<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 MARCH 31, 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 MARCH 31, 1999
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets, March 31, 1999 and December 31, 1998..........................1
Statements of Operations,
Three Months Ended March 31, 1999 and 1998 ...........................2
Statement of Partners' Equity (Deficiency),
Three Months Ended March 31, 1999 ....................................3
Statements of Cash Flows,
Three Months Ended March 31, 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
MARCH 31, 1999 AND DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ 799,457 $ 744,457
CASH AND CASH EQUIVALENTS (Note 1) 5,590,938 11,331,803
CASH DUE FROM ESCROW (Note 2) -- 1,950,530
------------ ------------
TOTAL ASSETS $ 6,390,395 $ 14,026,790
============ ============
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accounts payable $ 7,493 $ 308,747
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
PARTNERS' EQUITY (DEFICIENCY):
General partners (135,147) (61,795)
Limited partners 6,518,049 13,779,838
------------ ------------
6,382,902 13,718,043
------------ ------------
TOTAL LIABILITIES AND PARTNERS'
EQUITY $6,390,392 $ 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
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
INTEREST AND OTHER INCOME $ 37,609 $ 124,839
--------- ---------
OPERATING EXPENSES:
Legal and accounting 34,215 23,679
Management fees - general partner (Note 3) 44,247 113,700
Interest 37,750
Administrative (Note 3) 37,521 209,078
--------- ---------
Total operating expenses 115,983 384,207
--------- ---------
LOSS FROM OPERATIONS (78,374) (259,368)
COSTS RELATED TO THE SALE OF LIMITED
PARTNERSHIP INTERESTS (Note 2) (379,348) --
DISTRIBUTIONS FROM LIMITED
PARTNERSHIPS RECOGNIZED AS
INCOME (Note 2) 18,112 40,458
EQUITY IN INCOME OF LIMITED
PARTNERSHIPS AND
AMORTIZATION OF ACQUISITION
COSTS (Note 2) 55,000 64,000
--------- ---------
NET LOSS $(384,610) $(154,910)
========= =========
NET LOSS PER LIMITED PARTNERSHIP
INTEREST (Note 1) $ (34) $ (14)
========= =========
</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 THREE MONTHS ENDED MARCH 31, 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
Distributions (69,506) (6,881,025) (6,950,521)
Net loss for the three months
ended March 31, 1999 (3,846) (380,764) (384,610)
------------ ------------ ------------
EQUITY (DEFICIENCY),
March 31, 1999 $ (135,147) $ 6,518,049 $ 6,382,902
============ ============ ============
</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 THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (384,610) $ (154,910)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity in income of limited partnerships and
amortization of acquisition costs (55,000) (64,000)
Increase in other assets -- (54,561)
Increase in interest and other payables (301,257) 146,446
------------ ------------
Net cash used in operating activities (740,864) (127,025)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales proceeds 1,950,530
Distributions to limited partners (6,950,531)
------------ ------------
Net cash used in investing activities (5,000,001)
------------ ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (5,740,865) (127,025)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,331,803 10,575,810
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,590,938 $ 10,448,785
============ ============
</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
MARCH 31, 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 March 31, 1999 and the results of operations and
changes in cash flows for the 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 92.25% 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.
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)
MARCH 31, 1999
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 12 limited
partnerships as of March 31, 1999, after selling its interests in 20
limited partnerships in 1998. In addition, the Partnership holds a
general partner interest in Real Estate Associates III ("REA"), which
in term holds a limited partnership interest in one additional limited
partnership. NAPICO is also a general partner in REA II. In total,
therefore, the Partnership holds interests, either directly or
indirectly through REA I, in 12 partnerships which owned March 31,
1999, 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 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 the limited partnership in which it has
invested.
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.
6
<PAGE> 9
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
<TABLE>
<S> <C>
The following is a summary of the investment in limited
partnerships for the three months ended March 31, 1999:
Balance, beginning of period $ 744,457
Amortization of acquisitions costs (1,000)
Equity in income of limited partnerships 56,000
---------
Balance, end of period $ 799,457
=========
</TABLE>
The following are unaudited combined estimated statements of
operations for the three months ended March 31, 1999 and 1998 for the
limited partnerships in which the Partnership has investments:
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
REVENUES
Rental and other $ 2,056,000 $ 5,793,000
----------- -----------
EXPENSES
Depreciation 408,000 918,000
Interest 560,000 1,732,000
Operating 1,115,000 3,013,000
----------- -----------
2,083,000 5,663,000
NET (LOSS) INCOME $ (27,000) $ 130,000
=========== ===========
</TABLE>
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
7
<PAGE> 10
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
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.
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.
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.
8
<PAGE> 11
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
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.
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 three
months ended March 31, 1999 and 1998 was approximately $44,247 and
$113,700, respectively.
The Partnership reimburses NAPICO for certain expenses. The
reimbursement paid to NAPICO was approximately $4,122 and $8,800 for
the three months ended March 31, 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
9
<PAGE> 12
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
NOTE 4 - CONTINGENCIES (CONTINUED)
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.
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, 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)
MARCH 31, 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 March 31, 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 are 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
11
<PAGE> 14
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
partnerships. Unpaid interest is 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.
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,
12
<PAGE> 15
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
legal, valuation, structural and engineering costs, which amounted to
$767,974 through December 31, 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.
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.
13
<PAGE> 16
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 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.
14
<PAGE> 17
REAL ESTATE ASSOCIATES LIMITED III
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 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: May 20, 1999
-------------------------
/s/ CHARLES H. BOXENBAUM
---------------------------
Charles H. Boxenbaum
Chief Executive Officer
Date: May 20, 1999
-------------------------
15
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,590,938
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,590,938
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,390,395
<CURRENT-LIABILITIES> 7,493
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 6,382,902
<TOTAL-LIABILITY-AND-EQUITY> 6,390,395
<SALES> 0
<TOTAL-REVENUES> 110,721
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 495,331
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (384,610)
<INCOME-TAX> 0
<INCOME-CONTINUING> (384,610)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (384,610)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
