NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

Principles of Consolidation

The consolidated financial statements include the accounts of the Partnership and its wholly owned subsidiaries, as follows:



Subsidiaries	Number of Units	Location
RRE Memorial Towers Holdings, LLC (“Memorial Towers”)	112	Houston, Texas
RRE Villas Holdings, LLC (“Villas”)	228	San Antonio, Texas
RRE Coach Lantern Holdings, LLC (“Coach Lantern”)	90	Scarborough, Maine
RRE Foxcroft Holdings, LLC (“Foxcroft”)	104	Scarborough, Maine
RRE Park Hill Holdings, LLC (“Park Hill”)	288	San Antonio, Texas
Total	822

The Partnership also owns a 100% interest in RRE Funding II, LLC (“Funding”), which owns two non-performing subordinated notes, Acacia Park (“Acacia”), and Southern Cove (“Southern Cove”), with a combined face value of $2.5 million. During the year ended December 31, 2012, the loans were deemed uncollectible and charged off.

All material intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Partnership estimates the allowance for uncollectible receivables and loan losses and adjusts the balance quarterly. The Partnership also estimates the liability for real estate taxes on the Texas properties and adjusts the balance quarterly. Actual results could differ from those estimates.

Supplemental Disclosure of Cash Flow Information

During each of the nine months ended September 30, 2014 and 2013, the Partnership paid $1.8 million in cash for interest.

Deferred Financing Costs

Costs incurred to obtain financing have been capitalized and are being amortized over the term of the related debt using the effective yield method.

Income Taxes

Income taxes or credits resulting from earnings or losses are payable by or accrue to the benefit of, the partners; accordingly, no provision has been made for income taxes in these consolidated financial statements.

The Partnership evaluates the benefits of tax positions taken or expected to be taken in its tax returns under a two-step recognition and measurement process. Only the largest amount of benefits from the tax positions that will more likely than not be sustainable upon examination are recognized by the Partnership. The Partnership does not have any unrecognized tax benefits, nor interest and penalties, recorded in the Consolidated Balance Sheets or Consolidated Statements of Operations and does not anticipate significant adjustments to the total amount of unrecognized tax benefits within the next twelve months.

The Partnership is subject to examination by the U.S. Internal Revenue Service and by the taxing authorities in those states in which the Partnership has significant business operations. The Partnership is not currently undergoing any examinations by taxing authorities. The Partnership may be subject to U.S. federal income tax and state/local income tax examinations for years 2010 through 2013.

Revenue Recognition

Revenue is primarily derived from the rental of residential housing units with lease agreement terms of generally one year or less. The Partnership recognizes revenue in the period that rent is earned, which is on a monthly basis. The Partnership recognizes rent as income on a straight-line basis over the term of the related lease. Additionally, any incentives included in the lease are amortized on a straight-line basis over the term of the related lease.

Included within rental income are other income amounts such as utility reimbursements, late fees, parking fees, pet fees and lease application fees which are recognized when earned or received.

The future minimum rental payments to be received from noncancelable operating leases total approximately $5.1 million and $36,000 for the twelve months ending September 30, 2015 and 2016, respectively, and none thereafter.

Loans Held for Investment, Net

The Partnership recognizes any revenue from the loans it holds for investment as interest income using the effective yield method.

The initial investment made in a purchased loan includes the amount paid to the seller plus any fees. The initial investment frequently differs from the related loan’s principal amount at the date of purchase. This difference is recognized as an adjustment of the yield over the life of the loan.

The Partnership initially records its loans at their purchase price, and subsequently accounts for them based on their outstanding principal plus or minus any unamortized premiums or discounts.

Long-Lived Assets

The Partnership reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that an asset’s estimated future cash flows will not be sufficient to recover its carrying amount, an impairment charge will be recorded to reduce the carrying amount for that asset to its estimated fair value. The Partnership has estimated that the future cash flows from its properties will be sufficient to recover their carrying amounts and, as a result, the Partnership did not recognize any impairment losses with respect to its Properties for either the nine months ended September 30, 2014 or 2013.

Rental Properties

Rental properties are carried at cost, net of accumulated depreciation. Buildings and improvements and personal property are depreciated for financial reporting purposes on the straight-line method over their estimated useful lives. The value of in-place leases is amortized over twelve months on a straight-line basis. Useful lives used for calculating depreciation for financial reporting purposes are as follows:



	Buildings and improvements	5 - 27.5 years
	Personal property	3 - 15 years

During the current year, the Partnership modified the capitalization policy by increasing the capitalization thresholds.

Advertising

The Partnership expenses advertising costs as they are incurred. Advertising costs, which are included in rental operating expenses, totaled $32,000 and $78,000 for the three and nine months ending September 30, 2014 and $31,000 and $88,000 for the three and nine months ended September 30, 2013, respectively.

Tenant Receivables

Tenant receivables are stated in the financial statements at amounts due from tenants net of an allowance for uncollectible receivables. Payment terms vary and receivables outstanding longer than the payment terms are considered past due. The Partnership determines its allowance by considering a number of factors, including the length of time receivables are past due, security deposits held, the Partnership’s previous loss history, the tenants’ current ability to pay their obligations to the Partnership, the general condition of the economy and the condition of the industry as a whole. The Partnership writes off receivables when they become uncollectible. At September 30, 2014 and December 31, 2013, the allowance for uncollectible receivables was $0 and $2,000, respectively.

Redemptions

The LPs may request redemption of their units at any time. The Partnership has no obligation to redeem any units and will do so only at the GP’s discretion. If the Partnership redeems units, the redemption price is generally the amount of the initial investment less all distributions from the Partnership to the LP, and less all organization and offering expenses charged to the LP.

Recent Accounting Standards

Accounting Standards Issued But Not Yet Effective

In April 2014, the Financial Accounting Standards Board ("FASB") issued authoritative guidance to change the criteria for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in a company's operations and financial results should be reported as discontinued operations, with expanded disclosures. In addition, disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as discontinued operations is required. This guidance is effective for the Partnership as of January 1, 2015, with early adoption permitted. The Partnership believes this amendment will have no impact on its financial statements.

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which will replace most existing revenue recognition guidance in GAAP. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU will be effective for the Partnership beginning January 1, 2017, including interim periods in 2017, and allows for both retrospective and prospective methods of adoption. The Partnership is in the process of determining the method of adoption and assessing the impact of this ASU on the Partnership’s consolidated financial position, results of operations or cash flows.