Investments in Tax-Exempt Mortgage Revenue Bonds

Each of the tax-exempt mortgage revenue bonds were issued by various state and local governments, their agencies and authorities to finance the construction or rehabilitation of income-producing real estate properties. However, the tax-exempt mortgage revenue bonds do not constitute an obligation of any state or local government, agency or authority and no state or local government, agency or authority is liable on them, nor is the taxing power of any state or local government pledged to the payment of principal or interest on the tax-exempt mortgage revenue bonds. The tax-exempt mortgage revenue bonds are non-recourse obligations of the respective owners of the properties. The sole source of the funds to pay principal and interest on the tax-exempt mortgage revenue bonds is the net cash flow or the sale or refinancing proceeds from the properties. Each tax-exempt mortgage revenue bond, however, is collateralized by a mortgage on all real and personal property included in the related property and bears tax-exempt interest at a fixed rate and five of the tax-exempt mortgage revenue bonds provide for the payment of additional contingent interest that is payable solely from available net cash flow generated by the financed property.

The tax-exempt mortgage revenue bonds owned by the Company have been issued to provide construction and/or permanent financing of multifamily residential properties. The carrying value of each of the Partnership's tax-exempt mortgage revenue bonds as of December 31, 2012 and 2011 is as follows:



	December 31, 2012
Description of Tax-Exempt	Cost adjusted		Unrealized		Unrealized			Estimated
Mortgage Revenue Bonds	for pay-downs		Gain		Loss			Fair Value
Ashley Square ⁽¹⁾	$	5,260,000	$	246,981	$	—		$	5,506,981
Autumn Pines⁽²⁾	12,217,004		953,024		—			13,170,028
Bella Vista⁽¹⁾	6,600,000		93,324		—			6,693,324
Bridle Ridge ⁽¹⁾	7,765,000		108,632		—			7,873,632
Brookstone⁽¹⁾	7,453,246		1,459,408		—			8,912,654
Cross Creek⁽¹⁾	6,004,424		1,994,911		—			7,999,335
Lost Creek⁽¹⁾	15,987,744		3,467,182		—			19,454,926
Runnymede⁽¹⁾	10,605,000		491,330		—			11,096,330
Southpark ⁽¹⁾	11,904,968		2,462,350		—			14,367,318
Woodlynn Village⁽¹⁾	4,460,000		—		(446		)	4,459,554
Tax-exempt mortgage revenue bonds held in trust	$	88,257,386	$	11,277,142	$	(446	)	$	99,534,082

Description of Tax-Exempt	Cost adjusted		Unrealized		Unrealized			Estimated
Mortgage Revenue Bonds	for pay-downs		Gain		Loss			Fair Value
Arbors at Hickory Ridge	$	11,581,485	$	610,785	$	—		$	12,192,270
Iona Lakes	15,535,000		554,910		—			16,089,910
Vantage at Judson	6,049,000		—		(847		)	6,048,153
Woodland Park	15,662,000		—		(4,289,039		)	11,372,961
Tax-exempt mortgage revenue bonds	$	48,827,485	$	1,165,695	$	(4,289,886	)	$	45,703,294

(1) Bonds owned by ATAX TEBS I, LLC, Note 11

(2) Bond held by Duetsche Bank in a secured financing transaction, Note 11



	December 31, 2011
Description of Tax-Exempt	Cost adjusted		Unrealized		Unrealized			Estimated
Mortgage Revenue Bonds	for pay-downs		Gain		Loss			Fair Value
Ashley Square⁽¹⁾	$	5,308,000	$	—	$	—		$	5,308,000
Autumn Pines ⁽²⁾	12,280,776		—		(152,094		)	12,128,682
Bella Vista⁽¹⁾	6,650,000		—		(405,184		)	6,244,816
Bridle Ridge ⁽¹⁾	7,815,000		—		(469,056		)	7,345,944
Brookstone ⁽¹⁾	7,437,947		1,116,538		—			8,554,485
Cross Creek⁽¹⁾	5,961,478		1,824,167		—			7,785,645
GMF Madison	3,810,000		51,130		—			3,861,130
GMF Warren/Tulane	11,815,000		321,722		—			12,136,722
Lost Creek ⁽¹⁾	16,051,048		1,962,587		—			18,013,635
Runnymede ⁽¹⁾	10,685,000		—		(434,452		)	10,250,548
Southpark ⁽¹⁾	11,925,483		1,431,637		—			13,357,120
Woodlynn Village ⁽¹⁾	4,492,000		—		(325,940		)	4,166,060
Tax-exempt mortgage revenue bonds held in trust	$	104,231,732	$	6,707,781	$	(1,786,726	)	$	109,152,787

Description of Tax-Exempt	Cost adjusted		Unrealized		Unrealized			Estimated
Mortgage Revenue Bonds	for pay-downs		Gain		Loss			Fair Value
Iona Lakes	$	15,720,000	$	160,658	$	—		$	15,880,658
Woodland Park	15,662,000		—		(5,000,093		)	10,661,907
Tax-exempt mortgage revenue bonds	$	31,382,000	$	160,658	$	(5,000,093	)	$	26,542,565

(1) Bonds owned by ATAX TEBS I, LLC, Note 11

(2) Bond held by Duetsche Bank in a secured financing transaction, Note 11

Valuation - As all of the Company's investments in tax-exempt mortgage revenue bonds are classified as available-for-sale securities, they are carried on the balance sheets at their estimated fair values. Due to the limited market for the tax-exempt bonds, these estimates of fair value do not necessarily represent what the Company would actually receive in a sale of the bonds. There is no active trading market for the bonds and price quotes for the bonds are not generally available. As of December 31, 2012 and December 31, 2011, all of the Company's tax-exempt mortgage revenue bonds were valued using discounted cash flow or yield to maturity analysis performed by management. Management's valuation encompasses judgment in its application. The key assumption in management's yield to maturity analysis is the range of effective yields on the individual bonds. At December 31, 2012, the range of effective yields on the individual bonds was 5.7% to 8.4%. Additionally, the Company calculated the sensitivity of the key assumption used in calculating the fair values of these bonds. Assuming an immediate ten percent adverse change in the key assumption, the effective yields on the individual bonds would increase to a range of 6.2% to 9.3% and would result in additional unrealized losses on the bond portfolio of approximately $10.3 million. This sensitivity analysis is hypothetical and is as of a specific point in time. The results of the sensitivity analysis may not be indicative of actual changes in fair value and should be used with caution. If available, the general partner may also consider price quotes on similar bonds or other information from external sources, such as pricing services. Pricing services, broker quotes and management's analysis provide indicative pricing only.

Unrealized gains or losses on these tax-exempt bonds are recorded in accumulated other comprehensive income (loss) to reflect changes in their estimated fair values resulting from market conditions and fluctuations in the present value of the expected cash flows from the underlying properties. As of December 31, 2012, one bond that is in an unrealized loss position have been in an unrealized loss position for greater than twelve months. The valuation of all of the current bonds has improved over the prior year due to changes in the yields of new issuances of tax-exempt investments. The Company has reviewed each of its tax-exempt mortgage revenue bonds for impairment. Based upon this evaluation, the current unrealized losses on the bonds are not considered to be other-than-temporary. If the credit and capital markets deteriorate further, the Company experiences deterioration in the values of its investment portfolio, or if the Company's intent and ability to hold certain bonds changes, the Company may incur impairments to its investment portfolio which could negatively impact the Company's financial condition, cash flows, and reported earnings. The Vantage at Judson bond was purchased in December 2012 so it has been in an unrealized loss position for less than twelve months and the third bond in an unrealized position, Woodlynn Village, has also been in an unrealized loss position for less than twelve months.

The Company's ability to recover the tax-exempt mortgage revenue bond's entire amortized cost basis is dependent upon the issuer being able to meet debt service requirements. The primary source of repayment is the cash flows produced by the property which serves as the collateral for the bonds. The Company utilizes a discounted cash flow model for the underlying property and compares the results of the model to the amortized cost basis of the bond. These models reflect the cash flows expected to be generated by the underlying properties over a ten year period, including an assumed property sale at the end of year ten, discounted using the effective interest rate on the bonds in accordance with the accounting guidance on other than temporary impairment of debt securities. The revenue, expense, and resulting net operating income projections which are the basis for the discounted cash flow model are based on judgment.

The Company previously identified three tax-exempt mortgage revenue bonds for which certain actions may be necessary to protect the Company’s position as a secured bondholder and lender. These bonds were Woodland Park, DeCordova and Weatherford. The Company foreclosed on the bonds secured by DeCordova and Weatherford in February 2011 and one of the Company's subsidiaries took full ownership of these two properties. These properties are now classified and presented as MF Properties of the Company as discussed in Note 8.

The Company has evaluated the Woodland Park bond holding for an other-than-temporary decline in value as of December 31, 2012 and 2011 (see Note 2 for discussion of our impairment testing method). Based on this evaluation, the Company has concluded that no other-than-temporary impairment of the Woodland Park bond existed at December 31, 2012 and 2011. However, the evaluation determined that the interest receivable accrued on the Woodland Park bond was impaired and an approximate $953,000 allowance for loss on receivables was recorded in 2011. The Partnership received two interest payments in 2012 but has recorded an additional allowance of approximately $453,000 against the remaining interest receivable in 2012. The following provides further background of the circumstances related to the Woodland Park bond. In May 2010, there were insufficient funds available for debt service and the property owner did not provide additional capital to fund the shortfall. As a result, a payment default on the bonds occurred. In order to protect its investment, the Partnership issued a formal notice of default through the bond trustee and started the judicial foreclosure process. On February 28, 2013, the court issued a ruling confirming the bond trustee's right to foreclose its first mortgage on the Woodland Park property and confirming that the first mortgage securing the bond is senior to mechanic's liens filed on the property. Although the court's ruling is subject to appeal, the bond trustee has commenced foreclosure proceeding and we believe the Partnership will be able to acquire title to the Woodland Property within 75 days. Upon successfully taking ownership of Woodland Park, the Partnership will have the option of selling the property after converting it to 100% market-rate rents or maintaining the property as a rent restricted property and seeking to place new tax-exempt financing on the property and acquire the bonds. Although the foreclosure process has taken longer than originally anticipated, the Company continues to believe that the fair value of the Woodland Park property equals or exceeds the carrying amount of the Woodland Park tax-exempt mortgage revenue bond.

As of December 31, 2011, the property had 215 units leased out of total available units of 236, or 91% physical occupancy. As of December 31, 2012, occupancy had decreased to 211 units leased, or 89% physical occupancy. America First Properties Management Company, LLC, an affiliate of AFCA 2, provides management for this property. Measures have been implemented that we believe will maintain the physical occupancy of this property at approximately 89% for 2013, which will ensure that net operating income is in line with what had been projected for 2013 in the most recent evaluation for other than temporary impairment. Based on this evaluation, the current unrealized loss on this bond is considered to be temporary.

The various revenue and expense projections for the Woodland Park property operations are summarized as follows:

•

Revenue and expenses projected for 2013 are equal to the property budget. Budgeted revenues of approximately $1.73 million are based on a budgeted average occupancy of 88%. Budgeted expenses are approximately $901,000. Revenues are projected to grow over the ten years in the model to approximately $2.2 million in year ten based on average annual rental increases of 2% and an average occupancy increasing over time to 93%. Expenses are projected to grow to approximately $1.1 million in year ten based on average annual increases of 2.5%.

Recent Bond Activity

In December 2012, the Partnership purchased a $6,049,000 subordinate tax-exempt mortgage revenue bond and a $934,000 subordinate taxable bond both secured by the Vantage at Judson apartments. This property is located in San Antonio, Texas and is currently under construction. Both bonds mature on February 1, 2053 and carry an annual cash interest rate of 9% plus allow for an additional 3% of interest calculated on the property's cash flows after debt service. The Vantage at Judson apartments has a construction loan with an unrelated Bank and the Partnership's bonds are second lien borrowings to that construction loan. The property will have 288 units when construction is completed in the spring of 2014. The Company has determined that the entity which owns Vantage at Judson apartments is an unrelated not-for-profit which under the accounting guidance is not subject to applying the VIE consolidation guidance. As a result, the property's financial statements are not consolidated into the consolidated financial statements of the Company.

Under the terms of a Forward Delivery Bond Purchase Agreement, the Partnership has agreed to purchase a new tax-exempt mortgage revenue bond of up to $26,687,000 (“Series B Bonds”) which will be delivered by the tax-exempt mortgage revenue bond Issuer once the property meets specific obligations and occupancy rates. The Series B Bonds will have a stated annual interest rate of 6.0% and bond proceeds must be used to pay off the construction loan to the Bank and all or a portion of the $6,049,000 subordinate tax-exempt mortgage revenue bond. If the property does not meet its specific obligations and required occupancy rate before January 1, 2015, the Partnership has the right to terminate the purchase commitment. The Partnership accounts for the Bond Purchase Agreement as an available-for-sale security and, as such, records the estimated value of the forward purchase commitment as an asset or liability with changes in such valuation recorded in other comprehensive income. As of December 31, 2012, the Partnership has concluded there is no value to the forward purchase commitment.

In June 2012, the Partnership acquired a $10.0 million restructured par value tax-exempt mortgage revenue bond secured by Arbors at Hickory Ridge Apartments, a 348 unit multifamily apartment complex located in Memphis, Tennessee, which represented 100% of the bond issuance for approximately $10.2 million. The tax-exempt bond carried an annual interest rate of 7.98% and matures on April 1, 2026. The bond did not provide for contingent interest. In conjunction with the purchase of the Arbors of Hickory Ridge tax-exempt mortgage revenue bond, an affiliate of the Global Ministries Foundation, a not-for-profit entity unrelated to the Company acquired the multi-family property securing the bond. At closing, the Company also secured a $600,000 promissory note receivable as a fee for identifying this property acquisition and performing the related due diligence.

In December 2012, the tax-exempt mortgage revenue bond secured by Arbors at Hickory Ridge Apartments was restructured to an $11.5 million par value tax-exempt mortgage revenue bond with an annual interest rate of 6.25% and maturity of December 1, 2049. The Partnership then purchased 100% of this bond issuance plus a taxable loan of approximately $191,000 for a payment of approximately $1,041,000 made at closing. In connection with the closing of the restructured tax-exempt mortgage revenue bond, the Company received payment in full of the $600,000 promissory note less costs associated with the transaction and approximately $557,000 has been recorded as other income.

In October 2012, the Company acquired 100% of the $9.5 million tax-exempt mortgage revenue bonds issued by the North Carolina Housing Finance Agency as part of a plan of financing for the acquisition and rehabilitation of the Greens Property. The tax-exempt mortgage revenue bonds secured by the Greens Property were acquired by the Company at par and consisted of two series. The Series A bond has a par value of approximately $8.5 million and bears interest at an annual rate of 6.5%. The Series B bond has a par value of approximately $1.0 million and bears interest at an annual interest rate of 12.0%. Both series of bonds mature on October 1, 2047. In connection with the bond financing transaction, ownership of the Greens Property was conveyed by the Company to a new ownership entity controlled by an unaffiliated not-for-profit entity. However, because the new ownership entity did not have sufficient equity capital at the time of purchase and the property operations are the sole source of debt service on the Company's bonds, the Company is required to continue to account for the Greens Property as if it is the owner of real estate rather than as a secured lender. As such, the Company continues to report the results from the Greens Property as discontinued operations in its financial statements as of December 31, 2012 which, among other things, results in the elimination of the bonds in consolidation (Note 10).

In May 2012, the tax-exempt mortgage revenue bonds secured by GMF-Madison Tower Apartments and GMF-Warren/Tulane Apartments were sold for an amount greater than the outstanding principal and accrued base interest. The Company received approximately $4.1 million for the GMF-Madison Tower Apartments tax-exempt mortgage revenue bond and approximately $12.7 million from the GMF-Warren/Tulane Apartments tax-exempt mortgage revenue bond resulting in an approximate $668,000 realized gain. These tax-exempt mortgage revenue bonds had been acquired at par on June 1, 2011. At December 31, 2012, the Partnership still owns the taxable revenue bonds secured by these two properties. The taxable bond secured by GMF-Madison Tower Apartments carries an annual interest rate of 7.75% and matures on December 1, 2019. The taxable bond secured by GMF-Warren/Tulane Apartments carries an annual interest rate of 6.5% and matures on December 1, 2015. These taxable bonds were also acquired on June 1, 2011 and have an outstanding combined principal balance of $600,000 as of December 31, 2012.

In October 2011, the Briarwood Manor bond was called and retired at par plus accrued interest for approximately $4.9 million. This transaction resulted in approximately $445,000 gain reported in the fourth quarter. The net redemption proceeds were used by the Company to retire its $4.0 million term note with Omaha State Bank. The Briarwood bond was originally purchased on February 1, 2011 for $4.5 million.

In May 2011, the outstanding Clarkson College tax-exempt revenue bond held by the Company was retired early for an amount equal to the outstanding principal and base interest plus accrued but unpaid contingent interest. As of March 31, 2011, the Company carried the investment in the Clarkson College bond at an estimated fair market value of approximately $5.1 million. The retirement of the bond resulted in a payment to the Partnership of approximately $6.1 million consisting of approximately $5.8 million in principal, approximately $16,000 of base interest and approximately $308,000 of accrued contingent interest.

In November 2010, the Company acquired the tax-exempt mortgage revenue bond for a 250 unit multifamily apartment complex in Humble, Texas (Houston) known as Autumn Pines for approximately $12.3 million which represented 100% of the bond issuance. The bond par value is $13.4 million with an annual interest rate of 5.8%. The bond purchase price results in a yield to maturity of approximately 7.0% per annum. The bond matures on October 1, 2046.

In June 2010, the Company acquired all of the $18.3 million tax-exempt mortgage revenue bonds issued by the Ohio Housing Finance Agency in order to provide debt financing for the acquisition and rehabilitation of Crescent Village, Post Woods I, Post Woods II and Willow Bend Apartments in Ohio (the “Ohio Properties”). The tax-exempt mortgage bonds secured by the Ohio Properties were acquired by the Company at par and were issued in two series. The Series A bond has a par value of $14.7 million and bears interest at a fixed annual rate of 7.0%. The Series B bond has a par value of $3.6 million and bears interest at a fixed annual rate of 10.0%. Neither series provides for contingent interest. Each series of bonds matures on June 1, 2050. In connection with the bond financing transaction, ownership of the Ohio Properties was conveyed by the Company to three new ownership entities controlled by an unaffiliated not-for-profit entity. As of December 31, 2012, the new ownership entities had not invested sufficient equity capital and the property operations are the sole source of debt service on the Company's bonds. Since the Partnership owned the multi-family properties serving as the collateral for these bonds prior to purchasing the tax-exempt mortgage revenue bonds, the Partnership has yet to be able to recognize for accounting purposes the sale of these MF Properties and the underlying properties are reported as discontinued operations (Note 10). The tax-exempt mortgage revenue bonds secured by the Ohio Properties are eliminated upon consolidation.

In May 2010, the Company acquired the tax-exempt mortgage revenue bond for a 261 unit multifamily apartment complex in San Antonio, Texas known as The Villages at Lost Creek for approximately $15.9 million which represented 100% of the bond issuance. The bond par value is $18.5 million with an annual interest rate of 6.25%. The bond purchase price results in a yield to maturity of approximately 7.55% per annum. The bond matures on June 1, 2041.

Descriptions of certain terms of the tax-exempt mortgage revenue bonds are as follows:



Property Name	Location	Maturity Date	Base Interest Rate		Principal Outstanding at Dec. 31, 2012

Arbors at Hickory Ridge	Memphis, TN	12/1/2049	6.25	%	$	11,450,000
Ashley Square ⁽¹⁾	Des Moines, IA	12/1/2025	6.25	%	5,260,000
Autumn Pines ⁽²⁾	Humble, TX	10/1/2046	5.80	%	13,220,000
Bella Vista ⁽¹⁾	Gainesville, TX	4/1/2046	6.15	%	6,600,000
Bridle Ridge ⁽¹⁾	Greer, SC	1/1/2043	6.00	%	7,765,000
Brookstone ⁽¹⁾	Waukegan, IL	5/1/2040	5.45	%	9,416,794
Cross Creek ⁽¹⁾	Granbury, TX	3/1/2049	6.15	%	8,568,409
Iona Lakes	Ft. Myers, FL	4/1/2030	6.90	%	15,535,000
Runnymede ⁽¹⁾	Austin, TX	10/1/2042	6.00	%	10,605,000
Southpark ⁽¹⁾	Austin, TX	12/1/2049	6.13	%	13,900,000
Vantage at Judson	San Antonio. TX	2/1/2053	9.00	%	6,049,000
Villages at Lost Creek ⁽¹⁾	San Antonio, TX	6/1/2041	6.25	%	18,315,000
Woodland Park	Topeka, KS	11/1/2047	6.00	%	15,013,000
Woodland Park	Topeka, KS	11/1/2047	8.00	%	649,000
Woodlynn Village ⁽¹⁾	Maplewood, MN	11/1/2042	6.00	%	4,460,000
Total Tax-Exempt Mortgage Bonds					$	146,806,203

Property Name	Location	Maturity Date	Base Interest Rate		Principal Outstanding Dec. 31, 2011

Ashley Square ⁽¹⁾	Des Moines, IA	12/1/2025	6.25	%	$	5,308,000
Autumn Pines ⁽²⁾	Humble, TX	10/1/2046	5.80	%	13,325,000
Bella Vista ⁽¹⁾	Gainesville, TX	4/1/2046	6.15	%	6,650,000
Bridle Ridge ⁽¹⁾	Greer, SC	1/1/2043	6.00	%	7,815,000
Brookstone ⁽¹⁾	Waukegan, IL	5/1/2040	5.45	%	9,490,809
Cross Creek ⁽¹⁾	Granbury, TX	3/1/2049	6.15	%	8,634,693
GMF-Madison ⁽²⁾	Memphis, TN	12/1/2046	6.75	%	3,810,000
GMF-Warren/Tulane ⁽²⁾	Memphis, TN	12/1/2046	6.75	%	11,815,000
Iona Lakes	Ft. Myers, FL	4/1/2030	6.90	%	15,720,000
Runnymede ⁽¹⁾	Austin, TX	10/1/2042	6.00	%	10,685,000
Southpark ⁽¹⁾	Austin, TX	12/1/2049	6.13	%	14,000,000
Villages at Lost Creek ⁽¹⁾	San Antonio, TX	6/1/2041	6.25	%	18,500,000
Woodland Park	Topeka, KS	11/1/2047	6.00	%	15,013,000
Woodland Park	Topeka, KS	11/1/2047	8.00	%	649,000
Woodlynn Village ⁽¹⁾	Maplewood, MN	11/1/2042	6.00	%	4,492,000
Total Tax-Exempt Mortgage Bonds					$	145,907,502

(1) Bonds owned by ATAX TEBS I, LLC, Note 11

(2) Bond held by Deutsche Bank in a secured financing transaction, Note 11