SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
---------------------------------
Filed by the Registrant
Filed by a party other than the Registrant
---------------------------------
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Definitive Proxy Statement
[ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
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CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
(Name of Registrant as Specified in Its Charter)
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Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
Limited Partnership Units
(2) Aggregate number of securities to which transaction applies:
49,910 Units
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $22,305,100. Pursuant to Rule
0-11(c)(2), the fee was calculated on the amount of cash that is
estimated to be received from the Registrant from the sales
proceeds from the sales of the Registrant's property, assuming
that the Registrant receives distributions from its investments
in local partnerships equal to the maximum amount of the
estimated liquidation proceeds.
(4) Proposed maximum aggregate value of transaction: $22,305,100
(5) Total fee paid: $4,461
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-1l(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party: (4) Date Filed:
1/8/04
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
c/o C.R.I., Inc.
11200 Rockville Pike, 5th Floor
Rockville, Maryland, 20852
(301) 468-9200
IMPORTANT PARTNERSHIP MATTER -- PLEASE REVIEW AND RESPOND IMMEDIATELY
January 12, 2004
Dear Investor:
On behalf of Capital Realty Investors-II Limited Partnership ("CRI-II" or
"Partnership"), we are writing to recommend that you authorize C.R.I., Inc., as
the Managing General Partner of CRI-II, to liquidate the assets of CRI-II and
wind up its affairs. We have developed a strategy for potential sales of the
Partnership's investments in the underlying multifamily apartment complexes (the
"Apartment Complex" or "Apartment Complexes").
In connection with the proposed liquidation, enclosed are the following:
1. Consent Solicitation Statement - This document describes the terms of the
proposed liquidation, including two proposed amendments to the Partnership's
Limited Partnership Agreement to (i) allow the Managing General Partner to be
eligible to be paid certain disposition fees from the Partnership as
compensation for its efforts in marketing and selling an Apartment Complex on
the same basis as third parties (in the event that third parties are not paid
for this purpose) and (ii) in recognition that one or more of the Apartment
Complexes might not be saleable to parties not affiliated with the respective
Local Partnership due to the amount and/or terms of their current indebtedness,
allow the Managing General Partner to be paid a partnership liquidation fee in
the amount of Five Hundred Thousand Dollars ($500,000) payable only if the
Managing General Partner is successful in liquidating all of the Partnership's
investments within 36 months from the date the liquidation is approved. Our
internal analysis (based on capitalization of net operating income projected for
2004 at rates of 8.5% and 9.5% for market rate properties and certain stated
assumptions about the sales of affordable housing properties to Low Income
Housing Tax Credit buyers) estimates a pre-tax liquidation valuation range of
between $3,334 and $4,335 per 10 units of Limited Partner ownership interest.
Please see page 28 for a full description of the valuation methods and
assumptions we relied upon in our analysis.
2. Consent of Limited Partner and Return Envelope - Please mark your votes and
sign this form and return it in the enclosed, postage-prepaid envelope or by
facsimile to (212) 929-0308 by 5 p.m., Eastern Time, on March __, 2004, or such
later date and time as we may set.
Because you are an investor in CRI-II, we are required to ask for your
consent to complete the liquidation and vote on other related proposals. Please
carefully review the information in the enclosed Consent Solicitation Statement
before voting.
If you have any questions or require assistance completing the enclosed
consent card, please call CRI-II's consent solicitation agent, MacKenzie
Partners, Inc., at (800) 322-2885.
Sincerely, Sincerely,
Your response to this solicitation is very important in order to ensure
that your interests will be represented. Failure to return the enclosed consent
card will have the same effect as a vote against the liquidation and other
related proposals. We recommend that all Limited Partners vote "FOR" the
liquidation of the Partnership and each of the other related proposals.
TABLE OF CONTENTS
CONSENT SOLICITATION STATEMENT................................................1
QUESTIONS AND ANSWERS ABOUT THIS CONSENT SOLICITATION STATEMENT
AND THE PROPOSED LIQUIDATION................................................5
WHAT YOU SHOULD KNOW BEFORE VOTING ON THE LIQUIDATION........................12
BACKGROUND AND REASONS FOR THE LIQUIDATION................................12
RISKS OF THE LIQUIDATION..................................................15
PLAN OF LIQUIDATION AND DISSOLUTION.......................................18
AMENDMENT TO THE PARTNERSHIP AGREEMENT....................................19
INTERESTS OF CERTAIN PERSONS IN THE LIQUIDATION...........................22
SUMMARY HISTORICAL FINANCIAL DATA.........................................26
LIQUIDATION EXPENSES......................................................28
ESTIMATED RANGES OF VALUE OF PARTNERSHIP PROPERTIES.......................29
OTHER CONDITIONS TO THE LIQUIDATION.......................................34
ACCOUNTING TREATMENT......................................................37
EFFECTIVE TIME............................................................37
AMENDMENT OF THE PLAN OF LIQUIDATION AND DISSOLUTION......................37
NO APPRAISAL RIGHTS.......................................................37
REGULATORY APPROVALS......................................................38
THE PARTNERSHIP AND THE GENERAL PARTNERS.....................................39
SCHEDULE OF APARTMENT COMPLEXES OWNED BY LOCAL PARTNERSHIPS...............40
THE GENERAL PARTNERS......................................................41
THE SPECIAL LIMITED PARTNER...............................................42
THE INITIAL LIMITED PARTNER...............................................42
FEES OF THE GENERAL PARTNERS..............................................42
MARKET FOR THE BACS.......................................................45
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............46
GENERAL...................................................................46
OWNERSHIP INTEREST OF THE GENERAL PARTNERS IN THE PARTNERSHIP.............46
CONSENT PROCEDURES...........................................................47
TIMING OF THE CONSENT SOLICITATION........................................47
RECORD DATE AND OUTSTANDING BACS..........................................47
APPROVAL DATE; EXTENSIONS; AMENDMENT......................................47
CONSENT CARD AND VOTE REQUIRED............................................49
REVOCABILITY OF CONSENT...................................................50
SOLICITATION OF CONSENTS; SOLICITATION EXPENSES...........................50
EFFECT OF A FAILURE TO APPROVE THE LIQUIDATION............................50
INCORPORATION BY REFERENCE...................................................51
APPENDICES...................................................................51
APPENDIX A-- FORM OF PLAN OF LIQUIDATION AND DISSOLUTION
APPENDIX B - FORM OF LEGAL OPINION OF NIXON PEABODY LLP
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
c/o C.R.I., Inc.
11200 Rockville Pike, 5th Floor
Rockville, Maryland, 20852
(301) 468-9200
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CONSENT SOLICITATION STATEMENT
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This Consent Solicitation Statement and the enclosed consent card are being
first mailed to the holders of units of limited partner interests of Capital
Realty Investors-II Limited Partnership ("CRI-II" or the "Partnership"), a
Maryland limited partnership, on or about January ___, 2004, by the Managing
General Partner, as hereinafter defined, on behalf of the Partnership to solicit
consents for approval of the following:
(1) The sale of all of the Partnership's assets and the dissolution of the
Partnership pursuant to a Plan of Liquidation and Dissolution;
(2) The amendment of the Partnership's Limited Partnership Agreement to permit
C.R.I., Inc. ("CRI"), to be eligible to receive property disposition fees
from the Partnership on the same basis as such fees may currently be paid
to Local General Partners, real estate brokers or other third party
intermediaries employed to sell Partnership properties, to the extent that
CRI markets and sells the Partnership's properties instead of such persons
(a "Disposition Fee");
(3) The amendment of the Partnership's Limited Partnership Agreement to permit
CRI to be eligible to receive a partnership liquidation fee in the amount
of Five Hundred Thousand Dollars ($500,000), payable only if the Managing
General Partner is successful in liquidating all of the Partnership's
investments within 36 months from the date the liquidation is approved, in
recognition that one or more of the properties in which the Partnership
holds an interest might not be saleable to parties not affiliated with the
respective Local Partnership due to the amount and/or terms of their
current indebtedness (the "Partnership Liquidation Fee"); and
(4) To authorize the Managing General Partner, in its sole discretion, to elect
to extend the period during which Consents of Limited Partners may be
solicited and voted, but not beyond sixty (60) days from the date that this
Consent Solicitation Statement is sent to the Limited Partners.
In this Consent Solicitation Statement, the owners of units of Additional
Limited Partner interest are referred to as "Limited
Partners."
1
The matters for which the Limited Partners' consent is being solicited are
collectively referred to in this document as the "Liquidation." The Liquidation
consists of three independent proposals, each of which will be effective only
upon the approval of the holders of a majority of the outstanding Limited
Partner units in the Partnership entitled to vote as of December 31, 2003. The
first proposal consists of both the authorization to liquidate the Partnership
and the authorization of the Disposition Fee. CRI is of the view that it is
permissible to bundle these two items in one proposal because payment of the
Disposition Fee would not adversely affect the amount to be received by Limited
Partners from the sale of the Partnership's interest in a local partnership that
owns a multi-family apartment complex (an "Apartment Complex"). The Disposition
Fee of up to 5% of the sales price of a property would only be payable in those
circumstances where CRI actually performs the marketing and disposition services
that would otherwise have been performed by, and paid to, a broker or other
third party. The second proposal consists of the authorization of the
Partnership Liquidation Fee. The second proposal recognizes that in one or more
instances, a reasonable seller would not engage a broker to sell a particular
Apartment Complex or the Partnership's interest in the local partnership because
the amount or terms of its indebtedness would virtually preclude a sale to
anyone other than a Local General Partner or one of its affiliates. Under such
circumstances, if CRI successfully negotiates a disposition of such an Apartment
Complex or the Partnership's interest in the local partnership, CRI would not
receive a Disposition Fee, but it would be eligible to receive the Partnership
Liquidation Fee provided that it liquidates all of the Partnership's investments
within 36 months from the date the liquidation is approved by the Limited
Partners. The third proposal grants the Managing General Partner the right, in
its sole discretion, to extend the period during which Consents of Limited
Partners may be solicited and voted, but not beyond sixty (60) days from the
date of this Consent Solicitation Statement, if there are not sufficient votes
of Limited Partners at 5 p.m., Eastern Time, on March __, 2004, to approve the
other two proposals.
CRI is the Managing General Partner of CRI-II. William B. Dockser
("Dockser") and H. William Willoughby ("Willoughby"), the two current
shareholders of CRI, are General Partners of the Partnership, and Martin C.
Schwartzberg, a former shareholder of CRI who retired in 1990, is also a General
Partner of CRI-II. The Managing General Partner is referred to in this document
as "CRI," "we" or "our." If the Disposition Fee is approved by the Limited
Partners, Dockser and Willoughby will waive their respective portions of the
currently authorized 1% fee for their services to the Partnership payable upon a
sale of a property.
As described in this Consent Solicitation Statement, we are proposing to
liquidate CRI-II, subject to approval by the affirmative vote of holders of a
majority of the outstanding Limited Partner units in the Partnership entitled to
vote as of December 31, 2003. We have described in this Consent Solicitation
Statement what we believe to be a reasonable approach to estimating the values
of the properties and how, assuming the properties are sold within such
estimated value ranges, the proceeds would be distributed to Limited Partners
and the estimated tax consequences of such distributions. See "WHAT YOU SHOULD
KNOW BEFORE VOTING ON THE LIQUIDATION -- Estimated Ranges of Value of
Partnership Properties."
2
If the holders of a majority of the outstanding Limited Partner units in
the Partnership approve the Liquidation by marking the box entitled "FOR" on
Proposal 1 of the enclosed consent card and the other conditions described
herein are satisfied, then CRI will: (1) seek to sell the assets of the
Partnership and use the sales proceeds and/or other Partnership funds to pay all
expenses in connection with such sales, including the Disposition Fee where
applicable, (2) pay or make provision for payment of all Partnership obligations
and liabilities, including the Partnership Liquidation Fee if it is approved,
and (3) distribute the remaining assets as set forth in the Partnership's
Limited Partnership Agreement, as amended and as described in this Consent
Solicitation Statement. If Proposal 1 is approved by a majority in interest of
the Limited Partners, but Proposal 2 concerning the Partnership Liquidation Fee
is not approved, the Managing General Partner would not have an additional
economic incentive to complete the liquidation of all of the Partnership's
investments within the 36 month period. If Proposal 1 is approved by a majority
in interest of the Limited Partners, but Proposal 3 is not approved, your
completed consent card, to be accepted, must be received by no later than 5
p.m., Eastern Time, on March __, 2004, and the Managing General Partner will not
have the right to extend such consent period. See "WHAT YOU SHOULD KNOW BEFORE
VOTING ON THE LIQUIDATION - Plan of Liquidation and Dissolution."
In addition to solicitation by use of the mails, directors, officers,
employees and agents of CRI may solicit consents in person or by telephone,
facsimile or other means of communication. We have also engaged MacKenzie
Partners, Inc., to assist us in the solicitation and tabulation of consents.
MacKenzie will receive a fee of $8,000, plus reimbursement of out-of-pocket
expenses, in connection with its engagement.
We request that each Limited Partner complete and sign the enclosed consent
card and promptly return it in the enclosed postage-prepaid envelope or fax it
to the Partnership's consent solicitation agent, MacKenzie Partners, at (212)
929-0308. To be counted, your properly completed consent card must be received
at or before 5 p.m., Eastern Time, on March __, 2004, unless the Managing
General Partner elects to extend the period for giving consents (the "Expiration
Date").
Your vote is very important. Failure to return the enclosed consent card
will have the same effect as a vote against the Liquidation. We recommend that
all Limited Partners consent to the Liquidation by marking the boxes entitled
"FOR" with respect to each of the three proposals on the enclosed consent card.
If you sign and send in the consent card but do not indicate how you want to
vote as to the Liquidation, your consent card will be treated as voting "FOR"
each of the proposals.
This Consent Solicitation Statement contains forward-looking statements.
Discussions containing such forward-looking statements may be found in the
material set forth under "WHAT YOU SHOULD KNOW BEFORE VOTING ON THE LIQUIDATION"
as well as within this Consent Solicitation Statement generally. In addition,
when used in this Consent Solicitation Statement, the words "believes,"
"anticipates," "expects" and similar expressions are intended to identify
forward-looking statements; however, not all forward-looking statements will
contain such expressions. Such statements are subject to a number of risks and
uncertainties. Actual results or events in the future could differ materially
from those described in the forward-looking statements as a result of CRI's
inability to find suitable purchasers for the Partnership's interests in
Apartment Complexes, the inability to agree on an acceptable purchase price or
contract terms, fluctuations in the market value of the Apartment Complexes,
general economic conditions and other factors set forth in this Consent
Solicitation Statement. We further caution Limited Partners that the discussion
of these factors may not be exhaustive.
3
We undertake no obligation to update any forward-looking statements that
may be made to reflect any future events or circumstances.
Limited Partners who vote against the liquidation and the related proposals
will not have any rights of appraisal or similar rights.
The Liquidation has not been approved or disapproved by the Securities
andExchange Commission, nor has the Commission passed upon the fairness or THE
merits of The Proposed transaction, nor upon the accuracy or adequacy of the
information contained in this document. Any representation to the contrary is
unlawful.
4
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QUESTIONS AND ANSWERS
ABOUT THIS CONSENT SOLICITATION STATEMENT
AND THE PROPOSED LIQUIDATION
--------------------------------
BACKGROUND
Q: WHY HAVE I RECEIVED THIS CONSENT SOLICITATION STATEMENT?
A: You have received this Consent Solicitation Statement because CRI-II's
Limited Partnership Agreement requires that the holders of a majority of the
outstanding Limited Partner units in the Partnership approve the Liquidation.
You are entitled to vote because, according to the records of the Partnership,
you owned Limited Partner units in the Partnership on December 31, 2003. Even if
you have sold some or all of your units since that date, if you owned units on
December 31, 2003, you are entitled to vote.
THE LIQUIDATION
Q: WHAT DOES THE LIQUIDATION INVOLVE?
A: We are proposing to sell all of CRI-II's interests in limited partnerships
("Local Partnerships") or Apartment Complexes owned by the Local Partnerships in
which CRI-II is invested, pay or make provision for all Partnership obligations
and liabilities, distribute the available cash to the Partners and terminate the
Partnership. Throughout this Consent Solicitation Statement, sale of the
interests in the Local Partnerships or of an Apartment Complex itself is
referred to as a "sale of an Apartment Complex" or a "sale of a property".
We are also proposing that the Partnership's Limited Partnership Agreement
be amended to permit CRI to be eligible to receive a Disposition Fee of up to 5%
of the sale price if, and to the extent that, it is not necessary to pay
property disposition fees or other commissions to others in connection with the
sale of the Apartment Complexes and, instead, CRI markets and sells one or more
Partnership properties in connection with the Liquidation. The Partnership
Agreement provides that all property disposition fees and any other commissions
or fees payable upon the sale of the Apartment Complexes are subject to a fee
cap equal to the lesser of the competitive rate for such services or 6% of the
sales price of the Apartment Complexes. This limit on property disposition fees
will not change. Therefore, in no event would the proposed amendment permitting
CRI to be eligible to receive a Disposition Fee cause the existing fee cap to be
exceeded or otherwise increase the fees payable by the Partnership in connection
with the sales of the Partnership's properties. In other words, if CRI receives
the proposed Disposition Fee, the Limited Partners would receive the same net
distribution upon the sale of Apartment Complexes as if an unrelated third party
had performed the same services and received a market rate fee for doing so.
5
Under the Partnership Agreement, the individual General Partners (but not
CRI) are currently entitled to a deferred fee for their services to the
Partnership payable upon the sale of a property equal to 1% of the sales price
of the Apartment Complex. Such fee is not payable unless the Limited Partners
have received distributions in an amount sufficient to return capital and a
preferred return as described in the Partnership Agreement. If the liquidation
is approved, Willoughby and Dockser would waive their right to this fee and
would be eligible to receive indirectly the Disposition Fee payable to CRI, of
which they are the only shareholders. The Disposition Fee would be considered a
debt of the Partnership, payable prior to any return of capital or any preferred
return to the Limited Partners.
As used in this Consent Solicitation Statement, net sales proceeds means
all sale proceeds received by the Partnership from a Local Partnership (which
would already reflect payment of any mortgage repayment and transaction costs),
or directly from the purchaser, from the sale of an Apartment Complex, less
repayment of any purchase money note financing related to the applicable Local
Partnership, and after payment of the expenses related to the sale, including,
where applicable, the Disposition Fee to CRI. See "WHAT YOU SHOULD KNOW BEFORE
VOTING ON THE LIQUIDATION -Risks of the Liquidation - Purchase Money Note." As
used in this Consent Solicitation Statement, sales price means the gross amount
of consideration paid by a purchaser for an Apartment Complex or the
Partnership's interest in a Local Partnership, including any assumption of debt.
This Consent Solicitation Statement includes a separate proposal seeking
authorization of the Partnership Liquidation Fee in the amount of Five Hundred
Thousand Dollars ($500,000). This proposal recognizes that, in one or more
instances, a reasonable seller would not engage a broker to sell a particular
Apartment Complex because the amount or terms of its indebtedness would
virtually preclude a sale to anyone other than a Local General Partner or one of
its affiliates. Under such circumstances, if CRI successfully negotiates a
disposition of such an Apartment Complex, CRI would not receive a Disposition
Fee in connection with such sale, but it would be eligible to receive the
Partnership Liquidation Fee when the last asset of the Partnership is disposed
of, provided that CRI liquidates all of the Partnership's assets within 36
months after the Liquidation is approved. The Partnership Agreement provides
that all property disposition fees and any other commissions or fees payable
upon the sale of the Apartment Complexes are subject to a fee cap equal to the
lesser of the competitive rate for such services or 6% of the sales price of the
Apartment Complexes. This limit would not apply to the Partnership Liquidation
Fee. The Managing General Partner believes that the Partnership Liquidation Fee
should not be subject to the fee cap because, although the amount of expected
proceeds from the sale of property to a Local General Partner or its affiliate
is likely to be adversely impacted by the amount or terms of indebtedness on the
property, the amount of effort required from CRI to complete these transactions
in a timely manner is likely to be significant, and the dissolution of the
Partnership cannot be completed until these assets are sold. Since CRI would not
be eligible to receive a Disposition Fee in connection with any of these
transactions, the proposed Partnership Liquidation Fee will provide an
additional economic incentive to complete the liquidation of all of the
Partnership's investments within the 36 month period. The Partnership
Liquidation Fee, if earned, would be considered a debt of the Partnership,
payable prior to any return of capital or preferred return to the Limited
Partners.
6
Q: WHY IS THE MANAGING GENERAL PARTNER PROPOSING TO SELL THE PARTNERSHIP
PROPERTIES AT THIS TIME?
A: CRI is recommending the Liquidation because we believe the Partnership has
maximized the principal benefits of owning the Apartment Complexes, in
particular: (1) providing tax benefits in the form of tax losses which Limited
Partners may use to offset income from other sources; (2) generating current
income for Limited Partners through cash distributions; and (3) providing
potential capital appreciation opportunities. Moreover, the Partnership has
already held the Apartment Complexes longer than the originally contemplated
holding period and many Limited Partners have inquired about possible exit
strategies because they feel burdened by the Schedule K-1 tax reporting
requirements of the Partnership and/or they have few opportunities to liquidate
their investment due to the absence of a recognized market for the Partnership
interests.
In addition, CRI is of the view that current market conditions are
favorable for the sale of the Partnership's assets. In particular, the current
low interest rate environment may make the acquisition of major investments,
like multi-family rental properties, more attractive to purchasers.
Also, we believe that the increasing age of the properties in which the
Partnership is invested and the increasing maintenance and administrative
expenses for the Apartment Complexes will, within the next few years, lead to a
reduction of cash distributions received by the Partnership from the Local
Partnerships. Moreover, the Apartment Complexes may have limited prospects for
appreciation unless significant additional investments are made to upgrade the
properties. The need for upgrades and capital improvements also makes
refinancing a less attractive option than sale, for those properties whose
current mortgages permit prepayment, because a new lender would likely require
that significant sums be set aside for immediate repairs and improvements,
thereby diminishing any equity available for distribution.
At its inception, the Partnership had investments in 22 Local Partnerships.
Today the Partnership retains interests in only twelve of those Local
Partnerships. At its current size, the Partnership realizes fewer benefits from
the management efficiencies that occur when operating multiple properties. The
Partnership's expenses have not decreased in proportion to the number of
properties sold (or disposed of in satisfaction of matured Purchase Money Notes)
and the resulting decrease in net cash flows from operations. Certain expenses
of the Partnership, such as audit fees, management fees, tax return and K-1
preparation costs, are relatively fixed and do not vary significantly with the
number of properties owned. Consequently, CRI is of the view that the proposed
liquidation would provide the most profitable and efficient manner to distribute
the Partnership's remaining value to the Limited Partners.
Accordingly, the sale of the Local Partnership properties appears to be in
the best interests of the Partnership and its Limited Partners.
7
Q: WHY SHOULD THE PARTNERSHIP AGREEMENT BE AMENDED TO PERMIT CRI TO BE
ELIGIBLE TO RECEIVE A DISPOSITION FEE?
A: When the Partnership was initially formed, we viewed our role in the
disposition of the Apartment Complexes as limited to analysis of sales proposals
obtained and presented by others (such as the Local General Partners of Local
Partnerships or third party brokers). The individual General Partners (but not
CRI) are currently entitled to an aggregate fee of 1% of the sales price for
their services to the Partnership, payable upon the sale of an Apartment Complex
after a return of capital and preferred return to Limited Partners.
We did not anticipate active involvement in the marketing of and finding
buyers for the properties, or in the negotiation, due diligence and execution of
sales of the properties. However, we believe that CRI is now in a better
position than the Local General Partners or unaffiliated real estate agents to
maximize value in connection with the sale of the Apartment Complexes because of
CRI's extensive experience over the past decade in locating and directly
marketing similar properties to qualified buyers, negotiating sales contracts
and shepherding sales transactions to closing for dozens of such properties
nationwide in CRI's affiliated portfolios. We believe that the Partnership
should take advantage of this experience and that CRI should be compensated at a
market rate (limited up to 5% of the sales prices) for its efforts where CRI
takes such an active role in seeking to dispose of the properties in the same
way as Local General Partners or real estate agents would have been compensated
for such services. The amendment would permit such compensation but would have
no impact on the existing provisions in the Partnership Agreement limiting
aggregate property disposition fees and commissions to the lesser of the
competitive rate payable for similar services or 6% of the sales price of the
Apartment Complex. In other words, if CRI receives the proposed disposition fee,
the Limited Partners would receive the same net distribution upon the sale of
Apartment Complexes as if an unrelated third party had performed the same job
and received a market rate fee for its services.
Q: WHY SHOULD THE PARTNERSHIP AGREEMENT BE AMENDED TO PERMIT CRI TO BE
ELIGIBLE TO RECEIVE A PARTNERSHIP LIQUIDATION FEE?
A: CRI is of the view that, with respect to one or more of the Apartment
Complexes, a reasonable seller would not engage a broker to sell the property
because the amount or terms of its indebtedness would virtually preclude a sale
to anyone other than a Local General Partner or one of its affiliates.
Nevertheless, in order to complete the Liquidation, the Partnership must dispose
of all its assets. Under such circumstances, if CRI successfully negotiates a
disposition of such an Apartment Complex, CRI would not receive a Disposition
Fee in connection with such sale, but it would be eligible to receive the
Partnership Liquidation Fee of $500,000, provided that it liquidates all of the
Partnership's assets within 36 months from the date of approval of the
Liquidation. The existing fee cap equal to 6% of the sales price of the
Apartment Complexes would not apply to the Partnership Liquidation Fee. The
Managing General Partner believes that the Partnership Liquidation Fee is
justified because, although the amount of expected proceeds from the sale of
property to a Local General Partner or its affiliate is likely to be adversely
impacted by the amount or terms of indebtedness on the property, the amount of
effort required from CRI to complete these transactions in a timely manner is
likely to be significant and the dissolution of the Partnership cannot be
completed until these assets are sold. Since CRI would not be eligible to
receive a Disposition Fee in connection with any of these transactions, the
proposed Partnership Liquidation Fee will provide an additional economic
incentive to complete the liquidation of all of the Partnership's investments
within the 36 month period.
8
Q: DOES THE MANAGING GENERAL PARTNER RECOMMEND THAT I CONSENT TO THE
LIQUIDATION?
A: Yes. CRI recommends that Limited Partners consent to the Liquidation by
marking the boxes entitled "FOR" with respect to each proposal on the enclosed
consent card and returning it promptly in the enclosed postage-prepaid envelope
or faxing it to the Partnership's consent solicitation agent, MacKenzie
Partners, Inc., at (212) 929-0308. CRI, Dockser and Willoughby, however, have
conflicts of interest in recommending the Liquidation, in part due to the
Disposition Fee and the Partnership Liquidation Fee that CRI will be eligible to
receive if the Limited Partners approve the Liquidation. For additional
information regarding our conflicts of interest, see "WHAT YOU SHOULD KNOW
BEFORE VOTING ON THE LIQUIDATION-- Interests of Certain Persons in the
Liquidation."
Q: WHAT WILL HAPPEN IF THE LIQUIDATION IS APPROVED?
A: We will seek to market and sell the Partnership's interests in Apartment
Complexes or the Apartment Complexes themselves to independent entities and
distribute the net proceeds to the Partners in accordance with the terms of the
Partnership Agreement, as amended. Following these steps, we will take all
necessary steps to terminate the Partnership. We expect that it will take
approximately 36 months from the date of the Limited Partners' approval of the
Liquidation to sell the Partnership's interests in the Apartment Complexes.
Dissolution can be a complex process that may depend on a number of factors,
some of which are beyond our control. Accordingly, there can be no assurance
that the Liquidation will be completed within the specified time frame. If it is
not, however, CRI would not be eligible to receive the Partnership Liquidation
Fee. Completion of the Liquidation may also be subject to certain risks, see
"WHAT YOU SHOULD KNOW BEFORE VOTING ON THE LIQUIDATION-- Risks of the
Liquidation."
Q: WILL I OWE ANY FEDERAL INCOME TAX AS A RESULT OF THE LIQUIDATION?
A: The sale of the Apartment Complexes may generate both ordinary income and
capital gain or loss to the Limited Partners for United States federal income
tax purposes. Distribution of the Liquidation proceeds may result in additional
capital gain or loss to the Limited Partners for United States federal income
tax purposes. Tax matters are very complicated and your tax consequences may
depend on your financial situation and whether you purchased your Limited
Partner units in the original offering or the secondary market. Please consult
your tax advisor to determine the tax consequences of the Liquidation. See "WHAT
YOU SHOULD KNOW BEFORE VOTING ON THE LIQUIDATION-- Material Federal Income Tax
Considerations."
9
Q: WHAT IF THE LIQUIDATION IS NOT APPROVED?
A: If the Liquidation is not approved by the requisite number of Limited
Partners, then the Partnership will continue to operate as a legal entity with
its assets and liabilities.
Q: WHAT IF THE LIQUIDATION IS APPROVED BUT THE PARTNERSHIP LIQUIDATION FEE IS
NOT APPROVED?
A: If Proposal 1 is approved by a majority in interest of the Limited Partners,
but Proposal 2 concerning the Partnership Liquidation Fee is not approved the
Managing General Partner would not have an additional economic incentive to
complete the liquidation of all of the Partnership's investments within the 36
month period.
Note: The Managing General Partner assumes that it will take three years to
liquidate the Apartment Complexes because sales of affordable housing properties
to Low Income Housing Tax Credit Buyers are subject to allocations of credits by
states or other issuers that may occur only once or twice per year.
CONSENT SOLICITATION PROCESS
Q: AM I REQUIRED TO VOTE ON THE LIQUIDATION?
A: No. You are not required to vote. However, we cannot complete the Liquidation
without the approval of Limited Partners holding at least a majority of the
outstanding Limited Partner units entitled to vote. If you fail to send in your
consent card, it will have the same effect as a vote "AGAINST" the Liquidation.
Q: HOW LONG DO I HAVE TO CONSENT?
A: You may submit your signed consent card now. Please mark your vote, sign and
return the consent card using the enclosed postage pre-paid envelope provided or
fax it to the Partnership's consent solicitation agent, MacKenzie Partners, Inc,
at (212) 929-0308. In order for your consent card to be accepted, it must be
received by 5:00 p.m., Eastern Time, on the Expiration Date, March __, 2004,
unless CRI extends the period for giving consents, in which case the new
Expiration Date established by CRI will be the last date upon which your consent
card will be accepted. See "CONSENT PROCEDURES - Approval Date; Extensions;
Amendment."
Q: HOW WILL I BE NOTIFIED IF THE CONSENT PERIOD IS EXTENDED?
A: If Proposal 3 is approved by a majority in interest of the Limited Partners
and CRI elects to extend the consent period, CRI will issue a press release
(which press release will also be filed with the Securities and Exchange
Commission under cover of Form 8-K) announcing the extension no later than 10:00
a.m., Eastern Time, on the next business day after the day the consent period
was scheduled to expire and CRI may furnish you with a supplement to this
Consent Solicitation Statement. See "CONSENT PROCEDURES -- Approval Date;
Extensions; Amendment."
10
Q: CAN I REVOKE MY CONSENT?
A: Yes. Limited Partners may withdraw or revoke their consent at any time prior
5:00 p.m., Eastern Time, on the Expiration Date. To be effective, a written or
facsimile revocation or withdrawal of the consent card must be received by the
consent solicitation agent prior to such time and addressed as follows: CRI-II
Revocation, c/o MacKenzie Partners, Inc. 105 Madison Avenue, New York, NY 10016;
or by facsimile to MacKenzie Partners, Inc. at (212) 929-0308. A notice of
revocation or withdrawal must specify the Limited Partner's name and the number
of units being withdrawn. After the Expiration Date, all consents previously
executed and delivered and not revoked will become irrevocable.
Q: DO LIMITED PARTNERS HAVE APPRAISAL RIGHTS?
A: Under applicable state law, Limited Partners are not entitled to appraisal
rights with respect to the value of their interests. There will not be any
procedure by which a Limited Partner can seek an alternative valuation of his or
her units, regardless of whether the Limited Partner does or does not consent to
the Liquidation.
11
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WHAT YOU SHOULD KNOW BEFORE VOTING ON THE LIQUIDATION
---------------------------------------------
--------------------------------------------------------------
The information contained in this Consent Solicitation Statement with respect to
the Liquidation is qualified in its entirety by reference to the Plan of
Liquidation and Dissolution and the Partnership Amendments, a copy of the Plan
of Liquidation and Dissolution is attached to this Consent Solicitation
Statement as Appendix A, and is incorporated herein by reference. The text of
the Partnership Amendments is set forth in "Amendments to the Partnership
Agreement."
---------------------------------------------------------------
BACKGROUND AND REASONS FOR THE LIQUIDATION
The Partnership was formed in 1983 to invest in real estate by acquiring
and holding limited partner interests in limited partnerships ("Local
Partnerships"), which in turn own Apartment Complexes. We believe the
Partnership has maximized the principal benefits of owning Apartment Complexes,
in particular: (1) producing tax benefits in the form of tax losses which
Limited Partners may use to offset income from other sources; (2) generating
current income for Limited Partners through cash distributions; and (3)
providing potential capital appreciation opportunities. Consequently, we are
recommending that the Limited Partners approve the Liquidation.
Before recommending the Liquidation, we considered the benefits and risks
associated with continuing the business of the Partnership. After weighing the
benefits and risks of continuation, we believe that the Liquidation will have
the greater likelihood of providing optimal economic benefits for the Limited
Partners. We believe that the Liquidation provides the best alternative for the
Limited Partners for the following reasons:
(1) The Liquidation will provide Limited Partners with a return of
capital, giving Limited Partners the opportunity to redeploy such
funds to seek a higher rate of return. The Managing General Partner's
lowest estimate of the range of values for the Partnership properties
(See - Estimated Ranges of Value of Partnership Properties) would
result in distributions of cash to the Limited Partners of more than
two and one-half times the highest price offered in any tender offer
in the past few years ($3,334 per 10 Limited Partner units versus
$1,200 per 10 Limited Partner units per the tender offer).
(2) Currently, there is no established market for the Limited Partner
units and Limited Partners are only able to sell their Limited Partner
units in an informal and sparse secondary market, which contains a
small number of participants with infrequent transactions. In
addition, certain entities that hold Limited Partner units have made
either unregistered tender offers for less than 5% of the Limited
Partner units or registered tender offers for greater numbers of
units. Both types of tender offers have been made to Limited Partners
for their interests in the Partnership at prices which we have deemed
to be insufficient. We believe that there may be a desire on behalf of
a significant number of Limited Partners to liquidate portions of or
their entire investment in the Partnership. Liquidation of the
Partnership will result in an accelerated return of capital to the
Limited Partners and allow the conversion of their investment to cash.
See "THE PARTNERSHIP AND THE GENERAL PARTNERS-- Market for the Limited
Partner Units".
12
(3) Termination of the Partnership will eliminate the yearly expense and
possible delay to individual Limited Partners' preparation of tax
returns due to their investment in a limited partnership. Most
investors find the required Form K-1 complicated to report on their
tax returns, requiring individuals to incur tax return preparation
costs they would not otherwise have.
(4) The current interest rate environment provides purchasers the
opportunity to leverage properties at low carrying costs and,
therefore, creates favorable market conditions to sell.
(5) Maintenance and administrative expenses associated with aging
Apartment Complexes in which the Partnership holds interests will
continue to increase.
(6) Due to prepayment restrictions on mortgages covering five of the
Apartment Complexes representing 59% of the units in the portfolio,
those mortgages are not eligible for refinancing at this time. Even
those Apartment Complexes that could be refinanced may not produce
much equity for distribution, because new lenders would likely require
significant amounts to be set aside for immediate repairs and capital
improvements for the aging properties. Also, refinancing the other
Apartment Complexes would likely generate less cash than a sale due to
loan to value limits generally imposed by lenders of approximately
80%. Although refinancing would result in the distribution of cash
without triggering a taxable gain, CRI believes that the greater
proceeds that may be generated on a sale than on a refinancing make a
sale a more attractive alternative. Finally, selling some properties
while refinancing others would result in a smaller fund carrying
continuing fixed expenses.
(7) Substantially all of the depreciation deductions from all of the
Apartment Complexes have been exhausted, so Limited Partners will have
fewer deductions to offset any future income generated by the
Properties.
(8) To the extent the Apartment Complexes are not sold, they will continue
to subject the Partnership to the risks inherent in the ownership of
property, such as fluctuations in occupancy rates, operating expenses
and rental rates, which in turn may be affected by general and local
economic conditions and by the supply and demand for rental apartment
properties owned by the Local Partnerships.
13
(9) The sales of Apartment Complexes have always been a specific business
objective of the Partnership, and we believe that the Liquidation is
consistent with this objective.
If the Partnership were to continue under its current structure, Limited
Partners would likely retain their investment without any significant increase
in value or near term exit opportunities. However, possible improvements in
economic and market conditions could produce increased cash flow and enhance the
sales prices of the Apartment Complexes. Consequently, while we believe that the
Liquidation will achieve more favorable economic results for Limited Partners,
we cannot assure you that continuation of the Partnership's business would not
produce better results than those obtained in the Liquidation.
The alternative to Liquidation would be to continue the Partnership in
accordance with its existing business plan. CRI considered retaining the
Apartment Complexes for a longer period of time to realize greater capital
appreciation. However, due to the fact that the properties are aging, the Local
Partnerships may need to expend significant funds for capital improvements and
maintenance costs in order for the Apartment Complexes to compete in their
respective markets in the future. The improvements would involve ongoing
replacement of carpeting and appliances, repainting of unit interiors and
ongoing exterior maintenance, including painting, roof replacement, heating and
air conditioning refurbishment, repaving of common areas and access roads, and
ongoing repairs to plumbing, electrical systems and building exteriors. Property
replacement reserves may be insufficient to provide the level of upgrades that
may be necessary. While CRI is of the view that the Local Partnerships might be
able to borrow additional funds in order to finance these improvements, CRI does
not believe that increasing the level of debt of the Local Partnerships would be
in the best interests of the Partnership, if another alternative such as a sale
is feasible. Increasing indebtedness on the Apartment Complexes could increase
the risk of loss and significantly decrease net cash flow, resulting in an
indefinite suspension of cash distributions to the Limited Partners. Moreover,
it appears likely that a new lender would require significant amounts to be set
aside for immediate repairs and capital improvements, thereby diminishing any
equity available for distribution to Limited Partners from a refinancing.
Furthermore, the ability to recapitalize the Local Partnerships through
refinancing of the existing mortgages is limited due to various restrictions of
the current mortgages. Certain mortgages have prepayment prohibitions and/or
prohibitive prepayment penalties. Such restrictions limit the opportunity for
five of the twelve Local Partnerships to refinance the Apartment Complexes they
own at present. These five Properties represent approximately 59% of the
portfolio (1,064 of the 1,800 apartment units). Two additional Local
Partnerships, representing an additional 86 apartment units, are prohibited from
prepayment of their mortgages prior to their final maturities without the
written consent of the California Housing Finance Agency. There can be no
assurance that such consent would be obtained.
14
Accordingly, continuing the Partnership under its current business plan
would subject the Limited Partners to the continued risks of ownership of real
estate, which include changes in general or local economic conditions, changes
in the supply of or demand for competing properties in the area of a property,
changes in interest rates, and the need to maintain the Apartment Complexes and
to provide for substantial costs of major repairs, replacements, improvements,
and other capital expenditures. It would also prolong the fixed costs associated
with maintaining a public limited partnership, including the administrative
burden of annual filing of Schedule K-1 tax information. Most importantly,
however, due to the depletion of depreciation deductions at the Local
Partnership level and the increasing need for repairs and improvements, it is
likely that the Local Partnerships may generate taxable income for the
Partnership but not distribute sufficient cash for the Partnership to pass
through to its Limited Partners to cover resulting tax liabilities. In view of
the foregoing, CRI is of the view that liquidation would produce a better result
for the Limited Partners than continuing to operate the Partnership in its
current form indefinitely.
We have conflicts of interest in recommending the Liquidation as a result
of the proposed related partnership agreement amendments regarding the
Disposition Fee and the Partnership Liquidation Fee (see "Interests of Certain
Persons in the Liquidation"). No independent third party has reviewed or
approved our recommendation. However, we believe that our recommendation is in
the best interest of Limited Partners and, therefore, consistent with our
fiduciary duties to the Limited Partners. See "THE PARTNERSHIP AND THE GENERAL
PARTNERS -- The General Partners -- Fiduciary Duties of the General Partners."
Consequently, we recommend that the Limited Partners of the Partnership (1)
consent to the proposed Liquidation and the Disposition Fee by marking the box
entitled "FOR" next to Proposal 1 on the enclosed consent card; (2) consent to
the proposed Partnership Liquidation Fee by marking the box entitled "FOR" next
to Proposal 2 on the enclosed consent card; and (3) consent to authorizing the
Managing General Partner, in its sole discretion, to elect to extend the period
during which Limited Partner Consents may be solicited and voted, but not beyond
sixty (60) days from the date that this Consent Solicitation Statement is sent
to Limited Partners, by marking the box entitled "FOR" next to Proposal 3 on the
enclosed consent card.
Limited Partners are urged to consult with their independent financial and
tax advisors prior to consenting to the Liquidation.
RISKS OF THE LIQUIDATION
In addition to the other information included elsewhere in this Consent
Solicitation Statement, the following factors should be considered carefully in
determining whether to approve the proposed Liquidation. There can be no
assurance that the sale of the Partnership's properties will be consummated or
that any of the estimates set forth in this Consent Solicitation Statement will
be realized. You are cautioned not to attribute undue certainty to any
estimates, which are based on a variety of assumptions relating to the
properties, general business and economic conditions and other matters. The
information contained in this Consent Solicitation Statement, including the
minimum amount of proceeds from the sales of the Partnership's properties and
the date by which consummation of the sales is anticipated to occur, are based
on the Partnership's current estimates and are subject to various and
significant uncertainties, many of which are beyond the control of the
Partnership. These uncertainties could cause the actual results to differ
materially from the expectations of the Partnership and its Managing General
Partner.
15
UNCERTAINTY OF AMOUNT AND TIMING OF LIQUIDATING DISTRIBUTIONS TO LIMITED
PARTNERS. A number of factors will affect the amount and timing of liquidating
distributions in the Liquidation, including the prices for which the Apartment
Complexes are sold, the condition of the real estate market during the
Liquidation, the costs of liquidation and other matters, which may be beyond the
control of the Partnership. Due to numerous variables, the Partnership can only
estimate the amount of cash that will actually be distributed to you. There is
also no assurance that the Partnership's assets can be sold within a reasonable
period of time. As a result, we cannot guarantee the amount or timing of
liquidating distributions to Limited Partners. See "--Plan of Liquidation and
Dissolution."
SALES OF ASSETS PURSUANT TO THE PLAN OF LIQUIDATION AND DISSOLUTION ARE NOT
SUBJECT TO LIMITED PARTNER APPROVAL. If the Limited Partners approve the
Liquidation, CRI will commence marketing of all of the properties in which the
Partnership holds interests. Limited Partners will have no right or opportunity
to vote on the sale of each Apartment Complex and will, therefore, have no right
to approve or disapprove the terms of any individual sale. Therefore, by
consenting to the Liquidation, Limited Partners are granting us authority to
sell all of the Partnership's assets upon terms and conditions which we deem
appropriate. See "-- Plan of Liquidation and Dissolution." (In the past,
consistent with the terms of the Partnership Agreement, Limited Partner consent
was not necessary to sell interests in a single Apartment Complex. The proposal
to sell all of the Partnership's remaining assets in a series of fairly
contemporaneous dispositions, and dissolve the Partnership, triggers the need
for Limited Partner consent.) The Partnership will automatically (without
requiring any additional approval of the Limited Partners) be terminated and
dissolved following the sale of the Partnership's final property.
THE GENERAL PARTNERS HAVE CONFLICTS OF INTEREST. Consummation of the
Liquidation will eliminate any potential liability of the General Partners for
liabilities of the Partnership that could arise in the continued operation of
the Partnership. In addition, adoption of the proposed amendments to the
Partnership Agreement would result in CRI being eligible to receive two fees
that are not currently authorized. However, the amendment authorizing the
Disposition Fee would not change the overall limit on disposition fees and
commissions currently provided for in the Partnership Agreement, and the
Disposition Fee would be payable in lieu of fees that would be otherwise payable
to third parties. In addition, the Disposition Fee would be considered a debt of
the Partnership, payable prior to any return of capital or preferred return to
the Limited Partners. Based on CRI's estimated ranges of property values
discussed elsewhere in this Consent Solicitation Statement, under the
Partnership's current fee structure, the other, individual General Partners
would not receive their 1% disposition fee from the sale of Apartment Complexes
as a result of the level of priority of payment of such fee. Willoughby and
Dockser will waive their portion of this fee if the Liquidation is approved. The
proposed Partnership Liquidation Fee would be payable only if CRI successfully
disposes of all of the Partnership's assets within 36 months after the
Liquidation is approved, and would not be subject to the fee cap currently
provided for in the Partnership Agreement. For further discussion of the
fiduciary duties of the General Partners, see "THE PARTNERSHIP AND THE GENERAL
PARTNERS."
16
PURCHASE MONEY NOTE. The Partnership has obligations with respect to one of
its twelve remaining investments in Local Partnerships in the form of a purchase
money note that matured on September 1, 2003. The purchase money note, which is
nonrecourse to the Partnership, is secured by the Partnership's interest in the
Westgate Local Partnership. We do not expect that sale proceeds from the
Westgate Apartment Complex would exceed the amount required to pay the purchase
money note's principal and accrued interest and thereby generate funds for
distribution to the Limited Partners. As the noteholders have the right to
foreclose on the Partnership's interest in that Local Partnership, the Managing
General Partner offered to tender its interest in the Westgate Local Partnership
in satisfaction of the purchase money note. If the offer is accepted in lieu of
foreclosure, the excess of the nonrecourse indebtedness over the carrying amount
of the Partnership's investment in the Westgate Local Partnership would be
deemed cancellation of indebtedness income, which would be taxable to Limited
Partners at a federal tax rate of up to 35%. However, the Managing General
Partner continues to explore other options, such as a discounted payoff of the
purchase money note.
DELAY IN RECEIVING CERTAIN BENEFITS OF SALE. The Partnership Agreement
authorizes us to utilize proceeds from the sales of Apartment Complexes to
establish reserves for authorized Partnership purposes. We may reserve some of
the remaining undistributed proceeds from the sale of Apartment Complexes for
such purposes, as reserves for unknown liabilities, audit costs, fees (including
the Partnership Liquidation Fee, if approved) and tax return preparation. In
addition, if CRI is successful in negotiating a discounted payoff of the
Westgate purchase money note, it will be necessary to use existing reserves and
possibly reserves from future sales.
LACK OF INDEPENDENT REPRESENTATION. The Partnership has not retained an
independent representative to act on behalf of the Limited Partners or the
Partnership in designing the overall structure of the Liquidation, including the
amendments to the Partnership Agreement. In addition, we do not intend to employ
an independent agent to (i) structure and negotiate the terms and conditions
(including the consideration to be received) upon which the Partnership's assets
will be sold, (ii) determine what competitive commissions would be for the
purpose of determining the amount of a Disposition Fee which the Managing
General Partner may be eligible to receive for marketing and selling the
properties, or (iii) determine the reasonableness of the proposed Partnership
Liquidation Fee which the Managing General Partner may be eligible to receive
for successfully liquidating all of the Partnership's assets within 36 months of
the date of approval of the Liquidation. The Partnership did not seek to obtain
an opinion relating to the fairness to the Limited Partners of the proposed
Liquidation. There is no assurance that we can obtain better results for the
Partnership in the sale of Apartment Complexes than would otherwise be obtained
by the Local General Partners or a third party broker. No sales, however, will
be made to affiliates of the General Partners.
INDEMNIFICATION UNDER THE PARTNERSHIP AGREEMENT. The Partnership Agreement
provides that no General Partner shall be liable to the Partnership or any of
the Limited Partners for any act or omission performed or omitted by any General
Partner in good faith and in a manner reasonably believed by it to be within the
scope of authority granted to it by the Partnership and in the best interests of
the Partnership, provided that the conduct did not constitute fraud, bad faith,
negligence or misconduct. As a result of these provisions, Limited Partners may
have more restricted rights of action than they would otherwise have if such
restrictions had not been included in the Partnership Agreement. In general, the
General Partners may not be indemnified under the Partnership Agreement with
regard to liabilities arising under federal or state securities laws, rules or
regulations, unless the General Partners are successful in defending such action
and such indemnification is specifically approved by the court or by opinion of
counsel that the matter has been settled by controlling precedent.
17
If a claim were made against the General Partners in connection with their
actions on behalf of the Partnership with respect to the Liquidation, they would
most likely seek to be indemnified by the Partnership with respect to such
claim. Any expenses (including legal fees) incurred by the General Partners in
defending such claim may be paid as they are incurred, which may be prior to the
final disposition of such claim, only upon determination by independent legal
counsel in a written opinion that indemnification of the General Partner is
proper because he or it has met the applicable standard of conduct set forth
above. As a result of these indemnification rights, a Limited Partner's remedy
with respect to claims against the General Partners relating to their
involvement in the Liquidation could be more limited than the remedies that
would have been available absent the existence of these rights in the
Partnership Agreement. A successful claim for indemnification, including the
expenses of defending a claim made, would reduce the Partnership's assets by the
amount paid.
LOSS OF OPPORTUNITY TO BENEFIT FROM FUTURE EVENTS. The primary disadvantage
of disposing of the Apartment Complexes pursuant to the Liquidation is that
there can be no assurance that the Liquidation will result in greater returns to
Limited Partners than a continuation of the Partnership. After the Liquidation,
the Partnership will not benefit from possible improvements in economic and
market conditions that could produce increased cash flow and enhance the sales
prices of the Apartment Complexes. In addition, there can be no assurance that
the proposed Liquidation will result in greater returns to you than a merger of
the Partnership with another entity, a refinancing of some or all of the
Partnership's properties or any other strategic alternative, whether or not
considered by the General Partners.
PLAN OF LIQUIDATION AND DISSOLUTION
The Liquidation is to be effected in accordance with the terms and
conditions set forth in the proposed Plan of Liquidation and Dissolution and the
Partnership Agreement, as amended. Upon approval of the Liquidation, CRI will
(1) seek to sell the assets of the Partnership to third parties unrelated to CRI
and its principals and use the sales proceeds and/or other Partnership funds to
pay all expenses in connection with such sales, including the Disposition Fee
and /or Partnership Liquidation Fee if the latter is approved, (2) pay or make
provision for payment of all Partnership obligations and liabilities and (3)
distribute the remaining assets as set forth in the Partnership Agreement, as
amended and as described in this Consent Solicitation Statement. We will then
file a Certificate of Cancellation with the Maryland State Department of
Assessments and Taxation, whereupon, or at such later time as may be specified
in the Certificate of Cancellation, the Partnership will be terminated and it
will cease to exist.
18
Pursuant to the Plan of Liquidation and Dissolution, prior to completing
the Liquidation, the Partnership must file all tax returns with federal, state
and local tax authorities, and must file all reports with the Securities and
Exchange Commission and provide or make available such reports to Limited
Partners in accordance with the Partnership Agreement. Pending the sale of the
Apartment Complexes, the Local Partnerships will continue to lease units in the
Apartment Complexes and the Partnership will continue to operate.
We expect to complete the sale of the Apartment Complexes in approximately
36 months from the date of the Limited Partners' approval of the Liquidation.
Liquidation, however, can be a complex process which may depend on a number of
factors, and some of these factors are beyond our control. For example, the
Partnership may be pursuing claims against others or defending litigation or
there may be other contingencies to which the Partnership may become subject
during the Liquidation. Consequently, the final liquidating distribution may
occur months after all of the Apartment Complexes have been sold.
For a description of the proposed amendments to the Partnership Agreement
relating to the Liquidation, see "-- Amendments to the Partnership Agreement"
and "-- Interests of Certain Persons in the Liquidation." Consummation of the
Liquidation is subject to the consent of Limited Partners and certain other
conditions. See "CONSENT PROCEDURES" and "-- Other Conditions to the
Liquidation."
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
The Partnership Agreement currently provides that all fees and any other
commissions payable to the individual General Partners (but not CRI) upon the
sale of the Apartment Complexes, together with all other property disposition
fees and commissions payable upon such sale, may not exceed the lesser of the
competitive rate for such services or 6% of the sales price of the Apartment
Complexes. Under this cap, the individual General Partners are currently
entitled to receive a fee of 1% of the gross sales proceeds of the Apartment
Complexes, payable after the Limited Partners have received a return of all
their capital contributions (without deduction for prior cash distributions
other than prior distributions of proceeds from any sale or refinancing) and a
preferred return. We believe that this fee represents compensation for
addressing a general disposition strategy, reviewing sale proposals made by
Local General Partners and analyzing the effect of such proposals on the
Partnership and the Limited Partners.
We did not originally contemplate further involvement in the sales process,
because we anticipated that Local General Partners, brokers and real estate
consultants would be responsible for finding buyers, negotiating terms,
performing due diligence on purchasers and executing sales. We originally
intended that the unaffiliated Local General Partners of the Local Partnerships
and/or nonaffiliated real estate agents would perform these services. We now
believe that CRI, and not the Local General Partners of the Local Partnerships
and/or nonaffiliated real estate agents, is in a better position to maximize
value in connection with the sale of Apartment Complexes because of CRI's
experience in locating qualified buyers, negotiating sale contracts and
shepherding transactions to closing for dozens of properties nationwide in its
affiliated portfolios. In particular, CRI has developed an expertise in directly
marketing its properties, developing targeted sales packages and focusing on
qualified buyers. However, no authority currently exists under the Partnership
Agreement for CRI to receive additional compensation for the type of lengthy,
complex and expensive property-specific services that CRI is prepared to provide
in connection with the sale of Apartment Complexes. These services are now
possible because of CRI's expanded and further-developed expertise.
19
Consequently, we are seeking your authorization to amend the Partnership
Agreement to permit CRI to be eligible to receive a Disposition Fee of up to 5%
of the sales price of Apartment Complexes for its efforts in marketing and
selling the Apartment Complexes (which would be payable to CRI in lieu of such a
fee being paid to third parties). Such fee would be payable upon a sale of an
Apartment Complex. Dockser and Willoughby would waive their respective shares of
the currently authorized deferred fee of 1% to individual General Partners. This
Disposition Fee would be payable as a debt of the Partnership with respect to
each property CRI markets and sells prior to any distributions to Limited
Partners with respect to their capital contributions or preferred return in the
same way as any commissions or fees that would have otherwise been payable to
Local General Partners or third parties for their services. The overall cap on
the amount of commissions or property disposition fees equal to the lesser of
the competitive rate for such services or 6% of the sales prices of the
Apartment Complexes would still apply. In other words, if CRI receives the
proposed Disposition Fees, the Limited Partners would receive the same net
distribution upon the sale of Apartment Complexes as if an unrelated third party
had performed the same services and received a market rate fee for doing so.
In order to allow the payment of the Disposition Fee to CRI, Section 4.02
(a) of the Partnership Agreement would be amended by inserting the following
provision at the end thereof:
"Notwithstanding and in addition to the foregoing, the Managing General
Partner may receive a fee (not to exceed 5% of the sales price of Apartment
Complexes) from the Partnership or the Local Partnership for services provided
by the Managing General Partner and/or its Affiliates in connection with the
marketing and sale of Apartment Complexes. Such fee (a "Disposition Fee"), which
shall be payable pursuant to Section 4.02(a)(i), shall only be payable upon the
sale of an Apartment Complex or a sale of the Partnership's interest in the
Local Partnership (a sale in either of such formats is referred to in this
Section 4.02(a) as a "sale of an Apartment Complex"), and shall be subject to
the following restrictions: (i) all property disposition fees and any other
commissions payable upon the sale of any Apartment Complex, inclusive of any
fees to the General Partners and/or their Affiliates, shall not exceed the
lesser of the competitive rate paid to third parties for similar services or 6%
of the sales price of the applicable Apartment Complex, (ii) the Managing
General Partner and/or its Affiliates must provide substantial services in
connection with the marketing and sales effort (as determined by the General
Partners), and (iii) Dockser and Willoughby shall waive their respective shares
of the 1% fee payable under Section 4.02(a)(vii) above."
This amendment to the Partnership Agreement is part of the Liquidation and
requires the approval of the holders of a majority of the outstanding Limited
Partner units in the Partnership on December 31, 2003.
20
We are also seeking your authorization to amend the Partnership Agreement
to permit CRI to be eligible to receive a Partnership Liquidation Fee in the
amount of Five Hundred Thousand Dollars ($500,000), payable only if the Managing
General Partner is successful in liquidating all of the Partnership's
investments within 36 months from the date the Liquidation is approved. This fee
is proposed in recognition of the circumstances that, in one or more instances,
a reasonable seller would not engage a broker to sell a particular Apartment
Complex because the amount or terms of its indebtedness would virtually preclude
a sale to anyone other than a Local General Partner or one of its affiliates.
Under such circumstances, if CRI successfully negotiates a disposition of such
an Apartment Complex, CRI would not receive a Disposition Fee in connection with
such sale, but it would be eligible to receive the Partnership Liquidation Fee
when the last asset of the Partnership is disposed of, provided that CRI
liquidates all of the Partnership's assets within 36 months after the
Liquidation is approved. The Partnership Agreement provides that all property
disposition fees and any other commissions or fees payable upon the sale of the
Apartment Complexes are subject to a fee cap equal to the lesser of the
competitive rate for such services or 6% of the sales price of the Apartment
Complexes. This limit would not apply to the Partnership Liquidation Fee. The
Managing General Partner believes that the Partnership Liquidation Fee should
not be subject to the fee cap because, although the amount of expected proceeds
from the sale of property to a Local General Partner or its affiliate is likely
to be adversely impacted by the amount or terms of indebtedness on the property,
the amount of effort required from CRI to complete these transactions in a
timely manner is likely to be significant, and the dissolution of the
Partnership cannot be completed until these assets are sold. Since CRI would not
be eligible to receive a Disposition Fee in connection with any of these
transactions, the proposed Partnership Liquidation Fee will provide an
additional economic incentive to complete the liquidation of all of the
Partnership's investments within the 36 month period. The Partnership
Liquidation Fee, if earned, would be considered a debt of the Partnership,
payable prior to any return of capital or preferred return to the Limited
Partners.
In order to allow the payment of the Partnership Liquidation Fee to CRI,
Section 4.02(a) of the Partnership Agreement would be amended by inserting the
following provision at the end thereof (and after the prior amendment, if
approved, with respect to the proposed Disposition Fee):
"Notwithstanding any other provision of this Agreement to the contrary and
in addition to the foregoing, the Managing General Partner may receive a fee of
$500,000 from the Partnership for services provided by the Managing General
Partner and/or its Affiliates in connection with the sale of one or more of the
Apartment Complexes or of the Partnership's interest in one or more of the Local
Partnerships. Such fee (the "Partnership Liquidation Fee"), which shall be
payable pursuant to Section 4.02(a)(i), shall only be payable if all of the
Apartment Complexes (or, with respect to any Apartment Complex which has not
been sold, the Partnership's interest in the applicable Local Partnership) have
been sold or otherwise disposed of or the Partnership's interest therein has
been terminated on or before _______, 2007 [insert date 36 months after approval
of the Liquidation]."
21
This amendment to the Partnership Agreement is part of the Liquidation, but
shall be voted on as a separate proposal requiring the approval of the holders
of a majority of the outstanding Limited Partner units in the Partnership on
December 31, 2003.
INTERESTS OF CERTAIN PERSONS IN THE LIQUIDATION
GENERAL. CRI and the other General Partners have an interest in the
Liquidation. General Partners, however, are required to perform their duties
consistent with their fiduciary duties to the Limited Partners, in compliance
with the terms of the Partnership Agreement, and without regard to whether their
affiliates or they have an interest in a proposed transaction. See "THE
PARTNERSHIP AND THE GENERAL PARTNERS -- The General Partners -- Fiduciary Duties
of the General Partners" for a description of the General Partners' duties with
respect to the Partnership.
In addition, certain affiliates of the Managing General Partner are
currently the sole General Partners of five of the twelve Local Partnerships in
which the Partnership holds a limited partner interest. See "-- Affiliates of
the Managing General Partner" below.
The following table sets forth a comparison of the current and proposed
compensation arrangements as they relate to the distribution of proceeds from
the sale of an Apartment Complex.
22
CURRENT ORDER OF DISTRIBUTIONS OF SALE
- -------------------------------------- AMENDMENT PROPOSAL FOR DISTRIBUTION OF
PROCEEDS RECEIVED BY THE --------------------------------------
- ------------------------ SALE PROCEEDS RECEIVED BY THE PARTNERSHIP
PARTNERSHIP -----------------------------------------
- ----------- (IN ORDER OF DISTRIBUTION)
--------------------------
1) to the payment of debts and liabilities of the Partnership (including all Same, except a Disposition Fee may be
expenses of the Partnership incident to the Sale or Refinancing) other than paid to CRI if it performs services
loans or other debts and liabilities of the Partnership to any Partner or any otherwise provided by an unaffiliated
Affiliate, such debts and liabilities, in the case of a non-liquidating broker or consultant, and a Partnership
distribution, to be only those which are then required to be paid or, in the Liquidation Fee may be paid to CRI if it
judgment of the Managing General Partner, required to be provided for; disposes of all of the Partnership's
investments within 36 months after
approval of the Liquidation.
2) to the establishment of any Reserves which the Managing General Partner deems Same
reasonably necessary for contingent, unmatured or unforeseen liabilities or
obligations of the Partnership (including the Partnership Liquidation Fee);
3) to each Partner in an amount equal to the positive balance in his Capital Same
Account as of the date of the Sale or Refinancing, adjusted for operations and
distributions to that date, but before allocation of any Profits for Tax
Purposes realized from such Sale or Refinancing and allocated pursuant to
Section 4.03(d) of the Partnership Agreement;
4) to the Limited Partners an aggregate amount of proceeds from Sale or Same
Refinancing and all prior Sales or Refinancings equal to their Capital
Contributions, without reduction for prior cash distributions other than prior
distributions of Sale and Refinancing Proceeds, plus an additional amount equal
to a cumulative, non-compounded six percent return on each Limited Partner's
Capital Contribution, reduced by (a) an amount equal to 50% of the Losses for
Tax Purposes allocated to such Limited Partner and (b) distributions of Net Cash
Flow to each Limited Partner, such return, Losses for Tax Purposes and Net Cash
Flow distributions, commencing on the first day of the month in which the
Capital Contribution was made;
23
5) to the repayment of any unrepaid loans theretofore made by any Partner or any Same
Affiliate to the Partnership for Partnership obligations and to the payment of
any unpaid amounts owing to the General Partners under this Agreement;
6) to the General Partners in the amount of their Capital Contributions; Same
7) thereafter, for their services to the Partnership, in equal shares to Dockser and Willoughby will not be
Dockser, Schwartzberg and Willoughby, whether or not any is then a General entitled to their respective portions of
Partner (or their designees), an aggregate fee of 1% of the gross proceeds this fee
resulting from (A) such Sale (if the Proceeds are from a Sale rather than a
Refinancing) and (B) any prior Sales from which such 1 % fee was not paid to
Dockser, Schwartzberg or Willoughby or their designees; and
8) the remainder, 12% in the aggregate to the General Partners (or their Same
assignees), 3% to Two Broadway Associates II (or its successors-in-interest) and
85% in the aggregate to the Limited Partners (or their assignees).
24
The Partnership has not retained an independent representative to act on
behalf of the Limited Partners or the Partnership in designing the overall
structure of the Liquidation, including the amendments to the Partnership
Agreement. In addition, we do not intend to employ an independent agent to (i)
structure and negotiate the terms and conditions (including the consideration to
be received) upon which the Partnership's assets will be sold or (ii) determine
what competitive commissions would be for the purpose of determining the amount
of a disposition fee which the Managing General Partner may be eligible to
receive for marketing and selling the properties. There is no assurance that we
can obtain better results for the Partnership in the sale of Apartment Complexes
than would otherwise be obtained by the Local General Partner or a third party
broker. No sales, however, will be made to affiliates of the General Partners.
AFFILIATES OF THE MANAGING GENERAL PARTNER.
The Local Partnerships in which the Partnership is invested were organized
by private developers, unaffiliated with CRI, who acquired the sites, or options
thereon, applied for mortgage loans and applicable mortgage insurance and/or
entered into construction contracts, and who often remain as the Local General
Partners in the Local Partnerships. The general partners of the Local
Partnerships retain responsibility for maintaining, operating and managing the
properties. The Local General Partners may operate other apartment complexes
that may be in competition for eligible tenants with the Local Partnerships'
apartment complex. However, in the event of non-compliance with a Local
Partnerships' Partnership Agreement, the Local General Partner may be removed
and replaced with another Local General Partner or with an affiliate of the
Partnership's Managing General Partner. In addition, to protect the
Partnership's interest as a limited partner in each Local Partnership, an
affiliate of CRI became a general partner ("Affiliated Local Partner") in each
Local Partnership. An affiliate of CRI is now the only General Partner in five
of the Local Partnerships.
In addition to the distribution of sales proceeds received by the
Partnership set forth above, the affiliates of the Managing General Partner, in
their capacities as Affiliated General Partners of the Local Partnerships, are
entitled to receive a certain share of distributions and sales proceeds pursuant
to the Local Partnerships' Partnership Agreements. The table below sets forth
the Affiliated Local Partner's percentage interest in each Local Partnerships.
AFFILIATED LOCAL PARTNER'S
NAME AND LOCATION SHARE OF PROFITS, LOSSES
OF APARTMENT COMPLEX AND DISTRIBUTIONS
-------------------- --------------------------
Arrowhead Apartments
Palatine, IL 1.01%
Chevy Chase Park
Centerville, OH .01%
Country Place I
Burtonsville, MD 1.01%
Country Place II
Burtonsville, MD 1.01%
Four Winds West
Birmingham, AL 0.01%
Golden Acres
Chowchilla, CA 0.01%
Mercy Terrace
San Francisco, CA 1.0%
The Moorings
Roselle, IL 1.01%
Orangewood Plaza
Orange Cove, CA 0.01%
Posada Vallarta
Phoenix, AZ 0.01%
Troy Manor
Troy, AL 0.01%
Westgate Tower Apts.
Westland, MI 0.01%
25
The Affiliated Local Partner will receive repayment of any loans it may
have made to the Local Partnership prior to distributions to the Partnership.
Thereafter, an Affiliated Local Partner generally will be entitled to a return
of its capital contributions and its share of the proceeds from the Sale or
Refinancing of the Apartment Complex attributable to its interest in the Local
Partnership, only after the Partnership as a limited partner has received a
return of its capital contributions and often an additional sum as set forth in
each Local Partnership Agreement.
As of December 31, 2003, the Partnership is the sole limited partner in
nine of the twelve remaining Local Partnerships and the principal limited
partner in the other three. As a limited partner, the Partnership's legal
liability for obligations of the Local Partnerships is limited to its
investment.
SUMMARY HISTORICAL FINANCIAL DATA
The following summary historical financial data, insofar as it relates to
each of the years ended December 31, 1998 through 2002, has been derived from
the annual financial statements of the Partnership, including the balance sheets
at December 31, 1998, 1999, 2000, 2001 and 2002 and the related statements of
income for the years ended December 31, 1998 through 2002, and the notes thereto
as included in the Partnership's Annual Report on Form 10-K or Form 10-KSB for
the year ended December 31, 1998 through 2002. The data for the nine months
ended September 30, 2003 has been derived from unaudited financial statements as
included in the Partnership's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2003, which, in the opinion of the Managing General Partner,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the unaudited interim period.
26
For the Nine
Months Ended For the Year Ended December 31,
- -------------------- ------------ -----------------------------------------------------------------------------------
Statement of
Operations Sept. 2003 2002 2001 2000 1999 1998
----------- ---------- ----------- ----------- ----------- ----------
Revenues $1,919,397 $1,848,607 $11,094,032 $11,111,229 $12,111,397 $7,412,933
Net Income (Loss) $1,291,775 $3,811,999 $9,729,483 $15,086,988 $12,686,144 $2,918,904
allocated to
Limited Partner
Units
Earnings (Loss) $25.88 $76.24 $194.59 $301.74 $253.72 $58.38
per Unit
Balance Sheet Data:
Total Assets $6,154,507 $5,403,232 $4,904,279 $7,469,124 $10,503,976 $12,546,956
PMN(s) and Accrued $3,994,762 $4,577,938 $4,952,897 $14,206,205 $29,723,624 $43,155,031
Int. Payable
Distributions per $-0- $57.00 $65.00 $30.00 $66.50 $10.00
Unit
Events that generated capital gain and income to the Partnership and its Limited
Partners materially affected Net Income (Loss) for each of the years indicated
above. During 1998, the Partnership paid off at a discount the purchase money
notes secured by its interests in the Arrowhead and Moorings Local Partnerships,
which reduced the Partnership's long-term liabilities. During 1999, the
Partnership (i) paid off at a discount the purchase money notes secured by its
interests in the Chevy Chase, Four Winds West and Troy Manor Local Partnerships,
(ii) lost its interests in the Beech Hill I and II Local Partnerships when the
respective purchase money notes secured by them matured and could not be paid,
and (iii) sold the Wexford Ridge property. During 2000, the two Rolling Green
properties were sold by the respective Local Partnerships that owned them.
During 2001, the Partnership lost its interest in the Frenchman's Wharf II Local
Partnership when the purchase money notes secured by it matured and could not be
paid. In 2002, the Partnership sold its interest in the Rock Glen Local
Partnership. In each of 2000, 2001, 2002 and 2003, the Partnership transferred
approximately one-quarter of its interest in the Princeton Village Local
Partnership to the purchase money noteholder in satisfaction of its purchase
money note, so it no longer holds any interest in that Local Partnership.
27
LIQUIDATION EXPENSES
GENERAL. The Partnership will pay for the expenses of the solicitation and,
if approved by Limited Partners, the Liquidation. Expenses are estimated to be
as follows:
SOLICITATION/COMMUNICATION EXPENSES
Nixon Peabody LLP Legal Fees $30,000
MacKenzie Partners, Inc. Fee $ 8,000
MacKenzie Partners, Inc. estimated out-of-pocket expenses $ 4,400
Printers $ 5,000
Postage $ 3,500
Telephone $ 1,000
-------
Sub Total $51,900
LIQUIDATION COSTS
Estimated Disposition Fee (at maximum 5%) $4,800,000 to $5,000,000
(if properties are sold at amounts estimated herein)
Final audit and tax return preparation fees $ 92,000
Dissolution filing fees $ 1,000
Partnership Liquidation Fee, if approved and timely earned $500,000
--------
Sub Total $4,893,000 to $5,593,000
Total Costs $4,944,900 to $5,644,900
==========
SOLICITATION/COMMUNICATION EXPENSES. For purposes of the Liquidation, the
term "Solicitation/Communication Expenses" includes expenses such as the costs
of mailing and printing this Consent Solicitation Statement, any supplements
thereto or other documents related to the Liquidation, telephone calls, legal
fees, appraisal fees, accounting fees, consent solicitation agent fees and other
fees related to the solicitation of consents, as well as reimbursement of
expenses incurred by brokers and banks, if any, in forwarding the Consent
Solicitation Statement to Limited Partners. The Partnership will pay these
expenses whether or not the Liquidation is consummated.
LIQUIDATION COSTS. For purposes of the Liquidation, the term "Liquidation
Costs" means the Disposition Fees paid pursuant to the amended Partnership
Agreement, legal and accounting fees not included under
Solicitation/Communication Expenses, travel expenses and all other fees related
to the Liquidation, but not including Solicitation/Communication Expenses or
costs that would have otherwise been incurred by the Partnership in the ordinary
course of business. "Liquidation Costs" will also include the Partnership
Liquidation Fee if (i) it is approved by a majority in interest of the Limited
Partners, and (ii) CRI successfully disposes of all of the Partnership's assets
within 36 months from the date the Liquidation is approved.
28
ESTIMATED RANGES OF VALUE OF PARTNERSHIP PROPERTIES
To help decide whether to pursue the liquidation plan, CRI estimated the
potential sales values of the Apartment Complexes and the expected net sales
proceeds to the Partnership. We reviewed the income generating capabilities of
the Apartment Complexes and then valued them on the bases of their projected
incomes, taking into account appropriate disposition methodologies based upon
the various regulatory restrictions associated with each Apartment Complex. CRI
has not consulted any real estate brokers or other real estate professionals
concerning potential purchasers for the Apartment Complexes or interests in the
Local Partnerships. However, based upon CRI's experience and familiarity with
the markets for conventional multifamily housing and government assisted low
income housing, CRI is of the view that its estimates of values for the
properties reflect a reasonable range of expected sale prices should the
Apartment Complexes or interests therein be marketed.
CRI has estimated the values of the twelve Properties in which the Partnership
owns an interest using either the direct capitalization method or an assumed
sale in a Low Income Housing Tax Credit ("LIHTC") transaction, depending upon
certain federal and/or state restrictions associated with the particular
property.
Five of the twelve Apartment Complexes have been conventionally financed and are
not subject to federal and/or state restrictions that would have a material
impact on their valuation. It is the opinion of CRI that these Apartment
Complexes would be considered market rate and would be valued by a potential
investor by use of the direct capitalization method. This method involves
applying a capitalization rate to the net operating income (NOI) generated by
the property being valued. A capitalization rate is a percentage (rate of
return) commonly applied by purchasers of commercial real estate to property NOI
to determine the present value of income producing property. A lower
capitalization rate will result in a higher property value; conversely, a higher
capitalization rate will result in a lower property value.
The first step in this valuation process is to determine the appropriate NOI.
The NOI is defined as the actual or anticipated net income that remains after
all operating expenses are deducted from effective gross income, but before
mortgage debt service, book depreciation and capital expenditures are deducted.
We analyzed the historical and current operations of the subject properties and
projected the anticipated NOIs for 2004. We determined Gross Potential Rental
Income (GPR) for each property by annualizing the GPR for each property as of
the quarter ended September 30, 2003. Vacancy and collection loss estimates were
based upon a review of historical and current operating data as well as a review
of market conditions. This resulted in vacancy assumptions of: i) 15% for Posada
Vallarta; ii) 10% for Arrowhead and Moorings; and iii) 5.25% for Country Place I
and II. Other income excludes interest income and is based upon annualized
actual year to date collections through the nine months ended September 30,
2003. Operating Expenses were based upon annualized actual year to date
operating expenses through the nine months ended September 30, 2003. Management
fees have been estimated at 4% of effective gross income.
29
We then selected capitalization rates based on: (i) CRI's experience in valuing
and marketing similar properties; and (ii) a review of nationally recognized
investor surveys. The primary investor surveys relied upon in determining the
applicable cap rates were the National Real Estate Index Value Monitor (NREI),
Korpacz Real Estate Investor Survey and Real Capital Analytics Apartment Capital
Trends (RCA). These surveys report that average capitalization rates for the
National Apartment Market ranged from 7.0% to 8.0%. It is important to note that
these surveys include sales of investment grade properties. Investment grade
generally applies to real property sought by institutional buyers that meets
certain prevalent institutional investment criteria. The Apartment Complexes
owned by the Local Partnerships are not considered to be investment grade due to
their age, physical condition, and levels of amenities. RCA reports average
capitalization rates for properties built in the 1980's and 1970's ranged from
8.00% to 8.50% for the period from January 2002 through third quarter 2003.
Because CRI was of the view that the five properties in question are probably
not comparable to the investment grade properties in the surveys, we decided to
be more conservative and apply a somewhat higher capitalization rate. Based upon
the foregoing factors, we applied a capitalization rate range of 8.5% to 9.5% to
the properties. Arm's-length purchasers could base purchase offers on
capitalization rates higher or lower than those used in this analysis, resulting
in property values for each such property that could be lower or higher,
respectively, than those set forth herein.
By applying the capitalization rate range to the projected NOIs for the five
market rate Apartment Complexes, CRI's estimated property valuations are as
follows:
9.5% 8.5%
---- ----
PROPERTY CAPITALIZATION RATE CAPITALIZATION RATE
- ----------------- ------------------- -------------------
Arrowhead $ 7,896,000 $ 8,825,000
Country Place I $13,900,000 $15,535,000
Country Place II $ 8,739,000 $ 9,767,000
Moorings $16,389,000 $18,210,000
Posada Vallarta $15,135,000 $16,915,000
The remaining seven Local Partnerships own multifamily housing properties with a
mortgage note payable to, or insured by, an agency of the federal government or
local housing agency. The Local Partnerships are subject to various federal
and/or state agreements that restrict the use of the Apartment Complexes,
regulate their operations, and in certain cases limit dividends payable to the
Local Partnerships. In order to stimulate private investment in low income
housing, the federal government and certain state and local agencies have
provided ownership incentives, including among others, interest subsidies, rent
supplements and mortgage insurance, with the intent of reducing certain market
risks and providing investors with certain tax benefits, plus limited cash
distributions and the possibility of long-term capital gains. The regulatory
complexities associated with the agreements governing the operations vary by
property. Due to the terms of the federal and/or state agreements governing the
operations of these Apartment Complexes, it is CRI's opinion that a potential
purchaser would be required to preserve the affordable nature of these projects.
30
CRI has extensive experience in the marketing and sale of similar affordable
properties. Based upon this experience, CRI has valued these Apartment Complexes
assuming a sale in a Low Income Housing Tax Credit ("LIHTC") transaction. Under
this scenario, a tax credit developer/purchaser would continue the affordability
restrictions of the Apartment Complex, renovate the Apartment Complex (to
generate basis additions to maximize tax credits) and withdraw a developer's fee
from the acquisition's capitalized funding. Either conventional financing with
9% tax credits or tax-exempt bond financing with 4% tax credits could be used.
However, the prospective purchaser would be required to compete with other tax
credit developments for the limited pool of 9% tax credits with no assurance
that the purchaser would win the allocation. Therefore, we have assumed that
less competitive 4% tax credits, used in conjunction with tax-exempt bond
financing, would be generally available to purchasers to finance their
acquisitions. The tax credit developer/purchaser would admit an investor partner
to the acquiring entity who would contribute equity priced on the basis of the
tax credits. For purposes of this valuation, tax-exempt bond financing at 6.80%
interest, 30-year amortization and a minimum average 1.15 debt coverage ratio
has been assumed. Renovation expenses and soft costs have been estimated for
each Apartment Complex based upon its physical condition and various state
agency threshold requirements for bond and tax credit transactions. Investor
equity was calculated by estimating the amount of tax credits that would be
available (4% of the non-land acquisition price plus renovation costs and
developer fee) and multiplying the tax credits by $.80 (the amount of equity
likely to be paid per tax credit dollar). There are numerous variables in this
method of valuation that could impact the ultimate value of an Apartment
Complex. CRI has applied its best judgment based upon its experience in the
marketing and sale of similar properties to account for these variables and to
provide what CRI believes to be a reasonable range of valuations for these
properties.
Using the above-described approach, CRI estimates that the likely value to a tax
credit developer of those Apartment Complexes subject to material affordable
housing use restrictions would fall within the estimated range of values
identified in the following table:
PROPERTY LOWER RANGE VALUATION UPPER RANGE VALUATION
- ------------------- --------------------- ---------------------
Chevy Chase $9,396,000 $10,440,000
Four Winds West $ 992,000 $ 1,102,000
Golden Acres $1,041,000 $ 1,156,000
Mercy Terrace $8,422,000 $ 9,400,000
Orangewood Plaza $1,643,000 $ 1,826,000
Troy Manor $ 739,000 $ 822,000
Westgate $5,073,000 $ 5,637,000
When determining the value of the Apartment Complexes, one must keep in mind
that the Local Partnerships have certain liabilities, consisting of mortgages
and general partner or affiliate loans, that must be satisfied from sales
proceeds before any distributions would be available to the Partnership. The
following tables review the estimated payoff amounts for these liabilities
projected as of December 31, 2003.
31
PROPERTY MORTGAGE BALANCE ADDITIONAL INDEBTEDNESS TOTAL INDEBTEDNESS
- ---------------- ---------------- ----------------------- ------------------
Arrowhead $ 6,587,810 $ 0 $ 6,587,810
Chevy Chase $ 2,850,241 $ 0 $ 2,850,241
Country Place I $ 6,847,370 $ 0 $ 6,847,370
Country Place II $ 4,149,921 $ 0 $ 4,149,921
Four Winds West $ 831,370 $ 0 $ 831,370
Golden Acres $ 1,130,726 $ 44,992 $ 1,975,718
Mercy Terrace $ 8,220,915 $11,349,512 $19,570,427
Moorings $ 7,811,889 $ 0 $ 7,811,889
Orangewood Plaza $ 1,826,500 $ 0 $ 1,826,500
Posada Vallarta $14,304,236 $ 4,006,514 $18,310,750
Troy Manor $ 815,819 $ 6,252 $ 822,071
Westgate* $ 1,700,123 $ 0 $ 1,700,123
Total $57,076,920 $16,207,270 $73,284,190
* In addition to the Local Partnership debt, the Partnership is the
maker of a Purchase Money Note ("PMN") secured by its interest in the
Westgate Local Partnership in the original principal amount of
$1,400,000, with accrued interest of $2,626,274 through December 31,
2003. This PMN (previously extended) matured on September 1, 2003. The
PMN is nonrecourse to the Partnership. Therefore, there is no
liability to the Partnership for payment other than from the proceeds
of the sale of the Partnership's interest in the Westgate Local
Partnership. The Managing General Partner offered to tender its
interest in the Westgate Local Partnership in satisfaction of the PMN.
The trustee for the PMN holders indicated it might take several months
for him to formulate a recommendation to the beneficial holders of the
PMN. Accordingly, there can be no assurance that the Partnership will
retain its interest in Westgate.
It is expected that certain of the Apartment Complexes, if sold, would not
generate sufficient sale proceeds to retire outstanding Local Partnership
indebtedness. In these situations, a sale of the Partnership's interest in the
Local Partnership (most likely to an affiliate of a Local General Partner) could
be more advantageous than a sale of the property. In such circumstances, CRI has
assumed for purposes of estimating liquidation proceeds that the Partnership's
interest in those Local Partnerships would be sold for one dollar. CRI is of the
opinion that this assumption is conservative. In most instances, CRI believes
that the Partnership's interest could be sold for significantly higher amounts,
as the Partnership receives annual cash distributions that could be valued at a
multiple of their present value.
Assuming sales of the Apartment Complexes or the Partnership's interest in the
Local Partnerships, as the case may be, at the estimated valuations described
above, and after adjustments for the priority of distributions as required under
the terms of the Local Partnership agreements, it is the opinion of CRI that the
aggregate gross distribution of proceeds to the Partnership is estimated to
range between $18,500,000 and $24,000,000. A liquidation of the Partnership
would also allow for operating reserves to be released. CRI has estimated the
balance of such reserves to be disbursed would be $2,900,000 for purpose of
estimating liquidation proceeds. This amount could be overstated or understated
depending upon events between now and the liquidation of the Partnership.
32
The actual proceeds obtained from liquidation are highly uncertain and could be
more or less than our estimate. Other persons could derive different estimates
of the liquidation value. If the Partnership were to sell its assets and
liquidate, the value of the assets would be determined through negotiations with
third parties, who may use different valuation methods to determine the price of
the Partnership's assets. Accordingly, our estimated liquidation proceeds could
be higher or lower than the net proceeds that you would realize upon an actual
liquidation of your Partnership.
Based upon the foregoing, the distribution of estimated liquidation proceeds
pursuant to the Partnership Agreement is depicted below:
SOURCES OF FUNDS (1) LOW HIGH
DISTRIBUTIONS FROM LOCAL PARTNERSHIPS $18,500,000 $24,000,000
----------- -----------
CASH AND CASH EQUIVALENTS (2) $2,900,000 $2,900,000
----------- -----------
TOTAL SOURCE OF FUNDS $21,400,000 $26,900,000
USES OF FUNDS
Solicitation/Communication Expenses $51,900 $51,900
Final Audit and Tax Return Preparation Fees $92,000 $92,000
Dissolution Filing Fees $1,000 $1,000
Estimated Disposition Fees (3) $3,600,000 $3,950,000
Partnership Liquidation Fee (4) $500,000 $500,000
----------- -----------
TOTAL USE OF FUNDS $4,244,900 $4,594,900
LIQUIDATION PROCEEDS BEFORE TAXES $17,155,100 $22,305,100
- -------------------------------------------------------------------------------------------
PER $10,000 ORIGINAL INVESTMENT OR 10 UNITS (5) $3,334 $4,335
CURRENT NEGATIVE CAPITAL ACCOUNT ($7,095) ($7,095)
Less Cash from Sale ($3,334) ($4,335)
Plus 2003 estimated income (loss) $448 $448
Plus 2003 estimated portfolio income $22 $22
----------- ------------
UPDATED CAPITAL ACCOUNT AFTER LIQUIDATION ($9,960) ($10,961)
25% TAX RATE x 25% x 25%
----- -----
TAX LIABILITY ($2,490) ($2,740)
--------
PLUS CASH FROM LIQUIDATION $3,334 $4,335
LIQUIDATION PROCEEDS AFTER TAXES $844 $1,595
33
Notes:
(1) For presentation purposes, we have assumed that all sales will occur within
the same calendar year, although we expect the liquidation to take at least
three years.
(2) Reflects cash and cash equivalents as of September 30, 2003.
(3) This analysis assumes that a disposition fee would be earned on eight sale
transactions.
(4) This analysis assumes that the liquidation fee would be earned.
(5) Based on estimated liquidation proceeds available to Limited Partners
holding units of Additional Limited Partner interest.
The Managing General Partner is providing this valuation analysis to assist
Limited Partners in their decision whether or not to approve the Liquidation.
While the Managing General Partner believes that the assumptions upon which it
has relied are reasonable based on its experience, the cited surveys and its
knowledge of the Apartment Complexes and their markets, the Managing General
Partner cannot and is not providing any assurance that the actual proceeds
received for the Partnership properties will be within the estimated ranges.
Actual sale prices may be lower than estimated by a significant amount. See
"WHAT YOU SHOULD KNOW BEFORE VOTING ON THE LIQUIDATION - Risks of the
Liquidation."
OTHER CONDITIONS TO THE LIQUIDATION
LEGAL OPINION. The Partnership Agreement provides that the voting rights to
be exercised by the Limited Partners pursuant to this Consent Solicitation
Statement (which would be undertaken pursuant to a vote in lieu of a meeting, as
provided for in the Partnership Agreement) will not be so exercised unless and
until the Limited Partners receive the opinion of counsel satisfactory to a
majority in interest of the Limited Partners as to (i) the legality of the vote,
(ii) the absence of personal liability of the Limited Partners as a result of
voting, and (iii) the lack of effect of such vote on the Partnership's status
for tax purposes. Under the current terms of the Partnership Agreement, the
Partnership would be unable to effectuate the Liquidation without obtaining this
opinion of counsel.
The Managing General Partner has proposed that Nixon Peabody LLP, which has
served as special counsel to the Partnership, render the opinion, which will be
delivered prior to the effectiveness of the solicitation substantially in the
form attached hereto. Under the Partnership Agreement, such counsel will be
deemed approved if written disapprovals are not received from a majority in
interest of the Limited Partners within 45 days of the date hereof. The
Partnership Agreement also provides that if Limited Partners holding more than
10% in interest propose alternate counsel, such alternate counsel shall render
the required opinion. If the Liquidation is approved, but the retention of Nixon
Peabody LLP is disapproved, we will propose alternate counsel to the Limited
Partners for the rendering of the required legal opinion.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The federal income tax discussion set forth below addresses the material
federal income tax consequences of the Liquidation of a Partnership, but does
not purport to deal with all aspects of federal income taxation that may be
relevant to a particular Limited Partner in the light of such a Limited
Partner's personal circumstances. The discussion is directed solely to those who
hold the Limited Partner units as capital assets within the meaning of Section
1221 of the Internal Revenue Code of 1986, as amended (the "Code"), and have
acquired such Limited Partner units for investment and not as a dealer or for
resale. Further, this discussion may not be applicable to certain classes of
taxpayers, including insurance companies, securities dealers, non-resident alien
individuals, foreign entities, foreign trusts and estates and beneficiaries
thereof, financial institutions, real estate investment trusts, regulated
investment companies, tax exempt organizations, trusts or persons who acquired
Partnership interests as compensation. This discussion is based upon the Code,
Department of Treasury regulations, court decisions, published rulings of the
Internal Revenue Service (the "IRS") and other applicable authorities, all as in
effect on the date hereof and all of which are subject to change or differing
interpretation (possibly on a retroactive basis).
34
Limited Partners are urged to consult their own tax advisors as to the
specific tax consequences to them of the Liquidation of the Partnership,
including the applicability and effect of federal, state, local and other tax
laws.
IN GENERAL. The Partnership, as a partnership for federal income tax
purposes, is not subject to federal income tax; rather, each Limited Partner is
required to take into account its distributive share of the Partnership's
income, gains, losses, deductions, credits and tax preference items in computing
such Limited Partner's federal income tax liability for any taxable year of the
Partnership ending within or with the taxable year of such Limited Partner,
without regard to whether the Limited Partner has received or will receive any
distribution from the Partnership. Such distributive share is required to be
reported by the Partnership to each Limited Partner on a Schedule K-1. Each
Limited Partner is required to report consistently with such Schedule K-1 unless
it discloses any inconsistent position to the IRS when it files its federal
income tax return. A Limited Partner's distributive share of the Partnership's
income or loss is determined in accordance with the allocations set forth in the
Partnership Agreement.
For federal income tax purposes, the Liquidation consists of two separate
components:
(1) the sale by the Partnership of its assets; and
(2) the distribution of cash to each Limited Partner in liquidation (a
"liquidating distribution") of such Limited Partner's interest in the
Partnership. Each of these is separately discussed below.
SALE OF THE PARTNERSHIP'S ASSETS. For federal income tax purposes, each
Limited Partner will be required to include in its income its allocable share of
the gain or loss realized by the Partnership upon the sale of the Partnership's
assets pursuant to the Liquidation. Gain will result primarily from the sale of
an Apartment Complex and Apartment Complex related assets ("Apartment Complex
Gain"). Apartment Complex Gain which falls within the definition of
"depreciation recapture" will be treated as ordinary income for tax purposes.
Other Apartment Complex Gain, as well as other items of Partnership gain or
loss, will be capital or ordinary gain or loss, depending upon the nature of the
asset in the hands of the Partnership. To the extent Apartment Complex Gain
qualifies as capital gain, the gain will be taxed at a maximum rate of 25% (or
15% in certain circumstances). To the extent Apartment Complex Gain qualifies as
ordinary income, the gain will be taxed at a maximum rate of 35%.
DISTRIBUTION TO THE LIMITED PARTNERS. A Limited Partner will recognize gain
to the extent the amount of the liquidating distribution received by the Limited
Partner exceeds the Limited Partner's tax basis for its Limited Partner units.
Any such gain will be capital gain. In general, any such capital gain recognized
by an individual, estate or trust will qualify for the 15% maximum tax (5% in
the case of a taxpayer in the 15% ordinary income bracket) on capital gains if
the Limited Partner units were held by such Limited Partner for more than one
year. A Limited Partner's tax basis for its Limited Partner units will be
increased by both the Limited Partner's allocable share of any gain realized on
the sale of the Partnership's assets (see --"Sale of the Partnership's Assets")
and by the amount of the Limited Partner's allocable share of income from normal
Partnership operations for the year of the Liquidation. Nevertheless, a Limited
Partner's allocable share of the Partnership cash may exceed its basis for its
Limited Partner units, and thereby cause the Limited Partner to recognize gain.
35
For purposes of determining a Limited Partner's adjusted tax basis in its
units, an increase in a Limited Partner's share of partnership liabilities is
treated as a contribution of cash by that Limited Partner to the Partnership,
and thereby results in an increase in the Limited Partner's adjusted tax basis
in its Limited Partner units. Conversely, a decrease in a Limited Partner's
share of partnership liabilities is treated as a distribution of cash from the
Partnership, and thereby results in a decrease in the Limited Partner's adjusted
tax basis in its Limited Partner units. To the extent that a decrease in a
Limited Partner's share of partnership liabilities results in a deemed cash
distribution to the Limited Partner which exceeds the Limited Partner's adjusted
tax basis in its Limited Partner units, the Limited Partner will recognize gain
to the extent of the excess of the deemed cash contribution over its adjusted
tax basis in its Limited Partner units. Accordingly, the possibility of deemed
cash distributions should be taken into account in the above paragraph in the
same manner as actual cash distributions.
A Limited Partner will recognize a capital loss to the extent the amount of
the liquidating distribution received by the Limited Partner (including any
deemed cash distributions to the Limited Partner attributable to a reduction in
the Limited Partner's share of partnership liabilities) is less than the Limited
Partner's tax basis for its Limited Partner units, as such basis is adjusted to
reflect any gain or loss realized by the Partnership on the sale of its assets
and to reflect the Partnership's income or loss from operations for the year of
the Liquidation. Capital losses can be deducted, in any year, only to the extent
of a Limited Partner's capital gains plus, in the case of certain non-corporate
taxpayers, ordinary income up to $3,000.
PASSIVE ACTIVITY RULES. Limited Partners that are individuals, trusts,
estates, closely held corporations or personal service corporations are subject
to the passive activity loss limitations rules of Section 469 of the Code. A
Limited Partner's allocable share of Partnership income or loss from the sale of
the Partnership's assets is generally treated as derived from a passive
activity. As a result, a Limited Partner's allocable share of such losses may be
used by the Limited Partner in the current taxable year only to offset passive
activity income from a Limited Partner's other passive activity investments,
with the excess suspended indefinitely. Similarly, a Limited Partner's allocable
share of any Partnership gain realized on the sale of its assets is generally
characterized as passive activity income that may be offset by passive activity
losses from a Limited Partner's other passive activity investments. However,
because the liquidating distribution is a fully taxable transaction, Section 469
of the Code generally allows any suspended passive activity losses of the
Limited Partner with respect to its investment in the Partnership to be used to
reduce other income of the Limited Partner.
36
TAX TREATMENT OF PARTNERSHIP; FINAL PARTNERSHIP YEAR. The Partnership will
recognize no gain or loss by reason of the liquidating distribution. The
Partnership's final taxable year (the "termination year") will close on the date
on which the Certificate of Cancellation is filed with the Maryland State
Department of Assessments and Taxation or such later time as specified in the
Certificate of Cancellation see "-- Effective Time," and each Limited Partner's
distributive share of the Partnership's items of income, gain, loss, deduction
and credit for the termination year will be taken into account by the Limited
Partner on the Limited Partner's federal income tax return for the Limited
Partner's taxable year in which the termination year occurs, in accordance with
the procedures that applied to previous taxable years. Because the Partnership
has a calendar taxable year, a Limited Partner with a taxable year that is other
than a calendar year may be required to include such Limited Partner's
distributive share of Partnership income for two partnership years in the
Limited Partner's taxable year in which the termination year occurs.
ACCOUNTING TREATMENT
The Partnership will prepare financial statements in accordance with
generally accepted accounting principles as of and through the date the
Certificate of Cancellation is filed by the Partnership and will engage its
independent auditors to audit the financial statements.
EFFECTIVE TIME
The effective time of the Liquidation will occur upon the filing of the
Certificate of Cancellation for the Partnership with the Maryland State
Department of Assessments and Taxation, or at such later time as may be
specified in the Certificate of Cancellation. It is anticipated that such filing
will be made as promptly as practicable after the requisite approval of the
Limited Partners has been obtained, the assets of the Partnership are sold and
the other conditions to the Liquidation have been satisfied or waived, if
permitted under the Plan of Liquidation and Dissolution. See, however "-- Risks
of the Liquidation -- The Continued Existence of the Partnership due to
Litigation or Unresolved Claims."
AMENDMENT OF THE PLAN OF LIQUIDATION AND DISSOLUTION
Subject to applicable law, the Plan of Liquidation and Dissolution may be
amended by the Partnership at any time prior to the filing of the Certificate of
Cancellation with the Maryland State Department of Assessments and Taxation,
provided that, after approval of the Liquidation by the affirmative vote of
holders of a majority of the outstanding Limited Partner units of the
Partnership, no amendment may be made which alters or changes the terms and
conditions of the Plan of Liquidation and Dissolution if such alteration or
change would materially and adversely affect the Limited Partners.
NO APPRAISAL RIGHTS
Pursuant to Maryland law, a partnership agreement may provide for
contractual appraisal rights in connection with the sale of all or substantially
all of the limited partnership's assets. No such appraisal rights, however, are
available for Limited Partners of CRI-II because neither the Partnership
Agreement nor the Plan of Liquidation and Dissolution provide for appraisal
rights. Accordingly, the approval of the Liquidation by the affirmative vote of
the requisite number of Limited Partners will be binding on all of the
Partnership's Limited Partners.
37
REGULATORY APPROVALS
No United States federal or state regulatory requirements must be complied
with or approvals obtained in connection with CRI-II's liquidation and
dissolution.
38
----------------------------------
THE PARTNERSHIP AND THE GENERAL PARTNERS
----------------------------------
CRI-II is a limited partnership which was formed under the Maryland Revised
Uniform Limited Partnership Act as of March 23, 1983. On May 6, 1983, the
Partnership commenced a public offering for 15,000 units of limited partnership
interest which was managed by Merrill Lynch, Pierce, Fenner and Smith,
Incorporated. The Partnership sold a total of 49,995 Limited Partner units.
Beginning in 1994, a total of 85 Limited Partner units have been abandoned.
The Partnership was formed to invest in real estate by acquiring, holding,
selling, disposing of and otherwise dealing with limited partner interest in
Local Partnerships, which in turn develop, own and operate multi-family
apartment complexes (the "Apartment Complexes"). The original objectives of
these investments, not necessarily in order of importance, were to:
(i) preserve and protect the Partnership's capital;
(ii) provide current tax benefits to the Partners in the form of tax losses
during the early years of the Partnership's operations and equity
buildup through periodic payments on the indebtedness secured by the
Apartment Complexes;
(iii)provide capital appreciation through increases in the value of the
Partnership's investments;
(iv) provide cash distributions, on a limited basis, from rental
operations; and
(v) provide cash distributions from sale or refinancing of the
Partnership's investments.
The Partnership originally made investments in 22 Local Partnerships. As of
December 31, 2003, the Partnership retained investments in twelve Local
Partnerships.
CRI-II's principal place of business is 11200 Rockville Pike, 5th Floor,
Rockville, Maryland, 20852, and its telephone number at such address is (301)
468-9200.
39
The following table describes the Apartment Complexes as of December 31,
2003. The table does not reflect Apartment Complexes that had been sold.
SCHEDULE OF APARTMENT COMPLEXES OWNED BY LOCAL PARTNERSHIPS
IN WHICH CRI-II HAS AN INVESTMENT AT DECEMBER 31, 2003(1)
NAME AND LOCATION NUMBER OF
OF APARTMENT COMPLEX RENTAL UNITS
------------------------- ------------
Arrowhead Apartments 200
Palatine, IL
Chevy Chase Park 232
Centerville, OH
Country Place I 192
Burtonsville, MD
Country Place II 120
Burtonsville, MD
Four Winds West 62
Birmingham, AL
Golden Acres 46
Chowchilla, CA
Mercy Terrace 158
San Francisco, CA
The Moorings 216
Roselle, IL
Orangewood Plaza 40
Orange Cove, CA
Posada Vallarta 336
Phoenix, AZ
Troy Manor Apartments 50
Troy, AL
Westgate Tower Apts. 148
---
Westland, MI
TOTALS 2,039
=====
(1) All properties are multifamily housing complexes. No single tenant rents
10% or more of the rentable square footage. Residential leases are
typically one year or less in length, with varying expiration dates, and
substantially all rentable space is for residential purposes.
40
THE GENERAL PARTNERS
MANAGING GENERAL PARTNER. C.R.I., Inc., the Managing General Partner, is a
Delaware corporation which was organized in 1974 and has its principal place of
business in Rockville, Maryland. C.R.I., Inc. serves or served as a general
partner in over 200 partnerships which have offered and sold limited partnership
interests totaling over $1 billion.
GENERAL PARTNERS. The remaining General Partners are current or former
directors, executive officers or shareholders of the Managing General Partner
(Martin C. Schwartzberg retired in 1990 and does not participate in management).
Listed below is the biographical information of the individuals currently
involved in CRI-II's management and Mr. Schwartzberg.
William B. Dockser, 66, has been the Chairman of the Board and a Director
of CRI since 1974. Prior to forming CRI, he served as President of Kaufman and
Broad Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which
managed publicly held limited partnerships created to invest in low and moderate
income multifamily apartment properties. Prior to joining Kaufman and Broad, he
served in various positions at HUD, culminating in the post of Deputy FHA
Commissioner and Deputy Assistant Secretary for Housing Production and Mortgage
Credit, where he was responsible for all federally insured housing production
programs. Before coming to the Washington, D. C. area, Mr. Dockser was a
practicing attorney in Boston and served as a special Assistant Attorney General
for the Commonwealth of Massachusetts. He holds a Bachelor of Laws degree from
Yale University Law School and a Bachelor of Arts degree, cum laude, from
Harvard University. He is also a Director of CRIIMI MAE Inc. and CRIIMI, Inc.
H. William Willoughby, 57, has been President, Secretary and a Director of
CRI since January 1990 and was Senior Executive Vice President, Secretary and a
Director of CRI from 1974 to 1989. He is principally responsible for the
financial management of CRI and its associated partnerships. Prior to joining
CRI in 1974, he was Vice President of Shelter Corporation of America and a
number of its subsidiaries dealing principally with real estate development and
equity financing. Before joining Shelter Corporation, he was a senior tax
accountant with Arthur Andersen & Co. He holds a Juris Doctor degree, a Master
of Business Administration degree and a Bachelor of Science degree in Business
Administration from the University of South Dakota.
Martin C. Schwartzberg, 61, served as President and Director of CRI before
his retirement in 1990. Prior to founding CRI in 1974, he served as Executive
Vice President of Kaufman and Broad Asset Management, Inc. He previously served
at the United States Department of Housing and Urban Development in various
senior advisory positions. Since leaving CRI in 1990, he has worked as President
of National Foundation for Affordable Housing Solutions. He holds an LLB degree
from George Washington University and a Bachelor of Arts from the College of
Emporia.
41
FIDUCIARY DUTIES OF THE GENERAL PARTNERS. The General Partners of the
Partnership have fiduciary duties to the Partnership under Maryland law in
addition to the specific duties and obligations imposed upon them under the
Partnership Agreement. Subject to the terms of the Partnership Agreement, the
General Partners, in managing the affairs of the Partnership, are expected to
exercise good faith and integrity with respect to the affairs of the
Partnership, must make full disclosure in their dealings with the Partnership
and must disclose to the Partnership any benefit or profit derived by them from
any transaction connected with the Partnership. Under these fiduciary duties,
the General Partners are obligated to act in the best interests of the
Partnership, especially where consummation of such transactions may result in
their interests being opposed to, or not aligned with, the interests of the
Limited Partners.
ROLE OF THE GENERAL PARTNERS. The Managing General Partner generally
manages and controls the day to day operations of the Partnership, and has
general responsibility and overall authority over matters affecting the
interests of the Partnership. The Managing General Partner is responsible for
cash management, filing of tax returns, all accounting and recordkeeping, and
all communications between the Partnership and the Limited Partners. The General
Partners have joint and several liability for the Partnership's obligations.
However, by contract among the General Partners, Martin C. Schwartzberg has not
played an active role in the Partnership's management since he retired from CRI
in 1990.
ROLE OF THE LIMITED PARTNERS. Limited Partners of the Partnership may not
participate in management of the Partnership without subjecting themselves to
potential liability as a general partner.
THE SPECIAL LIMITED PARTNERS. MLH Merger Corp. and three individuals, all as
successors in interest to Two Broadway Associates II, a New York limited
partnership whose partners were a subsidiary and certain employees of Merrill
Lynch, Hubbard Inc. ("Hubbard"), an affiliate of Merrill Lynch, Pierce Fenner &
Smith Incorporated ("Merrill Lynch"), as such corporation may from time to time
be constituted.
THE INITIAL LIMITED PARTNER. Rockville Pike Associates Limited Partnership - II,
a limited partnership formed under the Uniform Limited Partnership Act of the
District of Columbia in 1982, as said limited partnership is constituted from
time to time. Its general partners are Dockser, Schwartzberg and Willoughby, and
its limited partners consist of former CRI employees.
FEES OF THE GENERAL PARTNERS
In accordance with the Partnership Agreement, the one or more of the
General Partners or their affiliates receive the following fees:
ACQUISITION FEE AND INITIAL MANAGEMENT FEE. In accordance with the
Partnership Agreement, the Partnership paid CRI a fee for services in with the
review, selection, evaluation, negotiation and acquisition of the interests in
Local Partnerships and a fee for its services in connection with the initial
management of the Partnership. As provided in the Partnership Agreement, the
acquisition fee and the initial management fee shall not exceed 11% of
Additional Limited Partners' capital contributions. As of December 31, 1983, the
Partnership had paid $1,000,000 allocated to acquisition fees and $4,500,000
allocated to initial management fees. The acquisition fees were capitalized and
are being amortized over the estimated useful lives of the properties (generally
30 years).
42
EXPENSE REIMBURSEMENT AND ADDITIONAL MANAGEMENT FEE PAYABLE TO THE MANAGING
GENERAL PARTNER OR AFFILIATE FOR MANAGING THE BUSINESS OF THE PARTNERSHIP. The
Managing General Partner or its affiliates are reimbursed for direct travel and
telephone expenses on Partnership business and direct out-of-pocket expenses
incurred in rendering legal, accounting, bookkeeping, computer, printing and
public relations services, which services could be performed by independent
parties. The Partnership paid the Managing Partner $205,778 in 2002 as direct
reimbursement of expenses incurred on behalf of the Partnership and $232,964 in
2003.
In addition, the Partnership is obligated to pay the Managing General
Partner an annual incentive management fee after the payment of all other
Partnership expenses. In 2002, the Partnership paid the Managing General Partner
$249,996 as the Additional Management Fee. In 2003, the Partnership paid the
Managing General Partner $249,996 as the Additional Management Fee.
EXPENSE ALLOWANCE TO AFFILIATED LOCAL GENERAL PARTNERS FOR EXPENSES
RELATING TO THE ADMINISTRATION AND MANAGEMENT OF LOCAL PARTNERSHIPS PAYABLE BY
SUCH LOCAL PARTNERSHIPS. The Partnership Agreement permits the payment to not
more than five Affiliated Local Partners of $7,500 per year per Local
Partnership as an allowance for expenses, before distributions to the
Partnership and other limited partners of such Local Partnerships.
The total of the reimbursements, management fee and $7,500 annual expense
allowance to Affiliated Local Partners shall not exceed .5% of Invested Assets.
APARTMENT COMPLEX MANAGEMENT FEES PAYABLE TO AN AFFILIATE OF THE MANAGING
GENERAL PARTNER PARTNERS BY THE LOCAL PARTNERSHIPS. Affiliates of the Managing
General Partner may provide on-site property management services with respect to
the Apartment Complexes. Such property management fees, together with any
amounts reimbursed to any affiliates for property management which are allocable
to the Apartment Complex, shall not exceed 5% of the Apartment Complex's gross
rental income, unless a higher amount has been approved by HUD, the state agency
or the mortgage lender for the Apartment Complex. An affiliate of the Managing
General Partner is a joint venture member of the entity that is the property
management agent for Chevy Chase Park. HUD approved a management fee of 6.75%
for this property. From July 2002, when the contract commenced, through
September 2003, the affiliate has received $46,677 from the joint venture for
its share of the property management services at that property.
FEES PAYABLE TO THE INDIVIDUAL GENERAL PARTNERS UPON SALES OF LOCAL
PARTNERSHIP INTERESTS OR APARTMENT COMPLEXES. The individual General Partners
only (not CRI) are currently entitled to an aggregate fee for their services to
the Partnership equal to 1% of the gross proceeds resulting from the sale of an
Apartment Complex, which selling price includes:
43
(i) any cash down payments received by the Local Partnerships;
(ii) the amounts of any assumed mortgage indebtedness on the Apartment
Complexes; and
(iii)the discounted value (at the then prevailing market rate of interest on
U.S. Treasury bills having a comparable term) of principal and interest
payments on any purchase money obligations received from purchasers of
Local Partnership interests or Apartment Complexes, including any amounts
previously accrued and unpaid upon prior sales of all Local Partnership
interests or substantially all of the Local Partnership interests or the
Apartment Complexes.
Such fee is payable to the individual General Partners only after:
(1) the Limited Partners have received a return of all their capital
contributions to the Partnership ("Capital Contributions"), without
reduction for prior cash distributions other than prior distributions
of Sale and Refinancing Proceeds, plus an additional amount equal to a
cumulative, non-compounded six percent (6%) per annum return on each
Limited Partner's Capital Contribution, reduced by (a) an amount equal
to 50% of Losses for Tax Purposes allocated to such Limited Partner
and (b) distributions of Net Cash Flow to each Limited Partner [for
purposes of this paragraph, "Limited Partners" includes the Initial
Limited Partner and Special Limited Partner];
(2) the repayment of any unpaid loans made by any Partner or any affiliate
or other amounts owing to the General Partners; and
(3) the return of Capital Contributions to the General Partners.
Fees payable to the individual General Partners, together with any other
commissions or fees payable upon the sale of all or substantially all of the
Local Partnership interests or Apartment Complexes, are not permitted to exceed
the lesser of the competitive rate or 6% of the sales price of the Apartment
Complexes.
We are seeking your authorization to amend the Partnership Agreement to
permit CRI to be eligible to receive a disposition fee of up to 5% of the sales
price of Apartment Complexes for its efforts in marketing and selling the
Apartment Complexes (payable in lieu of such fee being paid to a third party
upon the sale of an Apartment Complex.) In addition, Dockser and Willoughby will
waive their respective portions of the currently authorized property disposition
fee of 1%. As with the payment of a sales commission to a third party real
estate broker, this incentive fee is payable upon the sale of a Partnership
property and would not be deferred. Consequently, the fee would be considered a
debt of the Partnership, payable prior to any return of capital or preferred
return to the Limited Partners. We are also seeking your authorization to amend
the Partnership Agreement to permit CRI to be eligible to receive a $500,000
Partnership Liquidation Fee if it completes the sale of all of the Partnership's
investments within 36 months from the date that the Liquidation is approved. See
"WHAT YOU SHOULD KNOW BEFORE VOTING ON THE LIQUIDATION -- Amendments to the
Partnership Agreement; -- Interests of Certain Persons in the Liquidation."
44
MARKET FOR THE LIMITED PARTNER UNITS
The Limited Partner units are not listed on any national or regional
securities exchange or quoted on The Nasdaq Stock Market, and there is no
established public trading market for the Limited Partner units. Secondary sales
activity for the Limited Partner units has been limited and sporadic.
45
-----------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------
GENERAL
As of the record date, the Equity Resources Group and its affiliates owned
9,298.33 Limited Partner units, or approximately 18.63% of the outstanding
Limited Partner units.
OWNERSHIP INTERESTS OF THE GENERAL PARTNERS IN THE PARTNERSHIP
------------------
The following table sets forth certain information concerning all Limited
Partner units of the Partnership directly or beneficially owned as of December
31, 2003 by each General Partner, each director of the Managing General Partner,
and by all directors and officers of the Managing General Partner as a group.
Name of Amount and Nature % of total
Beneficial Owner of Beneficial Ownership Limited Partner units issued
---------------- ----------------------- ----------------------------
William B. Dockser None 0.00%
H. William Willoughby None 0.00%
Martin C. Schwartzberg None 0.00%
All General Partners,
Directors and Officers
as a Group (3 persons) None 0.00%
46
CONSENT PROCEDURES
-----------
The consent of each Limited Partner is important. Each Limited Partner is
urged to mark, date and sign the enclosed consent card and return it in the
enclosed postage prepaid envelope or fax it to MacKenzie Partners at (212)
929-0308. If you require assistance completing the consent card, please call
Susan T. Backman, Vice President of Investor Communications of CRI, toll free at
1 (800) 678-1116.
TIMING OF THE CONSENT SOLICITATION
The vote of the Limited Partners with respect to the Liquidation will be
tabulated on an ongoing basis until 5:00 p.m., Eastern Time, on the Expiration
Date, March __, 2004, unless the Managing General Partner, in its sole
discretion, extends the period for giving consents, in which case the new
Expiration Date will be the last date on which your consent card will be
accepted. If Proposal 3 is approved, the Managing General Partner may, in its
sole discretion, elect to extend the solicitation period but not beyond sixty
(60) days from the date that this Consent Solicitation Statement is sent to the
Limited Partners. If the solicitation period is extended, the Managing General
Partner will issue a press release (which press release will also be filed with
the Securities and Exchange Commission under cover of Form 8-K) announcing the
extension no later than 10:00 a.m., Eastern Time, on the next business day after
the date that the solicitation period was set to expire. The votes will be
tabulated by MacKenzie Partners, which is not affiliated with the Partnership or
the General Partners.
RECORD DATE AND OUTSTANDING LIMITED PARTNER UNITS
The Liquidation is being submitted for approval to Limited Partners as of
the record date. The record date is December 31, 2003 for the Partnership for
determining the Limited Partners entitled to consent to the Liquidation.
Accordingly, only record date Limited Partners will be entitled to consent to
the Liquidation. At the record date, 49,910 CRI-II Limited Partner units were
held of record by approximately 3,107 Limited Partners.
Each Limited Partner is entitled to one vote for each unit of limited
partnership interest held. Accordingly, the number of Limited Partner units
entitled to vote with respect to the Liquidation is equivalent to the number of
Limited Partner units held of record at the record date.
APPROVAL DATE; EXTENSIONS; AMENDMENT
This Consent Solicitation Statement and enclosed consent card constitute
the General Partners' notice to Limited Partners of the Liquidation. Each
Limited Partner has until 5:00 p.m., Eastern Time on the Expiration Date, unless
extended by the Managing General Partner in its sole discretion, to inform the
vote tabulator whether such Limited Partner wishes to vote for, against or
abstain from voting on the Liquidation. We ask that each Limited Partner vote by
completing and returning the enclosed consent card accompanying this Consent
Solicitation Statement in the manner described below.
47
Notwithstanding anything to the contrary set forth in this Consent
Solicitation Statement, CRI reserves the right, at any time prior to
effectiveness of the Liquidation, to amend or terminate the solicitation, or to
delay accepting consent cards.
48
CONSENT CARD AND VOTE REQUIRED
Approval of the Liquidation by the Partnership requires the affirmative
vote of a majority of the 49,910 outstanding Limited Partner units of the
Partnership as of the record date. Accordingly, 24,956 Limited Partner units
must be voted in favor of the Liquidation for it to be approved by the
Partnership.
Limited Partners who wish to vote "FOR" the Liquidation should complete,
sign and return the consent card. A consent card has been prepared for each
Limited Partner and is enclosed with this Consent Solicitation Statement.
Consent cards must be delivered in person, by mail, by facsimile or other
delivery service to the consent solicitation agent at the following address on,
or prior to, 5:00 p.m., Eastern Time, on the Expiration Date, March __, 2004,
unless extended by the Managing General Partner, in its sole discretion:
If in person, or by mail: If by facsimile:
MacKenzie Partners, Inc. (212) 929-0308
105 Madison Avenue
New York, NY 10016
--------------------------------------------------------
If you require assistance completing the consent card,
please call Susan T. Backman, Vice President of Investor Communications of CRI,
toll free at (800) 678-1116.
A consent card shall be deemed to have been "returned" to the Partnership
on the date that it is delivered in person, by facsimile or received by
MacKenzie Partners via mail or other delivery service. Limited Partners who sign
and return the consent card without indicating any vote will be deemed to have
voted "FOR" all three of the proposals listed thereon. The failure to return a
consent card or abstaining from voting with respect to any of the proposals
involved in the Liquidation will have the same effect as a vote "AGAINST" the
Liquidation.
Limited Partners who wish to vote "AGAINST" any or all of the proposals
should also complete and return the consent card in the manner described above.
A Limited Partner who abstains from voting, fails to return the consent card, or
votes "AGAINST" will receive such Limited Partner's share of the distribution of
the Partnership's Liquidation if
(1) the holders of a majority of the outstanding Limited Partner units in the
Partnership approve the Liquidation; and
(2) all other conditions for the consummation of the Liquidation are satisfied.
Limited Partners will not be entitled to appraisal rights. See "WHAT YOU
SHOULD KNOW BEFORE VOTING ON THE LIQUIDATION -- No Appraisal Rights."
49
The delivery of a consent card will not affect a Limited Partner's right to
sell or transfer such person's Limited Partner units in the Partnership.
All questions as to the form of all documents and the validity (including
time of receipt) of all approvals will be determined by the Managing General
Partner. Such determinations shall be final and binding. The Managing General
Partner reserves the absolute right to waive any of the conditions of the
Liquidation or any defects or irregularities in any approval of the Liquidation
or preparation of the form of consent card. The Managing General Partner's
interpretation of the terms and conditions of the proposed Plan of Liquidation
and Dissolution and the Partnership Amendments will be final and binding. The
Managing General Partner shall be under no duty to give notification of any
defects or irregularities in any approval of the Liquidation or preparation of
the form of consent card and shall not incur any liability for failure to give
such notification.
REVOCABILITY OF CONSENT
Limited Partners may withdraw or revoke their consent as to any or all of
the proposals listed on the consent card at any time prior to the earlier of
5:00 p.m., Eastern Time, on the Expiration Date. To be effective, a written or
facsimile revocation or withdrawal of the consent card must be received by the
consent solicitation agent prior to such time and addressed as follows:
MacKenzie Partners, Inc., 105 Madison Avenue, New York, NY 10016, or by
facsimile to (212) 929-0308. A notice of revocation or withdrawal must specify
the Limited Partner's name, the number of Limited Partner units being withdrawn
and to which proposal or proposals the revocation applies.
SOLICITATION OF CONSENTS; SOLICITATION EXPENSES
Votes of Limited Partners may be solicited by the Managing General Partner.
Costs of solicitation will be paid by the Partnership. See "WHAT YOU SHOULD KNOW
BEFORE VOTING ON THE LIQUIDATION -- Liquidation Expenses." The Partnership has
retained MacKenzie Partners, Inc., as the consent solicitation agent. The
Managing General Partner or MacKenzie Partners, Inc. will administer the
delivery of information to Limited Partners. MacKenzie Partners, Inc. will be
paid regardless of the outcome of the vote.
EFFECT OF A FAILURE TO APPROVE THE LIQUIDATION
If the requisite number of Limited Partner units does not approve the
Liquidation, then the Partnership will continue to operate as a legal entity
with its assets and liabilities. CRI does not anticipate taking any steps to
increase liquidity to the Partnership in the near term, and consistent with its
fiduciary duties, will re-evaluate the market conditions periodically to examine
other opportunities available to the Partnership's Limited Partners prior to the
termination date of the Partnership set forth in the Partnership Agreement.
There will be no change in its investment objectives, policies and restrictions,
and the Partnership will continue to be operated in accordance with the terms of
the Partnership Agreement.
50
INCORPORATION BY REFERENCE
The Partnership is subject to the informational requirements of Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, statements and other information with the Securities
and Exchange Commission (the "Commission"). Such reports, statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, NW, Washington, D.C., 20549,
and should be available at the Commission's regional offices at 175 W. Jackson
Boulevard, Suite 900, Chicago, Illinois 60604 and 233 Broadway, New York, New
York, 10279. Copies of such material can be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, NW, Washington, D.C., 20549, at
prescribed rates. Such material may also be accessed on the World Wide Web
through the Commission's Internet addresses at http://www.sec.gov.
The following documents filed with the Commission by the Partnership (File
No. 000-11973) pursuant to the Securities Exchange Act of 1934, as amended, are
incorporated by reference in this Consent Solicitation Statement and are
delivered herewith:
1. CRI-II's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2002; and
2. CRI-II's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2003.
A copy of the Partnership's Annual Report on Form 10-KSB and Quarterly
Report on Form 10-QSB are available without charge upon written request to CRI's
Investment Communications Group at 11200 Rockville Pike, 5th Floor, Rockville,
MD 20852.
No persons have been authorized to give any information or to make any
representations other than as contained in this Consent Solicitation Statement
in connection with the solicitations of consents for the Liquidation and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Partnership. This Consent Solicitation Statement
does not constitute the solicitation of consent by anyone in any jurisdiction in
which such solicitation is not authorized or in which the person making such
solicitation is not qualified to do so or to any person to whom it is unlawful
to make such solicitation. The delivery of this Consent Solicitation Statement
shall not under any circumstances create an implication that there has been any
change in the affairs of the Partnership since the date hereof or that the
information herein is correct as of any time subsequent to its date.
-------
APPENDICES
-------
Appendix A -- Form of Plan of Liquidation and Dissolution
Appendix B - Form of Legal Opinion of Nixon Peabody LLP
51
APPENDIX A
PLAN OF LIQUIDATION AND DISSOLUTION
OF
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
This Plan of Liquidation and Dissolution (the "Plan") dated as of January
___, 2004 of Capital Realty Investors-II Limited Partnership (the
"Partnership"), a limited partnership organized and existing under the Maryland
Revised Uniform Limited Partnership Act (the "Maryland Act"), is for the purpose
of effecting the complete liquidation and dissolution of the Partnership in
accordance with the laws of the State of Maryland.
1. Intention of the General Partners. C.R.I, Inc., as the Managing General
Partner, and its shareholders William B. Dockser and H. William Willoughby, who
are also individual General Partners, believe that the liquidation and
dissolution (the "Liquidation") of the Partnership at this time is in the best
interest of the Partnership and its Limited Partners. Therefore, three of the
four General Partners have submitted this Plan to the Limited Partners for their
consent to liquidate and dissolve the Partnership in accordance with Section
8.02 of the Limited Partnership Agreement of the Partnership dated as of March
23, 1983 (the "Partnership Agreement"). (Martin C. Schwartzberg is also a
General Partner but has not played an active role in the management of the
Partnership since he retired from CRI in 1990, so his recommendation was not
sought by the other General Partners.)
2. Effectiveness. The Plan shall be effective upon the approval hereof by
the affirmative vote of more than 50% of the outstanding Limited Partner units
of the Partnership as required by the Partnership Agreement. Until such time as
the Limited Partners approve this Plan, the Managing General Partner shall not
take and shall not cause the Partnership to take any of the actions, and shall
not do or cause the Partnership to do, any of the things provided herein,
provided that the foregoing shall in no event limit the right of the Managing
General Partner to sell, on behalf of the Partnership, single Apartment
Complexes (or the Partnership's interest therein) in one or more unrelated
transactions.
3. Dissolution. In accordance with the Partnership Agreement, one hundred
eighty days after the sale of all of the Partnership's assets, the Partnership
shall be dissolved without any further action by or on behalf of the
Partnership, the Limited Partners or the Managing General Partner.
4. Winding Up. The Managing General Partner, as liquidator for the
Partnership, shall sell or cause to be sold all of the assets of the Partnership
and shall apply the funds of the Partnership (including the proceeds of the sale
of any other assets of the Partnership) to (i) the payment of the liabilities of
the Partnership, including the expenses of the sale of the assets of the
Partnership, and the winding up, liquidation and termination of the Partnership,
including any Disposition Fee and Partnership Liquidation Fee (if the latter is
approved) to the Managing General Partner, upon the terms and conditions set
forth in Section 4.02 of the Partnership's Limited Partnership Agreement, as
amended; (ii) the expenses of preparation, filing and distribution of financial
statements, tax returns, reports required under the Securities Exchange Act of
1934 (the "Exchange Act") and reports to Limited Partners, including fees and
expenses of accountants and lawyers; (iii) the payment of all income, sales,
use, franchise, gross receipts, ad valorem, personal property and other taxes,
imports, duties and governmental charges payable by the Partnership with respect
to its income or operations through the time of its termination ("Taxes"),
including Taxes with respect to the sale of the Partnership's assets; and (iv)
the creation of reserves for any of the foregoing.
52
5. Liquidation. All assets and funds of the Partnership remaining after the
payments provided for by paragraph 4, and any amounts reserved by the Managing
General Partner pursuant to clause (i) of paragraph 4 and determined by the
Managing General Partner to be in excess of the amounts required therefor, shall
be distributed by the Managing General Partner as set forth in Section 4.02 of
the Partnership Agreement, as amended.
6. Cancellation of Interests in the Partnership. Liquidating distributions
shall be made in complete cancellation of all of the Limited Partners' interests
in the Partnership.
7. Reports and Filings. In connection with the Liquidation and winding up
of the Partnership, the Managing General Partner shall cause to be executed and
timely filed (i) with the office of the State Department of Assessments and
Taxation of Maryland, a Certificate of Cancellation canceling the Partnership's
Certificate of Limited Partnership; (ii) with the Internal Revenue Service, all
returns, reports, documents, certificates and other information required under
the Internal Revenue Code of 1986, as amended, or applicable Treasury Department
rules or regulations; (iii) with the appropriate authorities in any other tax
jurisdiction, all returns, reports, documents, certificates and other
information required under the laws of such jurisdictions; (iv) with the
Securities Exchange Commission, any reports required under the Exchange Act,
including a Form 15 terminating the registration of the Partnership under the
Exchange Act; and (v) all reports required to be delivered to the Limited
Partners in accordance with Article 9.04 of the Partnership Agreement.
8. Other Acts. The Managing General Partner shall take, or cause the
Partnership to take, such other acts and deeds and shall do, or cause the
Partnership to do, such other things, as are necessary or appropriate in
connection with the dissolution, winding up and Liquidation of the Partnership,
the termination of the responsibilities and liabilities of the Partnership under
applicable law, and the termination of the existence of the Partnership.
53
IN WITNESS WHEREOF, the parties hereto have made and executed this Plan as
of the date first written above.
C.R.I., INC.
AS MANAGING GENERAL PARTNER OF
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
/s/ William B. Dockser
By: ----------------------------------
Name: William B. Dockser
Title: Chairman
and
/s/ H. William Willoughby
By: ----------------------------------
Name: H. William Willoughby
Title: President
54
Appendix B
Form of Opinion
______________________, 2004
Limited Partners
of Capital Realty
Investors-II Limited Partnership
Re: Exercise of Voting Rights in connection with Consent Solicitation
-----------------------------------------------------------------
Statement
---------
We represent Capital Realty Investors-II Limited Partnership (the "Limited
Partnership") in connection with the proposed solicitation of consents on the
proposals outlined in the Consent Solicitation Statement dated January __, 2004
(the "Consent Solicitation Statement"). We have been asked to render the opinion
required pursuant to Section 10.3 of the Limited Partnership Agreement of the
Limited Partnership dated April 28, 1983 (the "Limited Partnership Agreement").
Although we have acted as special counsel to the Limited Partnership with
respect to the Consent Solicitation Statement, we do not act as counsel to the
Limited Partnership as to all matters and, therefore, may be unaware of certain
of its business dealings.
We have reviewed the following documents in connection with the opinions
rendered below:
1. The Consent Solicitation Statement; and
2. The Limited Partnership Agreement.
In addition, we have reviewed the following statutes and regulations and
relevant judicial and administrative interpretations thereof:
1. The Maryland Revised Uniform Limited Partnership Act ("MRULPA"), as
currently in effect, and related Maryland case law; and
2. The United States Internal Revenue Code, as currently in effect, and
related regulations, rulings and case law.
55
Limited Partners of Capital Realty
Investors-II Limited Partnership
________________, 2004
Page 2
In such examinations, we have assumed the genuineness of signatures on
documents and instruments, the authenticity of documents submitted to us as
originals, the conformity to originals of documents submitted to us as copies
and the truthfulness of all statements of fact contained therein. As to certain
factual matters involved in rendering the opinions set forth herein, we have
relied upon certificates of certain governmental authorities setting forth such
matters, signed by an official or authorized representative of the particular
government or authority and certificates and representations of officers of the
Managing General Partner of the Limited Partnership.
Based solely upon the above review, it is our opinion that:
1. The exercise of the voting rights pursuant to Sections 5.04(c) and (e)
and 10.02(a)(i) of the Limited Partnership Agreement by the Limited contemplated
by the Consent Solicitation Statement is authorized under the provisions of the
Limited Partnership Agreement and the MRULPA.
2. The exercise of such voting rights by Limited Partners will not subject
the Limited Partners to liability as general partners under the MRULPA.
3. The exercise of such voting rights may be effected without changing the
status of the Limited Partnership as a partnership for tax purposes.
Members of our firm are members of the Bar of the State of Maryland, and
the opinions expressed herein are limited to the laws of the State of Maryland
(not including the state securities or blue sky laws of Maryland) and the
federal laws of the United States of America. We assume no obligations to
supplement this opinion if any applicable laws change after the date hereof or
if we become aware of any facts that might change the opinions expressed herein
after the date hereof.
The addressees may rely on this opinion in connection with the exercise of
their voting rights as herein described. No other person may rely on this
opinion without our prior written consent.
Yours truly,
Nixon Peabody LLP
56
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
CONSENT CARD
THIS CONSENT IS SOLICITED BY THE MANAGING GENERAL PARTNER OF
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
C.R.I., Inc., the Managing General Partner of Capital Realty Investors-II
Limited Partnership (the "Partnership"), is proposing the liquidation of the
Partnership (the "Liquidation") that consists of: (1) the sale of all of the
Partnership's assets and the dissolution of the Partnership pursuant to the
proposed Plan of Liquidation and Dissolution; (2) the amendment of the
Partnership Agreement to permit the payment to the Managing General Partner of a
Disposition Fee; (3) the amendment of the Partnership Agreement to permit the
Managing General Partner to be eligible to receive a Partnership Liquidation Fee
in the amount of Five Hundred Thousand Dollars ($500,000), payable only if the
Managing General Partner is successful in liquidating all of the Partnership's
investments within 36 months from the date the Liquidation is approved; and (4)
authorization of the Managing General Partner, in its sole discretion, to elect
to extend the period during which Consents of Limited Partners may be solicited
and voted, but not beyond sixty (60) days from the date that this Consent
Solicitation Statement is sent to the Limited Partners.
------------------------------------------
THE MANAGING GENERAL PARTNER RECOMMENDS THAT LIMITED
PARTNERS CONSENT TO THE LIQUIDATION PROPOSALS BY MARKING THE
BOXES ENTITLED "FOR".
------------------------------------------
PROPOSAL 1:
To approve (i) the sale of all of the Partnership's assets and the dissolution
of the Partnership pursuant to the proposed Plan of Liquidation and Dissolution,
and (ii) the amendment of the Partnership Agreement to permit the payment to the
Managing General Partner of a Disposition Fee.
The undersigned hereby votes all Limited Partner units directly or beneficially
owned by the undersigned as follows:
[__] FOR [__] AGAINST [__] ABSTAIN
PROPOSAL 2:
To approve the amendment of the Partnership Agreement to permit the Managing
General Partner to be eligible to receive a Partnership Liquidation Fee in the
amount of Five Hundred Thousand Dollars ($500,000), payable only if the Managing
General Partner is successful in liquidating all of the Partnership's
investments within 36 months from the date the Liquidation is approved.
The undersigned hereby votes all Limited Partner units directly or beneficially
owned by the undersigned as follows:
[__] FOR [__] AGAINST [__] ABSTAIN
57
PROPOSAL 3:
To authorize the Managing General Partner, in its sole discretion, to elect to
extend the period during which Consents of Limited Partners may be solicited and
voted, but not beyond sixty (60) days from the date that this Consent
Solicitation Statement is sent to the Limited Partners.
The undersigned hereby votes all Limited Partner units directly or beneficially
owned by the undersigned as follows:
[___] FOR [___] AGAINST [___] ABSTAIN
The Limited Partner units represented by this consent card will be voted in
accordance with the election specified by the Limited Partner named below. ANY
PROPERLY EXECUTED CONSENT CARD ON WHICH A CHOICE IS NOT INDICATED WILL BE VOTED
"FOR" THE LIQUIDATION. FAILURE TO RETURN A CONSENT CARD OR ABSTENTION FROM
VOTING WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST" THE LIQUIDATION.
The undersigned hereby acknowledges receipt of the Consent Solicitation
Statement, dated January __, 2004 from the Managing General Partner.
------------------------------
Signature
------------------------------
Signature
Title:
Dated:
Sign exactly as addressed to you. Joint owners should each sign. If signing
as executor, administrator, attorney, trustee, or guardian, please include your
full title. If a corporation, sign in full corporate name by authorized officer.
If a partnership, sign in the name of authorized person. Please see reverse side
for instructions on returning this card.
58
YOUR VOTE IS IMPORTANT. PLEASE ACT PROMPTLY.
----------------------------------------------------------
PLEASE SIGN AND DATE THIS CONSENT CARD AND RETURN IT IN THE
ENCLOSED POSTAGE PREPAID ENVELOPE OR FAX IT TO (212) 929-0308 BY 5:00
P.M., EASTERN TIME, ON MARCH ___, 2004 (UNLESS SUCH DATE AND/OR TIME IS
EXTENDED IN THE SOLE DISCRETION OF THE MANAGING GENERAL PARTNER).
------------------------------------------------------------
The Consent Solicitation Agent: MacKenzie Partners, Inc.
105 Madison Avenue
New York, NY 10016
59