April 22, 2005
Dear Limited Partner:
Attached are the unaudited consolidated financial statements of Qualified
Housing Partners Limited Partnership ("QHP") and the twenty-seven
underlying operating partnerships as of December 31, 2004. These
statements are different from those that you have received in the past in
that they are unaudited. As discussed in the third-quarter statement,
QHP's auditor, Dixon Hughes, PLLC, resigned on November 17, 2004.
Although we have been actively searching for a replacement auditor, our
efforts thus far have been unsuccessful. It is important to note that
there were no disagreements between QHP and Dixon Hughes over any matters
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure. Dixon Hughes did not resign as tax preparer;
it prepared the 2004 tax return for QHP.
Because the reporting requirements of the Securities and Exchange
Commission ("SEC") have become more time consuming and expensive since the
enactment of the Sarbanes-Oxley Act of 2002, QHP has applied for exemptive
relief. If granted, QHP will no longer be required to file quarterly or
annual reports with the SEC. Even if relief is not granted, QHP will seek
to deregister if the number of investors falls below 300. If the SEC
approves, reporting requirements will no longer apply. As of December 31,
2004, QHP had 321 holders of limited partnership interests. Previously,
324 limited partners divested their interests as explained in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations". Divestitures are still occurring in 2005. Even if QHP is
not required to comply with SEC reporting requirements, it will continue
to furnish annual unaudited financial statements to the limited partners.
The general partners believe that such statements meet the reasonable
needs of the limited partners.
Your K-1 for tax reporting was previously sent to you under separate
cover. If you have any questions or we can be of any assistance to you,
please contact Ramona Logan of our Asset Management Department.
Qualified Housing Partners Limited Partnership
/s/ George F. Marshall
George F. Marshall
General Partner
/s/ Jenny C. Petri
Jenny C. Petri, Vice President
Frederick Investment Corporation, Corporate General Partner
Qualified Housing Partners
4700 Homewood Court, Suite 220
Raleigh, North Carolina 27609
(919) 787-4243
SUMMARY OF PARTNERSHIP INVESTMENTS
Total
Type Occupancy
Acquisition
of at
Description Location # Units Cost
Subsidy 12/31/04
Baldwyn Estates Baldwyn, MS 24 $ 877,380
USDA-RD 88%
Bloomfield Senior Apartments Bloomfield, MS 24 857,287
USDA-RD 100%
Booneville Manor Booneville, MS 24 861,843
USDA-RD 88%
Cape Fear Apartments Lillington, NC 24 1,016,932
USDA-RD 92%
Carthage Heights II Carthage, TX 40 1,131,195
USDA-RD 98%
Cedar Creek Apartments, Phase II Middletown, VA 42 1,804,154
USDA-RD 93%
Dimmitt Senior Citizens Housing Dimmitt, TX 24 748,689
USDA-RD 63%
Fayette Acres McAlisterville, PA 10 497,130
USDA-RD 100%
Forest Oaks Apartments Albemarle, NC 32 1,511,920
USDA-RD 100%
Gainesville Gardens Gainesville, TX 40 1,104,265
USDA-RD 75%
Glen Cove Apartments Dumas, AR 20 739,967
USDA-RD 75%
Holly Estates Holly Springs, MS 24 954,947
USDA-RD 100%
Litton Apartments Nashville, TN 162 6,177,010
HUD 78%
Mountain View Villas Mountain View, AR 27 1,098,968
USDA-RD 89%
Myrtle Grove Myrtle, MS 24 971,648
USDA-RD 92%
North Street Manor Mifflintown, PA 30 1,510,791
USDA-RD 100%
Northwood Apartments Irvine, KY 24 972,314
USDA-RD 100%
Parkland Apartments Eden, NC 40 1,731,922
USDA-RD 95%
Rayne Villas Rayne, LA 32 1,327,135
USDA-RD 100%
Royal Hills, Phase II Front Royal, VA 42 1,792,813
USDA-RD 100%
Silverleaf Apartments Haskell, OK 24 756,331
USDA-RD 83%
Southgate Apartments Reidsville, NC 32 1,368,146
USDA-RD 97%
Timber Ridge Apartments Rockingham, NC 32 1,496,399
USDA-RD 97%
Tschudi Court Amory, MS 48 1,757,150
USDA-RD 90%
Tuscarora Acres Port Royal, PA 17 840,226
USDA-RD 88%
Village Green Apartments Decatur, IN 30 1,108,658
USDA-RD 97%
Woodstock Village, Phase II Woodstock, VA 42 1,829,220
USDA-RD 98%
*USDA-RD is the United States Department of Agriculture -- Rural Development
(formerly
known as FmHA).
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(Unaudited)
2004 2003
ASSETS
RENTAL PROPERTIES
Land $ 1,326,402 $ 1,326,402
Buildings 34,810,549 34,757,798
Furniture and fixtures 2,381,095 2,352,006
38,518,046 38,436,206
Accumulated depreciation (14,379,679) (13,484,052)
24,138,367 24,952,154
CASH 308,132 305,114
OTHER ASSETS 1,984,635 1,887,743
$ 26,431,134 $ 27,145,011
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES APPLICABLE TO RENTAL PROPERTIES $ 23,969,709 $ 24,070,613
OTHER LIABILITIES 1,401,323 1,325,332
TOTAL LIABILITIES 25,371,032 25,395,945
MINORITY INTERESTS IN SUBSIDIARY
OPERATING PARTNERSHIPS 1,688,984 1,698,076
PARTNERS' CAPITAL (628,882) 50,990
$ 26,431,134 $ 27,145,011
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME AND EXPENSES
Years Ended December 31, 2004, 2003 and 2002
(Unaudited)
2004 2003 2002
RENTAL INCOME $ 4,004,038 $ 4,122,924 $ 3,958,881
RENTAL EXPENSES
Interest 539,721 568,067 624,189
Depreciation 904,328 896,558 875,977
Repairs and maintenance 1,185,990 1,106,730 1,063,844
Utilities 372,964 361,469 386,878
Real estate taxes 369,963 378,000 370,143
Management fees 495,393 469,008 428,651
Other 692,250 635,821 578,731
4,560,609 4,415,653 4,328,413
LOSS FROM RENTAL ACTIVITIES (556,571) (292,729) (369,532)
OTHER INCOME (EXPENSES)
Interest income 59 71 271
Management fees (84,562) (29,000) (84,562)
Administrative costs (44,419) (45,660) (34,735)
LOSS BEFORE DEDUCTING MINORITY
INTERESTS IN LOSSES OF
SUBSIDIARY OPERATING PARTNERSHIPS (685,493) (367,318) (488,558)
MINORITY INTERESTS IN LOSSES OF
SUBSIDIARY OPERATING PARTNERSHIPS 5,621 2,957 3,732
NET LOSS $ (679,872) $ (364,361) $ (484,826)
NET LOSS ALLOCATED TO GENERAL PARTNERS $ (6,799) $ (3,644) $ (4,848)
NET LOSS ALLOCATED TO LIMITED PARTNERS (673,073) (360,717) (479,978)
NET LOSS $ (679,872) $ (364,361) $ (484,826)
NET LOSS PER LIMITED PARTNERSHIP UNIT $ (77.61) $ (41.59) $ (55.34)
AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 8,673 8,673 8,673
See accompanying notes.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
Years Ended December 31, 2004, 2003, and 2002
(Unaudited)
General Limited
Partners Partners Total
PARTNERS' CAPITAL, January 1, 2002 $ (66,634) $ 966,811 $ 900,177
Net Loss (4,848) (479,978) (484,826)
PARTNERS' CAPITAL, December 31, 2002 (71,482) 486,833 415,351
Net Loss (3,644) (360,717) (364,361)
PARTNERS' CAPITAL, December 31, 2003 (75,126) 126,116 50,990
Net Loss (6,799) (673,073) (679,872)
PARTNERS' CAPITAL, December 31, 2004 $ (81,925) $ (546,957) $(628,882)
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003, and 2002
(Unaudited)
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(679,872) (364,361) $(484,826)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation 904,328 896,558 875,977
Minority interests in losses of
subsidiary operating partnerships (5,621) (2,957) (3,732)
Change in assets and liabilities
(Increase) decrease in other assets (96,892) 318,361 95,195
Increase in other liabilities 75,991 64,849 49,204
NET CASH PROVIDED BY
OPERATING ACITIVITIES 197,934 912,450 531,818
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of rental properties (90,540) (310,904) (187,149)
NET CASH USED BY INVESTING ACTIVITIES (90,540) (310,904) (187,149)
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash contribution from minority
investors - - -
Net cash distribution to minority
investors (3,471) (438) (412)
Proceeds from long-term borrowing - - -
Principal payments on long-term
borrowings (100,905) (507,520) (460,147)
NET CASH USED BY FINANCING ACTIVITIES (104,376) (507,958) (460,559)
NET INCREASE (DECREASE) IN CASH 3,018 93,588 (115,890)
CASH, BEGINNING 305,114 211,526 327,416
CASH, ENDING $308,132 $305,114 $211,526
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for interest $542,118 $573,717 $624,576
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2003 and 2002
Note A - Organization
Qualified Housing Partners Limited Partnership ("QHP" or the "Partnership")
was formed under the laws of the State of North Carolina on December 22,
1987. One unit of limited partnership interest (a "Unit") was issued for
$1,000 to the original Limited Partner and $1,000 was contributed for the
General Partners' continuing interest. The Partnership commenced operations
in 1988.
The Partnership was formed for the purpose of investing in multi-family
rental housing properties qualifying for the Low Income Housing Tax Credit
and, in certain circumstances, the Rehabilitation Tax Credit, which tax
credits may be applied against the federal income tax liabilities of the
Partnership's partners. The Partnership's investment is in the form of
limited partnership interests in limited partnerships (the "Subsidiary
Operating Partnerships") which own the rental properties. Frederick
Investment Corporation, a North Carolina corporation (the "Managing General
Partner"), and George F. Marshall are the general partners (the "General
Partners") of the Partnership.
Subsidiary Operating Partnerships, which receive either rental assistance or
mortgage subsidies from governmental agencies, are subject to regulations
restricting their ability to distribute significant cash flow to the
Partnership. Therefore, it is not anticipated that the Operating
Partnerships will distribute significant amounts of cash to the Partnership.
The Partnership is generally entitled to between 75% and 98.99% of the
distributable cash flow of the Operating Partnerships in which it invests.
The Partnership Agreement provides that profits, losses and tax credits of
the Partnership generally will be allocated 99% to the Limited Partners and
1% to the General Partners. A complete description of the provisions of the
Partnership Agreement governing allocations of profits, losses, tax credits,
cash flows and other items to the partners is included in the public offering
prospectus dated May 20, 1988, the supplements thereto dated October 18, 1988
and December 23, 1988, and the amendment thereto dated August 25, 1989.
As more fully discussed in Note C, the Partnership acquired interests in
twenty-seven Operating Partnerships during 1988 and 1989. No additional
Operating Partnership interests were acquired subsequent to 1989.
Note B - Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The Partnership owns 98.99% limited partnership interests in twenty-six
Subsidiary Operating Partnerships and a 94.99% limited partnership interest
in one Subsidiary Operating Partnership. The consolidated financial
statements include the accounts of Qualified Housing Partners Limited
Partnership and those twenty-seven majority-owned Subsidiary Partnerships.
The Partnership's minority interests on the consolidated balance sheets
includes the minority owned interests related to its twenty-seven
subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation.
RENTAL PROPERTIES
Rental properties are recorded at their respective costs to the Partnership,
which costs include certain fees paid to an outside party for consulting with
the Managing General Partner in its selection of the Partnership's
investments in Subsidiary Operating Partnerships. Depreciation is determined
by the straight-line method over the estimated useful lives of the rental
properties. Estimated useful lives are 25 to 50 years for buildings and 10
to 12 years for furniture and fixtures. The costs of major improvements are
capitalized while the costs of ordinary maintenance and repairs are charged
to expense as incurred. When properties are sold or retired, their costs and
the related accumulated depreciation will be removed from the accounts and
the gain or loss reflected in income. The Partnership periodically reviews
long-lived assets for impairment, when indicators of impairment exist, and an
impairment loss will be recognized if the value of assets is impaired.
REVENUE RECOGNITION
Revenues from rents are recognized for residential units as they accrue.
Advance receipts of rental income will be deferred until earned. All leases
between the operating partnerships and tenants are operating leases.
INCOME TAXES
No provision has been made for federal or state income taxes because income,
gains, losses and credits of the Partnership are reportable by the partners
under the partnership form of organization.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified by
the Company after May 31, 2003, and is effective at the beginning of the first
interim period beginning after June 15, 2003. However, the FASB has deferred
indefinitely the classification and measurement provisions as they related to
certain mandatory redeemable noncontrolling interests. The adoption of
Statement 150 did not have a material impact on the consolidated financial
statements.
OTHER ASSETS
Other assets at December 31, 2004 and 2003 consist
of the following: 2004 2003
Accounts receivable $ 119,228 $ 137,020
Prepayments and deferred charges 116,733 115,967
Restricted cash consisting principally of
reserves, tenant deposits and certain
escrow balances of Operating Partnerships 1,748,674 1,634,756
$ 1,984,635 $ 1,887,743
NET LOSS PER LIMITED PARTNERSHIP UNIT
Net loss per Limited Partnership Unit is based upon the net loss allocated to
the limited partners and is computed using the weighted average number of
Units outstanding of 8,673 Units.
USE OF ESTIMATES
Management has made estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of income and expenses during the reporting period. Actual results could
differ from those estimates.
Note C - Operating Partnerships
Commencing on the date of the initial closing of the public offering, the
Partnership began acquiring majority ownership interests in Subsidiary
Operating Partnerships in transactions accounted for as purchases. The
Partnership completed the acquisition of the 27 Subsidiary Operating
Partnerships in August 1989. Since the acquisitions occurred either during
or within a short period after the completion of the development or
rehabilitation phase of each Subsidiary Operating Partnership, the fair
values of net assets of the Subsidiary Operating Partnerships approximated
historical costs. The Subsidiary Operating Partnerships generally allocate
98.99% of income or loss and tax credits, and from 75% to 98.99% of
distributable cash to the Partnership.
Note D - Liabilities Applicable to Rental Properties
Liabilities applicable to rental properties consist of the following at
December 31, 2004 and 2003;
2004 2003
Rural Development financed mortgage loans to
Subsidiary Operating Partnerships collateralized
by deeds of trust on the rental properties and
assignments of all rents, profits and income of
the respective Subsidiary Operating Partnerships.
Loans are payable in various monthly amounts which
include interest at stated rates of 8.5% and 9.5%.
The effective rate of interest on each mortgage
loan is reduced by interest subsidies to 1% as
long as the respective Subsidiary Operating
Partnership remains in compliance with the
provisions of the mortgage loan agreement $23,969,709 $24,070,613
The estimated future maturities of mortgage loan obligations as of December
31, 2004 are as follows:
2005 $ 112,017
2006 122,501
2007 134,217
2008 146,993
2009 160,892
Thereafter 23,293,089
$ 23,969,709
Note E - Fair Value of Financial Instruments
The carrying amounts reflected in the consolidated balance sheets for cash
and restricted cash approximate their respective fair values because of the
short maturities of these instruments. Management believes it is not
practicable to estimate the fair value of liabilities applicable to rental
properties, which consist primarily of Rural Development financed mortgage
loans, because programs with similar characteristics are not currently
available.
Note F - Related Party Transactions
The accompanying consolidated financial statements reflect transactions
between the Partnership and its General Partners or their affiliates and
between the various Subsidiary Operating Partnerships and their general
partners. Frederick Investment Corporation, the Managing General Partner of
QHP, is a general or special limited partner in each of the Subsidiary
Operating Partnerships. Each Subsidiary Operating Partnership also has one
or more other general partners (the "Local General Partners"). Following is
a summary of related party transactions for 2004, 2003 and 2002:
QHP General General Partners of
Partners Operating Partnerships
or Affiliates or Affiliates
2004
ITEMS PAID OR PAYABLE BY QHP
Management Fees $ 84,562 $ --
Reimbursable Operating Expenses 27,164 --
ITEMS PAID OR PAYABLE BY
SUBSIDIARY PARTNERSHIPS
Property Management/Service Fees -- $ 456,835
$ 111,726 $ 456,835
PAYABLE BALANCES AT DECEMBER 31
By QHP $ 408,636 --
By Subsidiary Partnerships -- $ 339,127
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
2003
ITEMS PAID OR PAYABLE BY QHP
Management Fees $ 29,000 $ --
Reimbursable Operating Expenses 28,097 --
ITEMS PAID OR PAYABLE BY
SUBSIDIARY PARTNERSHIPS
Property Management/Service Fees -- $ 434,004
$ 57,097 $ 434,004
PAYABLE BALANCES AT DECEMBER 31
By QHP $ 340,146 --
By Subsidiary Partnerships -- $ 329,711
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
2002
ITEMS PAID OR PAYABLE BY QHP
Management Fees $ 84,562 $ --
Reimbursable Operating Expenses 21,685 --
ITEMS PAID OR PAYABLE BY
SUBSIDIARY PARTNERSHIPS
Property Management/Service Fees -- $ 391,161
$ 106,247 $ 391,161
PAYABLE BALANCES AT DECEMBER 31
By QHP $ 337,756 --
By Subsidiary Partnerships -- $ 325,886
The Partnership pays annual management fees to a related party for services
performed. The annual management fee under the Partnership Management fee
agreement is $84,562. Payment of the management fee in any given year is
contingent upon QHP's cash flow, which is derived from the annual cash flow
of the properties and any future sale of those properties. Unpaid fees
continue to accrue until cash is available for payment. The 2003
consolidated financial statements only expensed that portion of the 2003
annual management fee that was actually paid.
Most of the rental properties were constructed or rehabilitated by the
respective Local General Partner(s) or affiliated entities. Pursuant to the
operating partnership agreements, the Local General Partner must lend the
Subsidiary Operating Partnership funds sufficient to establish a working
capital reserve equal to 2% of the project's development costs and such
additional operating loans as needed. At December 31, 2004, 2003, and 2002
such loans in the amount of $299,717, $295,233 and $295,433 respectively,
were included in Other Liabilities.
QHP's tax credits have been exhausted, and most investors have no remaining
tax benefits. In November, the general partners offered an exit strategy,
whereby many investors could divest and obtain a one-time tax benefit. As of
December 31, 2004, 324 investors owning 4,468 units have assigned their
interest to one of the general partners.
Note G - Income Taxes
The Managing General Partner believes the Partnership is a partnership for
federal income tax purposes. Accordingly, no provision has been made for
federal or state income taxes because income, gains, deductions, losses and
credits of the Partnership are reportable by the partners under the
partnership form of organization. The following is a reconciliation of loss
before deducting minority interest in Subsidiary Operating Partnerships for
financial reporting purposes to loss allocated to QHP's limited partners for
federal income tax purposes:
2004 2003 2002
Loss Before Deducting Minority Interest
In Subsidiary Partnerships $ 685,493 $ 367,318 $ 488,558
Excess of Depreciation for Federal Income
Tax Purposes over Depreciation for
Financial Reporting Purposes 475,659 520,272 473,438
Other Differences (92,541) (23,209) (80,159)
Combined Losses for Federal Income Tax
Purposes of QHP and its Subsidiary
Partnerships 1,068,611 864,381 881,837
Loss Allocated to the General Partners of
QHP and its Subsidiary Partnerships, Net (21,513) (16,541) (16,446)
Loss Allocated to QHP's Limited Partners
For Federal Income Tax Purposes $1,047,098 $ 847,840 $ 865,391
At December 31, 2004 and 2003, the Partnership's reported net assets exceeded
their tax base by approximately $7,200,000 and $6,800,000, respectively.
Note H - Selected Quarterly Financial Data
(Unaudited)
2004
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Rental Income $ 957,092 $1,018,454 $ 978,151 $1,050,341
Loss From Rental Activities (119,756) (171,166) (147,351) (118,298)
Net Loss (138,617) (193,887) (151,716) (195,652)
Net Loss per Limited Partnership
Unit (15.82) (22.13) (17.32) (22.33)
2003
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Rental Income $1,028,514 $1,056,493 $1,039,605 $ 998,312
Loss From Rental Activities (64,057) (97,167) (58,625) (72,881)
Net Loss (105,804) (123,752) (87,893) (46,912)
Net Loss per Limited Partnership
Unit (12.08) (14.13) (10.03) (5.35)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selected Consolidated Financial Data
At December 31, 2004, 2003, 2002, 2001 and 2000 and for the years then ended:
CONSOLIDATED FINANCIAL CONDITION
2004 2003 2002
2001 2000
Total assets $26,431,134 $27,145,011 $27,955,438
$28,855,351 $29,432,085
Total liabilities $25,371,032 $25,395,945 $25,838,616
$26,249,559 $26,286,077
Partner's capital
General Partners $ (81,925) $ (75,126) $ (71,482) $
(66,634) $ (61,774)
Limited Partners $ (546,957) $ 126,116 $ 486,833 $
966,811 $ 1,447,971
CONSOLIDATED RESULTS OF OPERATIONS
Rental income $ 4,004,038 $ 4,122,924 $ 3,958,881 $
3,899,681 $ 3,849,364
Rental expense 4,560,609 4,415,653 4,328,413
4,271,165 4,044,435
Loss from rental activities (556,571) (292,729) (369,532)
(371,484) (195,071)
Interest income 59 71 271
493 374
Other expenses (128,981) (74,660) (119,297)
(118,781) (122,520)
Minority interests in losses
of Subsidiary Operating
Partnerships 5,621 2,957 3,732
3,752 1,970
NET LOSS $ (679,872) $ (364,361) $ (484,826) $
(486,020) $ (315,247)
NET LOSS PER LIMITED
PARTNERSHIP UNIT $ (77.61) $ (41.59) $ (55.34) $
(55.48) $ (35.98)
Liquidity and Capital Resources
Net of the Subsidiary Operating Partnerships, QHP held approximately $19,200
in cash and liquid investments at December 31, 2004. These assets will be
held as working capital. The only source of cash for QHP is annual cash
distributions from the Subsidiary Operating Partnerships. Anticipated
receipts for 2005 total approximately $58,000. Administrative expenses of
QHP other than the Partnership Management Fee are expected to total $40,000
in 2005. The annual Partnership Management Fee equals $84,562. The General
Partners, or one of their affiliates, will either defer a portion of their
Partnership Management Fee or advance the Partnership sufficient funds to
cover the shortfall in 2005. If advanced, interest will accrue at the prime
rate charged from time to time at Wachovia Bank. The loan plus interest will
be repayable within one year of the advance. In previous years, the General
Partners have deferred a portion of their fees. The balance owed as of
December 31, 2004 is $406,794.
Of the 27 Operating Partnerships, 16 distributed cash to QHP during 2004
totaling approximately $74,000. QHP utilized its working capital to pay
$13,000 of the Partnership Management Fee and to pay all other expenses of
the Partnership.
Results of Operations
Income for 2004 is down slightly, approximately 3%, from 2003 primarily as a
result of a rent decrease at the largest property in QHP's portfolio. This
property's rental assistance contract with the Department of Housing and
Urban Development ("HUD") expired December 31, 2003. HUD required that the
new rents be limited to market comparables which resulted in a decrease. As
the remaining 26 properties are subsidized under a different governmental
program, they should not experience a reduction in gross rents.
Maintenance expenditures continue to rise as the properties age. In
addition, renovations were made at one property to make it handicap
accessible. Other Expenses continue to increase primarily as a result of
increases in insurance premiums. Other variances were a result of normal
business fluctuations.
Occupancy of the 934 apartment units at December 31, 2004, increased from a
total of 831 units on December 31, 2003 to 841 units one year later. The
weighted average occupancy rate as of December 31, 2004 was approximately
90%. At December 31, 2004, and December 31, 2003, nine (9) properties had
average occupancies of less than 90%.
Although there was a slight improvement in 2004, the 24-unit property located
in Dimmitt, Texas, representing 2.5% of QHP's assets, continues to have
vacancy problems as a result of a diminishing market. As of December 31,
2004, 15 units were occupied (63%), as compared to only 12 at December 31,
2003 (50%). While the property did make a payment of $2,400 toward its 2004
property tax liability, it still owes property taxes for 2003 and the
remaining balance for 2004.
Related Party Transactions
Details of related party transactions can be found in Note F to the
consolidated financial statements.
Tax Credit
One of the Partnership's primary investment objectives has been to generate
tax benefits through Low Income Housing Tax Credits. The Tax Credits were
available over a ten-year period beginning in the year the properties were
placed in service, or at the option of QHP, one year later. The ten-year
credit period for all 27 properties expired by early 2000. However, pursuant
to IRS Code Section 42, a small number of apartment units are generating tax
credits over a fifteen-year period rather than ten years. This will produce
an insignificant amount of tax credits through 2004.
Future Outlook
It is unlikely that the properties owned by the Subsidiary Operating
Partnerships will be sold in the foreseeable future. Although the ten-year
tax credit period has expired, the Subsidiary Operating Partnerships are
required to maintain the properties as tax credit qualified rentals for 15
years (the "Compliance Period"). Future sale of one or all of the 27
properties relies on factors such as the economy, local real estate market
conditions and tax laws. No market exists for these properties at this time.
Divestiture
In November, 2003, the general partners offered an exit strategy whereby many
investors could divest and receive a one-time tax benefit. Investors
electing that strategy assign their interest to the general partner, and, by
doing so, will (a) receive a one-time Federal tax benefit of up to 34% of the
investment plus any state tax savings, (b) still receive cash distributions
(if any) until December 31, 2018, and (c) stop future reporting of QHP
results in their tax returns. As of the date of this report, 325 investors
owning 4,478 units had elected divestiture. Those investors who divested in
2004, received their additional tax benefit on their 2004 tax return and will
receive no further mailings from the Partnership unless there are cash
distributions. Those who are divesting in 2005 will continue to receive QHP
mailings through the remainder of the year and will receive their final K-1
in March 2006. If you are interested in divesting, contact Ramona Logan at
either (919) 787-4243 or investor_svcs@hotmail.com.
Critical Accounting Policies
A critical accounting policy is one that is both very important to the
portrayal of the Partnership's financial condition and results, and requires
management's most difficult, subjective or complex judgments. What makes
these judgments difficult, subjective and/or complex is the need to make
estimates about the effects of matters that are inherently uncertain. QHP
has no critical accounting policies.
Forward-Looking Information
This Annual Report to partners contains certain forward-looking statements
consisting of estimates and assumptions with respect to cash distributions
from the Subsidiary Operating Partnerships, administrative and other expenses
and other business of QHP that are subject to various factors which could
cause actual results to differ materially from these estimates and
assumptions. Factors which could influence these estimates and assumptions
primarily include changes in the multi-family rental housing market in the
local markets in which the Subsidiary Operating Partnerships operate.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities. This interpretation addresses
the consolidation by business enterprises of variable interest entities as
defined in the interpretation. In December 2003, the FASB issued a revision
to FIN 46 (FIN 46R) to clarify some of the provisions of FIN 46 and to exempt
certain entities from its requirements. Public entities, other than small
business issuers, must apply FIN 46R no later than the end of the first
reporting period ending after March 15, 2004. FIN 46 is effective for public
entities that have interests in structures that are commonly referred to as
special-purpose entities for periods ending after December 15, 2003.
Adoption of FIN 46R is not expected to have a material impact on the
consolidated financial statements.
Form 10-K
The Partnership has not filed its annual report for 2004 on Form 10-K with
the Securities and Exchange Commission ("SEC"). On March 25, 2005, QHP
applied to the SEC for exemptive relief from its reporting requirements. As
of the date of this report, QHP has not received a response from the SEC.
General Partners
George F. Marshall
Frederick Investment Corporation
- George F. Marshall, President
- Jenny C. Petri, Vice President
Directors: George F. Marshall
Jenny C. Petri
Hoyt S. Bradshaw, Jr.