SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
........................REAL ESTATE ASSOCIATES LIMITED IV.......................
(Name of registrant as specified in its charter)
................................................................................
(Name of person(s) filing proxy statement if other than the registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
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1) Title of each class of securities to which transaction applies:
. . . . . . . . . ................................................................................
2) Aggregate number of securities to which transaction applies:
. . . . . . . . . ................................................................................
3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11
(Set forth the amount on which the filing fee is calculated and state how it was determined):
. . . . . . . . . ................................................................................
4) Proposed maximum aggregate value of transaction:
. . . . . . . . . ................................................................................
5) Total fee paid:
. . . . . . . . . ................................................................................
</TABLE>
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11-(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
-------------------------------------------------
2) Form, Schedule or Registration Statement No:
----------------------------
3) Filing Party:
-----------------------------------------------------------
4) Date Filed:
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REAL ESTATE ASSOCIATES LIMITED IV
9090 Wilshire Boulevard
Beverly Hills, California 90211
___________ __, 1998
To the Limited Partners:
National Partnership Investments Corp., the managing general partner ("NAPICO"
or the "Managing General Partner") of Real Estate Associates Limited IV (the
"Partnership" or "REAL IV"), is writing to recommend, and seek your consent to,
(i) a proposed sale of the interests of the Partnership (the "Real Estate
Interests") in the real estate assets of 20 of the 29 limited partnerships
affiliated with the Partnership (the "Local Partnerships") to a real estate
investment trust or its designated affiliate (collectively referred to as the
"REIT") to be organized by Casden Properties, a California general partnership,
and certain of its affiliates (collectively referred to as "Casden"); and (ii)
certain amendments (the "Amendments") to the Partnership's Agreement of Limited
Partnership necessary to permit such sale.
NAPICO is a wholly-owned subsidiary of Casden Investment Corporation, the sole
director and stockholder of which is Mr. Alan I. Casden. Alan I. Casden is also
a general partner of Casden Properties, the sponsor of the REIT and an affiliate
of the Partnership. Four of the current members of NAPICO's board of directors,
Charles H. Boxenbaum, Bruce E. Nelson, Henry C. Casden and Alan I. Casden, are
expected to become officers and shareholders of the REIT. Seventeen of the
twenty Local Partnerships own a low income housing project that is subsidized
and/or has a mortgage note payable to or insured by agencies of the federal
government or a local housing agency. The remaining three Local Partnerships
each own a conventional multi-unit residential apartment complex. The properties
owned by the Local Partnerships are each referred to herein as a "Property." The
transactions by which the Partnership proposes to sell the Real Estate Interests
to the REIT and amend its Agreement of Limited Partnership are hereinafter
referred to as the "Sale." Limited Partners must separately approve the proposed
Sale and each of the proposed Amendments in order to allow consummation of the
Sale. The Partnership will remain in existence after consummation of the
proposed Sale and will retain direct or indirect interests in nine
property-owning limited partnerships.
In evaluating the proposed Sale, the Limited Partners should note that:
o The Properties do not currently produce significant cash flow and the
Partnership has not made any distributions to date. The Partnership's
investment in the Properties was initially structured primarily to
obtain tax benefits, and not to provide cash distributions. The
Partnership has substantially fulfilled its original objective of
providing tax benefits to the Limited Partners. The Partnership has
generated tax deductions equal to at least [D&T/AMG%] to each Limited
Partner's equity investment since the inception of the Partnership
(assuming a Limited Partner claimed such deductions in accordance with
the passive loss transitional relief rules contained in the Tax Reform
Act of 1986 and in connection with property dispositions). As a result
of such changes to the tax law, most Limited Partners no longer realize
any material tax benefits from continuing to hold their interests in
the Partnership.
o Based upon a purchase price for the Real Estate Interests of
$77,575,314, which is payable $5,462,648 in cash and $72,112,666 by
assumption by the REIT of certain mortgage indebtedness, it is
anticipated that the Partnership will make a distribution to Limited
Partners of $5,408,022 in the aggregate or approximately $406 per unit,
which represents the net proceeds. Each unit consists of two limited
partnership interests and warrants to purchase two additional limited
partnership interests in the Partnership, which were sold at an
original cost of $5,000 per unit. The per unit distribution amount of
$406 is anticipated to be sufficient to pay any federal and state
income taxes that would be due in connection with the Sale, assuming
(i) that
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Limited Partners have suspended passive losses of $2,093 per unit from
the Partnership; (ii) that such losses are available to offset ordinary
income taxed at the 39.6% marginal federal rate; and (iii) federal and
effective state capital gains rates of 25% and 5%, respectively.
o The Managing General Partner believes that now may be an opportune time
for the Partnership to sell the Real Estate Interests, given current
conditions in the real estate and capital markets, which have enabled
the REIT to make the proposal to the Partnership described in the
enclosed materials.
o Robert A. Stanger & Co., Inc., a recognized independent investment
banking firm, has determined that, subject to the assumptions,
limitations and qualifications contained in its opinion, the aggregate
value ascribed to the Properties in connection with determining the
Purchase Price to be received by the Partnership for the Real Estate
Interests in the Sale is fair from a financial point of view to the
Limited Partners.
o The Managing General Partner believes that selling the Local
Partnerships in a single transaction (as opposed to a series of
individual sales) will enable the Partnership to (i) reduce transaction
expenses; and (ii) dispose of a significant portion of its portfolio in
an expedited time frame. It should be noted that the Sale is
conditioned upon, among other things, the consents of the general
partners of the Local Partnerships in which the REIT intends to acquire
interests. The Partnership will retain its interests in a Property if
the general partner for the Local Partnership holding such Property
does not approve the transfer.
o The Managing General Partner does not believe that it would be feasible
to market the Local Partnerships to a third party because the
Partnership owns only limited partnership interests in the Local
Partnerships. The general partners of such Local Partnerships are
generally not affiliated with the Managing General Partner. As a
result, the cooperation of such local general partners is necessary to
allow the Partnership to effectuate a sale of the properties held by
the Local Partnerships, since a third party buyer would need to
negotiate a buy-out of all of the local general partners. The
Partnership does not have the power to compel a sale of such properties
to a third party.
o Seventeen of the twenty Properties are subject to Housing Assistance
Payments Contracts under Section 8 of the United States Housing Act.
Most of these contracts will expire by the end of 2003 and the United
States Department of Housing and Urban Development will not renew them
under their current terms, which could ultimately have an adverse
economic and tax impact on Limited Partners.
There are certain risk factors that the Limited Partners should consider
in evaluating the proposed Sale, such as:
o The Partnership does not have the right to compel a sale of the
Properties. Accordingly, the Managing General Partner has not marketed
the Properties for sale to third parties.
o The terms of the Sale have not been negotiated at arm's length.
o Casden is both an affiliate of the Managing General Partner and the
sponsor of the REIT and, as discussed in the enclosed materials, would
receive substantial benefits as a result of the Sale and the successful
formation and capitalization of the REIT that will not be available to
Limited Partners.
o It is possible that Limited Partners could earn a higher return on
their investment in the Partnership if the Partnership were to retain
ownership of the Properties, then market and sell the Properties to
third parties for a higher aggregate purchase price at a later date.
o As a result of the Sale, the Partnership will not realize any potential
benefits of continuing to own the Properties.
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o The Sale will have a tax impact on Limited Partners. For Limited
Partners who have been able to use all of the passive losses generated
by the Partnership on a current basis, the Sale should result in a
federal and state income tax cost of approximately $642 per Unit in
excess of the cash distribution. For Limited Partners who do not have
sufficient taxable income to be taxed at a 39.6% marginal rate, or who
have other losses available to deduct against their taxable income and
therefore could not fully utilize their suspended passive losses to
offset their ordinary income, the sale could have a federal and state
tax cost in excess of cash distributions.
The REIT is to be formed by combining a substantial portion of Casden's
multi-family housing assets, which consist of real estate businesses and
property interests, with conventional and subsidized housing properties acquired
from several Casden-sponsored and/or managed partnerships and from third-party
sellers. Casden and certain officers and directors of NAPICO, including Alan I.
Casden, Henry C. Casden, Charles H. Boxenbaum and Bruce E. Nelson, will receive
a significant ownership interest in the REIT in exchange for Casden contributing
substantially all of its multi-family housing assets and businesses to the REIT.
The REIT proposes to acquire the Real Estate Interests for cash, which it plans
to raise in connection with a private placement of its equity securities. The
closing of the Sale is subject to, among other things, (i) the consummation of
such private placement by the REIT; (ii) the consents of the general partners of
the Local Partnerships in which the REIT intends to acquire interests; (iii) the
approval of the United States Department of Housing and Urban Development and
certain state and local housing finance agencies; and (iv) the consummation of a
minimum number of similar sales transactions with other Casden-affiliated
partnerships.
If the Limited Partners do not approve the Sale, the Partnership will most
likely retain ownership of the Properties.
We urge you to carefully read the enclosed Consent Solicitation Statement in
order to vote your interests. YOUR VOTE IS IMPORTANT. BECAUSE APPROVAL REQUIRES
THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING UNITS OF LIMITED
PARTNERSHIP INTEREST, FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST THE SALE. To be sure your vote is represented, please sign, date and
return the enclosed consent as promptly as possible.
The proposed Sale is fully described in the enclosed Consent Solicitation
Statement. Please read the enclosed materials carefully, then return your signed
consent form either by facsimile to ______________ or in the enclosed envelope
on or before ________ __, 1998.
If you have any questions, please do not hesitate to contact MacKenzie Partners,
the Partnership's consent solicitation agent, at 212-929-5500.
Very truly yours,
National Partnership Investments Corp.
703767.5
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REAL ESTATE ASSOCIATES LIMITED IV
9090 Wilshire Boulevard
Beverly Hills, California 90211
________ __, 1998
CONSENT SOLICITATION STATEMENT
On the terms described in this Consent Solicitation Statement, National
Partnership Investments Corp. the managing general partner ("NAPICO" or the
"Managing General Partner") of Real Estate Associates Limited IV, a California
limited partnership (the "Partnership" or "REAL V"), is seeking the consent of
the Limited Partners of the Partnership to (i) the sale of the interests of the
Partnership (the "Real Estate Interests") in the real estate assets of 20 of the
29 limited partnerships in which the Partnership holds a limited partnership
interest, to a real estate investment trust or its designated affiliate
(collectively referred to as the "REIT") to be organized by Casden Properties, a
California general partnership, and certain of its affiliates (collectively
referred to herein as "Casden"), for a purchase price of $77,575,314 (the
"Purchase Price"), payable $5,462,648 in cash and $72,122,666 by assumption by
the REIT of certain mortgage indebtedness; and (ii) certain amendments to the
Partnership's Agreement of Limited Partnership (the "Amendments") necessary to
permit such a sale. The 20 limited partnerships, the real estate assets of which
are to be transferred in connection with the Sale, are hereinafter referred to
as the "Local Partnerships".
Seventeen of the twenty Local Partnerships each own a low income
housing project (each of which is referred to herein as a "Property") that is
subsidized and/or has a mortgage note payable to or insured by agencies of the
federal government or a local housing agency. The remaining three Local
Partnerships each own a conventional multi-unit residential apartment complex.
Pursuant to certain state housing finance statutes and regulations, certain of
the Local Partnerships are subject to limitations on the distributions of
dividends to the Partnership. Such statutes and regulations require such Local
Partnerships to hold cash flows in excess of such dividend limitations in
restricted reserve accounts that may be used only for limited purposes. The REIT
has agreed to assign its interests in one of the Local Partnerships to a third
party that is the general partner of four of the Local Partnerships immediately
after consummation of the Sale.
Consents are also being sought from the limited partners of certain
other limited partnerships, the general partners of which are affiliated with
the Casden (the Partnership and such other limited partnerships are hereinafter
collectively referred to as the "Casden Partnerships"), to allow the sale of
certain real estate assets owned by the Casden Partnerships to the REIT. The
transactions by which the Partnership proposes to sell the Real Estate Interests
to the REIT and amend its Agreement of Limited Partnership (the "Partnership
Agreement") are hereinafter referred to as the "Sale." The series of
transactions by which Casden proposes to form the REIT and acquire certain real
estate assets from the Casden Partnerships and others is hereinafter referred to
as the "REIT Transaction." The Partnership will remain in existence after
consummation of the proposed Sale and will retain direct or indirect interests
in a total of nine property-owing limited partnerships. The Sale and each of the
proposed Amendments are being submitted to the Limited Partners as separate
resolutions. Limited Partners must approve the proposed Sale and each of the
proposed Amendments in order to allow consummation of the Sale.
NAPICO is a wholly-owned subsidiary of Casden Investment Corporation,
the sole director and stockholder of which is Mr. Alan I. Casden. Alan I. Casden
is also a general partner of Casden Properties, the sponsor of the REIT and an
affiliate of the Partnership. Four of the current members of NAPICO's board of
directors, Charles H. Boxenbaum, Bruce E. Nelson, Henry C. Casden and Alan I.
Casden, are expected to become officers and shareholders of the REIT. See
"CONFLICTS OF INTEREST."
It is anticipated that the Partnership will make a distribution to
Limited Partners of approximately $406 per unit of limited partnership interests
in the Partnership from the net proceeds of the Sale.
The Sale is conditioned upon, (i) approval of a majority in interest of
the Limited Partners of the Partnership; (ii) the consummation of a private
placement of the REIT's equity securities; (iii) the consents of the general
partners of the Local Partnerships in which the REIT intends to acquire
interests; (iv) the approval of the United States
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Department of Housing and Urban Development ("HUD") and certain state housing
finance agencies; and (v) the consummation of a minimum number of real estate
purchases from the Casden Partnerships in connection with the REIT Transaction.
If the Partnership is unable to obtain a consent to the Sale from a general
partner of a particular Local Partnership, then the Real Estate Interests
relating to such Local Partnership will be retained by the Partnership and will
be excluded from the Sale.
Under the Partnership Agreement and California law, Limited Partners do
not have dissenters' rights of appraisal. If the Sale is approved by a majority
in interest of the Limited Partners, and the other conditions to consummation of
the Sale are satisfied, all Limited Partners, both those voting in favor of the
Sale and those not voting in favor, will be entitled to receive the resulting
cash distributions.
The Managing General Partner has approved the Sale, has concluded that
the Sale, including the Aggregate Property Valuation (as defined herein) and the
Purchase Price for the Real Estate Interests, is fair to the Limited Partners
and recommends that the Limited Partners consent to the Sale. Limited Partners
should note, however, that the Managing General Partner's recommendation is
subject to inherent conflicts of interest. See "CONFLICTS OF INTEREST."
National Partnership Investments Associates, a California Limited
Partnership ("NPIA"), is the non-managing General Partner of the Partnership.
Pursuant to an agreement between NAPICO and NPIA, NAPICO is responsible for the
performance of any duties required to be performed by the General Partners and
has sole and final discretion to manage and control the business of the
Partnership and make all decisions relating thereto. NPIA has not participated
in the management of the Partnership, or in decisions made by the Partnership in
connection with the proposed Sale. NPIA has not taken a position with respect to
the Sale nor has it participated in the preparation of this Consent Solicitation
Statement.
This Consent Solicitation Statement and the accompanying form of
Consent of Limited Partner are first being mailed to Limited Partners on or
about ________ __, 1998.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THIS SOLICITATION OF CONSENTS EXPIRES
NO LATER THAN 11:59 P.M. EASTERN TIME
ON ________ __, 1998, UNLESS EXTENDED.
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TABLE OF CONTENTS
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I. SUMMARY OF CONSENT SOLICITATION STATEMENT..................................................................1
The Partnership...........................................................................................1
The Sale..................................................................................................1
Potential Benefits of the Sale............................................................................2
Potential Adverse Effects of the Sale.....................................................................5
Amendments to Partnership Agreement.......................................................................7
Limited Partner Approval..................................................................................8
Third-Party Opinion.......................................................................................8
Recommendation of the Managing General Partner............................................................8
Conflicts of Interest.....................................................................................9
Federal Income Tax Consequences...........................................................................9
Summary Financial Information............................................................................11
Transaction Expenses.....................................................................................11
Voting Procedures........................................................................................12
II. THE PARTNERSHIP..........................................................................................12
General..................................................................................................12
The Properties...........................................................................................14
Market for Partnership Interests and Related Security Holder Matters.....................................15
Distribution History.....................................................................................16
Regulatory Arrangements..................................................................................16
Year 2000 Information....................................................................................17
Directors and Executive Officers of NAPICO...............................................................17
III. THE SALE................................................................................................18
Background and Reasons for the Sale......................................................................18
Acquisition Agreement....................................................................................20
Arrangements with General Partners of the Local Limited Partnerships.....................................21
Source of Funds..........................................................................................22
Transaction Costs........................................................................................22
Distribution of Sale Proceeds; Accounting Treatment......................................................22
Conditions...............................................................................................23
Fairness Opinion.........................................................................................23
Alternatives to the Sale.................................................................................29
Recommendation of the Managing General Partner; Fairness.................................................31
Post-Sale Operations of the Partnership..................................................................36
Historical and Pro Forma Financial Information...........................................................36
IV. AMENDMENTS TO THE PARTNERSHIP AGREEMENT..................................................................44
V. CONFLICTS OF INTEREST.....................................................................................45
General..................................................................................................45
Fiduciary Responsibility.................................................................................46
VI. SELECTED FINANCIAL INFORMATION...........................................................................48
VII. FEDERAL INCOME TAX CONSEQUENCES..........................................................................49
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VIII. LEGAL PROCEEDINGS .....................................................................................50
IX. LIMITED PARTNERS CONSENT PROCEDURE.......................................................................51
Distribution of Solicitation Materials...................................................................51
Voting Procedures and Consents...........................................................................51
Completion Instructions..................................................................................52
Withdrawal and Change of Election Rights.................................................................52
No Dissenters' Rights of Appraisal.......................................................................52
Solicitation of Consents.................................................................................52
X. IMPORTANT NOTE............................................................................................53
ANNEXES
Annex A - Fairness Opinion of Robert A. Stanger & Co., Inc.
Annex B - The Partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
Annex C - Proposed Amendments to the Partnership Agreement.
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AVAILABLE INFORMATION
Real Estate Associates Limited IV is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, consent solicitation
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, consent solicitation statements and other
information filed with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices,
Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. In
addition, the Commission maintains a site on the World Wide Web portion of the
Internet that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of such site is http://www.sec.gov. Copies of the latest Annual
Report on Form 10-K and Quarterly Report on Form 10-Q may also be obtained from
NAPICO without charge. All requests should be made in writing to National
Partnership Investments Corp., 9090 Wilshire Boulevard, Suite 201, Beverly
Hills, California 90211; Attention: Investor Services; Telephone 800-666-6274.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Partnership
are incorporated by reference in this Consent Solicitation Statement:
Annual Report on Form 10-K of the Partnership for the fiscal year ended
December 31, 1997
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Consent
Solicitation Statement to the extent that a statement contained herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Consent Solicitation Statement.
No person is authorized to give any information or to make any
representation not contained in this Consent Solicitation Statement in
connection with the solicitation of proxies made hereby, and, if given or made,
any such information or representation should not be relied upon as having been
authorized by the Partnership or any other person. The delivery of this Consent
Solicitation Statement shall not, under any circumstances, create any
implication that there has been no change in the information set forth herein or
in the affairs of the Partnership since the date of this Consent Solicitation
Statement.
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I. SUMMARY OF CONSENT SOLICITATION STATEMENT
The following summary is intended to provide only highlights of the
materials contained in this Consent Solicitation Statement. This summary is not
intended to be a complete statement of all material features of the proposed
Sale and is qualified in its entirety by the more detailed information contained
herein. Cross references in the summary are to the indicated captions or
portions of this Consent Solicitation Statement.
The Partnership
Real Estate Associates Limited IV is a California limited partnership,
the general partners of which are National Partnership Investments Corp., a
California corporation and National Partnership Investment Associates ("NPIA"),
a California limited partnership.
The Partnership holds limited partnership interests in twenty-two local
limited partnerships and a general partnership interest in Real Estate
Associates II ("REA II"), which in turn holds limited partnership interests in
an additional seven limited partnerships. A majority of the 29 limited
partnerships in which the Partnership holds a direct or indirect interest hold
title to a low income housing project that is subsidized and/or has a mortgage
note payable to or insured by an agencies of the federal, or local government.
Pursuant to certain state housing finance statutes and regulations, certain of
such limited partnerships are subject to limitations on the distributions of
dividends to the Partnership. Such statutes and regulations require the limited
partnerships to hold cash flows in excess of such dividend limitations in
restricted reserve accounts that may be used only for limited purposes. The
Properties are located in fourteen states. Nine of the Properties are located in
California. See "THE PARTNERSHIP -- The Properties."
The Partnership maintains offices at 9090 Wilshire Boulevard, Beverly
Hills, California 90211 (310-278-2191). The Partnership was organized as a
California limited partnership on August 24, 1981. See "THE PARTNERSHIP."
The Sale
The Partnership proposes to sell its interests in 14 of the 22 limited
partnerships in which the Partnership holds a direct limited partnership
interest, and its interests in six of the seven limited partnerships in which
the Partnership holds an indirect interest through REA II, to the REIT for cash
and the assumption of certain mortgage indebtedness. The Properties comprise
2,779 apartment units. The Partnership will remain in existence after
consummation of the proposed Sale and will retain direct or indirect interests
in a total of nine property-owning limited partnerships with an aggregate of 490
apartment units.
The aggregate consideration for the Real Estate Interests of the twenty
Local Partnerships that the Managing General Partner currently anticipates will
be included in the Sale is $77,575,314, payable $5,462,648 in cash and
$72,112,666 by assumption by the REIT of certain mortgage indebtedness. The REIT
intends to raise the cash to be paid to the Partnership through a private
placement of approximately $250 million of its equity securities (the "Private
Placement"). The REIT has agreed to assign its interests in one of the Local
Partnerships to a third party that is the general partner of four of the Local
Partnerships immediately after consummation of the Sale. The REIT intends to
commence an initial public offering of its equity securities subsequent to the
consummation of the Sale.
The net proceeds of the Sale will be distributed to the Limited and
General Partners in accordance with the cash distribution provisions of the
Partnership Agreement. See "THE SALE--Distribution of Sale Proceeds" for a
summary of the cash distribution rules applicable to such distributions. Limited
Partners are expected to receive a distribution of approximately $406 in cash
per unit. The units (the"Units"), each of which consists of two limited
partnership interests and warrants to purchase two additional limited
partnership interests, were originally sold for $5,000 per unit. All expenses of
the Sale will be borne by the Partnership.
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The distribution is anticipated to be sufficient to pay any federal
and state income taxes that would be due in connection with the Sale, assuming
that Limited Partners have suspended passive losses of $2,093 per Unit from the
Partnership that could be deducted in full against such Limited Partners'
ordinary income that is taxed at a federal rate of 39.6% and an effective state
income tax rate of 5%. For such Limited Partners, the Sale should result in a
net cash distribution of $287 per Unit. For Limited Partners who do not have
sufficient taxable income to be taxed at a 39.6% marginal federal rate or who
have other losses available to deduct against their taxable income and therefore
could not fully utilize such suspended passive losses to offset their ordinary
income, the Sale could result in a federal and state tax cost in excess of cash
distributions. For Limited Partners who do not have sufficient taxable income to
be taxed at a 39.6% marginal federal rate, the Sale may result in a smaller net
cash distribution. For Limited Partners who have been able to use all of the
passive losses generated by the Partnership on a current basis, the Sale should
result in a federal and state income tax cost of approximately $646 per Unit in
excess of the cash distribution. For a discussion of the bases of these
assumptions, see "FEDERAL INCOME TAX CONSEQUENCES." Each Limited Partner is
urged to consult his, her or its own tax advisor for a more detailed explanation
of the specific tax consequences to such Limited Partner from the Sale.
NAPICO and NPIA, the General Partners, will be entitled to receive
distributions in connection with the Sale of $54,626 in the aggregate.
The Sale is conditioned upon, (i) approval of a majority in interest of
the Limited Partners of the Partnership; (ii) the consummation of the Private
Placement; (iii) the consents of the general partners of the Local Partnerships
in which the REIT intends to acquire interests; (iv) the approval of HUD and
certain state housing finance agencies; and (v) the consummation of a minimum
number of real estate purchases from the Casden Partnerships in connection with
the REIT Transaction. See "THE PARTNERSHIP -- Regulatory Arrangements" and "THE
SALE -Conditions."
Potential Benefits of the Sale
The Managing General Partner believes that the Sale achieves the
Partnership's investment objectives for the following reasons:
o Receipt of Cash. The Sale will result in a cash distribution of
$406 per Unit to Limited Partners, which amount is anticipated to
be sufficient to pay any federal and state income taxes that would
be payable in connection with the Sale, assuming (i) that Limited
Partners have suspended passive losses of $2,093 per Unit from the
Partnership; (ii) that such losses are available to offset
ordinary income taxed at the 39.6% marginal federal rate and (iii)
federal and state effective capital gains rates of 25% and 5%,
respectively. For a discussion of the bases of these assumptions,
See "FEDERAL INCOME TAX CONSEQUENCES." The Partnership has never
made distributions and, if the Sale is not completed, the Managing
General Partner does not anticipate that the Partnership will make
distributions in the near future.
o Opportune Time to Sell. The Managing General Partner believes that
now may be an opportune time for the Partnership to sell its
interests in the Properties, given current conditions in the real
estate and capital markets. Specifically, the Managing General
Partner believes that investor demand for the stock of certain
public real estate companies similar to the proposed REIT has
increased significantly over the past several years. The Managing
General Partner believes that the current interest rate
environment and the availability of capital for real estate
investment trusts will enable Casden to form the REIT and make the
proposal to the Partnership for the Sale, which provides the
Partnership with an opportunity to maximize the value of the
Properties. In addition, the Managing General Partner took into
account the potential impact of recent changes in laws and
policies relating to payments under HAP Contracts, which the
Managing General Partner believes will result in significant
reductions in cash flow from the
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Properties. See "--Resolving HUD Uncertainties," "THE PARTNERSHIP --
Regulatory Arrangements" and "THE SALE -- Background and Reasons for
the Sale."
o Third Party Fairness Opinion. The Managing General Partner has
determined that the Properties owned by the Local Partnerships
that the REIT currently anticipates purchasing in connection with
the Sale have an aggregate value of $85,261,684 (the "Aggregate
Property Valuation"). Robert A. Stanger & Co., Inc. ("Stanger"),
an independent, nationally recognized real estate investment
banking firm, has been engaged by the Partnership to render an
opinion (the "Fairness Opinion") to the Partnership as to the
fairness, from a financial point of view, to Limited Partners of
the Aggregate Property Valuation utilized in connection with
determining the Purchase Price to be received by the Partnership
for the Real Estate Interests in the Sale. Stanger has conducted
certain reviews described herein and has concluded, subject to the
assumptions, qualifications and limitations contained in its
opinion, that the Aggregate Property Valuation utilized in
connection with determining the Purchase Price to be received for
the Real Estate Interests in the Sale is fair, from a financial
point of view, to Limited Partners. The Fairness Opinion addresses
neither the adjustments made to the Aggregate Property Valuation
to determine the distribution amount payable to Limited Partners
in connection with the Sale, (including the allocation of the
Aggregate Property Valuation between the Limited Partners, General
Partners and the local general partners,) nor the Purchase Price
itself. See "THE SALE-- Fairness Opinion."
o Eliminating the Risks of Real Estate Investing. Continued
ownership of the Properties subjects the Partnership to continued
risks inherent in real estate ownership, such as national and
local economic trends, supply and demand factors in the local
property market, the cost of operating and maintaining the
physical condition of the Properties and the cost and availability
of financing for prospective buyers of the Properties. No
assurance can be given that a prospective buyer would be willing
to pay an amount equal to or greater than the Purchase Price for
the Properties in the future.
o Unattractiveness of Other Options. The Managing General Partner
does not believe that other alternatives available to the
Partnership are as attractive to the Partnership as the Sale.
One alternative considered by the Managing General Partner was
continued indirect ownership of the Properties by the Partnership.
However, the Partnership is not currently making distributions to
the Limited Partners and recent changes in laws and policies
relating to payments under HAP Contracts are expected to result in
significant reductions in cash flows from the Properties. Further,
the tax benefits resulting from continuing to own the Properties,
which are available only to those Limited Partners able to
currently utilize passive losses (which can only be deducted
against passive income), are diminishing. The Managing General
Partner does not believe that the Partnership could realize the
same benefits anticipated to be received by the REIT through its
acquisition of the Properties. The REIT expects to realize
potential benefits from acquisitions of the Real Estate Interests
by also acquiring the interests of the general partners of each of
the Local Partnerships and the right to manage each of the
Properties, and the insured mortgage indebtedness currently
encumbering the Properties. The Managing General Partner does not
believe that the Partnership could obtain access to the capital
markets to make such acquisitions or that such acquisitions would
be consistent with the Partnership's investment objectives.
The Managing General Partner also considered marketing the
Properties to third parties in cooperation with the general
partners of the Local Partnerships; however, the Managing General
Partner does not believe that such alternative would be in the
interests of the Limited Partners, because the Managing General
Partner believes, based on the current uncertainties in the
government subsidized housing market, that it would be difficult
to sell the Properties and do not believe that such a sale would
result in a purchase price for the Properties as high as the
Purchase Price offered in connection with the Sale. Furthermore,
for a third party to acquire the Properties, it would have to
acquire not only the limited partnership interests in the Local
Partnerships owned by the Partnership, but also the interests of
each
703767.5
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local general partner. The Partnership owns only limited
partnership interests in the Local Partnerships and does not hold
title to the Properties. As a result, the Managing General Partner
believes that marketing the Properties to third parties would
result in significant delays and uncertainties. There can be no
assurance, however, that a well-capitalized third party buyer
would not be willing to pay a price in excess of the Purchase
Price to acquire the Properties.
In determining the structure of the transaction, the Managing
General Partner took into account the fact that the Partnership
owns limited partnership interests in the Local Partnerships and
does not directly own the Properties. A Property may not be sold
without the participation of the general partner of the Local
Partnership that owns such Property. As a result, the simultaneous
sale of the local general partners' interests is necessary to
enable the Partnership to realize the value of its Real Estate
Interests. This factor limited the ability of the Partnership to
market its interests to third parties. Additionally, the amount
required to be paid by a purchaser (whether a third party buyer or
the REIT) to purchase the interests of the local general partners
will have the effect of reducing the amount of consideration that
a buyer is willing to pay for the Partnership's Real Estate
Interests. The amounts that affiliates of the Managing General
Partner will pay to the unaffiliated local general partners in
connection with the buyouts of such local general partners is
being determined in arm's-length negotiations. Therefore, the
Managing General Partner believes that, while the amount paid to
the local general partners affects the amount of distribution to
Limited Partners and the buyout of the local general partners'
interests will benefit the REIT, the terms of these transactions
are fair to the Partnership and the Limited Partners.
Several of the options considered by the Managing General Partner,
including the reorganization of the Partnership as a real estate
investment trust, a rollup involving the Partnership and the use
of an "UPREIT" structure, would have (i) been prohibitively
expensive and logistically impractical; (ii) entailed compliance
with the rollup rules promulgated under the Securities Act of
1933, as amended (the "Securities Act"), which may have resulted
in significant delays, thereby potentially causing the Partnership
to miss the currently favorable market conditions for real estate
investment trusts; and (iii) resulted in the Limited Partners
receiving publicly traded securities rather than cash in exchange
for their Units. Such publicly traded securities would be subject
to the market risks generally applicable to equity securities. The
Managing General Partner believes that receipt of such securities
would be inconsistent with the Partnership's ultimate objective of
returning cash to the Limited Partners and winding up the business
of the Partnership. See "THE SALE -- Background and Reasons for
the Sale."
o Resolving HUD Uncertainty. Seventeen of the twenty Properties are
subject to Housing Assistance Payments Contracts under Section 8
of the United States Housing Act. The Managing General Partner
anticipates that, for the foreseeable future, rental rate
increases under such contracts will either not be permitted by HUD
or will be negligible and unlikely to exceed increases in
operating expenses. Most of these contracts will expire by the end
of 2003 and HUD will not renew them under their current terms.
Under recently passed legislation, in most cases project rents
will be reduced and the project mortgages restructured, which is
expected to reduce the cash flow from the Properties and could
create adverse tax consequences to the Limited Partners. HUD has
not yet issued implementing regulations on the Section 8
restructuring program, which creates additional uncertainty.
Accordingly, the Managing General Partner believes it may be
beneficial to the Limited Partners to avoid such uncertainties by
approving the Sale at this time. See "THE PARTNERSHIP-- Regulatory
Arrangements." and "THE SALE-- Background and Reasons for the
Sale."
o Reduced Transaction Costs. The Partnership will not be required to
pay brokerage commissions in connection with the Sale, which would
typically be paid when selling real property to third parties. As
a result, the Sale is likely to produce a higher cash distribution
to Limited Partners than a comparable sale to an unaffiliated
third party. In addition, the Managing General Partner believes
that selling a significant portion of the Partnership' portfolio
of real estate assets in a single transaction (as opposed
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<PAGE>
to a series of individual sales) will enable the Partnership to
dispose of a significant portion of its portfolio in an expedited
time frame and provide additional transaction cost savings,
although the Partnership will pay certain expenses, such as the
costs of structural and engineering inspections and costs relating
to proxy solicitation and fairness opinions which may be higher
than comparable expenses in a transaction with an unaffiliated
third party. See "THE SALE -- Transaction Costs" for a schedule of
the costs the Partnership expects to incur in connection with the
Sale.
o Anticipated Tax Benefits/Tax Law Changes. Subsequent to the
formation of the Partnership, tax law changes reduced the tax
benefits anticipated to be received by Limited Partners by not
allowing Limited Partners to currently deduct many of the losses
generated by the Partnership against a Limited Partner's other
taxable income from non-passive sources. As a result, Limited
Partners may have a significant amount of suspended passive losses
available to reduce the tax impact of the taxable gain generated
by the Sale. If a Limited Partner has not utilized any of the
passive activity losses allocated to such Limited Partner in
excess of those amounts permitted under certain transitional
rules, the Limited Partner will have a net federal and state tax
benefit from their suspended passive losses of approximately $933.
Because passive losses are generally only deductible against
passive income after 1986, the Managing General Partner does not
have any basis for determining the amount of such passive losses
which have previously been utilized by Limited Partners. The
anticipated cash distribution of approximately $406 per Unit would
be sufficient to pay the federal and state tax liability arising
from the Sale, assuming a federal capital gains rate of 25% and
assuming an effective state tax rate of 5%, and that Limited
Partners have suspended passive losses of $2,093 per Unit from the
Partnership (which is generally the amount of passive losses that
a Limited Partner would have had it not utilized any of its
passive losses and would result in a cash distribution of $287 per
Unit.
Potential Adverse Effects of the Sale
Limited Partners should also consider the following risk factors in
determining whether to approve or disapprove the Sale:
o Loss of Opportunity to Benefit from Future Events. It is possible
that the future performance of the Properties will improve or that
prospective buyers may be willing to pay more for the Properties
in the future. It is possible that Limited Partners might earn a
higher return on their investment if the Partnership retained
ownership of the Properties. By approving the Sale, Limited
Partners will also be relinquishing certain current benefits of
ownership of the Properties, such as the ability to deduct tax
losses generated by the Partnership against other passive income.
See "THE SALE -- Background and Reasons for the Sale."
o No Solicitation of Third Party Offers. The Managing General
Partner has not solicited any offers from third parties to acquire
the Real Estate Interests. There is no assurance that the Managing
General Partner would not be able to obtain higher or better
offers for the Real Estate Interests if such offers were to be
solicited from independent third parties. The Partnership does not
have the power to unilaterally sell any of the Properties..
o Sale Not Negotiated at Arm's-Length. Affiliates of the Managing
General Partner will possess a significant ownership interest in
the REIT and receive substantial other benefits from the formation
of the REIT and the Sale. The Purchase Price was not negotiated at
arm's-length. The Purchase Price was established by the Managing
General Partner and the Partnership did not retain an independent
financial or legal advisor to negotiate the terms of the Sale.
o Conflicts of Interest. In evaluating the proposed Sale, Limited
Partners should consider that Casden is both the sponsor of the
REIT and an affiliate of the Managing General Partner. If the REIT
is
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successfully formed and capitalized, the current owners of Casden
are likely to realize a substantial increase in the value and
liquidity of their investment in Casden Properties. The terms of
the Sale have been determined on behalf of the Partnership by
officers and directors of Casden who will directly benefit from
the Sale. Unlike Casden, the Limited Partners will not participate
in the REIT. It is anticipated that approximately 51% of the
equity securities of the REIT will be held by Casden and its
affiliates following the Private Placement, based on the terms of
the Private Placement as currently contemplated.
o Tax Consequences. The Sale will have a tax impact on Limited
Partners, producing a long-term capital gain of approximately
$3,508 per Unit. It is not anticipated that the Sale will produce
ordinary income attributable to depreciation recapture. For
Limited Partners who have been able to use all of the passive
losses generated by the Partnership on a current basis, the Sale
should result in a federal an state income tax cost of
approximately $646 per Unit in excess of cash distributions. In
addition, Limited Partners who have available all of the suspended
passive losses generated by the Partnership, but whose ordinary
income is not taxed at the 39.6% marginal federal rate, may incur
a federal income tax cost in excess of the cash distribution made
in connection with the Sale. For a discussion of the tax impact of
the Sale, and the Partnership's assumptions and the bases
therefor, see "CERTAIN FEDERAL TAX CONSEQUENCES." THE SPECIFIC TAX
IMPACT OF THE SALE ON LIMITED PARTNERS SHOULD BE DETERMINED BY
LIMITED PARTNERS IN CONSULTATION WITH THEIR TAX ADVISORS.
o No Appraisals; Limits on Fairness Opinion. The Managing General
Partner has not obtained independent appraisals of the Properties
to determine their value. In addition, while the Fairness Opinion
addresses the fairness of the Aggregate Property Valuation
utilized in connection with determining the Purchase Price, it
does not address the fairness of the Purchase Price itself or the
adjustments to the Aggregate Property Valuation utilized to arrive
at the distributions to the Limited Partners that will result from
the Sale, including the allocation of the Aggregate Property
Valuation between the Limited Partners and the general partners of
the Local Partnerships, which affects the amount of the
consideration to be paid to the Limited Partners. See "THE SALE--
Fairness Opinion."
o No Dissenter's Rights. Under the Partnership Agreement and
California law, Limited Partners do not have dissenters' rights of
appraisal.
o Conditions to Sale. The Sale is subject to certain conditions in
addition to approval of the Sale by the Limited Partners,
including consummation of the Private Placement. Accordingly, even
if the Sale is approved by the Limited Partners and a purchase and
sale agreement is entered into, the consummation of the Sale could
be delayed for a significant period of time and it is possible
that the Sale may not be consummated. The execution of a purchase
and sale agreement in connection with the Sale could delay the
time some or all of the Properties could be sold to a third party
if the Sale is not consummated.
o Uncertainty of Local General Partner Buyouts. The Managing General
Partner is in the process of attempting to negotiate buyouts of
the interests in the Local Partnerships held by the general
partners of the Local Partnerships. All but two of the general
partners of the Local Partnerships are unaffiliated with Casden
and the buyouts of the unaffiliated local general partners are
being negotiated on an arms- length basis. There can be no
assurance that the Managing General Partner will be able to
successfully complete buyouts from all of the unaffiliated general
partners on acceptable terms. If the Partnership retains its
interests in any of the Local Partnerships, the cash flows
generated by any such Local Partnerships are not likely to be
adequate to meet the operating expenses of the Partnership on an
ongoing basis and the Partnership may be required to utilize a
portion of its cash reserves to meet its operating expenses. The
Managing General Partner intends to eventually dispose of the
Partnership's interests in the limited partnerships not included
in the Sale, then wind up the affairs of the Partnership,
703767.5
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although the time frame for such activities cannot be determined
at this time. To the extent that the ultimate cost of the buyouts
of the local general partners exceeds the Managing General
Partner's current estimates of such cost, the distributions to
Limited Partners resulting from the Sale may be reduced. At the
time they consent to the Sale, the Limited Partners will not know
which of the Properties will ultimately be transferred in
connection with the Sale; nevertheless, consent to the Sale will
be deemed effective regardless of which Properties are ultimately
included in the Sale.
o Amendments to Partnership Agreement. In addition to approval of
the Sale, Limited Partners are also being asked to approve certain
amendments to the Partnership Agreement which are required to
consummate the Sale. For example, the Partnership Agreement
prohibits the Partnership from selling any Property or any
interest in a Property if the cash proceeds from such sale would
be less than the state and federal taxes applicable to such sale,
calculated using the maximum tax rates then in effect. The
Managing General Partner is seeking an amendment that modifies
such prohibition to allow the Partnership to assume, for purposes
of calculating taxes in connection with a sale of Properties, that
all of the suspended passive losses from the Partnership are
available to Limited Partners to offset ordinary income taxed at
the 39.6% federal marginal federal rate. By approving such
amendment, the Limited Partners are relinquishing a potential
benefit conferred by the terms of the Partnership Agreement.
Amendments to Partnership Agreement
Certain amendments to the Partnership Agreement are necessary in
connection with the consummation of the Sale.
The Partnership Agreement currently prohibits a sale of any of the
Properties to the Managing General Partner or its affiliates. Consent of the
Limited Partners is being sought for an amendment to the Partnership Agreement
that eliminates such prohibition.
The Partnership Agreement also requires that any agreement entered into
between the Partnership and the Managing General Partner or any affiliate of the
Managing General Partner shall provide that it may be canceled at any time by
the Partnership without penalty upon 60 days' prior written notice (the
"Termination Provision"). It is the position of the Managing General Partner
that the Termination Provision does not apply to the Sale; nevertheless, the
Managing General Partner is seeking the approval of the Limited Partners to an
amendment to the Partnership Agreement that eliminates the Termination Provision
in connection with the Sale or any future disposition of Properties.
The Partnership Agreement also prohibits the Partnership from selling
any Property or any interest in a Property if the cash proceeds from such sale
would be less than the state and federal taxes applicable to such sale,
calculated using the maximum tax rates then in effect (the "Tax Requirement").
The Managing General Partner is seeking the approval of the Limited Partners to
an amendment to the Partnership Agreement that modifies the Tax Requirement so
as to allow the Partnership to calculate the aggregate net tax liability from a
sale of a Property or Properties by subtracting from the aggregate tax payable
on the gain from such sale the tax benefit resulting from the ability to deduct
his, her or its suspended passive losses against ordinary income, assuming that
the Limited Partner has sufficient ordinary income that would otherwise have
been taxed at the 39.6% marginal tax rate for federal income tax purposes to
fully utilize such losses at such rate, an effective state income tax rate of 5%
and that such suspended Passive Losses remain available. By approving such
Amendment, the Limited Partners are relinquishing a potential benefit conferred
by the terms of the Partnership Agreement. However, the Managing General Partner
believes that it would not be possible to find a buyer willing to purchase the
Real Estate Interests under the conditions currently specified in the
Partnership Agreement, because compliance with such conditions would result in a
purchase price for the Properties substantially higher than their fair market
value.
703767.5
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<PAGE>
The consent of Limited Partners holding a majority in interest of the
outstanding Units is required in order to amend the Partnership Agreement.
Limited Partners must approve the proposed Sale and each of the three proposed
Amendments in order to allow consummation of the Sale.
Limited Partner Approval
The Managing General Partner is seeking the consent of the Limited
Partners to the Sale and the Amendments. The Partnership Agreement requires the
prior consent of Limited Partners holding a majority of the outstanding Units (a
"Majority Vote") to any sale of substantially all of the Partnership's assets,
and to an amendment to the Partnership Agreement.
If the Limited Partners do not approve the Sale and the Amendments by a
Majority Vote, or the other conditions to the consummation of the Sale are not
met, there will be no change in its investment objectives, policies and
restrictions and the Partnership will continue to be operated in accordance with
the terms of the Partnership Agreement. The Partnership will bear the costs of
the consent solicitation process whether or not the Sale is approved or
ultimately consummated.
Third-Party Opinion
The Partnership has obtained from Stanger, a recognized independent
real estate investment banking firm, an opinion that the Aggregate Property
Valuation utilized in connection with determining the Purchase Price to be
received by the Partnership for the Real Estate Interests in the Sale is fair to
the Limited Partners from a financial point of view. In the course of preparing
its Fairness Opinion, Stanger conducted such reviews as it deemed appropriate
and discussed its methodology, analysis and conclusions with the Managing
General Partner. The Managing General Partner has not obtained independent
appraisals to determine the value of the Properties. The Fairness Opinion, which
is subject to certain assumptions, qualifications and limitations, is attached
hereto as Exhibit A. Stanger has no obligation to update the Fairness Opinion on
the basis of subsequent events. Stanger will be paid an aggregate fee by the
Casden Partnerships of up to approximately $455,000, plus $4,100 per property
owned by the Casden Partnerships that is evaluated by Stanger. The portion of
the fee allocable to the Partnership is $27,800, plus $4,100 per Property, or an
aggregate of approximately $102,000. No portion of Stanger's fee is contingent
upon consummation of the Sale or completion of the REIT Transaction. See "THE
SALE -- Fairness Opinion" and "--Potential Adverse Effects of the Sale--No
Appraisals; Limits on Fairness Opinion."
Recommendation of the Managing General Partner
After a comprehensive review of various alternatives, the Managing
General Partner believes that the Sale is in the best interests of the Limited
Partners. The Managing General Partner believes that the current interest rate
environment and the availability of capital for real estate investment trusts
will enable Casden to form the REIT and make the proposal to the Partnership for
the Sale, which provides the Partnership with an opportunity to maximize the
value of the Real Estate Interests. In addition, the Managing General Partner
reviewed (but did not specifically adopt) the Fairness Opinion. See "THE SALE --
Alternatives to the Sale."
Based upon their analysis of the alternatives and their own business
judgment, the Managing General Partner believes that the terms of the Sale,
including the Aggregate Property Valuation and the Purchase Price for the Real
Estate Interests and the distributions to be made to the Limited Partners, is
fair from a financial point of view to the Limited Partners. In addition, the
Managing General Partner reviewed the Fairness Opinion. Accordingly, the
Managing General Partner has approved the Sale and recommends that it be
approved by the Limited Partners.
703767.5
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Limited Partners should note, however, that the Managing General Partner's
recommendation is subject to inherent conflicts of interest. See "CONFLICTS OF
INTEREST."
Conflicts of Interest
A number of conflicts of interest are inherent in the relationships
among the General Partners, the Casden Partnerships, Casden and the REIT, which
may, among other things, influence the recommendation of the Managing General
Partner. These conflicts include the following:
1. The terms of the Sale (including the Purchase Price) were
established by the REIT and the Managing General Partner (which are related
parties) without the participation of any independent financial or legal
advisor. There can be no assurance that arms-length negotiations would not have
resulted in terms more favorable to the Limited Partners. In addition, the
Properties to be included in the Sale were determined by the REIT and the
Managing General Partner.
2. Although Stanger provided an independent opinion with respect to the
fairness of the Aggregate Property Valuation utilized in connection with the
determination of the Purchase Price, no independent financial or legal advisor
was engaged to represent the interests of the Limited Partners and no third
party appraisals of the Properties were obtained.
3. If the REIT Transaction is consummated, affiliates of the Managing
General Partner will receive substantial interests in the REIT in exchange for
the contribution of real property assets and the property management operations
of Casden, including direct or indirect interests in the Managing General
Partner. The Managing General Partner anticipates that it will receive
significant economic benefits as a result of receiving interests in the REIT.
Such interests are expected to enjoy greater liquidity than the Managing General
Partner's current interests in the Partnership if the REIT successfully
completes an initial public offering following its initial formation as a
private REIT. Unlike Casden, the Limited Partners will not participate in the
REIT. It is anticipated that approximately 51% of the equity securities of the
REIT will be held by Casden and its affiliates following the Private Placement,
based on the terms of the Private Placement as currently contemplated.
4. It is anticipated that the return from the interests in the REIT to
be received by the Managing General Partner and its affiliates in connection
with the REIT Transaction, if it is successfully consummated, will exceed the
return such persons currently receive from the real estate assets and businesses
such persons will contribute or sell to the REIT.
5. The officers and employees of Casden and its affiliates will be
employed by the REIT. NAPICO will become a subsidiary of the REIT. See
"CONFLICTS OF INTEREST."
6. Affiliates of the Managing General Partner are currently in the
process of attempting to negotiate a buyout of the interests in the Local
Partnerships held by the general partners of the Local Partnerships. The
Managing General Partner will benefit from such buyouts because the interests of
such local general partners will be acquired by the REIT, but the costs of such
buyouts will be indirectly borne by the Limited Partners. To the extent that the
ultimate cost of such buyouts exceeds the Managing General Partner's current
estimates of such cost, the distributions to Limited Partners resulting from the
Sale could be reduced. In addition, the value attributed to the management fees
payable to the general partners of the two Local Partnerships affiliated with
the Managing General Partner was deducted from the Aggregate Property Valuation
when determining the Purchase Price payable to the Limited Partners. See
"CONFLICTS OF INTEREST."
Federal Income Tax Consequences
Generally, the Sale will result in a gain to the Partnership and,
accordingly, to the Limited Partners, to the extent that the consideration
received by the Partnership with respect to the Sale, including the amount of
Partnership
703767.5
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indebtedness of which the Partnership is relieved, exceeds its adjusted basis in
the Properties. The income tax calculations contained in this Consent
Solicitation Statement are based upon federal tax rates equal to 39.6% for
ordinary income and 25% for capital gain attributable to depreciation recapture.
In addition, such calculations assume that Limited Partners have suspended
passive losses of $2,093 per Unit from the Partnership and that such losses are
available to offset ordinary income taxed at the 39.6% marginal federal rate. In
light of the suitability standards that Limited Partners met at the time of
their original investment in the Partnership, the Managing General Partner
assumed for purposes of calculating the tax liabilities resulting from the
proposed Sale that each Limited Partner will have taxable income in excess of
$155,950 in 1998 (which is the income level at which married taxpayers
effectively become subject to a 39.6% marginal rate). While the financial
circumstances of the Limited Partners may vary considerably, the Managing
General Partner believes it is reasonable to assume that the majority of the
current Limited Partners will be in the highest federal tax bracket in 1998.
Limited Partners should consult their own tax advisors with respect to their
individual tax situations and as to the federal, state, local and other tax
consequences of the Sale.
See "FEDERAL INCOME TAX CONSEQUENCES."
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Summary Financial Information
The following table sets forth selected historical financial and
operating data of the Partnership for the fiscal years ended December 31, 1997,
1996, 1995, 1994, and 1993.
The following information should be read in conjunction with the
Partnership's Annual Report on Form 10-K attached hereto as Annex B.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income $ 325,842 $ 173,145 $ 152,450 $ 105,982 83,290
Operating Expenses $ 969,078 $ 809,646 $ 806,917 $ 786,244 780,323
Loss From Operations $ (643,236) $ (636,501) $ (654,466) $ (680,262) (697,033)
Distributions From Limited
Partnerships Recognized as
Income 1,406,888 1,107,630 1,222,286 1,053,488 948,374
Equity in Income of Limited
Partnerships and amortization
of acquisition costs 355,483 483,414 487,116 314,015 372,206
----------- ----------- ----------- ------------ ------------
Net Income $ 1,119,135 $ 954,543 $ 1,054,936 $ 687,241 623,547
=========== =========== =========== ============ ============
Net Income allocated
to Limited Partners $ 1,107,944 $ 944,998 $ 1,044,387 $ 680,369 617,312
Net Income per Limited
Partnership Interest $ 85 $ 72 $ 80 $ 52 47
=========== =========== =========== ============ ============
Total assets $ 10,896,957 $ 9,774,550 $ 8,997,384 $ 7,954,058 7,226,884
=========== =========== =========== ============ ============
Investments in Limited $ 3,374.262 $ 3,098,674 $ 3,221,339 $ 3,234,884 3,289,353
Partnerships
=========== =========== =========== ============ ============
Partners' Equity $ 9,403,481 $ 8,284,346 $ 7,329,803 $ 6,274,867 5,587,126
Limited Partners' Equity $ 9,581,476 $ 8,473,632 $ 7,528,635 $ 6,484,148 5,803,779
Limited Partners' Equity per
Limited partnership interest $ 725 $ 642 $ 570 $ 491 440
-- ----------- -- ----------- -- ----------- -- ------------ - ------------
</TABLE>
Transaction Expenses
The Partnership will bear its direct costs relating to the Sale,
including customary closing costs such as the seller's portion of title
insurance and escrow fees, and the costs incurred in connection with this
solicitation of consents. The aggregate amount of such costs is expected to be
approximately $421,000, which the Partnership is expected to pay using cash
equivalents held by the Partnership. The transaction costs will be borne by the
Partnership whether or not the Sale is approved by the Limited Partners or
ultimately consummated. Costs incurred individually by the Casden Partnerships,
including accounting and legal fees, will be borne directly by such
Partnerships.
Voting Procedures
This Consent Solicitation Statement outlines the procedures to be
followed by Limited Partners in order to consent to the Sale. A form of Consent
of Limited Partner (a "Consent") is attached hereto. These procedures must be
strictly followed in order for the instructions of a Limited Partner as marked
on such Limited Partner's Consent to be effective. The following is a summary of
certain of these procedures:
703767.5
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<PAGE>
1. A Limited Partner may make his or her election on the Consent only
during the solicitation period commencing upon the date of delivery of this
Consent Solicitation Statement and continuing until the earlier of (i)
___________, 1998 or such later date as may be determined by the Managing
General Partner and (ii) the date upon which the Managing General Partner
determines that a Majority Vote has been obtained (the "Solicitation Period").
2. Limited Partners are encouraged to return a properly completed and
executed Consent to the Partnership prior to the expiration of the Solicitation
Period.
3. A Consent delivered by a Limited Partner may be changed prior to the
expiration of the Solicitation Period by delivering to the Partnership a
substitute Consent, properly completed and executed, together with a letter
indicating that the Limited Partner's prior Consent has been revoked.
4. The Sale and each of the proposed Amendments are being submitted to
the Limited Partners as separate resolutions. Limited Partners must approve the
proposed Sale and each of the proposed Amendments in order to allow consummation
of the Sale.
5. A Limited Partner submitting a signed but unmarked Consent will be
deemed to have voted FOR the Partnership's participation in the Sale, and the
Amendments.
II. THE PARTNERSHIP
General
The Partnership is a limited partnership formed under the laws of the
State of California on August 24, 1981. On March 12, 1982, the Partnership
offered 3,000 units consisting of 6,000 limited partnership interests and
warrants to purchase 6,000 additional limited partnership interests at $5,000
per unit through an offering managed by an affiliate of the predecessor of
Lehman Brothers Inc. Each limited partnership interest of the Partnership is
referred to herein as an "Unit." There are currently 13,336 Units outstanding.
The General Partners of the Partnership are NAPICO and NPIA. The
business of the Partnership is conducted primarily by NAPICO. National
Partnership Investments Associates, a California Limited Partnership ("NPIA"),
is the non-managing General Partner of the Partnership. Pursuant to an agreement
between NAPICO and NPIA, NAPICO has the primary responsibility for the
performance of any duties required to be performed by the General Partners and,
in general, has sole and final discretion to manage and control the business of
the Partnership and make all decisions relating thereto. NPIA has not
participated in the management of the Partnership, or in decisions made by the
Partnership in connection with the proposed Sale. NPIA has not taken a position
with respect to the Sale nor has it participated in the preparation of this
Consent Solicitation Statement. The Partnership has no employees of its own.
Casden Investment Corporation owns 100 percent of NAPICO's stock. The
current members of NAPICO's Board of Directors are Charles H. Boxenbaum, Bruce
E. Nelson, Alan I. Casden and Henry C. Casden. Alan I. Casden is the sole
director and stockholder of Casden Investment Corporation and, accordingly,
controls NAPICO.
The original objectives of the Partnership were to own and operate the
Properties (and certain other real estate assets) for investment so as to obtain
(i) tax benefits for the Partners; (ii) reasonable protection for the
Partnership's capital investments; (iii) potential for appreciation, subject to
considerations of capital preservation; and (iv) potential for future cash
distributions from operations (on a limited basis), refinancings or sales of
assets.
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The Partnership holds limited partnership interests in 22 limited
partnerships. The Partnership also holds a general partnership interest in REA
II, which in turn holds limited partnership interests in seven limited
partnerships. Accordingly, the Partnership holds directly, or indirectly through
REA II, investments in 29 limited partnerships. A majority of the 29 limited
partnerships own a low income housing project that is subsidized and/or has a
mortgage note payable to or insured by an agency of the federal, or local
government. The remaining local limited partnerships each own a conventional
multi-unit residential apartment complex.
The Local Partnerships in which the Partnership has invested were, at
least initially, organized by private developers who acquired the sites, or
options thereon, and applied for applicable mortgage insurance and subsidies.
The Partnership became the principal limited partner in these Local Partnerships
pursuant to arm's-length negotiations with these developers, or others, who act
as general partners. As a limited partner, the Partnership's liability for
obligations of the Local Partnerships is limited to its investment. The general
partner of each Local Partnerships retains responsibility for maintaining,
operating and managing the Property.
Local Partnerships generated $1,486,783 in cash flow to the
Partnership, and interest income of $325,842 in 1997, before Partnership
expenses of approximately $969,078. On December 31, 1997, the Partnership had
cash on hand of $7,430,796.
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The Properties
During 1997, all of the Properties in which REAL IV had invested were
substantially rented. The following is a schedule of the status, as of December
31, 1997, of the Properties in which REAL IV holds an interest. Asterisks denote
properties to be included in the Sale. Daggers denote properties in which the
Partnership holds an indirect interest through REA II.
<TABLE>
<CAPTION>
Units Authorized
for Rental Percentage
No. of Assistance Units of
Units under Section 8 Occupied Total-Units
Name & Location --------------- -------------------- ----------- -------------
- ---------------
Alliance Towers*+
<S> <C> <C> <C> <C>
Alliance, OH 101 101 100 99%
Antelope Valley Apartments*
Lancaster, CA 121 121 120 99%
Armitage Commons*
Chicago, IL 104 104 103 99%
Baughman Towers*+
Phillippi, WV 104 104 102 98%
Beacon Hill/
Hillsdale Place*+
Hillsdale, MI 199 199 195 98%
Branford Elderly II
Branford, CT 44 44 43 98%
Buckingham Apartments*
Los Angeles, CA 83 83 83 100%
Cherry Ridge Terrace*
Barnesboro, PA 62 62 53 85%
Coatesville Towers*+
Coatesville, PA 90 90 89 99%
Daniel Scott Commons
Chester, PA 72 72 72 100%
Ethel Arnold Bradley
Los Angeles, CA 80 80 80 100%
Glenoaks Townhouses*
Los Angeles, CA 48 48 48 100%
Lakeland Place*+
Waterford, MI 200 200 200 100%
Loch Haven Apartments*+
Lauderhill, FL 208 None 206 99%
Ninety-Five Vine Street
Hartford, CT 31 31 30 97%
Oakridge Park Apartments
North Biloxi, MS 40 40 40 100%
O'Fallon Apartments*
O'Fallon, IL 132 132 132 100%
One Madison Avenue
Madison, ME 27 27 26 96%
Pacific Coast Villa*
Long Beach, CA 50 50 49 98%
Queensbury Heights
Middlesboro, KY 64 64 58 91%
Rosewood Apartments*
Camarillo, CA 150 None 143 98%
Sandwich Apartments*+
Sandwich, IL 90 90 90 100%
Scituate Vista*
Cranston, RI 230 230 228 99%
Sterling Village*
San Bernardino, CA 80 80 79 99%
Villa del Sol*
Norwalk, CA 120 None 108 90%
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Units Authorized Units Percentage
for Rental Occupied of
No. of Assistance Total-Units
Units under Section 8
Name & Location --------------- -------------------- --------------------------
- ---------------
Village of Albany/
Village of Broadhead
Albany & Broadhead, WI 32 32 26 81%
Vista Park Chino*
Chino, CA 40 40 39 98%
Wasco Arms Apartments*
Wasco, CA 78 78 77 99%
Wright Park Phase II
Rome, NY 99 20 25 25%
--------------- -------------------- --------------------------
TOTALS 2,779 2,087 2,644 95%
</TABLE>
The Properties are each approximately 16 years old. Routine repair and
maintenance and capital expenditures made out of operating cash and reserves
maintained by the Local Partnerships amounted to approximately $3,505,711 in the
aggregate for the year ended December 31, 1996, and $3,940,000 for the year
ended December 31, 1997. Due to the age of the Properties, capital expenditures
are expected to increase progressively over the remaining useful lives of the
Properties.
Market for Partnership Interests and Related Security Holder Matters
Limited partnership interests in the Partnership were sold through a
public offering managed by an affiliate of the predecessor of Lehman Brothers
Inc., and are not traded on a national securities exchange or listed for
quotation on the Nasdaq Stock Market. There is no established trading market for
Units and it is not anticipated that any market will develop for the purchase
and sale of the Units. Pursuant to the Partnership Agreement, Units may be
transferred only with the written consent of the General Partners, unless the
proposed transfer is to a member of the family of the transferring Limited
Partner, a trust set up for the benefit of the Limited Partner's family, or a
corporation or other entity in which the Limited Partner has a majority
interest. On December 31, 1997, there were 2,714 registered holders of Units in
the Partnership. None of the Units are beneficially owned by Casden. Three Units
are beneficially owned by Charles M. Boxenbaum.
The high and low purchase prices for Units in sales transactions
completed during the twelve-month period ending December 31, 1997 as compiled by
NAPICO were $150 and $12.50 per Unit, respectively. No established trading
market for the Units was ever expected to develop and the sales transactions for
the Units have been limited and sporadic.
The Managing General Partner monitors transfers of the Units (a)
because the admission of a substitute limited partner requires the consent of
the General Partners under the Partnership Agreement, and (b) in order to track
compliance with safe harbor provisions under the Securities Act to avoid
treatment as a "publicly traded partnership" for tax purposes. While the
Partnership requests to be provided with the price at which a transfer is being
made, and the Partnership receives some information regarding the price at which
secondary sale transactions in the Units have been effectuated, the Managing
General Partner does not maintain comprehensive information regarding the
activities of all broker/dealers and others known to facilitate from time to
time, or on a regular basis, secondary sales of the Units. It should be noted
that some transactions may not be reflected on the records of the Partnership.
It is not known to what extent Unit sales transactions are between buyers and
willing sellers, each having access to relevant information regarding the
financial affairs of the Partnerships, expected value of their assets, and their
prospects for the future. Many Unit sales transactions are believed to be
distressed sales where sellers are highly motivated to dispose of the Units and
willing to accept substantial discounts from what might otherwise be regarded as
the fair value of the interest being sold, to facilitate the sales. The prices
paid recently for Units generally do not reflect the current market of the
Partnerships' assets, nor are they indicative of total return, since prior cash
distributions and tax benefits received by the original investor are not
reflected in the price. Nonetheless, notwithstanding these qualifications, the
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Unit sales prices, to the extent that the reported data are reliable, are
indicative of the prices at which the Units have recently been sold. None of the
Unit sales transactions have involved Casden or its affiliates.
Distribution History
The Partnership has not made any distributions to Limited Partners
since its inception. The Partnership Agreement sets forth a procedure for
allocating distributions among the Limited Partners and General Partners. The
General Partners are entitled to receive 1% of the net cash flow from operations
to be distributed, reduced by any amount paid to the General Partners as an
annual management fee. The Limited Partners as a class are entitled to receive
the balance of the net cash flow from operations to be distributed. There are no
regulatory or legal restrictions on the Partnership's current or future ability
to pay distributions, although, pursuant to certain state housing finance
statutes and regulations, certain of the Local Partnerships are subject to
limitations on distributions to the Partnership.
Regulatory Arrangements
Although each of the Local Partnerships in which the Partnership has
invested generally owns a Property that must compete in the market place for
tenants, interest subsidies and rent supplements from governmental agencies make
it possible to offer these dwelling units to eligible "low income" tenants at a
cost significantly below the market rate for comparable conventionally financed
dwelling units in the area.
In order to stimulate private investment in low income housing, the
federal government and certain state and local agencies have provided
significant ownership incentives, including among others, interest subsidies,
rent supplements and mortgage insurance, with the intent of reducing certain
market risks and providing investors with certain tax benefits, plus limited
cash distributions and the possibility of long-term capital gains. There remain,
however, significant risks. The long-term nature of investments in government
assisted housing limits the ability of the Partnership to vary its portfolio in
response to changing economic, financial and investment conditions; such
investments are also subject to changes in local economic circumstances and
housing patterns, as well as rising operating costs, vacancies, rent collection
difficulties, energy shortages and other factors that have an impact on real
estate values. The Partnership's government assisted projects also require
greater management expertise and may have higher operating expenses than
conventional housing projects.
Section 8 of the United States Housing Act provides for the payment of
a federal rental subsidy for the benefit of low income families (the "Section 8
Program"). Pursuant to the Section 8 Program, the Partnership entered into
Housing Assistance Payments Contracts (the "HAP Contracts") with HUD or a state
or local administering agency as agent of HUD, with respect to seventeen of the
twenty Properties. Under the HAP Contracts, which generally have from one to
five years remaining, generally all of the apartment units at the seventeen
properties to be included in the Sale (which the Partnership has agreed to lease
to low or moderate income tenants) receive rental assistance payments from HUD.
During 1997, the Local Partnerships received an aggregate of approximately
$9,813,592 in rental assistance payments under the HAP Contracts. The 17
Properties subject to the HAP Contracts generally are subject to mortgage loans
insured by HUD's Federal Housing Administration ("FHA") and the HAP Contracts
generally provide for sufficient payments to make the payments due under the
federally insured mortgage loans.
Under recently adopted law and policy, HUD has determined not to renew
HAP contracts on a long term basis on the existing terms. In connection with
renewals of the HAP Contracts under such new law and policy, the amount of
rental assistance payments under renewed HAP Contracts will be based on market
rentals instead of above-market rentals, which was generally the case under
existing HAP Contracts. As a result, existing HAP Contracts that are renewed in
the future on projects insured by the FHA will not provide sufficient cash flow
to permit owners of properties to meet the debt service requirements of these
existing FHA-insured mortgages. In order to address the reduction in payments
under HAP Contracts as a result of this new policy, the Multi-family Assisted
Housing Reform and Affordability Act of 1997 (the "MAHRAA"), which was adopted
in October 1997, provides for the restructuring of mortgage loans insured by the
FHA with respect to properties subject to HAP Contracts that have been renewed
under the new policy. The restructured loans will be held by the current lender
or another lender. Under MAHRAA,
703767.5
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an FHA-insured mortgage loan can be restructured to reduce the annual debt
service on such loan. There can be no assurance that the Partnership will be
permitted to restructure its mortgage indebtedness pursuant to the new HUD rules
implementing MAHRAA or that the Partnership would choose to restructure such
mortgage indebtedness if it were eligible to participate in the MAHRAA program.
It should be noted that there are uncertainties as to the economic impact on the
Partnership of the combination of the reduced payments under the HAP Contracts
and the restructuring of the existing FHA-insured mortgage loans under MAHRAA.
Accordingly, the Managing General Partner is unable to predict with certainty
their impact on the Partnership's future cash flow.
Pursuant to the HAP Contracts, the Partnership cannot sell its
interests in a Property without the consent of HUD and, if applicable, the
appropriate state or local agency. The Managing General Partner is currently in
the process of seeking such consent. There is no assurance that HUD will provide
such approval.
Pursuant to certain state housing finance statutes and regulations,
certain of the Local Partnerships are subject to limitations on the
distributions of dividends to the Partnership. Such statutes and regulations
require such Local Partnerships to hold cash flows in excess of such dividend
limitations in restricted reserve accounts that may be used only for limited
purposes (the "Reserve Accounts"). The Purchase Price was calculated without
attributing value to the Reserve Accounts. The Managing General Partner believes
that federal and state regulatory considerations limiting the availability of
the Reserve Accounts to the Partnership have the effect of substantially
reducing or eliminating entirely any value attributable to such Reserve
Accounts. However, it is possible that the REIT may in the future realize a
benefit from the release of funds held in the Reserve Accounts.
Year 2000 Information
The Partnership has assessed the potential impact of the Year 2000
computer systems issue on its operations. The Partnership believes that no
significant actions are required to be taken by the Partnership to address the
issue and that the impact of the Year 2000 computer systems issue will not
materially affect the Partnership's future operating results or financial
condition.
Directors and Executive Officers of NAPICO
The Partnership is managed by NAPICO and has no directors or executive
officers of its own.
Biographical information for the directors and executive officers of
NAPICO with principal responsibility for the Partnership's affairs is presented
below. See "LEGAL PROCEEDINGS."
Alan I. Casden has served as Vice Chairman of the Board of Directors of
NAPICO since 1984. Mr. Casden has also served as Chairman and Chief Executive
Officer of Casden Properties and of The Casden Company since 1982 and 1985,
respectively. Mr. Casden has been involved in approximately $3.8 billion of real
estate financings and sales, and has been responsible for the development and
construction of approximately 90,000 multi-family apartment units and 10,000
single-family homes and condominiums. Mr. Casden has served as a member of the
Advisory Board of the National Multi-Family Housing Conference, the Multi-Family
Housing Council, the President's Council of the California Building Industry
Association and the Urban Land Institute. Mr. Casden currently serves on the
Visiting Committee to USC's Marshall School of Business. In 1988, Mr. Casden
received the "Distinguished Alumnus Award" from USC. He holds a bachelor of
science degree from USC. Mr. Casden is also Co-Chairman of the Board of Trustees
of the Simon Wiesenthal Center, an international human rights agency, and
building chairman for its $50 million Museum of Tolerance, which opened in Los
Angeles in 1993.
Henry C. Casden has served as a Director of NAPICO since February 1988
and as its Secretary since November 1994. Since 1988, Mr. Casden has served as
the President and Chief Operating Officer of The Casden Company as well as the
managing general partner of Casden Properties. From 1971 to February 1988, Mr.
Casden was engaged in the private practice of law in Los Angeles, including as a
named partner in his law firm. His practice was devoted principally to
counseling real estate developers, lenders and investors throughout the United
States. Mr.
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Casden is a member of the Board of Visitors of the University of San Diego
School of Law and the bar association of the District of Columbia. Mr. Casden
received his bachelor of arts degree from the University of California at Los
Angeles, and is a graduate of the University of San Diego Law School. Mr. Casden
is a member of the State Bar of California and has numerous professional and
philanthropic affiliations. Henry C. Casden and Alan I. Casden are brothers.
Charles H. Boxenbaum has served as Chairman of the Board of Directors
and Chief Executive Officer of NAPICO since 1966. He has been active in the real
estate industry since 1960. Prior to joining Sonnenblick-Goldman Corp. of
California, Mr. Boxenbaum was a real estate broker with the Beverly Hills firm
of Carl Rhodes Company. From 1966 to 1980, Mr. Boxenbaum was Chairman of the
Board and Chief Executive Officer of Sonnenblick- Goldman Corp. of California, a
firm specializing in mortgage brokerage. In 1978, the Sonnenblick Goldman Corp.
trade style was sold, and Mr. Boxenbaum purchased the outstanding stock and
changed the name of the firm to National Partnership Investments Corp. He is one
of the founders of and a past director of First Los Angeles Bank, organized in
November 1974. Since March 1995, Mr. Boxenbaum has served on the Board of
Directors of the National Multi Housing Council. Mr. Boxenbaum received his
bachelor of arts degree from the University of Chicago.
Bruce E. Nelson serves as President and a director of NAPICO. Mr.
Nelson joined NAPICO in 1980 and became President in February 1989. He is
responsible for the operation of all NAPICO sponsored limited partnerships.
Prior to that he was primarily responsible for the securities aspects of the
publicly offered real estate investment programs. Mr. Nelson is also involved in
the identification, analysis, and negotiation of real estate investments. From
February 1979 to October 1980, Mr. Nelson held the position of Associate General
Counsel at Western Consulting Group, Inc., private residential and commercial
real estate syndicators. Prior to that time Mr. Nelson was engaged in the
private practice of law in Los Angeles. Mr. Nelson received his Bachelor of Arts
degree from the University of Wisconsin and is a graduate of the University of
Colorado School of Law. He is a member of the State Bar of California and is a
licensed real estate broker in California and Texas.
III. THE SALE
Background and Reasons for the Sale
In recent years, real estate investment activity by publicly owned
corporations and trusts, such as real estate investment trusts ("REIT
Entities"), has increased dramatically. REIT Entities have become a major source
of capital for the real estate market as well as one of its most prominent
purchasers of real property. A publicly-traded REIT Entity is organized as a
real estate company to own and operate a portfolio of properties, has access to
new capital and its shares can be sold or transferred in the public securities
markets.
During the Spring of 1997, the managers of NAPICO and Casden Properties
(which are affiliated entities), including Alan I. Casden, Henry C. Casden,
Charles H. Boxenbaum and Bruce E. Nelson, evaluated the financial results and
prospects of the Casden Partnerships and considered various alternatives that
might allow them to maximize the current value of the Partnership's assets.
Among other things, they considered (i) reorganizing the Partnership as a REIT
Entity, (ii) attempting a rollup of the Partnership and certain other real
estate holding limited partnerships, (iii) marketing the Properties to third
parties in cooperation with the general partners of the Local Partnerships, and
(iv) continued indirect ownership of the Properties through the Partnership's
limited partnership interests in the Local Partnerships. The managers of NAPICO
and Casden Properties also considered forming a REIT Entity that would acquire
the Properties held by the Local Partnerships.
In May of 1997, NAPICO and Casden Properties invited Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ") and certain other investment banking
firms to make presentations regarding strategic alternatives available to Casden
Properties in light of favorable conditions in the real estate capital markets.
Following such presentations, the managers of Casden Properties decided to form
a REIT Entity.
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On April 1, 1997, Casden Properties retained Battle Fowler LLP as its
legal counsel in connection with the potential formation of a REIT Entity and
the potential sales of the assets of the Casden Partnerships. On September 4,
1997, Casden Properties engaged DLJ to act as Casden Properties' financial
advisor in connection with the formation of a REIT Entity.
On November 21, 1997, following several days of interviews with several
investment banking firms, NAPICO selected Stanger to render a fairness opinion
in connection with the Sale and the other proposed sales involving the Casden
Partnerships. For a description of the terms of Stanger's engagement and certain
additional information concerning Stanger, see "-- Fairness Opinion."
The financial and legal advisors of NAPICO and Casden Properties
conferred regularly from June of 1997 through April of 1998 regarding the
structure and terms of the proposed REIT Transaction, including the Aggregate
Property Valuation and the Purchase Price to be offered for the Real Estate
Interests.
The Managing General Partner believes that it is in the best interests
of the Partnership to sell its interests in the Properties. The Partnership is
not currently realizing any material cash flow that is available for
distribution to the Limited Partners and does not anticipate realizing
sufficient cash flow in the future to enable it to make distributions to Limited
Partners. Limited Partners will realize an aggregate of approximately $60 per
Unit in current passive activity rental losses for 1997. In addition, Limited
Partners will realize approximately $67 per Unit in interest income for 1997.
Assuming Limited Partners are restricted from utilizing passive losses, the
Limited Partners will be liable for the taxes related to the interest income
without any corresponding cash distribution. In light of the limited cash flow
currently generated by the Properties, the fact that the Partnership owns
limited partnership interests and does not own the Properties directly and the
potentially adverse consequences of the recent changes in the laws and policies
applicable to HAP Contracts, the Managing General Partner does not believe that
it would be feasible to market the Real Estate Interests.
The REIT believes that there are certain benefits to the REIT not
available to the Partnership that it may be able to realize as a result of the
acquisition of the Real Estate Interests held by the Partnership, the general
partner interests held by the local general partners, the insured mortgage debt
encumbering the Properties, and the other properties and businesses of Casden.
These potential benefits include (i) earning fee income by performing the
property management functions formerly performed by the local general partners,
(ii) acquiring and restructuring (under MAHRAA) the mortgage indebtedness to
which the Properties are subject, and (iii) realizing economies of scale in
connection with ownership and management of all of the Properties. These
benefits would not be available to the Partnership because it does not have
sufficient capital to buy out the local general partner interests and to
purchase the mortgage loans encumbering the Properties. Such activities would
also be inconsistent with the Partnership's original objectives.
Prior to the consummation of the Sale, the REIT intends to sell
approximately $250 million of its equity securities in the Private Placement.
The proceeds of the Private Placement will be used to finance the Sale and other
acquisitions of conventional and subsidized housing properties to be made in
connection with the REIT Transaction. The REIT intends to commence an initial
public offering of its equity securities subsequent to the consummation of the
Sale. Casden and its affiliates are expected to own approximately 51% of the
equity securities of the REIT upon completion of the Private Placement.
Subsequent to its initial public offering, the REIT intends to purchase and
restructure all insured mortgage indebtedness currently encumbering the
Properties, which the Managing General Partner believes will enhance the returns
associated with the ownership of the mortgages and the Properties.
In considering whether the Sale is in the interests of the Partnership,
the Managing General Partner also considered the effects of recent changes in
the law and policies relating to government-assisted housing. Under MAHRAA, to
the extent that rents are above market, as is the case with most of the
Properties, the amount of the HAP Contract payments will be reduced. While
MAHRAA also contemplates a restructuring of the mortgage loans to reduce the
current debt service on the mortgage loans, it is expected that the combination
of the reduced HAP
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Contract payments and the restructuring of the mortgage loans will result in a
significant reduction in the cash flow to the Local Partnerships. In the case of
two restructurings that are currently being negotiated by affiliates of the
Managing General Partner (involving Section 8 properties owned by partnerships
other than the Partnership), the restructurings proposed by HUD will
significantly reduce the cash flow from these properties. Furthermore, since the
local general partners would control the restructuring negotiations and most of
the local general partners' income results from their management fees, there can
be no assurance that any restructuring negotiated by local general partners
would optimize cash flow to the Partnership or result in any cash distributions
to the Partnership. Moreover, there are a number of uncertainties as to the
restructuring process, including potential for adverse tax consequences to the
Limited Partners and the local general partners. As a result, the Managing
General Partner believes that it is unlikely that the Limited Partners of the
Partnership will benefit from any restructuring under MAHRAA.
The Managing General Partner believes that the REIT, through its
potential access to the capital markets and its familiarity with the Properties,
is in a position to purchase the Properties on terms that are favorable to the
Partnership. The Managing General Partner believes that the current market for
securities issued by REIT Entities will provide the Partnership with an
opportunity to sell the Properties to the REIT for a favorable price. In
addition, because any third party buyer attempting to purchase the Properties
would have to purchase not only the Real Estate Interests of the Partnership,
but also the interests of each of the local general partners, the Managing
General Partner is not aware of any sufficiently well-capitalized third parties
engaged in the business of acquiring government assisted housing projects that
would be in a position to acquire the Properties. Furthermore, a third party
buyer would have to investigate each of the Properties, and negotiate the terms
of the buyout of each of the local general partners, which would be an expensive
and time consuming process for the Partnership. As a result, the Managing
General Partner believes it is unlikely that there would be a third-party buyer
for the Properties. Limited Partners should note, however, that the Managing
General Partner's recommendation is subject to inherent conflicts of interest.
See "CONFLICTS OF INTEREST."
REAL IV owns direct or indirect interests in each of the Local
Partnerships that hold title to the real estate assets that the REIT has offered
to purchase. All but two of the general partners of such Local Partnerships are
unaffiliated with the General Partners of REAL IV and the Partnership does not
control such unaffiliated local general partners. The partnership agreements of
the Local Partnerships do not grant the limited partner of such partnership
(REAL IV) the right to remove the general partner or to compel a sale of the
assets of the partnership. As a result, the simultaneous buyout of the local
general partners is necessary in order to enable the Partnership to realize the
value of its Real Estate Interests. Accordingly, the amount required to be paid
by a purchaser (whether a third party buyer or the REIT) to purchase the
interests of the local general partners will have the effect of reducing the
amount of consideration which a buyer is willing to pay for the Partnership's
Real Estate Interests. Currently, the REIT has entered into agreements or
agreements in principle or is in the process of negotiating agreements as to the
buyout of the interests of 20 of the local general partners. The amounts that
the Managing General Partner proposes to pay to the unaffiliated local general
partners for their interests has been determined as a result of arms-length
negotiations with the local general partners. The Managing General Partner
believes that, although the amount paid to the local general partners reduces
the Purchase Price and amount of distribution to Limited Partners, and the
buyout of the local general partners' interests will benefit the REIT, the terms
of these transactions are fair to the Partnership and the Limited Partners.
Acquisition Agreement
If the Sale is approved by the Limited Partners, it is contemplated
that the Partnership or the Local Partnerships, as the case may be, will enter
into a purchase and sale agreement with a subsidiary partnership of the REIT
(the "Operating Partnership"). The purchase and sale agreement will set forth
the terms and conditions under which the Partnership and the REIT and the
Operating Partnership are obligated to proceed with the Sale and will set forth
certain other agreements of such parties with respect to the Sale.
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Representations and Warranties. The Partnership will not make any
representations and warranties to the REIT and the Operating Partnership in the
purchase and sale agreement with respect to the Properties, and the Properties
will be sold "as is."
Conditions. As described in detail below under the heading " -
Conditions" below, the purchase and sale agreement will include a number of
conditions to the REIT's obligation to consummate the Sale.
Amendment and Closing. The Partnership and the REIT or the Operating
Partnership may mutually agree to amend the terms of the purchase and sale
agreement in a manner which, in the good faith judgment of the Managing General
Partner (consistent with the Managing General Partner's fiduciary duty to the
Partnership and the Limited Partners), does not materially reduce the benefits
to be received by the Limited Partners from the Sale without resoliciting the
consent of the Limited Partners. If the Sale is approved by a Majority Vote of
the Limited Partners and the other conditions to the Sale and the REIT
Transaction are satisfied, it is anticipated that the Sale will be consummated
by August 31, 1998. If the closing does not occur by December 31, 1998 the
purchase and sale agreement will be terminated.
Arrangements with General Partners of the Local Limited Partnerships
Affiliates of the Managing General Partner are currently in the process
of structuring and negotiating buyouts of the interests in the Local
Partnerships held by the general partners of the Local Partnerships, all but two
of whom are unaffiliated with Casden. The three affiliated local general
partners are entities in which Casden owns a controlling interest. Except for
the buyouts of the three affiliated local general partners, the buyouts are
being negotiated on an arms-length basis. The Managing General Partner expects
that the general partners of the Local Partnerships will be paid an aggregate of
approximately $8,280,000 for their interests in, and rights to manage, the Local
Partnerships. There can be no assurance that affiliates of the Managing General
Partner will be able to successfully complete buyouts from all of the
unaffiliated general partners of the Local Partnerships on acceptable terms. To
the extent that affiliates of the Managing General Partner are unable to
complete all such buyouts, there could be an adverse impact on the operating
results of the Partnership, depending on which Properties are retained by the
Partnership. If the Partnership retains its interests in any of the Local
Partnerships the cash flows generated by the remaining Property or Properties
would be inadequate to meet operating expenses of the Partnership and,
accordingly, the Partnership may be required to reduce the distribution
resulting from the Sale to the Limited Partners of cash held by the Partnership
in order to ensure that it has adequate cash to meet operating expenses. In
addition, the winding up of the Partnership's business could be delayed, perhaps
indefinitely. The make-up of the Partnership after the Sale if less than all of
the general partners of the Local Partnerships approve the Sale cannot be
determined at this time. To the extent that the ultimate cost of such buyouts
exceeds the Managing General Partner's current estimates of such cost, the
distributions to Limited Partners resulting from the Sale will be reduced.
In the case of two of the Local Partnerships, the general partners of
such partnerships are affiliates of the Managing General Partner. Each of the
affiliated general partners is directly or indirectly wholly owned by Alan
Casden, who indirectly owns 100% of the Common Stock of NAPICO. The Local
Partnerships in which affiliates of NAPICO are the general partners own 374 of
the 2,779 housing units in which the Partnership has invested, or approximately
13%. An aggregate of $604,780 in respect of future management fees payable to
such affiliates was deducted from the Aggregate Property Valuation utilized to
determine the Purchase Price. The amount deducted was determined on the same
basis used when calculating buyout offers to unaffiliated local general
partners. No value was attributed to the affiliated general partners' general
partnership interests in Local Partnerships.
Forest City Equity Services, Inc. ("Forest City"), the general partner
of four of the Local Partnerships holding title to Properties in which the
Partnership holds an indirect interest (Alliance Towers, Coatesville Towers,
Lakeland Place and Sterling Village), and which is the general partner of eight
additional partnerships in which a NAPICO-sponsored limited partnership is the
limited partner, has agreed in principle, in connection with the proposed Sale,
to transfer its interests in Alliance Towers, Coatesville Towers and Sterling
Village and seven other partnerships to the REIT in exchange for the
Partnership's limited partnership interest in the Lakeland Place Property, an
aggregate
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of $400,000 in cash and another NAPICO-sponsored partnership's limited
partnership interest in an additional partnership. Approval of the Sale by the
Limited Partners shall be deemed to include approval of the proposed transaction
with Forest City. The REIT will acquire the interest in the Lakeland Place
Property from the Partnership and then assign such interests to Forest City as
part of the REIT Transaction. See "CONFLICTS OF INTEREST."
Source of Funds
The REIT intends to raise the cash to be paid to the Partnership
through a private placement of approximately $250 million of its equity
securities.
Transaction Costs
The Managing General Partner estimates that the transaction costs in
connection with the Sale, will be as follows:
Accounting....................................... $ 100,000
Legal............................................ 50,000
Escrow Costs (seller's portion).................. 25,000
Title Policy (seller's portion).................. 35,000
Structural and Engineering Reports............... 100,000
Stanger Fairness Opinion......................... 100,000
Consent Solicitation Costs....................... 6,000
Miscellaneous Costs.............................. 500,000
-------
Total............................................ $ 421,000
=======
The General Partners will receive a distribution of approximately
$54,626 for their interests in the Partnership in connection with the Sale. The
General Partners are not entitled to receive fees in connection with the Sale.
Distribution of Sale Proceeds; Accounting Treatment
After the payment of all liabilities and expenses, the consideration to
be paid to the Partnership for the Properties will be allocated and distributed
among Limited and General Partners in accordance with the cash distribution
rules set forth in the Partnership Agreement. Pursuant to the Partnership
Agreement, net distribution proceeds are distributable as follows:
o First, the General Partners are entitled to a liquidation fee equal
to the lesser of (a) 10% of the net proceeds to the Partnership from
the Sale, or (b) 1% of the Purchase Price (including the assumed
mortgage indebtedness), plus 3% of the net proceeds after deducting an
amount sufficient to pay all federal and state taxes applicable to the
Sale. No part of a liquidation fee will be paid, however, unless the
Limited Partners shall have first received an amount equal to (i) the
greater of (A) their aggregate capital contributions, or (B) an amount
sufficient to satisfy the cumulative federal and state income tax
liability, if any, arising from the disposition of the Properties and
all other assets disposed of to date; less (ii) all amounts previously
distributed to Limited Partners. Because the above-referenced
conditions have not been met, the General Partners will not be entitled
to receive a liquidation fee in connection with the Sale.
o Next, after allocating income from the Sale in an amount equal to the
sum of the negative adjusted capital account balances of all Partners
with such balances (computed after any distributions made under the
paragraph above), and after allocating 1% of the income in excess
thereof, 1% to the General Partners and
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99% to the Limited Partners as a class, distributions shall be made in
accordance with such Partners' positive capital account balances.
Based on the distribution priority in the Partnership Agreement, and
assuming the net proceeds of the Sale are $5,462,648, the Limited Partners will
be entitled to receive $5,408,022 ($406 per Unit). The Partnership will retain
working capital reserves after the Sale (and payment of transaction costs) of
approximately $6,930,796. NAPICO and NPIA will be entitled to receive a
distribution in connection with the Sale of $54,626.
The purchase of the Real Estate Interests by the REIT is conditioned,
with respect to each of the Properties, on the general partner of the Local
Partnership owning such Property agreeing to transfer its general partnership
interests with respect to the Property. Under the partnership agreements of the
Local Partnerships, the assignment of the limited partnership interests in the
Local Partnership requires the consent of the local general partner. In
addition, the Managing General Partner does not believe that the REIT would
realize sufficient economic benefit from acquiring the Real Estate Interests
held by the Partnership unless it can simultaneously acquire the related general
partnership interests and the right to manage the Properties.
Conditions
In addition to the consent by Majority Vote of the Limited Partners,
the Purchase and Sale Agreement is expected to contain, among others, the
following conditions (which may be waived by the REIT) as conditions precedent
to the REIT's obligation to consummate the Sale:
o Subject to certain exceptions, no material adverse change shall have
occurred with respect to a Property that has a material adverse effect
on the value of the Properties as a whole;
o The Partnership shall have delivered to the REIT any required third
party consents to the Sale, including the consent of HUD, certain state
housing finance agencies, the general partners of the Local
Partnerships in which the REIT intends to acquire interests and the
holders of certain mortgages; and
o The REIT shall have consummated the Private Placement, which will be
conditioned upon, among other things, the transfer of a minimum number
of properties to the REIT by the Casden Partnerships and third parties
in connection with the REIT Transaction.
Fairness Opinion
Stanger, an independent investment banking firm, was engaged by NAPICO
to conduct an analysis and to render an opinion as to whether the Aggregate
Property Valuation utilized in connection with determining the Purchase Price to
be paid to the Partnership for the Real Estate Interests in the Sale is fair,
from a financial point of view, to the Limited Partners. NAPICO selected Stanger
because of its experience in providing similar services to other parties in
connection with real estate merger and sale transactions and Stanger's
experience and reputation in connection with real estate partnerships and real
estate assets. No other investment banking firm was engaged to provide, or has
provided, any report, analysis or opinion relating to the fairness of the Sale.
Stanger has advised the Managing General Partner that, subject to the
assumptions, limitations and qualifications contained in its Fairness Opinion,
the Aggregate Property Valuation utilized in connection with determining the
Purchase Price to be paid to the Partnership for the Real Estate Interests in
the proposed Sale is fair, from a financial point of view, to the Limited
Partners. The Fairness Opinion does not address adjustments made to the
Aggregate Property Valuation utilized to arrive at the distributions to the
Limited Partners that will result from the Sale, or the allocation of the
Aggregate Property Valuation between the Limited Partners and the general
partners of the Local Partnerships, which affects the ultimate amount of
consideration to be paid to the Limited Partners. In addition, the Fairness
Opinion does not address the fairness of the Purchase Price itself. The Purchase
Price and the Aggregate Property Valuation were determined solely by the General
Partners. The fact that the Managing General
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Partner applied its own methodology for determining the Aggregate Property
Valuation did not limit the methods and procedures followed by Stanger in
determining the fairness of the Aggregate Property Valuation itself. The
Managing General Partner used a valuation method that it believed to be a
reasonable basis for determining the Aggregate Property Valuation. Stanger
reviewed the fairness of the Aggregate Property Valuation determined by the
Managing General Partner, using methods and procedures selected by Stanger. The
Managing General Partner did not limit the method used by Stanger to review the
fairness of the Aggregate Property Valuation.
The full text of the Fairness Opinion, which contains a description of
the matters considered and the assumptions, limitations and qualifications made,
is set forth as Exhibit A hereto and should be read in its entirety. The summary
set forth herein does not purport to be a complete description of the review
performed by Stanger in rendering the Fairness Opinion. Arriving at a fairness
opinion is a complex process not necessarily susceptible to partial analysis or
amenable to summary description.
Except for certain assumptions described more fully below which the
Partnership advised Stanger that it would be reasonable to make, the Partnership
imposed no conditions or limitations on the scope of Stanger's investigation or
the methods and procedures to be followed in rendering the Fairness Opinion. See
"- Fairness Opinion - Assumptions, Limitations and Qualifications." The
Partnership has agreed to indemnify Stanger against certain liabilities arising
out of Stanger's engagement to prepare and deliver the Fairness Opinion.
Experience. Since its founding in 1978, Stanger and its affiliates have
provided information, research, investment banking and consulting services to
clients located throughout the United States, including major New York Stock
Exchange member firms, insurance companies and over 70 companies engaged in the
management and operation of partnerships and real estate investment trusts. The
investment banking activities of Stanger include financial advisory and fairness
opinion services, asset and securities valuations, industry and company research
and analysis, litigation support and expert witness services, and due diligence
investigations in connection with both publicly registered and privately placed
securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, reorganizations and for estate, tax, corporate and other
purposes. Stanger's valuation practice principally involves partnerships,
partnership securities and the assets typically held through partnerships, such
as real estate, oil and gas reserves, cable television systems and equipment
leasing assets. Stanger was selected because of its experience and reputation in
connection with real estate partnerships, real estate assets and mergers and
acquisitions.
Summary of Materials Considered. In the course of Stanger's analysis to
render its opinion, Stanger reviewed: (i) a draft of this Consent Solicitation
Statement related to the Sale in substantially the form which will be
distributed to Limited Partners; (ii) the Partnership's annual reports on Form
10-K for the fiscal years ending December 31, 1995, 1996 and 1997, which reports
the Partnership's management has indicated to be the most current available
financial statements; (iii) descriptive information concerning the Properties
provided by management, including location, number of units and unit mix, age,
and amenities; (iv) summary historical operating statements for the Properties
for 1995, 1996 and the nine months ending September 30, 1997; (v) operating
budgets for the Properties for 1997 and forecasts for 1998 for each Property, as
prepared by the Managing General Partner or the local general partners; (vi)
information prepared by management relating to the debt and the HAP Contracts
encumbering the Properties; (vii) information regarding market rental rates and
conditions for apartment properties in the general market area of the Properties
and other information relating to acquisition criteria for apartment properties;
and (viii) conducted other studies, analysis and inquiries as Stanger deemed
appropriate.
In addition, Stanger discussed with management of the Partnership and
the Managing General Partner the market conditions for apartment properties,
conditions in the market for sales/acquisitions of properties similar to that
owned by the Partnership, historical, current and projected operations and
performance of the Properties, the physical condition of the Properties
including any deferred maintenance, and other factors influencing value of the
Properties.
703767.5
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Stanger also performed site inspections of the Properties, reviewed local real
estate market conditions, and discussed with property management personnel
conditions in local apartment rental markets and market conditions for sales and
acquisitions of properties similar to the Properties.
Summary of Reviews. The following is a summary of the material reviews
conducted by Stanger in connection with and in support of its Fairness Opinion.
The summary of the opinion and reviews of Stanger set forth in this Consent
Solicitation Statement is qualified in its entirety by reference to the full
text of such opinion.
In preparing its Fairness Opinion, Stanger performed site inspections
of the Properties during December 1997 and January and February 1998. In the
course of the site visits, the physical facilities of the Properties were
observed, current rental and occupancy information for the Properties were
obtained, current local market conditions were reviewed, a sample of similar
properties were identified, and local property management personnel were
interviewed concerning the Properties and local market conditions. Stanger also
reviewed and relied upon information provided by the Partnership and the
Managing General Partner, including, but not limited to, financial schedules of
historical and current rental rates, occupancies, income, expenses, reserve
requirements, cash flow and related financial information; property descriptive
information including unit mix; and information relating to any required capital
expenditures and any deferred maintenance.
Stanger also reviewed historical operating statements for the
Properties for 1995, 1996 and the nine months ending September 30, 1997, the
operating budget for 1997 and operating forecasts for 1998 for each Property, as
prepared by the Managing General Partner and discussed with management the
current and anticipated operating results of the Properties.
In addition, Stanger interviewed management personnel of the
Partnership. Such interviews included discussions of conditions in the local
market, economic and development trends affecting the Properties, historical and
budgeted operating revenues and expenses and occupancies and the physical
condition of the Properties (including any deferred maintenance and other
factors affecting the physical condition of the improvements), projected capital
expenditures and building improvements, the terms of existing debt and the HAP
Contracts encumbering the Properties, and expectations of management regarding
the impact of various regulatory factors and proposed changes on the operating
results of the Properties.
Stanger also reviewed the acquisition criteria used by owners and
investors in the type of real estate owned by the Partnership, utilizing
available published information and information derived from interviews
conducted by Stanger with various real estate owners and investors.
Summary of Analysis. Based in part on the above reviews, Stanger then
performed a discounted cash flow analysis (a "DCF Analysis") of the Properties.
The DCF Analysis involved the following steps.
During its site visits to each Property, Stanger conducted local market
research, including the identification and assessment of relative quality (e.g.,
condition, location amenities, etc.) of similar multi-family properties in the
competitive market area of each Property and the collection of rental rate
information for various apartment unit sizes (e.g., efficiency, one-bedroom,
two-bedroom, etc.) for such Properties. In addition, Stanger reviewed
information provided by the Managing General Partner and management of the
Properties concerning rental rates allowed for each type of apartment in each
Property subject to HUD rental rate restrictions (the "Subsidized Properties")
based on the HAP Contract.
Utilizing the above information, Stanger determined the gross potential
rent for each Property based on the number and type of apartment units in each
Property and (i) for Subsidized Properties, rents allowed for each type of unit
under the existing HAP Contract ("Contract Rent"), and (ii) the estimated market
rental rates the Property would likely obtain based on review of the rates
charged at similar properties in the local market ("Market Rent").
703767.5
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<PAGE>
The gross potential rent amounts based on Contract Rent and Market Rent data
were used in the DCF Analysis as described below.
Stanger also reviewed historical and budgeted gross income and income
from ancillary sources for each Property in the portfolio in light of market
trends and competitive conditions in each Property's local market. Stanger also
reviewed summary information concerning occupancy rates and any HAP contracts
encumbering the Properties, including contract rental rates for each unit size
and contract expiration date.
After assessing the above factors, Stanger estimated each Property's
effective gross income based upon unit mix, contract or market rental rates, as
appropriate, and estimates of ancillary income and occupancy. Contract Rents
were utilized for Subsidized Properties during the term of the HAP contract,
with a mark to market of rental rates upon expiration of the HAP Contract.
Expenses were estimated based on historical and budgeted operating expenses,
discussions with management, and certain industry expense information. Estimated
property operating expenses, including replacement reserves, were then deducted
from effective gross income to arrive at each Property's estimated net operating
income. Debt service payments relating to mortgage debt encumbering each of the
Properties were also considered in the "leveraged" discounted cash flow
analysis, as described below. Expenses relating solely to investor reporting and
other expenses not related to the properties were excluded from the analysis.
Stanger then discounted to present value the estimated cash flows from
the continued operation of each of the Properties during a holding period equal
to the term of the existing HAP Contracts, or ten years in the case of the
conventional properties. In the case of Subsidized Properties subject to
dividend limitations, Stanger discounted cash flow amounts up to, but not
exceeding, the dividend limitation. Income and expense escalators utilized in
the analysis were based on parameters cited by investors, owners and managers of
similar properties, market factors, the relationship of Contract Rent and
estimated Market Rent, and historical and budgeted results for each Property.
Based on the relationship of Contract Rent and Market Rent for the Subsidized
Properties, income during the contract period was generally held flat for
Subsidized Properties or was escalated at a rate to provide sufficient income to
pay operating expenses and debt service. For the purpose of determining the
Subsidized Properties' residual value, as described below, estimated market
rental rates were generally escalated at 3% per annum. In the case of the
conventional properties, the rental rate was escalated at [3.19%] per year
during the holding period. Effective expense escalators generally ranged from
approximately [2.5% to 3.0%].
As part of its DCF Analysis, Stanger then estimated the residual values
of the Properties. In the case of the Partnership's conventional, non-subsidized
properties (the "Conventional Properties"), Stanger employed a direct
capitalization technique. The estimated net operating income after replacement
reserves in the eleventh year of operations was capitalized utilizing terminal
capitalization rates ranging from [9.5% to 10.0%] and the resulting value was
reduced by estimated sales costs of 3%.
In the case of Subsidized Properties, Stanger evaluated the residual
Property value at the time of the existing HAP Contract expiration based upon
the assumption that whether or not the HAP Contract was renewed, rents at the
Property would be marked to market rates (i.e. where Contract Rent at the time
of expiration exceeded estimated Market Rent, it was assumed that Contract Rent
upon any contract renewal would be set at an amount equal to the estimated
market rent at the time of reversion).
Stanger then evaluated estimated net operating income (after
replacement reserves) at the time of contract expiration, with rents marked to
market rates, to determine if such income would be sufficient to service the
existing mortgage debt encumbering the Subsidized Property. Where existing
mortgage debt could be prepaid at the time of contract expiration, Stanger
capitalized net operating income (after replacement reserves) with rents marked
to market at rates ranging from [9.0% to 11.0%] to estimate a free and clear
residual value from which estimated expenses of sale of 3% and, in the case of
the leveraged discounted cash flow analysis, as described below, anticipated
debt balances were deducted to arrive at net residual proceeds. Otherwise, any
remaining equity cash flow after debt
703767.5
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service available was capitalized at rates ranging from [10.0% to 12.0%] to
determine a residual equity value to be used in the Leveraged DCF Analysis.
The resulting annual cash flows and the residual value, after deduction
of estimated costs of sale, for each Property were then discounted to present
value assuming (i) the Properties were free-and-clear of mortgage debt (the
"Free-and-Clear DCF Analysis") and, for Subsidized Properties, (ii) as
encumbered by existing debt (the "Leveraged DCF Analysis"). In the case of the
Leveraged DCF Analysis, debt service payments were deducted from annual cash
flows, and the resulting annual cash flows and residual equity value were
discounted to present value using the following distinct ranges of discount
rates: (i) Subsidized Properties: leveraged cash flow discount rates ranged from
[9%] to [11%] and residual discount rates ranged from [12%] to [15%];
free-and-clear discount rates for cash flow ranged from [8%] to [10%] and
residual discount rates ranged from [11%] to [14%]; (ii) Conventional Property:
free-and-clear cash flow and residual discount rates ranged from [11%] to [12%].
In the Leveraged DCF Analysis, the resulting equity value was then added to
outstanding debt to arrive at a total estimated Property value.
Stanger observed that the range of estimated value of the portfolio of
Properties resulting from the Leveraged DCF Analysis was $_____ to $_____ and
that the Aggregate Property Valuation of $84,380,482 was [within/above] this
range of value. Stanger also observed that the range of estimated value of the
portfolio of Properties resulting from the Free-and-Clear DCF Analysis was
$_____ to $_____ and that the Aggregate Property Valuation was [within/above]
this range of value. (The difference between the value resulting from the
Leveraged DCF Analysis and the Free-and-Clear Analysis in part reflects the fact
that the estimated value of certain Properties is less than the debt currently
encumbering those Properties.)
Stanger concluded that the range of estimated value of the portfolio of
Properties resulting from the Free-andClear DCF Analysis and the Leveraged DCF
Analysis supported its opinion as to the fairness of the Aggregate Property
Valuation, from a financial point of view.
Due to the uncertainty in establishing many of the values cited above,
Stanger established a range of estimated values for each discounted cash flow
analysis. The estimated values are based in part on information provided to
Stanger in the context of rendering the fairness opinion, and there can be no
assurance that the same conditions analyzed by Stanger in arriving at the
estimates cited herein would exist at the time of consummation of the Sale. In
addition, the estimated values cited above are based on a variety of assumptions
that relate, among other things, to (i) each Property's revenues, expenses, and
cash flow; (ii) the capitalization rates that would be used by prospective
buyers when the existing HAP contracts expire and the Subsidized Properties are
sold; (iii) ranges of residual values of the Properties; (iv) selling costs; and
(v) appropriate discount rates to apply to estimated cash flows and residual
values in computing the discounted present value of such cash flows and residual
values. Actual results may vary from those utilized in the above analysis based
on numerous factors, including interest rate fluctuations, changes in
capitalization rates used by prospective purchasers, tax law changes,
supply/demand conditions for similar properties, changes in the availability of
capital, changes in the regulations or HUD's interpretations of existing and new
regulations relating to subsidized properties.
Conclusions. Stanger concluded, based upon its analysis of the
foregoing and the assumptions, qualifications and limitations stated below, as
of the date of the Fairness Opinion, that the Aggregate Property Valuation
utilized in connection with determining the Purchase Price to be paid to the
Partnership for the Real Estate Interests is fair to the Limited Partners from a
financial point of view.
Assumptions, Limitations and Qualifications. In rendering the Fairness
Opinion, Stanger relied upon and assumed, without independent verification, the
accuracy and completeness of all financial information and data, and all other
reports and information contained in this Consent Solicitation Statement or that
were provided, made available, or otherwise communicated to Stanger by the
Partnership, the Managing General Partner and/or its affiliates, the Local
Partnerships or the management of the Properties. Stanger has not performed an
independent appraisal, engineering study or environmental study of the assets
and liabilities of the Partnership. Stanger relied upon
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the representations of the Managing General Partner and its affiliates, the
Local Partnerships and the management of the Properties concerning, among other
things, any environmental liabilities, deferred maintenance and estimated
capital expenditure and replacement reserve requirements, and the terms and
conditions of any debt and the HAP Contracts encumbering the Properties. Stanger
also relied upon the assurance of the Partnership, Casden, the Managing General
Partner and its affiliates, the Local Partnerships, and the management of the
Properties that any financial statements, budgets, capital expenditure
estimates, mortgage debt and HAP Contract information, value estimates and other
information contained in this Consent Solicitation Statement or provided or
communicated to Stanger were reasonably prepared and adjusted on bases
consistent with actual historical experience and reflect the best currently
available estimates and good faith judgments; that all distributions under HAP
Contracts with dividend limitations allowable cumulatively since the time of the
partnership's investments in each Local Partnership have been paid in full to
the Partnership; that no material changes have occurred in the value of the
Properties or other information reviewed between the date of such information
provided and the date of the Fairness Opinion; that the Partnership, Casden, the
Managing General Partner and its affiliates, the Local Partnerships and the
management of the Properties are not aware of any information or facts that
would cause the information supplied to Stanger to be incomplete or misleading
in any material respect; that the highest and best use of the Properties is as
improved; and that all calculations were made in accordance with the terms of
the existing and anticipated regulatory agreements. Additional specific
assumptions relating to Stanger's analysis are included in the subsection
captioned "Summary of Analysis" above.
Stanger was not requested to, and therefore did not: (i) select the
method of determining the Aggregate Property Valuation utilized in connection
with determining the Purchase Price in the Sale; (iii) make any recommendation
to the Partnership or its partners with respect to whether to approve or reject
the proposed Sale; or (iv) express any opinion as to (a) the tax consequences of
the proposed Sale to the Limited Partners, (b) the terms of the Partnership
Agreement, or the fairness of proposed Amendments to the Partnership Agreement,
or the terms of any agreements or contracts between the Partnership and any
affiliates of the Managing General Partner, (c) the Managing General Partner's
business decision to effect the proposed Sale, (d) any adjustments made to the
Aggregate Property Valuation to determine the Purchase Price of the Real Estate
Interests and the net amounts distributable to the Limited Partners, including
but not limited to, balance sheet adjustments to reflect the Managing General
Partner's estimate of the value of current and projected net working capital
balances and cash and reserve accounts (including debt service and mortgage
escrow amounts, operating and replacement reserves, and surplus cash reserve
amounts and additions) and the income therefrom of the Partnership or the Local
Partnerships, the Managing General Partner's determination that no value should
be ascribed to any cash flow from the Properties in excess of certain
limitations on dividends to the Partnership, the amount of the Aggregate
Property Valuation ascribed to certain general partner and/or management
interests in the Local Partnerships and other expenses and fees associated with
the Sale, or (e) alternatives to the proposed Sale.
Stanger is not expressing any opinion as to the fairness of any terms
of the proposed Sale other than the Aggregate Property Valuation utilized in
connection with determining the Purchase Price of the Real Estate Interests paid
to the Partnership. Stanger's opinion is based on business, economic, real
estate market, and other conditions as of the date of its analysis and addresses
the proposed Sale in the context of information available as of the date of its
analysis. Events occurring after such date and before the closing of the
proposed Sale of the Real Estate Interests to the REIT could affect the
Properties or the assumptions used in preparing the Fairness Opinion. Stanger
has no obligation to update the Fairness Opinion on the basis of subsequent
events.
In connection with preparing the Fairness Opinion, Stanger was not
engaged to, and consequently did not, prepare any written report or compendium
of its analysis for internal or external use beyond the analysis set forth in
Exhibit A.
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Compensation and Material Relationships. Stanger has been retained by
the Managing General Partner and its affiliates to provide fairness opinions to
the Partnership and the other Casden Partnerships included in the REIT
Transaction. Stanger will be paid an aggregate fee by the Casden Partnerships of
up to approximately $455,000, plus $4,100 per property reviewed. The portion of
the fee allocable to the Partnership is $______, plus $4,100 per Property, or an
aggregate of approximately $100,000. In addition, Stanger is entitled to
reimbursement for reasonable legal, travel and out-of-pocket expenses incurred
in making site visits and preparing the Fairness Opinion, subject to an
aggregate maximum of up to approximately $1,000, plus $600 per Property, and is
entitled to indemnification against certain liabilities, including certain
liabilities under federal securities laws. Stanger has not been engaged to and
has not provided services, and will not participate or otherwise be involved in
the REIT private placement. In addition, Stanger has not been approached or
engaged to provide any services in connection with a future public offering by
the REIT. No portion of Stanger's fee is contingent upon consummation of the
Sale or completion of the REIT Transaction.
Alternatives to the Sale
The following is a brief discussion of alternatives to the Sale
considered by the Managing General Partner and the possible benefits and
disadvantages of such alternatives:
Continuation of the Partnership. One alternative considered by the
Managing General Partner was the continuation of the Partnership in accordance
with its existing business plan and its Partnership Agreement. However, the
Partnership is not currently realizing material cash flow that is available for
distribution to the Limited Partners and does not anticipate realizing
sufficient cash flow in the future to enable it to make distributions to Limited
Partners. Limited Partners will realize an aggregate of approximately $800,000
in current passive activity rental losses for 1997. Depreciation deductions that
are primarily responsible for generating losses realized by the Limited Partners
should continue to decline until the end of the depreciable lives of the
Properties, when taxable income to Limited Partners will exceed cash
distributions. Federal depreciation deductions relating to the original
acquisition of the Properties will no longer be available after December 31,
1998. Furthermore, the Managing General Partner does not believe that the
Partnership would be able to realize the potential benefits which the REIT
anticipates may be available to it after acquisition of the Real Estate
Interests. These potential benefits require the acquisition of (i) the
partnership interests held by the local general partners, (ii) the right to
manage the Properties, and (iii) the insured mortgage encumbering the
Properties, and would require significant additional capital. The Managing
General Partner believes it will be impractical to seek additional capital
contributions from Limited Partners in order to recapitalize the Partnership and
that the Partnership could not access the capital markets. Because there is no
active trading market for the Units, and because there are no apparent benefits
from continued ownership of Units, Limited Partners may not be able to liquidate
their investment in the Units while the Partnership remains in existence.
Furthermore, the partnership agreements of the Local Partnerships do not grant
the limited partner of such partnerships (REAL IV) the right to remove the local
general partner or to compel a sale of the assets of such Local Partnership.
Because there appears to be no market for the Properties and the Partnership
cannot cause a sale of the Properties, the Properties are likely to remain under
the control of the local general partners indefinitely if the Sale is not
consummated.
Marketing the Properties for Sale to Third Parties. The Managing
General Partner also considered marketing the Properties to third parties. The
portfolio of Properties can only be marketed in cooperation with the local
general partners. The Managing General Partner does not believe that such
alternative is viable or would be in the best interests of the Limited Partners,
because the Managing General Partner is not aware of any third party buyers
willing to purchase such a portfolio of Properties and believe that, even if
such a buyer could be identified, such a sale would be unlikely to result in a
purchase price for the Properties as high as the Purchase Price offered in
connection with the Sale. In light of the limited cash flow currently generated
by the Properties, the degree of control the local general partners exercise
over the Properties and the anticipated adverse consequences of the recent
changes in the laws and policies applicable to HAP Contracts, the Managing
General Partner does not believe that a favorable market for the Properties
currently exists. In addition, because REAL IV owns limited partnership
interests in the Local Partnerships that hold title to the Properties and the
general partners of such Local Partnerships are generally unaffiliated with the
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General Partners of REAL IV, the buyout of the local general partners would be
necessary for a third party to acquire the Properties. The Managing General
Partner believes it would be difficult to find a single buyer for the Properties
as a group, and that selling the Properties on a Property-by-Property basis
would involve an extensive negotiating process over an extended period of time.
During the continuation of such process, the Partnership would continue to be
responsible for all costs relating to the Properties and the Partnership's
ongoing administrative expenses and there would likely be higher transaction
costs, such as brokers' fees and attorneys' fees, relating to sale of the
Properties if they were sold individually. The Managing General Partner has not
received and has not been advised of any third party offers or indications of
interest for any of the Properties. The Managing General Partner does not
believe there are any third party buyers of low income housing projects that
would be able to match the Purchase Price offered by the REIT for the portfolio
of Properties. The Managing General Partner believes that it is unlikely that
third party buyers could be found to purchase the Real Estate Interests at a
higher price than the Purchase Price.
While the Managing General Partner has not consulted any real estate
brokers or other real estate professionals concerning potential purchasers for
the Real Estate Interests, based upon the Managing General Partner's experience
and familiarity with the market for low income housing, the Managing General
Partner does not believe that there are other potential bidders for the Real
Estate Interests at the Purchase Price. The Managing General Partner's
determination was based upon a number of factors, including the need for a
purchaser to negotiate the purchase of the Real Estate Interests with the
Partnership and enter into a transaction with the Partnership which would
require limited partner approval; the need for a purchaser to negotiate separate
transactions with each of the local general partners; the need for a purchaser
to have sufficient capital to purchase the interests of the local general
partners and the Partnership, and to purchase mortgage loans encumbering the
Properties and negotiate restructurings, which the Managing General Partner
believes is necessary to realize a return on the investment in the Properties;
and the impact of recent changes in the law and regulations of HUD relating to
HAP Contracts, which impacts the value of the Properties. As a result, the
General Partner believes that any transaction with a potential purchaser would
be time consuming, difficult to consummate and unlikely to result in a purchase
price higher than the Purchase Price. However, there can be no assurance that a
higher purchase price would not be received if the Properties were actively
marketed.
Rollup. The Managing General Partner considered combining the Casden
Partnerships into a new corporation that would qualify as a REIT entity. As a
result of such a transaction, the Limited Partners would have received shares of
stock in the REIT (or partnership interests convertible into REIT shares), which
would have been listed on a national stock exchange. Such a transaction would be
expected to (a) provide investors in the new entity with the opportunity to
liquidate their investment through the sale of the shares received in the
transaction, (b) permit distribution to investors of a simpler federal income
tax Form 1099-DIV (rather than Schedule K-1), and (c) provide investors with the
potential for receiving securities with a greater value than the proceeds they
will receive as a result of the Sale. Furthermore, such an entity would provide
increased asset diversification and, due to its size, improved access to capital
markets.
The Managing General Partner believes, however, that such a transaction
would have significant disadvantages. As a result of new legislation and
regulations, they believe that obtaining the necessary regulatory approvals for
a rollup would be very difficult, expensive and time-consuming. The Managing
General Partner was not confident that a rollup transaction could be completed
within a reasonably practical time period. Furthermore, the Managing General
Partner believes that there could be significant selling pressure on the
securities issued in connection with a rollup and that such selling pressure
might cause the price of the stock of the rollup entity to decline following
completion of the rollup transaction.
Another disadvantage of a rollup transaction is that the transaction
would cause the Limited Partners to incur a tax on the gain reflected in the
value of the stock of the new entity. The Managing General Partner determined
that Limited Partners would not be able to defer taxation through the use of an
UPREIT structure due to difficulties likely to be experienced in obtaining
approval from various states for the distribution of operating partnership
interests. Unless a Limited Partner sold all or a portion of the securities
received in the transaction, such Limited Partner would
703767.5
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have no additional cash with which to pay the taxes which would result from the
completion of a rollup transaction. The need for cash to pay the taxes on the
transaction could cause downward pressure on the price of the stock. In
addition, a Limited Partner would incur brokerage commissions on the sale of any
securities received in a rollup transaction, thereby reducing the net proceeds
received in the transaction.
Reorganization into a REIT. The Managing General Partner considered the
advisability of reorganizing the Partnership as a corporation treated as a real
estate investment trust. If approved, such a transaction would have provided
some advantages to the Limited Partners. Such a reorganization would be expected
to (a) provide investors in the reorganized entity with liquidity, (b) permit
distribution to investors of a simpler federal income tax form 1099- DIV
(compared to Schedule K-1), and (c) potentially be formed tax free to the
Limited Partners. The Managing General Partner was advised that the
reorganization of the Partnership into a REIT has a number of significant
disadvantages. For example, the small size of the reorganized Partnership, the
lack of diversification, the degree of debt relative to equity, and the absence
of internalized, integrated management would result in limited markets for the
shares of the newly formed real estate investment trust. As a result, the
Managing General Partner was advised that it would be unlikely that the real
estate investment trust shares would perform well in the market. In addition,
the Managing General Partner believes that the size of the resulting real estate
investment trust would not enable it to access the capital markets on an
advantageous basis.
Recommendation of the Managing General Partner; Fairness
The recommendation of the Managing General Partner in favor of the Sale
is based upon its belief that the Sale is fair to the Limited Partners for,
among others, the following reasons: (a) their belief that the terms and
conditions of the Sale, including the Aggregate Property Valuation and the
Purchase Price, are fair to the Limited Partners of the Partnership; (b) their
belief that the alternatives available to the Partnership are not as attractive
to the Limited Partners as the Sale; (c) their belief that now may be an
opportune time for the Partnership to sell the Properties, given current
conditions in the real estate and capital markets; and (d) their belief that the
Purchase Price represents a higher amount than a third party would offer the
Partnership for the Real Estate Interests.
The Managing General Partner has not obtained real estate appraisals to
establish the fair market value of the Properties, but, based upon its
significant real estate experience, it believes that the Aggregate Property
Valuation utilized in connection with determining the Purchase Price is not less
than the fair market value of the Properties. In addition, Stanger has opined
that the Aggregate Property Valuation used in determining the Purchase Price for
the Real Estate Interests is fair to the Limited Partners from a financial point
of view.
The Purchase Price was determined by the Managing General Partner. The
Managing General Partner valued the Real Estate Interests using the following
methodology. For Local Partnerships with HAP Contracts with expiration dates
more than ten years in the future, the Managing General Partner determined the
value by taking the aggregate net operating income before interest expense and
management fees (as adjusted for dividend restrictions with respect to
Properties subject to dividend restrictions) for such Local Partnership for
1996, less capital expenditures, and applied a capitalization rate of 11%. For
Local Partnerships with HAP Contracts with expiration dates greater than six
years but less than ten years in the future, the Managing General Partner
followed the same procedure, but applied a capitalization rate of 12%. For Local
Partnerships with HAP Contracts expiring in six years or less, the Managing
General Partner calculated such Local Partnership's distributions for 1996 (or
in certain cases used a three year average where the General Partners did not
believe that the 1996 distributions were representative), added the management
fees payable to the general partner of such Local Partnership for 1996, assumed
that these distributions would be received for the balance of the term of the
HAP Contracts and discounted these future distributions at a discount rate of
10%. For the three Local Partnerships with no HAP Contracts, the Managing
General Partner determined the value by taking the aggregate net operating
income before interest expense and management fees, less capital expenditures,
applied a capitalization rate of either 9% or 10%, then deducted $3,500 per
apartment unit in consideration of deferred maintenance requirements. In
selecting the capitalization rates, the Managing General Partner took into
account the expectation that cash flow would be significantly reduced after
expiration of the current HAP Contracts and used a higher capitalization rate if
the HAP Contracts expired earlier. With respect to the Local
703767.5
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<PAGE>
Partnerships with HAP Contracts expiring in less than seven years, the Managing
General Partner assumed that the Properties would have no residual value upon
expiration of the respective HAP Contracts, due to the uncertainties as to
future cash flow following the expiration of the term of the HAP Contracts.
Based on such assumptions, the Managing General Partner determined that
the 20 Properties owned by the Local Partnerships that the Managing General
Partner currently anticipates will be included in the Sale have an aggregate
value of $85,251,684 (the "Aggregate Property Valuation"). The Managing General
Partner subtracted from the Aggregate Property Valuation (i) $5,462,648 for the
aggregate estimated value of the general partnership interests in the Local
Partnerships (excluding the general partnership interests of the two local
general partners that are affiliates of the Managing General Partner) and the
local general partners' right to future management fees, including $604,780
attributable to the right to receive the future management fees payable to the
three local general partners affiliated with the General Partners (see "THE SALE
- - Arrangements with General Partners of the Local Partnerships"), and (ii) the
outstanding mortgage indebtedness and related party indebtedness of the Local
Partnerships of $72,112,666. In no event was the valuation of any of the Real
Estate Interests with respect to any of the Local Partnerships reduced below
zero on account of such indebtedness. The amount of the Aggregate Property
Valuation allocated to the general partnership interests in the Local
Partnerships is based in part upon the anticipated cost of buying out the local
general partners. The ultimate cost to buy out the unaffiliated general partners
of the Local Partnerships will be determined in arms-length negotiations between
the Managing General Partner and the general partners of the Local Partnerships.
However, while the costs of such buyouts will be paid by the REIT and the
buyouts will benefit the REIT, a portion of such costs will be indirectly borne
by the Limited Partners. The calculations of the Managing General Partner
described above resulted in distributable cash out of the proceeds of the Sale
of $5,462,648.
The Managing General Partner believes that the method used to determine
the Purchase Price was reasonable in light of the fact that the Partnership owns
limited partnership interests in the Local Partnerships and does not own the
Properties directly, and that any sale of the Properties is subject to the
approval of the general partners of the Local Partnerships. In addition, as
discussed below, recent changes in HUD laws and policies are expected to
adversely impact the Partnership's cash flow and prospects.
Accordingly, the Managing General Partner believes that the Purchase
Price is fair and reasonable and exceeds the price that the Partnership would
likely receive if the Real Estate Interests were to be sold to a third party or
parties. It should be noted that, for purposes of calculating the value of the
Real Estate Interests, the Managing General Partner assumed that certain of the
Properties would have no residual values upon expiration of the respective HAP
Contracts applicable to such Properties, based on its belief that cash flow
after expiration of the HAP Contracts will be significantly reduced, as
discussed below. The Managing General Partner made the same assumption when
determining the capitalization rates used in its valuation calculations.
Different assumptions would likely have resulted in different valuations for the
Real Estate Interests.
In determining the valuation of the Real Estate Interests, no
adjustment was made for the amount by which the value of assets other than the
Properties exceeded liabilities other than mortgage indebtedness because the
Managing General Partner does not believe that these assets are material (other
than the Reserve Accounts referred to below). In addition, pursuant to certain
state housing finance statutes and regulations, certain of the Local
Partnerships are subject to limitations on the distributions of dividends to the
Partnership. Such statutes and regulations require such Local Partnerships to
hold cash flows in excess of such dividend limitations in Reserve Accounts that
may be used only for limited purposes. The Purchase Price was calculated without
attributing value to the Reserve Accounts. The Managing General Partner believes
that federal and state regulatory considerations limiting the availability of
the Reserve Accounts to the Partnership have the effect of substantially
reducing or eliminating entirely any value attributable to such Reserve
Accounts. Nonetheless, the REIT may be able to realize a benefit in the future
by obtaining a reduction in the amount required to be held in the Reserve
Accounts.
703767.5
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<PAGE>
The Managing General Partner relied on the following qualitative
factors in determining that the Sale is fair to the Limited Partners:
o The Properties do not currently produce significant cash flow and the
Partnership has not made distributions to date. The Partnership's
investment in the Properties was initially structured primarily to
obtain tax benefits, and not to provide cash distributions. Due to
changes in the tax laws pursuant to which losses of the Partnership are
treated as passive losses and can only be deducted against passive
income, most Limited Partners are not realizing material tax benefits
from continuing to own their limited partnership interests. Accordingly
Limited Partners are not receiving material benefits from continuing to
hold their interests in the Partnership.
o Recent changes in HUD laws and policies are expected to adversely
affect the Partnership's cash flow and prospects. Under MAHRAA, to the
extent that rents are above market, as is the case with most of the
Properties, the amount of the HAP Contract payments will be reduced.
While MAHRAA also contemplates a restructuring of the mortgage loans to
reduce the current debt service on the mortgage loans, it is expected
that the combination of the reduced HAP Contract payments and the
restructuring of the mortgage loans will result in a significant
reduction in the cash flow to the Local Partnerships. In the case of
two restructurings that are currently being negotiated by affiliates of
the Managing General Partner (involving Section 8 properties owned by
partnerships other than the Partnership), the restructurings proposed
by HUD will significantly reduce the cash flow from these properties.
Furthermore, since the local general partners would control the
restructuring negotiations and most of the local general partners'
income results from their management fees, there can be no assurance
that any restructuring negotiated by local general partners will
optimize cash flow to the Partnership. Moreover, there are a number of
uncertainties as to the restructuring process, including potential for
adverse tax consequences to the Limited Partners. The Managing General
Partner does not believe that the "market" rents generated by the
Properties after reduction of the HAP Contract payments under MAHRAA
will be materially in excess of the debt service and operating expenses
on such Properties after expiration of the applicable HAP Contracts and
accordingly do not expect the Properties to produce any significant
cash flow at such time. When determining the Purchase Price offered for
the Real Estate Interests, the Managing General Partner ascribed no
residual value to certain Properties. The Managing General Partner
believes that it is highly unlikely that the Limited Partners of the
Partnership will benefit from any restructuring under MAHRAA.
o Due to the Partnership's limited current cash flow and the
uncertainties created by MAHRAA, the Managing General Partner do not
believe that the Properties could be sold to a third party on terms
comparable to those of the proposed Sale. In addition, REAL IV owns
only limited partnership interests in the Local Partnerships that hold
title to the Properties and the general partners of such unaffiliated
Local Partnerships are unaffiliated with the General Partners of REAL
IV. As a result, the simultaneous buyout of the local general partners
is necessary in order to acquire the Properties. Accordingly, it would
be difficult for the Partnership to seek a third party buyer for all of
its Real Estate Interests.
The Managing General Partner did not quantify, reach independent
conclusions regarding or otherwise assign relative weights to the individual
qualitative factors listed above. Instead, the Managing General Partner
considered the diminishing prospects of the Partnership in light of the totality
of the circumstances. The Managing General Partner believes that each of the
factors considered supported their determination that the Sale was fair to the
Limited Partners.
The REIT has offered to purchase the Real Estate Interests because the
acquisition of such interests is an important component in the formation of the
REIT and such acquisition may assist the REIT in carrying out its strategy of
acquiring the FHA-insured mortgage loans encumbering the Properties and
generating cash flow in connection with such loans. The REIT intends to purchase
the local general partners' general partnership interests, including the right
to manage the Properties. The REIT believes that acquisition of the Real Estate
Interests, the
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partnership interests of the local general partners, the right to manage each of
the Properties, and the insured mortgage indebtedness currently encumbering the
Properties will allow it to (i) earn fee income through the property management
functions formerly performed by the local general partners and (ii) restructure
the mortgage loans on the Properties on terms more advantageous than could be
obtained by the Partnership. The REIT's greater access to the capital markets
will allow it to take advantage of opportunities that are unavailable to the
Partnership and inconsistent with the Partnership's original objectives. The
Partnership's investment objectives contemplated that the Partnership would
dispose of its Real Estate Interests and liquidate. The Partnership's investment
objectives did not contemplate the Partnership raising additional capital or
acquiring additional partnership interests or mortgage loans, which is necessary
to realize the potential benefits anticipated by the REIT.
The Managing General Partner also considered the fairness of the terms
of the Sale, including the allocation of the Aggregate Property Valuation to the
local general partners and the Purchase Price. REAL IV owns limited partnership
interests in the Local Partnerships that hold title to the Properties that the
REIT has offered to purchase. The simultaneous buyout of the local general
partners is necessary in order to enable the Partnership to realize the value of
its Real Estate Interests. Accordingly, the amount required to be paid by a
purchaser (whether a third party buyer or the REIT) to purchase the interests of
the local general partners will have the effect of reducing the amount of
consideration which a buyer is willing to pay for the Partnership's Real Estate
Interests. The amounts that the Managing General Partner proposes to pay to the
unaffiliated local general partners in connection with the buyouts of such local
general partners will be determined in arms-length negotiations. The Managing
General Partner believes that the terms of such buyouts are fair to the
Partnership. Therefore, the Managing General Partner believes that, while the
amount paid to the local general partners affects the amount of distribution to
Limited Partners and the buyout of the local general partners' interests will
benefit the REIT, the terms of these transactions are fair to the Partnership
and the Limited Partners. In addition, the Managing General Partner believes
that the amount to be distributed to the Limited Partners from the Sale is fair
to the Limited Partners. The distributions represent the Purchase Price, less
expenses that the Managing General Partner believes are reasonable and
customary.
Set forth below are estimates of the value of the Units based on recent
sale prices. It should be noted that the estimated values are based on certain
assumptions, including selling costs and other expenses, costs, offsets and
contingencies attributable to the sale of assets and liquidation of the
Partnership, and such estimates may not be a reliable basis for valuing the
Units. While the Managing General Partner believes it has a reasonable basis for
the assumptions made, it is unlikely that all of the assumptions employed by the
Managing General Partner will prove to be accurate in all material respects.
Such assumptions were selected to simplify the analysis and may not approximate
the actual experience of the Partnership. The estimated values of the Units
would have been different if the Managing General Partner had made different
assumptions. The original cost per Unit was $5,000.
703767.5
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<PAGE>
The following table sets forth certain measures of value and permits a
comparison of these measures against the amount each Limited Partner would
receive per unit from the Sale and subsequent liquidation of the Partnership:
Secondary Market Prices(2)
-----------------------------------------
Amount to be High Low
Received from -----------------------------------------
Sale(1)
- -----------------------------------------------------------------
$406.00 $225.00 $25.00
- ---------------------
(1) This amount is an estimate of the total amount expected to be distributed
per Unit to Limited Partners as a result of the liquidation of the
Partnership after the Sale plus cash available for distribution. This
amount includes the proceeds of the Sale. This amount will be distributed
in one or a series of distributions.
(2) Based on the high and low value of Unit sales made during the twelve months
ending December 31, 1997, as compiled by NAPICO. NAPICO has advised that
its methodology for compiling trade prices is as follows: Trade price
information reflects per Unit transaction prices for trades involving the
purchase of Units by third- party investors during the applicable period.
Firms supplying trade price data are instructed to provide information only
on those transactions whereby third-party investors acquired Units from or
through such firms. Due to commission and mark-ups, sellers of Units
typically receive less than the amounts paid for Units by buyers as set
forth in the table.
The Limited Partners, in reviewing these measures of value, should
carefully review the procedures that have been followed in computing these
measures and, in particular, should recognize the limitations of these measures
as indicators of the fair market value of the Units or of the assets of the
Partnerships, as the case may be.
Secondary and Market Prices for Units. The information in the table
above under the heading "Secondary Market Trades" shows the highest and lowest
Unit sale prices as reported to NAPICO by certain secondary market firms
involved in sales of the Units over the twelve-month period ended December 31,
1997. When gathering such data, NAPICO requests that the recorded prices per
Unit include any mark-ups for Units sold by the firms acting as principals in
the secondary market transactions and include any commissions charged by them
for facilitating the transactions, unless the firms acted as retail brokers.
No established market for the Units was ever expected to develop and
the secondary market transactions for the Units have been limited and sporadic.
It is not known to what extent the transactions in the secondary market are
between buyers and willing sellers, each having access to relevant information
regarding the financial affairs of the Partnerships, expected value of their
assets, and their prospects for the future. Many transactions in the secondary
market are believed to be distressed sales where sellers are highly motivated to
dispose of the Units and willing to accept substantial discounts from what might
otherwise be regarded as the fair value of the interest being sold, to
facilitate the sales. Secondary market prices generally do not reflect the
current market of the Partnerships' assets, nor are they indicative of total
return, because tax benefits received by original investors are not reflected in
such price. Nonetheless, notwithstanding these qualifications, the secondary
market prices, to the extent that the reported data are reliable, are indicative
of the prices at which the Units trade in the illiquid secondary markets.
The Managing General Partner did not give any specific weight to any
one of the foregoing factors but viewed them in the aggregate in supporting its
fairness determination. The Managing General Partner recommends that the Sale be
approved by the Limited Partners. Limited Partners should note, however, that
the Managing General Partner's recommendation is subject to inherent conflicts
of interest. See "CONFLICTS OF INTEREST."
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<PAGE>
Other Measures of Value. The Managing General Partner has not
calculated a going concern value or a liquidation value of the Units. Due to the
anticipated reduction in HAP payments at the expiration of HAP Contracts, as
described above, and the uncertainties relating to the impact on cash flow of
the restructuring of the FHA-insured mortgage loans, the Partnership does not
believe there is a sufficient basis to estimate future cash flow from the
Properties and calculate going concern value. Similarly, due to the limited cash
flow from the Properties and the potential impact of the anticipated reductions
in payments under HAP Contracts, and the absence of future tax benefits from the
Properties, the Partnership does not believe that there is a sufficient market
for estimating the fair market value of the Properties. The Managing General
Partner has not calculated an estimate of the liquidation value of the Units
assuming that the Partnership's Properties were sold at their book value. The
net book value of the Properties (i.e. book value less mortgage indebtedness) is
less than zero, which is common with real estate that has been held for an
extended period. The book value of the real estate assets is based upon the
original cost of those assets, increased for capital expenditures and reduced
for accumulated depreciation, computed in accordance with generally accepted
accounting principles. The Managing General Partner did not obtain appraisals of
the Properties because, given the large number of Properties, the nature of the
Properties, the uncertainties resulting from the changes in law and policy
relating to payments under HAP Contracts, and the relatively small value of each
of the Properties, the Managing General Partner does not believe that the
benefits to be derived from such appraisals justified the expense to the
Partnership. The Managing General Partner does not believe that the price that
Unitholders originally paid for their Units was relevant in determining the
Purchase Price for the Real Estate Interests and therefore gave it no weight
when determining the fairness of the proposed Sale.
The Units were offered primarily to provide tax benefits to Limited
Partners and only secondarily to provide return of capital or appreciation in
value. In addition, due to recent changes in HUD law and policies relating to
HAP Contracts, the potential future return from the Properties, and therefore
the economic value of the Properties themselves, has been materially reduced.
REAL IV was originally structured to take advantage of opportunities provided by
the Internal Revenue Code and the United States Housing Act. Changes in the tax
code and the housing act have to a large extent eliminated such opportunities
and have adversely affected the economic value of the Properties. In light of
the current regulatory environment for tax-driven low-income housing
investments, the Managing General Partner does not believe that the 1982
offering price of the Units should be a material factor in calculating the
Purchase Price for the Real Estate Interests. Accordingly, the Managing General
Partner does not believe that the purchase price originally paid by Limited
Partners for their Units is relevant to the determination of the adequacy of the
Purchase Price on a sale of the Real Estate Interests.
Post-Sale Operations of the Partnership
Following consummation of the Sale, the Partnership will retain its
limited partnership interests in eight local partnerships and an indirect
interest, through REA II, in one local partnership. The Managing General Partner
does not anticipate that cash flows generated by such local partnerships will be
adequate to meet the operating expenses of such local partnerships on an ongoing
basis and that the Partnership will be required to utilize its cash reserves
(currently in excess of $6,000,000) to meet its operating expenses. The pro
forma net cash flow for the remaining Properties for the years ended December
31, 1997 and 1996 resulted in a deficit of approximately $196,000 and $142,000,
respectively. The Managing General Partner intend to eventually dispose of the
Partnership's interests in the remaining projects, then wind up the affairs of
the Partnership, although the time frame for such activities has not yet been
determined, and such dispositions would require approval of the general partners
of the Local Partnerships. The Managing General Partner does not believe that
the Partnership will be able to generate additional cash for distributions to
Limited Partners as a result of dispositions of the remaining Properties.
Historical and Pro Forma Financial Information
The following is condensed financial information with respect to those
properties in which the Partnership will continue to own interests if the Sale
is approved. Given the structure of the proposed Sale, the composition of the
Partnership after the Sale will depend to some extent upon the number of general
partners of the Local Partnerships that elect to transfer their interests in the
Local Partnerships to the REIT.
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The pro forma balance sheet of the Partnership has been prepared as if
the Sale was consummated on December 31, 1997. The pro forma statements of
operations of the Partnership for the year ended December 31, 1997 assume that
the Sale was consummated on January 1, 1997. The Sale will be accounted for
using the purchase method of accounting.
The pro forma financial statements are based on available information
and on certain assumptions, as set forth in the notes to pro forma financial
statements, that NAPICO believes are reasonable under the circumstances.
These statements do not purport to represent what the Partnership's
financial position, results of operations or cash flows would actually have been
if the Sale in fact had occurred on such dates or at the beginning of such
period or the Partnership's financial position, results of operations or cash
flows for any future date or period.
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<PAGE>
REAL ESTATE ASSOCIATES LIMITED IV
(a California limited partnership)
Pro Forma Consolidated Balance Sheet
As of December 31, 1997
(unaudited)
<TABLE>
<CAPTION>
Assets
Pro Forma Pro Forma
Historical Adjustments Consolidation
---------- ----------- -------------
<S> <C> <C> <C>
Investments in Limited Partnerships $3,374,262 (1,130,571)(A) $ 2,243,691
Cash and Cash Equivalents 7,430,796 - 7,430,796
91,899 (80,000 (B) 11,899
------ ------- ------
Other Assets
Total Assets $10,896,957 ($1,210,571) $9,686,386
</TABLE>
Liabilities and Partners' Equity (Deficiency)
<TABLE>
<CAPTION>
Liabilities:
<S> <C> <C> <C>
Notes and interest payable $1,362,625 (1,362,625)(C) $ -
130,851 - 130,851
------- -------
Accounts payable
1,493,476 (1,362,625) 130,851
Partners' Equity (Deficiency):
General partners (177,995) 1,521(D) (176,474)
9,581,476 150,533(E) 9,732,009
--------- ------- ---------
Limited partners
9,403,481 152,054 9,555,535
--------- ------- ---------
Total Liabilities and Partners' Equity 10,896,957 ($1,210,571 $9,686,386
========== =========== ==========
</TABLE>
703767.5
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<PAGE>
REAL ESTATE ASSOCIATES LIMITED IV
(a California limited partnership)
Notes to Pro Forma Balance Sheet
As of December 31, 1997
(unaudited)
Pro Forma Balance Sheet Adjustments
<TABLE>
<CAPTION>
(A) Investments in Limited Partnerships
<S> <C> <C>
Historical Balance as of 12/31/97 $3,098,674
Less:
Barnesboro/Cherry Ridge $ (263,910)
Lakeland Place (275,218)
Loch Haven Apartments (153,592)
Scituate Vista ----------------51)
Pro Forma Adjustment (1,130,571)
-----------
Pro Forma Balance as of 12/31/97 $ 1,968,103
============
(B) Other Assets
The Partnership advanced $80,000 to the limited partnership holding title
to the Villa del Sol property for working capital purposes. The resulting pro
forma balance was determined as follows:
Historical Balance $ 91,899
Less: Villa del Sol (80,000)
--------
Pro Forma Adjustment $ 80,000
=======
Pro Forma Balance 11,899
(C) Notes and Interest Payable
Historical Balance $1,362,625
Less:
Alliance Towers $ (175,525)
Baughman Towers (134,746)
Coatesville (212,758)
Lakeland Place (319,136)
Sandwich Manor (520,460)
---------
Pro Forma Adjustment (1,362,625)
-----------
Pro Forma Balance $ 0
=============
(D) General Partners' Deficiency 1% of pro forma equity adjustments.
(E) Limited Partners' Equity 99% of pro forma equity adjustments.
</TABLE>
703767.5
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<PAGE>
REAL ESTATE ASSOCIATES LIMITED IV
(a California limited partnership)
Pro Forma Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
--------------------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
$ 325,842 $ (43,185(A) $ 282,657
Interest Income ----------------- ------------- -----------------
Operating Expenses:
Legal and accounting 109,635 - 109,635
Management fees 505,392 (394,267(B) 111,125
Interest 74,057 (74,057(C) 0
Administrative 279,994 - 279,994
------- -------
969,078 (468,324) 500,754
Total Operating Expenses ------- --------- --------
Loss from Operations (643,236) 425,139 (218,097)
Distributions from Limited Partnerships
Recognized as Income 1,406,888 (1,402,474(D) 4,414
Equity in Income of Limited Partnerships and 355,483 (88,147(E) 267,336
Amortization of Acquisition Costs ---------- ----------- ---------
Net Income $ 1,119,135 $(1,065,482) $ (53,653)
---------------- ----------- ---------------
</TABLE>
703767.5
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<PAGE>
REAL ESTATE ASSOCIATES LIMITED IV
(a California limited partnership)
Notes to Pro Forma Consolidated Statement of Operations
(unaudited)
Pro Forma Statements of Operations Adjustments
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
Sept. 30, 1997 Dec. 31, 1997
-------------- -------------
(A) Interest Income
<S> <C> <C>
Reflects estimated interest income for the period related to cash
distributions that will no longer be received after the sale.
Historical Balance $ 236,477 $ 325,842
Cash Distribution:
Alliance Towers 78,226 78,226
Antelope Valley Apts. 242,934 242,934
Armitage Commons 91,911 91,911
Barnesboro (Cherry Ridge) - 21,033
Baughman Towers 106,308 106,308
Beacon Hill 57,805 57,805
Buckingham 90,128 90,128
Coatsville 120,413 120,413
Ethel Arnold Bradley 13,223 13,223
Glenoaks Place 121,696 121,696
Lakeland Place - 27,515
O'Fallon 76,412 76,412
Pacific Coast Villa 66,555 66,555
Rosewood 146,400 170,800
Vista Park Chino 30,837 30,837
Wasco Arms 123,692 123,692
------------ ------------
Total Cash Distributions 1,366,540 1,439,488
Pro Forma Adjustment (3% IR) ($40,996) ($43,185)
------------ -------------
Pro Forma Balance $ 195,481 $ 282,657
========== ===========
(B) Management Fees
Reflects reduction in management fees, calculated at 0.4% of
invested assets, as a result of the Sale of the properties.
Historical Balance $ 379,044 $ 505,392
Pro Forma Adjustment (295,700) (394,267)
--------- ---------
Pro Forma Balance $ 83,344 $ 111,125
========= ===========
</TABLE>
703767.5
-41-
<PAGE>
<TABLE>
<CAPTION>
Nine Months Year Ended
Ended Dec. 31, 1997
Sept. 30, 1997 -------------
--------------
Pro Forma Adjustment for Sale properties is calculated as:
<S> <C> <C>
Invested Assets $94,761,000 $126,348,000
Less - Sale properties:
Alliance Towers (2,715,665) (3,620,887)
Antelope Valley (5,335,777) (7,114,369)
Armitage Commons (4,679,462) (6,239,283)
Baughman Towers (3,798,992) (5,065,323)
Beacon Hill (6,851,100) (9,134,800)
Buckingham Apts. (3,565,070) (4,753,426)
Cherry Ridge (1,920,656) (2,560,875)
Coatesville (2,772,095) (3,696,126)
Ethel Arnold Bradley (3,930,509) (5,240,678)
Glenoaks (2,433,957) (3,245,276)
Lakeland Place (5,401,950) (7,202,600)
Loch Haven (5,469,486) (7,292,648)
O'Fallon (4,418,028) (5,890,704)
Pacific Coast Villa (1,299,465) (1,732,620)
Rosewood (4,538,400) (6,051,200)
Sandwich Manor (2,892,900) (3,857,200)
Sterling Village (3,196,007) (4,261,343)
Villa del Sol (3,349,163) (4,465,550)
Vista Park Chino (1,938,257) (2,584,342)
Wasco Arms (3,418,087) (4,557,449)
----------- -----------
Total for sale properties (73,925,024) (98,566,699)
----------
Pro Forma Invested Assets $20,835,976 $27,781,301
----------- ----------
Invested Assets related to Sale properties 73,925,024 98,566,699
Management fee rate 0.4 0.4
Annual adjustment - Year ended December 31, 1997 394,267
Adjustment for nine months 295,700
Adjustment fee nine months ended September 30, 1998
(C) Interest
The pro forma adjustments to the historical interest expense related to
notes payable, and the resulting pro forma balances were determined as
follows:
Historical Balance $83,696 $ 74,057
Less:
Alliance Towers (13,067) (122,928)
Baughman Towers (10,031) (84,153)
Coatesville (15,839) (107,932)
Lakeland Place (23,759) 268,955
Sandwich Manor (21,000) (28,000)
-------- --------
Pro Forma Adjustment (83,696) (74,057)
-------- --------
Pro Forma Balance $ 0 $ 0
=========== ========
</TABLE>
703767.5
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<PAGE>
<TABLE>
<CAPTION>
(D) Distributions from Limited Partnerships
The pro forma adjustments to the historical balances and the resulting
pro forma balances were determined as follows:
<S> <C> <C>
Historical Balance $ 1,357,731 $1,406,888
--------- ----------
Less:
Alliance Towers (78,226) (78,226)
Antelope Valley (242,934) (242,934)
Armitage Commons (91,911) (91,911)
Baughman Towers (106,308) (106,308)
Beacon Hill (57,805) (57,805)
Buckingham (90,128) (90,128)
Coatesville (120,413) (120,413)
Glenoaks Place (121,696) (121,696)
O'Fallon (76,412) (76,412)
Pacific Coast Villa (66,555) (66,555)
Rosewood (146,400) (170,800)
Sandwich Manor (24,757)
Vista Park Chino (30,837) (30,837)
Wasco Arms (123,692) (123,692)
--------- ---------
Pro Forma Adjustment (1,353,317) (1,402,474)
Pro Forma Balance
$4,414 $4,414
====== ======
(E) Equity in Income of Limited Partnership and Amortization of Acquisition Costs
The pro forma adjustments to the historical balance and the resulting
pro forma balance, were determined as follows:
Historical Balance $ 42,000 $355,483
Less:
Cherry Ridge/Barnesboro -- 17,002
Ethel Arnold Bradley -- (30,951)
Lakeland Place -- (55,268)
Loch Haven -- (18,930)
-- --------
Pro Forma Adjustment -- (88,147)
Pro Forma Balance $ 42,000 $267,336
============= =======
</TABLE>
703767.5
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<PAGE>
IV. AMENDMENTS TO THE PARTNERSHIP AGREEMENT
Certain amendments to the Partnership Agreement are necessary in
connection with the consummation of the Sale. The Partnership Agreement
currently prohibits a sale of any of the Real Estate Interests to the General
Partners or their affiliates. Accordingly, consent of the Limited Partners is
being sought for an amendment to the Partnership Agreement that eliminates such
prohibition.
The Partnership Agreement also requires that any agreement entered into
between the Partnership and the General Partners or any affiliate of the General
Partners shall provide that it may be canceled at any time by the Partnership
without penalty upon 60 days' prior written notice. It is the position of the
General Partners that the Termination Provision does not apply to the Sale;
nevertheless, the General Partners are seeking approval of the Limited Partners
to an amendment to the Partnership Agreement that eliminates the Termination
Provision in connection with the Sale and any future disposition of the
Properties.
The Partnership Agreement also prohibits the Partnership from selling
any Property or any interest in a Property if the cash proceeds from such sale
would be less than the state and federal taxes applicable to such sale,
calculated using the maximum tax rates then in effect (the "Tax Requirement").
The Managing General Partner is seeking the approval of the Limited Partners to
an amendment to the Partnership Agreement that modifies the Tax Requirement so
as to allow the Partnership to calculate the net tax liability from a sale of a
Property or Properties by subtracting from the tax payable on the gain from such
sale the tax benefit resulting from the ability to deduct the Partnership's
suspended passive losses against ordinary income, assuming that the Limited
Partner has sufficient ordinary income that would otherwise have been taxed at
the 39.6% marginal tax rate for federal income tax purposes to fully utilize
such losses at such rate, and assuming an effective state income tax rate of 5%.
By approving such amendment, the Limited Partners are relinquishing a
potential benefit conferred by the terms of the Partnership Agreement. However,
the Managing General Partner believes that it would not be possible to find a
buyer willing to purchase the Properties under the conditions currently
specified in the Partnership Agreement, because compliance with such conditions
would result in a purchase price for the Properties substantially higher than
their fair market value.
The consent of Limited Partners holding a majority of outstanding Units
is required in order to amend the Partnership Agreement. Limited Partners must
approve the proposed Sale and each of the three proposed Amendments in order to
allow consummation of the Sale.
703767.5
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<PAGE>
V. CONFLICTS OF INTEREST
General
Due to the key role of affiliates of the Managing General Partner in
the organization of the REIT, and the relationships among the Managing General
Partner, the Casden Partnerships, Casden and Casden's directors and officers,
the Managing General Partner has certain conflicts of interest in recommending
the Sale to the Limited Partners. Some important conflicts are:
1. The terms of the Sale were established by the REIT and the Managing
General Partner, which are related parties. Accordingly, the terms and
conditions of the proposed Sale were not determined through arms-length
negotiations. There can be no assurance that arms-length negotiations would not
have resulted in terms more favorable to the Limited Partners.
2. Although the Managing General Partner is accountable to the
Partnership and the Limited Partners as fiduciaries and are obligated to
exercise good faith and fair dealing toward other members of the Partnership,
and although Stanger provided an independent opinion with respect to the
fairness of the Aggregate Property Valuation utilized in connection with
determining the Purchase Price, no independent financial or legal advisors were
engaged to determine the Purchase Price or to represent the interests of the
Limited Partners. There can be no assurance that the involvement of financial or
legal advisors, or other third parties, on behalf of the Limited Partners would
not have resulted in a higher Purchase Price or terms more favorable to the
Limited Partners.
3. If the REIT Transaction is consummated, affiliates of the Managing
General Partner will receive substantial interests in the REIT in exchange for
the contribution of real property assets and the property management operations
of Casden, including direct or indirect interests in the General Partners. The
Managing General Partner anticipates that they will receive significant economic
benefits as a result of receiving interests in the REIT. Such interests in the
REIT are likely to enjoy greater liquidity than the General Partners' current
interests in the Partnership if the REIT successfully completes an initial
public offering following its initial formation as a private REIT. Unlike Casden
and its affiliates, the Limited Partners will not have the right to participate
in the REIT. It is anticipated that approximately 51% of the equity securities
of the REIT will be held by Casden and its affiliates following the Private
Placement, based on the terms of the Private Placement as currently
contemplated. The implied value of the REIT's securities (based on the pricing
of the REIT's securities in the Private Placement and in contemplated subsequent
public offerings, if consummated) that will be attributed to the other assets
being contributed to the REIT may exceed the Purchase Price paid by the REIT for
such interest in the Properties because of (i) the combination of real estate
assets and businesses and the resultant opportunities for enhanced access to
equity capital and financing alternatives that are likely to be available to the
REIT; (ii) the expected liquidity of the REIT's capital stock; (iii) the current
favorable public market valuation of real estate investment trusts; (iv) the
inclusion of certain real estate business and management companies owned by
affiliates of Casden in the REIT; and (v) the greater asset diversification of
the REIT, and other factors. Such realization of excess value is dependent on
economic, interest rate and real estate market trends, as well as market
conditions at the time of the formation of the REIT and the Private Placement
(and subsequent public offering) of its securities and, if realized, will likely
provide affiliates of the General Partners with significant economic benefits.
4. It is anticipated that the return from the interests in the REIT to
be received by the Managing General Partner and its affiliates in connection
with the REIT Transaction will exceed the return such persons currently receive
from the real estate assets and business such persons will contribute or sell to
the REIT. The implied value of the REIT's securities (based on the pricing of
the REIT's securities in the Private Placement and in contemplated subsequent
public offerings, if consummated) that will be attributed to the other assets
being contributed to the REIT may exceed the Purchase Price paid by the REIT for
such interest in the Properties because of (i) the combination of real estate
assets and businesses and the resultant opportunities for enhanced access to
equity capital and financing alternatives that are likely to be available to the
REIT; (ii) the expected liquidity of the REIT's capital stock; (iii) the
703767.5
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<PAGE>
current favorable public market valuation of real estate investment trusts; (iv)
the inclusion of certain real estate business and management companies owned by
affiliates of Casden in the REIT; and (v) the greater asset diversification of
the REIT, and other factors. Such realization of excess value is dependent on
economic, interest rate and real estate market trends, as well as market
conditions at the time of the formation of the REIT and the Private Placement
(and subsequent public offering) of its securities and, if realized, will likely
provide affiliates of the Managing General Partner with significant economic
benefits.
5. Substantially all of the officers and employees of Casden and its
affiliates will be employed as officers and employees of the REIT or its
subsidiaries. For their services as officers, directors or employees of the REIT
or its subsidiaries, such persons will be paid a salary and may be eligible to
participate in the REIT's bonus plan, option plan and other employee benefit
plans. In addition, through the REIT Transaction, the REIT will ensure
continuity of the business established by the Managing General Partner and its
affiliates. The Properties, if acquired by the REIT will continue to be managed
by the REIT's officers and employees for as long as the REIT continues to own
the Properties. In addition, unlike the Partnership, the REIT will have the
ability to reinvest proceeds from any future sale of the Properties. The REIT
will therefore afford ongoing employment opportunities for those persons
currently employed to assist with the administration and day-to-day operations
of the Properties and the REIT.
6. The Managing General Partner is currently in the process of
structuring a buyout of the interests in the Local Partnerships held by the
general partners of the Local Partnerships. There can be no assurance that the
Managing General Partner will be able to successfully complete the buyouts from
such unaffiliated general partners on acceptable terms. To the extent that the
ultimate cost of such buyouts exceeds the Managing General Partner's current
estimates of such cost, the distributions to Limited Partners resulting from the
Sale will be reduced. In addition, the value attributed to the management fees
payable to the general partners of the three Local Partnerships affiliated with
the General Partners was deducted from the Aggregate Property Valuation when
determining the Purchase Price payable to the Limited Partners. The right to
receive such management fees will be transferred to the REIT in connection with
the Sale, and affiliates of the Managing General Partner will have a substantial
interest in the REIT.
Fiduciary Responsibility
The Managing General Partner is accountable to the Partnership and the
Limited Partners as fiduciaries and consequently are obligated to exercise good
faith and fair dealing toward other members of the Partnership. The Partnership
Agreement provides that the General Partners and their officers, directors,
employees, agents, affiliates, subsidiaries and assigns are entitled to be
indemnified for any claim, loss, expense, liability, action or damage resulting
from any act or omission performed or omitted by them pursuant to the
Partnership Agreement, but the General Partners are not entitled to be
indemnified or held harmless for any act or omission constituting fraud,
negligence, breach of fiduciary duty or willful misconduct. In addition,
pursuant to the Partnership Agreement, the General Partners have no liability or
obligation to the other partners or the Partnership for any decision made or
action taken in connection with the discharge of their duties under the
Partnership Agreement, if such decision or action was made or taken in good
faith.
If a claim is made against the General Partners in connection with
their actions on behalf of the Partnership with respect to the Sale, the General
Partners expect that they will seek to be indemnified by the Partnership with
respect to such claim. Any expenses (including legal fees) incurred by the
General Partners in defending such claim shall be advanced by the Partnership
prior to the final disposition of such claim, subject to the receipt by the
Partnership of an undertaking by the General Partners to repay any amounts
advanced if it is determined that the General Partners' actions constituted
fraud, bad faith, gross negligence, or failure to comply with any
representation, condition or agreement contained in the Partnership Agreement.
As a result of these indemnification rights, a Limited Partner's remedy with
respect to claims against the General Partners relating to the General Partners'
involvement in the sale of the Partnership's interest in the Properties to the
REIT could be more limited than the remedy which would have been available
absent the existence of these rights in the Partnership Agreement. A successful
claim for
703767.5
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<PAGE>
indemnification, including the expenses of defending a claim made, would reduce
the Partnership's assets by the amount paid.
703767.5
-47-
<PAGE>
VI. SELECTED FINANCIAL INFORMATION
The following table sets forth selected historical financial and
operating data of the Partnership for the fiscal years ended December 31, 1997,
1996, 1995, 1994 and 1993.
The following information should be read in conjunction with the
Partnership's Annual Report on Form 10-K attached hereto as Annex B.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income $ 325,842 $ 173,145 $ 152,450 $ 105,982 83,290
Operating Expenses $ 969,078 $ 809,646 $ 806,917 $ 786,244 780,323
Loss From Operations $ (643,236) $ (636,501) $ (654,466) $ (680,262) (697,033)
Distributions From Limited
Partnerships Recognized as
Income 1,406,888 1,107,630 1,222,286 1,053,488 948,374
Equity in Income of Limited
Partnerships and amortization
of acquisition costs 355,483 483,414 487,116 314,015 372,206
----------- ----------- ----------- ------------ ------------
Net Income $ 1,119,135 $ 954,543 $ 1,054,936 $ 687,241 623,547
=========== =========== =========== ============ ============
Net Income allocated
to Limited Partners $ 1,107,944 $ 944,998 $ 1,044,387 $ 680,369 617,312
Net Income per Limited
Partnership Interest $ 85 $ 72 $ 80 $ 52 47
=========== =========== =========== ============ ============
Total assets $ 10,896,957 $ 9,774,550 $ 8,997,384 $ 7,954,058 7,226,884
=========== =========== =========== ============ ============
Investments in Limited $ 3,374.262 $ 3,098,674 $ 3,221,339 $ 3,234,884 3,289,353
Partnerships
=========== =========== =========== ============ ============
Partners' Equity $ 9,403,481 $ 8,284,346 $ 7,329,803 $ 6,274,867 5,587,126
Limited Partners' Equity $ 9,581,476 $ 8,473,632 $ 7,528,635 $ 6,484,148 5,803,779
Limited Partners' Equity per
Limited partnership interest $ 725 $ 642 $ 570 $ 491 440
-- ----------- -- ----------- -- ----------- -- ------------ - ------------
</TABLE>
703767.5
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<PAGE>
VII. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material tax consequences relating to
the proposed Sale and the distribution of approximately $406 per Unit. However,
each Limited Partner is urged to consult his, her or its own tax advisor for a
more detailed explanation of the specific tax consequences to such Limited
Partner from the Sale.
Upon consummation of the Sale, and subject to the passive activity
rules described below, each Limited Partner will recognize his, her or its share
of the taxable gain of the Partnership to the extent that the sum of (i) the
cash, plus (ii) the fair market value of any property received by the
Partnership on the Sale plus (iii) the outstanding principal amount of the
Partnership's nonrecourse indebtedness, exceeds the Partnership's adjusted basis
for the Properties. Gain realized by the Partnership on the Sale will generally
be a Section 1231 gain (i.e., long-term capital gain). A Partner's share of
gains and losses from Section 1231 transactions from all sources would be netted
and would be taxed as capital gains or constitute ordinary losses, as the case
may be. A net Section 1231 gain for a taxable year will be treated as capital
gain only to the extent such gain exceeds the net Section 1231 losses for the
five most recent prior taxable years not previously recaptured. Any gain
attributable to a Limited Partner's share of depreciation recapture will be
taxed at ordinary income rates.
The taxable income realized by each Limited Partner by reason of the
Sale should be characterized as income from a "passive activity" and may be
offset by a Limited Partner's available "passive activity losses" (including
suspended losses). Under the Tax Reform Act of 1986 (the "1986 Act") losses from
passive activities may only be offset against income from passive activities or
may be deducted in full when the taxpayer disposes of the passive activity from
which the loss arose. However, pursuant to a transitional rule contained in the
1986 Act, a certain percentage of losses from a passive activity which was held
by the taxpayer on the date of the enactment of the 1986 Act (i.e., October 22,
1986) and at all times thereafter was permitted to offset any type of income
during the years 1987 through 1990.
It is estimated that as a consequence of the Sale, each Limited Partner
will have taxable income equal to approximately $3,508 per Unit all of which
will constitute long-term capital gain. The income tax consequences of the Sale
to any Limited Partner depends in large part upon the amount of losses that were
allocated to such Limited Partner by the Partnership and the amount of such
losses which were applied by such Limited Partner to offset his or her taxable
income. If a Limited Partner has not utilized any of the passive activity losses
allocated to such Limited Partner in excess of those amounts permitted under the
transitional rule relief described above, the Limited Partner will have a net
federal and state tax liability of approximately $119. Because passive losses
are only deductible against passive income after 1986 (subject to certain
transitional rules), the Managing General Partner does not have any basis for
determining the amount of such passive losses which have previously been
utilized by Limited Partners. The anticipated cash distribution of approximately
$406 per Unit would be sufficient to pay the federal and state tax liability
arising from the Sale, assuming a federal capital gains rate of 25% (the current
capital gains rate for the portion of net Section 1231 gain attributable to
unrecaptured Section 1250 gain), and assuming an effective state tax rate of 5%,
and that Limited Partners have suspended passive losses of $2,093 per Unit from
the Partnership, which is the amount of passive losses that a Limited Partner
would have had it not utilized any of its passive losses (except to the extent
permitted under the transitional rule). The net tax liability was calculated by
deducting from the tax payable on the gain from the sale (calculated at a
federal tax rate of 25% since all of the income is attributable to depreciation
not recaptured as ordinary income and taxed at capital gains rates) the tax
benefit resulting from the ability to deduct the suspended passive losses
against ordinary income (which is permitted following disposition of the passive
activity) assuming that the Limited Partner has sufficient ordinary income which
would otherwise have been taxed at the 39.6% marginal tax rate for federal
income tax purposes to fully utilize such losses at such rate, and assuming a
state income tax rate of 5%. In addition to assuming federal income tax rates,
the calculation of income tax liability of a Limited Partner assumes that such
Limited Partner has no net Section 1231 losses for the five most recent prior
taxable years. If this latter assumption is not applicable to a Limited Partner,
the income tax liability of such Limited Partner could increase because certain
income would be taxed at ordinary, instead of capital gains tax rates. Limited
Partners are advised to consult with their own tax advisors for specific
application of the tax rules
703767.5
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<PAGE>
where the above-described assumption is not applicable. The foregoing does not
take into consideration the effect of any local tax liabilities that may be
applicable to the Sale.
The Managing General Partner believes that there were reasonable bases
for the foregoing assumptions. In light of the suitability standards that
Limited Partners met at the time of their original investment in the Partnership
and the types of investors who would have invested in an investment primarily
intended to provide tax benefits, the Managing General Partner assumed for
purposes of calculating the tax liabilities resulting from the proposed Sale
that each Limited Partner will have taxable income in excess of $155,950 (which
is the income level at which married taxpayers filing joint returns effectively
become subject to a 39.6% marginal rate) in 1998. While the financial
circumstances of the Limited Partners may vary considerably, the Managing
General Partner believes it is reasonable to assume that the majority of the
current Limited Partners will be in the highest federal tax bracket in 1998. The
Managing General Partner believes that while state tax rates vary from
state-to-state, the effective average state tax rate for individuals who itemize
deductions is approximately 5%. The Managing General Partner calculated the tax
benefit from the suspended passive losses at 44.6% (39.6% federal rate plus a 5%
effective state rate).
To the extent that a Limited Partner was able to utilize more passive
activity losses than were available under the transitional rules (e.g., because
such Limited Partner had passive income from other sources) to offset his, her
or its taxable income, the estimated federal income tax liability of such
Limited Partner would substantially increase. Thus, for example, if a Limited
Partner had no suspended passive activity losses to carry forward, it is
estimated that such Limited Partner would have a federal and state income tax
liability equal to approximately $1,052 per Unit, or $646 in excess of the
distribution of $406 per Unit. In addition, to the extent that a Limited Partner
does not have sufficient ordinary income taxed at a 39.6% marginal rate to fully
utilize the suspended passive losses against such income, the Limited Partner's
net tax benefits from the Sale would be reduced and the Limited Partner is
likely to be incur net tax costs in excess of the cash distributions which will
be received.
BECAUSE IT IS IMPOSSIBLE TO KNOW THE AMOUNT OF LOSSES ANY LIMITED
PARTNER HAS APPLIED TO OFFSET HIS, HER OR ITS TAXABLE INCOME, THE MANAGING
GENERAL PARTNER CANNOT ESTIMATE THE INCOME TAX LIABILITY OF EACH LIMITED PARTNER
ARISING FROM THE SALE, THEREFORE, EACH LIMITED PARTNER SHOULD CONSULT HIS, HER
OR ITS TAX ADVISOR CONCERNING THE INCOME TAX CONSEQUENCES OF CONSENTING TO THE
SALE WITH RESPECT TO SUCH LIMITED PARTNER'S OWN TAX SITUATION.
VIII. LEGAL PROCEEDINGS
On June 25, 1997, the Securities and Exchange Commission (the
"Commission") entered into a consent decree with NAPICO, three members of
NAPICO's senior management and three affiliated entities (collectively, the
"NAPICO Affiliates") in connection with their alleged roles in two separate
series of securities laws violations. In connection therewith, certain NAPICO
Affiliates agreed to cease and desist from committing or causing securities law
violations. In addition, National Partnership Equities, Inc. ("NPEI"), a
brokerage firm affiliated with NAPICO, agreed to undergo a review of certain of
its policies and procedures and pay a $100,000 penalty. The NAPICO Affiliates
consented to the above sanctions and relief without admitting or denying the
Commission's findings.
The two series of securities law violations relate to the NAPICO
Affiliates' (i) satisfying the minimum offering threshold of a "part or none"
private placement by utilizing a subscription from a non-bona fide investor and
failing to disclose such violation in subsequent offering materials for such
private placement and (ii) failing to disclose in the periodic reports for
another of its programs the fact that such program's cash was used to pay the
expenses of properties not owned by such program that were managed by an
affiliate and failing to maintain adequate internal controls to detect such
violations.
703767.5
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<PAGE>
IX. LIMITED PARTNERS CONSENT PROCEDURE
Distribution of Solicitation Materials
This Consent Solicitation Statement and the related Consent are first
being mailed to Limited Partners on or about ________ __, 1998. Only Limited
Partners of record on ___________, 1998 (the "Record Date") will be given notice
of, and allowed to give their consent regarding, the matters addressed in this
Consent Solicitation Statement.
This Consent Solicitation Statement, together with the Consent and the
letter from the Managing General Partner, constitute the Solicitation Materials
to be distributed to the Limited Partners to obtain their votes for or against
the Sale. The Solicitation Period is the time frame during which Limited
Partners may vote for or against the Sale. The Solicitation Period will commence
upon the date of delivery of this Consent Solicitation Statement and will
continue until the earlier of (i) _________, 1998 or such later date as may be
determined by the Managing General Partner and (ii) the date upon which the
Managing General Partner determines that a Majority Vote has been obtained. At
their discretion, the Managing General Partner may elect to extend the
Solicitation Period. Under no circumstances will the Solicitation Period be
extended beyond ______________, 1998. Any Consents delivered to the Partnership
prior to the termination of the Solicitation Period will be effective provided
that such Consents have been properly completed, signed and delivered.
As permitted by the Partnership Agreement, the Partnership has not
scheduled a special meeting of the Limited Partners to discuss the Solicitation
Materials or the terms of the Sale.
Voting Procedures and Consents
Limited Partners of record as of the Record Date will receive notice
of, and be entitled to vote, with respect to the Sale. Consent to the Sale will
also include consent to Amendments to the Partnership Agreement that (i)
eliminate a restriction against sales of Partnership assets to affiliates of the
General Partners; (ii) eliminate the Termination Provision in connection with
the Sale and (iii) modify the Tax Requirement to allow the Partnership to
assume, for purposes of calculating taxes, that all of the passive losses from
the Partnership are available to Limited Partners.
The Consent included in the Solicitation Materials constitutes the
ballot to be used by Limited Partners in casting their votes for or against the
Sale. By marking this ballot, the Limited Partner may either vote "for,"
"against" or "abstain" as to the Partnership's participation in the Sale. Once a
Limited Partner has voted, he may not revoke his vote unless he submits a second
Consent, properly signed and completed, together with a letter indicating that
this prior Consent has been revoked, and such second Consent is received by
____________________ (the "Tabulator") prior to expiration of the Solicitation
Period. See "Withdrawal and Change of Election Rights" below.
The Sale will not be completed unless it is approved by a Majority
Vote. See "THE SALE-- Conditions" for a discussion of the other conditions
precedent to the Sale. BECAUSE APPROVAL REQUIRES THE AFFIRMATIVE VOTE OF A
MAJORITY OF THE OUTSTANDING UNITS OF LIMITED PARTNERSHIP INTEREST, FAILURE TO
VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE SALE.
Any Limited Partner who returns his Consent signed but does not specify
"for," "against" or "abstain" will be deemed to have voted "for" the Sale.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the Consent will be determined by the
Tabulators, whose determination will be final and binding. The Tabulators
reserve the absolute right to reject any or all Consents that are not in proper
form or the acceptance of which, in the opinion of the Managing General
Partner's counsel, would be unlawful. The Tabulators also reserve the right to
waive any irregularities or conditions of the Consent as to particular Units.
Unless waived, any irregularities in connection with the Consents must be cured
within such time as the Tabulators shall determine. The Partnership, the
703767.5
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<PAGE>
Managing General Partner and the Tabulators shall be under no duty to give
notification of defects in such Consents or shall incur liabilities for failure
to give such notification. The delivery of the Consents will not be deemed to
have been made until such irregularities have been cured or waived.
Completion Instructions
Each Limited Partner is requested to complete and execute the Consent
in accordance with the instructions contained therein. For his Consent to be
effective, each Limited Partner must deliver his Consent to the Tabulator at any
time prior to the termination of the Solicitation Period to the Partnership at
the following address:
A pre-addressed stamped envelope for return of the Consent has been
included with the Solicitation Materials. Limited Partners may also telecopy an
executed copy of this Consent to the Partnership at ______________. The Consents
will be effective only upon actual receipt by the Partnership. The method of
delivery of the Consent to the Partnership is at the election and risk of the
Limited Partner, but if such delivery is by mail it is suggested that the
mailing be made sufficiently in advance of _______ __, 1998 to permit delivery
to the Partnership on or before such date.
Withdrawal and Change of Election Rights
Consents may be withdrawn at any time prior to the expiration of the
Solicitation Period. In addition, subsequent to submission of his Consent but
prior to expiration of the Solicitation Period, a Limited Partner may change his
vote in favor of or against the Sale. For a withdrawal or change in vote to be
effective, a written or facsimile transmission notice of withdrawal or change in
vote must be timely received by the Tabulator at its address set forth under
"Completion Instructions" above and must specify the name of the person having
executed the Consent to be withdrawn or vote changed and the name of the
registered holder if different from that of the person who executed the Consent.
No Dissenters' Rights of Appraisal
Under the Partnership Agreement and California law, Limited Partners do
not have dissenters' rights of appraisal. If the Sale is approved by a Majority
Vote, and the other conditions to consummation of the Sale are satisfied, all
Limited Partners, both those voting in favor of the Sale and those not voting in
favor, will be entitled to receive the resulting cash distributions.
Solicitation of Consents
The Managing General Partner and its officers, directors and employees
may assist in the solicitation of consents and in providing information to
Limited Partners in connection with any questions they may have with respect to
this Consent Solicitation Statement and the voting procedures. Such persons and
entities will be reimbursed by the Partnership for out of pocket expenses in
connection with such services. The Partnership may also engage third parties to
assist with the solicitation of Consents and pay fees and reimburse the expenses
of such persons.
YOUR CONSENT IS IMPORTANT. PLEASE MARK, SIGN, AND DATE THE ENCLOSED
CONSENT AND RETURN IT IN THE ENCLOSED SELF-ADDRESSED, STAMPED ENVELOPE
PROMPTLY.
If you have any questions about the consent procedure or require
assistance, please contact: MacKenzie Partners, the Partnership's consent
solicitation agent, at 212-929-5500.
703767.5
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<PAGE>
X. IMPORTANT NOTE
It is important that Consents be returned promptly. Limited Partners
are urged to complete, sign and date the accompanying form of Consent and mail
it in the enclosed envelope, which requires no postage if mailed in the United
States, so that their vote may be recorded.
_________ ___, 1998
703767.5
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<PAGE>
REAL ESTATE ASSOCIATES LIMITED IV
9090 Wilshire Boulevard
Beverly Hills, California 90211
THIS CONSENT IS SOLICITED BY THE MANAGING GENERAL PARTNER
OF REAL ESTATE ASSOCIATES LIMITED IV
CONSENT OF LIMITED PARTNER
The undersigned hereby gives written notice to REAL IV (the "Partnership")
that, with respect to the transaction by which the Partnership proposes to sell
all of its real estate assets to a real estate investment trust formed by
affiliates of certain general partners of the Partnership or to a subsidiary
partnership of the REIT, the undersigned votes all of his, her or its units of
limited partnership interest as indicated below:
On the proposal to sell all of the interests of the Partnership in the real
estate assets of twenty limited partnerships in which the Partnership holds a
limited partnership interest to a real estate investment trust or its affiliate
to be organized by Casden Properties and to authorize the Managing General
Partner to take any and all actions that may be required in connection
therewith, including the execution on behalf of the Partnership of such
amendments, instruments and documents as shall be necessary to reflect the
transfer of the general and limited partnership interests and to authorize the
Managing General Partner to sell any remaining real estate interests not
transferred to such real estate investment trust or its affiliates pursuant to
the proposal without further consent of the Limited Partners.
.
FOR AGAINST ABSTAIN
|_| |_| |_|
On the proposal to approve an amendment to the Partnership Agreement that
eliminates a provision prohibiting the Partnership from selling any Property to
a General Partner or its affiliate.
FOR AGAINST ABSTAIN
|_| |_| |_|
On the proposal to approve an amendment to the Partnership Agreement that
eliminates a provision allowing the Partnership to cancel, upon 60 days' prior
written notice, any agreement entered into between the Partnership and a General
Partner or an affiliate of a General Partner.
FOR AGAINST ABSTAIN
|_| |_| |_|
On the proposal to approve an amendment to the Partnership Agreement that
modifies certain tax provisions so as to allow the Partnership to calculate the
tax liability from a sale of a Property by subtracting from the tax payable on
the gain from such sale the tax benefit resulting from the ability to deduct a
Limited Partner's suspended passive losses against ordinary income, assuming
that the Limited Partner has sufficient ordinary income that would otherwise
have been taxed at the 39.6% marginal tax rate for federal income tax purposes
to fully utilize such losses at such rate, and assuming a state income tax rate
of 5%.
FOR AGAINST ABSTAIN
|_| |_| |_|
703767.5
<PAGE>
The undersigned acknowledges receipt from the
Managing General Partner of the Consent Solicitation
Statement dated _________ __, 1998.
<TABLE>
Dated: _____________, 199_ _______________________________
<S> <C>
Signature
-------------------------------
Print Name
-------------------------------
Signature (if held jointly)
-------------------------------
Print Name
-------------------------------
Title
</TABLE>
Please sign exactly as name appears hereon. When
units are held by joint tenants, both should sign.
When signing as an attorney, as executor,
administrator, trustee or guardian, please give full
title of such. If a corporation, please sign name by
President or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.
PLEASE RETURN THIS FORM BY 5:00 P.M. (NEW YORK CITY TIME) ON ________
[__], 1998.
PLEASE MARK, SIGN, DATE AND RETURN THIS CONSENT BY FACSIMILE TO
OR BY USING THE ENCLOSED PREPAID ENVELOPE TO THE ADDRESS FIRST
WRITTEN ABOVE, ATTENTION: _______________. IF YOU HAVE ANY QUESTIONS,
PLEASE CALL 212-929-5500.
A LIMITED PARTNER SUBMITTING A SIGNED BUT UNMARKED CONSENT WILL BE
DEEMED TO HAVE VOTED FOR THE PARTNERSHIP'S PARTICIPATION IN THE SALE.
703767.5
<PAGE>
BATTLE FOWLER LLP
A LIMITED LIABILITY PARTNERSHIP
75 East 55th Street
New York, New York 10022
(212) 856-7000
(212) 856-7181
(212) 856-7813
VIA EDGAR
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549
Attention: Filing Desk
Re: Real Estate Associates Limited IV/Preliminary
Consent Solicitation Material for a Sale of Assets
Ladies and Gentlemen:
On behalf of Real Estate Associates Limited IV, a California
limited partnership ("REAL IV"), enclosed herewith for filing pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended and under
cover of Schedule 14A, is a preliminary consent solicitation statement (the
"Consent Solicitation Statement") a letter to the limited partners of REAL IV
and the form of consent proposed to be furnished to REAL IV limited partners in
connection with the proposed sale of certain of the assets of REAL IV.
682194.1
<PAGE>
2
Securities and Exchange Commission May 4, 1998
The enclosed materials seek the consent of the limited partners of REAL IV to
(i) a proposed sale of the properties held by 20 of the 29 limited partnerships
in which REAL IV has an interest to a real estate investment trust or its
designated affiliate to be organized by Casden Properties, a California general
partnership ("Casden"), and certain of its affiliates; and (ii) amendments to
the REAL IV Agreement of Limited Partnership necessary to permit such a sale.
Casden is an affiliate of REAL IV's managing general partner.
Casden intends to make similar solicitations to the limited partners of certain
other partnerships in which an affiliate of Casden is a general partner,
including; REAL-Equity Partners, Housing Programs Limited, Real Estate
Associates Limited, Real Estate Associates Limited II, Real Estate Associates
Limited III, Real Estate Associates Limited V ("REAL V"), Real Estate Associates
Limited VI and Real Estate Associates Limited VII. A preliminary consent
solicitation statement for REAL V was first filed with the Commission on January
26, 1998 and most recently filed on April 27, 1998.
In order to alleviate the administrative burden on the Staff
and to expedite the review process, it is our intention to wait to receive the
Staff's comments on the preliminary consent solicitation statements for Real
Estate Associates Limited IV and REAL V before making filings on behalf of the
other partnerships listed above. At the time such other filings are made, we
intend to supplementally submit to the Staff additional copies of such filings,
blacklined against either the previously filed REAL V model or the REAL IV
model, as appropriate.
Because of the similarity in form of this Consent Solicitation
Statement to that filed on behalf of REAL V, we respectfully request that the
Commission not wait the customary 30 days for review.
On behalf of REAL IV, we request that any Staff comments or questions
regarding the enclosed Consent Solicitation Statement be conveyed to the
undersigned at (212) 856-7181.
Very truly yours,
/s/ Steven A. Fishman
---------------------
Steven A. Fishman
