SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the fiscal year ended December 31, 1999 .. Commission file number 0-14458
National Housing Partnership Realty Fund Two (A Maryland Limited Partnership)
(Exact name of registrant as specified in its charter)
Maryland 52-1365317
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
9200 Keystone Crossing, Suite 500 46240
Indianapolis, Indiana (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (317) 817-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: 18,258 Limited
Partnership Interests
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
[X]
State issuer's revenue for most recent fiscal year. $418,000
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within the past 60 days prior to the date of
filing. No market for the Registrant's limited partnership interests exists,
and, therefore, a market value for such interests cannot be determined.
Documents incorporated by reference. None
<PAGE>
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
1999 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Item 1. Business 2
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for the Registrant's Partnership
Interests and Related Partnership Matters 10
Item 6. Management's Discussion and Analysis or Plan
of Operations 10
Item 7. Financial Statements 14
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 38
PART III
Item 9. Directors and Executive Officers of the Registrant 39
Item 10. Executive Compensation 40
Item 11. Security Ownership of Certain Beneficial
Owners and Management 40
Item 12. Certain Relationships and Related Transactions 41
PART IV
Item 13. Exhibits and Reports on Form 8-K 42
<PAGE>
PART I
The matters discussed in this Form 10-KSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the disclosure
contained in this Form 10-KSB 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.
Item 1. Business
National Housing Partnership Realty Fund Two, a Maryland Limited
Partnership (the "Partnership" or the "Registrant"), was formed under the
Maryland Revised Uniform Limited Partnership Act as of January 22, 1985. On
March 15, 1985, the Partnership commenced offering 18,300 limited partnership
interests, at a price of $1,000 per interest, through a public offering
registered with the Securities and Exchange Commission (the "Offering"). The
Offering was managed by Dean Witter Reynolds, Inc. and was terminated on May 22,
1985, with subscriptions for all 18,300 limited partnership interests.
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 acquired control of the general partner of the Registrant and, therefore,
may be deemed to have acquired control of the Registrant.
Receipt of HUD Subpoena/Tolling Agreement
In October 1997, NHP received a subpoena from the Inspector General of the
United States Department of Housing and Urban Development ("HUD") requesting
documents relating to any agreement whereby NHP or any of its affiliates
provides or has provided compensation to owners (or their affiliates) of
HUD-assisted properties in connection with management of a HUD-assisted property
(the "Transactions"). Documents were produced which may have been responsive to
the HUD subpoena and submitted to the HUD Inspector General ("HUD 16) in 1998.
On or about February 26, 1998, Counsel for NHP and the U.S. government
entered into a Tolling Agreement with respect to any applicable statues of
limitations related to certain civil claims the government may have against NHP
in connection with the Transactions. The Tolling Agreement expired in August
1998.
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 investigations and do not believe that the investigations will
result in a material adverse impact on its operations. However, as with any
similar investigation, there can be no assurance that these will not result in
material fines, penalties or other costs.
NHP believes its operations are in compliance, in all material respects
with all laws, rules, and regulations related to HUD-assisted or HUD-insured
properties and has retained counsel in connection with NHP's response to the
subpoena. Although no action has been initiated against NHP or AIMCO or, to
AIMCO's knowledge, any owner of a HUD property managed by NHP or AIMCO, if any
such action is taken in the future, it could ultimately affect existing
arrangements with respect to HUD projects or otherwise have a material adverse
affect on the results of operations of AIMCO.
The Partnership's business is to hold limited partnership interests in
fifteen limited partnerships (Local Limited Partnerships), each of which owns
and operates a multi-family rental housing property (Properties) which receives
one or more forms of assistance from the Federal Government. In addition, the
Partnership held an interest in one additional limited partnership which sold
its property in 1998. The Partnership's ownership interest in three additional
limited partnerships was foreclosed upon in 1998. The Partnership's ownership
interest in two additional limited partnerships were foreclosed upon in 1999. In
each instance, NHP is the general partner of the Local Limited Partnership and
the Partnership is the principal limited partner. As a limited partner, the
Partnership's liability for obligations of the Local Limited Partnerships is
limited to its investment, and the Partnership does not exercise control over
the activities of the Local Limited Partnerships in accordance with the
partnership agreements. See "Item 6, Management's Discussion and Analysis or
Plan of Operations" for information relating to the Registrant's rights and
obligations to make additional contributions or loans to Local Limited
Partnerships.
The Partnership's investment objectives are to:
(1) preserve and protect Partnership capital;
(2) provide current tax benefits to Limited Partners to the extent
permitted by law, including, but not limited to, deductions that
Limited Partners may use to offset otherwise taxable income from
other sources;
(3) provide capital appreciation through increase in value of the
Partnership's investments, subject to considerations of capital
preservation and tax planning; and
(4) provide potential cash distributions from sales or refinancings of
the Partnership's investments and, on a limited basis, from
operations.
The Partnership does not have any employees. Services are performed for
the Partnership by the General Partner and agents retained by it.
The following is a schedule of the Properties owned by the Local Limited
Partnerships in which the Partnership is a limited partner:
<PAGE>
SCHEDULE OF PROPERTIES OWNED BY LOCAL LIMITED PARTNERSHIPS
IN WHICH NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO HAS AN INVESTMENT
<TABLE>
<CAPTION>
Occupancy
Units Authorized Percentage
Financed, Insured for Rental for the Year Ended
Property Name, Location Number of and Subsidized Assistance Under December 31,
and Partnership Name Units Under Section 8(D) 1999 1998
<S> <C> <C> <C> <C> <C>
Anderson Gardens 200 (A) 200 94% 92%
Anderson, South Carolina
(Hurbell II Limited
Partnership)
Caroline Arms 204 (A) 204 95% 97%
Jacksonville, Florida
(Caroline Arms Limited
Partnership)
Esbro (H) 100 (A) 99 97% 97%
Tuscon, Arizona
(Esbro Limited
Partnership)
Gulfway Manor (E) (E) (E) (E) (E)
Corpus Christie, Texas
(Gulfway Limited
Partnership)
Harold House 80 (A) 25 100% 100%
Jacksonville, Florida
(Harold House Limited
Partnership)
Hilltop 105 (A) 55 91% 91%
Hickory, North Carolina
(Hilltop Limited
Partnership)
Holly Oak 100 (A) 94 94% 93%
Shelby, North Carolina
(Hurbell I Limited
Partnership)
Kimberton 165 (A) 165 98% 95%
Newark, Delaware
(Kimberton Apartments
Associates Limited
Partnership)
Mayfair (H) 140 (A) 139 99% 98%
Tucson, Arizona
(Mayfair Manor Limited
Partnership)
Meadows (F) (F) (F) (F) 98%
Sparks, Nevada
(Meadows Apartments
Limited Partnership)
Meadows East (F) (F) (F) (F) 96%
Sparks, Nevada
(Meadows East Apartments
Limited Partnership)
Menlo Park (E) (E) (E) (E) (E)
Tucson, Arizona
(Menlo Limited
Partnership)
Park Avenue West I (G) 80 (B) -- 94% 92%
Mansfield, Ohio
(Park Avenue West I
Limited Partnership)
Park Avenue West II (G) 80 (A) 32 95% 98%
Mansfield, Ohio
(Park Avenue West II
Limited Partnership)
Rockwell Manor (E) (E) (E) (E) (E)
Brownsville, Texas
(Rockwell Limited
Partnership)
Rodeo Drive (G) 99 (A) 99 96% 98%
Victorville, California
(Rodeo Drive Limited
Partnership)
Royal Oak Gardens 100 (B) 100 96% 99%
Kannapolis, North Carolina
(Hurbell III Limited
Partnership)
San Juan del Centro 150 (A) 150 98% 99%
Boulder, Colorado
(San Juan del Centro
Limited Partnership)
Tinker Creek (D) (D) (D) (D) (D)
Roanoke, Virginia
(Tinker Creek Limited
Partnership)
West Oak Village 200 (A) 200 94% 94%
Tulsa, Oklahoma
(West Oak Village Limited
Partnership)
Windsor Apartments 169 (A) 169 96% 94%
Wilmington, Delaware
(Windsor Apartments
Associates Limited
Partnership)
</TABLE>
(A) The mortgage is insured by the Federal Housing Administration under the
provisions of Section 236 of the National Housing Act.
(B) The mortgage is insured by the Federal Housing Administration under the
provisions of Section 221(d)(3) of the National Housing Act.
(C) Section 8 of Title II of the Housing and Community Development Act of 1974.
(D) Property was sold during year ended December 31, 1998.
(E) Property was lost from foreclosure of partnership interests during year
ended December 31, 1998.
(F) Property was lost from foreclosure of Partnership interest during the year
ended December 31, 1999.
(G) Partnership's interest was transferred to the noteholder in January 2000.
(H) Noteholder has initiated foreclosure proceedings.
Although each Local Limited Partnership in which the Partnership has
invested owns an apartment complex which must compete with other apartment
complexes for tenants, government mortgage interest and rent subsidies make it
possible to rent units to eligible tenants at below market rates. In general,
this insulates the Properties from market competition.
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
1,731 units, 88 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 (1,731 in total) receiving rent subsidies from Section 8
have their contracts expiring during the year ending December 31, 2000. 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.
Regulation
General
Multifamily apartment properties are subject to various laws, ordinances
and regulations, including regulations relating to recreational facilities such
as swimming pools, activity centers and other common areas. Changes in laws
increasing the potential liability for environmental conditions existing on
properties or increasing the restrictions on discharges or other conditions, as
well as changes in laws effecting development, construction and safety
requirements, may result in significant unanticipated expenditures, which would
adversely affect the Partnership's cash flow from operating activities. In
addition, future enactment of rent control or rent stabilization laws or other
laws regulating multi-family housing may reduce rental revenue or increase
operating costs in particular markets.
HUD Approval and Enforcement
A significant number of properties owned by the Partnership are subject to
regulations by HUD. Under its regulations, HUD reserves the right to approve the
owner, and the manager of HUD-insured and HUD-assisted properties, as well as
their "principals" (e.g. general partners, stockholders with 10% or greater
interest, officers and directors) in connection with the acquisition of a
property, participation in HUD programs or the award of a management contract.
This approval process is commonly referred to as "2530 Clearance." HUD monitors
the performance of properties with HUD-insured mortgage loans. HUD also monitors
compliance with applicable regulations, and takes performance and compliance
into account in approving the acquisition of management of HUD-assisted
properties. In the event of instances of unsatisfactory performances or
regulatory violations, the HUD office with jurisdiction over the applicable
property has the authority to enter a "flag" into the computerized 2530
Clearance system. If one or more flags have been entered, a decision whether to
grant 2530 Clearance is then subject to review by HUD's Multifamily
Participation Review Committee in Washington, D.C., (the 2530 Committee). As a
result of certain mortgage defaults and unsatisfactory ratings received by NHP
Incorporated in years prior to its acquisition by AIMCO in December, 1997, HUD
believes that the 2530 Committee must review any application for 2530 Clearance
filed by AIMCO. On December 18, 1998, AIMCO received approval of approximately
fifty 2530 applications and had no unresolved flags in the 2530 system as of
December 31, 1998. As a result of HUD's review of 2530 applications during 1999,
two unresolved flags existed at December 31, 1999. Subsequent to December 31,
1999, one of these flags was resolved and the other is currently being
addressed.
Laws Benefiting Disabled Persons
Under the Americans with Disabilities Act of 1990, all places of public
accommodations are required to meet certain Federal requirements related to
access and use by disabled persons. These requirements became effective in 1992.
A number of additional Federal, state and local laws may also require
modifications to the Properties, or restrict certain further renovations of the
Properties, with respect to access thereto by disabled persons. For example, the
Fair Housing Amendments Act of 1988 requires apartment properties first occupied
after March 13, 1990 to be accessible to the handicapped. Noncompliance with
these laws could result in the imposition of fines or an award of damages to
private litigants and also could result in an order to correct any non-complying
feature, which could result in substantial capital expenditures. Although the
Partnership believes that its properties are substantially in compliance with
present requirements, it may incur unanticipated expenses to comply with these
laws.
Regulation of Affordable Housing
As of December 31, 1999, the Partnership held an equity interest in 15
properties that benefit from government programs intended to provide housing to
people of low or moderate incomes. These programs, which are usually
administered by the HUD or state housing finance agencies, typically provide
mortgage insurance, favorable financing terms or rental assistance payments to
the property owners. As a condition to the receipt of assistance under these
programs, the properties must comply with various requirements, which typically
limit rents to pre-approved amounts. If permitted rents on a property are
insufficient to cover costs, a sale of the property may become necessary, which
could result in a loss of the Partnership's interest in the property, as well as
any benefits flowing from the property. The Partnership must obtain the approval
of HUD in order to acquire a significant interest in a HUD-assisted or
HUD-insured property. The Partnership can make no assurance that it will always
receive such approval.
Environmental
Various Federal, state and local laws subject property owners or operators
to liability for the costs of removal or remediation of certain hazardous
substances present on a property. Such laws often impart liability without
regard to whether the owner or operator knew of, or was responsible for, the
release of the hazardous substances. The presence of, or failure to properly
remediate, hazardous substances may adversely affect occupancy at contaminated
apartment communities and the Partnership's ability to sell or borrow against
contaminated properties. In addition to the costs associated with investigation
and remediation actions brought by governmental agencies, the presence of
hazardous wastes on a property could result in personal injury or similar claims
by private plaintiffs. Various laws also impose liability for the cost of
removal or remediation of hazardous or toxic substances is potentially liable
under such laws. These laws often impose liability whether or not the person
arranging for the disposal ever owned or operated the disposal facility. In
connection with the ownership or operation of properties, the Partnership could
potentially be liable for environmental liabilities or costs associated with its
properties or properties it may acquire in the future.
Management believes that the Partnership's properties are covered by
adequate fire, flood and property insurance provided by reputable companies and
with commercially reasonable deductibles and limits.
Ownership Percentages
The following details the Partnership's ownership percentages of the Local
Limited Partnerships and the cost of acquisition of such ownership. All
interests are limited partner interests. Also included is the total mortgage
encumbrance and notes payable and accrued interest on each Property for each of
the Local Limited Partnerships as of December 31, 1999 (dollar amounts in
thousands):
NHP Realty Fund Cost of
Partnership Two Ownership Mortgage Notes payable and
Percentage Interest Notes Accrued
Ownership Interest (A)
Caroline Arms L.P. 94.5% $ 868 $1,808 $3,922
Esbro L.P. (D) 94.5% 569 871 2,893
Harold House L.P. 94.5% 364 711 1,506
Hilltop L.P. 94.5% 553 1,028 1,933
Hurbell I L.P. 94.5% 377 1,050 1,430
Hurbell II L.P. 94.5% 787 1,456 3,551
Hurbell III L.P. 94.5% 409 861 1,626
Kimberton Apts. 94.5% 2,078 1,733 (B)
Assoc. L.P.
Mayfair Manor L.P. (D) 94.5% 812 1,221 4,038
Park Avenue West I 94.5% 328 440 1,751
L.P. (C)
Park Avenue West II 94.5% 419 481 1,305
L.P. (C)
Rodeo Drive L.P. (C) 94.5% 600 1,025 2,470
San Juan del Centro 94.5% 799 1,507 3,430
L.P.
West Oak Village L.P. 94.5% 1,058 1,454 4,667
Windsor Apts. Assoc. 94.5% 2,117 2,219 (B)
L.P.
(A) See "Item 6. Management's Discussion and Analysis or Plan of Operations" for
further details.
(B) Notes payable on this property are held by the Partnership and not by the
Local Limited Partnership.
(C) Partnership's interest was transferred to the noteholder in January 2000.
(D) Noteholder has commenced foreclosure proceedings.
Item 2. Properties
See Item 1 for the real estate owned by the Partnership through the
ownership of limited partnership interests in Local Limited Partnerships.
Item 3. 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 investigations and does not believe that the investigations
will result in a material adverse impact on its 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted.
<PAGE>
PART II
Item 5. Market for the Registrant's Partnership Interests and Related
Partnership Matters
(a) Interests in the Partnership were sold through a public offering
managed by Dean Witter Reynolds, Inc. There is no established market
for resale of interests in the Partnership. Accordingly, an investor
may be unable to sell or otherwise dispose of his interest in the
Partnership.
(b) As of December 31, 1999, there were 1,156 registered holders of
18,258 limited partnership interests (in addition to 1133 Fifteenth
Street Two Associates - See "Item 7. Financial Statements - Note
1"). In 1999, the number of Limited Partnership Units decreased by
42 units due to limited partners abandoning their units. In
abandoning his or her Limited Partnership Unit(s), a Limited Partner
relinquishes all rights, title and interest in the Partnership as of
the date of abandonment.
(c) No cash dividends or distributions have been declared from the
inception of the Partnership through December 31, 1999.
Item 6. Management's Discussion and Analysis or Plan of Operations
The matters discussed in this Form 10-KSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the disclosure
contained in this Form 10-KSB 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.
This item should be read in conjunction with the financial statements and
other items contained elsewhere in this report.
Year 2000 Compliance
General Description
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 Managing
Agent's computer programs or hardware that had date-sensitive software or
embedded chips might have recognized a date using "00" as the year 1900 rather
than the year 2000. This could have resulted 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.
Computer Hardware, Software and Operating Equipment
In 1999, the Managing Agent completed all phases of its Year 2000 program
by completing the replacement and repair of any hardware or software system or
operating equipment that was not yet Year 2000 compliant. The Managing Agent's
hardware and software systems and its operating equipment are now Year 2000
compliant. No material failure or erroneous results have occurred in the
Managing Agent's computer applications related to the failure to reference the
Year 2000 to date.
Third Parties
To date, the Managing Agent is not aware of any significant supplier or
subcontractor (external agent) or financial institution of the Partnership that
has a Year 2000 issue that would have a material impact on the Partnership's
results of operations, liquidity or capital resources. However, the Managing
Agent has no means of ensuring or determining the Year 2000 compliance of
external agents. At this time, the Managing Agent does not believe that a Year
2000 issue of any non-compliant external agent will have a material impact on
the Partnership's financial position or results of operations.
Costs
The total cost of the Managing Agent's Year 2000 project was approximately
$3.2 million and was funded from operating cash flows.
Risks Associated with the Year 2000
The Managing Agent completed all necessary phases of its Year 2000 program
in 1999, and did not experience system or equipment malfunctions related to a
failure to reference the Year 2000. The Managing Agent or Partnership have not
been materially adversely effected by disruptions in the economy generally
resulting from the Year 2000 issue.
At this time, the Managing Agent does not believe that the Partnership's
businesses, results of operations or financial condition will be materially
adversely effected by the Year 2000 issue.
Contingency Plans Associated with the Year 2000
The Managing Agent has not had to implement contingency plans such as
manual workarounds or selecting new relationships for its banking or elevator
operation activities in order to avoid the Year 2000 issue.
Liquidity and Capital Resources
The Properties in which the Partnership has invested, through its
investments in the Local Limited Partnerships, 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.
As discussed in Note 6 to the Local Limited Partnerships' combined
financial statements attached hereto as an Exhibit, each Local Limited
Partnership with the exception of Kimberton Apartments Associates Limited
Partnership and 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 notes related to
Kimberton Apartments Associates and Windsor Apartments Associates of
approximately $1,254,000 and $1,160,000, respectively, are collateralized by the
Partnership's interest in these two Local Limited Partnerships and were due on
October 24, 1999. The Partnership is currently in default on these notes and has
received notification from the holders of the notes of their intent to initiate
foreclosure proceedings. 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, Hilltop, 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, November 2,
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. The financial statements do not include any adjustments which might
result from the outcome of this uncertainty. Caroline Arms, Harold House,
Hilltop and Hurbell I Local Limited Partnerships are all actively attempting to
sell their respective net assets.
Rodeo Drive Limited Partnership note was executed by the respective Local
Limited Partnership with the seller as part of the acquisition of the property
by the Local Limited Partnership. The note was a nonrecourse note secured by a
security interest in all Partnership interests in the Local Limited Partnership.
Neither the Limited Partnership nor any partners thereof, present or future
assume any personal liability for the payment of the notes. The note was due
December 6, 1997. The holder of the note demanded payment and an agreement was
reached on December 11, 1998 whereby the interest of the Partnership is to be
transferred to the note holder during January 2000. As a result of this
transaction, the Local Limited Partnership will not continue as a going concern.
The financial statements do not include any adjustments that might be necessary
as a result of this transaction.
Esbro and Mayfair Manor Limited Partnership notes were executed by the
respective Local Limited Partnership with the seller as part of the acquisition
of the property by the Local Limited Partnership. The notes are nonrecourse
notes secured by a security interest in all Partnership interests in the
respective Local Limited Partnership. The notes were initially due on October
15, 1997. Effective February 16, 1998, both Esbro and Mayfair Manor Limited
Partnerships executed Amended and Restated Promissory Notes for each of their
respective notes. The Amended Notes extended the maturity of the notes to
October 25, 1999. Neither the Limited Partnership nor any partners thereof,
present or future assume any personal liability for the payment of the notes.
Subsequent to December 31, 1999, both Local Limited Partnerships received notice
of demand for payment and the commencement of foreclosure proceedings. Such
foreclosure is subject to HUD approval, which is pending. Continuation of both
of the Local Limited Partnerships' operations in the present form is dependent
on the outcome of these proceedings. The financial statements do not include any
adjustments which might result from the outcome of this uncertainty. Esbro
Limited Partnership is actively attempting to sell its net assets.
Park Avenue West I and II Limited Partnerships both 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 both due December 20, 1999. The Local Limited Partnerships
were notified of the default and as a result of the default not being cured the
respective noteholders foreclosed on the Partnership's interests in full
satisfaction of the notes effective January 14, 2000. The financial statements
do not include any adjustments which might result from the outcome of these
transactions.
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 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 specific
partner's individual tax situation.
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.
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
approximately $1,785,000. Net proceeds of approximately $750,000 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 approximately $34,000 has been recorded in
the accompanying statements of operations for the year ended December 31, 1998,
as an extraordinary item - gain on extinguishment of debt.
During 1998, the General Partner advanced the Partnership approximately
$34,000 to pay legal expenses of the Partnership. No advances were made during
1999. During 1999, the Partnership repaid borrowings of approximately $34,000
and accrued interest of approximately $3,000 to the General Partner. Interest is
charged on borrowings at the Chase Manhattan Bank prime interest rate plus 2%.
Chase Manhattan Bank prime was 8.25% at December 31, 1999. At December 31, 1999
the Partnership had no unpaid borrowings or accrued interest due to the General
Partner.
During 1999 and 1998, the General Partner advanced approximately $1,000
and $214,000 to one and ten Local Limited Partnerships, respectively, for
insurance and entity expenses, including expenses incurred relating to potential
sales or refinancing under the LIHPRHA program. The Local Limited Partnerships
paid approximately $184,000 in loans during 1998 and approximately $123,000 in
interest on these loans during 1998. No payments were made on the loans or
interest during 1999. Interest is charged at a rate equal to the Chase Manhattan
Bank prime interest rate plus 2%. Chase Manhattan Bank prime was 8.25% at
December 31, 1999.
Net cash provided by operations for the year ended December 31, 1999 was
approximately $11,000 as compared to net cash used in operations of
approximately $33,000 for the year ended December 31, 1998. The decrease in cash
used in operations is primarily due to the increase in interest income received
from one of the Local Limited Partnerships partially offset by an increase in
payment of administrative reporting fees to the General Partner.
Distributions in excess of investment in Local Limited Partnerships and
distributions from Local Limited Partnerships typically 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 investment in Local Limited Partnerships,
certain investments' carrying values have been reduced to zero. For investments
in Local Limited Partnerships which have been reduced to zero, cash
distributions received are recorded in revenues as distributions in excess of
investment in Local Limited Partnerships. For investments in Local Limited
Partnerships which have not been reduced to zero, cash distributions received
are recorded as distributions from Local Limited Partnerships in the statements
of cash flows and reduce the Partnership's investment on the statement of
financial position. Cash distributions totaling approximately $77,000 and
$66,000 were received from one and three Local Limited Partnerships,
respectively, during the years ended December 31, 1999 and 1998, respectively.
The receipt of distributions in future years is dependent on the operations of
the underlying properties of the Local Limited Partnerships.
Cash and cash equivalents amounted to approximately $2,000 at December 31,
1999 as compared to approximately $25,000 at December .31, 1998. The decrease of
approximately $23,000 was due to approximately $34,000 of repayment of advances
from the General Partner which more than offset the approximately $11,000 of
cash provided by operating activities. The ability of the Partnership to meet
its on-going cash requirements in excess of cash on hand at December 31, 1999,
is dependent on distributions received from the Local Limited Partnerships and
proceeds from sales or refinancings of the underlying Properties. The
Partnership's only other form of liquidity is from General Partner loans. The
General Partner will evaluate lending the Partnership additional funds as such
funds are needed, but is in no way legally obligated to make such loans.
As of December 31, 1999, the Partnership owes the General Partner
approximately $1,219,000 for administrative and reporting services performed.
The payment of the unpaid administrative and reporting fees is predicated on the
operations and/or sale or refinancing of the underlying Properties of the Local
Limited Partnerships.
Results of Operations
The Partnership has invested as a limited partner in Local Limited
Partnerships which operated twenty-one rental housing properties. At December
31, 1999, the Partnership continued to hold an interest in fifteen 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 December 31,
1999 and 1998, the Partnership had no carrying basis in twelve and fourteen 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 a net profit of approximately $2,000 for the year
ended December 31, 1999, compared to a net loss of approximately $300,000 for
the year ended December 31, 1998. Net profit per unit of limited partnership
increased to $0 from $(16) for the 18,258 and 18,300 units outstanding at
December 31, 1999 and 1998, respectively. The increase in net profit was
primarily attributable to an increase in the Partnership's share of profits from
Local Limited Partnerships, an increase in interest income from a Local Limited
Partnership and a decrease in other operating expense. The Partnership did not
recognize approximately $1,572,000 of its allocated share of losses from eleven
Local Limited Partnerships for the year ended December 31, 1999, 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
$61,000 of its allocated share of profits from three of the Local Limited
Partnerships for the year ended December 31, 1999, as the Partnership had
cumulative unrecognized losses with respect to these three Local Limited
Partnerships. The Partnership's share of losses from the Local Limited
Partnerships, if not limited to its investment account balance, would have
increased approximately $332,000 between periods, primarily due to a decrease in
total revenue, which is offset partially by a decrease in total expenses. The
decrease in total expenses and rental income are primarily the result of the
loss of the Partnership's interests in the Menlo, Gulfway and Rockwell Limited
Partnerships in 1998 and Meadows Apartments and Meadows East Apartments Limited
Partnerships in 1999 due to foreclosures and the sale of the sole property in
Tinker Creek Limited Partnership in 1998.
Item 7. Financial Statements
The financial statements of the Partnership are included on pages 15
through 37 of this report.
Independent Auditors' Report
To The Partners of
National Housing Partnership Realty Fund Two
Indianapolis, Indiana
We have audited the accompanying statement of financial position of National
Housing Partnership Realty Fund Two (the Partnership) as of December 31, 1999,
and the related statements of operations, partners' deficit, and cash flows for
each of the two years in the period ended December 31, 1999. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Hurbell I Limited
Partnership, Rodeo Drive Limited Partnership, Kimberton Apartments Associates
Limited Partnership or Windsor Apartment Associates Limited Partnership
(investees of the Partnership) for the year ended December 31, 1999. We did not
audit the financial statements of Rodeo Drive Limited Partnership, Kimberton
Apartments Associates Limited Partnership, and Windsor Apartments Associates
Limited Partnership (investees of the Partnership) for the year ended December
31, 1998. The financial statements of these investees were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to amounts included for these investees, is based solely on the reports
of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of National Housing Partnership Realty Fund Two as of
December 31, 1999, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 9 to the financial statements, the due dates of certain of
the Local Partnership's notes payable have expired, and therefore, the notes are
in default. Subsequent to December 31, 1999, the noteholders for certain of the
Local Limited Partnerships foreclosed on the Partnership interests and the
noteholders for certain other Local Limited Partnerships began foreclosure
proceedings (Notes 2 and 4). These conditions raise substantial doubt about
their ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
Ernst & Young LLP
Indianapolis, Indiana
March 6, 2000
<PAGE>
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENTS OF FINANCIAL POSITION
December 31, 1999
(in thousands, except unit data)
ASSETS
Cash and cash equivalents $ 2
Investments in and advances to Local Limited
Partnerships (Note 2) 4,538
$ 4,540
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Accrued expenses $ 35
Administrative and reporting fees
payable to General Partner (Note 3) 1,219
Notes payable to General Partner (Note 4) 2,414
Accrued interest on notes payable
to General Partner (Note 4) 3,542
7,210
Partners' deficit:
General Partner - The National Housing
Partnership (NHP) (182)
Original Limited Partner - 1133 Fifteenth
Street Two Associates (186)
Other Limited Partners - 18,258 investment
units (2,302)
(2,670)
$ 4,540
See notes to financial statements.
<PAGE>
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(in thousands, except unit data)
Years Ended December 31,
1999 1998
REVENUE:
Share of profits from Local Limited
Partnerships(Note 3) $ 293 $ 146
Distribution in excess of investment
in Local Limited Partnership -- 17
Interest income 1 9
Interest income from Local Limited
Partnership 124 --
418 172
COSTS AND EXPENSES:
Administrative and reporting fees to
General Partner (Note 4) 114 137
Interest on notes payable to General
Partner (Note 5) 242 242
Interest on partner loans (Note 4) 1 2
Other operating expenses 59 125
416 506
PROFIT (LOSS) BEFORE EXTRAORDINARY ITEM 2 (334)
EXTRAORDINARY ITEM - SHARE OF GAIN ON
EXTINGUISHMENT OF DEBT (NOTE 3) -- 34
NET PROFIT (LOSS) $ 2 $ (300)
ALLOCATION OF NET PROFIT (LOSS):
General Partner - NHP $ -- $ (3)
Original Limited Partner - 1133
Fifteenth Street Two Associates -- (3)
Other Limited Partners 2 (294)
$ 2 $ (300)
NET PROFIT (LOSS) PER OTHER LIMITED
PARTNERSHIP INTEREST (NOTE 3)
Before extraordinary item $ -- $ (18)
Extraordinary item -- 2
Net profit (loss) $ -- $ (16)
See notes to financial statements
<PAGE>
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' DEFICIT
(in thousands, except unit data)
The National 1133
Housing Fifteenth Other
Partnership Street Two Limited
(NHP) Associates Partners Total
Deficit at January 1, 1998 $ (179) $ (183) $ (2,010) $ (2,372)
Net loss for the year ended
December 31, 1998 (3) (3) (294) (300)
Deficit at December 31, 1998 (182) (186) (2,304) (2,672)
Net profit for year ended
December 31, 1999 -- -- 2 2
Deficit at December 31, 1999 $ (182) $ (186) $ (2,302) $ (2,670)
Percentage interest at
December 31, 1998
and 1999 1% 1% 98%
(A) (B) (C)
(A) General Partner
(B) Original Limited Partner
(C) Consists of 18,258 and 18,300 investment units at December 31, 1999 and
1998, respectively. During 1999, 42 units were abandoned (Note 7).
See notes to financial statements
<PAGE>
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Distributions from Local Limited Partnerships $ 77 $ 50
Distributions received in excess of investment in
Local Limited Partnership -- 16
Interest received 1 9
Payment of administrative and reporting fees to
General Partner (107) --
Operating expenses paid (81) (108)
Interest income received from Local Limited
Partnership 124 --
Payment of interest on partner loans (3) --
Net cash provided by (used in) operating activities 11 (33)
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment of advances to Local Limited Partnerships -- 1
Net cash provided by investing activities -- 1
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from General Partner -- 34
Repayment of advances from General Partner (34) --
Net cash (used in) provided by financing activities (34) 34
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (23) 2
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25 23
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2 $ 25
See notes to financial statements
<PAGE>
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(in thousands)
(Continued)
Years Ended December 31,
1999 1998
RECONCILIATION OF NET PROFIT (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net profit (loss) $ 2 $ (300)
Adjustments to reconcile net profit (loss) to net cash
provided by (used in) operating activities:
Share of profits from Local Limited Partnerships (293) (146)
Share of gain on extinguishment of debt -- (34)
Repayment of advances to Local Limited Partnerships -- (1)
Distributions from Local Limited Partnerships 77 50
Change in operating assets and liabilities:
Administrative and reporting fees payable to
General Partner 7 137
Accrued interest on notes payable to General Partner 242 242
Accrued expenses (22) 17
Accrued interest on partner loans (2) 2
Total adjustments 9 267
Net cash provided by (used in) operating activities $ 11 $ (33)
<PAGE>
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF PARTNERSHIP ORGANIZATION AND SIGNIFICANT 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.
During 1985, the Partnership acquired limited partnership interests of
94.5% (98% with respect to allocation of losses) in twenty-one Local Limited
Partnerships, nineteen of which were organized in 1984 to acquire and operate
existing rental housing projects. The remaining two Local Limited Partnerships
were formed in 1972 and 1973 to construct and operate rental housing projects.
At December 31, 1999, the Partnership retained an ownership interest in fifteen
of the original Local Limited Partnerships.
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 NCHP at the time
the Partnership was formed and whose general partner is NHP.
Significant Accounting Policies
The financial statements of the Partnership are prepared on the accrual
basis of accounting. Direct costs of acquisition, including acquisition fees and
reimbursable acquisition expenses paid to the General Partner, have been
capitalized as investments in the Local Limited Partnerships. Other fees and
expenditures of the Partnership are recognized as expenses in the period the
related services are performed.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in Local Limited Partnerships are accounted for using the
equity method and thus are carried at cost less the Partnership's share of the
Local Limited Partnerships' losses and distributions plus the Partnership's
share of the Local Limited Partnerships' profits (see Note 2). An investment
account is maintained for each of the limited partnership investments and losses
are not taken once an investment account has decreased to zero. Cash
distributions are limited by the Regulatory Agreements between the Local Limited
Partnerships and HUD to the extent of surplus cash as defined by HUD.
Distributions received from Local Limited Partnerships in which the
Partnership's investment account has decreased to zero are recorded as revenue
in the year received. 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. Advances to Local Limited
Partnerships are included with Investments in Local Limited Partnerships to the
extent that the advances are not temporary advances of working capital.
For purposes of the Statement of Cash Flows, the Partnership considers all
highly liquid debt instruments purchased with original maturities of three
months or less to be cash equivalents.
Certain reclassifications of prior years' amounts have been made to
conform with the current year's presentation.
Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures About Fair Value of Financial
Instruments," requires disclosure of fair value information about significant
financial instruments, when it is practicable to estimate that value and
excessive costs would not be incurred. To estimate the fair value of the
balances due to the General Partner and accrued interest thereon, excessive
costs would be incurred and, therefore, no estimate has been made. The
Partnership believes that the carrying value of other assets and liabilities
reported on the statement of financial position that require such disclosure
approximates fair value.
Segment Reporting
Statement of Financial Accounting Standards No. 131, Disclosure about
Segments of an Enterprise and Related Information 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. The Partnership has only one reportable
segment.
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. During 1999, the
Partnership's interest in Meadows East Apartments Limited Partnership and
Meadows Apartments Limited Partnership were foreclosed upon.
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
$785,000. Net proceeds of approximately $750,000 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 approximately $34,000 has been recorded in the
accompanying 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.
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 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 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 approximately $1,572,000 and $1,240,000 of losses from eleven
Local Limited Partnerships during 1999 and 1998, respectively. During 1999 and
1998 the Partnership's share of profits in three Local Limited Partnerships in
the amount of approximately $61,000 and $49,000, respectively, were offset
against prior year losses not taken. The excess profit of approximately $19,000
during 1998 was offset against distributions taken into income. There were no
excess profits received during 1999. As a result of the sale and foreclosures
discussed above, during 1998 approximately $6,114,000 of profits resulting from
the Partnerships loss of interest in three Local Limited Partnerships and
extraordinary gain from the extinguishment of debt were offset against prior
years losses not taken. As of December 31, 1999 and 1998, the Partnership has
not recognized approximately $17,904,000 and $21,747,000, respectively, of its
allocated cumulative share of losses from twelve and fourteen Local Limited
Partnerships in which its investment has been reduced to zero.
The Partnership made no advances to the Local Limited Partnerships during
1999 and 1998. Accrued interest of approximately $1,000 and $9,000 was received
during 1999 and 1998, respectively. 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%. 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.
Summaries of the combined financial position of the aforementioned Local
Limited Partnerships as of December 31, 1999, and the combined results of
operations for the years ended December 31, 1999 and 1998, are as follows:
CONDENSED COMBINED FINANCIAL POSITION
OF THE LOCAL LIMITED PARTNERSHIPS
(in thousands)
December 31, 1999
Assets:
Land $ 3,901
Buildings and improvements, net of accumulated
depreciation of approximately $23,145
and impairment losses on rental property of
approximately $16,679 31,110
Other 6,208
$ 41,219
Liabilities and Partners' Deficit
Liabilities:
Mortgage notes payable $ 17,865
Notes payable 15,906
Accrued interest on notes payable 18,616
Other liabilities 3,837
56,224
Partners' Deficit:
National Housing Partnership Realty Fund Two (14,104)
Other partners (901)
(15,005)
$ 41,219
<PAGE>
CONDENSED COMBINED RESULTS OF OPERATIONS
OF THE LOCAL LIMITED PARTNERSHIPS
(in thousands)
Years Ended December 31,
1999 1998
Revenue $12,262 $13,344
Expenses:
Operating expenses 8,648 9,891
Financial expenses - primarily interest 327 272
Interest on notes payable 1,882 2,123
Depreciation and amortization 1,899 2,218
Impairment loss on rental property 736 347
13,492 14,851
Loss before extraordinary item (1,230) (1,507)
Gain on extinguishment of debt -- 1,618
Net (loss) profit $(1,230) $ 111
The combined financial statements of the Local Limited Partnerships are
prepared on the accrual basis of accounting. Thirteen Local Limited Partnerships
operate rental housing projects organized under Section 236 of the National
Housing Act. The remaining two Local Limited Partnerships operate projects
organized under Section 221(d)(3) of the National Housing Act. Each of the Local
Limited Partnerships receives some form of rental assistance from HUD. During
the year ended December 31, 1999 and 1998, the projects received a total of
approximately $6,616,000 and $7,265,000, respectively, of rental assistance from
HUD.
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
1,731 units, 88 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
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 (1,731 in total) receiving rent subsidies from Section 8
have their contracts expiring during the year ending December 31, 2000. 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.
Depreciation of the buildings and improvements for fifteen of the Local
Limited Partnerships is computed on a straight-line method assuming a 50-year
life from the date of initial occupancy at the time of construction or after
substantial rehabilitation, whereas the depreciation of the buildings and
improvements for one Local Limited Partnership is computed using the
straight-line method assuming a 30-year life and a 30% salvage value.
Depreciation for one Local Limited Partnership is computed using the
straight-line method, assuming a 40-year life. Depreciation of equipment is
calculated using accelerated methods over estimated useful lives of five to 27
years.
The mortgage notes payable are insured by the Federal Housing
Administration (FHA) and collateralized by first deeds of trust on the rental
properties. The notes bear interest at rates ranging from 3% to 8.5% per annum.
For the remaining thirteen rental housing projects insured under Section 236,
FHA makes subsidy payments directly to the mortgage lender reducing the monthly
principal and interest payments of the project owner to an effective interest
rate of 1% over the forty-year term of the notes. The liability of the Local
Limited Partnerships under the mortgage notes is limited to the underlying value
of the real estate collateral plus other amounts deposited with lenders.
Notes payable were executed by the Local Limited Partnerships with the
former owners as part of the acquisition of the properties by the Local Limited
Partnerships. These notes bear simple interest at rates of 9% or 10% per annum.
The notes are nonrecourse notes secured by a security interest in all
partnership interests in the respective Local Limited Partnership and are
subordinated to the respective mortgage note for as long as the mortgage note is
insured by HUD. Any payments due from project income are payable from the
respective Local Limited Partnership's surplus cash, as defined by the
respective HUD Regulatory Agreement. The notes may be prepaid in whole or in
part at any time without penalty. Neither the respective Local Limited
Partnership nor any partner thereof, present or future, assumes any personal
liability for the payment of these notes.
<PAGE>
These notes mature as follows:
Local Partnership Due Date Note Amount Accrued Interest
(in thousands)
Rodeo Drive Limited
Partnership December 6, 1997* $2,470 $ --
Esbro Limited
Partnership October 25, 1999* 1,204 1,689
Mayfair Manor Limited
Partnership October 25, 1999* 1,654 2,384
Hurbell II Limited
Partnership November 2, 1999* 1,502 2,049
Hilltop Limited
Partnership November 2, 1999* 817 1,116
Caroline Arms Limited
Partnership November 15, 1999* 1,561 2,361
Harold House Limited
Partnership November 15, 1999* 599 907
Hurbell I Limited
Partnership December 19, 1999* 608 822
Hurbell III Limited
Partnership December 19, 1999* 688 938
Park Avenue West I
Limited Partnership December 20, 1999* 744 1,007
Park Avenue West II
Limited Partnership December 20, 1999* 554 751
San Juan Del Centro
Limited Partnership December 20, 1999* 1,458 1,972
Total Delinquent 13,859 15,996
West Oak Limited
Partnership November 30, 2013* 2,047 2,620
Total Due $15,906 $18,616
* Notes are in default.
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, Hilltop, 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, November 2,
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. The financial statements do not include any adjustments which might
result from the outcome of this uncertainty. Caroline Arms, Harold House,
Hilltop and Hurbell I Local Limited Partnerships are all actively attempting to
sell their respective net assets.
Rodeo Drive Limited Partnership note was executed by the respective Local
Limited Partnership with the seller as part of the acquisition of the property
by the Local Limited Partnership. The note was a nonrecourse note secured by a
security interest in all Partnership interests in the Local Limited Partnership.
Neither the Limited Partnership nor any partners thereof, present or future
assume any personal liability for the payment of the notes. The note was due
December 6, 1997. The holder of the note demanded payment and an agreement was
reached on December 11, 1998 whereby the interest of the Partnership is to be
transferred to the note holder during January 2000. As a result of this
transaction, the Local Limited Partnership will not continue as a going concern.
The financial statements do not include any adjustments that might be necessary
as a result of this transaction.
Esbro and Mayfair Manor Limited Partnership notes were executed by the
respective Local Limited Partnership with the seller as part of the acquisition
of the property by the Local Limited Partnership. The notes are nonrecourse
notes secured by a security interest in all Partnership interests in the
respective Local Limited Partnership. The notes were initially due on October
15, 1997. Effective February 16, 1998, both Esbro and Mayfair Manor Limited
Partnerships executed Amended and Restated Promissory Notes for each of their
respective notes. The Amended Notes extended the maturity of the notes to
October 25, 1999. Neither the Limited Partnership nor any partners thereof,
present or future assume any personal liability for the payment of the notes.
Subsequent to December 31, 1999, both Local Limited Partnerships received notice
of demand for payment and the commencement of foreclosure proceedings. Such
foreclosure is subject to HUD approval, which is pending. Continuation of both
of the Local Limited Partnerships' operations in the present form is dependent
on the outcome of these proceedings. The financial statements do not include any
adjustments which might result from the outcome of this uncertainty. Esbro
Limited Partnership is actively attempting to sell its net assets.
Park Avenue West I and II Limited Partnerships both 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 both due December 20, 1999. The Local Limited Partnerships
were notified of the default and as a result of the default not being cured the
respective noteholders foreclosed on the Partnership's interests in full
satisfaction of the notes effective January 14, 2000. The financial statements
do not include any adjustments which might result from the outcome of these
transactions.
The Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (the "Statement") requires an impairment
loss to be recognized if the sum of estimated future cash flows (undiscounted
and without interest charges) is less than the carrying amount of rental
property. The impairment loss would be the amount by which the carrying value
exceeds the fair value of the rental property. If the rental property is to be
disposed of, fair value is calculated net of costs to sell.
During 1999, Hurbell I Limited Partnership recognized an impairment loss
on its rental property in the amount of approximately $736,000. The Limited
Partner is actively attempting to sell its net assets. This impairment loss was
the result of the net carrying value of the assets exceeding the estimated net
sales value.
Additionally, regardless of whether an impairment loss of an individual
property has been recorded or not, the carrying value of each of the rental
properties may still exceed their fair market value as of December 31, 1999.
Should a Local Limited Partnership be forced to dispose of any of its
properties, it could incur a loss.
3. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES OF THE GENERAL PARTNER
The Partnership accrued administrative and reporting fees payable to the
General Partner of approximately $114,000 and $137,000 during 1999 and 1998,
respectively. During 1999, the Partnership paid the General Partner
approximately $107,000 of these fees. No payments were made during 1998 for
these fees. The balance owed to the General Partner for these fees is
approximately $1,219,000 as of December 31, 1999.
During 1998, the General Partner advanced the Partnership approximately
$34,000 to pay legal expenses of the Partnership. No advances were made during
1999. During 1999, the Partnership repaid advances of approximately $34,000 and
accrued interest of approximately $3,000 to the General Partner. No repayments
were made during 1998. Interest is charged on borrowings at the Chase Manhattan
Bank prime interest rate plus 2%. Chase Manhattan Bank prime was 8.25% at
December 31, 1999. At December 31, 1999, the Partnership had no unpaid
borrowings or accrued interest due to the General Partner.
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.
An affiliate of the General Partner, NHP Management Company ("NHPMC"),
formerly a wholly owned subsidiary of NHP Incorporated ("NHPI"), is the project
management agent for the projects operated by eleven and fifteen of the Local
Limited Partnerships during 1999 and 1998, respectively. NHPMC and other
affiliates of NCHP earned approximately $768,000 and $946,000 for management
fees and other services provided to the Local Limited Partnerships during 1999
and 1998, respectively. As of December 31, 1999 and 1998, amounts due NHPMC and
unpaid by the Local Limited Partnerships amounted to approximately $45,000 and
$13,000, respectively.
Personnel working at the project sites, which are managed by NHPMC, were
employees of NHPI during the period January 1, 1996 through December 8, 1997 and
became employees of NHPMC (as a successor employer) as of December 8, 1997 and,
therefore, the projects reimbursed NHPI and NHPMC for the actual salaries and
related benefits. Prior to January 1, 1996, project employees were employees of
NCHP. Total reimbursements earned for salaries and benefits for the years ended
December 31, 1999 and 1998, were approximately $1,335,000 and $1,492,000,
respectively.
4. NOTES PAYABLE
The notes payable by the Partnership bear simple interest at a rate of 10%
per annum. The notes are payable to NHP in the same amount and same terms as
notes executed by NHP to former project owners, are nonrecourse, and are
collateralized by the Partnership's interests in Windsor Apartments Associates
Limited Partnership and Kimberton Apartments Associates Limited Partnership. The
notes were both due on October 24, 1999. The Partnership is currently in default
of these notes and has received notification from the holders of the notes of
their intent to initiate foreclosure proceedings.
5. INCOME TAXES
The Partnership is not taxed on its income. The partners are taxed in
their individual capacities based upon their distributive share of the
Partnership's taxable income and are allowed the benefits to be derived from
off-setting their distributive share of the tax losses against taxable income
from other sources subject to passive loss rule limitations. The taxable income
or loss differs from amounts included in the statements of operations because of
different methods used in determining the losses of the Local Limited
Partnerships as discussed below. The tax loss is allocated to partner groups in
accordance with Section 704(b) of the Internal Revenue Code and therefore is not
necessarily proportionate to the interest percentage owned.
A reconciliation follows (in thousands):
Years Ended December 31,
1999 1998
Net profit (loss) per financial statements $ 2 $ (300)
Add (deduct):
Interest on notes payable 241 241
Other (293) 149
Partnership's share of limited local
partnership's (loss) profit 6,510 9,626
Profit per tax return $6,460 $9,716
The following is a reconciliation between the Partnership's reported
amounts and the federal tax basis of net assets (in thousands):
December 31, 1999
Net deficit as reported $ (2,670)
Add (deduct):
Investment in Partnerships (30,577)
Other (146)
Net Deficit - federal tax basis $(33,393)
6. ALLOCATION OF RESULTS OF OPERATIONS, CASH DISTRIBUTIONS AND GAINS AND
LOSSES FROM SALE OR REFINANCING
Cash received from the sale or refinancing of any underlying property of
the Local Limited Partnerships, after payment of the applicable mortgage debt
and the payment of all expenses related to the transaction, is to be distributed
in the following manner:
First, to the General Partner for any unrepaid loans to the Partnership
and any unpaid fees (other than disposition and refinancing fees);
Second, to the establishment of any reserves which the General Partner
deems reasonably necessary for contingent, unmatured or unforeseen liabilities
or obligations of the Partnership.
Third, to the Limited Partners, until the Limited Partners have received a
return of their capital contributions, after deduction for prior cash
distributions from sales or refinancing, but without deduction for prior
cash distribution from operations;
Fourth, to the Limited Partners, until each Limited Partner has received
an amount equal to a cumulative noncompounded 12% annual return on its
capital contribution, after deduction of (a) an amount equal to 50% of the
tax losses allocated to the Limited Partner and (b) prior cash
distributions from operations and prior cash distributions from sales or
refinancing;
Fifth, to the General Partner until the General Partner has received a
return of its capital contributions, after deduction for prior cash
distributions from sales or refinancing, but without deduction for prior
cash distributions from operations;
Sixth, to the General Partner for disposition and refinancing fees,
including prior disposition and refinancing fees which have been accrued
but are unpaid;
Seventh, to the partners with positive capital accounts to bring
such accounts to zero; and
Finally, 85% of the remaining sales proceeds to the Limited Partners and
15% to the General Partner.
Net income or loss from operations of the Partnership is allocated 98% to
the Limited Partners, 1% to the General Partner and 1% to the Original Limited
Partner. Cash distributions from operations, after payment of certain
obligations (including reimbursement on a cumulative basis of direct expenses
incurred by the General Partner or its affiliates in managing the properties)
and payment of annual cumulative administrative and reporting fees, is
distributed 98% to the Limited Partners, 1% to the General Partner and 1% to the
Original Limited Partner.
Gain for Federal income tax purposes realized in the event of dissolution
of the Partnership or upon sale of interests in a Local Limited Partnership or
underlying property will be allocated in the following manner:
First, to the Limited Partners in an amount up to the negative balances of
the capital accounts of Limited Partners in the same proportion as each
Limited Partner's negative capital account bears to such aggregate
negative capital accounts;
Second, to the General Partner in an amount up to the General Partner's
negative capital account, if any;
Third, to the Limited Partners, up to the aggregate amount of capital
contributions of the Limited Partners, after deduction for prior cash
distributions from sales or refinancing, but without deduction for prior
cash distributions from operations, in the same proportion that such
Limited Partner's capital contribution bears to the aggregate of all
Limited Partners' capital contributions;
Fourth, to the Limited Partners, until each Limited Partner has been
allocated such an amount equal to a cumulative noncompounded 12% annual
return on their capital contribution, after deduction of (a) an amount
equal to 50% of the tax losses allocated to the Limited Partner and (b)
prior cash distributions from operations and prior cash distributions from
sales or refinancing;
Fifth, to the General Partner, up to the aggregate amount of capital
contributions made by the General Partner, after deduction for prior cash
distributions from sales or refinancing, but without deduction for prior
cash distributions from operations; and Finally, 85% of the remaining gain
to the Limited Partners and 15% to the General Partner.
Losses for Federal income tax purposes realized in the event of
dissolution of the Partnership or upon sale of interest in a Local Limited
Partnership or underlying property will be allocated 85% to the Limited Partners
and 15% to the General Partner.
7. ABANDONMENT OF LIMITED PARTNERSHIP UNITS
In 1999, the number of Limited Partnership Units decreased by 42 units due
to limited partners abandoning their units. In abandoning his or her Limited
Partnership Unit(s), a limited partner relinquishes all right, title, and
interest in the partnership as of the date of abandonments. However, the limited
partner is allocated his or her share of net income or loss for that year. The
income or loss per Limited Partnership Unit in the accompanying statements of
operations is calculated based on the number of units outstanding at the end of
the year. There were no such abandonments in 1998.
8. 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 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.
9. GOING CONCERN
Certain of the Local Partnership's notes payable are past due (see Note
3). Subsequent to December 31, 1999, the noteholders for certain of the Local
Limited Partnerships foreclosed on the Partnership interests and the noteholders
for certain other Local Limited Partnerships began foreclosure proceedings
(Notes 2 and 4). Continuation of the Local Partnerships' operations in the
present form is dependent on their ability to extend the maturity date of these
notes, or to repay or to refinance the notes. The financial statements do not
include any adjustments which might result from the outcome of this uncertainty.
10. REAL ESTATE AND ACCUMULATED DEPRECIATION OF LOCAL LIMITED PARTNERSHIPS IN
WHICH NHP REALTY FUND TWO HAS INVESTED
<TABLE>
<CAPTION>
Initial Cost Cost
To Local Limited Capitalized
Partnership (Removed)
(in thousands) Subsequent
to Acquisition
(in thousands)
Buildings
and Related
Personal Carrying Cost
Description Encumbrances Land Property Improvements Adjustments
<S> <C> <C> <C> <C> <C>
Caroline Arms
Limited $ (1) $ 260 $ 4,497 $1,579 $ --
Partnership
Esbro Limited
Partnership (1) 360 2,566 683 (500)
Harold House
Limited
Partnership (1) 80 1,782 1,037 --
Hilltop Limited
Partnership (1) 210 2,292 470 (1,699)
Hurbell I Limited
Partnership
(Holly Oak) (1) 100 2,043 428 (736)
Hurbell II Limited
Partnership
(Anderson) (1) 240 3,941 1,613 --
Hurbell III Limited
Partnership (1) 150 1,894 740 --
Kimberton Apartments
Associates Limited
Partnership (1) 250 5,265 1,111 --
Mayfair Manor
Limited
Partnership (1) 450 3,720 1,141 (1,468)
Park Avenue West I
Limited
Partnership (1) 96 1,799 294 (1,100)
Park Avenue West II
Limited
Partnership (1) 96 1,785 276 (1,177)
Rodeo Drive Limited
Partnership (1) 150 2,732 494 --
San Juan Del Centro
Limited (1) 725 3,360 1,169 --
Partnership
West Oak Village
Limited
Partnership (1) 400 4,667 1,026 --
Windsor Apartments
Associated Limited
Partnership (1) 169 5,926 770 --
Totals $ 3,736 $48,269 $12,831 $(6,680)
</TABLE>
<TABLE>
<CAPTION>
Gross Amount At Which
Carried
At December 31, 1999
(in thousands)
Buildings
And
Buildings
And
Related
Personal Accumulated Date of Date Depreciable
Description Land Property Total(2)(3) Depreciation(3) Construction Acquired Life-Years
<S> <C> <C> <C> <C> <C> <C> <C>
Caroline Arms $ 271 $ 6,065 $ 6,336 $ 2,520 1972 4/85 5-50
Limited Partnership
Esbro Limited
Partnership 375 2,734 3,109 1,230 1972 4/85 5-50
Harold House
Limited Partnership 96 2,803 2,899 1,063 1973 5/85 5-50
Hilltop Limited
Partnership 218 1,055 1,273 342 1974 4/85 5-50
Hurbell I Limited
Partnership
(Holly Oaks) 100 1,735 1,835 921 1975 4/85 5-40
Hurbell II Limited
Partnership 294 5,500 5,794 2,105 1972 4/85 5-50
(Anderson)
Hurbell III Limited
Partnership (Royal
Oaks) 184 2,600 2,784 1,018 1973 4/85 5-50
Kimberton Apartments
Associates Limited 250 6,376 6,626 3,127 1972 4/85 5-30
Partnership
Mayfair Manor Limited
Partnership 463 3,380 3,843 1,604 1971 4/85 5-50
Park Avenue West I
Limited Partnership 96 993 1,089 637 1969 5/85 5-50
Park Avenue West II
Limited Partnership 96 884 980 168 1970 5/85 5-50
Rodeo Drive Limited
Partnership 150 3,226 3,376 1,190 1973 4/85 5-30
San Juan Del Centro
Limited Partnership 731 4,523 5,254 1,863 1970 4/85 5-50
West Oak Village
Limited Partnership 408 5,685 6,093 2,319 1972 4/85 5-50
Windsor Apartments
Associates Limited
Partnership 169 6,696 6,865 3,038 1972 4/85 5-30
Totals $3,901 $54,255 $58,156 $23,145
</TABLE>
<PAGE>
(1) Schedule of Encumbrances (in thousands)
Notes
Payable and
Mortgage Accrued
Partnership Name Notes Interest Total
Caroline Arms Limited
Partnership $ 1,808 $ 3,922 $ 5,730
Esbro Limited Partnership 871 2,893 3,764
Harold House Limited Partnership 711 1,506 2,217
Hilltop Limited Partnership 1,028 1,933 2,961
Hurbell I Limited Partnership 1,050 1,430 2,480
Hurbell II Limited Partnership 1,456 3,551 5,007
Hurbell III Limited Partnership 861 1,626 2,487
Kimberton Apartments Associates
Limited Partnership 1,733 (A) 1,733
Mayfair Manor Limited
Partnership 1,221 4,038 5,259
Park Ave West I Limited
Partnership 440 1,751 2,191
Park Ave West II Limited
Partnership 481 1,305 1,786
Rodeo Drive Limited Partnership 1,025 2,470 3,495
San Juan del Centro Limited
Partnership 1,507 3,430 4,937
West Oak Village Limited
Partnership 1,454 4,667 6,121
Windsor Apartments Associates
Limited Partnership 2,219 (A) 2,219
Total $17,865 $34,522 $52,387
(A) Notes payable on this property are held by the Partnership and not by the
Local Limited Partnership.
(2) The aggregate cost of land for Federal income tax purposes is
approximately $3,720,000, and the aggregate costs of buildings and
improvements for Federal income tax purposes is approximately $60,731,000.
The total of the above-mentioned is $64,433,000.
<PAGE>
(3) Reconciliation of real estate (in thousands)
Years Ended December 31,
1999 1998
Balance at beginning of period $ 63,358 $75,904
Improvements during the period 1,721 1,072
Disposals of rental properties (13,271)
(6,187)
Impairment losses on rental property (347)
(736)
Balance at end of period $ 58,156 $63,358
Reconciliation of accumulated depreciation (in thousands)
1999 1998
Balance at beginning of period $ 24,333 $ 27,420
Depreciation expense for the period 1,894 2,214
Disposals of rental properties (3,082) (5,301)
Balance at end of period $ 23,145 $ 24,333
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant
(a),(b) and (c). The Partnership has no directors, executive officers or
significant employees of its own.
(a), (b), (c), (e) and (f). The names, ages, business experience and
involvement in legal proceedings of the directors and executive officers
of National Corporation for Housing Partnerships (NCHP), the sole general
partner of The National Housing Partnership, the sole general partner of
the Partnership, and certain of its affiliates, are as follows:
Directors of NCHP
Two individuals comprise the Board of Directors of NCHP. One director was
appointed by the President of the United States, by and with the advice and
consent of the Senate.
Thomas W. Toomey (age 39) was elected Executive Vice President Finance and
Administration and a Director of NCHP in 1997. Mr. Toomey has served as Senior
Vice President--Finance and Administration of AIMCO from January 1996 to March
1997, when he was promoted to Executive Vice President--Finance and
Administration until December 1999, when he was appointed Chief Operating
Officer. From 1990 until 1995, Mr. Toomey served in a similar capacity with
Lincoln Property Company ("LPC") as Vice President/Senior Controller and
Director of Administrative Services of Lincoln Property Services where he was
responsible for LPC's computer systems, accounting, tax, treasury services and
benefits administration. From 1984 to 1990, he was an audit manager with Arthur
Andersen & Co. where he served real estate and banking clients. Mr. Toomey
received a B.S. in Business Administration/Finance from Oregon State University.
Patrick J. Foye (age 42) has been Executive Vice President of NCHP since
October 1, 1998 and was appointed President in September 1999. Mr. Foye has
served as Executive Vice President of AIMCO since May 1998. Prior to joining
AIMCO, Mr. Foye was a partner in the law firm of Skadden, Arps, Slate, Meagher &
Flom LLP from 1989 to 1998 and was Managing Partner of the firm's Brussels,
Budapest and Moscow offices from 1992 through 1994. Mr. Foye is also Deputy
Chairman of the Long Island Power Authority and serves as a member of the New
York State Privatization Council. He received a B.A. from Fordham College and a
J.D. from Fordham University Law School.
Executive Officers
The current executive officers of NCHP and a description of their
principal occupations in recent years are listed below.
Thomas W. Toomey (age 39). See "Directors of NCHP."
Patrick J. Foye (age 42). See "Directors of NCHP."
Steven D. Ira (age 48) has served as Executive Vice President of NCHP
since 1997 and of AIMCO since 1994. From 1987 until July 1994, he served as
President of Property Asset Management ("PAM"). Prior to merging his firm with
PAM in 1987, Mr. Ira acquired extensive experience in property management.
Between 1977 and 1981 he supervised the property management of over 3,000
apartment and mobile home units in Colorado, Michigan, Pennsylvania and Florida,
and in 1981 he joined with others to form the property management firm of
McDermott, Stein and Ira. Mr. Ira served for several years on the National
Apartment Manager Accreditation Board and is a former president of the National
Apartment Association and the Colorado Apartment Association. Mr. Ira is the
sixth individual elected to the Hall of Fame of the National Apartment
Association in its 54-year history. He holds a Certified Apartment Property
Supervisor (CAPS) and a Certified Apartment Manager designation from the
National Apartment Association, a Certified Property Manager (CPM) designation
from the National Institute of Real Estate Management (IREM) and he is a member
of the Boards of Directors of the National Multi-Housing Council, the National
Apartment Association and the Apartment Association of Metro Denver. Mr. Ira
received a B.S. from Metropolitan State College in 1975.
Joel F. Bonder (age 57) was appointed Executive Vice President, General
Counsel and Secretary of NCHP and AIMCO effective December 1997. Prior to
jointing the Company, Mr. Bonder served as Senior Vice President and General
Counsel of NHP from April 1994 until December 1997. Mr. Bonder served as Vice
President and Deputy General Counsel of NHP from June 1991 to March 1994 and as
Associate General Counsel of NHP Incorporated from 1986 to 1991. From 1983 to
1985, Mr. Bonder practiced with the Washing, D.C. law firm of Lane & Edson, P.C.
and from 1979 to 1983 practiced with the Chicago law firm of Ross and Hardines.
Mr. Bonder received a B.A. from the University of Rochester and a J.D. from
Washington University School of Law.
Paul J. McAuliffe (age 43) has been Executive Vice President of NCHP and
AIMCO since February 1999 and was appointed Chief Financial Officer in October
1999. Prior to joining the Company, Mr. McAuliffe was Senior Managing Director
of Secured Capital Corp and prior to that time had been a Managing Director of
Smith Barney, Inc. from 1993 to 1996, where he was senior member of the
underwriting team that lead AIMCO's initial public offering in 1994. Mr.
McAuliffe was also a Managing Director and head of the real estate group at CS
First Boston from 1990 to 1993 and he was a Principal in the real estate group
at Morgan Stanley & Co., Inc. where he worked from 1983 to 1990. Mr. McAuliffe
received a B.A. from Columbia College and an M.B.A. from University of Virginia,
Darden School.
Martha L. Long (age 40) has been Senior Vice President and Controller of
NCHP and AIMCO since October 1998, as a result of the acquisition of Insignia
Financial Group, Inc. From June 1994 until January 1997, she was the Controller
for Insignia, and was promoted to Senior Vice President - Finance and Controller
in January 1997, retaining that title until October 1998. From 1988 to June
1994, Ms. Long was Senior Vice President and Controller for The First Savings
Bank, FSB in Greenville, South Carolina.
(d) There is no family relationship between any of the foregoing directors
and executive officers.
Item 10. Executive Compensation
National Housing Partnership Realty Fund Two has no officers or directors.
No direct form of compensation or remuneration was paid by the Partnership to
any officer or director of the General Partner. However, reimbursements and
other payments have been made to the Partnership's General Partner and its
affiliates, as described in "Item 13. Certain Relationships and Related
Transactions."
Item 11. Security Ownership of Certain Beneficial Owners and Management
1133 Fifteenth Street Two Associates, a Maryland Limited Partnership,
whose general partner is NHP and whose limited partners were employees of NCHP
at the time the partnership was formed, owns a 1% interest in the Partnership.
NHP is also the sole general partner of NHP Investment Partners I and NHP
Investment Partners III. NHP Investment Partners III, a limited partnership,
holds a 4.5% limited partnership interest (1% with respect to losses) in Hurbell
I Limited Partnership, Hurbell III Limited Partnership, and Hilltop Limited
Partnerships. NHP Investment Partners I, a limited partnership, holds a 4.5%
limited partnership interest (1% for allocation of losses) in the remaining
eighteen Local Limited Partnerships. Prior to the admittance of the Partnership
into the Local Limited Partnerships, NHP Investment Partners I and NHP
Investment Partners III held a 1% general partnership interest and 98% limited
partnership interest in the Local Limited Partnerships.
The following table sets forth certain information regarding limited
partnership units of the Registrant owned by each person or entity is known by
the Registrant to own beneficially or exercise voting or dispositive control
over more than 5% of the Registrant's limited partnership units as of December
31, 1999.
Name of
Beneficial Owner Number of Units% of Class
AIMCO and affiliates 1,809.0 9.91%
(affiliates of the General Partner)
The business address of AIMCO is 2000 South Colorado Boulevard, Denver,
Colorado 80222.
Item 12. Certain Relationships and Related Transactions
The Partnership accrued administrative and reporting fees payable to the
General Partner of approximately $114,000 and $137,000 during 1999 and 1998,
respectively. During 1999, the Partnership paid the General Partner
approximately $107,000 of these fees. No payments were made during 1998 for
these fees. The balance owed to the General Partner for these fees is
approximately $1,219,000 as of December 31, 1999.
During 1998, the General Partner advanced the Partnership approximately
$34,000 to pay legal expenses of the Partnership. No advances were made during
1999. During 1999, the Partnership repaid advances of approximately $34,000 and
accrued interest of approximately $3,000 to the General Partner. No repayments
were made during 1998. Interest is charged on borrowings at the Chase Manhattan
Bank prime interest rate plus 2%. Chase Manhattan Bank prime was 8.25% at
December 31, 1999. At December 31, 1999, the Partnership had no unpaid
borrowings or accrued interest due to the General Partner.
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.
An affiliate of the General Partner, NHP Management Company ("NHPMC"),
formerly a wholly owned subsidiary of NHP Incorporated ("NHPI"), is the project
management agent for the projects operated by eleven and fifteen of the Local
Limited Partnerships during 1999 and 1998, respectively. NHPMC and other
affiliates of NCHP earned approximately $768,000 and $946,000 for management
fees and other services provided to the Local Limited Partnerships during 1999
and 1998, respectively. As of December 31, 1999 and 1998, amounts due NHPMC and
unpaid by the Local Limited Partnerships amounted to approximately $45,000 and
$13,000, respectively.
Personnel working at the project sites, which are managed by NHPMC, were
employees of NHPI during the period January 1, 1996 through December 8, 1997 and
became employees of NHPMC (as a successor employer) as of December 8, 1997 and,
therefore, the projects reimbursed NHPI and NHPMC for the actual salaries and
related benefits. Prior to January 1, 1996, project employees were employees of
NCHP. Total reimbursements earned for salaries and benefits for the years ended
December 31, 1999 and 1998, were approximately $1,335,000 and $1,492,000,
respectively.
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27, Financial Data Schedule, is filed as an exhibit to this
report.
Exhibit 99.1, Audited Combined Financial Statements of the Local
Limited Partnerships in which the Partnership has invested are
included as an exhibit to this report:
(b) Reports on Form 8-K filed during the fourth quarter of 1999:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
National Housing Partnership Realty Fund Two
By: The National Housing Partnership, its sole general partner
By: National Corporation for Housing Partnerships, its
sole general partner
April 14, 2000 /s/ Patrick J. Foye
Date Patrick J. Foye
President
April 14, 2000 /s/Martha L. Long
Date Martha L. Long
Senior Vice President and
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
April 14, 2000 /s/ Patrick J. Foye
Date Patrick J. Foye
President
April 14, 2000 /s/Martha L. Long
Date Martha L. Long
Senior Vice President and
Controller
<PAGE>
EXHIBIT 99.1
NATIONAL HOUSING PARTNERS REALTY FUND TWO
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
<PAGE>
Independent Auditors' Report
To The Partners of
National Housing Partnership Realty Fund Two
Indianapolis, Indiana
We have audited the accompanying combined statement of financial position of the
Local Limited Partnerships in which National Housing Partnership Realty Fund Two
(the Partnership) holds a limited partnership interest as of December 31, 1999,
and the related combined statements of operations, partners' deficit, and cash
flows for each of the two years in the period ended December 31, 1999. These
combined financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Hurbell I Limited Partnership, Rodeo Drive Limited Partnership, Kimberton
Apartments Associates Limited Partnership or Windsor Apartment Associates
Limited Partnership (four of the seventeen Local Limited Partnerships) for the
year ended December 31, 1999 which reflect total assets of 30% of combined total
assets as of December 31, 1999, and net losses which reflect 57% of combined net
loss for the year then ended. We did not audit the financial statements of Rodeo
Drive Limited Partnership, Kimberton Apartments Associates Limited Partnership
or Windsor Apartment Associates Limited Partnership for the year ended December
31, 1998 which reflect total assets of 24% of combined total assets as of
December 31, 1998, and net profits which reflect 17% of combined net profits for
the year then ended. The financial statements of these Local Limited
Partnerships were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for these
Local Limited Partnerships, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the combined financial position of the Local Limited Partnerships in which
National Housing Partnership Realty Fund Two holds a limited partnership
interest as of December 31, 1999, and the combined results of their operations
and their cash flows for each of the two years in the period ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States.
As discussed in Notes 6, 11 and 13 to the combined financial statements, the due
dates of certain of the Local Partnership's notes payable have expired, and
therefore, the notes are in default. Subsequent to December 31, 1999, the
noteholders for certain of the Local Limited Partnerships foreclosed on the
Partnership interests and the noteholders for certain other Local Limited
Partnerships began foreclosure proceedings (Note 6). These conditions raise
substantial doubt about their ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
/s/Ernst & Young LLP
Indianapolis, Indiana
March 6, 2000
<PAGE>
REPORT OF FINCH, HAMILTON & CO., LLC.
INDEPENDENT AUDITORS AND CERTIFIED PUBLIC ACCOUNTANTS
LICENSED BY THE SOUTH CAROLINA BOARD OF ACCOUNTANCY
To the Partners
Hurbell I Limited Partnership
Shelby, North Carolina
We have audited the accompanying balance sheet of Hurbell I Limited
Partnership, (the Project) FHA Project No. 053-44202-LDP-SUP (A Limited
Partnership) as of December 31, 1999, and the related statements of income,
changes in partners' deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the Project's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
As described in Note A, these financial statements were prepared in
conformity with the accounting practices prescribed or permitted by the U.S.
Department of Housing and Urban Development, which is a comprehensive basis of
accounting other than generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hurbell I Limited
Partnership at December 31, 1999, and the results of its operations, changes in
partners' deficit and cash flows for the years then ended on the basis of
accounting described in Note A.
As discussed in Note G to the financial statements, the Partnership has
notes payable that matured on December 19, 1999. This condition raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
In accordance with Government Auditing Standards, we have also issued a
report dated February 1, 2000 on our consideration of Hurbell I Limited
Partnership's internal controls and a report dated February 1, 2000 on its
compliance with laws and regulations applicable to the basic financial
statements.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information included in
this report (shown on pages 19-23) is presented for the purposes of additional
analysis and is not a required part of the basic financial statements of Hurbell
I Limited Partnership. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly presented in all material respects in relation to the basic
financial statements taken as a whole.
February 1, 2000
<PAGE>
Independent Auditor's Report
Partners
Kimberton Apartments Associates
Indianapolis, IN
We have audited the accompanying statement of financial position of Kimberton
Apartments Associates, FHA Project No.032-44013-LD, A Limited Partnership, as of
December 31, 1999, and the related statements of profit and loss, partners'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kimberton Apartments Associates
at December 31, 1999, and the results of its operations, changes in partners'
equity and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional information, as referred
to in the Table of Contents, is presented for purposes of additional analysis
and is not a required part of the basic financial statements of the Partnership.
Such information has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly stated,
in all material respects, in relation to the basic financial statements taken as
a whole.
Armacost & Osborne LLP
Bethesda, Maryland
February 10, 2000
<PAGE>
Independent Auditor's Report
Partners
Kimberton Apartments Associates
Indianapolis, IN
We have audited the accompanying statement of financial position of Kimberton
Apartments Associates, FHA Project No.032-44013-LD, A Limited Partnership, as of
December 31, 1998, and the related statements of profit and loss (on HUD Form
No. 92410), partners' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kimberton Apartments Associates
at December 31, 1998, and the results of its operations, changes in partners'
equity and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
In accordance with Government Auditing Standards and the Consolidated Audit
Guide for Audits of HUD Programs, we have also issued a report dated February
12, 1999 on our consideration of Kimberton Apartments Associates' internal
control and reports dated February 12, 1999 on its compliance with specific
requirements applicable to major HUD programs and specific requirements
applicable to Fair Housing and Non-Discrimination.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional information, as referred
to in the Table of Contents, is presented for purposes of additional analysis
and is not a required part of the basic financial statements of the Partnership.
Such information has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly stated,
in all material respects, in relation to the basic financial statements taken as
a whole.
Armacost & Osborne LLP
Bethesda, Maryland
February 12, 1999
<PAGE>
Independent Auditors' Report
To the Partners
Rodeo Drive Limited Partnership
Indianapolis, Indiana
We have audited the accompanying statement of financial position of Rodeo Drive
Limited Partnership (a California limited partnership), FHA Project No.
122-44452-LDP, as of December 31, 1999, and the related statements of profit and
loss, partners' deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rodeo Drive Limited Partnership
as of December 31, 1999, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 3 to the
financial statements, the Partnership is in default on its loan agreement at
December 31, 1999, as a result of nonpayment. The Partnership has reached an
agreement with the lender, where as in satisfaction of the outstanding loan, the
assets of the Partnership will be transferred to the lender in 2000. As a result
of this transaction, the Partnership will not continue as a going concern. The
financial statements do not include any adjustments that might result from the
transfer of all assets to the lender in 2000.
In accordance with Government Auditing Standards and the Consolidated Audit
Guide for Audits of HUD Programs issued by the U.S. Department of Housing and
Urban Development, we have also issued a report dated March 9, 2000 on our
consideration of Rodeo Drive Limited Partnership's internal control and reports
dated March 9, 2000 on its compliance with specific requirements applicable to
major HUD programs and specific requirements applicable to Fair Housing and
Non-Discrimination.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The additional information, as referred to in the
Table of Contents, is presented for purposes of additional analysis and is not a
required part of the basic financial statements. This additional information is
the responsibility of the Partnership's management. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated, in all material respects, in
relation to the basic financial statements taken as a whole.
Hansen, Hunter & Company, P.C.
Portland, Oregon
March 9, 2000
<PAGE>
Independent Auditor's Report
To the Partners
Rodeo Drive Limited Partnership
Washington, D.C.
We have audited the accompanying statement of financial position of Rodeo Drive
Limited Partnership (a California limited partnership), FHA Project No.
122-44452-LDP, as of December 31, 1998, and the related statements of profit and
loss (on HUD Form No. 92410), partners' deficit, and cash flows for the year
then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rodeo Drive Limited Partnership
as of December 31, 1998, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 3 to the
financial statements, the Partnership is in default on its loan agreement at
December 31, 1998, as a result of nonpayment. The lenders have demanded
repayment of the loan. A lawsuit has been filed. The Partnership cannot predict
what the outcome will be. These conditions raise substantial doubt about the
Partnership's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
In accordance with Government Auditing Standards and the Consolidated Audit
Guide for Audits of HUD Programs issued by the U.S. Department of Housing and
Urban Development, we have also issued a report dated January 20, 1999 on our
consideration of Rodeo Drive Limited Partnership's internal control and reports
dated January 20, 1999 on its compliance with specific requirements applicable
to major HUD programs and specific requirements applicable to Fair Housing and
Non-Discrimination.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The additional information, as referred to in the
Table of Contents, is presented for purposes of additional analysis and is not a
required part of the basic financial statements. This additional information is
the responsibility of the Partnership's management. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated, in all material respects, in
relation to the basic financial statements taken as a whole.
Hansen, Hunter & Kibbee, P.C.
Portland, Oregon
January 20, 1999
<PAGE>
Independent Auditor's Report
Partners
Windsor Apartments Associates
Indianapolis, IN
We have audited the accompanying statement of financial position of Windsor
Apartments Associates, FHA Project No. 032-44012-LD-WAH-SUP, A Limited
Partnership, as of December 31, 1999, and the related statements of profit and
loss, partners' equity (deficit), and cash flows for the year then ended. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Windsor Apartments Associates
at December 31, 1999, and the results of its operations, changes in partners'
equity (deficit) and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional information, as referred
to in the Table of Contents, is presented for purposes of additional analysis
and is not a required part of the basic financial statements of the Partnership.
Such information has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly stated,
in all material respects, in relation to the basic financial statements taken as
a whole.
Armacost & Osborne LLP
Bethesda, Maryland
February 10, 2000
<PAGE>
Independent Auditors' Report
Partners
Windsor Apartments Associates
Washington, D.C.
We have audited the accompanying statement of financial position of Windsor
Apartments Associates, FHA Project No. 032-44012-LD-WAH-SUP, A Limited
Partnership, as of December 31, 1998, and the related statements of profit and
loss (on HUD Form No. 92410), partners' equity (deficit), and cash flows for the
year then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Windsor Apartments Associates
as of December 31, 1998, and the results of its operations, changes in partners'
equity and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
In accordance with Government Auditing Standards and the Consolidated Audit
Guide for Audits of HUD Programs, we have also issued a report dated February
12, 1999 on our consideration of Windsor Apartments Associates' internal control
and reports dated February 12, 1999 on its compliance with specific requirements
applicable to major HUD programs and specific requirements applicable to Fair
Housing and Non-Discrimination.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The additional information, as referred to in the
Table of Contents, is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated, in all material respects, in
relation to the basic financial statements taken as a whole.
Armacost & Osborne LLP
Bethesda, Maryland
February 12, 1999
<PAGE>
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENT OF FINANCIAL POSITION
(in thousands)
December 31, 1999
ASSETS
Cash and cash equivalents $ 1,043
Accounts receivable, net (Note 2) 824
Tenants' security deposits held in trust funds 335
Prepaid expenses and other assets 156
Deferred finance costs 62
Mortgage escrow deposits 3,788
Rental property, net (Notes 4, 5 and 10) 35,011
$ 41,219
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Accounts payable and accrued expenses $ 1,385
Due to management agent - NHPMC (Note 9) 45
Accrued real estate taxes 177
Partner loans and accrued interest (Note 7) 1,863
3,470
Distributions payable 45
Tenants' security deposits payable 322
Notes payable (Note 6) 15,906
Accrued interest on notes payable (Note 6) 18,616
Mortgage notes payable (Note 5) 17,865
Partners' deficit (15,005)
$ 41,219
See notes to combined financial statements
<PAGE>
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
Years Ended December 31,
1999 1998
REVENUE:
Rental income (Note 3) $ 11,556 $ 12,789
Interest income 184 154
Other income 522 401
12,262 13,344
EXPENSES:
Administrative expenses 1,045 1,268
Utilities and operating expenses 4,066 4,499
Management and other services from related 768 946
party (Note 9)
Salaries and related benefits to related party 1,335 1,492
(Note 9)
Depreciation and amortization 1,899 2,218
Taxes and insurance 1,301 1,513
Financial expense - primarily interest (Note 5) 327 272
Interest on notes payable (Note 6 and 7) 1,882 2,123
Annual partnership administrative fees to 128 139
General Partner (Note 7)
Impairment loss on rental property (Note 10) 736 347
Other entity expenses 5 34
13,492 14,851
LOSS BEFORE EXTRAORDINARY ITEM (1,230) (1,507)
EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT
OF DEBT -- 1,618
NET (LOSS) PROFIT $ (1,230) $ 111
See notes to combined financial statements
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
National
Housing The
Partnership National NHP NHP
Realty Fund Housing Investment Investment
Two Partnership Partners I Partners II Total
<S> <C> <C> <C> <C> <C>
Deficit at January 1,
1998 $(23,530) $ (468) $ (1,060) $ (64) $(25,122)
Distributions (67) (1) (3) -- (71)
Net profit (loss) 46 8 58 (1) 111
Transfer of interest 5,251 78 250 -- 5,579
Deficit at
December 31, 1998 (18,300) (383) (755) (65) (19,503)
Distributions (77) (1) (4) -- (82)
Cumulative unpaid
distributions (43) -- (2) -- (45)
Net profit (loss) (1,218) (12) 8 (8) (1,230)
Transfer of interest 5,533 59 263 -- 5,855
Deficit at December
31, 1999 $(14,105) $ (337) $ (490) $ (73) $ (15,005)
Percentage interest at
December 31, 1998,
and 1999 (A) (B) (C) (D)
</TABLE>
(A) Holds a 94.5% limited partnership interest (98% with respect to allocation
of losses) in seventeen Local Limited Partnerships.
(B) Holds a 1% general partnership interest in seventeen Local Limited
Partnerships.
(C) Holds a 4.5% limited partnership interest (1% with respect to allocation
of losses) in fourteen Local Limited Partnerships.
(D) Holds a 4.5% limited partnership interest (1% with respect to allocation
of losses) in three Local Limited Partnerships.
See notes to combined financial statements
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Receipts:
Rental receipts $ 11,473 $ 12,764
Interest receipts 245 158
Other operating receipts 481 444
Tenant security deposits 11 3
Transfer of operating liability to new owner 14 --
Entity receipts 1 1
Total receipts 12,225 13,370
Disbursements:
Administrative (943) (865)
Management fees (973) (1,147)
Utilities (1,670) (1,850)
Salaries and wages (1,810) (1,933)
Operating and maintenance (1,848) (2,365)
Real estate taxes (591) (674)
Property insurance (295) (401)
Miscellaneous taxes and insurance (428) (458)
Tenant security deposits (11) (8)
Other operating disbursements (151) (262)
Interest on mortgage (224) (150)
Mortgage insurance premium (79) (114)
Miscellaneous financial (13) (13)
Transfer of operating cash to new owner (36) (128)
Entity disbursements
Interest on notes payable (124) (321)
Miscellaneous disbursements (92) (218)
Total disbursements (9,288) (10,907)
Net cash provided by operating activities 2,937 2,463
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in mortgage escrow accounts 49 (710)
Proceeds from disposal of rental property -- 762
Net purchase of fixed assets (1,712) (1,110)
Other investing (76) (31)
Net cash used in investing activities (1,739) (1,089)
CASH FLOWS FROM FINANCING ACTIVITIES:
Mortgage principal payments (903) (949)
Proceeds from loans or notes payable 1 214
Principal payments on loans or notes payable -- (167)
Distributions (82) (71)
Payment in satisfaction of note payable
and accrued interest -- (600)
Other financing 7 --
Net cash used in financing activities (977) (1,573)
See notes to combined financial statements
<PAGE>
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
(Continued)
Years Ended December 31,
1999 1998
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 221 $ (199)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 822 1,021
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,043 $ 822
RECONCILIATION OF NET (LOSS) PROFIT TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net (loss) profit $ (1,230) $ 111
Adjustments to reconcile net (loss) profit
to net cash provided by operating activities:
Depreciation and amortization 1,899 2,218
Extraordinary gain on extinguishment of debt -- (1,618)
Impairment loss on rental properties 736 347
Changes in operating assets and liabilities:
Net tenant receivables (139) (38)
Accounts receivable - other (100) (250)
Accrued receivables 7 8
Prepaid expenses and other assets (19) 6
Cash restricted for tenants security
deposits (17) (15)
Accounts payable trade (68) (48)
Accrued liabilities 54 59
Accrued interest - notes payable 1,663 1,808
Tenant security deposits held in trust 17 10
Prepaid revenue 32 45
Transfer of operating cash to new owner (22) (128)
Entity liability accounts 124 (52)
Total adjustments 4,167 2,352
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,937 $ 2,463
See notes to combined financial statements
<PAGE>
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF PARTNERSHIP ORGANIZATION, BASIS OF COMBINATION AND SIGNIFICANT
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.
During 1985, the Partnership acquired limited partnership interests of
94.5% (98% with respect to losses) in twenty-one Local Limited Partnerships,
nineteen of which were organized in 1984 to acquire and operate existing rental
housing projects. The remaining two Local Limited Partnerships were formed in
1972 and 1973 to construct and operate rental housing projects. Eighteen of the
Local Limited Partnerships were originally organized under Section 236 of the
National Housing Act and three were originally organized under Section
221(d)(3)of the Act. As a limited partner in these Local Limited Partnerships,
the Partnership does not exercise control or influence over the activities of
the Local Limited Partnerships in accordance with the partnership agreements. As
of December 31, 1999 and 1998, the Partnership continues to hold interests in
fifteen and seventeen Local Limited Partnerships, respectively.
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 acquired control of the general partner of the Registrant and, therefore,
may be deemed to have acquired control of the Registrant.
NHP is also the sole general partner of NHP Investment Partners I and NHP
Investment Partners III. NHP Investment Partners III, a limited partnership,
holds a 4.5% limited partnership interest (1% with respect to losses) in Hurbell
I Limited Partnership, Hurbell III Limited Partnership, and Hilltop Limited
Partnerships. NHP Investment Partners I, a limited partnership, holds a 4.5%
limited partnership interest (1% for allocation of losses) in the remaining
fourteen Local Limited Partnerships (two of which were foreclosed on during
1999). Prior to the admittance of the Partnership into the Local Limited
Partnerships, NHP Investment Partners I and NHP Investment Partners III held a
1% general partnership interest and 98% limited partnership interest in the
Local Limited Partnerships.
Basis of Combination
The combined financial statements include the accounts of the following
seventeen and twenty-one Local Limited Partnerships in which the Partnership
holds a limited partnership interest during 1999 and 1998, respectively:
Caroline Arms Limited Partnership
Esbro Limited Partnership
Gulfway Limited Partnership (interest lost June 29, 1998) Harold House
Limited Partnership Hilltop Limited Partnership Hurbell I Limited
Partnership Hurbell II Limited Partnership Hurbell III Limited Partnership
Kimberton Apartments Associates Limited Partnership Mayfair Manor Limited
Partnership Meadows Apartments Limited Partnership (interest lost December
1, 1999) Meadows East Apartments Limited Partnership (interest lost August
5, 1999) Menlo Limited Partnership (interest lost January 5, 1998) Park
Avenue West I Limited Partnership Park Avenue West II Limited Partnership
Rockwell Limited Partnership (interest lost June 29, 1998) Rodeo Drive
Limited Partnership San Juan del Centro Limited Partnership Tinker Creek
Limited Partnership (interest sold July 2, 1998) West Oak Village Limited
Partnership Windsor Apartments Associates Limited Partnership
Significant Accounting Policies
The combined financial statements of the Local Limited Partnerships are
prepared on the accrual basis of accounting. Depreciation of buildings and
improvements for fifteen of the Local Limited Partnerships is computed using the
straight-line method assuming a 50-year life from the date of initial occupancy,
whereas depreciation of buildings and improvements is computed using the
straight-line method, assuming a 30-year life and 30% salvage value for one
Local Limited Partnership. Depreciation for one Local Limited Partnership is
computed using the straight-line method, assuming a 40-year life. Depreciation
of equipment is calculated using accelerated methods over estimated useful lives
of five to 27 years. Cash distributions are limited by the Regulatory Agreements
between the partnerships and HUD to the extent of surplus cash as defined by
HUD. Undistributed amounts are cumulative and may be distributed in subsequent
years if future operations provide surplus cash in excess of current
requirements. Deferred finance costs are amortized over the appropriate loan
period on a straight-line basis.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
For purposes of the statements of cash flows, the Local Limited
Partnerships consider all highly liquid debt instruments purchased with initial
maturities of three months or less to be cash equivalents.
Certain reclassifications of prior years' amounts have been made to
conform with the current year's presentation.
2. ACCOUNTS RECEIVABLE
At December 31, 1999, accounts receivable consist of the following (in
thousands):
Net tenant receivables $ 75
Housing assistance receivable (see Note 3) 502
Accrued interest receivable 11
Reserve releases receivable 189
Other receivables 47
Accounts receivable, net $ 824
3. HOUSING ASSISTANCE AGREEMENTS
The Federal Housing Administration (FHA) has contracted with fourteen
rental projects under Section 8 of Title II of the Housing and Community
Development Act of 1974, to make housing assistance payments to the respective
Local Limited Partnerships on behalf of qualified tenants. Fourteen of the
remaining Local Limited Partnership have an agreement in effect during 2000. The
Local Limited Partnerships received a total of approximately $6,616,000 and
$7,265,000 in the form of housing assistance payments during 1999 and 1998,
respectively, which is included in "Rental Income" on the combined statements of
operations.
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
1,731 units, 88 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
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 (1,731 in total) receiving rent subsidies from Section 8
have their contracts expiring during the year ending December 31, 2000. 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.
4. RENTAL PROPERTY
At December 31, 1999 rental property consists of the following (in
thousands):
Land $ 3,901
Buildings and improvements 54,255
58,156
Less accumulated depreciation (23,145)
Rental property, net $ 35,011
5. MORTGAGE NOTES PAYABLE
The mortgage notes payable are insured by FHA and collateralized by first
deeds of trust on the rental properties. The notes bear interest at rates
ranging from 3% to 8.5% per annum. However, FHA, under an interest reduction
contract with the fourteen Section 236 properties, makes subsidy payments
directly to the mortgage lender reducing the monthly principal and interest
payments of the project owner to an effective interest rate of 1% over the
forty-year terms of the notes. The liability of the Local Limited Partnerships
under the mortgage notes is limited to the underlying value of the real estate
collateral, plus other amounts deposited with the lenders.
Under agreements with the mortgage lenders and FHA, the Local Limited
Partnerships are required to make monthly escrow deposits for taxes, insurance,
and reserves for the replacement of project assets and are subject to
restrictions as to operating policies, rental charges, operating expenditures,
and distributions to partners.
Approximate maturities of mortgage notes payable for the next five years
and, thereafter, are as follows (in thousands):
2000 $ 866
2001 932
2002 1,004
2003 1,081
2004 1,164
Thereafter 12,818
$ 17,865
6. NOTES PAYABLE
Notes payable were executed by the Local Limited Partnerships with the
former owners as part of the acquisition of the properties by the Local Limited
Partnerships. These notes bear simple interest at rates of 9% or 10% per annum.
The notes are nonrecourse notes secured by a security interest in all
partnership interests in the respective Local Limited Partnership and are
subordinated to the respective mortgage note for as long as the mortgage note is
insured by HUD. Any payments due from project income are payable from the
respective Local Limited Partnership's surplus cash, as defined by the
respective HUD Regulatory Agreement. The notes may be prepaid in whole or in
part at any time without penalty. Neither the respective Local Limited
Partnership nor any partner thereof, present or future, assumes any personal
liability for the payment of these notes.
These notes mature as follows:
Local Partnership Due Date Note Amount Accrued Interest
Rodeo Drive Limited
Partnership December 6, 1997* $ 2,470 $ --
Esbro Limited
Partnership October 25, 1999* 1,204 1,689
Mayfair Manor Limited
Partnership October 25, 1999* 1,654 2,384
Hurbell II Limited
Partnership November 2, 1999* 1,502 2,049
Hilltop Limited
Partnership November 2, 1999* 817 1,116
Caroline Arms Limited
Partnership November 15, 1999* 1,561 2,361
Harold House Limited
Partnership November 15, 1999* 599 907
Hurbell I Limited
Partnership December 19, 1999* 608 822
Hurbell III Limited
Partnership December 19, 1999* 688 938
Park Avenue West I
Limited Partnership December 20, 1999* 744 1,007
Park Avenue West II
Limited Partnership December 20, 1999* 554 751
San Juan Del Centro
Limited Partnership December 20, 1999* 1,458 1,972
Total Delinquent 13,859 15,996
West Oak Limited
Partnership November 30, 2013* 2,047 2,620
Total Due $15,906 $18,616
* Notes are in default.
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, Hilltop, 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, November 2, 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. The financial statements do not include any adjustments which might
result from the outcome of this uncertainty. Caroline Arms, Harold House,
Hilltop and Hurbell I Local Limited Partnerships are all actively attempting to
sell their respective net assets.
Rodeo Drive Limited Partnership note was executed by the respective Local
Limited Partnership with the seller as part of the acquisition of the property
by the Local Limited Partnership. The note was a nonrecourse note secured by a
security interest in all Partnership interests in the Local Limited Partnership.
Neither the Limited Partnership nor any partners thereof, present or future
assume any personal liability for the payment of the notes. The note was due
December 6, 1997. The holder of the note demanded payment and an agreement was
reached on December 11, 1998 whereby the interest of the Partnership is to be
transferred to the note holder during January 2000. As a result of this
transaction, the Local Limited Partnership will not continue as a going concern.
The financial statements do not include any adjustments that might be necessary
as a result of this transaction.
Esbro and Mayfair Manor Limited Partnership notes were executed by the
respective Local Limited Partnership with the seller as part of the acquisition
of the property by the Local Limited Partnership. The notes are nonrecourse
notes secured by a security interest in all Partnership interests in the
respective Local Limited Partnership. The notes were initially due on October
15, 1997. Effective February 16, 1998, both Esbro and Mayfair Manor Limited
Partnerships executed Amended and Restated Promissory Notes for each of their
respective notes. The Amended Notes extended the maturity of the notes to
October 25, 1999. Neither the Limited Partnership nor any partners thereof,
present or future assume any personal liability for the payment of the notes.
Subsequent to December 31, 1999, both Local Limited Partnerships received notice
of demand for payment and the commencement of foreclosure proceedings. Such
foreclosure is subject to HUD approval, which is pending. Continuation of both
of the Local Limited Partnerships' operations in the present form is dependent
on the outcome of these proceedings. The financial statements do not include any
adjustments which might result from the outcome of this uncertainty. Esbro
Limited Partnership is actively attempting to sell its net assets.
Park Avenue West I and II Limited Partnerships both 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 both due December 20, 1999. The Local Limited Partnerships
were notified of the default and as a result of the default not being cured the
respective noteholders foreclosed on the Partnership's interests in full
satisfaction of the notes effective January 14, 2000. The financial statements
do not include any adjustments which might result from the outcome of these
transactions.
7. DUE TO PARTNERS
The Local Limited Partnerships accrued annual partnership administration
fees payable to the General Partner, of approximately $128,000 and $139,000 for
the year ended December 31, 1999 and 1998, respectively. Payments of these fees
are made to the General Partner without interest from surplus cash available for
distribution to partners pursuant to HUD regulations. During 1999 and 1998, the
Local Limited Partnerships paid approximately $145,000 and $200,000,
respectively. The balances owed to NHP for these fees were approximately
$657,000 at December 31, 1999.
During 1999 and 1998, the General Partner advanced approximately $1,000 and
$214,000 to one and ten Local Limited Partnerships for insurance and entity
expenses, including expenses incurred relating to potential sales or refinancing
under the LIHPRHA program. The Local Limited Partnerships paid approximately
$184,000 in loans during 1998 and approximately $123,000 in interest on these
loans during 1998. No payments were made on the loans or interest during 1999.
At December 31, 1999, approximately $1,863,000 of loans and accrued interest
were owed to the General Partner. Interest is charged at a rate equal to the
Chase Manhattan Bank prime interest rate plus 2%. Chase Manhattan Bank prime was
8.25% at December 31, 1999.
8. FEDERAL AND STATE INCOME TAXES
The Local Limited Partnerships are not taxed on their income. The partners
are taxed in their individual capacities upon their distributive share of the
Local Limited Partnerships' taxable income and are allowed the benefits to be
derived from offsetting their distributive share of the tax losses against
taxable income from other sources subject to passive loss rule limitations. The
taxable income or loss differs from amounts included in the statement of
operations primarily because of different methods used in determining
depreciation expense for tax purposes. The tax loss is allocated to partner
groups in accordance with Section 704(b) of the Internal Revenue Code and
therefore is not necessarily proportionate to the interest percentage owned.
9. RELATED PARTY TRANSACTIONS
An affiliate of the General Partner, NHP Management Company ("NHPMC"),
formerly a wholly owned subsidiary of NHP Incorporated ("NHPI"), is the project
management agent for the projects operated by eleven and fifteen of the Local
Limited Partnerships during 1999 and 1998, respectively. NHPMC and other
affiliates of NCHP earned approximately $768,000 and $946,000 for management
fees and other services provided to the Local Limited Partnerships during 1999
and 1998, respectively. As of December 31, 1999 and 1998, amounts due NHPMC and
unpaid by the Local Limited Partnerships amounted to approximately $45,000 and
$13,000, respectively.
Personnel working at the project sites, which are managed by NHPMC, were
employees of NHPI during the period January 1, 1996 through December 8, 1997 and
became employees of NHPMC (as a successor employer) as of December 8, 1997 and,
therefore, the projects reimbursed NHPI and NHPMC for the actual salaries and
related benefits. Prior to January 1, 1996, project employees were employees of
NCHP. Total reimbursements earned for salaries and benefits for the years ended
December 31, 1999 and 1998, were approximately $1,335,000 and $1,492,000,
respectively.
10. IMPAIRMENT LOSS ON RENTAL PROPERTY
The Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of" requires an impairment loss to be
recognized if the sum of estimated future cash flows (undiscounted and without
interest charges) is less than the carrying amount of rental property. The
impairment loss would be the amount by which the carrying value exceeds the fair
value of the rental property. If the rental property is to be disposed of, fair
value is calculated net of costs to sell.
The net assets of Hurbell I Limited Partnership are being actively
marketed for sale. During 1999, Hurbell I Limited Partnership recognized an
impairment loss on its rental property in the amount of approximately $736,000
based on the General Partner's estimated net sales value (estimated selling
price of the net assets, less an estimated cost of disposition). The ultimate
sales value or the success of a completed transaction to sell the Partnership's
net assets cannot presently be determined.
During 1998, Tinker Creek Limited Partnership recognized an impairment
loss on its rental property in the amount of $347,000. The amount of the
impairment loss is the amount by which the carrying value exceeds the fair value
of the property. The fair value of the rental property was determined by the
amount of the June 30, 1998 sale of approximately $1,785,000.
Additionally, regardless of whether an impairment loss of an individual
property has been recorded or not, the carrying value of each of the rental
properties may still exceed their fair market value as of December 31, 1999.
Should a Local Limited Partnership be forced to dispose of any of its
properties, it could incur a loss.
11. DISPOSALS OF RENTAL PROPERTIES
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. 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 has been recorded in the accompanying 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.
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 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 specific
partner's individual tax situation.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures About Fair Value of Financial
Instruments," requires disclosure of fair value information about financial
instruments, when it is practicable to estimate that value. For the notes
payable and related accrued interest, a reasonable estimate of fair value could
not be made without incurring excessive costs. The carrying amount of other
assets and liabilities reported on the statement of financial position that
require such disclosure approximates fair value.
13. GOING CONCERN
Certain of the Local Partnership's notes payable are past due (see Note 6).
Subsequent to December 31, 1999, the noteholders for certain of the Local
Limited Partnerships foreclosed on the Partnership interests and the noteholders
for certain other Local Limited Partnerships began foreclosure proceedings (Note
6). 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. The financial statements do not include any
adjustments which might result from the outcome of this uncertainty.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from National
Housing Partnership Realty Fund Two 1999 Fourth Quarter 10-KSB and is qualified
in its entirety by reference to such 10-KSB filing.
</LEGEND>
<CIK> 0000762859
<NAME> NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,540
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 5,956
0
0
<COMMON> 0
<OTHER-SE> (2,670)
<TOTAL-LIABILITY-AND-EQUITY> 4,540
<SALES> 0
<TOTAL-REVENUES> 418
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 243
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<FN>
<F1> Registrant has an unclassified balance sheet. <F2> Multiplier is 1.
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</TABLE>
