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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, 2014

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 MULTIFAMILY 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  x 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 definitions of “large accelerated filer”, “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



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INDEX

PART I – FINANCIAL INFORMATION

Financial Statements (Unaudited)
 
 
 
Condensed Consolidated Balance Sheets
 
Condensed Consolidated Statements of Operations
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
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
 


 
 



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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 which are 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 mortgage revenue bonds and mortgage-backed securities;
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 uncertain economic and credit market conditions
changes in the United States Department of Housing and Development Capital Fund Program; 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, 2013 and in Item 1A of Part II of this document.


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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERICA FIRST MULTIFAMILY INVESTORS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
 
Cash and cash equivalents
 
$
43,266,484

 
$
11,318,015

Restricted cash
 
5,119,621

 
6,845,543

Interest receivable
 
3,759,641

 
3,342,038

Mortgage revenue bonds held in trust, at fair value (Notes 4 & 10)
 
232,306,334

 
216,371,801

Mortgage revenue bonds, at fair value (Note 4)
 
124,006,732

 
68,946,370

Public housing capital fund trusts, at fair value (Note 5)
 
64,997,717

 
62,056,379

Mortgage-backed securities, at fair value (Note 6)
 
37,878,708

 
37,845,661

Real estate assets: (Note 7)
 
 
 
 
Land and improvements
 
11,081,992

 
11,081,992

Buildings and improvements
 
127,458,737

 
111,195,695

Real estate assets before accumulated depreciation
 
138,540,729

 
122,277,687

Accumulated depreciation
 
(21,584,793
)
 
(19,128,753
)
Net real estate assets
 
116,955,936

 
103,148,934

Other assets (Note 8)
 
25,054,159

 
24,358,291

Total Assets
 
$
653,345,332

 
$
534,233,032

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable, accrued expenses and other liabilities
 
$
11,718,809

 
$
5,450,694

Distribution payable
 
7,819,372

 
6,446,076

Due upon settlement of Live 929 Apartments (Note 4)
 
35,000,000

 

Debt financing (Note 10)
 
244,468,000

 
257,274,000

Mortgages payable (Note 11)
 
69,547,725

 
57,087,320

Bond purchase commitment - fair value adjustment (Notes 4 & 16)
 

 
4,852,177

Total Liabilities
 
368,553,906

 
331,110,267

 
 
 
 
 
Commitments and Contingencies (Note 16)
 


 


 
 
 
 
 
Partners' Capital
 
 
 
 
General Partner (Note 2)
 
323,019

 
16,671

Beneficial Unit Certificate holders
 
305,190,555

 
223,573,312

Unallocated deficit of Consolidated VIEs
 
(20,710,349
)
 
(20,455,896
)
Total Partners' Capital
 
284,803,225

 
203,134,087

Noncontrolling interest (Note 7)
 
(11,799
)
 
(11,322
)
Total Capital
 
284,791,426

 
203,122,765

Total Liabilities and Partners' Capital
 
$
653,345,332

 
$
534,233,032


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


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

 
 
For the Three Months Ended,
 
For the Six Months Ended,
 
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Revenues:
 
 
 
 
 
 
 
 
Property revenues
 
$
3,919,772

 
$
3,952,046

 
$
7,870,988

 
$
7,684,853

Investment income
 
6,241,475

 
4,595,197

 
12,447,033

 
12,311,814

Gain on mortgage revenue bonds - sale and redemption
 
849,655

 

 
3,684,898

 

Contingent interest income
 

 
6,497,160

 

 
6,497,160

Other interest income
 
242,077

 
96,180

 
450,900

 
1,341,165

Other income
 

 

 

 
250,000

Total revenues
 
11,252,979

 
15,140,583

 
24,453,819

 
28,084,992

Expenses:
 
 
 
 
 
 
 
 
Real estate operating (exclusive of items shown below)
 
2,270,170

 
2,315,325

 
4,370,463

 
4,372,361

Realized loss on taxable property loan
 

 
4,557,741

 

 
4,557,741

Provision for loan loss
 

 
96,000

 

 
96,000

Provision for loss on receivables
 

 
3,523

 

 
241,698

Depreciation and amortization
 
1,524,996

 
1,661,082

 
3,138,342

 
3,242,458

Interest
 
2,400,851

 
1,426,349

 
4,570,400

 
2,962,622

General and administrative
 
1,398,879

 
1,141,444

 
2,669,805

 
2,111,935

Total expenses
 
7,594,896

 
11,201,464

 
14,749,010

 
17,584,815

Income from continuing operations
 
3,658,083

 
3,939,119

 
9,704,809

 
10,500,177

Income from discontinued operations (including gain on sale of MF Properties of $1,775,527 in 2013)
 

 
166,887

 

 
2,099,906

Net income
 
3,658,083

 
4,106,006

 
9,704,809

 
12,600,083

Net (loss) income attributable to noncontrolling interest
 
(374
)
 
150,846

 
(477
)
 
323,497

Net income - America First Mulitfamily Investors, L.P.
 
$
3,658,457

 
$
3,955,160

 
$
9,705,286

 
$
12,276,586

 
 
 
 
 
 
 
 
 
Net income (loss) allocated to:
 
 
 
 
 
 
 
 
General Partner
 
$
247,564

 
$
508,033

 
$
989,619

 
$
1,019,784

Limited Partners - Unitholders
 
3,552,575

 
3,749,266

 
8,970,120

 
11,799,900

Unallocated loss of Consolidated Property VIEs
 
(141,682
)
 
(302,139
)
 
(254,453
)
 
(543,098
)
Noncontrolling interest
 
(374
)
 
150,846

 
(477
)
 
323,497

 
 
$
3,658,083

 
$
4,106,006

 
$
9,704,809

 
$
12,600,083

Unitholders' interest in net income per unit (basic and diluted):
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.05

 
$
0.09

 
$
0.15

 
$
0.23

Income from discontinued operations
 

 

 

 
0.05

Net income, basic and diluted, per unit
 
$
0.05

 
$
0.09

 
$
0.15

 
$
0.28

Distributions declared, per unit
 
$
0.125

 
$
0.125

 
$
0.25

 
$
0.25

Weighted average number of units outstanding, basic and diluted
 
60,252,928

 
42,772,928

 
58,595,469

 
42,772,928


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

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


 
 
For the Three Months Ended,
 
For the Six Months Ended,
 
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Net income
 
$
3,658,083

 
$
4,106,006

 
$
9,704,809

 
$
12,600,083

Unrealized gain (loss) on securities
 
15,715,046

 
(8,276,828
)
 
33,756,771

 
(5,476,209
)
Unrealized gain on bond purchase commitments
 
1,697,307

 

 
5,186,544

 

Comprehensive income (loss) - America First Multifamily Investors, L.P.
 
$
21,070,436

 
$
(4,170,822
)
 
$
48,648,124

 
$
7,123,874

 
 
 
 
 
 
 
 
 
Comprehensive (loss) income allocated to:
 
 
 
 
 
 
 
 
General Partner
 
$
421,688

 
$
425,265

 
$
1,379,052

 
$
965,022

Limited Partners - Unitholders
 
20,790,804

 
(4,444,794
)
 
47,524,002

 
6,378,453

Unallocated loss of Consolidated Property VIEs
 
(141,682
)
 
(302,139
)
 
(254,453
)
 
(543,098
)
Noncontrolling interest
 
(374
)
 
150,846

 
(477
)
 
323,497

Comprehensive income (loss) - America First Multifamily Investors, L.P.
 
$
21,070,436

 
$
(4,170,822
)
 
$
48,648,124

 
$
7,123,874


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



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AMERICA FIRST MULTIFAMILY INVESTORS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2014 and 2013
(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, 2014
$
16,671

 
51,052,928

 
$
223,573,312

 
$
(20,455,896
)
 
$
(11,322
)
 
$
203,122,765

 
$
(20,128,314
)
Sale of beneficial unit certificates


 
9,200,000

 
51,288,699

 
 
 
 
 
51,288,699

 
 
Redemption and sale of mortgage revenue bonds
(24,137
)
 
 
 
(2,389,576
)
 

 

 
(2,413,713
)
 
(2,413,713
)
Sale of MBS
2,599

 
 
 
257,350

 

 

 
259,949

 
259,949

Distributions paid or accrued
(1,051,166
)
 
 
 
(15,063,232
)
 

 

 
(16,114,398
)
 

Net income (loss)
989,619

 
 
 
8,970,120

 
(254,453
)
 
(477
)
 
9,704,809

 

Unrealized gain on securities
337,568

 
 
 
33,419,203

 

 

 
33,756,771

 
33,756,771

Unrealized gain on bond purchase commitment
51,865

 
 
 
5,134,679

 

 

 
5,186,544

 
5,186,544

Balance at June 30, 2014
$
323,019

 
60,252,928

 
$
305,190,555

 
$
(20,710,349
)
 
$
(11,799
)
 
$
284,791,426

 
$
16,661,237

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General Partner
 
# of Units
 
Beneficial Unit Certificate Holders
 
Unallocated Deficit of Consolidated VIEs
 
Non- controlling Interest
 
Total
 
Accumulated Other Comprehensive Income
Balance at January 1, 2013
$
(430,087
)
 
42,772,928

 
$
207,383,087

 
$
(25,035,808
)
 
$
2,053,739

 
$
183,970,931

 
$
7,161,381

Deconsolidation of Ohio Properties
14,064

 
 
 
1,392,303

 

 
(1,012,966
)
 
393,401

 
1,406,367

Redemption of mortgage revenue bond
(6,518
)
 
 
 
(645,331
)
 

 

 
(651,849
)
 
(651,849
)
Bond foreclosure
40,807

 
 
 
4,039,927

 

 

 
4,080,734

 
4,080,734

Distributions paid or accrued
(578,174
)
 
 
 
(10,693,232
)
 

 

 
(11,271,406
)
 

Net income (loss)
1,019,784

 
 
 
11,799,900

 
(543,098
)
 
323,497

 
12,600,083

 

Unrealized loss on securities
(54,762
)
 
 
 
(5,421,447
)
 

 

 
(5,476,209
)
 
(5,476,209
)
Balance at June 30, 2013
$
5,114

 
42,772,928

 
$
207,855,207

 
$
(25,578,906
)
 
$
1,364,270

 
$
183,645,685

 
$
6,520,424

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


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AMERICA FIRST MULTIFAMILY INVESTORS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
For Six Months Ended,
 
 
June 30, 2014
 
June 30, 2013
Cash flows from operating activities:
 
 
 
 
Net income
 
$
9,704,809

 
$
12,600,083

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
 
 
 
 
Depreciation and amortization expense
 
3,138,342

 
3,250,911

Provision for loss from receivables
 

 
241,698

Non-cash loss (gain) on derivatives
 
456,813

 
(136,246
)
Bond premium/discount amortization
 
(103,519
)
 
(166,811
)
Gain on mortgage revenue bonds - sale and redemption
 
(3,684,898
)
 

Gain on the sale of discontinued operations
 

 
(1,775,527
)
Contingent interest income
 

 
(6,497,160
)
Realized loss on taxable property loan
 

 
4,557,741

Changes in operating assets and liabilities, net of effect of acquisitions
 
 
 
 
Increase in interest receivable
 
(490,040
)
 
(638,417
)
Increase (decrease) in other assets
 
(463,950
)
 
(2,942,459
)
Decrease in accounts payable and accrued expenses
 
(2,082,745
)
 
(2,585,429
)
Net cash provided by operating activities
 
6,474,812

 
5,908,384

Cash flows from investing activities:
 
 
 
 
 Capital expenditures
 
(13,219,624
)
 
(4,723,977
)
 Acquisition of mortgage revenue bonds
 
(36,385,127
)
 
(62,210,000
)
Acqusition of interest rate derivative
 
(391,500
)
 

 Proceeds from mortgage revenue bonds and MBS - sale and redemptions
 
35,483,230

 
21,935,343

 Increase (decrease) in cash collateral deposits
 
1,999,973

 
(2,321,608
)
 Principal payments received on mortgage revenue bonds
 
2,369,132

 
1,402,947

 (Increase) decrease in restricted cash
 
(83,717
)
 
26,811

 Proceeds from the sale of discontinued operations
 

 
16,195,000

 Investment in bonds due to the sale recognition of discontinued operations
 

 
(18,313,000
)
Cash received from taxable property loans receivable - Ohio Properties
 

 
4,064,089

Change in restricted cash - Greens Property sale
 

 
2,546,362

 Acquisition of mortgage-backed securities
 

 
(12,629,888
)
 Acquisition of taxable bonds
 

 
(1,635,000
)
Net cash used in investing activities
 
(10,227,633
)
 
(55,662,921
)
Cash flows from financing activities:
 
 
 
 
Distributions paid
 
(14,741,101
)
 
(10,967,531
)
Proceeds from the sale of beneficial unit certificates
 
54,740,000

 

Payment of offering costs related to the sale of beneficial unit certificates
 
(3,451,301
)
 

Proceeds from debt financing
 
17,250,000

 
42,530,000

Principal borrowings on mortgages payable
 
14,652,293

 
7,500,000

Principal payments on debt financing
 
(30,056,000
)
 
1,151,000

Principal payments on mortgages payable
 
(2,191,887
)
 
(133,044
)
Net change in line of credit
 

 
6,000,000

Increase (decrease) in liabilities related to restricted cash
 
83,717

 
(26,811
)
Debt financing costs
 
(584,431
)
 
(334,308
)
Net cash provided by financing activities
 
35,701,290

 
43,417,306

Net increase (decrease) in cash and cash equivalents
 
31,948,469

 
(6,337,231
)
Cash and cash equivalents at beginning of period, including cash and cash equivalents of discontinued operations of $0 and $158,727, respectively
 
11,318,015

 
30,331,500

Cash and cash equivalents at end of period, including cash and cash equivalents of discontinued operations of $0 and $8,544, respectively
 
$
43,266,484

 
$
23,994,269


                                      




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AMERICA FIRST MULTIFAMILY INVESTORS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)

 
 
For Six Months Ended,
 
 
June 30, 2014
 
June 30, 2013
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during the period for interest
 
$
4,015,785

 
$
2,913,874

Distributions declared but not paid
 
7,819,373

 
5,870,784

Supplemental disclosure of non cash activities:
 
 
 
 
Capital expenditures financed through accounts and notes payable
 
3,100,135

 
1,460,185

Commitment obligation for Live 929 Apartments
 
40,270,000

 

Conversion of Woodland Park mortgage revenue bond to MF Property
 

 
15,662,000

Deconsolidation of the discontinued operations - noncontrolling interest
 

 
1,012,966

Recognition of taxable property loans receivable - discontinued operations
 

 
1,236,236


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


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)

1.  Basis of Presentation

General
 
America First Multifamily 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 mortgage revenue bonds which have been issued to provide construction and/or permanent financing of multifamily residential properties.  The Partnership expects and believes the interest earned on these mortgage revenue 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 securities that may or may not be secured by real estate and may make taxable property loans secured by multifamily properties which are financed by 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 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 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 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 “Company” refers to the consolidated financial statements reported in this Form 10-Q which include the assets, liabilities, and results of operations of the Partnership, its Consolidated Subsidiaries (defined below) and two entities in which the Partnership does not hold an ownership interest but which own multifamily apartment properties financed with 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 (the “Consolidated VIEs”). On June 30, 2014, the Consolidated Subsidiaries of the Partnership consist of:

ATAX TEBS I, LLC, a special purpose entity owned and controlled by the Partnership, created to hold mortgage revenue bonds in order to facilitate the Tax Exempt Bond Securitization (“TEBS”) Financing with Freddie Mac (Note 10).
Nine multifamily apartments (“MF Properties”) which are either wholly or majority owned by subsidiaries of the Partnership.

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 mortgage revenue bonds on the properties owned by Consolidated VIEs as debt, the nature of the interest payments, which it believes to be tax-exempt, received on the mortgage revenue 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.

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.


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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, 2013. These condensed consolidated financial statements and notes have been prepared consistently with the 2013 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, 2014, 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.

Subsequent to the issuance of the Company’s financial statements on Form 10-K for the period ended December 31, 2013, certain amounts included in the Consolidated Balance Sheet have been restated to correct an error related to the presentation of interest receivable on taxable loans.  Such correction recorded the loan loss reserve related to interest receivable against the interest receivable line of the consolidated balance sheet rather than against the other assets line, which includes the principle amount of taxable loans.   This correction resulted in a decrease in interest receivable and an increase in other assets of approximately $6.2 million.  This correction did not have an impact on total assets as reported in the Consolidated Balance Sheets and did not have an impact on the Consolidated Statements of Operations for all periods presented.

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 7) 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’s 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 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.

3.  Variable Interest Entities

The Partnership invests in mortgage revenue bonds which have been issued to provide construction and/or permanent financing of multifamily residential apartments.  The Partnership owns 100% of these mortgage revenue bonds and each bond is secured by a first mortgage on the property.  In certain cases, the Partnership has also made taxable property loans to the property owners which are secured by second mortgages on these properties.  Although each multifamily property financed with 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.   

At June 30, 2014 and December 31, 2013, the Partnership determined that four of the entities financed by mortgage revenue bonds owned by the Partnership were held by VIEs.  These VIEs were Ashley Square, Bent Tree, Cross Creek, and Fairmont Oaks. The Partnership then determined that it is the primary beneficiary of two of these VIEs; Bent Tree and Fairmont Oaks and has continued to consolidate these entities. As of June 30, 2013, a fifth entity, Lake Forest, which is also financed by a mortgage revenue bond owned by the Partnership, was held by a VIE. Effective December 1, 2013, the ownership of Lake Forest became a not-for-profit entity and Lake Forest ceased to be reported as a Consolidated VIE.


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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.

Consolidated VIEs

In determining the primary beneficiary of these VIEs, the Partnership considers 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 considers the related party relationship of the entities involved in the VIEs.  At June 30, 2014 and December 31, 2013, the Partnership determined it is the primary beneficiary of the Bent Tree and Fairmont Oaks VIEs. The capital structure of Bent Tree and Fairmont Oaks VIEs consists of senior debt, subordinated debt, and equity capital. The senior debt is in the form of a 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 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 Capital Group, LLC (“Burlington”).

Non-Consolidated VIEs

The Company did not consolidate two VIE entities, Ashley Square and Cross Creek as of June 30, 2014 based on its determination of the primary beneficiary of these two VIE entities. 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 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 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.









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Table of Contents

The following table presents information regarding the carrying value and classification of the assets held by the Partnership as of June 30, 2014 which constitute a variable interest in Ashley Square and Cross Creek.
 
Balance Sheet Classification
 
 Carrying Value
 
 Maximum Exposure to Loss
Ashley Square Apartments
 
 
 
 
 
Mortgage Revenue Bond
Bond Investment
 
$
5,496,609

 
$
5,188,000

Taxable Property Loan
Other Asset
 
1,482,000

 
7,292,126

 
 
 
$
6,978,609

 
$
12,480,126

Cross Creek Apartments
 
 
 
 
 
Mortgage Revenue Bond
Bond Investment
 
$
8,133,565

 
$
6,059,256

Taxable Property Loans
Other Asset
 
3,515,615

 
3,515,615

 
 
 
$
11,649,180

 
$
9,574,871


The mortgage revenue bonds are classified on the balance sheet as available for sale investments and are carried at fair value while taxable 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 mortgage revenue bonds and Note 8 for additional information regarding the taxable property loans.  The maximum exposure to loss for the mortgage revenue bonds is equal to the unpaid principal balance as of June 30, 2014.  The difference between the mortgage revenue bond’s carrying value and the maximum exposure to loss is a function of the fair value of the bond.  The difference between the taxable property loan’s carrying value and the maximum exposure is the value of loan loss reserves that have been previously recorded against the outstanding taxable property loan balances.


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Table of Contents

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, 2014 and December 31, 2013:
 
 
 
Partnership as of June 30, 2014
 
 Consolidated VIEs as of June 30, 2014
 
 Consolidation -Elimination as of June 30, 2014
 
 Total as of June 30, 2014
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
43,206,550

 
$
59,934

 
$

 
$
43,266,484

Restricted cash
 
4,553,239

 
566,382

 

 
5,119,621

Interest receivable
 
4,757,988

 

 
(998,347
)
 
3,759,641

Mortgage revenue bonds held in trust, at fair value
 
247,995,145

 

 
(15,688,811
)
 
232,306,334

Mortgage revenue bonds, at fair value
 
124,006,732

 

 

 
124,006,732

Public housing capital fund trusts, at fair value
 
64,997,717

 

 

 
64,997,717

Mortgage-backed securities, at fair value
 
37,878,708

 

 

 
37,878,708

Real estate assets:
 
 
 
 
 
 
 
 
Land and improvements
 
9,245,592

 
1,836,400

 

 
11,081,992

Buildings and improvements
 
106,420,002

 
21,038,735

 

 
127,458,737

Real estate assets before accumulated depreciation
 
115,665,594

 
22,875,135

 

 
138,540,729

Accumulated depreciation
 
(11,404,346
)
 
(10,180,447
)
 

 
(21,584,793
)
Net real estate assets
 
104,261,248

 
12,694,688

 

 
116,955,936

Other assets
 
35,288,634

 
355,921

 
(10,590,396
)
 
25,054,159

Total Assets
 
$
666,945,961

 
$
13,676,925

 
$
(27,277,554
)
 
$
653,345,332

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Accounts payable, accrued expenses and other liabilities
 
$
11,305,071

 
$
21,290,825

 
$
(20,877,087
)
 
$
11,718,809

Distribution payable
 
7,819,372

 

 

 
7,819,372

Due upon settlement of Live 929 Apartments
 
35,000,000

 

 

 
35,000,000

Debt financing
 
244,468,000

 

 

 
244,468,000

Mortgages payable
 
69,547,725

 
14,819,000

 
(14,819,000
)
 
69,547,725

Total Liabilities
 
368,140,168

 
36,109,825

 
(35,696,087
)
 
368,553,906

Partners' Capital
 
 
 
 
 
 
 
 
General Partner
 
323,019

 

 

 
323,019

Beneficial Unit Certificate holders
 
298,494,573

 

 
6,695,982

 
305,190,555

Unallocated deficit of Consolidated VIEs
 

 
(22,432,900
)
 
1,722,551

 
(20,710,349
)
Total Partners' Capital
 
298,817,592

 
(22,432,900
)
 
8,418,533

 
284,803,225

Noncontrolling interest
 
(11,799
)
 

 

 
(11,799
)
Total Capital
 
298,805,793

 
(22,432,900
)
 
8,418,533

 
284,791,426

Total Liabilities and Partners' Capital
 
$
666,945,961

 
$
13,676,925

 
$
(27,277,554
)
 
$
653,345,332

 


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Table of Contents

 
 
 Partnership as of December 31, 2013
 
 Consolidated VIEs as of December 31, 2013
 
 Consolidation -Elimination as of December 31, 2013
 
 Total as of December 31, 2013
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
11,292,039

 
$
25,976

 
$

 
$
11,318,015

Restricted cash
 
6,344,666

 
500,877

 

 
6,845,543

Interest receivable
 
5,281,398

 

 
(1,939,360
)
 
3,342,038

Mortgage revenue bonds held in trust, at fair value
 
230,885,864

 

 
(14,514,063
)
 
216,371,801

Mortgage revenue bonds, at fair value
 
68,946,370

 

 

 
68,946,370

Public housing capital fund trusts, at fair value
 
62,056,379

 

 

 
62,056,379

Mortgage-backed securities, at fair value
 
37,845,661

 

 

 
37,845,661

Real estate assets:
 
 
 
 
 
 
 
 
Land and improvements
 
9,245,592

 
1,836,400

 

 
11,081,992

Buildings and improvements
 
90,253,256

 
20,942,439

 

 
111,195,695

Real estate assets before accumulated depreciation
 
99,498,848

 
22,778,839

 

 
122,277,687

Accumulated depreciation
 
(9,386,811
)
 
(9,741,942
)
 

 
(19,128,753
)
Net real estate assets
 
90,112,037

 
13,036,897

 

 
103,148,934

Other assets
 
33,488,744

 
456,087

 
(9,586,540
)
 
24,358,291

Total Assets
 
$
546,253,158

 
$
14,019,837

 
$
(26,039,963
)
 
$
534,233,032

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Accounts payable, accrued expenses and other liabilities
 
$
4,963,653

 
$
20,634,613

 
$
(20,147,572
)
 
$
5,450,694

Distribution payable
 
6,446,076

 

 

 
6,446,076

Debt financing
 
257,274,000

 

 

 
257,274,000

Mortgages payable
 
57,087,320

 
14,897,000

 
(14,897,000
)
 
57,087,320

Bond purchase commitment at fair value
 
4,852,177
 

 

 
4,852,177
Total Liabilities
 
330,623,226

 
35,531,613

 
(35,044,572
)
 
331,110,267

Partners' Capital
 
 
 
 
 
 
 
 
General Partner
 
16,671

 

 

 
16,671

Beneficial Unit Certificate holders
 
215,624,583

 

 
7,948,729

 
223,573,312

Unallocated deficit of Consolidated VIEs
 

 
(21,511,776
)
 
1,055,880

 
(20,455,896
)
Total Partners' Capital
 
215,641,254

 
(21,511,776
)
 
9,004,609

 
203,134,087

Noncontrolling interest
 
(11,322
)
 

 

 
(11,322
)
Total Capital
 
215,629,932

 
(21,511,776
)
 
9,004,609

 
203,122,765

Total Liabilities and Partners' Capital
 
$
546,253,158

 
$
14,019,837

 
$
(26,039,963
)
 
$
534,233,032





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Table of Contents

Condensed Consolidating Statements of Operations for the six months ended June 30, 2014 and 2013:

 
 Partnership For the Three Months Ended June 30, 2014
 
 Consolidated VIEs For the Three Months Ended June 30, 2014
 
 Consolidation -Elimination For the Three Months Ended June 30, 2014
 
 Total For the Three Months Ended June 30, 2014
Revenues:
 
 
 
 
 
 
 
Property revenues
$
3,134,220

 
$
785,552

 
$

 
$
3,919,772

Investment income
6,474,140

 

 
(232,665
)
 
6,241,475

Gain on mortgage revenue bond sale
849,655

 

 

 
849,655

Other interest income
242,077

 

 

 
242,077

Total revenues
10,700,092

 
785,552

 
(232,665
)
 
11,252,979

Expenses:
 
 
 
 
 
 
 
Real estate operating (exclusive of items shown below)
1,807,044

 
463,126

 

 
2,270,170

Depreciation and amortization
1,293,553

 
238,145

 
(6,702
)
 
1,524,996

Interest
2,400,851

 
561,308

 
(561,308
)
 
2,400,851

General and administrative
1,398,879

 

 

 
1,398,879

Total expenses
6,900,327

 
1,262,579

 
(568,010
)
 
7,594,896

Net income (loss)
3,799,765

 
(477,027
)
 
335,345

 
3,658,083

Net loss attributable to noncontrolling interest
(374
)
 

 

 
(374
)
Net income (loss) - America First Multifamily Investors, L. P.
$
3,800,139

 
$
(477,027
)
 
$
335,345

 
$
3,658,457


 
 Partnership For the Three Months Ended June 30, 2013
 
 Consolidated VIEs For the Three Months Ended June 30, 2013
 
 Consolidation -Elimination For the Three Months Ended June 30, 2013
 
 Total For the Three Months Ended June 30, 2013
Revenues:
 
 
 
 
 
 
 
Property revenues
$
2,731,740

 
$
1,220,306

 
$

 
$
3,952,046

Investment income
4,971,873

 

 
(376,676
)
 
4,595,197

Contingent interest income
6,497,160

 

 

 
6,497,160

Other interest income
96,180

 

 

 
96,180

Total revenues
14,296,953

 
1,220,306

 
(376,676
)
 
15,140,583

Expenses:
 
 
 
 
 
 
 
Real estate operating (exclusive of items shown below)
1,515,316

 
800,009

 

 
2,315,325

Realized loss on taxable property loan
4,557,741

 

 

 
4,557,741

Provision for loan loss
96,000

 

 

 
96,000

Provision for loss on receivables
3,523

 

 

 
3,523

Depreciation and amortization
1,315,322

 
356,550

 
(10,790
)
 
1,661,082

Interest
1,426,349

 
825,466

 
(825,466
)
 
1,426,349

General and administrative
1,141,444

 

 

 
1,141,444

Total expenses
10,055,695

 
1,982,025

 
(836,256
)
 
11,201,464

Income (loss) from continuing operations
4,241,258

 
(761,719
)
 
459,580

 
3,939,119

Income (loss) from discontinued operations
166,887

 

 

 
166,887

Net income (loss)
4,408,145

 
(761,719
)
 
459,580

 
4,106,006

Net income attributable to noncontrolling interest
150,846

 

 

 
150,846

Net income (loss) - America First Multifamily Investors, L. P.
$
4,257,299

 
$
(761,719
)
 
$
459,580

 
$
3,955,160


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Table of Contents

 
 
 
 
 
 
 
 
 
 Partnership For the Six Months Ended June 30, 2014
 
 Consolidated VIEs For the Six Months Ended June 30, 2014
 
 Consolidation -Elimination For the Six Months Ended June 30, 2014
 
 Total For the Six Months Ended June 30, 2014
Revenues:
 
 
 
 
 
 
 
Property revenues
$
6,284,564

 
$
1,586,424

 
$

 
$
7,870,988

Mortgage revenue bond investment income
12,912,975

 

 
(465,942
)
 
12,447,033

Gain on mortgage revenue bonds - sale and redemption
3,684,898

 

 

 
3,684,898

Other interest income
450,900

 

 

 
450,900

Total revenues
23,333,337

 
1,586,424

 
(465,942
)
 
24,453,819

Expenses:
 
 
 
 
 
 
 
Real estate operating (exclusive of items shown below)
3,457,691

 
912,772

 

 
4,370,463

Depreciation and amortization
2,676,179

 
475,585

 
(13,422
)
 
3,138,342

Interest
4,570,400

 
1,119,192

 
(1,119,192
)
 
4,570,400

   General and administrative
2,669,805

 

 

 
2,669,805

Total expenses
13,374,075

 
2,507,549

 
(1,132,614
)
 
14,749,010

Net income (loss)
9,959,262

 
(921,125
)
 
666,672

 
9,704,809

  Net income attributable to noncontrolling interest
(477
)
 

 

 
(477
)
Net income (loss) - America First Multifamily Investors, L. P.
$
9,959,739

 
$
(921,125
)
 
$
666,672

 
$
9,705,286

 
 
 
 
 
 
 
 
 
 Partnership For the Six Months Ended June 30, 2013
 
 Consolidated VIEs For the Six Months Ended June 30, 2013
 
 Consolidation -Elimination For the Six Months Ended June 30, 2013
 
 Total For the Six Months Ended June 30, 2013
Revenues:
 
 
 
 
 
 
 
Property revenues
$
5,251,478

 
$
2,433,375

 
$

 
$
7,684,853

Investment income
13,066,199

 

 
(754,385
)
 
12,311,814

Contingent tax-exempt interest income
6,497,160

 

 

 
6,497,160

Other interest income
1,341,165

 

 

 
1,341,165

Other income
250,000

 

 

 
250,000

Total revenues
26,406,002

 
2,433,375

 
(754,385
)
 
28,084,992

Expenses:
 
 
 
 
 
 
 
Real estate operating (exclusive of items shown below)
2,838,950

 
1,533,411

 

 
4,372,361

Realized loss on taxable property loan
4,557,741

 

 

 
4,557,741

Provision for loan loss
96,000

 

 

 
96,000

Provision for loss on receivables
241,698

 

 

 
241,698

Depreciation and amortization
2,553,781

 
710,286

 
(21,609
)
 
3,242,458

Interest
2,962,622

 
1,644,629

 
(1,644,629
)
 
2,962,622

General and administrative
2,111,935

 

 

 
2,111,935

Total expenses
15,362,727

 
3,888,326

 
(1,666,238
)
 
17,584,815

Income (loss) from continuing operations
11,043,275

 
(1,454,951
)
 
911,853

 
10,500,177

Income from discontinued operations (including gain on sale of MF Properties of $1,775.527 in first quarter 2013)
2,099,906

 

 

 
2,099,906

Net income (loss)
13,143,181

 
(1,454,951
)
 
911,853

 
12,600,083

 Net income attributable to noncontrolling interest
323,497

 

 

 
323,497

Net income (loss) - America First Multifamily Investors, L. P.
$
12,819,684

 
$
(1,454,951
)
 
$
911,853

 
$
12,276,586



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Table of Contents

4.  Investments in Mortgage Revenue Bonds

The 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 mortgage revenue bonds issued with respect to properties owned by Consolidated VIEs at June 30, 2014 and December 31, 2013. Mortgage revenue bonds are either held directly by the Company or are held in trusts created in connection with debt financing transactions (Note 10). The Company had the following investments in mortgage revenue bonds as of dates shown:
 
 
June 30, 2014
Description of Mortgage Revenue Bonds
 
Cost adjusted for pay-downs
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
Arbors at Hickory Ridge (2)
 
$
11,573,571

 
$
1,198,224

 
$

 
$
12,771,795

Ashley Square (1)
 
5,188,000

 
308,609

 

 
5,496,609

Avistar at Chase Hill A Bond (2)
 
10,000,000

 
72,700

 

 
10,072,700

Avistar at the Crest A Bond (2)
 
9,700,000

 
290,030

 

 
9,990,030

Avistar at the Oaks (2)
 
8,354,000

 

 
(3,526
)
 
8,350,474

Avistar in 09 (2)
 
7,192,000

 
148,206

 

 
7,340,206

Avistar on the Boulevard A Bond (2)
 
16,525,000

 
881,774

 

 
17,406,774

Avistar on the Hills (2)
 
5,389,000

 
246,008

 

 
5,635,008

Bella Vista (1)
 
6,490,000

 
183,537

 

 
6,673,537

Bridle Ridge (1)
 
7,685,000

 
158,926

 

 
7,843,926

Brookstone (1)
 
7,466,934

 
952,394

 

 
8,419,328

Cross Creek (1)
 
6,059,256

 
2,074,309

 

 
8,133,565

Decatur-Angle (2)
 
23,000,000

 

 
(352,820
)
 
22,647,180

Greens Property A Bonds (2)
 
8,401,470

 
538,100

 

 
8,939,570

Lake Forest (1)
 
8,943,000

 
607,386

 

 
9,550,386

Ohio Properties A Bonds (1)
 
14,455,000

 
1,294,812

 

 
15,749,812

Runnymede (1)
 
10,485,000

 
667,999

 

 
11,152,999

Southpark (1)
 
11,918,045

 
2,764,111

 

 
14,682,156

The Suites on Paseo (2)
 
35,750,000

 
1,292,720

 

 
37,042,720

Woodlynn Village (1)
 
4,408,000

 

 
(441
)
 
4,407,559

Mortgage revenue bonds held in trust
 
$
218,983,276

 
$
13,679,845

 
$
(356,787
)
 
$
232,306,334

 
 
June 30, 2014
Description of Mortgage Revenue Bonds
 
Cost adjusted for pay-downs
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
Avistar at Chase Hill B Bond
 
$
965,000

 
$

 
$
(5,346
)
 
$
959,654

Avistar at the Crest B Bond
 
759,000

 
46,663

 

 
805,663

Avistar on the Boulevard B Bond
 
451,000

 
35,855

 

 
486,855

Copper Gate Apartments
 
5,220,000

 
182,961

 

 
5,402,961

Greens Property B Bond
 
947,277

 
309,453

 

 
1,256,730

Harden Ranch
 
9,300,000

 
152,953

 

 
9,452,953

Live 929 Apartments
 
40,270,000

 

 

 
40,270,000

Ohio Properties B Bonds
 
3,578,640

 
425,912

 

 
4,004,552

Renaissance
 
12,060,127

 
445,694

 

 
12,505,821

The Palms at Premier Park Apartments
 
20,152,000

 
1,843,908

 

 
21,995,908

Tyler Park Apartments
 
8,100,000

 

 
(38,353
)
 
8,061,647

Vantage at Harlingen
 
6,692,000

 
337,478

 

 
7,029,478

Vantage at Judson
 
6,049,000

 
304,991

 

 
6,353,991

Westside Village Market
 
5,400,000

 
20,519

 

 
5,420,519

Mortgage revenue bonds
 
$
119,944,044

 
$
4,106,387

 
$
(43,699
)
 
$
124,006,732

(1) Bonds owned by ATAX TEBS I, LLC, Note 10
(2) Bond held by Deutsche Bank in a secured financing transaction, Note 10


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Table of Contents

 
 
December 31, 2013
Description of Mortgage Revenue Bonds
 
Cost adjusted for pay-downs
 
Unrealized Gains
 
Unrealized Loss
 
Estimated Fair Value
Arbors at Hickory Ridge (2)
 
$
11,576,209

 
$
225,690

 
$

 
$
11,801,899

Ashley Square (1)
 
5,212,000

 

 

 
5,212,000

Autumn Pines (2)
 
12,147,873

 

 
(195,355
)
 
11,952,518

Avistar at Chase Hill A Bond (2)
 
8,960,000

 

 
(850,752
)
 
8,109,248

Avistar at the Crest A Bond (2)
 
8,759,000

 

 
(1,298,785
)
 
7,460,215

Avistar at the Oaks (2)
 
8,354,000

 

 
(1,103,115
)
 
7,250,885

Avistar in 09 (2)
 
7,192,000

 

 
(588,254
)
 
6,603,746

Avistar on the Boulevard A Bond (2)
 
13,760,000

 

 
(1,306,512
)
 
12,453,488

Avistar on the Hills (2)
 
5,389,000

 

 
(417,724
)
 
4,971,276

Bella Vista (1)
 
6,545,000

 

 
(473,989
)
 
6,071,011

Bridle Ridge (1)
 
7,715,000

 

 
(452,870
)
 
7,262,130

Brookstone (1)
 
7,463,641

 
841,751

 

 
8,305,392

Cross Creek (1)
 
6,042,297

 
1,480,266

 

 
7,522,563

Greens Property A Bond (2)
 
8,437,501

 

 
(577,426
)
 
7,860,075

Lake Forest (1)
 
8,997,000

 

 
(289,461
)
 
8,707,539

Lost Creek (1)
 
15,883,084

 
1,743,088

 

 
17,626,172

Ohio Properties A Bonds (1)
 
14,498,000

 

 

 
14,498,000

Runnymede (1)
 
10,525,000

 

 
(551,510
)
 
9,973,490

Southpark (1)
 
11,878,885

 
1,018,750

 

 
12,897,635

The Suites on Paseo (2)
 
35,750,000

 

 
(2,502
)
 
35,747,498

Woodlynn Village (1)
 
4,426,000

 

 
(340,979
)
 
4,085,021

Mortgage revenue bonds held in trust
 
$
219,511,490

 
$
5,309,545

 
$
(8,449,234
)
 
$
216,371,801

 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
Description of Mortgage Revenue Bonds
 
Cost adjusted for pay-downs
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
Avistar at Chase Hill B Bond
 
$
2,005,000

 
$

 
$
(159,117
)
 
$
1,845,883

Avistar at the Crest B Bond
 
1,700,000

 

 
(134,912
)
 
1,565,088

Avistar on the Boulevard B Bond
 
3,216,000

 

 
(255,222
)
 
2,960,778

Copper Gate Apartments
 
5,220,000

 

 
(252,648
)
 
4,967,352

Greens Property B Bond
 
948,291

 
189,589

 

 
1,137,880

Ohio Properties B Bonds
 
3,583,590

 
150,864

 

 
3,734,454

Renaissance
 
7,975,000

 

 
(16,964
)
 
7,958,036

The Palms at Premier Park Apartments
 
20,152,000

 

 
(283,942
)
 
19,868,058

Tyler Park Apartments
 
8,100,000

 

 
(526,601
)
 
7,573,399

Vantage at Harlingen
 
6,692,000

 

 
(211,735
)
 
6,480,265

Vantage at Judson
 
6,049,000

 

 
(190,423
)
 
5,858,577

Westside Village
 
5,400,000

 

 
(403,400
)
 
4,996,600

Mortgage revenue bonds
 
$
71,040,881

 
$
340,453

 
$
(2,434,964
)
 
$
68,946,370

(1) Mortgage revenue bonds owned by ATAX TEBS I, LLC, Note 10
(2) Mortgage revenue bonds held by Deutsche Bank in a secured financing transaction, Note 10

In June 2014, the Partnership committed to the purchase of an approximate $40.3 million par value mortgage revenue bond secured by the Live 929 Apartments, with a 5.78% annual stated interest rate. The project is a 572-bed existing student housing project on the campus of The Johns Hopkins University School of Medicine in Baltimore, Maryland. This investment will close upon the execution of a $35.0 million tender option bond (“TOB”) Trust under the existing TOB structure (Note 10). At June 30, 2014 the $35.0 million obligation is reported on the balance sheet as Due upon settlement of Live 929 Apartments. This amount will be converted into a TOB financing upon settlement. The remaining cash to close the commitment, approximately $5.3 million, will be paid when the TOB financing is executed and is currently reported in accounts payable and accrued expenses on the balance sheet.


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Table of Contents

In April 2014, the mortgage revenue bond secured by Autumn Pines was sold for the outstanding principal and accrued base interest. The Company received approximately $13.1 million for the Autumn Pines mortgage revenue bond and recognized a gain of approximately $873,000 after payment of all TOB related financing fees. This gain is Tier 2 income with approximately $650,000 allocated to the unitholders. This mortgage revenue bond had been acquired at a discount on June 1, 2011. The Company’s $9.8 million TOB financing facility which was the securitization of this mortgage revenue bond was collapsed and paid off in full in connection with this sale.

In February 2014, the Partnership acquired at par the senior $7.0 million par value and a subordinate $2.3 million par value mortgage revenue bond secured by Harden Ranch, a 100 unit multifamily apartment complex in Salinas, California. The senior mortgage revenue bond carries an annual interest rate of 5.75% and matures on March 1, 2030. The subordinate mortgage revenue bond carries an annual interest rate of 5.50% for the first year and 8.0% for the second year and matures on March 1, 2016.

In February 2014, the Company acquired at par the senior $23.0 million par value mortgage revenue bond secured by Decatur-Angle Apartments, a 302 unit multifamily apartment complex under construction in Fort Worth, Texas. The mortgage revenue bond carries an annual interest rate of 5.75% and matures on January 1, 2054.

In February 2014, the mortgage revenue bond secured by Lost Creek was redeemed for an amount greater than the outstanding principal and accrued base interest. This $18.5 million par value mortgage revenue bond had been acquired for approximately $15.9 million in May 2010. The Company received approximately $18.7 million for the Lost Creek mortgage revenue bond resulting in an approximate $2.8 million realized gain. This gain was Tier 2 income with 25% allocated to the General Partner.

In December 2013, the Partnership acquired seven mortgage revenue bonds. They are as follows:
The Partnership purchased an approximate $5.2 million par value Series A mortgage revenue bond with a stated interest rate of 6.25% per annum secured by Copper Gate Apartments, a 128 unit multifamily complex in Lafayette, Indiana, maturing on December 1, 2029.
The Partnership purchased an approximate $6.1 million par value senior and an approximate $2.0 million par value subordinate mortgage revenue bonds with stated interest rates of 5.75% and 5.5% per annum, respectively. These mortgage revenue bonds are secured by Tyler Park Townhomes, an 88 unit multifamily complex in Greenfield, California. The senior mortgage revenue bond matures on January 1, 2030 and the subordinate mortgage revenue bond matures on January 1, 2016.
The Partnership purchased an approximate $4.0 million par value senior and an approximate $1.4 million par value subordinate mortgage revenue bonds with stated interest rates of 5.75% and 5.5% per annum, respectively. These mortgage revenue bonds are secured by Westside Village, an 81 unit multifamily complex in Shafter, California. The senior mortgage revenue bond matures on January 1, 2030 and the subordinate mortgage revenue bond matures on January 1, 2016.
The Partnership purchased an approximate $20.2 million par value Series A mortgage revenue bond with a stated interest rate of 6.25% per annum secured by The Palms at Premier Park Apartments, a 240 unit multifamily complex in Columbia, South Carolina. This mortgage revenue bond matures on January 1, 2050.
The Partnership purchased an approximate $35.8 million par value Series A mortgage revenue bond with a stated interest rate of 6.25% per annum secured by The Suites on Paseo, a 384 bed student housing project in San Diego, California. This mortgage revenue bond matures on December 1, 2048.

Effective December 1, 2013, the ownership of Lake Forest became a not-for-profit entity, a reconsideration event, and Lake Forest ceased to be reported as a Consolidated VIE. As such, the Partnership is reporting the estimated fair value of the Lake Forest mortgage revenue bond as an investment asset for the first time in 2013. 

In August 2013, the Partnership acquired a mortgage revenue bond secured by the Vantage at Harlingen Apartments, a 288 unit multifamily apartment complex located in Harlingen, Texas which is under construction. The Series C bond was purchased for approximately $6.7 million par value, carries a base interest rate of 9.0% per annum, and matures on August 1, 2053. The Partnership also acquired a $1.3 million subordinate taxable bond which is recorded as an Other Asset. The Vantage at Harlingen Apartments has a construction loan with an unrelated bank and the Partnership’s mortgage revenue bonds are second lien borrowings to that construction loan.


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Table of Contents

Under the terms of a Forward Delivery Bond Purchase Agreement (“Bond Purchase Commitment”), the Partnership has agreed to purchase a new mortgage revenue bond between $18,000,000 and $24,692,000 (“Harlingen Series B Bond”) secured by the Vantage at Harlingen apartments which will be delivered by the mortgage revenue bond issuer once the property meets specific obligations and occupancy rates. The final amount of the Series B Bond will depend on the appraisal of the stabilized property. The Harlingen Series B Bond will have a stated annual interest rate of 6.0% per annum and bond proceeds must be used to pay off the construction loan to the bank and all or a portion of the $6.7 million subordinate Series C mortgage revenue bond. The Partnership accounts for the Bond Purchase Commitment as an available-for-sale security and, as such, records the change in the estimated fair value of the Bond Purchase Commitment as an asset or liability with changes in such valuation recorded in other comprehensive income.  As of June 30, 2014, the Partnership estimated the value of this Bond Purchase Commitment and recorded in other assets an asset of approximately $135,000.

In July 2013, the limited partner property owner contributed an approximate additional $800,000 of capital into the Greens Property which allowed the Company to recognize a sale of the discontinued operations (Note 9). As such, the Partnership reported the approximate $10.2 million and $9.1 million fair value of the mortgage revenue bonds related to the Greens Property as assets as of June 30, 2014 and December 31, 2013, respectively.

In June 2013, the Partnership redeemed its interest in the Iona Lakes mortgage revenue bond for approximately $21.9 million. This redemption resulted in the realization of approximately $6.5 million in contingent interest income and approximately $4.6 million realized loss on a taxable property loan. The trust indenture for this bond had a waterfall feature which stipulated that all unpaid contingent interest must be paid prior to making payment on any taxable loan between the owner of the bond and the property.

The Partnership, as sole bondholder, previously directed the bond trustee to file a foreclosure action on the Woodland Park mortgage revenue bond. On February 28, 2013, the court granted Summary Judgment in the bond trustee’s favor confirming that the mortgage revenue bond is senior to mechanic’s liens filed on the property. Woodland Park became an MF Property upon title conveyance which occurred on May 29, 2013 (Note 7). The Partnership requested the mortgage revenue bond issuer to remove the Land Use Restriction Agreement (“LURA”) on the property and the units have been converted to 100% market-rate rents. The Partnership may convert the property back to a rent restricted property, seek to place new financing on the property, and acquire the mortgage revenue bonds.

In June 2013, the Partnership acquired six mortgage revenue bonds secured by three properties located in San Antonio, Texas. On June 30, 2014 the Company finalized the restructuring of these six mortgage revenue bonds moving approximately $5.5 million in Series B mortgage revenue bonds to Series A mortgage revenue bonds. The par bond values reported on June 30, 2014 are as follows: approximately $7.8 million par value Series A and approximately $0.6 million par value Series B mortgage revenue bonds secured by the Avistar at the Oaks Apartments, a 156 unit multifamily apartment complex; approximately $5.4 million Series A mortgage revenue bonds secured by the Avistar on the Hills Apartments, a 129 unit multifamily apartment complex; and approximately $6.7 million Series A and approximately $0.5 million Series B mortgage revenue bonds secured by Avistar in 09 Apartments, a 133 unit multifamily apartment complex. The three Series A mortgage revenue bonds each carry an annual interest rate of 6.0% per annum and mature on August 1, 2050. The three Series B mortgage revenue bonds each carry an annual base interest rate of 9.0% per annum and mature on September 1, 2050. The Partnership also acquired approximately $831,000 of taxable mortgage revenue bonds which also carry a base interest rate of 9.0% per annum and mature on September 1, 2050. In connection with the mortgage revenue bond restructuring the Company loaned these entities approximately $526,000 to cover the costs of restructuring the mortgage revenue bonds (Note 8). The Company has determined that the entity which owns the three properties is an unrelated not-for-profit which under the accounting guidance is not subject to applying the VIE consolidation guidance. As a result, the properties’ financial statements are not consolidated into the consolidated financial statements of the Company.


19

Table of Contents

In April 2013, the Partnership acquired the Series C mortgage revenue bond secured by the Renaissance Gateway Apartments, a 208 unit multifamily apartment complex located in New Orleans, Louisiana for approximately $2.9 million par value. This property is undergoing a major rehabilitation and the Partnership has agreed to fund a total of approximately $8.6 million of a Series A mortgage revenue bond during construction which is estimated to be completed in August 2014. During the third and fourth quarter of 2013, the Partnership purchased $1.3 million par value Series B and $3.9 million par value Series A mortgage revenue bonds. During the first half of 2014, the Partnership purchased an additional approximate $4.0 million par value Series A mortgage revenue bond. The Series C mortgage revenue bond carries a base interest rate of 12.0% per annum and matures on June 1, 2015. The Series A and Series B mortgage revenue bonds carry a base interest rate of 6.0% and 12.0% per annum, respectively, maturing on June 1, 2030. Upon completion of construction and stabilization, the approximate $2.9 million Series C bond will be paid back on the earlier of when the property receives its final equity contribution by the limited partner or June 1, 2015. The Partnership accounts for the remaining Bond Purchase Commitment as an available-for-sale security and, as such, records the change in estimated fair value of the Bond Purchase Commitment as an asset or liability with changes in such valuation recorded in other comprehensive income.  As of June 30, 2014, the Partnership estimated the value of this Bond Purchase Commitment and recorded an asset of approximately $4,500.

In February 2013, the Partnership acquired six mortgage revenue bonds secured by three properties located in San Antonio, Texas. On June 30, 2014 the Company finalized the restructuring of six mortgage revenue bonds moving approximately $4.7 million in Series B mortgage revenue bonds to Series A mortgage revenue bonds. The par bond values reported on June 30, 2014 are as follows: approximately $16.5 million par value Series A and approximately $0.5 million par value Series B mortgage revenue bonds secured by the Avistar on the Boulevard, a 344 unit multifamily apartment complex; approximately $10.0 million Series A and approximately $1.0 million Series B mortgage revenue bonds secured by the Avistar at Chase Hill, a 232 unit multifamily apartment complex; and approximately $9.7 million Series A and approximately $0.8 million Series B mortgage revenue bonds secured by Avistar at the Crest, a 200 unit multifamily apartment complex. The three Series A mortgage revenue bonds each carry an annual interest rate of 6.0% per annum and mature on March 1, 2050. The three Series B mortgage revenue bonds each carry an annual base interest rate of 9.0% per annum and mature on April 1, 2050. The Partnership also acquired approximately $804,000 of taxable mortgage revenue bonds which also carry a base interest rate of 9.0% per annum and mature on April 1, 2050. The Company has determined that the entity which owns the three Avistar properties is an unrelated not-for-profit which under the accounting guidance is not subject to applying the VIE consolidation guidance. As a result, the properties’ financial statements are not consolidated into the consolidated financial statements of the Company.

Under the terms of a Bond Purchase Commitment, the Partnership has agreed to purchase a new mortgage revenue bond of between $20,638,000 and $26,687,000 (“Judson Series B Bond”) secured by the Vantage at Judson apartments which will be delivered by the mortgage revenue bond issuer once the property meets specific obligations and occupancy rates. The final amount of the Series B Bond will depend on the appraisal of the stabilized property. The Judson Series B Bond will have a stated annual interest rate of 6.0% per annum and bond proceeds must be used to pay off the construction loan to the Bank and all or a portion of the $6,049,000 subordinate mortgage revenue bond. If the property does not meet its specific obligations and required occupancy rate before January 1, 2015, the Partnership has the right to terminate the Bond Purchase Commitment. As of June 30, 2014, the Partnership estimated the value of this Bond Purchase Commitment and recorded an asset of approximately $154,000.

Valuation - As all of the Company’s investments in 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 mortgage revenue bonds, these estimates of fair value do not necessarily represent what the Company would actually receive in a sale of the mortgage revenue bonds.  There is no active trading market for the mortgage revenue bonds and price quotes for the mortgage revenue bonds are not generally available.  As of June 30, 2014, all of the Company’s 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 mortgage revenue bonds.  The effective yield analysis for each mortgage revenue bond considers the current market yield on similar mortgage revenue bonds as well as the debt service coverage ratio of each underlying property serving as collateral for the mortgage revenue bond. At June 30, 2014, the range of effective yields on the individual mortgage revenue bonds was 5.6% to 9.1% per annum.  At December 31, 2013, the range of effective yields on the individual mortgage revenue bonds was 6.3% to 9.8% per annum. Additionally, the Company calculated the sensitivity of the key assumption used in calculating the fair values of these mortgage revenue bonds.  Assuming a 10% adverse change in the key assumption, the effective yields on the individual mortgage revenue bonds would increase to a range of 6.1% to 10.0% per annum and would result in additional unrealized losses on the mortgage revenue bond portfolio of approximately $22.5 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 mortgage revenue bonds or other information from external sources, such as pricing services.  Pricing services, broker quotes and management’s analyses provide indicative pricing only.


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Table of Contents

Unrealized gains or losses on these 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, 2014, the Woodlynn Village mortgage revenue bond investment has been in an unrealized loss position for greater than twelve months.  The Company has the intent and ability to hold the mortgage revenue bond until its final maturity.
 
5. Public Housing Capital Fund Trust Certificates

The Company owns 100% of the residual participation receipts (“LIFERs”) in three tender option bond trusts (“PHC TOB Trusts”). At June 30, 2014, the PHC TOB Trusts own approximately $63.4 million of Public Housing Capital Fund Certificates (“PHC Certificates”) issued by three trusts (“PHC Trusts”) sponsored by Deutsche Bank (“DB”). 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 the 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. The loans payable by the public housing authorities are not debts of, or guaranteed by, the United States of America or HUD. 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 Company determined that the three PHC TOB trusts are variable interest entities and that the Company was the primary beneficiary of each of the three PHC TOB trusts. As a result, the Company reports the PHC TOB Trusts on a consolidated basis and the senior floating-rate participation interest (“SPEARS”) as debt financing. In determining the primary beneficiary of these specific VIEs, the Company considered who has the power to control the activities of the VIEs which most significantly impact their financial performance, the risks that the entity was designed to create, and how each risk affects the VIE. The indenture for the PHC TOB trusts stipulates that the Company has the sole right to cause the PHC TOB trusts to sell the PHC Certificates. If they were sold, the extent to which the VIEs will be exposed to gains or losses would result from decisions made by the Company.

The Company had the following investments in the PHC Certificates on June 30, 2014:
Description of Public Housing Capital Fund Trust Certificates
 
Cost adjusted for amortization of premium and discounts
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
 
 
 
 
 
 
 
 
 
Public Housing Capital Fund Trust Certificate I
 
$
27,713,429

 
$
728,924

 
$

 
$
28,442,353

Public Housing Capital Fund Trust Certificate II
 
15,878,114

 
270,767

 

 
16,148,881

Public Housing Capital Fund Trust Certificate III
 
20,454,474

 

 
(47,991
)
 
20,406,483

 
 
$
64,046,017

 
$
999,691

 
$
(47,991
)
 
$
64,997,717


The Company had the following investments in the PHC Certificates on December 31, 2013:
Description of Public Housing Capital Fund Trust Certificates
 
Cost adjusted for amortization of premium and discounts
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
 
 
 
 
 
 
 
 
 
Public Housing Capital Fund Trust Certificate I
 
$
27,979,527

 
$

 
$
(1,284,873
)
 
$
26,694,654

Public Housing Capital Fund Trust Certificate II
 
17,486,739

 

 
(1,083,235
)
 
16,403,504

Public Housing Capital Fund Trust Certificate III
 
20,434,848

 

 
(1,476,627
)
 
18,958,221

 
 
$
65,901,114

 
$

 
$
(3,844,735
)
 
$
62,056,379


During the first half of 2014 the Partnership realized approximately $1.8 million of paydown related to the Public Housing Capital Fund Trust Certificates.


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Table of Contents

Valuation - As all of the Company’s investments in PHC Certificates 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 PHC Certificates, these estimates of fair value do not necessarily represent what the Company would actually receive in a sale of the certificates.  The estimates of the fair values of these PHC certificates is based on a yield to maturity analysis which begins with the current market yield rate for a “AAA” rated tax-free municipal bond for a term consistent with the weighted-average life of each of the Public Housing Capital Fund trusts adjusted largely for unobservable inputs the General Partner believes would be used by market participants. Management’s fair value estimates encompass judgment. Management’s estimates are compared to external pricing services when available.   The PHC Certificates are AA- and BBB rated. The Company has concluded that the PHC Certificates are not other than temporarily impaired as of June 30, 2014 as it has the intent and ability to hold this investment until its final maturity.

At June 30, 2014, the range of effective yields on the PHC Certificates was 4.2% to 5.4% per annum.  At December 31, 2013, the range of effective yields on the PHC Certificates was 4.2% to 5.4% per annum. Additionally, the Company calculated the sensitivity of the key assumption used in calculating the fair values of these PHC Certificates.  Assuming a 10% adverse change in the key assumption, the effective yields on the PHC Certificates would increase to a range of 4.8% to 6.3% per annum and would result in additional unrealized losses on the PHC Certificates of approximately $2.5 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 other information from external sources, such as pricing services.  Pricing services and management’s analysis provide indicative pricing only.

The following table sets forth certain information relating to the PHC Certificates held in the PHC TOB Trusts on June 30, 2014:
 
 
Average Remaining Lives (Years)
 
Investment Rating
 
Weighted Average Interest Rate over Life
 
Principal Outstanding
Public Housing Capital Fund Trust Certificate I
 
10.75
 
AA-
 
5.330
%
 
$
26,210,285

Public Housing Capital Fund Trust Certificate II
 
10.22
 
AA-
 
4.240
%
 
16,330,476

Public Housing Capital Fund Trust Certificate III
 
11.31
 
BBB
 
5.410
%
 
20,898,432

Total Public Housing Capital Fund Trust Certificates
 
 
 
 
 
 
 
$
63,439,193


The following table sets forth certain information relating to the PHC Certificates held in the PHC TOB Trusts on December 31, 2013:
 
 
Average Remaining Lives (Years)
 
Investment Rating
 
Weighted Average Interest Rate over Life
 
Principal Outstanding
Public Housing Capital Fund Trust Certificate I
 
12.75
 
AA-
 
5.330
%
 
$
26,406,558

Public Housing Capital Fund Trust Certificate II
 
12.30
 
AA-
 
4.240
%
 
17,959,713

Public Housing Capital Fund Trust Certificate III
 
13.30
 
BBB
 
5.410
%
 
20,898,432

Total Public Housing Capital Fund Trust Certificates
 
 
 
 
 
 
 
$
65,264,703



6. Mortgage-Backed Securities (“MBS”)

Between November 2012 and April 2013, the Company executed six securitizations of mortgage-backed securities (“MBS TOB Trusts”). The Company purchased the LIFERS issued by the six MBS TOB Trusts for approximately $9.2 million.

Each of the six MBS TOB Trusts issued SPEARS to unaffiliated investors; these SPEARS totaled approximately $34.9 million at issuance. The SPEARS represent senior interests in the MBS TOB Trusts and have been credit enhanced by DB. The LIFERS entitle the Company to all principal and interest payments received by the MBS TOB Trust on the securitized MBS after payments due to the holders of the SPEARs and trust costs. The SPEARS bear interest at a variable rate based on Securities Industry and Financial Markets Association (“SIFMA”) index.


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The Company determined that the six MBS TOB Trusts are variable interest entities and that the Company was the primary beneficiary of each of them. As a result, the Company reports the MBS TOB Trusts on a consolidated basis and the SPEARS as debt financing. In determining the primary beneficiary of these specific VIEs, the Company considered who has the power to control the activities of the VIEs which most significantly impact their financial performance, the risks that the entity was designed to create, and how each risk affects the VIE. The indenture for the MBS TOB Trusts stipulates that the Company has the sole right to cause the MBS TOB Trusts to sell the MBS. If they were sold, the extent to which the MBS TOB Trusts will be exposed to gains or losses would result from decisions made by the Company.

In May 2014, the Company sold a portion of the MBS TOB Trusts for an amount approximating the outstanding amortized cost. This approximately $3.7 million par value MBS had been acquired for approximately $3.8 million in November 2012.

The carrying value of the Company’s MBS as of June 30, 2014 is as follows:
Agency Rating of MBS (1)
 
Cost adjusted for amortization of premium
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
“AAA”
 
$
23,165,482

 
$

 
$
(955,754
)
 
$
22,209,728

“AA”
 
16,851,823

 

 
(1,182,843
)
 
15,668,980

 
 
$
40,017,305

 
$

 
$
(2,138,597
)
 
$
37,878,708

(1) MBS are reported based on the lowest rating issued by a Rating Agency, if more than one rating is issued on the security, at the date presented.

The carrying value of the Company’s MBS as of December 31, 2013 is as follows:
Agency Rating of MBS (1)
 
Cost adjusted for amortization of premium
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
“AAA”
 
$
23,177,115

 
$

 
$
(3,069,555
)
 
$
20,107,560

“AA”
 
20,624,701

 

 
(2,886,600
)
 
17,738,101

 
 
$
43,801,816

 
$

 
$
(5,956,155
)
 
$
37,845,661

(1) MBS are reported based on the lowest rating issued by a Rating Agency, if more than one rating is issued on the security, at the date presented.

Valuation - The Company values each MBS based upon prices obtained from a third party pricing service, which are indicative of market activity. The valuation methodology of the Company’s third party pricing service incorporates commonly used market pricing methods, incorporates trading activity observed in the market place, and other data inputs. The methodology also considers the underlying characteristics of each security, which are also observable inputs, including: coupon; maturity date; loan age; reset date; collateral type; geography; and prepayment speeds. Management analyzes pricing data received from the third party pricing service by comparing it to valuation information obtained from at least one other third party pricing service and ensuring they are within a tolerable range of difference which the Company estimates as 7.5%. Management also looks at observations of trading activity observed in the market place when available. At June 30, 2014 and December 31, 2013, the range of effective yields on the individual MBS was 3.6% to 5.4% per annum.  Additionally, the Company calculated the sensitivity of the key assumption used in calculating the fair values of the MBS which is the effective yield on new issuances of similarly rated MBS.  Assuming a 10% adverse change in that key assumption, the effective yields on the MBS would increase to a range of 3.8% to 5.4% per annum and would result in additional unrealized losses on the bond portfolio of approximately $1.9 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.  Pricing services and management’s analysis provide indicative pricing only. The MBS have been in an unrealized loss position for more than twelve months and the Company does not believe the investment is other than temporarily impaired as of June 30, 2014 as it has the intent and ability to hold these investments until their estimated fair value recovers to the carrying cost or until final maturity.


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Table of Contents

The MBS are backed by residential mortgage loans and interest payable from the MBS is exempt from federal income taxation. Description of certain terms of the Company’s MBS is as follows:
Agency Rating of MBS
 
Principal Outstanding June 30, 2014
 
Weighted Average Maturity Date
 
Weighted Average Coupon Interest Rate
 
 
 
 
 
 
“AAA”
 
$
22,710,000

 
October 7, 2036
 
4.05
%
“AA”
 
16,440,000

 
January 18, 2036
 
4.11
%
 
 
$
39,150,000

 
 
 
 

7.  Real Estate Assets

MF Properties

To facilitate its investment strategy of acquiring additional mortgage revenue bonds secured by MF Properties, the Company has acquired through its various subsidiaries 99% limited partner positions in three limited partnerships and 100% member positions in six limited liability companies 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 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 mortgage revenue bonds issued by the new property owners as part of the restructuring.

Recent Transactions

The Partnership, as sole bondholder, previously directed the bond trustee to file a foreclosure action on the Woodland Park mortgage revenue bond. On February 28, 2013, the court granted Summary Judgment in the bond trustee’s favor confirming that the mortgage revenue bond is senior to mechanic’s liens filed on the property. Woodland Park became an MF Property at a net asset value of approximately $15.7 million upon conveyance of title on May 29, 2013. The Partnership requested the mortgage revenue bond issuer to remove the LURA on the property and the units have been converted to 100% market-rate rents. The Partnership may convert the property back to a rent restricted property, seek to place new financing on the property, and acquire the mortgage revenue bonds.
In March 2013, a wholly-owned subsidiary of the Company executed a 35-year ground lease with the University of Nebraska - Lincoln (“Lessor”) with an annual lease payment of $100. The leased property will have a mixed-use development consisting of a 1,605 stall parking garage and 475 bed student housing complex constructed on it. The Lessor will own the parking garage for which it will contribute approximately $16.7 million to its construction. The Company will own the student housing complex (named “The 50/50”) and currently estimates that construction will cost approximately $34.0 million. The Company executed a guaranteed maximum price contract with the general contractor for the construction on the mixed-use development. The Company expects to restructure its ownership of The 50/50 into a mortgage revenue bond holding after the construction is completed (which is estimated as August 1, 2014) and when the development has a sufficient history of operating results. To finance the construction of the student housing complex, the Company has executed an interest-only loan to borrow up to $25.5 million for a three year term at a variable interest rate. The Company also secured a $4.3 million tax-incremental financing loan which is for a term of five years, carries a fixed interest rate of approximately 4.7% per annum, requires principal payments commencing after 24 months and has a balloon payment due at maturity. The Company has borrowed approximately $21.8 million on this facility as of June 30, 2014 (Notes 11).


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Table of Contents

The Company had the following investments in MF Properties as of June 30, 2014 and December 31, 2013:
MF Properties
Property Name
 
Location
 
Number of Units
 
Land and Land Improvements
 
Buildings and
Improvements
 
 Carrying Value at June 30, 2014
Arboretum
 
Omaha, NE
 
145

 
$
1,739,554

 
$
19,164,378

 
$
20,903,932

Eagle Village
 
Evansville, IN
 
511

 
567,880

 
12,396,674

 
12,964,554

Glynn Place
 
Brunswick, GA
 
128

 
743,996

 
4,953,262

 
5,697,258

Maples on 97th
 
Omaha, NE
 
258

 
1,180,058

 
7,706,949

 
8,887,007

Meadowview
 
Highland Heights, KY
 
118

 
688,539

 
5,440,774

 
6,129,313

Residences of DeCordova
 
Granbury, TX
 
110

 
1,137,832

 
7,976,809

 
9,114,641

Residences of Weatherford
 
Weatherford, TX
 
76

 
1,927,701

 
5,710,886

 
7,638,587

Woodland Park
 
Topeka, KS
 
236

 
1,260,032

 
14,074,155

 
15,334,187

Construction work in process
Lincoln, NE
 
N/A

 

 
28,996,115

 
28,996,115

 
 
 
 
 
 
 
 
 
 
115,665,594

Less accumulated depreciation (depreciation expense of approximately $1.0 million and $2.0 million for the three and six months ended June 30, 2014, respectively)
 
(11,404,346
)
Balance at June 30, 2014
 
 
 
 
 
 
 
 
 
$
104,261,248

MF Properties
Property Name
 
Location
 
Number of Units
 
Land and Land Improvements
 
Buildings and
Improvements
 
Carrying Value at December 31, 2013
Arboretum
 
Omaha, NE
 
145

 
$
1,739,554

 
$
19,123,872

 
$
20,863,426

Eagle Village
 
Evansville, IN
 
511

 
567,880

 
12,336,975

 
12,904,855

Glynn Place
 
Brunswick, GA
 
128

 
743,996

 
4,937,172

 
5,681,168

The Colonial, f/k/a Maples on 97th
 
Omaha, NE
 
258

 
1,180,058

 
7,613,668

 
8,793,726

Meadowview
 
Highland Heights, KY
 
118

 
688,539

 
5,416,293

 
6,104,832

Residences of DeCordova
 
Granbury, TX
 
110

 
1,137,832

 
7,965,574

 
9,103,406

Residences of Weatherford
 
Weatherford, TX
 
76

 
1,927,701

 
5,695,600

 
7,623,301

Woodland Park
 
Topeka, KS
 
236

 
1,260,032

 
14,033,777

 
15,293,809

Construction work in process
 
Lincoln, NE
 
N/A

 

 
13,130,325

 
13,130,325

 
 
 
 
 
 
 
 
 
 
99,498,848

Less accumulated depreciation (depreciation expense of approximately $3.8 million in 2013)
 
 
 
(9,386,811
)
Balance at December 31, 2013
 
 
 
 
 
 
 
 
 
$
90,112,037


Acquisitions

The Woodland Park property purchase price allocation is disclosed pursuant to the accounting guidance on business combinations. A condensed balance sheet at the date of acquisitions is included below.

 
 
Woodland Park 5/29/2013 (Date of Acquisition)
Other current assets
 
$
201,321

In-place lease assets
 
403,216

Real estate assets
 
15,258,784

Total Assets
 
$
15,863,321

Accounts payable, accrued expenses and other
$
192,345

Net assets
 
15,670,976

Total liabilities and net assets
 
$
15,863,321



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Table of Contents

The table below shows the pro forma condensed consolidated results of operations of the Company as if Woodland Park had been acquired at the beginning of the periods presented:
 
 
For the Three Months Ended June 30, 2013
 
For the Six Months Ended June 30, 2013
 
 
 
 
 
Revenues
 
$
15,245,045

 
$
28,365,276

Net income
 
3,867,086

 
12,215,549

Net income allocated to unitholders
 
3,662,073

 
11,739,473

Unitholders' interest in net income per unit (basic and diluted)
 
$
0.09

 
$
0.27


Consolidated 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 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 unitholders 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, 2014 and December 31, 2013:
Consolidated VIEs
Property Name
 
Location
 
Number of Units
 
Land and Improvements
 
Buildings and Improvements
 
 Carrying Value at June 30, 2014
Bent Tree Apartments
 
Columbia, SC
 
232

 
$
986,000

 
$
12,170,553

 
$
13,156,553

Fairmont Oaks Apartments
 
Gainesville, FL
 
178

 
850,400

 
8,868,182

 
9,718,582

 
 
 
 
 
 
 
 
 
 
22,875,135

Less accumulated depreciation (depreciation expense of approximately $233,000 and $466,000 for the three and six months ended June 30, 2014)
 
(10,180,447
)
Balance at June 30, 2014
 
 
 
 
 
 
 
 
 
$
12,694,688

Consolidated VIEs
Property Name
 
Location
 
Number of Units
 
Land and Improvements
 
Buildings and Improvements
 
 Carrying Value at December 31, 2013
Bent Tree Apartments
 
Columbia, SC
 
232

 
$
986,000

 
$
12,097,419

 
$
13,083,419

Fairmont Oaks Apartments
 
Gainesville, FL
 
178

 
850,400

 
8,845,020

 
9,695,420

 
 
 
 
 
 
 
 
 
 
22,778,839

Less accumulated depreciation (depreciation expense of approximately $1.4 million in 2013)
 
 
 
(9,741,942
)
Balance at December 31, 2013
 
 
 
 
 
 
 
 
$
13,036,897



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Table of Contents

8. Other Assets

The Company had the following Other assets as of dates shown:
 
 
June 30, 2014
 
December 31, 2013
Taxable property loans receivable
 
$
22,172,045

 
$
21,549,927

Less: Loan loss reserves
 
(7,023,814
)
 
(7,023,814
)
Deferred financing costs - net
 
2,557,998

 
2,503,679

Fair value of derivative contracts
 
669,712

 
888,120

Taxable bonds at estimated fair value
 
4,370,023

 
4,075,953

Land held for sale
 
1,465,000

 
1,465,000

Bond purchase commitments - fair value adjustment (Notes 4 & 16)
 
334,367

 

Other assets
 
508,828

 
899,426

 Total Other assets
 
$
25,054,159

 
$
24,358,291


In addition to the mortgage revenue bonds held by the Company, taxable property loans have been made to the owners of the properties which secure the mortgage revenue bonds and are reported as taxable property loans receivable in Other assets, net of loan loss reserves.  The Company periodically, or as changes in circumstances or operations dictate, evaluates such taxable property loans receivable for impairment.  The value of the underlying property assets is ultimately the most relevant measure of value to support the taxable property loan values.  The Company utilizes a discounted cash flow model in estimating a property fair value.  Discounted cash flow models containing varying assumptions are considered.   The various models may assume multiple revenue and expense scenarios, various capitalization rates and multiple discount rates.  Other information, such as independent appraisals, may be considered in estimating a property’s fair value.  If the estimated fair value of the property after deducting the amortized cost basis of any senior mortgage revenue bond exceeds the principal balance of the taxable property loan then no potential loss is indicated and no loan loss reserve for taxable property loans is needed. In estimating the property valuation, the most significant assumptions utilized in the discounted cash flow model remain the same as discussed in the Form 10-K and include revenue and expense projections and capitalization rates.

On June 30, 2014, the Company restructured twelve mortgage revenue bonds related to Avistar on the Boulevard, Avistar at Chase Hill, Avistar at the Crest, Avistar on the Hills Apartments, Avistar at the Oaks Apartments, and Avistar in 09 Apartments purchased in June and February 2013 (Note 4). In connection with the mortgage revenue bond restructuring the Company loaned these entities approximately $526,000 to cover the costs of restructuring the mortgage revenue bonds. These taxable loans have a stated interest rate of 12.0% per annum due monthly with any unpaid balance due on June 26, 2024 (Note 4).

On November 26, 2013, the Company executed a loan agreement with Foundation for Affordable Housing, a not-for-profit borrower, for approximately $1.6 million. The proceeds from this loan were used to fund a portion of the not-for-profit borrower’s acquisition of Abbington at Stones River, a 96 unit multifamily property located in Tennessee. The term of the loan is approximately eighteen months and the stated interest rate is 9.0% per annum.

In August 2013, the Partnership acquired a Series C mortgage revenue bond and a forward contract to support the construction of Vantage at Harlingen Apartments in Harlingen, Texas. In conjunction with this contract, the Partnership acquired an approximate $1.3 million taxable mortgage revenue bond which carries a base interest rate of 9.0% per annum and matures on August 1, 2053. This taxable mortgage revenue bond is reported as part of the Taxable bonds at fair value in Other assets. Please see the Fair Value Measurement footnote (Note 15) for the detailed description of the fair value estimation process for the taxable mortgage bonds.

In June 2013, the Partnership acquired six mortgage revenue bonds secured by three properties located in San Antonio, Texas, Avistar at the Oaks Apartments, Avistar on the Hills Apartments, and Avistar in 09 Apartments. The Partnership also acquired approximately $831,000 of taxable mortgage revenue bonds which carry a base interest rate of 9.0% per annum and mature on September 1, 2050. These are reported as part of the Taxable bonds at fair value in Other assets.

In February 2013, the Partnership acquired six mortgage revenue bonds secured by three properties located in San Antonio, Texas, Avistar on the Boulevard, Avistar at Chase Hill, and Avistar at the Crest. The Partnership also acquired approximately $804,000 of taxable mortgage revenue bonds which carry a base interest rate of 9.0% per annum and mature on April 1, 2050. These are reported as part of the Taxable bonds at fair value in Other assets.


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Table of Contents

During the first half of 2014, the Partnership advanced additional funds to Cross Creek and the Ohio Properties of approximately $67,000 and $29,000, respectively. During the first half of 2013, the Partnership advanced additional funds to Ashley Square, Cross Creek and the Ohio Properties of approximately $118,000, $96,000, and $42,000, respectively. Due to the recognized sale of the Ohio and Greens Properties, the taxable property loans receivable with the Ohio and Greens Properties are no longer eliminated upon consolidation (Note 9). During the first half of 2014 and 2013, the Partnership recorded loan loss reserves equal to the accrued interest on the Ashley Square, Cross Creek, Greens and the Ohio Properties taxable property loans receivable because the Partnership determined they were not reasonably assured. The Partnership also reserved against the $96,000 advanced to the Cross Creek property in 2013 based on the quarterly impairment analysis.

The following is a summary of the taxable property loans receivable, accrued interest and loan loss reserves on the amounts due at June 30, 2014 and December 31, 2013, respectively:
 
 
June 30, 2014
 
 
Outstanding Balance
 
Accrued Interest
 
Loan Loss Reserves
 
Interest Allowance
 
Net Taxable Property Loans
Arbors at Hickory Ridge
 
$
191,264

 
$
19,411

 
$

 
$

 
$
210,675

Ashley Square
 
5,078,342

 
2,213,784

 
(3,596,342
)
 
(2,213,784
)
 
1,482,000

Avistar (February 2013 portfolio)
 
274,496

 

 

 

 
274,496

Avistar (June 2013 portfolio)
 
251,622

 

 

 

 
251,622

Cross Creek
 
6,888,087

 
1,953,904

 
(3,372,472
)
 
(1,953,904
)
 
3,515,615

Foundation for Affordable Housing
 
1,603,083

 
87,576

 

 

 
1,690,659

Greens Property
 
876,000

 
181,521

 

 
(2,284
)
 
1,055,237

Lake Forest
 
4,618,704

 
2,370,615

 
(55,000
)
 
(2,349,780
)
 
4,584,539

Ohio Properties
 
2,390,447

 
735,779

 

 
(245,654
)
 
2,880,572

 
 
$
22,172,045

 
$
7,562,590

 
$
(7,023,814
)
 
$
(6,765,406
)
 
$
15,945,415

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
Outstanding Balance
 
Accrued Interest
 
Loan Loss Reserves
 
Interest Allowance
 
Net Taxable Property Loans
Arbors at Hickory Ridge
 
$
191,264

 
$
12,979

 
$

 
$

 
$
204,243

Ashley Square
 
5,078,342

 
2,053,415

 
(3,596,342
)
 
(2,053,415
)
 
1,482,000

Cross Creek
 
6,821,087

 
1,825,389

 
(3,372,472
)
 
(1,825,389
)
 
3,448,615

Foundation for Affordable Housing
 
1,603,083

 
13,989

 

 

 
1,617,072

Greens Property
 
876,000

 
130,563

 

 
(921
)
 
1,005,642

Lake Forest
 
4,618,704

 
2,148,881

 
(55,000
)
 
(2,128,046
)
 
4,584,539

Ohio Properties
 
2,361,447

 
585,377

 

 
(186,706
)
 
2,760,118

 
 
$
21,549,927

 
$
6,770,593

 
$
(7,023,814
)
 
$
(6,194,477
)
 
$
15,102,229


The following is a detail of loan loss reserves for the six months ended June 30, 2014 and year ended December 31, 2013:
 
 
June 30, 2014
 
December 31, 2013
Balance, beginning of year
 
$
7,023,814

 
$
12,272,671

Realized loss on taxable loan - Iona Lakes
 

 
(4,557,741
)
Provision for loan loss
 

 
168,000

Deconsolidation of VIEs
 

 
55,000

Write off due to foreclosure
 

 
(914,116
)
Balance, end of year
 
$
7,023,814

 
$
7,023,814


In June 2013, the Partnership redeemed its interest in the Iona Lakes mortgage revenue bond for approximately $21.9 million. This redemption resulted in the realization of approximately $6.5 million in contingent interest income and approximately $4.6 million realized loss on taxable property loans.


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Table of Contents

9.  Discontinued Operations

In June 2010, the Company completed a sales transaction whereby the Ohio Properties were sold to three new ownership entities controlled by an unaffiliated not-for-profit entity and in October 2011, the three limited partnerships that own the Ohio Properties admitted two entities that are affiliates of BC Partners as new limited partners as part of a syndication of LIHTCs. The BC Partners agreed to contribute equity to these limited partnerships, subject to the Ohio Properties meeting certain debt service coverage ratios specified in the applicable limited partnership agreements. As such, there was not sufficient equity invested at closing by the not-for-profit or BC Partners into the Ohio Properties to allow the Company to recognize a real estate sale for accounting purposes. During the first quarter of 2013, BC Partners contributed $6.5 million of capital into the Ohio Properties which was sufficient to allow the Company to recognize the sale for accounting purposes. This gain on sale of discontinued operations was approximately $1.8 million.

The deposit method of accounting for real estate sales required deferral of the gain from the real estate sale and did not allow recognition of the interest payments by the Ohio Properties to the Company between June 2010 and the date of the equity contribution by BC Partners. In conjunction with the recognition of the real estate sale, approximately $3.5 million of interest was recognized within investment income in the first three months of 2013 which represents the interest payments received from the Ohio Properties between June 2010 and December 2012. In addition, the Partnership reported approximately $1.1 million in taxable note interest income received from the Ohio Properties and a $250,000 guarantee fee from the general partner of the Ohio Properties during the first quarter of 2013. Due to the deposit method of accounting, the Company recognized the sale of the Ohio Properties and the purchase of the mortgage revenue bonds they secure in the consolidated statement of cash flows during the first quarter of 2013. The Ohio Properties contributed approximately $0 and $138,000 to income from discontinued operations for the three and six months ended June 30, 2013.

In October 2012, the limited partnership that owns the Greens Property admitted two entities that are affiliates of BC Partners as new limited partners as part of a syndication of LIHTCs on the Greens Property. Prior to the execution of the admittance of the new limited partners, the Company had entered into an agreement to sell the Greens Property for approximately $7.3 million to an unaffiliated not-for-profit which is the general partner of the limited partnership that now owns the Greens Property.  That sale was conditional on securing the mortgage revenue bond and low-income housing tax credits from the North Carolina Housing Finance Agency.  The $961,000 BC Partners equity contribution into this limited partnership in October 2012 was not sufficient to allow the Company to recognize a real estate sale for accounting purposes. In July 2013, BC Partners made their required $800,000 capital contribution into the Greens Property as construction was then 75% complete.

The Company purchased 100% of the mortgage revenue bonds issued as part of the agreement to finance the acquisition and rehabilitation of the Greens Property. The Series A mortgage revenue bond has approximately $8.5 million par value and bears interest at 6.5% per annum. The Series B mortgage revenue bond has a $950,000 par value and bears interest at 12.0% per annum. Both series of mortgage revenue bonds mature on October 1, 2047. The Company also obtained an $850,000 taxable property loan secured by the Greens Property at closing. 

The July 2013 equity payment provided sufficient invested equity to recognize a real estate sale for accounting purposes and the Company recorded the sale of this discontinued operation. This gain on sale of discontinued operations was approximately $1.4 million. The deposit method of accounting for real estate sales required the deferral of the gain from the real estate sale and did not allow recognition of the interest payments by the Greens Property to the Company between October 2012 and July 2013, the date of the second equity contribution by BC Partners. In conjunction with the recognition of the real estate sale, approximately $523,000 of interest was recognized within investment income in the third quarter of 2013 which represents the interest payments received from the Greens Property between October 2012 and July 31, 2013. The Greens Property contributed a loss from discontinued operations of approximately $167,000 and $325,000 for the three and six months ended June 30, 2013, respectively.

There were no assets and liabilities of discontinued operations to report at June 30, 2014 and December 31, 2013.


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Table of Contents

10.  Debt Financing

At June 30, 2014 and December 31, 2013, the Company reported outstanding debt financing of approximately $244.5 million and approximately $257.3 million, respectively, under separate credit facilities.

Other Financings

In March 2014, the Partnership obtained two $5.0 million unsecured revolving lines of credit. The first revolving line of credit carries a variable interest rate which was approximately 3.5% at date of closing and matures in March 2015. The second revolving line of credit also carries a variable interest rate which was approximately 3.4% on June 30, 2014 and matures in March 2016. On June 30, 2014, the Partnership had not borrowed funds on either line of credit. The lines of credit will be utilized to help with short-term working capital needs and to fund new investments during the periods of time that the Company is working with its lender to finalize new TOB financings of assets.

Tender Option Bond Financings
Description of the Tender Option Bond Financings
 
Outstanding Debt Financing at June 30, 2014
 
Stated Maturity
 
 
 
 
 
PHC Certificates-TOB Trust
 
$
47,665,000

 
December 2014
MBS - TOB Trust 1
 
2,585,000

 
October 2014
MBS - TOB Trust 2
 
4,090,000

 
October 2014
MBS - TOB Trust 4
 
5,960,000

 
October 2014
MBS - TOB Trust 5
 
10,545,000

 
October 2014
Greens of Pine Glen - TOB Trust
 
5,670,000

 
June 2014
Arbors of Hickory Ridge - TOB Trust
 
7,000,000

 
August 2014
MBS - TOB Trust 6
 
7,825,000

 
August 2014
Avistar (February 2013 portfolio) - TOB Trust (1)
 
20,000,000

 
June 2014
Avistar (June 2013 portfolio) - TOB Trust (2)
 
13,210,000

 
October 2014
The Suites on Paseo - TOB Trust
 
25,750,000

 
December 2014
TOB - Decatur-Angle - TOB Trust
 
17,250,000

 
February 2015
 Total Debt Financing
 
$
167,550,000

 
 

(1) Avistar at the Oaks Apartments, Avistar on the Hills Apartments, and Avistar in 09 Apartments is the collateral for the $20.0 million TOB Trust.
(2) Avistar at Chase Hill, Avistar at the Crest, and Avistar on the Boulevard is the collateral for the approximate $13.2 million TOB Trust.


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Description of the Tender Option Bond Financings
 
Outstanding Debt Financing at December 31, 2013
 
Stated Maturity
 
 
 
 
 
PHC Certificates-TOB Trust
 
$
48,995,000

 
June 2014
Autumn Pines-TOB Trust
 
9,770,000

 
July 2014
MBS - TOB Trust 1
 
2,585,000

 
April 2014
MBS - TOB Trust 2
 
4,090,000

 
April 2014
MBS - TOB Trust 3
 
2,865,000

 
April 2014
MBS - TOB Trust 4
 
5,960,000

 
April 2014
MBS - TOB Trust 5
 
10,545,000

 
April 2014
Greens of Pine Glen - TOB Trust
 
5,700,000

 
June 2014
Arbors of Hickory Ridge - TOB Trust
 
7,000,000

 
August 2014
MBS - TOB Trust 6
 
7,825,000

 
August 2014
Avistar (February 2013 portfolio) - TOB Trust (1)
 
20,000,000

 
June 2014
Avistar (June 2013 portfolio) - TOB Trust (2)
 
13,210,000

 
October 2014
The Suites on Paseo - TOB Trust
 
25,750,000

 
December 2014
 Total Debt Financing
 
$
164,295,000

 
 

(1) Avistar at the Oaks Apartments, Avistar on the Hills Apartments, and Avistar in 09 Apartments is the collateral for the $20.0 million TOB Trust.
(2) Avistar at Chase Hill, Avistar at the Crest, and Avistar on the Boulevard is the collateral for the approximate $13.2 million TOB Trust.

In July 2011, the Company executed a Master Trust Agreement with DB which allows the Company to execute multiple Tender Option Bond (“TOB Trust”) structures upon the approval and agreement of terms by DB. Under each TOB Trust structure issued through the Master Trust Agreement, the TOB trustee issues SPEARS and LIFERS. These SPEARS and LIFERS represent beneficial interests in the securitized asset held by the TOB trustee. The Company will purchase the LIFERS from each of these TOB Trusts which will grant them certain rights to the securitized assets. The Master Trust Agreement with DB has covenants with which the Company is required to comply. At June 30, 2014, the most restrictive covenant was that cash available to distribute for the trailing twelve months must be at least two times trailing twelve month interest expense. The Company was in compliance with all covenants as of June 30, 2014. If the Company were to be out of compliance with any of these covenants, it would trigger a termination event of the financing facilities. The Company expects to renew each of the TOB financing facilities at its discretion per the terms of the agreements. DB can require the posting of cash collateral under the terms of the Master Trust Agreement.

In March 2014, the Company executed a new TOB Trust under its credit facility with DB securitizing the Decatur-Angle mortgage revenue bond borrowing $17.3 million. The facility has a variable interest rate tied to SIFMA and matures in February 2015. On the date of closing the total fixed TOB Trust fee was approximately 1.5% per annum and the variable rate paid on the TOB Trust on the SPEARS was approximately 0.3% resulting in a total cost of borrowing of approximately 1.8%. The outstanding balance remains at approximately $17.3 million on June 30, 2014. In July 2014, the Company entered into a new TOB Trust which replaces this TOB Trust (Note 18).

In December 2013, the Company executed a new TOB Trust under its credit facility with DB securitizing The Suites on Paseo Series A mortgage revenue bond. The amount borrowed was approximately $25.8 million with a variable interest rate tied to SIFMA. The facility matures in December 2014. On the date of the closing the total fixed TOB Trust fee was approximately 1.6% per annum and the variable rate paid on the TOB Trust on the SPEARS was approximately 0.4% per annum resulting in a total cost of borrowing of approximately 2.0% per annum. The outstanding balance remains at approximately $25.8 million on June 30, 2014.

In October 2013, the Company executed a new TOB Trust under its credit facility with DB securitizing the Avistar at the Oaks Apartments, the Avistar on the Hills Apartments, and the Avistar in 09 Apartments Series A mortgage revenue bonds. The amount borrowed was approximately $13.2 million with a variable interest rate tied to SIFMA. On the date of the closing the total fixed TOB Trust fee was approximately 1.8% per annum and the variable rate paid on the TOB Trust on the SPEARS was approximately 0.4% per annum resulting in a total cost of borrowing of approximately 2.2% per annum. The outstanding balance remains at $13.2 million on June 30, 2014. This TOB Trust was settled in July 2014 (Note 18).


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In June 2013, the Company executed a new TOB Trust under its credit facility with DB securitizing the Avistar on the Boulevard, Avistar at Chase Hill, and Avistar at the Crest Series A mortgage revenue bonds. The amount borrowed was $20.0 million with a variable interest rate tied to SIFMA. On the date of closing the total fixed TOB Trust fee was approximately 2.1% per annum and the variable rate paid on the TOB Trust on the SPEARS was approximately 0.4% resulting in a total cost of borrowing of approximately 2.5%. The outstanding balance remains at $20.0 million on June 30, 2014. This TOB Trust was settled in July 2014 (Note 18).

In March 2013, the Company executed a new TOB Trust under its credit facility with DB securitizing the Arbors at Hickory Ridge mortgage revenue bond. The amount borrowed was $7.0 million with a variable interest rate tied to SIFMA. On the date of closing the total fixed TOB Trust fee was approximately 2.1% per annum and the variable rate paid on the TOB Trust on the SPEARS was approximately 0.5% resulting in a total cost of borrowing of approximately 2.6%. The outstanding balance remains at $7.0 million on June 30, 2014. This TOB Trust was settled in July 2014 (Note 18).

In February 2013, the Company executed a new TOB Trust under its credit facility with DB securitizing the Greens Property mortgage revenue bond. The amount borrowed was approximately $5.8 million with a variable interest rate tied to SIFMA. On the date of closing the total fixed TOB trust fee was approximately 2.1% per annum and the variable rate paid on the TOB Trust on the SPEARS was approximately 0.5% resulting in a total cost of borrowing of approximately 2.6%. The outstanding balance was $5.7 million on June 30, 2014. This TOB Trust was settled in July 2014 (Note 18).

In the fourth quarter of 2012 through the second quarter of 2013, the Company purchased the LIFERS issued by the trustee of six additional TOB Trusts. The LIFERS entitle the Company to all principal and interest payments received by these TOB Trusts on the mortgage-backed securities after payments due to the holders of the SPEARS and trust costs (“MBS TOB Trusts”). The SPEARS represent senior interests in the MBS TOB Trusts and some have been credit enhanced by DB. The Company reports the MBS TOB Trusts on a consolidated basis as it has determined it is the primary beneficiary of these variable interest entities (Note 6). A summary of the six MBS TOB Trusts is as follows:
During the fourth quarter of 2012, the Company purchased approximately $6.5 million of LIFERS from securitized MBS TOB Trusts with a par value of approximately $31.6 million of MBS. The MBS TOB Trusts also issued SPEARS of approximately $25.1 million to unaffiliated investors. The approximate outstanding amount at June 30, 2014 is $21.2 million which mature in October 2014. On the date of closing the total fixed TOB Trust fee was approximately 0.9% per annum and the variable rate paid on the SPEARS of approximately 0.4% is tied to SIFMA which results in the total cost of borrowing of approximately 1.3%.
In January 2013, the Company purchased an additional $540,000 of LIFERS from one of the five MBS TOB Trusts which is a securitization of MBS with a par value of $2.5 million. SPEARS of approximately $2.0 million were issued by the MBS TOB Trust which is currently outstanding at June 30, 2014. This MBS TOB Trust matures in October 2014. On the date of closing the total fixed TOB Trust fee was approximately 0.9% per annum and the variable rate paid on the SPEARS of approximately 0.3% is tied to SIFMA which results in the total cost of borrowing of approximately 1.2%.
In April 2013, the Company purchased approximately $2.2 million of LIFERS issued by a new MBS TOB Trust which is the securitization of MBS with a par value of approximately $10.0 million. The MBS TOB Trusts issued SPEARS of approximately $7.8 million to unaffiliated investors which is the outstanding amount at June 30, 2014. This facility matures in August 2014. On the date of closing the total fixed TOB Trust fee was approximately 0.9% per annum and the variable rate paid on the SPEARS of approximately 0.3% is tied to SIFMA which results in the total cost of borrowing of approximately 1.2%.

In May 2014, the Company sold a portion of the MBS and collapsed the related MBS - TOB Trust 3 securitizing the related MBS for approximately $3.7 million. The Company’s $2.9 million TOB financing facility, which was the securitization of this MBS TOB Trust, was paid off in full in connection with this sale. .

In April 2014, the mortgage revenue bond secured by Autumn Pines was sold for approximately $13.1 million. The Company’s $9.8 million TOB financing facility, which was the securitization of this mortgage revenue bond, was collapsed and paid off in full in connection with this sale (Note 4).

As of June 30, 2014, the Company has posted approximately $2.5 million of cash collateral in connection with the MBS TOB Trusts. This collateral is recorded as restricted cash in the consolidated financial statements.


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The Company owns the PHC Certificate LIFERS issued by the PHC TOB Trusts and pledged the LIFERS to the trustee to secure certain reimbursement obligations of the Company as the holder of LIFERS. The Company is consolidating the PHC TOB Trust as it has determined it is the primary beneficiary of these variable interest entities. The PHC TOB Trusts issued SPEARS to unaffiliated investors. The SPEARS represent senior interests in the PHC TOB Trusts and have been credit enhanced by DB. The LIFERS entitle the Company to all principal and interest payments received by the PHC TOB Trusts. Approximately $1.3 million was paid to reduce the outstanding balance during the first half of 2014. The amount owed to the SPEARS owners is approximately $47.8 million at June 30, 2014.

The Company is accounting for these TOB Trust financing transactions as secured financing arrangements. As of June 30, 2014, the total cost of borrowing averaged approximately 2.3% and 1.1%, on the PHC TOB Trusts and MBS TOB Trusts, respectively.

2010 TEBS Financing

As of September 1, 2010, the Partnership and its Consolidated Subsidiary ATAX TEBS I, LLC, entered into a number of agreements relating to a new long-term debt financing facility provided through the securitization of thirteen mortgage revenue bonds owned by the ATAX TEBS I, LLC (the “Sponsor”) pursuant to the 2010 TEBS financing. The 2010 TEBS financing essentially provides the Partnership with a long-term variable-rate debt facility at interest rates reflecting prevailing short-term rates. In January 2014, the mortgage revenue bond secured by Lost Creek was retired for an amount greater than the outstanding principal and accrued base interest. The Company received approximately $18.7 million for the Lost Creek mortgage revenue bond and paid approximately $15.7 million to reduce the outstanding balance of the 2010 TEBS financing facility (Note 4), therefore at June 30, 2014 there are twelve mortgage revenue bonds owned by the Sponsor.
The par value of the mortgage revenue bonds included in this financing facility as of June 30, 2014 and December 31, 2013 are as follows:
Description of
 
Outstanding Bond Par Amounts
 
 
Mortgage Revenue Bonds
 
June 30, 2014
 
December 31, 2013
 
Financial Statement Presentation
Ashley Square
 
$
5,188,000

 
$
5,212,000

 
Mortgage revenue bond
Bella Vista
 
6,490,000

 
6,545,000

 
Mortgage revenue bond
Bent Tree
 
7,506,000

 
7,542,000

 
Consolidated VIE
Bridle Ridge
 
7,685,000

 
7,715,000

 
Mortgage revenue bond
Brookstone
 
9,297,869

 
9,338,603

 
Mortgage revenue bond
Cross Creek
 
8,461,040

 
8,497,933

 
Mortgage revenue bond
Fairmont Oaks
 
7,313,000

 
7,355,000

 
Consolidated VIE
Lake Forest
 
8,943,000

 
8,997,000

 
Mortgage revenue bond
Runnymede
 
10,485,000

 
10,525,000

 
Mortgage revenue bond
Southpark
 
13,795,000

 
13,795,000

 
Mortgage revenue bond
Woodlynn Village
 
4,408,000

 
4,426,000

 
Mortgage revenue bond
Ohio Series A Bond (1)
 
14,455,000

 
14,498,000

 
Mortgage revenue bond
Villages at Lost Creek
 

 
18,090,000

 
Mortgage revenue bond
  Total
 
$
104,026,909

 
$
122,536,536

 
 
(1) Collateralized by Crescent Village, Postwoods, and Willow Bend (Note 2 and Note 9)
The securitization of these assets occurred through two classes of certificates. The Class A TEBS Certificates were issued in an initial principal amount of $95.8 million and were sold through a placement agent to unaffiliated investors. The Class B TEBS Certificates were issued in an initial principal amount of $20.3 million and were retained by the Sponsor. The holders of the Class A TEBS Certificates are entitled to receive regular payments of interest from Freddie Mac at a variable rate which resets periodically based on the weekly SIFMA floating index rate plus certain credit, facility, remarketing and servicing fees (the “Facility Fees”).

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The total Facility Fees are 1.9% per annum, and as of June 30, 2014, the SIFMA rate was equal to approximately 0.1% resulting in a total cost of borrowing of approximately 2.0% on the outstanding balance of the 2010 TEBS financing facility of $77.2 million. The 2010 TEBS financing and the associated TEBS Trust are presented as secured financings within the consolidated financial statements.
The term of the 2010 TEBS financing coincides with the terms of the assets securing the TEBS Certificates, except that the Partnership may terminate the 2010 TEBS financing at its option on either September 15, 2017 or September 15, 2020. If the Partnership does not elect to terminate the 2010 TEBS financing on these dates, the full term of the 2010 TEBS financing runs through the final principal payment date associated with the securitized mortgage revenue bonds, or July 15, 2050.

The Company’s debt financing as of June 30, 2014 contractually matures over the next five years and thereafter as follows: 
2014
 
$
150,774,000

2015
 
18,160,000

2016
 
949,000

2017
 
74,585,000

2018
 

Thereafter
 

Total
 
$
244,468,000


In July 2014, the Company sold the LIFERS and retired the MBS TOB Trusts securitized by the SPEARS that came due in June 2014 (Note 18).

11.  Mortgages Payable

The Company reports the mortgage loans secured by certain MF Properties on its consolidated financial statements as Mortgages payable.  As of June 30, 2014, outstanding mortgage loans totaled approximately $69.5 million.  As of December 31, 2013, outstanding mortgage loans totaled approximately $57.1 million.  

In April 2014, the Company paid off in full the approximately $1.9 million mortgage which was collateralized by the Glynn Place Apartments, an MF Property.

In September 2013, the Partnership executed a $7.0 million promissory note related to the Woodland Park property. This promissory note carries a fixed interest rate of approximately 2.8% per annum plus 30-day London Interbank Offered Rate ("LIBOR") which was approximately 0.2%, resulting in approximately 3.0% at the date of closing. The Partnership has borrowed approximately $6.0 million as of June 30, 2014.
In April 2013, the Company executed an interest-only loan to borrow up to $25.5 million for a three year term at a variable interest rate secured by the student housing complex in Lincoln, Nebraska. The Company also secured a $4.3 million tax-incremental financing loan which is for a term of five years, carries a fixed interest rate of approximately 4.7% per annum, requires principal payments commencing after 24 months and has a balloon payment due at maturity. The Company has borrowed approximately $21.8 million on the three year term facility as of June 30, 2014 (Notes 7 and 16).

In February 2013, the Partnership obtained a $7.5 million loan secured by The Colonial, (f/k/a Maples on 97th) property. This loan is with an unrelated third party and carries a fixed annual interest rate of approximately 3.6% per annum through June 30, 2013 switching to approximately 4.4% per annum beginning on July 1, 2013, maturing on February 10, 2016.


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The Company’s mortgages payable as of June 30, 2014 contractually mature over the next five years and thereafter as follows:
2014
 
$
15,104,045

2015
 
897,309

2016
 
8,064,369

2017
 
23,652,271

2018
 

Thereafter
 
21,829,731

Total
 
$
69,547,725


The Company has extended the mortgage on the Eagle Village and Woodland Park mortgages. The Company paid off in full the $1.9 million mortgage secured by Glynn Place in April 2014.

12.  Transactions with Related Parties

The general partner of the Partnership, AFCA 2, is entitled to receive an administrative fee from the Partnership equal to 0.45% per annum of the outstanding principal balance of any of its mortgage revenue bonds, taxable property loans collateralized by real property, and other investments for which the owner of the financed property or other third party is not obligated to pay such administrative fee directly to AFCA 2. For the three and six months ended June 30, 2014 the Partnership paid or accrued administrative fees to AFCA 2 of approximately $471,000 and $944,000, respectively. For the three and six months ended June 30, 2013 the Partnership paid or accrued administrative fees to AFCA 2 of approximately $370,000 and $712,000, respectively. In addition to the administrative fees paid directly by the Partnership, AFCA 2 receives administrative fees directly from the owners of properties financed by certain of the mortgage revenue bonds held by the Partnership.  These administrative fees also equal 0.45% per annum of the outstanding principal balance of these mortgage revenue bonds and totaled approximately $17,000 and $34,000 for the three and six months ended June 30, 2014, respectively. For the three and six months ended June 30, 2013, these fees totaled approximately $33,000 and $66,000, respectively.

AFCA 2 earns mortgage placement fees in connection with the acquisition of certain mortgage revenue bonds.  These mortgage placement fees were paid by the owners of the respective properties and, accordingly, have not been reflected in the accompanying condensed consolidated financial statements because these properties are not considered VIEs.  During the three and six months ended June 30, 2014 AFCA 2 earned mortgage placement fees of approximately $403,000 and $726,000 , respectively. During the three and six months ended June 30, 2013, AFCA 2 earned mortgage placement fees of approximately $470,000 and $862,000, respectively.

An affiliate of AFCA 2, America First Properties Management Company, LLC (“Properties Management”) provided property management services for the eight MF Properties, the two Consolidated VIEs and six of the properties collateralized by the mortgage revenue bonds, earning management fees of approximately $315,000 and $634,000 for the three and six months ended June 30, 2014, respectively. Properties Management provided property management services for eight MF Properties, the three VIEs, the six properties classified as discontinued operations and four of the properties collateralized by the mortgage revenue bonds, earning management fees of approximately $305,000 and $608,000 for the three and six months ended June 30, 2013, respectively.  These property management fees are not Partnership expenses, but are paid in each case by the owner of the multifamily apartment property.  For properties owned by entities treated as Consolidated VIEs and for MF Properties, the property management fees are reflected as real estate operating expenses on the Company’s condensed consolidated financial statements.  The property management fees are paid out of the revenues generated by all properties financed by mortgage revenue bonds and taxable mortgages prior to the payment of debt service on the Partnership’s mortgage revenue bonds and taxable property loans.

The Partnership executed a Developer and Construction Management Agreement with two affiliates of AFCA 2 during the second quarter of 2013 in connection with the mixed-use development at the University of Nebraska - Lincoln (Note 7). Under the terms of this agreement, these affiliates received approximately $56,000 and $168,000 in the first three and six months of 2014. An affiliate of AFCA 2 acts as a placement advisor to the borrowers under the mortgage revenue bonds at the time they are acquired by the Company. Any and all advisory fees are paid by the borrower of the respective bonds and, accordingly, have not been reflected in the accompanying consolidated financial statements.

Two of the owners of the limited-purpose corporations which own two of the Consolidated VIEs held by the Company are employees of Burlington who are not involved in the operation or management of the Company and who are not executive officers or managers of Burlington.

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13. Issuances of Additional Beneficial Unit Certificates

In November 2013, a Registration Statement on Form S-3 was declared effective by the SEC under which the Partnership may offer up to $225.0 million of additional BUCs from time to time. In December 2013, the Partnership issued an additional 8,280,000 BUCs through an underwritten public offering at a public offering price of $6.25 per BUC pursuant to this new Registration Statement. Net proceeds realized by the Partnership from the issuance of these BUCs were approximately $48.2 million after payment of an underwriter’s discount and other offering costs of approximately $3.5 million. In January and February 2014, the Partnership issued an additional 9,200,000 BUCs through an underwritten public offering at a public offering price of $5.95 per BUC pursuant to this Registration Statement. Net proceeds realized by the Partnership from the issuance of these BUCs were approximately $51.3 million after payment of an underwriter’s discount and other offering costs of approximately $3.5 million.

14.  Interest Rate Derivative Agreements

As of June 30, 2014, the Company has six derivative agreements in order to mitigate its exposure to increases in interest rates on its variable-rate debt financing. The terms of the derivative agreements are as follows:
 
 
 Date Purchased
 
 Notional Amount
 
Effective Capped Rate
 
Maturity Date
 
Purchase Price
 
 Counterparty
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 2, 2010
 
$
31,936,667

 
3.00
%
 
September 1, 2017
 
$
921,000

 
Bank of New York Mellon
 
 
 
 

 
 

 
 
 
 

 
 
 
September 2, 2010
 
$
31,936,667

 
3.00
%
 
September 1, 2017
 
$
845,600

 
Barclays Bank PLC
 
 
 
 

 
 

 
 
 
 

 
 
 
September 2, 2010
 
$
31,936,667

 
3.00
%
 
September 1, 2017
 
$
928,000

 
Royal Bank of Canada
 
 
 
 
 
 
 
 
 
 
 
 
 
August 15, 2013
 
$
93,305,000

 
1.50
%
 
September 1, 2017
 
$
793,000

 
Deutsche Bank
 
 
 
 
 
 
 
 
 
 
 
 
 
February 18, 2014
 
$
41,250,000

 
1.00
%
 
March 1, 2017
 
$
230,500

 
SMBC Capital Markets, Inc
 
 
 
 
 
 
 
 
 
 
 
 
 
February 18, 2014
 
$
28,750,000

 
1.00
%
 
March 1, 2017
 
$
161,000

 
SMBC Capital Markets, Inc

In February 2014, the Company entered into two interest rate cap agreements with SMBC Capital Markets, Inc. for a notional amount of $70.0 million with an effective start date of March 1, 2014. These agreements effectively limit the interest component of the TOB financing correlated with the SIFMA index to a maximum of 1.0% on $70.0 million of the outstanding borrowings on the MBS TOB financing facilities and the PHC Certificates TOB financing facilities through a three year term ending March 1, 2017. These interest rate cap contracts cost approximately $390,000 and do not qualify for hedge accounting, therefore, changes in the estimated fair value of the interest rate derivatives are included in earnings.

On July 30, 2013, the Company purchased a new interest rate derivative with a notional amount of $93.3 million which represented the amount outstanding on the 2010 TEBS financing facility at August 1, 2013.  The maturity date of this interest rate derivative is September 1, 2017 and the effective capped interest rate is 1.5%.  On July 30, 2013, the Company also sold a new interest rate derivative to the same counterparty which had the same notional amount of $93.3 million and an effective capped interest rate of 3.0%.  The total cost of these two interest rate derivatives was approximately $800,000 and the derivative contracts do not qualify for hedge accounting, therefore, changes in the estimated fair value of the interest rate derivatives are included in earnings.  This interest rate corridor transaction effectively reduced the capped interest rate from 3.0% to 1.5% on the 2010 TEBS financing facility through the maturity date of the interest rate derivative contracts. In August 2013, the Company executed a master netting agreement with DB, which is the counterparty to these interest rate derivative contracts and is also the provider of the Company’s TOB financing facilities. The Company received $500,000 of cash collateral upon the execution of this master netting agreement. This $500,000 has been reported on a net basis against the cash collateral posted for the TOB financing facilities in the consolidated balance sheet as of June 30, 2014 and December 31, 2013.


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These interest rate derivatives do not qualify for hedge accounting and, accordingly, they are carried at fair value, with changes in fair value included in current period earnings within interest expense. The change in the fair value of these derivative contracts resulted in an increase in interest expense of approximately $434,000 and $610,000 for the three and six months ended June 30, 2014, respectively. The change in the fair value of these derivative contracts resulted in a decrease in interest expense of approximately $241,000 and $136,000 for the three and six months ended June 30, 2013, respectively. The valuation methodology used to estimate the fair value of the Company’s interest rate derivative agreements is disclosed in footnote 15.

15.   Fair Value Measurement

Current accounting guidance on fair value measurements establishes a framework for measuring fair value and provides for expanded disclosures about fair value measurements.  The guidance:
 
Defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date; and
Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk.  To increase consistency and comparability in fair value measurements and related disclosures, the fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.  The three levels of the hierarchy are defined as follows:
 
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs are unobservable inputs for asset or liabilities.

The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
 
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value.

Investments in Mortgage Revenue Bonds.  The fair values of the Company’s investments in mortgage revenue bonds have each been based on a discounted cash flow or yield to maturity analysis. The Company uses this same valuation methodology to estimate the fair value adjustment for its mortgage bond purchase commitments. There is no active trading market for the mortgage revenue bonds and price quotes for the mortgage revenue bonds are not available.  If available, the General Partner may also consider price quotes on similar mortgage revenue bonds or other information from external sources, such as pricing services.  The estimates of the fair values of these mortgage revenue bonds, whether estimated by the Company or based on external sources, are based largely on unobservable inputs the General Partner believes would be used by market participants.  Additionally, the calculation methodology used by the external sources and the Company encompasses the use of judgment in its application. To validate changes in the fair value of the Company’s investments in mortgage revenue bonds between reporting periods, the General Partner looks at the key inputs such as changes in the current market yields on similar bonds as well as changes in the operating performance of the underlying property serving as collateral for each bond. The General Partner validates that the changes in the estimated fair value of the mortgage revenue bonds move with the changes in these monitored factors. Given these facts the fair value measurement of the Company’s investment in mortgage revenue bonds is categorized as a Level 3 input. There is also an approximately $1.7 million and $5.2 million estimated fair market value adjustment related to forward bond purchase commitments that are categorized as a Level 3 input which were recorded in other comprehensive income (loss) during the three and six months ended June 30, 2014, respectively. The fair value of the bond purchase commitment is determined in the same manner as the mortgage revenue bonds.


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Investments in Public Housing Capital Fund Trust Certificates. The fair value of the Company’s investment in Public Housing Capital Fund Trust Certificates has been based on a yield to maturity analysis performed by the General Partner. There is no active trading market for the trusts’ certificates owned by the Company, but the General Partner will look at estimated values as determined by pricing services when available. The estimates of the fair values of these trusts’ certificates begin with the current market yield rate for a “AAA” rated tax-free municipal bond for a term consistent with the weighted-average life of each of the Public Housing Capital Fund trusts, adjusted largely for unobservable inputs the General Partner believes would be used by market participants. Additionally, the calculation methodology used by external pricing services and the Company encompasses the use of judgment in its application. The General Partner validates that the changes in the estimated fair value of Public Housing Capital Fund Trust Certificates move with the changes in the market yield rates of investment grade rated mortgage revenue municipal bonds with terms of similar length. Given these facts the fair value measurement of the Company’s investment in Public Housing Capital Fund Trust Certificates is categorized as a Level 3 input.
    
Investments in Mortgage-Backed Securities. The fair value of the Company’s investment in mortgage-backed securities is based upon prices obtained from a third party pricing service, which are indicative of market activity. The valuation methodology of the Company’s third party pricing service incorporates commonly used market pricing methods, incorporates trading activity observed in the market place, and other data inputs. The methodology also considers the underlying characteristics of each security, which are also observable inputs, including: coupon; maturity date; loan age; reset date; collateral type; geography; and prepayment speeds. The General Partner analyzes pricing data received from the third party pricing service by comparing it to valuation information obtained from at least one other third party pricing service, ensuring they are within a tolerable range of difference which the Company estimates as 7.5%. The General Partner also looks at observations of trading activity in the market place when available. Given these facts, the fair value measurements of the Company’s investment in mortgage-backed securities are categorized as Level 2 inputs.

Taxable Bonds. The fair values of the Company’s investments in taxable bonds have each been based on a discounted cash flow or yield to maturity analysis. There is no active trading market for the taxable bonds and price quotes are not available. The estimates of the fair values of these taxable bonds, whether estimated by the Company or based on external sources, are based largely on unobservable inputs the General Partner believes would be used by market participants.  Additionally, the calculation methodology used by the external sources and the Company encompasses the use of judgment in its application. To validate changes in the fair value of the Company’s investments in taxable bonds between reporting periods, management looks at the key inputs such as changes in the current market yields on similar bonds as well as changes in the operating performance of the underlying property serving as collateral for each bond. We validate that the changes in the estimated fair value of the taxable bonds move with the changes in these monitored factors. Given these facts the fair value measurement of the Company’s investment in taxable bonds is categorized as a Level 3 input.

Interest Rate Derivatives.  The effect of the Company’s interest rate caps is to set a cap, or upper limit, on the base rate of interest paid on the Company’s variable rate debt equal to the notional amount of the derivative agreement.  The effect of the Company’s interest rate swap is to change a variable rate debt obligation to a fixed rate for that portion of the debt equal to the notional amount of the derivative agreement.  The interest rate derivatives are recorded at fair value with changes in fair value included in current period earnings within interest expense.  The fair value of the interest rate derivatives is based on a model whose inputs are not observable and therefore are categorized as a Level 3 input. The inputs in the valuation model include three-month LIBOR rates, unobservable adjustments to account for the SIFMA index, as well as any recent interest rate cap trades with similar terms.

Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
 
Fair Value Measurements at June 30, 2014
Description
 
Assets at Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Assets
 
 
 
 
 
 
 
 
Mortgage Revenue Bonds
 
$
356,313,066

 
$

 
$

 
$
356,313,066

Bond Purchase Commitment
 
334,367

 

 

 
334,367

Public Housing Capital Fund Trust Certificates
 
64,997,717

 

 

 
64,997,717

MBS Investments
 
37,878,708

 

 
37,878,708

 

Taxable Bonds
 
4,370,023

 

 

 
4,370,023

Interest Rate Derivatives
 
669,712

 

 

 
669,712

Total Assets at Fair Value
 
$
464,563,593

 
$

 
$
37,878,708

 
$
426,684,885


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For Three Months Ended June 30, 2014
 
 
Fair Value Measurements Using Significant
 
 
Unobservable Inputs (Level 3)
 
 
Mortgage Revenue Bonds
 
Bond Purchase Commitment
 
 Public Housing Capital Fund Trust Certificates
 
 Taxable Bonds
 
Interest Rate Derivatives
 
Total
Beginning Balance April 1, 2014
 
$
316,471,727

 
$
(1,362,940
)
 
$
62,070,540

 
$
4,298,957

 
$
1,103,783

 
$
382,582,067

Total gains (losses) (realized/unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings
 

 

 

 

 
(434,071
)
 
(434,071
)
Included in other comprehensive income
 
10,960,638

 
1,697,307

 
3,138,575

 
146,066

 

 
15,942,586

Purchases
 
41,876,327

 

 

 

 

 
41,876,327

Mortgage revenue bond and MBS sales and redemption
 
(12,828,660
)
 

 

 

 

 
(12,828,660
)
Settlements
 
(166,967
)
 

 
(211,397
)
 
(75,000
)
 

 
(453,364
)
Ending Balance June 30, 2014
 
$
356,313,065

 
$
334,367

 
$
64,997,718

 
$
4,370,023

 
$
669,712

 
$
426,684,885

Total amount of losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held as of June 30, 2014
 
$

 
$

 
$

 
$

 
$
(434,071
)
 
$
(434,071
)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For Six Months Ended June 30, 2014
 
 
Fair Value Measurements Using Significant
 
 
Unobservable Inputs (Level 3)
 
 
Mortgage Revenue Bonds
 
Bond Purchase Commitment
 
 Public Housing Capital Fund Trust Certificates
 
Taxable Bonds
 
Interest Rate Derivatives
 
Total
Beginning Balance January 1, 2014
 
$
285,318,171

 
$
(4,852,177
)
 
$
62,056,379

 
$
4,075,953

 
$
888,120

 
$
347,486,446

Total gains (losses) (realized/unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
          Included in earnings
 

 

 

 

 
(609,908
)
 
(609,908
)
Included in other comprehensive loss
 
25,033,658

 
5,186,544

 
4,796,434

 
369,070

 

 
35,385,706

Purchases
 
76,655,127

 

 

 

 

 
76,655,127

Purchase interest rate derivative
 

 

 

 

 
391,500

 
391,500

Mortgage revenue bond and MBS sales and redemption
 
(30,464,798
)
 

 

 

 

 
(30,464,798
)
Settlements
 
(229,093
)
 

 
(1,855,095
)
 
(75,000
)
 

 
(2,159,188
)
Ending Balance June 30, 2014
 
$
356,313,065

 
$
334,367

 
$
64,997,718

 
$
4,370,023

 
$
669,712

 
$
426,684,885

Total amount of losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held as of June 30, 2014
 
$

 
$

 
$

 
$

 
$
(609,908
)
 
$
(609,908
)


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Fair Value Measurements at December 31, 2013
Description
 
Assets at Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Assets
 
 
 
 
 
 
 
 
Mortgage Revenue Bonds
 
$
285,318,171

 
$

 
$

 
$
285,318,171

Bond Purchase Commitment
 
(4,852,177
)
 

 

 
(4,852,177
)
Public Housing Capital Fund Trusts
 
62,056,379

 

 

 
62,056,379

MBS Investments
 
37,845,661

 

 
37,845,661

 

Taxable Bonds
 
4,075,953

 

 

 
4,075,953

Interest Rate Derivatives
 
888,120

 

 

 
888,120

Total Assets at Fair Value
 
$
385,332,107

 
$

 
$
37,845,661

 
$
347,486,446


 
 
For Three Months Ended June 30, 2013
 
 
Fair Value Measurements Using Significant
 
 
Unobservable Inputs (Level 3)
 
 
Mortgage Revenue Bonds
 
Public Housing Capital Fund Trust Certificates
 
Taxable Bonds
 
Interest Rate Derivatives
 
Total
Beginning Balance April 1, 2013
 
$
206,859,175

 
$
64,613,713

 
$
2,364,981.85

 
$
274,071

 
$
274,111,941

Total gains (losses) (realized/unrealized)
 
 
 
 
 
 
 
 
 
 
          Included in earnings
 

 

 

 
240,904

 
240,904

          Included in other comprehensive loss
 
(3,484,499
)
 
(1,840,314
)
 
(42,404
)
 

 
(5,367,217
)
Purchases
 
23,810,000

 

 
831,000

 

 
24,641,000

Mortgage revenue bond redemption
 
(16,052,849
)
 

 

 

 
(16,052,849
)
Mortgage revenue bond foreclosure
 
(11,581,266
)
 

 

 

 
(11,581,266
)
Settlements
 
(434,968
)
 
(14,131
)
 
(70,000
)
 

 
(519,099
)
Ending Balance June 30, 2013
 
$
199,115,593

 
$
62,759,268

 
$
3,083,578

 
$
514,975

 
$
265,473,414

Total amount of gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held as of June 30, 2013
$

 
$

 
$

 
$
240,904

 
$
240,904


 
 
 
 
 
 
 
 
 
 
 
 
 
For Six Months Ended June 30, 2013
 
 
Fair Value Measurements Using Significant
 
 
Unobservable Inputs (Level 3)
 
 
mortgage Revenue Bonds
 
Public Housing Capital Fund Trust Certificates
 
Taxable Bonds
 
Interest Rate Derivatives
 
Total
Beginning Balance January 1, 2013
 
$
145,237,376

 
$
65,389,298

 
$
1,524,873.14

 
$
378,729

 
$
212,530,276

Total gains (losses) (realized/unrealized)
 
 
 
 
 
 
 
 
 
 
         Included in earnings
 

 

 

 
136,246

 
136,246

         Included in other comprehensive income (loss)
 
144,376

 
(2,601,770
)
 
(6,295.18
)
 

 
(2,463,689
)
     Purchases
 
62,210,000

 

 
1,635,000

 

 
63,845,000

Mortgage revenue bond redemption
 
(16,052,849
)
 

 

 

 
(16,052,849
)
Mortgage revenue bond foreclosure
 
(11,581,266
)
 

 

 

 
(11,581,266
)
     Settlements
 
(423,210
)
 
(28,260
)
 
(70,000
)
 

 
(521,470
)
Ending Balance June 30, 2013
 
$
199,115,593

 
$
62,759,268

 
$
3,083,578

 
$
514,975

 
$
265,473,414

Total amount of gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held as of June 30, 2013
 
$

 
$

 
$

 
$
136,246

 
$
136,246


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Gains and losses included in earnings for the period shown above are included in interest expense.

The Company calculates a fair value of each financial instrument using a discounted cash flow model based on the debt amortization schedules at the effective rate of interest for each period represented. This estimate of fair value is based on Level 3 inputs. The table below represents the fair value of the debt held on the balance sheet for June 30, 2014 and December 31, 2013, respectively.
 
June 30, 2014
 
December 31, 2013
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Financial Liabilities:
 
 
 
 
 
 
 
Debt financing
$
244,468,000

 
$
244,283,717


$
257,274,000


$
258,639,691

Mortgages payable
$
69,547,725

 
$
68,886,229

 
$
57,087,320

 
$
58,117,798


16. Commitments and Contingencies

The Company, from time to time, may be subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are frequently covered by insurance. If it has been determined that a loss is probable, the estimated amount of the loss is accrued in the consolidated financial statements. While the resolution of these matters cannot be predicted with certainty, management believes the final outcome of such matters will not have a material effect on the Company’s consolidated financial statements.

Certain of the MF Properties own apartment properties that generated LIHTCs for the previous partners in these partnerships.  In connection with the acquisition of partnership interests in these partnerships by subsidiaries of the Company, the Company has agreed to reimburse the prior partners for any liabilities they incur due to recapture of these tax credits to the extent the recapture liability is due to the operation of the properties in a manner inconsistent with the laws and regulations relating to such tax credits after the date of acquisition. No amount has been accrued for this contingent liability because management believes that the likelihood of any payments being required thereunder is remote.

The Company provided a guarantee on the $2.8 million mortgage secured by the Abbington at Stones River, a 96 unit multifamily property located in Tennessee, in addition to providing the approximately $1.6 million taxable property loan to Foundation for Affordable Housing, the not-for-profit owner of the property. Based on the historical financial performance of the property and its estimated fair value, the Company estimates there is no value to record for this mortgage guarantee.

In connection with the sale of the Greens Property, the Company entered into guarantee agreements with the BC Partners under which the Company has guaranteed certain obligations of the general partner of the Greens of Pine Glen limited partnership, 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. No amount has been accrued for this contingent liability because the likelihood of a repurchase event is remote. The maximum exposure to the Company at June 30, 2014, under the guarantee provision of the repurchase clause is approximately $1.3 million which represents 75% of the equity contributed by BC Partners to date.

In connection with the Ohio Properties transaction in 2011, 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, 25% of the BC equity would remain 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 in Note 9. No amount has been accrued for this contingent liability because the likelihood of a repurchase event is remote. The maximum exposure to the Company at June 30, 2014, under the guarantee provision of the repurchase clause is approximately $4.9 million which represents 75% of the equity contributed by BC Partners.

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In March 2013, a wholly-owned subsidiary of the Company executed a 35-year ground lease with the University of Nebraska - Lincoln (“Lessor”) with an annual lease payment of $100. The leased property will have a mixed-use development consisting of a 1,605 stall parking garage and 475 bed student housing complex constructed on it. The Lessor will own the parking garage and the Company will own the student housing. The Company currently estimates the construction of the student housing will cost approximately $34.0 million and executed a guaranteed maximum price contract with the general contractor for the construction. The lease agreement has a stipulation that if the parking garage is not completed by August 1, 2014, the Company will pay damages of $6,000 per day of delayed completion to the Lessor. The Company’s construction contract with the general contractor also stipulates that the general contractor will pay the Company $6,000 per day of liquidated damages for each day subsequent to August 1, 2014 that the parking garage is not completed. Construction has commenced and is estimated to be completed before the August 1, 2014 deadline.

In June 2013, the Partnership executed a Bond Purchase Commitment agreeing to purchase an $8.0 million new mortgage revenue bond and a $500,000 taxable bond both secured by a multifamily property under construction in Albuquerque, New Mexico. The mortgage revenue bond will have a stated annual interest rate of 6.0% per annum, the taxable bond will have a stated rate of 12.0% per annum, and bond proceeds must be used to pay off the third party construction loan. The Partnership accounts for the Bond Purchase Commitment as an available-for-sale security and, as such, records the change in estimated fair value of the Bond Purchase Commitment as an asset or liability with changes in such valuation recorded in other comprehensive income.  As of June 30, 2014, the Partnership has estimated the value of this Bond Purchase Commitment and recorded in other assets an asset of approximately $41,000.

The Partnership has also executed a Guarantee Agreement with the construction lender for this Albuquerque project. The terms of the Guarantee Agreement require the Partnership to guarantee that all construction costs are paid when due and pay any remaining outstanding principal and unpaid interest on the construction loan on or before July 1, 2015. Construction is expected to be completed in the first quarter of 2015 when the Partnership anticipates purchasing the mortgage revenue bond and taxable bond. No amounts have been accrued for this Guarantee Agreement as the Partnership expects that the construction loan will be sufficient to pay all costs during the construction period and that the proceeds from the mortgage revenue bond, taxable bond, and third party equity contribution to be sufficient to pay off all outstanding principal and interest on the construction loan on or before July 1, 2015.

As the holder of residual interests issued in connection with its TEBS and TOB bond financing arrangements, the Partnership is required to guarantee certain losses that can be incurred by the trusts created in connection with these financings. These guarantees may result from a downgrade in the investment rating of mortgage revenue bonds held by the trust or of the senior securities issued by the trust, a ratings downgrade of the liquidity provider for the trust, increases in short term interest rates beyond pre-set maximums, an inability to re-market the senior securities or an inability to obtain liquidity for the trust. In each of these cases, the trust will be collapsed. If the proceeds from the sale of the trust collateral are not sufficient to pay the principal amount of the senior securities with accrued interest and the other expenses of the trusts, the Partnership will be required to fund any such shortfall pursuant to its guarantee.

17. Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition guidance in Topic 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services. This standard is effective for annual reporting periods beginning after December 15, 2016. The Partnership is still evaluating the impact of this pronouncement on the consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 raises the threshold for disposals to qualify as discontinued operations. It also requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The ASU is effective for fiscal years beginning after December 15, 2014, and interim periods within those years.  The Partnership is still evaluating the impact of this pronouncement on the consolidated financial statements. 



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18. Subsequent Events

Mortgage Revenue Bond Purchase
In August 2014, the Company acquired at par the approximate $18.1 million mortgage revenue bond secured by Bruton Apartments, a 264 unit multifamily apartment complex under construction in Dallas, Texas. The mortgage revenue bond carries an annual interest rate of 6.0% and matures on August 1, 2054.

Forward Commitment
On July 2, 2014, the Partnership entered into a Bond Purchase Commitment agreeing to purchase up to approximately $9.9 million new mortgage revenue bond secured by a multifamily property under construction in Vancouver, Washington. The mortgage revenue bond will have a stated annual interest rate of 6.25% and bond proceeds must be used to pay off the third party construction loan. The Partnership will account for the Bond Purchase Commitment as an available-for-sale security and, as such, will record any changes in estimated fair value of the Bond Purchase Commitment as an asset or liability with changes in such valuation recorded in other comprehensive income. 

2014 TEBS Financing
On July 2, 2014, a separate transaction occurred as a preliminary transaction to achieve the closing of the 2014 TEBS financing. DB purchased the SPEARS which securitized four TOB Trust facilities for approximately $45.9 million and approximately $26.5 million in the related residual LIFERS. DB held the ten mortgage revenue bonds that collateralized this transaction, the Greens Property, Arbors at Hickory Ridge, Avistar on the Boulevard, Avistar at Chase Hill, Avistar at the Crest, Avistar on the Hills Apartments, Avistar at the Oaks Apartments, and Avistar in 09 Apartments, until the 2014 TEBS financing facility closed on July 10, 2014.

On July 10, 2014, the Partnership and its newly created consolidated subsidiary, ATAX TEBS II, LLC (“the 2014 Sponsor”), entered into a number of agreements relating to a new long-term debt financing facility provided through the securitization of thirteen mortgage revenue bonds, with a par value of approximately $118.4 million, owned by the the 2014 Sponsor pursuant to the 2014 TEBS financing. The 2014 TEBS financing facility essentially provides the Partnership with a long-term variable-rate debt facility at interest rates reflecting prevailing short-term tax-exempt rates.
Effective July 1, 2014, the Partnership transferred the following mortgage revenue bonds to the 2014 Sponsor pursuant to the 2014 TEBS financing described above:

 
 
July 1, 2014
Description of Mortgage Revenue Bonds
 
 Bond Par Amount
 
Financial Statement Presentation
 
 
Arbors at Hickory Ridge
 
$
11,450,000

 
Mortgage revenue bond
Avistar at Chase Hill A Bond
 
10,000,000

 
Mortgage revenue bond
Avistar at the Crest A Bond
 
9,700,000

 
Mortgage revenue bond
Avistar at the Oaks A Bond
 
7,800,000

 
Mortgage revenue bond
Avistar in 09 A Bond
 
6,735,000

 
Mortgage revenue bond
Avistar on the Boulevard A Bond
 
16,525,000

 
Mortgage revenue bond
Avistar on the Hills
 
5,389,000

 
Mortgage revenue bond
Copper Gate Apartments
 
5,220,000

 
Mortgage revenue bond
 Greens Property A Bond
 
8,396,000

 
Mortgage revenue bond
 Harden Ranch A Bond
 
6,960,000

 
Mortgage revenue bond
The Palms at Premier Park Apartments
 
20,152,000

 
Mortgage revenue bond
Tyler Park Apartments A Bond
 
6,075,000

 
Mortgage revenue bond
Westside Village A Bond
 
3,970,000

 
Mortgage revenue bond
  Total
 
$
118,372,000

 
 


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The mortgage revenue bonds were then securitized by transferring these assets to Freddie Mac in exchange for Class A and Class B Freddie Mac Multifamily Variable Rate Certificates (collectively, the “2014 TEBS Certificates”) issued by Freddie Mac. The 2014 TEBS Certificates represent beneficial interests in the securitized assets held by Freddie Mac. The Class A TEBS Certificates were issued in an initial principal amount of approximately $94.7 million and were sold through a placement agent to unaffiliated investors. The Class B 2014 TEBS Certificates were issued in an initial principal amount of approximately $23.7 million and were retained by the 2014 Sponsor. The gross proceeds from the 2014 TEBS financing were approximately $94.7 million. After the payment of transaction expenses, the Partnership received net proceeds from the 2014 TEBS financing of approximately $91.6 million. The Partnership applied approximately $72.4 million of these net proceeds to retire the short-term securitization that previously existed on these bonds and $6.3 million to a stabilization escrow.
The holders of the Class A 2014 TEBS Certificates are entitled to receive regular payments of interest from Freddie Mac at a variable rate which resets periodically based on the weekly SIFMA floating index rate plus certain credit, facility, remarketing, and servicing fees (the “Facility Fees”). As of closing, the SIFMA rate was equal to 0.04% and the total Facility Fees were approximately 1.5%, resulting in a total initial cost of borrowing of approximately 1.5%. In order to mitigate its exposure to interest rate fluctuations on the variable rate 2014 TEBS financing, the 2014 Sponsor also entered into interest rate cap agreements with Barclays Bank PLC, the Royal Bank of Canada, and Sumitomo Mitsui Banking Corporation, each in an initial notional amount of approximately $31.6 million, which effectively limits the interest payable by the 2014 Sponsor on the Class A 2014 TEBS Certificates to a fixed rate of 3.0% per annum on the combined notional amounts of the interest rate cap agreements through August 15, 2019.
Payment of interest on the Class A 2014 TEBS Certificates will be made from the interest payments received by Freddie Mac from the Bonds held by Freddie Mac on designated interest payment dates prior to any payments of interest on the Class B 2014 TEBS Certificates held by the 2014 Sponsor. As the holder of the Class B 2014 TEBS Certificates, the 2014 Sponsor is not entitled to receive interest payments on the Class B TEBS Certificates at any particular rate, but will be entitled to all payments of principal and interest on the Bonds held by Freddie Mac after payment of principal and interest due on the Class A 2014 TEBS Certificates and payment of all Facility Fees and associated expenses. Accordingly, the amount of interest paid to the 2014 Sponsor on the Class B 2014 TEBS Certificates is expected to vary over time, and could be eliminated altogether, due to fluctuations in the interest rate payable on the Class A 2014 TEBS Certificates, Facility Fees, expenses, and other factors.

Freddie Mac has guaranteed payment of scheduled principal and interest payments on the Class A 2014 TEBS Certificates and also has guaranteed payment of the purchase price of any Class A 2014 TEBS Certificates that are tendered to Freddie Mac in accordance with their terms which cannot be remarketed to new holders within five business days.  The 2014 Sponsor is obligated to reimburse Freddie Mac for certain expenses, including any payments made by Freddie Mac under its guaranty. These obligations of the 2014 Sponsor are also guaranteed by the Partnership.  The Partnership also entered into various subordination agreements with Freddie Mac under which the Partnership has subordinated its rights and remedies with respect to the mortgage revenue and taxable bonds and mortgage loans made by it to the owners of properties securing certain of the Bonds to the rights of Freddie Mac as the holder of the Bonds.

The term of the 2014 TEBS financing coincides with the terms of the assets securing the 2014 TEBS Certificates, except the 2014 Sponsor may elect to purchase all (but not less than all) of the Bonds from Freddie Mac on either July 15, 2019 or July 15, 2024.  The 2014 Sponsor also retains a right to require a Bond to be released from Freddie Mac in the event of a payment default on the Bond which remains uncured for two consecutive scheduled payment dates or 60 days, whichever is shorter, by paying Freddie Mac the unpaid principal and accrued interest on the Bond plus a yield maintenance payment.  In addition, the 2014 Sponsor has a limited right to substitute new bonds for existing Bonds held by Freddie Mac in certain circumstances. Should the Partnership not elect to terminate the TEBS Financing on these dates the full term of the 2014 TEBS Financing runs through the final principal payment date associated with the securitized bonds, or August 1, 2050.

TOB Trust Financing
In July 2014, the Partnership executed a new TOB Trust under its credit facility with DB securitizing the Live 929 Apartments mortgage revenue bond borrowing approximately $35.0 million. The TOB Trust facility has an approximate 4.4% per annum fixed interest rate and will mature in July 2019. Pursuant to the terms of this TOB trust the Partnership is required to reimburse DB for any shortfall realized on the contractual cash flows on the SPEARS.

In July 2014, the Partnership executed a new TOB Trust under its credit facility with DB securitizing the Decatur-Angle mortgage revenue bond borrowing $21.9 million. The new TOB Trust facility will mature in October 2016. On the date of closing the total fixed TOB Trust facility interest rate will be approximately 4.3% per annum. This will replace the March 2014 TOB Trust which was securitized by the Decatur-Angle mortgage revenue bond (Note 10). Pursuant to the terms of this TOB trust the Partnership is required to reimburse DB for any shortfall realized on the contractual cash flows on the SPEARS.


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19.  Segment Reporting

The Company consists of five reportable segments, Mortgage Revenue Bond Investments, MF Properties, Public Housing Capital Fund Trusts, MBS Investments, and Consolidated VIEs.  In addition to the five reportable segments, the Company also separately reports its consolidation and elimination information because it does not allocate certain items to the segments.

Mortgage Revenue Bond Investments Segment

The Mortgage Revenue Bond Investments segment consists of the Company’s portfolio of mortgage revenue bonds which have been issued to provide construction and/or permanent financing of multifamily residential apartments.  Such mortgage revenue bonds are held as long-term investments.  As of June 30, 2014, the Company held forty-one mortgage revenue bonds not associated with Consolidated VIEs and two mortgage revenue bonds associated with Consolidated VIEs which are bonds that are eliminated in consolidation on the Company’s financial statements. The multifamily apartment properties financed by the forty-three mortgage revenue bonds contain a total of 5,607 rental units. Three of the bonds’ properties are not operational and are under construction (Note 4).

MF Properties Segment

The MF Properties segment consists of indirect equity interests in multifamily apartment properties which are not currently financed by mortgage revenue bonds held by the Partnership but which the Partnership eventually intends to finance by such bonds through a restructuring.  In connection with any such restructuring, the Partnership will be required to dispose of any equity interest held in such MF Properties.  The Partnership’s interests in its current MF Properties are not currently classified as Assets held for sale because the Partnership is not actively marketing them for sale, there is no definitive purchase agreement in existence that, under current guidance, can be recognized as a sale of real estate assets and, therefore, no sale is expected in the next twelve months. During the time the Partnership holds an interest in an MF Property, any net rental income generated by the MF Properties in excess of debt service will be available for distribution to the Partnership in accordance with its interest in the MF Property.  Any such cash distribution will contribute to the Partnership’s CAD.  As of June 30, 2014, the Company consolidated the results of eight MF Properties containing a total of 1,582 rental units plus the student housing complex in Lincoln, Nebraska that is currently under construction (Note 7).

Other Investments

The Partnership Agreement authorizes the Company to make investments other than in mortgage revenue bonds provided that these other investments are rated in one of the four highest rating categories by a national securities rating agency and do not constitute more than 25% of the Company’s assets at the time of acquisition as required under the Agreement of Limited Partnership. In addition, the amount of other investments is limited based on the conditions to the exemption from registration under the Investment Company Act of 1940. The Company currently owns other investments, PHC Certificates and MBS, which are reported as two separate segments. The PHC Trusts segment consists of the assets, liabilities, and related income and expenses of the PHC Trusts. The Partnership consolidates the PHC Trusts due to ownership of the LIFERS issued by the three PHC Trusts, which hold 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 HUD. This investment was acquired in July 2012. The MBS segment consists of the assets, liabilities, and related income and expenses of the MBS TOB Trusts that the Company consolidated due to its ownership of the LIFERs issued by the MBS TOB Trusts. These MBS TOB Trusts are securitizations of state-issued mortgage-backed securities which are backed by residential mortgage loans. These investments were acquired during the fourth quarter of 2012 through the second quarter of 2013 (Note 6).
The Consolidated VIE Segment

The Consolidated VIE segment consists of multifamily apartment properties which are financed with mortgage revenue bonds held by the Partnership, the assets, liabilities and operating results of which are consolidated with those of the Partnership as a result of consolidation guidance.  The mortgage revenue bonds on these Consolidated VIE properties are eliminated from the Company’s financial statements as a result of such consolidation, however, such bonds are held as long-term investments by the Partnership which continues to be entitled to receive principal and interest payments on such bonds.  The Company does not actually own an equity position in the Consolidated VIEs or their underlying properties.  As of June 30, 2014, the Company consolidated two VIEs containing a total 410 units (Note 3).


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Management closely monitors and evaluates the financial reporting associated with and the operations of the Consolidated VIEs and the MF Properties and performs such evaluation separately from the other operations of the Partnership through interaction with the affiliated property management company which manages the multifamily apartment properties held by the Consolidated VIEs and the MF Properties.
 
Management’s goals with respect to the properties constituting the Company’s Consolidated VIE and MF Properties reportable segments is to generate increasing amounts of net rental income from these properties that will allow them to (i) make all payments of base interest, and possibly pay contingent interest, on the properties included in the Mortgage Revenue Bond Investments segment and the Consolidated VIE segment, and (ii) distribute net rental income to the Partnership from the MF Properties segment until such properties can be refinanced with additional mortgage revenue bonds meeting the Partnership’s investment criteria.  In order to achieve these goals, management of these multifamily apartment properties is focused on: (i) maintaining high economic occupancy and increasing rental rates through effective leasing, reduced turnover rates and providing quality maintenance and services to maximize resident satisfaction; (ii) managing operating expenses and achieving cost reductions through operating efficiencies and economies of scale generally inherent in the management of a portfolio of multiple properties; and (iii) emphasizing regular programs of repairs, maintenance and property improvements to enhance the competitive advantage and value of its properties in their respective market areas.


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The following table details certain key financial information for the Company’s reportable segments for the three and six months ended June 30, 2014 and 2013:
 
 
For the Three Months Ended,
 
For the Six Months Ended,
 
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
 Total revenues
 
 
 
 
 
 
 
 
 Mortgage Revenue Bond Investments
 
$
6,393,180

 
$
10,327,518

 
$
14,654,093

 
$
18,771,045

 MF Properties
 
3,134,220

 
2,731,740

 
6,284,564

 
5,251,479

 Public Housing Capital Fund Trust Certificates
 
776,174

 
814,884

 
1,577,002

 
1,630,313

 Mortgage-Backed Securities
 
396,518

 
422,811

 
817,678

 
753,165

 Consolidated VIEs
 
785,552

 
1,220,306

 
1,586,424

 
2,433,375

 Consolidation/eliminations
 
(232,665
)
 
(376,676
)
 
(465,942
)
 
(754,385
)
 Total revenues
 
$
11,252,979

 
$
15,140,583

 
$
24,453,819

 
$
28,084,992

 
 
 
 
 
 
 
 
 
 Interest expense
 
 
 
 
 
 
 
 
 Mortgage Revenue Bond Investments
 
$
1,491,783

 
$
460,827

 
$
2,641,704

 
$
1,119,324

 MF Properties
 
460,209

 
520,784

 
1,023,550

 
1,023,789

 Public Housing Capital Fund Trust Certificates
 
334,840

 
321,733

 
672,397

 
599,593

 Mortgage-Backed Securities
 
114,019

 
123,005

 
232,749

 
219,916

 Consolidated VIEs
 
561,308

 
825,466

 
1,119,192

 
1,644,629

 Consolidation/eliminations
 
(561,308
)
 
(825,466
)
 
(1,119,192
)
 
(1,644,629
)
 Total interest expense
 
$
2,400,851

 
$
1,426,349

 
$
4,570,400

 
$
2,962,622

 
 
 
 
 
 
 
 
 
 Depreciation expense
 
 
 
 
 
 
 
 
 Mortgage Revenue Bond Investments
 
$

 
$

 
$

 
$

 MF Properties
 
1,027,112

 
912,411

 
2,046,478

 
1,761,731

 Public Housing Capital Fund Trust Certificates
 

 

 

 

 Mortgage-Backed Securities
 

 

 

 

 Consolidated VIEs
 
233,498

 
348,146

 
466,279

 
693,454

 Consolidation/eliminations
 

 

 

 

 Total depreciation expense
 
$
1,260,610

 
$
1,260,557

 
$
2,512,757

 
$
2,455,185

 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
 
 
 
 
 
 
 
 Mortgage Revenue Bond Investments
 
$
3,286,874

 
$
3,844,988

 
$
8,914,974

 
$
10,266,400

 MF Properties
 
(203,660
)
 
(362,197
)
 
(428,271
)
 
(726,691
)
 Public Housing Capital Fund Trust Certificates
 
434,180

 
485,956

 
890,298

 
1,016,414

 Mortgage-Backed Securities
 
282,371

 
272,511

 
582,261

 
487,152

 Consolidated VIEs
 
(477,027
)
 
(761,719
)
 
(921,125
)
 
(1,454,951
)
 Consolidation/eliminations
 
335,345

 
459,580

 
666,672

 
911,853

Income - America First Multifamily Investors, L. P.
 
$
3,658,083

 
$
3,939,119

 
$
9,704,809

 
$
10,500,177

 
 
 
 
 
 
 
 
 
 Net income (loss)
 
 
 
 
 
 
 
 
 Mortgage Revenue Bond Investments
 
$
3,286,874

 
$
3,844,988

 
$
8,914,974

 
$
10,266,400

 MF Properties
 
(203,286
)
 
(346,156
)
 
(427,794
)
 
1,049,718

 Public Housing Capital Fund Trust Certificates
 
434,180

 
485,956

 
890,298

 
1,016,414

 Mortgage-Backed Securities
 
282,371

 
272,511

 
582,261

 
487,152

 Consolidated VIEs
 
(477,027
)
 
(761,719
)
 
(921,125
)
 
(1,454,951
)
 Consolidation/eliminations
 
335,345

 
459,580

 
666,672

 
911,853

Net income - America First Multifamily Investors, L. P.
 
$
3,658,457

 
$
3,955,160

 
$
9,705,286

 
$
12,276,586



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The following table details certain key financial information for the Company’s reportable segments as of June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
 
December 31, 2013
 Total assets
 
 
 
 
 Mortgage Revenue Bond Investments
 
$
541,866,695

 
$
442,175,645

 MF Properties
 
97,972,223

 
83,580,479

 Public Housing Capital Fund Trusts
 
65,374,617

 
62,449,028

 Mortgage-Backed Securities
 
38,402,471

 
38,427,654

 Consolidated VIEs
 
13,676,925

 
14,019,837

 Consolidation/eliminations
 
(103,947,599
)
 
(106,419,611
)
 Total assets
 
$
653,345,332

 
$
534,233,032

 
 
 
 
 
 Total partners’ capital
 
 
 
 
 Mortgage Revenue Bond Investments
 
$
302,983,520

 
$
231,042,138

 MF Properties
 
21,994,912

 
23,107,538

 Public Housing Capital Fund Trusts
 
17,602,368

 
13,336,761

 Mortgage-Backed Securities
 
7,262,630

 
4,397,356

 Consolidated VIEs
 
(22,432,900
)
 
(21,511,776
)
 Consolidation/eliminations
 
(42,607,305
)
 
(47,237,930
)
 Total partners’ capital
 
$
284,803,225

 
$
203,134,087




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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In this Management’s Discussion and Analysis, the “Partnership” refers to America First Multifamily Investors, L.P. and its Consolidated Subsidiaries at June 30, 2014 which consist of:

ATAX TEBS I, LLC, a special purpose entity owned and controlled by the Partnership, created to hold mortgage revenue bonds in order to facilitate the Tax Exempt Bond Securitization (“TEBS”) Financing with Freddie Mac (see Note 10 to the consolidated financial statements).
Nine multifamily apartments (“MF Properties”) are majority owned by two limited partnerships in which a subsidiary of the Partnership holds a 99% limited partner interest in three and four limited liability companies of which a subsidiary of the Partnership owns a 100% member interest.

The “Company” refers to the condensed consolidated financial statements reported in this Form 10-Q which include the assets, liabilities and results of operations of the Partnership, its Consolidated Subsidiaries, and two entities in which the Partnership does not hold an ownership interest but which own multifamily apartment properties financed with 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 (the “Consolidated VIEs”). All transactions and accounts between the Partnership and the VIEs have been eliminated in consolidation.

Critical Accounting Policies

The Company’s critical accounting policies are the same as those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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.

Executive Summary

For the three months ended June 30, 2014 and 2013, the Company generated Net income of approximately $3.7 million and $4.0 million, respectively. For the six months ended June 30, 2014 and 2013, the Company generated Net income of approximately $9.7 million and $12.3 million, respectively. During the first half of 2014, the Company realized an approximate $2.8 million gain from the Lost Creek mortgage revenue bond redemption and an approximate $873,000 gain from the Autumn Pines mortgage revenue bond sale. During the first half of June 30, 2013, the Company realized approximately $6.5 million in contingent mortgage interest income offset by approximately $4.6 million in a realized loss on a taxable property loan related to the redemption of the Iona Lakes mortgage revenue bond. In addition, the Company realized approximately $5.3 million in mortgage revenue bond and taxable property loan interest income, a $250,000 guarantee fee, and an approximate $1.8 million gain on sale of discontinued operations in the first half of 2013 due to the recognition of the sale of the Ohio Properties. New mortgage revenue bond and MBS purchases during the second half of 2013 and first half of 2014 resulted in the Company reporting an approximate $2.6 million and $5.3 million in additional recurring mortgage revenue bond interest income in the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013, respectively. Offsetting these increases was an increase in interest expense from the first half of 2013 to the first half of 2014 due to increased borrowings and the adjustment of the derivatives to fair value.

The Company had a slight net increase in property revenues, real estate operating expenses, and depreciation and amortization expenses related to the Woodland Park foreclosure in May of 2013 which was offset by the deconsolidation of Lake Forest during the fourth quarter of 2013. Overall economic occupancy (which is adjusted to reflect rental concessions, delinquent rents, and non-revenue units such as model units and employee units) of the apartment properties that the Partnership has financed with mortgage revenue bonds was approximately 84% for the first six months of 2014 and approximately 88% for the first six months of 2013.  Overall economic occupancy of the MF Properties was approximately 85% for the first six months of 2014 and approximately 81% for the first six months of 2013.

The Company generated Cash Available for Distribution (“CAD”) of approximately $5.3 million and $5.7 million for the three months ended June 30, 2014 and 2013, respectively. The Company generated CAD of approximately $12.4 million and $10.7 million for the six months ended June 30, 2014 and 2013, respectively. See further discussion of CAD in the Liquidity and Capital Resources section in the Management’s Discussion and Analysis. The majority of this increase was due to the gains realized related to the Lost Creek mortgage bond redemption and the Autumn Pines mortgage revenue bond sale gains offset by increased interest expense due to increased borrowings and the change in derivatives.


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Recent Investment Activity

In June 2014, the Partnership committed to the purchase of an approximate $40.3 million par value mortgage revenue bond secured by the Live 929 Apartments, with a 5.78% annual stated interest rate. The project is a 321-unit, 572-bed existing student housing project on the campus of The Johns Hopkins University School of Medicine in Baltimore, Maryland. This investment will close upon execution of a $35.0 million tender option bond (“TOB”) Trust under the existing TOB structure (see Note 10). At June 30, 2014 the $35.0 million obligation is reported on the balance sheet as Due upon settlement of Live 929 Apartments. This amount will be converted into a TOB financing upon settlement. The remaining cash to close the commitment, approximately $5.3 million, will be paid when the TOB financing is executed and is currently reported in accounts payable and accrued expenses on the balance sheet (see Note 4).

On June 30, 2014 the Company finalized the restructuring of twelve mortgage revenue bonds related to Avistar on the Boulevard, Avistar at Chase Hill, Avistar at the Crest, Avistar on the Hills Apartments, Avistar at the Oaks Apartments, and Avistar in 09 Apartments purchased in June and February 2013 (see Note 4). In connection with the mortgage revenue bond restructuring the Company loaned these entities approximately $526,000 to cover the costs of restructuring the mortgage revenue bonds. These taxable loans have a stated interest rate of 12% per annum due monthly with any unpaid balance due on June 26, 2024 (see Notes 4 and 8).

In May 2014, the Company sold a portion of the MBS TOB Trusts for an amount almost equal to the outstanding cost adjusted for the amortization and premium. This approximately $3.7 million par value MBS had been acquired for approximately $3.8 million in November 2012 (see Note 6).

In April 2014, the mortgage revenue bond secured by Autumn Pines was sold for the outstanding principal and accrued base interest. The Company received approximately $13.1 million for the Autumn Pines mortgage revenue bond and recognized a gain of approximately $873,000 after payment of all TOB related financing fees. This gain is Tier 2 income with approximately $650,000 allocated to the unitholders. This mortgage revenue bond had been acquired at a discount on June 1, 2011 (see Note 4).

In February 2014, the Partnership acquired a senior $7.0 million par value and a subordinate $2.3 million par value mortgage revenue bond secured by Harden Ranch, a 100 unit multifamily apartment complex in Salinas, California. The senior mortgage revenue bond carries an annual interest rate of 5.75% and matures on March 1, 2031. The subordinate mortgage revenue bond carries an annual interest rate of 5.50% for the first year and 8.0% for the second year and matures on March 1, 2016 (see Note 4).

In February 2014, the Company acquired a senior $23 million par value mortgage revenue bond secured by Decatur-Angle Apartments, a 302 unit multifamily apartment complex under construction in Fort Worth, Texas. The mortgage revenue bond carries an annual interest rate of 5.75% and matures on January 1, 2054 (see Note 4).

In January 2014, the mortgage revenue bond secured by Lost Creek was retired for an amount greater than the outstanding principal and accrued base interest. This $18.5 million par value mortgage revenue bond had been acquired for approximately $15.9 million in May 2010 and carried an annual interest rate of 6.25%. The Company received approximately $18.7 million for the Lost Creek mortgage revenue bond resulting in an approximate $2.8 million realized gain (see Note 4). this gain was Tier 2 income with 25% allocated to the General Partner.

Recent Financing and Derivative Activities

In May 2014, the Company sold a portion of the MBS and collapsed the related MBS - TOB Trust 3 securitizing the related MBS for approximately $3.7 million. The Company’s $2.9 million TOB financing facility which was the securitization of this MBS TOB Trust was paid off in full in connection with this sale (see Note 10).

In April 2014, the mortgage revenue bond secured by Autumn Pines was sold for approximately $13.1 million. The Company’s $9.8 million TOB financing facility which was the securitization of this mortgage revenue bond was collapsed and paid off in full in connection with this sale (see Note 10).

In April 2014, the Company paid off in full the approximately $1.9 million mortgage which was collateralized by the Glynn Place Apartments, an MF Property (see Note 11).


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In March 2014, the Partnership obtained two $5.0 million unsecured revolving lines of credit. The first revolving line of credit carries a variable interest rate which was approximately 3.5% at date of closing and matures in March 2015. The second revolving line of credit carries a variable interest rate which was approximately 3.4% at date of closing and matures in March 2016. On June 30, 2014, the Partnership had not borrowed funds on either line of credit. These lines of credit will be utilized to help with short-term working capital needs and to fund new investments during the periods of time that the Company is working with its lender to finalize new TOB financings of assets (see Note 10).

In March 2014, the Company executed a new TOB Trust under its credit facility with Deutsche Bank (“DB”) securitizing the Decatur-Angle mortgage revenue bond borrowing $17.3 million. The facility has a variable interest rate tied to SIFMA and matures in February 2015. On the date of closing the total fixed TOB Trust fee was approximately 1.5% per annum and the variable rate paid on the TOB Trust on the SPEARS was approximately 0.3% resulting in a total cost of borrowing of approximately 1.8%. The outstanding balance remains at approximately $17.3 million on June 30, 2014. In July 2014, the Company entered into a new TOB Trust which replaces this TOB Trust (see Notes 10 and 18).

In February 2014, the Company entered into two interest rate cap agreements with SMBC Capital Markets, Inc. for a notional amount of $70.0 million with an effective start date of March 1, 2014. These agreements effectively limit the interest component of the TOB financing correlated with the SIFMA index to a maximum of 1.0% on $70.0 million of the outstanding borrowings on the MBS TOB financing facilities, and limit the interest on the PHC Certificates TOB financing facilities to 1.0% through a three year term ending March 1, 2017. These interest rate cap contracts cost approximately $390,000 and do not qualify for hedge accounting, therefore, changes in the estimated fair value of the interest rate derivatives are included in earnings (see Note 14).

Discussion of the Mortgage Revenue Bond Holdings as of June 30, 2014

The Partnership’s primary purpose is to acquire and hold as long-term investments a portfolio of mortgage revenue bonds which have been issued to provide construction and/or permanent financing of multifamily residential apartments. At June 30, 2014, the Partnership held 43 mortgage revenue bonds secured by 33 properties of which 12 bonds are owned by ATAX TEBS I, LLC and 15 are held in trust facilities with DB (see Note 10 to the consolidated financial statements).  Twenty-eight of the properties securing the bonds contain a total of 5,197 rental units and three of the bonds’ properties are not operational and are under construction. Two of the entities that own the apartment properties financed by two of the Partnership’s mortgage revenue bonds were deemed to be Consolidated VIEs of the Partnership at June 30, 2014 and, as a result, these bonds are eliminated in consolidation on the Company’s financial statements.  

For the three and six months ended June 30, 2014, the mortgage revenue bond investment segment reported revenue of approximately $6.4 million and $14.7 million, respectively, interest expense of approximately $1.5 million and $2.6 million, respectively, and income from continuing operations of approximately $3.3 million and $8.9 million, respectively. For the three and six months ended June 30, 2013, the mortgage revenue bond investment segment reported revenue of approximately $10.3 million and $18.8 million, respectively, interest expense of approximately $461,000 and $1.1 million, respectively, and income from continuing operations of approximately $3.9 million and $10.3 million, respectively. During the first half of 2014, the Company realized an approximate $2.8 million gain from the Lost Creek mortgage revenue bond redemption and an approximate $873,000 gain from the Autumn Pines mortgage revenue bond sale. During the first half of June 30, 2013, the Company realized approximately $6.5 million in contingent mortgage interest income offset by approximately $4.6 million in a realized loss on a taxable property loan related to the redemption of the Iona Lakes mortgage revenue bond. In addition, the Company realized approximately $5.3 million in mortgage revenue bond and taxable property loan interest income, a $250,000 guarantee fee, and an approximate $1.8 million gain on sale of discontinued operations in the first half of 2013 due to the recognition of the sale of the Ohio Properties. New mortgage revenue bond and MBS purchases during the second half of 2013 and first half of 2014 resulted in the Company reporting an approximate $2.6 million and $5.3 million in additional recurring mortgage revenue bond interest income when comparing the three and six months ended June 30, 2014 and 2013, respectively. Offsetting these increases was an increase in interest expense from the first half of 2013 to the first half of 2014 due to increased borrowings and the adjustment of the derivatives to fair value.

Discussion of the Public Housing Capital (“PHC”) Trusts Holdings as of June 30, 2014

In accordance with the terms of the Agreement of Limited Partnership, securities other than multifamily housing revenue bonds must be rated in one of the four highest rating categories by at least one nationally recognized securities rating agency and may not represent more than 25% of the Partnership’s assets at the time of acquisition. The Company must also limit its investment in these other securities to the extent necessary to maintain its exemption from registration under the Investment Company Act of 1940.


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The Public Housing Capital Fund Certificates (“PHC Certificates”) acquired in July 2012 consist of custodial receipts evidencing loans made to a number of 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 HUD under HUD’s Capital Fund Program. For the three and six months ended June 30, 2014, the PHC Certificate segment reported revenue of approximately $776,000 and $1.6 million, respectively, interest expense of approximately $335,000 and $672,000, respectively, and income from continuing operations of approximately $434,000 and $890,000, respectively. For the three and six months ended June 30, 2013, the PHC Certificate segment reported revenue of approximately $815,000 and $1.6 million, respectively, interest expense of approximately $322,000 and $600,000, respectively, and income from continuing operations of approximately $486,000 and $1.0 million, respectively. The following table sets forth certain information relating to the PHC Certificates held in the tender option bond trusts (“PHC TOB Trusts”):

 
 
Average Remaining Lives (Years)
 
Investment Rating
 
Weighted Average Interest Rate over Life
 
Principal Outstanding June 30, 2014
Public Housing Capital Fund Trust Certificate I
 
10.75
 
AA-
 
5.330
%
 
$
26,210,285

Public Housing Capital Fund Trust Certificate II
 
10.22
 
AA-
 
4.240
%
 
16,330,476

Public Housing Capital Fund Trust Certificate III
 
11.31
 
BBB
 
5.410
%
 
20,898,432

Total Public Housing Capital Fund Trust Certificates
 
 
 
 
 
 
 
$
63,439,193


Discussion of the Mortgage-Backed Securities Holdings as of June 30, 2014

The third class of security owned by the Company is MBS. As of June 30, 2014, the Company owns state-issued MBS with an aggregate outstanding principal amount of approximately $40.0 million. The MBS were acquired between fourth quarter 2012 and first quarter 2013 and are backed by residential mortgage loans. For the three and six months ended June 30, 2014, the MBS segment reported revenue of approximately $397,000 and $818,000, respectively, interest expense of approximately $114,000 and $233,000, respectively, and income from continuing operations of approximately $282,000 and $582,000, respectively. For the three and six months ended June 30, 2013, the MBS segment reported revenue of approximately $423,000 and $753,000, respectively, interest expense of approximately $123,000 and $220,000, respectively, and income from continuing operations of approximately $273,000 and $487,000, respectively. The following table sets forth certain information relating to the MBS held in the MBS TOB Trusts:
Agency Rating of Mortgage-Backed Securities
 
Principal Outstanding June 30, 2014
 
Weighted Average Maturity Date
 
Weighted Average Coupon Interest Rate
“AAA”
 
$
22,710,000

 
10/7/2036
 
4.05
%
“AA”
 
16,440,000

 
1/18/2036
 
4.11
%
 
 
$
39,150,000

 
 
 
 

Discussion of the MF Property Holdings as of June 30, 2014
 
To facilitate its investment strategy of acquiring additional mortgage revenue bonds secured by multifamily apartment properties, the Partnership may acquire ownership positions in MF Properties in order to ultimately restructure the property ownership through a sale of the MF Properties.  The Partnership expects each of these MF Properties to eventually be sold to a not-for-profit entity or in connection with a syndication of Low Income Housing Tax Credits (“LIHTCs”). The Partnership expects to acquire mortgage revenue bonds issued to provide debt financing for these properties at the time the property ownership is restructured. The Partnership expects to provide the mortgage revenue bonds to the new property owners as part of the restructuring.  Such restructurings will generally be expected to be initiated within 36 months of the Partnership’s investment in an MF Property and will often coincide with the expiration of the compliance period relating to LIHTCs previously issued with respect to the MF Property. 

At June 30, 2014 and 2013, the Partnership’s consolidated subsidiaries owned eight MF Properties which contain a total of 1,582 rental units plus the student housing complex in Lincoln, Nebraska that is currently under construction (see Note 7 to the consolidated financial statements). For the three and six months ended June 30, 2014, the MF Properties segment reported approximately $203,000 and $428,000 loss from continuing operations, respectively. For the three and six months ended June 30, 2013, the MF Properties segment reported approximately $362,000 and $727,000 loss from continuing operations, respectively, and approximately zero and $1.7 million gain on sale of MF Properties, respectively, which was recognized within income from discontinued operations.


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The decrease in loss from continuing operations for the three and six months ended June 30, 2014 compared to the prior year can be attributed to increased rental revenue due to increased economic occupancy for the MF Properties.

America First Properties Management Company (“Properties Management”), an affiliate of AFCA 2, provides property management services for the eight MF Properties, the three VIEs, and six of the properties collateralized by the mortgage revenue bonds.  Management believes that this relationship provides greater insight and understanding of the underlying property operations and their ability to meet debt service requirements to the Partnership.

The following table outlines certain information regarding the apartment properties on which the Partnership holds mortgage revenue bonds (separately identifying those owned by entities treated as Consolidated VIEs) and the MF Properties.  The narrative discussion that follows provides a brief operating analysis of each property during the first six months of 2014 and 2013.
 
 
 
 
Number of Units
 
Number of Units Occupied
 
Percentage of Occupied Units as of June 30,
 
Economic Occupancy (1) for the period ended June 30,
 
 
 
 
 
 
 
Property Name
 
Location
 
 
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Consolidated Properties
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Arbors of Hickory Ridge
 
Memphis, TN
 
348

 
317

 
91
%
 
94
%
 
88
%
 
87
%
Ashley Square Apartments
 
Des Moines, IA
 
144

 
130

 
90
%
 
96
%
 
92
%
 
96
%
Avistar at Chase Hill (2)
 
San Antonio, TX
 
232

 
n/a

 
n/a

 
n/a

 
n/a

 
n/a

Avistar at the Crest (2)
 
San Antonio, TX
 
200

 
n/a

 
n/a

 
n/a

 
n/a

 
n/a

Avistar at the Oaks (2)
 
San Antonio, TX
 
156

 
n/a

 
n/a

 
n/a

 
n/a

 
n/a

Avistar in 09 (2)
 
San Antonio, TX
 
133

 
n/a

 
n/a

 
n/a

 
n/a

 
n/a

Avistar on the Boulevard (2)
 
San Antonio, TX
 
344

 
n/a

 
n/a

 
n/a

 
n/a

 
n/a

Avistar on the Hills (2)
 
San Antonio, TX
 
129

 
n/a

 
n/a

 
n/a

 
n/a

 
n/a

Bella Vista Apartments
 
Gainesville, TX
 
144

 
139

 
97
%
 
85
%
 
86
%
 
82
%
Bridle Ridge Apartments
 
Greer, SC
 
152

 
149

 
98
%
 
96
%
 
96
%
 
88
%
Brookstone Apartments
 
Waukegan, IL
 
168

 
166

 
99
%
 
95
%
 
90
%
 
86
%
Copper Gate Apartments (2)
 
Lafayette, IN
 
128

 
 n/a

 
n/a

 
n/a

 
n/a

 
n/a

Cross Creek Apartments
 
Beaufort, SC
 
144

 
134

 
93
%
 
87
%
 
87
%
 
79
%
Greens of Pine Glen Apartments
 
Durham, NC
 
168

 
157

 
93
%
 
92
%
 
89
%
 
86
%
Harden Ranch Apartments (4)
 
Salinas, CA
 
100

 
98

 
98
%
 
n/a

 
98
%
 
n/a

Lake Forest Apartments
 
Daytona Beach, FL
 
240

 
211

 
88
%
 
90
%
 
82
%
 
80
%
Ohio Properties (3)
 
Ohio
 
362

 
349

 
96
%
 
93
%
 
93
%
 
93
%
Palms at Premier Park (4)
 
Columbia, SC
 
240

 
217

 
90
%
 
n/a

 
87
%
 
n/a

Runnymede Apartments
 
Austin, TX
 
252

 
245

 
97
%
 
98
%
 
97
%
 
93
%
South Park Ranch Apartments
 
Austin, TX
 
192

 
191

 
99
%
 
99
%
 
95
%
 
90
%
Suites at Paseo (4)
 
San Diego, CA
 
384

 
137

 
36
%
 
n/a

 
44
%
 
n/a

Tyler Park Townhomes (4)
 
Greenfield, CA
 
88

 
88

 
100
%
 
n/a

 
100
%
 
n/a

Vantage at Judson (5)
 
San Antonio, TX
 
288

 
176

 
61
%
 
n/a

 
n/a

 
n/a

Westside Village (4)
 
Shafter, CA
 
81

 
81

 
100
%
 
n/a

 
100
%
 
n/a

Woodlynn Village
 
Maplewood, MN
 
59

 
53

 
90
%
 
98
%
 
95
%
 
98
%
 
 
 
 
4,876

 
3,038

 
83
%
 
84
%
 
84
%
 
88
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bent Tree Apartments
 
Columbia, SC
 
232

 
217

 
94
%
 
91
%
 
85
%
 
80
%
Fairmont Oaks Apartments
 
Gainesville, FL
 
178

 
159

 
89
%
 
89
%
 
82
%
 
78
%
 
 
 
 
410

 
376

 
92
%
 
90
%
 
84
%
 
79
%
 
 
 
 
 
 
 
 
 



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Table of Contents



 
 
 
 
Number of Units
 
Number of Units Occupied
 
Percentage of Occupied Units as of June 30,
 
Economic Occupancy (1) for the period ended June 30,
 
 
 
 
 
 
 
Property Name
 
Location
 
 
 
2014

 
2013

 
2014

 
2013

MF Properties
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Arboretum
 
Omaha, NE
 
145

 
141

 
97
%
 
99
%
 
91
%
 
87
%
Eagle Village
 
Evansville, IN
 
511

 
209

 
41
%
 
40
%
 
66
%
 
74
%
Glynn Place
 
Brunswick, GA
 
128

 
109

 
85
%
 
89
%
 
74
%
 
72
%
Meadowview
 
Highland Heights, KY
 
118

 
100

 
85
%
 
77
%
 
91
%
 
87
%
Residences at DeCordova
 
Granbury, TX
 
110

 
104

 
95
%
 
95
%
 
95
%
 
82
%
Residences at Weatherford
 
Weatherford, TX
 
76

 
75

 
99
%
 
95
%
 
99
%
 
85
%
The Colonial, f/k/a Maples on 97th
 
Omaha, NE
 
258

 
221

 
86
%
 
90
%
 
82
%
 
79
%
Woodland Park (6)
 
Topeka, KS
 
236

 
218

 
92
%
 
91
%
 
90
%
 
93
%
 
 
 
 
1,582

 
1,177

 
74
%
 
74
%
 
85
%
 
81
%

(1) 
Economic occupancy is presented for the first six months of 2014 and 2013, and is defined as the net rental income received divided by the maximum amount of rental income to be derived from each property. This statistic is reflective of rental concessions, delinquent rents and non-revenue units such as model units and employee units. Actual occupancy is a point in time measure while economic occupancy is a measurement over the period presented, therefore, economic occupancy for a period may exceed the actual occupancy at any point in time.
(2) 
Previous period occupancy numbers are not available as these are new investments. In addition, these properties are under renovations so the properties are not considered stabilized at this time. Physical and economic occupancy will be reported when construction is substantially complete on renovations.
(3) 
The Partnership holds approximately $18.2 million of mortgage revenue bonds secured by Crescent Village, Willow Bend and Postwoods (Ohio Properties). Crescent Village is located in Cincinnati, Ohio, Willow Bend is located in Columbus (Hilliard), Ohio and Postwoods is located in Reynoldsburg, Ohio.
(4) 
Previous period occupancy numbers are not available as these are new investments.
(5) 
Previous period occupancy number are not available as these are new investments. In addition, these properties are newly constructed so the properties are not considered stabilized at this time. Economic occupancy will be reported when the properties are stabilized.
(6) 
This property was foreclosed on May 29, 2013 and became an MF Property. The occupancy information includes the periods prior to the foreclosure when the Partnership held a mortgage revenue bond secured by this property.
 
Non-Consolidated Properties

Arbors of Hickory Ridge - Arbors of Hickory Ridge Apartments is located in Memphis, Tennessee and is a 348 unit facility. In the first half of 2014, “Net Operating Income” (calculated as property revenue less salaries, advertising, administration, utilities, repair and maintenance, insurance, taxes, and management fee expense) was $619,000 as compared to $575,000 in 2013. The increase was a result of an increase in other income along with a decrease in administrative and utilities expenses. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Ashley Square – Ashley Square Apartments is located in Des Moines, Iowa.  In the first half of 2014, Net Operating Income was approximately $301,000 as compared to approximately $317,000 in 2013.  The decrease was a result of a decrease in economic occupancy along with an increase in salaries and administrative expenses. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Avistar on Chase Hill - Avistar on Chase Hill is located in San Antonio, Texas and is a 232 unit facility. This bond was purchased in February 2013. In the first half of 2014, Net Operating Income was approximately $356,000 on net revenue of approximately $844,000. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Avistar at the Crest - Avistar at the Crest is located in San Antonio, Texas and is a 200 unit facility. This bond was purchased in February 2013. In the first half of 2014, Net Operating Income was approximately $403,000 on net revenue of approximately $816,000. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Avistar at the Oaks - Avistar at the Oaks is located in San Antonio, Texas and is a 156 unit facility. This bond was purchased in June 2013. In the first half of 2014, Net Operating Income was approximately $241,000 on net revenue of approximately $527,000. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Avistar in 09 - Avistar in 09 is located in San Antonio, Texas and is a 133 unit facility. This bond was purchased in June 2013. In the first half of 2014, Net Operating Income was approximately $245,000 on net revenue of approximately $478,000. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

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Avistar on the Boulevard - Avistar on the Boulevard is located in San Antonio, Texas and is a 344 unit facility. This bond was purchased in February 2013. In the first half of 2014, Net Operating Income was approximately $671,000 on net revenue of approximately $1.2 million. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Avistar on the Hills - Avistar on the Hills is located in San Antonio, Texas and is a 129 unit facility. This bond was purchased in June 2013. In the first half of 2014, Net Operating Income was approximately $263,000 on net revenue of approximately $508,000. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Bella Vista – Bella Vista Apartments is located in Gainesville, Texas.  In the first half of 2014, Net Operating Income was approximately $290,000 as compared to approximately $281,000 in 2013.  Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Bridle Ridge Apartments – Bridle Ridge Apartments is located in Greer, South Carolina.  In the first half of 2014, Net Operating Income was approximately $337,000 as compared to approximately $339,000 in 2013.  Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Brookstone – Brookstone Apartments is located in Waukegan, Illinois.  In the first half of 2014, Net Operating Income was approximately $276,000 as compared to approximately $293,000 in 2013. This decrease was the result of an increase in utility and repair and maintenance expenses. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Copper Gate Apartments - Copper Gate Apartments is located in Lafayette, Indiana and is a 128 unit facility. This bond was purchased in December 2013. In the first half of 2014, Net Operating Income was approximately $217,000 on net revenue of approximately $487,000. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Cross Creek – Cross Creek Apartments is located in Beaufort, South Carolina. In the first half of 2014, Net Operating Income was approximately $260,000 as compared to approximately $215,000 in 2013.  This increase was a direct result of an increase in economic occupancy along with a decrease in advertising expenses. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Greens of Pine Glen – Greens of Pine Glen Apartments is located in Durham, North Carolina. In the first half of 2014, Net Operating Income was approximately $374,000 as compared to approximately $336,000 in 2013.  This increase was the result of an increase in economic occupancy along with a decrease in salary and utility expenses. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Harden Ranch Apartments - Harden Ranch Apartments is located in Salinas, California and is a 100 unit facility. This bond was purchased in February 2014. In the first half of 2014, Net Operating Income was approximately $224,000 on net revenue of approximately $425,000. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Lake Forest – Lake Forest Apartments is located in Daytona Beach, Florida.  In the first half of 2014, Net Operating Income was approximately $480,000 as compared to approximately $371,000 in 2013.  This increase was the result of a slight increase in economic occupancy along with a decrease in real estate taxes due to the restructuring of the property ownership.  Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Ohio Properties - The Ohio properties are made up of the following three multifamily apartment complexes located in Ohio. Debt service on the Partnership’s bonds on these properties was current as of June 30, 2014.

Crescent Village – Crescent Village Townhomes is located in Cincinnati, Ohio.  In the first half of 2014, Net Operating Income was approximately $223,000 as compared to approximately $214,000 in 2013.

Postwoods – Postwoods Townhomes is located in Reynoldsburg, Ohio.  In the first half of 2014, Net Operating Income was approximately $296,000 as compared to approximately $401,000 in 2013. This decrease was the result of an increase in real estate taxes, utilities, and repair and maintenance expenses.

Willow Bend – Willow Bend Townhomes is located in Columbus (Hilliard), Ohio.  In the first half of 2014, Net Operating Income was approximately $214,000 as compared to approximately $220,000 in 2013.  


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Table of Contents

Palms at Premier Park - Palms at Premier Park is located in Columbia, South Carolina and is a 240 unit facility. This bond was purchased in December 2013. In the first half of 2014, Net Operating Income was approximately $786,000 on net revenue of approximately $1.1 million. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Runnymede Apartments – Runnymede Apartments is located in Austin, Texas.  In the first half of 2014, Net Operating Income was approximately $605,000 as compared to approximately $579,000 in 2013.  The increase was the result of an increase in economic occupancy along with a decrease in repair and maintenance expenses. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

South Park Ranch Apartments – South Park Ranch Apartments is located in Austin, Texas. In the first half of 2014, Net Operating Income was approximately $674,000 as compared to approximately $649,000 in 2013.  This increase was the result of an increase in economic occupancy offset by an increase in utilities expenses.  Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Suites on Paseo - Suites on Paseo is located in San Diego, California and is a 384 unit facility. This bond was purchased in December 2013. In the first half of 2014, Net Operating Income was approximately $211,000 on net revenue of approximately $1.1 million. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Tyler Park Townhomes - Tyler Park Townhomes is located in Greenfield, California and is an 88 unit facility. This bond was purchased in December 2013. In the first half of 2014, Net Operating Income was approximately $206,000 on net revenue of approximately $460,000. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Vantage at Judson - Vantage at Judson is located in San Antonio, Texas and is a 288 unit facility. This bond was purchased in December 2012 and construction on this property was finished in Spring of 2014. In the first half of 2014, Net Operating Income was approximately $97,000 on net revenue of approximately $510,000. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Westside Village - Westside Village is located in Shafter, California and is an 81 unit facility. This bond was purchased in December 2013. In the first half of 2014, Net Operating Income was approximately $171,000 on net revenue of approximately $314,000. Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Woodlynn Village – Woodlynn Village is located in Maplewood, Minnesota.  In the first half of 2014, Net Operating Income was approximately $184,000 as compared to approximately $188,000 in 2013.  Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

Consolidated VIEs

Bent Tree – Bent Tree Apartments is located in Columbia, South Carolina.   In the first half of 2014, Net Operating Income was approximately $337,000 as compared to approximately $283,000 in 2013.  This increase was the direct result of an increase in economic occupancy.  Debt service on the Partnership’s bonds on this property was current of June 30, 2014.

Fairmont Oaks – Fairmont Oaks Apartments is located in Gainesville, Florida.  In the first half of 2014, Net Operating Income was approximately $378,000 as compared to approximately $315,000 in 2013.  This increase was the result of an increase in economic occupancy along with a decrease in salary and repair and maintenance expenses.  Debt service on the Partnership’s bonds on this property was current as of June 30, 2014.

MF Properties

Arboretum – Arboretum is located in Omaha, Nebraska. In the first half of 2014, Net Operating Income was approximately $818,000 as compared to approximately $709,000 in 2013. This increase was the result of an increase in economic occupancy along with a decrease in advertising expenses.

Eagle Village –Eagle Village is located in Evansville, Indiana. In the first half of 2014, Net Operating Income was approximately $282,000 as compared to approximately $411,000 in 2013. This decrease was the result of a decrease in economic occupancy along with an increase in advertising, utility and repair and maintenance expenses.

Glynn Place – Glynn Place Apartments is located in Brunswick, Georgia.  In the first half of 2014, Net Operating Income was approximately $151,000 as compared to approximately $140,000 in 2013.  This increase was the result of an increase in economic occupancy along with a decrease in salaries expenses.

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The Colonial, formerly known as ((“f/k/a”) Maples on 97th) – The Colonial, f/k/a Maples on 97th, is located in Omaha, Nebraska. In the first half of 2014, Net Operating Income was approximately $345,000 as compared to approximately $353,000 in 2013.

Meadowview – Meadowview Apartments is located in Highland Heights, Kentucky.  In the first half of 2014, Net Operating Income was approximately $269,000 as compared to approximately $341,000 in 2013.  This decrease was a result of an increase in salary, utility and repair and maintenance expenses.

Residences at DeCordova – Residences of DeCordova is located in Granbury, Texas in the Dallas-Fort Worth area.  In the first half of 2014, Net Operating Income was approximately $345,000 as compared to approximately $311,000 in 2013. This increase is the direct result of an increase in economic occupancy.

Residences at Weatherford – Residences of Weatherford is located in Weatherford, Texas in the Dallas-Fort Worth area. In the first half of 2014, Net Operating Income was approximately $242,000 on net revenue of approximately $426,000. The stabilization of this property happened in the second quarter of 2013.

Woodland Park – Woodland Park is located in Topeka, Kansas. This property was secured by a mortgage revenue bond owned by the Partnership but due to a foreclosure, became an MF Property effective on June 1, 2013. In the first half of 2014, Net Operating Income was approximately $435,000 on net revenue of approximately $896,000.


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Table of Contents

Results of Operations

Consolidated Results of Operations

The following discussion of the Company’s results of operations for the three and six months ended June 30, 2014 and 2013 should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 of this report as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Three Months Ended June 30, 2014 compared to Three Months Ended June 30, 2013 (Consolidated)
Change in Results of Operations


 
 
For Three Months Ended June 30, 2014
 
For Three Months Ended June 30, 2013
 
Dollar Change
Revenues:
 
 
 
 
 
 
Property revenues
 
$
3,919,772

 
$
3,952,046

 
$
(32,274
)
Investment income
 
6,241,475

 
4,595,197

 
1,646,278

Gain on mortgage revenue bond sale
 
849,655

 

 
849,655

Contingent interest income
 

 
6,497,160

 
(6,497,160
)
Other interest income
 
242,077

 
96,180

 
145,897

Total revenues
 
11,252,979

 
15,140,583

 
(3,887,604
)
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
Real estate operating (exclusive of items shown below)
 
2,270,170

 
2,315,325

 
(45,155
)
Realized loss on taxable property loan
 

 
4,557,741

 
(4,557,741
)
Provision for loan loss
 

 
96,000

 
(96,000
)
Provision for loss on receivables
 

 
3,523

 
(3,523
)
Depreciation and amortization
 
1,524,996

 
1,661,082

 
(136,086
)
Interest
 
2,400,851

 
1,426,349

 
974,502

General and administrative
 
1,398,879

 
1,141,444

 
257,435

Total Expenses
 
7,594,896

 
11,201,464

 
(3,606,568
)
Net income
 
3,658,083

 
3,939,119

 
(281,036
)
Income from discontinued operations
 

 
166,887

 
(166,887
)
Net income
 
3,658,083

 
4,106,006

 
(447,923
)
Net (loss) income attributable to noncontrolling interest
 
(374
)
 
150,846

 
(151,220
)
Net income - America First Multifamily Investors, L.P.
 
$
3,658,457

 
$
3,955,160

 
$
(296,703
)

Property revenues. Property revenues decreased approximately $32,000 from the second quarter of 2013 to the second quarter of 2014 due to offsetting factors. Approximately $303,000 of the increase was attributable to Woodland Park which became an MF Property effective June 1, 2013 after the completion of the foreclosure of the property’s mortgage revenue bond (see Note 7 to the condensed consolidated financial statements). In addition, approximately $94,000 was attributable to the net increase in the existing VIEs and MF Properties’ occupancy. Offsetting this increase was the $435,000 decrease due to the Lake Forest’s deconsolidation in the fourth quarter of 2013. The MF Properties averaged monthly rent of approximately $623 per unit in the second quarter of 2014 as compared with $613 per unit in the second quarter of 2013. The Consolidated VIEs averaged $611 per unit in monthly rent in second quarter of 2014 as compared to $586 per unit in second quarter of 2013.


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Table of Contents

Investment income.   Investment income includes interest earned on mortgage revenue bonds, PHC Certificates, and MBS. This income increased in the second quarter of 2014 as compared to the second quarter of 2013 by approximately $1.6 million due to offsetting factors. Approximately $2.5 million of the increase in investment income is the result of the addition of the Greens Property, Avistar on the Boulevard, Avistar at Chase Hill, Avistar at the Crest, Renaissance Apartments, Avistar on the Hills Apartments, Avistar at the Oaks Apartments, Avistar in 09 Apartments, Vantage at Harlingen Apartments, Tyler Park Townhomes, Westside Village, Lake Forest, Copper Gate, The Palms at Premier Park, The Suites on Paseo, Harden Ranch Apartments and Decatur-Angle Apartments mortgage revenue bonds, PHC Certificates, and the MBS. These increases were offset by a decrease of approximately $683,000 of investment income due to the redemption of the Iona Lakes mortgage revenue bond and the completion of the foreclosure of Woodland Park mortgage revenue bond in the second quarter of 2013 and the redemption of the Lost Creek mortgage revenue bond in first quarter 2014.

Gain on mortgage revenue bond sale.  The gain is the result of the sale of the Autumn Pines mortgage revenue bond in April 2014. There was no gain realized on the sale of mortgage revenue bonds in the second quarter of 2013.

Contingent interest income. The Company realized approximately $6.5 million of contingent interest income upon the redemption of the Iona Lakes mortgage revenue bond in June 2013 (see Note 4). There was no contingent interest income realized in 2014.

Other interest income. Other interest income is comprised mainly of interest income on taxable property loans held by the Partnership. The increase in other interest income in the second quarter of 2014 as compared to the second quarter of 2013 is attributable to taxable interest income from the taxable property loans.

Real estate operating expenses.  Real estate operating expenses associated with the MF Properties and the Consolidated VIEs is comprised principally of real estate taxes, property insurance, utilities, property management fees, repairs and maintenance, and salaries and related employee expenses of on-site employees. A portion of real estate operating expenses are fixed in nature, thus a decrease in physical and economic occupancy would result in a reduction in operating margins. Conversely, as physical and economic occupancy increase, the fixed nature of these expenses will increase operating margins as these real estate operating expenses would not increase at the same rate as rental revenues.  The types of real estate operating expenses are consistent for both the consolidated Company and Partnership Only formats. The net decrease in real estate operating expenses from the second quarter of 2013 to the second quarter of 2014 was related to offsetting factors. The primary increase of approximately $203,000 related to Woodland Park which became an MF Property effective June 1, 2013. Offsetting that was a decrease of approximately $308,000 of real estate operating expenses related to Lake Forest which was a VIE that was deconsolidated in the fourth quarter of 2013. The remaining increase was related to the existing VIEs and MF Properties normal operating increases in salaries, management fees, and repair and maintenance expenses.

Realized loss on taxable property loan. In June 2013, the Partnership redeemed its interest in the Iona Lakes mortgage revenue bond for approximately $21.9 million. This redemption resulted in the realization of an approximate $4.6 million loss on a taxable property loan. There was no realized loss on taxable property loans reported in the second quarter of 2014.

Provision for loan loss. The Company periodically, or as changes in circumstances or operations dictate, evaluates its investments for impairment. The value of the underlying property assets is ultimately the most relevant measure of value to support the investment carrying values. Investments tested for impairment include all fixed assets, bond investments and taxable property loans made to various properties and other amounts due to the Company. Such evaluation is based on cash flow and discounted cash flow models. During the second quarter of 2013, the Company determined a portion of the taxable property loans were potentially impaired and an additional provision for loan loss should be recorded.   A provision for loan loss and an associated loan loss reserve of $96,000 was recorded against the Cross Creek taxable property loan in the second quarter of 2013. There was no provision for loan loss or associated loan loss reserve in the second quarter of 2014.

Provision for loss on receivables. A quarterly provision for loss was recorded on the interest receivable from the Woodland Park mortgage revenue bond until the foreclosure was completed on May 29, 2013. As a result, there is no quarterly expense for the second quarter of 2014.


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Table of Contents

Depreciation and amortization expense.  Depreciation results primarily from the apartment properties of the Consolidated VIEs and the MF Properties. Amortization consists of in-place lease intangible assets recorded as part of the acquisition-method of accounting for the acquisition of MF Properties and deferred finance cost amortization related to the closing of the TEBS and TOB Credit Facilities. The net increase in depreciation and amortization when comparing the second quarter of 2014 to the second quarter of 2013 was the result of offsetting factors. A decrease of approximately $129,000 of depreciation and amortization is related to Lake Forest which was a VIE that was deconsolidated in the fourth quarter of 2013 (see Note 3). In addition, there was an approximate $56,000 decrease in in-place lease amortization related to the The Colonial f/k/a Maples on 97th, as these were fully amortized in 2013. These decreases were offset by an approximate $51,000 increase in depreciation and amortization expense related to Woodland Park which became an MF property effective June 1, 2013.

Interest expense. The net increase in interest expense in the second quarter of 2014 as compared to the second quarter of 2013 was partly due to an approximate $675,000 increase between the two quarters resulting from the change in the mark to market adjustment of the Company’s derivatives. These interest rate derivatives do not qualify for hedge accounting and, accordingly, they are carried at fair value, with changes in fair value included in current period earnings within interest expense. In addition, an increase of approximately $447,000 resulted from higher average outstanding debt principal between the two quarters. The Company’s borrowing cost averaged approximately 2.4% per annum for the second quarters of 2014 and 2013.

General and administrative expenses. The increase in general and administrative expenses when comparing the second quarter of 2014 to the second quarter of 2013 is attributable to an approximate $129,000 increase in administrative fees payable to AFCA 2 related to the acquisition of mortgage revenue bonds secured by Renaissance Apartments, Avistar at the Oaks Apartments, Avistar on the Hills Apartments, Avistar in 09 Apartments, Vantage at Harlingen Apartments, Tyler Park Townhomes, Westside Village, Copper Gate, The Palms at Premier Park, The Suites on Paseo, Harden Ranch Apartments, and Decatur-Angle Apartments offset by an approximate $21,000 reduction due to the Lost Creek bond redemption. In addition the Partnership realized a net increase of approximately $110,000 related to changes in professional fees, travel expenses, and salary and benefits.

Income from discontinued operations. The decrease from the second quarter of 2014 as compared to the second quarter of 2013 is attributable to the gain of approximately $1.8 million from the recognition of the sale of the Ohio Properties in the first quarter of 2013. There were no discontinued operations reported in the first quarter of 2014.


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Table of Contents

Six Months Ended June 30, 2014 compared to Six Months Ended June 30, 2013 (Consolidated)
Change in Results of Operations
 
 
 
 
 
 
 
 
 
For Six Months Ended June 30, 2014
 
For Six Months Ended June 30, 2013
 
Dollar Change
Revenues:
 
 
 
 
 
 
Property revenues
 
$
7,870,988

 
$
7,684,853

 
$
186,135

Investment income
 
12,447,033

 
12,311,814

 
135,219

Gain on mortgage revenue bonds - sale and redemption
 
3,684,898

 

 
3,684,898

Contingent interest income
 

 
6,497,160

 
(6,497,160
)
Other interest income
 
450,900

 
1,341,165

 
(890,265
)
Other income
 

 
250,000

 
(250,000
)
Total revenues
 
24,453,819

 
28,084,992

 
(3,631,173
)
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
Real estate operating (exclusive of items shown below)
 
4,370,463

 
4,372,361

 
(1,898
)
Realized loss on taxable property loan
 

 
4,557,741

 
(4,557,741
)
Provision for loan loss
 

 
96,000

 
(96,000
)
Provision for loss on receivables
 

 
241,698

 
(241,698
)
Depreciation and amortization
 
3,138,342

 
3,242,458

 
(104,116
)
Interest
 
4,570,400

 
2,962,622

 
1,607,778

General and administrative
 
2,669,805

 
2,111,935

 
557,870

Total expenses
 
14,749,010

 
17,584,815

 
(2,835,805
)
Income from continuing operations
 
9,704,809

 
10,500,177

 
(795,368
)
Income from discontinued operations (including gain on sale of MF Properties of $1,775,527 the first quarter of 2013)
 

 
2,099,906

 
(2,099,906
)
Net income
 
9,704,809

 
12,600,083

 
(2,895,274
)
Net (loss) income attributable to noncontrolling interest
 
(477
)
 
323,497

 
(323,974
)
Net income - America First Multifamily Investors, L. P.
 
$
9,705,286

 
$
12,276,586

 
$
(2,571,300
)

Property revenues. Property revenues increased approximately $186,000 when comparing the first half of 2014 with the first half of 2013 due to offsetting factors. Approximately $744,000 of the increase was attributable to Woodland Park which became an MF Property effective June 1, 2013 after the completion of the foreclosure of the property’s mortgage revenue bond (see Note 7 to the consolidated financial statements). In addition, approximately $366,000 was attributable to the net increase in the existing VIEs and MF Properties’ increased occupancy. Offsetting these increases was the approximate $946,000 decrease due to the Lake Forest deconsolidation in the fourth quarter 2013. The MF Properties averaged monthly rent of approximately $628 per unit in the first half of 2014 as compared with $606 per unit in the first half of 2013. The Consolidated VIEs averaged $619 per unit in monthly rent in the first half of 2014 as compared to $581 per unit in the first half of 2013.

Investment income. Investment income includes interest earned on mortgage revenue bonds, PHC Certificates, and MBS. Investment income increased in the first half of 2014 as compared to the first half of 2013 by approximately $135,000 due to offsetting factors. The increase is due to an approximate $5.3 million increase in investment income as the result of the addition of the Greens Property, Avistar on the Boulevard, Avistar at Chase Hill, Avistar at the Crest, Renaissance Apartments, Avistar on the Hills Apartments, Avistar at the Oaks Apartments, Avistar in 09 Apartments, Vantage at Harlingen Apartments, Tyler Park Townhomes, Westside Village, Lake Forest, Copper Gate, The Palms at Premier Park, The Suites on Paseo, Harden Ranch Apartments and Decatur-Angle Apartments mortgage revenue bonds and the MBS. These increases were offset by a decrease of approximately $5.1 million of investment income due to the recognition of the Ohio sale in first quarter of 2013, the redemption of the Iona Lakes mortgage revenue bond and the completion of the foreclosure of the Woodland Park mortgage revenue bond in the second quarter of 2013, the redemption of the Lost Creek mortgage revenue bond in the first quarter 2014, and the mortgage revenue bonds principal payments received.


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Gain on mortgage revenue bonds - sale and redemption.  The Company realized an approximate $2.8 million gain on the redemption of the Lost Creek mortgage revenue bond and an approximate $873,000 gain on the sale of the Autumn Pines mortgage revenue bond in February 2014 and April 2014, respectively. There was no gain realized on the sale or redemptions of mortgage revenue bonds in the first half of 2013.

Contingent interest income. The Company realized approximately $6.5 million of contingent interest income upon the redemption of the Iona Lakes mortgage revenue bond in June 2013 (see Note 4). There was no contingent interest income realized in 2014.

Other interest income. Other interest income is comprised mainly of interest income on taxable property loans held by the Partnership. The decrease in other interest income from the first half of 2014 as compared to the first half of 2013 is attributable to taxable interest income from the taxable property loans which are securitized by the Ohio Properties and recognized in the prior year when the Company was able to recognize the sale of the Ohio Properties (see Note 9).

Other income. Other income recognized in 2013 is a guarantee fee received from the General Partner owner of the Ohio Properties (see Note 9). There was no other income recognized in 2014.

Real estate operating expenses.  The net decrease in real estate operating expenses from the first half of 2013 to the first half of 2014 was related to offsetting factors. Decreases include approximately $573,000 of real estate operating expenses related to Lake Forest which was a VIE that was deconsolidated in the fourth quarter of 2013 and $106,000 in Glynn Place’s repair expenses. Offsetting these decreases was an increase of approximately $404,000 related to Woodland Park which became an MF Property effective June 1, 2013. The remaining increase was related to the existing VIEs and MF Properties normal operating increases in salaries, management fees, insurance, real estate taxes, and repair and maintenance expenses.

Realized loss on taxable property loan. In June 2013, the Partnership redeemed its interest in the Iona Lakes mortgage revenue bond for approximately $21.9 million. This redemption resulted in the realization of an approximate $4.6 million loss on a taxable property loan. There was no realized loss on taxable property loans reported in the first half of 2014 (see Note 4).

Provision for loan loss. The Company periodically, or as changes in circumstances or operations dictate, evaluates its investments for impairment. During the second quarter of 2013, the Company determined a portion of the taxable property loans were potentially impaired and an additional provision for loan loss should be recorded.   A provision for loan loss and an associated loan loss reserve of $96,000 was recorded against the Cross Creek taxable property loan in the second quarter of 2013. There was no provision for loan loss or associated loan loss reserve in the first half of 2014.

Provision for loss on receivables. A quarterly provision for loss was recorded on the interest receivable from the Woodland Park mortgage revenue bond until the foreclosure was completed on May 29, 2013. As a result, there is no expense for the first half of 2014.

Depreciation and amortization expense.  Depreciation results primarily from the apartment properties of the Consolidated VIEs and the MF Properties. Amortization consists of in-place lease intangible assets recorded as part of the acquisition-method of accounting for the acquisition of MF Properties and deferred finance cost amortization related to the closing of the TEBS and TOB Credit Facilities. The net decrease in depreciation and amortization when comparing the first half of 2014 to the first half of 2013 was the result of offsetting factors. A decrease of approximately $254,000 of depreciation and amortization is related to Lake Forest which was a VIE that was deconsolidated in the fourth quarter of 2013 (see Note 3). In addition, there was an approximate $219,000 decrease in in-place lease amortization related to the The Colonial, f/k/a Maples on 97th, as these were fully amortized in 2013. These decreases were offset by an approximate $281,000 increase in depreciation and amortization expense related to Woodland Park which became an MF property effective June 1, 2013. The remaining increase is related to the additional depreciation expense reported on asset additions to the existing properties.

Interest expense. The net increase in interest expense in the first half of 2014 as compared to the first half of 2013 was partly due to an approximate $746,000 increase between the two periods resulting from the change in the mark to market adjustment of the Company’s derivatives. These interest rate derivatives do not qualify for hedge accounting and, accordingly, they are carried at fair value, with changes in fair value included in current period earnings within interest expense. In addition, an increase of approximately $912,000 resulted from higher average outstanding debt principal between the two periods. The Company’s borrowing cost averaged approximately 2.5% per annum for the first half of 2014 and 2013.


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General and administrative expenses. The increase in general and administrative expenses when comparing the first half of 2014 to the first half of 2013 is attributable to approximately $325,000 increased administrative fees payable to AFCA 2 related to the acquisition of mortgage revenue bonds secured by Avistar on the Boulevard, Avistar at Chase Hill, Avistar at the Crest, Renaissance Apartments, Avistar at the Oaks Apartments, Avistar on the Hills Apartments, Avistar in 09 Apartments, Vantage at Harlingen Apartments, Tyler Park Townhomes, Westside Village, Copper Gate, The Palms at Premier Park, The Suites on Paseo, Harden Ranch Apartments, and Decatur-Angle Apartments. In addition the Partnership realized an increase of approximately $267,000 in professional fees and salary and benefits.

Income from discontinued operations. The decrease from the first half of 2014 as compared to the first half of 2013 is attributable to the gain of approximately $1.8 million from the recognition of the sale of the Ohio Properties in the first quarter of 2013. There were no discontinued operations reported in the first half of 2014.

Partnership Only Results of Operations

The following discussion of the Partnership’s results of operations for the three and six months ended June 30, 2014 and 2013 reflects the operations of the Partnership without the consolidation of any VIEs during either period under the GAAP consolidation rules then in effect.  This information is used by management to analyze the Partnership’s operations and is reflective of the consolidated operations of the Mortgage Revenue Bond Investments segment, Public Housing Capital Fund Trust Certificates segment, Mortgage-Backed Securities segment, and the MF Properties segment as presented in Note 19 to the condensed consolidated financial statements.

Three Months Ended June 30, 2014 compared to Three Months Ended June 30, 2013 (Partnership Only)
Changes in Results of Operations
 
 
 For Three Months Ended June 30, 2014
 
 For Three Months Ended June 30, 2013
 
Dollar Change
Revenues:
 
 
 
 
 
 
Property revenues
 
$
3,134,220

 
$
2,731,740

 
$
402,480

Investment income
 
6,474,140

 
4,971,873

 
1,502,267

Gain on mortgage revenue bond sale
 
849,655

 

 
849,655

Contingent interest income
 

 
6,497,160

 
(6,497,160
)
Other interest income
 
242,077

 
96,180

 
145,897

Total revenues
 
10,700,092

 
14,296,953

 
(3,596,861
)
Expenses:
 
 
 
 
 
 
Real estate operating (exclusive of items shown below)
 
1,807,044

 
1,515,316

 
291,728

Realized loss on taxable property loan
 

 
4,557,741

 
(4,557,741
)
Provision for loan loss
 

 
96,000

 
(96,000
)
Provision for loss on receivables
 

 
3,523

 
(3,523
)
Depreciation and amortization
 
1,293,553

 
1,315,322

 
(21,769
)
Interest
 
2,400,851

 
1,426,349

 
974,502

General and administrative
 
1,398,879

 
1,141,444

 
257,435

Total expenses
 
6,900,327

 
10,055,695

 
(3,155,368
)
Net income
 
3,799,765

 
4,241,258

 
(441,493
)
Income from discontinued operations
 

 
166,887

 
(166,887
)
Net income
 
3,799,765

 
4,408,145

 
(608,380
)
Net (loss) income attributable to noncontrolling interest
 
(374
)
 
150,846

 
(151,220
)
Net income - America First Multifamily Investors, L.P.
 
$
3,800,139

 
$
4,257,299

 
$
(457,160
)

Property revenues. Property revenues increased approximately $402,000 from the second quarter of 2013 to the second quarter of 2014. Approximately $303,000 of the increase was attributable to Woodland Park which became an MF Property effective June 1, 2013 after the completion of the foreclosure of the property’s mortgage revenue bond. In addition, approximately $120,000 was attributable to the net increase in the MF Properties’ occupancy. The MF Properties averaged monthly rent of approximately $623 per unit in the second quarter of 2014 as compared with $613 per unit in the second quarter of 2013.


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Investment income.   Investment income includes interest earned on mortgage revenue bonds, PHC Certificates, and MBS. This income increased in the second quarter of 2014 as compared to the second quarter of 2013 by approximately $1.5 million due to offsetting factors. Approximately $2.4 million of the increase in investment income is the result of the addition of the Greens Property, Avistar on the Boulevard, Avistar at Chase Hill, Avistar at the Crest, Renaissance Apartments, Avistar on the Hills Apartments, Avistar at the Oaks Apartments, Avistar in 09 Apartments, Vantage at Harlingen Apartments, Tyler Park Townhomes, Westside Village, Copper Gate, The Palms at Premier Park, The Suites on Paseo, Harden Ranch Apartments and Decatur-Angle Apartments mortgage revenue bonds, PHC Certificates, and the MBS. These increases were offset by a decrease of approximately $683,000 of investment income due to the redemption of the Iona Lakes mortgage revenue bond and the completion of the foreclosure of Woodland Park mortgage revenue bond in the second quarter of 2013 and the redemption of the Lost Creek mortgage revenue bond in first quarter 2014.

Gain on mortgage revenue bond sale.  The gain is the result of the sale of the Autumn Pines mortgage revenue bond in April 2014. There was no gain realized on the sale of mortgage revenue bonds in the second quarter of 2013.

Contingent interest income. The Company realized approximately $6.5 million of contingent interest income upon the redemption of the Iona Lakes mortgage revenue bond in June 2013 (see Note 4). There was no contingent interest income realized in 2014.

Other interest income. Other interest income is comprised mainly of interest income on taxable property loans held by the Partnership. The increase in other interest income in the second quarter of 2014 as compared to the second quarter of 2013 is attributable to taxable interest income from the taxable property loans.
 
Real estate operating expenses. The net increase in real estate operating expenses from the second quarter of 2013 to the second quarter of 2014 was related to approximately $203,000 of real estate operating expenses related to Woodland Park which became an MF Property effective June 1, 2013. The remaining increase was related to the existing MF Properties normal operating increases in salaries, management fees, and repair and maintenance expenses.

Realized loss on taxable property loan. In June 2013, the Partnership redeemed its interest in the Iona Lakes mortgage revenue bond for approximately $21.9 million. This redemption resulted in the realization of an approximate $4.6 million loss on a taxable property loan. There was no realized loss on taxable property loans reported in the second quarter of 2014.

Provision for loan loss. During the second quarter of 2013, the Company determined a portion of the taxable property loans were potentially impaired and an additional provision for loan loss should be recorded.   A provision for loan loss and an associated loan loss reserve of $96,000 was recorded against the Cross Creek taxable property loan in the second quarter of 2013. There was no provision for loan loss or associated loan loss reserve in the second quarter of 2014.

Provision for loss on receivables. A quarterly provision for loss was recorded on the interest receivable from the Woodland Park mortgage revenue bond until the foreclosure was completed on May 29, 2013. There is no quarterly expense for the second quarter of 2014.

Depreciation and amortization expense.  Depreciation results primarily from the apartment properties of the MF Properties. Amortization consists of in-place lease intangible assets recorded as part of the acquisition-method of accounting for the acquisition of MF Properties and deferred finance cost amortization related to the closing of the TEBS and TOB Credit Facilities. The net increase in depreciation and amortization when comparing the second quarter of 2014 to the second quarter of 2013 was the result of offsetting factors. There was an approximate $56,000 decrease in in-place lease amortization related to the The Colonial, f/k/a Maples on 97th, as these were fully amortized in 2013. This decrease was offset by an approximate $51,000 increase in depreciation and amortization expense related to Woodland Park which became an MF property effective June 1, 2013. The remaining decrease was related to the reduction in the amortization expense reported on the Partnership’s financing.

Interest expense. The net increase in interest expense in the second quarter of 2014 as compared to the second quarter of 2013 was partly due to an approximate $675,000 increase between the two quarters resulting from the change in the mark to market adjustment of the Company’s derivatives. These interest rate derivatives do not qualify for hedge accounting and, accordingly, they are carried at fair value, with changes in fair value included in current period earnings within interest expense. In addition, an increase of approximately $447,000 resulted from higher average outstanding debt principal between the two quarters. The Company’s borrowing cost averaged approximately 2.4% per annum for the second quarters of 2014 and 2013.


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General and administrative expenses. The increase in general and administrative expenses when comparing the second quarter of 2014 to the second quarter of 2013 is attributable to an approximate $129,000 increase in administrative fees payable to AFCA 2 related to the acquisition of mortgage revenue bonds secured by Renaissance Apartments, Avistar at the Oaks Apartments, Avistar on the Hills Apartments, Avistar in 09 Apartments, Vantage at Harlingen Apartments, Tyler Park Townhomes, Westside Village, Copper Gate, The Palms at Premier Park, The Suites on Paseo, Harden Ranch Apartments, and Decatur-Angle Apartments offset by an approximate $21,000 reduction due to the Lost Creek bond redemption. In addition the Partnership realized a net increase of approximately $110,000 related to changes in professional fees, travel expenses, and salary and benefits.

Income from discontinued operations. The decrease from the second quarter of 2014 as compared to the second quarter of 2013 is attributable to the gain of approximately $1.8 million from the recognition of the sale of the Ohio Properties in the first quarter of 2013. There were no discontinued operations reported in the first quarter of 2014.

Six Months Ended June 30, 2014 compared to Six Months Ended June 30, 2013 (Partnership Only)
Changes in Results of Operations
 
 
 
 
 
 
 
 
 
 For Six Months Ended June 30, 2014
 
 For Six Months Ended June 30, 2013
 
Dollar Change
Revenues:
 
 
 
 
 
 
Property revenues
 
$
6,284,564

 
$
5,251,478

 
$
1,033,086

Investment income
 
12,912,975

 
13,066,199

 
(153,224
)
Gain on mortgage revenue bonds - sale and redemption
 
3,684,898

 

 
3,684,898

Contingent interest income
 

 
6,497,160

 
(6,497,160
)
Other interest income
 
450,900

 
1,341,165

 
(890,265
)
Other income
 

 
250,000

 
(250,000
)
Total revenues
 
23,333,337

 
26,406,002

 
(3,072,665
)
Expenses:
 
 
 
 
 


Real estate operating (exclusive of items shown below)
 
3,457,691

 
2,838,950

 
618,741

Realized loss on taxable property loan
 

 
4,557,741

 
(4,557,741
)
Provision for loan loss
 

 
96,000

 
(96,000
)
Provision for loss on receivables
 

 
241,698

 
(241,698
)
Depreciation and amortization
 
2,676,179

 
2,553,781

 
122,398

Interest
 
4,570,400

 
2,962,622

 
1,607,778

General and administrative
 
2,669,805

 
2,111,935

 
557,870

Total expenses
 
13,374,075

 
15,362,727

 
(1,988,652
)
Net income
 
9,959,262

 
11,043,275

 
(1,084,013
)
Income from discontinued operations (including gain on sale of MF Properties of $1,775,527 the first quarter of 2013)
 

 
2,099,906

 
(2,099,906
)
Net income
 
9,959,262

 
13,143,181

 
(3,183,919
)
Net (loss) income attributable to noncontrolling interest
 
(477
)
 
323,497

 
(323,974
)
Net income - America First Multifamily Investors, L.P.
 
$
9,959,739

 
$
12,819,684

 
$
(2,859,945
)

Property revenues. Property revenues increased approximately $1.0 million from the first half of 2013 to the first half of 2014 due to offsetting factors. Approximately $744,000 of the increase was attributable to the Woodland Park which became an MF Property effective June 1, 2013 after the completion of the foreclosure of the property’s mortgage revenue bond (see Note 7 to the consolidated financial statements). In addition, approximately $362,000 was attributable to the net increase in the existing MF Properties’ increased occupancy. The MF Properties averaged monthly rent of approximately $628 per unit in the first half of 2014 as compared with $606 per unit in the first half of 2013.


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Investment income.   Investment income includes interest earned on mortgage revenue bonds, PHC Certificates, and MBS. This income decreased in the first half of 2014 as compared to the first half of 2013 by approximately $153,000 due to offsetting factors. The decrease is partially due to approximately $4.9 million of investment income due to the recognition of the Ohio sale in first quarter of 2013, the redemption of the Iona Lakes mortgage revenue bond and the completion of the foreclosure of the Woodland Park mortgage revenue bond in the second quarter of 2013, and the redemption of the Lost Creek mortgage revenue bond in the first quarter 2014. This decrease is offset by an approximate $5.0 million increase in investment income as the result of the addition of the Greens Property, Avistar on the Boulevard, Avistar at Chase Hill, Avistar at the Crest, Renaissance Apartments, Avistar on the Hills Apartments, Avistar at the Oaks Apartments, Avistar in 09 Apartments, Vantage at Harlingen Apartments, Tyler Park Townhomes, Westside Village, Copper Gate, The Palms at Premier Park, The Suites on Paseo, Harden Ranch Apartments and Decatur-Angle Apartments mortgage revenue bonds and the MBS.

Gain on mortgage revenue bonds - sale and redemption.  The Company realized an approximate $2.8 million gain on the redemption of the Lost Creek mortgage revenue bond and an approximate $873,000 gain on the sale of the Autumn Pines mortgage revenue bond in February 2014 and April 2014, respectively. There was no gain realized on the sale or redemptions of mortgage revenue bonds in the first half of 2013.

Contingent interest income. The Company realized approximately $6.5 million of contingent interest income upon the redemption of the Iona Lakes mortgage revenue bond in June 2013 (see Note 4). There was no contingent interest income realized in 2014.

Other interest income. Other interest income is comprised mainly of interest income on taxable property loans held by the Partnership. The decrease in other interest income from the first half of 2014 as compared to the first half of 2013 is attributable to taxable interest income from the taxable property loans which are securitized by the Ohio Properties and recognized in the prior year when the Company was able to recognize the sale of the Ohio Properties (see Note 9).

Other income. Other income recognized in 2013 is a guarantee fee received from the General Partner owner of the Ohio Properties (see Note 9). There was no other income recognized in 2014.

Real estate operating expenses.  The net increase in real estate operating expenses from the first half of 2013 to the first half of 2014 was related to offsetting factors. Approximately $404,000 of the increase was related to Woodland Park which became an MF Property effective June 1, 2013 and approximately $194,000 of the increase was related to the existing MF Properties normal operating increases in salaries, utilities, insurance, real estate taxes, and repair and maintenance expenses. Offsetting these increases was a decrease of approximately $106,000 in Glynn Place’s repair expenses.

Realized loss on taxable property loan. In June 2013, the Partnership redeemed its interest in the Iona Lakes mortgage revenue bond for approximately $21.9 million. This redemption resulted in the realization of an approximate $4.6 million loss on a taxable property loan. There was no realized loss on taxable property loans reported in the first half of 2014 (see Note 4).

Provision for loan loss. The Company periodically, or as changes in circumstances or operations dictate, evaluates its investments for impairment. During the second quarter of 2013, the Company determined a portion of the taxable property loans were potentially impaired and an additional provision for loan loss should be recorded.   A provision for loan loss and an associated loan loss reserve of $96,000 was recorded against the Cross Creek taxable property loan in the second quarter of 2013. There was no provision for loan loss or associated loan loss reserve in the first half of 2014.

Provision for loss on receivables. A quarterly provision for loss was recorded on the interest receivable from the Woodland Park mortgage revenue bond until the foreclosure was completed on May 29, 2013. There is no expense for the first half of 2014.

Depreciation and amortization expense.  Depreciation results primarily from the apartment properties of the MF Properties. Amortization consists of in-place lease intangible assets recorded as part of the acquisition-method of accounting for the acquisition of MF Properties and deferred finance cost amortization related to the closing of the TEBS and TOB Credit Facilities. The net increase in depreciation and amortization when comparing the first half of 2014 to the first half of 2013 was the result of offsetting factors. There was an approximate $281,000 increase in depreciation and amortization expense related to Woodland Park which became an MF property effective June 1, 2013 and an approximate $74,000 increase related to the additional depreciation expense reported on the existing properties’ asset additions. These increases were offset by an approximate $219,000 decrease in in-place lease amortization related to the The Colonial, f/k/a Maples on 97th, as these were fully amortized in 2013.


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Interest expense. The net increase in interest expense in the first half of 2014 as compared to the first half of 2013 was partly due to an approximate $746,000 increase between the two periods resulting from the change in the mark to market adjustment of the Company’s derivatives. These interest rate derivatives do not qualify for hedge accounting and, accordingly, they are carried at fair value, with changes in fair value included in current period earnings within interest expense. In addition, an increase of approximately $912,000 resulted from higher average outstanding debt principal between the two periods. The Company’s borrowing cost averaged approximately 2.5% per annum for the first half of 2014 and 2013.

General and administrative expenses. The increase in general and administrative expenses when comparing the first half of 2014 to the first half of 2013 is attributable to approximately $325,000 increased administrative fees payable to AFCA 2 related to the acquisition of mortgage revenue bonds secured by Avistar on the Boulevard, Avistar at Chase Hill, Avistar at the Crest, Renaissance Apartments, Avistar at the Oaks Apartments, Avistar on the Hills Apartments, Avistar in 09 Apartments, Vantage at Harlingen Apartments, Tyler Park Townhomes, Westside Village, Copper Gate, The Palms at Premier Park, The Suites on Paseo, Harden Ranch Apartments, and Decatur-Angle Apartments. In addition the Partnership realized an increase of approximately $267,000 in professional fees and salary and benefits.

Income from discontinued operations. The decrease from the first half of 2014 as compared to the first half of 2013 is attributable to the gain of approximately $1.8 million from the recognition of the sale of the Ohio Properties in the first quarter of 2013. There were no discontinued operations reported in the first half of 2014.


Liquidity and Capital Resources

Interest earned on the mortgage revenue bonds, including those financing properties held by Consolidated VIEs, and mortgage investment income earned on the PHC Certificates and the MBS represents the Partnership’s principal source of cash flow.  The Partnership may also receive interest payments on its taxable property loans, earnings on temporary investments and cash distributions from equity interests held in MF Properties.  Interest is primarily comprised of base interest payments received on the Partnership’s mortgage revenue bonds, PHC Certificates and MBS.  Certain of the mortgage revenue bonds may also generate payments of contingent interest to the Partnership from time to time when the underlying apartment properties generate excess cash flow.  Because base interest on each of the Partnership’s mortgage revenue bonds and MBS is fixed, the Partnership’s cash receipts tend to be fairly constant quarter to quarter unless the Partnership acquires or disposes of its investments in mortgage revenue bonds.  Changes in the economic performance of the properties financed by mortgage revenue bonds with a contingent interest provision will affect the amount of contingent interest, if any, paid to the Partnership. 

Similarly, the economic performance of MF Properties will affect the amount of cash distributions, if any, received by the Partnership from its ownership of these properties.  The economic performance of a multifamily apartment property depends on the rental and occupancy rates of the property and on the level of operating expenses.  Occupancy rates and rents are directly affected by the supply of, and demand for, apartments in the market area in which a property is located. This, in turn, is affected by several factors such as local or national economic conditions, the amount of new apartment construction and the affordability of single-family homes.  In addition, factors such as government regulation (such as zoning laws), inflation, real estate and other taxes, labor problems and natural disasters can affect the economic operations of an apartment property.  The primary uses of cash by apartment properties are the payment of operating expenses and debt service.

Other sources of cash available to the Partnership include proceeds from debt financing, mortgages, and the sale of additional Beneficial Unit Certificates (“BUCs”).  As of June 30, 2014, the Company has outstanding debt financing of $244.5 million under separate credit facilities and mortgages of $69.5 million secured by seven MF Properties.

In June 2014, the Partnership committed to the purchase of an approximate $40.3 million par value mortgage revenue bond secured by the Live 929 Apartments, with a 5.78% stated interest. This investment will close upon execution of a $35.0 million TOB Trust under the existing TOB structure (see Notes 4 and 10). At June 30, 2014 the $35.0 million obligation is reported on the balance sheet as Due upon settlement of Live 929 Apartments. This amount will be converted into a TOB financing upon settlement. The remaining cash to close the commitment, approximately $5.3 million, will be paid when the TOB Trust is executed and is currently reported in accounts payable and accrued expenses on the balance sheet (see Notes 4 and 10).

In March 2014, the Company executed a new TOB Trust under its credit facility with DB securitizing the Decatur-Angle mortgage revenue bond borrowing $17.3 million. The facility has a variable interest rate tied to SIFMA and matures in February 2015. On the date of closing the total fixed TOB Trust fee was approximately 1.5% per annum and the variable rate paid on the TOB Trust on the SPEARS was approximately 0.3% resulting in a total cost of borrowing of approximately 1.8%. The outstanding balance remains at approximately $17.3 million on June 30, 2014. In July 2014, the Company entered into a new TOB Trust which replaces this TOB Trust (see Notes 10 and 18).

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As of June 30, 2014, the total costs of borrowing by investment type:
range between approximately 2.0% and 2.4% for the TOB Trusts securitized by mortgage revenue bonds
range between approximately 1.0% and 1.1% for the MBS TOB Trusts; and
approximate 2.3% for the PHC Trust Certificates TOB Trusts

In addition to the debt facilities, the Company has seven outstanding mortgage loans collateralized by seven MF Properties. The total outstanding mortgage loan principal is approximately $69.5 million. These mortgages carry current interest rates ranging from 2.7% to 5.9% with maturity dates ranging from July 2014 to March 2020 (see Note 11 to the consolidated financial statements).
 
In November 2013, a Registration Statement on Form S-3 was declared effective by the SEC under which the Partnership may offer up to $225.0 million of additional BUCs from time to time. In December 2013, the Partnership issued an additional 8,280,000 BUCs through an underwritten public offering at a public offering price of $6.25 per BUC pursuant to this new Registration Statement. Net proceeds realized by the Partnership from the issuance of these BUCs were approximately $48.2 million after payment of an underwriter’s discount and other offering costs of approximately $3.5 million. In January and February 2014, the Partnership issued an additional 9,200,000 BUCs through an underwritten public offering at a public offering price of $5.95 per BUC pursuant to this Registration Statement. Net proceeds realized by the Partnership from the issuance of these BUCs were approximately $51.4 million after payment of an underwriter’s discount and other offering costs of approximately $3.5 million.

The Partnership’s principal uses of cash are the payment of distributions to unitholders, interest and principal on debt financing, and general and administrative expenses. The Partnership also uses cash to acquire additional investments.  Distributions to unitholders may increase or decrease at the determination of the General Partner.  The per unit cash available for distribution primarily depends on the amount of interest and other cash received by the Partnership from its portfolio of mortgage revenue bonds and other investments, the amount of the Partnership’s outstanding debt and the effective interest rates paid by the Partnership on this debt, the level of operating and other cash expenses incurred by the Partnership and the number of units outstanding. During the three and six months ended June 30, 2014, the Partnership generated cash available for distribution of $0.09 and $0.22 per unit, respectively. During the three and six months ended June 30, 2013, the Partnership generated cash available for distribution of $0.125 and $0.25 per unit, respectively, These cash available for distributions from earnings are compared to a distribution of $0.125 and $0.25 per unit for each of the 2014 periods, respectively. See “Cash Available for Distribution,” after the next section heading. The General Partner believes that upon completion of its current investment and financing plans, the Partnership will continue to meet its liquidity requirements, including the payment of expenses, interest on its debt financing, and cash distributions to unitholders at the current level of $0.50 per unit per year without the use of unrestricted cash. However, if actual results vary from current projections and the actual CAD generated is less than the new regular distribution, such distribution amount may need to be reduced.

The Partnership’s operating policy is to use securitizations or other forms of leverage to maintain a level of debt financing between 40% and 60% of the total par value of the Partnership’s mortgage revenue bond portfolio.   As of June 30, 2014, the total par value of the Partnership’s total bond portfolio is approximately $344.9 million. The outstanding debt financing arrangements securitized with mortgage revenue bonds include the six TOB facilities with DB, the 2010 TEBS financing agreement with Freddie Mac, and the due upon settlement obligation which was closed into a TOB Trust in July 2014. These debt financing arrangements and the settlement obligation have an outstanding balance of $200.8 million in total as of June 30, 2014.  This calculates to a leverage ratio of 58%.  The Partnership’s operating policy is to use securitizations or other forms of leverage to maintain a level of debt financing between 60% and 80% of the total par value of the Partnership’s other investments. The Partnership also has eight outstanding PHC and MBS TOB facilities at June 30, 2014, which have total outstanding borrowings of $78.7 million. These are securitizations of its PHC Certificates and MBS. The par value of its PHC Certificates and MBS is $102.6 million, which calculates to a leverage ratio of 77%. Additionally, the MF Properties are encumbered by mortgage loans with an aggregate principal balance of approximately $69.5 million.  These mortgage loans mature at various times from July 2014 through March 2020 (see Note 11 to the consolidated financial statements). The debt financing, settlement obligation, and mortgage loans total of $349.0 million which results in a leverage ratio to Partnership Total Assets of 52%.

The Consolidated VIEs’ and MF Properties’ primary sources of cash are net rental revenues generated by their real estate investments. Net rental revenues from a multifamily apartment property depend on the rental and occupancy rates of the property and on the level of operating expenses. Occupancy rates and rents are directly affected by the supply of, and demand for, apartments in the market area in which a property is located. This, in turn, is affected by several factors such as local or national economic conditions, the amount of new apartment construction and the affordability of single-family homes. In addition, factors such as government regulation (such as zoning laws), inflation, real estate and other taxes, labor problems and natural disasters can affect the economic operations of an apartment property.


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The Consolidated VIEs’ and MF Properties’ primary uses of cash are the payment of operating expenses and the payment of debt service.

On a consolidated basis, cash provided by operating activities increased by approximately $566,000 during the first half of 2014 as compared to first half of 2013 due to the decrease in income from continuing operations and changes in working capital components.  Cash used for investing activities increased approximately $45.4 million for the first half of 2014 as compared to the first half of 2013. In the first half of 2014, approximately $50.0 million of cash was used for mortgage revenue bond acquisitions, capital improvements, and interest rate derivatives. Offsetting this usage was an approximate $2.0 million received from the release of restricted cash in connection with the TOBS financing facilities and approximately $35.5 million received from the Lost Creek mortgage revenue bond redemption, the Autumn Pines mortgage revenue bond sale, and MBS sale. In the first half of 2013 the Company used approximately $83.5 million for the purchase of the mortgage revenue bonds and related taxable bonds, the purchase of MBS, the addition to restricted cash related to investments, and renovations on the MF Properties. Offsetting the use of cash, the Company received approximately $2.5 million from the release of construction restricted cash in connection with the Greens Property. In addition, the Company realized approximately $4.0 million in net cash related to the realization of the Ohio Properties sale and approximately $21.9 million from the Iona Lakes mortgage revenue bond redemption. The Company also received approximately $1.4 million from principal repayments related to investments. The Company had approximately $7.7 million less cash available from financing activities for the first half of 2014 as compared to the first half of 2013.  Financing cash flows in the first half of 2014 included approximately $51.2 million from the sale of beneficial unit certificates, approximately $17.3 million from a TOB financing, and approximately $14.7 million in construction loan borrowing. The Company used approximately $32.2 million to repay TOB financing facilities and mortgages payable (see Notes 10 and 11) and approximately $14.7 million to pay distributions. Financing cash flows in the first half of 2013 included approximately $48.5 million of cash from the TOB Trust and Line of Credit borrowings and $7.5 million of cash from borrowing on The Colonial, f/k/a Maples on 97th, offset by the use of cash to pay distributions and principal payments on debt.

Market Opportunities and Challenges

We believe the current credit environment continues to create opportunities to acquire existing mortgage revenue bonds from distressed holders at attractive yields.  The Partnership continues to evaluate potential investments in bonds which are available on the secondary market.  We believe many of these bonds will meet our investment criteria and that we have a unique ability to analyze and close on these opportunities while maintaining our ability and willingness to also participate in primary market transactions.
 
Current credit and real estate market conditions also create opportunities to acquire quality MF Properties from distressed owners and lenders.  Our ability to restructure existing debt together with the ability to improve the operations of the apartment properties through our affiliated property management company can position these MF Properties for an eventual financing with mortgage revenue bonds.  We believe we can selectively acquire MF Properties, restructure debt and improve operations in order to create value to our unitholders in the form of a strong mortgage bond investment.

On the other hand, continued economic weakness in some markets may limit our ability to access additional debt financing that the Partnership uses to partially finance its investment portfolio or otherwise meet its liquidity requirements.  In addition, the economic conditions including slow job growth and low home mortgage interest rates have had a negative effect on some of the apartment properties which collateralize our mortgage bond investments and our MF Properties in the form of lower occupancy.
While some properties have been negatively affected, overall economic occupancy (which is adjusted to reflect rental concessions, delinquent rents and non-revenue units such as model units and employee units) of the apartment properties that the Partnership has financed with mortgage revenue bonds was approximately 84% for the first six months of 2014 and approximately 88% for the first six months of 2013.  Overall economic occupancy of the MF Properties was approximately 85% for the first six months of 2014 and approximately 81% for the first six months of 2013. Based on the growth statistics in the markets these property operate, we expect to see a modest improvement in property operations and profitability.


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Cash Available for Distribution

Management utilizes a calculation of Cash Available for Distribution (“CAD”) as a means to determine the Partnership’s ability to make distributions to shareholders.  The General Partner believes that CAD provides relevant information about its operations and is necessary along with net income for understanding its operating results.  To calculate CAD, the Partnership adds back non-cash expenses consisting of amortization expense related to debt financing costs and bond reissuance costs, interest rate derivative expense or income, provision for loan losses, impairments on bonds, losses related to VIEs including depreciation expense, and income received in cash from transactions which have been eliminated in consolidation, to the Partnership’s net income (loss) as computed in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and deducts Tier 2 income attributable to the General Partner as defined in the Agreement of Limited Partnership,. Net income is the GAAP measure most comparable to CAD. There is no generally accepted methodology for computing CAD, and the Partnership’s computation of CAD may not be comparable to CAD reported by other companies.  Although the Company considers CAD to be a useful measure of its operating performance, CAD is a non-GAAP measure that should not be considered as an alternative to net income or net cash flows from operating activities which are calculated in accordance with GAAP, or any other measures of financial performance or liquidity presented in accordance with GAAP.

For the three and six months ended June 30, 2014 CAD included income from two transactions which may not recur in future quarters. For the three and six months ended June 30, 2014 the Partnership reported $0.09 and $0.21, respectively, of CAD per unit. For the three and six months ended June 30, 2014, CAD includes approximately $0.011 of CAD per unit (approximately $650,000 of CAD) from the sale of the Autumn Pines bond. For the six months ended June 30, 2014, CAD includes approximately $0.037 of CAD per unit (approximately $2.1 million of CAD) from the redemption of the Lost Creek mortgage revenue bond. The sale and redemption gains were Tier 2 income with 25% allocated to the General Partner.

Distributions

The Partnership has made annual cash distributions of $0.50 per unit since 2009. Since realized CAD per unit was less than $0.50 per unit in fiscal years 2013, 2012, and 2011, the Partnership paid approximately $4.0 million, $5.8 million, and $3.9 million of the distribution, respectively, using unrestricted cash to supplement the deficit which was a return of capital to shareholders. The Partnership has historically supplemented its cash available for distribution with unrestricted cash when necessary and expects to continue to do so until the Partnership is able to complete its current plans to invest the net proceeds realized by the Partnership from the issuance of BUCs in January and February 2014 on a leveraged basis. The General Partner has identified a pipeline of mortgage revenue bonds it intends to acquire during the balance of 2014 and is actively performing due diligence on these mortgage revenue bonds to ensure they meet the Partnership’s investment criteria. The General Partner is also working with the Partnership’s primary lenders to finance a portion of the acquisition of these bonds and believes that upon completion of its current investment and financing plans, the Partnership will be able to generate sufficient CAD to maintain cash distributions to shareholders at the current level of $0.50 per unit per year without the use of other available cash. However, there is no assurance that the Partnership will be able to generate CAD at levels in excess of the current annual distribution rate. In that case, the annual distribution rate per unit may need to be reduced.


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The following table shows the calculation of CAD (and a reconciliation of the Partnership’s net income as determined in accordance with GAAP to its CAD):
 
 
For Three Months Ended June 30, 2014
 
For Three Months Ended June 30, 2013
 
For Six Months Ended June 30, 2014
 
For Six Months Ended June 30, 2013
Net income - America First Multifamily Investors L.P.
 
$
3,658,457

 
$
3,955,160

 
9,705,286

 
12,276,586

Net loss related to VIEs and eliminations due to consolidation
 
141,682

 
302,139

 
254,453

 
543,098

Net income before impact of VIE consolidation
 
$
3,800,139

 
$
4,257,299

 
9,959,739

 
12,819,684

Change in fair value of derivatives and interest rate derivative amortization
 
434,071

 
(240,904
)
 
609,908

 
(136,246
)
Depreciation and amortization expense (Partnership only)
 
1,293,553

 
1,315,322

 
2,676,179

 
2,553,781

Tier 2 Income distributable to the General Partner (1)
 
(218,295
)
 
(484,855
)
 
(927,106
)
 
(484,855
)
Deposit liability gain - sale of the Ohio Properties (2)
 

 

 

 
(1,775,527
)
Developer income (3)
 
44,000

 
396,000

 
132,000

 
396,000

Provision for loan loss
 

 
96,000

 

 
96,000

Provision for loss on receivables
 

 
3,523

 

 
241,698

Depreciation and amortization related to discontinued operations
 

 
4,223

 

 
8,453

Bond purchase discount accretion (net of cash received)
 
(2,393
)
 
178,721

 
(25,869
)
 
131,446

Greens Property deferred interest and reversal of deferral
 

 
166,268

 

 
332,794

Ohio Properties deferred interest and reversal of deferral
 

 

 

 
(3,517,258
)
CAD
 
$
5,351,075

 
$
5,691,597

 
12,424,851

 
10,665,970

Weighted average number of units outstanding,
 
 
 
 
 
 
 
 
basic and diluted
 
60,252,928

 
42,772,928

 
58,595,469

 
42,772,928

Net income, basic and diluted, per unit
 
$
0.05

 
$
0.09

 
0.15

 
0.28

Total CAD per unit
 
$
0.09

 
$
0.13

 
0.21

 
0.25

Distributions per unit
 
$
0.125

 
$
0.125

 
0.250

 
0.250


(1) As described in Note 2 to the consolidated financial statements, Net Interest Income representing contingent interest and Net Residual Proceeds representing contingent interest (Tier 2 income) will be distributed 75% to the shareholders and 25% to the General Partner. This adjustment represents the 25% of Tier 2 income due to the General Partner. For the three and six months ended June 30, 2014, the Company realized the sale of the Autumn Pines bond which resulted in an approximate $873,000 gain and Tier 2 income due to the General Partner of approximately $218,000. For the six months ended June 30, 2014, the Company realized the redemption of the Lost Creek bond which resulted in an approximate $2.8 million gain and Tier 2 income due to the General Partner of approximately $709,000. For the quarter ended June 30, 2013, the Company realized approximately $1.9 million net gain and Tier 2 income due to the General Partner of approximately $485,000 from the Iona Lakes mortgage revenue bond redemption.
(2)The Company determined that the approximate $1.8 million gain from the sale of the Ohio Properties was Tier 2 income in 2010, the year in which the Ohio Properties were sold to the unaffiliated not-for-profit. As such, 25% of that gain was distributed to AFCA 2 in 2010 and there was no Tier 2 income reported in 2013 related to the Ohio Properties. As such, the gain from sale of discontinued operations is reversed out of the CAD calculation.
(3) The developer income amount represents cash received by the Partnership for developer and construction management services performed on the University of Nebraska - Lincoln mixed-use project.  The development under construction at the University of Nebraska - Lincoln is accounted for as an MF property and the cash received for these fees has been eliminated within the consolidated financial statements.  For purposes of CAD, management is treating these fees as if received from an unconsolidated entity. 

Contractual Obligations

As discussed in the Company’s Annual report on Form 10-K, the debt and mortgage obligations of the Company consist of scheduled principal payments on the TOB financing facilities, the TEBS credit facility with Freddie Mac, and payments on the MF Property mortgages.


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The Partnership has the following contractual obligations as of June 30, 2014:
 
Payments due by period
 
 
 
Less than
 
1-3
 
3-5
 
More than 5
 
Total
 
1 year
 
years
 
years
 
years
Debt financing
$
244,468,000

 
$
168,447,000

 
$
1,914,000

 
$
74,107,000

 
$

Mortgages payable
$
69,547,725

 
$
15,532,536

 
$
32,185,458

 
$

 
$
21,829,731

Effective interest rate(s) (1)
 
 
2.68
%
 
2.71
%
 
3.31
%
 
3.25
%
Interest (2)
$
13,949,740

 
$
4,886,382

 
$
6,687,599

 
$
1,666,293

 
$
709,466

Bond purchase commitment
$
47,252,873

 
$

 
$
47,252,873

 
$

 
$


(1)
Interest rates shown are the average effective rates as of June 30, 2014 and include the impact of our interest rate derivatives.
(2)
Interest shown is estimated based upon current effective interest rates through maturity.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition guidance in Topic 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services. This standard is effective for annual reporting periods beginning after December 15, 2016. The Partnership is still evaluating the impact of this pronouncement on the consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 raises the threshold for disposals to qualify as discontinued operations. It also requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The ASU is effective for fiscal years beginning after December 15, 2014, and interim periods within those years.  The Partnership is still evaluating the impact of this pronouncement on the consolidated financial statements. 


Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in market risk, except as discussed below, from the information provided under “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of the Company’s 2013 Annual Report on Form 10-K.

In order to mitigate its exposure to interest rate fluctuations on the 2010 variable rate TEBS financing, the Partnership entered into interest rate cap agreements with Barclays Bank PLC, Bank of New York Mellon and Royal Bank of Canada, each in an initial notional amount of  approximately $31.9 million which effectively limits the interest payable by the Company on the 2010 TEBS financing to a fixed rate of 3.0% per annum on the combined notional amounts of the interest rate cap agreements through August 2017.  The interest rate cap plus the Facility Fees result in a maximum potential cost of borrowing on the 2010 TEBS financing of 4.9% per annum.  

The following table outlines the interest rate caps the Company has in place as of June 30, 2014:
 
 
 
Notional
 
Effective
 
Maturity
 
Purchase
 
 
Date Purchased
 
Amount
 
Capped Rate
 
Date
 
Price
 
Counterparty
 
 
 
 
 
 
 
 
 
 
 
September 2, 2010
 
$
31,936,667

 
3.0
%
 
September 1, 2017
 
$
921,000

 
Bank of New York Mellon
 
 
 
 
 
 
 
 
 
 
 
September 2, 2010
 
$
31,936,667

 
3.0
%
 
September 1, 2017
 
$
845,600

 
Barclays Bank PLC
 
 
 
 
 
 
 
 
 
 
 
September 2, 2010
 
$
31,936,667

 
3.0
%
 
September 1, 2017
 
$
928,000

 
Royal Bank of Canada
 
 
 
 
 
 
 
 
 
 
 
August 15, 2013
 
$
93,305,000

 
1.5
%
 
September 1, 2017
 
$
793,000

 
Deutsche Bank
 
 
 
 
 
 
 
 
 
 
 
February 18, 2014
 
$
41,250,000

 
1.0
%
 
March 1, 2017
 
$
230,500

 
SMBC Capital Markets, Inc
 
 
 
 
 
 
 
 
 
 
 
February 18, 2014
 
$
28,750,000

 
1.0
%
 
March 1, 2017
 
$
161,000

 
SMBC Capital Markets, Inc

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In February 2014, the Company entered into two interest rate cap agreements with SMBC Capital Markets, Inc. for a notional amount of $70.0 million with an effective start date of March 1, 2014. These agreements effectively limit the interest component of the TOB financing correlated with the SIFMA index to a maximum of 1.0% on $70.0 million of the outstanding borrowings on the MBS TOB financing facilities and the PHC Certificates TOB financing facilities to 1.0% through a three year term ending March 1, 2017. These interest rate cap contracts cost approximately $390,000 and do not qualify for hedge accounting, therefore, changes in the estimated fair value of the interest rate derivatives are included in earnings.

On July 30, 2013, the Company purchased a new interest rate derivative with a notional amount of $93.3 million which represents the amount outstanding on the 2010 TEBS financing facility at August 1, 2013.  The maturity date of this interest rate derivative is September 1, 2017 and the effective capped interest rate is 1.5%.  On July 30, 2013, the Company also sold a new interest rate derivative to the same counterparty which had the same notional amount of $93.3 million and an effective capped interest rate of 3.0%.  The total cost of these two interest rate derivatives was approximately $800,000 and the derivative contracts do not qualify for hedge accounting and therefore, changes in the estimated fair value of the interest rate derivatives are included in earnings.  This interest rate corridor transaction effectively reduced the capped interest rate from 3.0% to 1.5% on the 2010 TEBS financing facility through the maturity date of the interest rate derivative contracts. In August 2013, the Company executed a master netting agreement with DB, which is the counterparty to these interest rate derivative contracts and is also the provider of the Company’s TOB financing facilities. The Company was refunded $500,000 of posted cash collateral on the TOB financing facilities upon the execution of this master netting agreement. There are no amounts reported on a net basis related to the Company’s interest rate derivative contracts as of June 30, 2014 or December 31, 2013.

These interest rate derivatives do not qualify for hedge accounting and, accordingly, they are carried at fair value, with changes in fair value included in current period earnings within interest expense. The change in the fair value of these derivative contracts resulted in an increase in interest expense of approximately $434,000 and $610,000 for the three and six months ended June 30, 2014, respectively. The change in the fair value of these derivative contracts resulted in an decrease in interest expense of approximately $241,000 and $136,000 for the three and six months ended June 30, 2013, respectively.

Item 4.  Controls and Procedures.
 
Evaluation of disclosure controls and procedures.  The Chief Executive Officer and Acting Chief Financial Officer has reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Acting Chief Financial Officer has concluded that, as of the end of such period, the Company’s current disclosure controls and procedures were effective in ensuring that (i) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in internal control over financial reporting.  The Chief Executive Officer and Acting Chief Financial Officer has determined that there were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recent fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II - OTHER INFORMATION

Item 1A. Risk Factors.

The risk factors affecting the Company are described in Item 1A “Risk Factors” of the Company’s 2013 Annual Report on Form 10-K. There have been no material changes from these previously disclosed risk factors for the three and six months ended June 30, 2014.

Item 6.  Exhibits.

The following exhibits are filed as required by Item 15(a)(3) of this report.  Exhibit numbers refer to the paragraph numbers under Item 601 of Regulation S-K:

3.1 Certificate of Limited Partnership of America First Multifamily Investors, L.P. (incorporated herein by reference to Exhibit 3.1 to Form 8-K (No. 000-24843), filed by the Partnership on November 12, 2013).

3.2 Amendment to the Certificate of Limited Partnership, effective November 12, 2013 (incorporated herein by reference to Exhibit 3.2 to Form 8-K (No. 000-24843), filed by the Partnership on November 12, 2013).

3.3 Agreement of Limited Partnership of the Partnership dated October 1, 1998 (incorporated herein by reference to Exhibit 4.2 to Registration Statement on Form S-3 (Reg. No. 333-191014) filed by the Partnership on September 5, 2013).

3.4 Amendment to Agreement of Limited Partnership of the Partnership dated November 12, 2013 (incorporated herein by reference to Exhibit 3.4 to Form 8-K (No. 000-24843), filed by the Partnership on November 12, 2013).

4.1 Form of Beneficial Unit Certificate of the Partnership (incorporated herein by reference to Exhibit 4.1 to Form 8-K (No. 000-24843), filed by the Partnership on November 12, 2013).
31.1  Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2  Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1  Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2  Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 The following materials from the Partnership’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, (ii) the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013, (iv) the Condensed Consolidated Statements of Partners’ Capital for the three and six months ended June 30, 2014 and 2013, (v) the Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2014 and 2013, and (vi) Notes to Condensed Consolidated Financial Statements. Such materials are presented with detailed tagging of notes and financial statement schedules.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

         AMERICA FIRST MULTIFAMILY INVESTORS, L.P.


Date: August 8, 2014
By:
/s/ Mark Hiatt
 
 
Mark Hiatt
 
 
Acting Chief Financial Officer
 
 
Chief Executive Officer

 
 
 


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