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 September 30, 2000
[ ] 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
(Exact name of small business issuer as specified in its charter)
Maryland 52-1365317
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, P.O. Box 1089
Greenville, South Carolina 29601
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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___
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
Statement of Financial Position
(Unaudited)
September 30, 2000
(in thousands)
ASSETS
Investments in and advances to Local Limited
Partnerships (Note 2) $ 2,204
LIABILITIES AND PARTNERS' DEFICIT
Liabilities
Accrued expenses $ 45
Administrative and reporting fees payable to General
Partner 1,271
Notes payable to General Partner 1,160
Accrued interest on notes payable to General Partner 1,777
4,253
Partners' deficit
General Partner -- The National Housing Partnership (NHP) (176)
Original Limited Partner -- 1133 Fifteenth Street Two
Associates (180)
Other Limited Partners -- 18,258 investment units (1,693)
(2,049)
$ 2,204
See Accompanying Notes to Financial Statements
<PAGE>
b)
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
Statements of Operations
(Unaudited)
(in thousands, except unit data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Revenues:
Share of profits from Local Limited
<S> <C> <C> <C> <C>
Partnership $ 4 $ 60 $ 34 $ 185
Distributions in excess of investment
in Local Limited Partnership 21 -- 55 --
Interest income from Local Limited
Partnership -- -- -- 124
25 60 89 309
Costs and Expenses:
Administrative and reporting fees to
General Partner 16 34 52 103
Interest on notes payable to General
Partner 39 61 157 182
Interest on partner loans -- -- -- 1
Other operating expenses 31 20 72 52
86 115 281 338
Loss before extraordinary gain (61) (55) (192) (29)
Extraordinary gain on loss of investment in
Local Limited Partnership 813 -- 813 --
Net income (loss) $ 752 $ (55) $ 621 $ (29)
Allocation of net income (loss):
General Partner - NHP $ 7 $ (1) $ 6 $ --
Original Limited Partner - 1133
Fifteenth Street Two Associates 8 (1) 6 --
Other limited partners' investment units 737 (53) 609 (29)
$ 752 $ (55) $ 621 $ (29)
Net income (loss) per limited partnership
interest $ 40.37 $ (2.90) $ 33.36 $ (1.58)
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
c)
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
Statement of Partners' Deficit
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
The National 1133
Housing Fifteenth Other
Partnership Street Two Limited
(NHP) Associates Partners Total
<S> <C> <C> <C> <C> <C> <C>
Deficit at December 31, 1999 $(182) $ (186) $(2,302) $(2,670)
Net income - nine months ended
September 30, 2000 6 6 609 621
Deficit at September 30, 2000 $(176) $ (180) $(1,693) $(2,049)
Percentage interest at
September 30, 2000 1% 1% 98% 100%
(A) (B) (C)
</TABLE>
(A) General Partner
(B) Original Limited Partner
(C) Consists of 18,258 investment units
See Accompanying Notes to Financial Statements
<PAGE>
d)
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A Maryland Limited Partnership)
Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Operating expenses paid $ (62) $ (75)
Interest income received from Local Limited
Partnership -- 124
Distributions received in excess of investment in
Local Limited Partnership 55 --
Payment of administrative reporting fees to General
Partner -- (97)
Payment of interest on partner loans -- (3)
Net cash used in operating activities (7) (51)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of advances from General Partner -- (34)
Cash flows from investing activities:
Distributions from Local Limited Partnership 5 62
NET DECREASE IN CASH AND CASH EQUIVALENTS (2) (23)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2 26
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 3
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH USED IN
OPERATING ACTIVITIES:
Net income (loss) $ 621 $ (29)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Share of profits from Local Limited Partnerships (34) (185)
Extraordinary gain on loss of investment in Local
Limited Partnership (813) --
Increase in accrued interest on deferred
acquisition notes 157 182
Decrease in accrued interest on Partner loans -- (2)
(Decrease) increase in administrative and
reporting fees payable 52 6
Increase (decrease) in other accrued expenses 10 (23)
Total adjustments (628) (22)
Net cash used in operating activities $ (7) $ (51)
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
e)
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 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 National Housing Partnership, a District of Columbia limited partnership
("NHP" or 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 unit. During 1985, the sale of
interests was closed after the sale of 18,300 interests to limited partners.
Apartment Investment and Management Company ("AIMCO") and its affiliates
ultimately control the General Partner. The original Limited Partner of the
Partnership is 1133 Fifteenth Street Two Associates, whose limited partners were
key employees of the general partner of NHP at the time the Partnership was
formed. NHP is the general partner of 1133 Fifteenth Street Two Associates.
Basis of Presentation
The accompanying unaudited interim financial statements reflect all adjustments
which are, in the opinion of management, necessary for 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 on Form 10-KSB for the year
ended December 31, 1999.
Certain reclassifications have been made to the 1999 information to conform with
the 2000 presentation.
(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 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. During 1999, the Partnership's
interest in Meadows East Apartments Limited Partnership and Meadows Apartments
Limited Partnership were foreclosed upon. During the first quarter of 2000, the
Partnership's interest in Esbro Limited Partnership, Mayfair Manor Limited
Partnership, Park Avenue West I Limited Partnership, Park Avenue West II Limited
Partnership, and Rodeo Drive Limited Partnership was foreclosed upon. During the
third quarter of 2000, the Partnership's interest in Kimberton Apartments
Limited Partnership and Hilltop Limited Partnership was foreclosed upon.
Meadows Apartments and Meadows East Apartments Limited Partnerships both had
notes payable which were due on December 12, 1997. The Local Limited
Partnerships did not have the resources to pay the amounts due. Effective August
5, 1999 and December 1, 1999, Meadows Apartments and Meadows East Apartments
Limited Partnership notes were foreclosed upon. Pursuant to the security
agreement of the note payable, the note holder was substituted as the 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 Meadows Apartments and Meadows
East Apartments to the note holders, the Partnership will not receive any future
benefits from these Local Limited Partnerships.
Esbro, Mayfair Manor, Park Avenue West I, Park Avenue West II and Rodeo Drive
Limited Partnership all had notes payable which were due October 15, 1997,
October 15, 1997, December 20, 1999, December 20, 1999 and December 6, 1997,
respectively. The Local Limited Partnerships did not have the resources to pay
the amounts due. During January 2000, the holders of the notes payable relating
to Esbro, Mayfair Manor, Park Avenue West I, Park Avenue West II and Rodeo Drive
Limited Partnership properties exercised their remedies under the security
agreement with respect to such notes payable, and were substituted as the sole
limited partner of the applicable Local Limited Partnership in place of the
Partnership and such 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 Esbro,
Mayfair Manor, Park Avenue West I, Park Avenue West II and Rodeo Drive to the
note holders, the Partnership will not receive any future benefits from these
Local Limited Partnerships and taxable income through the date of foreclosure
will be generated and allocated to the Partnership's investors without any
distributable cash. The specific impact of the tax consequence is dependent upon
each specific partner's individual tax situation.
Hilltop Limited Partnership had a note payable which was due on November 2,
1999. The Local Limited Partnership did not have the resources to pay the amount
due. Effective August 9, 2000, Hilltop Limited Partnership's note was foreclosed
upon. Pursuant to the security agreement of the note payable, the note holder
was substituted as the 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
Hilltop Limited Partnership to the note holder, the Partnership will not receive
any future benefits from this Local Limited Partnership. In addition Caroline
Arms, Harold House, Hurbell I, Hurbell II, Hurbell III, and San Juan Del Cantro
Limited Partnerships all have notes payable which are currently in default and
accordingly, the Local Limited Partnership interests are subject to potential
foreclosure. Continuation of the Local Limited Partnerships' operations in the
present form is dependent on its ability to extend the maturity date of the
respective notes, or to repay or refinance their note. The financial statements
do not include any adjustments which might result from the outcome of this
uncertainty.
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 approximately $298,000
and $517,000 of losses from nine and twelve Local Limited Partnerships during
the nine months ended September 30, 2000 and 1999, respectively. During the nine
months ended September 30, 2000, the Partnership's share of profits in two Local
Limited Partnerships in the amount of approximately $77,000 was offset against
prior years' losses not taken. As of September 30, 2000, the Partnership has not
recognized approximately $7,119,000 of its allocated cumulative share of losses
from seven Local Limited Partnerships in which its investment has been reduced
to zero. The Partnership's allocated cumulative share of losses in the five
Local Limited Partnerships, of which the investment account had been reduced to
zero, that were foreclosed on during the nine months ended September 30, 2000
was approximately $11,006,000.
No working capital advances or repayments were made between the Partnership and
the Local Limited Partnerships for the nine months ended September 30, 2000 and
1999. 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% (11.50% at September 30, 2000). 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 and nine
months ended September 30, 2000 and 1999, 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 managing agents of the projects,
and are unaudited.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Rental income $ 1,674 $ 2,812 $ 5,601 $ 8,714
Other income 57 143 212 368
Total income 1,731 2,955 5,813 9,082
Operating expenses 1,011 1,761 3,567 5,493
Interest, taxes, and insurance 242 769 1,293 2,435
Depreciation 346 422 1,137 1,382
Total expense 1,599 2,952 5,997 9,310
Net income (loss) $ 132 $ 3 $ (184) $ (228)
National Housing Partnership
Realty Fund Two share of income
(loss) $ 69 $ -- $ (186) $ (233)
</TABLE>
(3) TRANSACTIONS WITH THE GENERAL PARTNER
During the nine month periods ended September 30, 2000 and 1999, the Partnership
accrued administrative and reporting fees payable to the General Partner in the
amount of approximately $52,000 and $103,000, respectively, for services
provided to the Partnership. The Partnership paid $97,000 to the General Partner
for these fees during the nine months ended September 30, 1999. No payments have
been made during the nine months ended September 30, 2000. The amount of fees
due to the General Partner by the Partnership was approximately $1,271,000 at
September 30, 2000.
No working capital advances or repayments were made during the nine months ended
September 30, 2000. Subsequent to September 30, 2000, a working capital advance
of $25,000 was made by the General Partner to the Partnership to pay operating
expenses of the Partnership. During the nine months ended September 30, 1999,
the Partnership paid the General Partner approximately $34,000 and $3,000 for
repayment of a working capital advance and accrued interest on the advance,
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) NOTES PAYABLE
On July 24, 2000, the holder foreclosed on the note payable by the Partnership
which was collaterized by its interest in Kimberton Apartments Associates
Limited Partnership. The holder of the note was NHP, the general partner of the
Partnership and an affiliated party. As a result of this transaction, The
Partnership lost its interest in the Local Limited Partnership. The Partnership
recognized an extraordinary gain on the loss of its investment in this Local
Limited Partnership of approximately $813,000. The gain was comprised of the
write off of the note payable principal and accrued interest offset by the
Partnership's investment account balance in the Local Limited Partnership as of
the foreclosure date. With the loss of the Partnership's interest in Kimberton
Apartments Associates Limited Partnership to the note holder, the Partnership
will not receive any future benefits from the Local Limited Partnership.
The remaining note payable by the Partnership bears simple interest at a rate of
10% per annum. The note is payable to NHP in the same amount and same terms as
the note executed by NHP to the former project owner, is nonrecourse, and is
collaterized by the Partnership's interest in Windsor Apartments Associates
Limited Partnership. The note was due on October 24, 1999. The Partnership is
currently in default on this note and has received notification from the holder
of the note of their intent to initiate foreclosure proceedings.
(5) SEGMENT INFORMATION
The Partnership has only one reportable segment. Due to the very 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.
(6) LEGAL PROCEEDINGS
In 1997, NHP received subpoenas from the HUD Inspector General ("IG") requesting
documents relating to arrangements whereby NHP or any of its affiliates provided
compensation to owners of HUD-assisted or HUD-insured multi-family projects in
exchange for or in connection with property management of a HUD project. In July
1999, NHP received a grand jury subpoena requesting documents relating to the
same subject matter as the HUD IG subpoenas and NHP's operation of a group
purchasing program created by NHP, known as Buyers Access. To date, neither the
HUD IG nor the grand jury has initiated any action against NHP or Apartment
Investment and Management Company ("AIMCO"), the ultimate controlling entity of
NHP or, to NHP's or AIMCO's knowledge, any owner of a HUD property managed by
NHP. AIMCO believes that NHP's operations and programs are in compliance, in all
material respects, with all laws, rules and regulations relating to HUD-assisted
or HUD-insured properties. NHP and AIMCO are cooperating with the investigations
and do not believe that the investigations will result in a material adverse
impact on their operations. However, as with any similar investigation, there
can be no assurance that these will not result in material fines, penalties or
other costs.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
(7) GOING CONCERN
The Partnership's note payable and certain of the Local Partnership's notes
payable are past due (see Notes 2 and 4). Continuation of the Local
Partnerships' operations in the present form is dependent on its ability to
extend the maturity date of these notes, or to repay or to refinance the notes.
These conditions raise substantial doubt about their ability to continue as a
going concern. The financial statements do not include any adjustments which
might result from the outcome of this uncertainty.
<PAGE>
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
operations. 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.
This item should be read in conjunction with the financial statements and other
items contained elsewhere in this report.
Liquidity and Capital Resources
As of September 30, 2000, the Partnership retained an interest in eight of its
original twenty-one Local Limited Partnerships. 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.
No working capital advances or repayments were made between the Partnership and
the Local Limited Partnerships during the nine months ended September 30, 2000.
Subsequent to September 30, 2000, a working capital advance of $25,000 was made
by the General Partner to the Partnership to pay operating expenses of the
Partnership. During the nine months ended September 30, 1999, the Partnership
paid the General Partner approximately $34,000 and $3,000 for repayment of a
working capital advance and accrued interest on the advance, respectively.
Distributions received in excess of investment in 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, investments in
seven of the remaining nine Local Limited Partnerships had been reduced to zero
as of September 30, 2000. 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. Cash
distributions of approximately $5,000 and $62,000 from Local Limited Partnership
were received during the nine months ended September 30, 2000 and 1999,
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. One of these investments, Harold House Limited
Partnership, has a deferred acquisition note that is in default. If the holder
of the deferred acquisition note exercises its option of foreclosure (see
discussion below), this investment will be reduced to zero.
Net cash used in operations for the nine months ended September 30, 2000 and
1999 was approximately $7,000 and $51,000, respectively.
The Partnership has no cash and cash equivalents at September 30, 2000 as
compared to approximately $2,000 at December 31, 1999. The decrease in cash and
cash equivalents is due to cash used in operating activities which was partially
offset by distributions from Local Limited Partnership. The ability of the
Partnership to meet its on-going cash requirements at September 30, 2000 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
September 30, 2000 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 approximately $1,271,000 for
administrative and reporting services performed. The payment of the unpaid
administrative and reporting fees will most likely result, if at all, from the
sale or refinancing of the underlying properties of the Local Limited
Partnerships, rather than through recurring operations.
Each Local Limited Partnership, with the exception of Windsor Apartments
Associates 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 all past
due and are currently in default. West Oak Village Limited Partnership is
currently in default due to non-payment of required annual interest payments for
1999 (see below). The note related to Windsor Apartments Associates of
approximately $1,160,000 is collateralized by the Partnership's interest in this
Local Limited Partnership and was due on October 24, 1999. The Partnership is
currently in default on this note and has received notification from the holder
of the note of their intent to initiate foreclosure proceedings. On July 24,
2000, the holder of the note collaterized by the Partnership's interest in
Kimberton Apartments Associates Limited Partnership forclosed on the note (see
below). 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 bears interest at the rate of 9%
per annum. The note is nonrecourse and is secured by a security interest in the
Partnership's interest in the Local Limited Partnership. During 1997, the
noteholders entered into an agreement with the Partnership under which the
maturity date of the note was extended until November 2013, assuming annual
payments of interest are made to the noteholders. Under the terms of the
agreement, payments are to be made equal to the annual interest 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 Partnership has
the option to pay off the acquisition note at a discount equal to 70% of the
property's annual scheduled rent but not less than $700,000. The required annual
installment of interest for 1999, pursuant to the agreement with the
noteholders, was not made. Accordingly, the Local Limited Partnership is
currently in default on the required annual interest payments and the
Partnership interests are subject to potential foreclosure. The Local Limited
Partnership is actively attempting to sell its net assets.
Caroline Arms, Harold House, Hurbell I, Hurbell II, Hurbell III and San Juan Del
Centro Limited Partnerships all have notes which were executed by the respective
Local Limited Partnerships with the seller as part of the acquisition of the
property by the Local Limited Partnership. The notes were nonrecourse notes
secured by a security interest in all Partnership interests in the Local Limited
Partnership and are subordinated to the respective mortgage notes on each
property for as long as the mortgage notes are insured by HUD. Any payments due
from project income are payable from surplus cash, as defined by the HUD
Regulatory Agreement. Neither the Limited Partnership nor any partners thereof,
present or future assume any personal liability for the payment of the notes.
The notes were due November, 15, 1999, November 15, 1999, December 19, 1999,
November 2, 1999, December 19, 1999 and December 20, 1999, respectively. Each
note is in default and the Local Limited Partnership interests are subject to
potential foreclosure. Continuation of the Local Limited Partnerships'
operations in the present form is dependent on its ability to extend the
maturity date of their respective notes, or to repay or refinance their note.
Caroline Arms, Harold House, Hilltop and Hurbell I Local Limited Partnerships
are all actively attempting to sell their respective net assets.
Esbro, Mayfair Manor, Park Avenue West I, Park Avenue West II and Rodeo Drive
Limited Partnership all had notes payable which were due October 15, 1997,
October 15, 1997, December 20, 1999, December 20, 1999 and December 6, 1997,
respectively. The Local Limited Partnerships did not have the resources to pay
the amounts due. During January 2000, the holders of the notes payable relating
to Esbro, Mayfair Manor, Park Avenue West I, Park Avenue West II and Rodeo Drive
Limited Partnership properties exercised their remedies under the security
agreement with respect to such note payable, and were substituted as the sole
limited partner of the applicable Local Limited Partnership in place of the
Partnership and such 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 Esbro,
Mayfair Manor, Park Avenue West I, Park Avenue West II and Rodeo Drive to the
note holders, the Partnership will not receive any future benefits from these
Local Limited Partnerships and taxable income through the date of foreclosure
will be generated and allocated to the Partnership's investors without any
distributable cash. The specific impact of the tax consequence is dependent upon
each specific partner's individual tax situation.
On July 24, 2000, the holder foreclosed on the note payable by the Partnership
which was collaterized by its interest in Kimberton Apartments Associates
Limited Partnership. The holder of the note was NHP, the general partner of the
Partnership and an affiliated party. As a result of this transaction, The
Partnership lost its interest in the Local Limited Partnership. The Partnership
recognized an extraordinary gain on the loss of its investment in this Local
Limited Partnership of approximately $813,000. The gain was comprised of the
write off of the note payable principal and accrued interest offset by the
Partnership's investment account balance in the Local Limited Partnership as of
the foreclosure date. With the loss of the Partnership's interest in Kimberton
Apartments Associates Limited Partnership to the note holder, the Partnership
will not receive any future benefits from the Local Limited Partnership.
Hilltop Limited Partnership had a note payable which was due on November 2,
1999. The Local Limited Partnership did not have the resources to pay the amount
due. Effective August 9, 2000, Hilltop Limited Partnership's note was foreclosed
upon. Pursuant to the security agreement of the note payable, the note holder
was substituted as the 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
Hilltop Limited Partnership to the note holder, the Partnership will not receive
any future benefits from this Local Limited Partnership.
Meadows Apartments and Meadows East Apartments Limited Partnerships both had
notes payable which were due on December 12, 1997. The Local Limited
Partnerships did not have the resources to pay the amounts due. Effective August
5, 1999 and December 1, 1999, Meadows Apartments and Meadows East Apartments
Limited Partnership properties were foreclosed upon. Pursuant to the security
agreement of the note payable, the note holder was substituted as the 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 Meadows Apartments and Meadows
East Apartments to the note holders, the Partnership will not receive any future
benefits from these Local Limited Partnerships.
As a result of the above, there is substantial doubt about the Partnership's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible effects on the recoverability and
classification of assets or amounts and classifications of liabilities that may
result from these uncertainties.
Results of Operations
The Partnership invested as a limited partner in Local Limited Partnerships
which operated twenty-one rental housing properties. At September 30, 2000, the
Partnership continued to hold an interest in nine Local Limited Partnerships. 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 September 30, 2000, the Partnership
had no carrying basis in seven of the Local Limited Partnerships and therefore
reflected no results of operations for its share of losses for these Local
Limited Partnerships.
The Partnership had net income of approximately $621,000 for the nine months
ended September 30, 2000, compared to a net loss of approximately $29,000 for
the nine months ended September 30, 1999. The Partnership had net income of
approximately $752,000 for the three months ended September 30, 2000, compared
to a net loss of approximately $55,000 for the three months ended September 30,
1999. The net income per unit of limited partnership is $33.36 for the 18,285
units outstanding at September 30, 2000 compared to a net loss per unit of
limited partnership of $1.58 for the 18,300 units outstanding at September 30,
1999. The increase in net income was primarily attributable to an extraordinary
gain on the loss of an investment in a Local Limited Partnership (see discussion
above). The increase in loss before this extraordinary gain was primarily
attributable to decreases in the share of profits from Local Limited
Partnerships and interest income from Local Limited Partnerships partially
offset by an increase in distributions in excess of investment in Local Limited
Partnerships and decreases in costs and expenses. The Partnership did not
recognize approximately $298,000 of its allocated share of losses from nine
Local Limited Partnerships for the nine months ended September 30, 2000, as the
Partnership's net carrying basis in these Local Limited Partnerships had been
reduced to zero. In addition the Partnership did not recognize approximately
$77,000 of its allocated share of profits from two of the Local Limited
Partnerships for the nine months ended September 30, 2000 as the Partnership had
cumulative unrecognized losses with respect to that one Local Limited
Partnerships. The Partnership's share of losses from the Local Limited
Partnerships, if not limited to its investment account balance, would have
decreased approximately $219,000 between periods. The decrease is primarily the
result of the loss of the Partnership's interests in the Meadows Apartments and
Meadows East Apartments Limited Partnerships in 1999 and Esbro, Mayfair, Park
Avenue West I, Park Avenue West II, Rodeo Drive, Kimberton Apartments, and
Hilltop Limited Partnerships during the nine months ended September 30, 2000 due
to foreclosures.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1997, NHP received subpoenas from the HUD Inspector General ("IG") requesting
documents relating to arrangements whereby NHP or any of its affiliates provided
compensation to owners of HUD-assisted or HUD-insured multi-family projects in
exchange for or in connection with property management of a HUD project. In July
1999, NHP received a grand jury subpoena requesting documents relating to the
same subject matter as the HUD IG subpoenas and NHP's operation of a group
purchasing program created by NHP, known as Buyers Access. To date, neither the
HUD IG nor the grand jury has initiated any action against NHP or Apartment
Investment and Management Company ("AIMCO"), the ultimate controlling entity of
NHP or, to NHP's or AIMCO's knowledge, any owner of a HUD property managed by
NHP. AIMCO believes that NHP's operations and programs are in compliance, in all
material respects, with all laws, rules and regulations relating to HUD-assisted
or HUD-insured properties. NHP and AIMCO are cooperating with the investigations
and do not believe that the investigations will result in a material adverse
impact on their operations. However, as with any similar investigation, there
can be no assurance that these will not result in material fines, penalties or
other costs.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27, Financial Data Schedule
b) Reports on Form 8-K:
None filed during the quarter ended September 30, 2000.
<PAGE>
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 TWO
(Registrant)
By: The National Housing Partnership,
Its sole General Partner
By: National Corporation for Housing
Partnerships, its sole General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
President
By: /s/Martha L. Long
Martha L. Long
Senior Vice President and
Controller
Date:
