------------
<FN>
(a) Partial year of operations.
(b) Based on unaudited information as final audit not yet completed.
(c) Weighted average.
</FN>
</TABLE>
A-20
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
ONE PRIVATE
OFFERING CLOSED DURING 1995
1995(a) 1996 1997 1998(c)
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Gross revenue $ 58,335 $ 138,052 $ 24,580 $ 2,714
Profit (loss) on sale of
Limited partnership interest - - - (324,184)
Less:
Operating expenses 126,526 102,922 129,739 60,745
Interest - - - -
Depreciation and amortization 6,099 32,616 49,364 49,364
Equity in losses in local partnerships 161,903 453,545 39,326 747,171
------- ------- ------ -------
Net income (loss) -GAAP basis $(236,193) $ (451,031) $ (893,849) $(1,178,750)
========= ========= ========= ===========
Taxable (income) loss from operations $(146,497) $ (716,986) $(1,232,653) $(1,066,338)
-------- ---------- ----------- -----------
Taxable (income) loss from sale of
local limited partnership interest $ 0 $ 0 $ 0 $ (324,184)
-------- --------- ----------- ===========
Cash generated (used) from operations $ (74,596) $ 61,873 $ (91,302) $ (21,202)
Cash generated from sales - - - 267,885
Cash generated from refinancing - - - -
Less: Cash distributions to investors - - - -
Cash generated (deficiency) after
cash distsributions and special items $ (74,596) $ 61,873 $ (91,302) $ 246,683
======== ====== ======== =======
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b) $(10) $(48) $(81) $(71)
From recapture - - - -
Capital gain (loss) - - - (22)
Federal tax credits (b) 7 59 129 147
California tax credits - - - 1
Cash distributions to investors - - - -
Amount (in percentage terms)
remaining invested in program
properties at end of year
(original total acquisition costs of
properties retained divided by
total original acquisition costs
of all properties) 100% 100% 100% 100%
--------------------------------
<FN>
(a) Partial year of operations.
(b) Tax loss and tax credits allocated to an investor in the first year are
dependent upon an investor's entry date. Amount shown is that allocated
to initial investors.
(c) Based on unaudited information and estimates as final audit and tax
returns have not yet been completed.
</FN>
</TABLE>
A-21
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
THREE PRIVATE ONE PRIVATE
OFFERINGS CLOSED DURING 1997 OFFERING CLOSED DURING 1998
1997(a) 1998(c) 1998(a)(c)
------- ------- ----------
<S> <C> <C> <C>
Gross revenue $ 143,233 $ 189,537 $ 7,097
Less:
Operating expenses 49,648 260,360 22,150
Interest 355,783 2,152,313 0
Depreciation and amortization 467,061 106,258 7,104
Equity in losses in local partnerships 722,387 2,611,409 162,694
------- --------- -------
Net income (loss) - GAAP basis $(1,451,646) $(4,940,803) $(184,851)
=========== =========== =========
Taxable (income) loss from operations $(1,733,726) $(5,277,673) $(157,883)
=========== =========== =========
Cash generated (used) from operations $ 119,668 $ (80,799) $ 6,947
Cash generated from sales - - -
Cash generated from refinancing - - -
Less: Cash distributions to investors - - -
Cash generated (deficiency) after
cash distributions and special items $ 119,668 $ (80,799) $ 6,947
======= ======== =====
Federal income tax results
Ordinary income (loss)
From operations (d) $(26) (d) $(78) $(8)
From recapture - - -
Capital gain (loss) - - -
Federal tax credits (d) 17 (d) 67 3
Federal historic rehabilitation credits 19
California tax credits (d) 3 (d) 17 -
Cash distributions to investors - - -
Amount (in percentage terms)
remaining invested in program
properties at end of year
(original total acquisition costs of
properties retained divided by
total original acquisition costs
of all properties) 100% 100% 100%
--------------------------------
<FN>
(a) Partial year of operations.
(b) Tax loss and tax credits allocated to an investor in the first year are
dependent upon an investor's entry date. Amount shown is that allocated
to initial investors.
(c) Based on unaudited information and estimates as final audits and tax
returns have not yet been completed.
(d) Weighted average.
</FN>
</TABLE>
A-22
UNAUDITED
<PAGE>
TABLE IV
TABLE IV presents the results of programs sponsored by the Sponsor that have
completed operations during the five years ended December 31, 1998. One program,
Virgin Islands, completed operations and is presented in TABLE V.
A-23
UNAUDITED
<PAGE>
<TABLE>
TABLE IV
RESULTS OF COMPLETED PROGRAMS
(January 1, 1994 - December 31, 1998)
VIRGIN ISLANDS
CLEARVIEW APTS
<S> <C>
Dollar Amount Raised $705,000
Number of Properties Purchased 1
Date of Closing of Offering 4/83
Date of First Sale of Property 12/26/97
Date of Final Sale of Property 12/26/97
Receivable on Net Purchase Money Financing 140,000(b)
Tax and Distribution Data Per $1,000 Investment Through December 31, 1997
Federal Income Tax Results:
Ordinary income (loss)
from operations $(3,551)
from recapture -
Capital Gain 2,963
Deferred Gain
Capital 296
Ordinary -
Cash Distributions to Investors
Source (on GAAP basis)
Investment income -
Return of capital (a)
Source (on cash basis) -
Sales (a)
Refinancing -
Operations -
Other -
- --------------------------------
<FN>
(a) The first installment of $127 per $1,000 invested was made in July
1998. The second and final installment of approximately $196 per $1,000
invested will be made in July 1999 if the buyer's promissory note is
retired.
(b) The program took back a note from the buyer in the principal amount of
$140,000, bearing no interest and payable in July 1999. The receivable
is presented at face amount and not at discounted current value.
</FN>
</TABLE>
A-24
UNAUDITED
<PAGE>
TABLE V
TABLE V presents the sales or disposals of property by partnerships sponsored by
the Sponsor during the three years ended December 31, 1998.
A-25
UNAUDITED
<PAGE>
<TABLE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
(January 1, 1996 - December 31, 1998)
ITCF II SHELTER RESOURCE FUND
LAMBERT COMMUNITY FOLSOM GARDEN I FOLSOM GARDEN II
<S> <C> <C> <C> <C> <C> <C>
Date property acquired 4/11/97 11/30/83 11/30/83
Date of sale 6/15/98 1/30/97(a) 1/30/97(a)
Selling Price, Net of Closing Costs and
GAAP Adjustments:
Cash received (disbursed) net of closing costs $ 1,400,142 $ (216,345) $ 117,454
Mortgage balance and accrued interest at time of sale 2,293,021 1,918,394 1,586,941
Purchase money mortgage taken back by program 1,167,578 - -
Adjustments resulting from application of GAAP - -
----------- ------------ -----------
Total $4,860,741(b) $1,702,049(b) $1,704,395(b)
============ ============ ============
Cost of Properties Including Closing and Soft Costs
Original mortgage financing $2,293,021 $ 1,200,000 $ 1,200,000
Total acquisition cost, capital
improvement, closing and soft costs(c) 2,891,970 369,716 362,120
--------- ------- -----------
Total $5,184,991 $ 1,569,716 $ 1,562,120
========= ========= =========
Excess (Deficiency) of Property
Operating Cash Receipts Over Cash
Expenditures(d) $ (54,000) $ (27,339) $ 140,954
======== ========= =======
- --------------------------------
<FN>
(a) Sales were not to related parties.
(b) All taxable income was reported as Section 1231 income. Only Lambert
was reported as an installment sale.
(c) Amounts shown do not include pro rata share of original offering
costs.
(d) Costs incurred in the administration of the partnership and not
related to the operation of the property are not included.
</FN>
</TABLE>
A-26
UNAUDITED
<PAGE>
<TABLE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
(January 1, 1996 - December 31, 1998)
RIVERSIDE VIRGIN ISLANDS BELLE ISLE, LTD
ALBANY CLEARVIEW APTS T. T. APARTMENTS
<S> <C> <C> <C> <C> <C> <C>
Date property acquired 8/15/85 9/1/83 8/15/86
Date of sale 10/31/97(a) 12/26/97(a) 12/9/97
Selling Price, Net of Closing Costs and GAAP
Adjustments:
Cash received (disbursed) net of closing costs $ 42,693 $ 105,058 $ 35,200
Mortgage balance and accrued interest at time of 1,106,559 2,481,724 855,205
sale
Purchase money mortgage taken back by program 0 140,000
Adjustments resulting from application of GAAP - - -
---------- ---------- ---------
Total $1,149,252(b) $2,726,782(b) $890,405(b)
============ ============ ==========
Cost of Properties Including Closing and Soft Costs
Original mortgage financing $1,045,489 $2,267,400 $855,000
Total acquisition cost, capital
improvement, closing and soft costs(c) 220,000 442,000 136,800
------- ------- -------
Total $1,265,489 $2,709,400 $991,800
========= ========= =======
Excess (Deficiency) of Property
Operating Cash Receipts Over Cash
Expenditures(d) $(150,000) $(268,000) $ -
========= ========= =
- --------------------------------
<FN>
(a) Sales were not to related parties.
(b) All taxable income was reported as Section 1231 income.
Only T.T. Apartments was reported as an installment sale.
(c) Amounts shown do not include pro rata share of original offering costs.
(d) Costs incurred in the administration of the partnership and not
related to the operation of the property are not included.
</FN>
</TABLE>
A-27
UNAUDITED
<PAGE>
EXHIBIT B
WNC HOUSING TAX CREDIT FUND VI
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
Table of Contents
Page
ARTICLE 1 DEFINITIONS............................................... B-5
ARTICLE 2 FORMATION; NAME; PLACE OF BUSINESS;
PURPOSE AND TERM..........................................B-19
Section 2.1 Formation of Partnership.........................B-19
Section 2.2 Name.............................................B-19
Section 2.3 Place of Business................................B-19
Section 2.4 Purpose..........................................B-19
Section 2.5 Agent for Service of Process.....................B-20
Section 2.6 Term.............................................B-20
ARTICLE 3 PARTNERS AND CAPITAL......................................B-20
Section 3.1 General Partner..................................B-20
Section 3.2 Initial Limited Partner..........................B-20
Section 3.3 Additional Limited Partners;
Terms of Offering.......................B-20
Section 3.4 Payment or Return of
Additional Limited Partners' Capital....B-22
Section 3.5 Liability of Limited Partners....................B-25
Section 3.6 Miscellaneous....................................B-25
ARTICLE 4 DISTRIBUTIONS OF CASH; ALLOCATIONS OF
PROFITS AND LOSSES........................................B-26
Section 4.1 Distributions of Cash Available for Distribution.B-26
Section 4.2 Distributions of Sale or Refinancing Proceeds....B-26
Section 4.3 Profits and Losses...............................B-27
B-1
<PAGE>
Section 4.4 Certain Provisions Related to Partnership
Allocations and Distributions...........B-28
Section 4.5 Allocation of Tax Credits........................B-32
Section 4.6 Determinations of Allocations and Distributions
Within Classes of Partners..............B-33
ARTICLE 5 RIGHTS, POWERS AND DUTIES OF
GENERAL PARTNER...........................................B-34
Section 5.1 Management of the Partnership....................B-34
Section 5.2 General Authority of General Partner.............B-35
Section 5.3 Authority of General Partner and its
Affiliates to Deal with Partnership.....B-40
Section 5.4 Restrictions on Authority of General Partner.....B-44
Section 5.5 Duties and Obligations of General Partner........B-47
Section 5.6 Compensation of Sponsor..........................B-48
Section 5.7 Other Business of Partners.......................B-51
Section 5.8 Limitation on Liability of
Sponsor; Indemnification................B-51
ARTICLE 6 ADMISSION OF SUCCESSOR AND ADDITIONAL
GENERAL PARTNERS; WITHDRAWAL OF
GENERAL PARTNER...........................................B-53
Section 6.1 Admission of Successor or Additional
General Partners .......................B-53
Section 6.2 Restrictions on Transfer of
General Partner's Interest..............B-54
Section 6.3 Consent of Limited Partners to
Admission of Successor or
Additional General Partners.............B-54
Section 6.4 Event of Withdrawal of a General Partner.........B-54
Section 6.5 Interest and Liability of a Withdrawn
General Partner........................ B-55
Section 6.6 Valuation and Sale of Interest of
Former General Partner..................B-55
ARTICLE 7 TRANSFERABILITY OF UNITS..................................B-56
Section 7.1 Right to Transfer Units..........................B-56
Section 7.2 Restrictions on Transfers........................B-56
Section 7.3 Assignees and Assignment Procedure...............B-58
B-2
<PAGE>
Section 7.4 Substitute Limited Partners......................B-61
ARTICLE 8 DISSOLUTION AND WINDING-UP OF
THE PARTNERSHIP...........................................B-61
Section 8.1 Events Causing Dissolution.......................B-61
Section 8.2 Liquidation......................................B-62
ARTICLE 9 BOOKS AND RECORDS, ACCOUNTING, REPORTS,
TAX ELECTIONS, ETC........................................B-63
Section 9.1 Books and Records................................B-63
Section 9.2 Accounting and Fiscal Year.......................B-64
Section 9.3 Bank Accounts and Temporary Investments..........B-64
Section 9.4 Reports..........................................B-64
Section 9.5 Depreciation and Other Tax Elections.............B-66
Section 9.6 Designation of Tax Matters Partner...............B-66
ARTICLE 10 MEETINGS AND VOTING RIGHTS
OF LIMITED PARTNERS..............................B-67
Section 10.1 Meetings and Actions Without Meetings............B-67
Section 10.2 Voting Rights of Limited Partners................B-67
Section 10.3 Limitations on Roll-Ups; Dissenters' Rights......B-68
ARTICLE 11 SPECIAL POWER OF ATTORNEY.................................B-69
ARTICLE 12 AMENDMENTS................................................B-71
Section 12.1 Adoption of Amendments...........................B-71
Section 12.2 Filing of Required Documents.....................B-72
Section 12.3 Required Change of Partnership Name..............B-72
ARTICLE 13 MISCELLANEOUS PROVISIONS..................................B-72
Section 13.1 Security Interest and Right of Set-Off...........B-72
Section 13.2 Notices..........................................B-73
Section 13.3 Execution........................................B-73
Section 13.4 Binding Effect...................................B-73
Section 13.5 Applicable Law...................................B-73
Section 13.6 Counterparts.....................................B-74
Section 13.7 Separability of Provisions.......................B-74
B-3
<PAGE>
Section 13.8 Captions.........................................B-74
Section 13.9 Mandatory Arbitration............................B-74
Section 13.10 Partnerships Treated as Separate.................B-75
B-4
<PAGE>
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP dated as of
April 1, 1999 among WNC & Associates, Inc., as General Partner, John B. Lester,
Jr. as Initial Limited Partner and those Persons who shall hereafter be admitted
to the Partnership as Additional Limited Partners, who hereby agree as follows:
ARTICLE 1
DEFINITIONS
The following terms used in this Agreement shall, unless the context
otherwise requires, have the meanings specified in this Article 1. The singular
shall include the plural and the masculine gender shall include the feminine and
neuter genders, and vice versa, as the context requires.
"Accountants" means BDO Seidman, LLP, Costa Mesa, California, or such other
firm of independent public accountants as from time to time shall be engaged for
the Partnership by the General Partner.
"Acquisition and Investment Management Fees" means the fees to be paid to
the Sponsor pursuant to Section 5.6.4 hereof.
"Acquisition Expenses" means expenses, including, but not limited to, legal
fees and expenses, travel and communications expenses, costs of appraisals,
non-refundable option payments on property not acquired, accounting fees and
expenses, title insurance and miscellaneous expenses related to selection and
acquisition by the Partnership of Local Limited Partnership Interests and the
selection and acquisition of Apartment Complexes by the Local Limited
Partnerships, whether or not acquired, including the Nonaccountable Acquisition
Expense Reimbursement.
"Acquisition Fees" means the total of all fees and commissions paid by any
party in connection with the selection or purchase by the Partnership of any
Local Limited Partnership Interest, including fees and commissions paid in
connection with the investigation of Local Limited Partnerships an interest in
which is not acquired by the Partnership, and the purchase, development or
construction of an Apartment Complex by a Local Limited Partnership, whether
designated as an Acquisition and Investment Management Fee, real estate
commission, acquisition fee, finders' fee, selection fee, Development Fee,
Construction Fee, nonrecurring management fee, consulting fee or any fee of a
similar nature however designated, with the exception of Development Fees and
Construction Fees paid to Persons not affiliated with the Sponsor in connection
with the actual development and construction of an Apartment Complex. As used
B-5
<PAGE>
herein, a "Development Fee" shall be a fee for the packaging of an
Apartment Complex, including negotiating and approving plans, and undertaking to
assist in obtaining zoning and necessary variances, necessary financing and Tax
Credits for the Apartment Complex, either initially or at a later date, and a
"Construction Fee" shall be a fee or other remuneration for acting as general
contractor and/or construction manager to construct improvements, supervise and
coordinate projects or provide Major Repairs or Rehabilitation for an Apartment
Complex.
"Act" means the California Revised Limited Partnership Act (Corp. Code
Section 15611, et seq.), as now in effect and as the same may be amended from
time to time hereafter.
"Additional Limited Partners" means those Persons admitted to the
Partnership pursuant to Section 3.3 hereof.
"Adjusted Capital Account Deficit" means, with respect to each Partner, the
deficit balance in his Capital Account as of the end of the relevant fiscal
period of the Partnership, after giving effect to the following adjustments:
(a) Increasing such Capital Account by any amounts such Person is
obligated to restore under the standards set by Section
1.704-1(b)(2)(ii)(c) of the Regulations (or is deemed obligated to restore
under Section 1.704-2(g)(1) and (i)(5) of the Regulations); and
(b) Decreasing such Capital Account by the items described in
Section 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and
1.704-1(b)(2)(ii)(d)(6) of the Regulations.
"Adjusted Capital Contribution" means, for each fiscal period, the Limited
Partners' Capital Contribution reduced by all distributions of noninvested funds
pursuant to Section 3.4.2 hereof and distributions of Sale or Refinancing
Proceeds made to the Limited Partners through the end of such period.
"Affiliate" or "Affiliated Person" means, when used with reference to a
specified Person: (i) any Person who, directly or indirectly, controls or is
controlled by or is under common control with the specified Person; (ii) any
Person who is an officer or director of, or partner in, or serves in a similar
capacity with respect to, the specified Person or of which the specified Person
is an officer, director or partner, or with respect to which the specified
Person serves in a similar capacity; (iii) any Person who, directly or
indirectly, is the beneficial owner of, or controls, 10% or more of any class of
equity securities of, or otherwise has a 10% or more beneficial interest in, the
B-6
<PAGE>
specified Person; or (iv) any Person of which the specified Person is,
directly or indirectly, the owner of, or in control of, 10% or more of any class
of equity securities, or in which the specified Person has a 10% or more
beneficial interest.
"Agreement" means this First Amended and Restated Agreement of Limited
Partnership, as originally executed and as amended or restated from time to
time. Words such as "herein," "hereinafter," "hereof," "hereto," "hereby" and
"hereunder," when used with reference to this Agreement, refer to this Agreement
as a whole, unless the context otherwise requires.
"Apartment Complex" or "Property" means a multi-family residential rental
complex owned or under development or rehabilitation by a Local Limited
Partnership.
"Asset Based Fee" means compensation to the Sponsor computed in accordance
with Section IV.J. of the NASAA Guidelines. No Asset Based Fee shall be payable
to the Sponsor.
"Asset Management Fee" means the annual fee payable to the General Partner
or an Affiliate of the General Partner pursuant to Section 5.6.7.
"Capital Account" means, with respect to any Partner, the Capital Account
maintained for such Partner in accordance with the following provisions: (i) to
each Partner's Capital Account there shall be credited such Partner's Capital
Contribution, such Partner's distributive share of Profits, and such Partner's
share of any items in the nature of income and gain which are specially
allocated pursuant to Section 4.4 hereof, and (ii) to each Partner's Capital
Account there shall be debited the amount of cash and the net fair market value
of property distributed to such Partner pursuant to any provision of this
Agreement, such Partner's distributive share of Losses, and such Partner's share
of any items in the nature of expenses or losses which are specially allocated
pursuant to Section 4.4 hereof. In the event any interest in the Partnership is
transferred in accordance with the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferror to the extent it relates to
the transferred interest. Capital Accounts shall be maintained in accordance
with Treasury Regulation Section 1.704-1(b)(2)(iv).
"Capital Contribution" means the total amount of cash contributed to the
Partnership (excluding any cash contributed by the General Partner pursuant to
the last sentence of Section 3.3.3 hereof) determined without inclusion of any
interest or late charges paid on the Promissory Notes and without reduction for
any discounts for Designated Investors and Discount Investors (prior to the
deduction of any Syndication Expenses) by all the Partners or any class of
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Partners or any one Partner, as the case may be (or the predecessor holders
of the Interests of such Partners or Partner), reduced, in the case of the
Limited Partners, by the amount of any funds returned to them pursuant to
Section 3.4.2.
"Cash Available for Distribution" means, with respect to any period, Cash
Flow less any amounts set aside from Cash Flow for the restoration or creation
of Reserves.
"Cash Flow" means, with respect to any period, (i) all cash funds provided
to the Partnership from Local Limited Partnership operations (exclusive of any
proceeds derived from the sale, disposition, financing or refinancing of
Apartment Complexes, or other Sale or Refinancing transactions) plus (ii) all
cash funds from Partnership operations (including any interest from Promissory
Notes), without deduction for depreciation, but after deducting cash funds used
to pay all other expenses, Debt Service and capital expenditures.
"Code" means the Internal Revenue Code of 1986, as amended, or any
corresponding provision or provisions of succeeding law.
"Competitive" when applied to a fee, commission (other than a real estate
or brokerage commission) or other payment for goods supplied or services
rendered, means a payment equal to the amount customarily charged by Persons not
Affiliated with the payee for such goods or services in the geographic area in
which such goods are supplied or services rendered.
"Competitive Real Estate Commission" means a real estate or brokerage
commission paid for the purchase or sale of Property which is reasonable,
customary and competitive in light of the size, type and location of the
Property.
"Consent" means either (i) the approval given by vote at a meeting called
and held in accordance with the provisions of Section 10.1, or (ii) a prior
written approval required or permitted to be given pursuant to this Agreement.
"Dealer Manager" means WNC Capital Corporation.
"Dealer Manager Fee" means the fee payable to the Dealer Manager pursuant
to Section 5.6.2.
"Debt Service" means all payments required to be made in connection with
any loan to the Partnership or any loan secured by a lien on any of the
Apartment Complexes.
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"Deemed Liquidation Distribution" means, with respect to the Limited
Partners, as a class, and the General Partner the amount that would be
distributed to them as of the end of each fiscal year of the Partnership if the
Partnership were dissolved and liquidated and (i) the assets of the Partnership
were sold for cash equal to their Federal adjusted tax basis (or their Book
Value, where Section 4.4.2 applies); (ii) the liabilities of the Partnership
were paid; and (iii) the remaining cash of the Partnership were distributed to
such class of Partners in accordance with Section 4.2.1 (and not Section 4.2.2).
"Designated Investor" shall have the meaning specified in the Prospectus
under "Terms of the Offering and Plan of Distribution."
"Discount Investor" means any Additional Limited Partner (other than a
Designated Investor) who has paid or agreed to pay less than $1,000 per Unit
subscribed for by him on account of reduced selling commissions, reduced Dealer
Manager Fees and/or reduced Acquisition and Investment Management Fees
attributable to his Units, as specified in the Prospectus under "Terms of the
Offering and Plan of Distribution."
"Economic Risk of Loss" means the extent to which a Partner or Related
Person bears the economic risk of loss for a Partnership liability as determined
under Treasury Regulation Section 1.752-2.
"Escrow Agent" means Southern California Bank, Newport Beach, California,
or any other escrow agent chosen by the General Partner to hold funds from
investors pending their admission to the Partnership.
"Event of Withdrawal" means the occurrence of any of the following events
as to a General Partner: (i) its withdrawal from the Partnership pursuant to
Section 15662 of the Act; (ii) its removal in accordance with this Agreement;
(iii) it (a) makes an assignment for the benefit of creditors, (b) files a
voluntary petition in bankruptcy, (c) is adjudged a bankrupt or insolvent, or
has entered against it an order for relief in any bankruptcy or insolvency
proceeding, (d) files a petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any statute, law or regulation, (e) files an answer or
other pleading admitting or failing to contest the material allegations of a
petition filed against it in any proceeding of this nature, or (f) seeks,
consents to or acquiesces in the appointment of a trustee, receiver or
liquidator of itself or of all or any substantial part of its properties; (iv)
the lapse of 120 days after the commencement of any proceeding against it
seeking reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or regulation, if during
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such period the proceeding has not been dismissed, or the lapse of 90 days
after the appointment, without its consent or acquiescence, of a trustee,
receiver or liquidator of itself or of all or any substantial part of its
properties, if during such period the appointment is not vacated or stayed, or
if within 90 days after the expiration of any such stay, the appointment is not
vacated; (v) in the case of a General Partner who is a natural person, (a) his
death, or (b) the entry by a court of competent jurisdiction adjudicating him
incompetent to manage his person or his property; (vi) in the case of a General
Partner who is acting as a general partner by virtue of being a trustee of a
trust, the termination of the trust (but not merely the substitution of a new
trustee); (vii) in the case of a General Partner which is a separate
partnership, the dissolution and commencement of winding up of the separate
partnership; (viii) in the case of a General Partner which is a corporation, the
filing of a certificate of dissolution, or its equivalent, for the corporation
or the revocation of its charter; or (ix) in the case of a General Partner which
is an estate, the distribution by the fiduciary of the estate's entire interest
in the Partnership. Notwithstanding the foregoing, an Event of Withdrawal shall
not be deemed to have occurred as to a General Partner under the preceding
clause (iv) until 120 days shall have elapsed after Notification has been given
to the Limited Partners of the event which, with or without lapse of time, would
constitute an event contemplated by such clause.
"Front-End Fees" means fees and expenses paid by any party for any services
rendered during the organizational and acquisition phases of the Partnership,
including Organizational and Offering Expenses, Acquisition Fees, Acquisition
Expenses, interest on deferred fees and expenses and any other similar fees,
however designated. Front-End Fees which are to be paid pursuant to this
Agreement from installment payments on the Promissory Notes shall be paid pro
rata as the installment payments are received by the Partnership.
"General Partner" means WNC & Associates, Inc., or any Person or Persons
who, at the time of reference thereto, has been admitted as a successor to any
such General Partner or as an additional General Partner, in each such Person's
capacity as a general partner. Restrictions placed on the rights and powers of
the "General Partner" throughout this Agreement also serve to restrict the
rights and powers of the Affiliates of the General Partner.
"Government Assistance" means any form of Federal, state or local
government assistance provided to Properties or their tenants or owners,
including mortgage insurance, rental assistance payments, permanent mortgage
financing, low interest mortgage loans, interest reduction payments and Tax
Credits.
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"Gross Proceeds" means the gross proceeds of the Offering, determined
without inclusion of any interest or late charges paid on the Promissory Notes
and without reduction for any discounts for Designated Investors and Discount
Investors.
"HUD" means the United States Department of Housing and Urban Development
or any successor thereto.
"Historic Tax Credit" means the tax credit allowable pursuant to Section 47
of the Code for rehabilitation expenditures incurred with respect to certain
qualified buildings.
"Independent Expert" means a Person with no material current or prior
business or personal relationship with the Sponsor who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Partnership, and who is qualified to perform such
work.
"Initial Limited Partner" means John B. Lester, Jr.
"Interest" means the entire ownership interest of a Partner in the
Partnership at any particular time, including the right of such Partner to any
and all benefits to which a Partner may be entitled as provided in this
Agreement, together with the obligations of such Partner to comply with all the
terms and provisions of this Agreement. Reference to a majority, or specified
percentage, in interest of the Limited Partners means, Limited Partners whose
combined Capital Contribution represents over 50%, or such specified percentage,
respectively, of the Capital Contribution of all Limited Partners.
"Invested Assets" means the sum of the Partnership's Investment in Local
Limited Partnership Interests and the Partnership's allocable share of the
amount of the mortgage loans on, and other debts related to, the Apartment
Complexes owned by such Local Limited Partnerships.
"Investment Date" means the date of the final admission into the
Partnership of Additional Limited Partners who purchased Units.
"Investment in Local Limited Partnership Interests" means the amount of
Capital Contributions used by the Partnership to acquire Local Limited
Partnership Interests (except that, if a portion of the Partnership's investment
in a Local Limited Partnership is used to fund working capital reserves of the
Local Limited Partnership, there shall be excluded from this calculation any
amount which is used to fund working capital reserves which is in excess of 5%
of Gross Proceeds) plus Reserves of the Partnership, except that Reserves in
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excess of 5% of Gross Proceeds shall not be included, but excluding
Front-End Fees. Notwithstanding the preceding, the total amount of Capital
Contributions used to fund Partnership Reserves or working capital reserves of
the Local Limited Partnerships which shall be included in Investment in Local
Limited Partnership Interests shall not exceed 5% of Gross Proceeds.
"Investor Closing" means a closing at which purchasers of Units are
admitted as Additional Limited Partners pursuant to Section 3.3 hereof.
"Limited Partner" means any Person who is a Limited Partner, whether an
Initial Limited Partner, an Additional Limited Partner or a Substitute Limited
Partner at the time of reference thereto, in such Person's capacity as a Limited
Partner of the Partnership.
"Local General Partners" (whether or not capitalized) means the Persons who
are from time to time general partners (or managers in the cases of limited
liability companies) of Local Limited Partnerships, except that where reference
is made to Local General Partners in respect of any guaranties or undertakings
provided to the Partnership in connection with its investment in a Local Limited
Partnership, such term shall mean such Local General Partners at the date of
such investment or such other Persons (including Affiliates of such Local
General Partners) as actually provide such guaranties and undertakings.
"Local Limited Partnership" means a limited partnership or a limited
liability company which owns or is developing or rehabilitating one or more
rental housing projects to be qualified under Section 42(g) and/or Section 47 of
the Code.
"Local Limited Partnership Interest" means the limited partnership interest
of the Partnership in a Local Limited Partnership.
"Low Income Housing Credit" means the tax credit allowable under Section 42
of the Code for a qualified low income housing project.
"Major Repairs and Rehabilitation" means the repair, rehabilitation or
reconstruction of a Property where the aggregate costs of the repair,
rehabilitation or reconstruction exceed 10% of the fair market value of the
Property at the time of such services.
"Mortgage" (whether capitalized or not) means any mortgage, deed of trust,
or similar security instrument and, where the sense of this Agreement so
requires, the indebtedness secured thereby.
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"NASAA Guidelines" means the Statement of Policy Regarding Real Estate
Programs adopted by the North American Securities Administrators Association,
Inc., as in effect on the date of this Agreement.
"Net Proceeds" means the Gross Proceeds less Organizational and Offering
Expenses.
"Nonaccountable Acquisition Expense Reimbursement" means the payment to be
made to the Fund Manager or Affiliate thereof pursuant to Section 5.6.5 hereof.
"Nonaccountable O&O Expense Reimbursement" means the payment to be made to
the Dealer Manager pursuant to Section 5.6.3 hereof.
"Nonrecourse Deductions" has the meaning given it in Treasury Regulation
Section 1.704-2(b)(1).
"Nonrecourse Liability" means a Partnership liability with respect to which
no Partner or Related Person bears the Economic Risk of Loss.
"Note Capital Contribution" means that portion of a Limited Partner's
Capital Contribution, if any, paid in accordance with his Promissory Note.
"Notification" means a writing, containing the information required by this
Agreement to be communicated to any Person, personally delivered to such Person
or sent by registered, certified or regular mail, postage prepaid, to such
Person at the last known address of such Person. The date of personal delivery
or the date of mailing thereof, as the case may be, shall be deemed the date of
giving the Notification.
"Offering" means, with respect to the Partnership, the offering and sale of
its Units pursuant to the Prospectus.
"Offering Commencement Date" means, with respect to the Offering, the
effective date of the registration statement or post-effective amendment thereto
filed with the Securities and Exchange Commission which authorizes the
commencement of such Offering.
"Operating Cash Expenses" means, with respect to any fiscal period, the
amount of cash disbursed by the Partnership in that period in the ordinary
course of business for the payment of its operating expenses, such as expenses
for management, on-site property personnel, utilities, repair and maintenance,
insurance, investor communications, legal, accounting, statistical and
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bookkeeping services, use of computing or accounting equipment, travel and
telephone expenses, salaries and direct expenses of Partnership employees while
engaged in Partnership business, and any other operational and administrative
expenses necessary for the prudent operation of the Partnership. Without
limiting the generality of the foregoing, Operating Cash Expenses shall include
the actual cost of goods, materials and administrative services used for or by
the Partnership, whether incurred by the General Partner, an Affiliate of the
General Partner or a non-Affiliated Person in performing the foregoing
functions. As used in the preceding sentence, actual cost of goods and materials
means the actual cost of goods and materials used for or by the Partnership and
obtained from entities not Affiliated with the General Partner, and actual cost
of administrative services means the pro rata cost of personnel (as if such
persons were employees of the Partnership) associated therewith, but in no event
to exceed the Competitive amount.
"Organizational and Offering Expenses" means all expenses incurred in
connection with the formation of the Partnership, the registration and
qualification of the Units under Federal and state securities laws and the
Offering, including selling commissions, the Dealer Manager Fee, the
Nonaccountable O&O Expense Reimbursement and all advertising expenses.
"Partner" means any General Partner or Limited Partner.
"Partner Nonrecourse Debt" has the meaning given it in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" means the amount determined in
accordance with the principles of Treasury Regulation Section 1.704-2(i)(3).
"Partnership" means the partnership formed under the terms of this
Agreement.
"Partnership Minimum Gain" means the amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"Partnership Register" means the schedule listing the names and addresses
of all Limited Partners together with the amounts of their respective Capital
Contributions which shall be maintained by the General Partner in accordance
with Section 3.3.
"Person" means any individual, partnership, corporation, trust or other
legal entity.
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"Prime Rate" means the prime or reference rate of interest from time to
time announced by Southern California Bank as being charged by it on short-term
unsecured loans to its most creditworthy customers.
"Profits" and "Losses" means, for each fiscal year or other relevant
period, an amount equal to the Partnership's taxable income or loss for such
year or period determined in accordance with Section 703(a) of the Code (for
this purpose all items of income, gain, loss or deduction required to be stated
separately pursuant to Section 703(a)(1) of the Code shall be included in
taxable income or loss), with the following adjustments: (i) any income of the
Partnership that is exempt from Federal income tax and not otherwise taken into
account in computing Profits or Losses pursuant to this definition shall be
added to such taxable income or loss; (ii) any expenditures of the Partnership
described in Section 705(a)(2)(B) of the Code or treated as such pursuant to
Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into
account in computing Profits or Losses pursuant to this definition, shall be
subtracted from such taxable income or loss; (iii) any adjustment pursuant to
Section 743(b) of the Code shall be allocated solely to the Partner to whom such
adjustment relates and shall not be taken into account in computing Profits or
Losses; (iv) any gain or loss which would have been realized by the Partnership
on the sale of assets distributed in kind to Partners, determined with reference
to the fair market value and the adjusted tax basis of such property for Federal
income tax purposes immediately prior to such distribution, shall be added to or
subtracted from such taxable income or loss; (v) notwithstanding any other
provision of this definition, any items that are specially allocated pursuant to
Section 4.4 shall not be taken into account in computing Profits or Losses; and
(vi) if required, the adjustments specified in Section 4.4.2 shall be taken into
account.
"Promissory Note" means the full recourse promissory note evidencing the
deferred installments, if any, of the Capital Contribution required to be made
for a Unit.
"Property Management Fee" means a fee paid for day-to-day professional
property management services in connection with the Properties.
"Prospectus" means the prospectus contained in the registration statement
filed with the Securities and Exchange Commission with respect to the Units, in
the final form in which said prospectus is filed with said Commission and as
thereafter supplemented pursuant to Rule 424 under the Securities Act of 1933,
as amended.
"Purchase Price" means the price paid upon the purchase or sale of a
particular Local Limited Partnership Interest or Apartment Complex, as the case
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may be, including the amount of Acquisition Fees and all liens and
mortgages on the Apartment Complex, but excluding points and prepaid interest.
"RD" means the United States Department of Agriculture, Rural Development,
or any successor thereto.
"Registration Date" has the meaning given it in Section 7.3.2.
"Related Person" means a Person having a relationship with a Partner that
is described in Treasury Regulation Section 1.752-4(b).
"Reserves" means amounts set aside by the Partnership for working capital
or other obligations of the Partnership and contingencies related to the
ownership of Local Limited Partnership Interests.
"Return on Investment" means an annual, cumulative, but not compounded,
"return" to the Limited Partners as a class on their Adjusted Capital
Contributions commencing for each Limited Partner on the last day of the
calendar quarter during which the Limited Partner's Capital Contribution is
received by the Partnership, calculated at the following annual rates: (i) 11%
through December 31, 2010, and (ii) 6% for the balance of the Partnership's
term.
"Roll-Up" means a transaction involving the acquisition, merger, conversion
or consolidation, either directly or indirectly, of the Partnership and the
issuance of securities of a Roll-Up Entity. Such term does not include:
(i) any transaction if the securities of the Partnership have been for at
least twelve months traded on a national securities exchange or through the
National Association of Securities Dealers, Inc. Automated Quotation National
Market System; or
(ii) a transaction involving the conversion to corporate, trust or
association form of only the Partnership, if, as a consequence of the
transaction, there will be no significant adverse change in any of the
following: (a) the Limited Partners' voting rights; (b) the term of existence of
the Partnership; (c) the terms of compensation of the Sponsor; or (d) the
Partnership's investment objectives.
"Roll-Up Entity" means the partnership, real estate investment trust,
corporation, trust or other entity that would be created or would survive after
the successful completion of a proposed Roll-Up transaction.
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"SLP Affiliate" means an Affiliate of the Fund Manager in its capacity as a
limited partner (or member in the case of limited liability companies) of Local
Limited Partnerships.
"Sale or Refinancing" means a sale by the Partnership of any Local Limited
Partnership Interest, or any other real or personal property of the Partnership,
or the Partnership's receipt of the proceeds of a sale or refinancing of an
Apartment Complex or any other real or personal property of a Local Limited
Partnership.
"Sale or Refinancing Proceeds" means all cash receipts of the Partnership
arising from a Sale or Refinancing less the following:
(i) the amount paid or to be paid in connection with or as an expense of
such Sale or Refinancing, and, with regard to damage recoveries or insurance or
condemnation proceeds, the amount paid or to be paid for repairs, replacements
or renewals resulting from damage to or partial condemnation of the affected
property;
(ii) the amount applied to the payment of the debts and obligations of the
Partnership; and
(iii) any Reserves funded with such proceeds.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, the Partnership, or any Person who will manage or
participate in the management of the Partnership, and any Affiliate of any such
Person, but does not include a Person whose only relation with the Partnership
is as that of an independent property manager whose only compensation is as
such. "Sponsor" does not include wholly independent third parties such as
attorneys, accountants and underwriters whose only compensation is for
professional services rendered in connection with the Offering. A Person may
also be a "Sponsor" of the Partnership by: (i) taking the initiative, directly
or indirectly, in founding or organizing the business or enterprise of the
Partnership, either alone or in conjunction with one or more Persons; (ii)
receiving a material participation in the Partnership in connection with the
founding or organizing of the business of the Partnership, in consideration of
services or property, or both services or property; (iii) having a substantial
number of relationships and contacts with the Partnership; (iv) possessing
significant rights to control Partnership properties (other than Local General
Partners whose only association with the Partnership is as such); (v) receiving
fees for providing services to the Partnership which are paid on a basis that is
not customary in the industry; and (vi) providing goods or services to the
Partnership on a basis which was not negotiated at arm's length with the
Partnership.
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"State Tax Credits" means any credit permitted by a state's tax and/or
revenue laws against income tax liability owed to that state as a result of
activities or expenditures relating to low-income housing.
"Subordinated Disposition Fee" means the fee payable to the General Partner
in connection with dispositions of Properties owned by Local Limited
Partnerships pursuant to Section 5.6.8.
"Substitute Limited Partner" means any Person admitted to the Partnership
as a Limited Partner pursuant to the provisions of Section 7.3 and 7.4 hereof.
"Syndication Expenses" means all expenditures classified as syndication
expenses pursuant to Treasury Regulation Section 1.709-2(b). Syndication
Expenses shall be taken into account under this Agreement at the time they would
be taken into account under the Partnership's method of accounting if they were
deductible expenses.
"Tax Credits" means any credit permitted under the Code against the Federal
income tax liability of any Partner as a result of activities or expenditures of
the Partnership or any Local Limited Partnership, including, without limitation,
Low Income Housing Credits and Historic Tax Credits.
"Temporary Investments" means United States Government securities,
securities issued or fully guaranteed by United States Government agencies,
certificates of deposit and time or demand deposits in, or repurchase agreements
constituting obligations of, commercial banks with deposits insured by the
Federal Deposit Insurance Corporation and other short-term, highly liquid
investments.
"Treasury Regulation or Regulations" means the Income Tax Regulations
promulgated under the Code, as such regulations may be amended from time to time
(including corresponding provisions of succeeding regulations).
"Unit" means the Interest of a Limited Partner attributable to a Capital
Contribution of $1,000 (determined without regard to any discounts for
Designated Investors and Discount Investors).
"Voluntary Withdrawal" by a General Partner means any withdrawal initiated
by the General Partner and includes, but is not limited to, the commencement of
an action in bankruptcy by or against such General Partner, and excludes any
withdrawal accomplished as the result of a settlement, whether or not
incorporated in a decree of a court or administrative agency, between a
withdrawing General Partner and one or more of any remaining General Partners, a
majority-in-interest of the Limited
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Partners or any regulatory agency whether a Federal or state agency or a
self-regulatory agency, having jurisdiction over the affairs of the Partnership.
ARTICLE 2
FORMATION; NAME; PLACE OF BUSINESS; PURPOSE AND TERM
2.1. Formation of Partnership
The parties hereto hereby form the Partnership on the terms and conditions
set forth herein and pursuant to the provisions of the Act.
2.2. Name
The name of the Partnership shall be "WNC Housing Tax Credit Fund VI, L.P.,
Series 7," or "WNC Housing Tax Credit Fund VI, L.P., Series 8," as the case may
be. The General Partner, in its sole discretion, may change the name of the
Partnership at any time and from time to time provided that Notification thereof
is given to the Limited Partners within 30 days of the effective date thereof.
2.3. Place of Business
The Partnership shall continuously maintain an office in the State of
California which shall constitute its principal office and place of business and
at which the records required by Section 15615 of the Act and by Section 9.1 of
this Agreement shall be maintained. Such office shall initially be located at
3158 Redhill Avenue, Suite 120, Costa Mesa, California 92626, but may be changed
from time to time by the General Partner provided that Notification thereof is
given to the Limited Partners within 30 days of the effective date thereof.
The Partnership may maintain additional offices and places of business in
other locations selected by the General Partner.
2.4. Purpose
The purpose and character of the business of the Partnership shall be to
acquire, hold, sell, dispose of and otherwise invest in Local Limited
Partnership Interests and to engage in any other activities related or
incidental thereto. The investment objectives of the Partnership, in order of
importance, shall be to:
(i) provide current tax benefits, primarily in the form of Tax Credits
which Limited Partners may use to offset Federal income tax liabilities;
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(ii) preserve and protect the Partnership's capital; and
(iii) provide cash distributions from Sale or Refinancing transactions.
2.5. Agent for Service of Process
The Partnership shall continuously maintain an agent for service of process
on the Partnership at the Partnership's principal office in the State of
California. Such agent shall initially be David N. Shafer, Esq.
2.6. Term
The term of the Partnership shall commence on the date of the filing of its
Certificate of Limited Partnership with the office of the Secretary of State of
the State of California and shall continue in full force and effect until
December 31, 2060, or until the termination and winding up of the Partnership
prior to that time pursuant to the provisions of Article 8.
ARTICLE 3
PARTNERS AND CAPITAL
3.1. General Partner
The business address of the General Partner is 3158 Redhill Avenue, Suite
120, Costa Mesa, California 92626. The General Partner has made a Capital
Contribution to the Partnership of $100. The General Partner shall have no
personal liability for the repayment of the Capital Contribution of any Limited
Partner nor any other obligation to make Capital Contributions, loans or
advances to the Partnership.
3.2. Initial Limited Partner
The business address of the Initial Limited Partner is 3158 Redhill Avenue,
Suite 120, Costa Mesa, California 92626. The Initial Limited Partner has made a
Capital Contribution to the Partnership of $1,000. The Initial Limited Partner,
as such, shall not be required to make any additional Capital Contribution to
the Partnership.
3.3. Additional Limited Partners; Terms of Offering
3.3.1. The Partnership intends to make a public Offering of not more than
25,000 additional Units and shall admit as Limited Partners the Persons whose
subscriptions for such Units are accepted by the General Partner (who may refuse
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to accept any subscription for any reason). The names and the residence,
business or mailing addresses of the Additional Limited Partners and their
Capital Contributions shall be set forth in the Partnership Register.
3.3.2. The Capital Contribution required of each Additional Limited Partner
shall be not less than $5,000 and may be such greater integral multiple of
$1,000 (in each case determined without regard to any discounts for Designated
Investors and Discount Investors) as such Additional Limited Partner and the
General Partner shall agree upon. Notwithstanding the preceding, employees of
the General Partner and its Affiliates and/or investors in real estate
syndications previously sponsored by the Fund Manager may make a minimum Capital
Contribution of $2,000. Except with respect to subscribers who qualify for, and
elect to utilize, the installment payment procedure provided for in Section
3.4.1 below for the payment of up to one-half their Capital Contributions, all
of such required Capital Contribution shall be paid in cash at the time of
subscription for the Units.
All subscribers whose subscriptions are acceptable to the General Partner
shall be admitted to the Partnership as Additional Limited Partners on or before
the last day of the calendar month during which such subscriptions were
accepted.
3.3.3. All cash and Promissory Notes received from subscribers for Units
shall be received by the Partnership in trust and deposited in an escrow account
with the Escrow Agent. Subscriptions for Units shall be accepted or rejected by
the General Partner within 30 days after their receipt by the Partnership. Upon
receipt and deposit into escrow of Capital Contributions in the amount of at
least $1,400,000, the Escrow Agent shall release to the Partnership such Capital
Contributions and the Promissory Notes evidencing any Note Capital
Contributions, and the subscribers for such Units shall be admitted to the
Partnership as Additional Limited Partners within 15 days after the date of such
release. Thereafter, subscribers whose subscriptions are acceptable to the
General Partner shall be admitted to the Partnership as Additional Limited
Partners on or before the last day of the calendar month during which such
subscriptions were accepted. All cash and Promissory Notes deposited by
subscribers whose subscriptions are rejected by the General Partner shall be
returned to such subscribers within 10 business days after such rejection. If
the Escrow Agent does not receive Capital Contributions in the amount of at
least $1,400,000 within one year from the Offering Commencement Date, it shall
within 30 days thereafter return all cash and Promissory Notes deposited by
subscribers for Units. Any interest earned on subscription funds in the hands of
the Escrow Agent received by the Escrow Agent from any subscriber for Units
shall be paid to such subscriber promptly after the release of such subscription
proceeds by the Escrow Agent to the Partnership or to such subscriber, as the
case may be. The General Partner, in its sole discretion, may, but is not
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obligated to, increase the total interest earned by the subscribers on
funds held by the Escrow Agent. If so, the amount of the increase in interest
will be identified in the Prospectus. Any funds necessary to pay such additional
amount shall be contributed to the Partnership by the General Partner.
3.3.4. The Offering shall be terminated not later than two years from the
Offering Commencement Date, and may be terminated earlier at the election of the
General Partner.
3.3.5. To accomplish the purpose of this Section 3.3, the General Partner
is hereby authorized to do all things necessary to admit such Additional Limited
Partners, including, but not limited to, registering the Units under the
Securities Act of 1933, as amended, qualifying the Units for sale with state
securities regulatory agencies or perfecting exemptions from qualification, and
entering into underwriting or agency arrangements for the Offering upon such
terms and conditions as the General Partner may deem advisable.
3.4. Payment or Return of Additional Limited Partners' Capital
3.4.1. (a) Each Limited Partner who subscribes for 20 or more Units may
elect to contribute only $500 in cash for each Unit which such Partner acquires,
provided that he also shall make a Note Capital Contribution in the amount of
$500 for each such Unit. The Note Capital Contribution of each such Limited
Partner shall be evidenced by a Promissory Note delivered upon subscription for
the Units. Except as set forth below in this section, each Promissory Note shall
be payable in one installment of principal on (i) January 31, 2001, if the maker
subscribes for his Units between the date hereof and June 30, 2000, (ii) June
30, 2001, if the maker subscribes for his Units between July 1, 2000 and
December 31, 2000, or (iii) the later of the date of subscription or January 31,
2002, if the maker subscribes for his Units after December 31, 2000. Each
Promissory Note shall bear interest on the unpaid balance at a rate equal to the
one-year Treasury Bill rate, such rate to be determined quarterly. Interest will
be payable in arrears on the principal payment date. Notwithstanding the
preceding, (i) in connection with subscriptions to 500 or more Units by a single
purchaser the General Partner shall have the power, exercisable in its sole
discretion, to agree to a different schedule for payment of the Promissory Note,
including a schedule which provides for payment in more than one deferred
installment, provided that the total purchase price due from such investor is
paid within two years following the earlier of (A) the completion of the
Offering, or (B) one year following the effective date of the Offering; and (ii)
in connection with subscriptions to 500 or more Units by a single corporate
purchaser which has a credit rating issued by Standard & Poor's of A or better,
the General Partner shall have the power, exercisable in its sole discretion, to
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agree to a lower interest rate on such investor's Promissory Note, provided
that in no event may the interest rate by lower than 3%.
(b) Each Limited Partner who elects to pay for his Units in the
manner described in Section 3.4.1.(a) (an "Installment Contributor Limited
Partner") hereby grants to the Partnership a security interest in the Limited
Partner's Units to secure all of the Limited Partner's obligations under the
Promissory Note, any modifications, renewals or extensions of the Promissory
Note and all of the Limited Partner's other obligations under this Section
3.4.1.
(c) If an Installment Contributor Limited Partner defaults under
his Promissory Note or under any modifications, renewals or extensions thereof,
at the option of the Partnership, the entire unpaid principal balance of his
Promissory Note shall be immediately due and payable, the Promissory Note shall
continue to bear interest at the rate set forth in Section 3.4.1(a), a late
charge shall be imposed in an amount equal to 5% of any delinquent payment and
the Partnership shall be entitled to retain and, in any event, set off against
the amount owed to the Partnership by the defaulting Limited Partner, all
distributions attributable to the Units of the defaulting Limited Partner. In
addition, the Partnership may pursue any remedy available (including those
available under the provisions of the Uniform Commercial Code) or in equity to
collect, enforce and satisfy the obligations of the defaulting Limited Partner,
including the filing of a suit to obtain a judgment against the defaulting
Limited Partner.
The defaulting Limited Partner shall pay to the Partnership all costs
incurred by the Partnership in enforcing the Promissory Note, including but not
limited to costs of obtaining money damages and attorneys' fees. Each
Installment Contributor Limited Partner acknowledges that the Partnership may
pledge his Promissory Note as collateral security for Partnership debt. In the
event of a default under the Promissory Note, the Partnership or any other
holder of the Promissory Note, as applicable, may foreclose upon the defaulting
Limited Partner's interest in the Partnership and sell the Units in a
commercially reasonable manner to non-defaulting Limited Partners or to other
qualified investors on terms approved by the Partnership or any holder of the
Promissory Note. It is acknowledged by each Installment Contributor Limited
Partner that the purchase of the Units is a suitable investment only for Persons
meeting certain suitability standards and that it will be difficult for the
Partnership to find a suitable purchaser of the Units and to make adequate
disclosure of all of the then existing risks of the investment to prospective
purchasers. The General Partner and its Affiliates may (but are not obligated
to) purchase any such Units, but only if such Units have first been offered to
the non-defaulting Limited Partners. If Units are offered to non-defaulting
Limited Partners, they will be sold on a first-come, first-sold basis in
increments of whole Units only.
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Each Installment Contributor Limited Partner agrees that in the event of a
default under his Promissory Note and a foreclosure and sale of his Units by the
Partnership or any holder of his Promissory Note, as applicable, the purchaser
of the Units in such a sale may be substituted as a Limited Partner in place of
the defaulting Limited Partner without any further consent being required from
the defaulting Limited Partner, and specifically authorizes the General Partner
to execute on his behalf any amendment to this Agreement or other documentation
necessary to effect the substitution. Units acquired by the Partnership through
a foreclosure sale or otherwise may be reissued by the Partnership.
Each Promissory Note shall (i) be made with full recourse to the maker;
(ii) not be a negotiable instrument; (iii) be assignable only subject to the
defenses of the maker; (iv) be subject to venue for collection in the
jurisdiction in which the Installment Contributor Limited Partner resides; (v)
except as set forth below in this section, not be sold by the Partnership prior
to maturity; (vi) provide that a default in a payment due shall not occur until
30 days after its due date; provided, that until 30 days after default and
notice thereof and intent to foreclose has been given to the defaulting Limited
Partner, such Limited Partner shall have the right to cure such default with
interest due thereon without suffering any reduction in Interest in the
Partnership and the Partnership may not commence proceedings to enforce its
security interest in the defaulting Limited Partner's Units; (vii) not contain
any provision authorizing a confession of judgment; and (viii) be prepayable at
any time in whole (but not in part) without penalty. Subject to the foregoing,
the Partnership may pledge and grant security interests in Promissory Notes as
security for any Partnership obligation. Notwithstanding the preceding, the
General Partner shall have the power, exercisable in its sole discretion, to
sell the Promissory Note of any corporate investor, provided that such investor
has a credit rating issued by Standard & Poor's of A or better.
3.4.2. In the event that any portion of the amount available for Investment
in Local Limited Partnership Interests is not so invested within the later of
(i) 24 months after the Offering Commencement Date, or (ii) 12 months after
termination of the Offering, such uninvested portion (except for Reserves) shall
be distributed to the Limited Partners who invested in the Partnership as a
return of capital. In addition, in order to refund to the Limited Partners the
amount of Front-End Fees attributable to such returned capital, the General
Partner shall contribute to the Partnership and the Partnership shall distribute
pro rata to the Limited Partners the amount by which the quotient of (x) the
amount of uninvested capital distributed pursuant to the foregoing sentence,
divided by (y) the percentage of the Capital Contributions which remain after
payment of all Front-End Fees, exceeds the uninvested capital so distributed.
Any funds (i) with respect to the investment of which the Partnership has
executed a written agreement in principle, commitment letter, letter of intent
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or understanding, option agreement or other similar understanding or
contract, or (ii) which the Partnership has set aside or temporarily invested
for Reserves or to fund capital contributions to any Local Limited Partnerships
as of the later of (i) the date 24 months after the Offering Commencement Date
or (ii) the date 12 months after termination of the Offering will be deemed
invested on that date and will not subsequently be returned to the Limited
Partners even if investment of such funds is not consummated or the contingent
payments are not made.
3.5. Liability of Limited Partners
3.5.1. A Limited Partner shall be liable only to make his Capital
Contribution, including his Note Capital Contribution, and shall not be liable
for the debts, liabilities, contracts or any other obligations of the
Partnership.
3.5.2. A Limited Partner may be obligated to return a distribution of cash
or other property received by him from the Partnership to the extent that,
immediately after giving effect to the distribution, all liabilities of the
Partnership, other than liabilities to Limited Partners on account of their
Interests in the Partnership and liabilities as to which recourse of the
creditors is limited to specified property of the Partnership, exceed the fair
value of the Partnership's assets, provided that the fair value of any Property
that is subject to a liability as to which recourse of creditors is so limited
shall be included in the Partnership's assets only to the extent that the fair
value of the Property exceeds the liability.
3.6. Miscellaneous
3.6.1. No Partner shall be paid interest on any Capital Contribution.
3.6.2. No Partner shall have the right to withdraw prior to the dissolution
and winding up of the Partnership or to receive any return of his Capital
Contribution except as specifically provided in Article 4 and Sections 3.4.2 and
8.2. No Capital Contribution may be returned in the form of property other than
cash, except as specifically provided in Section 8.2.
3.6.3. After its issuance by the Partnership, no Unit shall be subject to
Assessment. For these purposes, the term "Assessment" means additional amounts
of capital which may be mandatorily required of or paid at the option of a
Limited Partner beyond his subscription commitment. The term "Assessment" does
not mean a Limited Partner's Note Capital Contribution.
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ARTICLE 4
DISTRIBUTIONS OF CASH; ALLOCATIONS OF PROFITS AND LOSSES
4.1. Distributions of Cash Available for Distribution
Any Cash Available for Distribution at the end of any fiscal year shall be
distributed, within 120 days after the end of such fiscal year, 99.9% to the
Limited Partners and 0.1% to the General Partner.
4.2. Distributions of Sale or Refinancing Proceeds
4.2.1. Subject to other provisions of this Section 4.2, all Sale or
Refinancing Proceeds, to the extent not used to acquire Local Limited
Partnership Interests as permitted by Section 5.4.1(x), shall be distributed in
the following amounts and order of priority:
(i) First, to the Limited Partners until they have received (a) their
Adjusted Capital Contributions, plus (b) their Return on Investment minus (i)
any cash distributed by the Partnership to the Limited Partners pursuant to
Section 4.1 or this Section 4.2.1(i)(b) on or before the close of the year in
which the distribution of Sale or Refinancing Proceeds occurs, and (ii) an
amount equal to the Tax Credits allocated to the Limited Partners on or before
the close of such year (reduced by any recapture thereof arising other than as a
result of the disposition of a Unit by a Limited Partner);
(ii) Second, to the General Partner in an amount equal to (a) its Capital
Contribution minus (b) any amounts previously distributed to it from Sale or
Refinancing Proceeds; and
(iii) Third (after payment of any accrued but unpaid Subordinated
Disposition Fee), the balance 90% to the Limited Partners and 10% to the General
Partner.
4.2.2. Upon termination and winding up of the Partnership, after payment
of, or adequate provision for, the debts and obligations of the Partnership, and
the funding of any Reserves deemed reasonable by the General Partner, the
remaining assets of the Partnership shall be distributed to all Partners with
positive Capital Accounts in the ratio of their respective positive Capital
Accounts to the sum of all such positive Capital Accounts. For purposes of the
preceding sentence, the Capital Account of each Partner shall be determined
after all adjustments in accordance with this Article 4 resulting from
Partnership operations and from all Sales or Refinancings.
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4.2.3. Notwithstanding any other provision of this Agreement to the
contrary, the interest of the General Partner and of its Affiliates in cash to
be distributed by the Partnership or by any Local Limited Partnership from Cash
Available for Distribution, from Sale or Refinancing Proceeds, or from similar
sources in the case of a Local Limited Partnership, will not exceed, in the case
of Cash Available for Distribution, 10% of total Cash Available for Distribution
and, in the case of Sale or Refinancing Proceeds, after the payment to Limited
Partners of an amount equal to 100% of their Capital Contributions and their
Return on Investment, 15% of remaining Sale or Refinancing Proceeds.
Furthermore, the interest of the General Partner and its Affiliates as Local
General Partners and/or as the SLP Affiliate in operating cash flow of all Local
Limited Partnerships, plus the Asset Management Fee payable pursuant to Section
5.6.7, will not in any year exceed an amount equal to 0.5% of that portion of
Invested Assets in Local Limited Partnerships which are attributable to
apartment units receiving Government Assistance.
4.3. Profits and Losses
After taking into account all special allocations and otherwise adjusting
the Partners' Capital Accounts in accordance with the applicable provisions of
Section 4.4, any remaining Profits and Losses shall be allocated among the
Partners in accordance with this Section 4.3.
4.3.1. If there is an aggregate Loss remaining, such remaining aggregate
Loss shall be allocated 99.9% to the Limited Partners and 0.1% to the General
Partner. Notwithstanding the preceding, the Losses allocated pursuant to the
preceding sentence shall not exceed the maximum amount of Losses that can be so
allocated without causing any Partner to have an Adjusted Capital Account
Deficit at the end of any fiscal year. In the event some but not all of the
Partners would have Adjusted Capital Account Deficits as a consequence of an
allocation of Losses, the limitation set forth herein shall be applied on a
Partner by Partner basis so as to allocate the maximum permissible Losses to
each Partner.
4.3.2. If there is an aggregate Profit remaining, such remaining aggregate
Profit shall be allocated:
(i) First, in the event that the Limited Partners have an aggregate
positive Capital Account balance and the General Partner has a negative Capital
Account balance or vice versa, to the class of Partners with and to the extent
of such negative balances;
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(ii) Second, to the extent of the aggregate negative Capital Account
balances of the Partners, to the Limited Partners and the General Partner in
such manner and amount as is necessary to cause the negative Capital Account
balances of such Partners, as so adjusted, to be in the ratio of 99.9% to the
Limited Partners and 0.1% to the General Partner; and
(iii) Third, to the Limited Partners and the General Partner in such manner
and amount as is necessary to cause the positive Capital Account balances of the
Partners to be equal to such Partners' Deemed Liquidation Distribution.
4.3.3. Whenever in this Section 4.3 a reference is made to the Limited
Partners, such reference shall be deemed to be a reference to the Limited
Partners as a class.
4.3.4. Profits and Losses and the amount of any expenditure giving rise to
a Tax Credit shall be determined and allocated with respect to each fiscal year
of the Partnership as of, and within 75 days after, the end of such year.
4.4. Certain Provisions Related to Partnership Allocations and
Distributions
4.4.1.(i) If the Partnership is advised at any time by its Accountants or
counsel that the allocations of Profits and Losses and/or Tax Credits are
unlikely to be respected for Federal income tax purposes, the General Partner is
authorized and empowered, without any Consent of Limited Partners, to amend this
Agreement to cure such defect.
(ii) Notwithstanding anything to the contrary, until the expiration of five
years after the last Apartment Complex qualifying for the Historic Tax Credit
has been placed in service, nothing in Section 4.3 or this Section 4.4.1 is
intended to, or shall, cause Profits to be allocated in any manner other than
99.9% to the Limited Partners and 0.1% to the General Partner.
4.4.2. The Partners acknowledge that under certain circumstances specified
in the Treasury Regulations, the allocations of taxable income or loss and any
item thereof may not be respected for Federal income tax purposes, unless the
assets of the Partnership are revalued to reflect their fair market value and
the Capital Accounts of the Partners are properly adjusted to reflect the
difference between this fair market value (referred to herein as the "Book
Value") and the Partnership's tax basis in such assets (or, in the case of a
prior revaluation, the Partnership's prior Book Value). The circumstances in
which such revaluation may be required include, without limitation, the
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contribution of property (other than cash) to the Partnership by a Partner
and certain distributions of property by the Partnership to a Partner. This
Agreement does not permit or provide for the contribution of property (other
than cash) to the Partnership and does not provide for the distribution of
property (other than cash) to the Partners, except for distributions to a
liquidating trust for the Partners under Section 8.2.2. However, in the event
that the Treasury Regulations are determined to require such a revaluation, the
Capital Accounts of the Partners shall be properly adjusted to reflect such
revaluation and the effect of such contribution or distribution on liabilities
that the recipient assumes or to which the revalued property is subject. Any
allocation of Profits and Losses and any adjustment to the Partners' Capital
Accounts required by the Treasury Regulations as a result of such required
revaluation, or any subsequent allocations of Profits and Losses, shall be made
in accordance with Treasury Regulations under Code Sections 704(b) and 704(c).
4.4.3.(i) In the event any Limited Partners unexpectedly receive any
adjustments, allocations, or distributions described in Treasury Regulation
Section 1.704- 1(b)(2)(ii)(d)(4)-(ii)(d)(6), items of Partnership income and
gain (consisting of a pro rata portion of each item of the Partnership's income,
including gross income, and gain for such year) shall be specially allocated to
such Partners in an amount and manner sufficient to eliminate, to the extent
required by the Regulations, the Adjusted Capital Account Deficit created by
such adjustments, allocations, or distributions as quickly as possible.
(ii) In the event the adjusted tax basis of any investment tax credit
property that has been placed in service by the Partnership is increased
pursuant to Section 50(c)(2) of the Code, such increase shall be allocated among
the Partners (as an item in the nature of income or gain) in the same
proportions as the investment tax credit that is recaptured with respect to such
Property is shared among the Partners.
(iii) The Capital Account of each Limited Partner shall be reduced by a
charge equal to the amount of the selling commission paid by the Partnership to
the soliciting dealers that is properly allocable to the Units held by such
Limited Partner. Notwithstanding any provision of this Agreement to the
contrary, the Partnership shall be deemed to have distributed to each Limited
Partner, and the Capital Account of each Limited Partner shall be reduced by a
charge equal to, the excess of a 7% selling commission over the amount charged
such Limited Partner's Capital Account as a selling commission in accordance
with the preceding sentence (the "Discount"). Any deemed distribution pursuant
to this Section 4.4.3(iii) shall not be deemed a return of a Partner's Capital
Contribution, but rather shall be deemed to be a compromise within the meaning
of Section 15636(c) of the Act, and no Partner shall be obligated to pay any
such amount to or for the benefit of the Partnership or any creditor of the
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Partnership. With respect to each Designated Investor and each Discount
Investor: (a) the Capital Contribution of such Investor shall be deemed to be
equal to $1,000 for each Unit purchased; (b) the amount of the selling
commission paid by the Partnership that is properly allocable to the Units held
by such Investor shall be deemed to be the reduced selling commission; and (c)
such Investor shall not receive an actual distribution but shall be deemed to
have received a distribution pursuant to this Section 4.4.3(iii) equal to the
Discount. All other Syndication Expenses for any fiscal year or other period
shall be specially allocated to the Limited Partners in proportion to their
Units, provided that if additional Limited Partners are admitted to the
Partnership pursuant to Section 3.3 hereof on different dates, all of such other
Syndication Expenses shall be divided among the Partners who own Units from time
to time so that, to the extent possible, the cumulative amount of such other
Syndication Expenses allocated with respect to each Unit at any time is the same
amount. In the event the General Partner shall determine that such result is not
likely to be achieved through future allocations of such other Syndication
Expenses, the General Partner may allocate a portion of Profits and Losses so as
to achieve the same effect on the Capital Accounts of the Limited Partners.
(iv) Any reduction in the adjusted tax basis (or cost) of Partnership
property pursuant to Section 50(c)(1) of the Code shall be allocated among the
Partners (as an item in the nature of expenses or losses) in the same
proportions as the basis (or cost) of such property is allocated pursuant to
Treasury Regulation Section 1.46-3(f)(2)(i).
(v) (a) Except as otherwise provided in Treasury Regulation Section 1.704-
2(f), if there is a net decrease in Partnership Minimum Gain during a fiscal
year of the Partnership, each Partner shall be allocated items of Partnership
income and gain for such year (and, if necessary, subsequent years) in
proportion to, and to the extent of, an amount equal to the portion of such
Partner's share of the net decrease in Partnership Minimum Gain during such
year.
(b) Except as otherwise provided in Treasury Regulation Section
1.704- 2(h), if there is a net decrease in Partner Nonrecourse Debt Minimum Gain
during a fiscal year of the Partnership determined in accordance with the
principles of Section 1.704-2(i) of the Regulations, each Partner who had a
share of Partner Nonrecourse Debt Minimum Gain at the beginning of such year
shall be allocated items of Partnership income and gain for such year (and, if
necessary, subsequent years) in proportion to, and to the extent of, an amount
equal to the portion of such Partner's share of the net decrease in Partner
Nonrecourse Debt Minimum Gain during such year that is allocable (in accordance
with the principles set forth in Treasury Regulation Section 1.704-2(i)) to the
disposition of Partnership property subject to the related Partner Nonrecourse
Debt.
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(vi) The allocations set forth in Sections 4.4.2 and 4.4.3 hereof, other
than this Section 4.4.3(vi) (the "Regulatory Allocations") are intended to
comply with certain requirements of Treasury Regulations. It is the intent of
the Partners that, to the extent possible, all Regulatory Allocations shall be
offset either with other Regulatory Allocations or with special allocations of
other items of Partnership income, gain, loss or deduction pursuant to this
Section 4.4.3(vi). Therefore, notwithstanding any other provision of this
Article 4 (other than the Regulatory Allocations), the General Partner shall
make such offsetting special allocations of Partnership income, gain, loss or
deductions in whatever amount it determines appropriate so that, after such
offsetting allocations are made, each Partner's Capital Account balance is, to
the extent possible, equal to the Capital Account balance such Partner would
have had if the Regulatory Allocations were not part of this Agreement and all
Partnership items were allocated pursuant to the provisions of this Article 4
other than the Regulatory Allocations. In exercising its discretion under this
Section 4.4.3(vi), the General Partner shall take into account future Regulatory
Allocations under Section 4.4.3(v)(a) and (b) that, although not yet made, are
likely to offset other Regulatory Allocations previously made under Sections
4.4.3(vii) and (viii).
(vii) Any deduction attributable to Partner Nonrecourse Debt shall be
allocated to the Partners that bear the Economic Risk of Loss for the Partner
Nonrecourse Debt.
(viii) Nonrecourse Deductions shall be allocated 99.9% to the Limited
Partners and 0.1% to the General Partner.
4.4.4. For the purpose of making any allocation of Profit and Loss, the
Capital Account of each Partner shall first be deemed to have been reduced by
the amount of any distribution that, at the end of the fiscal year of the
Partnership with respect to which such allocation is to be made, was reasonably
anticipated to be made to such Partner pursuant to Section 4.1 or Section 4.2.1,
except to the extent that, in compliance with Treasury Regulation Section
1.704-1(b)(2)(ii)(d)(6), the General Partner reasonably anticipates that the
Partnership will subsequently have offsetting income or gains.
4.4.5. To the extent that any amount of gain from the sale or other
disposition of a Property is treated as gain subject to the provisions of
Section 1245 or 1250 of the Code (other than as a result of the application of
Section 291 of the Code), such gain shall be allocated between the Limited
Partners, as a class, and the General Partner in the manner and amount necessary
to offset the amount of depreciation previously allocated to them that is being
recaptured as a result of such sale or other disposition (including any amount
so treated as a result of the application of Section 50(c) of the Code);
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provided, however, that nothing in this Section 4.4.5 shall alter the
aggregate amount of Profits and Losses allocable to any Partner pursuant to this
Article 4, and the character of other items included in such Profits and Losses
for the relevant period shall be appropriately adjusted to give effect to this
provision.
4.4.6. All amounts withheld pursuant to the Code or any provision of any
state or local tax law with respect to any distribution to, or allocable share
of, the Partners shall be treated as amounts distributed to the Partners
pursuant to this Article 4 for all purposes under this Agreement. The General
Partner may allocate any such amounts among the Limited Partners in any manner
that is in accordance with applicable law.
4.4.7. Where relevant in determining the allocation of Profits and Losses
among the Partners, including the character of any amount so allocated, such
Profits and Losses arising other than from a Sale or Refinancing shall be
allocated among the Partners before the allocation of such Profits and Losses
from a Sale or Refinancing, and where more than one Sale or Refinancing occurs
during the fiscal year, Profits and Losses from such transactions shall be
allocated among the Partners in chronological order.
4.4.8. To the extent permitted by Section 1.704-2(h)(3) of the Treasury
Regulations, the General Partner shall endeavor to treat Partnership
distributions as having been made from the proceeds of a Nonrecourse Liability
or a Partner Nonrecourse Debt only to the extent that such distributions would
cause or increase an Adjusted Capital Account Deficit for any Limited Partner.
4.4.9 Any interest income recognized by the Partnership in connection with
payments to the Partnership pursuant to a Promissory Note shall be allocated to
the Limited Partner which delivered such Promissory Note to the Partnership (or
his successor in interest).
4.5. Allocation of Tax Credits
4.5.1. Except as provided in Section 4.5.2, in accordance with Treasury
Regulation Section 1.704-1(b)(4)(ii), all expenditures giving rise to the
allowance of any Tax Credits shall be allocated among the Partners in the manner
in which the deductions arising from such expenditures are allocated among the
Partners for the relevant taxable year, it being the intention of the Partners
that such expenditures, including, without limitation, expenditures giving rise
to the allowance of Low Income Housing Credits, be allocated 99.9% to the
Limited Partners, as a class, and 0.1% to the General Partner.
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4.5.2. For purposes of the investment tax credit, including the Historic
Tax Credit, each Partner shall be allocated a share of the Partnership's basis
in the property qualifying for the investment tax credit. Each Partner's share
of such basis shall be determined in accordance with the ratio in which the
Partners are allocated Profits of the Partnership (other than Profits from a
Sale or Refinancing) for the year during which the property is placed in
service. If the Partnership realizes no Profits during such year, then such
share of such basis shall be determined in accordance with the ratio in which
the next dollar of such Profits would have been allocated if such Profits had
been realized.
4.5.3. Any recapture of any Tax Credits shall be allocated between the
Limited Partners, as a class, and the General Partner in the same manner in
which they shared the Tax Credits.
4.5.4. Notwithstanding Section 4.5.3, in the case of any recapture of any
Tax Credits resulting from the sale, exchange, transfer or assignment of any
Units, the Limited Partners holding such Units prior to the sale, exchange,
transfer or assignment shall indemnify the Partnership and the Partners not
transferring their Units for the consequences of such recapture in the
proportion in which such transferred Units shared the Tax Credits.
4.6. Determinations of Allocations and Distributions
Within Classes of Partners
4.6.1. All Cash Available for Distribution and Sale or Refinancing Proceeds
distributable to the Limited Partners as a class, and all Profits and Losses
(including each item of income, gain, loss, deduction or credit included
therein, except as provided in Section 4.4) allocable to the Limited Partners as
a class, shall be distributed or allocated, as the case may be, to each Limited
Partner entitled to a distribution or allocation, in the ratio which the number
of Units held by each Limited Partner bears to the total number of Units held by
all Limited Partners entitled to the distribution or allocation.
4.6.2. Except a provided in Sections 3.3.3, 4.6.3, 4.6.4, and 4.6.5, all
Profits and Losses not arising from a Sale or Refinancing and all Tax Credits
allocable to the Limited Partners as a class, shall be allocated, and all Cash
Available for Distribution distributable to the Limited Partners as a class
shall be distributed, to the Persons recognized (in accordance with Section
7.3.3 in the case of a transfer of Units) as the holders of Units for this
purpose as of the last day of the fiscal period for which the allocation or
distribution is to be made.
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4.6.3. Subject to Section 4.6.5, all Profits and Losses not arising from a
Sale or Refinancing and all Tax Credits for a fiscal year allocable to any Unit
which is transferred during the year shall be divided and allocated between the
transferee and the transferror based upon the number of quarterly periods that
each was recognized (in accordance with Section 7.3.3) as the holder of the Unit
for this purpose, without regard to whether Partnership operations during
particular quarterly periods of such fiscal year produced profits or losses or
cash distributions.
4.6.4. All Profits and Losses arising from a Sale or Refinancing allocable
to the Limited Partners as a class shall be allocated, and all Sale or
Refinancing Proceeds distributable to the Limited Partners as a class shall be
distributed, to the Persons recognized (in accordance with Section 7.3.3 in the
case of a transfer of Units) as the holders of Units for this purpose as of the
date of the Sale or Refinancing.
4.6.5. In the event that there is more than one Investor Closing, all Cash
Available for Distribution and Profits and Losses not arising from a Sale or
Refinancing, distributable or allocable, as the case may be, to the Limited
Partners as a class for the period commencing with the first day of the month of
the Investor Closing and ending on the last day of the month of the Investor
Closing will be distributed or allocated, as the case may be, on a monthly basis
in accordance with Section 4.6.1 solely to the Limited Partners admitted to the
Partnership as of or prior to the Investor Closing date which occurs during such
month.
ARTICLE 5
RIGHTS, POWERS AND DUTIES OF GENERAL PARTNER
5.1. Management of the Partnership
5.1.1. Subject to the Consent of the Limited Partners (or of a specified
percentage thereof) where required by this Agreement, the General Partner shall
have the exclusive right and authority to manage and control the business of the
Partnership and is hereby authorized to take any action and to do anything it
deems necessary to achieve the purposes of the Partnership in accordance with
the provisions of this Agreement and applicable law.
5.1.2. The General Partner shall, except as otherwise provided in this
Agreement, have all rights and powers and shall be subject to all the
restrictions and liabilities of a partner in a partnership without limited
partners.
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5.1.3. No Limited Partner (except one who may also be a General Partner,
and then only in its capacity as a General Partner) shall participate in or have
any control over the Partnership business or have any authority or right to act
for or bind the Partnership.
5.2. General Authority of General Partner
5.2.1. Subject to Sections 5.2.2, 5.3 and 5.4, the General Partner for, and
in the name and on behalf of, the Partnership is hereby authorized, without
limitation:
(i) to acquire, hold, encumber, sell, dispose of and otherwise deal with
Local Limited Partnership Interests, at such price and upon such terms as it
deems to be in the best interests of the Partnership, including exercise of the
Partnership's voting and other rights and powers as a limited partner in the
Local Limited Partnerships;
(ii) to acquire by purchase, lease, exchange or otherwise, any other real
or personal property;
(iii) to borrow money and issue evidences of indebtedness, and to secure
the same by pledge or other lien on any Local Limited Partnership Interests or
other assets of the Partnership;
(iv) to employ agents, employees, managers, accountants, attorneys,
consultants and other Persons necessary or appropriate to carry out the business
and operations of the Partnership, and to pay fees, expenses, salaries, wages
and other compensation to such Persons;
(v) to pay, extend, renew, modify, adjust, submit to arbitration,
prosecute, defend or compromise, upon such terms as it may determine and upon
such evidence as it may deem sufficient, any obligation, suit, liability, cause
of action or claim, including taxes, either in favor of or against the
Partnership;
(vi) to cause the Partnership to make or revoke any of the elections
referred to in the Code;
(vii) to offer and sell Units in the Partnership to the public directly or
through any licensed Person and to employ personnel, agents and dealers for such
purpose;
(viii) to establish and maintain Reserves for such purposes and in such
amounts as it deems appropriate from time to time, it being understood and
agreed that, after the termination of the Offering, the General Partner shall
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establish initial Reserves out of Capital Contributions, in the manner
contemplated by the Prospectus, in an amount equal to not less than 3% of such
Capital Contributions;
(ix) to invest the Net Proceeds in Temporary Investments prior to
investment in Local Limited Partnership Interests;
(x) to engage in any kind of activity necessary to, or in connection with,
or incidental to the accomplishment of the purposes of the Partnership;
(xi) to withhold income taxes as required by, and to otherwise comply with
and take actions necessary as a result of, provisions of the Code (or comparable
provisions of law in any state or other jurisdiction in which the Partnership
does business) requiring withholding;
(xii) in the absolute discretion of the General Partner, at any time after
conclusion of the Offering, to repurchase any Units upon the request of the
holder thereof on terms mutually agreeable to the Partnership and such holder if
the repurchase does not impair the capital or the operations of the Partnership.
Neither the Partnership nor the General Partner shall, at any time, have any
obligation whatsoever to repurchase any Units; and
(xiii) for purposes of the requirements of the Community Reinvestment Act
or related requirements, to allocate properties among Limited Partners in the
absolute discretion of the General Partner.
5.2.2. Notwithstanding any provision in this Agreement to the contrary, it
is understood and agreed that in selecting Local Limited Partnership Interests
for investment by the Partnership the General Partner shall be bound by the
following investment policies which may not be changed, altered or amended,
except as provided in Section 10.2:
(i) the Partnership shall make an investment in a Local Limited Partnership
Interest only if the Local Limited Partnership owns a completed Apartment
Complex or is in the process of developing a new Apartment Complex or
rehabilitating an Apartment Complex which shall be eligible, in the opinion of
counsel, (a) for the Low Income Housing Credit, and/or (b) the Historic Tax
Credit;
(ii) the Partnership shall not acquire any Local Limited Partnership
Interest unless the Partnership has received, with respect to the Apartment
Complex of such Local Limited Partnership, either (i) an appraisal prepared by a
competent, independent appraiser or (ii) RD Forms 1924-13 (estimate and
certificate of actual cost) and 1930- 7 (statement of budget, income and
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expense) or HUD project cost and budget analysis on Form 2264, or a
comparable form of any successor of RD or HUD or of a state or other
governmental agency, including any applicable Tax Credit allocation agency,
setting forth estimates with respect to construction and mortgage financing
costs and initial rental income and operating expenses, which in either case
shall be maintained in the Partnership's records for at least five years, and
shall be available for inspection and duplication by any Partner;
(iii) no part of the Partnership's investment in a Local Limited
Partnership Interest (other than with respect to a Local Limited Partnership
which owns a completed Apartment Complex at the time of the Partnership's
initial investment therein) shall be made prior to receipt of a commitment for
the construction loan, and no more than 75% of the Partnership's investment in
such a Local Limited Partnership Interest shall be made prior to receipt of a
commitment for the permanent loan;
(iv) the agreements with respect to the Partnership's investment in each
Local Limited Partnership Interest (other than with respect to a Local Limited
Partnership which owns a completed Apartment Complex at the date of the
Partnership's initial investment therein) must contain provisions whereby the
completion of construction of the Apartment Complex at the price contracted is
secured by an adequate completion bond or other satisfactory arrangements. For
the purposes of this Section 5.2.2(iv), other satisfactory arrangements include,
but are not limited to, the following:
(a) a written guarantee of completion by the Local General Partner
supported by financial statements demonstrating sufficient net worth or
adequately collateralized by other real or personal properties or other Persons'
guarantees; or
(b) a retention of a reasonable portion of the purchase
consideration as a potential offset to such purchase consideration in the event
the Local General Partner does not perform in accordance with such agreement;
(v) the Partnership shall not invest in any Local Limited Partnership
Interest unless an experienced real estate developer has agreed in writing for a
minimum term acceptable to the General Partner to supervise management of the
Property or to serve as its managing Local General Partner or Property manager;
(vi) the Partnership shall invest only in a Local Limited Partnership
Interest if the Local Limited Partnership restricts the payment of real estate
commissions by any Person to any Person upon resale of an Apartment Complex to a
maximum of the lesser of (a) the Competitive Real Estate Commission or (b) 6% of
the sales price of the Apartment Complex (including the amount of the commission
paid);
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(vii) the Partnership shall invest only in Local Limited Partnership
Interests as follows:
(a) if the Local General Partner of the Local Limited Partnership
is a Sponsor, the partnership agreement of the Local Limited Partnership must
include provisions (1) complying with Section IX.F. of the NASAA Guidelines, (2)
acknowledging privity between the Local General Partner and the Limited
Partners, (3) providing that the compensation payable to the Sponsor in the
aggregate from both the Partnership and the Local Limited Partnership shall not
exceed the amounts permitted under Section IV. of the NASAA Guidelines, (4)
providing that the Local Limited Partnership have as its limited partners only
publicly registered partnerships, except that special limited partners not
affiliated with the Sponsor shall be permitted if the interests taken by the
special limited partners result in no diminution in the control exercisable by
the other limited partners of the Local Limited Partnership, and (5) providing
that the Partnership's investment in the Local Limited Partnership shall not be
structured through more than a two-tier arrangement;
(b) if the Local General Partner of the Local Limited Partnership
is not a Sponsor, the partnership agreement of the Local Limited Partnership
must include provisions granting to the limited partners therein rights and
obligations with respect to such Local Limited Partnership similar to those
granted to the Limited Partners with respect to the Partnership in Sections
3.3.3 (respecting admissions), 3.6.3, 5.2.1(xii), 5.4.1(ix), 5.4.1(x), 5.4.2,
5.5.4, 5.5.6, 6.1, 7.1, 7.3.2, 7.4, 9.1, 9.4, 10.1, 10.2, 12.1.2 and 13.9
hereof;
(viii) the Partnership shall invest in Local Limited Partnership Interests
jointly with other limited partnerships (including limited partnerships which
are controlled by or otherwise affiliated with the General Partner) (the
Partnership and any other limited partnership being referred to hereinafter as a
"Program") only if each of the following conditions is satisfied:
(a) the two Programs have substantially identical investment
objectives;
(b) there are no duplicate property management or other fees;
(c) the compensation to the sponsor of each Program is substantially
identical in each Program;
(d) each Program will have a right of first refusal if the other
Program wishes to sell its Local Limited Partnership Interest;
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(e) the investment of each Program is on substantially the same terms
and conditions;
(f) if the other Program is controlled by or otherwise affiliated
with the General Partner, the other Program must be publicly registered under
the Securities Act of 1933; and
(g) if the other Program is not controlled by or otherwise affiliated
with the General Partner, the Partnership must acquire a Controlling Interest in
the joint venture. For this purpose the phrase "Controlling Interest" means
possessing the power to direct or cause the direction of the activities and
policies of the joint venture, whether through ownership of securities, by
contract, by the exercise of a power of veto over its activities and policies
other than in the ordinary course of business, or otherwise;
(ix) the Partnership shall commit a percentage of the Limited Partners'
Capital Contributions to Investment in Local Limited Partnership Interests which
is at least equal to the greater of (a) 80% of the Capital Contributions reduced
by 0.1625% for each 1% of the aggregate indebtedness secured or to be secured by
all liens and mortgages encumbering Properties owned by Local Limited
Partnerships or (b) 70% of the Capital Contributions. For purposes of this
calculation, the percentage of "aggregate indebtedness secured or to be secured
by all liens and mortgages encumbering Properties owned by Local Limited
Partnerships" is the percentage resulting when the Partnership's share of such
aggregate indebtedness is divided by the Partnership's share of the aggregate of
the Purchase Prices of all Properties held by Local Limited Partnerships,
excluding Front-End Fees. If the total amount of Front-End Fees must be reduced
in order to enable the Partnership to satisfy the foregoing restrictions, the
General Partner shall, and shall cause its Affiliates or other Persons to,
reimburse the Partnership for the amount of Front-End Fees received by them as
necessary to enable the Partnership to meet this investment requirement; and
(x) the Partnership may invest in a Local Limited Partnership Interest
where the Local Limited Partnership owns an existing Apartment Complex which has
experienced cash flow or operational difficulties, including mortgage
delinquencies, provided that the following are satisfied with respect to any
such investment: (a) a satisfactory workout arrangement is in place, (b) the
General Partner has determined that the risk associated with the investment is
not significantly greater than the risk associated with an investment in a Local
Limited Partnership Interest where the Apartment Complex is newly-constructed,
and (c) not more than 10% of Investment in Local Limited Partnership Interests
is invested in such Local Limited Partnership Interests. For purposes of this
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Section 5.2.2(x), an Apartment Complex which has been subject to
substantial rehabilitation shall not be considered to be an existing property.
5.2.3. With respect to each of its obligations, powers and responsibilities
under this Agreement, the General Partner is authorized to execute and deliver,
for and on behalf of the Partnership, such notes and other evidences of
indebtedness, contracts, agreements, assignments, deeds, leases, loan
agreements, mortgages and other security instruments and agreements as it deems
proper, all on such terms and conditions as it deems proper.
5.2.4. Any Person dealing with the Partnership or the General Partner may
rely upon a certificate signed by the General Partner as to:
(i) the identity of the General Partner or any Limited Partner;
(ii) the Persons who are authorized to execute and deliver any instrument
or document of or on behalf of the Partnership;
(iii) the existence or non-existence of any fact or facts which constitute
a condition precedent to acts by the General Partner or in any other manner are
germane to the affairs of the Partnership; or
(iv) any act or failure to act by the Partnership or as to any other matter
whatsoever involving the Partnership or any Partner.
5.3. Authority of General Partner and its Affiliates to Deal with
Partnership
5.3.1. Without limitation upon the other powers set forth herein, the
General Partner is expressly authorized for, in the name of, and on behalf of,
the Partnership to:
(i) subject to the limitations set forth herein, pay to the General Partner
or any of its Affiliates designated by them the compensation provided for in
Section 5.6 hereof;
(ii) borrow funds from the General Partner or any of its Affiliates;
provided, however, that such borrowings may only be made on a short-term basis
(not to exceed one year) and provided further that the Partnership may not pay
in connection therewith (a) interest or other financing charges or fees in
excess of the amounts which would be charged by unrelated lending institutions
on comparable loans for the same purpose in the same locality (and in no event
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may interest on such borrowings exceed 2% per annum above the Prime Rate)
or (b) any prepayment charge or penalty;
(iii) in connection with the organization of the Partnership and the
Offering, the Partnership shall pay the Nonaccountable O&O Expense Reimbursement
and shall pay, or reimburse the General Partner or its Affiliates for advances
made to cover, the retail selling commission equal to 7% of the Capital
Contribution and the Dealer Manager Fee; provided that the General Partner or
its Affiliates shall pay all Organizational and Offering Expenses, with the
exception of retail selling commissions equal to 7% of the Capital
Contributions, the Dealer Manager Fee, and the Nonaccountable O&O Expense
Reimbursement;
(iv) in connection with the acquisition by the Partnership of investments
in Local Limited Partnership Interests, the Partnership shall pay the
Nonaccountable Acquisition Expense Reimbursement to the General Partner;
provided that the General Partner shall pay all Acquisition Expenses, with the
exception of the Nonaccountable Acquisition Expense Reimbursement;
(v) deal with, or otherwise engage in business with, or provide services to
and receive compensation therefor from, any Person who has provided any services
to, lent money to, sold property to, or purchased property from, the General
Partner or any of its Affiliates;
(vi) require in any or all Partnership contracts that the General Partner
shall not have any personal liability thereon but that the Person contracting
with the Partnership shall look solely to the Partnership and its assets for
satisfaction; however, if any additional cost is imposed upon the Partnership as
a result of such a requirement, such additional cost shall be paid by the
General Partner from its own funds, without recourse to the funds of the
Partnership;
(vii) subject to the provisions of Section 5.2.2(vii) hereof, exercise the
right to cause an Affiliate of the General Partner to become a Local General
Partner, including the sole Local General Partner, of a Local Limited
Partnership (a) upon request by a lender that such action be taken, (b) in the
event of the bankruptcy, death, dissolution, withdrawal, removal or adjudication
of incompetence of a Local General Partner, or (c) in the event of a material
default by a Local General Partner or any of its Affiliates on any obligations
of such Local General Partner or Affiliate to the Local Limited Partnership or
to the Partnership or upon a material default by the Local Limited Partnership
under its mortgage loan or upon the occurrence of certain other events;
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(viii) exercise the right to cause the SLP Affiliate to become a special
limited partner of each Local Limited Partnership upon the terms and for the
interest in the Local Limited Partnership described in the Prospectus; and
(ix) in connection with a Local Limited Partnership which is expected to
generate Tax Credits and State Tax Credits, invest in the Local Limited
Partnership in such manner that the Partnership shall pay for, and shall be
allocated, the Tax Credits, and another investor in the Local Limited
Partnership, including an investor which may be the General Partner or an
Affiliate thereof, shall pay for and shall be allocated the State Tax Credits.
5.3.2. Other than as specifically authorized in this Section 5.3, the
General Partner is prohibited from entering into any agreements, contracts or
arrangements on behalf of the Partnership with the General Partner or any
Affiliate of the General Partner. Such prohibition shall include, without
limitation, the following:
(i) the Partnership shall not purchase any Local Limited Partnership
Interest from the Sponsor unless such purchase is pursuant to the right of first
refusal required by Section 5.2.2(viii) hereof or unless such Person purchased
the Local Limited Partnership Interest in its name in order to facilitate the
acquisition of such Local Limited Partnership Interest by the Partnership;
provided, however, that in the event of such an acquisition from the Sponsor (a)
the purchase price paid by the Partnership may not (except to the extent of any
reimbursement by the Partnership of carrying costs) exceed the cost of such
Local Limited Partnership Interest to the seller; (b) no compensation or other
benefit from the transaction may accrue to the Sponsor except as otherwise
permitted by this Agreement; (c) the seller has not held the Local Limited
Partnership Interest for a period in excess of twelve months prior to
commencement of the Offering; (d) there is no difference in interest terms of
the loans secured by the Local Limited Partnership Interest at the time acquired
by the Sponsor and the time acquired by the Partnership; (e) all income and
expense which accrues to the Sponsor as a result of the ownership of such Local
Limited Partnership Interest shall be treated as belonging to the Partnership;
(f) the cost of the Local Limited Partnership Interest may not exceed the funds
reasonably anticipated to be available to the Partnership to purchase such
asset; and (g) the seller is not a Program in which the General Partner has an
interest. For this purpose, the term "Program" shall mean a limited or general
partnership, joint venture, unincorporated association or similar organization
other than a corporation formed and operated for the primary purpose of
investment in and the operation of or gain from an interest in real property
including such entities formed to make or invest in mortgage loans;
(ii) neither the General Partner nor any of its Affiliates shall enter into
an agreement or contract with a Local Limited Partnership for the development of
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any Apartment Complex or the construction of improvements with respect to any
Apartment Complex;
(iii) neither the General Partner nor any of its Affiliates shall receive
directly or indirectly a commission or fee in connection with the reinvestment
of the proceeds of the sale, exchange or refinancing of any Local Limited
Partnership Interest or any Apartment Complex;
(iv) neither the General Partner nor any of its Affiliates shall provide
insurance brokerage services in connection with obtaining any insurance policy
covering any Apartment Complex;
(v) neither the General Partner nor any of its Affiliates shall be given an
exclusive right to sell or exclusive employment to sell any Local Limited
Partnership Interest for the Partnership or any Apartment Complex for any Local
Limited Partnership;
(vi) except as provided in Sections 5.3.1(vii) and (viii) hereof, the
Partnership shall not sell any Local Limited Partnership Interest to the General
Partner or any of its Affiliates;
(vii) the Partnership shall not lend any funds to the General Partner or
any of its Affiliates; and
(viii) no rebates or give-ups may be received by the General Partner or any
of its Affiliates, nor may the General Partner or any of its Affiliates
participate in any reciprocal business arrangement which would have the effect
of circumventing any of the provisions of this Agreement.
5.3.3. All of the Partnership's expenses shall be billed directly to and
paid by the Partnership to the extent practicable. Reimbursements to the General
Partner or any of its Affiliates by the Partnership shall be allowed only for
the Partnership's Organizational and Offering Expenses, Acquisition Expenses and
Operating Cash Expenses and only subject to the limitations on the reimbursement
of such expenses
set forth herein.
5.3.4. Reimbursement to the General Partner or any of its Affiliates of
Operating Cash Expenses pursuant to Section 5.3.3 hereof shall be subject to the
following:
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(i) No such reimbursement shall be permitted for services for which the
General Partner or any of its Affiliates is entitled to compensation by way of a
separate fee; and
(ii) No such reimbursement shall be made for (a) rent or depreciation,
utilities, capital equipment or other such administrative items, and (b)
salaries, fringe benefits, travel expenses and other administrative items
incurred or allocated to any "controlling person" of the General Partner or any
Affiliate of the General Partner. For the purposes of this Section 5.3.4(ii),
"controlling person" includes, but is not limited to, any Person, however
titled, who performs functions for the General Partner or any Affiliate of the
General Partner similar to those of: (1) chairman or member of the board of
directors; (2) executive management, such as president, vice president or senior
vice president, corporate secretary or treasurer; (3) senior management, such as
the vice president of an operating division who reports directly to executive
management; or (4) those holding 5% or more equity interest in the General
Partner or any Affiliate of the General Partner or a person having the power to
direct or cause the direction of the General Partner or any Affiliate of the
General Partner, whether through the ownership of voting securities, by contract
or otherwise.
5.4. Restrictions on Authority of General Partner
5.4.1. The General Partner shall not:
(i) do any act in contravention of this Agreement;
(ii) do any act which would make it impossible to carry on the ordinary
business of the Partnership;
(iii) possess Partnership property, or assign the Partnership's rights in
specific Partnership property, for other than a Partnership purpose;
(iv) admit a Person as a General Partner, except as provided in this
Agreement;
(v) admit a Person as a Limited Partner, except as provided in this
Agreement;
(vi) directly or indirectly pay or award any commissions or other
compensation to any Person engaged by a potential investor in the Partnership
for investment advice as an inducement to such adviser to advise the purchase of
Units, but this clause shall not prohibit the payment of the selling commissions
and other underwriting compensation contemplated herein or in the Prospectus to
a registered broker-dealer or other properly-licensed Person for selling Units;
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(vii) cause the Partnership to lend any funds to any Person (other than in
connection with Temporary Investments), except that the General Partner may
cause the Partnership to make loans to or to post letters of credit for Local
Limited Partnerships in which the Partnership is expected to own a Local Limited
Partnership Interest, provided that in the case of any such loan (a) the loan is
made prior to the date that the Partnership makes its initial capital
contribution to the Local Limited Partnership, (b) the total amount of all such
loans does not exceed 50% of the Limited Partners' Capital Contribution
committed to the investment in such Local Limited Partnership, and (c) such
borrowings may only be made on a short-term basis (not to exceed one year) and
must, unless earlier repaid, be repaid from the Partnership's initial capital
contribution to the Local Limited Partnership at the time such initial capital
contribution is made;
(viii) cause the Partnership to acquire unimproved or nonincome producing
property (but this clause shall not restrict the rights of the Partnership to
invest in Local Limited Partnerships owning Apartment Complexes under
construction or rehabilitation or Apartment Complexes as to which construction
or rehabilitation has not commenced but with respect to which closing of the
construction loan has occurred or the Apartment Complex site has been acquired
and a construction loan commitment has been obtained);
(ix) cause the Partnership to utilize Cash Available for Distribution to
acquire Local Limited Partnership Interests;
(x) cause the Partnership to reinvest Sale or Refinancing Proceeds unless a
sufficient portion thereof is distributed to the Limited Partners to enable each
Limited Partner, assuming that he is in a combined Federal, state and local
marginal income tax bracket of 30%, to pay the Federal, state and local income
tax liability arising from the Sale or Refinancing which generated such
proceeds, and in any event Sale or Refinancing Proceeds shall not be reinvested
following the second anniversary of the first day of the calendar quarter in
which the Investment Date occurs, except to the extent of any Reserves retained
therefrom;
(xi) cause the Partnership to acquire any Local Limited Partnership
Interest in exchange for Units;
(xii) change the Partnership's purposes from those set forth in Section
2.4;
(xiii) facilitate or recognize the trading of Units on an established
securities market or on a secondary market, if, in the opinion of counsel, such
action would result in the Partnership being classified as a publicly traded
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partnership under Section 7704 of the Code and such classification would
have material adverse tax consequences for the Limited Partners;
(xiv) cause the Partnership to invest in Local Limited Partnerships under
circumstances where duplicate fees for the same service may be payable by the
Partnership and/or the particular Local Limited Partnership;
(xv) except as set forth below in this subsection, following the
termination of the offering of Units, cause the total amount of indebtedness
incurred by the Partnership to at any time exceed the sum of 85% of the
aggregate purchase price of all Apartment Complexes which have not been
refinanced, and 85% of the aggregate fair market value of all Apartment
Complexes which have been refinanced, as determined by the lender as of the date
of refinancing. Notwithstanding the preceding, with respect to all indebtedness
insured or guaranteed by the full faith and credit of the United States
government, a state or local government, or an agency or instrumentality of any
of them, and with respect to all indebtedness provided by any such Person, the
total amount of indebtedness incurred by the Partnership shall at no time exceed
the sum of 100% of the aggregate purchase price of all Apartment Complexes which
have not been refinanced, and 100% of the aggregate fair market value of all
Apartment Complexes which have been refinanced, as determined by the lender as
of the date of refinancing. For purposes of this subsection only, the term
"indebtedness" shall include the principal of any loan together with any
interest that may be deferred pursuant to the terms of the loan agreement which
exceeds 5% per annum of the principal balance of such indebtedness (excluding
contingent participations in income and/or appreciation in the value of the
Apartment Complexes), and shall exclude any indebtedness incurred by the
Partnership for necessary working capital reserves;
(xvi) cause the Partnership to pay aggregate Acquisition Fees to all
Persons in an amount which exceeds the lesser of (a) the Competitive rate or (b)
18% of the Gross Proceeds. The foregoing limitation shall be complied with at
any given time and on an ongoing basis;
(xvii) cause the Partnership to invest in junior trust deeds or other
similar obligations, except for junior trust deeds which arise from the sale of
Properties; or
(xviii) cause the Partnership to invest in general partner interests of
limited partnerships or, except as provided in Section 5.2.2(viii), cause the
Partnership to invest in general partnerships or joint ventures.
5.4.2. Without the Consent of a majority-in-interest of the Limited
Partners, the General Partner may not:
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(i) sell at one time all or substantially all the assets of the
Partnership, except in connection with the liquidation and winding up of the
Partnership's business upon its dissolution;
(ii) cause the merger or other reorganization of the Partnership; or
(iii) elect to dissolve the Partnership.
5.4.3. Except as otherwise provided in Section 3.4.1(a) hereof with respect
to the Promissory Notes of certain corporations, the General Partner shall not
sell, assign or otherwise transfer the Promissory Notes at a discount; provided
that this restriction shall not prohibit the General Partner from pledging or
otherwise granting a security interest in the Promissory Notes as security for
any Partnership obligation.
5.5. Duties and Obligations of General Partner
5.5.1. The General Partner shall take such actions as may be necessary or
appropriate to form, qualify and continue the Partnership as a limited
partnership under the laws of the State of California and in order to form or
qualify the Partnership under the laws of any other jurisdiction in which the
Partnership is doing business or in which such formation or qualification is
necessary to protect the limited liability of the Limited Partners or in order
to continue in effect such formation or qualification. In this connection the
General Partner shall cause a Certificate of Limited Partnership to be filed on
behalf of the Partnership in the office of the California Secretary of State,
and shall cause an amendment to the Certificate to be filed in such office, and
in each other public office in which the Certificate was previously filed,
within 30 days after the happening of any of the following events:
(i) A change in the name of the Partnership;
(ii) A change in the address of the Partnership office;
(iii) A change in the name or address of the Partnership's agent for
service of process;
(iv) The withdrawal of a General Partner;
(v) The admission of a General Partner; or
(vi) The discovery by a General Partner of any false or erroneous material
statement contained in the Certificate.
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5.5.2. The General Partner shall prepare or cause to be prepared and shall
file on or before the due date (or any extension thereof) any Federal, state or
local tax returns required to be filed by the Partnership.
5.5.3. The General Partner shall use its best efforts to assure that the
Partnership shall not be deemed an investment company as such term is defined in
the Investment Company Act of 1940 and shall use its best efforts to obtain from
the Securities and Exchange Commission an order exempting the Partnership from
the provisions of the Investment Company Act of 1940. The General Partner is
expressly authorized to prepare, execute and file with the Securities and
Exchange Commission an application pursuant to Section 6(c) of the Investment
Company Act of 1940 for an exemption from all the provisions of such Act,
together with such other documents, and to do such other acts and things, as may
be necessary or convenient in seeking such an exemption. In the event that delay
is encountered in obtaining such order, the General Partner is authorized to
rely upon an opinion of counsel to the effect that the Partnership is exempt
from the provisions of the Investment Company Act of 1940 until such time as
such order is obtained, if ever.
5.5.4. The General Partner shall have fiduciary responsibility for the
safekeeping and use of all funds and assets of the Partnership, whether or not
in its immediate possession or control. The General Partner shall not employ, or
permit another to employ, such funds or assets in any manner except for the
exclusive benefit of the Partnership.
5.5.5. The funds of the Partnership shall not be commingled with the funds
of any other Person.
5.5.6. The General Partner shall not contract away the fiduciary duty owed
at common law to the Limited Partners.
5.5.7. The General Partner is authorized, in its discretion, to cause the
Partnership to acquire policies of limited partnership liability insurance,
insuring the Partners and their Affiliates against liabilities in connection
with the business of the Partnership and insuring the Partnership against
liabilities with respect to any indemnification it is legally required or
permitted to provide Partners and their Affiliates; subject to the provisions of
Section 5.8.3 hereof.
5.6. Compensation of Sponsor
5.6.1. The Sponsor shall not receive any salary, fees, profits,
distributions or allocations from the Partnership or any Local Limited
Partnership in which the Partnership invests except as expressly allowed by this
Agreement.
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5.6.2. The Dealer Manager shall be entitled to receive from the Partnership
retail selling commissions and the Dealer Manager Fee in respect of the sale of
Units, all as set forth in the Prospectus.
5.6.3. The General Partner shall receive from the Partnership a
Nonaccountable O&O Expense Reimbursement in an amount equal to 4% of the Capital
Contributions.
5.6.4. For services actually rendered or to be rendered, directly or
indirectly, by the Sponsor in connection with the acquisition of Local Limited
Partnership Interests and the initial management of Local Limited Partnerships,
the Partnership shall pay to the Sponsor Acquisition and Investment Management
Fees in an amount equal to 7% of the Capital Contributions. The services to be
performed for such fee shall include (i) identifying Local Limited Partnership
Interests for review, evaluation and, ultimately, selection or rejection as
potential acquisitions for the Partnership; (ii) drafting and negotiating the
partnership agreements of the Local Limited Partnerships; (iii) organizing and
structuring the Local Limited Partnerships; (iv) acting as a liaison between the
Partnership and the Local Limited Partnerships during the period of acquisition
of the Local Limited Partnership Interests and the period of construction and
rent-up of the Apartment Complexes; (v) establishing record-keeping and
reporting systems in connection with monitoring activities and performances of
the Local Limited Partnerships during the start-up period (i.e., a period
generally ending two to four years after the Partnership's investment in a Local
Limited Partnership); (vi) implementing banking, escrow or other cash management
arrangements for the payment of capital contributions to the Local Limited
Partnerships; and (vii) assisting the Local Limited Partnerships in establishing
systems for financial, regulatory and other compliance reporting, audit and
accounting procedures, partnership reserves management and miscellaneous
start-up period services. Such Acquisition and Investment Management Fees shall
be payable at the time Gross Proceeds are received. Notwithstanding the amount
of Acquisition and Investment Management Fees set forth herein, the total amount
thereof shall be reduced in connection with the purchase of Units by Discount
Investors, as described in the Prospectus under "Terms of the Offering and Plan
of Distribution." The amount of such reduction shall be treated as a
distribution to a Discount Investor but shall not be deemed a return of the
Discount Investor's Capital Contribution; rather the reduction amount shall be
deemed to be a compromise within the meaning of Section 15636(c) of the Act, and
no Discount Investor shall be obligated to pay any such amount to or for the
benefit of the Partnership or any creditor of the Partnership. Except as set
forth in this Section 5.6.4, no Acquisition Fees shall be paid to the Sponsor.
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5.6.5. The General Partner shall receive from the Partnership a
Nonaccountable Acquisition Expense Reimbursement in an amount equal to 2% of the
Capital Contributions.
5.6.6. For any property management services actually rendered by the
General Partner or its Affiliates respecting the Properties owned by Local
Limited Partnerships, the General Partner or any such Affiliate may receive
Property Management Fees from the Local Limited Partnerships. Included in any
such Property Management Fee shall be bookkeeping services and fees paid to
nonAffiliated Persons for property management services. The maximum Property
Management Fees paid to the General Partner or any of its Affiliates (including
all leasing and releasing fees and bonuses and other payments for leasing
related services, paid to any Person) shall be the lesser of 5% of the gross
revenues from the Property or a Competitive amount. Such property management
fees will include fees for rent-up, leasing and releasing services; however,
separate fees for the initial rent-up or initial leasing-up of newly-constructed
or substantially-rehabilitated properties may be paid to the General Partner or
its Affiliates in Competitive amounts.
5.6.7. For services rendered by the General Partner or an Affiliate of the
General Partner in connection with the administration of the affairs of the
Partnership, the General Partner or any such Affiliate shall receive from the
Partnership an annual Asset Management Fee in an amount not to exceed 0.2% of
that portion of Invested Assets in Local Limited Partnerships which are
attributable to apartment units receiving Government Assistance. The Asset
Management Fee shall be payable with respect to the previous calendar quarter on
the first day of each calendar quarter during the year, provided that the Asset
Management Fee shall only accrue and be payable as follows: the total Asset
Management Fee shall be allocated among the Apartment Complexes in proportion to
the amount of the Partnership's capital contribution to each Local Limited
Partnership, and the portion of the Asset Management Fee so attributable to any
Apartment Complex shall only accrue and be payable commencing with the date on
which such Apartment Complex commences operations. Accrued but unpaid Asset
Management Fees for any year shall be deferred without interest and shall be
payable in subsequent years from any funds available to the Partnership after
payment of all other costs and expenses of the Partnership, including any
Reserves then determined by the General Partner to no longer be necessary to be
retained by the Partnership, or from the proceeds of a Sale or Refinancing.
5.6.8. For services rendered by the General Partner or an Affiliate of the
General Partner in connection with the sale of any Property owned by a Local
Limited Partnership, the General Partner shall receive from the Partnership a
Subordinated Disposition Fee in an amount equal to 1% of the sales price of such
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Property if the General Partner or its Affiliate provides a substantial amount
of services in the sales effort. This fee shall be payable only after the
distributions in Section 4.2.1(i) and (ii) have been made, and may accrue if
there are insufficient Sale or Refinancing Proceeds payable to the Partnership
upon any such sale. This fee is subject to the limitations imposed by Section
5.2.2(vi).
5.7. Other Business of Partners
5.7.1. The General Partner shall devote to the affairs of the Partnership
such time as may be necessary for the proper performance of its duties
hereunder, but neither the General Partner, its officers and directors, nor any
successors to such parties shall be expected to devote their full time to the
performance of such duties.
5.7.2. Any Partner or any of his Affiliates may engage independently or
with others in other business ventures of every nature and description,
including, without limitation, the rendering of advice or services to other
investors and the making or management of other investments, including
investments in real properties receiving Government Assistance. Neither the
Partnership nor any Partner shall have any rights by virtue of this Agreement or
the partnership relationship created hereby in or to such other ventures or
activities or to the income or proceeds derived therefrom, provided that nothing
in this Section 5.7.2 shall relieve the General Partner of its general fiduciary
obligation to the Partnership.
5.7.3. The Sponsor may be presented with an investment opportunity which
could be availed of by the Partnership and one or more other entities which the
Sponsor or one of its Affiliates manages. The decision as to the particular
entity which shall make the investment shall be based upon such factors as the
effect of the acquisition on diversification of each entity's portfolio, the
estimated income tax effects of the purchase on each entity, the amount of funds
of each entity available for investment and the length of time such funds have
been available for investment. If a particular investment is determined to be
suitable for more than one entity, priority generally shall be given to the
entity having uninvested funds for the longest period of time; except that an
entity which was formed to invest primarily in apartment complexes eligible for
state low income housing credits as well as the Low Income Housing Credit shall
be given priority over the Partnership and other entities which are not seeking
to provide such state tax credits with respect to any investment which is
eligible for such state tax credits.
5.8. Limitation on Liability of Sponsor; Indemnification
5.8.1. No Sponsor shall have any liability to the Partnership or to any
Partner for any loss suffered by the Partnership which arises out of any action
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or inaction of the Sponsor if the Sponsor, in good faith, determined that
such course of conduct was in the best interest of the Partnership, the Sponsor
was acting on behalf of, or performing services for, the Partnership, and such
course of conduct did not constitute negligence or misconduct of the Sponsor.
Each Sponsor shall be indemnified by the Partnership against any losses,
judgments, liabilities, expenses and amounts paid in settlement of any claims
sustained by it when acting on behalf of, or performing services for, the
Partnership, provided that the same were not the result of negligence or
misconduct on the part of such Sponsor and were the result of a course of
conduct which the Sponsor, in good faith, determined was in the best interest of
the Partnership. Any indemnity under this Section 5.8 shall be provided out of
and to the extent of Partnership assets only, and no Limited Partner shall have
any personal liability on account thereof.
5.8.2. Notwithstanding anything to the contrary contained in Section 5.8.1,
the Sponsor (which term, for the purposes of this Section 5.8.2, shall include
Affiliates of the Sponsor only if such Affiliates are performing services on
behalf of the Partnership) and any Person acting as a broker-dealer shall not be
indemnified for any losses, liabilities or expenses arising from or out of an
alleged violation of Federal or state securities laws unless (i) there has been
a successful adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnitee, or (ii) such claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnitee, or (iii) a court of competent
jurisdiction approves a settlement of the claims against a particular indemnitee
and finds that indemnification of the settlement and related costs should be
made, provided that in the case of this clause (iii) the court has been advised
of the positions of the Securities and Exchange Commission, the California
Commissioner of Corporations, the Missouri Securities Division and any other
state securities regulatory authority in which Units of the Partnership were
offered and sold as to indemnification for violations of securities laws;
provided that the court need only be advised of and consider the positions of
the securities regulatory authorities of those states (i) which are specifically
set forth in this Section 5.8.2 and (ii) in which plaintiffs claim they were
sold Units.
5.8.3. The Partnership shall not pay for any insurance covering liability
of any party as to which such party is hereby prohibited from being indemnified;
provided, however, that nothing contained herein shall preclude the Partnership
from purchasing and paying for such types of insurance, including extended
coverage liability and casualty and workers' compensation, as would be customary
for any Person owning comparable assets and engaged in a similar business, or
from naming any Sponsor as additional insured parties thereunder, provided that
such addition does not add to the premiums payable by the Partnership.
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5.8.4. The Partnership may advance funds to each Sponsor for legal expenses
and other costs incurred by it in connection with any legal action brought
against it, provided that each of the following is satisfied: (i) the legal
action relates to acts or omissions with respect to the performance of duties or
services on behalf of the Partnership; (ii) the legal action is initiated by a
third party who is not a Limited Partner, or the legal action is initiated by a
Limited Partner and a court of competent jurisdiction specifically approves the
advancement of funds; and (iii) the Sponsor receiving the funds undertakes to
repay the funds to the Partnership in the event it is not entitled to
indemnification at the conclusion of such legal action.
ARTICLE 6
ADMISSION OF SUCCESSOR AND ADDITIONAL
GENERAL PARTNERS; WITHDRAWAL OF GENERAL PARTNER
6.1. Admission of Successor or Additional General Partners
6.1.1. With the Consent of all other General Partners, if any, and the
Consent of at least a majority-in-interest of the Limited Partners, any General
Partner may at any time designate one or more Persons to be its successor or to
be an additional General Partner, with such Interest in the Partnership as such
General Partner and the successor or additional General Partner agree upon,
provided that the Interests of the other Partners shall not be affected thereby.
6.1.2. If at any time any material reduction shall occur in the net worth
of the General Partner, the General Partner shall consult with legal counsel
and, if such counsel is of the opinion that such reduction might adversely
affect the treatment of the Partnership as such for Federal income tax purposes,
the General Partner shall use its best efforts either (i) to admit as General
Partners one or more Persons having a net worth sufficient to offset such
reduction, the additional General Partner or General Partners to have whatever
participation in the General Partner's Interests the General Partner and the
additional General Partners agree upon, provided that the additional General
Partners have no authority to manage or control the Partnership, there is no
change in the identity of the Persons who have authority to manage or control
the Partnership, and the admission of the additional General Partners does not
materially affect the Interests of the Limited Partners; or (ii) if necessary in
the opinion of legal counsel, to obtain additional capitalization sufficient to
satisfy any then existing requirements of the Internal Revenue Service for a
ruling that an entity, whether or not a corporation, has sufficient net worth so
that a limited partnership of which it is a general partner has the
characteristic of unlimited liability.
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6.1.3. Except in connection with a transfer to a successor or additional
General Partner pursuant to Section 6.1.1. or 6.1.2., the General Partner shall
have no right to retire or withdraw voluntarily from the Partnership or to sell,
transfer, or assign all or any portion of its Interest, except that it may
substitute in its stead as General Partner any entity which has, by merger,
consolidation or otherwise, acquired substantially all of its assets or stock
and continued its business.
6.1.4. Any Voluntary Withdrawal by the General Partner from the Partnership
or any sale, transfer or assignment by the General Partner of its Interest shall
be effective only upon the admission in accordance with this Section 6.1 and
Section 13.3 of a successor or additional General Partner, as the case may be.
6.1.5. No assignee or transferee of all or any part of the Interest of the
General Partner shall have any right to become a General Partner except as
provided in this Article 6.
6.2. Restrictions on Transfer of General Partner's Interest
Notwithstanding anything to the contrary in this Article 6, the assignment
or transfer of the General Partner's Interest shall at all times be subject to
the same restrictions applicable to an assignment or transfer of Units set forth
in Sections 7.2.1 and 7.2.2.
6.3. Consent of Limited Partners to Admission of Successor or
Additional General Partners
Each of the Limited Partners, by the execution of this Agreement, Consents
for all purposes of the Act to the admission of any Person as a successor or
additional General Partner for which the express Consent of a
majority-in-interest of the Limited Partners has been obtained at the time
pursuant to Section 6.1. Upon receipt of such a Consent to such admission from a
majority-in-interest of the Limited Partners, then, subject to the provisions of
Section 6.2, the admission shall, without any further Consent or approval of the
Limited Partners, be an act of all the Limited Partners.
6.4. Event of Withdrawal of a General Partner
If, at the time of an Event of Withdrawal of a General Partner, such
General Partner was not the sole General Partner, the remaining General Partner
or General Partners shall immediately: (i) give Notification to the Limited
Partners of such event; and (ii) make any amendments to this Agreement and
execute and file for recordation any amended Certificates or other instruments
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necessary to reflect the termination of the Interest of the General Partner
as to which such event has occurred and such General Partner's having ceased to
be a General Partner.
6.5. Interest and Liability of a Withdrawn General Partner
6.5.1. Upon an Event of Withdrawal as to a General Partner, such General
Partner shall immediately cease to be a General Partner, and its Interest shall
be subject to purchase in accordance with Section 6.6; provided, however, that
such a termination shall not affect any rights of such General Partner which
arose prior to such event (including rights to amounts then accrued and owing to
such General Partner), or the value, if any, at the time of such event of the
Interest of such General Partner.
6.5.2. Any General Partner who voluntarily or involuntarily for any reason
(including bankruptcy, death, dissolution or adjudication of incompetence)
withdraws from the Partnership or sells, transfers or assigns its Interest shall
be and shall remain liable for all obligations and liabilities incurred by the
Partnership prior to the time the withdrawal, sale, transfer or assignment
becomes effective, but it shall be free of any obligation or liability incurred
on account of the activities of the Partnership after that time.
6.6. Valuation and Sale of Interest of Former General Partner
6.6.1. If the business of the Partnership is continued after the Event of
Withdrawal of a General Partner, or if, following such event, the Partnership is
reconstituted, in each case as contemplated by Section 8.1, the Partnership
shall purchase such General Partner's Interest for a price equal to the then
present fair market value thereof. Such fair market value shall be determined by
agreement of the former General Partner and the Partnership, or, if they cannot
agree, by arbitration in accordance with the current rules of the American
Arbitration Association. The expense of arbitration will be shared equally
between such former General Partner and the Partnership.
6.6.2. Promptly after determination of the fair market value of a former
General Partner's Interest pursuant to Section 6.6.1, the Partnership shall
deliver to such former General Partner a promissory note of the Partnership for
such fair market value payable in no less than five equal consecutive annual
installments commencing on the first anniversary of the date of such note. Such
promissory note shall bear simple interest at the rate per annum which is at all
times equal to the Prime Rate, but not to exceed the maximum rate permitted by
law, payable on the last day of each calendar quarter while such note is
outstanding; provided, however, that if such note is delivered following an
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Event of Withdrawal of a General Partner which is a Voluntary Withdrawal on
its part then (i) such note shall neither be secured nor bear interest and (ii)
the principal payable to the withdrawing General Partner shall be limited in
amount and date of payment to distributions which such withdrawing General
Partner would have received under this Agreement had it not withdrawn. Within
120 days after the determination of the fair market value of the former General
Partner's Interest, the Partnership may, with the Consent of all remaining
General Partners and the Consent of a majority-in-interest of the Limited
Partners, sell such Interest to one or more Persons, who may be Affiliates of
the remaining General Partner or General Partners, and admit such Persons to the
Partnership as substitute General Partners; provided, however, that the purchase
price to be paid to the Partnership for the Interest of the former General
Partner shall not be less than its fair market value as determined by the
procedure set forth in Section 6.6.1. above. Such substitute General Partner or
Partners may pay said purchase price in installments in the manner set forth
above in this Section 6.6.2.
ARTICLE 7
TRANSFERABILITY OF UNITS
7.1. Right to Transfer Units
Subject to the requirements of this Article 7, a Limited Partner may assign
his Units by a written instrument of assignment, the terms of which shall
conform to the provisions of this Agreement.
7.2. Restrictions on Transfers
7.2.1. No sale, exchange, transfer or assignment of any Units may be made
if, in the opinion of counsel to the Partnership, such sale, exchange, transfer
or assignment would:
(i) when added to the total of all other Units sold or exchanged within a
period of 12 consecutive months prior thereto, result in the Partnership being
considered to have terminated within the meaning of Section 708 of the Code;
provided, that any deferred sales or exchanges shall be made (in chronological
order to the extent practicable) as of the first day of a fiscal quarter after
the end of any such 12-month period, subject to the provisions of this Article
7;
(ii) cause the Partnership to become a publicly-traded partnership for
Federal income tax purposes;
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(iii) cause the Partnership to cease to qualify under Section 42(j)(5)(B)
or Section 47 of the Code;
(iv) result in the Partnership or any other Partner being required to
recapture any Tax Credits unless the holder of such Units indemnifies the
Partnership and its Partners for such recapture; or
(v) result in the Partnership being treated as an association taxable as a
corporation for Federal income tax purposes.
7.2.2. No sale, exchange, transfer or assignment of any Unit shall be made
to any Person exempt from Federal income tax under Section 501 of the Code, to
any Person defined in Section 168(h)(2) of the Code, to any Individual
Retirement Account as defined in Section 408(a) of the Code, to any Keogh Plan,
to any nonresident alien, or to any foreign Person.
7.2.3. Any transfer of a Unit to a Person who makes a market in securities
shall be void ab initio unless such Person shall certify to the General Partner
that it has acquired such Unit solely for investment purposes and not for the
purpose of resale.
7.2.4. No purported sale, exchange, transfer or assignment by a transferror
of a Unit shall be permitted unless the transferror shall have represented that
such transfer:
(i) was effected through a broker-dealer or matching agent whose procedures
with respect to the transfer of Units have been approved by the General Partner
as not being incident to trading on an established securities market or a
secondary market and not through any other broker-dealer or matching agent; or
(ii) otherwise was not effected through an established securities market or
through a broker-dealer or matching agent which makes a market in Units or which
provides a readily available, regular and ongoing opportunity to the holders of
Units to sell or exchange their Units through a public means of obtaining or
providing information of offers to buy, sell or exchange Units.
7.2.5. All Units shall be subject to, and all documents of assignment and
transfer evidencing such Units shall bear, the following legend condition:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
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WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
Such restriction shall be noted in the appropriate records of the
Partnership, and no transfer of any interest in the Partnership shall be made
except in compliance with the terms of such legend condition.
7.2.6. No sale, exchange, transfer or assignment of any Unit shall be made
to any Person who does not satisfy the investor suitability standards imposed by
the Partnership in connection with the public Offering of the Units or such more
restrictive standards, if any, as may be required under applicable state
securities laws.
7.2.7. No purported sale, exchange, assignment or transfer by a Limited
Partner of any Unit after which any transferror or transferee would hold any
fraction of a Unit, will be permitted or recognized (except for transfers by
gift, inheritance, bequest or family dissolution, or transfers to Affiliates of
the transferror).
7.2.8. The General Partner (i) shall be entitled to make any reasonable
inquiry of the Limited Partners and prospective Limited Partners in connection
with the provisions of this Section 7.2, and (ii) may, in its sole discretion,
on behalf of the Partnership, impose any restrictions on transfers of Units or
any other additional procedures or requirements which it deems appropriate in
order to prevent the Partnership from being treated for tax purposes as an
association or as a publicly-traded partnership, or to give effect to the intent
of this Section 7.2, and shall be permitted, in order to give effect to any such
restriction, procedures or requirements, to amend this Agreement without the
Consent of the Limited Partners. The General Partner shall give Notification to
all Limited Partners in the event that sales, exchanges, transfers or
assignments have generally been suspended.
7.2.9. The General Partner will review from time to time the limitations
and restrictions on the sale, exchange, transfer or assignment of Units and will
eliminate or modify such limitations or restrictions to make them less
restrictive if the Partnership shall have received an opinion of counsel that
such elimination or modification may be made without material adverse tax
consequences to the Partners.
7.3. Assignees and Assignment Procedure
7.3.1. If a Limited Partner who is an individual dies or a court of
competent jurisdiction adjudges him to be incompetent to manage his person or
his property, such Limited Partner's executor, administrator, guardian,
conservator or other legal representative may exercise all of such Limited
Partner's rights for the purposes of settling his estate or administering his
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property, including any power under this Agreement to join with a proposed
assignee in satisfying conditions precedent to the assignment of his Interest to
such assignee and to such assignee becoming a Substitute Limited Partner. If a
Limited Partner which is not an individual is dissolved or terminated, the
powers of that Limited Partner may be exercised by its legal representative or
successor. Notwithstanding the foregoing, the Partnership shall not be under any
duty to recognize the authority of any such executor, administrator, guardian,
conservator or other legal representative or successor's rights unless and until
the Partnership shall have received such evidence of the authority of such party
as counsel for the Partnership may request. The death, dissolution, adjudication
of incompetence or bankruptcy of a Limited Partner shall not dissolve the
Partnership.
7.3.2. In order to give effect to the restrictions on transfer of Units
contained in this Article 7, a purported or proposed assignment of a Unit shall
not take effect for any purpose until it has been registered on the Partnership
Register (the date of such registration being called the "Registration Date").
The General Partner shall not be under any duty to cause any assignment to be so
registered until (i) the assigning Limited Partner and/or the proposed assignee,
as applicable, shall have delivered to the Partnership a duly executed and
acknowledged counterpart of the instrument of assignment, signed by both the
assignor and the assignee, evidencing written acceptance by the assignee of all
the terms and provisions of this Agreement and representing that the assignment
was made in accordance with all applicable laws and regulations (including
investment suitability requirements); (ii) the Partnership shall have received a
fee in an amount established by it from time to time sufficient to reimburse it
for all its actual costs in connection with such assignment, including, but not
by way of limitation, any advice of counsel contemplated by this Agreement in
connection with such assignment, and, if the Partnership has made an election
under Section 754 of the Code, any incremental accounting fees resulting from
compliance with Section 754 in connection with such assignment; provided,
however, that the amount of such fee shall in no event exceed the lower of the
Partnership's actual costs in connection with the transfer or $100; (iii) the
Partnership shall have received such evidence of the authority of the parties to
such assignment as counsel for the Partnership may request; (iv) if a Promissory
Note of the transferror has not been paid in full, the Partnership shall have
received a written statement signed by the assignee or transferee which
acknowledges the material terms of the Promissory Note, including the payment
due date, the status of payments, the Partnership's security interest in the
Units, the terms of default, the consequences thereof, and the terms for curing
the default; and (v) the Partnership shall have received such further evidence
of compliance of such assignment with the terms and conditions of this Agreement
and the Prospectus as the Partnership may reasonably request, including, but not
by way of limitation, instruments complying with Section 13.3 and any required
consent to such assignment of the Commissioner of Corporations of the State of
California. The General Partner shall cause such an assignment, upon compliance
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with the foregoing conditions and the conditions of Section 7.2, to be
registered on the Partnership Register not later than the last day of the
calendar month following satisfaction of such conditions.
7.3.3. Except as otherwise provided in this Section 7.3.3, if an assignment
of a Unit is registered on the Partnership Register as provided in Section
7.3.2, the assignee of such Unit shall: (i) for the purposes of Sections 4.6.2
and 4.6.3, be recognized as a holder of the Unit as of the first day of the
fiscal quarter following the fiscal quarter in which the Registration Date
occurs; and (ii) for the purposes of Section 4.6.4, be recognized as a holder of
the Unit as of the date specified by the parties in the instrument of assignment
provided for in Section 7.3.2, or if no date is specified therein, the first day
of the fiscal quarter following the fiscal quarter in which the Registration
Date occurs.
7.3.4. The rights of an assignee of a Unit who does not become a Substitute
Limited Partner shall be limited to the right to receive his share of Cash
Available for Distribution, Sale or Refinancing Proceeds, Profits and Losses and
Tax Credits, as determined under Article 4. Any assignee of all or any of the
Units of a Limited Partner who does not become a Substitute Limited Partner and
desires to make a further assignment of any of such Units shall be subject to
all the provisions of this Article 7 to the same extent and in the same manner
as any Limited Partner desiring to make an assignment of his Units.
7.3.5. Upon receipt of documents purporting to create or release a pledge
or other security interest in a Limited Partner's Interest, the General Partner
shall promptly cause such transaction to be registered on the Partnership
Register. Any purported or proposed pledge of, or other security interest in,
any Limited Partner's Interest shall not take effect for any purpose or be
deemed perfected unless and until the same has been registered on the
Partnership Register and shall be subject to any existing pledge and security
interest granted to the Partnership pursuant to Section 13.1. The Partnership
may charge a fee in an amount established by it from time to time sufficient to
reimburse it for all its actual costs in connection with such pledge, including
but not by way of limitation, any advice of counsel in connection with such
pledge, and no pledge shall be effective until such fee is paid.
7.3.6. The General Partner shall provide to each Limited Partner and
registered pledgee, if any, from time to time the transaction statements
required to be provided to such respective parties by the California Commercial
Code.
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7.4. Substitute Limited Partners
Subject to the Consent of the General Partner, which Consent may only be
withheld for the purpose of preserving the Partnership's tax status or to avoid
adverse legal consequences to the Partnership, the assignee of any Units duly
transferred to him pursuant to this Section 7 shall be admitted to the
Partnership as a Substitute Limited Partner upon satisfaction of the conditions
contained in Section 13.3. The Partnership Register shall be amended not less
often than quarterly to recognize the admission of Substitute Limited Partners.
ARTICLE 8
DISSOLUTION AND WINDING-UP OF THE PARTNERSHIP
8.1. Events Causing Dissolution
8.1.1. The Partnership shall dissolve and its affairs shall be wound up
upon the happening of any of the following events: (i) an Event of Withdrawal
shall occur as to a General Partner; (ii) the sale or other disposition of all
the Local Limited Partnership Interests and other assets of the Partnership;
(iii) the election by the General Partner pursuant to Section 5.4.2, or the vote
by the Limited Partners pursuant to Section 10.2.1(ii), to dissolve the
Partnership; or (iv) the expiration of the term of the Partnership specified in
Section 2.6.
8.1.2. Notwithstanding the foregoing, the Partnership shall not be
terminated, liquidated or wound up upon the occurrence of an event specified in
clause 8.1.1(i) above if (a) a remaining General Partner, if any, elects within
120 days after such an event to continue the business of the Partnership, or,
(b) if there is no remaining General Partner, a majority-in-interest of the
Limited Partners agree in writing to continue the business of the Partnership
and, within six months after the last remaining General Partner has ceased to be
a General Partner, to admit one or more General Partners.
8.1.3. Dissolution of the Partnership shall be effective on the day on
which the event occurs giving rise to the dissolution, but the Partnership shall
not terminate until the Partnership's Certificate of Limited Partnership shall
have been canceled and the assets of the Partnership shall have been distributed
as provided in Section 8.2. Notwithstanding the dissolution of the Partnership,
until the termination of the Partnership the business and affairs of the
Partnership shall continue to be governed by this Agreement.
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8.2. Liquidation
8.2.1. Upon dissolution of the Partnership, unless the business of the
Partnership is continued pursuant to Section 8.1, the General Partner shall
liquidate the assets of the Partnership and apply and distribute the proceeds
thereof as contemplated by this Section 8.2. After payment of liabilities owing
to creditors of the Partnership, the General Partner shall set aside as a
Reserve such amount as it deems reasonably necessary for any contingent
liabilities or obligations of the Partnership. Said Reserve may be paid over by
the General Partner to a bank, to be held in Temporary Investments for the
purpose of paying any such contingent liabilities or obligations and, at the
expiration of such period as the General Partner may deem advisable, the amount
in such Reserve shall be distributed to the Partners in accordance with Section
4.2.2.
8.2.2. Notwithstanding the foregoing, in the event the General Partner
determines that an immediate sale of part or all of the Partnership assets would
cause undue loss to the Partners, the General Partner, in order to avoid any
such loss may, after having given Notification to all the Limited Partners, to
the extent not then prohibited by applicable law, either defer liquidation of
and withhold from distribution for a reasonable time any assets of the
Partnership except those necessary to satisfy the Partnership's debts and
obligations, or convey the remaining assets of the Partnership to a liquidating
trust for the benefit of the Partners. In such event, the trustee will be a bank
authorized to accept such trusts, having deposits insured by the Federal Deposit
Insurance Corporation and having a combined capital and surplus of not less than
$50,000,000; such trustee will liquidate such assets in an orderly manner and
distribute the proceeds of such liquidation, net of costs associated therewith,
to the Partners in accordance with Section 4.2. The fair market value of any
assets conveyed to such liquidating trust shall be determined, promptly after
such conveyance, by an independent appraiser to be selected by random number
from a list of three qualified appraisers obtained by the General Partner from
the American Institute of Real Estate Appraisers.
8.2.3. The General Partner shall cause the business of the Partnership to
be wound up and cause the cancellation of the Partnership's Certificate of
Limited Partnership following the liquidation and distribution of all the
Partnership's assets.
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ARTICLE 9
BOOKS AND RECORDS, ACCOUNTING,
REPORTS, TAX ELECTIONS, ETC.
9.1. Books and Records
(a) The General Partner shall cause the Partnership to keep and maintain
full and complete books and records which shall include each of the following:
(i) a current list (updated at least quarterly) of the full name
and last known business or residence address and business telephone of each
Partner set forth in alphabetical order together with the Capital
Contribution and the share in Profits and Losses of each Partner (the
"Participant List");
(ii) a copy of the Certificate of Limited Partnership and all
certificates of amendment thereto, together with executed copies of any
powers of attorney pursuant to which any certificate has been executed;
(iii) copies of the Partnership's Federal, state and local income
tax information returns and reports, if any, for the six most recent
taxable years;
(iv) copies of the original of this Agreement and all amendments
thereto;
(v) financial statements of the Partnership for the six most recent
fiscal years; and
(vi) the Partnership's books and records for at least the current
and past three fiscal years.
(b) Upon the request of a Limited Partner, the General Partner shall within
10 days of the receipt of the request mail to the Limited Partner copies of the
Participant List (which shall be on white paper in a readily readable form of no
less than 10-point type), and the information set forth in Section 9.1(a)(ii) or
(iv) above and of the provisions of the Act described in Section 10.1.2 of this
Agreement. A reasonable charge for copy work may be charged by the Partnership.
Each Limited Partner shall have the right upon request and during normal
business hours to inspect and copy any of the foregoing records at his own
expense, and, upon request, to obtain from the General Partner copies of the
Partnership's Federal, state and local income tax or information returns,
promptly after such returns become available.
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(c) If the Sponsor neglects or refuses to exhibit, produce or mail a copy
of the Participant List as requested, the Sponsor shall be liable to any Limited
Partner requesting the list for costs, including attorneys' fees, incurred by
the Limited Partner for compelling the production of the Participant List, and
for actual damages suffered by the Limited Partner by reason of such refusal or
neglect. It shall be a defense that the actual purpose and reason for the
requests for inspection or for a copy of the information is to secure the list
of Limited Partners or other information for the purpose of selling such list or
information or copies thereof, or of using the same for a commercial purpose
other than in the interest of the requesting Person as a Limited Partner
relative to the affairs of the Partnership. The Sponsor may require the Limited
Partner requesting the Participant List to represent that the list is not
requested for a commercial purpose unrelated to the Limited Partner's interest
in the Partnership. The remedies provided hereunder to Limited Partners
requesting copies of the Participant List are in addition to, and shall not in
any way limit, other remedies available to Limited Partners under Federal law,
or the laws of any state.
9.2. Accounting and Fiscal Year
The books of the Partnership shall be kept on the accounting method
selected by the General Partner. The fiscal year of the Partnership shall end on
March 31 in each year, or on such other date as the General Partner determines.
9.3. Bank Accounts and Temporary Investments
The bank accounts of the Partnership shall be maintained in banking
institutions determined by the General Partner, and withdrawals shall be made
only in the regular course of Partnership business on signatures determined by
the General Partner. All deposits and other funds not needed in the operation of
the business or not yet invested may be invested in Temporary Investments.
9.4. Reports
9.4.1. Within 60 days after the end of each of the first three quarters of
each fiscal year of the Partnership, the General Partner shall send to each
Person who was a Limited Partner at any time during such quarter one or more
reports which, taken together, provide the following information (which need not
be audited): (i) a balance sheet as at the end of such quarter; (ii) a statement
of operations for such quarter; (iii) a statement of cash flows for such
quarter; (iv) a statement setting forth the amount of all fees and other
compensation and distributions and reimbursed expenses paid by the Partnership
for the quarter to the General Partner or any Affiliate of the General Partner;
(v) a report of the significant activities of the Partnership during the
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quarter; and (vi) until the Limited Partners' Capital Contributions (except
for any amounts utilized to pay Organizational and Offering Expenses,
Acquisition Fees, Acquisition Expenses or Operating Cash Expenses, or any
amounts set aside for Reserves) are fully invested, a special report of Local
Limited Partnership Interests acquired during the quarter, describing the terms
of such investments. If the Partnership acquires a Local Limited Partnership
Interest during the last quarter of any fiscal year, a report containing the
information described in the preceding clause (vi) shall be sent on or before
the date of transmission of the report for such year required by Section 9.4.3.
Until all Promissory Notes have been paid in full, each quarterly report shall
reflect any defaults in the payment of the Promissory Notes, actions taken by
the Partnership in response to any defaults, and a discussion and analysis of
the impact thereof on capital requirements of the Partnership.
9.4.2. Within 75 days after the end of each calendar year, the General
Partner shall provide to each Person who was a Limited Partner at any time
during the fiscal year ending during that calendar year all tax information
necessary for the preparation of his Federal and state income tax returns and
other tax returns with regard to jurisdictions in which the Partnership or a
Local Limited Partnership is formed or qualified or owns Properties.
9.4.3. Within 120 days after the end of each fiscal year of the
Partnership, the General Partner shall send to each Person who was a Limited
Partner at any time during such fiscal year: (i) a balance sheet as of the end
of such fiscal year and statements of operations, partners' equity and cash
flows for such fiscal year prepared in accordance with generally accepted
accounting principles and accompanied by an auditor's report containing an
opinion of the Accountants; (ii) a report (which need not be audited) setting
forth any distributions made to Persons who were Limited Partners at any time
during the fiscal year, separately identifying distributions from (a) Cash Flow
from Local Limited Partnership or Partnership operations during the fiscal year,
(b) Cash Flow from Local Limited Partnership or Partnership operations during a
prior fiscal year which had been held as Reserves, (c) Sale or Refinancing
Proceeds, and (d) amounts previously set aside as Reserves from Gross Proceeds;
(iii) a report of the significant activities of the Partnership during the year;
(iv) a special report setting forth the amount of all fees and other
compensation and distributions and reimbursed expenses paid by the Partnership
and the Local Limited Partnerships for the fiscal year to the General Partner or
any Affiliate of the General Partner and the services performed in consideration
therefor, which report shall be verified by the Accountants, with the method of
verification to include, at a minimum, a review of the time records of
individual employees, the costs of whose services were reimbursed, and a review
of the specific nature of the work performed by each such employee, all in
accordance with generally accepted auditing standards and, accordingly,
including such tests of the accounting records and such other auditing
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procedures as the Accountants consider appropriate in the circumstances. The
additional costs of such special report shall be itemized by the Accountants
among all programs sponsored by the General Partner and its Affiliates on a
program-by- program basis and may be reimbursed to the General Partner or its
Affiliates to the extent that such reimbursement, when added to the cost for
administrative services rendered, does not exceed the Competitive rate for such
services. Until all Promissory Notes have been paid in full, such annual report
shall reflect any defaults in the payment of the Promissory Notes, actions taken
by the Partnership in response to any defaults, and a discussion and analysis of
the impact thereof on capital requirements of the Partnership.
9.5. Depreciation and Other Tax Elections
The Partnership may elect to use with respect to depreciable assets of the
Partnership any depreciation method which is permitted by the Code and
appropriate in the opinion of the General Partner. All other Federal income tax
elections required or permitted to be made for or by the Partnership shall be
made by the General Partner after consulting with the Accountants. The General
Partner may, but shall not be under any duty to, cause the Partnership to make
an election under Section 754 of the Code (or any successor provision thereto).
9.6. Designation of Tax Matters Partner
The General Partner is hereby designated as the "Tax Matters Partner" of
the Partnership under Section 6231(a)(7) of the Code and, in connection
therewith and in addition to all powers given thereunto, shall have all other
powers needed to fully perform as the Tax Matters Partner, including, without
limitation, the power to retain all attorneys and accountants of its choice, the
right to settle any audits without the consent of the Limited Partners and the
right to challenge any final partnership administrative adjustment in a court
action. The designation made in this Section is hereby expressly consented to by
each Limited Partner as an express condition to becoming a Limited Partner.
Expenses of any administrative proceedings undertaken by the Tax Matters Partner
will be paid for out of Partnership assets. Each Limited Partner who elects to
participate in the proceedings will be responsible for any expenses incurred by
him in connection with his participation, and the cost of any resulting audits
or adjustments of a Limited Partner's tax return will be borne solely by the
affected Limited Partner. The General Partner is hereby designated as the
"notice partner" under Section 6231(a)(8) of the Code to receive any notice
provided by the Internal Revenue Service to the Limited Partners as a group in
accordance with Section 6223(b)(2) of the Code.
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ARTICLE 10
MEETINGS AND VOTING RIGHTS OF LIMITED PARTNERS
10.1. Meetings and Actions Without Meetings
10.1.1. Meetings of the Limited Partners for any purpose may be called by
the General Partner at any time, and shall be called by the General Partner upon
receipt of a request in writing, containing a proposal for the holding of such a
meeting, signed by 10% or more in interest of the Limited Partners and stating
the purpose of the meeting. In addition, the General Partner may, and, upon
receipt of a proposal in writing signed by the holders of 10% or more in
interest of the Limited Partners shall, submit any matter (upon which the
Limited Partners are entitled to act) to the Limited Partners for a vote by
written Consent without a meeting.
10.1.2. All meetings and actions of the Limited Partners shall be governed
in all respects, including matters relating to notice, quorum, adjournment,
proxies, record dates and actions without a meeting, by the provisions of
Section 15637 of the Act, as said Section 15637 shall be amended from time to
time. Notwithstanding the foregoing, upon receipt of a written request for a
Partnership meeting from one or more Limited Partners either in person or by
certified mail stating the purpose(s) of the meeting, the General Partner shall
provide all Limited Partners, within 10 days after receipt of said request,
written notice (either in person or by certified mail) of the meeting and the
purpose of such meeting to be held on a date not less than 15 days nor more than
60 days after receipt of said request, at a time and place convenient to the
Limited Partners.
10.2. Voting Rights of Limited Partners
10.2.1. The holders of a majority of the outstanding Units may, without the
concurrence of the General Partner:
(i) amend this Agreement, subject to the provisions of Section 12.1 hereof;
(ii) dissolve the Partnership;
(iii) remove the General Partner and elect a replacement General Partner;
(iv) approve or disapprove the sale of all or substantially all of the
assets of the Partnership in a single transaction other than in connection with
the liquidation of the Partnership; or
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(v) if the Partnership invests in a Local Limited Partnership of which the
Local General Partner is a Sponsor, direct the General Partner (acting on behalf
of the Partnership) to take any action permitted to be taken by the Partnership
pursuant to the partnership agreement of the Local Limited Partnership.
10.2.2. Notwithstanding any provision of the Act to the contrary, the
Limited Partners shall only have the right to vote on the matters set forth in
Paragraph 10.2.1.
of this Agreement.
10.2.3. In any vote of the Limited Partners, each Limited Partner shall be
entitled to cast one vote for each Unit which he owns as of the designated
record date. Notwithstanding any other provision of this Agreement, any Units
held by the Sponsor will not be entitled to vote, and will not be considered to
be "outstanding" Units for purposes of any vote, upon matters which involve a
conflict between the interests of such Sponsor and the Partnership, including,
but not limited to, any vote on the proposed removal of the General Partner or
regarding any transaction between the Partnership and the Sponsor.
10.3. Limitations on Roll-Ups; Dissenters' Rights
10.3.1. In connection with a proposed Roll-Up, an appraisal of all
Partnership assets shall be obtained from a competent, Independent Expert. If
the appraisal will be included in a prospectus used to offer the securities of a
Roll-Up Entity, the appraisal shall be filed with the Securities and Exchange
Commission and the states as an exhibit to the registration statement for the
offering. Accordingly, an issuer using the appraisal shall be subject to
liability for violation of Section 11 of the Securities Act of 1933 and
comparable provisions under state laws for any material misrepresentations or
material omissions in the appraisal. Partnership assets shall be appraised on a
consistent basis. The appraisal shall be based on an evaluation of all relevant
information, and shall indicate the value of the Partnership's assets as of a
date immediately prior to the announcement of the proposed Roll-Up. The
appraisal shall assume an orderly liquidation of Partnership assets over a
12-month period. The terms of the engagement of the Independent Expert shall
clearly state that the engagement is for the benefit of the Partnership and its
Limited Partners. A summary of the independent appraisal, indicating all
material assumptions underlying the appraisal, shall be included in a report to
the Limited Partners in connection with a proposed Roll-Up.
10.3.2. In connection with a proposed Roll-Up, the Person sponsoring the
Roll- Up shall offer to Limited Partners who vote "no" on the proposal the
choice of:
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(i) accepting the securities of the Roll-Up Entity offered in the proposed
Roll-Up; or
(ii) one of the following: (a) remaining as Limited Partners in the
Partnership, and preserving their interests therein on the same terms and
conditions as existed previously; or (b) receiving cash in an amount equal to
the Limited Partners' pro-rata share of the appraised value of the net assets of
the Partnership.
10.3.3. The Partnership shall not participate in any proposed Roll-Up which
would result in Limited Partners having democracy rights which are less than
those provided for under this Agreement. If the Roll-Up Entity is a corporation,
the voting rights of Limited Partners shall correspond to the voting rights
provided for in this Agreement to the greatest extent possible.
10.3.4. The Partnership shall not participate in any proposed Roll-Up which
includes provisions which would operate to materially impede or frustrate the
accumulation of shares by any purchaser of the securities of the Roll-Up Entity
(except to the minimum extent necessary to preserve the tax status of the
Roll-Up Entity). The Partnership shall not participate in any proposed Roll-Up
which would limit the ability of a Limited Partner to exercise the voting rights
of the securities of the Roll-Up Entity on the basis of the number of Units held
by that Limited Partner.
10.3.5. The Partnership shall not participate in any proposed Roll-Up in
which Limited Partners' rights of access to the records of the Roll-Up Entity
will be less than those provided for under this Agreement.
10.3.6. The Partnership shall not participate in any proposed Roll-Up in
which any of the costs of the transaction would be borne by the Partnership if
the Roll-Up is not approved by the Limited Partners.
10.3.7. In addition to those set forth above, Limited Partners who dissent
with respect to a proposed Roll-Up will have the rights provided under Sections
15679.1 through 15679.14 of the Act.
ARTICLE 11
SPECIAL POWER OF ATTORNEY
Each Limited Partner, including each Additional Limited Partner and
Substitute Limited Partner, by the execution of this Agreement, irrevocably
constitutes and appoints the General Partner, with full power of substitution in
the premises, his true and lawful attorney-in-fact with full power and authority
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in his name, place and stead to execute, acknowledge, deliver, swear to,
file and record at the appropriate public offices any documents necessary or
appropriate to carry out the provisions of this Agreement, including, but not
limited to:
(i) all certificates and other instruments (including counterparts of this
Agreement), and any amendment thereof, which the General Partner deems
appropriate in order to form, qualify or continue the Partnership as a limited
partnership (or a partnership in which the Limited Partners will have limited
liability comparable to that provided by the Act) in the State of California and
in the jurisdictions in which the Partnership may conduct business or in which
formation, qualification or continuation is, in the opinion of the General
Partner, necessary or desirable to protect the limited liability of the Limited
Partners;
(ii) all amendments to this Agreement adopted in accordance with its terms,
and all instruments which the General Partner deems appropriate to reflect a
change or modification of the Partnership in accordance with the terms of this
Agreement;
(iii) all financing statements, continuation statements or other documents
and amendments thereto which the General Partner deems appropriate to perfect or
continue the perfection of the Partnership's security interest in his Units
provided for in Section 13.1, and, if the Limited Partner is an Installment
Contributor Limited Partner, Section 3.4.1(b), of this Agreement, and all
instruments relating to the admission of any Additional or Substitute Limited
Partner, including any amendment to this Agreement which substitutes as a
Limited Partner the purchaser at a foreclosure sale of Units previously given as
security by a defaulting Limited Partner for his Promissory Note; and
(iv) all conveyances and other instruments which the General Partner deems
appropriate to implement the provisions of this Agreement or to reflect the
dissolution and winding up of the Partnership in accordance with the terms of
this Agreement.
The appointment by each of the Limited Partners of the General Partner as
his attorney-in-fact shall be deemed to be a power coupled with an interest, in
recognition of the fact that each of the Partners under this Agreement will be
relying upon the power of the General Partner to act as contemplated by this
Agreement in any filing and other action by it on behalf of the Partnership, and
shall survive and shall not be affected by the subsequent bankruptcy, death,
adjudication of incompetence or insanity, disability, incapacity or dissolution
of any Person hereby giving the power nor by the transfer or assignment of all
or any part of the Units of any such Person; provided, however, that in the
event of the transfer by a Limited Partner of all of his Units, the foregoing
power of attorney of a transferror Limited Partner shall survive the transfer
only until the transferee is admitted to the Partnership as a Substitute
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Limited Partner and all required documents and instruments are duly executed,
filed and recorded to effect the substitution.
ARTICLE 12
AMENDMENTS
12.1. Adoption of Amendments
12.1.1. In addition to the amendments authorized herein, amendments may be
made to this Agreement from time to time by a majority-in-interest of the
Limited Partners, without the Consent of the General Partner; provided that no
such amendment shall (a) in any manner allow the Limited Partners to take any
action which would constitute their participation in the control of the
Partnership's business within the meaning of Section 15632 of the Act, or
otherwise cause the loss of their limited liability, nor (b) without the Consent
of the General Partner, alter the rights, power, duties or compensation of the
General Partner or any of its Affiliates or its (or any of its Affiliates')
interest in Profits and Losses, Tax Credits, Cash Available for Distribution or
Sale or Refinancing Proceeds or alter any of the provisions of Sections 3.6.2 or
6.6 or this Section 12.1.1.
12.1.2. In addition to the amendments otherwise authorized herein,
amendments may be made to this Agreement from time to time by the General
Partner, without the Consent of any of the Limited Partners: (i) to add to the
representations, duties or obligations of the General Partner or surrender any
right or power granted to the General Partner herein, for the benefit of the
Limited Partners; (ii) to cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other provision herein, or
to make any other provisions with respect to matters or questions arising under
this Agreement which will not be inconsistent with the provisions of this
Agreement; and (iii) to delete or add any provision of this Agreement required
to be deleted or added by the staff of the Securities and Exchange Commission or
other Federal agency or by a state "Blue Sky" commissioner or similar official
and deemed by the Commission, agency, commissioner or official to be for the
benefit or protection of the Limited Partners.
No amendment shall be adopted pursuant to this Section 12.1.2 (except under
the preceding clause (iii)) unless its adoption: (i) is for the benefit of or
not adverse to the interests of the Limited Partners; (ii) is consistent with
Section 5.1 hereof; (iii) does not affect the distribution of Cash Available for
Distribution or Sale or Refinancing Proceeds or the allocation of Profits and
Losses or of Tax Credits among the Partners or between the Limited Partners as a
class and the General Partner; and (iv) does not, in the opinion of counsel for
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the Partnership, affect the limited liability of the Limited Partners under
the Act or the status of the Partnership as a partnership for Federal income tax
purposes.
In addition to the amendments otherwise authorized herein, notwithstanding
the preceding paragraph, amendments may be made to this Agreement without the
Consent of any Limited Partner with respect to the provisions of Article 4 of
this Agreement in accordance with Section 4.4.1 and/or Section 4.4.2.
12.2. Filing of Required Documents
In making any amendments, there shall be prepared and filed for recordation
by the General Partner all documents and certificates required to be prepared
and filed under the Act and under the laws of any other jurisdictions under the
laws of which the Partnership is then formed or qualified.
12.3. Required Change of Partnership Name
If at any time there is no General Partner which is an Affiliate of WNC &
Associates, Inc., a California corporation (or any successor thereto), the
Partnership shall forthwith change its name in such a manner as not to include
the initials "WNC." All parties to this Agreement recognize that damages at law
may be an inadequate remedy for breach of the foregoing covenant, and consent
that the same may be enforced by specific performance, injunction or equitable
remedy as well as in an action at law.
ARTICLE 13
MISCELLANEOUS PROVISIONS
13.1. Security Interest and Right of Set-Off
As security for any withholding tax or other liability or obligation to
which the Partnership may be subject as a result of any act or status of any
Limited Partner, or to which the Partnership becomes subject with respect to the
Interest of any Limited Partner, the Partnership shall have (and each Limited
Partner hereby grants to the Partnership) a security interest in all Cash
Available for Distribution and Sale or Refinancing Proceeds distributable to the
Limited Partner to the extent of the amount of the withholding tax or other
liability or obligation.
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13.2. Notices
Except as otherwise specifically provided herein, all notices, demands or
other communications hereunder shall be in writing and shall be deemed to have
been given, if given in any manner specified in the definition of "Notification"
herein, when dispatched, and shall be sent to the respective addresses referred
to in such definition.
13.3. Execution
Each Limited Partner, including any Additional Limited Partner and
Substitute Limited Partner, additional General Partner and successor General
Partner, shall become a Partner in the Partnership by signing counterpart
signature pages to this Agreement or a power of attorney to the General Partner
therefor, and any other instrument or instruments deemed necessary by the
General Partner. By so signing, each Limited Partner, including any Additional
Limited Partner and Substitute Limited Partner, additional General Partner or
successor General Partner, as the case may be, shall be deemed to have adopted,
and to have agreed to be bound by, all the provisions of this Agreement. A
Person may be admitted as an Additional Limited Partner and shall become bound
by this Agreement (i) if such Person (or a representative authorized by such
Person orally, in writing or by other action such as payment for his Units)
executes this Agreement or any other writing, including without limitation, the
Investor Form included with the Prospectus, evidencing the intent of such Person
to become an Additional Limited Partner or (ii) without such execution, if such
Person (or a representative authorized by such Person orally, in writing or by
other action such as payment for his Units) complies with the conditions for
becoming an Additional Limited Partner as set forth in this Agreement and
requests (orally, in writing or by other action such as payment for his Units)
that the Partnership Register reflect such admission.
13.4. Binding Effect
The covenants and agreements contained herein shall be binding upon, and
inure to the benefit of, the heirs, executors, administrators, personal
representatives, successors and assigns of the respective parties hereto.
13.5. Applicable Law
This Agreement shall be construed and enforced in accordance with the laws
of the State of California; provided, however, that the provisions of this
Section 13.5 shall not govern causes of action based on alleged violations of
Federal or state (other than the State of California) securities laws.
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13.6. Counterparts
This Agreement may be executed in several counterparts, all of which
together shall constitute one agreement binding on all parties hereto,
notwithstanding that all the parties have not signed the same counterpart.
13.7. Separability of Provisions
Each provision of this Agreement shall be considered separable, and if for
any reason any provision or provisions hereof are determined to be invalid and
contrary to any existing or future law, no such invalidity shall impair the
operation or affect those portions of this Agreement which are valid.
13.8. Captions
Section titles and the table of contents are for convenience of reference
only and shall not control or limit the meaning of this Agreement as set forth
in the text hereof.
13.9. Mandatory Arbitration
Except as provided in Article 6 hereof, mandatory arbitration shall not be
required in connection with any dispute between a Limited Partner and the
Sponsor or the Partnership. Nothing contained in this Section 13.9 shall apply
to pre-existing contracts between Limited Partners and their broker-dealers.
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13.10. Partnerships Treated as Separate
This Partnership Agreement shall apply to each Partnership separately, and
each Partnership shall file its own Certificate of Limited Partnership.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
General Partner:
WNC & Associates, Inc.,
General Partner
By: /s/ John B. Lester, Jr.
John B. Lester, Jr.,
President
Initial Limited Partner:
/s/ John B. Lester, Jr.
John B. Lester, Jr.
B-75
<PAGE>
EXHIBIT C
INVESTOR FORM
WNC Housing Tax Credit Fund VI, L.P., Series __
Amount of Investment
______________ x $1,000 _________________
# Units Total Dollar Amount
Minimum Investments: $5,000 ($2,000 for certain investors)
Additional increments: $1,000
____ New Account
____ Addition to Existing Account
____ Initial Here if the investor is paying for his Units with a check for the
total subscription amount.
____ Initial Here if the investor elects to use the installment payment. In such
case he shall make a check for one-half of the total subscription amount (i.e.,
the number of Units subscribed for x $500) and pay the remaining half with
interest pursuant to the terms of the Promissory Note on the reverse side
hereof, which must be executed by the investor. An investor is eligible to use
this installment payment method only if he is subscribing for at least 20 Units
($20,000).
Make Check Payable To: Southern California Bank
WNC/HTCF VI
Submit To: Southern California Bank
4100 Newport Place, Suite 100
Newport Beach, CA 92660
Attention: WNC Escrow Manager
INVESTOR INFORMATION
Investor ____ Dr. ____ Mr. ____ Mrs. ____ Ms. Social Security Number
- --------------------------------------------------------------------------------
Investor ____ Dr. ____ Mr. ____ Mrs. ____ Ms. Social Security Number
- --------------------------------------------------------------------------------
Entity Name Taxpayer Identification Number
- ----------------------------------- -----------------------------------
Occupation Income
- ----------------------------------- -----------------------------------
Mailing Address Residence Address
(if different from mailing address)
- ----------------------------------- -----------------------------------
City City
- ----------------------------------- -----------------------------------
State Zip State Zip
- ----------------------------------- -----------------------------------
Daytime Phone Daytime Phone
CONTINUED ON OTHER SIDE
<PAGE>
INVESTOR FORM (CONTINUED)
LEGAL FORM OF OWNERSHIP
____ Individual ____ Community Property ____ Joint Tenants with Rights of
Survivorship ____ Tenants in Common
____ Partnership (Copy of partnership agreement must be sent with this form)
____ Corporate (Certified corporate resolution must be sent with this form)
____ Revocable Trust (Trustee(s) is required to sign below. Copy of trust
instrument must be sent with this form)
____ Custodian for: _______________________________________________
Under Uniform Gift to Minors Act of the State of ________________. The
Units are being purchased in the State of
________________
(Complete if different from the state of residence.)
____ Other (Specify.)
____ Check here if the investor is not a citizen of the United States.
____ Check here if the investor is subject to backup withholding pursuant to
Section 3406(a)(1)(C) of the Internal Revenue Code.
____ Check here if the investor is a minor in the investor's state of residence.
Investor Signature
Execution of the Investor Form below constitutes the undersigned's subscription
for the number of Units indicated above and his acceptance and agreement to
perform the terms and conditions of the Agreement of Limited Partnership
included as Exhibit B to the Prospectus of WNC Housing Tax Credit Fund VI, dated
______________, 1999.
Signature of First Investor Date
- ----------------------------------- ---------------------------
Signature of Second Investor Date
- ----------------------------------- ---------------------------
In order to induce the Fund Manager to accept this subscription, investor
represents by initialing in the space provided that investor has received a copy
of the final Prospectus. ____________
(Initial Here)
____ By checking this box the investor directs the Fund Manager to treat all
information concerning the investor as confidential, and not to disseminate any
such information to any party, without the investor's consent, except as may by
required under an applicable statute or regulation or by the order of a court or
government agency.
Broker/Dealer Information
The undersigned represents that he has complied with the requirements of
the Conduct Rules of the NASD with respect to the subscriber whose name appears
on the above Investor Form and hereby certifies that he has reasonable grounds
to believe on the basis of information obtained from the investor concerning his
objectives, financial situation and needs and any other information known to the
undersigned that the investment in the Units is suitable for the investor, and,
in addition, has informed the investor as to the lack of liquidity and
marketability of the Units. The undersigned warrants that a Prospectus was
delivered to the subscriber not less than five days prior to submission of this
subscription to the Series.
- --------------------------- -----------------------------------
Account Executive Broker/Dealer Firm
- --------------------------------------------------------------------------------
Branch Office Address ____ Please check if new address
- --------------------------------------------------------------------------------
City State Zip Phone
- ------------------------------------------------ ------------------------
Account Executive's Signature and/or Branch Manager Date
C-1
<PAGE>
PROMISSORY NOTE
$500 PER UNIT
FOR VALUE RECEIVED, the undersigned ("Maker"), promises, jointly and severally
if more than one, to pay to the order of WNC Housing Tax Credit Fund VI, L.P.,
Series __, a California limited partnership ("Payee"), at the office of Payee,
3158 Redhill Avenue, Suite 120, Costa Mesa, California 92626-3416, or at such
other location as Payee may from time to time designate, the principal sum of
FIVE HUNDRED DOLLARS ($500), multiplied by the number of Units set forth in his
Investor Form, together with interest on the unpaid principal balance from the
date of the Maker's admission as a limited partner of the Payee until paid at
the rate of ____% per annum. Said principal sum shall be payable in one
installment as follows: (i) on January 31, 2001, if Maker subscribes on or
before June 30, 2000, (ii) on June 30, 2001, if Maker subscribes between July 1,
2000 and December 31, 2000, or (iii) the later of the date of subscription or
January 31, 2002, if Maker subscribes after December 31, 2000. Interest accrued
to the principal installment payment date shall also be due and payable on such
date.
This Promissory Note is delivered pursuant to the terms of the Agreement of
Limited Partnership of Payee, and shall be governed by the following provisions:
1. This Promissory Note shall be paid in lawful money of the United States. 2.
The occurrence of any of the following shall constitute an "Event of Default":
(a) Default in the payment of any amount payable hereunder when due,
which default in payment is not cured within 30 days after such due
date ("Payment Default"); or default in the performance of any other
obligation of Maker under this Promissory Note;
(b) A materially false or misleading omission or representation,
statement, certificate, warranty or other assertion in the Investor
Form or any other document executed by the Maker in connection with the
purchase of Units of limited partnership interest in Payee;
(c) The filing by, or against, the Maker of any proceeding under the
Federal Bankruptcy Code;
(d) An assignment for the benefit of creditors made by the Maker; or
(e) The appointment of, or application for, a receiver or trustee by
any party for all or any part of the assets of the Maker.
3. Upon the occurrence of an Event of Default, then at the option of Payee, the
entire unpaid balance of principal on this Promissory Note, together with
accrued interest and any other amounts due hereunder, shall be immediately due
and payable.
4. In the event that any amount payable under this Promissory Note is not paid
when due, a late charge in the amount of 5% of the late amount shall be due and
payable in addition to the interest provided herein.
5. If this Promissory Note is not paid when due or if an Event of Default
occurs, Maker promises to pay all costs of collection, including, but not
limited to, reasonable attorneys' fees incurred by Payee on account of such
collection whether or not suit is filed hereon.
6. In the event this Promissory Note is not paid when due or if an Event of
Default occurs, Payee may set off all amounts owed to Payee under this
Promissory Note against all distributions to which Maker is entitled relating to
Maker's Units of limited partnership interest in Payee.
7. In the event of a Payment Default, Maker shall be given a notice by Payee of
the Payment Default and the Payee's intent to foreclose on its security interest
given by Maker to secure the payment of this Promissory Note. For a period of 30
days after such notice (the "Cure Period"), Maker shall be entitled to cure such
Payment Default by paying the delinquent principal payment, with interest as
provided in this Promissory Note, to the Payee. Prior to the expiration of the
Cure Period, the Payee shall not be entitled to commence to foreclose its
security interest in the Maker's Units of limited partnership interest in Payee
and Maker's interest in Payee shall not be subject to any reduction as a result
of such Payment Default. However, Payee may withhold any distributions otherwise
payable or issuable to Maker pending the cure of the Payment Default prior to
the expiration of the Cure Period. Any reduction in Maker's interest in Payee
effective upon the expiration of the Cure Period will relate back and shall
apply to and affect any withheld distributions. Upon expiration of the Cure
Period Payee may commence to foreclose and foreclose its security interest in
the Maker's Units of limited partnership interest in Payee.
<PAGE>
8. This Promissory Note is made with full recourse to Maker, is by its terms not
a negotiable instrument, is assignable only subject to the defenses Maker may
have, is subject to venue for collection in the state in which Maker resides and
may not be sold by Payee prior to its maturity. Subject to the foregoing, Payee
may pledge and grant security interests in this Promissory Note as security for
any obligation of Payee.
9. This Promissory Note shall be governed by, and construed in accordance with,
the laws of the State of California.
10. Reference in this Promissory Note to "Payee" shall mean the original Payee
hereunder so long as the Payee shall be the holder of this Promissory Note and
thereafter shall mean any subsequent holder of the Promissory Note.
11. Time is of the essence of each obligation of Maker hereunder.
12. No delay or omission on the part of the Payee in exercising any rights
hereunder or under the Agreement of Limited Partnership of Payee or any other
instrument given to secure this Promissory Note shall operate as a waiver of
such rights or any other right hereunder or under said instruments.
13. This Promissory Note may be prepaid in full at any time without premium or
penalty; provided, however, that no partial prepayments shall be permitted.
14. Maker waives presentment, demand for payment, notice of dishonor, notice of
protest, protest and all other notices or demands in connection with the
delivery, acceptance, performance, default, endorsement or guaranty of this
instrument, except as provided in paragraph 7 above.
This note is executed as of _______, 199__.
---------------------------
Maker
---------------------------
Maker
C-2
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information and representations must not
be relied upon. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
state to any person to whom it is unlawful to make such offer. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Fund since the respective dates at which information is given
herein, or the date hereof. However, if any material change occurs while this
Prospectus is required by law to be delivered, this Prospectus will be amended
or supplemented accordingly.
TABLE OF CONTENTS
Page
Summary of the Offering.........................................................
Risk Factors....................................................................
Who Should Invest; Limitations on Use of Credits and Losses.....................
Estimated Use of Proceeds.......................................................
Management Compensation.........................................................
Conflicts of Interest...........................................................
Fiduciary Responsibility........................................................
Investment Objectives and Policies..............................................
The Low Income Housing Tax Credit...............................................
Other Government Assistance Programs............................................
Management......................................................................
Prior Performance Summary.......................................................
Federal Income Tax Considerations...............................................
State and Local Tax Considerations..............................................
Profits and Losses, Tax Credits and Cash Distributions..........................
Summary of Certain Provisions of the Partnership Agreement......................
Transferability of Units........................................................
Reports.........................................................................
Terms of the Offering and Plan of Distribution..................................
Sales Material..................................................................
Management's Discussion and Analysis of Financial Condition.....................
Legal Matters...................................................................
Experts.........................................................................
Further Information.............................................................
Glossary........................................................................
Financial Statements........................................................FS-i
Exhibit A - Prior Performance Tables........................................ A-1
Exhibit B - Partnership Agreement........................................... B-1
Exhibit C - Investor Form................................................... C-1
For a period of 90 days after the effective date of this Prospectus, all
dealers that effect transactions in these securities, whether or not
participating in the distribution, may be required to deliver a Prospectus. This
is in addition to the dealers' obligation to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
WNC & ASSOCIATES, INC.
3158 Redhill Avenue, Suite 120
Costa Mesa, CA 92626-3416
714/662-5565
<PAGE>
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 7
Supplement Dated __________, 1999
To Prospectus Dated ________, 1999
This Supplement is part of, and should be read in conjunction with, the
Prospectus of WNC Housing Tax Credit Fund VI, L.P., Series 7 ("Series 7") dated
_________, 1999. Capitalized terms used herein but not defined in this
Supplement have the meanings given to them in the Prospectus.
Principal Investment Objectives
Series 7 intends to invest in Local Limited Partnerships with a view to
realizing Tax Credits of from $1,000 to $1,200 per Unit. There can be no
assurance that this objective will be achieved. See "Investment Objectives and
Policies" and "Risk Factors" in the Prospectus.
THIS SUPPLEMENT IS NOT TO BE USED IN ARIZONA, MAINE, MASSACHUSETTS,
MINNESOTA, MISSOURI, NEBRASKA, PENNSYLVANIA, TENNESSEE OR TEXAS
<PAGE>
APPENDIX A TO PROSPECTUS
Description of Graphic Materials
1. At the upper left-hand corner of the cover page there is the outline of an
eagle.
2. Pages 9 to 22 are set up in columnar form, with the captions in the left
column and the narrative in the right column. Each section is surrounded by a
box.
3. On page 61 there are boxes drawn around the names of the entities. The
boxes are connected by lines.
4. At the upper portion of page 84 there are two pie charts. The pie chart to
the upper left is unsegmented, and the legend reads "Taxable Income ($125,000)."
The pie chart to the lower right is segmented, with the larger segment denoted
"Income After Taxes ($95,000)" and the smaller segment denoted "Tax Payment
($30,000)."
At the lower portion of page 84 there is a single pie chart consisting of
three segments. The largest segment is denoted "Income After Taxes
($95,000)," the second-largest segment is denoted "Recomputed Tax Payments
($22,250)" and the smallest segment is denoted "Additional Income From Tax
Credits ($7,750)."
5. On page 85 there appears a graph. The horizontal line represents the years
1970 through 1995, and the vertical line represents the shortage of affordable
rental units in the United States. The graph is entitled "Supply/Demand of
Affordable Housing."
6. Boxes surround the tables appearing at pages 87, 90, 91, 92, 94, 99, and
161.
7. On page 112 there appears a map of the contiguous United States and the
U.S. Virgin Islands. The map denotes those states and territories wherein
properties purchased by prior programs of the sponsor are located.
8. On page 138 there appears a reproduction of lines 34 to 56 of IRS Form
1040.
9. Exhibit C is designed as a form to be completed by the investor, with boxes
to be checked and entries to be made.
10. At the lower left-hand corner of the back cover page there is the outline
of an eagle.
11. At the upper left-hand corner of the supplement there is the outline of an
eagle.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
Set forth below is an estimate of the amount of fees and expenses to be
incurred in connection with the issuance and distribution of the registered
securities. The Registrants will pay to the dealer manager or the general
partner a 2% dealer manager fee and a 4% nonaccountable o&o fee, from which the
dealer manager or the general partner will pay all the Registrants' issuance and
distribution expenses, other than retail selling commissions and the two
aforesaid fees.
In the event that less than the maximum offering proceeds are raised by the
Registrants, the amounts estimated for certain of the expense items listed below
are expected to be reduced.
Issuer Seminar Costs.............. $229,000
Registration Fee - Securities and Exchange
Commission............... 13,900
NASD Filing Fee................... 5,500
Legal Fees and Expenses........... 250,000
Printing.......................... 250,000
Accounting Fees................... 150,000
Blue Sky Fees and Expenses........ 50,000
Advertising Costs and Sales Literature... 250,000
Escrow Costs...................... 50,000
Miscellaneous..................... 51,600
Wholesaling Salaries, Commissions
and Expenses............. 1,000,000
Retail Selling Commissions........ 3,500,000
Retail Selling Expense............ 750,000
----------
Total Expenses.................... $6,550,000
Item 32. Sales to Special Parties.
None.
Item 33. Recent Sales of Unregistered Securities.
On April 9, 1999, WNC Housing Tax Credit Fund VI, L.P., Series 7 sold one
unit of limited partnership interest to John B. Lester, Jr., an officer,
director and shareholder of the General Partner, for the sum of $1,000. Said
transaction was exempt from the registration requirements of the Securities Act
of 1933, pursuant to Section 4(2) thereof, as a transaction not constituting a
public offering.
Item 34. Indemnification of Directors and Officers.
The information set forth in the Prospectus under the heading "Fiduciary
Responsibility" and in Section 5.8 of the Partnership Agreement (Exhibit B to
the Prospectus) is incorporated herein by this reference.
Item 35. Treatment of Proceeds from Stock Being Registered.
Inapplicable.
II-1
<PAGE>
Item 36. Financial Statements and Exhibits.
(a) Financial Statements
See "Financial Statements" in Part I of this Registration Statement.
All financial statements are included in the Prospectus.
(b) Exhibits.
1.1 Selling Agreement (1)
1.2 Selected Dealers Agreement (1)
1.3 Investor Form (filed as Exhibit C to the Prospectus)
3.1 Agreement of Limited Partnership (filed as Exhibit B to
and the Prospectus)
4.1
5.1 Opinion of Counsel (1)
8.1 Opinion of Tax Counsel (1)
10.1 Escrow Agreement (1)
23.1 Consent of Derenthal & Dannhauser as to securities
opinion is set forth in Exhibit 5.1 to this
Registration Statement (1)
23.2 Consent of Derenthal & Dannhauser as to tax opinion
is set forth in Exhibit 8.1 to this Registration
Statement (1)
23.3 Consent of BDO Seidman, LLP (2)
23.4 Consent of Corbin & Wertz (2)
24.1 Power of attorney is included in signature page
contained in Part II of this Registration Statement
(1)
----------
(1) Filed as part of the Registration Statement on Form S-11.
(2) TO BE FILED BY AMENDMENT.
Item 37. Undertakings.
Each Registrant undertakes with respect to the securities offered by it:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement; and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement. (2) That, for the purpose of
determining liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof. (3) To remove from
registration by means of a post-effective amendment any of the securities being
registered which remain unsold at the termination of the offering.
II-2
<PAGE>
Each Registrant undertakes with respect to the securities offered by it (a)
to file any prospectuses required by Section 10(a)(3) as post-effective
amendments to the Registration Statement, (b) that for the purposes of
determining any liability under the Act each such post-effective amendment may
be deemed to be a new Registration Statement relating to the securities offered
therein and the offering of such securities at that time may be deemed to be the
initial bona fide offering thereof, (c) that all post-effective amendments will
comply with the applicable forms, rules and regulations of the Commission in
effect at the time such post-effective amendments are filed, and (d) to remove
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering.
Each Registrant undertakes to send to each Limited Partner in such
Registrant at least on an annual basis a detailed statement of any transactions
with its General Partner or its Affiliates and of fees, commissions,
compensation and other benefits paid or accrued to its General Partner or its
Affiliates for the year completed, showing the amount paid or accrued to each
recipient and the services performed.
Each Registrant undertakes to file a sticker supplement pursuant to Rule
424(b) under the Act during the distribution period describing each property not
identified in the Prospectus at such time as there arises a reasonable
probability that an interest in the Local Limited Partnership owning such
property will be acquired by the Registrant, and to consolidate all such
stickers into a post-effective amendment filed at least once every three months,
with the information provided simultaneously to its existing Limited Partners.
Each sticker supplement will disclose all compensation and fees received by its
General Partner and its Affiliates in connection with the acquisition. The post-
effective amendment shall include audited financial statements meeting the
requirements of Rule 3-14 of Regulation S-X only for properties owned by Local
Limited Partnerships interests in which are acquired during the acquisition
period.
Each Registrant undertakes to file after the end of the distribution period
a current report on Form 8-K containing the financial statements and any
additional information required by Rule 3-14 of Regulation S-X to reflect each
commitment (i.e., the signing of a binding purchase agreement) made after the
end of the distribution period involving the use of ten percent or more (on a
cumulative basis) of the net proceeds of the offering and to provide the
information contained in such report to its Limited Partners at least once each
quarter after the distribution period of the offering has expired.
Each Registrant undertakes to provide to its Limited Partners the financial
statements required by Form 10-K for the first full fiscal year of its
operations.
Each Registrant undertakes to send to its Limited Partners, within 45 days
of the close of each fiscal quarter, the information specified by Form 10-Q, if
such report is required to be filed with the Commission.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of a
Registrant pursuant to the provisions of its Partnership Agreement, or
otherwise, each Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in such Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by a
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrants will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in such Act and will
be governed by the final adjudication of such issue.
Each Registrant undertakes that the prospectus will be supplemented at the
close of any Series to state the amount of Units sold therein, the cumulative
amount sold under all Series formed under the Registration Statement, and the
amount of Units to be offered in the next Series and in succeeding Series to be
formed under the Registration Statement.
Each Registrant undertakes that if at the commencement of the offering of
Units in a Series, the Series has a reasonable probability of acquiring a
property, the offering will not commence until after a post-effective amendment
II-3
<PAGE>
to the Registration Statement has been filed and declared effective. Any such
post-effective amendment shall contain such information as would be required in
an original Registration Statement with respect to the property being acquired
(including audited financial statements of the property complying with Rule 3-14
of Regulation S-X if the property has been acquired).
II-4
<PAGE>
INFORMATION CONCERNING PRIOR PROGRAMS
TABLE VI - Acquisition of Properties by Prior Programs
Table VI describes all property acquisitions by all public Prior Programs
during the three years ended December 31, 1998. Refer to Table I in the
Prospectus for a presentation of acquisition costs as a percentage of total
dollars raised.
II-5
<PAGE>
<TABLE>
Table VI
Other Cash Expenditures
Total Mortgage
Square Financing at Cash Down Total
Feet of Date of Date of Payment Acquisition
Project/Location Apt. Units Units (1) Purchase Purchase (2) Total Expensed Capitalized Cost
- ------------------------------------------------------------------------------------------------------------------------------------
WNC California Housing Tax Credits IV, L.P.,
Series 4
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Chadron NE 16 11,200 12/17/1996 400,000 482,865 882,865 6,507 889,372
Eagleville MO 16 11,200 2/28/1996 358,000 78,920 436,920 1,063 437,983
Pawnee IL 20 14,000 2/28/1996 615,264 130,054 745,318 1,753 747,071
WNC California Housing Tax Credits IV, L.P.,
Series 5
Carthage MO 52 36,400 5/30/1996 690,000 657,221 1,347,221 1,611 1,348,832
Stockton CA 82 57,400 3/31/1996 2,711,699 2,909,790 5,621,489 7,132 5,628,621
Thayer MO 24 16,800 11/12/1998 463,000 741,583 1,204,583 0 1,204,583
WNC Housing Tax Credit Fund IV, L.P., Series 1
Seneca NY 32 22,400 7/28/1998 884,590 276,057 1,160,647 950 1,161,597
WNC Housing Tax Credit Fund IV, L.P., Series 2
Broken Bow NE 18 12,600 6/26/1996 450,000 608,192 1,058,192 3,918 1,062,110
Navasota TX 48 33,600 2/20/1996 1,009,500 224,939 1,234,439 1,449 1,235,888
Portage MI 114 79,800 7/22/1997 6,133,000 431,530 6,564,530 2,780 6,567,310
Sidney NE 18 12,600 5/9/1996 450,000 529,800 979,800 3,413 983,213
East Brewton AL 40 28,000 9/30/1998 1,156,053 1,254,965 2,411,018 8,084 2,419,102
WNC Housing Tax Credit Fund V, L.P., Series 3
Alliance NE 19 13,300 2/5/1996 647,779 604,108 1,251,887 5,733 1,257,620
Atlanta GA 375 262,500 4/26/1996 8,555,000 1,346,961 9,901,961 12,782 9,914,743
Berkeley MD 30 21,000 7/23/1996 713,307 753,295 1,466,602 7,149 1,473,751
Curtis NE 12 8,400 9/25/1996 430,000 88,366 528,622 839 529,461
El Monte (3) CA 68.5 47,950 9/17/1996 1,762,500 2,581,086 4,343,586 24,494 4,368,080
Greensboro NC 22 15,400 2/6/1996 742,444 437,100 1,179,544 4,148 1,183,692
Hastings NE 18 12,600 2/6/1996 450,000 542,107 992,107 5,144 997,251
Hobbs NM 17 11,900 4/10/1997 1,273,034 2,003,595 3,276,629 19,013 3,295,642
Jackson MS 31 21,700 1/3/1997 900,500 248,646 1,149,146 2,360 1,151,506
II-6
<PAGE>
Table VI
Other Cash Expenditures
Total Mortgage
Square Financing at Cash Down Total
Feet of Date of Date of Payment Acquisition
Project/Location Apt. Units Units (1) Purchase Purchase (2) Total Expensed Capitalized Cost
- ------------------------------------------------------------------------------------------------------------------------------------
WNC Housing Tax Credit Fund V, L.P., Series 3 (continued)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Morganton NC 36 25,200 2/5/1996 1,194,500 841,443 2,035,943 7,985 2,043,928
Ontario OR 28 19,600 7/23/1996 1,311,000 353,505 1,664,505 3,355 1,667,860
Silver City NM 31 21,700 5/26/1996 1,330,000 308,762 1,638,762 2,930 1,641,692
Solomon KS 16 11,200 6/20/1996 561,366 142,061 703,427 1,348 704,775
Syracuse KS 8 5,600 6/20/1996 295,171 84,524 379,695 802 380,497
Talladega AL 30 21,000 2/5/1996 822,513 653,237 1,475,750 6,199 1,481,949
WNC Housing Tax Credit Fund V, L.P., Series 4
Belen NM 56 39,200 4/28/1997 1,546,000 416,377 1,962,377 4,254 1,966,631
Crescent City CA 55 38,500 5/24/1996 1,960,000 1,191,878 3,151,878 12,178 3,164,056
El Monte (3) CA 68.5 47,950 9/17/1996 1,762,500 2,510,788 4,273,288 25,655 4,298,943
Lamar MO 28 19,600 1/14/1997 888,400 737,599 1,625,999 7,537 1,633,536
Los Alamos NM 142 99,400 2/21/1997 2,557,904 3,940,587 6,498,491 40,264 6,538,755
Los Alamos NM 52 36,400 5/15/1997 1,450,000 315,099 1,765,099 3,220 1,768,319
Marion AL 42 29,400 1/9/1997 1,296,500 1,288,020 2,584,520 13,161 2,597,681
Palestine TX 24 16,800 4/14/1997 371,450 120,814 492,264 1,234 493,498
Raleigh NC 48 33,600 5/29/1998 580,000 534,118 1,114,118 5,458 1,119,576
Shawnee OK 100 70,000 12/31/1996 2,187,000 2,317,180 4,504,180 23,677 4,527,857
Winsor MO 24 16,800 5/9/1997 643,000 641,829 1,284,829 6,558 1,291,387
Coffeeville KS 48 33,600 8/10/1998 552,444 1,447,650 2,000,094 14,792 2,014,886
New York(4) NY 18 12,600 12/21/1998 1,606,000 758,333 2,364,333 7,749 2,372,082
WNC Housing Tax Credit Fund VI, L.P., Series 5
Bradley AR 20 15,600 4/1/1998 110,685 532,196 642,881 4,922 647,803
Chillicothe MO 28 19,600 11/5/1997 775,000 990,861 1,765,861 9,164 1,775,025
El Reno OK 100 70,000 1/15/1998 2,403,000 3,039,985 5,442,985 28,116 5,471,101
Hughes Villas AR 21 14,700 1/23/1998 384,000 181,885 565,885 1,682 567,567
Mayer AZ 20 14,000 12/19/1997 624,987 716,254 1,341,241 6,624 1,347,865
II-7
<PAGE>
Table VI
Other Cash Expenditures
Total Mortgage
Square Financing at Cash Down Total
Feet of Date of Date of Payment Acquisition
Project/Location Apt. Units Units (1) Purchase Purchase (2) Total Expensed Capitalized Cost
- ------------------------------------------------------------------------------------------------------------------------------------
WNC Housing Tax Credit Fund VI, L.P., Series 5 (Continued)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Memphis TN 20 17,000 4/30/1998 380,392 742,930 1,123,322 6,871 1,130,193
Murfreesboro AR 24 16,800 4/10/1998 632,019 685,474 1,317,493 6,340 1,323,833
Oakland CA 106 74,200 1/14/1998 1,495,957 740,155 2,236,112 6,845 2,242,957
Orlando FL 26 18,200 4/8/1998 295,000 470,185 765,185 4,349 769,534
Theodore AL 40 28,000 11/4/1998 1,189,625 1,276,884 2,466,509 11,809 2,478,318
Memphis TN 40 28,000 8/19/1998 903,288 1,844,494 2,747,782 17,059 2,764,841
Marshalltown IA 32 22,400 6/5/1998 600,000 608,952 1,208,952 5,632 1,214,584
Carbon IL 115 80,500 9/19/1998 4,175,976 6,446,347 10,622,323 59,620 10,681,943
WNC Housing Tax Credit Fund VI, L.P., Series 6
Trenton MO 32 22,400 8/11/1998 730,000 1,024,738 1,754,738 5,006 1,759,744
Memphis TN 60 42,000 9/22/1998 1,311,517 2,812,622 4,124,139 13,740 4,137,879
Bonne MO 32 22,400 12/11/1998 633,000 1,063,406 1,696,406 5,195 1,701,601
Edgefield SC 44 30,800 7/20/1998 1,114,559 989,114 2,103,673 4,832 2,108,505
<FN>
(1) Based on an average of 700 square feet per apartment unit.
(2) Cash down payments include capital contributions made to the operating
partnerships by the investment partnership.
(3) WNC Housing Tax Credit Fund IV, L.P., Series 3 and Series 4 have each
invested 49.495% the in El Monte project.
Therefore units, square feet and mortgage financing are equally allocated.
(4) Included in amount of permanent financing is $1,300,000 in tax exempt bonds.
</FN>
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrants
certify that they have reasonable grounds to believe that they meet all of the
requirements for filing on Form S-11 and have duly caused this Amendment to
Registration Statement to be signed on their behalf by the undersigned,
thereunto duly authorized, in the City of Costa Mesa, State of California, on
the 28th day of May, 1999.
WNC HOUSING TAX CREDIT FUND VI, L.P.,
SERIES 7 and SERIES 8
By: WNC & ASSOCIATES, INC.,
General Partner
By: /s/ JOHN B. LESTER, JR.
John B. Lester, Jr.,
President
II-9
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
WILFRED N. COOPER, SR.* Director and chief May 28, 1999
Wilfred N. Cooper, Sr. executive officer of
WNC & Associates, Inc.
JOHN B. LESTER, JR.* Director, president May 28, 1999
John B. Lester, Jr. and secretary of WNC &
Associates, Inc.
WILFRED N. COOPER, JR.* Director and May 28, 1999
Wilfred N. Cooper, Jr. executive vice
president of WNC &
Associates, Inc.
/s/ DAVID N. SHAFER Director, senior May 28, 1999
DAVID N. SHAFER vice president and
general counsel of
WNC & Associates, Inc.
MICHAEL L. DICKENSON* Chief financial officer May 28, 1999
Michael L. Dickenson and chief accounting
officer of WNC &
Associates, Inc.
* By: /s/ DAVID N. SHAFER
David N. Shafer,
as attorney-in-fact
II-10
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibit Description
1.3 Investor Form (filed as
Exhibit C to the Prospectus)
3.1 Agreement of Limited Partnership
and (filed as Exhibit B to the
4.1 Prospectus)
23.3 Consent of BDO Seidman, LLP*
23.4 Consent of Corbin & Wertz*
- ----------
*TO BE FILED BY AMENDMENT
