10-Q 1 k17745e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2007 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2007 Commission File No. 0-15940 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND, A MICHIGAN LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) MICHIGAN 38-2593067 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number)

280 DAINES STREET, BIRMINGHAM, MICHIGAN 48009 (Address of principal executive offices) (Zip Code) (248) 645-9220 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(g) of the Act: $1,000 per unit, units of limited partnership interest Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-Q or any amendment to this Form 10-Q [ ] Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X] UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND, A MICHIGAN LIMITED PARTNERSHIP INDEX

UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND A MICHIGAN LIMITED PARTNERSHIP BALANCE SHEETS

See Notes to Financial Statements 3 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND A MICHIGAN LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS (UNAUDITED)

STATEMENT OF PARTNERS' EQUITY (DEFICIT) (UNAUDITED)

See Notes to Financial Statements 4 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND A MICHIGAN LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (UNAUDITED)

See Notes to Financial Statements 5 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND, A MICHIGAN LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS June 30, 2007 (Unaudited) 1. BASIS OF PRESENTATION: The accompanying unaudited 2007 financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date. Operating results for the three and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007, or for any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Partnership's Form 10-K for the year ended December 31, 2006. 2. RECENT ACCOUNTING PRONOUNCEMENTS: In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 is effective for fiscal years beginning after December 15, 2006. This interpretation clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS 109, "Accounting for Income Taxes" and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on various related matters such as derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Partnership is a tax-free entity, and was therefore not impacted by FIN 48. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Partnership is currently evaluating the impact of this pronouncement on the Partnership's financial position and results of operations. -6- In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS 159"), which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the company's choice to use fair value on its earnings. SFAS 159 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. SFAS 159 does not eliminate disclosure requirements of other accounting standards, including fair value measurement disclosures in SFAS 157. This statement is effective as of the beginning of an entity's first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of Statement 157. The Partnership is currently evaluating the impact of this pronouncement on the Partnership's financial position and results of operations. 3. RELATED PARTY TRANSACTION: On February 28, 2006, the Partnership sold its manufactured home inventory to an affiliate of the General Partner for its fair market value of $875,197. The fair market value was determined using The Manufactured Housing Appraisal Guide of the National Automobile Dealers Association as well as comparables in each market. Proceeds of the sale were used to pay off the $756,179 line of credit with the buyer, Uniprop Homes, Inc., and the balance of $119,018 was received in cash. 4. MORTGAGE PAYABLE: On August 11, 2006, the Partnership refinanced its existing mortgage note payable and executed a new mortgage payable in the amount of $34,468,750 secured by the four properties of the Partnership. The mortgage note payable provides for future advances of $3,031,250, of which $1,087,783 has been advanced as of June 30, 2007. The note is payable in monthly installments of interest only through August 2010. Interest on this note is accrued at a variable rate of 2.25% in excess of one month LIBOR, which was 7.57% as of June 30, 2007, and the balance on the note was $35,556,533. -7- In connection with the refinancing, the Company defeased the prior mortgage note payable with a balance of $33,500,000 by purchasing Treasury securities sufficient to make the monthly debt service payments and the balloon payment due under the mortgage agreement. The Treasury securities were then substituted for the four properties that originally served as collateral for the mortgage. As part of the defeasance, the Treasury securities and mortgage debt were transferred to a third party successor borrower that is responsible for all remaining obligations under this debt. This mortgage was fully paid off by the successor borrower from funds in the irrevocable defeasance trust on January 11, 2007. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recent Accounting Pronouncements In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 is effective for fiscal years beginning after December 15, 2006. This interpretation clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS 109, "Accounting for Income Taxes" and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on various related matters such as derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Partnership is a tax-free entity, and was therefore not impacted by FIN 48. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Partnership is currently evaluating the impact of this pronouncement on the Partnership's financial position and results of operations. -8- In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS 159"), which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the company's choice to use fair value on its earnings. SFAS 159 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. SFAS 159 does not eliminate disclosure requirements of other accounting standards, including fair value measurement disclosures in SFAS 157. This statement is effective as of the beginning of an entity's first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of Statement 157. The Partnership is currently evaluating the impact of this pronouncement on the Partnership's financial position and results of operations. Capital Resources The Partnership's capital resources consist primarily of its four manufactured housing communities. On March 25, 1997 the Partnership borrowed $33,500,000 from Nomura Asset Capital Corporation (the "Financing"). It secured the Financing by placing liens on its four communities. As a result of the Financing, the Partnership distributed $30,000,000 to the Limited Partners, which represented a full return of the original capital contributions of $1,000 per unit. As part of the refinancing which occurred on August 11, 2006, this note has been defeased, which required the Partnership to establish an irrevocable defeasance trust through a successor borrower, by placing risk free treasury bills into the trust to fund this mortgage. This mortgage was fully paid off by the successor borrower from funds in the irrevocable defeasance trust on January 11, 2007. On February 28, 2006, the Partnership sold its manufactured home inventory to an affiliate of the General Partner for its fair market value of $875,197. The fair market value was determined using The Manufactured Housing Appraisal Guide of the National Automobile Dealers Association, as well as, comparables in each market. The consideration for the sale was used to reduce the $756,179 line of credit with the buyer, Uniprop Homes, Inc., and the balance of $119,018 was received in cash. -9- On August 11, 2006, the Partnership borrowed $34,468,750 from Marathon Structured Finance Fund, L.P. The note provides for future advance of $3,031,250, of which $1,087,783 has been advanced as of June 30, 2007. The borrowing is secured by the four Properties. The note is payable in monthly installments of interest only through August 2010. Interest on this note is accrued at a variable rate of 2.25% in excess of One month LIBOR, which was 7.57% as of June 30, 2007, and the balance on the note was $35,556,533. In connection with the new mortgage debt, the Fund has entered into an interest rate cap with Fifth Third Bank to reduce a portion of the risk relating to the variable interest rate. The notional amount of the interest rate cap is $34,000,000. The strike rate is 7% based on the One month LIBOR index. The interest rate cap expires on September 1, 2008. The cost of the interest rate cap was $10,400. The Partnership incurred $1,154,449 in financing costs as a result of the refinancing which will be amortized over the remaining life of the Loan of approximately four years. Liquidity The Partnership's long-term liquidity is based, in part, upon its investment strategy. The properties owned by the Partnership were anticipated to be held for seven to ten years after their acquisition. All of the properties have been owned by the Partnership more than ten years. The General Partner may elect to have the Partnership own the properties for as long as, in the opinion of the General Partner, it is in the best interest of the Partnership to do so. As of June 30, 2007, the Partnership's cash balance amounted to $331,975. The level of cash balance maintained is at the discretion of the General Partner. The Partnership has an unsecured term note with National City Bank of the Midwest for $750,000, requiring monthly payments of $12,500 plus interest at LIBOR plus 1.80% which was 7.12% at June 30, 2007 and is due on October 19, 2010. The outstanding balance under this agreement was $512,500 at June 30, 2007. The quarterly Partnership Management Distribution due to the General Partner during the second quarter was $165,250, or one-fourth of 1.0% of the most recent appraised value of the properties held by the Partnership ($66,100,000 x 1/4 %= $165,250). The payment of this distribution has been suspended to maintain cash flow. The General Partner has continued to suspend payment of the Incentive Management Distribution during this quarter. Results of Operations Overall, as illustrated in the table below, the four properties had a combined average occupancy of 45% at the end of June 2007, versus 68% a year ago. The average monthly rent in June 2007 was approximately $504; compared to the $499 average monthly rent in June 2006 (average rent not a weighted average). -10-

* Not a weighted average

Net Operating Income ("NOI") is a non-GAAP financial measure equal to net income, the most comparable GAAP financial measure, plus depreciation, interest expense, partnership management expense, and other expenses. The Partnership believes that NOI is useful to investors and the Partnership's management as an indication of the Partnership's ability to service debt and pay cash distributions. NOI presented by the Partnership may not be comparable to NOI reported by other companies that define NOI differently, and should not be considered as an alternative to net income as an indication of performance or to cash flows as a measure of liquidity or ability to make distributions. -11- COMPARISON OF THREE MONTHS ENDED JUNE 30, 2007 TO THREE MONTHS ENDED JUNE 30, 2006 Gross revenues decreased $1,210,659 to $1,155,502 in 2007, as compared to $2,366,161 in 2006. The decrease was mainly due to the relocation of residents at Aztec Estates per Florida law to redevelop the property as a mixed-use residential development, and the elimination of the home inventory for sale. As described in the Statements of Operations, total operating expenses were $92,307 higher, moving from $2,022,226 in 2006 to $2,114,533 IN 2007. The increase was mainly due to higher interest expense, and home removal expenses associated with relocation of residents at Aztec Estates. As a result of the aforementioned factors, the Partnership had a net loss of $959,031 for the second quarter of 2007 compared to a net income of $343,935 for the same quarter of the prior year. COMPARISON OF SIX MONTHS ENDED JUNE 30, 2007 TO SIX MONTHS ENDED JUNE 30, 2006 Gross revenues decreased $2,938,193 to $2,625,978 in 2007, as compared to $5,564,171 in 2006. The decrease was mainly due to the relocation of residents at Aztec Estates per Florida law to redevelop the property as a mixed-use residential development, and to the elimination of the home inventory for sale. As described in the Statements of Operations, total operating expenses were $747,958 lower, moving from $5,324,450 in 2006 to $4,576,492 in 2007. The decrease was mainly due to lower wages and utility expense as a result of decreased occupancy associated with relocation of residents at Aztec Estates and to the elimination of the home inventory for sale. As a result of the aforementioned factors, the Partnership had net loss of $1,950,514 for the first six months of 2007 compared to a net income of $239,721 for the same period of the prior year. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership is exposed to interest rate rise primarily through its borrowing activities. There is inherent roll over risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Partnership's future financing requirements. -12- In connection with the new mortgage debt, the Fund has entered into an interest rate cap with Fifth Third Bank to reduce a portion of the risk relating to the variable interest rate. The notional amount of the interest rate cap is $34,000,000. The strike rate is 7% based on the One Month LIBOR index. The interest rate cap expires on September 1, 2008. Note Payable: The Partnership had a note payable in the amount of $37,500,000. Interest is accrued at a variable rate of 2.25% in excess of One Month LIBOR, which was 7.57 as of June 30, 2007. The outstanding balance of this note at June 30, 2007, was $35,556,533 and provides for future advances of $1,943,467. Term-Note: The Partnership has obtained an unsecured term note with National City Bank of the Midwest for $750,000, requiring monthly payments of $12,500 plus interest at LIBOR plus 1.80% which was 7.12% at June 30, 2007 and is due on October 19, 2010. The outstanding balance under this agreement was $512,500 at June 30, 2007. A 10% adverse change in interest rates on the portion of the Partnership's debt bearing interest at variable rates would result in an increase in interest expense of more than $260,000. As part of the refinance, the Partnership negotiated a variable interest rate which could expose the Partnership to higher interest expense if LIBOR were to increase dramatically. As previously described, the Partnership has entered into an interest rate cap to mitigate some of the variable rate interest exposure. Management does not expect it to have any effect on interest expense, absent some unforeseen economic event which cannot be predicted. The Partnership does not enter into financial instruments transactions for trading or other speculative purposes or to manage its interest rate exposure, except for the interest rate cap previously described. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Partnership carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon, and as of the date of, this evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the quarterly report is recorded, processed, summarized and reported as and when required. -13- There was no change in the Partnership's internal controls over financial reporting that occurred during the most recent completed quarter that has materially affected, or is reasonably likely to materially affect, the Partnership's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 1A. RISK FACTORS FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS The following risks and uncertainties could cause our business, financial condition or results of operations to be materially adversely affected. In that case, we might not be able to pay distributions on our Units, the net asset values of the Units could decline, and a Unit holder might lose all or a portion of its investment. 1. REAL ESTATE INVESTMENTS. The Partnership's investments are subject to the same risks generally incident to the ownership of real estate including: the uncertainty of cash flow to meet fixed or variable obligations, adverse changes in economic conditions, changes in the investment climate for real estate, adverse changes in local market conditions, changes in interest rates and the availability of mortgage funds or chattel financing, changes in real estate tax rates, governmental rules and regulations, acts of God and the inability to attract or retain residential tenants. Residential real estate, including manufactured housing communities, is subject to adverse housing pattern changes and uses, vandalism, rent controls, rising operating costs and adverse changes in local market conditions such as a decrease in demand for residential housing due to a decrease in employment. State governments also often regulate the relationship between manufactured housing community owners and residents. 2. THE GENERAL PARTNER AND ITS AFFILIATES HAVE CONFLICTS OF INTEREST. Although the General Partner has a fiduciary duty to manage the Partnership in a manner beneficial to the Unit holders, the directors and officers of the General Partner have a fiduciary duty to manage the General Partner in a manner beneficial to its owners. Furthermore, certain directors and officers of the General Partner are directors or officers of affiliates of the General Partner. Conflicts of interest may arise between the General Partner and its affiliates and the Unit holders. As a result of these conflicts, the General Partner may favor its own interests and the interests of its affiliates over the interests of the Unit holders. -14- 3. RELIANCE ON GENERAL PARTNER'S DIRECTION AND MANAGEMENT OF THE PROPERTIES. The success of the Partnership will, to a large extent, depend on the quality of the management of the Properties by the General Partner and affiliates of the General Partner and their collective judgment with respect to the operation, financing and disposition of the Properties. To the extent that the General Partner and its affiliates are unable to hire and retain quality management talent, the Partnership's financial results and operations may be adversely affected. 4. FEDERAL INCOME TAX RISKS. Federal income tax considerations will affect materially the economic consequences of an investment in the Properties. The tax consequences of the Partnership's activities are complex and subject to many uncertainties. Changes in the federal income tax laws or regulations may adversely affect the Partnership's financial results and its ability to make distributions to the Unit holders. Additionally, the tax benefits enjoyed by the Unit holders may be reduced or eliminated. 5. LIMITED LIQUIDITY OF THE UNITS. The transfer of Units is subject to certain limitations. The public market for such Units is limited. Unit Holders may not be able to liquidate their investment promptly or at favorable prices, if at all. 6. COMPETITION. The business of owning and operating residential manufactured housing communities is highly competitive. The Partnership competes with a number of established communities having greater financial resources. Moreover, there has been a trend for manufactured housing community residents to purchase home sites either collectively or individually. Finally, the popularity and affordability of site built homes has also increased in recent years while the availability of chattel financing has decreased. These trends have resulted in increased competition for tenants to occupy the Partnership properties. 7. MANAGEMENT AND CONTROL OF PARTNERSHIP AFFAIRS. The General Partner is vested with full authority as to the general management and supervision of the business affairs of the Partnership. The Unit Holders do not have the right to participate in the management of the Partnership or its operations. However, the vote of Unit Holders holding more than 50% of the outstanding interests is required to: (a) amend the Partnership Agreement; (b) approve or disprove the sale in one, or a series of, transactions of all or substantially all of the assets of the Partnership; (c) dissolve the Partnership; (d) remove the General Partner; or (e) approve certain actions by the General Partner that the Consultant recommends against. -15- 8. UNINSURED LOSSES. The Partnership carries comprehensive insurance, including liability, fire and extended coverage, and rent loss insurance which is customarily obtained for real estate projects. There are certain types of losses, however, that may be uninsurable or not economically insurable such as certain damage caused by a hurricane. If such losses were to be incurred, the financial position and operations of the Partnership as well as the Partnership's ability to make distributions would be adversely affected. 9. ENVIRONMENTAL MATTERS. Because the Partnership deals with real estate, it is subject to various federal, state and local environmental laws, rules and regulations. Changes in such laws, rules and regulations may cause the Partnership to incur increased costs of compliance which may have a material adverse effect on the operations of the Partnership and its ability to make distributions to Unit holders. 10. NO GUARANTEE OF DISTRIBUTIONS. The General Partner may withhold cash for extended periods of time if such cash is necessary to build cash reserves or for the conduct of the Partnership's business. A Unit holder will be required to pay federal income taxes, and, in some cases, state and local income taxes on the Unit holder's share of the Partnership's taxable income, whether or not cash distributions are made by the Partnership. A Unit holder may not receive cash distributions from the Partnership equal to the holder's share of taxable income or even equal to the tax liability that results from the Unit holder's share of the Partnership's taxable income. 11. THE PARTNERSHIP MAY NOT BE ABLE TO GENERATE SUFFICIENT WORKING CAPITAL TO FUND ITS OPERATIONS. There can be no assurance that the Partnership will generate sufficient working capital from operations to operate the business or to fund distributions. Further, there can be no assurance that the Partnership will be able to borrow additional funds on terms favorable to the Partnership, if at all, to meet unanticipated working capital needs or to make distributions to the Unit holders. -16- ITEM 6. EXHIBITS EXHIBIT 31.1 Principal Executive Officer Certification pursuant to Rule 13a-14(a)/15d- 14(a) of The Securities and Exchange Act of 1934, as amended EXHIBIT 31.2 Principal Financial Officer Certification pursuant to Rule 13a-14(a)/15d- 14(a) of The Securities and Exchange Act of 1934, as amended EXHIBIT 32.1 Certifications pursuant to 18 U.S C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes -Oxley Act of 2002. -17- SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Uniprop Manufactured Housing Communities Income Fund, A Michigan Limited Partnership BY: P.I. Associates Limited Partnership, A Michigan Limited Partnership, its General Partner BY: /s/ Paul M. Zlotoff ------------------------------------ Paul M. Zlotoff, General Partner BY: /s/ Joel Schwartz ------------------------------------ Joel Schwartz, Principal Financial Officer Dated: August 13, 2007

UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND 10-Q