1 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, 1999 Commission File Number 0-10673 REAL ESTATE ASSOCIATES LIMITED III (A California Limited Partnership) I.R.S. Employer Identification No. 95-3547611 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 [ ] 2 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets, September 30, 1999 and December 31, 1998................1 Statements of Operations, Nine and Three Months Ended September 30, 1999 and 1998 ..........2 Statement of Partners' Equity (Deficiency), Nine Months Ended September 30, 1999 .............................3 Statements of Cash Flows, Nine Months Ended September 30, 1999 and 1998 ....................4 Notes to Financial Statements ..........................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................12 PART II. OTHER INFORMATION Item 1. Legal Proceedings.....................................................16 Item 6. Exhibits and Reports on Form 8-K......................................16 Signatures .....................................................................17 3 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) BALANCE SHEETS SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 ASSETS 1999 (Unaudited) 1998 ------------ ------------ INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ 868,228 $ 744,457 CASH AND CASH EQUIVALENTS (Note 1) 5,593,229 11,331,803 CASH DUE FROM ESCROW (Note 2) -- 1,950,530 ------------ ------------ TOTAL ASSETS $ 6,461,457 $ 14,026,790 ============ ============ LIABILITIES AND PARTNERS' EQUITY LIABILITIES: Accounts payable (Note 2) $ 57 $ 308,747 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 3 and 4) PARTNERS' EQUITY (DEFICIENCY): General partners (134,362) (61,795) Limited partners 6,595,762 13,779,838 ------------ ------------ 6,461,400 13,718,043 ------------ ------------ TOTAL LIABILITIES AND PARTNERS' EQUITY $ 6,461,457 $ 14,026,790 ============ ============ The accompanying notes are integral part of these financial statements. 1 4 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited) Nine months Three months Nine months Three months ended ended ended ended Sept 30, 1999 Sept 30, 1999 Sept 30, 1998 Sept 30, 1998 ----------- ----------- ----------- ----------- INTEREST AND OTHER INCOME $ 159,526 $ 62,552 $ 374,894 $ 124,714 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Legal and accounting 79,993 1,695 78,001 43,550 Management fees - general partner (Note 3) 132,741 44,247 341,100 113,700 Interest (Note 2) -- -- 113,250 37,750 Administrative (Notes 2 and 3) 100,772 32,962 573,853 173,602 ----------- ----------- ----------- ----------- Total operating expenses 313,506 78,904 1,106,204 368,602 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (153,980) (16,352) (731,310) (243,888) COST RELATED TO SALE OF LIMITED PARTNERSHIP INTEREST (Note 2) (380,795) DISTRIBUTIONS FROM LIMITED PARTNERSHIPS RECOGNIZED AS INCOME (Note 2) 63,663 -- 1,733,146 1,083,961 EQUITY IN INCOME OF LIMITED PARTNERSHIPS AND AMORTIZATION OF ACQUISITION COSTS (Note 2) 165,000 55,000 192,000 64,000 ----------- ----------- ----------- ----------- NET (LOSS) INCOME $ (306,112) $ 38,648 $ 1,193,836 $ 904,073 =========== =========== =========== =========== NET (LOSS) INCOME PER LIMITED PARTNERSHIP INTEREST (Note 1) $ (27) $ 3 $ 104 $ 79 =========== =========== =========== =========== The accompanying notes are integral part of these financial statements. 2 5 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (Unaudited) General Limited Partners Partners Total ------------ ------------ ------------ PARTNERSHIP INTERESTS 11,444 ============ EQUITY (DEFICIENCY), January 1, 1999 $ (61,795) $ 13,779,838 $ 13,718,043 Distribution for the nine months ended September 30, 1999 (69,506) (6,881,025) (6,950,531) Net loss for the nine months ended September 30, 1999 (3,061) (303,051) (306,112) ------------ ------------ ------------ EQUITY (DEFICIENCY), September 30, 1999 $ (134,362) $ 6,595,762 $ 6,461,400 ============ ============ ============ The accompanying notes are integral part of these financial statements. 3 6 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited) 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (306,112) $ 1,193,836 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity in income of limited partnerships and amortization of acquisition costs (165,000) (192,000) Increase in other assets -- (90,181) Decrease in interest and other payables (308,690) (5,096) ------------ ------------ Net cash (used in) provided by operating activities (779,802) 906,559 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Sales proceeds 1,950,530 -- Distributions from limited partnerships recognized as a return of investment 41,229 81,089 ------------ ------------ Net cash provided by investing activities 1,991,759 81,089 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Distribution to partners (6,950,531) -- ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,738,574) 987,648 ------------ ------------ CASH AND CASH EQUIVALENTS, beginning of period 11,331,803 10,575,810 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 5,593,229 $ 11,563,458 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ -- $ 127,042 ============ ============ The accompanying notes are integral part of these financial statements. 4 7 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1999 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 audited financial statements; accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and related notes thereto contained in the Real Estate Associates Limited III (the "Partnership") annual report for the year ended December 31, 1998. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim period 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 as of September 30, 1999 and the results of operations for the nine and three months then ended and changes in cash flows for the nine 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 corporate 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. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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 are capitalized as part of the investment account, and are being amortized on a straight line basis over the estimated lives of the underlying assets, which is generally 30 years. 5 8 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 year. The number of limited partnership interests was 11,444 for the periods presented. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and bank certificates of deposit with an original maturity of three months or less. The Partnership has its cash and cash equivalents on deposit primarily with two high credit quality institutions. Such cash and cash equivalents are 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. 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 12 limited partnerships as of September 30, 1999, after selling its interests in 20 limited partnerships in 1998. The limited partnerships as of September 30, 1999 own residential low income rental projects consisting of 1,181 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 75 percent and 99 percent of the profits and losses of the limited partnerships. 6 9 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED) 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. Distributions from limited partnerships are recognized as a reduction of capital until the investment balance has been reduced to zero. Subsequent distributions received are recognized as income. The following is a summary of the investment in limited partnerships for the nine months ended September 30, 1999: Balance, beginning of period $ 744,457 Amortization of acquisitions costs (3,000) Distribution recognized as a return of capital (41,229) Equity in income of limited partnerships 168,000 --------- Balance, end of period $ 868,228 ========= The following are unaudited combined estimated statements of operations for the nine and three months ended September 30, 1999 and 1998 for the limited partnerships in which the Partnership has investments: Nine months Three months Nine months Three months ended ended ended ended Sept. 30, 1999 Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1998 -------------- -------------- -------------- -------------- REVENUES Rental and other $ 6,168,000 $ 2,056,000 $ 17,379,000 $ 5,793,000 ------------ ------------ ------------ ------------ EXPENSES Depreciation 1,224,000 408,000 2,754,000 918,000 Interest 1,680,000 560,000 5,196,000 1,732,000 Operating 3,345,000 1,115,000 9,039,000 3,013,000 ------------ ------------ ------------ ------------ 6,249,000 2,083,000 16,989,000 5,663,000 ------------ ------------ ------------ ------------ Net (loss) income $ (81,000) $ (27,000) $ 390,000 $ 130,000 ============ ============ ============ ============ 7 10 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED) NAPICO, or one of its affiliates, is the general partner and property management agent for certain of the limited partnerships included above. 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 was generally the case under existing HAP Contracts. The payments under the renewed HAP Contracts are not expected to 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. MAHRAA provides that properties begin the restructuring process in federal fiscal year 1999 (beginning October 1, 1998). On September 11, 1998, HUD issued interim regulations implementing MAHRAA and final regulations are expected to be issued in 1999. With respect to the local limited partnerships' expiring HAP Contracts, it is expected that the HAP payments will be reduced or terminated pursuant to the terms of MAHRAA. 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. 8 11 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED) As a result of the foregoing, the Partnership in 1997 undertook an extensive review of disposition, refinancing or re-engineering alternatives for the properties in which the limited partnerships have invested and are subject to HUD mortgage and rental subsidy programs. The Partnership has incurred expenses in connection with this review by various third party professionals, including accounting, legal, valuation, structural and engineering costs, which amounted to $767,974 through December 31, 1998, including approximately $511,000 for the nine months ended September 30, 1998. Additional costs amounting to approximately $46,000 were incurred in the first quarter of 1999. Accounts payable at December 31, 1998 includes approximately $168,000 of such costs. On December 30, 1998, the Partnership sold its limited partnership interests in 20 local limited partnerships to Affiliates of Casden Properties Inc. ("CPI Affiliates"). The sale resulted in cash proceeds to the Partnership of $1,950,530 and a net gain of $2,647,716, after deducting selling costs. The cash proceeds were held in escrow at December 31, 1998 and were collected in 1999. In March 1999, the Partnership made cash distributions of $6,881,025 to the limited partners and $69,506 to the general partners, which included using proceeds from the sale of the partnership interests. Additional selling costs of $379,349 were incurred in 1999 related to the sale of limited partnership interests in 1998. CPI Affiliates purchased such limited partner interests for cash, which it raised in connection with a private placement of its equity securities. The purchase was subject to, among other things, (i) the purchase of the general partner interests in the local limited partnerships by Casden Properties Inc.; (ii) the approval of HUD and certain state housing finance agencies; and (iii) the consent of the limited partners to the sale of the local limited partnership interests held for investment by the Partnership. In August 1998, a consent solicitation statement was sent to the limited partners setting forth the terms and conditions of the purchase of the limited partners' interests held for investment by the Partnership, together with certain amendments to the Partnership Agreement and other disclosures of various conflicts of interest in connection with the proposed transaction. Prior to the sale of the partnership interests, the consents of the limited partners to the sale and amendments to the Partnership Agreement were obtained. Until the sale of the partnership interests on December 30, 1998, the Partnership was obligated on non-recourse notes payable of $1,510,000 which bore interest at 10 percent per annum and had principal maturities ranging from June 2020 to March 2024. The notes and related interest 9 12 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED) were payable from cash flow generated from operations of the related rental properties as defined in the notes. These obligations were collateralized by the Partnership's investments in the limited partnerships. Unpaid interest was due at maturity of the notes. The Partnership was relieved of these notes and related accrued interest in connection with the sale of the partnership interests. NOTE 3 - MANAGEMENT FEE AND EXPENSES DUE TO 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 approximately equal to .4 percent of the invested assets. Invested assets are defined as the costs of acquiring project interests, including the proportionate amount of the mortgage loans related to the Partnership's interests in the capital accounts of the respective partnership. The management fee incurred for the nine months ended September 30, 1999 and 1998 was approximately $133,000 and $341,000, respectively. The Partnership reimburses NAPICO for certain expenses. The reimbursement paid to NAPICO was approximately $12,400 and $26,400 for the nine months ended September 30, 1999 and 1998, respectively, and is included in administrative expenses. NOTE 4 - CONTINGENCIES On August 27, 1998, two investors holding an aggregate of eight units of limited partnership interests in the Partnership and two investors holding an aggregate of five units of limited partnership interest in Real Estate Associates Limited VI (an 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 CPI Affiliates. 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 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 managing general partner of such NAPICO managed partnerships and the other defendants believe that the plaintiffs' claims are without merit and intend to contest the actions vigorously. 10 13 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 NOTE 4 - CONTINGENCIES (CONTINUED) The corporate general partner of the Partnership is involved in various 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. 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. NOTE 5 - 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. The carrying amount of assets and liabilities reported on the balance sheets that require such disclosure approximates fair value due to their short-term maturity. 11 14 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1999 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. The Partnership made a distribution to investors on March 12, 1999, using proceeds from the disposition of its investments in certain limited partnerships. 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 .4 percent of investment 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 investment account is reduced to zero are not recognized in accordance with the equity accounting method. 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. Overall distributions from limited partnerships continue to be favorable. This primarily is due, to improved operating results at several of the properties. Except for certificates of deposit and money market funds, the Partnership's investments are entirely interests in other limited partnerships owning government assisted projects. Funds temporarily not required for such investments in projects are invested in certificate of deposit and money market funds which provide substantial amounts of interest as reflected in the statement of operations. These investments are converted to cash to meet obligations as they arise. The Partnership intends to continue investing available funds in this manner. 12 15 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1999 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Until the sale of the partnership interests on December 30, 1998, the Partnership was obligated on non-recourse notes payable of $1,510,000 which bore interest at 10 percent per annum and had principal maturities ranging from June 2020 to March 2024. The notes and related interest were payable from cash flow generated from operations of the related rental properties as defined in the notes. These obligations were collateralized by the Partnership's investments in the limited partnerships. Unpaid interest was due at maturity of the notes. The Partnership was relieved of these notes and related accrued interest in connection with the sale of the partnership interests. 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 was generally the case under existing HAP Contracts. The payments under the renewed HAP Contracts are not expected to 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. MAHRAA provides that properties begin the restructuring process in federal fiscal year 1999 (beginning October 1, 1998). On September 11, 1998, HUD issued interim regulations implementing MAHRAA and final regulations are expected to be issued in 1999. With respect to the local limited partnerships' expiring HAP Contracts, it is expected that the HAP payments will be reduced or terminated pursuant to the terms of MAHRAA. 13 16 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1999 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) 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. As a result of the foregoing, the Partnership in 1997 undertook an extensive review of disposition, refinancing or re-engineering alternatives for the properties in which the limited partnerships have invested and are subject to HUD mortgage and rental subsidy programs. The Partnership has incurred expenses in connection with this review by various third party professionals, including accounting, legal, valuation, structural and engineering costs, which amounted to $767,974 through December 31, 1998, including approximately $511,000 for the nine months ended September 30, 1998. Additional costs amounting to approximately $46,000 were incurred in the first quarter of 1999. Accounts payable at December 31, 1998 includes $168,000 of such costs. On December 30, 1998, the Partnership sold its limited partnership interests in 20 local limited partnerships to Affiliates of Casden Properties Inc. ("CPI Affiliates"). The sale resulted in cash proceeds to the Partnership of $1,950,530 and a net gain of $2,647,716, after deducting selling costs. The cash proceeds were held in escrow at December 31, 1998 and were collected in 1999. In March 1999, the Partnership made cash distributions of $6,881,025 to the limited partners and $69,506 to the general partners, which included using proceeds from the sale of the partnership interests. Additional selling costs of $379,349 were incurred in 1999 related to the sale of limited partnership interests in 1998. CPI Affiliates purchased such limited partner interests for cash, which it raised in connection with a private placement of its equity securities. The purchase was subject to, among other things, (i) the purchase of the general partner interests in the local limited partnerships by Casden Properties Inc.; (ii) the approval of HUD and certain state housing finance agencies; and (iii) the consent of the limited partners to the sale of the local limited partnership interests held for investment by the Partnership. 14 17 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1999 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) In August 1998, a consent solicitation statement was sent to the limited partners setting forth the terms and conditions of the purchase of the limited partners' interests held for investment by the Partnership, together with certain amendments to the Partnership Agreement and other disclosures of various conflicts of interest in connection with the proposed transaction. Prior to the sale of the partnership interests, the consents of the limited partners to the sale and amendments to the Partnership Agreement were obtained. 15 18 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1999 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 the Partnership and two investors holding an aggregate of five units of limited partnership interest in Real Estate Associates Limited VI (an 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 CPI Affiliates. 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 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 managing general partner of such NAPICO managed partnerships and the other defendants believe that the plaintiffs' claims are without merit and intend to contest the actions vigorously. The corporate general partner is involved in various lawsuits. None of these are related to REAL III. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) No exhibits are required per the provision of Item 7 of regulation S-K. 16 19 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1999 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 III (a California limited partnership) By: National Partnership Investments Corp., its General Partner By: /s/ BRUCE NELSON ------------------------------------- Bruce Nelson President Date: November 17, 1999 ----------------------------------- By: /s/ CHARLES H. BOXENBAUM ------------------------------------- Charles H. Boxenbaum Chief Executive Officer Date: November 17, 1999 ----------------------------------- 17