UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-19244
Krupp Government Income Trust
(Exact name of registrant as specified in its charter)
Massachusetts 04-3089272
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Beacon Street, Boston, Massachusetts 02108
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (617) 523-0066
Securities registered pursuant to Section 12(b) of the Act:
Title Name of Exchange on which Registered
Shares of Beneficial Interest None
Securities registered pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
Aggregate market value of voting securities held by non-affiliates:
Not applicable.
Documents incorporated by reference: see Part IV, Item 14
The exhibit index is located on pages 13-21
<PAGE>
PART I
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those identified herein.
ITEM 1. BUSINESS
Krupp Government Income Trust (the "Trust") was formed on November 1, 1989
by filing a Declaration of Trust in the Commonwealth of Massachusetts. The
Trust is authorized to sell and issue not more than 17,510,000 shares of
beneficial interest ("the Shares"). The Trust raised approximately $300
million through a public offering of Shares of beneficial interest and used the
proceeds available for investment primarily to acquire participating insured
mortgages ("PIMs"), participating insured mortgage investments ("PIMIs"), and
mortgage-backed securities ("MBS"). The Trust considers itself to be engaged
in only one industry segment, investment in mortgages. The Trust has elected
to be treated as a real estate investment trust (AREIT@) under the Internal
Revenue Code of 1986, as amended. The Trust shall terminate on December 31,
2029, unless earlier terminated by the affirmative vote of holders of a
majority of the outstanding Shares entitled to vote thereon.
The Trust's investments in PIMs on multi-family residential properties
consist of 1) a MBS or an insured mortgage loan (collectively, the "insured
mortgage") guaranteed or insured as to principal and basic interest and 2) a
participating mortgage. The insured mortgages were issued or originated under
or in connection with the housing programs of Fannie Mae, the Government
National Mortgage Association ("GNMA"), or the Federal Housing Administration
("FHA") under the authority of the Department of Housing and Urban Development
("HUD"). PIMs provide the Trust with monthly payments of principal and
basic interest and may also provide for Trust participation in the current
revenue stream and in residual value, if any, from a sale or other realization
of the underlying property. The borrower conveys the participation rights to
the Trust through a subordinated promissory note and mortgage. The
participation features are neither insured nor guaranteed.
The PIMIs consist of 1) an insured mortgage issued by GNMA or originated
under the lending program of the FHA, 2) an additional loan ("Additional Loan")
to the borrower or owners of the borrower in excess of mortgage amounts insured
under GNMA or FHA programs that increases the Trust's total financing with
respect to that property and its participation interests and 3) a participating
mortgage. Additional Loans associated with an insured mortgage issued or
originated in connection with HUD insured programs cannot, under government
regulations, be collateralized by a mortgage on the underlying property.
These Additional Loans are typically collateralized by a security interest
satisfactory to Berkshire Mortgage Advisors Limited Partnership ("the
Advisor"). The Additional Loans are neither insured nor guaranteed. In
addition, the participation features related to the participating mortgage
are neither insured nor guaranteed. Additional Loans provide the Trust with
semi-annual interest payments and may provide additional interest in the future
while the participating mortgage provides for Trust participation in the net
income and residual value, if any, of the underlying property.
The Trust also acquired MBS collateralized by single-family and multi-family
mortgage loans issued or originated by GNMA, Fannie Mae, the Federal Home
Loan Mortgage Corporation ("FHLMC") or FHA. Fannie Mae and FHLMC guarantee
the principal and basic interest of the Fannie Mae and FHLMC MBS, respectively.
GNMA guarantees the timely payment of principal and interest on its MBS, and
HUD insures the pooled mortgage loans underlying the GNMA MBS and FHA mortgage
loans. The Trust will distribute all proceeds from prepayments or other
realizations of mortgage assets to investors either through quarterly dividends
or possibly special dividends.
Although the Trust will terminate no later than December 31, 2029, the value
of the PIMs and PIMIs may be realized by the Trust through repayment or sale
as early as ten years from the dates of the closings of the permanent loans,
and the Trust may realize the value of all of its other investments within
that time frame thereby resulting in a dissolution of the Trust significantly
prior to December 31, 2029.
The Trust's investments are not expected to be subject to seasonal
fluctuations, although net income may vary somewhat from quarter to quarter
based upon the participation features of its investments. The requirements
for compliance with federal, state and local regulations to date have not
adversely affected the Trust's operations, and the Trust anticipates no
adverse effect in the future.
To qualify as a real estate investment trust ("REIT") for federal income tax
purposes, the Trust made a valid election to be so treated and must continue to
satisfy a range of complex requirements including criteria related to its
ownership structure, the nature of its assets, the sources of its income and
the amount of its dividends to shareholders. The Trust intends to qualify as a
REIT in each year of operation, however, certain factors may have an adverse
effect on the Trust's REIT status. If for any taxable year, the Trustees
and the Advisor determine that any of the asset, income, or distribution tests
are not likely to be satisfied, the Trust may be required to borrow money,
dispose of mortgages or take other action to avoid loss of REIT status.
Additionally, if the Trust does not qualify as a REIT for any taxable
year, it will be subject to federal income tax as if it were a corporation and
the shareholders will be taxed as shareholders of a corporation. If the
Trust were taxed as a corporation, the payment of such tax by the Trust would
substantially reduce the funds available for dividends to shareholders or for
reinvestment. To the extent that dividends had been made in anticipation of the
Trust's qualification as a REIT, the Trust might be required to borrow
additional funds or to liquidate certain of its investments in order to pay the
applicable tax. Moreover, should the Trust's election to be taxed as a REIT be
terminated or voluntarily revoked, the Trust may not be able to elect to be
treated as a REIT for the following five-year period.
As of December 31, 1998, there were no personnel directly employed by the
Trust.
ITEM 2. PROPERTIES
None.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Trust is
a party or to which any of its investments are subject to.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There currently is no established public trading market for the Shares.
The number of investors holding Shares as of December 31, 1998 is
approximately 13,200.
The Trust has and intends to continue declaring and paying dividends on
a quarterly basis. The Trustees established a dividend rate per Share per
quarter of $.325 for 1998 and 1997.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information regarding
the Trust's financial position and operating results. This information
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Financial Statements and
Supplementary Data, which are included in Item 7 and Item 8 (Appendix A) of
this report, respectively.
<TABLE>
<CAPTION>
(Amounts in thousands, except for per Share amounts)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Total revenues $ 21,922 $ 17,618 $ 16,358 $ 17,200 $ 16,846
Net income $ 14,836 $ 12,899 $ 12,481 $ 13,022 $ 12,599
Net income per Share $ .99 $ .86 $ .83 $ .87 $ .84
Weighted average Shares
outstanding 15,053 15,053 15,053 15,053 15,053
Total assets at
December 31 $171,422 $221,779 $241,634 $247,620 $251,333
Average dividends
per Share $ 4.16 $ 2.22 $ 1.30 $ 1.30 $ 1.30
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Actual results could differ materially from those projected
in the forward-looking statements as a result of a number of factors, including
those identified herein.
The Advisor of the Trust has conducted an assessment of the Trust's core
internal and external computer information systems and has taken the further
necessary steps to understand the nature and extent of the work required to
make its systems Year 2000 ready in those situations in which it is required
to do so. The Year 2000 readiness issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after 1999.
This could result in a system failure or miscalculations causing disruptions of
operations. The Year 2000 issue affects virtually all companies and all
organizations.
In this regard, the Advisor of the Trust, along with certain affiliates, began
a computer systems project in 1997 to significantly upgrade its existing
hardware and software. The Advisor completed the testing and conversion of the
financial accounting operating systems in February 1998. As a result, the
Advisor has generated operating efficiencies and believes its financial
accounting operating systems are Year 2000 ready. The Advisor of the Trust
incurred hardware costs as well as consulting and other expenses related
to the infrastructure and facilities enhancements necessary to complete
the upgrade and prepare for the Year 2000. There are no other significant
internal systems or software that the Trust is using at the present time.
The Advisor of the Trust is in the process of evaluating the potential adverse
impact that could result from the failure of material third-party service
providers (including but not limited to its banks and telecommunications
providers) and significant vendors to be Year 2000 ready. The Trust is in
the process of surveying these third party providers and assessing their
readiness with year 2000. To date, the Trust is not aware of any problems that
would materially impact its results of operations, liquidity or capital
resources. However, the Trust has not yet obtained all written assurances that
these providers would be Year 2000, ready.
The Trust currently does not have a contingency plan in the event of a
particular provider or system not being Year 2000 ready. Such plan will be
developed if it becomes clear that a provider is not going to achieve its
scheduled readiness objectives by June 30, 1999. The inability of one of these
providers to complete its Year 2000 resolution process could impact the Trust.
In addition, the Trust is also subject to external forces that might generally
affect industry and commerce, such as utility and transportation company Year
2000 readiness failures and related service interruptions. To date, The Trust
has not incurred any cost associated with being Year 2000 ready. All costs
have been incurred by the Advisor and it is estimated that any future Year
2000 readiness costs will be borne by the Advisor. No estimate can be made
at this time as to the impact of the readiness of such third parties.
Liquidity and Capital Resources
At December 31, 1998 the Trust had significant liquidity consisting of cash and
cash equivalents of approximately $9 million as well as the cash inflows
provided by its investment in the PIMs, PIMIs and MBS. The Trust
anticipates that these sources will be adequate to provide the Trust with
sufficient liquidity to meet its
obligations as well as to provide dividends to its investors.
The most significant demand on the Trust's liquidity is dividends paid to
investors, approximately $4.9 million per quarter. The Trust currently has an
annual dividend rate of $1.30 per share, paid in quarterly installments of
$.325 per share. Funds for the dividends distributed by the Trust come from
the principal and interest payments on the PIMs, PIMIs and MBS, the principal
prepayments of the PIMs, PIMIs and MBS, and the interest earned on the Trust's
cash and cash equivalents. The portion of dividends attributable to the
principal collected from those payments reduces the capital resources of the
Trust. As the capital resources of the Trust decrease, the total cash flows
to the Trust also will decrease and over time may result in periodic adjustments
to the dividends paid to investors.
Seven of the Trust's PIMIs funded the construction of multifamily housing,
which requires time to achieve stabilized operations following the completion
of the construction. With this in mind, the Trust required those borrowers to
escrow a portion of the Additional Loan proceeds in reserves so funds would
be available for the PIMI Base Interest payments during the construction and
lease-up periods. As these reserves become depleted, full payment of the
Additional Loan interest becomes primarily dependent on whether the underlying
properties generate sufficient operating cash flow to make such payments.
Three properties with Additional Loans, Audubon Villas, Park Highlands and
The Seasons made the scheduled 1998 Additional Loan interest payments with
operating cash flow. Two others, Lifestyles and Windward Lakes, operated
under workout agreements with the Trust during 1998 that require Additional
Loan interest payments only if surplus cash is generated through property
operations after servicing the insured first mortgage. Lifestyles did not
generate any surplus cash during 1998 and consequently did not make any
Additional Loan interest payments. Windward Lakes generated some surplus cash
and made a partial Additional Loan interest payment during 1998 that the Trust
has recognized as deferred income. Mountain View did not generate surplus
cash during 1998, and its borrower funded one partial Additional Loan
interest payment during 1998; the remaining payment remains outstanding
while a workout is negotiated. Red Run generated some surplus cash during
1998, which funded a portion of the Additional Loan interest payment; the
balance was funded with reserves held in escrow by the Trust. Only Red Run
still has adequate reserves held in escrow by the Trust to make the scheduled
1999 Additional Loan interest payments if property cash flow is insufficient.
Additional Loan interest payments due from the Trust's other PIMI investments
will depend on those properties' ability to generate operating cash flow.
The Trust also could receive additional income through its participation
interest in either the underlying properties' cash flow generated by
operations, over and above operating and capital requirements and any
Additional Loan interest payment obligation, or any appreciation in value
realized at the time of a sale or refinance. However, this participation
interest is dependent upon whether property operations meet certain criteria.
During 1998, the property operating results of three of the Trust's PIM
investments and one of the Trust's PIMI investments exceeded the thresholds
established by that criteria and paid the Trust participation income: Lincoln
Green, $91,410; Riverview, $66,133; Waterford Townhomes, $44,860; and The
Seasons, $93,457. The payment received from The Season was after it paid its
Additional Loan interest. As a result of continuing strong operating
performance in 1998, the Advisor expects that the same four properties will pay
participation interest to the Trust again in 1999.
Many of the properties had stable operating results during 1998. High
occupancy rates were maintained and moderate rental rate increases were
achieved at more than half of the properties due to stable or improving
markets or the unique character of the specific property. Occupancy at Red
Run was consistently in the high 90% range throughout 1998. The appeal of the
New Town submarket of Owings Mills, Maryland contributes to Red Run's strong
performance despite increased competition from other newly built apartment
communities. Audubon Villas 90% occupancy has lagged somewhat behind the rest
of the Pinellas County, Florida market, but the property has still been able
to service its Additional Loan interest obligations. Windward Lakes
successfully completed 1998 by generating $45,623 of surplus cash that was
paid to the Trust as Additional Loan interest under its workout agreement.
Occupancy at year-end was in the 95% range.
Occupancy and operating results for four other properties are being closely
monitored by the Advisor and warrant mention. Rivergreens and Mill Pond, while
generating sufficient operating revenues to service debt obligations and
adequately maintain the properties, experienced drops in occupancy during
1998. Rivergreens is located in a submarket that typically lags behind the
rest of the Portland, Oregon market, which has been affected by the Asian
financial crisis and Boeing's downsizing. Compounding the adverse effects of
the general market, two fires at the property took a number of apartments out
of service. While reconstruction is now complete, releasing the apartments
in a soft market may take an extended period of time. Occupancy at year-end
was in the low 80% range. Mill Pond, located in Dayton, Ohio, also has
experienced the effects of a soft market created by new multifamily
construction, which creates more competition, and continuing low interest rates,
which shrinks the population of potential renters. Occupancy at year-end was in
the 90% range.
The operating results of Lifestyles and Mountain View declined more seriously
during 1998. Lifestyles operated under a two-year workout agreement with the
Trust through the end of 1997 and in December 1998 the Trust entered into a new
workout agreement. Due to increased vacancy caused by competition from new
properties and a general deterioration in the property's appearance, Lifestyles
was not able to generate sufficient revenues to maintain the property and
service the higher interest rate on the insured first mortgage after the
workout expired. Consequently, the borrower on the Lifestyles PIMI
defaulted on its May 1, 1998 debt service payment on the insured first mortgage.
The Trust agreed to reduce the effective interest rate on the insured first
mortgage by 1.75% retroactively for 1998 to clear the default, by 1.75% for
1999, and by 1.5% each year thereafter until the property is sold or refinanced.
The borrower made a $550,000 equity contribution, which has been escrowed for
the exclusive purpose of correcting deferred maintenance and making capital
improvements to the property. Any surplus cash that is generated by property
operations will be split evenly between the Trust and the borrower. When the
property is sold or refinanced, the first $1,100,000 of any proceeds remaining
after the insured first mortgage is paid off will be split 50% / 50%; the next
$1,690,220 of proceeds will be split 75% to the Trust and 25% to the borrower;
and any remaining proceeds will be split 50% / 50% between the Trust and the
borrower. The borrower's new equity and the reduction in the effective
interest rate on the insured first mortgage will provide funds for repairs and
improvements that should help reposition Lifestyles so it can compete more
effectively for residents and rental rates. As a result of the factors
described above, in December 1998, management determined that the additional
loan collateralized by the Lifestyles asset was impaired. As a result the
Trust recorded a valuation allowance of $1,130,346 in the fourth quarter of
1998.
Mountain View is similar to Lifestyles with respect to competitive market
conditions. Mountain View operated under an 18-month workout agreement with
the Trust during 1995 and 1996. The major components of that workout had been
a 1/2% per annum reduction in the interest rate on the insured first
mortgage and the waiver of four Additional Loan interest payments. That
workout helped stabilize the property during a down economic cycle in
Huntsville. However, the improving economy over the past 18 to 24 months
combined with low interest rates and abundant capital sources caused a flood
of both single-family and new apartment construction. Consequently, occupancy
and rental rates fell dramatically during 1998 as competition increased. The
property is just breaking even on the insured first mortgage debt obligation
but has not generated surplus cash to service the Additional Loan interest.
Contractually, the borrower must fund one-half of any shortfalls in the PIMI
Base Interest. The borrower met this obligation with respect to the first
payment that was due during 1998 and subsequently asked the Advisor to provide
long-term debt service relief. The second payment that was due during 1998
remains outstanding while the Advisor continues to negotiate a loan
modification to provide additional debt service relief until the market
stabilizes again. As a result of the factors described above, in October
1998, management determined that the additional loan collateralized by the
Mountain View asset was impaired. As a result the Trust recorded a valuation
allowance of $984,000 in the fourth quarter of 1998.
Whether the operating performance at any of the properties mentioned above
provide sufficient cash flow from operations to pay either the Additional
Loan interest or participation interest will depend on factors that the Trust
has little or no control over. Should the properties be unable to generate
sufficient cash flow to pay the Additional Loan interest, it would reduce the
Trust's distributable cash flow and could affect the value of the Additional
Loan collateral.
There are contractual restrictions on the repayment of the PIMs and PIMIs.
During the first five years of the investment, borrowers are prohibited from
repayment. During the second five years, the PIM borrowers can prepay the
insured first mortgage by paying the greater of a prepayment penalty or the
participation interest due at the time of the prepayment. Similarly, the
PIMI borrowers can prepay the insured first mortgage and the Additional Loan
by satisfying the Preferred Return obligation. The participation features
and Additional Loans are neither insured nor guaranteed. If the prepayment
of the PIM or PIMI results from the foreclosure on the underlying property
or an insurance claim, the Trust would probably not receive any participation
interest or any amounts due under the Additional Loan.
During 1998, the Trust received the prepayment of two of its PIMI investments
and was notified by the borrower of another PIMI of its intention to prepay its
loans during 1999. During the third quarter 1998, the Trust received a
prepayment of the Park Highlands PIMI when the property was sold. This
prepayment occurred prior to the expiration of the five-year prohibition.
However, the Advisor agreed to allow the transaction to be completed while
market conditions were favorable in return for an additional prepayment penalty.
The Trust received the prepayment of the principal balance of the insured first
mortgage, $16,752,295, the principal balance of the Additional Loan,
$3,000,000, the Additional Loan interest due at the time of the prepayment,
$57,945, and the prepayment penalty for the early payoff, $479,476. In
addition, the Trust received participation interest comprised of the outstanding
Preferred Return on the Trust investment, $1,481,865, and the Trust's share in
the increase in the value of the underlying property, $1,206,719.
Also during the third quarter of 1998, the Trust received a prepayment of the
Coconut Palm Club PIMI. This transaction was the result of a sale of the
underlying property as well, although the Trust received less than its full
Preferred Return. The Advisor agreed to allow the transaction because the
purchase price was judged to be favorable in light of the highly competitive
rental market in Broward County, Florida. In addition, without the sale it was
likely that the Advisor would have agreed to a loan restructure with the
borrower rather than expose the Trust to the uncertainty of a probable default.
The Trust received the prepayment of the principal balance of the insured first
mortgage, $15,851,211, the principal balance of the Additional Loan, $2,850,900,
and the Additional Loan interest due at the time of the repayment, $89,090.
In addition, the Trust received participation interest of $1,419,116 towards
the Preferred Return.
The Trust paid a special dividend on September 9, 1998 of $2.86 per share
from the prepayment proceeds of the Park Highlands and Coconut Palm Club PIMIs.
The borrower on the Audubon Villas PIMI informed the Trust of its intention to
prepay the insured first mortgage and the Additional Loan during 1999. An
appraisal of the underlying property was completed during the fourth quarter
1998 to determine its value for the purpose of calculating the participation
interest that would be due when the PIMI is prepaid. The borrower has questioned
the Advisor's interpretation of some of the prepayment provisions in the loan
documents, and the timing of the prepayment will depend on a satisfactory
resolution of the dispute.
The Trust has the option to call certain PIMs and all the PIMIs by accelerating
their maturity if the loans are not prepaid by the tenth year after permanent
funding. The Advisor will determine the merits of exercising the call option
for each PIM and PIMI as economic conditions warrant. Such factors as the
condition of the asset, local market conditions, the interest rate environment
and available financing will have an impact on these decisions.
Assessment of Credit Risk
The Trust's investments in insured mortgages and MBS are guaranteed or insured
by Fannie Mae, FHLMC, GNMA and HUD and therefore the certainty of their cash
flows and the risk of material loss of the amounts invested depends on the
creditworthiness of these entities.
Fannie Mae is a federally chartered private corporation that guarantees
obligations originated under its programs. FHLMC is a federally chartered
corporation that guarantees obligations originated under its programs and is
wholly-owned by the twelve Federal Home Loan Banks. These obligations are not
guaranteed by the U.S. Government or the Federal Home Loan Bank Board. GNMA
guarantees the full and timely payment of principal and basic interest on
the securities it issues, which represents interest in pooled mortgages
insured by HUD. Obligations insured by HUD, an agency of the U.S. Government,
are backed by the full faith and credit of the U.S. Government.
The Trust's Additional Loans have similar risks as those associated with
higher risk debt instruments, including: reliance on the owner's operating
skills, ability to maintain occupancy levels, control operating expenses,
ability to maintain the properties and obtain adequate insurance coverage;
adverse changes in general economic conditions, adverse local conditions, and
changes in governmental regulations, real estate zoning laws, or tax laws; and
other circumstances over which the Trust may have little or no control.
The Trust includes in cash and cash equivalents approximately $8.7 million
of commercial paper, which is issued by entities with a credit rating equal
to one of the top two rating categories of a nationally recognized statistical
rating organization.
Operations
The following discussion relates to the operations of the Trust during the
years ended December 31, 1998, 1997 and 1996. Dollars are stated in thousands,
except for per Share amounts.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
Per Per Per
Amount Share Amount Share Amount Share
Interest income on PIMs
and PIMIs:
<S> <C> <C> <C> <C> <C> <C>
Basic Interest $10,636 $ .71 $12,181 $ .81 $12,808 $ .86
Additional Loan interest 3,081 .20 794 .05 - -
Participation income 5,094 .34 1,385 .09 359 .02
Interest income on MBS 1,930 .13 2,199 .15 2,306 .15
Interest income on cash
and cash equivalents 1,181 .08 1,059 .07 886 .06
Trust expenses (1,973) (.13) (2,313) (.15) (2,264) (.15)
Amortization of prepaid
fees and expenses (2,999) (.20) (2,406) (.16) (1,614) (.11)
Provision for impaired
mortgage loans (2,114) (.14) - - - -
Net income $14,836 $ .99 $12,899 $ .86 $12,481 $ .83
Weighted average
Shares outstanding 15,053,13 515,053,135 15,053,135
</TABLE>
The net income of the Trust for 1998 increased as compared to 1997 and 1996.
During the three years in the periods ended December 31, 1998 the Trust's
operations have experienced changes in the mix of interest income as the Trust
has had prepayments in its PIMs and PIMIs in 1998, 1997 and 1996. These
prepayments have reduced the basic interest on PIMs and PIMIs, but there has
been an increase in participation income and Additional Loan interest.
The Trust's net income for 1998 increased by approximately $1,937,000 when
compared to 1997 due primarily to higher Participation income and Additional
Loan interest caused by the prepayments of Coconut Palm and Park Highlands.
This was somewhat offset by the Trust recording a provision for impaired
mortgage loans related to Lifestyles and Mountain View and lower basic interest.
The Trust received $1,419,000 from Coconut Palm Club and $3,168,000 from Park
Highlands for Participation Interest and the Trust recognized all of the
previously deferred Additional Loan interest of $1,290,000 from Coconut Palm
Club and $1,295,000 from Park Highlands as Additional Loan interest income.
The Trust also received participation income from Park Highlands, The Seasons
PIMI, the Lincoln Green, Riverview and Waterford PIMs of $212,000, $93,000,
$91,000, $66,000 and $45,000, respectively. Other interest income increased
$122,000 due primarily to the Trust having higher short-term investment balances
during 1998 when compared to 1997. These increases were offset by the
recording of a $2,114,000 provision for impaired loans as mentioned above. The
Trust saw a decline in expense reimbursements in 1998 due to a rebate for
expense reimbursements related to 1997 received in 1998. Basic interest
decreased $1,545,000 and asset management fees decreased $199,000 in 1998
primarily as a result of the Coconut Palm and Park Highland PIMI prepayments.
Interest income on MBS will continue to decline as principal collections reduce
the outstanding balance of the MBS portfolio. The increase in amortization
expense is because the Trust fully amortized the remaining balances of prepaid
fees and expenses associated with the Park Highlands and Coconut Palm Club
PIMI's.
The Trust's net income for 1997 increased by approximately $418,000 when
compared to 1996. This increase resulted from higher participation income,
Additional Loan interest income and other interest income of approximately
$1,026,000, $794,000 and $173,000, respectively, net of lower basic interest
income on PIMs and interest income on MBS of approximately $627,000 and 107,000,
respectively and increases in amortization expense and Trust expenses of
$792,000 and $49,000, respectively. The increase in participation income and
additional loan interest income are primarily related to the Timber Ridge
PIMI. The Trust received $1,246,000 of participation interest upon early
prepayment of the PIMI. The Trust also received participation income from the
Lincoln Green PIM, The Seasons PIMI and the Riverview PIM of $102,000,
$33,000 and $4,000, respectively. Interest income on cash and cash
equivalents increased as a result of short-term investments made with the
proceeds from the Canyon Ridge and Timber Ridge prepayments prior to the special
distribution made in the third quarter. Basic interest decreased as a result
of the repayment of the Timber Ridge PIMI during the first quarter of 1997, the
repayment of the Canyon Ridge PIM during the second quarter of 1996 and the
interest rate reduction given to Windward Lakes Apartments. Interest income
on MBS will continue to decline as principal collections reduce the outstanding
balance of the MBS portfolio. Amortization expenses increased for 1997 as
compared to 1996 due primarily to the Trust fully amortizing the prepaid
acquisition and servicing fees associated with Canyon Ridge Apartments PIM
and Timber Ridge Apartments PIMI.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Appendix A to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information as to the Trustees and Executive Officers of Krupp Government
Income Trust is as follows:
Position with Krupp
Name and Age Government Income Trust
Douglas Krupp (52) Chairman of Board of Trustees and Trustee
* Charles N. Goldberg (57) Trustee
* E. Robert Roskind (54) Trustee
* J. Paul Finnegan (74) Trustee
Robert A. Barrows (41) Treasurer
Scott D. Spelfogel (38) Clerk
Kristin L. Hicks (32) Assistant Clerk
* Independent Trustee
Douglas Krupp co-founded and serves as Co-Chairman and Chief Executive
Officer of The Berkshire Group, an integrated real estate financial services
firm engaged in real estate acquisition and property management, mortgage
banking and financial management. The Berkshire Group's interests include
ownership of a mortgage company specializing in commercial mortgage financing
with a portfolio of approximately $6.0 billion. In addition, The Berkshire
Group has a significant ownership interest in Berkshire Realty Company, Inc.
(NYSE-BRI), a real estate investment trust specializing in apartment
investments. Mr. Krupp has held the position of Co-Chairman since The
Berkshire Group was established as The Krupp Companies in 1969 and he has
served as the Chief Executive Officer since 1992. Mr. Krupp serves as
Chairman of the Board and Director of Berkshire Realty Company, Inc.
(NYSE-BRI) and he is also a member of the Board of Trustees at Brigham & Women's
Hospital. He is a graduate of Bryant College where he received an honorary
Doctor of Science in Business Administration in 1989 and was elected trustee
in 1990. Mr. Krupp also serves as Chairman of the Board and Trustee of
Krupp Government Income Trust II.
Charles N. Goldberg is of counsel to the law firm of Broocks, Baker & Lange,
L.L.P., which position he has held since December of 1997. Prior to joining
Broocks, Baker & Lange, L.L.P., Mr. Goldberg was a partner in the law firm of
Hirsch & Westheimer from March of 1996 to December of 1997. Prior to Hirsch &
Westheimer, he was the Managing Partner of Goldberg Brown, Attorneys at Law
from 1980 to March of 1996. He received a B.B.A. degree and a J.D. degree from
the University of Texas. He is a member of the State Bar of Texas and is
admitted to practice before the U.S. Court of Appeals, Fifth Circuit and
U.S. District Court, Southern District of Texas. He currently serves as a
Trustee of Krupp Government Income Trust II and a director of Berkshire
Realty Company, Inc. (NYSE-BRI). He received a B.B.A. degree and a J.D.
degree from the University of Texas. He is a member of the State Bar of Texas
and is admitted to practice before the U.S. Court of Appeals, Fifth
Circuit and U.S. District Court, Southern District of Texas.
E. Robert Roskind is the Chairman and Co-Chief Executive Officer of
Lexington Corporate Properties, a self-administered REIT, the shares of
which are listed on the NYSE. Mr. Roskind has served in this capacity since
October of 1993. Mr. Roskind is also the Managing Partner of The LCP Group,
a real estate investment firm based in New York, the predecessor of which he
co-founded in 1974. He holds a B.A. degree from the University of Pennsylvania
and a J.D. degree from Columbia Law School. He has been a member of the New
York Bar since 1970. He currently serves as a Trustee of Krupp Government
Income Trust II. He is also currently a director of Berkshire Realty Company,
Inc. (NYSE-BRI), as well as Chairman of the Board of Trustees of Lexington
Corporate Properties. Mr. Roskind holds a B.A. degree from the University of
Pennsylvania and a J.D. degree from Columbia Law School. He has been a member
of the New York Bar since 1970.
J. Paul Finnegan retired as a partner of Coopers & Lybrand in 1987.
Since then, he has been engaged in business as a consultant, a director and
arbitrator. Mr. Finnegan holds a B.A. degree from Harvard College, a J.D.
degree from Boston College Law School and an ASA from Bentley College. He is
also currently a director at Scituate Federal Savings Bank. Mr. Finnegan is
a Certified Public Accountant and an attorney. Mr. Finnegan currently serves
as a Trustee of Krupp Government Income Trust II and a director at Scituate
Federal Savings Bank and a director of Berkshire Realty Company, Inc.(NYSE-BRI).
Mr. Finnegan is a Certified Public Accountant and an attorney.
Robert A. Barrows is the Treasurer of the Trust and is Senior Vice President
and Chief Financial Officer of Berkshire Mortgage Finance. Mr. Barrows has
held several positions within The Berkshire Group since joining the company in
1983 and is currently responsible for accounting, financial reporting,
treasury and management information systems for Berkshire Mortgage Finance.
Prior to joining The Berkshire Group, he was an audit supervisor for Coopers
& Lybrand L.L.P. in Boston. He received a B.S. degree from Boston College
and is a Certified Public Accountant.
Scott D. Spelfogel is the Clerk of the Trust and is Senior Vice President
and General Counsel to The Berkshire Group. Prior to 1997, he served as Vice
President and Assistant General Counsel. Before joining the firm in November
1988, he was a litigator in private practice in Boston. He received a
Bachelor of Science degree in Business Administration from Boston University,
a Juris Doctor Degree from Syracuse University's College of Law, and a
Master of Laws degree in Taxation from Boston University Law School. He is
admitted to practice law in Massachusetts and New York, is a member of the
American, Boston, Massachusetts and New York State bar associations and is a
licensed real estate broker in Massachusetts.
Kristin L. Hicks is the Assistant Clerk of the Trust and is Assistant General
Counsel to The Berkshire Group. Prior to 1999, she served as Staff Attorney
for The Berkshire Group beginning in September 1997, and prior to that
position, she was the manager of the transfer department for Krupp Funds Group
from May of 1992 through September of 1997. She received a B.A. degree from
Northeastern University in 1989 and a J.D. degree from the Suffolk University
Law School in 1995. She is admitted to practice law in Massachusetts and is a
member of the American, Massachusetts and Boston bar associations.
In addition, the following are deemed to be Executive Officers of the
registrant:
George Krupp (age 54) is the Co-Founder and Co-Chairman of The Berkshire
Group, an integrated real estate financial services firm engaged in real
estate acquisition and property management, mortgage banking and financial
management. The Berkshire Group's interests include ownership of a mortgage
company specializing in commercial mortgage financing with a portfolio of
approximately $6.0 billion. In addition, The Berkshire Group has a significant
ownership interest in Berkshire Realty Company, Inc. (NYSE-BRI), a real estate
investment trust specializing in apartment investments. Mr. Krupp has held the
position of Co-Chairman since The Berkshire Group was established as The Krupp
Companies in 1969. Mr. Krupp has been an instructor of history at the New
Jewish High School in Waltham, Massachusetts since December of 1997. Mr. Krupp
attended the University of Pennsylvania and Harvard University and holds a
Master's Degree in History from Brown University.
Peter F. Donovan (age 45) is Chief Executive Officer of Berkshire Mortgage
Finance which position he has held since January of 1998 and in this capacity,
he oversees the strategic growth plans of this mortgage banking firm.
Berkshire Mortgage Finance is the 16th largest in the United States based
on servicing and asset management of a $5.7 billion loan portfolio.
Previously he served as President of Berkshire Mortgage Finance from January
of 1993 to January of 1998 and in that capacity he directed the production,
underwriting, servicing and asset management activities of the firm. Prior to
that, he was Senior Vice President of Berkshire Mortgage Finance and was
responsible for all participating mortgage originations. Before joining the
firm in 1984, he was Second Vice President, Real Estate Finance for Continental
Illinois National Bank & Trust, where he managed a $300 million construction
loan portfolio of commercial properties. Mr. Donovan received a B.A. from
Trinity College and an M.B.A. degree from Northwestern University.
Ronald Halpern (age 57) is President and COO of Berkshire Mortgage
Finance. He has served in these positions since January of 1998 and in this
capacity, he is responsible for the overall operations of the Company.
Prior to January of 1998, he was Executive Vice President, managing the
underwriting, closing, portfolio management and servicing departments for
Berkshire Mortgage Finance. Before joining the firm in 1987, he held senior
management positions with the Department of Housing and Urban Development in
Washington D.C. and several HUD regional offices. Mr. Halpern has over 30
years of experience in real estate finance. He is currently a member of
the Advisory Council for Fannie Mae and Freddie Mac and was prior Chairman
of the MBA Multifamily Housing Committee. He holds a B.A. degree from the
University of the City of New York and J.D. degree from Brooklyn Law School.
Carol J.C. Mills (age 49) is Senior Vice President for Loan Management of
Berkshire Mortgage Finance and in this capacity, she is responsible for the
Loan Servicing and Asset Management functions of the Boston, Bethesda and
Seattle offices of Berkshire Mortgage Finance. She manages the estimated
$6 billion portfolio of loans. Ms. Mills joined Berkshire in December 1997 as
Vice President and was promoted to Senior Vice President in January 1999.
From January 1989 through November 1997, Ms. Mills was Vice President of
First Winthrop Corporation and Winthrop Financial Associates, in Cambridge,
MA. Ms. Mills earned a B.A. degree from Mount Holyoke College and a Master of
Architecture degree from Harvard University. Ms. Mills is a member of the Real
Estate Finance Association, New England Women in Real Estate and the Mortgage
Bankers Association.
ITEM 11. EXECUTIVE COMPENSATION
Except for the Independent Trustees as described below, the Trustees
and Officers of the Trust have not been and will not be compensated by the
Trust for their services. However, the Officers will be compensated by the
Advisor or an affiliate of the Advisor.
Compensation of Trustees
The Trust paid each of the Independent Trustees a fee of $25,000 in 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 5, 1999, no person owned of record or was known by the
Advisor to own beneficially more than 5% of the Trust's 15,053,135
outstanding Shares. The only shares held by the Advisor or any of its
affiliates consist of the original 10,000 Shares.
<TABLE>
<CAPTION>
<S> <C> <C>
Class of Name of Beneficial Amount and Nature of Percent
Stock Owner Beneficial Interest of Class
Shares of Douglas Krupp
Beneficial One Beacon Street
Interest Boston, Mass. 02108 10,000 Shares** ***
Shares of
Beneficial All Directors and
Interest Officers 10,000 Shares ***
</TABLE>
** Mr. Krupp is a beneficial owner of the 10,000 shares held by
Berkshire Mortgage Advisors Limited Partnership, the Advisor to the Company,
by virtue of being a director of Berkshire Funding Corporation, the general
partner of Berkshire Mortgage Advisors Limited Partnership. In each case
where Mr. Krupp is a beneficial owner of shares he has shared voting and
investment powers.
*** The amount owned does not exceed one percent of the shares of
beneficial interest of the Trust outstanding as of February 5, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note G to Financial Statements included in Appendix A of this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - see Index to Financial Statements and
Supplementary Data included under Item 8, Appendix A, on page
F-2 of this report.
2. Financial Statement Schedules - see Index to Financial
Statements and Supplementary Data included under Item 8,
Appendix A, on page F-2 of this report. All schedules are
omitted as they are not applicable, not required or the
information is provided in the Financial Statements or the Notes
thereto.
(b) Exhibits:
Number and Description
Under Regulation S-K
The following reflects all applicable Exhibits required under Item 601
of Regulation S-K:
(4) Instruments defining the rights of security holders including
indentures:
(4.1) Second Amended and Restated Declaration of Trust
filed with the Massachusetts Secretary of State on
April 12, 1990 [Included as Exhibit 4.4 to Prospectus
included in Pre-effective Amendment No. 3 to
Registrant's Registration Statement on Form S-11 dated
April 16, 1990 (File No. 33-31942)].*
(4.2) Subscription Agreement Specimen [Included as
Exhibit C to Prospectus included in Pre-effective
Amendment No. 2 to Regis-trant's Registration
Statement on Form S-11 dated March 23, 1990 (File No.
33-31942)].*
(10) Material Contracts:
(10.1) Advisory Services Agreement dated October 22, 1990
between the Trustee and Krupp Mortgage Advisors
Limited Partnership. [Exhibit 10.1 to Registrant's
report on Form 10-K for the year ended December 31,
1994 (File No. 0-19244)].*
(10.2) Assignment and Assumption Agreement dated December 29,
1994 by and between Berkshire Realty Advisors Limited
Partnership (formerly known as Krupp Realty Advisors
Limited Partnership ("Assignor") and Berkshire
Mortgage Advisors Limited Partnership ("Assignee")
[Exhibit 10.2 to Registrant's report on Form 10-K
for the year ended December 31, 1994 (File No.
0-19244)].*
Lifestyles Apartments
(10.3) Modification Agreement by and between Krupp Government
Income Trust and Lifestyles at Boot Ranch and M&D
Palm Harbor, and FL-Tampa Inc. [Exhibit 10.1 to
Registrant's report on Form 10-Q for the quarter ended
September 30, 1996 (File No. 0-19244)].*
(10.4) Escrow Deposit Agreement by and between Krupp
Government Income Trust and M&D Palm Harbor, and
FL-Tampa Inc. the general partners of Lifestyles at
Boot Ranch. [Exhibit 10.2 to Registrant's report on
Form 10-Q for the quarter ended September 30, 1996
(File No. 0-19244)].*
(10.5) Subordinated Promissory Note dated December 11, 1990
between Lifestyles At Boot Ranch (the "Mortgagor")
and Krupp Government Income Trust (the "Holder")
[Exhibit 10.1 to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1990
(File No. 33-31942)].*
(10.6) Agreement RE Subordinated Note dated December 11,
1990 between Krupp Government Income Trust and Krupp
Mortgage Corporation [Exhibit 10.2 to Registrant's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1990 (File No. 33-31942)].*
(10.7) Subordinated Multifamily Mortgage dated December 11,
1990 between Lifestyles at Boot Ranch (the
"Mortgagor") and Krupp Government Income Trust (the
"Mortgagee") [Exhibit 10.3 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1990 (File No. 33-31942)].*
(10.8) Additional Loan Agreement dated December 11, 1990
between FL-Tampa, Inc. and M & D Palm Harbor, Inc
(collectively, the "Borrowers") and Krupp Government
Income Trust (the "Holder") [Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (File No.
33-31942)].*
(10.9) Additional Loan Note dated December 11,1990
between FL-Tampa, Inc and M & D Palm Harbor, Inc.
(collectively, the "Borrowers") and Krupp Government
Income Trust (the "Holder") [Exhibit 10.5 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 (File No. 33-31942)].*
(10.10) Mortgage Note dated December 11, 1991 between
Lifestyles at Boot Ranch (the "Borrower") and Krupp
Mortgage Corporation (the "Holder"). [Exhibit 10.6
to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991(File No.
0-19244)].*
(10.11) GNMA Purchase Agreement dated December 11, 1991
between Krupp Government Income Trust and Krupp
Mortgage Corporation. [Exhibit 10.7 to Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 (File No. 0-19244)].*
Windward Lakes Apartments
(10.12) Subordinated Promissory Note dated December 28, 1990
between the McNab-K C 3 Limited Partnership (the
"Mortgagor") and Krupp Government Income Trust (the
"Holder") [Exhibit 10.6 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1990 (File No. 33-31942)].*
(10.13) Additional Loan Agreement dated December 28, 1990
between George Krupp, Douglas Krupp and Krupp GP, Inc.
(collectively, the "Borrowers") and Krupp Government
Income Trust (the "Holder") [Exhibit 10.7 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 (File No. 33-31942)].*
(10.14) Additional Loan Note dated December 28, 1990 between
Krupp GP, Inc., George Krupp and Douglas Krupp
(collectively, the "Borrowers") and Krupp Government
Income Trust (the "Holder") [Exhibit 10.8 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (File No.
33-31942)].*
(10.15) Agreement RE Subordinated Note dated December 28, 1990
between Krupp Government Income Trust and Love
Funding Corporation. [Exhibit 10.11 to Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 (File No. 0-19244)].*
(10.16) Subordinated Multi-family Mortgage dated December 28,
1991 between McNab-KC3 Limited Partnership (the
"Borrower") and Krupp Government Income Trust (the
"Lender"). [Exhibit 10.12 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1991 (File No. 0-19244)].*
(10.17) GNMA Purchase Agreement dated December 28, 1991
between Krupp Government Income Trust and Love
Funding Corporation. [Exhibit 10.13 to Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 (File No. 0-19244)].*
River View Apartments
(10.18) Subordinated Promissory Note dated April 2, 1991
between Sterling Partners III Limited Partnership
(the "Mortgagor") and Krupp Government Income Trust
(the "Holder") [Exhibit 19.1 to Registrant's report
on Form 10-Q for the quarter ended June 30, 1991 (File
No. 0-19244)].*
(10.19) Agreement RE Subordinated Promissory Note dated
April 2, 1991 between Krupp Government Income Trust
and Love Funding Corporation [Exhibit 19.2 to
Registrant's report on Form 10-Q for the quarter ended
June 30, 1991 (File No. 0-19244)].*
(10.20) Subordinated Multifamily Mortgage dated April 2, 1991
between Sterling Partners III Limited Partnership (the
"Mortgagor") and Krupp Government Income Trust (the
"Mortgagee") [Exhibit 19.3 to Registrant's report on
Form 10-Q for the quarter ended June 30, 1991 (File
No. 0-19244)].*
(10.21) Supplement to Prospectus dated May 1, 1991 for
Government National Mortgage Association Pool Number
280840 [Exhibit 19.4 to Registrant's report on Form
10-Q for the quarter ended June 30, 1991 (File No.
0-19244)].*
Mill Pond Apartments
(10.22) Subordinated Promissory Note dated May 28, 1991
between Mill Pond Limited Partnership (the
"Mortgagor") and Krupp Government Income Trust (the
"Holder") [Exhibit 19.5 to Registrant's report on
Form 10-Q for the quarter ended June 30, 1991 (File
No. 0-19244)].*
(10.23) Agreement RE Subordinated Promissory Note dated
May 28, 1991 between Krupp Government Income Trust
and Krupp Mortgage Corporation [Exhibit 19.6 to
Registrant's report on Form 10-Q for the quarter ended
June 30, 1991 (File No. 0-19244)].*
(10.24) Subordinated Multifamily Mortgage dated May 28,
1991 between Mill Pond Limited Partnership (the
"Mortgagor") and Krupp Government Income Trust (the
"Mortgagee") [Exhibit 19.7 to Registrant's report
on Form 10-Q for the quarter ended June 30, 1991
(File No. 0-19244)].*
(10.25) Mortgage Note dated May 28, 1991 between Krupp
Mortgage Corporation (the "Holder") and Mill Pond
Apartments (the "Borrower") [Exhibit 19.8 to
Registrant's report on Form 10-Q for the quarter ended
June 30, 1991 (File No. 0-19244)].*
(10.26) Participation Agreement dated May 28, 1991 between
Krupp Mortgage Corporation (the "Mortgagee") and
Krupp Government Income Trust [Exhibit 19.9 to
Registrant's report on Form 10-Q for the quarter
ended June 30, 1991 (File No. 0-19244)].*
(10.27) Assignment of Open End Mortgage Deed and Security
Agreement dated May 28, 1991 between Krupp Mortgage
Corporation (the "Assignor") and Krupp Government
Income Trust (the "Assignee") [Exhibit 19.1 to
Registrants report on Form 10-Q for the
quarter ended September 30, 1991 (File No. 0-19244)].*
Waterford Townhome Apartments
(10.28) Subordinated Promissory Note dated June 12, 1991
between Waterford Apartment Corp. (the "Mortgagor")
and Krupp Government Income Trust (the "Holder")
[Exhibit 19.10 to Registrant's report on Form 10-Q
for the quarter ended June 30, 1991 (File No.
0-19244)].*
(10.29) Agreement RE Subordinated Promissory Note dated
June 12, 1991 between Krupp Government Income Trust
and Nichols/Conlan Financial Company [Exhibit 19.11
to Registrant's report on Form 10-Q for the quarter
ended June 30, 1991 (File No. 0-19244)].*
(10.30) Subordinated Multifamily Mortgage dated June 12, 1991
between Waterford Apartments Corp. (the "Mortgagor")
and Krupp Government Income Trust (the "Mortgagee")
[Exhibit 19.12 to Registrant's report on Form 10-Q
for the quarter ended June 30, 1991 (File No.
0-19244)].*
(10.31) Mortgage Note dated June 12, 1991 between Nichols/
Conlan Financial Company (the "Holder") and
Waterford Apartment Corp. (the "Borrower")
[Exhibit 19.13 to Registrant's report on Form 10-Q
for the quarter ended June 30, 1991 (File No.
0-19244)].*
(10.32) Assignment of Loan Documents dated June 12, 1991 by
Nichols/Conlan Financial Company to Krupp Mortgage
Corp [Exhibit 19.14 to Registrant's report on Form
10-Q for the quarter ended June 30, 1991 (File No.
0-19244)].*
(10.33) Participation Agreement dated June 12, 1991 between
Nichols/Conlan Financial Company (the "Mortgagee") and
Krupp Government Income Trust [Exhibit 19.15 to
Registrant's report on Form 10-Q for the quarter ended
June 30, 1991 (File No. 0-19244)].*
Rivergreens Apartments
(10.34) Subordinated Promissory Note dated November 14, 1991
between Rivergreens Associates Limited Partnership
(the "Mortgagor") and Krupp Government Income Trust
(the "Holder"). [Exhibit 10.33 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1991 (File No. 0-19244)].*
(10.35) Agreement Re-Subordinated Promissory Note dated
November 14, 1991 between Krupp Government Income
Trust and Krupp Mortgage Corporation. [Exhibit
10.34 to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991 (File No.
0-19244)].*
(10.36) Subordinated Multifamily Deed of Trust dated November
14, 1991 between Rivergreens Associates Limited
Partnership (the "Borrower"), Oregon Title Insurance
Company (the "Trustee") and Krupp Government Income
Trust (the "Lender"). [Exhibit 10.35 to Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 (File No. 0-19244)].*
(10.37) Mortgage Note dated November 14, 1991 between Krupp
Mortgage Corporation and Rivergreens Associates
Limited Partnership. [Exhibit 10.36 to Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 (File No. 0-19244)].*
(10.38) Participation Agreement dated November 14, 1991 between
Krupp Mortgage Corporation and Krupp Government Income
Trust. [Exhibit 10.37 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1991 (File No. 0-19244)].*
Audubon Villas
(10.39) Prospectus for Government National Mortgage Association
Pool Number 295307(CS) and Pool Number 295308(PN).
[Exhibit 10.38 to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991 (File
No. 0-19244)].*
(10.40) Subordinated Promissory Note dated December 27, 1991
between Golf View Partners, Ltd. (the "Mortgagor")
and Krupp Government Income Trust (the "Holder").
[Exhibit 10.39 to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991 (File
No. 0-19244)].*
(10.41) Agreement Re-Subordinated Promissory Note dated
December 27, 1991 between Krupp Government Income
Trust and Love Funding Corporation. [Exhibit 10.40 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991 (File No. 0-19244)].*
(10.42) Subordinated Multifamily Mortgage dated December
27, 1991 between Golf View Partners, Ltd. (the
"Borrower") and Krupp Government Income Trust (the
"Lender"). [Exhibit 10.41 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1991 (File No. 0-19244)].*
(10.43) Additional Loan Agreement dated December 27, 1991
between Capital Developments, Inc., Gus M. Pelias,Jr.,
and Durham Partners, Ltd. (collectively, the
"Borrowers"), Golf View Partners, Ltd. (the "Owner")
and Krupp Government Income Trust (the "Holder").
[Exhibit 10.42 to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991 (File
No. 0-19244)].*
(10.44) Additional Loan Note dated December 27, 1991 between
Capital Developments, Inc., Gus M. Pelias, Jr., and
Durham Partners, Ltd. (collectively, the "Borrowers")
and Krupp Government Income Trust (the "Holder").
[Exhibit 10.43 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991
(File No. 0-19244)].*
Mountain View Apartments
(10.45) Subordinated Promissory Note dated April 21, 1992
between Mountain View Ltd. (the "Mortgagor") and Krupp
Government Income Trust (the "Holder"). [Exhibit
19.1 to Registrant's report on Form 10-Q for the quarter
ended June 30, 1992 (File No. 0-19244)].*
(10.46) Agreement RE Subordinated Promissory Note dated April
21, 1992 between Krupp Government Income Trust and
Krupp Mortgage Corporation. [Exhibit 19.2 to
Registrant's report on Form 10-Q for the quarter
ended June 30, 1992 (File No. 0-19244)].*
(10.47) Subordinated Multifamily Mortgage dated April 21, 1992
between Mountain View Ltd. (the "Mortgagor") and Krupp
Government Income Trust (the "Mortgagee"). [Exhibit
19.3 to Registrant's report on Form 10-Q for the quarter
ended June 30, 1992 (File No. 0-19244)].*
(10.48) Additional Loan Agreement dated April 21, 1992 between
Philip P. Mulkey, Henry V. Bragg and Gregory V. Bragg
(collectively, the "Borrowers") and Krupp Government
Income Trust (the "Holder"). [Exhibit 19.4 to
Registrant's report on Form 10-Q for the quarter ended
June 30, 1992 (File No. 0-19244)].*
(10.49) Additional Loan Note dated April 21, 1992 between Philip
P. Mulkey, Henry V. Bragg and Gregory V. Bragg
(collectively, the "Borrowers") and Krupp Government
Income Trust (the "Holder"). [Exhibit 19.5 to
Registrant's report on Form 10-Q for the quarter ended
June 30, 1992 (File No. 0-19244)].*
(10.50) Mortgage Note dated April 21, 1992 between Mountain View
Ltd. (the "Borrower") and Krupp Mortgage Corporation
(the "Holder"). [Exhibit 19.6 to Registrant's report on
Form 10-Q for the quarter ended June 30, 1992 (File No.
0-19244)].*
(10.51) Modification Agreement by and between Krupp Government
Income Trust and Mountain View Ltd. [Exhibit 10.1 to
Registrant's report Form 10-Q for the quarter ended
September 30, 1995 (File No. 0-19244)].*
Red Run Apartments
(10.52) Subordinated Promissory Note dated May 5, 1992 between
Red Run Limited Partnership (the "Mortgagor") and Krupp
Government Income Trust (the "Holder"). [Exhibit 19.7
to Registrant's report on Form 10-Q for the quarter
ended June 30, 1992 (File No. 0-19244)].*
(10.53) Agreement RE Subordinated Promissory Note dated May 5,
1992 between Krupp Government Income Trust and Maryland
National Mortgage Corporation (the"Mortgagee").
[Exhibit 19.8 to Registrant's report on Form 10-Q for
the quarter ended June 30, 1992 (File No. 0-19244)].*
(10.54) Subordinated Multifamily Mortgage dated May 5, 1992
between Red Run Limited Partnership (the "Trustor")
and Krupp Government Income Trust (the "Lender").
[Exhibit 19.9 to Registrant's report on Form 10-Q
for the quarter ended June 30, 1992 (File No.
0-19244)].*
(10.55) Additional Loan Agreement dated May 5, 1992 between Red
Run Corporation and Summit Towers Company (collectively,
the "Borrowers") and Krupp Government Income Trust
(the "Holder"). [Exhibit 19.10 to Registrant's report
on Form 10-Q for the quarter ended June 30, 1992 (File
No. 0-19244)].*
(10.56) Additional Loan Note dated May 5, 1992 between Red Run
Corporation and Summit Towers Company (collectively, the
"Borrowers") and Krupp Government Income Trust (the
"Holder"). [Exhibit 19.11 to Registrant's report on
Form 10-Q for the quarter ended June 30, 1992 (File No.
0-19244)].*
(10.57) Deed of Trust Note dated May 5, 1992 between Red Run
Limited Partnership and Maryland National Mortgage
Corporation. [Exhibit 19.3 to Registrant's report on
Form 10-Q for the quarter ended September 30, 1992
(File No. 0-19244)].*
(10.58) Participation and Servicing Agreement by and between
Maryland National Mortgage Corporation and Krupp
Government Income Trust. [Exhibit 19.4 to Registrant's
report on Form 10-Q for the quarter ended September 30,
1992 (File No. 0-19244)].*
Lincoln Green Apartments
(10.59) Supplement to prospectus dated August 1, 1992 for
Federal National Mortgage Association pool number
MX-073023. [Exhibit 19.8 to Registrant's report on Form
10-Q for the quarter ended September 30, 1992 (File No.
0-19244)].*
(10.60) Subordinated promissory note dated September 15, 1992
by and between Lincoln Green Associates Limited
Partnership (the "Mortgagor") and Krupp Government
Income Trust (the "Holder"). [Exhibit 19.9 to
Registrant's report on Form 10-Q for the quarter ended
September 30, 1992 (File No. 0-19244)].*
(10.61) Subordinated Multi-family Deed of Trust dated September
16, 1992 by and between Lincoln Green Associates
Limited Partnership (the "Borrower") and Krupp
Government Income Trust (the "Lender"). [Exhibit 19.10
to Registrant's report on Form 10-Q for the quarter
ended September 30, 1992 (File No. 0-19244)].*
The Seasons
(10.62) Additional Loan Agreement dated September 16, 1993
between The Krupp Company Limited Partnership-IV (the
"Borrower") and Krupp Government Income Trust II (the
"Holder") [Exhibit 10.80 to Registrant's report on Form
10-K for the year ended December 31, 1994 (File No.
0-19244)].*
(10.63) Additional Loan Note dated September 16, 1993 between
The Krupp Company Limited Partnership-IV (the
"Borrower") and Krupp Government Income Trust II (the
"Holder")[Exhibit 10.81 to Registrant's report on Form
10-K for the year ended December 31, 1994 (File No.
0-19244)].*
(10.64) Subordinated Promissory Note dated September 16, 1993
between Maryland Associates Limited Partnership (the
"Maker") and Krupp Government Income Trust II (the
"Holder") [Exhibit 10.82 to Registrant's report on Form
10-K for the year ended December 31, 1994 (File No.
0-19244)].*
(10.65) Pledge and Security Agreement dated September 16, 1993
by and between The Krupp Company Limited Partnership-IV
(the "Debtor") and Krupp Government Income Trust II
(the "Secured Party") [Exhibit 10.83 to Registrant's
report on Form 10-K for the year ended December 31, 1994
(File No. 0-19244)].*
(10.66) The Deed of Trust dated September 16, 1993 by
and between Maryland Associates Limited Partnership
and Krupp Mortgage Corporation [Exhibit 10.84 to
Registrant's report on Form 10-K for the year ended
December 31, 1994 (File No. 0-19244)].*
(10.67) Participation and Servicing Agreement made as of
September 16, 1993 by and between Krupp Mortgage
Corporation (the "Servicer") and Krupp Government
Income Trust II (the "Participant") [Exhibit 10.85 to
Registrant's report on Form 10-K for the year ended
December 31, 1994 (File No. 0-19244)].*
(10.68) Assignment and Assumption Agreement dated September
16, 1993 between Krupp Government Income Trust II (the
"Assignor") and Krupp Government Income Trust (the
"Assignee") [Exhibit 10.86 to Registrant's report on
Form 10-K for the year ended December 31, 1994 (File No.
0-19244)].*
Rosemont Apartments
(10.69) Participation and Servicing Agreement dated July 14,
1994, by and between Rockport Mortgage Corporation (the
"Servicer") and Krupp Government Income Trust (the
"Participant") [Exhibit 10.87 to Registrant's report on
Form 10-K for the year ended December 31, 1994 (File No.
0-19244)].*
(10.70) Deed of Trust Note dated July 1, 1994 between Rosemont
Ltd. and Rockport Mortgage Corporation. [Exhibit
10.88 to Registrant's report on Form 10-K for the year
ended December 31, 1994 (File No. 0-19244)].*
(10.71) Allonge to Deed of Trust Note dated July 1, 1994 between
Rosemont Ltd. and Rockport Mortgage Corporation
[Exhibit 10.89 to Registrant's report on Form 10-K for
the year ended December 31, 1994 (File No. 0-19244)].*
(10.72) Participation Certificate with Krupp Government Income
Trust as registered owner. [Exhibit 10.96 to
Registrant's report on Form 10-K for the year ended
December 31, 1995 (File No. 0-19244)].*
* Incorporated by reference
(c) Reports on Form 8-K
During the last quarter of the year ended December 31, 1998,
the Trust did not file any reports on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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,
on the 12th day of March, 1999.
KRUPP GOVERNMENT INCOME TRUST
By: /s/ Douglas Krupp
Douglas Krupp, Chairman of Board of Trustees
and a Trustee of Krupp Government Income Trust
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the 12th day of March, 1999.
Signatures Title(s)
/s/ Douglas Krupp Chairman of Board of Trustees and a
Douglas Krupp Trustee of Krupp Government Income Trust
/s/ Robert A. Barrows Treasurer of Krupp Government Income Trust
Robert A. Barrows
/s/ Charles N. Goldberg Trustee of Krupp Government Income Trust
Charles N. Goldberg
/s/ E. Robert Roskind Trustee of Krupp Government Income Trust
E. Robert Roskind
/s/ J. Paul Finnegan Trustee of Krupp Government Income Trust
J. Paul Finnegan
APPENDIX A
KRUPP GOVERNMENT INCOME TRUST
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8 of FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1998
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants F-3
Balance Sheets at December 31, 1998 and 1997 F-4
Statements of Income for the Years Ended December 31, 1998,
1997 and 1996 F-5
Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996 F-6
Statements of Cash Flows for the Years Ended December 31, 1998, 1997
and 1996 F-7
Notes to Financial Statements F-8 - F-20
Schedule II - Valuation and Qualifying Accounts F-21
Supplementary Data - Selected Quarterly Financial Data (Unaudited) F-22
All other schedules are omitted as they are not applicable or not required,
or the information is provided in the financial statements or the notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Krupp Government Income Trust:
In our opinion, the accompanying financial statements and financial
statement schedule listed in the index on page F-2 of this Form 10-K present
fairly, in all material respects, the financial position of Krupp
Government Income Trust (the "Trust") at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility
of management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with generally accepted auditing standards which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion expressed above.
Boston, Massachusetts
March 12, 1999
<PAGE>
<TABLE>
KRUPP GOVERNMENT INCOME TRUST
BALANCE SHEETS
December 31, 1998 and 1997
<CAPTION>
ASSETS
1998 1997
Participating Insured Mortgage Investments
("PIMIs") (Notes B, C and J):
<S> <C> <C>
Insured Mortgages $ 75,386,460 $108,470,247
Additional loans, net 11,243,862 19,209,108
Participating Insured Mortgages ("PIMs")
(Notes B, D and J) 47,737,583 48,112,523
Mortgage-Backed Securities and insured
mortgage ("MBS") (Notes B, E and J) 22,132,858 27,085,341
Total mortgage investments 156,500,763 202,877,219
Cash and cash equivalents (Notes B and J) 9,004,397 9,749,804
Interest receivable and other assets 1,057,365 1,294,240
Prepaid acquisition fees and expenses, net
of accumulated amortization of $6,125,191
and $6,658,224 respectively (Note B) 3,445,605 5,608,226
Prepaid participation servicing fees, net of
accumulated amortization of $1,776,625
and $1,839,070 respectively (Note B) 1,413,559 2,249,643
Total assets $171,421,689 $221,779,132
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note B) $ 5,773,669 $ 7,871,606
Other liabilities 33,230 25,414
Total liabilities 5,806,899 7,897,020
Commitments (Note H)
Shareholders' equity (Notes A, F, H and I):
Common stock, no par value; 17,510,000
Shares authorized; 15,053,135 Shares
issued and outstanding 164,742,014 212,496,510
Accumulated comprehensive income (Note B) 872,776 1,385,602
Total Shareholders= equity 165,614,790 213,882,112
Total liabilities and Shareholders'
equity $171,421,689 $221,779,132
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<TABLE>
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
Revenues:
Interest income - PIMs and PIMIs:
<S> <C> <C> <C>
Basic interest $ 10,635,959 $12,180,539 $12,807,392
Additional Loan interest 3,080,944 793,577 -
Participation income 5,094,353 1,385,480 359,161
Interest income - MBS 1,930,383 2,199,234 2,305,613
Interest income cash and cash
equivalents 1,180,647 1,058,966 885,874
Total revenues 21,922,286 17,617,796 16,358,040
Expenses:
Asset management fee
to an affiliate (Note G) 1,331,745 1,531,026 1,604,853
Expense reimbursements
to affiliates (Note G) 207,165 395,934 343,214
Amortization of prepaid fees
and expenses 2,998,705 2,405,645 1,613,665
General and administrative 433,860 385,956 315,613
Provision for impaired mortgage
Loans (Notes B and C) 2,114,346 - -
Total expenses 7,085,821 4,718,561 3,877,345
Net income (Note I) $14,836,465 $12,899,235 $12,480,695
Basic earnings per share $ .99 $ .86 $ .83
Weighted average shares outstanding 15,053,135 15,053,135 15,053,135
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<TABLE>
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
<CAPTION>
Accumulated
Total
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 240,103,655 $ - $ 1,574,821 $ 241,678,476
Dividends (7,088,400) (12,480,695) - (19,569,095)
Net income - 12,480,695 - 12,480,695
Change in unrealized gain
on MBS - - (309,469) (309,469)
Balance at December 31, 1996 233,015,255 - 1,265,352 234,280,607
Dividends (20,518,745) (12,899,235) - (33,417,980)
Net income - 12,899,235 - 12,899,235
Change in unrealized gain
on MBS - - 120,250 120,250
Balance at December 31, 1997 212,496,510 - 1,385,602 213,882,112
Dividends (47,754,496) (14,836,465) - (62,590,961)
Net income - 14,836,465 - 14,836,465
Change in unrealized gain
on MBS - - (512,826) (512,826)
Balance at December 31, 1998 $164,742,014 $ - $ 872,776 $165,614,790
Shares issued and outstanding for each of the three years ended December 31,
1998 are 15,053,135
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<TABLE>
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
Operating activities:
<S> <C> <C> <C>
Net income $ 14,836,465 $ 12,899,235 $12,480,695
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of premium and discounts (7,646) 2,816 (1,110)
Provision for impaired mortgage loans 2,114,346 - -
Amortization of prepaid fees and expenses 2,998,705 2,405,645 1,613,665
Changes in assets and liabilities:
Decrease in interest receivable
and other assets 236,875 413,559 154,536
Increase (decrease) in other
liabilities 7,816 (2,319) 7,156
Net cash provided by operating
activities 20,186,561 15,718,936 14,254,942
Investing activities:
Principal collections on Insured Mortgages 855,221 891,321 855,308
Principal collections on MBS 4,447,303 3,152,419 4,331,574
Increase (decrease) in deferred
income on Additional Loans (2,097,937) 546,192 1,404,457
Insured mortgage prepayments 32,603,506 5,630,985 8,862,450
Additional Loan prepayments 5,850,900 1,540,000 -
Acquisition of MBS - (3,366,000) -
Net cash provided by investing
activities 41,658,993 8,394,917 15,453,789
Financing activity:
Dividends (62,590,961) (33,417,980) (19,569,095)
Net increase (decrease) in cash and
cash equivalents (745,407) (9,304,127) 10,139,636
Cash and cash equivalents, beginning
of year 9,749,804 19,053,931 8,914,295
Cash and cash equivalents, end of year $ 9,004,397 $ 9,749,804 $19,053,931
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
A. Organization
Krupp Government Income Trust (the "Trust") was formed on November 1,
1989 by filing a Declaration of Trust in The Commonwealth of
Massachusetts. The Trust is authorized to sell and issue not more than
17,510,000 shares of beneficial interest (the "Shares"). The Trust was
organized for the purpose of investing in commercial and multi-family
loans and mortgage backed securities. Berkshire Mortgage Advisors Limited
Partnership ("BMALP")(the Advisor), acquired 10,000 of such Shares for
$200,000 and 14,999,999 Shares were sold for $299,480,263 net of purchase
volume discounts of $519,717 under a public offering which commenced on
April 19, 1990 and ended on July 15, 1991. Under the Dividend Reinvestment
Plan ("DRP"), 43,136 Shares were sold for $819,356 during its public
offering. The Trust shall terminate on December 31, 2029, unless earlier
terminated by the affirmative vote of holders of a majority of the
outstanding Shares entitled to vote thereon.
B. Significant Accounting Policies
The Trust uses the following accounting policies for financial reporting
purposes:
MBS
The Trust, in accordance with the Financial Accounting Standards
Board's Statement 115, "Accounting for Certain Investments in Debt
and Equity Securities" (AFAS 115"), classifies its MBS portfolio as
available-for-sale. As such the Trust carries its MBS at fair
market value and reflects any unrealized gains (losses) as a
separate component of Shareholders' Equity. The Trust amortizes
purchase premiums or discounts over the life of the underlying
mortgages using the effective interest method.
Effective January 1, 1998, the Trust adopted "Statement of
Financial Accounting Standards No. 130, 'Reporting Comprehensive
Income'" (FAS 130), was issued establishing standards for reporting
and displaying comprehensive income and its components. FAS 130
requires comprehensive income and its components, as recognized
under accounting standards, to be displayed in a financial
statement with the same prominence as other financial statements,
if material. FASB 130 had no material effect on the Trust's
financial position or results of operations.
The Federal Housing Administration insured mortgages are carried
at amortized cost unless the Advisor of the Trust believes there is
an impairment in value, in which case a valuation allowance is
established in accordance with Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, and
Financial Accounting Standard No. 118, AAccounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures.
PIMs and PIMIs
The Trust accounts for its Insured Mortgages which are MBS in
accordance with FAS 115 under the classification of held to
maturity. The Trust carries those MBS at amortized cost.
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
B. Significant Accounting Policies, Continued
PIMs and PIMIs, Continued
The Federal Housing Administration Insured Mortgages and all
Additional Loans are carried at amortized cost unless the Advisor
of the Trust believes there is an impairment in value, in which
case a valuation allowance is established in accordance with
Financial Accounting Standards No. 114, Accounting by Creditors
for Impairment of a Loan, and Financial Accounting Standard No.
118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures.
Basic interest is recognized based on the stated rate of the
Department of Housing and Urban Development ("HUD") Insured
Mortgage loan (less the servicer's fee) or the coupon rate of
the Government National Mortgage Association ("GNMA") or Fannie Mae
MBS. The Trust recognizes interest related to the participation
features as earned and when it deems these amounts are collectible.
The Trust defers the recognition of Additional Loan interest
payments as income to the extent these interest payments are from
escrows established with the proceeds of the Additional Loan.
When the properties underlying the PIMIs generate sufficient cash
flow to make the required Additional Loan interest payments with
funds other than from escrows, the Trust may recognize income as
earned and may commence amortizing deferred interest amounts into
income over the remaining estimated term of the Additional Loan.
During periods where mortgage loans are impaired the trust supsends
amortizing interest income.
The Trust also fully reserves the portion of any Additional Loan
interest payment satisfied through the issuance of an operating
loan and any associated interest due on such operating loan. The
Trust will recognize the income related to the operating loan when
the borrower repays amounts due under the operating loan.
Impaired Mortgage Loans
Impaired loans are those loans which the Advisor believes that
the collection of all amounts due in accordance with the
contractual terms of the loan agreement are not likely. Impaired
loans are measured based on the fair value of the underlying
collateral. Interest received on the impaired loans is generally
applied against the loan principal or as interest income if deemed
collectable by the Advisor.
Cash Equivalents
The Trust includes all short-term investments with maturities of
three months or less from the date of acquisition in cash and cash
equivalents. The Trust invests its cash primarily in commercial
paper and money market funds with a commercial bank and has not
experienced any loss to date on its invested cash.
Prepaid Fees and Expenses
Prepaid fees and expenses represent prepaid acquisition fees and
expenses and prepaid participation servicing fees paid for the
acquisition and servicing of PIMs and PIMIs. The Trust amortizes
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
B. Significant Accounting Policies, Continued
Prepaid Fees and Expenses, Continued
prepaid acquisition fees and expenses using a method that
approximates the effective interest method over a period of ten to
twelve years, which represents the actual maturity or anticipated
call payoff of the underlying mortgage.
The Trust amortizes prepaid participation servicing fees using
a method that approximates the effective interest method over
a ten year period beginning at final endorsement of the loan if a
HUD-insured mortgage loan or a GNMA MBS and at closing if a Fannie
Mae MBS.
Income Taxes
The Trust has elected to be taxed as a REIT under the Internal
Revenue Code of 1986, as amended, and believes it will continue to
meet all such qualifications. Accordingly, the Trust will not
be subject to federal income taxes on amounts distributed to
shareholders provided it distributes annually at least 95% of
its REIT taxable income and meets certain other requirements for
qualifying as a REIT. Therefore, no provision for federal income
taxes has been recorded in the financial statements.
Estimates and Assumptions
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of
assets and liabilities, contingent assets and liabilities and
revenues and expenses during the period. Significant estimates
include the net carrying value of Additional Loans and the
unrealized gain on MBS investments. Actual results could differ
from those estimates.
C. PIMIs
The Trust had investments in six PIMIs on December 31, 1998 that provide
the permanent financing of multi-family housing. One component of a
PIMI is either a securitized HUD-insured first mortgage loan issued and
guaranteed by GNMA or a sole participation interest in a first mortgage
loan originated under the Federal Housing Administration ("FHA") lending
program and insured by HUD (collectively the "Insured Mortgages"). The
FHA first mortgage or the first mortgage underlying the GNMA security
provides the borrower (generally a limited partnership) with a below
market interest rate loan in exchange for providing the Trust with
participation in a percentage of the cash generated from property
operations and in a percentage of any appreciation of the underlying
property to a preferred return, then a percentage of any appreciation
thereafter. The borrower conveys these rights to the Trust through a
subordinated promissory note and mortgage. In addition, the Trust made
an Additional Loan to the owners of the borrower to provide additional
funds for the construction and permanent financing of the property.
The owners generally collateralize the Additional Loan through a pledge
and security agreement that pledges their ownership interests in the
borrower, and their share of any distributions made from surplus cash
generated by the property and the proceeds realized upon the refinancing
of the property, sale
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
C. PIMIs, Continued
of the property or sale of the partnership interests. Amounts payable
under the Additional Loan are neither guaranteed nor insured.
The Trust receives monthly principal and interest ("Basic Interest")
payments on the Insured Mortgage and is entitled to receive participation
income under the subordinated promissory note and mortgage, and
semi-annual interest payments ("Additional Loan Interest") and preferred
interest under the Additional Loan. The Trust receives principal and
interest payments on the insured mortgages currently, because these
payments are insured or guaranteed; however, there are limitations to
the amount and obligation to pay participation income and Additional Loan
interest.
The subordinated promissory note and mortgage entitles the Trust to
receive (i) Participating Income Interest generally equal to 50% of
(a) all distributable Surplus Cash (as defined in the regulatory
agreement of the HUD-insured first mortgage) generated by the property
(b) any unrestricted cash generated from property operations and (c) to
the extent available unexpended reserves and escrows, and (ii)
Participating Appreciation Interest generally equal to 50% of the net
proceeds or value of the property upon the sale, refinancing, maturity
or accelerated maturity, or permitted prepayment of all amounts due
under the Insured Mortgage and Additional Loan less the Outstanding
Indebtedness, as defined. Amounts received by the Trust pursuant to the
subordinated promissory note as Participating Income Interest reduce
amounts payable as Preferred Interest and may reduce amounts payable as
Base Interest under the Additional Loan.
The Insured Mortgage and subordinated promissory note generally have
maturities of 30 to 40 years, however, under the subordinated promissory
note the Trust can generally accelerate these maturity dates at any time
after the ninth or tenth anniversary of final endorsement for coinsurance
or insurance, but in certain cases for construction loans after the
eleventh or twelfth anniversary of initial endorsement (commencement of
construction) for coinsurance or insurance, upon giving twelve months
written notice for the payment of all accrued participation interest
through the accelerated maturity date. The Trust can accelerate the
maturity date for payment of amounts due under the subordinated promissory
note and the insured mortgage providing the contract of insurance or
coinsurance with the Secretary of HUD on the insured mortgage is
canceled prior to the accelerated maturity date.
Additional Loan Interest is payable from the following sources: (i) any
Surplus Cash received pursuant to the subordinated promissory note as
Participating Income Interest, (ii) amounts conveyed to the Trust by
the owners of the borrowing entity representing distributions of Surplus
Cash and (iii) amounts in reserve accounts established with the Additional
Loan proceeds, if available, and any interest earned on these amounts.
If these sources are not sufficient to make Additional Loan Interest
payments the owners of the borrowing entity must notify the Trust of the
amount of the shortfall and at its option the Trust could require a
capital call from the owners of the borrowing entity. The capital call
would be equal to 50% of the Base Interest shortfall and the Trust in
certain situations could convert the remaining 50% into an operating
loan.
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
C. PIMIs, Continued
In addition to the Additional Loan Interest payments, the Additional Loan
requires the payment of Preferred Interest representing a cumulative, non-
compounded preferred return from the date of final endorsement to the date
of calculation at interest rates ranging from 9.5% to 11% per annum on the
outstanding balance of the Insured Mortgage plus the Additional Loan
and any other funds advanced by the Trust to the borrowing entity or the
owners of the borrowing entity less: (i) interest payments paid to
the Trust under the Insured Mortgage, (ii) Participating Income Interest
and (iii) Additional Loan Interest payments made under the Additional Loan
including amounts foregone by the Trust.
The insured mortgage and subordinated promissory note generally cannot
be prepaid for a term of five years from the construction completion date
or final endorsement and thereafter may be prepaid in whole without
penalty provided all participation interest and amounts under the
insured mortgage are paid. Any prepayment requires not less than ninety
nor more than 180 days prior written notice.
The Additional Loan generally may not be prepaid before the fifth
anniversary of the Agreement or the construction completion date and
thereafter may be prepaid in full without penalty provided Preferred
Interest and any amounts due under the insured mortgage and subordinated
promissory note are paid in full.
On May 1, 1998, the borrowers on the Lifestlyes PIMI defaulted on its May
1998 debt service payment. The Trust continued to receive its monthly
principal and interest payments guaranteed by GNMA. In December 1998,
the Trust entered into a second modification agreement with the borrowers
of the Lifestlyes PIMI reducing the interest paid monthly on the
insured mortgage by 1.75% per annum for 1998 and 1999 and 1.5% per annum
for 2000 through 2007. In addition, the borrowers made a $550,000 equity
contribution, which has been escrowed, for the exclusive purpose of
correcting deferred maintenance. Under the Agreement any future surplus
cash generated by property operations will be split evenly between the
Trust and the borrowers as Participating Income Interest. When the
property is sold or refinanced, the first $1,100,000 of any proceeds
remaining after the insured first mortgage is paid off will be split
50% / 50%; the next $1,690,220 of proceeds will be split 75% to the
Trust and 25% to the borrower(the repayment of the Additional Loan);
and any remaining proceeds will be split 50% / 50% between the Trust and
the borrower. The Trust will not earn any Preferred Return or Base
Interest on the Additional Loan.
During June of 1998, the Trust received a prepayment of the Park Highlands
Insured Mortgage and Additional Loan having a remaining principal balances
of $16,752,295 and $3,000,000 respectively. In addition, the Trust
received the following: (i) a Preferred Return of $1,481,865, (ii)
Participating Appreciation interest of $1,206,719, (iii) a Prepayment
Premium of $479,476, (iv) Participating Income interest of $211,316 and
(v) Additional Loan interest payable through the date of sale of $57,945.
On July 15, 1998, the Trust received a prepayment of The Coconut Palm
Club Insured Mortgage having a remaining principal balance of
$15,851,211. In addition, in June the Trust received a prepayment of the
Coconut Palm Club
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
C. PIMIs, Continued
Additional Loan of $2,850,900. The Trust also received a preferred return
of $1,419,116 and Additional Loan interest payable through the date of
sale of $89,091.
Due to the prepayments of the Park Highlands and Coconut Palm Club
Additional Loans in June, the Trust also recognized additional loan
interest of $1,290,000 and $1,295,354 respectively, that had been
previously classified as deferred income on these Additional Loans.
On August 6, 1998, the Advisor of the Trust declared a special dividend
of $2.86 per share that was paid on September 9, 1998 from the prepayment
proceeds of the Park Highlands and Coconut Palm Club PIMIs.
Mountain View Apartments has been adversely affected by a competitive
housing market in the Huntsville area. Since September 1998 the borrower
of the Mountain View Additional Loan has been in technical defaulton its
Additional Loan for not making the full required interest payments. The
Advisor is currently assessing the feasibility of extending debt service
relief to the borrower until the market stabilizes.
On February 6, 1997, the Trust, with the approval of the independent
Trustees, agreed to a workout with the borrower of the Windward Lakes
Apartments PIMI, an affiliate of the Advisor of the Trust. The terms are
as follows: a) interest rate relief for 1997 of 2% per annum and 1% per
annum for 1998 through 2000 on the Insured Mortgage: b) the borrower,
McNab KC-3 L.P. ("McNab"), contributed $133,036 of new equity into the
property; c) the borrower will cap the annual management fee paid to an
affiliate at 3% of revenues; d) the Trust's participation in current
operations shall be 50% of Surplus Cash as determined under HUD
guidelines; e) Additional Loan Interest is payable from the Trust's
share of Surplus Cash and unpaid amounts accrue at 7.5% per annum; and
f) the Trust's participation in a sale or refinancing, after repayment
of the first mortgage and additional loans, interest rate relief,
accrued Additional Loan Interest and McNab=s new equity, shall be
50% of any remaining proceeds up to an amount which would result
in the Trust having received a cumulative, noncompounded preferred
return of 10% on its investment in the first mortgage and additional
loans; any remaining proceeds shall be distributed to McNab.
During the first quarter of 1997 the Trust received proceeds from the
prepayment of The Timber Ridge Apartments PIMI as follows: $1,540,000
to payoff the Additional Loan; $1,246,159 representing Participation
income which includes prepayment penalties; $5,630,985 to payoff the
outstanding first mortgage principal balance. During the third quarter
of 1997, the Trust made a special dividend of $.92 per share to its
investors. This special dividend was funded from the 1996 Canyon Ridge
PIM prepayment and the 1997 Timber Ridge prepayment proceeds, net of the
reinvestment in a $3,400,000 face value insured multifamily mortgage.
At December 31, 1998 and 1997 there are no Insured Mortgage loans within
the Trust's portfolio that are delinquent as to principal or interest.
The Trust's investments in PIMIs consist of the following at December 31,
1998 and 1997:
Continued
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
C. PIMIs, Continued
Original
Loan Interest Maturity Balance Outstanding
PIM Amount Rate Date at December 31,
1998 1997
<S> <C> <C> <C> <C> <C>
Lifestyles (GNMA) $10,292,394 7.00%(a) 5/1/32 $10,022,381 $ 10,074,176
Windward (GNMA) 14,000,778 7.50%(b) 6/1/32 13,667,163 13,732,172
Audubon Villas (GNMA) 15,250,000 7.75% 9/15/33 14,909,371 14,985,694
Coconut Palm (GNMA) 16,155,100 8.25% 5/1/33 - 15,899,315
Mountain View (FHA) 9,547,700 8.125%(c) 1/1/34 9,363,459 9,407,192
Red Run (FHA) 19,019,600 7.875% 5/1/34 18,651,261 18,742,124
Park Highland (FHA) 17,068,500 7.625% 1/1/34 - 16,788,083
The Seasons (FHA) (d) 9,075,351 7.875% 10/1/28 8,772,825 8,841,491
$110,409,423 $75,386,460 $108,470,247
(f)
</TABLE>
<TABLE>
<CAPTION>
Base Preferred
Outstanding Balance Interest Interest
Additional Loan 1998 1997 Rate Rate
<S> <C> <C> <C> <C>
Lifestyles (a) $ 1,817,665 $ 1,817,665 - -
Windward 2,471,294 2,471,294 7.5% 10%
Audubon Villas 2,691,000 2,691,000 7.0% 10%
Coconut Palm - 2,850,900 7.5% 11%
Mountain View (c) 1,553,600 1,553,600 7.0% 10%
Red Run 2,900,000 2,900,000 7.0% 10%
Park Highland - 3,000,000 7.5% 9.5%
The Seasons (d)(e) 1,924,649 1,924,649 9.0% 10%
$13,358,208 $ 19,209,108
</TABLE>
(a) The Trust entered into an Agreement which reduced the interest
rate on the Insured Mortgage by 1.75% per annum effective January
1, 1998 for a period of twenty-four months and 1.5% per annum
for 2000 though 2007. The Trust will not receive any Additional
Loan Base or Preferred interest due to workout.
(b) The Trust entered into an agreement which reduced the interest
rate on the Insured Mortgage by 2.0% per annum for 1997 and by
1.0% for 1998 through 2000.
(c) The Trust entered into an agreement which reduced the interest
rate on the Insured Mortgage .5% per annum effective July 1, 1995
for a period of eighteen months. The borrower was also allowed
to forego making
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
C. PIMIs, Continued
four semiannual Additional Loan interest payments beginning
March 1, 1995. These unpaid amounts will be payable from the net
proceeds of a sale or refinancing of the property.
(d) The total PIM and Additional Loan on this property were
$32,300,000 and $6,850,000, respectively, of which 72% is held
by Krupp Government Income Trust II. The Seasons is affiliated
with the Advisor of the Trust.
(e) The Additional Loan interest rate was 6% per annum for the first
three years and beginning in September 1996 increased to 9% per
annum.
(f) The aggregate cost for federal income tax purposes is $75,386,460.
Impaired Mortgage Loans
As a result of continued deterioration in property operations, the Advisor
of the Trust determined that the Lifestyles Additional Loan was impaired. As
a result, a valuation allowance of $1.1 million has been established to adjust
the carrying amount of the loan to the estimated fair market value of the
collateral less anticipated costs of sale. The Trust will recognize interest
income to the extent cash is received and supported by operating cash flow
generated by the collateral. The Trust did not recognize interest income on the
Lifestyles Additional Loan during 1998.
The Advisor of the Trust has determined that The Mountain View Additional
Loan is impaired. The Trust will recognize interest income to the extent cash
received is supported by operating cash flow generated by the collateral.
The Trust did not recognize interest income on the Mountain View Additional
Loan during 1998. In addition, a valuation allowance of $984,000 has been
established to adjust the carrying amount of the loan to estimated fair market
value of the collateral less anticipated costs of sale.
The activity in the valuation allowance together with the related recorded
and carrying value of the mortgage loans is as follows:
<TABLE>
<CAPTION>
Recorded Valuation Carrying
Value Allowance Value
<S> <C> <C> <C>
Lifestyles $1,817,665 $1,130,346 $687,319
Mountainview 1,553,600 984,000 569,600
Balance at December
31, 1998 $3,371,265 $2,114,346 $1,256,919
</TABLE>
The recorded value of the impaired mortgage loans did not differ materially from
the balances reported at the end of each period with the exception of the
impairment recorded in the fourth quarter of 1998 for the Lifestyles and
Mountainview additional loans. The Trust has also deferred income related
to Lifestyles and Mountain View of $687,319 and $367,383, respectively.
A reconciliation of activity for each of the three years in the period ended
December 31, 1998 is as follows:
Continued
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
C. PIMIs, Continued
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of period $108,470,247 $114,625,179 $115,131,611
Insured mortgage prepayments (32,603,506) (5,630,985) -
Principal collections (480,281) (523,947) (506,432)
Balance at end of period $ 75,386,460 $108,470,247 $114,625,179
</TABLE>
Property descriptions:
Lifestyles Apartments ("Lifestyles") is a 236-unit garden style apartment
complex located in Palm Harbor, Florida.
Windward Lakes Apartments ("Windward") is a 276-unit garden style apartment
complex located in Pompano Beach, Florida.
Audubon Villas is a 308-unit apartment complex located in Clearwater,
Florida.
Coconut Palm Club ("Coconut Palm") is a 301-unit apartment complex located
in Coconut Creek, Florida.
Mountain View Apartments ("Mountain View") is a 256-unit apartment complex
located in Madison, Alabama.
Red Run Apartments ("Red Run") is a 304-unit apartment complex located in
Owings Mills, Maryland.
Park Highland Apartments ("Park Highland") is a 250-unit apartment complex
located in Bellevue, Washington.
The Seasons is a 1,088-unit apartment complex located in Laurel, Maryland.
D. PIMs
The Trust had investments in five PIMs at December 31, 1998. The Trust's
PIMs consist of a GNMA or Fannie Mae MBS representing the securitized first
mortgage loan on the underlying property or a sole participation
interest in a first mortgage loan originated under the FHA lending program
on the underlying property (collectively the "Insured Mortgages"), and
participation interests in the revenue stream and appreciation of the
underlying property above specified base levels. The borrower conveys these
participation features to the Trust generally through a subordinated
promissory note and mortgage (the "Agreement").
The Trust receives guaranteed monthly payments of principal and interest on
the GNMA and Fannie Mae MBS and HUD insures the mortgage loan underlying the
GNMA MBS and the FHA mortgage loan. The borrower usually cannot prepay
the first mortgage loan during the first five years and may prepay the first
mortgage loan thereafter subject to a 9% prepayment penalty in years six
through nine, a 1% prepayment penalty in year ten and no prepayment penalty
thereafter. The Trust may receive income related to its participation
interests in the underlying property, however, these amounts are neither
insured nor guaranteed.
Generally, the participation features consist of the following: (i) "Minimum
Additional Interest" at rates ranging from .5% to .75% per annum calculated
on the unpaid principal balance of the first mortgage on the underlying
property, (ii) "Shared Income Interest" ranging from 25% to 30% of the
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
D. PIMs, continued
monthly gross rental income generated by the underlying property in excess
of a specified base, but only to the extent that it exceeds the amount of
Minimum Additional Interest received during such month, and (iii) "Shared
Appreciation Interest" ranging from 25% to 30% of any increase in value
of the underlying property in excess of a specified base. Payment of
participation interest from the operations of the property is limited to
50% of net revenue or surplus cash as defined by Fannie Mae or HUD,
respectively. Payment of participation interest at the time of the
prepayment of the PIM or upon its maturity generally cannot exceed 50% of
any increase in value of the underlying property.
Shared Appreciation Interest is payable when one of the following occurs:
(1) the sale of the underlying property to an unrelated third party
on a date which is later than five years from the date of the
Agreement, (2) the maturity date or accelerated maturity date of the
Agreement, or (3) prepayment of amounts due under the Agreement and the
Insured Mortgage.
Under the Agreement, the Trust, upon giving twelve months written notice,
can accelerate the maturity date of the Agreement to a date not earlier
than ten years from the date of the Agreement for (a) the payment of all
participation interest due under the Agreement as of the accelerated
maturity date, or (b) the payment of all participation interest due under
the Agreement plus all amounts due on the first mortgage note on the
property.
At December 31, 1998 and 1997 there are no Insured Mortgage loans within
the Trust's portfolio that are delinquent of principal or interest.
The Trust's PIMs consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Original
Loan Interest Maturity
PIM Amount Rate Date Balance at December 31,
1998 1997
<S> <C> <C> <C> <C> <C>
River View (GNMA) $ 9,284,877 8.00% 1/15/33 $ 9,070,196 $ 9,116,775
Mill Pond (FHA) 7,812,100 8.15% 1/1/33 7,622,447 7,661,308
Waterford (FHA) 6,935,900 8.125% 8/1/32 6,752,284 6,787,988
Rivergreens (FHA) 10,003,000 8.005% 4/1/33 9,765,665 9,815,836
Lincoln Green (FNMA) 15,565,000 6.75% 10/1/02 14,526,991 14,730,616
(a)
Total $49,600,877 $47,737,583 $48,112,523
(b)
</TABLE>
(a) Normal monthly benefit is based on a 30-year amortization. All
unpaid principal of approximately $13,583,000 and accrued interest is due
at the maturity date.
(b) The aggregate cost for federal income tax purposes is $47,737,583.
A reconciliation of activity for each of the three years in the period ended
December 31, 1998 is as follows:
Continued
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
D. PIMs, continued
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of period $48,112,523 $48,479,897 $57,691,223
PIM prepayment - - (8,862,450)
Prinicipal collections (374,940) (367,374) (348,876)
Balance at end of period $47,737,583 $48,112,523 $48,479,897
Property descriptions:
</TABLE>
River View Apartments ("River View") is a 220-unit apartment complex located
in Columbia, South Carolina.
Mill Pond Apartments ("Mill Pond") is a 146-unit apartment complex in
Bellbrook, Ohio.
Waterford Townhomes Apartments ("Waterford") is a 122-unit apartment complex
in Eagen, Minnesota.
Rivergreens Apartments ("Rivergreens") is a 208-unit apartment complex in
Gladstone, Oregon.
Lincoln Green Apartments ("Lincoln Green") is a 616-unit apartment complex
in Greensboro, North Carolina.
E. MBS
At December 31, 1998, the Trust's MBS portfolio had an amortized cost of
$16,255,176 and gross unrealized gains and losses of $875,328 and $2,552,
respectively. At December 31, 1998, the Trust has a FHA insured mortgage
with an amortized cost of $4,904,905. At December 31, 1997, the Trust's
MBS portfolio had an amortized cost of $25,699,739 and gross unrealized
gains of $1,385,602. The Trust's MBS have maturities ranging from 2008 to
2029.
During the first quarter of 1997, the Trust acquired a $3,400,000 face
value insured multi-family mortgage for $3,366,000 having a coupon rate of
7.5% per annum and a maturity of April 2032.
F. Shareholders' Equity
Under the Declaration of Trust and commencing with the initial closing of
the public offering of shares, the Trust has declared and paid dividends
on a quarterly basis. During the period in which the Trust qualifies
as a REIT, the Trust has and will pay quarterly dividends aggregating at
least 95% of taxable income on an annual basis to be allocated to the
shareholders in proportion to their respective number of shares. In order
for the Trust to maintain its REIT status with respect to the requirements
of Share ownership, the Declaration of Trust prohibits any investor from
owning, directly or indirectly, more than 9.8% of the outstanding Shares
and empowers the Trustees to refuse to permit any transfer of Shares which,
in their opinion, would jeopardize the status of the Trust as a REIT.
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
G. Related Party Transactions
Under the terms of the Advisory Service Agreement, the Advisor receives
an Asset Management Fee equal to .75% per annum of the value of the Trust's
actual and committed invested assets payable quarterly.
The Trust also reimburses affiliates of the Advisor for certain costs
incurred in connection with maintaining the books and records of the Trust
and the preparation and mailing of financial reports, tax information
and other communications to investors.
During the three years ended December 31, 1998, the Trust received interest
collections on Additional Loans with affiliates of the Advisor of the Trust
of $218,841, $400,838, and $234,593 respectively. In addition, the Trust
received $93,457 in 1998 and $32,622 in 1997 related to Participating
Interest Income.
H. Original Shares
Upon termination of the Trust, an affiliate of the Advisor is committed to
pay to holders of Original Shares the amount (if any) by which (a) the
Shareholders' Original Investments exceed (b) all Dividends (as defined
in the prospectus) paid by the Trust with respect to such Original Shares.
Original Shares are those Shares purchased during the Trust's initial
public offering either through purchase or through the dividend
reinvestment program and held until the last mortgage held by the Trust is
repaid or disposed of.
<TABLE>
<CAPTION>
I. Federal Income Taxes
<S> <C>
Net income per statement of income $ 14,836,465
Add: Provision for impaired mortgage loan 2,114,346
Less: Additional Loan interest deferred
for book purposes (1,478,403)
Book to tax difference for amortization
of prepaid fees and expenses (557,790)
Net income for federal income tax purposes $ 14,914,618
</TABLE>
The Trust paid dividends of $4.16 per share during 1998 which represents
approximately $.99 from ordinary income and $3.17 represents a non-taxable
distribution for federal income tax purposes.
The basis of the Trust's assets for financial reporting purposes is less
than its tax basis by approximately $7,311,000 and $4,622,000 at December
31, 1998 and 1997, respectively. The basis of the Trust=s liabilities
for financial reporting purposes exceeded its tax basis by approximately
$5,774,000 and $7,872,000 at December 31, 1998 and 1997, respectively.
J. Fair Value Disclosures of Financial Instruments
The Trust uses the following methods and assumptions to estimate the
fair value of each class of financial instruments:
Continued
<PAGE>
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
J. Fair Value Disclosures of Financial Instruments, continued
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity
of those instruments.
MBS
The Trust estimates the fair value of MBS based on quoted market prices
while it estimates the fair value of insured mortgages based on quoted
price of MBS with similar interest rates.
PIMs and PIMIs
There is no active trading market for these investments, so management
estimates the fair value of the PIMs and the insured mortgage portion
of the PIMIs using quoted market prices of MBS having the same stated
coupon rate as the Insured Mortgages. Additional Loans are based on
the estimated fair value of the underlying properties. Management does
not include any participation income in the Trust's estimated fair values,
because Management does not believe it can predict the time of realization
of the feature with any certainty. Based on the estimated fair value
determined using these methods and assumptions, the Trust's investments
in PIMs and PIMIs had gross unrealized losses and gains of approximately
$5,647,000 and $1,491,000, respectively, at December 31, 1998 and gross
unrealized losses and gains of approximately $6,551,000 and $381,000,
respectively, at December 31, 1997.
At December 31, 1998 and 1997, the Trust estimated the fair value of its
financial instruments as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
1998 1997
Fair Carrying Fair Carrying
Value Value Value Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 9,004 $ 9,004 $ 9,750 $ 9,750
MBS 22,473 22,133 27,085 27,085
PIMs and PIMIs:
PIMs 49,229 47,738 48,382 48,113
Insured mortgages 77,627 75,386 109,902 108,470
Additional Loans 11,244 11,244 19,209 19,209
$169,577 $165,505 $214,328 $212,627
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KRUPP GOVERNMENT INCOME TRUST
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning costs and end of
Description of period expenses Revenues period
<S> <C> <C> <C> <C>
Additional Loan $ - $2,114,346 $ - $2,114,346
(1) (2)
</TABLE>
(1) The Trust recognized a valuation allowance related to the Lifestyles and
Mountain View Additional Loans.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the balance
sheet and statement of income and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000857264
<NAME> Krupp Government Income Trust
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 9,004,397
<SECURITIES> 156,500,763<F1>
<RECEIVABLES> 1,057,365
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,859,164<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 171,421,689
<CURRENT-LIABILITIES> 5,773,669
<BONDS> 0
0
0
<COMMON> 164,742,014
<OTHER-SE> 872,776<F4>
<TOTAL-LIABILITY-AND-EQUITY> 171,421,689
<SALES> 0
<TOTAL-REVENUES> 21,922,286<F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,085,465<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,836,465
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,836,465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,836,465
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> Includes Participating Insured Mortgage Investments ("PIMIs") (insured
mortgages of $75,386,460 and Additional Loans of $11,243,862),
Participating Insured Mortgages ("PIMs") of $47,737,583 and Mortgage-backed
Securities ("MBS") of $22,132,858.
<F2> Includes prepaid acquisition fees and expenses of $9,570,796 net
accumulated amortization of $6,125,191 and prepaid participation servicing
fees of $3,190,184 net of accumulated amortization of $1,776,625.
<F3> Includes deferred income on Additional Loans of $5,773,669.
<F4> Unrealized gain on MBS.
<F5> Represents interest income on investments in mortgages and cash.
<F6> Includes $2,114,346 for impaired mortgage loans and $2,998,705 of
amortization of prepaid fees and expenses.
</FN>
</TABLE>
