<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996......Commission file number 0-14457
----------------------- -------
NATIONAL HOUSING PARTNERSHIP REALTY FUND III (A MARYLAND LIMITED PARTNERSHIP)
----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 52-1394972
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8065 LEESBURG PIKE, VIENNA, VIRGINIA 22182
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
<TABLE>
<S> <C>
Registrant's telephone number, including area code: (703) 394-2400
-------------
Securities registered pursuant to Section 12(b) of the Act: NONE
----
Securities registered pursuant to Section 12(g) of the Act: 11,500 LIMITED PARTNERSHIP INTERESTS
------------------------------------
</TABLE>
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
--- ---
The registrant is a partnership. Accordingly, no voting stock is held by
non-affiliates of the registrant.
Documents incorporated by reference. NONE
----
<PAGE> 2
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
(A MARYLAND LIMITED PARTNERSHIP)
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business 2
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for the Registrant's Partnership
Interests and Related Partnership Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 29
PART III
Item 10. Directors and Executive Officers of the Registrant 30
Item 11. Executive Compensation 32
Item 12. Security Ownership of Certain Beneficial
Owners and Management 32
Item 13. Certain Relationships and Related Transactions 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 34
1
<PAGE> 3
PART I
INTRODUCTION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements in certain circumstances. Certain
information included in this Report and other Partnership filings (collectively
"SEC Filings") under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (as well as information communicated orally or
in writing between the dates of such SEC Filings) contains or may contain
information that is forward looking, including statements regarding the effect
of government regulations. Actual results may differ materially from those
described in the forward looking statements and will be affected by a variety
of factors including national and local economic conditions, the general level
of interest rates, terms of governmental regulations that affect the
Partnership and interpretations of those regulations, the competitive
environment in which the properties owned by the Local Limited Partnerships
operate, the availability of working capital and dispositions of properties
owned by the Partnership.
Item 1. Business
National Housing Partnership Realty Fund III (A Maryland Limited
Partnership) (the Partnership) was formed under the Maryland Revised Uniform
Limited Partnership Act as of May 10, 1985. On June 14, 1985, the Partnership
commenced offering 11,500 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 July 18, 1985, with subscriptions for all
11,500 limited partnership interests.
The General Partner with a 1% interest in the Partnership is The
National Housing Partnership (NHP), a District of Columbia limited partnership,
whose sole general partner (0.2%) is National Corporation for Housing
Partnerships (NCHP). Following a corporate reorganization in August 1995, which
involved an initial public offering of NHP Incorporated's management-related
service companies (the "Reorganization"), the remaining 99.8% of NHP's limited
partnership interest is owned by NHP Partners Two Limited Partnership (Partners
Two), a Delaware limited partnership. NCHP is wholly owned by NHP Partners,
Inc. (Partners), a Delaware corporation. Notwithstanding the Reorganization,
control of NCHP, Partners Two and Partners remains with Demeter Holdings
Corporation (a Massachusetts nonprofit corporation, which is
wholly-owned/controlled by the President and Fellows of Harvard College, a
Massachusetts educational corporation created by the constitution of
Massachusetts), Capricorn Investors, L.P. (a Delaware investment limited
partnership, whose general partner is Capricorn Holdings, G.P., a Delaware
general partnership), and J. Roderick Heller, III (Chairman, President and
Chief Executive Officer of NCHP and Partners).
The Original Limited Partner of the Partnership is 1133 Fifteenth
Street Three Associates, a Maryland limited partnership, whose general partner
is NHP and whose limited partners were key employees of NCHP at the time the
Partnership was formed. The Original Limited Partner holds a 1% Limited
Partnership interest in the Partnership.
The remaining 98% limited partnership interests in the Partnership are
held by the investors who subscribed to the Offering.
The Partnership's business is to hold limited partnership interests in
twelve limited partnerships (Local Limited Partnerships) each of which owns and
operates multi-family rental housing properties (Properties), which receive one
or more forms of assistance from the Federal Government. 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, as a limited partner, the Partnership does not exercise control
over the activities of the Local Limited Partnerships in accordance with the
partnership agreements.
2
<PAGE> 4
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:
SCHEDULE OF PROPERTIES OWNED BY LOCAL LIMITED PARTNERSHIPS
IN WHICH NATIONAL HOUSING PARTNERSHIP REALTY FUND III HAS AN INVESTMENT
<TABLE>
<CAPTION>
Units authorized Units Occupied as
Financed, Insured for Rental a Percentage of
Property Name, Location and Number and Subsidized Assistance Under Total Units as of
Partnership Name of Units Under Section 8 (C) December 31, 1996
-------------------------------- -------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Brunswick Village 110 (B) 72 99%
Trenton, New Jersey
(Brunswick Village
Limited Partnership)
Edmond Estates 120 (A) 56 98%
Phoenix City, Alabama
(Edmond Estates
Limited Partnership)
Elden Terrace 184 (A) 0 98%
Herndon, Virginia
(Elden Limited
Partnership)
Galion East 61 (B) 60 99%
Galion, Ohio
(Galion Limited
Partnership)
</TABLE>
3
<PAGE> 5
<TABLE>
<CAPTION>
Units authorized Units Occupied as
Financed, Insured for Rental a Percentage of
Property Name, Location and Number and Subsidized Assistance Under Total Units as of
Partnership Name of Units Under Section 8 (C) December 31, 1996
-------------------------------- -------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Indian Valley I 100 (A) 40 97%
Kent, Ohio
(Indian Valley I
Limited Partnership)
Indian Valley II 90 (A) 36 98%
Kent, Ohio
(Indian Valley II
Limited Partnership)
Indian Valley III 98 (A) 39 98%
Kent, Ohio
(Indian Valley III
Limited Partnership)
Cherry Branch Townhomes 172 (A) 20 98%
Laurel, Maryland
(Kimberly Associates
Limited Partnership)
Meadowood Apartments I and II 291 (A) 100 97%
Edgewood, Maryland
(Meadowood Townhouses I
Limited Partnership)
Meadowood Apartments 283 (A) 164 94%
Associates III
Edgewood, Maryland
(Meadowood Townhouses III
Limited Partnership)
Newton Hill 40 (A) 16 97%
Akron, Ohio
(Newton Hill
Limited Partnership)
Woodmark 150 (A) 0 95%
Woodbridge, Virginia
(Woodmark 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.
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.
4
<PAGE> 6
The following table indicates the year within the Section 8 rent
subsidy contracts expire:
<TABLE>
<CAPTION>
Subsidized Units Subsidized Units
Expiring as a Expiring as a
Number Percentage of Total Percentage of
Year of Units Subsidized Units Total Units
---- -------- ---------------------- ----------------------
<S> <C> <C> <C>
1997 110 18% 6%
1998 493 82% 29%
--- --- --
Total 603 100% 35%
=== === ==
</TABLE>
Of the contracts above expiring during 1997, one Local Limited
Partnership, Galion Limited Partnership, has contracts for 60 units that expire
prior to September 30, 1997. Congress has passed legislation which will provide
a one-year renewal contract to replace those contracts.
One Local Limited Partnership, Brunswick Village, has a contract
covering the remaining 50 units that expire in October, 1997. It is uncertain
whether this agreement, as well as the agreement expiring in 1998 will be
renewed, and if so, on what terms.
For the past several years, various proposals have been advanced by
HUD, the Congress and others proposing the restructuring of the Section 8.
These proposals generally seek to lower subsidized rents to market levels and
to lower required debt service costs as needed to ensure financial viability at
the reduced rents, but vary greatly as to how that result is to be achieved.
Some proposals include a phase-out of project-based subsidies on a
property-by-property basis upon expiration of a property's HAP Contract, with a
conversion 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
a property of their choice, provided the tenant has the financial ability to
pay the difference between the selected property's monthly rent and the value
of the voucher, which would be established based on HUD's regulated fair market
rent for that geographic area.
Congress has not yet accepted any of these restructuring proposals and
instead has elected to renew expiring Section 8 HAP Contracts for one year
terms, generally at existing rents. While the Partnership does not believe that
the proposed changes would result in a significant number of tenants relocating
from properties owned by the Local Limited Partnerships, there can be no
assurance that the proposed changes would not significantly affect the
operations of the properties of the Local Limited Partnerships. Furthermore,
there can be no assurance that changes in federal subsidies will not be more
restrictive than those currently proposed or that other changes in policy will
not occur. Any such changes could have an adverse effect on the operation of
the Partnership.
Operations at all of the other properties were generally satisfactory
during the period.
National Corporation for Housing Partnerships was a significant
participant in the drafting and passage of the Low Income Housing Preservation
and Resident Homeownership Act of 1990 ("LIHPRHA"). LIHPRHA creates a procedure
under which owners of properties assisted under the HUD Section 236 or
221(d)(3) program may be eligible to receive financial incentives in return for
agreeing to extend their property's use as low income housing. The
appropriation for the Department of Housing and Urban Development (which
administers LIHPRHA) for the 1997 fiscal year was recently approved and is
insufficient to meet existing program demand. As part of this appropriation,
Congress directed HUD to suspend processing of any property which had not
received approval of a sale or refinancing under LIHPRHA as of the date of
enactment of the appropriation, which occurred on September 26, 1996. Brunswick
Village and Meadowood I, II and III all received approval to be sold under the
5
<PAGE> 7
program within the requisite time frame; however, none have been allocated
funds under the 1997 fiscal year appropriation, which is required so that these
transactions can close. It is uncertain at this point whether LIHPRHA will
receive future appropriations from Congress sufficient to allow the sales of
Brunswick Village and Meadowood I, II and III to close. In the event that the
LIHPRHA sales do not close, the General Partner will investigate other sale or
refinancing opportunities for these properties, but there can be no assurance
that these efforts will be successful. If unsuccessful, this could have a
substantially negative impact on the Partnership's future available capital
resources.
As discussed in Note 6 to the Local Limited Partnerships' combined
financial statements, all of the Local Limited Partnerships in which the
Partnership has invested carry deferred acquisition notes due the original
owner of each Property. The deferred acquisition notes in the amount of
$10,909,799 including accrued interest at December 31, 1996, of Meadowood
Townhouses I and III reached final maturity in April 1996. All other notes will
reach final maturity during 1999. These notes are secured by both the
Partnership's and NHP's interests in the 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.
On May 2, 1996, Meadowood Townhouses I and III Local Limited
Partnerships entered into an Agreement of Sale with Community Preservation and
Development Corporation, to sell their properties pursuant to the terms
LIHPRHA. The purchase price is based on the properties' Transfer Preservation
Value, as approved by HUD. Settlement is pending future appropriation of funds
to HUD by Congress for LIHPRHA.
In connection with the sale, a Forebearance Agreement has been
executed, which extends the maturity date of the deferred acquisition notes
made by the Local Limited Partner. Under the terms of this agreement, the
initial period of forebearance expires on April 30, 1997. A further extension
of forebearance will be granted until December 31, 1997, if funding for such
closing has been approved by HUD. If such funding has not been approved by
April 30, 1997, a further extension of forebearance until January 2, 1998, will
be granted to permit the Local Limited Partnerships to submit an alternative
plan to the note holders, and to negotiate and close such plan. In
consideration for the initial period of extension of forebearance, the Local
Limited Partnerships shall pay solely from their share of the net proceeds
received at closing, an extension fee of 1% of the aggregate amount of
principal due on the notes. The Local Limited Partnerships shall have no
liability for the extension fee if closing does not occur. Upon expiration of
the forebearance period with extensions, the Local Limited Partnerships shall
cause title to the Local Limited Partnership's interest in the Local Limited
Partnerships to be conveyed to the note holders.
The Partnership's continued ownership in Meadowood Townhouses I and
III Local Limited Partnerships is dependent on their successful efforts to
complete the LIHPRHA sale or to repay the principal and accrued interest on the
deferred acquisition notes or negotiate further amendments of the terms of the
note and the related sale and forebearance agreements. If title to the Local
Limited Partnership interest is conveyed to the note holder, the Partnership
will not receive any future benefits from the underlying Properties, and
taxable income will be generated and flow to the Partnership's investors
without any distributable cash. The specific impact of the tax consequences is
dependent upon each specific partner's individual tax situation.
The following details the Partnership's ownership percentages of the
Local Limited Partnerships and the cost of acquisitions of such ownership. All
interests are limited partner interests. Also included are the total mortgage
encumbrance and acquisition notes and related accrued interest encumbrances on
each property for each of the Local Limited Partnerships as of December 31,
1996.
6
<PAGE> 8
<TABLE>
<CAPTION>
Deferred
NHP Realty Acquisition
Fund III Cost of Notes
Percentage Ownership Mortgage and Accrued
Partnership Ownership Interest Notes Interest
- ----------- --------- -------------- --------------- --------------------
<S> <C> <C> <C> <C>
Brunswick Village, L.P. 99.0% $ 580,612 $ 680,347 $2,084,826
Edmond Estates, L.P. 94.5% 416,038 1,036,123 2,037,217
Elden, L.P. 94.5% 876,011 1,902,129 3,419,062
Galion, L.P. 94.5% 282,933 537,841 1,003,957
Indian Valley I, II
and III, L.P.s 94.5% 1,456,232 3,506,003 5,132,219
Kimberly Associates, L.P. 94.5% 902,469 1,999,730 2,920,243
Meadowoods
Townhouses I and III, L.P.s 99.0% 2,998,424 5,665,704 10,909,799
Newton Hill, L.P. 94.5% 210,227 453,569 684,714
Woodmark, L.P. 94.5% 835,732 1,532,668 3,235,318
</TABLE>
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
The Partnership is not involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted.
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, 1996, there were 921 registered holders of
limited partnership interests (in addition to 1133 Fifteenth
Street Three Associates - See Item 1).
(c) No cash dividends or distributions have been declared from the
inception of the Partnership through December 31, 1996.
7
<PAGE> 9
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Share of losses from
Local Limited
Partnerships (A) $ - $ - $ (13,066) $ (47,504) $ (65,412)
Other revenue and
expenses:
Interest income 8,073 6,057 7,185 32,783 7,362
Loss on investment in Local
Limited Partnerships - - (10,641) (527,829) -
Distributions received
in excess of
investment in
Local Limited
Partnerships 18,362 28,528 24,527 23,846 88,482
Partnership operating
expenses (133,660) (135,432) (139,684) (126,611) (121,738)
-------- -------- -------- -------- --------
Net loss $(107,225) $(100,847) $(131,679) $(645,315) $ (91,306)
======== ======== ======== ======== ========
Loss per unit of limited
partnership interest
based on the units
outstanding during
the period $ (9) $ (9) $ (11) $ (56) $ (8)
======== ======== ======== ======== ========
Total assets, at December 31 $ 140,782 $ 164,374 $ 176,583 $ 215,240 $ 836,714
======== ======== ======== ======== ========
Cash distributions per unit of
limited partnership interest $ - $ - $ - $ - $ -
======== ======== ======== ======== ========
</TABLE>
(A) The Partnership holds limited partnership interests in the Local
Limited Partnerships, and since its liability for obligations is
limited to its original investment, its investment account is not
reduced below zero (creating a liability) for the investments in these
Local Limited Partnerships. As a result, during 1996, 1995, 1994, 1993
and 1992, $1,690,487, $936,943, $3,803,923, $2,859,089 and $1,322,679,
respectively, of losses from eleven, twelve, twelve, eleven and eleven
of the Local Limited Partnerships have not been recognized by the
Partnership. During 1996, the Partnership's share of profits in Elden
Limited Partnership was $15,125 which was offset against prior year
losses not taken.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements in certain circumstances. Certain
information included in this Report and other Partnership filings (collectively
"SEC Filings") under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (as well as information communicated orally or
in writing between the dates of such SEC Filings) contains or may contain
information that is forward looking, including statements regarding the effect
of government regulations. Actual results may differ materially from those
described in the forward looking statements and will be affected by a variety
of factors including national and local economic conditions, the general level
of interest rates, terms of governmental regulations that affect the
Partnership and interpretations of those regulations, the competitive
environment in which the properties
8
<PAGE> 10
owned by the Local Limited Partnerships operate, the availability of working
capital and dispositions of properties owned by the Partnership.
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,
however, are not expected to impact the Partnership's ability to meet its cash
obligations.
In 1994, the Partnership advanced $10,641 to four of the Local Limited
Partnerships by paying expenses on behalf of the Local Limited Partnerships. No
advances were repaid to the Partnership during 1996, 1995 and 1994. As
discussed in Note 3 to the Partnership's financial statements, during 1993, the
Partnership re-evaluated the collectibility of its total outstanding advances
and, based on the Local Limited Partnerships' operations, determined that such
advances to Local Limited Partnerships were not likely to be collected and,
therefore, for accounting purposes, treated the advances balance as additional
Investment in Local Limited Partnerships. The balance was then reduced to zero,
with the corresponding charge to operations. Advances to the Local Limited
Partnerships remain due and payable to the Partnership.
During 1996 and 1995, NHP advanced a total of $30,715 and $120,952,
respectively, to seven and ten of the Local Limited Partnerships for expenses
incurred relating to potential sales or refinancing under the LIHPRHA program.
During 1995 and 1994, loans of $2,392 and $1,800, respectively, were repaid by
four and one Local Limited Partnerships. No repayments were made during 1996.
The balance owed to NHP by Local Limited Partnerships at December 31, 1996 and
1995, was $705,482 and $674,767, respectively. Interest is charged at a rate
equal to the Chase Manhattan Bank prime interest rate plus 2%.
Net cash used in operations for the year ended December 31, 1996 was
$23,592 as compared to cash used in operations of $7,944 in 1995 and $17,697 in
1994. The increase in cash used in operations from 1995 to 1996 was the result
of a decrease in distributions received in excess of investment in Local
Limited Partnerships. The decrease in cash used in operations from 1994 to 1995
was primarily the result of an increase in distributions received from the
Local Limited Partnerships and an increase in interest received.
Distributions in excess of investment in Local Limited Partnerships
and distributions from Local Limited Partnerships represent the Partnership's
proportionate share of the excess cash available for distribution from the
Local Limited Partnerships. As a result of the use of the equity method of
accounting for the Partnership's investment in Local Limited Partnerships, the
carrying values for all Local Limited Partnerships were reduced to zero during
1994. Cash distributions received are recorded as revenue as distributions in
excess of investment in Local Limited Partnerships. In prior years, cash
distributions received from investments in Local Limited Partnerships which had
not been reduced to zero, were recorded as distributions in the statement of
cash flows and reduced the Partnership's investment on the statement of
financial position. Cash distributions totaling $18,362, $28,528 and $24,527
were received from two Local Limited Partnerships during the years ended
December 31, 1996, 1995 and 1994, 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 $140,782 at December 31, 1996.
The ability of the Partnership to meet its on-going cash requirements, in
excess of cash on hand at December 31, 1996, is dependent on distributions
received from the Local Limited Partnerships and proceeds from sales or
refinancings of the underlying Properties. Cash on hand at December 31, 1996,
together with projected distributions from Local Limited Partnerships, should
provide sufficient capital to fund the Partnership during 1997.
As of December 31, 1996, the Partnership owes the General Partner
$533,737 for administrative and reporting services performed. The payment of
the unpaid administrative and reporting fees and any other advances will most
9
<PAGE> 11
likely result from the sale or refinancing of the underlying Properties of the
Local Limited Partnerships rather than through recurring operations.
National Corporation for Housing Partnerships was a significant
participant in the drafting and passage of the Low Income Housing Preservation
and Resident Homeownership Act of 1990 ("LIHPRHA"). LIHPRHA creates a procedure
under which owners of properties assisted under the HUD Section 236 or
221(d)(3) program may be eligible to receive financial incentives in return for
agreeing to extend their property's use as low income housing. The
appropriation for the Department of Housing and Urban Development (which
administers LIHPRHA) for the 1997 fiscal year was recently approved and is
insufficient to meet existing program demand. As part of this appropriation,
Congress directed HUD to suspend processing of any property which had not
received approval of a sale or refinancing under LIHPRHA as of the date of
enactment of the appropriation, which occurred on September 26, 1996. Meadowood
I, II and III all received approval to be sold under the program within the
requisite time frame; however, none have been allocated funds under the 1997
fiscal year appropriation, which is required so that these transactions can
close. It is uncertain at this point whether LIHPRHA will receive future
appropriations from Congress sufficient to allow the sales of Meadowood I, II
and III to close. In the event that the LIHPRHA sales do not close, the
General Partner will investigate other sale or refinancing opportunities for
these properties, but there can be no assurance that these efforts will be
successful. If unsuccessful, this could have a substantially negative impact on
the Partnership's future available capital resources.
All the Local Limited Partnerships in which the Partnership has
invested carry deferred acquisition notes due to the original owners of the
Properties. In the event of a default on these notes, the note holders would
re-assume both NHP's and the Partnership's interests in the Local Limited
Partnerships. All of the notes have final maturity dates between 1996 and 1999.
Due to the weakness in the rental markets where some of the Properties are
located, the General Partner currently believes the amounts due on the
acquisition notes may likely exceed the value to be obtained through the
Properties' participation in LIHPRHA or other refinancing opportunities. In the
event that the Partnership loses its interest in these Local Limited
Partnerships, the partners in the Partnership may incur adverse tax
consequences. The impact of the adverse tax consequences is dependent on each
partner's individual tax situation.
On May 2, 1996, Meadowood Townhouses I and III Local Limited
Partnerships entered into an Agreement of Sale with Community Preservation and
Development Corporation, to sell their properties pursuant to the terms of the
Low Income Housing Preservation and Homeownership Act of 1990 ("LIHPRHA"). The
purchase price is based on the properties' Transfer Preservation Value, as
approved by HUD. Settlement is pending future appropriation of funds to HUD by
Congress for LIHPRHA.
In connection with the sale, a Forebearance Agreement has been
executed, which extends the maturity date of the deferred acquisition notes
made by the Limited Partner. Under the terms of this agreement, the initial
period of forebearance expires on April 30, 1997. A further extension of
forebearance will be granted until December 31, 1997, for closing if funding
for such closing has been approved by HUD. If such funding has not been
approved by April 30, 1997, a further extension of forebearance until January
2, 1998, will be granted to permit the Local Limited Partnerships to submit an
alternative plan to the note holders, and to negotiate and close such plan. The
consideration for the initial period of extension of forebearance, the Local
Limited Partnerships shall pay solely from their share of the net proceeds
received at closing, an extension fee of 1% of the aggregate amount of
principal due on the notes. The Local Limited Partnerships shall have no
liability for the extension fee if closing does not occur. Upon expiration of
the forebearance period with extensions, the Local Limited Partnerships shall
cause title to the Local Limited Partnership's interest in the Local Limited
Partnerships to be conveyed to the note holders.
The Partnership's continued ownership in Meadowood Townhouses I and
III Local Limited Partnerships is dependent on their successful efforts to
complete the LIHPRHA sale or to repay the principal and accrued interest on the
deferred acquisition notes or negotiate further amendments of the terms of the
note and the related sale and forebearance agreements. If title to the Local
Limited Partnership interest is conveyed to the note holder, the Partnership
will not receive any future benefits from the underlying Properties, and
taxable income will be generated and flow to the Partnership's investors
without any distributable cash. The specific impact of the tax consequences is
dependent upon each specific partner's individual tax situation.
10
<PAGE> 12
Results of Operations
The Partnership has invested as a limited partner in Local Limited
Partnerships which operate thirteen rental housing properties. Due to the use
of the equity method of accounting as discussed in Note 1 to the Partnership's
financial statements, to the extent the Partnership still has a carrying basis
in a respective Local Limited Partnership, results of operations would be
impacted by the Partnership's share of the losses of the Local Limited
Partnerships. As of December 31, 1996 and 1995, the Partnership had no carrying
basis in any of the Local Limited Partnerships and reflected no share of losses
for Local Limited Partnerships in 1996 and 1995. During 1994, the Partnership
recorded $13,066 of its share of losses of one Local Limited Partnership.
The Partnership's net loss increased to $107,225 in 1996 from a net
loss of $100,847 in 1995. Net loss per unit of limited partnership interest was
$9 for the 11,500 units outstanding throughout both years. This increase was
primarily due to a decrease in distributions in excess of investment in Local
Limited Partnerships, partially offset by a decrease in operating expenses. The
Partnership did not recognize $1,690,487 of its allocated share of losses from
eleven Local Limited Partnerships for the year ended December 31, 1996, as the
Partnership's net book investment in them was reduced to zero prior to 1996
(see Note 3 to the Partnership's financial statements). In addition, the
Partnership's share of profits in Elden Limited Partnership was $15,125 which
was offset against prior year losses not taken. The Partnership's share of
losses from the Local Limited Partnerships, if not limited to its investment
account balance, would have increased $738,419 between years. The increase in
the loss was primarily the result of one of the Local Limited Partnerships
recognizing an impairment loss on its rental property of $450,000.
Additionally, rental income decreased during 1996 and operating expenses
increased.
The Partnership's net loss decreased to $100,847 in 1995 from a net
loss of $131,679 in 1994. Net loss per unit of limited partnership interest
decreased to $9 in 1995 from $11 in 1994 for the 11,500 units outstanding
throughout both years. This decrease was primarily due to a decrease in loss on
the Partnership's investment in the Local Limited Partnerships and a decrease
in the Partnership's share of losses from Local Limited Partnerships, as well
as an increase in distributions received in excess of investment in Local
Limited Partnerships. The Partnership did not recognize $936,943 of its
allocated share of losses from twelve Local Limited Partnerships for the year
ended December 31, 1995, as the Partnership's net book investment in them was
reduced to zero in a prior year (see Note 3 to the Partnership's financial
statements). The Partnership's share of losses from the Local Limited
Partnerships, if not limited to its investment account balance, would have
decreased $2,543,754 between years. The decrease was primarily the result of
one of the Local Limited Partnerships recording a loss on reduction of carrying
value of their respective rental property of $2,500,000 during 1994, as the
estimated future undiscounted cash flows from operations and ultimate sale were
less than the current net book value (discussed more fully in Note 3 to the
Partnership's financial statements). No such loss was recorded during 1995.
Additionally, rental income increased in 1995 from 1994 and operating expenses
decreased.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary schedules of the
Partnership are included on pages 12 through 27 of this report.
11
<PAGE> 13
Independent Auditors' Report
To The Partners of
National Housing Partnership Realty Fund III
Vienna, VA
We have audited the accompanying statements of financial position of National
Housing Partnership Realty Fund III (the Partnership) as of December 31, 1996
and 1995, and the related statements of operations, partners' deficit, and cash
flows for each of the three years in the period ended December 31, 1996, and
the financial statement schedule listed in the Index at Item 14. These
financial statements and schedule are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Brunswick Village Limited Partnership for the years ended
December 31, 1996, 1995 and 1994. The Partnership's equity in the net assets of
this investee has been reduced to zero at December 31, 1996 and 1995 in
accordance with the equity method of accounting. The financial statements of
this investee were audited by other auditors whose reports thereon have been
furnished to us, and our opinion, insofar as it relates to amounts included for
this investee, is based solely upon the report of the other auditors.
We conducted our audits 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 audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such
financial statements present fairly, in all material respects, the financial
position of the Partnership as of December 31, 1996 and 1995, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, based on our audits and the report of other
auditors, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
Washington, D. C.
March 6, 1997
12
<PAGE> 14
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents (Note 2) $ 140,782 $ 164,374
Investments in and advances to Local Limited Partnerships (Note 3) - -
-------- --------
$ 140,782 $ 164,374
======== ========
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Administrative and reporting fees payable to
General Partner $ 533,737 $ 447,489
Accrued expenses 39,095 41,710
-------- --------
572,832 489,199
-------- --------
Partners' deficit:
General Partner - The National Housing Partnership (NHP) (99,570) (98,498)
Original Limited Partner - 1133 Fifteenth Street
Three Associates (104,470) (103,398)
Other Limited Partners - 11,500 investment units (228,010) (122,929)
-------- --------
(432,050) (324,825)
-------- --------
$ 140,782 $ 164,374
======== ========
</TABLE>
See notes to financial statements.
13
<PAGE> 15
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Interest income $ 8,073 $ 6,057 $ 7,185
Distributions in excess of
investment in Local Limited
Partnerships (Note 3) 18,362 28,528 24,527
-------- -------- --------
26,435 34,585 31,712
-------- -------- --------
COSTS AND EXPENSES:
Loss on investment in Local Limited
Partnerships (Note 3) - - 10,641
Share of losses from Local Limited
Partnerships (Note 3) - - 13,066
Administrative and reporting fees to
General Partner (Note 4) 86,248 86,248 86,248
Other operating expenses 47,412 49,184 53,436
-------- -------- --------
133,660 135,432 163,391
-------- -------- --------
NET LOSS $(107,225) $(100,847) $(131,679)
======== ======== ========
ALLOCATION OF NET LOSS:
General Partner - NHP $ (1,072) $ (1,008) $ (1,317)
Original Limited Partner - 1133
Fifteenth Street Three Associates (1,072) (1,008) (1,317)
Other Limited Partners - 11,500
investment units (105,081) (98,831) (129,045)
-------- -------- --------
$(107,225) $(100,847) $(131,679)
======== ======== ========
NET LOSS PER LIMITED
PARTNERSHIP INTEREST $ (9) $ (9) $ (11)
======== ======== ========
</TABLE>
See notes to financial statements.
14
<PAGE> 16
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
The 1133
National Fifteenth
Housing Street Other
Partnership Three Limited
(NHP) Associates Partners Total
----- ---------- -------- -----
<S> <C> <C> <C> <C>
Equity (deficit) at January 1, 1994 $ (96,173) $(101,073) $ 104,947 $ (92,299)
Net loss (1,317) (1,317) (129,045) (131,679)
-------- -------- -------- --------
Deficit at December 31, 1994 (97,490) (102,390) (24,098) (223,978)
Net loss (1,008) (1,008) (98,831) (100,847)
-------- -------- -------- --------
Deficit at December 31, 1995 (98,498) (103,398) (122,929) (324,825)
Net loss (1,072) (1,072) (105,081) (107,225)
-------- -------- -------- --------
Deficit at December 31, 1996 $ (99,570) $(104,470) $(228,010) $(432,050)
======== ======== ======== ========
Percentage interest at
December 31, 1994, 1995,
and 1996 1% 1% 98%
======== ======== ========
(A) (B) (C)
======== ======== ========
</TABLE>
(A) General Partner
(B) Original Limited Partner
(C) Consists of 11,500 investment units held by 921 investors. Each unit
represents .0085% of ownership interest.
See notes to financial statements.
15
<PAGE> 17
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Distributions received in excess of
investment in Local Limited Partnerships $ 18,362 $ 28,528 $ 24,526
Interest received 8,073 8,804 4,438
Operating expenses paid (50,027) (45,276) (46,661)
-------- -------- --------
Net cash used in operating activities (23,592) (7,944) (17,697)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenses paid on behalf of Local Limited Partnerships - - (10,641)
Other receivable - - 7,145
-------- -------- --------
Net cash used in investing activities - - (3,496)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES -
Repayment of loans from General Partner - (1,518) -
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,592) (9,462) (21,193)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 164,374 173,836 195,029
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 140,782 $ 164,374 $ 173,836
======== ======== ========
RECONCILIATION OF NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
Net loss $(107,225) $(100,847) $(131,679)
-------- -------- --------
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on investment in Local Limited Partnerships - - 13,066
Decrease (increase) in interest receivable - 2,747 (2,747)
Share of losses from Local Limited Partnerships - - 10,641
Increase in administrative and reporting fees
payable to the General Partner 86,248 86,248 86,248
(Decrease) increase in payables (2,615) 3,908 6,774
-------- -------- --------
Total adjustments 83,633 92,903 113,982
-------- -------- --------
Net cash used in operating activities $ (23,592) $ (7,944) $ (17,697)
======== ======== ========
</TABLE>
See notes to financial statements.
16
<PAGE> 18
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF PARTNERSHIP ORGANIZATION AND SIGNIFICANT ACCOUNTING
POLICIES
Organization
National Housing Partnership Realty Fund III (the Partnership) is a
limited partnership organized under the Maryland Revised Uniform Limited
Partnership Act on May 10, 1985. The Partnership was formed for the purpose of
raising capital by offering and selling limited partnership interests and then
investing in Local Limited Partnerships, each of which either owns and operates
an existing rental housing project or has acquired limited partnership
interests in partnerships which own and operate one or two existing rental
housing projects. All such rental housing projects are 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 June 30, 1985,
inception of operations, 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 11,500 interests at a price of $1,000 per interest. During 1985, the sale
of interests was terminated after the sale of all 11,500 interests.
During 1985, the Partnership acquired limited partnership interests
ranging from 94.5% to 99% in twelve limited partnerships (Local Limited
Partnerships), which were organized in 1984 to directly or indirectly own and
operate existing rental housing projects.
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 (see Note 3). An
investment account is maintained for each of the Local Limited Partnership
investments and losses are not recognized 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 they are received. 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 statements of cash flows, the Partnership
considers all highly liquid debt instruments purchased with initial maturities
of three months or less to be cash equivalents.
17
<PAGE> 19
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash in demand accounts $ 952 $ 467
Money market account 139,830 163,907
------- -------
$140,782 $164,374
======= =======
</TABLE>
3. INVESTMENTS IN AND ADVANCES TO LOCAL LIMITED PARTNERSHIPS
During 1985, the Partnership acquired a 99% limited partnership
interest in Brunswick Village Limited Partnership and 94.5% limited partnership
interests (98% with respect to allocation of losses) in nine Local Limited
Partnerships: Elden Limited Partnership, Edmond Estates Limited Partnership,
Galion Limited Partnership, Indian Valley I Limited Partnership, Indian Valley
II Limited Partnership, Indian Valley III Limited Partnership, Kimberly
Associates Limited Partnership, Newton Hill Limited Partnership and Woodmark
Limited Partnership. The Partnership also acquired a 99% limited partnership
interest in Meadowood Townhouses I Limited Partnership and Meadowood Townhouses
III Limited Partnership. Those two Local Limited Partnerships each own a 99%
limited partnership interest in an operating limited partnership which holds
title to two and one rental housing properties, respectively. The
Partnership's effective interest in these operating limited partnerships is
98.01%.
Since the Partnership does not exercise control over the activities of
the Local Limited Partnerships in accordance with the partnership agreements,
the Partnership's 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. However, since the Partnership
is neither legally liable for the obligations of the Local Limited
Partnerships, nor otherwise committed to provide additional support to them, it
does not recognize losses once its investment, reduced for its share of losses
and cash distributions, reaches zero in each of the individual Local Limited
Partnerships. As a result, the Partnership did not recognize $1,690,487,
$936,943 and $3,803,923 of its allocated share of losses from eleven, twelve
and eleven Local Limited Partnerships during 1996, 1995 and 1994, respectively.
During 1996, the Partnership's share of profits in Elden Limited Partnership
was $15,125, which was offset against prior year losses not taken. As of
December 31, 1996 and 1995, the Partnership had not recognized $14,281,351 and
$12,605,989, respectively, of its allocated share of cumulative losses from the
twelve and eleven Local Limited Partnerships in which its investment is zero.
In 1994, the Partnership advanced $10,641 to four Local Limited
Partnerships by paying expenses on behalf of the Local Limited Partnerships. No
advances were made during 1996 and 1995. No advances were repaid to the
Partnership during 1996, 1995 and 1994. During 1993, the Partnership
re-evaluated the collectibility of the total outstanding advances made to the
Local Limited Partnerships and determined, based on the Local Limited
Partnerships' operations, that such advances are not likely to be collected.
The Partnership treated the advances balance as additional "Investment in
Limited Partnerships" for accounting purposes. The balance was then reduced to
zero, with corresponding charges to operations or the investment balance for
the individual Local Limited Partnerships. The charge to operations in 1994
reduced the Partnership's investment in Local Limited Partnerships to zero.
18
<PAGE> 20
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
These advances plus accrued interest remain due and payable to the
Partnership. As of December 31, 1996, the balance of such advances was
$534,280. 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 refinancing or sale 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, 1996 and 1995, and the combined
results of operations for the years ended December 31, 1996, 1995 and 1994 are
as follows:
COMBINED FINANCIAL POSITION
OF THE LOCAL LIMITED PARTNERSHIPS
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1996 1995
---- ----
<S> <C> <C>
Assets:
Land $ 2,992,600 $ 2,992,600
Buildings and improvements,
net of accumulated depreciation of
$14,098,487 and $12,743,988 and impairment
losses of $4,350,000 in 1996 and $3,900,00 in 1995 28,569,356 29,312,581
Other assets 4,731,800 4,842,167
----------- -----------
$ 36,293,756 $ 37,147,348
=========== ===========
Liabilities and partners' deficit:
Liabilities:
Mortgage notes payable $ 17,314,114 $ 17,892,400
Acquisition notes payable 14,683,867 14,683,867
Other liabilities 20,866,030 19,418,730
----------- -----------
52,864,011 51,994,997
Partners' deficit:
National Housing Partnership Realty Fund III (15,062,902) (13,369,178)
Other partners (1,507,353) (1,478,471)
----------- -----------
$ 36,293,756 $ 37,147,348
=========== ===========
</TABLE>
19
<PAGE> 21
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
COMBINED RESULTS OF OPERATIONS
OF THE LOCAL LIMITED PARTNERSHIPS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue $ 8,952,268 $ 8,997,266 $ 8,635,033
---------- ---------- ----------
Expenses:
Operating expenses 6,956,609 6,661,387 6,875,590
Financial expenses - primarily interest 505,862 640,359 552,011
Interest on acquisition notes 1,378,755 1,379,901 1,379,286
Depreciation and amortization 1,364,217 1,262,745 1,240,869
Impairment loss on rental property 450,000 - 2,500,000
---------- ---------- ----------
Total expenses 10,655,443 9,944,392 12,547,756
---------- ---------- ----------
Net loss $(1,703,175) $ (947,126) $(3,912,723)
========== ========== ==========
</TABLE>
The combined financial statements of the Local Limited Partnerships
are prepared on the accrual basis of accounting. The twelve Local Limited
Partnerships were formed during 1984 for the purpose of directly or indirectly
operating thirteen rental housing projects. Eleven of the projects receive a
substantial amount of rental assistance from HUD.
The following table indicates the year within the Section 8 rent
subsidy contracts expire:
<TABLE>
<CAPTION>
Subsidized Units Subsidized Units
Expiring as a Expiring as a
Number Percentage of Total Percentage of
Year of Units Subsidized Units Total Units
---- -------- ---------------------- ----------------------
<S> <C> <C> <C>
1997 110 18% 6%
1998 493 82% 29%
--- --- --
Total 603 100% 35%
=== === ==
</TABLE>
Of the contracts above expiring during 1997, one Local Limited
Partnership, Galion Limited Partnership, has contracts for 60 units that expire
prior to September 30, 1997. Congress has passed legislation which will provide
a one-year renewal contract to replace those contracts.
One Local Limited Partnership, Brunswick Village Limited Partnership,
has a contract covering the remaining 50 units that expire in October, 1997. It
is uncertain whether this agreement, as well as the agreement expiring in 1998,
will be renewed, and if so, on what terms.
20
<PAGE> 22
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
For the past several years, various proposals have been advanced by
HUD, the Congress and others proposing the restructuring of the Section 8.
These proposals generally seek to lower subsidized rents to market levels and
to lower required debt service costs as needed to ensure financial viability at
the reduced rents, but vary greatly as to how that result is to be achieved.
Some proposals include a phase-out of project-based subsidies on a
property-by-property basis upon expiration of a property's HAP Contract, with a
conversion 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
a property of their choice, provided the tenant has the financial ability to
pay the difference between the selected property's monthly rent and the value
of the voucher, which would be established based on HUD's regulated fair market
rent for that geographic area.
Congress has not yet accepted any of these restructuring proposals and
instead has elected to renew expiring Section 8 HAP Contracts for one year
terms, generally at existing rents. While the Partnership does not believe that
the proposed changes would result in a significant number of tenants relocating
from properties owned by the Local Limited Partnerships, there can be no
assurance that the proposed changes would not significantly affect the
operations of the properties of the Local Limited Partnerships. Furthermore,
there can be no assurance that changes in federal subsidies will not be more
restrictive than those currently proposed or that other changes in policy will
not occur. Any such changes could have an adverse effect on the operation of
the Partnership.
Depreciation of the buildings and improvements for eleven 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 of the building, whereas depreciation for one of the
Local Limited Partnerships is computed using the straight-line method, assuming
a 30-year life and a 30% salvage value. Depreciation of equipment is calculated
using accelerated methods over estimated useful lives of 5 to 27 years.
The mortgage notes payable are insured by the Federal Housing
Administration (FHA) and are 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 eleven rental housing projects insured under Section 236, the
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 the
lenders.
Deferred acquisition notes of $14,683,867 at December 31, 1996 bear
simple interest at rates of 9% or 10% per annum. These notes are collateralized
by partnership interests in all of the Local Limited Partnerships. Neither
principal nor interest are payable currently; all principal and accrued
interest are payable upon the earlier of the sale, transfer, or refinancing of
the project or dates ranging from 1996 to 1999 with extensions ranging up to
five years. In 1994, one of the Local Limited Partnerships exercised its
unilateral option to extend the maturity date of its notes originally due in
1994. A fee equal to 1% of the original principal amount was added to the
principal due.
On May 2, 1996, the two Meadowood Local Limited Partnerships entered
into Agreements of Sale with Community Preservation and Development
Corporation, pursuant to the terms of the Low Income Housing Preservation and
Homeownership Act of 1990 (LIHPRHA) to sell each of the Local Partnerships. The
purchase price is to be based on the project's Transfer Preservation Value, as
approved by HUD. Settlement is pending Congressional appropriation of LIHPRHA
funds to HUD.
In connection with the sale, a Forebearance Agreement has been
executed, which extends the maturity date of the deferred acquisition notes in
the amounts of $10,909,799 including accrued interest at Decemer 31, 1996 owned
by the two Meadowood Local Limited Partnerships. Under the terms of this
agreement, the initial period of forebearance shall expire on April 30, 1997. A
further extension of forebearance will be granted until December 31, 1997 for
closing,
21
<PAGE> 23
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
if funding for such closing has been approved by HUD. If such funding has not
been approved by April 30, 1997, a further expansion of forebearance until
January 2, 1998, will be granted to permit the Local Limited Partner to submit
an alternative plan to the note holders, and to negotiate and close such plan.
There can be no assurance that the efforts will be successful.
In consideration for the initial period of extension of forebearance,
the two Local Limited Partnerships shall pay, solely from their share of the
net proceeds received at closing, an extension fee of 1% of the aggregate
amount of principal due on the notes. The Local Limited Partnerships shall have
no liability for the extension fee if closing does not occur. Upon expiration
of the forebearance period, with extensions, the two Local Limited Partnerships
shall cause title to their interest in the local partnerships to be conveyed to
the note holders. The financial statements do not include any adjustments which
might result from this uncertainty.
The two Meadowood Local Limited Partnerships continued existence as a
going concern is dependent on the Local Limited Partnerships successful efforts
to complete the LIHPRHA sale described above, or for the Local Limited
Partnerships to repay the principal and accrued interest on the deferred
acquisition notes or to negotiate further amendments of the terms of the notes
and the related sales and forebearance documents. The Local Limited
Partnerships have for the past several years, generated losses which have been
funded through loans from the partners. The Local Limited Partnerships have
minimal cash and are generating negative cash flows. The partners are under no
obligation to provide such funding in the future.
The two Meadowood Local Limited Partnerships continued existence as a
going concern is dependent upon maintaining positive cash flows from operations
or obtaining additional capital from partners by borrowing additional funds.
NHP intends to manage the Local Limited Partnerships prudently so as to produce
positive cash flows from their operations, thus allowing for adequate cash
distributions.
Should the Local Limited Partnerships cease to exist as a going
concern, there could be significant tax consequences to the partners in the
Partnership.
In March 1995, The Financial Accounting Standards Board issued
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") effective for financial statements for fiscal years beginning
after December 15, 1996. Adoption of this Statement during the year ended
December 31, 1996, required 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.
Galion Limited Partnership recognized an impairment loss on its rental
property in the amount of $450,000. Because the Local Limited Partnership's
deferred acquisition note is due December 20, 1999, the Local Limited
Partnership estimated net cash flow only for the period January 1, 1997 to
December 20, 1999. As a result of this limited holding period, the estimated
net cash flow is less than the carrying amount at December 31, 1996. The Local
Limited Partnership has used the Direct Capitalization Method to estimate the
fair value of the rental property. Using this Method, estimated annual cash
flow generated by the property is divided by an overall capitalization rate to
estimate the rental property's fair value. The impairment loss had no impact
on the Partnership's operations, since its investment in Galion Limited
Partnership had been reduced to zero in a prior year.
Prior to 1996 and the Statement, generally accepted accounting
principles (GAAP) required that the Local Limited Partnerships evaluate whether
it is probable that the estimated undiscounted future cash flows of each of its
22
<PAGE> 24
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
properties, plus cash projected to be received upon an assumed sale of the
property (Net Realizable Value) was less than the net carrying value of the
property. If such a shortfall existed, and was material and deemed to be other
than temporary in nature, then a write-down equal to the shortfall was
warranted. The Local Limited Partnerships performed such evaluations on an
ongoing basis. During 1994, using a methodology consistent with GAAP, one of
the Local Limited Partnerships determined that the book value of the rental
property exceeded the rental property's estimated net realizable value. As
required by GAAP, the Local Limited Partnership recorded an adjustment of
$2,500,000 to reduce the carrying value of the rental property to its estimated
net realizable value for the year ended December 31, 1994.
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,
1996. Should a Local Limited Partnership be forced to dispose of any of its
properties, it could incur a loss.
4. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES OF THE GENERAL
PARTNER
The General Partner of the Partnership is The National Housing
Partnership (NHP). National Corporation for Housing Partnerships (NCHP) is the
sole General Partner of NHP. NHP Partners Two, LP, is the sole limited partner
of NHP. The Original Limited Partner of the Partnership, 1133 Fifteenth Street
Three Associates, is comprised of individuals who were key employees of NCHP at
the time the Partnership was formed.
The Partnership accrued Administrative and Reporting Fees payable to
the General Partner of $86,248 in 1996, 1995 and 1994. No payments were made
to the General Partner for those fees in 1996 and 1995. As of December 31, 1996
and 1995, the Partnership owed $533,737 and $447,489, respectively, to the
General Partner for accrued administrative and reporting fees.
An affiliate of the General Partner, NHP Management Company (NHPMC),
is the project management agent for the projects operated by four of the Local
Limited Partnerships under agreements which, subject to certain conditions,
extend to the year 2020. NHPMC and other affiliates of NCHP earned $625,232,
$583,446 and $568,801 from the Local Limited Partnerships for management fees
and other services provided to the Local Limited Partnerships during 1996, 1995
and 1994, respectively.
Prior to 1996, personnel working at the project sites which are
managed by NHPMC were NCHP employees and, therefore, the projects reimbursed
NCHP for the actual salaries and related benefits. Beginning January 1, 1996,
project employees became employees of NHP Incorporated. Total reimbursements
earned for salaries and benefits for the years ended December 31, 1996, 1995
and 1994, were approximately $786,000, $739,000 and $704,000, respectively. At
December 31, 1996 and 1995 account payable included $2,309 and $1,627 due to
NHP Incorporated and NCHP, respectively.
5. INCOME TAXES
The Partnership is not taxed on its income. The partners are taxed in
their individual capacities 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. The tax loss is allocated to the partner groups in accordance
with Section 704(b) of the Internal Revenue Code and therefore is not
necessarily proportionate to the percentage interest owned.
23
<PAGE> 25
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
For Federal income tax purposes, the twelve Local Limited Partnerships
compute depreciation of the buildings and improvements using the Accelerated
Cost Recovery System (ACRS) and the Modified Accelerated Cost Recovery System
(MACRS), while for financial statements purposes, depreciation is computed
using the straight-line method, assuming a 30-year life and a 30% salvage value
or a 50-year life. Rent received in advance is included as income in
determining the taxable income or loss for Federal income tax purposes; while
for financial statement purposes it is considered a liability. In addition,
interest expense on the acquisition notes payable by the Local Limited
Partnerships is computed for Federal income tax purposes using the economic
accrual method; while for financial statement purposes, interest is computed
using a simple interest rate. The Partnership's share of losses from the Local
Limited Partnerships is not recognized for financial statement purposes once
its investment account is decreased to zero; while, for income tax purposes,
losses continue to be recognized. Other differences result from the allocation
of tax losses in accordance with Section 704(b) of the Internal Revenue Code.
A reconciliation follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net loss per financial statements $ (107,225) $ (100,847) $ (131,679)
Timing differences in determining
losses of local limited partnerships:
Depreciation (1,041,755) (1,045,037) (1,026,469)
Interest on acquisition notes payable (161,384) (136,036) (66,114)
Losses taken in excess of financial statement
investment account (1,693,165) (962,475) (3,841,344)
Accrued interest on partner loans 151,341 208,654 15,867
Impairment loss on rental property 441,000 - 2,496,082
Other 109,338 225,733 255,506
---------- ---------- ----------
Loss per tax return $(2,301,850) $(1,810,008) $(2,298,151)
========== ========== ==========
</TABLE>
As discussed in Note 3, there is substantial doubt as to the ability
of two of the Local Limited Partnerships, Meadowood Townhouses I and III,
ability to continue as a going concern. Should the Partnership lose its
interest in a Local Limited Partnership, partners in the Partnership may incur
adverse tax consequences. The impact of the tax consequences is dependent upon
each partner's individual tax situation.
6. ALLOCATION OF RESULTS OF OPERATIONS, CASH DISTRIBUTIONS AND GAINS AND
LOSSES FROM SALES OR REFINANCING
Net income or loss from operations 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.
24
<PAGE> 26
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
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 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;
Third, 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;
Fourth, 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;
Fifth, to the General Partner for disposition and refinancing fees,
including prior disposition and refinancing fees which have been
accrued but are unpaid;
Sixth, 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.
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
each 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 in such 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;
25
<PAGE> 27
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
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 interests in a Local Limited
Partnership or underlying property will be allocated 85% to the Limited
Partners and 15% to the General Partner.
******************
26
<PAGE> 28
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL LIMITED PARTNERSHIPS IN WHICH NHP REALTY FUND III HAS INVESTED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Initial Cost Capitalized
Cost to Local Subsequent
Limited Partnership to Acquisition
------------------------------ -------------------------------
Buildings Carrying
and Cost
Partnership Name Encumbrances Land Improvements Improvements Adjustments
- -------------------------------------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Brunswick Village Limited Partnership (1) $ 275,000 $ 2,109,506 $ 465,860 $ -
Edmond Estates Limited Partnership (1) 150,000 2,470,329 176,381 (1,400,000)
Elden Limited Partnership (1) 338,000 4,355,651 1,165,463 -
Galion Limited Partnership (1) 60,000 1,308,947 163,599 (450,000)
Indian Valley I Limited Partnership (1) 120,000 2,764,506 184,762 -
Indian Valley II Limited Partnership (1) 108,000 2,278,088 197,679 -
Indian Valley III Limited Partnership (1) 117,600 2,782,409 211,623 -
Kimberly Associates Limited Partnership (1) 294,000 4,259,949 1,700,331 -
Meadowood Townhouses I Limited Partnership (1) 582,000 6,495,229 1,011,790 -
Meadowood Townhouses II Limited Partnership (1) 566,000 6,285,999 913,679 (2,500,000)
Newton Hill Limited Partnership (1) 60,000 1,015,475 83,686 -
Woodmark Limited Partnership (1) 322,000 3,882,930 733,972 -
---------- ----------- ---------- -----------
Total, December 31, 1996 $ 2,992,600 $ 40,009,018 $ 7,008,825 $ (4,350,000)
========== =========== ========== ===========
<CAPTION>
Gross Amount at which Carried
at Close of Period
--------------------------------------------------
Buildings Accumulated
and Total Depreciation Date of
Partnership Name Land Improvements (2) (3) (3) Construction
- -------------------------------------- ------------ ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Brunswick Village Limited Partnership $ 275,000 $ 2,575,366 $ 2,850,366 $ 751,855 1971
Edmond Estates Limited Partnership 150,000 1,246,710 1,396,710 641,412 1972
Elden Limited Partnership 338,000 5,521,114 5,859,114 1,783,204 1970
Galion Limited Partnership 60,000 1,022,546 1,082,546 441,344 1972
Indian Valley I Limited Partnership 120,000 2,949,268 3,069,268 893,970 1972
Indian Valley II Limited Partnership 108,000 2,475,767 2,583,767 736,392 1972
Indian Valley III Limited Partnership 117,600 2,994,032 3,111,632 884,210 1972
Kimberly Associates Limited Partnership 294,000 5,960,280 6,254,280 1,967,751 1971
Meadowood Townhouses I Limited Partnership 582,000 7,507,019 8,089,019 2,133,784 1972
Meadowood Townhouses II Limited Partnership 566,000 4,699,678 5,265,678 2,014,768 1972
Newton Hill Limited Partnership 60,000 1,099,161 1,159,161 348,579 1972
Woodmark Limited Partnership 322,000 4,616,902 4,938,902 1,501,218 1971
---------- ----------- ----------- -----------
Total, December 31, 1996 $ 2,992,600 $ 42,667,843 $ 45,660,443 $ 14,098,487
========== =========== =========== ===========
<CAPTION>
Life upon which
depreciation in
latest statement of
Date operations is
Partnership Name Acquired computed (years)
- -------------------------------------- -------- -------------------
<S> <C> <C>
Brunswick Village Limited Partnership 6/85 5-30
Edmond Estates Limited Partnership 6/85 5-50
Elden Limited Partnership 6/85 5-50
Galion Limited Partnership 7/85 5-50
Indian Valley I Limited Partnership 6/85 5-50
Indian Valley II Limited Partnership 6/85 5-50
Indian Valley III Limited Partnership 6/85 5-50
Kimberly Associates Limited Partnership 6/85 5-50
Meadowood Townhouses I Limited Partnership 6/85 5-50
Meadowood Townhouses II Limited Partnership 6/85 5-50
Newton Hill Limited Partnership 7/85 5-50
Woodmark Limited Partnership 6/85 5-50
Total, December 31, 1996
</TABLE>
See notes to Schedule XI.
27
<PAGE> 29
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
NOTES TO SCHEDULE XI - REAL ESTATE AND
ACCUMULATED DEPRECIATION OF LOCAL LIMITED
PARTNERSHIPS IN WHICH NHP REALTY FUND III HAS INVESTED
DECEMBER 31, 1996
(1) Schedule of Encumbrances
<TABLE>
<CAPTION>
Deferred
Acquisition
Notes and
Mortgage Accrued
Partnership Name Notes Interest Total
---------------- ----- -------- -----
<S> <C> <C> <C>
Brunswick Village Limited Partnership $ 680,347 $ 2,084,826 $ 2,765,173
Edmond Estates Limited Partnership 1,036,123 2,037,217 3,073,340
Elden Limited Partnership 1,902,129 3,419,062 5,321,191
Galion Limited Partnership 537,841 1,003,957 1,541,798
Indian Valley I Limited Partnership 1,132,773 2,006,673 3,139,446
Indian Valley II Limited Partnership 1,124,188 1,302,598 2,426,786
Indian Valley III Limited Partnership 1,249,042 1,822,948 3,071,990
Kimberly Associates Limited Partnership 1,999,730 2,920,243 4,919,973
Meadowood Townhouses I Limited
Partnership 2,640,285 6,129,576 8,769,861
Meadowood Townhouses III Limited
Partnership 3,025,419 4,780,223 7,805,642
Newton Hill Limited Partnership 453,569 684,714 1,138,283
Woodmark Limited Partnership 1,532,668 3,235,318 4,767,986
----------- ----------- -----------
TOTAL $ 17,314,114 $ 31,427,355 $ 48,741,469
=========== =========== ===========
</TABLE>
(2) The aggregate cost of land for Federal income tax purposes is
$2,992,600, and the aggregate costs of buildings and improvements for
Federal income tax purposes is $47,324,953. The total of the
above-mentioned items is $50,317,553.
28
<PAGE> 30
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
A LIMITED PARTNERSHIP
NOTES TO SCHEDULE XI - REAL ESTATE AND
ACCUMULATED DEPRECIATION OF LOCAL LIMITED
PARTNERSHIPS IN WHICH NHP REALTY FUND III HAS INVESTED
DECEMBER 31, 1996
(Continued)
<TABLE>
<CAPTION>
(3) Reconciliation of real estate
Years Ended December 31,
----------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $45,049,169 $43,987,221 $45,626,140
Improvements during the period 1,061,274 1,061,948 861,081
Impairment loss on rental property (450,000) - (2,500,000)
---------- ---------- ----------
Balance at end of period $45,660,443 $45,049,169 $43,987,221
========== ========== ==========
<CAPTION>
Reconciliation of accumulated depreciation
Years Ended December 31,
---------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $12,743,988 $11,491,517 $10,260,366
Depreciation expense for the period 1,354,499 1,252,471 1,231,151
---------- ---------- ----------
Balance at end of period $14,098,487 $12,743,988 $11,491,517
========== ========== ==========
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
29
<PAGE> 31
PART III
Item 10. 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
Seven individuals comprise the Board of Directors of NCHP. Three
directors were appointed by the President of the United States, by and with the
advice and consent of the Senate.
J. Roderick Heller, III (age 59) was elected President, Chief Operating
Officer and a Director of NCHP in 1985, Chief Executive Officer of NCHP in
1986, and Chairman in 1988. He currently serves as Chairman, President and
Chief Executive Officer of NCHP and its affiliate NHP Incorporated. From 1982
until 1985, Mr. Heller served as President and Chief Executive Officer of
Bristol Compressors, Inc., a Bristol, Virginia-based company involved in the
manufacturing of air conditioning compressors. From 1971 until 1982, he was a
partner in the Washington, D.C. law firm of Wilmer, Cutler & Pickering. Mr.
Heller was elected Chairman of the Board of public television station WETA in
Washington, D.C., and is a director of Auto-Trol Technology Corporation. Mr.
Heller completed his term as a director of a number of nonprofit organizations,
including the National Trust for Historic Preservation in 1996 after nine years
of service and was Chairman of the Board of The Civil War Trust from 1991 to
March 1997.
Susan R. Baron (age 45) is an attorney specializing in conventional
and government-assisted real estate development and finance in the residential
and commercial markets. From 1978 to 1993 she was with the Washington, D.C. law
firm of Dunnells, Duvall & Porter. Ms. Baron serves on the of Seeds of Peace
Advisory Board and is a past president of the National Leased Housing
Association. She was appointed to the Board of Directors by the President of
the United States in September 1994 to complete a term expiring in October 1994
and continues to serve until the appointment of a successor.
Danny K. Davis (age 55) has been a Commissioner on the Cook County
Board of Commissioners since November 1990. Prior to his service on the Cook
County Board, he served as an Alderman on the Chicago City Council for 11
years. Mr. Davis is also a member of numerous civic and professional
organizations. He was appointed to the Board of Directors by the President of
the United States in September 1994 and continues to serve until the
appointment of a successor.
Alan A. Diamonstein (age 65) has been a member of the Virginia House
of Delegates since 1967, currently serving as Chairman of the General Laws
Committee and a member of the standing committees on Appropriations, Education
and Rules. He is chairman of the Virginia Housing Study Commission and is a
member of the Peninsula Board of Advisors for Signet Bank, the
Jamestown-Yorktown Board of Trustees, as well as a number of educational and
civic organizations. Mr. Diamonstein is the senior partner in the law firm of
Diamonstein, Becker and Staley. He was appointed to the Board of Directors by
the President of the United States in October 1994 and continues to serve until
the appointment of a successor.
Michael R. Eisenson (age 41) is the President and Chief Executive
Officer of Harvard Private Capital Group, Inc. ("Harvard Capital"), which
manages the direct investment and private equities portfolio of the Harvard
30
<PAGE> 32
University endowment fund. Harvard Capital is the investment advisor for
Demeter. Mr. Eisenson joined Harvard Capital in 1986. Mr. Eisenson is a
director of ImmunoGen, Inc., Harken Energy Corporation, and Somatix Therapy
Corporation. Under a Shareholders Agreement between NHP Incorporated, Demeter
Holdings Corporation and Capricorn Investors, L.P. (see Item 1 above), Demeter
is entitled to elect two members of the NCHP Board of Directors. Pursuant to
this agreement, Mr. Eisenson was re-elected to the Board of Directors in 1992
and continues to serve.
Tim R. Palmer (age 39) joined Harvard Capital in 1990 and is currently
Managing Director. From 1987 to 1990, Mr. Palmer was Manager, Business
Development, at The Field Corporation, a private investment firm. Mr. Palmer is
a director of PriCellular Corporation. Under a Shareholders Agreement between
NHP Incorporated, Demeter Holdings Corporation and Capricorn Investors, L.P.
(see Item 1 above), Demeter is entitled to elect two members of the NCHP Board
of Directors. Pursuant to this agreement, Mr. Palmer was re-elected to the
Board of Directors in 1994 and continues to serve.
Herbert S. Winokur, Jr. (age 53) has served as the President of
Winokur & Associates, Inc., an investment and management services firm, and
Winokur Holdings, Inc., which is the managing general partner of Capricorn, a
private investment partnership, since 1987. Mr. Winokur is the past Chairman of
DynCorp and serves as a director of Enron Corporation and NacRe Corporation.
Under a Shareholders Agreement between NHP Incorporated, Demeter Holdings
Corporation and Capricorn Investors, L.P. (see Item 1 above), Capricorn is
entitled to elect one member of the NCHP Board of Directors. Pursuant to this
agreement, Mr. Winokur was re-elected to the Board of Directors in 1992 and
continues to serve.
EXECUTIVE OFFICERS
The current executive officers of NCHP and a description of their
principal occupations in recent years are listed below.
J. Roderick Heller, III (age 59). See "Directors of NCHP."
Ann Torre Grant (age 39) has served as Executive Vice President, Chief
Financial Officer and Treasurer of NCHP since February 1995. She was Vice
President and Treasurer of USAir, Inc. and USAir Group, Inc. from 1991 through
January 1995, and held other finance positions at the airline between 1988 and
1991. From 1983 to 1988, she held various finance positions with American
Airlines, Inc. Ms. Grant serves as a director of the Franklin Mutual Series
Funds.
Joel F. Bonder (age 48) has served as Senior Vice President and
General Counsel of NCHP since April 1994. Mr. Bonder also served as Vice
President and Deputy General Counsel from June 1991 to March 1994, as Associate
General Counsel from 1986 to 1991, and as Assistant General Counsel from 1985
to 1986. From 1983 to 1985, he was with the Washington, D.C. law firm of Lane &
Edson, P.C. From 1979 to 1983, Mr. Bonder practiced with the Chicago law firm
of Ross and Hardies.
Eric N. Ross (age 35) has served as Vice President, Asset Management
of NCHP since May 1996. He is responsible for delivery of asset management
services to NCHP's affiliated ownership organization and to other multifamily
owners. Previously, Mr. Ross served as Vice President, Finance, from March 1995
to May 1996 and Vice President, Asset Management, from September 1992 to March
1995. Prior to joining NHP in 1992, Mr. Ross was Assistant Vice President in
Asset Management for Winthrop Financial Associates.
Charles S. Wilkins, Jr. (age 46) has served as Senior Vice President
of NHP since September 1988 and is currently responsible for legislative and
regulatory affairs. He was formerly responsible for asset and property
management of the affordable multifamily portfolio. Prior to joining NCHP, Mr.
Wilkins was Senior Vice President of Westminster Company, a regional real
estate development firm where he was responsible for the property
31
<PAGE> 33
management of a diverse portfolio of properties. Mr. Wilkins is immediate
past-president of the National Assisted Housing Management Association and is a
director of the National Leased Housing Association as well as various
regulatory committees, including the Executive Committee of the HUD Occupancy
Task Force.
Jeffrey J. Ochs (age 39) has served as Vice President and Chief
Accounting Officer of NCHP since September 1995. From 1994 until September
1995, Mr. Ochs was Assistant Controller of USAir, Inc. From 1987 to 1994, he
held various accounting positions with USAir, Inc.
Eugene H. Goodsell (age 43) serves as Vice President and Controller of
NCHP. He has been with NCHP since 1983. Prior to joining NHP, Mr. Goodsell, a
CPA, was an audit manager with the public accounting firm of Arthur Andersen
LLP.
(d) There is no family relationship between any of the foregoing
directors and executive officers.
Item 11. Executive Compensation
National Housing Partnership Realty Fund III has no officers or
directors. However, as outlined in the prospectus, various fees and
reimbursements are paid to the General Partner and its affiliates. Following is
a summary of such fees paid or accrued during the year ended December 31, 1996:
(i) The Partnership accrued $86,248 for administrative and
reporting fees for managing the affairs of the Partnership and
for investor services during 1996. No payments were made in
1996.
(ii) Annual partnership administration fees of $97,500 are payable,
but not yet paid, to the General Partner for its services as
General Partner of the Local Limited Partnerships. During
1996, the Local Limited Partnerships made payments of $37,317
for previous years' annual partnership administrative fees.
(iii) An affiliate of the General Partner, NHP Management Company
(NHPMC), is the project management agent for the projects
operated by four of the Local Limited Partnerships. During
1996, NHPMC and other affiliates of NCHP earned $625,232 for
management fees and other services provided to the Local
Limited Partnerships.
(iv) In 1996, personnel working at the project sites which were
managed by NHPMC were NCHP employees, and therefore the
project reimbursed NHP Incorporated for their actual salaries
and related benefits. Total reimbursements for salaries and
benefits earned for the year ended December 31, 1996, was
approximately $786,000. At December 31, 1996 trade payables
include $2,309 due to NHP Incorporated.
Item 12. Security Ownership of Certain Beneficial Owners and Management
1133 Fifteenth Street Three Associates, a Maryland Limited
Partnership, whose general partner is NHP and whose limited partners were key
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. NHP
Investment Partners I holds 4.5% limited partnership interest (1% with respect
to allocation of losses) in nine of the Local Limited Partnerships. NHP
Investment Partners I held a 1% general partnership interest and a 98% limited
partnership interest in these Local Limited Partnerships prior to admittance of
the Partnership. A former employee of NCHP (a New Jersey resident) holds a
0.01% limited partnership interest in one Local Limited Partnership to meet
that state's legal requirements.
32
<PAGE> 34
Item 13. Certain Relationships and Related Transactions
The Partnership had no material transactions or business relationships
with NHP or its affiliates except as described in Items 8, 10, and 11, above.
33
<PAGE> 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as a part of this report:
1. Financial Statements
The financial statements, notes, and reports listed
below are included herein:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report
12
Statements of Financial Position,
December 31, 1996 and 1995
13
Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994
14
Statements of Partners' Deficit for the Years
Ended December 31, 1996, 1995 and 1994
15
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994
16
Notes to Financial Statements
17
Schedule XI - Real Estate and
Accumulated Depreciation of the Local Limited
Partnerships in which NHP Realty Fund III has
invested, December 31, 1996 27
</TABLE>
2. Financial Statement Schedules
Financial statement schedules for the Registrant:
Schedule XI is included in the financial statements
listed under Item 14(a)(1) above. All other schedules
have been omitted as the required information is
inapplicable or the information is presented in the
financial statements or notes thereto.
Financial statements required by Regulation S-X which
are excluded from the annual report to shareholders
by Rule 14a-3(b): See 3 below.
34
<PAGE> 36
3. Exhibits
The following combined financial statements of the
Local Limited Partnerships in which the Partnership
has invested funds are included as an exhibit to this
report and are incorporated herein:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports 38
Combined Statements of Financial
Position, December 31, 1996 and 1995 42
Combined Statements of Operations for the Years Ended
December 31, 1996, 1995, and 1994 43
Combined Statements of Partners'
Deficit for the Years Ended
December 31, 1996, 1995 and 1994 44
Combined Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994 45
Notes to Combined Financial
Statements 48
(b) Reports on Form 8-K.
None.
</TABLE>
35
<PAGE> 37
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 III
By: The National Housing Partnership, its sole general partner
By: National Corporation for Housing Partnerships, its sole
general partner
March 26, 1997 /s/ J. Roderick Heller, III
- -------------- -----------------------------------
Date J. Roderick Heller, III, Chairman, President
and Chief Executive Officer
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:
March 26, 1997 /s/ J. Roderick Heller, III
- -------------- -----------------------------------
Date J. Roderick Heller, III
Chairman, President, Chief Executive
Officer and Director
March 26, 1997 /s/ Ann Torre Grant
- -------------- -----------------------------------
Date Ann Torre Grant
Executive Vice President, Chief Financial Officer
and Treasurer
March 26, 1997 /s/ Jeffrey J. Ochs
- -------------- -----------------------------------
Date Jeffrey J. Ochs
Vice President and Chief Accounting Officer
36
<PAGE> 38
March 26, 1997 *
- -------------- -----------------------------------
Date Susan R. Baron, Director
March 26, 1997 *
- -------------- -----------------------------------
Date Michael R. Eisenson, Director
March 26, 1997 *
- -------------- -----------------------------------
Date Danny K. Davis, Director
March 26, 1997 *
- -------------- -----------------------------------
Date Tim R. Palmer, Director
March 26, 1997 *
- -------------- -----------------------------------
Date Alan A. Diamonstein, Director
March 26, 1997 *
- -------------- -----------------------------------
Date Herbert S. Winokur, Jr., Director
This registrant is a limited partnership whose sole general partner, The
National Housing Partnership, is also a limited partnership. The sole general
partner of The National Housing Partnership is National Corporation for Housing
Partnerships. The persons indicated are Directors of National Corporation for
Housing Partnerships. Powers of Attorney are on file in Registration Statement
No. 33-1141 and as Exhibit 25 to the Partnership's Form 10-K for the fiscal
years ended December 31, 1987, December 31, 1988, December 31, 1990 and
December 31, 1991. Other than the Form 10-K report, no annual report or proxy
materials have been sent to security holders.
*By J. Roderick Heller, III pursuant to Power of Attorney.
/s/ J. Roderick Heller, III
---------------------------
37
<PAGE> 39
Independent Auditors' Report
To The Partners of
National Housing Partnership Realty Fund III
Vienna, VA
We have audited the accompanying combined statements of financial position of
the Local Limited Partnerships in which National Housing Partnership Realty
Fund III (the Partnership) holds a limited partnership interest as of December
31, 1996 and 1995, and the related combined statements of operations, partners'
deficit, and cash flows for each of the three years in the period ended
December 31, 1996. 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 Brunswick Village Limited Partnership for the years ended
December 31, 1996, 1995 and 1994. This investee's statements of financial
position represent total assets constituting 7% of combined total assets at
December 31, 1996 and 1995, and net losses constituting 4%, 8% and 2% of
combined net loss for each of the three years in the period ended December 31,
1996. The financial statements of this investee were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as
it relates to amounts included for this investee, is based solely on the
reports of such other auditors.
We conducted our audits 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 audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, such
financial statements present fairly, in all material respects, the combined
financial position of the Local Limited Partnerships in which the Partnership
holds a limited partnership interest as of December 31, 1996 and 1995, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Washington, D. C.
March 6, 1997
38
<PAGE> 40
Independent Auditors' Report
The Partners
Brunswick Village Limited Partnership
Washington, D.C.
We have audited the accompanying balance sheet of BRUNSWICK VILLAGE
LIMITED PARTNERSHIP, HUD Project No. 031-55075-LDP, as of December 31, 1996,
and the related states of profit and loss (on HUD Form No. 92410), of partners'
deficiency and of 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 BRUNSWICK VILLAGE
LIMITED PARTNERSHIP as of December 31, 1996, and the results of its operations
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 accompanying supplementary
information shown on pages 42 to 56 is presented for purposes of additional
analysis and is not a required part 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.
Goldenberg Rosenthal Friedlander
Jenkintown, PA
January 29, 1997
39
<PAGE> 41
Independent Auditors' Report
The Partners
Brunswick Village Limited Partnership
Washington, D.C.
We have audited the accompanying balance sheet of BRUNSWICK VILLAGE
LIMITED PARTNERSHIP, HUD Project No. 031-55075-LDP, as of December 31, 1995,
and the related states of profit and loss (on HUD Form No. 92410), of partners'
deficiency and of 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 BRUNSWICK VILLAGE
LIMITED PARTNERSHIP as of December 31, 1995, and the results of its operations
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 accompanying supplementary
information shown on pages 42 to 56 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.
Goldenberg Rosenthal Friedlander
Jenkintown, PA
January 25, 1996
40
<PAGE> 42
Independent Auditors' Report
The Partners
Brunswick Village Limited Partnership
Washington, D.C.
We have audited the accompanying balance sheet of BRUNSWICK VILLAGE
LIMITED PARTNERSHIP, HUD Project No. 031-55075-LDP, as of December 31, 1994,
and the related states of profit and loss (on HUD Form No. 92410), of partners'
deficiency and of 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 BRUNSWICK VILLAGE
LIMITED PARTNERSHIP as of December 31, 1994, and the results of its operations
and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
Goldenberg Rosenthal Friedlander
Jenkintown, PA
January 23, 1995
41
<PAGE> 43
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 750,872 $ 748,359
Accounts receivable (Note 2) 194,383 422,422
Tenants' security deposits
held in trust funds 504,457 469,034
Prepaid taxes and insurance 167,382 167,878
Deferred finance costs 154,274 163,992
Mortgage escrow deposits (Note 5) 2,960,432 2,870,482
Rental property, net (Notes 4 and 11) 31,561,956 32,305,181
----------- -----------
$ 36,293,756 $ 37,147,348
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses:
Accounts payable (Note 9) $ 593,317 $ 763,213
Accrued real estate taxes 122,619 125,523
Due to management agent (NHPMC) (Note 9) 31,119 48,458
Accrued interest on mortgage notes 11,652 14,580
Due to partners (Note 7) 1,677,390 1,586,491
Accrued interest on partner loans 1,147,838 991,787
----------- -----------
3,583,935 3,530,052
Tenants' security deposits payable 498,850 477,530
Deferred income 39,757 47,914
Deferred acquisition notes payable (Note 6) 14,683,867 14,683,867
Accrued interest on deferred
acquisition notes (Note 6) 16,743,488 15,363,234
Mortgage notes payable (Note 5) 17,314,114 17,892,400
Partners' deficit (16,570,255) (14,847,649)
----------- -----------
$ 36,293,756 $ 37,147,348
=========== ===========
</TABLE>
See notes to combined financial statements.
42
<PAGE> 44
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Rental income (Note 3) $ 8,523,974 $8,589,996 $ 8,244,550
Interest income 145,891 144,838 95,991
Other income 282,403 262,432 294,492
----------- --------- ----------
8,952,268 8,997,266 8,635,033
----------- --------- ----------
EXPENSES:
Administrative expenses 1,014,031 971,059 1,020,348
Operating and maintenance expenses 3,361,064 3,268,140 3,496,289
Management and other services from
related party (Note 9) 625,232 583,446 568,801
Salaries and related benefits to
related party (Note 9) 786,391 739,044 703,878
Depreciation and amortization 1,364,217 1,262,745 1,240,869
Taxes and insurance 1,072,391 1,002,198 988,774
Financial expenses - primarily interest (Notes 5 and 7) 483,739 510,436 514,575
Interest on acquisition notes (Note 6) 1,378,755 1,379,901 1,379,286
Other entity expenses 22,123 129,923 37,436
Impairment loss on rental property (Note 11) 450,000 - 2,500,000
Annual partnership administrative
fees to General Partner (Note 7) 97,500 97,500 97,500
----------- --------- ----------
10,655,443 9,944,392 12,547,756
----------- --------- ----------
NET LOSS $ (1,703,175) $ (947,126) $(3,912,723)
=========== ========= ==========
</TABLE>
See notes to combined financial statements.
43
<PAGE> 45
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
National
Housing The
Partnership National NHP Other
Realty Fund Housing Investment Limited
III Partnership Partners I Partner Total
----------------- ----------- ---------- ------- -----
<S> <C> <C> <C> <C> <C>
Deficit at
January 1, 1994 $ (8,538,820) $(1,003,329) $(389,326) $(183) $ (9,931,658)
Distributions (24,527) (259) (1,168) - (25,954)
Net loss (3,864,332) (39,129) (9,262) - (3,912,723)
----------- ---------- -------- ----- -----------
Deficit at
December 31, 1994 (12,427,679) (1,042,717) (399,756) (183) (13,870,335)
Reclassification 23,972 (23,972) - - -
Distributions (28,528) (302) (1,358) - (30,188)
Net loss (936,943) (6,366) (3,817) - (947,126)
----------- ---------- -------- ----- -----------
Deficit at
December 31, 1995 (13,369,178) (1,073,357) (404,931) (183) (14,847,649)
Distributions (18,362) (195) (874) - (19,431)
Net loss (1,675,362) (15,447) (12,366) - (1,703,175)
----------- ---------- -------- ----- -----------
Deficit at
December 31, 1996 $(15,062,902) $(1,088,999) $(418,171) $(183) $(16,570,255)
=========== ========== ======== ===== ===========
Percentage interest
at December 31, 1994,
1995 and 1996 (A) (B) (C) (D)
=========== ========== ======== =====
</TABLE>
(A) Holds a 94.5% limited partnership interest (98% with respect to
allocation of losses) in nine local limited partnerships and 99%
limited partnership interest in three local limited partnerships.
(B) Holds a 1% general partnership interest in eleven local limited
partnerships and a .99% general partnership interest (1% with respect
to allocation of losses) in Brunswick Village Limited Partnership.
(C) Holds a 4.5% limited partnership interest (1% with respect to
allocation of losses) in nine local limited partnerships.
(D) A former employee of NCHP holds a .01% limited partnership interest
(0% with respect to allocation of losses) in Brunswick Village Limited
Partnership.
See notes to combined financial statements.
44
<PAGE> 46
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Rental receipts $ 8,313,360 $ 8,421,418 $ 8,120,041
Interest receipts 134,928 135,559 80,609
Other receipts 278,180 287,946 275,094
Administrative expenses paid (404,938) (367,535) (361,251)
Administrative salaries paid (430,085) (405,924) (401,627)
Management fees paid (747,666) (749,700) (731,656)
Computer and accounting fees paid (89,198) (89,369) (91,668)
Utilities paid (1,336,837) (1,262,837) (1,386,611)
Operating and maintenance expenses paid (1,925,757) (1,659,768) (1,935,297)
Operating and maintenance payroll paid (846,797) (775,432) (755,468)
Real estate taxes paid (525,411) (492,260) (504,797)
Payroll taxes paid (113,728) (108,668) (107,656)
Miscellaneous taxes paid (10,949) (18,306) (22,243)
Property insurance paid (248,182) (208,310) (184,614)
Miscellaneous insurance paid (177,692) (174,904) (144,074)
Interest on mortgage notes paid (158,387) (191,834) (227,531)
Interest on partner loans paid to General Partner (78,419) (10,852) (72,088)
Mortgage insurance premium paid (84,336) (85,974) (88,694)
Miscellaneous financial expenses paid (300) (747) (1,095)
Interest earned on entity funds 2,899 - -
Payment of partnership administrative fee
to General Partner (37,317) (145,013) (107,889)
Payment of other entity expense (471) (14,520) (4,418)
---------- ---------- -----------
Net cash provided by rental operating activities 1,512,897 2,082,970 1,347,067
(Increase) decrease in tenants' security deposits
held in trust fund (35,423) 19,174 313
Increase (decrease) in tenants' security deposits payable 21,320 (22,517) 20,319
---------- ---------- ----------
Net cash provided by operating activities 1,498,794 2,079,627 1,367,699
---------- ---------- ----------
</TABLE>
See notes to combined financial statements.
45
<PAGE> 47
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment purchases $ (985,968) $(1,044,889) $ (887,956)
Payment of deferred costs - - 17,873
Payments to mortgage escrow deposits (1,581,392) (1,539,584) (1,509,139)
Disbursements from mortgage escrow deposits 1,591,480 1,480,302 1,510,697
Interest earned on mortgage escrow deposits (100,038) (89,442) (57,456)
Decrease (increase) in receivable from mortgagee 171,189 (208,443) 51,974
----------- ---------- -----------
Net cash used in investing activities (904,729) (1,402,056) (874,007)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on mortgage notes (578,286) (538,772) (500,553)
Distributions to partners (19,431) (30,188) (25,954)
Loans from partners 6,165 5,549 8,038
Repayment of loans from partners in lieu of distributions - (2,392) (405)
----------- ---------- -----------
Net cash used in financing activities (591,552) (565,803) (518,874)
----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,513 111,768 (25,182)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 748,359 636,591 661,773
----------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 750,872 $ 748,359 $ 636,591
=========== ========== ===========
</TABLE>
See notes to combined financial statements.
46
<PAGE> 48
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss $(1,703,175) $ (947,126) $(3,912,723)
---------- ---------- ----------
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 1,364,217 1,262,745 1,240,869
Impairment loss on rental property 450,000 - 2,500,000
Mortgagor entity expenses 1,734,347 1,833,545 1,707,124
(Increase) decrease in receivable from tenants, net (6,328) 7,591 77,695
Decrease (increase) in other receivable 271 59 (16)
(Increase) decrease in receivable from FHA subsidy (1,296) (2,933) 16,220
Decrease (increase) in insurance proceeds receivable 65,422 (39,713) (13,569)
Increase in interest receivable (1,442) (850) (9,247)
Decrease in prepaid taxes and insurance 496 14,135 11,085
(Decrease) increase in accounts payable (251,517) 88,207 (71,781)
Decrease in accrued interest on mortgage note (2,928) (3,327) (2,576)
Decrease in accrued real estate taxes (2,904) (563) (71)
(Decrease) increase in deferred income (8,157) 29,614 4,580
(Decrease) increase in management fee payable (10,801) 2,506 (6,653)
Payment of interest on partner loans (78,419) (10,852) (72,088)
Payment of partnership administrative fee to
General Partner (37,317) (145,013) (107,899)
Payment of other entity expense (471) (14,520) (4,418)
Interest earned on entity funds 2,899 - -
Decrease (increase) in deferred costs - 9,465 (9,465)
(Increase) decrease in tenants' security deposits
held in trust fund (35,423) 19,174 313
Increase (decrease) in tenants' security deposits
payable 21,320 (22,517) 20,319
---------- ---------- ----------
Total adjustments 3,201,969 3,026,753 5,280,422
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,498,794 $ 2,079,627 $ 1,367,699
========== ========== ==========
</TABLE>
See notes to combined financial statements.
47
<PAGE> 49
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
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 III (the Partnership) is a
limited partnership organized under the Maryland Revised Uniform Limited
Partnership Act on May 10, 1985. The Partnership was formed for the purpose of
raising capital by offering and selling limited partnership interests and then
investing in Local Limited Partnerships, each of which either owns and operates
an existing rental housing project or has acquired limited partnership
interests in partnerships which own and operate one or two existing rental
housing projects. All such rental housing projects are 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). A substantial portion
of each Local Limited Partnership revenue is received from the housing
assistance agreements discussed in Note 3 below. On June 30, 1985, inception of
operations, the Partnership began raising capital and acquiring interests in
Local Limited Partnerships.
During 1985, the Partnership invested in twelve Local Limited
Partnerships which directly or indirectly own and operate thirteen rental
housing projects. The Partnership acquired 94.5% limited partnership interests
(98% with respect to allocation of losses) in nine Local Limited Partnerships
and a 99% limited partnership interest in one Local Limited Partnership. In
addition, the Partnership acquired 99% interests in two Local Limited
Partnerships, which each own a 99% limited partnership interest in an operating
limited partnership. The operating Partnership holds title to one and two
rental housing properties, respectively. The Partnership's effective interest
in these operating limited partnerships is 98.01%.
Eleven of the rental housing projects were originally organized under
Section 236 of the National Housing Act. The remaining two rental housing
projects were organized under Section 221(d)(3) of the National Housing Act. As
a limited partner, in accordance with the partnership agreements, the
Partnership does not exercise control over the activities of the Local Limited
Partnerships.
48
<PAGE> 50
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
Basis of Combination
The combined financial statements include the accounts of the
following twelve Local Limited Partnerships in which the Partnership holds a
limited partnership interest:
Brunswick Village Limited Partnership;
Edmond Estates Limited Partnership;
Elden Limited Partnership;
Galion Limited Partnership;
Indian Valley I Limited Partnership;
Indian Valley II Limited Partnership;
Indian Valley III Limited Partnership;
Kimberly Associates Limited Partnership;
(a)Meadowood Townhouses I Limited Partnership;
(b)Meadowood Townhouses III Limited Partnership;
Newton Hill Limited Partnership; and
Woodmark Limited Partnership.
(a)Owns a 99% limited partnership interest in two operating limited
partnerships.
(b)Owns a 99% limited partnership interest in one operating limited
partnership.
Significant Accounting Policies
The financial statements of the Local Limited Partnerships are
prepared on the accrual basis of accounting. For eleven of the Local Limited
Partnerships, depreciation of the buildings and improvements is computed using
the straight-line method, assuming a 50-year life from the date of initial
occupancy, whereas, for one of the Local Limited Partnerships, depreciation of
the buildings and improvements is computed using the straight-line method,
assuming a 30-year life and a 30% salvage value. Depreciation of equipment is
calculated using accelerated methods over estimated useful lives of 5 to 27
years. Cash distributions are limited by the Regulatory Agreements between the
rental projects 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. Organization costs are amortized over a 60 month 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.
49
<PAGE> 51
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1996 1995
---- ----
<S> <C> <C>
Due from tenants $123,982 $ 94,965
Due from mortgagee 86,074 257,263
Interest 26,794 25,352
Insurance proceeds 6,370 71,792
Other 11,957 11,155
------- -------
255,177 460,527
Less allowance for doubtful accounts (60,794) (38,105)
------- -------
Net accounts receivable $194,383 $422,422
======= =======
</TABLE>
3. HOUSING ASSISTANCE AGREEMENTS
The Federal Housing Administration (FHA) has contracted with eleven
rental projects under Section 8 of Title II of the Housing and Community
Development Act of 1974, to make housing assistance payments to the Partnership
on behalf of qualified tenants. The terms of the agreements are five years with
one or two five-year renewal options. The agreements expire at various dates
through 1998. Ten Local Limited Partnerships have agreements in effect during
1996. The Local Limited Partnerships received a total of $1,985,238, $1,999,593
and $1,778,617 in the form of housing assistance payments during 1996, 1995 and
1994, respectively, which is included in "Rental income" on the combined
statements of operations.
The following table indicates the year within the Section 8 rent
subsidy contracts expire:
<TABLE>
<CAPTION>
Subsidized Units Subsidized Units
Expiring as a Expiring as a
Number Percentage of Total Percentage of
of Units Subsidized Units Total Units
-------- ---------------------- ----------------------
<S> <C> <C> <C>
1997 110 18% 6%
1998 493 82% 29%
--- --- --
Total 603 100% 35%
=== === ==
</TABLE>
Of the contracts above expiring during 1997, for one Local Limited
Partnership, Galion East, has contracts for 60 units that expire prior to
September 30, 1997. Congress has passed legislation which will provide a
one-year renewal contract to replace those contracts.
50
<PAGE> 52
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
One Local Limited Partnership, Brunswick Village Limited Partnership,
has a contract covering the remaining 50 units that expire in October, 1997. It
is uncertain whether this agreement as well as agreements expiring within 1998
will be renewed, and if so, on what terms.
For the past several years, various proposals have been advanced by
HUD, the Congress and others proposing the restructuring of the Section 8.
These proposals generally seek to lower subsidized rents to market levels and
to lower required debt service costs as needed to ensure financial viability at
the reduced rents, but vary greatly as to how that result is to be achieved.
Some proposals include a phase-out of project-based subsidies on a
property-by-property basis upon expiration of a property's HAP Contract, with a
conversion 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
a property of their choice, provided the tenant has the financial ability to
pay the difference between the selected property's monthly rent and the value
of the voucher, which would be established based on HUD's regulated fair market
rent for that geographic area.
Congress has not yet accepted any of these restructuring proposals and
instead has elected to renew expiring Section 8 HAP Contracts for one year
terms, generally at existing rents. While the Partnership does not believe that
the proposed changes would result in a significant number of tenants relocating
from properties owned by the Local Limited Partnerships, there can be no
assurance that the proposed changes would not significantly affect the
operations of the properties of the Local Limited Partnerships. Furthermore,
there can be no assurance that changes in federal subsidies will not be more
restrictive than those currently proposed or that other changes in policy will
not occur. Any such changes could have an adverse effect on the operation of
the Partnership.
4. RENTAL PROPERTY
Rental property consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
Land $ 2,992,600 $ 2,992,600
Building and improvements 36,409,389 36,808,530
Furniture and equipment 6,258,454 5,248,039
----------- -----------
45,660,443 45,049,169
Less accumulated depreciation (14,098,487) (12,743,988)
----------- -----------
Net rental property $ 31,561,956 $ 32,305,181
=========== ===========
</TABLE>
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. FHA, under an interest reduction contract
with the eleven 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 40-year terms
51
<PAGE> 53
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
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 a reserve 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 are as follows:
<TABLE>
<S> <C>
1997 $ 622,000
1998 669,000
1999 720,000
2000 775,000
2001 834,000
Thereafter 13,694,000
----------
$17,314,000
==========
</TABLE>
6. DEFERRED ACQUISITION NOTES PAYABLE
The deferred acquisition notes bear simple interest at rates of 9% or
10% per annum. These notes are nonrecourse and are collateralized by
partnership interests in all of the Local Limited Partnerships. Principal and
accrued interest are payable upon the earlier of the sale, transfer, or
refinancing of the project or maturity dates ranging in 1999, except for the
two Meadowood Local Limited Parnerships notes discussed below. The notes may be
extended for periods ranging from three to five years. The notes may be prepaid
in whole or in part at any time without penalty.
On May 2, 1996, the two Meadowood Local Limited Partnerships entered
into Agreements of Sale with Community Preservation and Development
Corporation, pursuant to the terms of the Low Income Housing Preservation and
Homeownership Act of 1990 ("LIHPRHA") to sell each of the Local Partnerships.
The purchase price is to be based on the project's Transfer Preservation Value,
as approved by HUD. Settlement is pending Congressional appropriation of
LIHPRHA funds to HUD.
In connection with the sale, a Forebearance Agreement has been
executed, which extends the maturity date of the deferred acquisition notes in
the amount of $10,909,799 including accrued interest at December 31, 1996, made
by the two Meadowood Local Limited Partnerships. Under the terms of this
agreement, the initial period of forebearance shall expire on April 30, 1997. A
further extension of forebearance will be granted until December 31, 1997, for
closing if funding for such closing has been approved by HUD. If such funding
has not been approved by April 30, 1997, a further extension of forebearance
until January 2, 1998, will be granted to permit the Limited Partner to submit
an alternative plan to the note holders, and to negotiate and close such plan.
There can be no assurance that the efforts will be successful.
In consideration for the initial period of extension of forebearance,
the two Local Limited Partnerships shall pay solely from their share of the net
proceeds received at closing, an extension fee of 1% of the aggregate amount of
principal due on the notes. The Local Limited Partnerships shall have no
liability for the extension fee if closing does not occur. Upon expiration of
the forebearance period with extensions, the two Local Limited Partnerships
shall cause
52
<PAGE> 54
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
title to their interest in the Local Limited Partnerships to be conveyed to the
note holders. The financial statements do not include any adjustments which
might result from this uncertainty.
7. PAYABLES DUE PARTNERS
The Local Limited Partnerships accrued annual partnership
administration fees payable to the General Partner, The National Housing
Partnership (NHP), of $97,500 during 1996, 1995 and 1994, respectively.
Payments of these fees are made to NHP without interest from surplus cash
available for distribution to partners pursuant to HUD regulations. During
1996, 1995 and 1994, the Local Limited Partnerships paid $37,317, $145,013 and
$107,889 for such fees, respectively. The balances owed to NHP for these fees
were $437,628 and $377,445 at December 31, 1996 and 1995, respectively.
During 1996 and 1995, NHP advanced $30,715 and $120,952 to seven and
ten of the Local Limited Partnerships for expenses incurred relating to
potential sales or refinancing under the LIHPRHA program. During 1995 and 1994,
loans of $2,392 and $1,800, respectively, were repaid by four and one Local
Limited Partnerships. The balance owed to NHP by Local Limited Partnerships at
December 31, 1996 and 1995, was $705,482 and $674,767, respectively. Interest
is charged at a rate equal to the Chase Manhattan Bank prime interest rate plus
2%.
During 1994, the Partnership paid expenses of $10,641 on behalf of
four Local Limited Partnerships. At December 31, 1996 and 1995, the amount owed
the Partnership totaled $534,280.
During 1996, 1995 and 1994, respectively, accrued interest on advances
from NHP of $234,470, $226,220 and $164,669 was recorded, and $78,419, $10,852
and $72,088 of interest relating to prior years was repaid to NHP.
All advances and accumulated interest will be paid in conformity with
HUD and/or other regulatory requirements and applicable partnership agreements.
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
the partner groups in accordance with Section 704(b) of the Internal Revenue
Code and therefore is not necessarily proportionate to the percentage interest
owned.
For Federal income tax purposes, the Local Limited Partnerships
compute depreciation of the buildings and improvements using the Accelerated
Cost Recovery System (ACRS) and the Modified Accelerated Cost Recovery System
(MACRS), while for financial statements purposes, depreciation is computed
using the straight-line method, assuming a 30-year life and a 30% salvage value
or a 50-year life. Rent received in advance is included as income in
determining the taxable income or loss for Federal income tax purposes; while
for financial statement purposes it is shown as a liability. In addition,
interest expense on the acquisition notes payable by the Local Limited
Partnerships is computed for Federal income tax purposes using the economic
accrual method; while for financial statement purposes,
53
<PAGE> 55
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
interest is computed using a simple interest rate. Other differences result
from the allocation of tax losses in accordance with Section 704(b) of the
Internal Revenue Code.
A reconciliation follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net loss per financial statements $(1,703,175) $(947,126) $(3,912,723)
Depreciation and amortization (1,046,233) (1,073,733) (1,043,012)
Interest on acquisition notes payable (164,793) (138,644) (67,500)
Impairment loss on rental property 450,000 - 2,500,000
Accrued interest on partner loans 154,171 212,738 16,166
Other (30,467) 149,356 257,263
---------- ---------- ----------
Loss per tax returns $(2,340,497) $(1,797,409) $(2,249,806)
========== ========== ==========
</TABLE>
9. RELATED PARTY TRANSACTIONS
The General Partner of the Partnership is NHP. National Corporation
for Housing Partnerships (NCHP) is the sole general partner of NHP. NHP is the
sole general partner of the Local Limited Partnerships. NHP is also the sole
general partner of NHP Investment Partners I. NHP Investment Partners I holds
4.5% limited partnership interest (1% with respect to losses) in nine of the
Local Limited Partnerships. NHP Investment Partners I held a 1% general
partnership interest and a 98% limited partnership interest in these Local
Limited Partnerships prior to admittance of the Partnership. A former employee
of NCHP (a New Jersey resident) holds a 0.01% limited partnership interest in
one Local Limited Partnership to meet that state's legal requirements.
An affiliate of the General Partner, NHP Management Company (NHPMC),
is the project management agent for the projects operated by four of the Local
Limited Partnerships under agreements which, subject to certain conditions,
extend to the year 2020. NHPMC and other affiliates of NCHP earned $625,232,
$583,446 and $568,801 for management fees and other services provided to the
Local Limited Partnerships during 1996, 1995 and 1994, respectively. At
December 31, 1996 and 1995, amounts due NHPMC and unpaid by the Local Limited
Partnerships amounted to $31,119 and $48,458, respectively.
Prior to 1996, personnel working at the project sites which are
managed by NHPMC were NCHP employees and, therefore, the projects reimbursed
NCHP for the actual salaries and related benefits. Beginning January 1, 1996,
project employees became employees of NHP Incorporated. Total reimbursements
earned for salaries and benefits for the years ended December 31, 1996, 1995
and 1994, were approximately $786,000, $739,000 and $704,000, respectively. At
December 31, 1996 and 1995 account payable included $2,309 and $1,627 due to
NHP Incorporated and NCHP, respectively.
54
<PAGE> 56
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
10. FUTURE OPERATIONS AND CASH FLOWS
The two Meadowood Local Limited Partnerships continued existence as a
going concern is dependent on the Local Limited Partnerships successful efforts
to complete the LIHPRHA sale described in Note 6, or for the Local Limited
Partnerships to repay the principal and accrued interest on the deferred
acquisition notes, or to negotiate further amendments of the terms of the notes
and the related sale and forebearance documents. The Local Limited Partnerships
have, for the past several years, generated losses which have been funded
through loans from the partners. The Local Limited Partnerships have minimal
cash and are generating negative cash flows. The partners are under no
obligation to provide such funding in the future.
The two Meadowood Local Limited Partnerships continued existence as a
going concern is dependent upon maintaining positive cash flows from operations
or obtaining additional capital from partners by borrowing additional funds.
NHP intends to manage the Local Limited Partnerships prudently so as to produce
positive cash flows from their operations, thus allowing for adequate cash
distributions.
Should the two Meadowood Local Limited Partnerships cease to exist as
a going concern, there could be significant tax consequences to the partners in
the Partnership.
The total assets, deficit, revenues, and net loss of Meadowoods
Townhouses I and III represent 12%, 40%, 3% and 21%, respectively, of the
applicable amounts included in the accompanying combined financial statements
as of December 31, 1996 and for the year then ended.
11. IMPAIRMENT LOSS
In March 1995, The Financial Accounting Standards Board issued
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") effective for financial statements for fiscal years beginning
after December 15, 1995. Adoption of this Statement during the year ended
December 31, 1996, required 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.
Galion Limited Partnership recognized an impairment loss on its rental
property in the amount of $450,000. Because the Local Limited Partnership's
deferred acquisition note is due December 20, 1999, the Local Limited
Partnership estimated net cash flow only for the period January 1, 1997 to
December 20, 1999. As a result of this limited holding period, the estimated
net cash flow is less than the carrying amount at December 31, 1996. The Local
Limited Partnership has used the Direct Capitalization Method to estimate the
fair value of the rental property. Using this Method, estimated annual cash
flow generated by the property is divided by an overall capitalization rate to
estimate the rental property's fair value.
Prior to 1996 and the Statement, generally accepted accounting
principles (GAAP) required that the Local Limited Partnerships evaluate whether
it is probable that the estimated undiscounted future cash flows of each of its
properties, plus cash projected to be received upon an assumed sale of the
property (Net Realizable Value) was less than the net carrying value of the
property. If such a shortfall existed, and was material and deemed to be other
than temporary in nature, then a write-down equal to the shortfall was
warranted. The Local Limited Partnerships performed
55
<PAGE> 57
NATIONAL HOUSING PARTNERSHIP REALTY FUND III
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
such evaluations on an ongoing basis. During 1994, using a methodology
consistent with GAAP, one of the Local Limited Partnerships determined that the
book value of the rental property exceeded the rental property's estimated net
realizable value. As required by GAAP, the Local Limited Partnership recorded
an adjustment of $2,500,000 to reduce the carrying value of the rental property
to its estimated net realizable value for the year ended December 31, 1994.
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,
1996. Should a Local Limited Partnership be forced to dispose of any of its
properties, it could incur a loss.
12. NON-CASH INVESTING ACTIVITY
During 1996 and 1995, five and six of the Local Limited Partnerships
incurred costs of $145,744 and $72,257, respectively, for additions to rental
property which are included in accounts payable.
13. 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. The mortgage notes
payable are insured by the FHA and are secured by the rental property. The
operations generated by the rental property are subject to various government
rules, regulations and restrictions which make it impracticable to obtain the
information to estimate the fair value of the mortgage notes and the partner
loans and related accrued interest. For the deferred acquisition 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.
56
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 140,782
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 140,782
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 140,782
<CURRENT-LIABILITIES> 572,832
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (432,050)
<TOTAL-LIABILITY-AND-EQUITY> 140,782
<SALES> 0
<TOTAL-REVENUES> 26,435
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 133,660
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (107,225)
<INCOME-TAX> 0
<INCOME-CONTINUING> (107,225)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (107,225)
<EPS-PRIMARY> (9)
<EPS-DILUTED> (9)
</TABLE>
