<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, 2000
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, 2000
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets, June 30, 2000 and December 31, 1999 .......... 1
Statements of Operations,
Six and Three Months Ended June 30, 2000 and 1999 .... 2
Statement of Partners' Deficiency,
Six Months Ended June 30, 2000 ....................... 3
Statements of Cash Flows,
Six Months Ended June 30, 2000 and 1999 .............. 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, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
2000
(Unaudited) 1999
------------ ------------
<S> <C> <C>
ASSETS
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ 219,464 $ 239,464
CASH 111,106 96,379
------------ ------------
TOTAL ASSETS $ 330,570 $ 335,843
============ ============
LIABILITIES AND PARTNERS' DEFICIENCY
LIABILITIES:
Notes payable (Note 3) $ 17,424,501 $ 17,424,501
Accrued interest payable (Note 3) 24,407,240 23,588,625
Accrued fees and expenses
due general partner (Note 4) 5,256,657 5,006,313
Accounts payable and other liabilities 69,089 64,456
------------ ------------
47,157,487 46,083,895
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 4 and 5)
PARTNERS' DEFICIENCY:
General partners (791,400) (780,611)
Limited partners (46,035,517) (44,967,441)
------------ ------------
(46,826,917) (45,748,052)
------------ ------------
TOTAL LIABILITIES AND PARTNERS'
DEFICIENCY $ 330,570 $ 335,843
============ ============
</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, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Six months Three months Six months Three months
ended ended ended ended
June 30, 2000 June 30, 2000 June 30, 1999 June 30, 1999
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUE:
Interest income $ 1,594 $ 584 $ 359 $ 50
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Interest (Note 3) 818,615 409,308 818,615 409,308
Management fees - general partner (Note 4) 250,344 125,299 233,376 136,188
General and administrative (Notes 2 and 4) 54,850 36,030 78,858 475,988
Legal and accounting 60,714 35,926 80,586 37,680
----------- ----------- ----------- -----------
1,184,523 606,563 1,211,435 1,059,164
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,182,929) (605,979) (1,211,076) (1,059,114)
DISTRIBUTIONS FROM LIMITED
PARTNERSHIP RECOGNIZED
AS INCOME (Note 2) 124,064 124,064 233,317 102,213
EQUITY IN INCOME OF LIMITED
PARTNERSHIPS AND AMORTIZATION
OF ADDITIONAL BASIS AND
ACQUISITION COSTS (Note 2) (20,000) (10,000) 14,000 7,000
----------- ----------- ----------- -----------
NET LOSS $(1,078,865) $ (491,915) $ (963,759) $ (949,901)
=========== =========== =========== ===========
NET LOSS PER LIMITED PARTNERSHIP
INTEREST $ (52) $ (24) $ (46) $ (46)
=========== =========== =========== ===========
</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, 2000
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------------- --------------- ---------------
<S> <C> <C> <C>
PARTNERSHIP INTERESTS 20,802
==============
DEFICIENCY.
January 1, 2000 $(780,611) $ (44,967,441) $ (45,748,052)
Net loss for the six months
ended June 30, 2000 (10,789) (1,068,076) (1,078,865)
---------- -------------- --------------
DEFICIENCY.
June 30, 2000 $(791,400) $ (46,035,517) $ (46,826,917)
========== ============== ==============
</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, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,078,865) $ (963,759)
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 20,000 (14,000)
Increase in accrued interest payable 818,615 793,105
Increase in accrued fees and expenses
due general partner 250,344 233,376
Increase (decrease) in accounts payable and other liabilities 4,633 (90,168)
----------- -----------
Net cash provided by (used in) operating activities 14,727 (41,446)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions from limited partnerships recognized
as a return of capital -- 9,171
Sale proceeds -- 400,000
----------- -----------
Net cash provided from investing activities -- 409,171
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners -- (275,000)
----------- -----------
NET INCREASE IN CASH 14,727 92,725
CASH, BEGINNING OF PERIOD 96,379 --
----------- -----------
CASH, END OF PERIOD $ 111,106 $ 92,725
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR INTEREST $ -- $ 25,510
=========== ===========
</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, 2000
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, 1999 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, 2000, 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 accounting
principles generally accepted in the United States of America 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, 2000
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, 2000
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS
The Partnership holds limited partnership interests in 21 limited
partnerships as of June 30, 2000, 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, 2000:
<TABLE>
<S> <C>
Balance, beginning of period $359,566
Amortization of acquisition costs (4,000)
Equity in loss of limited partnerships (16,000)
---------
Balance, end of period $219,464
========
</TABLE>
7
<PAGE> 10
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
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, 2000 and 1999 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, 2000 June 30, 2000 June 30, 1999 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental and other $ 9,814,000 $ 4,907,000 $ 9,674,000 $ 4,837,000
----------- ----------- ----------- -----------
Expenses:
Depreciation 1,696,000 848,000 2,038,000 1,019,000
Interest 764,000 382,000 820,000 410,000
Operating 7,530,000 3,765,000 7,318,000 3,659,000
----------- ----------- ----------- -----------
9,990,000 4,995,000 1,176,000 5,088,000
----------- ----------- ----------- -----------
Net loss $ (176,000) $ (88,000) $ (502,000) $ (251,000)
=========== =========== =========== ===========
</TABLE>
NAPICO, or one of its affiliates, is the general partner and property
management agent for certain of the limited partnerships included
above.
Under recent adopted law and policy, the United States Department of
Housing and Urban Development ("HUD") has determined not to renew the
Housing Assistance Payment ("HAP") Contracts on a long term basis on
the existing terms. In connection with renewals of the HAP Contracts
under such new law and policy, the amount of rental assistance payments
under renewed HAP Contracts will be based on market rentals instead of
above market rentals, which was generally the case under existing HAP
Contracts. The payments under the renewed HAP Contracts are not
expected to be in an amount that would provide sufficient cash flow to
permit owners of properties subject to HAP Contracts to meet the debt
service requirements of existing loans insured by the Federal Housing
Administration of HUD ("FHA") unless such mortgage loans are
restructured. In order to address the reduction in payments 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
8
<PAGE> 11
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
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.
On September 11, 1998, HUD issued interim regulations implementing
MAHRAA and final regulations are expected to be issued in 2000.
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.
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 which was 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.
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.
9
<PAGE> 12
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
NOTE 3 - NOTES PAYABLE (CONTINUED)
Maturity dates on the notes and related accrued interest payable are as
follows:
<TABLE>
<CAPTION>
Accrued
Years Ending December 31, Notes Interest
------------------------- -------------- -----------
<S> <C> <C>
2000 $13,279,000 $18,545,460
2001 2,555,000 3,501,660
2002 1,590,501 2,360,120
------------- -----------
$17,424,501 $24,407,240
=========== ===========
</TABLE>
Notes and related accrued interest payable, aggregating $31,824,460
became payable in 1999. Due to the Partnership's lack of cash and
partners' deficiency, there is substantial doubt about its ability to
satisfy these obligations, which would result in the possible
foreclosure of the investments in the local limited partnerships. As a
result, there is substantial doubt about the Partnership's ability to
continue as a going concern.
In February 2000, the Partnership entered into an agreement with a
lender related to a note in the amount $2,200,000 plus accrued interest
of $2,934,572 as of December 31, 1999 that became payable in December
1999. Subject to certain conditions, the lender agreed to cancel the
note and accrued interest and release from escrow a payment of $100,000
to the Partnership in exchange for the Partnership surrendering its
interest in the Edgewood Terrace limited partnership. Upon satisfaction
of all conditions, the Partnership will recognize a gain on this
transaction of approximately $5,200,000 as it has a zero investment
balance in this limited partnership.
Management is in process of attempting to negotiate extensions of the
maturity dates on the past due notes payable.
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 $250,000 and
$233,000 for the six months ended June 30, 2000 and 1999, respectively.
10
<PAGE> 13
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
NOTE 4 - ACCRUED FEES AND EXPENSES DUE GENERAL PARTNER (CONTINUED)
The Partnership reimburses NAPICO for certain expenses. The
reimbursement to NAPICO was approximately $7,400 and $16,900 for the
six months ended June 30, 2000 and 1999, 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.
On August 4, 1999, one investor holding one unit of limited partnership
interest in Housing Programs Limited (another affiliated partnership in
which NAPICO is the managing general partner) 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 are contesting 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)
JUNE 30, 2000
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, 2000
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.
13
<PAGE> 16
REAL ESTATE ASSOCIATES LIMITED
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 2000
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.
On September 11, 1998, HUD issued interim regulations implementing
MAHRAA and final regulations are expected to be issued in 2000.
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, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Notes and related accrued interest payable, aggregating $31,824,460
became payable in 1999. Due to the Partnership's lack of cash and
partners' deficiency, there is substantial doubt about its ability to
satisfy these obligations, which would result in the possible
foreclosure of the investments in the local limited partnerships. As a
result, there is substantial doubt about the Partnership's ability to
continue as a going concern.
In February 2000, the Partnership entered into an agreement with a
lender related to a note in the amount $2,200,000 plus accrued interest
of $2,934,572 as of December 31, 1999 that became payable in December
1999. Subject to certain conditions, the lender agreed to cancel the
note and accrued interest and release from escrow a payment of $100,000
to the Partnership in exchange for the Partnership surrendering its
interest in the Edgewood Terrace limited partnership. Upon satisfaction
of all conditions, the Partnership will recognize a gain on this
transaction of approximately $5,200,000 as it has a zero investment
balance in this limited partnership.
Management is in process of attempting to negotiate extensions of the
maturity dates on the past due notes payable.
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 which was 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.
15
<PAGE> 18
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 2000
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. On August 4, 1999,
one investor holding one unit of limited partnership interest in Housing
Programs Limited (another affiliated partnership in which NAPICO is the managing
general partner) 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 are contesting 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 and no reports on Form 8-K were filed during the quarter ended
June 30, 2000.
16
<PAGE> 19
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 2000
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 21, 2000
---------------------------------------
/s/ PAUL PATIERNO
---------------------------------------
Paul Patierno
Chief Financial Officer
Date: August 21, 2000
--------------------------------------
17
