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[LEXFORD Letterhead]
6954 AMERICANA PARKWAY
REYNOLDSBURG, OHIO 43068
PHONE: 614/575-5202 FAX: 614/575-5217
[DATE]
NOTICE OF POTENTIAL SALE RESULTING IN CASH DISTRIBUTION OF $[X,XXX]
PER UNIT
Re: [PARTNERSHIP NAME] (the "Partnership")
Dear Limited Partner:
Lexford, Inc. (formerly Cardinal Realty Services, Inc.)1, Managing
General Partner of the Partnership, recently announced plans to consolidate
ownership of real estate presently owned by syndicated limited partnerships in
which Lexford, Inc. serves as the general partner. The purpose of this letter is
simply to assist you with your tax planning and notify you that the Partnership
plans to sell its property during 1998. If completed, the proposed transaction
will result in a CASH DISTRIBUTION TO YOU IN THE AMOUNT OF $[X,XXX] PER UNIT of
limited partner interest, which Lexford, Inc. believes is at least equal to any
cash distribution you could receive as a result of any alternatives available to
the Partnership. Section C.1 of the attached Appendix A sets forth the portion
of the cash distribution that represents your equity in the Partnership's
property and Section C.2 of Appendix A sets forth the cash distribution that
Lexford, Inc. will assure will be made to assist you in paying any taxes
relating to the transaction. Additionally, you may be able to utilize any
previously suspended tax benefits depending upon your individual tax situation.
Please consult your tax advisor with regard to actual tax benefits available to
you.
CURRENT FINANCIAL CONDITION OF THE PARTNERSHIP
After many difficult years, our property has finally appreciated to the
point where there is equity for the limited partners as set forth in Section A.7
of the attached Appendix A. Due to the current strong real estate market for
multifamily properties, we believe it is an opportune time to dispose of the
Partnership's property.
TRANSACTION SUMMARY AND BENEFITS
We have determined that it is in the best interests of both the limited
partners and Lexford, Inc. for a Lexford affiliate to purchase the Partnership's
property. The Partnership's Agreement of Limited Partnership authorizes Lexford,
- --------
1 Cardinal Realty Services, Inc. changed its name to Lexford, Inc.
effective October 7, 1997 in order to better reflect its mission under new
management. There was no change of ownership of the company.
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Inc., the Partnership's general partner, to sell the Partnership's property. It
is our present intention to transfer the Partnership's property during the
second quarter of 1998, with the cash distributions to occur promptly
thereafter. However we reserve the right to change our plans to transfer the
Partnership's property based upon facts and circumstances which may develop
prior to that time.
Benefits to Limited Partners
This transaction will allow limited partners to (i) receive a cash
distribution in the amount of $[X,XXX] per Unit of limited partner interest,
(ii) eliminate the omnipresent specter of future "recapture taxes" (if
applicable) at marginal rates lower than ever before and (iii) rid themselves of
their own tax and investment recordkeeping requirements. Additionally, Section B
of Appendix A may indicate that you will have a tax loss relating to the
transaction. (For further explanation, please see the first paragraph under the
heading "Federal Income Tax Considerations" below.) However, you should consult
your tax advisor with respect to the availability of these tax attributes. If
such a transfer is accomplished, you would receive a final (1998) K-1 in 1999.
Once and for all, the Partnership can be REMOVED FROM YOUR TAX AND ESTATE
PLANNING, along with concerns about possible future phantom (non-cash) income
such as debt discharge income, depreciation recapture, imputed gain on sale
(negative capital account recapture), etc.
Benefits to Lexford
We believe that Lexford, Inc. may derive more favorable economic
benefits from ownership of the Partnership property than a third party because
of the size and uniformity of Lexford, Inc.'s overall portfolio of apartment
complexes. If the proposed transaction occurs, Lexford, Inc. can then seek to
recover its second mortgage or other interests in the Partnership's property
without the cost and administrative burden of limited partner financial and tax
reporting and communications.
FEDERAL INCOME TAX CONSIDERATIONS
While each limited partner's tax situation is unique, we estimate that,
upon disposition of the Partnership's property, a limited partner holding one
Unit of limited partner interest will have an adjusted capital account balance
as set forth under Section B of Appendix A. If a deduction for suspended passive
activity losses is shown on Appendix A, this analysis assumes that passive
activity losses have been disallowed in prior years and carried forward, as
required by law, and have not been utilized in other income offsetting
transactions, in which case, a tax benefit may be available to you upon
disposition. If the adjusted capital account is shown as a deficit, a limited
partner will incur federal "recapture taxes" on amounts claimed (as of December
31, 1996) as losses in previous tax years to the extent such claimed losses
exceed the limited partner's investment in the Partnership, a substantial
portion of which would represent "depreciation recapture" taxes at a "special
rate" of not more than 25% (compared to a rate of up to 39.6% at the current tax
rate on ordinary income). Any remaining taxable income or gain should be taxed
as capital gain (assuming, among other things, you will have been a limited
partner of the Partnership for at least 18 months) at a federal rate of not more
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than 20% (compared to a rate of up to 28% under prior law). THERE CAN BE NO
ASSURANCE THAT THESE REDUCED RATES WILL REMAIN IN EFFECT IN FUTURE YEARS.
If you have received debt discharge income in prior years, you may have
elected to defer this income, and instead reduce the basis in your share of the
Partnership's property. In such situations, you may recognize a gain that is
greater than the analysis shows. Please consult your tax advisor on this matter,
both with regard to whether an election has been made in prior years, and with
regard to the tax consequences of the current proposed transaction in light of
any such prior election. Of course, these are only estimates and your personal
income tax situation may vary. Accordingly, we urge you to consult your own tax
advisor for advice specific to your personal tax situation.
If your capital account is shown as a deficit, failure to consummate
this transaction could place you in the position of recognizing non-cash
ordinary income from continuing operations, taxable at rates of up to 39.6%.
Generally, to the extent your tax capital account is negative, federal tax law
will seek ways to impute "recapture" income to you. For example, this income can
arise from any refinancing of the property's debt, especially when debt is
reduced or forgiven. Taxable income will also increase to all partners as
federal tax depreciation is exhausted on the property. Finally, basis for
allocating losses to you may have previously been available to you, by operation
of federal tax law, through your allocation of the basis in the second mortgage.
Regulations developed by the U.S. Department of Treasury will ultimately require
you to recapture any losses previously allowed for your portion of this
obligation.
No action is required by you to receive the cash distribution. If the
transaction is consummated, you will receive your cash distribution promptly
following consummation of the transaction, which is expected to occur in the
second quarter of 1998.
If you have any questions regarding the contents of this letter, feel
free to call our limited partner inquiry line at 614/575-5202 and Jeff Meyer,
Assistant Vice President, Lee Blackburn, Portfolio Manager, or Dana Lochard,
Investor Services Representative, will return your call.
Very truly yours,
LEXFORD, INC.
(formerly known as
Cardinal Realty Services, Inc.)
By: /s/ Paul R. Selid
-----------------
Paul R. Selid
Senior Vice President
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APPENDIX A
NAME OF LIMITED PARTNERSHIP
CURRENT FINANCIAL INFORMATION
Name of Partnership: Name of Limited Partnership ("Partnership")
Name of General Partner: Lexford, Inc. ("General Partner")
SECTION A: VALUATION OF PROPERTY AND LIMITED PARTNER EQUITY
1. Fair Market Value Estimate of Partnership Property:1 X,XXX,XXX
2. 1st and 2nd Mortgage Indebtedness (owed to non-affiliate of General Partner): X,XXX,XXX
3. 2nd Mortgage and Other Advances (owed to General Partner or its affiliate): XXX,XXX
4. Other Net Liabilities/(Assets): XX,XXX
------------
5. Total Partnership Obligations: X,XXX,XXX
------------
6. Net Partnership Equity in Property:2 XXX,XXX
============
7. Average Value of One Limited Partner Investment Unit in Partnership: X,XXX
============
SECTION B: SUMMARY OF SALIENT LIMITED PARTNER TAX INFORMATION
(BASED ON OWNERSHIP OF ONE LIMITED PARTNER INVESTMENT UNIT, ON AVERAGE)3
1. Limited Partner Capital Account Surplus/(Deficit) - Tax Basis: (XX,XXX)
2. Total Potential Distributions to Limited Partners (as set for in Section C.3 below): (X,XXX)
------------
3. Total Projected (Income)/Loss to Limited Partners (XX,XXX)
4. Estimated Suspended Passive Activity Losses:4 XX,XXX
------------
5. Net Taxable Loss/(Gain): (XX,XXX)
Assumed Tax Rate: 31%
------------
6. Estimated Average Limited Partner Tax Benefit/(Liability) per unit (based on
tax rate of 31%): 5 (X,XXX)
============
SECTION C: PROPOSED PAYMENT/DISTRIBUTIONS TO LIMITED PARTNERS
(ALL AMOUNTS PER ONE LIMITED PARTNER INVESTMENT UNIT)
1. Distribution of Limited Partner Equity in Partnership Property: X,XXX
2. Voluntary Payment: X,XXX
------------
3. Total Potential Distributions to Limited Partners: X,XXX
============
THIS ANALYSIS WAS PREPARED BY THE GENERAL PARTNER. LIMITED PARTNERS ARE URGED TO
CONSULT THEIR OWN REAL ESTATE AND TAX ADVISORS, ATTORNEYS AND ACCOUNTANTS WITH
SPECIFIC REFERENCE TO THE ABOVE ANALYSIS, THEIR OWN TAX SITUATION AND POTENTIAL
CHANGES IN APPLICABLE LAW.
1 The valuation methodology for the estimated fair market value is an accepted
industry valuation model for income-producing real estate, which involves (i)
deriving net operating income over the prior 12 months ended September 30,
1997, (ii) subtracting $300 per unit for a replacement reserve from net
operating income, (iii) applying a capitalization rate of 10.25% to the
result and (iv) subtracting a sales cost of 4%. Capitalization rate is
defined as the present value rate of return of income-producing property
expressed as a percentage. For example, a capitalization rate of 10% applied
to a property producing $10,000 in annual net income results in a present
market value of $100,000.
2 The Partnership's equity in the property is computed by subtracting the
Partnership's liabilities (including mortgage debt and advances from the
General Partner or its affiliate) from the estimated fair market value of the
property.
3 Your actual investment history may differ. Please consult your tax advisor.
4 This amount assumes each Limited Partner has not utilized Passive
Activity Losses on prior tax returns.
5 Assumes federal tax rate of 25% (based on capital gains tax rate applicable
to depreciation recapture) and 6% for state and local taxes. Actual effective
tax rate may be lower for portion of gain in excess of depreciation
recapture. And may be higher for any voluntary payment.
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