SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2)) [ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Sections240.14a-12
......................REAL ESTATE ASSOCIATES LIMITED II......................
(Name of registrant as specified in its charter)
................................................................................
(Name of person(s) filing proxy statement if other than the registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
. . . . . . . . . ................................................
2) Aggregate number of securities to which transaction applies:
. . . . . . . . . ................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined): . . .
....................................................................
4) Proposed maximum aggregate value of transaction:
. . . . . . . . . ................................................
5) Total fee paid:
. . . . . . . . . ................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11-(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No:
3) Filing Party:
4) Date Filed:
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REAL ESTATE ASSOCIATES LIMITED II
9090 Wilshire Boulevard
Beverly Hills, California 90211
___________ __, 1998
To the Limited Partners:
National Partnership Investments Corp., the managing general partner ("NAPICO"
or the "Managing General Partner") of Real Estate Associates Limited II (the
"Partnership" or "REAL II"), is writing to recommend, and seek your consent to,
(i) the sale of the interests of the Partnership (the "Real Estate Interests")
in the real estate assets of eight of the twenty-one limited partnerships
affiliated with the Partnership to a real estate investment trust or its
designated affiliate (collectively referred to as the "REIT") to be organized by
Casden Properties, a California general partnership, and certain of its
affiliates (collectively referred to as "Casden"); and (ii) certain amendments
(the"Amendments") to the Partnership's Agreement of Limited Partnership
necessary to permit such sale. The transactions by which the Partnership
proposes to sell the Real Estate Interests to the REIT and amend its Agreement
of Limited Partnership are hereinafter referred to as the "Sale."
NAPICO is a wholly-owned subsidiary of Casden Investment Corporation, the sole
director and stockholder of which is Mr. Alan I. Casden. Alan I. Casden is also
a general partner of Casden Properties, the sponsor of the REIT and an affiliate
of the Partnership. Four of the current members of NAPICO's board of directors,
Charles H. Boxenbaum, Bruce E. Nelson, Henry C. Casden and Alan I. Casden, are
expected to become officers and shareholders of the REIT. The eight
above-referenced limited partnerships each own a low income housing project
(each of which is referred to herein as a "Property") that is subsidized and/or
has a mortgage note payable to or insured by an agency of the federal government
or a local housing agency. Those eight limited partnerships, the real estate
assets of which are to be transferred in connection with the Sale, are
hereinafter referred to as the "Local Partnerships". Limited Partners must
separately approve the proposed Sale and each of the proposed Amendments in
order to allow consummation of the Sale. The Partnership will remain in
existence after consummation of the proposed Sale and will retain direct or
indirect interests in thirteen property-owning limited partnerships.
In evaluating the proposed Sale, the Limited Partners should note that:
o The Properties do not currently produce significant cash flow and the
Partnership has not made any distributions to date. The Partnership's
investment in the Properties was initially structured primarily to
obtain tax benefits, and not to provide cash distributions. The
Partnership has substantially fulfilled its original objective of
providing tax benefits to the Limited Partners. The Partnership has
generated net tax benefits equal to at least 142.6% of each Limited
Partner's equity investment since the inception of the Partnership
through December 31, 1990 (assuming a Limited Partner claimed such
deductions in accordance with the passive loss transitional relief
rules contained in the Tax Reform Act of 1986 and in connection with
property dispositions). As a result of such changes to the tax law,
most Limited Partners no longer realize any material tax benefits from
continuing to hold their interests in the Partnership.
o Based upon a purchase price for the Real Estate Interests of
$63,317,557, which is payable $6,500,000 in cash and $56,817,557 by
assumption by the REIT of certain mortgage indebtedness, it is
anticipated that the Partnership will make an aggregate distribution to
Limited Partners of $6,930,000, or approximately $1,296 per unit, which
represents an aggregate distribution of $6,435,000 from the net
proceeds of the Sale plus approximately $495,000 from the available
cash reserves of the Partnership. The limited partnership interests
were originally sold as units consisting of two limited partnership
interests and warrants to purchase two additional interests, and were
sold at an original cost of $5,000 per unit. Although the cash purchase
price and the distributions out of the Partnership's available cash are
less than the tax liability to a Limited Partner from the Sale, the
Sale will provide cash to enable Limited Partners to pay a portion of
their tax liability. Whether or not the Sale is consummated, Limited
Partners will be required to pay capital gains taxes at such
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time as the Properties or the Real Estate Interests are ultimately
disposed of by the Local Partnerships or the Partnership. However, if
the Sale is not consummated and the Properties or Real Estate Interests
are instead disposed of at a later date, the Managing General Partner
does not believe that cash equaling the purchase price offered in
connection with the Sale will be available to meet a portion of the
Limited Partners' tax liability. The purchase price to be paid by the
REIT is in excess of the amount determined by the Managing General
Partner to be the valuation of the Real Estate Interests.
o The Managing General Partner believes that now may be an opportune time
for the Partnership to sell the Real Estate Interests, given current
conditions in the real estate and capital markets, which have enabled
the REIT to make the proposal to the Partnership described in the
enclosed materials.
o Robert A. Stanger & Co., Inc., a recognized independent investment
banking firm, has determined that, subject to the assumptions,
limitations and qualifications contained in its opinion, the aggregate
value ascribed to the Properties in connection with determining the
Purchase Price to be received by the Partnership for the Real Estate
Interests in the Sale is fair from a financial point of view to the
Limited Partners.
o The Managing General Partner believes that selling the Real Estate
Interests in a single transaction (as opposed to a series of individual
sales) will enable the Partnership to (i) reduce transaction expenses;
and (ii) dispose of a significant portion of its portfolio in an
expedited time frame. It should be noted that the Sale is conditioned
upon, among other things, the consents of the general partners of the
Local Partnerships in which the REIT intends to acquire interests. The
Managing General Partner will retain its interests in a Property if the
general partner for the Local Partnership holding such Property does
not agree to sell its interests in the Property.
o The Managing General Partner does not believe that it would be feasible
to market the Properties to a third party because the Partnership owns
only limited partnership interests in the Local Partnerships. The
general partners of such Local Partnerships are generally not
affiliated with the Managing General Partner. As a result, the
cooperation of a local general partner is necessary to allow the
Partnership to effectuate a sale of a Property, since a third party
buyer would need to negotiate a buy-out of the local general partner of
such Property. The Partnership does not have the power to compel a sale
of a Property or Properties to a third party.
o All eight of the Properties are subject to Housing Assistance Payments
Contracts under Section 8 of the United States Housing Act. Most of
these contracts will expire by the end of 2002 and the United States
Department of Housing and Urban Development will not renew them under
their current terms, which could ultimately have an adverse economic
and tax impact on Limited Partners.
There are certain risk factors that the Limited Partners should consider in
evaluating the proposed Sale, such as:
o The Partnership does not have the right to compel a sale of the
Properties. Accordingly, the Managing General Partner has not marketed
the Properties for sale to third parties.
o The terms of the Sale have not been negotiated at arm's-length.
o Casden is both an affiliate of the Managing General Partner and the
sponsor of the REIT and, as discussed in the enclosed materials, would
receive substantial benefits as a result of the Sale and the successful
formation and capitalization of the REIT that will not be available to
Limited Partners.
o It is possible that Limited Partners could earn a higher return on
their investment in the Partnership if the Partnership were to retain
ownership of the Properties, then market and sell the Properties to
third parties for a higher aggregate purchase price at a later date.
o As a result of the Sale, the Partnership will not realize any potential
benefits of continuing to own the Properties.
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o The Sale will have a tax impact on Limited Partners. The Sale will
result in a net federal and state income tax cost of approximately
$1,031 per unit in excess of the cash distribution. Since gains from
prior dispositions of the Partnership's properties exceeded losses
suspended by the passive activity loss rules of the Internal Revenue
Code, there should be no suspended passive activity losses available
from the Partnership to offset gains from the sale of the Real Estate
Interests. For Limited Partners who have losses from other passive
activities, the taxable gain and therefore the net tax cost of the Sale
will be reduced by the ability to utilize such losses as an offset
against their taxable income.
The REIT is to be formed by combining a substantial portion of Casden's
multi-family housing assets, which consist of real estate businesses and
property interests, with conventional and subsidized housing properties acquired
from several Casden-sponsored and/or managed partnerships and from third-party
sellers. Casden and certain officers and directors of NAPICO, including Alan I.
Casden, Henry C. Casden, Charles H. Boxenbaum and Bruce E. Nelson, will receive
a significant ownership interest in the REIT in exchange for Casden contributing
substantially all of its multi-family housing assets and businesses to the REIT.
The REIT proposes to acquire the Real Estate Interests for cash, which it plans
to raise in connection with a private placement of its equity securities. The
closing of the Sale is subject to, among other things, (i) the consummation of
such private placement by the REIT; (ii) the consents of the general partners of
the Local Partnerships in which the REIT intends to acquire interests; (iii) the
approval of the United States Department of Housing and Urban Development and
certain state and local housing finance agencies; and (iv) the consummation of a
minimum number of similar sales transactions with other Casden-affiliated
partnerships.
If the Limited Partners do not approve the Sale, the Partnership will most
likely retain its indirect ownership of the Properties.
We urge you to carefully read the enclosed Consent Solicitation Statement in
order to vote your interests. YOUR VOTE IS IMPORTANT. BECAUSE APPROVAL REQUIRES
THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING UNITS OF LIMITED
PARTNERSHIP INTEREST, FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST THE SALE. To be sure your vote is represented, please sign, date and
return the enclosed consent as promptly as possible.
The proposed Sale is fully described in the enclosed Consent Solicitation
Statement. Please read the enclosed materials carefully, then return your signed
consent form either by facsimile to MacKenzie Partners at 303-705-6171 or in the
enclosed envelope on or before ________ __, 1998.
If you have any questions, please do not hesitate to contact MacKenzie Partners,
the Partnership's consent solicitation agent, toll free at 800-322-2885 or
collect at 212-929-5500.
Very truly yours,
National Partnership Investments Corp.
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REAL ESTATE ASSOCIATES LIMITED II
9090 Wilshire Boulevard
Beverly Hills, California 90211
________ __, 1998
CONSENT SOLICITATION STATEMENT
On the terms described in this Consent Solicitation Statement, National
Partnership Investments Corp. the managing general partner ("NAPICO" or the
"Managing General Partner"), of Real Estate Associates Limited II, a California
limited partnership (the "Partnership" or "REAL II"), is seeking the consent of
the Limited Partners of the Partnership to (i) the sale of the interests of the
Partnership (the "Real Estate Interests") in the real estate assets of eight of
the twenty-one limited partnerships in which the Partnership holds a limited
partnership interest, to a real estate investment trust or its designated
affiliate (collectively referred to as the "REIT") to be organized by Casden
Properties, a California general partnership, and certain of its affiliates
(collectively referred to herein as "Casden"), for a purchase price of
$63,317,557 (the "Purchase Price"), payable $6,500,000 in cash and $56,817,557
by assumption by the REIT of certain mortgage indebtedness; and (ii) certain
amendments to the Partnership's Agreement of Limited Partnership (the
"Amendments") necessary to permit such a sale. The eight limited partnerships,
the real estate assets of which are to be transferred in connection with the
Sale, are hereinafter referred to as the "Local Partnerships."
The eight Local Partnerships each own a low income housing project
(each of which is referred to herein as a "Property") that is subsidized and/or
has a mortgage note payable to or insured by an agency of the federal government
or a local housing agency. Pursuant to certain state housing finance statutes
and regulations, certain of the Local Partnerships are subject to limitations on
distributions to the Partnership. Such statutes and regulations require such
Local Partnerships to hold cash flows in excess of such distribution limitations
in restricted reserve accounts that may be used only for limited purposes.
Consents are also being sought from the limited partners of certain
other limited partnerships, the general partners of which are affiliated with
Casden (the Partnership and such other limited partnerships are hereinafter
collectively referred to as the "Casden Partnerships"), to allow the sale of
certain real estate assets owned by the Casden Partnerships to the REIT. The
transactions by which the Partnership proposes to sell the Real Estate Interests
to the REIT and amend its Agreement of Limited Partnership (the "Partnership
Agreement") are hereinafter referred to as the "Sale." The series of
transactions by which Casden proposes to form the REIT and acquire certain real
estate assets from the Casden Partnerships and others is hereinafter referred to
as the "REIT Transaction." The Partnership will remain in existence after
consummation of the proposed Sale and will retain direct or indirect interests
in a total of thirteen property-owning limited partnerships. The Sale and each
of the proposed Amendments are being submitted to the Limited Partners as
separate resolutions. Limited Partners must approve the proposed Sale and each
of the proposed Amendments in order to allow consummation of the Sale.
NAPICO is a wholly-owned subsidiary of Casden Investment Corporation,
the sole director and stockholder of which is Mr. Alan I. Casden. Alan I. Casden
is also a general partner of Casden Properties, the sponsor of the REIT and an
affiliate of the Partnership. Four of the current members of NAPICO's board of
directors, Charles H. Boxenbaum, Bruce E. Nelson, Henry C. Casden and Alan I.
Casden, are expected to become officers and shareholders of the REIT. See
"CONFLICTS OF INTEREST."
It is anticipated that the Partnership will make a distribution to
Limited Partners of approximately $1,296 per unit of limited partnership
interest from the net proceeds of the Sale and approximately $495,000 of the
available cash of the Partnership.
The Sale is conditioned upon, among other things, (i) approval of a
majority in interest of the Limited Partners of the Partnership; (ii) the
consummation of a private placement of the REIT's equity securities; (iii) the
consents of the general partners of the Local Partnerships in which the REIT
intends to acquire interests; (iv) the approval of the United States Department
of Housing and Urban Development ("HUD") and certain state housing finance
agencies; and (v) the consummation of a minimum number of real estate purchases
from the Casden Partnerships in connection
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with the REIT Transaction. If the Partnership is unable to obtain the consent of
a general partner of a particular Local Partnership, then the Real Estate
Interests relating to such Local Partnership will be retained by the Partnership
and will be excluded from the Sale.
Under the Partnership Agreement and California law, Limited Partners do
not have dissenters' rights of appraisal. If the Sale is approved by a majority
in interest of the Limited Partners, and the other conditions to consummation of
the Sale are satisfied, all Limited Partners, both those voting in favor of the
Sale and those not voting in favor, will be entitled to receive the resulting
cash distributions.
The Managing General Partner has approved the Sale, has concluded that
the Sale, including the Aggregate Property Valuation (as defined herein) and the
Purchase Price for the Real Estate Interests, is fair to the Limited Partners
and recommends that the Limited Partners consent to the Sale. Limited Partners
should note, however, that the Managing General Partner's recommendation is
subject to inherent conflicts of interest. See "CONFLICTS OF INTEREST."
National Partnership Investments Associates, a California Limited
Partnership ("NPIA"), is the non-managing General Partner of the Partnership.
Pursuant to an agreement between NAPICO and NPIA, NAPICO is responsible for the
performance of any duties required to be performed by the General Partners and
has sole and final discretion to manage and control the business of the
Partnership and make all decisions relating thereto. NPIA has not participated
in the management of the Partnership, or in decisions made by the Partnership in
connection with the Sale. NPIA has not taken a position with respect to the Sale
nor has it participated in the preparation of this Consent Solicitation
Statement.
This Consent Solicitation Statement and the accompanying form of
Consent of Limited Partner are first being mailed to Limited Partners on or
about ________ __, 1998.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THIS SOLICITATION OF CONSENTS EXPIRES
NO LATER THAN 11:59 P.M. EASTERN TIME
ON ________ __, 1998, UNLESS EXTENDED.
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TABLE OF CONTENTS
Page
I SUMMARY OF CONSENT SOLICITATION STATEMENT.............................1
The Partnership.......................................................1
The Sale..............................................................1
Potential Benefits of the Sale........................................2
Potential Adverse Effects of the Sale.................................5
Amendments to Partnership Agreement...................................6
Limited Partner Approval..............................................7
Third-Party Opinion...................................................7
Recommendation of the Managing General Partner........................8
Conflicts of Interest.................................................8
Federal Income Tax Consequences.......................................9
Summary Financial Information........................................10
Transaction Expenses.................................................10
Voting Procedures....................................................11
II. THE PARTNERSHIP......................................................11
General..............................................................11
The Properties.......................................................13
Market for Partnership Interests and Related Security Holder Matters.14
Distribution History.................................................14
Regulatory Arrangements..............................................15
Year 2000 Information................................................16
Directors and Executive Officers of NAPICO...........................16
III. THE SALE.............................................................17
Background and Reasons for the Sale..................................17
Acquisition Agreement................................................19
Arrangements with General Partners of the Local Limited Partnerships.20
Source of Funds......................................................20
Transaction Costs....................................................20
Distribution of Sale Proceeds; Accounting Treatment..................21
Conditions...........................................................21
Fairness Opinion.....................................................22
Alternatives to the Sale.............................................27
Recommendation of the Managing General Partner; Fairness.............29
Post-Sale Operations of the Partnership..............................34
Historical and Pro Forma Financial Information.......................34
IV. AMENDMENTS TO THE PARTNERSHIP AGREEMENT..............................41
V. CONFLICTS OF INTEREST................................................41
General..............................................................41
Fiduciary Responsibility.............................................42
VI. SELECTED FINANCIAL INFORMATION.......................................44
VII. FEDERAL INCOME TAX CONSEQUENCES......................................44
VIII. LEGAL PROCEEDINGS ...................................................45
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IX. LIMITED PARTNERS CONSENT PROCEDURE...................................46
Distribution of Solicitation Materials...............................46
Voting Procedures and Consents.......................................46
Completion Instructions..............................................47
Withdrawal and Change of Election Rights.............................47
No Dissenters' Rights of Appraisal...................................47
Solicitation of Consents.............................................48
X. IMPORTANT NOTE.......................................................48
ANNEXES
Annex A - Fairness Opinion of Robert A. Stanger & Co., Inc.
Annex B - The Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
Annex C - The Partnership's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.
Annex D - Text of Proposed
Amendments to the Partnership Agreement.
Annex E - Legal Opinion of Battle Fowler LLP.
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AVAILABLE INFORMATION
Real Estate Associates Limited II is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, consent solicitation
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, consent solicitation statements and other
information filed with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices,
Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. In
addition, the Commission maintains a site on the World Wide Web portion of the
Internet that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of such site is http://www.sec.gov. Copies of the latest Annual
Report on Form 10-K and Quarterly Report on Form 10-Q may also be obtained from
NAPICO without charge. All requests should be made in writing to National
Partnership Investments Corp., 9090 Wilshire Boulevard, Suite 201, Beverly
Hills, California 90211; Attention: Investor Services; Telephone 800-666-6274.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Partnership
are incorporated by reference in this Consent Solicitation Statement:
Annual Report of the Partnership on Form 10-K for the fiscal year ended
December 31, 1997, and
Quarterly Report of the Partnership on Form 10-Q for the quarter ended
March 31, 1998.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Consent
Solicitation Statement to the extent that a statement contained herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Consent Solicitation Statement.
No person is authorized to give any information or to make any
representation not contained in this Consent Solicitation Statement in
connection with the solicitation of proxies made hereby, and, if given or made,
any such information or representation should not be relied upon as having been
authorized by the Partnership or any other person. The delivery of this Consent
Solicitation Statement shall not, under any circumstances, create any
implication that there has been no change in the information set forth herein or
in the affairs of the Partnership since the date of this Consent Solicitation
Statement.
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I. SUMMARY OF CONSENT SOLICITATION STATEMENT
The following summary is intended to provide only highlights of the
materials contained in this Consent Solicitation Statement. This summary is not
intended to be a complete statement of all material features of the proposed
Sale and is qualified in its entirety by the more detailed information contained
herein. Cross references in the summary are to the indicated captions or
portions of this Consent Solicitation Statement.
The Partnership
Real Estate Associates Limited II is a California limited partnership,
the general partners of which are National Partnership Investments Corp. and
National Partnership Investments Associates a California limited partnership.
The Partnership holds limited partnership interests in twenty-one
limited partnerships, which in turn hold title to twenty-one properties.
Eighteen of the twenty-one limited partnerships in which the Partnership holds a
direct or indirect interest hold title to a low income housing project that is
subsidized and/or has a mortgage note payable to or insured by an agency of the
federal government or a local housing agency. Pursuant to certain state housing
finance statutes and regulations, certain of the Local Partnerships are subject
to limitations on distributions to the Partnership. Such statutes and
regulations require such Local Partnerships to hold cash flows in excess of such
distribution limitations in restricted reserve accounts that may be used only
for limited purposes. The twenty-one properties indirectly held by the
Partnership are located in seventeen states. See "THE PARTNERSHIP -- The
Properties."
The Partnership maintains offices at 9090 Wilshire Boulevard, Beverly
Hills, California 90211 (310-278-2191). The Partnership was organized as a
California limited partnership on December 4, 1979. See "THE PARTNERSHIP."
The Sale
The Partnership proposes to sell its interests in eight of the
twenty-one property-owning limited partnerships to the REIT for cash and the
assumption of certain mortgage indebtedness. See "THE SALE." The Partnership
will remain in existence after consummation of the proposed Sale and will retain
direct or indirect interests in a total of thirteen property-owning limited
partnerships with an aggregate of 1,461 apartment units.
The aggregate consideration for the Real Estate Interests that the
Managing General Partner currently anticipates will be included in the Sale is
$63,317,557, payable $6,500,000 in cash and $56,817,557 by assumption by the
REIT of certain mortgage indebtedness. The REIT intends to raise the cash to be
paid to the Partnership through a private placement of approximately $250
million of its equity securities (the "Private Placement"). The REIT intends to
commence an initial public offering of its equity securities subsequent to the
consummation of the Sale.
The net proceeds of the Sale will be distributed to the Limited and
General Partners in accordance with the cash distribution provisions of the
Partnership Agreement. See "THE SALE--Distribution of Sale Proceeds" for a
summary of the cash distribution rules applicable to such distributions. Limited
Partners are expected to receive a distribution of approximately $1,296 in cash
per unit, which represents distributions out of the net proceeds of the Sale
plus approximately $495,000 of the available cash of the Partnership. The
limited partnership interests were originally sold as units consisting of two
limited partnership interests and warrants to purchase two additional interests,
and were sold at an original cost of $5,000 per unit (the "Units"). All expenses
of the Sale will be borne by the Partnership.
Although the distribution will not be sufficient to pay all of the
federal and state income taxes that would be due in connection with the Sale,
the Sale will provide cash to enable Limited Partners to pay a portion of their
tax liability. Whether or not the Sale is consummated, Limited Partners will be
required to pay capital gains taxes at such time as the Properties or the Real
Estate Interests are ultimately disposed of by the Local Partnerships or the
Partnership. For Limited Partners who have losses from other Passive Activities,
the taxable gain and therefore the
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net tax cost of the Sale will be reduced by the ability to utilize such losses
as an offset against their taxable income. Since it is not possible for the
Managing General Partner to make any assumptions regarding other passive
activity investments of the Limited Partners, the net tax cost does not include
any estimate of other passive losses. For a discussion of the bases of these
assumptions, see "FEDERAL INCOME TAX CONSEQUENCES." Each Limited Partner is
urged to consult his, her or its own tax advisor for a more detailed explanation
of the specific tax consequences to such Limited Partner from the Sale.
NAPICO and NPIA, the General Partners of the Partnership, will be
entitled to receive distributions in connection with the Sale of $70,000 in the
aggregate.
The Sale is conditioned upon, (i) approval of a majority in interest of
the Limited Partners of the Partnership; (ii) the consummation of the Private
Placement; (iii) the consents of the general partners of the Local Partnerships
in which the REIT intends to acquire interests; (iv) the approval of HUD and
certain state housing finance agencies; and (v) the consummation of a minimum
number of real estate purchases from the Casden Partnerships in connection with
the REIT Transaction. See "THE PARTNERSHIP -- Regulatory Arrangements" and "THE
SALE -- Conditions."
Potential Benefits of the Sale
The Managing General Partner believes that the Sale achieves the
Partnership's investment objectives for the following reasons:
o Receipt of Cash. The Sale will result in a cash distribution of
$1,296 per Unit to Limited Partners. Although the cash purchase
price and the distributions out of the Partnership's available
cash are less than the Limited Partners' tax liability from the
Sale, the Sale will provide cash to enable Limited Partners to pay
a significant portion of the tax liability. Whether or not the
Sale is consummated, Limited Partners will be required to pay
capital gains taxes at such time as the Properties or the Real
Estate Interests are ultimately disposed of by the Local
Partnerships or the Partnership. However, if the Sale is not
consummated and the Properties or Real Estate Interests are
instead disposed of at an indeterminate time in the future, the
Managing General Partner does not believe that cash equaling the
purchase price offered in connection with the proposed Sale will
be available to meet a portion of the Limited Partners' tax
liability. The purchase price to be paid by the REIT is in excess
of the amount determined by the Managing General Partner to be the
valuation of the Real Estate Interests. For a discussion of the
Managing General Partners' tax assumptions, See "FEDERAL INCOME
TAX CONSEQUENCES." The Partnership has never made distributions
and, if the Sale is not completed, the Managing General Partner
does not anticipate that the Partnership will make distributions
in the near future.
o Opportune Time to Sell. The Managing General Partner believes that
now may be an opportune time for the Partnership to sell its
interests in the Properties, given current conditions in the real
estate and capital markets. Specifically, the Managing General
Partner believes that investor demand for the stock of certain
public real estate companies similar to the REIT has increased
significantly over the past several years. The Managing General
Partner believes that the current interest rate environment and
the availability of capital for real estate investment trusts will
enable Casden to form the REIT and make the proposal to the
Partnership for the Sale, which provides the Partnership with an
opportunity to maximize the value of the Properties. In addition,
the Managing General Partner took into account the potential
impact of recent changes in laws and policies relating to payments
under Housing Assistance Payments Contracts under Section 8 of the
United States Housing Act ("HAP Contracts"), which the Managing
General Partner believes will result in significant reductions in
cash flow from the Properties. See " - Resolving HUD
Uncertainties," "THE PARTNERSHIP-- Regulatory Arrangements" and
"THE SALE -- Background and Reasons for the Sale."
o Third Party Fairness Opinion. The Managing General Partner has
determined that the Properties that the REIT currently anticipates
purchasing in connection with the Sale have an aggregate value of
710529.7
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$69,220,316 (the "Aggregate Property Valuation"). Robert A.
Stanger & Co., Inc. ("Stanger"), an independent, nationally
recognized real estate investment banking firm, has been engaged
by the Partnership to render an opinion (the "Fairness Opinion")
to the Partnership as to the fairness, from a financial point of
view, to Limited Partners of the Aggregate Property Valuation
utilized in connection with determining the Purchase Price to be
received by the Partnership for the Real Estate Interests in the
Sale. Stanger has conducted certain reviews described herein and
has concluded, subject to the assumptions, qualifications and
limitations contained in its opinion, that the Aggregate Property
Valuation utilized in connection with determining the Purchase
Price for the Real Estate Interests in the Sale is fair, from a
financial point of view, to Limited Partners. The Fairness Opinion
addresses neither the adjustments made to the Aggregate Property
Valuation to determine the distribution amount payable to Limited
Partners in connection with the Sale (including the allocation of
the Aggregate Property Valuation between the Limited Partners,
General Partners and the local general partners), nor the Purchase
Price itself. See "THE SALE - Fairness Opinion."
o Reducing the Risks of Real Estate Investing. Continued ownership
of the Properties subjects the Partnership to continued risks
inherent in real estate ownership, such as national and local
economic trends, supply and demand factors in the local property
market, the cost of operating and maintaining the physical
condition of the Properties and the cost and availability of
financing for prospective buyers of the Properties. No assurance
can be given that a prospective buyer would be willing to pay an
amount equal to or greater than the Purchase Price for the
Properties in the future.
o Unattractiveness of Other Options. The Managing General Partner
does not believe that other alternatives available to the
Partnership are as attractive to the Partnership as the Sale.
One alternative considered by the Managing General Partner was
continued indirect ownership of the Properties by the Partnership.
However, the Partnership is not currently making distributions to
the Limited Partners and recent changes in laws and policies
relating to payments under HAP Contracts are expected to result in
significant reductions in cash flows from the Properties. Further,
the tax benefits resulting from continuing to own the Properties,
which remain available only to those Limited Partners currently
able to utilize passive losses (which can only be deducted against
passive income), are diminishing. The Managing General Partner
does not believe that the Partnership could realize the same
benefits anticipated to be received by the REIT through its
acquisition of the Properties. The REIT expects to realize
potential benefits from its acquisition of the Real Estate
Interests by also acquiring the partnership interests of the
general partners of the Local Partnerships, the right to manage
the Properties, and the insured mortgage indebtedness currently
encumbering the Properties. The Managing General Partner does not
believe that the Partnership could obtain the financing necessary
to make such acquisitions or that such acquisitions would be
consistent with the Partnership's investment objectives.
Accordingly, the Managing General Partner believes that it is
necessary for the Partnership to dispose of its interests in all
of the local limited partnerships and the proposed disposition of
the Real Estate Interests in connection with the Sale furthers
this goal.
The Managing General Partner also considered marketing the
Properties to third parties in cooperation with the general
partners of the Local Partnerships; however, the Managing General
Partner does not believe that such alternative would be in the
interests of the Limited Partners, because the Managing General
Partner believes, based on the current uncertainties in the
government subsidized housing market, that it would be difficult
to sell the Properties and that such a sale would not result in a
purchase price for the Properties as high as the Purchase Price
offered in connection with the Sale. Furthermore, for a third
party to acquire the Properties, it would have to acquire not only
the limited partnership interests in the Local Partnerships owned
by the Partnership, but also the interests of each local general
partner. The Partnership owns only limited partnership interests
in the Local Partnerships and does not hold title to the
Properties. As a result, the Managing General Partner believes
that marketing the Properties to third parties would result in
significant delays and uncertainties. There can
710529.7
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<PAGE>
be no assurance, however, that a well-capitalized third party
buyer would not be willing to pay a price in excess of the
Purchase Price to acquire the Properties.
In determining the structure of the transaction, the Managing
General Partner took into account the fact that the Partnership
owns limited partnership interests in the Local Partnerships and
does not directly own the Properties. A Property may not be sold
without the participation of the general partner of the Local
Partnership that owns such Property. As a result, the simultaneous
sale of the local general partners' interests is necessary to
enable the Partnership to realize the value of its Real Estate
Interests. This factor limits the ability of the Partnership to
market its interests to third parties. Additionally, the amount
required to be paid by a purchaser (whether a third party buyer or
the REIT) to purchase the interests of the local general partners
will have the effect of reducing the amount of consideration that
a buyer is willing to pay for the Partnership's Real Estate
Interests. The amounts that affiliates of the Managing General
Partner will pay to the unaffiliated local general partners in
connection with the buyouts of such local general partners have
been determined in arm's-length negotiations with the five
unaffiliated local general partners with whom the REIT has entered
into option agreements. Therefore, the Managing General Partner
believes that, while the amount paid to the local general partners
affects the amount of distribution to Limited Partners and that
the buyout of the local general partners' interests will benefit
the REIT, the terms of these transactions are fair to the
Partnership and the Limited Partners.
Several of the options considered by the Managing General
Partner, including the reorganization of the Partnership as a real
estate investment trust, a rollup involving the Partnership and
the use of an "UPREIT" structure, would have (i) been
prohibitively expensive and logistically impractical; (ii)
entailed compliance with the rollup rules promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), which
may have resulted in significant delays, thereby potentially
causing the Partnership to miss the currently favorable market
conditions for real estate investment trusts; and (iii) resulted
in the Limited Partners receiving publicly traded securities
rather than cash in exchange for their Units. Such publicly traded
securities would be subject to the market risks generally
applicable to equity securities. The Managing General Partner
believes that receipt of such securities would be inconsistent
with the Partnership's ultimate objective of returning cash to the
Limited Partners and winding up the business of the Partnership.
See "THE SALE -- Background and Reasons for the Sale."
o Resolving HUD Uncertainty. Each of the Properties is subject to
Housing Assistance Payments Contracts under Section 8 of the
United States Housing Act. The Managing General Partner
anticipates that, for the foreseeable future, rental rate
increases under such HAP Contracts will either not be permitted by
HUD or will be negligible and unlikely to exceed increases in
operating expenses. Most of these HAP Contracts will expire by the
end of 2002 and HUD will not renew them under their current terms.
Under recently passed legislation, in most cases project rents
will be reduced and the project mortgages restructured, which is
expected to reduce the cash flow from the Properties and could
create adverse tax consequences to the Limited Partners. HUD has
not yet issued implementing regulations on the Section 8
restructuring program, which creates additional uncertainty.
Accordingly, the Managing General Partner believes it may be
beneficial to the Limited Partners to reduce such uncertainties by
approving the Sale at this time. See "THE PARTNERSHIP - Regulatory
Arrangements." and "THE SALE-- Background and Reasons for the
Sale."
o Reduced Transaction Costs. The Partnership will not be required to
pay brokerage commissions in connection with the Sale, which would
typically be paid when selling real property to third parties. As
a result, the Sale is likely to produce a higher cash distribution
to Limited Partners than a comparable sale to an unaffiliated
third party. In addition, the Managing General Partner believes
that selling a significant portion of the Partnership's portfolio
of real estate assets in a single transaction (as opposed to a
series of individual sales) will enable the Partnership to dispose
of a significant portion of its portfolio in an expedited time
frame and provide additional transaction cost savings, although
the Partnership will pay certain expenses, such as the costs of
structural and engineering inspections and
710529.7
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costs relating to proxy solicitation and fairness opinions which
may be higher than comparable expenses in a transaction with an
unaffiliated third party. See "THE SALE -- Transaction Costs" for
a schedule of the costs the Partnership is expected to incur in
connection with the Sale.
Potential Adverse Effects of the Sale
Limited Partners should also consider the following risk factors in
determining whether to approve or disapprove the Sale:
o Loss of Opportunity to Benefit from Future Events. It is possible
that the future performance of the Properties will improve or that
prospective buyers may be willing to pay more for the Properties
in the future. It is possible that Limited Partners might earn a
higher return on their investment if the Partnership retained
ownership of the Real Estate Interests. By approving the Sale,
Limited Partners will be relinquishing certain current benefits of
ownership of the Real Estate Interests, such as the ability to
deduct tax losses generated by the Partnership against other
passive income. See "THE SALE -Background and Reasons for the
Sale."
o No Solicitation of Third Party Offers. The Managing General
Partner has not solicited any offers from third parties to acquire
the Real Estate Interests. There is no assurance that the Managing
General Partner would not be able to obtain higher or better
offers for the Real Estate Interests if such offers were to be
solicited from independent third parties. The Partnership does not
have the power to unilaterally sell any of the Properties.
o Sale Not Negotiated at Arm's-Length. Affiliates of the Managing
General Partner will possess a significant ownership interest in
the REIT and receive substantial other benefits from the formation
of the REIT and the Sale. The Purchase Price was not negotiated at
arm's-length. The Purchase Price was established by the Managing
General Partner and the Partnership did not retain an independent
financial or legal advisor to negotiate the terms of the Sale.
o Conflicts of Interest. In evaluating the proposed Sale, Limited
Partners should consider that Casden is both the sponsor of the
REIT and an affiliate of the Managing General Partner. If the REIT
is successfully formed and capitalized, the current owners of
Casden are likely to realize a substantial increase in the value
and liquidity of their investment in Casden Properties. The terms
of the Sale have been determined on behalf of the Partnership by
officers and directors of Casden who will directly benefit from
the Sale. Unlike Casden, the Limited Partners will not participate
in the REIT. It is anticipated that approximately 45% of the
equity securities of the REIT will be held by Casden and its
affiliates following the Private Placement, based on the terms of
the Private Placement as currently contemplated.
o Tax Consequences. The Sale will have a tax impact on Limited
Partners, producing a long-term capital gain of approximately
$7,756 per Unit. It is not anticipated that the Sale will produce
ordinary income attributable to depreciation recapture. The Sale
will result in a federal and state income tax cost of
approximately $1,031 per Unit in excess of cash distributions from
the net proceeds of the sale and the available cash of the
Partnership. In addition, while the distribution of the cash held
by the Partnership will currently provide cash to pay a portion of
the tax liability and will not be currently taxable, the
distribution of cash will increase the amount by which Limited
Partners' capital accounts are negative and will increase the
taxable gain Limited Partners will realize in the future on
disposition of the Partnership's remaining assets or a Limited
Partner's interest in the Partnership and the tax payable by a
Limited Partner at such time. For a discussion of the tax impact
of the Sale, and the Partnership's assumptions and the bases
therefor, see "CERTAIN FEDERAL TAX CONSEQUENCES." THE SPECIFIC TAX
IMPACT OF THE SALE ON LIMITED PARTNERS SHOULD BE DETERMINED BY
LIMITED PARTNERS IN CONSULTATION WITH THEIR TAX ADVISORS.
710529.7
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o No Appraisals; Limits on Fairness Opinion. The Managing General
Partner has not obtained independent appraisals of the Properties
to determine their value. In addition, while the Fairness Opinion
addresses the fairness of the Aggregate Property Valuation
utilized in connection with determining the Purchase Price, it
does not address the fairness of the Purchase Price itself or the
adjustments to the Aggregate Property Valuation to arrive at the
distributions to the Limited Partners that will result from the
Sale. Such adjustments include the allocation of the Aggregate
Property Valuation between the Limited Partners and the general
partners of the Local Partnerships, which affects the amount of
the consideration to be paid to the Limited Partners. See "THE
SALE - Fairness Opinion."
o No Dissenter's Rights. Under the Partnership Agreement and
California law, Limited Partners do not have dissenters' rights of
appraisal.
o Conditions to Sale. The Sale is subject to certain conditions in
addition to approval of the Sale by the Limited Partners,
including consummation of the Private Placement. Accordingly, even
if the Sale is approved by the Limited Partners and a purchase and
sale agreement is entered into, the consummation of the Sale could
be delayed for a significant period of time and it is possible
that the Sale may not be consummated. If a purchase and sale
agreement is executed in connection with the Sale, it will impede
the Partnership's ability to sell some or all of the Properties to
a third party.
o Uncertainty of Local General Partner Buyouts. While affiliates of
the Managing General Partner have entered into option agreements
with four of the five unaffiliated local general partners with
respect to the buyout of the interests in the Local Partnerships,
there can be no assurance that the Company will be able to
successfully complete buyouts from all such unaffiliated general
partners on acceptable terms, which in turn could reduce the cash
from the Sale available for distribution to the Limited Partners.
To the extent that the ultimate cost of the buyouts of the local
general partners exceeds the Managing General Partner's current
estimates of such cost, the distributions to Limited Partners
resulting from the Sale will be reduced. To the extent that the
cost of such buyouts is less than the Managing General Partners
estimates, distributions to Limited Partners will be increased. At
the time they consent to the Sale, the Limited Partners will not
know which of the Properties will ultimately be transferred in
connection with the Sale; nevertheless, consent to the Sale will
be deemed effective regardless of which Properties are ultimately
included in the Sale.
o Amendments to Partnership Agreement. In addition to approval of
the Sale, Limited Partners are also being asked to approve certain
amendments to the Partnership Agreement which are required to
consummate the Sale. For example, the Partnership Agreement
prohibits the Partnership from selling any Property or any
interest in a Property if the cash proceeds from such sale would
be less than the state and federal taxes applicable to such sale,
calculated using the maximum tax rates then in effect. The
Managing General Partner is seeking an amendment that eliminates
such prohibition to allow the Partnership to sell the Properties
although such tax requirement is not met. By approving such
amendment, the Limited Partners are relinquishing a potential
benefit conferred by the terms of the Partnership Agreement.
Amendments to Partnership Agreement
Certain amendments to the Partnership Agreement are necessary in
connection with the consummation of the Sale.
The Partnership Agreement currently prohibits a sale of any of the
Properties or Real Estate Interests to the General Partners or their affiliates.
Consent of the Limited Partners is being sought for an amendment to the
Partnership Agreement that eliminates such prohibition.
710529.7
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<PAGE>
The Partnership Agreement also requires that any agreement entered into
between the Partnership and the General Partners or any affiliate of the General
Partners shall provide that it may be canceled at any time by the Partnership
without penalty upon 60 days' prior written notice (the "Termination
Provision"). It is the position of the Managing General Partner that the
Termination Provision does not apply to the Sale; nevertheless, the Managing
General Partner is seeking the approval of the Limited Partners to an amendment
to the Partnership Agreement that eliminates the Termination Provision in
connection with the Sale or any future disposition of Properties.
The Partnership Agreement also prohibits the Partnership from selling
any Property or any interest in a Property if the cash proceeds from such sale
would be less than the state and federal taxes applicable to such sale,
calculated using the maximum tax rates then in effect (the "Tax Requirement").
The Managing General Partner is seeking the approval of the Limited Partners to
an amendment to the Partnership Agreement that eliminates the Tax Requirement so
as to allow the Partnership to sell the Properties although such Tax Requirement
is not met.
By approving such amendments, the Limited Partners are relinquishing
potential benefits conferred by the terms of the Partnership Agreement. However,
the Managing General Partner believes that as a result of (i) recent legislation
relating to government-assisted housing, which is expected to reduce the cash
flow from the Properties and create possible adverse tax consequences to owners
of the Properties, and (ii) the substantial negative capital accounts which most
Limited Partners have which will result in recognition of significant gain on a
sale of the Real Estate Interests or the Properties, the Tax Requirement would
prevent sales of Properties or Real Estate Interests which are in the best
interests of the Limited Partners.
The consent of Limited Partners holding a majority interest of the
outstanding Units is required in order to amend the Partnership Agreement.
Limited Partners must approve the Sale and each of the three proposed Amendments
in order to allow consummation of the Sale.
Limited Partner Approval
The Managing General Partner is seeking the consent of the Limited
Partners to the Sale and the Amendments. The Partnership Agreement requires the
prior consent of Limited Partners holding a majority in interest of the
outstanding Units (a "Majority Vote") to an amendment to the Partnership
Agreement.
If the Limited Partners do not approve the Sale and the Amendments by a
Majority Vote, or the other conditions to the consummation of the Sale are not
met, there will be no change in its investment objectives, policies and
restrictions and the Partnership will continue to be operated in accordance with
the terms of the Partnership Agreement. The Partnership will bear the costs of
the consent solicitation process whether or not the Sale is approved or
ultimately consummated.
Third-Party Opinion
The Partnership has obtained from Stanger, a recognized independent
real estate investment banking firm, an opinion that the Aggregate Property
Valuation utilized in connection with determining the Purchase Price to be
received by the Partnership for the Real Estate Interests in the Sale is fair to
the Limited Partners from a financial point of view. In the course of preparing
its Fairness Opinion, Stanger conducted such reviews as it deemed appropriate
and discussed its methodology, analysis and conclusions with the Managing
General Partner. The Managing General Partner has not obtained independent
appraisals to determine the value of the Properties. The Fairness Opinion, which
is subject to certain assumptions, qualifications and limitations, is attached
hereto as Exhibit A. Stanger has no obligation to update the Fairness Opinion on
the basis of subsequent events. Stanger will be paid an aggregate fee by the
Casden Partnerships of up to approximately $455,000, plus $4,100 per property
owned by the Casden Partnerships that is evaluated by Stanger. The portion of
the fee allocable to the Partnership is approximately $27,800, plus $4,100 per
Property, or an aggregate of approximately $64,800. No portion of Stanger's fee
is contingent upon consummation of the Sale or completion of the REIT
Transaction. See "THE SALE-- Fairness Opinion" and "--Potential Adverse Effects
of the Sale--No Appraisals; Limits on Fairness Opinion."
710529.7
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<PAGE>
Recommendation of the Managing General Partner
After a comprehensive review of various alternatives, the Managing
General Partner believes that the Sale is in the best interests of the Limited
Partners. The Managing General Partner believes that the current interest rate
environment and the availability of capital for real estate investment trusts
will enable Casden to form the REIT and make the proposal to the Partnership for
the Sale, which provides the Partnership with an opportunity to maximize the
value of the Real Estate Interests. In addition, the Managing General Partner
reviewed (but did not specifically adopt) the Fairness Opinion. See "THE SALE --
Alternatives to the Sale."
Based upon its analysis of the alternatives and its own business
judgment, the Managing General Partner believes that the terms of the Sale,
including the Aggregate Property Valuation and the Purchase Price for the Real
Estate Interests and the distributions to be made to the Limited Partners, are
fair from a financial point of view to the Limited Partners. Accordingly, the
Managing General Partner has approved the Sale and recommends that it be
approved by the Limited Partners. Limited Partners should note, however, that
the Managing General Partner's recommendation is subject to inherent conflicts
of interest. See "CONFLICTS OF INTEREST."
Conflicts of Interest
A number of conflicts of interest are inherent in the relationships
among the General Partners, the Casden Partnerships, Casden and the REIT, which
may, among other things, influence the recommendation of the Managing General
Partner. These conflicts include the following:
1. The terms of the Sale (including the Purchase Price) were
established by the REIT and the Managing General Partner (which are related
parties) without the participation of any independent financial or legal
advisor. There can be no assurance that arm's-length negotiations would not have
resulted in terms more favorable to the Limited Partners. In addition, the
Properties to be included in the Sale were determined by the REIT and the
Managing General Partner.
2. Although Stanger provided an independent opinion with respect to the
fairness of the Aggregate Property Valuation utilized in connection with the
determination of the Purchase Price, no independent financial or legal advisor
was engaged to represent the interests of the Limited Partners and no third
party appraisals of the Properties were obtained.
3. If the REIT Transaction is consummated, affiliates of the Managing
General Partner will receive substantial interests in the REIT in exchange for
the contribution of real property assets and the property management operations
of Casden, including direct or indirect interests in the Managing General
Partner. The Managing General Partner anticipates that it will receive
significant economic benefits as a result of receiving interests in the REIT.
Such interests are expected to enjoy greater liquidity than the Managing General
Partner's current interests in the Partnership if the REIT successfully
completes an initial public offering following its initial formation as a
private REIT. Unlike Casden, the Limited Partners will not participate in the
REIT. It is anticipated that approximately 45% of the equity securities of the
REIT will be held by Casden and its affiliates following the Private Placement,
based on the terms of the Private Placement as currently contemplated.
4. It is anticipated that the return from the interests in the REIT to
be received by the Managing General Partner and its affiliates in connection
with the REIT Transaction, if it is successfully consummated, will exceed the
return such persons currently receive from the real estate assets and businesses
such persons will contribute or sell to the REIT.
5. The officers and employees of Casden and its affiliates will be
employed by the REIT. NAPICO will become a subsidiary of the REIT. See
"CONFLICTS OF INTEREST."
710529.7
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<PAGE>
6. Affiliates of the Managing General Partner have entered into option
agreements for the buyout of the interests in seven of the Local Partnerships
held by the general partners of such Local Partnerships. The Managing General
Partner will benefit from such buyouts because the interests of such local
general partners will be acquired by the REIT, but the costs of such buyouts
will be indirectly borne by the Limited Partners. The value attributed to the
management fees payable to the five local general partners that are unaffiliated
with the Managing General Partner were included in the Aggregate Property
Valuation when determining the Purchase Price payable to the Limited Partners.
See "CONFLICTS OF INTEREST."
Federal Income Tax Consequences
Generally, the Sale will result in a gain to the Partnership and,
accordingly, to the Limited Partners, to the extent that the consideration
received by the Partnership with respect to the Sale, including the amount of
Partnership indebtedness of which the Partnership is relieved, exceeds its
adjusted basis in the Properties. The income tax calculations contained in this
Consent Solicitation Statement are based upon federal tax rates equal to 39.6%
for ordinary income and 25% for capital gain attributable to depreciation
recapture. Limited Partners should consult their own tax advisors with respect
to their individual tax situations and as to the federal, state, local and other
tax consequences of the Sale. See "FEDERAL INCOME TAX CONSEQUENCES."
710529.7
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Summary Financial Information
The following table sets forth selected historical financial and
operating data of the Partnership for the fiscal years ended December 31, 1997,
1996, 1995, 1994, 1993 and the three months ended March 31, 1998. The following
information should be read in conjunction with the Partnership's Annual Report
on Form 10-K and Quarterly Report on Form 10-Q, attached hereto as Annexes B and
C respectively.
The selected historical financial and operating data of the Partnership
for the three-month period ended March 31, 1998 and March 31, 1997 are derived
from unaudited consolidated financial statements of the Partnership which, in
the opinion of the Managing General Partner, include all adjustments (consisting
only of normal recurring items unless otherwise disclosed) necessary for a fair
presentation of the Partnership's financial position and results of operations.
The results set forth for the three-month period ended March 31, 1998 and March
31, 1997 are not necessarily indicative of results to be expected for a full
year.
<TABLE>
<CAPTION>
Three Months Ended -------------
Year Ended December 31, ------March-31,---------------------
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1998 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income..................... $ 82,692 74,125 79,206 29,192 25,800 19,197 20,477
Operating Expenses.................. 749,191 523,208 553,385 521,486 534,553 176,088 140,599
Loss From Operations................ (666,499) (449,123) (474,179) (492,294) (508,753) (156,891) (120,122)
Distributions From Limited Partnershi
Recognized as Income................ ps 244,281 113,203 172,189 796,658 270,938 133,020 37,941
Equity in Income of Limited Partnerships 820,899 1,154,755 1,172,891 734,711 532,359 217,900 268,000
and Amortization of Acquisition Costs ------- --------- --------- ------- ------- ------- -------
Net Income.......................... $ 398,681 818,835 870,901 1,039,075 294,544 194,029 185,819
------- ------- ------- --------- ------- ------- -------
Net Income allocated
to Limited Partners................. $ 394,694 810,647 862,192 1,028,684 291,599 192,089 183,961
Net Income per Limited Partnership $ 37 77 81 96 27 18 17
Interest ======= ======= ====== ======== ====== ======= =======
$ 5,095,968 4,630,145 3,821,884 2,917,236 1,873,009 5,284,527 5,095,968
Total Assets........................ ========= ========= ========= ========= ========= ========= =========
Investments in Limited Partnerships $ 3,493,251 2,808,190 1,959,173 1,135,982 1,407,989 3,679,292 3,493,251
========= ========= ========= ========= ========= ========= =========
Partners' Equity.................... $ 4,997,014 4,598,333 3,779,498 2,908,597 1,869,522 5,191,043 4,997,014
========= ========= ========= ========= ========= ========= =========
Limited Partners' Equity............ $ 5,165,139 4,770,445 3,959,748 3,097,606 2,068,922 5,357,228 5,165,139
Limited Partners' Equity $ 483 446 370 290 194 501 463
per Limited Partnership Interest ========= ========= ========= ========= ========= ========= ========
</TABLE>
Transaction Expenses
The Partnership will bear its direct costs relating to the Sale,
including customary closing costs such as the seller's portion of title
insurance and escrow fees, and the costs incurred in connection with this
solicitation of consents. The aggregate amount of such costs is expected to be
approximately $350,800, which the Partnership is expected to pay using cash
equivalents held by the Partnership. The transaction costs will be borne by the
Partnership whether or not the Sale is approved by the Limited Partners or
ultimately consummated. Costs incurred individually by the Casden Partnerships,
including accounting and legal fees, will be borne directly by such
partnerships.
710529.7
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Voting Procedures
This Consent Solicitation Statement outlines the procedures to be
followed by Limited Partners in order to consent to the Sale. A form of Consent
of Limited Partner (a "Consent") is attached hereto. These procedures must be
strictly followed in order for the instructions of a Limited Partner as marked
on such Limited Partner's Consent to be effective. The following is a summary of
certain of these procedures:
1. A Limited Partner may make his or her election on the Consent only
during the solicitation period commencing upon the date of delivery of this
Consent Solicitation Statement and continuing until the earlier of (i)
___________, 1998 or such later date as may be determined by the Managing
General Partner and (ii) the date upon which the Managing General Partner
determines that a Majority Vote has been obtained (the "Solicitation Period").
2. Limited Partners are encouraged to return a properly completed and
executed Consent in the enclosed envelope prior to the expiration of the
Solicitation Period.
3. A Consent delivered by a Limited Partner may be changed prior to the
expiration of the Solicitation Period by delivering to the Partnership a
substitute Consent, properly completed and executed, together with a letter
indicating that the Limited Partner's prior Consent has been revoked.
4. The Sale and each of the proposed Amendments are being submitted to
the Limited Partners as separate resolutions. Limited Partners must approve the
proposed Sale and each of the proposed Amendments in order to allow consummation
of the Sale.
5. A Limited Partner submitting a signed but unmarked Consent will be
deemed to have voted FOR the Partnership's participation in the Sale, and the
Amendments.
II. THE PARTNERSHIP
General
The Partnership is a limited partnership formed under the laws of the
State of California on December 4, 1979. On March 7, 1980 the Partnership
offered 3,000 Units consisting of 6,000 limited partnership interests and
warrants to purchase a maximum of 6,000 additional limited partnership interests
at $5,000 per Unit through an offering managed by an affiliate of the
predecessor of Lehman Brothers Inc. As of March 31, 1998 there were a total of
10,694 limited partnership interests (5,347 Units) outstanding.
The business of the Partnership is conducted primarily by NAPICO, the
managing General Partner of the Partnership. NPIA is the non-managing General
Partner of the Partnership. Pursuant to an agreement between NAPICO and NPIA,
NAPICO has the primary responsibility for the performance of any duties required
to be performed by the General Partners and, in general, has sole and final
discretion to manage and control the business of the Partnership and make all
decisions relating thereto. NPIA has not participated in the management of the
Partnership, or in decisions made by the Partnership in connection with the
proposed Sale. NPIA has not taken a position with respect to the Sale nor has it
participated in the preparation of this Consent Solicitation Statement. The
Partnership has no employees of its own.
Casden Investment Corporation owns 100 percent of NAPICO's stock. The
current members of NAPICO's Board of Directors are Charles H. Boxenbaum, Bruce
E. Nelson, Alan I. Casden and Henry C. Casden. Alan I. Casden is the sole
director and stockholder of Casden Investment Corporation and, accordingly,
controls NAPICO.
The original objectives of the Partnership were to own and operate the
Properties (and certain other real estate assets) for investment so as to obtain
(i) tax benefits for the Partners; (ii) reasonable protection for the
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Partnership's capital investments; (iii) potential for appreciation, subject to
considerations of capital preservation; and (iv) potential for future cash
distributions from operations (on a limited basis), refinancings or sales of
assets.
The Partnership holds limited partnership interests in twenty-one
limited partnerships, eighteen of which own a low income housing project that is
subsidized and/or has a mortgage note payable to or insured by an agency of the
federal government or a local housing agency.
The real estate holding limited partnerships in which the Partnership
has invested were, in general, organized by private developers who acquired the
sites, or options thereon, and applied for applicable mortgage insurance and
subsidies. The Partnership became the principal limited partner in these real
estate holding limited partnerships pursuant to arm's-length negotiations with
these developers, or others, who act as general partners. As a limited partner,
the Partnership's liability for obligations of the real estate holding limited
partnerships is limited to its investment. The general partners of such local
partnerships retain responsibility for developing, constructing, maintaining,
operating and managing the properties.
The twenty-one real estate holding limited partnerships generated
approximately $432,119 in cash flow to the Partnership in 1997, before
Partnership expenses of approximately $749,191. At December 31, 1997, the
Partnership had a cash reserve of $1,602,717, approximately $500,000 of which
will be distributed to the Limited Partners after consummation of the Sale.
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The Properties
During 1997, all of the Properties in which REAL II had invested were
substantially rented. The following is a schedule of the status, as of December
31, 1997, of the Properties in which REAL II holds an interest. Asterisks denote
properties to be included in the Sale.
<TABLE>
<CAPTION>
Units Authorized for
Rental-Assistance
under Section 8/ Units Percentage of
No. of Units State Program Occupied Total Units
------------ ------------- -------- -----------
Name & Location
Azalea Court
<S> <C> <C> <C> <C>
Theodore, AL 48 4/19 46 96%
Berger Apts.*
New Haven, CT 144 144/0 144 100%
Biltmore*
Dayton, OH 231 231/0 224 97%
Branford Elderly
Branford, CT 38 38/0 38 100%
Castlewood Apts.*
Davenport, IA 96 96/0 91 95%
Cherrywood Apts.
Twin Falls, ID 40 40/0 39 98%
Clearfield Manor
Clearfield, KY 40 40/0 38 95%
Crystal Springs
Crystal Springs, MS 28 0/28 28 100%
East Farm Village*
East Haven, CT 240 240/0 240 100%
Grant Park *
Atlanta, GA 188 188/0 188 100%
Lakeside Apts.
Mishawaka, IN 48 48/0 47 68%
Landmark Towers
Nampa, ID 40 40/0 40 100%
Magnolia State
Gulfport, MS 60 0/38 58 97%
New Haven Plaza*
Far Rockaway, NY 344 344/0 344 100%
Pennbrook Apts.*
Owosso, MI 108 108/0 108 100%
Redfern Grove Apts.
E. Providence, RI 72 72/0 71 99%
Saturn Apts.
Idaho Falls, ID 38 38/0 38 100%
Sugar River Mills
Claremont, NH 162 162/0 159 98%
Valebrook
Lawrence, MA 151 151/0 151 100%
Westward Ho Apts.*
Phoenix, AZ 290 289/0 267 92%
Willow Wick Apts.
Centre, AL 24 0/5 13 54%
-- --- -- ---
TOTALS 2,430 2,273/90 2,372 98%
</TABLE>
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Each of the Properties is approximately eighteen years old. Routine
repair and maintenance and capital expenditures made out of operating cash and
reserves maintained by local partnerships amounted to approximately $3,369,303
in the aggregate for the year ended December 31, 1997. Due to the age of the
properties, capital expenditures are expected to increase progressively over the
remaining useful lives of the properties.
Market for Partnership Interests and Related Security Holder Matters
Limited partnership interests in the Partnership were sold through a
public offering managed by E.F. Hutton & Co. Inc., a predecessor of Lehman
Brothers Inc., and are not traded on national securities exchange or listed for
quotation on the Nasdaq Stock Market. There is no established trading market for
Units and it is not anticipated that any market will develop for the purchase
and sale of the Units. Pursuant to the Partnership Agreement, Units may be
transferred only with the written consent of the Managing General Partner,
unless the proposed transfer is to a member of the family of the transferring
Limited Partner, a trust set up for the benefit of the Limited Partner's family,
or a corporation or other entity in which the Limited Partner has a majority
interest. At December 31, 1997, there were 1,676 registered holders of Units.
None of the Units are beneficially owned by Casden. Twelve Units are
beneficially owned by Charles M. Boxenbaum.
The high and low purchase prices for Units in sales transactions
completed during the twelve-month period ending December 31, 1997 as compiled by
NAPICO were $169.00 and $11.00 per Unit, respectively. No established trading
market for the Units was ever expected to develop and sales transactions for the
Units have been limited and sporadic.
The Managing General Partner monitors transfers of the Units (a)
because the admission of a substitute limited partner requires the consent of
the Managing General Partner under the Partnership Agreement, and (b) in order
to track compliance with safe harbor provisions under the Securities Act to
avoid treatment as a "publicly traded partnership" for tax purposes. While the
Partnership requests to be provided with the price at which a transfer is being
made, and the Partnership receives some information regarding the price at which
secondary sale transactions in the Units have been effectuated, the Managing
General Partner does not maintain comprehensive information regarding the
activities of all broker/dealers and others known to facilitate from time to
time, or on a regular basis, secondary sales of the Units. It should be noted
that some transactions may not be reflected on the records of the Partnership.
It is not known to what extent Unit sales transactions are between buyers and
willing sellers, each having access to relevant information regarding the
financial affairs of the Partnerships, expected value of their assets, and their
prospects for the future. Many Unit sales transactions are believed to be
distressed sales where sellers are highly motivated to dispose of the Units and
willing to accept substantial discounts from what might otherwise be regarded as
the fair value of the interest being sold, to facilitate the sales. The prices
paid recently for Units generally do not reflect the current market of the
Partnerships' assets, nor are they indicative of total return, since prior cash
distributions and tax benefits received by the original investor are not
reflected in the price. Nonetheless, notwithstanding these qualifications, the
Unit sales prices, to the extent that the reported data are reliable, are
indicative of the prices at which the Units have recently been sold. None of the
Unit sales transactions have involved Casden or its affiliates.
Distribution History
The Partnership has not made any distributions to Limited Partners
since its inception. The Partnership Agreement sets forth a procedure for
allocating distributions among the Limited Partners and General Partners. The
General Partners are entitled to receive 1% of the net cash flow from operations
to be distributed, reduced by any amount paid to the General Partners as an
annual management fee. The Limited Partners as a class are entitled to receive
the balance of the net cash flow from operations to be distributed. There are no
regulatory or legal restrictions on the Partnership's current or future ability
to pay distributions, although, pursuant to certain state housing finance
statutes and regulations, certain of the Local Partnerships are subject to
limitations on distributions to the Partnership.
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Regulatory Arrangements
Although each of the real estate holding limited partnerships in which
the Partnership has invested generally owns a property that must compete in the
market place for tenants, interest subsidies and rent supplements from
governmental agencies make it possible to offer these dwelling units to eligible
"low income" tenants at a cost significantly below the market rate for
comparable conventionally financed dwelling units in the area.
In order to stimulate private investment in low income housing, the
federal government and certain state and local agencies have provided
significant ownership incentives, including among others, interest subsidies,
rent supplements and mortgage insurance, with the intent of reducing certain
market risks and providing investors with certain tax benefits, plus limited
cash distributions and the possibility of long-term capital gains. There remain,
however, significant risks. The long-term nature of investments in government
assisted housing limits the ability of the Partnership to vary its portfolio in
response to changing economic, financial and investment conditions; such
investments are also subject to changes in local economic circumstances and
housing patterns, as well as rising operating costs, vacancies, rent collection
difficulties, energy shortages and other factors that have an impact on real
estate values. The Partnership's government assisted projects also require
greater management expertise and may have higher operating expenses than
conventional housing projects.
Section 8 of the United States Housing Act provides for the payment of
a federal rental subsidy for the benefit of low income families (the "Section 8
Program"). Pursuant to the Section 8 Program, the Partnership entered into
Housing Assistance Payments Contracts (the "HAP Contracts") with HUD or a state
or local administering agency as agent of HUD, with respect to all eight of the
Properties. Under the HAP Contracts, which generally have from two to thirteen
years remaining, 2,111 of the apartment units at the eight Properties to be
included in the Sale (which the Partnership has agreed to lease to low or
moderate income tenants) receive rental assistance payments from HUD. During
1997, the eight real estate holding limited partnerships received an aggregate
of approximately $12,083,841 in rental assistance payments under the HAP
Contracts. The eight Properties generally are subject to mortgage loans insured
by HUD's Federal Housing Administration ("FHA") and the HAP Contracts generally
provide for sufficient payments to make the payments due under the federally
insured mortgage loans.
Under recently adopted law and policy, HUD has determined not to renew
HAP Contracts on a long term basis on the existing terms. In connection with
renewals of the HAP Contracts under such new law and policy, the amount of
rental assistance payments under renewed HAP Contracts will be based on market
rentals instead of above-market rentals, which was generally the case under
existing HAP Contracts. As a result, existing HAP Contracts that are renewed in
the future on projects insured by the FHA will not provide sufficient cash flow
to permit owners of properties to meet the debt service requirements of these
existing FHA-insured mortgages. In order to address the reduction in payments
under HAP Contracts as a result of this new policy, the Multi-family Assisted
Housing Reform and Affordability Act of 1997 (the "MAHRAA"), which was adopted
in October 1997, provides for the restructuring of mortgage loans insured by the
FHA with respect to properties subject to HAP Contracts that have been renewed
under the new policy. The restructured loans will be held by the current lender
or another lender. Under MAHRAA, an FHA-insured mortgage loan can be
restructured to reduce the annual debt service on such loan. There can be no
assurance that the Partnership will be permitted to restructure its mortgage
indebtedness pursuant to the new HUD rules implementing MAHRAA or that the
Partnership would choose to restructure such mortgage indebtedness if it were
eligible to participate in the MAHRAA program. It should be noted that there are
uncertainties as to the economic impact on the Partnership of the combination of
the reduced payments under the HAP Contracts and the restructuring of the
existing FHA-insured mortgage loans under MAHRAA. Accordingly, the Managing
General Partner is unable to predict with certainty their impact on the
Partnership's future cash flow.
Pursuant to the HAP Contracts, the Partnership cannot sell its
interests in a Property without the consent of HUD and, if applicable, the
appropriate state or local agency. The Managing General Partner is currently in
the process of seeking such consent. There is no assurance that HUD will provide
such approval.
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Pursuant to certain state housing finance statutes and regulations,
certain of the Local Partnerships are subject to limitations on distributions to
the Partnership. Such statutes and regulations require such Local Partnerships
to hold cash flows in excess of such distribution limitations in restricted
reserve accounts that may be used only for limited purposes (the "Reserve
Accounts"). The Purchase Price was calculated without attributing value to the
Reserve Accounts. The Managing General Partner believes that federal and state
regulatory considerations limiting the availability of the Reserve Accounts to
the Partnership have the effect of substantially reducing or eliminating
entirely any value attributable to such Reserve Accounts. However, it is
possible that the REIT may in the future realize a benefit from the release of
funds held in the Reserve Accounts.
Year 2000 Information
The Partnership has assessed the potential impact of the Year 2000
computer systems issue on its operations. The Partnership believes that no
significant actions are required to be taken by the Partnership to address the
issue and that the impact of the Year 2000 computer systems issue will not
materially affect the Partnership's future operating results or financial
condition.
Directors and Executive Officers of NAPICO
The Partnership is managed by NAPICO and has no directors or executive
officers of its own.
Biographical information for the directors and executive officers of
NAPICO with principal responsibility for the Partnership's affairs is presented
below. See "LEGAL PROCEEDINGS."
Alan I. Casden has served as Vice Chairman of the Board of Directors of
NAPICO since 1984. Mr. Casden has also served as Chairman and Chief Executive
Officer of Casden Properties and of The Casden Company since 1982 and 1985,
respectively. Mr. Casden has been involved in approximately $3.8 billion of real
estate financings and sales, and has been responsible for the development and
construction of approximately 90,000 multi-family apartment units and 10,000
single-family homes and condominiums. Mr. Casden has served as a member of the
Advisory Board of the National Multi-Family Housing Conference, the Multi-Family
Housing Council, the President's Council of the California Building Industry
Association and the Urban Land Institute. Mr. Casden currently serves on the
Visiting Committee to USC's Marshall School of Business. In 1988, Mr. Casden
received the "Distinguished Alumnus Award" from USC. He holds a bachelor of
science degree from USC. Mr. Casden is also Co-Chairman of the Board of Trustees
of the Simon Wiesenthal Center, an international human rights agency, and
building chairman for its $50 million Museum of Tolerance, which opened in Los
Angeles in 1993.
Henry C. Casden has served as a Director of NAPICO since February 1988
and as its Secretary since November 1994. Since 1988, Mr. Casden has served as
the President and Chief Operating Officer of The Casden Company as well as the
managing general partner of Casden Properties. From 1971 to February 1988, Mr.
Casden was engaged in the private practice of law in Los Angeles, including as a
named partner in his law firm. His practice was devoted principally to
counseling real estate developers, lenders and investors throughout the United
States. Mr. Casden is a member of the Board of Visitors of the University of San
Diego School of Law and the bar association of the District of Columbia. Mr.
Casden received his bachelor of arts degree from the University of California at
Los Angeles, and is a graduate of the University of San Diego Law School. Mr.
Casden is a member of the State Bar of California and has numerous professional
and philanthropic affiliations. Henry C. Casden and Alan I. Casden are brothers.
Charles H. Boxenbaum has served as Chairman of the Board of Directors
and Chief Executive Officer of NAPICO since 1966. He has been active in the real
estate industry since 1960. Prior to joining Sonnenblick- Goldman Corp. of
California, Mr. Boxenbaum was a real estate broker with the Beverly Hills firm
of Carl Rhodes Company. From 1966 to 1980, Mr. Boxenbaum was Chairman of the
Board and Chief Executive Officer of Sonnenblick-Goldman Corp. of California, a
firm specializing in mortgage brokerage. In 1978, the Sonnenblick Goldman Corp.
trade style was sold, and Mr. Boxenbaum purchased the outstanding stock and
changed the name of the firm to National Partnership Investments Corp. He is one
of the founders of and a past director of First Los
710529.7
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<PAGE>
Angeles Bank, organized in November 1974. Since March 1995, Mr. Boxenbaum has
served on the Board of Directors of the National Multi Housing Council. Mr.
Boxenbaum received his bachelor of arts degree from the University of Chicago.
Bruce E. Nelson serves as President and a director of NAPICO. Mr.
Nelson joined NAPICO in 1980 and became President in February 1989. He is
responsible for the operation of all NAPICO sponsored limited partnerships.
Prior to that he was primarily responsible for the securities aspects of the
publicly offered real estate investment programs. Mr. Nelson is also involved in
the identification, analysis, and negotiation of real estate investments. From
February 1979 to October 1980, Mr. Nelson held the position of Associate General
Counsel at Western Consulting Group, Inc., private residential and commercial
real estate syndicators. Prior to that time Mr. Nelson was engaged in the
private practice of law in Los Angeles. Mr. Nelson received his Bachelor of Arts
degree from the University of Wisconsin and is a graduate of the University of
Colorado School of Law. He is a member of the State Bar of California and is a
licensed real estate broker in California and Texas.
III. THE SALE
Background and Reasons for the Sale
In recent years, real estate investment activity by publicly owned
corporations and trusts, such as real estate investment trusts ("REIT
Entities"), has increased dramatically. REIT Entities have become a major source
of capital for the real estate market as well as one of its most prominent
purchasers of real property. A publicly-traded REIT Entity is organized as a
real estate company to own and operate a portfolio of properties, has access to
new capital and its shares can be sold or transferred in the public securities
markets.
During the Spring of 1997, the managers of NAPICO and Casden Properties
(which are affiliated entities), including Alan I. Casden, Henry C. Casden,
Charles H. Boxenbaum and Bruce E. Nelson, evaluated the financial results and
prospects of the Casden Partnerships and considered various alternatives that
might allow them to maximize the current value of the Partnership's assets.
Among other things, they considered (i) reorganizing the Partnership as a REIT
Entity, (ii) attempting a rollup of the Partnership and certain other real
estate holding limited partnerships, (iii) marketing the Properties to third
parties in cooperation with the general partners of the Local Partnerships, and
(iv) continued indirect ownership of the Properties through the Partnership's
limited partnership interests in the Local Partnerships. The managers of NAPICO
and Casden Properties also considered forming a REIT Entity that would acquire
the Properties held by the Local Partnerships.
In May of 1997, NAPICO and Casden Properties invited Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ") and certain other investment banking
firms to make presentations regarding strategic alternatives available to Casden
Properties in light of favorable conditions in the real estate capital markets.
Following such presentations, the managers of Casden Properties decided to form
a REIT Entity.
On April 1, 1997, Casden Properties retained Battle Fowler LLP as its
legal counsel in connection with the potential formation of a REIT Entity and
the potential sales of the assets of the Casden Partnerships. On September 4,
1997, Casden Properties engaged DLJ to act as Casden Properties' financial
advisor in connection with the formation of a REIT Entity.
On November 21, 1997, following several days of interviews with several
investment banking firms, NAPICO selected Stanger to render a fairness opinion
in connection with the Sale and the other proposed sales involving the Casden
Partnerships. For a description of the terms of Stanger's engagement and certain
additional information concerning Stanger, see "-- Fairness Opinion."
The financial and legal advisors of NAPICO and Casden Properties
conferred regularly from June of 1997 through June of 1998 regarding the
structure and terms of the proposed REIT Transaction, including the Aggregate
Property Valuation and the Purchase Price to be offered for the Real Estate
Interests.
710529.7
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<PAGE>
The Managing General Partner believes that it is in the best interests
of the Partnership to sell its interests in the Properties. Accordingly, the
Managing General Partner believes that it is necessary for the partnership to
dispose of its interests in all of the Local Partnerships and its sales of the
Real Estate Interests pursuant to the Sale furthers this goal. The Partnership
is not currently realizing any material cash flow that is available for
distribution to the Limited Partners and does not anticipate realizing
sufficient cash flow in the future to enable it to make distributions to Limited
Partners. Limited Partners did not realize any passive activity rental losses in
1997. In addition, Limited Partners realized approximately $94.62 per Unit in
interest income for 1997. Assuming Limited Partners are restricted from
utilizing passive losses, the Limited Partners will be liable for the taxes
related to the Partnership's passive activity rental income and portfolio
interest income without any corresponding cash distribution. In light of the
limited cash flow currently generated by the Properties, the fact that the
Partnership owns limited partnership interests and does not own the Properties
directly, and the potentially adverse consequences of the recent changes in the
laws and policies applicable to HAP Contracts, the Managing General Partner does
not believe that it would be feasible to market the Real Estate Interests.
The REIT believes that there are certain benefits not available to the
Partnership that the REIT may be able to realize as a result of the acquisition
of the Real Estate Interests held by the Partnership, the general partner
interests held by the local general partners, the insured mortgage debt
encumbering the Properties, and the other properties and businesses of Casden.
These potential benefits include (i) earning fee income by performing the
property management functions formerly performed by the local general partners,
(ii) acquiring and restructuring (under MAHRAA) the mortgage indebtedness to
which the Properties are subject, and (iii) realizing economies of scale in
connection with ownership and management of all of the Properties. These
benefits would not be available to the Partnership because it does not have
sufficient capital to buy out the local general partner interests and to
purchase the mortgage loans encumbering the Properties. Such activities would
also be inconsistent with the Partnership's original objectives.
Prior to the consummation of the Sale, the REIT intends to sell
approximately $250 million of its equity securities in the Private Placement.
The proceeds of the Private Placement will be used to finance the Sale and other
acquisitions of conventional and subsidized housing properties to be made in
connection with the REIT Transaction. The REIT intends to commence an initial
public offering of its equity securities subsequent to the consummation of the
Sale. Casden and its affiliates are expected to own approximately 45% of the
equity securities of the REIT upon completion of the Private Placement.
Subsequent to its initial public offering, the REIT intends to purchase and
restructure all insured mortgage indebtedness currently encumbering the
Properties, which the Managing General Partner believes will enhance the returns
associated with the ownership of the mortgages and the Properties.
In considering whether the Sale is in the interests of the Partnership,
the Managing General Partner also considered the effects of recent changes in
the law and policies relating to government-assisted housing. Under MAHRAA, to
the extent that rents are above market, as is the case with most of the
Properties, the amount of the HAP Contract payments will be reduced. While
MAHRAA also contemplates a restructuring of the mortgage loans to reduce the
current debt service on the mortgage loans, it is expected that the combination
of the reduced HAP Contract payments and the restructuring of the mortgage loans
will result in a significant reduction in the cash flow to the Local
Partnerships. In the case of two restructurings that are currently being
negotiated by affiliates of the Managing General Partner (involving Section 8
properties owned by partnerships other than the Partnership), the restructurings
proposed by HUD will significantly reduce the cash flow from these properties.
Furthermore, since the local general partners would control the restructuring
negotiations and most of the local general partners' income results from their
management fees, there can be no assurance that any restructuring negotiated by
local general partners would optimize cash flow to the Partnership or result in
any cash distributions to the Partnership. Moreover, there are a number of
uncertainties as to the restructuring process, including potential for adverse
tax consequences to the Limited Partners and the local general partners. As a
result, the Managing General Partner believes that it is unlikely that the
Limited Partners of the Partnership will benefit from any restructuring under
MAHRAA.
The Managing General Partner believes that the REIT, through its
potential access to the capital markets and its familiarity with the Properties,
is in a position to purchase the Properties on terms that are favorable to the
710529.7
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<PAGE>
Partnership. The Managing General Partner believes that the current market for
securities issued by REIT Entities will provide the Partnership with an
opportunity to sell the Real Estate Interests to the REIT for a favorable price.
In addition, because any third party buyer attempting to purchase the Properties
would have to purchase not only the Real Estate Interests, but also the
interests of each of the local general partners, the Managing General Partner is
not aware of any sufficiently well-capitalized third parties engaged in the
business of acquiring government assisted housing projects that would be in a
position to acquire the Properties. Furthermore, a third party buyer would have
to investigate each of the Properties, and negotiate the terms of the buyout of
each of the local general partners, which would be an expensive and time
consuming process for the Partnership. As a result, the Managing General Partner
believes it is unlikely that there would be a third-party buyer for the
Properties. Limited Partners should note, however, that the Managing General
Partner's recommendation is subject to inherent conflicts of interest. See
"CONFLICTS OF INTEREST."
REAL II owns limited partnership interests in the Local Partnerships
that hold title to the real estate assets that the REIT has offered to purchase.
All but three of the general partners of such Local Partnerships are
unaffiliated with the General Partners of REAL II and the Partnership does not
control such unaffiliated local general partners. The partnership agreements of
the Local Partnerships do not grant the limited partner of such partnership the
right to remove the general partner or to compel a sale of the assets of the
partnership. As a result, the simultaneous buyout of the local general partners
is necessary in order to enable the Partnership to realize the value of its Real
Estate Interests. Accordingly, the amount required to be paid by a purchaser
(whether a third party buyer or the REIT) to purchase the interests of the local
general partners will have the effect of reducing the amount of consideration
which a buyer is willing to pay for the Partnership's Real Estate Interests.
Currently, the REIT has entered into option agreements to acquire the interests
of four of the unaffiliated local general partners. The purchase prices to be
paid these unaffiliated local general partners for their interests have been
determined as a result of arm'slength negotiations with the local general
partners. The Managing General Partner believes that, although the amount paid
to the local general partners reduces the Purchase Price and amount of
distribution to Limited Partners, and the buyout of the local general partners'
interests will benefit the REIT, the terms of these transactions are fair to the
Partnership and the Limited Partners.
Acquisition Agreement
If the Sale is approved by the Limited Partners, it is contemplated
that the Partnership or the Local Partnerships, as the case may be, will enter
into a purchase and sale agreement with a subsidiary partnership of the REIT
(the "Operating Partnership"). The purchase and sale agreement will set forth
the terms and conditions under which the Partnership and the REIT and the
Operating Partnership are obligated to proceed with the Sale and will set forth
certain other agreements of such parties with respect to the Sale.
Representations and Warranties. The Partnership will not make any
representations and warranties to the REIT and the Operating Partnership in the
purchase and sale agreement with respect to the Properties, and the Properties
will be sold "as is."
Conditions. As described in detail below under the heading "Conditions"
below, the purchase and sale agreement will include a number of conditions to
the REIT's obligation to consummate the Sale.
Amendment and Closing. The Partnership and the REIT or the Operating
Partnership may mutually agree to amend the terms of the purchase and sale
agreement in a manner which, in the good faith judgment of the Managing General
Partner (consistent with the Managing General Partner's fiduciary duty to the
Partnership and the Limited Partners), does not materially reduce the benefits
to be received by the Limited Partners from the Sale without resoliciting the
consent of the Limited Partners. If the Sale is approved by a Majority Vote of
the Limited Partners and the other conditions to the Sale and the REIT
Transaction are satisfied, it is anticipated that the Sale will be consummated
by August 31, 1998. If the closing does not occur by December 31, 1998 the
purchase and sale agreement will be terminated.
710529.7
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<PAGE>
Arrangements with General Partners of the Local Limited Partnerships
Affiliates of the Managing General Partner have entered into option
agreements for the buyouts of the interests in the Local Partnerships held by
the general partners of seven of the eight Local Partnerships, all but three of
whom are unaffiliated with Casden. The three affiliated local general partners
are entities in which Casden owns a controlling interest. Except for the buyouts
of the three affiliated local general partners, the buyouts have been negotiated
on an arm's-length basis. The Managing General Partner expects that the general
partners of the Local Partnerships will be paid an aggregate of approximately
$5,902,759 for their interests in, and rights to manage, the Local Partnerships.
There can be no assurance that the Managing General Partner will be able to
successfully complete buyouts from all of the unaffiliated general partners of
the Local Partnerships on acceptable terms. To the extent that affiliates of the
Managing General Partner are unable to complete all such buyouts, there could be
an adverse impact on the operating results of the Partnership, depending on
which Properties are retained by the Partnership. The make-up of the Partnership
after the Sale if less than all of the general partners of the Local
Partnerships approve the Sale cannot be determined at this time. To the extent
that the ultimate cost of buying out the unaffiliated local general partners
exceeds the Managing General Partner's current estimate of such cost, the
distributions to Limited Partners resulting from the Sale will be reduced. To
the extent that the cost of such buyouts is less than the Managing General
Partners estimates, distributions to Limited Partners will be increased.
In the case of three of the Local Partnerships, the general partners of
such partnerships are affiliates of the Managing General Partner. Each of the
affiliated general partners is directly or indirectly wholly owned by Alan
Casden, who indirectly owns 100% of the common stock of NAPICO. The three Local
Partnerships in which affiliates of NAPICO are the general partners own 548 of
the 1,641 housing units in which the Local Partnership have invested, or
approximately 23%. An aggregate of $1,554,370 in respect of future management
fees payable to such affiliates was deducted from the Aggregate Property
Valuation utilized to determine the Purchase Price. The amount deducted was by
applying a multiplier of 6.0 to the 1996 management fees received by the
affiliated local general partners, which is the same methodology the Managing
General Partner used when estimating the costs of buying out the unaffiliated
local general partners. Actual amounts paid to the unaffiliated local general
partners varied based upon the negotiations with such local general partners. No
value was attributed to the affiliated general partners' general partnership
interests in Local Partnerships.
Source of Funds
The REIT intends to raise the cash to be paid to the Partnership
through a private placement of approximately $250 million of its equity
securities.
Transaction Costs
The Managing General Partner estimates that the transaction costs in
connection with the Sale, which will be paid by the Partnership out of cash
reserves on hand, will be as follows:
Accounting................................ 100,000
Legal..................................... 50,000
Escrow Costs (Seller's portion)........... 25,000
Title Policies (Seller's portion)......... 35,000
Structural and Engineering Reports........ 65,000
Stanger Fairness Opinion.................. 64,800
Consent Solicitation Costs................ 6,000
5,000
Miscellaneous Costs....................... --------------
TOTAL 350,800
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The General Partners will receive a distribution of approximately
$70,000 for their interests in the Partnership in connection with the Sale. The
General Partners are not entitled to receive fees in connection with the Sale.
Distribution of Sale Proceeds; Accounting Treatment
After the payment of all liabilities and expenses, the consideration to
be paid to the Partnership for the Properties will be allocated and distributed
among Limited and General Partners in accordance with the cash distribution
rules set forth in the Partnership Agreement. Pursuant to the Partnership
Agreement, net distribution proceeds are distributable as follows:
First, the General Partners will be entitled to a fee equal to the
lesser of (a) 10% of the net proceeds to the Partnership from the Sale, or (b)
1% of the Purchase Price (including the assumed mortgage indebtedness), plus 3%
of the net proceeds after deducting an amount sufficient to pay all federal and
state taxes applicable to the Sale. No part of the fee will be paid, however,
unless the Limited Partners shall have first received an amount equal to (i) the
greater of (A) their aggregate capital contributions, or (B) an amount
sufficient to satisfy the cumulative federal and state income tax liability, if
any, arising from the disposition of the Properties and all other assets
disposed of to date; less (ii) all amounts previously distributed to Limited
Partners. Because the above-referenced conditions have not been met, the General
Partners will not be entitled to receive a fee in connection with the Sale.
Next, after allocating income from the Sale in an amount equal to the
sum of the negative adjusted capital account balances of all Partners with such
balances (computed after any distributions made under the paragraph above), and
after allocating 1% of the income in excess thereof, 1% to the General Partners
and 99% to the Limited Partners as a class, distributions shall be made in
accordance with such Partners' positive capital account balances.
Based on the distribution priority in the Partnership Agreement, and
assuming (i) the net proceeds of the Sale are $6,500,000 and (ii) cash available
for distribution (after payment of expenses) of approximately $500,000, the
Limited Partners will be entitled to receive $6,930,000 in cash ($1,296 per
Unit). The Partnership will retain working capital reserves after the Sale (and
payment of transaction costs) of approximately $1,390,751. NAPICO and NPIA will
be entitled to receive a distribution in connection with the Sale of $70,000.
The purchase of the Real Estate Interests by the REIT is conditioned,
with respect to each of the Properties, on the general partner of the Local
Partnership owning such Property agreeing to transfer its general partnership
interests in such Local Partnership. Under the partnership agreements of the
Local Partnerships, the assignment of the limited partnership interests in the
Local Partnership requires the consent of the local general partner. In
addition, the Managing General Partner does not believe that the REIT would
realize sufficient economic benefit from acquiring the Real Estate Interests
held by the Partnership unless it can simultaneously acquire the related general
partnership interests and the right to manage the Properties.
Conditions
In addition to the consent by Majority Vote of the Limited Partners,
the Purchase and Sale Agreement is expected to contain, among others, the
following conditions (which may be waived by the REIT) as conditions precedent
to the REIT's obligation to consummate the Sale:
o Subject to certain exceptions, no material adverse change shall have
occurred with respect to a Property that has a material adverse effect
on the value of the Properties as a whole;
o The Partnership shall have delivered to the REIT any required third
party consents to the Sale, including the consent of HUD, certain state
housing finance agencies, the general partners of the Local
Partnerships in which the REIT intends to acquire interests and the
holders of certain mortgages; and
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<PAGE>
o The REIT shall have consummated the Private Placement, which will be
conditioned upon, among other things, the transfer of a minimum number
of properties to the REIT by the Casden Partnerships and third parties
in connection with the REIT Transaction.
Fairness Opinion
Stanger, an independent investment banking firm, was engaged by NAPICO
to conduct an analysis and to render an opinion as to whether the Aggregate
Property Valuation utilized in connection with determining the Purchase Price to
be paid to the Partnership for the Real Estate Interests in the Sale is fair,
from a financial point of view, to the Limited Partners. NAPICO selected Stanger
because of its experience in providing similar services to other parties in
connection with real estate merger and sale transactions and Stanger's
experience and reputation in connection with real estate partnerships and real
estate assets. No other investment banking firm was engaged to provide, or has
provided, any report, analysis or opinion relating to the fairness of the Sale.
Stanger has advised the Managing General Partner that, subject to the
assumptions, limitations and qualifications contained in its Fairness Opinion,
the Aggregate Property Valuation utilized in connection with determining the
Purchase Price to be paid to the Partnership for the Real Estate Interests in
the proposed Sale is fair, from a financial point of view, to the Limited
Partners. The Fairness Opinion does not address adjustments made to the
Aggregate Property Valuation utilized to arrive at the distributions to the
Limited Partners that will result from the Sale, or the allocation of the
Aggregate Property Valuation between the Limited Partners and the general
partners of the Local Partnerships, which affects the ultimate amount of
consideration to be paid to the Limited Partners. In addition, the Fairness
Opinion does not address the fairness of the Purchase Price itself. The Purchase
Price and the Aggregate Property Valuation were determined solely by the General
Partners. The fact that the Managing General Partner applied its own methodology
for determining the Aggregate Property Valuation did not limit the methods and
procedures followed by Stanger in determining the fairness of the Aggregate
Property Valuation itself. The Managing General Partner used a valuation method
that it believed to be a reasonable basis for determining the Aggregate Property
Valuation. Stanger reviewed the fairness of the Aggregate Property Valuation
determined by the Managing General Partner, using methods and procedures
selected by Stanger. The Managing General Partner did not limit the method used
by Stanger to review the fairness of the Aggregate Property Valuation.
The full text of the Fairness Opinion, which contains a description of
the matters considered and the assumptions, limitations and qualifications made,
is set forth as Exhibit A hereto and should be read in its entirety. The summary
set forth herein does not purport to be a complete description of the review
performed by Stanger in rendering the Fairness Opinion. Arriving at a fairness
opinion is a complex process not necessarily susceptible to partial analysis or
amenable to summary description.
Except for certain assumptions described more fully below which the
Partnership advised Stanger that it would be reasonable to make, the Partnership
imposed no conditions or limitations on the scope of Stanger's investigation or
the methods and procedures to be followed in rendering the Fairness Opinion. See
"- Fairness Opinion - Assumptions, Limitations and Qualifications." The
Partnership has agreed to indemnify Stanger against certain liabilities arising
out of Stanger's engagement to prepare and deliver the Fairness Opinion.
Experience. Since its founding in 1978, Stanger and its affiliates have
provided information, research, investment banking and consulting services to
clients located throughout the United States, including major New York Stock
Exchange member firms, insurance companies and over 70 companies engaged in the
management and operation of partnerships and real estate investment trusts. The
investment banking activities of Stanger include financial advisory and fairness
opinion services, asset and securities valuations, industry and company research
and analysis, litigation support and expert witness services, and due diligence
investigations in connection with both publicly registered and privately placed
securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, reorganizations and for estate, tax, corporate and other
purposes. Stanger's valuation practice principally involves partnerships,
partnership securities and the assets
710529.7
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<PAGE>
typically held through partnerships, such as real estate, oil and gas reserves,
cable television systems and equipment leasing assets. Stanger was selected
because of its experience and reputation in connection with real estate
partnerships, real estate assets and mergers and acquisitions.
Summary of Materials Considered. In the course of Stanger's analysis to
render its opinion, Stanger reviewed: (i) a draft of this Consent Solicitation
Statement related to the Sale in substantially the form which will be
distributed to Limited Partners; (ii) the Partnership's annual reports on Form
10-K for the fiscal years ending December 31, 1995, 1996 and 1997, and the
Partnership's quarterly report on Form 10-Q for the three-month period ended
March 31, 1998, which reports the Partnership's management has indicated to be
the most current available financial statements; (iii) descriptive information
concerning the Properties provided by management, including location, number of
units and unit mix, age, and amenities; (iv) summary historical operating
statements for the Properties for 1995, 1996 and 1997; (v) operating budgets for
the Properties for 1998, as prepared by the Managing General Partner or the
local general partners; (vi) information prepared by management relating to the
debt and the HAP Contracts encumbering the Properties; (vii) information
regarding market rental rates and conditions for apartment properties in the
general market area of the Properties and other information relating to
acquisition criteria for apartment properties; and (viii) conducted other
studies, analysis and inquiries as Stanger deemed appropriate.
In addition, Stanger discussed with management of the Partnership and
the Managing General Partner the market conditions for apartment properties,
conditions in the market for sales/acquisitions of properties similar to those
owned by the Local Partnerships, historical, current and projected operations
and performance of the Properties, the physical condition of the Properties
including any deferred maintenance, and other factors influencing value of the
Properties. Stanger also performed site inspections of the Properties, reviewed
local real estate market conditions, and discussed with property management
personnel conditions in local apartment rental markets and market conditions for
sales and acquisitions of properties similar to the Properties.
Summary of Reviews. The following is a summary of the material reviews
conducted by Stanger in connection with and in support of its Fairness Opinion.
The summary of the opinion and reviews of Stanger set forth in this Consent
Solicitation Statement is qualified in its entirety by reference to the full
text of such opinion.
In preparing its Fairness Opinion, Stanger performed site inspections
of the Properties from December 1997 through April 1998. In the course of the
site visits, the physical facilities of the Properties were observed, current
rental and occupancy information for the Properties were obtained, current local
market conditions were reviewed, a sample of similar properties were identified,
and local property management personnel were interviewed concerning the
Properties and local market conditions. Stanger also reviewed and relied upon
information provided by the Partnership and the Managing General Partner,
including, but not limited to, financial schedules of historical and current
rental rates, occupancies, income, expenses, reserve requirements, cash flow and
related financial information; property descriptive information including unit
mix and rentable square footage; and information relating to any required
capital expenditures and any deferred maintenance.
Stanger also reviewed historical operating statements for the
Properties for 1995, 1996 and 1997, the forecast for 1998 for each Property, as
prepared by the Managing General Partner and discussed with management the
current and anticipated operating results of the Properties.
In addition, Stanger interviewed management personnel of the
Partnership. Such interviews included discussions of conditions in the local
market, economic and development trends affecting the Properties, historical and
budgeted operating revenues and expenses and occupancies and the physical
condition of the Properties (including any deferred maintenance and other
factors affecting the physical condition of the improvements), projected capital
expenditures and building improvements, the terms of existing debt and the HAP
Contracts encumbering the Properties, and expectations of management regarding
the impact of various regulatory factors and proposed changes on the operating
results of the Properties.
710529.7
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<PAGE>
Stanger also reviewed the acquisition criteria used by owners and
investors in the type of real estate owned by the Partnership, utilizing
available published information and information derived from interviews
conducted by Stanger with various real estate owners and investors.
Summary of Analysis. Based in part on the above reviews, Stanger then
performed a discounted cash flow analysis (a "DCF Analysis") of the Properties.
The DCF Analysis involved the following steps.
During its site visits to each Property, Stanger conducted local market
research, including the identification and assessment of relative quality (e.g.,
condition, location amenities, etc.) of similar multi-family properties in the
competitive market area of each Property and the collection of rental rate
information for various apartment unit sizes (e.g., efficiency, one-bedroom,
two-bedroom, etc.) for such Properties. In addition, Stanger reviewed
information provided by the Managing General Partner and management of the
Properties concerning rental rates allowed for each type of apartment in each
Property subject to HUD rental rate restrictions based on the HAP Contract.
Utilizing the above information, Stanger determined the gross potential
rent for each Property based on the number and type of apartment units in each
Property and (i) rents allowed for each type of unit under the existing HAP
Contract ("Contract Rent"), and (ii) the estimated market rental rates the
Property would likely obtain based on review of the rates charged at similar
properties in the local market ("Market Rent"). The gross potential rent amounts
based on Contract Rent and Market Rent data were used in the DCF Analysis as
described below.
Stanger also reviewed historical and budgeted gross income and income
from ancillary sources for each Property in the portfolio in light of market
trends and competitive conditions in each Property's local market. Stanger also
reviewed summary information concerning occupancy rates and any HAP contracts
encumbering the Properties, including contract rental rates for each unit size
and contract expiration date.
After assessing the above factors, Stanger estimated each Property's
effective gross income based upon unit mix, contract or market rental rates, as
appropriate, and estimates of ancillary income and occupancy. Contract Rents
were utilized during the term of the HAP contract, with a mark to market rental
rates upon expiration of the HAP Contract. Expenses were estimated based on
historical and budgeted operating expenses, discussions with management, and
certain industry expense information. Estimated property operating expenses,
including replacement reserves, were then deducted from effective gross income
to arrive at each Property's estimated net operating income. Debt service
payments relating to mortgage debt encumbering each of the Properties were also
considered in the "leveraged" discounted cash flow analysis, as described below.
Expenses relating solely to investor reporting and other expenses not related to
the properties were excluded from the analysis.
Stanger then discounted to present value the estimated cash flows from
the continued operation of each of the Properties during a holding period equal
to the term of the existing HAP Contract. In the case of Properties subject to
distribution limitations, Stanger discounted cash flow amounts up to, but not
exceeding, the distribution limitation. Income and expense escalators utilized
in the analysis were based on parameters cited by investors, owners and managers
of similar properties, market factors, the relationship of Contract Rent and
estimated Market Rent, and historical and budgeted results for each Property.
Based on the relationship of Contract Rent and Market Rent, income during the
contract period was generally held flat or was escalated at a rate to provide
sufficient income to pay operating expenses and debt service. For the purpose of
determining the Properties' residual value, as described below, estimated market
rental rates were generally escalated at 3% per annum. Effective expense
escalators generally ranged from approximately 2.5% to 3.0%.
As part of its DCF Analysis, Stanger then estimated the residual values
of the Properties. Stanger evaluated the residual Property value at the time of
the existing HAP Contract expiration based upon the assumption that whether or
not the HAP Contract was renewed, rents at the Property would be marked to
market rates (i.e. where Contract Rent at the time of expiration exceeded
estimated Market Rent, it was assumed that Contract Rent upon any contract
renewal would be set at an amount equal to the estimated market rent at the time
of reversion).
710529.7
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<PAGE>
Stanger then evaluated estimated net operating income (after
replacement reserves) at the time of contract expiration, with rents marked to
market rates, to determine if such income would be sufficient to service the
existing mortgage debt encumbering the Property. Where existing mortgage debt
could be prepaid at the time of contract expiration, Stanger capitalized net
operating income (after replacement reserves) with rents marked to market at
rates ranging from 9.0% to 11.0% to estimate a free and clear residual value
from which estimated expenses of sale of 3% and, in the case of the leveraged
discounted cash flow analysis, as described below, anticipated debt balances
were deducted to arrive at net residual proceeds. Otherwise, any remaining
equity cash flow after debt service available was capitalized at rates ranging
from 10.0% to 12.0% to determine a residual equity value to be used in the
Leveraged DCF Analysis.
The resulting annual cash flows and the residual value, after deduction
of estimated costs of sale, for each Property were then discounted to present
value assuming (i) the Properties were free-and-clear of mortgage debt (the
"Free-and-Clear DCF Analysis") and (ii) as encumbered by existing debt (the
"Leveraged DCF Analysis"). In the case of the Leveraged DCF Analysis, debt
service payments were deducted from annual cash flows, and the resulting annual
cash flows and residual equity value were discounted to present value using the
following distinct ranges of discount rates: Leveraged cash flow discount rates
ranged from 9% to 11% and residual discount rates ranged from 12% to 15%;
free-and-clear discount rates for cash flow ranged from 8% to 10% and residual
discount rates ranged from 11% to 14%. In the Leveraged DCF Analysis, the
resulting equity value was then added to outstanding debt to arrive at a total
estimated Property value.
Stanger observed that the range of estimated value of the portfolio of
Properties resulting from the Leveraged DCF Analysis was $62,550,000 to
$64,430,000 and that the Aggregate Property Valuation of $69,220,316 was above
this range of value. Stanger also observed that the range of estimated value of
the portfolio of Properties resulting from the Free-and-Clear DCF Analysis was
$47,850,000 to $51,280,000 and that the Aggregate Property Valuation was above
this range of value. (The difference between the value resulting from the
Leveraged DCF Analysis and the Free-and-Clear Analysis in part reflects the fact
that the estimated value of certain Properties is less than the debt currently
encumbering those Properties.)
Stanger concluded that the range of estimated value of the portfolio of
Properties resulting from the Freeand-Clear DCF Analysis and the Leveraged DCF
Analysis supported its opinion as to the fairness of the Aggregate Property
Valuation, from a financial point of view.
Due to the uncertainty in establishing many of the values cited above,
Stanger established a range of estimated values for each discounted cash flow
analysis. The estimated values are based in part on information provided to
Stanger in the context of rendering the fairness opinion, and there can be no
assurance that the same conditions analyzed by Stanger in arriving at the
estimates cited herein would exist at the time of consummation of the Sale. In
addition, the estimated values cited above are based on a variety of assumptions
that relate, among other things, to (i) each Property's revenues, expenses, and
cash flow; (ii) the capitalization rates that would be used by prospective
buyers when the existing HAP contracts expire and the Properties are sold; (iii)
ranges of residual values of the Properties; (iv) selling costs; and (v)
appropriate discount rates to apply to estimated cash flows and residual values
in computing the discounted present value of such cash flows and residual
values. Actual results may vary from those utilized in the above analysis based
on numerous factors, including interest rate fluctuations, changes in
capitalization rates used by prospective purchasers, tax law changes,
supply/demand conditions for similar properties, changes in the availability of
capital, changes in the regulations or HUD's interpretations of existing and new
regulations relating to subsidized properties.
Conclusions. Stanger concluded, based upon its analysis of the
foregoing and the assumptions, qualifications and limitations stated below, as
of the date of the Fairness Opinion, that the Aggregate Property Valuation
utilized in connection with determining the Purchase Price to be paid to the
Partnership for the Real Estate Interests is fair to the Limited Partners from a
financial point of view.
Assumptions, Limitations and Qualifications. In rendering the Fairness
Opinion, Stanger relied upon and assumed, without independent verification, the
accuracy and completeness of all financial information and data, and
710529.7
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<PAGE>
all other reports and information contained in this Consent Solicitation
Statement or that were provided, made available, or otherwise communicated to
Stanger by the Partnership, the Managing General Partner and/or their
affiliates, the Local Partnerships or the management of the Properties. Stanger
has not performed an independent appraisal, engineering study or environmental
study of the assets and liabilities of the Partnership. Stanger relied upon the
representations of the Managing General Partner and its affiliates, the Local
Partnerships and the management of the Properties concerning, among other
things, any environmental liabilities, deferred maintenance and estimated
capital expenditure and replacement reserve requirements, and the terms and
conditions of any debt and the HAP Contracts encumbering the Properties. Stanger
also relied upon the assurance of the Partnership, Casden, the Managing General
Partner and its affiliates, the Local Partnerships, and the management of the
Properties that any financial statements, budgets, capital expenditure
estimates, debt and HAP Contract information, value estimates and other
information contained in this Consent Solicitation Statement or provided or
communicated to Stanger were reasonably prepared and adjusted on bases
consistent with actual historical experience and reflect the best currently
available estimates and good faith judgments; that all distributions under HAP
Contracts with distribution limitations allowable cumulatively since the time of
the partnership's investments in each Local Partnership have been paid in full
to the Partnership; that no material changes have occurred in the value of the
Properties or other information reviewed between the date of such information
provided and the date of the Fairness Opinion; that the Partnership, Casden, the
Managing General Partner and its affiliates, the Local Partnerships and the
management of the Properties are not aware of any information or facts that
would cause the information supplied to Stanger to be incomplete or misleading
in any material respect; that the highest and best use of the Properties is as
improved; and that all calculations were made in accordance with the terms of
the Partnership Agreement, the Local Partnership Agreements and the existing and
anticipated regulatory agreements. Additional specific assumptions relating to
Stanger's analysis are included in the subsection captioned "Summary of
Analysis" above.
Stanger was not requested to, and therefore did not: (i) select the
method of determining the Aggregate Property Valuation utilized in connection
with determining the Purchase Price in the Sale; (ii) make any recommendation to
the Partnership or its partners with respect to whether to approve or reject the
proposed Sale; or (iii) express any opinion as to (a) the tax consequences of
the proposed Sale to the Limited Partners or the Managing General Partner's
determination of any amounts included in the Aggregate Property Valuation
intended to satisfy certain potential tax liabilities of the Limited Partners,
(b) the terms of the Partnership Agreement, or the fairness of proposed
Amendments to the Partnership Agreement, or the terms of any agreements or
contracts between the Partnership and any affiliates of the Managing General
Partner, (c) the Managing General Partner's business decision to effect the
proposed Sale, (d) any adjustments made to the Aggregate Property Valuation to
determine the Purchase Price of the Real Estate Interests and the net amounts
distributable to the Limited Partners, including but not limited to, balance
sheet adjustments to reflect the Managing General Partner's estimate of the
value of current and projected net working capital balances and cash and reserve
accounts (including debt service and mortgage escrow amounts, operating and
replacement reserves, and surplus cash reserve amounts and additions) and the
income therefrom of the Partnership or the Local Partnerships, the Managing
General Partner's determination that no value should be ascribed to any reserves
of the Local Partnerships or the cash flow from the Properties in excess of
certain limitations on distributions to the Partnership, the Managing General
Partner's determination of the value of any notes due to affiliates of the
Managing General Partner or management of the Local Partnerships, the allocation
of the Aggregate Property Valuation among the Local Partnerships, the amount of
the Aggregate Property Valuation ascribed to certain general partner and/or
management interests in the Local Partnerships and other expenses and fees
associated with the Sale, (e) the fairness of the buyout costs of certain
general partner and/or management interests in the Local Partnerships, the
allocation of such buyout costs among the Local Partnerships, or the amount of
any contingency reserves associated with such buyouts, (f) the Managing General
Partner's decision to deduct the face value of certain notes payable to
affiliates and/or management of the Local Partnerships in determining the
Purchase Price to be paid for the Real Estate Interests where the actual cost of
purchasing the notes is less than the face value of the notes, (g) the Purchase
Price to be paid for the Real Estate Interests, or (h) alternatives to the
proposed Sale.
Stanger is not expressing any opinion as to the fairness of any terms
of the proposed Sale other than the Aggregate Property Valuation utilized in
connection with determining the Purchase Price of the Real Estate Interests paid
to the Partnership. Stanger's opinion is based on business, economic, real
estate market, and other conditions
710529.7
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<PAGE>
as of the date of its analysis and addresses the proposed Sale in the context of
information available as of the date of its analysis. Events occurring after
such date and before the closing of the proposed Sale of the Real Estate
Interests to the REIT could affect the Properties or the assumptions used in
preparing the Fairness Opinion. Stanger has no obligation to update the Fairness
Opinion on the basis of subsequent events.
In connection with preparing the Fairness Opinion, Stanger was not
engaged to, and consequently did not, prepare any written report or compendium
of its analysis for internal or external use beyond the analysis set forth in
Exhibit A.
Compensation and Material Relationships. Stanger has been retained by
the Managing General Partner and its affiliates to provide fairness opinions to
the Partnership and the other Casden Partnerships included in the REIT
Transaction. Stanger will be paid an aggregate fee by the Casden Partnerships of
up to approximately $455,000, plus $4,100 per property reviewed. The portion of
the fee allocable to the Partnership is approximately $27,800, plus $4,100 per
Property, or an aggregate of approximately $64,800. In addition, Stanger is
entitled to reimbursement for reasonable legal, travel and out-of-pocket
expenses incurred in making site visits and preparing the Fairness Opinion,
subject to an aggregate maximum of up to approximately $1,000, plus $600 per
Property, and is entitled to indemnification against certain liabilities,
including certain liabilities under federal securities laws. Stanger has not
been engaged to and has not provided services, and will not participate or
otherwise be involved in the REIT private placement. In addition, Stanger has
not been approached or engaged to provide any services in connection with a
future public offering by the REIT. No portion of Stanger's fee is contingent
upon consummation of the Sale or completion of the REIT Transaction.
Alternatives to the Sale
The following is a brief discussion of alternatives to the Sale
considered by the Managing General Partner and the possible benefits and
disadvantages of such alternatives:
Continuation of the Partnership. One alternative considered by the
Managing General Partner was the continuation of the Partnership in accordance
with its existing business plan and its Partnership Agreement. However, the
Partnership is not currently realizing material cash flow that is available for
distribution to the Limited Partners and does not anticipate realizing
sufficient cash flow in the future to enable it to make distributions to Limited
Partners. Limited Partners did not realize any passive activity rental losses in
1997. Federal depreciation deductions that are primarily responsible for
generating losses realized by the Limited Partners have substantially ceased to
be available. Furthermore, the Managing General Partner does not believe that
the Partnership would be able to realize the potential benefits which the REIT
anticipates may be available to it after acquisition of the Real Estate
Interests. These potential benefits require the acquisition of (i) the
partnership interests held by the local general partners, (ii) the right to
manage the Properties, and (iii) the insured mortgage encumbering the
Properties, and would require significant additional capital. The Managing
General Partner believes it will be impractical to seek additional capital
contributions from Limited Partners in order to recapitalize the Partnership and
that the Partnership could not access the capital markets. Because there appears
to be no active trading market for the Units, and because there are no apparent
benefits from continued ownership of Units, Limited Partners may not be able to
liquidate their investment in the Units while the Partnership remains in
existence. Furthermore, the partnership agreements of the Local Partnerships do
not grant the limited partner of such partnerships (Real II) the right to remove
the local general partner or to compel a sale of the assets of such Local
Partnership. Because there appears to be no market for the Properties and the
Partnership cannot cause a sale of the Properties, the Properties are likely to
remain under the control of the local general partners indefinitely if the Sale
is not consummated.
Marketing the Properties for Sale to Third Parties. The Managing
General Partner also considered marketing the Properties to third parties. The
Properties can only be marketed in cooperation with the local general partners.
The Managing General Partner does not believe that such alternative is viable or
would be in the best interests of the Limited Partners, because the Managing
General Partner is not aware of any third party buyers willing to purchase such
a portfolio of Properties and believes that, even if such a buyer could be
identified, such a sale would be unlikely to result in a purchase price for the
Properties as high as the Purchase Price offered in connection with the
710529.7
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<PAGE>
Sale. In light of the limited cash flow currently generated by the Properties,
the degree of control the local general partners exercise over the Properties
and the anticipated adverse consequences of the recent changes in the laws and
policies applicable to HAP Contracts, the Managing General Partner does not
believe that a favorable market for the Properties currently exists. In
addition, because REAL II owns limited partnership interests in the Local
Partnerships that hold title to the Properties and the general partners of such
Local Partnerships are generally unaffiliated with the General Partners of REAL
II, the buyout of the local general partners would be necessary for a third
party to acquire the Properties. The Managing General Partner believes it would
be difficult to find a single buyer for the Properties as a group, and that
selling the Properties on a Property-by-Property basis would involve an
extensive negotiating process over an extended period of time. During the
continuation of such process, the Partnership would continue to be responsible
for all costs relating to the Properties and the Partnership's ongoing
administrative expenses and there would likely be higher transaction costs, such
as brokers' fees and attorneys' fees, relating to sale of the Properties if they
were sold individually. The Managing General Partner has not received and has
not been advised of any third party offers or indications of interest for any of
the Properties and the Managing General Partner does not believe there are any
third party buyers of low income housing projects that would be able to match
the Purchase Price offered by the REIT for the portfolio of Properties. The
Managing General Partner believes that it is unlikely that third party buyers
could be found to purchase the Real Estate Interests at a higher price than the
Purchase Price.
While the Managing General Partner has not consulted any real estate
brokers or other real estate professionals concerning potential purchasers for
the Real Estate Interests, based upon the Managing General Partner's experience
and familiarity with the market for low income housing, the Managing General
Partner does not believe that there are other potential bidders for the Real
Estate Interests at the Purchase Price. The Managing General Partner's
determination was based upon a number of factors, including the need for a
purchaser to negotiate the purchase of the Real Estate Interests with the
Partnership and enter into a transaction with the Partnership which would
require limited partner approval; the need for a purchaser to negotiate separate
transactions with each of the local general partners; the need for a purchaser
to have sufficient capital to purchase the interests of the local general
partners and the Partnership, and to purchase mortgage loans encumbering the
Properties and negotiate restructurings, which the Managing General Partner
believes is necessary to realize a return on the investment in the Properties;
and the impact of recent changes in the law and regulations of HUD relating to
HAP Contracts, which impacts the value of the Properties. As a result, the
General Partner believes that any transaction with a potential purchaser would
be time consuming, difficult to consummate and unlikely to result in a purchase
price higher than the Purchase Price. However, there can be no assurance that a
higher purchase price would not be received if the Properties were actively
marketed.
Rollup. The Managing General Partner considered combining the Casden
Partnerships into a new corporation that would qualify as a REIT entity. As a
result of such a transaction, the Limited Partners would have received shares of
stock in the REIT (or partnership interests convertible into REIT shares), which
would have been listed on a national stock exchange. Such a transaction would be
expected to (a) provide investors in the new entity with the opportunity to
liquidate their investment through the sale of the shares received in the
transaction, (b) permit distribution to investors of a simpler federal income
tax Form 1099-DIV (rather than Schedule K-1), and (c) provide investors with the
potential for receiving securities with a greater value than the proceeds they
will receive as a result of the Sale. Furthermore, such an entity would provide
increased asset diversification and, due to its size, improved access to capital
markets.
The Managing General Partner believes, however, that such a transaction
would have significant disadvantages. As a result of new legislation and
regulations, it believes that obtaining the necessary regulatory approvals for a
rollup would be very difficult, expensive and time-consuming. The Managing
General Partner was not confident that a rollup transaction could be completed
within a reasonably practical time period. Furthermore, the Managing General
Partner believes that there could be significant selling pressure on the
securities issued in connection with a rollup and that such selling pressure
might cause the price of the stock of the rollup entity to decline following
completion of the rollup transaction.
710529.7
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<PAGE>
Another disadvantage of a rollup transaction is that the transaction
would cause the Limited Partners to incur a tax on the gain reflected in the
value of the stock of the new entity. The Managing General Partner determined
that Limited Partners would not be able to defer taxation through the use of an
UPREIT structure due to difficulties likely to be experienced in obtaining
approval from various states for the distribution of operating partnership
interests. Unless a Limited Partner sold all or a portion of the securities
received in the transaction, such Limited Partner would have no additional cash
with which to pay the taxes which would result from the completion of a rollup
transaction. The need for cash to pay the taxes on the transaction could cause
downward pressure on the price of the stock. In addition, a Limited Partner
would incur brokerage commissions on the sale of any securities received in a
rollup transaction, thereby reducing the net proceeds received in the
transaction.
Reorganization into a REIT. The Managing General Partner considered the
advisability of reorganizing the Partnership as a corporation treated as a real
estate investment trust. If approved, such a transaction would have provided
some advantages to the Limited Partners. Such a reorganization would be expected
to (a) provide investors in the reorganized entity with liquidity, (b) permit
distribution to investors of a simpler federal income tax form 1099- DIV
(compared to Schedule K-1), and (c) potentially be formed tax free to the
Limited Partners. The Managing General Partner was advised that the
reorganization of the Partnership into a REIT has a number of significant
disadvantages. For example, the small size of the reorganized Partnership, the
lack of diversification, the degree of debt relative to equity, and the absence
of internalized, integrated management would result in limited markets for the
shares of the newly formed real estate investment trust. As a result, the
Managing General Partner was advised that it would be unlikely that the real
estate investment trust shares would perform well in the market. In addition,
the Managing General Partner believes that the size of the resulting real estate
investment trust would not enable it to access the capital markets on an
advantageous basis.
Recommendation of the Managing General Partner; Fairness
The recommendation of the Managing General Partner in favor of the Sale
is based upon its belief that the Sale is fair to the Limited Partners for,
among others, the following reasons: (a) its belief that the terms and
conditions of the Sale, including the Aggregate Property Valuation and the
Purchase Price, are fair to the Limited Partners of the Partnership; (b) its
belief that the alternatives available to the Partnership are not as attractive
to the Limited Partners as the Sale; (c) its belief that now may be an opportune
time for the Partnership to sell the Properties, given current conditions in the
real estate and capital markets; (d) its belief that the Purchase Price
represents a higher amount than a third party would offer the Partnership for
the Real Estate Interests; and (e) its belief that while the Purchase Price from
the Sale and the distribution of available cash of the Partnership are not
sufficient to pay the tax liabilities, the Purchase Price to be paid by the REIT
is in excess of the amount determined by the Managing General Partner to be the
valuation of the Real Estate Interests and provides Limited Partners with cash
to pay a portion of their tax liability.
The Managing General Partner has not obtained real estate appraisals to
establish the fair market value of the Properties, but, based upon its
significant real estate experience, it believes that the Aggregate Property
Valuation utilized in connection with determining the Purchase Price is not less
than the fair market value of the Properties. In addition, Stanger has opined
that the Aggregate Property Valuation used in determining the Purchase Price for
the Real Estate Interests is fair to the Limited Partners from a financial point
of view.
The Purchase Price was determined by the Managing General Partner. The
Managing General Partner valued the Real Estate Interests using the following
methodology. For Local Partnerships with HAP Contracts with expiration dates
more than ten years in the future, the Managing General Partner determined the
value by taking the aggregate net operating income before interest expense and
management fees (as adjusted for dividend restrictions with respect to
Properties subject to dividend restrictions) for such Local Partnership for
1996, less capital expenditures, and applied a capitalization rate of 11%. For
Local Partnerships with HAP Contracts with expiration dates greater than six
years but less than ten years in the future, the Managing General Partner
followed the same procedure, but applied a capitalization rate of 12%. For Local
Partnerships with HAP Contracts expiring in six years or less, the Managing
General Partner calculated such Local Partnership's distributions for 1996 (or
in certain cases used a three year average where the General Partners did not
believe that the 1996 distributions were representative),
710529.7
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<PAGE>
added the management fees payable to the general partner of such Local
Partnership for 1996, assumed that these distributions would be received for the
balance of the term of the HAP Contracts and discounted these future
distributions at a discount rate of 10%. For the Local Partnership with no HAP
Contract, the Managing General Partner determined the value by taking the 1996
net operating income before interest expense and management fees, less capital
expenditures, applied a capitalization rate of 9%, then deducted $3,500 per
apartment unit in consideration of deferred maintenance requirements. To the
extent that capital expenditures were less that $600 per apartment unit, which
was the case for most of the Properties, the Managing General Partner has
increased the capital expenditures for purposes of this calculation to $600 per
apartment unit to cover future repair and maintenance requirements. In selecting
the capitalization rates, the Managing General Partner took into account the
expectation that cash flow would be significantly reduced after expiration of
the current HAP Contracts and used a higher capitalization rate if the HAP
Contracts expired earlier. With respect to the Local Partnerships with HAP
Contracts expiring in less than seven years, the Managing General Partner
assumed that the Properties would have no residual value upon expiration of the
respective HAP Contracts, due to the uncertainties as to future cash flow
following the expiration of the term of the HAP Contracts.
Based on such assumptions, the Managing General Partner determined that
the eight Properties owned by the Local Partnerships that the Managing General
Partner currently anticipates will be included in the Sale have an aggregate
value, after adjustment to provide cash to pay a portion of certain tax
liabilities discussed below, of $69,220,316 (the "Aggregate Property
Valuation"). The Managing General Partner subtracted from the Aggregate Property
Valuation (i) $5,902,759 for the aggregate estimated value of the general
partnership interests in the Local Partnerships (excluding the general
partnership interests of the three local general partners that are affiliates of
the Managing General Partner) and the local general partners' right to future
management fees, including $1,965,250 attributable to the right to receive the
future management fees payable to the three local general partners affiliated
with the Managing General Partner (see "THE SALE - Arrangements with General
Partners of the Local Partnerships"), and (ii) the outstanding mortgage
indebtedness and related party indebtedness of the Local Partnerships of
$56,817,557. In no event was the valuation of any of the Real Estate Interests
with respect to any of the Local Partnerships reduced below zero on account of
such indebtedness. The valuation of the Real Estate Interests using this
methodology includes cash to pay $1,204 per Unit of the net tax liability. The
amount of the Aggregate Property Valuation allocated to the general partnership
interests in the Local Partnerships is based in part upon the anticipated cost
of buying out the local general partners. The cost to buy out the unaffiliated
general partners of the Local Partnerships has been determined in arm's-length
negotiations between the Managing General Partner and the general partners of
the Local Partnerships. However, while the costs of such buyouts will be paid by
the REIT and the buyouts will benefit the REIT, a portion of such costs will be
indirectly borne by the Limited Partners. The calculations of the Managing
General Partner described above resulted in distributable cash to Limited
Partners out of the proceeds of the Sale of $6,435,000.
The Managing General Partner believes that the method used to determine
the Purchase Price was reasonable in light of the fact that the Partnership owns
limited partnership interests in the Local Partnerships and does not own the
Properties directly, and that any sale of the Properties is subject to the
approval of the general partners of the Local Partnerships. In addition, as
discussed below, recent changes in HUD laws and policies are expected to
adversely impact the Partnership's cash flow and prospects.
The Managing General Partner believes that the Purchase Price is fair
and reasonable and exceeds the price that the Partnership would likely receive
if the Real Estate Interests were to be sold to a third party or parties. It
should be noted that, for purposes of calculating the value of the Real Estate
Interests, the Managing General Partner assumed that certain of the Properties
would have no residual values upon expiration of the respective HAP Contracts
applicable to such Properties, based on its belief that cash flow after
expiration of the HAP Contracts will be significantly reduced, as discussed
below. The Managing General Partner made the same assumption when determining
the capitalization rates used in their valuation calculations. Different
assumptions would likely have resulted in different valuations for the Real
Estate Interests.
In determining the valuation of the Real Estate Interests, no
adjustment was made for the amount by which the value of assets other than the
Properties exceeded liabilities other than mortgage indebtedness because the
710529.7
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<PAGE>
Managing General Partner does not believe that these assets are material (other
than the Reserve Accounts referred to below). In addition, pursuant to certain
state housing finance statutes and regulations, certain of the Local
Partnerships are subject to limitations on the distributions of dividends to the
Partnership. Such statutes and regulations require such Local Partnerships to
hold cash flows in excess of such dividend limitations in Reserve Accounts that
may be used only for limited purposes. The Purchase Price was calculated without
attributing value to the Reserve Accounts. The Managing General Partner believes
that state regulatory considerations limiting the availability of the Reserve
Accounts to the Partnership have the effect of substantially reducing or
eliminating entirely any value attributable to such Reserve Accounts.
Nonetheless, the REIT may be able to realize a benefit in the future by
obtaining a reduction in the amount required to be held in the Reserve Accounts.
The Partnership held approximately $800,000 in such Reserve Accounts at
September 30, 1997.
The Managing General Partner relied on the following qualitative
factors in determining that the Sale is fair to the Limited Partners:
o The Properties do not currently produce significant cash flow and the
Partnership has not made distributions to date. The Partnership's
investment in the Properties was initially structured primarily to
obtain tax benefits, and not to provide cash distributions. Due to
changes in the tax laws pursuant to which losses of the Partnership are
treated as passive losses and can only be deducted against passive
income, most Limited Partners are not realizing material tax benefits
from continuing to own their limited partnership interests.
Accordingly, Limited Partners are not receiving material benefits from
continuing to hold their interests in the Partnership.
o Recent changes in HUD laws and policies are expected to adversely
affect the Partnership's cash flow and prospects. Under MAHRAA, to the
extent that rents are above market, as is the case with most of the
Properties, the amount of the HAP Contract payments will be reduced.
While MAHRAA also contemplates a restructuring of the mortgage loans to
reduce the current debt service on the mortgage loans, it is expected
that the combination of the reduced HAP Contract payments and the
restructuring of the mortgage loans will result in a significant
reduction in the cash flow to the Local Partnerships. In the case of
two restructurings that are currently being negotiated by affiliates of
the Managing General Partner (involving Section 8 properties owned by
Casden Partnerships other than the Partnership), the restructurings
proposed by HUD will significantly reduce the cash flow from these
properties. Furthermore, since the local general partners would control
the restructuring negotiations and most of the local general partners'
income results from their management fees, there can be no assurance
that any restructuring negotiated by local general partners will
optimize cash flow to the Partnership. Moreover, there are a number of
uncertainties as to the restructuring process, including potential for
adverse tax consequences to the Limited Partners. The Managing General
Partner does not believe that the "market" rents generated by the
Properties after reduction of the HAP Contract payments under MAHRAA
will be materially in excess of the debt service and operating expenses
on such Properties after expiration of the applicable HAP Contracts and
accordingly do not expect the Properties to produce any significant
cash flow at such time. When determining the Purchase Price offered for
the Real Estate Interests, the Managing General Partner ascribed no
residual value to certain of the Properties. The Managing General
Partner believes that it is highly unlikely that the Limited Partners
of the Partnership will benefit from any restructuring under MAHRAA.
o Although the cash purchase price and the distributions out of the
Partnership's available cash are less than the tax liability to a
Limited Partner from the Sale, the Sale will provide cash to enable
Limited Partners to pay a portion of the tax liability. In the absence
of the Sale, Limited Partners would have had to pay tax on the gain at
such time as the Properties or the Real Estate Interests were disposed
of by the Local Partnership or the Partnership. However, in such case,
the Managing General Partner believes that Limited Partners would not
have the cash purchase price from the Sale to meet a portion of the
tax. The purchase price to be paid by the REIT has been increased from
the amount determined by the Managing General Partner to be the
valuation of the Real Estate Interests using the methods described
above to provide cash to pay a portion of the tax liability.
710529.7
- 31 -
<PAGE>
o Due to the Partnership's limited current cash flow and the
uncertainties created by MAHRAA, the Managing General Partner does not
believe that the Properties could be sold to a third party on terms
comparable to those of the proposed Sale. In addition, the Partnership
owns only limited partnership interests in the Local Partnerships that
hold title to the Properties and the general partners of such
unaffiliated Local Partnerships are unaffiliated with the Managing
General Partner of the Partnership. As a result, the simultaneous
buyout of the local general partners is necessary in order to acquire
the Properties. Accordingly, it would be difficult for the Partnership
to seek a third party buyer for all of its Real Estate Interests.
The Managing General Partner did not quantify, reach independent
conclusions regarding or otherwise assign relative weights to the individual
qualitative factors listed above. Instead, the Managing General Partner
considered the diminishing prospects of the Partnership in light of the totality
of the circumstances. The Managing General Partner believes that each of the
factors considered supported its determination that the Sale is fair to the
Limited Partners.
The REIT has offered to purchase the Real Estate Interests because the
acquisition of such interests is an important component in the formation of the
REIT and such acquisition may assist the REIT in carrying out its strategy of
acquiring the FHA-insured mortgage loans encumbering the Properties and
generating cash flow in connection with the potential restructuring of such
loans. The REIT intends to purchase the local general partners' general
partnership interests, including the right to manage the Properties. The REIT
believes that acquisition of the Real Estate Interests, the partnership
interests of the local general partners, the right to manage each of the
Properties, and the insured mortgage indebtedness currently encumbering the
Properties will allow it to (i) earn fee income through the property management
functions formerly performed by the local general partners and (ii) restructure
the mortgage loans on the Properties on terms more advantageous than could be
obtained by the Partnership. The REIT's greater access to the capital markets
will allow it to take advantage of opportunities that are unavailable to the
Partnership and inconsistent with the Partnership's original objectives. The
Partnership's investment objectives contemplated that the Partnership would
dispose of its Real Estate Interests and liquidate. The Partnership's investment
objectives did not contemplate the Partnership raising additional capital or
acquiring additional partnership interests or mortgage loans, which would be
necessary if the Partnership were to realize the potential benefits anticipated
by the REIT.
The Managing General Partner also considered the fairness of the terms
of the Sale, including the allocation of the Aggregate Property Valuation to the
local general partners and the Purchase Price. REAL II owns limited partnership
interests in the Local Partnerships that hold title to the Properties that the
REIT has offered to purchase. The simultaneous buyout of the local general
partners is necessary in order to enable the Partnership to realize the value of
its Real Estate Interests. Accordingly, the amount required to be paid by a
purchaser (whether a third party buyer or the REIT) to purchase the interests of
the local general partners will have the effect of reducing the amount of
consideration which a buyer is willing to pay for the Partnership's Real Estate
Interests. The amounts that the Managing General Partner will pay to the
unaffiliated local general partners in connection with the buyouts of such local
general partners with whom the REIT has entered into option agreements have been
determined in arm's-length negotiations. The Managing General Partner believes
that the terms of such buyouts are fair to the Partnership. Therefore, the
Managing General Partner believes that, while the amount paid to the local
general partners affects the amount of distribution to Limited Partners and the
buyout of the local general partners' interests will benefit the REIT, the terms
of these transactions are fair to the Partnership and the Limited Partners. In
addition, the Managing General Partner believes that the amount to be
distributed to the Limited Partners from the Sale is fair to the Limited
Partners. The distributions represent the Purchase Price plus $500,000 of cash
held by the Partnership, less expenses that the Managing General Partner
believes are reasonable and customary.
Secondary and Market Prices for Units. The highest and lowest Unit sale
prices as reported to NAPICO by certain secondary market firms involved in sales
of the Units over the twelve-month period ended December 31, 1997 were $169.00
and $11.00, respectively. When gathering such data, NAPICO requests that the
recorded prices per Unit include any mark-ups for Units sold by the firms acting
as principals in the secondary market transactions
710529.7
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<PAGE>
and include any commissions charged by them for facilitating the transactions,
unless the firms acted as retail brokers.
No established market for the Units was ever expected to develop and
the secondary market transactions for the Units have been limited and sporadic.
It is not known to what extent the transactions in the secondary market are
between buyers and willing sellers, each having access to relevant information
regarding the financial affairs of the Partnerships, expected value of their
assets, and their prospects for the future. Many transactions in the secondary
market are believed to be distressed sales where sellers are highly motivated to
dispose of the Units and willing to accept substantial discounts from what might
otherwise be regarded as the fair value of the interest being sold, to
facilitate the sales. Secondary market prices generally do not reflect the
current market of the Partnerships' assets, nor are they indicative of total
return, because tax benefits received by original investors are not reflected in
such price. Nonetheless, notwithstanding these qualifications, the secondary
market prices, to the extent that the reported data are reliable, are indicative
of the prices at which the Units trade in the illiquid secondary markets.
On February 15, 1998, the Limited Partners received an offer from Bond
Purchase L.L.C. to purchase up to 4.8% of the outstanding units at a purchase
price of $215.00 per Unit.
The Managing General Partner did not give any specific weight to any
one of the foregoing factors but viewed them in the aggregate in supporting its
fairness determination. The Managing General Partner recommends that the Sale be
approved by the Limited Partners. Limited Partners should note, however, that
the Managing General Partner's recommendation is subject to inherent conflicts
of interest. See "CONFLICTS OF INTEREST."
Other Measures of Value. The Managing General Partner has not
calculated a going concern value or a liquidation value of the Units. Due to the
anticipated reduction in HAP payments at the expiration of HAP Contracts, as
described above, and the uncertainties relating to the impact on cash flow of
the restructuring of the FHA-insured mortgage loans, the Partnership does not
believe there is a sufficient basis to estimate future cash flow from the
Properties and calculate going concern value. Similarly, due to the limited cash
flow from the Properties and the potential impact of the anticipated reductions
in payments under HAP Contracts, and the absence of future tax benefits from the
Properties, the Partnership does not believe that there is a sufficient market
for estimating the fair market value of the Properties. The Managing General
Partner has not calculated an estimate of the liquidation value of the Units
assuming that the Partnership's Properties were sold at their book value. The
net book value of the Properties (i.e. book value less mortgage indebtedness) is
less than zero, which is common with real estate that has been held for an
extended period. The book value of the real estate assets is based upon the
original cost of those assets, increased for capital expenditures and reduced
for accumulated depreciation, computed in accordance with generally accepted
accounting principles. The Managing General Partner did not obtain appraisals of
the Properties because, given the nature of the Properties, the uncertainties
resulting from the changes in law and policy relating to payments under HAP
Contracts, and the relatively small value of each of the Properties, the
Managing General Partner does not believe that the benefits to be derived from
such appraisals justified the expense to the Partnership. The Managing General
Partner does not believe that the price that Limited Partners originally paid
for their Units was relevant in determining the Purchase Price for the Real
Estate Interests and therefore gave it no weight when determining the fairness
of the proposed Sale.
The Units were offered primarily to provide tax benefits to Limited
Partners and only secondarily to provide return of capital or appreciation in
value. In addition, due to recent changes in HUD law and policies relating to
HAP Contracts, the potential future return from the Properties and therefore the
economic value of the Properties themselves has been materially reduced. REAL II
was originally structured to take advantage of opportunities provided by the
Internal Revenue Code and the United States Housing Act. Changes in the tax code
and the housing statutes have to a large extent eliminated such opportunities
and have adversely affected the economic value of the Properties. In light of
the current regulatory environment for tax-driven low-income housing
investments, the Managing General Partner does not believe that the 1982
offering price of the Units should be a material factor in calculating the
Purchase Price for the Real Estate Interests. Accordingly, the Managing General
Partner does not believe that the purchase price originally paid by Limited
Partners for their Units is relevant to the determination of the adequacy of the
Purchase Price on a sale of the Real Estate Interests.
710529.7
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<PAGE>
Post-Sale Operations of the Partnership
Following consummation of the Sale, the Partnership will retain its
limited partnership interests in thirteen local partnerships. The Managing
General Partner of the Partnership does not anticipate that cash flows generated
by such local partnerships will be adequate to meet the operating expenses of
such local partnerships on an ongoing basis and that the Partnership will be
required to utilize its cash reserves ($1,605,235 at March 31, 1998) to meet its
operating expenses. The pro forma net cash flow for the remaining Properties for
the year ended December 31, 1997 and the quarter ended March 31, 1998 resulted
in a deficit of approximately $200,892 and $53,457, respectively. The Managing
General Partner intends to eventually dispose of the Partnership's interests in
the remaining projects, then wind up the affairs of the Partnership, although
the time frame for such activities has not yet been determined, and such
dispositions would require approval of the general partners of the Local
Partnerships. The Managing General Partner does not believe that the Partnership
will be able to generate additional cash for distributions to Limited Partners
as a result of dispositions of the remaining Properties.
Historical and Pro Forma Financial Information
The following is condensed financial information with respect to those
properties in which the Partnership will continue to own interests if the Sale
is approved. Given the structure of the proposed Sale, the composition of the
Partnership after the Sale will depend to some extent upon the number of general
partners of the Local Partnerships that elect to transfer their interests in the
Local Partnerships to the REIT.
The pro forma balance sheet of the Partnership has been prepared as if
the Sale was consummated on December 31, 1997. The pro forma statements of
operations of the Partnership for the year ended December 31, 1997 assume that
the Sale was consummated on January 1, 1998. The Sale will be accounted for
using the purchase method of accounting.
The pro forma financial statements are based on available information
and on certain assumptions, as set forth in the notes to pro forma financial
statements, that NAPICO believes are reasonable under the circumstances. These
statements do not purport to represent what the Partnership's financial
position, results of operations or cash flows would actually have been if the
Sale in fact had occurred on such dates or at the beginning of such period or
the Partnership's financial position, results of operations or cash flows for
any future date or period.
710529.7
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<PAGE>
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
Pro Forma Consolidated Balance Sheet
As of March 31, 1998
(unaudited)
Assets
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adjustments
-------------- ------------- -----------------
<S> <C> <C> <C>
Investments in Limited Partnerships $ 3,679,292 $ (726,716) (A) $ 2,952,576
1,605,235 - 1,605,235
Cash and Cash Equivalents --------------- ----------- ----------
Total Assets $ 5,284,527 $(726,716) $ 4,557,811
============= ========= =============
Liabilities and Partners' Equity (Deficiency)
Liabilities
Accounts payable $ 93,484 $ - $ 93,484
93,484 - 93,484
Partners' Equity (Deficiency):
General partners (166,185) (7,267)(B) (173,452)
Limited partners 5,357,228 (719,449)(C) 4,637,779
5,191,043 (726,716) 4,464,327
--------- --------- ---------
$ 5,284,527 $(726,716) $ 4,557,811
Total Liabilities and Partners' Equity ========= ======== =========
</TABLE>
710529.7
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<PAGE>
REAL ESTATE ASSOCIATES LIMITED II
Notes to Pro Forma Balance Sheet
As of March 31, 1998
(unaudited)
Pro Forma Balance Sheet Adjustments
(A) Investments in Limited Partnerships
Historical Balance $3,679,292
Less:
(726,716
Berger ---------
Pro Forma Adjustment (726,716)
Pro Forma Balance $2,952,576
=========
(B) General Partners' Deficiency
1% of pro forma equity adjustments.
(C) Limited Partners' Equity
99% of pro forma equity adjustments.
710529.7
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<PAGE>
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
Pro Forma Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998 Year Ended December 31, 1997
--------------------------------- ----------------------------
Pro Forma Pro Forma
Historical Adjustments Pro Forma Historical Adjustments Pro Forma
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Income 19,197 (3,839)(A) 15,358 82,692 (8,363)(A) 74,329
------ ---------- ------ ------ ---------- ------
Operating Expenses:
Legal and accounting 24,450 - 24,450 132,650 - 132,650
Management fees 99,420 (70,347) 29,073 397,680 (320,625) 77,055
Administrative 52,218 - (B) 52,218 218,861 -(B) 218,861
------------- ---------- ---------- ---------- --------- ----------
Total Operating Expenses 176,088 (70,347) 105,741 749,191 (320,625) 428,566
------------- ---------- ----------- ---------- --------- ----------
Loss from Operations (156,891) 66,509 (90,382) (666,499) 312,262 (354,237)
Distributions from Limited
Partnerships Recognized as Income 133,020 (127,954) (C) 5,066 244,281 (146,134)(C) 98,147
Equity in Income of Limited Partnerships 217,900 (40,655) (D) 177,246 820,899 (162,618)(D) 658,281
and Amortization of Acquisition Costs ---------- --------- -------- -------- ------------ -------
$ 194,029 $ (102,000) $ 91,929 $ 398,681 $ 3,510 $ 402,191
Net Income ============= ========= ======== ========= ============ ========
</TABLE>
710529.7
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<PAGE>
REAL ESTATE ASSOCIATES LIMITED II
Notes to Pro Forma Consolidated Statements of Operations
(unaudited)
Pro Forma Statements of Operations Adjustments
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
March 31, 1998 Dec. 31, 1997
------------------ ------------------
(A) Interest Income
Reflects estimated interest income for the period related to cash
distribution that will no longer be received after the sale.
<S> <C> <C>
Historical Balance $ 19,197 $ 82,692
Total Cash Distributions
Pro Forma Adjustment (%3 IR) (3,839) (8,363)
Total Interest Income $ 15,358 $ 74,329
================ =================
(B) Management Fees
Reflects reduction in management fees, calculated at 0.4% of invested
assets, as a result of the sale of the properties.
Historical Balance $ 397,680
(320,625)
Pro Forma Adjustment -----------------------
Pro Forma Balance $ 77,055
======================
Pro Forma adjustment of sale properties is calculated as follows:
Invested Assets $ 99,419,540
Less-Sale properties:
Berger (6,792,500)
Biltmore (11,015,073)
Castlewood (3,904,713)
East Farm Village (11,333,710)
Grant Park (5,978,115)
New Haven Plaza (12,663,920)
Pennbrook (3,783,633)
Sugar River Mills (9,808,854)
Westward Ho (14,875,755)
-----------------------
(80,156,273)
Total for sale properties -----------------------
$ 19,263,267
Pro Forma Invested Assets -----------------------
Invested Assets related to Sale properties $ 80,156,273
Management fee rate 0.4%
</TABLE>
710529.7
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<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
March 31, 1998 Dec. 31, 1997
--------------- -------------
<S> <C> <C>
Annual adjustment - three months ended March 31, 1998
and year ended Dec. 31, 1997 $ $ 320,625
=========
(C) Distributions from Limited Partnership Recognized as Income $ 70,347
=========
The pro forma adjustments to the historical balances and the resulting
pro forma balances were determined as follows:
Historical Balance $ 133,020 $ 244,281
Less:
Castlewood -- (5,397)
East Farm -- (36,616)
Grant Park -- (51,398)
New Haven Plaza -- --
Pennbrook -- (7,183)
Sugar River Mills -- (45,000)
Westward Ho (127,954) -
---------- --------
Pro Forma Adjustment (127,954) (146,134)
-------------- -------------
Pro Forma Balance $ 5,066 $ 98,147
============ =============
(D) Equity in Income of Limited Partnership and Amortization of Acquisition
Costs The pro forma adjustments to the historical balance and the
resulting pro forma balance were determined as follows:
Historical Balance 217,900 820,899
Less:
Berger (52,943) (211,773)
Biltmore (13,000) 52,000
New Haven Plaza (711) (2,845)
New Haven Plaza ---------- -------------
Pro Forma Adjustment (40,665) (162,618)
---------- -------------
Total Pro Forma Balance $ 177,246 $ 658,281
========== =============
</TABLE>
IV. AMENDMENTS TO THE PARTNERSHIP AGREEMENT
Certain amendments to the Partnership Agreement are necessary in
connection with the consummation of the Sale. The Partnership Agreement
currently prohibits a sale of any of the Properties or Real Estate Interests to
the General Partners or their affiliates. Accordingly, consent of the Limited
Partners is being sought for an amendment to the Partnership Agreement that
eliminates such prohibition.
The Partnership Agreement also requires that any agreement entered into
between the Partnership and the General Partners or any affiliate of the General
Partners shall provide that it may be canceled at any time by the Partnership
without penalty upon 60 days' prior written notice. It is the position of the
Managing General Partner that the Termination Provision does not apply to the
Sale; nevertheless, the Managing General Partner is seeking the
710529.7
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<PAGE>
approval of the Limited Partners to an amendment to the Partnership Agreement
that eliminates the Termination Provision in connection with the Sale or any
future disposition of Properties.
The Partnership Agreement also prohibits the Partnership from selling
any Property or any interest in a Property if the cash proceeds from such sale
would be less than the state and federal taxes applicable to such sale,
calculated using the maximum tax rates then in effect (the "Tax Requirement").
The Managing General Partner is seeking the approval of the Limited Partners to
an amendment to the Partnership Agreement that eliminates the Tax Requirement so
as to allow the Partnership to sell the Properties although such tax requirement
is not met. By approving such Amendment, the Limited Partners are relinquishing
a potential benefit conferred by the terms of the Partnership Agreement.
However, the Managing General Partner believes that as a result of (i) recent
legislation relating to government-assisted housing, which is expected to reduce
the cash flow from the Properties and create possible adverse tax consequences
to owners of the Properties, and (ii) the substantial negative capital accounts
which most Limited Partners have which will result in recognition of significant
gain on a sale of the Real Estate Interests or the Properties, the Tax
Requirement would prevent sales of Properties or Real Estate Interests which are
in the best interests of the Limited Partners.
The consent of Limited Partners holding a majority of outstanding Units
is required in order to amend the Partnership Agreement. Limited Partners must
approve the proposed Sale and each of the three proposed Amendments in order to
allow consummation of the Sale.
V. CONFLICTS OF INTEREST
General
Due to the key role of affiliates of the Managing General Partner in
the organization of the REIT, and the relationships among the Managing General
Partner, the Casden Partnerships, Casden and Casden's directors and officers,
the Managing General Partner has certain conflicts of interest in recommending
the Sale to the Limited Partners. Some important conflicts are:
1. The terms of the Sale were established by the REIT and the Managing
General Partner, which are related parties. Accordingly, the terms and
conditions of the proposed Sale were not determined through arm'slength
negotiations. There can be no assurance that arm's-length negotiations would not
have resulted in terms more favorable to the Limited Partners.
2. Although the Managing General Partner is accountable to the
Partnership and the Limited Partners as fiduciaries and is obligated to exercise
good faith and fair dealing toward other members of the Partnership, and
although Stanger provided an independent opinion with respect to the fairness of
the Aggregate Property Valuation utilized in connection with determining the
Purchase Price, no independent financial or legal advisors were engaged to
determine the Purchase Price or to represent the interests of the Limited
Partners. There can be no assurance that the involvement of financial or legal
advisors, or other third parties, on behalf of the Limited Partners would not
have resulted in a higher Purchase Price or terms more favorable to the Limited
Partners.
3. If the REIT Transaction is consummated, affiliates of the Managing
General Partner will receive substantial interests in the REIT in exchange for
the contribution of real property assets and the property management operations
of Casden, including direct or indirect interests in the Managing General
Partner. The Managing General Partner anticipates that it will receive
significant economic benefits as a result of receiving interests in the REIT.
Such interests in the REIT are likely to enjoy greater liquidity than the
Managing General Partner's current interests in the Partnership if the REIT
successfully completes an initial public offering following its initial
formation as a private REIT. Unlike Casden and its affiliates, the Limited
Partners will not have the right to participate in the REIT. It is anticipated
that approximately 45% of the equity securities of the REIT will be held by
Casden and its affiliates following the Private Placement, based on the terms of
the Private Placement as currently contemplated.
710529.7
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<PAGE>
4. It is anticipated that the return from the interests in the REIT to
be received by the Managing General Partner and its affiliates in connection
with the REIT Transaction will exceed the return such persons currently receive
from the real estate assets and business such persons will contribute or sell to
the REIT. The implied value of the REIT's securities (based on the pricing of
the REIT's securities in the Private Placement and in contemplated subsequent
public offerings, if consummated) that will be attributed to the other assets
being contributed to the REIT may exceed the price paid by the REIT for such
interest in the Properties because of (i) the combination of real estate assets
and businesses and the resultant opportunities for enhanced access to equity
capital and financing alternatives that are likely to be available to the REIT;
(ii) the expected liquidity of the REIT's capital stock; (iii) the current
favorable public market valuation of real estate investment trusts; (iv) the
inclusion of certain real estate business and management companies owned by
affiliates of Casden in the REIT; and (v) the greater asset diversification of
the REIT, and other factors. Such realization of excess value is dependent on
economic, interest rate and real estate market trends, as well as market
conditions at the time of the formation of the REIT and the Private Placement
(and subsequent public offering) of its securities and, if realized, will likely
provide affiliates of the Managing General Partner with significant economic
benefits.
5. Substantially all of the officers and employees of Casden and its
affiliates will be employed as officers and employees of the REIT or its
subsidiaries. For their services as officers, directors or employees of the REIT
or its subsidiaries, such persons will be paid a salary and may be eligible to
participate in the REIT's bonus plan, option plan and other employee benefit
plans. In addition, through the REIT Transaction, the REIT will ensure
continuity of the business established by the Managing General Partner and its
affiliates. The Properties, if acquired by the REIT, will continue to be managed
by the REIT's officers and employees for as long as the REIT continues to own
the Properties. In addition, unlike the Partnership, the REIT will have the
ability to reinvest proceeds from any future sale of the Properties. The REIT
will therefore afford ongoing employment opportunities for those persons
currently employed to assist with the administration and day-to-day operations
of the Properties and the REIT.
6. Affiliates of the Managing General Partner have entered into option
agreements with respect to seven of the Local Partnerships held by the general
partners of the Local Partnerships. The value attributed to the management fees
payable to the general partners of the three Local Partnerships affiliated with
the Managing General Partner was deducted from the Aggregate Property Valuation
when determining the Purchase Price payable to the Limited Partners. The right
to receive such management fees will be transferred to the REIT in connection
with the Sale, and affiliates of the Managing General Partner will have a
substantial interest in the REIT.
Fiduciary Responsibility
The Managing General Partner is accountable to the Partnership and the
Limited Partners as a fiduciary and consequently is obligated to exercise good
faith and fair dealing toward other members of the Partnership. The Partnership
Agreement provides that the Managing General Partner and its officers,
directors, employees, agents, affiliates, subsidiaries and assigns are entitled
to be indemnified for any claim, loss, expense, liability, action or damage
resulting from any act or omission performed or omitted by it pursuant to the
Partnership Agreement, but the Managing General Partner is not entitled to be
indemnified or held harmless for any act or omission constituting fraud,
negligence, breach of fiduciary duty or willful misconduct. In addition,
pursuant to the Partnership Agreement, the Managing General Partner has no
liability or obligation to the other partners or the Partnership for any
decision made or action taken in connection with the discharge of its duties
under the Partnership Agreement, if such decision or action was made or taken in
good faith.
If a claim is made against the Managing General Partner in connection
with its actions on behalf of the Partnership with respect to the Sale, the
Managing General Partner expects that it will seek to be indemnified by the
Partnership with respect to such claim. Any expenses (including legal fees)
incurred by the Managing General Partner in defending such claim shall be
advanced by the Partnership prior to the final disposition of such claim,
subject to the receipt by the Partnership of an undertaking by the Managing
General Partner to repay any amounts advanced if it is determined that the
Managing General Partner's actions constituted fraud, bad faith, gross
negligence, or failure to comply with any representation, condition or agreement
contained in the Partnership
710529.7
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<PAGE>
Agreement. As a result of these indemnification rights, a Limited Partner's
remedy with respect to claims against the Managing General Partner relating to
the Managing General Partner's involvement in the sale of the Partnership's
interest in the Properties to the REIT could be more limited than the remedy
which would have been available absent the existence of these rights in the
Partnership Agreement. A successful claim for indemnification, including the
expenses of defending a claim made, would reduce the Partnership's assets by the
amount paid.
710529.7
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<PAGE>
VI. SELECTED FINANCIAL INFORMATION
The following table sets forth selected historical financial and
operating data of the partnership for the fiscal years ended December 31, 1997,
1996, 1995, 1994, 1993 and for the three months ended March 31, 1998 and 1997.
The following information should be read in conjunction with the Partnership's
Annual Report on Form 10-K and Quarterly Report on Form 10-Q, which are attached
hereto as Annexes B and C respectively.
The selected historical financial and operating data of the Partnership
for the three-month period ended March 31, 1998 and March 31, 1997 are derived
from unaudited consolidated financial statements of the Partnership which, in
the opinion of the Managing General Partner, include all adjustments (consisting
only of normal recurring items unless otherwise disclosed) necessary for a fair
presentation of the Partnership's financial position and results of operations.
The results set forth for the three-month period ended March 31, 1998 and March
31, 1997 are not necessarily indicative of results to be expected for a full
year.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1998 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income..................... $ 82,692 $ 74,125 $ 79,20 $ 29,192 $ 25,800 $ 19,197 $ 20,477
Operating Expenses.................. 749,191 523,208 553,385 521,486 534,553 176,088 140,599
Loss From Operations................ (666,499) (449,123) (474,179) (492,294) (508,753) (156,891) (120,122)
Distributions From Limited Partnerships
Recognized as Income................ 244,281 113,203 172,189 796,658 270,938 133,020 37,941
Equity in Income of Limited Partnerships 820,899 1,154,755 1,172,891 734,711 532,359 217,900 268,000
and Amortization of Acquisiiton Costs ------- --------- --------- ------- ------- ------- -------
Net Income.......................... $ 398,681 $818,835 $ 870,901 1,039,075 $ 294,544 $ 194,029 $ 185,819
======= ======== ========= ========= ========== ========= =========
Net Income allocated
to Limited Partners................. $ 394,694$ 810,647 $ 862,192 $ 1,028,684 $ 291,599 $ 192,089 $ 183,961
Net Income per Limited Partnership
Interest 37$ 77 $ 81 $ 96 27$ 18 17 $
------- --------- --------- ------- ------- ------- -------
Total Assets........................ $ 5,095,968$4,630,145 $3,821,884 $2,917,236 $1,873,009 $5,284,527 $5,095,968
--------- --------- ---------- --------- --------- --------- ---------
Investments in Limited Partnershps..$ 3,493,251$2,808,190 $1,959,173 $1,135,982 $1,407,989 $3,679,292 $3,493,251
---------- --------- --------- --------- ---------- ---------- ---------
Partners' Equity.................... $ 4,997,014$4,598,333 $3,779,498 $2,908,597 $1,869,522 $5,191,043 $4,997,014
Limited Partners' Equity............ $ 5,165,139$4,770,445 $3,959,748 $3,097,606 $2,068,922 $5,357,228 $5,165,139
Limited Partners' Equity $ 483$ 446 $ 37 $ 290 $ 194 $ 50 $ 463
per Limited Partnership Interest.... ========== ========= ========= ========= ========= ========= =========
</TABLE>
VII. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material tax consequences relating to
the proposed Sale and the distribution of approximately $1,296 per Unit.
However, each Limited Partner is urged to consult his, her or its own tax
advisor for a more detailed explanation of the specific tax consequences to such
Limited Partner from the Sale.
Upon consummation of the Sale, and subject to the passive activity
rules described below, each Limited Partner will recognize his, her or its share
of the taxable gain of the Partnership to the extent that the sum of (i) the
cash, plus (ii) the fair market value of any property received by the
Partnership on the Sale plus (iii) the outstanding principal amount of the
Partnership's nonrecourse indebtedness, exceeds the Partnership's adjusted basis
for the Properties. Gain realized by the Partnership on the Sale will generally
be a Section 1231 gain (i.e., long-term capital gain). A Partner's share of
gains and losses from Section 1231 transactions from all sources would be netted
and would be taxed as capital gains or constitute ordinary losses, as the case
may be. A net Section 1231 gain for a
710529.7
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<PAGE>
taxable year will be treated as capital gain only to the extent such gain
exceeds the net Section 1231 losses for the five most recent prior taxable years
not previously recaptured. Any gain attributable to a Limited Partner's share of
depreciation recapture will be taxed at ordinary income rates.
The taxable income realized by each Limited Partner by reason of the
Sale should be characterized as income from a "passive activity" and may be
offset by a Limited Partner's available "passive activity losses" (including
suspended losses from other passive activities). Under the Tax Reform Act of
1986 (the "1986 Act") losses from passive activities may only be offset against
income from passive activities or may be deducted in full when the taxpayer
disposes of the passive activity from which the loss arose. However, pursuant to
a transitional rule contained in the 1986 Act, a certain percentage of losses
from a passive activity which was held by the taxpayer on the date of the
enactment of the 1986 Act (i.e., October 22, 1986) and at all times thereafter
was permitted to offset any type of income during the years 1987 through 1990.
The Limited Partners have no suspended passive activity losses from the
Partnership due to dispositions of Partnership properties in prior years.
It is estimated that as a consequence of the Sale, each Limited Partner
will have taxable income equal to approximately $7,756 per Unit all of which
will constitute long-term capital gain. The anticipated cash distribution of
approximately $1,296 per Unit is not sufficient to pay the federal and state tax
liability arising from the Sale. The tax liabilities have been calculated
assuming a federal capital gains rate of 25%, the current capital gains rate for
the portion of net Section 1231 gain attributable to unrecaptured Section 1250
gain and assuming an effective state tax rate of 5%. Because the Limited
Partners have no suspended passive activity losses from the Partnership, the net
tax cost in excess of the distribution, including the distribution from
available cash, is approximately $1,031 per unit. If a Limited Partner has any
passive activity losses (including suspended losses) from any other passive
activity the net tax cost may be reduced by the ability of a limited partner to
offset the gain from the Sale by passive activity investments subject to the
passive loss rules. To the extent the Partnership generates future losses from
the properties it retains, such losses will only be available to offset the
income generated from other passive activities. The distributions to the Limited
Partners consisted of $1,204 per Unit out of the net proceeds from the Sale and
$92 per Unit out of the available cash of the Partnership. It should be noted
that, while the distribution of the cash held by the Partnership will currently
provide cash to pay a portion of the tax liability and will not be currently
taxable, the distribution of cash will increase the amount by which Limited
Partners' capital accounts are negative and will increase the taxable gain
Limited Partners will realize in the future on disposition of the Partnership's
remaining assets or a Limited Partner's interest in the Partnership and the tax
payable by a Limited Partner at such time. In addition to assuming federal
income tax rates, the calculation of income tax liability of a Limited Partner
assumes that such Limited Partner has no net Section 1231 losses for the five
most recent prior taxable years. If this latter assumption is not applicable to
a Limited Partner, the income tax liability of such Limited Partner could
increase because certain income would be taxed at ordinary, instead of capital
gains tax rates. Limited Partners are advised to consult with their own tax
advisors for specific application of the tax rules where the above-described
assumption is not applicable. The foregoing does not take into consideration the
effect of any local tax liabilities that may be applicable to the Sale.
BECAUSE IT IS IMPOSSIBLE TO KNOW THE AMOUNT OF LOSSES ANY LIMITED
PARTNER HAS AVAILABLE FROM OTHER SOURCES TO APPLY TO OFFSET HIS, HER OR ITS
TAXABLE INCOME FROM THE SALE, THE MANAGING GENERAL PARTNER CANNOT ESTIMATE THE
INCOME TAX LIABILITY OF EACH LIMITED PARTNER ARISING FROM THE SALE, THEREFORE,
EACH LIMITED PARTNER SHOULD CONSULT HIS, HER OR ITS TAX ADVISOR CONCERNING THE
INCOME TAX CONSEQUENCES OF CONSENTING TO THE SALE WITH RESPECT TO SUCH LIMITED
PARTNER'S OWN TAX SITUATION.
VIII. LEGAL PROCEEDINGS
As of December 31, 1997, NAPICO was a plaintiff or defendant in several
lawsuits. In addition, REAL II is involved in the following lawsuits. In the
opinion of management and NAPICO, the claims will not result in any material
liability to the Partnership.
710529.7
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<PAGE>
On June 25, 1997, the Securities and Exchange Commission (the
"Commission") entered into a consent decree with NAPICO, three members of
NAPICO's senior management and three affiliated entities (collectively, the
"NAPICO Affiliates") in connection with their alleged roles in two separate
series of securities laws violations. In connection therewith, certain NAPICO
Affiliates agreed to cease and desist from committing or causing securities law
violations. In addition, National Partnership Equities, Inc. ("NPEI"), a
brokerage firm affiliated with NAPICO, agreed to undergo a review of certain of
its policies and procedures and pay a $100,000 penalty. The NAPICO Affiliates
consented to the above sanctions and relief without admitting or denying the
Commission's findings.
The two series of securities law violations relate to the NAPICO
Affiliates' (i) satisfying the minimum offering threshold of a "part or none"
private placement by utilizing a subscription from a non-bona fide investor and
failing to disclose such violation in subsequent offering materials for such
private placement and (ii) failing to disclose in the periodic reports for
another of its programs the fact that such program's cash was used to pay the
expenses of properties not owned by such program that were managed by an
affiliate and failing to maintain adequate internal controls to detect such
violations.
IX. LIMITED PARTNERS CONSENT PROCEDURE
Distribution of Solicitation Materials
This Consent Solicitation Statement and the related Consent are first
being mailed to Limited Partners on or about ________ __, 1998. Only Limited
Partners of record on ___________, 1998 (the "Record Date") will be given notice
of, and allowed to give their consent regarding, the matters addressed in this
Consent Solicitation Statement.
This Consent Solicitation Statement, together with the Consent and the
letter from the Managing General Partner, constitute the Solicitation Materials
to be distributed to the Limited Partners to obtain their votes for or against
the Sale. The Solicitation Period is the time frame during which Limited
Partners may vote for or against the Sale. The Solicitation Period will commence
upon the date of delivery of this Consent Solicitation Statement and will
continue until the earlier of (i) _________, 1998 or such later date as may be
determined by the Managing General Partner and (ii) the date upon which the
Managing General Partner determines that a Majority Vote has been obtained. At
its discretion, the Managing General Partner may elect to extend the
Solicitation Period. Under no circumstances will the Solicitation Period be
extended beyond ______________, 1998. Any Consents delivered to the Partnership
prior to the termination of the Solicitation Period will be effective provided
that such Consents have been properly completed, signed and delivered.
As permitted by the Partnership Agreement, the Partnership has not
scheduled a special meeting of the Limited Partners to discuss the Solicitation
Materials or the terms of the Sale.
Voting Procedures and Consents
Limited Partners of record as of the Record Date will receive notice
of, and be entitled to vote, with respect to the Sale. Consent to the Sale will
also include consent to Amendments to the Partnership Agreement that (i)
eliminate a restriction against sales of Partnership assets to affiliates of the
Managing General Partner; (ii) eliminate the Termination Provision in connection
with the Sale and (iii) modify the Tax Requirement to allow the Partnership to
assume, for purposes of calculating taxes, that all of the passive losses from
the Partnership are available to Limited Partners.
The Consent included in the Solicitation Materials constitutes the
ballot to be used by Limited Partners in casting their votes for or against the
Sale. By marking this ballot, the Limited Partner may either vote "for,"
"against" or "abstain" as to the Partnership's participation in the Sale. Once a
Limited Partner has voted, he may not revoke his vote unless he submits a second
Consent, properly signed and completed, together with a letter indicating that
this prior Consent has been revoked, and such second Consent is received by
Gemisys Corporation
710529.7
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<PAGE>
(the "Tabulator") prior to expiration of the Solicitation Period. See
"Withdrawal and Change of Election Rights" below
The Sale will not be completed unless it is approved by a Majority
Vote. See "THE SALE-- Conditions" for a discussion of the other conditions
precedent to the Sale. BECAUSE APPROVAL REQUIRES THE AFFIRMATIVE VOTE OF A
MAJORITY OF THE OUTSTANDING UNITS OF LIMITED PARTNERSHIP INTEREST, FAILURE TO
VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE SALE.
Any Limited Partner who returns his Consent signed but does not specify
"for," "against" or "abstain" will be deemed to have voted for the Sale.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the Consent will be determined by the
Tabulator, whose determination will be final and binding. The Tabulator reserves
the absolute right to reject any or all Consents that are not in proper form or
the acceptance of which, in the opinion of the Managing General Partner's
counsel, would be unlawful. The Tabulator also reserves the right to waive any
irregularities or conditions of the Consent as to particular Units. Unless
waived, any irregularities in connection with the Consents must be cured within
such time as the Tabulator shall determine. The Partnership, the Managing
General Partner and the Tabulator shall be under no duty to give notification of
defects in such Consents or shall incur liabilities for failure to give such
notification. The delivery of the Consents will not be deemed to have been made
until such irregularities have been cured or waived.
Completion Instructions
Each Limited Partner is requested to complete and execute the Consent
in accordance with the instructions contained therein. For his Consent to be
effective, each Limited Partner must deliver his Consent to the Tabulator at any
time prior to the termination of the Solicitation Period to the Partnership at
the following address:
Gemisys Corporation
7103 South Revere Parkway
Englewood, Colorado 80112
A pre-addressed stamped envelope for return of the Consent has been
included with the Solicitation Materials. Limited Partners may also telecopy an
executed copy of this Consent to the Tabulator at 303-705-6171. The Consents
will be effective only upon actual receipt by the Partnership. The method of
delivery of the Consent to the Partnership is at the election and risk of the
Limited Partner, but if such delivery is by mail it is suggested that the
mailing be made sufficiently in advance of _______ __, 1998 to permit delivery
to the Partnership on or before such date.
Withdrawal and Change of Election Rights
Consents may be withdrawn at any time prior to the expiration of the
Solicitation Period. In addition, subsequent to submission of his Consent but
prior to expiration of the Solicitation Period, a Limited Partner may change his
vote in favor of or against the Sale. For a withdrawal or change in vote to be
effective, a written or facsimile transmission notice of withdrawal or change in
vote must be timely received by the Tabulator at its address set forth under
"Completion Instructions" above and must specify the name of the person having
executed the Consent to be withdrawn or vote changed and the name of the
registered holder if different from that of the person who executed the Consent.
No Dissenters' Rights of Appraisal
Under the Partnership Agreement and California law, Limited Partners do
not have dissenters' rights of appraisal. If the Sale is approved by a Majority
Vote, and the other conditions to consummation of the Sale are
710529.7
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<PAGE>
satisfied, all Limited Partners, both those voting in favor of the Sale and
those not voting in favor, will be entitled to receive the resulting cash
distributions.
Solicitation of Consents
The Managing General Partner and its officers, directors and employees
may assist in the solicitation of consents and in providing information to
Limited Partners in connection with any questions they may have with respect to
this Consent Solicitation Statement and the voting procedures. Such persons and
entities will be reimbursed by the Partnership for out of pocket expenses in
connection with such services. The Partnership may also engage third parties to
assist with the solicitation of Consents and pay fees and reimburse the expenses
of such persons.
YOUR CONSENT IS IMPORTANT. PLEASE MARK, SIGN, AND DATE THE ENCLOSED
CONSENT AND RETURN IT IN THE ENCLOSED SELF-ADDRESSED, STAMPED ENVELOPE
PROMPTLY.
If you have any questions about the consent procedure or require
assistance, please contact MacKenzie Partners, the Partnership's consent
solicitation agent, toll free at 800-322-2885 or collect at 212-929-5500.
X. IMPORTANT NOTE
It is important that Consents be returned promptly. Limited Partners
are urged to complete, sign and date the accompanying form of Consent and mail
it in the enclosed envelope, which requires no postage if mailed in the United
States, so that their vote may be recorded.
________ ___, 1998
710529.7
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<PAGE>
REAL ESTATE ASSOCIATES LIMITED II
9090 WILSHIRE BOULEVARD
BEVERLY HILLS, CALIFORNIA 90211
THIS CONSENT IS BEING SOLICITED BY THE MANAGING GENERAL PARTNER
OF REAL ESTATE ASSOCIATES LIMITED II
CONSENT OF LIMITED PARTNER
The undersigned hereby gives written notice to REAL II (the
"Partnership") that, with respect to the transaction by which the Partnership
proposes to sell certain of its real estate assets to a real estate investment
trust sponsored by affiliates of certain general partners of the Partnership,
the undersigned votes all of his, her or its units of limited partnership
interest as indicated below:
On the proposal to sell all of the interests of the Partnership in the real
estate assets of eight of the twenty-one limited partnerships in which the
Partnership holds a limited partnership interest to a real estate investment
trust or its affiliate to be organized by Casden Properties and to authorize the
Managing General Partner to take any and all actions that may be required in
connection therewith, including the execution on behalf of the Partnership of
such amendments, instruments and documents as shall be necessary to reflect the
transfer of the general and limited partnership interests and to authorize the
Managing General Partner to sell any remaining real estate interests not
transferred to such real estate investment trust or its affiliates pursuant to
the proposal without further consent of the Limited Partners.
FOR AGAINST ABSTAIN
/ / / / / /
On the proposal to approve an amendment to the Partnership Agreement that
eliminates a provision prohibiting the Partnership from selling any Property to
a General Partner or its affiliate.
FOR AGAINST ABSTAIN
/ / / / / /
On the proposal to approve an amendment to the Partnership Agreement that
eliminates a provision allowing the Partnership to cancel, upon 60 days' prior
written notice, any agreement entered into between the Partnership and a General
Partner or an affiliate of a General Partner.
FOR AGAINST ABSTAIN
/ / / / / /
On the proposal to approve an amendment to the Partnership Agreement that
eliminates certain tax provisions that were required to be met as a condition to
a disposition of the Partnership's real property assets.
FOR AGAINST ABSTAIN
/ / / / / /
710529.7
<PAGE>
The undersigned acknowledges receipt
from the Managing General Partner of
the Consent Solicitation Statement
dated
_________ __, 1998.
Dated: _____________, 199_ _______________________________
Signature
-------------------------------
Print Name
-------------------------------
Signature (if held jointly)
-------------------------------
Print Name
-------------------------------
Title
Please sign exactly as name appears
hereon. When units are held by joint
tenants, both should sign. When
signing as an attorney, as executor,
administrator, trustee or guardian,
please give full title of such. If a
corporation, please sign name by
President or other authorized
officer. If a partnership, please
sign in partnership name by
authorized person.
PLEASE RETURN THIS FORM BY 5:00 P.M. (NEW YORK CITY TIME) ON
________ [__], 1998.
PLEASE MARK, SIGN, DATE AND RETURN THIS CONSENT BY FACSIMILE
TO 303-705-6171 OR BY USING THE ENCLOSED PREPAID ENVELOPE TO THE ADDRESS FIRST
WRITTEN ABOVE. IF YOU HAVE ANY QUESTIONS, PLEASE CALL 800-322-2885.
A LIMITED PARTNER SUBMITTING A SIGNED BUT UNMARKED CONSENT
WILL BE DEEMED TO HAVE VOTED FOR THE PARTNERSHIP'S PARTICIPATION IN THE
SALE.
710529.7
<PAGE>
ANNEX A
FORM OF OPINION
Real Estate Associates Limited II
9090 Wilshire Boulevard
Beverly Hills, California 90211
Gentlemen:
You have advised us that Real Estate Associates Limited II (the
"Partnership"), National Partnership Investments Corp., and National Partnership
Investments Associates, the general partners (the "General Partners") of the
Partnership, and Casden Properties and certain of its affiliates (the
"Company"), an affiliate of the General Partners, are contemplating a
transaction in which interests (the "Real Estate Interests") in certain real
estate assets listed in Exhibit I (the "Properties"), which are owned by the
Partnership through investments in certain local limited partnerships (the
"Local Partnerships"), will be sold to a newly formed real estate investment
trust or its designated affiliate to be organized by the Company (the "REIT"),
subject to, among other matters, the requisite approval of the limited partners
(the "Limited Partners") of the Partnership (the "Sale").
You have further advised us that in connection with the proposed Sale,
the value ascribed to the eight Properties to be sold (the "Aggregate Property
Valuation") will be $68,193,115, which value includes amounts intended to
satisfy certain potential tax liabilities of Limited Partners. In addition, we
have been advised that the Aggregate Property Valuation will be utilized and
adjusted by the General Partners to reflect, among other things, various other
assets and liabilities of the Partnership and the Local Partnerships, the
allocation of the Aggregate Property Valuation among the Local Partnerships,
amounts attributable to general partner and management interests in the Local
Partnerships or the General Partners' estimate of the costs associated with the
buyout thereof, and transaction expenses to determine a net purchase price of
the Real Estate Interests to be acquired (the "Purchase Price").
In addition, you have advised us that certain of the Properties are
subject to restrictions on the amount of cash flow which can be distributed to
investors (the "Dividend Limitation") which limit annual dividend payments, and
that the Local Partnerships do not have any accrued but unpaid distribution
balances ("Accrued Distributions") or other contractual or regulatory provisions
which would allow the Local Partnerships, and therefore the Partnership, to make
distributions in excess of the Dividend Limitation in future years.
You have requested that Robert A. Stanger & Co., Inc. ("Stanger")
provide to the Partnership an opinion as to whether the Aggregate Property
Valuation, which is to be utilized in connection with determining the Purchase
Price to be paid for the Real Estate Interests in the Sale, is fair to the
Limited Partners from a financial point of view.
In the course of our analysis for rendering this opinion, we have,
among other things:
o Reviewed a draft of the consent solicitation statement (the
"Consent") relating to the Sale in a form the Partnership's
management has represented to be substantially the same as
will be distributed to the Limited Partners;
o Reviewed the Partnership's annual reports on form 10-K filed
with the Securities and Exchange Commission for the years
ended December 31, 1995, 1996, and 1997, and quarterly reports
on form 10-Q for the period ending March 30, 1998, which the
Partnership's management has indicated to be the most current
financial statements;
o Reviewed descriptive information concerning the Properties,
including location, number of units and unit mix, age, and
amenities;
o Reviewed summary historical operating statements for the
Properties, as made available by the General Partners, for the
years ended December 31, 1995, 1996, and 1997;
o Reviewed 1998 operating budgets for the Properties prepared by
the Partnership's or the Local Partnership's management;
o Discussed with management of the Partnership and the Managing
General Partner the market conditions for apartment
properties; conditions in the market for sales/acquisitions of
properties similar to those owned by the Local Partnerships;
historical, current and projected operations and performances
of the Properties; the physical condition of the Properties
including any deferred maintenance; and other factors
influencing the value of the Properties;
o Performed site visits of the Properties;
o Reviewed data concerning, and discussed with property
management personnel, local real estate rental market
conditions in the market of each Property, and reviewed
available information relating to acquisition criteria for
income-producing properties similar to the Properties;
o Reviewed information provided by management relating to debt
encumbering the Properties and Housing Assistance Program
contract provisions pertaining to the Properties;
o Conducted such other studies, analyses, inquiries, and
investigations as we deemed appropriate.
In rendering this opinion, we have relied upon and assumed, without
independent verification, the accuracy and completeness of all financial
information, management reports and data, and all other reports and information
that were provided, made available or otherwise communicated to us by the
Partnership, the Company, the General Partners and their affiliates, the Local
Partnerships or management of the Properties. We have not performed an
independent appraisal, engineering study or environmental study of the assets
and liabilities of the Partnership. We have relied upon the representations of
the Partnership, the Company, the General Partners and their affiliates, the
Local Partnerships and management of the Properties concerning, among other
things, any environmental liabilities, deferred maintenance and estimated
capital expenditure and replacement reserve requirements, and the terms and
conditions of any debt or regulatory agreements encumbering the Properties. We
have also relied upon the assurance of the Partnership, the Company, and the
General Partners and their affiliates, and management of the Properties that any
financial statements, budgets, forecasts, capital expenditure and replacement
reserve estimates, debt and regulatory agreement summaries, value estimates and
other information contained in the Consent or otherwise provided or communicated
to us were reasonably prepared on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments; that no material changes have occurred in the value of the Properties
or other information reviewed between the date such information was provided and
date of this letter; that the Partnership, the Company, the General Partners and
their affiliates, the Local Partnerships and the management of the Properties
are not aware of any information or facts that would cause the information
supplied to us to be incomplete or misleading in any material respect; that the
highest and best use of each of the Properties is as improved; and that all
calculations and projections were made in accordance with the terms of the
Partnership and Local Partnerships Agreements and the existing and anticipated
regulatory agreements.
We have not been requested to, and therefore did not: (i) select the
method of determining the Aggregate Property Valuation or the Purchase Price to
be paid for the Real Estate Interests in the Sale; (ii) make any recommendation
to the Partnership or its partners with respect to whether to approve or reject
the proposed Sale; or (iii) express any opinion as to (a) the tax consequences
of the proposed Sale to the Limited Partners or the General Partners'
determination of any amounts included in the Aggregate Property Valuation
intended to satisfy certain potential tax liabilities of the Limited Partners,
(b) the terms of the Partnership Agreement, the fairness of the proposed
amendments to the Partnership Agreement, or the terms of any agreements or
contracts between the Partnership, the Company, any affiliates of the General
Partners, and the Local Partnerships, (c) the General Partners' business
decision to effect the proposed Sale, (d) any adjustments made to the Aggregate
Property Valuation to determine the Purchase Price to be paid for the Real
Estate Interests and the net amounts distributable to the partners, including
but not limited to, balance sheet adjustments to reflect the General Partners'
estimate of the value of current and projected net working capital balances and
cash and reserve accounts of the Partnership and the Local Partnerships
(including debt service and mortgage escrow amounts, operating and replacement
reserves, and surplus cash reserve amounts and additions) and the income
therefrom, the General Partners' determination that no value should be ascribed
to any reserves of the Local Partnerships or the cash flow from the Properties
in excess of certain limitations on dividends to the Partnership, the General
<PAGE>
Annex D
PROPOSED AMENDMENTS
TO THE PARTNERSHIP AGREEMENT
Set forth below is the text of the proposed Amendments to the Partnership
Agreement for which the consent of the Limited Partners is being sought in
connection with the Sale.
Section 9.3(d) of the Partnership Agreement is amended to read as follows:
"(d) the Partnership will not sell any Project or Project
Interest, except pursuant to exempted sales to qualified
tenant groups, if the cash proceeds from the sale of any
Project or Project Interest, or any Projects or Project
Interests sold in a single transaction, would be less than the
Aggregate Net Tax Liability (as defined below), and upon any
sale or refinancing the Partnership shall not reinvest any
proceeds thereof prior to distributing to the Partners from
the proceeds sufficient cash to pay the Aggregate Net Tax
Liability, and in no event will the Partnership reinvest such
proceeds. For purposes hereof, the Aggregate Net Tax Liability
shall equal the aggregate state and federal taxes payable on
the sale of any Project or Projects or any Project Interest or
Project Interests (assuming the maximum federal income tax
rate then in effect and an effective state income tax rate of
5%) minus the aggregate tax benefit resulting from the ability
of the Limited Partners to deduct the suspended passive losses
that become deductible as a result of such sale against
ordinary income; assuming that all such suspended passive
losses in excess of passive losses which could be deducted
prior to 1987 and during the period from 1987 to 1990 under
certain transition rules provided under the Tax Reform Act of
1986 remain available and that the Limited Partner has
sufficient ordinary income that would otherwise have been
taxed at the 39.6% marginal tax rate for federal income tax
purposes to fully utilize such losses at such rate and
assuming an effective state income tax rate of 5%."
Section 9.3(k) of the Partnership Agreement is amended to read as
follows: "(k) the Partnership will not sell or lease any
Project or Project Interest to the General Partners or their
affiliates; provided that the foregoing shall not apply to any
sale of Project Interests made in connection with the proposed
Sale described in the Definitive Consent Solicitation
Statement of the Partnership dated May __, 1998."
Section 9.1(h) of the Partnership Agreement is amended to read as
follows: "(h) to enter into and carry out agreements of any
kind, provided that all contracts with the General Partners or
their affiliates must provide for termination by the
Partnership on 60 days written notice, without penalty, and to
do any and all other acts and things necessary, proper,
convenient, or advisable to effectuate and carry out the
purposes of the Partnership. The limitation contained in the
proviso in the preceding sentence shall not apply to any
agreement entered into in connection with the proposed Sale."
<PAGE>
Annex E
July __, 1998
Real Estate Associates Limited II
9090 Wilshire Boulevard
Beverly Hills, CA 90211
Re: Amendments to the Agreement of Limited Partnership of
Real Estate Associates Limited II
Dear Sir or Madam:
We have acted as counsel to Real Estate Associates Limited II,
a California limited partnership (the "Partnership"), in connection with the
amendments to the Partnership's Restated Certificate and Agreement of Limited
Partnership (the "Partnership Agreement") of the Partnership, the form of which
is attached hereto as Exhibit A (the "Amendments").
In rendering this opinion, we have examined originals or
copies of the following:
(i) The Partnership Agreement as certified by an
officer of National Partnership Investments Corp.
("NAPICO"), the managing general partner of the
Partnership;
(ii) The Certificate of Limited Partnership of the
Partnership (the "Certificate of Limited
Partnership"), as certified by the Secretary of
State of the State of California and by an officer
of NAPICO;
(iii) An Agreement dated June 1, 1984 between
NAPICO and National Partnership Investments
Associates (the "General Partners' Agreement") as
certified by an officer of NAPICO;
(iv) The Definitive Consent Solicitation Statement
of the Partnership dated July __, 1998 ("Consent
Solicitation Statement"); and
(v) The Amendments.
The documents listed above are collectively referred to as the
"Documents".
In rendering this opinion we have made the following
assumptions, each as you have agreed, without any investigation or independent
verification: (i) the genuineness of all signatures of all persons executing any
or all of the Documents; (ii) the authenticity and completeness of all
documents, certificates and instruments submitted to us as originals; (iii) the
conformity with the originals of all documents, certificates and instruments
submitted to us as copies; (iv) the legal capacity to sign of all individuals
executing such documents, certificates and instruments; and (v) there are no
oral modifications or written agreements or understandings which limit, modify
or otherwise alter the terms, provisions, and conditions of, or relate to, the
transactions contemplated by the Documents.
As to matters of fact relevant to this opinion, as you have
agreed we have relied without independent investigation on, and assumed the
accuracy and completeness of, the certificate of an officer of NAPICO (referred
to herein as the "Officer's Certificate"). As you have agreed, we have not made
an investigation as to, and have not independently verified, the facts
underlying the matters covered by such Officer's Certificate.
We also have assumed, without any investigation or independent
verification, (a) the due authorization, execution, acknowledgment as indicated
thereon, and delivery of the Documents, and the validity and enforceability
thereof against all parties thereto, (b) that each party is validly existing,
has full power, authority and legal right to execute and deliver the Documents
to which it is a party and to carry out the transactions contemplated
thereunder, and that each is duly qualified and in good standing in each
jurisdiction where qualification is required,(c) that each party has complied
with any order, rule, and regulation or law which may be applicable to such
party with regard to any aspect of the transactions contemplated by the
Documents, (d) that in accordance with the Officer's Certificate, pursuant to
the General Partners Agreement, NAPICO has the power to make all decisions
pursuant to the Partnership Agreement to be made by the General Partners of the
Partnership and (e) that all actions taken by NAPICO in connection with the
Consent Solicitation Statement have been duly authorized by all necessary
corporate action on the part of NAPICO.
Our opinions are limited to the California Uniform Limited
Partnership Act.
We express no opinion except as expressly set forth below and
no other opinions shall be implied. We express no opinion as to state and
federal laws, rules, regulations, principles and requirements (collectively
"laws") in the following areas: securities or "Blue Sky" laws, including without
limitation, any opinions with respect to the compliance of the Consent
Solicitation Statement with the securities laws, or laws of fiduciary duty. We
disclaim any obligation to update any of the opinions expressed herein for
events (including changes of law or fact) occurring after the date hereof.
We have not reviewed and our opinion does not extend to any
agreements, documents or instruments other than those which we have expressly
acknowledged herein examining.
Based upon and subject to the foregoing, we are of the opinion
that the Amendments, if duly approved by the limited partners of the Partnership
pursuant to the Consent Solicitation Statement, will not violate the Partnership
Agreement or the California Uniform Limited Partnership Act.
This opinion is solely for the benefit of the addressee in
connection with the transaction contemplated by the Consent Solicitation
Statement, and is not to be relied upon in any other context nor quoted in whole
or in part, nor otherwise referred to.
Sincerely,
