FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the transition period from to
Commission file number 0-14458
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
(Exact name of small business issuer as specified in its charter)
Maryland 52-1365317
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9200 Keystone Crossing, Suite 500
Indianapolis, Indiana 46240-7602
(Address of principal executive offices)
(317) 817-7500
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
MARCH 31, 1999
ASSETS
Cash and cash equivalents $ 25,344
Investments in and advances to Local Limited
Partnerships (Note 2) 4,380,054
$ 4,405,398
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities
Other accrued expenses $ 75,948
Administrative and reporting fee payable to
General Partner 1,246,391
Notes payable to General Partner 2,414,468
Accrued interest on notes payable
to General Partner 3,542,328
Due to the General Partner 33,650
Accrued interest on partner loans 2,501
7,315,286
Partners' deficit
General Partner-The National Housing
Partnership (NHP) (184,188)
Original Limited Partner-1133 Fifteenth
Street Two Associates (189,088)
Other Limited Partners-18,300 investment
units (2,536,612)
(2,909,888)
$ 4,405,398
See Accompanying Notes to Consolidated Financial Statements
b)
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
REVENUES:
Share of profits from Local Limited Partnership $ 57,777 $ 19,858
Interest income 155 138
57,932 19,996
COSTS AND EXPENSES:
Administrative and reporting fees to General
Partner 34,312 34,312
Interest on deferred acquisition notes
to General Partner 241,447 60,362
Interest on partner loans 800 --
Other operating expenses 18,516 14,226
295,075 108,900
NET LOSS $(237,143) $(88,904)
ALLOCATION OF NET LOSS:
General Partner - NHP $ (2,371) $ (889)
Original Limited Partner - 1133 Fifteenth Street
Two Associates (2,371) (889)
Other limited partners - 18,300 investment units (232,401) (87,126)
$(237,143) $(88,904)
NET LOSS PER LIMITED PARTNERSHIP INTEREST $ (13) $ (5)
See Accompanying Notes to Consolidated Financial Statements
c)
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENTS OF PARTNER'S DEFICIT
(UNAUDITED)
The National 1133
Housing Fifteenth Other
Partnership Street Limited
(NHP) Associates Partners Total
Deficit at December 31, 1998 $(181,817) $(186,717) $(2,304,211) $(2,672,745)
Net loss - three months ended
March 31, 1999 $ (2,371) $ (2,371) $ (232,401) $ (237,143)
Deficit at March 31, 1999 $ (184,188) $(189,088) $(2,536,612) $(2,909,888)
Percentage interest at
March 31, 1999 1% 1% 98% 100%
(A) (B) (C)
(A) General Partner
(B) Original Limited Partner
(C) Consists of 18,300 investment units
See Accompanying Notes to Consolidated Financial Statements
d)
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOW
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 155 $ 138
Operating expenses paid (400) (476)
Net cash used in operating activities (245) (338)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,589 23,409
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,344 $ 23,071
RECONCILIATION OF NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Net loss $(237,143) $(88,904)
Adjustments to reconcile net loss to net cash
used in operating activities:
Share of profits from Local Limited Partnerships (57,777) (19,858)
Increase in accrued interest on deferred
acquisition notes 241,447 60,362
Increase in accrued interest on Partner loans 800 --
Increase in administrative and reporting fees
payable 34,312 34,312
Increase in other accrued expenses 18,116 13,750
Total adjustments 236,898 88,566
Net cash used in operating activities $ (245) $ (338)
See Accompanying Notes to Consolidated Financial Statements
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) ACCOUNTING POLICIES
ORGANIZATION
National Housing Partnership Realty Fund Two (the "Partnership" or the
"Registrant") is a limited partnership organized under the laws of the State of
Maryland under the Maryland Revised Uniform Limited Partnership Act on January
22, 1985. The Partnership was formed for the purpose of raising capital by
offering and selling limited partnership interests and then investing in limited
partnerships (Local Limited Partnerships), each of which owns and operates an
existing rental housing project which is financed and/or operated with one or
more forms of rental assistance or financial assistance from the U.S. Department
of Housing and Urban Development (HUD). On April 30, 1985, the Partnership began
raising capital and acquiring interests in Local Limited Partnerships.
The General Partner was authorized to raise capital for the Partnership by
offering and selling to additional limited partners not more than 18,300
interests at a price of $1,000 per interest. During 1985, the sale of interests
was closed after the sale of 18,300 interests to limited partners.
On June 3, 1997, Apartment Investment and Management Company, a Maryland
corporation ("AIMCO" and, together with its subsidiaries and other controlled
entities, the ("AIMCO Group"), acquired all of the issued and outstanding
capital stock of NHP Partners, Inc., a Delaware corporation ("NHP Partners"),
and the AIMCO Group acquired all of the outstanding interests in NHP Partners
Two Limited Partnership, a Delaware limited partnership ("NHP Partners Two").
The acquisitions were made pursuant to a Real Estate Acquisition Agreement,
dated as of May 22, 1997 (the "Agreement"), by and among AIMCO, AIMCO
Properties, L.P., a Delaware limited partnership (the "Operating Partnership"),
Demeter Holdings Corporation, a Massachusetts corporation ("Demeter"), Phemus
Corporation, a Massachusetts corporation ("Phemus"), Capricorn Investors, L.P.,
a Delaware limited partnership ("Capricorn"), J. Roderick Heller, III and NHP
Partners Two LLC, a Delaware limited liability company ("NHP Partners Two LLC").
NHP Partners owns all of the outstanding capital stock of the National
Corporation for Housing Partnerships, a District of Columbia corporation
("NCHP"), which is the general partner of The National Housing Partnership, a
District of Columbia limited partnership ("NHP" or the "General Partner").
Together, NCHP and NHP Partners Two own all of the outstanding partnership
interests in NHP. NHP is the general partner of the Registrant. As a result of
these transactions, the AIMCO Group has acquired control of the general partner
of the Registrant and, therefore, may be deemed to have acquired control of the
Registrant.
The Original Limited Partner of the Partnership is 1133 Fifteenth Street Two
Associates, whose limited partners were key employees of an affiliate of the
Partnership at the time the Partnership was formed and whose general partner is
the sole shareholder of the Partnership's General Partner.
BASIS OF PRESENTATION
The accompanying unaudited interim financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of the
financial condition and results of operations for the interim periods presented.
All such adjustments are of a normal and recurring nature.
While the General Partner believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these financial
statements be read in conjunction with the financial statements and notes
included in the Partnership's Annual Report filed in Form 10-K for the year
ended December 31, 1998.
(2) INVESTMENTS IN AND ADVANCES TO LOCAL LIMITED PARTNERSHIPS
During 1985, the Partnership acquired a 94.5% limited partnership interest (98%
with respect to allocation of losses) in twenty-one Local Limited Partnerships:
Meadows Apartments Limited Partnership, Esbro Limited Partnership, Rodeo Drive
Limited Partnership, Menlo Limited Partnership, Mayfair Manor Limited
Partnership, Hurbell I Limited Partnership, Hurbell II Limited Partnership,
Hurbell III Limited Partnership, Tinker Creek Limited Partnership, Rockwell
Limited Partnership, Meadows East Apartments Limited Partnership, Kimberton
Apartments Associates Limited Partnership, San Juan del Centro Limited
Partnership, Gulfway Limited Partnership, Caroline Arms Limited Partnership,
Hilltop Limited Partnership, Harold House Limited Partnership, Park Avenue West
I Limited Partnership, West Oak Village Limited Partnership, Park Avenue West II
Limited Partnership, and Windsor Apartments Associates Limited Partnership.
During 1998, the Partnership's interest in Gulfway Limited Partnership, Menlo
Limited Partnership and Rockwell Limited Partnership were foreclosed upon and
Tinker Creek Limited Partnership sold its property.
The Menlo Limited Partnership had a note payable which was due on October 31,
1997. On November 10, 1997, the note holder notified Menlo Limited Partnership
that the note was in default and demanded immediate payment. The Local Limited
Partnership did not have the resources to pay amounts due on the note payable.
On January 5, 1998, pursuant to the security agreement of the note payable, the
note holder was substituted as sole limited partner of the Local Limited
Partnership in place of the Partnership and the note holder's assignee was
substituted as the general partner. No gain or loss has been recorded as a
result of the transfer of this partnership interest. With the loss of the
Partnership's interest in Menlo Limited Partnership to the note holder, the
Partnership will not receive any future benefits from this Local Limited
Partnership and taxable income will be generated and flow to the Partnership's
investors without any distributable cash. The specific impact of the tax
consequence is dependent upon each partner's individual tax situation.
Additionally, the Gulfway and Rockwell Limited Partnerships had notes payable
which were due on November 7, 1997. The Local Limited Partnerships did not have
the resources to pay amounts due on the notes payable. On June 29, 1998,
pursuant to the security agreements of the notes payable, the note holders were
substituted as sole limited partner of the Local Limited Partnerships in place
of NHP Realty Fund Two and the note holders' assignee was substituted as the
general partner. No gain or loss has been recorded as a result of the transfers
of the partnership interest. With the loss of the Partnership's interest in
Gulfway and Rockwell Limited Partnerships to the note holders, the Partnership
will not receive any future benefits from these Local Limited Partnerships and
taxable income will be generated and flow to the Partnership's investors without
any distributable cash. The specific impact of the tax consequence is dependent
upon each partner's individual tax situation.
Tinker Creek Limited Partnership had a note payable due on June 30, 1998. During
February 1998, Tinker Creek Limited Partnership entered into a sales agreement
with Artcraft Investment, L.L.C. for the sale of Tinker Creek Apartments. The
closing occurred on July 2, 1998, with a purchase price of $1,785,000. Net
proceeds of $750,081 were divided between the holders of the Tinker Creek note
payable and Tinker Creek Limited Partnership, with the note holders receiving
80% of the net proceeds in full satisfaction of amounts due on their notes. Any
unpaid balances were forgiven. Tinker Creek Limited Partnership received the
remaining 20% of the net proceeds. The Partnership's share of the gain from the
sale, in excess of cumulative losses not taken, in the amount of $33,818 was
recorded in the statements of operations for the year ended December 31, 1998,
as an extraordinary item - gain on extinguishment of debt. The sale may generate
taxable income to the Partnership's investors. The specific impact of the tax
consequences is dependent upon each specific partner's individual tax situation.
Since the Partnership, as a limited partner, does not exercise control over the
activities of the Local Limited Partnerships in accordance with the partnership
agreements, these investments are accounted for using the equity method. Thus,
the investments are carried at cost less the Partnership's share of the Local
Limited Partnerships' losses and distributions plus the Partnership's share of
Local Limited Partnerships' profits. However, since the Partnership is not
legally liable for the obligations of the Local Limited Partnerships, and is not
otherwise committed to provide additional support to them, it does not recognize
losses once its investment in each of the individual Local Limited Partnerships
reduced for its share of losses and cash distributions, reaches zero. Once an
investment account has been reduced to zero, profits reported by a Local Limited
Partnership are not recognized by the Partnership until such profits equal
losses not recognized plus distributions received and previously recognized as
revenue. As a result, the Partnership did not recognize $205,498 and $466,915 of
losses from seventeen and eighteen Local Limited Partnerships during the three
months ended March 31, 1999 and 1998, respectively. During the three months
ended March 31, 1999, the Partnership's share of profits in three Local Limited
Partnerships in the amount of $33,038 were offset against prior year losses not
taken. As of March 31, 1999, the Partnership has not recognized $21,983,534 of
its allocated cumulative share of losses from sixteen Local Limited Partnerships
in which its investment has been reduced to zero.
No working capital advances or repayments were made between the Partnership and
the Local Limited Partnerships. During 1993 the Partnership re-evaluated the
timing of the collectibility of the advances and determined, based on the Local
Limited Partnerships' operations, that such advances are not likely to be
collected. For accounting purposes, the Partnership treated the advance balance
as additional investments in the Local Limited Partnerships. The balance was
then reduced to zero, with a corresponding charge to operations to reflect a
portion of the previously unrecognized losses on investments.
Advances to the Local Limited Partnership remain due and payable to the
Partnership. Interest is calculated at the Chase Manhattan Bank prime rate plus
2% (9.75% at March 31, 1999). Payment of principal and interest is contingent
upon the Local Limited Partnerships having available surplus cash, as defined by
HUD regulations, from operations or from the sale or refinancing of the Local
Limited Partnership Properties. Any future repayment of advances or interest
will be reflected as Partnership income when received.
The following are combined statements of operations for the three months ended
March 31, 1999 and 1998, respectively, of the Local Limited Partnerships in
which the Partnership has invested. The statements are compiled from financial
statements of the Local Limited Partnerships, prepared on the accrual basis of
accounting, as supplied by the management agents of the projects, and are
unaudited.
COMBINED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
1999 1998
Rental income $2,937,684 $3,488,423
Other income 108,916 141,445
Total income 3,046,600 3,629,868
Operating expenses 1,900,959 2,461,452
Interest, taxes and insurance 853,218 1,064,340
Depreciation 472,752 558,294
Total expenses 3,226,929 4,084,086
Net loss $ (180,329) $ (454,218)
National Housing Partnership
Realty Fund Two share of losses $ (178,888) $ (447,057)
(3) TRANSACTIONS WITH THE GENERAL PARTNER
During the three month periods ended March 31, 1999 and 1998, the Partnership
accrued administrative and reporting fees payable to the General Partner in the
amount of $34,312 for services provided to the Partnership. The Partnership did
not make any payments to the General Partner for these fees during the three
months ended March 31, 1999 and 1998. The amount of fees due to the General
Partner by the Partnership was $1,246,391 at March 31, 1999.
During the three months ended March 31, 1999 and 1998, no working capital
advances or repayments were made between the General Partner and the
Partnership. The amount owed to the General Partner at March 31, 1999 was
$33,650. Interest is charged on borrowings at the Chase Manhattan Bank rate of
prime plus 2% (9.75% at March 31, 1999). Accrued interest on this loan amounted
to $2,501 and $1,701 at March 31, 1999 and December 31, 1998, respectively.
The accrued administrative and reporting fees payable to the General Partner
will be paid as cash flow permits or from the sale or refinancing of one or more
of the underlying properties of the Local Limited Partnerships.
(4) SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information", which is
effective for years beginning after December 15, 1997. SFAS 131 established
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. As defined in
SFAS No. 131, the Partnership has only one reportable segment. Moreover, due to
the nature of the Partnership's operations, the General Partner believes that
segment-based disclosures will not result in a more meaningful presentation than
the financial statements as currently presented.
(5) LEGAL PROCEEDINGS
The Partnership is unaware of any pending or outstanding litigation that is not
of a routine nature arising in the ordinary course of business.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-QSB and the other filings with the
Securities and Exchange Commission made by the Registrant from time to time.
The discussion of the Registrant's business and results of operations, including
forward-looking statements pertaining to such matters, does not take into
account the effects of any changes to the Registrant's business and results of
operation. Accordingly, actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those identified herein.
LIQUIDITY AND CAPITAL RESOURCES
The properties in which the Local Limited Partnerships have invested, receive
one or more forms of assistance from the Federal Government. As a result, the
Local Limited Partnerships' ability to transfer funds either to the Partnership
or among themselves in the form of cash distributions, loans or advances is
generally restricted by these government-assistance programs. These restrictions
could impact the Partnership's ability to meet its cash obligations given the
low level of reserves at the Partnership level.
For the past several years, various proposals have been advanced by the United
States Department of Housing and Urban Development ("HUD"), Congress and others
proposing the restructuring of HUD's rental assistance programs under Section 8
of the United States Housing Act of 1937 ("Section 8"), under which 1,739 units,
76 percent of the total units owned by the properties in which the Partnership
has invested, receive rental subsidies. On October 27, 1997, the President
signed into law the Multifamily Assisted Housing Reform and Affordability Act of
1997 (the "1997 Housing Act"). Under the 1997 Housing Act, certain properties
assisted under Section 8, with rents above market levels and financed with HUD-
insured mortgage loans, will be restructured by adjusting subsidized rents to
market levels, thereby potentially reducing rent subsidies, and lowering
required debt service costs as needed to ensure financial viability at the
reduced rents and rent subsidies. The 1997 Housing Act retains project-based
subsidies for most properties (properties in rental markets with limited supply,
properties serving the elderly, and certain other properties). The 1997 Housing
Act phases out project-based subsidies on selected properties servicing families
not located in rental markets with limited supply, converting such subsidies to
a tenant-based subsidy. Under a tenant-based system, rent vouchers would be
issued to qualified tenants who then could elect to reside at properties of
their choice, provided such tenants have the financial ability to pay the
difference between the selected properties' monthly rent and the value of the
vouchers, which would be established based on HUD's regulated fair market rent
for the relevant geographical areas. With respect to Housing Assistance Payments
Contracts ("HAP Contracts") expiring before October 1, 1998, Congress has
elected to renew them for one-year terms, generally at existing rents, so long
as the properties remain in compliance with the HAP Contracts. While the
Partnership does not expect the provisions of the 1997 Housing Act to result in
a significant number of tenants relocating from properties owned by the Local
Limited Partnerships, there can be no assurance that the provisions will not
significantly affect the operations of the properties of the Local Limited
Partnerships. Furthermore, there can be no assurance that other changes in
Federal housing subsidy policy will not occur. Any such changes could have an
adverse effect on the operation of the Partnership.
All of the units (1,739 in total) receiving rent subsidies from Section 8 have
their contracts expiring during the year ending December 31, 1999. HUD has
issued new regulations that govern the continuance of project-based subsidies.
Under the new regulations, owners with HAP contracts expiring after September
30, 1998 may elect to (1) renew the contract without restructuring for one year,
(2) opt out of the contract, or (3) enter into the Mark-to Market program, which
includes a potential restructuring of the mortgage and renewal of the contract.
At this time it is not possible to determine which option each of the Local
Limited Partnerships will elect, and accordingly, it is not possible to
determine the ultimate impact on the operations of the Local Limited
Partnerships and therefore the Partnership.
No working capital advances or repayments were made between the Partnership and
the Local Limited Partnerships during the three months ended March 31, 1999 and
1998. The combined amount carried as due to the Partnership by the Local
Limited Partnerships was $424,600, as of March 31, 1999.
Distributions received from Local Limited Partnerships represent the
Partnership's proportionate share of the excess cash available for distribution
from the Local Limited Partnerships. As a result of the use of the equity method
of accounting for the Partnership's investments, as of March 31, 1999,
investments in eighteen Local Limited Partnerships had been reduced to zero. For
these investments, cash distributions received are recorded in income as
distributions received in excess of investment in Local Limited Partnerships.
For those investments not reduced to zero, distributions received are recorded
as distributions from Local Limited Partnerships. There were no cash
distributions during the three months ended March 31, 1999 and 1998,
respectively. The receipt of distributions in future quarters and years is
dependent upon the operations of the underlying properties of the Local Limited
Partnerships to generate sufficient cash for distribution in accordance with
applicable HUD regulations.
Net cash used in operations for the three months ended March 31, 1999 was $245
as compared to net cash used in operations of $338 for the three months ended
March 31, 1998. The decrease in cash used in operations resulted from a
decrease in operating expenses paid partially offset by an increase in interest
income during the three months ended March 31, 1999, compared to the three
months ended March 31, 1998.
Cash and cash equivalents amounted to $25,344 at March 31, 1999 as compared to
$25,589 at December 31, 1998. The ability of the Partnership to meet its on-
going cash requirements, in excess of cash on hand at March 31, 1999, is
dependent upon the future receipt of distributions from the Local Limited
Partnerships or proceeds from sales or refinancing of one or more of the
underlying properties of the Local Limited Partnerships. Cash on hand at March
31, 1999, plus any distributions from the underlying operations of the combined
Local Limited Partnerships is expected to adequately fund the operations of the
Partnership in the current year. However, there can be no assurance that future
distributions will be adequate to fund the operations beyond the current year.
The Partnership currently owes the General Partner $1,246,391 for administrative
and reporting services performed. The payment of the unpaid administrative and
reporting fees will most likely result from the sale or refinancing of the
underlying properties of the Local Limited Partnerships, rather than through
recurring operations.
Each Local Limited Partnership in which the Partnership currently holds an
interest has a note payable due to the original owner of each Property. With the
exception of West Oak Village Limited Partnership, these notes are either
currently due or become due in 1999. These notes are secured by both the
Partnership's and NHP's interests in the applicable Local Limited Partnerships.
In the event of a default on the notes, the note holders would be able to assume
NHP's and the Partnership's interests in the Local Limited Partnerships.
The West Oak Village Limited Partnership note payable matured on November 30,
1996. During 1997, the note holders entered into an agreement with the West Oak
Village Limited Partnership under which the maturity date of the note was
extended until November 2013. Under the terms of the agreement, the Local
Limited Partnership must pay the note holders annual interest on or before each
December 31, during the term of the note at a variable rate based on the prior
year's interest rate payment multiplied by the most recent Consumer Price Index
rate, with any increase subject to a floor of 2% and a ceiling of 5%. At any
time prior to the note's maturity, the Local Limited Partnership has an option
to pay off the note payable at a discount equal to 70% of the property's annual
scheduled rent but no less than $700,000. At March 31, 1999, the outstanding
principal and related interest, respectively, were $2,046,695 and $2,482,331.
There can be no assurance that the Local Limited Partnership will have
sufficient cash or that the General Partner will loan additional cash to the
Local Limited Partnership, if necessary, to make the annual installment payments
required under the Agreement. The failure to make the required payments may
result in a loss of interest in this Local Limited Partnership, which may result
in the investors incurring adverse tax consequences.
The Menlo Limited Partnership had a note payable which was due on October 31,
1997. On November 10, 1997, the note holder notified Menlo Limited Partnership
that the note was in default and demanded immediate payment. The Local Limited
Partnership did not have the resources to pay amounts due on the note payable.
On January 5, 1998, pursuant to the security agreement of the note payable, the
note holder was substituted as sole limited partner of the Local Limited
Partnership in place of the Partnership and the note holder's assignee was
substituted as the general partner. With the loss of the Partnership's interest
in Menlo Limited Partnership to the note holder, the Partnership will not
receive any future benefits from this Local Limited Partnership and taxable
income will be generated and flow to the Partnership's investors without any
distributable cash. The specific impact of the tax consequence is dependent upon
each partner's individual tax situation.
Additionally, the Gulfway and Rockwell Limited Partnerships had notes payable
which were due on November 7, 1997. The Local Limited Partnerships did not have
the resources to pay amounts due on the notes payable. On June 29, 1998,
pursuant to the security agreements of the notes payable, the note holders were
substituted as sole limited partner of the Local Limited Partnerships in place
of NHP Realty Fund Two and the note holders' assignee was substituted as the
general partner. No gain or loss has been recorded as a result of the transfers
of the partnership interest. With the loss of the Partnership's interest in
Gulfway and Rockwell Limited Partnerships to the note holders, the Partnership
will not receive any future benefits from these Local Limited Partnerships and
taxable income will be generated and flow to the Partnership's investors without
any distributable cash. The specific impact of the tax consequence is dependent
upon each partner's individual tax situation.
Mayfair Manor and Esbro Limited Partnerships have notes payable which matured on
October 25, 1997. Effective February 16, 1998, both Mayfair Manor and Esbro
Limited Partnerships executed Amended and Restated Promissory Notes ("ARPN") for
each of their notes payable. The general terms of the ARPN's require payment of
the following upon the earlier of the sale, transfer or refinancing of the
underlying property, or October 25, 1999:
a) the original principal sum of the note payable, plus
b) interest which accrued on such principal at the rate of 9% per annum from
the original date to October 25, 1997, plus
c) interest on the foregoing sums of principal and interest from October 25,
1997 at the rate of 5.54% per annum, compounded annually.
The ARPN's are collateralized by a security interest in the general and limited
partnership interests of the Local Limited Partnerships. The note holders were
paid an extension fee of $90,000 and $70,000 for Mayfair Manor and Esbro,
respectively, which was paid from the proceeds of loans from the General
Partner.
Tinker Creek Limited Partnership had a note payable due on June 30, 1998. During
February 1998, Tinker Creek Limited Partnership entered into a sales agreement
with Artcraft Investment, L.L.C. for the sale of Tinker Creek Apartments. The
closing occurred on July 2, 1998, with a purchase price of $1,785,000. Net
proceeds of $750,081 were divided between the holders of the Tinker Creek note
payable and Tinker Creek Limited Partnership, with the note holders receiving
80% of the net proceeds in full satisfaction of amounts due on their notes. Any
unpaid balances were forgiven. Tinker Creek Limited Partnership received the
remaining 20% of the net proceeds. The sale may generate taxable income to the
Partnership's investors. The specific impact of the tax consequences is
dependent upon each specific partner's individual tax situation.
The note payable with respect to Rodeo Drive Limited Partnership matured on
December 6, 1997. The Local Limited Partnership does not have the resources to
pay amounts due on the note payable. The holders of the note commenced a civil
action seeking to gain control of the general and limited partnership interests
of the Rodeo Drive Limited Partnership. With the loss of the Partnership's
interest in Rodeo Drive Limited Partnership to the note holder, the Partnership
will not receive any future benefits from this Local Limited Partnership and
taxable income will be generated and flow to the Partnership's investors without
any distributable cash. The specific impact of the tax consequence is dependent
upon each partner's individual tax situation.
Additionally, both Meadows Apartments and Meadows East Apartments Local Limited
Partnerships had notes payable which were due on December 12, 1997. The Local
Limited Partnerships do not have the resources to pay the amounts due on their
respective notes payable and are currently in default on their respective notes.
The holders of the notes have started proceedings to take back the Partnership's
interest in each Local Limited Partnership. Should the Partnership lose its
interest in the Local Limited Partnerships, partners in the Partnership may
incur adverse tax consequences. The impact of the tax consequence is dependent
upon each partner's individual tax situation.
The notes related to the other eleven Local Limited Partnerships, in addition to
the extensions to the notes relating to Mayfair Manor and Esbro Local Limited
Partnerships discussed above, will reach final maturity during the fourth
quarter of 1999. As of March 31, 1999, the Local Limited Partnerships' have not
renegotiated the terms of the notes, including the extension of the due date.
Continuation of the Local Limited Partnerships' operations in the present form
is dependent on their ability to extend the maturity dates of these notes or to
repay or refinance the notes. These notes are secured by both the Partnership's
and the General Partner's interests in the Local Limited Partnerships. In the
event of a default on the notes, the note holders would be able to assume the
General Partner's and the Partnership's interests in the Local Limited
Partnerships. Should the Partnership lose its interest in a Local Limited
Partnership, partners in the Partnership may incur adverse tax consequences. The
impact of the tax consequence is dependent upon each partner's individual tax
situation. There can be no assurance that the General Partner will be successful
in extending or restructuring the notes payable as they mature.
During 1998, the General Partner advanced the Partnership $33,650 to pay legal
expenses of the Partnership. No repayments were made for the three months ended
March 31, 1999 or 1998. Interest is charged on borrowings at the Chase
Manhattan Bank prime interest rate plus 2% (9.75% at March 31, 1999). At March
31, 1999 the Partnership owed the General Partner $33,650 in advances and $2,501
in accrued interest.
RESULTS OF OPERATIONS
The Partnership has invested as a limited partner in Local Limited Partnerships
which operate twenty-one rental housing properties. At March 31, 1999, the
partnership continued to hold an interest in eighteen Local Limited
Partnerships, one of which sold its only property in 1998. To the extent the
Partnership still has a carrying basis in a respective Local Limited
Partnership, results of operations are significantly impacted by the
Partnership's share of the profits or losses in the Local Limited Partnership.
These profits or losses include depreciation and accrued note payable interest
expense which are noncash in nature. As of March 31, 1999, the Partnership had
no carrying basis in eighteen of the Local Limited Partnerships and therefore
reflected no results of operations, for its share of losses for these Local
Limited Partnerships.
The Partnership's net loss increased to $237,143 for the three months ended
March 31, 1999, compared to a net loss of $88,904 for the three months ended
March 31, 1998. Net loss per unit of limited partnership increased to $13 from
$5 for the 18,300 units outstanding at March 31, 1999 and 1998, respectively.
The increase in net loss was primarily attributable to an increase in interest
on deferred acquisition notes to the General Partner. This was partially offset
by an increase in share of profits from Local Limited Partnerships. The
Partnership did not recognize $236,665 of its allocated share of losses from
sixteen Local Limited Partnerships for the three months ended March 31, 1999, as
the Partnership's net carrying basis in these Local Limited Partnerships had
been reduced to zero. The Partnership's share of losses from the Local Limited
Partnerships, if not limited to its investment account balance, would have
decreased $332,374 between periods, primarily due to a decrease in rental income
offset partially by a decrease in operating expenses.
YEAR 2000 COMPLIANCE
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership
is dependent upon the General Partner and its affiliates for management and
administrative services ("Managing Agent"). Any of the computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Over the past two years, the Managing Agent has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Managing Agent presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
not completed in time, the Year 2000 issue could have a material impact on the
operations of the Partnership.
The Managing Agent's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Managing
Agent has fully completed its assessment of all the information systems that
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems. The status of each
is detailed below.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
Computer Hardware:
During 1997 and 1998, the Managing Agent identified all of the computer systems
at risk and formulated a plan to repair or replace each of the affected systems.
In August 1998, the mainframe system used by the Managing Agent became fully
functional. In addition to the mainframe, PC-based network servers, routers and
desktop PCs were analyzed for compliance. The Managing Agent has begun to
replace each of the non-compliant network connections and desktop PCs and, as of
March 31, 1999, had completed approximately 75% of this effort.
The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date. The remaining network connections and
desktop PCs are expected to be upgraded to Year 2000 compliant systems by July
31, 1999.
Computer Software:
The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
During 1998, the Managing Agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at all
properties, is $200,000, and the implementation and the testing process is
expected to be completed by July 31, 1999.
The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded 80% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
July 31, 1999.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally. The Managing Agent intends to have a third-party conduct an
audit of these systems and report their findings by July 31, 1999.
Any of the above operating equipment that has been found to be non-compliant to
date has been replaced or repaired. To date, these have consisted only of
security systems and phone systems. As of March 31, 1999 the Managing Agent has
evaluated approximately 86% of the operating equipment for the Year 2000
compliance.
The total cost incurred for all properties managed by the Managing Agent as of
March 31, 1999 to replace or repair the operating equipment was approximately
$400,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $325,000, which is expected to be
completed by August 30, 1999.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. The Managing
Agent has banking relationships with three major financial institutions, all of
which have indicated their compliance efforts will be complete before May 1999.
The Managing Agent has updated data transmission standards with two of the three
financial institutions. The Managing Agent's contingency plan in this regard is
to move accounts from any institution that cannot be certified Year 2000
compliant by June 1, 1999.
The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.8 million ($0.6 million expensed
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None filed during the quarter ended March 31, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
NATIONAL HOUSING PARTNERSHIP REALTY FUND I
(Registrant)
By: The National Housing Partnership,
its sole General Partner
By: National Corporation for Housing
Partnerships, its sole General Partner
By: /s/
Troy D. Butts
As Senior Vice President
and Chief Financial Officer
Date: May 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from National
Housing Partnership Realty Fund II 1999 First Quarter 10-QSB and is qualified in
its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000762859
<NAME> NATIONAL HOUSING PARTNERSHIP REALTY FUND II
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 25,344
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,405,398
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (2,909,888)
<TOTAL-LIABILITY-AND-EQUITY> 4,405,398
<SALES> 0
<TOTAL-REVENUES> 57,932
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 295,075
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 242,247
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (237,143)
<EPS-PRIMARY> (13.00)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
