XNAS:ATAX America First Multifamily Investors LP Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

Q      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to
Commission File Number:  000-24843

AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
(Exact name of registrant as specified in its charter)

Delaware
47-0810385
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
1004 Farnam Street, Suite 400
Omaha, Nebraska 68102
(Address of principal executive offices)
(Zip Code)
(402) 444-1630
(Registrant's telephone number, including area code)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  x NO £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £
Accelerated filer  Q
Non- accelerated filer £
Smaller reporting company £
 
 
(do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  £  NO Q




INDEX

PART I – FINANCIAL INFORMATION

Financial Statements (Unaudited)
 
 
 
Condensed Consolidated Balance Sheets
 
Condensed Consolidated Statements of Operations
 
Condensed Consolidated Statements of Comprehensive Income
 
Condensed Consolidated Statements of Partners’ Capital
 
Condensed Consolidated Statements of Cash Flows
 
Notes to Condensed Consolidated Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures

PART II – OTHER INFORMATION

Risk Factors
 
Exhibits
 



Forward-Looking Statements

This report (including, but not limited to, the information contained in “Management's Discussion and Analysis of Financial Condition and Results of Operations”) contains forward-looking statements.  All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements.  When used, statements which are not historical in nature, including those containing words such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” and similar expressions, are intended to identify forward-looking statements.  We have based forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations.  This report also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data.  This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates.  We have not independently verified the statistical and other industry data generated by independent parties and contained in this report and, accordingly, we cannot guarantee their accuracy or completeness.  

These forward-looking statements are subject to various risks and uncertainties, including those relating to:

defaults on the mortgage loans securing our tax-exempt mortgage revenue bonds;
risks associated with investing in multifamily apartments, including changes in business conditions and the general economy;
changes in short-term interest rates;
our ability to use borrowings to finance our assets;
current negative economic and credit market conditions; and
changes in government regulations affecting our business.

Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described under the headings “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in item 1A of Part II of this document.





PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
 
June 30,
2012
 
December 31,
2011
Assets
 
 
 
 
Cash and cash equivalents
 
$
81,790,870

 
$
20,201,573

Restricted cash
 
6,419,577

 
13,852,753

Interest receivable
 
7,083,519

 
6,984,978

Tax-exempt mortgage revenue bonds held in trust, at fair value (Notes 4 & 9)
 
98,707,622

 
109,152,787

Tax-exempt mortgage revenue bonds, at fair value (Note 4)
 
38,138,997

 
26,542,565

Real estate assets: (Note 6)
 
 
 
 
Land
 
13,802,148

 
12,430,434

Buildings and improvements
 
114,355,138

 
111,653,203

Real estate assets before accumulated depreciation
 
128,157,286

 
124,083,637

Accumulated depreciation
 
(22,402,643
)
 
(19,817,998
)
Net real estate assets
 
105,754,643

 
104,265,639

Other assets (Note 7)
 
8,552,585

 
10,211,388

Assets of discontinued operations (Note 8)
 
6,698,871

 
6,764,862

Total Assets
 
$
353,146,684

 
$
297,976,545

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable, accrued expenses and other liabilities
 
$
3,596,921

 
$
3,491,642

Distribution payable
 
5,562,518

 
3,911,340

Debt financing (Note 9)
 
104,328,000

 
112,673,000

Mortgages payable (Note 10)
 
43,231,990

 
40,092,455

Liabilities of discontinued operations (Note 8)
 
6,131,925

 
6,219,063

Total Liabilities
 
162,851,354

 
166,387,500

 
 
 
 
 
Commitments and Contingencies (Note 15)
 


 


 
 
 
 
 
Partners' Capital
 
 
 
 
General Partner (Note 2)
 
(364,091
)
 
(354,006
)
Beneficial Unit Certificate holders
 
213,861,059

 
154,911,228

Unallocated deficit of Consolidated VIEs
 
(24,011,830
)
 
(23,512,962
)
Total Partners' Capital
 
189,485,138

 
131,044,260

Noncontrolling interest (Note 6)
 
810,192

 
544,785

Total Capital
 
190,295,330

 
131,589,045

Total Liabilities and Partners' Capital
 
$
353,146,684

 
$
297,976,545


The accompanying notes are an integral part of the condensed consolidated financial statements.


1


AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 
 
For the Three Months Ended,
 
For the Six Months Ended,
 
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Revenues:
 
 
 
 
 
 
 
 
Property revenues
 
$
4,145,933

 
$
4,031,179

 
$
8,384,862

 
$
7,596,732

Mortgage revenue bond investment income
 
2,288,646

 
2,407,760

 
4,660,050

 
4,628,673

Gain on sale of bonds
 
667,821

 

 
667,821

 

Other income
 
43,427

 
148,950

 
82,772

 
400,311

Total revenues
 
7,145,827

 
6,587,889

 
13,795,505

 
12,625,716

Expenses:
 
 
 
 
 
 
 
 
Real estate operating (exclusive of items shown below)
 
2,447,042

 
2,374,329

 
4,726,976

 
4,506,537

Provision for loss on receivables
 
238,175

 
710,690

 
476,350

 
710,690

Depreciation and amortization
 
1,527,403

 
1,316,112

 
2,966,308

 
2,449,171

Interest
 
1,546,688

 
1,630,527

 
2,865,223

 
2,404,261

General and administrative
 
1,048,366

 
677,422

 
1,698,945

 
1,319,017

Total expenses
 
6,807,674

 
6,709,080

 
12,733,802

 
11,389,676

Income (loss) from continuing operations
 
338,153

 
(121,191
)
 
1,061,703

 
1,236,040

Income from discontinued operations
 
90,113

 
379

 
136,147

 
14,383

Net income (loss)
 
428,266

 
(120,812
)
 
1,197,850

 
1,250,423

Net income attributable to noncontrolling interest
 
122,218

 
122,436

 
261,370

 
304,497

Net income (loss) - America First Tax Exempt Investors, L.P.
 
$
306,048

 
$
(243,248
)
 
$
936,480

 
$
945,926

 
 
 
 
 
 
 
 
 
Net income (loss) allocated to:
 
 
 
 
 
 
 
 
General Partner
 
$
165,927

 
$
56,769

 
174,630

 
71,462

Limited Partners - Unitholders
 
399,130

 
116,905

 
1,260,718

 
1,571,515

Unallocated loss of Consolidated Property VIEs
 
(259,009
)
 
(416,922
)
 
(498,868
)
 
(697,051
)
Noncontrolling interest
 
122,218

 
122,436

 
261,370

 
304,497

 
 
$
428,266

 
$
(120,812
)
 
$
1,197,850

 
$
1,250,423

Unitholders' interest in net income per unit (basic and diluted):
 
 
 
 
 
 
 
 
Net income (loss), basic and diluted, per unit
 
$
0.01

 
$

 
$
0.04

 
$
0.05

Weighted average number of units outstanding, basic and diluted
 
33,682,818

 
30,122,928

 
31,912,707

 
30,122,928


The accompanying notes are an integral part of the condensed consolidated financial statements.

2


AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)


 
 
For the Three Months Ended,
 
For the Six Months Ended,
 
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Net income (loss)
 
$
428,266

 
$
(120,812
)
 
$
1,197,850

 
$
1,250,423

Deconsolidation of VIE
 

 
(726,243
)
 

 
(726,243
)
Unrealized gain on securities
 
4,074,444

 
4,542,067

 
6,922,051

 
7,397,625

Comprehensive income
 
4,502,710

 
3,695,012

 
8,119,901

 
7,921,805

Comprehensive income attributable to noncontrolling interest
 
122,218

 
122,436

 
261,370

 
304,497

Comprehensive income - America First Tax Exempt Investors, L.P.
 
$
4,380,492

 
$
3,572,576

 
$
7,858,531

 
$
7,617,308


The accompanying notes are an integral part of the condensed consolidated financial statements.



3


AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2012 and 2011
(UNAUDITED)

 
General Partner
 
# of Units
 
Beneficial Unit Certificate Holders
 
Unallocated Deficit of Consolidated VIEs
 
Non- controlling Interest
 
Total
 
Accumulated Other Comprehensive Income (Loss)
Balance at January 1, 2012
$
(354,006
)
 
30,122,928

 
$
154,911,228

 
$
(23,512,962
)
 
$
544,785

 
$
131,589,045

 
$
95,894

Sale of Beneficial Unit Certificates

 
12,650,000

 
59,948,265

 


 


 
59,948,265

 


Noncontrolling interest contribution

 
 
 

 

 
4,037

 
4,037

 
 
Distributions paid or accrued
(253,936
)
 

 
(9,111,982
)
 

 

 
(9,365,918
)
 

Net income (loss)
174,630

 

 
1,260,718

 
(498,868
)
 
261,370

 
1,197,850

 

Unrealized gain on securities
69,221

 

 
6,852,830

 

 

 
6,922,051

 
6,922,051

Balance at June 30, 2012
$
(364,091
)
 
42,772,928

 
$
213,861,059

 
$
(24,011,830
)
 
$
810,192

 
$
190,295,330

 
$
7,017,945

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General Partner
 
# of Units
 
Beneficial Unit Certificate Holders
 
Unallocated Deficit of Consolidated VIEs
 
Non- controlling Interest
 
Total
 
Accumulated Other Comprehensive Income (Loss)
Balance at January 1, 2011
$
(280,629
)
 
30,122,928

 
$
161,389,189

 
$
(32,945,669
)
 
$
(141,326
)
 
$
128,021,565

 
$
(9,692,233
)
Deconsolidation of VIE (Note 3)
(7,262
)
 

 
(718,981
)
 
10,722,246

 
 
 
9,996,003

 
(726,243
)
Distributions paid or accrued
(139,609
)
 
 
 
(7,530,732
)
 

 

 
(7,670,341
)
 
 
Net income (loss)
71,462

 

 
1,571,515

 
(697,051
)
 
304,497

 
1,250,423

 

Unrealized gain on securities
73,976

 

 
7,323,649

 

 

 
7,397,625

 
7,397,625

Balance at June 30, 2011
$
(282,062
)
 
30,122,928

 
$
162,034,640

 
$
(22,920,474
)
 
$
163,171

 
$
138,995,275

 
$
(3,020,851
)
 
The accompanying notes are an integral part of the condensed consolidated financial statements.


4


AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
For Six Months Ended,
 
 
June 30, 2012
 
June 30, 2011
Cash flows from operating activities:
 
 
 
 
Net income
 
$
1,197,850

 
$
1,250,423

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization expense
 
3,056,181

 
2,634,551

Provision for loss from receivables
 
476,350

 
710,690

Non-cash loss on derivatives
 
780,497

 
888,554

Gain on sale of bonds
 
(667,821
)
 

Bond discount amortization
 
(215,777
)
 
(241,075
)
Gain on asset sold
 

 
(21,103
)
Gain on early extinguishment of debt
 

 
(104,988
)
Changes in operating assets and liabilities, net of effect of acquisitions
 


 


Increase in interest receivable
 
(1,073,526
)
 
(1,417,399
)
Decrease (increase) in other assets
 
262,683

 
(551,180
)
Increase (decrease) in accounts payable and accrued expenses
 
90,823

 
(62,587
)
Net cash provided by operating activities
 
3,907,260

 
3,085,886

Cash flows from investing activities:
 


 


Capital expenditures
 
(3,744,461
)
 
(2,634,679
)
Acquisition of tax-exempt mortgage revenue bonds
 
(10,164,815
)
 
(20,917,500
)
Acquisition of partnerships, net of cash acquired
 

 
(24,779,613
)
Proceeds from assets sold
 

 
36,500

Decrease in restricted cash
 
208,195

 
148,366

Restricted cash - debt collateral released
 
7,248,436

 
291,719

Cash released upon foreclosure
 

 
2,047,161

Proceeds from the sale of bonds
 
16,829,960

 

Proceeds from bond retirement
 

 
6,119,573

Transfer of cash to unconsolidated VIE upon deconsolidation
 

 
(5,135
)
Principal payments received on taxable bonds
 
95,000

 

Principal payments received on tax-exempt mortgage revenue bonds
 
499,134

 
278,963

Net cash provided (used) by investing activities
 
10,971,449

 
(39,414,645
)
Cash flows from financing activities:
 


 


Distributions paid
 
(7,714,741
)
 
(7,606,800
)
Net proceeds from sale of beneficial unit certificates
 
59,948,265

 

Sale of LP Interests - Ohio Properties
 
4,037

 

Decrease in liabilities related to restricted cash
 
(208,195
)
 
(148,366
)
Proceeds from debt financing
 
3,167,342

 
32,128,584

Proceeds from line of credit borrowing
 

 
1,000,000

Debt financing costs
 
(34,188
)
 
(40,275
)
Principal payments on debt financing
 
(8,345,000
)
 
(285,000
)
Principal payments on mortgages payable
 
(100,491
)
 
(98,034
)
Net cash provided by financing activities
 
46,717,029

 
24,950,109

Net increase (decrease) in cash and cash equivalents
 
61,595,738

 
(11,378,650
)
Cash and cash equivalents at beginning of period, including cash and cash equivalents of discontinued operations of $11,840 and $18,928, respectively
 
20,213,413

 
13,277,048

Cash and cash equivalents at end of period, including cash and cash equivalents of discontinued operations of $18,281 and $17,372, respectively
 
$
81,809,151

 
$
1,898,398


 


 


Supplemental cash flow information:
 
 
 
 
Cash paid during the period for interest
 
2,077,832

 
2,500,829

Distributions declared but not paid
 
5,562,518

 
3,866,940

Capital expenditures financed through notes payable
 
73,765

 
8,934,328


The accompanying notes are an integral part of the condensed consolidated financial statements.


5


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(UNAUDITED)

1.  Basis of Presentation

General
 
America First Tax Exempt Investors, L.P. (the “Partnership”) was formed on April 2, 1998, under the Delaware Revised Uniform Limited Partnership Act for the primary purpose of acquiring, holding, selling and otherwise dealing with a portfolio of federally tax-exempt mortgage revenue bonds which have been issued to provide construction and/or permanent financing of multifamily residential properties.  Interest on these bonds is excludable from gross income for federal income tax purposes.  As a result, most of the income earned by the Partnership is exempt from federal income taxes.  The Partnership may also invest in other types of tax-exempt securities that may or may not be secured by real estate and may make taxable mortgage loans secured by multifamily properties which are financed by tax-exempt mortgage revenue bonds held by the Partnership.  The Partnership generally does not seek to acquire direct interests in real property as long term or permanent investments.  The Partnership may, however, acquire real estate securing its tax-exempt mortgage revenue bonds or taxable mortgage loans through foreclosure in the event of a default.  In addition, the Partnership may acquire interests in multifamily apartment properties (“MF Properties”) in order to position itself for future investments in tax-exempt mortgage revenue bonds issued to finance these properties. The Partnership expects to sell its interest in these MF Properties in connection with the future syndication of low income housing tax credits under Section 42 of the Internal Revenue Code ("LIHTCs") or to a tax-exempt organization and to acquire tax-exempt mortgage revenue bonds on these properties to provide debt financing to the new owners.
 
Our general partner is America First Capital Associates Limited Partnership Two (“AFCA 2” or “General Partner”).  The general partner of AFCA2 is The Burlington Capital Group LLC ("Burlington"). The Partnership has issued Beneficial Unit Certificates (“BUCs”) representing assigned limited partner interests to investors (“unitholders”).  The Partnership will terminate on December 31, 2050, unless terminated earlier under provisions of its Agreement of Limited Partnership.
 
The condensed consolidated financial statements of the “Company” reported in this Form 10-Q include the assets, liabilities and results of operations of the Partnership, its Consolidated Subsidiaries and three other consolidated entities in which the Partnership does not hold an ownership interest but which own multifamily apartment properties financed with tax-exempt mortgage revenue bonds held by the Partnership and which are treated as variable interest entities ("VIEs") of which the Partnership has been determined to be the primary beneficiary (“Consolidated VIEs”).  The Consolidated Subsidiaries of the Partnership consist of:

ATAX TEBS I, LLC, a special purpose entity owned and controlled by the Partnership, created to facilitate the Tax Exempt Bond Securitization (“TEBS”) Financing with Freddie Mac (Note 9).
Nine multifamily apartments ("MF Properties") owned by various Partnership subsidiaries. Such subsidiaries hold a 99% limited partner interest in five limited partnerships and 100% member positions in four limited liability companies. Three apartment properties which are subject to a sales agreement and are also reported as MF Properties (Note 2).
One of the five limited Partnerships which owns an MF Property is reported as a discontinued operation in both periods (Note 8).

Stand alone financial information of the Partnership reported in this Form 10-Q includes only the assets, liabilities, and results of operations of the Partnership and its Consolidated Subsidiaries (hereafter the “Partnership”) without the Consolidated VIEs.  In the Company’s consolidated financial statements, all transactions and accounts between the Partnership, the Consolidated Subsidiaries and the Consolidated VIEs have been eliminated in consolidation.  The Partnership does not believe that the consolidation of VIEs for reporting under accounting principles generally accepted in the United States of America (“GAAP”) affects the Partnership’s status as a partnership for federal income tax purposes or the status of unitholders as partners of the Partnership, the treatment of the tax-exempt mortgage revenue bonds on the properties owned by Consolidated VIEs as debt, the tax-exempt nature of the interest payments received on bonds secured by the properties owned by Consolidated VIEs or the manner in which the Partnership’s income is reported to unitholders on IRS Form K-1.


6


The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  The accompanying interim unaudited condensed consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. These condensed consolidated financial statements and notes have been prepared consistently with the 2011 Form 10-K. In the opinion of management, all adjustments (consisting of normal and recurring accruals) necessary to present fairly the financial position as of June 30, 2012, and the results of operations for the interim periods presented have been made. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year.

2.  Partnership Income, Expenses and Cash Distributions
 
The Agreement of Limited Partnership of the Partnership contains provisions for the distribution of Net Interest Income, Net Residual Proceeds and Liquidation Proceeds, for the allocation of income or loss from operations and for the allocation of income and loss arising from a repayment, sale, or liquidation of investments.  Income and losses will be allocated to each unitholder on a periodic basis, as determined by the General Partner, based on the number of BUCs held by each unitholder as of the last day of the period for which such allocation is to be made. Distributions of Net Interest Income and Net Residual Proceeds will be made to each unitholder of record on the last day of each distribution period based on the number of BUCs held by each unitholder as of such date. For purposes of the Agreement of Limited Partnership, cash distributions, if any, received by the Partnership from its indirect interest in MF Properties (Note 5) will be included in the Partnership’s Interest Income and cash distributions received by the Partnership from the sale of such properties will be included in the Partnership Residual Proceeds.

Cash distributions are currently made on a quarterly basis but may be made on a monthly or semiannual basis at the election of AFCA 2.  On each distribution date, Net Interest Income is distributed 99% to the unitholders and 1% to AFCA 2 and Net Residual Proceeds are distributed 100% to unitholders except that Net Interest Income and Net Residual Proceeds representing contingent interest in an amount equal to 0.9% per annum of the principal amount of the tax-exempt mortgage revenue bonds on a cumulative basis (defined as Net Interest Income (Tier 2) and Net Residual Proceeds (Tier 2), respectively) are distributed 75% to the unitholders and 25% to AFCA 2.

In June 2010, the Company completed a sales transaction whereby four of the MF Properties, Crescent Village, Post Woods (I and II), and Willow Bend apartments in Ohio (the “Ohio Properties”), were sold to three new ownership entities controlled by an unaffiliated not-for-profit entity. The Company acquired 100% of the $18.3 million tax-exempt mortgage revenue bonds issued by the Ohio Housing Finance Agency as part of a plan of financing for the acquisition and rehabilitation of the Ohio Properties. The tax-exempt mortgage revenue bonds secured by the Ohio Properties were acquired by the Company at par and consisted of two series. The Series A bond has a par value of $14.7 million and bears interest at an annual rate of 7.0%. The Series B bond has a par value of $3.6 million and bears interest at an annual interest rate of 10.0%. Both series of bonds mature in June 2050. The Company had previously acquired a 99% interest in the Ohio Properties as part of its strategy of acquiring existing multifamily apartment properties that it expects will be partially financed with new tax-exempt mortgage bonds at the time the properties become eligible for the issuance of additional LIHTCs. In addition to the new tax-exempt mortgage revenue bonds acquired by the Company, the plan of financing for the acquisition included other subordinated debt issued by the Company. At the time of acquisition, the new owners had not contributed any capital to the transaction and the Company effectively provided 100% of the capital structure to the new owners as part of the sale transaction. Pursuant to accounting guidance for property, plant, and equipment - real estate sales, the sale and restructure does not meet the criteria for derecognition of the properties or full accrual accounting for the gain. The guidance requires sufficient equity at risk as part of a sales transaction to indicate a commitment from the buyer (typically a minimum of 3 to 5% investment by the new owners). Under the sales agreement, the Ohio Properties were sold for a total purchase price of $16.2 million. Cash received by the selling limited partnerships as part of the sale transaction represents a gain on the sale transaction of approximately $1.8 million which has been deferred by the Company.


7


In October 2011, the three limited partnerships that own the Ohio Properties admitted two entities that are affiliates of Boston Capital (the “BC Partners”) as new limited partners as part of a syndication of LIHTCs on the Ohio Properties. The BC Partners have agreed to contribute approximately $6.7 million to the equity of these limited partnerships, subject to the Ohio Properties meeting certain debt service coverage ratios specified in the applicable limited partnership agreements. As of June 30, 2012, the Ohio Properties had not yet achieved these debt service coverage ratios and the BC Partners had not contributed a sufficient amount of additional capital to these limited partnerships to allow the Company to deconsolidate the Ohio Properties. Accordingly, the Company will continue to report each Ohio Property as an MF Property, and no gain from the 2010 sale of such Ohio Property will be recognized by the Company, until the Ohio Property achieves specified debt service coverage ratios and the BC Partners have contributed their additional capital to the limited partnership owning the Ohio Property. The Company expects that each of the Ohio Properties will achieve the debt service coverage ratios so that the BC Partners will fully fund their capital commitments during 2012. As that occurs, each Ohio Property will cease to be reported as an MF Property and the Company will recognize the gain for the 2010 sale of the Ohio Property. After that time, the Company will report the tax-exempt mortgage revenue bonds on such Ohio Property as an asset and will report the related interest income on the bond.

In connection with the BC Partners transaction, the Company entered into guarantee agreements with the BC Partners under which the Company has guaranteed certain obligations of the general partner of these limited partnerships, including an obligation to repurchase the interests of the BC Partners if certain “repurchase events” occur. A repurchase event is defined as any one of a number of events mainly focused on the completion of the property rehabilitation, property rent stabilization, the delivery of LIHTCs, tax credit recapture and foreclosure. Even if a repurchase event should occur after the $7.8 million of equity has been contributed, 25% of the BC contributed capital would remain as equity in the Ohio Properties and thus BC, a third party, would have sufficient equity in the Ohio Properties for the Company to recognize the sale discussed above.

No amount has been accrued for this contingent liability because the likelihood of a repurchase event is remote (Note 15).

The unallocated deficit of the Consolidated VIEs is primarily comprised of the accumulated historical net losses of the Consolidated VIEs since the applicable consolidation date. The unallocated deficit of the VIEs and the VIEs' net losses subsequent to that date are not allocated to the General Partner and unitholders as such activity is not contemplated by, or addressed in, the Agreement of Limited Partnership.

3.  Variable Interest Entities

The Partnership invests in federally tax-exempt mortgage revenue bonds which have been issued to provide construction and/or permanent financing of multifamily residential apartments.  The Partnership owns 100% of these bonds and each bond is secured by a first mortgage on the property.  The Partnership has also made taxable loans to the property owners in certain cases which are secured by second mortgages on these properties.  Although each multifamily property financed with tax-exempt mortgage revenue bonds held by the Partnership is owned by a separate entity in which the Partnership has no equity ownership interest, the debt financing provided by the Partnership creates a variable interest in these ownership entities that may require the Partnership to report the assets, liabilities, and results of operations of these entities on a consolidated basis under GAAP.   

The Partnership determined that five of the entities financed by tax-exempt mortgage revenue bonds owned by the Partnership are held by VIEs as of June 30, 2012.  These VIEs are Ashley Square, Bent Tree, Cross Creek, Fairmont Oaks, and Lake Forest. See below for further discussion on which VIEs are consolidated as of the reporting date.

At June 30, 2012 and 2011, the Partnership reported three properties as Consolidated VIEs; Bent Tree, Fairmont Oaks, and Lake Forest and has continued to consolidate these entities. In June 2011, the ownership of Iona Lakes became an unaffiliated not-for-profit entity and Iona Lakes ceased to be reported as a Consolidated VIE.

The Partnership does not hold an equity interest in these VIEs and, therefore, the assets of the VIEs cannot be used to settle the general commitments of the Partnership and the Partnership is not responsible for the commitments and liabilities of the VIEs.  The primary risks to the Partnership associated with these VIEs relate to the entities ability to meet debt service obligations to the Partnership and the valuation of the underlying multifamily apartment property which serves as bond collateral.

The following is a discussion of the significant judgments and assumptions made by the Partnership in determining the primary beneficiary of the VIE and, therefore, whether the Partnership must consolidate the VIE.


8


Consolidated VIEs

The Partnership determined it is the primary beneficiary of the following properties at June 30, 2012: Bent Tree, Fairmont Oaks, and Lake Forest. The capital structure of each of these VIEs consists of senior debt, subordinated debt, and equity capital.  The senior debt is in the form of a tax-exempt multifamily housing mortgage revenue bonds and accounts for the majority of each VIE's total capital. As the bondholder, the Partnership is entitled to principal and interest payments and has certain protective rights as established by the bond documents.  The equity ownership of the consolidated VIEs is ultimately held by corporations which are owned by four individuals, two of which are related parties.  Additionally, each of these properties is managed by an affiliate of the Partnership, America First Properties Management Company, LLC (“Properties Management”) which is an affiliate of Burlington.

In determining the primary beneficiary of these VIEs, the Partnership considered the activities of the VIE which most significantly impact the VIEs' economic performance, who has the power to control such activities, the risks which the entities were designed to create, the variability associated with those risks and the interests which absorb such variability.  The Partnership also considered the related party relationship of the entities involved in the VIEs.  It was determined that the Partnership, as part of the related party group, met both of the primary beneficiary criteria and was the most closely associated with the VIEs and; therefore, was determined to be the primary beneficiary.

Non-Consolidated VIEs

The Company does not consolidate two VIE entities, Ashley Square and Cross Creek.  In determining the primary beneficiary of these VIEs, the Partnership considered the activities of each VIE which most significantly impact the VIEs' economic performance, who has the power to control such activities, the risks which the entities were designed to create, the variability associated with those risks and the interests which absorb such variability.  The significant activities of the VIE that impact the economic performance of the entity include leasing and maintaining apartments, determining if the property is to be sold, decisions relating to debt refinancing, the selection of or replacement of the property manager and the approval of the operating and capital budgets.  As discussed below, while the capital structures of these VIEs resulted in the Partnership holding a majority of the variable interests in these VIEs, the Partnership determined it does not have the power to direct the activities of these VIEs that most significantly impact the VIEs’ economic performance and, as a result, is not the primary beneficiary of these VIEs.
 
Ashley Square –  Ashley Square Housing Cooperative acquired the ownership of the Ashley Square Apartments in December 2008 from Ashley Square LLC through a warranty deed of transfer and an assumption of debt.  This transfer of ownership constituted a reconsideration event as outlined in the consolidation guidance which triggered a re-evaluation of the holders of variable interests to determine the primary beneficiary of the VIE.  The capital structure of the VIE consists of senior debt, subordinated loans and equity capital.  The senior debt is in the form of tax-exempt mortgage revenue bonds that are 100% owned by the Partnership and account for the majority of the VIE’s total capital.  As the bondholder, the Partnership is entitled to principal and interest payments and has certain protective rights as established by the bond documents.  The VIE is organized as a housing cooperative and the 99% equity owner of this VIE is The Foundation for Affordable Housing (“FAH”), an unaffiliated Nebraska not-for-profit organization.  Additionally, this property is managed by Properties Management.

Cross Creek –  Cross Creek Apartments Holdings LLC is the owner of the Cross Creek Apartments.  On January 1, 2010, Cross Creek Apartment Holdings LLC entered into a new operating agreement and admitted three new members.  These new members committed approximately $2.2 million of capital payable in three installments including $563,000 on January 1, 2010.  The new operating agreement and admission of new owner members constituted a reconsideration event as outlined in the consolidation guidance which triggered a re-evaluation of the holders of variable interests to determine the primary beneficiary of the VIE.  The capital structure of the VIE consists of senior debt, subordinated loans, and equity capital at risk.  The senior debt is in the form of tax-exempt mortgage revenue bonds that are 100% owned by the Partnership and account for the majority of the VIE’s total capital.  As the bondholder, the Partnership is entitled to principal and interest payments and has certain protective rights as established by the bond documents.  The three newly admitted members of this VIE are each unaffiliated with the Partnership and have contributed significant equity capital to the VIE.  These members collectively control a 99% interest in the VIE.  The other 1% member of this VIE is FAH, which is also unaffiliated with the Partnership.  Additionally, this property is managed by Properties Management.


9


The following table presents information regarding the carrying value and classification of the assets held by the Partnership as of June 30, 2012, which constitute a variable interest in Ashley Square and Cross Creek.
 
Balance Sheet Classification
 
 Carrying Value
 
 Maximum Exposure to Loss
Ashley Square Apartments
 
 
 
 
 
Tax Exempt Mortgage Revenue Bond
Bond Investment
 
$
5,490,902

 
$
5,284,000

Property Loan
Other Asset
 
4,811,342

 
1,215,000

 
 
 
$
10,302,244

 
$
6,499,000

Cross Creek Apartments
 
 
 
 
 
Tax Exempt Mortgage Revenue Bond
Bond Investment
 
$
7,936,745

 
$
5,983,564

Property Loans
Other Asset
 
3,383,615

 
3,383,615

 
 
 
$
11,320,360

 
$
9,367,179


The tax exempt mortgage revenue bonds are classified on the balance sheet as available for sale investments and are carried at fair value while property loans are presented on the balance sheet as Other assets and are carried at the unpaid principal and interest less any loan loss reserves.  See Note 4 for additional information regarding the bonds and Note 7 for additional information regarding the property loans.  The maximum exposure to loss for the bonds is equal to the unpaid principal balance as of June 30, 2012.  The difference between the carrying value and the maximum exposure to loss is a function of the fair value of the bond.  The difference between the carrying value and the maximum exposure is the value of loan loss reserves that have been previously recorded against the outstanding loan balances.


10


The following tables present the effects of the consolidation of the Consolidated VIEs on the Company’s Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations.

Condensed Consolidating Balance Sheets as of June 30, 2012 and December 31, 2011:
 
 
 
 Partnership as of June 30, 2012
 
 Consolidated VIEs as of June 30, 2012
 
 Consolidation -Elimination as of June 30, 2012
 
 Total as of June 30, 2012
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
81,738,675

 
$
52,195

 
$

 
$
81,790,870

Restricted cash
 
5,426,851

 
992,726

 

 
6,419,577

Interest receivable
 
12,104,935

 

 
(5,021,416
)
 
7,083,519

Tax-exempt mortgage revenue bonds held in trust, at fair value
 
123,353,050

 

 
(24,645,428
)
 
98,707,622

Tax-exempt mortgage revenue bonds, at fair value
 
38,138,997

 

 

 
38,138,997

Real estate assets:
 
 
 
 
 
 
 
 
Land
 
10,552,104

 
3,250,044

 

 
13,802,148

Buildings and improvements
 
82,601,481

 
31,753,657

 

 
114,355,138

Real estate assets before accumulated depreciation
 
93,153,585

 
35,003,701

 

 
128,157,286

Accumulated depreciation
 
(9,373,669
)
 
(13,028,974
)
 

 
(22,402,643
)
Net real estate assets
 
83,779,916

 
21,974,727

 

 
105,754,643

Other assets
 
18,121,728

 
794,620

 
(10,363,763
)
 
8,552,585

Assets of discontinued operations
 
6,698,871

 

 

 
6,698,871

Total Assets
 
$
369,363,023

 
$
23,814,268

 
$
(40,030,607
)
 
$
353,146,684

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Accounts payable, accrued expenses and other liabilities
 
$
2,624,822

 
$
25,763,858

 
$
(24,791,759
)
 
$
3,596,921

Distribution payable
 
5,562,518

 

 

 
5,562,518

Debt financing
 
104,328,000

 

 

 
104,328,000

Mortgages payable
 
43,231,990

 
24,284,000

 
(24,284,000
)
 
43,231,990

Liabilities of discontinued operations
 
6,131,925

 

 

 
6,131,925

Total Liabilities
 
161,879,255

 
50,047,858

 
(49,075,759
)
 
162,851,354

Partners' Capital
 
 
 
 
 
 
 
 
General Partner
 
(364,091
)
 

 

 
(364,091
)
Beneficial Unit Certificate holders
 
207,037,667

 

 
6,823,392

 
213,861,059

Unallocated deficit of Consolidated VIEs
 

 
(26,233,590
)
 
2,221,760

 
(24,011,830
)
Total Partners' Capital
 
206,673,576

 
(26,233,590
)
 
9,045,152

 
189,485,138

Noncontrolling interest
 
810,192

 

 

 
810,192

Total Capital
 
207,483,768

 
(26,233,590
)
 
9,045,152

 
190,295,330

Total Liabilities and Partners' Capital
 
$
369,363,023

 
$
23,814,268

 
$
(40,030,607
)
 
$
353,146,684

 


11


 
 
 Partnership as of December 31, 2011
 
 Consolidated VIEs as of December 31, 2011
 
 Consolidation -Elimination as of December 31, 2011
 
 Total as of December 31, 2011
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
20,188,855

 
$
12,718

 
$

 
$
20,201,573

Restricted cash
 
12,915,700

 
937,053

 

 
13,852,753

Interest receivable
 
11,395,266

 

 
(4,410,288
)
 
6,984,978

Tax-exempt mortgage revenue bonds held in trust, at fair value
 
132,920,723

 

 
(23,767,936
)
 
109,152,787

Tax-exempt mortgage revenue bonds, at fair value
 
26,542,565

 

 

 
26,542,565

Real estate assets:
 
 
 
 
 
 
 
 
Land
 
9,180,390

 
3,250,044

 

 
12,430,434

Buildings and improvements
 
80,045,210

 
31,607,993

 

 
111,653,203

Real estate assets before accumulated depreciation
 
89,225,600

 
34,858,037

 

 
124,083,637

Accumulated depreciation
 
(7,485,664
)
 
(12,332,334
)
 

 
(19,817,998
)
Net real estate assets
 
81,739,936

 
22,525,703

 

 
104,265,639

Other assets
 
20,222,928

 
839,879

 
(10,851,419
)
 
10,211,388

Assets of discontinued operations
 
6,764,862

 

 

 
6,764,862

Total Assets
 
$
312,690,835

 
$
24,315,353

 
$
(39,029,643
)
 
$
297,976,545

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Accounts payable, accrued expenses and other liabilities
 
$
2,516,851

 
$
24,780,781

 
$
(23,805,990
)
 
$
3,491,642

Distribution payable
 
3,911,340

 

 

 
3,911,340

Debt financing
 
112,673,000

 

 

 
112,673,000

Mortgages payable
 
40,092,455

 
24,407,000

 
(24,407,000
)
 
40,092,455

Liabilities of discontinued operations
 
6,219,063

 

 

 
6,219,063

Total Liabilities
 
165,412,709

 
49,187,781

 
(48,212,990
)
 
166,387,500

Partners' Capital
 
 
 
 
 
 
 
 
General Partner
 
(354,006
)
 

 

 
(354,006
)
Beneficial Unit Certificate holders
 
147,087,347

 

 
7,823,881

 
154,911,228

Unallocated deficit of Consolidated VIEs
 

 
(24,872,428
)
 
1,359,466

 
(23,512,962
)
Total Partners' Capital
 
146,733,341

 
(24,872,428
)
 
9,183,347

 
131,044,260

Noncontrolling interest
 
544,785

 

 

 
544,785

Total Capital
 
147,278,126

 
(24,872,428
)
 
9,183,347

 
131,589,045

Total Liabilities and Partners' Capital
 
$
312,690,835

 
$
24,315,353

 
$
(39,029,643
)
 
$
297,976,545





12


Condensed Consolidating Statements of Operations for the three months ended June 30, 2012 and 2011:

 
 Partnership For the Three Months Ended June 30, 2012
 
 Consolidated VIEs For the Three Months Ended June 30, 2012
 
 Consolidation -Elimination For the Three Months Ended June 30, 2012
 
 Total For the Three Months Ended June 30, 2012
Revenues:
 
 
 
 
 
 
 
Property revenues
$
2,946,188

 
$
1,199,745

 
$

 
$
4,145,933

Mortgage revenue bond investment income
2,669,348

 

 
(380,702
)
 
2,288,646

Gain on sale of bonds
667,821

 

 

 
667,821

Other income
43,427

 

 

 
43,427

Total revenues
6,326,784

 
1,199,745

 
(380,702
)
 
7,145,827

Expenses:
 
 
 
 
 
 
 
Real estate operating (exclusive of items shown below)
1,715,747

 
731,295

 

 
2,447,042

Provision for loss on receivables
238,175

 

 

 
238,175

Depreciation and amortization
1,180,646

 
357,661

 
(10,904
)
 
1,527,403

Interest
1,546,688

 
803,693

 
(803,693
)
 
1,546,688

General and administrative
1,048,366

 

 

 
1,048,366

Total expenses
5,729,622

 
1,892,649

 
(814,597
)
 
6,807,674

Income (loss) from operations
597,162

 
(692,904
)
 
433,895

 
338,153

Income from discontinued operations
90,113

 

 

 
90,113

Net income (loss)
687,275

 
(692,904
)
 
433,895

 
428,266

Net income attributable to noncontrolling interest
122,218

 

 

 
122,218

Net income (loss) - America First Tax Exempt Investors, L. P.
$
565,057

 
$
(692,904
)
 
$
433,895

 
$
306,048


 
 Partnership For the Three Months Ended June 30, 2011
 
 Consolidated VIEs For the Three Months Ended June 30, 2011
 
 Consolidation -Elimination For the Three Months Ended June 30, 2011
 
 Total For the Three Months Ended June 30, 2011
Revenues:
 
 
 
 
 
 
 
Property revenues
$
2,370,614

 
$
1,660,565

 
$

 
$
4,031,179

Mortgage revenue bond investment income
2,975,786

 

 
(568,026
)
 
2,407,760

Other income
148,951

 
716,639

 
(716,640
)
 
148,950

Total revenues
5,495,351

 
2,377,204

 
(1,284,666
)
 
6,587,889

Expenses:
 
 
 
 
 
 
 
Real estate operating (exclusive of items shown below)
1,333,989

 
1,040,340

 

 
2,374,329

Provision for loss on receivables
710,690

 

 

 
710,690

Depreciation and amortization
846,992

 
474,333

 
(5,213
)
 
1,316,112

Interest
1,630,527

 
1,130,108

 
(1,130,108
)
 
1,630,527

General and administrative
677,422

 

 

 
677,422

Total expenses
5,199,620

 
2,644,781

 
(1,135,321
)
 
6,709,080

Income (loss) from operations
295,731

 
(267,577
)
 
(149,345
)
 
(121,191
)
Income from discontinued operations
379

 

 

 
379

Net income (loss)
296,110

 
(267,577
)
 
(149,345
)
 
(120,812
)
Net income attributable to noncontrolling interest
122,436

 

 

 
122,436

Net income (loss) - America First Tax Exempt Investors, L. P.
$
173,674

 
$
(267,577
)
 
$
(149,345
)
 
$
(243,248
)



13


Condensed Consolidating Statements of Operations for the six months ended June 30, 2012 and 2011:
 
 Partnership For the Six Months Ended June 30, 2012
 
 Consolidated VIEs For the Six Months Ended June 30, 2012
 
 Consolidation -Elimination For the Six Months Ended June 30, 2012
 
 Total For the Three Six Ended June 30, 2012
Revenues:
 
 
 
 
 
 
 
Property revenues
$
5,990,208

 
$
2,394,654

 
$

 
$
8,384,862

Mortgage revenue bond investment income
5,422,425

 

 
(762,375
)
 
4,660,050

Gain on sale of bonds
667,821

 

 

 
667,821

Other income
82,772

 

 

 
82,772

Total Revenues
12,163,226

 
2,394,654

 
(762,375
)
 
13,795,505

Expenses:
 
 
 
 
 
 
 
Real estate operating (exclusive of items shown below)
3,287,640

 
1,439,336

 

 
4,726,976

Provision for loss on receivables
476,350

 

 

 
476,350

Depreciation and amortization
2,274,497

 
713,647

 
(21,836
)
 
2,966,308

Interest
2,865,223

 
1,602,835

 
(1,602,835
)
 
2,865,223

General and administrative
1,698,945

 

 

 
1,698,945

Total Expenses
10,602,655

 
3,755,818

 
(1,624,671
)
 
12,733,802

Income (loss) from continuing operations
1,560,571

 
(1,361,164
)
 
862,296

 
1,061,703

Income from discontinued operations
136,147

 

 

 
136,147

Net income (loss)
1,696,718

 
(1,361,164
)
 
862,296

 
1,197,850

Net income attributable to noncontrolling interest
261,370

 

 

 
261,370

Net income (loss) - America First Tax Exempt Investors, L. P.
$
1,435,348

 
$
(1,361,164
)
 
$
862,296

 
$
936,480


 
 Partnership For the Six Months Ended June 30, 2011
 
 Consolidated VIEs For the Six Months Ended June 30, 2011
 
 Consolidation -Elimination For the Six Months Ended June 30, 2011
 
 Total For the Six Months Ended June 30, 2011
Revenues:
 
 
 
 
 
 
 
Property revenues
$
4,049,929

 
$
3,546,803

 
$

 
$
7,596,732

Mortgage revenue bond investment income
5,880,460

 

 
(1,251,787
)
 
4,628,673

Other income
295,324

 
4,133,477

 
(4,028,490
)
 
400,311

Total Revenues
10,225,713

 
7,680,280

 
(5,280,277
)
 
12,625,716

Expenses:
 
 
 
 
 
 
 
Real estate operating (exclusive of items shown below)
2,410,073

 
2,096,464

 

 
4,506,537

Proveision for Loss on Receivables
710,690

 

 

 
710,690

Depreciation and amortization
1,448,581

 
1,019,059

 
(18,469
)
 
2,449,171

Interest
2,404,261

 
2,454,406

 
(2,454,406
)
 
2,404,261

General and administrative
1,319,017

 

 

 
1,319,017

Total Expenses
8,292,622

 
5,569,929

 
(2,472,875
)
 
11,389,676

Income (loss) from continuing operations
1,933,091

 
2,110,351

 
(2,807,402
)
 
1,236,040

Income from discontinued operations
14,383

 

 

 
14,383

Net income (loss)
1,947,474

 
2,110,351

 
(2,807,402
)
 
1,250,423

 Net income attributable to noncontrolling interest
304,497

 

 

 
304,497

Net income (loss) - America First Tax Exempt Investors, L. P.
$
1,642,977

 
$
2,110,351

 
$
(2,807,402
)
 
$
945,926




14


4.  Investments in Tax-Exempt Bonds

The tax-exempt mortgage revenue bonds owned by the Company have been issued to provide construction and/or permanent financing of multifamily residential properties and do not include the tax-exempt mortgage revenue bonds issued with respect to properties owned by Consolidated VIEs or the Ohio Properties presented as MF Properties (Note 2 and Note 6). Tax-exempt mortgage revenue bonds are either held directly by the Company or are held in trusts created in connection with debt financing transactions (Note 9). The Company had the following investments in tax-exempt mortgage revenue bonds as of dates shown:

 
 
June 30, 2012
Description of Tax-Exempt Mortgage Revenue Bonds
 
Cost adjusted for pay-downs
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
Ashley Square (1)
 
$
5,284,000

 
$
206,902

 
$

 
$
5,490,902

Autumn Pines (2)
 
12,301,431

 
779,055

 

 
13,080,486

Bella Vista (1)
 
6,600,000

 

 
(792
)
 
6,599,208

Bridle Ridge (1)
 
7,790,000

 

 

 
7,790,000

Brookstone (1)
 
7,446,192

 
1,390,962

 

 
8,837,154

Cross Creek (1)
 
5,983,564

 
1,953,181

 

 
7,936,745

Lost Creek (1)
 
15,927,201

 
3,271,131

 

 
19,198,332

Runnymede (1)
 
10,645,000

 
456,883

 

 
11,101,883

Southpark (1)
 
11,965,225

 
2,293,635

 

 
14,258,860

Woodlynn Village (1)
 
4,476,000

 

 
(61,948
)
 
4,414,052

Tax-exempt mortgage revenue bonds held in trust
 
$
88,418,613

 
$
10,351,749

 
$
(62,740
)
 
$
98,707,622

 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
Description of Tax-Exempt Mortgage Revenue Bonds
 
Cost adjusted for pay-downs
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
Arbors at Hickory Ridge
 
$
10,164,815

 
462,285

 

 
$
10,627,100

Iona Lakes
 
15,630,000

 
650,833

 

 
16,280,833

Woodland Park
 
15,662,000

 

 
(4,430,936
)
 
11,231,064

Tax-exempt mortgage revenue bonds
 
$
41,456,815

 
$
1,113,118

 
$
(4,430,936
)
 
$
38,138,997

 
 
 
 
 
 
 
(1) Bonds owned by ATAX TEBS I, LLC, Note 9
(2) Bond held by Deutsche Bank in a secured financing transaction, Note 9

15


 
 
December 31, 2011
Description of Tax-Exempt Mortgage Revenue Bonds
 
Cost adjusted for pay-downs
 
Unrealized Gains
 
Unrealized Loss
 
Estimated Fair Value
Ashley Square (1)
 
$
5,308,000

 
$

 
$

 
$
5,308,000

Autumn Pines (1)
 
12,280,776

 

 
(152,094
)
 
12,128,682

Bella Vista (1)
 
6,650,000

 

 
(405,184
)
 
6,244,816

Bridle Ridge (1)
 
7,815,000

 

 
(469,056
)
 
7,345,944

Brookstone (1)
 
7,437,947

 
1,116,538

 

 
8,554,485

Cross Creek (1)
 
5,961,478

 
1,824,167

 

 
7,785,645

GMF-Madison Tower (2)
 
3,810,000

 
51,130

 

 
3,861,130

GMF-Warren/Tulane (2)
 
11,815,000

 
321,722

 

 
12,136,722

Lost Creek (1)
 
16,051,048

 
1,962,587

 

 
18,013,635

Runnymede (1)
 
10,685,000

 

 
(434,452
)
 
10,250,548

Southpark (1)
 
11,925,483

 
1,431,637

 

 
13,357,120

Woodlynn Village (1)
 
4,492,000

 

 
(325,940
)
 
4,166,060

Tax-exempt mortgage revenue bonds held in trust
 
$
104,231,732

 
$
6,707,781

 
$
(1,786,726
)
 
$
109,152,787

 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
Description of Tax-Exempt Mortgage Revenue Bonds
 
Cost adjusted for pay-downs
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
Iona Lakes
 
$
15,720,000

 
$
160,658

 
$

 
$
15,880,658

Woodland Park
 
15,662,000

 

 
(5,000,093
)
 
10,661,907

Tax-exempt mortgage revenue bonds
 
$
31,382,000

 
$
160,658

 
$
(5,000,093
)
 
$
26,542,565


(1) Bonds owned by ATAX TEBS I, LLC, Note 9
(2) Bond held by Deutsche Bank in a secured financing transaction, Note 9

In June 2012, the Partnership acquired a $10.0 million par value tax-exempt mortgage revenue bond secured by Arbors at Hickory Ridge Apartments, a 348 unit multifamily apartment complex located in Memphis, Tennessee, which represented 100% of the bond issuance for approximately $10.2 million. The tax-exempt bond carries an annual interest rate of 7.98% and matures on April 1, 2026. The bonds do not provide for contingent interest.

In May 2012, the outstanding GMF-Madison Tower Apartments and GMF-Warren/Tulane Apartments tax-exempt mortgage revenue bonds held by the Company were sold for an amount greater than the outstanding principal and base interest. The Company received approximately $4.1 million for the GMF-Madison Tower Apartments tax-exempt mortgage revenue bond and approximately $12.7 million from the GMF-Warren/Tulane Apartments tax-exempt mortgage revenue bond resulting in an approximate $668,000 realized gain.

Valuation - As all of the Company’s investments in tax-exempt mortgage revenue bonds are classified as available-for-sale securities, they are carried on the balance sheet at their estimated fair values.  Due to the limited market for the tax-exempt mortgage revenue bonds, these estimates of fair value do not necessarily represent what the Company would actually receive in a sale of the bonds.  There is no active trading market for the bonds and price quotes for the bonds are not generally available.  As of June 30, 2012, all of the Company’s tax-exempt mortgage revenue bonds were valued using discounted cash flow and yield to maturity analyses performed by management.  Management’s valuation encompasses judgment in its application.  The key assumption in management’s yield to maturity analysis is the range of effective yields on the individual bonds.  The effective yield analysis for each bond considers the current market yield on similar bonds as well as the debt service coverage ratio of each underlying property serving as collateral for the bond. At June 30, 2012, the range of effective yields on the individual bonds was 5.7% to 8.6%.  At December 31, 2011, the range of effective yields on the individual bonds was 6.3% to 9.0%. Additionally, the Company calculated the sensitivity of the key assumption used in calculating the fair values of these bonds.  Assuming a 10% adverse change in the key assumption, the effective yields on the individual bonds would increase to a range of 6.3% to 9.4% and would result in additional unrealized losses on the bond portfolio of approximately $10.2 million.  This sensitivity analysis is hypothetical and is as of a specific point in time.  The results of the sensitivity analysis may not be indicative of actual changes in fair value and should be used with caution.  If available, the general partner may also consider price quotes on similar bonds or other information from external sources, such as pricing services.  Pricing services, broker quotes and management’s analyses provide indicative pricing only.


16


Unrealized gains or losses on these tax-exempt mortgage revenue bonds are recorded in accumulated other comprehensive income (loss) to reflect changes in their estimated fair values resulting from market conditions and fluctuations in the present value of the expected cash flows from the underlying properties. As of June 30, 2012, the following bond investments have been in an unrealized loss position for greater than twelve months; Bella Vista, Woodlynn Village, and Woodland Park.  The Company has reviewed each of these mortgage revenue bonds in an unrealized loss position for impairment. The Company's ability to recover the tax-exempt mortgage revenue bond's entire amortized cost basis is dependent upon the issuer being able to meet debt service requirements. Both the Bella Vista and Woodlynn Village properties which issued the bonds are current in their debt service and have debt service coverage ratios greater than 1.0 as of June 30, 2012. Based upon this evaluation, the current unrealized losses on these two bonds are considered to be temporary.  Valuations of the bonds in an unrealized loss position have improved during the first half of 2012. If the credit and capital markets would deteriorate, the Company experiences deterioration in the values of its investment portfolio, or if the Company’s intent and ability to hold certain bonds changes, the Company may incur impairments to its investment portfolio which could negatively impact the Company’s financial condition, cash flows, and reported earnings.
 
The Partnership previously identified the Woodland Park tax-exempt mortgage revenue bond for which certain actions may be necessary to protect the Partnership’s position as a secured bondholder and lender. The Company evaluated the Woodland Park bond holding for an other-than-temporary decline in value as of December 31, 2011 (see Form 10-K, Footnote 5 for discussion of our impairment testing method which remains the same).  Based on this evaluation, the Company has concluded that no other-than-temporary impairment of the Woodland Park bond existed at December 31, 2011. However, the evaluation determined that the interest receivable accrued on the Woodland Park bond was impaired and an approximate $953,000 allowance for loss on receivables was recorded during fiscal year 2011. The Partnership has recorded an additional allowance for loss on receivables of approximately $476,000 against the interest receivable in the first half of 2012, which represents the accrued interest income on the bond for the first half of 2012. The Partnership continues to monitor these investments for changes in circumstances that might warrant an impairment charge.  As of December 31, 2011, the property had 215 units leased out of total available units of 236, or 91% physical occupancy. As of June 30, 2012, occupancy had decreased to 203 units leased, or 86% physical occupancy and we believe this is a temporary decline. As of July 31, 2012, the occupancy has increased to 212 units, or 90% physical occupancy and we project physical occupancy will be at or higher than 90% through December 31, 2012 which will increase the property's net operating income to be in line with what had been projected for the second half of 2012 in the most recent evaluation for other than temporary impairment. Based on this evaluation, the current unrealized loss on this bond is considered to be temporary.

5. Subsequent Event

On July 19, 2012, the Company purchased 100% of the residual participation receipts (“LIFERs”) in tender option bond trusts (the “TOB Trusts”) which acquired approximately $65.3 million of Public Housing Capital Fund Certificates (“PHC Certificates”) issued by three trusts sponsored by DB (the “PHC Trusts”). The assets held by the PHC Trusts consist of custodial receipts evidencing loans made to a number of local public housing authorities. Principal and interest on these loans are payable by the respective public housing authorities out of annual appropriations to be made to the public housing authorities by the United States Department of Housing and Urban Development (“HUD”) under HUD's Capital Fund Program established under Quality Housing and Work Responsibility Act of 1998 (the “Capital Fund Program”). The PHC Trusts have a first lien on these annual Capital Fund Program payments to secure the public housing authorities' respective obligations to pay principal and interest on their loans. Interest payable on the public housing authority debt held by the PHC Trusts is exempt from federal income taxes. The PHC Certificates issued by each of the PHC Trusts have been rated investment grade by Standard & Poor's.
The following table sets forth certain information relating to the PHC Certificates held in the TOB Trusts:
 
 
Weighted Average Lives (Years)
 
Investment Rating
 
Weighted Average Interest Rate over Life
 
Principal Outstanding June 30, 2012
Public Housing Capital Fund Trust I
 
12.75
 
AA-
 
5.330
%
 
$
26,406,558

Public Housing Capital Fund Trust II
 
12.3
 
AA-
 
4.240
%
 
17,959,713

Public Housing Capital Fund Trust III
 
13.3
 
BBB
 
5.410
%
 
20,898,432

Total Public Housing Capital Fund
 
 
 
 
 
 
 
$
65,264,703



17


The Company purchased the LIFERS issued by the TOB Trusts for approximately $16 million and pledged the LIFERS to the trustee to secure certain reimbursement obligations of the Company as the holder of LIFERS. The TOB Trusts also issued senior floating-rate participation interest (“SPEARS”) of approximately $49 million to unaffiliated investors. The SPEARS represent senior interests in the TOB Trusts and have been credit enhanced by DB. The LIFERS entitle to Company to all principal and interest payments received by the TOB Trusts on the $65.3 million of PHC Certificates held by it after payments due to the holders of the SPEARS and trust costs. The SPEARS bear interest at a variable rate based on SIFMA.

The Company is still assessing the appropriate accounting treatment for the LIFERs ownership and the manner in which they will be reflected on its consolidated balance sheet for the period ending September 30, 2012.

The Company executed an investment placement agreement with AFCA 2 in connection with this transaction. AFCA 2 received a fee of $652,640 from the Company in connection with this agreement which was paid in July 2012. This fee is consistent with the mortgage placement fees that AFCA 2 has earned previously in connection with the acquisition of tax-exempt mortgage revenue bonds by the Company.

6.  Real Estate Assets

MF Properties

To facilitate its investment strategy of acquiring additional tax-exempt mortgage revenue bonds secured by MF Properties, the Company has acquired through its various subsidiaries 99% limited partner positions in five limited partnerships and 100% member positions in four limited liability companies that own the MF Properties.  One of the five limited partnerships are reported as a discontinued operation in all periods presented. The financial statements of these properties are consolidated with those of the Company.  The general partners of these partnerships are unaffiliated parties and their 1% ownership interest in these limited partnerships is reflected in the Company’s consolidated financial statements as noncontrolling interests.  The Company expects each of these MF Properties to eventually be sold either to a not-for-profit entity or in connection with a syndication of LIHTCs. The Company expects to purchase tax-exempt mortgage revenue bonds issued by the new property owners as part of the restructuring.  

Recent Transactions

During the first quarter of 2012, a brokerage contract was executed to list the Churchland property for sale. This listing results in the property being reported as a discontinued operation for all periods reported. The net fixed assets of the Churchland property were approximately $6.5 million of the total $6.7 million discontinued operation total assets reported at June 30, 2012, and $6.8 million total discontinued operation assets reported at December 31, 2011 (Note 8).

The Partnership purchased land adjacent to DeCordova property for approximately $153,000 in 2011, and began constructing 34 additional units in 2012. The construction is expected to be completed in the fall of 2012, at which time the units will be leased as market rate units.

In February 2012, the Company secured a $2.0 million construction loan for the expansion of the DeCordova property. The construction loan is with an unrelated third party and carries a fixed annual interest rate of 5.0%, maturing on February 1, 2017. On June 30, 2012 the balance of this loan was approximately $1.4 million.

Residences at DeCordova. This property is a senior (55+) affordable housing project located in Granbury, Texas in the Dallas-Fort Worth area.  As of June 30, 2012 and December 31, 2011, the property had 76 units leased, or 100% physical occupancy. At this time, the Partnership expects to operate the property as a market rate rental property for the next six months when it will evaluate its options in order to recoup its investment.

Residences at Weatherford. This property is a senior (55+) affordable housing project located in Weatherford, Texas in the Dallas-Fort Worth area. The property had been completed and has begun to lease up. As of June 30, 2012, the property had 19 units leased, or 25% occupancy as construction was recently completed. The Partnership is operating the property as a market rate property and will continue to evaluate its options in order to recoup its investment.

On June 30, 2012, the Company had a $6.5 million construction loan secured by the DeCordova and Weatherford properties. This construction loan was used to fund the completion of Weatherford. The construction loan is with an unrelated third party and carries a fixed annual interest rate of 5.9%, maturing on July 28, 2015. This agreement requires $500,000 to be held by the Company as restricted cash.


18


Acquisition

In the third quarter of 2010, the Company purchased a minority interest equal to 8.7% ownership in 810 Schutte Road LLC ("Eagle Village"), a 511 bed student housing facility located in Evansville, Indiana. The minority interest investment totaled approximately $1.1 million and was presented in other assets. In June 2011, the Partnership acquired the remaining ownership interest in Eagle Village with approximately $3.1 million of cash on hand plus a conventional mortgage of approximately $8.9 million. The mortgage loan carries a variable interest rate of one-month LIBOR plus 2.75% but will not be less than 3.5%. On June 30, 2012, this rate was 3.5%. This mortgage matures on June 1, 2013. Eagle Village returned $125,000 to the Company as a preferred return on their investment. The transaction is eliminated upon consolidation. Eagle Village is wholly owned by a subsidiary of the Partnership and was reported as an MF Property. The Partnership plans to operate the property as a student housing facility. Once stabilized as a student housing property, the Company will seek to restructure the ownership and capital structure through the sale of the property to a student housing not-for-profit entity. The Company anticipates it will purchase tax-exempt mortgage revenue bonds issued as part of the restructuring.

This acquisition is disclosed pursuant to the accounting guidance on business combinations. A condensed balance sheet at the date of acquisition is included below.
 
 
Eagle Village 6/29/2011 (Date of acquisition)
Cash and cash equivalents
 
$
244,923

Restricted cash
 
589,493

Other current assets
 
46,380

In-place lease assets
 
96,829

Real estate assets
 
12,383,605

Finance costs
 
108,060

Total assets
 
$
13,469,290

Accounts payable, accrued expenses and other
 
$
278,230

Mortgage payable
 
8,925,000

Stockholders' equity
 
4,266,060

Total liabilities and stockholders' equity
 
$
13,469,290


In March 2011, the Partnership also purchased The Arboretum on Farnam Drive ("Arboretum"), 145 unit independent senior living facility located in Omaha, Nebraska for approximately $20 million. That purchase price allocation did not change from what was disclosed in our December 31, 2011 Form 10-K. The table below shows the pro forma condensed consolidated results of operations of the Company as if the Eagle Village and Arboretum had been acquired at the beginning of the periods presented:
 
For the Three Months Ended June 30, 2011
 
For Six Months Ended June 30, 2011
 
For the Year Ended December 31, 2011