<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended SEPTEMBER 30, 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 SEPTEMBER 30, 1999
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<S> <C>
Balance Sheets, September 30, 1999 and December 31, 1998 .................. 1
Statements of Operations, Nine and Three Months Ended September 30,
1999 and 1998 ...................................................... 2
Statement of Partners' Deficiency, Nine Months Ended September
30, 1999 ........................................................... 3
Statements of Cash Flows, Nine Months Ended September 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 ........................................................ 16
Item 6. Exhibits and Reports on Form 8-K ......................................... 16
Signatures ........................................................................ 17
</TABLE>
<PAGE> 3
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
1999
(Unaudited) 1998
------------ ------------
<S> <C> <C>
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ 371,395 $ 359,566
CASH 186,838 --
CASH DUE FROM ESCROW (Note 2) -- 400,000
OTHER ASSETS 34,729 34,729
------------ ------------
TOTAL ASSETS $ 592,962 $ 794,295
============ ============
LIABILITIES AND PARTNERS' DEFICIENCY
LIABILITIES:
Notes payable (Note 3) $ 17,424,501 $ 17,424,501
Accrued interest payable (Note 3) 23,225,941 22,023,528
Accrued fees and expenses
due general partner (Note 4) 4,875,698 4,506,134
Accounts payable and other liabilities (Note 2) 71,192 122,156
------------ ------------
45,597,332 44,076,319
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)
PARTNERS' DEFICIENCY:
General partners (773,174) (755,951)
Limited partners (44,231,196) (42,526,073)
------------ ------------
(45,004,370) (43,282,024)
------------ ------------
TOTAL LIABILITIES AND PARTNERS'
DEFICIENCY $ 592,962 $ 794,295
============ ============
</TABLE>
The accompanying notes are an integral part of thesefinancial statements.
1
<PAGE> 4
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Nine months Three months Nine months Three months
ended ended ended ended
Sept 30, 1999 Sept 30, 1999 Sept 30, 1998 Sept 30, 1998
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUE:
Interest income $ 1,066 $ 707 $ 12,307 $ 3,436
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Interest (Note 3) 1,227,923 409,308 1,747,062 582,354
Management fees - general partner (Note 4) 369,564 136,188 557,730 185,910
General and administrative (Notes 2 and 4) 113,683 20,700 435,090 162,388
Legal and accounting 115,736 49,276 90,013 20,789
----------- ----------- ----------- -----------
1,826,906 615,472 2,829,895 951,441
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,825,840) (614,765) (2,817,588) (948,005)
DISTRIBUTIONS FROM LIMITED
PARTNERSHIP RECOGNIZED
AS INCOME (Note 2) 357,494 124,178 199,985 --
EQUITY IN INCOME OF LIMITED
PARTNERSHIPS AND AMORTIZATION
OF ADDITIONAL BASIS AND
ACQUISITION COSTS (Note 2) 21,000 7,000 45,000 6,000
----------- ----------- ----------- -----------
NET LOSS $(1,447,346) $ (483,587) $(2,572,603) $ (942,005)
=========== =========== =========== ===========
NET LOSS PER LIMITED PARTNERSHIP
INTEREST $ (93) $ (31) $ (124) $ (45)
=========== =========== =========== ===========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
------------ ------------ ------------
<S> <C> <C> <C>
PARTNERSHIP INTERESTS 15,578
============
DEFICIENCY
January 1, 1999 $ (755,951) $(42,526,073) $(43,282,024)
Distributions (2,750) (272,250) (275,000)
Net loss for the nine months
ended September 30, 1999 (14,473) (1,432,873) (1,447,346)
------------ ------------ ------------
DEFICIENCY
September 30, 1999 $ (773,174) $(44,231,196) $(45,004,370)
============ ============ ============
</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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,447,346) $(2,572,603)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Equity in loss of limited partnerships
and amortization of additional basis
and acquisition costs (21,000) (45,000)
Increase in other assets -- (1,600)
Increase in accrued interest payable 1,202,413 1,368,815
Increase in accrued fees and expenses
due general partner 369,564 557,730
Decrease in accounts payable and other liabilities (50,964) (3,456)
----------- -----------
Net cash provided by (used in) operating activities 52,667 (696,114)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions from limited partnerships recognized
as a return of capital 9,171 425,848
Sale proceeds 400,000 --
----------- -----------
Net cash provided from investing activities 409,171 425,848
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (275,000) --
----------- -----------
NET INCREASE (DECREASE) IN CASH 186,838 (270,266)
CASH, BEGINNING OF PERIOD -- 447,200
----------- -----------
CASH, END OF PERIOD $ 186,838 $ 176,934
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR INTEREST $ 25,510 $ 378,247
=========== ===========
</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
SEPTEMBER 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 the Partnership
at September 30, 1999, and the results of operations for the nine and three
months then ended and changes in cash flows for the nine months then ended.
The general partners have a 1 percent interest in profits and losses of the
Partnership. The limited partners have the remaining 99 percent interest which
is allocated in proportion to their respective individual investments. National
Partnership Investments Corp. (NAPICO) is the corporate general partner of the
Partnership. 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)
SEPTEMBER 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
15,578 for the periods presented.
CASH
The Partnership has its cash on deposit with one 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)
SEPTEMBER 30, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS
The Partnership holds limited partnership interests in 21 limited partnerships
as of September 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
nine months ended September 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 (6,000)
Equity in loss of limited partnerships 27,000
---------
Balance, end of period $ 371,395
=========
</TABLE>
7
<PAGE> 10
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
The following are unaudited combined estimated statements of operations for the
nine and three months ended September 30, 1999 and 1998 for the limited
partnerships in which the Partnership has investments:
<TABLE>
<CAPTION>
Nine months Three months Nine months Three months
ended ended ended ended
Sept. 30, 1999 Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Rental and other $ 14,511,000 $ 4,837,000 $ 9,711,000 $ 3,237,000
------------ ------------ ------------ ------------
EXPENSES:
Depreciation 3,057,000 1,019,000 1,605,000 535,000
Interest 1,230,000 410,000 1,104,000 368,000
Operating 10,977,000 3,659,000 7,932,000 2,644,000
------------ ------------ ------------ ------------
15,264,000 5,088,000 10,641,000 3,547,000
------------ ------------ ------------ ------------
Net loss $ (753,000) $ (251,000) $ (930,000) $ (310,000)
============ ============ ============ ============
</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)
SEPTEMBER 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 approximately $328,000 for the
nine months ended September 30, 1998. Additional costs amounting to
approximately $41,000 were incurred in the first quarter of 1999. Accounts
payable at December 31, 1998 includes approximately $2,000 of such costs.
9
<PAGE> 12
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 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 Affiliates of Casden Properties Inc. ("CPI
Affiliates"). 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.
CPI Affiliates 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)
SEPTEMBER 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 $370,000 and $558,000 for the nine months ended September 30, 1999
and 1998, respectively.
The Partnership reimburses NAPICO for certain expenses. The reimbursement to
NAPICO was approximately $17,000 and $35,000 for the nine months ended September
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 Associated Limited Real VI 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 CPI Affiliates. The
plaintiffs seek equitable relief, as well as compensatory damages and litigation
related costs. On August 4, 1999, one investor holding one unit of limited
partnership interest in Housing Programs Limited commenced a virtually identical
action in the United States District Court for the Central District of
California against the Partnership, NAPICO and certain other affiliated
entities. 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 actions 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)
SEPTEMBER 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)
SEPTEMBER 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 VII
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 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 VII
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 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 approximately $328,000 for the
nine months ended September 30, 1998. Additional costs amounting to
approximately $41,000 were incurred in the first quarter of 1999. Accounts
payable at December 31, 1998 includes approximately $2,000 of such costs.
On December 30, 1998, the Partnership sold its limited partnership interests in
11 local limited partnerships to Affiliates of Casden Properties Inc. ("CPI
Affiliates"). 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.
CPI Affiliates 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)
SEPTEMBER 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 Associated Limited Real VI 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 CPI Affiliates. The
plaintiffs seek equitable relief, as well as compensatory damages and litigation
related costs. On August 4, 1999, one investor holding one unit of limited
partnership interest in Housing Programs Limited commenced a virtually identical
action in the United States District Court for the Central District of
California against the Partnership, NAPICO and certain other affiliated
entities. 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 actions 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)
SEPTEMBER 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.,
its General Partner
By: /s/ BRUCE NELSON
-------------------------------
Bruce Nelson
President
Date: November 17, 1999
-----------------------------
By: /s/ CHARLES H. BOXENBAUM
------------------------------
Charles H. Boxenbaum
Chief Executive Officer
Date: November 17, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 186,838
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 186,838
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 592,962
<CURRENT-LIABILITIES> 71,192
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (45,004,370)
<TOTAL-LIABILITY-AND-EQUITY> 592,962
<SALES> 0
<TOTAL-REVENUES> 379,560
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,826,906
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,447,346)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,447,346)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,447,346)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
