Note 2 - Investments in and Advances To Local Partnerships

12 Months Ended

Dec. 31, 2012

Notes

Note 2 - Investments in and Advances To Local Partnerships

Note 2 - Investments In and Advances to Local Partnerships

As of December 31, 2012 and 2011, the Partnership holds limited partnership interests in 4 and 5 Local Partnerships, respectively, located in four and five states, respectively. As a limited partner of the Local Partnerships, the Partnership does not have authority over day-to-day management of the Local Partnerships or their properties (the "Apartment Complexes"). The general partners responsible for management of the Local Partnerships (the "Local Operating General Partners") are not affiliated with the General Partner of the Partnership, except as discussed below.

At December 31, 2012 and 2011, the Local Partnerships own residential projects consisting of 494 and 674 apartment units, respectively. During the year ended December 31, 2012, the Partnership sold its limited partnership interest in one of the Local Partnerships owning residential projects consisting of 180 apartment units.

The projects owned by the Local Partnerships in which the Partnership has invested were developed by the Local Operating General Partners who acquired the sites and applied for applicable mortgages and subsidies, if any. The Partnership became the principal limited partner in these Local Partnerships pursuant to arm's-length negotiations with the Local Operating General Partners.  As a limited partner, the Partnership’s liability for obligations of the Local Partnerships is limited to its investment. The Local Operating General Partner of the Local Partnerships retains responsibility for developing, constructing, maintaining, operating and managing the Projects.  Under certain circumstances, an affiliate of NAPICO or the Partnership may act as the Local Operating General Partner.  An affiliate of NAPICO, National Tax Credit Inc. II ("NTC-II") is acting either as a special limited partner or non-managing administrative general partner (the “Administrative General Partner”) of each Local Partnership in which the Partnership had an investment.

The Partnership, as a limited partner, does not have a contractual relationship with the Local Partnerships or exercise control over the activities and operations, including refinancing or selling decisions, of the Local Partnerships that would require or allow for consolidation. Accordingly, the Partnership accounts for its investments in the Local Partnerships using the equity method. The Partnership is allocated profits and losses of the Local Partnerships based upon its respective ownership percentage (between 98.90% and 99%). The Partnership is allocated profits and losses and receives distributions from refinancings and sales in accordance with the Local Partnerships’ partnership agreements. These agreements usually limit the Partnership’s distributions to an amount substantially less than its ownership percentage in the Local Partnership.

The individual investments are carried at cost plus the Partnership’s share of the Local Partnership’s profits less the Partnership’s share of the Local Partnership’s losses, distributions and impairment charges. See “Note 1 – Organization and Summary of Significant Accounting Policies” for a description of the impairment policy. The Partnership is not legally liable for the obligations of the Local Partnerships and is not otherwise committed to provide additional support to them. Therefore, the Partnership does not recognize losses once the Partnership’s investment in each of the Local Partnerships reaches zero.  Distributions from the Local Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. When the investment balance has been reduced to zero, subsequent distributions received are recognized as income in the accompanying statements of operations. During the year ended December 31, 2011, the Partnership received approximately $10,000 in operating distributions from three Local Partnerships in which the Partnership does not have an investment balance, which was recognized as income in the statements of operations for the year ended December 31, 2011, as these distributions were received from Local Partnerships in which the Partnership’s investment balance had previously been reduced to zero. There were no such distributions received in 2012.

For those investments where the Partnership has determined that the carrying value of the Partnership’s investments approximates the estimated fair value of those investments, the Partnership’s policy is to recognize equity in income of the Local Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Partnerships.  Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize.

As of December 31, 2012 and 2011, the investment balance in three of the four and four of the five Local Partnerships, respectively, had been reduced to zero. The Partnership’s remaining investment balance relates to the mortgage note receivable, which is discussed in “Note 3 – Mortgage Note Receivable”.

At times, advances are made to Local Partnerships in order to preserve the ability to receive applicable tax credits. Advances made by the Partnership to the individual Local Partnerships are considered part of the Partnership’s investment in limited partnerships.  Advances made to Local Partnerships in which the investment balance has been reduced to zero are charged to expense. The Partnership made an advance of less than $1,000 to Michigan Beach during the year ended December 31, 2012, for filing fees associated with management of the property. The Partnership did not make any advances during the year ended December 31, 2011. Subsequent to December 31, 2012 the Partnership advanced approximately $206,000 to Michigan Beach for operations and capital expenditures.  While not obligated to make advances to any of the Local Partnerships, the Partnership may make future advances in order to protect its economic investment in the Local Partnerships.

The difference between the investment per the accompanying balance sheets at December 31, 2012 and 2011 and the equity per the Local Partnerships' condensed combined financial statements is due primarily to cumulative unrecognized equity in losses of certain Local Partnerships, costs capitalized to the investment account, and cumulative distributions recognized as income.

The Partnership’s value of its investments and its equity in the income/loss and/or distributions from the Local Partnerships are, for certain Local Partnerships, individually, not material to the overall financial position of the Partnership. The financial information from the unaudited condensed combined financial statements of such Local Partnerships at December 31, 2012 and 2011 and for each of the two years in the period then ended is presented below.  The Partnership’s value of its investment in Michigan Beach Limited Partnership, (the “Material Investee”) is considered material to the Partnership’s financial position and amounts included below for the Material Investee are included on an audited basis.

The following are estimated unaudited condensed combined statements of operations for the years ended December 31, 2012 and 2011 for the Local Partnerships in which the Partnership has investments. The 2012 and 2011 amounts exclude Pineview Terrace, for which the Partnership sold its limited partnership interest in February 2011; Sitka III, Soldotna Apartments, and Torres Del Plata II, for which the Partnership sold its limited partnership interests in June 2011; and Countryside Place, for which the Partnership sold its limited partnership interest in April 2012.

Condensed Combined Balance Sheets of the Local Partnerships
(in thousands)
	December 31, 2012
Assets:	Unaudited	Material Investee	Total
Land	$    562	$    843	$  1,405
Building and improvements	13,125	8,222	21,347
Accumulated depreciation	(8,578)	(3,967)	(12,545)
Other assets	665	736	1,401
Total assets	$  5,774	$  5,834	$ 11,608
Liabilities and Partners Deficit:
Liabilities:
Mortgage notes payable	$  8,172	$  9,073	$ 17,245
Other liabilities	1,310	9,032	10,342
Partners’ deficit	(3,708)	(12,271)	(15,979)
Total liabilities and partners' deficit	$  5,774	$  5,834	$ 11,608

	December 31, 2011
Assets	Unaudited	Material Investee	Total
Land	$    562	$    843	$  1,405
Building and improvements	13,065	7,714	20,779
Accumulated depreciation	(8,195)	(3,555)	(11,750)
Other assets	619	1,002	1,621
Total assets	$  6,051	$  6,004	$ 12,055
Liabilities and Partners Deficit:
Liabilities:
Mortgage notes payable	$  8,179	$  9,124	$ 17,303
Other liabilities	1,269	9,201	10,470
Partners’ deficit	(3,397)	(12,321)	(15,718)
Total liabilities and partners' deficit	$  6,051	$  6,004	$ 12,055

Condensed Combined Results of Operations of the Local Partnerships
(in thousands)
	For the year Ended December 31, 2012			For the year Ended December 31, 2011
	Unaudited	Material Investee	Total	Unaudited	Material Investee	Total
Rental and other revenue	$ 1,406	$ 2,288	$ 3,694	$ 1,442	$ 2,200	$ 3,642
Expenses:
Operating expenses	1,085	1,837	2,922	1,096	1,574	2,670
Interest	245	(15)	230	250	673	923
Depreciation and amortization	387	417	804	399	437	836
Total expenses	1,717	2,239	3,956	1,745	2,684	4,429
Income (loss) from continuing operations	$  (311)	$    49	$  (262)	$  (303)	$  (484)	$  (787)

Real Estate and Accumulated Depreciation of Local Partnerships

The following tables exclude the Local Partnerships sold in 2012 and 2011 as described above.

(1) Schedule of Encumbrances and Investment Properties (all amounts unaudited except for those amounts relative to the Material Investee and are the gross amounts at which carried at December 31, 2012) (in thousands):
Description	Encumbrances	Land	Buildings And Related Personal Property	Total	Accumulated Depreciation
Lincoln Grove	$ 2,047	$   185	$ 4,025	$ 4,210	$ 2,242
Michigan Beach	9,073	843	8,222	9,065	3,967
Virginia Park Meadows	3,413	79	5,397	5,476	4,351
Jamestown Terrace	2,712	298	3,703	4,001	1,985
Total	$17,245	$ 1,405	$21,347	$22,752	$12,545

(2) Reconciliation of real estate (all amounts unaudited except for those amounts relative to the Material Investee) (in thousands):
	Year Ended December 31, 2012			Year Ended December 31, 2011
	Unaudited	Material Investee	Total	Unaudited	Material Investee	Total
Real estate:
Balance at beginning of year	$13,627	$ 8,557	$22,184	$13,597	$ 8,428	$22,025
Improvements	60	508	568	30	129	159
Balance at end of year	$13,687	$ 9,065	$22,752	$13,627	$ 8,557	$22,184

(3) Reconciliation of accumulated depreciation (all amounts unaudited except for those amounts relative to the Material Investee) (in thousands):
	Year Ended December 31, 2012			Year Ended December 31, 2011
	Unaudited	Material Investee	Total	Unaudited	Material Investee	Total
Accumulated depreciation:
Balance at beginning of year	$ 8,195	$ 3,555	$11,750	$ 7,821	$ 3,118	$10,939
Depreciation expense	383	412	795	374	437	811
Balance at end of year	$ 8,578	$ 3,967	$12,545	$ 8,195	$ 3,555	$11,750

An affiliate of the General Partner is currently the Local Operating General Partner in one of the Partnership’s four Local Partnerships included above, and a former affiliate received property management fees of approximately 5 percent of gross revenues from the same Local Partnership (See “Note 4 – Transactions with Affiliated Parties”).

On February 4, 2011, the Partnership assigned its limited partnership interest in Pineview Terrace to a third party and received net proceeds of $1,000,000, which was recognized as gain from sales of limited partnership interests in Local Partnerships during the year ended December 31, 2011. The Partnership’s investment balance in Pineview Terrace was zero at the date of the assignment.

On June 7, 2011, the Partnership assigned its limited partnership interest in both Sitka III Associates and Soldotna Associates to a third party and received net proceeds of $3,000 for each interest, which was recognized as gain from sales of limited partnership interests in Local Partnerships during the year ended December 31, 2011. The Partnership’s investment balance in both Sitka III Associates and Soldotna Associates was zero at the date of the assignment.

On June 15, 2011, the Partnership sold its limited partnership interest in Torres del Plata II Limited Partnership to a third party and received net proceeds of approximately $25,000, which was recognized as gain from sales of limited partnership interests in Local Partnerships during the year ended December 31, 2011. The Partnership’s investment balance in Torres del Plata II was zero at the date of the sale.

During November 2011, the Partnership entered into an assignment and assumption agreement with a third party affiliated with the operating general partner of Countryside North American Partners, L.P. (“Countryside”). The agreement provided for an assignment of the Partnership’s 99% limited partnership interest in Countryside for $3,700,000. The assignment was subject to the consent of the Executive Director of the New Jersey Housing and Mortgage Finance Agency, which was received during December 2011. Upon receipt of approval from the Executive Director of the New Jersey Housing and Mortgage Finance Agency, the assignment of the Partnership’s 99% limited partnership interest in Countryside became effective on December 30, 2011. Pursuant to the terms of the assignment agreement, the Partnership received a deposit of $150,000 in cash and a promissory note in the principal amount of $3,550,000 in December 2011. The promissory note had a maturity date of June 30, 2012 and bore interest at the annual rate of two percent if paid on or before March 31, 2012 and seven percent if paid after March 31, 2012. At December 31, 2011, this sale was accounted for under the deposit method, as it lacked adequate initial investment by the buyer to qualify as a sale transaction. Accordingly, the Partnership recorded deferred revenues of $145,000 (cash portion of the sales price received less $5,000 of expenses incurred in connection with the assignment) and excluded the promissory note from its assets at December 31, 2011. During the year ended December 31, 2012, the Partnership paid approximately $43,000 of New Jersey taxes associated with the sale, which was recognized as a reduction to the gain. During the year ended December 31, 2012, the Partnership received approximately $3,562,000 in payment of the note receivable of approximately $3,550,000 and accrued interest of approximately $12,000. The Partnership recognized a gain from sale of limited partnership interest of approximately $3,652,000 and interest income of approximately $12,000 during the year ended December 31, 2012. The Partnership had no investment balance remaining in this Local Partnership at the date of assignment and accounted for the investment as an asset held for sale at December 31, 2011.