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Note 2 - Investments in and Advances To Local Partnerships

12 Months Ended

Dec. 31, 2014

Note 2 - Investments in and Advances To Local Partnerships

Note 2 - Investments In and Advances to Local Partnerships

As of December 31, 2014 and 2013, the Partnership holds limited partnership interests in two Local Partnerships, located in two states. 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, 2014 and 2013, the Local Partnerships own residential projects consisting of 355 apartment units. 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, 2014 and 2013, 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 was 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 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. In April 2014 and December 2014, the Partnership entered into an amendment and a second amendment to each of the Assignment and Assumption Agreement and the Loan Purchase Agreement to, among other things, extend the closing date for the transaction to December 31, 2014 and March 31, 2015, respectively. As of December 31, 2014, the outstanding principal balance on the Loan was $3,596,000. The Registrant’s investment balance in Michigan Beach was reduced to zero. The assignment and the Loan purchase are expected to close during 2015 and 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 is not met prior to March 31, 2015, then the Assignment Agreement and the Loan Agreement would terminate. 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 Registrant 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, 2014 and 2013, the investment balance in one of the two Local Partnerships 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 $306,000 and $1,344,000 to Michigan Beach during the years ended December 31, 2014 and 2013, respectively, for deferred capital needs. 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, 2014 and 2013 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, 2014 and 2013 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, 2014 and 2013 for the Local Partnerships in which the Partnership has investments. The 2013 amounts exclude Jamestown and Virginia Park, for which the Partnership assigned its limited partnership interest in October 2013.

Condensed Combined Balance Sheets of the Local Partnerships
(in thousands)
	December 31, 2014
Assets:	Unaudited	Material Investee	Total

Land	$ 112	$ 1,013	$ 1,125
Building and improvements	4,109	10,599	14,708
Accumulated depreciation	(2,462)	(4,821)	(7,283)
Other assets	37	595	632
Total assets	$ 1,796	$ 7,386	$ 9,182

Liabilities and Partners Deficit:
Liabilities:
Mortgage notes payable and interest	$ 2,047	$ 19,785	$ 21,832
Other liabilities	277	366	643
Partners’ deficit	(528)	(12,765)	(13,293)

Total liabilities and partners' deficit	$ 1,796	$ 7,386	$ 9,182

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	$ 19,046	$ 21,093
Other liabilities	284	422	706
Partners’ deficit	(398)	(12,512)	(12,910)

Total liabilities and partners' deficit	$ 1,933	$ 6,956	$ 8,889

Condensed Combined Results of Operations of the Local Partnerships
(in thousands)
	December 31, 2014
	Unaudited	Material Investee	Total

Rental and other	$ 412	$ 2,708	$ 3,120

Expenses:
Operating expenses	413	1,882	2,295
Interest and entity expenses	24	645	669

Depreciation and amortization	107	434	541
Total expenses	544	2,961	3,505

Income (loss) from continuing operations	$ (132)	$ (253)	$ (385)

Condensed Combined Results of Operations of the Local Partnerships
(in thousands)
	December 31, 2013
	Unaudited	Material Investee	Total

Rental and other	$ 430	$ 2,433	$ 2,863

Expenses:
Operating expenses	384	1,648	2,032
Interest and entity expenses	24	599	623

Depreciation and amortization	114	430	544
Total expenses	522	2,677	3,199

Income (loss) from continuing operations	$ (92)	$ (244)	$ (336)

Real Estate and Accumulated Depreciation of Local Partnerships

The following tables exclude the Local Partnerships sold in 2014 and 2013 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, 2014) (in thousands):

Description	Encumbrances	Land	Buildings And Related Personal Property	Total	Accumulated Depreciation

Lincoln Grove	$ 2,047	$ 112	$ 4,109	$ 4,221	$ 2,462
Michigan Beach	19,785	1,013	10,599	11,612	4,821
Total	$ 21,832	$ 1,125	$ 14,708	$ 15,833	$ 7,283

(2) Reconciliation of real estate (all amounts unaudited except for those amounts relative to the Material Investee) (in thousands):

	December 31, 2014
	Unaudited	Material Investee	Total

Real Estate:
Balance at beginning of year	$ 4,221	$ 10,761	$ 14,982
Improvements	0	851	851
Balance at end of year	$ 4,221	$ 11,612	$ 15,833

	December 31, 2013
	Unaudited	Material Investee	Total

Real Estate:
Balance at beginning of year	$ 4,210	$ 9,065	$ 13,275
Improvements	11	1,696	1,707
Balance at end of year	$ 4,221	$ 10,761	$ 14,982

(3) Reconciliation of accumulated depreciation (all amounts unaudited except for those amounts relative to the Material Investee) (in thousands):

	December 31, 2014
	Unaudited	Material Investee	Total

Accumulated depreciation:
Balance at beginning of year	$ 2,355	$ 4,393	$ 6,748
Depreciation expense	107	428	535
Balance at end of year	$ 2,462	$ 4,821	$ 7,283

	December 31, 2013
	Unaudited	Material Investee	Total

Accumulated depreciation:
Balance at beginning of year	$ 2,241	$ 3,967	$ 6,208
Depreciation expense	114	426	540
Balance at end of year	$ 2,355	$ 4,393	$ 6,748

An affiliate of the General Partner is currently the Local Operating General Partner in one of the Partnership’s two Local Partnerships included above.