SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended SEPTEMBER 30, 2001
Commission File Number 0-13810
REAL ESTATE ASSOCIATES LIMITED VII
(A California Limited Partnership)
I.R.S. Employer Identification No. 95-3290316
9090 WILSHIRE BLVD., SUITE 201
BEVERLY HILLS, CALIF. 90211
Registrant's Telephone Number,
Including Area Code (310) 278-2191
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets, September 30, 2001 and December 31, 2000 ........................ 1
Statements of Operations,
Nine and Three Months Ended September 30, 2001 and 2000 ................... 2
Statement of Partners' Deficiency,
Nine Months Ended September 30, 2001 ...................................... 3
Statements of Cash Flows,
Nine Months Ended September 30, 2001 and 2000 ............................. 4
Notes to Financial Statements ................................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation ........................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................17
Item 6. Exhibits and Reports on Form 8-K..............................................17
Signatures.............................................................................18
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
ASSETS
2001
(Unaudited) 2000
------------ ------------
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ -- $ 149,626
CASH 710,387 205,538
------------ ------------
TOTAL ASSETS $ 710,387 $ 355,164
============ ============
LIABILITIES AND PARTNERS' DEFICIENCY
LIABILITIES:
Notes payable (Notes 3 and 6) $ 15,124,501 $ 17,424,501
Accrued interest payable (Notes 3 and 6) 23,049,401 25,147,770
Accrued fees and expenses
due general partner (Note 4) 4,415,466 5,506,492
Accounts payable and other liabilities 49,235 78,280
------------ ------------
42,638,603 48,157,043
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 4 and 5)
PARTNERS' DEFICIENCY:
General partners (742,413) (801,150)
Limited partners (41,185,803) (47,000,729)
------------ ------------
(41,928,216) (47,801,879)
------------ ------------
TOTAL LIABILITIES AND PARTNERS'
DEFICIENCY $ 710,387 $ 355,164
============ ============
The accompanying notes are an integral part of these financial statements.
1
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(Unaudited)
Nine months Three months Nine months Three months
ended ended ended ended
Sept 30, 2001 Sept 30, 2001 Sept 30, 2000 Sept 30, 2000
------------- ------------- ------------- -------------
REVENUE:
Interest income $ 11,732 $ 5,025 $ 2,182 $ 589
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Interest (Note 3) 1,204,620 378,318 1,227,923 409,308
Management fees - general partner (Note 4) 375,917 124,986 375,134 124,790
General and administrative (Note 4) 63,304 26,634 80,844 19,501
Legal and accounting 97,409 43,464 56,921 2,700
----------- ----------- ----------- -----------
Total operating expenses 1,741,250 573,402 1,740,822 556,299
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,729,518) (568,377) (1,738,640) (555,710)
GAIN ON SALE AND TRANSFER OF
PARTNERSHIP INTERESTS (Note 2) 7,492,612 5,308,239 -- --
DISTRIBUTIONS FROM LIMITED
PARTNERSHIP RECOGNIZED
AS INCOME (Note 2) 105,655 -- 139,904 15,840
EQUITY IN INCOME (LOSS) OF LIMITED
PARTNERSHIPS AND AMORTIZATION
OF ADDITIONAL BASIS AND
ACQUISITION COSTS (Note 2) 4,914 (2,809) (30,000) (10,000)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 5,873,663 $ 4,737,053 $(1,628,736) $ (549,870)
----------- ----------- ----------- -----------
NET INCOME (LOSS) PER LIMITED PARTNERSHIP
INTEREST $ 282 $ 228 $ (78) $ (26)
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
2
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF PARTNERS' DEFICIENCY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited)
General Limited
Partners Partners Total
------------ ------------ ------------
PARTNERSHIP INTERESTS 20,802
============
DEFICIENCY
January 1, 2001 $ (801,150) $(47,000,729) $(47,801,879)
Net income for the nine months
ended September 30, 2001 58,737 5,814,926 5,873,663
------------ ------------ ------------
DEFICIENCY
September 30, 2001 $ (742,413) $(41,185,803) $(41,928,216)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
3
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(Unaudited)
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,873,663 $(1,628,736)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Gain on sale and transfer of partnership interest (7,492,612) --
Equity in (income) loss of limited partnerships (4,914) 30,000
Increase in accrued interest payable 1,167,119 1,227,923
(Decrease) increase in accrued fees and expenses
due general partner (1,091,026) 392,924
Decrease in accounts payable and other liabilities (29,045) (3,334)
----------- -----------
Net cash (used in) provided by operating activities (1,576,815) 18,777
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to limited partnerships (102,709)
Proceeds from sale of partnership interest 2,184,373 --
----------- -----------
Net cash provided by investing activities 2,081,664 --
----------- -----------
NET INCREASE IN CASH 504,849 18,777
CASH, BEGINNING OF PERIOD 205,538 96,379
----------- -----------
CASH, END OF PERIOD $ 710,387 $ 115,156
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
SEE NOTE 3
The accompanying notes are an integral part of these financial statements.
4
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The information contained in the following notes to the financial
statements is condensed from that which would appear in the annual
financial statements; accordingly, the financial statements included
herein should be reviewed in conjunction with the financial statements
and related notes thereto contained in the Annual Report for the year
ended December 31, 2000 prepared by Real Estate Associates Limited VII
(the "Partnership."). Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end. The
results of operations for the interim periods presented are not
necessarily indicative of the results for the entire year.
In the opinion of the Partnership, the accompanying unaudited financial
statements contain all adjustments (consisting primarily of normal
recurring accruals), necessary to present fairly the financial position
of he Partnership at September 30, 2001, and the results of operations
and changes in cash flows for the nine and three months then ended.
The general partners have a 1 percent interest in profits and losses of
the Partnership. The limited partners have the remaining 99 percent
interest which is allocated in proportion to their respective individual
investments. National Partnership Investments Corp. (NAPICO) is the
managing general partner of the Partnership. Casden Properties Inc. owns
a 95.25% economic interest in NAPICO, with the balance owned by Casden
Investment Corporation ("CIC"). CIC, which is wholly owned by Alan I.
Casden, owns 95% of the voting common stock of NAPICO.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 was effective immediately and SFAS 142
will be effective January 2002. The new standards are not expected to
have a significant impact on the Partnership's financial statements.
5
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
SEPTEMBER 30, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USES OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
METHOD OF ACCOUNTING FOR INVESTMENT IN LIMITED PARTNERSHIPS
The investment in limited partnerships is accounted for on the equity
method. Acquisition, selection and other costs related to the
acquisition of the projects were capitalized as part of the investment
account and are being amortized on a straight line basis over the
estimated lines of the underlying assets, which is generally 30 years.
NET INCOME (LOSS) PER LIMITED PARTNERSHIP INTEREST
Net income (loss) per limited partnership interest was computed by
dividing the limited partners' share of net income (loss) by the number
of limited partnership interests outstanding during the period. The
number of limited partnership interests was 20,802 for the periods
presented.
CASH
The Partnership has its cash on deposit primarily with high credit
quality financial institutions. Such cash is in excess of the FDIC
insurance limit.
INCOME TAXES
No provision has been made for income taxes in the accompanying
financial statements since such taxes, if any, are the liability of the
individual partners.
6
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
SEPTEMBER 30, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Partnership reviews long-lived assets to determine if there has been
any permanent impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
If the sum of the expected future cash flows is less than the carrying
amount of the assets, the Partnership recognizes an impairment loss.
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS
The Partnership holds limited partnership interests in 19 limited
partnerships as of September 30, 2001, after surrendering its interest
in one limited partnership in July 2001 and selling its interest in one
limited partnership in April 2001. In addition, the Partnership holds a
general partner interest in Real Estate Associates IV ("REA IV"), which
in turn, holds limited partner interest in 15 additional limited
partnerships. NAPICO is also a general partner in REA IV. In total,
therefore the Partnership holds interests, either directly or indirectly
through REAL VII, in 35 limited partnerships, located in 9 different
states which own residential low income rental projects consisting of
3,259 apartment units. The mortgage loans of these projects are payable
to or insured by various governmental agencies.
The Partnership, as a limited partner, is entitled to between 98 percent
and 99 percent of the profits and losses in the limited partnerships it
has invested in directly. The Partnership is also entitled to 99 percent
of the profits and losses of REA IV. REA IV holds a 99 percent interest
in each of the limited partnerships in which it has invested.
Equity in losses of limited partnerships is recognized in the financial
statements until the limited partnership investment account is reduced
to a zero balance. Losses incurred after the limited partnership
investment account is reduced to zero are not recognized. The cumulative
amount of the unrecognized equity in losses of certain limited
partnerships was in the aggregate approximately $10,900,000 and
$10,427,000 as of September 30, 2001 and December 31, 2000,
respectively.
Distributions from the limited partnerships are accounted for as a
return of capital until the investment balance is reduced to zero.
Subsequent distributions received are recognized as income.
7
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
SEPTEMBER 30, 2001
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
In July 2001, the Partnership surrendered its interest in the Edgewood
Terrace limited partnership and realized a gain of $5,308,239 (Note 3).
In May 2001, a foreclosure action was filed by the holders of certain
purchase money notes against the Danbury local partnership, in which the
Partnership has invested. The notes are in the aggregate face amount of
$1,150,000 (Note 3), and were issued in connection with the acquisition
of Danbury Park (a 151-unit complex located in Ypsilanti, Michigan) by
the local partnership. The parties have reached a settlement whereby the
plaintiffs have agreed to (i) accept payment of a discounted amount
($765,000), provided payment is made by June 30, 2002, and (ii) stay the
foreclosure proceedings unless payment is not received on or before the
due date. The Partnership has no investment related to this limited
partnership.
In April 2001, the Partnership sold its interest in the Pebbleshire
limited partnership and realized a gain of $2,184,373. The gain is equal
to the net proceeds received because the Partnership had no investment
balance related to this limited partnership.
The following is a summary of the investment in limited partnerships for
the nine months ended September 30, 2001:
Balance, beginning of period $ 149,626
Equity in income of limited partnerships 9,513
Write-off of Edgewood Terrace (257,249)
Amortization of acquisition costs (4,599)
Advances to limited partnerships 102,709
---------
Balance, end of period $ 0
=========
8
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
SEPTEMBER 30, 2001
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
The following are unaudited combined estimated statements of operations
for the nine and three months ended September 30, 2001 and 2000 for the
limited partnerships in which the Partnership has investments:
Nine months Three months Nine months Three months
ended ended ended ended
Sept. 30, 2001 Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2000
-------------- -------------- -------------- --------------
REVENUES:
Rental and other $ 15,057,000 $ 5,019,000 $ 14,719,000 $ 4,907,000
------------ ------------ ------------ ------------
EXPENSES:
Depreciation 2,400,000 800,000 543,000 848,000
Interest 1,458,000 486,000 145,000 382,000
Operating 11,661,000 3,887,000 11,298,000 3,766,000
------------ ------------ ------------ ------------
15,519,000 5,173,000 14,986,000 4,996,000
------------ ------------ ------------ ------------
Net loss $ (462,000) $ (154,000) $ (267,000) $ (89,000)
============ ============ ============ ============
An affiliate of NAPICO, was the general partner and property management
agent for the Pebbleshire limited partnership. This Local Partnership
paid the affiliate property management fees in the amount of 5 percent
of its gross rental revenues and data processing fees. The amounts paid
were approximately $4,115 for the nine months ended September 30, 2001.
Under recent adopted law and policy, the United States Department of
Housing and Urban Development ("HUD") has determined not to renew the
Housing Assistance Payment ("HAP") Contracts on a long term basis on the
existing terms. In connection with renewals of the HAP Contracts under
such new law and policy, the amount of rental assistance payments under
renewed HAP Contracts will be based on market rentals instead of above
market rentals, which may be the case under existing HAP Contracts. The
payments under the renewed HAP Contracts may not be in an amount that
would provide sufficient cash flow to permit owners of properties
subject to HAP Contracts to meet the debt service requirements of
existing loans insured by the Federal Housing Administration of HUD
("FHA") unless such mortgage loans
9
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
SEPTEMBER 30, 2001
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
are restructured. In order to address the reduction in payments under
HAP Contracts as a result of this new policy, the Multi-family Assisted
Housing Reform and Affordability Act of 1997 ("MAHRAA"), which was
adopted in October 1997, provides for the restructuring of mortgage
loans insured by the FHA with respect to properties subject to the
Section 8 program. Under MAHRAA, an FHA-insured mortgage loan can be
restructured into a first mortgage loan which will be amortized on a
current basis and a low interest second mortgage loan payable to FHA
which will only be payable on maturity of the first mortgage loan. This
restructuring results in a reduction in annual debt service payable by
the owner of the FHA-insured mortgage loan and is expected to result in
an insurance payment from FHA to the holder of the FHA-insured loan due
to the reduction in the principal amount. MAHRAA also phases out
project-based subsidies on selected properties serving families not
located in rental markets with limited supply, converting such subsidies
to a tenant-based subsidy.
When the HAP Contracts are subject to renewal, there can be no assurance
that the local limited partnerships in which the Partnership has an
investment will be permitted to restructure its mortgage indebtedness
under MAHRAA. In addition, the economic impact on the Partnership of the
combination of the reduced payments under the HAP Contracts and the
restructuring of the existing FHA-insured mortgage loans under MAHRAA is
uncertain.
On December 30, 1998, the Partnership sold its limited partnership
interests in 11 local limited partnerships to subsidiaries of Casden
Properties Inc. The sale resulted in cash proceeds to the Partnership of
$400,000 which was collected in 1999. In March 1999, the Partnership
made cash distributions of $272,500 to the limited partners and $2,750
to the general partners, primarily using proceeds from the sale of the
partnership interests.
NOTE 3 - NOTES PAYABLE
Certain of the Partnership's investments involved purchases of
partnership interests from partners who subsequently withdrew from the
operating partnership. The Partnership is obligated on non-recourse
notes payable of $17,324,501, bearing interest at 9.5 to 10 percent, to
the sellers of the Partnership interests. The notes have principal
maturity dates ranging from August 1999 to January 2002 or upon sale or
refinancing of the underlying partnership properties. These obligations
are collateralized by the Partnership's investments in the investee
10
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
SEPTEMBER 30, 2001
NOTE 3 - NOTES PAYABLE (CONTINUED)
partnerships and are payable out of cash distributions from the investee
partnerships, as defined in the notes. Unpaid interest is due at
maturity of the notes.
Maturity dates on the notes and related accrued interest payable are as
follows:
Accrued
Years Ending December 31, Notes Interest
- ------------------------- ----------- -----------
2001 $13,534,000 $20,525,799
2002 1,590,501 2,523,602
----------- -----------
$15,124,501 $23,049,401
=========== ===========
Notes and related accrued interest payable, aggregating $39,560,121
became payable prior to September 30, 2001. Due to the Partnership's
lack of cash and partners' deficiency, there is substantial doubt about
its ability to satisfy these obligations, which would result in the
possible foreclosure of the investments in the local limited
partnerships. As a result, there is substantial doubt about the
Partnership's ability to continue as a going concern.
In February 2000, the Partnership entered into an agreement with a
lender related to a note in the amount $2,200,000 plus accrued interest
of $3,265,488 as of July 31, 2001 that became payable in December 1999.
All conditions of the agreement were satisfied in July 2001, and the
lender cancelled the note and accrued interest in exchange for the
Partnership surrendering its interest in the Edgewood Terrace limited
partnership. The Partnership recognized a gain on this transaction of
approximately $5,308,000.
Management is in process of attempting to negotiate extensions of the
maturity dates on the other past due notes payable.
NOTE 4 - ACCRUED FEES AND EXPENSES DUE GENERAL PARTNER
Under the terms of the Restated Certificate and Agreement of Limited
Partnership, the Partnership is obligated to NAPICO for an annual
management fee equal to .5 percent of the invested assets of the
partnerships. Invested assets is defined as the costs of acquiring
project interests, including the proportionate amount of the mortgage
loans related to the Partnership's
11
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
SEPTEMBER 30, 2001
NOTE 4 - ACCRUED FEES AND EXPENSES DUE GENERAL PARTNER (CONTINUED)
interests in the capital accounts of the respective partnerships. The
fee was $376,000 and $375,000 for the nine months ended September 30,
2001 and 2000, respectively.
The Partnership reimburses NAPICO for certain expenses. The expense
incurred to NAPICO was approximately $33,000 and $25,000 for the nine
months ended September 30, 2001 and 2000, respectively, and is included
in administrative expenses.
As of September 30, 2001, the fees and expenses of $4,415,466 due the
general partner exceeded the Partnership's cash. The general partner,
during the forthcoming year, will not demand payment of amounts due in
excess of such cash or such that the Partnership would not have
sufficient operating cash; however, the Partnership will remain liable
for all such amounts.
NOTE 5 - CONTINGENCIES
On August 27, 1998, two investors holding an aggregate of eight units of
limited partnership interests in Real Estate Associates Limited III (an
affiliated partnership in which NAPICO is the managing general partner)
and two investors holding an aggregate of five units of limited
partnership interest in Real Estate Associates Limited VI (another
affiliated partnership in which NAPICO is the managing general partner)
commenced an action in the United States District Court for the Central
District of California against the Partnership, NAPICO and certain other
affiliated entities. The complaint alleges that the defendants breached
their fiduciary duty to the limited partners of certain NAPICO managed
partnerships and made materially false and misleading statements in the
consent solicitation statements sent to the limited partners of such
partnerships relating to approval of the transfer of partnership
interests in limited partnerships, owning certain of the properties, to
Casden Properties Inc., which was organized by an affiliate of NAPICO.
The plaintiffs seek equitable relief, as well as compensatory damages
and litigation related costs. On August 4, 1999, one investor holding
one unit of limited partnership interest in Housing Programs Limited
(another affiliated partnership in which NAPICO is the managing general
partner) commenced a virtually identical action in the United States
District Court for the Central District of California against the
Partnership, NAPICO and certain other affiliated entities. The second
action has been subsumed in the first action, which has been certified
as a class action. NAPICO, the
12
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
SEPTEMBER 30, 2001
NOTE 5 -- CONTINGENCIES (CONTINUED)
managing general partner of such partnerships, and the other defendants
believe that the plaintiffs' claims are without merit and are contesting
the actions vigorously.
The managing general partner of the Partnership is a plaintiff in
various lawsuits and has also been named a defendant in other lawsuits
arising from transactions in the ordinary course of business. In the
opinion of management and the corporate general partner, the claims will
not result in any material liability to the Partnership.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments" requires disclosure of fair value
information about financial instruments, when it is practicable to
estimate that value. The notes payable are collateralized by the
Partnership's investments in investee limited partnerships and are
payable only out of cash distributions from the investee partnerships.
The operations generated by the investee limited partnerships, which
account for the Partnership's primary source of revenues, are subject to
various government rules, regulations and restrictions which make it
impracticable to estimate the fair value of the notes payable and
related accrued interest and amounts due general partner. The carrying
amounts of other assets and liabilities reported on the balance sheets
that require such disclosure approximate fair value due to their
short-term maturity.
13
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of funds include interest income
earned from investing available cash and distributions from limited
partnerships in which the Partnership has invested. It is not expected
that any of the local limited partnerships in which the Partnership has
invested will generate cash flow sufficient to provide for distributions
to limited partners in any material amount.
RESULTS OF OPERATIONS
Partnership revenues consist primarily of interest income earned on
certificates of deposit and other temporary investment of funds not
required for investment in local partnerships.
Operating expenses consist primarily of recurring general and
administrative expenses and professional fees for services rendered to
the Partnership. In addition, an annual Partnership management fee in an
amount equal to .5 percent of invested assets is payable to the
corporate general partner.
The Partnership accounts for its investments in the local limited
partnerships on the equity method, thereby adjusting its investment
balance by its proportionate share of the income or loss of the local
limited partnerships. Losses incurred after the limited partnership
account is reduced to zero are not recognized.
Distributions received from limited partnerships are recognized as
return of capital until the investment balance has been reduced to zero
or to a negative amount equal to future capital contributions required.
Subsequent distributions received are recognized as income.
Except for certificates of deposit and money market funds, the
Partnership's investments are entirely interests in other limited and
general partnerships owning government assisted projects. Available cash
is invested in money market funds and certificates of deposit which
provide interest income as reflected in the statement of operations.
These temporary investments can be easily converted to cash to meet
obligations as they arise.
14
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Under recently adopted law and policy, the United States Department of
Housing and Urban Development ("HUD") has determined not to renew the
Housing Assistance Payment ("HAP") Contracts on a long term basis on the
existing terms. In connection with renewals of the HAP Contracts under
such new law and policy, the amount of rental assistance payments under
renewed HAP Contracts will be based on market rentals instead of above
market rentals, which may be the case under existing HAP Contracts. The
payments under the renewed HAP Contracts may not be in an amount that
would provide sufficient cash flow to permit owners of properties
subject to HAP Contracts to meet the debt service requirements of
existing loans insured by the Federal Housing Administration of HUD
("FHA") unless such mortgage loans are restructured. In order to address
the reduction in payments under HAP Contracts as a result of this new
policy, the Multi-family Assisted Housing Reform and Affordability Act
of 1997 ("MAHRAA"), which was adopted in October 1997, provides for the
restructuring of mortgage loans insured by the FHA with respect to
properties subject to the Section 8 program. Under MAHRAA, an
FHA-insured mortgage loan can be restructured into a first mortgage loan
which will be amortized on a current basis and a low interest second
mortgage loan payable to FHA which will only be payable on maturity of
the first mortgage loan. This restructuring results in a reduction in
annual debt service payable by the owner of the FHA-insured mortgage
loan and is expected to result in an insurance payment from FHA to the
holder of the FHA-insured loan due to the reduction in the principal
amount. MAHRAA also phases out project-based subsidies on selected
properties serving families not located in rental markets with limited
supply, converting such subsidies to a tenant-based subsidy.
When the HAP Contracts are subject to renewal, there can be no assurance
that the local limited partnerships in which the Partnership has an
investment will be permitted to restructure its mortgage indebtedness
under MAHRAA. In addition, the economic impact on the Partnership of the
combination of the reduced payments under the HAP Contracts and the
restructuring of the existing FHA-insured mortgage loans under MAHRAA is
uncertain.
15
REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Notes and related accrued interest payable, aggregating $39,560,121
became payable prior to September 30, 2001. Due to the Partnership's
lack of cash and partners' deficiency, there is substantial doubt about
its ability to satisfy these obligations, which would result in the
possible foreclosure of the investments in the local limited
partnerships. As a result, there is substantial doubt about the
Partnership's ability to continue as a going concern.
In February 2000, the Partnership entered into an agreement with a
lender related to a note in the amount $2,200,000 plus accrued interest
of $3,300,322 as of September 30, 2001 that became payable in December
1999. Subject to certain conditions, the lender agreed to cancel the
note and accrued interest and release from escrow a payment of $100,000
to the Partnership in exchange for the Partnership surrendering its
interest in the Edgewood Terrace limited partnership. Upon satisfaction
of all conditions, the Partnership will recognize a gain on this
transaction of approximately $5,600,000 as it has a zero investment
balance in this limited partnership.
Management is in process of attempting to negotiate extensions of the
maturity dates on the other past due notes payable.
In April 2001, the Partnership sold its interest in the Pebbleshire
limited partnership and realized a gain of $2,184,373. The gain is equal
to the net proceeds received because the Partnership had no investment
balance related to this limited partnership.
On December 30, 1998, the Partnership sold its limited partnership
interests in 11 local limited partnerships to the Operating Partnership.
The sale resulted in cash proceeds to the Partnership of $400,000, which
was collected in 1999. In March 1999, the Partnership made cash
distributions of $272,000 to the limited partners and $2,750 to the
general partners, primarily using proceeds from the sale of the
partnership interests.
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REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 2001
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 27, 1998, two investors holding an aggregate of eight units of limited
partnership interests in Real Estate Associates Limited III (an affiliated
partnership in which NAPICO is the managing general partner) and two investors
holding an aggregate of five units of limited partnership interest in Real
Estate Associates Limited VI (another affiliated partnership in which NAPICO is
the managing general partner) commenced an action in the United States District
Court for the Central District of California against the Partnership, NAPICO and
certain other affiliated entities. The complaint alleges that the defendants
breached their fiduciary duty to the limited partners of certain NAPICO managed
partnerships and made materially false and misleading statements in the consent
solicitation statements sent to the limited partners of such partnerships
relating to approval of the transfer of partnership interests in limited
partnerships, owning certain of the properties, to Casden Properties Inc., which
was organized by an affiliate of NAPICO. The plaintiffs seek equitable relief,
as well as compensatory damages and litigation related costs. On August 4, 1999,
one investor holding one unit of limited partnership interest in Housing
Programs Limited (another affiliated partnership in which NAPICO is the managing
general partner) commenced a virtually identical action in the United States
District Court for the Central District of California against the Partnership,
NAPICO and certain other affiliated entities. The second action has been
subsumed in the first action, which has been certified as a class action.
NAPICO, the managing general partner of such partnerships, and the other
defendants believe that the plaintiffs' claims are without merit and are
contesting the actions vigorously.
The Partnership's managing general partner is involved in various lawsuits. None
of these are related to REAL VII.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are required per the provision of Item 7 of
regulation S-K and no reports on Form 8-K were filed during the
quarter ended September 30, 2001.
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REAL ESTATE ASSOCIATES LIMITED VII
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REAL ESTATE ASSOCIATES LIMITED VII
(a California limited partnership)
By: National Partnership Investments Corp.,
General Partner
/s/ BRUCE NELSON
--------------------------------
Bruce Nelson
President
Date: NOVEMBER 14, 2001
--------------------------------
/s/ BRIAN H. SHUMAN
--------------------------------
Brian H. Shuman
Chief Financial Officer
Date: NOVEMBER 14, 2001
--------------------------------
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