FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1996 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-15854
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 47-0700550
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Commission File Number: 0-15665
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
(Exact name of registrant as specified in its charter)
Delaware 47-0700551
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Suite 400, 1004 Farnam Street, Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
(402) 444-1630
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
<PAGE> -i-
Part I. Financial Information
Item 1. Financial Statements
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1996 Dec. 31, 1995
-------------- --------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which approximates market value $ 7,969,787 $ 2,573,156
Investment in U.S. government securities - 5,025,000
Investment in mortgage-backed securities (Note 4) 41,384,334 43,103,240
Investment in preferred equity participations (PEPs), net of valuation allowance (Note 5) 337,440 325,517
Investment in real estate (Note 6) 6,591,500 6,668,864
Investment in participating loans, net of valuation allowance (Note 7) 2,960,000 2,960,000
Interest receivable 301,821 374,487
Investment evaluation fees, net 604,718 610,477
Other assets 2,988,537 2,925,362
-------------- --------------
$ 63,138,137 $ 64,566,103
============== ==============
Liabilities and Partners' Capital
Liabilities
Accounts payable (Note 9) $ 240,952 $ 316,778
Distributions payable (Note 3) 1,029,322 1,029,143
Mortgage notes payable (Note 10) 9,614,760 9,614,760
-------------- --------------
10,885,034 10,960,681
-------------- --------------
Partners' Capital
General Partner 100 100
Passthrough Certificate Holder ($22,478 per certificate in 1996 and $23,060 in 1995) 2,247,799 2,305,965
Exchangeable Unit Holders ($8.99 per unit in 1996 and $9.22 in 1995) 50,005,204 51,299,357
-------------- --------------
52,253,103 53,605,422
-------------- --------------
$ 63,138,137 $ 64,566,103
============== ==============
The accompanying notes are an integral part of the combined financial statements.
</TABLE>
<PAGE> -1-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Income
Mortgage and mortgage-backed securities income $ 794,849 $ 870,257
Equity in earnings of property partnerships 61,916 44,649
Rental income 576,922 560,710
Interest income on participating loans 64,485 67,444
Interest income on temporary cash investments
and U.S. government securities 108,099 101,094
-------------- --------------
1,606,271 1,644,154
-------------- --------------
Expenses
General and administrative expenses (Note 9) 214,094 191,174
Real estate operating expenses 299,923 239,350
Depreciation 81,009 118,750
Interest expense 195,990 202,610
-------------- --------------
791,016 751,884
-------------- --------------
Net income $ 815,255 $ 892,270
============== ==============
Net income allocated to:
General Partner $ 7,990 $ 8,935
Exchangeable Unit Holders 772,542 845,832
Passthrough Certificate Holder 34,723 37,503
-------------- --------------
$ 815,255 $ 892,270
============== ==============
Net income per exchangeable unit $ .14 $ .15
============== ==============
Net income per passthrough certificate $ 347.23 $ 375.03
============== ==============
Weighted average number of certificates outstanding 100 100
============== ==============
Weighted average number of units outstanding 5,562,267 5,638,410
============== ==============
The accompanying notes are an integral part of the combined financial statements.
</TABLE>
<PAGE> -2-
COMBINED STATEMENT OF PARTNERS' CAPITAL
FOR THE QUARTER ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Passthrough Certificate Exchangeable Unit
Holders Holders
-------------------------- -------------------------
General # of
Partner Certificates Amount # of Units Amount Total
-------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Partners' Capital (excluding net unrealized
holding gains)
Balance at December 31, 1995 $ 100 100 $ 2,271,186 5,562,267 $ 50,525,558 $ 52,796,844
Net income 7,990 - 34,723 - 772,542 815,255
Cash distributions paid or accrued (Note 3) (7,990) - (66,225) - (1,473,445) (1,547,660)
-------- ------------ ------------ ---------- ------------ ------------
100 100 2,239,684 5,562,267 49,824,655 52,064,439
-------- ------------ ------------ ---------- ------------ ------------
Net unrealized holding gains
Balance at December 31, 1995 - - 34,779 - 773,799 808,578
Net change - - (26,664) - (593,250) (619,914)
-------- ------------ ------------ ---------- ------------ ------------
- - 8,115 - 180,549 188,664
-------- ------------ ------------ ---------- ------------ ------------
Balance at March 31, 1996 $ 100 100 $ 2,247,799 5,562,267 $ 50,005,204 $ 52,253,103
======== ============ ============ ========== ============ ============
The accompanying notes are an integral part of the combined financial statements.
</TABLE>
<PAGE> -3-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 815,255 $ 892,270
Adjustments to reconcile net income to
net cash from operating activities:
Equity in earnings of property partnerships (61,916) (44,649)
Depreciation 81,009 118,750
Amortization of discount on mortgage-backed
and U.S. government securities (22,397) (3,483)
Decrease in interest receivable 72,666 5,199
Amortization of investment evaluation fees 5,759 5,760
Increase in other assets (63,175) (118,721)
Decrease in accounts payable (75,826) (16,223)
-------------- --------------
Net cash provided by operating activities 751,375 838,903
-------------- --------------
Cash flows from investing activities
Maturity of U.S. government securities 5,000,000 -
Mortgage principal payments received 1,146,389 487,442
Acquisition of U.S. government securities - (4,937,891)
Acquisition of mortgage-backed securities - (5,208)
Distributions received from PEPs 49,993 103,819
Investment in real estate (3,645) -
-------------- --------------
Net cash provided by (used in) investing activities 6,192,737 (4,351,838)
-------------- --------------
Cash flows from financing activities
Distributions paid (1,547,481) (2,093,247)
Purchase of Units - (441,913)
-------------- --------------
Net cash used in financing activities (1,547,481) (2,535,160)
-------------- --------------
Net increase (decrease) in cash and temporary cash investments 5,396,631 (6,048,095)
Cash and temporary cash investments at beginning of period 2,573,156 7,806,496
-------------- --------------
Cash and temporary cash investments at end of period $ 7,969,787 $ 1,758,401
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 195,990 $ 202,610
============== ==============
The accompanying notes are an integral part of the combined financial statements.
</TABLE>
<PAGE>
<PAGE> -4-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. Organization
America First Participating/Preferred Equity Mortgage Fund (the Fund) was
formed on November 20, 1986, as a Nebraska general partnership for the purpose
of acquiring a portfolio of federally-insured multifamily mortgages or other
investments including preferred equity participations (PEPs). PEPs consist
of equity interests which are intended to provide the Fund with a
participation in the net cash flow and net sale or refinancing proceeds of the
properties collateralizing the mortgage loans. America First
Participating/Preferred Equity Mortgage Fund Limited Partnership (the
Partnership) was also formed on November 20, 1986, under the Delaware Revised
Uniform Limited Partnership Act to serve as the managing general partner of
the Fund. The Fund and the Partnership will continue in existence until
December 31, 2036, unless terminated earlier under the provisions of the
Pooling and Servicing Agreement forming the Fund and the Partnership Agreement
forming the Partnership. The General Partner of the Partnership is America
First Capital Associates Limited Partnership Three (AFCA 3).
2. Summary of Significant Accounting Policies
A)Financial Statement Presentation
The financial statements include the combined statements of the Fund and
the Partnership and have been prepared without audit. The combined
financial statements are prepared on the accrual basis of accounting in
accordance with generally accepted accounting principles. The financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Fund's Annual Report on Form 10-K for the
year ended December 31, 1995. In the opinion of management, all
adjustments necessary to present fairly the financial position at
March 31, 1996, and results of operations for all periods presented have
been made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B)Investments in Mortgage-Backed Securities, U.S. Government Securities and
Participating Loans
Investment securities are classified as held-to-maturity, available-for-
sale, or trading. Investments classified as held-to-maturity are carried
at amortized cost. Investments classified as available-for-sale are
reported at fair value with any unrealized gains or losses excluded from
earnings and reflected as a separate component of partners' capital.
Subsequent increases and decreases in the net unrealized gain/loss on the
available-for-sale securities are reflected as adjustments to the carrying
value of the portfolio and adjustments to the component of partners'
capital. The Fund does not have investment securities classified as
trading.
The investment in Participating Loans is recorded at cost and reduced by
principal payments received. Participating Loans are not insured or
guaranteed. The value of these investments is a function of the value of
the real estate collateralizing the Participating Loans. Interest income on
Participating Loans is excluded from income when, in the opinion of
management, collection of such interest is doubtful. This interest is
recognized as income when it is received.
<PAGE> -5-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
C)Investment in Preferred Equity Participations (PEPs)
The investment in PEPs consist of interests in limited partnerships which
own the properties underlying the mortgage-backed securities and are
accounted for using the equity method. PEPs are not insured or guaranteed.
The value of these investments is a function of the value of the real estate
underlying the PEPs.
D)Allowance for Losses on Investment in PEPs and Participating Loans
The allowance for losses on investments in PEPs is a valuation reserve
which has been established at a level that management feels is adequate to
absorb potential losses on investments in PEPs. The allowance is based on
the fair value of the properties underlying the PEPs.
The allowance for losses on Participating Loans is a valuation reserve
which has been established at a level that management feels is adequate to
absorb potential losses on outstanding loans. Reserves are established for
loans which management considers impaired. Loans are considered impaired
when it is probable that the Fund will be unable to collect amounts due
according to the contractual terms of the loan agreements. Based on this
analysis, all Participating Loans were considered impaired at
March 31, 1996. A reserve is established for the difference between the
recorded investment in the Participating Loans and the fair value of the
underlying collateral.
The allowances are periodically reviewed and adjustments are made to the
allowances when there are significant changes in the estimated net
realizable value of the properties underlying the PEPs or the underlying
collateral for the loans.
E)Investment in Real Estate
The investment in real estate is recorded at the lower of cost or estimated
net realizable value at the date of acquisition.
F)Depreciation
Depreciation of real estate acquired in settlement of PEPs is based on the
estimated useful life of the properties (ranging from 6 to 27 1/2 years)
using the straight-line method.
G)Income Taxes
No provision has been made for income taxes since each Exchangeable Unit
Holder or Passthrough Certificate Holder is required to report their share
of the Partnership's or Fund's income for federal and state income tax
purposes.
H)Temporary Cash Investments
Temporary cash investments are invested in short-term debt securities
purchased with original maturities of three months or less.
I)Investment Evaluation Fees
The investment evaluation fees were incurred in connection with the
acquisition of assets. These fees are being amortized over the life of the
Fund.
J)Net Income Per Exchangeable Unit and Passthrough Certificate
Net income per Exchangeable Unit and Passthrough Certificate is allocated
based on the weighted average number of exchangeable units and passthrough
certificates outstanding during each period presented.
<PAGE> -6-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
K)New Accounting Pronouncement
The Fund adopted Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". Among other things, this Statement requires
that long-lived assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events or
circumstances indicate that the carrying value of an asset may not be
recoverable. The adoption of this Statement did not have a material impact
on the combined financial statements.
3. Fund and Partnership Income, Expenses and Cash Distributions
The Partnership Agreement and the Pooling and Servicing Agreement contain
provisions for distributing the cash available for distribution and for the
allocation of income and expenses for tax purposes among AFCA 3 and investors.
Cash distributions included in the combined financial statements represent the
actual cash distributions made during each period and the cash distributions
accrued at the end of each period.
4. Investment in Mortgage-Backed Securities
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association (GNMA) Certificates and Federal National
Mortgage Association (FNMA) Certificates. The GNMA Certificates are backed by
first mortgage loans on multifamily residential properties and pools of single-
family properties. The FNMA Certificates are backed by pools of single-family
properties. The GNMA Certificates are debt securities issued by a private
mortgage lender and are guaranteed by GNMA as to the full and timely payment
of principal and interest on the underlying loans. The FNMA Certificates are
debt securities issued by FNMA and are guaranteed by FNMA as to the full and
timely payment of principal and interest on the underlying loans.
At March 31, 1996, the total amortized cost, gross unrealized holding gains
and aggregate fair value of held-to-maturity securities were $15,078,578,
$486,531 and $15,565,109, respectively.
<PAGE> -7-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
Descriptions of the Fund's mortgage-backed securities at March 31, 1996, are
as follows:
<TABLE>
<CAPTION>
Number Interest Maturity Carrying
Type of Security and Name Location of Units Rate Date Amount
- ---------------------------------- ------------------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Held-to-Maturity
GNMA Certificates:
The Parklane Salt Lake City, UT 94 9.25% 03/15/2029 $ 6,414,658
Grand Villa Grand Junction, CO 46 9.25% 03/15/2029 1,998,210
Cambridge Court Kearney, NE 41 9.25% 02/15/2029 1,949,666
Hickory Villa Omaha, NE 57 9.25% 02/15/2029 2,524,133
Pools of single-family properties 9.58% (1) 2017 2,149,233
Pools of single-family properties 9.62% (1) 2016 to 2017 42,678
------------
15,078,578
------------
Available-for-Sale
GNMA Certificates:
Pools of single-family properties 8.56% (1) 2016 to 2020 3,245,928 (2)
Pools of single-family properties 9.30% (1) 07/15/2021 1,945,462 (2)
Pools of single-family properties 8.76% (1) 2021 1,263,806 (2)
Pools of single-family properties 8.76% (1) 05/15/2021 502,598 (2)
Pools of single-family properties 8.25% (1) 2021 to 2022 2,455,836 (2)
Pools of single-family properties 6.50% (1) 2023 4,396,478 (2)
Pools of single-family properties 6.03% (1) 2008 2,443,355 (2)
Pools of single-family properties 7.13% (1) 2009 6,930,826 (2)
FNMA Certificates:
Pools of single-family properties 5.52% (1) 2000 3,121,467 (2)
------------
26,305,756
------------
$ 41,384,334
============
(1)Represents yield to the Fund.
(2)Reserve account asset - see Note 8.
</TABLE>
Reconciliation of the carrying amount of the mortgage-backed securities is
as follows:
<TABLE>
<S> <C>
Balance at December 31, 1995 $ 43,103,240
Addition
Amortization of discount on mortgage-backed securities 6,537
Deductions
Mortgage principal payments received (1,146,389)
Net change in unrealized holding gains on available-for-sale securities (579,054)
------------
Balance at March 31, 1996 $ 41,384,334
============
</TABLE>
<PAGE> -8-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
5. Investment in Preferred Equity Participations (PEPs)
The PEPs consist of interests in limited partnerships which own properties
financed by the Fund. The limited partnership agreements provide for a
participation in the net cash flow and net sale or refinancing proceeds of the
properties subject to various priority payments.
Descriptions of the PEPs held at March 31, 1996, are as follows:
<TABLE>
Carrying
Name Location Partnership Name Amount
- -------------------------- ------------------ -------------------------------------- ------------
<S> <C> <C> <C>
Harmony Bay Apartments Roswell, GA Harmony Bay Associates, Ltd. $ 887,388
Timber Cove Apartments Decatur, IL Timber Cove Associates 50,019
Grand Villa Grand Junction, CO Stazier Associates Grand Junction Ltd. 221,385
Cambridge Court Kearney, NE Stazier Associates Kearney Ltd. 132,916
The Parklane Salt Lake City, UT Congregate Care Company -
Hickory Villa Omaha, NE Stazier Associates Omaha Ltd. -
------------
1,291,708
Less valuation allowance (954,268)
------------
$ 337,440
============
Reconciliation of the carrying amount of the PEPs is as follows:
Balance at December 31, 1995 $ 325,517
Equity in earnings of property partnerships 61,916
Distributions received from PREPs (49,993)
------------
Balance at March 31, 1996 $ 337,440
============
</TABLE>
6. Real Estate Acquired in Settlement of PEPs
The rental income and real estate operating, interest and depreciation
expenses of the properties owned by the Fund have been consolidated with the
Fund's operations and are reflected in the combined financial statements.
Real estate acquired in settlement of PEPs is comprised of the following
multifamily housing properties at March 31, 1996:
<TABLE>
Number Carrying
Name Location of Units Amount
- -------------------------- ------------------ -------- ------------
<S> <C> <C> <C>
Meadow Brook Apartments Amelia, OH 168 $ 3,470,774
Morrowood Townhouses Morrow, GA 264 6,005,601
------------
9,476,375
Less accumulated depreciation (2,884,875)
------------
$ 6,591,500
============
Reconciliation of the carrying amount of the real estate held is as follows:
Balance at December 31, 1995 $ 6,668,864
Investment in real estate 3,645
Depreciation (81,009)
------------
Balance at March 31, 1996 $ 6,591,500
============
</TABLE>
<PAGE> -9-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
7. Investment in Participating Loans
The Participating Loans are collateralized by first mortgages on properties
jointly financed with America First Tax Exempt Mortgage Fund 2 Limited
Partnership, whose general partner is an affiliate of AFCA 3. The
Participating Loan agreements call for payment of base interest and additional
interest out of a portion of the net cash flow or net sale or refinancing
proceeds of the properties.
Descriptions of the Participating Loans held as of March 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Base
Number Interest Maturity Carrying
Name Location of Units Rate (1) Date Amount
- ---------------------------------- ------------------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Avalon Ridge Renton, WA 356 10% (2) 09/01/99 $ 1,245,000
Jackson Park Place Fresno, CA 296 10% 09/01/99 2,100,000
------------
3,345,000
Valuation allowance to net realizable value (385,000)
------------
$ 2,960,000
============
</TABLE>
(1)In addition to the base interest rate, the notes bear additional contingent
interest which, when combined with the base interest, is limited to a
cumulative, non-compounded amount not greater than 13% per annum. The Fund
did not receive any additional contingent interest in 1996.
(2)Interest is recognized as income on the cash basis which is at a rate lower
than the base interest rate. The amount of foregone interest for 1996 was
$19,140.
8. Fund Reserve Account
The Fund maintains a reserve account which consisted of the following at
March 31, 1996:
Cash and temporary cash investments $ 6,915,050
GNMA Certificates 23,184,289
FNMA Certificates 3,121,467
--------------
$ 33,220,806
==============
The reserve account was established to maintain working capital for the Fund
and is available to supplement distributions to investors and for any
contingencies related to the ownership of the investments and the operation of
the Fund. The GNMA Certificates mature between 2008 and 2023 and the FNMA
Certificates mature in 2000.
At March 31, 1996, the total amortized cost, gross unrealized holding
gains, gross unrealized holding losses and the aggregate fair value of
available-for-sale securities were $26,117,092, $522,819, $334,155 and
$26,305,756 respectively.
On September 12, 1990, June 7, 1995 and July 25, 1995, management announced
its intent to utilize a portion of the reserve account to acquire a maximum of
200,000 Exchangeable Units (Units) in the over-the-counter market. As of
March 31, 1996, 160,260 Units (none for the quarter ended March 31, 1996) had
been acquired at a total cost of $1,529,382.
<PAGE> -10-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
9. Transactions with Related Parties
Substantially all of the Fund's general and administrative expenses are paid
by AFCA 3 or an affiliate and reimbursed by the Fund. The amount of such
expenses reimbursed to AFCA 3 during 1996 was $261,336. The reimbursed
expenses are presented on a cash basis and do not reflect accruals made at
quarter end.
AFCA 3 is entitled to an administrative fee of .35% per annum of the
outstanding amount of investments of the Fund to be paid by the Fund to the
extent such amount is not paid by property owners. During 1996, AFCA 3 earned
administrative fees of $60,076. Of this amount, $27,517 was paid by the
Fund and the remainder was paid by property owners.
An affiliate of AFCA 3 has been retained to provide property management
services for Morrowood Townhouses, Avalon Ridge and Harmony Bay Apartments.
The fees for services provided represent the lower of: (i) costs incurred in
providing management of the property; or, (ii) customary fees for such
services determined on a competitive basis. Total fees amounted to $42,584 in
1996.
10. Mortgage Notes Payable
The Fund assumed the following mortgage notes payable as a result of the
acquisition of real estate in settlement of PEPs.
<TABLE>
<CAPTION>
Interest Maturity Monthly
Collateral Rate Date Payment Balance
- ------------------------ -------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Meadow Brook Apartments 9.50% 11/25/2022 $ 24,374 $ 3,569,236
Morrowood Townhouses 9.50% 11/19/2022 44,118 6,045,524
------------
Balance at March 31, 1996 $ 9,614,760
============
</TABLE>
These notes are payable to an unaffiliated party and are collateralized solely
by the foregoing properties. The notes are in default; however, the Fund
effectively has no risk with respect to the mortgage notes payable since the
Fund's net equity in the properties has previously been reduced to zero.
Therefore, for accounting purposes, the Fund records interest expense on these
notes only when it is paid.
<PAGE> -11-
Item 2.
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity and Capital Resources
The Fund originally acquired: (i) ten mortgage-backed securities guaranteed as
to principal and interest by the Government National Mortgage Association
(GNMA) collateralized by first mortgage loans on multifamily housing
properties located in seven states, GNMA Certificates backed by pools of
single-family mortgages (the GNMA Certificates); (ii) a first mortgage loan
insured by the Federal Housing Administration (the FHA Loan) on a retirement
living center located in California; (iii) limited partnership interests
(PEPs) in eleven limited partnerships which own the multifamily properties
financed by the GNMA Certificates and the FHA Loan; and (iv) two participating
first mortgage loans (the Participating Loans) on multifamily housing
properties financed in part by an affiliated mortgage fund. The FHA Loan and
six of the GNMA Certificates secured by multifamily properties have been
repaid which left the Fund with only the PEPs on these properties. Under the
terms of the limited partnership agreements for the PEPs, the Fund has removed
the general partners of seven of the limited partnerships owning multifamily
properties. In three cases, the Fund acquired the general partners' interest
in the limited partnerships in addition to its PEP. Accordingly, the Fund
became the indirect owner of the entire equity interest in these properties
and began accounting for them as investments in real estate (the "Real Estate
Interests"). One of these properties was foreclosed upon by GNMA in 1989 and,
therefore, the Fund no longer holds an interest in this property. In the
remaining four limited partnerships, a substitute limited partner was admitted
and acquired a portion of the removed general partner's interest. The Fund
continued to own PEPs in these properties until 1995 when Casa Sandoval was
sold in foreclosure and the Fund withdrew as the limited partner from
Moonraker Apartments. As a result of the foregoing, the Fund continues to
hold four GNMA Certificates, six PEPs, two Real Estate Interests and two
Participating Loans.
The following table shows the occupancy levels of the properties financed by
the Fund in which the Fund continues to hold an interest at March 31, 1996:
<TABLE>
<CAPTION>
Number Percentage
Number of Units of Units
Property Name Location of Units Occupied Occupied
- ----------------------------- ------------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
The Parklane Salt Lake City, UT 94 91 97%
Grand Villa Grand Junction, CO 46 46 100%
Cambridge Court Kearney, NE 41 40 98%
Hickory Villa Omaha, NE 57 53 93%
Harmony Bay Apartments Roswell, GA 300 286 95%
Timber Cove Apartments Decatur, IA 272 229 84%
Meadow Brook Apartments (1) Amelia, OH 168 155 92%
Morrowood Townhouses (1) Morrow, GA 264 256 97%
Avalon Ridge Renton, WA 356 288 81%
Jackson Park Place Fresno, CA 296 282 95%
--------- ---------- -----------
1,894 1,726 91%
========= ========== ===========
(1)Property acquired in settlement of PEP.
</TABLE>
<PAGE>
<PAGE> -12-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Distributions
Cash distributions paid or accrued were as follows:
<TABLE>
<CAPTION>
For the Quarter Ended For the Quarter Ended
March 31, 1996 March 31, 1995
------------------------------- -------------------------------
Per Per
Per Unit Certificate Per Unit Certificate
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Regular monthly distributions
Income distributed $ .1389 $ 347.23 $ .1500 $ 375.03
Return of capital .1260 315.02 .1149 287.22
------------- ------------- ------------- -------------
$ .2649 $ 662.25 $ .2649 $ 662.25
============= ============= ============= =============
Distributions
Paid out of current and prior undistributed cash flow $ .2649 $ 662.25 $ .2649 $ 662.25
============= ============= ============= =============
</TABLE>
Regular monthly distributions to investors consist primarily of interest and
principal received on mortgage-backed securities. Additional cash for
distributions is received from PEPs and other investments. The Fund may draw
on reserves to pay operating expenses or to supplement cash distributions to
investors. The Fund is permitted to replenish its reserves through the sale
or refinancing of assets. During 1996, a net amount of $402,061 of
undistributed mortgage principal payments was placed in reserves. The total
amount held in reserves at March 31, 1996, was $33,220,806 of which
$26,305,756 was invested in GNMA and FNMA Certificates.
The Fund believes that cash provided by operating and investing activities
and, if necessary, withdrawals from the Fund's reserves will be adequate to
meet its short-term and long-term liquidity requirements, including the
payments of distributions to investors. The Fund has no other internal or
external sources of liquidity. Under the terms of the Pooling and Servicing
agreement, the Fund is not authorized to enter into short-term or long-term
debt financing arrangements or issue additional Units or Certificates to meet
short-term and long-term liquidity requirements.
Asset Quality
The Fund continues to receive the full amount of monthly principal and
interest payments on its GNMA and FNMA Certificates. The GNMA and FNMA
Certificates are fully guaranteed as to principal and interest by GNMA and
FNMA, respectively. The obligations of GNMA are backed by the full faith and
credit of the United States government.
<PAGE> -13-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PEPs and Participating Loans, however, are not insured or guaranteed. The
value of these investments is a function of the value of the real estate
underlying the PEPs or collateralizing the Participating Loans. It is the
policy of the management of the Fund to make a periodic review of the real
estate underlying the PEPs or collateralizing the Participating Loans in order
to establish, when necessary, valuation reserves on investments in PEPs and
Participating Loans. The allowance for losses on investments in PEPs is based
on the fair value of the properties underlying the PEPs. A reserve for the
Participating Loans is established for the difference between the recorded
investment in the Participating Loans and the fair value of the underlying
collateral. The fair value of the properties underlying the PEPs and the
collateral for the Participating Loans is based on management's best estimate
of the net realizable value of such properties; however, the ultimate realized
values may vary from these estimates. The allowances are periodically
reviewed and adjustments are made to the allowances when there are significant
changes in the estimated net realizable value of the properties underlying the
PEPs or the underlying collateral for the loans. Internal property valuations
and reviews performed during 1996 indicated that the investment in PEPs and
Participating Loans recorded on the balance sheet at March 31, 1996, required
no adjustments to current carrying amounts.
The overall status of the Fund's Permanent Investments has remained relatively
constant since December 31, 1995.
Results of Operations
The table below compares the results of operations for each period shown.
<TABLE>
<CAPTION>
For the For the Increase
Quarter Ended Quarter Ended (Decrease)
March 31, 1996 March 31, 1995 From 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Mortgage and mortgage-backed securities income $ 794,849 $ 870,257 $ (75,408)
Equity in earnings of property partnerships 61,916 44,649 17,267
Rental income 576,922 560,710 16,212
Interest income on participating loans 64,485 67,444 (2,959)
Interest income on temporary cash investments
and U.S. government securities 108,099 101,094 7,005
-------------- -------------- --------------
1,606,271 1,644,154 (37,883)
-------------- -------------- --------------
General and administrative expenses 214,094 191,174 22,920
Real estate operating expenses 299,923 239,350 60,573
Depreciation 81,009 118,750 (37,741)
Interest expense 195,990 202,610 (6,620)
-------------- -------------- --------------
791,016 751,884 39,132
-------------- -------------- --------------
Net income $ 815,255 $ 892,270 $ (77,015)
============== ============== ==============
</TABLE>
The decrease in mortgage and mortgage-backed securities income for the quarter
ended March 31, 1996, compared to the same period in 1995, is due to the
continued amortization of the principal balances of the mortgage-backed
securities.
Equity in earnings of property partnerships is a function of the cash flow
received by the Fund from its PEP interests in the operating partnerships
which own certain of the properties as well as the Fund's allocable share of
earnings generated by these properties. Equity in earnings of property
partnerships increased for the quarter ended March 31, 1996, compared to the
same period in 1995, due primarily to an increase in earnings generated by
Grand Villa. This increase in earnings was due to a significant increase in
Grand Villa's average occupancy.
<PAGE> -14-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The decrease in interest income on Participating Loans for the quarter ended
March 31, 1996, compared to the same period in 1995, is attributable to the
Fund recording income on the Avalon Ridge property when it is received. The
rate of interest received, which is lower than the base interest rate,
fluctuates with the cash flow generated by this property.
Rental income, net of real estate operating expenses and depreciation, from
the properties acquired by the Fund in settlement of PEPs decreased by $6,620
for the quarter ended March 31, 1996, compared to the same period in 1995.
This decrease resulted from higher real estate operating expenses due
primarily to increases in repairs and maintenance expenses, property
improvements, real estate taxes and insurance. The higher real estate
operating expenses were partially offset by an increase in rental income
resulting from an increase in average occupancy and a decrease in depreciation
expense. The decrease in net rental income was entirely offset by decreases
in interest paid by the Fund on the mortgage loans it has assumed on these
properties. Since interest is paid only to the extent of available cash flow
from these properties, the Fund records less interest expense as such cash
flow decreases.
The increase in interest income on temporary cash investments of $7,005 from
1995 to 1996 is attributable to additional cash available for investment
resulting from the receipt of principal payments on GNMA Certificates backed
by pools of single-family properties. Principal payments have exceeded normal
amortization because of increased prepayments of the underlying mortgages
resulting from significant declines in long-term interest rates.
General and administrative expenses increased $22,920 from 1995 to 1996 due
primarily to increases in salaries and related expenses.
<PAGE> -15-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Agreement of Limited Partnership dated November 20, 1986
(incorporated herein by reference to Form 10-K dated
December 31, 1986 filed pursuant to Section 13 or 15(d) of
the Securities Act of 1934 by America First Participating/
Preferred Equity Mortgage Fund Limited Partnership
(Commission File No. 0-15854)).
4(b) Form of Certificate of Beneficial Unit Certificate
(incorporated herein by reference to Form S-11 Registration
Statement filed February 24, 1986 with the Securities and
Exchange Commission by America First Participating/
Preferred Equity Mortgage Fund Limited Partnership
(Commission File No. 33-3566)).
4(c) Pooling and Servicing Agreement dated November 20, 1986
(including as an exhibit thereto the Form of Exchangeable
Passthrough Certificate) (incorporated herein by reference
to Form 10-K dated December 31, 1986 filed pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
by America First Participating/Preferred Equity Mortgage
Fund (Commission File No. 0-15665)).
(b) Form 8-K
The registrant did not file a report on Form 8-K during the
quarter for which this report is filed.
<PAGE>
<PAGE> -16-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to be
signed on their behalf by the undersigned, thereunto duly authorized.
AMERICA FIRST PARTICIPATING/
PREFERRED EQUITY MORTGAGE FUND
By America First Participating/
Preferred Equity Mortgage
Fund Limited Partnership,
managing general partner
By America First Capital
Associates Limited Partnership
Three, general partner of America First
Participating/Preferred Equity Mortgage
Fund Limited Partnership
By America First Companies L.L.C, general
partner of America First Capital
Associates Limited Partnership
Three
By /s/ Michael Thesing
Michael Thesing,
Vice President
Date: May 15, 1996
AMERICA FIRST PARTICIPATING/
PREFERRED EQUITY MORTGAGE
FUND LIMITED PARTNERSHIP
By America First Capital
Associates Limited Partnership
Three, general partner of America First
Participating/Preferred Equity Mortgage
Fund Limited Partnership
By America First Companies L.L.C, general
partner of America First Capital
Associates Limited Partnership
Three
By /s/ Michael Thesing
Michael Thesing,
Vice President
Date: May 15, 1996
<PAGE> -17-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 7,969,787
<SECURITIES> 41,384,334
<RECEIVABLES> 301,821
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,271,608
<PP&E> 9,476,375
<DEPRECIATION> (2,884,875)
<TOTAL-ASSETS> 63,138,137
<CURRENT-LIABILITIES> 1,270,274
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 52,253,103
<TOTAL-LIABILITY-AND-EQUITY> 63,138,137
<SALES> 0
<TOTAL-REVENUES> 1,606,271
<CGS> 0
<TOTAL-COSTS> 595,026
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195,990
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 815,255
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
