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 ss. 240.14a-11(c) or ss. 240.14a-12
......................REAL ESTATE ASSOCIATES LIMITED III.......................
(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 III
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 III (the
"Partnership" or "REAL III"), is writing to recommend, and seek your consent to,
(i) a proposed sale of the interests of the Partnership (the "Real Estate
Interests") in the real estate assets of twenty-two of the thirty-two 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." The
twenty-two 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."
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. Twenty-one of the
twenty-two above-referenced Local Partnerships each 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 remaining
Local Partnership owns a conventional multi-unit residential apartment complex.
The properties owned by the Local Partnerships are each referred to herein as a
"Property." 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 ten 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 tax benefits equal to
at least 111.0% to 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 $78,840,875,
which is payable $1,950,530 in cash and $76,890,345 by assumption by the
REIT of certain mortgage indebtedness, it is anticipated that the
Partnership will make an aggregate distribution to Limited Partners of
$6,881,025, or approximately $1,201 per unit, which represents
distributions from the net proceeds of the Sale plus approximately
$4,950,000 of the available cash reserves of the Partnership. Each unit
consists of two limited partnership interests and warrants to purchase two
additional limited partnership interests, which were sold at an original
cost of $5,000 per unit. The per unit distribution amount of $1,201 is
anticipated to be sufficient to pay any federal and state income taxes that
would be due in connection with the Sale, assuming (i) that Limited
Partners have
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suspended passive losses of $3,262 per unit from the Partnership; (ii) that
such losses are available to offset ordinary income taxed at the 39.6%
marginal federal rate; and (iii) federal and effective state capital gains
rates of 25% and 5%, respectively.
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 Partnership will retain
its interests in a Property if the general partner of 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 Twenty of the twenty-two 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. For Limited Partners
who have been able to use all of the passive losses generated by the
Partnership on a current basis, the Sale and the distribution of available
cash will result in a federal and state income tax cost of approximately
$1,394 per unit in excess of the cash distribution. For Limited Partners
who do not have sufficient taxable income to be taxed at a 39.6% marginal
rate, or who have other losses available to deduct against their taxable
income and therefore could not fully utilize their suspended passive losses
to offset their ordinary income, the sale could result in a federal and
state tax cost in excess of cash distributions.
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 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 III
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 III, a California
limited partnership (the "Partnership" or "REAL III"), 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
twenty-two of the thirty-two 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 $78,740,345 (the "Purchase Price"), payable $1,950,530 in cash and
$76,890,345 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 twenty-two 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."
Twenty-one of the twenty-two Local Partnerships 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. The remaining Local Partnership owns a
conventional multi-unit residential apartment complex. 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 REIT has agreed to assign its interests in one of the
local partnerships that is the general partner of six of the Local Partnerships
immediately after consummation of the Sale.
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 ten 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 the
Limited Partners of approximately $1,201 per unit of limited partnership
interests in the Partnership from the net proceeds of the Sale and approximately
$4,950,000 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
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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 with the REIT Transaction. If the Partnership
is unable to obtain a consent to the Sale from 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."
This Consent Solicitation Statement and the accompanying form of Consent of
Limited Partner are first being mailed to Limited Partners on or about ________
__, 1998.
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
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.
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.................................7
Limited Partner Approval............................................8
Third-Party Opinion.................................................8
Recommendation of the Managing General Partner......................8
Conflicts of Interest...............................................9
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
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..............................................20
Arrangements with General Partners of the Local Limited
Partnerships....................................................20
Source of Funds....................................................21
Transaction Costs..................................................21
Distribution of Sale Proceeds; Accounting Treatment................22
Conditions.........................................................22
Fairness Opinion...................................................23
Alternatives to the Sale...........................................28
Recommendation of the Managing General Partner; Fairness...........30
Post-Sale Operations of the Partnership............................35
Historical and Pro Forma Financial Information.....................35
IV. AMENDMENTS TO THE PARTNERSHIP AGREEMENT............................43
V. CONFLICTS OF INTEREST..............................................43
General............................................................43
Fiduciary Responsibility...........................................45
VI. SELECTED FINANCIAL INFORMATION.....................................46
VII. FEDERAL INCOME TAX CONSEQUENCES....................................47
VIII. LEGAL PROCEEDINGS..................................................48
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Page
IX. LIMITED PARTNERS CONSENT PROCEDURE.................................49
Distribution of Solicitation Materials.............................49
Voting Procedures and Consents.....................................49
Completion Instructions............................................50
Withdrawal and Change of Election Rights...........................50
No Dissenters' Rights of Appraisal.................................50
Solicitation of Consents...........................................50
X. IMPORTANT NOTE.....................................................51
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 - Proposed Amendments to the Partnership Agreement.
Annex E - Legal Opinion of Battle Fowler LLP.
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AVAILABLE INFORMATION
Real Estate Associates Limited III 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 on Form 10-K of the Partnership for the fiscal year ended
December 31, 1997, and
Quarterly Report on Form 10-Q of the Partnership 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 III is a California limited partnership, the
general partners of which are National Partnership Investments Corp. ("NAPICO")
and National Partnership Investments Associates, a California limited
partnership ("NPIA").
The Partnership holds limited partnership interests in twenty-six local
limited partnerships and a general partner interest in Real Estate Associates
("REA") which in turn holds limited partnership interests in an additional six
local limited partnerships. Accordingly, REAL III holds directly, or indirectly
through REA, investments in thirty-two local limited partnerships. A majority of
the thirty-two local 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 or local government. 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 the
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
Properties are located in thirteen states and Puerto Rico. Ten of the Properties
are located in California. 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 July 25, 1980. See "THE PARTNERSHIP."
The Sale
The Partnership proposes to sell its interests in 22 of the 32
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 ten property- owning limited partnerships with
an aggregate of 556 apartment units.
The aggregate consideration for the Real Estate Interests that the Managing
General Partner currently anticipates will be included in the Sale is
$78,840,875 payable $1,950,530 in cash and $76,890,345 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 has agreed to assign
its interests in one of the local partnerships that is the general partner of
six of the Local Partnerships immediately after consummation of the Sale. 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 $1,201 in cash per unit,
which represents the distributions from the net proceeds of the Sale, plus
approximately $4,950,000 of the available cash of the Partnership. The units,
each of which consists of two limited partnership interests and warrants to
purchase two additional limited partnership interests, were originally sold for
$5,000 per unit (each, a "Unit"). All expenses of the Sale will be borne by the
Partnership.
The distribution is anticipated to be sufficient to pay any federal and
state income taxes that would be due in connection with the Sale, assuming that
Limited Partners have suspended passive losses of $3,262 per Unit from the
Partnership that could be deducted in full against such Limited Partners'
ordinary income that is taxed at a federal rate
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of 39.6% and an effective state income tax rate of 5%. For such Limited
Partners, the Sale and the distribution of available cash should result, in a
cash distribution of $61 per Unit in excess of the federal and state income tax
cost (i.e. the amount by which the tax payable on the sale exceeds the tax
savings resulting from deducting the passive losses) of $3,262 per Unit,
assuming such Limited Partner has sufficient taxable income taxed at federal tax
rates of 39.6% on ordinary income and 25% on long-term capital gain attributable
to depreciation (and assuming an effective 5% state tax). For Limited Partners
who do not have sufficient taxable income to be taxed at a 39.6% marginal
federal rate or who have other losses available to deduct against their taxable
income and therefore could not fully utilize such suspended passive losses to
offset their ordinary income, the Sale could result in a federal and state tax
cost in excess of cash distributions. For Limited Partners who have been able to
use all of the passive losses generated by the Partnership on a current basis,
the Sale will result in additional federal and state income tax costs of
approximately $1,394 in excess of the cash distribution. 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. 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, will be entitled to receive
distributions in connection with the Sale of $69,505 in the aggregate, including
$50,000 in distributions from available cash reserves of the Partnership.
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 $1,201 per
Unit to Limited Partners, including distributions out of the net proceeds
from the sale of $1,832,025 and $4,950,000 from the distribution of
available cash reserves, which amount is anticipated to be sufficient to
pay any federal and state income taxes that would be payable in connection
with the Sale, assuming (i) that Limited Partners have suspended passive
losses of $3,262 per Unit from the Partnership; (ii) that such losses are
available to offset ordinary income taxed at the 39.6% marginal federal
rate and (iii) federal and state effective capital gains rates of 25% and
5%, respectively. It should be noted that, while the distribution of the
cash held by the Partnerships 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 resulting in an increase
in the tax payable by a Limited Partner at such time. For a discussion of
the bases of these assumptions, See "FEDERAL INCOME TAX CONSEQUENCES." The
Partnership has never made distributions from operations 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
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<PAGE>
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 $85,545,163 (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 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 to be received
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 each of the Local Partnerships, the
right to manage each of 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.
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<PAGE>
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 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 nineteen 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. All but one of the Properties are 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
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<PAGE>
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 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.
o Anticipated Tax Benefits/Tax Law Changes. Subsequent to the formation of
the Partnership, tax law changes reduced the tax benefits anticipated to be
received by Limited Partners by not allowing Limited Partners to currently
deduct many of the losses generated by the Partnership against a Limited
Partner's other taxable income from non-passive sources. As a result,
Limited Partners may have a significant amount of suspended passive losses
available to reduce the tax impact of the taxable gain generated by the
Sale. If a Limited Partner has not utilized any of the passive activity
losses allocated to such Limited Partner in excess of those amounts
permitted under certain transitional rules, the Limited Partner will have a
net federal and state tax cost of approximately $1,135 per Unit. Because
passive losses are generally only deductible against passive income after
1986, the Managing General Partner does not have any basis for determining
the amount of such passive losses which have previously been utilized by
Limited Partners. The anticipated cash distribution of approximately $1,201
per Unit would be sufficient to pay the federal and state tax liability
arising from the Sale, assuming a federal capital gains rate of 25%, the
current capital gains rate and that Limited Partners have suspended passive
losses of $3,262 per Unit from the Partnership (which is generally the
amount of passive losses that a Limited Partner would have had it not
utilized any of its passive losses) and assuming an effective state tax
rate of 5%. It should be noted that, while the distribution of the cash
held by the Partnership will currently provide cash to pay 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.
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.
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<PAGE>
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 $8,649 per Unit. It is
not anticipated that the Sale will produce ordinary income attributable to
depreciation recapture. A substantial portion of the cash distributions to
pay tax liability is provided by distribution of $864 per Unit of the
Partnership's available cash reserves. 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 Limited Partners who have been able to
use all of the passive losses generated by the Partnership on a current
basis, the Sale should result in a federal and state income tax cost of
approximately $1,394 per Unit in excess of distributions. In addition,
Limited Partners who have available all of the suspended passive losses
generated by the Partnership, but whose ordinary income is not taxed at the
39.6% marginal federal rate, may incur a federal income tax cost in excess
of the cash distribution made in connection with the Sale. 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.
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 made 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 that could be
sold to a third party.
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<PAGE>
o Uncertainty of Local General Partner Buyouts. While affiliates of the
Managing General Partner have entered into option agreements with nineteen
of the twenty unaffiliated local general partners with respect to the
buyouts of the interests in 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 on
acceptable terms, which in turn could reduce the cash from the Sale
available for distribution to the Limited Partners. If the Partnership
retains its interests in any of the Local Partnerships, the cash flows
generated by any such Local Partnerships are not likely to be adequate to
meet the operating expenses of the Partnership on an ongoing basis and the
Partnership may be required to utilize a portion of its cash reserves to
meet its operating expenses. The Managing General Partner intends to
eventually dispose of the Partnership's interests in the limited
partnerships not included in the Sale, then wind up the affairs of the
Partnership, although the time frame for such activities cannot be
determined at this time. To the extent that the ultimate cost of the
buyouts of the 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 Partner's 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 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.
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 Managing General Partners or their
affiliates. 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 (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 and any future disposition of the Partnership's real
property assets.
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
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<PAGE>
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 in interest of the
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.
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 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 $27,800, plus $4,100 per Property, or an
aggregate of approximately $122,000. 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."
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, is 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."
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<PAGE>
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."
6. Affiliates of the Managing General Partner have entered into option
agreements with respect to the buyout of the interests held by the general
partners of nineteen 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 general partners of the two 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. 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, 25% for capital gain attributable to depreciation recapture
and an effective state tax rate of 5%. In addition, such calculations assume
that Limited Partners have suspended passive losses of $3,262 per Unit from the
Partnership and that such losses are available to offset ordinary income taxed
at the 39.6% marginal federal rate and an effective state tax rate of 5%. In
light of the suitability standards that Limited Partners met at the time of
their original investment in the Partnership, the Managing General Partner
assumed for purposes of calculating the tax liabilities
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<PAGE>
resulting from the proposed Sale that each Limited Partner will have taxable
income in excess of $155,950 in 1998 (which is the income level at which married
taxpayers effectively become subject to a 39.6% marginal rate). While the
financial circumstances of the Limited Partners may vary considerably, the
Managing General Partner believes it is reasonable to assume that the majority
of the current Limited Partners will be in the highest federal tax bracket in
1998. 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."
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 and 1993 and for 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 the Partnership's 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,
--------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1998 1997
------------ ------------ ------------- ------------ ------------ ------------- -------------
Operating Expenses $ 921,391 $ 820,938 $ 834,610 $ 758,781 $ 729,818 $ 384,207 $ 202,344
============ =========== ============ =========== =========== ============ ============
Loss From Operations $ (443,767) $ (518,472) $ (567,421) $ (577,031) $ (586,269) $ (259,368) $ (92,400)
Distributions From Limited
Partnerships Recognized as
Income 1,072,912 858,869 765,514 683,491 987,697 40,458 81,041
Equity in Income of Limited
Partnerships and Amortization
of Acquisition Costs 255,652 383,682 887,919 539,729 708,865 64,000 64,000
------------ ----------- ----------- ----------- ----------- ----------- ------------
Net Income $ 884,797 $ 724,079 $ 1,086,012 $ 646,189 $ 1,110,293 $ (154,910) $ 52,641
============ =========== =========== =========== =========== =========== ============
Net Income Allocated to Limited
Partners $ 875,949 $ 716,838 $ 1,075,152 $ 639,727 $ 1,099,190 $ (153,361) $ 52,115
Net Income (Loss) per Limited
Partnership Interest $ 77 $ 63 $ 95 $ 56 $ 96 $ (14) $ 5
============ =========== =========== =========== =========== ============ ============
Total Assets $ 11,960,231 $10,933,018 $10,185,039 $ 9,095,839 $ 8,489,578 $ 11,951,768 $ 11,022,256
============ =========== =========== =========== =========== ============ ============
Investments in Limited
Partnerships $ 1,249,421 $ 1,063,487 $ 930,576 $ 690,570 $ 679,271 $ 1,313,422 $ 1,127,487
============ =========== =========== =========== =========== ============ ============
Partners' Equity $ 9,925,762 $ 9,040,965 $ 8,316,886 $ 7,230,874 $ 6,584,685 $ 9,770,852 $ 9,093,606
============ =========== =========== =========== =========== ============ ============
Limited Partners' Equity $ 10,025,480 $ 9,149,531 $ 8,432,693 $ 7,357,541 $ 6,717,814 $ 9,872,119 $ 9,201,646
============ =========== =========== =========== =========== ============ ============
Limited Partners' Equity per $ 872 $ 796 $ 733 $ 640 $ 584 $ 858 $ 800
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
$608,000, which the Partnership is expected to pay using cash equivalents held
by the Partnership. The transaction costs will be borne by the Partnership
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<PAGE>
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.
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 July 25, 1980. On January 5, 1981 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 September 30, 1997 there were 11,450 limited partnership
interests of the Partnership outstanding.
The Managing General Partner of the Partnership is NAPICO. NPIA is the
non-managing General Partner of the Partnership. The business of the Partnership
is conducted primarily by NAPICO. 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.
-11-
<PAGE>
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
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-six local
limited partnerships and a general partner interest in Real Estate Associates
("REA") which in turn holds limited partnership interests in an additional six
limited partnerships, a majority 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 local housing agency. The remaining local limited
partnerships each own a conventional multi-unit residential apartment complex.
The Local 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
limited partnerships retain responsibility for maintaining, operating and
managing the properties.
The 32 real estate holding limited partnerships generated $1,142,630 in
cash flow to the Partnership in 1997, before Partnership expenses of
approximately $921,391 and interest income of $477,624. At December 31, 1997,
the Partnership had a cash reserve of approximately $10,575,810, $5,000,000 of
which will be distributed to the Limited Partners and the General Partners after
consummation of the Sale.
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<PAGE>
The Properties
During 1997, all of the Properties in which REAL III had invested were
substantially rented. The following is a schedule of the status, as of December
31, 1997, of the Properties owned by the limited partnerships in which REAL III
is a limited partner. Asterisks denote Properties to be included in the Sale.
<TABLE>
<S> <C> <C> <C> <C>
Units Authorized for
Rental Assistance under Percentage of
Name & Location No. of Units Section 8/State Program Units Occupied Total Units
- ------------------------------ ---------------- ------------------------ -------------- -------------
Bowin Place* 193 191/0 191 99%
Detroit, MI
Casa de las Hermanitas* 88 88/0 88 100%
Los Angeles, CA
Charlotte Lakeview, Riverview 553 114/553 514 93%
Residential Project*
Rochester, NY
Creekview Apts.* 80 80/0 80 100%
Stroudsburg, PA
Foothill Gardens* 54 54/0 54 100%
Los Angeles, CA
Frazier Park Apts.* 60 60/0 60 100%
Baldwin Park, CA
Gary Manor* 198 198/0 196 99%
Gary, IN
Grandview Homes* 26 26/0 26 100%
Los Angeles, CA
Hidden Pines Apts. 40 40/0 35 88%
Greenville, MI
Highlawn Place Apartments* 133 133/0 133 100%
Huntington, WV
Jenks School Apts. 83 82/0 83 100%
Pawtucket, RI
Kern Villa* 49 49/0 49 100%
Los Angeles, CA
Lakeside Apts. 32 0/13 32 100%
Stuart, FL
New Baltimore* 101 101/0 99 98%
New Baltimore, MI
Panorama Park Apts.* 66 66/0 64 97%
Bakersfield, CA
Ramblewood Apts. 64 0/13 59 92%
Fort Payne, AL
Santa Maria Apts. 86 86/0 86 100%
San German, Puerto Rico
Senior Chateau on the Hill* 185 183/0 181 98%
Cincinnati, OH
Sheraton Towers* 97 97/0 97 100%
High Point, NC
South Bay Villa* 80 80/0 80 100%
Los Angeles, CA
Sunset Grove Apts. 22 22/0 22 100%
Carson City, MI
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<PAGE>
Units Authorized for
Rental Assistance under Percentage of
Name & Location No. of Units Section 8/State Program Units Occupied Total Units
- ------------------------------ ---------------- ------------------------ -------------- -------------
Sunshine Canyon 26 26/0 26 100%
Stanton, MI
Tujunga Gardens* 54 53/0 54 100%
Los Angeles, CA
Twenty-nine Palms* 48 47/0 40 83%
Twenty-nine Palms, CA
Village Apts. 51 51/0 49 96%
La Follette, TN
Village of Kaufman* 68 68/0 66 97%
Kaufman, TX
Village Grove Apts.* 104 None 97 93%
Corona, CA
Vincente Geigel Polanco Apts. 80 80/0 80 100%
Isabela, Puerto Rico
Vista De Jagueyes* 73 73/0 73 100%
Aguas Buenas, PR
Westgate Apts. 72 33/16 62 86%
Albertville, AL
Wilderness Trail Manor* 124 124/0 124 100%
Pineville, KY
Wilkes Towers*
Wilkesboro, NC 72 72/0 70 97%
- ------------------------------ ---------------- ------------------------ -------------- -------------
TOTALS 3,062 2,376/195 2,970 97%
================ ======================== ============== =============
</TABLE>
Each of the Properties is approximately 16 years old. Routine repair and
maintenance and capital expenditures made out of operating cash and reserves
maintained by the local limited partnerships amounted to approximately
$3,656,065 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 an affiliate of the 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 2,064 registered holders of Units. None of the
Units are beneficially owned by Casden. Ten limited partnership interests are
beneficially owned by NPIA, seven limited partnership interests are beneficially
owned by Charles H. Boxenbaum and two limited partnership interests are
beneficially owned by Bruce E. Nelson.
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 $210 and $5 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.
-14-
<PAGE>
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.
The Partnership has not made any distributions from operations to Limited
Partners since its inception. In 1988 a conventional apartment complex in
Corona, California was sold and Sales proceeds of $584 per Unit were distributed
to the Limited Partners. 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 the distributions to the Partnership.
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 of the
Properties. Under the HAP Contracts, which generally have from one to twenty-two
years remaining, 1,957 of the apartment units at the twenty-one Properties to be
included in the Sale (which the Partnership has agreed to lease to low or
moderate income tenants) receive
-15-
<PAGE>
rental assistance payments from HUD. During 1997, the Local Partnerships
received an aggregate of approximately $11,390,000 in rental assistance payments
under the HAP Contracts. The properties subject to HAP Contracts 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.
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
-16-
<PAGE>
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 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.
-17-
<PAGE>
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.
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 limited 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
for 1997. Limited Partners realized approximately $154 per Unit in interest
income from activities at the local limited partnerships and interest income
earned by the Partnership in 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
-18-
<PAGE>
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
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 III owns direct or indirect interests in each of the Local
Partnerships that hold title to the real estate assets that the REIT has offered
to purchase. All but two of the general partners of such Local Partnerships are
unaffiliated with the General Partners of REAL III 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
(REAL III) 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 nineteen of the twenty unaffiliated local general
partners.
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The purchase prices to be paid to these unaffiliated local general partners for
their interests have been determined as a result of arm's-length 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.
Arrangements with General Partners of the Local Limited Partnerships
Affiliates of the Managing General Partner have entered into option
agreements with respect to buyouts of the interests in the Local Partnerships
held by the general partners of twenty-one of the twenty-two Local Partnerships,
all but two of whom are unaffiliated with Casden. The two affiliated local
general partners are entities in which Casden owns a controlling interest.
Except for the buyouts of the 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 $6,704,288 for their interests in, and rights to
manage, the Local Partnerships. There can be no assurance that affiliates of the
Managing General Partner will be able to successfully complete buyouts from all
of the unaffiliated general partners of the Local Partnerships. 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. If
the Partnership retains its interests in any of the Local Partnerships, the
Partnership may be required to reduce the distribution resulting from the Sale.
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 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 Partner's estimates, distributions to Limited Partners will be
increased.
In the case of two of the Local Partnerships, the general Partners of such
partnerships are affiliates of the Managing General Partner. The affiliated
general partners are directly or indirectly wholly owned by Alan Casden, who
indirectly owns 100% of the Common Stock of NAPICO. The Local Partnerships in
which affiliates of
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NAPICO are the general partners own 116 of the 2,506 housing units in which the
Local Partnerships have invested, or 5%. $251,250 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 determined 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.
As part of its purchase of the partnership interests and management
contracts of the general partners of the Local Partnerships, the REIT has also
simultaneously negotiated the purchase of certain promissory notes held by such
local general partners (the "Notes") based on an implied valuation below the
face value of the Notes. The Notes, which have an aggregate face value of
$2,057,000, including accrued and unpaid interest, were issued by the Local
Partnerships or the Partnership. In most cases, the Notes are secured by the
Partnership's interests in the relevant Local Partnership. Most of the Notes
will mature within the next three years. The Local Partnerships and the
Partnership are not expected to have sufficient resources to satisfy all of the
Notes as they come due. In connection with its calculation of the Purchase
Price, the Managing General Partner deducted the face values of the Notes from
the Aggregate Property Valuation, because the Notes represent payments due to
the local general partners before any distributions from the Local Partnerships
to the Partnership may be made out of the proceeds of a sale of the Properties.
The benefit resulting from the purchase of the Notes below the full amount
inures to the benefit of the REIT. See "THE SALE -- Recommendation of the
Managing General Partner; Fairness."
Forest City Equity Services, Inc. ("Forest City"), the general partner of
one of the Local Partnerships holding title to Properties in which the
Partnership holds an indirect interest (Bowin Place), and which is the general
partner of eleven additional partnerships in which a NAPICO-sponsored limited
partnership is the limited partner, has agreed in principle, in connection with
the proposed Sale, to transfer its interests in ten other partnerships to the
REIT in exchange for the Partnership's limited partnership interest in the Bowin
Place Property, an aggregate of $400,000 in cash and another NAPICO-sponsored
partnership's limited partnership interest in an additional partnership.
Approval of the Sale by the Limited Partners shall be deemed to include approval
of the proposed transaction with Forest City. The REIT will acquire the interest
in the Bowin Place Property from the Partnership and then assign such interests
to Forest City as part of the REIT Transaction. See "CONFLICTS OF INTEREST."
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 Partnership's transaction
costs in connection with the Sale, which are payable out of the Partnership's
available cash on hand, will be as follows:
Accounting.............................. 185,000
Legal................................... 50,000
Escrow Costs (Seller's portion)......... 25,000
Title Policies (Seller's portion)....... 35,000
Structural and Engineering Reports...... 180,000
Stanger Fairness Opinion................ 122,000
Consent Solicitation Costs.............. 6,000
Miscellaneous Costs..................... 5,000
-------------------------------------------------
Total 608,000
===========
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The General Partners will receive a distribution of approximately $69,505
for their interests in the Partnership in connection with the Sale and
distribution of cash reserves. 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:
o First, the General Partners are 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.
o 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 $1,950,530 and (ii) cash available
for distribution (after payment of expenses) of approximately $5,000,000, the
Limited Partners will be entitled to receive $6,881,025 in cash ($1,201 per
Unit). Assuming cash balances as of March 31, 1998, the Partnership would retain
cash reserves after the Sale (and payment of transaction costs and cash
distributions) of approximately $4,840,000. NAPICO and NPIA will be entitled to
receive a distribution in connection with the Sale of $69,505.
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;
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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
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.
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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 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 during December 1997 through May 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, and the operating budgets for 1998 for each Property,
as prepared by the Managing General Partner or local general Partners 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, HAP Contracts or other
regulatory agreements encumbering the Properties, and expectations of management
regarding the impact of various regulatory factors and proposed changes on the
operating results of the Properties.
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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 or other rental rate restrictions (the "Subsidized
Properties") 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) for Subsidized Properties, rents allowed for each type of unit
under the existing HAP Contract or other regulatory agreements ("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 or
other regulatory agreements 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 of contract or market rental rates,
as appropriate, and estimates of ancillary income and occupancy. Contract Rents
were utilized for subsidized Properties during the term of the HAP contract or
other regulatory agreements, with a mark to market of rental rates upon
expiration of the HAP Contract or other regulatory agreements. 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 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 Contracts or other regulatory agreements, or ten
years in the case of the conventional properties. In the case of Subsidized
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 for the Subsidized Properties, income during the contract period
was generally held flat for Subsidized Properties or was escalated at a rate to
provide sufficient income to pay operating expenses and debt service. For the
purpose of determining the Subsidized Properties' residual value, as described
below, estimated market rental rates were generally escalated at 3% per annum.
In the case of the conventional property, effective rate was escalated at 3.0%
per year during the holding period. Effective expense escalators generally
ranged from approximately 2.5% to 3.0%.
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As part of its DCF Analysis, Stanger then estimated the residual values of
the Properties. In the case of the Partnership's one conventional,
non-subsidized property (the "Conventional Property"), Stanger employed a direct
capitalization technique. The estimated net operating income after replacement
reserves in the eleventh year of operations was capitalized utilizing terminal
capitalization rates ranging from 10.5% to 11.0% and the resulting value was
reduced by estimated sales costs of 3%.
In the case of Subsidized Properties, Stanger evaluated the residual
Property value at the time of the existing HAP Contract or other regulatory
agreements expiration based upon the assumption that whether or not the HAP
Contract or other regulatory agreement 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).
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 Subsidized Property. Where existing 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 12.0% 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, for Subsidized Properties, (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: (i) Subsidized Properties: leveraged cash flow discount rates ranged from
9% to 12% 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%; (ii) Conventional Property: free-and-clear cash flow and
residual discount rates ranged from 11.25% to 12.25%. 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 $83,550,000 to
$85,370,000 and that the Aggregate Property Valuation of $85,545,163 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
$59,270,000 to $65,240,000 and that the Aggregate Property Valuation of
$85,545,163 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 Free- and-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 or other regulatory agreements expire and
the Subsidized
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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 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 its 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 or other regulatory agreements 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 or other regulatory agreements 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 or other regulatory agreements 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, (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, any
affiliates of the Managing General Partner and the Local Partnerships, (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
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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 and capital market, and other conditions 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 $122,000. 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 for 1997.
Depreciation deductions that are primarily responsible for generating losses
realized by the Limited Partners should continue to decline until the end of the
depreciable lives of the Properties, when taxable income to Limited Partners
will exceed cash distributions. Federal depreciation for all of the Properties
will cease to be available within one year. 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
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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 III) 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 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 III 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 Managing General Partner of REAL III, 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. 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
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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.
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 were 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; and (d) its belief that the Purchase Price represents a
higher amount than a third party would offer the Partnership for the Real Estate
Interests.
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.
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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 distribution restrictions with respect to
Properties subject to distribution restrictions) for such Local Partnerships 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 Partnerships' distributions for 1996 (or
in certain cases used a three year average where the Managing General Partner
did not believe that the 1996 distributions were representative), 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 Local Partnerships 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. Based on the methodology utilized, the increase in
capital expenditures affected the value of five of the twenty-two Properties.
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 and on certain increases in the aggregate
valuation as a result of discussions with the fairness opinion provider, the
Managing General Partner determined that the twenty-two Properties owned by the
Local Partnerships that the Managing General Partner currently anticipates will
be included in the Sale have an aggregate value of $85,545,163 (the "Aggregate
Property Valuation"). The Managing General Partner subtracted from the Aggregate
Property Valuation (i) $6,704,288 for the aggregate estimated value of the
general partnership interests in the Local Partnerships (excluding the general
partnership interest of the local general partner that is an affiliate of the
Managing General Partner) and the local general partners' right to future
management fees, including $251,250 attributable to the right to receive the
future management fees payable to the one 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
$76,890,345. 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 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 out of the proceeds of the Sale of $1,950,530.
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.
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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 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
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.
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 $330,000 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
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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 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 General Partners 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 III 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 the
nineteen 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 net proceeds of the
Sale plus $5,000,000 of cash held by the Partnership. 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
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were $210.00 and $5.00 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 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 Partnership's 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 7, 1997, the Limited Partners received an offer from Equity
Resource Fund XX to purchase up to 550 of the outstanding Units for a purchase
price of $75.00 per Unit. On March 2, 1998, the Limited Partners received an
offer from Bond Purchase L.L.C. to purchase up to 570 of the outstanding Units
for a purchase price of $610.00 per Unit. On June 26, 1998, Bond Purchase L.L.C.
offered to purchase up to 570 of the outstanding Units for a purchase price of
$312.00 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 recommend 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 did not believe that the benefits to be derived from
such appraisals justified the expense to the Partnership. The Managing General
Partner did 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 III 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
-34-
<PAGE>
Managing General Partner does not believe that the original 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.
Post-Sale Operations of the Partnership
Following consummation of the Sale, the Partnership will retain its limited
partnership interests in ten 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 (of approximately $4,840,000 at March 31, 1998 after
Payment of transaction costs and cash distributions) 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 cash
flow (deficit) of approximately $111,045 and $(98,157), 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.
-35-
<PAGE>
<TABLE>
<CAPTION>
REAL ESTATE ASSOCIATES LIMITED III
(a California limited partnership)
Pro Forma Consolidated Balance Sheet
As of March 31, 1998
(unaudited)
Assets
<S> <C> <C> <C>
Pro Forma Pro Forma
Historical Adjustments Consolidation
------------- ----------- ----------------
Investments in Limited Partnerships $ 1,313,422 $ (683,280) (A) $ 630,142
Cash and Cash Equivalents 10,448,785 0 10,448,785
Other Assets 189,561 (154,561) (B) 35,000
------------- ------------ -------------
Total Assets $ 11,951,768 $ (837,841) $ 11,113,927
============= ============ =============
Liabilities and Partners' Equity (Deficiency)
Liabilities:
Notes and interest payable $ 1,962,027 $ 1,962,027 $ --
Accounts payable 218,889 -- (C) 218,889
------------- ------------ -------------
2,180,916 (1,962,027) 218,889
Partners' Equity (Deficiency):
General partners (101,267) 11,242 (D) (90,025)
Limited partners 9,872,119 1,112,944 (E) 10,985,063
------------- ------------ -------------
9,770,852 1,124,186 10,895,038
------------- ------------ -------------
Total Liabilities and Partners' Equity $ 11,951,768 $ (837,841) $ 11,113,927
=============== ============= =============
</TABLE>
-36-
<PAGE>
<TABLE>
<CAPTION>
REAL ESTATE ASSOCIATES LIMITED III
(a California limited partnership)
Notes to Pro Forma Balance Sheet
As of March 31, 1998
(unaudited)
Pro Forma Balance Sheet Adjustments
<S> <C>
(A) Investments in Limited Partnerships
Historical Balance $ 1,313,422
-----------------
Less:
Bowin Place (683,280)
-----------------
Pro Forma Adjustment (683,280)
-----------------
Pro Forma Balance $ 630,142
=================
(B) Other Assets
The Partnership advanced $154,561 to the Limited Partnership
holding title to the Village Grove property for working
capital purposes. The resulting pro forma balance was
determined as follows:
Historical Balance $ 189,561
-----------------
Less:
Village Grove (154,561)
-----------------
Pro Forma Adjustment (154,561)
-----------------
Pro Forma Balance $ 35,000
=================
(C) Note and Interest Payable
Historical balance $ 1,924,027
-----------------
Less:
Bowin Place (490,782)
Gary Manor (457,205)
Highlawn Place (225,000)
New Baltimore (238,648)
Senior Chateau (337,633)
Wilderness Trail (212,759)
-----------------
Pro Forma Adjustment (1,962,027)
-----------------
Pro Forma Balance $ 0
=================
-37-
<PAGE>
REAL ESTATE ASSOCIATES LIMITED III
(a California limited partnership)
Notes to Pro Forma Balance Sheet
As of March 31, 1998
(unaudited)
Pro Forma Balance Sheet Adjustments
(D) General Partners' Deficiency
1% of pro forma equity adjustments.
(E) Limited Partners' Equity
99% of pro forma equity adjustments.
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
REAL ESTATE ASSOCIATES LIMITED III
(a California limited partnership)
Pro Forma Consolidated Statements of Operations
(unaudited)
Three Months Ended March 31, 1998 Year Ended December 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Pro Forma Pro Pro Forma Pro
Historical Adjustments Forma Historical Adjustments Forma
------------- ----------- ------------- ----------- ------------ -----------
Interest and other income $ 124,839 $ (323) (A)$ 124,516 $ 477,624 $(32,482) (A) $ 445,142
------------- ---------- ------------- ---------- --------- ----------
Operating Expenses:
Legal and accounting 61,429 -- 61,429 76,993 -- 76,993
Management fees -general partner 113,700 (94,098) (B) 19,602 454,800 (376,392) (B) 78,408
Interest 37,750 (37,750) (C) 0 151,000 (151,000) (C) 0
Administrative 171,328 -- 171,328 238,598 -- 238,598
------------ ----------- --------- -------- --------- ---------
Total Operating Expenses 384,207 (131,848) 252,359 921,391 (527,392) 393,999
------------ ----------- --------- -------- --------- ---------
Income (Loss) from Operations (259,368) 131,525 (127,843) (443,767) 494,910 51,143
Distributions from Limited
Partnerships Recognized as Income 40,458 (10,772) (D) 29,686 1,072,912 (1,054,239) (D) 18,673
Equity in income of Limited
Partnerships
and Amortization of Acquisition
Costs 64,000 (28,701) (E) 35,299 255,652 (114,803) (E) 140,849
------------ ----------- --------- -------- --------- ---------
NET INCOME (LOSS) $(154,910) $ 92,052 $(62,858) $ 884,797 $(674,132) $210,665
============ ============ ========== ========== ========== ==========
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
REAL ESTATE ASSOCIATES LIMITED III
(a California limited partnership)
Notes to Pro Forma Consolidated Statement of Operations
(unaudited)
Pro Forma Statements of Operations Adjustments
<S> <C> <C>
Three Months
Ended Year Ended
March 31, 1998 Dec. 31, 1997
---------------- ---------------
(A) Interest Income
Reflects estimated interest income for the period related to cash
distributions that will no longer be received after the sale.
Historical Balance $ 124,839 $ 477,624
Pro Forma Adjustment (323) (32,482)
---------------- ----------------
Pro Forma Balance $ 124,516 $ 445,142
================ ================
(B) Management Fees
Reflects reduction in management fees, calculated at 0.4% of invested
assets, as result of the sale of the properties:
Historical Balance $ 113,700 $ 454,800
Pro Forma Adjustment (94,098) (376,392)
--------------- ----------------
Pro Forma Balance $ 19,602 $ 78,408
================ ================
Pro Forma Adjustment for sale properties is calculated as
follows:
Invested Assets $ 28,425,602 $ 113,702,409
---------------- ----------------
Less - sale properties:
29 Palms (1,828,236)
Bowin Place (7,404,267)
Casa de las Hermanitas (4,173,614)
Charlotte Lake (9,362,272)
Creekview (2,630,813)
Foothill Gardens (2,716,852)
Frazier Park (3,646,533)
Gary Manor (7,830,455)
Grandview Homes (1,685,604)
Highlawn Place (4,321,835)
Kern Villa (3,274,622)
New Baltimore Towers (3,827,450)
Panorama Park (3,858,001)
Senior Chateau (6,091,240)
-40-
<PAGE>
REAL ESTATE ASSOCIATES LIMITED III
(a California limited partnership)
Notes to Pro Forma Consolidated Statement of Operations
(unaudited)
Pro Forma Statements of Operations Adjustments (continued)
Three Months
Ended Year Ended
March 31, 1998 Dec. 31, 1997
---------------- ---------------
Sheraton Towers (3,921,169)
South Bay Villa (4,849,245)
Tujunga Gardens (2,760,689)
Village Grove (4,714,375)
Village of Kaufman (2,135,348)
Vista de Jagueyes (3,356,294)
Wilderness Trail (7,183,450)
Wilkes Towers (2,525,554)
---------------
Total for sale properties (94,097,918)
===============
Pro Forma Invested Assets $ 19,604,491
================
Invested Assets related to Sale properties $ 94,097,918
Management fee rate 0.4%
----------------
Annual adjustment - Year ended Dec. 31, 1997 $ 376,392
================
Quarter adjustment - three months ended Mar. 31, 1998 $ 94,098
================
(C) Interest
The pro forma adjustments to the historical interest expense related to
notes payable, and the resulting pro forma balances were determined as
follows:
Historical Balance $ 37,750 $ 151,000
---------------- ----------------
Less:
Bowin Place (7,500) (30,000)
Gary Manor (8,750) (35,000)
Highlawn Place (5,000) (20,000)
New Baltimore (4,500) (18,000)
Senior Chateau (7,500) (30,000)
Wilderness Trail (4,500) (18,000)
---------------- ----------------
Pro Forma Adjustment (37,750) (151,000)
---------------- ----------------
Pro Forma Balance $ 0 $ 0
================ ================
-41-
<PAGE>
REAL ESTATE ASSOCIATES LIMITED III
(a California limited partnership)
Notes to Pro Forma Consolidated Statement of Operations
(unaudited)
Pro Forma Statements of Operations Adjustments (continued)
Three Months
Ended Year Ended
March 31, 1998 Dec. 31, 1997
---------------- ---------------
(D) Distributions from Limited Partnerships
The pro forma adjustments to the historical balances and the resulting
pro forma balances were determined as follows:
Historical Balance $ 40,458 $ 1,072,912
---------------- ----------------
Less:
Casa de las Hermanitas -- (74,490)
Creekview (10,772) (12,702)
Foothill Gardens -- (103,188)
Frazier Park -- (57,014)
Gary Manor -- (66,929)
Grandview Homes -- (39,782)
Highlawn Place -- (160,419)
Panorama Park -- (85,335)
Senior Chateau -- (94,082)
Sheraton Towers -- (26,346)
South Bay Villa -- (141,886)
Tujunga Gardens -- (152,885)
Wilderness Trail -- (15,862)
Wilkes Towers -- (23,319)
---------------- ----------------
Pro Forma Adjustment (10,772) (1,054,239)
---------------- ----------------
Pro Forma Balance $ 29,686 $ 18,673
================ ================
(E) 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:
-42-
<PAGE>
REAL ESTATE ASSOCIATES LIMITED III
(a California limited partnership)
Notes to Pro Forma Consolidated Statement of Operations
(unaudited)
Pro Forma Statements of Operations Adjustments (continued)
Three Months
Ended Year Ended
March 31, 1998 Dec. 31, 1997
---------------- ---------------
Historical Balance $ 64,000 $ 255,652
---------------- ---------------
Less:
Bowin Place (28,701) (114,803)
Casa de las Hermanitas 0
Grandview Homes 0
Tujunga Gardens 0
---------------- -----------------
Pro Forma Adjustment (28,701) (114,803)
---------------- -----------------
Total Pro Forma Balance $ 35,299 $ 140,849
=============== =================
</TABLE>
-43-
<PAGE>
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 the Real Estate Interests to the Managing 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 (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 and any future disposition of the 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's- length
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
-44-
<PAGE>
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. 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 Purchase 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 General
Partners with significant economic benefits.
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 Purchase 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 nineteen 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 two Local Partnerships
affiliated with the Managing
-45-
<PAGE>
General Partner were 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
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.
-46-
<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 and 1993 and for 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 the Partnership's 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,
--------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1998 1997
------------ ------------ ------------- ------------ ------------ ------------- -------------
Operating Expenses $ 921,391 $ 820,938 $ 834,610 $ 758,781 $ 729,818 $ 384,207 $ 202,344
============ =========== ============ =========== =========== ============ ============
Loss From Operations $ (443,767) $ (518,472) $ (567,421) $ (577,031) $ (586,269) $ (259,368) $ (92,400)
Distributions From Limited
Partnerships Recognized as
Income $ 1,072,912 858,869 765,514 683,491 987,697 40,458 81,041
Equity in Income of Limited
Partnerships and Amortization
of Acquisition Costs $ 255,652 383,682 887,919 539,729 708,865 64,000 64,000
------------ ----------- ----------- ----------- ----------- ----------- ------------
Net Income (Loss) $ 884,797 $ 724,079 $ 1,086,012 $ 646,189 $ 1,110,293 $ (154,910) $ 52,641
============ =========== =========== =========== =========== =========== ============
Net Income (Loss) Allocated to
Limited Partners $ 875,949 716,838 1,075,152 639,727 1,099,190 (153,361) 52,115
Net Income (Loss) per Limited
Partnership Interest $ 77 $ 63 $ 95 $ 56 $ 96 $ (14) $ 5
============ =========== =========== =========== =========== ============ ============
Total Assets $ 11,960,231 $10,933,018 $10,185,039 $ 9,095,839 $ 8,489,578 $ 11,951,768 $ 11,022,256
============ =========== =========== =========== =========== ============ ============
Investments in Limited
Partnerships $ 1,249,421 $ 1,063,487 $ 930,576 $ 690,570 $ 679,271 $ 1,313,422 $ 1,127,487
============ =========== =========== =========== =========== ============ ============
Partners' Equity $ 9,925,762 $ 9,040,965 $ 8,316,886 $ 7,230,874 $ 6,584,685 $ 9,770,852 $ 9,093,606
============ =========== =========== =========== =========== ============ ============
Limited Partners' Equity $ 10,025,480 $ 9,149,531 $ 8,432,693 $ 7,357,541 $ 6,717,814 $ 9,872,119 $ 9,201,646
============ =========== =========== =========== =========== ============ ============
Limited Partners' Equity per $ 872 $ 796 $ 733 $ 640 $ 584 $ 858 $ 800
Limited Partnership Interest ============ =========== =========== =========== =========== ============ ============
</TABLE>
-47-
<PAGE>
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 $1,201 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, except for the portion thereof
which is taxable as ordinary income due to depreciation recapture). 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 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.
It is estimated that as a consequence of the Sale, each Limited Partner
will have taxable income equal to approximately $8,649 per Unit, all of which
will constitute long-term capital gain. The income tax consequences of the Sale
to any Limited Partner depends in large part upon the amount of losses that were
allocated to such Limited Partner by the Partnership and the amount of such
losses which were applied by such Limited Partner to offset his or her taxable
income. If a Limited Partner has not utilized any of the passive activity losses
allocated to such Limited Partner in excess of those amounts permitted under the
transitional rule relief described above, the Limited Partner will have a net
federal and state tax liability of approximately $1,135. Because passive losses
are only deductible against passive income after 1986 (subject to certain
transitional rules), the Managing General Partner does not have any basis for
determining the amount of such passive losses which have previously been
utilized by Limited Partners. The net tax liability was 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% and that Limited Partners have
suspended passive activity losses of $3,262 per Unit from the Partnership (which
is the amount of passive losses that a Limited Partner would have it had it not
utilized any of its passive losses (except to the extent permitted under the
transitional rule)). The net tax liability was calculated by deducting from the
tax payable on the gain from the sale (calculated at a federal tax rate of 25%
since all of the income is attributable to depreciation not recaptured as
ordinary income and taxed at capital gains rates) the tax benefit resulting from
the ability to deduct the suspended passive losses against ordinary income
(which is permitted following disposition of the passive activity) assuming that
the Limited Partner has sufficient ordinary income which 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%. Based on the foregoing, the cash distribution of $1,201 per Unit
would exceed a Limited Partner's net tax liability of $1,135 by $61. 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
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<PAGE>
applicable. The foregoing does not take into consideration the effect of any
local tax liabilities that may be applicable to the Sale. 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.
The Managing General Partner believes that there were reasonable bases for
the foregoing assumptions. In light of the suitability standards that Limited
Partners met at the time of their original investment in the Partnership and the
types of investors who would have invested in an investment primarily intended
to provide tax benefits, the Managing General Partner assumed for purposes of
calculating the tax liabilities resulting from the proposed Sale that each
Limited Partner will have taxable income in excess of $155,950 (which is the
income level at which married taxpayers filing joint returns effectively become
subject to a 39.6% marginal rate) in 1998. While the financial circumstances of
the Limited Partners may vary considerably, the Managing General Partner
believes it is reasonable to assume that the majority of the current Limited
Partners will be in the highest federal tax bracket in 1998. The Managing
General Partner believes that while state tax rates vary from state-to-state,
the effective average state tax rate for individuals who itemize deductions is
approximately 5%. The Managing General Partner calculated the tax benefit from
the suspended passive losses at 44.6% (39.6% federal rate plus a 5% effective
state rate).
To the extent that a Limited Partner was able to utilize more passive
activity losses than were available under the transitional rules (e.g., because
such Limited Partner had passive income from other sources) to offset his, her
or its taxable income, the estimated federal income tax liability of such
Limited Partner would substantially increase. Thus, for example, if a Limited
Partner had no suspended passive activity losses to carry forward, it is
estimated that such Limited Partner would have a federal and state income tax
liability equal to approximately $2,595 per Unit, or $1,394 in excess of the
distribution of $1,201 per Unit. In addition, to the extent that a Limited
Partner does not have sufficient ordinary income taxed at a 39.6% marginal rate
to fully utilize the suspended passive losses against such income, the Limited
Partner's net tax benefits from the Sale would be reduced and the Limited
Partner is likely to incur net tax costs in excess of the cash distributions
which will be received.
BECAUSE IT IS IMPOSSIBLE TO KNOW THE AMOUNT OF LOSSES ANY LIMITED PARTNER
HAS APPLIED TO OFFSET HIS, HER OR ITS TAXABLE INCOME, 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
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.
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<PAGE>
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 (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
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<PAGE>
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 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.
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<PAGE>
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
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<PAGE>
REAL ESTATE ASSOCIATES LIMITED III
9090 Wilshire Boulevard
Beverly Hills, California 90211
THIS CONSENT IS SOLICITED BY THE MANAGING GENERAL PARTNER
OF REAL ESTATE ASSOCIATES LIMITED III
CONSENT OF LIMITED PARTNER
The undersigned hereby gives written notice to REAL III (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 or to a subsidiary
partnership of the REIT, 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 twenty-two of the thirty-two 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
/ / / / / /
<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 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.
<PAGE>
Annex A
FORM OF OPINION
Real Estate Associates Limited III
9090 Wilshire Boulevard
Beverly Hills, CA 90211
Gentlemen:
You have advised us that Real Estate Associates Limited III (the
"Partnership"), National Partnership Investments Corp., and Coast Housing
Investment 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 1 (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 twenty-two Properties to be sold (the "Aggregate Property
Valuation") will be approximately $85,545,000. 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
<PAGE>
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 Partnerships' 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 performance 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;
2
<PAGE>
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, (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
3
<PAGE>
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 Partners' determination of the value of any notes due to affiliates of
the General Partners or management of the Local Partnerships, the allocation of
the Aggregate Property Valuation among the Local Partnerships, the amount of
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 cost of certain general
partner and/or management interests in the Local Partnerships or the allocation
of such buyout costs among the Local Partnerships, or the amount of any
contingency reserves associated with such buyouts, (f) the General Partners'
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, including
but not limited to continuing to operate the Partnership as a going concern. We
are 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 to be paid for the Real Estate Interest.
Our opinion addresses only the aggregate value of the Properties and is
based on business, economic, real estate and capital market, and other
conditions as they existed and could be evaluated as of the date of our analysis
and addresses the proposed Sale in the context of information available as of
the date of our analysis. Events occurring after that date could affect the
Properties and the assumptions used in preparing the opinion.
Based upon and subject to the foregoing, it is our opinion that as of the
date of this letter the Aggregate Property Valuation 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.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Partnership and the General Partners that our entire analysis must
be considered as a whole and that selecting portions of our analysis and the
factors considered by us, without considering all analyses and facts, could
create an incomplete view of the evaluation process underlying this opinion.
Yours truly,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
______________________, 1998
4
<PAGE>
EXHIBIT 1
REAL ESTATE ASSOCIATES LIMITED III
LISTING OF PROPERTIES
Property Location
--------------------------- ----------------------
Twenty-Nine Palms Twenty-Nine Palms, CA
Bowin Place Detroit, MI
Casa de Las Hermanitas Los Angeles, CA
Charlotte Lakeview Rochester, NY
Creekview Apartments Stroudsburg, PA
Foothill Gardens Los Angeles, CA
Frazier Park Apartments Baldwin Park, CA
Gary Manor Gary, IN
Grandview Homes Los Angeles, CA
Highlawn Place Apartments Huntington, WV
Kern Villa Los Angeles, CA
New Baltimore New Baltimore, MI
Panorama Park Bakersfield, CA
Senior Chateau on the Hill Cincinnati, OH
Sheraton Towers High Point, NC
South Bay Villa Los Angeles, CA
Tujunga Gardens Los Angeles, CA
Village Grove Apartments Corona, CA
Village of Kaufman Kaufman, TX
Vista De Jagueyes Aguas Buenas, PR
Wilderness Trail Manor Pineville, KY
Wilkes Towers Wilkesboro, NC
5
<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
<PAGE>
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
<PAGE>
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 III
9090 Wilshire Boulevard
Beverly Hills, CA 90211
Re: Amendments to the Agreement of Limited Partnership of
Real Estate Associates Limited III
Dear Sir or Madam:
We have acted as counsel to Real Estate Associates Limited III, 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;
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(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.
2
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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,
3
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