SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2)) [ ] Definitive Proxy Statement [ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
.............................HOUSING PROGRAMS LIMITED...........................
(Name of registrant as specified in its charter)
................................................................................
(Name of person(s) filing proxy statement if other than the registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
. . . . . . . . . ................................................
2) Aggregate number of securities to which transaction applies:
. . . . . . . . . ................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
. . . . . . . . . ................................................
4) Proposed maximum aggregate value of transaction:
. . . . . . . . . ................................................
5) Total fee paid:
. . . . . . . . . ................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11-(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:_________________________________________________
2) Form, Schedule or Registration Statement No:____________________________
3) Filing Party:___________________________________________________________
4) Date Filed:_____________________________________________________________
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Housing Programs Limited
9090 Wilshire Boulevard
Beverly Hills, California 90211
___________ __, 1998
To the Limited Partners:
National Partnership Investments Corp., the managing general partner ("NAPICO"
or the "Managing General Partner") of Housing Programs Limited (the
"Partnership" or "HPGL"), is writing to recommend, and seek your consent to, (i)
the sale of the interests of the Partnership (the "Real Estate Interests") in
the real estate assets of eight of the seventeen limited partnerships affiliated
with the Partnership to a real estate investment trust or its designated
affiliate (collectively referred to as the "REIT") to be organized by Casden
Properties, a California general partnership, and certain of its affiliates
(collectively referred to as "Casden"); and (ii) certain amendments (the
"Amendments") to the Partnership's Agreement of Limited Partnership necessary to
permit such sale. The transactions by which the Partnership proposes to sell the
Real Estate Interests to the REIT and amend its Agreement of Limited Partnership
are hereinafter referred to as the "Sale."
NAPICO is a wholly-owned subsidiary of Casden Investment Corporation, the sole
director and stockholder of which is Mr. Alan I. Casden. Alan I. Casden is also
a general partner of Casden Properties, the sponsor of the REIT and an affiliate
of the Partnership. Four of the current members of NAPICO's board of directors,
Charles H. Boxenbaum, Bruce E. Nelson, Henry C. Casden and Alan I. Casden, are
expected to become officers and shareholders of the REIT. The eight
above-referenced limited partnerships each own a low income housing project
(each of which is referred to herein as a "Property") that is subsidized and/or
has a mortgage note payable to or insured by an agency of the federal government
or a local housing agency. Those eight limited partnerships, the real estate
assets of which are to be transferred in connection with the Sale, are
hereinafter referred to as the "Local Partnerships". Limited Partners must
separately approve the proposed Sale and each of the proposed Amendments in
order to allow consummation of the Sale. The Partnership will remain in
existence after consummation of the proposed Sale and will retain direct or
indirect interests in nine property-owning limited partnerships.
In evaluating the proposed Sale, the Limited Partners should note that:
o The Properties do not currently produce significant cash flow and the
Partnership has not made any distributions to date. The Partnership's
investment in the Properties was initially structured primarily to
obtain tax benefits, and not to provide cash distributions. The
Partnership has substantially fulfilled its original objective of
providing tax benefits to the Limited Partners. The Partnership has
generated net tax benefits equal to at least 70.1% of each Limited
Partner's equity investment since the inception of the Partnership
through December 31, 1990 (assuming a Limited Partner claimed such
deductions in accordance with the passive loss transitional relief
rules contained in the Tax Reform Act of 1986 and in connection with
property dispositions). As a result of such changes to the tax law,
most Limited Partners no longer realize any material tax benefits from
continuing to hold their interests in the Partnership. In addition, as
a result of recent changes in federal income tax rates, the gain
recognized on the Sale will permit Limited Partners to deduct against
their ordinary income previously suspended Partnership losses and
thereby realize a federal and state net tax benefit of $264 per Unit.
o Based upon a purchase price for the Real Estate Interests of
$34,478,773, which is payable $202,714 in cash and $34,276,059 by
assumption by the REIT of certain mortgage and related-party
indebtedness, it is anticipated that the Partnership will make an
aggregate distribution to Limited Partners of $695,687, or
approximately $112 per unit. The per unit distribution amount
represents a net distribution of $200,687 from the proceeds of the Sale
plus approximately $500,000 of the available cash reserves of the
Partnership. Each unit consists of two limited partnership interests
and warrants to purchase two additional interests, which were sold at
an original cost of $5,000 per unit. The per unit distribution amount
of $112 is anticipated to be in
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addition to the federal and state income tax benefit of $264 per unit
arising from the Sale, assuming (i) that Limited Partners have
suspended passive losses of $1,882 per unit from the Partnership; (ii)
that such losses are available to offset ordinary income taxed at the
39.6% marginal federal rate; and (iii) federal and effective state
capital gains rates of 25% and 5%, respectively.
o The Managing General Partner believes that now may be an opportune
time for the Partnership to sell the Real Estate Interests, given
current conditions in the real estate and capital markets, which have
enabled the REIT to make the proposal to the Partnership described in
the enclosed materials.
o Robert A. Stanger & Co., Inc., a recognized independent investment
banking firm, has determined that, subject to the assumptions,
limitations and qualifications contained in its opinion, the aggregate
value ascribed to the Properties in connection with determining the
Purchase Price to be received by the Partnership for the Real Estate
Interests in the Sale is fair from a financial point of view to the
Limited Partners.
o Certain of the partnership interests being sold pursuant to the Sale
are collateral for promissory notes issued to the general partners of
Local Partnerships. These notes mature generally in the next eighteen
months and the Partnership does not have sufficient cash reserves to
pay these notes when they come due. Accordingly, it is likely that on
maturity, the holders of these notes will exercise their rights under
the notes and foreclose on the partnership interests. As a result, the
Partnership will no longer continue to hold these partnership
interests, whether or not the Sale is consummated. However, in the
event of the foreclosure, the Limited Partners will not realize the
benefits from the Sale.
o The Managing General Partner believes that selling the Real Estate
Interests in a single transaction (as opposed to a series of
individual sales) will enable the Partnership to (i) reduce transaction
expenses, and (ii) dispose of a significant portion of its portfolio in
an expedited time frame.
There are certain risk factors that the Limited Partners should consider in
evaluating the proposed Sale, such as:
o The Managing General Partner has not marketed the Properties for sale
to third parties.
o The terms of the Sale have not been negotiated at arm's-length.
o Casden is both an affiliate of the Managing General Partner and the
sponsor of the REIT and, as discussed in the enclosed materials, would
receive substantial benefits as a result of the Sale and the successful
formation and capitalization of the REIT that will not be available to
Limited Partners.
o It is possible that Limited Partners could earn a higher return on
their investment in the Partnership if the Partnership were to retain
ownership of the Properties, then market and sell the Properties to
third parties for a higher aggregate purchase price at a later date.
o As a result of the Sale, the Partnership will not realize any
potential benefits of continuing to own the Properties.
o The Sale will have a tax impact on Limited Partners. For Limited
Partners who have been able to use all of the passive losses generated
by the Partnership on a current basis, the Sale should result in a
federal and state income tax cost of approximately $463 per Unit in
excess of the cash distribution. For Limited Partners who do not have
sufficient taxable income to be taxed at a 39.6% marginal rate, or who
have other losses available to deduct against their taxable income and
therefore could not fully utilize their suspended passive losses to
offset their ordinary income, the sale could have a federal and state
tax cost in excess of cash distributions.
The REIT is to be formed by combining a substantial portion of Casden's
multi-family housing assets, which consist of real estate businesses and
property interests, with conventional and subsidized housing properties acquired
from several Casden-sponsored and/or managed partnerships and from third-party
sellers. Casden and certain officers and directors of NAPICO, including Alan I.
Casden, Henry C. Casden, Charles H. Boxenbaum and Bruce E. Nelson, will receive
a significant ownership interest in the REIT in exchange for Casden contributing
substantially all of its multi-family housing assets and businesses to the REIT.
The REIT proposes to acquire the Real Estate Interests for cash and the
assumption of certain mortgage and related-party indebtedness, which it plans to
raise in connection with a private placement of its equity securities. The
closing of the Sale is subject to, among other things, (i) the consummation of
such private
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placement by the REIT; (ii) the consents of the general partners of the Local
Partnerships in which the REIT intends to acquire interests; (iii) the approval
of the United States Department of Housing and Urban Development and certain
state and local housing finance agencies; and (iv) the consummation of a minimum
number of similar sales transactions with other Casden-affiliated partnerships.
If the Limited Partners do not approve the Sale, the Partnership will most
likely retain its indirect ownership of the Properties.
We urge you to carefully read the enclosed Consent Solicitation Statement in
order to vote your interests. YOUR VOTE IS IMPORTANT. BECAUSE APPROVAL REQUIRES
THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING UNITS OF LIMITED
PARTNERSHIP INTEREST, FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST THE SALE. To be sure your vote is represented, please sign, date and
return the enclosed consent as promptly as possible.
The proposed Sale is fully described in the enclosed Consent Solicitation
Statement. Please read the enclosed materials carefully, then return your signed
consent form either by facsimile to 303-705-6171 or in the enclosed envelope on
or before ________ __, 1998.
If you have any questions, please do not hesitate to contact MacKenzie Partners,
the Partnership's consent solicitation agent, toll free at 800-322-2885 or
collect at 212-929-5500.
Very truly yours,
National Partnership Investments Corp.
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Housing Programs Limited
9090 Wilshire Boulevard
Beverly Hills, California 90211
________ __, 1998
CONSENT SOLICITATION STATEMENT
On the terms described in this Consent Solicitation Statement, National
Partnership Investments Corp. the managing general partner ("NAPICO" or the
"Managing General Partner"), of Housing Programs Limited, a California limited
partnership (the "Partnership" or "HPGL"), is seeking the consent of the Limited
Partners of the Partnership to (i) the sale of the interests of the Partnership
(the "Real Estate Interests") in the real estate assets of eight of the
seventeen limited partnerships in which the Partnership holds a limited
partnership interest, to a real estate investment trust or its designated
affiliate (collectively referred to as the "REIT") to be organized by Casden
Properties, a California general partnership, and certain of its affiliates
(collectively referred to herein as "Casden"), for a purchase price of
$34,478,773 (the "Purchase Price"), payable $202,714 in cash and $34,276,059 by
assumption by the REIT of certain mortgage and related-party indebtedness; and
(ii) certain amendments to the Partnership's Agreement of Limited Partnership
(the "Amendments") necessary to permit such a sale. The eight limited
partnerships, the real estate assets of which are to be transferred in
connection with the Sale, are hereinafter referred to as the "Local
Partnerships."
The eight Local Partnerships each own a low income housing project
(each of which is referred to herein as a "Property") that is subsidized and/or
has a mortgage note payable to or insured by an agency of the federal government
or a local housing agency. Pursuant to certain state housing finance statutes
and regulations, certain of the Local Partnerships are subject to limitations on
distributions to the Partnership. Such statutes and regulations require such
Local Partnerships to hold cash flows in excess of such distribution limitations
in restricted reserve accounts that may be used only for limited purposes.
Consents are also being sought from the limited partners of certain
other limited partnerships, the general partners of which are affiliated with
Casden (the Partnership and such other limited partnerships are hereinafter
collectively referred to as the "Casden Partnerships"), to allow the sale of
certain real estate assets owned by the Casden Partnerships to the REIT. The
transactions by which the Partnership proposes to sell the Real Estate Interests
to the REIT and amend its Agreement of Limited Partnership (the "Partnership
Agreement") are hereinafter referred to as the "Sale." The series of
transactions by which Casden proposes to form the REIT and acquire certain real
estate assets from the Casden Partnerships and others is hereinafter referred to
as the "REIT Transaction." The Partnership will remain in existence after
consummation of the proposed Sale and will retain direct or indirect interests
in a total of nine property-owning limited partnerships. The Sale and each of
the proposed Amendments are being submitted to the Limited Partners as separate
resolutions. Limited Partners must approve the proposed Sale and each of the
proposed Amendments in order to allow consummation of the Sale.
NAPICO is a wholly-owned subsidiary of Casden Investment Corporation,
the sole director and stockholder of which is Mr. Alan I. Casden. Alan I. Casden
is also a general partner of Casden Properties, the sponsor of the REIT and an
affiliate of the Partnership. Four of the current members of NAPICO's board of
directors, Charles H. Boxenbaum, Bruce E. Nelson, Henry C. Casden and Alan I.
Casden, are expected to become officers and shareholders of the REIT. See
"CONFLICTS OF INTEREST."
It is anticipated that the Partnership will make a distribution to
Limited Partners of approximately $112 per unit of limited partnership interest
from the net proceeds of the Sale and approximately $495,000 of the available
cash of the Partnership.
The Sale is conditioned upon, among other things, (i) approval of a
majority in interest of the Limited Partners of the Partnership; (ii) the
consummation of a private placement of the REIT's equity securities; (iii) the
consents of the unaffiliated general partners of the Local Partnerships in which
the REIT intends to acquire interests; (iv) the approval of the United States
Department of Housing and Urban Development ("HUD") and certain state housing
finance agencies; and (v) the consummation of a minimum number of real estate
purchases from the Casden Partnerships in connection with the REIT Transaction.
If the Partnership is unable to obtain the consent of a general partner of a
particular Local Partnership, then the Real Estate Interests relating to such
Local Partnership will be retained by the Partnership and will be excluded from
the Sale.
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Under the Partnership Agreement and California law, Limited Partners do
not have dissenters' rights of appraisal. If the Sale is approved by a majority
in interest of the Limited Partners, and the other conditions to consummation of
the Sale are satisfied, all Limited Partners, both those voting in favor of the
Sale and those not voting in favor, will be entitled to receive the resulting
cash distributions.
The Managing General Partner has approved the Sale, has concluded that
the Sale, including the Aggregate Property Valuation (as defined in the attached
Consent Solicitation Statement) and the Purchase Price for the Real Estate
Interests, is fair to the Limited Partners and recommends that the Limited
Partners consent to the Sale. Limited Partners should note, however, that the
Managing General Partner's recommendation is subject to inherent conflicts of
interest. See "CONFLICTS OF INTEREST."
National Partnership Investments Associates, a California limited
partnership ("NPIA"), and Housing Programs Corporation II, a Delaware
corporation ("HPC"), are the non-managing General Partners of the Partnership.
Pursuant to certain agreements between NAPICO, NPIA and HPC, NAPICO is
responsible for the performance of any duties required to be performed by the
General Partners. NPIA and HPC have not participated in the management of the
Partnership, or in decisions made by the Partnership in connection with the
proposed Sale. NPIA and HPC have not taken a position with respect to the Sale
nor have they participated in the preparation of this Consent Solicitation
Statement.
This Consent Solicitation Statement and the accompanying form of
Consent of Limited Partner are first being mailed to Limited Partners on or
about ________ __, 1998.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THIS SOLICITATION OF CONSENTS EXPIRES
NO LATER THAN 11:59 P.M. EASTERN TIME
ON ________ __, 1998, UNLESS EXTENDED.
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TABLE OF CONTENTS
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Page
I. SUMMARY OF CONSENT SOLICITATION STATEMENT................................................................1
The Partnership..........................................................................................1
The Sale ................................................................................................1
Potential Benefits of the Sale...........................................................................2
Potential Adverse Effects of the Sale....................................................................4
Amendments to Partnership Agreement......................................................................6
Approval of HPC..........................................................................................7
Limited Partner Approval.................................................................................7
Third Party Opinion......................................................................................7
Recommendation of the Managing General Partner...........................................................7
Conflicts of Interest....................................................................................8
Federal Income Tax Consequences..........................................................................9
Summary Financial Information...........................................................................10
Transaction Expenses....................................................................................11
Voting Procedures.......................................................................................11
II. THE PARTNERSHIP.........................................................................................11
General.................................................................................................11
The Properties..........................................................................................13
Market for Partnership Interests and Related Security Holder Matters....................................14
Distribution History....................................................................................14
Regulatory Arrangements.................................................................................14
Year 2000 Information...................................................................................16
Directors and Executive Officers of NAPICO..............................................................16
III. THE SALE................................................................................................17
Background and Reasons for the Sale.....................................................................17
Acquisition Agreement...................................................................................19
Arrangements with General Partners of the Local Limited Partnerships....................................19
Source of Funds.........................................................................................20
Transaction Costs.......................................................................................20
Distribution of Sale proceeds; Accounting Treatment.....................................................20
Conditions..............................................................................................21
Fairness Opinion........................................................................................21
Alternatives to the Sale................................................................................27
Recommendation of the Managing General Partner; Fairness ...............................................28
Post Sale Operations of the Partnership.................................................................32
Historical and Pro Forma Financial Information..........................................................33
IV. AMENDMENTS TO THE PARTNERSHIP AGREEMENT.................................................................40
V. CONFLICTS OF INTEREST...................................................................................40
General ...............................................................................................40
Fiduciary Responsibility................................................................................41
VI. SELECTED FINANCIAL INFORMATION..........................................................................43
VII. FEDERAL INCOME TAX CONSEQUENCES.........................................................................44
</TABLE>
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VIII. LEGAL PROCEEDINGS ......................................................................................45
IX. LIMITED PARTNERS CONSENT PROCEDURE......................................................................46
Distribution of Solicitation Materials..................................................................46
Voting Procedures and Consents..........................................................................46
Completion Instructions.................................................................................47
Withdrawal and Change of Election Rights................................................................47
No Dissenters' Rights of Appraisal......................................................................47
Solicitation of Consents................................................................................47
X. IMPORTANT NOTE..........................................................................................48
ANNEXES
Annex A - Fairness Opinion of Robert A. Stanger & Co., Inc.
Annex B - The Partnership's Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
Annex C - The Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
Annex D - Text of Proposed Amendments to the Partnership Agreement.
Annex E - Legal Opinion of Battle Fowler LLP.
</TABLE>
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AVAILABLE INFORMATION
Housing Programs Limited is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, consent solicitation statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, consent solicitation statements and other information filed with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices, Seven World Trade Center,
13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. In addition, the Commission
maintains a site on the World Wide Web portion of the Internet that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is http://www.sec.gov. Copies of the latest Annual Report on Form 10-K and
Quarterly Report on Form 10-Q may also be obtained from NAPICO without charge.
All requests should be made in writing to National Partnership Investments
Corp., 9090 Wilshire Boulevard, Suite 201, Beverly Hills, California 90211;
Attention: Investor Services; Telephone 800-666-6274.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Partnership are
incorporated by reference in this Consent Solicitation Statement:
Annual Report of the Partnership on Form 10-K for the fiscal year ended
December 31, 1997, and
Quarterly Report of the Partnership on Form 10-Q for the quarter ended
March 31, 1998.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Consent
Solicitation Statement to the extent that a statement contained herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Consent Solicitation Statement.
No person is authorized to give any information or to make any
representation not contained in this Consent Solicitation Statement in
connection with the solicitation of proxies made hereby, and, if given or made,
any such information or representation should not be relied upon as having been
authorized by the Partnership or any other person. The delivery of this Consent
Solicitation Statement shall not, under any circumstances, create any
implication that there has been no change in the information set forth herein or
in the affairs of the Partnership since the date of this Consent Solicitation
Statement.
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I. SUMMARY OF CONSENT SOLICITATION STATEMENT
The following summary is intended to provide only highlights of the
materials contained in this Consent Solicitation Statement. This summary is not
intended to be a complete statement of all material features of the proposed
Sale and is qualified in its entirety by the more detailed information contained
herein. Cross references in the summary are to the indicated captions or
portions of this Consent Solicitation Statement.
The Partnership
Housing Programs Limited is a California limited partnership, the general
partners of which are National Partnership Investments Corp. ("NAPICO"),
National Partnership Investments Associates ("NPIA"), a California limited
partnership, and Housing Programs Corporation II ("HPC") (NPIA and HPC are
hereinafter referred to as the "Non-Managing General Partners").
The Partnership holds limited partnership interests in seventeen local
limited partnerships, which in turn hold title to seventeen properties. A
majority of the seventeen limited partnerships in which the Partnership holds an
indirect interest hold title to a low income housing project that is subsidized
and/or has a mortgage note payable to or insured by an agency of the federal
government or a local housing agency. Pursuant to certain state housing finance
statutes and regulations, certain of such partnerships are subject to
limitations on distributions to the Partnership and are required to hold cash
flows in excess of such distribution limitations in restricted reserve accounts
that may be used only for limited purposes. The seventeen properties indirectly
held by the Partnership are located in ten states. See "THE PARTNERSHIP -- The
Properties."
The Partnership maintains offices at 9090 Wilshire Boulevard, Beverly
Hills, California 90211 (310-278-2191). The Partnership was organized as a
California limited partnership on May 15, 1984. See "THE PARTNERSHIP."
The Sale
The Partnership proposes to sell its interests in the Real Estate
Interests of eight of the seventeen property-owning limited partnerships to the
REIT for Assumption of certain mortgage indebtedness. See "THE SALE." The
Partnership will remain in existence after consummation of the proposed Sale and
will retain direct or indirect interest in a total of nine property-owning
limited partnerships with an aggregate of 1,607 apartment units.
The aggregate consideration for the Real Estate Interests that the
Managing General Partner currently anticipates will be included in the Sale is
$34,478,773, payable $202,714 in cash and $34,276,059 by assumption by the REIT
of of certain mortgage and related-party indebtedness. The REIT intends to raise
the cash to be paid to the Partnership through a private placement of
approximately $250 million of its equity securities (the "Private Placement").
The REIT intends to commence an initial public offering of its equity securities
subsequent to the consummation of the Sale.
The net proceeds of the Sale will be distributed to the Limited and
General Partners in accordance with the cash distribution provisions of the
Partnership Agreement. See "THE SALE--Distribution of Sale Proceeds" for a
summary of the cash distribution rules applicable to such distributions. Limited
Partners are expected to receive a distribution of approximately $112 in cash
per unit, which represents distributions out of the net proceeds of the Sale
plus approximately $495,000 of the available cash of the Partnership. The
limited partnership interests were originally sold as units consisting of two
limited partnership interests and warrants to purchase two additional interests,
and were sold at an original cost of $5,000 per unit (the "Units"). All expenses
of the Sale will be borne by the Partnership.
In addition to the cash distribution of $112 per Unit, it is anticipated
that there will be a federal and state income tax benefit arising from the Sale,
assuming that Limited Partners have suspended passive losses of $1,882 per Unit
from the Partnership that could be deducted in full against such Limited
Partners' ordinary income and that such income is taxed at a federal marginal
rate of 39.6% and an effective state income tax rate of 5%. For such Limited
Partners, the Sale should result in a federal and state income tax benefit (i.e.
the amount of the tax savings resulting from deducting the passive losses
related to the Sale) of $264 per Unit, assuming such Limited Partner has
sufficient taxable income taxed at federal tax rates of 39.6% on ordinary income
and 25% on long-term capital gain attributable to depreciation (and assuming an
effective 5% state tax rate). For Limited Partners who do not have sufficient
taxable income to be taxed at the 39.6% marginal federal rate or who have other
losses available to deduct against their taxable income and therefore could not
fully utilize such suspended passive losses to offset their ordinary income, the
Sale
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could result in a federal and state tax costs in excess of cash distributions.
For Limited Partners who have been able to use all of the passive losses
generated by the Partnership on a current basis, the Sale will result in federal
and state income tax costs of approximately $463 per Unit in excess of the cash
distribution. For a discussion of the bases of these assumptions, see "FEDERAL
INCOME TAX CONSEQUENCES." Each Limited Partner is urged to consult his, her or
its own tax advisor for a more detailed explanation of the specific tax
consequences to such Limited Partner from the Sale.
NAPICO, NPIA and HPC, the General Partners of the Partnership, will be
entitled to receive distributions in connection with the Sale of $7,027 in the
aggregate, including $5,000 from the Partnership's distribution of cash on hand.
The Sale is conditioned upon, (i) approval of a majority-in-interest of
the Limited Partners of the Partnership; (ii) the consummation of the Private
Placement; (iii) the consents of the unaffiliated general partners of the Local
Partnerships in which the REIT intends to acquire interests; (iv) the approval
of HUD and certain state housing finance agencies; and (v) the consummation of a
minimum number of real estate purchases from the Casden Partnerships in
connection with the REIT Transaction. See "THE PARTNERSHIP -- Regulatory
Arrangements" and "THE SALE -- Conditions."
Potential Benefits of the Sale
The Managing General Partner believes that the Sale achieves the
Partnership's investment objectives for the following reasons:
o Receipt of Cash. The Sale will result in a cash distribution of
$112 per Unit to Limited Partners, which includes a distribution of
the net proceeds from the Sale and a distribution of $80 per Unit from
available cash reserves. This amount is anticipated to be in addition
to the federal and state income tax benefit arising from the Sale,
assuming (i) that Limited Partners have suspended passive losses of at
least $1,882 per Unit from the Partnership; (ii) that such losses are
available to offset ordinary income taxed at the 39.6% marginal federal
rate; and (iii) federal and state effective capital gains rates of 25%
and 5%, respectively. For a discussion of the bases of these
assumptions, see "FEDERAL INCOME TAX CONSEQUENCES." The Partnership has
never made distributions from operations and, if the Sale is not
completed, the Managing General Partner does not anticipate that the
Partnership will make distributions from operations in the foreseeable
future.
o Third Party Fairness Opinion. The Managing General Partner has
determined that the eight Properties that the REIT currently
anticipates purchasing in connection with the Sale have an aggregate
value of $36,410,447 (the "Aggregate Property Valuation"). Robert A.
Stanger & Co., Inc. ("Stanger"), an independent, nationally recognized
real estate investment banking firm, has been engaged by the
Partnership to render an opinion (the "Fairness Opinion") to the
Partnership as to the fairness, from a financial point of view, to
Limited Partners of the Aggregate Property Valuation utilized in
connection with determining the Purchase Price to be received by the
Partnership for the Real Estate Interests in the Sale. Stanger has
conducted certain reviews described herein and has concluded, subject
to the assumptions, qualifications and limitations contained in its
opinion, that the Aggregate Property Valuation utilized in connection
with determining the Purchase Price to be received for the Real Estate
Interests in the Sale is fair, from a financial point of view, to
Limited Partners. The Fairness Opinion addresses neither the
adjustments made to the Aggregate Property Valuation to determine the
distribution amount payable to Limited Partners in connection with the
Sale, (including the allocation of the Aggregate Property Valuation
between the Limited Partners, General Partners and the local general
partners) nor the Purchase Price itself. See "THE SALE -- Fairness
Opinion."
727945.5
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<PAGE>
o Reducing the Risks of Real Estate Investing. Continued ownership of
the Properties subjects the Partnership to continued risks inherent in
real estate ownership, such as national and local economic trends,
supply and demand factors in the local property market, the cost of
operating and maintaining the physical condition of the Properties and
the cost and availability of financing for prospective buyers of the
Properties.
o Opportune Time to Sell. The Managing General Partner believes that
now may be an opportune time for the Partnership to sell its interests
in the Properties, given current conditions in the real estate and
capital markets. Specifically, the Managing General Partner believes
that investor demand for the stock of certain public real estate
companies similar to the REIT has increased significantly over the past
several years. The Managing General Partner believes that the current
interest rate environment and the availability of capital for real
estate investment trusts will enable Casden to form the REIT and make
the proposal to the Partnership for the Sale, which provides the
Partnership with an opportunity to maximize the value of the
Properties.
o Unattractiveness of Other Options. The Managing General Partner does
not believe that other alternatives available to the Partnership are as
attractive to the Partnership as the Sale.
One alternative considered by the Managing General Partner was
continued indirect ownership of the Properties by the Partnership.
However, the Partnership is not currently making distributions to the
Limited Partners and recent changes in laws and policies relating to
payments under Housing Assistance Payments Contracts under Section 8 of
the United States Housing Act ("HAP Contracts") are expected to result
in significant reductions in cash flows from the Properties. Further,
the tax benefits resulting from continuing to own the Properties, which
remain available only to those Limited Partners currently able to
utilize passive losses (which can only be deducted against passive
income), are diminishing. The Managing General Partner does not believe
that the Partnership could realize the same benefits anticipated to be
received by the REIT through its acquisition of the Properties. The
REIT expects to realize potential benefits from its acquisition of the
Real Estate Interests by also acquiring the partnership interests of
the general partners of the Local Partnerships and the right to manage
the Properties, and the insured mortgage indebtedness currently
encumbering the Properties. The Managing General Partner does not
believe that the Partnership could obtain the financing necessary to
make such acquisitions or that such acquisitions would be consistent
with the Partnership's investment objectives.
The Managing General Partner also considered marketing the Properties
to third parties in cooperation with the general partners of the Local
Partnerships; however, the Managing General Partner does not believe
that such alternative would be in the interests of the Limited
Partners, because the Managing General Partner believes, based on the
current uncertainties in the government subsidized housing market, that
it would be difficult to sell the Properties and that such a sale would
not result in a purchase price for the Properties as high as the
Purchase Price offered in connection with the Sale. The Managing
General Partner also believes that marketing the Properties to third
parties would result in significant delays and uncertainties. There can
be no assurance, however, that a well-capitalized third party buyer
would not be willing to pay a price in excess of the Purchase Price to
acquire the Properties.
In determining the structure of the transaction, the Managing General
Partner took into account the fact that the Partnership owns only
limited partnership interests in the Local Partnerships and does not
directly own the Properties. As a result, the simultaneous sale of the
local general partners' interests is necessary to enable the
Partnership to realize the value of its Real Estate Interests. The
amount required to be paid by a purchaser (whether a third party buyer
or the REIT) to purchase the interests of the local general partners
will have the effect of reducing the amount of consideration that a
buyer is willing to pay for the Partnership's Real Estate Interests.
The amounts that affiliates of the Managing General Partner will pay to
the three unaffiliated local general partners in connection with the
buyouts of such local general partners have been determined in arm's-
length negotiations.
Several of the options considered by the Managing General Partner,
including the reorganization of the Partnership as a real estate
investment trust, a rollup involving the Partnership and the use of an
"UPREIT" structure, would have (i) been prohibitively expensive and
logistically impractical; (ii) entailed compliance with the rollup
rules promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), which may have resulted in significant delays,
thereby potentially causing the Partnership to miss the currently
favorable market conditions for real estate investment trusts; and
(iii) resulted in the Limited Partners receiving publicly traded
securities rather than cash in exchange for their Units. Such publicly
traded securities would be subject to the market risks generally
applicable to equity securities. The Managing General Partner believes
that receipt of such securities would be inconsistent with the
Partnership's ultimate
727945.5
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objective of returning cash to the Limited Partners and winding up the
business of the Partnership. See "THE SALE -- Background and Reasons
for the Sale."
o Resolving HUD Uncertainty. Each of the Properties is subject to
Housing Assistance Payments Contracts under Section 8 of the United
States Housing Act. The Managing General Partner anticipates that, for
the foreseeable future, rental rate increases under such HAP Contracts
will either not be permitted by HUD or will be negligible and unlikely
to exceed increases in operating expenses. Most of these HAP Contracts
will expire by the end of 2018 and HUD will not renew them under their
current terms. Under recently passed legislation, in most cases project
rents will be reduced and the project mortgages restructured, which is
expected to reduce the cash flow from the Properties and could create
adverse tax consequences to the Limited Partners. HUD has not yet
issued implementing regulations on the Section 8 restructuring program,
which creates additional uncertainty. Accordingly, the Managing General
Partner believes it may be beneficial to the Limited Partners to reduce
such uncertainties by approving the Sale at this time. See "THE
PARTNERSHIP -- Regulatory Arrangements" and "THE SALE -- Background and
Reasons for the Sale."
o Anticipated Tax Benefits/Tax Law Changes. Subsequent to the formation
of the Partnership, tax law changes reduced the tax benefits
anticipated to be received by Limited Partners by not allowing Limited
Partners to currently deduct many of the losses generated by the
Partnership against a Limited Partner's other taxable income from
non-passive sources. As a result, Limited Partners may have a
significant amount of suspended passive losses available to reduce the
tax impact of the taxable gain generated by the Sale. If a Limited
Partner has not utilized any of the passive activity losses allocated
to such Limited Partner in excess of those amounts permitted under
certain transitional rules, the Limited Partner will have a net federal
and state tax benefit of approximately $264. Because passive losses are
generally only deductible against passive income after 1986, the
Managing General Partner does not have any basis for determining the
amount of such passive losses which have previously been utilized by
Limited Partners. The anticipated cash distribution of approximately
$112 per Unit would be sufficient to pay the federal and state tax
liability arising from the Sale, assuming a federal capital gains rate
of 25%, the current capital gains rate and that Limited Partners have
suspended passive losses of $1,882 per Unit from the Partnership (the
amount of passive losses that a Limited Partner would utilize under the
Passive loss rules is limited to the amount of the gain recognized by
such Limited Partner) and assuming an effective state tax rate of 5%,
the Sale would result in a net benefit of $376. Limited Partners will
generally have suspended passive losses in excess of the amount of gain
on the Sale. Such remaining passive activity losses will be available
to offset other passive activity income or future passive activity gain
or income of the Partnership.
o Avoiding Loss of Interests through Foreclosure. Certain of the
partnership interests being sold pursuant to the Sale are collateral
for promissory notes issued to the general partners of Local
Partnerships. These notes mature generally in the next eighteen months
and the Partnership does not have sufficient cash reserves to pay these
notes when they come due. Accordingly, it is likely that on maturity,
the holders of these notes will exercise their rights under the notes
and foreclose on the partnership interests. As a result, the
Partnership will no longer continue to hold these partnership
interests, whether or not the Sale is consummated. However, in the
event of the foreclosure, the Limited Partners will not realize the
benefits from the Sale.
Potential Adverse Effects of the Sale
Limited Partners should also consider the following risk factors in
determining whether to approve or disapprove the Sale:
o Loss of Opportunity to Benefit from Future Events. It is possible
that the future performance of the Properties will improve or that
prospective buyers may be willing to pay more for the Properties in the
future. It is possible that Limited Partners might earn a higher return
on their investment if the Partnership retained ownership of the Real
Estate Interests. By approving the Sale, Limited Partners will also be
relinquishing certain current benefits of ownership of the Real Estate
Interests, such as the ability to deduct tax losses
727945.5
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<PAGE>
generated by the Partnership against other passive income. See "THE
SALE -- Background and Reasons for the Sale."
o No Solicitation of Third Party Offers. The Managing General Partner
has not solicited any offers from third parties to acquire the Real
Estate Interests. There is no assurance that the Managing General
Partner would not be able to obtain higher or better offers for the
Real Estate Interests if such offers were to be solicited from
independent third parties. The Partnership does not have the power to
unilaterally sell any of the Properties.
o Sale Not Negotiated at Arm's-Length. Affiliates of the Managing
General Partner will possess a significant ownership interest in the
REIT and receive substantial other benefits from the formation of the
REIT and the Sale. The Purchase Price was not negotiated at
arm's-length. The Purchase Price was established by the Managing
General Partner and the Partnership did not retain an independent
financial or legal advisor to negotiate the terms of the Sale.
o Conflicts of Interest. In evaluating the proposed Sale, Limited
Partners should consider that Casden is both the sponsor of the REIT
and an affiliate of the Managing General Partner. If the REIT is
successfully formed and capitalized, the current owners of Casden are
likely to realize a substantial increase in the value and liquidity of
their investment in Casden Properties. The terms of the Sale have been
determined on behalf of the Partnership by officers and directors of
Casden who will directly benefit from the Sale. Unlike Casden, the
Limited Partners will not participate in the REIT. It is anticipated
that approximately 45% of the equity securities of the REIT will be
held by Casden and its affiliates following the Private Placement,
based on the terms of the Private Placement as currently contemplated.
o Tax Consequences. The Sale will have a tax impact on Limited
Partners, producing a long-term capital gain of approximately $1,811
per Unit. In addition, the Sale will produce ordinary income
attributable to accelerated depreciation recapture of approximately
$440,000 in the aggregate or $71 per Unit. For Limited Partners who
have been able to use all of the passive losses generated by the
Partnership on a current basis, the Sale should result in a federal and
state income tax cost of approximately $463 per Unit in excess of the
cash distribution. In addition, Limited Partners who have available all
of the suspended passive losses generated by the Partnership, but whose
ordinary income is not taxed at the 39.6% marginal federal rate, may
incur a federal income tax cost in excess of the cash distribution made
in connection with the Sale. For a discussion of the tax impact of the
Sale, and the Partnership's assumptions and the bases therefor, see
"CERTAIN FEDERAL TAX CONSEQUENCES." THE SPECIFIC TAX IMPACT OF THE SALE
ON LIMITED PARTNERS SHOULD BE DETERMINED BY LIMITED PARTNERS IN
CONSULTATION WITH THEIR TAX ADVISORS.
o No Appraisals; Limits on Fairness Opinion. The Managing General
Partner has not obtained independent appraisals of the Properties to
determine their value. In addition, while the Fairness Opinion
addresses the fairness of the Aggregate Property Valuation utilized in
connection with determining the Purchase Price, it does not address the
fairness of the Purchase Price itself or the adjustments made to the
Aggregate Property Valuation utilized to arrive at the distributions to
the Limited Partners that will result from the Sale. Such adjustments
include the allocation of the Aggregate Property Valuation between the
Limited Partners and the general partners of the Local Partnerships,
which affects the amount of the consideration to be paid to the Limited
Partners. See "THE SALE -- Fairness Opinion."
o No Dissenter's Rights. Under the Partnership Agreement and California
law, Limited Partners do not have dissenters' rights of appraisal.
o Conditions to Sale. The Sale is subject to certain conditions in
addition to approval of the Sale by the Limited Partners, including
consummation of the Private Placement. Accordingly, even if the Sale is
approved by the Limited Partners and a purchase and sale agreement is
entered into, the consummation of the Sale could be delayed for a
significant period of time and it is possible that the Sale may not be
consummated. If a
727945.5
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<PAGE>
purchase and sale agreement is executed in connection with the Sale, it
will impede the Partnership's ability to sell some or all of the
Properties to a third party.
o Uncertainty of Local General Partner Buyouts. While affiliates of the
Managing General Partner have entered into option agreements with each
of the three unaffiliated local general partners with respect to the
buyout of the interests in the Local Partnerships, there can be no
assurance that the Company will be able to successfully complete
buyouts from all three of the unaffiliated local general partners on
acceptable terms, which in turn could reduce the cash from the Sale
available for distribution to the Limited Partners. To the extent that
the ultimate cost of the buyouts of the Unaffiliated local general
partners exceeds the Managing General Partner's current estimates of
such cost, the distributions to Limited Partners resulting from the
Sale will be reduced. To the extent that the cost of such buyouts is
less than the Managing General Partner's estimate, distributions to
Limited Partners will be increased. At the time they consent to the
Sale, the Limited Partners will not know which of the Properties will
ultimately be transferred in connection with the Sale; nevertheless,
consent to the Sale will be deemed effective regardless of which
Properties are ultimately included in the Sale.
o Amendments to Partnership Agreement. In addition to approval of the
Sale, Limited Partners are also being asked to approve certain
amendments to the Partnership Agreement which are required to
consummate the Sale. For example, the Partnership Agreement prohibits
the Partnership from selling any Property or any interest in a Property
if the cash proceeds from such sale would be less than the state and
federal taxes applicable to such sale, calculated using the maximum tax
rates then in effect. The Managing General Partner is seeking an
amendment that eliminates such prohibition to allow the Partnership to
sell the Properties although such tax requirement is not met. By
approving such amendment, the Limited Partners are relinquishing a
potential benefit conferred by the terms of the Partnership Agreement.
Amendments to Partnership Agreement
Certain amendments to the Partnership Agreement are necessary in
connection with the consummation of the Sale.
The Partnership Agreement currently prohibits a sale of any of the
Properties to the General Partners or their affiliates. Consent of the Limited
Partners is being sought for an amendment to the Partnership Agreement that
eliminates such prohibition.
The Partnership Agreement also requires that any agreement entered into
between the Partnership and the General Partners or any affiliate of the General
Partners shall provide that it may be canceled at any time by the Partnership
without penalty upon 60 days' prior written notice (the "Termination
Provision"). It is the position of the Managing General Partner that the
Termination Provision does not apply to the Sale; nevertheless, the Managing
General Partner is seeking the approval of the Limited Partners to an amendment
to the Partnership Agreement that eliminates the Termination Provision in
connection with the Sale or any future disposition of Properties.
The Partnership Agreement also prohibits the Partnership from selling any
Property or any interest in a Property if the cash proceeds from such sale would
be less than the state and federal taxes applicable to such sale, calculated
using the maximum tax rates then in effect (the "Tax Requirement"). The Managing
General Partner is seeking the approval of the Limited Partners to an amendment
to the Partnership Agreement that modifies the tax requirement so as to allow
the Partnership to calculate the aggregate net tax liability from a sale of
Property or Properties by subtracting from the aggregate tax payable on the gain
from such sale the tax benefit resulting from the ability to deduct his, her or
its suspended passive losses against ordinary income, assuming that the Limited
Partner has sufficient ordinary income that would otherwise have been taxed at
the 39.6% marginal tax rate for federal tax income purposes to fully utilize
such losses at such rate, an effective state income tax rate of 5% and that such
suspended passive losses remain available. By approving such Amendment, the
Limited Partners are relinquishing a potential benefit conferred by the terms of
the Partnership Agreement. However, the Managing General Partner believes that
it would not be possible to find a buyer willing to purchase under the
conditions currently specified in the Partnership Agreement,
727945.5
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<PAGE>
because compliance with such conditions would result in a purchase price for the
Properties substantially higher than their fair market value.
The consent of Limited Partners holding a majority in interest of the
outstanding Units is required in order to amend the Partnership Agreement.
Limited Partners must approve the proposed Sale and each of the three proposed
Amendments in order to allow consummation of the Sale.
Approval of HPC
Pursuant to a certain Memorandum of Understanding entered into as of
August 11, 1995 by and among the Non- Managing General Partner, the Partnership
and NAPICO, among others (the "MOU"), the Sale is subject to the prior written
consent of HPC.
Limited Partner Approval
The Managing General Partner is seeking the consent of the Limited
Partners to the Sale and the Amendments. The Partnership Agreement requires the
prior consent of Limited Partners holding a majority-in-interest of the
outstanding Units (a "Majority Vote") to an amendment to the Partnership
Agreement.
If the Limited Partners do not approve the Sale and the Amendments by a
Majority Vote, or the other conditions to the consummation of the Sale are not
met, there will be no change in its investment objectives, policies and
restrictions and the Partnership will continue to be operated in accordance with
the terms of the Partnership Agreement. The Partnership will bear the costs of
the consent solicitation process whether or not the Sale is approved or
ultimately consummated.
Third-Party Opinion
The Partnership has obtained from Stanger, a recognized independent real
estate investment banking firm, an opinion that the Aggregate Property Valuation
utilized in connection with determining the Purchase Price to be received by the
Partnership for the Real Estate Interests in the Sale is fair to the Limited
Partners from a financial point of view. In the course of preparing its Fairness
Opinion, Stanger conducted such reviews as it deemed appropriate and discussed
its methodology, analysis and conclusions with the Managing General Partner. The
Managing General Partner has not obtained independent appraisals to determine
the value of the Properties. The Fairness Opinion, which is subject to certain
assumptions, qualifications and limitations, is attached hereto as Exhibit A.
Stanger has no obligation to update the Fairness Opinion on the basis of
subsequent events. Stanger will be paid an aggregate fee by the Casden
Partnerships of up to approximately $455,000, plus $4,100 per property owned by
the Casden Partnerships that is evaluated by Stanger. The portion of the fee
allocable to the Partnership is approximately $27,800, plus $4,100 per Property,
or an aggregate of approximately $77,000. No portion of Stanger's fee is
contingent upon consummation of the Sale or completion of the REIT Transaction.
See "THE SALE-- Fairness Opinion" and "--Potential Adverse Effects of the
Sale--No Appraisals; Limits on Fairness Opinion."
Recommendation of the Managing General Partner
After a comprehensive review of various alternatives, the Managing
General Partner believes that the Sale is in the best interests of the Limited
Partners. The Managing General Partner believes that the current interest rate
environment and the availability of capital for real estate investment trusts
will enable Casden to form the REIT and make the proposal to the Partnership for
the Sale, which provides the Partnership with an opportunity to maximize the
value of the Real Estate Interests. In addition, the Managing General Partner
reviewed (but did not specifically adopt) the Fairness Opinion. See "THE
SALE--Alternatives to the Sale."
Based upon its analysis of the alternatives and its own business
judgment, the Managing General Partner believes that the terms of the Sale,
including the Aggregate Property Valuation and the Purchase Price for the Real
Estate Interests and the distributions to be made to the Limited Partners, are
fair from a financial point of view to the Limited Partners. Accordingly, the
Managing General Partner has approved the Sale and recommends that it be
approved by
727945.5
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<PAGE>
the Limited Partners. Limited Partners should note, however, that the Managing
General Partner's recommendation is subject to inherent conflicts of interest.
See "CONFLICTS OF INTEREST."
The Non-Managing General Partners have not participated in the
preparation of this Consent Solicitation Statement.
Conflicts of Interest
A number of conflicts of interest are inherent in the relationships among
NAPICO, NPIA, the Casden Partnerships, Casden and the REIT, which may, among
other things, influence the recommendation of the Managing General Partner.
These conflicts include the following:
1. The terms of the Sale (including the Purchase Price) were established
by the REIT and the Managing General Partner (which are related parties) without
the participation of any independent financial or legal advisor. There can be no
assurance that arm's-length negotiations would not have resulted in terms more
favorable to the Limited Partners. In addition, the Properties to be included in
the Sale were determined by the REIT and the Managing General Partner.
2. Although Stanger provided an independent opinion with respect to the
fairness of the Aggregate Property Valuation utilized in connection with the
determination of the Purchase Price, no independent financial or legal advisor
was engaged to represent the interests of the Limited Partners and no third
party appraisals of the Properties were obtained.
3. If the REIT Transaction is consummated, affiliates of the Managing
General Partner will receive substantial interests in the REIT in exchange for
the contribution of real property assets and the property management operations
of Casden, including direct or indirect interests in the Managing General
Partner. The Managing General Partner anticipates that it will receive
significant economic benefits as a result of receiving interests in the REIT.
Such interests are expected to enjoy greater liquidity than the Managing General
Partner's current interests in the Partnership if the REIT successfully
completes an initial public offering following its initial formation as a
private REIT. Unlike Casden, the Limited Partners will not participate in the
REIT. It is anticipated that approximately 45% of the equity securities of the
REIT will be held by Casden and its affiliates following the Private Placement,
based on the terms of the Private Placement as currently contemplated.
4. It is anticipated that the return from the interests in the REIT to be
received by the Managing General Partner and its affiliates in connection with
the REIT Transaction, if it is successfully consummated, will exceed the return
such persons currently receive from the real estate assets and businesses such
persons will contribute or sell to the REIT.
5. The officers and employees of Casden and its affiliates will be
employed by the REIT. NAPICO will become a subsidiary of the REIT. See
"CONFLICTS OF INTEREST."
6. Affiliates of the Managing General Partner have entered into option
agreements for the buyout of the interests in all of the unaffiliated Local
Partnerships held by the general partners of such Local Partnerships. The
Managing General Partner will benefit from such buyouts because the interests of
such local general partners will be acquired by the REIT, but the costs of such
buyouts will be indirectly borne by the Limited Partners. The value attributed
to the management fees payable to the local general partners was included in the
Aggregate Property Valuation when determining the Purchase Price payable to the
Limited Partners. See "CONFLICTS OF INTEREST."
Federal Income Tax Consequences
Generally, the Sale will result in a gain to the Partnership and,
accordingly, to the Limited Partners, to the extent that the consideration
received by the Partnership with respect to the Sale, including the amount of
Partnership indebtedness of which the Partnership is relieved, exceeds its
adjusted basis in the Properties. The income tax calculations contained in this
Consent Solicitation Statement are based upon federal tax rates equal to 39.6%
for
727945.5
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<PAGE>
ordinary income, 25% for capital gain attributable to depreciation recapture and
an effective state tax rate of 5%. In addition, such calculations assume that
Limited Partners have suspended passive losses of at least $1,882 per Unit from
the Partnership and that such losses are available to offset ordinary income
taxed at the 39.6% marginal federal rate. In light of the suitability standards
that Limited Partners met at the time of their original investment in the
Partnership, the Managing General Partner assumed for purposes of calculating
the tax liabilities resulting from the proposed Sale that each Limited Partner
will have taxable income in excess of $155,950 in 1998 (which is the income
level at which married taxpayers effectively become subject to a 39.6% marginal
rate). While the financial circumstances of the Limited Partners may vary
considerably, the Managing General Partner believes it is reasonable to assume
that the majority of the current Limited Partners will be in the highest federal
tax bracket in 1998. Limited Partners should consult their own tax advisors with
respect to their individual tax situations and as to the federal, state, local
and other tax consequences of the Sale. See "FEDERAL INCOME TAX CONSEQUENCES."
727945.5
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<PAGE>
Summary Financial Information
The following table sets forth selected historical financial and
operating data of the Partnership for the fiscal years ended December 31, 1997,
1996, 1995, 1994, 1993 and for the three-month periods ended March 31, 1998. The
following information should be read in conjunction with the Partnership's
Annual Report on Form 10-K and the Partnership's Quarterly Report on Form 10-Q,
which are attached hereto as Annexes B and C, respectively.
The selected historical financial and operating data of the Partnership
for the three-month periods ended March 31, 1998 and March 31, 1997 are derived
from unaudited consolidated financial statements of the Partnership which, in
the opinion of the Managing General Partner, include all adjustments (consisting
only of normal recurring items unless otherwise disclosed) necessary for a fair
presentation of the Partnership's financial position and results of operations.
The results set forth for the three-month period ended March 31, 1998 and March
31, 1997 are not necessarily indicative of results to be expected for a full
year.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Months Ended
Year Ended December 31, March-31,
---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1998 1997
---------------------------------------------------------------------------------------
57,988 39,934 44,144 26,370 20,316 15,350 12,038
Interest Income................ ---------------------------------------------------------------------------------------
Operating Expenses............. 1,611,999 1,738,266 1,771,191 1,716,736 1,719,958 398,700 443,141
Loss From Operations........... (1,554,011) (1,698,332) (1,727,047) (1,690,366) (1,699,642) (383,350) (431,103)
Distributions From Limited Partn
ships Recognized as Income..... er 468,618 387,721 307,474 520,001 473,210 117,568 133,856
Equity in Income of Limited
Partnerships and amortization of 367,144 142,894 87,795 (210,249) 616,683 92,000 36,378
acquisition costs.............. ---------------------------------------------------------------------------------------
Extraordinary Gain - Debt 2,149,096 -- -- -- -- -- --
Forgiveness.................... ---------------------------------------------------------------------------------------
$ 1,430,847 $(1,167,717) $(1,331,178) $(1,380,614) $ (609,749) $ (173,782) $(260,869)
Net Income (Loss).............. =========================================================================================
Net Income (Loss) allocated $ 1,416,539 $(1,156,040) $(1,318,460) $(1,366,808) $ (603,652) $ (172,044) $(258,260)
to Limited Partners............ =========================================================================================
Net Income (Loss) per Limited $ 116 $ (94) $ (108) $ (111) $ (49) $ (14) $ (21)
Partnership Interest........... =========================================================================================
$ 14,571,452 $15,312,532 $15,191,113 $15,692,284 $15,858,598 $15,009,894 $15,381,619
Total assets................... =========================================================================================
Investments in Limited $13,409,054 $14,364,056 $14,470,783 $14,533,940 $151,814,763 $13,501,054 $14,371,333
Partnerships =========================================================================================
$ (5,585,870 $(7,016,717)$(5,849,000)$(4,517,222)$ (3,136,608)$ (5,759,652$ (7,277,686)
Partners' Deficit.............. =========================================================================================
$ (5,279,265 $(6,695,804)$(5,539,764)$(4,221,304)$ (2,854,496)$ (5,451,309$ (6,954,069)
Limited Partners' Deficit...... =========================================================================================
Limited Partners' Deficit per $ (427) $ (541) $ (447) $ (341) $ (231) $ (441) $ (561)
Limited Partnership Interest... =========================================================================================
</TABLE>
727945.5
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Transaction Expenses
The Partnership will bear its direct costs relating to the Sale,
including customary closing costs such as the seller's portion of title
insurance and escrow fees, and the costs incurred in connection with this
solicitation of consents. The aggregate amount of such costs is expected to be
approximately $418,000, which the Partnership is expected to pay using cash
equivalents held by the Partnership. The transaction costs will be borne by the
Partnership as they are incurred whether or not the Sale is approved by the
Limited Partners or ultimately consummated. Costs incurred individually by the
Casden Partnerships, including accounting and legal fees, will be borne directly
by such partnerships.
Voting Procedures
This Consent Solicitation Statement outlines the procedures to be
followed by Limited Partners in order to consent to the Sale. A form of Consent
of Limited Partner (a "Consent") is attached hereto. These procedures must be
strictly followed in order for the instructions of a Limited Partner as marked
on such Limited Partner's Consent to be effective. The following is a summary of
certain of these procedures:
1. A Limited Partner may make his or her election on the Consent only
during the solicitation period commencing upon the date of delivery of this
Consent Solicitation Statement and continuing until the earlier of (i)
___________, 1998 or such later date as may be determined by the Managing
General Partner and (ii) the date upon which the Managing General Partner
determines that a Majority Vote has been obtained (the "Solicitation Period").
2. Limited Partners are encouraged to return a properly completed and
executed Consent in the enclosed envelope prior to the expiration of the
Solicitation Period.
3. A Consent delivered by a Limited Partner may be changed prior to the
expiration of the Solicitation Period by delivering to the Partnership a
substitute Consent, properly completed and executed, together with a letter
indicating that the Limited Partner's prior Consent has been revoked.
4. The Sale and each of the proposed Amendments are being submitted to
the Limited Partners as separate resolutions. Limited Partners must approve the
proposed Sale and each of the proposed Amendments in order to allow consummation
of the Sale.
5. A Limited Partner submitting a signed but unmarked Consent will be
deemed to have voted FOR the Sale, and each of the proposed Amendments.
II. THE PARTNERSHIP
General
The Partnership is a limited partnership formed under the laws of the
State of California on May 15, 1984. On September 12, 1984 the partnership
offered 3,000 Units consisting of 6,000 Limited Partnership Interests and
warrants to purchase a maximum of 6,000 additional limited partnership interests
at $5,000 per Unit through an offering managed by an affiliate of the
predecessor of Lehman Brothers Inc. As of September 30, 1997 there were 6,184
Units of limited partnership interest in the Partnership outstanding.
The Managing General Partner of the Partnership is NAPICO. The business
of the Partnership is conducted primarily by NAPICO. NPIA and HPC are the
non-managing General Partners of the Partnership. Pursuant to agreements among
NAPICO, NPIA and HPC, NAPICO has the primary responsibility for the performance
of any duties required to be performed by the General Partners. NPIA and HPC
have not participated in the management of the Partnership, or in decisions made
by the Partnership in connection with the proposed Sale. NPIA and HPC have not
taken a position with respect to the Sale nor have they participated in the
preparation of this Consent Solicitation Statement. The approval of HPC is
necessary in order to consummate the Sale. The Partnership has no employees of
its own.
727945.5
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Casden Investment Corporation owns 100 percent of NAPICO's stock. The
current members of NAPICO's Board of Directors are Charles H. Boxenbaum, Bruce
E. Nelson, Alan I. Casden and Henry C. Casden. Alan I. Casden is the sole
director and stockholder of Casden Investment Corporation and, accordingly,
controls NAPICO.
The original objectives of the Partnership were to own and operate the
Properties (and certain other real estate assets) for investment so as to obtain
(i) tax benefits for the Partners; (ii) reasonable protection for the
Partnership's capital investments; (iii) potential for appreciation, subject to
considerations of capital preservation; and (iv) potential for future cash
distributions from operations (on a limited basis), refinancings or sales of
assets.
The Partnership holds limited partnership interests in seventeen limited
partnerships, each of which owns a low income housing project that is subsidized
and/or has a mortgage note payable to or insured by an agency of the federal
government or a local housing agency.
The real estate holding limited partnerships in which the Partnership has
invested were, in general, organized by private developers who acquired the
sites, or options thereon, and applied for applicable mortgage insurance and
subsidies. The Partnership became the principal limited partner in these real
estate holding limited partnerships pursuant to arm's-length negotiations with
these developers, or others, who act as general partners. As a limited partner,
the Partnership's liability for obligations of the real estate holding limited
partnerships is limited to its investment. The general partners of such local
partnerships retain responsibility for developing, constructing, operating and
managing the properties.
The Local Partnerships generated $1,790,762 in cash flow to the
Partnership in 1997, before Partnership expenses of approximately $1,611,999 and
interest income of $57,988. At December 31, 1997 the Partnership had a cash
reserve of $1,162,398 approximately $500,000 of which will be distributed to the
Limited and General Partners after consummation of the Sale.
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The Properties
During 1997, all of the Properties in which HPGL had invested were
substantially rented. The following is a schedule of the status, as of December
31, 1997, of the properties in which HPGL holds an interest. Asterisks denote
the eight Properties to be included in the Sale.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Units Authorized
for Rental
Assistance under Percentage of
Name & Location No. of Units Section 8 Units Occupied Total Units
- --------------------------------------------- ------------------ ------------------ ------------------ ------------------
Bannock Arms Apts.* 66 66 66 100%
Boise, ID
Berkeley Gardens* 132 26 128 97%
Martinsburg, WV
Cape LaCroix 125 0 120 96%
Cape Girardeau, MO
Cloverdale 100 0 97 97%
Crawfordsville, IN
Cloverleaf 94 94 93 99%
Indianapolis, IN
Evergreen Apts 330 330 323 98%
Oshtemo, MI
Friendship Arms* 151 150 151 100%
Hyattsville, MD
Jenny Lind Hall* 78 78 78 100%
Springfield, MO
Lancaster Heights 198 0 184 93%
Normal, IL
Locust House* 99 98 99 100%
Westminster, MD
Midpark Towers 202 202 200 99%
Dallas, TX
Oxford House* 156 152 156 100%
Decatur, IL
Plaza Village 228 114 219 96%
Woonsocket, RI
Round Barn Manor* 156 156 156 100%
Champaign, IL
Santa Fe Towers 252 251 244 97%
Overland Park, KS
Walnut Towers 78 77 78 100%
Winfield, KS
Westwood Terrace*
Moline, IL 97 97 96 99%
------------------ ------------------ ------------------ ------------------
TOTAL 2,542 1,909 2,488 98%
=========================================================
</TABLE>
The Properties are each approximately twenty-three years old. Routine
repair and maintenance and capital expenditures made out of operating cash and
reserves maintained by the local limited partnerships amounted to approximately
$1,561,902 in the aggregate for the year ended December 31, 1997. Due to the age
of the properties, capital expenditures are expected to increase progressively
over the remaining useful lives of the properties.
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Market for Partnership Interests and Related Security Holder Matters
Limited partnership interests in the Partnership were sold through a
public offering managed by E.F. Hutton & Co. Inc., predecessor of Lehman
Brothers Inc., and are not traded on national securities exchange or listed for
quotation on the Nasdaq Stock Market. There is no established trading market for
Units and it is not anticipated that any market will develop for the purchase
and sale of the Units. Pursuant to the Partnership Agreement, Units may be
transferred only with the written consent of the Managing General Partner,
unless the proposed transfer is to a member of the family of the transferring
Limited Partner, a trust set up for the benefit of the Limited Partner's family,
or a corporation or other entity in which the Limited Partner has a majority
interest. As of March 15, 1998, there were 2,866 registered holders of Units in
HPGL. None of the Units are beneficially owned by Casden.
The high and low purchase prices for Units in sales transactions
completed during the twelve-month period ending December 31, 1997 as compiled by
NAPICO were $170.50 to $ 5.00 per Unit, respectively. No established trading
market for the Units was ever expected to develop and the sales transactions for
the Units have been limited and sporadic.
The Managing General Partner monitors transfers of the Units (a) because
the admission of a substitute limited partner requires the consent of the
Managing General Partner under the Partnership Agreement, and (b) in order to
track compliance with safe harbor provisions under the Securities Act to avoid
treatment as a "publicly traded partnership" for tax purposes. While the
Partnership requests to be provided with the price at which a transfer is being
made, and the Partnership receives some information regarding the price at which
secondary sale transactions in the Units have been effectuated, the Managing
General Partner does not maintain comprehensive information regarding the
activities of all broker/dealers and others known to facilitate from time to
time, or on a regular basis, secondary sales of the Units. It should be noted
that some transactions may not be reflected on the records of the Partnership.
It is not known to what extent Unit sales transactions are between buyers and
willing sellers, each having access to relevant information regarding the
financial affairs of the Partnerships, expected value of their assets, and their
prospects for the future. Many Unit sales transactions are believed to be
distressed sales where sellers are highly motivated to dispose of the Units and
willing to accept substantial discounts from what might otherwise be regarded as
the fair value of the interest being sold, to facilitate the sales. The prices
paid recently for Units generally do not reflect the current market of the
Partnerships' assets, nor are they indicative of total return, since prior cash
distributions and tax benefits received by the original investor are not
reflected in the price. Nonetheless, notwithstanding these qualifications, the
Unit sales prices, to the extent that the reported data are reliable, are
indicative of the prices at which the Units have recently been sold. None of the
Unit sales transactions have involved Casden or its affiliates.
Distribution History
The Partnership has not made any distributions from operations to Limited
Partners since its inception. The Partnership Agreement sets forth a procedure
for allocating distributions among the Limited Partners and General Partners.
The General Partners are entitled to receive 1% of the net cash flow from
operations to be distributed, reduced by any amount paid to the General Partners
as an annual management fee. The Limited Partners as a class are entitled to
receive the balance of the net cash flow from operations to be distributed.
There are no regulatory or legal restrictions on the Partnership's current or
future ability to pay distributions, although, pursuant to certain state housing
finance statutes and regulations, certain of the Local Partnerships are subject
to limitations on the distributions to the Partnership.
Regulatory Arrangements
Although each of the real estate holding limited partnerships in which
the Partnership has invested generally owns a property that must compete in the
market place for tenants, interest subsidies and rent supplements from
governmental agencies make it possible to offer these dwelling units to eligible
"low income" tenants at a cost significantly below the market rate for
comparable conventionally financed dwelling units in the area.
727945.5
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In order to stimulate private investment in low income housing, the
federal government and certain state and local agencies have provided
significant ownership incentives, including among others, interest subsidies,
rent supplements and mortgage insurance, with the intent of reducing certain
market risks and providing investors with certain tax benefits, plus limited
cash distributions and the possibility of long-term capital gains. There remain,
however, significant risks. The long-term nature of investments in government
assisted housing limits the ability of the Partnership to vary its portfolio in
response to changing economic, financial and investment conditions; such
investments are also subject to changes in local economic circumstances and
housing patterns, as well as rising operating costs, vacancies, rent collection
difficulties, energy shortages and other factors that have an impact on real
estate values. The Partnership's government assisted projects also require
greater management expertise and may have higher operating expenses than
conventional housing projects.
Section 8 of the United States Housing Act provides for the payment of a
federal rental subsidy for the benefit of low income families (the "Section 8
Program"). Pursuant to the Section 8 Program, the Partnership entered into
Housing Assistance Payments Contracts (the "HAP Contracts") with HUD or a state
or local administering agency as agent of HUD, with respect to all of the
Properties. Under the HAP Contracts, which generally have from one to twenty
years remaining, 823 of the apartment units at the eight Properties to be
included in the Sale (which the Partnership has agreed to lease to low or
moderate income tenants) receive rental assistance payments from HUD. During
1997, the eight real estate holding partnerships received an aggregate of
approximately $4,622,000 in rental assistance payments under the HAP Contracts.
The eight Properties generally are subject to mortgage loans insured by HUD's
Federal Housing Administration ("FHA") and the HAP Contracts generally provide
for sufficient payments to make the payments due under the federally insured
mortgage loans.
Under recently adopted law and policy, HUD has determined not to renew
HAP Contracts on a long term basis on the existing terms. In connection with
renewals of the HAP Contracts under such new law and policy, the amount of
rental assistance payments under renewed HAP Contracts will be based on market
rentals instead of above market rentals, which was generally the case under
existing HAP Contracts. As a result, existing HAP Contracts that are renewed in
the future on projects insured by the FHA will not provide sufficient cash flow
to permit owners of properties to meet the debt service requirements of these
existing FHA-insured mortgages. In order to address the reduction in payments
under HAP Contracts as a result of this new policy, the Multi-family Assisted
Housing Reform and Affordability Act of 1997 (the "MAHRAA"), which was adopted
in October 1997, provides for the restructuring of mortgage loans insured by the
FHA with respect to properties subject to HAP Contracts that have been renewed
under the new policy. The restructured loans will be held by the current lender
or another lender. Under MAHRAA, an FHA-insured mortgage loan can be
restructured to reduce the annual debt service on such loan. There can be no
assurance that the Partnership will be permitted to restructure its mortgage
indebtedness pursuant to the new HUD rules implementing MAHRAA or that the
Partnership would choose to restructure such mortgage indebtedness if it were
eligible to participate in the MAHRAA program. It should be noted that there are
uncertainties as to the economic impact on the Partnership of the combination of
the reduced payments under the HAP Contracts and the restructuring of the
existing FHA-insured mortgage loans under MAHRAA. Accordingly, the Managing
General Partner is unable to predict with certainty their impact on the
Partnership's future cash flow.
Pursuant to the HAP Contracts, the Partnership cannot sell its interests
in a Property without the consent of HUD and, if applicable, the appropriate
state or local agency. The Managing General Partner is currently in the process
of seeking such consent. There is no assurance that HUD will provide such
approval.
Pursuant to certain state housing finance statutes and regulations,
certain of the Local Partnerships are subject to limitations on distributions to
the Partnership. Such statutes and regulations require such Local Partnerships
to hold cash flows in excess of such distribution limitations in restricted
reserve accounts that may be used only for limited purposes (the "Reserve
Accounts"). The Purchase Price was calculated without attributing value to the
Reserve Accounts. The Managing General Partner believes that federal and state
regulatory considerations limiting the availability of the Reserve Accounts to
the Partnership have the effect of substantially reducing or eliminating
entirely any value attributable to such Reserve Accounts. However, it is
possible that the REIT may in the future realize a benefit from the release of
funds held in the Reserve Accounts.
727945.5
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Year 2000 Information
The Partnership has assessed the potential impact of the Year 2000
computer systems issue on its operations. The Partnership believes that no
significant actions are required to be taken by the Partnership to address the
issue and that the impact of the Year 2000 computer systems issue will not
materially affect the Partnership's future operating results or financial
condition.
Directors and Executive Officers of NAPICO
The Partnership is managed by NAPICO and has no directors or executive
officers of its own.
Biographical information for the directors and executive officers of
NAPICO with principal responsibility for the Partnership's affairs is presented
below. See "LEGAL PROCEEDINGS."
Alan I. Casden has served as Vice Chairman of the Board of Directors of
NAPICO since 1984. Mr. Casden has also served as Chairman and Chief Executive
Officer of Casden Properties and of The Casden Company since 1982 and 1985,
respectively. Mr. Casden has been involved in approximately $3.8 billion of real
estate financings and sales, and has been responsible for the development and
construction of approximately 90,000 multi-family apartment units and 10,000
single-family homes and condominiums. Mr. Casden has served as a member of the
Advisory Board of the National Multi-Family Housing Conference, the Multi-Family
Housing Council, the President's Council of the California Building Industry
Association and the Urban Land Institute. Mr. Casden currently serves on the
Visiting Committee to USC's Marshall School of Business. In 1988, Mr. Casden
received the "Distinguished Alumnus Award" from USC. He holds a bachelor of
science degree from USC. Mr. Casden is also Co-Chairman of the Board of Trustees
of the Simon Wiesenthal Center, an international human rights agency, and
building chairman for its $50 million Museum of Tolerance, which opened in Los
Angeles in 1993.
Henry C. Casden has served as a Director of NAPICO since February 1988
and as its Secretary since November 1994. Since 1988, Mr. Casden has served as
the President and Chief Operating Officer of The Casden Company as well as the
managing general partner of Casden Properties. From 1971 to February 1988, Mr.
Casden was engaged in the private practice of law in Los Angeles, including as a
named partner in his law firm. His practice was devoted principally to
counseling real estate developers, lenders and investors throughout the United
States. Mr. Casden is a member of the Board of Visitors of the University of San
Diego School of Law and the bar association of the District of Columbia. Mr.
Casden received his bachelor of arts degree from the University of California at
Los Angeles, and is a graduate of the University of San Diego Law School. Mr.
Casden is a member of the State Bar of California and has numerous professional
and philanthropic affiliations. Henry C. Casden and Alan I. Casden are brothers.
Charles H. Boxenbaum has served as Chairman of the Board of Directors and
Chief Executive Officer of NAPICO since 1966. He has been active in the real
estate industry since 1960. Prior to joining Sonnenblick-Goldman Corp. of
California, Mr. Boxenbaum was a real estate broker with the Beverly Hills firm
of Carl Rhodes Company. From 1966 to 1980, Mr. Boxenbaum was Chairman of the
Board and Chief Executive Officer of Sonnenblick-Goldman Corp. of California, a
firm specializing in mortgage brokerage. In 1978, the Sonnenblick Goldman Corp.
trade style was sold, and Mr. Boxenbaum purchased the outstanding stock and
changed the name of the firm to National Partnership Investments Corp. He is one
of the founders of and a past director of First Los Angeles Bank, organized in
November 1974. Since March 1995, Mr. Boxenbaum has served on the Board of
Directors of the National Multi Housing Council. Mr. Boxenbaum received his
bachelor of arts degree from the University of Chicago.
Bruce E. Nelson serves as President and a director of NAPICO. Mr. Nelson
joined NAPICO in 1980 and became President in February 1989. He is responsible
for the operation of all NAPICO sponsored limited partnerships. Prior to that he
was primarily responsible for the securities aspects of the publicly offered
real estate investment programs. Mr. Nelson is also involved in the
identification, analysis, and negotiation of real estate investments. From
February 1979 to October 1980, Mr. Nelson held the position of Associate General
Counsel at Western Consulting Group, Inc., private residential and commercial
real estate syndicators. Prior to that time Mr. Nelson was engaged in the
private practice of law in Los Angeles. Mr. Nelson received his Bachelor of Arts
degree
727945.5
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from the University of Wisconsin and is a graduate of the University of Colorado
School of Law. He is a member of the State Bar of California and is a licensed
real estate broker in California and Texas.
III. THE SALE
Background and Reasons for the Sale
In recent years, real estate investment activity by publicly owned
corporations and trusts, such as real estate investment trusts ("REIT
Entities"), has increased dramatically. REIT Entities have become a major source
of capital for the real estate market as well as one of its most prominent
purchasers of real property. A publicly-traded REIT Entity is organized as a
real estate company to own and operate a portfolio of properties, has access to
new capital and its shares can be sold or transferred in the public securities
markets.
During the Spring of 1997, the managers of NAPICO and Casden Properties
(which are affiliated entities), including Alan I. Casden, Henry C. Casden,
Charles H. Boxenbaum and Bruce E. Nelson, evaluated the financial results and
prospects of the Casden Partnerships and considered various alternatives that
might allow them to maximize the current value of the Partnership's assets.
Among other things, they considered (i) reorganizing the Partnership as a REIT
Entity, (ii) attempting a rollup of the Partnership and certain other real
estate holding limited partnerships, (iii) marketing the Properties to third
parties in cooperation with the general partners of the Local Partnerships, and
(iv) continued indirect ownership of the Properties through the Partnership's
limited partnership interests in the Local Partnerships. The managers of NAPICO
and Casden Properties also considered forming a REIT Entity that would acquire
the Properties held by the Local Partnerships.
In May of 1997, NAPICO and Casden Properties invited Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") and certain other investment banking
firms to make presentations regarding strategic alternatives available to Casden
Properties in light of favorable conditions in the real estate capital markets.
Following such presentations, the managers of Casden Properties decided to form
a REIT Entity.
On April 1, 1997, Casden Properties retained Battle Fowler LLP as its
legal counsel in connection with the potential formation of a REIT Entity and
the potential sales of the assets of the Casden Partnerships. On September 4,
1997, Casden Properties engaged DLJ to act as Casden Properties' financial
advisor in connection with the formation of a REIT Entity.
On November 21, 1997, following several days of interviews with several
investment banking firms, NAPICO selected Stanger to render a fairness opinion
in connection with the Sale and the other proposed sales involving the Casden
Partnerships. For a description of the terms of Stanger's engagement and certain
additional information concerning Stanger, see "-- Fairness Opinion."
The financial and legal advisors of NAPICO and Casden Properties
conferred regularly from June of 1997 through July of 1998 regarding the
structure and terms of the proposed REIT Transaction, including the Aggregate
Property Valuation and the Purchase Price to be offered for the Real Estate
Interests.
The Managing General Partner believes that it is in the best interests of
the Partnership to sell its interests in the Properties. Accordingly, the
Managing General Partner believes that it is necessary for the partnership to
dispose of its interests in all of the local limited partnerships and its sales
of the Real Estate Interests pursuant to the Sale furthers this goal. The
Partnership is not currently realizing any material cash flow that is available
for distribution to the Limited Partners and does not anticipate realizing
sufficient cash flow in the future to enable it to make distributions to Limited
Partners. Limited Partners did not realize current passive activity rental
losses in 1997. However, the Limited Partners realized approximately $100 per
Unit in interest income in 1997. Assuming Limited Partners are restricted from
utilizing passive losses, the Limited Partners will be liable for the taxes
related to the Partnership's passive activity rental income and portfolio
interest income without any corresponding cash distribution. In light of the
limited cash flow currently generated by the Properties, the fact that the
Partnership owns limited partnership interests and does not own the Properties
directly and the potentially adverse consequences of the recent
727945.5
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changes in the laws and policies applicable to HAP Contracts, the Managing
General Partner does not believe that it would be feasible to market the Real
Estate Interests.
The REIT believes that there are certain benefits to the REIT not
available to the Partnership that the REIT may be able to realize as a result of
the acquisition of the Real Estate Interests held by the Partnership, the
general partner interests held by the local general partners, the insured
mortgage debt encumbering the Properties, and the other properties and
businesses of Casden. These potential benefits include (i) earning fee income by
performing the property management functions formerly performed by the local
general partners, (ii) acquiring and restructuring (under MAHRAA) the mortgage
indebtedness to which the Properties are subject, and (iii) realizing economies
of scale in connection with ownership and management of all of the Properties.
These benefits would not be available to the Partnership because it does not
have sufficient capital to buy out the local general partner interests and to
purchase the mortgage loans encumbering the Properties. Such activities would
also be inconsistent with the Partnership's original objectives.
Prior to the consummation of the Sale, the REIT intends to sell
approximately $250 million of its equity securities in the Private Placement.
The proceeds of the Private Placement will be used to finance the Sale and other
acquisitions of conventional and subsidized housing properties to be made in
connection with the REIT Transaction. The REIT intends to commence an initial
public offering of its equity securities subsequent to the consummation of the
Sale. Casden and its affiliates are expected to own approximately 45% of the
equity securities of the REIT upon completion of the Private Placement.
Subsequent to its initial public offering, the REIT intends to purchase and
restructure all insured mortgage indebtedness currently encumbering the
Properties, which the Managing General Partner believes will enhance the returns
associated with the ownership of the mortgages and the Properties.
In considering whether the Sale is in the interests of the Partnership,
the Managing General Partner also considered the effects of recent changes in
the law and policies relating to government-assisted housing. Under MAHRAA, to
the extent that rents are above market, as is the case with most of the
Properties, the amount of the HAP Contract payments will be reduced. While
MAHRAA also contemplates a restructuring of the mortgage loans to reduce the
current debt service on the mortgage loans, it is expected that the combination
of the reduced HAP Contract payments and the restructuring of the mortgage loans
will result in a significant reduction in the cash flow to the Local
Partnerships. In the case of two restructurings that are currently being
negotiated by affiliates of the Managing General Partner (involving one property
owned by the Partnership (Jenny Lind Hall) and one other property owned by a
Casden Partnership other than the Partnership), the restructurings proposed by
HUD will significantly reduce the cash flow from these properties. Furthermore,
since the local general partners would control the restructuring negotiations
and most of the local general partners' income results from their management
fees, there can be no assurance that any restructuring negotiated by local
general partners would optimize cash flow to the Partnership or result in any
cash distributions to the Partnership. Moreover, there are a number of
uncertainties as to the restructuring process, including potential for adverse
tax consequences to the Limited Partners and the local general partners. As a
result, the Managing General Partner believes that it is unlikely that the
Limited Partners of the Partnership will benefit from any restructuring under
MAHRAA.
HPGL owns limited partnership interests in the Local Partnerships that
hold title to the Real Estate Assets that the REIT has offered to purchase. All
but three of the general partners of such Local Partnerships are unaffiliated
with the General Partners of HPGL and the Partnership does not control such
unaffiliated local general partners. The partnership agreements of the Local
Partnerships do not grant the limited partner of such partnership the right to
remove the general partner or to compel a sale of the assets of the partnership.
As a result, the simultaneous buyout of the local general partners is necessary
in order to enable the Partnership to realize the value of its Real Estate
Interests. Accordingly, the amount required to be paid by a purchaser (whether a
third party buyer or the REIT) to purchase the interests of the local general
partners will have the effect of reducing the amount of consideration which a
buyer is willing to pay for the Partnership's Real Estate Interests. The amounts
that the Managing General Partner proposes to pay to the unaffiliated local
general partners for their interests have been determined as a result of arm's-
length negotiations with the local general partners.
The Managing General Partner believes that the REIT, through its
potential access to the capital markets and its familiarity with the Properties,
is in a position to purchase the Properties on terms that are favorable to the
Partnership.
727945.5
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The Managing General Partner believes that the current market for securities
issued by REIT Entities will provide the Partnership with an opportunity to sell
the Properties to the REIT for a favorable price.
Acquisition Agreement
If the Sale is approved by the Limited Partners, it is contemplated that
the Partnership or the Local Partnerships, as the case may be, will enter into a
purchase and sale agreement with a subsidiary partnership of the REIT (the
"Operating Partnership"). The purchase and sale agreement will set forth the
terms and conditions under which the Partnership and the REIT and the Operating
Partnership are obligated to proceed with the Sale and will set forth certain
other agreements of such parties with respect to the Sale. The final terms of
the purchase and sale agreement are subject to the approval of the Non-Managing
General Partner.
Representations and Warranties. The Partnership will not make any
representations and warranties to the REIT and the Operating Partnership in the
purchase and sale agreement with respect to the Properties, and the Properties
will be sold "as is."
Conditions. As described in detail below under the heading " --
Conditions" below, the purchase and sale agreement will include a number of
conditions to the REIT's obligation to consummate the Sale.
Amendment and Closing. The Partnership and the REIT or the Operating
Partnership may mutually agree to amend the terms of the purchase and sale
agreement in a manner which, in the good faith judgment of the Managing General
Partner (consistent with the Managing General Partner's fiduciary duty to the
Partnership and the Limited Partners), does not materially reduce the benefits
to be received by the Limited Partners from the Sale without resoliciting the
consent of the Limited Partners. If the Sale is approved by a Majority Vote of
the Limited Partners and the other conditions to the Sale and the REIT
Transaction are satisfied, it is anticipated that the Sale will be consummated
by August 31, 1998. If the closing does not occur by December 31, 1998 the
purchase and sale agreement will be terminated.
Arrangements with General Partners of the Local Limited Partnerships
Affiliates of the Managing General Partner have entered into option
agreements for the buyouts of the interests in the Local Partnerships held by
the general partners of each of the eight Local Partnerships, three of whom are
unaffiliated with Casden. The five affiliated local general partners are
entities in which Casden owns a controlling interest. The buyouts of the
unaffiliated local general partners have been negotiated on an arm's-length
basis. The Managing General Partner expects that the general partners of the
Local Partnerships will be paid an aggregate of approximately $1,932,000 for
their interests in, and rights to manage, the Local Partnerships. There can be
no assurance that the Managing General Partner will be able to successfully
complete buyouts from all of the unaffiliated general partners of the Local
Partnerships on acceptable terms. To the extent that affiliates of the Managing
General Partner are unable to complete all such buyouts, there could be an
adverse impact on the operating results of the Partnership, depending on which
of the Properties are retained by the Partnership. The make-up of the
Partnership after the Sale if less than all of the general partners of the Local
Partnerships approve the Sale cannot be determined at this time. To the extent
that the ultimate cost of buying out the unaffiliated local general partners
exceeds the Managing General Partner's current estimate of such cost, the
distributions to Limited Partners resulting from the Sale will be reduced. To
the extent that the cost of such buyouts is less than the Managing General
Partner's estimates, distributions to Limited Partners will be increased.
In the case of five of the Local Partnerships, the general partners of
such partnerships are affiliates of the Managing General Partner. Each of the
affiliated general partners is directly or indirectly wholly owned by Alan
Casden, who indirectly owns 100% of the Common Stock of NAPICO. The Local
Partnerships in which affiliates of NAPICO are the general partners own 553 of
the 935 housing units in which the Local Partnerships have invested, or 59%. An
aggregate of $761,434 in respect of future management fees payable to such
affiliates was deducted from the Aggregate Property Valuation utilized to
determine the Purchase Price. The amount deducted was determined by applying a
multiplier of 6.0 (or, in the case of one management contract with a longer
term, a multiplier of 7.0) to the 1996 management fees received by the
affiliated local general partners, which is the same methodology the Managing
727945.5
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General Partner used when estimating the costs of buying out the unaffiliated
local general partners. Actual amounts paid to the unaffiliated local general
partners varied based upon negotiations with such local general partners. No
value was attributed to the affiliated general partners' general partnership
interests in Local Partnerships.
As part of its purchase of the partnership interests and management
contracts of the general partners of the Local Partnerships, the REIT has also
simultaneously negotiated the purchase of certain promissory notes held by such
local general partners (the "Notes") based on an implied valuation below the
face value of the Notes. The Notes, which have an aggregate face value of
$10,866,912, including accrued and unpaid interest, were issued by the Local
Partnerships or the Partnership. In most cases, the Notes are secured by the
Partnership's interests in the relevant Local Partnership. Each of the Notes
will mature within the next three years. The Partnership is not expected to have
sufficient resources to satisfy all of the Notes as they come due. The Notes are
secured by the Partnership's interests in the Local Partnership and to the
extent that the Partnership is unable to repay such Notes as they mature, such
interests will be forfeited. In connection with its calculation of the Purchase
Price, the Managing General Partner deducted the face values of the Notes from
the Aggregate Property Valuation, because the Notes represent payments due to
the local general partners before any distributions from the Local Partnerships
to the Partnership may be made out of the proceeds of a sale of the Properties.
See "THE SALE -- Recommendation of the Managing General Partner; Fairness."
Source of Funds
The REIT intends to raise the cash to be paid to the Partnership through
a private placement of approximately $250 million of its equity securities.
Transaction Costs
The Managing General Partner estimates that the transaction costs in
connection with the Sale, which will be paid out of the Partnership's cash on
hand, will be as follows:
Accounting............................................... $ 150,000
Legal ................................................... 50,000
Escrow Costs (seller's portion).......................... 25,000
Title Policy (seller's portion).......................... 35,000
Physical Inspection...................................... 70,000
Stanger Fairness Opinion................................. 77,000
Consent Solicitation Costs............................... 6,000
Miscellaneous Costs......................................
5,000
---------------
Total.................................................... $ 418,000
===============
The General Partners will receive a distribution of approximately $7,027
for their interests in the Partnership in connection with the Sale, including
$5,000 from the Partnership's distribution of cash on hand. The General Partners
are not entitled to receive fees in connection with the Sale.
Distribution of Sale proceeds; Accounting Treatment
After the payment of all liabilities and expenses, the consideration to
be paid to the Partnership for the Properties will be allocated and distributed
among Limited and General Partners in accordance with the cash distribution
rules set forth in the Partnership Agreement. Pursuant to the Partnership
Agreement, net distribution proceeds are distributable as follows:
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First, the General Partners will be entitled to a fee equal to the lesser
of (a) 10% of the net proceeds to the Partnership from the Sale, or (b) 1% of
the Purchase Price (including the assumed mortgage indebtedness), plus 3% of the
net proceeds after deducting an amount sufficient to pay all federal and state
taxes applicable to the Sale. No part of the fee will be paid, however, unless
the Limited Partners shall have first received an amount equal to (i) the
greater of (A) their aggregate capital contributions, or (B) an amount
sufficient to satisfy the cumulative federal and state income tax liability, if
any, arising from the disposition of the Properties and all other assets
disposed of to date; less (ii) all amounts previously distributed to Limited
Partners. Because the above-referenced conditions have not been met, the General
Partners will not be entitled to receive a fee in connection with the Sale.
Next, after allocating income from the Sale in an amount equal to the sum
of the negative adjusted capital account balances of all Partners with such
balances (computed after any distributions made under the paragraph above), and
after allocating 1% of the income in excess thereof, 1% to the General Partners
and 99% to the Limited Partners as a class, distributions shall be made in
accordance with such Partners' positive capital account balances.
Based on the distribution priority in the Partnership Agreement, and
assuming (i) the net proceeds of the Sale are $202,714 and (ii) cash available
for distribution (after payment of expenses) of approximately $500,000, the
Limited Partners will be entitled to receive $695,687 in cash or $112 per Unit.
In addition, NAPICO, NPIA and HPC will be entitled to receive a distribution of
$7,027 in connection with the Sale, including $5,000 from cash available for
distribution. Based on March 31, 1998 balances, the Partnership will retain cash
revenues after the Sale (and payment of transaction costs) of approximately
$1,090,000, $500,000 of which will be distributed to Limited and General
Partnership.
The purchase of the Real Estate Interests by the REIT is conditioned,
with respect to each of the Properties, on the general partner of the Local
Partnership owning such Property agreeing to transfer its general partnership
interests with respect to the Property. Under the partnership agreements of the
Local Partnerships, the assignment of the limited partnership interests in the
Local Partnership requires the consent of the local general partner. In
addition, the Managing General Partner does not believe that the REIT would
realize sufficient economic benefit from acquiring the Real Estate Interests
held by the Partnership unless it can simultaneously acquire the related general
partnership interests and the right to manage the Properties.
Conditions
In addition to the consent by Majority Vote of the Limited Partners, the
Purchase and Sale Agreement is expected to contain, among others, the following
conditions (which may be waived by the REIT) as conditions precedent to the
REIT's obligation to consummate the Sale:
o Subject to certain exceptions, no material adverse change shall
have occurred with respect to a Property that has a material
adverse effect on the value of the Properties as a whole;
o The Partnership shall have delivered to the REIT any required
third party consents to the Sale, including the consent of HUD,
certain state housing finance agencies, the general partners of
the Local Partnerships in which the REIT intends to acquire
interests and the holders of certain mortgages; and
o The REIT shall have consummated the Private Placement, which
will be conditioned upon, among other things, the transfer of a
minimum number of properties to the REIT by the Casden
Partnerships and third parties in connection with the REIT
Transaction.
Fairness Opinion
Stanger, an independent investment banking firm, was engaged by NAPICO to
conduct an analysis and to render an opinion as to whether the Aggregate
Property Valuation utilized in connection with determining the Purchase Price to
be paid to the Partnership for the Real Estate Interests in the Sale is fair,
from a financial point of view, to
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the Limited Partners. NAPICO selected Stanger because of its experience in
providing similar services to other parties in connection with real estate
merger and sale transactions and Stanger's experience and reputation in
connection with real estate partnerships and real estate assets. No other
investment banking firm was engaged to provide, or has provided, any report,
analysis or opinion relating to the fairness of the Sale.
Stanger has advised the Managing General Partner that, subject to the
assumptions, limitations and qualifications contained in its Fairness Opinion,
the Aggregate Property Valuation utilized in connection with determining the
Purchase Price to be paid to the Partnership for the Real Estate Interests in
the proposed Sale is fair, from a financial point of view, to the Limited
Partners. The Fairness Opinion does not address adjustments made to the
Aggregate Property Valuation utilized to arrive at the distributions to the
Limited Partners that will result from the Sale, or the allocation of the
Aggregate Property Valuation between the Limited Partners and the general
partners of the Local Partnerships, which affects the ultimate amount of
consideration to be paid to the Limited Partners. In addition, the Fairness
Opinion does not address the fairness of the Purchase Price itself. The Purchase
Price and the Aggregate Property Valuation were determined solely by the General
Partners. The fact that the Managing General Partner applied its own methodology
for determining the Aggregate Property Valuation did not limit the methods and
procedures followed by Stanger in determining the fairness of the Aggregate
Property Valuation itself. The Managing General Partner used a valuation method
that it believed to be a reasonable basis for determining the Aggregate Property
Valuation. Stanger reviewed the fairness of the Aggregate Property Valuation
determined by the Managing General Partner using methods and procedures selected
by Stanger. The Managing General Partner did not limit the method used by
Stanger to review the fairness of the Aggregate Property Valuation.
The full text of the Fairness Opinion, which contains a description of
the matters considered and the assumptions, limitations and qualifications made,
is set forth as Exhibit A hereto and should be read in its entirety. The summary
set forth herein does not purport to be a complete description of the review
performed by Stanger in rendering the Fairness Opinion. Arriving at a fairness
opinion is a complex process not necessarily susceptible to partial analysis or
amenable to summary description.
Except for certain assumptions described more fully below which the
Partnership advised Stanger that it would be reasonable to make, the Partnership
imposed no conditions or limitations on the scope of Stanger's investigation or
the methods and procedures to be followed in rendering the Fairness Opinion. See
"-- Fairness Opinion -- Assumptions, Limitations and Qualifications." The
Partnership has agreed to indemnify Stanger against certain liabilities arising
out of Stanger's engagement to prepare and deliver the Fairness Opinion.
Experience. Since its founding in 1978, Stanger and its affiliates have
provided information, research, investment banking and consulting services to
clients located throughout the United States, including major New York Stock
Exchange member firms, insurance companies and over 70 companies engaged in the
management and operation of partnerships and real estate investment trusts. The
investment banking activities of Stanger include financial advisory and fairness
opinion services, asset and securities valuations, industry and company research
and analysis, litigation support and expert witness services, and due diligence
investigations in connection with both publicly registered and privately placed
securities transactions.
Stanger, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers,
acquisitions, reorganizations and for estate, tax, corporate and other purposes.
Stanger's valuation practice principally involves partnerships, partnership
securities and the assets typically held through partnerships, such as real
estate, oil and gas reserves, cable television systems and equipment leasing
assets. Stanger was selected because of its experience and reputation in
connection with real estate partnerships, real estate assets and mergers and
acquisitions.
Summary of Materials Considered. In the course of Stanger's analysis to
render its opinion, Stanger reviewed: (i) a draft of this Consent Solicitation
Statement related to the Sale in substantially the form which will be
distributed to Limited Partners; (ii) the Partnership's annual reports on Form
10-K for the fiscal years ending December 31, 1995, 1996 and 1997 and the
Partnership's quarterly report on Form 10-Q for the three month period ending
March 31, 1998 which reports the Partnership's management has indicated to be
the most current available financial statements; (iii) descriptive information
concerning the Properties provided by management, including
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location, number of units and unit mix, age, and amenities; (iv) summary
historical operating statements for the Properties for 1995, 1996 and 1997; (v)
operating budgets for the Properties for 1998 for each Property, as prepared by
the Managing General Partner or the local general partners; (vi) information
prepared by management relating to the debt, HAP Contracts or other regulatory
agreements encumbering the Properties; (vii) information regarding market rental
rates and conditions for apartment properties in the general market area of the
Properties and other information relating to acquisition criteria for apartment
properties; and (viii) conducted other studies, analysis and inquiries as
Stanger deemed appropriate.
In addition, Stanger discussed with management of the Partnership and the
Managing General Partner the market conditions for apartment properties,
conditions in the market for sales/acquisitions of properties similar to that
owned by the Local Partnerships, historical, current and projected operations
and performance of the Properties, the physical condition of the Properties
including any deferred maintenance, and other factors influencing value of the
Properties. Stanger also performed site inspections of the Properties, reviewed
local real estate market conditions, and discussed with property management
personnel conditions in local apartment rental markets and market conditions for
sales and acquisitions of properties similar to the Properties.
Summary of Reviews. The following is a summary of the material reviews
conducted by Stanger in connection with and in support of its Fairness Opinion.
The summary of the opinion and reviews of Stanger set forth in this Consent
Solicitation Statement is qualified in its entirety by reference to the full
text of such opinion.
In preparing its Fairness Opinion, Stanger performed site inspections of
the Properties during December 1997 through April 1998. In the course of the
site visits, the physical facilities of the Properties were observed, current
rental and occupancy information for the Properties were obtained, current local
market conditions were reviewed, a sample of similar properties were identified,
and local property management personnel were interviewed concerning the
Properties and local market conditions. Stanger also reviewed and relied upon
information provided by the Partnership and the Managing General Partner,
including, but not limited to, financial schedules of historical and current
rental rates, occupancies, income, expenses, reserve requirements, cash flow and
related financial information; property descriptive information including unit
mix; and information relating to any required capital expenditures and any
deferred maintenance.
Stanger also reviewed historical operating statements for the Properties
for 1995, 1996 and 1997, the operating budget for 1998 for each Property, as
prepared by the Managing General Partner or the local general partners and
discussed with management the current and anticipated operating results of the
Properties.
In addition, Stanger interviewed management personnel of the Partnership.
Such interviews included discussions of conditions in the local market, economic
and development trends affecting the Properties, historical and budgeted
operating revenues and expenses and occupancies and the physical condition of
the Properties (including any deferred maintenance and other factors affecting
the physical condition of the improvements), projected capital expenditures and
building improvements, the terms of existing debt, HAP Contracts or other
regulatory agreements encumbering the Properties, and expectations of management
regarding the impact of various regulatory factors and proposed changes on the
operating results of the Properties.
Stanger also reviewed the acquisition criteria used by owners and
investors in the type of real estate owned by the Partnership, utilizing
available published information and information derived from interviews
conducted by Stanger with various real estate owners and investors.
Summary of Analysis. Based in part on the above reviews, Stanger then
performed a discounted cash flow analysis (a "DCF Analysis") of the Properties.
The DCF Analysis involved the following steps.
During its site visits to each Property, Stanger conducted local market
research, including the identification and assessment of relative quality (e.g.,
condition, location amenities, etc.) of similar multi-family properties in the
competitive market area of each Property and the collection of rental rate
information for various apartment unit sizes (e.g., efficiency, one-bedroom,
two-bedroom, etc.) for such Properties. In addition, Stanger reviewed
information
727945.5
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provided by the Managing General Partner and management of the Properties
concerning rental rates allowed for each type of apartment in each Property
subject to HUD or other rental rate restrictions.
Utilizing the above information, Stanger determined the gross potential
rent for each Property based on the number and type of apartment units in each
Property and (i) rents allowed for each type of unit under the existing HAP
Contract or other regulatory agreement ("Contract Rent"), and (ii) the estimated
market rental rates the Property would likely obtain based on review of the
rates charged at similar properties in the local market ("Market Rent"). The
gross potential rent amounts based on Contract Rent and Market Rent data were
used in the DCF Analysis as described below.
Stanger also reviewed historical and budgeted gross income and income
from ancillary sources for each Property in the portfolio in light of market
trends and competitive conditions in each Property's local market. Stanger also
reviewed summary information concerning occupancy rates and any HAP contracts or
other regulatory agreements encumbering the Properties, including contract
rental rates for each unit size and contract expiration date.
After assessing the above factors, Stanger estimated each Property's
effective gross income based upon unit mix of contract or market rental rates,
as appropriate, and estimates of ancillary income and occupancy. Contract Rents
were utilized during the term of the HAP contract or other regulatory agreement,
with a mark to market of rental rates upon expiration of the HAP Contract or
other regulatory agreement. Expenses were estimated based on historical and
budgeted operating expenses, discussions with management, and certain industry
expense information. Estimated property operating expenses, including
replacement reserves, were then deducted from effective gross income to arrive
at each Property's estimated net operating income. Debt service payments
relating to debt encumbering each of the Properties were also considered in the
"leveraged" discounted cash flow analysis, as described below. Expenses relating
solely to investor reporting and other expenses not related to the properties
were excluded from the analysis.
Stanger then discounted to present value the estimated cash flows from
the continued operation of each of the Properties during a holding period equal
to the term of the existing HAP Contract or other regulatory agreement. In the
case of properties subject to dividend limitations, Stanger discounted cash flow
amounts up to, but not exceeding, the dividend limitation. Income and expense
escalators utilized in the analysis were based on parameters cited by investors,
owners and managers of similar properties, market factors, the relationship of
Contract Rent and estimated Market Rent, and historical and budgeted results for
each Property. Based on the relationship of Contract Rent and Market Rent,
income during the regulatory contract period was generally held flat or was
escalated at a rate to provide sufficient income to pay operating expenses and
debt service. For the purpose of determining the Properties' residual value, as
described below, estimated market rental rates were generally escalated at 3%
per annum. Expenses were also escalated at 3.0% per annum.
Stanger evaluated the residual Property value at the time of the existing
HAP Contract or other regulatory agreement expiration based upon the assumption
that whether or not the HAP Contract or other regulatory agreement was renewed,
rents at the Property would be marked to market rates (i.e. where Contract Rent
at the time of expiration exceeded estimated Market Rent, it was assumed that
Contract Rent upon any contract renewal would be set at an amount equal to the
estimated market rent at the time of reversion).
Stanger then evaluated estimated net operating income (after replacement
reserves) at the time of contract expiration, with rents marked to market rates,
to determine if such income would be sufficient to service the existing debt
encumbering the Property. Where existing debt could be prepaid at the time of
contract expiration, Stanger capitalized net operating income (after replacement
reserves) with rents marked to market at rates ranging from 9.0% to 12.5% to
estimate a free and clear residual value from which estimated expenses of sale
of 3% and, in the case of the leveraged discounted cash flow analysis, as
described below, anticipated debt balances were deducted to arrive at net
residual proceeds. Otherwise, any remaining equity cash flow after debt service
available was capitalized at rates ranging from 10.0% to 12.0% to determine a
residual equity value to be used in the Leveraged DCF Analysis.
The resulting annual cash flows and the residual value, after deduction
of estimated costs of sale, for each Property were then discounted to present
value assuming (i) the Properties were free-and-clear of mortgage debt (the
"Free-and-Clear DCF Analysis") and (ii) as encumbered by existing debt (the
"Leveraged DCF Analysis"). In the
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case of the Leveraged DCF Analysis, debt service payments were deducted from
annual cash flows, and the resulting annual cash flows and residual equity value
were discounted to present value using leveraged cash flow discount rates
ranging from 9% to 12% and residual discount rates ranging from 12% to 15%.
Free-and-clear discount rates for cash flow ranged from 8% to 10% and residual
discount rates ranged from 11% to 14%. In the Leveraged DCF Analysis, the
resulting equity value was then added to outstanding debt to arrive at a total
estimated Property value.
Stanger observed that the range of estimated value of the portfolio of
Properties resulting from the Leveraged DCF Analysis was $36,250,000 to
$36,360,000 and that the Aggregate Property Valuation of $36,410,447 was above
this range of value. Stanger also observed that the range of estimated value of
the portfolio of Properties resulting from the Free-and-Clear DCF Analysis was
$19,110,000 to $21,960,000 and that the Aggregate Property Valuation was above
this range of value. (The difference between the value resulting from the
Leveraged DCF Analysis and the Free-and-Clear Analysis in part reflects the fact
that the estimated value of certain Properties is less than the debt currently
encumbering those Properties.)
Stanger concluded that the range of estimated value of the portfolio of
Properties resulting from the Free-and- Clear DCF Analysis and the Leveraged DCF
Analysis supported its opinion as to the fairness of the Aggregate Property
Valuation, from a financial point of view.
Due to the uncertainty in establishing many of the values cited above,
Stanger established a range of estimated values for each discounted cash flow
analysis. The estimated values are based in part on information provided to
Stanger in the context of rendering the fairness opinion, and there can be no
assurance that the same conditions analyzed by Stanger in arriving at the
estimates cited herein would exist at the time of consummation of the Sale. In
addition, the estimated values cited above are based on a variety of assumptions
that relate, among other things, to (i) each Property's revenues, expenses, and
cash flow; (ii) the capitalization rates that would be used by prospective
buyers when the existing HAP contracts or other regulatory agreements expire and
the Properties are sold; (iii) ranges of residual values of the Properties; (iv)
selling costs; and (v) appropriate discount rates to apply to estimated cash
flows and residual values in computing the discounted present value of such cash
flows and residual values. Actual results may vary from those utilized in the
above analysis based on numerous factors, including interest rate fluctuations,
changes in capitalization rates used by prospective purchasers, tax law changes,
supply/demand conditions for similar properties, changes in the availability of
capital, changes in the regulations or HUD's interpretations of existing and new
regulations relating to subsidized properties.
Conclusions. Stanger concluded, based upon its analysis of the foregoing
and the assumptions, qualifications and limitations stated below, as of the date
of the Fairness Opinion, that the Aggregate Property Valuation utilized in
connection with determining the Purchase Price to be paid to the Partnership for
the Real Estate Interests is fair to the Limited Partners from a financial point
of view.
Assumptions, Limitations and Qualifications. In rendering the Fairness
Opinion, Stanger relied upon and assumed, without independent verification, the
accuracy and completeness of all financial information and data, and all other
reports and information contained in this Consent Solicitation Statement or that
were provided, made available, or otherwise communicated to Stanger by the
Partnership, the Managing General Partner and/or its affiliates, the Local
Partnerships or the management of the Properties. Stanger has not performed an
independent appraisal, engineering study or environmental study of the assets
and liabilities of the Partnership. Stanger relied upon the representations of
the Managing General Partner and its affiliates, the Local Partnerships and the
management of the Properties concerning, among other things, any environmental
liabilities, deferred maintenance and estimated capital expenditure and
replacement reserve requirements, and the terms and conditions of any debt, the
HAP Contracts or other regulatory agreements encumbering the Properties. Stanger
also relied upon the assurance of the Partnership, Casden, the Managing General
Partner and its affiliates, the Local Partnerships, and the management of the
Properties that any financial statements, budgets, capital expenditure
estimates, debt, HAP Contract or other regulatory agreement information, value
estimates and other information contained in this Consent Solicitation Statement
or provided or communicated to Stanger were reasonably prepared and adjusted on
bases consistent with actual historical experience and reflect the best
currently available estimates and good faith judgments; that all distributions
under HAP Contracts or other regulatory agreements with dividend limitations
allowable cumulatively since the time of the partnership's investments in each
Local Partnership have been paid in full to the Partnership; that no material
changes have occurred
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in the value of the Properties or other information reviewed between the date of
such information provided and the date of the Fairness Opinion; that the
Partnership, Casden, the Managing General Partner and its affiliates, the Local
Partnerships and the management of the Properties are not aware of any
information or facts that would cause the information supplied to Stanger to be
incomplete or misleading in any material respect; that the highest and best use
of the Properties is as improved; and that all calculations were made in
accordance with the terms of the existing and anticipated regulatory agreements.
Additional specific assumptions relating to Stanger's analysis are included in
the subsection captioned "Summary of Analysis" above.
Stanger was not requested to, and therefore did not: (i) select the
method of determining the Aggregate Property Valuation utilized in connection
with determining the Purchase Price in the Sale; (ii) make any recommendation to
the Partnership or its partners with respect to whether to approve or reject the
proposed Sale; or (iii) express any opinion as to (a) the tax consequences of
the proposed Sale to the Limited Partners, (b) the terms of the Partnership
Agreement, or the fairness of proposed Amendments to the Partnership Agreement,
or the terms of any agreements or contracts between the Partnership, any
affiliates of the Managing General Partner and the Local Partnerships, (c) the
Managing General Partner's business decision to effect the proposed Sale, (d)
any adjustments made to the Aggregate Property Valuation to determine the
Purchase Price of the Real Estate Interests and the net amounts distributable to
the Limited Partners, including but not limited to, balance sheet adjustments to
reflect the Managing General Partner's estimate of the value of current and
projected net working capital balances and cash and reserve accounts (including
debt service and mortgage escrow amounts, operating and replacement reserves,
and surplus cash reserve amounts and additions) and the income therefrom of the
Partnership or the Local Partnerships, the Managing General Partner's
determination that no value should be ascribed to any reserves of the Local
Partnerships or any cash flow from the Properties in excess of certain
limitations on distributions to the Partnership, the Managing General Partner's
determination of the value of any notes due to affiliates of the Managing
General Partner or management of the Local Partnerships, the allocation of the
Aggregate Property Valuation among the Local Partnerships, the amount of the
Aggregate Property Valuation ascribed to certain general partner and/or
management interests in the Local Partnerships and other expenses and fees
associated with the Sale, (e) the fairness of the buyout costs of certain
general partner and/or management interests in the Local Partnerships, the
allocation of such buyout costs among the Local Partnerships, or the amount of
any contingency reserves associated with such buyouts, (f) the Managing General
Partner's decision to deduct the face value of certain notes payable to
affiliates and/or management of the Local Partnerships in determining the
Purchase Price to be paid for the Real Estate Interests where the actual cost of
purchasing the notes may be less than the face value of the notes, (g) the
Purchase Price to be paid for the Real Estate Interests, or (h) alternatives to
the proposed Sale.
Stanger is not expressing any opinion as to the fairness of any terms of
the proposed Sale other than the Aggregate Property Valuation utilized in
connection with determining the Purchase Price of the Real Estate Interests paid
to the Partnership. Stanger's opinion is based on business, economic, real
estate and capital market, and other conditions as of the date of its analysis
and addresses the proposed Sale in the context of information available as of
the date of its analysis. Events occurring after such date and before the
closing of the proposed Sale of the Real Estate Interests to the REIT could
affect the Properties or the assumptions used in preparing the Fairness Opinion.
Stanger has no obligation to update the Fairness Opinion on the basis of
subsequent events.
In connection with preparing the Fairness Opinion, Stanger was not
engaged to, and consequently did not, prepare any written report or compendium
of its analysis for internal or external use beyond the analysis set forth in
Exhibit A.
Compensation and Material Relationships. Stanger has been retained by the
Managing General Partner and its affiliates to provide fairness opinions to the
Partnership and the other Casden Partnerships included in the REIT Transaction.
Stanger will be paid an aggregate fee by the Casden Partnerships of up to
approximately $455,000, plus $4,100 per property reviewed. The portion of the
fee allocable to the Partnership is $27,800, plus $4,100 per Property, or an
aggregate of approximately $77,000. In addition, Stanger is entitled to
reimbursement for reasonable legal, travel and out-of-pocket expenses incurred
in making site visits and preparing the Fairness Opinion, subject to an
aggregate maximum of up to approximately $1,000, plus $600 per Property, and is
entitled to indemnification against certain liabilities, including certain
liabilities under federal securities laws. Stanger has not been engaged to
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and has not provided services, and will not participate or otherwise be involved
in the REIT private placement. In addition, Stanger has not been approached or
engaged to provide any services in connection with a future public offering by
the REIT. No portion of Stanger's fee is contingent upon consummation of the
Sale or completion of the REIT Transaction.
Alternatives to the Sale
The following is a brief discussion of alternatives to the Sale
considered by the Managing General Partner and the possible benefits and
disadvantages of such alternatives:
Continuation of the Partnership. One alternative considered by the
Managing General Partner was the continuation of the Partnership in accordance
with its existing business plan and its Partnership Agreement. However, the
Partnership is not currently realizing material cash flow that is available for
distribution to the Limited Partners and does not anticipate realizing
sufficient cash flow in the future to enable it to make distributions to Limited
Partners. Limited Partners did not realize any passive activity rental losses in
1997. Federal depreciation deductions that are primarily responsible for
generating losses realized by the Limited Partners should continue to decline
until the end of the depreciable lives of the Properties, when taxable income to
Limited Partners will exceed cash distributions. Federal depreciation for all of
the Properties will cease to be available within one to two years. Furthermore,
the Managing General Partner does not believe that the Partnership would be able
to realize the potential benefits which the REIT anticipates may be available to
it after acquisition of the Real Estate Interests. These potential benefits
require the acquisition of (i) the partnership interests held by the local
general partners, (ii) the right to manage the Properties, and (iii) the insured
mortgage encumbering the Properties, which would require the Partnership to
raise significant additional capital. The Managing General Partner believes it
will be impractical to seek additional capital contributions from Limited
Partners in order to recapitalize the Partnership and that the Partnership could
not access the capital markets. Because there appears to be no active trading
market for the Units, and because there are no apparent benefits from continued
ownership of Units, Limited Partners may not be able to liquidate their
investment in the Units while the Partnership remains in existence. Furthermore,
the partnership agreements of the Local Partnerships do not grant the limited
partner of such partnerships (HPGL) the right to remove the local general
partner or to compel a sale of the assets of such Local Partnership. Because
there appears to be no market for the Properties and the Partnership cannot
compel a sale of the Properties, the Properties are likely to remain under the
control of the local general partners indefinitely if the Sale is not
consummated.
Marketing the Properties for Sale to Third Parties. The Managing General
Partner also considered marketing the Properties to third parties. The Managing
General Partner does not believe that such alternative is viable or would be in
the best interests of the Limited Partners. In light of the limited cash flow
currently generated by the Properties, and the anticipated adverse consequences
of the recent changes in the laws and policies applicable to HAP Contracts, the
Managing General Partner does not believe that a favorable market for the
Properties currently exists. In addition, because HPGL owns limited partnership
interest in the Local Partnerships that hold title to the Properties and the
general partners of such Local Partnerships are generally unaffiliated with the
General Partners of HPGL, the buyout of the local general partners would be
necessary for a third party to acquire the Properties. The Managing General
Partner believes it would be difficult to find a single buyer for the Properties
as a group, and that selling the Properties on a Property-by Property basis
would involve an extensive negotiating process over an extended period of time
and increased costs. The Managing General Partner has not received and has not
been advised of any third party offers for any of the Properties. The Managing
General Partner believes that it is unlikely that third party buyers could be
found to purchase the Real Estate Interests.
While the Managing General Partner has not consulted any real estate
brokers or other real estate professionals concerning potential purchasers for
the Real Estate Interests, based upon the Managing General Partner's experience
and familiarity with the market for low income housing, the Managing General
Partner does not believe that there are other potential bidders for the Real
Estate Interests at the Purchase Price. The Managing General Partner's
determination was based upon a number of factors, including the need for a
purchaser to negotiate the purchase of the Real Estate Interests with the
Partnership and enter into a transaction with the Partnership which would
require limited partner approval; the need for a purchaser to have sufficient
capital to purchase the interests of the local general partners, and to purchase
mortgage loans encumbering the Properties and negotiate restructurings, which
the
727945.5
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<PAGE>
Managing General Partner believes is necessary to realize a return on the
investment in the Properties; and the impact of recent changes in the law and
regulations of HUD relating to HAP Contracts, which impacts the value of the
Properties. As a result, the Managing General Partner believes that any
transaction with a potential purchaser would be time consuming, difficult to
consummate and unlikely to result in a purchase price higher than the Purchase
Price. However, there can be no assurance that a higher purchase price would not
be received if the Properties were actively marketed.
Rollup. The Managing General Partner considered combining the Casden
Partnerships into a new corporation that would qualify as a REIT entity. As a
result of such a transaction, the Limited Partners would have received shares of
stock in the REIT (or partnership interests convertible into REIT shares), which
would have been listed on a national stock exchange. Such a transaction would be
expected to (a) provide investors in the new entity with the opportunity to
liquidate their investment through the sale of the shares received in the
transaction, (b) permit distribution to investors of a simpler federal income
tax Form 1099-DIV (rather than Schedule K-1), and (c) provide investors with the
potential for receiving securities with a greater value than the proceeds they
will receive as a result of the Sale. Furthermore, such an entity would provide
increased asset diversification and, due to its size, improved access to capital
markets.
The Managing General Partner believes, however, that such a transaction
would have significant disadvantages. As a result of new legislation and
regulations, it believes that obtaining the necessary regulatory approvals for a
rollup would be very difficult, expensive and time-consuming. The Managing
General Partner was not confident that a rollup transaction could be completed
within a reasonably practical time period. Furthermore, the Managing General
Partner believes that there could be significant selling pressure on the
securities issued in connection with a rollup and that such selling pressure
might cause the price of the stock of the rollup entity to decline following
completion of the rollup transaction.
Another disadvantage of a rollup transaction is that the transaction
would cause the Limited Partners to incur a tax on the gain reflected in the
value of the stock of the new entity. The Managing General Partner determined
that Limited Partners would not be able to defer taxation through the use of an
UPREIT structure due to difficulties likely to be experienced in obtaining
approval from various states for the distribution of operating partnership
interests. Unless a Limited Partner sold all or a portion of the securities
received in the transaction, such Limited Partner would have no additional cash
with which to pay the taxes which would result from the completion of a rollup
transaction. The need for cash to pay the taxes on the transaction could cause
downward pressure on the price of the stock. In addition, a Limited Partner
would incur brokerage commissions on the sale of any securities received in a
rollup transaction, thereby reducing the net proceeds received in the
transaction.
Reorganization into a REIT. The Managing General Partner considered the
advisability of reorganizing the Partnership as a corporation treated as a real
estate investment trust. If approved, such a transaction would have provided
some advantages to the Limited Partners. Such a reorganization would be expected
to (a) provide investors in the reorganized entity with liquidity, (b) permit
distribution to investors of a simpler federal income tax form 1099- DIV
(compared to Schedule K-1), and (c) potentially be formed tax free to the
Limited Partners. The Managing General Partner was advised that the
reorganization of the Partnership into a REIT has a number of significant
disadvantages. For example, the small size of the reorganized Partnership, the
lack of diversification, the degree of debt relative to equity, and the absence
of internalized, integrated management would result in limited markets for the
shares of the newly formed real estate investment trust. As a result, the
Managing General Partner was advised that it would be unlikely that the real
estate investment trust shares would perform well in the market. In addition,
the Managing General Partner believes that the size of the resulting real estate
investment trust would not enable it to access the capital markets on an
advantageous basis.
Recommendation of the Managing General Partner; Fairness
The recommendation of the Managing General Partner in favor of the Sale
is based upon its belief that the Sale is fair to the Limited Partners for,
among others, the following reasons: (a) its belief that the terms and
conditions of the Sale, including the Aggregate Property Valuation and the
Purchase Price, are fair to the Limited Partners of the Partnership; (b) its
belief that the alternatives available to the Partnership are not as attractive
to the Limited Partners
727945.5
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<PAGE>
as the Sale; (c) its belief that now may be an opportune time for the
Partnership to sell the Properties, given current conditions in the real estate
and capital markets; and (d) its belief that the Purchase Price represents a
higher amount than a third party would offer the Partnership for the Real Estate
Interests.
The Managing General Partner has not obtained real estate appraisals to
establish the fair market value of the Properties, but, based upon its
significant real estate experience, it believes that the Aggregate Property
Valuation utilized in connection with determining the Purchase Price is not less
than the fair market value of the Properties. In addition, Stanger has opined
that the Aggregate Property Valuation used in determining the Purchase Price for
the Real Estate Interests is fair to the Limited Partners from a financial point
of view.
The Purchase Price was determined by the Managing General Partner. The
Managing General Partner valued the Real Estate Interests using the following
methodology. For Local Partnerships with HAP Contracts with expiration dates
more than ten years in the future, the Managing General Partner determined the
value by taking the aggregate net operating income before interest expense and
management fees (as adjusted for distribution restrictions with respect to
Properties subject to distribution restrictions) for such Local Partnership for
1996, less capital expenditures, and applied a capitalization rate of 11%. For
Local Partnerships with HAP Contracts with expiration dates greater than six
years but less than ten years in the future, the Managing General Partner
followed the same procedure, but applied a capitalization rate of 12%. For Local
Partnerships with HAP Contracts expiring in six years or less, the Managing
General Partner calculated such Local Partnership's distributions for 1996 (or
in certain cases used a three year average where the General Partners did not
believe that the 1996 distributions were representative), added the management
fees payable to the general partner of such Local Partnership for 1996, assumed
that these distributions would be received for the balance of the term of the
HAP Contracts and discounted these future distributions at a discount rate of
10%. In selecting the capitalization rates, the Managing General Partner took
into account the expectation that cash flow would be significantly reduced after
expiration of the current HAP Contracts and used a higher capitalization rate if
the HAP Contracts expired earlier. With respect to the Local Partnerships with
HAP Contracts expiring in less than seven years, the Managing General Partner
assumed that the Properties would have no residual value upon expiration of the
respective HAP Contracts, due to the uncertainties as to future cash flow
following the expiration of the term of the HAP Contracts.
Based on such assumptions, the Managing General Partner determined that
the eight Properties owned by the Local Partnerships that the Managing General
Partner currently anticipates will be included in the Sale have aggregate value
of $36,410,447 (the "Aggregate Property Valuation"). The Managing General
Partner subtracted from the Aggregate Property Valuation (i) $ 1,931,674 for the
aggregate estimated value of the general partnership interests in the Local
Partnerships (excluding the general partnership interests of the five local
general partners that are affiliates of the Managing General Partner) and the
local general partners' right to future management fees, including $715,182
attributable to the right to receive the future management fees payable to the
five local general partners affiliated with the Managing General Partner (see
"THE SALE -- Arrangements with General Partners of the Local Partnerships"), and
(ii) the outstanding mortgage indebtedness and related party indebtedness of the
Local Partnerships of 34,276,059. The amount of the Aggregate Property Valuation
allocated to the general partnership interests in the Local Partnerships is
based in part upon the cost of buying out the local general partners. The cost
to buy out the unaffiliated general partners of the Local Partnerships has been
determined in arm's-length negotiations between the Managing General Partner and
the general partners of the Local Partnerships. However, while the costs of such
buyouts will be paid by the REIT and the buyouts will benefit the REIT, a
portion of such costs will be indirectly borne by the Limited Partners. After
deduction of the value of the general partner interests and the assumption of
the mortgage indebtedness form the aggregate value, the net proceeds from the
Sale available for distribution will be $202,714.
The Managing General Partner believes that the Purchase Price is fair and
reasonable, and exceeds the price that the Partnership would likely receive if
the Real Estate Interests were to be sold to a third party or parties. It
727945.5
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<PAGE>
should be noted that, for purposes of calculating the value of the Real Estate
Interests, the Managing General Partner assumed that certain of the Properties
would have no residual values upon expiration of the respective HAP Contracts
applicable to such Properties, based on their belief that cash flow after
expiration of the HAP Contracts will be significantly reduced, as discussed
below. The Managing General Partner made the same assumption when determining
the capitalization rates used in their valuation calculations. Different
assumptions would likely have resulted in different valuations for the Real
Estate Interests.
In determining the valuation of the Real Estate Interests, no adjustment
was made for the amount by which the value of assets other than the Properties
exceeded liabilities other than mortgage and related-party indebtedness because
the Managing General Partner does not believe that these assets are material
(other than the Reserve Accounts referred to below). In addition, pursuant to
certain state housing finance statutes and regulations, certain of the Local
Partnerships are subject to limitations on the distributions of dividends to the
Partnership. Such statutes and regulations require such Local Partnerships to
hold cash flows in excess of such dividend limitations in Reserve Accounts that
may be used only for limited purposes. The Purchase Price was calculated without
attributing value to the Reserve Accounts. The Managing General Partner believes
that federal and state regulatory considerations limiting the availability of
the Reserve Accounts to the Partnership have the effect of substantially
reducing or eliminating entirely any value attributable to such Reserve
Accounts. Nonetheless, the REIT may be able to realize a benefit in the future
by obtaining a reduction in the amount required to be held in the Reserve
Accounts.
The Managing General Partner relied on the following qualitative factors
in determining that the Sale is fair to the Limited Partners:
o The Properties do not currently produce significant cash flow and the
Partnership has not made distributions to date. The Partnership's
investment in the Properties was initially structured primarily to obtain
tax benefits, and not to provide cash distributions. Due to changes in
the tax laws pursuant to which losses of the Partnership are treated as
passive losses and can only be deducted against passive income, most
Limited Partners are not realizing material tax benefits from continuing
to own their limited partnership interests. Accordingly Limited Partners
are not receiving material benefits from continuing to hold their
interests in the Partnership.
o Recent changes in HUD laws and policies are expected to adversely
affect the Partnership's cash flow and prospects. Under MAHRAA, to the
extent that rents are above market, as is the case with most of the
Properties, the amount of the HAP Contract payments will be reduced.
While MAHRAA also contemplates a restructuring of the mortgage loans to
reduce the current debt service on the mortgage loans, it is expected
that the combination of the reduced HAP Contract payments and the
restructuring of the mortgage loans will result in a significant
reduction in the cash flow to the Local Partnerships. In the case of two
restructurings that are currently being negotiated by affiliates of the
Managing General Partner (involving one Section 8 property owned by the
Partnership (Jenny Lind Hall) and one other property owned by a Casden
Partnership other than the Partnership), the restructurings proposed by
HUD will significantly reduce the cash flow from these properties.
Furthermore, since the local general partners would control the
restructuring negotiations and most of the local general partners' income
results from their management fees, there can be no assurance that any
restructuring negotiated by local general partners will optimize cash
flow to the Partnership. Moreover, there are a number of uncertainties as
to the restructuring process, including potential for adverse tax
consequences to the Limited Partners. The Managing General Partner does
not believe that the "market" rents generated by the Properties after
reduction of the HAP Contract payments under MAHRAA will be materially in
excess of the debt service and operating expenses on such Properties
after expiration of the applicable HAP Contracts and accordingly do not
expect the Properties to produce any significant cash flow at such time.
When determining the Purchase Price offered for the Real Estate
Interests, the Managing General Partner ascribed no residual value to
certain of the Properties. The Managing General Partner believes that it
is highly unlikely that the Limited Partners of the Partnership will
benefit from any restructuring under MAHRAA.
o Due to the Partnership's limited current cash flow and the
uncertainties created by MAHRAA, the Managing General Partner does not
believe that the Properties could be sold to a third party on terms
comparable to those of the proposed Sale.
727945.5
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<PAGE>
The Managing General Partner did not quantify, reach independent
conclusions regarding or otherwise assign relative weights to the individual
qualitative factors listed above. Instead, the Managing General Partner
considered the diminishing prospects of the Partnership in light of the totality
of the circumstances. The Managing General Partner believes that each of the
factors considered supported their determination that the Sale was fair to the
Limited Partners.
The REIT has offered to purchase the Real Estate Interests because the
acquisition of such interests is an important component in the formation of the
REIT and such acquisition may assist the REIT in carrying out its strategy of
acquiring the FHA-insured mortgage loans encumbering the Properties and
generating cash flow in connection with such loans. The REIT intends to purchase
the local general partners' general partnership interests, including the right
to manage the Properties. The REIT believes that acquisition of the Real Estate
Interests, the partnership interests of the local general partners, the right to
manage each of the Properties, and the insured mortgage indebtedness currently
encumbering the Properties will allow it to (i) earn fee income through the
property management functions formerly performed by the local general partners
and (ii) restructure the mortgage loans on the Properties on terms more
advantageous than could be obtained by the Partnership. The REIT's greater
access to the capital markets will allow it to take advantage of opportunities
that are unavailable to the Partnership and inconsistent with the Partnership's
original objectives. The Partnership's investment objectives contemplated that
the Partnership would dispose of its Real Estate Interests and liquidate. The
Partnership's investment objectives did not contemplate the Partnership raising
additional capital or acquiring additional partnership interests or mortgage
loans, which would be necessary for the Partnership to realize the potential
benefits anticipated by the REIT.
The Managing General Partner also considered the fairness of the terms of
the Sale, including the allocation of the Aggregate Property Valuation to the
local general partners and the Purchase Price. HPGL owns limited partnership
interests in the Local Partnerships that hold title to the Properties that the
REIT has offered to purchase. The simultaneous buyout of the local general
partners is necessary in order to enable the Partnership to realize the value of
its Real Estate Interests. Accordingly, the amount required to be paid by a
purchaser (whether a third party buyer or the REIT) to purchase the interests of
the local general partners will have the effect of reducing the amount of
consideration which a buyer is willing to pay for the Partnership's Real Estate
Interests. The amounts that the Managing General Partner will pay to the
unaffiliated local general partners in connection with the buyouts of the eight
local general partners with whom the REIT has entered into option agreements
have been determined in arms-length negotiations. The Managing General Partner
believes that the terms of such buyouts are fair to the Partnership. Therefore,
the Managing General Partner believes that, while the amount paid to the local
general partners affects the amount of distribution to Limited Partners and the
buyout of the local general partners' interests will benefit the REIT, the terms
of these transactions are fair to the Partnership and the Limited Partners. In
addition, the Managing General Partner believes that the amount to be
distributed to the Limited Partners from the Sale is fair to the Limited
Partners. The distributions represent the Purchase Price plus $500,000 of cash
held by the Partnership less expenses that the Managing General Partner believes
are reasonable and customary.
Secondary and Market Prices for Units. The highest and lowest Unit sale
prices as reported to NAPICO by certain secondary market firms involved in sales
of the Units over the twelve-month period ended December 31, 1997 were $170.00
and $5.00 respectively. When gathering such data, NAPICO requests that the
recorded prices per Unit include any mark-ups for Units sold by the firms acting
as principals in the secondary market transactions and include any commissions
charged by them for facilitating the transactions, unless the firms acted as
retail brokers. It should be noted that the proposed Sale is for only 8 of the
17 properties owned by the Partnership and that Limited Partners will continue
to own their Units after the consummation of the Sale.
No established market for the Units was ever expected to develop and the
secondary market transactions for the Units have been limited and sporadic. It
is not known to what extent the transactions in the secondary market are between
buyers and willing sellers, each having access to relevant information regarding
the financial affairs of the Partnerships, expected value of their assets, and
their prospects for the future. Many transactions in the secondary market are
believed to be distressed sales where sellers are highly motivated to dispose of
the Units and willing to accept substantial discounts from what might otherwise
be regarded as the fair value of the interest being sold, to facilitate the
sales. Secondary market prices generally do not reflect the current market of
the Partnerships' assets, nor are they indicative of total return, because tax
benefits received by original investors are not reflected in such price.
Nonetheless, notwithstanding these qualifications, the secondary market prices,
to the extent that the reported data are reliable, are indicative of the prices
at which the Units trade in the illiquid secondary markets.
727945.5
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<PAGE>
The Limited Partners have received an offer from Bond Purchase L.L.C. to
purchase up to 4.9% of the outstanding Units at a purchase price of $100.00 per
Unit.
The Managing General Partner did not give any specific weight to any one
of the foregoing factors but viewed them in the aggregate in supporting its
fairness determination. The Managing General Partner recommends that the Sale be
approved by the Limited Partners. Limited Partners should note, however, that
the Managing General Partner's recommendation is subject to inherent conflicts
of interest. See "CONFLICTS OF INTEREST."
Other Measures of Value. The Managing General Partner has not calculated
a going concern value or a liquidation value of the Units. Due to the
anticipated reduction in HAP payments at the expiration of HAP Contracts, as
described above, and the uncertainties relating to the impact on cash flow of
the restructuring of the FHA-insured mortgage loans, the Partnership does not
believe there is a sufficient basis to estimate future cash flow from the
Properties and calculate going concern value. Similarly, due to the limited cash
flow from the Properties and the potential impact of the anticipated reductions
in payments under HAP Contracts, and the absence of future tax benefits from the
Properties, the Partnership does not believe that there is a sufficient market
for estimating the fair market value of the Properties. The Managing General
Partner has not calculated an estimate of the liquidation value of the Units
assuming that the Partnership's Properties were sold at their book value. The
net book value of the Properties (i.e. book value less mortgage indebtedness) is
less than zero, which is common with real estate that has been held for an
extended period. The book value of the real estate assets is based upon the
original cost of those assets, increased for capital expenditures and reduced
for accumulated depreciation, computed in accordance with generally accepted
accounting principles. The Managing General Partner did not obtain appraisals of
the Properties because, given the nature of the Properties, the uncertainties
resulting from the changes in law and policy relating to payments under HAP
Contracts, and the relatively small value of each of the Properties, the
Managing General Partner does not believe that the benefits to be derived from
such appraisals justified the expense to the Partnership. The Managing General
Partner does not believe that the price that Limited Partners originally paid
for their Units was relevant in determining the Purchase Price for the Real
Estate Interests and therefore gave it no weight when determining the fairness
of the proposed Sale.
The Units were offered primarily to provide tax benefits to Limited
Partners and only secondarily to provide return of capital or appreciation in
value. In addition, due to recent changes in HUD law and policies relating to
HAP Contracts, the potential future return from the Properties, and therefore
the economic value of the Properties themselves, has been materially reduced.
HPGL was originally structured to take advantage of opportunities provided by
the Internal Revenue Code and the United States Housing Act. Changes in the tax
code and the housing statutes have to a large extent eliminated such
opportunities and have adversely affected the economic value of the Properties.
In light of the current regulatory environment for tax-driven low-income housing
investments, the Managing General Partner does not believe that the original
offering price of the Units should be a material factor in calculating the
Purchase Price for the Real Estate Interests. Accordingly, the Managing General
Partner does not believe that the purchase price originally paid by Limited
Partners for their Units is relevant to the determination of the adequacy of the
Purchase Price on a sale of the Real Estate Interests.
The Non-Managing General Partners have not participated in the
preparation of this Consent Solicitation Statement.
Post-Sale Operations of the Partnership
Following consummation of the Sale, the Partnership will retain its
limited partnership interests in nine local partnerships. The Managing General
Partner of the Partnership does not anticipate that cash flows generated by such
local partnerships will be adequate to meet the operating expenses of such local
partnerships on an ongoing basis and that the Partnership will be required to
utilize its cash reserves to meet its operating expenses. Based on March 31,
1998 balances, the Partnership will retain approximately $679,000 after payment
of transaction costs and distribution of cash. The pro forma net cash flow for
the remaining properties for the year ended December 31, 1997 and the quarter
ended March 31, 1998 resulted in a cash flow (deficit) of approximately
$1,030,000 and $122,149, respectively. The Managing General Partner intends to
eventually dispose of the Partnership's interests in the remaining projects,
then wind up the affairs of the Partnership, although the time frame for such
activities has not yet
727945.5
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<PAGE>
been determined, and such dispositions would require approval of the general
partners of the Local Partnerships. There can be no assurance that the
Partnership will be able to generate any additional cash for distributions to
Limited Partners as a result of dispositions of the remaining Properties.
Historical and Pro Forma Financial Information
The following is condensed financial information with respect to those
properties in which the Partnership will continue to own interests if the Sale
is approved. Given the structure of the proposed Sale, the composition of the
Partnership after the Sale will depend to some extent upon the number of general
partners of the Local Partnerships that elect to transfer their interests in the
Local Partnerships to the REIT.
The pro forma balance sheet of the Partnership has been prepared as if
the Sale was consummated on March 31, 1998. The pro forma statements of
operations of the Partnership for the three months ended March 31, 1998 and the
year ended December 31, 1997 assume that the Sale was consummated on January 1,
1998 and 1997, respectively. The Sale will be accounted for using the purchase
method of accounting.
The pro forma financial statements are based on available information and
on certain assumptions, as set forth in the notes to pro forma financial
statements, that NAPICO believes are reasonable under the circumstances.
These statements do not purport to represent what the Partnership's
financial position, results of operations or cash flows would actually have been
if the Sale in fact had occurred on such dates or at the beginning of such
period or the Partnership's financial position, results of operations or cash
flows for any future date or period.
727945.5
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<PAGE>
HOUSING PROGRAMS LIMITED
(a California limited partnership)
Pro Forma Consolidated Balance Sheet
As of March 31, 1998
(unaudited)
Assets
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Pro Forma
Historical Adjustments Pro Forma
----------------------------------------------------------
Investments in Limited Partnership $ 13,501,054 $ (3,939,151(A) $ 9,561,903
1,508,840 -- 1,508,840
Cash and Cash Equivalents -----------------------------------------------------------
$ 15,009,894 $ (3,939,151) $ 11,070,743
Total Assets ===========================================================
Liabilities and Partners' Equity (Deficiency)
Liabilities:
Notes and interest payable $ 18,796,821 $ (8,908,636(B) $ 9,888,185
Accrued fees and expenses due general partners 1,635,793 - 1,635,793
Accounts payable 336,932 - 336,932
----------------------------------------------------------
20,769,546 (8,908,636) 11,860,910
Partners' Equity (Deficiency)
General partners (308,343) 49,695(C) (258,648)
Limited partners (5,451,309) 4,919,790(D) (531,519)
----------------------------------------------------------
(5,759,652) 4,969,485 (790,167)
----------------------------------------------------------
Total Liabilities and Partners' Equity $ 15,009,894 $ (3,939,151) $ 11,070,743
==========================================================
</TABLE>
727945.5
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<PAGE>
HOUSING PROGRAMS LIMITED
Notes to Pro Forma Balance Sheet
As of March 31, 1998
(unaudited)
Pro Forma Balance Sheet Adjustments
(A) Investments in Limited Partnerships
$ 13,501,054
Historical Balance ---------------------
Less:
Bannock Arms (615,775)
Berkeley Gardens (288,107)
Friendship Arms (2,055,500)
(979,769)
Locust House ---------------------
(3,939,151)
Pro Forma Adjustment ---------------------
$ 9,561,903
Pro Forma Balance =====================
(B) Notes and Interest Payable
$ 18,796,821
Historical Balance ---------------------
Less:
Berkeley Gardens (2,230,869)
Friendship Arms (3,694,382)
(2,983,385)
Locust House ---------------------
(8,908,636)
Pro Forma Adjustment ---------------------
$ 9,888,185
Pro Forma Balance =====================
(C) General Partners' Deficiency 1% of pro forma equity adjustments.
(D) Limited Partners' Equity 99% of pro forma equity adjustments.
727945.5
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<PAGE>
HOUSING PROGRAMS LIMITED
(a California limited partnership)
Pro Forma Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended March 31, 1998 Year Ended December 31, 1997
------------------------------------------- ----------------------------------
Pro Forma Pro Forma
Historical Adjustments Pro Forma Historical Adjustments Pro Forma
---------- ----------- --------- ---------- ----------- ---------
Interest Income $ 15,350$ 0(A) $ 15,350 $ 57,988 $ (8,777) (A) $ 49,211
Operating Expenses:
Management fees- 123,240 (46,977)(B) 76,263 509,806 (187,907) (B) 321,899
general partner
General and 18,192 - 18,192 75,592 0 75,592
administrative
Legal and accounting 51,362 - 51,362 109,225 0 109,225
Interest 205,906 (96,656)(C) 109,250 917,376 (386,626) (C) 530,750
Total Operating Expenses 398,700 (143,633) 255,067 1,611,994 (574,533) 1,037,468
----------------------------------------------------------------------------------
Loss from Operations (383,350) 143,633 (239,717) (1,554,011) 565,735 (988,256)
Distributions from Limited 117,568 0(D) 117,568 468,618 (10,414) (D) 458,204
Partnerships recognized as
income
Equity in income of Limited 92,000 442(E) 92,442 367,144 1,769 (E) 368,913
Partnerships and Amortization of ----------------------------------------------------------------------------------
Acquisition Costs
NET INCOME (LOSS) BEFORE $ (173,782) $144,075 $ (29,707) $1,430,847 $567,110 $1,987,857
====================================================================================
EXTRAORDINARY GAIN
Extraordinary Gain Debt -- -- -- 2,149,096 -- 2,149,096
Forgiveness ------------------------------------------------------------------------------------
Net Income (Loss) $ (173,782) $ 144,025 $ (29,707) $1,430,847 $ 557,111 $ 1,987,958
===================================================================================
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
727945.5
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<PAGE>
HOUSING PROGRAMS LIMITED
Notes to Pro Forma Consolidated Statements of Operations
(unaudited)
Pro Forma Statements of Operations Adjustments (continued)
HOUSING PROGRAMS LIMITED
Notes to Pro Forma Consolidated Statements of Operations
(unaudited)
Pro Forma Statements of Operations Adjustments
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Three Months Year Ended
Ended December 31,
March 31, 1998 1997
----------------------------------
(A) Interest Income
Reflects estimated interest income for the period related to cash distributions
that no longer be received after the sale.
Historical Balance $15,350 $57,988
Pro Forma Adjustment 0 $(8,777)
----------------------------------
Pro Forma Balance $15,350 $49,211
==================================
(B) Management Fees
Reflects reduction in management fees, calculated at 0.5% of invested assets, as result of the
sale of the properties.
Historical Balance $123,240 $509,806
Pro Forma Adjustment (46,977) (187,907)
----------------------------------
Pro Forma Balance $76,263 $321,899
==================================
Pro Forma Adjustment for sale properties is calculated as follows:
Invested Assets $98,591,416
============
Less - sale properties
Bannock Arms (2,978,078)
Berkeley Gardens (3,471,765)
Friendship Arms (7,591,378)
Jenny Lined Hall (3,047,024)
Locust House (4,643,318)
Oxford House (5,898,970)
Round Barn (5,918,865)
Westwood Terrace (4,031,911)
--------------
Total for sale properties (37,581,309)
=============
</TABLE>
-37-
727945.5
<PAGE>
HOUSING PROGRAMS LIMITED
Notes to Pro Forma Consolidated Statements of Operations
(unaudited)
Pro Forma Statements of Operations Adjustments (continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Year Ended
Ended December 31,
March 31, 1998 1997
---------------------------------
Pro Forma Invested Assets $61,010,107
------------
Invested Assets Related to Sale properties $37,581,309
Management fee rate 0.5%
------------
Annual adjustment - Year ended December 31, 1997 $310,347
------------
Adjustment fee for three months ended March 31, 1998 $77,587
============
(C) Interest
The pro forma adjustments to the historical interest expense related to notes
payable, and the resulting pro forma balances were determined as follows:
Historical Balance $205,906 $917,376
-------------------------
Less:
Berkeley Gardens (23,750) (95,000)
Friendship Arms (40,738) (162,952)
Locust House (32,168) (128,674)
-------------------------
Pro Forma Adjustment (96,656) (386,626)
-------------------------
Pro Forma Balance $109,250 $530,750
=========================
(D) Distributions from Limited Partnerships
The pro forma adjustments to the historical balances and the resulting
pro forma balances were determined as follows:
Historical Balance $117,568 $468,618
-------------------------
Less:
Westwood Terrace - (10,414)
-------------------------
Pro Forma Adjustment - (10,414)
-------------------------
Total Pro Forma Balance $117,568 $458,204
=========================
</TABLE>
727945.5
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Year Ended
Ended December 31,
March 31, 1998 1997
---------------------------------
(E) Equity in Income of Limited Partnership and Amortization of Acquisition Costs
The pro forma adjustments to the historical balance and the resulting
pro forma balance, were determined as follows:
Historical Balance $92,000 $367,144
-------------------------
Less:
Bannock Arms (40,221) (160,885)
Berkeley Gardens 7,105 28,421
Friendship Arms 24,595 98,381
Locust House 8,963 35,852
-------------------------
Pro Forma Adjustment 442 1,769
-------------------------
Pro Forma Balance $92,442 $368,913
=========================
</TABLE>
727945.5
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<PAGE>
IV. AMENDMENTS TO THE PARTNERSHIP AGREEMENT
Certain amendments to the Partnership Agreement are necessary in
connection with the consummation of the Sale.
The Partnership Agreement currently prohibits a sale of any of the
Properties or Real Estate Interests to the General Partners or their affiliates.
Accordingly, consent of the Limited Partners is being sought for an amendment to
the Partnership Agreement that eliminates such prohibition.
The Partnership Agreement also requires that any agreement entered into
between the Partnership and the General Partners or any affiliate of the General
Partners shall provide that it may be canceled at any time by the Partnership
without penalty upon 60 days' prior written notice (the "Termination
Provision"). It is the position of the Managing General Partner that the
Termination Provision does not apply to the Sale; nevertheless, the Managing
General Partner is seeking the approval of the Limited Partners to an amendment
to the Partnership Agreement that eliminates the Termination Provision in
connection with the Sale or any future disposition of Properties.
The Partnership Agreement also prohibits the Partnership from selling any
Property or any interest in a Property if the cash proceeds from such sale would
be less than the state and federal taxes applicable to such sale, calculated
using the maximum tax rates then in effect (the "Tax Requirement"). The Managing
General Partner is seeking the approval of the Limited Partners to an amendment
to the Partnership Agreement that modifies the Tax Requirement so as to allow
the Partnership to calculate the aggregate net tax liability from a sale of a
Property or Properties by subtracting from the aggregate tax payable on the gain
from such sale the tax benefit resulting from the ability to deduct his, her or
its suspended passive losses against ordinary income, assuming that the Limited
Partner has sufficient ordinary income that would otherwise have been taxed at
the 39.6% marginal tax rate for federal income tax purposes to fully utilize
such losses at such rate, an effective state income tax rate of 5% and that such
suspended Passive Losses remain available. By approving such Amendment, the
Limited Partners are relinquishing a potential benefit conferred by the terms of
the Partnership Agreement. However, the Managing General Partner believes that
it would not be possible to find a buyer willing to purchase the Real Estate
Interests under the conditions currently specified in the Partnership Agreement,
because compliance with such conditions would result in a purchase price for the
Properties substantially higher than their fair market value.
The consent of Limited Partners holding a majority-in-interest of the
outstanding Units is required in order to amend the Partnership Agreement.
Limited Partners must approve the proposed Sale and each of the three proposed
Amendments in order to allow consummation of the Sale.
V. CONFLICTS OF INTEREST
General
Due to the key role of affiliates of the Managing General Partner in the
organization of the REIT, and the relationships among the Managing General
Partner, the Casden Partnerships, Casden and Casden's directors and officers,
the Managing General Partner has certain conflicts of interest in recommending
the Sale to the Limited Partners. Some important conflicts are:
1. The terms of the Sale were established by the REIT and the Managing
General Partner, which are related parties. Accordingly, the terms and
conditions of the proposed Sale were not determined through arm's-length
negotiations. There can be no assurance that arm's-length negotiations would not
have resulted in terms more favorable to the Limited Partners.
2. Although the Managing General Partner is accountable to the
Partnership and the Limited Partners as fiduciaries and is obligated to exercise
good faith and fair dealing toward other members of the Partnership, and
although Stanger provided an independent opinion with respect to the fairness of
the Aggregate Property Valuation utilized in connection with determining the
Purchase Price, no independent financial or legal advisors were engaged
727945.5
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<PAGE>
to determine the Purchase Price or to represent the interests of the Limited
Partners. There can be no assurance that the involvement of financial or legal
advisors, or other third parties, on behalf of the Limited Partners would not
have resulted in a higher Purchase Price or terms more favorable to the Limited
Partners.
3. If the REIT Transaction is consummated, affiliates of the Managing
General Partner will receive substantial interests in the REIT in exchange for
the contribution of real property assets and the property management operations
of Casden, including direct or indirect interests in the Managing General
Partner. The Managing General Partner anticipates that it will receive
significant economic benefits as a result of receiving interests in the REIT.
Such interests in the REIT are likely to enjoy greater liquidity than the
Managing General Partner's current interests in the Partnership if the REIT
successfully completes an initial public offering following its initial
formation as a private REIT. Unlike Casden and its affiliates, the Limited
Partners will not have the right to participate in the REIT. It is anticipated
that approximately 45% of the equity securities of the REIT will be held by
Casden and its affiliates following the Private Placement, based on the terms of
the Private Placement as currently contemplated.
4. It is anticipated that the return from the interests in the REIT to be
received by the Managing General Partner and its affiliates in connection with
the REIT Transaction will exceed the return such persons currently receive from
the real estate assets and business such persons will contribute or sell to the
REIT. The implied value of the REIT's securities (based on the pricing of the
REIT's securities in the Private Placement and in contemplated subsequent public
offerings, if consummated) that will be attributed to the other assets being
contributed to the REIT may exceed the Purchase Price paid by the REIT for such
interest in the Properties because of (i) the combination of real estate assets
and businesses and the resultant opportunities for enhanced access to equity
capital and financing alternatives that are likely to be available to the REIT;
(ii) the expected liquidity of the REIT's capital stock; (iii) the current
favorable public market valuation of real estate investment trusts; (iv) the
inclusion of certain real estate business and management companies owned by
affiliates of Casden in the REIT; and (v) the greater asset diversification of
the REIT, and other factors. Such realization of excess value is dependent on
economic, interest rate and real estate market trends, as well as market
conditions at the time of the formation of the REIT and the Private Placement
(and subsequent public offering) of its securities and, if realized, will likely
provide affiliates of the Managing General Partner with significant economic
benefits.
5. Substantially all of the officers and employees of Casden and its
affiliates will be employed as officers and employees of the REIT or its
subsidiaries. For their services as officers, directors or employees of the REIT
or its subsidiaries, such persons will be paid a salary and may be eligible to
participate in the REIT's bonus plan, option plan and other employee benefit
plans. In addition, through the REIT Transaction, the REIT will ensure
continuity of the business established by the Managing General Partner and its
affiliates. The Properties, if acquired by the REIT will continue to be managed
by the REIT's officers and employees for as long as the REIT continues to own
the Properties. In addition, unlike the Partnership, the REIT will have the
ability to reinvest proceeds from any future sale of the Properties. The REIT
will therefore afford ongoing employment opportunities for those persons
currently employed to assist with the administration and day-to-day operations
of the Properties and the REIT.
6. Affiliates of the Managing General Partner have entered into option
agreements with respect to the Local Partnerships held by the general partners
of the Local Partnerships. The value attributed to the management fees payable
to the general partners of the five Local Partnerships affiliated with the
Managing General Partner was deducted from the Aggregate Property Valuation when
determining the Purchase Price payable to the Limited Partners. The right to
receive such management fees will be transferred to the REIT in connection with
the Sale, and affiliates of the Managing General Partner will have a substantial
interest in the REIT.
Fiduciary Responsibility
The Managing General Partner is accountable to the Partnership and the
Limited Partners as a fiduciary and consequently is obligated to exercise good
faith and fair dealing toward other members of the Partnership. The Partnership
Agreement provides that the Managing General Partner and its officers,
directors, employees, agents, affiliates, subsidiaries and assigns are entitled
to be indemnified for any claim, loss, expense, liability, action or damage
resulting from any act or omission performed or omitted by it pursuant to the
Partnership Agreement, but the
727945.5
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<PAGE>
Managing General Partner is not entitled to be indemnified or held harmless for
any act or omission constituting fraud, negligence, breach of fiduciary duty or
willful misconduct. In addition, pursuant to the Partnership Agreement, the
Managing General Partner has no liability or obligation to the other partners or
the Partnership for any decision made or action taken in connection with the
discharge of its duties under the Partnership Agreement, if such decision or
action was made or taken in good faith.
If a claim is made against the Managing General Partner in connection
with its actions on behalf of the Partnership with respect to the Sale, the
Managing General Partner expects that it will seek to be indemnified by the
Partnership with respect to such claim. Any expenses (including legal fees)
incurred by the Managing General Partner in defending such claim shall be
advanced by the Partnership prior to the final disposition of such claim,
subject to the receipt by the Partnership of an undertaking by the Managing
General Partner to repay any amounts advanced if it is determined that the
Managing General Partner's actions constituted fraud, bad faith, gross
negligence, or failure to comply with any representation, condition or agreement
contained in the Partnership Agreement. As a result of these indemnification
rights, a Limited Partner's remedy with respect to claims against the Managing
General Partner relating to the Managing General Partner's involvement in the
sale of the Partnership's interest in the Properties to the REIT could be more
limited than the remedy which would have been available absent the existence of
these rights in the Partnership Agreement. A successful claim for
indemnification, including the expenses of defending a claim made, would reduce
the Partnership's assets by the amount paid.
727945.5
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<PAGE>
VI. SELECTED FINANCIAL INFORMATION
The following table sets forth selected historical financial and
operating data of the Partnership for the fiscal years ended December 31, 1997,
1996, 1995, 1994, 1993 and for the three months ended March 31, 1998 and 1997.
The following information should be read in conjunction with the Partnership's
Annual Report on Form 10-K and Quarterly Report on Form 10-Q, which are attached
hereto as Annexes B and C, respectively.
The selected historical financial and operating data of the Partnership
for the three-month period ended March 31, 1998 and March 31, 1997 are derived
from unaudited consolidated financial statements of the Partnership which, in
the opinion of the Managing General Partner, include all adjustments (consisting
only of normal recurring items unless otherwise disclosed) necessary for a fair
presentation of the Partnership's financial position and results of operations.
The results set forth for the three-month period ended March 31, 1998 and March
31, 1997 are not necessarily indicative of results to be expected for a full
year.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Months Ended
Year Ended December 31, March 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1998 1997
-----------------------------------------------------------------------------------
Interest Income................... 57,988 39,934 44,144 26,370 20,316 15,350 12,038
-----------------------------------------------------------------------------------
Operating Expenses............... 1,611,999 1,738,266 1,771,191 1,716,736 1,719,958 398,700 443,141
Loss From Operations............. (1,554,011) (1,698,332)(1,727,047) (1,690,366) (1,699,642) (383,350) (431,103)
Distributions From Limited
Partnerships Recognized as
Income........................... 468,618 387,721 307,474 520,001 473,210 117,568 133,856
Equity in Income of Limited
Partnerships and amortization
of acquisition costs 367,144 142,894 87,795 (210,249) 616,683 92,000 36,378
------------------------------------------------------------------------------------
Extraordinary Gain - Debt
Forgiveness 2,149,096 -- -- -- -- -- --
------------------------------------------------------------------------------------
Net Income (Loss) $ 1,430,847 $(1,167,717$(1,331,178)$(1,380,614) $(609,749) $(173,782) $(260,869)
===================================================================================
Net Income (Loss) allocated
to Limited Partners $ 1,416,539 $(1,156,040) $(1,318,460)$(1,366,808)$(603,652) $(172,044) $(258,260)
===================================================================================
Net Income (Loss) per Limited
Partnership Interest $ 116 $ (94) $ (108) $ (111) $ (49) $ (14) $ (21)
===================================================================================
Total assets $ 14,571,452 $15,312,532$15,191,113 $15,692,284 $15,858,598 $15,009,894 $15,381,619
===================================================================================
Investments in Limited
Partnerships $ 13,409,054 $14,364,056 $14,470,783 $14,533,940 $151,814,763 $13,501,054 $14,371,333
=====================================================================================
Partners' Deficit $(5,585,870) $(7,016,717 $(5,849,000) $(4,517,222) $(3,136,608) $(5,759,652) $(7,277,686)
=========================================================================================
Limited Partners' Deficit $(5,279,265) $(6,695,804) $(5,539,764) $(4,221,304) $(2,854,496) $(5,451,309) $(6,954,069)
=========================================================================================
Limited Partners' Deficit per
Limited Partnership Interest $ (427) $ (541) $ (447) $ (341) $ (231) $ (441) (562)
===========================================================================================
</TABLE>
727945.5
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<PAGE>
VII. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material tax consequences relating to
the proposed Sale and the distribution of approximately $112 per Unit. However,
each Limited Partner is urged to consult his, her or its own tax advisor for a
more detailed explanation of the specific tax consequences to such Limited
Partner from the Sale.
Upon consummation of the Sale, and subject to the passive activity rules
described below, each Limited Partner will recognize his, her or its share of
the taxable gain of the Partnership to the extent that the sum of (i) the cash,
plus (ii) the fair market value of any property received by the Partnership on
the Sale plus (iii) the outstanding principal amount of the Partnership's
nonrecourse indebtedness, exceeds the Partnership's adjusted basis for the
Properties. Gain realized by the Partnership on the Sale will generally be a
Section 1231 gain (i.e., long-term capital gain, except for the portion thereof
which is taxable as ordinary income due to depreciation recapture). A Partner's
share of gains and losses from Section 1231 transactions from all sources would
be netted and would be taxed as capital gains or constitute ordinary losses, as
the case may be. A net Section 1231 gain for a taxable year will be treated as
capital gain only to the extent such gain exceeds the net Section 1231 losses
for the five most recent prior taxable years not previously recaptured. Any gain
attributable to a Limited Partner's share of depreciation recapture will be
taxed at ordinary income rates.
The taxable income realized by each Limited Partner by reason of the Sale
should be characterized as income from a "passive activity" and may be offset by
a Limited Partner's available "passive activity losses" (including suspended
losses). Under the Tax Reform Act of 1986 (the "1986 Act") losses from passive
activities may only be offset against income from passive activities or may be
deducted in full when the taxpayer disposes of the passive activity from which
the loss arose. However, pursuant to a transitional rule contained in the 1986
Act, a certain percentage of losses from a passive activity which was held by
the taxpayer on the date of the enactment of the 1986 Act (i.e., October 22,
1986) and at all times thereafter was permitted to offset any type of income
during the years 1987 through 1990.
It is estimated that as a consequence of the Sale, each Limited Partner
will have taxable income equal to approximately $1,882 per Unit, $1,811 all of
which will constitute long-term capital gain and $71 will be ordinary income
related to accelerated depreciation recapture. The income tax consequences of
the Sale to any Limited Partner depends in large part upon the amount of losses
that were allocated to such Limited Partner by the Partnership and the amount of
such losses which were applied by such Limited Partner to offset his or her
taxable income. If a Limited Partner has not utilized any of the passive
activity losses allocated to such Limited Partner in excess of those amounts
permitted under the transitional rule relief described above, the Limited
Partner will have a net federal and state tax benefit of approximately $264 per
Unit. Because passive losses are only deductible against passive income after
1986 (subject to certain transitional rules), the Managing General Partner does
not have any basis for determining the amount of such passive losses which have
previously been utilized by Limited Partners. The anticipated cash distribution
of approximately $112 per Unit would be in addition to the federal and state tax
benefit arising from the Sale, assuming a federal capital gains rate of 25%, the
current capital gains rate for the portion of net Section 1231 gain attributable
to unrecaptured Section 1250 gain, and assuming an effective state tax rate of
5%,and that Limited Partners have suspended passive losses of at least $1,882
per Unit from the Partnership (the amount of passive losses that a Limited
Partner would be able to utilize under the Passive Loss Rules limited to the
amount of the gain recognized by such Limited Partner and would result in a net
benefit, after federal and state income taxes of $376. Limited Partners will
generally have suspended losses in excess of the amount of the gain on the Sale
which will be available to offset other passive activity income or future
passive gain or income from the Partnership. The remaining passive activity
losses will be available to offset other passive activity income or future
passive income from the Partnership. The net tax liability was calculated by
deducting from the tax payable on the gain from the sale (calculated at a
federal tax rate of 25% since all of the income is attributable to depreciation
not recaptured as ordinary income and taxed at capital gains rates) the tax
benefit resulting from the ability to deduct the suspended passive losses
against ordinary income (which is permitted following disposition of the passive
activity) assuming that the Limited Partner has sufficient ordinary income which
would otherwise have been taxed at the 39.6% marginal tax rate for federal
income tax purposes to fully utilize such losses at such rate, and assuming a
state income tax rate of 5%. In addition to assuming federal income tax rates,
the calculation of income tax liability of a Limited Partner assumes that
727945.5
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<PAGE>
such Limited Partner has no net Section 1231 losses for the five most recent
prior taxable years. If this latter assumption is not applicable to a Limited
Partner, the income tax liability of such Limited Partner could increase because
certain income would be taxed at ordinary, instead of capital gains tax rates.
Limited Partners are advised to consult with their own tax advisors for specific
application of the tax rules where the above-described assumption is not
applicable. The foregoing does not take into consideration the effect of any
local tax liabilities that may be applicable to the Sale.
The Managing General Partner believes that there were reasonable bases
for the foregoing assumptions. In light of the suitability standards that
Limited Partners met at the time of their original investment in the Partnership
and the types of investors who would have invested in an investment primarily
intended to provide tax benefits, the Managing General Partner assumed for
purposes of calculating the tax liabilities resulting from the proposed Sale
that each Limited Partner will have taxable income in excess of $155,950 (which
is the income level at which married taxpayers filing joint returns effectively
become subject to a 39.6% marginal rate) in 1998. While the financial
circumstances of the Limited Partners may vary considerably, the Managing
General Partner believes it is reasonable to assume that the majority of the
current Limited Partners will be in the highest federal tax bracket in 1998. The
Managing General Partner believes that while state tax rates vary from
state-to-state, the effective average state tax rate for individuals who itemize
deductions is approximately 5%. The Managing General Partner calculated the tax
benefit from the suspended passive losses at 44.6% (39.6% federal rate plus a 5%
effective state rate)
To the extent that a Limited Partner was able to utilize more passive
activity losses than were available under the transitional rules (e.g., because
such Limited Partner had passive income from other sources) to offset his, her
or its taxable income, the estimated federal income tax liability of such
Limited Partner would substantially increase. Thus, for example, if a Limited
Partner had no suspended passive activity losses to carry forward, it is
estimated that such Limited Partner would have a federal and state income tax
liability equal to approximately $575 per Unit, or $463 in excess of the
distribution of $112 per Unit. In addition, to the extent that a Limited Partner
does not have sufficient ordinary income taxed at a 39.6% marginal rate to fully
utilize the suspended passive losses against such income, the Limited Partner's
net tax benefits from the Sale would be reduced and the Limited Partner is
likely to be incur net tax costs in excess of the cash distributions which will
be received.
BECAUSE IT IS IMPOSSIBLE TO KNOW THE AMOUNT OF LOSSES ANY LIMITED PARTNER
HAS APPLIED TO OFFSET HIS, HER OR ITS TAXABLE INCOME FROM THE SALE , THE
MANAGING GENERAL PARTNER CANNOT ESTIMATE THE INCOME TAX LIABILITY OF EACH
LIMITED PARTNER ARISING FROM THE SALE, THEREFORE, EACH LIMITED PARTNER SHOULD
CONSULT HIS, HER OR ITS TAX ADVISOR CONCERNING THE INCOME TAX CONSEQUENCES OF
CONSENTING TO THE SALE WITH RESPECT TO SUCH LIMITED PARTNER'S OWN TAX SITUATION.
VIII. LEGAL PROCEEDINGS
On June 25, 1997, the Securities and Exchange Commission (the
"Commission") entered into a consent decree with NAPICO, three members of
NAPICO's senior management and three affiliated entities (collectively, the
"NAPICO Affiliates") in connection with their alleged roles in two separate
series of securities laws violations. In connection therewith, certain NAPICO
Affiliates agreed to cease and desist from committing or causing securities law
violations. In addition, National Partnership Equities, Inc. ("NPEI"), a
brokerage firm affiliated with NAPICO, agreed to undergo a review of certain of
its policies and procedures and pay a $100,000 penalty. The NAPICO Affiliates
consented to the above sanctions and relief without admitting or denying the
Commission's findings.
The two series of securities law violations relate to the NAPICO
Affiliates' (i) satisfying the minimum offering threshold of a "part or none"
private placement by utilizing a subscription from a non-bona fide investor and
failing to disclose such violation in subsequent offering materials for such
private placement and (ii) failing to disclose in the periodic reports for
another of its programs the fact that such program's cash was used to pay the
expenses of properties not owned by such program that were managed by an
affiliate and failing to maintain adequate internal controls to detect such
violations.
727945.5
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<PAGE>
IX. LIMITED PARTNERS CONSENT PROCEDURE
Distribution of Solicitation Materials
This Consent Solicitation Statement and the related Consent are first
being mailed to Limited Partners on or about ________ __, 1998. Only Limited
Partners of record on ___________, 1998 (the "Record Date") will be given notice
of, and allowed to give their consent regarding, the matters addressed in this
Consent Solicitation Statement.
This Consent Solicitation Statement, together with the Consent and the
letter from the Managing General Partner, constitute the Solicitation Materials
to be distributed to the Limited Partners to obtain their votes for or against
the Sale. The Solicitation Period is the time frame during which Limited
Partners may vote for or against the Sale. The Solicitation Period will commence
upon the date of delivery of this Consent Solicitation Statement and will
continue until the earlier of (i) _________, 1998 or such later date as may be
determined by the Managing General Partner and (ii) the date upon which the
Managing General Partner determines that a Majority Vote has been obtained. At
its discretion, the Managing General Partner may elect to extend the
Solicitation Period. Under no circumstances will the Solicitation Period be
extended beyond ______________, 1998. Any Consents delivered to the Partnership
prior to the termination of the Solicitation Period will be effective provided
that such Consents have been properly completed, signed and delivered.
As permitted by the Partnership Agreement, the Partnership has not
scheduled a special meeting of the Limited Partners to discuss the Solicitation
Materials or the terms of the Sale.
Voting Procedures and Consents
Limited Partners of record as of the Record Date will receive notice of,
and be entitled to vote, with respect to the Sale. Consent to the Sale will also
include consent to Amendments to the Partnership Agreement that (i) eliminate a
restriction against sales of Partnership assets to affiliates of the Managing
General Partner; (ii) eliminate the Termination Provision in connection with the
Sale and (iii) modify the Tax Requirement to allow the Partnership to assume,
for purposes of calculating taxes, that all of the passive losses from the
Partnership are available to Limited Partners.
The Consent included in the Solicitation Materials constitutes the ballot
to be used by Limited Partners in casting their votes for or against the Sale.
By marking this ballot, the Limited Partner may either vote "for," "against" or
"abstain" as to the Partnership's participation in the Sale. Once a Limited
Partner has voted, he may not revoke his vote unless he submits a second
Consent, properly signed and completed, together with a letter indicating that
this prior Consent has been revoked, and such second Consent is received by
Gemisys Corporation (the "Tabulator") prior to expiration of the Solicitation
Period. See "Withdrawal and Change of Election Rights" below
The Sale will not be completed unless it is approved by a Majority Vote.
See "THE SALE-- Conditions" for a discussion of the other conditions precedent
to the Sale. BECAUSE APPROVAL REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE
OUTSTANDING UNITS OF LIMITED PARTNERSHIP INTEREST, FAILURE TO VOTE WILL HAVE THE
SAME EFFECT AS A VOTE AGAINST THE SALE.
Any Limited Partner who returns his Consent signed but does not specify
"for," "against" or "abstain" will be deemed to have voted for the Sale.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the Consent will be determined by the
Tabulator, whose determination will be final and binding. The Tabulator reserves
the absolute right to reject any or all Consents that are not in proper form or
the acceptance of which, in the opinion of the Managing General Partner's
counsel, would be unlawful. The Tabulator also reserves the right to waive any
irregularities or conditions of the Consent as to particular Units. Unless
waived, any irregularities in connection with the Consents must be cured within
such time as the Tabulator shall determine. The Partnership, the Managing
General Partner and the Tabulator shall be under no duty to give notification of
defects in such Consents
727945.5
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<PAGE>
or shall incur liabilities for failure to give such notification. The delivery
of the Consents will not be deemed to have been made until such irregularities
have been cured or waived.
Completion Instructions
Each Limited Partner is requested to complete and execute the Consent in
accordance with the instructions contained therein. For his Consent to be
effective, each Limited Partner must deliver his Consent to the Tabulator at any
time prior to the termination of the Solicitation Period to the Partnership at
the following address:
Gemisys Corporation
7103 South Revere Parkway
Englewood, Colorado 80112
A pre-addressed stamped envelope for return of the Consent has been
included with the Solicitation Materials. Limited Partners may also telecopy an
executed copy of this Consent to the Tabulator at 303-705-6171. The Consents
will be effective only upon actual receipt by the Partnership. The method of
delivery of the Consent to the Partnership is at the election and risk of the
Limited Partner, but if such delivery is by mail it is suggested that the
mailing be made sufficiently in advance of _______ __, 1998 to permit delivery
to the Partnership on or before such date.
Withdrawal and Change of Election Rights
Consents may be withdrawn at any time prior to the expiration of the
Solicitation Period. In addition, subsequent to submission of his Consent but
prior to expiration of the Solicitation Period, a Limited Partner may change his
vote in favor of or against the Sale. For a withdrawal or change in vote to be
effective, a written or facsimile transmission notice of withdrawal or change in
vote must be timely received by the Tabulator at its address set forth under
"Completion Instructions" above and must specify the name of the person having
executed the Consent to be withdrawn or vote changed and the name of the
registered holder if different from that of the person who executed the Consent.
No Dissenters' Rights of Appraisal
Under the Partnership Agreement and California law, Limited Partners do
not have dissenters' rights of appraisal. If the Sale is approved by a Majority
Vote, and the other conditions to consummation of the Sale are satisfied, all
Limited Partners, both those voting in favor of the Sale and those not voting in
favor, will be entitled to receive the resulting cash distributions.
Solicitation of Consents
The Managing General Partner and its officers, directors and employees
may assist in the solicitation of consents and in providing information to
Limited Partners in connection with any questions they may have with respect to
this Consent Solicitation Statement and the voting procedures. Such persons and
entities will be reimbursed by the Partnership for out of pocket expenses in
connection with such services. The Partnership may also engage third parties to
assist with the solicitation of Consents and pay fees and reimburse the expenses
of such persons.
YOUR CONSENT IS IMPORTANT. PLEASE MARK, SIGN, AND DATE THE ENCLOSED
CONSENT AND RETURN IT IN THE ENCLOSED SELF-ADDRESSED, STAMPED ENVELOPE PROMPTLY.
If you have any questions about the consent procedure or require
assistance, please contact: MacKenzie Partners, the Partnership's consent
solicitation agent toll free at 800-322-2885 or collect, at 212-929-5500.
727945.5
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<PAGE>
X. IMPORTANT NOTE
It is important that Consents be returned promptly. Limited Partners are
urged to complete, sign and date the accompanying form of Consent and mail it in
the enclosed envelope, which requires no postage if mailed in the United States,
so that their vote may be recorded.
_________ ___, 1998
727945.5
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Housing Programs Limited
9090 Wilshire Boulevard
Beverly Hills, California 90211
THIS CONSENT IS SOLICITED BY THE MANAGING GENERAL
PARTNER OF HOUSING PROGRAMS LIMITED
CONSENT OF LIMITED PARTNER
The undersigned hereby gives written notice to Housing Programs Limited
(the "Partnership") that, with respect to the transaction by which the
Partnership proposes to sell certain of its real estate assets to a real estate
investment trust (the "REIT") sponsored by affiliates of certain general
partners of the Partnership or to a subsidiary partnership of the REIT, the
undersigned votes all of his, her or its units of limited partnership interest
as indicated below:
On the proposal to sell all of the interests of the Partnership in the
real estate assets of eight of the seventeen limited partnerships in which the
Partnership holds a limited partnership interest to the REIT and to authorize
the Managing General Partner to take any and all actions that may be required in
connection therewith, including the execution on behalf of the Partnership of
such amendments, instruments and documents as shall be necessary to reflect the
transfer of the general and limited partnership interests and to authorize the
Managing General Partner to sell any remaining real estate interests not
transferred to such real estate investment trust or its affiliates pursuant to
the proposal without further consent of the Limited Partners.
FOR AGAINST ABSTAIN
|_| |_| |_|
On the proposal to approve an amendment to the Partnership Agreement that
eliminates a provision prohibiting the Partnership from selling any Property to
a General Partner or its affiliate.
FOR AGAINST ABSTAIN
|_| |_| |_|
On the proposal to approve an amendment to the Partnership Agreement that
eliminates a provision allowing the Partnership to cancel, upon 60 days' prior
written notice, any agreement entered into between the Partnership and a General
Partner or an affiliate of a General Partner.
FOR AGAINST ABSTAIN
|_| |_| |_|
On the proposal to approve an amendment to the Partnership Agreement that
modifies certain tax provisions so as to allow the Partnership to calculate the
tax liability from a sale of a Property by subtracting from the tax payable on
the gain from such sale the tax benefit resulting from the ability to deduct a
Limited Partner's suspended passive losses against ordinary income, assuming
that the Limited Partner has sufficient ordinary income that would otherwise
have been taxed at the 39.6% marginal tax rate for federal income tax purposes
to fully utilize such losses at such rate, and assuming a state income tax rate
of 5%.
FOR AGAINST ABSTAIN
|_| |_| |_|
727945.5
<PAGE>
The undersigned acknowledges receipt from the Managing General Partner of the
Consent Solicitation Statement dated _________ __, 1998.
Dated: _____________, 199_ _______________________________
Signature
-------------------------------
Print Name
-------------------------------
Signature (if held jointly)
-------------------------------
Print Name
-------------------------------
Title
Please sign exactly as name appears hereon. When
units are held by joint tenants, both should sign.
When signing as an attorney, as executor,
administrator, trustee or guardian, please give full
title of such. If a corporation, please sign name by
President or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.
PLEASE RETURN THIS FORM BY 5:00 P.M. (NEW YORK CITY TIME) ON ________
[__], 1998.
PLEASE MARK, SIGN, DATE AND RETURN THIS CONSENT BY FACSIMILE TO
305-705-6171 OR BY USING THE ENCLOSED PREPAID ENVELOPE. IF YOU HAVE ANY
QUESTIONS, PLEASE CALL 800-322-2885.
A LIMITED PARTNER SUBMITTING A SIGNED BUT UNMARKED CONSENT WILL BE DEEMED
TO HAVE VOTED FOR EACH OF THE FOREGOING PROPOSALS.
727945.5
<PAGE>
Annex A
FORM OF OPINION
Housing Programs Limited
9090 Wilshire Boulevard
Beverly Hills, California 90211
Gentlemen:
You have advised us that Housing Programs Limited (the "Partnership"),
National Partnership Investments Corp., and National Partnership Investments
Associates, two of the general partners (the "General Partners") of the
Partnership, and Casden Properties and certain of its affiliates (the
"Company"), an affiliate of the General Partners, are contemplating a
transaction in which interests (the "Real Estate Interests") in certain real
estate assets listed in Exhibit 1 (the "Properties"), which are owned by the
Partnership through investments in certain local limited partnerships (the
"Local Partnerships"), will be sold to a newly formed real estate investment
trust or its designated affiliate to be organized by the Company (the "REIT"),
subject to, among other matters, the requisite approval of the limited partners
(the "Limited Partners") of the Partnership (the "Sale").
You have further advised us that in connection with the proposed Sale,
the value ascribed to the eight Properties to be sold (the "Aggregate Property
Valuation") will be $36,410,447. In addition, we have been advised that the
Aggregate Property Valuation will be utilized and adjusted by the General
Partners to reflect, among other things, various other assets and liabilities of
the Partnership and the Local Partnerships, the allocation of the Aggregate
Property Valuation among the Local Partnerships, amounts attributable to general
partner and management interests in the Local Partnerships or the General
Partners' estimate of the costs associated with the buyout thereof, and
transaction expenses to determine a net purchase price of the Real Estate
Interests to be acquired (the "Purchase Price").
In addition, you have advised us that certain of the Properties are
subject to restrictions on the amount of cash flow which can be distributed to
investors (the "Dividend Limitation") which limit annual dividend payments, and
that the Local Partnerships do not have any accrued but unpaid distribution
balances ("Accrued Distributions") or other contractual or regulatory provisions
which would allow the Local Partnerships, and therefore the Partnership, to make
distributions in excess of the Dividend Limitation in future years.
You have requested that Robert A. Stanger & Co., Inc. ("Stanger") provide
to the Partnership an opinion as to whether the Aggregate Property Valuation,
which is to be utilized in
741808.1
1
<PAGE>
connection with determining the Purchase Price to be paid for the Real Estate
Interests in the Sale, is fair to the Limited Partners from a financial point of
view.
In the course of our analysis for rendering this opinion, we have, among
other things:
o Reviewed a draft of the consent solicitation statement (the
"Consent") relating to the Sale in a form the Partnership's
management has represented to be substantially the same as
will be distributed to the Limited Partners;
o Reviewed the Partnership's annual reports on form 10-K filed
with the Securities and Exchange Commission for the years
ended December 31, 1995, 1996, and 1997, and quarterly reports
on form 10-Q for the period ending March 30, 1998, which the
Partnership's management has indicated to be the most current
financial statements;
o Reviewed descriptive information concerning the Properties,
including location, number of units and unit mix, age, and
amenities;
o Reviewed summary historical operating statements for the
Properties, as made available by the General Partners, for the
years ended December 31, 1995, 1996, and 1997;
o Reviewed 1998 operating budgets for the Properties prepared
by the Partnership's or the Local Partnerships' management;
o Discussed with management of the Partnership and the
Managing General Partner the market conditions for apartment
properties; conditions in the market for sales/acquisitions of
properties similar to those owned by the Local Partnerships;
historical, current and projected operations and performance
of the Properties; the physical condition of the Properties
including any deferred maintenance; and other factors
influencing the value of the Properties;
o Performed site visits of the Properties;
o Reviewed data concerning, and discussed with property
management personnel, local real estate rental market
conditions in the market of each Property, and reviewed
available information relating to acquisition criteria for
income-producing properties similar to the Properties;
o Reviewed information provided by management relating to debt
encumbering the Properties and Housing Assistance Program
contract provisions pertaining to the Properties;
741808.1
2
<PAGE>
o Conducted such other studies, analyses, inquiries and
investigations as we deemed appropriate.
In rendering this opinion, we have relied upon and assumed, without
independent verification, the accuracy and completeness of all financial
information, management reports and data, and all other reports and information
that were provided, made available or otherwise communicated to us by the
Partnership, the Company, the General Partners and their affiliates, the Local
Partnerships or management of the Properties. We have not performed an
independent appraisal, engineering study or environmental study of the assets
and liabilities of the Partnership. We have relied upon the representations of
the Partnership, the Company, the General Partners and their affiliates, the
Local Partnerships and management of the Properties concerning, among other
things, any environmental liabilities, deferred maintenance and estimated
capital expenditure and replacement reserve requirements, and the terms and
conditions of any debt or regulatory agreements encumbering the Properties. We
have also relied upon the assurance of the Partnership, the Company, and the
General Partners and their affiliates, and management of the Properties that any
financial statements, budgets, forecasts, capital expenditure and replacement
reserve estimates, debt and regulatory agreement summaries, value estimates and
other information contained in the Consent or otherwise provided or communicated
to us were reasonably prepared on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments; that no material changes have occurred in the value of the Properties
or other information reviewed between the date such information was provided and
date of this letter; that the Partnership, the Company, the General Partners and
their affiliates, the Local Partnerships and the management of the Properties
are not aware of any information or facts that would cause the information
supplied to us to be incomplete or misleading in any material respect; that the
highest and best use of each of the Properties is as improved; and that all
calculations and projections were made in accordance with the terms of the
Partnership and Local Partnerships Agreements and the existing and anticipated
regulatory agreements.
We have not been requested to, and therefore did not: (i) select the
method of determining the Aggregate Property Valuation or the Purchase Price to
be paid for the Real Estate Interests in the Sale; (ii) make any recommendation
to the Partnership or its partners with respect to whether to approve or reject
the proposed Sale; or (iii) express any opinion as to (a) the tax consequences
of the proposed Sale to the Limited Partners, (b) the terms of the Partnership
Agreement, the fairness of the proposed amendments to the Partnership Agreement,
or the terms of any agreements or contracts between the Partnership, the
Company, any affiliates of the General Partners, and the Local Partnerships, (c)
the General Partners' business decision to effect the proposed Sale, (d) any
adjustments made to the Aggregate Property Valuation to determine the Purchase
Price to be paid for the Real Estate Interests and the net amounts distributable
to the partners, including but not limited to, balance sheet adjustments to
reflect the General Partners' estimate of the value of current and projected net
working capital balances and cash and reserve accounts of the Partnership and
the Local Partnerships (including debt service and mortgage escrow amounts,
operating and replacement reserves, and surplus cash reserve amounts and
741808.1
3
<PAGE>
additions) and the income therefrom, the General Partners' determination that no
value should be ascribed to any reserves of the Local Partnerships or the cash
flow from the Properties in excess of certain limitations on dividends to the
Partnership, the General Partners' determination of the value of any notes due
to affiliates of the General Partners or management of the Local Partnerships,
the allocation of the Aggregate Property Valuation among the Local Partnerships,
the amount of Aggregate Property Valuation ascribed to certain general partner
and/or management interests in the Local Partnerships, and other expenses and
fees associated with the Sale, (e) the fairness of the buyout cost of certain
general partner and/or management interests in the Local Partnerships or the
allocation of such buyout costs among the Local Partnerships, or the amount of
any contingency reserves associated with such buyouts, (f) the General Partners'
decision to deduct the face value of certain notes payable to affiliates and/or
management of the Local Partnerships in determining the Purchase Price to be
paid for the Real Estate Interests where the actual cost of purchasing the notes
may be less than the face value of the notes, (g) the Purchase Price to be paid
for the Real Estate Interests, or (h) alternatives to the proposed Sale,
including but not limited to continuing to operate the Partnership as a going
concern. We are not expressing any opinion as to the fairness of any terms of
the proposed Sale other than the Aggregate Property Valuation utilized in
connection with determining the Purchase Price to be paid for the Real Estate
Interests.
Our opinion addresses only the aggregate value of the Properties and is
based on business, economic, real estate and capital market, and other
conditions as they existed and could be evaluated as of the date of our analysis
and addresses the proposed Sale in the context of information available as of
the date of our analysis. Events occurring after that date could affect the
Properties and the assumptions used in preparing the opinion.
Based upon and subject to the foregoing, it is our opinion that as of the
date of this letter the Aggregate Property Valuation utilized in connection with
determining the Purchase Price to be paid for the Real Estate Interests in the
Sale is fair to the Limited Partners from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Partnership and the General Partners that our entire analysis must
be considered as a whole and that selecting portions of our analysis and the
factors considered by us, without considering all analyses and facts, could
create an incomplete view of the evaluation process underlying this opinion.
Yours truly,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
_______________, 1998
741808.1
4
<PAGE>
EXHIBIT 1
HOUSING PROGRAMS LIMITED
LISTING OF PROPERTIES
Property Location
Bannock Arms Apartments Boise, ID
Berkeley Gardens Martinsburg, WV
Friendship Arms Hayattsville, MD
Jenny Lind Hall Springfield, MD
Locust House Westminister, MD
Oxford House Decatur, IL
Round Barn Manor Champaign, IL
Westwood Terrace Moline, IL
741808.1
5
<PAGE>
Annex D
PROPOSED AMENDMENTS
TO THE PARTNERSHIP AGREEMENT
Set forth below is the text of the proposed Amendments to the Partnership
Agreement for which the consent of the Limited Partners is being sought in
connection with the Sale.
Section 9.3(d) of the Partnership Agreement is amended to read as
follows: "(d) the Partnership will not sell any Project or
Project Interest, except pursuant to exempted sales to
qualified tenant groups, if the cash proceeds from the sale of
any Project or Project Interest, or any Projects or Project
Interests sold in a single transaction, would be less than the
Aggregate Net Tax Liability (as defined below), and upon any
sale or refinancing the Partnership shall not reinvest any
proceeds thereof prior to distributing to the Partners from
the proceeds sufficient cash to pay the Aggregate Net Tax
Liability, and in no event will the Partnership reinvest such
proceeds. For purposes hereof, the Aggregate Net Tax Liability
shall equal the aggregate state and federal taxes payable on
the sale of any Project or Projects or any Project Interest or
Project Interests (assuming the maximum federal income tax
rate then in effect and an effective state income tax rate of
5%) minus the aggregate tax benefit resulting from the ability
of the Limited Partners to deduct the suspended passive losses
that become
709282.3
<PAGE>
deductible as a result of such sale against ordinary income;
assuming that all such suspended passive losses in excess of
passive losses which could be deducted prior to 1987 and
during the period from 1987 to 1990 under certain transition
rules provided under the Tax Reform Act of 1986 remain
available and that the Limited Partner has sufficient ordinary
income that would otherwise have been taxed at the 39.6%
marginal tax rate for federal income tax purposes to fully
utilize such losses at such rate and assuming an effective
state income tax rate of 5%."
Section 9.3(k) of the Partnership Agreement is amended to read as
follows: "(k) the Partnership will not sell or lease any
Project or Project Interest to the General Partners or their
affiliates; provided that the foregoing shall not apply to any
sale of Project Interests made in connection with the proposed
Sale described in the Definitive Consent Solicitation
Statement of the Partnership dated May __, 1998."
Section 9.1(h) of the Partnership Agreement is amended to read as
follows: "(h) to enter into and carry out agreements of any
kind, provided that all contracts with the General Partners or
their affiliates must provide for termination by the
Partnership on 60 days written notice, without penalty, and to
do any and all other acts and things necessary, proper,
convenient, or advisable to effectuate and carry out the
purposes of the Partnership. The limitation
709282.3
<PAGE>
contained in the proviso in the preceding sentence shall not
apply to any agreement entered into in connection with the
proposed Sale."
709282.3
<PAGE>
Annex E
July __, 1998
Housing Programs Limited
9090 Wilshire Boulevard
Beverly Hills, CA 90211
Re: Amendments to the Agreement of Limited Partnership of
Housing Programs Limited
Dear Sir or Madam:
We have acted as counsel to Housing Programs Limited, a
California limited partnership (the "Partnership"), in connection with the
amendments to the Partnership's Restated Certificate and Agreement of Limited
Partnership (the "Partnership Agreement") of the Partnership, the form of which
is attached hereto as Exhibit
A (the "Amendments").
In rendering this opinion, we have examined originals or
copies of the following:
(i) The Partnership Agreement as certified by an
officer of National Partnership Investments
Corp. ("NAPICO"), the managing general partner
of the Partnership;
(ii) The Certificate of Limited Partnership of the
Partnership (the "Certificate of Limited
Partnership"), as certified by the Secretary of
State of the State of California and by an officer
of NAPICO;
(iii) An Agreement dated June 1, 1984 between NAPICO and
National Partnership Investments Associates (the
"General Partners' Agreement") as certified by an
officer of NAPICO;
741839.1
1
<PAGE>
(iv) The Definitive Consent Solicitation Statement of
the Partnership dated July __, 1998 ("Consent
Solicitation Statement"); and
(v) The Amendments.
The documents listed above are collectively referred to as the
"Documents".
In rendering this opinion we have made the following
assumptions, each as you have agreed, without any investigation or independent
verification: (i) the genuineness of all signatures of all persons executing any
or all of the Documents; (ii) the authenticity and completeness of all
documents, certificates and instruments submitted to us as originals; (iii) the
conformity with the originals of all documents, certificates and instruments
submitted to us as copies; (iv) the legal capacity to sign of all individuals
executing such documents, certificates and instruments; and (v) there are no
oral modifications or written agreements or understandings which limit, modify
or otherwise alter the terms, provisions, and conditions of, or relate to, the
transactions contemplated by the Documents.
As to matters of fact relevant to this opinion, as you have
agreed we have relied without independent investigation on, and assumed the
accuracy and completeness of, the certificate of an officer of NAPICO (referred
to herein as the "Officer's Certificate"). As you have agreed, we have not made
an investigation as to, and have not independently verified, the facts
underlying the matters covered by such Officer's Certificate.
We also have assumed, without any investigation or independent
verification, (a) the due authorization, execution, acknowledgment as indicated
thereon, and delivery of the Documents, and the validity and enforceability
thereof against all parties thereto, (b) that each party is validly existing,
has full power, authority and legal right to execute and deliver the Documents
to which it is a party and to carry out the transactions contemplated
thereunder, and that each is duly qualified and in good standing in each
jurisdiction where qualification is required, (c) that each party has complied
with any order, rule, and regulation or law which may be applicable to such
party with regard to any aspect of the transactions contemplated by the
Documents, (d) that in accordance with the Officer's Certificate, pursuant to
the General Partners Agreement, NAPICO has the power to make all decisions
pursuant to the Partnership Agreement to be made by the General Partners of the
Partnership and (e) that all actions taken by NAPICO in connection with the
Consent Solicitation Statement have been duly authorized by all necessary
corporate action on the part of NAPICO.
741839.1
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<PAGE>
Our opinions are limited to the California Uniform
Limited Partnership Act.
We express no opinion except as expressly set forth below and
no other opinions shall be implied. We express no opinion as to state and
federal laws, rules, regulations, principles and requirements (collectively
"laws") in the following areas: securities or "Blue Sky" laws, including without
limitation, any opinions with respect to the compliance of the Consent
Solicitation Statement with the securities laws, or laws of fiduciary duty. We
disclaim any obligation to update any of the opinions expressed herein for
events (including changes of law or fact) occurring after the date hereof.
We have not reviewed and our opinion does not extend to any
agreements, documents or instruments other than those which we have expressly
acknowledged herein examining.
Based upon and subject to the foregoing, we are of the opinion
that the Amendments, if duly approved by the limited partners of the Partnership
pursuant to the Consent Solicitation Statement, will not violate the Partnership
Agreement or the California Uniform Limited Partnership Act.
This opinion is solely for the benefit of the addressee in
connection with the transaction contemplated by the Consent Solicitation
Statement, and is not to be relied upon in any other context nor quoted in whole
or in part, nor otherwise referred to.
Sincerely,
741839.1
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