10-Q 1 d10q.txt NATIONAL AFFORDABLE HOUSING UNITED STATES 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 March 31, 2001 Commission File Number 0-17669 ------- NATIONAL HOUSING TRUST LIMITED PARTNERSHIP (A Delaware Limited Partnership) I.R.S. Employer Identification No. 04-2981989 ---------- 2335 North Bank Drive, Columbus, OH 43220 Registrant's Telephone Number, Including Area Code: (614) 451-9929 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: 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 ____ ----- 1 NATIONAL HOUSING TRUST LIMITED PARTNERSHIP A DELAWARE LIMITED PARTNERSHIP MARCH 31, 2001 FORM 10-Q TABLE OF CONTENTS

2 NATIONAL HOUSING TRUST LIMITED PARTNERSHIP AND ITS SUBSTANTIALLY WHOLLY-OWNED OPERATING PARTNERSHIPS COMBINED BALANCE SHEETS MARCH 31, 2001 (UNAUDITED) AND DECEMBER 31, 2000 (In Thousands)

The accompanying notes are an integral part of the combined financial statements. 3 NATIONAL HOUSING TRUST LIMITED PARTNERSHIP AND ITS SUBSTANTIALLY WHOLLY-OWNED OPERATING PARTNERSHIPS COMBINED BALANCE SHEETS, CONTINUED (In Thousands, except Investment Units)

The accompanying notes are an integral part of the combined financial statements. 4 NATIONAL HOUSING TRUST LIMITED PARTNERSHIP AND ITS SUBSTANTIALLY WHOLLY-OWNED OPERATING PARTNERSHIPS COMBINED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (In Thousands, except per Unit Amounts)

The accompanying notes are an integral part of the combined financial statements. 5 NATIONAL HOUSING TRUST LIMITED PARTNERSHIP AND ITS SUBSTANTIALLY WHOLLY-OWNED OPERATING PARTNERSHIPS COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (In Thousands)

The accompanying notes are an integral part of the combined financial statements. 6 NATIONAL HOUSING TRUST LIMITED PARTNERSHIP AND ITS SUBSTANTIALLY WHOLLY OWNED OPERATING PARTNERSHIPS (UNAUDITED) NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A--BASIS OF PRESENTATION The accompanying combined financial statements include the accounts of National Housing Trust Limited Partnership (Investment Partnership) and the Operating Partnerships in which it has acquired significant limited partnership interests. The information furnished reflects all adjustments (all of which were of a normal recurring nature) which are, in the opinion of management, necessary to fairly present the combined financial position, results of operations, and cash flows on a consistent basis. The accompanying unaudited combined financial statements are presented in accordance with the requirements for Form 10-Q and consequently do not include all disclosures normally required by generally accepted accounting principles. Reference should be made to the Partnership's 2000 Annual Report on Form 10-K for additional disclosures including a summary of the Partnership's accounting policies which are not significantly different. 7 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General ------- In 1988, the Investment Partnership raised $20,293,000 in gross proceeds through a public offering. After paying the selling, offering and organization expenses of the offering, the Investment Partnership had $17,249,000 in net proceeds. Of the net proceeds, $260,000 was deposited in the Investment Partnership reserve and $16,989,000 was invested in 31 Operating Partnerships. The 31 Operating Partnerships that were acquired own low-income housing developments eligible for the low-income housing tax credit. One of the Properties was also eligible for the historic rehabilitation tax credit. The 31 acquisitions occurred from October 1988 through March 1990. Two Operating Partnerships were liquidated in 1998, having paid remaining Operating Partnership liabilities out of available Operating Partnership cash. Any cash in excess of liabilities was distributed to the Partnership. No distributions were made to Unit holders. The Springchase Apartments Limited Partnership was dissolved in 1999. The Trinidad Apartments Limited Partnership is expected to be dissolved once all litigation has been resolved. Each Operating Partnership's Property qualifies for the LIHTC. The LIHTC was created by the 1986 Tax Reform Act and is governed by Section 42 of the Internal Revenue Code. In order for a Property to qualify for the LIHTC, the Property must be utilized as a low-income property for 15 years before it can be sold. The General Partner anticipates the Properties will be sold in the years 2003 through 2008. The Investment Partnership serves as a conduit of the Operating Partnerships' tax credits, passive losses, portfolio income and other tax information to the holders of Units of limited partnership interest in the Investment Partnership (the "Unit holders"). The LIHTCs are allocated to the Unit holders for 10 years after a property has been placed in service and rented up. The tax credits were first allocated to Unit holders in 1988 and are anticipated to continue until 2001. The Investment Partnership elected a special option available in 1990 to accelerate the LIHTC for individuals who had an interest in the Investment Partnership before October 26, 1990. Qualifying Unit holders received a tax credit of 150% of the LIHTC otherwise allowable for the first tax year ending December 31, 1990. The remaining tax credit available for 1991 and subsequent tax years is being reduced on a pro rata basis by the amount of the 1990 increased credit. Non-qualifying Unit holders will receive the original unaccelerated tax credit for the remaining qualifying tax years of their investment. An analysis of future tax credits anticipated based upon current information and assuming no changes in the Operating Partnerships indicates an estimate of future tax credits for the qualifying Unit holders who received the 1990 acceleration to be as follows: approximately $ .19 of credit per unit for the year ending December 31, 2001. In certain respects government-assisted housing complexes differ from conventional housing complexes. These include (a) greater financing leverage than is usual in conventional complexes, (b) review of compliance with construction and other standards and (c) various contingency reserves required in connection with such government assistance programs. Government-assisted housing is also subject to special conditions and risks including, but not limited to, (a) general surveillance by the appropriate governmental assistance agency, which may include the application of rental and other guidelines affecting tenant eligibility, operating costs and rental levels, (b) maintenance of a reserve fund for replacements in an amount paid concurrently with amortization of the mortgage and in addition to payments of principal and interest, restricted such that withdrawals from the fund are subject to the prior approval of the appropriate governmental assistance agency, (c) compliance with the HUD regulations regarding management of the premises, (d) limitations on salability, as contained in regulatory agreements with the appropriate governmental assistance agency, (e) limitations on rent increases, and (f) the uncertain effects of changes in complex rules and regulations governing such government-assisted programs, or changes in the manner in which those regulations are interpreted. Government assistance payments may be reduced in the event that a project rents less than 100% of its units eligible for rental subsidies to qualified low income tenants. HUD generally elects to reduce subsidies only in the event that occupancy levels for qualified tenants drop below 95% for a period of two years. Finally, HUD commitments are subject to HUD's appropriation of federal funds sufficient to meet its obligations in any given year. At the present time, certain legislative initiatives and governmental budget negotiations could result in a reduction of funds available for the various HUD-administered housing programs and could also result in new limitations on subsidized rent levels. This in turn could adversely impact the net operating income generated by the Properties. 8 Real property investments are subject to varying degrees of risk. Revenues and property values may be adversely affected by the general economic climate, the local economic climate and local real estate conditions, including (i) the perceptions of prospective tenants of the attractiveness of the property; (ii) the ability to retain qualified individuals to provide adequate management and maintenance of the property; (iii) the inability to collect rent due to bankruptcy or insolvency of tenants or otherwise; and (iv) increased operating costs. Real estate values may also be adversely affected by such factors as applicable laws, including tax laws, interest rates levels and the availability of financing. The availability of a pool of qualified and interested buyers for the Investment Partnership's remaining assets is critical to the Investment Partnership's ability to realize the fair market values of such properties at the time of their final dispositions. Demand by buyers of multi-family apartment properties is affected by many factors, including the size, quality, age, condition and location of the subject property, potential environmental liability concerns, the existing debt structure, the liquidity in the debt and equity markets for asset acquisitions, the general level of market interest rates and the general and local economic climates. In addition, because of the government restrictions on rental revenues and the related capital expenditure reserve requirements and cash flow distribution limitations, there are a limited number of potential buyers in the market for government subsidized, low-income housing properties such as the Investment Partnership has invested in. Furthermore, the current uncertainty regarding potential future reductions in the level of federal government assistance for these programs may further restrict the Properties' marketability. The Properties are subject to substantial debt, in many cases including seller financing on which interest has accrued since the Investment Partnership invested in the Properties. Most of the Properties are dependent upon continuing government subsidies. In addition, many of the Properties are located in market areas that would not support current rents. Finally, most of the Properties are subject to use restrictions that limit their use to low- income housing beyond the end of the tax credit compliance period. The ownership structure of the Investment Partnership's investments through Operating Partnerships could adversely impact the timing of the Investment Partnership's planned dispositions of its remaining assets and the amount of proceeds received from such dispositions. It is possible that the general partners of the Operating Partnerships could have economic or business interests which are inconsistent with those of the Investment Partnership. Given the limited rights which the Investment Partnership has under the terms of the Operating Partnership agreements, any conflict between the partners could result in delays in completing a sale of the related operating property and could lead to an impairment in the marketability of the property to third parties for purposes of achieving the highest possible sale price. For these and other reasons, in Management's judgment, upon sale of many of the Properties, it is likely that sale proceeds will not be in excess of the debt financing, liabilities of the Operating Partnership, the expenses of sale and liabilities of the Investment Partnership, therefore, it is likely that the sale proceeds will not be sufficient to make any distribution to the Unit holders and, depending on the Unit holders tax situation, the Unit holder may incur tax liability without cash distributions to pay the taxes resulting from those sales. Properties ---------- As of March 31, 2001, average occupancy of the Properties was 96%. The financial performance of the Operating Partnerships will be impacted by the competition from comparable properties in their local market areas. The occupancy levels achievable at the Properties and the rental rates at the non- subsidized Properties are largely a function of supply and demand in the markets. In many markets across the country, development of new multi-family properties has increased significantly over the past two years. Existing apartment properties in such markets could be expected to experience increased vacancy levels, declines in effective rental rates and, in some cases, declines in estimated market values as a result of the increased competition. There are no assurances that these competitive pressures will not adversely affect the operations and/or market values of the Operating Partnerships in the future and, in particular, subsequent to the expiration of any existing subsidy agreements. A Detroit, Michigan Property ---------------------------- During 1998, an impairment loss in the amount of $4,100,000 was recorded with respect to the Research Park project in Detroit, Michigan, which is owned by one of the Operating Partnerships. The loss was recorded under the requirements of Financial Accounting Standards Board Statement No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the undiscounted cash 9 flows are not sufficient to recover the assets' carrying amount. Indicators present during 1998 for this Operating Partnership include cash flow from operations that was less than the debt service on the property; however, debt service was paid by allowing trade payables to become larger and more delinquent. Therefore, an assessment was done to evaluate the undiscounted cash flows, which were not sufficient to recover the assets' carrying amount. Based on this assessment, an impairment loss of $4,100,000 was recognized to reduce the carrying amount of the property to its estimated fair value of $4,300,000. During 1999, the property continued to have cash flow problems relating to higher than desired vacancy and high maintenance costs. Effective June 1, 1999, a new management company was hired for the property. In addition, the Managing General Partner continues to negotiate with the Michigan State Housing Development Authority to work out a solution to enable the property to generate positive cash flow. During 2000 and 2001, the property continues to have cash flow difficulties. At this time, there is no assurance as to how these matters will be resolved. A Greenville, Michigan Property ------------------------------- A Greenville, Michigan Property has experienced continuing cash flow deficits. The property has not adequately funded reserves for taxes, insurance and replacement reserves and is deficient in the payment of real estate taxes. The Managing General Partner has been working with the Rural Development Authority to resolve the cash flow problems; however, there can be no assurance as to how these matters will be resolved. In addition, as part of a work-out strategy, the Managing General Partner has entered into a purchase and sale contract to sell the property subject to the approval of the Partnership as Limited Partner of the Operating Partnership. The General Partner intends to seek approval of the Unit holders for the sale. It is anticipated that a part of the transaction will include the posting of a bond to protect the Unit holders against recapture. There is no assurance that the conditions of the sale will be satisfied, and that the sale will be consummated even if the Unit holders give approval. A Gaylord, Michigan Property ---------------------------- A Gaylord, Michigan Property has experienced a need for maintenance and repairs in excess of the available reserves and operating cash flow. The City of Gaylord has issued a letter requiring the repairs be performed. The Managing General Partner has been working with the Rural Development Authority to attempt to resolve problems; however, there can be no assurance as to how these matters will be resolved. In addition, as part of a work-out strategy, the Managing General Partner has entered into a purchase and sale contract to sell the property subject to the approval of the Partnership as Limited Partner of the Operating Partnership. The General Partner intends to seek approval of the Unit holders for the sale. It is anticipated that a part of the transaction will include the posting of a bond to protect the Unit holders against recapture. There is no assurance that the conditions of the sale will be satisfied, and that the sale will be consummated even if the Unit holders give approval. Four Oklahoma Properties ------------------------ The four Oklahoma Properties are part of the HUD Restructuring Mark to Market Program (See further detail in Liquidity and Capital Resources). Although it is not anticipated, restructuring could possibly reduce the cash flow of the Properties, potentially causing the Properties to be unable to cover their expenses, as well as potentially creating debt forgiveness taxable income. Currently, the Managing General Partner and HUD have tentatively agreed on a restructuring proposal that provides for rehabilitation, a reduction of rents and a corresponding reduction of debt service. It is anticipated that the proposal will be approved sometime in 2001. Although a restructuring is in process, there can be no assurances as to the actual outcome at this time. Other Property Issues --------------------- At March 31, 2001, ten other Properties have cash flow difficulties. Three of these properties continue to run at the edge of break-even with a slight change in occupancy or operating cost causing a slight cash flow problem. Seven of the properties are located in the Midwest and had higher than normal energy costs for the first quarter of 2001. Many of the properties in the portfolio continue to operate at the edge of break-even, incurring cash flow difficulties whenever there are reductions in occupancy or increased operating and utility expenses. Liquidity and Capital Resources ------------------------------- Liquidity is defined as an entity's ability to meet its current and long-term financial obligations. If a Property were to lose its governmental rent, interest subsidy or mortgage insurance, the Operating Partnership holding such Property might be unable to fund expenses on an ongoing basis. 10 Liquidity shortfalls might be covered by federal governmental subsidy programs, by state and local agencies, or by funds from the Investment Partnership reserves, although there is no assurance that such sources would be available or, if available, sufficient to cover any liquidity shortfall. A liquidity shortfall, for whatever reason, might result in a sale, refinancing, or foreclosure of the Property, any one of which could have material adverse tax consequences to a Unit holder, including a partial recapture of previously allocated LIHTCs. Material changes have been made and additional changes have been proposed by various Members of Congress and the Clinton Administration in the programs of HUD. The Multifamily Assisted Housing Reform and Affordability Act of 1997, Public Law 105-65, effective October 1, 1997, established a debt restructuring program applicable to all HUD-Insured projects with rents above those of comparable properties in local markets. Under the program, subsided rent levels generally are reduced to market levels and the debt may be restructured into two or three mortgages. The first mortgage loan is set at a level supportable by the lower subsidized rents, and the second and third mortgage loans are payable only out of cash flow after other approved expenses and sale or refinancing proceeds. In many cases, rent subsidies will become tenant-based, meaning that the subsidies may move with the tenants. However, for certain projects, such as those that predominately serve elderly or disabled families or are located in markets with an inadequate supply of affordable housing, the rent subsidies may continue to be project-based. HUD has entered into contracts to carry out the restructuring with state housing finance agencies and others ("Participating Administrative Entities" or "PAEs"). The PAEs have authority to set rents above the comparable rents for only 20% of their inventory each year. These rents will be based on approved project budgets, and are capped at 120% of FMRs, except for up to 5% of the inventory, which can have budget-based rents above 120% of FMRs based on a showing of special need. Owners who have engaged in adverse financial or managerial actions are barred from participating in the restructuring program. The Operating Partnerships own twelve Properties whose Section 8 contracts have expired or will expire in fiscal year 2001, and are not subject to optional renewal by the owner. The General Partner expects that Section 8 contracts for all of these Properties will be renewed by HUD at current levels until at least the end of fiscal year 2001, although there can be no assurance that HUD will do so. Four of these properties have rents in excess of 100% of HUD-established fair market rents. Four of these properties are subject to the mark to market program in the process of restructuring with HUD (See Four Oklahoma Properties). Currently, the Managing General Partner and HUD have tentatively agreed on a restructuring proposal that provides for rehabilitation, a reduction of rents and a corresponding reduction of debt service. It is anticipated that the proposal will be approved sometime in 2001. Although a restructuring is in process, there can be no assurances as to the actual outcome at this time. Although it is not anticipated, additional projects may become subject to the restructuring program. The General Partner will work with the general partners of the Operating Partnerships to seek to renew all expiring Section 8 contracts, and if required or appropriate, to participate in the program to restructure loans and rent subsidies. Of the Investment Partnership's remaining projected LIHTCs, approximately 4% are attributable to these Operating Partnerships. Restructuring could affect demand for and cash flow of many of the Properties, as well as potentially create debt forgiveness taxable income. Moreover, a shift to tenant-based subsidies could lead over time to lower occupancies and lower rents, adversely affecting cash flow. The General Partner is monitoring the development of HUD policy guidance and legislation. The General Partner is unable to predict with certainty the impact of HUD program restructuring on the Operating Partnerships, but it is possible that a restructuring could have a material adverse effect on one or more of the Operating Partnerships, which in turn could have a material adverse effect on the Investment Partnership. At March 31, 2001 restricted cash was $6,261,000. The restricted cash was composed of the Investment Partnership reserve of $539,000 and Operating Partnership reserves of $5,722,000. Deposits and withdrawals from Operating Partnership reserves are generally regulated by a governing federal, state or local agency. Investment Partnership reserves are available to fund repairs and maintenance as well as operational expenses, while the reserves maintained by an Operating Partnership are typically available only for the Property owned by such Operating Partnership. Historically, the Investment Partnership reserve has been available to fund obligations of the Investment Partnership, including the management fee payable by the Investment Partnership to the General Partner. As of December 31, 2000 the General Partner voluntarily deferred payment of $876,000 of its supervisory and program management fee. The General Partner is under no obligation to continue to defer this fee, and there can be no assurance that the Investment Partnership reserve will be sufficient to satisfy the liquidity requirements of any given Operating Partnership in the event that the reserves of such Operating Partnership are insufficient for this purpose. 11 Low-income housing projects frequently generate limited cash flow and, therefore, the potential for cash flow deficits exists. The General Partner does not anticipate that the Investment Partnership will distribute cash to Unit holders in circumstances other than refinancing or disposition of its investments in the Operating Partnerships. Moreover, especially in light of the reduced availability of subsidies and the consequent reduction in market value of the Properties, there can be no assurance of cash distributions in the event of refinancing or disposition. Unit holders could be faced with an obligation to pay taxes as a result of disposition of the Properties but no cash distributions with which to pay those taxes. Results of Operations --------------------- The March 31, 2001 net loss of $978,000 increased 6.88% from the March 31, 2000 net loss of $915,000. The reasons for the differences are discussed below. Total revenue increased $146,000 (4.85%) when comparing the three months ended March 31, 2001 and 2000. Total expenses exclusive of depreciation and interest for the three months ended March 31, 2001 and 2000 were $2,591,000 and $2,396,000, respectively. The $195,000 (8.14%) increase in expenses between 2001 and 2000 primarily relates to a decrease in operating and maintenance expense of $96,000 (12.78%), an increase in management fees of $58,000 (24.37%), and an increase in utility expenses of $209,000 (52.25%). The decrease in operating and maintenance expenses in 2001 relates to additional improvements and maintenance in first quarter of 2000 as compared to the current and previous years. The increase in management fees relates to two properties being able to pay an incentive management fee in 2001. The increase in utility expenses relates to a general increase in energy costs for seven of the Midwest properties. In recent years rental income, after the HUD rent adjustments, has not been increasing at a rate equivalent to increases in expenses (excluding depreciation and interest). To date, inflation has not had a significant impact on the Partnerships' combined operations. However, rent levels of the Properties are generally limited by the requirements of the low-income housing tax credit and are subject to strict governmental regulation. In the event of significant inflation, including increases in the price of utilities resulting from general increases in the cost of energy, the Operating Partnerships may be unable to increase rents sufficiently to compensate for increases in expenses. Due to the changes in HUD programs, future increases in subsidy income may be limited. Other ----- The Operating Partnerships carry comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to their properties with insured limits and policy specifications that management believes are customary for similar properties. There are, however, certain types of losses (generally of a catastrophic nature such as wars, floods or earthquakes) which may be either uninsurable, or, in management's judgment, not economically insurable. Should an uninsured loss occur, the Investment Partnership could lose both its invested capital in and anticipated profits from the affected property. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may become liable for the costs of the investigation, removal and remediation of hazardous or toxic substances on, under, in or migrating from such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The Investment Partnership is not aware of any notification by any private party or governmental authority of any non-compliance, liability or other claim in connection with environmental conditions at any of its Properties that it believes will involve any expenditure which would be material to the Investment Partnership, nor is the Investment Partnership aware of any environmental condition with respect to any of its Properties that it believes will involve any such material expenditure. However, there can be no assurance that any non- compliance, liability, claim or expenditure will not arise in the future. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None 12 PART II. OTHER INFORMATION --------------------------- ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit 27 - Financial Data Schedule 13 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 National Housing Trust Limited Partnership ------------------------------------------ (Registrant) Date May 10, 2001 By /s/ James A. Bowman ------------------ ---------------------------------. James A. Bowman President, NHT, Inc. Date May 10, 2001 By /s/ Susan E. Basting --------------------- ---------------------------------. Susan E. Basting Treasurer, NHT, Inc. 14

NATIONAL HOUSING TRUST LIMITED PARTNERSHIP 10-Q