10-Q 1 lib10q_3rd.txt 3RD QUARTER 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended September 30, 2001 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------------- ------------------------ Commission file number 0-13520 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Massachusetts 04-2828131 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Second Avenue, Needham, MA 02494 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (781) 444-5251 -------------------------------------------------------------------- Former address, if changed from last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 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. [X] Yes [ ] No Exhibits Index on Page 25 Page 1 of 26

5 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENT OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, 2000 ------------- Cash flows from operating activities: Cash distributions from Local Limited Partnerships $ 129,618 Interest payments on Purchase Money Notes (123,760) Cash paid for general and administration expenses (47,567) Interest received 13,899 ----------- Net cash used in operating activities (27,810) ----------- Cash flows from financing activity: Capital distributions (3,087) ----------- Net cash used in financing activities (3,087) ----------- Cash flows from investing items: Cash proceeds from sale of investment in Osuna Apartments 100,000 Consulting fees (23,426) Deferred closing costs and reimbursable expenses (49,797) Estimated state taxes paid from proceeds from sale of investments in Local Limited Partnerships (211,271) ----------- Net cash used in investing items (184,494) ----------- Net decrease in cash and cash equivalents (215,391) Cash and cash equivalents at: Beginning of period 526,940 ----------- End of period $ 311,549 =========== (continued) 6 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENT OF CASH FLOWS (continued) (Unaudited) Reconciliation of net income to net cash provided by operating activities: For the Nine Months Ended September 30, 2000 ------------- Net income $ 1,894,334 Adjustments to reconcile net income to net cash provided by operating activities: Share of income of Local Limited Partnership investments (109,599) Cash distributions from Local Limited Partnerships 129,618 Interest expense added to Purchase Money Notes, net of discount amortization 440,482 Gain on sale of investment in Local Limited Partnerships (2,432,299) (Decrease) increase in: Accrued interest payable (3,280) Accounts payable to affiliates 73,499 Accounts payable (1,565) Accrued expenses (19,000) ----------- Net cash used in operating activities $ (27,810) =========== The accompanying notes are an integral part of these financial statements. 7 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Organization and Liquidation of the Partnership Organization Liberty Housing Partners Limited Partnership (the "Partnership") was formed under the Massachusetts Uniform Limited Partnership Act on March 20, 1984 for the primary purpose of investing in other limited partnerships which own and operate government assisted multi-family rental housing complexes (the "Local Limited Partnerships"). Liquidation and Sale of Investments in Local Limited Partnerships On March 30, 2001, the Partnership sold its 98% limited partnership interests in Fuquay-Varina, Oxford Homes and Williamston Homes to the general partner of these partnerships or his affiliate for $148,485 plus the assumption of the related Purchase Money Note obligations. The carrying value of these properties had been adjusted at December 31, 2000 to reflect the actual sales transactions. On February 1, 2000, the Partnership sold its 98% interest as a limited partner (the "Partnership Interest") in Osuna Apartments Company ("Osuna") to the Sovereign Management Corporation, the company retained by Osuna to manage its apartment complex (the "Purchaser"). In consideration for the sale of the Partnership Interest, the Partnership received a net cash purchase price of $100,000. In connection with the sale, the holders of the Purchase Money Notes (the "Notes") issued by the Partnership in connection with its acquisition of the Partnership Interest released the Partnership from all liabilities in connection with the Notes. After transaction expenses, including $1,800 recognized in the third quarter of 2000, the Partnership recognized a gain of $2,432,299 on the sale of the investment. On May 28, 1999, the Partnership sold its interest in Fiddlers Creek Apartments in exchange for $483,451 in cash and assumption of the Purchase Money Note obligations. On April 13, 2000, estimated state withholding taxes totaling $211,271 were paid from the proceeds of the sale of the Partnership's investment in Fiddlers Creek Apartments. The Partnership subsequently reevaluated this obligation and applied for a refund of the $211, 271 previously remitted. On November 7, 2000 the refund was received with interest of $4,659. On July 15, 1999, the Partnership sold its interest in Linden Park Associates Limited Partnership in exchange for $395,960 in cash. Linden Park Associates refinanced their existing debt and also paid in full the principal and accrued and unpaid interest due the Partnership on their notes totaling $241,058. In accordance with the Partnership's agreement with the General Partner of Linden Park Associates (the "Linden GP"), these funds have been segregated for use to pay the fees and expenses due the Linden GP in connection with the consulting arrangement described below. Interest earned on these segregated funds will be available to pay these fees and expenses. 8 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Organization and Liquidation of the Partnership, continued Liquidation and Sale of Investments in Local Limited Partnerships, continued The Linden GP was engaged in September, 1998 to assist the general partner to review the Partnership's portfolio, develop a strategy for maximizing the value of the portfolio and implementing the strategy. The agreement provides for fees based on the successful implementation of all or part of the strategy developed which will be paid from the segregated funds discussed above. The remaining balance of the segregated funds was $58,696 as of September 30, 2001. In the second quarter of 2001, consulting fees totaling $18,018 were paid to the Linden GP in respect to Austintown Associates. In the first quarter of 2001, the consulting fees paid to the Linden GP in respect of the successful sales of the Partnership's investments in Fuquary-Varina, Oxford Homes and Williamston Homes totaled $71,723. In 2000, the consulting fees paid to the Linden GP in respect of the successful sale of the Partnership's investment in Osuna Apartments was $23,426 and reimbursed expenses totaled $407. Management entered into negotiations to sell the Partnership's 94% interests in Brierwood, Brierwood II, Pine Forest and Meadowwood Apartments. The sale of the Partnership's interests in Brierwood, Pine Forest and Meadowwood Apartments requires consent from all the related Purchase Money Note holders. Such consents were requested. The Partnership received unanimous consent from the Purchase Money Note holders relating to Pine Forest Apartments but did not receive unanimous consent from the Purchase Money Note holders relating to Brierwood and Meadowwood Apartments. Accordingly, the transactions could not all be consummated as proposed. Under the partnership agreements relating to these investments, Liberty LGP has the right to cause the sale of the partnership's project. Liberty LGP has agreed to pursue the sale of these four projects and has caused the respective Local Limited Partnerships to enter into contracts for sale of the projects. The proposed purchasers are affiliates of the local general partner in these partnerships. The Local Limited Partnership would receive only a nominal cash payment in connection with each sale. The transactions are not expected to result in any distribution in respect of the Partnership's interest in these partnerships. Management presently anticipates the closing of these transactions by the end of 2001. The Partnership entered into an agreement with the local general partner of Austintown Associates to sell the Partnership's 98% limited partnership interest, subject, among other things, to the consent of the related Purchase Money Note holders. The Partnership did not receive unanimous consent of the Purchase Money Note holders and the agreement expired on April 1, 2000. On September 15, 2000 certain of the Purchase Money Note holders commenced an action in the Court of Common Pleas Mahoning County, Ohio seeking, among other things, to foreclose upon the Partnership's pledge of its 98% limited partnership interest in Austintown Associates. The Partnership did not contest the proceeding and, on February 26, 2001, the Court entered a default judgment and order appointing a receiver to sell the Partnership's interest in Austintown Associates to satisfy the judgment. The sale proceeds, after the costs of sale, will be paid to the Purchase Money Note holders. 9 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Organization and Liquidation of the Partnership, continued Liquidation and Sale of Investments in Local Limited Partnerships, continued Management commenced discussions with the local manager for Surry Manor, Ltd. and Glendale Manor Apartments to either purchase the Partnership's interests in those partnerships or sell the Partnership's projects. The local manager is now in the process of obtaining market studies for these properties. No agreement on the transfer of these interests or the sale of these properties has been reached. The sale of these interests requires unanimous consent of the Purchase Money Note holders. Under the partnership agreements relating to these investments, Liberty LGP has the right to cause the sale of these projects. Management will continue to pursue both options in the fourth quarter of 2001. The carrying values of the investments in the Local Limited Partnerships and the Purchase Money Notes and related accrued interest were adjusted to their estimated fair values and settlement amounts, respectively, upon adopting the liquidation basis of accounting (See Note 2). As discussed above, the Partnership is currently in various stages of negotiations to sell its interests in the remaining seven Local Limited Partnerships. If the Partnership is successful in disposing of its remaining investments, management presently intends to wind up the Partnership's operations in the fourth quarter of 2001 or the first quarter of 2002. No assurance can be given that the Partnership will be able to successfully conclude any of the above transactions. Consequently, the completion of the liquidation of the Partnership may be different than currently anticipated. The net amount, if any, ultimately available for distribution from the liquidation of the Partnership depends on many unpredictable factors, such as the amounts realized on the sale of the remaining investments in Local Limited Partnerships, carrying costs of the assets prior to sale, settlement of claims and commitments, the amount of revenue and expenses of the Partnership until completely liquidated and other uncertainties. 2. Significant Accounting Policies Basis of Presentation In the opinion of the General Partner, the accompanying unaudited financial statements contain all normal recurring adjustments necessary to present fairly the financial statements of the Partnership for the periods presented. Changes of net assets in liquidation and operating results of any interim period are not necessarily indicative of the results that may be expected for a full year. The financial statements do not 10 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Unaudited) 2. Significant Accounting Policies, continued Basis of Presentation, continued include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the Partnership's audited financial statements and notes thereto included in the Partnership's annual report on Form 10-K for the year ended December 31, 2000. Basis of Accounting Effective December 31, 2000, the Partnership adopted the liquidation basis of accounting. Prior to that date, the Partnership recorded results of operations using the going concern basis of accounting. The accompanying statements of net assets in liquidation and statement of changes of net assets in liquidation, reflect the transactions of the Partnership utilizing liquidation accounting concepts as required by accounting principles generally accepted in the United States of America. Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated payable amounts. The valuation of assets and liabilities necessarily requires estimates and assumptions, and there are uncertainties in carrying out the dissolution of the Partnership. The actual values upon dissolution and costs associated therewith could be higher or lower than the amounts recorded. The accompanying statement of operations for the three months and nine months ended September 30, 2000 reflects the operations of the Partnership prior to the adoption of liquidation basis of accounting and prior to the adjustments required to adopt the liquidation basis of accounting. Investment in Local Limited Partnerships Investments in Local Limited Partnerships at September 30, 2001 consist of investments in seven Local Limited Partnerships which are stated at estimated liquidation value. Prior to the adoption of liquidation accounting, the investments in Local Limited Partnerships were accounted for by the equity method whereby costs to acquire the investments, including cash paid, notes issued and other costs of acquisition, were capitalized as part of the investment account. The Partnership's equity in the earnings or losses of each of the Local Limited Partnerships was reflected as an addition to or reduction of the respective investment account. The Partnership did not recognize losses, which reduced its investment account below zero. Cash distributions received which reduce the investment below zero were recognized as investment income. 11 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Unaudited) 2. Significant Accounting Policies, continued Use 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 the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 3. Contingencies The Purchase Money Notes relating to Austintown Associates, Meadowwood Ltd, Brierwood Ltd and Pine Forest matured on October 30, 1999. The Purchase Money Notes relating to Glendale Manor matured on August 29, 2000. The Purchase Money Notes for Surry Manor matured on July 9, 2001. These six series Purchase Money Notes were in default at September 30, 2001. The sale or other disposition by the Partnership of its interests in the Local Limited Partnerships, including in connection with a foreclosure of the pledged security for Purchase Money Note obligations, is likely to result in recapture of previously claimed tax losses to the Partnership and may have other adverse tax consequences to the Partnership and to the Limited Partners. Such recapture may cause some or all of the Limited Partners to have taxable income from the Partnership without cash distributions from the Partnership with which to satisfy the tax liability resulting therefrom. As discussed in Note 1 above, the Partnership is currently in various stages of negotiations to sell its interests in the remaining seven Local Limited Partnerships. If the Partnership is successful in disposing of its remaining investments, management presently intends to wind up the Partnership's operations in the fourth quarter of 2001 or the first quarter of 2002. No assurance can be given that the Partnership will be able to successfully conclude any of the above transactions. Consequently, the completion of the liquidation of the Partnership may be different than currently anticipated. As a result of its investments in the Local Limited Partnerships, the Partnership is affected by certain risks and uncertainties associated with the operations of the Properties owned by the Local Limited Partnerships. 12 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Unaudited) 3. Contingencies, continued The rents of the Properties, many of which receive rental subsidy payments, including payments under Section 8 of Title II of the Housing and Community Development Act of 1974 ("Section 8"), are subject to specific laws, regulations and agreements with federal and state agencies. The subsidy agreements for Surry Manor and Glendale Manor expire in April, 2002 and May 2002, respectively. The agreements for Austintown Associates expired in October, 2001 and the local manager is working with HUD for a one year extension. Under the Multifamily Assisted Housing and Reform and Affordability Act (MAHRAA) of 1997, as amended, Congress set forth the legislation for a permanent "mark-to-market" program and provided for permanent authority for the renewal of Section 8 Contracts. Owners with Section 8 contracts expiring after September 30, 1998 are subject to the provisions of MAHRA. On September 11, 1998, HUD issued an interim rule to provide clarification for implementation of the mark-to-market program. Since then, revised guidance has been provided through various HUD housing notices, including notice 99-36, which addresses project-based Section 8 contracts expiring in fiscal year 2000. In February 2001, HUD issued a new Section 8 Contract Renewal GuideBook, which replaced HUD notice 99-36. Under the GuideBook, project owners have several options for Section 8 contract renewals, depending on the type of project and rent level. Options include marking rents up to market, renewing other contracts with rents at or below market, referring projects to the Office of Multifamily Housing Assistance Restructuring (OMHAR) for mark-to-market or "OMHAR lite" renewals, renewing contracts that are exempted from referral to OMHAR, renewing contracts for portfolio re-engineering demonstration and preservation projects, and opting out of the Section 8 program. Owners must submit their option to HUD at least 120 days before expiration of their contract. Each option contains specific rules and procedures that must be followed to comply with the requirements of the GuideBook. As such, each Local Limited Partnership may choose to either opt out of the Section 8 program, request mortgage restructuring and renewal of the Section 8 contract, or request renewal of the Section 8 contract without mortgage restructuring. Each option contains a specific set of rules and procedures that must be followed in order to comply with the requirements of MAHRAA. The properties are working with HUD to renew their existing contracts for two to five year periods. The Partnership cannot reasonably predict legislative initiatives and governmental budget negotiations, the outcome of which could result in a reduction in funds available for the various federal and state administered housing programs including the Section 8 program. Such changes could adversely affect the future net operating income and debt structure of certain Local Limited Partnerships currently receiving such subsidy or similar subsidies. 13 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Unaudited) 4. Investments in Local Limited Partnerships The Partnership acquired Local Limited Partnership interests in thirteen Local Limited Partnerships which own and operate government assisted multi-family housing complexes. As discussed in Note 1 above, the Partnership has sold six of its investments as of September 30, 2001. The Partnership, as Investor Limited Partner pursuant to Local Limited Partnership Agreements, acquired interests ranging from 94% to 98% in the profit or losses from operations and cash from operations of each of the Local Limited Partnerships. As discussed above, the Partnership is currently in the process of liquidating the Partnership and disposing of its remaining investments in the Local Limited Partnerships presently estimated to occur through the fourth quarter of 2001 or first quarter of 2002. No assurance can be given that management will be able to complete its liquidation of Partnership's investments within this time period. The following is a summary of cumulative activity for investments in Local Limited Partnerships since their dates of acquisition:

14 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Unaudited) 4. Investments in Local Limited Partnerships, continued Summarized financial information from the combined financial statements of the ten Local Limited Partnerships in which the Partnership held investments during the three and nine months ended September 30, 2001 and 2000 are as follows:

15 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS 4. Investments in Local Limited Partnerships, continued The difference between the Partnership's share of income in Local Limited Partnership investments in the Partnership's Statement of Operations for the three months ended and nine months ended September 30, 2000 and the share of loss in the above Summarized Statement of Operations consists of the Partnership's unrecorded share of losses and cash distributions recorded as investment income as follows:

16 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Partnership) NOTES TO THE FINANCIAL STATEMENTS (Unaudited) 5. Transactions with Affiliates In the first nine months of 2000, the Partnership recognized administrative expenses and management fees owed to the Managing General Partner of $36,000 and $37,500, respectively. In the third quarter of 2000, $12,000 and $12,500, respectively of these fees were recognized. In connection with the adoption of the liquidation basis of accounting, an adjustment to record estimated liabilities through the liquidation of $100,000 was recorded at December 31, 2000. This amount included $50,000 of partnership management fees and $50,000 of reimbursable administration expenses. At September 30, 2001, accounts payable to affiliates totaling $384,271 represents amounts owed for reimbursements of Partnership administrative expenses and management fees of $180,000 and $179,771, respectively and amounts estimated through the liquidation for administrative expenses and management fees of $12,000 and $12,500, respectively. In the first nine months of 2001, there were no management fees to the General Partner recognized in addition to the estimate through liquidation recorded at December 31, 2000 and estimated administrative expenses through liquidation were reduced by $2,000. 6. Statement of Distributable Cash from Operations Distributable Cash From Operations for the nine months ended September 30, 2001, as defined in Section 17 of the Partnership Agreement, is as follows: Interest income $ 14,174 Less: General and administrative expenses (113,555) --------- Cash from Operations, as defined (99,381) --------- Distributable Cash from Operations, as defined $ 0 ========= 17 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Partnership) Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Because of the progress which had been made during 2000 in connection with the Partnership's efforts to liquidate its portfolio of investments in Local Limited Partnerships, effective December 31, 2000, the Partnership adopted the liquidation basis of accounting. Prior to that date, the Partnership recorded results of operations using the going concern basis of accounting. Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts. The valuation of assets and liabilities necessarily requires many estimates and assumptions, and there are substantial uncertainties in carrying out the liquidation of the Partnership's assets. The actual values upon liquidation and costs associated therewith could be higher or lower than the amounts recorded. In connection with the liquidation, the Partnership has recorded an accrual for additional expenses to reflect the Partnership's best estimate of the costs associated with the liquidation. Liquidity and Capital Resources The Partnership The Partnership is liable for the amount of the Purchase Money Notes delivered to purchase its interests in the Local Limited Partnerships (as hereinafter described), and for the Partnership's day-to-day administrative and operating expenses. The Partnership acquired its interests in two Local Limited Partnerships for cash. The Partnership acquired its interests in eleven other Local Limited Partnerships by delivery of cash, short-term promissory notes (all of which have been paid in full) and purchase money promissory notes which bear interest at the rate of 9% per annum (the "Purchase Money Notes"). The payment of each Purchase Money Note is secured by a pledge of the Partnership's interest in the Local Limited Partnership to which the note relates. Recourse on each Purchase Money Note is limited to the pledged partnership interest. Each note had an initial term of 15 to 17 years. The Partnership's interests in these Local Limited Partnerships were pledged as security for the Partnership's obligations under the respective Purchase Money Notes. In May 1999, the Partnership sold its interest in Fiddlers Creek Apartments and the purchaser assumed the Partnership's obligations under the related Purchase Money Notes. In July 1999, the Partnership sold its interest in Linden Park Associates. Linden Park Associates refinanced their existing debt and also paid in full the principal and accrued and unpaid interest due the Partnership on their notes. In February 2000, the Partnership sold its interest in Osuna Apartments Company and the holders of the Purchase Money Notes released the Partnership from all liabilities in connection with the Notes. On March 30, 2001, the Partnership sold its interest in Fuquay-Varina, Oxford Homes and Williamston Homes and the purchaser assumed the Partnership obligations under the related Purchase Money Notes. 18 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Partnership) Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources, continued The Partnership, continued At September 30, 2001, six series of the Purchase Money Notes, relating to Austintown Associates, Meadowwood Ltd., Brierwood Ltd, Pine Forest Apartments, Ltd., Glendale Manor Apartments and Surry Manor, Ltd. had matured and were in default. None of the series of Purchase Money Notes is cross-defaulted to the others, nor are the series of Purchase Money Notes cross-collateralized in any manner. The terms of each Purchase Money Note permit interest to accrue to the extent cash distributions to the Partnership from the applicable Local Limited Partnership are insufficient to enable the Partnership to pay the Purchase Money Note on a current basis. Generally, the amount of such cash distributions have not been sufficient in any year to pay the full amount of interest accrued for that year on the Purchase Money Notes. The Purchase Money Notes do not require payment of any portion of the principal amount of the note prior to maturity (except that the Purchase Money Notes require immediate payment following a default (as defined therein) by the Partnership thereunder). Accordingly, each Purchase Money Note requires a substantial balloon payment at maturity. In connection with the adoption of the liquidation basis of accounting, the value shown for the Purchase Money Notes was adjusted to the anticipated settlement amount and no further interest accruals will be recorded. The sale or other disposition by the Partnership of its interests in the Local Limited Partnerships, including in connection with a foreclosure of the pledged security, is likely to result in recapture of previously claimed tax losses to the Partnership and may have other adverse tax consequences to the Partnership and to the Unit holders. Such recapture may cause some or all of the Unit holders to have taxable income from the Partnership without cash distributions from the Partnership with which to satisfy the tax liability resulting therefrom. On March 30, 2001, the Partnership sold its 98% limited partnership interests in Fuquay-Varina, Oxford Homes and Williamston Homes to the general partner of these partnerships or his affiliate for $148,485 plus the assumption of the related Purchase Money Note obligations. The carrying value of these properties had been adjusted at December 31, 2000 to reflect the actual sales transactions. On February 1, 2000, the Partnership sold its 98% interest as a limited partner (the "Partnership Interest") in Osuna Apartments Company ("Osuna") to the Sovereign Management Corporation, the company retained by Osuna to manage its apartment complex (the "Purchaser"). In consideration for the sale of the Partnership Interest, the Partnership received a net cash purchase price of $100,000. In connection with the sale, the holders of the Purchase Money Notes (the "Notes") issued by the Partnership in connection with its acquisition of the Partnership Interest released the Partnership from all liabilities in connection with the Notes. After transaction expenses, including $1,800 recognized in the third quarter of 2000, the Partnership recognized a gain of $2,432,299 on the sale of the investment. 19 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Partnership) Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources, continued The Partnership, continued On May 28, 1999, the Partnership sold its interest in Fiddlers Creek Apartments in exchange for $483,451 in cash and assumption of the Purchase Money Note obligations. On April 13, 2000, estimated state withholding taxes totaling $211,271 were paid from the proceeds of the sale of the Partnership's investment in Fiddlers Creek Apartments. The Partnership subsequently reevaluated this obligation and applied for a refund of the $211, 271 previously remitted. On November 7, 2000 the refund was received with interest of $4,659. On July 15, 1999, the Partnership sold its interest in Linden Park Associates Limited Partnership in exchange for $395,960 in cash. Linden Park Associates refinanced their existing debt and also paid in full the principal and accrued and unpaid interest due the Partnership on their notes totaling $241,058. In accordance with the Partnership's agreement with the General Partner of Linden Park Associates (the "Linden GP"), these funds have been segregated for use to pay the fees and expenses due the Linden GP in connection with the consulting arrangement described below. Interest earned on these segregated funds will be available to pay these fees and expenses. Management entered into negotiations to sell the Partnership's 94% interests in Brierwood, Brierwood II, Pine Forest and Meadowwood Apartments. The sale of the Partnership's interests in Brierwood, Pine Forest and Meadowwood Apartments requires consent from all the related Purchase Money Note holders. Such consents were requested. The Partnership received unanimous consent from the Purchase Money Note holders relating to Pine Forest Apartments but did not receive unanimous consent from the Purchase Money Note holders relating to Brierwood and Meadowwood Apartments. Accordingly, the transactions could not be consummated as proposed. Under the partnership agreements relating to these investments, Liberty LGP has the right to cause the sale of the partnership's project. Liberty LGP has agreed to pursue the sale of these four projects and has caused the respective Local Limited Partnerships to enter into contracts for sale of the projects. The proposed purchasers are affiliates of the local general partner in these partnerships. The Local Limited Partnership would receive only a nominal cash payment in connection with each sale. The transactions are not expected to result in any distribution in respect of the Partnership's interest in these partnerships. Management presently anticipates the closing of these transactions by the end of 2001. The Partnership entered into an agreement with the local general partner of Austintown Associates to sell the Partnership's 98% limited partnership interest, subject, among other things, to the consent of the related Purchase Money Note holders. The Partnership did not receive unanimous consent of the Purchase Money Note holders and the agreement expired on April 1, 2000. On September 15, 2000 certain of the Purchase Money Note holders commenced an action in the Court of Common Pleas Mahoning County, Ohio seeking, among other things, to foreclose upon the Partnership's pledge of its 98% limited partnership interest in Austintown Associates. The Partnership did not contest the proceeding and, on February 26, 2001, the Court 20 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Partnership) Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources, continued The Partnership, continued entered a default judgment and order appointing a receiver to sell the Partnership's interest in Austintown Associates to satisfy the judgment. The sale proceeds, after the costs of sale, will be paid to the Purchase Money Note holders Management commenced discussions with the local manager for Surry Manor, Ltd. and Glendale Manor Apartments to either purchase the Partnership's interests in those partnerships or sell the Partnership's projects. The local manager is now in the process of obtaining market studies and appraisals for these properties. No agreement on the transfer of these interests or the sale of these properties has been reached. The sale of these interests requires unanimous consent of the Purchase Money Note holders. Under the partnership agreements relating to these investments, Liberty LGP has the right to cause the sale of these projects. Management will continue to pursue both options in the fourth quarter of 2001. As discussed above, the Partnership is currently in various stages of negotiations to sell its interests in the remaining seven Local Limited Partnerships. If the Partnership is successful in disposing of its remaining investments, management presently intends to wind up the Partnership's operations in the fourth quarter of 2001 or the first quarter of 2002. No assurance can be given that the Partnership will be able to successfully conclude any of the above transactions. Consequently, the completion of the liquidation of the Partnership may be different than currently anticipated. The net amount, if any, ultimately available for distribution from the liquidation of the Partnership depends on many unpredictable factors, such as the amounts realized on the sale of the remaining investments in Local Limited Partnerships, carrying costs of the assets prior to sale, settlement of claims and commitments, the amount of revenue and expenses of the Partnership until completely liquidated and other uncertainties. In light of the Partnership's adoption of the liquidation basis of accounting, the Partnership's net asset values as of September 30, 2001 and December 31, 2000 reflect the net realizable values for the Investments in Local Limited Partnerships after giving effect to the estimated closing costs upon sale or disposal of the investments. In addition, an estimated liability was recorded for estimates of costs to be incurred in carrying out the dissolution and liquidation of the Partnership. These costs include estimated legal fees, accounting fees, tax return preparation and partnership administration. Actual costs could vary significantly from these estimated costs due to uncertainties related to the length of time required to complete the liquidation and dissolution of the Partnership and unanticipated events which may arise in disposing of the Partnership's remaining assets. 21 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Partnership) Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources, continued The Partnership, continued At September 30, 2001, the Partnership had total cash and cash equivalents of $507,939, including cash reserves of $449,243 and restricted cash of $58,696 as compared to total cash at December 31, 2000 of $523,389, including cash reserves of $376,286 and restricted cash of $147,103. Cash reserves increased primarily as the result of $148,485 proceeds from the sale of the Partnership's interests in Fuquay-Varina, Oxford Homes and Williamston Homes. Restricted cash decreased as a result of costs paid relating to the sale of the Partnership's investments. Accounts payable and accrued expenses decreased to a total of $216,669 at September 30, 2001 from $378,846 at December 31, 2000. The decrease was primarily the result of payment of consulting fees relating to the sale of the Partnership's investments of $89,741, legal and accounting fees of $58,174 and other operating costs of $14,262. The Local Limited Partnerships. The liquidity of the Local Limited Partnerships in which the Partnership has invested is dependent on the ability of the respective Local Limited Partnerships, which own and operate government assisted multi-family rental housing complexes, to generate cash flow sufficient to fund operations and debt service and to maintain working capital reserves. Each of the Local Limited Partnerships is regulated by government agencies which require monthly funding of certain operating and capital improvements reserves and which regulate the amount of cash to be distributed to owners. Each Local Limited Partnership's source of funds is rental income received from tenants and government subsidies. Certain of the Local Limited Partnerships receive rental income pursuant to Section 8 rental assistance contracts. Surry Manor and Glendale Manor's contracts expire in April 2002 and May 2002, respectively. Austintown Associates' contract expires in October 2001. The local manager is working with HUD to extend this agreement for a year. Under the Multifamily Assisted Housing and Reform and Affordability Act (MAHRAA) of 1997, as amended, Congress set forth the legislation for a permanent "mark-to-market" program and provided for permanent authority for the renewal of Section 8 Contracts. Owners with Section 8 contracts expiring after September 30, 1998 are subject to the provisions of MAHRAA. On September 11, 1998, HUD issued an interim rule to provide clarification of the implementation of the mark-to-market program. Since then, revised guidance has been provided through various HUD housing notices, including notice 99-36, which addresses project-based Section 8 contracts expiring in fiscal year 2000. In February 2001, HUD issued a new Section 8 Contract Renewal GuideBook, which replaced HUD notice 99-36. Under the GuideBook, project owners have several options for Section 8 contract renewals, depending on the type of project and rent level. Options include marking rents up to market, renewing other contracts with rents at or below market, referring projects to the Office of Multifamily Housing Assistance Restructuring 22 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Partnership) Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources, continued The Local Limited Partnerships, continued (OMHAR) for mark-to-market or "OMHAR lite" renewals, renewing contracts that are exempted from referral to OMHAR, renewing contracts for portfolio re-engineering demonstration and preservation projects, and opting out of the Section 8 program. Owners must submit their option to HUD at least 120 days before expiration of their contract. Each option contains specific rules and procedures that must be followed to comply with the requirements of the GuideBook. As such, each Local Limited Partnership may choose to either opt out of the Section 8 program, request mortgage restructuring and renewal of the Section 8 contract, or request renewal of the Section 8 contract without mortgage restructuring. Each option contains a specific set of rules and procedures that must be followed in order to comply with the requirements of MAHRAA. The properties are working with HUD to renew their existing contracts for two to five year periods. The Partnership cannot reasonably predict legislative initiatives and governmental budget negotiations, the outcome of which could result in a reduction in funds available for the various federal and state administered housing programs including the Section 8 program. Such changes could adversely affect the future net operating income and debt structure of certain Local Limited Partnerships currently receiving such subsidy or similar subsidies. The Local Limited Partnerships are impacted by inflation in several ways. Inflation allows for increases in rental rates generally reflecting the impact of higher operating and replacement costs. Inflation also affects the Local Limited Partnerships adversely by increasing operating costs such as utilities and salaries. As discussed above, the Partnership is currently in various stages of negotiations to sell its interests in the remaining seven local limited partnerships. If the Partnership is successful in disposing of its remaining seven investments, management presently intends to wind up the Partnership's operations in the fourth quarter of 2001 or the first quarter of 2002. Each of the Local Limited Partnerships has incurred mortgage indebtedness. The mortgage loans provide for equal monthly payments of principal and interest in amounts, which will reduce the principal amount of the loans to zero at maturity. Each of the maturity dates of the respective mortgages is substantially beyond the due date of the Purchase Money Note obligations. Upon a sale of a property by a Local Limited Partnership the mortgage indebtedness of such property must be satisfied prior to distribution of any funds to the partners in the Local Limited Partnership. 23 LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP (A Massachusetts Partnership) Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources, continued Partnership Operations Because the Partnership adopted the liquidation basis of accounting on December 31, 2000, the results of operations for the three month and nine month periods ended September 30, 2001 are not presented. Instead, the Partnership's operating results have been reflected on the statement of changes of net assets in liquidation and reflect changes from the estimated net realizable values of assets and anticipated payable amounts of liabilities previously recorded. In the three months ended September 30, 2001, interest income earned on cash reserves increased to $4,297 from $3,733 in the three months ended September 30, 2000. For the first nine months of 2001, interest income increased slightly to $14,174 from $13,899 in the first nine months of 2000. In the three months ended September 30, 2001, the Partnership incurred additional expenses of $1,674 versus $42,511 in the three months ended September 30, 2000 and additional expenses of $11,160 in the first nine months of 2001 versus $100,501 in the first nine months of 2000. The Partnership has not booked interest expense on the remaining Purchase Money Notes in the first nine months of 2001, although the associated legal liability has increased. For the three months and nine months ended September 30, 2000, the Partnership incurred purchase money note interest of $201,690 and $560,962. Under the liquidation basis of accounting, the carrying value of the Purchase Money Notes and accrued interest has been written down to the anticipated payable amounts. On March 30, 2001, the Partnership sold its interest in Fuquay-Varina, Oxford Homes and Williamston Homes. These sales transactions did not vary materially from previously recorded amounts. The Partnership's equity in income (loss) for the three months and nine months ended September 30, 2000 was $(12,011) and $109,599 respectively. 24 PART II Other Information Item 3. Defaults Upon Senior Securities. The Purchase Money Notes relating to Austintown Associates, Meadowwood Ltd, Brierwood Ltd and Pine Forest matured on October 30, 1999. The Purchase Money Notes relating to Glendale Manor matured on August 29, 2000. The Purchase Money Notes relating to Surry Manor, Ltd. matured on July 9, 2001. These six series of Purchase Money Notes are now in default. The amounts due at maturity under these non-recourse obligations consisted of $3,640,000 in aggregate principal amount and $4,253,892 in accrued and unpaid interest. As of November 1, 2001, the aggregate arrearages under these notes amounted to $8,455,902. 25 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. LIBERTY HOUSING PARTNERS LIMITED PARTNERSHIP By: TNG Properties Inc. Managing General Partner By: /s/ Michael A. Stoller Michael A. Stoller President and CEO By: TNG Properties Inc. Managing General Partner By: /s/ Wilma R. Brooks Wilma R. Brooks Chief Financial Officer Date: November 13, 2001 26

LIBERTY HOUSING PARTNERS LTD PARTNERSHIP 10-Q