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 September 30, 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>
Sept. 30, 1996 Dec. 31, 1995
-------------- --------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which approximates market value $ 8,624,256 $ 2,573,156
Investment in U.S. government securities - 5,025,000
Investment in mortgage-backed securities (Note 4) 38,161,286 43,103,240
Investment in preferred equity participations (PEPs), net of valuation allowance (Note 5) 312,163 325,517
Investment in real estate (Note 6) 6,436,955 6,668,864
Investment in participating loans, net of valuation allowance (Note 7) 2,960,000 2,960,000
Interest receivable 310,132 374,487
Investment evaluation fees, net 593,200 610,477
Other assets 3,248,964 2,925,362
-------------- --------------
$ 60,646,956 $ 64,566,103
============== ==============
Liabilities and Partners' Capital
Liabilities
Accounts payable (Note 9) $ 265,103 $ 316,778
Distributions payable (Note 3) 512,361 1,029,143
Mortgage notes payable (Note 10) 9,614,760 9,614,760
-------------- --------------
10,392,224 10,960,681
-------------- --------------
Partners' Capital
General Partner 100 100
Passthrough Certificate Holder ($21,755 per certificate in 1996 and $23,060 in 1995) 2,175,469 2,305,965
Exchangeable Unit Holders ($8.70 per unit in 1996 and $9.22 in 1995) 48,079,163 51,299,357
-------------- --------------
50,254,732 53,605,422
-------------- --------------
$ 60,646,956 $ 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 For the Nine For the Nine
Quarter Ended Quarter Ended Months Ended Months Ended
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Income
Mortgage and mortgage-backed securities income $ 735,828 $ 847,493 $ 2,298,465 $ 2,578,554
Equity in earnings of property partnerships 84,125 15,175 206,224 86,711
Rental income 608,048 569,747 1,788,012 1,702,636
Interest income on participating loans 59,030 60,124 184,481 190,891
Interest income on temporary cash investments and
U.S. government securities 117,171 98,095 324,938 303,340
-------------- -------------- -------------- --------------
1,604,202 1,590,634 4,802,120 4,862,132
-------------- -------------- -------------- --------------
Expenses
General and administrative expenses (Note 9) 222,849 216,344 679,835 609,547
Real estate operating expenses 288,652 152,493 913,699 659,412
Depreciation 81,009 118,750 243,027 356,250
Interest expense 238,387 298,504 631,286 686,974
-------------- -------------- -------------- --------------
830,897 786,091 2,467,847 2,312,183
-------------- -------------- -------------- --------------
Net income $ 773,305 $ 804,543 $ 2,334,273 $ 2,549,949
============== ============== ============== ==============
Net income allocated to:
General Partner $ 7,348 $ 8,352 $ 22,649 $ 26,007
Exchangeable Unit Holders 732,821 761,984 2,211,933 2,416,264
Passthrough Certificate Holder 33,136 34,207 99,691 107,678
-------------- -------------- -------------- --------------
$ 773,305 $ 804,543 $ 2,334,273 $ 2,549,949
============== ============== ============== ==============
Net income per exchangeable unit $ .13 $ .14 $ .40 $ .43
============== ============== ============== ==============
Net income per passthrough certificate $ 331.36 $ 342.13 $ 996.91 $ 1,076.84
============== ============== ============== ==============
Weighted average number of units outstanding 5,528,867 5,570,692 5,546,717 5,609,606
============== ============== ============== ==============
Weighted average number of certificates outstanding 100 100 100 100
============== ============== ============== ==============
The accompanying notes are an integral part of the combined financial statements.
</TABLE>
<PAGE> -2-
COMBINED STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 (losses))
Balance at December 31, 1995 $ 100 100 $ 2,271,186 5,562,267 $ 50,525,558 $ 52,796,844
Net income 22,649 - 99,691 - 2,211,933 2,334,273
Cash distributions paid or accrued (Note 3) (22,649) - (198,675) - (4,407,976) (4,629,300)
Purchase of 36,470 units (Note 8) - - 1,242 (36,470) (295,381) (294,139)
-------- ------------ ------------ ---------- ------------ ------------
100 100 2,173,444 5,525,797 48,034,134 50,207,678
-------- ------------ ------------ ---------- ------------ ------------
Net unrealized holding gains (losses)
Balance at December 31, 1995 - - 34,779 - 773,799 808,578
Net change - - (32,754) - (728,770) (761,524)
-------- ------------ ------------ ---------- ------------ ------------
- - 2,025 - 45,029 47,054
-------- ------------ ------------ ---------- ------------ ------------
Balance at September 30, 1996 $ 100 100 $ 2,175,469 5,525,797 $ 48,079,163 $ 50,254,732
======== ============ ============ ========== ============ ============
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 Nine For the Nine
Months Ended Months Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,334,273 $ 2,549,949
Adjustments to reconcile net income to
net cash from operating activities:
Equity in earnings of property partnerships (206,224) (86,711)
Depreciation 243,027 356,250
Amortization of discount on mortgage-backed
and U.S. government securities (46,317) (48,402)
Decrease (increase) in interest receivable 64,355 (85,180)
Amortization of investment evaluation fees 17,277 17,278
Increase in other assets (323,602) (380,729)
Decrease in accounts payable (51,675) (37,426)
-------------- --------------
Net cash provided by operating activities 2,031,114 2,285,029
-------------- --------------
Cash flows from investing activities
Maturity of U.S. government securities 5,000,000 -
Mortgage principal payments received 4,251,747 2,158,879
Acquisition of U.S. government securities - (4,937,891)
Acquisition of mortgage-backed securities - (10,002)
Distributions received from PEPs 219,578 226,869
Investment in real estate (11,118) (30,630)
-------------- --------------
Net cash provided by (used in) investing activities 9,460,207 (2,592,775)
-------------- --------------
Cash flows from financing activities
Purchase of Units (294,139) (928,656)
Distributions paid (5,146,082) (4,701,143)
-------------- --------------
Net cash used in financing activities (5,440,221) (5,629,799)
-------------- --------------
Net increase (decrease) in cash and temporary cash investments 6,051,100 (5,937,545)
Cash and temporary cash investments at beginning of period 2,573,156 7,806,496
-------------- --------------
Cash and temporary cash investments at end of period $ 8,624,256 $ 1,868,951
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 631,286 $ 686,974
============== ==============
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
SEPTEMBER 30, 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
September 30, 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
SEPTEMBER 30, 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
September 30, 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
SEPTEMBER 30, 1996
(UNAUDITED)
K)New Accounting Pronouncement
On January 1, 1996, the Fund adopted Statement of Financial Accounting
Standards No. 121 (FAS 121) "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of". Among other things,
FAS 121 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 FAS 121 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 September 30, 1996, the total amortized cost, gross unrealized holding
gains and aggregate fair value of held-to-maturity securities were
$14,695,891, $561,431 and $15,257,322, respectively.
At September 30, 1996, the total amortized cost, gross unrealized holding
gains, gross unrealized holding losses and the aggregate fair value of
available-for-sale securities were $23,418,343, $450,892, $403,840 and
$23,465,395 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
SEPTEMBER 30, 1996
(UNAUDITED)
Descriptions of the Fund's mortgage-backed securities at September 30, 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 $ 6,400,340
Grand Villa Grand Junction, CO 46 9.25% 03/15/2029 1,993,750
Cambridge Court Kearney, NE 41 9.25% 02/15/2029 1,945,278
Hickory Villa Omaha, NE 57 9.25% 02/15/2029 2,518,453
Pools of single-family properties 9.58% (1) 2017 1,797,694
Pools of single-family properties 9.62% (1) 2016 to 2017 40,376
------------
14,695,891
------------
Available-for-Sale
GNMA Certificates:
Pools of single-family properties 8.56% (1) 2016 to 2020 2,852,880 (2)
Pools of single-family properties 9.30% (1) 07/15/2021 1,584,627 (2)
Pools of single-family properties 8.76% (1) 2021 902,457 (2)
Pools of single-family properties 8.76% (1) 05/15/2021 376,747 (2)
Pools of single-family properties 8.25% (1) 2021 to 2022 2,271,696 (2)
Pools of single-family properties 6.50% (1) 2023 4,091,191 (2)
Pools of single-family properties 6.03% (1) 2008 2,197,918 (2)
Pools of single-family properties 7.13% (1) 2009 6,317,139 (2)
FNMA Certificates:
Pools of single-family properties 5.52% (1) 2000 2,870,740 (2)
------------
23,465,395
------------
$ 38,161,286
============
(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 30,457
Deductions
Mortgage principal payments received (4,251,747)
Net change in unrealized holding gains (losses) on available-for-sale securities (720,664)
------------
Balance at September 30, 1996 $ 38,161,286
============
</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
SEPTEMBER 30, 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 September 30, 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
Grand Villa Grand Junction, CO Stazier Associates Grand Junction Ltd. 207,244
Cambridge Court Kearney, NE Stazier Associates Kearney Ltd. 121,780
The Parklane Salt Lake City, UT Congregate Care Company -
Hickory Villa Omaha, NE Stazier Associates Omaha Ltd. -
------------
1,216,412
Less valuation allowance (904,249)
------------
$ 312,163
============
Reconciliation of the carrying amount of the PEPs is as follows:
Balance at December 31, 1995 $ 1,279,785
Equity in earnings of property partnerships 206,224
Distributions received from PREPs (219,578)
Write off (1) (50,019)
------------
Balance at September 30, 1996 $ 1,216,412
============
The following summarizes the activity in the valuation allowance:
Balance at December 31, 1995 $ 954,268
Write off (1) (50,019)
------------
Balance at September 30, 1996 $ 904,249
============
</TABLE>
(1)Timber Cove Apartments was sold at a foreclosure auction effective
September 29, 1996. Therefore, the Fund no longer holds a PEP
investment in this property. The valuation allowance previously
established for the full amount of this PEP investment was written off.
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.
<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 6,013,074
------------
9,483,848
Less accumulated depreciation (3,046,893)
------------
$ 6,436,955
============
<PAGE> -9-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
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 11,118
Depreciation (243,027)
------------
Balance at September 30, 1996 $ 6,436,955
============
</TABLE>
7. Investment in Participating Loans
The Participating Loans are collateralized by first mortgages on properties
jointly financed with America First Apartment Investors, L.P., 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 September 30, 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
$66,394 ($24,595 for the quarter ended September 30, 1996)
8. Fund Reserve Account
The Fund maintains a reserve account which consisted of the following at
September 30, 1996:
Cash and temporary cash investments $ 8,181,451
GNMA Certificates 20,594,655
FNMA Certificates 2,870,740
--------------
$ 31,646,846
==============
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.
<PAGE> -10-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
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. Through
September 30, 1996, 196,730 Units (36,470 during 1996 and 16,720 during the
quarter ended September 30, 1996) had been acquired at a total cost of
$1,823,521 ($294,139 for 1996 and $131,920 for the quarter ended
September 30, 1996).
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 $541,051 ($134,175 for the
quarter ended September 30, 1996). 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 $178,618 ($59,284 for the quarter ended
September 30, 1996). Of this amount, $129,184 ($44,247 for the quarter ended
September 30, 1996) 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, Harmony Bay Apartments and
Meadow Brook Apartments (effective in September 1996). 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 $133,807 in 1996 ($47,755 for the
quarter ended September 30, 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 September 30, 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 collateralized 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. Additionally, effective
September 29, 1996, Timber Cove Apartments was sold at a foreclosure auction.
As a result of the foregoing, the Fund continues to hold four GNMA
Certificates, five 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 September 30, 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 94 100%
Grand Villa Grand Junction, CO 46 46 100%
Cambridge Court Kearney, NE 41 41 100%
Hickory Villa Omaha, NE 57 53 93%
Harmony Bay Apartments Roswell, GA 300 280 93%
Meadow Brook Apartments (1) Amelia, OH 168 153 91%
Morrowood Townhouses (1) Morrow, GA 264 254 96%
Avalon Ridge Renton, WA 356 321 90%
Jackson Park Place Fresno, CA 296 283 96%
--------- ---------- -----------
1,622 1,525 94%
========= ========== ===========
(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 Nine Months Ended For the Nine Months Ended
Sept. 30, 1996 Sept. 30, 1995
------------------------------- -------------------------------
Per Per
Per Unit Certificate Per Unit Certificate
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Regular monthly distributions
Income distributed $ .3988 $ 996.91 $ .4307 $ 1,076.84
Return of capital .3959 989.84 .3640 909.91
------------- ------------- ------------- -------------
$ .7947 $ 1,986.75 $ .7947 $ 1,986.75
============= ============= ============= =============
Distributions
Paid out of current and prior undistributed cash flow $ .7947 $ 1,986.75 $ .7947 $ 1,986.75
============= ============= ============= =============
</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 $1,970,074 ($707,003
for the quarter ended September 30, 1996) of undistributed mortgage principal
payments was placed in reserves. In addition, during the quarter ended
September 30, 1996, the Partnership withdrew $294,139 from reserves to
purchase 36,470 Exchangeable Units (Units). The total amount held in reserves
at September 30, 1996, was $31,646,846 of which $23,465,395 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 September 30, 1996,
required no adjustments to current carrying amounts.
Effective September 29, 1996, Timber Cove Apartments was sold at a foreclosure
auction. Therefore, the Fund no longer has a PEP investment in this
property. Since a valuation allowance had previously been established for the
full amount of this PEP investment, no additional loss to the Fund occurred as
a result of the foreclosure.
The overall status of the Fund's other Permanent Investments has remained
relatively constant since June 30, 1996.
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)
Sept. 30, 1996 Sept. 30, 1995 From 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Mortgage and mortgage-backed securities income $ 735,828 $ 847,493 $ (111,665)
Equity in earnings of property partnerships 84,125 15,175 68,950
Rental income 608,048 569,747 38,301
Interest income on participating loans 59,030 60,124 (1,094)
Interest income on temporary cash investments
and U.S. government securities 117,171 98,095 19,076
-------------- -------------- --------------
1,604,202 1,590,634 13,568
-------------- -------------- --------------
General and administrative expenses 222,849 216,344 6,505
Real estate operating expenses 288,652 152,493 136,159
Depreciation 81,009 118,750 (37,741)
Interest expense 238,387 298,504 (60,117)
-------------- -------------- --------------
830,897 786,091 44,806
-------------- -------------- --------------
Net income $ 773,305 $ 804,543 $ (31,238)
============== ============== ==============
</TABLE>
<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
<TABLE>
<CAPTION>
For the Nine For the Nine Increase
Months Ended Months Ended (Decrease)
Sept. 30, 1996 Sept. 30, 1995 From 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Mortgage and mortgage-backed securities income $ 2,298,465 $ 2,578,554 $ (280,089)
Equity in earnings of property partnerships 206,224 86,711 119,513
Rental income 1,788,012 1,702,636 85,376
Interest income on participating loans 184,481 190,891 (6,410)
Interest income on temporary cash investments
and U.S. government securities 324,938 303,340 21,598
-------------- -------------- --------------
4,802,120 4,862,132 (60,012)
-------------- -------------- --------------
General and administrative expenses 679,835 609,547 70,288
Real estate operating expenses 913,699 659,412 254,287
Depreciation 243,027 356,250 (113,223)
Interest expense 631,286 686,974 (55,688)
-------------- -------------- --------------
2,467,847 2,312,183 155,664
-------------- -------------- --------------
Net income $ 2,334,273 $ 2,549,949 $ (215,676)
============== ============== ==============
</TABLE>
The decrease in mortgage and mortgage-backed securities income for the quarter
and nine months ended September 30, 1996, compared to the same periods 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 and nine months ended
September 30, 1996, compared to the same periods in 1995, due primarily to
increases in earnings generated by Grand Villa, The Parklane and Cambridge
Court. These increases in earnings were due to increases in average occupancy
of these properties, particularly Grand Villa. Grand Villa's average
occupancy increased 25% and 20% for the quarter and nine months ended
September 30, 1996, respectively, compared to the same periods in 1995.
The decrease in interest income on Participating Loans for the quarter and
nine months ended September 30, 1996, compared to the same periods 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 $60,117
for the quarter and $55,688 for the nine months ended September 30, 1996,
compared to the same periods 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 utility
expenses which were partially offset by an increase in rental income resulting
from a slight 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.
<PAGE> -15-
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
Interest income on temporary cash investments increased for the quarter and
nine months ended September 30, 1996, compared to the same periods in 1995,
primarily due to an increase in reserve cash due to the continued amortization
of the principal balances of the mortgage-backed securities.
The increase in general and administrative expenses for the quarter ended
September 30, 1996, compared to the same period in 1995, was due to increases
in: (i) salaries and related expenses of approximately $4,000 and (ii) other
general and administrative expenses of approximately $2,500. The increase in
general and administrative expenses for the nine months ended
September 30, 1996, compared to the same period in 1995, is due to increases
in: (i) salaries and related expenses of approximately $65,000; (ii)
professional fees of approximately $14,000 and (iii) other general and
administrative expenses of approximately $18,000; offset by a decrease of
approximately $27,000 in administrative fees paid to the general partner due
to the property owners incurring more of such fees.
<PAGE> -16-
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> -17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 12, 1996 AMERICA FIRST PARTICIPATING/
PREFERRED EQUITY MORTGAGE FUND
LIMITED PARTNERSHIP
By America First Capital
Associates Limited
Partnership Three, General
Partner
By America First Companies L.L.C.,
General Partner
By /s/ Michael Thesing
Michael Thesing
Vice President, Secretary,
Treasurer and Chief Financial
Officer
Dated: November 12, 1996 AMERICA FIRST PARTICIPATING/
PREFERRED EQUITY MORTGAGE FUND
By America First Participating/
Preferred Equity Mortgage Fund
Limited Partnership
By America First Capital
Associates Limited
Partnership Three, General
Partner
By America First Companies L.L.C.,
General Partner
By /s/ Michael Thesing
Michael Thesing
Vice President, Secretary,
Treasurer and Chief Financial
Officer
<PAGE> -18-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 8,624,256
<SECURITIES> 38,161,286
<RECEIVABLES> 310,132
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,934,388
<PP&E> 9,483,848
<DEPRECIATION> (3,046,893)
<TOTAL-ASSETS> 60,646,956
<CURRENT-LIABILITIES> 777,464
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 50,254,732
<TOTAL-LIABILITY-AND-EQUITY> 60,646,956
<SALES> 0
<TOTAL-REVENUES> 4,802,120
<CGS> 0
<TOTAL-COSTS> 1,836,561
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 631,286
<INCOME-PRETAX> 2,334,273
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,334,273
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
