As filed with the Securities and Exchange Commission on June 18, 1997
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934 (Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use
[X] Definitive Proxy Statement of the Commission Only
[_] Definitive Additional Materials (as permitted by Rule 14a-6(e)(2))
[_] Soliciting Material Pursuant
to Rule 14a-11(c) or Rule 14a-12
Summit Tax Exempt Bond Fund L.P. (Commission File No. 1-9373); Summit Tax
Exempt Bond Fund L.P II (Commission File No. 0-15726) and Summit Tax Exempt
Bond Fund L.P. III (Commission File No. 0-16816)
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rule 0-11(c)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each Party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Shares of Beneficial Interest
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
20,586,383 Shares of Beneficial Interest
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$15 per share based upon (for purposes of this fee calculation only)
adjusted net asset value of consolidated entities
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$308,795,745
- --------------------------------------------------------------------------------
(5) Total fee paid:
$61,760
- --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-0-
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement to:
N/A
- --------------------------------------------------------------------------------
(3) Filing Party:
N/A
- --------------------------------------------------------------------------------
(4) Date Filed:
N/A
- --------------------------------------------------------------------------------
<PAGE>
The Related General Goodkind Labaton Milberg Weiss Bershad
Partners Rudoff & Sucharow LLP Hynes & Lerach LLP
625 Madison Avenue 100 Park Avenue One Pennsylvania Plaza
New York, New York 10022 New York, New York 10017 New York, New York 10119
June 18, 1997
Dear Investor:
Enclosed you will find a notice and a solicitation statement concerning a
proposed settlement of a pending class action that affects units you own in one
or more of the following partnerships: Summit Tax Exempt Bond Fund, L.P., Summit
Tax Exempt L.P. II and Summit Tax Exempt L.P. III (the "Tax Exempt Funds"). As
part of the proposed settlement, if it is approved by the Court after a hearing
to be held on August 28, 1997, the three currently separate Tax Exempt Funds
will be reorganized into a single business trust, whose securities will be
approved for listing on the American Stock Exchange (or other national exchange
or market) upon official notice of issuance prior to consummation of the
proposed reorganization.
The terms, conditions, risks and benefits of the proposed settlement and
reorganization are described in detail in the enclosed notice and solicitation
statement, which you are urged to read carefully. The Related General Partners
and Plaintiffs' Class Counsel recommend approval of the settlement as fair and
reasonable and in the best interests of the investors. If for any reason you
disagree and wish to object, the procedure for doing so is described in the
enclosed notice and solicitation statement. If you approve of the settlement,
you do not have to do anything to indicate such approval.
For additional information, you may call: Related Capital Company
(Investor Services Department) at 800-600-6422 for information about the
reorganization; or write to counsel for the plaintiff class In re Prudential
Securities Incorporated Limited Partnerships Litigation, M.D.L. No. 1005
(S.D.N.Y.) at the address set forth above for information about the settlement.
Sincerely,
<TABLE>
<S> <C>
Milberg Weiss Bershad Hynes & Lerach LLP Related Tax Exempt Bond Associates, Inc.
by Melvyn I. Weiss, Esq. Related Tax Exempt Associates II, Inc.
-and- Related Tax Exempt Associates III, Inc.
Goodkind Labaton Rudoff & Sucharow LLP
by Lawrence A. Sucharow, Esq.
The Related General Partners
Class Counsel Co-Chairmen
</TABLE>
<PAGE>
SOLICITATION STATEMENT
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
This Solicitation Statement is being provided to the limited partners and
holders of beneficial unit certificates representing assignments of limited
partnership interests (collectively, the "BUC$holders"), of Summit Tax Exempt
Bond Fund, L.P. ("Tax Exempt I"), Summit Tax Exempt L.P. II ("Tax Exempt II")
and Summit Tax Exempt L.P. III ("Tax Exempt III") (each, a "Partnership" and,
collectively, the "Partnerships") pursuant to a preliminary order, dated
December 31, 1996 (the "Order"), of the United States District Court for the
Southern District of New York (the "Court") issued in connection with the
proposed settlement of class action litigation (the "Litigation") captioned In
re Prudential Securities Incorporated Limited Partnerships Litigation brought on
behalf of the BUC$holders. The Litigation named as defendants Prudential
Securities Incorporated ("PSI"), Prudential-Bache Properties, Inc., a general
partner of the Partnerships (the "P-B General Partner"), and affiliates of
Related Capital Company ("Related") that also serve as general partners of the
Partnerships (the "Related General Partners"). PSI and the P-B General Partner
have previously settled claims against them in the Litigation; the proposed
settlement relates to the causes of action against the Related General Partners
(the "Related Settlement").
Pursuant to the Related Settlement, among other matters, the Partnerships
would be combined (the "Consolidation") into Charter Municipal Mortgage
Acceptance Company (the "Company"), a newly created Delaware business trust
whose shares will be approved for listing on the American Stock Exchange (or
other national exchange or market) prior to consummation of the Consolidation.
Pursuant to the Consolidation, the Company will issue beneficial interests (the
"Shares") which will be allocated to each BUC$holder and the Related General
Partner and its affiliates based upon his or its proportionate interest in the
Shares allocated to his or its Partnership in the Consolidation. The allocation
of Shares among the Partnerships was made by the Related General Partners based
on the relative adjusted net asset value (the "Adjusted Net Asset Value") of
each Partnership. For the purpose of determining Adjusted Net Asset Values, the
Related General Partners utilized, in part, the letter of value appraisals
prepared by Cushman & Wakefield as of October 15, 1995, to independently
appraise the value of the properties which secure the FMBs (defined below) held
by the Partnerships and adjusted such appraised values based on certain
quantitative factors. Oppenheimer & Co., Inc. has issued its fairness opinion
that the Consolidation, including the allocation of Shares among the
Partnerships, is fair, from a financial point of view, to the BUC$holders of
each Partnership.
The Consolidation involves certain risks that should be considered by
BUC$holders. See "RISK FACTORS" beginning on page 23 of this Solicitation
Statement. In particular, BUC$holders should consider the following:
[bullet] The comparative analysis prepared by the Related General Partners to
assist BUC$holders in analyzing the Consolidation indicates that, based
on a variety of assumptions, the estimated going concern and
liquidation values exceed the lowest estimated market value of the
Shares.
[bullet] Uncertainty as to prices at which the Shares will trade and the
possibility that such prices will be below the proportionate Adjusted
Net Asset Value of the assets exchanged for Shares.
[bullet] The Consolidation involves a fundamental change in the nature of a
BUC$holder's investment from (i) an investment in a finite-life entity,
in which a BUC$holder will receive liquidating distributions based upon
the net proceeds from the sale of the entity's assets, to (ii) an
investment in an infinite-life entity that will be able to issue
additional equity securities and reinvest asset sale proceeds, if any,
and mortgage repayments and in which a BUC$holder who receives Shares
will recover his or its investment not from liquidating distributions
but rather from the sale of such Shares. The Company also expects to
invest in a wider range of tax-exempt investments, including
non-participating FMBs, which may have risks not present in the FMBs
which constitute substantially the entire existing portfolio of the
Partnerships.
[bullet] The Consolidation involves potential conflicts of interest from the
Related General Partners and the Manager receiving consideration and
economic benefits with respect to the Consolidation.
[bullet] Pursuant to the Court's Order preliminarily approving the Settlement
Stipulation and subject to final Court approval, a Partnership will
participate in the Consolidation unless BUC$holders holding more than
33-1/3% of the outstanding Units in such Partnership object to the
Consolidation. Participation by a Partnership in the Consolidation will
bind all BUC$holders, including BUC$holders that object to the
Consolidation.
[bullet] BUC$holders in Participating Partnerships who object to the
Consolidation do not have the right to receive cash based on an
appraisal of their interests in the Participating Partnerships or
otherwise.
[bullet] The Company will be allowed to incur debt or other financing of up to
50% of its Total Market Value, as defined below (measured at the time
such leverage is incurred), and will be more highly leveraged than the
Partnerships, two of which are presently debt-free and one of which has
an immaterial amount of debt outstanding. An increase in leverage may
increase the risk of default in the Company's obligations.
[bullet] The Company will have the ability to offer additional Shares or other
equity or debt securities in exchange for money, property or otherwise.
Shareholders will have no preemptive right to acquire any such
securities, and any such issuance of equity securities could result in
dilution of a Shareholder's investment in the Company.
<PAGE>
(cover page continued)
[bullet] Regardless of the initial level of distributions by the Company, there
is no guarantee with respect to the level of future distributions.
[bullet] The Consolidation will result in expenses to the Company, currently
estimated to be approximately $1,984,125, or approximately 0.64% of the
total Adjusted Net Asset Value, as defined below, of the Company (based
on the aggregate Adjusted Net Asset Values assigned to the Partnerships
in the Consolidation, and assuming 100% Participation).
[bullet] The Company could be subject to corporate income tax in certain
states.
The Court's Order, among other matters, (a) certified for purposes of
settlement, two classes consisting of (i) all BUC$holders (the "Equitable
Class") and (ii) generally, all persons that purchased Units, as defined below,
in certain partnerships sponsored by PSI or its affiliates between January 1,
1980 and June 8, 1994, regardless of whether they currently hold Units (the
"Monetary Class"), and (b) preliminarily approved the Related Settlement
pursuant to the Stipulation of Settlement (the "Settlement Stipulation") entered
into by the Related General Partners and certain other parties to the
Litigation. The Settlement Stipulation generally provides for the settlement,
discharge and release of all claims against the Related General Partners in
exchange for certain benefits to the two classes.
The Related Settlement consists of two parts: a monetary settlement (the
"Monetary Settlement") for the benefit of the Monetary Class and an equitable
settlement (the "Equitable Settlement") for the benefit of the Equitable Class.
This Solicitation Statement provides information with respect to the Equitable
Settlement.
Pursuant to the Court's Order preliminarily approving the Settlement
Stipulation and subject to final Court approval, unless the BUC$holders of a
Partnership holding more than 33-1/3% of the outstanding limited partnership
interests and beneficial unit certificates representing assignments of limited
partnership interests (collectively, the "Units") object to the participation of
that Partnership, that Partnership will participate (each, a "Participating
Partnership" and, collectively, the "Participating Partnerships"), in the
Consolidation whereby the Units held by all BUC$holders of a Participating
Partnership will be exchanged for Shares of the Company, thereby combining the
Participating Partnerships into the Company.
Equitable Class Members may not individually opt out of the Equitable
Settlement or the Consolidation. If, however, either (a) BUC$holders holding 1/3
or more of the Units of a particular Partnership object to that Partnership
participating in the Consolidation, or (b) the Court does not approve of any
particular Partnership participating in the Consolidation, then that Partnership
will not participate in the Consolidation.
In connection with the Consolidation, immediately following the exchange by
the BUC$holders of the Participating Partnerships of their Units for Shares,
Related Charter LP, a newly formed affiliate of Related, will acquire the
general partner interests of the P-B General Partner in each of the
Participating Partnerships (the "P-B Interests") and the P-B General Partner
will withdraw as a general partner of the Participating Partnerships. One-half
of the P-B Interests will be contributed back to the Participating Partnerships
by Related Charter LP, resulting in the BUC$holders of the Participating
Partnerships ultimately owning a greater percentage of the Shares than would
otherwise be the case if Related Charter LP did not make such a contribution.
Related Charter LP will then transfer to the Company the remaining one-half P-B
Interests in exchange for Shares. The Related General Partners will also
transfer to the Company their general partner interests in the Participating
Partnerships in exchange for Shares. The Participating Partnerships will then
dissolve and the assets of the Participating Partnerships will be distributed to
the Company as the sole BUC$holder. The Company will assume all of the
liabilities of the Participating Partnerships.
Related Charter LP will also serve as the manager (the "Manager") of the
Company pursuant to a management agreement (the "Management Agreement") that
will provide for, among other things, the Manager to provide services to the
Company consistent with those currently provided to the Partnerships by the
Related General Partners and the P-B General Partner (collectively, the "General
Partners"), for which the Manager will receive aggregate annual fees which are
25% lower than the sum of the aggregate annual fees currently received by both
of the General Partners.
If all of the Partnerships participate in the Consolidation ("100%
Participation"), (i) the Company will initially own (a) 31 tax-exempt
participating first mortgage bonds ("FMBs") with an aggregate outstanding
principal balance as of December 31, 1996 of $348,602,428 issued by various
state or local governments or other agencies or authorities and secured by
participating first mortgage loans ("Mortgage Loans") on 31 multifamily
residential apartment projects and retirement community projects developed by
third party developers or affiliates of the Related General Partners, and (b) 7
second mortgage loans ("SMLs") (the income from which is not tax-exempt),
with an aggregate outstanding principal amount of $11,381,537, which loans were
advanced by or assigned to the Partnerships in connection with sale,
modification and forbearance agreements with respect to the FMBs, and (ii) the
Company will issue an aggregate of 20,586,383 Shares which will be allocated to
each BUC$holder, the Related General Partners and the Manager based upon his or
its proportionate interest in the Shares allocated to his or its Partnership in
the Consolidation. Based on such allocation, the 20,586,383 Shares will be
issued as follows: (i) 20,277,587 (or, 98.5%) to the BUC$holders and (ii)
308,796 (or, 1.5%) to the Related General Partners and the Manager.
Consummation of the Consolidation is conditioned upon, among other things,
(i)(a) participation in the Consolidation by two of the three Partnerships and
(b) the Related General Partners' agreement to proceed with the Consolidation
notwithstanding that there is
<PAGE>
(cover page continued)
less than 100% Participation (collectively, "Minimum Participation") and (ii)
Court approval of the Consolidation and the Related Settlement after a fairness
hearing (the "Fairness Hearing") that is scheduled for 10:30 a.m. on August 28,
1997 at United States Courthouse, 40 Centre Street, New York, New York 10007,
Courtroom 1305. See "THE CONSOLIDATION AND RELATED TRANSACTIONS--The
Consolidation--Conditions to the Consolidation."
This Solicitation Statement is first being mailed to BUC$holders by the Related
General Partners and the Company on or about June 18, 1997.
NEITHER THE CONSOLIDATION NOR THE ISSUANCE OF SHARES HAS BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION. NEITHER THE SECURITIES AND EXCHANGE
COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS PASSED
UPON THE FAIRNESS OR MERITS OF THE CONSOLIDATION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS SOLICITATION STATEMENT; ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THE CONSOLIDATION; ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
OBJECTIONS TO THE CONSOLIDATION MAY BE DELIVERED TO THE RELATED GENERAL
PARTNERS UNTIL 5:00 P.M., EASTERN TIME
ON AUGUST 18, 1997, UNLESS EXTENDED.
BUC$HOLDERS ALSO HAVE THE OPPORTUNITY TO OBJECT TO THE
CONSOLIDATION AT THE SETTLEMENT FAIRNESS HEARING.
THE RELATED GENERAL PARTNERS RECOMMEND THAT BUC$HOLDERS
NOT OBJECT TO THE CONSOLIDATION. COUNSEL FOR PLAINTIFFS
IN THE CLASS ACTION SUPPORT THE CONSOLIDATION AS PART OF THE RELATED
SETTLEMENT.
BUC$HOLDERS THAT WISH TO OBJECT TO THE CONSOLIDATION SHOULD
PROVIDE NOTICE OF SUCH OBJECTION TO THE RELATED
GENERAL PARTNERS AT THE ADDRESS BELOW, AS SOON AS POSSIBLE.
BUC$HOLDERS THAT DO NOT WISH TO
OBJECT TO THE CONSOLIDATION
SHOULD DO NOTHING.
ALL QUESTIONS AND INQUIRIES SHOULD BE DIRECTED TO
RELATED CAPITAL COMPANY
625 MADISON AVENUE
NEW YORK, NY 10022
TELEPHONE (800) 600-6422
ATTENTION: INVESTOR SERVICES DEPARTMENT
The date of this Solicitation Statement is June 18, 1997.
<PAGE>
AVAILABLE INFORMATION
The Partnerships are subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are
required to file reports and other information with the Securities and Exchange
Commission (the "Commission"), 450 Fifth Street N.W., Washington, D.C. 20549.
For further information concerning the Partnerships, please refer to the reports
of the Partnerships filed under the Exchange Act, copies of which may be
examined without charge at, or obtained upon payment of prescribed fees from,
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and which will also be available for
inspection and copying at the regional offices of the Commission located at 7
World Trade Center, Suite 1300, New York, New York 10048 and at its web site
(http://www.sec.gov) and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661- 2511. The Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
Statements contained in this Solicitation Statement as to the contents of
any agreement or other document which are referenced in this Solicitation
Statement are not necessarily complete, and each such statement is qualified in
its entirety by reference to the full text of such agreement or document, copies
of which may be obtained from the Related General Partners without charge. In
addition, copies of the latest Annual Reports on Form 10-K and Quarterly Reports
on Form 10-Q for each of the Partnerships may also be obtained from the Related
General Partner without charge. All requests should be directed to Related
Capital Company, 625 Madison Avenue, New York, NY 10022; Telephone (800)
600-6422; Attention: Investor Services Department.
Upon consummation of the Consolidation, the Company will be required to
file reports and other information with the Commission pursuant to the Exchange
Act. In addition to applicable legal or American Stock Exchange requirements, if
any, holders of the Shares will receive semi-annual reports containing unaudited
financial statements and annual reports containing audited financial statements
with a report thereon by the Company's independent auditors. If a Partnership
does not participate in the Consolidation, such Partnership will continue to
file reports and other information with the Commission, as required by law, and
will continue to furnish reports to BUC$holders.
CAUTIONARY STATEMENT
INFORMATION CONTAINED IN THIS SOLICITATION STATEMENT CONTAINS
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT,"
"ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE CAUTIONARY STATEMENTS SET
FORTH UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE IN THIS SOLICITATION
STATEMENT IDENTIFY IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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SUMMARY................................................................................... 1
The Consolidation....................................................................... 1
Conditions to the Consolidation...................................................... 1
Allocation of Shares................................................................. 2
Purchase of P-B General Partner's Interest........................................... 2
Restrictions on Transfers and other Activities Prior to Final Approval of
Conosolidation...................................................................... 2
Risk Factors............................................................................ 2
Lowest Estimated Market Value of Shares is Less Than Estimated Going Concern and
Liquidation Values.................................................................. 2
Market Price May Decrease after Consolidation........................................ 2
Fundamental Change in Nature of Investment........................................... 2
Conflicts of Interest of Related General Partners.................................... 3
Less Than Majority in Interest Will Bind All BUC$holders in a Partnership............ 3
No Cash Paid to Objecting BUC$holders................................................ 3
Risk of Increased Leverage........................................................... 3
Possible Dilutive Effect Arising from Shares Available for Future Sale............... 3
Risk of Lower Distributions.......................................................... 3
Consolidation Expenses will Reduce Cash of the Company............................... 3
State Tax Consequences of Treatment as an Association................................ 3
Risk of Improper Allocation of Shares................................................ 4
Negative Impact of Not Being a Self-Managed Entity................................... 4
The Company............................................................................. 4
General.............................................................................. 4
Management........................................................................... 4
Organization......................................................................... 4
Business and Objectives.............................................................. 5
Reinvestment, Leverage............................................................... 5
Shares............................................................................... 5
Background.............................................................................. 5
History of the Partnerships.......................................................... 5
History of Related................................................................... 6
Related General Partners' Reasons for Recommending the Consolidation.................... 6
Liquidity; Increased Size............................................................ 6
Increased Percentage of Distributions................................................ 7
Reduced Fees and Expenses............................................................ 7
Increased Distributions.............................................................. 7
Increase in Trading Value of Shares.................................................. 7
Ability to Raise Capital............................................................. 8
Growth............................................................................... 8
Diversification...................................................................... 8
Withdrawal of P-B General Partner as a General Partner/Equity Holder................. 8
Limited Liability.................................................................... 8
Fairness of the Consolidation........................................................... 8
Recommendation of the Related General Partners....................................... 8
Fairness Opinion..................................................................... 9
The Management Agreement................................................................ 9
Objection Procedures.................................................................... 9
Appraisal Rights........................................................................ 10
Alternatives to the Consolidation....................................................... 10
Continuation of Partnerships......................................................... 10
Liquidation.......................................................................... 10
Comparison of Alternatives to the Consolidation......................................... 11
Conflicts of Interest................................................................... 12
Related General Partners............................................................. 12
Class Counsel........................................................................ 12
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Distribution Policy..................................................................... 13
Federal Income Tax Considerations....................................................... 13
Accounting Treatment.................................................................... 13
Selected Financial Data................................................................. 13
Comparison of Partnership Units and Company Shares...................................... 18
Non-Participating Partnerships.......................................................... 22
RISK FACTORS.............................................................................. 23
Risks Relating to the Consolidation..................................................... 23
Lowest Estimated Market Value of Shares is Less Than Estimated Going Concern and
Liquidation Values.................................................................. 23
No Prior Market for Shares; Market Price May Decrease After Consolidation............ 23
Risks Related to the Differences in the Business and Investment Objectives Between
the Company and the Partnerships................................................... 23
Conflicts of Interest of Related General Partners.................................... 24
Potential Conflicts of Interest Due to Competition with Affiliates................... 24
Potential Conflict of Interest of Class Counsel...................................... 24
Less than Majority in Interest Will Bind All BUC$holders in a Partnership............ 25
No Cash Paid to Objecting BUC$holders................................................ 25
Relinquishment of Rights from Court Approval of Related Settlement................... 25
Risk of Increased Leverage........................................................... 25
Risk of Lower Distributions.......................................................... 26
Consolidation Expenses Will Reduce the Cash of the Company Available for
Distribution to Shareholders........................................................ 26
Risk of Improper Allocation of Shares................................................ 26
Contingent or Undisclosed Liabilities................................................ 26
Loss of Relative Voting Power by BUC$holders......................................... 26
Negative Impact of Not Being a Self-Managed Entity................................... 26
The Consolidation Will Require Participating BUC$holders to Forego Alternatives to
the Consolidation................................................................... 27
Risk of Interest Rate Increases...................................................... 27
Board of Trustees May Change Investment Policies..................................... 27
Lack of Operating History............................................................ 27
Risks Related to Anti-takeover Provisions............................................ 27
Possible Dilutive Effect Arising from Shares Available for Future Sale and Shares to
Be Issued to Class Counsel Pursuant to the Settlement............................... 28
Risks Relating to the Existing Portfolio and New FMBs to be Acquired by the Company..... 28
No Government Obligation............................................................. 28
Possible Failure to Obtain Contingent Interest and Other Payments.................... 28
Risks Relating to Mortgage Loans, FMBs and Underlying Real Estate.................... 28
Risks Relating to Moderate and Low Income Set Asides................................. 29
Acquisition of FMBs Prior to Issuer Approval......................................... 29
Risks from Interest Rate Fluctuations................................................ 29
Possible Difficulty of Repayment; Loan to Value Ratio................................ 29
Certain Contingent Interest May Be Based on Appraisals............................... 29
FMBs and Mortgage Loans May Be Considered Usurious................................... 30
Uninsured Losses..................................................................... 30
Risks Relating to the Company........................................................... 30
Construction Completion Risks........................................................ 30
Competition and Availability of FMBs................................................. 30
Ownership of Minority Positions...................................................... 31
Underlying Properties Owned by Charities............................................. 31
Possible Inability to Achieve Growth................................................. 31
Status of the Company Under ERISA.................................................... 31
Possible Negative Effects of Requirements with respect to Permissible Income of
Occupants of Properties............................................................. 31
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Possible Liability of Shareholders...................................... 31
Shareholders Must Rely on Management.................................... 32
Tax Risks.................................................................. 32
Possible Failure to Obtain Tax-Exempt Income............................ 32
Risk of Failure to Obtain State Partnership Tax Status.................. 33
Adverse Effects of Potential Dealer Status.............................. 33
Other Income Tax Risks.................................................. 33
Limitations on Opinion of Counsel as to Tax Matters..................... 33
Possible Changes in Tax Laws............................................ 33
BACKGROUND, BENEFITS OF, AND REASONS FOR, THE CONSOLIDATION.................. 34
History of the Partnerships................................................ 34
Formation............................................................... 34
The Related General Partners' Management of the Partnerships............ 34
Historical Information and Achievement of Objectives.................... 34
Tax Exempt I............................................................ 34
Tax Exempt II........................................................... 34
Tax Exempt III.......................................................... 34
Recent Purported Tender Offer for Tax Exempt II......................... 35
Description of the Litigation.............................................. 35
The Related Settlement..................................................... 36
History of Settlement Negotiations...................................... 36
Summary of Related Settlement; Effect on Rights of BUC$holders.......... 37
Right to Terminate...................................................... 38
Consolidation Approval Procedure........................................ 38
Class Counsel.............................................................. 38
Alternatives to the Consolidation.......................................... 39
Continuation of the Partnerships........................................... 39
Benefits of Continuation................................................ 39
Detriments of Continuation.............................................. 39
Valuation Comparison.................................................... 39
Liquidation of the Partnerships............................................ 39
Benefits of Liquidation................................................. 39
Detriments to Liquidation............................................... 40
Potential Acquisition of Partnership Assets............................. 40
Benefits of, and Reasons for, the Consolidation............................ 40
Increase in Liquidity from Listing and Increased Size................... 40
Increased Distributions................................................. 41
Reduction in Aggregate Annual Fees...................................... 41
Increase in Trading Value of Shares..................................... 42
Ability to Raise Capital................................................ 42
Growth.................................................................. 42
Diversification......................................................... 42
Withdrawal of P-B General Partner as a General Partner/Equity Holder 42
Limited Liability....................................................... 42
Cash Flow............................................................... 42
Sales and Refinancing Proceeds.......................................... 42
Market Attractiveness................................................... 43
Reduction in Administrative Costs; Simplified Administration............ 43
Consequences if Consolidation Not Completed................................ 43
Disadvantages of the Use of Trust Form..................................... 43
THE CONSOLIDATION AND RELATED TRANSACTIONS................................... 44
The Consolidation.......................................................... 44
Exchange of Units....................................................... 44
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General Partner Interests............................................................ 44
Amendments........................................................................... 44
Recommendation of the Related General Partners and Class Counsel..................... 44
Objections Required to Prevent Consolidation......................................... 44
Minimum Participation Requirement.................................................... 45
Conditions to the Consolidation...................................................... 45
Allocation of Shares................................................................. 45
Appraisals and Fairness Opinion...................................................... 45
Accounting Treatment................................................................. 45
No Fractional Shares................................................................. 45
Taxable Gain or Loss................................................................. 45
Effect of Consolidation on Objecting BUC$holders..................................... 45
Effect of Consolidation on Non-Participating Partnerships............................ 46
Title Insurance...................................................................... 46
Representations and Warranties....................................................... 46
Legal Proceedings.................................................................... 46
Environmental Matters................................................................ 46
Related Transactions.................................................................... 46
Purchase Agreement between Related and the P-B General Partner.......................... 46
Overview............................................................................. 46
Covenants as to Voting of Units, Tender Offers....................................... 47
Conditions to Closing; Court Approval................................................ 47
Withdrawal of the P-B General Partner................................................... 47
Consolidation Expenses.................................................................. 47
FAIRNESS.................................................................................. 49
General Partners' Belief as to Fairness................................................. 49
Related General Partners............................................................. 49
P-B General Partner.................................................................. 49
Material Factors Underlying Belief as to Fairness....................................... 49
Negotiation of Related Settlement; Court Approval.................................... 49
Appraisals........................................................................... 50
Fairness of Allocations.............................................................. 50
Allocation of Shares................................................................. 50
Fairness Opinion..................................................................... 50
Court Approval of Fairness........................................................... 50
Comparison of Benefits and Detriments of Alternatives to the Consolidation.............. 50
Continuation......................................................................... 50
Liquidation.......................................................................... 51
Fairness in View of Conflicts of Interest............................................... 51
Related General Partners............................................................. 51
Class Counsel........................................................................ 51
Fairness of Allocations................................................................. 52
Impact of Consolidation on Expected Distributions to Shareholders.................... 52
Distribution of Shares to BUC$holders, Related General Partners and the Manager in
Proportion to Interests in the Partnerships.......................................... 52
Fairness to Non-Participating Partnerships.............................................. 52
Allocation of Consolidation Expenses................................................. 52
Continuance of Non-Participating Partnerships........................................ 52
Comparison of Alternatives to the Consolidation......................................... 52
General.............................................................................. 52
Summary of Comparative Valuation Alternatives........................................... 54
Conclusion........................................................................... 54
Estimated Market Value of Shares........................................................ 55
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Selected Comparable Companies .................................................................... 55
Going-Concern Value .............................................................................. 56
Liquidation Values ............................................................................... 57
Comparative Analysis of Values ................................................................... 58
Secondary and Market Prices for Units ............................................................ 58
Tax Exempt I .................................................................................. 58
Tax Exempt II and III ......................................................................... 59
Recent Purported Tender Offer for Tax Exempt II .................................................. 59
Distribution Comparison .......................................................................... 59
Compensation, Reimbursements and Distributions to the Related General Partners ................... 60
ALLOCATION OF SHARES ............................................................................... 63
Overview ......................................................................................... 63
Explanation of Allocations ....................................................................... 63
Allocation among the Partnerships ............................................................. 63
Allocation among the BUC$holders, the Related General Partners and the Manager ................ 63
Determination of Adjusted Net Asset Value ........................................................ 63
Valuations .................................................................................... 63
Possible Revisions to Valuations .............................................................. 64
FAIRNESS OPINION AND APPRAISALS .................................................................... 65
Fairness Opinion ................................................................................. 65
General ....................................................................................... 65
Information Reviewed .......................................................................... 65
Assumptions, Limitations and Qualifications ................................................... 66
Summary of Analysis and Methodology ........................................................... 66
Liquidation Analysis--Discounted Cash Flow Analysis ........................................... 66
Continuation of the Partnerships--Valuation of the Partnerships on a Continuing Basis ......... 67
Valuation of the Company--Consolidation of the Partnerships into the Company--Comparable
Company Analysis ............................................................................. 68
Valuation of the Company--Consolidation of the Partnerships into the Company--Discounted Cash
Flow Analysis ................................................................................ 69
Allocation of Shares in the Consolidation ..................................................... 69
Conclusions ................................................................................... 69
Appraisals ....................................................................................... 69
General ....................................................................................... 69
Methodology ................................................................................... 70
Summary of Analysis ........................................................................... 70
Conclusions as to Value ....................................................................... 71
Assumptions, Limitations and Qualifications of Appraisals ..................................... 72
Compensation and Material Relationships .......................................................... 72
COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE COMPANY AND BUC$HOLDERS
OF THE PARTNERSHIPS ............................................................................... 74
THE COMPANY ........................................................................................ 82
Overview ......................................................................................... 82
Management ....................................................................................... 82
Ownership Structure .............................................................................. 82
Company Objectives ............................................................................... 82
Assets of the Company ............................................................................ 83
Overview; Existing Portfolio of FMBs .......................................................... 83
Existing Portfolio ............................................................................ 84
Bond Modifications/Forbearance Agreements ..................................................... 87
General .......................................................................................... 92
Description of Existing Indebtedness ............................................................. 92
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Internal Growth....................................................... 93
Distribution Policy................................................... 93
Financing Policies.................................................... 94
Investment Policies and Business Plan................................. 94
Overview........................................................... 94
Sources of Capital................................................. 94
Investment of Newly Raised Capital................................. 94
Short Term Investments............................................. 95
Selection of FMBs.................................................. 95
The Terms of the FMBs and Mortgage Loans........................... 96
Regulatory Requirements............................................ 98
Description of Certain FMBs and Affiliated Properties.............. 100
Construction Period Guarantees..................................... 100
Operating Deficit Guarantees....................................... 101
Administration of Mortgage Loans...................................... 101
Joint Ventures and Participations..................................... 101
Disposition of FMBs................................................... 101
Policies with Respect to Other Activities............................. 101
Change in Policies.................................................... 102
Employees............................................................. 102
OBJECTION PROCEDURES.................................................... 103
Time of Objecting and Record Date..................................... 103
Objection Notice...................................................... 103
Revocability of Objection............................................. 103
No Right of Appraisal................................................. 103
Information Services.................................................. 103
DESCRIPTION OF SHARES................................................... 104
General............................................................... 104
Listing, Price and Trading............................................ 104
SHARES ELIGIBLE FOR FUTURE SALE......................................... 104
CERTAIN PROVISIONS OF DELAWARE LAW AND THE TRUST AGREEMENT.............. 105
General............................................................... 105
Nature of the Company................................................. 105
Additional Classes and Series of Shares............................... 105
The Responsibilities of the Registered Trustee........................ 105
Advance Notice of Managing Trustee Nominations and New Business....... 106
Number of Managing Trustees; Removal; Filling Vacancies............... 106
Term and Dissolution.................................................. 106
Change of Control; Anti-Takeover Provisions........................... 107
Voting Rights of Shareholders......................................... 107
Meetings.............................................................. 107
Indemnification and Limitation of Liability........................... 107
Trustees........................................................... 107
The Registered Trustee............................................. 108
The Withdrawing/Terminated General Partners........................ 108
Borrowing Policies.................................................... 108
Liability of Shareholders............................................. 108
CONFLICTS OF INTEREST................................................... 109
General............................................................... 109
Conflicts of Interest of the Related General Partners................. 109
Substantial Benefits to Related General Partners................... 109
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Conflicts of Interest of the Company............................................. 109
Future Dealings With Related General Partners and Affiliates.................. 109
Initial Company Trustees and Officers......................................... 109
Competition with Affiliates of the Company....................................... 110
Conflicts of Interest of Class Counsel........................................... 110
RESPONSIBILITY OF TRUSTEES......................................................... 110
FINANCIAL INFORMATION.............................................................. 112
Index to Financial Information................................................... 112
Selected Financial Data.......................................................... 115
PRO FORMA FINANCIAL INFORMATION.................................................... 119
FEDERAL INCOME TAX CONSIDERATIONS.................................................. 248
Opinions of Counsel.............................................................. 248
Certain Similarities Between the Ownership of the Units and Beneficial Shares 249
Tax Consequences of the Consolidation............................................ 249
Consequences to Participating BUC$holders..................................... 249
Consequences to Company....................................................... 249
Partnership Status............................................................... 250
Classification as a Trust..................................................... 250
Determination of Partnership Status........................................... 250
Publicly Traded Partnerships.................................................. 250
Company Income................................................................... 251
Treatment of Mortgage Loans Containing Contingent Interest....................... 252
Company Expenses................................................................. 252
Marginal Tax Rates; Capital Gains Taxation....................................... 253
Potential Dealer Status.......................................................... 253
Sale of Shares; Disposition of FMBs; Treatment of Market Discount................ 253
Tax Elections.................................................................... 253
Alternative Minimum Tax.......................................................... 254
Interest Incurred by Company and/or Shareholder.................................. 254
State and Local Taxes............................................................ 254
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................... 256
Security Ownership of Certain Beneficial Owners.................................. 256
Class Counsel.................................................................... 256
Security Ownership of Management................................................. 256
MANAGEMENT......................................................................... 257
Overview......................................................................... 257
Registered Trustee............................................................... 257
The Board of Trustees............................................................ 257
Managing Trustees................................................................ 258
Committees of the Board of Trustees.............................................. 258
Audit Committee............................................................... 258
Compensation Committee........................................................ 259
The Manager...................................................................... 259
Summary of the Management Agreement.............................................. 260
Description of Incentive Share Option Plan....................................... 262
EXECUTIVE COMPENSATION............................................................. 263
Executive Officers of the Manager................................................ 263
Managing Trustees................................................................ 263
INDEPENDENT AUDITORS............................................................... 263
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LEGAL MATTERS ......................................................... 263
GLOSSARY ............................................................ 264
APPENDICES:
APPENDIX A: Fairness Opinion ....................................... A-1
APPENDIX B: Summarization Letter Prepared by C&W .................. B-1
APPENDIX C: Financial Forecasts of Partnership/Company Operations ... C-1
APPENDIX D: Objection Notice ....................................... D-1
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SUMMARY
The following Summary is qualified in its entirety by the detailed
information appearing elsewhere in this Solicitation Statement, including the
appendix hereto. Unless the context otherwise requires, all references to the
"Company" in this Solicitation Statement assumes 100% Participation of the
Partnerships in the Consolidation. See "GLOSSARY" for the definitions of certain
of the capitalized terms used in this Solicitation Statement.
The Consolidation
The Consolidation is being proposed by the Related General Partners and
supported by Class Counsel as part of the Related Settlement.
Pursuant to the Court's Order preliminarily approving the Settlement
Stipulation and subject to final Court approval, unless the BUC$holders of a
Partnership holding more than 33-1/3% of the outstanding Units object to the
participation of that Partnership in the Consolidation by timely delivery of a
notice of objection in the form attached as Appendix D (an "Objection Notice"),
that Partnership will participate in the Consolidation whereby the Units held by
all BUC$holders of a Participating Partnership ("Participating BUC$holders")
will be exchanged for Shares of Charter. In connection with the Consolidation,
the assets and liabilities of the Participating Partnerships will be combined
into the Company.
Unlike most consolidation transactions in which investors are not
independently represented in structuring or determining the terms and conditions
of the transaction, the Consolidation is the result of extensive negotiations,
under the auspices of the Court, between Related and Class Counsel, on behalf of
the BUC$holders, in connection with the settlement of the Litigation. Class
Counsel has negotiated a settlement that it considers fair and reasonable to,
and in the best interests of, the BUC$holders.
Class Counsel has also retained Oppenheimer & Co., Inc. ("Oppenheimer") to
opine as to the fairness of the Consolidation, including the allocation of
Shares among the Partnerships, from a financial point of view, to the
BUC$holders of each Partnership (the "Fairness Opinion"). The allocation of
Shares among the Partnerships was made by the Related General Partners based on
the relative adjusted net asset value (the "Adjusted Net Asset Value") of each
Partnership. For the purpose of determining Adjusted Net Asset Values, the
Related General Partners utilized, in part, the limited appraisals (the
"Appraisals") prepared by Cushman & Wakefield of Florida, Inc. or other
affiliates thereof ("C&W") as of October 15, 1995, to independently appraise the
individual "as is" market values of the fee simple interest of the properties
which secure the FMBs held by the Partnerships (the "Appraised Values") and
adjusted such Appraised Values based on certain qualitative factors.
In addition, the Court has scheduled the Fairness Hearing at which time (i)
BUC$holders and other Class Members may appear before the Court and object to
any aspect of the Related Settlement, including the Consolidation
(notwithstanding a BUC$holder's failure to deliver an Objection Notice by the
Objection Deadline), (ii) the Related General Partners will provide the Court
with a tabulation of the number of Units held by BUC$holders in each Partnership
that have objected to the Consolidation and (iii) the Court will either (x)
approve the Related Settlement or (y) notwithstanding satisfaction of the
Minimum Participation requirement and all other conditions to consummation of
the Consolidation, not approve the Related Settlement.
Assuming that all of the Partnerships participate in the Consolidation
("100% Participation"), upon consummation of the Consolidation (the "Effective
Date"), (i) the BUC$holders of the Partnerships will receive an aggregate of
98.5% of the 20,586,383 Shares allocated to the Partnerships in the
Consolidation, and the applicable Related General Partner and the Manager will
receive an aggregate of 1.5% of the Shares allocated to the Partnerships in the
Consolidation.
Conditions to the Consolidation. The Company will not proceed to consummate
the Consolidation unless, among other things, (i) the Minimum Participation
requirement is met; (ii) the P-B General Partner withdraws as general partner of
each Partnership and relinquishes its right to obtain an equity or other
interest in the Company in respect of the P-B Interests; (iii) the Shares are
approved for listing on the American Stock Exchange (or other national exchange
or market) subject to notice of issuance; and (iv) the Court has issued its
final order approving the Related Settlement, including the Consolidation (the
"Final Order"). "Minimum Participation" means, collectively, (a) the
participation in the Consolidation by any two of the three Partnerships and (b)
the waiver by the Related General Partners of their right under the Settlement
Stipulation to not proceed unless there is 100% Participation.
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Allocation of Shares. Assuming 100% Participation in the Consolidation,
the Shares to be issued in the Consolidation will be allocated among the
Partnerships as follows:
Percentage of Number of
Adjusted Aggregate Shares
Net Asset Adjusted Net Allocated to
Partnership Value Asset Value Partnership
- ---------------- -------------- --------------- -------------
Tax Exempt I $115,096,936 37.27% 7,673,129
Tax Exempt II 150,666,979 48.79% 10,044,465
Tax Exempt III 43,031,833 13.94% 2,868,789
------------- ------- -----------
TOTAL $308,795,748 100.00% 20,586,383
============= ======= ===========
See "ALLOCATION OF SHARES" for more detailed information regarding the
allocation of Shares. Shares will be allocated to each BUC$holder, the Related
General Partners and the Manager in accordance with the respective Partnership
Agreements and based upon their respective interests in distributions of cash
flow from operations of the Partnership.
Purchase of P-B General Partner's Interest. As part of the Consolidation,
the Manager will acquire the P-B Interests and the P-B General Partner will
withdraw as a general partner of the Partnerships, in accordance with the terms
and conditions of a purchase agreement, dated as of December 19, 1996 (the "P-B
Purchase Agreement"), among the P-B General Partner, Related and other
affiliates of Prudential. The Manager will contribute one-half of the P-B
Interests it acquires to the Participating Partnerships, resulting in the
BUC$holders of such Partnerships ultimately owning a greater percentage of the
Shares than would otherwise be the case if the Manager did not make such a
contribution. Pursuant to the P-B Purchase Agreement, the Manager may, subject
to the approval of the Court, acquire the P-B Interests whether or not the
Consolidation is consummated. See "THE CONSOLIDATION AND RELATED TRANSACTIONS--
Related Transactions--Purchase Agreement between Related and the P-B General
Partner--Overview."
Restrictions on Transfers and other Activities Prior to Final Approval of
Consolidation. Pending final approval of the Related Settlement, the Court's
Order prohibits Class Members from (i) transferring their Units unless the
transferee agrees to be bound by the Related Settlement; (ii) granting a proxy
to object to the Consolidation or (iii) commencing a tender offer for the Units.
In addition, the General Partners are enjoined from (i) recording any transfers
made in violation of the Order and (ii) providing the list of investors in any
Partnership to any person conducting a tender offer.
In addition, pursuant to the P-B Purchase Agreement, the P-B General
Partner is not required to consummate the sale of the P-B Interests to Related
if Related makes a tender offer for any Units (except in response to a third
party tender offer) and Related has agreed not to tender, without the P-B
General Partners' prior consent, for any Units or Shares for a period of one
year from the Effective Date (except in response to a third party tender offer).
Furthermore, if prior to the Effective Date Related acquires Units in connection
with a defensive tender offer, Related is obligated to offer such Units to the
Company at a price equal to the tender price, including any borrowing or other
costs incurred by Related to acquire the Units.
Risk Factors
BUC$holders should carefully consider the matters disclosed under "RISK
FACTORS" before deciding whether or not to object to the Consolidation. The
following is a summary of the material risks and other adverse features of the
Consolidation.
Lowest Estimated Market Value of Shares is Less Than Estimated Going
Concern and Liquidation Values. The comparative analysis prepared by the Related
General Partners to assist BUC$holders in analyzing the Consolidation indicates
that, based on such estimates which include a number of assumptions, the
estimated going concern and liquidation values exceed the lowest estimated value
of the Shares. See "FAIRNESS--Comparison of Alternatives to the Consolidation."
Market Price May Decrease after Consolidation. There is substantial
uncertainty as to the prices at which the Shares will trade and the possibility
exists that the trading price of the Shares may be lower than the proportionate
Adjusted Net Asset Value assigned to the Partnerships in the Consolidation.
Fundamental Change in Nature of Investment. The nature of each
Participating BUC$holder's investment will change from (i) an interest in a
finite-life entity holding a specified portfolio of tax-exempt participating
first mortgage bonds ("FMBs") and second mortgage loans ("SMLs") (the income
from which is not tax-exempt) that will be liquidated over time to (ii) an
equity interest (i.e., beneficial interests), in an ongoing, infinite life
company, that will reinvest the proceeds of asset sales, if any, and mortgage
repayments and whose portfolio of tax-exempt debt instruments secured by
multifamily residential apartment projects, assisted living, continuing care and
retirement community projects or nursing homes (the "Underlying Properties")
developed by third party developers or affiliates of the Related General
Partners will initially be expanded and more diversified than that of any single
Partnership, and may be changed from time to time by the Company's Board of
Trustees without approval of Shareholders. If the Consolidation is consummated,
a Shareholder's investment will be recovered not from proceeds of sales of
Partnership assets, but from a sale of his or its Shares, either on the American
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Exchange or in private transactions. The Company also expects to invest in a
wider range of tax-exempt investments which may have risks not present in the
portfolio of FMBs and SMLs currently held by each individual Partnership,
including non-participating FMBs and, in selected circumstances, small amounts
of taxable bonds.
Conflicts of Interest of Related General Partners. The Related General
Partners initiated and participated in the structuring of the Consolidation and
have certain conflicts of interest with respect to its completion. The Related
General Partners have a financial interest in the consummation of the
Consolidation, which creates an inherent conflict of interest in their
recommending that BUC$holders not object to the Consolidation. The Related
General Partners and their affiliates will realize certain economic benefits if
the Consolidation is consummated, including the Manager entering into the
Management Agreement which is not cancelable for four years, other than for
Cause. See "CONFLICTS OF INTEREST--Conflicts of Interest of the Related General
Partners."
Less Than Majority in Interest Will Bind All BUC$holders in a Partnership.
Pursuant to the Court's Order preliminarily approving the Settlement Stipulation
and subject to final Court approval, a Partnership will participate in the
Consolidation unless BUC$holders holding more than 33-1/3% of the outstanding
Units in such Partnership object to the Consolidation. If a Partnership
participates in the Consolidation, all BUC$holders of such Partnership,
including BUC$holders who objected to the Consolidation (either by delivering an
Objection Notice by the Objection Deadline or by objecting at the Fairness
Hearing), will participate in the Consolidation. Under the applicable
Partnership Agreements, if the Consolidation were not subject to a judicial
determination and Court order following a Fairness Hearing, it could only be
consummated by obtaining the approval of holders of a majority of the
outstanding Units of each Participating Partnership. See "OBJECTION PROCEDURES."
No Cash Paid to Objecting BUC$holders. BUC$holders who object to the
Consolidation do not have a right to receive cash based on an appraisal of their
Units in the Participating Partnerships or otherwise.
Risk of Increased Leverage. Only Tax Exempt I currently has outstanding
debt. Pursuant to the Trust Agreement, the Company is permitted to incur
leverage or other financing of up to 50% of the Company's Total Market Value
(measured at the time such leverage is incurred). Assuming 100% Participation,
upon consummation of the Consolidation, the Company's leverage is anticipated to
represent approximately 6.87% of the Company's Total Market Value. An increase
in debt and other leverage may increase the risk of default on the Company's
obligations and, along with fluctuations in interest rates that may be
applicable to the leverage of the Company, may reduce the cash flow available
for distribution.
Possible Dilutive Effect Arising from Shares Available for Future Sale. The
Board of Trustees of the Company will have the ability, without Shareholder
approval, to offer additional Shares or other equity or debt securities in
exchange for money, property or otherwise. In particular, the Company may issue
Shares to Class Counsel (as part of the Related Settlement) and to the Manager
(upon the exercise of certain options which may be granted to the Manager). No
prediction can be made as to the effect, if any, that future sales of Shares or
the availability of such Shares for future sale will have on the market price of
the Shares. Future sales of substantial amounts of Shares (including Shares
issued to Class Counsel) or the perception that such sales would occur, may
adversely affect prevailing market prices for the Shares. Shareholders will have
no preemptive right to purchase Shares issued in any such offerings, and any
such offerings might cause a dilution of a Shareholder's investment in the
Company. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT--Security Ownership of Certain Beneficial Owners" and "RISK
FACTORS--Risk and Other Adverse Factors Relating to the Consolidation--Possible
Dilutive Effect Arising from Shares Available for Future Sale."
Risk of Lower Distributions. There is no guarantee with respect to the
level of future cash distributions, and regardless of the initial level of such
distributions, they could decline in the future to a level at which some
Shareholders would receive lower distributions than they received prior to the
Consolidation and lower than they would have received had the Consolidation not
occurred. The Company's 1996 pro forma financial statements indicate that
BUC$holders of Tax Exempt II and Tax Exempt III would have received lower
distributions (approximately 1% or $0.56 per $1,000 of original investment
("Original Investment"), less than 1996 annual distributions for Tax Exempt II
and approximately 0.8% or $0.37 per $1,000 of Original Investment less than 1996
annual distributions for Tax Exempt III had the Consolidation occurred on
January 1, 1996, with 100% Participation).
Consolidation Expenses will Reduce Cash of the Company. Expenses of the
Consolidation (the "Consolidation Expenses") are estimated to be approximately
$1,984,125 or approximately 0.64% of the total Adjusted Net Asset Value of the
Company (based on the aggregate Adjusted Net Asset Values of the Partnerships
and assuming 100% Participation). The Company will borrow to pay the
Consolidation Expenses which will reduce the Company's cash balances to the
extent of payments on such debt. Funds used to pay Consolidation Expenses
(including with respect to any debt incurred to finance such expenses) would
otherwise be available for distribution to Shareholders. See "RISK
FACTORS--Consolidation Expenses."
State Tax Consequences of Treatment as an Association. Although the Company
will be created as a Delaware business trust, it is anticipated that it will be
treated as a partnership for federal income tax purposes. Although new "check
the box" federal regulations permit an entity to choose whether to be taxed as a
partnership or another type of entity for federal income tax purposes, it is not
clear
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whether all states will adopt regulations similar to these new federal
regulations. If the Company does not satisfy the requirements to be treated as a
partnership for state tax purposes, it would most likely be treated as an
association taxable as a corporation and be subject to "double taxation" on its
income for state tax purposes, which could reduce the anticipated distributions
to Participating BUC$holders. See "FEDERAL INCOME TAX
CONSIDERATIONS--Partnership Status."
Risk of Improper Allocation of Shares. The allocation of Shares among
Participating Partnerships is based upon the Adjusted Net Asset Values assigned
to each such Partnership, which are based upon and subject to significant
assumptions and limitations, and which are based, in part, on the Appraisals
which necessarily include their own significant assumptions and limitations.
Accordingly, there can be no assurance that the number of Shares allocated to
each Participating Partnership reflects the relative values at which the assets
of each such Partnership could be sold, the relative values at which the Units
of each such Partnership could be sold, or that such Shares could be sold at a
price equal to the Adjusted Net Asset Value assigned to such Shares. The risk of
improper allocation of Shares passes through to Shareholders, each of whom, upon
consummation of the Consolidation, will receive a pro rata percentage of the
Shares allocated to the Participating Partnership in which such Shareholder held
Units prior to the Consolidation.
Negative Impact of Not Being a Self-Managed Entity. The Company will be an
externally managed entity, rather than a self-managed entity, which may have a
negative impact on the value of the Shares. The Company believes that many
investment bankers, brokerage firms, financial consultants, institutional
investors and others believe that self-managed entities are more favorably
received in the equity markets.
The Related General Partners, together with Class Counsel, explored the
possibility of structuring the Company as a self-administered trust. Such a
structure would require the Company to purchase those operating divisions of
Related necessary to support the activities of the Manager. The purchase price
for such a transaction is generally determined by applying a multiple to
recurring and transaction income generated by the entity to be purchased.
Because the Manager is newly formed and has no operating history, and due to the
potentially dilutive effect of issuing Shares to accomplish such structure,
Related and Class Counsel were unable to establish a mutually agreeable price
for the Manager. The Company could determine in the future to acquire the
Manager or otherwise become self-administered although management does not have
any present intention to do so.
The Company
General. Charter Municipal Mortgage Acceptance Company is a newly created
Delaware business trust organized under the Delaware Business Trust Act (the
"Delaware Act") on August 12, 1996 to facilitate the Consolidation. The
Company's principal executive offices are located at 625 Madison Avenue, New
York, NY 10022; Telephone (800) 600-6422.
Management. The Company's Board of Trustees will initially be comprised of
five managing trustees (the "Managing Trustees"); three of whom have been
selected by the Related General Partners and two of whom were recommended by the
Related General Partners and approved by Class Counsel. See
"MANAGEMENT--Trustees and Executive Officers of the Company." The Company's
assets will be managed by the Manager pursuant to the Management Agreement
between the Company and the Manager. See "MANAGEMENT--The Manager" and "Summary
of the Management Agreement." The Manager will also serve as the general partner
of the Company for tax purposes.
Pursuant to the Trust Agreement, the Board of Trustees must be comprised of
one-third Independent Trustees. The Company will have annual Shareholder
meetings to elect those Managing Trustees whose terms have expired. Managing
Trustees will generally serve staggered three-year terms. See "CERTAIN
PROVISIONS OF DELAWARE LAW AND THE TRUST AGREEMENT--Number of Managing Trustees;
Removal; Filling Vacancies."
A trustee of the Company (the "Registered Trustee") is also Wilmington
Trust Company, a Delaware banking corporation. The Registered Trustee has been
appointed as a trustee solely to satisfy certain requirements of the Delaware
Act and its duties and responsibilities with respect to the Company and the
Shareholders are very limited. See "MANAGEMENT--Registered Trustee."
Organization. The following diagram illustrates the structure and the
ownership of the Company, assuming 100% Participation, and the relationships
among the Company, the Partnerships, the Related General Partners and the
Manager upon consummation of the Consolidation, including the percentage
ownership of such persons of Shares outstanding immediately after consummation
of the Consolidation.
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- ----------------------------- --------------------------
Manager/ Shareholders
Related General Partners (ex-BUC$holders)
- ----------------------------- --------------------------
| |
| 1.5% |98.5%
| Shares |Shares
| |
------------------------------------------
| |
| The Company |
| |
| Assets: 31 FMBs |
| 7 SMLs |
| |
------------------------------------------
Business and Objectives. The Company's primary objective will be to
generate distributable tax-exempt income through the acquisition and ownership
(either directly or indirectly) of tax-exempt participating and
non-participating FMBs and other tax-exempt instruments issued by various state
or local governments or other agencies or authorities and secured by
participating and non-participating Mortgage Loans on the Underlying Properties
developed by third party developers or affiliates of the Related General
Partners generally consistent with the present objectives of the Participating
Partnerships. If all of the Partnerships participate in the Consolidation, the
Company and its affiliates initially will own a portfolio of assets (the
"Existing Portfolio") consisting of: (i) 31 FMBs with an aggregate outstanding
principal balance as of December 31, 1996 of $348,602,428 secured by first
mortgage loans ("Mortgage Loans") on 31 Underlying Properties and (ii) 7 SMLs
with an aggregate outstanding principal amount of $11,381,537 most of which are
secured by second mortgages on Underlying Properties. Based upon current market
conditions, the Manager anticipates that the Company's acquisition strategy will
initially focus on existing FMBs which may be restructured so as to provide Base
Interest and Contingent Interest. The Company may also acquire newly issued
FMBs, which, because of newly adopted regulations restricting the receipt of
participating interest, are unlikely to have Contingent Interest. The proceeds
of these newly issued FMBs will have been used to, or will, finance the
construction and ownership of multifamily residential apartment projects,
assisted living, continuing care and retirement community projects or nursing
homes. It is in these areas that the Manager believes the greatest opportunities
exist. Such focus may change based on future market conditions and other
factors.
The Board of Trustees, in its sole discretion, may change the Company's
investment objectives as the Board of Trustees deems appropriate and in the best
interests of the Shareholders, providing the Company with flexibility to adjust
its investment objectives in a timely manner when faced with changing market
conditions and growth opportunities. Prior to its changing any of the Company's
investment objectives, the Board of Trustees will consider, among other factors,
Shareholder expectations, changing market trends, the expertise and the ability
of the Manager and the relative risks and rewards associated with any such
change. See "THE COMPANY--Investment Policies and Business Plan." Also see "RISK
FACTORS--Board of Trustees May Change Investment Policies."
Reinvestment, Leverage. To finance its growth, the Company will be
permitted to reinvest the proceeds of asset sales, if any, and mortgage
repayments and to incur leverage or other financing up to 50% of the Company's
Total Market Value (measured at the time such leverage is incurred). The Company
may use several techniques to leverage its portfolio including traditional debt
financing, granting participating equity interests in its Existing Portfolio of
FMBs and so-called "off-balance sheet" financing where the Company and new
investors each acquire an interest in an entity created by the Company to hold
title to the FMBs. See "THE COMPANY--Investment Policies and Business
Plan--Sources of Capital." The Company's intention is to initially finance its
growth through the leveraging of its Existing Portfolio rather than by raising
new equity capital.
Shares. The Shares will be approved for listing on the American Stock
Exchange (or other national exchange or market) upon official notice of
issuance prior to consummation of the Consolidation, which should provide a
Shareholder with an efficient means of liquidating his or its investment. There
is currently no market for the Shares.
Background
History of the Partnerships. All of the Partnerships were originally
sponsored between 1986 and 1987 by the Related General Partners and the P-B
General Partner.
The Partnerships' original investment objectives and other aspects of their
formation are discussed under "BACKGROUND, BENEFITS OF, AND REASONS FOR, THE
CONSOLIDATION--History of the Partnerships."
5
<PAGE>
All of the Partnerships have paid quarterly distributions since inception.
History of Related. Affiliates of Related were founded in 1972 by Stephen
M. Ross to engage in the business of providing financial and real estate
acquisition, development and management services. Its real estate related
products include luxury apartments, commercial office properties, retail centers
and affordable multifamily properties located in nearly every state and major
market place in the U.S. and Puerto Rico.
Through Related's Financial Services Division, Related and its affiliates
have sponsored 22 public and 238 private real estate investment programs that
have raised in excess of $3.1 billion from more than 106,000 investors. This
positions Related as one of the nation's largest sponsors of real estate
investment programs for retail and institutional investors. These programs have
accounted for the acquisition of over 800 properties with a valuation, at cost,
of approximately $7.3 billion. The Related portfolio, in the aggregate, consists
of approximately 112,000 residential apartment units, 25 shopping centers and 5
regional malls. This division also provides asset monitoring services for the
properties comprising the Related sponsored investment programs' real estate
portfolio. This involves regular site visits, monitoring of financial and
operating reports, regulatory compliance checks and independent periodic
analysis of local marketplace conditions. These services are currently provided
with respect to approximately 440 properties encompassing 59,000 residential
units.
Related's Development Division ranks as one of New York's largest
developers of luxury rental housing and as one of Florida's largest developers
of multifamily rental housing. To date, the Development Division has completed
approximately 3.5 million square feet of commercial space, 6,300 units of market
rate housing and 9,700 units of government-assisted affordable rental housing,
together valued at approximately $2 billion. Among its commercial projects are
the U.S. headquarters for Nestle Foods, Revlon and American Brands.
Related's Property Management Division provides property management
services. It directly manages approximately 11,400 residential units and 3.2
million square feet of first class commercial and mixed use space from its New
York offices. From its Florida offices, Related manages approximately 16,400
residential units and 17 shopping centers.
Related General Partners' Reasons for Recommending the Consolidation
The Consolidation is being proposed by the Related General Partners in
connection with the Related Settlement and pursuant to the Settlement
Stipulation, and the Related Settlement is being supported by Class Counsel. The
P-B General Partner has not taken a position with respect to the Consolidation
due to its conflict of interest in selling the P-B Interests to the Manager.
Summarized below are the principal benefits of the Consolidation to
BUC$holders. There can be no assurance that such benefits will be achieved by
the Company.
[bullet] Liquidity; Increased Size. The Consolidation offers BUC$holders of
Tax Exempt II and Tax Exempt III liquidity through the public trading
expected to result from listing the Shares on the American Stock
Exchange. The Related General Partners believe that BUC$holders
desire more control over the timing of liquidating their investments
than they would have if the Partnerships were to continue in
existence. While the Consolidation is not the only means by which
BUC$holders could achieve liquidity for their investments in the
Partnerships, the Related General Partners believe that the
Consolidation is preferable to the potential principal alternatives,
which are (i) sale of Units in the informal secondary markets for
real estate limited partnership interests, in which trading values
are generally steeply discounted from underlying asset value and,
thus, in the Related General Partners' opinion, not an attractive
option for most BUC$holders, and (ii) a sale of all of a
Partnership's assets and distribution of the net proceeds to
BUC$holders, which in the opinion of the Related General Partners is
not in the BUC$holders' best interests (even if the Consolidation
were not being offered), given that the current level of market value
of the Partnerships' assets have not as yet increased to a level
which would result in the return of the BUC$holders Original
Investment and, in light of the attendant estimated costs of
liquidation, would not provide the BUC$holders with their greatest
return.
By participating in the Consolidation and receiving Shares,
BUC$holders can obtain the opportunity to liquidate their investment
at a time most advantageous and convenient to them. However, the
Related General Partners anticipate that the liquidity benefit
inherent in the Consolidation may temporarily be adversely affected
by a number of factors, including the likelihood that some
Shareholders will sell their Shares as soon as possible after the
Consolidation, putting downward pressure on the market value of the
Shares; and market uncertainty about the Company's performance until
a stable earnings and distribution record is established.
Accordingly, Shareholders who must immediately generate cash from
any available source, regardless of the loss of future opportunities,
may be forced to accept a price for their Shares that is less than
underlying asset value. For the near term, other Shareholders may
wish to consider holding their Shares and focusing more on
distributions and growth than on liquidity, in assessing the
potential benefits of the Consolidation.
BUC$holders of Tax Exempt I, which is currently listed on the
American Stock Exchange, as well as the BUC$holders of Tax Exempt II
and III, will all benefit from the increased size of the entity in
which they are investing. The Related General Partners believe that
the relatively small capitalization of Tax Exempt I (approximately
$93.9 million based upon the price per share
6
<PAGE>
of Tax Exempt I as of December 31, 1996 multiplied by the total
shares outstanding as of such date) has resulted in a lower
trading volume (and, hence, less liquidity) than would be the case
for an entity, such as the Company, with a significantly greater
capitalization (approximately $310 million initially).
[bullet] Increased Percentage of Distributions. As a result of
the contribution by the Manager to the Participating Partnerships of
one-half of the P-B Interests, BUC$holders will receive a greater
percentage of the Shares allocated with respect to the Partnerships
and, therefore, a greater percentage of distributions as Shareholders
than they would have received as BUC$holders.
Percentage of Percentage of Increase in
Cash Flow Cash Flow Percentage of
Distributable Distributable Distributable
to BUC$holders to Shareholders Cash Flow
---------------- ----------------- --------------
Tax Exempt I 98.00% 98.50% .50%
Tax Exempt II 98.00% 98.50% .50%
Tax Exempt III 98.00% 98.50% .50%
[bullet] Reduced Fees and Expenses. The Consolidation will result in the
Manager receiving aggregate annual fees which are 25% lower than the
aggregate annual fees currently payable by the Partnerships to both
of the General Partners (the Loan Servicing Fee payable solely to the
Related General Partner remains unchanged). In addition, the Related
General Partners believe that the Company will be able to achieve
lower costs thereby increasing the cash available for distribution.
Cost reductions are expected to result from the elimination of
expenses associated with the operation and maintenance of the
Partnerships as public partnerships and certain economies of scale
resulting from the common beneficial ownership and management of
the Participating Partnerships' portfolio. Furthermore, the
Consolidation will simplify the preparation of financial statements,
tax returns, investor information and reports and filings otherwise
required. Certain cost savings will be enhanced to the extent that
more than the minimum number of Partnerships participate in the
Consolidation. See "FINANCIAL INFORMATION--Pro Forma Financial
Information." Although the formulas used to calculate all
post-Consolidation fees (except the Bond Selection and Loan Servicing
Fees which remain unchanged) reflect reduced amounts from those
currently payable to the General Partners, the gross amount of such
fees could be higher post-Consolidation due to the increased size of
the Company's portfolio as a result of new acquisitions expected to
be made by the Company (although such fees will still be less than
they would have been under the old formulas).
Pursuant to the Partnership Agreements, the Trust Agreement and the
Management Agreement, the General Partners and the Manager are
entitled to reimbursement of certain administrative costs incurred by
them on behalf of the Partnerships and the Company. Reimbursement of
such costs is included in General Administrative Expenses ("G & A")
in the pro forma and historical financial statements. Pursuant to the
Management Agreement, the maximum amount of expenses which the
Company may reimburse the Manager is $200,000 in any given year of
operation, subject to the following adjustments: the overall limit on
reimbursements for administrative expenses will be increased (i)
after the Company's first year of operations and each year thereafter
by a percentage equal to the Consumer Price Index for the year then
ended, and (ii) proportionately as the Company increases its asset
portfolio.
[bullet] Increased Distributions. The Consolidation provides all BUC$holders
with an opportunity to participate in a transaction that is
anticipated to result in an increase in distributions as a result of
(i) lower fees and costs and (ii) the contribution by the Manager
to the Partnerships of one-half of the P-B Interests. The Company's
1996 pro forma financial statements indicate that BUC$holders of Tax
Exempt II and Tax Exempt III would have received lower distributions
(approximately 1% or $0.56 per $1,000 of Original Investment less
than 1996 annual distributions for Tax Exempt II and approximately
0.8% or $0.37 per $1,000 of Original Investment less than 1996 annual
distributions for Tax Exempt III) had the Consolidation occurred on
January 1, 1996, with 100% Participation. However, the Related
General Partners believe that additional cost savings together with
the benefits anticipated to be derived from the Company's new
business plan, neither of which is reflected in the Company's 1996
pro forma financial statements, will be achieved, thereby
progressively increasing distributions to BUC$holders including
those in Tax Exempt II and Tax Exempt III (these savings and benefits
cannot be reflected in the pro forma financial statements because
regulations regarding preparation of pro forma financial information
as promulgated by the Commission do not permit the inclusion of this
type of prospective information). There can be no assurance that such
additional cost savings or benefits expected to be derived from the
Company's new business plan will be achieved.
For additional information regarding aggregate compensation paid and
distributions made by the Company and the Partnerships on a pro forma and
historical basis, see "FAIRNESS--Compensation, Reimbursements and Distributions
to the General Partners."
[bullet] Increase in Trading Value of Shares. The Related General Partners
expect the stabilized market price of the Company's Shares will
increase relative to the current market/trading value of the Units.
This belief is based on the expectation that the marketplace
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<PAGE>
will place a greater value on an entity which has the ability to
grow and has a significant enough capitalization to be able to
access the financial markets and achieve greater liquidity, none of
which qualities exist with the Partnerships. Notwithstanding the
expected outlook for the stabilized value of the Company's Shares,
the Related General Partners recognize that there is substantial
uncertainty as to the prices at which the Shares will trade in the
short-term following the consummation of the Consolidation. Trading
pressure resulting from BUC$holders wishing to sell their Shares
immediately after the Effective Date may result in the trading price
of the Shares being artificially depressed until the market for the
Shares is stabilized.
[bullet] Ability to Raise Capital. The Company will have access to financing
sources and the capital markets and the ability to fund future growth
and capital requirements through the issuance of additional equity
securities and the raising of funds from debt and leveraging, subject
to a maximum leverage limit equal to 50% of the Company's Total
Market Value (measured at the time such leverage is incurred).
[bullet] Growth. The Partnerships were originally formed to acquire
participating FMBs issued by various state or local governments or
other agencies or authorities and secured by participating Mortgage
Loans on Underlying Properties. The Manager believes that the current
marketplace provides opportunities to acquire existing FMBs which may
be restructured so as to provide Base Interest and Contingent
Interest. Opportunities also exist for the Company to acquire newly
issued FMBs, the proceeds of which will finance the construction and
ownership of multifamily or retirement projects and other properties.
Because of newly adopted regulations, newly issued FMBs are unlikely
to have Contingent Interest features. Therefore, growth opportunities
are available for those companies with available capital able to
commit to acquire FMBs in a timely manner according to the Company's
investment policies. The Consolidation will provide a capital
structure and increased efficiency of portfolio management which will
allow the Company to take advantage of such opportunities.
[bullet] Diversification. The Company's initial investment portfolio will be
substantially expanded and more diversified than the portfolio of
any Partnership. This expansion and diversification reduces a
BUC$holder's exposure to region-specific issues as well as the
performance of any single asset.
[bullet] Withdrawal of P-B General Partner as a General Partner/Equity Holder.
As part of the Consolidation, the P-B General Partner will relinquish
its general partner interests in the Partnerships and will not
receive any equity interest in the Company. The Manager, an affiliate
of Related, will serve as sole manager to the Company and will
perform the investor services, accounting and administrative
responsibilities and functions that currently are performed by the
General Partners for the Partnerships.
[bullet] Limited Liability. Similar to the limited liability of the
BUC$holders of the Partnerships, Shareholders will not have any
liability for obligations of the Company solely as a result of their
status as beneficial owners of the Company under Delaware law.
For a more complete description of these and other anticipated benefits,
see "BACKGROUND, BENEFITS OF, AND REASONS FOR, THE CONSOLIDATION--Benefits of,
and Reasons for, the Consolidation."
Fairness of the Consolidation
Recommendation of the Related General Partners. The Related General
Partners believe that the terms of the Consolidation are fair when considered as
a whole, and to the BUC$holders in each of the Partnerships, regardless of which
of the Partnerships are included in the Consolidation, assuming the requirements
of any of the Minimum Participation scenarios are met. The material factors
underlying the beliefs of the Related General Partners relating to the fairness
of the Consolidation are discussed under "FAIRNESS--Material Factors Underlying
Belief as to Fairness." The Related General Partners' judgment as to the
fairness of the Consolidation may be affected by the fact that they will derive
financial benefits from the Consolidation, and are thus subject to conflicts of
interest. See "CONFLICTS OF INTEREST--Conflicts of Interest of the Related
General Partners."
The Related General Partners based their determination as to the fairness
of the Consolidation on a variety of factors, including, but not limited to: (i)
the process of arm's length negotiation of the structure, terms and conditions
of the Consolidation with Class Counsel acting on behalf of the Class Members,
and Class Counsel's responsibility to act in the best interests of the
BUC$holders; (ii) the Related General Partners' knowledge that any settlement
would necessarily entail obtaining preliminary and final approval by the Court
of the Related Settlement, including the Consolidation; (iii) the opportunity
for each BUC$holder to object to the Consolidation; (iv) with respect to the
allocation of Shares among the Partnerships, the Adjusted Net Asset Values
assigned to the Partnerships based in part upon the Appraisals of the Underlying
Properties securing the Mortgage Loans held by the Partnerships on a
partnership-by-partnership basis as set forth in the Appraisals prepared by C&W;
(v) the fact that C&W prepared all the Appraisals thereby maximizing consistency
among the Appraisals; (vi) a comparison of the potential benefits and detriments
of the Consolidation with those of the alternatives to the Consolidation; and
(vii) the Fairness Opinion rendered by Oppenheimer.
The Related General Partners believe that an investment in the Company
through the ownership of Shares will provide greater overall benefits to
BUC$holders than the benefits derived from an investment in an individual
Partnership or from any of the alternatives to the
8
<PAGE>
Consolidation analyzed by the Related General Partners. Based upon the
foregoing, the Related General Partners are recommending that BUC$holders not
object to the Consolidation.
Fairness Opinion. The preparation and delivery of the Fairness Opinion were
requested by Class Counsel. Subject to the qualifications and limitations set
forth under "FAIRNESS OPINION AND APPRAISALS--Fairness Opinion," Oppenheimer
concluded that the Consolidation, including the allocation of Shares among the
Partnerships, is fair, from a financial point of view, to the BUC$holders of the
Partnerships assuming 100% Participation and all other combinations of
Participating Partnerships, including the Minimum Participation scenarios.
The Management Agreement
Pursuant to the Management Agreement to be entered into between the Company
and the Manager, the Manager will provide to the Company substantially the same
services as are provided by the General Partners to the Partnerships. In
consideration for such services the Company will pay the Manager (i) bond
selection fees equal to 2.00% of the principal amount of each FMB or other tax
exempt instrument acquired or originated by the Company (the "Bond Selection
Fee"); (ii) Special Distributions from Adjusted Cash Flow equal to 0.375% per
annum of Total Invested Assets (the "Special Distribution"); and (iii) loan
servicing fees equal to 0.25% per annum based on the outstanding principal
amount of FMBs or other mortgage investment (the "Loan Servicing Fee"). In
addition, (a) the Related General Partners and the Manager will be entitled to
receive distributions from the Company in respect of any Shares they hold; (b)
the Company will reimburse the Manager for direct expenses incurred by the
Manager in an amount not to exceed $200,000 per annum (subject to annual
increases based upon increases in the Consumer Price Index and the increase in
the Company's assets); (c) the Manager will be entitled to a bond placement fee
equal to 2.00% of the principal amount of each FMB or other tax exempt
instrument acquired or originated by the Company (payable by the borrower under
such mortgage, and not the Company) (the "Bond Placement Fee"); (d) if the
Company is dissolved, a liquidation fee equal to 1.50% of the gross sales price
of the assets sold by the Company in connection with a liquidation of the
Company's assets supervised by the Manager (the "Liquidation Fee"); and (e) the
Manager may receive options to acquire additional Shares pursuant to the
Company's Incentive Share Option Plan only if the Company's distributions in any
year exceed $0.9517 per Share (i.e., the 1996 pro forma distributions set forth
in this Solicitation Statement), and the Compensation Committee of the Board of
Trustees determines to grant such options.
The foregoing annual fees are less than the aggregate annual fees currently
paid by the Partnerships to the General Partners. It is anticipated that the
Manager will retain affiliates of Related to provide the services which it is
required to provide to the Company under the Management Agreement.
The Management Agreement cannot be terminated by the Company prior to the
fourth anniversary of the Effective Date, other than for Cause, and the Company
cannot dissolve and liquidate prior to such anniversary date except upon a
recommendation of the Manager and the affirmative vote of holders of not less
than a majority in interest of the outstanding Shares ("Majority Vote"). The
four year limitation on dissolution was negotiated with Class Counsel in order
to allow the Manager sufficient time to implement the Company's strategies for
growth as described in this Solicitation Statement. The Manager may be removed
after the fourth anniversary of the Effective Date upon the Majority Vote of
Shareholders, with or without Cause. After the fourth anniversary of the
Effective Date, the vote of the holders of 66-2/3% of the Company's then
outstanding Shares is required to approve a dissolution and liquidation of the
Company that is not recommended by the Manager and the Majority Vote of
Shareholders is required to approve a dissolution and liquidation of the Company
that is recommended by the Manager. If for any reason, whether prior to or after
the fourth anniversary of the Effective Date, the Management Agreement is
terminated in accordance with its terms, the Company may dissolve and liquidate
upon the Majority Vote of Shareholders.
Objection Procedures
Pursuant to the Court's Order preliminarily approving the Settlement
Stipulation and subject to final Court approval, a Partnership will participate
in the Consolidation unless BUC$holders holding more than 33-1/3% of the
outstanding Units in such Partnership object to the Consolidation. BUC$holders
may object to the participation of their Partnership in the Consolidation by
delivering an Objection Notice to the Related General Partners. BUC$holders may
also object to any aspect of the Related Settlement, including the
Consolidation, at the Fairness Hearing by following the procedures set forth in
the Class Notice which accompanies this Solicitation Statement.
Equitable Class Members may not individually opt out of the Equitable
Settlement or the Consolidation. If, however, either (a) BUC$holders holding 1/3
or more of the Units of a particular Partnership object to that Partnership
participating in the Consolidation, or (b) the Court does not approve of any
particular Partnership participating in the Consolidation, then that Partnership
will not participate in the Consolidation.
BUC$holders that wish to object to the Consolidation should return the
Objection Notice (the form of which is attached as Appendix D) to the Related
General Partners at 625 Madison Avenue, New York, New York 10022, as soon as
possible. The Objection Notice must contain the name and address of the
BUC$holder, the Partnership in which such BUC$holder holds Units and the number
of Units so held.
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<PAGE>
BUC$holders holding Units as of December 24, 1996 (the date the Settlement
Stipulation was entered into by the parties, which the Court Order preliminarily
approved while certifying the class) (the "Record Date"), have until 5:00 p.m.
Eastern Time, on August 18, 1997, unless extended (the "Objection Deadline"), to
object to the Consolidation.
All BUC$holders, including BUC$holders who object to the Consolidation,
will receive Shares if their Partnership participates in the Consolidation. See
"OBJECTION PROCEDURES."
BUC$holders may withdraw or revoke their objection at any time prior to
the Objection Deadline. See "OBJECTION PROCEDURES--Revocability of Objection."
THE RELATED GENERAL PARTNERS RECOMMEND THAT BUC$HOLDERS NOT OBJECT TO THE
CONSOLIDATION. CLASS COUNSEL SUPPORTS THE CONSOLIDATION AS PART OF THE RELATED
SETTLEMENT. The Related General Partners are subject to conflicts of interest
with respect to the Consolidation. See "CONFLICTS OF INTEREST--Conflicts of
Interest of the Related General Partners."
Appraisal Rights
BUC$holders of a Participating Partnership who object to the Consolidation
will not be entitled to dissenters' or appraisal rights under the Partnership
Agreements. Such rights, when they exist, give the holders of securities the
right to surrender such securities for an appraised value in cash, if they
oppose a merger or similar reorganization. No such rights will be provided by
the Partnerships or the Company in connection with the Consolidation.
Alternatives to the Consolidation
The following is a brief summary of the alternatives to the Consolidation
considered by the Related General Partners and is qualified in its entirety by
the more complete discussions set forth under the heading "BACKGROUND, BENEFITS
OF, AND REASONS FOR, THE CONSOLIDATION--Alternatives to the Consolidation."
Continuation of Partnerships. An alternative to the Consolidation would be
to continue each of the Partnerships in accordance with its respective existing
business plan and Partnership Agreement. Continuing the Partnerships without
change would have the following benefits: (i) each Partnership would remain a
separate entity with its own assets and liabilities, and would remain under an
obligation to pursue its original investment objectives, consistent with the
guidelines, restrictions and safeguards set forth in its Partnership Agreement;
(ii) the Partnership's performance would not be affected by the performance of
the other Partnerships, including the investment objectives, interests and
intentions of the BUC$holders of the other Partnerships; (iii) there would be no
change in the nature of the BUC$holders' investment or relative voting rights;
(iv) there would be no change in the cash distribution policy; and (v) the
Participating Partnerships would not incur the Consolidation Expenses, which are
estimated to be approximately $1,984,125.
However, maintaining the Partnerships as separate entities would have the
following disadvantages, among others: (i) illiquidity of investment on a
current basis due to the lack of an established secondary market (except in the
case of Units of Tax Exempt I which are listed on the American Stock Exchange)
and in the case of Tax Exempt I in particular, the inability to take advantage
of the increased size resulting from the Consolidation which is expected to
improve liquidity; (ii) the inability of the Partnerships to increase
distributions over the long term; (iii) inability to realize the fee reductions
and cost savings associated with the Consolidation; and (iv) difficulty in
valuing the investment due to the limited secondary market for Units of
Tax-Exempt II and III.
Liquidation. Liquidation is not currently considered to be a viable option
by the Related General Partners. However, for comparison purposes, the Related
General Partners have analyzed this alternative and concluded that a liquidation
would not be as beneficial to BUC$holders as the Consolidation because by
comparison to conditions prevailing when most of the Partnerships' FMBs were
acquired, subject to construction of the Underlying Property and with no
operating history, market values have not increased to a level sufficient to
allow BUC$holders to obtain a return of their Original Investment. The Related
General Partners believe that current buyers of FMBs would (i) in no event pay
more than the face amount of the FMBs; (ii) highly discount Contingent Interest
payable from Cash Flow and from Net Sale or Repayment Proceeds in excess of the
amount necessary to repay the face amount of the FMB; and (iii) purchase the
FMBs based on a 5 year holding period. In the aggregate, these factors, which
are reflected in the liquidation value estimates set forth in this Solicitation
Statement, have the effect of significantly reducing the value of FMBs under a
liquidation scenario.
Because the Related General Partners believe conditions may improve over
time and that BUC$holders may, in fact, realize payments of Contingent Interest
from participations in Net Property Cash Flow or Net Sale or Repayment Proceeds
resulting from appreciation in the value of the Underlying Properties, they
believe that liquidation of assets at this time is premature and would not
provide BUC$holders with their best alternative to realize the optimum return on
their investments. In addition, there could be potentially significant
administrative and overhead costs in the winding down of the Partnerships and
such costs are largely independent of asset size and could, over an extended
liquidation period, reach disproportionately high levels in relation to
revenues, thereby reducing the portion of proceeds available for distribution to
BUC$holders. Liquidation would, however, provide for the final liquidation of
the BUC$holders' investments
10
<PAGE>
and a likely substantial distribution of cash equal to net liquidation proceeds,
though not at a level that would allow BUC$holders to realize their Original
Investment.
Comparison of Alternatives to the Consolidation
To assist BUC$holders in evaluating the Consolidation, the Related General
Partners have attempted to compare the estimated value of the Shares against:
(i) estimates of the value of the Units on a going-concern basis, (ii) estimates
of the value of the Units on a liquidation basis, and (iii) recent prices at
which the Units have been sold on the American Stock Exchange (Tax Exempt I) and
in the illiquid secondary market (Tax Exempt II and III). Such valuation
estimates are subject to significant uncertainties and, with respect to the
value of the Shares, the Related General Partners have established a range of
estimated values. Since the value of the Shares, as well as that of the possible
alternatives to the Consolidation, is dependent upon a number of estimates,
variables and assumptions, as well as varying market conditions, no assurance
can be given that the estimated values indicated could be realized. However, the
Related General Partners believe that analyzing the alternatives in terms of
estimated values, based upon currently available market data and reasonable
estimates and assumptions, establishes a reasonable basis for comparing the
estimated value of the Shares to the alternatives. The results of this
comparative analysis are discussed in detail in the table under
"FAIRNESS--Comparison of Alternatives to the Consolidation."
The Related General Partners believe that the comparison of the values that
might be realized by the BUC$holders from various alternatives when considered
together with the anticipated effect of the Consolidation on distributions and
with all the other differences between continued ownership of Units as compared
with the receipt of Shares, supports the Related General Partners' conclusion
that the Consolidation is fair to BUC$holders. BUC$holders should, however, bear
in mind that the estimated values assigned to the Shares and the alternatives to
the Consolidation are based on a variety of assumptions that have been made by
the Related General Partners. These assumptions relate, among other things, to
the assumptions used by C&W in preparing the Appraisals, projections as to the
Partnerships' future income, expenses, cash flow and other significant financial
matters and discounts attributable to sales of assets. In addition, these
estimates are based upon certain information available to the Related General
Partners at the time the estimates were computed, and no assurance can be given
that the same conditions will exist at the time of the Consolidation. While the
Related General Partners believe they have a reasonable basis for the
assumptions selected, it is unlikely that the assumptions employed by the
Related General Partners will prove to be accurate in all respects, and some
assumptions used by the Related General Partners as to future events have been
selected to simplify the analysis and may not approximate the actual experience
of the Partnerships. The estimated values of the Shares and alternative forms of
consideration would have been different had the Related General Partners made
different assumptions.
The following table summarizes the results of the comparative analysis
described above.
Summary of Comparative Valuation Alternatives*
<TABLE>
<CAPTION>
Estimated
Market Value of
Estimated Units per
Market Value $1,000 of
of Shares Per Original
$1,000 of Estimated Investment
Original Going Concern Estimated Liquidation Based on
Investment(1) Value of Value of Units Per Market
--------------- Units $1,000 of Original Trades(4)
per $1,000 of Investment if Assets --------------
High Low Original Sold at Adjusted High Low
Partnership Value Value Investment(2) Net Asset Value(3) Value Value
- ------------------- ------- ------- --------------- ---------------------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Tax Exempt I $758 $569 $606 $580 $587 $475
Tax Exempt II $857 $643 $742 $777 $647 $450
Tax Exempt III $727 $545 $660 $597 $525 $441
</TABLE>
- --------------
* The information shown on this table assumes 100% Participation; see
"FAIRNESS--Comparison of Alternatives to the Consolidation" for additional
comparisons based upon the Minimum Participation scenarios. An Original
Investment of $1,000 equates to 50 Units in each of the Partnerships.
BUC$holders should note that certain assumptions used by the Related
General Partners to determine the valuations set forth in this table are
different from those utilized by Oppenheimer in connection with the
analysis used by Oppenheimer to support its Fairness Opinion. See "FAIRNESS
OPINION AND APPRAISALS--Fairness Opinion." Furthermore, there can be no
assurance that the assumptions utilized by the Related General Partners
will in fact occur and that the conclusions based upon such assumptions
would not differ substantially from those set forth in this table.
(1) The High Value and Low Value figures were computed by capitalizing
anticipated annual distributions after the Consolidation (assuming
distributions are equal to those in the 1996 pro forma financial
statements), by a range of yield rates for selected comparable companies
which invest in similar type assets and operate in a similar fashion,
ranging from 6.0% (High Value) to 8.0% (Low Value) as more fully discussed
under "FAIRNESS--Comparison of Alternatives to the Consolidation."
11
<PAGE>
(2) These values were derived from the amount which would be payable to the
Partnerships pursuant to the terms of the FMBs based upon a discounted cash
flow analysis, applied to the anticipated (i) cash flow from the operation
and (ii) sale proceeds from the sale of each Underlying Property as per the
Appraisals. For each FMB, it was assumed that the FMB would be held until
the end of the eleventh calendar year following the date of acquisition of
the last FMB acquired, followed by the immediate liquidation of all assets
of the Partnership (including the SMLs, if any) for cash and the immediate
distribution of the proceeds. The annual Partnership cash flow was adjusted
for Partnership administration expenses, which were increased annually at
the rate of 3%, and the adjusted cash flow was discounted back to present
value at a rate equal to the average of the rates used in the Underlying
Property's cash flow analysis as per the Appraisals.
(3) The figures in this column represent the amounts that would be distributed
pursuant to the Partnership Agreements with respect to each $1,000 of
Original Investment if the Partnerships sold their FMBs, in bulk sale, on
June 30, 1996. It was assumed that the FMBs were sold at prices equal to the
lesser of (i) the respective face amounts of the FMBs or (ii) an amount
equal to (a) the present value of the interest income from the FMBs over a
5-year period assuming Base Interest is discounted at rates ranging from 7%
to 10.5% and Contingent Interest is discounted at rates ranging from 17% to
22% plus (b) the present value of the sale proceeds from an assumed sale at
the end of such 5-year period, discounted at rates ranging from 7% to 10.5%.
The total proceeds were then decreased by 3.1% to 3.4% to account for
liquidation costs, expenses and contingencies.
(4) Tax Exempt II and Tax Exempt III values are based on the high and low value
of secondary market trades during the twelve months ending November 30,
1996, as compiled by Partnership Spectrum. Partnership Spectrum has advised
that its methodology for compiling trade prices is as follows: trade price
information reflects per Unit transaction prices for trades involving the
purchase of Units by third-party investors during the applicable period.
Firms supplying trade price data are instructed to provide information only
on those transactions whereby third party investors acquired Units from or
through such firms. If the firm acted as an agent, the per Unit price is to
include any commissions charged the buyer (but not including commissions
paid to retail brokers representing buyers). Due to commission and mark-ups,
sellers of Units typically receive less than the amounts paid for Units by
buyers as set forth in the table.
Tax Exempt I values are based on the high and low value of AMEX trades
during the twelve months ending December 31, 1996.
Conflicts of Interest
Related General Partners. The Related General Partners initiated and
participated in the structuring of the Consolidation and have conflicts of
interest with respect to its completion, including the following:
[bullet] The Related General Partners, each of which is an affiliate of
Related, serve as general partners of each Partnership, which creates
an inherent conflict of interest when they serve in such capacity for
Participating Partnerships that have different interests.
[bullet] The Consolidation affords a number of benefits to the Related General
Partners, including the following: The Manager, an affiliate of
Related, will enter in the Management Agreement, which cannot be
terminated by the Company, except for Cause, until the fourth
anniversary of the Effective Date. Pursuant to the Management
Agreement (and as a result of the Manager's purchase of the P-B
Interests), the Manager will be entitled to receive from the Company
approximately 75% of the sum of the aggregate annual fees currently
payable by the Partnerships to the General Partners. Therefore,
although the total aggregate annual fees payable by the Company to
both General Partners will be reduced by approximately 25%, the
Manager's share of such fees will increase by approximately $436,000
per year.
The Manager will also have the ability, subject to the terms and conditions
of the Trust Agreement and Management Agreement, to cause the Company to incur
debt and other leverage to finance asset purchases and reinvest proceeds from
asset sales and mortgage repayments to grow the Company's assets and thereby
increase the amount of compensation it can earn, including the Bond Selection
Fee, Bond Placement Fee, Loan Servicing Fee and Special Distribution. If the
Company were to utilize the maximum leverage permitted, the Manager would be
entitled to Bond Placement Fees and Bond Selection Fees aggregating up to
approximately $14,231,000 and increased annual Loan Servicing Fees and Special
Distributions of approximately $880,000 and $1,321,000, respectively. Such
additional fees will only be payable to the Manager if and when the Company is
able to acquire additional assets.
Finally, pursuant to the Incentive Share Option Plan, the Manager may
receive additional Shares only if the Company's distributions in any year exceed
$0.9517 per Share (i.e., the 1996 pro forma distributions set forth in this
Solicitation Statement) and the Compensation Committee of the Board of Trustees
determines to grant such options. Similar to the BUC$holders, the Related
General Partners and the Manager will receive Shares and, therefore, will have
enhanced their liquidity.
In addition, if the Consolidation is consummated, the Related General
Partners and Class Counsel would effect a settlement in connection with the
Litigation, therefore, the Related General Partners are subject to a conflict of
interest in recommending to the BUC$holders that they not object to the
Consolidation.
For a more complete discussion of the conflicts of interest of the Related
General Partners and their affiliates with respect to the Consolidation, see
"CONFLICTS OF INTEREST."
Class Counsel. In assessing Class Counsel's recommendation that BUC$holders
not object to the Consolidation, BUC$holders should consider that Class Counsel
may be deemed to have a conflict of interest with respect to such
recommendation. In particular, the fees and expenses of Class Counsel, if
approved by the Court, will be paid from the cash settlement pool provided by
Related and other defendants pursuant to the Related Settlement and settlements
reached with other defendants in the Litigation. In addition, as part of the
Equitable Settlement, Class Counsel will have the right to petition the Court
for additional attorneys' fees in an amount to be determined in the Court's sole
discretion but which will be proposed to be 25% of the increase, if any, as of
the first anniversary of the date the Shares are first publicly traded (the
"Anniversary Date") in the capitalization of the Company, based upon (i) the
difference between
12
<PAGE>
the trading prices of the Company's Shares on the Anniversary Date and (ii) the
trading prices of the Units and the asset values of the Partnerships prior to
the Effective Date. The number of Counsel's Fees Shares issued shall be subject
to a maximum amount not to exceed 3.95% of the total number of the Company's
outstanding Shares on the Anniversary Date. See "CONFLICTS OF
INTEREST--Conflicts of Interest of Class Counsel."
Distribution Policy
The Company intends to pay regular quarterly distributions to its
Shareholders, commencing in its first fiscal quarter after the Effective Date.
Prior to the Consolidation, the Partnerships will continue to make quarterly
distributions to BUC$holders. While the Delaware Act does not specifically
impose any restrictions on the Company's ability to make distributions, other
laws may impose certain restrictions and in certain circumstances could impose
an obligation on Shareholders to return distributions. See "THE COMPANY--
Distribution Policy."
Federal Income Tax Considerations
The Consolidation and ownership of Shares involve numerous federal income
tax consequences to Shareholders and the Company. In evaluating the
Consolidation, BUC$holders should consider the matters set forth below, as well
as those set forth in the more detailed discussion under "FEDERAL INCOME TAX
CONSIDERATIONS."
In general, no taxable gain or loss is expected to result from the
Consolidation to Participating BUC$holders who acquired Units from the
Partnerships in the initial offering. It is possible that certain Participating
BUC$holders that acquired Units in the secondary market in any of the
Participating Partnerships could recognize taxable gain with respect to their
investment in Units, which will generally be recognized in the year of the
Consolidation. Consequently, certain Participating BUC$holders may be required
to pay tax on any gains recognized but will not receive a special cash
distribution for the payment of such taxes. Any gain or loss recognized as a
result of the Consolidation generally will be treated as capital gain or loss.
Accounting Treatment
The Consolidation will be accounted for using the purchase method of
accounting. Under this method, the Participating Partnership with the BUC$holder
group receiving the largest ownership in the Company (in this case Tax Exempt II
in all scenarios except where it is not a Participating Partnership in which
event Tax Exempt I would be the largest) will be deemed to be the acquirer. As
the surviving entity for accounting purposes, the acquirer's assets and
liabilities will be recorded by the Company at their historical cost with the
assets and liabilities of the other Participating Partnerships recorded at their
estimated fair values, using the Adjusted Net Asset Values. See "FINANCIAL
INFORMATION."
Selected Financial Data
The following table sets forth selected financial data on a pro forma basis
for the Company (assuming 100% Participation and the following Minimum
Participation scenarios: (i) Tax Exempt II and I; (ii) Tax Exempt II and III;
and (iii) Tax Exempt I and III), and on a historical basis for Tax Exempt II and
Tax Exempt I. The table should be read in conjunction with the unaudited pro
forma financial information, and with the financial statements and notes thereto
of the Partnerships included under the heading "FINANCIAL INFORMATION".
The following unaudited pro forma operating and other data have been
prepared to reflect the Consolidation and related transactions as if such
transactions had occurred on January 1, 1996. The unaudited pro forma balance
sheet data has been prepared assuming that the Consolidation and related
transactions had occurred on March 31, 1997. The Consolidation will be accounted
for using the purchase method of accounting. See "Accounting Treatment" above.
13
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Tax Exempt II Historical
---------------------------------------------
1992 1993
---------------------- ----------------------
<S> <C> <C> <C>
OPERATING DATA:
Total revenues $11,239,743 $11,653,788
Total expenses 2,025,696 3,368,115
Net income 9,214,047 8,285,673
Distributions to limited partners 9,536,926 9,517,685
BALANCE SHEET DATA:
Cash and cash equivalents 228,469 302,826
Total assets 166,738,439 165,778,624
Loan payable -- --
Total liabilities (C) 394,110 860,545
Partners' capital/Shareholders' equity (D) 166,344,329 164,918,079
Net assets at Consolidation value (B) N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents (11,226) 74,357
Net cash provided by operating activities 9,728,706 9,583,717
Ratio of earnings to fixed charges 2,719.01 --
Ratio of earnings to total assets 0.06 0.05
Book value per $1,000 of Original Investment (A) 909.19 901.55
Book value per share at Consolidation value (G) N/A N/A
Earnings per $1,000 of Original Investment (A)/(F) 49.33 44.36
Earnings per share--pro forma (H) N/A N/A
Distribution per $1,000 of Original Investment (A)/(E) 52.11 52.00(J)
<CAPTION>
Tax Exempt II Historical
----------------------------------------------------------------
1994 1995 1996
---------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $11,870,490 $12,039,287 $11,812,316
Total expenses 2,247,441 2,851,484 5,967,275
Net income 9,623,049 9,187,803 5,845,041
Distributions to limited partners 9,517,685 9,517,685 9,517,685
BALANCE SHEET DATA:
Cash and cash equivalents 872,662 972,889 249,192
Total assets 157,436,945 157,019,314 154,896,475
Loan payable -- -- --
Total liabilities (C) 1,088,738 652,350 573,874
Partners' capital/Shareholders' equity (D) 156,348,207 156,366,964 154,322,601
Net assets at Consolidation value (B) N/A N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents 569,836 100,227 (723,697)
Net cash provided by operating activities 10,085,510 10,405,327 10,014,905
Ratio of earnings to fixed charges -- -- --
Ratio of earnings to total assets 0.06 0.06 0.04
Book value per $1,000 of Original Investment (A) 855.66 855.76 844.82
Book value per share at Consolidation value (G) N/A N/A N/A
Earnings per $1,000 of Original Investment (A)/(F) 51.52 49.19 31.30
Earnings per share--pro forma (H) N/A N/A N/A
Distribution per $1,000 of Original Investment (A)/(E) 52.00 52.00 52.00
<CAPTION>
1996 Pro Forma of The Company
----------------------------------------------------------------
100% Minimum Minimum
Participation Participation(1) Participation(2)
--------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $25,015,232 $21,724,089 $15,103,459
Total expenses 7,949,447 7,571,766 5,569,464
Net income 17,065,785 14,152,323 9,533,995
Distributions to limited partners 19,297,975 16,514,825 12,514,405
BALANCE SHEET DATA:
Cash and cash equivalents N/A N/A N/A
Total assets N/A N/A N/A
Loan payable N/A N/A N/A
Total liabilities (C) N/A N/A N/A
Partners' capital/Shareholders' equity (D) N/A N/A N/A
Net assets at Consolidation value (B) N/A N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents (1,393,725) (1,105,649) (1,011,773)
Net cash provided by operating activities 20,796,885 18,012,739 13,574,542
Ratio of earnings to fixed charges 12.37 10.59 86.12
Ratio of earnings to total assets N/A N/A N/A
Book value per $1,000 of Original Investment (A) N/A N/A N/A
Book value per share at Consolidation value (G) N/A N/A N/A
Earnings per $1,000 of Original Investment (A)/(F) 38.53 37.65 35.14
Earnings per share--pro forma (H) 0.77 0.74 0.68
Distribution per $1,000 of Original Investment (A)/(E) 47.91 48.41 51.15
</TABLE>
- ----------------
(1) Minimum Participation--Tax Exempt II and I
(2) Minimum Participation--Tax Exempt II and III
(3) Minimum Participation--Tax Exempt I and III
(A) The respective calculations have been presented using the base of $1,000 of
Original Investment. For comparison of historical to pro forma
distribution by Partnership see Distribution Comparison table (page 60).
(B) Net assets at Consolidation value reflect adjustment of the book value of
assets and liabilities to the value assigned for purposes of the
Consolidation. This disclosure is informational only; assets and liabilities
of the Company will be recorded at carrying values for Tax Exempt II and
fair values for Tax Exempt I and III in the 100% Participation, Minimum
Participation (1) and (2) scenario. Minimum Participation (3) assets and
liabilities will be recorded at the carrying values for Tax Exempt I and
fair value for Tax Exempt III.
(C) Pro Forma Total liabilities reflect the accrual of the Consolidation
Expenses loan of $1,984,125, $1,707,630, $1,244,585 and $1,016,035 for 100%
Participation and Minimum Participation (1), (2) and (3), respectively.
(D) Pro Forma Shareholders' equity reflects the change in the respective
percentage ownership interest of BUC$holders and the General Partners.
(E) Pro Forma Distributions reflect the reduction in fees payable to the General
Partners, decrease in G&A expenses, increase in additional interest expense
expected to be incurred as a result of financing and an increase in
allocable cash flow to former BUC$holders as a result of the Manager
contributing back one-half of the P-B Interest.
(F) Earnings per $1,000 of Original Investment has been calculated over a per
$1,000 of Original Investment basis.
(G) Book value per share at Consolidation value using pro forma March 31, 1997
total shareholders' equity over the number of shares of beneficial interest
assumed to be outstanding upon Consolidation (20,586,383, 17,717,594,
12,913,254 and 10,541,918 shares at 100% Participation and Minimum
Participation (1), (2) and (3) respectively).
(H) Pro forma earnings per share has been calculated using the number of shares
of beneficial interest assumed to be outstanding upon Consolidation, as in
Note (G) above.
14
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of and for the Three Months
Ended March 31,
---------------------------------
Tax Exempt II--Historical
---------------------------------
1996 1997
---------------- ----------------
<S> <C> <C> <C>
OPERATING DATA:
Total revenues $ 2,915,042 $ 2,757,147
Total expenses 429,359 434,852
Net income (loss) 2,485,683 2,322,295
Distributions to limited partners 2,379,421 2,379,421
BALANCE SHEET DATA:
Cash and cash equivalents 288,636 1,114,246
Total assets 157,251,113 155,086,944
Loan payable -- --
Total liabilities (C) 826,447 870,029
Partners' capital/Shareholders' equity (D) 156,424,666 154,216,915
Net assets at Consolidation value (B) N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents (684,253) 865,054
Net cash provided by operating activities 2,735,495 2,959,852
Ratio of earnings to fixed charges -- --
Ratio of earnings to total assets 0.02 0.01
Book value per $1,000 of Original Investment (A) 856.07 844.25
Book value per share at Consolidation value (G) N/A N/A
Earnings per $1,000 of Original Investment (A)/(F) 13.31 12.43
Earnings per share--pro forma (H) N/A N/A
Distribution per $1,000 of Original Investment (A)/(E) 13.00 13.00
<CAPTION>
As of and for the Three Months Ended March 31,
----------------------------------------------------
1997 Pro Forma of The Company
----------------------------------------------------
100% Minimum Minimum
Participation Participation(1) Participation(2)
--------------- ------------------ -----------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 5,826,820 $ 5,071,142 $ 3,512,825
Total expenses 906,511 827,780 323,254
Net income (loss) 4,920,309 4,243,362 3,189,571
Distributions to limited partners 4,806,985 4,125,265 3,111,042
BALANCE SHEET DATA:
Cash and cash equivalents 2,241,794 1,967,424 309,024
Total assets 333,137,880 287,862,172 200,365,652
Loan payable 15,664,991 15,388,496 1,244,585
Total liabilities (C) 22,776,321 20,255,951 4,358,489
Partners' capital/Shareholders' equity (D) 310,361,559 267,606,221 196,007,163
Net assets at Consolidation value (B) 308,795,748 265,763,915 193,698,812
OTHER DATA:
Net increase in cash and cash equivalents 1,688,331 1,473,793 1,079,592
Net cash provided by operating activities 5,783,489 5,076,850 3,856,820
Ratio of earnings to fixed charges 14.11 12.50 114.90
Ratio of earnings to total assets 0.01 0.01 0.02
Book value per $1,000 of Original Investment (A) 758.97 772.64 789.10
Book value per share at Consolidation value (G) 15.08 15.10 15.18
Earnings per $1,000 of Original Investment (A)/(F) 11.23 11.45 12.03
Earnings per share--pro forma (H) 0.22 0.22 0.23
Distribution per $1,000 of Original Investment (A)/(E) 11.93 12.09 12.72
</TABLE>
- ----------------
(1) Minimum Participation--Tax Exempt II and I
(2) Minimum Participation--Tax Exempt II and III
(3) Minimum Participation--Tax Exempt I and III
(A) The respective calculations have been presented using the base of $1,000 of
Original Investment. For comparison of historical to pro forma
distribution by Partnership see Distribution Comparison table (page 60).
(B) Net assets at Consolidation value reflect adjustment of the book value of
assets and liabilities to the value assigned for purposes of the
Consolidation. This disclosure is informational only; assets and
liabilities of the Company will be recorded at carrying values for Tax
Exempt II and fair values for Tax Exempt I and III in the 100%
Participation, Minimum Participation (1) and (2) scenario. Minimum
Participation (3) assets and liabilities will be recorded at the carrying
values for Tax Exempt I and fair value for Tax Exempt III.
(C) Pro Forma Total liabilities reflect the accrual of the Consolidation
Expenses loan of $1,984,125, $1,707,630, and $1,244,585 and $1,016,035 for
100% Participation and Minimum Participation (1), (2) and (3),
respectively.
(D) Pro Forma Shareholders' equity reflects the change in the respective
percentage ownership interest of BUC$holders and the General Partners.
(E) Pro Forma Distributions reflect the reduction in fees payable to the
General Partners, decrease in G&A expenses, increase in additional
interest expense expected to be incurred as a result of financing and an
increase in allocable cash flow to former BUC$holders as a result of the
anager contributing back one-half of the P-B Interest.
(F) Earnings per $1,000 of Original Investment has been calculated over a per
$1,000 of Original Investment basis.
(G) Book value per share at Consolidation value using pro forma March 31, 1997
total shareholders' equity over the number of shares of beneficial
interest assumed to be outstanding upon Consolidation (20,586,383,
17,717,594, 12,913,254 and 10,541,918 shares at 100% Participation and
Minimum Participation (1), (2) and (3) respectively).
(H) Pro forma earnings per share has been calculated using the number of shares
of beneficial interest assumed to be outstanding upon Consolidation, as in
Note (G) above.
15
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Tax Exempt I Historical
---------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- ----------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 8,480,951 $10,304,404 $10,034,274 $ 9,898,082 $ 9,799,440
Total expenses 2,018,379 6,168,630 4,348,384 3,928,867 3,271,877
Net income 6,462,572 4,135,774 5,685,890 5,969,215 6,527,563
Distributions to limited partners 6,641,238 6,641,238 6,641,238 6,641,238 6,641,237
BALANCE SHEET DATA:
Cash and cash equivalents 151,621 200,227 173,689 626,391 244,439
Total assets 134,028,372 141,881,705 136,021,035 136,278,329 134,476,035
Loan payable 45,620 13,680,866 13,680,866 13,680,866 13,680,866
Total liabilities (C) 5,309,322 15,803,655 15,317,147 14,998,169 14,879,400
Partners' capital/Shareholders'
equity (D) 128,719,050 126,078,050 120,703,888 121,280,160 119,596,635
Net assets at Consolidation
value (B) N/A N/A N/A N/A N/A
OTHER DATA:
Net increase in cash and cash
equivalents (19,008) 48,606 (26,538) 452,702 (381,952)
Net cash provided by operating
activities 6,582,020 7,440,321 6,712,297 6,609,883 6,608,335
Ratio of earnings to fixed
charges 706.06 5.28 5.91 5.29 5.94
Ratio of earnings to total assets 0.05 0.03 0.04 0.04 0.05
Book value per $1,000 of
Original Investment (A) 815.84 799.47 766.16 769.73 759.30
Book value per share at
Consolidation value (G) N/A N/A N/A N/A N/A
Earnings per $1,000 of Original
Investment (A)/(F) 40.05 25.63 35.24 37.00 40.46
Earnings per share--pro forma (H) N/A N/A N/A N/A N/A
Distribution per $1,000 of
Original Investment (A)/(E) 42.00 42.00(J) 42.00 42.00 42.00
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of and for the Three Months Ended March 31,
----------------------------------------------------
1996 1997
Pro Forma of Pro Forma of
the Company Tax Exempt I - Historical the Company
------------------ ------------------------------- ------------------
Minimum Minimum
Participation(3) 1996 1997 Participation( 3)
---------------- ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $13,090,583 $ 2,580,171 $ 2,289,990 $ 3,045,668
Total expenses 3,035,550 783,288 806,282 731,461
Net income 10,055,033 1,796,883 1,483,708 2,314,207
Distributions to limited partners 9,566,721 1,660,309 1,660,309 2,377,662
BALANCE SHEET DATA:
Cash and cash equivalents N/A 127,432 853,178 1,127,548
Total assets N/A 136,535,313 134,406,713 179,682,421
Loan payable N/A 13,680,866 13,680,866 14,696,901
Total liabilities (C) N/A 15,152,463 15,020,563 18,280,473
Partners' capital/Shareholders'
equity (D) N/A 121,382,850 119,386,150 161,401,948
Net assets at Consolidation
value (B) N/A N/A N/A 158,128,769
OTHER DATA:
Net increase in cash and cash
equivalents (670,028) (498,959) 608,739 823,277
Net cash provided by operating
activities 10,006,488 2,074,294 1,773,117 2,633,308
Ratio of earnings to fixed
charges 8.11 6.43 5.49 7.55
Ratio of earnings to total assets N/A 0.01 0.01 0.01
Book value per $1,000 of
Original Investment (A) N/A 770.37 758.00 723.44
Book value per share at
Consolidation value (G) N/A N/A N/A 15.31
Earnings per $1,000 of Original
Investment (A)/(F) 41.93 11.14 9.20 9.59
Earnings per share--pro forma (H) 0.89 N/A N/A 0.20
Distribution per $1,000 of
Original Investment (A)/(E) 43.53 10.50 10.50 10.82
</TABLE>
- --------------
(See footnotes on the next page)
16
<PAGE>
(1) Minimum Participation--Tax Exempt II and I
(2) Minimum Participation--Tax Exempt II and III
(3) Minimum Participation--Tax Exempt I and III
(A) The respective calculations have been presented using the base of $1,000 of
Original Investment. For comparison of historical to pro forma
distribution by Partnership see Distribution Comparison table (page 60).
(B) Net assets at Consolidation value reflect adjustment of the book value of
assets and liabilities to the value assigned for purposes of the
Consolidation. This disclosure is informational only; assets and
liabilities of the Company will be recorded at carrying values for Tax
Exempt II and fair values for Tax Exempt I and III in the 100%
Participation, Minimum Participation (1) and (2) scenario. Minimum
Participation (3) assets and liabilities will be recorded at the carrying
values for Tax Exempt I and fair value for Tax Exempt III.
(C) Pro Forma Total liabilities reflect the accrual of the Consolidation
Expenses loan of $1,984,125, $1,707,630, and $1,244,585 and $1,016,035 for
100% Participation and Minimum Participation (1), (2) and (3),
respectively.
(D) Pro Forma Shareholders' equity reflects the change in the respective
percentage ownership interest of BUC$holders and the General Partners.
(E) Pro Forma Distributions reflect the reduction in fees payable to the
General Partners, decrease in G&A expenses, increase in additional
interest expense expected to be incurred as a result of financing and an
increase in allocable cash flow to former BUC$holders as a result of the
Manager contributing back one-half of the P-B Interest.
(F) Earnings per $1,000 of Original Investment has been calculated over a per
$1,000 of Original Investment basis.
(G) Book value per share at Consolidation value using pro forma March 31, 1997
total shareholders' equity over the number of shares of beneficial
interest assumed to be outstanding upon Consolidation (20,586,383,
17,717,594, 12,913,254 and 10,541,918 shares at 100% Participation and
Minimum Participation (1), (2) and (3) respectively).
(H) Pro forma earnings per share has been calculated using the number of shares
of beneficial interest assumed to be outstanding upon Consolidation, as in
Note (G) above.
17
<PAGE>
Comparison of Partnership Units and Company Shares
The following is a summary of certain attributes of the ownership of Units
and the ownership of Shares. The following descriptions are qualified in their
entirety by reference to the Trust Agreement and to each Partnership's
Partnership Agreement as well as the Delaware Act and the Delaware Partnership
Law. The descriptions are summaries and do not purport to be complete
discussions of these matters. BUC$holders are encouraged to review carefully
the more detailed comparison regarding the Units and the Shares discussed under
"COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE
PARTNERSHIPS" in this Solicitation Statement for additional comparisons. A
Shareholder's investment in Shares and a BUC$holder's investment in Units are
subject to the risks of the Company's business and each Partnership's business,
respectively. Similar to the limited liability of a BUC$holder of the
Partnerships, a Shareholder will not have any liability under Delaware law for
obligations of the Company solely as a result of his status as a Shareholder.
<TABLE>
<CAPTION>
Characteristic Limited Partnership (Units) Company (Shares)
- ------------------ ------------------------------------------------- ----------------------------------------------
<S> <C> <C>
General Business [bullet] Own tax-exempt participating FMBs [bullet] Acquire and own tax-exempt
issued by various state or local participating and
governments or other agencies or non-participating FMBs issued by
authorities and secured by various state or local governments
participating Mortgage Loans on or other agencies or authorities
multi-family residential apartment and secured by participating and
projects and retirement community non-participating Mortgage Loans
projects developed by third party on multi-family residential
developers or affiliates of the apartment projects, retirement
Related General Partners. community projects and other types
of projects developed by third
party developers or affiliates of
the Related General Partners
[bullet] No reinvestment of proceeds from [bullet] Reinvestment of proceeds from
asset sales or repayments of FMBs asset sales, if any, and
repayments of FMBs and incurrence
of debt to finance asset
purchases, for growth
[bullet] Trust Agreement permits the Company
to engage in any lawful act or
activity for which trusts may be
created under the laws of the State
of Delaware including the issuance
of securities in exchange for FMBs
or other assets of the Company
[bullet] Board of Trustees may change
investment policies
[bullet] Joint Ventures are permitted under [bullet] Joint ventures and similar
the Partnership Agreements within business ventures are permitted
certain specified parameters under the Trust Agreement,
provided that the Company owns a
majority interest or otherwise has
veto rights over, or control of,
major decisions
[bullet] The Company may acquire Minority
Positions in an amount not to
exceed 15% of Total Market Value
of the Company
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Characteristic Limited Partnership (Units Company (Shares)
- -------------------------------- -------------------------------------------------- -----------------------------------------------
<S> <C> <C>
[bullet] In selected circumstances, and only in
connection with the acquisition of
tax-exempt FMBs, the Company may
acquire a small amount of taxable
bonds. Known as "Taxable Tails", the
primary purpose of these bonds is to
fund certain costs associated with the
issuance of FMBs that, under current
regulations, cannot be funded by FMBs
Liquidity and Transferability [bullet] Except for Tax Exempt I, illiquid--no [bullet] To be listed on the American Stock
established market Exchange (or other national exchange
or market)
[bullet] Transfers are subject to certain
limitation [bullet] Transfers are subject to certain
limitation.
Portfolio [bullet] Static Portfolio [bullet] Investment flexibility
[bullet] More diversification and ability to
grow
[bullet] Larger portfolio
Duration of Entity [bullet] 34 to 35 years from formation [bullet] Perpetual; provided that if the
Management Agreement is still in
effect, the Company may be dissolved
(i) prior to the fourth anniversary of
the Effective Date, only with
recommendation of the Manager and
Majority Vote of Shareholders; (ii)
after the fourth anniversary of the
Effective Date, upon recommendation of
Manager and a Majority Vote of
Shareholders or upon a two-thirds vote
of Shareholders without recommendation
of Manager
Asset Holding Period [bullet] 10 to 12 year anticipated holding [bullet] No established holding period;
period investments expected to be held to
maturity, proceeds of asset sales, if
any, and mortgage repayments will be
reinvested
Federal Taxation [bullet] Partnerships not subject to federal tax [bullet] Intended that Company be treated as a
partnership for federal income tax
purposes, thus not subject to federal
tax
Tax-exempt Distributions [bullet] Distributions are tax-exempt to [bullet] Distributions are tax-exempt to
BUC$holders (other than distributions Shareholders; (other than
of interest from SMLs which are distributions of interest from SMLs
taxable) and Taxable Tails which are taxable)
Tax Characterization of Income [bullet] Portfolio income [bullet] Portfolio income
Tax Reporting [bullet] Schedule K-1, generally mailed by [bullet] Schedule K-1, generally mailed by
March 15 of each year March 15 of each year
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Characteristic Limited Partnership (Units) Company (Shares)
- ---------------------- ---------------------------------------------------- ----------------------------------------------------
<S> <C> <C>
Leverage [bullet] Generally not permitted [bullet] Permitted, up to 50% of the Company's
Total Market Value (measured at the time
assets are leveraged)
Management [bullet] Vested in General Partners [bullet] Vested in Board of Trustees elected by
Shareholders
[bullet] Manager manages day-to-day affairs
Voting [bullet] Voting is based on a BUC$holder's [bullet] One vote per Share; voting is generally
ownership interest in a Partnership; permitted only for significant action as
voting is generally permitted only for provided under the Trust Agreement. No
significant actions, as provided under super-majority voting requirements
Delaware Partnership Law and the (except a liquidation which has not been
Partnership Agreements recommended by the Manager)
[bullet] No annual meetings; General Partner may [bullet] Annual meeting to elect Managing Trustees
be removed by majority vote of Units whose terms are expiring; Managing
with or without Cause Trustees may be removed by the Majority
Vote of Shareholders only for Cause prior
[bullet] BUC$holders holding 10% or more of the to the fourth anniversary of the
outstanding Units may call a meeting of Effective Date, and with or without Cause
BUC$holders after such anniversary
[bullet] Shareholders holding 10% or more of the
outstanding Shares may call a meeting of
Shareholders
Management Fees [bullet] Bond Selection Fees of 2% [bullet] Bond Selection Fees of 2%
[bullet] Partnership Management Fee (Tax Exempt I [bullet] Special Distribution from Adjusted Cash
and II)/Special Distribution from Flow of 0.375% of Total Invested Assets
Adjusted Cash Flow (Tax Exempt III) of
0.50% of Total Invested Assets
[bullet] Bond Placement Fee of 4% (payable by [bullet] Bond Placement Fees of 2% (payable by
borrower, not the Partnership) borrower, not the Company)
[bullet] Loan Servicing Fees of 0.25% [bullet] Loan Servicing Fees of 0.25%
[bullet] Percentage of Sales and Refinancing [bullet] None
Proceeds, generally subordinated to prior
return of BUC$holders capital
[bullet] None [bullet] Liquidation Fees of 1.5%, payable in
connection with a liquidation of the
Company supervised by the Manager
Acquisition Expenses [bullet] Amounts payable by the Partnerships for [bullet] As an operating company, the Company will
expenses related to the initial be directly responsible for all
acquisition of FMBs were subject to acquisition expenses incurred in
limitations based upon the overall connection with future asset acquisitions
front-end fees which a Partnership was
permitted to incur; generally capped at
approximately 1% of the gross proceeds
raised in the initial offering
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Characteristic Limited Partnership (Units) Company (Shares)
- ----------------------- --------------------------------------------------- ------------------------------------------------------
<S> <C> <C>
Anti-takeover [bullet] While the limited partnership interests [bullet] Certain provisions of the Trust Agreement
Provisions are transferable, subject to certain and the Management Agreement might have
restrictions, the General Partners under the effect of delaying, deferring or
the Partnership Agreements may under preventing a transaction or a change in
certain circumstances refuse to permit control of the Company that might involve
assignees of limited partnership a premium price for Shares or otherwise
interests (who are not permitted to vote be in the best interest of the
on any Partnership matters) to become Shareholders. Such provisions include:
substituted limited partners
--The power of the Board of Trustees to issue
preferred or common beneficial interests
which could contain anti-takeover
provisions
--The Management Agreement may only be
terminated for Cause for the first four
years after the Effective Date
[bullet] Company not permitted to dissolve and
liquidate for four years and, thereafter,
supermajority vote required to liquidate,
unless Manager recommends liquidation in
which case a Majority Vote is required
Distributions [bullet] General Partners' distribution of cash [bullet] Related General Partners and the Manager
flow of 2% will be entitled to receive an aggregate
1.5% of the Shares issuable in the
Consolidation
[bullet] Incentive Share Options may be issued to
the Manager if the Company's
distributions in any year exceed $0.9517
per Share (i.e., the 1996 pro forma
distributions set forth in this
Solicitation Statement) if granted by the
Compensation Committee
Expenses [bullet] All Partnership expenses paid by [bullet] Reimbursements to the Manager for
Partnerships; General Partners reimbursed administrative expenses will not exceed
for certain services performed for the $200,000 per annum subject to the
Partnerships following adjustments: the overall limit
on reimbursements for administrative
expenses will be increased (i) after the
Company's first year of operations and
each year thereafter by a percentage
equal to the Consumer Price Index for the
year then ended, and (ii) proportionately
as the Company increases its asset
portfolio
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Characteristic Limited Partnership (Units) Company (Shares)
- ---------------------- --------------------------------------------------- ------------------------------------------------
<S> <C> <C>
Potential Dilution [bullet] Partnerships are not authorized to issue [bullet] Board of Trustees may, in its discretion,
additional equity securities without the cause the Company to issue additional
consent of a majority in interest of the beneficial interests (common or
BUC$holders preferred) and other debt and equity
securities without any Shareholder
approval, including certain Shares which
may be issued to the Manager upon
exercise of options granted to it and its
employees pursuant to the Incentive Share
Option Plan. The Company may be required
to issue Shares to Class Counsel pursuant
to the Related Settlement
Potential Redemption [bullet] The Partnerships have no ability to [bullet] The Board of Trustees may, at its sole
purchase or redeem Units. discretion, determine to cause the
Company to repurchase Shares from time to
time out of surplus funds, if any, to
further the business objectives of the
Company
</TABLE>
Non-Participating Partnerships
A Partnership in which BUC$holders representing more than 33-1/3% of the
Units object to the Consolidation (a "Non-Participating Partnership") will not
participate in the Consolidation, and will continue to operate as a separate
legal entity subject to its existing Partnership Agreement.
22
<PAGE>
RISK FACTORS
The Consolidation involves certain risks and other adverse factors.
BUC$holders are urged to read this Solicitation Statement carefully in its
entirety, including all appendices and supplements hereto, and should consider
carefully the following factors in evaluating the Consolidation, the Company
and its business before determining whether to object to the Consolidation.
Unless otherwise indicated, the risks described below are materially the same
for the BUC$holders of each of the Partnerships.
BUC$holders should note that due to the fact that each of the Partnerships
and the Company have substantially similar investment objectives and policies,
the risks of owning Units are substantially similar to the risks of owning
Shares. Therefore, set forth below are the risks associated with the
Consolidation and new risks associated with the Company's plan to grow and
expand its Existing Portfolio through (i) the use of leverage and (ii) the
acquisition of tax-exempt investments, including non-participating FMBs, that
may differ from the FMBs that are included in the Existing Portfolio. This
section does not review risks that exist only with respect to the Existing
Portfolio.
Risks Relating to the Consolidation
Lowest Estimated Market Value of Shares is Less Than Estimated Going
Concern and Liquidation Values. The comparative analysis prepared by the
Related General Partners to assist BUC$holders in analyzing the Consolidation
indicates that, based on a variety of assumptions, the estimated going concern
and liquidation values exceed the lowest estimated market value of the Shares.
There can be no assurance that the actual market value of the Shares after the
Effective Date will exceed the going concern or liquidation values. See
"FAIRNESS--Comparison of Alternatives to the Consolidation."
No Prior Market for Shares; Market Price May Decrease After
Consolidation. There has been no prior market for the Shares and it is possible
that the Shares will trade at prices substantially below the estimated
liquidation value of the assets of the Company and the value assigned to the
Shares for purposes of the Consolidation. The Shares will be approved for
listing on the American Stock Exchange (or other national exchange or market)
upon official notice of issuance prior to consummation of the Consolidation.
The market price of the Shares may be subject to significant volatility after
the Consolidation and could substantially decrease as a result of substantial
initial selling activity following issuance of the Shares, the interest level
of investors in purchasing the Shares after the Consolidation, interest rate
levels, the amount of distributions to be paid by the Company and the
continuing acceptance by the securities markets of mortgage companies as an
investment vehicle. The relatively small size of the Company, in terms of
equity capitalization, could also tend to depress the market value of the
Shares by comparison to real estate companies with larger equity
capitalization. Thus, there is substantial uncertainty as to the prices at
which the Shares will trade and the possibility that such prices will be less
than the Adjusted Net Asset Values of the Partnerships.
There is substantial uncertainty as to the prices at which the Shares will
trade and the possibility that such prices will be less than the Adjusted Net
Asset Value per Share. See "FAIRNESS--Comparison of Alternatives to the
Consolidation."
Risks Related to the Differences in the Business and Investment Objectives
Between the Company and the Partnerships. As a result of the Consolidation,
BUC$holders will own an interest in a Company with a portfolio of assets which
is different from, and more varied than, the type of assets in which they
originally invested. Furthermore, the Company, unlike the Partnerships, will
seek to expand its portfolio of assets. As a result of the foregoing changes,
the business and investment objectives of the Company will differ from those of
the individual Partnerships in certain respects resulting in the following new
risk to BUC$holders:
Fundamental Change in Nature of Investment; Change in the Portfolio of
Assets. BUC$holders who become Shareholders will have fundamentally changed the
nature of their investment. Each Partnership was formed as a finite-life entity
with certain characteristics, including: (i) investments in a portfolio of
tax-exempt participating FMBs; (ii) BUC$holders who expected to receive
tax-exempt regular cash distributions from the Partnership's cash flow and
special distributions upon liquidation of the Partnership's assets; (iii) the
Partnerships were expected to hold assets for between ten and twelve years
after their acquisition, depending on market conditions; (iv) any net proceeds
from the sale or other disposition of any Partnership assets would be
distributed to BUC$holders to the extent such proceeds exceed the Partnership's
other cash requirements, rather than reinvested; and (v) upon liquidation, the
BUC$holders would realize the market value of the Partnerships' assets, less
expenses of liquidation and disposition fees payable to the General Partners.
By contrast, (i) the Company's portfolio of FMBs will initially be
expanded and more diversified than that of any single Partnership, and the
composition of such portfolio may be changed from time to time by the Company's
Board of Trustees without Shareholder approval; and (ii) although Shareholders
are expected to receive regular cash distributions which are exempt from
federal income tax, the Company has no specific intention to liquidate or to
sell a substantial amount of its assets, and it plans to continue operations
indefinitely. If the Consolidation is completed, Shareholders will not receive
liquidation proceeds through asset sales but may liquidate their investment at
any time by selling their Shares on the American Stock Exchange or in private
transactions. In this regard, the market value of the Shares may never reflect
the full fair market value of the Company's assets and, consequently,
Shareholders may not realize the full fair market value of such assets by
selling their Shares at prices which will be determined by trading on the
American Stock Exchange. See "COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE
COMPANY AND BUC$HOLDERS OF THE PARTNERSHIPS."
Risks Relating to the Diversification of Asset Portfolios, Change in
Geographic Diversity and Overall Asset Quality. The assets and liabilities of
the Participating Partnerships will be combined in the Consolidation. Changes
in the value of the assets or in the operating cash flows will be shared by all
Shareholders. In addition, certain risks are inherent in the combination of
tax-exempt participating FMBs as
23
<PAGE>
contemplated by the Consolidation. As a result of the Consolidation, the
type and geographic diversity of the assets in which the Shareholders will own
an interest will change. In all cases, the change will increase geographic
diversity. However, because the market for real estate may vary widely from
one region of the country to another, the change in geographic diversity may
expose Shareholders to different and greater risks than those to which they
are presently exposed as BUC$holders. For geographic information regarding the
Partnerships' assets, see "THE COMPANY--Assets of the Company." In addition,
because the assets owned by the Partnerships are not of uniform type or
quality, combining assets and liabilities of the Participating Partnerships in
the Consolidation may diminish the overall asset quality underlying the
investments of certain of the Shareholders by comparison with their existing
Partnership investment. Furthermore, because the Consolidation may be
completed without the participation of one of the Partnerships, no assurance
can be given as to which of these Partnerships will participate in the
Consolidation. If one of the Partnerships does not participate in the
Consolidation, the Company's ability to provide diversification in its asset
base will decrease, thereby reducing the benefits to be realized from the
Company's greater size and limiting the investment flexibility that would be
realized if all Partnerships participate.
Conflicts of Interest of Related General Partners. The Related General
Partners initiated and participated in the structuring of the Consolidation and
have conflicts of interest with respect to its completion, including the
following: (i) the Related General Partners, each of which is an affiliate of
Related, serve as general partners of each Partnership, which creates an
inherent conflict of interest when they serve in such capacity for
Participating Partnerships that have different interests; and (ii) the
Consolidation affords a number of benefits to the Related General Partners,
including the following: (a) if the Consolidation is consummated, the Related
General Partners and Class Counsel would effect a settlement in connection with
the Litigation, therefore, the Related General Partners are subject to a
conflict of interest in recommending to the BUC$holders that they not object to
the Consolidation; and (b) the Management Agreement may not be terminated,
except for Cause, until the fourth anniversary of the Effective Date. Pursuant
to the Management Agreement (and as a result of the Manager's purchase of the
P-B Interests), the Manager will be entitled to receive from the Company
approximately 75% of the sum of the aggregate annual fees currently paid by the
Partnerships to both the Related General Partners and the P-B General Partner.
Therefore, although such aggregate annual fees payable by the Company will be
reduced by approximately 25%, the Manager's share of such fees will increase by
approximately $436,000 per year.
The Manager will also have the ability, subject to the terms and
conditions of the Management Agreement, to cause the Company to incur debt and
other leverage to finance asset purchases and reinvest proceeds from asset
sales and mortgage repayments to grow the Company's assets and thereby increase
the amount of fees it can earn, including the Bond Selection Fee, Bond
Placement Fee, Loan Servicing Fee and Special Distribution. If the Company were
to utilize the maximum leverage permitted to purchase additional FMBs, the
Manager would be entitled to Bond Placement Fees and Bond Selection Fees
aggregating up to approximately $14,231,000 and increased annual Loan Servicing
Fees and Special Distributions of approximately $880,000 and $1,321,000,
respectively. Such additional fees will only be payable to the Manager if and
when the Company is able to acquire additional FMBs.
Finally, pursuant to the Incentive Stock Option Plan, the Manager may
receive additional Shares only if the Company's distributions in any year
exceed the pro forma distributions set forth in this Solicitation Statement.
Similar to the BUC$holders, the Related General Partners and the Manager will
receive Shares and, therefore, will have enhanced their liquidity.
Potential Conflicts of Interest Due to Competition with Affiliates. It is
anticipated that the Manager will retain affiliates of Related to provide the
services which it is required to provide to the Company under the Management
Agreement. Furthermore, the Manager and such affiliates may also act as manager
to other clients or investment vehicles (affiliated or otherwise) which invest
in tax-exempt debt instruments secured by Underlying Properties. To the extent
that other publicly-offered programs with similar investment objectives have
funds available for investment at the same time as the Company, and/or an
investment is potentially suitable for more than one such entity, conflicts of
interest will arise as to which entity should acquire the investment. In such
situations the Manager and its affiliates will review the investment portfolio
of each such entity and will make the decision as to which such entity will
acquire the investment on the basis of such factors as the effect of the
acquisition on each such entity's portfolio and objectives, the amount of funds
available and the then length of time such funds have been available for
investment, and the cash requirements of each such entity. If funds should be
available to two or more publicly-offered programs to purchase a given
investment and the other factors enumerated above have been evaluated and
deemed equally applicable to each entity, then the affiliates will acquire such
investment for the publicly-offered programs on a basis of rotation with the
initial order of priority determined by the dates of formation of the entities.
In addition, The Related Companies, L.P., which is affiliated with
Related, each of the Related General Partners and the Manager, controls 50% of
Centre Mortgage Capital, L.L.C. ("CMC"), a Delaware limited liability company
which shares office space with Related. The remaining 50% of CMC is controlled
by Centre Trading Holdings Limited, an affiliate of the Zurich Insurance Group
which is not affiliated with Related. One of CMC's lines of business is the
arrangement of credit enhancement for FMBs of the type that the Company might
want to acquire without the benefit of credit enhancement. Thus, it is possible
that the Company and CMC could each be engaged in discussions with a developer
of an Underlying Property respecting the provision of financing or acquisition
for such Underlying Property. The Company intends to pursue its investment
objectives vigorously. There can be no assurance, however, that The Related
Companies, L.P. will not determine that the Company forego an investment
opportunity, if it is viewed as a more appropriate or profitable opportunity
for CMC.
Potential Conflict of Interest of Class Counsel. In assessing Class
Counsel's recommendation that BUC$holders not object to the Consolidation,
BUC$holders should consider that Class Counsel may be deemed to have a conflict
of interest with respect to such
24
<PAGE>
recommendation. In particular, the fees and expenses of Class Counsel, if
approved by the Court, will be paid from the cash settlement pool provided by
Related and other defendants pursuant to the Related Settlement and
settlements reached with other defendants in the Litigation. In addition, as
part of the Equitable Settlement, Class Counsel will have the right to
petition the Court for additional attorneys' fees in an amount to be
determined in the Court's sole discretion but which will be proposed to be 25%
of the increase, if any, as of the Anniversary Date in the capitalization of
the Company, based upon (i) the difference between the trading prices of the
Company's Shares on the Anniversary Date and (ii) the trading prices of the
Units and the asset values of the Partnerships prior to the Effective Date.
The number of Counsel's Fee Shares issued shall be subject to a maximum amount
not to exceed 3.95% of the total number of the Company's outstanding Shares on
the Anniversary Date. See "CONFLICTS OF INTEREST--Conflicts of Interest of
Class Counsel."
Less than Majority in Interest Will Bind All BUC$holders in a
Partnership. Pursuant to the Court's Order preliminarily approving the
Settlement Stipulation and subject to final Court approval, a Partnership will
participate in the Consolidation unless BUC$holders holding more than 33-1/3%
of the outstanding Units in such Partnership object to the Consolidation. If a
Partnership participates in the Consolidation, all BUC$holders of such
Partnership, including BUC$holders who objected to the Consolidation (by
delivering the Objection Notice by the Objection Deadline) will participate in
the Consolidation. Unlike the Monetary Settlement, BUC$holders may not
separately "opt-out" from the Equitable Settlement if their Partnership
participates in the Consolidation. See "--Relinquishment of Rights from Court
Approval of Related Settlement" below. The Units held by each Participating
BUC$holder, including objecting BUC$holders, will be exchanged for Shares.
Conversely, if BUC$holders holding more than 33-1/3% of the outstanding Units
in a Partnership object to the Consolidation, that Partnership will not
participate in the Consolidation. If a Partnership does not participate in the
Consolidation, none of its BUC$holders will be permitted to receive Shares in
exchange for their Units. Under the applicable Partnership Agreements, if the
Consolidation were not subject to a judicial determination and Court Order
following a Fairness Hearing, it could be consummated only by obtaining the
approval of holders of a majority of the outstanding Units. See "THE
CONSOLIDATION AND RELATED TRANSACTIONS" and "OBJECTION PROCEDURES."
No Cash Paid to Objecting BUC$holders. Objecting BUC$holders do not have
the right to receive cash based on an appraisal of their interests in the
Participating Partnerships or otherwise. See "OBJECTION PROCEDURES--No Right of
Appraisal."
Relinquishment of Rights from Court Approval of Related Settlement. If the
Related Settlement is approved by the Court: (a) all Participating BUC$holders
(including those who have objected to the Consolidation) will release and
discharge all claims against the Related General Partners and their affiliates
based on allegations similar to those made in the Consolidated Complaint or in
any Constituent Action which seek equitable relief different from that provided
by the Related Settlement; (b) all Participating BUC$holders will also release
and discharge all claims against the Related General Partners, their
affiliates, the P-B General Partner and its affiliates, relating to or arising
out of the terms or implementation of the Related Settlement with the Equitable
Class, the Consolidation, and the withdrawal of the P-B General Partners; and
(c) all non-participating BUC$holders will release and discharge all claims
against the Related General Partners, their affiliates, the P-B General Partner
and its affiliates arising out of or relating to the withdrawal of the P-B
General Partner. In addition, if the Related Settlement is approved by the
Court, all members of the Monetary Class who do not "opt-out" of the Monetary
Settlement will release and discharge all claims against the Related General
Partners and their affiliates in connection with or which arise out of the
allegations set forth in the Consolidated Complaint or in any pleading in any
Constituent Action or which relate to (i) the marketing, purchase, sale or
holding of Units during the period January 1, 1980 through June 8, 1994 or (ii)
the operation, oversight, monitoring or management of the Partnerships and
other partnerships during such period (other than claims, rights, causes of
action or liabilities described in this clause (ii) that are based on actual
fraud committed by the Related General Partners, their officers, directors and
employees). See "BACKGROUND, BENEFITS OF, AND REASONS FOR THE
CONSOLIDATION--The Related Settlement."
If the Related Settlement is not approved, members of the Monetary Class
and BUC$holders could pursue the claims which are being released as part of the
approval of the Related Settlement, subject to the right of the parties against
whom claims were asserted to raise any defenses available to them.
Risk of Increased Leverage. The Partnership Agreements of the Partnerships
contain various restrictions on the amount and nature of Partnership borrowings
and repayment terms. The Trust Agreement permits the Company to leverage its
assets up to 50% of the Company's Total Market Value (measured at the time such
leverage was incurred), but will not limit repayment terms, interest rate
structures or payment priorities. The maximum amount the Company would be able
to borrow or leverage is approximately $359,372,000. The foregoing amount
assumes that FMBs acquired with leverage proceeds will, in turn, be leveraged
up to 50% and that the Company will use the resulting additional proceeds to
acquire additional FMBs and other assets.
Only Tax Exempt I currently has outstanding debt. See "THE
COMPANY--Financing Policies."
If the Company incurs substantial debt or other leverage, it will be subject
to the following risks: (a) the Company could lose its interests in assets given
as collateral for secured borrowings or leverage if the required repayments are
not made when due; (b) the Company's cash flow from operations may not be
sufficient to retire these obligations as they mature, making it necessary for
the Company to either refinance these obligations prior to maturity or to raise
additional debt and/or equity for the Company or dispose of some of the
Company's assets to retire the obligations which could have an adverse effect on
the amount of funds available for distribution to Shareholders; (c) the
Company's ability to leverage or otherwise raise additional funds will be
restricted by the 50% leverage to Total
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Market Value limitation; and (d) no assurance can be given as to the
availability, or the terms and conditions, of any financing needed by the
Company to refinance borrowings.
In addition, because the Company intends to leverage its assets at rates
that adjust based on prevailing short term, tax exempt market interest rates,
an increase in the prevailing market interest rates would adversely affect the
Company's cash flow and would reduce the amount of funds available for
distribution to Shareholders. A significant increase in prevailing short term
tax exempt rates would result in a significant reduction in the Company's cash
flow and in extreme circumstances could reduce such cash flow to zero and/or
result in a partial liquidation of the Company's assets.
Risk of Lower Distributions. There is no guarantee with respect to the
level of the Company's future cash distributions. Regardless of the initial
level of such distributions, they could decline in the future to a level at
which some Participating BUC$holders would receive lower distributions than
they received prior to the Consolidation. The Company's 1996 pro forma
financial statements indicate that BUC$holders of Tax Exempt II and Tax Exempt
III would have received lower distributions (approximately 1% or $0.56 per
$1,000 of Original Investment less than 1996 annual distributions for Tax
Exempt II and approximately 0.8% or $0.37 per $1,000 of Original Investment
less than 1996 annual distributions for Tax Exempt III) had the Consolidation
occurred on January 1, 1996, with 100% Participation. While the Delaware Act
does not specifically impose any restrictions on the Company's ability to make
distributions, other laws may impose certain restrictions and in certain
circumstances could impose an obligation on Shareholders to return
distributions. See "THE COMPANY--Distribution Policy."
Consolidation Expenses Will Reduce the Cash of the Company Available for
Distribution to Shareholders. Consolidation Expenses are estimated to be
approximately $1,984,125 or approximately 0.64% of the Company's total Adjusted
Net Asset Value (based on the Adjusted Net Asset Values of the Partnerships and
assuming 100% Participation). The Company will borrow to pay the Consolidation
Expenses which will increase the expenses of the Company or reduce the
Company's cash balances to the extent of payments on such leverage or
financing. Funds used to pay Consolidation Expenses (including with respect to
any debt incurred to finance such expenses) would otherwise be available for
distributions to Shareholders. If the Consolidation is consummated with 100%
Participation, all Consolidation Expenses will be paid by the Company. If the
Consolidation is not consummated, the Related General Partners will bear the
Consolidation Expenses. If the Consolidation is consummated at less than 100%
Participation, the Related General Partners will be responsible for the
Consolidation Expenses otherwise allocable to Non-Participating Partnerships.
Risk of Improper Allocation of Shares. The allocation of Shares among
Participating Partnerships is based upon the Adjusted Net Asset Values assigned
to each such Partnership, which are based upon and subject to significant
assumptions and limitations, and which are based, in part, on the Appraisals
which necessarily include their own significant assumptions and limitations.
Accordingly, there can be no assurance that the number of Shares allocated to
each Participating Partnership reflects the relative values at which the
underlying assets of each such Partnership could be sold, the relative values
at which the Units of each such Partnership could be sold, or that such Shares
could be sold at a price equal to the Adjusted Net Asset Value assigned to such
Shares. The risk of improper allocation of Shares passes through to
BUC$holders, each of whom, upon the Effective Date, will receive a pro rata
percentage of the Shares allocated to the Participating Partnership in which
such BUC$holders held Units prior to the Consolidation. If, based on future
operations of the Company, it could be shown that the allocation method
resulted in an inequitable allocation of Shares, some BUC$holders would have
received more or less Shares than they otherwise should have been allocated.
Contingent or Undisclosed Liabilities. The Company will agree, upon the
consummation of the Consolidation, to succeed to all assets and liabilities of
the Participating Partnerships including any contingent, conditional and
unknown liabilities. Neither the General Partners nor the Partnerships will
make any representations or warranties to the Company with respect to the
assets or liabilities of the Partnerships. As a result, the Company will not be
entitled to any indemnification if assets are encumbered or if undisclosed
liabilities exist. If after the Consolidation the Company determines that the
assets are materially encumbered or that undisclosed liabilities exist, there
may be an adverse effect on the market value of the Shares.
Loss of Relative Voting Power by BUC$holders. If the Consolidation is
completed, Shareholders will have an investment in a larger entity and will
thus lose relative voting power. BUC$holders may currently vote on certain
Partnership matters in proportion to their interests in the Partnership
relative to the interests of all BUC$holders in the same Partnership. After the
Consolidation, Participating BUC$holders will be able to vote as Shareholders
of the Company and will hold approximately 98.5% of the outstanding Shares.
Shareholders will have one vote per Share. Pursuant to the Trust Agreement,
Shareholders are generally entitled to vote on certain material transactions or
actions relating to the Company, and such transactions or actions may not be
consummated without the approval of the requisite number of Shares. See
"COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE
PARTNERSHIPS."
Negative Impact of Not Being a Self-Managed Entity. The Company will be an
externally-managed entity, rather than a self-managed entity, which may have a
negative impact on the value of the Shares. The Related General Partners
believe that many investment bankers, brokerage firms, financial consultants,
institutional investors and others believe that self-managed entities are more
favorably received in the equity markets. The Related General Partners,
together with Class Counsel, explored the possibility of structuring the
Company as a self-managed entity. Such a structure would require the Company
to purchase those operating divisions of Related necessary
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to support the activities of the Manager. The purchase price for such a
transaction is generally determined by applying a multiple to recurring and
transaction income generated by the entity to be purchased. Because the
Manager is newly formed and has no operating history, and due to the
potentially dilutive effect of issuing Shares to accomplish such structure,
Related and Class Counsel were unable to establish a mutually agreeable price
for the Manager. The Company could determine in the future to acquire the
Manager or otherwise become self-managed although management does not have any
present intention to do so.
The Company does not own any equity interests in the Manager and,
therefore, will not be able to influence the day-to-day decisions of the
Manager. As a result, the Manager may implement business policies or decisions
that would not have been implemented by persons controlled by the Company which
are adverse to the Company or could lead to adverse financial results which
could impact the Company's financial condition and ability to make
distributions to Shareholders. See "MANAGEMENT--Description of Incentive Share
Option Plan."
The Consolidation Will Require Participating BUC$holders to Forego
Alternatives to the Consolidation. The Related General Partners considered
alternatives to the Consolidation, such as the continuation of the Partnerships
as currently structured and the liquidation of the Partnerships through sales
of entire Partnership portfolios or sales of individual Partnership assets. The
benefits of these alternatives are avoiding certain expenses of the
Consolidation and avoiding some of the risks associated with the Consolidation
as set forth in this section. Retaining the finite-life feature of the
Partnerships would allow BUC$holders eventually to receive liquidation proceeds
from the sale of the Partnership assets. A BUC$holder's share of these sale
proceeds from a liquidation in the future or currently could be higher than the
amount realized from a sale of the Company's Shares received in exchange for
the Units in the Consolidation. See "BACKGROUND, BENEFITS OF, AND REASONS FOR,
THE CONSOLIDATION--Alternatives to the Consolidation."
Risk of Interest Rate Increases. Historically, the market value of real
estate and, in particular, mortgage securities has been sensitive to changes in
market interest rates. Due to the fluctuating nature of interest rates in
general, and the impact of such fluctuations on the prices of real estate
securities in particular, and the impact of such fluctuations on the Company's
leverage, most of which is expected to require payments or interest at variable
rates, the Shares will be vulnerable to increases in interest rates, which may
tend to reduce cash flow available for distributions and the market price of
the Shares. See "Risk of Increased Leverage" above. In addition, because of the
Company's investments in FMBs, the trading price of the Shares may be affected
by prevailing market interest rates, including (i) in periods of high interest
rates, the Shares may be less attractive than alternative investments of equal
or lower risk, and (ii) high interest rates may have a negative effect on the
value of the Company's FMBs.
Board of Trustees May Change Investment Policies. The descriptions in this
Solicitation Statement of the major policies and the various types of
investments to be made by the Company reflect only the current plans of the
Company's Board of Trustees. The Company's Board of Trustees may change the
investment policies of the Company without a vote of the Shareholders. If the
Company changes its investment policies, the risks and potential rewards of an
investment in the Company may also change. In addition, the methods of
implementing the Company's investment policies may vary as new investment
techniques are developed. See "THE COMPANY-- Investment Policies."
Lack of Operating History. The Company is newly created, with no operating
history. In addition, the Company's business and investment objectives differ
from those of the Partnerships. For example, the Company expects to acquire
interests in existing FMBs which may require restructuring, whereas the
Partnerships invested in newly issued FMBs which funded construction and
ownership of the Underlying Properties. In addition, the Company will be able
to issue additional equity securities, incur debt and reinvest the proceeds
from the sale of assets and repayments of mortgages while none of the
Partnerships are permitted to do so. There can be no assurance that the Company
will achieve its stated objectives.
Risks Related to Anti-takeover Provisions. Certain provisions of the Trust
Agreement and the Management Agreement may have the effect of discouraging a
third party from making an acquisition proposal for the Company and may thereby
inhibit a change in control of the Company under circumstances that could give
Shareholders the opportunity to realize a premium over the then-prevailing
market prices of the Shares. Such provisions include the following:
Additional Classes and Series of Shares. The Trust Agreement permits the
Board of Trustees to issue additional classes or series of beneficial interests
and to establish the preferences and rights of any such issued. Thus, the Board
of Trustees could authorize the issuance of beneficial interests with terms and
conditions which could have the effect of discouraging a takeover or other
transaction in which holders of some, or a majority, of the Shares might
receive a premium for their Shares over the then-prevailing market price of
such Shares. See "DESCRIPTION OF SHARES."
Staggered Board. The Board of Trustees has three classes of Managing
Trustees. The terms of the first, second and third classes will expire in 1998,
1999 and 2000, respectively. Managing Trustees for each class will be chosen
for a three-year term upon the expiration of the current class' term, beginning
in 1998. Managing Trustees may be removed by the Majority Vote of Shareholders
only for Cause prior to the fourth anniversary of the Effective Date, and with
or without Cause after such anniversary. The use of a staggered board makes it
more difficult for a third-party to acquire control over the Company.
Manager's Rights Under the Management Agreement. The Management Agreement
cannot be terminated by the Company prior to the fourth anniversary of the
Effective Date, other than for Cause, and the Company cannot dissolve and
liquidate prior to such
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anniversary date except upon a recommendation of the Manager. After the
fourth anniversary of the Effective Date, the vote of the holders of 66-2/3%
of the Company's then outstanding Shares is required to approve a dissolution
and liquidation of the Company that is not recommended by the Manager and the
Majority Vote of Shareholders is required to approve a dissolution and
liquidation of the Company that is recommended by the Manager. The inability
to terminate the Management Agreement prior to the fourth anniversary of the
Effective Date could discourage third parties willing to acquire a controlling
interest in the Company from doing so especially if they were seeking to
replace the Manager in order to permit them to provide advisory services to
the Company and receive the fees otherwise payable to the Manager.
Possible Dilutive Effect Arising from Shares Available for Future Sale and
Shares to Be Issued to Class Counsel Pursuant to the Settlement. The Board of
Trustees of the Company will have the ability, without Shareholder approval, to
cause the Company to offer additional Shares or other equity or debt securities
in exchange for money, property or otherwise. No prediction can be made as to
the effect, if any, that future sales of Shares or the availability of such
Shares for future sale will have on the market price of the Shares. Future
sales of substantial amounts of Shares (including Shares issued to Class
Counsel as described below) or the perception that such sales would occur, may
adversely affect prevailing market prices for the Shares. Shareholders will
have no preemptive right to purchase shares issued in any such offerings, and
any such offerings might cause a dilution of a Shareholder's investment in the
Company.
As part of the Equitable Settlement, Class Counsel will have the right to
petition the Court for additional attorneys' fees in an amount to be determined
in the Court's sole discretion but which will be proposed to be 25% of the
increase, if any, as of the Anniversary Date in the capitalization of the
Company, based upon (i) the difference between the trading prices of the
Company's Shares on the Anniversary Date and (ii) the trading prices of the
Units and the asset values of the Partnerships prior to the Effective Date.
One-half of such fees, if any, will be paid in the form of restricted
securities (restricted only with respect to sale, assignment, pledge or other
transfer of such securities) (the "Restricted Securities") and the remaining
one-half of such fees will be paid in the form of unrestricted securities (the
"Unrestricted Securities" and, together with the Restricted Securities,
"Counsel's Fee Shares"). The number of Counsel's Fee Shares issued shall be
subject to a maximum amount not to exceed 3.95% of the total number of
outstanding Shares of the Company on the Anniversary Date. Although the value
of such Shares cannot be determined at this time, if Class Counsel were to
receive the maximum number of Shares possible it would own approximately
801,000 Shares based upon the number of Shares outstanding as of the Effective
Date. The Counsel's Fee Shares will be distributed to Class Counsel quarterly
in eight equal distributions commencing thirty days after the Anniversary Date
and restrictions on the Restricted Securities expire one year from the date of
issuance. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT--Security Ownership of Certain Beneficial Owners."
Risks Relating to the Existing Portfolio and New FMBs to be Acquired by the
Company
No Government Obligation. Even though the FMBs are issued by state or
local governments or their agencies or authorities, the principal and interest
of each FMB will be payable only from the revenue and appreciation generated by
the properties securing the Mortgage Loans. None of the FMBs constitute a
general obligation of any state or local government, agency or authority, and
no state or local government, agency or authority is liable on them except to
the extent revenues are received under the Mortgage Loans, nor is the taxing
power of any state or local government pledged to the payment of the principal
of or interest on the FMBs.
Possible Failure to Obtain Contingent Interest and Other Payments. The
Company will invest primarily in FMBs which provide for Base Interest and
Contingent Interest. No assurance can be given that Contingent Interest will be
paid or if paid the amount of such payments in any given year. Therefore, the
rate of return on the FMBs may vary from year to year. Failure to pay the
interest, including any Contingent Interest, if and when due and payable will
constitute a default under the Mortgage Loans and therefore the FMBs. No
assurance can be given that there will be sufficient Net Property Cash Flow and
Net Sale or Repayment Proceeds to pay any Contingent Interest. The ability of
the borrowers to make payments due under the Mortgage Loans, the amount of
Contingent Interest to be realized by the Company and the amount the Company
may realize after a default will be dependent on the level of operations and
the increase or decline in value of the Underlying Properties as well as the
other risks generally associated with mortgage loans and real estate
investments described under "Risks Relating to Underlying Real Estate" below.
Risks Relating to Mortgage Loans, FMBs and Underlying Real Estate. All
mortgage loans and, accordingly, tax-exempt bonds, are subject to some degree of
risk, including the risk of a default by the borrower and the possibility that
the lender may have to foreclose in order to protect its investment.
Accordingly, the Company's investments may become subject to general risks
inherent in the ownership of real property, including reduction in rental income
due to an inability to maintain occupancy levels, rent controls, adverse changes
in general economic conditions, adverse local conditions (such as competitive
over-building or decrease in employment, adverse changes in real estate zoning
laws, particularly "down-zoning," which may reduce the desirability of real
estate in the area, or acts of God, such as earthquakes and floods). Because the
Underlying Properties will be rentals, the Underlying Properties must attract
and retain tenants with the financial stability and ability (either personally
or through other sources) to pay rent and the costs of those services.
Reductions in rental income from expected levels may cause the borrower/property
owner (the "Property Owners") to default on its obligations under a Mortgage
Loan and result in a default under an FMB. In addition, the Mortgage Loan
documents generally prohibit condominium conversion of an Underlying Property
during the term specified in its Regulatory Agreement. See THE
COMPANY--"Investment Objectives and Policies--The Regulatory Agreement." The
Property Owners may provide the Company with limited guarantees against
operating deficits of the partnership or other entities which own the Underlying
Properties. See "THE COMPANY--Investment Policies and
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Business Plan--Operating Deficit Guarantees." However, there are no
assurances that the Manager can obtain operating deficit guarantees or, if
obtained, that the Property Owners will have sufficient funds to discharge
their obligations under such operating deficit guarantees.
Risks Relating to Moderate and Low Income Set Asides. All FMBs issued to
provide privately owned multifamily housing projects are required to set aside
a certain number of units for moderate and low income tenants. FMBs issued
prior to 1986, or otherwise subject to the provisions of the Internal Revenue
Code of 1954, require that 20% of a project's units be set aside for persons
whose income does not exceed eighty percent of the area average median income
without adjustments for family size. FMBs issued pursuant to the Code require
that either 20% of a project's units be rented to persons whose income does not
exceed 50% of the area average median income or that 40% of a project's units
be rented to persons whose income does not exceed 60% of the area average
median income, in either case adjusted for family size. Although there is no
legal limit on the amount of rent that moderate and low income tenants may be
charged, the market and economic realities dictate that rent generally will not
exceed 30% to 35% of a tenant's income. In the case of projects which avail
themselves of the LIHTC, many are occupied 100% by qualifying moderate and low
income tenants and the Code does limit rents to 30% of the qualifying moderate
and low income amount. Also, low income multifamily projects owned by charities
described in Section 501(c)(3) of the Code must set aside substantially all of
their units for low income persons and charge rents affordable by them.
This is especially likely to occur if expenses increase at a rate greater
than area median income. In addition, failure to comply with the moderate and
low income set asides could result in the interest on the FMBs being included
in gross income for federal income tax purposes. See, "RISK FACTORS--Tax Risks"
below.
Acquisition of FMBs Prior to Issuer Approval. It is anticipated that some
of the new FMBs acquired by the Company will have been in default prior to
their acquisition by the Company. Because such previous defaults may indicate
that the debt on the Underlying Properties was too great in relation to the
value of the Underlying Properties at the time of default, the Company will in
most cases acquire an outstanding FMB only if the Company has reached agreement
with the Property Owner to restructure the FMB. Furthermore, the terms of any
restructuring will be subject to the approval of the issuer. In most
circumstances, the Manager expects that the issuer will approve the
restructuring of FMBs before they are acquired by the Company. However, the
Company may acquire FMBs before the issuer approves such restructuring, and
there is no assurance that such approval will ultimately be obtained. When such
outstanding FMBs are acquired without the prior approval of the issuer, and if
the Company is unable to reach a subsequent agreement with the issuer, the
Company, in order to attempt to avoid the receipt of taxable income, could be
forced either to sell the unrestructured FMBs or to foreclose on the Underlying
Property, if in default. However, if any such sale or other disposition
produced a gain or if the Company acquired the Underlying Property as a result
of a foreclosure and was in receipt of net rental income, the Shareholders
would recognize taxable income. See "Tax Risks-Possible Failure to Obtain
Tax-Exempt Income" above and "FEDERAL INCOME TAX CONSEQUENCES--
Company Income."
Risks from Interest Rate Fluctuations. In the event that there is a
significant increase or decrease in interest rates, the quality of FMBs and
value of FMBs and tax-exempt securities may be affected. If interest rates
significantly decrease, the number and quality of properties on which Property
Owners may be willing to place a Mortgage Loan on the terms described herein
may be reduced. If interest rates significantly increase above the interest
being paid on FMBs, the value of any existing FMBs may decrease and,
accordingly, the price the Company could receive if it sold or remarketed its
FMBs or tax-exempt securities may decrease as well.
Possible Difficulty of Repayment; Loan to Value Ratio. Full principal of a
Mortgage Loan will generally be required to be repaid as a lump-sum "balloon"
payment. Consequently, the ability of the Property Owners to repay the Mortgage
Loans may be dependent upon their ability to sell the Underlying Properties or
obtain refinancing. As is the case with the FMBs in the Existing Portfolio, the
new Mortgage Loans are not expected to be personal obligations of the Property
Owners, and the Company will be relying solely on the value of the Underlying
Properties for its security. In no event will the principal of a Mortgage Loan
at the time the loan is made or after the related bonds are acquired and the
bonds and the loan are restructured, together with all other mortgage loans on
the subject Underlying Property, exceed 85% of the appraised fair market value
of the Underlying Property unless the Manager determines that substantial
justification exists because of other aspects of the loan, such as the net
worth of the Property Owner, the credit rating of the Property Owner based on
historical financial performance, additional collateral (such as a pledge or
assignment of other real estate or another real estate mortgage) or an
assignment of rents under a lease or where the Company has purchased an FMB at
a price that is no more than 85% of the value of the Underlying Property
(notwithstanding that the face amount of the outstanding mortgage loans with
respect to the Underlying Property exceed 85% of the appraised fair market
value of the Underlying Property), provided that any loans relating to the
Underlying Property which are advanced by third parties (and which cause the
aggregate amount of all mortgage loans outstanding on the Underlying Property
to exceed 85% of the appraised fair market value of the Underlying Property)
are subordinated to the Company's investment and do not entitle such third
party lender to any rights upon default without the Company's consent until
after the Company's FMB and related Mortgage Loan with respect to such
Underlying Property have been repaid. In addition, if the Company chooses to
foreclose on a Mortgage Loan which is in default, it may result in the Company
realizing taxable income. See "THE COMPANY--Investment Policies and Business
Plan--Selection of FMBs."
Certain Contingent Interest May Be Based on Appraisals. In the event an
Underlying Property is not sold prior to the maturity or remarketing of the
FMBs, any Contingent Interest payable by virtue of the Company's participation
in the Net Sale or Repayment
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Proceeds of the Underlying Property will be determined on the basis of the
appraised value of the Underlying Property. See "THE COMPANY--Investment
Policies and Business Plan--The Terms of the FMBs and Mortgage Loans." Real
estate appraisals represent only an estimate of the value of the property
being appraised and are based on subjective determinations, such as the extent
to which the properties are comparable to the property being evaluated and the
rate at which a prospective purchaser would capitalize the cash flow of the
property to determine a purchase price. Accordingly, such appraisals may
result in the Company realizing more or less Contingent Interest from the FMBs
than would have been realized had such Underlying Property been sold, and the
amount realized may, to a certain extent, be based on subjective decisions by
the independent appraisers.
FMBs and Mortgage Loans May Be Considered Usurious. State usury laws
establish restrictions, in certain circumstances, on the maximum rate of
interest that may be charged by a lender and impose penalties on the making of
usurious loans, including monetary penalties, forfeiture of interest and
unenforceabilty of the debt. Although the Company does not intend to acquire
FMBs secured by Mortgage Loans at usurious rates, there is a risk that FMBs and
Mortgage Loans could be found to be usurious as a result of uncertainties in
determining the maximum legal rate of interest in certain jurisdictions,
especially with respect to Contingent Interest. Therefore, the amount of
interest to be charged and the Company's return from the FMBs will be limited
by the state usury laws. In order to minimize the risk of making a usurious
loan, the Trust Agreement requires the Manager to obtain an opinion of local
counsel to the effect that the interest rate of a proposed FMB is not usurious
under applicable state law. The Company also intends to obtain an opinion of
local counsel to the effect that the interest on the Mortgage Loan is not
usurious. To obtain such opinions the Company may have to agree to defer or
reduce the amount of interest that can be paid in any year. Some states may
prohibit the compounding of interest, in which case the Company may have to
agree to forego the compounding feature of the FMB structure.
Uninsured Losses. The Company intends to require comprehensive insurance,
including liability, fire and extended coverage, which is customarily obtained
for or by a mortgagee on Underlying Properties in which it acquires a
mortgagee's interest (generally, such insurance will be obtained by the
Property Owner). However, there are certain types of losses (generally of a
catastrophic nature, such as earthquakes, floods and wars) which are either
uninsurable or not economically insurable. Should such a disaster occur to, or
cause the destruction of, any such Underlying Properties, it is possible that
the Company could lose both its invested capital and anticipated profits from
its investment in the FMB for such Underlying Property.
Risks Relating to the Company
Construction Completion Risks. Although the Company's Existing Portfolio
of FMBs is secured by Mortgage Loans on existing Underlying Properties, the
Company may, in the future, invest in FMBs secured by loans on Underlying
Properties which are to be constructed. Construction of such projects generally
takes approximately two years. The principal risk associated with construction
lending is the risk of noncompletion of construction which may arise as a
result of (i) underestimated initial construction costs; (ii) cost overruns
during construction; (iii) delays in construction; (iv) failure to obtain
governmental approvals; and (v) adverse weather and other unpredictable
contingencies beyond the control of the developer. If the Mortgage Loan is
called due to construction not being completed as required in the Mortgage Loan
documents, the Company will have suffered a loss of capital in order to
preserve its investment. See "THE COMPANY--Investment Policies and Business
Plan--Construction Period Guarantees."
In order to minimize certain risks which may occur during the construction
phase of a property, the Company will endeavor to obtain in most instances one
or more types of security during such period, including a construction
completion guarantee of principals of the Property Owner, personal recourse to
the Property Owner and payment and performance bonding of the general
contractor, if any, with respect to a property. In addition, the Company may
require principals of the Property Owner to provide the Company with an
operating deficit guarantee, covering operating deficits of the Underlying
Property during an agreed upon period. The Company may not be able, however, to
obtain such security with respect to certain properties; in other cases, the
Company may decide to forego certain types of available security if the Company
determines in its sole discretion that the security is not necessary or is too
expensive to obtain in relation to the risks covered.
Competition and Availability of FMBs. In acquiring FMBs from time to time,
the Company may be in competition with private investors, mortgage banking
companies, lending institutions, trust funds, mutual funds, domestic and
foreign credit enhancers, bond insurers, investment partnerships and other
entities, with objectives similar to those of the Company. Some of these
entities can be expected to have substantially greater resources and experience
in acquiring FMBs than the Company. Some of the entities which may compete with
the Company may be affiliates. See "CONFLICTS OF INTEREST--Competition with
Affiliates of the Company."
Since 1986 the Code has provided that any FMB which is a "private activity
bond" (other than certain refunding bonds and bonds issued for Section
501(c)(3) organizations) must receive an allocation of "volume cap" from the
governmental issuer of the FMB. The amount of volume cap was established in
1986 and was not indexed for inflation. Thus, the amount of available volume
cap in real dollars is decreasing each year, reducing the number of projects
that may be financed with private activity bonds. Although the Company expects
to acquire existing FMBs which may be restructured as well as bonds issued for
Section 501(c)(3) organizations (which do not require volume cap), it also will
attempt to acquire FMBs that are newly issued for private developers of
multifamily housing and other projects (which do require volume cap). Unless
Congress amends the Code to provide for an increase in available volume cap,
the number of such newly issued FMBs is likely to decrease.
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<PAGE>
Ownership of Minority Positions. The Company may determine to acquire only
a small portion of an FMB, which portion may be entitled to floating rates of
interest based upon a designated index, and agree to subordinate such portion
to the credit position of the holders of the remaining parties of such FMB (a
"Minority Position"). Although the Company will limit the amount of such FMBs
it acquires to 15% of the Total Market Value of the Company, Minority Positions
entail greater risk of non-payment because the Minority Position is generally
subordinated to payment of the remainder of the FMB. In addition, if an event
of default occurs respecting an FMB, the Company, if it only owns a Minority
Position, will not have control over the exercise of remedies, including any
work-out with the owner of the Underlying Property. There can be no assurance
that the majority owners of such an FMB will be experienced in real estate
matters or will take appropriate actions to protect the interests of the
Company as the owner of a Minority Position.
Underlying Properties Owned by Charities. The Company may acquire FMBs
that were issued to finance low income multifamily projects and facilities for
the elderly (including retirement centers, assisted living projects and nursing
homes) owned by charities described in Section 501(c)(3) of the Code. Because
volume cap is not needed for such FMBs they may be more readily available than
FMBs which require volume cap. However, because charities are not profit
motivated, they may not operate projects as efficiently as for-profit owners.
In addition, certain facilities owned by charities, such as nursing homes, rely
heavily on governmental programs such as Medicaid as a revenue source. There
can be no assurance that such programs will not be amended or terminated which
could materially adversely affect the financial condition of such facilities.
Also, charitable organizations are expected to subsidize indigent persons who
use their facilities, which may reduce the cash flow available to pay debt
service on FMBs of such facilities. In the event a charity fails to provide
such subsidies or otherwise fails to act in a manner consistent with its
charitable purpose, its charitable status under Section 501(c)(3) may be
revoked. Such revocation could result in the interest on FMBs being included in
gross income for purposes of federal income taxation. See, "RISK FACTORS--Tax
Risks" below.
Possible Inability to Achieve Growth. The Company's growth objectives will
be affected by a variety of factors (including factors over which the Company
may have little or no control), including (i) conditions prevailing in the
public securities markets generally, such as the level of interest rates, and
the relative demand for public securities generally, and real estate related
securities specifically, (ii) the performance and perception of the Company,
which will be affected by general real estate conditions, as well as by the
Company's specific assets and operations, and (iii) competition. Thus, there is
no assurance that the Company will be able either to raise through debt or
equity offerings the necessary funds for growth, or to persuade others to
accept the securities of the Company in a direct exchange for assets.
Status of the Company Under ERISA. The Company has received an opinion of
Counsel to the effect that, based on certain assumptions concerning the public
ownership and transferability of the Shares, the Shares should be "publicly
offered securities" for purposes of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and that, consequently, the assets of the
Company should not be deemed "plan assets" of an ERISA plan, individual
retirement account or other non-ERISA plan that invests in the Beneficial
Interests. If the Company's assets were deemed to be plan assets of any such
plan, then, among other consequences, certain persons exercising discretion as
to the Company's assets would be fiduciaries under ERISA, transactions
involving the Company undertaken at their direction or pursuant to their advice
might violate ERISA, and certain transactions that the Company might enter into
in the ordinary course of its business might constitute "prohibited
transactions" under ERISA and the Code.
Possible Negative Effects of Requirements with respect to Permissible
Income of Occupants of Properties. All of the Underlying Properties are subject
to certain federal, state and/or local requirements with respect to the
permissible income of occupants. Often, state or local law establishes an
income ceiling for some or all tenants. In addition, pursuant to the Code, all
of the Underlying Properties are required to have at least 20% (and in some
instances, at least 40%) of the units held for occupancy by low- or
moderate-income persons or families. Since no federal subsidies are available
in connection with the Mortgage Loans, rents must be charged on such portions
of the units at a level to permit such units to be continuously occupied by
low- or moderate-income persons or families, which rents may not be sufficient
to cover all operating costs with respect to such units and debt service on the
applicable Underlying Property. In such event, the rents on the remaining units
may have to be higher than they would otherwise be in order to cover the
operating costs including debt service on all units in the Underlying Property
and may therefore exceed competitive rents, which may adversely affect the
occupancy rate of an Underlying Property and the developer's ability to service
its debt. In this regard, the Code provides that, as a general rule, for
obligations issued on or after January 1, 1986, the income limitations for low-
or moderate-income tenants will be adjusted for family size. See "FEDERAL
INCOME TAX CONSIDERATIONS--Company Income."
Possible Liability of Shareholders. The Company is governed by the laws of
the State of Delaware. Under the Trust Agreement and the Delaware Act,
Shareholders will be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations. In general, stockholders of
a Delaware corporation are not personally liable for the payment of a
corporation's debts and obligations. They are liable only to the extent of
their investment in the Delaware corporation.
In jurisdictions which have not adopted legislative provisions regarding
business trusts similar to those of the Delaware Act, questions exist as to
whether such jurisdictions would recognize a business trust, absent a state
statute, and whether a court in such a jurisdiction would recognize the
Delaware Act as controlling. If not, a court in such jurisdictions could hold
that the Shareholders are not entitled to the limitation of liability set
forth in the Delaware Act and, as a result, are personally liable for the
debts and obligations of the Company. See "Certain Provisions of Delaware Law
and the Trust Agreement--Liability of Shareholders."
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<PAGE>
Shareholders Must Rely on Management. With the supervision of the Board of
Trustees, all decisions with respect to the management or control of the
Company will be made exclusively by the Manager including, without limitation,
the determination as to investments in FMBs and tax-exempt securities. The
success of the Company will, to a large extent, depend on the selection of such
investments and the general quality of the management of the Manager. Although
the Manager has limited experience in revenue bond and real estate
transactions, individual officers, directors and employees of the Manager have
had substantial prior experience in the organization and management of real
estate programs, both public and private, and in the utilization of revenue
bond financing for real estate projects. Except for certain limited voting
rights, Shareholders have no right or power to take part in the management of
the Company.
Tax Risks
Possible Failure to Obtain Tax-Exempt Income. The Company will not acquire
an FMB unless it receives, or there has been issued previously, an opinion of
bond counsel to the effect that interest on such FMB will be exempt from
regular federal income taxation. Such opinion may be reasoned or qualified on
certain issues and will be based upon certain assumptions, including the
assumption that the Underlying Property will be operated to meet the regulatory
requirements that are designed to assure the use of the Underlying Property to
provide housing for families of low and moderate income and restrictions on the
use of the proceeds of tax-exempt financing issued to construct or acquire the
project. The opinion of bond counsel may rely upon the opinions of other
counsel or may be given by more than one counsel. The opinion of bond counsel
will not be binding on the Internal Revenue Service ("IRS"). The Company will
not restructure an FMB unless it receives such an opinion of bond counsel or a
confirmation that the restructuring will not adversely affect the conclusions
in such opinion.
Interest on the FMBs would be considered to be taxable if:
(a) The owner of the Underlying Property (who will not be subject to
control by the Company) breaches certain of the regulatory requirements on the
use of the Underlying Property and the use of proceeds of tax-exempt financing;
(b) The Company is treated as a substantial user of the Underlying
Property or a related person to such a substantial user, which risk would
increase if the Company were to gain direct or indirect control over the
Underlying Property upon a default of an FMB;
(c) Certain of the fees paid in connection with a restructuring of an
outstanding FMB were considered to exceed certain prescribed limits; and
(d) In the case of an acquisition and restructuring of a previously
outstanding FMB that constitutes a new issuance for tax purposes, within six
months before or after the restructuring, there is a change of the ownership of
the Underlying Property and the bonds do not then meet all of the requirements
and current restrictions in the Code.
In addition, interest on the FMBs would not be considered interest if all
or a portion of the FMBs or the right to Contingent Interest is considered an
equity interest in the Underlying Property rather than a debt obligation and
interest thereon, with the result that such "interest" would be considered
taxable rental income. Further, pursuant to recently issued regulations under
the original issue discount rules of the Code ("OID"), Contingent Interest on
an FMB may be treated as taxable capital gain to the extent the amount of
Contingent Interest is in excess of a specific yield on such FMB. See "FEDERAL
INCOME TAX CONSIDERATIONS--Treatment of Mortgage Loans Containing Contingent
Interest."
Although interest on the FMBs will be exempt from regular federal income
taxes, such interest may be an item of tax preference subject to the
alternative minimum tax for both individuals and corporations and could
increase a corporation's environmental tax liability, an S corporation's excess
net passive income tax liability or a foreign corporation's branch profits tax.
The receipt of such interest also could cause certain otherwise tax-free social
security or railroad retirement benefits to be subject to federal income
taxation.
In those cases in which the Company purchases FMBs prior to their being
restructured, the Company expects such FMBs to have a face amount in excess of
the acquisition price paid by the Company. In restructuring the FMBs, if the
Company receives, or is deemed to receive, restructured FMBs or other
obligations with an issue price in excess of the acquisition price paid by the
Company, then the Company may be deemed to recognize a taxable gain either at
the time of the restructuring or on repayment of the principal amount of the
restructured FMBs.
If the Company were to acquire the Underlying Property securing a Mortgage
Loan as a result of foreclosure, income recognized as a result of such
foreclosure, as well as income recognized from the Company's ownership and
operation of the Underlying Property, would not be tax-exempt. In addition, the
deduction of any losses resulting from such a foreclosure and/or the Company's
subsequent ownership and operation of the Underlying Property may be
restricted.
In addition, if the Company acquires an FMB before obtaining the approval
of the relevant government issuer to any restructuring, and in the event it
does not ultimately obtain such governmental approval, the Company, in order to
avoid the receipt of taxable income, may be forced to sell or otherwise dispose
of the FMB, including through foreclosure on the Underlying Property if the
Mortgage Loan is then in default. If any such sale or other disposition produced
a gain or if the Company acquired the Underlying Property as a result of a
foreclosure and was in receipt of net rental income, the Shareholders would
recognize taxable income.
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<PAGE>
Interest on an FMB may be includible in gross income of the Shareholders
for state income tax purposes.
Risk of Failure to Obtain State Partnership Tax Status. The Company will
not apply for an IRS ruling that it will be classified as a partnership rather
than an association taxable as a corporation for federal income tax purposes.
The Company will instead rely on an opinion of counsel with respect to its
status as a partnership for federal income tax purposes. In the event the
Company is treated as an association taxable as a corporation by certain states
where property securing an FMB is located, distributions made by the Company to
the Shareholders could be treated as taxable dividends by such states to the
extent of the Company's current and accumulated earnings and profits (which
would include receipt of tax-exempt interest although no tax would be imposed
on the association) and would be included in gross income of the Shareholders
for income tax purposes by such particular states. See "FEDERAL INCOME TAX
CONSIDERATIONS--Partnership Status."
Adverse Effects of Potential Dealer Status. The Company expects to hold its
FMBs for investment. However, if it were determined that the Company did not
hold its FMBs for investment but for sale in the ordinary course of business,
the Company would be characterized as a "dealer" for federal income tax
purposes, which could cause the Company to be taxed as a corporation because of
its inability to satisfy the 90% Test exception from corporate treatment as a
publicly traded partnership (see "Federal Income Tax Considerations--
Partnership Status--Publicly Traded Partnerships"). If the Company was treated
as a "dealer" but satisfied the requirements of the 90% Test, gain on the sale
or other disposition of the FMBs would be taxable at rates ranging up to 39.6%
for individuals, rather than at a maximum 28% rate. While Counsel has assumed
that the Company will not be treated as a "dealer," because the determination of
"dealer" status is dependent upon future Company activities, Counsel can render
no opinion as to whether the Company will be charaterized as a "dealer."
Other Income Tax Risks. There are numerous income tax aspects and certain
income tax risks associated with the Consolidation, the ownership of Shares and
the future operations of the Company. Such aspects and risks include, but are
not limited to, whether and to what extent the Consolidation will be taxable to
a Participating BUC$holder, whether the Shareholders will have taxable income
or tax liability in excess of cash distributions in a particular taxable year
or upon a sale of their Shares, and whether the Company will be audited by the
IRS, which might result in an audit of a Shareholder's personal income tax
return.
The Company does not intend to request, and will not receive, any rulings
from the IRS. A prospective Shareholder must consult with his professional tax
advisors and review the entire section of this Solicitation Statement entitled
"Federal Income Tax Considerations" in order to adequately evaluate the income
tax consequences and considerations relating to participating in the
Consolidation and owning Shares. Investors and their advisors must also
consider, among other tax aspects, state and local tax consequences and estate
and gift tax consequences of owning Shares.
Limitations on Opinion of Counsel as to Tax Matters. As set forth under
"FEDERAL INCOME TAX CONSIDERATIONS-- Opinion of Counsel," counsel to the Company
has expressed no opinion as to certain tax matters relating to the Company
because of the factual nature of such issues or the lack of clear authority in
the law. Accordingly, there may be a risk that the IRS would not accept the
Company's treatment of certain tax items and that the Shareholders could be
adversely affected as a result. In any event the opinions of counsel are not
binding on the IRS.
Possible Changes in Tax Laws. Income tax treatment of publicly traded
partnerships and/or obligations which presently generate tax-exempt interest
may be modified, prospectively or retroactively, by legislative, judicial or
administrative action at any time. No assurance can be given that legislation,
new regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to such matters. In addition to
any direct effects such changes might have, such changes might also indirectly
affect the market value of all real estate investments, and consequently the
ability of the Company to realize its investment objectives. While any such
legislation may contain transitional rules that would reduce its impact on the
Company, it is impossible to predict whether or in what form such legislation
may be enacted in the future. See generally "FEDERAL INCOME TAX
CONSIDERATIONS."
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<PAGE>
BACKGROUND, BENEFITS OF, AND REASONS FOR, THE CONSOLIDATION
History of the Partnerships
Formation. The Partnerships were formed between 1986 and 1987 to invest
primarily in FMBs secured by Mortgage Loans on Underlying Properties. In
general, the Partnerships' original investment objectives were to (i) preserve
and protect the Partnership's invested capital; (ii) provide quarterly
distributions that are exempt from federal income taxation (except as to
certain separate and/or additional taxes); and (iii) provide additional
distributions from Contingent Interest payments exempt from federal income
taxation (subject to the same exception as noted in (ii) arising from (a) a
participation in the Net Property Cash Flow of the Underlying Properties and
(b) a participation in the Net Sale or Repayment Proceeds of the Underlying
Properties.
The Related General Partners' Management of the Partnerships. The Related
General Partners have managed the day-to-day operations of the Partnerships
since inception. As general partners of the Partnerships, they have been
responsible for management and administration of the Partnerships, including
finance and accounting, asset management and administration, overall loan
compliance and coordination of loan modification and restructuring, where
applicable.
Historical Information and Achievement of Objectives. All of the
Partnerships have paid distributions since inception. As set forth in the table
below, as of March 31, 1997, the Partnerships had made aggregate cash
distributions to BUC$holders of approximately $227,944,805. Distributions for
Tax Exempt I, Tax Exempt II, and Tax Exempt III have been at stable levels
(adjusted for dispositions) for 21 quarters, 21 quarters, and 14 quarters,
respectively.
The Partnerships have suffered to varying degrees from the adverse
conditions that prevailed in the real estate industry in the 1980s and early
1990s and that still persist in some areas of the country. These adverse
conditions have resulted in varying levels of reduced cash flow or erosion of
capital or both.
The table set forth below provides a comparison of the capital raised, and
distributions made, by the Partnerships as of March 31, 1997:
Historical Information Concerning the Partnerships
<TABLE>
<CAPTION>
Distributions Distributions
to to Date of Last
BUC$holders BUC$holders Admission
Total through in Most of Original
Partnership Capital Raised 3/31/97 Recent Quarter BUC$holders
- ----------------- ---------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
Tax Exempt I $158,124,680 $ 90,535,247 $1,660,319 3/3/86
Tax Exempt II $183,032,400 $105,063,540 $2,379,421 5/7/87
Tax Exempt III $ 61,632,500 $ 32,346,018 $ 677,958 8/13/88
------------- ------------- ----------- --------
TOTAL $402,789,580 $227,944,805 $4,717,688
============= ============= ===========
</TABLE>
To the best knowledge of the Related General Partners, 100% of the net
proceeds of the original offerings of all of the Partnerships was invested in
accordance with the Partnerships' original investment objectives.
The following information sets forth, on a Partnership-by-Partnership
basis, the original investment objectives of each Partnership and the extent to
which the Related General Partners believe such objectives have been met.
Tax Exempt I. Original investment objectives: (i) to preserve and protect
the Partnership's invested capital; (ii) to provide quarterly distributions
generated from income that is exempt from federal income taxation (except as to
certain separate and/or additional taxes); and (iii) to provide additional
distributions from Contingent Interest payments exempt from federal income
taxation (subject to the same exception as noted in (ii)) arising from (a) a
participation in the Net Property Cash Flow of the Underlying Properties and
(b) a participation in the Net Sale or Repayment Proceeds of the Underlying
Properties. Based upon the original capital raised from BUC$holders of
$158,124,680, distributions of $90,535,247, as of March 31, 1997, and an
Adjusted Net Asset Value of $115,096,936, the Related General Partners believe
that objectives (i) and (ii) above were substantially met and objective (iii)
above has not been met and will not be realized until there has been a general
improvement in the real estate market.
Tax Exempt II. Original investment objectives are the same as Tax Exempt
I. Based upon the original capital raised from BUC$holders of $183,032,400,
distributions of $105,063,540 as of March 31, 1997, and an Adjusted Net Asset
Value of $150,666,979, the Related General Partners believe that objectives (i)
and (ii) above were substantially met and objective (iii) above has not been
met and will not be realized until there has been a general improvement in the
real estate market.
Tax Exempt III. Original investment objectives are the same as Tax Exempt
I. Based upon the original capital raised from BUC$holders of $61,632,500,
distributions of $32,346,018 as of March 31, 1997, and an Adjusted Net Asset
Value of $43,031,833 the
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<PAGE>
Related General Partners believe that objectives (i) and (ii) above were
substantially met and objective (iii) above has not been met and will not be
realized until there has been a general improvement in the real estate market.
Since the Units (other than the Units of Tax Exempt I) are not listed on
any national or regional stock exchange, nor quoted on the Nasdaq National
Market, there has been limited liquidity available to BUC$holders. Secondary
market sales activity in the Units of Tax Exempt II and III has been limited
and sporadic, with less than five percent of all outstanding Units traded
(excluding intra-family transfers) during 1996. Daily trading volume for Units
of Tax Exempt I averaged 6,688 Units per day in 1996. Based upon information
provided by Partnership Spectrum compiled from approximately twelve secondary
market firms for the twelve months from December 1, 1995 through November 30,
1996 (and, with respect to Tax Exempt I, the American Stock Exchange), during
the twelve months ended December 31, 1996, secondary (and American Stock
Exchange) market sales prices were generally below the Adjusted Net Asset
Values of the Partnerships. See "THE PARTNERSHIPS--Secondary Market in
Partnership Units." See "FAIRNESS--Comparison of Alternatives to the
Consolidation--Secondary and Market Prices for Units."
The offering materials for the Partnerships generally contemplated
investment holding periods between ten years and twelve years following the
date of the last Partnership investment, unless economic conditions indicated
that a variation from those periods was in the best interests of the
BUC$holders.
The following table sets forth, with respect to each Partnership, the age
of the Partnership relative to the anticipated holding period of the
Partnership's investments as set forth in the applicable offering materials:
Original Anticipated Holding
Period of the Partnerships
Remaining
Original Anticipated
Last Date Anticipated Holding
Assets Holding Period
Partnership Acquired Period (years) (years)
- --------------- ----------- ---------------- -----------
Tax Exempt I 2/12/87 10-12 0-2
Tax Exempt II 7/31/87 10-12 0-2
Tax Exempt III 5/1/89 10-12 2-4
Recent Purported Tender Offer for Tax Exempt II. On April 24, 1997,
various entities for which MacKenzie Patterson, Inc. is a general partner or an
agent (collectively, the "Offerors") notified the Related General Partner of
Tax Exempt II that they were making a tender offer for up to 177,500 Units of
Tax Exempt II at a price of $10.50 per Unit. At the request of the Related
General Partner, the Court issued an order to show cause requiring the Offerors
to show cause why they should not be held in contempt and required to cease and
desist from pursuing their tender offer. The application for the order to show
cause was based on the fact that, among other matters, (i) the Court's
preliminary Order enjoined BUC$holders and persons acting in concert with them
from making a tender offer for any Units of any of the Partnerships pending
approval of the Consolidation and (ii) the tender offer will interfere with the
Court's jurisdiction and the orderly consideration and administration of a
settlement of the Class Action. See "SUMMARY--The Consolidation--
Restrictions on Transfers and Other Activities Prior to Final Approval of
Consolidation." The Court held a hearing on the matter on May 19, 1997 at which
time the Court enjoined the Offerors' tender offer until further order by the
Court.
Description of the Litigation
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group Inc. et al. (CV-93-654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of BUC$holders in the Partnerships against the Partnerships, PSI, the P-B
General Partner and a number of other defendants including certain other
partnerships (the "Other Partnerships") sponsored by Prudential and affiliates
of Related. Plaintiffs alleged violations of the Racketeer Influenced and
Corrupt Organizations Act ("RICO") statutes, breach of fiduciary duty, fraud,
deceit and negligence, and demanded an accounting. Plaintiffs sought
unspecified compensatory, punitive and treble damages, and rescission,
including costs and attorneys' fees. PSI and the P-B General Partner have
previously settled claims against them in the Litigation.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, together with a number of other actions, was transferred
to a single judge of the Court and consolidated for pretrial proceedings under
the caption In re Prudential Securities Incorporated Limited Partnerships
Litigation (MDL Docket No. 1005). On June 8, 1994, plaintiffs in the
transferred cases filed a complaint (the "Consolidated Complaint") covering,
for pretrial purposes, all of the transferred actions ("Constituent Actions")
and their constituent complaints (the "Constituent Complaints"), and naming as
defendants, among others, Prudential and the Related General Partners. The
Partnerships are not named as defendants in the Consolidated Complaint
(although they remain named-defendants in certain of the Constituent
Complaints), but the names of the Partnerships are listed as being among the
limited partnerships at issue in the case.
The Consolidated Complaint alleges violations of the federal and New
Jersey RICO statutes, fraud, negligent misrepresentation, breach of fiduciary
duties, breach of third-party beneficiary contracts and breach of implied
covenants in connection with the marketing
35
<PAGE>
and sales of the Units. In particular, the Consolidated Complaint alleges
material misrepresentations and omissions respecting the level of safety,
income and growth and complains about the illiquidity of the Units.
Plaintiffs request relief in the nature of rescission of the purchase of
the Units and recovery of all consideration and expenses in connection
therewith, as well as compensation for lost use of money invested less cash
distributions; compensatory damages; consequential damages; treble damages for
defendants' RICO violations (both federal and New Jersey); general damages for
all injuries resulting from negligence, fraud, breaches of contract, and
breaches of duty in an amount to be determined at trial; disgorgement and
restitution of all earnings, profits, benefits and compensation received by
defendants as a result of their unlawful acts; costs and disbursements of the
action; reasonable attorneys' fees; and such other and further relief as the
Court deems just and proper.
On November 28, 1994, the Court deemed certain of the Constituent
Complaints (including Kinnes) amended to incorporate into the Constituent
Complaints the new allegations and new parties (e.g., the Related General
Partners) set forth in the Consolidated Complaint.
The defendants have vigorously denied and continue to deny all liability
to the Class Members and all allegations of wrongdoing directed at defendants
in the Consolidated Complaint. Notwithstanding the foregoing, settlement
discussions with the plaintiffs have resulted in proposed settlements with
some, but not all, of the defendants. In particular, after a fairness hearing
on November 17, 1995, the Court, among other matters, granted (i) final
approval to the class certification and (ii) final approval of a partial
settlement of the Class Action against PSI and the P-B General Partner pursuant
to which they agreed to establish a settlement fund of $110 million. Settlement
negotiations with respect to defendants other than Prudential and Related are
continuing.
The Related Settlement
History of Settlement Negotiations. Related first explored with Class
Counsel the possibility of a settlement of the Litigation at a meeting on or
about August 8, 1994. During that meeting, Related described the broad outlines
of a settlement involving a monetary payment and the reorganization of the
Partnerships and the Other Partnerships. As a result of that meeting, and at
Class Counsel's request, on or about September 26, 1994, Related delivered to
Class Counsel a written outline of a possible settlement. That outline assumed
that the P-B General Partner would be negotiating a settlement with Class
Counsel which would result in, among other things, the P-B General Partner's
withdrawal as a general partner from each of the Partnerships and the Other
Partnerships without compensation for doing so.
For approximately one year thereafter, there was little communication with
Class Counsel regarding a possible settlement. During that time Class Counsel
negotiated and ultimately reached a settlement with PSI and the P-B General
Partner in the amount of $110,000,000.
On July 11, 1995, Related met with Class Counsel to review certain aspects
of the proposal that had been made. On August 17, 1995, Related sent to Class
Counsel a draft memorandum of understanding that contained more detail than the
original August 1994 settlement outline. At about this time, Related and PSI
determined that the P-B General Partner would be compensated by Related for
withdrawing as a general partner of the Partnerships and the Other
Partnerships. As a result, Related sought to reduce the cash component of the
settlement inasmuch as it would now have to compensate the P-B General Partner
for its interests. Class Counsel, however, refused.
On September 14, 1995, Class Counsel delivered a term sheet to Related
containing a draft of the settlement terms. A series of meetings then ensued
between Related, its counsel, Class Counsel and their financial consultant,
including meetings on September 19, 1995, October 19, 1995, December 1, 1995,
December 7, 1995, December 15, 1995 and January 3, 1996. Various issues were
negotiated at those meetings including the structure and terms of the
Consolidation, the scope of releases to be given, the scope of the monetary
class and the equitable class, the extent to which fees payable by the
Partnerships would be reduced, the extent to which Related would be responsible
for the costs attendant to the Consolidation and the extent to which Related
would be reimbursed if the Consolidation were approved and became effective. In
addition, during this period, at Class Counsel's request, Related delivered to
Class Counsel detailed information, including a break-down of the fees the
General Partners had been receiving from each Partnership and the reduction in
each type of fee which would inure to the benefit of the Partnerships.
On January 16, 1996, Related sent Class Counsel a term sheet outlining the
proposed Consolidation. On March 12, 1996, Class Counsel sent an initial draft
of the proposed Settlement Stipulation. On March 28, 1996, Class Counsel sent a
revised draft of the term sheet. On or about March 29, 1996, Related
communicated its comments regarding the term sheet and the proposed Settlement
Stipulation. As a result, on May 16, 1996, Class Counsel sent a revised draft
of the proposed Settlement Stipulation to Related. Subsequently, several
revised drafts of the proposed Settlement Stipulation and term sheets were
prepared and distributed in June 1996. In addition, Related met with Class
Counsel several times in June 1996 to discuss, among other items, the addition
of Pru-Bache Tax Credit to the equitable class and the equitable relief that
members of that partnership would be receiving. After the details of the
equitable relief had been determined, Related and representatives of Class
Counsel discussed and agreed upon the methodology that the Court would be asked
to approve pursuant to which Class Counsel would be compensated for their
services to the Equitable Class. See "CONFLICTS OF INTEREST--
Conflicts of Interest of Class Counsel." The Settlement Stipulation and other
documents respecting the Related Settlement were further negotiated, drafted
and revised during the period from June to December 1996.
36
<PAGE>
On December 24, 1996, Class Counsel and Related entered into the
Settlement Stipulation, which was preliminarily approved by order of the Court
dated December 31, 1996.
The Order, among other matters, (iii) certified two classes for settlement
purposes: one pursuant to Rule 23(b)(3) of the Federal Rules of Civil Procedure
for monetary relief (the "Monetary Class Members") and the other pursuant to
Rule 23(b)(1) and (2) for equitable relief (the "Equitable Class Members" and,
together with the Monetary Class Members, the "Class Members"); (iv) approved
the form of class notices ("Class Notices") and directed that the Class Notices
be sent, along with this Solicitation Statement, to the applicable Class
Members after review and approval by the Court subsequent to the filing and
clearance of the Solicitation Statement with the Commission; and (v) scheduled
a date for the Fairness Hearing at which all BUC$holders and Class Members will
have an opportunity to be heard. In addition, the Court enjoined: (i) the Class
Members from (a) transferring their Units prior to the Fairness Hearing unless
the transferee agrees to be bound by the Related Settlement, (b) conducting a
tender offer for Units, or (c) transferring their right to vote or granting a
proxy with respect to the Consolidation; and (ii) the General Partners from (a)
recognizing or processing transfers of Units except in accordance with the
Order, and (b) making the list of unitholders in each Partnership available to
any person seeking to conduct a tender offer.
The Monetary Class Members consist of, among others, all persons who
between January 1, 1980 and June 8, 1994 purchased Units, regardless of whether
they currently hold Units, excluding those BUC$holders who have previously
settled or litigated to conclusion with PSI or the P-B General Partner in
arbitrations or court proceedings other than MDL Docket No. 1005. The Equitable
Class Members consist of, among others, all current holders of Units,
regardless of whether they have settled with PSI or the P-B General Partner.
There is substantial overlap between the two classes and they are not mutually
exclusive. Accordingly, many people will be a member of both classes. However,
some Monetary Class Members will not be members of the Equitable Class (e.g.,
persons who purchased their Units between January 1, 1980 through June 8, 1994
but who have sold their Units and are no longer BUC$holders). Conversely, some
Equitable Class Members will not be members of the Monetary Class (e.g.,
persons who are current BUC$holders but who purchased their Units after June 8,
1994). If a person who is a member of both classes opts out of the Monetary
Class, he will still be able to sue individually for money damages
notwithstanding the fact that he remains a member of the Equitable Class.
Conversely, a person who is an Equitable Class Member who is also a Monetary
Class Member will be able to object to the Consolidation in response to the
Solicitation Statement without opting out of the Monetary Class. However,
Equitable Class Members whose Partnership is a Participating Partnership may
not opt out of the Equitable Class even if they object to the Consolidation.
Summary of Related Settlement; Effect on Rights of BUC$holders. The
Related Settlement is comprised of two parts, the Monetary Settlement, in which
only Monetary Class Members may participate, and the Equitable Settlement, in
which only Equitable Class Members will participate.
The Monetary Settlement requires Related to pay $2,058,333 (the
"Settlement Amount") in settlement of its portion of the Monetary Class claims.
The Settlement Amount, less Court-approved fees and expenses, will be
distributed among Monetary Class Members in accordance with a plan of
allocation that was formulated by Class Counsel and approved by the Court.
Equitable relief provided to the Equitable Class Members as part of the
Related Settlement consists of (a) the Consolidation and/or (b) the withdrawal
of the P-B General Partner as a general partner of each of the Partnerships.
The Related Settlement will result in the full and complete settlement,
discharge and release of the claims by Monetary Class Members against the
Related General Partners and their affiliates in connection with or which arise
out of the allegations set forth in the Consolidated Complaint or in any
pleading in any Constituent Action or which relate to (i) the marketing,
purchase, sale or holding of Units during the period January 1, 1980 through
June 8, 1994 or (ii) the operation, oversight, monitoring or management of the
Partnerships and Other Partnerships during such period (other than claims,
rights, causes of action or liabilities described in this clause (ii) that are
based on actual fraud committed by the Related General Partners, their
officers, directors and employees). Each BUC$holder who invested in a
Partnership that is part of the Consolidation is restrained from commencing or
prosecuting any settled claims.
If the Related Settlement is approved by the Court, all Participating
BUC$holders will release and discharge, and be enjoined from bringing, all
claims against the Related General Partners and their affiliates based on
allegations similar to those made in the Consolidated Complaint or in any
Constituent Action and that seek equitable relief different from that provided
by the Related Settlement. If the Related Settlement is approved by the Court,
all Participating BUC$holders will also release and discharge, and be enjoined
from bringing, all claims against the Related General Partners, their
affiliates, the P-B General Partner and its affiliates relating to or arising
out of the terms or implementation of the Related Settlement with the Equitable
Class, the Consolidation, and the withdrawal of the P-B General Partners. If
the Related Settlement is approved by the Court, all non-Participating
BUC$holders will release and discharge, and be enjoined from bringing, all
claims against the Related General Partners, their affiliates, the P-B General
Partner and its affiliates arising out of or relating to the withdrawal of the
P-B General Partner.
The Related General Partners will advance payment for all costs of notice
and administration of the Related Settlement. However, if the Monetary
Settlement is approved, the Related General Partners will be reimbursed,
subject to Court approval of such reimbursement, for all costs of notice and
administration incurred by the Related General Partners in connection with the
Monetary Settlement in excess
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<PAGE>
of $100,000. Such reimbursement will be made from the settlement pool created
by the Related General Partners cash settlement payment. The Related General
Partners will initially pay all expenses incurred in connection with the
Equitable Settlement. If approval of the Consolidation is obtained, the Company
will reimburse the Related General Partners for the expenses incurred in
connection with the Consolidation. If the Consolidation is not consummated for
any reason then the Related General Partners shall bear all costs related to
the Equitable Settlement and shall not be entitled to any reimbursement of such
costs from the Partnerships.
Right to Terminate. The Related General Partners may, at their discretion,
terminate the Related Settlement for any of the following reasons: (1) requests
for exclusion from the Monetary Class are validly filed by persons otherwise
entitled to be Monetary Class Members who purchased Units in the Partnerships
and other Partnerships having an aggregate original purchase price equal to or
greater than a certain specified amount agreed upon by Class Counsel and the
Related General Partners; (2) the Court fails or declines to enter the Order
and final judgment within 180 days after the Fairness Hearing; (3) the Court
enters an alternative judgment; (4) the action entitled Romano v. Prudential
Insurance Company of America, No. 94 Civ. 3527 is not dismissed with respect to
the Related General Partners and their affiliates named as defendants in such
action; (5) the requirements of one of the two Minimum Participation scenarios
are not satisfied or such Minimum Participation requirements are met but, as
permitted by the Settlement Stipulation, Related refuses to proceed without
100% Participation; or (6) the Court has not approved the Related Settlement,
including the Consolidation.
Consolidation Approval Procedure. Approval of the Equitable Settlement
and, therefore, the Consolidation is in the sole discretion of the Court. The
Equitable Settlement provides that, assuming certain other conditions are met,
a Partnership will participate in the Consolidation unless BUC$holders holding
more than 33-1/3% of the outstanding Units in such Partnership object to the
Consolidation. BUC$holders have until August 18, 1997 to object to the
Consolidation. Thus, a Partnership will participate in the Consolidation if (a)
BUC$holders holding less than 33-1/3% of the outstanding Units of a given
Partnership object to including that Partnership in the Consolidation, (b) the
Court approves of the Partnership being included in the Consolidation, (c) the
P-B General Partner withdraws as a general partner from each of the
Partnerships, and (d) the other terms and conditions of the Settlement
Stipulation are satisfied or waived. Under the applicable Partnership
Agreements, if the Consolidation were not subject to a judicial determination
and court order following a Fairness Hearing, it could only be consummated by
obtaining the affirmative approval of holders of a majority of the outstanding
Units.
In addition to a BUC$holder's right to object to the Consolidation by
delivery of an Objection Notice pursuant to this Solicitation Statement,
BUC$holders may object to any aspect of the Related Settlement, including the
Consolidation, by following the procedures set forth in the Class Notice which
accompanies this Solicitation Statement. However, if the Court approves the
Consolidation after the Fairness Hearing and an objecting BUC$holder is a
BUC$holder in a Participating Partnership, such BUC$holder may not opt out of
the Equitable Settlement.
If more than 33-1/3% of the BUC$holders of a Partnership object to the
participation of that Partnership in the Consolidation, that Partnership will
not participate in the Consolidation and will continue to operate as a separate
legal entity with its own existing properties and other assets and its own
existing liabilities. Consummation of the Consolidation with respect to
Participating Partnerships will not have any impact on the investment
objectives, policies or restrictions applicable to a Non-Participating
Partnership, or affect the fees and distributions payable by such
Non-Participating Partnership to its general partners and their affiliates
(although, at the Related General Partner's option (and subject to Court
approval), the P-B General Partner will be required to withdraw from such
Partnership).
Class Counsel
Class Counsel consists of 25 law firms located throughout the United
States, each of which is unaffiliated with the Related General Partners. Such
firms were selected by the individual plaintiffs who commenced or intervened in
the Litigation, all of whom are BUC$holders, to represent and act on behalf of
BUC$holders in the Litigation, including settlement of the Litigation. Class
Counsel represented all BUC$holders in the Litigation. Class Counsel are
coordinated by an Executive Committee consisting of seven nationally recognized
law firms with extensive experience in the prosecution and resolution of
securities class actions. The Executive Committee is chaired by: Melvyn I.
Weiss, Esq., Milberg Weiss Bershad Hynes & Lerach LLP, One Pennsylvania Plaza,
New York, New York 10119; and Lawrence A. Sucharow, Esq., Goodkind Labaton
Rudoff & Sucharow LLP, 100 Park Avenue, New York, New York 10017.
Each of the above law firms is experienced in representing investors in
securities and limited partnership class action litigation, and each has
represented investors in complex settlement negotiations resulting in a variety
of transactions. Class Counsel have recovered billions of dollars on behalf of
class members and have been involved in numerous actions the resolution of
which required the issuer to take remedial actions.
Class Counsel investigated the claims asserted against the Related General
Partners in the Litigation, conducted discovery, including the review of
numerous documents and the taking of depositions, and conducted extensive
negotiations with the Related General Partners resulting in the Related
Settlement. Prior to agreeing to the final terms of the Related Settlement, of
which the Consolidation forms a part, and recommending it to the Equitable
Class Members, Class Counsel retained the services of Oppenheimer & Co., a well
known investment banking firm, and obtained the Fairness Opinion. See "FAIRNESS
OPINION AND APPRAISALS."
The fees of Class Counsel, as approved by the Court, will be paid from the
cash settlement pool provided by the Related General Partners and other
defendants pursuant to the terms of the Related Settlement and settlements
reached with other defendants in the Litigation.
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<PAGE>
Class Counsel may be deemed to have a conflict of interest in determining
to recommend to Equitable Class Members that they not object to the Related
Settlement, of which the Consolidation is a part, because Class Counsel intend
to apply to the Court for an award of fees and reimbursement of expenses. Such
fees would be payable in Counsel's Fee Shares which will be issued only in the
event that the Consolidation results in an increase in the value of investor
equity as determined one year following the commencement of trading of the
securities to be issued to Equitable Class Members pursuant to the
Consolidation. The maximum amount of Shares which may be issued to Class
Counsel will be equal to 3.95% of the total number of Shares outstanding as of
the Anniversary Date. See "CONFLICTS OF INTEREST--Conflicts of Interest of
Class Counsel." The settlement and Class Counsel's fee application are subject
to the approval of the Court. See "BACKGROUND, BENEFITS OF, AND REASONS FOR,
THE CONSOLIDATION--Description of the Litigation."
Alternatives to the Consolidation
Before deciding to recommend the Consolidation, the Related General
Partners examined certain alternatives to the proposed Consolidation in an
effort to achieve maximum benefits to each BUC$holder. These alternatives were
(a) continued management of the Partnerships as currently structured and (b)
liquidation of the Partnerships through entire portfolio sales or sales of
individual assets. For a detailed quantitative comparison of the alternatives
to the Consolidation, see "FAIRNESS."
Furthermore, inasmuch as the Consolidation is being proposed by the
Related General Partners in connection with the Related Settlement, they did
not actually consider other transactions as alternatives to the Consolidation.
However, in comparing the alternatives examined, the Related General Partners
considered the fact that the Partnerships' offering prospectuses contemplated a
holding period for their respective assets of ten to twelve years from the date
of a Partnership's last acquisition of assets (which dates of acquisition range
from 1987 to 1989). However, such holding periods were only estimations made at
the time of the offering of Units and, as more fully discussed below, due to
current real estate market conditions, the Related General Partners do not
believe that the sale of the assets at this time would be in the best interest
of BUC$holders. Finally, the Related General Partners are not required to cause
the Partnerships to sell their assets at any specific time.
Continuation of the Partnerships
Benefits of Continuation. An alternative to the Consolidation would be to
continue each of the Partnerships in accordance with its existing business
plan. Each Partnership would remain a separate legal entity, with its own
assets and liabilities, governed by its existing Partnership Agreement.
BUC$holders in favor of this option should consider objecting to the
Consolidation. Continuing the Partnerships without change has a number of
benefits, including the following: (i) each Partnership would remain a separate
entity, with its own assets and liabilities, and its original investment
objectives, consistent with the guidelines, restrictions and safeguards in its
Partnership Agreement; (ii) the Partnership's performance would not be affected
by the performance of the other Partnerships, including the investment
objectives, interests and intentions of the BUC$holders in the other
Partnerships; (iii) there would be no change in the nature of the BUC$holders'
investment or relative voting rights; (iv) there would be no change in the cash
distribution policy (solely as a result of not participating in the
Consolidation) and (v) the Participating Partnerships would not incur the
expenses associated with the Consolidation, which are estimated to be
approximately $1,984,125.
In addition, continuing the Partnerships without change avoids the
disadvantages inherent in the Consolidation. These disadvantages include, among
others: (i) the uncertainties of allocating the Shares to be issued by the
Company on a fair and equitable basis; (ii) the uncertain market value of the
Shares to be issued by the Company; (iii) the fundamental change in the
investment caused by the Consolidation; and (iv) the risks and other detriments
set forth in this Solicitation Statement.
Detriments of Continuation. Maintaining the Partnerships as separate
entities may have the following potentially negative results when compared with
the benefits that the Related General Partners perceive may be derived from the
Consolidation: (i) in the case of Tax Exempt II and III, illiquidity of
investment on a current basis due to the lack of a large and established
secondary market and in the case of Tax Exempt I in particular, the inability
to take advantage of the increased size resulting from the Consolidation which
is expected to improve liquidity and result in a larger portion of
institutional ownership, both of which may favorably affect share prices; (ii)
a less efficient and cost effective exit strategy for BUC$holders wishing to
liquidate their investment at some future date; (iii) duplication among the
Partnerships in reporting, filing and other costly administrative services;
(iv) in the case of Tax Exempt II and III, difficulty in valuing the investment
due to the limited secondary market for Units; (v) inability to achieve cost
savings; and (vi) less flexibility and control in actively managing the
portfolio.
Valuation Comparison. As discussed in the more detailed quantitative
analysis of the alternatives to the Consolidation, the Related General Partners
have estimated that the going-concern value of the Units per $1,000 of Original
Investment for each Partnership would be less than the highest estimated value
of the Shares (on the same per $1,000 of Original Investment basis) and more
than the lowest estimated value of the Shares (on the same basis). See
"FAIRNESS--Comparison of Alternatives to the Consolidation".
Liquidation of the Partnerships
Benefits of Liquidation. Although not considered by the Related General
Partners to be a viable option at this time, each of the Partnerships could
immediately dissolve, sell its assets, pay off existing liabilities and
distribute the net liquidation proceeds to the BUC$holders and General Partners
in accordance with the distribution provisions of its Partnership Agreement.
The primary benefit of
39
<PAGE>
this strategy is that it would allow for an immediate final liquidation of all
of the BUC$holders's investment and a distribution of cash equal to the net
liquidation proceeds.
Detriments to Liquidation. Circumstances currently affecting the financial
and real estate markets must be taken into consideration in analyzing the
desirability of selling the Partnerships' assets, including timing of the sale
of assets. Although in recent years the performance of certain types of real
estate assets in many parts of the country have shown marked improvement,
overall conditions including those relating to the Underlying Properties, have
not fully recovered to the levels prevailing when most of the Partnerships'
FMBs were originally underwritten and acquired, and the rent level and thus
market values of many of the Underlying Properties have not increased to levels
sufficient to allow BUC$holders (through the Partnerships' ownership of FMBs)
to obtain a return of their Original Investment. The Related General Partners
believe that current buyers of FMBs would in no event pay more than the face
amount of the FMBs and further would highly discount projected Contingent
Interest payable from ongoing cash flows on certain FMBs and from net sales
proceeds in excess of the face bond amounts and would make their purchase
valuations based on no more than a five year holding period. In the aggregate,
these factors have the effect of greatly reducing the value of FMBs in a
liquidation of the Partnerships' assets. It is not certain whether market
conditions are likely to improve sufficiently in the near future to permit
asset sales at more favorable market values, but, real estate and investments
historically have been considered a stable long term investment despite
periodic market fluctuations. The Related General Partners believe that
conditions may improve over time and the BUC$holders may realize payments of
Contingent Interest from participations in Net Property Cash Flow or Net Sale
or Repayment Proceeds resulting from appreciation in the value of the
Underlying Properties. The Related General Partners believe that holding,
rather than liquidating, the Partnerships' assets, with the expectation that
market values will continue to improve over the long term is in the best
interest of the BUC$holders and could improve their overall investment return.
Based on the factors described above, the Related General Partners concluded
that a sale of the Partnerships' assets and a liquidation of the Partnerships'
at this time would be premature.
A liquidation would be expected to occur in one of two ways: (i) on an
asset-by-asset basis, which would likely realize optimum prices for each asset,
but which would be expensive, drawn-out, and result in the protracted life of a
Partnership until all of its assets could be sold and the entity dissolved; or
(ii) on a portfolio basis to one or two buyers, which may result in a less
drawn-out liquidation period and less protracted life of the Partnership, but
would likely result in some potentially steep price reductions or other
additional costs to compensate a buyer for purchasing assets which may not
entirely fit its investment criteria. There could, in addition, be potentially
significant partnership administrative and overhead costs incurred as the
Partnerships windup, which costs are largely independent of asset size and
nature, and which over an extended liquidation period, could reach
disproportionately high levels in relation to revenues, thereby further
reducing the portion of net sales proceeds ultimately available for
distribution to BUC$holders from the liquidation.
Potential Acquisition of Partnership Assets
The Related General Partners believe there are, at this time, no ready
buyers for the Partnerships' FMBs in bulk at optimum prices. One potential
buyer, however, would be an institutional high yield entity interested in
tax-exempt yields of 8% or more, but would purchase based on 75-80% loan to
value ratios and minimum 1.25 x debt service coverage. Such criteria would
require the Partnership to take steep discounts on the sale of FMBs (25-30%) to
induce such a buyer to purchase FMBs, either piecemeal or in bulk. Another
potential buyer would be "vulture fund" type entities interested in buying the
portfolio at discounted prices in order (through foreclosure or deed-
in-lieu transactions) to realize enhanced values derived from actual ownership
of Underlying Properties. Again, such a buyer would require steep discounts in
order to effect profits from such a scenario.
Further, in a liquidation sale of FMBs, the Partnerships would forfeit not
only the difference between liquidation sales proceeds and the current value of
FMBs and potential future value increases due to appreciation of the Underlying
Properties, but would also incur the costs of the liquidation including
potentially significant overhead costs if the liquidation period became
extended.
Benefits of, and Reasons for, the Consolidation
In deciding whether to recommend the Consolidation to BUC$holders, and in
negotiating the terms of the Consolidation, the Related General Partners and
Class Counsel considered the benefits to be derived as a result of the
Consolidation. The following is a brief discussion of the primary advantages
the Consolidation is expected to generate for BUC$holders.
Increase in Liquidity from Listing and Increased Size. Currently, the
Partnerships' Units (other than Tax Exempt I) are traded only through an
informal and inefficient secondary market. The Shares will be approved for
listing on the American Stock Exchange (or other national exchange or market)
upon official notice of issuance prior to consummation of the Consolidation.
The Related General Partners believe that listing the Shares on the American
Stock Exchange is likely to substantially enhance the liquidity of the
investment. In particular and specifically as it relates to Tax Exempt I, the
increased size of the Company's portfolio in relation to the portfolio of FMBs
of any single Partnership, is expected to assist the Company in achieving
increased liquidity through higher stock trading volumes and a larger portion
of institutional ownership attendant with a market capitalization in excess of
$100 million over that currently available to any of the Partnerships,
including Tax Exempt I which is already listed. The Related General Partners
believe the Consolidation offers Participating BUC$holders a faster and more
efficient means of liquidating their investment than if the Partnerships were
to attempt to liquidate their portfolios through conventional asset sales or if
the BUC$holders were to sell their Units in the relatively illiquid secondary
market for such Units.
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Increased Distributions. Lower costs resulting from the elimination of a
portion of the fees payable to the P-B General Partner and the contribution to
the Company of one-half of the P-B Interest acquired by the Manager as well as
reduced costs associated with the operation and maintenance of the Partnerships
as public partnerships and certain economies of scale resulting from the common
beneficial ownership and management of the Participating Partnerships'
portfolio is expected to generate an increase in the funds available for
distribution from that which could be generated by the individual Partnerships.
Furthermore, the Consolidation will simplify the preparation of financial
statements, tax returns, investor information and reports and filings otherwise
required. Certain cost savings will be enhanced to the extent that more than
the minimum number of Partnerships participate in the Consolidation. The
Company's 1996 pro forma financial statements indicate that BUC$holders of Tax
Exempt II and Tax Exempt III would have received lower distributions
(approximately 1% or $0.56 per $1,000 of Original Investment less than 1996
annual distributions for Tax Exempt II and approximately 0.8% or $0.37 per
$1,000 of Original Investment less than 1996 annual distributions for Tax
Exempt III) had the Consolidation occurred on January 1, 1996, with 100%
Participation. However, the Related General Partners believe that additional
cost savings together with the benefits anticipated to be derived from the
Company's new business plan, neither of which is reflected in the Company's
1996 pro forma financial statements, will be achieved, thereby resulting in a
progressive increase in distributions to BUC$holders including those in Tax
Exempt II and Tax Exempt III. There can be no assurance that such additional
cost savings or benefits derived from the Company's new business plan will be
achieved.
Reduction in Aggregate Annual Fees. The Consolidation will result in lower
aggregate annual fees being paid by the Company to the Manager than the
aggregate annual fees currently paid by the Partnership to the General
Partners. In addition, the Related General Partners believe that the Company
will be able to achieve cost savings as a result of combining the services
currently provided to the Partnerships, thereby increasing the aggregate cash
flow which would be available for distribution. See "PRO FORMA FINANCIAL
INFORMATION." Although the formulas used to calculate all post-Consolidation
fees (except the Bond Selection and Loan Servicing Fees which remain unchanged)
reflect reduced amounts from those currently payable to the General Partners,
the gross amount of such fees could be higher post-Consolidation due to the
increased size of the Company's portfolio as a result of new acquisitions to be
made by the Company (although such fees will still be less than they would have
been under the old formulas).
The following is a comparison of (i) the aggregate fees paid by each of
the Partnerships to the General Partners, to (ii) the fees that will be paid by
the Company to the Manager.
Summary of Reduction in Fees
<TABLE>
<CAPTION>
Percentage
Post- (Decrease)/
Current Consolidation Increase
Fees Fees* in Fees
-------- --------------- ------------
<S> <C> <C> <C>
Tax Exempt I
Bond Selection Fee(1) 2.00% 2.000% 0%
Bond Placement Fee(2) 4.00% 2.000% (50%)
Partnership Management Fee/Special
Distribution from Adjusted Cash Flow(3) 0.50% 0.375% (25%)
Loan Servicing Fee(4) 0.25% 0.250% 0%
Tax Exempt II
Bond Selection Fee(1) 2.00% 2.000% 0%
Bond Placement Fee(2) 4.00% 2.000% (50%)
Partnership Management Fee/Special
Distribution from Adjusted Cash Flow(3) 0.50% 0.375% (25%)
Loan Servicing Fee(4) 0.25% 0.250% 0%
Tax Exempt III
Bond Selection Fee(1) 2.00% 2.000% 0%
Bond Placement Fee(2) 4.00% 2.000% (50%)
Special Distribution from Adjusted Cash Flow(3) 0.50% 0.375% (25%)
Loan Servicing Fee(4) 0.25% 0.250% 0%
</TABLE>
- --------------
* The Manager may also receive (a) incentive share options which will be
issued only if the Company's distributions in any year exceed $0.9517 per
Share (i.e., the 1996 pro forma distributions set forth in this Solicitation
Statement) and if granted by the Compensation Committee and (b) a
Liquidation Fee payable only if the Company is dissolved and such
dissolution and liquidation of the assets of the Company is supervised by
the Manager.
(1) Based on the principal amount of each FMB acquired or originated by the
Company.
(2) This fee is and will continue to be paid by the borrower and not the
Company.
(3) Per annum based on the Company's Total Invested Assets; payable by the
Company quarterly, in arrears, at the end of each calendar quarter. Tax
Exempt I and II pay a Partnership Management Fee; Tax Exempt III and the
Company pay a Special Distribution.
(4) Per annum based on the outstanding principal amount of the Company's
Mortgage Loans; payable by the Company quarterly, in arrears, at the end
of each calendar quarter.
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Pursuant to the Partnership Agreements, the Trust Agreement and the
Management Agreement, the General Partners and the Manager are entitled to
reimbursement of certain administrative costs incurred by them on behalf of the
Partnerships or the Company. Reimbursement of such costs is included in General
Administrative Expenses ("G & A") in the pro forma and historical financial
statements. The Related General Partners believe that as a result of the
Consolidation the Company's G & A will be reduced as a result of combining
services currently provided to the Partnerships. Pursuant to the Management
Agreement, the maximum amount of expenses which the Company may reimburse the
Manager is $200,000 in any given year of operations, subject to the following
adjustments: the overall limit on reimbursements for administrative expenses
will be increased (i) after the Company's first year of operations and each
year thereafter by a percentage equal to the Consumer Price Index for the year
then ended, and (ii) proportionately as the Company increases its asset
portfolio.
For more information regarding aggregate compensation paid and
distributions made by the Company and the Partnerships on a pro forma and
historical basis, see "FAIRNESS--Compensation, Reimbursements and Distributions
to the General Partners."
Increase in Trading Value of Shares. The Related General Partners expect
the stabilized market price of the Company's Shares will increase relative to
the current market/trading value of the Units. This belief is based on the
expectation that the marketplace will place a greater value on an entity which
has the ability to grow and has a significant enough capitalization to be able
to access the financial markets and achieve greater liquidity, none of which
qualities exist with the Partnerships. Notwithstanding the expected outlook for
the stabilized value of the Company's Shares, the Related General Partners
recognize that there is substantial uncertainty as to the prices at which the
Shares will trade in the short-term following the consummation of the
Consolidation. Trading pressure resulting from BUC$holders wishing to sell
their Shares immediately after the Effective Date may result in the trading
price of the Shares being artificially depressed until the market for the
Shares is stabilized.
Ability to Raise Capital. The Company will have access to financing and
the capital markets with the ability to fund future growth and capital
requirements through the issuance of additional publicly-traded and
privately-placed securities and the raising of funds from debt and mortgage
obligations, subject to a maximum leverage limit equal to 50% of the Company's
Total Market Value (measured at the time such assets are leveraged).
Growth. The Company expects to grow through the acquisition and ownership
of additional FMBs. The Manager intends to retain affiliates of Related to
provide the services to the Company required to be provided by the Manager.
Related has substantial experience in raising capital and acquiring, holding
and servicing FMBs.
Diversification. The Company's initial FMB portfolio will be expanded and
more diversified in terms of geographic location, number and type of assets
than that of any of the Partnerships. Such expansion and diversification may be
further enhanced through the acquisition of additional FMBs. An expanded and
more diversified portfolio should result in greater protection against certain
risks associated with the ownership of real estate assets.
Withdrawal of P-B General Partner as a General Partner/Equity Holder. As
part of the Consolidation, the P-B General Partner will relinquish its general
partner interests in the Partnerships and will not receive an equity interest
in the Company. See "THE CONSOLIDATION AND RELATED TRANSACTIONS--Related
Transactions; Purchase Agreement between Related and the P-B General
Partner--Overview." The Manager, an affiliate of Related, will serve as the
sole manager to the Company and perform the investor services, accounting and
administrative responsibilities and functions that currently are performed by
the P-B General Partner.
Limited Liability. Similar to the limited liability of the BUC$holders of
the Partnerships, Shareholders will not have any liability solely as a result
of their status as Shareholders under Delaware law for obligations of the
Company. See "COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE COMPANY AND
BUC$HOLDERS OF THE PARTNERSHIPS."
Cash Flow. Currently, among other compensation, the General Partners are
entitled to receive 2% of all distributions from the Partnerships. As a result
of the contribution of one-half of the P-B Interests to the Partnerships,
BUC$holders will receive a greater percentage of the Shares allocated to the
Partnerships and, therefore, a greater percentage of distributions as
Shareholders than they would have received as BUC$holders as follows:
<TABLE>
<CAPTION>
Percentage
Percentage of Percentage of Increase in
Cash Flow Cash Flow Percentage of
Distributable Distributable Distributable
to BUC$holders to Shareholders Cash Flow
---------------- ----------------- --------------
<S> <C> <C> <C>
Tax Exempt I 98.00% 98.50% .50%
Tax Exempt II 98.00% 98.50% .50%
Tax Exempt III 98.00% 98.50% .50%
</TABLE>
Sales and Refinancing Proceeds. The General Partner's interest in
distributions from capital transactions increases to between 10% and 11% after
BUC$holders of the Partnerships have received a specified return on their
original investment. In connection with the Consolidation, the Related General
Partners have eliminated their right to receive such increased distributions.
The Related General
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<PAGE>
Partners believe that it is unlikely that they would receive any increased
distributions from capital transactions under the current Partnership
Agreements.
Market Attractiveness. The Related General Partners expect that the
Company will be more attractive in the marketplace than the Partnerships, with
attendant benefits for its Shareholders. In particular, the Related General
Partners believe that the Company, with its capability for growth by making
additional investments will be viewed by the market as an operating business
and, therefore, the Shares may be expected to trade at a higher level than the
Units of the Partnerships which are closed-end funds (i.e., a "going concern"
should trade at a price which (i) is greater than the sum of its underlying
assets or (ii) represents a smaller discount to the value of its assets than a
closed-end fund; each of the Partnerships' Units currently trade sporadically
in the informal secondary market at a price which reflects a substantial
discount to the value of its underlying assets).
Reduction in Administrative Costs; Simplified Administration. Each year,
the Partnerships must prepare three separate annual audited financial
statements, as well as tax returns and investor communications, and throughout
the year provide other periodic reports to BUC$holders and the Commission. The
preparation of this material requires substantial expense, time and effort.
Furthermore, to the extent service providers, such as legal counsel,
accountants, appraisers and other professionals, render services benefitting
two or more of the Partnerships, costs and expenses associated with such
services must be fairly and equitably allocated among the Partnerships relative
to the benefits afforded the Partnerships. The Consolidation will reduce the
number of entities for which administrative services are required and eliminate
much of the duplication in reporting, filing and other administrative services,
thus simplifying administration and reducing administrative costs of the
consolidated entities. The Consolidation will eliminate the cumbersome process
of allocating common costs and expenses, and simplify the preparation of
financial statements, tax returns, investor information and reports and filings
otherwise required. In light of the foregoing, the Related General Partners
believe that the Consolidation will result in cost savings to Participating
BUC$holders. For information relating to the pro forma operating expenses of
the Company see "FINANCIAL STATEMENTS."
Consequences if Consolidation Not Completed
If the Consolidation is not completed, the Partnerships will continue to
operate as separate legal entities with their own assets and liabilities. There
will be no change in their investment objectives, policies and restrictions.
Disadvantages of the Use of Trust Form
The Company is a Delaware business trust subject to the Delaware Act. A
comparison of the limited partnership structure of the Partnerships and the
business trust structure of the Company is set forth under "COMPARISON OF
RIGHTS OF SHAREHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE PARTNERSHIPS."
There are various potential disadvantages in converting to the business trust
form of the Company, including the following: (a) the business trust structure
of the Company permits a wide range of business activities, thereby increasing
risks to Participating BUC$holders; (b) the business trust structure of the
Company permits perpetual existence, thereby eliminating the right of
Participating BUC$holders to receive cash proceeds from the sale or refinancing
of properties or the repayment of mortgages; (c) the business trust structure
of the Company permits the Board of Trustees to change the investment
objectives of the Company without a vote of Shareholders, thereby increasing
risk to Participating BUC$holders; and (d) in the business trust structure of
the Company, the rights of Shareholders against management of the Company may
be more restricted than in the limited partnership form of the Partnerships due
to the fact that the Trust Agreement includes provisions, among others, that
limit the liability of the Trustees to the Company and the Shareholders for
money damages in most circumstances and require the Company to provide a broad
indemnity to Trustees in contrast to the Partnership Agreements which contain
limitations on the General Partners' rights to indemnification. See "CERTAIN
PROVISIONS OF DELAWARE LAW AND THE TRUST AGREEMENT--Indemnification and
Limitation of Liability."
43
<PAGE>
THE CONSOLIDATION AND RELATED TRANSACTIONS
The Consolidation
Exchange of Units. If the Consolidation is approved by the Court, the
Participating Partnerships and the Company will enter into one or more
contribution agreements (the "Contribution Agreements") described below.
Consummation of the Consolidation is subject to certain conditions. See
"--Conditions to the Consolidation" below.
The Contribution Agreements will provide that (i) the Units will be
converted into the right to receive Shares based on the proportion which each
Unit represents of the total Units outstanding and the Units will be deemed
transferred to the Company in exchange for Shares; (ii) the respective Assignor
Limited Partners of the Partnerships will assign to the Company all of the
limited partnership interests it holds in such Partnerships; and (iii) the
Related General Partners and the Manager will assign their respective general
partner interests in such Partnerships to the Company, in each case, in
consideration for the issuance by the Company to the BUC$holders, the Related
General Partners and the Manager of the aggregate number of Shares allocated to
such Partnership in the Consolidation. The Company will issue to the
BUC$holders (as well as the applicable Related General Partners and the
Manager) Shares in proportion to the respective interests in distributions of
cash flow from operations of such persons in such Partnerships.
If the Consolidation is approved by the Court, the limited partners in the
Participating Partnerships (other than the Assignor Limited Partner) will be
deemed to have transferred to the Company their limited partnership interests
in exchange for Shares. Such Shares will be distributed to the respective
limited partners in proportion to the respective interests in distributions of
cash flow from operations of such limited partners in the Partnerships.
General Partner Interests. The Related General Partners and the Manager
will receive, in the aggregate, 1.5% of the aggregate Shares allocated to the
Participating Partnerships in the Consolidation, in respect of their general
partner interests in such Partnerships.
Amendments. The Court's final order will provide that the General Partners,
Assignor Limited Partners of each Participating Partnership and the Company, as
the sole BUC$holder of each Participating Partnership, may amend their
respective Partnership Agreements (the "Amendments") to the extent necessary to
implement and consummate the Related Settlement and the Consolidation. Such
Amendments and actions may include, but are not limited to, authorizing (i) the
P-B General Partner (A) to transfer its entire P-B Interest in each of the
Participating Partnerships to the Manager (who will not be admitted to the
Participating Partnerships as a general partner), and (B) to cease to be a
general partner of the Participating Partnerships; (ii) the Manager to
contribute to each Participating Partnership one-half of the P-B Interests
transferred to it by the P-B General Partner which interest shall thereupon be
deemed cancelled; (iii) each Related General Partner (A) to transfer its entire
general partner interest in each Participating Partnership to the Company in
exchange for Shares, and (B) to cease to be a general partner of the
Participating Partnerships; (iv) the Manager to transfer its remaining general
partner interest in the Participating Partnerships to the Company in exchange
for Shares; (v) the Assignor Limited Partner to transfer to the Company its
entire limited partnership interest in the Participating Partnerships; (vi) the
dissolution of the Participating Partnerships and, after satisfaction of
creditors of the Participating Partnerships, the distribution in kind to the
Company, as the sole BUC$holder and sole holder of general partner interests of
each Participating Partnership, of all of the assets of the Participating
Partnerships; and (vii) the continued indemnification of a withdrawing general
partner of each Participating Partnership for the period prior to such
withdrawal. See "CERTAIN PROVISIONS OF DELAWARE LAW AND TRUST AGREEMENT--
Indemnification and Limitation of Liability--Withdrawing/Terminated General
Partners."
Recommendation of the Related General Partners and Class Counsel. The
Related General Partners recommend the Consolidation. Class Counsel believes
that the Consolidation is in the best interests of the BUC$holders. The P-B
General Partner takes no position with respect to the Consolidation due to its
conflict of interests in selling the P-B Interests to the Manager. The Related
General Partners believe that an investment in the Company through the
ownership of Shares will provide greater overall benefits to BUC$holders than
the benefits derived from an investment in an individual Partnership or from
any of the alternatives to the Consolidation analyzed by the Related General
Partners. See "FAIRNESS" and "BACKGROUND, BENEFITS OF, AND REASONS FOR, THE
CONSOLIDATION--Alternatives to the Consolidation." This belief is based on a
comparison of the consideration to be received by BUC$holders with respect to
alternatives analyzed. Consequently, the Related General Partners and Class
Counsel recommend that the BUC$holders not object to the Consolidation.
However, BUC$holders are urged to consider carefully the factors described
under "RISK FACTORS" and the comparison of an investment in a limited
partnership versus an investment in the Company set forth under "COMPARISON OF
RIGHTS OF SHAREHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE PARTNERSHIPS."
BUC$holders are also urged to consult with their independent financial and tax
advisors prior to determining whether or not to object to the Consolidation.
The Related General Partners and Class Counsel are subject to conflicts of
interest with respect to the Consolidation. See "CONFLICTS OF
INTEREST--Conflicts of Interest of the Related General Partners," and
"--Conflicts of Interest of Class Counsel."
Objections Required to Prevent Consolidation. Pursuant to the Court's
Order preliminarily approving the Settlement Stipulation and subject to final
Court approval, a Partnership will participate in the Consolidation unless
BUC$holders holding more than 33-1/3% of the outstanding Units in such
Partnership object to the Consolidation. If a Partnership participates in the
Consolidation, all BUC$holders of such Partnership, including BUC$holders who
object to the Consolidation will participate in the Consolidation.
Additionally, such BUC$holders will have no appraisal rights in connection with
their Units.
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<PAGE>
Minimum Participation Requirement. Participation by all Partnerships is
not required in order for the Consolidation to be consummated. However, the
Consolidation will not be consummated unless it is approved by two of the three
Partnerships and, if there is less than 100% Participation, unless the Related
General Partners waive their right not to proceed with the Consolidation with
less than 100% Participation. See "Conditions to the Consolidation." The
Fairness Opinion considers the fairness of the Consolidation based on both 100%
Participation and the three Minimum Participation scenarios. See "FAIRNESS
OPINION AND APPRAISALS--Fairness Opinion."
Conditions to the Consolidation. The Company will not proceed to
consummate the Consolidation unless, among other things, (i) the Minimum
Participation requirement is met; (ii) the P-B General Partner withdraws as a
general partner of each Partnership and relinquishes its right to obtain an
equity or other interest in the Company in respect of the P-B Interests; (iii)
the Shares are approved for listing on the American Stock Exchange (or other
national exchange or market) subject to notice of issuance; and (iv) the Court
has approved the Related Settlement, including the Consolidation. The Minimum
Participation requirement has been included by the Related General Partners as
a condition to the Consolidation because the Related General Partners believe
that many of the expected benefits of the Consolidation, including increased
liquidity, reduced expenses and diversification can be achieved even if less
than all of the Partnerships participate in the Consolidation.
Prior to, and as a condition of, obtaining the Order and distributing this
Solicitation Statement, the Related General Partners received a letter from the
Commission in which it took a "no-action" position to the effect that, among
other matters, (i) the distribution by the Company of the Shares to the
BUC$holders, the Related General Partners and the Manager in the Consolidation
may be made without registration under the Securities Act of 1933, as amended
(the "Securities Act"), and (ii) the public resale of the Shares by (a) persons
that are not deemed to be affiliates of the Related General Partners or the
Manager may be made without registration under the Securities Act and without
compliance with Rule 144 promulgated under the Securities Act, and (b) persons
that are deemed to be affiliates of the Related General Partners or the Manager
may be made in compliance with certain other rules depending upon whether they
were affiliates of the Related General Partner or the Manager either before or
after the Consolidation.
Allocation of Shares. The total Shares allocated to the Participating
Partnerships (20,586,383 Shares, assuming 100% Participation) will be allocated
among the Participating Partnerships based on relative Adjusted Net Asset Value
assigned to each such Partnership. The Shares to be received in the
Consolidation will be allocated to each Participating BUC$holder, the Related
General Partners and the Manager in accordance with the respective Partnership
Agreements and his or its proportionate interest in distributions of cash flow
from operations of the Partnership. See "ALLOCATION OF SHARES."
Appraisals and Fairness Opinion. The Partnerships engaged C&W to appraise
the individual "as is" market value of the Underlying Properties securing the
Mortgage Loans. The Appraisals were prepared in connection with a valuation of
the real properties for purposes of complying with ERISA requirements and for
use in connection with the Partnerships' 1995 audit of their financial
statements. The Appraised Values were used, in part, to determine the value of
the FMBs which, together with the value of certain other non-FMB assets, less
debt outstanding, resulted in the Adjusted Net Asset Value of each of the
Partnerships. In addition, Class Counsel retained Oppenheimer to render its
opinion which concluded that, based on the assumptions and subject to the
qualifications and limitations stated therein, that the Consolidation,
including the allocation of Shares among the Partnerships is fair, from a
financial point of view, to the BUC$holders of the Partnerships assuming 100%
Participation and all other combinations of Participating Partnerships
(including the Minimum Participation scenarios). See "FAIRNESS OPINION AND
APPRAISALS," regarding C&W and Oppenheimer, any material relationships with,
and compensation received or expected to be received by C&W and Oppenheimer,
and summaries of the Appraisals and the Fairness Opinion.
Accounting Treatment. The Consolidation will be accounted for, using the
purchase method of accounting. Under this method, the Participating Partnership
with the BUC$holder group receiving the largest ownership in the Company (in
this case Tax Exempt II in all scenarios except where it is not a Participating
Partnership in which event Tax Exempt I would be the largest) will be deemed to
be the acquirer. As the surviving entity for accounting purposes, the
acquirer's assets and liabilities will be recorded by the Company at their
historical cost with the assets and liabilities of the other Participating
Partnerships recorded at their estimated fair values, using the Adjusted Net
Asset Values. For a discussion of the accounting adjustments necessary to give
effect to the Consolidation, see "FINANCIAL INFORMATION."
No Fractional Shares. No fractional Shares will be issued by the Company
in the Consolidation. Each Participating BUC$holder who would otherwise be
entitled to a fractional Share (which entitlement will be determined by
combining such Participating BUC$holder's allocation of Shares from each
Participating Partnership as to which such Participating BUC$holder is
receiving Shares) will receive one Share for each fractional share of 0.5 or
greater. No Shares will be issued for fractional shares of less than 0.5.
Taxable Gain or Loss. No taxable gains or losses are expected to result
from the Consolidation to Participating BUC$holders. See "FEDERAL INCOME TAX
CONSIDERATIONS."
Effect of Consolidation on Objecting BUC$holders. A BUC$holder of a
Participating Partnership who objects to the Consolidation does not have a
statutory right to elect to be paid the appraised value of his or her interest
in the Partnership.
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<PAGE>
Effect of Consolidation on Non-Participating Partnerships. Each
Non-Participating Partnership that does not participate in the Consolidation
will continue to operate as a separate legal entity with its own assets and
liabilities. There will be no change in its investment objectives, policies or
restrictions, or fees or distributions payable to its General Partners. Each
Non-Participating Partnership will remain subject to the terms of its
Partnership Agreement, and each will continue to be managed by substantially
the same persons currently employed by the Related General Partners. See
"FAIRNESS--Fairness to Non-Participating Partnerships."
Title Insurance. The Company intends to obtain a title insurance
endorsement under which the coverage of the existing lender's policies will be
extended to the Company.
Representations and Warranties. Neither the General Partners nor the
Partnerships will make any representations or warranties to the Company (in the
Contribution Agreements or otherwise) with respect to the assets or liabilities
of the Partnerships. As a result, the Company will not be entitled to any
indemnification if undisclosed liabilities exist.
Legal Proceedings. The Related General Partners and one or more of the
Partnerships may be involved in litigation incidental to their businesses, but
no material litigation is currently pending or threatened against any of the
Partnerships, the Partnership properties or the Related General Partners (other
than the Litigation being settled pursuant to the Settlement Stipulation).
Environmental Matters. The environmental laws of the federal government
and of certain state and local governments impose liability on property owners
and mortgagees for the cleanup of hazardous and toxic substances located on the
property. This liability may be imposed without regard to the timing, cause or
person responsible for the release of such substances onto the property.
Property Owners are required to comply with such laws pursuant to the Mortgage
Loans, but the Company could be subject to liability in the event that it
acquires a Mortgage Loan for which an Underlying Property has such
environmental problems, or if the owner defaults on its cleanup obligations.
This potential liability could adversely affect the BUC$holders of Partnerships
without such environmental liability, and no adjustment was made in the
Appraisals for the possible effects of the presence of hazardous or toxic
substances at any of the properties. In addition, similar liabilities could be
imposed on persons holding mortgages secured by properties with environmental
problems.
The Partnerships did not obtain Phase I Reports with respect to the
initial financing of the Existing Portfolio of FMBs. One of the Partnerships
(Tax Exempt I) obtained Phase 1 reports on five of its Underlying Properties
with respect to a loan agreement it entered into with an unaffiliated lender
(See "THE COMPANY--Description of Existing Indebtedness") in January 1993
whereby five FMBs and collateral documents were pledged and assigned for a
$15,000,000 credit facility.
The Phase 1 reports undertaken for East Ridge, Martin's Creek, The
Mansion, Thomas Lake and Sunset Terrace found no violations of applicable
regulations and concluded that there has been no verifiable or apparent adverse
environmental impact from past or present land use. Other than these five Phase
1 reports, the Partnerships have had no further environmental analyses
performed with respect to the underlying properties.
No environmental audits were obtained by the Partnerships at the time the
FMBs were initially financed. Other than the results of the Phase I Reports
described above, each Partnership's awareness of environmental problems
associated with the Underlying Properties securing its FMBs is derived, for the
most part, from information obtained from owners, due diligence inquiries when
the FMBs were financed, or visual inspections of properties by independent
appraisers. There may, however, be environmental problems associated with the
Underlying Properties not known to the Partnerships and not revealed by the
Phase I Reports. In the event preexisting environmental conditions requiring
remediation are discovered subsequent to the Effective Date, the cost of
remediation with respect to the Underlying Properties may be required to be
borne by the Company, except to the extent that the Company is able to obtain
remediation from an owner. In any circumstance in which the Company bears the
remediation cost, the Company will pursue all reasonable means of obtaining
reimbursement from third parties who may have been liable to the Partnership.
The Related General Partner is aware of one potential environmental
liability with respect to the FMBs which relates to the Underlying Property
securing the Newport Village FMB. While no regulatory authority has made an
environmental liability claim against the Underlying Property or the
Partnership (Tax Exempt II), the developer believes the Underlying Property and
its owners may have a legitimate claim for environmental damages allegedly
perpetrated by a company known as ASARCO. The claim relates to soil
contamination of an area within a 2 mile radius of the Newport Village
apartment complex and the developer and the owners are contemplating joining a
class action with respect to such claim. Neither the Related General Partners
nor any of the Partnerships are aware of any other environmental non-compliance
or other environmental claim in connection with any of the other assets of the
Partnerships.
Related Transactions
Purchase Agreement between Related and the P-B General Partner
Overview. Pursuant to the P-B Purchase Agreement, among other things and
subject to the conditions set forth therein, the P-B General Partner has agreed
to withdraw as a general partner of the Partnerships and to sell, assign and
transfer the P-B Interests to Related or an affiliate of Related (e.g., the
Manager) for an aggregate purchase price of $2,863,000 (assuming the P-B
Interests in each of the Partnerships is acquired). Related is also acquiring
the interests of the P-B General Partner in five other partnerships (four of
which were
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co-sponsored by Related) for $1,137,000. The P-B General Partner (and the
Related General Partners) will also be entitled to receive payment from the
Partnerships of any deferred fees, if any, which remain unpaid as of the
closing of the P-B Agreement. See the Partnerships' financial statements under
the heading "FINANCIAL INFORMATION." The total amount payable to the P-B
General Partner pursuant to the P-B Purchase Agreement is, therefore,
$4,000,000. The P-B General Partner paid a nominal amount for its interests in
each of the Partnerships.
The withdrawal of the P-B General Partner was requested by Class Counsel
as part of the Related Settlement. The P-B General Partner has advised the
Related General Partners that it acquiesced in such request based upon
Related's agreement to pay fair consideration for the P-B Interests and its
desire to terminate its involvement in the sponsorship and management of
limited partnerships.
The Manager has not yet determined whether it will utilize its own funds
in the purchase of the P-B Interests or seek to finance the purchase. If it
utilizes financing, the Manager expects that it will secure such financing by
pledging (i) the P-B Interests (which, following the Consolidation, will be
represented by Shares) and the distributions receivable in respect of such
interests to the lender providing such financing; and (ii) the portion of the
fees payable by the Company that relate to the P-B Interests.
The Manager will contribute one-half of the P-B Interests it acquires to
the Participating Partnerships, resulting in the BUC$holders of such
Partnerships ultimately owning a greater percentage of the Shares than
otherwise would be the case if the Manager did not make such a contribution.
Such contribution was requested by Class Counsel in negotiating the Related
Settlement and represents an added benefit to the Equitable Class.
Covenants as to Voting of Units, Tender Offers. Pursuant to the P-B
Purchase Agreement, the P-B General Partner has agreed that with respect to any
Units held by it or its affiliates (less than 1% of the aggregate Units
outstanding as of the date of this Solicitation Statement), it would not object
to the Consolidation. Furthermore, if as of the Effective Date, the P-B General
Partner and its affiliates own more than 1% of the Company, they have agreed
(subject to certain exceptions) not to sell any Shares they receive as part of
the Consolidation in respect of their Units until after the first anniversary
of the Effective Date.
In addition, pursuant to the P-B Purchase Agreement, the P-B General
Partner is not required to consummate the sale of the P-B Interests to Related
if Related makes a tender offer for any Units (except in response to a third
party tender offer) and Related has agreed not to tender without the P-B
General Partners' prior consent, for any Units or Shares for a period of one
year from the Effective Date (except in response to a third party tender
offer). Furthermore, if prior to the closing, Related acquires Units in
connection with a defensive tender offer, Related is obligated to offer such
Units to the Company at a price equal to the tender price, including any
borrowing or other costs incurred by Related to acquire the Units; and such
offer must remain open for a period of one year after the Effective Date.
Conditions to Closing; Court Approval. Pursuant to the terms of the P-B
Purchase Agreement, Related has no obligation to purchase the P-B Interests if
Court approval of the Related Settlement, including the Consolidation, is not
obtained. However, Related or its affiliates may, subject to the approval of
the Court, acquire the P-B Interests whether or not the Consolidation is
consummated.
Withdrawal of the P-B General Partner
As noted above, Related at its option, may acquire the P-B interests even
if the Consolidation is not consummated. The option is subject to the approval
of the Court which may be granted by the Court whether or not it approves the
Consolidation or a Partnership would otherwise have been a Participating
Partnership. In the event Related exercises its option, the Related General
Partners will be the sole general partner of their respective Partnerships. In
such event, the Related General Partners are not obligated to contribute any
portion of the P-B Interests they acquire to the Partnerships nor to reduce the
fees payable to the General Partners.
Consolidation Expenses
The Consolidation Expenses are estimated, in the aggregate, to be as
follows:
Printing and postage $ 165,000
Legal Fees 950,000
Fairness Opinion (including fees
and expenses) 403,500(1)
Registration, Listing and Filing
Fees 107,510(2)
Accounting Fees 190,000
Contingency 168,115
-----------
TOTAL $1,984,125
===========
- --------------
(1) Oppenheimer was engaged by Class Counsel to render its opinion as to the
fairness, from a financial point of view, of the Consolidation and in
connection with a consolidation transaction involving four other limited
partnerships sponsored by affiliates of Related and Prudential. The
aggregate cost of such engagement (including fees and expenses) is
expected to total $550,000. The cost of the Fairness Opinion allocated to
the Company is in proportion to the aggregate Adjusted Net Asset Value of
the Partnerships and the aggregate adjusted net asset value of the limited
partnerships that are the subject of the other consolidation transaction.
See "FAIRNESS OPINION AND APPRAISALS--Fairness Opinion."
(2) Includes an estimate of initial entry fees to include the Company's Shares
for listing on the American Stock Exchange of approximately $25,000, the
Commission's required filing fees of approximately $61,760 and Blue Sky
fees of $20,750.
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If the Consolidation is consummated, Consolidation Expenses will be paid
by the Company. If the Consolidation is not consummated, the Related General
Partners will bear the Consolidation Expenses. If the Consolidation is
consummated with less than 100% Participation, the Related General Partners
will be responsible for the Consolidation Expenses otherwise allocable to
Non-Participating Partnerships. NonParticipating Partnerships will not bear any
portion of the Consolidation Expenses. The Company intends to borrow the funds
necessary to pay the Consolidation Expenses. For a description of the terms of
such debt, see "THE COMPANY--Description of Existing
Indebtedness--Consolidation Expenses Loan."
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<PAGE>
FAIRNESS
General Partners' Belief as to Fairness
Related General Partners. The Related General Partners believe that the
terms of the Consolidation are fair when considered as a whole, and to the
BUC$holders in each of the Partnerships, regardless of which of the Partnerships
are included in the Consolidation, assuming the requirements of any of the
Minimum Participation scenarios are met. The material factors underlying the
beliefs of the Related General Partners relating to the fairness of the
Consolidation are discussed below under "--Material Factors Underlying Belief as
to Fairness." The Related General Partners' judgment as to the fairness of the
Consolidation may be affected by the fact that they will derive financial
benefits from the Consolidation, and are thus subject to conflicts of interest.
See "CONFLICTS OF INTEREST-- Conflicts of Interest of the Related General
Partners."
The Related General Partners based their determination as to the fairness
of the Consolidation on a variety of factors, including, but not limited to: (i)
the process of arm's length negotiation of the structure, terms and conditions
of the Consolidation with Class Counsel acting on behalf of the Class Members,
and Class Counsel's responsibility to act in the best interests of the
BUC$holders; (ii) the Related General Partners' knowledge that any settlement
would necessarily entail obtaining preliminary and final approval by the Court
of the Related Settlement, including the Consolidation; (iii) the opportunity
for each BUC$holder to object to the Consolidation; (iv) with respect to the
allocation of Shares among the Partnerships, the Adjusted Net Asset Values
assigned to the Partnerships based in part upon the Appraisals of the properties
securing the Mortgage Loan held by the Partnerships on a
partnership-by-partnership basis as set forth in the Appraisals prepared by C&W;
(v) the fact that C&W prepared all the Appraisals thereby maximizing consistency
among the Appraisals; (vi) a comparison of the potential benefits and detriments
of the Consolidation with those of the alternatives to the Consolidation; and
(vi) the Fairness Opinion rendered by Oppenheimer. The Related General Partners
did not give any specific weight to any one of the foregoing factors but viewed
them in the aggregate in supporting their fairness determination.
The Related General Partners believe that an investment in the Company
through the ownership of Shares will provide greater overall benefits to
BUC$holders than the benefits derived from an investment in an individual
Partnership or from any of the alternatives to the Consolidation analyzed by the
Related General Partners. Based upon the foregoing, the Related General Partners
are recommending that BUC$holders not object to the Consolidation.
In reaching the conclusion that the Consolidation is fair, the Related
General Partners also considered, in particular, the fact that Participating
BUC$holders will surrender their right to receive cash proceeds from the
liquidation of the Partnerships at some time in the future. In this regard, the
Related General Partners compared the amount of consideration to be received if
the Partnerships were liquidated, to the anticipated market value of the Shares
(computed by capitalizing annual distributions based upon the 1996 pro forma
distributions and applying a yield of 6% and 8.0%). Notwithstanding the
uncertainties in estimating the value of the Shares, the Related General
Partners believe that the Shares constitute reasonable consideration for the
Units. See "--Comparison of Alternatives to the Consolidation--Valuation of
Shares" below. In proposing the Consolidation, the Related General Partners
determined that achieving the Partnerships' objective of receiving net
liquidation proceeds from finite-life entities was outweighed by the Company's
(i) potential to provide improved liquidity to BUC$holders through ownership of
Shares, (ii) potential for growth, (iii) greater flexibility with respect to its
investment portfolio as an infinite-life entity, and (iv) potential for
increased distributions of cash flow from operations to Shareholders.
P-B General Partner. The P-B General Partner takes no position with respect
to the Consolidation due to the fact that it (i) has not been a party to the
negotiations which led to the Related Settlement (PSI and the P-B General
Partners have previously settled with the Class Members) and (ii) will have no
involvement with the Company after the Consolidation. Furthermore, the P-B
General Partner has an inherent conflict of interest in selling the P-B
Interests to the Manager, due to the fact that consummation of the P-B Agreement
is dependent upon approval of the Consolidation and/or the P-B General Partner's
withdrawal from the Partnership.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying the
Related General Partners' belief that the Consolidation is fair as a whole and
to the BUC$holders in each of the Partnerships. No specific weight was given to
any one of these factors; rather the Related General Partners viewed them in the
aggregate in supporting their fairness determination.
Negotiation of Related Settlement; Court Approval. Unlike most
consolidation transactions in which investors are not independently represented
in structuring or determining the terms and conditions of the transaction, the
Consolidation is the result of extensive negotiations, under the auspices of the
Court, between Related and Class Counsel, on behalf of the BUC$holders, in
connection with the settlement of the Litigation. Class Counsel has negotiated a
settlement that it considers to be in the best interests of the BUC$holders.
To further protect the interests of BUC$holders, Class Counsel retained
Oppenheimer to opine as to the fairness of the Consolidation, including the
allocation of Shares among the Partnerships, from a financial point of view, to
the BUC$holders of each Partnership. See "FAIRNESS OPINION AND APPRAISALS--
Fairness Opinion." The allocation of Shares among the Partnerships was made by
the Related General Partners based on the relative Adjusted Net Asset Values of
each Partnership. For the purpose of determining Adjusted Net Asset Values, the
Related General Partners utilized, in part, the Appraisals prepared by C&W as of
October 15, 1995. See "ALLOCATION OF SHARES."
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Finally, the Court has scheduled the Fairness Hearing at which time (i)
BUC$holders and other Class Members may appear before the Court and object to
any aspect of the Related Settlement, including the Consolidation, (ii) the
Related General Partners will provide the Court with a tabulation of the number
of Units held by BUC$holders in each Partnership that have objected to the
Consolidation and (iii) the Court will either (x) approve the Related Settlement
and the Consolidation or (y) notwithstanding satisfaction of the requirements of
one of the three Minimum Participation scenarios and all other conditions to
consummation of the Consolidation, not approve the Related Settlement and the
Consolidation.
Appraisals. The Related General Partners have relied upon the Appraisals
prepared by C&W, an independent appraiser, to establish the "as is" market value
as of October 15, 1995 (the "Appraised Value(s)") of the Underlying Properties
and such Appraised Values were utilized by the Related General Partners, in
part, in determining the Adjusted Net Asset Value of the Partnerships. In
preparing the Appraisals in 1995, C&W was not engaged to represent the interests
of the Related General Partners or any specific group of BUC$holders, but was
engaged to determine the Appraised Value of the Underlying Properties without
taking into account the specific financial interest of any person or group of
investors. Therefore, C&W has expressed no opinion on the terms of the
Consolidation.
The Related General Partners believe that the use of a single independent
appraiser, applying consistent methodology and criteria in estimating the
Appraised Value of each of the Underlying Properties, increased the likelihood
that the Appraised Value of each such real property would be determined on a
fair, consistent and unbiased basis. See "FAIRNESS OPINION AND
APPRAISALS--Appraisals" for a more comprehensive discussion of the factors
considered and the methodology employed by C&W in making the Appraisals. The
Related General Partners believe the Appraisals support the fairness of the
terms of the Consolidation.
Fairness of Allocations. The Related General Partners believe that based
upon the method of allocation of Shares in the Consolidation, the consideration
to be paid to BUC$holders is fair to BUC$holders regardless of the combination
of Participating Partnerships, assuming the Minimum Participation requirement is
satisfied.
Allocation of Shares. The Related General Partners believe that the
Adjusted Net Asset Values of each of the Partnerships represent fair estimates
of the value of the assets of each such Partnership, net of liabilities as of
March 31, 1996, and constitute a reasonable basis for allocating the Shares
among the Partnerships. The Adjusted Net Asset Values were based in part upon
the Appraised Values.
Fairness Opinion. The Related General Partners have relied, in part, upon
the Fairness Opinion to support their conclusion that the Shares have been
fairly allocated among the Partnerships. The preparation and delivery of the
Fairness Opinion were requested by Class Counsel, which retained Oppenheimer to
render its opinion as to the fairness, from a financial point of view, of the
Consolidation, including the allocation of Shares among the Partnerships, to the
BUC$holders of the Partnerships, from a financial point of view, assuming 100%
Participation and all other combinations of Participating Partnerships
(including the Minimum Participation scenarios). Subject to the qualifications
and limitations set forth under "FAIRNESS OPINION AND APPRAISALS--Fairness
Opinion", Oppenheimer concluded that the Consolidation, including the allocation
of Shares among the Partnerships, is fair, from a financial point of view, to
the BUC$holders of the Partnerships assuming 100% Participation and all other
combinations of Participating Partnerships, including the Minimum Participation
scenarios. The Related General Partners believe that the Fairness Opinion
supports the Related General Partners' conclusions as to fairness of the
allocations of Shares among the Partnerships.
Court Approval of Fairness. Prior to consummating the Consolidation, the
Court will be asked to approve the procedural and substantive fairness of the
Related Settlement, including the Consolidation. Specifically, (i) the Court
will hold the Fairness Hearing to determine whether the Related Settlement,
including the Consolidation and the allocation of Shares among the Participating
Partnerships and the BUC$holders, is fair, reasonable and adequate; (ii) the
BUC$holders will receive notice of the Fairness Hearing and have the opportunity
to object to the Consolidation, or appear before the Court in person or through
Class Counsel at the hearing; (iii) the Court's final approval order will
approve the method used to allocate the Shares among the Partnerships and among
the partners of each Partnership; and (iv) if it approves of the Settlement, the
Court will expressly find that the terms and conditions of the Related
Settlement are fair, reasonable and adequate and in the best interests of the
BUC$holders.
Comparison of Benefits and Detriments of Alternatives to the Consolidation
Prior to concluding that the Consolidation should be proposed to
BUC$holders and in order to evaluate the fairness of the transaction, the
Related General Partners examined the estimated values which could be derived
from alternatives to the Consolidation. The alternatives examined by the Related
General Partners were: (i) continuation of the Partnerships and (ii) liquidation
of the Partnerships. See "BACKGROUND, BENEFITS OF, AND REASONS FOR, THE
CONSOLIDATION--Alternatives to the Consolidation." In order to determine whether
the Consolidation or one of these alternatives would be more beneficial to
BUC$holders, the Related General Partners compared the potential benefits and
detriments of the Consolidation with the potential benefits and detriments of
each of the alternatives. Each of the Consolidation and its alternatives have
potential benefits and detriments not present in the other alternatives. For the
reasons set forth below, the Related General Partners determined that the
Consolidation is more beneficial to BUC$holders than either of the alternatives
to the Consolidation. For further information regarding these alternatives, see
"BACKGROUND, BENEFITS OF, AND REASONS FOR, THE CONSOLIDATION--Alternatives to
the Consolidation."
Continuation. The Related General Partners believe that when compared to
the Consolidation, continuation of the Partnerships in their present form would
provide: (i) a less efficient and less cost effective exit strategy for
BUC$holders who wish to liquidate their
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Partnership investment; (ii) illiquidity of the BUC$holders' investment (other
than Tax Exempt I, which is listed on the AMEX); (iii) the inability, due to
restrictions in the Partnership Agreements, to take advantage of future
investment opportunities; (iv) duplication in reporting, filing and other
administrative services; (v) inability to achieve cost savings; and (vi) less
flexibility in managing their real estate portfolio. Continuation of the
Partnerships would, however, allow the Partnerships to: (i) maintain their
current legal form, with their own assets and liabilities and an investment
strategy governed by the guidelines, restrictions and safeguards in the
Partnership Agreements; (ii) avoid having their performance tied to that of the
other Partnerships; (iii) maintain the legal nature of the BUC$holders' original
investment; (iv) maintain the current Partnership cash distribution policy,
which would result in the liquidation and distribution of proceeds to the
BUC$holders in accordance with the original business plan of investing in
tax-exempt participating FMBs and holding them for a finite period of time; and
(v) avoid the incurrence of their pro rata share of Consolidation Expenses. See
"THE CONSOLIDATION AND RELATED TRANSACTIONS--Consolidation Expenses."
Liquidation. Liquidation is not currently considered to be a viable option
by the Related General Partners. However, for comparison purposes, the Related
General Partners have analyzed this alternative and concluded that a liquidation
would not be as beneficial to BUC$holders as the Consolidation because by
comparison to conditions prevailing when the Partnerships' FMBs were acquired,
market values have not increased to allow BUC$holders to obtain a return of
their Original Investment. The Related General Partners believe that current
buyers of FMBs would (i) not in any event pay more than the face amount of the
FMBs; (ii) highly discount Contingent Interest payable from Cash Flow and from
Net Sale or Repayment Proceeds which are in excess of the amount necessary to
repay the face amount of the FMB; and (iii) purchase the FMBs based on a 5 year
holding period. In the aggregate, these factors, which are reflected in the
liquidation value estimates set forth in this Solicitation Statement, have the
effect of significantly reducing the value of FMBs under a liquidation scenario.
Because the Related General Partners believe conditions may improve over
time and that BUC$holders may, in fact realize payments of Contingent Interest
from participations in Net Property Cash Flow or Net Sale or Repayment Proceeds
resulting from appreciation in the value of the Underlying Properties, they
believe that liquidation of assets at this time is premature and would not
provide BUC$holders with their best alternative to realize the optimum return on
their investments. In addition, there could be potentially significant
administrative and overhead costs in the winding down of the Partnerships and
such costs are largely independent of asset size and could, over an extended
liquidation period, reach disproportionately high levels in relation to
revenues, thereby reducing the portion of proceeds available for distribution to
BUC$holders. Liquidation would, however, provide for the final liquidation of
the BUC$holders' investments and a likely substantial distribution of cash equal
to net liquidation proceeds, though not at a level that would allow BUC$holders
to realize their Original Investment.
Based upon this comparison of the potential benefits and detriments of the
Consolidation to the potential benefits and detriments of certain possible
alternatives to the Consolidation, the Related General Partners have concluded
that the Consolidation is the more attractive alternative for BUC$holders.
Fairness in View of Conflicts of Interest
Related General Partners. In determining whether or not to object to the
Consolidation, BUC$holders should consider that the Consolidation affords a
number of benefits to the Related General Partners, including that under the
Management Agreement, the Company may not terminate the Manager, an affiliate of
Related, except for Cause, until the fourth anniversary of the Effective Date.
Pursuant to the Management Agreement (and as a result of the Manager's purchase
of the P-B Interests), the Manager will be entitled to receive from the Company
approximately 75% of the sum of aggregate annual fees and distributions
currently payable by the Partnerships to both of the General Partners. The
Manager will be incentivized, in part, because it will have the ability, subject
to the terms and conditions of the Management Agreement, to grow the Company's
assets and thereby increase the amount of fees it can earn. Pursuant to the
Company's Incentive Share Option Plan, the Manager may receive additional Shares
if the Company's distributions in any year exceed $0.9517 per share (i.e., the
1996 pro forma distributions set forth in this Solicitation Statement). Similar
to the BUC$holders, the Related General Partners and the Manager will receive
Shares and, therefore, will have enhanced their liquidity.
The Related General Partners have fiduciary duties to each of their
Partnerships, in addition to the specific duties and obligations imposed upon
them under the Partnership Agreements. Subject to the terms of the Partnership
Agreements, the Related General Partners, in managing the affairs of the
Partnership, are expected to exercise utmost good faith, to use care and
prudence and to act with an undivided duty of loyalty to the BUC$holders. Under
these fiduciary duties, the Related General Partners are obligated to ensure
that each Partnership is treated fairly and equitably in transactions with third
parties, especially where consummation of such transactions may result in the
interests of the Related General Partners being opposed to, or not aligned with,
the interests of the BUC$holders. Accordingly, the Related General Partners are
required to assess whether the Consolidation is fair and equitable, taking into
account the unique characteristics of each Partnership (such as the
Partnership's revenues and expenses and the prospects for increases or decreases
in future cash flow) affecting the value of its assets, and comparing these
factors against similar factors affecting the value of the assets held by the
other Partnerships and the Related General Partners. The Related General
Partners believe that they have fulfilled their fiduciary duties as described
above in reaching their recommendation that BUC$holders not object to the
Consolidation notwithstanding the inherent conflicts of interest present in this
transaction.
Class Counsel. In assessing Class Counsel's recommendation that
BUC$holders not object to the Consolidation, BUC$holders should consider that
Class Counsel may be deemed to have a conflict of interest with respect to such
recommendation. In particular, the
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fees and expenses of Class Counsel, if approved by the Court, will be paid from
the cash settlement pool provided by Related and other defendants pursuant to
the Related Settlement and settlements reached with other defendants in the
Litigation. In addition, as part of the Equitable Settlement, Class Counsel will
have the right to petition the Court for additional attorneys' fees in an amount
to be determined in the Court's sole discretion but which will be proposed to be
25% of the increase, if any, as of the Anniversary Date in the capitalization of
the Company, based upon (i) the difference between the trading prices of the
Company's Shares on the Anniversary Date and (ii) the trading prices of the
Units and the asset values of the Partnerships prior to the Effective Date. The
number of Counsel's Fee Shares issued shall be subject to a maximum amount not
to exceed 3.95% of the total number of the Company's outstanding Shares on the
Anniversary Date. See "CONFLICTS OF INTEREST--Conflicts of Interest of Class
Counsel."
Fairness of Allocations
Impact of Consolidation on Expected Distributions to Shareholders. The
Consolidation is expected to affect the level of distributions made to
BUC$holders who become Shareholders. Distributions are expected to increase. The
Company's 1996 pro forma financial statements indicate that BUC$holders of Tax
Exempt II and Tax Exempt III would have received lower distributions
(approximately 1% or $0.56 per $1,000 of Original Investment less than 1996
annual distributions for Tax Exempt II and approximately 0.8% or $0.37 per
$1,000 of Original Investment less than 1996 annual distributions for Tax Exempt
III) had the Consolidation occurred on January 1, 1996, with 100% Participation.
However, the Related General Partners believe that additional cost savings
together with the benefits anticipated to be derived from the Company's new
business plan, neither of which is reflected in the Company's 1996 pro forma
financial statements, will be achieved, thereby progressively increasing
distributions to BUC$holders including those in Tax Exempt II and Tax Exempt
III. There can be no assurance that such additional cost savings or benefits
expected to be derived from the Company's new business plan will be achieved.
Distributions to any particular investor are not expected to vary materially
depending upon how many Partnerships participate in the Consolidation. The
Related General Partners believe that the principles being used to allocate the
consideration among the Partnerships take into account fairly the relative value
of the assets to be contributed to the Company and, therefore, any differences
in the level of distributions made to a BUC$holder who becomes a Shareholder,
before and after the Consolidation, are properly attributable to these
differences in relative contribution among the Partnerships. BUC$holders should
also bear in mind that the levels of prior distributions of cash flow from
operations from the Partnerships were influenced by various factors not directly
related to the net cash flow generated by the Partnerships' assets and the
underlying value of the Partnership's assets. These factors included the
Partnerships' quarterly cash distribution policies, capital expenditure levels
(where applicable) and payments on outstanding debt, if any. These factors will
not continue to affect distributions in precisely the same fashion, due to the
consolidation of the Participating Partnerships' assets and liabilities.
Distribution of Shares to BUC$holders, Related General Partners and the
Manager in Proportion to Interests in the Partnerships. Shares will be allocated
to each Participating BUC$holder, the Related General Partners and the Manager
in accordance with his or its proportionate interest in distributions of cash
flow from operations of the Partnership pursuant to the respective Partnership
Agreements. Under the various Partnership Agreements, the Related General
Partners and the Manager are entitled to receive 1.5% of the Partnership's
distributions of cash flow from operations (after reflecting that one-half of
the P-B Interests are being allocated to the BUC$holders as part of the
Consolidation). Assuming 100% Participation, the Related General Partners and
the Manager will receive an aggregate of 308,796 Shares for their general
partner interests in the Partnerships. The Related General Partners believe that
the distribution to partners and BUC$holders of Shares allocated to a
Partnership in proportion to their interests in cash flow from operations of the
applicable Partnership supports their conclusion that the Consolidation is fair
to BUC$holders. See "ALLOCATION OF SHARES" for a discussion of the procedures
followed in allocating the Shares to be issued by the Company.
Fairness to Non-Participating Partnerships
The Related General Partners believe the Consolidation is fair to
BUC$holders in Non-Participating Partnerships for the reasons discussed below.
Allocation of Consolidation Expenses. If the Consolidation is consummated
with 100% Participation, all Consolidation Expenses will be paid by the Company.
If the Consolidation is not consummated, the Related General Partners will bear
the Consolidation Expenses. If the Consolidation is consummated at less than
100% Participation, the Related General Partners will be responsible for the
Consolidation Expenses otherwise allocable to Non-Participating Partnerships.
Continuance of Non-Participating Partnerships. A Non-Participating
Partnership will continue to operate as a separate legal entity subject to its
existing Partnership Agreement. There will be no change in its investment
objectives, policies or restrictions, or fees or distributions payable to its
General Partners as a result of its non-participation in the Consolidation. Each
Non-Participating Partnership will remain subject to the terms of its
Partnership Agreement, and each will continue to be managed by substantially the
same persons currently employed by the Related General Partners.
Comparison of Alternatives to the Consolidation
General. To assist BUC$holders in evaluating the fairness of the
consideration offered by the Company in the Consolidation, the Related General
Partners have compared the estimated market value of the Shares with: (i)
estimates of the value of the Units under a "liquidation" scenario, assuming
that the Partnerships' assets were sold at an assumed value based on discounted
cash flow analysis,
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together with the value of other collateral as may exist and be relevant to
determining realizable value in a liquidation and followed by a distribution of
net proceeds to the General Partners and BUC$holders in accordance with the
respective Partnership Agreement; (ii) estimates of the value of the Units on a
"going concern" basis, assuming that the assets would be operated until the end
of the calendar year which is eleven years following the date of the acquisition
of the last FMB acquired by each respective Partnership, followed by the
immediate liquidation of all assets for cash and the immediate distribution of
the proceeds in accordance with the Partnership Agreements; and (iii) prices at
which Units (a) of Tax Exempt II and III have been trading on the illiquid
secondary market over the recent twelve month period ended November 30, 1996, as
compiled and reported by Partnership Spectrum; and (b) of Tax Exempt I have
traded on the American Stock Exchange over the twelve month period ended
December 31, 1996. The above valuation estimates are subject to significant
uncertainties, since the value of the Shares, as well as the comparative
estimated values, are based upon a number of estimates, variables, assumptions
and varying market conditions. Therefore, no assurance can be given that the
estimated values indicated could be realized and actual realized values may be
higher or lower than the estimates of such values.
The results of this comparative analysis are summarized in the table
entitled "Summary of Comparative Valuation Alternatives" set forth below.
BUC$holders should bear in mind that the estimated values assigned to the Shares
and alternative forms of consideration are based on a variety of assumptions
that have been made by the Related General Partners. These assumptions relate,
among other things, to: (i) projections as to the Partnerships' future income,
expenses, cash flow and other significant financial matters; (ii) the
capitalization rates that would likely be used by prospective buyers if the
Partnerships' assets were liquidated; (iii) appropriate discount rates applied
to expected cash flows in computing the present value of the cash flows that may
be received with respect to the Units; and (iv) selling costs and other
expenses, costs, offsets and contingencies attributable to the sale of assets
and liquidation of the Partnerships. In addition, these estimates are based upon
certain information available to the Related General Partners at the time the
estimates were computed, and no assurance can be given that the same conditions
analyzed by the Related General Partners in arriving at the estimates of value
would exist at the time of the Consolidation. The assumptions used have been
determined by the Related General Partners and, where appropriate, are based
upon current historical information regarding the Partnerships and current real
estate markets, and have been highlighted below to the extent critical to the
Related General Partners' conclusions. While the Related General Partners
believe they have a reasonable basis for the assumptions made, it is unlikely
that all of the assumptions employed by the Related General Partners will prove
to be accurate in all material respects and some assumptions used by the Related
General Partners as to future events have been selected to simplify the analysis
and may not approximate the actual experience of the Partnerships. The estimated
values of the Shares and alternative forms of consideration, would have been
different had the Related General Partners made different assumptions. No
assurance can be given that such consideration would have been realized through
any of the alternatives described.
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Summary of Comparative Valuation Alternatives*
<TABLE>
<CAPTION>
Estimated Market Value of Shares per $1,000 of Original Estimated
Investment(1) Liquidation Estimated Market
--------------------------------------------------------------- Value of Value of Units
Minimum Minimum Minimum Units Per per $1,000 of
Participation Participation Participation $1,000 of Original
Including Including Including Original Investment Based
100% Tax Exempt Tax Exempt Tax Exempt Estimated Going Investment if on Market
Participation I/II II/III I/III Concern Value of Assets Sold Trades(4)
------------- ------------- ------------- -------------- Units Per $1,000 at Adjusted ----------------
Partnership High Low High Low High Low High Low of Original Net Asset High Low
Value Value Value Value Value Value Value Value Investment(2) Value(3) Value Value
- ------------------------------------------------------------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tax Exempt I $758 $569 $754 $565 $ -- $ -- $734 $550 $606 $580 $587 $475
Tax Exempt II $857 $643 $853 $639 $886 $665 $ -- $ -- $742 $777 $647 $450
Tax Exempt III $727 $545 $ -- $ -- $752 $564 $704 $528 $660 $597 $525 $441
</TABLE>
- --------------
* The information shown on this table assumes 100% Participation; see
"FAIRNESS--Comparison of Alternatives to the Consolidation" for additional
comparisons based upon the Minimum Participation scenarios. An Original
Investment of $1,000 equates to 50 Units in each of the Partnerships.
BUC$holders should note that certain assumptions used by the Related General
Partners to determine the valuations set forth in this table are different
from those utilized by Oppenheimer in connection with the analysis used by
Oppenheimer to support its Fairness Opinion. See "FAIRNESS OPINION AND
APPRAISALS--Fairness Opinion." Furthermore, there can be no assurance that
the assumptions utilized by the Related General Partners will in fact occur
and that the conclusions based upon such assumptions would not differ
substantially from those set forth in this table.
(1) The High Value and Low Value figures were computed by capitalizing
anticipated annual distributions after the Consolidation (assuming
distributions are equal to those in the 1996 pro forma financial
statements), by a range of yield rates for selected comparable companies
which invest in similar type assets and operate in a similar fashion,
ranging from 6.0% (High Value) to 8.0% (Low Value) as more fully discussed
under "FAIRNESS--Comparison of Alternatives to the Consolidation."
(2) These values were derived from the amount which would be payable to the
Partnerships pursuant to the terms of the FMBs based upon a discounted cash
flow analysis, applied to the anticipated (i) cash flow from the operation
and (ii) sale proceeds from the sale of each Underlying Property as per the
Appraisals. For each FMB, it was assumed that the FMB would be held until
the end of the eleventh calendar year following the date of acquisition of
the last FMB acquired, followed by the immediate liquidation of all assets
of the Partnership (including the SMLs) for cash and the immediate
distribution of the proceeds. The annual Partnership cash flow was adjusted
for Partnership administration expenses, which were increased annually at
the rate of 3%, and the adjusted cash flow was discounted back to present
value at a rate equal to the average of the rates used in the Underlying
Property's cash flow analysis as per the Appraisals.
(3) The figures in this column represent the amounts that would be distributed
pursuant to the Partnership Agreements with respect to each $1,000 of
Original Investment if the Partnerships sold their FMBs, in bulk sale, on
June 30, 1996. It was assumed that the FMBs were sold at prices equal to the
lesser of (i) the respective face amounts of the FMBs or (ii) an amount
equal to (a) the present value of the interest income from the FMBs over a
5-year period assuming Base Interest is discounted at rates ranging from 7%
to 10.5% and Contingent Interest is discounted at rates ranging from 17% to
22% plus (b) the present value of the sale proceeds from an assumed sale at
the end of such 5-year period, discounted at rates ranging from 7% to 10.5%.
The total proceeds were then decreased by 3.1% to 3.4% to account for
liquidation costs, expenses and contingencies.
(4) Tax Exempt II and Tax Exempt III values are based on the high and low value
of secondary market trades during the twelve months ending November 30,
1996, as compiled by Partnership Spectrum. Partnership Spectrum has advised
that its methodology for compiling trade prices is as follows: trade price
information reflects per Unit transaction prices for trades involving the
purchase of Units by third-party investors during the applicable period.
Firms supplying trade price data are instructed to provide information only
on those transactions whereby third party investors acquired Units from or
through such firms. If the firm acted as an agent, the per Unit price is to
include any commissions charged the buyer (but not including commissions
paid to retail brokers representing buyers). Due to commission and mark-ups,
sellers of Units typically receive less than the amounts paid for Units by
buyers as set forth in the table.
Tax Exempt I values are based on the high and low value of AMEX trades
during the twelve months ending December 31, 1996.
Conclusion. The Related General Partners reached the following conclusions
when comparing the estimated potential values of the Shares with the estimated
potential values of the consideration which may be offered in the alternatives
to the Consolidation: (i) it is not possible to assign a specific value to the
Shares or to predict accurately the prices at which the Shares will trade in the
market following the Consolidation; (ii) given the uncertainty as to the value
of the Shares, which is dependent in part upon the capital structure resulting
from the Consolidation, it is appropriate to analyze the Shares as having a
range of potential values; (iii) the Shares, when traded, may trade at prices
higher or lower than the range of values estimated by the Company, depending
upon a variety of market conditions not susceptible to precise determination;
(iv) there are similar difficulties in establishing the value of the
consideration available to BUC$holders from alternatives to the Consolidation,
with such values also dependent upon a number of market conditions not
susceptible to precise determination; and (v) the assumptions used by the
Related General Partners in establishing values for the alternatives to the
Consolidation may not prove to be accurate, and such consideration may have a
value higher or lower than the values estimated by the Related General Partners.
Furthermore, even if based on present market conditions, there is an overlap
between the indicated ranges of likely values of the Shares versus the
consideration which may be offered in the alternatives to the Consolidation, so
that the lower range of potential values of the Shares following the
Consolidation may be less than potential values for one or more of the
alternatives to the Consolidation, the Shares may still constitute fair
consideration for a Partnership's assets because (i) the Consolidation entails
other potential benefits to BUC$holders (e.g., liquidity and the potential
impact on distributions) besides the market value of the Shares which, in the
Related General Partners' opinion, could outweigh the possibility that the value
of the Shares at the time of Consolidation might be less than the value of
alternative consideration; (ii) as market conditions change over time, the range
of possible values for the Shares may improve in relation to the potential
values for the alternatives to the Consolidation; and (iii) the upper end of the
range of estimated
54
<PAGE>
potential values for the Shares is equal to or higher than the estimated value
for such alternatives. Notwithstanding the uncertainties in estimating the value
of the Shares, the Related General Partners believe the available information
suggests that the Shares constitute fair consideration for the assets of the
Partnerships taking into account the ranges of estimated values for the Shares
and the estimated values for alternatives to the Consolidation.
Estimated Market Value of Shares
It is not possible to determine with precision the value of the Company's
Shares and there can be no assurance that the market will value the Company's
Shares in relation to classes of securities selected by the Related General
Partner for comparative purposes. It is possible, therefore, that the Company's
Shares may trade at lower values than set forth below.
In order to estimate the range of possible values of the Shares based on
100% Participation, the Related General Partners observed and analyzed data for
selected companies which focus on the acquisition and ownership of multi-family
participating tax-exempt mortgage bonds because the assets to be owned by the
Company will, initially, consist of such bonds. None of these companies,
however, conduct their business in an identical or substantially similar fashion
as that proposed for the Company. The analysis included: (i) the determination
of the trading value of the securities and annual distribution yields for such
securities of comparable companies; (ii) the derivation of the distribution
yield of each comparable company (equal to the annual distribution rate per
share divided by the trading value per share); (iii) the identification of a
range of possible distribution yields; (iv) the determination of the pro forma
annual distribution per Share of the Company; and (v) the estimation of a
possible range of trading values for the Shares by capitalizing the Company's
pro forma annual distribution per Share by the high and low distribution yields
of the determined range.
In the Related General Partner's view, the most clearly comparable company
to that of the Company is Tax Exempt I which has assets which will become those
of the Company and are substantially similar to those of the Company. Further,
Tax Exempt I is listed on the American Stock Exchange as proposed for the
Company. Tax Exempt I, however, has a market capitalization of approximately $94
million (based on aggregate market value of outstanding publicly listed shares
as of December 31, 1996) and is a finite-life master limited partnership. The
Related General Partners believe that investors in real estate securities in the
current market will tend to ascribe a higher value (and, therefore, lower
distribution yield) to the Company than to Tax Exempt I for the following
reasons: (i) higher relative prospects for growth; (ii) good relative current
market position; (iii) quality of assets; and (iv) a higher market
capitalization (in excess of $300 million) which promotes higher trading volumes
and a larger percentage of institutional ownership of the Shares. The Related
General Partners believe these elements may weigh in favor of a higher relative
Share price (and, therefore, lower yield) than observed for Tax Exempt I. Tax
Exempt I's average annual yield was 7.76% in 1996.
Five companies that owned assets substantially similar to that of the
Company have, since prior to year-end 1996, changed their business purpose from
exclusively owning participating tax exempt mortgages and bonds to owning and
acquiring underlying properties subject to tax-exempt financing. They were not
considered in this analysis though they traded in 1996 at annual yields ranging
from 7.85%-8.82%.
One other company, Municipal Mortgage and Equity, LLC ("Muni-Mae") is a
product of a merger of two master limited partnerships and has assets and a
business purpose similar to the Company and trades on the American Stock
Exchange. However, it has a very limited trading history, having only begun
trading on August 30, 1996. Its market capitalization (based on aggregate market
value of outstanding publicly listed shares as of December 31, 1996) is smaller
than that of the Company at $164.32 million and it operates as a limited
liability company. Muni-Mae is internally managed while the Company is
externally managed. At 100% Participation, the Company's initial equity market
capitalization is expected to be approximately $308,796,000.
The following table sets forth data with regard to these comparables,
including market capitalization, trading price, indicated yield against trading
price, 52 week high-low stock price range, and 52 high-low yield range against
trading price.
Selected Comparable Companies
Per Share Information at December 31, 1996
------------------------------------------
<TABLE>
<CAPTION>
Current
(In millions) Indicated
Market Annualized 52 Week High- 52 Week
Company Capitalization(1) Price Yield Low Price Yield Range
------- ----------------- ----- ---------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Summit Tax Exempt Bond Fund LP $ 93.90 $11.875 7.070% $12.00-9.9850 7.00%-8.51%
Municipal Mortgage & Equity LLC $164.32 $16.000 8.375% $16.00-13.875 8.37%-9.65%
</TABLE>
- --------------
(1) Based on aggregate market value of outstanding publicly listed shares as of
12/31/96.
Based upon the foregoing, the Related General Partners observed that the
distribution yields for these companies range from 7% to approximately 9.65% for
the 12 month period ended December 31, 1996 (although Muni Mae had a limited
operating history of only five months).
55
<PAGE>
The Related General Partners believe that the Company's Shares will trade
in a range which reflects distribution yields of 6% to 8.0%, generally
reflecting a range approximately 14% below the low yield of Tax Exempt I and
slightly below the low yield of Muni Mae for the 52 week period ended December
31, 1996. The Related General Partners believe the market will ascribe a higher
relative value to the Company than to Tax Exempt I due to its anticipated growth
prospects and higher relative market capitalization (and thus liquidity) which
would be expected to result in a lower distribution yield than for Tax Exempt I.
Likewise, the Related General Partners believe that the positive factors
which are associated with the Company are also not attributable to Muni Mae
because its current market capitalization ($164 million based on aggregate
market value of outstanding publicly listed shares as of December 31, 1996) is
less by almost half than that anticipated initially for the Company (at 100%
Participation). Also, Muni Mae's charter, operations and objectives differ
markedly from that of both Tax Exempt I and the Company, as enumerated below.
1. There is no cap on the amount Muni Mae can invest in subordinated
investments. Approximately 20% of Muni Mae's acquisitions are related to
subordinated mortgage bonds. The Company's primary objective is to invest
in first mortgage bonds.
2. Muni Mae's board of directors can change, at their discretion, the
percentage of leverage to market capitalization. The Company's Board of
Trustees does not have this power and any increase in maximum leverage
limitation of the Company can only be made by Majority Vote of the
Shareholders.
3. Muni Mae's publicly listed shares (known as "Growth Shares") are
subordinate to three other classes of shares which receive priority
distributions over the publicly traded shares. The Company's traded Shares
are not subordinate to any other classes of shares.
Based on the above and assuming 100% Participation, the Related General
Partners utilized a distribution yield range of 6% to 8.0% to estimate the
possible range for the initial trading value of the Company's Shares. Based on
the above range of yields (6-8%) the mid range of the distribution yields (7%)
is slightly below the average of distribution yields for Tax Exempt I for the 52
week period ended December 31, 1996 and its current yield as of December 31,
1996. To calculate the range of estimated trading values for each $1,000 of
Original Investment, the Related General Partners first capitalized the
Company's annualized distribution based on the December 31, 1996 pro forma
financials of $0.9517 per Share by the foregoing distribution yield rates, which
resulted in a range of estimated trading values per Share of between $15.86 and
$11.90. The higher value of the estimated trading value range per $1,000 of
Original Investment for each Partnership was then determined by multiplying
$15.86 by the number of Shares to be received by the BUC$holders for each $1,000
of Original Investment. Similarly, the low value of estimated trading value
ranges per $1,000 of Original Investment for each Partnership was determined by
multiplying $11.90 by the number of Shares to be received by BUC$holders for
each $1,000 of Original Investment.
The Related General Partners also compared the Company to the comparable
companies listed above in terms of distribution yields. Based on an annualized
distribution based on the December 31, 1996 pro forma financials of $0.9517 per
Share and a hypothetical Share value of $15.00 per share, the Company's annual
distribution yield is 6.34%. Based on a hypothetical Share value of $12.00, the
Company's annual distribution yield is 7.93% and at a hypothetical Share value
of $10.00, the Company's annual distribution yield is 9.52%. These yields are
within the ranges established above for comparable companies.
The prices at which the Shares initially trade will be affected by, among
other things, (i) the potential pent-up selling pressures as a result of the
historic illiquidity of investments in the Partnerships; (ii) the Company's lack
of an operating history; (iii) the unfamiliarity of institutional investors,
financial analysts and broker-dealers with the Company and its prospects as an
investment when compared with other equity securities; (iv) the historical
financial performance of the Participating Partnerships which may be viewed by
some analysts as disappointing; and (v) the fact that equity securities of new
companies formed through consolidation of partnerships have traded below the
shareholders' equity reflected in the consolidated entity's financial
statements. It is impossible to predict how these factors will affect the price
of the Shares. For this reason, neither the data, nor the Company's use of such
materials, should be regarded as an opinion of the Related General Partners or
the Company as to the prices at which the Shares may trade following the
Consolidation. The range of estimated values shown for the Shares is designed to
facilitate an analysis of the Consolidation's fairness, and not to predict the
future trading prices of the Shares. Such prices may be either lower or higher
than those in the range of estimated values.
Going-Concern Value
The Related General Partners have estimated the going-concern value of the
Units by analyzing projected cash distributions generated by the assets,
assuming that the assets would be held until the end of the calendar year which
is eleven years following the date of the acquisition of the last FMB acquired
for each Partnership, followed by the immediate liquidation of all assets for
cash and the immediate distribution of the net proceeds and other cash available
for distribution to the holder of each Unit.
In order to determine the projected cash distributions in estimating the
going concern value of the Units, the Related General Partners undertook a
discounted cash flow analysis for each Partnership which takes into account (i)
cash flows derived from each Partnership's ongoing operations; and (ii) net
sales proceeds payable to the Partnership pursuant to the FMBs from the sale of
each Underlying Property. As noted above, for each Partnership it was assumed
that FMBs would be held until the end of the eleventh year following the date of
the acquisition of the last FMB acquired. The interest income from FMBs payable
to the Partnerships was determined using the same
56
<PAGE>
cash flow and sales scenario assumptions as provided in the Appraisals, with
Contingent Interest and sales proceeds discounted at the same rates as utilized
in the Appraisals and ranging from 11-12.5%. Each Partnership's annual cash flow
during the holding period was adjusted with respect to its administrative
expenses, which were increased at a rate of 3% annually. The resulting adjusted
cash flows incorporating net sales proceeds payable to the Partnership pursuant
to the FMBs from Underlying Properties, were then discounted to present value at
rates equal to the average of the discount rates utilized in the Appraisals for
the Underlying Properties for each Partnership: Tax Exempt I--11.66%; Tax Exempt
II--11.72%; Tax Exempt III--11.70%. Other assets (i.e. cash and temporary
investments) were then added and liabilities (i.e. notes and accounts payable)
were subtracted to arrive at net proceeds to be distributed to BUC$holders and
General Partners in accordance with the Partnership Agreements. The amount
estimated to be distributed to BUC$holders is the indicated going concern value
for the Units.
Although the Related General Partners consider it unlikely that all the
Underlying Properties or the Partnerships' assets could be sold in a single
transaction, this assumption was utilized in the going-concern analysis. This
approach does not take account of market conditions or other factors that may
affect asset management strategies, and it is unlikely that operation of a
Partnership as a going-concern would in fact follow such a format. Should the
assets be sold over time, even at prices equal to those projected, distributions
of cash flow from operations to the BUC$holders might be reduced because the
Partnership's relatively fixed costs, such as general and administrative
expenses, are not proportionately reduced with the sale of assets. However, for
simplification purposes, the sales are assumed to occur concurrently.
The value of the Units on a going-concern basis is not intended to be
indicative of the prices at which the Units could be sold by BUC$holders in the
currently illiquid secondary market, nor are such estimates intended to reflect
the distributions payable with respect to the Units if the Partnership's assets
were to be sold at their current fair market values.
Going Concern Analysis (as of June 30, 1996)
<TABLE>
<CAPTION>
Tax Exempt I Tax Exempt II Tax Exempt III
-------------- --------------- ---------------
<S> <C> <C> <C>
Net Present Value of Net Income(1) $109,556,032 $134,696,728 $41,262,677
Plus: Undistributed Cash & Accounts Receivable 2,369,953 4,314,926 544,703
Less: Notes Payable (13,680,866) 0 0
Less: Accounts Payable (427,514) (496,371) (269,111)
------------ ------------ -----------
Going Concern Value $ 97,817,605 $138,515,283 $41,538,269
General Partners (2%) $ 1,956,352 $ 2,770,306 $ 830,765
Limited Partners (98%) $ 95,861,253 $135,744,977 $40,707,504
Value per $1,000 Original Investment $ 606 $ 742 $ 660
</TABLE>
- --------------
(1) Based on discounted cash flow analysis assuming assets are held until the
end of calendar year that is eleven years from the acquisition of the last
asset in the Partnerships.
Liquidation Values
Although not considered to be a viable option at this time, an alternative
available to the Related General Partners is to proceed with a liquidation of
the Partnerships and with a corresponding distribution of the net liquidation
proceeds to the Related General Partners and BUC$holders in accordance with the
Partnership Agreements.
In order to estimate the liquidation value of the Units with respect to
each of the Partnerships, the Related General Partners assumed that each FMB was
sold as of June 30, 1996 at values determined by discounting the stream of
interest payments and repayment proceeds (including Contingent Interest) payable
to the Partnerships for a five year period as follows: (i) Base Interest and
repayment of the face amount of the FMBs were discounted at rates ranging from
7% to 10.5%; and (ii) Contingent Interest payable from Net Property Cash Flow or
Net Sale and Repayment Proceeds was discounted at rates ranging from 17 to 22%.
Net cash flows and sales proceeds from operations of the Underlying Properties
were derived utilizing the same assumptions as presented in the Appraisals.
Individual discount rates in the ranges outlined above were derived based on
debt service coverage ratios of each Underlying Property's cash flow, reflecting
the perceived risks and credit-worthiness attendant with each FMB. The Related
General Partners believe the resulting values reasonably indicate the selling
prices or values of the FMBs held by the Partnerships. From these values,
brokerage commissions payable in connection with the sale of the FMBs was
estimated at 3% of FMB sales proceeds and were subtracted from the proceeds from
the sale of FMBs. All the Partnerships' (i) other assets as of June 30, 1996,
including accounts receivable, undistributed cash and other assets were then
added to the net proceeds from sale of FMBs and (ii) liabilities were then
subtracted, including notes and accounts payable, contingency costs as well as
partnership level costs incurred in winding down the Partnerships. The resulting
net liquidation proceeds were then distributed among the General Partners and
BUC$holders in accordance with the Partnership Agreements. The amount estimated
to be distributed is the indicated liquidation value for the Units.
Applying these procedures, the Related General Partners arrived at the
liquidation values set forth in the table entitled "Summary of Comparative
Valuation Alternatives," above. The Appraisals set forth, subject to the
specified assumptions, limitations and qualifications
57
<PAGE>
of the Partnership's future income, expenses, cash flow and other significant
financial matters, C&W's professional opinion as to the Appraised Value of the
Underlying Property securing the Partnership's FMBs. While the Appraisals do not
indicate the price at which the Underlying Properties would actually sell for,
the valuation methodology utilized by C&W generally seeks to estimate the prices
at which the Underlying Properties would sell, as of October 15, 1995, if
disposed of in an arm's-length transaction between a buyer and a willing seller,
each having access to relevant information regarding the historical revenues and
expenses of such properties. The Appraisals assume that the Underlying
Properties are disposed of in an orderly manner and are not sold in forced or
distressed sales where sellers might be expected to dispose of their interests
at substantial discounts to their Appraised Values.
The following chart sets forth a summary of the results of the Related
General Partners' analysis with respect to the liquidation values of each
Partnership.
Liquidation Analysis (as of June 30, 1996)
<TABLE>
<CAPTION>
Tax Exempt I Tax Exempt II Tax Exempt III
-------------- --------------- ---------------
<S> <C> <C> <C>
Proceeds from sale of FMBs(1)(2) $108,883,463 $146,100,514 $38,582,406
Plus: Undistributed Cash and Accounts
Receivable 2,369,953 4,314,926 544,703
Less: Notes Payable (13,680,866) 0 0
Less: Accounts Payable (427,514) (496,371) (269,111)
Less: Brokerage Commissions (3,354,013) (4,583,899) (1,174,053)
Less: Sales costs and contingencies (227,873) (211,395) (160,594)
------------ ------------ -----------
Liquidation Value $ 93,563,150 $145,123,775 $37,523,351
General Partners (2%) 1,871,263 2,902,476 750,467
Limited Partners (98%) 91,691,887 142,221,300 36,772,884
Value per $1,000 Original Investment $ 580 $ 777 $ 597
</TABLE>
- --------------
(1) Proceeds from FMBs are the amounts assumed to be paid to the Partnerships at
the present values of the mortgages/loans, based on discounting the stream
of Base Interest payments, utilizing discount rates ranging from 7% to 10.5%
(depending on credit quality) and the stream of Contingent Interest
payments, utilizing discount rates ranging from 17% to 22%.
(2) Includes the SML from Clarendon Hills in Tax-Exempt I; all other SMLs were
valued for this purpose at zero.
Comparative Analysis of Values
In reviewing the fairness of the Consolidation, the Related General
Partners also reviewed and compared the estimated market value of the Shares
with the estimated liquidation and going-concern values of the Partnerships
(calculated as described above). The Related General Partners observed that
anticipated liquidation and going-concern proceeds exceed the lowest estimated
value of the Shares. Thus, it is possible that the value that would be derived
by BUC$holders in one or more of the Partnerships from a liquidation or
continuation of the Partnership may be greater than the value that would be
derived from the Consolidation. The Related General Partners concluded that this
potential detriment of the Consolidation does not affect the fairness of the
Consolidation to BUC$holders. This conclusion takes into account (a) the
inherent uncertainty in setting forth and comparing estimated market valuations
of publicly traded securities and the liquidation and going-concern values for
entities such as the Partnerships which have illiquid assets whose disposition
would occur over time, (b) the fact that the top end of the range of potential
values of Shares to be issued in the Consolidation is higher than the
liquidation and going-concern values of the Partnerships (calculated as
described above), (c) the absence of any assurance that the liquidation and
going-concern values (calculated as described above) can actually be achieved,
especially in light of administrative costs likely to be incurred over a
measured liquidation or continued operation of the Partnerships, together with
other transaction costs and (d) the Related General Partners' belief that the
value of the Shares to be issued in the Consolidation includes a greater
potential for liquidity and growth than the liquidation or going-concern value
of the Partnerships (calculated as described above). In light of all of the
foregoing factors, BUC$holders are urged to carefully review the information
regarding valuation estimations in this Solicitation Statement, including the
information set forth under "--Comparison of Alternatives to the Consolidation."
58
<PAGE>
Secondary and Market Prices for Units
Tax Exempt I
The information in the table above under the heading "Market Trades" shows
the highest and lowest closing Unit price (based upon $1,000 of Original
Investment) on the American Stock Exchange for the twelve month period ending
December 31, 1996. Set forth below are the high and low prices for each
quarterly period of the last two years for which the Units were traded:
1997 1997 1996 1996 1995 1995
Low High Low High Low High
------ ------ ------ ------ ----- ------
March 31 11-5/8 12-3/4 9-1/4 10-3/8 8-1/2 9-7/8
June 30 -- -- 9-7/8 10-5/8 9-3/8 10-1/4
September 30 -- -- 9-7/8 11 9-3/4 10-1/4
December 31 -- -- 10-3/8 11-7/8 9-1/2 10-3/8
Tax Exempt II and III
The information in the table above under the heading "Secondary Market
Trades" shows the highest and lowest secondary market prices for the Units
(based upon $1,000 of Original Investment) as reported to Partnership Spectrum
by certain secondary market firms involved in sales of the Units over the twelve
month period ended November 30, 1996. When gathering such data, Partnership
Spectrum requests that the recorded prices per Unit include any mark-ups for
Units sold by the firms acting as principals in the secondary market
transactions and include any commissions charged by them for facilitating the
transactions, unless the firms acted as retail brokers.
No established market for the Units of Tax Exempt II or III was ever
expected to develop and the secondary market transactions for the Units have
been limited and sporadic. It is not known to what extent the transactions in
the secondary market are between buyers and willing sellers, each having access
to relevant information regarding the financial affairs of the Partnerships,
expected value of their assets, and their prospects for the future. Many
transactions in the secondary market are believed to be distressed sales where
sellers are highly motivated to dispose of the Units and willing to accept
substantial discounts from what might otherwise be regarded as the fair value of
the interest being sold, to facilitate the sales. Secondary market prices
generally do not reflect the current market of the Partnerships' assets, nor are
they indicative of total return, since prior cash distributions and tax benefits
received by the original investor are not reflected in the price. Nonetheless,
notwithstanding these qualifications, the secondary market prices, to the extent
that the reported data are reliable, are indicative of the prices at which the
Units trade in the illiquid secondary markets.
Recent Purported Tender Offer for Tax Exempt II
On April 24, 1997, various entities for which MacKenzie Patterson, Inc. is
a general partner or an agent (collectively, the "Offerors") notified the
Related General Partner of Tax Exempt II that they were making a tender offer
for up to 177,500 Units of Tax Exempt II at a price of $10.50 per Unit. At the
request of the Related General Partner, the Court issued an order to show cause
requiring the Offerors to show cause why they should not be held in contempt and
required to cease and desist from pursuing their tender offer. The application
for the order to show cause was based on the fact that, among other matters, (i)
the Court's preliminary Order enjoined BUC$holders and persons acting in concert
with them from making a tender offer for any Units of any of the Partnerships
pending approval of the Consolidation and (ii) the tender offer will interfere
with the Court's jurisdiction and the orderly consideration and administration
of a settlement of the Class Action. See "SUMMARY--The
Consolidation--Restrictions on Transfers and Other Activities Prior to Final
Approval of Consolidation." The Court held a hearing on the matter on May 19,
1997 at which time the Court involved the Offerors' tender offer until further
order by the Court.
Distribution Comparison
The Related General Partners have considered the potential impact of the
Consolidation upon distributions that would be made to BUC$holders that become
Shareholders. The Related General Partners anticipate that BUC$holders will
experience an increase in distributions. Lower costs resulting from the
elimination of certain fees payable to the P-B General Partner and the
contribution to the Company of one-half of the P-B Interest acquired by the
Related General Partner as well as reduced costs associated with the operation
and maintenance of the Partnerships as public partnerships and certain economies
of scale resulting from the common beneficial ownership and management of the
Participating Partnerships' portfolio is expected to increase funds higher than
funds available for distribution by the individual Partnerships. Furthermore,
the Consolidation will simplify the preparation of financial statements, tax
returns, investor information and reports and filings otherwise required.
Certain cost savings will be enhanced to the extent that more than the minimum
number of Partnerships participate in the Consolidation.
Notwithstanding the Related General Partners' belief that distributions to
BUC$holders will increase after the Consolidation, the Company's 1996 pro forma
financial statements indicate that BUC$holders of Tax Exempt II and Tax Exempt
III would have received lower distributions (approximately 1% or $0.56 per
$1,000 of Original Investment less than 1996 annual distributions for Tax Exempt
II and approximately 0.8% or $0.37 per $1,000 of Original Investment less than
1996 annual distributions for Tax Exempt III had the Consolidation occurred on
January 1, 1996 with 100% Participation). However, the Related General Partners
believe that additional cost savings together with the benefits anticipated to
be derived from the Company's new business plan, neither of which is reflected
in the
59
<PAGE>
Company's 1996 pro forma financial statements, will be achieved, thereby
resulting in a progressive increase in distributions to BUC$holders including
those in Tax Exempt II and Tax Exempt III. There can be no assurance that such
additional cost savings or benefits from the Company's new business plan will be
achieved.
The Related General Partners have prepared the following pro forma
distribution comparison to show the distributions that would have been made to
BUC$holders had they become Shareholders of the Company on January 1, 1996,
assuming 100% Participation and all three Minimum Participation scenarios, as
compared with the actual distributions made by the Partnerships in 1996.
Historical/Pro Forma Distribution Comparison
<TABLE>
<CAPTION>
Pro Forma
Distribution to
Shareholders in 1996
Historical Distribution (BUC$holders
Partnership to BUC$holders in 1996 Only)(1)(2)
- ---------------- ------------------------- ----------------------
<S> <C> <C>
Tax Exempt I $ 6,641,237 $ 7,192,903
Tax Exempt II $ 9,517,685 $ 9,415,828
Tax Exempt III $ 2,711,830 $ 2,689,244
------------ ------------
$18,870,751 $19,297,975
<CAPTION>
Pro Forma
Distribution Per $1,000 of Original Investment(2)
--------------------------------------------------------------------------
Minimum
Participation Minimum Minimum
Historical Distribution Including Participation Participation
calculated per $1,000 Tax Exempt Including Including Tax
Partnership of Original Investment 100% Participation I & II Tax Exempt II & III Exempt I & III
- ---------------- ------------------------- -------------------- --------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Tax Exempt I $42.00 $45.49 $45.23 N/A $44.04
Tax Exempt II $52.00 $51.44 $51.15 $53.18 N/A
Tax Exempt III $44.00 $43.63 N/A $45.11 $42.24
</TABLE>
- --------------
(1) Assumes 100% Participation.
(2) Assumes pro forma adjustments to the Company's distributable cash flow for
the year ending December 31, 1996 as follows: (1) reduction in G & A
expenses pursuant to the Management Agreement (the maximum amount of
expenses which the Company may reimburse the Manager is $200,000 (pro rata
for Minimum Participation scenarios)); (ii) additional interest expense
expected to be incurred as a result of financing the Consolidation Expenses;
(iii) decrease of approximately 25% of the sum of the aggregate annual fees
paid to both General Partners (i.e. the Special Distribution/Partnership
Management Fee); and (iv) an increase in allocable cash flow to the former
BUC$holders as a result of the Manager contributing back one-half of the P-B
Interest.
When analyzing distribution data, BUC$holders should bear in mind that a
number of factors affect the level of the Partnerships' quarterly distributions.
These factors include the distributable income generated by Partnership
operations and the Partnership policy with respect to quarterly cash
distributions. In some cases, the Partnerships have, in order to maintain
constant levels of distributions, made quarterly distributions in excess of
distributable cash specifically generated by Partnership operations during the
preceding quarter. The Partnership's ability to make such an excess distribution
would also be affected by existing cash reserves, excess distributable cash
generated in previous quarters and/or the ability to borrow funds necessary to
make the distribution. Alternatively, the Partnerships have, on occasion,
reduced distribution levels to a level consistent with current and/or projected
cash flow from operations. In addition, the portion of total assets represented
by income-generating assets versus cash and non-cash generating assets differs
among the Partnerships. Such differences affect to some degree the amount of
distributable cash generated relative to the Adjusted Net Asset Values of the
Partnerships. For the foregoing reasons, the fact that pro forma distributions
may be higher than actual distributions for a single period (such as the
Company's pro forma distributions for 1996 for one of the three Partnerships)
does not necessarily mean that distributions to BUC$holders of a given
Partnership following the Consolidation will exceed distributions that would
have been paid by that Partnership when analyzed over a number of years.
Compensation, Reimbursements and Distributions to the Related General Partners
Under the Partnership Agreements, the Related General Partners and their
affiliates are entitled to receive compensation in connection with managing the
affairs of each Partnership. Such compensation includes distributions in respect
of general partner equity interests, management and transaction fees, and
reimbursement of expenses for partnership level services such as legal,
accounting, data processing and duplicating services. For a comparison of the
compensation structure of each of the Partnerships with that of the Company, see
"COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE
PARTNERSHIPS--Fees and Expenses."
Following the Consolidation, the Company will retain the Manager to manage
the operations of the Company. The Manager will generally receive from the
Company approximately 75% of the sum of the aggregate annual fees and
distributions payable by the Partnerships to both of the General Partners. See
"MANAGEMENT--Summary of the Management Agreement" for a description of the fees
and other compensation payable to the Manager.
The following table sets forth the historical compensation and
distributions paid by the Partnerships on a combined basis to the General
Partners and their affiliates for the Partnerships' last three fiscal years and
for the three month period ended March 31, 1997 (Historical) and the
compensation and distributions that would have been paid in the last three
fiscal years and for the three month period ended March 31, 1997 if the
Consolidation had been in effect, assuming 100% Participation (Pro Forma).
60
<PAGE>
COMPENSATION AND DISTRIBUTIONS TO GENERAL PARTNERS
<TABLE>
<CAPTION>
Three Months Year Ended December 31,
Ended -----------------------------
March 31, 1997 1996 1995 1994
---------------- -------- ------- ------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Historical:
Bond Selection Fees(1) $ -- $ -- $ -- $ --
Bond Placement Fees(1) -- -- -- --
---- ------ ------ ------
Subtotal -- -- -- --
---- ------ ------ ------
Asset Management and Transaction
Fees(2) -- 33 49 39
Loan Servicing Fees(11) 215 872 872 872
Partnership Administration Fees and
Reimbursements(3) 68 278 330 318
---- ------ ------ ------
Subtotal 283 1,183 1,251 1,229
---- ------ ------ ------
Special Distributions/Partnership
Management Fee(4) 435 1,745 1,745 1,745
General Partner Distributions(5) 96 385 385 385
---- ------ ------ ------
Subtotal 531 2,130 2,130 2,130
---- ------ ------ ------
Disposition Fee(6) -- -- -- --
---- ------ ------ ------
Total Historical $814 $3,313 $3,381 $3,359
==== ====== ====== ======
Pro Forma (Assuming no leverage):
Bond Selection Fees $ -- $ -- $ -- $ --
Bond Placement Fees -- -- -- --
---- ------ ------ ------
Subtotal -- -- -- --
---- ------ ------ ------
Asset Management and Transaction
Fees(2) -- 33 49 39
Loan Servicing Fees(12) 215 872 872 872
G & A Reimbursements(7) 54 211 205 200
---- ------ ------ ------
Subtotal 269 1,116 1,126 1,111
---- ------ ------ ------
Special Distributions 327 1,309 1,309 1,309
Distributions Attributable to Shares(8) 73 289 289 289
---- ------ ------ ------
Subtotal 400 1,598 1,598 1,598
Liquidation Fee(9) -- -- -- --
---- ------ ------ ------
Total Pro Forma (assuming no
leverage) $669 $2,714 $2,724 $2,709
==== ====== ====== ======
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Three Months Year Ended December 31,
Ended -------------------------------------------------
March 31, 1997 1996 1995 1994
---------------- ------------- ------------- -----------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Pro Forma (Assuming maximum leverage):
Bond Selection Fees(10) $ -- $ -- $ -- $ 7,187(10)
Bond Placement Fees -- -- -- 7,044(10)
------ ------ ------ -------
Subtotal -- -- -- 14,231
------ ------ ------ -------
Asset Management and Transaction
Fees(2) -- 33 49 39
Loan Servicing Fees(2) 435 1,752 1,752 1,753
G & A Reimbursements(7) 107 423 412 402
------ ------ ------ -------
Subtotal 542 2,208 2,213 2,194
------ ------ ------ -------
Special Distributions 657 2,629 2,629 2,629
Distributions Attributable to Shares(11) N/A N/A N/A N/A
------ ------ ------ -------
Subtotal 657 2,629 2,629 2,629
------ ------ ------ -------
Liquidation Fee(9) -- -- -- --
------ ------ ------ -------
Total Pro Forma (assuming
maximum leverage) $1,199 $4,837 $4,842 $19,054
====== ====== ====== =======
</TABLE>
- --------------
(1) No Bond Selection or Bond Placement Fees have been paid by these
Partnerships during this time.
(2) Asset management and transaction fees include all fees paid by (i) the
Partnerships to the General Partners and affiliates, pursuant to the
applicable partnership agreement and (ii) the Company in each case for
Asset monitoring services relating to periodic inspections and the
monitoring of the performance of the underlying properties. The amount of
increased fees assuming maximum leverage is not determinable at this time.
(3) Partnership administration fees and reimbursements include all amounts paid
by the Partnerships to the General Partners and their affiliates for
partnership administration services, as a reimbursement for general and
administrative and overhead costs payable by each Partnership, pursuant to
the applicable partnership agreement.
(4) Reflects a Partnership Management Fee for Tax Exempt I and II with Tax
Exempt III being paid as a Special Distribution from adjusted cash flow.
(5) Reflects the distributions paid by the Partnerships to the General Partners
by virtue of their general partner interests in the Partnerships.
(6) Represents a subordinated fee payable to the General Partners, generally
based on the gross proceeds from the sale or repayment of FMBs. It is
unlikely that the General Partners would receive such fee.
(7) Reimbursements to the Manager for administrative expenses will not exceed
$200,000 in any given year of operations, subject to the following
adjustments: the overall limit on reimbursements for administrative
expenses will be increased (i) after the Company's first year of operations
and each year thereafter by a percentage equal to the Consumer Price Index
for the year then ended, and (ii) proportionately as the Company increases
its asset portfolio.
(8) Reflects distributions paid to the Related General Partners and the Manager
by virtue of their ownership of Shares.
(9) The Liquidation Fee is only payable in the event of the Company's
liquidation.
(10) In determining the pro forma compensation payable with respect to new
acquisitions by the Company in the last three fiscal years, the table
assumes that 100% of the proceeds of the maximum leverage was incurred and
fully invested as of January 1, 1994.
(11) These distributions are based on future cash flow which is not determinable
at this time.
(12) Loan servicing includes all fees paid by (i) the Partnership to General
Partners and affiliates, pursuant to the applicable Partnership Agreement,
and (ii) the Company to the Manager for servicing and managing the FMBs and
other tax-exempt instruments.
62
<PAGE>
ALLOCATION OF SHARES
Overview
The number of Shares to be allocated in the Consolidation will be
determined as the result of two separate allocations: (i) Shares allocated among
the Participating Partnerships, and (ii) Shares allocated to each Participating
Partnership which are then allocated among the BUC$holders, the Related General
Partners and the Manager.
Explanation of Allocations
Allocation among the Partnerships. The total Shares allocated to the
Participating Partnerships (20,586,383 shares, assuming 100% Participation) will
be allocated among the Participating Partnerships based on the relative Adjusted
Net Asset Values assigned to each such Partnership.
The following table assumes 100% Participation and sets forth for each of
the Partnerships the Adjusted Net Asset Value, the percentage of aggregate
Adjusted Net Asset Value, and the number of Shares allocable to such
Partnership.
Allocation Summary
<TABLE>
<CAPTION>
Number of
Adjusted Percentage of Shares
Net Asset Aggregate Adjusted Net Allocated to
Partnership Value Asset Value Partnership
- ---------------- -------------- ------------------------ -------------
<S> <C> <C> <C>
Tax Exempt I $115,096,936 37.27% 7,673,129
Tax Exempt II 150,666,979 48.79% 10,044,465
Tax Exempt III 43,031,833 13.94% 2,868,789
------------ ------ ----------
TOTAL $308,795,748 100.00% 20,586,383
============ ====== ==========
</TABLE>
Allocation among the BUC$holders, the Related General Partners and the
Manager. Each of the Partnership Agreements sets forth a procedure for
allocating distributions (i) between the General Partners and the BUC$holders
and (ii) among the BUC$holders as a group. These distribution rules were
described in detail in the disclosure documents delivered to the BUC$holders
when, through the sale of Units, capital was originally raised by the
Partnerships. The allocation of Shares between the Related General Partners
(including the Manager) and the BUC$holders will be made in accordance with the
provisions applicable to distributions of cash flow from operations of the
Partnership. With respect to the Shares allocated to the BUC$holders as a group,
such Shares will be allocated among the BUC$holders in proportion to, and in
accordance with, the number of Units held by each BUC$holder. The table below
sets forth the number of Shares allocable to the Related General Partners, the
Manager and the BUC$holders and the number of Shares per $1,000 of Original
Investment in each Partnership.
Allocation of Shares per $1,000 of Original Investment
<TABLE>
<CAPTION>
No. of Shares No. of Shares
Allocated to Allocated to
No. of Shares Related General No. of Shares BUC$holders
Allocated to Partners and the Allocated to $1,000 of Original
Partnership Partnership Manager BUC$holders Investment(1)
- ----------------- --------------- ------------------ --------------- -------------------
<S> <C> <C> <C> <C>
Tax Exempt I 7,673,129 115,097 7,558,032 48
Tax Exempt II 10,044,465 150,667 9,893,798 54
Tax Exempt III 2,868,789 43,032 2,825,757 46
---------- ------- ----------
Total 20,586,383 308,796 20,277,587
========== ======= ==========
</TABLE>
- --------------
(1) Rounded to the nearest whole Share.
Determination of Adjusted Net Asset Value
Valuations. The adjusted net asset value (the "Adjusted Net Asset Value")
of each Partnership was based, in part, on the Appraised Value determined by C&W
of each of the Underlying Properties which secure Mortgage Loans held by a
Partnership. The Summarization Letter from C&W states that there may have been
changes in the market values of the Underlying Properties and that physical
changes in the Underlying Properties may result in changes to the Appraised
Value thereof. The Related General Partners determined not to obtain new
appraisals or update the Appraisals, based on their belief that the Appraised
Value of the Underlying Properties securing the Partnership's tax-exempt
participating FMBs has not changed materially since October 15, 1995 and the
cost of obtaining new appraisals or updating the Appraisals. Adjusted Net Asset
Value for a Partnership is equal to an amount calculated as follows:
(i) the aggregate Loan Values (defined and calculated as set forth
below) of the FMBs held by the Partnership; plus
(ii) the amount of any undistributed cash and other assets held by the
Partnership as of March 31, 1996; less
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<PAGE>
(iii) the amount of the Partnership's accounts payable (including,
without limitation, Partnership indebtedness and deferred fees payable to the
General Partners and affiliates) as of March 31, 1996.
The "Loan Value" of each FMB held by a Partnership is equal to the amount
which the Partnership would receive under the terms of the FMB (i.e., principal,
accrued and unpaid Base Interest and Contingent Interest on the FMB and SML's)
if (i) the Underlying Property which secures the FMB were sold for an amount
equal to its Appraised Value and (ii) the net sale proceeds (i.e., after payment
of third party expenses) were applied first to repay the Partnership's FMB.
Set forth below is a table which shows the derivation of the Adjusted Net
Asset Values for each Partnership based upon the formula described above.
DERIVATION OF ADJUSTED NET ASSET VALUES
<TABLE>
<CAPTION>
Tax Exempt I Tax Exempt II Tax Exempt III
-------------- --------------- ---------------
<S> <C> <C> <C>
Net Proceeds from Sale of FMBs(1) $126,818,800 $146,980,713 $42,684,850
Add: Undistributed Cash and Accounts Receivable 2,377,432 4,088,636 633,602
Less: Notes Payable (13,680,866) 0 0
Less: Accounts Payable (418,430) (402,370) (286,619)
------------ ------------ -----------
Adjusted Net Asset Value(2)(3) $115,096,936 $150,666,979 $43,031,833
</TABLE>
- --------------
(1) Net proceeds from sale of FMBs are the amounts assumed to be paid to the
Partnerships according to the FMB and SML loan documents, assuming the
Underlying Properties securing the FMBs were sold on 3/31/96 at the 10/15/95
Appraised Values less selling expenses (3-5% of sales proceeds as determined
in the Appraisals).
(2) No Consolidation Expenses were attributed in this analysis.
(3) Assets and liabilities are as of 3/31/96.
Possible Revisions to Valuations. The Company has used these Adjusted Net
Asset Values to determine the allocation of Shares, even though such Adjusted
Net Asset Values might be different if calculated as of the date of the Fairness
Hearing. The Adjusted Net Asset Values will not be recalculated as of the date
of the Fairness Hearing based upon the Related General Partner's belief that the
Adjusted Net Asset Values of the Partnerships, as computed, will not differ
materially from the Adjusted Net Asset Values of the Partnership as of the date
of this Solicitation Statement. However, if the assets of any Partnership are
actually different as of the date of the Fairness Hearing, the Related General
Partners reserve the right to revise the Adjusted Net Asset Values, subject to
the approval of the Court. BUC$holders will not have the opportunity to review
and object to any revisions made to the Adjusted Net Asset Values. However, at
the Fairness Hearing, the Court will have the opportunity to review any such
revisions and, pursuant to the Settlement Stipulation, the Court must
specifically find as part of its Final Order that the allocations were fair,
just and equitable. Therefore, the Court, in its discretion, can reject any
revisions to the Adjusted Net Asset Values set forth in this Solicitation
Statement (as well as modify the allocation method set forth in this
Solicitation Statement or any other aspect of the Related Settlement) subject to
Related's option to terminate the Related Settlement if such revisions are not
acceptable to it.
Furthermore, in the event that due to unforeseen developments the Adjusted
Net Asset Values as of the Effective Date (or such other time as the
Consolidation is consummated) are materially different from the Adjusted Net
Asset Values set forth in the Solicitation Statement, then Class Counsel and
Related have the right to apply to the Court for an order altering the
allocation of Shares to take into account such materially changed circumstances
that result in material differences in the Adjusted Net Asset Values. The
proposed Final Order that the parties will ask the Court to enter after the
Fairness Hearing in connection with the Court's Approval of the Related
Settlement provides that the Court will retain exclusive jurisdiction, among
other things, over the parties and the Class Members for the purpose of the
administration and implementation of the Related Settlement, including the
resolution of any disputes relating to the allocation of Shares.
64
<PAGE>
FAIRNESS OPINION AND APPRAISALS
Fairness Opinion
General. Class Counsel retained Oppenheimer to render its opinion as to the
fairness, from a financial point of view, of the Consolidation, including the
allocation of Shares among the Partnerships, to the BUC$holders of the
Partnerships assuming 100% Participation and all other combinations of
Participating Partnerships (including the Minimum Participation scenarios). The
full text of the Fairness Opinion, which contains a description of the
assumptions and qualifications made, matters considered and limitations imposed
on the review and analysis, is set forth in Appendix A and should be read in its
entirety. Certain of the material assumptions, qualifications and limitations to
the Fairness Opinion are described below. The summary set forth below does not
purport to be a complete description of the analyses used by Oppenheimer in
rendering the Fairness Opinion.
In connection with its engagement, Oppenheimer was not requested to serve
as financial advisor to Class Counsel or any other party in the negotiation of
the terms of the Consolidation. Oppenheimer was not requested to and does not
make any recommendation to the BUC$holders regarding the Consolidation. Also,
Oppenheimer was not requested to and did not analyze or give any effect to the
impact of any federal, state or local income taxes to the BUC$holders arising
out of the Consolidation contemplated herein.
Oppenheimer, as part of its investment banking business, is regularly
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate, estate and other purposes. Class Counsel's selection
of Oppenheimer was based upon several factors, including experience, reputation
and price.
Class Counsel did not place any limitation on the scope of Oppenheimer's
investigation or review.
In connection with preparing the Fairness Opinion, Oppenheimer was not
engaged to, and consequently did not, prepare any written report or compendium
of its analysis for internal or external use beyond the opinion obtained.
The Related General Partners and the Partnerships have agreed to indemnify
Oppenheimer against certain liabilities arising out of Oppenheimer's engagement
to prepare and deliver the Fairness Opinion. In addition, the Related General
Partners and the Partnerships have agreed to cause the Company to become an
additional indemnifying party upon consummation of the Consolidation. Upon
consummation of the Consolidation, the Partnerships' indemnity obligations will
become obligations of the Company.
The preparation and receipt of the Fairness Opinion was requested by Class
Counsel. In connection with such request, Class Counsel asked that the Related
General Partners interview and provide them with a list of firms qualified to
render fairness opinions. After interviewing several such entities, the Related
General Partners provided Class Counsel with the names of four such entities
based on each such entity's experience, expression of interest, timing and
price. From the list provided by the Related General Partners, Class Counsel
initially sought to retain Bear Stearns & Co., Inc. ("Bear Stearns") to render
the Fairness Opinion. However, after initially agreeing to being engaged for
this assignment, Bear Stearns withdrew from the assignment after Class Counsel
insisted that Bear Stearns directly represent the interests of investors and
that the opinion be rendered directly to it and the BUC$holders. Specifically,
Bear Stearns declined to be retained by, and render a fairness opinion to, Class
Counsel or to the BUC$holders although they were willing to be retained by and
consider rendering a fairness opinion to the Related General Partners and the
Partnerships. Bear Stearns advised Class Counsel that it is its general policy
with respect to engagements relating to limited partnerships to render fairness
opinions only to the general partner(s) and/or the partnerships themselves, and
not to other parties such as Class Counsel or the investors.
Information Reviewed. In rendering its Fairness Opinion which is dated
November 11, 1996, and as the basis therefore, Oppenheimer, among other things,
reviewed: this Solicitation Statement; the Prospectus dated February 19, 1986
for Tax Exempt I; the Prospectus dated July 7, 1986 for Tax Exempt II; the
Prospectus dated June 10, 1987 for Tax Exempt III; audited financial statements
for each Partnership for calendar years 1994 and 1995; the Form 10-K for each
Partnership for the year ended December 31, 1995 and the Form 10-Q for each
Partnership for the quarter ended June 30, 1996; documents describing each
Partnership's FMBs, documents describing the details of any bond modifications
and/or forbearance agreements (if applicable); the Appraisals dated October 15,
1995 prepared by C&W for each Underlying Property securing a mortgage loan made
by a Partnership; audited financial statements for calendar years 1994 and 1995
and unaudited financial statements and other financial information for the six
month periods ending June 30, 1996 for each of the Underlying Properties
securing a mortgage loan made by a Partnership; pro forma financial statements
of the Company for the year ended December 31, 1995 and for the quarterly period
ended March 31, 1996, assuming in each case that the Consolidation occurred as
of January 1, 1996; financial forecasts of future operations of the Partnerships
covering each of the years in the five year period ended June 30, 2001;
financial forecasts of future operations of the Company covering each of the
years in the five year period ended June 30, 2001, assuming the Consolidation
occurred as of June 30, 1996; a business plan of the Company; and certain other
financial and other information that was publicly available or furnished to
Oppenheimer by Class Counsel or the Related General Partners. The financial
forecasts provided to Oppenheimer by the Related General Partners are attached
as Appendix C.
In addition, Oppenheimer held discussions with representatives of Class
Counsel and the Related General Partners, inspected a representative number of
the Underlying Properties which secure FMBs held by the Partnerships,
interviewed property managers at the Under-
65
<PAGE>
lying Properties inspected, interviewed representatives of C&W and conducted
such other investigations, financial analyses and studies, and reviewed such
other information and factors as it deemed appropriate for the purposes of the
Fairness Opinion.
Oppenheimer also reviewed the procedures and methodology applied by C&W to
value the Underlying Properties to determine if they had been applied on a
consistent basis among the Partnerships, reviewed the components of each
Partnerships' other assets and other liabilities and analyzed the method used to
allocate the Shares among the Partnerships by the Related General Partners.
Assumptions, Limitations and Qualifications. In rendering the Fairness
Opinion, Oppenheimer, without assuming responsibility for independent
verification, relied on the accuracy and completeness of all financial and
operating data, financial analyses, reports and other information that were
publicly available, compiled or approved by or otherwise furnished or
communicated to Oppenheimer by or on behalf of the Related General Partners.
With respect to the financial and operating forecasts furnished to Oppenheimer,
Oppenheimer assumed, with Class Counsel's approval, that they reflected the best
current judgement of the Related General Partners as to future financial
performance, and that there was a reasonable probability that the projections
would prove to be substantially correct. Oppenheimer did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnerships.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analyses or summary description. Accordingly, Oppenheimer believes that
its analyses must be considered as a whole and that considering any portion of
such analyses and of the factors considered, without considering all analyses
and factors, could create a misleading or incomplete view of the process
underlying its Fairness Opinion. Any estimates contained in these analyses are
not necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
herein. In addition, analyses relating to the value of the FMBs, the Underlying
Properties and/or the business of the Company do not purport to be appraisals or
to reflect the prices at which the FMBs, the Underlying Properties or Company
may actually be sold.
Oppenheimer expressed no opinion as to the price or trading range at which
the Company's Shares would trade following completion of the Consolidation and
the listing of the Shares on the American Stock Exchange. It is likely that, at
least during the immediate period following completion of the Consolidation, the
Shares will trade below the estimated ranges of values.
Oppenheimer's Fairness Opinion, dated November 11, 1996, was based solely
upon information available to Oppenheimer and the economic market and other
circumstances that existed as of the date of the Fairness Opinion. In general,
Oppenheimer used historical financial information through June 30, 1996. Events
occurring after such date could materially affect the assumptions and
conclusions contained in the Fairness Opinion. Oppenheimer has not undertaken to
reaffirm or revise the Fairness Opinion or otherwise comment upon any events
occurring after the date thereof. The Related General Partners believe that as
of the date of this Solicitation Statement there have not been any material
changes in the financial or operating condition of the Partnerships which would
materially affect the assumptions and conclusions contained in the Fairness
Opinion.
Summary of Analysis and Methodology. The following paragraphs summarize the
significant quantitative and qualitative analyses performed by Oppenheimer in
arriving at the Fairness Opinion. Oppenheimer considered all such quantitative
and qualitative analyses in connection with its final analysis, and no one
method of analysis was given particular emphasis. All references to the
conversion of Units into Shares are based upon the Related General Partners'
allocation of Shares among the Partnerships.
In determining appropriate capitalization and discount rates underlying its
analysis Oppenheimer utilized as a base the same rates employed by C&W in its
appraisals of each Underlying Property servicing the Partnerships' FMBs. These
rates were then adjusted upward and downward by 50 basis points to develop a
range of discount and capitalization rates for each property. Mortgage revenue
bond yield rates were obtained from discussions with Oppenheimer traders active
in the mortgage revenue bond market.
In determining the adequacy of these rates, Oppenheimer conducted a phone
interview with representatives from C&W, inspected a representative sample of
the properties, interviewed property managers at the Underlying Properties
inspected, examined recent surveys of institutional investors conducted by C&W,
Real Estate Research Corporation, National Multi-housing Council and the Urban
Land Institute, held discussions with institutional investors actively acquiring
properties similar to those encumbered by the Partnerships' FMBs and reviewed
such other information and factors as it deemed appropriate.
Liquidation Analysis--Discounted Cash Flow Analysis. Oppenheimer performed
a discounted cash flow analysis of the (i) present value of the forecasted Base
and Contingent Interest payments to be received from the Underlying Properties
from July 1, 1996 to June 30, 2001, and (ii) the present value of the forecasted
principal to be received by the Partnerships upon repayment of the FMBs.
For those FMBs which were not subject to bond modifications/forbearance
agreements, Oppenheimer calculated, utilizing the financial forecasts provided
by the Related General Partners, the Base Interest and Contingent Interest, if
any, to be received by the Partnerships from July 1, 1996 through June 30, 2001
and the estimated principal to be received assuming the Underlying Properties
were sold on June 30, 2001 based upon capitalizing forecasted net operating
income after capital expenditures ("Forecasted Cash Flow") for the period July
1, 2001 to June 30, 2002 at capitalization rates ranging from 7.5% to 10.5 % and
the FMBs were repaid. Oppenheimer then discounted
66
<PAGE>
the Base Interest payments projected to be received by the Partnerships to
present value utilizing discount rates of 8.0% to 9.0%, which Oppenheimer
estimated to be the current yield for comparable tax-exempt mortgages having
similar maturities and investment characteristics, including debt coverage and
loan to value ratios. Oppenheimer then discounted the Contingent Interest, if
any, projected to be received by the Partnerships to present value utilizing
discount rates of 15.0% to 20.0%, which Oppenheimer estimated to be the yield
requirement for comparable mortgage investments having similar investment
characteristics. Oppenheimer discounted the estimated principal to be received
by the Partnerships to present value utilizing discount rates of 8.0% to 9.0%.
For those FMBs subject to bond modifications/forbearance agreements,
Oppenheimer calculated, utilizing the financial forecasts provided by the
Related General Partners and the terms of the individual bond
modifications/forbearance agreements, the Base Interest payments to be received
by the Partnerships from July 1, 1996 to June 30, 2001 and the estimated
principal to be received assuming the Underlying Properties were sold on June
30, 2001 based upon capitalizing Forecasted Cash Flow for the period July 1,
2001 to June 30, 2002 at capitalization rates ranging from 7.5% to 10.5% and the
FMBs were repaid. Oppenheimer then discounted the Base Interest payments
projected to be received by the Partnerships to present value utilizing discount
rates of 8.0% to 9.0%, which Oppenheimer estimated to be the current yield for
comparable tax-exempt mortgages having similar maturities and investment
characteristics, including debt coverage and loan to value ratios. Oppenheimer
then discounted the Contingent Interest, if any, projected to be received by the
Partnerships to present value utilizing discount rates of 15.0% to 20.0% which
Oppenheimer estimated to be the yield requirement for comparable mortgage
investments having similar investment characteristics. Oppenheimer discounted
the estimated principal to be received by the Partnerships to present value
utilizing discount rates of 8.0% to 9.0%. In those instances where the bond
modification/forbearance agreement did not extend until June 30, 2001,
Oppenheimer assumed, with Class Counsel's approval, that the bond modification/
forbearance agreements would be extended through June 30, 2001.
With respect to all FMBs, Oppenheimer then deducted the estimated expenses
associated with liquidating the Partnerships, including general and
administrative expenses. To the resulting range of values, Oppenheimer added the
estimated value of each Partnership's other assets and subtracted the estimated
value of each Partnership's other liabilities. Oppenheimer's analysis also gave
effect to the tax free nature of the interest payments to be made under the FMBs
through their maturity.
Tax Exempt I. Oppenheimer's analysis indicated a range of values for Tax
Exempt I of $98.9 million to $109.7 million (or $12.51 to $13.87 per Unit)
compared to the estimated value of $113.7 million to $124.0 million (or $14.37
to $15.68 per Unit), assuming each Unit is converted into 0.97 Shares of the
Company and each Share is valued as determined by utilizing the methodology
described below at Valuation of the Company--Consolidation of the Partnerships
into the Company--Comparable Company Analysis and an estimated value of $136.2
million to $140.3 million (or $17.23 to $17.75 per Unit), assuming each Unit is
converted into 0.97 Shares of the Company and each Share is valued as determined
by utilizing the methodology described below at Valuation of the
Company--Consolidation of the Partnerships into the Company--Discounted Cash
Flow Analysis.
Tax Exempt II. Oppenheimer's analysis further indicated a range of values
for Tax Exempt II of $125.5 million to $139.0 million (or $13.71 to $15.19 per
Unit) compared to the estimated value of $148.8 million to $162.3 million (or
$16.26 to $17.73 per Unit), assuming each Unit is converted into 1.10 Shares of
the Company and each Share is valued as determined by utilizing the methodology
described below at Valuation of the Company--Consolidation of the Partnerships
into the Company--Comparable Company Analysis and an estimated value of $178.3
million to $183.7 million (or $19.49 to $20.07 per Unit), assuming each Unit is
converted into 1.10 Shares of the Company and each Share is valued as determined
by utilizing the methodology described below at Valuation of the
Company--Consolidation of the Partnerships into the Company--Discounted Cash
Flow Analysis.
Tax Exempt III. Oppenheimer's analysis further indicated a range of values
for Tax Exempt III of $35.4 million to $39.3 million (or $11.47 to $12.74 per
Unit) compared to the estimated value of $42.5 million to $46.4 million (or
$13.79 to $15.04 per Unit), assuming each Unit is converted into 0.93 Shares of
the Company and each Share is valued as determined by utilizing the methodology
described below at Valuation of the Company--Consolidation of the Partnerships
into the Company--Comparable Company Analysis and an estimated value of $50.9
million to $52.5 million (or $16.53 to $17.02 per Unit), assuming each Unit is
converted into 0.93 Shares of the Company and each Share is valued as determined
by utilizing the methodology described below at Valuation of the Company--
Consolidation of the Partnerships into the Company--Discounted Cash Flow
Analysis.
Conclusion. Oppenheimer believes the discounted cash flow analysis supports
its fairness determination because the implied ranges of values of the Units
assuming they are converted into Shares in the Consolidation is within or
greater than the implied range of equity value of Tax Exempt I, Tax Exempt II
and Tax Exempt III under the discounted cash flow analysis.
Continuation of the Partnerships--Valuation of the Partnerships on a
Continuing Basis. Oppenheimer performed an analysis of the Partnerships assuming
each of the Partnerships continued to operate on an on-going basis from July 1,
1996 through June 30, 2001. Oppenheimer estimated (i) the Base Interest payments
and Contingent Interest payments, if any, to be received from the Underlying
Properties and (ii) the principal repayment to be received by the Partnerships
assuming the Underlying Properties were sold on June 30, 2001 and the estimated
proceeds utilized to repay the outstanding balance of the Partnerships' Mortgage
Loans. In connection with this analysis, Oppenheimer estimated such sales
proceeds by capitalizing Forecasted Cash Flow for each Underlying Property for
the period July 1, 2001 to June 30, 2002 at capitalization rates ranging from
7.50% to 10.50%.
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In connection with the Continuation of the Partnerships-Valuation of the
Partnerships on a Continuing Basis analysis for each of the Partnerships,
Oppenheimer then deducted the projected annual fees due the respective General
Partners and the projected general and administrative expenses associated with
operating each Partnership on an annual basis for the forecast period from the
estimated annual cash available for distribution of the Partnerships, allocated
the remainder between the BUC$holders and the General Partners based upon the
terms of the respective Partnership Agreements and discounted the projected
distributions to BUC$holders to present value utilizing discount rates of 10.0%
to 12.0%. To the resulting range of values, Oppenheimer added the estimated
present value, as of June 30, 1996, of each Partnership's other assets and
subtracted the estimated present value, as of June 30, 1996, of each
Partnership's other liabilities. Oppenheimer's analysis also gave effect to the
tax free nature of the interest payments to be made under the Mortgage Loans
through their maturity.
Tax Exempt I. Oppenheimer's analysis indicated an implied range of present
values for Tax Exempt I of $13.24 to $14.51 per Unit compared to the estimated
value per Unit of $14.37 to $15.68, assuming each Unit is converted into 0.97
Shares of the Company and each Share is valued as determined by utilizing the
methodology described below at Valuation of the Company--Consolidation of the
Partnerships into the Company--Comparable Company Analysis and an implied range
of present values per Unit of $17.23 to $17.75, assuming each Unit is converted
into 0.97 Shares of the Company and each Share is valued as determined by
utilizing the methodology described below at Valuation of the
Company--Consolidation of the Partnerships into the Company--Discounted Cash
Flow Analysis.
Tax Exempt II. Oppenheimer's analysis indicated an implied range of present
values for Tax Exempt II of $14.56 to $15.77 per Unit compared to the estimated
value per Unit of $16.26 to $17.73, assuming each Unit is converted into 1.10
Shares of the Company and each Share is valued as determined by utilizing the
methodology described below at Valuation of the Company--Consolidation of the
Partnerships into the Company--Comparable Company Analysis and an implied range
of present values per Unit of $19.49 to $20.07, assuming each Unit is converted
into 1.10 Shares of the Company and each Share is valued as determined by
utilizing the methodology described below at Valuation of the
Company--Consolidation of the Partnerships into the Company--Discounted Cash
Flow Analysis.
Tax Exempt III. Oppenheimer's analysis also indicated an implied range of
present values for Tax Exempt III of $13.00 to $14.12 per Unit compared to the
estimated value per Unit of $13.79 to $15.04, assuming each Unit is converted
into 0.93 Shares of the Company and each Share is valued as determined by
utilizing the methodology described below at Valuation of the
Company--Consolidation of the Partnerships into the Company--Comparable Company
Analysis and an implied range of present values per Unit of $16.53 to $17.02,
assuming each Unit is converted into 0.93 Shares of the Company and each Share
is valued as determined by utilizing the methodology described below at
Valuation of the Company--Consolidation of the Partnerships into the
Company--Discounted Cash Flow Analysis.
Conclusion. Oppenheimer believes this analysis supports its fairness
determination because the implied range of values of the Units in each
Partnership assuming they are converted into Shares in the Consolidation for
each Partnership is within or greater than the implied range of equity values
for such Units assuming the continuation of the Partnerships.
Valuation of the Company--Consolidation of the Partnerships into the
Company--Comparable Company Analysis. Oppenheimer assumed the Consolidation
occurred as of July 1, 1996. As consummation of the Consolidation is conditioned
upon, among other things, Minimum Participation in the Consolidation by two of
the three Partnerships, Oppenheimer developed a matrix of the various
combinations which could occur so as to achieve the Minimum Participation
required to complete the Consolidation, in addition to considering the
Consolidation assuming 100% Participation. Oppenheimer utilized the business
plan and forecasts of future operations of the Company prepared by the Related
General Partners to estimate the value of the Company. Oppenheimer's analysis
also gave effect to the tax free nature of the interest payments to be made
under the FMBs through their maturity. Oppenheimer reviewed the determination of
net income and cash flow per Share developed by the Related General Partners and
reflected in their financial forecasts and business plan. Such forecasts gave
effect to the reduction in fees and the increased interest in the Company to be
owned by the Shareholders due to the withdrawal of the P-B General Partner as a
general partner of the Partnerships.
Oppenheimer derived ranges of values for the Shares by applying estimated
net income per share of the Company upon consummation of the Consolidation for
the fiscal year ended June 30, 1998, the first stabilized fiscal year occurring
after implementation of the Company's business plan to the corresponding range
of net income multiples for certain publicly-traded companies that Oppenheimer
considered comparable to the Company (the "Comparable Companies")(1). The
Comparable Companies consisted of five companies which focused on ownership of
participating tax-exempt mortgages because the assets to be owned by the
Company upon consummation of the Consolidation will consist exclusively of
tax-exempt participating FMBs. The per share net income and net income
multiples for the Comparable Companies were based on the twelve month period
ended June 30, 1996, the last period for which such figures were currently
available. There are no First Call estimates for 1996 or beyond for these
companies.(2) In calculating the net income multiples for the selected period,
the October 31, 1996 closing stock prices of the Comparable Companies were
used. Based on this analysis, Oppenheimer allocated to each Partnership the
number of Shares of the Company each Partnership would receive based upon the
allocation percentages utilized by the Related General Partners. Oppenheimer
observed that the net income multiples for the Comparable Companies ranged from
11.4x to 17.6x, with a median of 11.8x.
- --------------
(1) The Comparable Companies are as follows: America First Tax-Exempt Mortgage
L.P., America First Apartment Investors L.P., C.R.I.T.E.F. I L.P.,
C.R.I.T.E.F. II L.P. and C.R.I.T.E.F. III L.P..
(2) First Call is a financial services company which provides estimates of per
share net income for selected publicly traded companies. The First Call
estimates are derived by polling equity research analysts for net income
estimates of the companies they follow.
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<PAGE>
Based on the foregoing, Oppenheimer estimated a range of values of the
Shares, assuming the various combinations which could occur in the Consolidation
so as to achieve the Minimum Participation, in addition to considering the
Consolidation assuming 100% Participation, of $14.81 to $16.16. BUC$holders
should be aware that estimates of values of the Shares are not intended and
should not be construed as a prediction or estimate as to the trading price of
the Shares following the Effective Date. It is likely that, at least during the
immediate period following the completion of the Consolidation, that the Shares
will trade below the estimated ranges of values.
Valuation of the Company--Consolidation of the Partnerships into the
Company--Discounted Cash Flow Analysis. Oppenheimer analyzed the Company on a
consolidated basis based upon a discounted cash flow analysis utilizing
projections of net income and cash distributions prepared by the Related General
Partners for the period July 1, 1996 through June 30, 2001. Oppenheimer derived
a range of per Share values for the Company by calculating the present value of
projected net income per share and a terminal equity value. Oppenheimer assumed
a range of discount rates from 8.3% to 9.1% for the projected cash distributions
of the Company which Oppenheimer believes reflect the risks inherent in the
ownership of the Company's Shares. Terminal equity values were calculated using
projected net income for the period July 1, 2001 to June 30, 2002 and terminal
net income multiples of 11.0x to 12.0x, with the resulting range of values
discounted to present value at discount rates ranging from 8.3% to 9.1%. Based
on the foregoing, Oppenheimer estimated a range of value for the Shares,
assuming the various combinations which could occur in the Consolidation so as
to achieve the Minimum Participation, in addition to considering the
Consolidation assuming 100% Participation, of $18.46 to $19.01.
Allocation of Shares in the Consolidation. In assessing the fairness of the
allocation of Shares of the Company among each of the Partnerships, Oppenheimer
observed that, assuming 100% Participation, the Shares will be allocated as
follows: Tax Exempt I 37.3%; Tax Exempt II 48.8%; and Tax Exempt III 13.9%. In
the following analyses, Oppenheimer utilized the aggregate values of each
Partnership determined above under Liquidation Analysis--Discounted Cash Flow
Analysis as such valuation methodology was utilized by the Related General
Partners to allocate Shares among each of the Partnerships.
Tax Exempt I. Oppenheimer compared the percentage of Shares to be allocated
to Tax Exempt I to the range of percentages determined by (i) comparing the low
end of the range of values for Tax Exempt I to the total of the low end of the
range of values for Tax Exempt I and the high end of the combined range of
values for Tax Exempt II and Tax Exempt III (which amounts to 35.7%) and (ii)
comparing the high end of the range of values for Tax Exempt I to the total of
the high end of the range of values for Tax Exempt I and the low end of the
combined range of values for Tax Exempt II and Tax Exempt III (which amounts to
40.6%). Oppenheimer believes that this analysis supports its opinion that the
allocation of Shares to Tax Exempt I is fair to the BUC$holders of Tax Exempt I
from a financial point of view because the percentage of Shares allocated to Tax
Exempt I is within the range of the percentages determined by Oppenheimer in the
above analysis.
Tax Exempt II. Oppenheimer compared the percentage of Shares to be
allocated to Tax Exempt II to the range of percentages determined by (i)
comparing the low end of the range of values for Tax Exempt II to the total of
the low end of the range of values for Tax Exempt II and the high end of the
combined range of values for Tax Exempt I and Tax Exempt III (which amounts to
45.7%) and (ii) comparing the high end of the range of values for Tax Exempt II
to the total of the high end of the range of values for Tax Exempt II and the
low end of the combined range of values for Tax Exempt I and Tax Exempt III
(which amounts to 50.9%). Oppenheimer believes that this analysis supports its
opinion that the allocation of Shares to Tax Exempt II is fair to the
BUC$holders of Tax Exempt II from a financial point of view because the
percentage of Shares allocated to Tax Exempt II is within the range of the
percentages determined by Oppenheimer in the above analysis.
Tax Exempt III. Oppenheimer compared the percentage of Shares to be
allocated to Tax Exempt III to the range of percentages determined by (i)
comparing the low end of the range of values for Tax Exempt III to the total of
the low end of the range of values for Tax Exempt III and the high end of the
combined range of values for Tax Exempt I and Tax Exempt II (which amounts to
12.5%) and (ii) comparing the high end of the range of values for Tax Exempt III
to the total of the high end of the range of values for Tax Exempt III and the
low end of the combined range of values for Tax Exempt I and Tax Exempt II
(which amounts to 14.9%). Oppenheimer believes that this analysis supports its
opinion that the allocation of Shares to Tax Exempt III is fair to the
BUC$holders of Tax Exempt III from a financial point of view because the
percentage of Shares allocated to Tax Exempt III is within the range of the
percentages determined by Oppenheimer in the above analysis.
Oppenheimer has analyzed, but did not give significant weight to, the
trading history of Tax Exempt I, whose shares trade on the American Stock
Exchange; and Tax Exempt II and Tax Exempt III which trade in the informal
secondary market for limited partnership interests.
Conclusions. Based on the foregoing analysis, and subject to the
assumptions, limitations and qualifications noted above and in their Fairness
Opinion, Oppenheimer concluded that the Consolidation, including the allocation
of Shares among the Partnerships, is fair from a financial point of view, to the
BUC$holders of the Partnerships assuming 100% Participation and all other
combinations of Participating Partnerships (including the Minimum Participation
scenarios).
Appraisals
General. C&W was engaged by Related Capital Company on September 14, 1995
to prepare 31 individual limited appraisals utilizing the summary report
("Summary Report") format (the "Appraisals") for each of the Underlying
Properties as of October 15, 1995. The Appraisals were prepared in connection
with a valuation of the Underlying Properties for purposes of complying with
ERISA
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<PAGE>
requirements and for use in connection with the Partnerships' 1995 audit of
their financial statements. The Appraisals were certified by an MAI Appraiser.
It is C&W's opinion that changes in market conditions since the October 15, 1995
date of the Appraisals may or may not have changed the estimated market
value(s). In addition, it is C&W's opinion that physical changes to the 31
Underlying Properties since the October 15, 1995 date of the Appraisals, may or
may not have changed the individual "as is" value(s). C&W has not updated the
Appraisals from the date thereof and has not rendered any opinion as to any
events or conditions arising subsequent thereto. Notwithstanding the foregoing,
the Related General Partners determined not to obtain new appraisals or update
the Appraisals, based on their belief that the Appraised Values of the
Underlying Properties securing the Partnership's FMBs have not changed
materially since October 15, 1995 and the cost of obtaining new appraisals or
updating the Appraisals.
The Partnerships selected C&W to provide the Appraisals because of its
experience and reputation in connection with real estate assets. C&W has
substantial experience and expertise in assessing the value of real estate and
preparing real estate appraisals, having prepared real estate appraisals for
over 25 years. In addition to valuation, C&W provides services to the investment
community that include investment research and consulting, property management,
leasing, investment sales and acquisitions as well as hospitality and leisure
consulting services. The Related General Partners and the Partnerships have
agreed to indemnify C&W against certain liabilities arising out of C&W's
engagement to prepare and deliver the Appraisals. Upon the consummation of the
Consolidation, Participating Partnerships' indemnity obligations will be
obligations of the Company pursuant to an indemnification agreement between the
Company and C&W. The Related General Partners have relied, in part, upon these
Appraisals to determine the Adjusted Net Asset Values.
The Appraisals, which contain a description of the assumptions and limiting
conditions made, matters considered and limitations on the review and analysis,
will be made available for inspection during normal business hours at the
offices of the Related General Partners upon not less than two business days'
prior written notice to the Related General Partners and should be read in their
entirety.
Methodology. C&W prepared a letter dated April 11, 1997 (the "Summarization
Letter") which addresses certain common methods utilized in each Appraisal. This
Summarization Letter is presented in its entirety in Appendix B. For purposes of
its Appraisals, C&W has defined "market value" pursuant to USPAP guidelines, as
the most probable price which a property should bring in a competitive and open
market under all conditions requisite to a fair sale, the buyer and seller each
acting prudently and knowledgeably and assuming the price is not affected by any
undue stimulus. Implicit in this definition is the consummation of a sale as of
a date and the passing of title from seller to buyer under conditions whereby:
(i) buyer and seller are typically motivated;
(ii) both parties are well informed or well advised and are acting in what
they consider their best interest;
(iii) a reasonable time is allowed for exposure in the open market;
(iv) payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(v) the price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
Summary of Analysis. As noted in the Summarization Letter prepared by C & W
which is attached in its entirety as Appendix B, in conducting the appraisals
representatives of C & W performed site inspections for each Underlying Property
during the period between September and October 1995. At that time, it also
reviewed historical financial information provided by, and made other inquiries
of, the Related General Partners (and their affiliates) as it deemed
appropriate. C & W representatives analyzed each Underlying Property's rent
roll, income and expense statements and its capital budget. C & W then estimated
stabilized annual income for each Underlying Property by estimating appropriate
rental rates by unit type and other income generated from sources other than
apartment rentals. It then estimated appropriate vacancy and collection loss,
based on the respective Underlying Property's history and surveys of other
comparable competitive projects, in order to arrive at an estimate of effective
gross income. A forecast of each property's stabilized annual operating expenses
and reserves for replacements was then prepared after review of each Underlying
Property's historical performance and operating statements and the experience of
similar complexes, familiar to C & W. Each item of expense was analyzed and C &
W compared each such expense item to its estimate of the amounts that a typical
informed investor would consider reasonable. Net stabilized operating income was
estimated by subtracting estimated stabilized expenses from estimated effective
gross income.
Pursuant to the terms of its engagement letters with the Partnerships, C &
W estimated the value of the Underlying Properties based on the income approach
using (i) the direct capitalization methodology applied against C & W's estimate
of net stabilized operating income as of October 1, 1995 and (ii) the discounted
cash flow methodology (as detailed below) and supported this methodology, where
possible, by using direct sales comparisons.
The discounted cash flow methodology utilized by C & W measures the present
value of projected income flows and the reversion value of a property sale at
the end of a 10-year holding period. The estimated income and expenses over the
10-year forecast period and the estimated property value at the time of
reversion are discounted at an appropriate rate to estimate present market value
of the Underlying Property. In general, as noted in the Summarization Letter,
the steps taken to determine value based on this methodology were as follows:
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1. A 10-year income and expense pro-forma was prepared based on a 10-year
holding period, beginning November 1, 1995;
2. All revenue and expense items were estimated based on C & W's October
1995 estimates;
3. Based on C & W's assessment of the particular rental markets, an
estimate was made as to annual percentage growth rates for rents and
other income over the 10-year holding period;
4. General operating expenses were estimated to increase at appropriate
inflationary levels;
5. The reversion estimate was based on a resale in the tenth year of the
analysis and was formulated by applying a terminal capitalization rate
to the estimate of the net operating income for the eleventh year NOI
and subtracting estimated selling costs appropriate for each property
and each market;
6. The net cash flows and reversion estimate were then discounted to net
present value using an appropriate market-supported equity yield
(discount rate) to arrive at the indicated "as is" value.
The selected discount and capitalization rates reflect certain qualitative
factors relating to each Underlying Property, as of October 1, 1995, including
strength of the property and tenancy, October 1995 market conditions, historical
operating performance and future potential of the property as well as other
relevant economic and demographic considerations.
Conclusions as to Value. Based on the valuation methodology described
above, C&W assigned an individual market value to each of the 31 Underlying
Properties, as of October 15, 1995.
Set forth below for each Underlying Property are (i) the discount rate;
(ii) the direct capitalization rate; (iii) the terminal capitalization rate; and
(iv) the "as is" value estimated by C & W as of October 15, 1995.
<TABLE>
<CAPTION>
"As Is"
Direct Terminal 10/15/95 Value
Discount Capitalization Capitalization "As Is" Per Apartment
Property Rate Rate Rate Value Unit
- ----------------- ---------- ---------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Mansion 11.75% 8.75% 9.75% $20,500,000 $37,273
Martin's Creek 11.50% 9.00% 9.75% $ 6,300,000 $31,500
East Ridge 11.50% 9.57% 10.0% $ 8,500,000 $42,500
Highpointe 11.50% 9.25% 9.50% $ 9,000,000 $37,500
Cypress Run 11.50% 7.90% 9.50% $12,600,000 $30,882
Thomas Lake 12.00% 8.93% 9.50% $14,800,000 $68,519
North Glen 11.50% 9.10% 9.75% $11,200,000 $39,437
Greenway 11.50% 9.26% 9.26% $12,600,000 $40,385
Clarendon 11.50% 8.21% 8.50% $25,000,000 $87,719
Cedar Creek 12.50% 9.90% 10.50% $ 7,500,000 $30,000
Sunset Terrace 12.00% 9.36% 9.75% $ 6,540,000 $35,543
Bay Club 11.50% 9.39% 10.00% $ 6,250,000 $39,063
Loveridge 11.75% 8.60% 9.00% $ 7,400,000 $50,000
The Lakes 12.00% 9.29% 10.00% $12,000,000 $30,000
Orchard Hills 11.50% 9.49% 10.00% $ 5,900,000 $33,523
Crowne Pointe 12.00% 9.61% 10.00% $ 5,600,000 $35,000
Highland Ridge 12.00% 9.01% 9.50% $12,400,000 $54,386
Newport Village 11.50% 9.26% 9.75% $13,200,000 $32,836
Sunset Downs 12.00% 9.40% 9.75% $ 9,780,000 $37,045
Pelican Cove 11.50% 9.28% 11.00% $15,700,000 $38,765
Willow Creek 12.00% 9.17% 10.00% $ 5,250,000 $38,043
Cedar Pointe 11.75% 9.26% 9.75% $10,000,000 $47,619
Shannon Lake 11.50% 9.30% 9.75% $10,500,000 $35,714
Bristol Village 12.00% 8.95% 9.50% $18,800,000 $64,828
Suntree 11.50% 9.10% 9.50% $ 8,400,000 $35,000
River Run 11.50% 9.22% 9.50% $ 7,900,000 $48,171
Players Club 11.50% 9.10% 9.50% $ 9,600,000 $33,333
Lakepointe 11.50% 9.20% 9.75% $14,400,000 $40,000
Sunset Village 12.00% 9.40% 9.75% $ 7,760,000 $38,039
Sunset Creek 12.00% 9.35% 9.75% $ 5,620,000 $37,973
Orchard Mill 11.50% 9.10% 9.75% $ 9,100,000 $38,235
</TABLE>
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The aggregate values as of October 15, 1995 allocated to each Partnership
based on the values determined by C&W for each Underlying Property are set forth
in the following table:
Partnerships Aggregate Underlying Property Value Conclusion
- --------------------- -----------------------------------------------
Tax Exempt I $134,540,000
Tax Exempt II $151,555,000
Tax Exempt III $ 44,005,000
Notwithstanding the aggregate values set forth above, it is C&W's opinion
that the total of the individual market values of the Underlying Properties does
not represent portfolio market value(s).
Assumptions, Limitations and Qualifications of Appraisals. C&W utilized
certain assumptions to determine the Appraised Values of the Underlying
Properties. Specifically, C&W was not responsible for, unless otherwise stated
in the Appraisals, verifying or confirming: (a) that title to the property was
good and marketable; (b) that the property was free and clear of any and all
liens or encumbrances, unless otherwise stated; (c) responsible ownership and
competent property management of each such property; (d) the accuracy of
information furnished by others in connection with preparing the Appraisals; (e)
the accuracy of engineering studies relied upon in connection with the
preparation of the Appraisals; (f) that there were no hidden or unapparent
conditions of the property, subsoil or structures that would render it more or
less valuable; (g) the property was in full compliance with all applicable
federal, state, and local environmental regulations and laws, unless the lack of
compliance was stated, described, and considered in the Appraisals; (h) that the
property conformed to all applicable zoning and use regulations and
restrictions, unless a nonconformity was identified, described and considered in
the appraisal report; (i) that all required licenses, certificates of occupancy,
consents, and other legislative or administrative authority from any local,
state, or national government or private entity or organization have been or can
be obtained or renewed for any use on which the value estimate contained in each
such Appraisal was based; (j) that the use of the land and improvements is
confined within the boundaries or property lines of the property described and
that there was no encroachment or trespass, unless noted in each such Appraisal;
and (k) the non-existence of hazardous materials, which may or may not be
present on the property; provided, however, that C&W has no knowledge of the
existence of such materials on or in the property (C&W is not qualified to
detect such substances, however, the presence of substances such as asbestos,
urea-formaldehyde foam insulation, and other potentially hazardous materials may
affect the value of the property. The value estimated for each property was
predicated on the assumption that there is no such material on or in the
property that would cause a loss in value). In addition, C&W was not responsible
for providing a compliance survey and analysis or otherwise determining whether
or not each property complies with the various detailed requirements of the
Americans with Disabilities Act ("ADA").
The Appraisals reflect C&W's opinion as of October 15, 1995 of the value of
the Underlying Properties which secure the FMBs held by the Partnerships in the
context of the information available on such date. Events occurring after
October 15, 1995 and before the Closing of the Consolidation could affect the
real properties or assumptions used in preparing the Appraisals. C&W has no
obligation to update the Appraisals on the basis of subsequent events. In
connection with preparing the Appraisals, C&W has not been engaged to, and
consequently did not, prepare any written report or compendium of its analysis
other than the Summary Reports dated as of October 15, 1996. C&W will not
deliver any additional written summary of the analysis other than the
Summarization Letter which is attached in its entirety as Appendix B which was
prepared specifically for inclusion in this Solicitation Statement in order to
comply with disclosure requirements under certain governmental rules and
regulations.
Compensation and Material Relationships
The Related General Partners will pay Oppenheimer aggregate fees of
$353,500 (including legal expenses subject to a maximum of $50,000) to prepare
the Fairness Opinion and the Partnerships paid professional fees to C&W of
$131,750 in 1995 for preparing the Appraisals in connection with the
Partnership's year-end audits, portfolio valuation requirements under ERISA and
for other internal purposes. In addition, Cushman & Wakefield of Florida, Inc.
is to be paid $4,000 for preparation of the Summarization Letter and review and
preparation of the portions of the Solicitation Statement related to the
Appraisals. In addition, Oppenheimer is entitled to reimbursement for reasonable
travel and out-of-pocket expenses incurred in making site visits and preparing
the valuations. Both Oppenheimer and C&W are entitled to indemnification against
certain liabilities, including certain liabilities under federal securities laws
from the Partnerships, the Company and the Related General Partners.
Oppenheimer was retained by Class Counsel, but will be paid by the Related
General Partners. The fees were negotiated between the Related General Partners
and each of Oppenheimer and C&W and payment thereof is not dependent upon
completion of the Consolidation or the conclusions reached in the Fairness
Opinion or the Appraisals.
Oppenheimer was also engaged by Class Counsel to provide a fairness opinion
in connection with a consolidation transaction involving four other limited
partnership sponsored by affiliates of Related and Prudential. The aggregate
cost of these fairness opinions, including the Fairness Opinion to be provided
in connection with the Consolidation (including fees and expenses), is expected
to total $550,000. The cost of the Fairness Opinion allocated to the Company is
in proportion to the aggregate Adjusted Net Asset Value of the Partnerships and
the aggregate adjusted net asset value of the limited partnerships that are the
subject of the other consolidation transaction. Oppenheimer has not provided any
other services to the Related General Partners or the Partnerships during the
past two years.
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C&W has been engaged from time to time by Related and its affiliates to
perform appraisal services. C&W is part of a national network of affiliated
companies providing real estate services. As such, from time to time, C&W and
its affiliates have provided and in the future may provide real estate related
services, including brokerage and leasing agent services, to Related, the
Related General Partners, its affiliated companies or its principals, or may
represent others doing business with Related, the Related General Partners, its
affiliated companies or its principals.
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COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE
PARTNERSHIPS
In the Consolidation, all Participating BUC$holders will be issued Shares
in exchange for their Units. The effect of the Consolidation, therefore, for the
Participating BUC$holders, is to convert their Units into Shares. Due to the
inherent differences in form, the change in structure from a partnership to a
business trust will result in certain differences in the scope and operation of
the Participating Partnerships' current businesses and in the interests of the
BUC$holders. In addition, the Participating Partnerships have certain features
and characteristics which are different from those which will exist in the
Company.
The rights of BUC$holders are governed by the Delaware Partnership Law and
by the respective Partnership Agreements of the Participating Partnerships. The
rights of the Company's Shareholders will be governed by the Delaware Act and
the Trust Agreement.
UNITS SHARES
- ------------------------------------- ---------------------------------------
Form of Organization
Each of the Partnerships is a limited The Company was created as a business
partnership formed under the Delaware trust under the Delaware Act. The
Partnership Law. Each Partnership has Company expects to be treated as a
been treated as a partnership for partnership for federal income tax
federal income tax purposes. purposes.
Business
The Partnership Agreements generally The Company will acquire and own a
limit the business of the Partnerships diversified portfolio of tax-exempt
to investment in tax-exempt participating and non- participating
participating FMBs issued by various FMBs issued by various state or local
state or local governments or other governments or other agencies or
agencies or authorities and secured by authorities and secured by
participating Mortgage Loans on participating and non-participating
multifamily residential apartment first Mortgage Loans on multifamily
projects and retirement community residential apartment projects,
projects developed by third party assisted living, continuing care and
developers and affiliates of the retirement community projects or
Related General Partners. In some nursing homes developed by third party
cases the Partnership Agreements developers or affiliates of the
prohibit investments in certain types Manager, including properties
of assets. The Partnerships are benefitting from the low income
organized to hold only a fixed pool of housing tax credit.
assets for a limited time period. The
Partnership Agreements do not permit The powers and limitations with
the Partnerships to raise new capital. respect to the real estate operations
conferred in the Partnership
Agreements will not be applicable to
the business activities of the
Company.
The Company may be able to take
advantage of financing opportunities
that may not be available to the
Partnerships. Further, the Company may
use forms of financing which the
Partnerships did not use. Additional
capital may be raised through all
available sources, including
additional equity financing, borrowing
from banks, institutional investors,
public and private debt markets or
other financing vehicles which will be
dependent upon the equity and debt
market conditions, interest rates and
other factors including the Company's
policy on limiting leverage.
Many of these additional forms of
financing also expose the Company to
additional risks which do not exist
with respect to the Partnerships,
including the risk of default and
foreclosure on any assets securing
leverage. Also, the Trust Agreement
permits the Company to engage in any
lawful act or activity required to
permit the Company to acquire and own
a diversified portfolio of FMBs.
Joint Ventures are permitted under the Joint Ventures and similar business
Partnership Agreements within certain ventures are permitted under the Trust
specified parameters. Agreement, provided that the Company
owns a majority interest or otherwise
has veto rights over, or control of,
major decisions.
The Company may acquire Minority
Positions in an amount not to exceed
15% of Total Market Value of the
Company.
In selected circumstances, and only in
connection with the acquisition of
tax-exempt FMBs, the Company may
acquire a small amount of taxable
bonds. Known as "Taxable Tails", the
primary purpose of these bonds is to
fund certain costs associated with the
issuance of FMBs that, under current
regulations, cannot be funded by FMBs.
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UNITS SHARES
- ------------------------------------- ---------------------------------------
The Partnership Agreements are silent The Company will be specifically
as to partnerships' authority to permitted to make forward loan
provide forward loan commitments to commitments to take advantage of
prospective borrowers. additional fees that can be earned by
the Company.
The Partnership Agreement of Tax The Company will be specifically
Exempt I does not permit investment in permitted to invest an amount of up to
FMBs which are secured by properties 15% of its Total Market Value
owned by affiliates of the Related (measured at the time of investment)
General Partner of such partnership; in new FMBs which are secured by
Tax Exempt II and III are permitted to Underlying Properties which are owned
invest up to 15% of their gross by affiliates of the Manager.
proceeds in FMBs served by properties
owned by affiliates.
The Company will have broader business opportunities than the Partnerships, as
well as access to additional financing opportunities which are currently not
available to the Partnerships. Inherent in such financing opportunities are
certain risks which may not presently exist in the case of the Partnerships.
Duration of Existence
The Partnership Agreements provide In accordance with the Delaware Act
that the Partnerships may exist for and the Trust Agreement, the Company
original terms ranging from 34 to 35 will continue its existence
years and that the Partnerships have a indefinitely. The Company has no
limited existence. In furtherance of present intention to sell a
this objective the Partnership substantial number of assets. The
Agreements generally provide that the Company currently does not have any
proceeds from the sale, financing, restrictions on reinvesting funds
refinancing or other disposition of after the sale of an original
any property or the repayment of investment. Therefore, the Company
mortgage loans owned by the respective believes that it will be in a position
Partnerships will not be reinvested to take advantage of economic
but will be distributed to the opportunities as they are presented.
BUC$holders to the extent such Because the Company currently does not
proceeds exceed the respective have any restrictions on the
Partnership's other cash requirements. reinvestment of funds (other than the
If market conditions permit, the debt limit), Shareholders assume the
Partnerships intend to hold their risk of such reinvestment and will not
respective investments for original be entitled to an immediate
periods ranging from 10 to 12 years, distribution from sale, financing,
although the assets could be sold refinancing or mortgage repayment
earlier if economic conditions permit proceeds.
or later at the discretion of the
respective General Partners based upon
their assessment of prevailing If the Management Agreement: (a) is
economic factors. still in effect prior to the fourth
anniversary of the Effective Date, the
Company may be dissolved only with the
recommendation of the Manager and a
Majority Vote of Shareholders; (b) is
still in effect after the fourth
anniversary of the Effective Date, the
Company may be dissolved (i) upon the
recommendation of the Manager and a
Majority Vote of Shareholders or (ii)
upon a two-thirds vote of
Shareholders; and (c) is not in effect
at any time after the Effective Date,
the Company may be dissolved upon a
Majority Vote of Shareholders. See
"CERTAIN PROVISIONS OF DELAWARE LAW
AND THE TRUST AGREEMENT--Term and
Dissolution" and "--Change of Control;
Anti-Takeover Provisions."
The Partnership Agreements provide for the dissolution of the Partnerships
after a specified number of years, whereas the Trust Agreement provides for
perpetual existence. Upon completion of the Consolidation, Participating
BUC$holders will not be entitled to an immediate distribution of liquidation or
disposition proceeds.
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UNITS SHARES
- ------------------------------------- ---------------------------------------
Investment Objectives and Policies
The principal investment objectives of The investment objectives of the
the Partnerships are similar: to Company are to preserve invested
preserve invested capital; provide capital; provide quarterly
quarterly distributions that are distributions that are generally
generally exempt from federal income exempt from federal income taxation;
taxation; and provide additional and provide additional distributions
distributions from Contingent Interest from Contingent Interest payments that
payments that are generally exempt are generally exempt from federal
from federal income taxation. income taxation.
Under the Partnership Agreements, the The Company intends to continue its
Partnerships are not permitted to operations for an indefinite period of
reinvest cash from sales in new time and is not precluded from raising
properties or other assets, except new capital through the issuance of
during a prescribed period which has equity securities, including senior
expired. The Partnerships will securities with priority over the
automatically dissolve at varying Shares as to cash flow, distributions
times during the years 2020 and 2021, and liquidation proceeds, or from
unless dissolved earlier. The reinvesting cash flow or sale,
Partnerships have no present intention financing or repayment proceeds in new
to liquidate or to sell or finance FMBs. Therefore, Shareholders have the
their properties. ability to liquidate their investment
only by selling their Shares in the
market, and the market value of the
Shares may never equal or exceed the
market value of the Company's assets
or the net proceeds which may be
available for distribution upon
liquidation if the Company were to
liquidate. The Company has the
potential for acquiring new assets and
increasing Shareholder value as such
new investments are made.
Under the Partnership Agreements, the The Board of Trustees may alter the
General Partner may alter the Company's investment objectives and
investment objectives and policies of policies without the vote of
each Partnership only after obtaining Shareholders if, in their sole
a majority vote of BUC$holders to discretion, they determine in the
amend the Partnership Agreement to future that such a change is in the
reflect the alteration of the best interests of the Company and its
Partnership's existing investment Shareholders.
objectives and policies.
BUC$holders who become Shareholders will be able to liquidate their
investment by selling their Shares in the market. The interest of Shareholders
in the Company can be diluted through the issuance of additional securities,
including securities that have priority over the Shares as to cash flow,
distributions and liquidation proceeds. The Company's Board of Trustees may
change the investment policies of the Company without a vote of the
Shareholders.
Borrowing Policies
The Partnerships are restricted in the The Trust Agreement limits aggregate
amount and nature of borrowings. Only leverage (whether secured or
Tax Exempt I has outstanding debt. unsecured) to 50% of the Company's
Total Market Value (measured at the
time any additional assets are
leveraged). The Trust Agreement does
not limit the portion of the permitted
debt that may bear interest at a fixed
rate, or at a variable rate. An
increase in debt may increase the risk
of default on the Company's
obligations and may reduce the cash
flow available for distribution as a
result of fluctuations in the interest
rates applicable to indebtedness of
the Company. Upon the Effective Date,
the Company's leverage is anticipated
to represent 6.87% of the Company's
Total Market Value.
BUC$holders who become Shareholders will have invested in an entity that
may incur debt and other leverage in the ordinary course of business and that
reinvests proceeds from borrowings. The incurrence of leverage increases the
risk of investment.
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<PAGE>
UNITS SHARES
- ------------------------------------- ---------------------------------------
Management
The Partnerships are managed by the The business and affairs of the
General Partners, which have exclusive Company are managed under the
authority over the Partnerships' direction of a Board of Trustees
operations, subject to certain elected by the Shareholders. Under the
limitations provided in the Trust Agreement, the trustees are
Partnership Agreements. Under Delaware required to perform their duties in
law, subject to the terms of the good faith, in a manner reasonably
Partnership Agreements, the General believed to be in the best interests
Partners are accountable to the of the Company and with such care as
Partnerships as fiduciaries and an ordinarily prudent person in a like
consequently are required to exercise position would use under similar
utmost good faith, fairness and circumstances. The Trust Agreement
loyalty in all their dealings with includes provisions that (i) limit the
respect to Partnership affairs. The liability of its trustees and officers
limited partners may not participate to the Company and the Shareholders
in management of the Partnerships, for money damages in most
other than voting on the sale of all circumstances, (ii) in certain
assets or other limited matters. The circumstances obligate the Company, to
General Partners have general the maximum extent permitted by
liability for all partnership Delaware law, to indemnify and to pay
obligations, other than those that are or reimburse reasonable expenses to a
non- recourse (which includes mortgage director or officer of the Company in
debt, if any). The Partnership advance of final disposition of a
Agreements provide generally that the proceeding to which he is made a party
General Partners are indemnified from by reason of his service in that
losses relating to acts performed or capacity, and (iii) require the
omitted to be performed in good faith Company to indemnify a director or
and in the best interests of the officer who has been successful, on
Partnerships, provided the conduct did the merits or otherwise, in the
not constitute negligence or defense of any proceeding to which he
misconduct. is made a party by reason of his
service in that capacity.
Additionally, the Company intends to
enter into agreements with the
Company's directors and officers,
indemnifying them.
The General Partners may be removed by The Managing Trustees may be removed
a vote of a majority of the by the Majority Vote of Shareholders
outstanding Units in the respective only for Cause prior to the fourth
Partnerships, with or without Cause. anniversary of the Effective Date, and
with or without Cause after such
anniversary. The Management Agreement
cannot be terminated by the Company
prior to the fourth anniversary of the
Effective Date, except for Cause.
The Company's assets and day-to-day
operations will be managed by the
Manager.
The rights of Shareholders against management of the Company in certain
circumstances are more limited than the rights of BUC$holders against the
General Partners.
Fees and Expenses
Bond Selection Fees of 2% Bond Selection Fees of 2%
Bond Placement Fees of 4% (payable by Bond Placement Fees of 2% (payable by
the borrower, not the Partnerships) the borrower, not the Company)
Partnership Management Fee (Tax Exempt Special Distributions from Adjusted
I and II)/Special Distributions from Cash Flow of 0.375%
Adjusted Cash Flow (Tax Exempt III) of
0.50%
Loan Servicing Fees of 0.25% Loan Servicing Fees of 0.25%
Percentage of Sales and Repayment None
Proceeds ranging from 10% to 11% after
certain priority distributions have
been made. None
None Liquidation Fees of 1.5%, payable in
connection with a liquidation of the
Company supervised by the Manager
General Partners' distribution of cash Related General Partners and the
flow equal to 2% Manager will be entitled to receive an
aggregate 1.5% of the Shares issued in
the Consolidation.
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UNITS SHARES
- ------------------------------------- ---------------------------------------
Amounts payable by the As an operating company, the
Partnerships for expenses related to Company will be directly responsible
the initial acquisition of FMBs were for all acquisition expenses incurred
subject to limitations based upon the in connection with future asset
overall front-end fees which a acquisitions.
Partnership was permitted to incur;
generally capped at approximately 1%
of the gross proceeds raised in the
initial offering.
All Partnership expenses paid by All expenses paid by Company;
Partnerships; General Partners Manager reimbursed for certain
reimbursed for certain services services performed for the Company, up
performed for the Partnership. to a maximum of $200,000 in any given
year of operations, subject to the
following adjustments: the overall
limit on reimbursements for
administrative expenses will be
increased (i) after the Company's
first year of operations and each year
thereafter by a percentage equal to
the Consumer Price Index for the year
then ended, and (ii) proportionately
as the Company increases its asset
portfolio.
Incentive Share Options may be
issued to Manager if the Company's
distributions in any year exceed
$0.9517 per Share (i.e., the 1996 pro
forma distributions set forth in this
Solicitation Statement) if granted by
the Compensation Committee.
Pursuant to the Management Agreement (and as a result of the Manager's
purchase of the P-B Interests), the Manager will be entitled to receive from the
Company approximately 75% of the sum of the aggregate annual fees currently
payable by the Partnerships to both of the General Partners. The Manager will
own Shares of the Company, but the interests of the Manager will not necessarily
be aligned with the interests of the Shareholders. Implementation of the
Incentive Share Option Plan is expected to more closely align the financial
interests of the Manager with the interests of the Shareholders by providing the
Manager with a substantial financial interest in the Company's success.
Potential Dilution
Partnerships are not authorized to The Board of Trustees may, in its
issue additional equity securities discretion, issue additional Shares
without the consent of a majority in without any Shareholder approval. The
interest of the BUC$holders and Company may issue (i) up to 3.95% of
limited partners. its outstanding Shares to Class
Counsel ratably over eight quarters
after the Anniversary Date, subject to
acceleration under certain
circumstances, as additional
attorneys' fees based upon the
increase in the Company's value, if
any, in the year following the date on
which the Shares are first publicly
traded and (ii) up to approximately
2,000,000 Shares (10% of the Shares
outstanding on the Effective Date) to
the Manager and other employees
pursuant to the Incentive Share Option
Plan. See "MANAGEMENT--Description of
Incentive Share Option Plan" and
"SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT--Security Ownership of
Certain Beneficial Owners."
Potential Dilution of Payment Rights
Since the Partnerships are not The Board of Trustees may, in its
authorized to issue additional equity discretion, issue additional
securities without the consent of a beneficial interests (common or
majority in interest of the preferred) with such powers,
BUC$holders and limited partners, preferences and rights as the Board of
there can be no dilution of Trustees may at the time designate.
distributions to BUC$holders. The issuance of additional Shares
beyond the Shares to be issued in the
Consolidation may result in the
dilution of the interests of the
Shareholders.
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UNITS SHARES
- ------------------------------------- ---------------------------------------
Potential Redemption
The Partnerships have no ability to The Board of Trustees may, at its sole
purchase or redeem Units. discretion, determine to repurchase
Shares from time to time out of
surplus funds, if any, to further the
business objectives of the Company.
The Shareholders will be subject to potential dilution if the Company issues
additional equity securities. Furthermore, the Company may issue beneficial
interests with priorities or preferences with respect to distributions and
liquidation proceeds. Any secured debt obligations issued by the Company would
have prior claims against the collateral given for security in the event the
Company defaults in the payments of those secured obligations.
Anti-Takeover Provisions
While the limited partnership The Trust Agreement contains the
interests are transferable, subject to following provisions which could have
certain restrictions, the General the effect of delaying, deferring or
Partners under the Partnership preventing a transaction or a change
Agreements may under certain of control of the Company that might
circumstances refuse to permit involve a premium price for Shares or
assignees of limited partnership otherwise be in the best interest of
interests (who are not permitted to Shareholders: (i) the Board of
vote on any Partnership matters) to Trustees' power to issue beneficial
become substituted limited partners. interests (preferred and common) which
could include anti-takeover
provisions; and (ii) the
classification of the Company's Board
of Trustees (the Company's Board of
Trustees will be divided into three
classes, the Managing Trustees in each
of such classes will be elected for
three-year terms).
In addition, the Management Agreement
contains the following provisions
which may also have an anti-takeover
effect: (i) the Management Agreement
may be terminated only for Cause for
four years; and (ii) the Company may
not dissolve or liquidate for four
years and, thereafter, a supermajority
vote is required to dissolve or
liquidate, unless the Manager
recommends liquidation.
Certain provisions of the organizational documents of the Partnerships and
the Company could have the effect of delaying, deferring or preventing attempts
to obtain control of the Partnerships and the Company in transactions not
approved by the General Partners and the Board of Trustees and Manager,
respectively.
The following compares certain of the investment attributes and legal rights
associated with the ownership of Units and Shares.
Nature of Investment
The Units of each Partnership The Shares constitute equity interests
constitute equity interests entitling in the Company. Each Shareholder will
each BUC$holder to his or its pro rata be entitled to his or its pro rata
share of cash distributions made to share of distributions made with
the BUC$holders of the Partnership. respect to the Shares. The
Each of the Partnership Agreements distributions payable to the
specifies how the cash available for Shareholders are not fixed in amount
distribution is to be shared among the and are only paid when authorized by
General Partners and BUC$holders. The the Company's Board of Trustees in
distributions payable to the accordance with applicable law and the
BUC$holders are not fixed in amount Trust Agreement.
and depend upon the Partnerships'
operating results and net sale,
refinancing or mortgage repayment
proceeds available from the
disposition of the Partnerships'
assets.
Both the Units and Shares represent equity interests entitling the holders
thereof to participate in the growth of the Partnerships and the Company,
respectively. Distributions payable with respect to the Units and Shares depend
upon the performance of the Partnerships and the Company, respectively.
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UNITS SHARES
- ------------------------------------- ---------------------------------------
Expected Distributions and Payments
The Partnerships make quarterly The Company intends to pay quarterly
distributions. Amounts distributed to distributions to its Shareholders. The
the BUC$holders are derived from their amount of such distributions will be
share of distributions of cash flow established by the Board of Trustees,
from operations or cash flow from taking into account the cash needs of
sales or mortgage repayments or the Company, yields available to
constitute a return of the Shareholders and ranges in market
BUC$holders' equity contributions to prices for the Shares. Unlike the
the Partnerships. The General Partners Partnerships, the Company is not
may, under the Partnership Agreements, required to distribute net proceeds
create reserves which may decrease from the sale, refinancing or
cash distributions. See repayment of its FMBs.
"SUMMARY--Summary Financial and Other
Data" for a presentation of
distributions per $1,000 of Original
Investment to the BUC$holders over the
five most recent calendar years. Given
current market conditions, there is no
expectation that significant
distributions of net sale or mortgage
repayment proceeds will be made to the
BUC$holders within the next several
years.
Distributions will be paid if, as and when declared by the Board of
Trustees of the Company in its discretion out of funds legally available
therefor. BUC$holders who become Shareholders will receive their pro rata share
of the distributions made with respect to the Company's Shares. The amount of
such distributions will depend upon the Company's earnings, operating expenses,
debt service payments, capital expenditures, reserves and funds set aside for
expansion.
Liquidity and Transferability
While the Units are transferable, the The market for the Shares, which will
General Partners have discretion under be approved for listing on the
the Partnership Agreements to refuse American Stock Exchange (or other
to permit assignees to become national exchange or market) upon
substituted limited partners and the official notice of issuance prior to
Partnership Agreements contain various consummation of the Consolidation, is
other restrictions on the expected to be more active and broader
transferability of Units with respect based than the market for the Units.
to Tax Exempt II and III, although The Shares may trade at a discount to
limited secondary sales of Units have their book value, and the market value
occurred (generally at prices that are of the Shares may never equal or
low in relation to other measures of exceed the net proceeds that might be
value), there is essentially no available if the Company's assets were
established public trading market for liquidated.
the Units and none is expected to
develop. Units in Tax Exempt I are
traded on the American Stock Exchange.
The Units (other than Tax Exempt I)
are not marginable.
One of the primary objectives of the Consolidation is to provide increased
liquidity to the BUC$holders. The Shares will be approved for listing on the
American Stock Exchange (or other national exchange or market) upon official
notice of issuance prior to consummation of the Consolidation, and there is
expected to be a public market for the Shares following the Consolidation. The
breadth of the market for the Shares cannot yet be determined. While there has
been a limited secondary market for the Units of Tax Exempt II and III, trading
on that market has been sporadic and limited, and prices at which Units have
generally traded are low in relation to other measures of value.
80
<PAGE>
UNITS SHARES
- ------------------------------------- ---------------------------------------
Taxation of Taxable Investors
The Partnerships, as partnerships for Although created as a Delaware
federal income tax purposes, are not business trust, it is anticipated that
subject to tax, but the BUC$holders the Company will satisfy the
report their allocable share of requirements to be treated as a
partnership income and loss on their partnership for federal income tax
respective tax returns. Income from purposes and therefore the treatment
the Partnerships generally constitutes of Shareholders will be the same as
"portfolio" income to the BUC$holders, treatment of the BUC$holders.
which cannot offset "passive" losses
from their other investments.
Generally, by March 15 of each year,
BUC$holders receive annual Schedule
K-1 forms with respect to information
for inclusion on their federal income
tax returns. BUC$holders must file
state income tax returns and incur
state income tax in most states in
which the Partnerships own property.
BUC$holders pay federal, state and
local income tax, if any, on
Partnership distributions.
Each Partnership is a pass-through entity whose income and loss is not
taxed at the entity level but instead allocated directly to the General Partners
and BUC$holders. BUC$holders are taxed on income or loss allocated to them
whether or not cash distributions are made to the BUC$holders. The Company
expects to be treated as a partnership for federal income tax purposes.
Voting Rights
The BUC$holders are entitled to vote Each outstanding Share entitles the
only as provided under the Delaware holder to one vote on all matters
Partnership Law and the respective submitted to a vote of Shareholders.
Partnership Agreements. Generally, a Pursuant to the Trust Agreement,
BUC$holder may vote on, in most cases Shareholders are generally entitled to
without the consent of the General vote on any material transactions or
Partner: (i) material amendments to actions relating to the Company, and
the Partnership Agreement; (ii) the such transactions or actions may not
approval of the disposition of be consummated without the approval of
substantially all of the Partnership's the requisite number of Shareholders.
assets; (iii) an election to dissolve These instances include: (i) the right
the Partnership; (iv) the to elect the Board of Trustees (annual
determination to remove a General meetings will be held to elect
Partner; (v) the pledge or encumbrance Managing Trustees whose terms have
of all or substantially all of the expired); (ii) the right to amend the
Partnership's assets; approval of the Company's Trust Agreement; (iii) the
Partnership incurring material determination to dissolve the Company
additional amounts of indebtedness; (subject to certain restrictions in
(vi) the determination to materially the first 4 years after the Effective
modify a contract between the Date); (iv) the determination to merge
Partnership and the General Partners or consolidate the Company with or
or an affiliate thereof; (vii) the into, or to convert the Company into,
approval of a successor General another entity; (v) the determination
Partner; (viii) the extension of the to approve or disapprove the sale of
Partnership's term; (ix) any material substantially all of the Company's
change in the Partnership's investment assets; and (vi) any other matters
objectives; and (x) the assignment of which are properly brought before the
the General Partner's interest except Shareholders.
in connection with a merger or
consolidation. Under the Delaware
Partnership Law and the Partnership
Agreements, decisions relating to the
operation and management of the
Partnerships are made by the General
Partners of each Partnership. There
are no provisions for annual meetings
of the BUC$holders in the Partnership
Agreements. If a limited partner were
granted additional voting rights, the
possibility exists under the Code that
the partnership structure and the
terms of the applicable Partnership
Agreement would be disregarded. In
such event, the Partnership may be
taxed as an association for tax
purposes and thus would be subject to
double taxation similar to a
corporation.
BUC$holders holding 10% or more of the Shareholders holding 10% or more of
outstanding Units may call a meeting the outstanding Shares may call a
of BUC$holders meeting of Shareholders
Participating BUC$holders will be entitled to vote on generally the same
matters as Shareholders of the Company as they did as Unitholders of a
Partnership. On substantially all Partnership matters on which BUC$holders can
vote, BUC$holders can cause the Partnerships to take action with respect to such
matters without the consent of the General Partners.
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<PAGE>
THE COMPANY
Overview
The Company is a newly created Delaware business trust. The Company was
created to facilitate the Consolidation and to carry on the business of
acquiring and owning tax-exempt participating and non-participating FMBs issued
by various state or local governments or other agencies or authorities and
secured by participating and non-participating Mortgage Loans on multifamily
residential apartment projects, retirement community projects and other types of
projects developed by third party developers or affiliates of the Related
General Partners. In order to facilitate the distribution of tax exempt income
to the Shareholders, the Company will be formed as a Delaware business trust,
which will be treated as a partnership for federal income tax purposes.
If all of the Partnerships participate in the Consolidation, the Company
and its affiliates initially will own the Existing Portfolio.
As a result of the Consolidation, the Company anticipates that it will be
able to take advantage of its size to obtain capital from numerous sources with
which to carry on its business. The Company believes that the Consolidation will
enable the Company to benefit from economies of scale, while also providing
enhanced investment returns through the use of low-cost leverage to acquire
additional FMBs.
The Company's executive offices are located at 625 Madison Avenue, New
York, New York 10022, and its telephone number is (212) 421-5333.
Management
The Company will have an elected board of Managing Trustees which will
govern the Company and oversee the activities of the Manager. See
"MANAGEMENT--Trustees and Executive Officers of the Company". The Board of
Trustees will initially be comprised of five Managing Trustees; three of whom
have been selected by the Related General Partners and two of whom were
recommended by the Related General Partners and approved by Class Counsel.
Pursuant to the Trust Agreement, one-third of the members of the Board of
Trustees must be Independent Trustees.
The Company's assets will be managed by the Manager pursuant to the
Management Agreement, which cannot be terminated by the Company prior to the
fourth anniversary of the Effective Date. See "MANAGEMENT--The Manager" and
"--Summary of the Management Agreement." The Manager will also serve as the
general partner of the Company for tax purposes.
The Registered Trustee has been appointed as a trustee solely to satisfy
certain requirements of the Delaware Act and its duties and responsibilities
are very limited. See "MANAGEMENT--Registered Trustee."
Ownership Structure
The following diagram illustrates the structure and the ownership of the
Company, assuming 100% Participation, and the relationships among the Company,
the Partnerships, the Related General Partners and the Manager upon the
Effective Date, including the percentage ownership of such persons of Shares
outstanding immediately after the Effective Date.
------------------------- ------------------------
| Manager/ | | Shareholders |
|Related General Partners| | (ex-BUC$holders) |
------------------------- ------------------------
| |
| 1.5% | 98.5%
| Shares | Shares
| |
| |
------------------------
| The Company |
| |
| Assets: 31 FMBs |
| 7 SMLs |
------------------------
Company Objectives
The Company's primary objectives, which are substantially the same as the
Partnership's, will be to: (i) preserve and protect the Company's invested
capital; (ii) provide quarterly distributions generated from Base Interest
received by the Company that is excluded from gross income for purposes of
federal income taxation; and (iii) provide additional distributions generated
from Contingent Interest received by the Company that are excluded from gross
income for purposes of federal income taxation arising from (a) a participation
in the Net Property Cash Flow of the Underlying Properties and (b) a
participation in the Net Sale or Repayment Proceeds of the Underlying
Properties. There can be no assurance that such objectives will be achieved.
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<PAGE>
The Company intends to achieve these objectives by capitalizing on the
financial, development and management expertise of Related, and through the
following:
[bullet] The Company will limit debt and other financing to 50% of the
Company's Total Market Value (measured as of the date such financing
is incurred).
[bullet] The Company will seek to fund future investments in FMBs either
through issuance of new Shares, future equity offerings or the
issuance of debt, subject to the financing limit described above.
[bullet] The Company intends to take advantage of economies of scale which
have the potential to increase profitability as the investment
portfolio grows.
[bullet] The Company will seek to enhance its market position and existing
real estate industry relationships in order to improve its access to
new investment opportunities.
The financing of additional investment activity by the Company may be
funded through public or private offerings of equity securities in the Company
or its wholly controlled subsidiaries, by additional borrowings by the Company
or its wholly controlled subsidiaries (subject to the financing limit) through
various means, including public or private offerings of convertible or
nonconvertible debt securities or loans, or by the use of cash flow from
operations or proceeds from the sale and repayment of FMBs (including the FMBs
in the Existing Portfolio). The Company may offer Shares in exchange for assets
which conform to its investment standards and to repurchase or otherwise acquire
its Shares or other securities. The Company may also invest in the securities of
other real estate investment entities for the purpose of exercising control. The
Company's intention is to initially finance its growth through the leveraging of
its Existing Portfolio rather than by raising new equity capital.
Assets of the Company
Overview; Existing Portfolio of FMBs
If all the Partnerships participate in the Consolidation, the Existing
Portfolio of the Company will include (i) 31 tax exempt participating FMBs with
an outstanding principal balance as of December 31, 1996 of $348,602,428,
together with (ii) 7 SMLs with an aggregate principal balance as of December 31,
1996 of $11,701,538. The SMLs were advanced by or assigned to the respective
Partnerships in conjunction with sales, modification agreements and forbearance
agreements with respect to the FMBs.
The principal and interest payments of each FMB and SML in the Existing
Portfolio are payable either from cash flow from operations of the Underlying
Properties and/or from proceeds of a sale or refinancing. None of the FMBs or
SMLs constitute a general obligation of any state or local government, agency or
authority. Each FMB is secured by a Mortgage Loan on the Underlying Property
which Mortgage Loan mirrors the structure of the corresponding FMB. Each SML is
secured by a second mortgage on the Underlying Property.
Unless otherwise modified, the FMBs in the Existing Portfolio call for
interest-only payments during their respective terms (which are generally up to
24 years) with repayment due in a lump sum "balloon" payment (including accrued
and unpaid interest) at the expiration of the respective terms or at such
earlier times as may be required by the Company pursuant to the terms of the
bond documents.
Generally, unless otherwise modified, waived or extended, the Company has
an option to require redemption of the FMBs beginning approximately twelve years
from the date of their original issuance. In addition, the obligors generally
have an option to prepay the FMBs without penalty commencing ten years from the
date of their original issuance upon full payment of outstanding principal and
accrued and unpaid interest (including Contingent Interest) to the extent
required pursuant to the terms of the bond documents.
As noted in the table set forth below under the heading "Existing
Portfolio," the current stated Base Interest rates of the FMBs range from 4.8%
to 9.0% and each provides for Contingent Interest in amounts ranging from 25% to
65% payable from Net Property Cash Flow or Net Sale or Repayment Proceeds until
the obligor has paid interest at a simple annual rate of up to 16% over the term
of the FMB. Both Base Interest and Contingent Interest are excluded from gross
income for purposes of federal income taxation.
Base Interest is paid monthly and Contingent Interest is generally paid on
a quarterly basis, adjusted annually based on year-end audited financial
statements. In 1995 and 1996, three FMBs paid Contingent Interest in the
aggregate amount of $371,000 and $256,350, respectively.
On a proforma basis, no single FMB provided interest income which exceed
15% of the Company's total revenue for any of the years ended December 31, 1996,
1995 or 1994.
In order to protect the tax exempt status of the FMBs, the Partnerships
have required the obligors to covenant to own, manage and operate the Underlying
Properties in accordance with the terms of the Regulatory Agreements and the
requirements of the Internal Revenue Code.
As noted below under the heading "Bond Modification and Forbearance
Agreements," many of the FMBs held by each of the Partnerships have been the
subject of adverse developments. In such cases, the Partnerships elected to
either seek their rights and remedies through foreclosure proceedings or
deed-in-lieu of foreclosure settlements with the respective obligors or
otherwise entered into modi-
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<PAGE>
fication or forbearance agreements. With respect to those FMBs which have been
modified, such modifications have been either pursuant to settlement agreements
with the obligor or pursuant to a sale of the Underlying Property to a new
obligor and generally provide for new stated Base Interest rates, modified
Contingent Interest rate features, extensions of mandatory redemption options
and, in some cases, further extensions of bond maturities.
With respect to certain of the FMBs which are subject to modification or
forbearance agreements, the difference between the stated Base Interest rate and
the actual pay rate (the greater of the agreed upon minimum pay rate or net cash
flow generated by the Underlying Property) is deferred and payable from future
available Net Property Cash Flow or ultimately from Net Sale or Repayment
Proceeds, and is not accrued for financial statement purposes. The determination
by each Partnership as to whether to enter into modification or forbearance
agreements respecting these FMBs or to otherwise pursue its rights and remedies
under the loan documents (including foreclosure or deed-in-lieu thereof) was
based on several factors including but not limited to perceived market
conditions, property performance, owner cooperation and projected legal costs
under each scenario.
Existing Portfolio
The following table lists the FMBs that the Company will initially own upon
the Effective Date, together with certain information regarding the Underlying
Properties:
84
<PAGE>
<TABLE>
<CAPTION>
Carrying Project
FMB Face Amount Date Completion
Project Location Units Amount 12/31/96 Closed Date
- ----------------- ----------------------- ------ -------------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tax Exempt I
- ------------
Mansions Independence, MO 550 $ 19,450,000 $ 18,454,884 5/13/86 Dec-87
Martins Creek Summerville, SC 200 7,300,000 6,642,891 5/20/86 May-86
East Ridge Mt. Pleasant, SC 200 8,700,000 8,215,330 5/20/86 May-86
Highpointe Harrisburg, PA 240 8,900,000 7,000,188 7/29/86 Apr-91
Cypress Run Tampa, FL 408 15,402,428 13,982,796 8/14/86 Jun-88
Thomas Lake Eagan, MN 216 12,975,000 13,488,852 9/2/86 Feb-88
North Glen Atlanta, GA 284 12,400,000 11,228,210 9/30/86 Dec-87
Greenway St. Louis, MO 312 12,850,000 13,020,536 10/9/86 Dec-87
Clarendon Hayward, CA 285 17,600,000 14,683,645 12/8/86 Jul-89
Cedar Creek McKinney, TX 250 8,100,000 8,551,563 12/29/86 Feb-88
Sunset Terrace Lancaster, CA 184 10,350,000 8,095,850 2/12/87 Feb-87
----- ------------ ------------
Tax Exempt I Subtotal 3,129 $134,027,428 $123,364,743
----- ------------ ------------
Tax Exempt II
- -------------
Bay Club Mt. Pleasant, SC 160 $ 6,400,000 $ 6,134,588 9/11/86 Dec-87
Loveridge Pittsburgh, CA 148 8,550,000 6,826,198 11/13/86 Mar-87
The Lakes Kansas City, MO 400 13,650,000 10,101,816 12/30/86 Jan-89
Orchard Hills Tacoma, WA 174 5,650,000 5,842,439 12/31/86 Sep-87
Crowne Pointe Olympia, WA 160 5,075,000 5,322,225 12/31/86 Jun-87
Highland Ridge St. Paul, MN 228 15,000,000 12,971,183 2/2/87 Jan-89
Newport Village Tacoma, WA 402 13,000,000 12,843,816 2/11/87 Feb-87
Sunset Downs Lancaster, CA 264 15,000,000 11,306,665 2/11/87 Jul-87
Pelican Cove St. Louis, MO 402 18,000,000 16,907,362 2/27/87 Nov-89
Willow Creek Ames, IA 138 6,100,000 6,019,067 2/27/87 Aug-88
Cedar Pointe Nashville, TN 210 9,500,000 8,423,412 4/22/87 Sep-89
Shannon Lake Atlanta, GA 294 12,000,000 10,920,358 6/26/87 Aug-88
Bristol Village Bloomington, MN 290 17,000,000 17,254,892 7/31/87 Sep-89
Suntree Ft. Myers, FL 240 7,500,000 7,387,848 7/31/87 Dec-85
River Run Miami, FL 164 7,200,000 7,457,110 8/7/87 Jul-87
Players Club (h) Ft. Myers, FL 288 2,500,000 2,404,447 8/14/87 Dec-85
----- ------------ ------------
Tax Exempt II Subtotal 3,966 $162,125,000 $148,123,426
----- ------------ ------------
<CAPTION>
Base Interest 1996 Total
Call Occ% Interest Minimum Rate Interest SML Balance(j)
Project Maturity Date 2/16/97 Rate* Pay Rate* Paid* Paid 12/31/96
- ------------------ ---------- -------- --------- ---------- ----------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax Exempt I
Mansions Apr-08 Apr-06 94.7% 5.23% 5.23% 6.78%(d) $ 1,318,958
Martins Creek May-10 Mar-00 96.5% 8.25% 7.50%(c) 6.91%(c) 504,259
East Ridge May-10 Mar-00 96.4% 8.25% 7.50%(c) 7.83%(c) 680,889
Highpointe Jun-06 Jun-98 97.9% 8.50% 6.07%(b) 6.74% 600,000 $ 3,180,000
Cypress Run Aug-06 Aug-98 90.3% 8.50% 6.00%(b) 5.72% 881,000 995,063
Thomas Lake Aug-06 Aug-98 99.5% 8.50% 8.50%(a) 8.83%(e) 1,145,363 79,795
North Glen Aug-08 Aug-98 89.0% 8.50% 6.00%(a) 6.00% 746,038 110,175
Greenway Sep-06 Oct-98 96.8% 8.50% 8.50% 9.17%(e) 1,177,800 6,600,000
Clarendon Dec-03 Dec-03 98.9% 5.52% 5.52% 5.52% 976,843
Cedar Creek Dec-06 Dec-98 86.1% 8.50% 8.00%(b) 7.88% 638,574
Sunset Terrace May-07 Feb-99 91.3% 8.00% 5.00%(b) 4.93% 510,363
----------- -----------
$ 9,180,087 $10,965,033
----------- -----------
Tax Exempt II
Bay Club Sep-06 Sep-00 99.4% 8.25% 7.50%(c) 8.43%(c) $ 539,664
Loveridge Nov-06 Nov-98 93.9% 8.00% 5.00%(b) 4.83% 412,952
The Lakes Dec-06 Dec-06 96.9% 4.87% 4.87% 5.61%(f) 766,856
Orchard Hills Dec-06 Dec-98 98.3% 8.00% 8.00% 8.00% 453,238
Crowne Pointe Dec-06 Dec-98 96.0% 8.00% 8.00% 8.00% 407,112
Highland Ridge Feb-07 Feb-99 97.7% 8.00% 7.25%(a) 7.06% 1,059,135
Newport Village Jan-07 Jan-99 90.2% 8.00% 8.00%(a) 7.98%(e) 1,039,877
Sunset Downs May-07 May-99 90.2% 8.00% 5.00%(b) 4.35% 652,144
Pelican Cove Feb-07 Feb-99 94.5% 8.00% 8.00%(b) 7.50% 1,350,000
Willow Creek Oct-06 Oct-99 100.0% 8.00% 8.00% 8.00% 489,337
Cedar Pointe Apr-07 Apr-99 84.8% 8.00% 7.00%(g) 7.88%(g) 748,652
Shannon Lake Jun-07 Jun-99 88.1% 8.00% 6.00%(a) 6.00% 732,000 $ 398,614
Bristol Village Jun-05 Jun-99 94.6% 8.00% 7.75%(a) 9.87%(e) 1,680,975 17,890
Suntree Jul-07 Jul-99 90.7% 8.00% 7.50%(a) 7.63% 571,879
River Run Aug-07 Aug-99 95.0% 8.00% 8.00% 9.83%(d) 707,600
Players Club (h) Aug-07 Aug-99 83.9% 8.00% 7.00%(a) 7.37% 184,271
----------- -----------
$11,795,692 $ 416,504
----------- -----------
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
Carrying Project
FMB Face Amount Date Completion
Project Location Units Amount 12/31/96 Closed Date
- ------------------ ------------------------- ----- ------------ ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tax Exempt III
- --------------
Players Club (i) Ft. Myers, FL 288 $ 7,200,000 $ 6,843,428 8/14/87 Dec-85
Lakepoint Atlanta, GA 360 15,100,000 14,159,707 11/18/87 Mar-89
Sunset Village Lancaster, CA 204 11,375,000 9,085,396 3/25/88 Oct-89
Sunset Creek Lancaster, CA 148 8,275,000 6,004,427 3/25/88 Oct-89
Orchard Mill Atlanta, GA 238 10,500,000 8,676,834 5/1/89 Sep-90
----- ------------ ------------
Tax Exempt III Subtotal 1,238 $ 52,450,000 $ 44,769,792
----- ------------ ------------
TOTAL 8,333 $348,602,428 $316,257,961
===== ============ ============
<CAPTION>
Base Interest 1996 Total
Call Occ% Interest Minimum Rate Interest SML Balance(j)
Project Maturity Date 2/16/97 Rate* Pay Rate* Paid* Paid 12/31/96
- ------------------ ---------- -------- --------- ---------- ----------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax Exempt III
- --------------
Players Club (i) Aug-07 Aug-99 83.9% 8.00% 7.00%(a) 7.37% $ 530,700
Lakepoint Oct-07 Jan-00 91.4% 8.50% 6.00%(a) 6.00% 921,099
Sunset Village Mar-08 Mar-00 91.4% 8.50% 5.00%(b) 4.50% 511,971
Sunset Creek Mar-08 Mar-00 92.8% 8.50% 5.00%(b) 4.46% 369,186
Orchard Mill Mar-08 Apr-01 99.2% 9.00% 5.00% 6.76%(e) 710,800
----------- -----------
$ 3,043,756 $ 0
----------- -----------
$24,019,535 $11,381,537
=========== ===========
</TABLE>
- ----------------
* The Interest rate paid represents total interest recorded by the Partnerships
while the Base Interest rate represents the coupon rate of the FMB. The
Minimum Pay rate represents the minimum rate payable pursuant to the
applicable loan modification agreements and forbearance agreements.
(a) The Minimum Pay rate on the FMB is scheduled to increase to the Base
Interest rate for the remaining terms of the FMB.
(b) The Minimum Pay rate is the current net cash flow of the property less
reserves.
(c) The Minimum Pay rate on the FMB increases in increments from 6% in 1990 to
8.25% in 1997. The actual pay rate is adjusted on an annual basis as of the
developer's fiscal year end, based on unaudited financial statements to a
rate no less than the Minimum Pay rate.
(d) Includes receipt of Contingent Interest.
(e) Includes receipt of deferred Base Interest relating to prior periods.
(f) Includes receipt of primary and supplemental Contingent Interest.
(g) Reflects payments received pursuant to a forbearance agreement entered as
of 2/1/97, which lowered the Base Interest rate to 7% effective 9/16/96.
(h) The Player's Club FMB is jointly owned by Tax Exempt II and III.
(i) Carrying amount reflects a provision for loss on impairment of assets to
record the estimated impairment of FMBs based upon an analysis of estimated
cash flows from the individual properties securing the FMBs.
(j) Interest income on SMLs is taxable.
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<PAGE>
Bond Modifications/Forbearance Agreements
Set forth below is a discussion of the current status of certain events
with respect to certain FMBs owned by Partnerships. For further details and
descriptions, please refer to the financial statements included under the
heading "FINANCIAL INFORMATION".
Tax Exempt I
- ------------
Mansion
In July 1988 pursuant to a settlement agreement with the original obligor
under the Mansion FMB, the deed to the Underlying Property was transferred to an
affiliate of the Related General Partner due to the obligor's inability to
continue to make full debt service payments as called for under the FMB.
Effective as of that date, interest was paid under the FMB only to the extent of
cash flow generated by the Underlying Property.
On April 1, 1994 the Mansion was sold to an unrelated third party for
$700,000 in cash and the assumption of obligations under the FMB and a $400,000
second mortgage taken by assignment from the seller and payable to a lender
affiliated with the Related General Partner. Notwithstanding the assumption of
obligations under the FMB, Tax Exempt I agreed to enter into a forbearance
agreement with the new owner pursuant to which Tax Exempt I would be paid a 5%
per annum minimum pay rate plus 100% of cash flow generated by the Underlying
Property, as available. On October 18, 1994 the FMB was modified to provide for
a Base Interest rate of 5.23%, an additional .386% in primary Contingent
Interest payable from 100% of Net Property Cash Flow and additional Contingent
Interest amounts payable from 35% of remaining Net Property Cash Flow until the
obligor receives a 12.5% cumulative annual return on its cash investment and the
return of its investment. Thereafter, Tax Exempt I is entitled to additional
amounts of Contingent Interest up to a cumulative annual interest rate of 16%
payable from 50% of remaining Net Property Cash Flow and Net Sale or Repayment
Proceeds. Notwithstanding the obligation to pay amounts due as primary
Contingent Interest (approximately $75,000 per annum), Tax Exempt I agreed,
until April 1998, that the obligation to pay such amounts will be considered
satisfied subject to those amounts being contributed by the obligor toward
certain designated repairs to the Underlying Property. Amounts due from
remaining cash flow above the primary contingent interest rate are,
nevertheless, due from remaining Net Property Cash Flow or Net Sale or Repayment
Proceeds if any.
East Ridge/Martin's Creek
The FMBs for East Ridge and Martin's Creek were modified in March 1990 when
the Underlying Properties were sold to an unrelated third party. Previously, in
1988, the original obligor under the FMBs defaulted and the deeds were
transferred to affiliates of the Related General Partner who made no equity
investment in the Underlying Properties but assumed the day-to-day
responsibilities of the operation and obligations under the FMBs. Interest
payments due under the FMBs at that time were made only to the extent of cash
flow generated by operations of the Underlying Properties.
The modifications in 1990 provided for minimum fixed pay rates beginning at
6.0% per annum and increasing in annual increments through March 1997 to 8.25%
per annum (new Base Interest rate). The difference between the Base Interest
rate and amounts actually paid (the greater of the minimum pay rate or net cash
flow generated by the Underlying Property, adjusted on an annual basis) is
deferred and payable out of future available Net Property Cash Flow or
ultimately from Net Sales or Repayment Proceeds. Also, as part of the
modification, Tax Exempt I received $950,000 in 13% self-amortizing second
mortgage notes maturing in January 1996. These notes were partially secured by
letters of credit. The notes have been paid in full in accordance with their
terms and the letters of credit released.
Highpointe Club
Due to the original obligor's inability to complete construction and
various defaults related thereto under the Highpointe FMB, the deed to the
Underlying Property was transferred to an affiliate of the Related General
Partner which proceeded to complete construction and lease up the Underlying
Property. The Related affiliate made no equity investment in the Underlying
Property but assumed day-to-day responsibilities of the operation and
obligations under the FMB.
Construction was completed on 216 units in April 1990 and the final 24
units were completed in June 1991. Due to cost overruns resulting from the
defaults, additional "low floater" pari-passu first mortgage bonds in the amount
of $3,250,000 ("Chemical Bonds") were issued by the local authority in June
1989, which were additionally secured by a letter of credit ("L/C") issued by
Chemical Bank on behalf of affiliates of the Related General Partner. The
proceeds from the sale of the bonds to third parties by Chemical were applied to
the payment of construction completion costs. The L/C, renewable annually with a
final maturity of five years (1994), was nevertheless extended through 1995. In
June 1996, Tax Exempt I entered into a purchase agreement with Chemical Bank
(now Chase) which is secured by a pledge and assignment of Tax Exempt I's
$8,900,000 Highpointe FMB. The purpose of the transaction was to obtain a
further 2-year extension (to January 1998) of the L/C securing the Chemical
Bonds. The purchase agreement provides that, should the $3,250,000 Chemical
Bonds not be otherwise refinanced or the L/C replaced as of January 1998 or the
Highpointe obligor defaults on its obligations under the Chemical Bonds, Tax
Exempt I will unconditionally purchase the Chemical Bonds from Chemical Bank.
Previously, $3,180,000 was advanced under a credit facility, guaranteed by
Tax Exempt I, which was utilized to pay construction completion costs. This note
has been assigned to Tax Exempt I in conjunction with the 1993 credit facility
more fully discussed below under the heading "Description of Existing
Indebtedness."
87
<PAGE>
In April 1995, funds (including approximately $121,000 in accrued interest)
relating to a $600,000 settlement in 1989 between the original developer and
USF&G, a construction performance bonding company, and released to Highpointe in
1993, were paid to Tax Exempt I. These funds were applied by Tax Exempt I as
partial payment toward accrued and unpaid interest due under the FMB.
Tax Exempt I has permitted the obligor to pay interest under the FMB only
to the extent of cash flow generated by the Underlying Property, although no
forbearance agreement has been entered into with the obligor with respect to
such arrangement.
Cypress Run
In July 1994, as a result of the failure to pay 1992 and 1993 real estate
taxes, Tax Exempt I initiated steps to enforce its rights and remedies under the
Cypress Run FMB. These remedies included acceleration of the Mortgage Loan,
institution of foreclosure proceedings and a draw on a $350,000 irrevocable
letter of credit issued on behalf of the obligor of the FMB as security for its
obligations under a rental performance guaranty agreement. Pursuant to the terms
of the bond documents, approximately $348,000 of the proceeds received from the
letter of credit was applied as a reduction of the FMB with the balance applied
as interest. In response to the acceleration, on July 15, 1994, the obligor
filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code and
continued to operate the property as debtor-in-possession. The bankruptcy filing
operated as a stay against Tax Exempt I's enforcement of remedies including
foreclosure; however, pursuant to court order, Tax Exempt I received monthly net
cash flow generated by the Underlying Property which was applied to amounts due
as interest under the FMB. On March 31, 1995 pursuant to the terms of a
settlement stipulation entered into on November 10, 1994 and upheld by court
order in March 1995, the deed to the Underlying Property was transferred to an
affiliate of the Related General Partner which made no equity investment in the
Underlying Property, but assumed day-to-day responsibilities of operating the
Underlying Property and obligations under the FMB.
Tax Exempt I has permitted the obligor to pay interest under the FMB only
to the extent of cash flow generated by the Underlying Property, although no
forbearance agreement has been entered into with the obligor with respect to
such arrangement.
In April 1995, December 1996 and February 1997, Tax Exempt I made loans to
the owner of the Underlying Property of approximately $721,000, $274,000 and
$111,000, respectively, which was utilized to pay delinquent real estate taxes
and certain required capital repairs.
Previously in June 1992, Tax Exempt I made a $320,000 secured mortgage loan
to the original obligor under the FMB which was utilized to pay the Underlying
Property's 1991 real estate taxes. This loan required monthly interest-only
payments at 8.5% per annum with principal due in a balloon payment on July 1,
1994. The loan was guaranteed by an affiliate of the obligor of the Cypress Run
FMB. Upon full settlement of bankruptcy proceedings pursuant to a court order
issued in February 1997, obligations under the loan and guaranty have been
released.
Thomas Lake
In December 1991, Tax Exempt I entered into a forbearance agreement with
the obligor of the Thomas Lake FMB providing for interest to be paid at a
minimum pay rate of 7% per annum increasing in annual increments to the stated
Base Interest rate of 8.5% over the ensuing four years. The difference between
the Base Interest rate and the actual pay rate (the greater of the minimum pay
rate or net cash flow generated by the Underlying Property) is deferred and
payable from future available Net Property Cash Flow or ultimately from Net Sale
or Repayment Proceeds. As of December 1996, the stated Base Interest rate has
been fully reinstated in accordance with terms of the forbearance agreement.
In May 1992, Summit Tax Exempt Funding Corp., an affiliate of Tax Exempt I,
made a second mortgage loan to the obligor in the amount of $220,000 which was
utilized to pay the Underlying Property's real estate taxes. In January 1993,
the note was assigned to Tax Exempt I. The note originally required
interest-only payments at prime +2% per annum, payable monthly with principal
due in a balloon payment in April 1995. In April 1995, the loan was extended and
modified as a self-amortizing note at a fixed rate of 8.5% interest per annum,
maturing in October 1997, payable monthly.
North Glen
In 1991, Tax Exempt I entered into a forbearance agreement with the obligor
of the North Glen FMB providing for interest to be paid at a minimum pay rate of
7% per annum, increasing to 7.75% in 1992 and to the stated Base Interest rate
of 8.5% as of 1993. The difference between the stated Base Interest rate and the
actual pay rate (the greater of the minimum pay rate or cash flow generated by
the Underlying Property) is deferred and payable from future available Net
Property Cash Flow or ultimately Net Sale or Repayment Proceeds.
In 1992, payments were made at a 7.75% annual rate for 3 months as agreed,
at which time, due to continuing soft market conditions and pursuant to a
modification of the terms of the forbearance agreement, interest payments were
made at a 7.0% annual rate through April 1993. In 1993 and in 1996 the
forbearance agreement was extended and modified to provide for a minimum pay
rate of 6% per annum through December 15, 1997.
In April 1993 a second mortgage loan was made to the obligor in the amount
of $126,000 which was utilized to pay the Underlying Property's real estate
taxes. The note provided for interest-only payments at 8.5% per annum, payable
monthly, with a balloon payment of principal due on April 30, 1996. In April
1996, this loan was extended and modified as a self-amortizing note at 8.5% per
annum, maturing in April 2000.
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Greenway Manor
Due to the failure of the obligor under the Greenway FMB to pay 1990 and
1991 property taxes as well as monthly interest due under the FMB from March to
August 1992, Tax Exempt I instituted foreclosure proceedings. On July 20, 1992
the obligor filed for bankruptcy under Chapter 11 of the United States
Bankruptcy Code. The bankruptcy filing operated as a stay against Tax Exempt I's
enforcement remedies including foreclosure; however, pursuant to a stipulation,
Tax Exempt I received monthly net cash flow generated by the Underlying Property
which was applied to payment of amounts due as interest under the FMB. On June
30, 1993, the court dismissed the bankruptcy proceedings, at which time the
obligor agreed to transfer the deed to the Underlying Property to an affiliate
of the Related General Partner which made no equity investment in the Underlying
Property but assumed day-to-day responsibilities of operating the Underlying
Property and the obligations under the FMB.
Since that time, Tax Exempt I has permitted the obligor to pay interest
under the FMB only to the extent of cash flow generated by the Underlying
Property, although no forbearance agreement has been entered into with the
obligor with respect to such arrangement.
Clarendon Hills
In 1988, the original obligor of the Clarendon Hills FMB transferred the
deed to the Underlying Property in-lieu-of foreclosure to an affiliate of the
Related General Partner due to its inability to complete construction and
various defaults related thereto. The Related affiliate proceeded to complete
construction and to lease-up the Underlying Property.
In May 1992, the Underlying Property was sold to an unrelated third party
for $2,000,000 in cash, a $6,600,000 promissory note payable to the seller and
the assumption of the $17,600,000 FMB. The promissory note provides for
interest-only payments at an annual rate of 8%, payable monthly with principal
due in a balloon payment in December 2003.
In connection with the sale, the FMB was modified to provide for a Base
Interest rate of 5.52%. After payment to the obligor of $220,000 as an annual
return on its investment, Tax Exempt I is then entitled to an additional 2.73%
per annum in Contingent Interest payable from 65% of Net Property Cash Flow and
then up to 7.75% per annum payable from 35% of remaining Net Property Cash Flow,
if available.
Cedar Creek
In 1988, pursuant to a settlement agreement with the original obligor under
the Cedar Creek FMB, the deed to the Underlying Property was transferred to an
affiliate of the Related General Partner due to the obligor's inability to make
interest payments as called for under the FMB. The affiliate of the Related
General Partner made no equity investment in the Underlying Property, but has
assumed day-to-day responsibilities of operating the Underlying Property and
obligations under the FMB.
Tax Exempt I has permitted the obligor to pay interest under the FMB only
to the extent of cash flow generated by the Underlying Property, although no
forbearance agreement has been entered into with the obligor with respect to
such arrangement.
Sunset Terrace
In May 1995, due to soft market conditions, the obligor under the Sunset
Terrace FMB began to make interest payments based on monthly net cash flow
generated by the Underlying Property's operations, pending finalization of a
forbearance agreement with Tax Exempt I. In August 1995, the forbearance
agreement was finalized providing for, among other things: (i) interest-only
payable to the extent of cash flow generated by the Underlying Property's
operations; (ii) the replacement of the property manager/leasing agent with an
affiliate of the Related General Partner or other designee of Tax Exempt I;
(iii) agreement by the obligor to transfer ownership of the Underlying Property
to a designee of Tax Exempt I no later than January 30, 1997 in the event that
all amounts of interest due and payable under the FMB are not brought fully
current as of that date; and (iv) a guarantee of obligations outlined in the
forbearance agreement by an affiliate of the obligor.
In accordance with the terms of the forbearance agreement and effective
January 30, 1997, the deed to the Underlying Property was transferred to an
affiliate of the Related General Partner who has not made an equity investment
in the Underlying Property but has assumed the day-to-day responsibilities of
operations and the obligations under the FMB.
Tax Exempt I has permitted the obligor to pay interest under the FMB only
to the extent of cash flow generated by the Underlying Property, although no
forbearance agreement has been entered into with the obligor with respect to
such arrangement.
Tax Exempt II
- -------------
Bay Club
In 1988, pursuant to a settlement agreement with the original obligor of
the Bay Club FMB, the deed to the Underlying Property was transferred to an
affiliate of the Related General Partner which assumed day-to-day
responsibilities of operating the Underlying Property and obligations under the
FMB. Effective as of that date, interest due under the FMB was paid only to the
extent of net cash flow from operations of the Underlying Property.
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In 1990, the Underlying Property was sold to an unaffiliated third party
and the FMB was modified. The modification in 1990 provided for a minimum fixed
pay rate beginning at 6% per annum, increasing in annual increments through
March 1997 to 8.25% (new Base Interest rate). The difference between the new
Base Interest rate and the rate actually paid (the greater of the minimum pay
rate or cash flow generated by the Underlying Property adjusted on an annual
basis) is deferred and payable from available future Net Property Cash Flow or
ultimately from Net Sale or Repayment Proceeds. As part of this sale and
modification, Tax Exempt II also received a $360,000 self-amortizing second
mortgage note with an annual interest rate of 13% and maturity in January 1996.
This note was also partially secured by a letter of credit. The note has been
fully repaid in accordance with its terms and the letter of credit released.
The Lakes
In August 1988, due to an inability to complete construction and defaults
related thereto and pursuant to a settlement agreement with the original obligor
under The Lakes FMB, the deed to the Underlying Property was transferred to an
affiliate of the Related General Partner who made no equity investment in the
Underlying Property but assumed the day-to-day responsibilities of operations
for the Underlying Property and obligations under the FMB. In January 1994, the
FMB was modified to provide for a reduction in the Base Interest rate to 4.87%
per annum, a Contingent Interest rate of .37% payable from 100% of Net Property
Cash Flow and additional amounts of Interest payable from 35% of remaining Net
Property Cash Flow until the obligor receives a 14% return on its investment and
a return of its investment. Thereafter, Tax Exempt II is entitled to additional
amounts of Contingent Interest up to a cumulative annual interest rate of 16%
from 50% of remaining Net Property Cash Flow and Net Sale or Repayment Proceeds.
In August 1994 the Underlying Property was sold to an unaffiliated third party
for $700,000 in cash and assumption of the obligations under the modified FMB.
On May 13, 1993, Tax Exempt II, on behalf of the Related affiliated
obligor, deposited a cash escrow of $500,000 in connection with the filing of an
appeal of a mechanic's lien judgement rendered against the obligor and the
former developer. On January 23, 1995, after an appeal and a re-hearing, a
settlement was reached in which the plaintiff was paid approximately $422,000 of
the current escrow balance (which included accrued interest). Pursuant to the
settlement, the balance of funds (approximately $99,000) was returned to the
obligor and thence to Tax Exempt II.
Highland Ridge
In April 1996, due to soft market conditions and delinquent real estate
taxes, the obligor of Highland Ridge FMB entered into a forbearance agreement
with Tax Exempt II, effective as of October 1995. Pursuant to the terms of the
forbearance agreement, the obligor has made minimum monthly interest payments
under the FMB beginning at 7% per annum, increasing in annual increments over
the ensuing 5 years to the Base Interest rate of 8%. The difference between the
Net Base Interest rate and the actual pay rate (the greater of the minimum pay
rate or net cash flow generated by the Underlying Property) is deferred and
payable from future available Net Property Cash Flow or ultimately Net Sale or
Repayment Proceeds. In addition, pursuant to the terms of the forbearance
agreement, delinquent real estate taxes were to be paid in 3 installments by the
obligor over no less than an 18-month period beginning in October 1995. The
first two such installment payments have been made as required. The obligations
under the forbearance agreement are secured by a personal guarantee of the
general partner of the obligor.
Newport Village
In September 1992, due to soft market conditions and delinquent real estate
taxes, the obligor under the Newport Village FMB entered into a forbearance
agreement with Tax Exempt II. Pursuant to the terms of the agreement, the
obligor made minimum monthly interest payments under the FMB initially at a 6%
annual rate, increasing in annual increments over the ensuing 4 years to the
stated Base Interest rate of 8% per annum. The difference between the Base
Interest rate and the actual pay rate (in no event less than the minimum rate
but in any event equal to net cash flow generated by the Underlying Property),
is deferred to future available Net Property Cash Flow or ultimately Net Sale or
Repayment Proceeds. As of September 1996, the stated Base Interest has been
fully reinstated in accordance with the terms of the forbearance agreement.
Sunset Downs
In May 1995, due to soft market conditions, the obligor under the Sunset
Downs FMB began to make interest payments based on monthly net cash flow
generated by the Underlying Property's operations, pending finalization of a
forbearance agreement with Tax Exempt II. In August 1995, the forbearance
agreement was finalized providing for, among other things: (i) interest-only
payable to the extent of cash flow generated by the Underlying Property's
operations; (ii) the replacement of the property manager/leasing agent with an
affiliate of the Related General Partner or other designee of Tax Exempt II;
(iii) agreement by the obligor to transfer ownership of the Underlying Property
to a designee of Tax Exempt II no later than January 30, 1997 in the event that
all amounts of interest due and payable under the FMB are not brought fully
current as of that date; and (iv) a guarantee of obligations outlined in the
forbearance agreement by an affiliate of the obligor.
In accordance with the terms of the forbearance agreement and effective
January 30, 1997, the deed to the Underlying Property was transferred to an
affiliate of the Related General Partner who has not made an equity investment
in the Underlying Property but has assumed the day-to-day responsibilities of
operations of the Underlying Property and the obligations under the FMB. Tax
Exempt
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I has permitted the obligor to pay interest under the FMB only to the extent of
cash flow generated by the Underlying Property, although no forbearance
agreement has been entered into with the obligor with respect to such
arrangement.
Pelican Cove
In October 1989, pursuant to a settlement agreement with Tax Exempt II, the
obligor of the Pelican Cove FMB transferred the deed to the Underlying Property
to an affiliate of the Related General Partner who has not made an equity
investment but has assumed the day-to-day responsibilities of the operation of
the Underlying Property and the obligations of the FMB. Tax Exempt I has
permitted the obligor to pay interest under the FMB only to the extent of cash
flow generated by the Underlying Property, although no forbearance agreement has
been entered into with the obligor with respect to such arrangement.
Cedar Pointe
In September 1996, due to its inability to remain current on required tax
escrow payments, the obligor under the Cedar Point FMB began making partial
payments of interest under the Cedar Pointe FMB equal to a rate of 7% per annum,
pending finalization of a forbearance agreement. In February 1997 Tax Exempt II
finalized a forbearance agreement with the obligor which provides for, among
other things, a minimum pay rate of 7%. In addition, it is anticipated that the
FMB will be permanently modified prior to June 1997, which modification will
provide for a new Base Interest rate of 7% and a Contingent Interest rate of up
to 5% payable from 25% of remaining Net Property Cash Flow or Net Sale or
Repayment Proceeds, if any. In addition, it is expected that the maturity of the
bonds will be extended to April 2017 and the "call date" provision will be
extended to November 2006.
Shannon Lake
In 1991, the obligor under the Shannon Lake FMB entered into a forbearance
agreement with Tax Exempt II providing for a minimum pay rate of 7% increasing
to the stated Base Interest rate over 2 years. In April 1993, the forbearance
agreement was modified and extended to provide for a minimum pay rate of 6% per
annum through December 1995. The agreement was subsequently extended through
December 1997. The difference between the Base Interest rate and the rate
actually paid (the greater of the minimum rate or net cash flow generated by the
Underlying Property) is deferred to future available Net Property Cash Flow or
ultimately Net Sale or Repayment Proceeds.
In April 1993, Tax Exempt II made a second mortgage loan to the obligor
which was utilized to pay real estate taxes. The note called for interest-only
payments of 8.5% per annum, payable monthly, with principal due in a balloon
payment in April 1996. In April 1996 the loan was extended and modified to a
self- amortizing note at 8.5% interest per annum and maturing in April 2000,
payable monthly.
Bristol Village
In October 1992, due to high real estate taxes and soft market conditions,
the obligor under the Bristol Village FMB entered into a forbearance agreement
with Tax Exempt II providing for a minimum pay rate of 6% per annum, increasing
in annual increments to the stated Base Interest rate of 8% as of January 1997.
The difference between the rate actually paid (the greater of the minimum pay
rate or the cash flow generated by the Underlying Property) is deferred and
payable from future Net Property Cash Flow or ultimately from Net Sale or
Repayment Proceeds.
As of January 1997, the Base Interest rate has been fully reinstated in
accordance with the terms of the forbearance agreement. In addition, all
previously deferred Base Interest has been paid to Tax Exempt II.
In April 1993, Tax Exempt II made a second mortgage loan in the amount of
$125,000 to the obligor, which was utilized to pay past due real estate taxes.
The loan is self-amortizing over four years with an annual interest rate of 8%
per annum, payable monthly and matures in May 1997.
Suntree and Players Club
In 1992, due to soft market conditions and costs of necessary capital
repairs, the obligors of the Suntree and Players Club FMBs entered into
forbearance agreements with Tax Exempt II providing for minimum payments to be
paid under the FMB at 7% per annum for a two year period, at which time the
stated Base Interest rate would be reinstated. In 1994, the forbearance
agreements were extended and modified to provide for a minimum pay rate of 6%
per annum through December 1994. In 1995, the agreements were again extended and
modified, effective January 1995, to provide for minimum pay rates for Suntree
of 7.5% per annum and for Players Club of 7.0% per annum. In 1996 and again in
1997 these agreements were further extended and modified, providing for a
minimum pay rate of 6.5% per annum for Suntree from January 1997 through July
1997, and increasing to 7% per annum through December 1997. For Players Club the
minimum pay rate will be 6.25% per annum through December 1997. The difference
between the Base Interest rate and the rate actually paid (the greater of the
minimum pay rate or net cash flow generated by the Underlying Property) is
deferred and paid from future available Net Property Cash Flow or ultimately
from Net Sale or Repayment Proceeds.
In addition, on May 12, 1997, Tax Exempt II made a second mortgage loan of
approximately $280,000 to the obligor of the Players Club FMB which was utilized
to pay costs of certain deferred maintenance (estimated at approximately
$120,000) and 1996 real estate taxes (approximately $156,000).
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Tax Exempt III
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Players Club
Tax Exempt II and III each hold a portion of the Players Club FMB. See
discussion under Tax Exempt II under the heading "Suntree and Players Club"
relating to the Players.
Lakepoint
In 1991, the obligor under the Lakepoint FMB entered into a forbearance
agreement with Tax Exempt III. The agreement provided for a minimum pay rate of
7.5% per annum in 1991, increasing in annual increments over 2 years to the
stated Base Interest rate of 8.5% per annum. The forbearance agreement was
extended and modified in 1992 to provide for a minimum pay rate of 7.5% from
January 1992 through March 1993. It was further modified and extended in April
1993 to provide for a minimum pay rate of 6% through December 1995 and again in
1996 through year end 1997 calling for a 6% minimum annual pay rate. The
difference between the Base Interest rate and the rate actually paid (in no
event less than the minimum pay rate and in any event equal to monthly net cash
flow generated by the Underlying Property if greater than the minimum rate) is
deferred and payable from future available Net Property Cash Flow or ultimately
Net Sale or Repayment Proceeds.
Sunset Creek and Sunset Village
In 1992, due to soft market conditions, the obligors under the Sunset Creek
and Sunset Village FMBs entered into forbearance agreements with Tax Exempt III.
The agreements provided for a minimum pay rate of 7% per annum as of April 1992
increasing in annual increments through May 1996 to the stated Base Interest
rate of 8.5%. The difference between the rate actually paid (the greater of the
minimum pay rate or net cash flow generated by the Underlying Property) is
deferred to future available Net Property Cash Flow or ultimately Net Sale or
Repayment Proceeds. In May 1995 due to continuing soft market conditions and an
inability to remain current on interest payments, the obligors began making
interest payments to Tax Exempt III only to the extent of cash flow generated by
the Underlying Property, pending finalization of a settlement agreement with Tax
Exempt III. Effective August 1, 1995, the obligors transferred the deeds to the
Underlying Properties to an affiliate of the Related General Partner who has not
made an equity investment in the underlying properties but assumed day-to-day
responsibilities and the obligations under the FMBs. Tax Exempt III has
permitted the obligor to pay interest under the FMB only to the extent of cash
flow generated by the Underlying Property, although no forbearance agreement has
been entered into with the obligor with respect to such arrangement.
Orchard Mill
In 1991 due to soft market conditions, the obligor under the Orchard Mill
FMB entered into a forbearance agreement with Tax Exempt III which provided for,
among other things, interest payments to be paid only to the extent of net cash
flow generated by the Underlying Property and replacement of the property
manager and leasing agent by a designee of Tax Exempt III. The difference
between the stated Base Interest rate and the rate actually paid (based on net
cash flow from the operations of the Underlying Property) is deferred and
payable from future available Net Property Cash Flow or ultimately Net Sale or
Repayment Proceeds.
In October 1992, Tax Exempt III made a second mortgage loan to the obligor
under the FMB in the amount of approximately $82,000 which was utilized to pay
the 1992 real estate taxes. The loan was self- amortizing over a two year period
with interest at 9% per annum beginning in December 1992. In 1994, the loan was
fully repaid in accordance with its terms.
Effective as of May 1995, the forbearance agreement was modified to provide
for, among other things, a minimum pay rate of 5% per annum. The difference
between the stated Base Interest rate and the rate actually paid (the greater of
the minimum pay rate or net cash flow generated by the Underlying Property) is
deferred and payable from future Net Property Cash Flow or ultimately from Net
Sale or Repayment Proceeds.
General
Where the original owners of the Underlying Properties and obligors of the
FMBs were replaced by affiliates of the Related General Partners, buyers are
being sought for the Underlying Properties who would make appropriate levels of
equity investments in the Underlying Properties and assume the non-recourse
obligations under the FMBs. Although the Underlying Properties are not producing
sufficient cash flow to fully service all the obligations under the FMBs, the
Partnerships have no present intention of declaring defaults or pursuing their
rights and remedies under the FMBs.
Description of Existing Indebtedness
Credit Facility
---------------
On January 15, 1993, Tax Exempt I entered into a loan agreement with an
unaffiliated lender for a $15,000,000 credit facility with the maturity date of
January 14, 1998, and an option to extend for two years for an additional fee.
The debt service requirements include monthly interest-only payments with a
variable interest rate equal to the 30-day commercial paper interest rate (5.45%
and 5.80% at December 31, 1996 and 1995, respectively), plus 4.05% with
principal due at maturity. The facility is collateralized by a pledge and
assignment of the FMBs and associated collateral of East Ridge, Martin's Creek,
The Mansion, Thomas Lake and Sunset Terrace. The
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initial proceeds from this facility were used to repay a $10,000,000 credit
facility guaranteed by Tax Exempt I, to repay a $3,000,000 non-interest-bearing
working capital loan made to Tax Exempt I from the Related General Partner and
to pay associated closing costs. The $10,000,000 credit facility had been used
to pay for costs incurred to complete construction of the properties securing
the High Pointe Club and Clarendon Hills FMBs and to fund a loan toward the
payment of property taxes on the Thomas Lake property. The $3,000,000 working
capital loan was used to supplement distributions commencing with the fourth
quarter 1988 distribution. Through December 31, 1996 $13,680,866 in loan
proceeds have been drawn against the $15,000,000 credit facility. The unused
portion of Tax Exempt I's $15,000,000 credit facility is to be used for future
working capital requirements and other cash requirements, as necessary, subject
to approval of the lender. The transfer of the Credit Facility requires the
lender's consent with respect to the specific business of the borrower, the
borrower's business structure, the transfer of the borrower's assets to another
entity, as well as the transfer of interests in the General Partners, including
the withdrawal of a general partner. The Related General Partners have had
preliminary discussions with the lender with respect to its consent to such
transfer, and it is their expectation that consent will be obtained subject to
the final terms and ultimate consummation of the Consolidation. There is,
however, no assurance that such consent will be obtained. Should the lender's
consent not be obtained, the Company must refinance the Credit Facility or find
other means to repay it which may include a sale of one or more of the FMBs or
other assets of the Company.
In conjunction with Tax Exempt I's credit facility and the repayment of the
previously existing $10,000,000 credit facility, Tax Exempt I was assigned
nonrecourse promissory notes in the amount of $6,600,000, $3,180,000 and
$220,000 for the Clarendon Hills, High Pointe Club and Thomas Lake properties,
respectively. The Clarendon Hills promissory note, secured by a second deed of
trust, requires monthly interest only payments of 8.0% per annum with the
principal due on December 31, 2003. The unsecured High Pointe Club note also
requires monthly interest only payments of 8.0% per annum with the principal due
on December 31, 2003. Since the High Pointe Club property is paying interest on
the FMB on a cash flow basis, interest on the promissory note is only recorded
when cash flow is received in excess of the stated Base Interest rate. No
interest on the High Pointe Club promissory note has been received or recorded
through December 31, 1996. The assigned High Pointe Club note is subordinate to
the High Pointe Club FMB and has been fully reserved. The Thomas Lake promissory
note in the principal amount of $220,000, which is secured by a second mortgage
on the property, matured in April 1995 and was modified and extended. The
modified loan is self-amortizing over thirty months at an 8.5% interest rate.
Clarendon Hills and Thomas Lake promissory notes are current on their interest
payments through December 31, 1996.
Consolidation Expenses Loan
---------------------------
The Company expects to borrow sufficient funds to pay the Consolidation
Expenses of approximately $1,984,125 pursuant to a loan agreement, the terms and
provisions of which are currently being negotiated by the Manager. The Related
General Partners expect that the principal terms of such loan will be as
follows:
Principal amount: $1,984,125
Origination date: Consummation of the Consolidation
Term / Maturity: Assumed 5 years
Interest Rate: Assumed 9.0%
Amortization: None.
The pro forma financial statements were prepared based upon the foregoing
assumptions.
Internal Growth
The Partnerships originally acquired for investment participating FMBs
secured by first mortgages on to-be-constructed multi-family properties. The
Related General Partners believe that there are growth opportunities available
for the Company to acquire additional FMBs secured by loans on multi-family or
other types of properties (i) with expiring credit enhancement; (ii) which are
to be constructed; (iii) benefitting from Federal low income housing tax
credits; and (iv) owned or to be acquired by 501(c)(3) corporations. See "RISK
FACTORS AND OTHER ADVERSE FACTORS." The Consolidation is expected to provide a
capital structure and increased efficiency of portfolio management which will
allow the Company to take advantage of such opportunities.
Distribution Policy
The Company will pay distributions to Shareholders if, as and when
authorized by its Board of Trustees out of funds legally available therefor. The
Company intends to pay distributions on a quarterly basis, commencing in the
first fiscal quarter after the Effective Date. Cash available for distribution
does not represent cash generated from operating activities determined in
accordance with GAAP, is not necessarily indicative of cash available to fund
all of the Company's cash needs and should not be considered as an alternative
to net income as an indication of the Company's performance or to cash flows as
a measure of liquidity. Initially, the Company intends to follow cash
distribution policies similar to those followed by the Partnerships. However, in
setting the level of Shareholder distributions, the Board of Trustees will take
into account, among other things, the Company's financial performance, need of
funds for working capital reserves, capital improvements and new investment
opportunities. While the Delaware Act does not specifically impose any
restrictions
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on the Company's ability to make distributions, other laws may impose certain
restrictions and in certain circumstances could impose an obligation on
Shareholders to return distributions. Unlike the Partnerships, the Company is
not required to distribute net proceeds from the sale or refinancing of assets
or repayment of FMBs.
Financing Policies
The Trust Agreement will limit the Company's ability to incur debt or other
financing in excess of 50% of the Company's Total Market Value (measured as of
the date such leverage is incurred).
Investment Policies and Business Plan
Overview
In addition to its Existing Portfolio, the Company intends to invest in
FMBs issued by state or local governments or their instrumentalities and secured
by Mortgage Loans on multifamily residential apartment projects, assisted
living, continuing care and retirement community projects or nursing homes
developed by third-party developers or affiliates of the Manager. To the extent
permitted by applicable law as well as by market conditions, the Company will
attempt to acquire FMBs which permit the holder thereof to participate in both
the on-going cash flow and sale or refinancing proceeds of the Underlying
Property. As with the Existing Portfolio, it is intended that all interest
income on the FMBs will be excluded from gross income for purposes of federal
income taxation. Interest income on some of the FMBs may be includible as an
item of tax preference in calculating federal alternative minimum tax and may
result in other collateral federal income tax consequences. See "Federal Income
Tax Considerations." The Company intends to hold such FMBs on a long term basis
for the benefit of the Shareholders. In addition, the Company may also invest
funds on hand in either highly rated tax exempt securities or mutual funds which
invest in those securities pending the acquisition of appropriate FMBs.
Sources of Capital
In order to carry out its business plan of acquiring additional FMBs the
Company intends to raise additional capital. The Company may raise additional
capital either through the incurrence of debt or other leverage or by attracting
new equity or some combination of both strategies. If the Company decides to
raise capital through the incurrence of debt or other leverage it will limit
such indebtedness or leverage to 50% of the Company's Total Market Value
(measured as of the date such indebtedness or leverage is incurred). The
Company's intention is to initially finance its growth through the leveraging of
its Existing Portfolio rather than by raising new equity capital.
The Manager is currently exploring the option of raising capital for the
Company by offering to a new class of equity investors credit enhanced interests
in the Company that will pay monthly distributions to such investors of tax
exempt interest at a seven day tax exempt rate. Although the new investors will
be classified as equity owners in the Company for federal income tax purposes,
from the point of view of the Shareholders the cost of this new capital
generally will be equal to the cost of borrowing at a weekly tax exempt variable
rate of interest. In order to arrange this type of low cost financing, it will
be necessary for the Company to enter into an arrangement with a highly rated
bank or other financial institution to provide credit enhancement and liquidity
to this new class of investors. It is anticipated that in order to effect such
an arrangement the Company will have to pledge all of its existing tax exempt
cash flow to such credit enhancer as well as an interest in the FMBs owned by
the Company from time to time, similar to pledges which the Company would be
required to make to a lender.
It is possible that in order to permit the Company to raise new capital at
low cost approximating the weekly tax exempt borrowing rate that the Company
will need to establish a new special purpose pass-through entity to hold all of
its FMBs. If this structure is required by the credit enhancers or otherwise, it
is anticipated that the new pass-through entity would have two classes of
investors: One class would be new investors who would be paid a priority return
out of the tax exempt interest received on the FMBs equal to the seven day tax
exempt borrowing rate; the second class would be owned entirely by the Company
and would represent all of the tax-exempt interest received on the FMBs that
remains after paying the priority return to the new investors. The Company will
only utilize this structure if it receives an opinion of counsel which concludes
that the Company will not be deemed to be an "investment company" under the
Investment Company Act of 1940 as a result of its ownership of an interest in
such pass-through entity.
There can be no assurance that the Company will be able to obtain the low
cost of funds described above, nor can it be predicted exactly what form the
transaction may take. Because this source of capital, though classified as
equity, closely resembles debt, the Company will limit the amount of capital
raised in this manner to 50% of the Company's Total Market Value. Accordingly,
the Board of Trustees of the Company and the Manager reserve the right to take
whatever steps they deem are necessary and prudent to raise the capital required
for future operations at the lowest costs to the Company.
Investment of Newly Raised Capital
The goal of the Company is to use the newly acquired capital to invest in
additional FMBs. The Company's preference will be to invest in FMBs with
Contingent Interest. Because the Company anticipates being able to raise capital
at very low tax exempt rates, the Company believes it can provide both growth
and an increasing tax exempt return to the Shareholders through the acquisition
of additional FMBs.
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The Company expects that it will acquire mostly FMBs the proceeds of which
were used to acquire, construct or equip multifamily residential rental
properties, assisted living, continuing care and other retirement communities
and nursing homes. However, if attractive investment opportunities materialize
in connection with FMBs that financed other types of facilities, such other
bonds might be acquired as well. It is anticipated that the FMBs will be
acquired without the benefit of any credit enhancement or any rating from a
nationally recognized rating service. Some of the FMBs that are acquired may be
in default and will be restructured after their acquisition by the Company. It
is expected that the FMBs will generally bear fixed rates of interest with
maturities ranging from 5 to 35 years. The Company will invest only in FMBs
which have a principal amount not greater than 85% of the value of the
Underlying Property unless the Manager determines that substantial justification
exists for investing in such an FMB because of other criteria such as additional
credit or collateral. However, the Company does not presently intend to set any
parameters for debt service coverage respecting FMBs it will acquire.
Each of the FMBs in the Existing Portfolio bears interest at a fixed rate
plus a participating rate of interest based on a percentage of cash flow and
sale or refinancing proceeds. One of the primary objectives of the Company is to
acquire additional FMBs with such participating interest features. The ability
of the Company to acquire such bonds, however, will be constrained in part by
recently promulgated Treasury Regulations which limit the ability to obtain
significant amounts of tax free interest on a participating basis other than in
connection with the refinancing of certain existing tax exempt bonds.
Accordingly, to the extent the Company acquires newly issued FMBs the proceeds
of which were or will be used to finance the acquisition or construction of
residential rental or other types of underlying projects, the FMBs will not bear
interest based on a participation in the projects' cash flow or sale or
refinancing proceeds. Therefore, in order to maximize the number of FMBs which
do have a participating interest feature, the Company will focus its acquisition
strategy on outstanding previously issued FMBs which may be restructured to
contain a participating interest feature.
Although the Company will focus on opportunities to acquire existing tax
exempt bonds which may be restructured so as to provide Base Interest and
Contingent Interest, the Company will also seek to acquire existing FMBs which
present yield opportunities without restructuring as well as newly issued bonds,
the proceeds of which will finance the construction of multifamily residential
apartment projects, assisted living, continuing care and retirement community
projects or nursing homes. Certain of these newly issued FMBs may be issued in
connection with projects whose expected residents are all qualifying low income
persons so that the project may also take advantage of the Low Income Housing
Tax Credit (the "LIHTC") described in Section 42 of the Internal Revenue Code of
1986, as amended (the "Code"). Such FMBs may generally be less likely to go into
default than FMBs respecting multifamily projects that do not qualify for or
avail themselves of the LIHTC because (i) LIHTC projects often benefit from
various state and local government grants and subsidiaries (including rent
subsidies) and (ii) owners of and investors in LIHTC projects are likely to go
to great lengths to avoid foreclosure of a mortgage on such a project because of
the adverse consequences of a foreclosure on the LIHTC. While it is contemplated
that the majority of the Underlying Properties will be owned by profit-motivated
entities, a portion of the portfolio acquired by the Company may represent
projects owned by charitable organizations described in Section 501(c)(3) of the
Code. Generally, projects owned by such charitable organizations will be
dedicated to low income persons or to elderly residents.
The Company will acquire FMBs which finance the construction of new
projects. The Company will also provide permanent financing once construction is
completed. To achieve that end, the Company, in appropriate circumstances, will
offer forward commitments to acquire a FMB at a future date upon the completion
of construction of an Underlying Property. In offering such forward commitments
the Company generally will agree to acquire a FMB at a future date at an
interest rate to be determined at the time the FMB is acquired by the Company by
reference to a spread above an appropriate interest index. This type of floating
forward commitment does not expose the Company to any significant risk of
interest rate fluctuation. In certain circumstances the Company may offer a
forward commitment to acquire FMBs at a future date at a predetermined fixed
rate. In such situations the Company is exposed to interest rate fluctuations
and would engage in appropriate hedging techniques to minimize such interest
rate risk. In selected circumstances, and only in connection with the
acquisition of tax-exempt FMBs, the Company may acquire a small amount of
taxable bonds. Known as "Taxable Tails", the primary purpose of these bonds is
to fund certain costs associated with the issuance of FMBs that, under current
law, cannot be funded by FMBs.
Short Term Investments
Pending the use of new capital to acquire FMBs, the Company may invest in
Tax-exempt Securities. "Tax Exempt Securities" are short-term tax-exempt bonds
or mutual funds which invest in such bonds, which are rated not lower than A1 by
Moody's Investors Service, Inc., A+ by Standard & Poor's Ratings Group, or which
the Manager determines are of comparable quality.
Selection of FMBs
FMBs will be selected on the basis of the Company's investment objectives
and policies.
In evaluating the FMBs, the Manager will consider such factors as: the
ability of the Underlying Property to compete in the market; the overall quality
of the Property Owner and the property manager; if the FMBs are in default or
otherwise in need of restructuring, the terms on which such bonds could be
restructured and the likelihood of obtaining the issuer's approval thereof;
whether there are state or local limitations on Contingent Interest which could
affect the FMBs; the ratio of the amount of the investment to the value of the
Underlying Property by which it is to be secured; the potential of the
Underlying Property for capital appreciation; the projected cash
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flow of the Underlying Property and the ability to increase cash flow through
capable management; the location and design of the Underlying Property;
prospects for liquidity through sale or refinancing; the potential for economic
growth of the community; and diversification.
In addition, the Company will apply the following policies to its
investments in FMBs: (i) the Company may not invest in an FMB secured by a
Mortgage Loan on any one Underlying Property if the principal of such FMB would
exceed, in the aggregate, an amount equal to 20% of the Total Market Value of
the Company; (ii) the Company may not invest in FMBs secured by Mortgage Loans
to any one Property Owner if the principal of such FMBs would exceed, in the
aggregate, an amount greater than 20% of the Total Market Value of the Company;
(iii) the Company may not invest in FMBs secured by Mortgage Loans on unimproved
real property or tax-exempt securities relating to unimproved real property in
an amount in excess of 10% of the Total Market Value of the Company; and (iv)
the Company may not invest in an FMB secured by a Mortgage Loan on any one
Underlying Property if the aggregate amount of all mortgage loans outstanding on
the Underlying Property, plus the principal amount of the Mortgage Loan, would
exceed an amount equal to 85% of the appraisal value of the Underlying Property
as determined by an independent appraiser, unless (a) such excess mortgage loan
amounts are payable only from available cash flow and no foreclosure rights
exist with respect to such mortgage loans without the Company's consent; (b) the
Manager determines that substantial justification exists because of other
aspects of the loan, such as the net worth of the Property Owner, the credit
rating of the Property Owner based on historical financial performance,
additional collateral (such as a pledge or assignment of other real estate or
another real estate mortgage) or an assignment of rents; or (c) the Company has
purchased an FMB at a price that is no more than 85% of the value of the
Underlying Property (notwithstanding that the face amount of the outstanding
mortgage loans with respect to the Underlying Property exceeds 85% of the value
of the Underlying Property), provided that any loans relating to the Underlying
Property which are advanced by third parties (and which cause the aggregate
amount of all mortgage loans outstanding on the Underlying Property to exceed
85% of the appraised value of the Underlying Property) are subordinated to the
Company's investment and do not entitle such third party lender to any rights
upon default without the Company's consent until after the Company's FMB and
related Mortgage Loan with respect to such Underlying Property have been repaid.
Independent appraisals obtained in connection with investments in FMBs will
be maintained by the Manager at the Company's principal offices for a period of
five years and will be available for inspection and duplication by Shareholders.
Generally, the Company will acquire an entire issue of FMBs or, in any event, a
large enough portion of an issue of FMBs to permit the Company to be in a
position to make decisions respecting the FMBs in the event of a default or
otherwise.
The Company may acquire FMBs secured by mortgage loans on Underlying
Properties owned by affiliates of the Manager. However, no more than 15% of the
Total Market Value of the Company may be invested in FMBs in which affiliates of
the Manager have an interest. See "Description of Certain FMBs and Affiliated
Properties--Properties Owned by Affiliates," below.
The Company may also determine to acquire Minority Positions in FMBs,
either directly or through a wholly owned subsidiary. In such instances, the
Company will generally not retain the right to make decisions respecting the
FMBs, which control of decisions will instead be enjoyed by the holders of the
majority of such FMBs. Accordingly, with respect to this portion of the
Company's portfolio (which will not exceed 15% of the Total Market Value of the
Company), persons outside of the Company will have control over certain matters
including what course of action to pursue in the event of a default respecting
such FMBs.
The Terms of the FMBs and Mortgage Loans
The terms of a Mortgage Loan will be substantially parallel to the terms of
the related FMB insofar as the Mortgage Loans are expected to require Property
Owners to make payments sufficient to meet debt service payments on the FMBs.
The intended terms of the FMBs and Mortgage Loans are described below. NO
ASSURANCE CAN BE GIVEN THAT THE MANAGER WILL BE ABLE TO OBTAIN TERMS COMPARABLE
TO THOSE SET FORTH BELOW.
Opinion of Bond Counsel. FMBs will only be acquired by the Company if an
opinion from bond counsel (retained by the issuer of the FMBs or by the Company)
or counsel for the Company has been rendered to the effect that interest on such
FMB's will be excluded from gross income for federal income tax purposes and
that the FMB's are valid obligations of the issuer. In some states or
municipalities, there may not be sufficient legal authority to permit bond
counsel to render an unqualified opinion as to the validity of the Contingent
Interest. In such cases, the Company may acquire FMBs which provide that
interest is payable only to the extent permitted by law, in which event, the
Company would accept an unqualified opinion on the validity and enforceability
of the obligation to pay principal and current interest and a qualified or
reasoned opinion as to the obligation to pay Contingent Interest. In addition,
in situations involving pending legislation, pending regulations or certain
other matters, the Company may accept a reasoned or qualified opinion with
respect to the exclusion of interest from gross income for purposes of federal
income taxation. In certain circumstances the opinion of bond counsel may rely
upon opinions of other counsel or may be given by one or more counsel.
Nature of the Obligation. Each FMB will be a special obligation of a state
or local issuer payable solely from revenues received under the Mortgage Loan to
be made from the proceeds of such FMB. The issuers may pledge or assign the
Mortgage Loans to the Company as owner of the FMBs, or to an escrow agent or
bond trustee for the benefit of the owner of the FMB. The Mortgage Loans will
bear interest at the same or slightly higher rates as the related FMBs in that
the Mortgage Loans will require payments sufficient to pay debt service on the
related FMB, and in some cases fees of the issuers of the FMB imposed upon the
Property Owners. Thus, payment
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of the Mortgage Loan in accordance with its terms will discharge both the
Property Owner's obligation to the issuer of the FMB, if any, and the obligation
of the issuer to the Company.
Interest Rate. The FMBs will generally bear a fixed Base Interest rate. In
addition, to the extent permitted by existing regulations, a majority of the
FMBs are expected to provide for Contingent Interest until the Property Owner
has paid interest at a simple annual rate of up to 16% over the term of the FMB.
Depending upon the facts of a particular Mortgage Loan and the requirements
of counsel, Net Sale or Repayment Proceeds may be computed to take into account
any excess in value of an Underlying Property over the outstanding balance of
the FMB at the time the bond was restructured by the Company or originated, if
the Company acquires a new bond. This excess will reduce the Net Sale or
Repayment Proceeds that would otherwise result from a sale or refinancing of the
Underlying Property. Any such greater amount is expected to reflect additions to
the project's cost and an excess of original cost or appraised value over the
original principal amount of the FMB.
Any cash flow from the Underlying Property which remains after the payment
of all interest, including Contingent Interest, due and payable pursuant to the
terms of the Mortgage Loan belongs to the Property Owner.
Term. Each FMB is generally expected to be for a term of up to 5 to 35
years, although the Company anticipates holding the FMBs for approximately 5 to
17 years and having the right to cause repayment of the bonds at that time. The
Company will consider shorter terms for FMBs which present yield opportunities.
The Company expects to structure newly acquired FMBs to provide a call option to
the Company at any time after 5 to 17 years on six months' notice. In many
cases, the principal of an FMB may not amortize during the term of the FMB but
may be required to be repaid in a lump-sum "balloon" payment at the expiration
of the term of the FMB or at such earlier time as the Company may require. To
the extent that the FMBs call for "balloon" payment of the principal instead of
amortization, the Special Distribution and Loan Servicing Fee payable to the
Manager and its affiliates will be proportionately greater.
Prepayment. The FMBs are generally expected not to be subject to optional
prepayment by the Property Owner during the first five to ten years of the
Company's ownership of the bond. Optional prepayments, in whole but not in part,
are expected to be permitted at any time thereafter subject to the payment of a
redemption premium equal in the case of a five year lockout to at least 5% of
the principal amount of the FMB to be redeemed, if prepaid during the sixth
year, with such premium being reduced by 1% per year until there is no premium.
Prepayment premiums for FMBs with longer initial lockouts will probably be
somewhat lower.
The Company may require redemption of the FMB, and, therefore, prepayment
of a Mortgage Loan, upon the occurrence of a "Determination of Taxability." For
this purpose, a "Determination of Taxability" generally includes the issuance of
a written notice of deficiency by the Internal Revenue Service to the effect
that interest on any FMB is subject to federal income taxation or the enactment
of legislation, rendering of a judicial decision, publication of an official
statement by the Internal Revenue Service or the occurrence or existence of any
other act, event or circumstance which prevents bond counsel from opining that
interest on the FMB will, either currently or retroactively, be exempt from
federal income taxation. Failure of a property owner to honor its regulatory
covenants (see Regulatory Requirements below) could result in a Determination of
Taxability.
In the event of prepayment, whether optional or mandatory, and in the event
of the tender of an FMB for purchase, the redemption price or purchase price, as
the case may be, will be equal to the principal amount of the FMB to be redeemed
or purchased, together with interest thereon (including Contingent Interest) to
the date of redemption or tender, as the case may be. Where applicable, the
calculation of Contingent Interest payable is expected to be performed
substantially as follows. If the Underlying Property is sold, the Net Sale or
Repayment Proceeds portion of the calculation is expected to be based upon the
sales price obtained. If the Underlying Property is not sold at the time of the
redemption or tender of an FMB, the Contingent Interest due is expected to be
based on the Net Sale or Repayment Proceeds from the related Underlying Property
as determined by independent appraisal. The Company and the Property Owner will
each choose a qualified independent appraiser. In the event such appraisers are
unable to agree as to an appraisal value for the Underlying Property, those
appraisers shall in turn choose a third qualified independent appraiser. The
third appraiser shall be required to choose the appraisal value prepared by one
of the original two appraisers which it determines is closest to the true fair
market value, and such shall be used in determining the Net Sale or Repayment
Proceeds for purposes of calculating the Contingent Interest payable on the FMB.
Such appraisal value shall be binding upon the Company and the Property Owner.
Due on Sale. The FMBs and, therefore, the Mortgage Loans are expected to
be, in the discretion of the holder of the FMB, subject to redemption or
purchase on the sale or refinancing of an Underlying Property, except where such
clauses are unenforceable under applicable state law.
Security. Each FMB will be secured by a first mortgage on all real
property, an assignment of rents and a security interest in personal property at
the Underlying Property. The Manager intends that the Mortgage Loans securing
the FMBs will be with recourse to the Property Owners during any construction
period and without recourse to the Property Owners thereafter; however, no
assurance can be given that the Manager will be able to arrange Mortgage Loans
with recourse during the construction of any Underlying Property. Because the
Mortgage Loans are expected to be nonrecourse obligations (other than possibly
during the construction period, if any, or in the case of existing Underlying
Properties for which operating deficit guarantees have been obtained, for the
first 12-36 months of operation), the Company
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will be able to look solely to the Underlying Property in the event of a default
by the Property Owner on the payment of a Mortgage Loan. However, the Manager
will attempt to obtain operating deficit guarantees as additional security for
the Mortgage Loans from the principals of the Property Owners. During any
construction period, some or all of the following additional security may be
provided: a letter of credit from a financial institution acceptable to the
Manager in an amount expected to be 10% or more of the loan; a payment and
performance bond or letter of credit from the general contractor or from the
major subcontractors; and a guarantee of payment and completion of the
construction of the Underlying Property by the Property Owners. See
"Construction Period Guarantees," below.
Other Indebtedness on the Properties. The Manager generally intends to
preclude Property Owners from obtaining second mortgages or comparable
indebtedness which is secured by a lien on Underlying Properties; however, if
such indebtedness is allowed for a specific Underlying Property, the Manager
will require that any such indebtedness shall be subordinate to the Mortgage
Loan on the Underlying Property and to other loans made to the Property Owner by
the Company which are secured by a lien on the Underlying Property.
Where the Company, consistent with its objectives and policies, acquires an
FMB which is in default, the principal amount of such FMB may be greater than
the fair market value of the Underlying Property securing such FMB. In such
event, in order to avoid adverse tax consequences to the Company and to
facilitate reaching agreement with the Property Owner regarding the
restructuring of such bond, it may be desirable to divide the FMB and the
related Mortgage Loan into two portions. Thereupon, the Company would hold the
senior portion of the FMB and a third party or an affiliate of the Manager would
hold the junior portion of the FMB. The junior portion would be subordinate to
the senior portion in all respects, including in right of payment of Base
Interest and Contingent Interest. In addition, the junior portion of the bond
would have no right to declare an event of default under the FMB or, in the
event of default, to foreclose on the Underlying Property.
Defaults. The following, among other events, will ordinarily constitute
"events of default" under a Mortgage Loan:
(a) failure of the Property Owner to make, or cause to be made, any payment
under the Mortgage Loan on or before the date such payment is due thereunder;
(b) failure of the Property Owner to perform or observe any non-monetary
covenants or agreements contained in the Mortgage Loan documents, and such
failure continues for the period and after notice, if any, specified in the
relevant Mortgage Loan document;
(c) failure of the guarantor to perform its obligations under its operating
deficit guarantee, if any, and such failure continues after notice thereof; and
(d) the Property Owner is notified that it has failed to comply with
certain covenants in the Mortgage Loan documents which relate to the maintenance
of the tax-exempt character of the interest on the FMBs and 60 days have passed
since delivery of such notice, unless (i) bond counsel advises that such failure
will not adversely affect the tax-exemption of such FMB or that such failure can
be remedied with the effect of permitting the interest on the FMB to continue to
be exempt from federal income taxation and (ii) such failure does not cause a
violation of the state law that authorized the issuance of an FMB.
Whenever any event of default under a Mortgage Loan shall have occurred and
is continuing, the Company may (either directly or indirectly, through a bond
trustee) (i) declare all payments under the Mortgage Loan to be immediately due
and payable and pursue all remedies permitted under the Mortgage Loan documents,
which remedies may include foreclosure of the mortgage on the Underlying
Property or the appointment of a receiver; or (ii) enter into a work-out or
forbearance agreement with the Property Owner pursuant to which the Manager may
waive or forbear certain rights under the Mortgage Loan documents in return for
certain concessions by the Property Owner.
Amendments and Waivers. It is anticipated that the Mortgage Loan documents
will provide that they may not be amended or supplemented or the terms or
conditions set forth in them waived except by the express written consent of the
Company (as bondholder) or the trustee or other fiduciary for the bondholder.
Title Insurance. The Company expects that mortgagee title insurance will be
obtained in connection with each FMB it acquires in substantially the
outstanding principal amount of such bond (subject to certain exceptions,
including pending disbursement provisions).
Regulatory Requirements
The Property Owners of Underlying Properties which are multi-family rental
housing will be required under the Mortgage Loan documents, including the
Regulatory Agreements in particular, to own, manage and operate such Underlying
Properties continuously as "residential rental property" meeting the
requirements of Section 142(d) of the Code (or, in the case of FMBs subject to
the provisions of the Internal Revenue Code of 1954, as amended (the "1954
Code") Section 103(b)(4) of the 1954 Code). To that end, each such Owner has or
will covenant substantially as follows:
(a) that the Underlying Property has been or will be acquired and
constructed for the purpose of providing multi-family rental housing, and the
Property Owner shall own, manage and operate the Underlying Property as
multi-family rental housing, all in accordance
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with Code Section 142(d) (or Section 103(b)(4)(A) of the 1954 Code) and Treasury
Regulations Section 1.103-8(a) and (b), as the same be amended from time to
time;
(b) for the longer of the "qualified project period" (as defined below) or
the term of the FMBs, the Underlying Property will be operated as a rental
property and the Property Owner will not convert the Underlying Property to
condominium ownership or other use. The "qualified project period" for
Underlying Properties subject to the 1954 Code will begin on the later of the
date of issuance of the FMBs or the first day on which at least 10% of the units
in the Underlying Property are occupied and will end on the later of (i) the
date which is 10 years after the date on which 50% of the rental units in the
Underlying Property are first occupied, (ii) the date which is a "qualified
number of days" after the date of initial occupancy of the Underlying Property
or (iii) the date on which any assistance is provided with respect to the
Underlying Property under Section 8 of the United States Housing Act of 1937, as
amended, terminates. The "qualified number of days" mean 50% of the total number
of days comprising the term of the FMB with the longest maturity. For FMBs
subject to the Code, the "qualified project period" begins on the date when at
least 10% of the units are first occupied and ends on the latest of (i) 15 years
after the date on which at least 50% of the units are first occupied; (ii) the
date on which none of the bonds issued to finance the project are outstanding or
(iii) the date on which any assistance provided to the project under Section 8
of the United States Housing Act of 1937 terminates.
(c) for Underlying Properties subject to the Code, (i) either 40% of the
units must be occupied or reserved for individuals or families earning 60% or
less of the median gross income or 20% of the units must be occupied or reserved
for individuals or families earning 50% or less of the median gross income in
the relevant locality during the "qualified project period," with adjustments
for smaller and larger families; and (ii) for an Underlying Property subject to
the 1954 Code, at least 20% of the completed rental units in the Underlying
Property must be occupied or held available for occupancy on a continuous basis
during the "qualified project period" by individuals or families whose incomes
are 80% or less of the median gross income for the area ("low- or moderate-
income tenants") generally without adjustments for smaller and larger families.
For the purpose of complying with this requirement under the 1954 Code, a
unit occupied by an individual or family who at the commencement of the
occupancy qualifies as a low- or moderate-income tenant is treated as occupied
by such an individual or family during their tenancy in such unit, even though
they subsequently cease to be of low or moderate income. For projects which are
subject to the Code if the income of existing tenants increases to 140% of the
permitted amount, the existing tenants may remain as tenants, but no longer
qualify as meeting the income requirement and the first vacant market-rate units
of comparable or smaller size to those occupied by tenants whose income had
increased must be rented to new low-income tenants; and
(d) for Underlying Properties subject to the Code, that at least 95% of the
net proceeds of FMBs (or 90% of net proceeds of FMBs respecting Underlying
Properties subject to the 1954 Code) will be or will have been used to finance
land and the capital costs of construction or acquisition of buildings and
equipment that qualify as multi-family residential housing, or facilities
functionally related and subordinate thereto;
If the Property Owner defaults in the performance of its obligations under
the Regulatory Agreement or breaches any covenant, agreement or warranty of the
Property Owner set forth in the Regulatory Agreement, and if such default
remains uncured for the period specified in the Regulatory Agreement (60 days in
most instances) after notice thereof shall have been given to the Property Owner
by the state or local government or agency or authority that made the Mortgage
Loan (or any other party authorized under the Regulatory Agreement), then the
FMBs may be declared in default and the issuer (and the trustee for such FMBs or
the Company in many cases) may take such action at law or in equity or such
other remedy as may be deemed most effective to enforce the obligations of the
Property Owner under the Regulatory Agreement with respect to the Underlying
Property. If certain defaults remain uncured, interest on the FMB may be
declared taxable from the date of issuance, and a Determination of Taxability
may occur.
The Regulatory Agreement will also contain any additional restrictions and
rental requirements which may be required by the issuers of the FMBs or bond
counsel. It is not uncommon for issuers to insist on more restrictive and longer
term low income set asides than those required by the Internal Revenue Code
described above. Bond counsel may approve variations in the requirements of the
Regulatory Agreement.
Underlying Properties which are owned by charitable organizations described
in Section 501(c)(3) of the Code will be subject to different regulatory
requirements. FMBs issued for the benefit of such organizations pursuant to
Section 145 of the Code will have their interest excluded from gross income only
for so long as the Underlying Property is owned by a charitable organization. In
order to maintain its charitable status, a charitable organization must on a
continuous basis fulfill its charitable purpose. Moreover, Section 145 of the
Code requires that at least 95% of the proceeds of any FMB issued for a charity
be used in furtherance of its charitable mission and that no more than 5% of the
proceeds be used in an unrelated trade or business.
Thus, if a charity's mission is to provide housing for low income persons,
the charity must, during the entire term of an FMB used to finance such a
project, fulfill that charitable mission. With respect to low income housing
projects, the Internal Revenue Service has published a safe harbor which
provides that if (i) at least 75% of a project's units are rented to persons or
families whose median income does not exceed 80% of the area median income
(adjusted for family size); (ii) at least 20% of the units are rented to persons
or families
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whose income does not exceed 50% of the area median income or, alternatively,
40% of the units are rented out to persons or families whose income does not
exceed 60% of the area median income (in each case adjusted for family size);
(iii) the project is actually occupied by poor and distressed residents; and
(iv) the rentals are affordable to such persons, then such project will be
considered charitable.
Charities which promote housing may be organized to fulfill other
charitable purposes such as combatting urban blight or the promotion of racial
integration. In such circumstances, the low income requirements set forth above
may become less important in the determination of whether the charity is
fulfilling its charitable purpose.
In addition, the Company may purchase FMBs for charities which provide
housing for the elderly and handicapped persons or which own and operate
assisted living projects or other retirement projects for the elderly, or
nursing homes. With respect to these projects, also, the income of the residents
generally is less important in the determination of whether a charity is
fulfilling its charitable purpose. However, other factors may need to be
considered, such as whether the facility provides meals, social and other
services to its residents and whether accommodations are made for persons who
may be unable fully to pay the customary charges of the facility.
Description of Certain FMBs and Affiliated Properties
General. The FMBs are expected to be secured by Mortgage Loans on
multi-family residential apartment projects assisted living, continuing care and
retirement community projects. Multi-family residential apartment projects will
be primarily garden apartment projects. Retirement communities are apartment
projects designed and developed for elderly retired persons. Such communities
will generally provide additional services to residents beyond those provided by
conventional garden apartment projects, such as meals provided in community
dining facilities, housekeeping services, laundry services, scheduled
transportation, 24-hour security services and organized social and recreational
activities. In addition, retirement communities may offer a variety of special
services, facilities and activities for tenants. FMBs issued to finance nursing
home facilities providing intensive nursing care may also be acquired. In
certain circumstances, retirement community projects financed with FMBs may not
constitute multi-family residential rental property. In such case, the interest
on FMBs financing such projects will be excluded from gross income for purposes
of federal income taxation under another provision of the 1954 Code or the Code,
and will be subject to the regulatory requirements under Section 145 of the Code
pertaining to projects owned by charities described above. In selected
circumstances, and only in connection with the acquisition of tax-exempt FMBs,
the Company may acquire a small amount of taxable bonds. Known as "Taxable
Tails", the usual purpose of these bonds is to fund certain costs associated
with the issuance of FMBs that, under current law, cannot be funded by FMBs.
Properties Owned by Affiliates. Up to 15% of the Total Market Value of the
Company may be invested in FMBs in which affiliates of the Manager have a
controlling interest, equity interest or security interest, including a
controlling interest, equity interest or security interest in the related
Mortgage Loans or Underlying Properties. For purposes of the 15% limit, the term
"affiliate" has the same meaning as in the Partnership Agreements. The 15% limit
will not be applicable to properties to which the Manager or its affiliates have
taken title for the benefit of the Company, and shall apply only to newly
acquired FMBs which are not held in the Existing Portfolio.
The terms and conditions of such FMBs will be reviewed by an independent
adviser and will not be acquired unless the independent adviser issues a letter
of opinion to the effect that the terms of the Mortgage Loan securing such
proposed FMBs are fair and at least as favorable to the Company as a loan to an
unaffiliated Property Owner in similar circumstances. In addition, the Manager
will be required to obtain a letter of opinion from an independent adviser in
connection with any disposition, renegotiation or other material subsequent
transaction involving loans made to the Manager or its affiliates.
The independent adviser must be a nationally recognized investment banking
firm, accounting firm, mortgage banking firm, bank, real estate financial
consulting firm or advisory firm which has a staff of real estate professionals
and which is compensated by the Manager or its affiliates and not by the Company
(which compensation must be predetermined). In addition, the independent
adviser, directly or indirectly, must have no interest in, nor any material
business or professional relationship with, the Company, the Manager, the
Property Owner or any affiliates thereof. Independence will be considered to be
impaired if, for example, during the period of the adviser's engagement, or at
the time of expressing his opinion, he or his firm: (a) had, or was committed to
acquire, any direct or indirect ownership interest in the Company, the Manager,
the borrower, or affiliates thereof, (b) had any joint closely held business
investment with the Company, the Manager, or any affiliates thereof, which was
material in relation to the adviser's net worth, (c) had any loan to or from the
Company, the Manager, the Property Owner or affiliates thereof or (d) had
performed or had agreed to perform a real estate property appraisal with respect
to the Underlying Property.
Construction Period Guarantees
With respect to those Underlying Properties, if any, which are to be built,
during the construction period the following additional security may be obtained
which will reduce some of the risk inherent in the construction period. See
"RISK FACTORS--General Risks of Ownership of FMBs--Construction Completion."
Construction Completion and Payment Guarantees. The guarantees of
construction completion, if obtained, are expected to be separate undertakings
by principals of the Property Owners to complete the construction of a Property
according to the loan agreement and substantially in accordance with the
approved plans and specifications. A letter of credit may be obtained from a
financial institution
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acceptable to the Manager as partial security for any construction guarantee in
an amount expected to be 10% or more of the amount of the Mortgage Loan. No
assurance can be given that the Manager will be able to obtain such construction
completion guarantees or, if obtained, that the guarantors will have sufficient
funds to discharge their obligations under the guarantees. In some cases, such
principals will also guarantee the payment to the Company of all interest
required to be paid on the Mortgage Loan until completion of construction.
The General Contractor. The general contractor or major sub-contractors of
the Underlying Properties, if any, are expected to be either affiliates of a
Property Owner or independent third-party contractors. The general contractor
and/or the major subcontractors may be required to provide a payment and
performance bond or letter of credit regarding construction of the Underlying
Properties. In addition, with respect to each Underlying Property, the general
contractor may be required to undertake to pay all construction cost overruns
for the Underlying Property. No assurance can be given that the general
contractor will provide such bonds or commit to such construction contracts.
Operating Deficit Guarantees
It is the intent of the Manager that principals of the Property Owners
provide the Company (or the trustee for bondholders) with operating deficit
guarantees as additional security for the FMBs. Such guarantees will cover
operating deficits of the Underlying Properties for an agreed upon amount and
period after acquisition of the FMB's with respect to an existing facility or
the completion of construction (usually the earlier of three years after
completion of construction or the date by which the Underlying Property has met
certain collected rental income targets). Operating deficit guarantees are not
typically required by entities which will compete with the Company in the
origination of FMBs; therefore, no assurance can be given that the Manager will
be able to obtain such operating deficit guarantees. Furthermore, no assurance
can be given that the Property Owners will have sufficient funds to discharge
their obligations under such guarantees.
Administration of Mortgage Loans
The Mortgage Loans are expected to be serviced by the Manager or its
affiliates; provided, however, that if required by the issuer of an FMB, the
trustee for the bond holders will service the Mortgage Loans or may appoint a
mortgage servicer in lieu of any other entity chosen by the Manager. The Manager
or its affiliate has serviced and may continue to service mortgage loans for
other affiliated entities.
Joint Ventures and Participations
In those cases where a publicly-registered affiliate of the Manager is
acting as a participant with the Company in the acquisition of an investment,
the Trust Agreement provides that all of the following conditions must be met:
(i) both parties are organized with substantially identical investment
objectives and policies; (ii) there must be no duplicative fees; (iii) the
Company must have a right of first refusal to buy if such affiliate wishes to
sell the investment in which they participate; (iv) the investment of the
Company in the FMBs or tax-exempt securities to be acquired with an affiliate
must be made on substantially the same or better terms and conditions as those
received by the affiliate, although the amounts invested do not have to be
comparable; and (v) the Company must not pay affiliates of the Manager greater
compensation than it would have paid the Company if it had invested in the FMBs
or tax-exempt securities individually and not jointly. In connection with such
an investment, the Company would be required to approve any decisions concerning
the FMBs or tax-exempt securities. The exercise of a right of first refusal
would be subject to the Company's having the financial resources to effectuate
such a purchase, and there can be no assurance that it would have such
resources.
The investment by the Company jointly with a publicly-registered affiliate
or with an unaffiliated third party may, under certain circumstances, involve
risks not otherwise present, including, for example, risks associated with the
possibility that the participant may at some time have economic or business
interests or goals which are inconsistent with the business interests or goals
of the Company. In addition, it is possible that the Company and such affiliate
may reach an impasse in making decisions regarding the management or sale of the
investment or that such affiliate might be in a position to take actions
contrary to the instructions and interests of the Company.
Disposition of FMBs
It is not the intention of the Company to sell any particular FMB upon
consummation of the Consolidation. The Company anticipates holding its
investments until maturity. However, the Company may consider selling one or
more of the FMB's in the event circumstances should arise which would make such
sale advisable.
Policies with Respect to Other Activities
The Company has the authority to offer its Shares or other equity or debt
securities in exchange for assets and to repurchase or otherwise reacquire
Shares or any other securities and may engage in such activities in the future
although it has no present intention to do so. The Company also may enter into
joint ventures and make loans to such joint ventures in which it may participate
in the future. The Company will not engage in trading, underwriting or the
agency distribution or sale of securities of other issuers. In addition, the
Company intends to operate its business in a manner that will not require the
Company to register under the Investment Company Act of 1940.
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Change in Policies
The Company's Board of Trustees will determine its investment and financing
policies, its growth strategy, and its debt, capitalization, distribution and
operating policies. The Board of Trustees of the Company will review the
policies of the Company at least annually to determine that the policies being
followed by the Company at any time are in the best interests of the Company's
Shareholders. Although the Board of Trustees has no present intention to revise
or amend these strategies and policies, the Board of Trustees may do so at any
time without a vote of the Company's Shareholders (except with respect to (i)
the debt limitation of 50% of Total Market Value), (ii) the Minority Position
limitation of 15% of Total Market Value and (iii) the limitation of 15% of Total
Market Value on investments secured by Underlying Properties owned by affiliates
of the Manager). The methods of implementing the Company's investment policies
may vary as new investment and financing techniques are developed or for other
reasons.
Employees
The Company will not have any employees. The Company will retain the
Manager to manage the Company's day-to-day affairs, oversee the acquisition or
disposition of investments, and manage the assets of the Company. The Manager
has a fiduciary duty to the Company. See "MANAGEMENT--The Manager."
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OBJECTION PROCEDURES
Time of Objecting and Record Date
BUC$holders holding Units as of the Record Date (i.e., December 24, 1996)
have until the Objection Deadline (i.e., August 18, 1997) to object to the
Consolidation.
As of the Record Date, the following number of Units were held of record by
the number of BUC$holders indicated below:
Number of
Objecting Units
Required for a
Number of Partnership Not
Number of Units Held to Participate in
Partnership BUC$holders of Record Consolidation
- -------------- ----------- ---------- -----------------
Tax Exempt I 6,444 7,906,234 2,635,411
Tax Exempt II 11,086 9,151,620 3,050,540
Tax Exempt III 3,571 3,081,625 1,027,208
The number of Units entitled to object to the Consolidation is equivalent
to the number of Units held of record at the Record Date. The Partnership
Agreements give the BUC$holders in each Partnership the power, by a majority
vote, to approve the Consolidation and/or replace a General Partner. However, as
structured by Class Counsel and the Related General Partners, approval of the
Consolidation is in the sole discretion of the Court. In this regard, the
Court's Order preliminarily approving the Settlement Stipulation provides that
unless the BUC$holders of a Partnership holding more than 33-1/3% of the Units
object to the participation of such Partnership in the Consolidation, such
Partnership will participate in the Consolidation if the Consolidation is
approved by the Court. See "THE CONSOLIDATION AND RELATED TRANSACTIONS--The
Consolidation--Objections Required to Prevent Consolidation."
Equitable Class Members may not individually opt out of the Equitable
Settlement or the Consolidation. If, however, either (a) BUC$holders holding 1/3
or more of the Units of a particular Partnership object to that Partnership
participating in the Consolidation, or (b) the Court does not approve of any
particular Partnership participating in the Consolidation, then that Partnership
will not participate in the Consolidation.
Objection Notice
BUC$holders that wish to object to the Consolidation should send the
Objection Notice attached as Appendix D to Related at 625 Madison Avenue, New
York, New York 10022 as soon as possible but in no event later than the
expiration of the Objection Deadline. Such notice must contain the name and
address of the BUC$holder, the Partnership in which such BUC$holder holds Units
and the number of Units so held. A BUC$holder who objects to his Partnership's
participation in the Consolidation must deliver notice of such objection to the
Related General Partners on or prior to the Objection Deadline. The Court will
consider any objection or comment of the BUC$holders in determining whether to
approve the Related Settlement, provided that any such objection or comment is
received on or before the Objection Deadline. BUC$holders also have the right to
object at the Fairness Hearing. Whether or not they have submitted an Objection
Notice in connection with this Solicitation Statement. See "FAIRNESS--Material
Factors Underlying Belief as to Fairness-- Negotiation of Related Settlement;
Court Approval."
The Related General Partners and Class Counsel recommend that BUC$holders
not object to the Consolidation. Pursuant to the P-B Purchase Agreement, the P-B
General Partner has agreed that with respect to any Units held by it or its
affiliates (less than 1% of the aggregate Units outstanding as of the date of
this Solicitation Statement), it would not object to the Consolidation. Messrs.
Fried and Boesky hold Units in certain of the Partnerships as detailed under
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT--Security
Ownership of Management" and have advised that they will not object to the
Consolidation. Such Units represent less than 1% of the aggregate Units of each
such Partnership outstanding as of the date of this Solicitation Statement.
Revocability of Objection
BUC$holders may revoke their objection at any time prior to the Objection
Deadline by mailing a revocation of the Objection Notice to the address above
(which revocation must be received by Related on or prior to the Objection
Deadline) or by appearing, in person, at the Fairness Hearing and revoking such
objection before the Court.
No Right of Appraisal
BUC$holders of a Participating Partnership who object to the Consolidation
will not be entitled to dissenters' or appraisal rights under the Partnership
Agreements. Such rights, when they exist, give the holders of securities the
right to surrender such securities for an appraised value in cash, if they
oppose a merger or similar reorganization. No such rights will be provided by
the Partnerships or the Company in connection with the Consolidation.
Information Services
The Related General Partners and their officers, directors and employees
may assist in providing information to BUC$holders in connection with any
questions they may have with respect to this Solicitation Statement and the
objection procedures. Such persons and entities will be reimbursed by the
Partnerships for out of pocket expenses in connection with such services in
accordance with the pro-
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cedures described under "THE CONSOLIDATION-- Consolidation Expenses."
Arrangements will also be made with brokerage houses and other custodians,
nominees and fiduciaries for forwarding solicitation materials to the beneficial
owners of Units held of record by such persons, and the Partnership will
reimburse such persons for their reasonable expenses incurred in that
connection.
DESCRIPTION OF SHARES
General
The Trust Agreement will authorize the issuance of up to 50,000,000 of
beneficial interests. There are presently 1,000 Shares issued and outstanding,
all of which are held by Related, which purchased the Shares at a price of $1.00
per Share when the Company was created. Upon the Effective Date, all such
outstanding Shares held by Related will be repurchased by the Company at a price
of $1.00 per share. The number of Shares to be issued in connection with the
Consolidation depends upon the number of Partnerships that approve and
participate in the Consolidation. Assuming 100% Participation in the
Consolidation, 20,586,383 Shares will be issued and outstanding after the
Consolidation. Under Delaware law, similar to shareholders of a corporation,
beneficial owners of a trust (such as the Shareholders) generally are not liable
for the Company's obligations solely as a result of their status as
Shareholders.
Shareholders are entitled to one vote per Share on all matters voted on by
Shareholders and, except as provided in the Trust Agreement in respect of any
other class or series of beneficial interests, the holders of such Shares
exclusively possess all voting power. Subject to any preferential rights of any
outstanding shares or series of shares, holders of Shares are entitled to
receive distributions, when and as authorized by the Board of Trustees, out of
funds legally available therefor. Upon any liquidation, dissolution or winding
up of the Company, the holders of Shares are entitled to receive pro rata all
assets of the Company available for distribution to its Shareholders after
payment of, or adequate provisions for, all debts and liabilities of the
Company. All Shares now outstanding are, and the Shares offered in the
Consolidation will be when issued in accordance with the terms and conditions of
the Consolidation, fully paid and nonassessable undivided beneficial interests
in the assets of the Company. The holders thereof will not have preemptive
rights to subscribe to additional securities issued by the Company at a
subsequent date.
The Trust Agreement authorizes the Board of Trustees to classify or
reclassify any unissued Shares, to provide for the issuance of beneficial
interests of the Company in other classes or series, including preferred
beneficial interests in one or more series, to establish the number of
beneficial interests in each class or series and to fix the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
distributions, qualifications or terms or conditions of redemption of such class
or series. The Company has no present intention to issue beneficial interests of
any class or series other than the Shares.
Listing, Price and Trading
There is currently no established trading market for the Shares, and prior
to the Consolidation, the Shares will not be listed on any national securities
exchange or included for quotation on the Nasdaq National Market. Therefore, no
sale or bid price information is available with respect to the Shares. The
Company will meet the round lot distribution and market value standards
established by the American Stock Exchange (or other national exchange or market
on which the Shares are listed). The Company will appoint a transfer agent and
registrar of the Shares prior to the Effective Date.
Shares received by Participating BUC$holders in the Consolidation will be
freely transferable, except for Shares received by Persons who may be deemed to
be affiliates of the Company under the Securities Act. Persons who may be deemed
to be affiliates of the Company after the Consolidation generally include
individuals or entities that control, are controlled by, or are under common
control with the Company, and may include certain principal Shareholders of the
Company. Persons who are affiliates will be permitted to sell their Shares only
pursuant to an effective registration statement under the Securities Act or an
applicable exemption from registration under the Securities Act.
SHARES ELIGIBLE FOR FUTURE SALE
Assuming 100% Participation upon the completion of the Consolidation, the
Company will have outstanding 20,586,383 Shares. As part of the Equitable
Settlement, Class Counsel will have the right to petition the Court for
additional attorneys' fees in an amount to be determined in the Court's sole
discretion but which will be proposed to be 25% of the increase, if any, as of
the Anniversary Date in the capitalization of the Company, based upon (i) the
difference between the trading prices of the Company's Shares on the Anniversary
Date and (ii) the trading prices of the Units and the asset values of the
Partnerships prior to the Effective Date. One-half of such fees, if any, will be
paid in the form of Restricted Securities (restricted only with respect to sale,
assignment, pledge or other transfer of such securities) and the remaining
one-half of such fees will be paid in the form of Unrestricted Securities. The
number of Counsel's Fee Shares issued shall be subject to a maximum amount not
to exceed 3.95% of the total number of outstanding Shares of the Company on the
Anniversary Date. The Counsel's Fee Shares will be distributed to Class Counsel
quarterly in eight equal distributions commencing thirty days after the
Anniversary Date. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT--Security Ownership of Certain Beneficial Owners," "RISK FACTORS AND
OTHER ADVERSE FACTORS--Risk and Other Adverse Factors Relating to the
Consolidation--Possible Dilutive Effect Arising from Shares Available for Future
Sale."
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In addition, pursuant to the Incentive Share Option Plan, in any calendar
year the Compensation Committee will have the authority (subject to the Company
meeting certain performance standards) to issue options to purchase, in the
aggregate, that number of Shares which is equal to 3% of the Shares outstanding
as of December 31 of the immediately preceding calendar year (or, in the initial
year, as of the Effective Date), provided, that the Compensation Committee may
only issue, in the aggregate, options to purchase a maximum number of Shares
over the life of the Incentive Share Option Plan equal to 10% of the Shares
outstanding on the Effective Date. See "MANAGEMENT--Description of Incentive
Share Option Plan."
The Related General Partners received a letter from the Commission in which
it took a "no-action" position to the effect that the public resale of Shares by
persons: (i) who are not deemed to be affiliates of the Partnerships prior to
the consummation of the Consolidation or the Company after the consummation of
the Consolidation without registration under the Securities Act and compliance
with Rules 144 or 145(c) and (d) under the Securities Act; (ii) who are
affiliates of the Partnership(s) prior to the consummation of the Consolidation
but who are not affiliates of the Company following the consummation of the
Consolidation in compliance with Rule 145(d)(1) (without regard to the holding
period required by Rule 144(d) under the Securities Act); and (iii) who are
affiliates of the Partnership(s) prior to the consummation of the Consolidation
or affiliates of the Company following the consummation of the Consolidation in
compliance with Rule 145(d)(1) but without regard to the holding period
requirement of Rule 144(d). Therefore, all of the Shares, other than any Shares
received by affiliates ("Restricted Shares"), will be tradable without
restriction under the Securities Act, and affiliates of the Company may sell
Restricted Shares without registration in accordance with the exceptions
provided by Rule 144(d) or Rule 145(d)(1) under the Securities Act.
Prior to the date of this Solicitation Statement, there has been no public
market for the Shares. The Shares will be approved for listing on the American
Stock Exchange (or other national exchange or market) upon official notice of
issuance prior to consummation of the Consolidation. No prediction can be made
as to the effect, if any, that future issuances of Shares, or the availability
of Shares for the future sale, will have on the market price prevailing from
time to time. Sales of substantial amounts of Shares (including Shares issued
upon the exercise of options), or the perception that such sales may occur,
could adversely affect prevailing market prices of the Shares. See "RISK FACTORS
AND OTHER ADVERSE FACTORS--Risks and Other Adverse Factors Relating to the
Consolidation--No Prior Market for Shares; Market Price May Decrease After
Consolidation."
CERTAIN PROVISIONS OF DELAWARE LAW AND THE TRUST AGREEMENT
General
The following summary of certain provisions of Delaware law and the Trust
Agreement does not purport to be complete and is subject to and qualified in its
entirety by reference to Delaware law and the Trust Agreement for its entire
terms.
Certain provisions of the Trust Agreement described in this section could
delay, defer or prevent a transaction or a change in control of the Company that
might involve a premium price for holders of Shares or otherwise be in their
best interests.
Nature of the Company
The Company is a business trust created under the Delaware Act. The Trust
Agreement authorizes the issuance and sale of 50,000,000 Shares. The Company
will issue an aggregate of 20,586,383 Shares in the Consolidation.
Additional Classes and Series of Shares
The Trust Agreement authorizes the Board of Trustees to classify or
reclassify any unissued beneficial interests to provide for the issuance of
beneficial interests in other classes or series of securities, to establish the
number of beneficial interests in each class or series and to fix the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to distributions, qualifications or terms or conditions of
redemption of such class or series. The Company believes that the ability of the
Board of Trustees to issue one or more classes or series of beneficial interests
will provide the Company with increased flexibility in structuring possible
future financings and acquisitions, and in meeting other needs which might
arise. The additional classes or series, as well as the Shares, will be
available for issuance without further action by the Company's Shareholders,
unless such action is required by applicable law or the rules of the American
Stock Exchange (or other national exchange or market). Although the Board of
Trustees has no intention at the present time of doing so, it could issue a
class or series that could, depending on the terms of such class or series,
delay, defer or prevent a transaction or a change in control of the Company that
might involve a premium price for holders of Shares or otherwise be in their
best interest.
The Responsibilities of the Registered Trustee
The Registered Trustee's duties and responsibilities are limited to (i) the
execution, delivery and filing of any certificates of trust and amendments
thereto required to be filed pursuant to applicable law, (ii) the execution of
Company Certificates if reasonably requested by the Manager, (iii) the execution
of any duly adopted amendments to the Trust Agreement and (iv) the execution,
delivery and filing of any certificate of cancellation required to be filed
pursuant to applicable law. The Registered Trustee has no responsibility for
monitoring the conduct of the Board of Trustees or the Manager or causing the
Board of Trustees or the Manager to discharge their respective duties under the
Trust Agreement and the Management Agreement, and the Trust Agreement provides
that the Registered Trustee shall have no liability for the acts and omissions
of the Company, the Board of Trustees or the Manager.
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Advance Notice of Managing Trustee Nominations and New Business
The Trust Agreement provides that (i) with respect to an annual meeting of
Shareholders, nominations of persons for election to the Board of Trustees and
the proposal of business to be considered by Shareholders may be made only (a)
pursuant to the Company's notice of the meeting, (b) by the Board of Trustees,
or (c) by a Shareholder who is entitled to vote at the meeting and has complied
with the advance notice procedures set forth in the Trust Agreement, and (ii)
with respect to special meetings of Shareholders, only the business specified in
the Company's notice of meeting may be brought before the meeting of
Shareholders, and nominations of persons for election to the Board of Trustees
may be made only (a) pursuant to the Company's notice of the meeting, (b) by the
Board of Trustees, or (c) provided that the Board of Trustees has determined
that Managing Trustees shall be elected at such meeting, by a Shareholder who is
entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Trust Agreement.
The advance notice provisions of the Trust Agreement could have the effect
of delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for holders of Shares or otherwise.
Number of Managing Trustees; Removal; Filling Vacancies
The Trust Agreement will provide for not less than three nor more than nine
Managing Trustees, one-third of whom must be independent Trustees (each, an
"Independent Trustee" and, collectively, "Independent Trustees").
Initially, the Company will have five Managing Trustees, two of whom will
be Independent Trustees whose appointment was approved by Class Counsel. The
Board of Trustees will establish written policies on investments and borrowings
and will monitor the administrative procedures, investment operations and
performance of the Company and the Manager to assure that such policies are
carried out. Until modified by the Managing Trustees, the Company will follow
the policies on investments and borrowings set forth in this Solicitation
Statement. See "THE COMPANY--Investment Policies and Business Plan." The
Independent Trustees will be responsible for reviewing the investment policies
of the Company not less often than annually and with sufficient frequency to
determine that the policies being followed are in the best interests of the
Shareholders.
A vacancy in the Board of Trustees created by the death, resignation, or
incapacity of a Managing Trustee or by an increase in the number of Managing
Trustees (within the limits referred to above) may be filled by the vote of a
majority of the remaining Managing Trustees (with respect to a vacancy created
by the death, resignation, or incapacity of an Independent Trustee, the
remaining Independent Trustees shall nominate a replacement). Any Managing
Trustee may resign at any time and may be removed by the Majority Vote of
Shareholders only for Cause prior to the fourth anniversary of the Effective
Date, and with or without Cause after such anniversary. The Company will have
annual Shareholder meetings to reelect the Board of Trustees, who will generally
serve staggered three-year terms.
Independent Trustees will be entitled to receive compensation for serving
as Managing Trustees at the rate of $5,000 per year in cash and Shares having an
aggregate value of $10,000, based on the fair market value on the date of
issuance, in addition to the expense reimbursement for attending meetings. At
the discretion of the Board of Trustees, Independent Trustees may be granted
additional cash compensation for serving on a committee of the Board of
Trustees.
Pursuant to the terms of the Incentive Share Option Plan, the Compensation
Committee may, subject to certain restrictions, grant options to members of the
Board of Trustees to purchase Shares of the Company. See
"MANAGEMENT--Description of Incentive Share Option Plan." To date, no member of
the Board of Trustees has received any options pursuant to the Incentive Share
Option Plan.
Pursuant to the Trust Agreement, the Board of Trustees will be divided into
three classes. All five members of the Board of Trustees will initially be
designated by the Related General Partners (Class Counsel has approved the two
initial Independent Trustees chosen by the Related General Partners). After
consummation of the Consolidation, the Board of Trustees will be elected by the
Shareholders of the Company. The Class I and Class II Managing Trustees will
each consist of two Managing Trustees, one of whom in each class will be an
Independent Managing Trustee. The Class III Trustees will consist of one
Managing Trustee.
The term of the initial Class I Managing Trustees will terminate on the
date of the 1998 annual meeting of Shareholders; the term of the initial Class
II Managing Trustees will terminate on the date of the 1999 annual meeting of
Shareholders and the term of the initial Class III Managing Trustees will
terminate on the date of the 2000 annual meeting of Shareholders. At each annual
meeting of Shareholders, Managing Trustees of the class to be elected shall be
elected for a three-year term. Managing Trustees will hold office until the
annual meeting for the year in which their terms expire and until their
successors shall be elected and qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from office. The terms of
the initial Managing Trustees will commence on the Effective Date.
The Trust Agreement provides that, subject to the right of the holders of
any class of stock to elect additional Managing Trustees under specified
circumstances, Managing Trustees may be removed by the Majority Vote of
Shareholders only for Cause prior to the fourth anniversary of the Effective
Date, and with or without Cause after such anniversary.
Term and Dissolution
The Company will have perpetual existence, but may be dissolved at an
earlier date if certain contingencies occur. The contingencies whereby the
Company may be dissolved are as follows:
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(a) a Majority Vote of Shareholders (two-thirds, if not recommended by the
Manager) in favor of dissolution and termination of the Company provided that
such a vote or a dissolution and termination of the Company cannot occur prior
to the fourth anniversary of the Expiration Date; or
(b) the disposition of all assets held by the Company and the receipt of
final payment with respect to all investments.
Upon dissolution of the Company, the Company's assets will be liquidated
and the proceeds of liquidation will be applied first to the satisfaction
(whether by payment or reasonable provision for payment
thereof) of obligations of the Company to third parties and second to the
Manager or its affiliates who are creditors of the Company. Any remaining
proceeds will then be distributed to the Shareholders.
Change of Control; Anti-Takeover Provisions
The Trust Agreement contains provisions that might have the effect of
delaying, deferring or preventing a transaction or a change of control of the
Company that might involve a premium price for the Shares or otherwise be in the
best interest of the Shareholders. See "COMPARISON OF RIGHTS OF SHAREHOLDERS OF
THE COMPANY AND BUC$HOLDERS OF THE PARTNERSHIPS--Anti-Takeover
Provisions."
In addition, the Management Agreement cannot be terminated by the Company
prior to the fourth anniversary of the Effective Date, other than for Cause, and
the Company cannot liquidate prior to such anniversary date except upon a
recommendation of the Manager and the Majority Vote of Shareholders. After the
fourth anniversary of the Effective Date, the vote of the holders of 662/3% of
the Company's then outstanding Shares is required to approve a dissolution and
liquidation of the Company that is not recommended by the Manager and a Majority
Vote of Shareholders is required to approve a dissolution and liquidation of the
Company recommended by the Manager.
Voting Rights of Shareholders
Shareholders have no right to participate in the control of the Company's
business. However, Shareholders have been granted certain voting rights which
are set forth in the Trust Agreement. The Shareholders, as a class, have the
right to vote upon:
a. the election of the Board of Trustees;
b. merger, consolidation or termination and dissolution of the Company;
c. sale of all or substantially all of the Trust's assets; and
d. amendment of the Trust Agreement (except in certain limited
circumstances), provided that provisions relating to the limitation of
liability and indemnification may only be amended prospectively. See
"RESPONSIBILITY OF OFFICERS AND TRUSTEES."
Meetings
The Company will hold annual meetings to elect Managing Trustees whose
terms have expired. The Board of Trustees may at any time call a meeting of
Shareholders or call for a vote, without a meeting, of the Shareholders on
matters on which they are entitled to vote, and shall call for such meeting or
vote following receipt of a written request therefor of Shareholders holding 10%
or more of the outstanding Shares.
Indemnification and Limitation of Liability
Trustees. The Delaware Act provides that, except to the extent otherwise
provided in the governing instrument of a business trust, a trustee, when acting
in such capacity, shall not be personally liable to any person other than the
business trust or a beneficial owner for any act, omission or obligation of the
business trust or any trustee thereof. In addition, the Delaware Act provides
that, except to the extent otherwise provided in the governing instrument of a
business trust, an officer, employee, manager or other person acting on behalf
of the business trust, when acting in such capacity, shall not be personally
liable to any person other than the business trust or the beneficial owner for
any act, omission or obligation of the business or any trustee thereof.
The Delaware Act provides that, subject to such standards and restrictions,
if any, as are set forth in the governing instrument of a business trust, a
business trust shall have the power to indemnify and hold harmless any trustee
or beneficial owner or other person from and against any and all claims and
demands whatsoever.
The Trust Agreement requires the Company to indemnify its present and
former trustees, among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service in those
or other capacities unless it is established that (a) the act or omission of the
trustee was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the trustee actually received an improper personal benefit in
money, property or services, or (c) in the case of any criminal proceeding, the
trustee had reasonable cause to believe that the act or omission was unlawful.
In addition, the Trust Agreement requires the Company, as conditions to
advancing expenses, to obtain (i) a written affirmation by the trustee of his or
its good-faith belief that he or it has met the standard of conduct necessary
for indemnification by the Company as authorized by the Trust Agreement and (ii)
a written statement
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by him or it or on his or its behalf to repay the amount paid or reimbursed by
the Company if it shall ultimately be determined that the standard of conduct
was not met. The Trust Agreement also requires the Company to provide
indemnification and advance of expenses to a present or former trustee who
served a predecessor of the Company in such capacity, and to any employee or
agent of the Company or a predecessor of the Company.
By comparison, the Partnership Agreements generally provide for
indemnification of the Related General Partners for losses arising out of any
act or omission, provided that it was determined in good faith that such conduct
was in the best interest of the Partnership and that such conduct did not
constitute negligence or misconduct.
The rights of Shareholders against management of the Company in certain
circumstances are more limited than the rights of BUC$holders against the
Related General Partners.
The Company will obtain a liability insurance policy for trustees of the
Company (as well as the Manager). In particular, the Company will assume all
indemnification obligations of the Participating Partnerships under the
respective Partnership Agreements with respect to the General Partners and their
affiliates.
The Registered Trustee. The Trust Agreement provides that the Company shall
indemnify and hold harmless the Registered Trustee and its affiliates, and their
respective officers, directors, employees, agents and representatives, from and
against any and all claims or liabilities (including any environmental
liabilities) for which any such person may become liable by reason of the
Registered Trustee's acting as trustee under the Trust Agreement or arising out
of (i) the Trust Agreement, (ii) any breach of duty owed to the Company or the
Shareholders by a third party or (iii) any violation or alleged violation of
federal or state securities laws. However, the Company is not liable to
indemnify such persons for liabilities resulting from such persons' own fraud,
gross negligence or willful misconduct.
The Withdrawing/Terminated General Partners. Pursuant to the P-B Purchase
Agreement and as a condition to its withdrawal as a general partner of the
Partnerships, the Company is required to assume the indemnification obligations
of the Partnerships to the P-B General Partner. In this regard, the Company will
enter into an indemnification agreement on the Effective Date to provide the P-B
General Partner with the same indemnity as that provided by the Partnerships
with respect to claims against the P-B General Partner during the period in
which it acted as a general partner (the "Tail Indemnity"). If the Consolidation
is not consummated (or there is less than 100% Participation) and the P-B
General Partner withdraws as a general partner of a Participating Partnership,
the Partnership Agreement of such Partnership will be amended to confirm that
the P-B General Partner is entitled to the Tail Indemnity.
The Tail Indemnity does not permit the P-B General Partner to seek
indemnification from the Company or the Partnerships for any liability, loss or
damage incurred by the P-B General Partner arising out of, based upon, or
otherwise related to the Litigation.
The Company will also enter into agreements with the Related General
Partners to provide the Related General Partners with similar tail indemnities.
Borrowing Policies
The Trust Agreement provides that the Company will be allowed to incur debt
or other financing of up to 50% of its Total Market Value (measured as of the
date such leverage is incurred).
Liability of Shareholders
The Company is governed by the laws of the State of Delaware. The
Shareholders shall be entitled to the same limitation of personal liability
extended to stockholders of private corporations for profit organized under the
General Corporation Law of the State of Delaware.
In general, stockholders of a Delaware corporation are not personally
liable for the payment of the corporation's debts and obligations. They are
liable only to the extent of their investment in the Delaware corporation. In
addition, under the Delaware Act, neither the existence of certain powers in the
Trust Agreement that may be exercised by the Shareholders nor the exercise of
such powers will cause such Shareholders to be deemed to be a trustee of the
Company or to be held personally liable for the acts, omissions and obligations
of the Company.
The principles of law governing the limitation of liability of beneficial
owners of a business trust have not been authoritatively established as to
business trusts organized under the laws of one jurisdiction but operating or
owning property, incurring obligations or having beneficiaries resident in other
jurisdictions. A number of states have adopted legislation containing provisions
comparable to the provisions of the Delaware Act. Accordingly, in such states,
the limitation of liability of Shareholders to the Company provided by the Act
should be respected.
In those jurisdictions which have not adopted similar legislative
provisions, questions exist as to whether such jurisdictions would recognize a
business trust, absent a state statute, and whether a court in such
jurisdictions would recognize the Delaware Act as controlling. If not, a court
in such jurisdiction could hold that the Shareholders are not entitled to the
limitation of liability set forth in the Trust Agreement and, as a result, are
personally liable for the debts and obligations of the Company.
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CONFLICTS OF INTEREST
General
Related Tax Exempt Bond Associates I, Inc., Related Tax Exempt Associates
II, Inc. and Related Tax Exempt Associates III, Inc. are the co-general partners
of Tax Exempt I, Tax Exempt II and Tax Exempt III, respectively. Each of the
Related General Partners is an affiliate of Related. The Related General
Partners are subject to various conflicts of interest arising out of their
relationship with the Company. The Related General Partners are subject to a
conflict of interest in recommending to the BUC$holders that they not object to
the Consolidation. The Related General Partners have interests and affiliations
different from those of BUC$holders.
The Related General Partners of each of the Partnerships have fiduciary
duties to the Partnerships, in addition to the specific duties and obligations
imposed upon them under the Partnership Agreements. Subject to the terms of the
Partnership Agreements, the Related General Partners, in managing the affairs of
the Partnership, are expected to exercise good faith, to use care and prudence
and to act with an undivided duty of loyalty to the BUC$holders. Under these
fiduciary duties, the Related General Partners are obligated to ensure that each
Partnership is treated fairly and equitably in transactions with third parties,
especially where consummation of such transactions may result in the interests
of the Related General Partners being opposed to, or not aligned with, the
interests of the BUC$holders. Accordingly, the Related General Partners are
required to assess whether the Consolidation is fair and equitable, taking into
account the unique characteristics of each Partnership (such as the
Partnership's revenues and expenses and the prospects for increases or decreases
in future cash flow) affecting the value of its assets, and comparing these
factors against similar factors affecting the value of the assets held by the
other Partnerships and the Related General Partners. As discussed in
"BACKGROUND, BENEFITS OF, AND REASONS FOR, THE CONSOLIDATION and FAIRNESS,"
after consideration of the terms and conditions of the Consolidation, the
Related General Partners recommend that BUC$holders not object to their
Partnership's participation in the Consolidation.
Conflicts of Interest of the Related General Partners
Substantial Benefits to Related General Partners. The Related General
Partners initiated and participated in the structuring of the Consolidation and
have conflicts of interest with respect to its completion, including the
following: (i) the Related General Partners, each of which is an affiliate of
Related, serve as general partners of each Partnership, which creates an
inherent conflict of interest when they serve in such capacity for Participating
Partnerships that have different interests; and (ii) the Consolidation affords a
number of benefits to the Related General Partners, including the following: (a)
if the Consolidation is consummated, the Related General Partners and Class
Counsel would effect a settlement in connection with the Litigation, therefore,
the Related General Partners are subject to a conflict of interest in
recommending to the BUC$holders that they not object to the Consolidation; and
(b) the Management Agreement cannot be terminated by the Company, except for
Cause, until the fourth anniversary of the Effective Date. Pursuant to the
Management Agreement (and as a result of the Manager's purchase of the P-B
Interests), the Manager will be entitled to receive from the Company
approximately 75% of the sum of the aggregate annual fees currently paid by the
Partnerships to both the Related General Partners and the P-B General Partner.
Therefore, although such aggregate annual fees payable by the Company (as
compared to the Partnerships) will be reduced by approximately 25%, the
Manager's share of such fees will increase by approximately $436,000 per year.
The Manager will also have the ability, subject to the terms and conditions
of the Management Agreement, to grow the Company's assets and thereby increase
the amount of fees it can earn, including Bond Selection Fees, Bond Placement
Fees, Loan Servicing Fees and Special Distributions. If the Company were to
utilize the maximum leverage permitted, the Manager would be entitled to Bond
Selection Fees and Bond Placement Fees aggregating up to approximately
$14,231,000 and increased annual Special Distributions and Loan Servicing Fees
of approximately $1,321,000 and $880,000, respectively. Such additional fees
will only be payable to the Manager if and when the Company is able to acquire
additional assets.
Finally, pursuant to the Incentive Share Option Plan, the Manager may
receive additional Shares if the Company's distributions in any year exceed the
pro forma distributions set forth in this Solicitation Statement. Similar to the
BUC$holders, the Related General Partners and the Manager will receive Shares
and, therefore, will have enhanced their liquidity.
Conflicts of Interest of the Company
Future Dealings With Related General Partners and Affiliates. The Related
General Partners have a financial interest in the consummation of the
Consolidation, which creates an inherent conflict of interest in their
recommending that BUC$holders not object to the Consolidation. The Related
General Partners and their affiliates will realize certain economic benefits if
the Consolidation is consummated, including that pursuant to the Management
Agreement the Manager may not be removed for four years, other than for Cause.
As is currently the case with the Partnership, the Company will experience a
conflict of interest if it makes loans to affiliates of Related. Any such
investments will only be made after receipt of a fairness opinion from an
independent advisor.
Initial Company Trustees and Officers. The Company's initial Board of
Trustees following the Consolidation will be comprised principally of persons
associated with Related and officers of the Company are presently directors and
officers of the Related General Partners. Owing to these relationships, such
persons may not exercise the same degree of independence in conducting the
Company's business with respect to the NonParticipating Partnerships as might be
expected of persons having no prior business, professional or personal dealings
with any of the Related General Partners or Related. These persons have,
however, no agreement or understanding, written
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or oral, with any of the Related General Partners or their affiliates as to the
manner in which they would exercise their duties and responsibilities as
directors or officers of the Company and are expected to discharge such duties
in the manner required by the Delaware Act and without regard to whether Related
General Partners or their affiliates have an interest in a proposed transaction
with the Company. In addition, it is anticipated that the Manager will retain
affiliates of Related to provide the services which it is required to provide to
the Company under the Management Agreement. See "MANAGEMENT."
Competition with Affiliates of the Company
The Manager and its affiliates (including officers, directors and/or
partners for their own account or that of others) have formed and may in the
future form other entities, some of which may have the same or similar
investment objectives as the Company. Further, officers, directors, employees
and affiliates of the Manager may for their own account acquire properties and
other tax-exempt debt instruments secured by Underlying Properties similar to
those acquired by the Company, provided, however, that the Manager shall be
obligated to present to the Company any suitable investment opportunity before
acquiring it for its own account.
Various other entities may in the future be formed by the Related General
Partner or its affiliates to engage in business which may be competitive with
the Company and which may have the same management as the Company. To the extent
that other publicly-offered programs with similar investment objectives have
funds available for investment at the same time as the Company, and/or an
investment is potentially suitable for more than one such entity, conflicts of
interest will arise as to which entity should acquire the investment. In such
situations the Manager and its affiliates will review the investment portfolio
of each such entity and will make the decision as to which such entity will
acquire the investment on the basis of such factors as the effect of the
acquisition on each such entity's portfolio and objectives, the amount of funds
available and the then length of time such funds have been available for
investment, and the cash requirements of each such entity. If funds should be
available to two or more publicly-offered programs to purchase a given
investment and the other factors enumerated above have been evaluated and deemed
equally applicable to each entity, then the affiliates will acquire such
investment for the publicly-offered programs on a basis of rotation with the
initial order of priority determined by the dates of formation of the entities.
As of the date hereof, an affiliate of Related acts as the manager to
American Tax Exempt Bond Trust ("ATEBT"), which was formed to invest in FMBs and
has substantially the same investment objectives and policies as the Company,
has fully committed the proceeds raised in its public offering which terminated
in November 1996, although such commitments have not yet closed.
In addition, The Related Companies, L.P., which is affiliated with Related,
each of the Related General Partners and the Manager, controls 50% of CMC which
shares office space with Related. The remaining 50% of CMC is controlled by
Centre Trading Holdings Limited, an affiliate of the Zurich Insurance Group
which is not affiliated with Related. One of the CMC's lines of business is the
arrangement of credit enhancement for FMBs of the type that the Company might
want to acquire without the benefit of credit enhancement. Thus, it is possible
that the Company and CMC could each be engaged in discussions with a developer
of an Underlying Property respecting the provision of financing or acquisition
for such Underlying Property. The Company intends to pursue its investment
objectives vigorously. There can be no assurance, however, that The Related
Companies, L.P. will not determine that the Company forego an investment
opportunity, if it is viewed as a more appropriate or profitable opportunity for
CMC.
Conflicts of Interest of Class Counsel
As part of the Equitable Settlement, Class Counsel will have the right to
petition the Court for additional attorneys' fees in an amount to be determined
in the Court's sole discretion but which will be based upon 25% of the increase
in value of the Company, if any, as of the Anniversary Date in the
capitalization of the Company, based upon the difference between (i) the trading
prices of the Company's Shares on the Anniversary Date and (ii) the trading
prices of the Units and the asset values of the Partnerships prior to the
Effective Date. One-half of such fees, if any, will be paid in the form of
Restricted Securities (restricted only with respect to the sale, assignment,
pledge or other transfer of such securities) and the remaining one-half of such
fees will be paid in the form of Unrestricted Securities. The number of
Counsel's Fee Shares issued shall be subject to a maximum amount not to exceed
3.95% of the total number of outstanding Shares of the Company on the
Anniversary Date. The Counsel's Fee Shares will be distributed to Class Counsel
quarterly in eight equal distributions commencing thirty days after the
Anniversary Date and restrictions on the Restricted Securities expire one year
from the date of issuance. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT--Security Ownership of Certain Beneficial Owners."
RESPONSIBILITY OF TRUSTEES
As general partners of a limited partnership, the General Partners owe the
BUC$holders, under Delaware law and subject to the terms of the Partnership
Agreements, the fiduciary duty of utmost good faith, fairness and loyalty in
handling the affairs of the Partnerships. This fiduciary duty, to the extent not
modified by the Partnership Agreements, may include a duty to refrain from
self-dealing to the advantage of the General Partners at the expense of the
Partnerships.
Under the Delaware Act, subject to the terms of the Trust Agreement, the
Managing Trustees of the Company owe fiduciary duties to the Company and the
Shareholders. As a general matter (and except as modified by agreement), under
Delaware law, a trustee's fiduciary duties to beneficial owners of a business
trust are substantially similar to the fiduciary duties of a general partner of
a Delaware limited
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partnership to its limited partners. Delaware law applicable to both limited
partnerships and business trusts provides that the duties (including fiduciary
duties) and liabilities relating thereto of a general partner to a limited
partnership or its partners or of a trustee to a business trust or its
beneficial owners may be expanded or restricted by provisions in the applicable
partnership agreement or trust agreement. Further, the Partnership Agreements
provide broad indemnification rights in favor of the General Partners so long as
their conduct was in good faith, in the best interests of the Partnerships and
did not constitute negligence or misconduct by the General Partners. With
respect to the Company, the Trustees are broadly indemnified and held harmless
so long as the liability otherwise to be indemnified for does not result from
any act or omission as described under the heading "CERTAIN PROVISIONS OF
DELAWARE LAW AND THE TRUST AGREEMENT, Indemnification and Limitation of
Liability."
The nature of fiduciary duties is an evolving area of the law and it is
unclear whether or to what extent there are differences in such fiduciary
duties. It is, however, possible that the fiduciary duties of the Managing
Trustees to the Shareholders could be less than those of the General Partners to
the BUC$holders. Shareholders who have questions concerning the duties of the
Managing Trustees with respect to the Company or the duties of the General
Partners with respect to the Partnerships should consult their counsel.
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FINANCIAL INFORMATION
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C>
Selected Financial Data................................................................... 115
Management's Discussion and Analysis of Historical Combined See Tax Exempt I
Results of Operations and Liquidity and Capital Resources................... and Tax Exempt II below
Pro Forma Financial Information
Introduction to Pro Forma Consolidated Financial Statements for the Three Months Ended
March 31, 1997 and the
Year Ended December 31, 1996.............................................................. 119
100% Participation
Pro Forma Consolidated Balance Sheet as of March 31, 1997 (100% Participation).......... 120
Pro Forma Consolidated Income Statements for the Three Months Ended March 31, 1997 and
the Year Ended December 31, 1996 (100% Participation)................................... 121
Pro Forma Statements of Cash Flows for the Three Months Ended March 31, 1997 and the
Year Ended December 31, 1996 (100% Participation)....................................... 123
Supplemental Pro Forma Per Share/Unit Data for the Three Months Ended March 31, 1997
and the Year Ended December 31, 1996 (100% Participation)............................... 127
Notes to Pro Forma Financial Statements for the Three Months Ended March 31, 1997 and
the Year Ended December 31, 1996 (100% Participation)................................... 128
Minimum Participation (including Tax Exempt II and Tax Exempt I)
Pro Forma Consolidated Balance Sheet as of March 31, 1997 (Minimum Participation
including Tax Exempt II/I).............................................................. 130
Pro Forma Consolidated Income Statements for the Three Months Ended March 31, 1997 and
the Year Ended December 31, 1996 (Minimum Participation including
Tax Exempt II/I)........................................................................ 131
Pro Forma Statements of Cash Flows for the Three Months Ended March 31, 1997 and
the Year Ended December 31, 1996 (Minimum Participation including Tax Exempt II/I)...... 133
Supplemental Pro Forma Per Share/Unit Data for the Three Months Ended March 31, 1997
and the Year Ended December 31, 1996 (Minimum Participation including Tax II/I)......... 137
Notes to Pro Forma Financial Statements for the Three Months Ended March 31, 1997 and
the Year Ended December 31, 1996 (Minimum Participation including Tax Exempt II/I)....... 138
Minimum Participation (including Tax Exempt II and Tax Exempt III)
Pro Forma Consolidated Balance Sheet as of March 31, 1997 (Minimum Participation
including Tax Exempt II/III)............................................................ 140
Pro Forma Consolidated Income Statements for the Three Months Ended March 31, 1997 and
the Year Ended December 31, 1996 (Minimum Participation including Tax Exempt II/III).... 141
Pro Forma Statements of Cash Flows for the Three Months Ended March 31, 1997 and the
Year Ended December 31, 1996 (Minimum Participation including Tax Exempt II/III)........ 143
Supplemental Pro Forma Per Share/Unit Data for the Three Months Ended March 31, 1997
and the Year Ended December 31, 1996 (Minimum Participation including Tax II/III)....... 147
Notes to Pro Forma Financial Statements for the Three Months Ended March 31, 1997 and
the Year Ended December 31, 1996 (Minimum Participation including Tax Exempt II/III).... 148
Minimum Participation (including Tax Exempt I and Tax Exempt III)
Pro Forma Consolidated Balance Sheet as of March 31, 1997 (Minimum Participation
including Tax Exempt I/III)............................................................. 150
Pro Forma Consolidated Income Statements for the Three Months Ended March 31, 1997 and
the Year Ended December 31, 1996 (Minimum Participation including Tax Exempt I/III)..... 151
Pro Forma Statements of Cash Flows for the Three Months Ended March 31, 1997 and the
Year Ended December 31, 1996 (Minimum Participation including Tax Exempt I/III)......... 153
</TABLE>
112
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<TABLE>
<CAPTION>
Page
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<S> <C>
Supplemental Pro Forma Per Share/Unit Data for the Three Months Ended March 31, 1997
and the Year Ended December 31, 1996 (Minimum Participation including Tax I/III)........ 157
Notes to Pro Forma Financial Statements for the Three Months Ended March 31, 1997
and the Year Ended December 31, 1996 (Minimum Participation including Tax
Exempt I/III............................................................................ 158
The Company
Independent Auditors' Report............................................................ 160
Balance Sheet of the Company as of May 29, 1997......................................... 161
Notes to Balance Sheet.................................................................. 162
The Manager
Independent Auditors' Report............................................................ 163
Balance Sheet of the Manager (a limited partnership) as of May 29, 1997................. 164
Notes to Balance Sheet.................................................................. 165
The General Partner of the Manager
Independent Auditors' Report............................................................ 166
Balance Sheet of the general partner (a limited liability company) of the Manager as of 167
May 29, 1997
Notes to Balance Sheet.................................................................. 168
Tax Exempt I
December 31, 1996
Independent Auditors' Report............................................................ 169
Statements of Financial Condition as of December 31, 1996 and 1995...................... 170
Statements of Income--Years ended December 31, 1996, 1995 and 1994...................... 171
Statements of Changes in Partners' Capital (Deficit)--Years ended December 31, 1996, 172
1995 and 1994 Statements of Cash Flows--Years ended December 31, 1996, 1995 and 1994.... 173
Notes to Financial Statements........................................................... 174
Management's Discussion and Analysis of Operations and Liquidity and Capital Resources.. 184
March 31, 1997
Statements of Financial Condition (Unaudited) as of March 31, 1997 and
December 31, 1996....................................................................... 187
Statements of Income (Unaudited)--Three months ended March 31, 1997 and 1996............ 188
Statements of Changes in Partners' Capital (Deficit) (Unaudited)--Three months ended
March 31, 1997.......................................................................... 189
Statements of Cash Flows (Unaudited)--Three months ended March 31, 1997 and 1996........ 190
Notes to Financial Statements........................................................... 191
Management's Discussion and Analysis of Operations and Liquidity and Capital Resources.. 195
Tax Exempt II
December 31, 1996
Independent Auditors' Report............................................................ 197
Statements of Financial Condition as of December 31, 1996 and 1995...................... 198
Statements of Income--Years ended December 31, 1996, 1995 and 1994...................... 199
Statements of Changes in Partners' Capital (Deficit)--Years ended
December 31, 1996, 1995 and 1994........................................................ 200
Statements of Cash Flows--Years ended December 31, 1996, 1995 and 1994.................. 201
Notes to Financial Statements........................................................... 202
Management's Discussion and Analysis of Operations and Liquidity and Capital Resources.. 210
</TABLE>
113
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<TABLE>
<CAPTION>
Page
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<S> <C>
March 31, 1997
Statements of Financial Condition (Unaudited) as of March 31, 1997
and December 31, 1996................................................................... 214
Statements of Income (Unaudited)--Three months ended March 31, 1997 and 1996............ 215
Statements of Changes in Partners' Capital (Deficit) (Unaudited)--Three months ended
March 31, 1997.......................................................................... 216
Statements of Cash Flows (Unaudited)--Three months ended March 31, 1997 and 1996........ 217
Notes to Financial Statements........................................................... 218
Management's Discussion and Analysis of Operations and Liquidity and Capital Resources 222
Tax Exempt III
December 31, 1996
Independent Auditors' Report............................................................ 224
Statements of Financial Condition as of December 31, 1996 and 1995...................... 225
Statements of Income--Years ended December 31, 1996, 1995 and 1994...................... 226
Statements of Changes in Partners' Capital (Deficit)--Years ended December 31, 1996,
1995 and 1994........................................................................... 227
Statements of Cash Flows--Years ended December 31, 1996, 1995 and 1994.................. 228
Notes to Financial Statements........................................................... 229
Management's Discussion and Analysis of Operations and Liquidity and Capital Resources 235
March 31, 1997
Statements of Financial Condition (Unaudited as of March 31, 1997 and December 31, 1996 238
Statements of Income (Unaudited)--Three months ended March 31, 1997 and 1996............ 239
Statements of Changes in Partners' Capital (Deficit) (Unaudited)--Three months ended
March 31, 1997.......................................................................... 240
Statements of Cash Flows (Unaudited)--Three months ended March 31, 1997 and 1996........ 241
Notes to Financial Statements........................................................... 242
Managements Discussion and Analysis of Operations and Liquidity and Capital Resources 246
</TABLE>
114
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Selected Financial Data
The following table sets forth selected financial data on a pro forma basis
for the Company (assuming 100% Participation, and the following Minimum
Participation scenarios: (i) Tax Exempt II and I; Tax Exempt II and III; and Tax
Exempt I and III), and on a historical basis for Tax Exempt II and Tax Exempt I.
The table should be read in conjunction with the unaudited pro forma financial
information, and with the financial statements and notes thereto of the
Partnerships included in this section of the Solicitation Statement.
The following unaudited pro forma operating and other data have been
prepared to reflect the Consolidation and related transactions as if such
transactions had occurred on January 1, 1996. The unaudited pro forma balance
sheet data has been prepared assuming that the Consolidation and related
transactions had occurred on March 31, 1997. The Consolidation will be accounted
for using the purchase method of accounting. Under this method, the
Participating Partnership with the BUC$holder group receiving the largest
ownership in the Company (in this case Tax Exempt II in all scenarios except
where it is not a Participating Partnership in which event Tax Exempt I would be
the largest) will be deemed to be the acquirer. As the surviving entity for
accounting purposes, such partnership's assets and liabilities will be recorded
by the Company at their historical cost, with the assets and liabilities of the
other Participating Partnerships recorded at their estimated fair values, using
the Adjusted Net Asset Values.
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SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Tax Exempt II Historical
---------------------------------------------
1992 1993
---------------------- ----------------------
<S> <C> <C> <C>
OPERATING DATA:
Total revenues $11,239,743 $11,653,788
Total expenses 2,025,696 3,368,115
Net income 9,214,047 8,285,673
Distributions to limited partners 9,536,926 9,517,685
BALANCE SHEET DATA:
Cash and cash equivalents 228,469 302,826
Total assets 166,738,439 165,778,624
Loan payable -- --
Total liabilities (C) 394,110 860,545
Partners' capital/Shareholders' equity (D) 166,344,329 164,918,079
Net assets at Consolidation value (B) N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents (11,226) 74,357
Net cash provided by operating activities 9,728,706 9,583,717
Ratio of earnings to fixed charges 2,719.01 --
Ratio of earnings to total assets 0.06 0.05
Book value per $1,000 of Original Investment (A) 909.19 901.55
Book value per share at Consolidation value (G) N/A N/A
Earnings per $1,000 of Original Investment (A)/(F) 49.33 44.36
Earnings per share--pro forma (H) N/A N/A
Distribution per $1,000 of Original Investment (A)/(E) 52.11 52.00(J)
<CAPTION>
1994 1995 1996
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $11,870,490 $12,039,287 $11,812,316
Total expenses 2,247,441 2,851,484 5,967,275
Net income 9,623,049 9,187,803 5,845,041
Distributions to limited partners 9,517,685 9,517,685 9,517,685
BALANCE SHEET DATA:
Cash and cash equivalents 872,662 972,889 249,192
Total assets 157,436,945 157,019,314 154,896,475
Loan payable -- -- --
Total liabilities (C) 1,088,738 652,350 573,874
Partners' capital/Shareholders' equity (D) 156,348,207 156,366,964 154,322,601
Net assets at Consolidation value (B) N/A N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents 569,836 100,227 (723,697)
Net cash provided by operating activities 10,085,510 10,405,327 10,014,905
Ratio of earnings to fixed charges -- -- --
Ratio of earnings to total assets 0.06 0.06 0.04
Book value per $1,000 of Original Investment (A) 855.66 855.76 844.82
Book value per share at Consolidation value (G) N/A N/A N/A
Earnings per $1,000 of Original Investment (A)/(F) 51.52 49.19 31.30
Earnings per share--pro forma (H) N/A N/A N/A
Distribution per $1,000 of Original Investment (A)/(E) 52.00 52.00 52.00
<CAPTION>
1996 Pro Forma of The Company
----------------------------------------------------------------
100% Minimum Minimum
Participation Participation(1) Participation(2)
--------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $25,015,232 $21,724,089 $15,103,459
Total expenses 7,949,447 7,571,766 5,569,464
Net income 17,065,785 14,152,323 9,533,995
Distributions to limited partners 19,297,975 16,514,825 12,514,405
BALANCE SHEET DATA:
Cash and cash equivalents N/A N/A N/A
Total assets N/A N/A N/A
Loan payable N/A N/A N/A
Total liabilities (C) N/A N/A N/A
Partners' capital/Shareholders' equity (D) N/A N/A N/A
Net assets at Consolidation value (B) N/A N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents (1,393,725) (1,105,649) (1,011,773)
Net cash provided by operating activities 20,796,885 18,012,739 13,574,542
Ratio of earnings to fixed charges 12.37 10.59 86.12
Ratio of earnings to total assets N/A N/A N/A
Book value per $1,000 of Original Investment (A) N/A N/A N/A
Book value per share at Consolidation value (G) N/A N/A N/A
Earnings per $1,000 of Original Investment (A)/(F) 38.53 37.65 35.14
Earnings per share--pro forma (H) 0.77 0.74 0.68
Distribution per $1,000 of Original Investment (A)/(E) 47.91 48.41 51.15
</TABLE>
- --------------
(1) Minimum Participation--Tax Exempt II and I
(2) Minimum Participation--Tax Exempt II and III
(3) Minimum Participation--Tax Exempt I and III
(A) The respective calculations have been presented using the base of $1,000 of
Original Investment. For comparison of historical to pro forma
distribution by Partnership see Distribution Comparison table (page 60).
(B) Net assets at Consolidation value reflect adjustment of the book value of
assets and liabilities to the value assigned for purposes of the
Consolidation. This disclosure is informational only; assets and liabilities
of the Company will be recorded at carrying values for Tax Exempt II and
fair values for Tax Exempt I and III in the 100% Participation, Minimum
Participation (1) and (2) scenario. Minimum Participation (3) assets and
liabilities will be recorded at the carrying values for Tax Exempt I and
fair value for Tax Exempt III.
(C) Pro Forma Total liabilities reflect the accrual of the Consolidation
Expenses loan of $1,984,125, $1,707,630, $1,244,585 and $1,016,035 for 100%
Participation and Minimum Participation (1), (2) and (3), respectively.
(D) Pro Forma Shareholders' equity reflects the change in the respective
percentage ownership interest of BUC$holders and the General Partners.
(E) Pro Forma Distributions reflect the reduction in fees payable to the General
Partners, decrease in G&A expenses, increase in additional interest expense
expected to be incurred as a result of financing and an increase in
allocable cash flow to former BUC$holders as a result of the Manager
contributing back one-half of the P-B Interest.
(F) Earnings per $1,000 of Original Investment has been calculated over a per
$1,000 of Original Investment basis.
(G) Book value per share at Consolidation value using pro forma March 31, 1997
total shareholders' equity over the number of shares of beneficial interest
assumed to be outstanding upon Consolidation (20,586,383, 17,717,594,
12,913,254 and 10,541,918 shares at 100% Participation and Minimum
Participation (1), (2) and (3) respectively).
(H) Pro forma earnings per share has been calculated using the number of shares
of beneficial interest assumed to be outstanding upon Consolidation, as in
Note (G) above.
116
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of and for the Three
Months Ended March 31,
-----------------------------
Tax Exempt II--Historical
-----------------------------
1996 1997
-------------- --------------
<S> <C> <C> <C>
OPERATING DATA:
Total revenues $ 2,915,042 $ 2,757,147
Total expenses 429,359 434,852
Net income (loss) 2,485,683 2,322,295
Distributions to limited partners 2,379,421 2,379,421
BALANCE SHEET DATA:
Cash and cash equivalents 288,636 1,114,246
Total assets 157,251,113 155,086,944
Loan payable -- --
Total liabilities (C) 826,447 870,029
Partners' capital/Shareholders' equity (D) 156,424,666 154,216,915
Net assets at Consolidation value (B) N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents (684,253) 865,054
Net cash provided by operating activities 2,735,495 2,959,852
Ratio of earnings to fixed charges -- --
Ratio of earnings to total assets 0.02 0.01
Book value per $1,000 of Original Investment (A) 856.07 844.25
Book value per share at Consolidation value (G) N/A N/A
Earnings per $1,000 of Original Investment (A)/(F) 13.31 12.43
Earnings per share--pro forma (H) N/A N/A
Distribution per $1,000 of Original Investment (A)/(E) 13.00 13.00
<CAPTION>
As of and for the Three Months Ended March 31
----------------------------------------------------
1997 Pro Forma of The Company
----------------------------------------------------
100% Minimum Minimum
Participation Participation(1) Participation(2)
--------------- ------------------ -----------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 5,826,820 $ 5,071,142 $ 3,512,825
Total expenses 906,511 827,780 323,254
Net income (loss) 4,920,309 4,243,362 3,189,571
Distributions to limited partners 4,806,985 4,125,265 3,111,042
BALANCE SHEET DATA:
Cash and cash equivalents 2,241,794 1,967,424 309,024
Total assets 333,137,880 287,862,172 200,365,652
Loan payable 15,664,991 15,388,496 1,244,585
Total liabilities (C) 22,776,321 20,255,951 4,358,489
Partners' capital/Shareholders' equity (D) 310,361,559 267,606,221 196,007,163
Net assets at Consolidation value (B) 308,795,748 265,763,915 193,698,812
OTHER DATA:
Net increase in cash and cash equivalents 1,688,331 1,473,793 1,079,592
Net cash provided by operating activities 5,783,489 5,076,850 3,856,820
Ratio of earnings to fixed charges 14.11 12.50 114.90
Ratio of earnings to total assets 0.01 0.01 0.02
Book value per $1,000 of Original Investment (A) 758.97 772.64 789.10
Book value per share at Consolidation value (G) 15.08 15.10 15.18
Earnings per $1,000 of Original Investment (A)/(F) 11.23 11.45 12.03
Earnings per share--pro forma (H) 0.22 0.22 0.23
Distribution per $1,000 of Original Investment (A)/(E) 11.93 12.09 12.72
</TABLE>
- --------------
(1) Minimum Participation--Tax Exempt II and I
(2) Minimum Participation--Tax Exempt II and III
(3) Minimum Participation--Tax Exempt I and III
(A) The respective calculations have been presented using the base of $1,000 of
Original Investment. For comparison of historical to pro forma
distribution by Partnership see Distribution Comparison table (page 60).
(B) Net assets at Consolidation value reflect adjustment of the book value of
assets and liabilities to the value assigned for purposes of the
Consolidation. This disclosure is informational only; assets and
liabilities of the Company will be recorded at carrying values for Tax
Exempt II and fair values for Tax Exempt I and III in the 100%
Participation, Minimum Participation (1) and (2) scenario. Minimum
Participation (3) assets and liabilities will be recorded at the carrying
values for Tax Exempt I and fair value for Tax Exempt III.
(C) Pro Forma Total liabilities reflect the accrual of the Consolidation
Expenses loan of $1,984,125, $1,707,630, and $1,244,585 and $1,016,035 for
100% Participation and Minimum Participation (1), (2) and (3),
respectively.
(D) Pro Forma Shareholders' equity reflects the change in the respective
percentage ownership interest of BUC$holders and the General Partners.
(E) Pro Forma Distributions reflect the reduction in fees payable to the
General Partners, decrease in G&A expenses, increase in additional
interest expense expected to be incurred as a result of financing and an
increase in allocable cash flow to former BUC$holders as a result of the
Manager contributing back one-half of the P-B Interest.
(F) Earnings per $1,000 of Original Investment has been calculated over a per
$1,000 of Original Investment basis.
(G) Book value per share at Consolidation value using pro forma March 31, 1997
total shareholders' equity over the number of shares of beneficial
interest assumed to be outstanding upon Consolidation (20,586,383,
17,717,594, 12,913,254 and 10,541,918 shares at 100% Participation and
Minimum Participation (1), (2) and (3) respectively).
(H) Pro forma earnings per share has been calculated using the number of shares
of beneficial interest assumed to be outstanding upon Consolidation, as in
Note (G) above.
117
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
Tax Exempt I Historical
--------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 8,480,951 $ 10,304,404 $ 10,034,274 $ 9,898,082 9,799,440
Total expenses 2,018,379 6,168,630 4,348,384 3,928,867 3,271,877
Net income 6,462,572 4,135,774 5,685,890 5,969,215 6,527,563
Distributions to limited partners 6,641,238 6,641,238 6,641,238 6,641,238 6,641,237
BALANCE SHEET DATA:
Cash and cash equivalents 151,621 200,227 173,689 626,391 244,439
Total assets 134,028,372 141,881,705 136,021,035 136,278,329 134,476,035
Loan payable 45,620 13,680,866 13,680,866 13,680,866 13,680,866
Total liabilities (C) 5,309,322 15,803,655 15,317,147 14,998,169 14,879,400
Partners' capital/Shareholders' equity (D) 128,719,050 126,078,050 120,703,888 121,280,160 119,596,635
Net assets at Consolidation value (B) N/A N/A N/A N/A N/A
OTHER DATA:
Net increase in cash and cash
equivalents (19,008) 48,606 (26,538) 452,702 (381,952)
Net cash provided by operating
activities 6,582,020 7,440,321 6,712,297 6,609,883 6,608,335
Ratio of earnings to fixed charges 706.06 5.28 5.91 5.29 5.94
Ratio of earnings to total assets 0.05 0.03 0.04 0.04 0.05
Book value per $1,000 of Original
Investment (A) 815.84 799.47 766.16 769.73 759.30
Book value per share at Consolidation
value (G) N/A N/A N/A N/A N/A
Earnings per $1,000 of Original
Investment (A)/(F) 40.05 25.63 35.24 37.00 40.46
Earnings per share--pro forma (H) N/A N/A N/A N/A N/A
Distribution per $1,000 of Original
Investment (A)/(E) 42.00 42.00(J) 42.00 42.00 42.00
As of and for the Three Months Ended March 31,
--------------------------------------------
1996 1997
Pro Forma of Pro Forma
the Company Tax Exempt I - Historical the Company
---------------- ----------------------------- -------------
Minimum Minimum
Participation(3) 1996 1997 Participation
---------------- ---- ---- -------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $13,090,583 $ 2,580,171 $ 2,289,990 $ 3,045,668
Total expenses 3,035,550 783,288 806,282 731,461
Net income 10,055,033 1,796,883 1,483,708 2,314,207
Distributions to limited partners 9,566,721 1,660,309 1,660,309 2,377,662
BALANCE SHEET DATA:
Cash and cash equivalents N/A 127,432 853,178 1,127,548
Total assets N/A 136,535,313 134,406,713 179,682,421
Loan payable N/A 13,680,866 13,680,866 14,696,901
Total liabilities (C) N/A 15,152,463 15,020,563 18,280,473
Partners' capital/Shareholders' equity (D) N/A 121,382,850 119,386,150 161,401,948
Net assets at Consolidation value (B) N/A N/A N/A 158,128,769
OTHER DATA:
Net increase in cash and cash
equivalents (670,028) (498,959) 608,739 823,277
Net cash provided by operating
activities 10,006,488 2,074,294 1,773,117 2,633,308
Ratio of earnings to fixed charges 8.11 6.43 5.49 7.55
Ratio of earnings to total assets N/A 0.01 0.01 0.01
Book value per $1,000 of Original
Investment (A) N/A 770.37 758.00 723.44
Book value per share at Consolidation
value (G) N/A N/A N/A 15.31
Earnings per $1,000 of Original
Investment (A)/(F) 41.93 11.14 9.20 9.59
Earnings per share--pro forma (H) 0.89 N/A N/A 0.20
Distribution per $1,000 of Original
Investment (A)/(E) 43.53 10.50 10.50 10.82
</TABLE>
- --------------
(1) Minimum Participation--Tax Exempt II and I
(2) Minimum Participation--Tax Exempt II and III
(3) Minimum Participation--Tax Exempt I and III
(A) The respective calculations have been presented using the base of $1,000 of
Original Investment. For comparison of historical to pro forma
distribution by Partnership see Distribution Comparison table (page 60).
(B) Net assets at Consolidation value reflect adjustment of the book value of
assets and liabilities to the value assigned for purposes of the
Consolidation. This disclosure is informational only; assets and
liabilities of the Company will be recorded at carrying values for Tax
Exempt II and fair values for Tax Exempt I and III in the 100%
Participation, Minimum Participation (1) and (2) scenario. Minimum
Participation (3) assets and liabilities will be recorded at the carrying
values for Tax Exempt I and fair value for Tax Exempt III.
(C) Pro Forma Total liabilities reflect the accrual of the Consolidation
Expenses loan of $1,984,125, $1,707,630, and $1,244,585 and $1,016,035 for
100% Participation and Minimum Participation (1), (2) and (3),
respectively.
(D) Pro Forma Shareholders' equity reflects the change in the respective
percentage ownership interest of BUC$holders and the General Partners.
(E) Pro Forma Distributions reflect the reduction in fees payable to the
General Partners, decrease in G&A expenses, increase in additional
interest expense expected to be incurred as a result of financing and an
increase in allocable cash flow to former BUC$holders as a result of the
Manager contributing back one-half of the P-B Interest.
(F) Earnings per $1,000 of Original Investment has been calculated over a per
$1,000 of Original Investment basis.
(G) Book value per share at Consolidation value using pro forma March 31, 1997
total shareholders' equity over the number of shares of beneficial
interest assumed to be outstanding upon Consolidation (20,586,383,
17,717,594, 12,913,254 and 10,541,918 shares at 100% Participation and
Minimum Participation (1), (2) and (3) respectively).
(H) Pro forma earnings per share has been calculated using the number of shares
of beneficial interest assumed to be outstanding upon Consolidation, as in
Note (G) above.
118
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Introduction
Given the structure of the proposed Consolidation, the composition of the
Company after the Consolidation will differ depending on the number of
Partnerships that elect to participate in the Consolidation.
To assist BUC$holders in analyzing the Consolidation, four sets of pro
forma financial statements have been prepared to show the impact of the
Consolidation based upon four assumptions regarding the Partnerships'
participation in the Consolidation. The first set of pro forma financial
statements assumes 100% Participation by all Partnerships while the three
Minimum Participation scenarios assume only certain of the Partnerships
participate.
The pro forma balance sheet of the Company has been prepared as if the
Consolidation was consummated on March 31, 1997. The pro forma statements of
operations and cash flows of the Company for the year ended December 31, 1996
and the three months ended March 31, 1997 assume that the Consolidation was
consummated on January 1, 1996. The Consolidation will be accounted for using
the purchase method of accounting. Under this method, the Participating
Partnership with the BUC$holder group receiving the largest ownership in the
Company (in this case Tax Exempt II in all scenarios except where it is not a
Participating Partnership in which event Tax Exempt I would be the largest)
will be deemed to be the acquirer. As the surviving entity for accounting
purposes, such partnership's assets and liabilities will be recorded by the
Company at their historical cost, with the assets and liabilities of the other
Participating Partnerships recorded at their estimated fair values, using the
Adjusted Net Asset Values.
The pro forma financial statements are based upon available information
and upon certain assumptions, as set forth in the notes to pro forma financial
statements, that management of the Company believes are reasonable in the
circumstances.
These statements do not purport to represent what the Company's financial
position or results of operations or cash flows would actually have been if the
Consolidation in fact had occurred on such dates or at the beginning of such
periods or the Company's financial position, results of operations or cash
flows for any future date or period.
119
<PAGE>
Charter Municipal Mortgage Acceptance Company--Full Participation
Pro Forma Consolidated Balance Sheet
As of March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax I-At Tax II-At Tax III-At Historical
Historical Cost Historical Cost Historical Cost Combined Totals
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Participating first mortgage bonds,
at fair value $123,397 $148,130 $44,770 $316,297
Temporary investments 1,150 3,300 100 4,550
Cash and cash equivalents 853 1,114 274 2,241
Promissory notes receivable, net 6,650 242 -- 6,892
Deferred bond selection fees, net 1,521 1,759 652 3,932
Interest receivable, net 725 531 128 1,384
Other assets 111 11 4 126
-------- -------- ------- --------
Total assets $134,407 $155,087 $45,928 $335,422
======== ======== ======= ========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Loan payable $ 13,681 $ -- $ -- $ 13,681
Deferred income 921 384 -- 1,305
Accounts payable and accrued expenses 88 81 119 288
Due to affiliates 331 405 214 950
Excess of acquired net assets over cost -- -- -- --
-------- -------- ------- --------
Total liabilities 15,021 870 333 16,224
-------- -------- ------- --------
Partners' capital (deficit):
BUC$holders 124,105 160,519 48,950 333,574
General Partners (385) (186) (175) (746)
Net unrealized loss on participating first
mortgage bonds (4,334) (6,116) (3,180) (13,630)
-------- -------- ------- --------
Total partners' capital 119,386 154,217 45,595 319,198
-------- -------- ------- --------
Total liabilities and partners' capital $134,407 $155,087 $45,928 $335,422
======== ======== ======= ========
Beneficial owners' equity; 50,000,000 shares
authorized; 20,586,383 shares issued and outstanding
Beneficial owners' equity-manager
Beneficial owners' equity-shareholders
Net unrealized loss on participating first mortgage bonds
Total liabilities and equity
<CAPTION>
Purchase Tax II At Consolidation
Accounting Pro Historical Cost, Transaction Pro
Forma Tax I & III At Fair Forma The Company
Adjustments Value Adjustments Pro Forma
------------------- --------------------- --------------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Participating first mortgage bonds,
at fair value $316,297 $316,297
Temporary investments 4,550 4,550
Cash and cash equivalents 2,241 2,241
Promissory notes receivable, net 6,892 6,892
Deferred bond selection fees, net $ (1,521) (a) 1,759 1,759
(652) (b)
Interest receivable, net 1,384 1,384
Other assets (111) (a) 15 15
----------- -------- --------
Total assets $333,138 $333,138
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Loan payable $ 13,681 $ 1,984 (d) $ 15,665
Deferred income (921) (a) 384 384
Accounts payable and accrued expenses 288 288
Due to affiliates 950 950
Excess of acquired net assets over cost 3,579 (a) 5,490 5,490
----------- -------- --------
1,911 (b)
Total liabilities 20,793 22,777
-------- --------
Partners' capital (deficit):
BUC$holders (8,451) (a) 319,495 (319,495) (c) --
(5,628) (b)
General Partners (173) (a) (1,034) 1,034 (c) --
(115) (b)
Net unrealized loss on participating first
mortgage bonds 4,334 (a) (6,116) 6,116 (c) --
3,180 (b)
----------- -------- --------
Total partners' capital 312,345 --
-------- --------
Total liabilities and partners' capital $333,138 $ --
======== ========
Beneficial owners' equity; 50,000,000 shares
authorized; 20,586,383 shares issued and outstanding
Beneficial owners' equity-manager
4,777 (c) $ 4,747
(30) (d)
(1,954) (d)
Beneficial owners' equity-shareholders 313,684 (c) 311,730
Net unrealized loss on participating first mortgage bonds (6,116) (c) (6,116)
--------
310,361
--------
Total liabilities and equity $333,138
========
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
120
<PAGE>
Charter Municipal Mortgage Acceptance Company--Full Participation
Pro Forma Consolidated Income Statement
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Tax Exempt I and
Tax Exempt II- Tax Exempt III- Total Historical Pro Forma The Company Pro
Historical Cost Historical Cost Partnerships Adjustments Forma
--------------- ---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income from participating
first mortgage bonds $2,717 $2,848 $5,565 $ 137 (e) $5,637
(65) (e)
Interest income from promissory
notes 32 136 168 168
Interest income from temporary
investments 8 14 22 22
------ ------ ------ ------
Total revenues 2,757 2,998 5,755 5,827
------ ------ ------ ------
EXPENSES
Interest expense -- 331 331 45 (f) 376
Management fees 203 168 371 (371) (g) --
General and administrative 86 202 288 (18) (h) 270
Loan servicing fees 100 115 215 215
Amortization of deferred bond
selection fees 46 53 99 (53) (e) 46
Amortization of deferred
financing fees -- 32 32 (32) (e) --
------ ------ ------ ------
Total expenses 435 901 1,336 907
------ ------ ------ ------
Net income $2,322 $2,097 $4,419 4,920
====== ====== ====== ------
Special distribution to manager 327
------
Net income available to shareholders $4,593
======
Net income per share, 20,586,383 shares outstanding during the period $ 0.22
======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
121
<PAGE>
Charter Municipal Mortgage Acceptance Company--Full Participation
Pro Forma Consolidated Income Statement
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Tax Exempt I and
Tax Exempt II- Tax Exempt III- Total Historical Pro Forma The Company Pro
Historical Cost Historical Cost Partnerships Adjustments Forma
--------------- ---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income from participating
first mortgage bonds $11,647 $12,230 $23,877 $ 578 (e) $24,193
(262) (e)
Interest income from promissory
notes 27 571 598 598
Interest income from temporary
investments 138 86 224 224
------- ------- ------- -------
Total revenues 11,812 12,887 24,699 25,015
------- ------- ------- -------
EXPENSES
Interest expense -- 1,322 1,322 179 (f) 1,501
Management fees 811 672 1,483 (1,483) (g) --
General and administrative 566 904 1,470 (78) (h) 1,392
Loan servicing fees 405 466 871 871
Amortization of deferred bond
selection fees 185 212 397 (212) (e) 185
Amortization of deferred
financing fees -- 128 128 (128) (e) --
Loss on impairment of assets 4,000 -- 4,000 4,000
------- ------- ------- -------
Total expenses 5,967 3,704 9,671 7,949
------- ------- ------- -------
Net income $ 5,845 $ 9,183 $15,028 17,066
======= ======= ======= -------
Special distribution to manager 1,309
-------
Net income available to shareholders $15,757
=======
Net income per share, 20,586,383 shares outstanding during the period $ 0.77
=======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
122
<PAGE>
Charter Municipal Mortgage Acceptance Company--Full Participation
Pro Forma Consolidated Cash Flows
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax II At
Tax Exempt I and Historical Cost,
Tax Exempt II- Tax Exempt III, At Tax I & III At Pro Forma The Company
Historical Cost Fair Value (j) Fair Value Adjustments Pro Forma
--------------- ------------------ ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Interest received $ 2,946 $ 3,181 $ 6,127 $ 6,127
Loan made to property affiliates -- (111) (111) (111)
Amount received (paid) which was
due from/to affiliate 84 (84) -- --
Fees and expenses paid (70) (176) (246) $ 389 (i) 143
Interest paid -- (331) (331) (45) (i) (376)
------- ------- ------- -------
Net cash provided by operating
activities 2,960 2,479 5,439 5,783
------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES
Net sale of temporary investments 300 700 1,000 1,000
Principal payments received from
loans made to properties 33 30 63 63
------- ------- ------- -------
Net cash provided by investment
activities 333 730 1,063 1,063
------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase in Loan Payable related
to additional financing -- -- -- 1,984 (i) 1,984
Payment of transaction costs -- -- -- (1,984) (i) (1,984)
Distributions paid (2,428) (2,386) (4,814) 45 (i) (5,158)
(371) (i)
(18) (i)
------- ------- ------- -------
Net cash used in financing
activities (2,428) (2,386) (4,814) (5,158)
------- ------- ------- -------
Net increase in cash and cash
equivalents 865 823 1,688 1,688
Cash and cash equivalents at
beginning of period 249 304 553 553
------- ------- ------- -------
Cash and cash equivalents at end
of period $ 1,114 $ 1,127 $ 2,241 $ 2,241
======= ======= ======= =======
</TABLE>
(continued)
123
<PAGE>
Charter Municipal Mortgage Acceptance Company--Full Participation
Pro Forma Consolidated Cash Flows
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax II At
Tax Exempt I and Historical Cost,
Tax Exempt II- Tax Exempt III, At Tax I & III At Pro Forma The Company
Historical Cost Fair Value (j) Fair Value Adjustments Pro Forma
--------------- ------------------ ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SCHEDULE RECONCILING NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $2,322 $2,254 $4,576 $ (45) (i) $4,920
------ ------ ------ ------
Adjustments to reconcile net 371 (i)
income to net cash provided by 18 (i)
operating activities:
Accretion of deferred income (17) -- (17) (17)
Amortization of deferred bond
selection fees 46 -- 46 46
Amortization of excess of
acquired net assets over cost -- (137) (137) (137)
Changes in operating assets and liabilities:
Decrease in interest receivable 205 137 342 342
Decrease in other assets 13 7 20 20
Decrease in accounts payable
and accrued expenses (26) (19) (45) (45)
Decrease in due from affiliates 84 -- 84 84
Increase in due to affiliates 333 237 570 570
------ ------ ------ ------
Total adjustments 638 225 863 863
------ ------ ------ ------
Net cash provided by operating
activities $2,960 $2,479 $5,439 $5,783
====== ====== ====== ======
</TABLE>
See accompanying notes to proforma consolidated financial statements.
124
<PAGE>
Charter Municipal Mortgage Acceptance Company--Full Participation
Pro Forma Consolidated Cash Flows
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax II At
Tax Exempt I and Historical Cost,
Tax Exempt II- Tax Exempt III, At Tax I & III At Pro Forma The Company
Historical Cost Fair Value (j) Fair Value Adjustments Pro Forma
--------------- ------------------ ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Interest received $11,910 $12,870 $ 24,780 $ 24,780
Loan made to property affiliates -- (274) (274) (274)
Fees and expenses paid (1,895) (1,874) (3,769) $ 1,561 (i) (2,208)
Interest paid -- (1,322) (1,322) (179) (i) (1,501)
------- ------- -------- --------
Net cash provided by operating
activities 10,015 9,400 19,415 20,797
------- ------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of temporary investments (800) (350) (1,150) (1,150)
Loan made to properties (300) -- (300) (300)
Principal payments received from
loans made to properties 73 -- 73 73
------- ------- -------- --------
Net cash used in investment
activities (1,027) (350) (1,377) (1,377)
------- ------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES
Principal repayments on
promissory note -- 86 86 86
Increase in Loan Payable related
to additional financing -- -- -- 1,984 (i) 1,984
Payment of transaction costs -- -- -- (1,984) (i) (1,984)
Distributions paid (9,712) (9,806) (19,518) 179 (i) (20,900)
(1,483) (i)
(78) (i)
------- ------- -------- --------
Net cash used in financing
activities (9,712) (9,720) (19,432) (20,814)
------- ------- -------- --------
Net increase in cash and cash
equivalents (724) (670) (1,394) (1,394)
Cash and cash equivalents at
beginning of year 973 974 1,947 1,947
------- ------- -------- --------
Cash and cash equivalents at end
of year $ 249 $ 304 $ 553 $ 553
======= ======= ======== ========
</TABLE>
(continued)
125
<PAGE>
Charter Municipal Mortgage Acceptance Company--Full Participation
Pro Forma Consolidated Cash Flows
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax II At
Tax Exempt I and Historical Cost,
Tax Exempt II- Tax Exempt III, At Tax I & III At Pro Forma The Company
Historical Cost Fair Value (j) Fair Value Adjustments Pro Forma
--------------- ------------------ ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
SCHEDULE RECONCILING NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $ 5,845 $9,839 $15,684 $ (179) (i) $17,066
------- ------- -------- --------
Adjustments to reconcile net 1,483 (i)
income to net cash provided by 78 (i)
operating activities:
Accretion of deferred income (66) -- (66) (66)
Amortization of deferred bond
selection fees 185 -- 185 185
Amortization of excess of
acquired net assets over cost -- (578) (578) (578)
Loss on impairment of assets 4,000 -- 4,000 4,000
Changes in operating assets and
liabilities:
Decrease in promissory notes
receivable, net 22 57 79 79
(Increase) decrease in interest receivable 164 (28) 136 136
Increase in other assets (11) (6) (17) (17)
Decrease in deferred income (23) (57) (80) (80)
Increase (decrease) in
accounts payable and
accrued expenses (25) 23 (2) (2)
Decrease in due from
affiliates (84) -- (84) (84)
Increase in due to affiliates 8 150 158 158
------- ------- -------- --------
Total adjustments 4,170 (439) 3,731 3,731
------- ------- -------- --------
Net cash provided by operating
activities $10,015 $9,400 $19,415 $20,797
======= ======= ======== ========
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
126
<PAGE>
Charter Municipal Acceptance Company--Full Participation
Supplemental Pro Forma Per Share/Unit Data (k)
As Of And For The Three Months Ended March 31, 1997 And The Year Ended December
31, 1996
<TABLE>
<CAPTION>
Book Value Distributions Net Income
As of Year Ended Year Ended
March 31, 1997 March 31, 1997 March 31, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Pro forma-the Company (Per Share) $15.08 $0.2371 $0.22
Historical-Tax I (Per Unit) 15.16 0.2100 0.18
Equivalent pro forma-Tax I (Per Unit) 14.42 0.2267 0.21
Historical-Tax II (Per Unit) 16.89 0.2600 0.25
Equivalent pro forma-Tax II (Per Unit) 16.30 0.2563 0.24
Historical-Tax III (Per Unit) 14.87 0.2200 0.17
Equivalent pro forma-Tax III (Per Unit) 13.83 0.2174 0.20
</TABLE>
<TABLE>
<CAPTION>
Book Value Distributions Net Income
As of Year Ended Year Ended
December 31, 1996 December 31, 1996 December 31, 1996
------------------- ------------------- ------------------
<S> <C> <C> <C>
Pro forma-the Company (Per Share) N/A $0.9517 $0.77
Historical-Tax I (Per Unit) N/A 0.8400 0.81
Equivalent pro forma-Tax I (Per Unit) N/A 0.9098 0.74
Historical-Tax II (Per Unit) N/A 1.0400 0.63
Equivalent pro forma-Tax II (Per Unit) N/A 1.0289 0.83
Historical-Tax III (Per Unit) N/A 0.8800 0.76
Equivalent pro forma-Tax III (Per Unit) N/A 0.8727 0.71
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
127
<PAGE>
Charter Municipal Acceptance Company--Full Participation
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997 And The Year Ended December
31, 1996
(Dollars in thousands)
(a) The historical balance sheet of Summit Tax Exempt Bond Fund L.P. has been
adjusted to reflect the impact of applying the purchase method of
accounting to this transaction. The net assets of this partnership are
being adjusted to their estimated fair value of $115,096. The estimated
fair value was determined by the Related General Partner and the Manager
based on the adjusted net asset value. The adjusted net asset value is
equal to the (i) amount the partnership would receive under the terms of
the participating first mortgage bonds if the underlying properties
collateralizing the partnership's participating first mortgage bonds were
sold for an amount equal to the appraised value net of third party expenses
plus, (ii) any undistributed cash and other assets less, (iii) any
outstanding liabilities owned by the partnership.
The effect of purchase accounting on the balance sheet results in the
following adjustments: (i) intangible items included in other assets as
well as deferred bond selection fee, net, and deferred income have been
eliminated resulting from those items being assigned no value, (ii) the net
unrealized loss on participating first mortgage bonds has been eliminated,
because the bonds' fair value becomes their cost basis, (iii) a deferred
credit resulting from an excess of acquired net assets over cost (negative
goodwill) has been recorded, and (iv) the net effect of those changes to
the assets and liabilities has been applied to the partners' capital
account.
(b) The historical balance sheet of Summit Tax Exempt L.P. III has been
adjusted to reflect the impact of applying the purchase method of
accounting to this transaction. The net assets of this partnership are
being adjusted to their estimated fair value of $43,032. The estimated fair
value was determined by the Related General Partner and the Manager based
on the adjusted net asset value. The adjusted net asset value is equal to
the (i) amount the partnership would receive under the terms of the first
mortgage bonds if the underlying properties collateralizing the
partnership's mortgage bonds were sold for an amount equal to the appraised
value net of third party expenses plus, (ii) any undistributed cash and
other assets less, (iii) any outstanding liabilities owned by the
partnership.
The effect of purchase accounting on the balance sheet results in the
following adjustments: (i) deferred bond selection fee, net, has been
eliminated resulting from this intangible item being assigned no value,
(ii) the net unrealized loss on participating first mortgage bonds has been
eliminated, because the bonds' fair value becomes their cost, (iii) a
deferred credit resulting from an excess of acquired net assets over cost
has been added, and (iv) the net effect of those changes to the assets and
liabilities has been applied to the partners' capital account.
(c) Represents reclassification of the existing partners' capital to beneficial
owners' equity and in accordance with the terms of the consolidation, the
contribution to the Company by Related Charter L.P. of a portion of
Prudential - Bache Properties, Inc.'s former general partner interest which
results in a 1.5% ownership of shares by Related Charter L.P.s.
(d) Represents the additional financing obtained as a result of the
transactional costs expected to be incurred. These transactional costs are
expected to equal $1,984 and will be recorded as a reduction to beneficial
owners' equity.
(e) Represents the following adjustments to Summit Tax Exempt Bond Fund L.P.
and Summit Tax Exempt L.P. III due to their being recorded at their fair
values in applying the purchase method of accounting: (i) the elimination
of the historical amortization of deferred financing fees, deferred bond
selection fees and deferred income because these intangible items were
assigned no value under purchase accounting and, (ii) the amortization of
the deferred credit, the excess of acquired net assets over costs,
(included in interest income from participating first mortgage bonds) using
the straight line method over 10 years, which approximates the average
remaining term to maturity of the participating first mortgage bonds.
(f) Represents interest expense at an assumed annual rate of 9% on the
financing of the transactional costs expected to be incurred.
(g) Historically, the partnership agreements have provided for the general
partners of Summit Tax Exempt Bond Fund L.P. and Summit Tax Exempt L.P. II
to receive a partnership management fee of .5% of total invested assets and
the general partners of Summit Tax Exempt L.P. III to receive a special
distribution of .5% of total invested assets. In accordance with the terms
of the consolidation, the historical partnership management fees for Summit
Tax Exempt Bond Fund L.P. and Summit Tax Exempt L.P. II have been
reclassified to a special distribution. Also under the terms of
consolidation, the special distributions are reduced to .375% per annum of
total invested assets.
(h) Pursuant to the terms of the consolidation as outlined in the Management
Agreement, reimbursement of overhead costs is limited to a maximum of $200
annually for all three partnerships, subject to certain adjustments. Thus,
for the periods ending March 31, 1997 and December 31, 1996, overhead costs
are limited to $50 and $200, respectively. The historical overhead costs
for these respective periods of $68 and $278 have therefore been reduced by
$18 to equal $50 for the three months and $78 to equal $200 for the full
year.
128
<PAGE>
Charter Municipal Acceptance Company--Full Participation
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997 And The Year Ended December
31, 1996
(Dollars in thousands)
(i) Represents the cash flow statement effect for the periods ending March 31,
1997 and December 31, 1996, for the following pro forma adjustments
described above: reduction of G & A expenses, $18 and $78 (note h),
additional interest expense related to the transactional costs of $45 and
$179 (note f), a reclassification of the management fee for Summit Tax
Exempt Bond Fund L.P. and Summit Tax Exempt L.P. II to special distribution
of $371 and $1,483 (note g), increase in loan payable related to additional
financing, $1,984, and payment of transactional costs, $1,984 (note d). The
net change in cash flow resulting from the consolidation transaction has
been applied to distributions paid.
(j) Historical statements of cash flows of Summit Tax Exempt Bond Fund L.P. and
Summit Tax Exempt L.P. III combined have been adjusted to reflect the
changes caused by applying the purchase method of accounting. For the
periods ending March 31, 1997 and December 31, 1996, net historical income
increased $157 and $656, amortization of deferred bond selection fees and
financing fees decreased $85 and $340, amortization of deferred income
decreased $65 and $262, and an increase in amortization of the deferred
credit, the excess of acquired net assets over costs $137 and $578.
(k) Equivalent pro forma data has been calculated by multiplying the Company
pro forma amounts by the exchange ratio (below) for each participating
partnership, so that the Company per share pro forma amounts are equated to
the respective values for one unit of the respective partnership.
Exchange Ratio:
(1 unit=X shares)
Tax I 0.9560
Tax II 1.0811
Tax III 0.9170
129
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt Bond Fund, L.P.)
Pro Forma Consolidated Balance Sheet
As of March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax Exempt II- Tax Exempt I-
At Historical At Historical Historical
Cost Cost Combined Totals
---------------- --------------- -----------------
<S> <C> <C> <C>
ASSETS
Participating first mortgage bonds, at
fair value $148,130 $123,397 $271,527
Temporary investments 3,300 1,150 4,450
Cash and cash equivalents 1,114 853 1,967
Promissory notes receivable, net 242 6,650 6,892
Deferred bond selection fees, net 1,759 1,521 3,280
Interest receivable, net 531 725 1,256
Other assets 11 111 122
-------- -------- --------
Total assets $155,087 $134,407 $289,494
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Loan payable $ -- $ 13,681 $ 13,681
Deferred income 384 921 1,305
Accounts payable and accrued
expenses 81 88 169
Due to affiliates 405 331 736
Excess of acquired net assets
over cost -- -- --
-------- -------- --------
Total liabilities 870 15,021 15,891
-------- -------- --------
Partners' capital (deficit):
BUC$holders 160,519 124,105 284,624
General Partners (186) (385) (571)
Net unrealized loss on participating
first mortgage bonds (6,116) (4,334) (10,450)
-------- -------- --------
Total partners' capital 154,217 119,386 273,603
-------- -------- --------
Total liabilities and partner's capital $155,087 $134,407 $289,494
======== ======== ========
<CAPTION>
Purchase Tax II At Consolidation
Accounting Pro Historical Cost & Transaction Pro
Forma Tax I At Fair Forma The Company
Adjustments Value Adjustments Pro Forma
---------------- ----------------- --------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Participating first mortgage bonds, at
fair value $271,527 $271,527
Temporary investments 4,450 4,450
Cash and cash equivalents 1,967 1,967
Promissory notes receivable, net 6,892 6,892
Deferred bond selection fees, net $ (1,521) (a) 1,759 1,759
Interest receivable, net 1,256 1,256
Other assets (111) (a) 11 11
-------- --------
Total assets $287,862 $287,862
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Loan payable $ 13,681 $ 1,708 (c) $ 15,389
Deferred income (921) (a) 384 384
Accounts payable and accrued
expenses 169 169
Due to affiliates 736 736
Excess of acquired net assets
over cost 3,579 (a) 3,579 3,579
--------- -------- --------
Total liabilities 18,549 20,257
-------- --------
Partners' capital (deficit):
BUC$holders (8,451) (a) 276,173 (276,173) (b) --
General Partners (173) (a) (744) 744 (b) --
Net unrealized loss on participating
first mortgage bonds 4,334 (a) (6,116) 6,116 (b) --
--------- -------- --------
Total partners' capital 269,313 --
-------- --------
Total liabilities and partner's capital $287,862 $ --
======== ========
Beneficial owners' equity; 50,000,000 shares
authorized; 17,717,594 shares issued and outstanding
Beneficial owners' equity-manager 4,131 (b) $ 4,105
(26) (c)
(1,682) (c)
Beneficial owners' equity-shareholders 271,298 (b) 269,616
Net unrealized loss on participating first mortgage bonds (6,116) (b) (6,116)
--------
267,605
--------
Total liabilities and equity
$287,862
========
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
130
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt Bond Fund, L.P.)
Pro Forma Consolidated Income Statement
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Tax Exempt II- Tax Exempt I- Total Historical Pro Forma The Company Pro
Historical Cost Historical Cost Partnerships Adjustments Forma
----------------- ----------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income from participating
first mortgage bonds $2,717 $2,143 $4,860 $ 24 (d) $4,884
Interest income from promissory
notes 32 136 168 168
Interest income from temporary
investments 8 11 19 19
------ ------ ------ ------
Total revenues 2,757 2,290 5,047 5,071
------ ------ ------ ------
EXPENSES
Interest expense -- 331 331 38 (e) 369
Management fees 203 168 371 (371) (f) --
General and administrative 86 156 242 (12) (g) 230
Loan servicing fees 100 83 183 183
Amortization of deferred bond
selection fees 46 38 84 (38) (d) 46
Amortization of deferred
financing fees -- 32 32 (32) (d) --
------ ------ ------ ------
Total expenses 435 808 1,243 828
------ ------ ------ ------
Net income $2,322 $1,482 $3,804 4,243
====== ====== ====== ------
Special distribution to manager 278
------
Net income available to shareholders $3,965
======
Net income per share, 17,717,594 shares outstanding during the period $ 0.22
======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
131
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt Bond Fund, L.P.)
Pro Forma Consolidated Income Statement
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Tax Exempt II- Tax Exempt I- Total Historical Pro Forma The Company Pro
Historical Cost Historical Cost Partnerships Adjustments Forma
--------------- --------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income from participating
first mortgage bonds $11,647 $9,155 $20,802 $ 112 (d) $20,914
Interest income from promissory
notes 27 571 598 598
Interest income from temporary
investments 138 73 211 211
------- ------ ------- -------
Total revenues 11,812 9,799 21,611 21,723
------- ------ ------- -------
EXPENSES
Interest expense -- 1,322 1,322 154 (e) 1,476
Management fees 811 672 1,483 (1,483) (f) --
General and administrative 566 665 1,231 (61) (g) 1,170
Loan servicing fees 405 335 740 740
Amortization of deferred bond
selection fees 185 150 335 (150) (d) 185
Amortization of deferred
financing fees -- 128 128 (128) (d) --
Loss on impairment of assets 4,000 -- 4,000 4,000
------- ------ ------- -------
Total expenses 5,967 3,272 9,239 7,571
------- ------ ------- -------
Net income $ 5,845 $6,527 $12,372 14,152
======= ====== ======= -------
Special distribution to manager 1,112
-------
Net income available to shareholders $13,040
=======
Net income per share, 17,717,594 shares outstanding during the period $ 0.74
=======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
132
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt Bond Fund, L.P.)
Pro Forma Consolidated Cash Flows
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax II At
Historical Cost
Tax Exempt II- Tax Exempt I, At & Tax I At Fair Pro Forma The Company
Historical Cost Fair Value (i) Value Adjustments Pro Forma
--------------- ---------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Interest received $ 2,946 $ 2,436 $ 5,382 $ 5,382
Loan made to property affiliates -- (111) (111) (111)
Amount received (paid) which was
due from/to affiliate 84 (84) -- --
Fees and expenses paid (70) (137) (207) $ 383 (h) 176
Interest paid -- (331) (331) (38) (h) (369)
------- ------- ------- ---------- -------
Net cash provided by operating
activities 2,960 1,773 4,733 5,078
------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES
Net sale of temporary investments 300 500 800 800
Principal payments received from
loans made to properties 33 30 63 63
------- ------- ------- -------
Net cash provided by investment
activities 333 530 863 863
------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase in Loan Payable related
to additional financing -- -- -- 1,708 (h) 1,708
Payment of transaction costs -- -- -- (1,708) (h) (1,708)
Distributions paid (2,428) (1,694) (4,122) 38 (h) (4,467)
(371) (h)
(12) (h)
------- ------- ------- -------
Net cash used in financing
activities (2,428) (1,694) (4,122) (4,467)
Net increase in cash and cash
equivalents 865 609 1,474 1,474
Cash and cash equivalents at
beginning of period 249 244 493 493
------- ------- ------- -------
Cash and cash equivalents at end
of period $ 1,114 $ 853 $ 1,967 $ 1,967
======= ======= ======= =======
</TABLE>
(continued)
133
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt Bond Fund, L.P.)
Pro Forma Consolidated Cash Flows
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax II At
Historical Cost
Tax Exempt II- Tax Exempt I, At & Tax I At Fair Pro Forma The Company
Historical Cost Fair Value (i) Value Adjustments Pro Forma
--------------- ---------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
SCHEDULE RECONCILING NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $2,322 $1,576 $3,898 $ (38) (h) $4,243
------ ------ ------ ------
Adjustments to reconcile net 371 (h)
income to net cash provided by 12 (h)
operating activities:
Accretion of deferred income (17) -- (17) (17)
Amortization of deferred bond
selection fees 46 -- 46 46
Amortization of excess of
acquired net assets over cost -- (89) (89) (89)
Changes in operating assets and liabilities:
Decrease in interest receivable 205 100 305 305
Decrease in other assets 13 11 24 24
Decrease in accounts payable
and accrued expenses (26) (13) (39) (39)
Decrease in due from affiliates 84 -- 84 84
Increase in due to affiliates 333 188 521 521
------ ------ ------ ------
Total adjustments 638 197 835 835
------ ------ ------ ------
Net cash provided by operating
activities $2,960 $1,773 $4,733 $5,078
====== ====== ====== ======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
134
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt Bond Fund, L.P.)
Pro Forma Consolidated Cash Flows
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax II At
Historical Cost
Tax Exempt II- Tax Exempt I, At & Tax I At Fair Pro Forma The Company
Historical Cost Fair Value (i) Value Adjustments Pro Forma
--------------- ---------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Interest received $11,910 $ 9,816 $ 21,726 $ 21,726
Loan made to property affiliates -- (274) (274) (274)
Fees and expenses paid (1,895) (1,611) (3,506) $ 1,544 (h) (1,962)
Interest paid -- (1,322) (1,322) (154) (h) (1,476)
------- ------- -------- --------- --------
Net cash provided by operating
activities 10,015 6,609 16,624 18,014
------- ------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES
Net purchase of temporary
investments (800) (300) (1,100) (1,100)
Loan made to properties (300) -- (300) (300)
Principal payments received from
loans made to properties 73 -- 73 73
------- ------- -------- --------
Net cash used in investment
activities (1,027) (300) (1,327) (1,327)
------- ------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES
Principal repayments on
promissory note -- 87 87 87
Increase in Loan Payable related
to additional financing -- -- -- 1,708 (h) 1,708
Payment of transaction costs -- -- -- (1,708) (h) (1,708)
Distributions paid (9,712) (6,777) (16,489) 154 (h) (17,879)
(1,483) (h)
(61) (h)
------- ------- -------- --------
Net cash used in financing
activities (9,712) (6,690) (16,402) (17,792)
------- ------- -------- --------
Net decrease in cash and cash
equivalents (724) (381) (1,105) (1,105)
Cash and cash equivalents at
beginning of year 973 626 1,599 1,599
------- ------- -------- --------
Cash and cash equivalents at end
of year $ 249 $ 245 $ 494 $ 494
======= ======= ======== ========
</TABLE>
(continued)
135
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt Bond Fund, L.P.)
Pro Forma Consolidated Cash Flows
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax II At
Historical Cost
Tax Exempt II- Tax Exempt I, At & Tax I At Fair Pro Forma The Company
Historical Cost Fair Value (i) Value Adjustments Pro Forma
--------------- ---------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
SCHEDULE RECONCILING NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $ 5,845 $6,917 $12,762 $ (154) (h) $14,152
------- ------ ------- -------
Adjustments to reconcile net 1,483 (h)
income to net cash provided by 61 (h)
operating activities:
Accretion of deferred income (66) -- (66) (66)
Amortization of deferred bond
selection fees 185 -- 185 185
Amortization of excess of
acquired net assets over cost -- (374) (374) (374)
Loss on impairment of assets 4,000 -- 4,000 4,000
Changes in operating assets and
liabilities:
Decrease in promissory notes
receivable, net 22 57 79 79
Decrease in interest
receivable 164 4 168 168
Increase in other assets (11) (10) (21) (21)
Decrease in deferred income (23) (57) (80) (80)
Decrease in accounts payable
and accrued expenses (25) (23) (48) (48)
Decrease in due from
affiliates (84) -- (84) (84)
Increase in due to affiliates 8 95 103 103
------- ------ ------- -------
Total adjustments 4,170 (308) 3,862 3,862
------- ------ ------- -------
Net cash provided by operating
activities $10,015 $6,609 $16,624 $18,014
======= ====== ======= =======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
136
<PAGE>
Charter Municipal Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt Bond, L.P.)
Supplemental Pro Forma Per Share/Unit Data (j)
As Of And For The Three Months Ended March 31, 1997 And The Year Ended December
31, 1996
<TABLE>
<CAPTION>
Book Value Distributions Net Income
As of Year Ended Year Ended
March 31, 1997 March 31, 1997 March 31, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Pro forma-the Company (Per Share) $15.10 $0.2364 $0.22
Historical-Tax I (Per Unit) 15.16 0.2100 0.18
Equivalent pro forma-Tax I (Per Unit) 14.44 0.2260 0.21
Historical-Tax II (Per Unit) 16.89 0.2600 0.25
Equivalent pro forma-Tax II (Per Unit) 16.33 0.2556 0.24
</TABLE>
<TABLE>
<CAPTION>
Book Value Distributions Net Income
As of Year Ended Year Ended
December 31, 1996 December 31, 1996 Decmeber 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Pro forma-the Company (Per Share) N/A $0.9463 $0.74
Historical-Tax I (Per Unit) N/A 0.8400 0.81
Equivalent pro forma-Tax I (Per Unit) N/A 0.9046 0.71
Historical-Tax II (Per Unit) N/A 1.0400 0.63
Equivalent pro forma-Tax II (Per Unit) N/A 1.0231 0.80
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
137
<PAGE>
Charter Municipal Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt Fund, L.P.)
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
(Dollars in thousands)
(a) The historical balance sheet of Summit Tax Exempt Bond Fund L.P. has been
adjusted to reflect the impact of applying the purchase method of
accounting to this transaction. The net assets of this partnership are
being adjusted to their estimated fair value of $115,096. The estimated
fair value was determined by the Related General Partner and the Manager
based on the adjusted net asset value. The adjusted net asset value is
equal to the (i) amount the partnership would receive under the terms of
the participating first mortgage bonds if the underlying properties
collateralizing the partnership's participating first mortgage bonds were
sold for an amount equal to the appraised value net of third party expenses
plus, (ii) any undistributed cash and other assets less, (iii) any
outstanding liabilities owed by the partnership.
The effect of purchase accounting on the balance sheet results in the
following adjustments: (i) intangible items included in other assets as
well as deferred bond selection fee, net, and deferred income have been
eliminated resulting from those items being assigned no value, (ii) the net
unrealized loss on participating first mortgage bonds has been eliminated,
because the bonds' fair value becomes their cost basis, (iii) a deferred
credit resulting from an excess of acquired net assets over cost (negative
goodwill) has been recorded, and (iv) the net effect of those changes to
the assets and liabilities has been applied to the partners' capital
account.
(b) Represents reclassification of the existing partners' capital to beneficial
owners' equity and in accordance with the terms of the consolidation, the
contribution to the Company by Related Charter L.P. of a portion of
Prudential - Bache Properties, Inc.'s former general partner interest which
results in a 1.5% ownership of shares by Related Charter L.P.s.
(c) Represents the additional financing obtained as a result of the
transactional costs expected to be incurred. These transactional costs are
expected to equal $1,708 and will be recorded as a reduction to beneficial
owners' equity.
(d) Represents the following adjustments to Summit Tax Exempt Bond Fund L.P.
due it being recorded at its fair values in applying the purchase method of
accounting: (i) the elimination of the historical amortization of deferred
financing fees, deferred bond selection fees and deferred income because
these intangible items were assigned no value under purchase accounting
and, (ii) the amortization of the deferred credit, the excess of acquired
net assets over costs, (included in interest income from participating
first mortgage bonds) using the straight line method over 10 years, which
approximates the average remaining term to maturity of the participating
first mortgage bonds.
(e) Represents interest expense at an assumed annual rate of 9% on the
financing of the transactional costs expected to be incurred.
(f) Historically, the partnership agreements have provided for the general
partners of Summit Tax Exempt Bond Fund L.P. and Summit Tax Exempt L.P. II
to receive a partnership management fee of .5% of total invested assets. In
accordance with the terms of the consolidation, the historical partnership
management fees have been reclassified to a special distribution. Also
under the terms of consolidation, the special distributions are reduced to
.375% per annum of total invested assets.
(g) Pursuant to the terms of the consolidation as outlined in the Management
Agreement, reimbursement of overhead costs is limited to a maximum of $200
annually for all three partnerships, pro rata for the minimum scenario,
subject to certain adjustments. Thus, for the periods ending March 31, 1997
and December 31, 1996, overhead costs are limited to $39 and $129,
respectively. The historical overhead costs for these periods of $51 and
$190 have therefore been reduced by $12 to equal $39 for the three months
and by $61 to equal $129 for a full year.
(h) Represents the cash flow statement effect for the periods ending March 31,
1997 and December 31, 1996, for the following pro forma adjustments
described above: reduction of G&A expenses, $12 and $61 (note g),
additional interest expense related to the transactional costs of $38 and
$154 (note e), a reclassification of the management fee to special
distribution of $371 and $1,483 (note f), increase in loan payable related
to additional financing, $1,708, and payment of transactional costs, $1,708
(note c). The net change in cash flow resulting from consolidation
transaction has been applied to distributions paid.
138
<PAGE>
Charter Municipal Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt Fund, L.P.)
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
(Dollars in thousands)
(i) Historical statement of cash flow of Summit Tax Exempt Bond Fund L.P. has
been adjusted to reflect the changes caused by applying the purchase method
of accounting. For the periods ending March 31, 1997 and December 31, 1996
respectively, net historical income increased $94 and $390, amortization of
deferred bond selection fees and financing fees decreased $70 and $278,
amortization of deferred income decreased $65 and $262, and an increase in
amortization of the deferred credit, the excess of acquired net assets over
costs $89 and $374.
(j) Equivalent pro forma data has been calculated by multiplying the Company
pro forma amounts by the exchange ratio (below) for each participating
partnership, so that the Company per share pro forma amounts are equated to
the respective values for one unit of the respective partnership.
Exchange Ratio:
(1 unit=X shares)
Tax I 0.9560
Tax II 1.0811
139
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III)
Pro Forma Consolidated Balance Sheet
As of March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax II-At Tax III-At Historical
Historical Cost Historical Cost Combined Totals
----------------- ----------------- -----------------
<S> <C> <C> <C>
ASSETS
Participating first mortgage bonds,
at fair value $148,130 $44,770 $192,900
Temporary investments 3,300 100 3,400
Cash and cash equivalents 1,114 274 1,388
Promissory notes receivable, net 242 -- 242
Deferred bond selection fees, net 1,759 652 2,411
Interest receivable, net 531 128 659
Other assets 11 4 15
-------- ------- --------
Total assets $155,087 $45,928 $201,015
======== ======= ========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Loan payable $ -- $ -- $ --
Deferred income 384 -- 384
Accounts payable and accrued
expenses 81 119 200
Due to affiliates 405 214 619
Excess of acquired net assets
over cost -- -- --
-------- ------- --------
Total liabilities 870 333 1,203
-------- ------- --------
Partners' capital (deficit):
BUC$holders 160,519 48,950 209,469
General Partners (186) (175) (361)
Net unrealized loss on participating
first mortgage bonds (6,116) (3,180) (9,296)
-------- ------- --------
Total partners' capital 154,217 45,595 199,812
-------- ------- --------
Total liabilities and partners' capital $155,087 $45,928 $201,015
======== ======= ========
<CAPTION>
Purchase Tax II At Consolidation
Accounting Pro Historical Cost & Transaction Pro
Forma Tax III At Fair Forma The Company
Adjustments Value Adjustments Pro Forma
---------------- ----------------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Participating first mortgage bonds,
at fair value $192,900 $192,900
Temporary investments 3,400 3,400
Cash and cash equivalents 1,388 1,388
Promissory notes receivable, net 242 242
Deferred bond selection fees, net $ (652) (a) 1,759 1,759
Interest receivable, net 659 659
Other assets 15 15
-------- --------
Total assets $200,363 200,363
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Loan payable $ -- $ 1,245 (c) $ 1,245
Deferred income 384 384
Accounts payable and accrued
expenses 200 200
Due to affiliates 619 619
Excess of acquired net assets
over cost 1,911 (a) 1,911 1,911
-------- -------- --------
Total liabilities 3,114 4,359
-------- --------
Partners' capital (deficit):
BUC$holders (5,628) (a) 203,841 (203,841) (b) --
General Partners (115) (a) (476) 476 (b) --
Net unrealized loss on participating
first mortgage bonds 3,180 (a) (6,116) 6,116 (b) --
-------- -------- -------- --------
Total partners' capital 197,249 --
-------- --------
Total liabilities and partners' capital $200,363 $ --
======== ========
Beneficial owners' equity; 50,000,000 shares
authorized; 12,913,254 shares issued and outstanding
Beneficial owners' equity-manager 3,050 (b) $ 3,031
(19) (c)
(1,226) (c)
Beneficial owners' equity-shareholders 200,315 (b) 199,089
Net unrealized loss on participating first mortgage bonds (6,116) (b) (6,116)
--------
Total liabilities and equity 196,004
--------
$200,363
========
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
140
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III)
Pro Forma Consolidated Income Statement
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Tax Exempt II- Tax Exempt III- Total Historical Pro Forma The Company Pro
Historical Cost Historical Cost Partnerships Adjustments Forma
--------------- --------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income from participating
first mortgage bonds $2,717 $706 $3,423 $ 48 (d) $3,471
Interest income from promissory
notes 32 -- 32 32
Interest income from temporary
investments 8 2 10 10
------ ---- ------ ------
Total revenues 2,757 708 3,465 3,513
------ ---- ------ ------
EXPENSES
Interest expense -- -- -- 28 (e) 28
Management fees 203 -- 203 (203) (f) --
General and administrative 86 47 133 (16) (g) 117
Loan servicing fees 100 32 132 132
Amortization of deferred bond
selection fees 46 15 61 (15) (d) 46
------ ---- ------ ------ ------
Total expenses 435 94 529 323
------ ---- ------ ------
Net income $2,322 $614 $2,936 3,190
====== ==== ====== ======
Special distribution to manager 201
------
Net income available to shareholders $2,989
======
Net income per share, 12,913,254 shares outstanding during the period $ 0.23
======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
141
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III)
Pro Forma Consolidated Income Statement
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Tax Exempt II- Tax Exempt III- Total Historical Pro Forma The Company Pro
Historical Cost Historical Cost Partnerships Adjustments Forma
--------------- --------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income from participating
first mortgage bonds $11,647 $3,074 $14,721 $ 204 (d) $14,925
Interest income from promissory
notes 27 -- 27 27
Interest income from temporary
investments 138 12 150 150
------- ------ ------- -------
Total revenues 11,812 3,086 14,898 15,102
------- ------ ------- -------
EXPENSES
Interest expense -- -- -- 112 (e) 112
Management fees 811 -- 811 (811) (f) --
General and administrative 566 239 805 (70) (g) 735
Loan servicing fees 405 131 536 536
Amortization of deferred bond
selection fees 185 62 247 (62) (d) 185
Loss on impairment of assets 4,000 -- 4,000 4,000
------- ------ ------- -------
Total expenses 5,967 432 6,399 5,568
------- ------ ------- -------
Net income $ 5,845 $2,654 $ 8,499 9,534
======= ====== ======= =======
Special distribution to manager 805
-------
Net income available to shareholders $ 8,729
=======
Net income per share, 12,913,254 shares outstanding during the period $ 0.68
=======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
142
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III)
Pro Forma Consolidated Cash Flows
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax II At
Historical Cost
Tax Exempt II- Tax Exempt III, At & Tax III At Pro Forma The Company
Historical Cost Fair Value (i) Fair Value Adjustments Pro Forma
--------------- ------------------ --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Interest received $ 2,946 $ 745 $ 3,691 $ 3,691
Amount received which was due
from affiliate 84 -- 84 84
Fees and expenses paid (70) (39) (109) $ 219 (h) 110
Interest paid -- -- -- (28) (h) (28)
------- ----- ------- ------ -------
Net cash provided by operating
activities 2,960 706 3,666 3,857
------- ----- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES
Net sale of temporary investments 300 200 500 500
Principal payments received from
loans made to properties 33 -- 33 33
------- ----- ------- -------
Net cash provided by investment
activities 333 200 533 533
------- ----- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase in Loan Payable related
to additional financing -- -- -- 1,245 (h) 1,245
Payment of transaction costs -- -- -- (1,245) (h) (1,245)
Distributions paid (2,428) (692) (3,120) 28 (h) (3,311)
(203) (h)
(16) (h)
------
Net cash used in financing
activities (2,428) (692) (3,120) (3,311)
------- ----- ------- -------
Net increase in cash and cash
equivalents 865 214 1,079 1,079
Cash and cash equivalents at
beginning of period 249 60 309 309
------- ----- ------- -------
Cash and cash equivalents at end
of period $ 1,114 $ 274 $ 1,388 $ 1,388
======= ===== ======= =======
</TABLE>
(continued)
143
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III
Pro Forma Consolidated Cash Flows
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax II At
Historical Cost
Tax Exempt II- Tax Exempt III, At & Tax III At Pro Forma The Company
Historical Cost Fair Value (i) Fair Value Adjustments Pro Forma
--------------- ------------------ --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
SCHEDULE RECONCILING NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $2,322 $677 $2,999 $ (28) (h) $3,190
------ ----- ------ -------- ------
Adjustments to reconcile net 203 (h)
income to net cash provided by 16 (h)
operating activities:
Accretion of deferred income (17) -- (17) (17)
Amortization of deferred bond
selection fees 46 -- 46 46
Amortization of excess of
acquired net assets over cost -- (48) (48) (48)
Changes in operating assets and
liabilities:
Decrease in interest receivable 205 37 242 242
(Increase) decrease in other
assets 13 (4) 9 9
Decrease in accounts payable
and accrued expenses (26) (5) (31) (31)
Decrease in due from affiliates 84 -- 84 84
Increase in due to affiliates 333 49 382 382
------ ----- ------ ------
Total adjustments 638 29 667 667
------ ----- ------ ------
Net cash provided by operating
activities $2,960 $706 $3,666 $3,857
====== ===== ====== ======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
144
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III
Pro Forma Consolidated Cash Flows
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax II At
Historical Cost
Tax Exempt II- Tax Exempt III, At & Tax III At Pro Forma The Company
Historical Cost Fair Value (i) Fair Value Adjustments Pro Forma
--------------- ------------------ --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Interest received $11,910 $ 3,054 $ 14,964 $ 14,964
Fees and expenses paid (1,895) (263) (2,158) $ 881 (h) (1,277)
Interest paid -- -- -- (112) (h) (112)
------- ------- -------- ------ --------
Net cash provided by operating
activities 10,015 2,791 12,806 13,575
------- ------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES
Net purchase of temporary
investments (800) (50) (850) (850)
Loan made to properties (300) -- (300) (300)
Principal payments received from
loans made to properties 73 -- 73 73
------- ------- -------- --------
Net cash used in investment
activities (1,027) (50) (1,077) (1,077)
------- ------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase in Loan Payable related
to additional financing -- -- -- 1,245 (h) 1,245
Payment of transaction costs -- -- -- (1,245) (h) (1,245)
Distributions paid (9,712) (3,029) (12,741) 112 (h) (13,510)
(811) (h)
(70) (h)
--------
Net cash used in financing
activities (9,712) (3,029) (12,741) (13,510)
------- ------- -------- --------
Net decrease in cash and cash
equivalents (724) (288) (1,012) (1,012)
Cash and cash equivalents at
beginning of period 973 348 1,321 1,321
------- ------- -------- --------
Cash and cash equivalents at end
of year $ 249 $ 60 $ 309 $ 309
======= ======= ======== ========
</TABLE>
(continued)
145
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III
Pro Forma Consolidated Cash Flows
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax II At
Historical Cost
Tax Exempt II- Tax Exempt III, At & Tax III At Pro Forma The Company
Historical Cost Fair Value (i) Fair Value Adjustments Pro Forma
--------------- ------------------ --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SCHEDULE RECONCILING NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $ 5,845 $2,920 $ 8,765 $ (112) (h) $ 9,534
------- ------ ------- ------ --------
Adjustments to reconcile net 811 (h)
income to net cash provided by 70 (h)
operating activities:
Accretion of deferred income (66) -- (66) (66)
Amortization of deferred bond
selection fees 185 -- 185 185
Amortization of excess of
acquired net assets over cost -- (204) (204) (204)
Loss on impairment of assets 4,000 -- 4,000 4,000
Changes in operating assets and liabilities:
Decrease in promissory notes
receivable, net 22 -- 22 22
(Increase) decrease in interest
receivable 164 (32) 132 132
(Increase) decrease in other
assets (11) 4 (7) (7)
Decrease in deferred income (23) -- (23) (23)
(Increase) decrease in
accounts payable and
accrued expenses (25) 46 21 21
Decrease in due from
affiliates (84) -- (84) (84)
Increase in due to affiliates 8 57 65 65
------- ------ ------- -------
Total adjustments 4,170 (129) 4,041 4,041
------- ------ ------- -------
Net cash provided by operating
activities $10,015 $2,791 $12,806 $13,575
======= ====== ======= =======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
146
<PAGE>
Charter Municipal Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III)
Supplemental Pro Forma Per Share/Unit Data (j)
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
<TABLE>
<CAPTION>
Book Value Distributions Net Income
As of Year Ended Year Ended
March 31, 1997 March 31, 1997 March 31, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Pro forma-the Company (Per Share) $15.18 $0.2446 $0.23
Historical-Tax II (Per Unit) 16.89 0.2600 0.25
Equivalent pro forma-Tax II (Per Unit) 16.41 0.2644 0.25
Historical-Tax III (Per Unit) 14.87 0.2200 0.17
Equivalent pro forma-Tax III (Per Unit) 13.92 0.2243 0.21
</TABLE>
<TABLE>
<CAPTION>
Book Value Distributions Net Income
As of Year Ended Year Ended
December 31, 1996 December 31, 1996 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C>
Pro forma-the Company (Per Share) N/A $0.9839 $0.68
Historical-Tax II (Per Unit) N/A 1.0400 0.63
Equivalent pro forma-Tax II (Per Unit) N/A 1.0637 0.74
Historical-Tax III (Per Unit) N/A 0.8800 0.76
Equivalent pro forma-Tax III (Per Unit) N/A 0.9022 0.62
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
147
<PAGE>
Charter Municipal Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III)
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
(Dollars in thousands)
(a) The historical balance sheet of Summit Tax Exempt L.P. III has been
adjusted to reflect the impact of applying the purchase method of
accounting to this transaction. The net assets of this partnership are
being adjusted to their estimated fair value of $43,032. The estimated fair
value was determined by the Related General Partner and the Manager based
on the adjusted net asset value. The adjusted net asset value is equal to
the (i) amount the partnership would receive under the terms of the first
mortgage bonds if the underlying properties collateralizing the
partnership's mortgage bonds were sold for an amount equal to the appraised
value net of third party expenses plus, (ii) any undistributed cash and
other assets less, (iii) any outstanding liabilities owned by the
partnership.
The effect of purchase accounting on the balance sheet results in the
following adjustments: (i) deferred bond selection fee, net, has been
eliminated resulting from this intangible item being assigned no value,
(ii) the net unrealized loss on participating first mortgage bonds has been
eliminated, because the bonds' fair value becomes their cost basis, (iii) a
deferred credit resulting from an excess of acquired net assets over cost
has been added, and (iv), the net effect of those changes to the assets and
liabilities has been applied to the partner's capital account.
(b) Represents reclassification of the existing partners' capital to beneficial
owners' equity and in accordance with the terms of the consolidation, the
contribution to the Company by Related Charter L.P. of a portion of
Prudential - Bache Properties, Inc.'s former general partner interest which
results in a 1.5% ownership of shares by Related Charter L.P.s.
(c) Represents the additional financing obtained as a result of the
transactional costs expected to be incurred. These transactional costs are
expected to equal $1,245 and will be recorded as a reduction to beneficial
owners' equity.
(d) Represents the following adjustments to Summmit Tax Exempt L.P. III due to
it being recorded at its fair values in applying the purchase method of
accounting: (i) the elimination of the historical amortization of deferred
bond selection fees because this intangible item was assigned no value
under purchase accounting and, (ii) the amortization of the deferred
credit, the excess of acquired net assets over costs, (included in interest
income from participating first mortgage bonds) using the straight line
method over 10 years, which approximates the average remaining term to
maturity of the participating first mortgage bonds.
(e) Represents interest expense at an assumed annual rate of 9% on the
financing of the transactional costs expected to be incurred.
(f) Historically, the partnership agreements have provided for the general
partners of Summit Tax Exempt L.P. II to receive a partnership management
fee of .5% of total invested assets and the general partners of Summit Tax
Exempt L.P. III to receive a special distribution of .5% of total invested
assets. In accordance with the terms of the consolidation, the historical
partnership management fee for Summit Tax Exempt L.P. II has been
reclassified to a special distribution. Also under the terms of
consolidation, the special distributions are reduced to .375% per annum of
total invested assets.
(g) Pursuant to the terms of the consolidation as outlined in the Management
Agreement, reimbursement of overhead costs is limited to a maximum of $200
annually for all three partnerships, pro rata for the minimum scenario,
subject to certain adjustments. Thus, for the periods ending March 31, 1997
and December 31, 1996, overhead costs are limited to $31 and $120,
respectively. The historical overhead costs for these periods of $47 and
$190 have therefore been reduced by $16 to equal $31 for the three months
and by $70 to equal $120 for a full year.
(h) Represents the cash flow statement effect for the periods ending March 31,
1997 and December 31, 1996, for the following pro forma adjustments
described above: reduction of G&A expenses, $16 and $70 (note g),
additional interest expense related to the transactional costs of $28 and
$112 (note e), a reclassification of the management fee for Summit Tax
Exempt L.P. II to special distribution of $203 and $811 (note f), increase
in loan payable related to additional financing, $1,245, and payment of
transactional costs, $1,245 (note c). The net change in cash flow resulting
from the consolidation transaction has been applied to distributions paid.
(i) Historical statement of cash flow of Summit Tax Exempt L.P. III has been
adjusted to reflect the changes caused by applying the purchase method of
accounting. For the periods ending March 31, 1997 and December 31, 1996
respectively, net historical income increased $63 and $266, amortization of
deferred bond selection fees and financing fees decreased $15 and $62, and
an increase in amortization of the deferred credit, the excess of acquired
net assets over costs $48 and $204.
148
<PAGE>
Charter Municipal Acceptance Company--Minimum Participation
(Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III)
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
(Dollars in thousands)
(j) Equivalent pro forma data has been calculated by multiplying the Company
pro forma amounts by the exchange ratio (below) for each participating
partnership, so that the Company per share pro forma amounts are equated to
the respective values for one unit of the respective partnership.
Exchange Ratio:
(1 unit=X shares)
Tax II 1.0811
Tax III 0.9170
149
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
See accompanying notes to pro forma consolidated financial statements.
(Summit Tax Exempt Bond Fund L.P. and Summit Tax Exempt L.P. III)
Pro Forma Consolidated Balance Sheet
As of March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax Exempt I-At Tax III-At Historical
Historical Cost Historical Cost Combined Totals
----------------- ----------------- -----------------
<S> <C> <C> <C>
ASSETS
Participating first mortgage bonds,
at fair value $123,397 $44,770 $168,167
Temporary investments 1,150 100 1,250
Cash and cash equivalents 853 274 1,127
Promissory notes receivable, net 6,650 -- 6,650
Deferred bond selection fees, net 1,521 652 2,173
Interest receivable, net 725 128 853
Other assets 111 4 115
-------- ------- --------
Total assets $134,407 $45,928 $180,335
======== ======= ========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Loan payable $ 13,681 $ -- $ 13,681
Deferred income 921 -- 921
Accounts payable and accrued
expenses 88 119 207
Due to affiliates 331 214 545
Excess of acquired net assets
over cost -- -- --
-------- ------- --------
Total liabilities 15,021 333 15,354
-------- ------- --------
Partners' capital (deficit):
BUC$holders 124,105 48,950 173,055
General Partners (385) (175) (560)
Net unrealized loss on participating
first mortgage bonds (4,334) (3,180) (7,514)
-------- ------- --------
Total partners' capital 119,386 45,595 164,981
-------- ------- --------
Total liabilities and partner's capital $134,407 $45,928 $180,335
======== ======= ========
<CAPTION>
Purchase Tax I At Consolidation
Accounting Pro Historical Cost & Transaction Pro
Forma Tax III At Fair Forma The Company
Adjustments Value Adjustments Pro Forma
--------------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Participating first mortgage bonds,
at fair value $168,167 $168,167
Temporary investments 1,250 1,250
Cash and cash equivalents 1,127 1,127
Promissory notes receivable, net 6,650 6,650
Deferred bond selection fees, net $ (652) (a) 1,521 1,521
Interest receivable, net 853 853
Other assets 115 115
-------- --------
Total assets $179,683 179,683
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Loan payable $ 13,681 $ 1,016 (c) $ 14,697
Deferred income 921 921
Accounts payable and accrued
expenses 207 207
Due to affiliates 545 545
Excess of acquired net assets
over cost 1,911 (a) 1,911 1,911
---------- -------- --------
Total liabilities 17,265 18,281
-------- --------
Partners' capital (deficit):
BUC$holders (5,628) (a) 167,427 (167,427) (b) --
General Partners (115) (a) (675) 675 (b) --
Net unrealized loss on participating
first mortgage bonds 3,180 (a) (4,334) 4,334 (b) --
-------- -------- --------- --------
Total partners' capital 162,418 --
-------- --------
Total liabilities and partner's capital $179,683 $ --
======== ========
Beneficial owners' equity; 50,000,000 shares
authorized; 10,541,918 shares issued and outstanding
Beneficial owners' equity-manager 2,501 (b) $ 2,486
(15) (c)
(1,001) (c)
Beneficial owners' equity-shareholders 164,251 (b) 163,250
Net unrealized loss on participating first mortgage bonds (4,334) (b) (4,334)
--------
Total liabilities and equity 161,402
--------
$179,683
========
</TABLE>
150
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt Bond Fund, L.P. and Summit Tax Exempt L.P. III)
Pro Forma Consolidated Income Statement
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Tax Exempt I- Tax Exempt III- Total Historical Pro Forma The Company Pro
Historical Cost Historical Cost Partnerships Adjustments Forma
--------------- --------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income from participating
first mortgage bonds $2,143 $706 $2,849 $ 48 (d) $2,897
Interest income from promissory
notes 136 -- 136 136
Interest income from temporary
investments 12 2 14 14
------- ----- ------- -------
Total revenues 2,291 708 2,999 3,047
------- ----- ------- -------
EXPENSES
Interest expense 331 -- 331 23 (e) 354
Management fees 168 -- 168 (168) (f) --
General and administrative 156 47 203 (9) (g) 194
Loan servicing fees 83 32 115 115
Amortization of deferred bond
selection fees 38 15 53 (15) (d) 38
Amortization of deferred financing
fees 32 -- 32 32
------- ----- ------- -------
Total expenses 808 94 902 733
------- ----- ------- -------
Net income $1,483 $614 $2,097 2,314
======= ===== ======= =======
Special distribution to manager 175
-------
Net income available to shareholders $2,139
=======
Net income per share, 10,541,918 shares outstanding during the period $ 0.20
=======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
151
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt Bond Fund, L.P. and Summit Tax Exempt L.P. III)
Pro Forma Consolidated Income Statement
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Tax Exempt I- Tax Exempt III- Total Historical Pro Forma The Company Pro
Historical Cost Historical Cost Partnerships Adjustments Forma
--------------- --------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income from participating
first mortgage bonds $9,155 $3,075 $12,230 $ 204(d) $12,434
Interest income from promissory
notes 571 -- 571 571
Interest income from temporary
investments 73 12 85 85
------ ------ ------- -------
Total revenues 9,799 3,087 12,886 13,090
------ ------ ------- -------
EXPENSES
Interest expense 1,322 -- 1,322 91 (e) 1,413
Management fees 672 -- 672 (672) (f) --
General and administrative 665 239 904 (26) (g) 878
Loan servicing fees 335 131 466 466
Amortization of deferred bond
selection fees 150 62 212 (62) (d) 150
Amortization of deferred financing
fees 128 -- 128 128
------ ------ ------- -------
Total expenses 3,272 432 3,704 3,035
------ ------ ------- -------
Net income $6,527 $2,655 $ 9,182 10,055
====== ====== ======= =======
Special distribution to manager 701
-------
Net income available to shareholders $ 9,354
=======
Net income per share, 10,541,918 shares outstanding during the period $ 0.89
========
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
152
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt Bond Fund, L.P. and Summit Tax Exempt L.P. III)
Pro Forma Consolidated Cash Flows
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax I At
Historical Cost
Tax Exempt I- Tax Exempt III, At & Tax III At Pro Forma The Company
Historical Fair Value (i) Fair Value Adjustments Pro Forma
------------- ------------------ --------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Interest received $ 2,436 $ 745 $ 3,181 $ 3,181
Loan made to property affiliates (111) -- (111) (111)
Amount paid which was due to
affiliate (84) -- (84) (84)
Fees and expenses paid (137) (39) (176) $ 177 (h) 1
Interest paid (331) -- (331) (23) (h) (354)
------- ----- ------- -------- -------
Net cash provided by operating
activities 1,773 706 2,479 2,633
------- ----- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES
Net sale of temporary investments 500 200 700 700
Principal payments received from
loans made to properties 30 -- 30 30
------- ----- ------- -------
Net cash provided by investment
activities 530 200 730 730
------- ----- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase in Loan Payable related
to additional financing -- -- -- 1,016 (h) 1,016
Payment of transaction costs -- -- -- (1,016) (h) (1,016)
Distributions paid (1,694) (692) (2,386) 23 (h) (2,540)
(168) (h)
(9) (h)
-------
Net cash used in financing
activities (1,694) (692) (2,386) (2,540)
------- ----- ------- -------
Net increase in cash and cash
equivalents 609 214 823 823
Cash and cash equivalents at
beginning of period 244 60 304 304
------- ----- ------- -------
Cash and cash equivalents at end
of period $ 853 $ 274 $ 1,127 $ 1,127
======= ===== ======= =======
</TABLE>
(continued)
153
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt Bond Fund, L.P. and Summit Tax Exempt L.P. III)
Pro Forma Consolidated Cash Flows
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax I At
Historical Cost
Tax Exempt I- Tax Exempt III, At & Tax III At Pro Forma The Company
Historical Fair Value (i) Fair Value Adjustments Pro Forma
------------- ------------------ --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
SCHEDULE RECONCILING NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $1,483 $677 $2,160 $ (23) (h) $2,314
------ ----- ------ ------- ------
Adjustments to reconcile net 168 (h)
income to net cash provided by 9 (h)
operating activities:
Amortization of deferred
income (65) -- (65) (65)
Amortization of deferred bond
selection fees 38 -- 38 38
Amortization of deferred
financing fees 32 -- 32 32
Amortization of excess of
acquired net assets over cost -- (48) (48) (48)
Changes in operating assets and liabilities:
Decrease in interest
receivable 100 37 137 137
(Increase) decrease in other
assets 10 (4) 6 6
Decrease in accounts payable
and accrued expenses (14) (5) (19) (19)
Increase in due to affiliates 189 49 238 238
------ ----- ------ ------
Total adjustments 290 29 319 319
------ ----- ------ ------
Net cash provided by operating
activities $1,773 $706 $2,479 $2,633
====== ===== ====== ======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
154
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt Bond Fund, L.P. and Summit Tax Exempt L.P. III)
Pro Forma Consolidated Cash Flows
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax I At
Historical Cost
Tax Exempt I- Tax Exempt III, At & Tax III At Pro Forma The Company
Historical Fair Value (i) Fair Value Adjustments Pro Forma
------------- ------------------ --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Interest received $ 9,816 $ 3,054 $12,870 $ 12,870
Loan made to property affiliates (274) -- (274) (274)
Fees and expenses paid (1,611) (263) (1,874) $ 698 (h) (1,176)
Interest paid (1,322) -- (1,322) (91) (h) (1,413)
------- ------- ------- ---------- --------
Net cash provided by operating
activities 6,609 2,791 9,400 10,007
------- ------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES
Net purchase of temporary
investments (300) (50) (350) (350)
------- ------- ------- --------
Net cash used in investment
activities (300) (50) (350) (350)
------- ------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES
Principal repayments on
promissory note 86 -- 86 86
Increase in Loan Payable related
to additional financing -- -- -- 1,016 (h) 1,016
Payment of transaction costs -- -- -- (1,016) (h) (1,016)
Distributions paid (6,777) (3,029) (9,806) 91 (h) (10,413)
(672) (h)
(26) (h)
---------
Net cash used in financing
activities (6,691) (3,029) (9,720) (10,327)
------- ------- ------- --------
Net decrease in cash and cash
equivalents (382) (288) (670) (670)
Cash and cash equivalents at
beginning of year 626 348 974 974
------- ------- ------- --------
Cash and cash equivalents at end
of year $ 244 $ 60 $ 304 $ 304
======= ======= ======= ========
</TABLE>
(continued)
155
<PAGE>
Charter Municipal Mortgage Acceptance Company--Minimum Participation
(Summit Tax Exempt Bond Fund, L.P. and Summit Tax Exempt L.P. III)
Pro Forma Consolidated Cash Flows
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Tax I At
Historical Cost
Tax Exempt I- Tax Exempt III, At & Tax III At Pro Forma The Company
Historical Fair Value (i) Fair Value Adjustments Pro Forma
------------- ------------------ --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
SCHEDULE RECONCILING NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $6,527 $2,921 $9,448 $ (91) (h) $10,055
------ ------ ------ -------
Adjustments to reconcile net 672 (h)
income to net cash provided by 26 (h)
operating activities:
Amortization of deferred
income (262) -- (262) (262)
Amortization of deferred bond
selection fees 150 -- 150 150
Amortization of deferred
financing fees 128 -- 128 128
Amortization of excess of
acquired net assets over cost -- (204) (204) (204)
Changes in operating assets and liabilities:
Decrease in promissory notes
receivable, net 57 -- 57 57
(Increase) decrease in interest
receivable 4 (33) (29) (29)
(Increase) decrease in other
assets (10) 4 (6) (6)
Decrease in deferred income (57) -- (57) (57)
(Increase) decrease in
accounts payable and
accrued expenses (23) 46 23 23
Increase in due to affiliates 95 57 152 152
------ ------ ------ -------
Total adjustments 82 (130) (48) (48)
------ ------ ------ -------
Net cash provided by operating
activities $6,609 $2,791 $9,400 $10,007
====== ====== ====== =======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
156
<PAGE>
Charter Municipal Acceptance Company--Minimum Participation
(Summit Tax Exempt Bond Fund L.P. and Summit Tax Exempt L.P. III)
Supplemental Pro Forma Per Share/Unit Data (j)
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
<TABLE>
<CAPTION>
Book Value Distributions Net Income
As of Year Ended Year Ended
March 31, 1997 March 31, 1997 March 31, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Pro forma-the Company (Per Share) $15.31 $0.2290 $0.20
Historical-Tax I (Per Unit) 15.16 0.2100 0.18
Equivalent pro forma-Tax I (Per Unit) 14.64 0.2189 0.19
Historical-Tax III (Per Unit) 14.87 0.2200 0.17
Equivalent pro forma-Tax III (Per Unit) 14.04 0.2100 0.18
</TABLE>
<TABLE>
<CAPTION>
Book Value Distributions Net Income
As of Year Ended Year Ended
December 31, 1996 December 31, 1996 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Pro forma-the Company (Per Share) N/A $0.9213 $0.89
Historical-Tax I (Per Unit) N/A 0.8400 0.81
Equivalent pro forma-Tax I (Per Unit) N/A 0.8807 0.85
Historical-Tax III (Per Unit) N/A 0.8800 0.76
Equivalent pro forma-Tax III (Per Unit) N/A 0.8448 0.82
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
157
<PAGE>
Charter Municipal Acceptance Company--Minimum Participation
(Summit Tax Exempt Bond Fund, L.P. and Summit Tax Exempt L.P. III)
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
(Dollars in thousands)
(a) The historical balance sheet of Summit Tax Exempt L.P. III has been adjusted
to reflect the impact of applying the purchase method of accounting to this
transaction. The net assets of this partnership are being adjusted to their
estimated fair value of $43,032. The estimated fair value was determined by
the Related General Partner and the Manager based on the adjusted net asset
value. The adjusted net asset value is equal to the (i) amount the
partnership would receive under the terms of the first mortgage bonds if the
underlying properties collateralizing the partnership's mortgage bonds were
sold for an amount equal to the appraised vale net of third party expenses
plus, (ii) any undistributed cash and other assets less, (iii) any
outstanding liabilities owned by the partnership.
The effect of purchase accounting on the balance sheet results in the
following adjustments: (i) deferred bond selection fee, net, has been
eliminated resulting from this intangible item being assigned no value, (ii)
the net unrealized loss on participating first mortgage bonds has been
eliminated, because the bonds' fair value becomes their cost basis, (iii) a
deferred credit resulting from an excess of acquired net assets over cost
has been added, and (iv) the net effect of those changes to the assets and
liabilities has been applied to the partners' capital account.
(b) Represents reclassification of the existing partner's capital to beneficial
owners' equity and in accordance with the terms of the consolidation, the
contribution to the Company by Related Charter L.P. of a portion of
Prudential - Bache Properties, Inc.'s former general partner interest which
results in a 1.5% ownership of shares by Related Charter L.P.s.
(c) Represents the additional financing obtained as a result of the
transactional costs expected to be incurred. These transactional costs are
expected to equal $1,016 and will be recorded as a reduction to beneficial
owners' equity.
(d) Represents the following adjustments to Summit Tax Exempt L.P. III due to
their being recorded at their fair values in applying the purchase method of
accounting: (i) the elimination of the historical amortization of deferred
bond selection fees because this intangible item was assigned no value under
purchase accounting and, (ii) the amortization of the deferred credit, the
excess of acquired net assets over costs, (included in interest income from
participating first mortgage bonds) using the straight line method over 10
years, which approximates the average remaining term to maturity of the
participating first mortgage bonds.
(e) Represents interest expense at an assumed annual rate of 9% on the financing
of the transactional costs expected to be incurred.
(f) Historically, the partnership agreements have provided for the general
partners of Summit Tax Exempt Bond Fund L.P. to receive a partnership
management fee of .5% of total invested assets and the general partners of
Summit Tax Exempt L.P. III to receive a special distribution of .5% of total
invested assets. In accordance with the terms of the consolidation, the
historical partnership management fee for Summit Tax Exempt Bond Fund L.P.
has been reclassified to a special distribution. Also under the terms of
consolidation, the special distributions are reduced to .375% per annum of
total invested assets.
(g) Pursuant to the terms of the consolidation as outlined in the Management
Agreement, reimbursement of overhead costs is limited to a maximum of $200
annually all three partnership, pro rata for the minimum scenario, subject
to certain adjustments. Thus, for the periods ending March 31, 1997 and
December 31, 1996, overhead costs are limited to $30 and $150, respectively.
The historical overhead costs for these periods of $39 and $176 have
therefore been reduced by $9 to equal $30 for the three months ended and by
$26 to equal $150 for a full year.
(h) Represents the cash flow statement effect for the periods ending March 31,
1997 and December 31, 1996, for the following pro forma adjustments
described above: reduction of G&A expenses, $9 and $26 (note g), additional
interest expense related to the transactional costs of $23 and $91 (note e),
a reclassification of the management fee for Summit Tax Exempt L.P. II to
special distribution of $168 and $672 (note f), increase in loan payable
related to additional financing, $1,016, and payment of transactional costs,
$1,016 (note c). The net change in cash flow resulting from the
consolidation transaction has been applied to distributions paid.
(i) Historical statement of cash flows of Summit Tax Exempt L.P. III has been
adjusted to reflect the changes caused by applying the purchase method of
accounting. For the periods ending March 31, 1997 and December 31, 1996
respectively, net historical income increased $63 and $266, amortization of
deferred bond selection fees decreased $15 and $62, and an increase in
amortization of the deferred credit, the excess of acquired net assets over
costs $48 and $204.
158
<PAGE>
Charter Municipal Acceptance Company--Minimum Participation
(Summit Tax Exempt Bond Fund, L.P. and Summit Tax Exempt L.P. III)
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
(Dollars in thousands)
(j) Equivalent pro forma data has been calculated by multiplying the Company
pro forma amounts by the exchange ratio (below) for each participating
partnership, so that the Company per share pro forma amounts are equated to
the respective values for one unit of the respective partnership.
Exchange Ratio:
(1 unit=X shares)
Tax I 0.9560
Tax III 0.9170
159
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
Charter Municipal Mortgage Acceptance Company
New York, New York
We have audited the accompanying balance sheet of Charter Municipal
Mortgage Acceptance Company as of May 29, 1997. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of Charter Municipal Mortgage Acceptance
Company as of May 29, 1997 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
New York, New York
May 29, 1997
160
<PAGE>
Charter Municipal Mortage Acceptance Company
Balance Sheet
May 29, 1997
ASSET
Cash $1,000
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Commitments and contingencies
Beneficial owner's equity--shareholder
(1,000 shares authorized, issued and outstanding) $1,000
======
See accompanying notes to balance sheet.
161
<PAGE>
Charter Municipal Mortgage Acceptance Company
Notes To Balance Sheet
May 29, 1997
NOTE 1--General
Charter Municipal Mortgage Acceptance Company, formerly Summit Tax Exempt
Trust, (the "Company") was formed on August 12, 1996 as a Delaware business
trust for the primary purpose of generating distributable tax-exempt income
through a consolidation of limited partnerships (the "Partnerships") owning a
portfolio of (i) thirty-one tax-exempt participating first mortgage revenue
bonds ("FMBs") issued by various state or local governments or their agencies
or authorities secured by first mortgage loans on thirty-one underlying
properties and (ii) seven taxable second mortgage loans advanced to the
obligors of certain FMBs in conjunction with sale, modification and forbearance
agreements with respect to the FMBs secured by second mortgages on the
underlying properties.
On May 5, 1997 the Company issued 1,000 shares of beneficial interest at
$1.00 per share in exchange for $1,000 cash from Related Capital Company, an
affiliate of the Company.
Upon consummation of the consolidation, assuming 100% participation by the
Partnerships, 20,277,587 shares will be issued to the former limited partners
of the Partnerships, 205,864 shares will be issued to the former affiliated
general partners of the Partnership and 102,932 shares will be issued to
Related Charter LP, the manager of the Company (the "Manager").
The Company's Trust Agreement authorizes the Board of Trustees to classify
or reclassify any unissued shares, to provide for the issuance of beneficial
interests of the Company in other classes or series, including preferred
beneficial interests in one or more series, to establish the number of
beneficial interests in each class or series and to fix the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
distributions, qualifications or terms or conditions of redemption of such
class or series. The Company has no present intention to issue beneficial
interests of any class or series other than the shares of beneficial interest
issuable in connection with the consolidation.
As of May 29, 1997, the Company has not commenced operations.
NOTE 2--Related Party Transactions
Upon consummation of the consolidation, the Company shall enter into an
agreement with Related Charter LP, an affiliate of Related Capital Company, to
act as manager of the Company (the "Management Agreement"). The Manager will
receive (i) bond selection fees based on the principal amount of each FMB or
other tax exempt instrument acquired or originated by the Company; (ii) special
distributions calculated as a percentage of total invested assets by the
Company; (iii) loan servicing fees based on the outstanding principal amount of
FMBs; (iv) a liquidation fee based on the gross sales price of assets sold by
the Company in connection with a liquidation of the Company's assets; and (v)
reimbursement of certain administrative costs incurred by the Manager on behalf
of the Company.
The original term of the Management Agreement will terminate on the fourth
anniversary of the date of the consummation of the consolidation (the
"Effective Date"). Thereafter, the Management Agreement may be renewed annually
by the Company, subject to an evaluation of the performance of the Manager by
the Board of Trustees. The Management Agreement cannot be terminated by the
Company prior to the fourth anniversary of the Effective Date, other than for
gross negligence or willful misconduct of the Manager and by a majority vote of
the Company's independent trustees. The Management Agreement may be terminated
without cause by the Manager.
The Company cannot dissolve and liquidate prior to the fourth anniversary
of the Effective Date except upon a recommendation of the Manager and the
majority vote of shareholders. After the fourth anniversary of the Effective
Date, the vote of the holders of 662/3% of the Company's then outstanding
shares of beneficial interest is required to approve a dissolution and
liquidation of the Company that is not recommended by the Manager and the
majority vote of shareholders is required to approve a liquidation of the
Company recommended by the Manager. If for any reason, whether prior to or
after the fourth anniversary of the Effective Date, the Management Agreement is
terminated in accordance with its terms, the Company may dissolve and liquidate
upon the majority vote of its shareholders.
NOTE 3--Income Taxes
The Company is not required to provide for, or pay, any federal income
taxes. Income tax attributes that arise from its operation are passed directly
to the individual shareholders. The Company may be subject to state and local
taxes in jurisdictions in which it operates.
NOTE 4--Commitments and Contingencies
The Company will be liable for expenses of the consolidation. Assuming all
of the limited partnerships participate in the consolidation, such expenses are
presently estimated to be approximately $1,984,000.
162
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners of
Related Charter LP
New York, New York
We have audited the accompanying balance sheet of Related Charter LP as of
May 29, 1997. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of Related Charter LP as of May 29, 1997 in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
New York, New York
May 29, 1997
163
<PAGE>
Related Charter LP
Balance Sheet
May 29, 1997
ASSET
Cash $1,000
======
LIABILITIES AND PARTNERS' CAPITAL
Commitments and Contingencies
Partners' Capital
General Partner $ 10
Limited Partners 990
------
Total Partners' Capital $1,000
======
See accompanying notes to balance sheet.
164
<PAGE>
Related Charter LP
Notes To Balance Sheet
May 29, 1997
NOTE 1--General
Related Charter LP (the "Company") was formed pursuant to the laws of the
state of Delaware on May 5, 1997 to act as the manager of Charter Municipal
Mortgage Acceptance Company ("Charter"), an affiliated entity. Charter was
formed on August 12, 1996 as a Delaware business trust for the primary purpose
of generating distributable tax-exempt income through a consolidation of
limited partnerships (the "Partnerships") owning a portfolio of (i) thirty-one
tax-exempt participating first mortgage revenue bonds ("FMBs") issued by
various state or local governments or their agencies or authorities secured by
first mortgage loans on thirty-one underlying properties and (ii) seven taxable
second mortgage loans advanced to the obligors of certain FMBs in conjunction
with sale, modification and forbearance agreements with respect to the FMBs
secured by second mortgages on the underlying properties.
The Company intends to purchase the non-affiliated general partner
interests in the Partnerships for an aggregate purchase price of $2,863,000
(assuming the non-affiliated general partner interests in each of the
Partnerships is acquired) and intends to finance the purchases by pledging such
interests. Upon consummation of the consolidation, assuming 100% participation
by the Partnerships, 20,277,587 shares of beneficial interest will be issued to
the former limited partners of the Partnerships, 205,864 shares will be issued
to the former affiliated general partners of the Partnerships and, in exchange
for the non-affiliated general partner interests of the Partnerships, 102,932
shares will be issued to the Company.
Neither the Company nor Charter has commenced operations as of May 29,
1997.
NOTE 2--Income Taxes
The Company is not required to provide for, or pay, any federal income
taxes. Income tax attributes that arise from its operations are passed directly
to the individual partners. The Company may be subject to state and local taxes
in jurisdictions in which it operates.
NOTE 3--Related Party Transactions
Upon consummation of the consolidation, the Company shall enter into an
agreement with Charter (the "Management Agreement"). The Company will receive
(i) bond selection fees based on the principal amount of each FMB or other tax
exempt instrument acquired or originated by Charter; (ii) special distributions
calculated as a percentage of total invested assets by Charter; (iii) loan
servicing fees based on the outstanding principal amount of FMBs; (iv) a
liquidation fee based on the gross sales price of assets sold by Charter in
connection with a liquidation of Charter's assets; and (v) reimbursement of
certain administrative costs incurred by the Company on behalf of Charter.
The original term of the Management Agreement will terminate on the fourth
anniversary of the date of the consummation of the consolidation (the
"Effective Date"). Thereafter, the Management Agreement may be renewed annually
by Charter, subject to an evaluation of the performance of the Company by
Charter's Board of Trustees. The Management Agreement cannot be terminated by
Charter prior to the fourth anniversary of the Effective Date, other than for
gross negligence or willful misconduct of the Company and by a majority vote of
Charter's independent trustees. The Management Agreement may be terminated
without cause by the Company.
Charter cannot dissolve and liquidate prior to the fourth anniversary of
the Effective Date except upon a recommendation of the Company and the majority
vote of Charter's shareholders. After the fourth anniversary of the Effective
Date, the vote of the holders of 662/3% of Charter's then outstanding shares of
beneficial interest is required to approve a dissolution and liquidation of
Charter that is not recommended by the Company and the majority vote of
shareholders is required to approve a liquidation of Charter recommended by the
Company. If for any reason, whether prior to or after the fourth anniversary of
the Effective Date, the Management Agreement is terminated in accordance with
its terms, Charter may dissolve and liquidate upon the majority vote of its
shareholders.
165
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members of
Related Charter LLC
New York, New York
We have audited the accompanying balance sheet of Related Charter LLC as
of May 29, 1997. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of Related Charter LLC as of May 29, 1997 in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
New York, New York
May 29, 1997
166
<PAGE>
Related Charter LLC
Balance Sheet
May 29, 1997
ASSETS
Cash $1,000
Investment in Limited Partnership 10
------
Total Assets $1,010
======
LIABILITIES AND MEMBERS' EQUITY
Members' Equity $1,010
======
See accompanying notes to balance sheet.
167
<PAGE>
Related Charter LLC
Notes To Balance Sheet
May 29, 1997
NOTE 1--General
Related Charter LLC (the "Company") is a limited liability company formed
pursuant to the laws of the state of Delaware on April 30, 1997 as sole general
partner of Related Charter LP which is the manager of Charter Municipal
Mortgage Acceptance Company, both of which are affiliated entities.
As of May 29, 1997, the Company has not commenced operations.
NOTE 2--Investment in Limited Partnership
The Company has an investment of $10 in Related Charter LP consisting of a
$10 cash payment.
The Company accounts for its investment using the equity method. As of May
29, 1997, Related Charter LP has not commenced operations.
NOTE 3--Income Taxes
The Company is not required to provide for, or pay, any federal income
taxes. Income tax attributes that arise from its operations are passed directly
to the individual members. The Company may be subject to state and local taxes
in jurisdictions in which it operates.
168
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Summit Tax Exempt Bond Fund L.P.
New York, New York
We have audited the accompanying statements of financial condition of
Summit Tax Exempt Bond Fund L.P. (a Delaware Limited Partnership) as of
December 31, 1996 and 1995, and the related statements of income, changes in
partners' capital (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 General Partners. Our responsibility is to express an
opinion on these financial statements based on our audits.
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 the General Partners, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Summit Tax Exempt Bond Fund L.P. 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.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 20, 1997
169
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Statements of Financial Condition
ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Participating first mortgage bonds--at fair value $123,364,743 $124,669,059
Temporary investments 1,650,000 1,350,000
Cash and cash equivalents 244,439 626,391
Promissory notes receivable, net 6,679,795 6,823,335
Deferred bond selection fees, net 1,558,161 1,708,218
Interest receivable, net 825,237 829,565
Deferred financing fees, net 133,156 260,985
Other assets 20,504 10,776
------------ ------------
Total assets $134,476,035 $136,278,329
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Loan payable $ 13,680,866 $ 13,680,866
Deferred income 954,256 1,143,191
Accounts payable and accrued expenses 101,255 124,850
Due to affiliates 143,023 49,262
------------ ------------
Total liabilities 14,879,400 14,998,169
------------ ------------
Contingencies
Partner's capital (deficit):
BUC$holders (7,906,234 BUC$ issued and outstanding) 124,311,220 124,555,445
General partners (380,822) (375,838)
Net unrealized loss on participating first mortgage bonds (4,333,763) (2,899,447)
------------ ------------
Total partners' capital 119,596,635 121,280,160
------------ ------------
Total liabilities and partners' capital $134,476,035 $136,278,329
============ ============
</TABLE>
See accompanying notes to financial statements.
170
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Interest income:
Participating first mortgage bonds $9,155,001 $9,246,436 $9,376,790
Promissory notes 571,208 577,562 612,090
Temporary investments 73,231 74,084 45,394
---------- ---------- ----------
Total revenues 9,799,440 9,898,082 10,034,274
---------- ---------- ----------
Expenses:
Interest expense 1,322,370 1,391,496 1,156,858
Management fees 671,876 671,875 671,875
General and administrative 341,382 405,528 339,975
Loan servicing fees 335,068 335,068 335,938
Legal expense 323,295 347,014 215,854
Amortization of deferred bond selection fees 150,057 150,055 150,056
Amortization of deferred financing fees 127,829 127,831 127,828
Loss on impairment of assets 0 500,000 1,350,000
---------- ---------- ----------
Total expenses 3,271,877 3,928,867 4,348,384
---------- ---------- ----------
Net income $6,527,563 $5,969,215 $5,685,890
========== ========== ==========
Allocation of Net Income:
BUC$holders $6,397,012 $5,849,831 $5,572,171
========== ========== ==========
General partners $ 130,551 $ 119,384 $ 113,719
========== ========== ==========
Net income per BUC $ 0.81 $ 0.74 $ 0.71
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
171
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Statements of Changes in Partners' Capital (Deficit)
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Participating
First
Total BUC$holders General Partners Mortgage Bonds
------------- ------------ ---------------- --------------
<S> <C> <C> <C> <C>
Partners' capital (deficit)-December 31, 1993 $126,078,050 $126,415,919 $ (337,869)
Cumulative effect through January 1, 1994 of
accounting change (Note 2) (7,693,373) 0 0 $ (7,693,373)
Net income 5,685,890 5,572,171 113,719 0
Distributions (6,776,774) (6,641,238) (135,536) 0
Net change in fair value of participating first
mortgage bonds 3,410,095 0 0 3,410,095
------------ ------------ ---------- ------------
Partners' capital (deficit)-December 31, 1994 120,703,888 125,346,852 (359,686) (4,283,278)
Net income 5,969,215 5,849,831 119,384 0
Distributions (6,776,774) (6,641,238) (135,536) 0
Net change in fair value of participating first
mortgage bonds 1,383,831 0 0 1,383,831
------------ ------------ ---------- ------------
Partners' capital (deficit)-December 31, 1995 121,280,160 124,555,445 (375,838) (2,899,447)
Net income 6,527,563 6,397,012 130,551 0
Distributions (6,776,772) (6,641,237) (135,535) 0
Net change in fair value of participating first
mortgage bonds (1,434,316) 0 0 (1,434,316)
------------ ------------ ---------- ------------
Partners' capital (deficit)-December 31, 1996 $119,596,635 $124,311,220 $ (380,822) $ (4,333,763)
============ ============ ========== ============
</TABLE>
See accompanying notes to financial statements.
172
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(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:
Interest received $ 9,815,686 $10,472,273 $ 9,720,452
Loan made to property affiliate (273,798) (721,266) 0
Fees and expenses paid (1,611,183) (1,749,628) (1,766,476)
Interest paid (1,322,370) (1,391,496) (1,241,679)
----------- ----------- -----------
Net cash provided by operating activities 6,608,335 6,609,883 6,712,297
----------- ----------- -----------
Cash flows from investing activities:
Net (purchase) sale of temporary investments (300,000) 565,874 (415,114)
Income deferred upon assumption of bond obligations by new debtor 0 0 105,477
----------- ----------- -----------
Net cash (used in) provided by investment activities (300,000) 565,874 (309,637)
----------- ----------- -----------
Cash flows from financing activities:
Principal repayments on promissory note 86,485 53,719 0
Principal payment received on bond 0 0 347,576
Distributions paid (6,776,772) (6,776,774) (6,776,774)
----------- ----------- -----------
Net cash used in financing activities (6,690,287) (6,723,055) (6,429,198)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (381,952) 452,702 (26,538)
Cash and cash equivalents at beginning of year 626,391 173,689 200,227
----------- ----------- -----------
Cash and cash equivalents at end of year $ 244,439 $ 626,391 $ 173,689
=========== =========== ===========
Schedule reconciling net income to net cash provided by
operating activities:
Net income $ 6,527,563 $ 5,969,215 $ 5,685,890
----------- ----------- -----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of deferred income (261,880) (261,877) (260,253)
Amortization of deferred bond selection fees 150,057 150,055 150,056
Amortization of deferred financing fees 127,829 127,831 127,828
Loss on impairment of assets 0 500,000 1,350,000
Changes in:
Promissory notes receivable, net 57,055 247,821 172,411
Interest receivable 4,328 114,802 (53,569)
Other assets (9,728) 2,852 1,678
Deferred income (57,055) (247,821) (172,411)
Accounts payable and accrued expenses (23,595) 4,165 (179,984)
Accrued interest expense 0 0 (84,821)
Due to affiliates 93,761 2,840 (24,528)
----------- ----------- -----------
Total adjustments 80,772 640,668 1,026,407
----------- ----------- -----------
Net cash provided by operating activities $ 6,608,335 $ 6,609,883 $ 6,712,297
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 1,322,370 $ 1,391,496 $ 1,156,858
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
173
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 1--General
Summit Tax Exempt Bond Fund, L.P. (the "Partnership"), a Delaware limited
partnership, was formed on December 18, 1985 and will terminate on December 31,
2020 unless terminated sooner under the provisions of the Agreement of Limited
Partnership (the "Partnership Agreement"). The Partnership was formed to invest
in tax-exempt participating first mortgage revenue bonds ("FMBs") issued by
various state or local governments or their agencies or authorities. The FMBs
are secured by participating first mortgage loans on multi-family residential
apartment projects (the "Properties"). The general partners of the Partnership
(the "General Partners") are Prudential-Bache Properties, Inc. ("PBP") (a
wholly-owned subsidiary of Prudential Securities Group, Inc.) and Related Tax
Exempt Bond Associates, Inc. (the "Related General Partner"). Related
BUC$ Associates, Inc. (the "Assignor Limited Partner"), which acquired and
holds limited partnership interests on behalf of those persons who purchase
Beneficial Unit Certificates ("BUC$"), has assigned to those persons
substantially all of its rights and interest in and under such limited
partnership interests. The Related General Partner and the Assignor Limited
Partner are under common ownership. As of December 31, 1996, the Partnership
had invested in a total of eleven FMBs.
NOTE 2--Summary of Significant Accounting Policies
a) Basis of Accounting
The books and records of the Partnership are maintained on the accrual
basis of accounting in accordance with generally accepted accounting
principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the General Partners to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
b) Participating first mortgage bonds and promissory notes receivable
Effective January 1, 1994, the Partnership accounts for its investments in
the FMBs as debt securities under the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115").
The Partnership has a right to require redemption of the FMBs
approximately twelve years after their issuance. The Partnership anticipates
holding the FMBs for approximately 12 to 15 years from the date of issuance;
however, it can and may elect to hold until maturity. As such, SFAS 115
requires the Partnership to classify these investments as "available for sale."
Accordingly, investments in FMBs are carried at their estimated fair values,
with unrealized gains and losses reported in a separate component of partners'
capital. The cumulative effect of adopting such accounting was a decrease in
partners' capital at January 1, 1994 of approximately $7,693,000 due to
unrealized holding losses. Unrealized holding gains or losses do not affect the
cash flow generated from property operations, distributions to BUC$holders, the
characterization of the tax-exempt income stream or the financial obligations
under the FMBs.
The Partnership periodically evaluates each FMB to determine whether a
decline in fair value below the FMB's cost basis is other than temporary. Such
a decline is considered to be other than temporary if, based on current
information and events, it is probable that the Partnership will be unable to
collect all amounts due according to the existing contractual terms of the
bonds. If the decline is judged to be other than temporary, the cost basis of
the bond is written down to its then estimated fair value, with the amount of
the write-down accounted for as realized loss.
Because the FMBs are not readily marketable, the Partnership estimates
fair value for each bond as the present value of its expected cash flows using
a discount rate for comparable tax-exempt investments. This process is based
upon projections of future economic events affecting the real estate
collateralizing the bonds, such as property occupancy rates, rental rates,
operating cost inflation and market capitalization rates, and upon
determination of an appropriate market rate of interest, all of which are based
on good faith estimates and assumptions developed by the Partnership's
management. Changes in market conditions and circumstances may occur which
would cause these estimates and assumptions to change, therefore, actual
results may vary from the estimates and the variance may be material.
From time to time, the Partnership has advanced funds to the owners of
certain properties in the form of promissory notes collateralized by second
mortgages on these properties. These promissory notes are carried at cost less
a valuation allowance where appropriate. The Partnership periodically evaluates
the collectibility of both interest and principal of these investments to
determine whether a reserve is necessary. As of December 31, 1996 and 1995
reserves on these investments totaled approximately $4,605,000 and $4,347,000,
respectively. For the years ended December 31, 1996 and 1995, $274,000 and
$721,000 was added to reserves, respectively.
174
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 2--Summary of Significant Accounting Policies (continued)
For both FMBs and promissory notes, interest income is recognized at the
stated rate when collectibility of future amounts is reasonably assured.
Interest income from FMBs with modified terms where the collectibility of
future amounts is uncertain is recognized based upon expected cash receipts.
c) Temporary investments
Temporary investments at December 31, 1996 represent tax-exempt municipal
preferred stock and tax-exempt floating rate municipal bonds which are carried
at cost plus accrued interest which approximates market value. Temporary
investments at December 31, 1995 represent tax-exempt municipal preferred stock
which is also carried at cost which approximates market value.
d) Cash and cash equivalents
Cash and cash equivalents include cash in banks, and investments in
short-term instruments with an original maturity of three months or less, for
which cost approximates market value.
e) Income taxes
The Partnership is not required to provide for, or pay, any Federal income
taxes. Income tax attributes that arise from its operations are passed directly
to the BUC$holders. The Partnership may be subject to other state and local
taxes in jurisdictions in which it operates.
f) Profit and loss allocations and distributions
Net profits or losses and distributions are allocated 98% to the
BUC$holders and 2% to the General Partners in accordance with the Partnership
Agreement.
g) Deferred bond selection fees
The General Partners were paid bond selection fees (equal to 2% of the
gross proceeds from the initial offering) for evaluating and selecting FMBs,
negotiating the terms of mortgage loans and coordinating the development effort
with property developers and government agencies. These fees have been
capitalized and are being amortized over the terms of the FMBs. The accumulated
amortization as of December 31, 1996 and 1995 was approximately $1,533,000 and
$1,383,000, respectively.
h) Deferred financing fees
Financing fees incurred in connection with the Partnership's credit
facility were capitalized and are being amortized over five years (the life of
the credit facility). The accumulated amortization at December 31, 1996 and
1995 was approximately $506,000 and $378,000, respectively.
i) Fair value of financial instruments
As described in Note 2.b. above, the Partnership's investments in FMBs are
carried at estimated fair values. The Partnership has determined that the fair
value of its remaining financial instruments, including its temporary
investments, cash and cash equivalents, promissory notes receivable and loan
payable approximate their carrying values.
j) Reclassifications
Certain reclassifications have been made to prior year amounts to conform
to the current year's presentation.
NOTE 3--Participating First Mortgage Bonds
Overview
The principal and interest payments on each FMB are payable only from the
cash flows, including proceeds in the event of a sale, from the Properties
underlying the FMBs or refinance of the mortgage loan. None of these FMBs
constitute a general obligation of any state or local government, agency or
authority. The FMBs are secured by the mortgage loans on the underlying
Properties and the structure of each mortgage loan mirrors the structure of the
corresponding FMB.
175
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 3--Participating First Mortgage Bonds (continued)
Unless otherwise modified, the principal of the FMBs will not be amortized
during their respective terms (which range from 17 to 24 years) and will be
required to be repaid in lump sum "balloon" payments at the expiration of the
respective terms or at such earlier times as the Partnership may require
pursuant to the bond documents, The Partnership has a right to require
redemption of the FMBs approximately twelve years after their issuance. The
Partnership anticipates holding the FMBs for approximately 12 to 15 years from
the date of issuance; however, it can and may elect to hold them until
maturity.
In addition to the stated base interest rates ranging from 5.23% to 8.50%
per annum, each of the FMBs which have not been modified provides for
"contingent interest" consisting of (a) an amount equal to 50% to 100% of net
property cash flow and 50% to 100% of net sale of refinancing proceeds until
the borrower has paid, during the post-construction period, annually compounded
interest at a rate ranging from 8.875% to 9.34% on a cumulative basis, and
thereafter (b) an amount equal to 25% to 50% of the remaining net property cash
flow and 25% to 50% of remaining net sale or refinancing proceeds until the
borrower has paid interest at a simple annual rate of 16% over the term of the
FMB. Both the stated and contingent interest are exempt from Federal income
taxation.
In order to protect the tax-exempt status of the FMBs, the owners of the
Properties are required to enter into certain agreements to own, manage and
operate such Properties in accordance with the requirements of the Internal
Revenue Code.
Sunset Terrace
During 1992, a forbearance agreement was finalized with the owner of the
Sunset Terrace Property. Terms of the agreement call for a reduced pay rate of
7.0% per annum through May 1993 with scheduled annual increments to the
original stated rate of 8.0% in May 1996. However, effective with the May 1,
1995 payment date, the Sunset Terrace FMB has made payments based on the
monthly net cash flow generated by the operations of the underlying Property in
accordance with the agreement outlined below. Effective as of August 1, 1995,
the obligor of the Sunset Terrace FMB entered into a new forbearance agreement.
In accordance with the terms of that agreement, the obligor of the FMB is
paying debt service on the FMB to the extent of cash flow generated by the
underlying Property. The difference between the pay rate and the stated rate of
this FMB is deferred and payable out of available future cash flow. In
addition, pursuant to the agreement, the obligor replaced the property manager
and leasing agent with a new property manager who is an affiliate of the
Related General Partner. Effective as of January 30, 1997, the obligor
transferred the deed to the underlying Property to an affiliate of the Related
General Partner, who made no equity investment in the Property but assumed day
to day responsibilities of operations and obligations under the FMB.
Highpointe
In November 1989, a $600,000 settlement was reached between the previous
developer of Highpointe Club Apartments and USF&G, the construction performance
bonding company for the Highpointe property. Prior to this settlement, the
previous developer agreed to place the settlement proceeds in escrow later to
be shared with the subsequent developer ("Greenhill Project Investors, Inc.")
or its successors and assigns pursuant to an arbitration proceeding. On April
23, 1993, the previous developer agreed to release the escrowed funds to RHA
Inv., Inc. ("RHA"), the successor to Greenhill Project Investors, Inc. In April
1995, RHA paid to the Partnership approximately $721,000 consisting of the
settlement proceeds plus accrued interest. These funds were applied as partial
payment toward accrued and unpaid interest due under the Highpointe Club FMB.
With respect to the Highpointe FMB, effective as of July 12, 1996, the
Partnership has entered into a purchase agreement with Chemical Bank (now Chase
Bank) which is secured by a pledge and assignment of the Partnership's
Highpointe FMB (face amount of $8,900,000). The purpose of this transaction was
to obtain an extension to January 1998, of a Letter of Credit ("L/C") issued by
Chemical Bank on behalf of Highpointe (RHA Inv., Inc.) to credit enhance
$3,250,000 in pari-passu first mortgage "low floater" bonds ("Chemical Bonds"),
which proceeds were used to complete construction of the project in 1989.
Pursuant to the terms of the purchase agreement, the Partnership has agreed
that, should the Chemical Bonds not otherwise be refinanced or the L/C replaced
as of January 1998 or the Highpointe obligor defaults on its obligations under
the Chemical Bonds, the Partnership will unconditionally purchase the bonds
from Chemical Bank.
The Mansion
On April 1, 1994, Mansion Apartment Project Investors, Inc. ("MAPI"), an
affiliate of the Related General Partner who replaced the original developer of
The Mansion property, sold the ownership interest in the property to an
unrelated third party for $700,000 in cash and the assumption of the obligation
under the Partnership's $19,450,000 FMB as well as a $400,000 second mortgage
note payable to a lender affiliated with the Related General Partner taken by
assignment from the seller. Notwithstanding the assumption of the FMB, the
General Partners agreed to forbear on the Partnership's rights and remedies in
declaring an interest payment default under the FMB loan documents provided the
new borrower made minimum monthly interest payments to the Partnership equal to
approximately $81,000 per month (5% per annum) together with payments to a
replacement reserve escrow account of approximately $4,500 per month and
complied with all other covenants and obligations.
176
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 3--Participating First Mortgage Bonds (continued)
Effective October 18, 1994, The Mansion FMB was modified. The modification
provides for a base pay rate of 5.23%. In addition, the contingent interest
feature has been changed. Under the modified FMB, an additional .386% per year
(primary contingent interest) is due and payable from 100% of cash flow above
the base pay rate. If not paid, the difference between the minimum pay rate and
the primary contingent interest rate is deferred and is payable from future
cash flow and sale or refinancing proceeds. Remaining cash flow and sale or
refinancing proceeds, if any, are paid to the Partnership in an amount equal to
35% of net cash flow until the borrower receives a 12.5% cumulative return on
its investment together with the return of the initial investment. Then, the
Partnership is entitled to 50% of remaining cash flow and net sale or
refinancing proceeds until the owner has paid interest at a cumulative annual
rate of 16%. Notwithstanding The Mansion owner's obligations to pay amounts due
as primary contingent interest, the Partnership has agreed, until 1998, that
the obligation to pay such amounts will be considered satisfied subject to
those amounts being contributed by The Mansion's owner toward certain
designated repairs to the property. The Mansion's owner will nevertheless be
obligated to pay amounts due from remaining cash flow if available above the
primary contingent interest rate.
The net cash proceeds from the sale of the ownership interest in The
Mansion by MAPI of approximately $105,000 (net of a $400,000 escrow for certain
repairs, a $50,000 second mortgage note principal payment, and closing costs),
paid to the Partnership to reduce accrued and unpaid interest, was recorded by
the Partnership as deferred income and is being amortized as interest income
over the remaining life of The Mansion FMB. The balance of the deferred income
relating to The Mansion FMB was approximately $87,000 and $94,000 at December
31, 1996 and 1995. All other accrued and unpaid interest on The Mansion FMB
which previously had been reserved for financial statement purposes was
forgiven.
In 1992, the Partnership loaned approximately $134,000, to the owner of
The Mansion property to pay property taxes. The loan was self-
amortizing over two years with interest at 8.5% per annum beginning June 1992.
This loan was fully repaid in the second quarter of 1994.
Cedar Creek
In 1988, pursuant to a settlement agreement with the original obligor
under the Cedar Creek FMB, the deed to the underlying property was transferred
to an affiliate of the Related General Partner due to the obligor's inability
to make interest payments as called for under the FMB. The affiliate of the
Related General Partner made no equity investment in the underlying property,
but has assumed day-to-day responsibilities of operating the underlying
property and obligations under the FMB.
The Partnership has permitted the obligor to pay interest under the FMB
only to the extent of cash flow generated by the underlying property, although
no forbearance agreement has been entered into with the obligor with respect to
such arrangement.
In 1992, the Partnership loaned approximately $86,000 to the owner of
Cedar Creek property to pay property taxes. The loan was self-
amortizing over two years with interest at 8.5% per annum beginning June 1992.
This loan was fully repaid in the second quarter of 1994.
Cypress Run
In June 1992, the partnership made a $320,000 second mortgage loan to the
owner of the property underlying the Cypress Run FMB for the payment of 1991
property taxes. This loan required monthly interest only payments at a rate of
8.5% per annum with the principal due on July 1, 1994. Interest payments on the
loan as well as the FMB were current through June 1994; however, due to
bankruptcy, the loan remains outstanding and the borrower has been notified of
the default (see below for discussion of borrower's bankruptcy filing). An
allowance for possible loss was established for this loan in 1993.
As a result of the failure to pay 1992 and 1993 real estate taxes, the
Partnership initiated steps to enforce its rights and remedies against the
Cypress Run property in July 1994. These remedies include acceleration of the
loan and a $350,000 draw on an irrevocable letter of credit issued of behalf of
the owner of Cypress Run as security relating to obligations under the Rental
Performance Agreement. Pursuant to the terms of the bond documents,
approximately $348,000 of the proceeds received from the draw on the letter of
credit has been recorded as a reduction of the FMB with the balance applied as
interest. In response, on July 15, 1994, the owner of the property filed for
bankruptcy under Chapter 11 of the United States Bankruptcy Code and continued
to operate the property as a debtor-in-
possession. At the initial hearing, the court consented, among other things, to
allow the Partnership to receive monthly net cash flow generated by the
property as its debt service payments.
On November 10, 1994, an Order Modifying Stay together with a Settlement
Stipulation was entered by the Court which granted the Partnership relief from
the Automatic Stay. This order became effective on March 31, 1995 unless a sale
of the property, subject to the Partnership's approval, was closed beforehand.
On March 31, 1995, pursuant to a court order, ownership of the Cypress Run
property was transferred to an affiliate of the Related General Partner. The
affiliate has not made an equity investment in the underlying property;
177
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 3--Participating First Mortgage Bonds (continued)
however, it will assume the day-to-day responsibilities and obligations of
operating the property. The Partnership continues to receive the monthly net
cash flow generated by the property as payment toward debt service. Upon
Settlement of Bankruptcy proceedings prusuant to a Court Order issued in
February 1997, obligations under the loan and guaranty has been released. The
Partnership made advances in April 1995 of $721,000, in December 1996 of
$274,000, and again, in February 1997 of $111,000, aggregating approximately
$1,106,000 to the obligor of the Cypress Run FMB (an Affiliate of the Related
General Partner) toward payment of delinquent real estate taxes and certain
capital improvements. The advances are made pursuant to a demand note from the
obligor for a loan amount up to $1,500,000 providing for interest only at 8.5%
per annum, payable monthly. Principal is due on demand.
Greenway Manor
Due to the failure to pay 1990 and 1991 property taxes and interest from
March to August 1992, the Partnership instituted foreclosure proceedings
against Greenway Manor. On July 20, 1992, the partnership which owned this
property filed for bankruptcy under Chapter 11 of the United States Bankruptcy
Code. Pursuant to a 1992 court order, the receiver paid the Partnership the
cash flow remaining after paying past due taxes, paying operating costs and
escrowing for 1992 taxes. On June 30, 1993, the court dismissed the bankruptcy
proceeding at which time the owner of the property and obligor under the FMB
agreed to transfer the deed-in-lieu of foreclosure to an affiliate of the
Related General Partner.
Clarendon Hills
On May 31, 1992, Clarendon Hills Investor, Inc. ("CHI"), an affiliate of
the Related General Partner who had replaced the developer of the Clarendon
Hills property, sold its ownership interest in the property to an unrelated
third party (the "Purchaser") for $26,200,000. The Purchaser paid $2,000,000 in
cash, assumed the $17,600,000 obligation of the Partnership's FMB and issued a
$6,600,000 promissory note to CHI which in turn was assigned to the
Partnership. The $6,600,0000 promissory note bears interest at the rate of 8.0%
per annum payable in equal monthly installments until December 2003 at which
time the entire unpaid principal and interest will be due and payable. The
$1,441,209 in net cash proceeds of the sale (net of certain closing costs),
paid by CHI to the Partnership to reduce accrued and unpaid interest, was
recorded by the Partnership as deferred income and is being amortized as
interest income from FMBs over the remaining life of the Clarendon Hills FMB.
The balance of the deferred income relating to the Clarendon Hills FMB was
approximately $867,000 and $992,000 at December 31, 1996 and 1995,
respectively.
In connection with the sale of the Clarendon Hills property by CHI, the
FMB collateralized by the property was modified to provide for, among other
things; the discharge of all accrued and unpaid interest relating to a previous
owner (which for financial statement purposes had been fully reserved) and a
reduction of the base interest rate to 5.52% per annum on the $17,600,000 FMB.
In addition, the contingent interest feature was modified to assign annual cash
flow as follows: (1) to pay the Partnership its 5.52% base rate of the FMB and
to pay the 8.0% interest owed on the promissory note; (2) to assign the
Purchaser the next $220,000 representing return on its investment; and then (3)
to pay the Partnership 65% of cash flow until the Partnership receives an
interest rate equal to 8.25% per annum on $24,200,000 ($17,600,000 FMB and
$6,600,000 promissory note) for each respective year on a non-cumulative basis.
Any remaining cash flow is then shared 65% by the Purchaser and 35% by the
Partnership.
East Ridge/Martins Creek
The FMBs for the East Ridge and Martin's Creek properties were modified in
1990 when the equity interest in the properties and the related obligations of
the FMBs were sold by an affiliate of the Related General Partner to an
unrelated third party. The modifications provide for the minimum pay rate
increases from 6.0% per annum in 1990 to 7.5% per annum in March 1996.
Beginning in March 1997, the pay rate has increased to 8.25% per annum. The
difference between the minimum interest rate and the original stated rate is
deferred and is payable out of available future cash flow or ultimately from
sale or refinancing proceeds. As part of this modification, the Partnership
received $950,000 in 13% second mortgage notes with monthly interest and
principal payments through December 1995. These notes were also partially
secured by letters of credit. In January 1996, the second mortgage notes for
East Ridge and Martin's Creek were paid in full and the letters of credit were
released.
North Glen
During 1991, a forbearance agreement was finalized with the owners of the
North Glen property. The General Partners further modified the North Glen
forbearance agreement on April 1993 to allow the owner to make debt payments at
a pay rate of 6.0% per annum through December 1995 at which time the rate was
scheduled to increase to the stated rate of 8.5% per annum, however, the
General Partners extended the forbearance agreement through December 15, 1997.
178
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 3--Participating First Mortgage Bonds (continued)
The original North Glen second mortgage in the principal amount of
$126,000 which is secured by a second mortgage on the property matured as of
May 1996 and was modified and extended. The modified loan is self amortizing
over 48 months at an interest rate of 8.5% per annum. North Glen is current on
its interest payments through December 31, 1996.
Thomas Lake
Pursuant to the terms of the forbearance agreement entered into as of
December 1991, the pay rate for the Thomas Lake property returned to the
original stated rate of 8.5% in December 1996.
In May 1992, Summit Tax Exempt Funding Corp., an affiliate of the
Partnership, made a loan in the amount of $220,000 secured by a second mortgage
on the Thomas Lake Property toward the payment of past due property taxes. In
January 1993, this loan was assigned to the Partnership as part of the
transaction in which the Partnership obtained a new credit facility. The loan
requires interest only payments at the Citibank, N.A. prime rate (8.5% at
December 31, 1994) plus 2.0% per annum, payable monthly. Principal was due in
full on April 15, 1995 but the loan was modified and extended. The modified
loan is self-amortizing over thirty months at an 8.5% interest rate. Thomas
Lake is current on its interest payments through December 31, 1996.
General
For several properties collateralizing FMBs (Highpointe Club securing an
$8,900,000 FMB; Cypress Run securing an $15,402,428 FMB; Greenway Manor,
securing a $12,850,000 FMB; Cedar Creek, securing an $8,100,000 FMB and Sunset
Terrace securing a $10,350,000 FMB) the original owners of the underlying
properties and obligors of the FMBs were replaced by affiliates of the Related
General Partner who have not made equity investments in the underlying
properties. These entities have assumed the day-to-day responsibilities and
obligations of operating the underlying properties. Buyers are being sought who
would make equity investments in the underlying properties and assume the
nonrecourse obligations for the FMB's. Although certain of these properties are
not producing sufficient cash flow to fully service the debt, the Partnership
has no present intention to declare a default on these FMBs.
The determination as to whether it is in the best interest of the
Partnership to enter into forbearance agreements on the FMBs or, alternatively,
to pursue its remedies under the loan documents, including foreclosure, is
based upon several factors. These factors include, but are not limited to,
property performance, owner cooperation and projected legal costs. Payments
under each of the existing forbearance agreements aree current as of December
31, 1996.
The difference between the stated interest rates and the rates paid on
certain FMBs is not accrued for financial statement purposes, although it is
deferred and payable from available future cash flow and sale or refinancing
proceeds. Interest income relating to these FMBs of approximately $1,411,000,
$1,571,000, and $1,707,000 was not recorded for the years ended December 31,
1996, 1995 and 1994, respectively.
The following FMB's interest income exceeded 15% of the Partnership's
total revenue for one or more of the three years in the period ended December
31, 1996:
1996 1995 1994
---- ---- ----
Cypress Run * * 17%
The Mansion * * 16%
*FMB's interest income was less than 15% of the Partnership's total
revenue for the year.
The cost basis of the FMBs at December 31, 1996 and 1995 was $127,698,506
and $127,568,506, respectively. The net unrealized loss on FMBs consists of
gross unrealized gains and losses of $2,842,285 and $7,176,048, respectively,
at December 31, 1996 and $3,150,835 and $6,050,282, respectively, at December
31, 1995.
179
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 3--Participating First Mortgage Bonds (continued)
Descriptions of the various FMBs owned by the Partnership at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Minimum
Average Pay Rate
Interest Rate at December
Property Location Paid for 1996* 31, 1996*
- ----------------- ------------------ ---------------- -------------
<S> <C> <C> <C>
The Mansion Independence, MO 6.78%(B) 5.23%
Martin's Creek Summerville, SC 6.91(D) 7.50(D)
East Ridge Mt. Pleasant, SC 7.83(D) 7.50(D)
Highpointe Club Harrisburg, PA 6.74 (A)
Cypress Run Tampa, FL 5.72 (A)
Thomas Lake Eagan, MN 8.83(C) 8.50
North Glen Atlanta, GA 6.00 6.00
Greenway Manor St. Louis, MO 9.17(C) 8.50
Clarendon Hills Hayward, CA 5.52 5.52
Cedar Creek McKinney, TX 7.88 (A)
Sunset Terrace Lancaster, CA 4.93 (A)
<CAPTION>
Carrying
Stated Amount
Interest Maturity Face at December
Property Rate* Call Date Date Amount 31, 1996 (E)
- ----------------- ---------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
The Mansion 5.23% April 2006 April 2008 $ 19,450,000 $ 18,454,884
Martin's Creek 8.25 Mar. 2000 May 2010 7,300,000 6,642,891
East Ridge 8.25 Mar. 2000 May 2010 8,700,000 8,215,330
Highpointe Club 8.50 June 1998 June 2006 8,900,000 7,000,186
Cypress Run 8.50 Aug. 1998 Aug. 2006 15,402,428 13,982,796
Thomas Lake 8.50 Aug. 1998 Aug. 2006 12,975,000 13,488,852
North Glen 8.50 Aug. 1998 Aug. 2008 12,400,000 11,228,210
Greenway Manor 8.50 Oct. 1998 Sept. 2006 12,850,000 13,020,536
Clarendon Hills 5.52 Dec. 2003 Dec. 2003 17,600,000 14,683,645
Cedar Creek 8.50 Dec. 1998 Dec. 2006 8,100,000 8,551,563
Sunset Terrace 8.00 Feb. 1999 May 2007 10,350,000 8,095,850
------------ ------------
$134,027,428 $123,364,743
============ ============
</TABLE>
* The average interest rate paid represents the interest recorded by the
Partnership while the stated interest rate represents the coupon rate of the
FMB and the minimum pay rate represents the minimum rate payable pursuant to
the applicable forbearance agreement, if any.
(A) Pay rate is based on the net cash flow generated by the property.
(B) Includes contingent interest paid during the year ended December 31,
1996.
(C) Includes receipt of deferred base interest related to prior periods.
(D) The actual pay rate is adjusted as of the property's fiscal year-end
based on audited financials to no less than the minimum pay rate.
(E) The FMBs are carried at their estimated fair values at December 31,
1996.
NOTE 4--Loan Payable
On January 15, 1993, the Partnership entered into a loan agreement with an
unaffiliated lender for a $15,000,000 credit facility with a maturity date of
January 14, 1998 and an option to extend for two years for an additional fee.
The debt service requirements include monthly interest only payments with a
variable interest rate equal to the 30-day commercial paper interest rate
(5.45% and 5.85% at December 31, 1996 and 1995, respectively) plus 4.05% with
principal due at maturity. The facility is collateralized by a pledge of the
FMBs and associated collateral of East Ridge, Martin's Creek, The Mansion,
Thomas Lake and Sunset Terrace. The initial proceeds from this facility were
used to repay a $10,000,000 credit facility guaranteed by the Partnership, to
repay a $3,000,000 noninterest-bearing working capital loan made to the
Partnership from the Related General Partner and to pay associated closing
costs. The $10,000,000 credit facility had been used to pay for costs incurred
to complete construction of the properties securing the Highpointe Club and
Clarendon Hills FMBs and to fund a loan toward the payment of property taxes on
the Thomas Lake property. The $3,000,000 working capital loan was used to
supplement distributions commencing with the fourth quarter 1988 distribution.
The unused portion of the Partnership's $15,000,000 credit facility is to be
used for future working capital requirements and other cash requirements, as
necessary, subject to the approval of the lender.
In conjunction with the Partnership's credit facility and the repayment of
the previously existing $10,000,000 credit facility, the Partnership was
assigned nonrecourse notes in the amount of $6,600,000, $3,180,000 and $220,000
from the Clarendon Hills, Highpointe Club and Thomas Lake properties,
respectively. The Clarendon Hills promissory note, secured by a deed of trust,
requires monthly interest only payments of 8.0% per annum with the principal
due on December 1, 2003. The unsecured Highpointe Club note also requires
monthly interest only payments of 8.0% per annum with the principal due on
December 31, 2003. Since the Highpointe Club property is paying interest on a
cash flow basis, interest on the promissory note is only recorded when cash
flow is received in excess of the stated rate. No interest on the Highpointe
Club promissory note has been received or recorded through December 31, 1996.
The assigned Highpointe Club note is subordinate to the Highpointe Club FMB and
has been fully reserved. The Thomas Lake promissory note in the principal
amount of $220,000, which is secured by a second mortgage on the property,
matured in April 1995 and was modified and extended. The modified loan is
self-amortizing over thirty months at an 8.5% interest rate. Clarendon Hills
and Thomas Lake promissory notes are current on the interest payments through
December 31, 1996.
180
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 5--Income Taxes
Following is a reconciliation of net income for financial statement
purposes with net income for Federal income tax reporting purposes:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Net income per financial statements $6,527,563 $5,969,215 $ 5,685,890
Loss on impairment of assets 0 500,000 1,350,000
Uncollected interest on FMBs 1,410,705 1,570,781 1,707,305
Nondeductible interest expense 355,850 374,452 311,255
Uncollected interest on promissory notes 254,400 254,400 254,400
Amortization of bond selection fees 150,057 150,055 150,056
Loss from debt restructure 0 0 (3,632,747)
Other, net (56,987) (214,698) (326,925)
---------- ---------- -----------
Net income for tax purposes $8,641,588 $8,604,205 $ 5,499,234
========== ========== ===========
</TABLE>
Net income for tax purposes is generally exempt from Federal income tax.
The differences between the tax and book basis of partners' capital are
primarily attributable to the cumulative effect of the book to tax income
adjustments, the recording of distributions and the Partnership's accounting
for the FMBs at fair value for book purposes and cost for tax purposes.
NOTE 6--Related Parties
The General Partners and their affiliates perform services for the
Partnership which include, but are not limited to: accounting and financial
management; registrar, transfer and assignment functions; asset management;
investor communications; printing and other administrative services. The
General Partners and their affiliates receive reimbursements for costs incurred
in connection with these services, the amount of which is limited by the
provisions of the Partnership Agreement. The costs and expenses were:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Prudential-Bache Properties, Inc. and affiliates
General and administrative $ 33,507 $ 93,392 $ 93,000
Management fee 335,938 335,937 335,937
---------- ---------- ----------
369,445 429,329 428,937
---------- ---------- ----------
Related Tax Exempt Bond Associates, Inc. and affiliates
General and administrative 71,149 39,723 28,246
Management fee 335,938 335,938 335,938
Loan servicing fees 335,068 335,068 335,938
---------- ---------- ----------
742,155 710,729 700,122
---------- ---------- ----------
$1,111,600 $1,140,058 $1,129,059
========== ========== ==========
</TABLE>
Effective October 1, 1995 the Related General Partner has assumed from
PBP, the responsibilities and duties of the Tax Matters Partner as defined in
the Partnership Agreement.
The General Partners are paid, in aggregate, an annual management fee
equal to .5% of the total invested assets (which equals the total original face
amount of the FMBs).
An affiliate of the Related General Partner receives loan servicing fees
in the amount of .25% per annum of the principal amount outstanding on mortgage
loans serviced by the affiliate.
During 1995 and January 1996, a division of Prudential Securities
Incorporated ("PSI"), an affiliate of PBP, was responsible for the purchase,
sale and safekeeping of the Partnership's temporary investments. This account
was maintained in accordance with the Partnership Agreement.
PSI owns 7,600 BUC$ at December 31, 1996.
Several executive officers and directors of the Related General Partner
own less than 1% of the outstanding BUC$.
181
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 6--Related Parties (continued)
As of December 31, 1996 the original owner of the underlying property and
obligor of the Cedar Creek, Cypress Run, Highpointe and Greenway Manor FMBs
have been replaced with an affiliate of the Related General Partner who has not
made an equity investment. This entity has assumed the day-to-day
responsibilities and obligations of the underlying property. Buyers are being
sought who would make an equity investment in the underlying property and
assume the nonrecourse obligations for the FMB.
NOTE 7--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV 654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants. On November 16, 1993, a putative class action captioned
Connelly et al. v. Prudential-Bache Securities Inc. et al. (93 Civ. 713) , was
filed in the United States District Court for the District of Arizona ,
purportedly on behalf of investors in the Partnership against the Partnership,
PBP, PSI and a number of other defendants. On January 3, 1992, a putative class
action, captioned Levine v. Prudential-Bache Properties Inc. et al. (92 Civ.
52), was filed in the United States District Court for the Northern District of
Illinois purportedly on behalf of investors in the Partnership against the
General Partners, PSI and a number of other defendants. Subsequently the
Related General Partner was dismissed from the Levine litigation.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, by order dated May 4, 1994, the Connelly case and by
order dated July 13, 1994, the Levine case, to a single judge of the United
States District Court for the Southern District of New York (the "Court") and
consolidated for pretrial proceedings under the caption In re Prudential
Securities Incorporated Limited Partnerships Litigation (MDL Docket 1005) (the
"Class Action"). On June 8, 1994, plaintiffs in the transferred cases filed a
complaint that consolidated the previously filed complaints and named as
defendants, among others, PSI, certain of its present and former employees and
the General Partners. The Partnership was not named a defendant in the
consolidated complaint, but the name of the Partnership was listed as being
among the limited partnerships at issue in the case.
On August 9, 1995 PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class.
The Court gave final approval to the settlement, certified a class of
purchasers of specific limited partnerships, including the Partnership,
released all settled claims by members of the class against the PSI settling
defendants and permanently barred and enjoined class members from instituting,
commencing or prosecuting any settled claim against the released parties. The
full amount due under the settlement agreement has been paid by PSI. The Levine
and Connelly cases were dismissed with prejudice as to the Prudential
defendants by court order dated October 25, 1996. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
two other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well
as each of the other concerned partnerships and final approval of the Court
after review of the proposals at a fairness hearing.
Under the proposed Reorganization plan, the BUC$holders of the
Partnership, and Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III, will
receive shares in a newly formed business trust. It is anticipated that shares
will be allocated proportionately among the partnerships and their respective
investors based upon appraisals and other factors as supported by a third-party
fairness opinion. Detailed information about the proposed Related Settlement
and Reorganization will be sent to BUC$holders in the near future. The terms of
the Reorganization include, among other matters, the acquisition by affiliates
of the Related Capital Company ("RCC") of PBP's general partner interest (the
"PBP Interest"), transfer to the BUC$holders of one-half of the PBP Interest,
reduction of fees currently payable to the General Partners by 25%, filing an
application to list the new company's shares on an exchange and the creation of
an infinite, as opposed to finite, life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996, PBP and RCC entered into an agreement for the purchase by
RCC or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions, including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
182
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 7--Contingencies (continued)
Pending final approval of the Related Settlement, the Court's Order
prohibits class members (including the BUC$holders) from, among other matters,
(i) granting a proxy to object to the Reorganization; or (ii) commencing a
tender offer for the BUC$. In addition, the General Partners are enjoined from
(i) recording any transfers made in violation of the Order and (ii) providing
the list of investors in any of the partnerships which are the subject of the
Reorganization to any person conducting a tender offer.
There can be no assurance that the conditions to the closing of the
proposed Related Settlement and Reorganization will be satisfied nor that a
closing may occur in the projected time frame. In the event a settlement cannot
be reached, the Related General Partner believes it has meritorious defenses to
the consolidated complaint and intends to vigorously defend this action.
NOTE 8--Selected Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
1996 Quarter ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income from participating first mortgage bonds $2,405,750 $2,293,601 $ 2,348,277 $ 2,107,373
=========== =========== ============= ============
Net income $1,796,883 $1,653,437 $ 1,659,467 $ 1,417,776
=========== =========== ============= ============
Net income per BUC $ 0.22 $ 0.21 $ 0.20 $ 0.18
=========== =========== ============= ============
1995 Quarter ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- ------------- ------------
Interest income from participating first mortgage bonds $2,359,498 $2,320,794 $ 2,274,988 $ 2,291,156
=========== =========== ============= ============
Loss on impairment of assets $ 0 $ 0 $ 0 $ 500,000
=========== =========== ============= ============
Net income $1,689,483 $1,562,255 $ 1,590,145 $ 1,127,332
=========== =========== ============= ============
Net income per BUC $ 0.21 $ 0.19 $ 0.20 $ 0.14
=========== =========== ============= ============
</TABLE>
NOTE 9--Subsequent Events
In February 1997, distributions of approximately $1,660,000 and $34,000
were paid to the BUC$holders and General Partners, respectively, for the
quarter ended December 31, 1996.
183
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources
The Registrant has invested in eleven tax-exempt FMBs issued by various
state or local governments or their agencies or authorities. The FMBs are
secured by participating first mortgage loans on multi-family residential
apartment projects.
At the beginning of the year, the Registrant had cash and temporary
investments of approximately $1,976,000. After payment of distributions of
approximately $6,777,000 and receipt of the net cash flow from operations of
approximately $6,608,000. The Registrant ended the year with approximately
$1,894,000 in cash and temporary investments. The fourth quarter distribution
of approximately $1,660,000 ($.21 per BUC) was paid to BUC$holders in February
1997 from current and previously undistributed cash flow from operations. The
Registrant anticipates funding future cash distributions from current and
previously undistributed cash flow from operations. The restructurings of the
FMBs in 1996 and any future restructurings may result in the General Partners
reducing the distributions to BUC$holders in future periods.
The Registrant has entered into forbearance agreements on several FMBs and
may be required to extend these agreements or enter into new agreements in the
future. Such agreements may adversely impact liquidity; however interest
payments from FMBs are anticipated to provide sufficient liquidity to fund in
future years the Registrant's operating expenditures, debt service and
distributions.
The Registrant's loan payable has a variable interest rate; therefore,
future levels of interest expense will fluctuate in correlation to movements in
the 30-day commercial paper interest rate.
With respect to the Highpointe FMB, effective as of July 12, 1996, the
Registrant has entered into a purchase agreement with Chemical Bank (now Chase
Bank) which is secured by a pledge and assignment of the Registrant's
Highpointe FMBs (face amount of $8,900,000). The purpose of this transaction
was to obtain an extension, to January 1998, of a Letter of Credit ("L/C")
issued by Chemical Bank on behalf of Highpointe (RHA Inv., Inc.) to credit
enhance $3,250,000 in pari-passu first mortgage "low floater" bonds ("Chemical
Bonds"), which proceeds were used to complete construction of the project in
1989. Pursuant to the terms of the purchase agreement, the Registrant has
agreed that, should the Chemical Bonds not otherwise be refinanced or the L/C
replaced as of January 1998 or the Highpointe obligor defaults on its
obligations under the Chemical Bonds, the Registrant will unconditionally
purchase the bonds from Chemical Bank.
For a discussion of the proposed Settlement of the Class Action relating
to the Registrant see Other Events in Item 1. Business above.
Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed that will or are likely
to impact liquidity in a material way. The Registrant's investments in FMBs are
secured by Registrant's interest in properties which are diversified by
location so that if one area of the country is experiencing downturns in the
economy, the remaining properties may be experiencing upswings. However, the
geographic diversifications of the portfolio may not protect against a general
downturn in the economy.
Results of Operations
The Registrant accounts for its investments in the FMBs as debt securities
under the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115").
The Registrant has a right to require redemption of the FMBs approximately
twelve years after their issuance. The Registrant anticipates holding the FMBs
for approximately 12 to 15 years from the date of issuance; however, it can and
may elect to hold them until maturity. As such, SFAS 115 requires the
Registrant to classify these investments as "available for sale." Accordingly,
investments in FMBs are carried at their estimated fair values, with unrealized
gains and losses reported in a separate component of partners' capital.
Unrealized holding gains or losses do not affect the cash flow generated from
property operations, distributions to BUC$holders, the characterization of the
tax-exempt income stream or the financial obligations under the FMBs.
The Registrant periodically evaluates each FMB to determine whether a
decline in fair value below the FMB's cost basis is other than temporary. Such
a decline is considered to be other than temporary if, based on current
information and events, it is probable that the Registrant will be unable to
collect all amounts due according to the existing contractual terms of the
FMBs. If the decline is judged to be other than temporary, the cost basis of
the FMB is written down to its then estimated fair value, with the amount of
the write-down accounted for as realized loss.
Because the FMBs are not readily marketable, the Registrant estimates fair
value for each FMB as the present value of its expected cash flows using a
discount rate for comparable tax-exempt investments. This process is based upon
projections of future economic events affecting the real estate collateralizing
the FMBs, such as property occupancy rates, rental rates, operating cost
inflation and market
184
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
capitalization rates, and upon determination of an appropriate market rate of
interest, all of which are based on good faith estimates and assumptions
developed by the Registrant's management. Changes in market conditions and
circumstances may occur which would cause these estimates and assumptions to
change, therefore, actual results may vary from the estimates and the variance
may be material.
1996 vs 1995
Net income increased approximately $558,000 for the year ended December
31, 1996 as compared to the corresponding period in 1995 primarily due to the
$500,000 loss on impairment of assets recorded in 1995 and for the reasons
discussed below:
Interest income from FMBs decreased approximately $91,000 for the year
ended December 31, 1996 as compared to the corresponding period in 1995
primarily due to a tax loan to Cypress Run in December 1996 which was fully
reserved for and accounted for as a reduction of interest from the FMB, reduced
debt service payments received from the Sunset Terrace FMB and the repayment of
the East Ridge and Martin's Creek second mortgage loans in January 1996. These
decreases were partially offset by increased debt service payments received
from the Cedar Creek FMB and an increase in contingent interest from the
Mansions FMB.
General and administrative expenses decreased approximately $64,000 for
the year ended December 31, 1996 as compared to the corresponding period in
1995 primarily due to the nonrecurring costs incurred in obtaining appraisals
of the properties in 1995.
1995 vs. 1994
Net income increased approximately $283,000 for the year ended December
31, 1995 as compared to the corresponding period in 1994 primarily due to the
$1,350,000 loss on impairment of assets recorded in 1994 and for the reasons
discussed below:
Interest income from FMBs decreased by approximately $130,000 for the year
ended December 31, 1995 as compared to the corresponding period in 1994
primarily due to reduced debt service payments received from the Sunset Terrace
and Cedar Creek FMBs.
Interest income from promissory notes decreased by approximately $35,000
for the year ended December 31, 1995 as compared to the corresponding period in
1994. This decrease resulted primarily from the repayment of the Cypress Run
tax loan in 1994 resulting in no interest income in 1995.
Interest income from temporary investments increased approximately $29,000
for the year ended December 31, 1995 as compared to the corresponding period in
1994 primarily due to higher interest rates and invested balances.
Interest expense increased approximately $235,000 for the year ended
December 31, 1995 as compared to the corresponding period in 1994 due to
interest rate increases during 1995 on the Registrant's loan payable.
General and administrative expenses increased approximately $66,000 for
the year ended December 31, 1995 as compared to the corresponding period in
1994 primarily due to the timing of certain accruals recorded in the respective
years and increased costs associated with the administration of the Registrant.
Losses on impairment of assets of $500,000 and $1,350,000 were recorded
during the years ended December 31, 1995 and 1994, respectively, to write down
the cost basis of certain FMBs to recognize other-than-temporary impairment.
Legal expenses increased approximately $131,000 for the year ended
December 31, 1995 as compared to the corresponding period in 1994 primarily due
to the legal costs incurred with respect to the Cypress Run bankruptcy
proceedings, debt modifications and the Kinnes litigation discussed in Note 7
to the financial statements in Item 8.
Property Information
The following table lists the FMBs that the Registrant owns with occupancy
rates of the underlying properties as of February 11, 1997:
<TABLE>
<CAPTION>
Carrying Minimum Pay
Amount Average Stated Rate at
Face Amount at December Interest Rate Interest December 31,
Property Location of Bond 31, 1996 (F) Occupancy Paid for 1996* Rate* 1996*
- ----------------- ------------------ ------------- -------------- ----------- ---------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
The Mansion Independence, MO $19,450,000 $18,454,884 94.7% 6.78%(D) 5.23% 5.23%
Martin's Creek Summerville, SC 7,300,000 6,642,891 96.5 6.91 (C) 8.25 7.50(C)
East Ridge Mt. Pleasant, SC 8,700,000 8,215,330 96.4 7.83 (C) 8.25 7.50(C)
Highpointe Club Harrisburg, PA 8,900,000 7,000,186 97.9 6.74 8.50 (B)
Cypress Run Tampa, FL 15,402,428 13,982,796 90.3 5.72 8.50 (B)
Thomas Lake Eagan, MN 12,975,000 13,488,852 99.5 8.83 (E) 8.50 8.50
</TABLE>
185
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
<TABLE>
<CAPTION>
Carrying Minimum Pay
Amount Average Stated Rate at
Face Amount at December Interest Rate Interest December 31,
Property Location of Bond 31, 1996 (F) Occupancy Paid for 1996* Rate* 1996*
- ----------------- --------------- -------------- -------------- ----------- ---------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
North Glen Atlanta, GA 12,400,000 11,228,210 89.0 6.00 8.50 6.00(A)
Greenway Manor St. Louis, MO $ 12,850,000 13,020,536 96.8 9.17 (E) 8.50 8.50
Clarendon Hills Hayward, CA 17,600,000 14,683,645 98.9 5.52 5.52 5.52
Cedar Creek McKinney, TX 8,100,000 8,551,563 86.1 7.88 8.50 (B)
Sunset Terrace Lancaster, CA 10,350,000 8,095,850 91.3 4.93 8.00 (B)
------------- -------------
$134,027,428 $123,364,743
============= =============
</TABLE>
* The average interest rate paid represents the interest recorded by the
Registrant while the stated interest rate represents the coupon rate of the FMB
and the minimum pay rate represents the minimum rate payable pursuant to the
applicable forbearance agreement, if any.
(A) The minimum pay rate on the FMB is scheduled to increase to the
stated interest rate over the remaining term of the FMB.
(B) The minimum pay rate is the current cash flow of the property.
(C) The minimum pay rate on the FMB increases in increments from 6%
in 1990 to 8.25% in March 1997. The actual pay rate is adjusted as
of the property's fiscal year end based on audited financial
statements to no less than the minimum pay rate.
(D) Includes contingent interest paid during 1996.
(E) Includes receipt of deferred base interest relating to prior
periods.
(F) The FMBs are carried at their estimated fair values at December
31, 1996.
General
The determination as to whether it is in the best interest of the
Registrant to enter into forbearance agreements on the FMBs, or alternatively,
to pursue its remedies under the loan documents, including foreclosure, is
based upon several factors. These factors include, but are not limited to,
property performance, owner cooperation and projected legal costs.
The difference between the stated interest rates and the rates paid on
certain FMBs is not accrued for financial statement purposes, although it is
deferred and payable from available future cash flow and sale or refinancing
proceeds. Interest income relating to these FMBs of approximately $1,411,000,
$1,571,000, and $1,707,000 was not recorded for the years ended December 31,
1996, 1995 and 1994, respectively.
From time to time, certain property owners have elected to supplement the
cash flow generated by the properties to meet the required FMB interest
payments. There can be no assurance that in the future any property owner will
continue to elect to supplement property cash flow to satisfy FMB interest
requirements if necessary. The owner of the Sunset Terrace property supplemented
the cash flow generated by the property to meet the required interest payments
in 1994. No property owner made supplementary payments in 1996 or 1995.
186
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Statements of Financial Condition
(unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Participating first mortgage bonds-at fair value $123,397,243 $123,364,743
Temporary investments 1,150,000 1,650,000
Cash and cash equivalents 853,178 244,439
Promissory notes receivable, net 6,649,980 6,679,795
Deferred bond selection fees, net 1,520,646 1,558,161
Interest receivable, net 724,827 825,237
Deferred financing fees, net 101,199 133,156
Other assets 9,640 20,504
------------ ------------
Total assets $134,406,713 $134,476,035
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Loan payable $ 13,680,866 $ 13,680,866
Deferred income 921,286 954,256
Due to affiliates 330,925 143,023
Accounts payable and accrued expenses 87,486 101,255
------------ ------------
Total liabilities 15,020,563 14,879,400
------------ ------------
Contingencies
Partners' capital (deficit):
BUC$holders (7,906,234 BUC$ issued and outstanding) 124,104,945 124,311,220
General Partners (385,032) (380,822)
Net unrealized loss on participating first mortgage bonds (4,333,763) (4,333,763)
------------ ------------
Total partners' capital 119,386,150 119,596,635
------------ ------------
Total liabilities and partners' capital $134,406,713 $134,476,035
============ ============
</TABLE>
See accompanying notes to financial statements.
187
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Revenues:
Interest income:
Participating first mortgage bonds, net $2,142,851 $2,405,750
Promissory notes 135,615 158,734
Temporary investments 11,524 15,687
---------- ----------
Total revenues 2,289,990 2,580,171
---------- ----------
Expenses:
Interest 330,575 330,807
Management fees 167,969 167,969
General and administrative 89,183 80,254
Loan servicing fees 82,620 83,309
Legal 66,463 51,478
Amortization of deferred bond selection fees 37,515 37,514
Amortization of deferred financing fees 31,957 31,957
---------- ----------
Total expenses 806,282 783,288
---------- ----------
Net Income $1,483,708 $1,796,883
========== ==========
Allocation of Net Income:
BUC$holders $1,454,034 $1,760,945
========== ==========
General Partners $ 29,674 $ 35,938
========== ==========
Net Income per BUC $ .18 $ .22
========== ==========
</TABLE>
See accompanying notes to financial statements.
188
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Statements of Changes in Partners' Capital (Deficit)
(unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Loss on
Participating
First
Total BUC$holders General Partners Mortgage Bonds
-------------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Partners' capital (deficit)-January 1, 1997 $119,596,635 $124,311,220 $ (380,822) $ (4,333,763)
Net income 1,483,708 1,454,034 29,674 0
Distributions (1,694,193) (1,660,309) (33,884) 0
------------ ------------ ---------- ------------
Partners' capital (deficit)-March 31, 1997 $119,386,150 $124,104,945 (385,032) $ (4,333,763)
============ ============ ========== ============
</TABLE>
See accompanying notes to financial statements.
189
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1997 1996
--------------- ------------
<S> <C> <C>
Cash flows from Operating Activities:
Interest received, net $ 2,435,828 $ 2,533,017
Loan made to property (110,898) 0
Amount paid which was due to affiliate (84,225) 0
Fees and expenses paid (137,013) (127,916)
Interest paid (330,575) (330,807)
----------- -----------
Net cash provided by operating activities 1,773,117 2,074,294
----------- -----------
Cash Flows from Investing Activities:
Net sale (purchase) of temporary investments 500,000 (900,000)
Principal payments on promissory note 29,815 20,940
----------- -----------
Net cash provided by (used in) investing activities 529,815 (879,060)
----------- -----------
Cash Flow from Financing Activities:
Distributions paid (1,694,193) (1,694,193)
----------- -----------
Net increase (decrease) in cash and cash equivalents 608,739 (498,959)
Cash and cash equivalents at beginning of period 244,439 626,391
----------- -----------
Cash and cash equivalents at end of period $ 853,178 $ 127,432
=========== ===========
Schedule Reconciling Net Income to Net Cash
Provided by Operating Activities:
Net income $ 1,483,708 $ 1,796,883
----------- -----------
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred income (65,470) (65,471)
Amortization of deferred bond selection fees 37,515 37,514
Amortization of deferred financing fees 31,957 31,957
Changes in:
Promissory notes receivable, net 0 57,053
Interest receivable, net 100,410 18,317
Other assets 10,864 10,776
Deferred income 0 (57,053)
Accounts payable and accrued expenses (13,769) (4,934)
Due to affiliates 187,902 249,252
----------- -----------
Total adjustments 289,409 277,411
----------- -----------
Net cash provided by operating activities $ 1,773,117 $ 2,074,294
=========== ===========
</TABLE>
See accompanying notes to financial statements.
190
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
March 31, 1997 (unaudited)
NOTE 1--General
These financial statements have been prepared without audit. In the
opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of Summit Tax Exempt Bond Fund, L.P. (the "Partnership")
as of March 31, 1997 and the results of its operations and its cash flows for
the three months ended March 31, 1997 and 1996. However, the operating results
for the interim periods may not be indicative of the results expected for the
full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1996.
Certain reclassifications have been made to prior year amounts to conform
to the current year's presentation.
NOTE 2--Participating First Mortgage Bonds ("FMBs")
The Partnership accounts for its investments in the FMBs as "available for
sale" debt securities under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Accordingly, investments in FMBs are carried at their
estimated fair values with unrealized gains and losses reported in a separate
component of partners' capital.
Because the FMBs are not readily marketable, the Partnership estimates
fair value for each bond as the present value of its expected cash flows using
a discount rate for comparable tax-exempt investments. This process is based
upon projections of future economic events affecting the real estate
collateralizing the bonds, such as property occupancy rates, rental rates,
operating cost inflation and market capitalization rates, and upon
determination of an appropriate market rate of interest, all of which are based
on good faith estimates and assumptions developed by the Partnership's
management. Changes in market conditions and circumstances may occur which
would cause these estimates and assumptions to change, therefore, actual
results may vary from the estimates and the variance may be material.
Effective as of January 30, 1997, pursuant to the terms of a forbearance
agreement executed in August 1995, the obligor of the Sunset Terrace FMB
transferred the deed to the underlying Property to an affiliate of the Related
General Partner, who made no equity investment in the Property but assumed day
to day responsibilities of operations and obligations under the FMB.
With respect to the Sunset Terrace FMB, the Partnership paid certain
insurance premiums on January 31, 1997 in the amount of approximately $64,000
as a result of the forbearance agreement and transfer of the deed to the
underlying property to an affiliate of the Related General Partner. This loan
was recorded in operating income as a reduction of interest income from
participating first mortgage bonds because the Sunset Terrace FMB is paying
interest on a cash flow basis.
In February 1997, the Partnership made an additional advance of
approximately $111,000 to the obligor of the Cypress Run FMB (an affiliate of
the Related General Partner) toward payment of certain capital improvements to
cure deferred maintenance. This advance as well as previous advances in April
1995 and December 1996 in the amount of $721,000 and $274,000, respectively,
toward payment of delinquent real estate taxes, all of which are fully reserved
for (and accounted for as a reduction of interest income from Participating
First Mortgage Bonds), are made pursuant to a demand note from the obligor for
a loan amount up to $1,500,000 providing for interest only at 8.5% per annum,
payable monthly. Principal is due on demand.
With respect to the FMBs which are subject to forbearance agreements with
the respective obligors, the difference between the stated interest rates and
the rates paid (whether deferred and payable out of available future cash flow
or, ultimately, from sale or refinancing proceeds) on FMBs is not accrued for
financial statement purposes. The accrual of interest at the stated interest
rate will resume once a property's ability to pay the stated rate has been
adequately demonstrated. Unrecorded contractual interest income was
approximately $515,000 and $326,000 for the three months ended March 31, 1997
and 1996, respectively.
The cost basis of the FMBs at March 31, 1997 and December 31, 1996 was
$127,731,006 and $127,698,506, respectively. The net unrealized loss on FMBs
consists of gross unrealized gains and losses of $2,842,285 and $7,176,048,
respectively, at both March 31, 1997 and December 31, 1996.
191
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
March 31, 1997 (unaudited)
NOTE 2--Participating First Mortgage Bonds ("FMBs") (continued)
Descriptions of the various FMBs owned by the Partnership at March 31,
1997 are as follows:
<TABLE>
<CAPTION>
Annualized
Interest Rate Paid Minimum
for the Three Months Pay Rate
Ended at March 31,
Property Location March 31, 1997* 1997*
- ----------------- ------------------ ---------------------- --------------
<S> <C> <C> <C>
The Mansion Independence, MO 6.75%(B) 5.23%
Martin's Creek Summerville, SC 7.37 (C) 8.25
East Ridge Mt. Pleasant, SC 8.25 (C) 8.25
Highpointe Club Harrisburg, PA 6.84 (A)
Cypress Run Tampa, FL 5.92 (A)
Thomas Lake Eagan, MN 9.94 (D) 8.50
North Glen Atlanta, GA 6.00 6.00
Greenway Manor St. Louis, MO 9.00 (D) 8.50
Clarendon Hills Hayward, CA 5.52 5.52
Cedar Creek McKinney, TX 7.88 (A)
Sunset Terrace Lancaster, CA 4.93 (A)
<CAPTION>
Carrying
Stated Amount
Interest Maturity Face at March 31,
Property Rate* Call Date Date Amount 1997 (E)
- ----------------- ---------- ----------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
The Mansion 5.23% Apr. 2006 Apr. 2008 $ 19,450,000 $ 18,454,884
Martin's Creek 8.25 Mar. 2000 May 2010 7,300,000 6,657,721
East Ridge 8.25 Mar. 2000 May 2010 8,700,000 8,233,000
Highpointe Club 8.50 Jun. 1998 Jun. 2006 8,900,000 7,000,186
Cypress Run 8.50 Aug. 1998 Aug. 2006 15,402,428 13,982,796
Thomas Lake 8.50 Aug. 1998 Aug. 2006 12,975,000 13,488,852
North Glen 8.50 Aug. 1998 Aug. 2008 12,400,000 11,228,210
Greenway Manor 8.50 Oct. 1998 Sept. 2006 12,850,000 13,020,536
Clarendon Hills 5.52 Dec. 2003 Dec. 2003 17,600,000 14,683,645
Cedar Creek 8.50 Dec. 1998 Dec. 2006 8,100,000 8,551,563
Sunset Terrace 8.00 Feb. 1999 May 2007 10,350,000 8,095,850
------------ ------------
$134,027,428 $123,397,243
============ ============
</TABLE>
*The annualized interest rate paid represents the interest recorded by the
Partnership while the stated interest rate represents the coupon rate of
the FMB and the minimum pay rate represents the minimum rate payable
pursuant to the applicable forbearance agreement, if any.
(A) Pay rate is based on the net cash flow generated by the property.
(B) Includes contingent interest paid during the three months ended
March 31, 1997.
(C) Any deficit in the actual annual pay rate is restored as of the
property's fiscal year end based on audited financial statements
to no less than the minimum pay rate.
(D) Includes receipt of deferred base interest related to prior
periods.
(E) The FMBs are carried at their estimated fair values at March 31,
1997.
NOTE 3--Related Parties
Prudential-Bache Properties, Inc. ("PBP") and the Related General Partner
(collectively, the "General Partners") and their affiliates perform services
for the Partnership which include, but are not limited to: accounting and
financial management; registrar, transfer and assignment functions; asset
management; investor communications; printing and other administrative
services. The General Partners and their affiliates receive reimbursements for
costs incurred in connection with these services, the amount of which is
limited by the provisions of the Agreement of Limited Partnership (the
"Partnership Agreement"). The costs and expenses were:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
PBP and affiliates:
General and administrative $ 9,731 $ 21,730
Management fee 83,984 83,984
-------- --------
93,715 105,714
-------- --------
The Related General Partner and affiliates:
General and administrative 11,692 15,000
Loan servicing fees 82,620 83,309
Management fee 83,985 83,985
-------- --------
178,297 182,294
-------- --------
$272,012 $288,008
======== ========
</TABLE>
192
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
March 31, 1997 (unaudited)
NOTE 3--Related Parties (continued)
An affiliate of the Related General Partner receives loan servicing fees
(see above) in an amount of .25% per annum of the principal amount outstanding
on FMBs serviced by the affiliate.
The General Partners are paid, in the aggregate, an annual management fee
(see above) equal to .5% of the original amount invested in FMBs.
During January 1996, a division of Prudential Securities Incorporated
("PSI"), an affiliate of PBP, was responsible for the purchase, sale and
safekeeping of the Partnership's temporary investments. This account was
maintained in accordance with the Partnership Agreement.
PSI owns 7,600 BUC$ at March 31, 1997.
Several executive officers and directors of the Related General Partner
own less than 1% of the outstanding BUC$.
As of March 31, 1997, the original owners of the underlying properties and
obligors of the Cedar Creek, Cypress Run, Highpointe, Greenway Manor and Sunset
Terrace FMBs have been replaced with affiliates of the Related General Partner
who have not made equity investments. These entities have assumed the
day-to-day responsibilities and obligations of the underlying properties.
Buyers are being sought who would make equity investments in the underlying
properties and assume the nonrecourse obligations for each of the FMBs.
NOTE 4--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV 654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants. On November 16, 1993, a putative class action captioned
Connelly et al. v. Prudential-Bache Securities Inc. et al. (93 Civ. 713), was
filed in the United States District Court for the District of Arizona,
purportedly on behalf of investors in the Partnership against the Partnership,
PBP, PSI and a number of other defendants. On January 3, 1992, a putative class
action, captioned Levine v. Prudential-Bache Properties Inc. et al. (92 Civ.
52), was filed in the United States District Court for the Northern District of
Illinois purportedly on behalf of investors in the Partnership against the
General Partners, PSI and a number of other defendants. Subsequently, the
Related General Partner was dismissed from the Levine litigation.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, by order dated May 4, 1994, the Connelly case and by
order dated July 13, 1994, the Levine case, were transferred to a single judge
of the United States District Court for the Southern District of New York (the
"Court") and consolidated for pretrial proceedings under the caption In re
Prudential Securities Incorporated Limited Partnerships Litigation (MDL Docket
1005) (the "Class Action"). On June 8, 1994, plaintiffs in the transferred
cases filed a complaint that consolidated the previously filed complaints and
named as defendants, among others, PSI, certain of its present and former
employees and the General Partners. The Partnership was not named a defendant
in the consolidated complaint, but the name of the Partnership was listed as
being among the limited partnerships at issue in the case.
On August 9, 1995 PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class.
The Court gave final approval to the settlement, certified a class of
purchasers of specific limited partnerships, including the Partnership,
released all settled claims by members of the class against the PSI settling
defendants and permanently barred and enjoined class members from instituting,
commencing or prosecuting any settled claim against the released parties. The
full amount due under the settlement agreement has been paid by PSI. The Levine
and Connelly cases were dismissed with prejudice as to the Prudential
defendants by court order dated October 25, 1996. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
two other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well
as each of the other concerned partnerships and final approval of the Court
after review of the proposals at a fairness hearing.
193
<PAGE>
Summit Tax Exempt Bond Fund, L.P.
(a limited partnership)
Notes to Financial Statements
March 31, 1997 (unaudited)
NOTE 4--Contingencies (continued)
Under the proposed Reorganization plan, the BUC$holders of the
Partnership, and Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III, will
receive shares in a newly formed business trust. It is anticipated that shares
will be allocated proportionately among the partnerships and their respective
investors based upon appraisals and other factors as supported by a third-party
fairness opinion. Detailed information about the proposed Related Settlement
and Reorganization will be sent to BUC$holders in the near future. The terms of
the Reorganization include, among other matters, the acquisition by affiliates
of the Related Capital Company ("RCC") of PBP's general partner interest (the
"PBP Interest"), transfer to the BUC$holders of one-half of the PBP Interest,
reduction of the sum of the aggregate annual fees currently payable to both
General Partners by 25%, filing an application to list the new company's shares
on an exchange and the creation of an infinite, as opposed to finite,
life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996, PBP and RCC entered into an agreement for the purchase by
RCC or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions, including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
Pending final approval of the Related Settlement, the Court's Order
prohibits class members (including the BUC$holders) from, among other matters,
(i) granting a proxy to object to the Reorganization; or (ii) commencing a
tender offer for the BUC$. In addition, the General Partners are enjoined from
(i) recording any transfers made in violation of the Order and (ii) providing
the list of investors in any of the partnerships which are the subject of the
Reorganization to any person conducting a tender offer.
There can be no assurance that the conditions to the closing of the
proposed Related Settlement and Reorganization will be satisfied nor as to the
time frame in which a closing may occur. In the event a settlement cannot be
reached, the Related General Partner believes it has meritorious defenses to
the consolidated complaint and intends to vigorously defend this action.
NOTE 5--Subsequent Event
In May 1997, distributions of approximately $1,660,000 and $34,000 were
paid to the BUC$holders and General Partners, respectively, for the quarter
ended March 31, 1997.
194
<PAGE>
Summit Tax Exempt Band Fund, L.P.
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity and Capital Resources
Summit Tax Exempt Bond Fund, L.P. (the "Partnership") has invested in
eleven tax-exempt participating first mortgage bonds ("FMBs") issued by various
state or local governments or their agencies or authorities. The FMBs are
secured by participating first mortgage loans on multi-family residential
apartment projects.
At the beginning of the year, the Partnership had cash and temporary
investments of approximately $1,894,000. After payment of distributions of
approximately $1,694,000 and receipt of the net cash flow from operations of
approximately $1,773,000, the Partnership ended the three months with
approximately $2,003,000 in cash and temporary investments. The first quarter
distribution of $1,660,000 ($.21 per BUC) was paid to BUC$holders in May 1997
from cash flow from operations. The Partnership anticipates funding future cash
distributions from current and previously undistributed cash flow from
operations. The restructuring of the FMBs in prior years and any future
restructuring may result in the General Partners reducing the distributions to
BUC$holders in future periods.
Effective as of January 30, 1997, pursuant tothe terms of a forbearance
agreement executed in August 1995, the obligor of the Sunset Terrace FMB
transferred the deed to the underlying Property to an affiliate of the Related
General Partner, who made no equity investment in the Property but assumed day
to day responsibilities of operations and obligations under the FMB.
With respect to the Sunset Terrace FMB, the Partnership paid certain
insurance premiums on January 31, 1997 in the amount of approximately $64,000
as a result of the forbearance agreement and transfer of the deed to the
underlying property to an affiliate of the Related General Partner. This loan
was recorded in operating income as a reduction of interest income from
participating first mortgage bonds because the Sunset Terrace FMB is paying
interest on a cash flow basis.
In February 1997, the Partnership made an additional advance of
approximately $111,000 to the obligor of the Cypress Run FMB (an affiliate of
the Related General Partner) toward payment of certain capital improvements to
cure deferred maintenance. This advance as well as previous advances in April
1995 and December 1996 in the amounts of $721,000 and $274,000, respectively,
toward payment of delinquent real estate taxes, all of which are fully reserved
for (and accounted for as a reduction of interest income from Participating
First Mortgage Bonds), are made pursuant to a demand note from the obligor for
a loan amount up to $1,500,000 providing for interest only at 8.5% per annum,
payable monthly. Principal is due on demand.
The Partnership has entered into forbearance agreements on several FMBs
and may be required to extend or modify those agreements or enter into new
agreements in the future. Such agreements may adversely impact liquidity;
however interest payments from FMBs are anticipated to provide sufficient
liquidity to fund in future years the Partnership's operating expenditures,
debt service and distributions.
The Partnership's loan payable has a variable interest rate; therefore,
future levels of interest expense will fluctuate in correlation to movements in
the 30-day commercial paper interest rate.
For a discussion of the proposed settlement of the Class Action relating
to the Partnership, see Note 4 to the financial statements.
Management is not aware of any trends or events, commitments or
uncertainties which have not otherwise been disclosed that will or are likely
to impact liquidity in a material way. The Partnership's investments in FMBs
are secured by a Partnership interest in properties which are diversified by
location so that if one area of the country is experiencing downturns in the
economy, the remaining properties may be experiencing upswings. However, the
geographic diversifications of the portfolio may not protect against a general
downturn in the economy.
Results of Operations
Net income decreased approximately $313,000 for the three months ended
March 31, 1997 as compared to the corresponding period in 1996 for the reasons
discussed below.
Interest income from FMBs decreased approximately $263,000 for the three
months ended March 31, 1997 as compared to the corresponding period in 1996
primarily due to a loan to Cypress Run in February 1997, which was fully
reserved for and accounted for as a reduction of interest from the FMB, a
decrease in the amount of contingent interest received from the Mansions FMB as
compared to the corresponding period in 1996 (which includes an adjustment in
prior periods) and a decrease due to the payment of insurance premiums related
to the underlying property of the Sunset Terrace FMB which was recorded as a
reduction of income.
Interest income from promissory notes decreased approximately $23,000 for
the three months ended March 31, 1997 as compared to the corresponding period
in 1996, primarily due to the repayment of the East Ridge and Martin's Creek
second mortgage loans in January 1996.
195
<PAGE>
Summit Tax Exempt Band Fund, L.P.
(a limited partnership)
Interest income from temporary investments decreased approximately $4,000
for the three months ended March 31, 1997 as compared to the corresponding
period in 1996 primarily due to lower cash and temporary investment balances in
1997.
General and administrative expenses increased approximately $9,000 for the
three months ended March 31, 1997 as compared to the corresponding period in
1996 primarily due to an overaccrual of audit fees at December 31, 1995.
Legal expenses increased approximately $15,000 for the three months ended
March 31, 1997 as compared to the corresponding period in 1996 primarily due to
legal costs incurred with respect to finalization of the Cypress Run bankruptcy
proceedings and related issues.
General
The determination as to whether it is in the best interest of the
Partnership to enter into forbearance agreements on the FMBs or, alternatively,
to pursue its remedies under the loan documents, including foreclosure, is
based upon several factors including, but not limited to, property performance,
owner cooperation and projected legal costs.
Certain property owners have, at times, supplemented the cash flow
generated by the properties to meet the required FMB interest payments. There
can be no assurance that in the future any property owner will elect to
supplement property cash flow to satisfy bond interest requirements, if
necessary. No property owner made supplementary payments during the three
months ended March 31, 1997 and 1996.
Property Information
The following table lists the FMBs the Partnership owns together with
occupancy rates of the underlying properties as of March 31, 1997:
<TABLE>
<CAPTION>
Annualized
Interest
Rate Paid
for the Three Minimum
Stated Months Ended Pay Rate at
Interest March 31, March 31,
Property Location Face Amount Occupancy Rate* 1997* 1997*
- ----------------- ------------------ ------------- ----------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
The Mansion Independence, MO $ 19,450,000 96.0% 5.23% 6.75% (B)5.23%
Martin's Creek Summerville, SC 7,300,000 97.0 8.25 7.37(C) 8.25
East Ridge Mt. Pleasant, SC 8,700,000 95.9 8.25 8.25(C) 8.25
Highpointe Club Harrisburg, PA 8,900,000 98.7 8.50 6.84 (A)
Cypress Run Tampa, FL 15,402,428 92.3 8.50 5.92 (A)
Thomas Lake Eagan, MN 12,975,000 99.5 8.50 9.94(D) 8.50
North Glen Atlanta, GA 12,400,000 92.6 8.50 6.00 6.00
Greenway Manor St. Louis, MO 12,850,000 97.1 8.50 9.00(D) 8.50
Clarendon Hills Hayward, CA 17,600,000 99.6 5.52 5.52 5.52
Cedar Creek McKinney, TX 8,100,000 87.3 8.50 7.88 (A)
Sunset Terrace Lancaster, CA 10,350,000 89.1 8.00 4.93 (A)
-------------
$134,027,428
=============
</TABLE>
*The annualized interest rate paid represents the interest recorded by the
Partnership while the stated interest rate represents the coupon rate of
the FMB and the minimum pay rate represents the minimum rate payable
pursuant to the applicable forbearance agreement, if any.
(A) Pay rate is based on net cash flow generated by the property.
(B) Includes contingent interest paid during the three months ended
March 31, 1997.
(C) The actual annual pay rate is adjusted as of the property's
fiscal year end based on audited financial statements to no less
than the minimum pay rate.
(D) Includes receipt of deferred base interest related to prior
periods.
196
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Summit Tax Exempt L.P. II
New York, New York
We have audited the accompanying statements of financial condition of
Summit Tax Exempt L.P. II (a Delaware Limited Partnership) as of December 31,
1996 and 1995, and the related statements of income, changes in partners'
capital (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 General Partners. Our responsibility is to express an opinion on these
financial statements based on our audits.
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 the General Partners, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Summit Tax Exempt L.P. II 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.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 20, 1997
197
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Statements of Financial Condition
ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Participating first mortgage bonds-at fair value $148,123,426 $150,274,452
Temporary investments 3,600,000 2,800,000
Cash and cash equivalents 249,192 972,889
Interest receivable, net 735,343 899,299
Promissory notes receivable, net 275,572 70,513
Deferred bond selection fees, net 1,804,942 1,989,663
Due from affiliates 84,225 0
Other assets 23,775 12,498
------------ ------------
Total assets $154,896,475 $157,019,314
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Deferred income $ 394,259 $ 455,636
Accrued expenses 107,421 132,653
Due to affiliates 72,194 64,061
------------ ------------
Total liabilities 573,874 652,350
------------ ------------
Contingencies
Partners' capital (deficit):
BUC$holders (9,151,620 BUC$ issued and outstanding) 160,622,463 164,412,008
General partners (184,260) (106,923)
Net unrealized loss on participating first mortgage bonds (6,115,602) (7,938,121)
------------ ------------
Total partners' capital 154,322,601 156,366,964
------------ ------------
Total liabilities and partners' capital $154,896,475 $157,019,314
============ ============
</TABLE>
See accompanying notes to financial statements.
198
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest income:
Participating first mortgage loans $11,647,431 $11,895,439 $11,765,112
Temporary investments 138,088 120,370 68,017
Promissory notes 26,797 23,478 37,361
----------- ----------- -----------
Total revenues 11,812,316 12,039,287 11,870,490
----------- ----------- -----------
Expenses:
Management fees 810,625 810,625 810,625
Loan servicing fees 405,313 405,313 405,313
General and administrative 566,616 450,823 324,496
Amortization of deferred bond selection fees 184,721 184,723 184,720
Provision for disputed claim 0 0 22,287
Loss on impairment of assets 4,000,000 1,000,000 500,000
----------- ----------- -----------
Total expenses 5,967,275 2,851,484 2,247,441
----------- ----------- -----------
Net income $ 5,845,041 $ 9,187,803 $ 9,623,049
=========== =========== ===========
Allocation of Net Income:
BUC$holders $ 5,728,140 $ 9,004,047 $ 9,430,588
=========== =========== ===========
General Partners $ 116,901 $ 183,756 $ 192,461
=========== =========== ===========
Net income per BUC $ 0.63 $ 0.98 $ 1.03
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
199
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Statements of Changes in Partners' Capital (Deficit)
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Participating
First
Total BUC$holders General Partners Mortgage Bonds
--------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Partners' capital (deficit)-December 31, 1993 $164,918,079 $165,012,743 $ (94,664)
Cumulative effect through January 1, 1994 of
accounting change (Note 2) (9,337,668) 0 0 $ (9,337,668)
Net income 9,623,049 9,430,588 192,461 0
Distributions (9,711,923) (9,517,685) (194,238) 0
Net change in fair value of participating first
mortgage bonds 856,670 0 0 856,670
------------ ------------ ---------- ------------
Partners' capital (deficit)-December 31, 1994 156,348,207 164,925,646 (96,441) (8,480,998)
Net income 9,187,803 9,004,047 183,756 0
Distributions (9,711,923) (9,517,685) (194,238) 0
Net change in fair value of participating first
mortgage bonds 542,877 0 0 542,877
------------ ------------ ---------- ------------
Partners' capital (deficit)-December 31, 1995 156,366,964 164,412,008 (106,923) (7,938,121)
Net income 5,845,041 5,728,140 116,901 0
Distributions (9,711,923) (9,517,685) (194,238) 0
Realization of loss on impairment of assets 4,000,000 0 0 4,000,000
Net change in fair value of participating first
mortgage bonds (2,177,481) 0 0 (2,177,481)
------------ ------------ ---------- ------------
Partners' capital (deficit)-December 31, 1996 $154,322,601 $160,622,463 $ (184,260) $ (6,115,602)
============ ============ ========== ============
</TABLE>
See accompanying notes to financial statements.
200
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $11,910,060 $11,871,177 $11,839,187
Fees and expenses paid (1,895,155) (1,564,240) (1,741,023)
Cash held in escrow 0 98,390 (12,654)
----------- ----------- -----------
Net cash provided by operating activities 10,014,905 10,405,327 10,085,510
----------- ----------- -----------
Cash flows from investing activities:
Net purchase of temporary investments (800,000) (624,510) (319,710)
Loans made to properties (300,000) 0 0
Principal payments received from loans made to properties 73,321 31,333 28,934
Income deferred upon assumption of bond by new debtor 0 0 487,025
----------- ----------- -----------
Net cash (used in) provided by investing activities (1,026,679) (593,177) 196,249
----------- ----------- -----------
Cash flows from financing activities:
Distributions paid (9,711,923) (9,711,923) (9,711,923)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (723,697) 100,227 569,836
Cash and cash equivalents at the beginning of year 972,889 872,662 302,826
----------- ----------- -----------
Cash and cash equivalents at the end of the year $ 249,192 $ 972,889 $ 872,662
=========== =========== ===========
Schedule reconciling net income to net cash
provided by operating activities:
Net income $ 5,845,041 $ 9,187,803 $ 9,623,049
----------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on impairment of assets 4,000,000 1,000,000 500,000
Provision for disputed claim 0 0 22,287
Amortization of deferred bond selection fees 184,721 184,723 184,720
Accretion of deferred income (66,212) (66,212) (39,707)
Changes in:
Cash held in escrow 0 520,677 (12,654)
Interest receivable, net 163,956 (101,898) 8,404
Promissory notes receivable, net 21,620 73,560 65,334
Other assets (11,277) 3,305 1,944
Reserve for disputed claim 0 (422,287) 0
Accrued expenses (25,232) 65,636 (74,852)
Deferred income (21,620) (73,560) (65,334)
Due from affiliates (84,225) 0 0
Due to affiliates 8,133 33,580 (127,681)
----------- ----------- -----------
Total adjustments 4,169,864 1,217,524 462,461
----------- ----------- -----------
Net cash provided by operating activities $10,014,905 $10,405,327 $10,085,510
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
201
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 1--General
Summit Tax Exempt L.P. II, a Delaware limited partnership (the
"Partnership"), was formed on April 11, 1986 and will terminate on December 31,
2020 unless terminated sooner under the provisions of the Agreement of Limited
Partnership (the "Partnership Agreement"). The Partnership was formed to invest
in tax-exempt participating first mortgage revenue bonds ("FMBs") issued by
various state or local governments or their agencies or authorities. The FMBs
are secured by participating first mortgage loans on multi-family residential
apartment projects (the "Properties"). The General Partners of the Partnership
(the "General Partners") are Prudential-Bache Properties, Inc. ("PBP") (a
wholly-owned subsidiary of Prudential Securities Group Inc.) and Related Tax
Exempt Associates II, Inc. (the "Related General Partner"). Related
BUC$ Associates II, Inc. (the "Assignor Limited Partner"), which acquired and
holds limited partnership interests on behalf of those persons who purchased
Beneficial Unit Certificates ("BUC$"), has assigned to those persons
substantially all of its rights and interest in and under such limited
partnership interests. The Related General Partner and the Assignor Limited
Partner are under common ownership. As of December 31, 1996, the Partnership
had invested in a total of sixteen FMBs.
NOTE 2--Summary of Significant Accounting Policies
a) Basis of Accounting
The books and records of the Partnership are maintained on the accrual
basis of accounting in accordance with generally accepted accounting
principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the General Partners to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
b) Participating first mortgage bonds and promissory notes receivable
Effective January 1, 1994, the Partnership accounts for its investments in
the FMBs as debt securities under the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115").
The Partnership has a right to require redemption of the FMBs
approximately twelve years after their issuance. The Partnership anticipates
holding the FMBs for approximately 12 to 15 years from the date of issuance;
however, it can and may elect to hold until maturity. As such, SFAS 115
requires the Partnership to classify these investments as "available for sale."
Accordingly, investments in FMBs are carried at their estimated fair values,
with unrealized gains and losses reported in a separate component of partners'
capital. The cumulative effect of adopting this accounting was a decrease in
partners capital at January 1, 1994 of approximately $9,338,000 due to
unrealized holding losses. Unrealized holding gains or losses do not affect the
cash flow generated from property operations, distributions to BUC$holders, the
characterization of the tax-exempt income stream or the financial obligations
under the FMBs.
The Partnership periodically evaluates each FMB to determine whether a
decline in fair value below the FMB's cost basis is other than temporary. Such
a decline is considered to be other than temporary if, based on current
information and events, it is probable that the Partnership will be unable to
collect all amounts due according to the existing contractual terms of the
bonds. If the decline is judged to be other than temporary, the cost basis of
the bond is written down to its then estimated fair value, with the amount of
the write-down accounted for as a realized loss.
Because the FMBs are not readily marketable, the Partnership estimates
fair value for each bond as the present value of its expected cash flows using
a discount rate for comparable tax-exempt investments. This process is based
upon projections of future economic events affecting the real estate
collateralizing the bonds, such as property occupancy rates, rental rates,
operating cost inflation and market capitalization rates, and upon
determination of an appropriate market rate of interest, all of which are based
on good faith estimates and assumptions developed by the Partnership's
management. Changes in market conditions and circumstances may occur which
would cause these estimates and assumptions to change, therefore, actual
results may vary from the estimates and the variance may be material.
From time to time, the Partnership has advanced funds to the owners of
certain properties in the form of promissory notes collateralized by second
mortgages on these properties. These promissory notes are carried at cost less
a valuation allowance where appropriate. The Partnership periodically evaluates
the collectibility of both interest and principal of these investments to
determine whether a reserve is necessary. As of both December 31, 1996 and 1995
reserves on these investments totaled approximately $138,000.
202
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 2--Summary of Significant Accounting Policies (continued)
For both FMBs and promissory notes, interest income is recognized at the
stated rate when collectibility of future amounts is reasonably assured.
Interest income from FMBs with modified terms where the collectibility of
future amounts is uncertain is recognized based upon expected cash receipts.
c) Temporary Investments
Temporary investments at December 31, 1996 represent tax-exempt municipal
preferred stock and tax-exempt floating rate municipal bonds which are carried
at cost plus accrued interest which approximates market value. Temporary
investments at December 31, 1995 represent tax-exempt municipal preferred stock
which is also carried at cost which approximates market value.
d) Cash and Cash Equivalents
Cash and cash equivalents include cash in banks, and investments in
short-term instruments with an original maturity of three months or less, for
which cost approximates market value.
e) Income Taxes
The Partnership is not required to provide for, or pay, any Federal income
taxes. Income tax attributes that arise from its operations are passed directly
to the BUC$holders. The Partnership may be subject to other state and local
taxes in jurisdictions in which it operates.
f) Profit and Loss Allocations and Distributions
Net profits or losses and distributions are allocated 98% to the
BUC$holders and 2% to the General Partners in accordance with the Partnership
Agreement.
g) Deferred Bond Selection Fees
The General Partners were paid bond selection fees (equal to 2% of the
gross proceeds from the initial offering) for evaluating and selecting FMBs,
negotiating the terms of mortgage loans and coordinating the development effort
with property developers and government agencies. These fees have been
capitalized and are being amortized over the terms of the FMBs. The accumulated
amortization as of December 31, 1996 and 1995 was approximately $1,822,000 and
$1,637,000, respectively.
h) Fair Value of Financial Investments
As described in Note 2.b. above, the Partnership's investment in FMBs are
carried at estimated fair values. The Partnership has determined that the fair
value of its remaining financial instruments, including its temporary
investments, cash and cash equivalents and promissory notes receivable
approximates their carrying values.
i) Reclassifications
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
NOTE 3--Participating First Mortgage Bonds
Overview
The principal and interest payments on each FMB are payable only from the
cash flows, including proceeds in the event of a sale, from the Properties.
None of these FMBs constitute a general obligation of any state or local
government, agency or authority. The FMBs are secured by the mortgage loans on
the underlying Properties and the structure of each mortgage loan mirrors the
structure of the corresponding FMB.
Unless otherwise modified, the principal of the FMBs will not be amortized
during their respective terms (which are generally up to 24 years) and will be
required to be repaid in lump sum "balloon" payments at the expiration of the
respective terms or at such earlier times as the Partnership may require. The
Partnership has a right to require redemption of the FMBs approximately twelve
years after their issuance. The Partnership anticipates holding the FMBs for
approximately 12 to 15 years from the date of issuance; however, it can and may
elect to hold to maturity.
In addition to the stated base rates of interest ranging from 4.87% to
8.25% per annum, each of the FMBs (which have not been modified) provides for
"contingent interest" which is equal to: (a) an amount equal to 50% to 100% of
net property cash flow and 75% to 100% of net sale or refinancing proceeds
until the borrower has paid, during the post-construction period, annually
compounded interest at a rate ranging from 9.0% to 9.25% on a cumulative basis,
and thereafter (b) an amount equal to 25% to 50% of the remaining net
203
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 3--Participating First Mortgage Bonds (continued)
property cash flow and 25% to 50% of the remaining net sale of refinancing
proceeds until the borrower has paid interest at a simple annual rate of 16%
over the term of the FMB. Both stated and contingent interest are exempt from
federal income taxation. During the year ended December 31, 1996, two FMBs, the
Lakes and River Run, paid contingent interest amounting to approximately
$98,000 and $122,000, respectively. During the year ended December 31, 1995,
one FMB, The Lakes, paid contingent interest amounting to approximately
$68,000.
In order to protect the tax-exempt status of the FMBs, the owners of the
Properties are required to enter into certain agreements to own, manage and
operate such Properties in accordance with requirements of the Internal Revenue
Code.
Highland Ridge
Due to increases in its real estate taxes, in April, 1996, the obligor of
the Highland Ridge FMB entered into a forbearance agreement with the
Partnership effective retroactive to October, 1995. In accordance with the
terms and conditions of this agreement, the obligor will make minimum monthly
debt service payments beginning at a 7% annual rate and increasing in annual
increments over a period of four years back to the original stated rate. The
difference between the actual pay rate and the stated rate of the FMB is
deferred and payable from future available cash flow or sale or refinancing
proceeds. In addition, delinquent taxes will be paid in three installments by
the developer over an 18 month period. The developer has paid the first and
second such installments of the delinquent taxes due as of May 7, 1996 and
February 5, 1997. The obligations under the forbearance agreement are further
secured by a guarantee from the general partner of the obligor.
Sunset Downs
In June 1992, under a forbearance agreement, the Sunset Downs property
began paying debt service at 7.0% and was scheduled to increase in annual
increments to the original stated rate of 8.0% in June 1996. Effective with the
May 1, 1995 payment date, the Sunset Downs FMB has made payments based on the
monthly net cash flow generated by the operations of its underlying property in
accordance with the terms of the agreement outlined below. Effective as of
August 1, 1995, the obligor of the Sunset Downs FMB entered into a forbearance
agreement. In accordance with the terms of this agreement, the obligor of the
FMB is paying debt service of the FMB to the extent of cash flow generated by
the underlying property. In addition, pursuant to the agreement, the obligor
has replaced the present property manager and leasing agent with a new property
manager who is an affiliate of the Related General Partner. Effective as of
January 30, 1997, the obligor transferred the deed to the underlying property
to an affiliate of the Related General Partner, who made no equity investment
in the property but assumed the day-to-day responsibilities of operations and
obligations under the FMB.
Loveridge
Effective with the May 1, 1995 payment date, the Loveridge FMB has made
payments based on the monthly net cash flow generated by the operations of the
underlying properties. Subsequently, on August 1, 1995, the original owner and
obligor of the Loveridge FMB transferred the deed to the underlying property to
an affiliate of the Related General Partner for limited consideration. The
Related General Partner's affiliate, who has not made an equity investment in
the underlying property, assumed the day-to-day responsibilities and
obligations of operating the property. Although this property is not producing
sufficient cash flow to fully service the debt, the Registrant has no present
intention to declare a default on the FMB.
Lakes
On May 13, 1993, the Partnership, on behalf of Lakes Project Investors,
Inc. ("LPI"), affiliate of the Related General Partner who replaced the
original developer, deposited a cash escrow of $500,000 in connection with the
filing of an appeal of a mechanics lien judgment rendered against LPI. In July,
1994, the appeal was rejected and the judgment affirmed. However, at that time
LPI petitioned the court for a rehearing. On January 23, 1995, in settlement of
this case, LPI and the plaintiff agreed that approximately $422,000 of the
current escrow balance be paid to the plaintiff. The balance of funds
(approximately $99,000) remaining in escrow was returned to LPI and thence to
the Partnership as payment toward previously accrued and unpaid interest.
Previously, the Partnership had reserved fully for the appeal.
On January 27, 1994, LPI sold an option to purchase the ownership interest
in the Lakes, subject to the assumption of the obligation under the
Partnership's $13,650,000 FMB, to an unrelated third party for $200,000.
Pursuant to the terms of the option and assumption of the FMB, the option was
exercised on August 31, 1994. In conjunction with the sale, the Lakes FMB was
modified to allow debt service payments at 4.87% per annum with 100% of the
excess property cash flow paid to the Partnership up to a rate of 5.24% and
participation in the net cash flow thereafter. The net cash proceeds of
approximately $487,000 (net of an escrow for certain repairs and closing
costs), paid to the Partnership to reduce previously accrued and unpaid
interest, was recorded as deferred income and is being
204
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 3--Participating First Mortgage Bonds (continued)
accreted as interest income from participating first mortgage bonds over the
remaining life of The Lakes FMB. The balance of the deferred income relating to
The Lakes FMB was approximately $394,000 at December 31, 1996 and $434,000 at
December 31, 1995.
Newport Village, Bristol Village, Suntree and Players Club
In 1992, forbearance agreements were finalized with the owners of the
Newport Village, Bristol Village, Suntree and Players Club properties. In
October 1992, the Newport Village property began paying debt service at 6.0%
per annum and was scheduled to increase in annual increments to the original
stated rate of 8.0% in September 1996. As of September 16, 1996, the pay rate
of the Newport Village returned to the original stated base interest rate of 8%
per annum. In October 1992, the Bristol Village property began paying debt
service at 6.0% per annum and was scheduled to increase in annual increments to
the stated rate of 8.0% in January 1997. As of January 1, 1997 the pay rate for
the Bristol Village property returned to the stated rate of 8% per annum.
During 1992, the Suntree and Players Club properties began paying debt service
at 7.0% per annum. In 1994, the Suntree and Players Club forbearance agreements
were further modified to allow debt service payments to be made at 6.0% per
annum through the end of 1994. Effective January 1, 1995, and again extended
effective January 1, 1996 the Suntree and Players Club forbearance agreements
were again modified to allow minimum debt service payments to be made at 7.5%
and 7.0% per annum, respectively, through the end of 1996. Effective January 1,
1997 the Suntree and Players Club forbearance agreements were modified to allow
minimum debt service payments at 6.50% and 6.25% per annum, respectively,
through August 1, 1997 and December 31, 1997, respectively.
The Partnership also made a $125,000 loan in April 1993 to the owner of
the property underlying the Bristol Village FMB for payment of past due
property taxes. This loan is self-amortizing over four years with interest at
8.0% per annum payable monthly. The current balance outstanding as of December
31, 1996 is approximately $15,000. Payments on this loan are current at
December 31, 1996.
Shannon Lake
A forbearance agreement with the owner of the Shannon Lake property
originally made in 1991, further modified as of June 1, 1993 was extended as of
May 1, 1996 to allow the property to make minimum monthly interest payments at
annual rate of 6%. The Partnership agreed to extend other provisions and terms
of the 1993 agreement effective for the period March 16, 1993 through December
15, 1997. In addition, as of June 1, 1996 an Extension and Modification
Agreement was executed regarding the extension and modification of the $138,000
note due on April 30, 1996. The note was increased by $300,000 for certain
capital improvements to $438,000. The modified loan is self amortizing
beginning August 1, 1996 at the annual rate of 8%, payable in 48 equal monthly
installments of $10,692.86, with a final maturity of July 1, 2000. An allowance
for possible loss was established for $138,000 during 1993.
Bay Club
In 1990, the terms of the Bay Club FMB were modified when the equity
interest in the property and the related obligation of the FMB were sold by an
affiliate of the Related General Partner to an unrelated third party. As part
of this transaction, the minimum annual pay rate increases in annual increments
from 6.0% in 1990 to 8.25% in 1997. The difference between the rate paid and
the original stated rate is deferred and is payable from available future cash
flow or ultimately from sale or refinancing proceeds. The Partnership received
$360,000 in a 13% second mortgage note with interest and principal payments due
monthly through December 1995. This note is also partially secured by a letter
of credit. In January 1996 the second mortgage note to Bay Club was paid in
full and the letter of credit released.
Pelican Cove
The original owner of the underlying property and obligor of the Pelican
Cove FMB has been replaced with an affiliate of the Related General Partner who
has not made an equity investment. This entity has assumed the day-to-day
responsibilities and obligations of the underlying property. Buyers are being
sought who would make an equity investment in the underlying property and
assume the nonrecourse obligations for the FMB. Although this property is not
producing sufficient cash flow to fully service the debt, the Partnership has
no present intention to declare a default on the FMB.
Cedar Pointe
A forbearance agreement with the owner of the Cedar Pointe property was
executed on February 1, 1997, which provided for a minimum pay rate of 7% per
annum effective September 16, 1996. Pursuant to the terms of the forbearance
agreement, it is envisioned that the FMB will be formally and permanently
modified to provide for a new base interest rate of 7% and a contingent
interest rate of up to 5% payable from 25% of cash flow or sale or refinancing
proceeds. In addition, the FMB modification will call for the discharge of
accrued and unpaid primary contingent interest, primary deferred interest,
supplemental contingent interest, supplemental deferred interest and
construction period deferred and contingent interest through September 15,
1996, whether payable before, on, or after September 15, 1996. It is further
expected that maturity of the FMB will be extended to 2017 and the call date
extended to 2006.
205
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 3--Participating First Mortgage Bonds (continued)
General
The determination as to whether it is in the best interest of the
Partnership to enter into forbearance agreements on the FMBs, or alternatively,
to pursue its remedies under the loan documents, including foreclosure, is
based upon several factors. These factors include, but are not limited to,
property performance, owner cooperation and projected legal costs. Payments
under each of the existing forbearance agreements are current as of December
31, 1996.
With respect to the FMBs which are subject to forbearance agreements with
the respective obligors, the difference between the stated interest rates and
the rates paid (whether deferred and payable out of available future cash flow
or, ultimately, from sale or refinancing proceeds) on FMBs is not accrued for
financial statement purposes. The accrual of interest at the stated interest
rate will resume once a property's ability to pay the stated rate has been
adequately demonstrated. Unrecorded contractual interest income was
approximately $1,407,000, $704,000 and $931,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
The cost basis of the FMBs at December 31, 1996 and 1995 was $154,239,028
and $158,212,573, respectively. The net unrealized loss on FMBs consists of
gross unrealized gains and losses of $951,666 and $7,067,268, respectively, at
December 31, 1996 and $2,113,430 and $10,051,551, respectively, at December 31,
1995.
Descriptions of the various FMBs owned by the Partnership at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Minimum
Average Pay Rate
Interest Rate at December
Property Location Paid for 1996* 31, 1996*
- ------------------ ------------------ ---------------- -----------
<S> <C> <C> <C>
Bay Club Mt. Pleasant, SC 8.43%(E) 7.50%(E)
Loveridge Contra Costa, CA 4.83 (B)
The Lakes Kansas City, MO 5.61 (D) 4.87
Crowne Pointe Olympia, WA 8.00 8.00
Orchard Hills Tacoma, WA 8.00 8.00
Highland Ridge St. Paul, MN 7.06 7.25 (F)
Newport Village Tacoma, WA 7.98 (C) 8.00
Sunset Downs Lancaster, CA 4.35 (B)
Pelican Cove St Louis, MO 7.50 (B)
Willow Creek Ames, IA 8.00 8.00
Cedar Pointe Nashville, TN 7.88 (H) 7.00
Shannon Lake Atlanta, GA 6.00 6.00 (F)
Bristol Village Bloomington, MN 9.87 (C) 7.75 (F)
Suntree Ft. Myers, FL 7.63 7.50 (F)
River Run Miami, FL 9.83 (I) 8.00
Players Club (A) Ft. Myers, FL 7.37 7.00 (F)
<CAPTION>
Carrying
Stated Amount
Interest Maturity Face at December
Property Rate* Call Date Date Amount 31, 1996 (G)
- ------------------ ---------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Bay Club 8.25% Sep. 2000 Sep. 2006 $ 6,400,000 $ 6,134,588
Loveridge 8.00 Nov. 1998 Nov. 2006 8,550,000 6,826,198
The Lakes 4.87 Dec. 2006 Dec. 2006 13,650,000 10,101,816
Crowne Pointe 8.00 Dec. 1998 Dec. 2006 5,075,000 5,322,225
Orchard Hills 8.00 Dec. 1998 Dec. 2006 5,650,000 5,842,439
Highland Ridge 8.00 Feb. 1999 Feb. 2007 15,000,000 12,971,183
Newport Village 8.00 Jan. 1999 Jan. 2007 13,000,000 12,843,816
Sunset Downs 8.00 May 1999 May 2007 15,000,000 11,306,665
Pelican Cove 8.00 Feb. 1999 Feb. 2007 18,000,000 16,907,362
Willow Creek 8.00 Oct. 1999 Oct. 2006 6,100,000 6,019,067
Cedar Pointe 8.00 Apr. 1999 Apr. 2007 9,500,000 8,423,412
Shannon Lake 8.00 Jun. 1999 Jun. 2007 12,000,000 10,920,358
Bristol Village 8.00 Jun. 1999 Jun. 2005 17,000,000 17,254,892
Suntree 8.00 Jul. 1999 Jul. 2007 7,500,000 7,387,848
River Run 8.00 Aug. 1999 Aug. 2007 7,200,000 7,457,110
Players Club (A) 8.00 Aug. 1999 Aug. 2007 2,500,000 2,404,447
------------- -------------
$162,125,000 $148,123,426
============= =============
</TABLE>
*The average interest rate paid represents the interest recorded by the
Partnership while the stated interest rate represents the coupon rate of
the FMB and the minimum pay rate represents the minimum rate payable
pursuant to the applicable forbearance agreement, if any.
(A) Summit Tax Exempt L.P. III, of which the general partners are
either the same of affiliates of the General Partners of the
Partnership, acquired the other $7,200,000 of the Players Club
FMB.
(B) Pay rate is based on the net cash flow generated by operations of
the underlying property.
(C) Includes receipt of deferred base interest relating to prior
periods.
(D) Includes receipt of primary and supplemental contingent interest.
(E) The minimum pay rate on the FMB increases in increments from 6.0%
in 1990 to 8.25% in 1997. The actual pay rate is adjusted as of
the property's fiscal year-end based on audited financial
statements to no less than the minimum pay rate.
(F) The minimum pay rate on the FMB is scheduled to increase to the
stated interest rate over the remaining term of the FMB.
(G) The FMBs are carried at their estimated fair values at December
31, 1996.
(H) Reflects payments accrued at December 31, 1996 that were received
pursuant to a forbearance agreement entered as of February 1,
1997, which lowered the base interest rate to 7% effective
September 16, 1996.
(I) Includes receipt of primary contingent interest.
206
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 4--Income Taxes
The following is a reconciliation of net income for financial reporting
purposes with net income for tax reporting for the years ended December 31,
1996, 1995 and 1994, respectively:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net income per financial statements $ 5,845,041 $ 9,187,803 $ 9,623,049
Uncollected interest on FMBs and receivables 1,157,499 704,152 931,251
Loss on impairment of assets 4,000,000 1,000,000 500,000
Property tax loans deferred for tax reporting purposes, net 260,614 0 (116,199)
Amortization of bond selection fees 184,721 184,723 184,720
Write-off of accrued and unpaid interest 0 0 (2,229,178)
Loss from debt restructure 0 0 (1,331,857)
Reversal of reserve for disputed claim 0 (422,287) 0
Other 53,887 (26,455) (104,944)
----------- ----------- -----------
Tax basis net income $11,501,762 $10,627,936 $ 7,456,842
=========== =========== ===========
</TABLE>
Net income for tax purposes is generally exempt from Federal income tax.
The differences between the tax and book bases of partners' capital are
primarily attributable to the cumulative effect of the book to tax income
adjustments, the recording of distributions and the Partnership's accounting
for the FMBs at fair value for book purposes and cost for tax purposes.
NOTE 5--Related Parties
The General Partners and their affiliates perform services for the
Partnership which include, but are not limited to: accounting and financial
management; registrar, transfer and assignment functions; asset management;
investor communications; printing and other administrative services. The
General Partners and their affiliates receive reimbursements for costs incurred
in connection with these services, the amount of which is limited by the
provisions of the Partnership Agreement. The costs and expenses were:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
PBP and affiliates
General and administrative $ 67,483 $ 103,839 $ 102,633
Management fee 405,312 405,312 405,312
---------- ---------- ----------
472,795 509,151 507,945
---------- ---------- ----------
Related General Partner and affiliates
General and administrative 46,725 49,073 15,124
Management fee 405,313 405,313 405,313
Loan servicing fee 405,313 405,313 405,313
---------- ---------- ----------
857,351 859,699 825,750
---------- ---------- ----------
$1,330,146 $1,368,850 $1,333,695
========== ========== ==========
</TABLE>
Effective October 1, 1995, the Related General Partner has assumed from
PBP the responsibilities and duties of the Tax Matters Partner as defined in
the Partnership Agreement.
The General Partners are paid, in aggregate, an annual management fee
equal to .5% of the total invested assets (which equals the total original face
amount of the FMBs).
An affiliate of the Related General Partner receives loan servicing fees
in an amount of .25% per annum of the principal amount outstanding on mortgage
loans serviced by the affiliate.
During 1995 and January and February of 1996, a division of Prudential
Securities Incorporated ("PSI"), an affiliate of PBP, was responsible for the
purchase, sale and safekeeping of the Partnership's temporary investments. This
account was maintained in accordance with the Partnership Agreement.
PSI owns 62,015 BUC$ at December 31, 1996.
207
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 5--Related Parties (continued)
The Players Club property (securing a $2,500,000 FMB in this Partnership) also
secures an FMB for $7,200,000 owned by Summit Tax Exempt L.P. III, of which the
general partners are either the same or affiliates of the General Partners of
this Partnership.
The original obligors of the Suntree, Players Club and River Run FMBs are
affiliates of the Related General Partner.
As of December 31, 1996, the original owners of the underlying properties and
obligors of the Pelican Cove and Loveridge have been replaced with affiliates
of the Related General Partner who have not made equity investments. These
entities have assumed the day-to-day responsibilities and obligations of the
underlying properties. Buyers are being sought who would make equity
investments in the underlying properties and assume the nonrecourse obligations
for the FMB.
NOTE 6--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV 654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants. On November 16, 1993, a putative class action captioned
Connelly et al. v. Prudential-Bache Securities Inc. et al. (93 Civ. 713) , was
filed in the United States District Court for the District of Arizona ,
purportedly on behalf of investors in the Partnership against the Partnership,
PBP, PSI and a number of other defendants. On January 3, 1992, a putative class
action, captioned Levine v. Prudential-Bache Properties Inc. et al. (92 Civ.
52), was filed in the United States District Court for the Northern District of
Illinois purportedly on behalf of investors in the Partnership against the
General Partners, PSI and a number of other defendants. Subsequently the
Related General Partner was dismissed from the Levine litigation.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, by order dated May 4, 1994, the Connelly case and by
order dated July 13, 1994, the Levine case, to a single judge of the United
States District Court for the Southern District of New York (the "Court") and
consolidated for pretrial proceedings under the caption In re Prudential
Securities Incorporated Limited Partnerships Litigation (MDL Docket 1005) (the
"Class Action"). On June 8, 1994, plaintiffs in the transferred cases filed a
complaint that consolidated the previously filed complaints and named as
defendants, among others, PSI, certain of its present and former employees and
the General Partners. The Partnership was not named a defendant in the
consolidated complaint, but the name of the Partnership was listed as being
among the limited partnerships at issue in the case.
On August 9, 1995 PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class.
The Court gave final approval to the settlement, certified a class of
purchasers of specific limited partnerships, including the Partnership,
released all settled claims by members of the class against the PSI settling
defendants and permanently barred and enjoined class members from instituting,
commencing or prosecuting any settled claim against the released parties. The
full amount due under the settlement agreement has been paid by PSI. The Levine
and Connelly cases were dismissed with prejudice as to the Prudential
defendants by court order dated October 25, 1996. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to the settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
two other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well
as each of the other concerned partnerships and final approval of the Court
after review of the proposals at a fairness hearing.
Under the proposed Reorganization plan, the BUC$holders of the
Partnership, and Summit Tax Exempt Bond Fund L.P. and Summit Tax Exempt L.P.
III, will receive shares in a newly formed business trust. It is anticipated
that the shares will be allocated proportionately among the partnerships and
their respective investors based upon appraisals and other factors as supported
by a third-party fairness opinion. Detailed information about the proposed
Related Settlement and Reorganization will be sent to BUC$holders in the near
future. The terms of the Reorganization include, among other matters, the
acquisition by affiliates of the Related Capital Company ("RCC") of PBP's
general partner interest (the "PBP Interest"), transfer to the BUC$holders of
one-half of the PBP Interest, reduction of fees currently payable
208
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 6--Contingencies (continued)
to the General Partners by 25%, filing an application to list the new company's
shares on an exchange and the creation of an infinite, as opposed to finite,
life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996, PBP and RCC entered into an agreement for the purchase by
RCC or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions, including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
Pending final approval of the Related Settlement, the Court's Order prohibits
class members (including the BUC$holders) from, among other matters, (i)
transferring their BUC$ unless the transferee agrees to be bound by the Related
Settlement; (ii) granting a proxy to object to the Reorganization; or (iii)
commencing a tender offer for the BUC$. In addition, the General Partners are
enjoined from (i) recording any transfers made in violation of the Order and
(ii) providing the list of investors in any of the partnerships which are the
subject of the Reorganization to any person conducting a tender offer.
There can be no assurance that the conditions to the closing of the proposed
Related Settlement and Reorganization will be satisfied nor that a closing may
occur in the projected time frame. In the event a settlement cannot be reached,
the Related General Partner believes it has meritorious defenses to the
consolidated complaint and intends to vigorously defend this action.
NOTE 7--Subsequent Events
In February 1997, distributions of approximately $2,379,000 and $49,000
were paid to the BUC$holders and General Partners, respectively, for the
quarter ended December 31, 1996.
A forbearance agreement with the owner of the Cedar Pointe property was
executed on February 1, 1997, which provided for a minimum pay rate of 7% per
annum effective September 16, 1996 (see Note 3).
Effective as of January 30, 1997, the obligor of the Sunset Downs FMB
transferred the deed to the underlying property to an affiliate of the Related
General Partner, who made no equity investment in the property but assumed the
day-to-day responsibilities of operations and obligations under the FMB (see
Note 3).
209
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity and Capital Resources
Summit Tax Exempt L.P. II ("the Registrant") has invested in sixteen
tax-exempt participating first mortgage bonds ("FMBs") issued by various state
or local governments or their agencies or authorities. The FMBs are secured by
participating first mortgage loans on multi-family residential apartment
properties.
At the beginning of the year, the Registrant had cash and temporary
investments of approximately $3,773,000. After payment of distributions of
approximately $9,712,000, net loans made to properties of approximately
$277,000 and receipt of the net cash flow from operations of approximately
$10,015,000, the Registrant ended the year with approximately $3,849,000 in
cash and temporary investments. The fourth quarter distribution of
approximately $2,379,000 ($.26 per BUC) was paid to BUC$holders in February
1997 from current and previously undistributed cash flow from operations. The
Registrant anticipates funding future cash distributions from current and
previously undistributed cash flow from operations.
Due to increases in its real estate taxes, in April, 1996, the obligor of
the Highland Ridge FMB entered into a forbearance agreement with the Registrant
effective retroactive to October, 1995. In accordance with the terms and
conditions of this agreement, the obligor will make minimum monthly debt
service payments beginning at a 7% annual rate and increasing in annual
increments over a period of four years back to the original stated rate. The
difference between the actual pay rate and the stated rate of the FMB is
deferred and payable from future available cash flow or sale or refinancing
proceeds. In addition, delinquent taxes will be paid in three installments by
the developer over an 18 month period. The developer has paid the first and
second such installments of the delinquent taxes due as of May 7, 1996 and
February 5, 1997. The obligations under the forbearance agreement are further
secured by a guarantee from the general partner of the obligor. Payments under
the forbearance agreement are current as of December 31, 1996.
A forbearance agreement with the owner of the Shannon Lake property
originally made in 1991, further modified as of June 1, 1993 was extended as of
May 1, 1996 to allow the property to make minimum monthly interest payments at
annual rate of 6%. The Registrant agreed to extend other provisions and terms
of the 1993 agreement effective for the period March 16, 1993 through December
15, 1997. In addition, as of June 1, 1996 an Extension and Modification
Agreement was executed regarding the extension and modification of the $138,000
note due on April 30, 1996. The note was increased by $300,000 for certain
capital improvements to $438,000. The modified loan is self-amortizing
beginning August 1, 1996 at the annual rate of 8%, payable in 48 equal monthly
installments of $10,692.86, with a final maturity of July 1, 2000. Allowance
for possible loss was established for $138,000 during 1993. Payments due under
the forbearance agreement and the note are current as of December 31, 1996.
A forbearance agreement with the owner of the Cedar Pointe property was
executed on February 1, 1997, which provided for a minimum pay rate of 7% per
annum effective September 16, 1996. Pursuant to the terms of the forbearance
agreement, it is envisioned that the FMB will be formally and permanently
modified to provide for a new base interest rate of 7% and a contingent
interest rate of up to 5% payable from 25% of cash flow or sale or refinancing
proceeds. In addition, the FMB modification will call for the discharge of
accrued and unpaid primary contingent interest, primary deferred interest,
supplemental contingent interest, supplemental deferred interest and
construction period deferred and contingent interest through September 15,
1996, whether payable before, on, or after September 15, 1996. It is further
expected that maturity of the FMB will be extended to 2017 and the call date
extended to 2006.
The Registrant has entered into forbearance agreements on several FMBs and
may be required to extend these agreements or enter into new agreements in the
future. Such agreements may adversely impact liquidity; however interest
payments from FMBs are anticipated to provide sufficient liquidity to fund in
future years the Registrant's operating expenditures and distributions.
For a discussion of the proposed settlement of the Class Action relating
to the Registrant see Other Events in Item 1. Business above.
Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed that will or are likely
to impact liquidity in a material way. The Partnership's investments in FMBs
are secured by a Partnership interest in properties which are diversified by
location so that if one area of the country is experiencing downturns in the
economy, the remaining properties may be experiencing upswings. However, the
geographic diversifications of the portfolio may not protect against a general
downturn in the national economy.
Results of Operations
The Registrant accounts for its investments in the FMBs as debt securities
under the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115").
210
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
The Registrant has a right to require redemption of the FMBs approximately
twelve years after their issuance. The Registrant anticipates holding the FMBs
for approximately 12 to 15 years from the date of issuance; however, it can and
may elect to hold until maturity. As such, SFAS 115 requires the Partnership to
classify these investments as "available for sale." Accordingly, investments in
FMBs are carried at their estimated fair values, with unrealized gains and
losses reported in a separate component of partners' capital. Unrealized
holding gains or losses do not affect the cash flow generated from property
operations, distributions to BUC$holders, the characterization of the
tax-exempt income stream or the financial obligations under the FMBs.
The Registrant periodically evaluates each FMB to determine whether a
decline in fair value below the FMB's cost basis is other than temporary. Such
a decline is considered to be other than temporary if, based on current
information and events, it is probable that the Registrant will be unable to
collect all amounts due according to the existing contractual terms of the
bonds. If the decline is judged to be other than temporary, the cost basis of
the bond is written down to its then estimated fair value, with the amount of
the write-down accounted for as a realized loss.
Because the FMBs are not readily marketable, the Registrant estimates fair
value for each bond as the present value of its expected cash flows using a
discount rate for comparable tax-exempt investments. This process is based upon
projections of future economic events affecting the real estate collateralizing
the bonds, such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates, and upon determination of an
appropriate market rate of interest, all of which are based on good faith
estimates and assumptions developed by the Registrant's management. Changes in
market conditions and circumstances may occur which would cause these estimates
and assumptions to change, therefore, actual results may vary from the
estimates and the variance may be material.
1996 vs. 1995
Net income decreased approximately $3,343,000 for the year ended December
31, 1996 as compared to the corresponding period in1995 primarily due to the
loss on impairment of assets of $4,000,000 and $1,000,000 recorded in 1996 and
1995, respectively, and for the reasons discussed below.
Interest income from participating FMBs decreased by approximately
$248,000 as compared to the corresponding period in 1995 primarily due to
reduced interest payments received from the Loveridge and Sunset Downs FMBs as
a result of payments being based on the monthly cash flow generated by the
operations of the underlying properties effective with the May 1, 1995 payment
date and a reduction in the minimum monthly debt service payments from the
Highland Ridge FMB as a result of a forbearance agreement retroactive to
October 1995. These decreases were partially offset by the receipt of
contingent interest from the River Run FMB and an increase in deferred base
interest received from the Bristol Village FMB in 1996.
Interest income from temporary investments increased approximately $18,000
for the year ended December 31, 1996 as compared to the corresponding period in
1995 primarily due to higher invested cash balances in 1996.
Interest income from promissory notes increased approximately $3,000 for
the year ended December 31, 1996 as compared to the corresponding period in
1995 primarily due to a $300,000 increase in the Shannon Lake loan in July 1996
which was partially offset by a decrease due to the maturity of the Bay Club
loan in January 1996.
General and administrative expenses increased approximately $116,000 for
the year ended December 31, 1996 as compared to the corresponding period in
1995 primarily due to increases in legal costs, most of which relate to the
Kinnes litigation described in Note 6 to the financial statements as well as an
increase in non-recurring legal expenses, partially offset by the cost of
obtaining appraisals in 1995.
A $4,000,000 loss on impairment of assets was recorded during the year
ended December 31, 1996 to recognize other-than-temporary impairment of three
FMBs based upon continuing operating difficulties being experienced at the
properties securing the FMBs.
1995 vs. 1994
Net income decreased approximately $435,000 for the year ended December
31, 1995 as compared to the corresponding period in 1994 primarily due to the
loss on impairment of assets of $1,000,000 and $500,000 recorded in 1995 and
1994, respectively, and for the reasons discussed below.
Interest income from FMBs increased by approximately $130,000 as compared
to the corresponding period in 1994 primarily due to additional interest
received from the Newport Village, Shannon Lake, Bristol Village, Players Club,
Bay Club and Suntree FMBs as required by the terms of their respective
forbearance agreements together with increased cash flow generated by the
Pelican Cove property resulting in an increase of its interest payments to the
Registrant and contingent interest received from The Lakes. The increase is
partially
211
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
offset by reduced debt service payments received from the Loveridge, Sunset
Downs and Highland Ridge FMBs and nonrecurring contingent interest received in
1994 from Crowne Pointe and Willow Creek.
Interest income from temporary investments increased approximately $52,000
for the year ended December 31, 1995 as compared to the corresponding period in
1994 due to higher interest rates and invested balances in 1995.
Interest income from promissory notes decreased approximately $14,000 for
the year ended December 31, 1995 as compared to the corresponding period in
1994 due to the repayment of the Pelican Cove and The Lakes property tax loans
in May 1994.
A $1,000,000 loss on impairment of assets was recorded during the year
ended December 31, 1995 to write down the cost basis of certain FMBs to
recognize other-than-temporary impairment.
General and administrative expenses increased approximately $126,000 for
the year ended December 31, 1995 as compared to the corresponding period in
1994 primarily due to an increase in administrative expense as well as the cost
of obtaining appraisals in 1995.
Property Information
The following table lists the Registrant's FMBs together with occupancy
rates of the underlying properties as of February 11, 1997:
<TABLE>
<CAPTION>
Carrying Minimum Pay
Amount Average Stated Rate at
Face Amount at December Interest Rate Interest December 31,
Property Location of Bond 31, 1996 (G) Occupancy Paid for 1996* Rate* 1996*
- ------------------ ------------------ -------------- -------------- ----------- ---------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bay Club Mt. Pleasant, SC $ 6,400,000 $ 6,134,588 99.4% 8.43%(A) 8.25% 7.50%(A)
Loveridge Contra Costa, CA 8,550,000 6,826,198 93.9 4.83 8.00 (C)
The Lakes Kansas City, MO 13,650,000 10,101,816 96.9 5.61 (E) 4.87 4.87
Crowne Pointe Olympia, WA 5,075,000 5,322,225 96.0 8.00 8.00 8.00
Orchard Hills Tacoma, WA 5,650,000 5,842,439 98.3 8.00 8.00 8.00
Highland Ridge St. Paul, MN 15,000,000 12,971,183 97.7 7.06 8.00 7.25 (F)
Newport Village Tacoma, WA 13,000,000 12,843,816 90.2 7.98 (D) 8.00 8.00
Sunset Downs Lancaster, CA $ 15,000,000 $ 11,306,665 90.2 4.35 8.00 (C)
Pelican Cove St. Louis, MO 18,000,000 16,907,362 94.5 7.50 8.00 (C)
Willow Creek Ames, IA 6,100,000 6,019,067 100.0 8.00 8.00 8.00
Cedar Pointe Nashville, TN 9,500,000 8,423,412 84.8 7.88 (H) 8.00 7.00
Shannon Lake Atlanta, GA 12,000,000 10,920,358 88.1 6.00 8.00 6.00 (F)
Bristol Village Bloomington, MN 17,000,000 17,254,892 94.6 9.87 (D) 8.00 7.75 (F)
Suntree Ft. Myers, FL 7,500,000 7,387,848 90.7 7.63 8.00 7.50 (F)
River Run Miami, FL 7,200,000 7,457,110 95.0 9.83 (I) 8.00 8.00
Players Club (B) Ft. Myers, FL 2,500,000 2,404,447 83.9 7.37 8.00 7.00 (F)
------------- -------------
$162,125,000 $148,123,426
============= =============
</TABLE>
*The average rate paid represents the interest recorded by the Registrant
while the stated interest rate represents the coupon rate of the FMB and
the minimum pay rate represents the minimum rate payable pursuant to the
applicable forbearance agreement, if any.
(A) The minimum pay rate on the FMB increases in increments from 6.0%
in 1990 to 8.25% in 1997. The actual pay rate is adjusted as of
the property's fiscal year-end based on audited financials to no
less than the minimum pay rate.
(B) Summit Tax Exempt L.P. III, of which the general partners are
either the same or affiliates of the General Partners of the
Registrant, acquired the other $7,200,000 of the Players Club bond
issue.
(C) The pay rate is based on the net cash flow generated by the
underlying property. See Note 3 to the financial statements.
(D) Includes receipt of deferred base interest relating to prior
periods.
(E) Includes receipt of primary and supplemental contingent interest.
(F) The minimum pay rate on the FMB is scheduled to increase to the
stated interest rate over the remaining term of the FMB.
(G) The FMBs are carried at their estimated fair values at December
31, 1996.
(H) Reflects payments accrued at December 31, 1996 that were received
pursuant to a forbearance agreement entered as of February 1,
1997, which lowered the base interest rate to 7% effective
September 16, 1996.
(I) Includes receipt of primary contingent interest.
212
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
General
The determination as to whether it is in the best interest of the
Registrant to enter into forbearance agreements on the FMBs or, alternatively,
to pursue its remedies under the loan documents, including foreclosures, is
based upon several factors. These factors include, but are not limited to,
property performance, owner cooperation and projected legal costs.
The difference between the stated interest rates and the rates paid by
FMBs is not accrued as interest income for financial reporting purposes. The
accrual of interest at the stated interest rate will resume once a property's
ability to pay the stated rate has been adequately demonstrated. Interest
income of approximately $1,407,000, $704,000 and $931,000 was not recognized
for the years ended December 31, 1996, 1995 and 1994, respectively.
From time to time, certain property owners have elected to supplement the
cash flow generated by the properties to meet the required FMB interest
payments. There can be no assurance that in the future any property owner will
continue to elect to supplement property cash flow to satisfy bond interest
requirements if necessary. The owners of the Sunset Downs, Highland Ridge and
Loveridge properties supplemented the cash flow generated by the respective
properties to meet the required interest payments in 1994. No property owner
made supplementary payments in 1995 or 1996.
213
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Statements of Financial Condition
(unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------- ----------------
<S> <C> <C>
Participating first mortgage bonds-at fair value $148,130,039 $148,123,426
Temporary investments 3,300,000 3,600,000
Cash and cash equivalents 1,114,246 249,192
Interest receivable, net 530,330 735,343
Promissory notes receivable, net 242,389 275,572
Deferred bond selection fees, net 1,758,762 1,804,942
Due from affiliates 0 84,225
Other assets 11,178 23,775
------------ ------------
Total assets $155,086,944 $154,896,475
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Deferred income $ 384,319 $ 394,259
Accrued expenses 80,766 107,421
Due to affiliates 404,944 72,194
------------ ------------
Total liabilities 870,029 573,874
------------ ------------
Contingencies
Partners' capital (deficit):
BUC$holders (9,151,620 BUC$ issued and outstanding) 160,518,891 160,622,463
General Partners (186,374) (184,260)
Net unrealized loss on participating first mortgage bonds (6,115,602) (6,115,602)
------------ ------------
Total partners' capital 154,216,915 154,322,601
------------ ------------
Total liabilities and partners' capital $155,086,944 $154,896,475
============ ============
</TABLE>
See accompanying notes to financial statements.
214
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Statements of Income
(unaudited)
Three Months Ended
March 31,
--------------------------
1997 1996
------------ -----------
Revenues:
Interest income:
Participating first mortgage bonds $2,717,025 $2,880,553
Temporary investments 32,292 30,165
Promissory notes 7,830 4,324
----------- -----------
Total revenues 2,757,147 2,915,042
----------- -----------
Expenses:
Management fees 202,656 202,656
Loan servicing fees 99,940 100,774
General and administrative 86,076 79,749
Amortization of deferred bond selection fees 46,180 46,180
----------- -----------
Total expenses 434,852 429,359
----------- -----------
Net Income $2,322,295 $2,485,683
=========== ===========
Allocation of Net Income:
BUC$holders $2,275,849 $2,435,969
=========== ===========
General Partners $ 46,446 $ 49,714
=========== ===========
Net Income per BUC $ 0.25 $ 0.27
=========== ===========
See accompanying notes to financial statements.
215
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Statement of Changes in Partners' Capital (Deficit)
(unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Loss on
Participating
First
Total BUC$holders General Partners Mortgage Bonds
------------ ------------ ---------------- --------------
<S> <C> <C> <C> <C>
Partners' capital (deficit)-January 1, 1997 $154,322,601 $160,622,463 $ (184,260) $ (6,115,602)
Net Income 2,322,295 2,275,849 46,446 0
Distributions (2,427,981) (2,379,421) (48,560) 0
------------ ------------ ---------- ------------
Partners' capital (deficit)-March 31, 1997 $154,216,915 $160,518,891 $ (186,374) $ (6,115,602)
============ ============ ========== ============
</TABLE>
See accompanying notes to financial statements.
216
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1997 1996
--------------- ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Interest received, net $ 2,945,608 $ 2,900,520
Amount received which was due from affiliate 84,225 0
Fees and expenses paid (69,981) (165,025)
----------- -----------
Net cash provided by operating activities 2,959,852 2,735,495
----------- -----------
Cash Flows from Investing Activities:
Net sale (purchase) of temporary investments 300,000 (1,000,000)
Principal payments received from loans made to properties 33,183 8,233
----------- -----------
Net cash provided by (used in) investing activities 333,183 (991,767)
----------- -----------
Cash Flows from Financing Activities:
Distributions paid (2,427,981) (2,427,981)
----------- -----------
Net increase (decrease) in cash and cash equivalents 865,054 (684,253)
Cash and cash equivalents at beginning of period 249,192 972,889
----------- -----------
Cash and cash equivalents at end of period $ 1,114,246 $ 288,636
=========== ===========
Schedule Reconciling Net Income to Net Cash
Provided by Operating Activities:
Net income $ 2,322,295 $ 2,485,683
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred bond selection fees 46,180 46,180
Accretion of deferred income (16,553) (16,553)
Changes in:
Interest receivable, net 205,013 2,031
Promissory notes receivable, net 0 21,620
Other assets 12,597 12,498
Accrued expenses (26,655) (42,239)
Deferred income 0 (21,620)
Due from affiliates 84,225 0
Due to affiliates 332,750 247,895
----------- -----------
Total adjustments 637,557 249,812
----------- -----------
Net cash provided by operating activities $ 2,959,852 $ 2,735,495
=========== ===========
</TABLE>
See accompanying notes to financial statements.
217
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Notes to Financial Statements
March 31, 1997 (unaudited)
NOTE 1--General
These financial statements have been prepared without audit. In the
opinion of management, the financial statements contain all adjustments,
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of Summit Tax Exempt L.P. II (the "Partnership") as of
March 31, 1997, and the results of its operations and its cash flows for the
three months ended March 31, 1997 and 1996. However, the operating results for
the interim periods may not be indicative of the results expected for the full
year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1996.
NOTE 2--Participating First Mortgage Bonds ("FMBs")
The Partnership accounts for its investments in the FMBs as "available for
sale" debt securities under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Accordingly, investments in FMBs are carried at their
estimated fair values, with unrealized gains and losses reported in a separate
component of partners' capital.
Because the FMBs are not readily marketable, the Partnership estimates
fair value for each bond as the present value of its expected cash flows using
a discount interest rate for comparable tax-exempt investments. This process is
based upon projections of future economic events affecting the real estate
collateralizing the bonds, such as property occupancy rates, rental rates,
operating cost inflation and market capitalization rates, and upon
determination of an appropriate market rate of interest, all of which are based
on good faith estimates and assumptions developed by the Partnership's
management. Changes in market conditions and circumstances may occur which
would cause these estimates and assumptions to change, therefore, actual
results may vary from the estimates and the variance may be material.
Effective January 1, 1997, forbearance agreements with respect to the
Suntree and Players Club FMBs were modified and extended due to a continuous
weak rental market and to ensure real estate tax payments and capital
improvements are made. Pursuant to the modification, the minimum pay rate for
Suntree was reduced to 6.5% and 7.5% for the periods January 1, 1997 through
June 30, 1997, July 1, 1997 through December 31, 1997, respectively.
Thereafter, the stated rate is to be reinstated. The minimum pay rate for
Players Club was reduced to 6.5% and 6.25% for the periods January 1, 1997
through January 31, 1997 and February 1, 1997 through December 31, 1997,
respectively. Thereafter, it is expected that the stated rate of 8% will be
reinstated.
With respect to the Highland Ridge FMB, and pursuant to terms of the
forbearance agreement, the developer has paid the first and second of three
annual installments towards the payment of delinquent taxes.
Effective as of January 30, 1997, pursuant to the terms of a forbearance
agreement entered into in August 1995, the obligor of the Sunset Downs FMB
transferred the deed to the underlying property to an affiliate of the Related
General Partner, who made no equity investment in the property but assumed the
day-to-day responsibilities of operations and obligations under the FMB.
With respect to the Sunset Downs FMB, the Partnership paid certain
insurance premiums on January 31, 1997 in the amount of approximately $92,000
as a result of the forbearance agreement and transfer of the deed to the
underlying property to an affiliate of the Related General Partner. This loan
was recorded in operating income as a reduction of interest income from
participating first mortgage bonds because the Sunset Downs FMB is paying
interest on a cash flow basis.
A forbearance agreement with the owner of the Cedar Pointe property was
executed on February 1, 1997, which provided for a minimum pay rate of 7% per
annum effective September 16, 1996. Pursuant to the terms of the forbearance
agreement, it is envisioned that the FMB will be formally and permanently
modified to provide for a new base interest rate of 7% and a contingent
interest rate of up to 5% payable from 25% of cash flow or sale or refinancing
proceeds. In addition, the FMB modification will call for the discharge of
accrued and unpaid primary contingent interest, primary deferred interest,
supplemental contingent interest, supplemental deferred interest and
construction period deferred and contingent interest through September 15,
1996, whether payable before, on, or after September 15, 1996. It is further
expected that maturity of the FMB will be extended to 2017 and the call date
extended to 2006.
With respect to the FMBs which are subject to forbearance agreements with
the respective obligors, the difference between the stated interest rates and
the rates paid (whether deferred and payable out of available future cash flow
or, ultimately, from sale or refinancing proceeds) on FMBs is not accrued for
financial statement purposes. The accrual of interest at the stated interest
rate will resume once a property's ability to pay the stated rate has been
adequately demonstrated. Unrecorded contractual interest income was
approximately $449,000 and $325,000 for the three months ended March 31, 1997
and 1996, respectively.
218
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Notes to Financial Statements
March 31, 1997 (unaudited)
NOTE 2--Participating First Mortgage Bonds ("FMBs") (continued)
The cost basis of the FMBs at March 31, 1997 and December 31, 1996 was
$154,245,641 and $154,239,028, respectively. The net unrealized loss on FMBs
consists of gross unrealized gains and losses of $951,666 and $7,067,268,
respectively, at both March 31, 1997 and December 31, 1996.
Descriptions of the FMBs owned by the Partnership at March 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Annualized
Interest Rate
Paid for the Minimum
Three Months Pay Rate
Ended at March 31,
Property Location March 31, 1997* 1997*
- ------------------ ------------------ -------------------- --------------
<S> <C> <C> <C>
Bay Club Mt. Pleasant, SC 7.57%(D) 8.25%(D)
Loveridge Contra Costa, CA 5.17 (B)
The Lakes Kansas City, MO 4.87 4.87
Crowne Pointe Olympia, WA 8.00 8.00
Orchard Hills Tacoma, WA 8.00 8.00
Highland Ridge St. Paul, MN 7.25 7.25 (F)
Newport Village Tacoma, WA 8.22 (C) 8.00
Sunset Downs Lancaster, CA 4.33 (B)
Willow Creek Ames, IA 8.00 8.00
Cedar Pointe Nashville, TN 7.00 7.00
Shannon Lake Atlanta, GA 6.00 6.00 (F)
Bristol Village Bloomington, MN 8.38 (C)(E) 8.00
Suntree Ft. Myers, FL 6.84 6.50 (F)
River Run Miami, FL 8.00 8.00
Pelican Cove St. Louis, MO 7.50 (B)
Players Club (A) Ft. Myers, FL 6.42 6.25 (F)
<CAPTION>
Carrying
Stated Amount
Interest Maturity Face at March 31,
Property Rate* Call Date Date Amount 1997 (G)
- ------------------ ---------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Bay Club 8.25% Sept. 2000 Sept. 2006 $ 6,400,000 $ 6,141,201
Loveridge 8.00 Nov. 1998 Nov. 2006 8,550,000 6,826,198
The Lakes 4.87 Dec. 2006 Dec. 2006 13,650,000 10,101,816
Crowne Pointe 8.00 Dec. 1998 Dec. 2006 5,075,000 5,322,225
Orchard Hills 8.00 Dec. 1998 Dec. 2006 5,650,000 5,842,439
Highland Ridge 8.00 Feb. 1999 Feb. 2007 15,000,000 12,971,183
Newport Village 8.00 Jan. 1999 Jan. 2007 13,000,000 12,843,816
Sunset Downs 8.00 May 1999 May 2007 15,000,000 11,306,665
Willow Creek 8.00 Oct. 1999 Oct. 2006 6,100,000 6,019,067
Cedar Pointe 7.00 Apr. 1999 Apr. 2007 9,500,000 8,423,412
Shannon Lake 8.00 Jun. 1999 Jun. 2007 12,000,000 10,920,358
Bristol Village 8.00 Jun. 1999 Jun. 2005 17,000,000 17,254,892
Suntree 8.00 Jul. 1999 Jul. 2007 7,500,000 7,387,848
River Run 8.00 Aug. 1999 Aug. 2007 7,200,000 7,457,110
Pelican Cove 8.00 Feb. 1999 Feb. 2007 18,000,000 16,907,362
Players Club (A) 8.00 Aug. 1999 Aug. 2007 2,500,000 2,404,447
------------- -------------
$162,125,000 $148,130,039
============= =============
</TABLE>
*The annualized interest rate paid represents the interest recorded by the
Partnership while the stated interest rate represents the coupon rate of
the FMB and the minimum pay rate represents the minimum rate payable
pursuant to the applicable forbearance agreements, if any.
(A) Summit Tax Exempt L.P. III, of which the general partners are
either the same or affiliates of the General Partners of the
Partnership, acquired the other $7,200,000 of the Players Club
FMB.
(B) Pay rate is based on net cash flow generated by operations of the
underlying property.
(C) Includes receipt of deferred base interest related to prior
periods.
(D) The minimum pay rate on the FMB increased in increments from 6.0%
in 1990 to 8.25% in 1997. The actual pay rate is adjusted as of
the property's fiscal year-end based on audited financial
statements to no less than the minimum pay rate.
(E) Includes receipt of primary contingent interest related to prior
periods.
(F) The minimum pay rate on the FMB is scheduled to increase to the
stated interest rate over the remaining term of the FMB.
(G) The FMBs are carried at their estimated fair value at March 31,
1997.
NOTE 3--Related Parties
Prudential-Bache Properties, Inc. ("PBP") and the Related General Partner
(collectively, the "General Partners") and their affiliates perform services
for the Partnership which include, but are not limited to: accounting and
financial management; registrar, transfer and assignment functions; asset
management; investor communications; printing and other administrative
services. The General Partners and their affiliates receive reimbursements for
costs incurred in connection with these services, the amount of which is
limited by the provisions of the Agreement of Limited Partnership (the
"Partnership Agreement"). The costs and expenses were:
219
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Notes to Financial Statements
March 31, 1997 (unaudited)
NOTE 3--Related Parties (continued)
Three Months Ended
March 31,
--------------------
1997 1996
--------- --------
PBP and affiliates:
Management fee $101,328 $101,328
General and administrative 17,446 11,172
-------- --------
118,774 112,500
-------- --------
Related General Partner and affiliates:
Management fee 101,328 101,328
Loan servicing fees 99,940 100,774
General and administrative 12,309 24,000
-------- --------
213,577 226,102
-------- --------
$332,351 $338,602
======== ========
An affiliate of the Related General Partner receives loan servicing fees
(see above) in an amount of .25% per annum of the principal amount outstanding
on FMBs serviced by the affiliate.
The General Partners are paid, in the aggregate, an annual management fee
(see above) equal to .5% of the original amount invested invested in FMBs.
During January and February of 1996, a division of Prudential Securities
Incorporated ("PSI"), an affiliate of PBP, was responsible for the purchase,
sale and safekeeping of the Partnership's temporary investments. This account
was maintained in accordance with the Partnership Agreement.
PSI owns 62,015 BUC$ at March 31, 1997.
The Players Club property (securing a $2,500,000 FMB in this Partnership)
also secures an FMB for $7,200,000 owned by Summit Tax Exempt L.P. III, of
which the general partners are either the same or affiliates of the General
Partners of this Partnership.
The original obligors of the Suntree, Players Club and River Run FMBs are
affiliates of the Related General Partner.
As of March 31, 1997, the original owners of the underlying properties and
obligors of the Pelican Cove, Loveridge and Sunset Downs FMBs have been
replaced with affiliates of the Related General Partner who have not made
equity investments. These entities have assumed the day-to-day responsibilities
and obligations of the underlying properties. Buyers are being sought who would
make equity investments in the underlying properties and assume the nonrecourse
obligations for each of the FMBs.
NOTE 4--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV 654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants. On November 16, 1993, a putative class action captioned
Connelly et al. v. Prudential-Bache Securities Inc. et al. (93 Civ. 713) , was
filed in the United States District Court for the District of Arizona ,
purportedly on behalf of investors in the Partnership against the Partnership,
PBP, PSI and a number of other defendants. On January 3, 1992, a putative class
action, captioned Levine v. Prudential-Bache Properties Inc. et al. (92 Civ.
52), was filed in the United States District Court for the Northern District of
Illinois purportedly on behalf of investors in the Partnership against the
General Partners, PSI and a number of other defendants. Subsequently, the
Related General Partner was dismissed from the Levine litigation.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, by order dated May 4, 1994, the Connelly case and by
order dated July 13, 1994, the Levine case, were transferred to a single judge
of the United States District Court for the Southern District of New York (the
"Court") and consolidated for pretrial proceedings under the caption In re
Prudential Securities Incorporated Limited Partnerships Litigation (MDL Docket
1005) (the "Class Action"). On June 8, 1994, plaintiffs in the transferred
cases filed a complaint that consolidated the previously filed complaints and
named as defendants, among others, PSI, certain of its present and former
employees and the General Partners. The Partnership was not named a defendant
in the consolidated complaint, but the name of the Partnership was listed as
being among the limited partnerships at issue in the case.
220
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Notes to Financial Statements
March 31, 1997 (unaudited)
NOTE 4--Contingencies (continued)
On August 9, 1995 PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class.
The Court gave final approval to the settlement, certified a class of
purchasers of specific limited partnerships, including the Partnership,
released all settled claims by members of the class against the PSI settling
defendants and permanently barred and enjoined class members from instituting,
commencing or prosecuting any settled claim against the released parties. The
full amount due under the settlement agreement has been paid by PSI. The Levine
and Connelly cases were dismissed with prejudice as to the Prudential
defendants by court order dated October 25, 1996. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
two other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well
as each of the other concerned partnerships and final approval of the Court
after review of the proposals at a fairness hearing.
Under the proposed Reorganization plan, the BUC$holders of the
Partnership, and Summit Tax Exempt Bond Fund L.P. and Summit Tax Exempt L.P.
III, will receive shares in a newly formed business trust. It is anticipated
that the shares will be allocated proportionately among the partnerships and
their respective investors based upon appraisals and other factors as supported
by a third-party fairness opinion. Detailed information about the proposed
Related Settlement and Reorganization will be sent to BUC$holders in the near
future. The terms of the Reorganization include, among other matters, the
acquisition by affiliates of the Related Capital Company ("RCC") of PBP's
general partner interest (the "PBP Interest"), transfer to the BUC$holders of
one-half of the PBP Interest, reduction of the sum of the aggregate annual fees
currently payable to both General Partners by 25%, filing an application to
list the new company's shares on an exchange and the creation of an infinite,
as opposed to finite, life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996, PBP and RCC entered into an agreement for the purchase by
RCC or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions, including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
Pending final approval of the Related Settlement, the Court's Order
prohibits class members (including the BUC$holders) from, among other matters,
(i) transferring their BUC$unless the transferee agrees to be bound by the
Related Settlement; (ii) granting a proxy to object to the Reorganization; or
(iii) commencing a tender offer for the BUC$. In addition, the General Partners
are enjoined from (i) recording any transfers made in violation of the Order
and (ii) providing the list of investors in any of the partnerships which are
the subject of the Reorganization to any person conducting a tender offer.
There can be no assurance that the conditions to the closing of the
proposed Related Settlement and Reorganization will be satisfied nor as to the
time frame in which a closing may occur . In the event a settlement cannot be
reached, the Related General Partner believes it has meritorious defenses to
the consolidated complaint and intends to vigorously defend this action.
NOTE 5--Subsequent Events
In May 1997, distributions of approximately $2,379,000 and $49,000 were
paid to the BUC$holders and General Partners, respectively, for the quarter
ended ended March 31, 1997.
On May 12, 1997, the Partnership loaned the obligor of the Players Club
FMB $280,000 to cover its shortfall on its 1996 real estate tax payment and to
fund a capital improvement account. The note will be self-amortizing at an
annual interest rate of 8% for a term of 48 months.
221
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity and Capital Resources
Summit Tax Exempt L.P. II (the "Partnership") has invested in sixteen
tax-exempt participating first mortgage bonds ("FMBs") issued by various state
or local governments or their agencies or authorities. The FMBs are secured by
participating first mortgage loans on multi-family residential apartment
projects.
At the beginning of the year, the Partnership had cash and temporary
investments of $3,849,000. After payment of distributions of $2,428,000,
principal payments received from loans made to properties of approximately
$33,000 and receipt of the net cash flow from operations of approximately
$2,960,000, the Partnership had approximately $4,414,000 in cash and temporary
investments at March 31, 1997. The first quarter distribution of $2,379,000
($.26 per BUC) was paid to BUC$holders in May 1997 from cash flow from
operations.
Effective January 1, 1997, forbearance agreements with respect to the
Suntree and Players Club FMBs were modified and extended due to a continuous
weak rental market and to ensure real estate tax payments and capital
improvements are made. Pursuant to the modification, the minimum pay rate for
Suntree was reduced to 6.5% and 7.5% for the periods January 1, 1997 through
June 30, 1997, July 1, 1997 through December 31, 1997, respectively.
Thereafter, the stated rate is to be reinstated. The minimum pay rate for
Players Club was reduced to 6.5% and 6.25% for the periods January 1, 1997
through January 31, 1997 and February 1, 1997 through December 31, 1997,
respectively. Thereafter, it is expected that the stated rate of 8% will be
reinstated.
With respect to the Highland Ridge FMB and pursuant to terms of the
forbearance agreement, the developer has paid the first and second of three
annual installments towards the payment of delinquent taxes.
Effective as of January 30, 1997, pursuant to the terms of a forbearance
agreement entered into in August 1995, the obligor of the Sunset Downs FMB
transferred the deed to the underlying property to an affiliate of the Related
General Partner, who made no equity investment in the property but assumed the
day-to-day responsibilities of operations and obligations under the FMB.
With respect to the Sunset Downs FMB, the Partnership paid certain
insurance premiums on January 31, 1997 in the amount of approximately $92,000
as a result of the forbearance agreement and transfer of the deed to the
underlying property to an affiliate of the Related General Partner. This loan
was recorded in operating income as a reduction of interest income from
participating first mortgage bonds because the Sunset Downs FMB is paying
interest on a cash flow basis.
A forbearance agreement with the owner of the Cedar Pointe property was
executed on February 1, 1997, which provided for a minimum pay rate of 7% per
annum effective September 16, 1996. Pursuant to the terms of the forbearance
agreement, it is envisioned that the FMB will be formally and permanently
modified to provide for a new base interest rate of 7% and a contingent
interest rate of up to 5% payable from 25% of cash flow or sale or refinancing
proceeds. In addition, the FMB modification will call for the discharge of
accrued and unpaid primary contingent interest, primary deferred interest,
supplemental contingent interest, supplemental deferred interest and
construction period deferred and contingent interest through September 15,
1996, whether payable before, on, or after September 15, 1996. It is further
expected that maturity of the FMB will be extended to 2017 and the call date
extended to 2006.
The Partnership has entered into forbearance agreements on several FMBs
and may be required to extend these agreements or enter into new agreements in
the future. Such agreements may adversely impact liquidity; however interest
payments from FMBs are anticipated to provide sufficient liquidity to fund in
future years the Partnership's operating expenditures and distributions.
For a discussion of the proposed settlement of the Class Action relating
to the Partnership, see Note 4 to the financial statements.
Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed that will or are likely
to impact liquidity in a material way. The Partnership's investments in FMBs
are secured by a Partnership interest in properties which are diversified by
location so that if one area of the country is experiencing downturns in the
economy, the remaining properties may be experiencing upswings. However, the
geographic diversification of the portfolio may not protect against a general
downturn in the national economy.
Results of Operations
Net income decreased approximately $163,000 for the three months ended
March 31, 1997 as compared to 1996 primarily due to the reasons discussed
below.
Interest income from FMBs decreased by approximately $164,000 for the
three months ended March 31, 1997 as compared to the corresponding period in
1996 primarily due to a reduction in the income recorded from the Highland
Ridge FMB as a result of a forbearance
222
<PAGE>
Summit Tax Exempt L.P. II
(a limited partnership)
agreement for which a retroactive adjustment to October 1995 was made in the
fourth quarter of 1996 and a decrease due to an insurance loan made to the
owner of the underlying property of the Sunset Downs FMB which was recorded as
a reduction of income.
Interest income from promissory notes increased by approximately $4,000
for the three months ended March 31, 1997 as compared to the corresponding
period in 1996 primarily due to the $300,000 increase in the Shannon Lake loan
in July 1996.
General
The determination as to whether it is in the best interest of the
Partnership to enter into forbearance agreements on the FMBs or, alternatively,
to pursue its remedies under the loan documents, including foreclosure, is
based upon several factors including, but not limited to, property performance,
owner cooperation and projected legal costs.
Certain property owners have, at times, supplemented the cash flow
generated by the properties to meet the required FMB interest payments. There
can be no assurance that in the future any property owner will elect to
supplement property cash flow to satisfy bond interest requirements, if
necessary. No property owner made supplementary payments during the three
months ended March 31, 1997 and 1996.
Property Information
The following table lists the FMBs the Partnership owns together with
occupancy rates of the underlying properties as of March 31, 1997:
<TABLE>
<CAPTION>
Annualized
Interest
Rate Paid Minimum
for the Three Annual
Stated Months Ended Pay Rate at
Face Amount Interest March 31, March 31,
Property Location of FMB Occupancy Rate* 1997* 1997*
- ----------------- ------------------ ------------- ----------- ---------- -------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Bay Club Mt. Pleasant, SC $ 6,400,000 100.0% 8.25% 7.57%(D) 8.25%(D)
Loveridge Contra Costa, CA 8,550,000 93.2 8.00 5.17 (B)
The Lakes Kansas City, MO 13,650,000 98.0 4.87 4.87 4.87
Crowne Pointe Olympia, WA 5,075,000 96.2 8.00 8.00 8.00
Orchard Hills Tacoma, WA 5,650,000 92.0 8.00 8.00 8.00
Highland Ridge St. Paul, MN 15,000,000 92.5 8.00 7.25 7.25 (F)
Newport Village Tacoma, WA 13,000,000 89.2 8.00 8.22 (C) 8.00
Sunset Downs Lancaster, CA 15,000,000 90.0 8.00 4.33 (B)
Willow Creek Ames, IA 6,100,000 100.0 8.00 8.00 8.00
Cedar Pointe Nashville, TN 9,500,000 90.4 7.00 7.00 7.00
Shannon Lake Atlanta, GA 12,000,000 96.2 8.00 6.00 6.00 (F)
Bristol Village Bloomington, MN 17,000,000 94.7 8.00 8.38 (C)(E) 8.00
Suntree Ft. Myers, FL 7,500,000 93.6 8.00 6.84 6.50 (F)
River Run Miami, FL 7,200,000 92.5 8.00 8.00 8.00
Pelican Cove St. Louis, MO 18,000,000 94.9 8.00 7.50 (B)
Players Club(A) Ft. Myers, FL 2,500,000 78.4 8.00 6.42 6.25 (F)
------------
$162,125,000
============
</TABLE>
*The annualized interest rate paid represents the interest recorded by the
Partnership while the stated interest rate represents the coupon rate of
the FMB and the minimum pay rate represents the minimum rate payable
pursuant to the applicable forbearance agreements, if any.
(A) Summit Tax Exempt L.P. III, of which the general partners are
either the same or affiliates of the General Partners of the
Partnership, acquired the other $7,200,000 of the Players Club
FMB.
(B) Pay rate is based on the net cash flow generated by operations of
the underlying property.
(C) Includes receipt of deferred base interest related to prior
periods.
(D) The minimum pay rate on the FMB increased in increments from 6.0%
in 1990 to 8.25% in 1997. The actual pay rate is adjusted as of
the property's fiscal year-end based on audited financial
statements to no less than the minimum pay rate.
(E) Includes receipt of primary contingent interest related to prior
periods.
(F) The minimum pay rate on the FMB is scheduled to increase to the
stated interest rate over the remaining term of the FMB.
223
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Summit Tax Exempt L.P. III
New York, New York
We have audited the accompanying statements of financial condition of
Summit Tax Exempt L.P. III (a Delaware Limited Partnership) as of December 31,
1996 and 1995, and the related statements of income, changes in partners'
capital (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 General Partners. Our responsibility is to express an opinion on these
financial statements based on our audits.
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 the General Partners, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Summit Tax Exempt L.P. III 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.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 20, 1997
224
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Statements of Financial Condition
ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
------------- ------------
<S> <C> <C>
Participating first mortgage bonds-at fair value $44,769,792 $46,686,585
Temporary investments 300,000 250,000
Cash and cash equivalents 59,832 347,908
Interest receivable, net 164,883 132,128
Deferred bond selection fees, net 667,755 729,686
Other assets 0 4,209
----------- -----------
Total assets $45,962,262 $48,150,516
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 124,106 $ 77,880
Due to affiliates 100,261 43,427
----------- -----------
Total liabilities 224,367 121,307
----------- -----------
Contingencies
Partners' capital (deficit):
BUC$holders (3,081,625 BUC$ issued and outstanding) 49,089,896 49,456,927
General Partners (171,793) (164,303)
Net unrealized loss on participating first mortgage bonds (3,180,208) (1,263,415)
----------- -----------
Total partners' capital 45,737,895 48,029,209
----------- -----------
Total liabilities and partners' capital $45,962,262 $48,150,516
=========== ===========
</TABLE>
See accompanying notes to financial statements.
225
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Interest income:
Participating first mortgage bonds $3,074,857 $3,185,563 $3,444,722
Temporary investments 12,455 20,752 13,908
----------- ----------- -----------
Total revenues 3,087,312 3,206,315 3,458,630
----------- ----------- -----------
Expenses:
General and administrative 239,354 201,739 148,351
Loan servicing fees 131,125 131,125 131,125
Amortization of deferred bond selection fees 61,931 61,332 61,633
Provision for uncollectible interest 0 0 69,405
----------- ----------- -----------
Total expenses 432,410 394,196 410,514
----------- ----------- -----------
Net income $2,654,902 $2,812,119 $3,048,116
=========== =========== ===========
Allocation of Net Income:
BUC$holders $2,344,799 $2,498,872 $2,730,149
=========== =========== ===========
General Partners:
Special distribution $ 262,250 $ 262,250 $ 262,250
Other 47,853 50,997 55,717
----------- ----------- -----------
$ 310,103 $ 313,247 $ 317,967
=========== =========== ===========
Net income per BUC $ .76 $ .81 $ .89
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
226
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Statements of Changes in Partners' Capital (Deficit)
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Participating
First
Total BUC$holders General Partners Mortgage Bonds
------------- ------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Partners' capital (deficit)-December 31, 1993 $49,491,235 $49,651,566 $ (160,331)
Cumulative effect through January 1, 1994 of
accounting change (Note 2) (475,556) 0 0 $ (475,556)
Net income 3,048,116 2,730,149 317,967 0
Distributions (3,029,423) (2,711,830) (317,593) 0
Net change in fair value of participating first
mortgage bonds (961,930) 0 0 (961,930)
----------- ----------- ---------- ------------
Partners' capital (deficit)-December 31, 1994 48,072,442 49,669,885 (159,957) (1,437,486)
Net income 2,812,119 2,498,872 313,247 0
Distributions (3,029,423) (2,711,830) (317,593) 0
Net change in fair value of participating first
mortgage bonds 174,071 0 0 174,071
----------- ----------- ---------- ------------
Partners' capital (deficit)-December 31, 1995 48,029,209 49,456,927 (164,303) (1,263,415)
Net income 2,654,902 2,344,799 310,103 0
Distributions (3,029,423) (2,711,830) (317,593) 0
Net change in fair value of participating first
mortgage bonds (1,916,793) 0 0 (1,916,793)
----------- ----------- ---------- ------------
Partners' capital (deficit)-December 31, 1996 $45,737,895 $49,089,896 $ (171,793) $ (3,180,208)
=========== =========== ========== ============
</TABLE>
See accompanying notes to financial statements.
227
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1995 1994
--------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 3,054,557 $ 3,301,923 $ 3,448,922
Fees and expenses paid (263,210) (316,869) (280,770)
----------- ----------- -----------
Net cash provided by operating activities 2,791,347 2,985,054 3,168,152
----------- ----------- -----------
Cash flows from investing activities:
Net (purchase) sale of temporary investments (50,000) 316,327 (166,287)
----------- ----------- -----------
Cash flows from financing activities:
Distributions paid (3,029,423) (3,029,423) (3,029,423)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (288,076) 271,958 (27,558)
Cash and cash equivalents at beginning of year 347,908 75,950 103,508
----------- ----------- -----------
Cash and cash equivalents at end of year $ 59,832 $ 347,908 $ 75,950
=========== =========== ===========
Schedule reconciling net income to net cash flow
provided by operating activities:
Net income $ 2,654,902 $ 2,812,119 $ 3,048,116
----------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for uncollectible interest 0 0 69,405
Amortization of deferred bond selection fees 61,931 61,332 61,633
Changes in:
Interest receivable (32,755) 95,608 (9,708)
Other assets 4,209 1,114 76,154
Accounts payable and accrued expenses 46,226 (4,185) (57,304)
Due to affiliates 56,834 19,066 (20,144)
----------- ----------- -----------
Total adjustments 136,445 172,935 120,036
----------- ----------- -----------
Net cash provided by operating activities $ 2,791,347 $ 2,985,054 $ 3,168,152
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
228
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 1--General
Summit Tax Exempt L.P. III (the "Partnership"), a Delaware limited
partnership, was formed February 25, 1987 and will terminate on December 31,
2021 unless terminated sooner under the provisions of the Agreement of Limited
Partnership (the "Partnership Agreement"). The Partnership was formed to invest
in tax-exempt participating first mortgage revenue bonds ("FMBs") issued by
various state or local governments or their agencies or authorities. The FMBs
are secured by participating first mortgage loans ("Mortgage Loans") on
multi-family residential apartment projects (the "Properties"). The general
partners of the Partnership (the "General Partners") are Prudential-Bache
Properties, Inc. ("PBP") (a wholly-owned subsidiary of Prudential Securities
Group Inc.) and Related Tax Exempt Associates III, Inc. ( the "Related General
Partner"). Related BUC$ Associates III, Inc. (the "Assignor Limited Partner"),
which acquired and holds limited partnership interests on behalf of those
persons who purchase Beneficial Unit Certificates ("BUC$"), has assigned to
those persons substantially all of its rights and interest in and under such
limited partnership interests. The Related General Partner and the Assignor
Limited Partner are under common ownership. As of December 31, 1996, the
Partnership has invested in a total of five FMBs.
NOTE 2--Summary of Significant Accounting Policies
a) Basis of Accounting
The books and records of the Partnership are maintained on the accrual
basis of accounting in accordance with generally accepted accounting
principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the General Partners to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
b) Participating first mortgage bonds
Effective January 1, 1994, the Partnership accounts for its investments in
the FMBs as debt securities under the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115").
The Partnership has a right to require redemption of the FMBs
approximately twelve years after their issuance. The Partnership anticipates
holding the FMBs for approximately 12 to 15 years from the date of issuance;
however, it can and may elect to hold until maturity. As such, SFAS 115
requires the Partnership to classify these investments as "available for sale."
Accordingly, investments in FMBs are carried at their estimated fair values,
with unrealized gains and losses reported in a separate component of partners'
capital. The cumulative effect of adopting this accounting was a decrease in
partners' capital at January 1, 1994 of approximately $476,000 due to
unrealized holding losses. Unrealized holding gains or losses do not affect the
cash flow generated from property operations, distributions to BUC$holders, the
characterization of the tax-exempt income stream or the financial obligations
under the FMBs.
The Partnership periodically evaluates each FMB to determine whether a
decline in fair value below the FMB's cost basis is other than temporary. Such
a decline is considered to be other than temporary if, based on current
information and events, it is probable that the Partnership will be unable to
collect all amounts due according to the existing contractual terms of the
bonds. If the decline is judged to be other than temporary, the cost basis of
the bond is written down to its then estimated fair value, with the amount of
the write-down accounted for as realized loss.
Because the FMBs are not readily marketable, the Partnership estimates
fair value for each bond as the present value of its expected cash flows using
a discount rate for comparable tax-exempt investments. This process is based
upon projections of future economic events affecting the real estate
collateralizing the bonds, such as property occupancy rates, rental rates,
operating cost inflation and market capitalization rates, and upon
determination of an appropriate market rate of interest, all of which are based
on good faith estimates and assumptions developed by the Partnership's
management. Changes in market conditions and circumstances may occur which
would cause these estimates and assumptions to change, therefore, actual
results may vary from the estimates and the variance may be material.
Interest income from FMBs is recognized at the stated rate when
collectibility of future amounts is reasonably assured. Interest income from
FMBs with modified terms where the collectibility of future amounts is
uncertain is recognized based upon expected cash receipts.
c) Temporary Investments
Temporary investments at December 31, 1996 and 1995 represent tax-exempt
municipal preferred stock which is carried at cost which approximates market
value.
229
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 2--Summary of Significant Accounting Policies (continued)
d) Cash and cash equivalents
Cash and cash equivalents include cash on hand, cash in banks, and
investments in short-term instruments with an original maturity of three months
or less, for which cost approximates market value.
e) Income taxes
The Partnership is not required to provide, or pay, any Federal income
taxes. Income tax attributes that arise from its operations are passed directly
to the BUC$holders. The Partnership may be subject to other state and local
taxes in jurisdictions in which it operates.
f) Profit and loss allocations and distributions
As more fully described in the Partnership Agreement, the General Partners
receive a special distribution equal to a .5% per annum of the total invested
assets (which equals the face amount of the FMBs), payable quarterly, for
managing the affairs of the Partnership.
Income is allocated first to the General Partners in an amount equal to
the special distribution. The net remaining profits or losses and distributions
are then allocated 98% to the BUC$holders and 2% to the General Partners, in
accordance with the Partnership Agreement.
g) Bond selection fees
The General Partners were paid bond selection fees (equal to 2% of the
gross proceeds from the initial offering) for evaluating and selecting FMBs,
negotiating the terms of mortgage loans and coordinating the development effort
with property developers and government agencies. These fees have been
capitalized and are being amortized over the terms of the FMBs. The accumulated
amortization as of December 31, 1996 and 1995, was approximately $565,000 and
$503,000, respectively.
h) Fair value of financial instruments
As described in Note 2.b. above, the Partnership's investment in FMBs are
carried at estimated fair values. The Partnership has determined that the fair
value of its remaining financial instruments, including its temporary
investments and cash and cash equivalents approximates their carrying values.
NOTE 3--Participating First Mortgage Bonds
Overview
The principal and interest payments on each FMB are payable only from the
cash flows, including proceeds in the event of sale, from the Properties
underlying the FMBs. None of these FMBs constitute a general obligation of any
state or local government, agency or authority. The FMBs are secured by the
mortgage loans on the underlying Properties and the structure of each mortgage
loan mirrors the structure of the corresponding FMB.
Unless otherwise modified, the principal of the FMBs will not be amortized
during their respective terms (which are generally up to 24 years) and will be
required to be repaid in lump sum "balloon" payments at the expiration of the
respective terms or at such earlier times as the Partnership may require
pursuant to the terms of the bond documents. The Partnership has a right to
require redemption of the FMBs approximately twelve years after their issuance.
The Partnership anticipates holding the FMBs for approximately 12 to 15 years
from the date of issuance; however, it can and may elect to hold until
maturity.
In addition to the stated rates of interest ranging from 8.0% to 9.0% per
annum, each of the FMBs provides for "contingent interest" which is equal to:
(a) an amount equal to 50% to 100% of net property cash flow and 75% to 100% of
net sale or refinancing proceeds until the borrower has paid, during the
post-construction period, annually compounded interest at 9% on a cumulative
basis, and thereafter (b) an amount equal to 25% of remaining net property cash
flow and 25% of remaining net sale or refinancing proceeds until the borrower
has paid interest at a simple annual rate of 16% over the term of the FMB. Both
the stated and contingent interest are exempt from Federal income taxation. The
Partnership has not received any contingent interest to date.
In order to protect the tax-exempt status of the FMBs, the owners of the
Properties are required to enter into certain agreements to own, manage and
operate such Properties in accordance with requirements of the Internal Revenue
Code.
Forbearance agreements have been executed with the owners of all five of
the properties.
230
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 3--Participating First Mortgage Bonds (continued)
Lakepoint
During 1991, the Partnership entered into a forbearance agreement with the
owner of the Lakepoint property allowing interest payments at a pay rate of
7.5% per annum in 1991, 8.0% in 1992 and 8.5% in 1993. Due to weakness in the
market in June 1993, the forbearance agreement was further modified to allow
for a pay rate of 7.5% from January 1992 through March 1993 and 6.0% from April
1993 through December 1995. In May 1996, the General Partners granted an
extension of the forbearance agreement providing for a minimum rate of 6.0% per
annum to be paid through December 15, 1997.
Orchard Mill
The 1991 forbearance agreement relating to the Orchard Mill FMB permits
interest to be paid only to the extent of the net cash flow from the property.
Pursuant to the terms of a forbearance agreement with Orchard Mill effective as
of May 1, 1995, the minimum monthly interest pay rate was established at a 5%
annual rate with all remaining cash flow generated by the property payable to
the Partnership and applied to accrued and unpaid base interest and contingent
interest as set forth in the forbearance agreement and loan agreements. For the
year ended December 31, 1996, Orchard Mill has paid interest monthly at an
annual rate equal to 6.76%, consistent with the terms of the forbearance
agreement.
Players Club
In 1992, the Partnership entered into a forbearance agreement with the
owner of the Players Club property. This agreement was substantially modified
on January 1, 1994 , January 1, 1995, January 1, 1996 and again on January 1,
1997 to require minimum debt service payments of 6.0% per annum through the end
of 1994, 7.0% for 1995 and 1996 and 6.25% through the end of 1997.
Sunset Village/Sunset Creek
Forbearance agreements were also entered into with the owner of the Sunset
Village and Sunset Creek properties in 1992 allowing debt service payments at a
rate of 7.0% per annum through April 1993 at which time the pay rate increased
to 7.25% and was scheduled to increase in annual increments to the stated rate
of 8.5% in May 1996. Effective with the May 1, 1995 payment date, the Sunset
Village and Sunset Creek FMBs have made payments based on the monthly net cash
flow generated by the operations of the underlying properties in accordance
with the terms of the agreement outlined below. Effective as of August 1, 1995,
the original owner and obligor of the Sunset Creek and Sunset Village FMBs
transferred the deeds to the underlying properties to an affiliate of the
Related General Partner for limited consideration. Pursuant to the agreement,
the Related General Partner's affiliate, who has not made an equity investment
in the underlying property, assumed the day-to-day responsibilities and
obligations of operating the properties. The Partnership receives the monthly
net cash generated by these properties as payment toward debt service.
General
The determination as to whether it is in the best interest of the
Partnership to enter into forbearance agreements on the FMBs, or alternatively,
to pursue its remedies under the loan documents, including foreclosure, is
based upon several factors. These factors include, but are not limited to,
property performance, owner cooperation and projected legal costs.
The difference between the stated interest rates and the rates paid by
FMBs is not accrued as interest income for financial reporting purposes. The
accrual of interest at the stated rate will resume once a property's ability to
pay the stated interest rate has been adequately demonstrated. Interest income
of approximately $1,400,000, $969,000, and $963,000 was not recognized for the
years ended December 31, 1996, 1995, and 1994, respectively.
The following FMBs' interest income exceeded 15% of the Registrant's total
revenue for each of the three years in the period ended December 31, 1996:
1996 1995 1994
---- ---- ----
Lakepoint 30% 29% 29%
Sunset Village 17% 21% 22%
Orchard Mill 24% 19% 21%
Sunset Creek * 15% 16%
Players Club 17% 16% *
* FMB interest income was less than 15% of the Registrant's total revenue
for the year.
The cost basis of the FMBs was $47,950,000 at December 31, 1996 and 1995.
The net unrealized loss on FMBs consists of gross unrealized gains and losses
of $0 and $3,180,208, respectively, at December 31, 1996 and $488,045 and
$1,751,460, respectively, at December 31, 1995.
231
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 3--Participating First Mortgage Bonds (continued)
Descriptions of the various FMBs owned by the Partnership at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Minimum Carrying
Average Pay Rate Stated Amount
Interest Rate at December Interest Maturity Face at December
Property Location Paid for 1996* 31, 1996* Rate* Call Date Date Amount 31, 1996 (C)
- ------------------ ----------------- ---------------- ------------- ---------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Players Club (A) Ft. Myers, FL 7.37% 7.00% 8.00% Aug. 1999 Aug. 2007 $ 7,200,000 $ 6,843,428
Lakepoint Dekalb City, GA 6.10 6.00 8.50 Jan. 2000 Oct. 2007 15,100,000 14,159,707
Sunset Village Lancaster, CA 4.50 (B) 8.50 Mar. 2000 Mar. 2008 11,375,000 9,085,396
Sunset Creek Lancaster, CA 4.46 (B) 8.50 Mar. 2000 Mar. 2008 8,275,000 6,004,427
Orchard Mill Atlanta, GA 6.76 (D) 5.00 9.00 Apr. 2001 Mar. 2008 10,500,000 8,676,834
----------- -----------
$52,450,000 $44,769,792
=========== ===========
</TABLE>
*The average interest rate paid represents the interest recorded by the
Partnership while the stated interest rate represents the coupon rate of
the FMB and the minimum pay rate represents the minimum rate required to be
paid under the respective forbearance agreements.
(A) Summit Tax Exempt L.P. II, of which the general partners are
either the same or affiliates of the General Partners of the
Partnership, acquired the other $2,500,000 of the Players Club
bond issue.
(B) Interest on this FMB is paid to the extent of the property's net
cash flow.
(C) The FMBs are carried at their estimated fair values at December
31, 1996.
(D) Includes receipt of deferred base interest related to prior
periods.
NOTE 4--Income Taxes
Following is a reconciliation of net income for financial statement
purposes with net income for Federal income tax reporting purposes:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net income per financial statements $2,654,902 $2,812,119 $3,048,116
Uncollected interest from FMBs 1,399,894 969,000 1,031,827
Provision for uncollectible interest 0 0 69,405
Property tax loan deferred for tax reporting purposes,
net 0 (82,204) 0
Amortization of deferred bond selection fees 61,931 61,332 61,633
---------- ---------- ----------
Net income for tax purposes $4,116,727 $3,760,247 $4,210,981
========== ========== ==========
</TABLE>
Net income for tax purposes is generally exempt from Federal income tax.
The differences between the tax and book bases of partner's capital are
primarily attributable to the cumulative effect of the book to tax income
adjustments, the recording of distributions and the Partnership's accounting
for the FMBs at fair value for book purposes and cost for tax purposes.
NOTE 5--Related Parties
The General Partners and their affiliates perform services for the
Partnership which include, but are not limited to: accounting and financial
management; registrar, transfer and assignment functions; asset management;
investor communications; printing and other administrative services. The
General Partners and their affiliates receive reimbursements for costs incurred
in connection with these services, the amount of which is limited by the
Partnership Agreement. The costs and expenses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Prudential-Bache Properties, Inc. and affiliates
General and administrative $ 39,778 $ 71,153 $ 61,866
Related Tax Exempt Associates III, Inc. and affiliates
General and administrative 48,805 21,853 8,521
Loan servicing fee 131,125 131,125 131,125
--------- --------- ---------
179,930 152,978 139,646
--------- --------- ---------
$219,708 $224,131 $201,512
========= ========= =========
</TABLE>
232
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 5--Related Parties (continued)
Effective October 1, 1995 the Related General Partner has assumed from
PBP, the responsibilities and duties of the Tax Matters Partner as defined in
the Partnership Agreement.
An affiliate of the Related General Partner receives the loan servicing
fee in the amount of .25% per annum of the principal amount outstanding of
mortgage loans serviced by the affiliate.
During 1995 and January 1996, a division of Prudential Securities
Incorporated ("PSI"), an affiliate of PBP, was responsible for the purchase,
sale and safekeeping of the Partnership's temporary investments. This account
was maintained in accordance with the Partnership Agreement.
PSI owns 17,700 BUC$ at December 31, 1996.
The Players Club property (securing a $7,200,000 bond in this Partnership)
also secures an FMB for $2,500,000 held by Summit Tax Exempt L.P. II, of which
the general partners are either the same or affiliates of the General Partners
of this Partnership. The original owner of the FMB is an affiliate of the
Related General Partner.
Effective as of August 1, 1995, the original owner and obligor of the
Sunset Creek and Sunset Village FMBs transferred the deeds to the underlying
properties to an affiliate of the Related General Partner for limited
consideration. Pursuant to the agreement, the Related General Partner's
affiliate, who has not made an equity investment in the underlying property,
assumed the day-to-day responsibilities and obligations of operating the
properties.
NOTE 6--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV 654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants. On November 16, 1993, a putative class action captioned
Connelly et al. v. Prudential-Bache Securities Inc. et al. (93 Civ. 713) , was
filed in the United States District Court for the District of Arizona ,
purportedly on behalf of investors in the Partnership against the Partnership,
PBP, PSI and a number of other defendants. On January 3, 1992, a putative class
action, captioned Levine v. Prudential-Bache Properties Inc. et al. (92 Civ.
52), was filed in the United States District Court for the Northern District of
Illinois purportedly on behalf of investors in the Partnership against the
General Partners, PSI and a number of other defendants. Subsequently the
Related General Partner was dismissed from the Levine litigation.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, by order dated May 4, 1994, the Connelly case and by
order dated July 13, 1994, the Levine case, to a single judge of the United
States District Court for the Southern District of New York (the "Court") and
consolidated for pretrial proceedings under the caption In re Prudential
Securities Incorporated Limited Partnerships Litigation (MDL Docket 1005) (the
"Class Action"). On June 8, 1994, plaintiffs in the transferred cases filed a
complaint that consolidated the previously filed complaints and named as
defendants, among others, PSI, certain of its present and former employees and
the General Partners. The Partnership was not named a defendant in the
consolidated complaint, but the name of the Partnership was listed as being
among the limited partnerships at issue in the case.
On August 9, 1995 PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class.
The Court gave final approval to the settlement, certified a class of
purchasers of specific limited partnerships, including the Partnership,
released all settled claims by members of the class against the PSI settling
defendants and permanently barred and enjoined class members from instituting,
commencing or prosecuting any settled claim against the released parties. The
full amount due under the settlement agreement has been paid by PSI. The Levine
and Connelly cases were dismissed with prejudice as to the Prudential
defendants by court order dated October 25, 1996. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
two other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
233
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 6--Contingencies (continued)
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well
as each of the other concerned partnerships and final approval of the Court
after review of the proposals at a fairness hearing.
Under the proposed Reorganization plan, the BUC$holders of the
Partnership, and Summit Tax Exempt Bond Fund L.P. and Summit Tax Exempt L.P.
II, will receive shares in a newly formed business trust. It is anticipated
that the shares will be allocated proportionately among the partnerships and
their respective investors based upon appraisals and other factors as supported
by a third-party fairness opinion. Detailed information about the proposed
Related Settlement and Reorganization will be sent to BUC$holders in the near
future. The terms of the Reorganization include, among other matters,
affiliates of the Related Capital Company ("RCC") of PBP's general partner
interest (the "PBP Interest"), transfer to the BUC$holders of one-half of the
PBP Interest, reduction of fees currently payable to the General Partners by
25%, filing an application to list the new company's shares on an exchange and
the creation of an infinite, as opposed to finite, life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996, PBP and RCC entered into an agreement for the purchase by
RCC or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions, including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
Pending final approval of the Related Settlement, the Court's Order
prohibits class members (including the BUC$holders) from, among other matters,
(i) transferring their BUC$unless the transferee agrees to be bound by the
Related Settlement; (ii) granting a proxy to object to the Reorganization; or
(iii) commencing a tender offer for the BUC$. In addition, the General Partners
are enjoined from (i) recording any transfers made in violation of the Order
and (ii) providing the list of investors in any of the partnerships which are
the subject of the Reorganization to any person conducting a tender offer.
There can be no assurance that the conditions to the closing of the
proposed Related Settlement and Reorganization will be satisfied that a closing
may occur in the projected time frame. In the event a settlement cannot be
reached, the Related General Partner believes it has meritorious defenses to
the consolidated complaint and intends to vigorously defend this action.
NOTE 7--Subsequent Event
In February 1997, distributions of approximately $678,000 and $14,000 were
paid to the BUC$holders and General Partners, respectively, for the quarter
ended December 31, 1996.
234
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity and Capital Resources
Summit Tax Exempt L.P. III ("the Registrant") has invested in five
tax-exempt participating First Mortgage Bonds ("FMBs") issued by various state
or local governments or their agencies or authorities. The FMBs are secured by
participating first mortgage loans on the properties.
At the beginning of the year, the Registrant had cash and temporary
investments of approximately $598,000. After the payment of distributions of
approximately $3,029,000 and receipt of the net cash flow from operations of
approximately $2,791,000, the Registrant ended the year with approximately
$360,000 in cash and temporary investments. The fourth quarter distribution of
approximately $678,000 ($.22 per BUC) was paid to BUC$holders in February 1997
from cash flow from operations. Interest payments from FMBs are anticipated to
provide sufficient liquidity to fund in future years Registrant's operating
expenditures, debt service and distributions. The restructuring of the FMBs in
1995 and any future restructurings may result in the General Partners reducing
the distributions to BUC$holders in future periods.
Pursuant to the terms of a forbearance agreement with Orchard Mill
effective as of May 1, 1995, the minimum monthly interest pay rate was
established at a 5% annual rate with all remaining cash flow generated by the
property payable to the Registrant and applied to accrued and unpaid base
interest and contingent interest pursuant to the forbearance agreement and loan
agreements. For the year ended December 31, 1996, Orchard Mill has paid
interest monthly at an annual rate equal to 6.76%, consistent with the terms of
the forbearance agreement.
For a discussion of the settlement of the proposed Class Action relating
to the Registrant see Other Events in Item 1. Business above.
Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed that will or are likely
to impact liquidity in a material way. The Registrant's investments in FMBs are
secured by Registrant's interest in properties which are diversified by
location so that if one area of the country is experiencing downturns in the
economy, the remaining properties may be experiencing upswings. However, the
geographic diversification of the portfolio may not protect against a general
downturn in the national economy.
Results of Operations
The Registrant accounts for its investments in the FMBs as debt securities
under the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115").
The Registrant has a right to require redemption of the FMBs approximately
twelve years after their issuance. The Registrant anticipates holding the FMBs
for approximately 12 to 15 years from the date of issuance; however, it can and
may elect to hold until maturity. As such, SFAS 115 requires the Registrant to
classify these investments as "available for sale." Accordingly, investments in
FMBs are carried at their estimated fair values, with unrealized gains and
losses reported in a separate component of partners' capital. Unrealized
holding gains or losses do not affect the cash flow generated from property
operations, distributions to BUC$holders, the characterization of the
tax-exempt income stream or the financial obligations under the FMBs.
The Registrant periodically evaluates each FMB to determine whether a
decline in fair value below the FMB's cost basis is other than temporary. Such
a decline is considered to be other than temporary if, based on current
information and events, it is probable that the Registrant will be unable to
collect all amounts due according to the existing contractual terms of the
bonds. If the decline is judged to be other than temporary, the cost basis of
the bond is written down to its then estimated fair value, with the amount of
the write-down accounted for as realized loss.
Because the FMBs are not readily marketable, the Registrant estimates fair
value for each bond as the present value of its expected cash flows using a
discount rate for comparable tax-exempt investments. This process is based upon
projections of future economic events affecting the real estate collateralizing
the bonds, such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates, and upon determination of an
appropriate market rate of interest, all of which are based on good faith
estimates and assumptions developed by the Registrant's management. Changes in
market conditions and circumstances may occur which would cause these estimates
and assumptions to change, therefore, actual results may vary from the
estimates and the variance may be material.
1996 vs. 1995
Net income decreased by approximately $157,000 for the year ended December
31, 1996 as compared to the corresponding period in 1995 for the following
reasons:
235
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Interest income from Participating FMBs decreased by approximately
$111,000 for the year ended December 31, 1996 as compared to the corresponding
period in 1995 primarily due to reduced debt service payments received for the
Sunset Village and Sunset Creek FMBs, which were restructured in the third
quarter 1995, partially offset by an increase in base and deferred base
interest received from Orchard Mill.
Interest income from temporary investments decreased approximately $8,000
for the year ended December 31, 1996 as compared to the corresponding period in
1995 primarily due to higher interest rates and invested balances in 1995.
General and administrative expenses increased approximately $38,000 for
the year ended December 31, 1996 as compared to the corresponding period in
1995 primarily due to an increase in legal costs relating to the Kinnes
litigation described in Note 6 to the Financial Statements.
1995 vs. 1994
Net income decreased by approximately $236,000 for the year ended December
31, 1995 as compared to the corresponding period in 1994 for the following
reasons:
Interest income from FMBs decreased by approximately $259,000 for the year
ended December 31, 1995 as compared to the corresponding period in 1994
primarily due to reduced interest received from the Sunset Village and Sunset
Creek FMBs. This decrease was partially offset by an increase in interest paid
on the Player's Club FMB as required by the terms of its forbearance agreement.
Interest income from temporary investments increased approximately $7,000
for the year ended December 31, 1995 as compared to the corresponding period in
1994 primarily due to higher interest rates and invested balances.
General and administrative expenses increased approximately $53,000 for
the year ended December 31, 1995 as compared to the corresponding period in
1994 primarily due to increased legal fees in 1995 and increased costs
associated with the administration of the Registrant.
General
The determination as to whether it is in the best interest of the
Registrant to enter into forbearance agreements on the FMBs, or alternatively,
to pursue its remedies under the loan documents, including foreclosure, is
based upon several factors including, but not limited to, property performance,
owner cooperation and projected legal costs.
The difference between the stated interest rates and the rates paid by
FMBs is not accrued as interest income for financial reporting purposes. The
accrual of interest at the stated rate will resume once a property's ability to
pay the stated interest rate has been adequately demonstrated. Interest income
of approximately $1,400,000, $969,000, and $963,000 was not recognized for the
years ended December 31, 1996, 1995, and 1994, respectively.
From time to time, certain property owners have elected to supplement the
cash flow generated by the properties to meet the required FMB interest
payments. No such payments were made in 1994, 1995 or 1996. There can be no
assurance that in the future any property owner will elect to supplement
property cash flow to satisfy bond interest requirements, if necessary.
Property Information
The following table lists the FMBs that the Registrant owns together with
occupancy rates of the underlying properties: es of the underlying properties
as of February 11, 1997:
<TABLE>
<CAPTION>
Carrying Minimum Pay
Amount February 11, Average Stated Rate at
Face Amount at December 1997 Interest Rate Interest December 31,
Property Location of FMB 31, 1996 (C) Occupancy Paid for 1996* Rate* 1996*
- ------------------ ------------------- ------------- -------------- -------------- ---------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Players Club (A) Fort Myers, FL $ 7,200,000 $ 6,843,428 83.9% 7.37% 8.00% 7.00%
Lakepoint Dekalb County, GA 15,100,000 14,159,707 91.4 6.10 8.50 6.00
Sunset Village Lancaster, CA 11,375,000 9,085,396 91.4 4.50 8.50 (B)
Sunset Creek Lancaster, CA 8,275,000 6,004,427 92.8 4.46 8.50 (B)
Orchard Mill Atlanta, GA 10,500,000 8,676,834 99.2 6.76 (D) 9.00 5.00
----------- -----------
$52,450,000 $44,769,792
=========== ===========
</TABLE>
236
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
*The average interest rate paid represents the interest recorded by the
Registrant while the stated interest rate represents the coupon rate of the
FMB and the minimum pay rate represents the minimum rate required to be
paid under the respective forbearance agreements.
(A) Summit Tax Exempt L.P. II, of which the general partners are
either the same or affiliates of the General Partners of the
Registrant, acquired the other $2,500,000 of the Players Club bond
issue.
(B) Interest on this FMB is paid to the extent of the property's net
cash flow.
(C) The FMBs are carried at their estimated fair values at December
31, 1996.
(D) Includes receipt of deferred base interest related to prior
periods.
237
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Statements of Financial Condition
(unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Participating first mortgage bonds-at fair value $44,769,792 $44,769,792
Temporary investments 100,000 300,000
Cash and cash equivalents 274,370 59,832
Interest receivable, net 127,677 164,883
Deferred bond selection fees, net 652,347 667,755
Other assets 3,869 0
----------- -----------
Total assets $45,928,055 $45,962,262
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 118,813 $ 124,106
Due to affiliates 214,341 100,261
----------- -----------
Total liabilities 333,154 224,367
----------- -----------
Contingencies
Partners' capital (deficit):
BUC$holders (3,081,625 BUC$issued and outstanding) 48,949,762 49,089,896
General Partners (174,653) (171,793)
Net unrealized loss on participating first mortgage bonds (3,180,208) (3,180,208)
----------- -----------
Total partners' capital 45,594,901 45,737,895
----------- -----------
Total liabilities and partners' capital $45,928,055 $45,962,262
=========== ===========
</TABLE>
See accompanying notes to financial statements.
238
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1997 1996
-------- ---------
<S> <C> <C>
Revenues:
Interest income:
Participating first mortgage bonds $705,517 $699,417
Temporary investments 2,393 3,314
-------- --------
Total revenues 707,910 702,731
-------- --------
Expenses:
General and administrative 46,706 46,690
Loan servicing fees 32,332 32,691
Amortization of deferred bond selection fees 15,408 15,407
-------- --------
Total expenses 94,446 94,788
-------- --------
Net Income $613,464 $607,943
======== ========
Allocation of Net Income:
BUC$holders $537,824 $531,709
======== ========
General Partners:
Special distribution $ 64,664 $ 65,383
Other 10,976 10,851
-------- --------
$ 75,640 $ 76,234
======== ========
Net Income per BUC $ .17 $ .17
======== ========
</TABLE>
See accompanying notes to financial statements.
239
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Statements of Changes in Partners' Capital (Deficit)
(unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Loss on
Participating
First
Total BUC$holders General Partners Mortgage Bonds
------------- ------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Partners' capital (deficit)-January 1, 1997 $45,737,895 $49,089,896 $ (171,793) $ (3,180,208)
Net income 613,464 537,824 75,640 0
Distributions (756,458) (677,958) (78,500) 0
----------- ----------- ---------- ------------
Partners' capital (deficit)-March 31, 1997 $45,594,901 $48,949,762 $ (174,653) $ (3,180,208)
=========== =========== ========== ============
</TABLE>
See accompanying notes to financial statements.
240
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
------------- ------------
<S> <C> <C>
Cash Fows from Operating Activities:
Interest received, net $ 745,116 $ 702,731
Amount received which is due to affiliate 0 39,517
Fees and expenses paid (38,784) (14,760)
---------- ----------
Net cash provided by operating activities 706,332 727,488
---------- ----------
Cash Flows from Investing Activities:
Net sale of temporary investments 200,000 25,000
Cash Flows from Financing Activities:
Distributions paid (691,794) (691,794)
---------- ----------
Net increase in cash and cash equivalents 214,538 60,694
Cash and cash equivalents at beginning of period 59,832 347,908
---------- ----------
Cash and cash equivalents at end of period $ 274,370 $ 408,602
========== ==========
Schedule Reconciling Net Income to Net Cash Flow
Provided by Operating Activities:
Net income $ 613,464 $ 607,943
---------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred bond selection fees 15,408 15,407
Changes in:
Interest receivable, net 37,206 0
Other assets (3,869) 4,209
Accounts payable and accrued expenses (5,293) 15,961
Due to affiliates 49,416 83,968
---------- ----------
Total adjustments 92,868 119,545
---------- ----------
Net cash provided by operating activities $ 706,332 $ 727,488
========== ==========
Supplemental Schedule of Financing Activities:
Distributions to partners $ (756,458) $ (757,177)
Increase in distributions payable 64,664 65,383
---------- ----------
Distributions paid to partners $ (691,794) $ (691,794)
========== ==========
</TABLE>
See accompanying notes to financial statements.
241
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Notes to Financial Statements
March 31, 1997 (unaudited)
NOTE 1--General
These financial statements have been prepared without audit. In the
opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of Summit Tax Exempt L.P. III (the "Partnership") as of
March 31, 1997 and the results of its operations and its cash flows for the
three months ended March 31, 1997 and 1996. However, the operating results for
the interim periods may not be indicative of the results expected for the full
year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1996.
NOTE 2--Participating First Mortgage Bonds ("FMBs")
The Partnership accounts for its investments in the FMBs as "available for
sale" debt securities under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Accordingly, investments in FMBs are carried at their
estimated fair values, with unrealized gains and losses reported in a separate
component of partners' capital.
Because the FMBs are not readily marketable, the Partnership estimates
fair value for each bond as the present value of its expected cash flows using
a discount rate for comparable tax-exempt investments. This process is based
upon projections of future economic events affecting the real estate
collateralizing the bonds, such as property occupancy rates, rental rates,
operating cost inflation and market capitalization rates, and upon
determination of an appropriate market rate of interest, all of which are based
on good faith estimates and assumptions developed by the Partnership's
management. Changes in market conditions and circumstances may occur which
would cause these estimates and assumptions to change, therefore, actual
results may vary from the estimates and the variance may be material.
Effective January 1, 1997, a forbearance agreement with respect to the
Players Club FMB was modified and extended due to a continuous weak rental
market and to ensure that real estate tax payments and capital improvements are
made. The minimum pay rate for Players Club was reduced to 6.5% and 6.25% for
the periods January 1, 1997 through January 31, 1997 and February 1, 1997
through December 31, 1997, respectively. Thereafter, it is expected that the
stated rate of 8% will be reinstated.
With respect to all FMBs, the difference between the stated interest rates
and the actual rates paid (whether deferred and payable out of future cash flow
or, ultimately, from sale or refinancing proceeds) on FMBs is not accrued for
financial statement purposes. Unrecorded contractual interest income was
approximately $407,000 and $417,000 for the three months ended March 31, 1997
and 1996, respectively.-
The cost basis of the FMBs was $47,950,000 at March 31, 1997 and December
31, 1996. The net unrealized loss on FMBs consists of gross unrealized gains
and losses of $0 and $3,180,208, respectively, at both March 31, 1997 and
December 31, 1996.
Descriptions of the various FMBs owned by the Partnership at March 31,
1997 are as follows:
<TABLE>
<CAPTION>
Annualized
Interest Rate Minimum
Paid for the Annual
Three Months Pay Rate
Ended at March 31,
Property Location March 31, 1997* 1997*
- ------------------- -------------------- ----------------- --------------
<S> <C> <C> <C>
Player's Club (A) Fort Myers, FL 6.42% 6.25%
Lakepointe Stone Mountain, GA 6.00 6.00
Sunset Village Lancaster, CA 4.01 (B)
Sunset Creek Lancaster, CA 4.40 (B)
Orchard Mill Atlanta, GA 7.53 (D) 5.00
<CAPTION>
Carrying
Stated Amount
Interest Maturity Face at March 31,
Property Rate* Call Date Date Amount 1997 (C)
- ------------------- ---------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Player's Club (A) 8.00% Aug. 1999 Aug. 2007 $ 7,200,000 $ 6,843,428
Lakepointe 8.50 Jan. 2000 Oct. 2007 15,100,000 14,159,707
Sunset Village 8.50 Mar. 2000 Mar. 2008 11,375,000 9,085,396
Sunset Creek 8.50 Mar. 2000 Mar. 2008 8,275,000 6,004,427
Orchard Mill 9.00 Apr. 2001 Mar. 2008 10,500,000 8,676,834
------------ ------------
$52,450,000 $44,769,792
============ ============
</TABLE>
*The annualized interest rate paid represents the interest recorded by the
Partnership while the stated interest rate represents the coupon rate of
the FMB and the minimum annual pay rate represents the minimum rate
required to be paid under the respective forbearance agreements.
242
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Notes to Financial Statements
March 31, 1997 (unaudited)
NOTE 2--Participating First Mortgage Bonds ("FMBs") (continued)
(A) Summit Tax Exempt L.P. II, of which the general partners are
either the same or affiliates of the General Partners of the
Partnership, acquired the other $2,500,000 of the Player's Club
Bond issue.
(B) Interest on this FMB is paid to the extent of the property's net
cash flow.
(C) FMBs are carried at their estimated fair values at March 31,
1997.
(D) Includes receipt of deferred base interest related to prior
periods.
NOTE 3--Related Parties
Prudential-Bache Properties, Inc. ("PBP") and the Related General Partner
(collectively, the "General Partners") and their affiliates perform services
for the Partnership which include, but are not limited to: accounting and
financial management; registrar, transfer and assignment functions; asset
management; investor communications; printing and other administrative
services. The General Partners and their affiliates receive reimbursements for
costs incurred in connection with these services, the amount of which is
limited by the provisions of the Agreement of Limited Partnership (the
"Partnership Agreement"). The costs and expenses were:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
------- -------
<S> <C> <C>
PBP and affiliates:
General and administrative $10,683 $15,112
------- -------
Related General Partner and affiliates:
Loan servicing fees 32,332 32,691
General and administrative 6,345 15,000
------- -------
38,677 47,691
------- -------
$49,360 $62,803
======= =======
</TABLE>
An affiliate of the Related General Partner receives loan servicing fees
(see above) in an amount of .25% per annum of the principal amount outstanding
of mortgage loans serviced by the affiliate.
During January 1996, a division of Prudential Securities Incorporated
("PSI"), an affiliate of PBP, was responsible for the purchase, sale and
safekeeping of the Partnership's temporary investments. This account was
maintained in accordance with the Partnership Agreement.
PSI owns 17,700 BUC$ at March 31, 1997.
The Player's Club property (securing a $7,200,000 FMB in this Partnership)
also secures an FMB for $2,500,000 held by Summit Tax Exempt L.P. II, of which
the general partners are either the same or affiliates of the General Partners
of this Partnership. The original owner of the FMB is an affiliate of the
Related General Partner.
Effective as of August 1, 1995, the original owner and obligor of the
Sunset Creek and Sunset Village FMBs transferred the deeds to the underlying
properties to an affiliate of the Related General Partner for limited
consideration. Purusant to the agreement, the Related General Partner's
affiliate, who has not made an equity investment in the underlying property,
assumed the day-to-day responsibilities and obligations of operating the
properties.
NOTE 4--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV 654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants. On November 16, 1993, a putative class action captioned
Connelly et al. v. Prudential-Bache Securities Inc. et al. (93 Civ. 713) , was
filed in the United States District Court for the District of Arizona ,
purportedly on behalf of investors in the Partnership against the Partnership,
PBP, PSI and a number of other defendants. On January 3, 1992, a putative class
action, captioned Levine v. Prudential-Bache Properties Inc. et al. (92 Civ.
52), was filed in the United States District Court for the Northern District of
Illinois purportedly on behalf of investors in the Partnership against the
General Partners, PSI and a number of other defendants. Subsequently, the
Related General Partner was dismissed from the Levine litigation.
243
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Notes to Financial Statements
March 31, 1997 (unaudited)
NOTE 4--Contingencies (continued)
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, by order dated May 4, 1994, the Connelly case and by
order dated July 13, 1994, the Levine case, were transferred to a single judge
of the United States District Court for the Southern District of New York (the
"Court") and consolidated for pretrial proceedings under the caption In re
Prudential Securities Incorporated Limited Partnerships Litigation (MDL Docket
1005) (the "Class Action"). On June 8, 1994, plaintiffs in the transferred
cases filed a complaint that consolidated the previously filed complaints and
named as defendants, among others, PSI, certain of its present and former
employees and the General Partners. The Partnership was not named a defendant
in the consolidated complaint, but the name of the Partnership was listed as
being among the limited partnerships at issue in the case.
On August 9, 1995 PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class.
The Court gave final approval to the settlement, certified a class of
purchasers of specific limited partnerships, including the Partnership,
released all settled claims by members of the class against the PSI settling
defendants and permanently barred and enjoined class members from instituting,
commencing or prosecuting any settled claim against the released parties. The
full amount due under the settlement agreement has been paid by PSI. The Levine
and Connelly cases were dismissed with prejudice as to the Prudential
defendants by court order dated October 25, 1996. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
two other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well
as each of the other concerned partnerships and final approval of the Court
after review of the proposals at a fairness hearing.
Under the proposed Reorganization plan, the BUC$holders of the
Partnership, and Summit Tax Exempt Bond Fund L.P. and Summit Tax Exempt L.P.
II, will receive shares in a newly formed business trust. It is anticipated
that the shares will be allocated proportionately among the partnerships and
their respective investors based upon appraisals and other factors as supported
by a third-party fairness opinion. Detailed information about the proposed
Related Settlement and Reorganization will be sent to BUC$holders in the near
future. The terms of the Reorganization include, among other matters, the
acquisition by affiliates of the Related Capital Company ("RCC") of PBP's
general partner interest (the "PBP Interest"), transfer to the BUC$holders of
one-half of the PBP Interest, reduction of the sum of the aggregate annual fees
currently payable to both General Partners by 25%, filing an application to
list the new company's shares on an exchange and the creation of an infinite,
as opposed to finite, life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996, PBP and RCC entered into an agreement for the purchase by
RCC or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions, including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
Pending final approval of the Related Settlement, the Court's Order
prohibits class members (including the BUC$holders) from, among other matters,
(i) transferring their BUC$unless the transferee agrees to be bound by the
Related Settlement; (ii) granting a proxy to object to the Reorganization; or
(iii) commencing a tender offer for the BUC$. In addition, the General Partners
are enjoined from (i) recording any transfers made in violation of the Order
and (ii) providing the list of investors in any of the partnerships which are
the subject of the Reorganization to any person conducting a tender offer.
There can be no assurance that the conditions to the closing of the
proposed Related Settlement and Reorganization will be satisfied nor as to the
time frame in which a closing may occur. In the event a settlement cannot be
reached, the Related General Partner believes it has meritorious defenses to
the consolidated complaint and intends to vigorously defend this action.
244
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Notes to Financial Statements
March 31, 1997 (unaudited)
NOTE 5--Subsequent Events
On May 12, 1997, Summit Tax Exempt L.P. II, of which the general partners
are either the same or affiliates of the General Partners of this Partnership,
loaned the obligor of the Players Club $280,000 to cover the shortfall on its
1996 real estate tax payment and to fund a capital improvement account. The
note will be self-amortizing at an annual interest rate of 8% for a term of 48
months.
In May 1997, a distribution of approximately $678,000 and $14,000 was paid
to the BUC$holders and General Partners, respectively, for the quarter ended
March 31, 1997.
245
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity and Capital Resources
Summit Tax Exempt L.P. III (the "Partnership") has invested in five
tax-exempt participating first mortgage bonds ("FMBs") issued by various state
or local governments or their agencies or authorities. The FMBs are secured by
participating first mortgage loans on the properties.
At the beginning of the year, the Partnership had cash and temporary
investments of approximately $360,000. After receipt of the net cash flow from
operations of approximately $706,000 and the payment of distributions of
approximately $693,000, the Partnership had approximately $374,000 in cash and
temporary investments at March 31, 1997. The first quarter distribution of
$678,000 ($.22 per BUC) was paid to BUC$holders in May 1997 from cash flow from
operations. Interest payments from FMBs are anticipated to provide sufficient
liquidity to fund in future years the Partnership's operating expenditures,
debt service and distributions. The restructuring of the FMBs in prior years
and any future restructurings may result in the General Partners reducing the
distributions to BUC$holders in future periods.
Effective January 1, 1997, a forbearance agreement with respect to the
Players Club FMB was modified and extended due to a continuous weak rental
market and to ensure that real estate tax payments and capital improvements are
made. The minimum pay rate for Players Club was reduced to 6.5% and 6.25% for
the periods January 1, 1997 through January 31, 1997 and February 1, 1997
through December 31, 1997, respectively. Thereafter, it is expected that the
stated rate of 8% will be reinstated.
For a discussion of the proposed settlement of the Class Action relating
to the Partnership, see Note 4 to the financial statements.
Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed that will or are likely
to impact liquidity in a material way. The Partnership's investments in FMBs
are secured by a Partnership interest in properties which are diversified by
location so that if one area of the country is experiencing downturns in the
economy, the remaining properties may be experiencing upswings. However, the
geographic diversification of the portfolio may not protect against a general
downturn in the national economy.
Results of Operations
Net income increased approximately $6,000 for the three months ended March
31, 1997 as compared to the corresponding period in 1996 for the reason
discussed below.
Interest income from FMBs increased approximately $6,000 for the three
months ended March 31, 1997, as compared to the corresponding period in 1996
primarily due to increased debt service payments received from the Orchard Mill
(including the receipt of deferred base interest relating to prior periods) and
Sunset Creek FMBs, partially offest by a decrease in debt service payments
received from the Player's Club FMB.
General
The determination as to whether it is in the best interest of the
Partnership to enter into forbearance agreements on the FMBs or, alternatively,
to pursue its remedies under the loan documents, including foreclosure, is
based upon several factors including, but not limited to, property performance,
owner cooperation and projected legal costs.
From time to time, certain property owners have elected to supplement the
cash flow generated by the properties to meet the required FMB interest
payments. There can be no assurance that in the future any property owner will
elect to supplement property cash flow to satisfy bond interest requirements,
if necessary. No property owner made supplementary payments during the three
months ended March 31, 1997 and 1996.
Property Information
The following table lists the FMBs the Partnership owns together with
occupancy rates of the underlying properties as of March 31, 1997:
246
<PAGE>
Summit Tax Exempt L.P. III
(a limited partnership)
<TABLE>
<CAPTION>
Annualized
Interest
Rate Paid Minimum
for the Three Annual
Stated Months Ended Pay Rate at
Interest March 31, March 31,
Property Face Amount Occupancy Rate* 1997* 1997*
- --------------------------------- ------------- --------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Player's Club, Fort Myers, FL (A) $ 7,200,000 82.0% 8.00% 6.42% 6.25%
Lakepointe, Stone Mountain, GA 15,100,000 89.7 8.50 6.00 6.00
Sunset Village, Lancaster, CA 11,375,000 95.0 8.50 4.01 (B)
Sunset Creek, Lancaster, CA 8,275,000 93.0 8.50 4.40 (B)
Orchard Mill, Atlanta, GA 10,500,000 96.0 9.00 7.53(C) 5.00
-----------
$52,450,000
===========
</TABLE>
*The annualized interest rate paid represents the interest recorded by the
Partnership while the stated interest rate represents the coupon rate of
the FMB and the minimum annual pay rate represents the minimum rate
required to be paid under the respective forbearance agreements.
(A) Summit Tax Exempt L.P. II, of which the general partners are
either the same or affiliates of the General Partners of the
Partnership, acquired the other $2,500,000 of the Player's Club
Bond issue.
(B) Interest on this FMB is paid to the extent of the property's net
cash flow.
(C) Includes receipt of deferred base interest related to prior
periods.
247
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax issues
associated with the Consolidation, and with operations of the Company and the
transactions related thereto which are expected to be undertaken as a result of
the Consolidation and therefore were not described in the prospectuses issued
in connection with the initial public offerings of Units of the Participating
Partnerships and which may affect BUC$holders who are individuals and citizens
or residents of the United States. There is no discussion of the federal tax
issues associated with the Consolidation for tax-exempt investors because such
investors were not permitted to purchase BUC$ at the initial public offering.
This summary was prepared by Battle Fowler LLP, for the Company , and is based
upon the Code, Treasury regulations promulgated or proposed thereunder and
published rulings and court decisions, all of which are subject to changes
which could adversely affect the Investors. Each BUC$holder should consult his
or her own tax advisor as to the specific consequences of the proposed
Consolidation, the receipt and ownership of Shares by Participating
BUC$holders, the taxation of the Company as a partnership and the application
and effect of federal, state and local income and other tax laws and of any
potential changes in the applicable law after the date hereof.
The opinions described herein represent Counsel's best legal judgment as
to the most likely outcome of an issue if the matter were litigated. Opinions
of counsel have no binding effect or official status of any kind, and in the
absence of a ruling from the IRS, there can be no assurance that the IRS will
not challenge the conclusion or propriety of any of Counsel's opinions. No
ruling from the IRS, or from any other taxing authority, will be sought or
obtained as to any of the following tax issues, and neither the IRS nor the
courts are bound by the discussion or the opinions of Counsel set forth below.
Income tax laws may be modified, prospectively or retroactively, by
legislative, judicial or administrative action at any time. No assurance can be
given that legislation, new regulations, administrative interpretations or
court decisions will not significantly change the tax laws. In addition to any
direct effects such changes might have, such changes might also indirectly
affect the market value of all real estate investments, and consequently the
ability of the Company to realize its investment objectives. While any such
legislation may contain transitional rules that would reduce their impact on
the Company, its is impossible to predict whether or in what form such
legislation may be enacted in the future.
Opinions of Counsel
Counsel has rendered its opinion to the Company and the Partnerships
concerning the material federal income tax issues regarding the Consolidation
and related transactions. In rendering its opinion, Counsel has relied upon
representations of the Company with respect to certain factual matters and upon
representations from the General Partners that the assets of the Partnerships
are held for investment and not for resale. Counsel has not undertaken an
independent inquiry into or verification of these facts. Based upon the
foregoing representations, and subject to the limitations and qualifications
described above and herein, Counsel has opined that:
(a) the exchange of Units in the Participating Partnerships for Shares in
the Company pursuant to the Consolidation by Participating BUC$holders will
not be a taxable event and such BUC$holders will not recognize gain or loss
for federal income tax purposes unless the amount of cash held by a
Participating Partnership, on a pro rata basis, is in excess of a
Participating BUC$holder's basis in his Units, in which case such
Participating BUC$holder will recognize gain in an amount equal to such
excess;
(b) the Company will satisfy the requirements to be treated as a
partnership for federal income tax purposes;
(c) to the extent the summary of federal income tax consequences set forth
in this Solicitation Statement involves matters of law, such statements of
law are correct; and
(d) the following discussion fairly summarizes the material federal income
tax considerations associated with the Consolidation and the operations of
the Company.
The Company intends to continue to invest in FMBs and tax-exempt
securities. Although the Company anticipates that substantially all of its
income will be excluded from gross income for federal income tax purposes, the
Company could have taxable income under certain circumstances. For example, the
Company will have taxable income as a result of its investment in SMLs and
Taxable Tails and would have taxable income or gain if interest on the FMBs or
tax-exempt securities were determined to be taxable, if the Company acquired a
Property through foreclosure, if the Company sold FMBs or if the amount of
Contingent Interest is in excess of a certain amount so that it is treated as a
taxable capital gain. Furthermore, interest on FMBs or tax-exempt securities
may cause certain other tax consequences, including an alternative minimum tax,
depending upon the investor's tax situation. Because the Company does not
believe that these events are likely, no substantial discussion of the tax
consequences of these events is provided. If, however, these events were to
occur and the Company were to have taxable income, the tax consequences of an
investment in the Company would differ possibly significantly, from those
described below.
The opinions of Counsel are based upon the facts described in this
Solicitation Statement and upon the facts as they have been represented by the
Manager to Counsel. Any alteration of the facts may adversely affect the
opinions rendered. Furthermore, the opinions of Counsel are based upon existing
laws, applicable current and proposed Treasury Regulations, current published
administrative positions
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of the IRS contained in Revenue Rulings and Revenue Procedures, and judicial
decisions, which are subject to change either prospectively or retroactively.
Each prospective investor should note that the opinions described herein
represent only Counsel's best legal judgment and have no binding effect or
official status of any kind. Thus, in the absence of a ruling from the IRS,
there can be no assurance that the IRS will not challenge the conclusion or
propriety of any of Counsel's opinions.
Because of certain facts which can be ascertained only in the future and
in certain cases the lack of clear legal authority, Counsel has concluded that
it is not possible to reach a judgment as to the outcome on the merits (either
favorable or unfavorable) of the following federal income tax issues and,
accordingly, expresses no opinion with respect to them: (1) whether the Company
will be treated as a partnership for state income tax purposes; (2) whether the
interest received with respect to FMBs and tax-exempt securities will be exempt
from federal income taxation (an opinion to this effect is expected to be
obtained from bond counsel (retained by the issuer of the FMBs or by the
Company) or counsel for the Company); (3) whether the Company will be deemed to
be a "dealer" in mortgage bonds at the time of the sale or disposition of all
or a portion of the Company's bond portfolio, thereby resulting in the entire
gain, if any, from such sale or other disposition of FMBs being treated as
ordinary income; and (4) whether the Company's inclusion of the Bond Selection
Fee in the basis of the FMBs will be respected. Furthermore, no opinion is
expressed as to the tax consequences for foreign investors, who should consult
with their own tax advisers as to the income, estate and gift tax consequences
of investing in Shares. See "Special Classes of Investors--Foreign Investors."
Certain Similarities Between the Ownership of the Units and Beneficial Shares
The Partnerships of which the BUC$holders are partners are not subject to
federal income taxation and instead each BUC$holder is required to take into
account his or her share of the income or loss of such Partnership, regardless
of whether any cash is distributed. On the Effective Date, BUC$holders of a
respective Participating Partnership will receive Shares in the Company. See
"COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE
PARTNERSHIPS."
A Delaware business trust will be treated as a partnership for federal
income tax purposes if such an entity satisfies the requirements for taxation
as a partnership under applicable IRS rules and regulations. As discussed
below, it is expected that the Company will satisfy the requirements for
taxation as a partnership. See "Partnership Status--Determination of
Partnership Status."
On the other hand, it is expected that the Company will be a "publicly
traded partnership," which could result in the Company being taxed as an
association taxable as a corporation. However, based on certain representations
by the Company as to its intended method of operation and future method of
raising capital, the Company expects that at least 90 percent of its gross
income will be derived from interest on obligations secured by mortgages on
real property, and gain from the sale of such investments, and therefore the
Company should satisfy the requirements for an exception to treatment as a
corporation. See "Partnership Status--Publicly Traded Partnerships."
Tax Consequences of the Consolidation
Consequences to Participating BUC$holders.
In connection with the Consolidation, the Participating BUC$holders'
interests in the Participating Partnerships will be transferred to the Company
in exchange for shares of Shares of the Company. The Participating Partnerships
will then be liquidated and will distribute their property (i.e., Mortgage
Loans) to the Company. It is anticipated that Participating BUC$holders will
not recognize income or loss as a result of the transfer of Units to the
Company. However, in the unlikely event that a Participating Partnership
distributes cash to the Company which is in excess of a Participating
BUC$holder's basis in its interest in the respective Participating Partnership,
such Participating BUC$holder would recognize taxable gain equal to the amount
of such excess.
The basis which each Participating BUC$holder will take in shares of
Shares received as a result of the Consolidation will equal the Participating
BUC$holder's basis in his or its Units adjusted to reflect any gain recognized
by the Participating BUC$holder on the receipt of shares. A Shareholder's
holding period for the Shares for purposes of determining capital gain or loss
will include the period during which such shareholder held the Units.
On the Effective Date, the Participating Partnerships will be liquidated
and will distribute their assets to the Company. The taxable year of the
Participating Partnerships will end at such time and each Participating
BUC$holder must report, in his or its taxable year that includes the
Consolidation, his or its share of all income, gain, loss, deduction, and
credit for the Participating Partnerships through the date of the Consolidation
(including any gain resulting from the Consolidation described above). It is
possible that a Participating BUC$holder whose taxable year is not a calendar
year could be required to take into account in a single taxable year his or its
share of income of the Participating BUC$holderships attributable to more than
one of its taxable years.
Consequences to Company. The Company will not recognize gain or loss as a
result of the Consolidation. The Company will have a holding period in the
Units which will include the period during which each Participating BUC$holder
held the Units. The basis of the assets received by the Company from the
liquidated Participating Partnerships will be equal to the adjusted basis of
the Company in the Units, reduced by the amount of any money distributed in the
same transaction.
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The Company may have market discount or premium with respect to its
acquisition in the Consolidation of loans held by the Participating
Partnerships. The market discount rules provide, in part, for the treatment of
gain attributable to accrued market discount as ordinary income upon the
receipt of principal payments or on the sale or other disposition of the loan
(to the extent such payment, sale or other disposition proceeds do not exceed
the accrued market discount on such obligations) and for the deferral of
interest deductions with respect to debt incurred to acquire or carry the
market discount loan. If a loan is treated as being acquired by the Company at
a premium, such premium will be amortized as an offset to interest income (with
a corresponding reduction in the Company's basis) under a constant-yield method
over the term of the loan if an election under Section 171 of the Code is made.
Partnership Status
The federal income tax treatment of an investment in the Company will
depend upon, among other things, the classification of the Company as a
partnership for federal income tax purposes rather than as an "association"
taxable as a corporation or as a trust. The Company will not request a ruling
from the IRS that it will be treated as a partnership but will instead rely
upon an opinion of Counsel that it will be treated as a partnership for federal
income tax purposes.
The opinion of Counsel is not binding on the IRS or the courts and there
can be no assurance that the IRS will not assert that the Company should be
taxed as an association taxable as a corporation, in which event the
Shareholders would be treated as corporate shareholders and would not be
entitled to the favorable tax treatment outlined below. This determination
would also have a substantial adverse effect on the withholding obligations
with respect to, and the United States tax liability of, any foreign
Shareholders. The opinion of Counsel as to partnership status assumes
compliance from the date of formation of the Company throughout the term of its
existence with the following conditions: (1) that the Company's activities will
be conducted in accordance with the provisions of the Trust Agreement; and (2)
that the Company and the Shareholders will have the objective of carrying on
business for profit and dividing the gains therefrom.
Classification as a Trust. Although the Company is formed as a business
trust under the Act, it is not treated as a trust for federal income tax
purposes merely because it is cast in the form of a trust. Treas. Reg. Sec.
301.7701-4. Rather, it will be treated as a trust only if its purpose were to
vest in the trustees the responsibility for the protection and conservation of
property for beneficiaries who cannot share in the discharge of this
responsibility and, therefore, are not associates in a joint enterprise for the
conduct of business for profit. Under the Trust Agreement, the purpose of the
Company and the responsibility of the Manager is not the protection and
conservation of property. The Trust Agreement provides that the purpose of the
Company is to invest in, hold, sell, dispose of and otherwise act with respect
to FMBs secured by Mortgage Loans on Underlying Properties, and, to a lesser
extent, tax-exempt securities, and the Company and the Manager are granted all
of the powers necessary to carry out that purpose. Consequently, the
Shareholders should be treated as "associates in a joint enterprise for the
conduct of business for profit" and the Company should not be treated as a
trust for federal income tax purposes.
Determination of Partnership Status. Under recently issued regulations
("check the box regulations"), an organization with two or more members will be
classified as a partnership on or after January 1, 1997 unless it elects to be
treated as an association (and therefore taxable as a corporation) or falls
within one of several specific provisions which define a corporation. Based on
the provisions of the check the box regulations, the provisions of the Trust
Agreement, certain factual assumptions and certain factual representations of
the Manager, Counsel is of the opinion that the Company will be treated as a
partnership for federal income tax purposes and not as an association taxable
as a corporation. However, many states have not yet confirmed that they will
follow the check the box regulations in classifying entities for state income
tax purposes. If the Company were to do business in a state that treated the
Company as an association taxable as a corporation for state income tax
purposes, the Company could be required to pay tax to such states, which could
substantially reduce the effective yield on an investment in Beneficial
Interests. The Manager would cause the Company to contest any adverse
determination as to the Company's tax status. However, investors should be
aware that any such contest would result in additional expenses. To the extent
Company funds were then insufficient to meet such expenses, they might have to
be furnished by the Shareholders, although the Shareholders would have no
obligation to do so.
Publicly Traded Partnerships. A "publicly traded partnership" will be
treated as an association taxable as a corporation unless the partnership
derives certain "qualifying" income equal to at least 90% of its gross income
for each of its taxable years beginning after December 31, 1987 (the "90%
Test"). "Qualifying" income generally includes interest (as long as such
interest is not derived in the conduct of a financial or insurance business),
dividends, rents from real property and gain from the sale of property
producing such income. A "publicly traded partnership" is any partnership whose
interests are either (i) traded on an established securities market, or (ii)
readily tradeable on a secondary market (or the substantial equivalent
thereof).
The Manager has represented that interests in the Company will be listed
for quotation on the American Stock Exchange. Consequently, the Company is
expected to be a publicly traded partnership. However, based on certain
representations by the Company, the assumption that the Company will act in
accordance with such representations and on the assumption that the Company
will not be treated as a dealer in FMBs, Counsel is of the opinion that the
Company should satisfy the 90% Test. The representations from the Company on
which Counsel is basing its opinion relate to certain limitations on the
Company's activities so that it will not be considered to be engaged in the
conduct of a financial or insurance business. If, notwithstanding Counsel's
opinion, the Company did not satisfy the
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requirements of the 90% Test, the Company would be taxed as a corporation,
which would cause distributions to Shareholders to be taxable as ordinary
income to the extent of the Company's earnings and profits and, to the extent
such distributions were in excess of a Shareholder's basis, taxable as capital
gain.
Company Income
It is expected that most of the FMBs will be multifamily "private activity
bonds" as defined in the Code. The Code excludes interest on certain private
activity bonds from gross income for federal income tax purposes if certain
requirements are met. In general, these requirements include certain
limitations on the use of the Properties (e.g., percentage of units that must
be occupied by persons of low or moderate income, see below), limitation on the
investment of proceeds of the FMBs and other amounts and requirements that
certain earnings be rebated to the federal government. Noncompliance with such
requirements may cause interest on such obligations to become subject to
federal income taxation retroactive to the FMB's date of issue, irrespective of
the date of occurrence of such noncompliance.
With respect to FMBs issued after December 31, 1985, other than bonds
financing certain properties owned by non-profit corporations, either 40% of
the units in a tax-exempt financed multi-family housing project must be
reserved for families earning 60% or less of the median gross income in the
relevant locality, or 20% of the units must be reserved for families earning
50% or less of such median gross income. While under prior law, a tenant is a
low- or moderate-income person or family if such tenant was low- or
moderate-income at the time of initial occupancy, the Code now provides that if
a project ceases to comply with the set-aside because of existing tenant income
increases, the existing tenants who no longer meet the income requirements may
remain tenants but the first vacant market-rate units of comparable or smaller
size to those occupied by tenants whose income had increased must be rented to
new low-income tenants. In addition, the "qualified project period" for
multi-family housing projects, during which the foregoing low- or
moderate-income requirements must be satisfied, begins on the later of the date
of issuance of the FMBs or the date when at least 10% of the units are first
occupied and ends on the latest of (i) 15 years (as opposed to 10 years under
prior law) after the date on which at least 50% of the units are first
occupied, (ii) the date on which none of the bonds issued with respect to the
project are outstanding (as opposed to a "qualified number of days" as under
prior law), or (iii) the date of termination of any assistance provided to the
project under Section 8 of the United States Housing Act of 1937. This change
in the definition of "qualified project period" generally increases the period
of time during which low- or moderate-income requirements must be satisfied,
thereby possibly delaying the sale of the project to a purchaser desiring
higher income tenants. Due to the application of the transition rules of the
1986 Act, certain FMBs acquired by the Company may still be subject to the
provisions of prior law (as discussed more fully in "THE COMPANY--Investment
Policies and Business Plan--Regulatory Requirements") and may not be subject to
the more stringent provisions of current law.
Current law requires that 95% (rather than 90% as under prior law) of the
proceeds of tax-exempt multi-family housing bonds (other than proceeds invested
in a reasonably required reserve or replacement fund) be expended for
qualifying costs (i.e., expended for the exempt purpose of the borrowing) in
order for the interest on such bonds to be exempt from tax. The costs of bond
issuance (including attorneys' fees and underwriter's spread) do not count
toward the satisfaction of the 95% requirement. In addition, the aggregate
costs of issuance provided by the bonds may not exceed 2% of the proceeds of
the bonds. As a general rule, these restrictions apply to FMBs issued after
August 15, 1986.
In order to comply with the above-described requirements, each borrower
(except in certain limited cases with respect to non-profit owners of
Properties) has entered into a Regulatory Agreement providing, among other
things, that its Property will be maintained and available for the period and
in the manner required by the Regulations.
Except in the case of FMBs issued to finance certain properties for a
non-profit corporation, interest on an FMB will not be excluded from the gross
income of the Company for any period during which the Company is a "substantial
user" of the corresponding Property or a "related person" to a substantial
user. In addition, any Shareholder's allocable share of interest income from
such an FMB will not be excluded from gross income for any period during which
such Shareholder is a "substantial user" of the corresponding Property or a
"related person" to a "substantial user." Applicable regulations provide that a
"substantial user" of a Property would include the corresponding borrower, and
any partner of the corresponding borrower would be considered a "related
person" to a substantial user. Therefore, if such a partner of a borrower
becomes a Shareholder, such partner will receive taxable income to the extent
of its allocable share of interest received by the Company with regard to the
FMBs that financed the Properties owned by the borrower in which such
Shareholder is a partner. Moreover, it is possible that if such partner of a
borrower becomes a Shareholder, distributions related to this borrower's FMB
may be taxable for all Shareholders.
The "original issue discount" ("OID") rules of the Code do not generally
apply to tax-exempt obligations. However, in the event that, notwithstanding
the opinion of bond counsel, interest received by the Company on the FMBs is
includible in its gross income for federal income tax purposes, then with
respect to the Contingent Interest, the Company (and Shareholders) may be
required to include a portion of the Contingent Interest in gross income
annually pursuant to a compounding method, even though the Company may not
receive any payments on the FMBs in that year. However, the OID rules provide
that the portion of contingent interest payments which is considered interest
(rather than principal) under such regulations is not subject to the OID rules
and is includible in the payee's income and deductible from the payor's income
in their respective taxable years in which the amount of the payment becomes
fixed.
If any sale or other disposition of an FMB produced a gain or if the
Company acquired the underlying Property as a result of a foreclosure and was
in receipt of net rental income, the Shareholders would recognize taxable
income.
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The Code imposes a tax, at the highest income tax rate applicable to
corporations, on the "excess passive net income" of an S corporation for any
taxable year in which the S corporation has (i) Subchapter C earnings and
profits as of the close of such taxable year and (ii) passive investment income
in excess of 25% of its gross receipts for such taxable year. Interest on the
FMBs will be considered passive investment income for purposes of determining
whether an S corporation is subject to this tax.
The Code also provides that 100% of any otherwise allowable interest
expense of financial institutions allocable to the purchase or carrying of FMBs
acquired after August 7, 1986 will be disallowed. As under prior law, interest
on indebtedness incurred or continued by an individual to purchase or carry
FMBs will not be deductible. The Code further provides that interest on the
FMBs is includible in the calculation of modified gross income in determining
whether a portion of social security or railroad retirement benefits are to be
included in taxable income of individuals.
Treatment of Mortgage Loans Containing Contingent Interest
As described above in "THE COMPANY--Assets of the Company and--Investment
Policies and Business Plan," payment of a portion of the interest accruing on
the FMBs will be dependent upon the net property cash flow and the appreciation
of the Properties. In view of this, an issue may arise as to whether the
relationship between the Company and the mortgagor is that of debtor and
creditor or whether the Company is engaged in a partnership or joint venture
with the mortgagor. As a creditor of the mortgagor, income derived from the
mortgagor would be treated in full as interest and exempt from federal income
taxation (based on the opinion of bond counsel that interest on the FMBs is
exempt). As a partner or a joint venturer with the mortgagor, the income from
such contingent interest payments and/or the base rate of interest would be
treated as a distribution of partnership profits. A determination that the
Company is a partner or a joint venturer with a mortgagor could cause the
Company to be treated as a "substantial user" of the Properties and, therefore,
cause interest on the FMBs to be included in the Company's gross income for
federal income tax purposes. In addition, treatment of the FMBs as involving an
equity investment might also result in the reallocation of taxable income and
loss from the mortgagors to the Company.
In analyzing whether a partner's unsecured loan to a partnership should be
treated as a loan or a capital contribution (see Joseph W. Hambuechen, 43 T.C.
90 (1964)) and whether an unsecured loan creates a joint venture relationship
(see Hyman Podell, 55 T.C. 429 (1970)), courts have considered all the facts
and circumstances surrounding the transactions and at times both lines of
authority consider the same factors. Counsel believes that in determining
whether the relationship between the Company and a mortgagor is that of a
debtor paying interest or a joint venturer distributing net profits, a court
would consider the following factors: (1) the names given to the certificates
evidencing the indebtedness; (2) the presence or absence of a maturity date;
(3) the source of the payments; (4) the right to enforce the payment of
principal and interest; (5) participation in management; (6) a status equal to
or inferior to that of regular creditors; (7) the intent of the parties; (8)
the existence of "thin" or adequate capitalization; (9) identity of or interest
between creditor and borrower; (10) payment of interest only out of net
profits; and (11) the ability of the entity to obtain loans from outside
lending institutions.
Amendments made to the Code in 1989 authorized the Treasury to prescribe
regulations to determine whether an interest in a corporation should be treated
as part stock and part debt. Although applicable by its terms to interests in
corporations, the principles leading to this amendment of the Code could also
be expanded to apply to mortgage loans which possess both debt and equity
features. For example, such treatment may be appropriate in circumstances where
a debt instrument provides for payments that are dependent to a significant
extent (whether in whole or in part) on corporate performance, whether through
equity kickers, contingent interest, significant deferral or payment,
subordination or an interest rate sufficiently high to suggest a significant
risk of default. Any regulations issued pursuant to the Treasury's authority
will apply on a prospective basis only; i.e., with respect to instruments
issued after the date on which the Treasury Department provides public guidance
as to the characterization of such instruments. In addition, under recently
issued regulations under the OID rules, Contingent Interest in excess of a
certain yield ("Excess Contingent Interest") is treated as taxable capital
gain.
The Company has represented that it will not invest in any FMBs unless it
receives an opinion of bond counsel (retained by the issuer of the FMBs or by
the Company) or special counsel for the Company that interest on the FMBs,
including Contingent Interest (other than Excess Contingent Interest) will be
deemed to be interest and therefore not includible in the gross income of the
Company.
Company Expenses
The Company will incur certain expenses in connection with the operation
of the Company. The Manager anticipates that all of the Company's ordinary
expenses will be attributable to the production of tax-exempt interest income.
The Code prohibits the deduction of any expense otherwise allowable under Code
Section 212 which is allocable to tax-exempt interest income. Code Section 212
permits individuals to claim a deduction for ordinary and necessary expenses
paid or incurred for the production or collection of income or for the
management, conservation or maintenance of property held for production of
income. Accordingly, the Manager anticipates that most Shareholders who are
individuals will not be permitted to claim their share of Company expenses in
calculating their federal income tax.
To the extent that Company expenses are not attributable to tax-exempt
interest income, current law, subject to regulations to be issued, prohibits a
Shareholder's deduction of his allocable portion of such Company expenses
except to the extent that such expenses, when added to the Shareholder's other
miscellaneous itemized deductions, exceed 2% of the Shareholder's adjusted
gross income.
However, a Shareholder which acquires Beneficial Interests in the ordinary
course of its trade or business may claim its share of Company expenses in
calculating its federal income tax. Such a deduction might be available, for
example, to Shareholders such as financial institutions or securities dealers
if they acquire Beneficial Interests in the ordinary course of their trade or
business. Any such deduction will be permitted only to the extent that Company
expenses are reasonable and properly allocable to the period in which they are
deducted.
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Although the Manager believes that expenses incurred by the Company will be
reasonable and will be allocated to the proper periods, the IRS may challenge
and disallow all or a portion of any deduction allocable to the expense. In any
event, Shareholders should consult with their personal tax advisers prior to
attempting to deduct any portion of their share of Company expenses.
Marginal Tax Rates; Capital Gains Taxation
The Code provides a maximum marginal tax rate of 39.6% for individuals and
35% for corporations. The maximum capital gains rate for non-corporate
taxpayers is 28%. Net capital losses of non-corporate taxpayers are deductible
only up to a maximum of $3,000 per year.
Potential Dealer Status
If the Company is deemed to be a "dealer" for federal income tax purposes,
such determination would have an adverse effect on investors in the Company.
The Company could be taxed as a corporation because of its inability to satisfy
the requirements of the 90% Test exception from corporate treatment as a
publicly traded partnership. See "--Partnership Status--Publicly Traded
Partnerships." Even if the Company were treated as a "dealer" but satisfied the
requirements of the 90% Test, gain, if any, resulting from the disposition of
FMBs or tax-exempt securities would be treated as ordinary income to investors
because the FMBs or tax-exempt securities would not be capital assets. See
"Marginal Tax Rates; Capital Gains Taxation," above.
A "dealer" is one who holds property primarily for sale to customers in
the ordinary course of his trade or business. The Company has been organized to
acquire FMBs and, to a lesser extent, tax-exempt securities for investment and
not to engage in the business of buying and selling FMBs and tax-exempt
securities. Accordingly, the Manager does not believe that the Company will be
treated as a "dealer and Counsel has assumed that the Company will not be
treated as a "dealer." See "--Partnership Status--Publicly Traded
Partnerships." Since the determination of this issue depends, however, on the
facts and circumstances of the Company's operations existing from time to time,
Counsel has not opined on the status of the Company as a "dealer" and no
assurance can be given that the Company will not be deemed to be a "dealer" in
FMBs and tax-exempt securities.
Sale of Shares; Disposition of FMBs; Treatment of Market Discount
Any gain recognized by a Shareholder on the sale or exchange of Shares
will generally be treated as a capital gain, unless the FMBs or tax-exempt
securities held by the Company are not capital assets or such FMBs or
tax-exempt securities would not be capital assets if held by the Shareholder
(because the FMBs or tax-exempt securities are dealer property) and such FMBs
or tax-exempt securities have a fair market value of more than 120% of their
basis to the Company. Such gain also may not be treated as capital gain if the
participation feature of an FMB is deemed to be a partnership or joint venture
interest. Apart from the foregoing, although a Shareholder may otherwise be a
dealer in Shares, gain or loss on the sale of a Share will be characterized as
a capital gain or loss. See H. Clinton Pollack, Jr. v. Comm'r, 69 T.C. 142
(1977). See "Allocation of Profits and Losses" above for a discussion of the
effect of a sale on allocations of profits and losses.
Code Section 6031(c)(1) requires that any person who holds an interest in
the Company as a nominee for any other person (such as a broker holding Shares
in street-name) must furnish the Company with the name, address and taxpayer
identification number of both the nominee and each beneficial owner for whom
the nominee held Shares at any time during the year, setting forth the number
of Shares owned for each beneficial owner and the number of Shares which are
transferred by the nominee during the year to the beneficial owner or to any
other person. The nominee must furnish this information to the Company on or
before the January 31st following the close of each Company taxable year.
Failure to properly notify the Company will subject the nominee to IRS
penalties.
Any gain recognized by the Company on the sale or exchange of an FMB or
tax-exempt securities will be treated as a capital gain unless the Company is
deemed to be a "dealer" in FMBs or tax-exempt securities for federal income tax
purposes. In such events, the entire gain, if any, would constitute ordinary
income. See "Potential Dealer Status." In addition, gain to the extent of
"accrued market discount" (discussed below) may be taxable as ordinary income.
Gain attributable to accrued market discount on tax-exempt obligations,
such as the FMBs, issued after July 18, 1984, and acquired after April 30,
1993, will be taxed as ordinary income, and any gain realized in excess of such
accrued market discount will be taxed as capital gain as long as the obligor on
the FMB is not an individual and the FMB is held as a capital asset.
In almost all cases the restructured FMBs will be deemed to have been
issued after July 18, 1984 so that the market discount rules of the Code would
apply. "Market discount" is the excess of a bond's stated redemption price at
maturity over the adjusted basis of such bond immediately after its acquisition
by the taxpayer; "accrued market discount" is the sum of the equal daily
portions of the market discount during the period the taxpayer holds the bond.
In the case of a disposition of an acquired FMB which was issued after July 18,
1984, the Company will recognize a portion of the gain on such disposition as
ordinary income, equal to the amount of accrued market discount. Under the
Code, market discount on obligations issued after July 18, 1984 is deemed to
accrue on a straight-line basis unless the holder elects to accrue such
discount on a constant interest basis. If the Company were to make such an
election, the amount of market discount includible in income would be lower in
earlier years and greater in later years than amounts computed on a
straight-line basis.
Tax Elections
Code Section 754 permits an entity taxed as a partnership to elect to
adjust the basis of its property upon (i) the transfer of an interest in the
entity by sale or exchange or on the death of an investor in the entity, and
(ii) the distribution of property by the entity to an investor. The general
effect of such an election is that transferees of such interests are treated,
for purposes of computing gain, as though they
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had acquired a direct interest in the entity's assets and the entity is treated
for such purposes, upon certain distributions to investors, as though it had
newly acquired an interest in such transferee's allocable portion of such assets
and therefore acquired a new cost basis for such assets. Any such election may
not be revoked unless the consent of the IRS is obtained. As a result of the
complexities and added expense of the tax accounting required to implement such
an election, the Manager does not presently intend to make such an election,
although it is empowered to do so by the Management Agreement. Accordingly, upon
the sale of an FMB or Tax-Exempt Security by the Company subsequent to the
transfer of a Share, taxable gain or loss to the transferee of the Share will be
measured by the difference between its pro rata share of the amount realized by
the Company on such sale and its share of the Trust's tax basis in such FMB or a
Tax-Exempt Security (which, in the absence of a Section 754 election, will be
unchanged by the transfer of the Shares), rather than by the difference between
its share of the amount realized and the portion of the purchase price that was
allocable to such FMB or Tax- Exempt Security. As a consequence, if the FMBs or
tax-exempt securities have appreciated in value, such transferee may be subject
to tax upon a portion of the proceeds which, as to him, may constitute a return
of capital if the purchase price of his Beneficial Interests exceeded his share
of the Company's adjusted basis in all its FMBs or tax-exempt securities.
Therefore, any benefits which might have been available to Shareholders by
reason of such an election will not be available.
The Company may make various elections for federal income tax reporting
purposes which could result in items of income, gain, loss or deduction being
treated differently for tax purposes than for accounting purposes. The
determination of whether to elect a different treatment for tax purposes than
for accounting purposes with respect to a particular item will be made by the
Manager.
Alternative Minimum Tax
Individuals and corporations are subject to an alternative minimum tax at
rates up to 25% and 20% of alternative minimum taxable income, respectively,
which is payable generally to the extent that it exceeds their regular tax
liability. Alternative minimum taxable income is based on regular tax adjusted
gross income, increased by certain tax preferences and reduced by the
alternative tax itemized deductions. The exemption amount ($45,000 for married
filing jointly; $33,750 for single; $40,000 for corporations) is reduced by 25%
of the amount by which alternative minimum taxable income exceeds $150,000
($112,500 for single taxpayers).
Among the tax preference items for both corporate and individual corporate
alternative minimum tax purposes is the interest on private activity bonds such
as tax-exempt bonds used to finance multifamily residential rental projects.
This provision applies to interest on FMBs issued after August 7, 1986, but
does not apply to FMBs issued after such date to refund a bond that was issued
before August 8, 1986. For corporate investors, a portion of the interest on
the FMBs will also be taken into account in computing the "adjusted current
earnings" adjustment item and may thereby be included in a corporation's
alternative minimum taxable income. The effect of the alternative minimum tax
upon an investor in the Company will depend upon the investor's own tax
situation.
Interest Incurred by Company and/or Shareholder
The Code prohibits a deduction by a taxpayer for any interest on
indebtedness incurred or continued to purchase or carry FMBs or tax-exempt
securities. Consequently, most Shareholders may not deduct interest paid or
accrued on Company indebtedness incurred or continued to purchase or carry FMBs
or tax-exempt securities or indebtedness, if any, incurred by a Shareholder to
purchase or carry an interest in the Company. Although a deduction for interest
on indebtedness may be disallowed even if the purchase of an interest in the
Company is not directly traceable to the indebtedness, the IRS generally will
not disallow a deduction for interest on indebtedness incurred for personal
purposes (e.g., a mortgage on a personal residence) or in connection with the
active conduct of a trade or business (unless it is determined that the
borrowing was in excess of business needs or that the taxpayer could reasonably
have foreseen when purchasing the tax-exempt securities that debt would have to
be incurred to meet ordinary and recurring business needs). However, if a
Shareholder acquires an interest in the Company and has outstanding debts which
are not directly connected either with personal expenditures or with the active
conduct of a trade or business, a deduction for interest on such debt may be
disallowed.
Code Section 265(b) provides that financial institutions cannot deduct
interest expense allocable to the purchase or carrying of FMBs acquired after
August 7, 1986. Interest incurred by these financial institutions to purchase
or carry an interest in the Company will be subject to these limitations.
Each Shareholder should consult his tax adviser to determine the
application of these provisions, including certain rules governing the
allocation of indebtedness to tax-exempt obligations, to his particular facts
and circumstances.
State and Local Taxes
Although substantially all of the Company's net income is expected to be
exempt from federal income taxation, the Company may operate in states and
localities which impose a tax on the Company's assets or income, or on each
Shareholder based upon his share of any income (generally in excess of
specified amounts) derived from the Company's activities in such jurisdiction.
This summary will make no attempt to summarize the state tax consequences of
owning Shares in the various states in which investors may reside, and an
investor is advised to consult his own tax counsel as to the state tax
consequences in his particular state of residence. However, an investor should
be aware that many states which impose a state income tax will tax bonds which
are exempt from federal income taxation unless the bond is issued to finance a
facility in such state.
The Company has been created under the laws of the State of Delaware.
Under the Delaware Act, for the purpose of any tax imposed by the State of
Delaware or any instrumentality, agency or political division of the State of
Delaware, the Company shall be classified as a corporation, an association, a
partnership, a trust or otherwise as shall be determined for federal income tax
purposes.
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If the Company is classified as a partnership for federal income tax
purposes and, assuming that the Company derives no income from or connected
with sources within Delaware, no Shareholders, other than those who reside or
are domiciled in Delaware will have liability for income taxes imposed by the
State of Delaware solely as a result of their participation in the Company, and
the Company will not be liable for any income tax imposed by the State of
Delaware.
If the Company derives income from or connected with sources within
Delaware, the Shareholders, other than those who reside or are domiciled in
Delaware, may be subject to Delaware income tax in the following manner. Each
Shareholder's distributive share of items of Company income, gain, loss, and
deduction entering into his federal taxable income (with certain modifications)
derived from or connected with sources within Delaware will be included in the
Shareholder's taxable income for determining the Shareholder's tax liability
under Delaware income tax laws.
Those Shareholders who are considered under Delaware tax law to reside or
to be domiciled in Delaware will be subject to Delaware income tax on their
entire taxable income. For such purposes, entire taxable income means the
Shareholder's federal adjusted gross income with certain modifications and less
certain deductions and personal exemptions provided by Delaware law.
If the Company derives income from or in connection with sources within
Delaware, or if the Company has a Shareholder who is a resident individual in
Delaware as that term is defined in the Delaware Code, then the Company will be
required to file a tax return in Delaware for such tax year.
THIS ANALYSIS IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING. IN
ADDITION, THE ANALYSIS DOES NOT DISCUSS THE POSSIBLE COMPLEX ESTATE OR GIFT TAX
CONSEQUENCES RELATED TO THIS INVESTMENT. ACCORDINGLY, PROSPECTIVE SHAREHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THEIR OWN TAX
SITUATION AND THE EFFECTS OF THIS INVESTMENT THEREON.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
Based on information available to the Company as of the date of this
Solicitation Statement, there are no persons (including any "group" as that
term is used in Section 13(d)(3) of the Exchange Act) known to the Company to
be the beneficial owner of more than five percent of the Company's Shares.
Class Counsel
As part of the Equitable Settlement, Class Counsel will have the right to
petition the Court for additional attorneys' fees in an amount to be determined
in the Court's sole discretion but which will equal 25% of the increase in the
value of the Company, if any, as of the Anniversary Date in the capitalization
of the Company, based upon (i) the difference between the trading prices of the
Company's Shares on the Anniversary Date and (ii) the trading prices of the
Units and asset values of the Partnerships prior to the Effective Date.
One-half of such fees, if any, will be paid in the form of Restricted
Securities (restricted only with respect to transfer of such securities) and
the remaining one-half of such fees will be paid in the form of unrestricted
securities. The number of Counsel's Fee Shares issued shall be subject to a
maximum amount not to exceed 3.95% of the total number of shares of the
Company's outstanding Shares on the Anniversary Date. The Counsel's Fee Shares
will be distributed to Class Counsel quarterly in eight equal installments,
commencing thirty days after the Anniversary Date, subject to acceleration
under certain circumstances, including in the event of a change of control,
fundamental change in the nature of the business, sale or liquidation of the
Manager. Restrictions on the Restricted Securities expire one year from the
date of issuance.
Security Ownership of Management
The following table sets forth information concerning the Shares that are
expected to be beneficially owned, assuming 100% Participation in the
Consolidation, by each of the Managing Trustees and each of the executive
officers of the general partner of the Manager and by all Managing Trustees and
such executive officers as a group. The Share ownership amounts set forth below
are based on the number of Units beneficially owned by such persons as of the
Record Date. No such executive officer of the general partner of the Manager or
Managing Trustee beneficially owns any Units in any of the Partnerships other
than Messrs. Fried and Boesky.
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership(1) of Class
------------------------ ----------------------- --------
J. Michael Fried 355,283(2)(3) 1.73%
Peter T. Allen --(4) --
Arthur P. Fisch --(4) --
Arthur G. Hatzopoulos -- --
Stuart J. Boesky 328,404(2)(5) 1.60%
Alan P. Hirmes 308,796(2) 1.50%
Bruce H. Brown -- --
Mark J. Schlacter -- --
Denise L. Kiley -- --
Marc D. Schnitzer -- --
Richard A. Palermo -- --
Lynn A. McMahon -- --
------- ----
All Managing Trustees and executive
officers of the general partner of the
Manager as a group (12 persons) 359,107(2)(3)(5) 1.74%
======= ====
- ----------
(1) All amounts are directly owned unless stated otherwise.
(2) 308,796 of such Shares represents Shares owned directly by the Manager and
the Related General Partners for which each such party serves as a
director or executive officer. Each such party disclaims beneficial
ownership of the Shares owned by the Manager and the Related General
Partners.
(3) 15,784 of such Shares represent 14,600 Units of Tax Exempt II owned
directly by BF Security Partners, a general partnership in which Messrs.
Fried and Boesky are 50% general partners. 30,703 of such Shares represent
25,000 Units of Tax Exempt I, 2,900 Units of Tax Exempt II and 4,000 Units
of Tax Exempt III which are owned directly by Mr. Fried.
(4) Independent Trustees will receive annually Shares valued at $10,000 as
partial consideration for services as a Managing Trustee, payable in
arrears.
(5) 15,784 of such Shares represent 14,600 Units of Tax Exempt II owned
directly by BF Security Partners, a general partnership in which Messrs.
Fried and Boesky are 50% general partners. 3,824 of such Shares represent
4,000 Units of Tax Exempt I which are owned directly by Mr. Boesky.
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MANAGEMENT
Overview
The Board of Trustees will direct the management of the business and
affairs of the Company but pursuant to the Management Agreement the Manager will
manage the Company's day-to-day affairs including, among other things,
overseeing the portfolio of assets of the Company and the acquisition or
disposition of investments. The Company will not have any officers or employees.
The Registered Trustee is Wilmington Trust Company, a Delaware banking
corporation.
Registered Trustee
The Registered Trustee has been appointed as a trustee solely in order to
satisfy the requirements of Section 3807 of the Delaware Act, and its duties and
responsibilities are limited to (i) the execution, delivery and filing of any
certificates of trust and amendments thereto required to be filed pursuant to
applicable law, (ii) the execution of Trust Certificates if reasonably requested
by the Manager, (iii) the execution of any duly adopted amendments to the Trust
Agreement and (iv) the execution, delivery and filing of any certificates of
cancellation required to be filed pursuant to applicable law. The Registered
Trustee has no responsibility for monitoring the conduct of the Board of
Trustees or the Manager or causing the Board of Trustees or the Manager to
discharge their respective duties under the Trust Agreement and the Management
Agreement, and the Trust Agreement provides that the Registered Trustee shall
have no liability for the acts and omissions of the Board of Trustees or the
Manager.
The Board of Trustees
The Trust Agreement will provide for not less than three nor more than nine
Managing Trustees, at least one-third of whom must be Independent Trustees.
Initially, the Board of Trustees will be comprised of five Trustees, two of
whom will be Independent Managing Trustees. All of the Initial Managing Trustees
will be designated by the Related General Partners (with the two Independent
Trustees having been approved by Class Counsel). The terms of the Initial
Managing Trustees will commence on the Effective Date.
The Company will have annual Shareholder meetings to elect the Managing
Trustees whose terms have expired.
A vacancy in the Board of Trustees created by the death, resignation, or
incapacity of a Trustee or by an increase in the number of Trustees (within the
limits referred to above) may be filled by the vote of a majority of the
remaining Trustees (with respect to a vacancy created by the death, resignation,
or incapacity of an Independent Trustee, the remaining Independent Trustees
shall nominate a replacement). Any Trustee may resign at any time and may be
removed by the Majority Vote of Shareholders only for Cause prior to the fourth
anniversary of the Effective Date, and with or without Cause after such
anniversary.
The Board of Trustees will establish written policies on investments and
borrowings and will monitor the administrative procedures, investment operations
and performance of the Company and the Manager to assure that such policies are
carried out. Until modified by the Trustees, the Company will follow the
policies on investments and borrowings set forth in this Solicitation Statement.
The Independent Trustees will be responsible for reviewing the investment
policies of the Company not less often than annually and with sufficient
frequency to determine that the policies being followed are in the best
interests of the Shareholders.
Members of the Board of Trustees who are not Independent Trustees will not
receive any cash compensation for serving as a member of the Board of Trustees
and likewise will not receive any compensation for attending meetings or for
serving on any committees of the Board of Trustees; however, members of the
Board of Trustees will receive reimbursement of travel and other expenses and
other out-of-pocket disbursements incurred in connection with attending any
meetings.
Independent Trustees will be entitled to receive compensation for serving
as Managing Trustees at the rate of $5,000 per year in cash and Shares having an
aggregate value of $10,000, based on the fair market value at the date of
issuance, in addition to the expense reimbursement for attending meetings
described above. At the discretion of the Board of Trustees, Independent
Trustees may be granted additional cash compensation for serving on a committee
of the Board of Trustees.
Pursuant to the terms of the Incentive Share Option Plan, the Compensation
Committee may, subject to certain restrictions, grant options to members of the
Board of Trustees to purchase Shares of the Company. See "MANAGEMENT--
Description of Incentive Share Option Plan." To date, no such member of the
Board of Trustees has received any options pursuant to the Incentive Share
Option Plan.
Pursuant to the Trust Agreement, the Board of Trustees will be divided into
three classes. All five members of the Board of Trustees will initially be
designated by the Related General Partners (Class Counsel has approved the two
initial Independent Trustees chosen by the Related General Partners). After
consummation of the Consolidation, the Board of Trustees will be elected by the
Shareholders of the Company. The Class I and Class II Managing Trustees will
each consist of two Managing Trustees, one of whom in each class will be an
Independent Managing Trustee. The Class III Trustees will consist of one
Managing Trustee.
The term of the initial Class I Managing Trustees will terminate on the
date of the 1998 annual meeting of Shareholders; the term of the initial Class
II Managing Trustees will terminate on the date of the 1999 annual meeting of
Shareholders and the term of the initial Class III Managing Trustees will
terminate on the date of the 2000 annual meeting of Shareholders. At each annual
meeting of Share-
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holders, Managing Trustees of the class to be elected shall be elected for a
three-year term. Managing Trustees will hold office until the annual meeting for
the year in which their terms expire and until their successors shall be elected
and qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. The terms of the initial Managing
Trustees will commence on the Effective Date.
The Trust Agreement provides that, subject to the right of the holders of
any class of stock to elect additional Managing Trustees under specified
circumstances, Managing Trustees may be removed by the Majority Vote of
Shareholders only for Cause prior to the fourth anniversary of the Effective
Date, and with or without Cause after such anniversary.
Managing Trustees
As of the Effective Date, the Managing Trustees of the Company will be as
follows:
Name Age Offices Held
- ---- --- ----------------------------------------
J. Michael Fried 51 Managing Trustee, Chairman of the Board
Peter T. Allen 51 Managing Trustee
Arthur P. Fisch 54 Managing Trustee
Stuart J. Boesky 40 Managing Trustee
Alan P. Hirmes 41 Managing Trustee
J. Michael Fried is President, Chief Executive Officer and a member of the
general partner of the Manager. Mr. Fried is also the sole stockholder of one of
the general partners of Related, the real estate finance affiliate of The
Related Companies, L.P. In that capacity, he is generally responsible for all of
the syndication, finance, acquisition and investor reporting activities of
Related and its affiliates. Mr. Fried is also the President and a member of the
general partner of the Manager. Mr. Fried practiced corporate law in New York
City with the law firm of Proskauer Rose Goetz & Mendelsohn from 1974 until he
joined Related in 1979. Mr. Fried graduated from Brooklyn Law School with a
Juris Doctor Degree, magna cum laude; from Long Island University Graduate
School with a Master of Science degree in Psychology; and from Michigan State
University with a Bachelor of Arts degree in History.
Peter T. Allen is President of Peter Allen & Associates, Inc., a real
estate development and management firm, in which capacity he has been
responsible for the leasing, refinancing and development of major commercial
properties. Mr. Allen has also been an Adjunct Professor of the Graduate School
of Business at the University of Michigan since 1981. Mr. Allen received a
Bachelor of Arts Degree in history/economics from DePauw University and a
Masters Degree in Business Administration with Distinction from the University
of Michigan. Mr. Allen is an Independent Trustee.
Arthur P. Fisch has been an attorney in private practice specializing in
real property and securities law since October 1987, with Arthur P. Fisch, P.C.
and Fisch & Kaufman. From 1975-1987, Mr. Fisch was employed by E.F. Hutton &
Company, serving as First Vice President in the Direct Investment Department
from 1981-1987 and associate general counsel from 1975-1980 in the legal
department. As First Vice President, he was responsible for the syndication and
acquisition of millions of dollars in residential real estate. Mr. Fisch was
the Corporate General Partner in four public real estate funds and responsible
for the acquisition of several thousand apartment units. He was also in charge
of the Subsidized Housing and Cable TV groups at E.F. Hutton's Direct
Investment Department. Mr. Fisch received a B.B.A. from Bernard Baruch College
of the City University of New York and a Juris Doctor degree from New York Law
School. Mr. Fisch is admitted to practice law in New York and Pennsylvania. Mr.
Fisch is an Independent Trustee.
Stuart J. Boesky is Executive Vice President, Chief Operating Officer and a
member of the general partner of the Manager. Mr. Boesky practiced real estate
and tax law in New York City with the law firm of Shipley & Rothstein from 1984
until February 1986 when he joined Related. From 1983 to 1984 Mr. Boesky
practiced law with the Boston law firm of Kaye, Fialkow, Richmond & Rothstein
(which subsequently merged with Strook & Strook & Lavan) and from 1978 to 1980
was a consultant specializing in real estate at the accounting firm of Laventhol
& Horwath. Mr. Boesky is the sole stockholder of one of the general partners of
Related. Mr. Boesky graduated from Michigan State University with a Bachelor of
Arts degree and from Wayne State School of Law with a Juris Doctor degree. He
then received a Master of Laws degree in Taxation from Boston University School
of Law.
Alan P. Hirmes is a Senior Vice President, the Chief Financial Officer and
a member of the general partner of the Manager. Mr. Hirmes has been a Certified
Public Accountant in New York since 1978. Prior to joining Related in October
1983, Mr. Hirmes was employed by Wiener & Co., certified public accountants.
Mr. Hirmes is also the sole stockholder of one of the general partners of
Related. Mr. Hirmes graduated from Hofstra University with a Bachelor of Arts
degree.
Committees of the Board of Trustees
Audit Committee. The Company will have an Audit Committee comprised of
Messrs. Peter T. Allen, Arthur P. Fisch and Stuart J. Boesky. The Audit
Committee's duties include the review and oversight of all transactions between
the Company and its Trustees, officers, holders of 5% or more of its Shares or
any affiliates, periodic review of the Company's financial statements and
meetings with the Company's independent auditors. At the discretion of the Board
of Trustees, Members of the Audit Committee may receive additional compensation
for serving on such committee, but there is presently no intention that it will
do so.
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Compensation Committee. The Company will have a Compensation Committee (the
"Compensation Committee") comprised of Peter T. Allen and Arthur P. Fisch. The
duties of the Compensation Committee include determining the compensation of the
Company's executive officers and the administration of the Company's Incentive
Share Option Plan. The Compensation Committee must have at least two members and
only Independent Trustees may be members of the Compensation Committee. At the
discretion of the Board of Trustees, Members of the Compensation Committee may
receive additional compensation for serving on such committee, but there is
presently no intention that it will do so.
The Manager
The Manager is a Delaware limited partnership, formed in May 1997. The
general partner of the Manager is Related Charter LLC, a Delaware limited
liability company, and the limited partners are Related and Messrs. Ross, Fried,
Hirmes and Boesky (the limited partners are also the members of the general
partner). The services of the Manager include managing the Company's day-to-day
affairs and overseeing the acquisition or disposition of investments, and
managing the assets of the Company. Subject to the terms of the Management
Agreement, the Manager has a fiduciary duty to the Shareholders and the Company.
The members and officers of the general partner of the Manager are set
forth below. The officers of the general partner of the Manager may also provide
services to the Company on behalf of the Manager.
<TABLE>
<CAPTION>
Name Age Offices Held
- ---- --- ------------
<S> <C> <C>
J. Michael Fried 51 Member, President and Chief Executive Officer
Stuart J. Boesky 40 Member, Executive Vice President and Chief Operating Officer
Alan P. Hirmes 41 Member, Senior Vice President and Chief Financial Officer
Stephen M. Ross 56 Member
Arthur G. Hatzopoulos 42 Senior Vice President
Bruce H. Brown 43 Senior Vice President
Mark J. Schlacter 45 Vice President
Denise L. Kiley 37 Vice President
Marc D. Schnitzer 36 Vice President
Richard A. Palermo 36 Treasurer
Lynn A. McMahon 40 Secretary
</TABLE>
Biographical information with respect to Messrs. Fried, Boesky and Hirmes
is set forth above.
Stephen M. Ross is a member of the general partner of the Manager. Mr. Ross
is also president, director and shareholder of The Related Realty Group, Inc.,
the general partner of The Related Companies, L.P. He graduated from the
University of Michigan School of Business Administration with a Bachelor of
Science degree and from Wayne State University School of Law with a Juris Doctor
degree. Mr. Ross then received a Master of Laws degree in taxation from New York
University School of Law. He joined the accounting firm of Coopers & Lybrand in
Detroit as a tax specialist and later moved to New York, where he worked for two
large Wall Street investment banking firms in their real estate and corporate
finance departments. Mr. Ross formed the predecessor of The Related Companies,
L.P. in 1972 to develop, manage, finance and acquire subsidized and conventional
apartment developments.
Arthur G. Hatzopoulos is a Senior Vice President of the general partner of
the Manager. He is also a Vice President of Related AMI Associates, Inc., an
affiliate of Related, and he is a Senior Vice President of Related where he
directs the mortgage acquisition group. Mr. Hatzopoulos has been with Related
since August 1992. Prior to joining Related, Mr. Hatzopoulos was a First Vice
President and Portfolio Manager for First Nationwide Bank, where he was
responsible for debt restructuring, special lending relationships and asset
sales. He has also been associated with an investment banking firm where he was
responsible for monitoring a national portfolio of multifamily revenue bond
projects. From 1981 to 1985 he served as Deputy Director of the Jersey City
Department of Housing and Economic Development. Mr. Hatzopoulos graduated from
Columbia University with a Bachelor of Arts degree. He also holds a Masters in
City and Regional Planning from Harvard University, Kennedy School of
Government.
Bruce H. Brown is a Senior Vice President of the general partner of the
Manager. He is also a Senior Vice President of Related and director of the
Portfolio Management Group. He is responsible for overseeing the administration
of the firm's public debt and equity partnerships encompassing the monitoring of
the performance of each partnership and each investment. He is also responsible
for Related's loan servicing activities with respect to the firm's $600 million
portfolio of FMBs and FNMA/GNMA insured and co-insured loan portfolio. Prior to
joining Related in 1987, Mr. Brown was a real estate lending officer at U.S.
Trust Company of New York and previously held management positions in the hotel
and resort industry with Helmsley-Spear and Westin Hotels. Mr. Brown graduated
from Colgate University with a Bachelor of Arts degree.
Mark J. Schlacter is a Vice President of the general partner of the
Manager. Mr. Schlacter is also a Vice President of Mortgage Acquisitions of
Related, and has been with Related since June 1989. Mr. Schlacter is
responsible for the origination of Related's taxable participating debt
programs and low-income housing tax credit debt programs. Prior to joining
Related, Mr. Schlacter garnered 16 years of direct real estate experience
covering commercial and residential construction, single and multifamily
mortgage origination and ser-
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vicing, commercial mortgage origination and servicing, multifamily property
acquisition and financing, and multifamily mortgage lending program underwriting
and development. He was a Vice President with Bankers Trust Company from 1986 to
June 1989, and held prior positions with Citibank, Anchor Savings Bank and the
Pyramid Companies covering the 1972-1986 period. Mr. Schlacter holds a Bachelor
of Arts degree in Political Science from Pennsylvania State University and
periodically teaches multifamily underwriting at the New York University School
of Continuing Education, Real Estate Institute.
Marc D. Schnitzer is a Vice President of the general partner of the
Manager. Mr. Schnitzer is an Executive Vice President of Related and Director
of the firm's Tax Credit Acquisitions Group. Mr. Schnitzer received a Master of
Business Administration degree from The Wharton School of The University of
Pennsylvania in December 1987, and joined Related in January, 1988. From 1983
to 1986, Mr. Schnitzer was a Financial Analyst in the Fixed Income Research
department of The First Boston Corporation in New York. Mr. Schnitzer received
a Bachelor of Science degree, summa cum laude, in Business Administration from
the School of Management at Boston University.
Denise L. Kiley is a Vice President of the general partner of the Manager
and is also an Executive Vice President and Chief Underwriter for Related,
responsible for overseeing the investment underwriting and approval of all
multifamily residential properties invested in Related sponsored corporate,
public and private equity and debt funds. Ms. Kiley is also responsible for the
strategic planning and implementation of the firm's mortgage financing programs.
Prior to joining Related in 1990, Ms. Kiley had experience acquiring, financing,
and managing the assets of multifamily residential properties. From 1981 through
1985 she was an auditor with a national accounting firm. Ms. Kiley holds a
Bachelor of Science in Accounting from Boston College and is a Member of the
Affordable Housing Roundtable.
Richard A. Palermo is the Treasurer of the general partner of the Manager.
Mr. Palermo has been a Certified Public Accountant in New York since 1985.
Prior to joining Related in September 1993, Mr. Palermo was employed by
Sterling Grace Capital Management from October 1990 to September 1993,
Integrated Resources, Inc. from October 1988 to October 1990 and E.F. Hutton &
Company, Inc. from June 1986 to October 1988. From October 1982 to June 1986,
Mr. Palermo was employed by Marks Shron & Company and Mann Judd Landau,
certified public accountants. Mr. Palermo graduated from Adelphi University
with a Bachelor of Business Administration degree.
Lynn A. McMahon is the Secretary of the general partner of the Manager.
She has served since 1983 as assistant to J. Michael Fried. From 1978 to 1983,
she was employed at Sony Corporation of America in the Government Relations
Department.
Summary of the Management Agreement
The Company and the Manager will enter into the Management Agreement
pursuant to which the Manager is obligated to use its best efforts to seek out
and present to the Company, whether through its own efforts or those of third
parties retained by it, suitable and a sufficient number of investment
opportunities which are consistent with the investment policies and objectives
of the Company and consistent with such investment programs as the Board of
Trustees may adopt from time to time in conformity with the Trust Agreement. It
is anticipated that the Manager will retain affiliates of Related to provide the
services which it is required to provide to the Company under the Management
Agreement.
Although the Board of Trustees has continuing exclusive authority over the
management of the Company, the conduct of its affairs and the management and
disposition of the Company's assets, the Board of Trustees has initially
delegated to the Manager, subject to the supervision and review of the Board of
Trustees and consistent with the provisions of the Trust Agreement, the power
and duty to: (i) manage the day-to-day operations of the Company; (ii) acquire,
retain or sell Company Assets; (iii) seek out, present and recommend investment
opportunities consistent with the Company's investment policies and objectives,
and negotiate on behalf of the Company with respect to potential investments or
the disposition thereof; (iv) when appropriate, cause an affiliate to serve as
the mortgagee of record for mortgage investments of the Company and in that
capacity hold escrows on behalf of mortgagors in connection with the servicing
of mortgages; (v) obtain for the Company such services as may be required in
acquiring and disposing of investments, disbursing and collecting the funds of
the Company, paying the debts and fulfilling the obligations of the Company, and
handling, prosecuting and settling any claims of the Company, including
foreclosing and otherwise enforcing mortgages and other liens securing
investments; (vi) obtain for the Company such services as may be required for
property management, mortgage brokerage and servicing, and other activities
relating to the investment portfolio of the Company; (vii) evaluate, structure
and negotiate prepayments or sales of the Company's mortgage investments and
mortgage securities; (viii) monitor operations and expenses of the Company; and
(ix) from time to time, or as requested by the Board of Trustees, make reports
to the Company as to its performance of the foregoing services.
The original term of the Management Agreement will terminate on the fourth
anniversary of the Effective Date (i.e., the date of the consummation of the
Consolidation). Thereafter, the Management Agreement may be renewed annually by
the Company, subject to an evaluation of the performance of the Manager by the
Board of Trustees. The Management Agreement may be terminated (i) without Cause
by the Manager or (ii) for Cause by a majority of the Independent Trustees, each
without penalty, and each upon 60 days' prior written notice to the
non-terminating party.
The Management Agreement cannot be terminated by the Company prior to the
fourth anniversary of the Effective Date, other than for Cause. "Cause" is
defined as gross negligence or wilful misconduct of the Manager. The Company
cannot dissolve and liquidate
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prior to such anniversary date except upon a recommendation of the Manager and
the Majority Vote of the Shareholders. After the fourth anniversary of the
Effective Date, the vote of the holders of 66-2/3% of the Company's then
outstanding Shares is required to approve a dissolution and liquidation of the
Company that is not recommended by the Manager and the Majority Vote of
Shareholders is required to approve a liquidation of the Company recommended by
the Manager. If for any reason, whether prior to or after the fourth anniversary
of the Effective Date, the Management Agreement is terminated in accordance with
its terms, the Company may dissolve and liquidate upon the Majority Vote of
Shareholders.
Pursuant to the terms of the Management Agreement, the Manager will be
entitled to receive the fees and other compensation set forth below:
<TABLE>
<CAPTION>
Fee/Compensation(1) Amount
- ------------------- ------
<S> <C>
Bond Selection Fee 2.00 % of the principal amount of each FMB or other tax exempt instrument originated or acquired by
the Company
Bond Placement Fee 2.00 % of the principal amount of each FMB or other tax exempt instrument originated or acquired by
the Company (payable by the borrower, and not the Company)
Special Distribution 0.375% per annum of Total Invested Assets
Loan Servicing Fee 0.25 % per annum based on the outstanding principal amount of FMBs
Shareholder Distributions Manager will be entitled to receive distributions from the Company in respect of any Shares it holds
Operating Expense For direct expenses incurred by the Manager in an amount not to exceed $200,000 per annum (subject to
Reimbursement increases based on increases in the Company's assets and to annual increases based upon increases in
the Consumer Price Index).
Incentive Share Options Manager may receive options to acquire additional Shares pursuant to the Company's Incentive Share
Option Plan only if the Company's distributions in any year exceed $0.9517 per Share (i.e., the 1996
pro forma distributions set forth in this Solicitation Statement), and the Compensation Committee of
the Board of Trustees determines to grant such options
Liquidation Fee 1.50 % of the gross sales price of the assets sold by the Company in connection with a liquidation of
the Company's assets supervised by the Manager
</TABLE>
- ----------
(1) The Partnership Agreements currently permit the General Partners to
receive miscellaneous compensation from the Partnerships and third parties.
The Manager will also be permitted to earn such miscellaneous compensation
which may include, without limitation, construction fees, escrow interest,
property management fees, leasing commissions and insurance brokerage fees.
The payment of any such compensation is subject to restrictions similar to
those set forth in the Partnership Agreements with any amounts payable to
the Manager by the Company generally being limited to the competitive rate
for the services being performed.
Affiliates of the Manager may provide certain financial guarantees to
facilitate leveraging by the Company, for which they could be paid market rate
fees. In addition, affiliates of the Manager may provide certain financial
guarantees to the owners (or partners of the owners) of the Underlying
Properties securing the Company's FMBs, for which they could be paid market rate
fees.
The Manager may engage in other business activities related to real estate,
mortgage investments or other investments whether similar or dissimilar to those
made by the Company or act as manager to any other person or entity having
investment policies whether similar or dissimilar to those of the Company.
However, except for the allocation of investments between the Company and other
affiliated Programs as described under the caption "CONFLICTS OF
INTEREST--Conflicts of Interest of the Company--Future Dealings with Related
General Partners and Affiliates," before the Manager, the officers and directors
of the Manager and all persons controlled by the Manager and its officers and
directors may take advantage of an opportunity for their own account or present
or recommend it to others, they are obligated to present an investment
opportunity to the Company if (i) such opportunity is of a character which could
be taken by the Company, (ii) such opportunity is compatible with the Company's
investment objectives and policies and (iii) the Company has the financial
resources to take advantage of such opportunity.
The Trust Agreement and Management Agreement provides that the Company
shall indemnify the Manager and its affiliates for any loss arising out of any
of their acts or omissions in connection with the business of the Company;
provided that (i) the Board of Trustees must have determined, in good faith,
that such course of conduct was in the best interests of the Company and did not
constitute negligence or misconduct by the Manager or its affiliates; (ii) such
conduct was within the scope of authority of the Manager; and (iii) any such
indemnification shall be recoverable only from the assets of the Company and not
from the assets of the Shareholders. Notwithstanding the foregoing, the Manager
or its affiliates shall not be indemnified for any liability, loss or damage
incurred by the Manager or its affiliates in connection with any claim or
settlement involving allegations that federal or state securities laws were
violated by the Manager or its affiliates unless: (a) the Manager or its
affiliates seeking indemnification are successful in defending such action on
the merits of each count involving securities law violations; or (b) such claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction; or (c) a court of competent jurisdiction approves a settlement of
the claims against the Manager or its affiliates
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seeking indemnification involving securities law violations and finds that
indemnification of the settlement and related costs should be made; or (d)
indemnification is specifically approved by a court of competent jurisdiction in
each such case.
The Manager has been designated the "Tax Matters Partner" to manage
administrative tax proceedings conducted at the Company level by the IRS with
respect to Company matters. The Manager will also serve as the general partner
of the Company for tax purposes.
Description of Incentive Share Option Plan
The following description of the Incentive Share Option Plan does not
purport to be complete and is qualified in its entirety by reference to the
Incentive Share Option Plan.
On the Effective Date, the Board of Trustees will adopt the Incentive Share
Option Plan, the purpose of which is to (i) attract and retain qualified persons
as directors, officers and employees and (ii) incentivize and more closely align
the financial interests of the Manager with the interests of the Shareholders by
providing the Manager with substantial financial interest in the Company's
success (each, a "Potential Optionee", and collectively, "Potential Optionees").
The Compensation Committee (which is comprised of only two or more Independent
Trustees) shall be authorized and directed to administer the Incentive Share
Option Plan. Pursuant to the Incentive Share Option Plan, if the Company's
distributions per Share in the immediately preceding calendar year exceed
$0.9517 per Share (i.e., the 1996 pro forma per share distribution set forth in
this Solicitation Statement) in any calendar year, the Compensation Committee
will have the authority to issue options to purchase, in the aggregate, that
number of Shares which is equal to three percent (3%) of the Shares outstanding
as of December 31 of the immediately preceding calendar year (or, in the initial
year, as of the Effective Date), provided, that the Compensation Committee may
only issue, in the aggregate, options to purchase a maximum number of Shares
over the life of the Incentive Share Option Plan equal to 10% of the Shares
outstanding on the Effective Date.
Subject to the limitations described in the preceding paragraph, if the
Compensation Committee does not grant the maximum number of options in any year,
then the excess of the number of authorized options over the number of options
granted in such year will be added to the number of authorized options in the
next succeeding year and will be available for grant to Potential Optionees by
the Compensation Committee in such succeeding year.
Pursuant to the Incentive Share Option Plan, the Compensation Committee
will not be authorized to grant any options until six months after the Shares
have been listed on the American Stock Exchange. All options granted by the
Compensation Committee will have an exercise price equal to or greater than the
fair market value of the Shares on the date of the grant. The maximum option
term to be established by the Compensation Committee will be ten (10) years from
the date of grant. All share options granted pursuant to the Incentive Share
Option Plan will vest immediately upon issuance.
If the holder of an option ceases to serve as a trustee, officer or
employee of, or Manager to, the Company for any reason (other than removal for
Cause) options that have been previously granted to such holder and that are
vested as of the date such holder ceases to serve as a director, officer,
employee or Manager may be exercised by such holder or such holder's legal
representative in accordance with and subject to the Incentive Share Option
Plan. If the holder of an option is removed as a director, officer or employee
or Manager of the Company for Cause, options that have been previously granted
to such holder and that have not been vested will be forfeited and options that
are vested as of the date of such cessation may be exercised by such holder in
accordance with and subject to the Incentive Share Option Plan.
The Company intends to file with the Securities and Exchange Commission, on
or before 180 days after the Effective Date, a Registration Statement on Form
S-8 with respect to the Shares to be issued pursuant to the Incentive Share
Option Plan. Shares, if any, issued pursuant to the Incentive Share Option Plan
prior to the date on which the Company's Registration Statement on Form S-8
becomes effective will be restricted securities in the hands of the holders
thereof. Shares to be issued pursuant to the Incentive Share Option Plan after
the date on which the Company's Registration Statement on Form S-8 becomes
effective, will be registered under the Securities Act pursuant to such Form
S-8.
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EXECUTIVE COMPENSATION
Executive Officers of the Manager
The Company has no executive officers. However, pursuant to the terms of
the Incentive Share Option Plan, the Compensation Committee may, subject to
certain restrictions, grant options to the executive officers of the general
partner of the Manager to purchase Shares of the Company. See "MANAGEMENT--
Description of Incentive Share Option Plan." To date, no executive officer of
the Manager has received any options pursuant to the Incentive Share Option
Plan.
Managing Trustees
Members of the Board of Trustees who are not Independent Trustees will not
receive any cash compensation for serving as a member of the Board of Trustees
and likewise will not receive any compensation for attending meetings or for
serving on any committees of the Board of Trustees; however, members of the
Board of Trustees will receive reimbursement of travel and other expenses and
other out-of-pocket disbursements incurred in connection with attending any
meetings.
Independent Trustees will be entitled to receive compensation for serving
as trustees at the rate of $5,000 per year in cash and Shares having an
aggregate value of $10,000, based on the fair market value at the date of
issuance, in addition to the expense reimbursement for attending meetings
described above. At the discretion of the Board of Trustees, Independent
Trustees may be granted additional cash compensation for serving on a committee
of the Board of Trustees.
Pursuant to the terms of the Incentive Share Option Plan, the Compensation
Committee may, subject to certain restrictions, grant options to members of the
Board of Trustees to purchase Shares. See "MANAGEMENT-- Description of Incentive
Share Option Plan." To date, no such member of the Board of Trustees has
received any options pursuant to the Incentive Share Option Plan.
INDEPENDENT AUDITORS
The financial statements of Tax Exempt I, Tax Exempt II, and Tax Exempt III
as of December 31, 1996 and 1995 and for each of the three years in the period
ended December 31, 1996; and the balance sheet of the Company, the Manager and
of the general partner of the Manager, each as of May 29, 1997, included herein,
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports included therein.
LEGAL MATTERS
The law firm of Battle Fowler LLP ("Counsel") will deliver an opinion to
the effect that the Shares offered pursuant to this Solicitation Statement will
be validly issued, fully paid and nonassessable undivided beneficial interests
in the assets of the Company. Counsel has relied on the law firm of Richards,
Layton & Finger, special Delaware counsel to the Company, Related and Wilmington
Trust Company, which will deliver an opinion as to matters of Delaware law
regarding the validity of the Shares and the creation of the Company. Counsel
will deliver an opinion as to the status of the Company as a partnership and to
the effect that the discussion under "FEDERAL INCOME TAX CONSIDERATIONS" fairly
summarizes all of the material federal income tax considerations for a
BUC$holder who participates in the Consolidation. Counsel has previously
performed certain legal services on behalf of the Partnerships, the Related
General Partners and their affiliates. The statements relating to the FMBs set
forth in "RISK FACTORS" and "THE COMPANY" have been reviewed by the law firm of
Greenberg Traurig Hoffman Lipoff Rosen & Quentel.
The opinions of Counsel are not attached as an appendix to this
Solicitation Statement; however, upon receipt of a written request by a
BUC$holder or representative so designated in writing, a copy of such opinion
will be sent by the Related General Partners. All such requests should be
directed to Related Capital Company, 625 Madison Avenue, New York, N.Y. 10022;
Attention: Investor Services Department.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Solicitation
Statement:
"1954 Code" or "prior law" means the Internal Revenue Code of 1954, as
amended prior to amendments by the Tax Reform Act of 1986.
"ACMs" means asbestos-containing materials.
"ADA" means the Americans With Disabilities Act.
"Adjusted Net Asset Value" means, (a) with respect to each Partnership, the
value utilized by the Related General Partners to determine the allocation of
Shares among the Partnerships calculated as described under the heading
"ALLOCATION OF SHARES-- Determination of Adjusted Net Asset Value-- Valuations"
and (b) with respect to the Company, the aggregate Adjusted Net Asset Values of
all of the Participating Partnerships.
"Amendments" means the proposed amendments to the Partnership Agreements.
"Anniversary Date" means the first anniversary of the date the Shares are
first publicly traded.
"Appraisals" means the 31 limited appraisals, as reported in Summary Report
formats, of the Underlying Properties securing the Partnership's FMBs which were
prepared by C&W. The 31 individual Summary Reports were prepared in accordance
with the Departure Provision of the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
"Appraised Value" means the "as is" market value of the fee simple interest
as of October 15, 1995 for each of the Underlying Properties which secure the
FMBs held by the Partnership as established by C&W. Each Underlying Property was
appraised individually and not as a portfolio.
"Assignor Limited Partner" means, (i) Related BUC$ Associates, Inc., or its
successor, with respect to Tax Exempt I, (ii) Related BUC$ Associates II, Inc.,
or its successor, with respect to Tax Exempt II, and (iii) Related BUC$
Associates III, Inc., or its successor, with respect to Tax Exempt III.
"ATEBT" means American Tax Exempt Bond Trust.
"Base Interest" means the stated fixed base amount of interest payable
under the FMBs, generally payable monthly.
"Bear Stearns" means Bear Stearns & Co., Inc.
"Board of Trustees" means the board of trustees of the Company.
"Bond Placement Fee" means the bond placement fee payable to the Manager
equal to 2.00% of the principal amount of each FMB or other tax exempt
instrument made, acquired or originated by the Company (other than temporary
investments), which is held by the Company or other entities to whom the Company
has transferred such FMBs to facilitate financing.
"Bond Selection Fee" means the bond selection fee payable to the Manager
equal to 2.00% of the principal amount of each FMB or other investment tax
exempt instrument made, acquired or originated by the Company, which is held by
the Company or other entities to whom the Company has transferred such FMBs to
facilitate financing.
"BUC$holder" or "BUC$holders" means any person who holds Units and who is
reflected as an assignee of record of limited partnership interests on the books
and records of each Partnership.
"Cause" means gross negligence or willful misconduct.
"C&W" means Cushman & Wakefield of Florida, Inc. or other affiliates of
Cushman & Wakefield of Florida, Inc., which prepared the Appraisals.
"Class Counsel" means counsel representing the BUC$holders in the
Litigation.
"Class Members" means the Equitable Class Members and the Monetary Class
Members.
"Class Notices" means the notices distributed to the Class Members pursuant
to the Court's Order.
"Code" means the United States Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Company" means Charter Municipal Mortgage Acceptance Company, a Delaware
business trust.
"Company Assets" means the portfolio of assets of the Company.
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"Compensation Committee" means a committee of the Board of Trustees of the
Company which will determine the compensation of the Company's Trustees and
which will administer the Company's Incentive Share Option Plan.
"Consolidated Complaint" means the complaint filed by the Executive
Committee of Plaintiffs' Counsel cases under MDL Docket No. 1005.
"Consolidation" means a transaction whereby the Units held by all
BUC$holders of a Participating Partnership will be exchanged for Shares.
"Consolidation Expenses" means the expenses related to the Consolidation.
"Constituent Action" means all of the transferred actions included in the
Constituent Complaints.
"Constituent Complaints" means the transferred actions and the constituent
complaints under MDL Docket No. 1005.
"Contingent Interest" means an amount of additional interest paid above the
stated Base Interest payable from Net Property Cash Flow and Net Sale or
Repayment Proceeds until the borrower has paid interest at a simple annual rate
of up to 16% over the term of the FMB.
"Contribution Agreements" means one or more agreements which the
Participating Partnerships will enter into if the Consolidation is approved by
the Court.
"Counsel" means Battle Fowler LLP.
"Counsel's Fee Shares" means the Restricted Securities and the
Unrestricted Securities.
"Court" means the United States District Court for the Southern District
of New York.
"Delaware Act" means the Delaware Business Trust Act, as amended.
"Delaware Partnership Law" means the Delaware Revised Uniform Limited
Partnership Act, as amended.
"Effective Date" means the date the Consolidation is consummated.
"Equitable Class" or "Equitable Class Members" refers to the class
certified pursuant to Rule 23(b)(1) and (2) of the Federal Rules of Civil
Procedure for equitable relief in connection with the Litigation.
"Equitable Settlement" means the part of the Related Settlement in which
only the Equitable Class Members may participate.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Contingent Interest" means Contingent Interest in excess of a
certain yield which is treated as taxable capital gain.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Portfolio" means the (i) 31 tax-exempt participating FMBs with an
aggregate outstanding principal balance as of December 31, 1996 of $348,602,428
secured by Mortgage Loans on 31 Underlying Properties, and (ii) 7 SMLs with an
aggregate outstanding principal balance as of December 31, 1996 of $11,381,537
secured by second mortgages on 7 Underlying Properties.
"Fairness Hearing" means the fairness hearing at which all class members
will have an opportunity to be heard.
"Fairness Opinion" means the opinion of Oppenheimer as to the fairness of
the Consolidation from a financial point of view to BUC$holders.
"Final Order" means the Court's final order approving the Related
Settlement, including the Consolidation.
"FMBs" means the tax-exempt participating or non-participating first
mortgage bonds issued by various state or local governments or other agencies or
authorities.
"Forecasted Cash Flow" means the estimated net operating income after
capital expenditures from future operations of the properties as forecast by the
Related General Partners and utilized by Oppenheimer in connection with its
Fairness Opinion.
"G & A" means General and Administrative Expenses.
"GAAP" means generally accepted accounting principles.
"GCM" means General Counsel Memoranda.
"General Partners" means, collectively, the Related General Partners and
P-B General Partner.
"Incentive Share Option Plan" means the Company's Incentive Share Plan to
be adopted by the Board of Trustees as of the Effective Date.
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"Incentive Share Options" means the options issued by the Company pursuant
to the Company's Incentive Share Option Plan.
"Independent Trustees" means those members of the Board of Trustees of the
Company who are not salaried employees of the Company, Related or their
respective affiliates.
"IRS" means Internal Revenue Service.
"Liquidation Fee" means, if the Company is dissolved, a fee payable to the
Manager equal to 1.50% of the gross sales price of the assets sold in
connection with the liquidation of the Company's directly or indirectly owned
assets.
"Litigation" means the litigation captioned In re Prudential Securities
Incorporated Limited Partnerships Litigation.
"Loan Servicing Fee" shall mean the loan servicing fees payable to the
Manager equal to 0.25% per annum based on the outstanding principal amount of
FMBs or other mortgage investments which are held by the Company or other
entities to whom the Company has transferred such FMBs to facilitate financing.
"Loan Value" means, for each loan held by a Partnership, the amount which
the Partnership would receive under the terms of the loan (i.e., principal,
accrued and unpaid interest and participating interest) if (i) the Underlying
Property which secures the loan were sold for an amount equal to its Appraised
Value and (ii) the net sale proceeds (i.e., after payment of third party
expenses) were applied first to repay the Partnership's Mortgage Loans.
"LPI" means Lakes Project Investors, Inc.
"Majority Vote" means the affirmative vote of holders of not less than a
majority of the then outstanding Shares of beneficial interest of the Company.
"Management Agreement" means the agreement between the Company and the
Manager.
"Manager" means Related Charter LP, or any successor thereto.
"Managing Trustees" means the managing trustees which comprise the Board of
Trustees of the Company.
"MAPI" means Mansion Apartment Project Investors, Inc.
"Minimum Participation" means participation in the Consolidation by two of
the three Partnerships, together with the Related General Partners' agreement to
proceed with the Consolidation notwithstanding the fact that there is less than
100% Participation.
"Monetary Class" means the class certified pursuant to Rule 23(b)(3) of the
Federal Rules of Civil Procedure for monetary relief in connection with the
Related Settlement.
"Monetary Class Members" means members of the Monetary Class.
"Minority Position" means a minority portion of an FMB, which portion (i)
may be entitled to floating rates of interest based upon a designated index, and
(ii) is subordinated to the credit position of the holders of the remaining
portions of such FMB.
"Monetary Settlement" means the part of the Related Settlement in which
only the Monetary Class Members may participate.
"Mortgage Loans" means the first mortgage loans on multifamily residential
apartment projects and retirement community projects.
"Mortgages" means interests in first mortgage and equity loans.
"Net Property Cash Flow" means with respect to any period, all cash
receipts derived from operation of an Underlying Property (exclusive of Net Sale
or Repayment Proceeds), less operating expenses including interest (other than
Contingent Interest). With respect to Net Property Cash Flow as it relates only
to terms of FMBs, the Manager shall have the discretion to vary the components
of Net Property Cash Flow.
"Net Sale or Repayment Proceeds" means (a) the cash and any other
consideration received by the Property Owner from the sale, refinancing or
disposition of an Underlying Property), after retirement of all amounts of
outstanding principal on the Mortgage Loan for the Underlying Property and less
all expenses related to the sale, refinancing or disposition and other amounts
specified by counsel or (b) the appraisal value of the Underlying Property less
the outstanding principal on the Mortgage Loan for the Underlying Property, less
customary costs of sale, and other amounts specified by counsel; provided,
however, that Net Sale or Repayment Proceeds shall be calculated exclusive of
Contingent Interest. With respect to Net Sale or Repayment Proceeds as they
relate only to the terms of FMBs, the Manager shall have the discretion to vary
the components of Net Sale or Repayment Proceeds.
"Non-Participating Partnership" means a Partnership that does not
participate in the Consolidation.
"Objection Deadline" means August 18, 1997, unless extended.
"Objection Notice" means the notice sent by a BUC$holder pursuant to this
Solicitation Statement.
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"OID" means the original issue discount rules promulgated under the Code.
"100% Participation" means the participation of each of the Partnerships in
the Consolidation; to participate in the Consolidation, (i) BUC$holders holding
more than 331/3% of the Units of a Partnership must not object to the
participation of such Partnership in the Consolidation and (ii) the
Consolidation must be approved by the Court.
"Oppenheimer" means Oppenheimer & Co., Inc.
"Order" means the Court's order preliminarily approving the Settlement
Stipulation.
"Original Investment" means a BUC$holder's gross original cash investment
in each of Tax Exempt I, Tax Exempt II, or Tax Exempt III, as the case may be.
"Other Partnerships" means all other partnerships named as defendants in
the litigation that are sponsored by affiliates of Prudential and affiliates of
Related.
"Ownership Limit" means the restriction in the Trust Agreement providing
that no individual may own more than 9.9% of the value of the outstanding Shares
of the Company.
"Participating BUC$holders" means BUC$holders that participate in the
Consolidation.
"Participating Partnership(s)" means the partnership(s) which participate
in the Consolidation.
"Partnership Agreement" means the Amended and Restated Agreement of
Limited Partnership of each Partnership.
"Partnership Base Value" means the average of (i) the liquidation value (as
described in this Solicitation Statement) multiplied by the number of
outstanding Units on the Effective Date; and (ii) the average of the high and
low secondary market price for each of the four most-recent complete quarterly
periods prior to the Effective Date multiplied by the number of outstanding
Units on the Effective Date.
"Partnership(s)" means, collectively, Tax Exempt I, Tax Exempt II and Tax
Exempt III.
"P-B General Partner" means Prudential-Bache Properties, Inc., a Delaware
corporation.
"P-B Group" means, collectively, the P-B General Partner, P.B. Tax Credit
S.L.P., a Delaware limited partnership and Prudential- Bache Services II, Inc.,
a Delaware corporation.
"P-B Interests" means the general partner interests of the P-B General
Partner in the Partnerships which will be acquired by the Manager.
"P-B Purchase Agreement" means the Purchase Agreement dated as of December
19, 1996, among the P-B Group and Related, pursuant to which, among other
things, the P-B General Partner agrees to withdraw as a general partner of the
Partnership and sell, assign or otherwise transfer its interests in the
Partnership to Related or an affiliate of Related.
"Phase I Reports" means the Phase I Environmental Assessments performed on
certain of the properties held by the Partnerships.
"Potential Optionee(s)" means each of the persons who qualify to receive
options under the Incentive Share Option Plan.
"Property Owners" means the owners of the Underlying Property, who are also
the borrowers under the FMBs.
"Prudential" means, collectively, PSI and the P-B General Partner,
collectively.
"PSI" means Prudential Securities Incorporated.
"Purchaser" means an unrelated third party purchaser.
"Record Date" means December 24, 1996.
"Registered Trustee" means Wilmington Trust Company.
"Related" means Related Capital Company, a New York general partnership.
"Related General Partners" means, collectively, Related Tax Exempt Bond
Associates, Inc., Related Tax Exempt Associates, II, Inc., and Related Tax
Exempt Associates, III, Inc.
"Related Settlement" refers to the settlement of the Litigation with
respect to the Related General Partners and its affiliates.
"Restricted Securities" means one-half of the Shares which may be issued by
the Company to Class Counsel at the sole discretion of the Court as additional
attorneys' fees based on the increase in value of the Company, if any, as of the
Anniversary Date, which Shares shall be restricted as to transferability.
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"Restricted Shares" means Shares with respect to which there are transfer
restrictions under the securities laws.
"RICO" means the Racketeer Influenced and Corrupt Organizations Act.
"SMLs" means taxable second mortgage loans which were from time to time
advanced by a Partnership to, or assigned to a Partnership by, the obligors of
certain FMBs in conjunction with sale, modification and forbearance agreements
with respect to the FMBs.
"Securities Act" means the Securities Act of 1933, as amended.
"Settlement Amount" means the $2,058,333.00 which Related has agreed to pay
in settlement of the claims of the Monetary Class in the Consolidated Action.
"Settlement Stipulation" means the stipulation of settlement dated December
24, 1996 entered into by the parties to the Litigation.
"Shareholders" means all persons that own or will receive Shares on the
Effective Date.
"Shares" means the beneficial interests of the Company issuable in
connection with the Consolidation.
"Solicitation Statement" means this information statement, which is to be
distributed to the Partnerships' BUC$holders.
"Special Distribution" or "Special Distribution from Adjusted Cash Flow"
means the distribution payable to the Manager equal to 0.375% per annum of Total
Invested Assets.
"Summary Report" means the summary report format used for preparation of
the Appraisals.
"Tail Indemnity" means the indemnity to be provided by the Company to the
P-B General Partner and the Related General Partners on the Effective Date to
provide them with the same indemnity as that provided by the Partnerships with
respect to claims during the period in which they acted as general partners.
"Taxable Tails" means taxable bonds acquired by the Company to fund certain
costs associated with the issuance of FMBs that, under current regulations,
cannot be funded by FMBs.
"Tax Exempt I" means Summit Tax Exempt Bond Fund L.P.
"Tax Exempt II" means Summit Tax Exempt L.P. II.
"Tax Exempt III" means Summit Tax Exempt L.P. III.
"Total Invested Assets" means the aggregate original amount invested from
time to time in mortgage investments and tax exempt securities (regardless of
whether such mortgage investments or tax exempt securities are held by the
Company or other entities to whom the Company has transferred such mortgage
investments to facilitate financing) reduced, upon the receipt of sale proceeds,
or insurance or guarantee proceeds or, by the original amount invested in the
mortgage investment or tax exempt securities which is not reinvested, except
that in the case of a partial prepayment, Total Invested Assets shall be reduced
on a pro rata basis to the extent not reinvested.
"Total Market Value" means the greater of (i) the sum of (a) the aggregate
market value of the Company's outstanding Shares, and (b) the total leverage of
the Company and (ii) the aggregate value of the Company's assets as determined
by the Manager based upon third-party or management appraisals and other
criteria as the Board of Trustees shall determine in its sole discretion.
"Trust Agreement" means the Company's amended and restated trust agreement
providing for, among other things, the Manager to provide services to the
Company consistent with those provided to the Partnership by the General
Partners.
"UBTI" means unrelated business taxable income.
"Underlying Properties" means the multifamily residential apartment
projects and retirement community projects (and, with respect to the Company,
assisted living, continuing care projects and nursing homes following the
Effective Date) developed by third party developers or affiliates of the Related
General Partners. With respect to the Appraisals, "Underlying Properties" refers
to the 31 multifamily residential apartment projects securing the FMBs currently
owned by the Partnerships.
"Units" means the outstanding beneficial unit certificates representing
assignments of limited partnership interests.
"Unrestricted Securities" means one-half of the Shares which may be issued
by the Company to Class Counsel at the sole discretion of the Court as
additional attorneys' fees based on the increase in value of the Company, if
any, as of the Anniversary Date, which are not subject to transfer restrictions.
"USPAP" means Uniform Standards of Professional Appraisal Practice of the
Appraisal Foundation.
268
<PAGE>
APPENDIX A
FAIRNESS OPINION
<PAGE>
Oppenheimer Tower
World Financial Center
Oppenheimer Co., Inc.
Oppenheimer & Co., Inc.
Investment Banking Group
November 11, 1996
Goodkind Labaton Rudoff & Sucharow LLP
100 Park Avenue
New York, New York 10017-5563
Gentlemen:
You have requested our opinion as to whether the proposed transaction
involving the business consolidation of Summit Tax Exempt Bond Fund, L.P.,
Summit Tax Exempt Bond Fund, L.P. II, and Summit Tax Exempt Bond Fund, L.P. III
(the "Partnerships") into Charter Municipal Mortgage Acceptance Company (the
"Company"), a newly formed business trust, including the allocation of
beneficial interests in the Company among the Partnerships, are fair to the
beneficial unit certificate holders (the "Unitholders") in such Partnerships,
from a financial point of view.
Oppenheimer & Co., Inc. ("Oppenheimer"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate, estate and other purposes. We have been
retained by Goodkind Labaton Rudoff& Sucharow LLP ("Counsel") for the purpose
of, and will receive a fee for, rendering this Fairness Opinion.
In connection with our Fairness Opinion, we have reviewed: the draft
Information Statement to be provided Limited Partners; the Prospectus dated
February 19, 1986 for Tax Exempt I; the Prospectus dated July 7, 1986 for Tax
Exempt II; the Prospectus dated June 10, 1987 for Tax Exempt III; audited
financial statements for each Partnership for calendar years 1994 and 1995; the
Form 10-K for each Partnership for the year ended December 31, 1995 and the Form
10-Q for each Partnership for the quarter ended June 30, 1996; documents
describing each Partnership's mortgage revenue bonds; documents describing bond
modification and/or forbearance agreements; limited appraisals in a summary
format dated October 15, 1995 prepared by Cushman & Wakefield, Inc. for each
property securing a mortgage loan made by a Partnership; audited financial
statements for calendar years 1994 and 1995 and unaudited financial statements
and other financial information for the period ending June 30, 1996 for each of
the properties securing a mortgage loan made by a Partnership; pro forma
financial statements of the Company for the year ended December 31, 1996 and as
of and for the quarterly period ended March 31, 1996, assuming in each case that
the Consolidation occurred as of January 1, 1996; financial forecasts of future
operations of the Partnerships prepared by the Related General Partner covering
each of the years in the five year period ended June 30, 2001; financial
forecasts of future operations of the Company prepared by the
<PAGE>
Related General Partner covering each of the years in the five year period ended
June 30, 2001, assuming the Consolidation occurred as of June 30, 1996; a
business plan of the Company; and certain other financial and other information
that was publicly available or furnished to Oppenheimer by Counsel or the
Related General Partners.
In addition, Oppenheimer held discussions with representatives of Counsel
and the Related General Partners, inspected a representative number of the
properties which secured a mortgage loan made by a Partnership, interviewed
property managers at the properties inspected, interviewed representatives of
Cushman & Wakefield, Inc. and conducted such other investigations, financial
analyses and studies, and reviewed such other information and factors as it
deemed appropriate for the purposes of the Fairness Opinion. Oppenheimer's
Fairness Opinion is based upon analysis of the foregoing factors in light of our
assessment of general economic, financial and market conditions as they exist on
the date hereof. Events occurring after such date could materially affect the
assumptions and conclusions contained in the Fairness Opinion. We have not been
requested or engaged and did not undertake to reaffirm or revise our fairness
Opinion or otherwise comment upon any events occurring after the date thereof.
In rendering the Fairness Opinion, Oppenheimer relied, without assuming
responsibility for independent verification, on the accuracy and completeness of
all financial and operating data, financial analyses, reports and other
information that were publicly available, compiled or approved by or otherwise
furnished or communicated to Oppenheimer by or on behalf of the Related General
Partners or Counsel. With respect to the financial and operating forecasts
prepared by the Related General Partners and furnished to Oppenheimer,
Oppenheimer assumed, with Counsel's approval, that they reflected the best
current judgement of the Related General Partners as to future financial
performance, and that there was a reasonable probability that the projections
would prove to be substantially correct. Oppenheimer did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnerships.
Furthermore, Oppenheimer expressed no opinion as to the price or trading
range at which the Company's Shares would trade following the completion of the
Consolidation and the listing of the Shares on the American Stock Exchange.
Oppenheimer was not requested to serve as financial advisor to Counsel, the
Related General Partners or the Partnerships or to assist in the structuring of
the proposed transaction. Additionally, Oppenheimer did not analyze the impact
of any federal, state or local income taxes to the Unitholders arising out of
the proposed transaction.
It is understood that this Fairness Opinion is not to be quoted, referred
to, excerpted or summarized in whole or in part, or used for any purpose,
without our written consent. The Fairness Opinion may be distributed to the
Unitholders in connection with the distribution by the Related General Partners
of an Information Statement describing the proposed Transaction. We have been
engaged by Counsel for the purpose of rendering this Fairness Opinion, in
connection with which we will receive a fee payable in installments (i) upon
engagement and (ii) upon the rendering of the Fairness Opinion.
A-2
<PAGE>
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
proposed transaction involving the business consolidation of the Partnerships
with the Company, including the allocation of shares of common stock in the
Company among the Partnerships are fair, from a financial point of view, to the
Unitholders in such Partnerships.
Very truly yours,
/s/ Oppenheimer & Co., Inc.
Oppenheimer & Co., Inc.
A-3
<PAGE>
APPENDIX B
SUMMARIZATION LETTER PREPARED BY C&W
<PAGE>
[CUSHMAN & WAKEFIELD LETTERHEAD]
Cushman & Wakefield of Florida, Inc.
Licensed Real Estate Brokers
800 Corporate Drive, Suite 502
Ft. Lauderdale, FL 33334
Tel: (954) 771-0800
Fax: (954) 771-3608
April 11, 1997
Mr. Bruce Brown
RELATED CAPITAL COMPANY
625 Madison Avenue
New York, New York 10022-1801
RE: Summarization Letter
Summit Tax Exempt I, II, III
C&W File No. 97-9048
Dear Mr. Brown
In fulfillment of our agreement as outlined in the letter of engagement,
Cushman & Wakefield of Florida, Inc. is pleased to submit this Summarization
Letter pertaining to the October 15, 1995 limited appraisals of the 31
multi-family residential apartment properties in which Summit Tax Exempt Bond
Fund, L.P., Summit Tax Exempt L.P. II and 111 hold first mortgage revenue bonds.
The results of the individual limited appraisals were conveyed in individual
Summary Reports. The properties were individually appraised by Cushman &
Wakefield of Florida, Inc. or other affiliates of Cushman & Wakefield of
Florida, Inc. proximate to the various properties, as outlined within this
Summarization Letter. The terms "our" or "we" as used herein refers to the
Cushman & Wakefield company which prepared the reports and estimated the values.
October 15, 1995 was the date of valuation for all the properties.
This Summarization Letter is not an appraisal. It merely summarizes the 31
Summary Reports prepared by identified Cushman & Wakefield appraisers. For each
individual property/limited appraisal, this Summarization Letter will:
1. Identify the property by its name, location and number of apartment
units.
2. Identify the office of the Cushman & Wakefield affiliate that performed
the limited appraisal.
3. Identify the appraiser(s) that signed the limited appraisal, summary
format.
4. Identify the interest appraised.
5. Indicate procedures undertaken and the methodology of the appraisal.
6. Indicate the Date of Value.
7. Indicate the estimated Market Value that was reported within the Summary
Report by the identified signatory appraiser(s).
8. Include a brief description of common valuation methodology employed
within all of the Limited Appraisals, Summary Reports.
9. Identify the standard Assumptions and Limiting Conditions utilized in
each report, as detailed on Exhibit A.
<PAGE>
Mr. Bruce Brown
RELATED CAPITAL COMPANY
April 11, 1997
Page 2
It is our understanding that this Summarization Letter will be an exhibit
attached to the Solicitation Statement, on the condition that the entire
Summarization Letter be provided. Once again, this document is not an appraisal
and it does not conform to the reporting requirements of the Uniform Standards
of Professional Appraisal Practice. However, the individual Summary Reports were
prepared in accordance with the Departure Provision of the Uniform Standards of
Professional Appraisal Practice. Changes in market conditions since the October
15, 1995 date of value(s) may or may not have changed the estimated market
value(s). Since this Summarization Letter is not an appraisal there may have
been changes in market values since the original date of value(s), October 15,
1995. Furthermore, physical changes to the 31 subject properties since the
October 15, 1995 date(s) of value(s) (approximately 18 months ago), may have
changed the estimated market value(s).
The October 15, 1995 limited appraisals estimated the fee simple market
value of each property individually. Cushman & Wakefield did not estimate the
portfolio market values for the properties encumbered by first mortgage revenue
bonds held by Summit Tax Exempt Bond Fund, L.P., Summit Tax Exempt L.P. II and
lilt The aggregate or total fee simple market values should not be relied upon
as being the equivalent to the price that would necessarily be received in the
event of a sale or other disposition of each portfolio.
Our individual market value(s), as presented in the 31 individual summary
reports, were based in part upon information supplied to us by Related Capital
Company and/or its affiliated management companies including but not limited to:
rent rolls, building reports, financial schedules of current lease rates,
income, expenses, cash flow and related financial information, property
descriptive information, and other supporting documentation. We relied upon such
information and assumed that the information provided is accurate and complete.
We did not attempt to independently verify such information.
History of Assignment: On September 14, 1995, Cushman & Wakefield of
Florida, Inc. was engaged by Mr. Bruce Brown, Senior Vice President, Related
Capital Company to prepare individual limited appraisals of 31 multi-family
residential apartment properties in which Summit Tax Exempt Bond Fund, L.P.,
Summit Tax Exempt L.P. II and 111 held first mortgage revenue bonds. All of the
properties were inspected by Cushman & Wakefield appraiser(s) during the period
between September and October 1995. The appraisals were delivered during October
and November 1995.
All of the appraisals were limited appraisals prepared in accordance with
the Departure Provision of the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation. The results of the limited appraisals were
conveyed in summary reports in accordance with our September 14, 1995 agreement.
The limited appraisal contains something less than the work required by the
specific guidelines of the Uniform Standards of Professional Appraisal Practice.
In this case, only the Income Approach was utilized. The Cost and Sales
Comparison Approaches, which might have been appropriate to the appraisals, were
not developed. This constitutes a departure from Standards Rule 1-4(a), 1-4(b)
i, ii, and iii of USPAP. The Income Approach was deemed to be the valuation
method of primary relevance to the appraisals.
[Cushman & Wakefield Logo]
B-2
<PAGE>
Mr. Bruce Brown
RELATED CAPITAL COMPANY
April 11, 1997
Page 3
Appraisal Process: The 31 individual limited appraisals generally followed
the following outline:
o Cover or Title Page
o Letter of Transmittal
o Summary of Salient Facts and Conclusions
o Table of Contents
o Photographs of the Subject Property
o Introduction Section, including:
-- Identification of Property
-- Property Ownership and Recent History
-- Purpose and Intended Use of the Appraisal
-- Extent of the Appraisal Process
-- Date of Value and Property Inspection
-- Property Rights Appraised
-- Definitions of Value, Interest Appraise, and Other Pertinent Terms
-- Legal Description
o Neighborhood and Market Analysis
o Property Description Section
-- Description of the Site
-- Description of the Improvements
o Real Property Taxes and Assessments
o Zoning
o Highest and Best Use
-- As Though Vacant
-- As Improved
o Valuation Process Section
o Income Approach
o Reconciliation and Final Value Estimate
o Assumptions and Limiting Conditions
o Certification of Appraisal
o Addenda
[Cushman & Wakefield Logo]
B-3
<PAGE>
Mr. Bruce Brown
RELATED CAPITAL COMPANY
April 11, 1997
Page 4
As indicated, the individual limited appraisals only utilized the Income
Approach. In developing the Income Approach we:
o Estimated appropriate rental rates by unit type by examining recent
leases in the complex appraised and by surveying similar competing
complexes.
o Estimated income from sources other than apartment rentals (e.g., washer
and dryer rental, forfeited deposits, late charges, parking space
rentals, garage rentals, and various other fees).
o Estimated an appropriate vacancy and collection loss based upon the
subject's rental history and the experience of similar complexes.
o Forecasted the property's stabilized annual operating expenses and
reserves for replacement after reviewing its historical performance and
the operating statements of similar complexes with which we are
familiar. We analyzed each item of expense and attempted to forecast
amounts a typical informed investor would consider reasonable. We also
examined industry norms as reported by The Institute of Real Estate
Management in its apartment survey.
o Estimated net operating income by subtracting stabilized expenses from
effective gross income.
o Capitalized stabilized net operating income into an indication of
capital value. In the direct capitalization method, we estimated market
value by dividing stabilized net operating income by an overall rate
derived from our analyses of market sales and/or market surveys and
computed by dividing the net operating income from a sold property by
its sale price. Most overall capitalization rates were derived from
comparable improved properties located within or near the subject
market.
o Prepared a discounted cash flow analysis in which the estimated income
and expenses over a 10 year forecast, and the estimated property value
at the time of reversion, are discounted at an appropriate rate to
estimate present market value. In general, the steps were as follows:
1. The pro forma was based on a ten-year holding period, beginning
November 1, 1995.
2. All revenue and expense items were entered based on our October 1995
estimates.
3. Based upon our assessment of the rental market, we estimated an
annual percentage growth rate in effective rents.
4. General operating expenses were estimated to increase at appropriate
inflationary levels.
5. The reversion estimate was based on a resale in the tenth year of
the analysis period. It was formulated by applying a terminal
overall rate to the eleventh year NOI and subtracting appropriate
estimated selling costs.
6. The net cash flows and net reversion were discounted to net present
value using an appropriate market supported equity yield (discount)
rate.
[Cushman & Wakefield Logo]
B-4
<PAGE>
Mr. Bruce Brown
RELATED CAPITAL COMPANY
April 11, 1997
Page 5
On the attached Exhibit B, I present the summary of the 31 individual
limited appraisals. The total of the individual property values does not
represent a portfolio market value(s). Al1 the values are as of October 15. 1995
(approximately 18 months from the date of this Summarization Letter) and no
opinion is rendered after that date.
I trust that this Summarization Letter will meet your requirements at this
time. Once again, it is always a pleasure to be of service.
Sincerely,
CUSHMAN & WAKEFIELD OF FLORIDA, INC.
/s/ Thomas J. Landon
Thomas J. Landon, MAI
Director and Manager, Florida Valuation Advisory Services
State-Certified General Real Estate Appraiser No. RZ0000430
TJL/pf
Enclosures
[Cushman & Wakefield Logo]
B-5
<PAGE>
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EXHIBIT A
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[Cushman & Wakefield Logo]
B-7
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
"Appraisal" means the appraisal report and opinion of value stated therein; or
the letter opinion of value, to which these Assumptions and Limiting Conditions
are annexed.
"Property" means the subject of the Appraisal.
"C&W" means Cushman & Wakefield, Inc. or its subsidiary which issued the
Appraisal.
"Appraiser(s)" means the employee(s) of C&W who prepared and signed the
Appraisal.
This appraisal is made subject to the following assumptions and limiting
conditions:
1. No opinion is intended to be expressed and no responsibility is assumed for
the legal description or for any matters which are legal in nature or
require legal expertise or specialized knowledge beyond that of a real
estate appraiser. Title to the Property is assumed to be good and marketable
and the Property is assumed to be free and clear of all liens unless
otherwise stated. No survey of the Property was undertaken.
2. The information contained in the Appraisal or upon which the Appraisal is
based has been gathered from sources the Appraiser assumes to be reliable
and accurate. Some of such information may have been provided by the owner
of the Property. Neither the Appraiser nor C&W shall be responsible for the
accuracy or completeness of such information, including the correctness of
estimates, opinions, dimensions, sketches, exhibits and factual matters.
3. The opinion of value is only as of the date stated in the Appraisal. Changes
since that date in external and market factors or in the Property itself can
significantly affect property value.
4. The Appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal. Publication
of the Appraisal or any portion thereof without the prior written consent of
C&W is prohibited. Except as may be otherwise stated in the letter of
engagement, the Appraisal may not be used by any person other than the party
to whom it is addressed or for purposes other than that for which it was
prepared. No part of the Appraisal shall be conveyed to the public through
advertising, or used in any sales or promotional material without C&W's
prior written consent. Reference to the Appraisal Institute or to the MAI
designation is prohibited.
5. Except as may be otherwise stated in the letter of engagement, the Appraiser
shall not be required to give testimony in any court or administrative
proceeding relating to the Property or the Appraisal.
6. The Appraisal assumes (a) responsible ownership and competent management of
the Property; (b) there are no hidden or unapparent conditions of the
Property, subsoil or structures that render the Property more or less
valuable (no responsibility is assumed or such conditions or for arranging
for engineering studies that may be required to discover them); (c) full
compliance with all applicable federal, state and local zoning and
environmental regulations and laws, unless noncompliance is stated, defined
and considered in the Appraisal; and (d) all required licenses, certificates
of occupancy and other governmental consents have been or can be obtained
and renewed for any use on which the value estimate contained in the
Appraisal is based.
[Cushman & Wakefield Logo]
B-9
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
7. The physical condition of the improvements considered by the Appraisal is
based on visual inspection by the Appraiser or other person identified in
the Appraisal. C&W assumes no responsibility for the soundness of structural
members nor for the condition of mechanical equipment, plumbing or
electrical components.
8. The forecasted potential gross income referred to in the Appraisal may be
based on lease summaries provided by the owner or third parties. The
Appraiser has not reviewed lease documents and assumes no responsibility for
the authenticity or completeness of lease information provided by others.
C&W recommends that legal advice be obtained regarding the interpretation of
lease provisions and the contractual rights of parties.
9. The forecasts of income and expenses are not predictions of the future.
Rather, they are the Appraiser's best estimates of current market thinking
on future income and expenses. The Appraiser and C&W make no warranty or
representation that these forecasts will materialize. The real estate market
is constantly fluctuating and changing. It is not the Appraiser's task to
predict or in any way warrant the conditions of a future real estate market;
the Appraiser can only reflect what the investment community, as of the date
of the Appraisal, envisages for the future in terms of rental rates,
expenses, supply and demand.
10. Unless otherwise stated in the Appraisal, the existence of potentially
hazardous or toxic materials which may have been used in the construction or
maintenance of the improvements or may be located at or about the Property
was not considered in arriving at the opinion of value. These materials
(such as formaldehyde foam insulation, asbestos insulation and other
potentially hazardous materials) may adversely affect the value of the
Property. The Appraisers are not qualified to detect such substances. C&W
recommends that an environmental expert be employed to determine the impact
of these matters on the opinion of value.
11. Unless otherwise stated in the Appraisal, compliance with the requirements
of the Americans With Disabilities Act of 1990 (ADA) has not been considered
in arriving at the opinion of value. Failure to comply with the requirements
of the ADA may adversely affect the value of the property. C&W recommends
that an expert in this field be employed.
[Cushman & Wakefield Logo]
B-10
<PAGE>
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EXHIBIT B
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[Cushman & Wakefield Logo]
B-11
<PAGE>
EXHIBIT B
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SUMMARIZATION LETTER--RELATED CAPITAL
DATE OF VALUATION FOR ALL 31 LIMITED APPRAISALS: OCTOBER 15, 1995
<TABLE>
<CAPTION>
1st Mortgage
Revenue Bond C&W VAS
Number Property City State Holder Office
- ------ ----------------- -------------- --------------- ------------- ------------
Note: Miami office has moved to Ft. Lauderdale
<S> <C> <C> <C> <C> <C>
1 Players Club Ft. Myers Florida 2&3 Miami
2 Suntree Ft. Myers Florida 2 Miami
3 River Run Miami Florida 2 Miami
4 Bay Club Mt. Pleasant South Carolina 2 Miami
5 East Ridge Mt. Pleasant South Carolina 1 Miami
6 Martin's Creek Summerville South Carolina 1 Miami
7 Cypress Run Tampa Florida 1 Tampa
8 Cedar Pointe Nashville Tennessee 2 Atlanta
9 Lakepoint Dekalb County Georgia 3 Atlanta
10 Orchard Mill Atlanta Georgia 3 Atlanta
11 Shannon Lake Atlanta Georgia 2 Atlanta
12 North Glen Atlanta Georgia 1 Atlanta
13 Willow Creek Ames Iowa 2 Chicago
14 The Lakes Kansas City Missouri 2 Chicago
15 The Mansion Independence Missouri 1 Chicago
16 Greenway Manor St. Louis Missouri 1 Miami
17 Pelican Grove St. Louis Missouri 2 Miami
18 Highland Ridge St. Paul Minnesota 2 Chicago
19 Bristol Village Bloomington Minnesota 2 Chicago
20 Thomas Lake Eagan Minnesota 1 Chicago
21 Cedar Creek McKinney Texas 1 Dallas
22 Loveridge Contra Costa California 2 San Jose
23 Clarendon Hills Hayward California 1 San Jose
24 Sunset Village Lancaster California 3 Los Angeles
25 Sunset Creek Lancaster California 3 Los Angeles
26 Sunset Downs Lancaster California 2 Los Angeles
27 Sunset Terrace Lancaster California 1 Los Angeles
28 Crowne Pointe Olympia Washington 2 Seattle
29 Orchard Hills Tacoma Washington 2 Seattle
30 Newport Village Tacoma Washington 2 Seattle
31 High Pointe Club Harrisburg Pennsylvania 1 Philadelphia
<CAPTION>
C&W
SIGNING Average Average Appraisal 10/15/95 Overall
MAI/STAFF No. of Square Unit Monthly Date "As Is" Capitalization Discount
Number Appraiser(s) Units Footage Size Rent Occupancy Value $/unit Rate Rate
- ------- --------------------- ------ ------- ------- ------- --------- ----------- ------- -------------- --------
Note: Miami office has moved to Ft. Lauderdale
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Landon/Davie 288 224,160 778 $517 93% $ 9,600,000 $33,333 9.10% 11.50%
2 Landon/Davie 240 193,000 804 $532 92% $ 8,400,000 $35,000 9.10% 11.50%
3 Landon/Walsh 164 132,418 807 $699 97% $ 7,900,000 $48,171 9.22% 11.50%
4 Landon/Davie 160 147,200 156 $584 98% $ 6,250,000 $39,063 9.39% 11.50%
5 Landon/Davie 200 193,856 969 $595 98% $ 8,500,000 $42,500 9.57% 11.50%
6 Landon/Davie 200 194,272 971 $489 96% $ 6,300,000 $31,500 9.00% 11.50%
7 Foltz/Roude 408 335,444 822 $552 80% $ 12,600,000 $30,882 7.90% 11.50%
8 Sechrest 210 224,000 1,067 $696 97% $ 10,000,000 $47,619 9.26% 11.75%
9 Sechrest 360 332,920 925 $480 95% $ 14,400,000 $40,000 9.20% 11.50%
10 Sechrest 238 203,830 856 $583 96% $ 9,100,000 $38,235 9.10% 11.50%
11 Sechrest 294 270,930 922 $603 98% $ 10,500,000 $35,714 9.30% 11.50%
12 Sechrest 284 268,384 945 $642 96% $ 11,200,000 $39,437 9.10% 11.50%
13 Dennis/Schumacher 138 138,718 749 $638 100% $ 5,250,000 $38,043 9.17% 12.00%
14 Dennis/Schumacher 400 291,408 728 $485 87% $ 12,000,000 $30,000 9.29% 12.00%
15 Dennis/Schumacher 550 436,698 794 $528 96% $ 20,500,000 $37,273 8.75% 11.75%
16 Landon/Nappier 312 279,312 895 $499 97% $ 12,600,000 $40,385 9.26% 11.50%
17 Landon/Nappier 405 319,086 788 $538 98% $ 15,700,000 $38,765 9.28% 11.50%
18 Krause/Hanson/Dennis 228 215,863 947 $905 96% $ 12,400,000 $54,386 9.01% 12.00%
19 Krause/Hanson/Dennis 290 330,185 1,139 $931 99% $ 18,800,000 $64,828 8.95% 12.00%
20 Krause/Hanson/Dennis 216 229,056 1,060 $833 100% $ 14,800,000 $68,519 8.93% 12.00%
21 Potts/Weaver 250 193,932 772 $558 96% $ 7,500,000 $30,000 9.90% 12.50%
22 Matlin/Augusto 148 119,430 785 $624 93% $ 7,400,000 $50,000 8.60% 11.75%
23 Matlin/Augusto 285 247,698 869 $960 97% $ 25,000,000 $87,719 8.21% 11.50%
24 Mings/Jones 204 179,000 877 $559 89% $ 7,760,000 $38,039 9.40% 12.00%
25 Mings/Jones 148 132,152 893 $567 85% $ 5,620,000 $37,973 9.35% 12.00%
26 Mings/Jones 264 231,912 878 $549 80% $ 9,780,000 $37,045 9.40% 12.00%
27 Mings/Jones 184 160,888 874 $547 83% $ 6,540,000 $35,543 9.36% 12.00%
28 Barnes/Shigley 160 130,102 813 $551 97% $ 5,600,000 $35,000 9.61% 12.00%
29 Barnes/Shigley 176 135,652 830 $541 96% $ 5,900,000 $33,523 9.49% 11.50%
30 Barnes/Shigley 402 298,422 746 $504 91% $ 13,200,000 $32,836 9.26% 11.50%
31 Rush/Sullivan 240 215,280 897 $595 98% $ 9,000,000 $37,500 9.25% 11.50%
--------------
Aggregate or Average 8,046 7,005,208 849 $610 94% | $330,100,000 | $41,027 9.15% 11.72%
--------------
|
This does not represent
the portfolio market value
<CAPTION>
- --------------------------------------------------------------------------------------------------------
| <S> <C> |
| Key for 1st Mortgage Revenue Bond Holders; 1 = Summit Tax Exempt Bond Fund, L.P. |
| ----------------------------------------------------- |
| 2 = Summit Tax Exempt, L.P. II |
| ----------------------------------------------------- |
| 3 = Summit Tax Exempt, L.P. III |
| |
- --------------------------------------------------------------------------------------------------------
</TABLE>
[Cushman & Wakefield Logo]
B-13
<PAGE>
APPENDIX C
----------
FINANCIAL FORECASTS OF PARTNERSHIP/COMPANY OPERATIONS
<PAGE>
Appendix C
Financial Forecasts of Partnership/Company Operations
1. Going Concern Analysis
o Summary of Going Concern Analysis C-2
o Summit Tax Exempt Bond Fund L.P. C-3
o Summit Tax Exempt Bond L.P. II C-4
o Summit Tax Exempt Bond L.P. III C-5
o Management's Assumptions C-6
2. Consolidated Forecasts of Charter Municipal Mortgage
Acceptance Company
o Consolidated Forecasts C-7
o Management's Assumptions C-9
* These forecasts were prepared solely for internal use and for use by
Oppenheimer in connection with its Fairness Opinion and not with a view to
public disclosure or compliance with the published guidelines of the United
States Securities and Exchange Commission or the American Institute of Certified
Public Accountants regarding projections. The Company's independent accountants
have not examined, reviewed or compiled any of the projections presented below
or expressed any conclusion or provided any other form of assurance with respect
to such projections and accordingly assume no responsibility for them.
The forecasts have been included in this Solicitation Statement solely to
comply with disclosure requirements under certain governmental regulations.
While presented with numerical specificity, the forecasts are based on a variety
of assumptions relating to the future business of the Company, industry
performance, general business and economic conditions and other matters which
are subject to significant uncertainties and contingencies, many of which are
beyond the Company's control, and, therefore, such forecasts are inherently
imprecise and there can be no assurance that any projections will be realized.
Also, actual future results may vary materially from those shown in the
forecasts. Neither the Company nor the Related General Partners is under any
obligation to, or has any intention to, update these forecasts at any future
time.
<PAGE>
Summary of Going Concern Analysis
<TABLE>
<CAPTION>
Projected Projected Projected Projected Projected
Year 1 Year 2 Year 3 Year 4 Year 5
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Summit Tax Exempt Bond Fund L.P.
Total Interest Income 10,398,494 11,339,845 12,067,134 12,455,789 12,749,351
General & Administrative (423,777) (436,490) (449,585) (463,072) (476,964)
Servicing and Other Fees (1,006,943) (1,006,943) (1,006,943) (1,006,943) (1,006,943)
----------------------------------------------------------------------------------
Sub-Totals 8,967,774 9,896,412 10,610,606 10,985,774 11,265,444
Summit Tax Exempt Bond L.P. II
Total Interest Income 12,542,212 13,237,810 13,706,681 13,969,875 14,274,675
General & Administrative (471,110) (485,243) (499,801) (514,795) (530,238)
Servicing and Other Fees (1,215,938) (1,215,938) (1,215,938) (1,215,938) (1,215,938)
----------------------------------------------------------------------------------
Sub-Totals 10,855,164 11,536,629 11,990,942 12,239,142 12,528,499
Summit Tax Exempt Bond L.P. III
Total Interest Income 3,233,690 3,734,935 4,255,927 4,366,361 4,366,033
General & Administrative (201,739) (207,791) (214,025) (220,446) (227,059)
Servicing and Other Fees (131,125) (131,125) (131,125) (131,125) (131,125)
----------------------------------------------------------------------------------
Sub-Totals 2,900,826 3,396,019 3,910,777 4,014,790 4,007,849
Totals: 22,723,764 24,829,060 26,512,325 27,239,706 27,801,792
</TABLE>
C-2
<PAGE>
Summit Tax Exempt Bond Fund L.P.
Going Concern Analysis
<TABLE>
<CAPTION>
Projected Projected Projected Projected Projected
Year 1 Year 2 Year 3 Year 4 Year 5
Interest Interest Interest Interest Interest
Income Income Income Income Income
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property
Thomas Lake $ 1,185,735 $ 1,233,165 $ 1,282,491 $ 1,318,559 $ 1,246,926
North Glen Apartments 996,391 1,065,717 1,138,996 1,184,555 1,231,938
Greenway Manor 1,266,973 1,304,982 1,344,132 1,384,456 1,425,989
East Ridge 625,364 650,478 676,536 696,832 717,737
Clarendon Hills Apartments 1,569,028 1,616,516 1,665,903 1,717,266 1,770,683
Cypress Run 972,310 1,266,165 1,453,762 1,497,375 1,542,296
Cedar Creek 687,483 764,105 845,757 879,587 914,771
Sunset Terrace 537,718 628,356 725,385 754,401 784,577
Martin's Creek 537,093 563,655 591,329 609,068 627,340
The Mansion 1,281,052 1,481,279 1,550,554 1,593,731 1,638,636
Highpointe Club 739,347 765,427 792,290 819,959 848,457
-----------------------------------------------------------------------------
Totals $10,398,494 $11,339,845 $12,067,134 $12,455,789 $12,749,351
Less:
General &Administrative (423,777) (436,490) (449,585) (463,072) (476,964)
Servicing and Other Fees (1,006,943) (1,006,943) (1,006,943) (1,006,943) (1,006,943)
-----------------------------------------------------------------------------
Distributable Cash Flow $ 8,967,774 $ 9,896,412 $10,610,606 $10,985,773 $11,265,443
</TABLE>
C-3
<PAGE>
Summit Tax Exempt L.P. II
Going Concern Analysis
<TABLE>
<CAPTION>
Projected Projected Projected Projected Projected
Year 1 Year 2 Year 3 Year 4 Year 5
Interest Interest Interest Interest Interest
Income Income Income Income Income
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property
Suntree at Fort Myers $ 670,846 $ 761,711 $ 771,853 $ 727,037 $ 733,661
Shannon Lake Apartments 919,180 996,166 1,077,840 1,120,954 1,165,792
River Run 679,797 688,455 697,458 703,802 710,336
Pelican Cove 1,360,435 1,432,982 1,508,458 1,553,918 1,600,535
Newport Village 1,252,968 1,348,420 1,239,618 1,250,481 1,261,671
Orchard Hills 504,801 523,448 533,727 538,297 543,005
Loveridge 520,421 564,012 610,258 634,668 660,055
The Lakes Apartments 779,957 794,140 808,890 824,230 870,935
Highland Ridge 944,219 991,127 1,040,277 1,081,888 1,125,164
Crowne Pointe 488,106 483,189 495,463 500,050 504,774
Cedar Pointe 870,652 904,100 924,628 935,963 947,751
Bristol Apartments 1,585,244 1,559,663 1,576,150 1,593,296 1,611,128
Bay Club 507,346 522,566 538,243 554,391 571,022
Sunset Downs 785,305 930,946 1,086,983 1,130,462 1,175,680
Willow Creek 485,436 508,991 533,599 549,819 554,651
Players Club at Fort Myers 187,500 227,894 263,038 270,621 238,514
-----------------------------------------------------------------------------
Totals $12,542,212 $13,237,810 $13,706,681 $13,969,875 $14,274,675
Less:
General & Administrative (471,110) (485,243) (499,801) (514,795) (530,238)
Servicing and Other Fees (1,215,938) (1,215,938) (1,215,938) (1,215,938) (1,215,938)
-----------------------------------------------------------------------------
Distributable Cash Flow $10,855,164 $11,536,629 $11,990,942 $12,239,142 $12,528,499
</TABLE>
C-4
<PAGE>
Summit Tax Exempt L.P. III
Going Concern Analysis
<TABLE>
<CAPTION>
Projected Projected Projected Projected Projected
Year 1 Year 2 Year 3 Year 4 Year 5
Interest Interest Interest Interest Interest
Income Income Income Income Income
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property
Sunset Creek $ 424,876 $ 503,940 $ 585,405 $ 608,821 $ 633,174
Sunset Village 647,129 746,641 853,079 887,202 922,690
Lakepoint Apartments 906,000 1,094,750 1,283,500 1,283,500 1,283,500
Orchard Mill Apartments 692,311 733,268 776,394 807,450 839,748
Players Club at Fort Myers 560,374 656,335 757,549 779,388 686,921
-----------------------------------------------------------------------
Totals $3,233,690 $3,734,935 $4,255,927 $4,366,361 $4,366,033
Less:
General & Administrative (201,739) (207,791) (214,025) (220,446) (227,059)
Servicing and Other Fees (131,125) (131,125) (131,125) (131,125) (131,125)
-----------------------------------------------------------------------
Distributable Cash Flow $2,900,826 $3,396,019 $3,910,778 $4,014,790 $4,007,849
</TABLE>
C-5
<PAGE>
Management's Assumptions
Set forth below are management's assumptions in connection with the preparation
of the Going Concern Analysis. The purpose of this analysis was to make a
reasonable estimate of the Partnerships' income for a five year period.
Management prepared income and expense forecasts for each apartment complex
securing the FMB's. The assumptions were based, in part, on the historical
operations of the Underlying Properties and market conditions. The occupancy
rates are forecasted to remain constant for any property which, at the time of
this analysis, was more than 95% occupied. For those properties that were less
than 95% occupied, the assumption was that over a reasonable period of time the
occupancy would increase to a stabilized rate of 95% and remain constant at 95%
for the remainder of the projected period. It was also assumed that income and
expenses of the Underlying Properties would grow annually at a rate of 3%. The
income and expense figures were then used to determine the amount of interest
income, including Contingent Interest and debt service payments on SML's, if
any, that the Partnerships could expect to receive from each FMB. This income
was then reduced by general and administrative expenses of the Partnerships,
which are estimated to increase annually at a rate of 3%, and by the Loan
Servicing Fees, Asset Management Fees, and the Special Distribution paid to the
General Partners. The net result determined the amount of cash flow available
for distributions to the partners of the Partnerships.
C-6
<PAGE>
Charter Municipal Mortgage Acceptance Company
Consolidated forecasts of Charter Municipal Mortgage Acceptance Company
on a combined basis
showing projected cash flows assuming use of leverage in acquiring new assets
<TABLE>
<CAPTION>
Projected Projected Projected Projected Projected Projected
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Interest Income--Summit Tax Exempt L.P. $ 10,398,494 $ 11,339,845 $ 12,067,134 $ 12,455,789 $ 12,749,351 $ 13,141,483
Interest Income--Summit Tax Exempt L.P. II 12,542,212 13,237,810 13,706,681 13,969,875 14,274,675 14,624,287
Interest Income--Summit Tax Exempt L.P. III 3,233,690 3,734,935 4,255,927 4,366,361 4,366,033 4,467,885
Interest From Temporary Investments 228,500 237,500 247,000 257,000 267,000 277,000
Other Income 0 0 0 0 0 0
Total lncome Before Acquisitions: 26,402,896 28,550,090 30,276,742 31,049,025 31,657,059 32,510,655
Year One Acquisitions (1) 12,642,943 12,642,943 12,642,943 12,642,943 12,642,943 12,642,943
Year Two Acquisitions (1) 0 6,195,042 6,195,042 6,195,042 6,195,042 6,195,042
Year Three Acquisitions (1) 0 0 3,035,571 3,035,571 3,035,571 3,035,571
Participation (2) 474,110 815,470 1,095,053 1,291,956 1,494,766 1,703,661
------------ ------------ ------------ ------------ ------------ ------------
Total lncome From Acquisitions 13,117,053 19,653,455 22,968,609 23,165,512 23,368,322 23,577,217
Total Income Available for Distribution $ 39,519,949 $ 48,203,545 $ 53,245,351 $ 54,214,537 $ 55,025,381 $ 56,087,872
Expenses
Interest Expense-Existing Debt $ 1,570,067 $ 1,570,067 $ 1,570,067 $ 1,570,067 $ 1,570,067 $ 1,570,067
Loan Servicing Fees-Existing Assets (3) 872,375 872,375 872,375 872,375 872,375 872,375
Loan Servicing Fees-New Acquisitions (4) 361,227 538,228 624,959 624,959 624,959 624,959
Leverage Expense-Year 1 Acquisitions (5) 8,846,374 8,846,374 8,846,374 8,846,374 8,846,374 8,846,374
Leverage Expense-Year 2 Acquisitions (5) 0 4,334,723 4,334,723 4,334,723 4,334,723 4,334,723
Leverage Expense-Year 3 Acquisitions (5) 0 0 2,124,014 2,124,014 2,124,014 2,124,014
------------ ------------ ------------ ------------ ------------ ------------
Total Interest Expense 11,650,043 16,161,767 18,372,512 18,372,512 18,372,512 18,372,512
Consolidated Projection of G&A
(Historical) (6) 1,328,650 1,381,800 1,437,050 1,494,450 1,554,174 1,616,341
Consolidated Projection of G&A(New
Business) (7) 65,585 98,267 114,843 115,828 116,842 117,886
Amortization of Deferred Bond Selection
Fees (Historical) 396,110 396,110 396,110 396,110 396,110 396,110
Amortization of Deferred Bond Selection
Fees (New Business) (8) 245,733 366,142 425,142 425,142 425,142 425,142
Amortization of Deferred Financing Fees
(Historical) 127,831 66,577 2,661 0 0 0
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses $ 13,813,952 $ 18,470,663 $ 20,748,318 $ 20,804,042 $ 20,864,780 $ 20,927,991
Net Income $ 25,705,997 $ 29,732,882 $ 32,497,033 $ 33,410,495 $ 34,160,601 $ 35,159,881
============ ============ ============ ============ ============ ============
Earnings per Share $ 1.25 $ 1.44 $ 1.58 $ 1.67 $ 1.66 $ 1.71
Add back:
All Amortization 769,674 828,828 823,913 821,252 821,252 821,252
Less:
Par Value of Shares Issued to Trustees 20,100 20,100 20,100 20,100 20,100 20,100
Special Distribution to Advisor
(Historical) (9) 1,308,563 1,308,563 1,308,563 1,308,563 1,308,563 1,308,563
Special Distribution to Advisor (New
Business) (10) 541,840 807,342 937,438 937,438 937,438 937,438
------------ ------------ ------------ ------------ ------------ ------------
Net Cash Flow Available for Distribution $ 24,645,368 $ 28,465,905 $ 31,095,044 $ 32,005,845 $ 32,755,951 $ 33,755,230
============ ============ ============ ============ ============ ============
Net Cash Flow Per Share $ 1.20 $ 1.38 $ 1.51 $ 1.55 $ 1.59 $ 1.64
Total Market Capitalization (11) $282,885,961 $326,739,082 $356,917,028 $367,371,441 $375,981,350 $387,451,340
Debt-to Market Capitalization 33.81% 39.72% 41.19% 40.49% 39.94% 39.22%
</TABLE>
C-7
<PAGE>
(1) The Company is permitted to leverage up to 50% of Total Market Value. This
table utilizes the following assumptions:
Year 1 Year 2 Year 3
------------ ----------- -----------
Leverage for new acquisitions $147,439,565 $72,245,387 $35,400,240
Less: transaction fees 2,948,791 1,444,908 708,005
------------ ----------- -----------
New acquisitions $144,490,774 $70,800,479 $34,692,235
(2) Represents Contingent Interest after payment of Base Interest on new
acquisitions with an assumed debt service coverage of 1.15 x net operating
income.
(3) Represents 0.25% of existing assets.
(4) Represents 0.25% of new acquisitions.
(5) Represents 6% of leverage.
(6) Represents 0.5% of income from existing assets.
(7) Represents 0.5% of income from new acquisitions.
(8) Represents transaction fees (see Note 1) amortized over a 12 year period.
(9) Represents 0.375% of existing assets.
(10) Represents 0.375% of new acquisitions.
(11) Assumes the following:
Shares Outstanding: Tax Exempt 7,673,129
Tax Exempt II 10,044,465
Tax Exempt III 2,868,789
----------
Total 20,586,383
Assumed Earnings per Share Multiple: 11x 12x
Assumed Cash Available for Distribution: 9.09% 8.33%
Year One Indicated Share Price: $13.74
Year Two Indicated Share Price: $15.87
Year Three Indicated Share Price: $17.34
Year Four Indicated Share Price: $17.85
C-8
<PAGE>
Management's Assumptions
Set forth below are management's assumptions in connection with the preparation
of the consolidated forecasts of Charter Municipal Mortgage Acceptance Company
on a combined basis.
The consolidated forecasts of the Company on a combined basis show the assumed
cash flows of the Company giving effect to the reduction in fees, certain
savings attendant with the Consolidation and assuming the use of leverage in
acquiring new assets. The forecasts assume that the Company will leverage
approximately fifty percent of its Total Market Value estimated to be
$147,440,000, $72,245,000, and $35,400,000 in years 1, 2, and 3, respectively.
It is assumed that the Company will pay an annual rate of 6% as the cost of
leveraging. The income and expense analysis of the existing Partnerships, as
described previously on page C-6, were used to provide the interest income from
existing FMB's and SML's of the consolidated Company.
The forecasted interest income of the Company's new assets, which for this
purpose were assumed to be comprised solely of FMB's with the Contingent
Interest feature, took into account and gave effect to an overall plan to
acquire FMB's with assumed Base Interest rates of 8.75% and Contingent Interest
estimated at 25% of cash flow after payment of Base Interest. It is also
Management's assumption to acquire FMB's on the basis that the net operating
income of the underlying properties would provide an assumed debt service
coverage of 115%. For purposes of calculating contingent interest payable from
participation in cash flow, projected income and expenses of the Underlying
Properties, are assumed to grow annually at a rate of 3% with a stabilized
occupancy of 95%. The interest income from the existing and newly acquired FMB's
is then reduced by general and administrative expenses of the Company, estimated
to be equal to one half of one percent of the income generated from the existing
and new assets, and by Loan Servicing Fees and Special Distributions payable to
the Manager.
C-9
<PAGE>
APPENDIX D
----------
OBJECTION NOTICE
<PAGE>
FORM FOR OBJECTING TO CONSOLIDATION
IF YOU APPROVE OF THE PARTNERSHIPS IN WHICH YOU INVESTED PARTICIPATING IN
THE CONSOLIDATION, DO NOT COMPLETE AND SUBMIT THIS FORM.
YOU NEED DO NOTHING TO INDICATE YOUR APPROVAL. THIS FORM SHOULD BE USED
ONLY BY PERSONS WHO OBJECT TO ONE OR MORE OF THE PARTNERSHIPS IN WHICH THEY
HOLD UNITS PARTICIPATING IN THE CONSOLIDATION.
The undersigned hereby object(s) to the following partnership(s) in which
I/we hold units participating in the Consolidation pursuant to the Settlement by
the Related Defendants of the Class Actions pending under the caption In re
Prudential Securities Incorporated Limited Partnerships Securities Litigation,
MDL No. 1005 (S.D.N.Y.), as more fully described in the Solicitation Statement
dated June 18, 1997:
- --------------------------------------------------------------------------------
Name of Partnership:
-------------------------------------------------
Number of Units held by objecting Unitholder:
------------------------
State whether Units were purchased through the initial offering or
through the secondary market:
-----------------------------------------
If purchased through the secondary market, state the dates on which the
Units were purchased (if more than one date, specify the number of
Units purchased on each date):
--------------------------------------
Was a certificate issued for these Units?
----------------------------
If "yes," what is the certificate number(s):
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Name of Partnership:
-------------------------------------------------
Number of Units held by objecting Unitholder:
------------------------
State whether Units were purchased through the initial offering or
through the secondary market:
-----------------------------------------
If purchased through the secondary market, state the dates on which the
Units were purchased (if more than one date, specify the number of
Units purchased on each date):
--------------------------------------
Was a certificate issued for these Units?
----------------------------
If "yes," what is the certificate number(s):
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Name of Partnership:
-------------------------------------------------
Number of Units held by objecting Unitholder:
------------------------
State whether Units were purchased through the initial offering or
through the secondary market:
-----------------------------------------
If purchased through the secondary market, state the dates on which the
Units were purchased (if more than one date, specify the number of
Units purchased on each date):
--------------------------------------
Was a certificate issued for these Units?
----------------------------
If "yes," what is the certificate number(s):
------------------------
- --------------------------------------------------------------------------------
(cut along dotted line)
<PAGE>
- --------------------------------------------------------------------------------
Name of Partnership:
-------------------------------------------------
Number of Units held by objecting Unitholder:
------------------------
State whether Units were purchased through the initial offering or
through the secondary market:
---------------------------------------
If purchased through the secondary market, state the dates on which the
Units were purchased (if more than one date, specify the number of
Units purchased on each date):
--------------------------------------
Was a certificate issued for these Units?
----------------------------
If "yes," what is the certificate number(s):
------------------------
- --------------------------------------------------------------------------------
(cut along dotted line)
Address of Unitholder:
-----------------------------------------------------
-----------------------------------------------------
Social Security or Taxpayer Identification No. of Unitholder:
-------------
I/we hereby certify that the foregoing information is complete and
accurate.
--------------------------------------------------------------------------
Print or type name of Unitholder(s) as it appears on partnership
subscription agreement
-------------------------------------------------------------------------
Signature of Unitholder Date
-------------------------------------------------------------------------
Signature of Co-Owner Date
YOU MUST PROVIDE ALL OF THE INFORMATION REQUESTED ABOVE IN ORDER TO SUBMIT
A VALID OBJECTION TO ANY PARTNERSHIP IN WHICH YOU OWN UNITS PARTICIPATING IN
THE CONSOLIDATION.
EQUITABLE CLASS MEMBERS MAY NOT INDIVIDUALLY OPT OUT OF THE EQUITABLE
SETTLEMENT OR THE CONSOLIDATION. IF, HOWEVER, EITHER (A) UNITHOLDERS HOLDING 1/3
OR MORE OF THE UNITS OF A PARTICULAR PARTNERSHIP OBJECT TO THAT PARTNERSHIP
PARTICIPATING IN THE CONSOLIDATION, OR (B) THE COURT DOES NOT APPROVE OF ANY
PARTICULAR PARTNERSHIP PARTICIPATING IN THE CONSOLIDATION, THEN THAT PARTNERSHIP
WILL NOT PARTICIPATE IN THE CONSOLIDATION.
YOU SHOULD NOTE THAT BY SUBMITTING THIS OBJECTION NOTICE YOU ARE NOT
OBJECTING TO THE ENTIRE RELATED DEFENDANTS' SETTLEMENT OR TO ANY ASPECT OF THE
RELATED DEFENDANTS' SETTLEMENT OTHER THAN TO THE PARTNERSHIP OR PARTNERSHIPS
LISTED ABOVE PARTICIPATING IN THE CONSOLIDATION. IF YOU WISH TO EXPRESS ANY
OTHER OBJECTIONS TO THE RELATED SETTLEMENT, YOU MUST FOLLOW THE PROCEDURE
SPECIFIED IN THE CLASS NOTICES.
The deadline for submission of this Objection Notice is August 18, 1997.
Objection Notices should be sent to:
Related Capital Company
625 Madison Avenue
New York, New York 10022
Attn: Investor Services Department
