SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2)) [ ] Definitive Proxy Statement [ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
..............................REAL-EQUITY PARTNERS.............................
(Name of registrant as specified in its charter)
...............................................................................
(Name of person(s) filing proxy statement if other than the registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
. . . . .Units of Limited Partnership Interest...................
2) Aggregate number of securities to which transaction applies:
. . . . .30,000 Units............................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined): . .
. . .$552....................................................
4) Proposed maximum aggregate value of transaction: . . . .
.$16,720,992.............................................
5) Total fee paid:
. . . . .$3,344..................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(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:
767376.6
REAL-EQUITY PARTNERS
9090 Wilshire Boulevard
Beverly Hills, California 90211
___________ __, 1998
To the Limited Partners:
National Partnership Investments Corp., the managing general partner
("NAPICO" or the "Managing General Partner") of REAL-Equity Partners (the
"Partnership" or "REP"), is writing to recommend, and seek your consent to, a
proposed sale of the five real estate properties owned by the Partnership (the
"Properties") to JH Real Estate Partners, Inc., a California corporation, and
American Apartment Communities III, L.P., a Delaware limited partnership
(collectively, the "Buyers"), neither of which are affiliated with the
Partnership or the Managing General Partner. The transactions by which the
Partnership proposes to sell the Properties to the Buyers is hereinafter
referred to as the "Sale." If the Sale is consummated, it will result in a
dissolution of the Partnership under the terms of the Partnership Agreement.
In evaluating the proposed Sale, the Limited Partners should note that:
o Based upon a purchase price for the Properties of $31,900,000 and
the assumption of certain indebtedness, it is anticipated that the
Partnership will make an aggregate distribution to Limited
Partners of approximately $16,553,782, or $552 per unit. The
distribution amount is anticipated to be sufficient to pay any
federal and state income taxes incurred in connection with the
Sale and Limited Partners may be able to utilize suspended passive
losses to offset their tax liabilities. In connection with the
Sale, the Partnership will pre-pay or assign its $14,443,323 of
mortgage indebtedness in connection with the Sale. The units were
sold at an original cost of $1,000 per unit.
o The Managing General Partner believes that now may be an opportune
time for the Partnership to sell the Properties.
o The terms of the Sale have been negotiated at arm's length.
o Robert A. Stanger & Co., Inc., a recognized independent investment
banking firm, has determined that, subject to the assumptions,
limitations and qualifications contained in its opinion, the
Purchase Price to be received by the Partnership for the
Properties in the Sale is fair from a financial point of view to
the Limited Partners.
o The Managing General Partner believes that selling the
Partnership's entire portfolio of real estate assets in a single
transaction (as opposed to a series of individual sales) will
enable the Partnership to reduce transaction expenses and dispose
of its portfolio in an expedited time frame.
There are certain risk factors that the Limited Partners should
consider in evaluating the proposed Sale, such as:
o As a result of the Sale, the Partnership will forego any potential
benefits of continuing to own the Properties.
o The Sale and liquidation of the Partnership will have a tax impact
on Limited Partners. For Limited Partners who have been able to
use all of the passive losses generated by the Partnership on a
current
767376.6
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basis, the Sale should result in a net cash distribution, after
payment of tax liabilities, of $384 per Unit in excess of the
federal and state income taxes that would be due in connection
with the Sale.
On July 29, 1998, the Partnership filed a preliminary consent
solicitation statement with the Securities and Exchange Commission regarding a
proposed sale of the Properties to an affiliate of the Managing General Partner
for a purchase price of $24,876,300, $10,432,977 of which was to be payable in
cash and $14,443,323 through the assumption of certain mortgage indebtedness.
On August 14, 1998, JH Real Estate Partners, Inc. of Anaheim,
California contacted the Partnership to express its interest in acquiring the
Properties. After satisfactorily demonstrating its ability to finance the
proposed transaction, JH Real Estate Partners commenced a due diligence review
of the Properties. As of September 25, 1998, the affiliate of the Managing
General Partners withdrew its offer of $24,876,300 and the Partnership entered
into a purchase and sale agreement with the Buyers that included a purchase
price of $31,900,000 and the assumption of certain indebtedness. The terms of
the Sale were determined in arm's-length negotiations between the Partnership
and the Buyers.
Under the terms of the Partnership's Amended and Restated Certificate
and Agreement of Limited Partnership, a copy of which was included as an exhibit
to the offering materials Limited Partners received in connection with their
investments in the Partnership, the Partnership is obligated to pay the Managing
General Partner a fee for services rendered to the Partnership in connection
with the selection, purchase, development and management of the Properties (the
"Deferred Acquisition Fee"). The Partnership Agreement provides that
distributions of the Deferred Acquisition Fee will cease upon the distribution
made with respect to the 15th year of the Partnership term, which the
Partnership Agreement states commenced September 9, 1981 with the filing of the
Partnership's Certificate and Agreement of Limited Partnership with the Recorder
of Los Angeles County, California. However, it is the position of the Managing
General Partner that the Partnership's term did not commence until the admission
of Limited Partners in connection with the Partnership's offering of Units
through E.F. Hutton and, as a result, remains due and payable. Although the
Managing General Partner believes that the Partnership is required to pay the
Deferred Acquisition Fee in connection with the Sale, it is seeking the consent
of the Limited Partners to the payment of such Fee. As of December 31, 1997, a
Deferred Acquisition Fee of $735,685 was due and payable to the Managing General
Partner. The payment of the Deferred Acquisition Fee will be paid out of the
proceeds of the Sale and will reduce the Limited Partners' distributions from
$576 to $552 per Unit. The Managing General Partner is requesting that Limited
Partners approve both the Sale and the payment of the Deferred Acquisition Fee.
Approval of the proposed Sale will be deemed to include approval of the Deferred
Acquisition Fee.
Consummation of the Sale is subject to the approval of a
majority-in-interest of the Limited Partners. If the Limited Partners do not
approve the Sale, the Partnership will most likely retain ownership of the
Properties.
We urge you to carefully read the enclosed Consent Solicitation
Statement in order to vote your interests. YOUR VOTE IS IMPORTANT. BECAUSE
APPROVAL REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING UNITS OF
LIMITED PARTNERSHIP INTEREST, FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A
VOTE AGAINST THE SALE. To be sure your vote is represented, please sign, date
and return the enclosed consent as promptly as possible.
The proposed Sale is fully described in the enclosed Consent
Solicitation Statement. Please read the enclosed materials carefully, then
return your signed consent form either by facsimile to 303-705-6171 or in the
enclosed envelope on or before ________ __, 1998.
767376.6
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If you have any questions, please do not hesitate to contact MacKenzie
Partners, the Partnership's consent solicitation agent, toll free at
800-322-2885 or collect at 212-929-5500.
Very truly yours,
National Partnership Investments Corp.
767376.6
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REAL-EQUITY PARTNERS
9090 Wilshire Boulevard
Beverly Hills, California 90211
________ __, 1998
CONSENT SOLICITATION STATEMENT
On the terms described in this Consent Solicitation Statement, National
Partnership Investments Corp. the managing general partner ("NAPICO" or the
"Managing General Partner"), of REAL-Equity Partners, a California limited
partnership (the "Partnership" or "REP"), is seeking the consent of the Limited
Partners of the Partnership to the sale of the five real estate properties owned
by Partnership (the "Properties") to JH Real Estate Partners, Inc., a California
corporation, and American Apartment Communities III, L.P., a Delaware limited
partnership (collectively, the "Buyers"), for a purchase price of $31,900,000
(the "Purchase Price"). The transaction by which the Partnership proposes to
sell the Properties to the Buyers is hereinafter referred to as the "Sale."
Each of the Properties is a conventional multi-unit residential
apartment complex. The mortgage on one of the Properties is insured by the
United States Department of Housing and Urban Development ("HUD") and during the
period for which the mortgage is so insured, its rents will be subject to
regulation by HUD.
It is anticipated that the Partnership will make a distribution to
Limited Partners of approximately $552 per unit of limited partnership interest
in the Partnership from the net proceeds of the Sale. If the Sale is
consummated, it will result in a dissolution of the Partnership under the terms
of the Partnership Agreement.
The Sale is conditioned upon approval of a majority in interest of the
Limited Partners of the Partnership. Under the Partnership Agreement and
California law, Limited Partners do not have dissenters' rights of appraisal. If
the Sale is approved by a majority-in-interest of the Limited Partners, all
Limited Partners, both those voting in favor of the Sale and those not voting in
favor, will be entitled to receive the resulting cash distributions.
The Managing General Partner has approved the Sale, has concluded that
the Sale, including the Purchase Price for the Properties, is fair to the
Limited Partners and recommends that the Limited Partners consent to the Sale.
National Partnership Investments Associates II, a California limited
partnership ("NPIA II"), is the non- managing General Partner of the
Partnership. Pursuant to an agreement between NAPICO and NPIA II, NAPICO is
responsible for the performance of any duties required to be performed by the
General Partners and has sole and final discretion to manage and control the
business of the Partnership and make all decisions relating thereto. NPIA II has
not participated in the management of the Partnership, or in decisions made by
the Partnership in connection with the proposed Sale. NPIA II has not taken a
position with respect to the Sale nor has it participated in the preparation of
this Consent Solicitation Statement.
This Consent Solicitation Statement and the accompanying form of
Consent of Limited Partner are first being mailed to Limited Partners on or
about ________ __, 1998.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THIS SOLICITATION OF CONSENTS EXPIRES
NO LATER THAN 11:59 P.M. EASTERN TIME
ON ________ __, 1998, UNLESS EXTENDED.
767376.6
TABLE OF CONTENTS
Page
I. SUMMARY OF CONSENT SOLICITATION STATEMENT..................................1
The Partnership.......................................................1
The Sale..............................................................1
Potential Benefits of the Sale........................................2
Potential Adverse Effects of the Sale.................................3
Limited Partner Approval..............................................3
Third-Party Opinion...................................................4
Recommendation of the Managing General Partner; Fairness..............4
Summary Financial Information.........................................5
Transaction Expenses..................................................6
Voting Procedures.....................................................6
II. THE SALE..................................................................6
Background and Reasons for the Sale...................................6
Acquisition Agreement.................................................7
Transaction Costs.....................................................8
Distribution of Sale Proceeds; Accounting Treatment...................8
Fairness Opinion......................................................9
Recommendation of the Managing General Partner; Fairness.............13
III. THE PARTNERSHIP.........................................................13
General..............................................................13
The Properties.......................................................14
Market for Partnership Interests and Related Security Holder Matters.16
Distribution History.................................................17
Year 2000 Information................................................18
IV. SELECTED FINANCIAL INFORMATION...........................................19
V. FEDERAL INCOME TAX CONSEQUENCES...........................................20
VI. LEGAL PROCEEDINGS .......................................................21
VII. LIMITED PARTNERS CONSENT PROCEDURE......................................22
Distribution of Solicitation Materials...............................22
Voting Procedures and Consents.......................................22
Completion Instructions..............................................23
Withdrawal and Change of Election Rights.............................23
No Dissenters' Rights of Appraisal...................................23
Solicitation of Consents.............................................24
VIII. IMPORTANT NOTE.........................................................24
767376.6
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ANNEXES
Annex A - Fairness Opinion of Robert A. Stanger & Co., Inc.
Annex B - The Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
Annex C - The Partnership's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
767376.6
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AVAILABLE INFORMATION
REAL-Equity Partners is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, consent solicitation statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, consent solicitation statements and other information filed with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices, Seven World Trade Center,
13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. In addition, the Commission
maintains a site on the World Wide Web portion of the Internet that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is http://www.sec.gov. Copies of the latest Annual Report on Form 10-K and
Quarterly Report on Form 10-Q may also be obtained from NAPICO without charge.
All requests should be made in writing to National Partnership Investments
Corp., 9090 Wilshire Boulevard, Suite 201, Beverly Hills, California 90211;
Attention: Investor Services; Telephone 800-666-6274.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Partnership
are incorporated by reference in this Consent Solicitation Statement:
Annual Report on Form 10-K of the Partnership for the fiscal year ended
December 31, 1997.
Quarterly Report on Form 10-Q of the Partnership for the quarter ended
June 30, 1998.
Current Report on Form 8-K of the Partnership dated March 9, 1998.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Consent
Solicitation Statement to the extent that a statement contained herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Consent Solicitation Statement.
No person is authorized to give any information or to make any
representation not contained in this Consent Solicitation Statement in
connection with the solicitation of proxies made hereby, and, if given or made,
any such information or representation should not be relied upon as having been
authorized by the Partnership or any other person. The delivery of this Consent
Solicitation Statement shall not, under any circumstances, create any
implication that there has been no change in the information set forth herein or
in the affairs of the Partnership since the date of this Consent Solicitation
Statement.
767376.6
I. SUMMARY OF CONSENT SOLICITATION STATEMENT
The following summary is intended to provide only highlights of the
materials contained in this Consent Solicitation Statement. This summary is not
intended to be a complete statement of all material features of the proposed
Sale and is qualified in its entirety by the more detailed information contained
herein. Cross references in the summary are to the indicated captions or
portions of this Consent Solicitation Statement.
The Partnership
REAL-Equity Partners is a California limited partnership, the general
partners of which are National Partnership Investments Corp. and National
Partnership Investments Associates II, a California limited partnership.
The Partnership holds title to five Properties. Each of the Properties
is a conventional multi-unit apartment complex. The mortgage on one of the
Properties is insured by HUD. During the period for which the mortgage is so
insured, its rents will be subject to regulation by HUD. Four of the Properties
are located in California and one is located in Nevada. See "THE PARTNERSHIP -
The Properties."
The Partnership maintains offices at 9090 Wilshire Boulevard, Beverly
Hills, California 90211 (310-278-2191). The Partnership was organized as a
California limited partnership on September 9, 1981. See "THE PARTNERSHIP."
The Sale
The Partnership proposes to sell the Properties to the Buyers for a
Purchase Price of $31,900,000. Under the terms of the Partnership Agreement, the
Sale will result in the dissolution of the Partnership. It is the intention of
the Managing General Partner to liquidate the Partnership in accordance with its
Amended and Restated Certificate and Agreement of Limited Partnership (the
"Partnership Agreement") following the consummation of the Sale.
Neither the Partnership nor the Managing General Partner is affiliated
with the Buyers. The address of JH Real Estate Partners, Inc. is 600 City
Parkway West, Suite 730, Orange, California 92862, Attention: Hugo F. Aviles,
714-712-9400. The address of American Apartment Communities III, Inc. is 21 W.
Broad Street, 11th Floor, Columbus, Ohio 43215, 614-220-8900.
The aggregate consideration for the Properties is $31,900,000, and the
assumption of the mortgage indebtedness encumbering the Arbor Glen Property. The
Sale will enable the Partnership to pre-pay or assign all of the $14,443,323 of
mortgage indebtedness encumbering the Properties. The net proceeds of the Sale
will be distributed to the Limited and General Partners in accordance with the
cash distribution provisions of the Partnership Agreement. See "THE
SALE--Distribution of Sale Proceeds" for a summary of the cash distribution
rules applicable to such distributions. Limited Partners are expected to receive
a distribution of approximately $552 in cash per unit. The units (the "Units"),
each of which represents one limited partnership interest, were originally sold
for $1,000 per Unit. All of the Partnership's expenses incurred in connection
with the Sale will be borne by the Partnership.
The distribution of $552 per Unit is anticipated to be sufficient to
pay the federal and state income taxes that would be due in connection with the
Sale, assuming that Limited Partners have suspended passive losses of $297 per
Unit from the Partnership that could be deducted in full against such Limited
Partners' ordinary income and assuming such Limited Partner has sufficient
taxable income taxed at federal tax rates of 39.6% on ordinary income and 25% on
long-term capital gain attributable to depreciation (and assuming an effective
5% state tax). For Limited Partners who do not have sufficient taxable income to
be taxed at a 39.6% marginal federal rate or who have other losses available to
deduct against their taxable income and therefore could not fully utilize such
suspended passive losses to offset their ordinary income, the Sale could result
in a lower net cash distribution. For Limited
767376.6
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Partners who have been able to use all of the passive losses generated by the
Partnership on a current basis, the Sale should result in a net cash
distribution of $516 per Unit after payment of their tax liability. Each Limited
Partner is urged to consult his, her or its own tax advisor for a more detailed
explanation of the specific tax consequences to such Limited Partner from the
Sale.
Under the terms of the Partnership Agreement, the Partnership is
obligated to pay the Managing General Partner a fee for services rendered to the
Partnership in connection with the selection, purchase, development and
management of the Properties (the "Deferred Acquisition Fee"). The Partnership
Agreement provides that distributions of the Deferred Acquisition Fee will cease
upon the distribution made with respect to the 15th year of the Partnership
term, which the Partnership Agreement states commenced September 9, 1981 with
the filing of the Partnership's Certificate and Agreement of Limited Partnership
with the Recorder of Los Angeles County, California. However, it is the position
of the Managing General Partner that the Partnership's term did not commence
until the admission of Limited Partners in connection with the Partnership's
offering of Units through E.F. Hutton and, as a result, remains due and payable.
Although the Managing General Partner believes that the Partnership is required
to pay the Deferred Acquisition Fee in connection with the Sale, it is seeking
the consent of the Limited Partners to the payment of such Fee. As of December
31, 1997, a Deferred Acquisition Fee of $735,685 was due and payable to the
Managing General Partner. The payment of the Deferred Acquisition Fee will be
paid out of the proceeds of the Sale and will reduce the Limited Partners'
distributions from $576 to $552 per Unit. The Managing General Partner requests
that Limited Partners approve both the Sale and the payment of the Deferred
Acquisition Fee. Approval of the proposed Sale will be deemed to include
approval of the Deferred Acquisition Fee. If approved, NAPICO and NPIA II, the
General Partners, will be entitled to receive distributions in connection with
the Sale of $910,252 in the aggregate.
The Sale, including payment of the Deferred Acquisition Fee to the
Managing General Partner, is conditioned upon approval of a majority-in-interest
of the Limited Partners of the Partnership.
Potential Benefits of the Sale
The Managing General Partner believes that the Sale achieves the
Partnership's investment objectives for the following reasons:
o Receipt of Cash. The Sale will result in a cash distribution of
$552 per Unit to Limited Partners, which amount is anticipated to
be sufficient to pay any federal and state income taxes that would
be payable in connection with the Sale, assuming (i) that Limited
Partners have suspended passive losses of $297 per Unit from the
Partnership; (ii) that such losses are available to offset
ordinary income taxed at the 39.6% marginal federal rate and (iii)
federal and state effective capital gains rates of 25% and 5%,
respectively. For a discussion of the bases of these assumptions,
see "FEDERAL INCOME TAX CONSEQUENCES." If the Sale is not
completed, there can be no assurance that the Partnership will be
able to make distributions at the current rate or that the
Partnership will be able to make any future distributions.
o Third Party Fairness Opinion. Robert A. Stanger & Co., Inc.
("Stanger"), an independent, nationally recognized real estate
investment banking firm, has been engaged by the Partnership to
render an opinion (the "Fairness Opinion") to the Partnership as
to the fairness, from a financial point of view, to Limited
Partners of the Purchase Price to be received by the Partnership
for the Properties in the Sale. Stanger has conducted certain
reviews described herein and has concluded, subject to the
assumptions, qualifications and limitations contained in its
opinion, that the Purchase Price to be received for the Properties
in the Sale is fair, from a financial point of view, to Limited
Partners. See "THE SALE-- Fairness Opinion."
o Eliminating the Risks of Real Estate Investing. Continued
ownership of the Properties subjects the Partnership to continued
risks inherent in real estate ownership, such as national and
local economic
767376.6
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trends, supply and demand factors in the local property market,
the cost of operating and maintaining the physical condition of
the Properties and the cost and availability of financing for
prospective buyers of the Properties. No assurance can be given
that a prospective buyer would be willing to pay an amount equal
to or greater than the Purchase Price for the Properties in the
future.
o Attractive Sale Terms. The Managing General Partner believes that
the Purchase Price for the Properties is fair to the Limited
Partners and, based on its experience in the real estate industry,
believes that it exceeds the price that the Partnership would be
likely to receive in a sale to a third party or parties.
o Reduced Transaction Costs. The Partnership will not be required to
pay brokerage commissions in connection with the Sale, which would
typically be paid when selling real property to third parties. As
a result, the Sale is likely to produce a higher cash distribution
to Limited Partners than a comparable sale to another unaffiliated
third party. In addition, the Managing General Partner believes
that selling the Partnership's portfolio of real estate assets in
a single transaction (as opposed to a series of individual sales)
will enable the Partnership to dispose of its portfolio in an
expedited time frame and provide additional transaction cost
savings, although the Partnership will pay certain expenses, such
as the costs of environmental inspections and costs relating to
proxy solicitation and fairness opinions which may be higher than
comparable expenses in a transaction with another unaffiliated
third party. See "THE SALE-- Transaction Costs" for a schedule of
the costs the Partnership is expected to incur in connection with
the Sale.
Potential Adverse Effects of the Sale
Limited Partners should also consider the following risk factors in
determining whether to approve or disapprove the Sale:
o Loss of Opportunity to Benefit from Future Events. It is possible
that the future performance of the Properties will improve or that
prospective buyers may be willing to pay more for the Properties
in the future. It is possible that Limited Partners might earn a
higher return on their investment if the Partnership retained
ownership of the Properties. By approving the Sale, Limited
Partners will also be foregoing certain current benefits of
ownership of the Properties, such as continuing distributions. See
"THE SALE -- Background and Reasons for the Sale."
o No Solicitation of Third Party Offers. The Managing General
Partner has not solicited offers from third parties to acquire the
Properties. There is no assurance that the Managing General
Partner would not be able to obtain higher or better offers for
the Properties if such offers were to be solicited from
independent third parties.
o Tax Consequences. The Sale will have a tax impact on Limited
Partners, producing a long-term capital gain of approximately $536
per Unit. In addition, the Sale will produce ordinary income
attributable to accelerated depreciation recapture of
approximately $16 per Unit. For Limited Partners who have been
able to use all of the passive losses generated by the Partnership
on a current basis, the Sale should result in a net cash
distribution of $384 per Unit after payment of their tax
liability. Limited Partners who have available all of the
suspended passive losses generated by the Partnership, but whose
ordinary income is not taxed at the 39.6% marginal federal rate,
may receive a lower net cash distribution made in connection with
the Sale. For a discussion of the tax impact of the Sale, and the
Partnership's assumptions and the bases therefor, see "FEDERAL
INCOME TAX CONSEQUENCES." THE SPECIFIC TAX IMPACT OF THE SALE ON
LIMITED PARTNERS SHOULD BE DETERMINED BY LIMITED PARTNERS IN
CONSULTATION WITH THEIR TAX ADVISORS.
767376.6
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o No Dissenter's Rights. Under the Partnership Agreement and
California law, Limited Partners do not have dissenters' rights of
appraisal.
Limited Partner Approval
The Managing General Partner is seeking the consent of the Limited
Partners to the Sale. If a majority-in-interest of the Limited Partners do not
approve the Sale, 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. The Partnership will bear the costs
of the consent solicitation process whether or not the Sale is approved or
ultimately consummated.
Third-Party Opinion
The Partnership has obtained from Stanger, a recognized independent
real estate investment banking firm, an opinion that the Purchase Price to be
received by the Partnership for the Properties in the Sale is fair to the
Limited Partners from a financial point of view. In the course of preparing its
Fairness Opinion, Stanger conducted such reviews as it deemed appropriate and
discussed its methodology, analysis and conclusions with the Managing General
Partner. The Fairness Opinion, which is subject to certain assumptions,
qualifications and limitations, is attached hereto as Exhibit A. Stanger has no
obligation to update the Fairness Opinion on the basis of subsequent events.
Stanger will be paid an aggregate fee by the Partnership of $55,500, plus $4,100
per Property, or an aggregate of approximately $76,000. No portion of Stanger's
fee is contingent upon consummation of the Sale. See "THE SALE-- Fairness
Opinion" and "--Potential Adverse Effects of the Sale--No Appraisals; Limits on
Fairness Opinion."
Recommendation of the Managing General Partner; Fairness
The Managing General Partner believes that the Sale is fair from a
financial point of view and in the best interests of the Limited Partners. In
addition, the Managing General Partner reviewed (but did not specifically adopt)
the Fairness Opinion. Accordingly, the Managing General Partner has approved the
Sale and recommends that it be approved by the Limited Partners.
767376.6
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Summary Financial Information
The following table sets forth selected historical financial and
operating data of the Partnership for the fiscal years ended December 31, 1997,
1996, 1995, 1994, 1993 and for the six months ended June 30, 1998. The following
information should be read in conjunction with the Partnership's Annual Report
on Form 10-K and Quarterly Report on Form 10-Q, which are attached hereto as
Annexes B and C, respectively.
The selected historical financial and operating data of the Partnership
for the six-month periods ended June 30, 1998 and June 30, 1997 are derived from
unaudited consolidated financial statements of the Partnership which, in the
opinion of the Managing General Partner, include all adjustments (consisting
only of normal recurring items unless otherwise disclosed) necessary for a fair
presentation of the Partnership's financial position and results of operations.
The results set forth for the six-month periods ended June 30, 1998 and June 30,
1997 are not necessarily indicative of results to be expected for a full year.
Year Ended December 31, Six Months Ended June 30,
-------------------------------------------------------------------- ----------------------------
1997 1996 1995 1994 1993 1998 1997
------------- ------------- ------------------------- ------------ ------------ --------------
Partnership
Operations
Interest Income $ $ $ $ $ $ $
105,777 89,711 49,476 37,710 12,779 28,185 75,391
Operating Expenses 355,249 158,460 185,584 226,208 353,825 156,240 131,802
------------- ------------- ------------------------- ------------ ------------ --------------
Income (Loss) from (249,472) (68,749) (136,108) (188,498) (341,046) (128,055) (56,411)
Partnership
Operations
------------- ------------- ------------------------- ------------ ------------ --------------
Rental Operations
Revenues 4,925,227 4,935,895 5,486,329 5,678,656 5,463,671 2,530,407 2,427,278
Expenses 4,921,727 4,942,160 5,675,071 6,514,923 5,402,010 4,177,214 2,491,664
------------- ------------- ------------------------- ------------
Income (Loss) from 3,500 (6,265) (188,742) (836,267) 61,661 (107,362) (64,386)
Rental
Operations
Gain on Foreclosure -- 259,088 -- -- -- -- --
of
Rental Property
Net Income (Loss) $ (245,972) $ 184,074 $ (324,850)$ (1,024,765) $ (279,385) $ (235,417) $ (120,797)
============= ============= ========================= ============ ============ ==============
Net Income (Loss)
allocated to
Limited Partners $(243,512) $ 182,234 $ (321,601)$ (1,014,517) $ (276,591) $ (233,063) $ (119,589)
============= ============= ========================= ============ ============ ==============
Net Income (Loss)
per Limited
Partnership
Interest $ (8) $ 6 $ (11) $ (34) $ (9) $ (8) $ (4)
============= ============= ========================= ============ ============ ==============
Total assets $ 20,791,123 $ 22,049,995 $ 26,365,792 $ 26,668,029 $ 27,182,103 $ 20,296,242 $ 21,281,493
============= ============= ========================= ============ ============ ==============
Mortgage Notes
Payable $ 14,443,323 $ 14,064,914 $17,747,363 $17,959,940 $15,517,461 $14,320,565 $ 14,562,880
============= ============= ========================= ============ ============ ==============
Cash Distribution
per Limited
Partnership
Interest $ 20.00 $ 10.00 $ -- $ 15.00 $ 10.00 $ 5.00 $ 10.00
============= ============= ========================= ============ ============ ==============
Partners' Equity $ 4,562,631 $ 6,309,459 $ 6,425,385 $ 6,750,235 $ 8,225,000 $ 4,177,214 $ 5,021,140
============= ============= ========================= ============ ============ ==============
Limited Partners'
Equity $ 6,184,431 $ 7,027,943 $ 7,145,709 $ 7,467,310 $ 8,931,827 $ 5,801,369 $ 6,608,354
============= ============= ========================= ============ ============ ==============
Limited Partners'
Equity per
Limited Partnership
Interest $ 206 $ 234 $ 238 $ 249 $ 298 $ 193 $ 220
============= ============= ========================= ============ ============ ==============
Transaction Expenses
The Partnership will bear its direct costs relating to the Sale,
including customary closing costs such as the seller's portion of title
insurance and escrow fees, and the costs incurred in connection with this
solicitation of consents. The aggregate amount of such costs is expected to be
approximately $247,000, which the Partnership expects to pay using cash
equivalents held by the Partnership. The transaction costs will be borne by the
Partnership as they are incurred, whether or not the Sale is approved by the
Limited Partners or ultimately consummated.
The Managing General Partner believes that, under the terms of the
Partnership Agreement, the Partnership is obligated to the Managing General
Partner for the Deferred Acquisition Fee for services rendered to the
Partnership in connection with the selection, purchase, development and
management of the Properties. As of December 31, 1997, $735,685 of the Deferred
Acquisition Fee was due and payable to the Managing General Partner, all of
which will be paid out of the proceeds of the Sale.
Voting Procedures
This Consent Solicitation Statement outlines the procedures to be
followed by Limited Partners in order to consent to the Sale. A form of Consent
of Limited Partner (a "Consent") is attached hereto. These procedures must be
strictly followed in order for the instructions of a Limited Partner as marked
on such Limited Partner's Consent to be effective. The following is a summary of
certain of these procedures:
1. A Limited Partner may make his or her election on the Consent only
during the solicitation period commencing upon the date of delivery of this
Consent Solicitation Statement and continuing until the earlier of (i)
___________, 1998 or such later date as may be determined by the Managing
General Partner and (ii) the date upon which the Managing General Partner
determines that a Majority Vote has been obtained (the "Solicitation Period").
2. Limited Partners are encouraged to return a properly completed and
executed Consent in the enclosed envelope prior to the expiration of the
Solicitation Period.
3. A Consent delivered by a Limited Partner may be changed prior to the
expiration of the Solicitation Period by delivering to the Partnership a
substitute Consent, properly completed and executed, together with a letter
indicating that the Limited Partner's prior Consent has been revoked.
4. The Sale and each of the proposed Amendment are being submitted to
the Limited Partners as separate resolutions. Limited Partners must approve the
proposed Sale and the proposed Amendment in order to allow consummation of the
Sale.
5. A Limited Partner submitting a signed but unmarked Consent will be
deemed to have voted FOR the Partnership's participation in the Sale.
II. THE SALE
Background and Reasons for the Sale
On July 29, 1998, the Partnership filed a preliminary consent
solicitation statement with the Securities and Exchange Commission regarding a
proposed sale of the Properties to an affiliate of the Managing General Partner
for a purchase price of $24,876,300, $10,432,977 of which was to be payable in
cash and $14,443,323 through the assumption of certain mortgage indebtedness.
767376.6
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On August 14, 1998, JH Real Estate Partners, Inc. of Anaheim,
California contacted the Partnership to express its interest in acquiring the
Properties. After satisfactorily demonstrating its ability to finance the
proposed transaction, JH Real Estate Partners commenced a due diligence review
of the Properties. As of September 25, 1998, the affiliate of the Managing
General Partners withdrew its offer of $24,876,300 and the Partnership entered
into a purchase and sale agreement with the Buyers that included a purchase
price of $31,900,000. The terms of the Sale were determined in arm's-length
negotiations between the Partnership and the Buyers. Consummation of the Sale is
subject to the approval of a majority-in-interest of the Limited Partners.
The Managing General Partner believes that it is in the best interests
of the Partnership to sell its interests in the Properties. Limited Partners
realized an aggregate of approximately $24.00 per Unit in current passive
activity rental losses for 1997. In addition, Limited Partners realized
approximately $4.29 per Unit in interest income for 1997.
Pursuant to the terms of the Partnership Agreement, the Sale will
result in the dissolution of the Partnership.
Acquisition Agreement
The Partnership has entered into a purchase and sale agreement with the
Buyers. The purchase and sale agreement sets forth the terms and conditions
under which the Partnership and the Buyers are obligated to proceed with the
Sale and sets forth certain other agreements of such parties with respect to the
Sale.
Consideration. The purchase and sale agreement provides for a purchase
price of $31,000,000 for the Properties.
Representations and Warranties. The Partnership has not made any
representations and warranties to the Buyers in the purchase and sale agreement
with respect to the Properties, and the Properties will be sold "as is." In
addition, the Buyers will assume certain mortgage indebtedness in connection
with the Sale.
Conditions. The purchase and sale agreement includes a number of
conditions to the Buyer's obligation to consummate the Sale, including the
receipt of any required third-party consents to the Sale and that no material
adverse change shall have occurred with respect to a Property.
Amendment and Closing. The Partnership and the Buyers may mutually
agree to amend the terms of the purchase and sale agreement in a manner which,
in the good faith judgment of the Managing General Partner (consistent with the
Managing General Partner's fiduciary duty to the Partnership and the Limited
Partners), does not materially reduce the benefits to be received by the Limited
Partners from the Sale without resoliciting the consent of the Limited Partners.
Approval of the proposed Sale by the Limited Partners will be deemed to include
authorization of the Managing General Partner to (i) execute on behalf of the
Partnership such amendments, instruments and documents as shall be necessary to
effectuate the Sale, and (ii) make modifications to the terms of the proposed
Sale that, in good faith determination of the managing General Partners, are in
the best interests of the Limited Partners. If the closing does not occur by
December 31, 1998 the purchase and sale agreement will be terminated.
767376.6
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Transaction Costs
The transaction costs incurred in connection with the Sale will be
borne by the Partnership as they are incurred, whether or not the Sale is
approved by the Limited Partners or ultimately consummated. The Managing General
Partner estimates that the transaction costs will be as follows:
Accounting .............................................. $ 50,000
Legal ................................................... 50,000
Escrow Costs (seller's portion).......................... 25,000
Title Policy (seller's portion).......................... 35,000
Stanger Fairness Opinion................................. 76,000
Consent Solicitation Costs............................... 6,000
Miscellaneous Costs...................................... 5,000
------------
Total.................................................... $ 247,000
========
The General Partners will receive a distribution of approximately
$174,567 for their interests in the Partnership in connection with the Sale,
plus $735,685 in consideration of the Deferred Acquisition Fee.
Distribution of Sale Proceeds; Accounting Treatment
Following the Sale it is anticipated that the Partnership's affairs
will be wound up and the Partnership will be liquidated. After the payment of
all liabilities and expenses, the consideration to be paid to the Partnership
for the Properties will be allocated and distributed among Limited and General
Partners in accordance with the cash distribution rules set forth in the
Partnership Agreement. Pursuant to the Partnership Agreement, net distribution
proceeds are distributable as follows:
o Proceeds from the liquidation of the partnership shall be
distributed first to creditors in the order of priority as
provided for by law, second to the setting up of such reserves as
the General Partners deem necessary, and third to the Limited and
General Partners as set forth below: (a) first to the General
Partners in an amount equal to any fees owed to the General
Partners under the Partnership Agreement that have not yet been
paid, including the Deferred Acquisition Fee; (b) next, 99% to the
Limited Partners and 1% to the General Partners until the Limited
Partners have received an amount equal to their adjusted capital
accounts plus an amount equal to a cumulative non-compounded
6%annual return on their aggregate adjusted capital accounts from
time to time (which annual return shall, with respect to each
Limited Partner, be calculated commencing with the fiscal quarter
after termination of the offering, and shall be reduced by any
cash distributions actually distributed to such Limited Partner or
predecessor in interest); and (c) the balance, if any, 85% to the
Limited Partners and 15% to the General Partners: provided, that
upon dissolution of the Partnership, such balance, if any, shall
be distributed to the Limited Partners and the General Partners in
proportion to their respective positive account balances.
Based on the distribution priority in the Partnership Agreement, and
assuming the net proceeds of the Sale are $16,720,992, the Limited Partners will
be entitled to receive $16,553,782 in cash ($552 per Unit). NAPICO and NPIA II
will be entitled to receive a distribution in connection with the Sale of
$174,567. In addition, the Partnership will pay, using available cash on hand,
approximately $736,000 to the Managing General Partner in connection with the
unpaid Deferred Acquisition Fee. The Deferred Acquisition Fee is for services
rendered to the Partnership in connection with the selection, purchase,
development and management of the Properties. The
767376.6
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Partnership will also distribute any cash reserves remaining after winding down
its operations and liquidating after the Sale. Such reserves are expected to be
insignificant.
Fairness Opinion
Stanger, an independent investment banking firm, was engaged by the
Managing General Partner to conduct an analysis and to render an opinion as to
whether the Purchase Price to be paid to the Partnership for the Properties in
the Sale is fair, from a financial point of view, to the Limited Partners. The
Managing General Partner selected Stanger because of its experience in providing
similar services to other parties in connection with real estate merger and sale
transactions and Stanger's experience and reputation in connection with real
estate partnerships and real estate assets. No other investment banking firm was
engaged to provide, or has provided, any report, analysis or opinion relating to
the fairness of the Sale.
Stanger has advised the Partnership that, subject to the assumptions,
limitations and qualifications contained in its Fairness Opinion, the Purchase
Price to be paid to the Partnership for the Properties in the proposed Sale is
fair, from a financial point of view, to the Limited Partners. The full text of
the Fairness Opinion, which contains a description of the matters considered and
the assumptions, limitations and qualifications made, is set forth as Exhibit A
hereto and should be read in its entirety. The summary set forth herein does not
purport to be a complete description of the review performed by Stanger in
rendering the Fairness Opinion. Arriving at a fairness opinion is a complex
process not necessarily susceptible to partial analysis or amenable to summary
description.
Except for certain assumptions described more fully below which the
Partnership advised Stanger that it would be reasonable to make, the Partnership
imposed no conditions or limitations on the scope of Stanger's investigation or
the methods and procedures to be followed in rendering the Fairness Opinion. See
"-- Fairness Opinion -- Assumptions, Limitations and Qualifications." The
Partnership has agreed to indemnify Stanger against certain liabilities arising
out of Stanger's engagement to prepare and deliver the Fairness Opinion.
Experience. Since its founding in 1978, Stanger and its affiliates have
provided information, research, investment banking and consulting services to
clients located throughout the United States, including major New York Stock
Exchange member firms, insurance companies and over 70 companies engaged in the
management and operation of partnerships and real estate investment trusts. The
investment banking activities of Stanger include financial advisory and fairness
opinion services, asset and securities valuations, industry and company research
and analysis, litigation support and expert witness services, and due diligence
investigations in connection with both publicly registered and privately placed
securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, reorganizations and for estate, tax, corporate and other
purposes. Stanger's valuation practice principally involves partnerships,
partnership securities and the assets typically held through partnerships, such
as real estate, oil and gas reserves, cable television systems and equipment
leasing assets. Stanger was selected because of its experience and reputation in
connection with real estate partnerships, real estate assets and mergers and
acquisitions.
Summary of Materials Considered. In the course of Stanger's analysis to
render its opinion, Stanger reviewed: (i) a draft of this Consent Solicitation
Statement in substantially the form which will be distributed to Limited
Partners; (ii) the Partnership's annual reports on Form 10-K for the years ended
December 31, 1995, 1996 and 1997 and the Partnership's quarterly report on Form
10-Q for the six-month period ended June 30, 1998, which reports the
Partnership's management has indicated to be the most current available
financial statements; (iii) descriptive information concerning the Properties
provided by management, including location, number of units and unit mix, age,
and amenities; (iv) summary historical operating statements for the Properties
for the years ended December 31, 1995, 1996 and 1997 and year-to-date through
September 1998; (v) operating budgets for the Properties for 1998, as prepared
by the Managing General Partner; (vi) information regarding market rental rates
and conditions for apartment properties in the general market area of the
Properties and other information relating
767376.6
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to acquisition criteria for apartment properties; (vii) the February 1998
Property appraisals; (viii) a schedule of projected capital expenditures and
deferred maintenance for the Properties as prepared by the Managing General
Partner; (ix) a draft of the purchase and sale agreement between the Partnership
and the Buyers in substantially final form; and (x) conducted other studies,
analysis and inquiries as Stanger deemed appropriate.
In addition, Stanger discussed with management of the Partnership and
the Managing General Partner the market conditions for apartment properties,
conditions in the market for sales/acquisitions of properties similar to those
owned by the Partnership, historical, current and projected operations and
performance of the Properties, the physical condition of the Properties
including any deferred maintenance, and other factors influencing value of the
Properties. Stanger also performed site inspections of the Properties, reviewed
local real estate market conditions, and discussed with property management
personnel conditions in local apartment rental markets and market conditions for
sales and acquisitions of properties similar to the Properties.
Summary of Reviews. The following is a summary of the material reviews
conducted by Stanger in connection with and in support of its Fairness Opinion.
The summary of the opinion and reviews of Stanger set forth in this Consent
Solicitation Statement is qualified in its entirety by reference to the full
text of such opinion.
In preparing its Fairness Opinion, Stanger performed site inspections
of the Properties during December 1997. In the course of the site visits, the
physical facilities of the Properties were observed, current rental and
occupancy information for the Properties were obtained, current local market
conditions were reviewed, a sample of similar properties were identified, and
local property management personnel were interviewed concerning the Properties
and local market conditions. Stanger also reviewed and relied upon information
provided by the Partnership and the Managing General Partner, including, but not
limited to, financial schedules of historical and current rental rates,
occupancies, income, expenses, reserve requirements, cash flow and related
financial information; property descriptive information including unit mix; and
information relating to any required capital expenditures and any deferred
maintenance.
Stanger also reviewed historical operating statements for the
Properties for 1995, 1996, 1997 and year-to-date through September 1998, the
operating budget for 1998 for each Property, as prepared by the Managing General
Partner and discussed with management the current and anticipated operating
results of the Properties.
In addition, Stanger interviewed management personnel of the
Partnership. Such interviews included discussions of conditions in the local
market, economic and development trends affecting the Properties, historical and
budgeted operating revenues and expenses and occupancies and the physical
condition of the Properties (including any deferred maintenance and other
factors affecting the physical condition of the improvements), projected capital
expenditures and building improvements, and expectations of management regarding
the impact of various regulatory factors and proposed changes on the operating
results of the Properties.
Stanger also reviewed the acquisition criteria used by owners and
investors in the type of real estate owned by the Partnership, utilizing
available published information and information derived from interviews
conducted by Stanger with various real estate owners and investors.
Summary of Analysis. Based in part on the above reviews, Stanger then
performed a discounted cash flow analysis (a "DCF Analysis") of the Properties.
The DCF Analysis involved the following steps.
During its site visits to each Property, Stanger conducted local market
research, including the identification and assessment of relative quality (e.g.,
condition, location amenities, etc.) of similar multi-family properties in the
competitive market area of each Property and the collection of rental rate
information for various apartment unit sizes (e.g., efficiency, one-bedroom,
two-bedroom, etc.) for such Properties. In addition, Stanger reviewed
information provided by the Managing General Partner and management of the
Properties concerning the terms of the HUD rental rate restrictions and the
rental rates allowed for each type of apartment for the single Property subject
to such HUD rental rate restrictions.
767376.6
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Utilizing the above information, Stanger determined the gross potential
rent for each Property based on the number and type of apartment units in each
Property and the estimated market rental rates the Property would likely obtain
based on review of the rates charged at similar properties in the local market
and considering the current HUD rental rate restrictions at the one Property
subject to such restrictions.
Stanger also reviewed historical and budgeted gross income and income
from ancillary sources for each Property in the portfolio in light of market
trends and competitive conditions in each Property's local market. Stanger also
reviewed summary information concerning occupancy rates for each of the
Properties.
After assessing the above factors, Stanger estimated each Property's
effective gross income based upon estimated gross potential rent and estimates
of ancillary income and occupancy. Expenses were estimated based on historical
and budgeted operating expenses, discussions with management, and certain
industry expense information. Estimated property operating expenses, including
recurring replacement reserves, were then deducted from effective gross income
to arrive at each Property's estimated net operating income. Expenses relating
solely to investor reporting and other expenses not related to the properties
were excluded from the analysis.
Stanger then discounted to present value the estimated cash flows from
the continued operation of each of the Properties during a holding period equal
to ten years. Income and expense escalators utilized in the analysis were based
on parameters cited by investors, owners and managers of similar properties,
market factors, and historical and budgeted results for each Property. Effective
rental income escalators generally ranged from approximately 3.0% to 3.5% per
year during the holding period. Effective expense escalators generally ranged
from approximately 2.9% to 3.0% per year.
As part of its DCF Analysis, Stanger then estimated the residual values
of the Properties by utilizing a direct capitalization technique. The estimated
net operating income after replacement reserves in the eleventh year of
operations was capitalized utilizing terminal capitalization rates ranging from
9.0% to 10.0% and the resulting value was reduced by estimated sales costs of
3%.
The resulting annual cash flows and the residual value, after deduction
of estimated costs of sale, for each Property were then discounted to present
value assuming the Properties were free-and-clear of mortgage debt utilizing
discount rates ranging from 11.00% to 12.00%.
Stanger observed that the range of estimated value of the portfolio of
Properties resulting from the above-referenced analysis was $29,140,000 to
$31,730,000 and that the Purchase Price of $31,900,000 was above this range of
value. The above-referenced value range excludes any reductions in value related
to capital expenditure requirements to cure deferred maintenance. Stanger
further observed that the Properties are being sold to the Buyers in an "as is"
condition.
Stanger concluded that the range of estimated value of the portfolio of
Properties resulting from the DCF Analysis supported its opinion as to the
fairness of the Purchase Price from a financial point of view.
Due to the uncertainty in establishing many of the values cited above,
Stanger established a range of estimated values. The estimated values are based
in part on information provided to Stanger in the context of rendering the
fairness opinion, and there can be no assurance that the same conditions
analyzed by Stanger in arriving at the estimates cited herein would exist at the
time of consummation of the Sale. In addition, the estimated values cited above
are based on a variety of assumptions that relate, among other things, to (i)
each Property's revenues, expenses, and cash flow; (ii) the capitalization rates
that would be used by prospective buyers; (iii) ranges of residual values of the
Properties; (iv) selling costs; and (v) appropriate discount rates to apply to
estimated cash flows and residual values in computing the discounted present
value of such cash flows and residual values. Actual results may vary from those
utilized in the above analysis based on numerous factors, including interest
rate fluctuations, changes in capitalization rates used by prospective
purchasers, tax law changes, supply/demand conditions for similar properties,
changes in the availability of capital, changes in the regulations or HUD's
767376.6
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interpretations of existing and/or new regulations relating to the single
Property currently operating under HUD rental rate restrictions.
Stanger also reviewed the February 1998 Property appraisals conducted
by an independent third party. Stanger observed that the appraised value of the
Properties was $27,200,000 and that the appraisals explicitly excluded
reductions in value related to capital expenditure requirements to cure deferred
maintenance at the Properties. Stanger further observed that the appraisals were
prepared for the Partnership's internal asset management purposes and were not
obtained in connection with the evaluation of the Sale.
Conclusions. Stanger concluded, based upon its analysis of the
foregoing and the assumptions, qualifications and limitations stated below, as
of the date of the Fairness Opinion, that the Purchase Price to be paid to the
Partnership for the Properties is fair to the Limited Partners from a financial
point of view.
Assumptions, Limitations and Qualifications. In rendering the Fairness
Opinion, Stanger relied upon and assumed, without independent verification, the
accuracy and completeness of all financial information and data, and all other
reports and information contained in this Consent Solicitation Statement or that
were provided, made available, or otherwise communicated to Stanger by the
Partnership, the Managing General Partner and/or its affiliates, or the
management of the Properties. Stanger has not performed an independent
appraisal, structural or engineering study or environmental study of the assets
and liabilities of the Partnership. Stanger relied upon the representations of
the Managing General Partner and its affiliates, and the management of the
Properties concerning, among other things, any environmental liabilities and
deferred maintenance and estimated capital expenditure and replacement reserve
requirements. Stanger also relied upon the assurance of the Partnership, the
Managing General Partner and its affiliates, and the management of the
Properties that any financial statements, budgets, capital expenditures and
deferred maintenance estimates, mortgage debt, value estimates and other
information contained in this Consent Solicitation Statement or provided or
communicated to Stanger were reasonably prepared and adjusted on bases
consistent with actual historical experience and reflect the best currently
available estimates and good faith judgments; that no material changes have
occurred in the value of the Properties or other information reviewed between
the date of such information provided and the date of the Fairness Opinion; that
the Partnership, the Managing General Partner and its affiliates, and the
management of the Properties are not aware of any information or facts that
would cause the information supplied to Stanger to be incomplete or misleading
in any material respect; and that the highest and best use of the Properties is
as improved.
Stanger was not requested to, and therefore did not: (i) select the
method of determining the Purchase Price offered in connection with the Sale or
participate in the negotiation of the Purchase Price or terms of the Sale; (ii)
make any recommendation to the Partnership or its partners with respect to
whether to approve or reject the proposed Sale; or (iii) express any opinion as
to (a) the tax consequences of the proposed Sale to the Limited Partners, (b)
the terms of the Partnership Agreement, or the terms of any agreements or
contracts between the Partnership and the Buyers, (c) the Managing General
Partner's business decision to effect the proposed Sale, (d) any adjustments
made by the Managing General Partner to the Purchase Price to determine the net
amounts distributable to the Limited Partners, including but not limited to,
balance sheet adjustments to reflect the Managing General Partner's estimate of
the value of current and projected net working capital balances and cash and
reserve accounts (including debt service and mortgage escrow amounts and
operating and replacement reserves and the income therefrom) of the Partnership,
the payment of the Deferred Acquisition Fee and other expenses and fees
associated with the Sale, or (e) alternatives to the proposed Sale.
Stanger is not expressing any opinion as to the fairness of any terms
of the proposed Sale other than the Purchase Price of the Properties paid to the
Partnership. Stanger's opinion is based on business, economic, real estate and
capital market, and other conditions as of the date of its analysis and
addresses the proposed Sale in the context of information available as of the
date of its analysis. Events occurring after such date and before the closing of
the proposed Sale of the Properties to the Buyers could affect the Properties or
the assumptions used in preparing the Fairness Opinion. Stanger has no
obligation to update the Fairness Opinion on the basis of subsequent events.
767376.6
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In connection with preparing the Fairness Opinion, Stanger was not
engaged to, and consequently did not, prepare any written report or compendium
of its analysis for internal or external use beyond the analysis set forth in
Exhibit A.
Compensation and Material Relationships. Stanger has been retained by
the Managing General Partner and its affiliates to provide fairness opinions to
certain partnerships affiliated with the Managing General Partner in connection
with the formation of a real estate investment trust. Stanger will be paid an
aggregate fee by the Partnership and the partnerships participating in the
formation of the real estate investment trust of up to approximately $455,000,
plus $4,100 per property reviewed. The portion of the fee allocable to the
Partnership with regard to the Sale is approximately $55,500, plus $4,100 per
Property, or an aggregate of approximately $76,000. In addition, Stanger is
entitled to reimbursement for reasonable legal, travel and out-of-pocket
expenses incurred in making site visits and preparing the Fairness Opinion,
subject to an aggregate maximum of up to approximately $1,000, plus $600 per
Property, and is entitled to indemnification against certain liabilities,
including certain liabilities under federal securities laws. No portion of
Stanger's fee is contingent upon consummation of the Sale.
Recommendation of the Managing General Partner; Fairness
The recommendation of the Managing General Partner in favor of the Sale
is based upon its belief that the Sale is fair to the Limited Partners for,
among others, the following reasons: (a) its belief that the terms and
conditions of the Sale, including the Purchase Price, are fair to the Limited
Partners of the Partnership; (b) its belief that the alternatives available to
the Partnership are not as attractive to the Limited Partners as the Sale; (c)
its belief that now may be an opportune time for the Partnership to sell the
Properties, given current conditions in the real estate and capital markets; and
(d) its belief that the Purchase Price represents the highest amount that a
third party would offer the Partnership for the Properties. The Managing General
Partner did not attempt to market the Properties to any third parties.
The Purchase Price of $31,900,000 was determined as a result of
arm's-length negotiations and it exceeded the proposed purchase price offered by
affiliates of the Managing General Partner, which the Managing General Partner
believed was fair. The Managing General Partner believes that the Purchase Price
is fair and reasonable and exceeds the price that the Partnership would likely
receive if the Properties were to be marketed to a third party or parties. Due
to changes in the tax laws pursuant to which losses of the Partnership are
treated as passive losses and can only be deducted against passive income, most
Limited Partners are not realizing material tax benefits from continuing to own
their limited partnership interests.
III. THE PARTNERSHIP
General
The Partnership is a limited partnership that was formed under the laws
of the State of California on September 9, 1981. On September 27, 1983, the
Partnership offered 30,000 Units, each Unit consisting of one limited
partnership interest in the Partnership, at $1,000 per Unit through an offering
managed by E.F. Hutton & Company Inc. As of May 12, 1998 there were 30,000
limited partnership interests in the Partnership outstanding.
The Managing General Partner of the Partnership is NAPICO. The business
of the Partnership is conducted primarily by NAPICO. NPIA II is the non-managing
General Partner of the Partnership. Pursuant to an agreement between NAPICO and
NPIA II, NAPICO has the primary responsibility for the performance of any duties
required to be performed by the General Partners and, in general, has sole and
final discretion to manage and control the business of the Partnership and make
all decisions relating thereto. NPIA II has not participated in the management
of the Partnership, or in decisions made by the Partnership in connection with
the proposed Sale. NPIA II has not taken a position with respect to the Sale nor
has it participated in the preparation of this Consent Solicitation Statement.
The Partnership has no employees of its own.
767376.6
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Casden Investment Corporation owns 100 percent of NAPICO's stock. The
current members of NAPICO's Board of Directors are Charles H. Boxenbaum, Bruce
E. Nelson, Alan I. Casden and Henry C. Casden. Alan I. Casden is the sole
director and stockholder of Casden Investment Corporation and, accordingly,
controls NAPICO.
The original objectives of the Partnership were to own and operate the
Properties (and certain other real estate assets) for investment so as to (i)
generate cash distributions for Limited Partners from operations of the
Properties, of which all or a portion of would be a return of capital or "tax
sheltered"; (ii) provide protection for the Partnership's capital investments;
and (iii) provide capital gains through appreciation, and equity build up
through principal reduction of mortgage loans on the properties over a period of
five to seven years.
The Partnership holds interests in five Properties, each of which is a
conventional multi-unit apartment complex. The mortgage on one of the Properties
is insured by HUD. During the period for which the mortgage is so insured, its
rents will be subject to regulation by HUD.
The Properties in which the Partnership has invested generated $3,500
in income to the Partnership in 1997, before Partnership expenses of
approximately $355,249 and interest income of $105,777. At December 31, 1997,
the Partnership had a cash reserve of $1,354,289.
The Properties
During 1997, all of the Properties in which the Partnership had
invested were substantially rented. The following is a schedule of the status,
as of December 31, 1997, of the Properties owned by the Partnership.
No. of Percentage of
Name & Location Units Units Occupied Total Units
Arbor Glenn 208 195 94%
West Covina, CA
Park Creek 123 112 91%
- - - ---------- --- --- ---
Canoga Park, CA
- - - -----------------
Warner Willows I 74 74 100%
- - - ---------------- -- -- ----
Woodland Hills, CA
- - - --------------------
Warner Willows II 73 70 96%
- - - ----------------- -- -- ---
Woodland Hills, CA
- - - --------------------
Willowbrook Apartments 183 175 96%
- - - ---------------------- --- --- ---
Reno, NV
- - - ----------
_________________ ____ _____
- - - ----------------- ------- -----
Total 661 626 95%
- - - ----- ----- ----- -----
The Properties range in age from 17 to 25 years. Routine repair,
maintenance and capital expenditures made out of operating cash reserves by the
Partnership amounted to approximately $1,781,359 in the aggregate for the year
ended December 31 1997. Due to the age of the Properties, capital expenditures
are expected to increase progressively over the remaining useful lives of the
Properties. In addition, recent engineering studies of the Properties performed
by the Managing General Partner indicate that the Properties require immediate
capital expenditures of approximately $3,000,000 in order to maintain the
Properties' competitive position their respective markets.
Each of the five Properties is encumbered by a mortgage note. The
outstanding principal balance as of December 31, 1997 were as follows:
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Arbor Glen $ 5,574,398
Park Creek 1,280,984
Warner Willows I 2,715,447
Warner Willows II 2,654,098
Willowbrook 2,218,396
---------
$14,443,323
===========
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The following is a summary of the operating budgets for the Properties
for 1998.
Arbor Glen Park Creek Warner Willows I Warner Willows II Willowbrook
---------- ---------- ---------------- ----------------- -----------
Gross Potential Income $ 1,686,600 $ 874,704 $ 756,660 $ 735,060 $1,431,252
Vacancy & Concessions (84,330) (133,387) (37,836) (36,753) (82,761)
Bad Debt Expense (15,120) (14,244) (13,320) (22,572) (8,400)
------------- ------------- ------------- ---------------- ------------
Net Rental Income 1,587,150 727,073 705,504 675,735 1,340,091
Total Other Income 61,704 39,492 17,400 22,980 42,780
------------- ------------- ------------- ---------------- ------------
Total Revenue 1,648,854 766,565 722,904 698,715 1,382,871
------------- ------------- ------------- ---------------- ------------
Payroll 127,235 107,294 66,057 65,955 194,093
Utilities 166,560 61,716 59,136 54,996 231,269
Grounds and Pool 98,892 23,460 32,460 28,584 34,750
Repairs and Maintenance 121,504 63,144 39,693 45,991 60,590
Taxes and Insurance 205,917 100,058 77,515 74,566 141,884
Rental Expense 20,304 8,832 6,384 6,384 12,120
General Administrative 120,612 59,700 51,829 45,616 113,113
------------- ------------- ------------- ---------------- ------------
Total Operating Expenses 861,024 424,204 333,074 322,092 787,819
------------- ------------- ------------- ---------------- ------------
Net Operating Income 787,830 342,361 389,830 376,623 595,052
Total Capital Expenditures 172,181 63,690 19,080 19,080 214,601
------------- ------------- ------------- ---------------- ------------
Net Cash Flow Before Debt-Service 615,649 278,671 370,750 357,543 380,451
Total Debt Service 548,764 164,051 330,836 319,629 234,842
------------- ------------- ------------- ---------------- ------------
Net Cash Flow $ 66,885 $ 114,620 $ 39,914 $ 37,914 $ 145,609
============== =========== ============== ================ ===========
Market for Partnership Interests and Related Security Holder Matters
Limited partnership interests in the Partnership were sold through a
public offering managed by an affiliate of the predecessor of Lehman Brothers
Inc., and are not traded on a national securities exchange or listed for
quotation on the Nasdaq Stock Market. There is no established trading market for
Units and it is not anticipated that any market will develop for the purchase
and sale of the Units. Pursuant to the Partnership Agreement, Units may be
transferred only with the written consent of the Managing General Partner,
unless the proposed transfer is to a member of the family of the transferring
Limited Partner, a trust set up for the benefit of the Limited Partner's family,
or a corporation or other entity in which the Limited Partner has a majority
interest. At June 30, 1998, there were 2,781 registered holders of Units in the
Partnership. None of the Units are beneficially owned by the Managing General
Partner or its affiliates.
No established trading market for the Units was ever expected to
develop and the sales transactions for the Units have been limited and sporadic.
On March 9, 1998, the Limited Partners received an unsolicited offer from a
third party to purchase up to 3.3% of the outstanding Units at a purchase price
of $300.00 per Unit. On May 15, 1998, the Limited Partners received an
unsolicited offer from a third party to purchase 4.9% of the outstanding Units
at a purchase price of $350.00 per Unit.
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The following table sets forth the quarterly high and low sales prices
for the Units for each quarterly period during the last two years (including
transfers made in connection with unsolicited tender offers).
High Low
Fourth Quarter 1996 $215.00 $50.00
First Quarter 1997 $242.00 $176.00
Second Quarter 1997 $263.00 $195.00
Third Quarter 1997 $287.04 $140.50
Fourth Quarter 1997 $265.00 $142.00
First Quarter 1998 $287.00 $227.00
Second Quarter 1998 $300.00 $150.00
Third Quarter 1998 $350.00 $245.00
The Managing General Partner monitors transfers of the Units (a)
because the admission of a substitute limited partner requires the consent of
the Managing General Partner under the Partnership Agreement, and (b) in order
to track compliance with safe harbor provisions under the Securities Act to
avoid treatment as a "publicly traded partnership" for tax purposes. While the
Partnership requests to be provided with the price at which a transfer is being
made, and the Partnership receives some information regarding the price at which
secondary sale transactions in the Units have been effectuated, the Managing
General Partner does not maintain comprehensive information regarding the
activities of all broker/dealers and others known to facilitate from time to
time, or on a regular basis, secondary sales of the Units. It should be noted
that some transactions may not be reflected on the records of the Partnership.
It is not known to what extent Unit sales transactions are between buyers and
willing sellers, each having access to relevant information regarding the
financial affairs of the Partnerships, expected value of their assets, and their
prospects for the future. Many Unit sales transactions are believed to be
distressed sales where sellers are highly motivated to dispose of the Units and
willing to accept substantial discounts from what might otherwise be regarded as
the fair value of the interest being sold, to facilitate the sales. The prices
paid recently for Units generally do not reflect the current market of the
Partnerships' assets, nor are they indicative of total return, since prior cash
distributions and tax benefits received by the original investor are not
reflected in the price. Nonetheless, notwithstanding these qualifications, the
Unit sales prices, to the extent that the reported data are reliable, are
indicative of the prices at which the Units have recently been sold. None of the
Unit sales transactions have involved the Managing General Partner or its
affiliates.
The Partnership is not aware of any person that holds 5% or more of the
Units. Neither NAPICO nor its officers and directors hold any Units.
Distribution History
It was the intention of the Partnership that distributions of net cash
from operations be made quarterly, pro rata, in proportion to the number of
Units held. From November 1994 through May 1996, distributions to Limited
Partners were not made due to the Partnership's setting aside funds for losses
incurred as a result of the January 17, 1994 Northridge earthquake. The
Partnership made distributions of $600,000 and $300,000 to the Limited Partners
in 1997 and 1996, respectively. In addition, total distributions of $900,856
were made to NAPICO in 1997 consisting of $834,188 related to prior years and
$66,668 related to 1997. Under the terms of the Partnership Agreement, cash
available for distribution is to be allocated 90 percent to the Limited Partners
as a group and 10 percent to the General Partners. Based on cash distributions
made to the Limited Partners as of December 31, 1996, $834,188 was due to the
General Partners as their 10% percent share of cash available for distribution.
This amount was paid to the General Partners in February 1997. Future
distributions will depend in part on the operating results of the Properties and
will be impacted significantly by anticipated capital expenditures to cure
certain items of deferred maintenance, including roof and wall repairs and
repairs relating to earthquake damage.
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In the case of the sale or refinancing of the property, the General
Partners are entitled to receive 1% of the net proceeds from the sale or
refinancing until the Limited Partners have received an amount equal to their
adjusted capital value (as defined in the Partnership Agreement) plus cumulative
distributions (including net cash from operations) equal to a non-compounded 6%
annual distribution with respect to their adjusted capital value, after which
the General Partners shall receive 15% of the balance of any net proceeds from
sale or refinancing. In addition, the Partnership will pay, using available cash
on hand, approximately $736,000 to the Managing General Partner in connection
with the Deferred Acquisition Fees. The Deferred Acquisition Fee is for services
rendered to the Partnership in connection with the selection, purchase,
development and management of the Properties. Income and losses are allocated
99% to Limited Partners and 1% to the General Partners.
There are no regulatory or legal restrictions on the Partnership's
current or future ability to pay distributions, however, the rental rates of one
of the Properties are subject to HUD regulation during the period that the
mortgage of such Property is insured by HUD.
Year 2000 Information
The Partnership has assessed the potential impact of the Year 2000
computer systems issue on its operations. The Partnership believes that no
significant actions are required to be taken by the Partnership to address the
issue and that the impact of the Year 2000 computer systems issue will not
materially affect the Partnership's future operating results or financial
condition. Due to the nature of its operations and its relationships with third
parties, the Partnership does not anticipate having to make any material
expenditures related to the Year 2000 computer systems issue.
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IV. SELECTED FINANCIAL INFORMATION
The following table sets forth selected historical financial and
operating data of the Partnership for the fiscal years ended December 31, 1997,
1996, 1995, 1994, 1993 and for the six months ended June 30, 1998. The following
information should be read in conjunction with the Partnership's Annual Report
on Form 10-K and Quarterly Report on Form 10-Q, which are attached hereto as
Annexes B and C, respectively.
The selected historical financial and operating data of the Partnership
for the six-month periods ended June 30, 1998 and June 30, 1997 are derived from
unaudited consolidated financial statements of the Partnership which, in the
opinion of the Managing General Partner, include all adjustments (consisting
only of normal recurring items unless otherwise disclosed) necessary for a fair
presentation of the Partnership's financial position and results of operations.
The results set forth for the six-month periods ended June 30, 1998 and June 30,
1997 are not necessarily indicative of results to be expected for a full year.
Year Ended December 31, Six Months Ended June 30,
--------------------------------------------------------------------- --------------------------
1997 1996 1995 1994 1993 1998 1997
------------ ----------- ----------- ----------- ------------ ------------ -----------
Partnership Operations
Interest Income............ $ 105,777 $ 89,711 $ 49,476 $ 37,710 $ 12,779 $ 28,185 $ 75,391
Operating Expenses......... 355,249 158,460 185,584 226,208 353,825 156,240 131,802
------------ ----------- ----------- ----------- ------------ ------------ -----------
Income (Loss) from
Partnership Operations.... (249,472) (68,749) (136,108) (188,498) (341,046) (128,055) (56,411)
------------ ----------- ----------- ----------- ------------ ------------ -----------
Rental Operations
Revenues 4,925,227 4,935,895 5,486,329 5,678,656 5,463,671 2,530,407 2,427,278
Expenses 4,921,727 4,942,160 5,675,071 6,514,923 5,402,010 4,177,214 2,491,664
------------- ------------- ------------ ------------- ------------ ------------- ------------
Income (Loss) from
Rental Operations 3,500 (6,265) (188,742) (836,267) 61,661 (107,362) (64,386)
------------- ------------- ------------ ------------- ------------ ------------- ------------
Gain on Foreclosure of
Rental Property -- 259,088 -- -- -- -- --
------------- ------------- ------------ ------------- ------------ ------------- ------------
Net Income (Loss) $ (245,972) $ 184,074 $ (324,850) $ (1,024,765) $ (279,385) $ (235,417) $ (120,797)
============= ============= ============ ============= ============ ============= ============
Net Income (Loss)
allocated to
Limited Partners $ (243,512) $ 182,234 $ (321,601) $(1,014,517) $ (276,591) $ (233,063) $ (119,589)
============= ============= ============ ============= ============ ============= ============
Net Income (Loss)
per Limited
Partnership Interest $ (8) $ 6 $ (11) $ (34) $ (9) $ (8) $ (4)
============= ============= ============ ============= ============ ============= ============
Total assets $ 20,791,123 $ 22,049,995 $ 26,365,792 $ 26,668,029 $ 27,182,103 $ 20,296,242 $ 21,281,493
============= ============= ============ ============= ============ ============= ============
Mortgage Notes Payable $ 14,443,323 $ 14,064,914 $ 17,747,363 $ 17,959,940 $ 15,517,461 $ 14,320,565 $ 14,562,880
============= ============= ============ ============= ============ ============= ============
Cash Distribution per
Limited Partnership
Interest $ 20.00 $ 10.00 $ __ $ 15.00 $ 10.00 $ 5.00 $ 10.00
============= ============= ============ ============= ============ ============= ============
Partners' Equity $ 4,562,631 $ 6,309,459 $ 6,425,385 $ 6,750,235 $ 8,225,000 $ 4,177,214 $ 5,021,140
============= ============= ============ ============= ============ ============= ============
Limited Partners'
Equity $ 6,184,431 $ 7,027,943 $ 7,145,709 $ 7,467,310 $ 8,931,827 $ 5,801,369 $ 6,608,354
============= ============= ============ ============= ============ ============= ============
Limited Partners'
Equity per Limited
Partnership Interest $ 206 $ 234 $ 238 $ 249 $ 298 $ 193 $ 220
============= ============= ============ ============= ============ ============= ============
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V. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material tax consequences relating to
the proposed Sale and the distribution of approximately $552 per Unit to the
Limited Partners. However, each Limited Partner is urged to consult his, her or
its own tax advisor for a more detailed explanation of the specific tax
consequences to such Limited Partner from the Sale.
Upon consummation of the Sale, and subject to the passive activity
rules described below, each Limited Partner will recognize his, her or its share
of the taxable gain of the Partnership to the extent that the sum of (i) the
cash, plus (ii) the fair market value of any property received by the
Partnership on the Sale plus (iii) the outstanding principal amount of the
Partnership's nonrecourse indebtedness, exceeds the Partnership's adjusted basis
for the Properties. Gain realized by the Partnership on the Sale will generally
be a Section 1231 gain (i.e., long-term capital gain, except for the portion
thereof which is taxable as ordinary income due to depreciation recapture). A
Partner's share of gains and losses from Section 1231 transactions from all
sources would be netted and would be taxed as capital gains or constitute
ordinary losses, as the case may be. A net Section 1231 gain for a taxable year
will be treated as capital gain only to the extent such gain exceeds the net
Section 1231 losses for the five most recent prior taxable years not previously
recaptured. Any gain attributable to a Limited Partner's share of depreciation
recapture will be taxed at ordinary income rates.
The taxable income realized by each Limited Partner by reason of the
Sale should be characterized as income from a "passive activity" and may be
offset by a Limited Partner's available "passive activity losses" (including
suspended losses). Under the Tax Reform Act of 1986 (the "1986 Act") losses from
passive activities may only be offset against income from passive activities or
may be deducted in full when the taxpayer disposes of the passive activity from
which the loss arose. However, pursuant to a transitional rule contained in the
1986 Act, a certain percentage of losses from a passive activity which was held
by the taxpayer on the date of the enactment of the 1986 Act (i.e., October 22,
1986) and at all times thereafter was permitted to offset any type of income
during the years 1987 through 1990.
It is estimated that as a consequence of the Sale, each Limited Partner
will have taxable income equal to approximately $552 per Unit, of which $536
will constitute long-term capital gain and $16 of which will be ordinary income
due to recapture of accelerated depreciation. The income tax consequences of the
Sale to any Limited Partner depends in large part upon the amount of losses that
were allocated to such Limited Partner by the Partnership and the amount of such
losses which were applied by such Limited Partner to offset his or her taxable
income. If a Limited Partner has not utilized any of the passive activity losses
allocated to such Limited Partner in excess of those amounts permitted under the
transitional rule relief described above, the Limited Partner will realize net
cash in excess of any federal and state taxes of approximately $516 per Unit.
Because passive losses are only deductible against passive income after 1986
(subject to the transitional rules described above), the Managing General
Partner does not have any basis for determining the amount of such passive
losses which have previously been utilized by Limited Partners. The anticipated
cash distribution of approximately $552 per Unit would be sufficient to pay the
federal and state tax liability arising from the Sale.
The net tax liability was calculated assuming a federal capital gains
rate of 25%, (the current capital gains rate for the portion of net Section 1231
gain attributable to unrecaptured depreciation not otherwise taxed as ordinary
income) and assuming an effective state tax rate of 5%, and that Limited
Partners have suspended passive losses of $297 per Unit from the Partnership
(which is the amount of passive losses that a Limited Partner would have it had
it not utilized any of its passive losses (except to the extent permitted under
the transitional rule)). The net tax liability was calculated by deducting from
the tax payable on the gain from the sale the tax benefit resulting from the
ability to deduct the suspended passive losses against ordinary income assuming
that the Limited Partner has sufficient ordinary income which would otherwise
have been taxed at the 39.6% marginal tax rate for federal income tax purposes
to fully utilize such losses at such rate, and assuming a state income tax rate
of 5%. In addition to assuming federal income tax rates, the calculation of
income tax liability of a Limited Partner assumes that such
767376.6
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Limited Partner has no net Section 1231 losses for the five most recent prior
taxable years. If this latter assumption is not applicable to a Limited Partner,
the income tax liability of such Limited Partner could increase because certain
income would be taxed at ordinary, instead of capital gains tax rates. Limited
Partners are advised to consult with their own tax advisors for specific
application of the tax rules where the above-described assumption is not
applicable. The foregoing does not take into consideration the effect of any
local tax liabilities that may be applicable to the Sale.
While the financial circumstances of the Limited Partners may vary
considerably, the Managing General Partner believes it is reasonable to assume
that the majority of the current Limited Partners will be in the highest federal
tax bracket in 1998. The Managing General Partner believes that while state tax
rates vary from state-to- state, the effective average state tax rate for
individuals who itemize deductions is approximately 5%. The Managing General
Partner calculated the tax benefit from the suspended passive losses at 44.6%
(39.6% federal rate plus a 5% effective state rate).
To the extent that a Limited Partner was able to utilize more passive
activity losses than were available under the transitional rules (e.g., because
such Limited Partner had passive income from other sources) to offset his, her
or its taxable income, the estimated federal income tax liability of such
Limited Partner would substantially increase. Thus, for example, if a Limited
Partner had no suspended passive activity losses to carry forward, it is
estimated that such Limited Partner would have a federal and state income tax
liability equal to approximately $168 per Unit. Accordingly, net cash received
by such Limited Partners in connection with the Sale is anticipated to be
approximately $384 per Unit. In addition, to the extent that a Limited Partner
does not have sufficient ordinary income taxed at a 39.6% marginal rate to fully
utilize the suspended passive losses against such income, the Limited Partner's
net tax benefits from the Sale would be reduced and the Limited Partner is
likely to receive a lower net cash distribution.
BECAUSE IT IS IMPOSSIBLE TO KNOW THE AMOUNT OF LOSSES ANY LIMITED
PARTNER HAS APPLIED TO OFFSET HIS, HER OR ITS TAXABLE INCOME, THE GENERAL
PARTNERS CANNOT ESTIMATE THE INCOME TAX LIABILITY OF EACH LIMITED PARTNER
ARISING FROM THE SALE, THEREFORE, EACH LIMITED PARTNER SHOULD CONSULT HIS, HER
OR ITS TAX ADVISOR CONCERNING THE INCOME TAX CONSEQUENCES OF CONSENTING TO THE
SALE WITH RESPECT TO SUCH LIMITED PARTNER'S OWN TAX SITUATION.
VI. LEGAL PROCEEDINGS
On June 25, 1997, the Commission settled administrative proceedings
against NAPICO, three members of NAPICO's senior management and three affiliated
entities for their roles in two separate series of securities laws allegations.
In connection therewith, the Commission ordered certain NAPICO-related persons
and entities to cease and desist from committing or causing securities law
violations and ordered NPEI, a brokerage firm affiliated with NAPICO, to undergo
a review of certain of its policies and procedures and pay a $100,000 penalty.
The first series of securities law allegations involved a "part or
none" private placement offering of interests in National Corporate Tax Credit
Fund ("Corporate Fund"). The offering was to take place in phases, with the
first phase closing after the sale of five units, priced at $1 million each. The
Commission found that, in June 1992, NAPICO accomplished the closing of the
first phase through the use of a non-bona fide investor. The Commission found
that NAPICO and the Corporate Fund thereby violated Section 10(b) of the
Exchange Act and Rule 10b-9, provisions that prohibit misrepresentations in
connection with "all or none" or "part or none" offerings. The Corporate Fund
offering continued in 1992 and 1993, and the offering documents distributed to
potential investors contained no disclosure related to this transaction, which
the Commission found was in violation of Sections 17(a)(2) and (3) of the
Securities Act, which prohibit material misrepresentations or omissions in
connection with the offer and sale of securities. The Commission found that Alan
I. Casden, Vice Chairman of NAPICO's Board of Directors
767376.6
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and NAPICO's beneficial owner; Charles H. Boxenbaum, Chairman of NAPICO's Board
of Directors; and Bruce E. Nelson, NAPICO's President, caused these violations.
The second series of violations involved a NAPICO-controlled public
partnership called Century HillCreste Apartment Investors ("HillCreste").
HillCreste was required to file annual and quarterly reports with the
Commission. The Commission found that HillCreste failed to disclose in its
reports filed with the Commission from 1991 through 1993 that HillCreste's cash
was used to pay the expenses of other properties that were managed by an
affiliated property management company, including properties syndicated by
entities affiliated with Casden or NAPICO. The Commission found that these
disclosure failures by HillCreste violated Sections 17(a)(2) and (3) of the
Securities Act, Sections 13(a) and Rules 13a-1, 13a-13 and 12(b)(2) thereunder,
which prohibit material misrepresentations or omissions in periodic reports
filed with the Commission. The Commission found that the failure of HillCreste
to maintain adequate internal controls to prevent these transactions from being
improperly recorded violated Sections 13(b)(2)(A) and (B) of the Exchange Act,
books and records provisions of the federal securities laws. The Commission
found Alan Casden to have caused HillCreste's violations of these provisions.
NAPICO, NPEI, Corporate Fund, HillCreste, Mr. Casden, Mr. Boxenbaum and
Mr. Nelson all consented to the above relief without admitting or denying the
findings in the Commission's order.
VII. LIMITED PARTNERS CONSENT PROCEDURE
Distribution of Solicitation Materials
This Consent Solicitation Statement and the related Consent are first
being mailed to Limited Partners on or about ________ __, 1998. Only Limited
Partners of record on ___________, 1998 (the "Record Date") will be given notice
of, and allowed to give their consent regarding, the matters addressed in this
Consent Solicitation Statement.
This Consent Solicitation Statement, together with the Consent and the
letter from the Managing General Partner, constitute the Solicitation Materials
to be distributed to the Limited Partners to obtain their votes for or against
the Sale. The Solicitation Period is the time frame during which Limited
Partners may vote for or against the Sale. The Solicitation Period will commence
upon the date of delivery of this Consent Solicitation Statement and will
continue until the earlier of (i) _________, 1998 or such later date as may be
determined by the Managing General Partner and (ii) the date upon which the
Managing General Partner determines that a Majority Vote has been obtained. At
its discretion, the Managing General Partner may elect to extend the
Solicitation Period. Under no circumstances will the Solicitation Period be
extended beyond ______________, 1998. Any Consents delivered to the Partnership
prior to the termination of the Solicitation Period will be effective provided
that such Consents have been properly completed, signed and delivered.
As permitted by the Partnership Agreement, the Partnership has not
scheduled a special meeting of the Limited Partners to discuss the Solicitation
Materials or the terms of the Sale.
Voting Procedures and Consents
Limited Partners of record as of the Record Date will receive notice
of, and be entitled to vote, with respect to the Sale.
The Consent included in the Solicitation Materials constitutes the
ballot to be used by Limited Partners in casting their votes for or against the
Sale. By marking this ballot, the Limited Partner may either vote "for,"
"against" or "abstain" as to the Partnership's participation in the Sale. Once a
Limited Partner has voted, he may not revoke his vote unless he submits a second
Consent, properly signed and completed, together with a letter indicating that
this prior Consent has been revoked, and such second Consent is received by
Gemisys Corporation
767376.6
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(the "Tabulator") prior to expiration of the Solicitation Period. See
"Withdrawal and Change of Election Rights" below.
The Sale will not be completed unless it is approved by a Majority
Vote. See "THE SALE -- Conditions" for a discussion of the other conditions
precedent to the Sale. BECAUSE APPROVAL REQUIRES THE AFFIRMATIVE VOTE OF A
MAJORITY OF THE OUTSTANDING UNITS OF LIMITED PARTNERSHIP INTEREST, FAILURE TO
VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE SALE.
Any Limited Partner who returns his Consent signed but does not specify
"for," "against" or "abstain" will be deemed to have voted "for" the Sale.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the Consent will be determined by the
Tabulators, whose determination will be final and binding. The Tabulator
reserves the absolute right to reject any or all Consents that are not in proper
form or the acceptance of which, in the opinion of the Managing General
Partner's counsel, would be unlawful. The Tabulator also reserves the right to
waive any irregularities or conditions of the Consent as to particular Units.
Unless waived, any irregularities in connection with the Consents must be cured
within such time as the Tabulator shall determine. The Partnership, the Managing
General Partner and the Tabulator shall be under no duty to give notification of
defects in such Consents or shall incur liabilities for failure to give such
notification. The delivery of the Consents will not be deemed to have been made
until such irregularities have been cured or waived.
Completion Instructions
Each Limited Partner is requested to complete and execute the Consent
in accordance with the instructions contained therein. For his Consent to be
effective, each Limited Partner must deliver his Consent to the Tabulator at any
time prior to the termination of the Solicitation Period to the Partnership at
the following address:
Gemisys Corporation
7103 South Revere Parkway
Englewood, Colorado 80112
A pre-addressed stamped envelope for return of the Consent has been
included with the Solicitation Materials. Limited Partners may also telecopy an
executed copy of this Consent to the Partnership at Tabulator at 303-705-6171.
The Consents will be effective only upon actual receipt by the Partnership. The
method of delivery of the Consent to the Partnership is at the election and risk
of the Limited Partner, but if such delivery is by mail it is suggested that the
mailing be made sufficiently in advance of _______ __, 1998 to permit delivery
to the Partnership on or before such date.
Withdrawal and Change of Election Rights
Consents may be withdrawn at any time prior to the expiration of the
Solicitation Period. In addition, subsequent to submission of his Consent but
prior to expiration of the Solicitation Period, a Limited Partner may change his
vote in favor of or against the Sale. For a withdrawal or change in vote to be
effective, a written or facsimile transmission notice of withdrawal or change in
vote must be timely received by the Tabulator at its address set forth under
"Completion Instructions" above and must specify the name of the person having
executed the Consent to be withdrawn or vote changed and the name of the
registered holder if different from that of the person who executed the Consent.
No Dissenters' Rights of Appraisal
Under the Partnership Agreement and California law, Limited Partners do
not have dissenters' rights of appraisal. If the Sale is approved by a Majority
Vote, and the other conditions to consummation of the Sale are
767376.6
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satisfied, all Limited Partners, both those voting in favor of the Sale and
those not voting in favor, will be entitled to receive the resulting cash
distributions.
Solicitation of Consents
The Managing General Partner and its officers, directors and employees
may assist in the solicitation of consents and in providing information to
Limited Partners in connection with any questions they may have with respect to
this Consent Solicitation Statement and the voting procedures. Such persons and
entities will be reimbursed by the Partnership for out of pocket expenses in
connection with such services. The Partnership may also engage third parties to
assist with the solicitation of Consents and pay fees and reimburse the expenses
of such persons.
YOUR CONSENT IS IMPORTANT. PLEASE MARK, SIGN, AND DATE THE ENCLOSED
CONSENT AND RETURN IT IN THE ENCLOSED SELF-ADDRESSED, STAMPED ENVELOPE PROMPTLY.
If you have any questions about the consent procedure or require
assistance, please contact: MacKenzie Partners, the Partnership's consent
solicitation agent, toll free at 800-322-2885 or collect at 212- 929-5500.
VIII. IMPORTANT NOTE
It is important that Consents be returned promptly. Limited Partners
are urged to complete, sign and date the accompanying form of Consent and mail
it in the enclosed envelope, which requires no postage if mailed in the United
States, so that their vote may be recorded.
_________ ___, 1998
767376.6
-23-
REAL-EQUITY PARTNERS
9090 WILSHIRE BOULEVARD
BEVERLY HILLS, CALIFORNIA 90211
THIS CONSENT IS SOLICITED BY THE MANAGING GENERAL PARTNER
OF REAL-EQUITY PARTNERS
CONSENT OF LIMITED PARTNER
The undersigned hereby gives written notice to the Partnership that,
with respect to the proposal to sell all of the Partnership's real estate assets
to JH Real Estate Partners, Inc., a California corporation, and American
Apartment Communities III, L.P., a Delaware limited partnership, and to
authorize the Managing General Partner to take any and all actions that may be
required in connection therewith, including the payment of the Deferred
Acquisition Fee and the execution on behalf of the Partnership of such
amendments, instruments and documents as shall be necessary to effectuate the
Sale, the undersigned votes all of his, her or its units of limited partnership
interest as indicated below:
FOR AGAINST ABSTAIN
|_| |_| |_|
The undersigned acknowledges receipt from the Managing General Partner
of the Consent Solicitation Statement dated _________ __, 1998.
Dated: _____________, 199_
_______________________________
Signature
-------------------------------
Print Name
-------------------------------
Signature (if held jointly)
-------------------------------
Print Name
-------------------------------
Title
Please sign exactly as name appears hereon. When
units are held by joint tenants, both should sign.
When signing as an attorney, as executor,
administrator, trustee or guardian, please give
full title of such. If a corporation, please sign
name by President or other authorized officer. If
a partnership, please sign in partnership name by
authorized person.
PLEASE RETURN THIS FORM BY 5:00 P.M. (NEW YORK CITY TIME) ON ________
[__], 1998.
PLEASE MARK, SIGN, DATE AND RETURN THIS CONSENT BY FACSIMILE TO
303-705-6171 OR BY USING THE ENCLOSED PREPAID ENVELOPE. IF YOU HAVE ANY
QUESTIONS, PLEASE CALL 800-322-2885.
A LIMITED PARTNER SUBMITTING A SIGNED BUT UNMARKED CONSENT WILL BE
DEEMED TO HAVE VOTED IN FAVOR OF THE SALE.
767376.6