Fair Value of Financial Instruments

Current accounting guidance on fair value measurements establishes a framework for measuring fair value and provides for expanded disclosures about fair value measurements. The guidance:


•	Defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date; and


•	Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability on the measurement date.

Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. To increase consistency and comparability in fair value measurements and related disclosures, the fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of the hierarchy are defined as follows:


•	Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.


•	Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.


•	Level 3 inputs are unobservable inputs for asset or liabilities.

The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value.

Investments in Mortgage Revenue Bonds. The fair values of the Partnership’s investments in mortgage revenue bonds have each been based on a discounted cash flow or yield to maturity analysis. The Partnership uses this same valuation methodology to estimate the fair value adjustment for its bond purchase commitments. There is no active trading market for the mortgage revenue bonds and price quotes for the mortgage revenue bonds are not available. If available, the General Partner may also consider price quotes on similar mortgage revenue bonds or other information from external sources, such as pricing services. The estimates of the fair values of these mortgage revenue bonds, whether estimated by the Partnership or based on external sources, are based largely on unobservable inputs the General Partner believes would be used by market participants. Additionally, the calculation methodology used by the external sources and the Partnership encompasses the use of judgment in its application. To validate changes in the fair value of the Partnership’s investments in mortgage revenue bonds between reporting periods, the General Partner looks at the key inputs such as changes in the current market yields on similar bonds as well as changes in the operating performance of the underlying property serving as collateral for each bond. The General Partner validates that the changes in the estimated fair value of the mortgage revenue bonds move with the changes in these monitored factors. Given these facts the fair value measurement of the Partnership’s investment in mortgage revenue bonds is categorized as a Level 3 input. There is also approximately $3.3 million of estimated fair market value adjustments related to Bond Purchase Commitments that are categorized as a Level 3 inputs which were recorded in other comprehensive loss during the three and nine months ended September 30, 2015. The fair value of the Bond Purchase Commitments are determined in the same manner as the mortgage revenue bonds.

Investments in Public Housing Capital Fund Trust Certificates. The fair value of the Partnership’s investment in Public Housing Capital Fund Trust Certificates has been based on a yield to maturity analysis performed by the General Partner. There is no active trading market for the trusts’ certificates owned by the Partnership, but the General Partner will look at estimated values as determined by pricing services when available. The estimates of the fair values of these trusts’ certificates begin with the current market yield rate for a “AAA” rated tax-free municipal bond for a term consistent with the weighted-average life of each of the Public Housing Capital Fund trusts, adjusted largely for unobservable inputs the General Partner believes would be used by market participants. Additionally, the calculation methodology used by external pricing services and the Partnership encompasses the use of judgment in its application. The Partnership validates that the changes in the estimated fair value of Public Housing Capital Fund Trust Certificates move with the changes in the market yield rates of investment grade rated mortgage revenue municipal bonds with terms of similar length. Given these facts the fair value measurement of the Partnership’s investment in Public Housing Capital Fund Trust Certificates is categorized as a Level 3 input.

Investments in Mortgage-Backed Securities. The fair value of the Partnership’s investment in mortgage-backed securities is based upon prices obtained from a third party pricing service, which are indicative of market activity. The valuation methodology of the Partnership’s third party pricing service incorporates commonly used market pricing methods, incorporates trading activity observed in the market place, and other data inputs. The methodology also considers the underlying characteristics of each security, which are also observable inputs, including: coupon; maturity date; loan age; reset date; collateral type; geography; and prepayment speeds. The Partnership analyzes pricing data received from the third party pricing service by comparing it to valuation information obtained from at least one other third party pricing service, ensuring they are within a tolerable range of difference which the Partnership estimates as 7.5%. The General Partner also looks at observations of trading activity in the market place when available. Given these facts, the fair value measurements of the Partnership’s investment in mortgage-backed securities are categorized as Level 2 inputs.

Taxable Bonds. The fair values of the Partnership’s investments in taxable bonds have each been based on a discounted cash flow or yield to maturity analysis. There is no active trading market for the taxable bonds and price quotes are not available. The estimates of the fair values of these taxable bonds, whether estimated by the Partnership or based on external sources, are based largely on unobservable inputs the General Partner believes would be used by market participants. Additionally, the calculation methodology used by the external sources and the Partnership encompasses the use of judgment in its application. To validate changes in the fair value of the Partnership’s investments in taxable bonds between reporting periods, management looks at the key inputs such as changes in the current market yields on similar bonds as well as changes in the operating performance of the underlying property serving as collateral for each bond. We validate that the changes in the estimated fair value of the taxable bonds move with the changes in these monitored factors. Given these facts the fair value measurement of the Partnership’s investment in taxable bonds is categorized as a Level 3 input.

Interest Rate Derivatives. The effect of the Partnership’s interest rate caps is to set a cap, or upper limit, on the base rate of interest paid on the Partnership’s variable rate debt equal to the notional amount of the derivative agreement. The effect of the Partnership’s interest rate swap is to change a variable rate debt obligation to a fixed rate for that portion of the debt equal to the notional amount of the derivative agreement. The interest rate derivatives are recorded at fair value with changes in fair value included in current period earnings within interest expense. The fair value of the interest rate derivatives is based on a model whose inputs are not observable and therefore are categorized as a Level 3 input. The inputs in the valuation model include three-month LIBOR rates, unobservable adjustments to account for the SIFMA index, as well as any recent interest rate cap trades with similar terms.

Assets and liabilities measured at fair value on a recurring basis are summarized below:



	Fair Value Measurements at September 30, 2015
Description	Assets and Liabilities at Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and Liabilities
Mortgage revenue bonds	$	527,445,542		$	—	$	—	$	527,445,542
Bond purchase commitments	3,335,926			—		—		3,335,926
Public housing capital fund trust certificates	59,876,842			—		—		59,876,842
Mortgage-backed securities	14,681,587			—		14,681,587		—
Taxable mortgage bonds	5,056,428			—		—		5,056,428
Interest rate derivatives	(1,125,936		)	—		—		(1,125,936		)
Total Assets and Liabilities at Fair Value	$	609,270,389		$	—	$	14,681,587	$	594,588,802



	For Three Months Ended September 30, 2015
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Mortgage Revenue Bonds			Bond Purchase Commitments		Public Housing Capital Fund Trust Certificates			Taxable Bonds			Interest Rate Derivatives			Total
Beginning Balance July 1, 2015	$	548,935,985		$	883,999	$	58,991,437		$	4,711,687		$	(443,961	)	$	613,079,147
Total gains (losses) (realized/unrealized)
Included in earnings	—			—		—			—			(1,254,563		)	(1,254,563		)
Included in other comprehensive income (loss)	19,222,410			2,451,927		899,057			345,902			—			22,919,296
Purchases	6,320,000			—		—			—			—			6,320,000
Mortgage revenue bond exchanged for MF Property	(40,950,000		)												(40,950,000		)
Purchase interest rate derivative	—			—		—			—			572,588			572,588
Settlements	(6,082,853		)	—		(13,652		)	(1,161		)	—			(6,097,666		)
Ending Balance September 30, 2015	$	527,445,542		$	3,335,926	$	59,876,842		$	5,056,428		$	(1,125,936	)	$	594,588,802
Total amount of gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held on September 30, 2015	$	—		$	—	$	—		$	—		$	(1,254,563	)	$	(1,254,563	)




	For Nine Months Ended September 30, 2015
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Mortgage Revenue Bonds			Bond Purchase Commitments			Public Housing Capital Fund Trust Certificates			Taxable Bonds			Interest Rate Derivatives			Total
Beginning Balance January 1, 2015	$	449,024,137		$	5,780,413		$	61,263,123		$	4,616,565		$	267,669		$	520,951,907
Total gains (losses) (realized/unrealized)
Included in earnings	—			—			—			—			(1,955,693		)	(1,955,693		)
Included in other comprehensive income (loss)	2,752,871			(2,444,487		)	(381,802		)	11,842			—			(61,576		)
Purchases	137,805,000			—			—			500,000			—			138,305,000
Mortgage revenue bond exchanged for MF Property	(40,950,000		)	—			—			—			—			(40,950,000		)
Refund of interest rate derivative cost	—			—			—			—			(10,500		)	(10,500		)
Payment of interest rate derivative cost	—			—			—			—			572,588			572,588
Settlements	(21,186,466		)	—			(1,004,479		)	(71,979		)	—			(22,262,924		)
Ending Balance September 30, 2015	$	527,445,542		$	3,335,926		$	59,876,842		$	5,056,428		$	(1,125,936	)	$	594,588,802
Total amount of losses for the period included in earning attributable to the change in unrealized gains or losses relating to assets or liabilities still held on September 30, 2015	$	—		$	—		$	—		$	—		$	(1,955,693	)	$	(1,955,693	)



	Fair Value Measurements at December 31, 2014
Description	Assets and Liabilities at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and Liabilities
Mortgage revenue bonds	$	449,024,137	$	—	$	—	$	449,024,137
Bond purchase commitments	5,780,413		—		—		5,780,413
Public housing capital fund trust certificates	61,263,123		—		—		61,263,123
Mortgage-backed securities	14,841,558		—		14,841,558		—
Taxable mortgage bonds	4,616,565		—		—		4,616,565
Interest rate derivatives	267,669		—		—		267,669
Total Assets and Liabilities at Fair Value	$	535,793,465	$	—	$	14,841,558	$	520,951,907



	For Three Months Ended September 30, 2014
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Mortgage Revenue Bonds			Bond Purchase Commitments		Public Housing Capital Fund Trust Certificates			Taxable Bonds		Interest Rate Derivatives			Total
Beginning Balance July 1, 2014	$	356,313,065		$	334,367	$	64,997,718		$	4,370,023	$	669,712		$	426,684,885
Total gains (losses) (realized/unrealized)
Included in earnings	—			—		—			—		(153,810		)	(153,810		)
Included in other comprehensive income	17,464,986			2,634,574		(316,185		)	174,447		—			19,957,822
Purchases	31,115,700			—		—			—		—			31,115,700
Refund of interest rate derivative cost	—			—		—			—		991,400			991,400
Settlements	(104,629		)	—		(4,144,447		)	—		—			(4,249,076		)
Ending Balance September 30, 2014	$	404,789,122		$	2,968,941	$	60,537,086		$	4,544,470	$	1,507,302		$	474,346,921
Total amount of losses for the period included in earning attributable to the change in unrealized gains or losses relating to assets or liabilities still held on September 30, 2014	$	—		$	—	$	—		$	—	$	(153,810	)	$	(153,810	)




	For Nine Months Ended September 30, 2014
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Mortgage Revenue Bonds			Bond Purchase Commitments			Public Housing Capital Fund Trust Certificates			Taxable Bonds			Interest Rate Derivatives			Total
Beginning Balance January 1, 2014	$	285,318,171		$	(4,852,177	)	$	62,056,379		$	4,075,953		$	888,120		$	347,486,446
Total gains (losses) (realized/unrealized)
Included in earnings	—			—			—			—			(763,718		)	(763,718		)
Included in other comprehensive income	42,498,644			7,821,118			4,480,249			543,517			—			55,343,528
Purchases	107,770,827			—			—			—			—			107,770,827
Purchase interest rate derivatives	—			—			—			—			1,382,900			1,382,900
Mortgage revenue bond and MBS sales and redemption	(30,464,798		)	—			—			—			—			(30,464,798		)
Settlements	(333,722		)	—			(5,999,542		)	(75,000		)	—			(6,408,264		)
Ending Balance September 30, 2014	$	404,789,122		$	2,968,941		$	60,537,086		$	4,544,470		$	1,507,302		$	474,346,921
Total amount of losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held on September 30, 2014	$	—		$	—		$	—		$	—		$	(763,718	)	$	(763,718	)

Gains and losses included in earnings for the period shown above are included in interest expense.

The Partnership calculates a fair value of each financial instrument using a discounted cash flow model based on the debt amortization schedules at the effective rate of interest for each period represented. This estimate of fair value is based on Level 3 inputs. The table below represents the fair value of the debt held on the condensed consolidated balance sheet on September 30, 2015 and December 31, 2014, respectively.



	September 30, 2015				December 31, 2014
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Liabilities:
Debt financing	$	454,031,754	$	453,832,018	$	345,359,000	$	346,813,909
Mortgages payable	$	68,494,688	$	67,260,985	$	76,707,845	$	76,134,465