Note 2 - Investments in and Advances To Local Partnerships

12 Months Ended

Dec. 31, 2013

Notes

Note 2 - Investments in and Advances To Local Partnerships

Note 2 - Investments In and Advances to Local Partnerships

As of December 31, 2013 and 2012, the Partnership holds limited partnership interests in two and four Local Partnerships, respectively, located in two and four 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, 2013 and 2012, the Local Partnerships own residential projects consisting of 355 and 494 apartment units, respectively. During the year ended December 31, 2013, the Partnership sold its limited partnership interest in two of the Local Partnerships owning residential projects consisting of 139 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, 2013 and 2012, there were no such distributions received.

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.

In October 2013, the Partnership assigned its limited partnership interest in Jamestown Terrace to an affiliate of the Local Operating General Partner for a total of $10,000. This amount will be recognized as a gain on sales of limited partnership interest in Local Partnerships during the year ended December 31, 2013 as the Partnership had no investment balance remaining at the date of the assignment.

In November 2013, the Partnership assigned its limited partnership interest in Virginia Park Meadows to an affiliate of the Local Operating General Partner for no consideration. This agreement was subject to the Partnership paying a $3,000 transfer fee to the state of Michigan. The Partnership had no investment balance remaining as of the date of the agreement.

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.

During September 2013, the Partnership entered into an Assignment and Assumption Agreement to assign its limited partnership interest in Michigan Beach to a third party for a total amount of $10.00. Additionally, during September 2013, the Partnership entered into a Loan Purchase Agreement with the same third party, to sell the second mortgage held by the Partnership for an amount equal to the outstanding principal on the Loan. As of December 31, 2013, the outstanding principal balance on the Loan was $3,596,000. The Partnership's investment balance in Michigan Beach was reduced to zero. The assignment and the Loan purchase are subject to i) the consent of the United States Department of Housing and Urban Development and ii) the consent of Midland Loan Services, Inc. If either condition was not met prior to December 31, 2013, the Assignment Agreement and the Loan Agreement would terminate. All parties have agreed to extend and reinstate the loan agreement. Negotiations are ongoing at this time. An extension is expected to be signed in the second quarter of 2014. In the event that the closing does not timely occur due to the default by Assignee of its obligations under the Assignment Agreement or the Loan Agreement, then the Partnership will be entitled to keep the $1,000 escrow deposit made by Assignee in connection with the Loan Agreement. In the event that the closing does not timely occur due to the default by the Partnership, then the rights and obligations of both parties under both agreements terminate, except for certain indemnification rights.

As of December 31, 2013 and 2012, the investment balance in one of the two and three of the four 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. 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 advances of approximately $1,344,000 to Michigan Beach during the year ended December 31, 2013, for deferred capital needs. Subsequent to December 31, 2013, the Partnership advanced approximately $89,000.  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, 2013 and 2012 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, 2013 and 2012 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, 2013 and 2012 for the Local Partnerships in which the Partnership has investments. The 2013 and 2012 amounts exclude Jamestown and Virginia Park, for which the Partnership assigned its limited partnership interest in October 2013; The 2012 amounts exclude 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, 2013
Assets:	Unaudited	Material Investee	Total
Land	$  112	$  1,010	$ 1,122
Building and improvements	4,109	9,751	13,860
Accumulated depreciation	(2,355)	(4,393)	(6,748)
Other assets	67	588	655
Total assets	$ 1,933	$  6,956	$ 8,889
Liabilities and Partners Deficit:
Liabilities:
Mortgage notes payable and interest	$ 2,047	$  12,375	$ 14,422
Other liabilities	284	7,093	7,377
Partners’ deficit	(398)	(12,512)	(12,910)
Total liabilities and partners' deficit	$ 1,933	$  6,956	$  8,889

	December 31, 2012
Assets	Unaudited	Material Investee	Total
Land	$   185	$    843	$  1,028
Building and improvements	4,025	8,222	12,247
Accumulated depreciation	(2,241)	(3,967)	(6,208)
Other assets	58	736	794
Total assets	$ 2,027	$  5,834	$  7,861
Liabilities and Partners Deficit:
Liabilities:
Mortgage notes payable	$ 2,047	$  9,073	$ 11,120
Other liabilities	286	9,032	9,318
Partners’ deficit	(306)	(12,271)	(12,577)
Total liabilities and partners' deficit	$ 2,027	$  5,834	$ 7,861

Condensed Combined Results of Operations of the Local Partnerships
(in thousands)
	For the year Ended December 31, 2013			For the year Ended December 31, 2012
	Unaudited	Material Investee	Total	Unaudited	Material Investee	Total
Rental and other revenue	$    430	$   2,433	$ 2,863	$   459	$ 2,288	$ 2,747
Expenses:
Operating expenses	383	588	971	440	1,837	2,277
Interest and entity
expenses	24	430	454	--	(15)	(15)
Depreciation and     amortization	115	1,659	1,774	109	417	526
Total expenses	522	2,677	3,199	549	2,239	2,788
Income (loss) from continuing operations	$    (92)	$   (244)	$  (336)	$   (90)	$    49	$   (41)

Real Estate and Accumulated Depreciation of Local Partnerships

The following tables exclude the Local Partnerships sold in 2013 and 2012 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, 2013) (in thousands):
Description	Encumbrances	Land	Buildings And Related Personal Property	Total	Accumulated Depreciation
Lincoln Grove	$  2,047	$   112	$  4,109	$  4,221	$ 2,355
Michigan Beach	12,375	1,010	9,751	10,761	4,393
Total	$ 14,422	$ 1,122	$ 13,860	$ 14,982	$ 6,748

(2) Reconciliation of real estate (all amounts unaudited except for those amounts relative to the Material Investee) (in thousands):
	Year Ended December 31, 2013			Year Ended December 31, 2012
	Unaudited	Material Investee	Total	Unaudited	Material Investee	Total
Real estate:
Balance at beginning of year	$ 4,210	$ 9,065	$ 13,275	$ 4,190	$ 8,557	$12,747
Improvements	11	1,696	1,707	20	508	528
Balance at end of year	$ 4,221	$10,761	$ 14,982	$ 4,210	$ 9,065	$13,275

(3) Reconciliation of accumulated depreciation (all amounts unaudited except for those amounts relative to the Material Investee) (in thousands):
	Year Ended December 31, 2013			Year Ended December 31, 2012
	Unaudited	Material Investee	Total	Unaudited	Material Investee	Total
Accumulated depreciation:
Balance at beginning of year	$ 2,241	$ 3,967	$ 6,208	$ 2,133	$ 3,555	$ 5,688
Depreciation expense	114	426	540	108	412	520
Balance at end of year	$ 2,355	$ 4,393	$ 6,748	$ 2,241	$ 3,967	$ 6,208

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”).