REAL ESTATE ASSOCIATES LIMITED/CA, III, IV, V and VII
55 Beattie Place, P.O. Box 1089
Greenville, SC 29602
May 10, 2005
Correspondence Filing Via Edgar and Overnight Delivery
United States Securities and Exchange Commission
Division of Corporation Finance
Mail Stop 0409
450 Fifth Street, NW
Washington, D.C. 20549
Attn: Mr. Daniel Gordon
Re: Real Estate Associates Limited/CA, III, IV, V and VII
Form 10-KSB for the year ended December 31, 2004
File No. 0-09262, 0-10673, 0-12439, 0-12438 and 0-13810
Ladies and Gentlemen:
This letter responds to the comments of the staff of the Securities and Exchange
Commission (the "Staff") addressed to Real Estate Associates Limited/CA
("REAL"), Real Estate Associates Limited III ("REAL III"), Real Estate
Associates Limited IV ("REAL IV"), Real Estate Associates Limited V ("REAL V"),
and Real Estate Associates Limited VII ("REAL VII"), California limited
partnerships (collectively the "Partnerships"), in a letter dated April 18,
2005. The Partnerships appreciate the Staff's willingness to provide an
extension of time for this response. The Partnerships' response to the Staff's
comments are set forth below and are numbered to correspond to the numbering of
the Staff's comments in the Staff's letter.
* * * * *
Form 10-KSB for the year ended December 31, 2004
Note 1 - Organization and Summary of Significant Accounting Policies
Recent Accounting Pronouncements
1. Comment: We note that you adopted FIN 46R and you determined that
you held variable interests in VIE's for which each of the
Partnerships were not the primary beneficiary. Please tell us how
you determined that the interests the partnerships hold in the local
limited partnerships are variable interests. In addition, please
tell us how you determined that you were not considered the primary
beneficiary considering that you own 95 to 99% of the local limited
partnerships. Reference is made to paragraphs 14-17 of FIN 46R.
Response: The Partnerships first became involved with the local
limited partnerships in the early 1980's. The Partnerships
historically have used the equity method of accounting for their
investments in local limited partnerships. The individuals involved
with the creation of the Partnerships are no longer employed by
National Partnership Investments Corp ("NAPICO"), the corporate
general partner of the Partnership. With the exception of one
general partner that is a wholly-owned subsidiary of NAPICO and
serves as the general partner of eighteen local limited
partnerships, the general partners of the local limited partnerships
are not affiliated with the Partnerships or NAPICO. Accordingly, the
Partnerships' initial consideration of the requirements of FASB
Interpretation No. 46 (Revised December 2003), Consolidation of
Variable Interest Entities (FIN 46R) was based primarily on
documents relating to the formation of local limited partnerships
and financial information available as of December 31, 2003 and
2004. There may be other facts and circumstances related to each of
the Partnerships' involvement with the local limited partnerships
that might be relevant in making determinations required by FIN 46R;
however, the Partnerships necessarily based their determination upon
those written documents and other information currently available to
the Partnerships.
The Partnerships' determination that the local limited partnerships
are variable interest entities ("VIE") was made based on
consideration of paragraphs 5, 9 and 10 of FIN 46R. The Partnerships
specifically determined that five (REAL ), seven (REAL III), four
(REAL IV), one (REAL V) and nine (REAL VII) of the local limited
partnerships are VIEs based on paragraph 5(b)(1) and that one (REAL
), two (REAL III), and two (REAL IV) of the local limited
partnerships are VIE's based on paragraphs 5(a) and 9.
With respect to the local limited partnerships that were determined
to be VIEs under paragraph 5(b)(1), the group of equity holders at
risk was comprised only of its limited partners (the group that
contributed the capital necessary to fund the acquisition of
properties owned by the local limited partnerships). The general
partners were not considered to have equity at risk because their
capital contributions were insignificant. Based on the terms of the
related limited partnership agreements, the limited partners were
not deemed to have the right to make decisions that have a
significant effect on the operations or success of the local limited
partnership. Therefore, these local limited partnerships were
determined to be VIEs and no further evaluation under paragraph 5
was necessary.
With respect to the local limited partnerships that were determined
to be VIEs under paragraphs 5(a), 9 and 10 the Partnership
determined based on review of the audited financial statements of
the local limited partnership and other available financial
information that these local limited partnerships had insufficient
equity investment at risk to permit the local limited partnerships
to finance their activities. Accordingly, these local limited
partnerships were determined to be VIEs.
The Partnerships made their determination of the primary beneficiary
of the local limited partnerships identified as VIEs based on a
qualitative analysis with reference to paragraphs 16 and 17 of FIN
46R.
Paragraph 16 of FIN 46R states, in part, "For purposes of
determining whether it is the primary beneficiary of a variable
interest entity, an enterprise with a variable interest shall treat
variable interests in that same entity held by its related parties
as its own interests. For purposes of this Interpretation, the term
related parties includes those parties identified in FASB Statement
No. 57, Related Party Disclosures, and certain other parties that
are acting as de facto agents or de facto principals of the variable
interest holder." Paragraph 16(d) of FIN 46R further provides that
de facto agents of an enterprise include "A party that has (1) an
agreement that it cannot sell, transfer, or encumber its interest in
the entity without the prior approval of the enterprise...The right
of prior approval creates a de facto agency relationship only if
that right could constrain the others party's ability to manage the
economic risks or realize the economic rewards from its interests in
a variable interest entity through the sale, transfer, or
encumbrance of those interests."
With respect to the local limited partnerships identified as VIEs, a
provision of each of the partnership agreements prohibits the
general partner from selling, assigning, transferring, mortgaging,
pledging, or otherwise encumbering or disposing of its interest in
the local limited partnership for which it serves as the general
partner. Accordingly, in order for the general partner to take any
of these actions, a modification of the local limited partnership
agreement would be necessary and such modification would require
written consent or vote of a majority interest of the general
partner and the limited partner, voting as one class, in proportion
to ownership interest. Another provision of each of the partnership
agreements for the local limited partnerships prohibits any limited
partner from assigning in whole or any part of its interest in a
local limited partnership unless the limited partner first receives
consent of the general partner of the local limited partnership
(which consent may be withheld at the sole discretion of the general
partner). These provisions of the partnership agreements establish
de facto agency relationships, as contemplated in paragraph 16(d) of
FIN 46R, between the Partnerships, as limited partner in the local
limited partnerships, and the respective general partners of the
local limited partnerships.
Having determined under paragraph 16 that the Partnerships and the
respective general partners of the local limited partnerships are a
related party group for purposes of FIN 46R, the Partnerships
considered the guidance in paragraph 17 of FIN 46R to identify the
primary beneficiary of each local limited partnership. Paragraph 17
of FIN 46R states, "If two or more related parties (including the de
facto agents described in paragraph 16) hold variable interests in
the same variable interest entity, and the aggregate variable
interest held by those parties would, if held by a single party,
identify that party as the primary beneficiary, then the party,
within the related party group, that is most closely associated with
the variable interest entity is the primary beneficiary". The
Partnerships believe that the variable interests held by the related
party group, consisting of the Partnerships and the general
partners, would, if held by a single party, identify that party as
the primary beneficiary. Accordingly, the Partnerships believe that
based on a qualitative evaluation, that a party within the related
party group must be the primary beneficiary.
Paragraph 17 of FIN 46R goes on to state "the determination of which
party within the related party group is most closely associated with
the variable interest entity requires judgment and shall be based on
an analysis of all relevant facts and circumstances, including:
a. The existence of a principal-agency relationship between parties
within the related party group
b. The relationship and significance of the activities of the variable
interest entity to the various parties within the related party group
c. A party's exposure to the expected losses of the variable interest
entity
d. The design of the variable interest entity."
The Partnerships believe that in the application of paragraph 17 of
FIN 46R, the factors listed need to be considered together in
conjunction with the structure of each local limited partnership and
how the Partnerships believe other entities would view the role of
the general partner and the limited partner (i.e., the
Partnerships).
The Partnerships' consideration of the requirements of paragraph 17
of FIN 46 revealed factors that individually could identify either
the general partner or the Partnerships as the party with the
characteristics most closely associated with the respective local
limited partnerships.
Ultimately, as discussed below, the Partnerships concluded that the
general partner is the party within the related party group, that
has the characteristics most closely associated with the local
limited partnerships. Factors considered most relevant include:
o Although the de facto agency relationships that were identified in
connection with paragraph 16 of FIN 46R do not clearly indicate which
party is the principal or agent, the Partnerships believe the general
partner has characteristics that are commonly associated with the
principal. In this regard, the Partnerships noted that the general
partner is the party an outside entity would contact regarding a local
limited partnership matter. For example, the United States Department
of Housing and Urban Development, or one of its agencies, ("HUD"), is
the outside entity with the most direct contact and or communication
with the local limited partnerships due to the interest and tenant
subsidies and mortgage insurance that exist at the local limited
partnership level. In all instances HUD contacts the general partner
with respect to matters involving the local limited partnership and
the general partner acts with authority in addressing those matters.
o The Partnerships noted that each general partner's relationship with
the local limited partnerships involves the following significant
activities related to its rights and obligations under the related
limited partnership agreements:
o The general partner shall manage and conduct the business of the local
limited partnership;
o Employees of the general partner (or its affiliates) are actively
involved in managing the operations of the local limited partnerships
o The general partner has the obligation to fund any recourse
obligations of the local limited partnership
o The general partner is authorized to develop land acquired by the
local limited partnership with off-site and on-site improvements, and
to construct, rehabilitate, maintain, operate and manage the housing
units and other facilities of the respective local limited partnership
o The general partner is authorized to borrow funds, execute and issue
mortgage notes and other evidences of indebtedness
o The general partner is authorized to apply for and obtain from the
respective government agency, contracts for leasing, interest
subsidies, tax abatement and tax limitation, as well as other
supplemental payments and subsidies
o The general partner shall promptly take any and all action which may
be necessary or appropriate to perfect and maintain the local limited
partnership, as a limited partnership under state law, and to develop,
maintain, and operate the respective local limited partnerships in
accordance with provisions of the local limited partnership agreement
and applicable Federal, state and local laws and regulations
o The general partner shall cause the local limited partnership to
obtain and maintain at all times, insurance in such amounts and at
terms customary for a project similar to the local limited partnership
o The general partner is responsible for obtaining a management agent
for the respective local limited partnership
o In addition, the local limited partnership agreements each state
that the Partnership, as limited partner, shall not take part in
the management of the local limited partnership's business or
transact any business for the local limited partnership, nor have
any power to sign for or to bind the local limited partnership or
to subject the local limited partnership to any liability or
obligation.
These factors strongly indicate that the general partners are the
parties most closely associated with the local limited partnerships.
Although the Partnerships have not performed a quantitative analysis
to determine the relative exposures of the Partnerships and general
partners to the expected losses and residual returns of the local
limited partnerships, the Partnerships generally believe that they
would have the greatest exposure based on provisions in the local
limited partnerships that provide for 95-99 percent allocations and
distributions to the limited partner. However, this factor is not
sufficient to offset the above indicators that the general partner
is the party most closely associated with the local limited
partnerships.
As an additional note, the Partnerships were unable to make a clear
determination as to which parties were more involved with the design
of the local limited partnerships due to the length of time since
the local limited partnerships were created and the lack of
individuals associated with that process available for consultation.
The Partnerships presume that both the general partner and the
Partnerships were highly involved in the negotiation of local
limited partnership provisions. Those negotiations ultimately
resulted in the general partner having more substantial rights and
obligations under the local limited partnership agreements.
The Partnerships concluded, based on their qualitative consideration
of the factors in paragraph 17 of FIN 46R as noted above, that the
general partners are the party in the related party group that are
most closely associated with, and therefore are the primary
beneficiary of, the respective local limited partnerships.
Accordingly, the Partnerships are not the primary beneficiary of any
of the local limited partnerships identified as VIE's and are not
required to consolidate any of the local limited partnerships.
* * * * *
As requested by the Staff, the Partnership acknowledges that: (a) the
Partnerships are responsible for the adequacy and accuracy of the disclosure
in its filings; (b) Staff comments or changes to disclosure in response to
Staff comments do not foreclose the Commission from taking any action with
respect to the filings; and (c) the Partnerships may not assert Staff comments
as a defense in any proceeding initiated by the Commission or any person under
the federal securities laws of the United States.
If you have further questions regarding the information provided, please
contact the undersigned or Stephen Waters. Mr. Waters can be reached directly
at (864) 239-1554 or by fax at (864) 239-5824.
Sincerely,
/s/ David R. Robertson
David R. Robertson
President and Chief Executive Officer
National Partnership Investments Corp.,
the corporate general partner of Real
Estate Associates Limited/CA, III, IV, V
and VII
cc: Stephen B. Waters