<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended JUNE 30, 1999
Commission File Number 0-13810
REAL ESTATE ASSOCIATES LIMITED VII
(A California Limited Partnership)
I.R.S. Employer Identification No. 95-3290316
9090 WILSHIRE BLVD., SUITE 201
BEVERLY HILLS, CALIF. 90211
Registrant's Telephone Number,
Including Area Code (310) 278-2191
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
<PAGE> 2
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Balance Sheets, June 30, 1999 and December 31, 1998 ..............................1
Statements of Operations,
Six and Three Months Ended June 30, 1999 and 1998 ..........................2
Statement of Partners' Deficiency,
Six Months Ended June 30, 1999 .............................................3
Statements of Cash Flows,
Six Months Ended June 30, 1999 and 1998 ....................................4
Notes to Financial Statements ....................................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation ........................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................15
Item 6. Exhibits and Reports on Form 8-K..............................................15
Signatures.............................................................................16
</TABLE>
<PAGE> 3
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
1999
(Unaudited) 1998
------------ ------------
<S> <C> <C>
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ 364,395 $ 359,566
CASH 92,725 --
CASH DUE FROM ESCROW (Note 2) -- 400,000
OTHER ASSETS 34,729 34,729
------------ ------------
TOTAL ASSETS $ 491,849 $ 794,295
============ ============
LIABILITIES AND PARTNERS' DEFICIENCY
LIABILITIES:
Notes payable (Note 3) $ 17,424,501 $ 17,424,501
Accrued interest payable (Note 3) 22,816,633 22,023,528
Accrued fees and expenses
due general partner (Note 4) 4,739,510 4,506,134
Accounts payable and other liabilities 31,988 122,156
------------ ------------
45,012,632 44,076,319
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)
PARTNERS' DEFICIENCY:
General partners (768,339) (755,951)
Limited partners (43,752,444) (42,526,073)
------------ ------------
(44,520,783) (43,282,024)
------------ ------------
TOTAL LIABILITIES AND PARTNERS'
DEFICIENCY $ 491,849 $ 794,295
============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
1
<PAGE> 4
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
SIX AND THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Six months Three months Six months Three months
ended ended ended ended
June 30, 1999 June 30, 1999 June 30, 1998 June 30, 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Interest income $ 359 $ 50 $ 8,871 $ 4,490
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Interest (Note 3) 818,615 409,308 1,164,708 582,354
Management fees - general partner (Note 4) 233,376 136,188 371,820 185,910
General and administrative (Notes 2 and 4) 78,858 475,988 257,300 123,056
Legal and accounting 80,586 37,680 85,465 51,222
----------- ----------- ----------- -----------
1,211,435 1,059,164 1,879,293 942,542
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,211,076) (1,059,114) (1,870,422) (938,052)
DISTRIBUTIONS FROM LIMITED
PARTNERSHIP RECOGNIZED
AS INCOME (Note 2) 233,317 102,213 209,825 102,198
EQUITY IN INCOME OF LIMITED
PARTNERSHIPS AND AMORTIZATION
OF ADDITIONAL BASIS AND
ACQUISITION COSTS (Note 2) 14,000 7,000 30,000 15,000
----------- ----------- ----------- -----------
NET LOSS $ (963,759) $ (949,901) $(1,630,597) $ (820,854)
=========== =========== =========== ===========
NET LOSS PER LIMITED PARTNERSHIP
INTEREST $ (46) $ (46) $ (78) $ (39)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
2
<PAGE> 5
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF PARTNERS' DEFICIENCY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
------------- ------------- ---------------
<S> <C> <C> <C>
PARTNERSHIP INTERESTS 20,802
============
DEFICIENCY.
January 1, 1999 $ (755,951) $(42,526,073) $(43,282,024)
Distributions (2,750) (272,250) (275,000)
Net loss for the six months
ended June 30, 1999 (9,638) (954,121) (963,759)
------------ ------------ ------------
DEFICIENCY.
June 30, 1999 $ (768,339) $(43,752,444) $(44,520,783)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
<PAGE> 6
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (963,759) $(1,630,597)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in loss of limited partnerships
and amortization of additional basis
and acquisition costs (14,000) (30,000)
Decrease in other assets -- (1,600)
Increase in accrued interest payable 793,105 856,244
Increase in accrued fees and expenses
due general partner 233,376 371,820
Increase (decrease) in accounts payable and other liabilities (90,168) 52,709
----------- -----------
Net cash used in operating activities (41,446) (381,424)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions from limited partnerships recognized
as a return of capital 9,171 392,957
Sale proceeds 400,000 --
----------- -----------
Net cash provided from investing activities 409,171 392,957
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (275,000) --
----------- -----------
NET INCREASE (DECREASE) IN CASH 92,725 (381,424)
CASH, BEGINNING OF PERIOD -- 447,200
----------- -----------
CASH, END OF PERIOD $ 92,725 $ 65,776
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR INTEREST $ 25,510 $ 316,152
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
4
<PAGE> 7
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The information contained in the following notes to the financial
statements is condensed from that which would appear in the annual
financial statements; accordingly, the financial statements included
herein should be reviewed in conjunction with the financial statements
and related notes thereto contained in the Annual Report for the year
ended December 31, 1998 prepared by Real Estate Associates Limited VII
(the "Partnership."). Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year end. The results of
operations for the interim periods presented are not necessarily
indicative of the results for the entire year.
In the opinion of the Partnership, the accompanying unaudited financial
statements contain all adjustments (consisting primarily of normal
recurring accruals), necessary to present fairly the financial position
of he Partnership at June 30, 1999, and the results of operations and
changes in cash flows for the six and three months then ended.
The general partners have a 1 percent interest in profits and losses of
the Partnership. The limited partners have the remaining 99 percent
interest which is allocated in proportion to their respective individual
investments. National Partnership Investments Corp. (NAPICO) is the
corporate general partner of the Partnership. Casden Properties Inc. owns
a 95.25% economic interest in NAPICO, with the balance owned by Casden
Investment Corporation ("CIC"). CIC, which is wholly owned by Alan I.
Casden, owns 95% of the voting common stock of NAPICO.
USES OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
5
<PAGE> 8
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
METHOD OF ACCOUNTING FOR INVESTMENT IN LIMITED PARTNERSHIPS
The investment in limited partnerships is accounted for on the equity
method. Acquisition, selection and other costs related to the acquisition
of the projects were capitalized as part of the investment account and
are being amortized on a straight line basis over the estimated lines of
the underlying assets, which is generally 30 years.
NET LOSS PER LIMITED PARTNERSHIP INTEREST
Net loss per limited partnership interest was computed by dividing the
limited partners' share of net loss by the number of limited partnership
interests outstanding during the year. The number of limited partnership
interests was 20,802 for the periods presented.
CASH
The Partnership has its cash on deposit primarily with two high credit
quality financial institutions. Such cash is in excess of the FDIC
insurance limit.
INCOME TAXES
No provision has been made for income taxes in the accompanying financial
statements since such taxes, if any, are the liability of the individual
partners.
IMPAIRMENT OF LONG-LIVED ASSETS
The Partnership reviews long-lived assets to determine if there has been
any permanent impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. If
the sum of the expected future cash flows is less than the carrying
amount of the assets, the Partnership recognizes an impairment loss.
6
<PAGE> 9
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS
The Partnership holds limited partnership interests in 21 limited
partnerships as of June 30, 1999, after selling its interests in 11
limited partnerships. In addition, the Partnership holds a general
partner interest in Real Estate Associates IV ("REA IV"), which in turn,
holds limited partner interest in 15 additional limited partnerships.
NAPICO is also a general partner in REA IV. In total, therefore the
Partnership holds interests, either directly or indirectly through REAL
VII, in 36 limited partnerships which own residential low income rental
projects consisting of 3,379 apartment units. The mortgage loans of these
projects are payable to or insured by various governmental agencies.
The Partnership, as a limited partner, is entitled to between 98 percent
and 99 percent of the profits and losses in the limited partnerships it
has invested in directly. The Partnership is also entitled to 99 percent
of the profits and losses of REA IV. REA IV holds a 99 percent interest
in each of the limited partnerships in which it has invested.
Equity in losses of limited partnerships is recognized in the financial
statements until the limited partnership investment account is reduced to
a zero balance. Losses incurred after the limited partnership investment
account is reduced to zero are not recognized.
Distributions from the limited partnerships are accounted for as a return
of capital until the investment balance is reduced to zero. Subsequent
distributions received are recognized as income.
The following is a summary of the investment in limited partnerships for
the six months ended June 30, 1999:
<TABLE>
<S> <C>
Balance, beginning of period $359,566
Cash distributions recognized as a return of capital (9,171)
Amortization of acquisition costs (4,000)
Equity in loss of limited partnerships 18,000
--------
Balance, end of period $364,395
========
</TABLE>
7
<PAGE> 10
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
The following are unaudited combined estimated statements of operations
for the six and three months ended June 30, 1999 and 1998 for the limited
partnerships in which the Partnership has investments:
<TABLE>
<CAPTION>
Six months Three months Six months Three months
ended ended ended ended
June 30, 1999 June 30, 1999 June 30, 1998 June 30, 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental and other $ 9,674,000 $ 4,837,000 $ 6,474,000 $ 3,237,000
----------- ----------- ----------- -----------
Expenses:
Depreciation 2,038,000 1,019,000 1,070,000 535,000
Interest 820,000 410,000 736,000 368,000
Operating 7,318,000 3,659,000 5,288,000 2,644,000
----------- ----------- ----------- -----------
1,176,000 5,088,000 7,094,000 3,547,000
----------- ----------- ----------- -----------
Net loss $ (502,000) $ (251,000) $ (620,000) $ (832,000)
=========== =========== =========== ===========
</TABLE>
NAPICO, or one of its affiliates, is the general partner and property
management agent for certain of the limited partnerships included above.
Under recent adopted law and policy, the United States Department of
Housing and Urban Development ("HUD") has determined not to renew the
Housing Assistance Payment ("HAP") Contracts on a long term basis on the
existing terms. In connection with renewals of the HAP Contracts under
such new law and policy, the amount of rental assistance payments under
renewed HAP Contracts will be based on market rentals instead of above
market rentals, which was generally the case under existing HAP
Contracts. The payments under the renewed HAP Contracts are not expected
to be in an amount that would provide sufficient cash flow to permit
owners of properties subject to HAP Contracts to meet the debt service
requirements of existing
8
<PAGE> 11
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
loans insured by the Federal Housing Administration of HUD ("FHA") unless
such mortgage loans are restructured. In order to address the reduction
in payments under HAP Contracts as a result of this new policy, the
Multi-family Assisted Housing Reform and Affordability Act of 1997 (
"MAHRAA"), which was adopted in October 1997, provides for the
restructuring of mortgage loans insured by the FHA with respect to
properties subject to the Section 8 program. Under MAHRAA, an FHA-insured
mortgage loan can be restructured into a first mortgage loan which will
be amortized on a current basis and a low interest second mortgage loan
payable to FHA which will only be payable on maturity of the first
mortgage loan. This restructuring results in a reduction in annual debt
service payable by the owner of the FHA-insured mortgage loan and is
expected to result in an insurance payment from FHA to the holder of the
FHA-insured loan due to the reduction in the principal amount. MAHRAA
also phases out project-based subsidies on selected properties serving
families not located in rental markets with limited supply, converting
such subsidies to a tenant-based subsidy.
MAHRAA provides that properties begin the restructuring process in
federal fiscal year 1999 (beginning October 1, 1998). On September 11,
1998, HUD issued interim regulations implementing MAHRAA and final
regulations are expected to be issued in 1999. With respect to the local
limited partnerships' expiring HAP Contracts, it is expected that the HAP
payments will be reduced or terminated pursuant to the terms of MAHRAA.
When the HAP Contracts are subject to renewal, there can be no assurance
that the local limited partnerships in which the Partnership has an
investment will be permitted to restructure its mortgage indebtedness
under MAHRAA. In addition, the economic impact on the Partnership of the
combination of the reduced payments under the HAP Contracts and the
restructuring of the existing FHA-insured mortgage loans under MAHRAA is
uncertain.
As a result of the foregoing, the Partnership in 1997 undertook an
extensive review of disposition, refinancing or re-engineering
alternatives for the properties in which the limited partnerships have
invested and are subject to HUD mortgage and rental subsidy programs. The
Partnership has incurred expenses in connection with this review by
various third party professionals, including accounting, legal,
valuation, structural and engineering costs, which amounted to $495,729
through December 31, 1998, including $199,183 for the six months ended
June 30, 1998.
9
<PAGE> 12
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
On December 30, 1998, the Partnership sold its limited partnership
interests in 11 local limited partnerships to subsidiaries of Casden
Properties Inc. The sale resulted in cash proceeds to the Partnership of
$400,000 and a net gain of $7,132,262, after being relieved of notes and
interest payable and deducting selling costs. The cash proceeds were held
in escrow at December 31, 1998 and were collected in 1999. In March 1999,
the Partnership made cash distributions of $272,500 to the limited
partners and $2,750 to the general partners, primarily using proceeds
from the sale of the partnership interests.
Casden Properties Inc. purchased such limited partner interests for cash,
which it raised in connection with a private placement of its equity
securities. The purchase was subject to, among other things, (i) the
purchase of the general partner interests in the local limited
partnerships by Casden Properties Inc.; (ii) the approval of HUD and
certain state housing finance agencies; and (iii) the consent of the
limited partners to the sale of the local limited partnership interests
held for investment by the Partnership.
In August 1998, a consent solicitation statement was sent to the limited
partners setting forth the terms and conditions of the purchase of the
limited partners' interests held for investment by the Partnership,
together with certain amendments to the Partnership Agreement and other
disclosures of various conflicts of interest in connection with the
proposed transaction. Prior to the sale of the partnership interests, the
consents of the limited partners to the sale and amendments to the
Partnership Agreement were obtained.
NOTE 3 - NOTES PAYABLE
Certain of the Partnership's investments involved purchases of
partnership interests from partners who subsequently withdrew from the
operating partnership. The Partnership is obligated on non-recourse notes
payable of $17,424,501, bearing interest at 9 1/2 percent, to the sellers
of the Partnership interests. The notes have principal maturity dates
ranging from December 1999 to December 2002 or upon sale or refinancing
of the underlying partnership properties. These obligations are
collateralized by the Partnership's investments in the investee
partnerships and are payable out of cash distributions from the investee
partnerships, as defined in the notes. Unpaid interest is due at maturity
of the notes.
10
<PAGE> 13
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
NOTE 4 - ACCRUED FEES AND EXPENSES DUE GENERAL PARTNER
Under the terms of the Restated Certificate and Agreement of Limited
Partnership, the Partnership is obligated to NAPICO for an annual
management fee equal to .5 percent of the invested assets of the
partnerships. Invested assets is defined as the costs of acquiring
project interests, including the proportionate amount of the mortgage
loans related to the Partnership's interests in the capital accounts of
the respective partnerships. The fee was approximately $233,000 and
$372,000 for the six months ended June 30, 1999 and 1998, respectively.
The Partnership reimburses NAPICO for certain expenses. The reimbursement
to NAPICO was approximately $16,900 and $23,500 for the six months ended
June 30, 1999 and 1998, respectively, and is included in administrative
expenses.
NOTE 5 - CONTINGENCIES
On August 27, 1998, two investors holding an aggregate of eight units of
limited partnership interests in Real Estate Associates Limited III (an
affiliated partnership in which NAPICO is the managing general partner)
and two investors holding an aggregate of five units of limited
partnership interest in Real Estate Associates Limited VI (another
affiliated partnership in which NAPICO is the managing general partner)
commenced an action in the United States District Court for the Central
District of California against the Partnership, NAPICO and certain other
affiliated entities. The complaint alleges that the defendants breached
their fiduciary duty to the limited partners of certain NAPICO managed
partnerships and made materially false and misleading statements in the
consent solicitation statements sent to the limited partners of such
partnerships relating to approval of the transfer of partnership
interests in limited partnerships, owning certain of the properties, to
Casden Properties Inc., which was organized by an affiliate of NAPICO.
The plaintiffs seek equitable relief, as well as compensatory damages and
litigation related costs. The managing general partner of such NAPICO
managed partnerships and the other defendants believe that the
plaintiffs' claims are without merit and intend to contest the action
vigorously.
The corporate general partner of the Partnership is a plaintiff in
various lawsuits and has also been named a defendant in other lawsuits
arising from transactions in the ordinary course of business. In the
opinion of management and the corporate general partner, the claims will
not result in any material liability to the Partnership.
11
<PAGE> 14
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
NOTE 5 - CONTINGENCIES (CONTINUED)
The Partnership has assessed the potential impact of the Year 2000
computer systems issue on its operations. The Partnership believes that
no significant actions are required to be taken by the Partnership to
address the issue and that the impact of the Year 2000 computer systems
issue will not materially affect the Partnership's future operating
results or financial condition.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, when it is practicable to
estimate that value. The notes payable are collateralized by the
Partnership's investments in investee limited partnerships and are
payable only out of cash distributions from the investee partnerships.
The operations generated by the investee limited partnerships, which
account for the Partnership's primary source of revenues, are subject to
various government rules, regulations and restrictions which make it
impracticable to estimate the fair value of the notes payable and related
accrued interest and amounts due general partner. The carrying amount of
other assets and liabilities reported on the balance sheets that require
such disclosure approximates fair value due to their short-term maturity.
12
<PAGE> 15
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of funds include interest income earned
from investing available cash and distributions from limited partnerships
in which the Partnership has invested. It is not expected that any of the
local limited partnerships in which the Partnership has invested will
generate cash flow sufficient to provide for distributions to limited
partners in any material amount.
RESULTS OF OPERATIONS
Partnership revenues consist primarily of interest income earned on
certificates of deposit and other temporary investment of funds not
required for investment in local partnerships.
Operating expenses consist primarily of recurring general and
administrative expenses and professional fees for services rendered to
the Partnership. In addition, an annual Partnership management fee in an
amount equal to .5 percent of invested assets is payable to the corporate
general partner.
The Partnership accounts for its investments in the local limited
partnerships on the equity method, thereby adjusting its investment
balance by its proportionate share of the income or loss of the local
limited partnerships. Losses incurred after the limited partnership
account is reduced to zero are not recognized.
Distributions received from limited partnerships are recognized as return
of capital until the investment balance has been reduced to zero or to a
negative amount equal to future capital contributions required.
Subsequent distributions received are recognized as income.
Except for certificates of deposit and money market funds, the
Partnership's investments are entirely interests in other limited and
general partnerships owning government assisted projects. Available cash
is invested in money market funds and certificates of deposit which
provide interest income as reflected in the statement of operations.
These temporary investments can be easily converted to cash to meet
obligations as they arise. The Partnership intends to continue investing
available funds in this manner.
13
<PAGE> 16
REAL ESTATE ASSOCIATES LIMITED
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Under recently adopted law and policy, the United States Department of
Housing and Urban Development ("HUD") has determined not to renew the
Housing Assistance Payment ("HAP") Contracts on a long term basis on the
existing terms. In connection with renewals of the HAP Contracts under
such new law and policy, the amount of rental assistance payments under
renewed HAP Contracts will be based on market rentals instead of above
market rentals, which was generally the case under existing HAP
Contracts. The payments under the renewed HAP Contracts are not expected
to be in an amount that would provide sufficient cash flow to permit
owners of properties subject to HAP Contracts to meet the debt service
requirements of existing loans insured by the Federal Housing
Administration of HUD ("FHA") unless such mortgage loans are
restructured. In order to address the reduction in payments under HAP
Contracts as a result of this new policy, the Multi-family Assisted
Housing Reform and Affordability Act of 1997 ("MAHRAA"), which was
adopted in October 1997, provides for the restructuring of mortgage loans
insured by the FHA with respect to properties subject to the Section 8
program. Under MAHRAA, an FHA-insured mortgage loan can be restructured
into a first mortgage loan which will be amortized on a current basis and
a low interest second mortgage loan payable to FHA which will only be
payable on maturity of the first mortgage loan. This restructuring
results in a reduction in annual debt service payable by the owner of the
FHA-insured mortgage loan and is expected to result in an insurance
payment from FHA to the holder of the FHA-insured loan due to the
reduction in the principal amount. MAHRAA also phases out project-based
subsidies on selected properties serving families not located in rental
markets with limited supply, converting such subsidies to a tenant-based
subsidy.
MAHRAA provides that properties begin the restructuring process in
federal fiscal year 1999 (beginning October 1, 1998). On September 11,
1998, HUD issued interim regulations implementing MAHRAA and final
regulations are expected to be issued in 1999. With respect to the local
limited partnerships' expiring HAP Contracts, it is expected that the HAP
payments will be reduced or terminated pursuant to the terms of MAHRAA.
When the HAP Contracts are subject to renewal, there can be no assurance
that the local limited partnerships in which the Partnership has an
investment will be permitted to restructure its mortgage indebtedness
under MAHRAA. In addition, the economic impact on the Partnership of the
combination of the reduced payments under the HAP Contracts and the
restructuring of the existing FHA-insured mortgage loans under MAHRAA is
uncertain.
14
<PAGE> 17
REAL ESTATE ASSOCIATES LIMITED
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
As a result of the foregoing, the Partnership in 1997 undertook an
extensive review of disposition, refinancing or re-engineering
alternatives for the properties in which the limited partnerships have
invested and are subject to HUD mortgage and rental subsidy programs. The
Partnership has incurred expenses in connection with this review by
various third party professionals, including accounting, legal,
valuation, structural and engineering costs, which amounted to $495,729
through December 31, 1998, including $199,183 for the six months ended
June 30, 1998.
On December 30, 1998, the Partnership sold its limited partnership
interests in 11 local limited partnerships to the Operating Partnership.
The sale resulted in cash proceeds to the Partnership of $400,000 and a
net gain of $7,132,262, after being relieved of notes and interest
payable and deducting selling costs. The cash proceeds were held in
escrow at December 31, 1999 and were collected in 1999. In March 1999,
the Partnership made cash distributions of $272,000 to the limited
partners and $2,750 to the general partners, primarily using proceeds
from the sale of the partnership interests.
Casden Properties Inc. purchased such limited partner interests for cash,
which it raised in connection with a private placement of its equity
securities. The purchase was subject to, among other things, (i) the
purchase of the general partner interests in the local limited
partnerships by Casden Properties Inc.; (ii) the approval of HUD and
certain state housing finance agencies; and (iii) the consent of the
limited partners to the sale of the local limited partnership interests
held for investment by the Partnership.
In August 1998, a consent solicitation statement was sent to the limited
partners setting forth the terms and conditions of the purchase of the
limited partners' interests held for investment by the Partnership,
together with certain amendments to the Partnership Agreement and other
disclosures of various conflicts of interest in connection with the
proposed transaction. Prior to the sale of the partnership interests, the
consents of the limited partners to the sale and amendments to the
Partnership Agreement were obtained.
15
<PAGE> 18
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1999
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 27, 1998, two investors holding an aggregate of eight units of limited
partnership interests in Real Estate Associates Limited III (an affiliated
partnership in which NAPICO is the managing general partner) and two investors
holding an aggregate of five units of limited partnership interest in Real
Estate Associates Limited VI (another affiliated partnership in which NAPICO is
the managing general partner) commenced an action in the United States District
Court for the Central District of California against the Partnership, NAPICO and
certain other affiliated entities. The complaint alleges that the defendants
breached their fiduciary duty to the limited partners of certain NAPICO managed
partnerships and made materially false and misleading statements in the consent
solicitation statements sent to the limited partners of such partnerships
relating to approval of the transfer of partnership interests in limited
partnerships, owning certain of the properties, to Casden Properties Inc., which
was organized by an affiliate of NAPICO. The plaintiffs seek equitable relief,
as well as compensatory damages and litigation related costs. The managing
general partner of such NAPICO managed partnerships and the other defendants
believe that the plaintiffs' claims are without merit and intend to contest the
action vigorously.
The Partnership's Corporate General Partner is involved in various lawsuits.
None of these are related to REAL VII:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are required per the provision of Item 7 of regulation
S-K.
16
<PAGE> 19
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REAL ESTATE ASSOCIATES LIMITED VII
(a California limited partnership)
By: National Partnership Investments Corp.,
General Partner
/s/ BRUCE NELSON
-----------------------------------------
Bruce Nelson
President
Date: August 13, 1999
-----------------------------------------
/s/ CHARLES H. BOXENBAUM
-----------------------------------------
Charles H. Boxenbaum
Chief Executive Officer
Date: August 13, 1999
-----------------------------------------
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PARTNERSHIP'S STATEMENTS OF EARNINGS AND BALANCE SHEETS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 92,725
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 92,725
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 491,849
<CURRENT-LIABILITIES> 31,988
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (44,520,783)
<TOTAL-LIABILITY-AND-EQUITY> 491,849
<SALES> 0
<TOTAL-REVENUES> 247,676
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,211,435
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (963,759)
<INCOME-TAX> 0
<INCOME-CONTINUING> (963,759)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (963,759)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
