-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PWkpDvQ5C1ODqYMP0L1LD9A5PbB+a9GzY1VIHg76QCDWX1v53IJ2+XelTkeofQ5j G0LmLQk4yU0pAmrjAo2jCA== 0000857264-00-000001.txt : 20000331 0000857264-00-000001.hdr.sgml : 20000331 ACCESSION NUMBER: 0000857264-00-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRUPP GOVERNMENT INCOME TRUST CENTRAL INDEX KEY: 0000857264 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043089272 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19244 FILM NUMBER: 586949 BUSINESS ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 BUSINESS PHONE: 6174232233 MAIL ADDRESS: STREET 1: 470 STREET 2: ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 10-K 1 KRUPP GOVERNMENT INCOME TRUST UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) 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, 1999 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 (IRS Employer Identification No.) of incorporation or organization) 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 13-19 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 ("REIT") 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 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 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, 1999, 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, 1999 is approximately 11,911. 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 1999 and 1998 and $.17 per Share per quarter for 2000. 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.
(Amounts in thousands, except for per Share amounts) 1999 1998 1997 1996 1995 Total revenues $ 15,632 $ 21,922 $ 17,618 $ 16,358 $ 17,200 Net income $ 12,317 $ 14,836 $ 12,899 $ 12,481 $ 13,022 Net income per Share $ .82 $ .99 $ .86 $ .83 $ .87 Weighted average Shares outstanding 15,053 15,053 15,053 15,053 15,053 Total assets at December 31 $ 142,096 $171,422 $221,779 $241,634 $247,620 Average dividends per Share $ 2.60 $ 4.16 $ 2.22 $ 1.30 $ 1.30
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. Impact of the Year 2000 Issue Starting in 1997 the Advisor conducted an assessment of the Trust's core internal and external computer information systems to understand the nature and extent of work required to make its systems Year 2000 ready. The Year 2000 readiness issue was concerned with the inability of computerized information systems to accurately calculate, store or use a date after 1999. The Advisor believed that a system failure or miscalculation could cause disruptions of operations. As a result of this concern, the Advisor, along with certain affiliates, upgraded their computer systems including their hardware and software so they would be Year 2000 ready. In addition, the Advisor surveyed the Trust's material third-party service providers and significant vendors and received assurances that they were Year 2000 ready. The Advisor also developed contingency plans for all of its "mission-critical functions" to insure business continuity. As a result of these efforts and the efforts of third parties, the Year 2000 did not result in any disruption of activities to the Trust. Liquidity and Capital Resources At December 31, 1999 the Trust had liquidity consisting of cash and cash equivalents, of approximately $4.6 million as well as the cash inflows provided by PIMs, PIMIs, MBS, cash and cash equivalents. The Trust may also receive additional cash flow from the participation features of its PIMs and PIMIs. The Trust anticipates that these sources will be adequate to provide the Trust with sufficient liquidity to meet its obligations, including providing dividends to its investors. The most significant demand on the Trust's liquidity is quarterly dividends, paid to investors of approximately $2.6 million, and special distributions. Funds for dividends come from interest income received on PIMs, PIMIs, MBS, cash and cash equivalents net of operating expenses and the principal collections received on PIMs, PIMIs and MBS. The portion of dividends funded from principal collections reduces the capital resources of the Trust. As the capital resources of the Trust decrease, the total cash flows to the Trust will also decrease which may result in periodic adjustments to the dividends paid to the investors. The Advisor periodically reviews the dividend rate to determine whether an adjustment is necessary based on projected future cash flows. Based on current projections, the Advisor presented the Board of Trustees with a proposal to reduce the dividend rate to $.17 per Share per quarter commencing in February 2000. The Board of Trustees approved the new rate at their quarterly meeting in November. In general, the Advisor tries to set a dividend rate that provides for level quarterly distributions. To the extent quarterly dividends do not fully utilize the cash available for distribution and cash balances increase, the Advisor may adjust the dividend rate or distribute such funds through a special distribution. The Trust's PIMIs funded the construction or significant rehabilitation of multifamily housing, which requires time to achieve stabilized operations following the completion of the work. 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 Additional Loan 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 property generates sufficient operating cash flow to make such payments. The Seasons was the only property that made its full scheduled 1999 Additional Loan interest payments from operating cash flow. Red Run generated some surplus cash during 1999, which funded a portion of the Additional Loan interest payment, the balance was funded with reserves held in escrow by the Trust. Three others, Lifestyles, Mountain View and Windward Lakes, operated under workout agreements with the Trust during 1999 that require Additional Loan interest payments only if surplus cash is generated through property operations after servicing the insured first mortgage. Lifestyles and Mountain View did not generate any surplus cash during 1999 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 1999 that the Trust has recognized as income. The Trust also can receive additional income through its participation in 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 is dependent upon whether property operations meet certain criteria. During 1999, the property operating results of one of the Trust's PIM investments and two of the Trust's PIMI investments exceeded the thresholds established by that criteria and paid the Trust participation income: (Lincoln Green, $143,324; Red Run, $4,781 and The Seasons, $153,498). Most of the properties had stable operating results during 1999. High occupancy rates were maintained and moderate rental income increases were achieved at many of the properties due to stable or improving markets. Occupancy at the three properties that generated participation income was consistently in the high 90% range as was a fourth, Waterford Townhomes. Market forces have affected occupancy at three other properties more; Mill Pond, Rivergreens and Riverview had average occupancy during 1999 in the 90% range, although all three showed some improvement at year-end. These three properties generate sufficient revenues to address capital needs and pay debt service, but do not generate sufficient surplus cash to pay any participation income to the Trust. Occupancy and operating results at these three properties are operating under workout agreements with the Trust which are being closely monitored. Occupancy at Windward Lakes was generally consistent in the low 90% range; occupancy at Lifestyles improved substantially during 1999, ending the year in the high 90% range; and occupancy at Mountain View recovered to the high 80% range after falling to 80% during the first quarter. Windward Lakes operating results deteriorated during 1995 and 1996, and in early 1997 the independent Trustees approved a workout with the borrower of the Windward Lakes PIMI, an affiliate of the Advisor of the Trust. In the workout, the Trust agreed to reduce the effective basic interest rate on the insured first mortgage by 2% per annum for 1997 and 1% per annum for 1998, 1999 and 2000. The borrower made an equity contribution of $133,036 to the property and agreed to cap the annual management fee paid to an affiliate at 3% of revenues. The Trust's participation in current operations is 50% of any Surplus Cash as determined under HUD guidelines and the Trust's Additional Loan interest is payable out of its share of Surplus Cash. Any unpaid Additional Loan interest accrues at 7.5% per annum. During 1999, the Trust received $51,938 as its share of Surplus Cash generated by Windward Lakes and credited it towards Additional Loan interest income. When the property is sold or refinanced, the Trust will receive 50% of any net proceeds remaining after repayment of the insured mortgage, the Additional Loan, the interest rate relief, accrued and unpaid Additional Loan interest and the borrower's equity up to the point that the Trust has received a cumulative, non-compounded 10% preferred return on its investments in the insured mortgage and Additional Loan. Lifestyles operating results deteriorated during 1995, and the Trust approved a two-year workout that effectively reduced the interest rate on the insured mortgage by 1%. When that workout ended in 1997, the property was not able to generate sufficient revenues to maintain the property and service the original interest rate. Consequently, the borrower on the Lifestyles PIMI defaulted on its May 1, 1998 debt service payment on the insured mortgage. The Trust agreed to a new workout through 2007. Under its terms, the Trust agreed to reduce the effective interest rate on the insured 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 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%. The borrower's new equity and the reduction in the effective interest rate on the insured 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 the Advisor 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 and has maintained such allowance in 1999. Mountain View is similar to Lifestyles with respect to competitive market conditions. In June 1999, the Trust entered into a second modification agreement (the "Agreement") with the borrowers of the Mountain View Apartments PIMI reducing the interest rate on the insured mortgage by 1.25% per annum beginning January 1, 1999 and continuing through December 31, 2004 and changing the participation feature. The Agreement eliminated the Preferred Interest required under the Additional Loan and changed the Trust's participation in the surplus cash generated by property. Under the Agreement, the Trust will receive 75% of the first $130,667 of surplus cash and 50% of any remaining surplus cash on an annual basis to pay the base interest on the Additional Loan. Unpaid Additional Loan base interest will accrue and be payable if there are sufficient proceeds from a sale or refinancing of the property except that $288,580 of existing accruals related to the Additional Loan had been forgiven, In addition, the borrower repaid $153,600 of the Additional Loan and funded approximately $54,000 to a reserve for property improvements. As a result of the Advisor determining that the Mountain View Additional Loan was impaired, the Trust recorded a valuation allowance of $984,000 in the fourth quarter of 1998. During the fourth quarter of 1999, the Trust increased this reserve by $48,272 as a result of additional decreases in the collateral value. 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 income 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 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 income or any amounts due under the Additional Loan. During the third quarter of 1999, the Trust received a prepayment of the Audubon Villas PIMI when the property was refinanced. The Trust received the prepayment of the principal balance of the insured mortgage, $14,861,957, the principal balance of the Additional Loan, $2,691,000, and participation income of $1,966,901. Also, $1,962,261 was recognized as Additional Loan interest income which was previously recorded as deferred income. On August 18, 1999, the Advisor declared a special dividend of $1.30 per share that was paid on September 17, 1999 from the payoff of the mortgage on Audubon Villas PIMI. 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 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, the Federal Home Loan Mortgage Corporation (FHLMC), the Government National Mortgage Association (GNMA) and the Department of Housing and Urban Development (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 $4.2 million of Agency paper. Interest Rate Risk The Trust's primary market risk exposure is to interest rate risk, which can be defined as the exposure of the Trust's net income, comprehensive income or financial condition to adverse movements in interest rates. At December 31, 1999, the Trust's PIMs, PIMIs and MBS comprise the majority of the Trust's assets. As such, decreases in interest rates may accelerate the prepayment of the Trust's investments. The Trust does not utilize any derivatives or other instruments to manage this risk as the Trust plans to hold all of its investments to expected maturity. The Trust monitors prepayments and considers prepayment trends, as well as distribution requirements of the Trust, when setting regular dividend distribution policy. For MBS, the fund forecasts prepayments based on trends in similar securities as reported by statistical reporting entities such as Bloomberg. For PIMs and PIMIs, the Trust incorporates prepayment assumptions into planning as individual properties notify the Trust of the intent to prepay or as they mature. The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. For mortgage investments, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The expected maturity date is contractual maturity adjusted for expectations of prepayments.
Expected maturity dates ($ in thousands) 2000 2001 2002 2003 2004 Thereafter Total Fair Value Face Value Interest-sensitive assets: MBS $1,731 $ 1,498 $ 1,297 $ 1,126 $ 980 $ 10,833 $ 17,465 $ 17,495 Weighted average interest rate 8.34% 8.34% 8.34% 8.34% 8.34% 8.34% 8.34% PIMS 440 476 14,051 258 280 31,827 47,332 46,995 Weighted average interest rate 7.67% 7.67% 8.06% 8.06% 8.06% 8.06% 7.90% PIMIS 377 409 445 484 525 57,889 60,129 59,081 Weighted average interest rate 7.49% 7.72% 7.72% 7.72% 7.72% 7.91% 7.71% Additional Loans 0 0 2,471 1,400 2,900 3,743 10,514 8,351 Weighted Average interest rate 6.27% 6.27% 5.90% 5.66% 4.63% 4.63% 5.82% Total Interest- Sensitive Assets $2,548 $2,383 $18,264 $3,268 $ 4,685 $ 104,292 $ 135,440 $ 131,922
Operations The following discussion relates to the operations of the Trust during the years ended December 31, 1999, 1998 and 1997. Dollars are stated in thousands, except for per Share amounts.
Years Ended December 31, 1999 1998 1997 Per Per Per Amount Share Amount Share Amount Share Interest income on PIMs and PIMIs: Basic Interest $ 8,789 $ .58 $10,636 $ .71 $12,181 $ .81 Additional Loan interest 2,535 .18 3,081 .20 794 .05 Participation income 2,269 .15 5,094 .34 1,385 .09 Interest income on MBS 1,531 .10 1,930 .13 2,199 .15 Interest income on cash and cash equivalents 508 .03 1,181 .08 1,059 .07 Trust expenses (1,595) (.11) (1,973) (.13) (2,313) (.15) Amortization of prepaid fees and expenses (1,672) (.11) (2,999) (.20) (2,406) (.16) Provision for impaired mortgage loans (48) - (2,114) (.14) - - Net income $ 12,317 $ .82 $14,836 $ .99 $12,899 $ .86 Weighted average Shares outstanding 15,053,135 15,053,135 15,053,135
The net income of the Trust for 1999 decreased as compared to 1998 and 1997. During the three years in the periods ended December 31, the Trust's operations have experienced changes in the mix of interest income as the Trust has had prepayments in its PIMs and PIMIs. These prepayments have reduced the basic interest on PIMs and PIMIs, and decreased participation income and additional loan interest income in 1999 as compared to 1998. The Trust's net income decreased by approximately $2.5 million for 1999 when compared to 1998 due primarily to decreases in interest income net of decreases in asset management fees due to an affiliate, the provision for impaired mortgage loans and amortization expense. The prepayment of Park Highland and Coconut Palm in 1998, and Audubon Villas in 1999 caused a decrease in basic interest income on PIM and PIMIs. Participation income was higher in 1998 by $2.8 million as compared to 1999 resulting from the participation income received when the Park Highlands and Coconut Palm PIMIs prepaid, exceeding the income received when the Audubon Villas PIMI prepaid in 1999. Interest income on MBS will continue to decline as principal collections reduce the MBS investment balance. Other interest income decreased due to lower average cash balances. Amortization expense decreased due to the payoffs of the Audubon Villas, Park Highland and Coconut Palm PIMIs. The decrease in asset management fees is due to the Trust's asset base declining. The provision for impaired mortgage loans decreased from 1998 to 1999. In 1998, the Trust recorded a provision for impaired mortgage loans in connection with the Lifestyles and Mountain View Additional Loans. In 1999, the trust recorded an additional $48,000 to adjust the carrying value of the loan to the estimated fair value of the collateral. The Trust's net income for 1998 increased by approximately $1.9 million when compared to 1997 due primarily to higher participation income and Additional Loan interest caused by the prepayments of Coconut Palm and Park Highlands PIMI's. This was somewhat offset by the Trust recording a provision for impaired mortgage loans of $ 2,114,000 in 1998 related to Lifestyles and Mountain View as discussed above and lower basic interest. The Trust received $1,419,000 from Coconut Palm Club and $3,168,000 from Park Highlands for participation income 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. The prepayments also caused the majority of the decline in basic interest. Other interest income increased $122,000 due primarily to the Trust having higher short-term investment balances during 1998 when compared to 1997. The Trust saw a decline in expense reimbursements in 1998 due to a rebate for expense reimbursements related to 1997 received in 1998. Asset management fees decreased $199,000 in 1998 primarily as a result of the Coconut Palm and Park Highland PIMI prepayments. 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. 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 (53) Chairman of Board of Trustees and Trustee * Charles N. Goldberg (58) Trustee * E. Robert Roskind (55) Trustee * J. Paul Finnegan (75) Trustee Robert A. Barrows (42) Treasurer Scott D. Spelfogel (39) Clerk Kristin L. Hicks (33) 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, investment sponsorship, venture capital investing, mortgage banking, financial management, and ownership of three operating companies through private equity 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 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. 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. 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 and Chairman of the Board of Trustees of Lexington Corporate Properties. J. Paul Finnegan retired as a partner of Coopers & Lybrand in 1987. Since then, he has been engaged in business as a consultant, 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 degree from Bentley College. Mr. Finnegan is a Certified Public Accountant and an attorney. Mr. Finnegan currently serves as a Trustee of Krupp Government Income Trust and a director at Scituate Federal Savings Bank. Robert A. Barrows is the Treasurer of the Trust, 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, 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 55) 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, investment sponsorship, venture capital investing, mortgage banking, financial management, and ownership of three operating companies through private equity 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 September 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 46) 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 $7.2 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 58) is President and Chief Operating Officer 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 a J.D. degree from Brooklyn Law School. Carol J.C. Mills (age 50) 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 $7.2 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 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of February 5, 2000, 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.
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 ***
** 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, 2000. 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 Registrant'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) 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)].* (10.4) 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)].* (10.5) 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)].* (10.6) 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)].* (10.7) 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)].* (10.8) 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)].* (10.9) 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)].* (10.10) 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)].* (10.11) 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)].* (10.12) Second Modification Agreement by and between Krupp Government Income Trust and Lifestyles at Boot Ranch and M&D Palm Harbor Partnership and FL-Tampa, Inc. + Windward Lakes Apartments (10.13) 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)].* (10.14) 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)].* (10.15) 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)].* (10.16) 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)].* (10.17) 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)].* (10.18) 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)].* (10.19) Modification Agreement between Krupp Government Income Trust, Love Funding Corporation, McNab-KC3 Limited Partnership, and Krupp GP, Inc. + River View Apartments (10.20) 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)].* (10.21) 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)].* (10.22) 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)].* (10.23) 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 (10.24) 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)].* (10.25) 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)].* (10.26) 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)].* (10.27) 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)].* (10.28) 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)].* (10.29) 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 (10.30) 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)].* (10.31) 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)].* (10.32) 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)].* (10.33) 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)].* (10.34) 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)].* (10.35) 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 (10.36) 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)].* (10.37) 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)].* (10.38) 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)].* (10.39) 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)].* (10.40) 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)].* Mountain View Apartments (10.41) 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)].* (10.42) 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)].* (10.43) 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)].* (10.44) 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)].* (10.45) 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)].* (10.46) 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)].* (10.47) 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)].* (10.48) Second Modification Agreement by and between Krupp Government Trust and Mountain View LTD. [Exhibit 10.1 to Registrant's report Form 10-Q for the quarter ended June 30, 1999 (File No. 0-19244)]* Red Run Apartments (10.49) 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)].* (10.50) 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)].* (10.51) 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)].* (10.52) 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)].* (10.53) 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)].* (10.54) 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)].* (10.55) 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 (10.56) 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)].* (10.57) 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)].* (10.58) 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 (10.59) 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)].* (10.60) 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)].* (10.61) 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)].* (10.62) 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)].* (10.63) 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)].* (10.64) 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)].* (10.65) 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 (10.66) 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)].* (10.67) 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)].* (10.68) 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)].* (10.69) 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 + Filed Herein (c) Reports on Form 8-K During the last quarter of the year ended December 31, 1999, the Trust did not file any reports on Form 8-K. 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 9th day of March, 2000. 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 9th day of March, 2000. 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, 1999 KRUPP GOVERNMENT INCOME TRUST INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Accountants F-3 Balance Sheets at December 31, 1999 and 1998 F-4 Statements of Income and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997 F-5 Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 F-6 Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 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. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Trustees and the Shareholders of Krupp Government Income Trust: In our opinion, the accompanying balance sheets and the related statements of income and comprehensive income, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Krupp Government Income Trust (the "Trust") at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with auditing principles generally accepted in the United States. 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 auditing standards generally accepted in the United States 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. PricewaterhouseCoopers LLP Boston, Massachusetts March 9, 2000
KRUPP GOVERNMENT INCOME TRUST BALANCE SHEETS December 31, 1999 and 1998 ASSETS 1999 1998 Participating Insured Mortgage Investments ("PIMIs") (Notes B, C and J): Insured Mortgages $ 60,129,492 $ 75,386,460 Additional loans, net of impairment provision of $2,162,618 and $2,114,346, respectively 8,350,990 11,243,862 Participating Insured Mortgages ("PIMs") (Notes B, D and J) 47,331,673 47,737,583 Mortgage-Backed Securities and insured mortgage loan("MBS") (Notes B, E and J) 17,495,423 22,132,858 Total mortgage investments 133,307,578 156,500,763 Cash and cash equivalents (Notes B and J) 4,627,499 9,004,397 Interest receivable and other assets 973,491 1,057,365 Prepaid acquisition fees and expenses, net of accumulated amortization of $6,089,755 and $6,125,191, respectively (Note B) 2,243,706 3,445,605 Prepaid participation servicing fees, net of accumulated amortization of $1,834,434 and $1,776,625, respectively (Note B) 943,315 1,413,559 Total assets $ 142,095,589 $ 171,421,689 LIABILITIES AND SHAREHOLDERS' EQUITY Deferred income on Additional Loans (Note B) $ 3,918,021 $ 5,773,669 Other liabilities 25,025 33,230 Total liabilities 3,943,046 5,806,899 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 137,921,227 164,742,014 Accumulated comprehensive income (Note B) 231,316 872,776 Total Shareholders' equity 138,152,543 165,614,790 Total liabilities and Shareholders' equity $ 142,095,589 $ 171,421,689
The accompanying notes are an integral part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 Revenues: Interest income - PIMs and PIMIs: Basic interest $ 8,789,439 $ 10,635,959 $ 12,180,539 Additional Loan interest 2,534,790 3,080,944 793,577 Participation income 2,268,505 5,094,353 1,385,480 Interest income - MBS 1,531,351 1,930,383 2,199,234 Interest income cash and cash equivalents 508,144 1,180,647 1,058,966 Total revenues 15,632,229 21,922,286 17,617,796 Expenses: Asset management fee to an affiliate (Note G) 1,104,431 1,331,745 1,531,026 Expense reimbursements to affiliates (Note G) 220,657 207,165 395,934 Amortization of prepaid fees and expenses 1,672,143 2,998,705 2,405,645 General and administrative 269,345 433,860 385,956 Provision for impaired mortgage loans (Notes B and C) 48,272 2,114,346 - Total expenses 3,314,848 7,085,821 4,718,561 Net income (Note I) 12,317,381 14,836,465 12,899,235 Other comprehensive income: Net change in unrealized (loss) gain on MBS (641,460) (512,826) 120,250 Total comprehensive income $ 11,675,921 $ 14,323,639 $ 13,019,485 Basic earnings per share $ .82 $ .99 $ .86 Weighted average shares outstanding 15,053,135 15,053,135 15,053,135
The accompanying notes are an integral part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 1999, 1998 and 1997 Accumulated Total Common Retained Comprehensive Shareholders' Stock Earnings Income Equity 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 Dividends (26,820,787) (12,317,381) - (39,138,168) Net income - 12,317,381 - 12,317,381 Change in unrealized gain on MBS - - (641,460) (641,460) Balance at December 31, 1999 $ 137,921,227 $ - $ 231,316 $ 138,152,543 Shares issued and outstanding for each of the three years ended December 31, are 15,053,135
The accompanying notes are an integral part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 Operating activities: Net income $ 12,317,381 $ 14,836,465 $ 12, 899,235 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of premium and (discounts) 3,044 (7,646) 2,816 Provision for impaired mortgage loans 48,272 2,114,346 - Amortization of prepaid fees and expenses 1,672,143 2,998,705 2,405,645 Changes in assets and liabilities: Decrease in interest receivable and other assets 83,874 236,875 413,559 (Decrease) increase in deferred income on Additional Loans (1,855,648) (2,097,937) 546,192 (Decrease) increase in other liabilities (8,205) 7,816 (2,319) Net cash provided by operating activities 12,260,861 18,088,624 16,265,128 Investing activities: Principal collections on Insured Mortgages 800,921 855,221 891,321 Principal collections on MBS 3,992,931 4,447,303 3,152,419 Insured mortgage prepayments 14,861,957 32,603,506 5,630,985 Additional Loan prepayments 2,844,600 5,850,900 1,540,000 Acquisition of MBS - - (3,366,000) Net cash provided by investing activities 22,500,409 43,756,930 7,848,725 Financing activity: Dividends (39,138,168) (62,590,961) (33,417,980) Net decrease in cash and cash equivalents (4,376,898) (745,407) (9,304,127) Cash and cash equivalents, beginning of year 9,004,397 9,749,804 19,053,931 Cash and cash equivalents, end of year $ 4,627,499 $ 9,004,397 $ 9,749,804 Non Cash Activities: (Decrease) increase in Fair Value of MBS $ (641,460) $ (512,826) $ 120,250
The accompanying notes are an integral part of the financial statements. 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" ("FAS 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). FAS 130 established 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 (FHA) insured mortgage is carried at amortized cost. The Trust holds this loan at amortized cost since it is fully insured by FHA. PIMs and PIMIs The Trust accounts for its MBS portion of a PIM or PIMI in accordance with FAS 115 under the classification of held to maturity. The Trust carries those MBS at amortized cost. The insured mortgage portion of the FHA PIM or FHA PIMI is carried at amortized cost. The Trust holds these mortgages at amortized cost since they are fully insured by FHA. Continued KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS, Continued B. Significant Accounting Policies, Continued PIMs and PIMIs, Continued The 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 FAS 114 and FAS 118. 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 when it deems these amounts estimable and 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 PIMI's generate sufficient operating cash flow to make the required Additional Loan interest payments the Trust recognizes income as earned commences amortization of the deferred interest amounts into income over the remaining estimated term of the Additional Loan. During periods where mortgage loans are impaired the Trust suspends amortizing deferred interest. 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 Agency paper, 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 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. Continued KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS, Continued B. Significant Accounting Policies, Continued Prepaid Fees and Expenses, Continued 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 five PIMIs on December 31, 1999 and 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 of the property or sale of the partnership interests. Amounts payable under the Additional Loan are neither guaranteed nor insured. Continued KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS, Continued C. PIMIs, Continued The Trust receives level monthly principal and interest ("Basic Interest") payments amortizing over thirty to forty years, 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 Additional Loan Interest shortfall and the Trust in certain situations could convert the remaining 50% into an operating loan. Continued 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. In June 1999, the Trust entered into a second modification agreement (the "Agreement") with the borrowers of the Mountain View Apartments PIMI reducing the interest rate on the insured mortgage by 1.25% per annum beginning January 1, 1999 and continuing through December 31, 2004 and changing the participation feature. The Agreement eliminated the Preferred Interest required under the Additional Loan and changed the Trust's participation in the surplus cash generated by the property. Under the Agreement, the Trust will receive 75% of the first $130,667 of surplus cash and 50% of any remaining surplus cash on an annual basis to pay the base interest on the Additional Loan. Unpaid Additional Loan base interest will accrue and be payable if there are sufficient proceeds from a sale or refinancing of the property except that $288,580 of existing accruals related to the Additional Loan had been forgiven. In addition, the borrower repaid $153,600 of the Additional Loan and funded approximately $54,000 to a reserve for property improvements. During the third quarter of 1999, the Trust received a prepayment of the Audubon Villas PIMI including the Insured mortgage with a remaining principal balance of $14,861,957, the Additional Loan of $2,691,000 and participation income of $1,966,901. Also, $1,962,261 was recognized as Additional Loan interest income which was previously recorded as deferred income. On August 18, 1999, the Advisor declared a special dividend of $1.30 per share that was paid on September 17, 1999 from the payoff of the mortgage on the Audubon Villas PIMI. On May 1, 1998, the borrowers on the Lifestyles 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 Lifestyles 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 Additional Loan interest. Continued KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS, Continued C. PIMIs, Continued 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 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. 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, 1999 and 1998 there are no Insured Mortgage loans within the Trust's portfolio that are delinquent as to principal or interest. Continued
KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS, Continued The Trust's investments in PIMIs consist of the following at December 31, 1999 and 1998: C. PIMIs, Continued Original Loan Monthly Interest Maturity Balance Outstanding PIMI's Amount Payments Rate Date at December 31, 1999 1998 Lifestyles (GNMA) $ 10,292,394 $ 60,958 7.00%(a) 05/01/32 $ 9,966,008 $ 10,022,381 Windward (GNMA) 14,000,778 91,165 7.50%(b) 06/01/32 13,596,232 13,667,163 Audubon Villas (GNMA) 15,250,000 - 7.75% 09/15/33 - 14,909,371 Mountain View (FHA) 9,547,700 57,504 6.875%(c) 01/01/34 9,315,978 9,363,459 Red Run (FHA) 19,019,600 130,312 7.875% 05/01/34 18,552,815 18,651,261 The Seasons (FHA) (d) 9,075,351 63,552 7.875% 10/01/28 8,698,459 8,772,825 $ 77,185,823 $ 403,491 $ 60,129,492 $ 75,386,460 (f)
Base Preferred Outstanding Balance Maturity Interest Interest Additional Loan 1999 1998 Date Rate Rate Lifestyles (a) $ 1,817,665 $ 1,817,665 05/14/2007 - - Windward (b) 2,471,294 2,471,294 07/07/2002 7.5% 10% Audubon Villas - 2,691,000 - 7.0% 10% Mountain View (c) 1,400,000 1,553,600 09/16/2003 7.0% - Red Run 2,900,000 2,900,000 06/23/2004 7.0% 10% The Seasons(d)(e) 1,924,649 1,924,649 10/01/2028 9.0% 10% $ 10,513,608 $ 13,358,208 (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 interest or Preferred Return due to the 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. Additional loan interest is payable from surplus cash.
Continued KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS, Continued C. PIMIs, Continued (c) The Trust entered into a second modification agreement which reduced the interest rate on the Insured Mortgage by 1.25% per annum effective January 1, 1999 and continuing through December 31, 2004. The Agreement eliminated the Preferred Interest required under the Additional Loan and changed the Trust's participation in the surplus cash generated by the property. Furthermore, debt service relief provided by the first modification was forgiven. (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 $60,129,492. Impaired Mortgage Loans The Advisor of the Trust has determined that the Lifestyles Additional Loan is impaired. As a result, during 1998, a valuation allowance of $1.1 million was 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 1999 or 1998. The Advisor of the Trust has determined that the Mountain View Additional Loan is impaired. As a result, during 1998, a valuation allowance of $984,000 was established to adjust the carrying amount of the loan to the then estimated fair market value of the collateral less anticipated costs of sale. During 1999, the Trust increased the valuation allowance of Mountain View by $48,272. 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 income on the Mountain View Additional Loan during 1999 or 1998.
The activity in the valuation allowance together with the related recorded and carrying value of the mortgage loans is as follows: Recorded Valuation Carrying Value Allowance Value Lifestyles $1,817,665 $1,130,346 $ 687,319 Mountain View 1,400,000 1,032,272 367,728 Balance at December 31, 1999 $3,217,665 $2,162,618 $1,055,047
The recorded value of the impaired mortgage loans did not differ materially from the balances reported at the end of each quarter with the exception of the impairment recorded in the fourth quarter of 1998 for the Lifestyles and Mountain View Additional Loans. The Trust has also deferred income related to Lifestyles and Mountain View of $687,319 and$367,383, respectively. Continued
KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS, Continued C. PIMIs, Continued A reconciliation of activity for each of the three years in the period ended December 31, is as follows: Insured Mortgages 1999 1998 1997 Balance at beginning of period $ 75,386,460 $ 108,470,247 $ 114,625,179 Insured mortgage prepayments (14,861,957) (32,603,506) (5,630,985) Principal collections (395,011) (480,281) (523,947) Balance at end of period $ 60,129,492 $ 75,386,460 $ 108,470,247 Additional Loans Balance at beginning of period $ 11,243,862 $ 19,209,108 $ 20,749,108 Additional loan prepayments (2,844,600) (5,850,900) (1,540,000) Valuation allowance (48,272) (2,114,346) - Balance at end of period $ 8,350,990 $ 11,243,862 $ 19,209,108
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. - - 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. - - 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, 1999. 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 level monthly payments of principal and interest, amortizing over thirty to forty years 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. Continued KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS, Continued D. PIMs, continued 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 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 income 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 income 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, 1999 and 1998 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, 1999 and 1998: Original Loan Monthly Interest Maturity PIM Amount Payments Rate Date Balance Outstanding at December 31, 1999 1998 River View (GNMA) $ 9,284,877 $ 64,535 8.00% 01/15/33 $ 9,019,623 $ 9,070,196 Mill Pond (FHA) 7,812,100 55,157 8.15% 01/01/33 7,580,257 7,622,447 Waterford (FHA) 6,935,900 48,832 8.125% 08/01/32 6,713,520 6,752,284 Rivergreens (FHA) 10,003,000 69,518 8.005% 04/01/33 9,711,260 9,765,665 Lincoln Green (FNMA) 15,565,000 99,571 6.75% 10/01/02 14,307,013 14,526,991 (a) Total $ 49,600,877 $ 337,613 $ 47,331,673 $ 47,737,583 (b) (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 $47,331,673.
Continued
KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS, Continued D. PIMs, continued A reconciliation of activity for each of the three years in the period ended December 31, is as follows: 1999 1998 1997 Balance at beginning of period $ 47,737,583 $ 48,112,523 $ 48,479,897 PIM prepayment - - - Prinicipal collections (405,910) (374,940) (367,374) Balance at end of period $ 47,331,673 $ 47,737,583 $ 48,112,523
Property descriptions: - 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, 1999, the Trust's MBS portfolio had an amortized cost of $12,377,145 and gross unrealized gains and losses of $258,056 and $26,740, respectively. At December 31, 1999, the Trust has a FHA insured mortgage with an amortized cost of $4,886,962. At December 31, 1998, the Trust's MBS portfolio had an amortized cost of $16,355,176 and gross unrealized gains and losses of $875,328 and $2,552, respectively. At December 31, 1998, the Trust's FHA insured mortgage had an amortized cost of $4,904,906. The Trust's MBS have maturities ranging from 2008 to 2035.
Unrealized Maturity Date Fair Value Gain/(Loss) 2001 - 2005 $ - $ - 2006 - 2010 462,299 (3,694) 2011 - 2035 17,032,700 234,586 Total $ 17,494,999 $ 230,892
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. Continued KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS, Continued 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. 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, 1999, 1998, and 1997, the Trust received interest collections on Additional Loans with affiliates of the Advisor of the Trust of $ 225,156, $218,841, and $400,838, respectively. In addition, the Trust received $ 153,499 in 1999, $ 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.
I. Federal Income Taxes Net income per statement of income $ 12,317,381 Add: Provision for impaired mortgage loan 48,272 Less: Additional Loan interest recognized and previously deferred for book purposes (1,825,446) Book to tax difference for amortization of prepaid fees and expenses (109,242) Net income for federal income tax purposes $ 10,430,965
The Trust paid dividends of $2.60 per share during 1999 which represents approximately $.69 from ordinary income and $1.91 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 $7,921,000 and $7,311,000 at December 31, 1999 and 1998, respectively. The basis of the Trust's liabilities for financial reporting purposes exceeded its tax basis by approximately $3,918,000 and $5,774,000 at December 31, 1999 and 1998, respectively. Continued KRUPP GOVERNMENT INCOME TRUST NOTES TO FINANCIAL STATEMENTS, Continued 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: 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. Based on the estimated fair value determined using these methods and assumptions the Trust's investments in MBS had gross unrealized gains and losses of approximately $258,000 and $27,000 at December 31, 1999 and $875,000 and $3,000 at December 31, 1998. 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 gains and losses of approximately $419,000 and $1,804,000, respectively at December 31, 1999 and gross unrealized gains of approximately $3,732,000, at December 31, 1998.
At December 31, 1999 and 1998, the Trust estimated the fair value of its financial instruments as follows: (amounts in thousands) 1999 1998 Fair Carrying Fair Carrying Value Value Value Value Cash and cash equivalents $ 4,627 $ 4,627 $ 9,004 $ 9,004 MBS 17,495 17,495 22,133 22,133 PIMs and PIMIs: PIMs 46,995 47,332 49,229 47,738 Insured mortgages 59,081 60,129 77,627 75,386 Additional Loans 8,351 8,351 11,244 11,244 $ 136,549 $ 137,934 $ 169,237 $ 165,505
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 Additional Loan impairment provision $2,114,346 $ 48,272 $ - $ 2,162,618 (1) (1) The Trust recognized a valuation allowance related to the Lifestyles and Mountain View Additional Loans.
KRUPP GOVERNMENT INCOME TRUST SUPPLEMENTARY DATA SELECTED QUARTERLY FINANCIAL DATA For the Quarter Ended March 31, June 30, September 30, December 31, 1999 1999 1999 1999 Total revenues $ 2,972,169 $ 2,930,082 $ 7,000,373 $ 2,729,605 Net income $ 2,305,965 $ 2,128,720 $ 5,800,454 $ 2,082,242 Earnings per Share $ .15 $ .14 $ .39 $ .14 For the Quarter Ended March 31, June 30, September 30, December 31, 1998 1998 1998 1998 Total revenues $ 3,838,996 $ 11,336,961 $ 3,772,455 $ 2,973,874 Net income $ 2,909,567 $ 9,604,704 $ 2,224,441 $ 97,753 Earnings per Share $ .19 $ .64 $ .15 $ .01
(Unaudited) (Amounts in thousands, except per Share amounts) Year Inception Ended Through 12/31/99 12/31/99 Distributable Cash Flow (a): Net income $ 12,317 $ 124,788 Items not requiring or providing the use of operating funds: Provision for impaired mortgage loan 49 2,163 Amortization of prepaid fees and expenses and organization costs 1,672 14,828 Additional Loan Interest Deferred (1,855) 3,918 Total Distributable Cash Flow ("DCF") 12,183 145,697 DCF per Share based on Shares outstanding at December 31, 1999 $ .81 $ 9.68 (c) Dividends: Total dividends to Shareholders $ 36,805 (b) $ 269,494 (b) Average dividend per Share based on Shares outstanding at December 31, 1999 $ 2.44 $ 17.90 (b)(c)
(a) Distributable Cash Flow consists of income before provision for impaired mortgage loans, amortization of prepaid fees and expenses and organization costs and includes deferred interest on Additional Loans. The Trust believes Distributable Cash Flow is an appropriate supplemental measure of operating performance, however, it should not be considered as a substitute for net income as an indication of operating performance or cash flows as a measure of liquidity. (b) Includes an estimate of the distribution to be paid February 2000. (c) Shareholders average per Share return of capital on a cash basis as of February 2000 is $8.22 [$17.90 - $9.68]. Return of capital represents that portion of the dividends which is not funded from DCF such as principal collections received from MBS and PIMs. EX-11 2 SECOND MODIFICATION AGREEMENT This document should be returned after recording to: Peggy DeMuth Berkshire Mortgage Finance One Beacon Street 14th Floor Boston, MA 02108 SPACE ABOVE THIS LINE FOR RECORDER'S USE Second Modification Agreement This Second Modification Agreement (the "Agreement") is made and entered into as of the day of December 1999 by and among KRUPP GOVERNMENT INCOME TRUST, a Massachusetts business trust ("GIT"); BERKSHIRE MORTGAGE FINANCE CORPORATION, a Massachusetts corporation (the "First Mortgagee"); LIFESTYLES AT BOOT RANCH, a Florida general partnership (the "Partnership"); and M&D Palm Harbor Partnership, a Florida partnership, and FL-TAMPA, Inc., a Florida corporation (collectively, the "Partners" or "Borrowers"). W I T N E S S E T H: WHEREAS, Krupp Mortgage Corporation, now known as Berkshire Mortgage Finance Corporation (the "First Mortgagee") made a mortgage loan to the Partnership in the principal sum of Ten Million Three Hundred Thousand One Hundred and No/100 Dollars ($10,300,100) which loan was coinsured by the U.S. Department of Housing and Urban Development (the "Coinsured Loan"); WHEREAS, the Coinsured Loan was made with respect to Lifestyles at Boot Ranch Apartments (the "Project") located on the land described in Exhibit A hereto attached (the "Project") and the terms of the following Coinsured Loan documents: A. The Coinsured Loan is evidenced by a certain Mortgage Note (the "Coinsured Note") dated December 11, 1990 from the Partnership to the First Mortgagee in the original principal sum of $10,300,100.00; B. The repayment of the indebtedness evidenced by the Coinsured Note is secured by, among other things, (i) a Mortgage dated December 11, 1990 and recorded in the Official Records of Pinellas County, Florida in Book 7446, Page 1133 (the "Coinsured Mortgage"); (ii) a Regulatory Agreement dated December 11, 1990 (the "Regulatory Agreement") and recorded in the Official Records of Pinellas County, Florida in Book 7446, Page 1140 (the Coinsured Note, Coinsured Mortgage and Regulatory Agreement are collectively referred to as the "First Mortgage Loan Documents") WHEREAS, the First Mortgagee obtained funding for the Coinsured Loan through the purchase of a GNMA MBS by GIT. The interest rate on the Coinsured Loan was below the then-prevailing interest rates for comparable loans and securities and GIT was unwilling to participate in the Coinsured Loan unless the Partnership agreed to pay additional interest to GIT; WHEREAS, the Partnership agreed to pay additional interest to GIT pursuant to a subordinated promissory note (the "Subordinated Note") made by the Partnership in favor of GIT which is secured by a subordinated multifamily mortgage (the "Subordinated Mortgage") dated December 11, 1990 and recorded in the Official Records of Pinellas County, Florida in Book 7447, Page 1096 (the Subordinated Note and Subordinated Mortgage are collectively referred to as the "Participating Loan Documents"); WHEREAS, the Partners have executed an Additional Loan Agreement and a Additional Loan Note evidencing an Additional Loan in the principal sum of One Million Eight Hundred Seventeen Thousand Six Hundred Sixty-five and No/100 Dollars ($1,817,665.00) (the "Additional Loan"), which Additional Loan is secured by Pledge and Security Agreements and UCC financing statements with all documents dated December 11, 1990 (collectively, the "Additional Loan Documents"); WHEREAS, the Additional Loan Agreement was amended in the Addendum to Additional Loan Agreement executed by the Partners and GIT on May 14, 1992; WHEREAS, the Project experienced financial difficulties and the Partnership and the Partners requested assistance from GIT in regards to their obligations under the Coinsured Loan Documents, the Participating Loan Documents and the Additional Loan Documents; WHEREAS, the Partnership, Partners, the First Mortgagee and GIT executed a Modification Agreement dated August 1, 1996 (the "1996 Modification Agreement") that provided debt service relief on the Coinsured Loan for two years ending December 31, 1997, that changed the payment obligations under the Additional Loan Documents, and that changed the participation features of the Participating Loan Documents for that period; WHEREAS, the Project has continued to experience financial difficulties and the Partnership and the Partners have requested additional assistance from GIT in regards to their obligations under the Coinsured Loan Documents, the Participating Loan Documents and the Additional Loan Documents; WHEREAS, the Partnership, the Partners, the First Mortgagee and GIT have agreed to further modify the Subordinated Note, the Additional Loan Agreement and the Additional Loan Note based on GIT's providing the financial assistance described herein, and WHEREAS, the Partnership, the Partners, the First Mortgagee and GIT have reached an agreement to the terms and conditions of the financial assistance which is set forth herein. NOW THEREFORE, in consideration of the foregoing, Ten and No/100 Dollars ($10.00) in hand paid to GIT and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, intending to be legally bound, the Partnership, the Partners, the First Mortgagee and GIT hereby agree as follows: 1. Recitals Incorporated. The foregoing Recitals are hereby incorporated herein to the same extent as if hereafter fully set forth. 2. Coinsured Loan Default. The Coinsured Loan must be fully reinstated concurrent with the execution of this Agreement. All delinquent principal, interest, escrow deposits and late charges then owing to the First Mortgagee must be paid in full through the date of execution. 3. Interest Rebate. The Partnership shall continue to make monthly debt service payment in accordance with the Coinsured Note. Retroactively to January 1, 1998 and during the period of the next ten years thereafter (the "Workout Term"), GIT will rebate monthly to the Partnership the difference between (i) the interest rate payable under the Coinsured Note (i.e., 8.5% per annum) and (ii) the rate indicated for each of the following calendar years during the Workout Term (collectively, the "Modified Rate"): Calendar Year Modified Rate 1998 6.75% 1999 6.75% 2000 7.00% 2001 7.00% 2002 7.00% 2003 7.00% 2004 7.00% 2005 7.00% 2006 7.00% 2007 7.00% 4. Partnership and/or Partners' New Equity Contribution. The Partnership and/or the Partners will provide upon execution of this Agreement an equity contribution of $550,000 to be deposited in an interest-bearing escrow account controlled by GIT. Withdrawals from the escrow account may be used solely for Project repairs and replacements mutually agreed to by the managing general partner of the Partnership and GIT. 5. Additional Interest under the Subordinated Note. Paragraph 1 of the Subordinated Note, Payment of Additional Interest appearing on pages two, three and four, is hereby deleted in its entirety. The following is substituted in lieu thereof. 1. Additional Interest. The Maker covenants and agrees to pay the Holder "Additional Interest" which shall mean and include "Participating Income Interest" and "Participating Appreciation Interest" as defined below. All payments of Participating Income Interest made by the Maker to the Holder under this Subordinated Note shall be calculated in accordance with the provisions of this Paragraph 1 and shall be applied towards those amounts due to the Holder, GIT, under the Additional Loan Documents. Notwithstanding anything to the contrary contained or implied in the preceding sentence, the Maker shall be obligated only for payments of Additional Interest pursuant to this Subordinated Note and shall not be in any way directly liable for making payments under the Additional Loan Note, except for the guarantee specifically providing for under Section 8.N. of the Additional Loan Agreement. A. Participating Income Interest. Participating Income Interest shall mean fifty percent (50%) of the following: (i) all distributable Surplus Cash, as that term is defined in the Regulatory Agreement, subject, however, to the extent then applicable, to the provisions of Paragraph 4 herein relating to Surplus Cash and the requirement in the Regulatory Agreement that Surplus Cash may only be distributed at the end of a semiannual or annual fiscal year, (except for proceeds of refinancing, casualty insurance proceeds, and capital contributions to the Maker from any Partner); (ii) any unrestricted cash of the Maker generated from the operation of the Project; and (iii) any balance in reserve or escrow accounts not used to satisfy closing prorations or paid to a third party for the purpose of such escrow. Solely for the purpose of calculating Participating Income Interest, any management fees in excess of 4% gross income, or such higher management fee as HUD or the Lender may determine to be necessary in order to obtain proper management of the Project, shall not be recognized as a deduction from the Maker's distributable Surplus Cash or unrestricted cash in determining Participating Income Interest. Participating Income Interest shall be deemed to be earned on an annual basis, concurrent with the calculation period for Surplus Cash, beginning with the first full fiscal year after the execution of this Agreement. Participating Income Interest, to the extent it is earned, shall be payable annually to the Holder within 90 days of the end of any fiscal year in which Surplus Cash has been generated. In order to verify the accuracy of the computation of Participating Income Interest, Holder may review the Maker's books and records during normal business hours upon three (3) days' notice. Maker also shall submit to the Holder monthly unaudited and annual audited financial statements and shall submit to the Holder all financial statements submitted to the Lender. B. Participating Appreciation Interest. Participating Income Interest shall mean and include, (i) in the event of a Sale or a Refinancing, Net Proceeds from the Sale or Refinancing Transaction allocated as follows (all terms as hereinafter defined): (a) pari parsu 50% to the Maker and 50% to the Holder up to an aggregate of the first $1,100,000 of Net Proceeds, (b) pari parsu 25% to the Maker and 75% to the Holder up to an aggregate of the next $1,690,220 of Net Proceeds, and (c) pari parsu 50% to Maker and 50% to the Holder of any remaining Net Proceeds; or (ii) upon the Accelerated Maturity Date or upon acceleration pursuant to Paragraph 1.D. below, an allocation of the Value over the Outstanding Indebtedness as follows (all terms as hereinafter defined): (a) pari parsu 50% to the Maker and 50% to the Holder up to an aggregate of the first $1,100,000 of Net Proceeds, (b) pari parsu 25% to the Maker and 75% to the Holder up to an aggregate of the next $1,690,220 of Net Proceeds, and (c) pari parsu 50% to Maker and 50% to the Holder of any remaining Net Proceeds. "Sale" means any bona fide sale, transfer, conveyance, assignment, exchange, liquidation or other disposition for value to a third party or parties of the Project or of 10% or more of the beneficial interest in the Maker, including a transfer as described in Section 6.0 below. Any sale to a "Related Party" or "Affiliate" must receive the prior written approval of the Holder. A "Related Party" includes, without limitation, any spouse, brother, sister, parent, child or grandchild or the Maker or general partner of the Maker. An "Affiliate" means, as to the Maker, any individual or entity (i) that directly or indirectly controls or is controlled by or is under common control with the Maker, (ii) that is an officer of, partner in or trustee of, or serves in a similar capacity with respect to the Maker of which the Maker is an officer, partner or trustee, or with respect to which the Maker serves in a similar capacity, or (iii) that is the beneficial owner, directly or indirectly, of 10% or more of any class of equity securities of the Maker or of which the Maker is directly or indirectly the owner of 10% or more of any class of equity securities. "Refinancing" means the payment in full of the Coinsured Loan prior to the Maturity Date from the proceeds of a loan or loans secured by the Project or loans secured by a pledge of any beneficial interest in the Project or the Maker. "Net Proceeds from a Sale or Refinancing Transaction" means, (i) in the case of a Sale, all consideration paid in connection with a Sale of the Project including the stated purchase price, cash, notes, interest on any deferred portion of the purchase price and the value of any and all other consideration for or with respect to the Project, direct or indirect, and whether paid to the Maker or to any other person or party, less (a) prorations and reasonable selling expenses including reasonable independent third party broker's commissions, (b) title searches, (c) survey costs, (d) recording costs, escrowed charges and transfer taxes, and (e) reasonable attorneys' fees paid by Maker in connection with such Sale, or (ii) in the case of a Refinancing, "Value" less "Outstanding Indebtedness" and (a) points paid by the Maker as origination fees on the loan, (b) reasonable underwriting expenses paid by the Maker, including appraisal, engineering, environmental and survey fees, and (c) reasonable attorneys' fees paid by the Maker to close the loan. "Outstanding Indebtedness" means: (i) the unpaid principal balance of the Coinsured Loan and all accrued and unpaid interest thereon; (ii) any and all other sums then due and owing by the Maker to the Lender in accordance with the Coinsured Mortgage, including, without limitation, (a) all late charges and any applicable penalties, (b) all amounts which the Lender may have advanced to pay obligations of the Maker under the Coinsured Mortgage (including, without limitation, insurance premiums, taxes, costs of maintenance and repair of the Project, title costs and filing fees and charges), together with interest thereon at the rate stipulated in the Coinsured Note, reduced by all insurance proceeds, condemnation awards, or reserve or escrowed funds to which the Lender shall then be entitled. In connection with a Sale of a beneficial interest in the Maker that is greater than 10% of the total beneficial interests in the Maker, the Outstanding Indebtedness, as calculated in subparagraphs (i) and (ii) above shall be reduced proportionately so that it bears the same ratio to the total Outstanding Indebtedness that the amount of the beneficial interest sold bears to the total of all of the beneficial interests in the Maker. "Value" of the Project shall be determined by an appraisal of the Project, prepared not earlier than sixty (60) days prior to, as applicable, the Maturity Date or the date of Refinancing. The appraisal shall be prepared by a qualified M.A.I. appraiser selected by the Maker from a list of three M.A.I. appraisers selected by the Holder. The determination of appraised value shall be based on the then prevailing market rates for comparable multifamily rental space in the same vicinity of the Project even if the actual rent then being paid is less than the rental income of the Project shown in the appraisal. To determine the highest appraised value, the appraisal shall separately specify: (i) The Value of the Project assuming the Coinsured Loan may be assumed by the purchaser of the Project with financing charge or expense imposed by the Holder in connection with such assumptions (other than fees permitted by the Secretary of HUD for approving a transfer of physical assets); (ii) The Value of the Project assuming the Loan may not be assumed; and (iii) The Value of the Project assuming conversion to condominium or cooperative ownership, provided, however, that there is evidence satisfactory to the Holder that there exists a market for condominium or cooperative conversions in the area where the Project is located and taking into account an allowance for reasonable costs incurred in connection with such conversion. In the absence of such evidence, Value shall be determined in accordance with subparagraphs (i) and (ii) above. The Value established under (i) above may be utilized only if the Holder has not elected to direct the Lender to declare the principal sum owing with respect to the Coinsured Loan to be due and payable. In the event either the Maker or Holder does not agree with the appraisal, within ten (10) business days after receipt thereof, the party not agreeing with the appraisal must notify the other party, and the Holder will arrange for another appraisal of the Project by one of the other two M.A.I. appraisers on the list, which appraisal must be completed and submitted to the Maker and Holder within sixty (60) days. If the second appraisal amount differs from the first appraisal amount by 5% or less, the average of the two appraisals shall become the Value. If the second appraisal differs from the first appraisal by more than 5% and the Maker and Holder to not agree upon Value, within ten (10) days the two appraiser shall select a third M.A.I. appraiser who shall review the two appraisals and within thirty (30) days shall establish the Value. The cost of the first appraisal shall be paid by the Maker. The cost of subsequent appraisals will be divided equally between Maker and Holder. C. Participating Appreciation Interest shall be deemed earned and payable on the first to occur of (i) the date of Sale or Refinancing; (ii) the Maturity Date or Accelerated Maturity Date, or (iii) a permitted prepayment of all sums owed under this Subordinated Note and the Coinsured Note. D. Notwithstanding the foregoing, in the event of a default by the Maker, and upon the Holder's election, in its sole discretion, to accelerate all amounts owned under this Subordinated Note, the Holder may obtain the appraisal described above, and the Participating Appreciation Interest, if any, owed to the Holder as a result of such appraisal shall be due and payable within ten (10) days after a copy of the completed appraisal is delivered to the Maker. E. Notwithstanding any provision herein to the contrary, the Maker expressly understands and agrees to pay to the Holder all Additional Interest which has not been paid, when the Secretary of HUD or his successors or assigns is no longer the coinsurer of the Coinsured Loan. 6. Operating Loan Notes and Interest Advance. Principal and interest outstanding for the following four (4) Operating Loan Notes and the Interest Advance outstanding under the 1996 Modification Agreement shall be payable exclusively from the amounts payable to Holder as Participating Appreciation Interest pursuant to this Agreement. Any such payments shall be credited first against accrued and unpaid interest due under the Operating Loan Notes, second against principal due under the Operating Loan Notes, and third against the Interest Advance outstanding under the 1996 Modification Agreement. The current principal balances are:
Operating Loan Note dated September 1, 1993 $ 32,710 Operating Loan Note dated March 1, 1994 32,681 Operating Loan Note dated September 1, 1994 32,706 Operating Loan Note dated September 1, 1995 12,840 Interest Advance for 1996 101,458 Interest Advance for 1997 101,003 Total Current Outstanding Principal $ 313,398
7. Acceleration of Maturity Date. The first paragraph of Paragraph 3.A. of the Subordinated Note, Acceleration of Maturity appearing at the top of page five, is hereby deleted and the following is substituted therefore. At any time on or after the 14th anniversary of Final Endorsement, namely, June 14, 2006, the Holder of this Subordinated Promissory Note may, in its sole discretion, upon not less than twelve (12) calendar months written notice to the Maker, accelerate the Maturity Date ("Accelerated Maturity Date") of this Subordinated Note: 8. General Provisions of Subordinated Note. The first sentence of Paragraph 6.C. is hereby deleted in its entirety and the following substituted in lieu thereof. C. Notwithstanding anything to the contrary contained in the Subordinated Note, payment of Participating Income Interest shall be due and payable within 90 days of the end of any fiscal year in which Surplus Cash was generated. 9. Additional Loan Interest. Paragraph 1.(b) of the Additional Loan Agreement is hereby deleted in its entirety and the following substituted in lieu thereof. (b) Additional Loan Interest shall mean Base Interest as described in Paragraph 1.(e). 10. Base Interest on Additional Loan. Section 1.(e) of the Additional Loan Agreement is hereby deleted in its entirety and the following substituted in lieu thereof: (e) "Base Interest" shall mean any surplus cash earned by the Holder in any calendar year and characterized as Participating Income Interest in accordance with the terms of the Subordinated Note. 11. Capital Calls. Paragraph 1.(f) of the Additional Loan Agreement is hereby deleted in its entirety. 12. Preferred Interest on Additional Loan. Section 1.(n) of the Additional Loan Agreement is hereby deleted in its entirety. Any subsequent references to Preferred Interest within the Additional Loan agreement are hereby deleted as well. 13. Payment of Additional Loan. Section 2 of the Additional Loan Agreement is deleted in its entirety and the following substituted in lieu thereof: Borrowers hereby jointly and severally covenant and agree to pay all obligations under the Additional Loan Note and this Agreement, including without limitation, principal and Base Interest to the Holder in accordance with the terms of the Additional Loan Note. A. Base Interest shall be payable from any surplus cash received by the Holder pursuant to the Subordinated Note and characterized therein as Participating Income Interest but credited as Base Interest under the Additional Loan Note. B. Principal shall be due and payable in the manner set forth in the Additional Loan Note. 14. Payment Shortfalls/Capital Calls. Section 3 of the Additional Loan Agreement is deleted in its entirety. 15. Acceleration of Payment Date. Section 6.A. of the Additional Loan Agreement is hereby deleted in its entirety and the following substituted in lieu thereof: A. At any time on or after the 14th anniversary date of the Final Endorsement, namely, June 14, 2006, the Holder of this Additional Loan Agreement may, in its sole discretion, upon not less than twelve (12) calendar months written notice to the Borrowers, accelerate the Payment Date of the Additional Loan Note. 16. Additional Loan Note. The first paragraph of the Additional Loan Note shall be deleted in its entirety and the following substituted in lieu thereof: FOR VALUE RECEIVED, FL-TAMPA, INC. AND M&D PALM HARBOR PARTNERSHIP (collectively, the "Borrowers") jointly and severally promise to pay to the order of Krupp Government Income Trust, a Massachusetts business trust organized and existing under the laws of Massachusetts ("Holder") or order, as it principal place of business at One Beacon Street, Boston, Massachusetts 02108 or at such other place as may be designated in writing by Holder, the principal sum of One Million Eight Hundred Seventeen Thousand Six Hundred Sixty-Five and No/100 Dollars ($1,817,665.00) together with Base Interest as that term is defined in and computed in Subsections 1(e) of the Additional Loan Agreement executed between Holder and Borrowers of even date herewith and attached hereto and made a part hereof (the "Additional Loan Agreement") as follows: A. Unless otherwise accelerated as provided herein or in the Additional Loan Agreement, the outstanding principal balance shall be payable on the earlier of the 15th anniversary of the Final Endorsement, namely May 14, 2007 (the "Payment Date"). B. Base Interest shall be payable in annual installments equal to the Holder's share of Surplus Cash payable as Participating Income Interest in accordance with the Subordinated Note, within 90 days of the end of each fiscal year in which Surplus Cash is generated. C. This Note may be prepaid in full without prepayment penalty so long as any amounts due under the Coinsured Note and the Subordinated Promissory Note have been paid in full at the time of such prepayment. 17. Certain Definitions. All capitalized terms unless defined herein shall have the same meaning as those terms are defined in the Subordinated Note, the Additional Loan Agreement and the Additional Loan Note. 18. Notice Requirements. (a) All notices and other communications required or permitted under this Agreement shall be in writing and, if mailed by prepaid United States first-class, certified mail, return receipt requested, at any time other than a general discontinuance of postal service due to strike, lockout or otherwise, shall be deemed to be received on the earlier of the date shown on the return receipt or three (3) business days after the postmarked day thereof. In addition, notices hereunder may be delivered by hand or by overnight courier, in which event the notice shall be deemed effective when delivered. All notices and other communications under this Agreement shall be given to the parties hereto at the following addresses: If to the Partnership or Partners: c/o Forest City Enterprises 700 Terminal Tower Cleveland, Ohio 44113 Attention: James J. Prohaska If to the Partners: FL-Tampa, Inc. c/o Forest City Enterprises 700 Terminal Tower Cleveland, Ohio 44113 Attention: James J. Prohaska M&D Palm Harbor, Inc. 3816 W. Linebaugh Ave., Suite 105 Tampa, Florida 33624 Attention: Kenneth Mamula If to the First Mortgagee: Berkshire Mortgage Finance Corporation One Beacon Street Boston, Massachusetts 02108 If to GIT: c/o Berkshire Mortgage Finance Corporation One Beacon Street Boston, Massachusetts 02108 with a copy to Peabody & Brown Suite 800 1255 23rd Street, NW Washington, D.C. 20037 Attention: George L. Daves, Esquire (b) Any party hereto may change the address to which notices shall be directed under this paragraph 17 by giving ten (10) days written notice of such change to the other parties. 19. Loan Documents Not Impaired. Except as expressly set forth herein with respect to the Subordinated Note, the Additional Loan Agreement and the Additional Loan Note, the agreements set forth herein are not intended to affect or alter the obligations of the Partnership and the Partners under the First Mortgage Documents, the Subordinated Loan Documents or Additional Loan Documents and this Agreement shall not be construed as a novation, renegotiation or release under any of these documents. 20. Representations of Borrower. The Partnership and Partners hereby acknowledge and confirm with the First Mortgagee and GIT that: (i) They have no offset, counterclaim or defense with respect to the obligations under the First Mortgage Loan Documents, the Subordinated Loan Documents or Additional Loan Documents and to the extent that they have any offset, counterclaim or defense with respect to the obligations thereunder, they hereby waive and release such offset, counterclaim and defense. (ii) The Partnership and Partners ratify and affirm all obligations under the First Mortgage Loan Documents and the Subordinated Loan Documents and the Additional Loan Documents. (iii) Except for the matters expressly set forth herein, the Partnership and the Partners hereby release and forever discharge the First Mortgagee and GIT and all its directors, officer, employees, administrators, agents, subsidiaries, affiliates, appraisers, inspectors, accountant, attorneys, successors and assigns from any and all present existing causes of action, demands, claims, debts, accounts, liabilities, costs, expenses, contracts, promises, agreements and damages whatsoever (hereinafter referred to individually and collectively as the "Claims") which related to the First Mortgage Loan Documents, the Subordinated Loan Documents, the Additional Loan Documents and also including without limitation any and all claims arising out of or relating to the exercise by the First Mortgagee and GIT of any rights pursuant thereto. 21. Representation of the First Mortgagee and GIT. The First Mortgagee and GIT hereby acknowledge that all payment obligations identified in this Agreement, First Mortgage Loan Documents, the Subordinated Loan Documents, and the Additional Loan Documents are nonrecourse. 22. Execution in Counterparts. This Agreement may be signed in counterparts by the parties and shall be effective upon the signature of the second party to sign the Agreement. 23. Binding Effect. The terms and provisions of this Agreement shall be binding upon the parties hereto and their heirs, successors and assigns. 24. Time is of the Essence. Time is of the essence in this Agreement. 25. Governing Law. This Agreement shall be construed under the laws of the State of Florida and if any provisions of this Agreement are held by a court of competent jurisdiction to be illegal, invalid or unenforceable, then such illegality, invalidity or unenforceability shall not affect the legality, validity or enforceability of the other provisions of this Agreement. IN WITNESS WHEREOF, the undersigned parties have caused this instrument to be executed as of the day, month and year first written above. PARTNERSHIP: Lifestyles at Boot Ranch, a Florida general partnership By: FL-Tampa, Inc. a Florida corporation, general partner By: Name: James J. Prohaska Title: Executive Vice President By: M&D Palm Harbor Partnership, a Florida partnership, general partner By: Name: Kenneth G. Mamula Title: General Partner PARTNERS: FL-Tampa, Inc., a Florida corporation By: Name: James J. Prohaska Title: Executive Vice President M&D Palm Harbor Partnership, a Florida partnership By: Name: Kenneth G. Mamula Title: General Partner GIT: Krupp Government Income Trust, a Massachusetts business trust By: Berkshire Mortgage Advisors Limited Partnership, its Advisor By: BRF Corporation, its general partner By: Name: Carol J.C. Mills Title: Vice President FIRST MORTGAGEE: Berkshire Mortgage Finance Corporation By: Name: Carol J.C. Mills Title: Vice President COUNTY OF: Cuyahoga STATE OF OHIO The foregoing instrument was acknowledged before me this __th day of December 1999 by James J. Prohaska, Executive Vice President of FL-Tampa, Inc., a Florida corporation, a general partner of Lifestyles at Boot Ranch, a Florida general partnership, on behalf of said partnership. WITNESS my hand and Notarial Seal. Jennifer E. Carpenter NOTARY PUBLIC, State of Ohio Recorded in Cuyahoga County My Commission Expires Mar.17,2002 My Commission Expires: COUNTY OF: Hillsborough STATE OF: Florida The foregoing instrument was acknowledged before me this __th day of December 1998 by Kenneth G. Mamula, General Partner of M&D Palm Harbor, Inc., a Florida corporation, a general partner of Lifestyles at Boot Ranch, a Florida general partnership, on behalf of said partnership. WITNESS my hand and Notarial Seal. Mary Ann Pyett NOTARY PUBLIC, State of Florida Commission # CC 783993 Expires NOV.19,2002 Bonded Thru Atlantic Bonding Co.,Inc. My Commission Expires: COUNTY OF SUFFOLK COMMONWEALTH OF MASSACHUSETTS The foregoing instrument was acknowledged before me this __th day of December 1998 by Carol J.C. Mills, Vice President of BRF Corporation, general partner of Berkshire Mortgage Advisors Limited Partnership, advisor to Krupp Government Income Trust, a Massachusetts business trust, on behalf of said trust. WITNESS my hand and Notarial Seal. Theresa T. Campbell NOTARY PUBLIC My Commission Expires: March 13, 2003 COUNTY OF SUFFOLK COMMONWEALTH OF MASSACHUSETTS The foregoing instrument was acknowledged before me this __th day of December 1998 by Carol J.C. Mills, Vice President of Berkshire Mortgage Finance Corporation, a Massachusetts corporation, on behalf of said corporation. WITNESS my hand and Notarial Seal. Theresa T. Campbell NOTARY PUBLIC My Commission Expires: March 13, 2003 EX-10 3 MODIFICATION AGREEMENT MODIFICATION AGREEMENT This modification agreement (the "Agreement") is made into as of the ___ day of May, 1997 by and among KRUPP GOVERNMENT INCOME TRUST, a Massachusetts business trust ("GIT"), LOVE FUNDING CORPORATION, a Virginia Corporation ("The First Mortgage"), McNAB-K C 3 LIMITED PARTNERSHIP, a Massachusetts limited partnership ("The Partnership") and KRUPP GP, INC., a Massachusetts corporation, GEORGE KRUPP, an individual (collectively, the "Partners") WITNESSETH WHEREAS, First Mortgage made a mortgage loan to the Partnership in the principal sum Fourteen Million Four Thousand and no/100 dollars ($14,004,000.00) which loan was coinsured by the U.S. Department of Housing and Urban Development (the "Coinsured loan"); WHEREAS, the Coinsured Loan was made with respect to the Winward Lakes Apartments (the "Project") located in Pompano Beach, Broward County, Florida on the land described in Exhibit A attached hereto (the "Property") and the terms of the following coinsured loan documents: A. The Coinsured Loan is evidenced by a certain Mortgage note ("the Coinsured Note") dated December 28, 1990 from the Partnership to the First Mortgage in the original principal sum of $14,004,000.00; B. The repayment of the indebtedness evidenced by the Coinsured Note is secured by, among other things, (I) a Mortgage dated December 28, 1990 and recorded in the Official Records of Broward County, Florida in Book 18030, Page 946 ("the Coinsured Mortgage"); (II) a Regulatory Agreement ("the Regulatory Agreement") dated December 28, 1990 and recorded in said Official Records in book 18030, the Page 957 ( the Coinsured Note, Coinsured Mortgage and Regulatory Agreement are collectively referred to as the "First Mortgage Loan Documents"); WHEREAS, the First Mortgage obtained funding for the Coinsured Loan through purchase of a Government National Mortgage Association ("GNMA") Mortgage backed Security ("MBS") by GIT. The interest rates on the Coinsured Loan were below the then prevailing interest rates for comparable loans and securities and GIT was unwilling to participate in the Coinsured Loan, unless the Partnership agreed to pay additional interest to GIT; WHEREAS, the Partnership agreed to pay additional interest to GIT pursuant to a Subordinated Promissory note ("the Subordinated Note") made by the Partnership in favor of GIT which is secured by a Subordinated Multifamily Mortgage, Assignment of Rents and Security Agreement ("the Subordinated Mortgage") dated December 28, 1990 and recorded in the Official Records of Broward County, Florida on January 2, 1991 under Clerk's File No. 91-002643 (collectively, the "Subordinated Loan Documents"); WHEREAS, the Partners have executed an Additional Loan Agreement and an Additional Loan Note evidencing additional indebtedness of the Partners to GIT of Two Million Four Hundred Seventy-One Thousand Two Hundred Ninety-Four and no/100 Dollars ($2,471,294.00) ("Additional Loan") which Additional Loan is secured by Pledge and Security Agreements and UCC financing statements with all documents dated December 28, 1990 (collectively, the "Additional Loan Documents") WHEREAS, the Project has experienced financial difficulties and the Partnership and Partners have requested assistance from GIT in regards to their obligation under the Coinsured Loan Documents and The Additional Loan Documents; WHEREAS, the Partnership, the Partners, the First Mortgage and GIT have agreed to modify the Subordinated Note, the Additional Loan Agreement and the Additional Loan Note based upon GIT's providing the financial assistance described herein; and WHEREAS, the Partnership, the Partners, the First Mortgage and GIT have reached an agreement the terms and conditions of which agreement are set forth herein. NOW THEREFORE, in consideration of the foregoing and Ten and no/100 Dollars ($10.00) in hand paid to GIT, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, intending to be legally bound, the Partnership, the Partners, the First Mortgage and GIT hereby agree as follows: 1. Recitals Incorporated. The foregoing Recitals are hereby incorporated herein to the same extent as hereafter fully set forth 2. Interest Rebate. The Partnership shall continue to make monthly debt service payments in accordance with Coinsured Note. Effective January 1, 1997 and during a period of forty-eight (48) months thereafter (the "Workout Term"), GIT will rebate monthly to the Partnership the difference between (I) the interest rate (i.e. 8.75%) payable under the Coinsured Note (the "Original Rate") and (ii) the following rates for each of the following calendar years during the Workout Term )collectively, the "Modified Rate");
Calendar Year Modified Rate Interest Rebate 1997 6.75% $275,298 (2%) 1998 7.75% $137,028 (1%) 1999 7.75% $136.352 (1%) 2000 7.75% $135,613 (1%) TOTAL $684,291
The difference between the Original Rate and Modified Rate for each such monthly payment in the aggregate (hereinafter the "Interest Rebate") shall be treated as a loan by GIT to the Partnership and shall be repaid as provided in Section 6 below. 3. Additional Equity Contribution The Partnership and/or Partners will provide upon execution of this agreement an additional equity contribution of $133,036 to be deposited in the Project operating accountable and used for such Project related costs as may be approved by GIT 4. Payment of participating Income and Base Interest Section 1. A. Of the Subordinated Promissory Note is hereby amended to include the following paragraph: The Maker agrees that Surplus shall be calculated in accordance with the Regulatory Agreement twice each year as of June 30 and December 31 until Coinsured Loan and Additional Loan have been paid in full. Furthermore, the Maker agrees that the Holder's 50% share of any distributable Surplus Cash calculated as of (a) June 30 shall be distributed no later than August 31 of the same year, or (b) December 31 shall be distibuted no later than March 31 of next year. Section 2. A. of the Additional Loan Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: A. Base Interest shall be payable only to the extent that the Holder receives 50% of distributable Surplus Cash at participating Income Interest pursuant to the Subordinated Promissory Note. Any unpaid Base Interest pursuant to the Subordinated Promissory Note. Any unpaid base Interest shall accrue and shall be repaid as provided in Section 6 of the Modification Agreement dated May___, 1997 5. Definition and Payment of Preferred Interest. Section 1 (n) of the Additional Loan Agreement is deleted in it's entirety and substituted in lieu thereof is the following: (n) "Preferred Interest" shall mean and refer to the amount which, as of the time of calculation, would be equal to a cumulative, noncompounded preferred return to the Holder of ten percent (10%) per annum simple interest from the date of Final Endorsement to the date of such calculation on the outstanding balance of the Holder's total capital investment in the Coinsured Loan and the Additional Loan, which total capital investment shall include the aggregate principal amount of the Coinsured Loan and the Additional Loan, which outstanding balance shall be reduced from time to time by the aggregate amount of any prepayments of principal under the Coinsured loan and/or the Additional Loan, less (A) interest payments received by holder pursuant to the GNMA MBS, (B) Participating Income Interest as set forth in the Subordinated Note, and (C) Base Interest payments made under the Additional Loan Note. Section 2.B. (I) of the Additional Loan Agreement is deleted in its entirety and the following is substituted in lieu thereof: (I) ten percent (10%) per annum simple interest from the date of Final Endorsement to the date of calculation of such interest on the outstanding balance of the Coinsured Loan plus the Additional Loan, which outstanding balance shall be reduced from time to time by the aggregate amount of any permitted prepayments of principal under Coinsured Loan and/or the Additional Loan, until the Coinsured Loan and the Additional Loan have been paid in full, less (a) interest payments received by the Holder pursuant to the GNMA MBS, (b) Participating Income Interest made under the Subordinated Note, and (c) Base Interest payments made under the Additional Loan Note. 6. Payment Obligation Priorities: Notwithstanding any provisions to the contrary contained in the Subordinated Note, Additional Loan Agreement of the Additional Loan Note, the undersigned parties agree that the priority and payment of the following shall occur upon the earlier of (I) Sale or Refinancing, (II) prepayment of the Additional Loan, (III) prepayment of the Coinsured Loan, (IV) the Accelerated Maturity Date, (V) the Payment Date or (VI) the Maturity of the Coinsured Loan and shall be paid in the following order: (a) Payment of principal and interest of the Coinsured Loan (b) Payment of the principal of the Additional Loan (c) Payment of any unpaid or accrued Interest Rebate. (d) Payment of any unpaid or accrued Base Interest (e) Repayment of the $133,036 deposit as provided in Section 3 above and any Capital Call advance made by the Partners in accordance with Section 3 of the Additional Loan Agreement, as modified by this Agreement, pari- passu with any Capital Call advance made by GIT. (f) Any remaining proceeds shall be split 50% to the Partnership and 50% to GIT until all Preferred Interest has been paid to GIT in full. Thereafter, any remaining proceeds shall be paid 100% to the Partnership. 7. Reduction of Management Fee The Partnership agrees that, until payment in full of the Coinsured Loan and the Additional Loan, the management fee paid to the Partnership or any affiliate thereof with respect to the management of the Project shall be limited to 3% of monthly gross rental income. 8. Certain Definitions. All Capitalized terms unless defined herein shall have the same meaning as the term is defined in the Subordinated Note, the Additional Loan Agreement and the Additional Loan Note. 9. Notice Requirement a) All notices and other communication required or permitted under this Agreement shall be in writing and, if mailed by prepaid United States first-class, certified mail, return receipt requested, at any other than a general discontinuance of postal service due to strike, lockout or otherwise, shall be deemed to be received on the earlier of the date shown on the return receipt or three (3) business days after the postmarked day thereof. In addition, notices hereunder may be delivered by hand or by overnight courier, in which event the notice shall be deemed effective when delivered. All notices and other communications under this Agreement shall be given to the parties hereto at the following addresses: If the Partnership or the Partners c/o McNab-K C 3 Limited Partnership 470 Atlantic Avenue Boston, MA 02210 Attn: Steve Parthum If to the First Mortgagee: Love Funding Corporation 1220 Nineteenth Street, N.W. Suite 801 Washington, DC 20036 If to GIT: c/o Berkshire Mortgage Finance Corporation 470 Atlantic Avenue Boston, MA 02210 Attn: Ronald F. Halpern with a copy to: Hinckley, Allen & Snyder One Financial Center Suite 4600 Boston, MA 02111 Attn: Scott E. Cooper, Esq. b) Any party hereto may change the address to which notices shall be directed under this section 9 by giving ten (10) days written notice of such change to the other parties. 10. Loan Documents Not Impaired Except as expressly set forth herein with respect to the Subordinated Note, the Additional Loan Agreement and the Additional Loan Note, the agreements set forth herein are not intended to affect or alter the obligations of the Partnership and/or the Partners under the First Mortgage Documents, the Subordinated Loan Document or the Additional Loan Documents and this Agreement shall not be construed as a novation, renegotiation or release under any of these documents. 11. Representation of Borrower. The Partnership and the Partners hereby acknowledge and confirm with the First Mortgage and GIT that: a) They have no offset, counterclaim or defense with respect to the obligations under the First Mortgage Loan Document, the Subordinated Loan Documents or the Additional Loan Documents and to the extent that they have any offset, counterclaim or defense with respect to the obligations thereunder, they hereby waive and release such offset, counterclaim and defense. b. The Partnership and the Partners ratify and affirm all obligations under the First Mortgage Loan Documents, the Subordinated Loan Documents and the Additional Loan Documents. c. Except for the matters expressly set forth herein, the Partnership and the Partners hereby release and forever discharge the First Mortgagee and GIT and all its directors, officers, employees, administrators, agents subsidiaries, affiliates, appraisers, inspectors, accountants, attorneys, successors, and assigns from any and all present existing causes of action, demands, claims, debts, accounts liabilities, costs, expenses, contracts, promises, agreements and damages whatsoever (hereinafter referred to individually and collectively as the "Claims") which related to the First Mortgage Loan Documents, the Subordinated Loan Documents and/or the Additional Loan Documents and also including, without limitation, any and all Claims arising out of or relating to the exercise by the First Mortgagee or GIT of any rights pursuant thereto. 12. Execution in Counterparts. This Agreement may be signed in counterparts by the parties and shall be effective upon the signature of the second party to sign the Agreement. 13. Binding Effect. The terms and provisions of this Agreement shall be binding upon the parties hereto and their heirs, successors and assigns. 14. Time of Essence. Time is of the essence in this Agreement. 15. Governing Law. This Agreement shall be construed under the laws of the State of Florida and if any provisions of this Agreement are held by a court of competent jurisdiction to be illegal, invalid or unenforceable, then such illegality, invalidity or unenforceability shall not affect the legality, validity or enforceability of the other provisions of this Agreement. IN WITNESS WHEREOF, the undersigned parties have caused this instrument to be executed as of the day, month and year first written above. PARTNERSHIP: McNab-K C 3 Limited Partnership, a Massachusetts limited partnership By: Krupp GP, Inc. a Massachusetts corporation, general partner By: __________________________ Name: Title PARTNERS Krupp GP, Inc., a Massachusetts Corporation By: _________________________ Name: Title George Krupp, individually Douglas Krupp, individually GIT: Krupp Government Income Trust, a Massachusetts business trust By: Berkshire Mortgage Advisors Limited Partnership, its advisor By: BRF Corporation, its general partner By: Name: Ronald F. Halpern Title: FIRST MORTGAGEE Love Funding Corporation By: Name: Title: Exhibit "A" LEGAL DESCRIPTION ALL OF TRACT A, ACCORDING TO THE PLAT OF McNAB ESTATES, AS RECORDED IN PLAT BOOK 142 AT PAGE 29 OF THE PUBLIC RECORES OF BROWARD COUNTY, FLORIDA RECORDED IN THE OFFICIAL RECORDS BOOK OF BROWARD COUNTY, FLORIDA L.A. HESTER COUNTY ADMINISTRATOR BK 18030PG0956 246CP4071E EX-27 4 FDS--
5 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. 0000857264 KRUPP GOVERNMENT INCOME TRUST 12-MOS DEC-31-1999 DEC-31-1999 4,627,499 133,307,578 973,491 0 0 3,187,021 0 0 142,095,589 3,943,046 0 0 0 137,921,227 231,316 142,095,589 0 15,632,229 0 0 3,314,848 0 0 12,317,381 0 12,317,381 0 0 0 12,317,381 0 0 Includes Participating Insured Mortgage Investments ("PIMIs")(insured mortgages of $60,129,492 and Additional Loans of $8,350,990), Participating Insured Mortgages ("PIMs") of $47,331,673 and Mortgage-backed Securities ("MBS") of $17,495,423. Includes prepaid acquisition fees and expenses of $8,333,461 net of accumulated amortization of $6,089,755 and prepaid participation servicing fees of $2,777,749 net of accumulated amortization of $1,834,434. Includes deferred income on Additional Loans of $3,918,021. Unrealized gain on MBS. Represents interest income on investments in mortgages and cash. Includes $48,272 for impaired mortgage loans and $1,672,143 of amortization of prepaid fees and expenses.
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