<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 JUNE 30, 1999
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 JUNE 30, 1999
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets, June 30, 1999 and December 31, 1998..................1
Statements of Operations,
Six and Three Months Ended June 30, 1999 and 1998 .............2
Statement of Partners' Equity (Deficiency),
Six Months Ended June 30, 1999 ................................3
Statements of Cash Flows,
Six Months Ended June 30, 1999 and 1998 .......................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
JUNE 30, 1999 AND DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
1999
(Unaudited) 1998
------------ ------------
<S> <C> <C>
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ 854,457 $ 744,457
CASH AND CASH EQUIVALENTS (Note 1) 5,569,653 11,331,803
CASH DUE FROM ESCROW (Note 2) -- 1,950,530
------------ ------------
TOTAL ASSETS $ 6,424,110 $ 14,026,790
============ ============
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accounts payable $ 1,357 $ 308,747
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
PARTNERS' EQUITY (DEFICIENCY):
General partners (134,749) (61,795)
Limited partners 6,557,502 13,779,838
------------ ------------
6,422,753 13,718,043
------------ ------------
TOTAL LIABILITIES AND PARTNERS'
EQUITY $ 6,424,110 $ 14,026,790
============ ============
</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
SIX AND THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Six months Three months Six months Three months
ended ended ended ended
June 30, 1999 June 30, 1999 June 30, 1998 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INTEREST AND OTHER INCOME $ 96,974 $ 59,365 $ 250,180 $ 125,341
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Legal and accounting 78,298 44,084 61,160 37,481
Management fees - general partner (Note 3) 88,494 44,247 227,400 113,700
Interest (Note 2) -- -- 75,500 37,750
Administrative (Notes 2 and 3) 69,257 31,735 373,542 164,464
------------- ------------- ------------- -------------
Total operating expenses 236,049 120,066 737,602 353,395
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (139,075) (60,701) (487,422) (228,054)
COST RELATED TO SALE OF LIMITED
PARTNERSHIP INTEREST (Note 2) (379,348)
DISTRIBUTIONS FROM LIMITED
PARTNERSHIPS RECOGNIZED AS
INCOME (Note 2) 63,664 45,552 649,186 608,728
EQUITY IN INCOME OF LIMITED PARTNERSHIPS
AND AMORTIZATION OF ACQUISITION COSTS (Note 2) 110,000 55,000 128,000 64,000
------------- ------------- ------------- -------------
NET (LOSS) INCOME $ (344,759) $ 39,851 $ 289,764 $ 444,674
============= ============= ============= =============
NET (LOSS) INCOME PER LIMITED
PARTNERSHIP INTEREST (Note 1) $ (30) $ 5 $ 25 $ 39
============= ============= ============= =============
</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 SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
------------- ------------- -------------
<S> <C> <C> <C>
PARTNERSHIP INTERESTS 11,456
=============
EQUITY (DEFICIENCY),
January 1, 1999 $ (61,795) $ 13,779,838 $ 13,718,043
Distribution for the six months
ended June 30, 1999 (69,506) (6,881,025) (6,950,531)
Net loss for the six months
ended June 30, 1999 (3,448) (341,311) (344,759)
------------- ------------- -------------
EQUITY (DEFICIENCY),
June 30, 1999 $ (134,749) $ 6,557,502 $ 6,422,753
============= ============= =============
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (344,759) $ 289,764
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Equity in income of limited partnerships and
amortization of acquisition costs (110,000) (128,000)
Increase in other assets -- (90,181)
Decrease in interest and other payables (307,390) 116,759
------------ ------------
Net cash (used in) provided by operating activities (762,149) 188,342
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales proceeds 1,950,530 --
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to partners (6,950,531) --
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,762,150) 188,342
CASH AND CASH EQUIVALENTS, beginning of period 11,331,803 10,575,810
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 5,569,653 $ 10,764,152
============ ============
</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
JUNE 30, 1999
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, 1998. 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 June 30, 1999 and the results of operations and changes in cash
flows for the six and three 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. Casden Properties Inc.
owns a 95.25% economic interest in NAPICO, with the balance owned by
Casden Investment Corporation ("CIC"). CIC, which is wholly owned by
Alan I. Casden, owns 95% of the voting common stock of NAPICO.
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.
5
<PAGE> 8
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER LIMITED PARTNERSHIP INTEREST
Net income (loss) 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.
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 12 limited
partnerships as of June 30, 1999, after selling its interests in 20
limited partnerships in 1998. The limited partnerships as of June 30,
1999 own residential low income rental projects consisting of 1,181
apartment units. The mortgage loans of these projects are payable to or
insured by various 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.
6
<PAGE> 9
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
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 six months ended June 30, 1999:
<TABLE>
<S> <C>
Balance, beginning of period $ 744,457
Amortization of acquisitions costs (2,000)
Equity in income of limited partnerships 112,000
---------
Balance, end of period $ 854,457
=========
</TABLE>
The following are unaudited combined estimated statements of operations
for the six and three months ended June 30, 1999 and 1998 for the
limited partnerships in which the Partnership has investments:
<TABLE>
<CAPTION>
Six months Three months Six months Three months
ended ended ended ended
June 30, 1999 June 30, 1999 June 30,1998 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Rental and other $ 4,112,000 $ 2,056,000 $ 11,586,000 $ 5,793,000
------------- ------------- ------------- -------------
EXPENSES
Depreciation 816,000 408,000 1,836,000 918,000
Interest 1,120,000 560,000 3,464,000 1,732,000
Operating 2,230,000 1,115,000 6,026,000 3,013,000
------------- ------------- ------------- -------------
4,166,000 2,083,000 11,326,000 5,663,000
------------- ------------- ------------- -------------
NET (LOSS) INCOME $ (54,000) $ (27,000) $ 260,000 $ (130,000)
============= ============= ============= =============
</TABLE>
7
<PAGE> 10
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
NAPICO, or one of its affiliates, is the general partner and property
management agent for certain of the limited partnerships included above.
Under recent adopted law and policy, the United States Department of
Housing and Urban Development ("HUD") has determined not to renew the
Housing Assistance Payment ("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. The payments under the renewed HAP Contracts are not expected
to be in an amount that would provide sufficient cash flow to permit
owners of properties subject to HAP Contracts to meet the debt service
requirements of existing loans insured by the Federal Housing
Administration of HUD ("FHA") unless such mortgage loans are
restructured. 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 the
Section 8 program. Under MAHRAA, an FHA-insured mortgage loan can be
restructured into a first mortgage loan which will be amortized on a
current basis and a low interest second mortgage loan payable to FHA
which will only be payable on maturity of the first mortgage loan. This
restructuring results in a reduction in annual debt service payable by
the owner of the FHA-insured mortgage loan and is expected to result in
an insurance payment from FHA to the holder of the FHA-insured loan due
to the reduction in the principal amount. MAHRAA also phases out
project-based subsidies on selected properties serving families not
located in rental markets with limited supply, converting such subsidies
to a tenant-based subsidy.
MAHRAA provides that properties begin the restructuring process in
federal fiscal year 1999 (beginning October 1, 1998). On September 11,
1998, HUD issued interim regulations implementing MAHRAA and final
regulations are expected to be issued in 1999. With respect to the local
limited partnerships' expiring HAP Contracts, it is expected that the
HAP payments will be reduced or terminated pursuant to the terms of
MAHRAA.
When the HAP Contracts are subject to renewal, there can be no assurance
that the local limited partnerships in which the Partnership has an
investment will be permitted to restructure its mortgage indebtedness
under MAHRAA. In addition, 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 is
uncertain.
8
<PAGE> 11
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
As a result of the foregoing, the Partnership in 1997 undertook an
extensive review of disposition, refinancing or re-engineering
alternatives for the properties in which the limited partnerships have
invested and are subject to HUD mortgage and rental subsidy programs.
The Partnership has incurred expenses in connection with this review by
various third party professionals, including accounting, legal,
valuation, structural and engineering costs, which amounted to $767,974
through December 31, 1998, including $327,533 for the six months ended
June 30, 1998.
On December 30, 1998, the Partnership sold its limited partnership
interests in 20 local limited partnerships to subsidiaries of Casden
Properties Inc. The sale resulted in cash proceeds to the Partnership of
$1,950,000 and a net gain of $2,647,716, after deducting selling costs.
The cash proceeds were held in escrow at December 31, 1998 and were
collected in 1999. In March 1999, the Partnership made cash
distributions of $6,881,025 to the limited partners and $69,505 to the
general partners, which included using proceeds from the sale of the
partnership interests. Additional selling costs of $379,349 were
incurred in 1999 related to the sale of limited partnership interests in
1998.
Casden Properties Inc. purchased such limited partner interests for
cash, which it raised in connection with a private placement of its
equity securities. The purchase was subject to, among other things, (i)
the purchase of the general partner interests in the local limited
partnerships by Casden Properties Inc.; (ii) the approval of HUD and
certain state housing finance agencies; and (iii) the consent of the
limited partners to the sale of the local limited partnership interests
held for investment by the Partnership.
In August 1998, a consent solicitation statement was 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. Prior to the sale of the partnership interests,
the consents of the limited partners to the sale and amendments to the
Partnership Agreement were obtained.
Until the sale of the partnership interests on December 30, 1998, the
Partnership was obligated on non-recourse notes payable of $1,510,000
which bore interest at 10 percent per annum and had principal maturities
ranging from June 2020 to March 2024. The notes and related interest
were payable from cash flow generated from operations of the related
rental properties as defined in the notes. These obligations were
collateralized by the Partnership's investments in the limited
partnerships. Unpaid interest was due at maturity of the notes. The
Partnership was relieved of these notes and related accrued interest in
connection with the sale of the partnership interests.
9
<PAGE> 12
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 3 - 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 six months ended June
30, 1999 and 1998 was approximately $88,494 and $227,400, respectively.
The Partnership reimburses NAPICO for certain expenses. The
reimbursement paid to NAPICO was approximately $8,000 and $16,000 for
the six months ended June 30, 1999 and 1998, respectively, and is
included in administrative expenses.
NOTE 4 - 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 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
Casden Properties Inc., which was organized by an affiliate of NAPICO.
The plaintiffs seek equitable relief, as well as compensatory damages
and litigation related costs. The managing general partner of such
NAPICO managed 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.
10
<PAGE> 13
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 5 - 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. The carrying amount of assets
and liabilities reported on the balance sheets that require such
disclosure approximates fair value due to their short-term maturity.
11
<PAGE> 14
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1999
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 limited partners in any material amount. The Partnership made a
distributions to investors in June 30, 1999, previously using proceeds
from the disposition of its investments in certain limited partnerships.
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.
Until the sale of the partnership interests on December 30, 1998, the
Partnership was obligated on non-recourse notes payable of $1,510,000
which bore interest at 10 percent per annum and had principal maturities
ranging from June 2020 to March 2024. The notes and related interest
12
<PAGE> 15
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
were payable from cash flow generated from operations of the related
rental properties as defined in the notes. These obligations were
collateralized by the Partnership's investments in the limited
partnerships. Unpaid interest was due at maturity of the notes. The
Partnership was relieved of these notes and related accrued interest in
connection with the sale of the partnership interests.
Under recent adopted law and policy, the United States Department of
Housing and Urban Development ("HUD") has determined not to renew the
Housing Assistance Payment ("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. The payments under the renewed HAP Contracts are not expected
to be in an amount that would provide sufficient cash flow to permit
owners of properties subject to HAP Contracts to meet the debt service
requirements of existing loans insured by the Federal Housing
Administration of HUD ("FHA") unless such mortgage loans are
restructured. 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 the
Section 8 program. Under MAHRAA, an FHA-insured mortgage loan can be
restructured into a first mortgage loan which will be amortized on a
current basis and a low interest second mortgage loan payable to FHA
which will only be payable on maturity of the first mortgage loan. This
restructuring results in a reduction in annual debt service payable by
the owner of the FHA-insured mortgage loan and is expected to result in
an insurance payment from FHA to the holder of the FHA-insured loan due
to the reduction in the principal amount. MAHRAA also phases out
project-based subsidies on selected properties serving families not
located in rental markets with limited supply, converting such subsidies
to a tenant-based subsidy.
MAHRAA provides that properties begin the restructuring process in
federal fiscal year 1999 (beginning October 1, 1998). On September 11,
1998, HUD issued interim regulations implementing MAHRAA and final
regulations are expected to be issued in 1999. With respect to the local
limited partnerships' expiring HAP Contracts, it is expected that the
HAP payments will be reduced or terminated pursuant to the terms of
MAHRAA.
When the HAP Contracts are subject to renewal, there can be no assurance
that the local limited partnerships in which the Partnership has an
investment will be permitted to restructure its mortgage indebtedness
under MAHRAA. In addition, 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 is
uncertain.
13
<PAGE> 16
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
As a result of the foregoing, the Partnership in 1997 undertook an
extensive review of disposition, refinancing or re-engineering
alternatives for the properties in which the limited partnerships have
invested and are subject to HUD mortgage and rental subsidy programs.
The Partnership has incurred expenses in connection with this review by
various third party professionals, including accounting, legal,
valuation, structural and engineering costs, which amounted to $767,974
through December 31, 1998, including $327,533 for the six months ended
June 30, 1998.
On December 30, 1998, the Partnership sold its limited partnership
interests in 20 local limited partnerships to subsidiaries of Casden
Properties Inc. The sale resulted in cash proceeds to the Partnership of
$1,950,530 and a net gain of $2,647,716, after deducting selling costs.
The cash proceeds were held in escrow at December 31, 1998 and were
collected in 1999. In March 1999, the Partnership made cash
distributions of $6,881,025 to the limited partners and $69,505 to the
general partners, which included using proceeds from the sale of the
partnership interests. Additional selling costs of $379,349 were
incurred in 1999 related to the sale of limited partnership interests in
1998.
Casden Properties Inc. purchased such limited partner interests for
cash, which it raised in connection with a private placement of its
equity securities. The purchase was subject to, among other things, (i)
the purchase of the general partner interests in the local limited
partnerships by Casden Properties Inc.; (ii) the approval of HUD and
certain state housing finance agencies; and (iii) the consent of the
limited partners to the sale of the local limited partnership interests
held for investment by the Partnership.
In August 1998, a consent solicitation statement was 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. Prior to the sale of the partnership interests,
the consents of the limited partners to the sale and amendments to the
Partnership Agreement were obtained.
14
<PAGE> 17
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1999
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
Casden Properties Inc., which was organized by an affiliate of NAPICO.
The plaintiffs seek equitable relief, as well as compensatory damages
and litigation related costs. The managing general partner of such
NAPICO managed 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) No exhibits are required per the provision of Item 7 of
regulation S-K.
15
<PAGE> 18
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1999
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/ BRUCE NELSON
------------------------------------
Bruce Nelson
President
Date: August 13, 1999
-----------------------------------
/s/ CHARLES H. BOXENBAUM
------------------------------------
Charles H. Boxenbaum
Chief Executive Officer
Date: August 13, 1999
-----------------------------------
16
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,569,653
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,569,653
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,424,110
<CURRENT-LIABILITIES> 1,357
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 6,422,753
<TOTAL-LIABILITY-AND-EQUITY> 6,424,110
<SALES> 0
<TOTAL-REVENUES> 270,638
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 615,397
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (344,759)
<INCOME-TAX> 0
<INCOME-CONTINUING> (344,759)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (344,759)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
