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AN IMPORTANT MESSAGE TO INVESTORS
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AMERICA FIRST TAX EXEMPT MORTGAGE FUND 2 L.P.
1004 FARNAM STREET
OMAHA, NEBRASKA 68102
800/283-2357
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JUNE , 1996
DEAR INVESTOR:
The general partner of America First Tax Exempt Mortgage Fund 2 Limited
Partnership (the "Fund") is seeking your consent to a restructuring of the Fund.
The proposed restructuring will allow the implementation of a new business
strategy which will seek to take advantage of existing tax-exempt bonds as a
source of low-cost financing to acquire additional apartment properties. By
doing so, the general partner hopes to be able to increase current cash
distributions and enhance the long-term value of your investment by making the
Fund's assets more attractive to potential portfolio buyers.
BACKGROUND
The Fund was formed in 1985 with the intent of providing regular distributions
of federally tax-exempt interest and the potential for an increasing tax-exempt
yield from a participation in the net cash flow and net sale proceeds from the
properties financed by the Fund. In the late 1980s, the overbuilding of
apartment complexes in the United States resulted in adverse conditions in many
of the markets in which the Fund's properties are located. As a consequence, the
Fund was forced to foreclose on a number of properties. In addition, the values
of the Fund's properties have fallen below the amount of the Fund's original
investment and the general partner believes that it is unlikely that the value
of these properties will increase enough to allow the Fund to fully recoup its
original investment in the bonds.
The foreclosures have also had adverse effects on the nature of the Fund's
income. The Fund receives net rental revenues from the foreclosed properties
rather than tax-exempt interest and, as a result, less than half of the Fund's
current distributions remain tax-exempt. Two of the Fund's remaining tax-exempt
bonds are also in default and the Fund accepts interest payments on these bonds
in amounts less than the base interest. This has caused the amount of net cash
flow available for distribution to BUC holders to be less than the amount
originally anticipated by the general partner and it is not expected to increase
significantly in the foreseeable future.
In the opinion of the general partner, the best way to address these issues is
to restructure the Fund so that it may acquire additional apartment properties
with monies generated through the refunding of existing tax-exempt bonds.
TAX-EXEMPT BOND -- A VALUABLE ASSET
Although the Fund has foreclosed on properties which were originally financed
with tax-exempt bonds, these bonds continue to have value that cannot be
utilized under the Fund's existing structure. If the Fund were restructured, the
bonds would represent a source of low-cost financing which could be accessed to
acquire additional properties for the Fund. By causing the bonds to be reissued
to new bond holders, monies can be borrowed at rates approximately 25% below
those available from conventional sources of debt. If the Fund is restructured
as the general partner proposes, it expects to generate approximately $70
million in this manner and use the monies to acquire between five and eight
additional apartment properties. The general partner will only acquire an
additional apartment complex if the property generates a positive spread between
the interest payments on the refunded
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bond and the net rental revenues generated by the acquired property. By
utilizing this source of low-cost financing, the general partner believes it can
generate additional cash flow for distribution to investors.
By acquiring additional properties, the general partner also hopes to increase
net asset value so that BUC holders will receive greater distributions upon the
eventual sale of the assets or upon liquidation. Moreover, the general partner
believes that it may be able to enhance the value of the Fund's assets by
selling certain existing properties that are inconsistent with the overall
make-up of the Fund's portfolio and reinvesting the proceeds of those sales to
acquire new properties which more closely fit into the Fund's portfolio.
PROPOSED RESTRUCTURING
Under the Fund's current structure, the general partner does not have clear
authority to reinvest the proceeds from bond refundings or from the sale of
existing properties and, therefore, does not have the ability to implement this
plan. Your vote for the proposal will give the general partner the ability to
implement the merger as outlined below and more completely defined in the
enclosed consent solicitation materials.
The proposed restructuring will result in the transfer of all of the Fund's
assets and liabilities to a newly-formed limited partnership which will have the
authority to borrow money by refunding the tax-exempt bonds and reinvest this
money in additional apartment properties. The name of the new limited
partnership will be America First Apartment Investors, L.P. (AFAI) which
reflects its focus on equity ownership of real estate, rather than tax-exempt
bonds. The restructuring will be accomplished through a merger of the Fund and
AFAI and, upon closing of the transaction, you will be issued one BUC in AFAI
for each BUC you held in the Fund as of May 31, 1996, which is the record date
established by Fund management. There will be no current tax ramifications to
you from the transaction.
Cash distributions are expected to continue to be made at the current rate after
the closing and are expected to increase over time as a result of the
restructuring; however, AFAI will not have as its investment objective the
generation of tax-exempt income. In addition, because of the introduction of
leverage, future cash distributions may be negatively impacted if there is a
significant downturn in cash flow from the properties. If the general partner is
able to successfully refund the bonds and acquire additional properties, it
expects to earn increased amounts of fees, and will share proportionately in
increased cash distributions paid to investors.
CONCLUSION
The general partner has considered other options to improve the current and
future value of the Fund and has concluded that the proposed restructuring
offers the best way to accomplish its goals. The board of directors believes
that the proposed restructuring is in the best interest of the Fund and its
investors and recommends that investors grant their consent by executing the
enclosed consent card and mailing it in the enclosed postage-paid envelope as
promptly as possible. INVESTORS SHOULD BASE THEIR DECISION TO CONSENT TO THE
PROPOSED RESTRUCTURING ON THE INFORMATION CONTAINED IN THE ACCOMPANYING CONSENT
SOLICITATION/PROSPECTUS. If you have any questions regarding the proposal,
please call our Investor Services Department at 800-283-2357.
[LOGO]
Michael B. Yanney
Chairman
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Following are questions you might have about the proposed restructuring of
America First Tax Exempt Mortgage Fund 2. If you have further questions, please
do not hesitate to call the America First Investor Service Center at
800-283-2357.
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Q: HOW WILL THE STRUCTURE OF THE FUND CHANGE?
A: When investors approve, America First Tax Exempt Fund 2 (the Fund) will merge
with a newly formed limited partnership to be known as America First Apartment
Investors, L.P. (AFAI). As a result, all of the assets and liabilities of the
Fund will be transferred to AFAI and you will receive one BUC in AFAI for each
BUC you held in the Fund on May 31, 1996. The general partner of the Fund will
become the general partner of AFAI. As a BUC holder of AFAI, you will be subject
to the terms of AFAI's limited partnership agreement which remains the same as
the Fund's in most respects.
Q: WHY ARE THE FUND'S ASSETS BEING TRANSFERRED TO AFAI?
A: AFAI, as an equity real estate fund, will have the ability to grow by taking
advantage of tax-exempt bond refinancings to acquire additional properties with
the goal of increasing cash distributions and enhancing asset value. AFAI will
have the ability to sell properties and reinvest the proceeds in additional
properties in order to create a more consistent portfolio of properties which
should be more attractive to potential portfolio buyers. The Fund's current
partnership agreement does not provide clear authority to take these actions.
The proposed transaction will provide Fund management with operating authority
that is consistent with the nature of the Fund's assets.
Q: WHY DOESN'T FUND MANAGEMENT RETURN THE FUND TO A TAX-EXEMPT STRUCTURE?
A: Fund management does not believe that this option represents the best way to
increase value for investors. In this option, the foreclosed properties would be
sold to third parties which would cause the tax-exempt bonds on these properties
to be reinstated, thereby returning the Fund to its original structure as a
tax-exempt bond fund. There are several reasons management does not believe this
is the best scenario for investors. First, the principal amount of the bonds
would have to be reduced to no more than the current market value of the
foreclosed properties. The amount of the bonds cannot be increased as the
underlying properties increase in value. Therefore, investors would lose the
ability to participate in any future increases in property values. Second, the
reissued bonds would bear interest at current tax-exempt interest rates which
are substantially below the original 8.5% base interest rate on the bonds and it
may be difficult to negotiate any type of contingent interest feature on these
bonds. As a result, investors would probably receive significantly less cash
flow than the Fund is currently generating. Finally, the Fund would lose the
day-to-day control over the operation of these properties.
Q. WHAT WILL HAPPEN IF THE FUND IS NOT RESTRUCTURED?
A. If there are no changes in the structure:
- The below-market interest rates available through the reissuance of the
tax-exempt bonds cannot be utilized by the Fund to increase the assets of the
Fund. Therefore, the bonds will not add to the value of the Fund assets as
they are expected to do if they are reissued. Since the tax-exempt bonds must
be redeemed in approximately two years, the Fund will soon lose the ability
to reissue the bonds and, therefore, will forfeit the value of these bonds to
the Fund.
- As bonds are redeemed, the underlying properties will be sold at prices which
are expected to be less than the principal amounts of the bonds. This will
result in a partial loss of the Fund's investment in these properties which
the Fund will have no ability to recover.
- The bonds in their current state, namely unrated, uninsured and
non-performing, could not be sold for their full principal amounts.
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- Cash distributions are not expected to increase above current levels, and
will decrease as remaining bonds are redeemed.
- Cash distributions, which are currently about 50% tax-exempt, are expected to
become all taxable as remaining bonds are redeemed.
Q: WHAT ARE THE ADVANTAGES TO INVESTORS OF VOTING FOR THE PROPOSAL?
A: The expected benefits to investors from the restructuring are:
- An increase in the cash available for distribution, a significant portion of
which will be sheltered from current federal income taxation by depreciation;
- A larger asset base with greater potential for appreciation in value;
- The ability of Fund management to actively manage the mix of the properties
in order to create a portfolio which is more attractive to potential purchasers.
Q: WHAT ARE THE POSSIBLE DISADVANTAGES TO INVESTORS IN VOTING FOR THE PROPOSAL?
A: Possible disadvantages to investors include:
- While interest received by the Fund on its bonds is exempt from federal
income tax, the rental revenues received by AFAI from owning equity interests in
apartment properties will be subject to federal income tax.
- AFAI will have the ability to use leverage to buy additional properties and,
if the new properties do not produce net rental revenues in the amounts expected
by the Fund management, AFAI may have to pay a portion of the debt service on
these borrowings with cash that would otherwise be available for
distribution.
- The limited partnership agreement of AFAI is different from the limited
partnership agreement of the Fund in some respects and certain of the
differences may be adverse to the BUC holders.
- There are alternatives to the proposal, including returning the Fund to a
tax-exempt mortgage bond fund. The general partner expects to realize greater
economic benefits if the transaction is completed than if any of the
alternatives are taken.
- The acquisition of additional properties by AFAI will entail the risks
generally involved with investing in real estate.
Q: WHAT ARE THE ADVANTAGES TO THE GENERAL PARTNER FROM THE PROPOSAL?
A: The general partner's fees will be paid at the same rates as it currently
receives from the Fund; however, the general partner will receive a property
acquisition fee if AFAI acquires additional properties and will receive greater
management fees as AFAI's assets increase. The general partner will also share
proportionately in increased cash distributions paid to investors.
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You should review the section entitled "Risk Factors" in the Consent
Solicitation Statement/ Prospectus which is included in the enclosed materials.
