<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended SEPTEMBER 30, 1998
Commission File Number 0-10673
REAL ESTATE ASSOCIATES LIMITED III
(A California Limited Partnership)
I.R.S. Employer Identification No. 95-3547611
9090 WILSHIRE BLVD., SUITE 201
BEVERLY HILLS, CALIF. 90211
Registrant's Telephone Number,
Including Area Code (310) 278-2191
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
<PAGE> 2
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets, September 30, 1998 and December 31, 1997................. 1
Statements of Operations,
Nine and Three Months Ended September 30, 1998 and 1997 ......... 2
Statement of Partners' Equity (Deficiency),
Nine months Ended September 30, 1998 ............................ 3
Statements of Cash Flows,
Nine Months Ended September 30, 1998 and 1997 ................... 4
Notes to Financial Statements ........................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 14
Item 6. Exhibits and Reports on Form 8-K....................................... 14
Signatures ....................................................................... 15
</TABLE>
<PAGE> 3
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ 1,360,332 $ 1,249,422
CASH AND CASH EQUIVALENTS (Note 1) 11,563,458 10,575,810
OTHER ASSETS 225,181 135,000
------------ ------------
TOTAL ASSETS $ 13,148,971 $ 11,960,232
============ ============
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Notes payable (Notes 3 and 6) $ 1,510,000 $ 1,510,000
Interest payable (Notes 3 and 6) 400,485 414,277
Accounts payable 118,888 110,193
------------ ------------
2,029,373 2,034,470
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)
PARTNERS' EQUITY (DEFICIENCY):
General partners (87,780) (99,718)
Limited partners 11,207,378 10,025,480
------------ ------------
11,119,598 9,925,762
------------ ------------
TOTAL LIABILITIES AND PARTNERS'
EQUITY $ 13,148,971 $ 11,960,232
============ ============
</TABLE>
The accompanying notes are integral part of these financial statements.
1
<PAGE> 4
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Nine months Three months Nine months Three months
ended ended ended ended
Sept. 30, 1998 Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INTEREST AND OTHER INCOME $ 374,894 $ 124,714 $ 351,310 $ 125,491
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Legal and accounting 179,153 43,550 130,797 50,267
Management fees - general partner (Note 4) 341,100 113,700 341,100 113,700
Interest (Note 3) 113,250 37,750 113,250 37,750
Administrative (Notes 2 and 4) 472,701 173,602 69,477 25,537
----------- ----------- ----------- -----------
Total operating expenses 1,106,204 368,602 654,624 227,254
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (731,310) (243,888) (303,314) (101,763)
DISTRIBUTIONS FROM LIMITED
PARTNERSHIPS RECOGNIZED AS
INCOME (Note 2) 1,733,146 1,083,961 1,072,912
EQUITY IN INCOME OF LIMITED
PARTNERSHIPS AND AMORTI-
ZATION OF ACQUISITION
COSTS (Note 2) 192,000 64,000 192,000 64,000
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 1,193,836 $ 904,073 $ 961,598 $ (37,763)
=========== =========== =========== ===========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST (Note 1) $ 104 $ 5 $ 84 $ (3)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements.
2
<PAGE> 5
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- ----------- -----------
<S> <C> <C> <C>
PARTNERSHIP INTERESTS 11,456
===========
EQUITY (DEFICIENCY),
January 1, 1998 $(99,718) $10,025,480 $ 9,925,762
Net income for the nine months
ended September 30, 1998 11,938 1,181,898 1,193,836
-------- ----------- -----------
EQUITY (DEFICIENCY),
September 30, 1998 $(87,780) $11,207,378 $11,119,598
======== =========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements.
3
<PAGE> 6
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,193,836 $ 961,598
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in income of limited partnerships and
amortization of acquisition costs (192,000) (192,000)
Increase in other assets (90,181) --
(Decrease) increase in interest and other payables (5,096) 60,129
------------ ------------
Net cash provided by operating activities 906,559 829,727
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distribution from limited partnership
recognized as a return of investment 81,089 41,228
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 987,648 870,955
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,575,810 9,734,531
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,563,458 $ 10,605,486
============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for interest $ 127,042 $ 91,395
============ ============
</TABLE>
The accompanying notes are integral part of these financial statements.
4
<PAGE> 7
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The information contained in the following notes to the financial
statements is condensed from that which would appear in the annual
audited financial statements; accordingly, the financial statements
included herein should be reviewed in conjunction with the financial
statements and related notes thereto contained in the Real Estate
Associates Limited III (the "Partnership") annual report for the year
ended December 31, 1997. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end. The
results of operations for the interim period presented are not
necessarily indicative of the results for the entire year.
In the opinion of the Partnership, the accompanying unaudited financial
statements contain all adjustments (consisting primarily of normal
recurring accruals) necessary to present fairly the financial position
as of September 30, 1998 and the results of operations for the nine and
three months then ended and changes in cash flows for the nine months
then ended.
The general partners have a 1 percent interest in profits and losses of
the Partnership. The limited partners have the remaining 99 percent
interest which is allocated in proportion to their respective
individual investments. National Partnership Investments Corp. (NAPICO)
is the corporate general partner of the Partnership. NAPICO is a wholly
owned subsidiary of Casden Investment Corporation, which is wholly
owned by Alan I. Casden.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
METHOD OF ACCOUNTING FOR INVESTMENT IN LIMITED PARTNERSHIPS
The investment in limited partnerships is accounted for on the equity
method. Acquisition, selection and other costs related to the
acquisition of the projects are capitalized as part of the investment
account, and are being amortized on a straight line basis over the
estimated lives of the underlying assets, which is generally 30 years.
NET INCOME PER LIMITED PARTNERSHIP INTEREST
Net income per limited partnership interest was computed by dividing
the limited partners' share of net income by the number of limited
partnership interests outstanding during the year. The number of
limited partnership interests was 11,456 for the periods presented.
5
<PAGE> 8
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and bank certificates of
deposit with an original maturity of three months or less. The
Partnership has its cash and cash equivalents on deposit primarily with
two high credit quality institutions. Such cash and cash equivalents
are in excess of the FDIC insurance limit.
INCOME TAXES
No provision has been made for income taxes in the accompanying
financial statements since such taxes, if any, are the liability of the
individual partners
IMPAIRMENT OF LONG-LIVED ASSETS
The Partnership reviews long-lived assets to determine if there has
been any permanent impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If the sum of the expected future cash flows is less than
the carrying amount of the assets, the Partnership recognizes an
impairment loss.
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS
The Partnership holds limited partnership interests in 26 limited
partnerships. In addition, the Partnership holds a general partner
interest in REA. NAPICO is also a general partner in REA. REA, in turn,
holds limited partner interests in nine additional limited
partnerships. In total, therefore, the Partnership holds interest,
either directly or indirectly including through REA, 32 partnerships
which own residential rental projects consisting of 3,062 apartment
units. The mortgage loans of these projects are insured by the United
States Department of Housing and Urban Development ("HUD") or state
governmental agencies.
The Partnership, as a limited partner, is entitled to between 75
percent and 99 percent of the profits and losses of the limited
partnerships it has invested in directly. The Partnership is also
entitled to 99.9 percent of the profits and losses of REA. REA holds a
99 percent interest in each of the limited partnerships in which it has
invested.
6
<PAGE> 9
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
Equity in losses of limited partnerships is recognized in the financial
statements until the limited partnership investment account is reduced
to a zero balance. Losses incurred after the limited partnership
investment account is reduced to zero are not recognized.
Distributions from limited partnerships are recognized as a reduction
of capital until the investment balance has been reduced to zero.
Subsequent distributions received are recognized as income.
The following is a summary of the investment in limited partnerships
for the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Balance, beginning of period $1,249,421
Distribution recognized as return of capital (81,089)
Amortization of acquisitions costs (40,500)
Equity in income of limited partnerships 232,500
----------
Balance, end of period $1,360,332
==========
</TABLE>
The following are unaudited combined estimated statements of operations
for the nine and three months ended September 30, 1998 and 1997 for the
limited partnerships in which the Partnership has investments:
<TABLE>
<CAPTION>
Nine months Three months Nine months Three months
ended ended ended ended
Sept. 30, 1998 Sept. 30, 1998 Sept. 30,1997 Sept. 30, 1997
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUES
Rental and other $ 17,379,000 $ 5,793,000 $ 16,791,000 $ 5,597,000
------------ ------------ ------------ ------------
EXPENSES
Depreciation 2,754,000 918,000 2,817,000 939,000
Interest 5,196,000 1,732,000 5,271,000 1,757,000
Operating 9,039,000 3,013,000 9,327,000 3,109,000
------------ ------------ ------------ ------------
16,989,000 5,663,000 17,415,000 5,805,000
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ 390,000 $ 130,000 $ (624,000) $ (208,000)
============ ============ ============ ============
</TABLE>
NAPICO, or one of its affiliates, is the general partner and property
management agent for certain of the limited partnerships included
above.
7
<PAGE> 10
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
Under recently adopted law and policy, HUD has determined not to renew
housing assistance payments contracts ("HAP Contracts") on their 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 Federal Housing Administration of HUD ("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 ("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 General Partners are unable to predict with certainty their
impact on the Partnership's future cash flow.
As a result of the foregoing, the Partnership is undergoing an extensive
review of the properties in which the limited partnerships have invested
that are subject to HUD mortgages and which may be sold to the REIT as set
forth below. The Partnership has incurred expenses in connection with this
review by various third party professionals, including accounting, legal,
valuation, structural review and engineering costs, which amounted to
approximately $651,000 through September 30, 1998 including approximately
$511,000 and $56,000 for the nine months ended September 30, 1998 and 1997,
respectively, which are included in general and administrative expenses.
A real estate investment trust ("REIT") organized by affiliates of NAPICO
has advised the Partnership that it intends to make a proposal to purchase
from the Partnership certain of the limited partnership interests held for
investment by the Partnership.
The REIT proposes to purchase such limited partnership interests for cash,
which it plans to raise in connection with a private placement of its equity
securities. The purchase is subject to, among other things, (i) consummation
of such private placement by the REIT; (ii) the purchase of the general
partnership interests in the local limited partnerships by the REIT; (iii)
the approval of HUD and certain state housing finance agencies; (iv) the
consent of the limited partners to the sale of the local limited partnership
interests held for investment by REAL III; and (v) the consummation of a
minimum number of purchase transactions with other NAPICO affiliated
partnerships.
8
<PAGE> 11
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
A consent solicitation statement has been sent to the limited partners
setting forth the terms and conditions of the purchase of the limited
partners' interests held for investment by the Partnership, together with
certain amendments to the Partnership Agreement and other disclosures of
various conflicts of interest in connection with the proposed transaction.
As of November 2, 1998, the consents of the limited partners to the sale of
the partnership interests and amendments to the Partnership Agreement have
been obtained. In addition, the REIT has completed buy-out negotiations with
a majority of the general partners of the local limited partnerships and has
obtained approval from HUD.
NOTE 3 - NOTES PAYABLES
Certain of the Partnership's investments involved purchases of partnership
interests from partners who subsequently withdrew from the operating
partnerships. The Partnership is obligated on non-recourse notes payable of
$1,510,000, bearing interest at 10 percent, to the sellers of the
partnership interests. These notes are payable by the Partnership through
REA, and have principal maturity dates in June 2020 and March 2024 or upon
the sale or refinancing of the underlying partnership properties. These
notes and the related interest are collateralized by REA's investment in the
respective limited partnerships and are payable only out of cash
distributions from the investee partnerships, as defined in the notes.
Unpaid interest is due at maturity of the notes.
NOTE 4 - MANAGEMENT FEE AND EXPENSES DUE TO GENERAL PARTNER
Under the terms of the Restated Certificate and Agreement of Limited
Partnership, the Partnership is obligated to NAPICO for an annual management
fee approximately equal to .4 percent of the invested assets. Invested
assets are defined as the costs of acquiring project interests, including
the proportionate amount of the mortgage loans related to the Partnership's
interests in the capital accounts of the respective partnership. The
management fee incurred for the nine months ended September 30, 1998 and
1997 was approximately $341,100.
The Partnership reimburses NAPICO for certain expenses. The reimbursement
paid to NAPICO was approximately $26,400 and $24,400 for the nine months
ended September 30, 1998 and 1997, respectively, and is included in
administrative expenses.
NOTE 5 - CONTINGENCIES
On August 27, 1998, two investors holding an aggregate of eight units of
limited partnership interests in Real Estate Associates Limited III (an
affiliated partnership in which NAPICO is the managing general partner) and
two investors holding an aggregate of five units of limited partnership
interest in Real Estate Associates Limited VI (another affiliated
partnership in which NAPICO is the managing general partner) commenced an
action in the United States District Court for the Central District of
California against the Partnership, NAPICO and certain other affiliated
entities. The complaint alleges that the defendants breached their fiduciary
duty to the limited partners of certain NAPICO managed partnerships and made
materially false and misleading statements in the consent solicitation
statements
9
<PAGE> 12
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 5 - CONTINGENCIES (CONTINUED)
sent to the limited partners of such partnerships relating to approval of
the transfer of partnership interests in limited partnerships, owning
certain of the properties, to the REIT (Note 2). The plaintiffs seek
preliminary and permanent injunctive relief and other equitable relief, as
well as compensatory and punitive damages. The managing general partner of
such NAPICO partnerships and the other defendants believe that the
plaintiffs' claims are without merit and intend to contest the action
vigorously.
The corporate general partner of the Partnership is involved in various
lawsuits arising from transactions in the ordinary course of business. In
the opinion of management and the corporate general partner, the claims will
not result in any material liability to the Partnership.
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.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, when it is practicable to estimate
that value. The notes payable are collateralized by the Partnership's
investments in the investee limited partnerships and are payable only out of
cash distributions from the investee partnerships. The operations generated
by the investee limited partnerships are subject to various government
rules, regulations and restrictions which make it impracticable to estimate
the fair value of the notes payable and related accrued interest. The
carrying amount of other assets and liabilities reported on the balance
sheets that require such disclosure approximates fair value due to their
short-term maturity.
10
<PAGE> 13
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of funds include interest income earned
from investing available cash and distributions from limited partnerships in
which the Partnership has invested. It is not expected that any of the local
limited partnerships in which the Partnership has invested will generate
cash flow sufficient to provide for distributions to the Partnership's
limited partners in any material amount.
RESULTS OF OPERATIONS
Partnership revenues consist primarily of interest income earned on
certificates of deposit and other temporary investment of funds not required
for investment in local partnerships.
Operating expenses consist primarily of recurring general and administrative
expenses and professional fees for services rendered to the Partnership. In
addition, an annual Partnership management fee in an amount equal to .4
percent of investment assets is payable to the corporate general partner.
The Partnership accounts for its investments in the local limited
partnerships on the equity method, thereby adjusting its investment balance
by its proportionate share of the income or loss of the local limited
partnerships. Losses incurred after the limited partnership investment
account is reduced to zero are not recognized in accordance with the equity
accounting method.
Distributions received from limited partnerships are recognized as return of
capital until the investment balance has been reduced to zero or to a
negative amount equal to future capital contributions required. Subsequent
distributions received are recognized as income. Overall distributions from
limited partnerships continue to be favorable. This primarily is due, to
improved operating results at several of the properties.
Except for certificates of deposit and money market funds, the Partnership's
investments are entirely interests in other limited partnerships owning
government assisted projects. Funds temporarily not required for such
investments in projects are invested in certificate of deposit and money
market funds which provide substantial amounts of interest as reflected in
the statement of operations. These investments are converted to cash to meet
obligations as they arise. The Partnership intends to continue investing
available funds in this manner.
The Partnership is obligated on non-recourse notes payable of $1,510,000
which bear interest at 10 percent per annum and have principal maturities
ranging from June 2020 to March 2024. The notes and related interest are
payable from cash flow generated from operations of the related rental
properties as defined in the notes. These obligations are collateralized by
the Partnership's investments in the limited partnerships. Unpaid interest
is due at maturity of the notes. Because no payments have been made on these
notes, interest expense has remained constant for each of the three years.
11
<PAGE> 14
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Under recently adopted law and policy, HUD has determined not to renew
housing assistance payments contracts ("HAP Contracts") on their 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 Federal Housing Administration of HUD ("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 ("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 General Partners are unable to predict with certainty their
impact on the Partnership's future cash flow.
As a result of the foregoing, the Partnership is undergoing an extensive
review of the properties in which the limited partnerships have invested
that are subject to HUD mortgages and which may be sold to the REIT as set
forth below. The Partnership has incurred expenses in connection with this
review by various third party professionals, including accounting, legal,
valuation, structural review and engineering costs, which amounted to
approximately $651,000 through September 30, 1998 including approximately
$511,000 and $56,000 for the nine months ended September 30, 1998 and 1997,
respectively, which are included in general and administrative expenses.
A real estate investment trust ("REIT") organized by affiliates of NAPICO
has advised the Partnership that it intends to make a proposal to purchase
from the Partnership certain of the limited partnership interests held for
investment by the Partnership.
The REIT proposes to purchase such limited partnership interests for cash,
which it plans to raise in connection with a private placement of its equity
securities. The purchase is subject to, among other things, (i) consummation
of such private placement by the REIT; (ii) the purchase of the general
partnership interests in the local limited partnerships by the REIT; (iii)
the approval of HUD and certain state housing finance agencies; (iv) the
consent of the limited partners to the sale of the local limited partnership
interests held for investment by REAL III; and (v) the consummation of a
minimum number of purchase transactions with other NAPICO affiliated
partnerships.
12
<PAGE> 15
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
A consent solicitation statement has been sent to the limited partners
setting forth the terms and conditions of the purchase of the limited
partners' interests held for investment by the Partnership, together with
certain amendments to the Partnership Agreement and other disclosures of
various conflicts of interest in connection with the proposed transaction.
As of November 2, 1998, the consents of the limited partners to the sale of
the partnership interests and amendments to the Partnership Agreement have
been obtained. In addition, the REIT has completed buy-out negotiations with
a majority of the general partners of the local limited partnerships and has
obtained approval from HUD.
13
<PAGE> 16
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1998
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 27, 1998, two investors holding an aggregate of eight units of
limited partnership interests in Real Estate Associates Limited III (an
affiliated partnership in which NAPICO is the managing general partner) and
two investors holding an aggregate of five units of limited partnership
interest in Real Estate Associates Limited VI (another affiliated
partnership in which NAPICO is the managing general partner) commenced an
action in the United States District Court for the Central District of
California against the Partnership, NAPICO and certain other affiliated
entities. The complaint alleges that the defendants breached their fiduciary
duty to the limited partners of certain NAPICO managed partnerships and made
materially false and misleading statements in the consent solicitation
statements sent to the limited partners of such partnerships relating to
approval of the transfer of partnership interests in limited partnerships,
owning certain of the properties, to the REIT (Note 2). The plaintiffs seek
preliminary and permanent injunctive relief and other equitable relief, as
well as compensatory and punitive damages. The managing general partner of
such NAPICO partnerships and the other defendants believe that the
plaintiffs' claims are without merit and intend to contest the action
vigorously.
The corporate general partner is involved in various lawsuits. None of these
are related to REAL III.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A report 8-K relating to an unsolicited offer to buy units of limited
partnership interests (the "Units"), as discussed below, was filed with the
Securities and Exchange Commission during the quarter ended September 30,
1998.
On June 26, 1998, Bond Purchase, L.L.C. (the "Buyer") made an unsolicited
tender offer to buy a certain number of Units in the Partnership for a price
of $312 per Unit. The Buyer did not contact the Corporate General Partner
prior to commencing its tender offer. By letter dated July 15, 1998, the
Corporate General Partner advised limited partners that it had determined
not to take a position with respect to the tender offer but cautioned
limited partners to consider certain items before determining whether to
tender their Units to the Buyer. A copy of the letter from the Buyer is
attached as an Exhibit to this form 10-Q.
14
<PAGE> 17
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REAL ESTATE ASSOCIATES LIMITED III
(a California limited partnership)
By: National Partnership Investments Corp.
General Partner
/s/ PAUL PATIERNO
---------------------------------------
Paul Patierno
Chief Financial Officer
Date:
---------------------------------------
/s/ CHARLES H. BOXENBAUM
---------------------------------------
Charles H. Boxenbaum
Chief Executive Officer
Date:
---------------------------------------
15
<PAGE> 18
BOND PURCHASE L.L.C.
P.O. Box 26730
Kansas City, MO 64196
June 26, 1998
To the Holders of Limited Partnership Interests in Real Estate Associates
Limited III.
RE: OFFER TO PURCHASE LIMITED PARTNERSHIP INTERESTS FOR $312.00
Dear Investor:
We are offering you an opportunity to sell your limited partnership
interests (the "Units") in Real Estate Associates Limited III (the
"Partnership") for cash in the amount of $312.00 per Unit (which amount will be
reduced by any cash distributions declared by the Partnership after the date of
this letter). Our offer provides you with an opportunity to sell your Units now
without the costly transfer fees and commission costs (typically up to 10%)
usually paid by the seller in secondary market sales. ALL TRANSFER COSTS AND
FEES WILL BE PAID BY BOND PURCHASE, L.L.C.
We believe that it is appropriate for investors to have financial choices.
Our offer gives you, the investor, the ability to make a decision about your
continued involvement with the Partnership. You may no longer wish to continue
with your investment in the Partnership for a number of reasons, including:
* NO FURTHER IRS FILING.
* HIGHEST OFFER - This offer is higher than the last reported trade of
$304 (October 1, 1997 to December 31, 1997) in the secondary market.
* If you sell your units, 1998 will be the fiscal year for which you
receive a K-1 tax form from the partnership.
* You may be able to realize a tax loss that would reduce your taxes for
1998.
* The Partnership was closed seventeen years ago in 1981. Your money has
been tied up for this long period with minimal return.
* More immediate use for the cash tied up in your investment in the Units.
* The absence of a formal trading market for the Units and their resulting
relative illiquidity.
<PAGE> 19
* The lack of any current cash distributions.
* General disenchantment with real estate investments, particularly
long-term investments in limited partnerships;
Our offer is limited to 570 of the 11,456 outstanding Units. If we were to
acquire more than this amount, the administrative costs of our offer would
become burdensome.
We will accept for purchase properly documented Units on a
"first-received, first-buy" basis. You will be paid promptly following
confirmation of a valid, properly executed Agreement of Transfer and other
required transfer documents. We will pay for all Partnership transfer fees and
costs. All tenders of Units will be irrevocable and may not be rescinded or
withdrawn.
We are real estate investors who are not affiliated with the Partnership
or the General Partners. The General Partners of the Partnership have not
analyzed, approved, endorsed or made any recommendation as to acceptance of the
offer. The purchase offer has been determined solely at the discretion of Bond
Purchase, L.L.C. and does not necessarily represent the true market value of
each unit. We are seeking to acquire Units for investment purposes only and not
with a view to their resale.
An Agreement of Transfer is enclosed which you can use to accept our
offer. Please execute page 3 of this document, as well as the Power of
Attorney. Obtain all other required signatures and return the documentation in
the enclosed envelope. Please note that all signatures must be medallion
guaranteed. The transfer cannot be processed without signatures that are
medallion guaranteed and failure to obtain them will result in needless delays.
In addition, place your Unit Certificate in the enclosed envelope. We
encourage you to act immediately if you are interested in accepted or offer as
only 570 Units will be purchased.
OUR OFFER WILL EXPIRE AT 5:00 PM ON JULY 31, 1998, UNLESS EXTENDED.
Please call John Katzer at (816) 421-4670 if you have any questions.
Sincerely,
Bond Purchase, L.L.C.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PARTNERSHIP'S STATEMENTS OF EARNINGS AND BALANCE SHEETS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,563,458
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,788,639
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,148,971
<CURRENT-LIABILITIES> 118,888
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 11,119,598
<TOTAL-LIABILITY-AND-EQUITY> 13,148,971
<SALES> 0
<TOTAL-REVENUES> 2,300,040
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 992,954
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,250
<INCOME-PRETAX> 1,193,836
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,193,836
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,193,836
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
