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

FORM 10-Q

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

For the quarterly period ended June 30, 2010

OR

o           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  o

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  o  NO  o

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 o
Accelerated filer  x
Non- accelerated filer  o
Smaller reporting company  o
   
(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  o  NO  x




 
 
 
 
INDEX


PART I – FINANCIAL INFORMATION

Financial Statements (Unaudited)
   
 
Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
1
 
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009
2
 
Condensed Consolidated Statements of Partners’ Capital and Comprehensive Income (Loss) for the six months ended June 30, 2010 and 2009
3
 
Condensed Statement of Cash Flows for the six months ended June 30, 2010 and 2009
4
 
Notes to Condensed Consolidated Financial Statements
5
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Quantitative and Qualitative Disclosures About Market Risk
41
Controls and Procedures
41

PART II – OTHER INFORMATION

Risk Factors
42
Exhibits
42


 
43

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:
·
current maturities of our financing arrangements and our ability to renew or refinance such financing arrangements;
·
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, 2009 and in Item 1A of Part II of this report.

 
 

 


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.

AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)


    June 30, 2010     December 31, 2009  
         
Assets
           
Cash and cash equivalents
  $ 17,875,760     $ 17,280,535  
Restricted cash
    13,247,917       5,277,217  
Interest receivable
    3,210,856       993,181  
Tax-exempt mortgage revenue bonds, at fair value (Note 4)
    92,894,247       69,399,763  
Real estate assets: (Note 5)
               
Land
    12,627,499       13,403,655  
Buildings and improvements
    93,445,362       100,255,779  
Real estate assets before accumulated depreciation
    106,072,861       113,659,434  
Accumulated depreciation
    (21,385,127 )     (21,868,541 )
Net real estate assets
    84,687,734       91,790,893  
Other assets (Note 6)
    8,295,469       6,029,131  
Total Assets
  $ 220,211,983     $ 190,770,720  
                 
Liabilities
               
Accounts payable, accrued expenses and other liabilities
  $ 3,487,803     $ 3,931,848  
Distribution payable
    4,253,382       2,757,945  
Debt financing (Note 8)
    54,797,000       55,363,333  
Mortgages payable (Note 8)
    17,234,549       30,116,854  
Total Liabilities
    79,772,734       92,169,980  
                 
Commitments and Contingencies (Note 13)
               
                 
Partners' Capital
               
General partner (Note 2)
    (168,319 )     271,051  
Beneficial Unit Certificate holders
    173,119,475       130,482,881  
Unallocated deficit of Consolidated VIEs
    (32,051,204 )     (32,215,697 )
Total Partners' Capital
    140,899,952       98,538,235  
Noncontrolling interest (Note 5)
    (460,703 )     62,505  
Total Capital
    140,439,249       98,600,740  
Total Liabilities and Capital
  $ 220,211,983     $ 190,770,720  
                 
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, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
Revenues:
                       
  Property revenues   $ 3,728,809     $ 3,903,272     $ 7,250,302     $ 7,654,515  
  Mortgage revenue bond investment income     1,538,313       1,054,551       3,018,884       2,002,895  
  Gain on early extinquishment of debt     438,816       -       438,816       -  
  Other interest income     115,894       17,879       212,826       51,894  
Total Revenues
    5,821,832       4,975,702       10,920,828       9,709,304  
Expenses:
                                 
  Real estate operating (exclusive of items shown below)     3,073,725       2,580,266       5,148,617       4,940,909  
  Depreciation and amortization     1,240,241       1,679,036       2,437,258       3,259,908  
  Interest     872,277       965,329       1,845,279       2,156,198  
  General and administrative     590,541       324,401       1,098,776       901,163  
Total Expenses
    5,776,784       5,549,032       10,529,930       11,258,178  
Income (loss) from continuing operations
    45,048       (573,330 )     390,898       (1,548,874 )
Income from discontinued operations (including gain on bond redemption of $26,514,809 in 2009)
    -       -       -       26,734,754  
Net income (loss)
    45,048       (573,330 )     390,898       25,185,880  
  Less: net loss attributable to noncontrolling interest     521,666       2,964       523,208       6,824  
Net income (loss) - America First Tax Exempt Investors, L.P.   $ 566,714     $ (570,366 )   $ 914,106     $ 25,192,704  
                                   
Net income (loss) allocated to:
                               
  General Partner   $ 16,881     $ 13,766     $ 27,267     $ 587,856  
  Limited Partners - BUC holders     1,430,466       351,927       2,458,634       1,997,377  
  Unallocated gain (loss) of Consolidated VIEs     (880,633 )     (936,059 )     (1,571,795 )     22,607,471  
  Noncontrolling interest     (521,666 )     (2,964 )     (523,208 )     (6,824 )
      $ 45,048     $ (573,330 )   $ 390,898     $ 25,185,880  
                                   
BUC holders' interest in net income per unit (basic and diluted):
                               
  Net income, basic and diluted, per unit   $ 0.05     $ 0.02     $ 0.10     $ 0.14  
                                   
Weighted average number of units outstanding, basic and diluted     27,765,126       14,820,620       24,820,387       14,170,387  
 
 
2

 
 
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL AND COMPREHENSIVE INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)


   
General Partner
   
# of Units
   
Beneficial Unit Certificate Holders
   
Unallocated Deficit of Consolidated VIEs
   
Noncontrolling Interest
   
Total
   
Accumulated Other Comprehensive Income (Loss)
 
Balance at January 1, 2010
  $ 271,051       21,842,928     $ 130,482,881     $ (32,215,697 )   $ 62,505     $ 98,600,740     $ (11,009,231 )
Sale of Beneficial Unit Certificates
    -       8,280,000       41,656,763                       41,656,763          
Deconsolidation of VIEs - (Note 3)
    15,881       -       1,572,185       1,736,288       -       3,324,354       1,588,066  
Consolidation of VIEs - (Note 3)
    27,523       -       2,724,760       -       -       2,752,283       2,752,283  
Distributions paid or accrued
                                                       
  Regular distribution
    (51,498 )     -       (5,098,283 )     -       -       (5,149,781 )     -  
   Distribution of Tier II earnings (Note 2)
    (465,816 )     -       (1,397,449 )     -       -       (1,863,265 )     -  
Comprehensive income:
                                                       
Net Income (loss)
    27,267       -       2,458,634       (1,571,795 )     (523,208 )     390,898       -  
Unrealized gain on securities
    7,273       -       719,984       -       -       727,257       727,257  
Comprehensive income
                                            1,118,155          
Comprehensive loss attributable to noncontolling interest
    -       -       -       -       -       (523,208 )     -  
Comprehensive income attributable to Partnership
    -       -       -       -       -       1,641,363       -  
Balance at June 30, 2010
  $ (168,319 )     30,122,928     $ 173,119,475     $ (32,051,204 )   $ (460,703 )   $ 140,439,249     $ (5,941,625 )
                                                         
                                                         
   
General Partner
   
# of Units
   
Beneficial Unit Certificate Holders
   
Unallocated Deficit of Consolidated VIEs
   
Noncontrolling Interest
   
Total
   
Accumulated Other Comprehensive Income (Loss)
 
Balance at January 1, 2009
  $ 261,785       13,512,928     $ 93,277,480     $ (52,711,654 )   $ 67,716     $ 40,895,327     $ (16,857,807 )
Sale of Beneficial Unit Certificates
            3,500,000       16,153,565                       16,153,565          
Noncontrolling interest contribution
    -       -       -       -       6,366       6,366       -  
Distributions paid or accrued
    (1,196,389 )     -       (3,950,861 )     -       -       (5,147,250 )     -  
Reclssification of Tier II income
    607,201       -       (607,201 )     -       -       -       -  
Comprehensive income:
                                                       
Net Income (loss)
    587,856       -       1,997,377       22,607,471       (6,824 )     25,185,880       -  
Unrealized gain on securities
    41,157       -       4,074,506       -       -       4,115,663       4,115,663  
Comprehensive income
                                            29,301,543          
Comprehensive loss attributable to noncontolling interest
    -       -       -       -       -       (6,824 )     -  
Comprehensive income attributable to Partnership
    -       -       -       -       -       29,308,367       -  
Balance at June 30, 2009
  $ 301,610       17,012,928     $ 110,944,866     $ (30,104,183 )   $ 67,258     $ 81,209,551     $ (12,742,144 )



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 CASH FLOWS
(UNAUDITED)

   
For the six months ended,
 
   
June 30, 2010
   
June 30, 2009
 
Cash flows from operating activities:
           
Net income
  $ 390,898     $ 25,185,880  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization expense
    2,437,258       3,259,908  
Non-cash loss on derivatives
    128,772       490,522  
Gain on early extinquishment of debt
    (438,816 )     -  
Gain on sale of discontinued operations
    -       (26,514,809 )
Changes in operating assets and liabilities, net of effect of acquisitions
               
Increase in interest receivable
    (1,281,508 )     (109,341 )
Increase in other assets
    (1,371,412 )     (833,864 )
Increase (decrease) in accounts payable, accrued expenses and other liabilities
    36,334       (1,481,267 )
Net cash used by operating activities
    (98,474 )     (2,971 )
Cash flows from investing activities:
               
Proceeds from sale of discontinued operations
    -       32,000,000  
Increase in restricted cash
    (2,397,811 )     (1,501,917 )
Restricted cash - debt collateral (paid) released
    (2,930,543 )     8,529,235  
Increase in restricted cash - Ohio sale
    (2,684,876 )     -  
Capital expenditures
    (435,965 )     (466,187 )
Acquisition of partnerships, net of cash acquired
    -       (7,886,852 )
Acquisition of asset held for sale
    -       (2,649,991 )
Transfer of cash to unconsolidated VIE upon deconsolidation
    (88,949 )     -  
Transfer of cash from consolidated VIE upon consolidation
    1,979       -  
Purchase of tax exempt bond
    (15,867,588 )     -  
Principal payments received on tax-exempt mortgage revenue bonds
    272,713       118,000  
Net cash (used) provided by investing activities
    (24,131,040 )     28,142,288  
Cash flows from financing activities:
               
Distributions paid
    (5,517,609 )     (4,864,653 )
Increase in liabilities related to restricted cash
    2,397,811       1,501,917  
Deferred financing costs
    (455,920 )     (550,912 )
Proceeds from debt financing
    -       50,000,000  
Principal payments on debt financing and mortgage payable
    (13,009,821 )     (76,643,772 )
Loan extension payment
    (246,485 )     -  
Derivative settlements
    -       (238,980 )
Acquisition of interest rate cap agreements
    -       (554,000 )
Sale of Beneficial Unit Certificates
    41,656,763       16,153,565  
Net cash provided (used) by financing activities
    24,824,739       (15,196,835 )
Net increase in cash and cash equivalents
    595,225       12,942,482  
Cash and cash equivalents at beginning of period, including cash and cash equivalents of discontinued operations of $0 and $164,866 respectively
    17,280,535       7,361,140  
Cash and cash equivalents at end of period
  $ 17,875,760     $ 20,303,622  
                 
Cash paid during the period for interest
  $ 1,647,219     $ 2,453,284  
Liabilites assumed in the acquisition of partnerships
  $ -     $ 6,506,329  
Distributions declared but not paid
  $ 4,253,382     $ 2,714,924  
Cash received for sale of MF Properties eliminated in consolidation (Note 5)
  $ 16,192,000     $ -  
Cash paid for purchase of tax exempt bond eliminated in consolidation (Note 4)
  $ (18,313,000 )   $ -  
Cash paid for taxable loan eliminated in consolidation (Note 5)
  $ (1,236,236 )   $ -  
                 
The accompanying notes are an integral part of the condensed consolidated financial statements.
         
 
4

 


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)

1.  Basis of Presentation

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 bonds issued to finance these properties.
 
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 (“BUC holders”).  The Partnership will terminate on December 31, 2050 unless terminated earlier under provisions of its Agreement of Limited Partnership.
 
The consolidated financial statements of the “Company” reported in this Form 10-Q include the assets, liabilities and results of operations of the Partnership, the eight multifamily apartments owned by various limited partnerships in which Partnership subsidiaries hold a 99% limited partner interest including three apartment properties which are subject to a sales agreement (the “MF Properties” – see Note 5) and six other consolidated entities in which the Partnership does not hold an ownership interest but which own multifamily apartment properties financed with tax-exempt 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”).  Effective January 1, 2010, the Company adopted new provisions of the consolidation guidance included in Accounting Standards Codification (“ASC”) 810 Consolidations (“ASC 810”) that amended the consolidation guidance applicable to VIEs and the definition of a VIE, and requires enhanced disclosures to provide more information about an enterprise’s involvement in a VIE.  ASC 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE.  The adoption of these provisions on January 1, 2010 resulted in the deconsolidation of certain entities previously included in the Company’s consolidated financial statements.  Additionally, as of June 30, 2010, the adoption of these provisions resulted in certain additional disclosures and in the consolidation of certain entities, for the period March 1, 2010 to June 30, 2010, which were previously reported as investments in tax-exempt mortgage revenue bonds (see Note 3).

Stand alone financial information of the Partnership reported in this Form 10-Q includes only the assets and results of operations of the Partnership and the MF Properties, including the properties subject to sales agreements, without the consolidation of the VIEs.  In the Company’s consolidated financial statements, all transactions and accounts between the Partnership, the MF Properties 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 BUC holders as partners of the Partnership, the treatment of the tax-exempt 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 BUC holders on IRS Form K-1.

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, 2009. These condensed consolidated financial statements and notes have been prepared consistently with the 2009 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, 2010, and the results of operations for all periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

 
5

 
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 BUC holder on a periodic basis, as determined by the General Partner, based on the number of BUCs held by each BUC holder 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 BUC holder of record on the last day of each distribution period based on the number of BUCs held by each BUC holder 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 BUC holders and 1% to AFCA 2 and Net Residual Proceeds are distributed 100% to BUC holders 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 mortgage bonds on a cumulative basis (defined as Net Interest Income (Tier 2) and Net Residual Proceeds (Tier 2), respectively) are distributed 75% to the BUC holders and 25% to AFCA 2.

During June, 2010 the Company completed a sales transaction whereby four of the MF Properties, the Ohio Properties, were sold to three new ownership entities controlled by an unaffiliated not-for-profit entity (See Note 5).  The new owners did not contribute any capital to the transaction and the Company has effectively provided 100% of the capital structure to the new owners as part of the sale transaction.  Pursuant to ASC 360-20, Property, Plant, and Equipment - Real Estate Sales, ("ASC 360-20"), the sale and restructure does not meet the criteria for treatment as a sale.  As such, the Company will continue to consolidate the Ohio Properties as if the sale was not completed.  The properties will continue to be presented as MF Properties and no gain will be recognized until such time as the transaction can be accounted for as a sale.  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 deferred gain on the sale transaction of approximately $1.9 million.  As the deferred gain on the transaction represents cash paid to the Company and no on-going legal obligations related to the Ohio Properties or potential obligation to repay any amounts exists, the deferred gain represents income from a tax perspective and Cash Available for Distribution.  This gain meets the definition of Net Residual Proceeds representing contingent interest (Tier 2 income) and will therefore be distributed 75% to the BUC holders and 25% to the General Partner.  The accounting treatment under generally accepted accounting principles (“GAAP”) combined with the distribution of Tier 2 income under the Agreement of Limited Partnership results in a negative balance in the capital account of the General Partner as of June 30, 2010.  The negative balance will reverse when the deferred gain is able to be recognized under GAAP which would result in a consistent treatment of the transaction between tax accounting, the allocations of income and distributions as outline in the Agreement of Limited Partnership and GAAP.

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 BUC holders 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.  In addition, the Partnership has 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 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.   

On January 1, 2010, revised standards contained in ASC 810 became effective for the Partnership and were adopted by the Partnership.  Under the consolidation guidance included in the ASC, the Partnership must make an evaluation of these entities to determine if they meet the definition of a VIE. Generally, a VIE is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated  financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about an entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.

The revised accounting standard introduces a more qualitative approach to evaluating VIEs for consolidation and requires the Partnership to perform an analysis to determine whether its variable interests give it a controlling financial interest in a VIE.  This analysis identifies the primary beneficiary, the entity that must consolidate the VIE, as the entity that has (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.  In adopting this revised accounting standard, the Partnership has re-evaluated all of its investments to determine if the property owners are VIEs and, if so, whether the Partnership is the primary beneficiary of the VIE. ASC 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE.  As a result, changes to the Consolidated VIEs may occur in the future based on changes in circumstances.  The accounting guidance on consolidations is complex and requires significant analysis and judgment.
 
6

 
The Partnership has determined that, as of January 1, 2010, six of the entities financed by tax-exempt bonds owned by the Partnership were held by VIEs.  These VIEs are Ashley Square, Bent Tree, Cross Creek, Fairmont Oaks, Iona Lakes and Lake Forest.   Additionally, in January 2010, the Partnership issued a Notice of Default on two bond holdings, Residences at DeCordova ("DeCordova") (formerly known as ("f/k/a") The Gardens of DeCordova) and Residences at Weatherford ("Weatherford") (f/k/a The Gardens of Weatherford), and began foreclosure procedures. The foreclosure on these bonds was completed in March 2010.  Simultaneous with the foreclosure, the property was acquired through the assumption of liabilities by new ownership and the tax-exempt mortgage revenue bonds owned by the Partnership became the obligations of the new owners.  Prior to the foreclosure and ownership transfer the owners of these properties were not considered VIEs.  Based on the foreclosures and the lack of sufficient equity investment at risk by the new owners, these entities were determined to be Consolidated VIEs in March 2010.

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.

Under the prior consolidation standards the Partnership consolidated Ashley Square, Bent Tree, Cross Creek, Fairmont Oaks, Iona Lakes and Lake Forest as it held the majority of the variable interests in these VIEs.  Under the revised standards the Partnership has determined that it is the primary beneficiary of four of these VIEs; Bent Tree, Fairmont Oaks, Iona Lakes and Lake Forest and has continued to consolidate these entities.  As a result of adopting the new guidance on January 1, 2010, the Partnership no longer reports Ashley Square and Cross Creek on a consolidated basis.

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.

Consolidated VIEs

The Partnership has determined it is the primary beneficiary of the Bent Tree, Fairmont Oaks, Iona Lakes, Lake Forest, DeCordova and Weatherford VIEs.  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 bond and accounts for the majority of the VIEs' 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 in these entities is held, ultimately, by corporations which are owned by four individuals, three 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.

The following is a discussion of the circumstances related to the DeCordova and Weatherford properties.

Residences at DeCordova. This property is a senior (55+) affordable housing project located in Granbury, Texas in the Dallas-Fort Worth area.  Construction was completed in April 2009 and lease-up continues, however, the property has not yet reached stabilization which is defined in the bond documents as the generation of a 1.15:1 debt service coverage ratio for six straight months.  In January 2010, the Partnership issued a Notice of Default through the bond trustee to begin foreclosure procedures in order to remove the limited partner. Such notice was issued in February 2010 and the foreclosure was completed in March 2010. Through this process the Partnership has removed the limited partner which will allow the property owner to “re-syndicate” the low income housing tax credits (“LIHTCs”) to a new limited partner thereby providing additional capital to the project. The Partnership believes that, if this can be accomplished, such new equity would be sufficient to allow for the current bonds to remain in place and operations be funded through an extended lease-up period. Until such time as additional capital, through the re-syndication of the LIHTCs, is contributed, the full impact of these developments will not be known.  As of December 31, 2009, the property had 31 units leased out of total available units of 76, or 41% physical occupancy. As of June 30, 2010, the property had 41 units leased out of total available units of 76, or approximately 54% physical occupancy and an additional five leases are pending.  At the request of the Partnership, in April 2010, the property owner reduced the number of units set aside for affordable tenants to 60% and began leasing 30 units to market rate tenants. Based on the level of leasing activity resulting from the change in the mix of affordable and market rate tenants, the Partnership continues to believe that DeCordova is capable of reaching stabilization

 
7

 
Residences at Weatherford. Residences at Weatherford are currently under construction and will contain 76 units upon completion. This property is a senior (55+) affordable housing project located in Weatherford, Texas in the Dallas-Fort Worth area. At this time infrastructure construction activities have been substantially completed but no construction has begun on the actual apartment buildings.  In January 2010, the Partnership issued a Notice of Default through the bond trustee and began foreclosure procedures to remove the limited partner. Such notice was issued in February 2010 and the foreclosure was completed in March 2010. Through this process the Partnership has removed the limited partner which will allow the property owner to recapitalize the property by pursuing an alternative plan of financing.  Specifically, the Partnership has worked with the general partner of the owner to identify available Tax Credit Assistance Program (“TCAP”) funding through application to the Texas Department of Housing and Community Affairs (“TDHCA”). A TCAP Written Agreement with TDHCA has been entered into which commits TCAP funds to the project and final approval of the funding was received from the TDHCA board in March 2010.  The Partnership believes that the TCAP funding will be sufficient to allow for the current bonds to remain in place, construction to be complete and operations to be funded through an extended lease-up period. Formal agreements must still be finalized before such funds are available to the project. Formal agreements and funding were originally expected to be completed in the second quarter of 2010, however, the process has been delayed due to the large number of transactions involving TDHCA to be closed.  We continue to work with TDHCA to complete all necessary documentation and now expect to be completed and have funding available before December 31, 2010.

Non-Consolidated VIEs

As a result of adopting the new accounting guidance, we deconsolidated two entities, the Ashley Square and Cross Creek VIEs.  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 constitutes a reconsideration event as outlined in ASC 810 which triggers 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 non-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 constitutes a reconsideration event as outlined in ASC 810 which triggers 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.

 
8

The following tables presents information regarding the carrying value and classification of the assets held by the Partnership 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
  $ 6,440,915     $ 6,500,000  
Property Loan
Other Asset
    298,000       3,544,342  
      $ 6,738,915     $ 10,044,342  
                   
Cross Creek Apartments
                 
Tax Exempt Mortgage Revenue Bond
Bond Investment
  $ 7,108,415     $ 5,747,804  
Property Loans
Other Asset
    3,062,754       3,062,754  
      $ 10,171,169     $ 8,810,558  
 
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 cost less any loan loss reserves.  See Footnote 4 for additional information regarding the bonds and Footnote 6 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, 2010.  The difference between the carrying value and the maximum exposure to loss is a function of the fair value of the bond.  The maximum exposure to loss for the property loans is equal to the cost basis. The difference between the carrying value and the maximum exposure is the value of loss reserves that have been previously recorded against the outstanding loan balances.
 
The consolidated financial statements of the Company include the assets, liabilities and results of operations of the Partnership, the MF Properties and the Consolidated VIEs.  Financial information of the Partnership, on a stand-alone basis, includes only the assets, liabilities and results of operations of the Partnership and the MF Properties without the impact of the consolidation of the VIEs.  In the Company’s consolidated financial statements, all transactions and accounts between the Partnership, the MF Properties and the Consolidated VIEs have been eliminated.
 
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 Sheet as of June 30, 2010:
   
Partnership as of June 30, 2010
   
Consolidated VIEs as of June 30, 2010
   
Consolidation -Elimination as of June 30, 2010
   
Total as of June 30, 2010
 
Assets
                       
Cash and cash equivalents
  $ 17,773,694     $ 102,066     $ -     $ 17,875,760  
Restricted cash
    8,794,805       4,453,112       -       13,247,917  
Interest receivable
    7,867,947       -       (4,657,091 )     3,210,856  
Tax-exempt mortgage revenue bonds
    142,586,611       -       (49,692,364 )     92,894,247  
Real estate assets:
                               
Land
    6,736,351       5,891,148       -       12,627,499  
Buildings and improvements
    37,543,428       56,056,285       (154,351 )     93,445,362  
Real estate assets before accumulated depreciation
    44,279,779       61,947,433       (154,351 )     106,072,861  
Accumulated depreciation
    (4,281,349 )     (17,103,778 )     -       (21,385,127 )
Net real estate assets
    39,998,430       44,843,655       (154,351 )     84,687,734  
Other assets
    21,567,865       1,307,422       (14,579,818 )     8,295,469  
Total Assets
  $ 238,589,352     $ 50,706,255     $ (69,083,624 )   $ 220,211,983  
                                 
Liabilities
                               
Accounts payable, accrued expenses and other
  $ 1,550,427     $ 32,489,402     $ (30,552,026 )   $ 3,487,803  
Distribution payable
    4,253,382       -       -       4,253,382  
Debt financing
    54,797,000       -       -       54,797,000  
Mortgage payable
    17,234,549       54,244,000       (54,244,000 )     17,234,549  
Total Liabilities
    77,835,358       86,733,402       (84,796,026 )     79,772,734  
Partners' Capital
                               
General Partner
    (168,319 )     -       -       (168,319 )
Beneficial Unit Certificate holders
    161,383,016       -       11,736,459       173,119,475  
Unallocated deficit of Consolidated VIEs
    -       (36,027,147 )     3,975,943       (32,051,204 )
Total Partners' Capital
    161,214,697       (36,027,147 )     15,712,402       140,899,952  
Noncontrolling interest
    (460,703 )     -       -       (460,703 )
Total Capital
    160,753,994       (36,027,147 )     15,712,402       140,439,249  
Total Liabilities and Partners' Capital
  $ 238,589,352     $ 50,706,255     $ (69,083,624 )   $ 220,211,983  
 
9

 
Condensed Consolidating Balance Sheet as of December 31, 2009:
   
Partnership as of December 31, 2009
   
Consolidated VIEs as of December 31, 2009
   
Consolidation -Elimination as of December 31, 2009
   
Total as of December 31, 2009
 
Assets
                       
Cash and cash equivalents
  $ 17,009,418     $ 271,117     $ -     $ 17,280,535  
Restricted cash
    3,137,244       2,139,973       -       5,277,217  
Interest receivable
    6,075,991       -       (5,082,810 )     993,181  
Tax-exempt mortgage revenue bonds
    125,703,198       -       (56,303,435 )     69,399,763  
Real estate assets:
                               
Land
    6,736,351       6,667,304       -       13,403,655  
Buildings and improvements
    37,375,063       65,512,057       (2,631,341 )     100,255,779  
Real estate assets before accumulated depreciation
    44,111,414       72,179,361       (2,631,341 )     113,659,434  
Accumulated depreciation
    (3,324,801 )     (18,543,740 )     -       (21,868,541 )
Net real estate assets
    40,786,613       53,635,621       (2,631,341 )     91,790,893  
Other assets
    19,843,456       1,714,940       (15,529,265 )     6,029,131  
Total Assets
  $ 212,555,920     $ 57,761,651     $ (79,546,851 )   $ 190,770,720  
                                 
Liabilities and Owners' Equity
                               
Accounts payable, accrued expenses and other
  $ 1,618,741     $ 41,691,171     $ (39,378,064 )   $ 3,931,848  
Distribution Payable
    2,757,945       -       -       2,757,945  
Debt financing
    55,363,333       -       -       55,363,333  
Mortgage payable
    30,116,854       57,764,026       (57,764,026 )     30,116,854  
Total Liabilities
    89,856,873       99,455,197       (97,142,090 )     92,169,980  
Partners' Capital
                               
General Partner
    271,051       -       -       271,051  
Beneficial Unit Certificate holders
    122,365,491       -       8,117,390       130,482,881  
Unallocated deficit of Consolidated VIEs
    -       (41,693,546 )     9,477,849       (32,215,697 )
Total Partners' Capital
    122,636,542       (41,693,546 )     17,595,239       98,538,235  
Noncontrolling interest
    62,505       -       -       62,505  
Total Capital
    122,699,047       (41,693,546 )     17,595,239       98,600,740  
Total Liabilities and Partners' Capital
  $ 212,555,920     $ 57,761,651     $ (79,546,851 )   $ 190,770,720  
 
 
10

 
Condensed Consolidating Statements of Operations for the three and six months ended June 30, 2010 and 2009:
 
    Partnership For the Three Months Ended June 30, 2010     Consolidated VIEs For the Three Months Ended June 30, 2010     Consolidation-Elimination For the Three Months Ended June 30, 2010     Total For the Three Months Ended June 30, 2010  
                 
                 
                 
Revenues:
                       
Property revenues
  $ 1,828,927     $ 1,899,882     $ -     $ 3,728,809  
Mortgage revenue bond investment income
    2,447,227       -       (908,914 )     1,538,313  
Gain on early extinguishment of debt
    438,816       -       -       438,816  
Other interest income
    125,928       -       (10,034 )     115,894  
     Total Revenues
    4,840,898       1,899,882       (918,948 )     5,821,832  
Expenses:
                               
Real estate operating (exclusive of items shown below)
    1,788,233       1,285,492       -       3,073,725  
Depreciation and amortization
    664,166       590,681       (14,606 )     1,240,241  
Interest
    872,277       1,411,426       (1,411,426 )     872,277  
General and administrative
    590,541       -       -       590,541  
    Total Expenses
    3,915,217       3,287,599       (1,426,032 )     5,776,784  
Net income (loss)
    925,681       (1,387,717 )     507,084       45,048  
Less: net loss attributable to noncontrolling interest
    521,666       -       -       521,666  
Net income (loss) - America First Tax Exempt Investors, L. P.
  $ 1,447,347     $ (1,387,717 )   $ 507,084     $ 566,714  
                                 
    Partnership For the Three Months Ended June 30, 2009     Consolidated VIEs For the Three Months Ended June 30, 2009     Consolidation-Elimination For the Three Months Ended June 30, 2009     Total For the Three Months Ended June 30, 2009  
                 
                 
                 
Revenues:
                               
Property revenues
  $ 1,839,243     $ 2,064,029     $ -     $ 3,903,272  
Mortgage revenue bond investment income
    2,127,071       -       (1,072,520 )     1,054,551  
Other interest income
    17,879       -       -       17,879  
     Total Revenues
    3,984,193       2,064,029       (1,072,520 )     4,975,702  
Expenses:
                               
Real estate operating (exclusive of items shown below)
    1,041,056       1,539,210       -       2,580,266  
Property loan loss
    220,000       -       (220,000 )     -  
Depreciation and amortization
    1,070,677       622,094       (13,735 )     1,679,036  
Interest
    965,330       1,638,576       (1,638,577 )     965,329  
General and administrative
    324,401       -       -       324,401  
    Total Expenses
    3,621,464       3,799,880       (1,872,312 )     5,549,032  
Income (loss) from continuing operations
    362,729       (1,735,851 )     799,792       (573,330 )
Income (loss) from discontinued operations
    -       -       -       -  
Net income (loss)
    362,729       (1,735,851 )     799,792       (573,330 )
Less: net loss attributable to noncontrolling interest
    2,964       -       -       2,964  
Net income (loss) - America First Tax Exempt Investors, L. P.
  $ 365,693     $ (1,735,851 )   $ 799,792     $ (570,366 )


 
11

 
 
    Partnership For the Six Months Ended June 30, 2010     Consolidated VIEs For the Six Months Ended June 30, 2010     Consolidation-Elimination For the Six Months Ended June 30, 2010     Total For the Six Months Ended June 30, 2010  
                 
                 
                 
Revenues:
                       
Property revenues
  $ 3,582,518     $ 3,667,784     $ -     $ 7,250,302  
Mortgage revenue bond investment income
    4,743,512       -       (1,724,628 )     3,018,884  
Gain on early extinguishment of debt
    438,816       -       -       438,816  
Other interest income
    222,860       -       (10,034 )     212,826  
     Total Revenues
    8,987,706       3,667,784       (1,734,662 )     10,920,828  
Expenses:
                               
Real estate operating (exclusive of items shown below)
    2,747,935       2,400,682       -       5,148,617  
Depreciation and amortization
    1,333,023       1,132,096       (27,861 )     2,437,258  
Interest
    1,845,279       2,756,945       (2,756,945 )     1,845,279  
General and administrative
    1,098,776       -       -       1,098,776  
    Total Expenses
    7,025,013       6,289,723       (2,784,806 )     10,529,930  
Net income (loss)
    1,962,693       (2,621,939 )     1,050,144       390,898  
Less: net loss attributable to noncontrolling interest
    523,208       -       -       523,208  
Net income (loss) - America First Tax Exempt Investors, L. P.
  $ 2,485,901     $ (2,621,939 )   $ 1,050,144     $ 914,106  
                                 
    Partnership For the Six Months Ended June 30, 2009     Consolidated VIEs For the Six Months Ended June 30, 2009     Consolidation-Elimination For the Six Months Ended June 30, 2009     Total For the Six Months Ended June 30, 2009  
                 
                 
                 
Revenues:
                               
Property revenues
  $ 3,470,941     $ 4,183,574     $ -     $ 7,654,515  
Mortgage revenue bond investment income
    6,770,084       -       (4,767,189 )     2,002,895  
Other interest income (loss)
    (75,601 )     -       127,495       51,894  
     Total Revenues
    10,165,424       4,183,574       (4,639,694 )     9,709,304  
Expenses:
                               
Real estate operating (exclusive of items shown below)
    2,076,713       2,864,196       -       4,940,909  
Property loan loss
    294,999       -       (294,999 )     -  
Depreciation and amortization
    2,076,388       1,211,709       (28,189 )     3,259,908  
Interest
    2,237,752       3,149,420       (3,230,974 )     2,156,198  
General and administrative
    901,163       -       -       901,163  
    Total Expenses
    7,587,015       7,225,325       (3,554,162 )     11,258,178  
Income (loss) from continuing operations
    2,578,409       (3,041,751 )     (1,085,532 )     (1,548,874 )
Income (loss) from discontinued operations
    -       34,786,445       (8,051,691 )     26,734,754  
Net income (loss)
    2,578,409       31,744,694       (9,137,223 )     25,185,880  
Less: net loss attributable to noncontrolling interest
    6,824       -       -       6,824  
Net income (loss) - America First Tax Exempt Investors, L. P.
  $ 2,585,233     $ 31,744,694     $ (9,137,223 )   $ 25,192,704  
 
 
12

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 bonds issued with respect to properties owned by Consolidated VIEs. The Company had the following investments in tax-exempt mortgage revenue bonds as of dates shown:
 
   
June 30, 2010
 
 
  Cost adjusted for pay-downs     Unrealized Gain     Unrealized Loss     Estimated Fair Value  
Description of Tax-Exepmt Mortgage Revenue Bonds
               
                         
Ashley Square
  $ 6,500,000     $ -     $ (59,085 )   $ 6,440,915  
Bella Vista
    6,695,000       -       (974,390 )     5,720,610  
Bridle Ridge
    7,885,000       -       (1,267,671 )     6,617,329  
Brookstone
    7,345,955       462,285       -       7,808,240  
Clarkson College
    5,886,665       -       (632,163 )     5,254,502  
Cross Creek
    5,747,804       1,360,611       -       7,108,415  
Lost Creek
    15,867,588       778,158       -       16,645,746  
Runnymede
    10,790,000       -       (1,059,362 )     9,730,638  
Southpark
    11,919,860       515,442       -       12,435,302  
Woodland Park
    15,662,000       -       (4,336,651 )     11,325,349  
Woodlynn Village
    4,536,000       -       (728,799 )     3,807,201  
    $ 98,835,872     $ 3,116,496     $ (9,058,121 )   $ 92,894,247  
                                 
   
December 31, 2009
 
 
  Cost adjusted for pay-downs     Unrealized Gain     Unrealized Loss     Estimated Fair Value  
Description of Tax-Exempt Mortgage Revenue Bonds
               
                                 
Bella Vista
  $ 6,740,000     $ -     $ (946,161 )   $ 5,793,839  
Bridle Ridge
    7,885,000       -       (1,143,404 )     6,741,596  
Brookstone
    7,351,469       379,508       -       7,730,977  
Clarkson College
    5,936,665       -       (620,670 )     5,315,995  
Gardens of DeCordova
    4,853,000       -       (1,302,060 )     3,550,940  
Gardens of Weatherford
    4,686,000       -       (1,450,223 )     3,235,777  
Runnymede
    10,825,000       -       (1,385,383 )     9,439,617  
Southpark
    11,919,860       427,699       -       12,347,559  
Woodland Park
    15,662,000       -       (4,210,416 )     11,451,584  
Woodlynn Village
    4,550,000       -       (758,121 )     3,791,879  
    $ 80,408,994     $ 807,207     $ (11,816,438 )   $ 69,399,763  
 
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 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, 2010 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.  At June 30, 2010, the range of effective yields on the individual bonds was 6.8% to 8.5%.  Additionally, the Company calculated the sensitivity of the key assumption used in calculating the fair values of these bonds.  Assuming an immediate 10 percent adverse change in the key assumption, the effective yields on the individual bonds would increase to a range of 7.4% to 9.3% and would result in additional unrealized losses on the bond portfolio of approximately $7.7 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.

Unrealized gains or losses on these tax-exempt 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, 2010, all of the current bond investments except the Ashley Square, Brookstone, Cross Creek, Lost Creek, and South Park investments have been in an unrealized loss position for greater than twelve months.  The Company has reviewed each of its mortgage revenue bonds for impairment. Based upon this evaluation, the current unrealized losses on the bonds are considered to be temporary.  The Company is currently negotiating the terms and conditions of a Tax Exempt Bond Securitization (“TEBS”) facility discussed further in Note 8.  The Company believes, based upon current negotiations, that the trust structure of the financing arrangement will result in the TEBS trust being a VIE and that the Company will be the primary beneficiary of the VIE.  This treatment will result in the consolidation of the TEBS trust by the Company.  However, if the accounting for this transaction differs, some or all of the current unrealized losses on the bonds could become realized.
 
13

 
Although valuations have generally been flat in the first half of 2010, 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.

In May 2010, the Company acquired the tax-exempt mortgage revenue bond for a 261 unit multi-family apartment complex in San Antonio, Texas known as The Villages at Lost Creek for approximately $15.9 million which represented 100% of the bond issuance. The bond par value is $18.5 million with an annual interest rate of 6.25%. The bond purchase price results in a yield to maturity of approximately 7.55% per annum. The bond matures in June 2041. The Company has determined that the entity which owns Lost Creek does not meet the definition of a VIE and, accordingly, its financial statements are not consolidated into the consolidated financial statements of the Company.

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 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 low-income housing tax credits. In addition to the new tax-exempt bonds acquired by the Company, the plan of financing for the acquisition included other subordinated debt issued by the Company.  The new owners ultimately plan to sell limited partnership interests in the properties and syndicate LIHTCs as part of the overall plan of finance. The new owners have not contributed any capital to the transaction and the Company has effectively provided 100% of the capital structure to the new owners as part of the sale transaction.  Pursuant to ASC 360-20, Property, Plant, and Equipment - Real Estate Sales, ("ASC 360-20"), the sale and restructure does not meet the criteria for treatment as a sale.  ASC 360-20 requires sufficient equity capital 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).  As the buyer has no equity capital in this transaction and the property operations are the current support for the debt service, the Company, in substance, remains the owner for accounting purposes.  As such, the Company will continue to consolidate the Ohio Properties as if the sale was not completed.  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 $1.9 million.  The properties will continue to be presented as MF Properties and no gain will be recognized until such time as the transaction can be accounted for as a sale (See Note 5).

The Partnership previously identified three tax-exempt mortgage revenue bonds for which certain actions may be necessary to protect the Partnership’s position as a secured bondholder and lender. These bonds are Woodland Park, DeCordova and Weatherford.  The Partnership foreclosed on the bonds secured by DeCordova and Weatherford in March 2010.  These properties are now treated as Consolidated VIEs of the Company as discussed in Note 3.  The following is a discussion of the circumstances related to the Woodland Park property.

Woodland Park. Woodland Park was completed in November 2008, but remains in its initial lease-up phase and has not yet reached stabilization which is defined in the bond documents as the generation of a 1.15:1 debt service coverage ratio for six straight months.  Additionally, there were insufficient funds on deposit with the bond trustee to make the debt service payment of approximately $452,000 on the bonds which was due on May 3, 2010 and the property owner did not provide additional capital to fund the shortfall.  As a result, a payment default on the bonds has occurred.  In order to protect its investment the Partnership has issued a formal notice of default through the bond trustee and has started the foreclosure process.  The foreclosure process may take several months to complete.  The Partnership would expect to remove and replace the general and limited partners of the property owner through foreclosure.  This action would allow a new property owner to re-syndicate the LIHTCs associated with this property.  If these LIHTCs can be successfully re-syndicated, it will provide additional capital to the project which can be used to support debt service payments on the tax-exempt mortgage revenue bonds until property operations improve to the point that sufficient cash is generated to pay any past due amounts on the bonds as well as ongoing debt service.  If the re-syndication of LIHTCs is not successful, the Partnership may pursue other options including making additional taxable loans to the property or completing the foreclosure process and taking direct ownership of the property.  The Partnership believes that the most significant issue in the slow lease-up of the property and its failure to achieve stabilization has been the 100% set aside of the rental units for tenants that make less than 60% of the area median income. At the request of the Partnership, in April 2010, the property owner reduced the number of units set aside for affordable tenants to 75% and began leasing 59 units to market rate tenants. Additionally, the property owner has agreed that, if needed to stabilize the property, it would further reduce the units set aside for affordable tenants to 60% thereby making an additional 35 units available to market rate tenants.  As of December 31, 2009, the property had 116 units leased out of total available units of 236, or 49% physical occupancy.   As of June 30, 2010, occupancy has increased to 153 units, or 65% physical occupancy, and an additional ten leases are pending.  Based on the level of leasing activity resulting from the change in the mix of affordable and market rate tenants, the Partnership continues to believe that Woodland is capable of reaching stabilization.

 
14

 
The Partnership previously evaluated the Woodland Park bonds for an other-than-temporary decline in value as of December 31, 2009 (see Footnote 2 in the December 31, 2009 Form 10-K for discussion of our impairment testing method).  Based on this evaluation, the Partnership concluded that no other-than-temporary impairment of these bonds existed at December 31, 2009.  The potential for a payment default was a factor which was considered in the evaluation.  As such, as of June 30, 2010, there were no significant changes in circumstances for these bonds that were not considered in the December 31, 2009 evaluation.  Therefore, the Partnership has concluded that no other-than-temporary impairment of these bonds exists as of June 30, 2010.
 
5.  Real Estate Assets

MF Properties

To facilitate its investment strategy of acquiring additional tax-exempt mortgage bonds secured by MF Properties, the Company has acquired through its various subsidiaries 99% limited partner positions in limited partnerships that own the MF Properties.  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 non-controlling 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.  

As discussed in Note 5, in June 2010 the Company completed a sales transaction whereby four of the MF Properties, 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 bonds secured by the Ohio Properties were acquired 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%.  In addition to the new tax-exempt bonds acquired by the Company, the plan of financing for the acquisition included other subordinated debt issued by the Company.  The new owners ultimately plan to sell limited partnership interests in the properties and syndicate LIHTCs as part of the overall plan of finance. The new owners have not contributed any capital to the transaction and the Company has effectively provided 100% of the capital structure to the new owners as part of the sale transaction.  Pursuant to ASC 360-20, Property, Plant, and Equipment - Real Estate Sales, ("ASC 360-20"), the sale and restructure does not meet the criteria for treatment as a sale.  ASC 360-20 requires sufficient equity capital as part of a sales transaction to indicate a commitment from the buyer (typically a minimum of 3 to 5%).  As the buyer has no equity capital in this transaction and the property operations are the current support for the debt service, the Company, in substance, remains the owner.  As such, the Company will continue to consolidate the Ohio Properties as if the sale was not completed.  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 deferred gain on the sale transaction of approximately $1.9 million.  The properties will continue to be presented as MF Properties and no gain will be recognized until such time as the transaction can be accounted for as a sale.

 
15

 

MF Properties
 
Property Name
Location
 
Number of Units
   
Land
   
Buildings and Improvements
   
Carrying Value at June 30, 2010
 
Eagle Ridge
Erlanger, KY
    64     $ 290,763       2,438,075     $ 2,728,838  
Meadowview
Highland Heights, KY
    118       703,936       4,982,363       5,686,299  
Churchland
Chesapeake, VA
    124       1,171,146       6,323,051       7,494,197  
Glynn Place
Brunswick, GA
    128       743,996       4,600,295       5,344,291  
Greens of Pine Glen
Durham, NC
    168       1,744,760       5,172,874       6,917,634  
                                28,171,259  
Less accumulated depreciation (depreciation expense of approximately $640,000 for the first half of 2010)
      (2,446,425 )
Balance at June 30, 2010
                            $ 25,724,834  
MF Properties Subject to Sales Agreement
 
Property Name
Location
 
Number of Units
   
Land
   
Buildings and Improvements
   
Carrying Value at June 30, 2010
 
Crescent Village
Cincinnati, OH
    90     $ 353,117       4,368,164     $ 4,721,281  
Willow Bend
Hilliard, OH
    92       580,130       3,052,489       3,632,619  
Postwoods
Reynoldsburg, OH
    180       1,148,504       6,606,117       7,754,621  
                                16,108,521  
Less accumulated depreciation (depreciation expense of approximately $316,000 for the first half of 2010)
      (1,834,924 )
Balance at June 30, 2010
                            $ 14,273,597  
                                   
MF Properties
 
Property Name
Location
 
Number of Units
   
Land
   
Buildings and Improvements
   
Carrying Value at December 31, 2009
 
Eagle Ridge
Erlanger, KY
    64     $ 290,763     $ 2,431,975     $ 2,722,738  
Meadowview
Highland Heights, KY
    118       703,936       4,961,618       5,665,554  
Crescent Village
Cincinnati, OH
    90       353,117       4,344,981       4,698,098  
Willow Bend
Hilliard, OH
    92       580,130       3,029,928       3,610,058  
Postwoods
Reynoldsburg, OH
    180       1,148,504       6,587,724       7,736,228  
Churchland
Chesapeake, VA
    124       1,171,146       6,298,605       7,469,751  
Glynn Place
Brunswick, GA
    128       743,996       4,572,850       5,316,846  
Greens of Pine Glen
Durham, NC
    168       1,744,760       5,147,383       6,892,143  
                                44,111,416  
Less accumulated depreciation (depreciation expense of approximately $1.8 million in 2009)
              (3,324,801 )
Balance at December 31, 2009
                            $ 40,786,615  

 
 
16

 
VIE Properties

In addition to the MF Properties, the Company consolidates the assets, liabilities and results of operations of the Consolidated VIEs in accordance with the accounting guidance on consolidations.  Although the assets of these VIEs are consolidated, the Company has no ownership interest in the VIEs other than to the extent they serve as collateral for the tax-exempt mortgage revenue bonds owned by the Partnership.  The results of operations of those properties are recorded by the Company in consolidation but any net income or loss from these properties does not accrue to the BUC holders or the general partner, but is instead included in "Unallocated deficit of Consolidated VIEs.”

The Company consolidated the following properties owned by Consolidated VIEs in continuing operations as of June 30, 2010 and December 31, 2009:
 
Consolidated VIEs
 
Property Name
 
Location
 
Number of Units
   
Land
   
Buildings and Improvements
   
Carrying Value at June 30, 2010
 
Bent Tree Apartments
 
Columbia, SC
    232       986,000       11,537,125     $ 12,523,125  
Fairmont Oaks Apartments
 
Gainsville, FL