10-Q 1 f10q_dec2004-lib3.txt 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 quarterly period ended December 31, 2004 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 Commission File Number 0-24656 LIBERTY TAX CREDIT PLUS III L.P. -------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3491408 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 625 Madison Avenue, New York, New York 10022 ---------------------------------------- -------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212)421-5333 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X ------- -------- PART I - Financial Information Item 1. Financial Statements LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited)

============= ============== ~~September~~December 3031, March 31, 2004 2004 ------------- ------------- ASSETS Operating Assets: Property and equipment at cost, net of accumulated depreciation of $~~128~~122,~~047~~997,~~728~~360 and $123,219,520, respectively $~~159~~ 150,~~614~~824,~~729~~263 $ 163,934,774 Cash and cash equivalents 43,~~098~~328,~~867~~060 3,656,322 Cash held in escrow 1413,~~531~~100,~~714~~640 13,258,260 Deferred costs, net of accumulated amortization of $2,~~245~~234,~~947~~349 and $2,172,~~729~~279, respectively 2,~~597~~541,~~257~~062 2,670,475 Other assets 2,~~552~~969,~~675~~039 2,776,525 ------------- ------------- Total operating assets 172,763,064 186,296,356 ------------- ------------- Discontinued Assets (Note 5): Property and equipment held for sale, net of accumulated depreciation of $~~183~~5,~~395~~327,~~242~~579 and $0, respectively 5,014,661 0 Net assets held for sale 1,670,117 0 ------------- ------------- Total discontinued assets 6,684,778 0 ------------- ------------- Total assets $ 179,447,842 $ 186,296,356 ============= =============

2 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) (continued)

============= ============== ~~September~~December 3031, March 31, 2004 2004 ------------- ------------- LIABILITIES AND PARTNERS' DEFICIT Operating Liabilities: Mortgage notes payable $ ~~169~~163,~~779~~786,~~923~~053 $ 172,456,295 Due to debt guarantor 52,~~106~~929,~~021~~553 49,958,612 Accounts payable and other liabilities 2826,~~262~~772,~~349~~528 24,044,416 Due to local general partners and affiliates 11,~~435~~502,~~454~~911 11,682,238 Due to general partners and affiliates 12,~~388~~213,~~825~~958 11,905,206 ------------- ------------- Total operating liabilities ~~273~~267,~~972~~205,~~572~~003 270,046,767 ------------- ------------- Discontinued Liabilities (Note 5): Mortgage notes payable of assets held for sale 3,527,256 0 Net liabilities held for sale 26,575 0 ------------- ------------- Total discontinued liabilities 3,553,831 0 ------------- ------------- Total liabilities 270,758,834 270,046,767 ------------- ------------- Minority interest (1,~~863~~472,~~497~~059) (1,481,127) ------------- ------------- Commitments and contingencies (Note 4) Partners' deficit: Limited partners (139,101.5 BACs issued and outstanding) (8687,~~591~~705,~~238~~086) (80,211,134) General Partners (2,~~122~~133,~~595~~847) (2,058,150) ------------- ------------- Total partners' deficit (8889,~~713~~838,~~833~~933) (82,269,284) ------------- ------------- Total liabilities and partners' deficit $ ~~183~~179,~~395~~447,~~242~~842 $ 186,296,356 ============= =============

See accompanying notes to consolidated financial statements. 3 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited)

============================ ============================ Three Months Ended ~~Six~~Nine Months Ended ~~September~~December 3031, ~~September~~December 3031, ---------------------------- ---------------------------- 2004 2003* 2004 2003* ---------------------------- ---------------------------- Operations: Revenues Rental income $ 87,~~243~~704,~~172~~403 $ 87,~~723~~907,~~742~~480 $ 1623,~~551~~040,~~649~~570 $ 1723,~~589~~401,~~953~~714 Other ~~574~~276,~~512~~138 ~~381~~331,~~036~~319 ~~912~~934,~~956~~114 ~~747~~898,~~533~~615 ~~Gain on sale of properties (Note 3) 0 13,948,508 0 13,948,508~~ ------------ ------------ ------------ ------------ Total revenue 87,~~817~~980,~~684~~541 238,~~053~~238,~~286~~799 1723,~~464~~974,~~605~~684 3224,~~285~~300,~~944~~329 ------------ ------------ ------------ ------------ Expenses General and administrative 1,~~858~~962,~~204~~826 21,~~241~~925,~~654~~971 35,~~758~~551,~~204~~160 45,~~263~~729,~~506~~161 General and administrative- related parties (Note 2) ~~877~~822,~~957~~118 ~~970~~851,~~503~~419 12,~~760~~458,~~192~~289 12,~~883~~540,~~416~~060 Operating ~~983~~815,~~620~~502 1815,~~018,323~~044 2,~~085~~723,~~400~~408 2,~~171~~730,~~847~~610 Repairs and maintenance 1,~~440~~280,~~428~~293 1,~~368~~332,~~447~~661 23,~~720~~900,~~647~~052 23,~~765~~805,~~399~~610 Real estate taxes ~~572~~496,~~048~~155 ~~569~~480,~~255~~394 1,~~115~~490,~~829~~889 1,~~127~~421,~~429~~790 Insurance ~~589~~501,~~288~~107 ~~467~~419,~~407~~488 1,~~111~~572,~~604~~180 ~~988~~1,~~236~~299,379 Interest 3,~~320~~292,~~818~~686 3,~~858~~258,~~956~~096 69,~~569~~667,~~735~~802 710,~~490~~023,~~034~~277 Depreciation and amortization 2,~~535~~366,~~528~~943 2,~~764~~301,~~399~~329 47,~~920~~035,~~985~~667 57,~~361~~101,~~733~~625 ------------ ------------ ------------ ------------ Total expenses 1211,~~177~~537,~~891~~630 1311,~~258~~384,~~944~~402 2434,~~042~~399,~~596~~447 2634,~~051~~651,~~600~~512 ------------ ------------ ------------ ------------ (Loss) ~~income~~from operations before minority interest (3,~~360~~557,~~207~~089) 9(3,~~794~~145,~~342~~603) (610,~~577~~424,~~991~~763) 6(10,~~234~~351,~~394~~183) Minority interest in losses of subsidiary partnerships 71from operations 66,~~164~~507 6261,~~064~~558 ~~133~~206,~~442~~291 ~~125~~191,~~528~~256 ------------ ------------ ------------ ------------ ~~Net~~Loss ~~(loss)~~from ~~income~~operations $ (3,~~289~~490,~~043~~582) ~~$ 9~~(3,~~856~~084,~~406~~045) $ (610,~~444~~218,~~549~~472) ~~$ 6~~(10,~~359~~159,~~922~~927) ~~============~~------------ ~~============~~------------ ~~============~~------------ ~~============~~------------ ~~Net~~Discontinued ~~(loss)~~Operations: ~~income~~Income from discon- ~~limited~~tinued ~~partners~~operations $ (~~3,256,153)~~including $gain ~~9,757,842 $~~ (~~6,380,104~~loss) $on ~~6,296,323~~sale ~~============~~of ~~============~~properties ~~============~~and ~~============~~minority ~~Number~~interest) of(Notes ~~BACs~~3 ~~outstanding~~and ~~139,101.~~5) ~~139~~2,~~101.5~~365,482 ~~139~~127,~~101.5~~465 ~~139~~2,~~101.5~~648,823 ~~============~~13,563,269 ~~============~~------------ ~~============~~------------ ~~============~~------------ ------------ Net (loss) income ~~per BAC~~ $ (~~23.41~~1,125,100) $ ~~70.15~~(2,956,580) $ (~~45.87~~7,569,649) $ ~~45.26~~3,403,342 ============ ============ ============ ============

4 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) (continued)

============================ ============================ ~~Limited~~Three ~~General~~Months ~~Total~~Ended ~~Partners~~Nine ~~Partners~~Months Ended December 31, December 31, ---------------------------- ---------------------------- ~~Partners'~~2004 ~~deficit~~2003* 2004 2003* ---------------------------- ~~April~~---------------------------- 1,Loss ~~2004~~from operations limited partners $ (823,~~269~~455,~~284~~676) $ (803,~~211~~053,~~134~~204) $(10,116,287) $(210,058,~~150~~328) ~~Net~~Income from discon- tinued operations (including gain (loss) on sale of properties) - ~~six~~limited ~~months~~partners ~~ended~~2,341,827 ~~September~~126,190 302,622,335 ~~2004~~13,427,637 ------------ ------------ ------------ ------------ Net (6loss) income - limited partners $ (1,~~444~~113,~~549~~849) $ (62,~~380~~927,~~104~~014) $ (647,~~445~~493,952) $ 3,369,309 ============ ============ ============ ============ Number of BACs outstanding 139,101.5 139,101.5 139,101.5 139,101.5 ============ ============ ============ ============ Loss from operations - per BAC $ (24.84) $ (21.95) $ (72.73) $ (72.31) Income from discon- tinued operations (including gain (loss) on sale of properties) - per BAC 16.83 0.91 18.85 96.53 ------------ ------------ ------------ ~~Partners'~~------------ ~~deficit~~Net -(loss) ~~September~~income ~~30,~~- ~~2004~~per BAC $ (~~88,713,833~~8.01) $ (~~86,591,238~~21.04) $ (~~2,122,595~~53.88) $ 24.22 ============ ============ ============ ============

* Reclassified for comparative purposes. See accompanying notes to consolidated financial statements. 5 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Consolidated Statement of Changes in Partners' Deficit (Unaudited)

================================================= ~~Six~~Limited ~~Months~~General ~~Ended~~Total ~~September~~Partners ~~30,~~Partners ---------------------------- 2004 2003* ---------------------~~-------~~ ~~Cash~~Partners' ~~flows~~deficit ~~from~~- ~~operating~~April ~~activities:~~1, ~~Net~~2004 ~~(loss) income~~ $ (682,~~444~~269,~~549~~284) $ 6(80,~~359~~211,~~922 Adjustments to reconcile net (loss~~134) ~~income~~$ ~~to net cash provided by operating activities: Gain on sale of properties~~ (~~Note 3) 0 (13~~2,~~948~~058,~~508~~150) ~~Depreciation~~Net ~~and amortization 4,920,985 5,361,733 Minority interest in~~ loss of- ~~subsidiaries~~nine ~~(133,442)~~months ~~(125,528)~~ended ~~Increase~~December ~~in accounts payable and other liabilities 3~~31,~~565,646~~ ~~1,142,995~~2004 ~~Increase in cash held in escrow~~ (17,~~244~~569,~~049~~649) (~~469~~7,~~697) Decrease (increase) in other assets 223~~493,~~850 (204,954~~952) ~~Increase in due to general partners and affiliates 483,619 940,477 Increase in due to local general partners and affiliates 195,824 265,726 Decrease in due to local general partners and affiliates~~ (~~440~~75,~~170~~697) ~~(469,557) Increase in due to debt guarantor 2,147,409 1,727,872~~ ------------ ------------ ~~Net cash provided by operating activities 3,275,123 580,481~~ ------------ ~~------------~~Partners' ~~Cash~~deficit ~~flows~~- ~~from~~December ~~investing~~31, ~~activities:~~2004 ~~Acquisition of property and equipment~~ $(~~566~~89,~~080) (346~~838,~~849~~933) ~~Net proceeds from sale of properties 690,645 0 Increase in cash held in escrow~~ $(2987,~~405) (318~~705,~~365~~086) ~~Increase~~$ ~~in due to local general partners and affiliates 0~~ (2,~~427 ------------ ------------ Net cash provided by (used in) investing activities 95~~133,~~160 (662,787~~847) ~~------------~~============ ~~------------~~============ ============

See accompanying notes to consolidated financial statements. 6 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)

=============================== ~~Six~~Nine Months Ended ~~September~~December 3031, ------------------------------- 2004 2003* ------------------------------- Cash flows from ~~financing~~operating activities: ~~Principal~~Net ~~payments~~(loss) ofincome ~~mortgage~~$ ~~notes~~(7,569,649) ~~payable~~$ 3,403,342 Adjustments to reconcile net(loss) income to net cash provided by operating activities: Income from discontinued operations (2,~~676~~648,~~372~~823) (113,~~594~~563,269) Depreciation and amortization 7,035,667 7,101,625 Increase in cash held in escrow (951,946) ~~Decrease~~(569,568) Increase in other assets (282,979) (475,139) Increase in due to debt guarantor 2,970,941 2,529,161 Increase in accounts payable and other liabilities 4,475,140 1,150,286 Increase in due to local general partners and affiliates (2314,~~438)~~863 ~~(12~~331,~~817)~~640 Decrease in ~~capitalization~~due ofto ~~consolidated~~local ~~subsidiaries~~general ~~attributable~~partners toand ~~minority~~affiliates ~~interest~~ (~~248~~458,~~928~~176) (~~344~~472,~~440~~154) ~~------------~~Increase ~~------------~~in ~~Net~~due ~~cash~~to ~~used~~general partners and affiliates 390,114 1,308,715 Minority interest in ~~financing~~loss ~~activities~~of subsidiaries (2206,~~927,738~~291) (1191,~~951,292~~256) ------------ ------------ Net ~~increase (decrease) in~~ cash ~~and~~provided ~~cash~~by ~~equivalents~~operating ~~442,545~~activities ~~(2,033,598) Cash and cash equivalents at beginning of period~~ 3,~~656~~068,~~322~~861 5553,~~098,740~~383 ------------ ------------ Cash ~~and~~flows ~~cash~~from ~~equivalents~~investing atactivities: ~~end~~Acquisition of ~~period~~property $and 4equipment (1,~~098~~118,~~867~~776) ~~$ 3~~(936,~~065,142~~802) ~~============~~Proceeds ~~============~~from ~~Summarized below are the components of the gain on~~ sale of properties: ~~Decrease~~690,645 in0 ~~property~~Decrease ~~and~~(increase) ~~equipment,~~in ~~net~~cash ofheld ~~accumulated~~in ~~depreciation~~escrow $48,492 ~~0 $ 3~~(34,~~267,097~~841) Decrease in ~~deferred~~due ~~costs~~to 0local ~~223,110~~general ~~Decrease~~partners ~~in prepaid expenses~~ and ~~other~~affiliates ~~assets~~ 0 632,~~022~~427 ~~Decrease~~------------ in------------ ~~accounts~~Net ~~payable,~~cash ~~accrued~~used ~~expenses~~in ~~and~~investing ~~other~~activities ~~liabilities 0~~ (~~382~~379,~~580~~639) ~~Decrease in mortgage notes payable 0~~ (10969,~~760,000~~216) ~~Decrease~~------------ ~~in due to local general partners and their affiliates 0 (6,359,157)~~------------

7 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (continued)

~~Three~~=============================== ~~Months~~Nine ~~Ended Six~~ Months Ended ~~September~~December 3031, ~~September 30,~~ ----------------------- --------~~---------------~~ 2004 2003* ~~2004 2003~~ ----------------------- --------~~---------------~~ ~~Partnership~~Cash ~~management~~flows ~~fees~~from financing activities: Principal payments of mortgage notes payable (a2,950,086) ~~$ 308~~(1,~~750~~451,264) $Decrease ~~354,000~~in $due ~~646,000~~to $local ~~708,000~~general ~~Expense~~partners ~~reimburse-~~and ~~ment~~affiliates (b2,438) ~~101~~(12,~~414~~817) ~~95,837~~Decrease ~~156,094~~in ~~151,898~~capitalization ~~Local~~of ~~administrative~~consolidated ~~fee~~subsidiaries ~~(d)~~attributable ~~48,500~~to ~~50,000~~minority 75interest (64,~~500~~960) ~~100~~(363,~~000~~785) ---------- --~~--------~~ ---------- --~~--------~~ ~~Total~~Net ~~general~~cash ~~and~~used ~~ad-~~in ~~ministrative-General~~financing ~~Partners~~activities ~~458~~(3,~~664 499~~017,~~837~~484) ~~877~~(1,~~594 959~~827,~~898~~866) ---------- --~~--------~~ ---------- --~~--------~~ ~~Property~~Net ~~management~~decrease ~~fees~~in ~~incurred~~cash toand ~~af-~~cash ~~filiates~~equivalents of(328,262) ~~the~~(2,243,699) ~~subsidi-~~Cash ~~ary~~and ~~partnerships'~~cash ~~general~~equivalents ~~partners~~at ~~(c)~~beginning ~~419,293~~of ~~470,666~~period ~~882~~3,~~598~~656,322 ~~923~~5,~~518~~098,740 ---------- --~~--------~~ ---------- --~~--------~~ ~~Total~~Cash ~~general~~ and ~~ad-~~cash ~~ministrative-related~~equivalents ~~parties~~at $end ~~877,957~~of period $ ~~970~~3,~~503 $1~~328,~~760,192~~060 $1 2,~~883~~885,~~416~~041 ========== ==~~========~~ ========== ==~~========~~ Summarized below are the components of discontinued operations: Decrease in property and equipment, net of accumulated depreciation $ 2,304,990 $ 4,098,721 Increase in cash held in escrow (261,661) (239,644) Decrease in deferred costs 0 223,110 Decrease in prepaid expenses and other assets 52,847 123,735 Decrease in accounts payable, accrued expenses and other liabilities (1,573,979) (329,420) Decrease in mortgage notes payable (2,192,900) (11,078,432) Decrease in due to local general partners and their affiliates (33,576) (6,366,557) Decrease in due to general partners and affiliates (73,862) (2,013) (Decrease) increase in capitalization of consolidated subsidiaries attributable to minority interest (180,037) 7,231

* Reclassified for comparative purposes. See accompanying notes to consolidated financial statements. 8 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 (Unaudited) Note 1 - General The consolidated financial statements for the nine months ended December 31, 2004 and 2003 include the accounts of Liberty Tax Credit Plus III L.P. (the "Partnership") and 60 and 61 subsidiary partnerships (the "subsidiary partnerships", "Local Partnerships" or "subsidiaries"), respectively. The Partnership holds a 98% limited partnership interest in each subsidiary partnership except one subsidiary partnership, in which the Partnership holds a 27% limited partnership interest (the other 71% limited partnership interest is owned by an affiliate of the Partnership with the same management). Through the rights of the Partnership and/or an affiliate of Related Credit Properties III L.P. and Liberty GP III Inc. (the "General Partners"), which affiliate has a contractual obligation to act on behalf of the Partnership, to remove the general partner of each subsidiary partnership (each a "Local General Partner") and to approve certain major operating and financial decisions, the Partnership has a controlling financial interest in the subsidiary partnerships. As of December 31, 2004, the Partnership has disposed of five of its sixty-two investments (see Note 3). For financial reporting purposes, the Partnership's fiscal quarter ends December 31. All subsidiaries have fiscal quarters ending September 30. Accounts of the subsidiaries have been adjusted for intercompany transactions from October 1 through December 31. The Partnership's fiscal quarter ends December 31 in order to allow adequate time for the subsidiaries financial statements to be prepared and consolidated. All intercompany accounts and transactions have been eliminated in consolidation. Increases (decreases) in the capitalization of consolidated subsidiaries attributable to minority interest arise from cash contributions from and cash distributions to the minority interest partners. Losses attributable to minority interests which exceed the minority interests' investment in a subsidiary have been charged to the Partnership. Such losses aggregated approximately $25,000 and $0 and $136,000 and $0 for the three and nine months ended December 31, 2004 and 2003, respectively. The Partnership's investment in each subsidiary is generally equal to the respective subsidiary partners' equity less minority interest capital, if any. In consolidation, all 9 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 (Unaudited) subsidiary partnership losses are included in the Partnership's capital account except for losses allocated to minority interest capital. The books and records of the Partnership are maintained on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles ("GAAP"). In the opinion of the General Partners of the Partnership, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Partnership as of December 31, 2004, the results of operations for the three and nine months ended December 31, 2004 and 2003 and cash flows for the nine months ended December 31, 2004 and 2003. However, the operating results for the nine months ended December 31, 2004 may not be indicative of the results for the year. In accordance with FASB 144, the results of discontinued operations are reported as a separate component of income before extraordinary items on the Consolidated Statements of Operations. Discontinued operations include the results of operations and any gain or loss recognized for Local Partnerships that have been disposed of or are held for sale. A gain or loss recognized on the disposal is disclosed in the notes to the consolidated financial statements. Adjustments to amounts previously reported in operations that are directly related to the disposal of a Local Partnership are reclassified in the current period as discontinued operations for comparability purposes. Assets and liabilities of a Local Partnership that are classified as held for sale are presented separately in the asset and liability sections, respectively, of the Consolidated Balance Sheets. Certain information and note disclosure normally included in financial statements prepared in accordance with GAAP have been omitted or condensed. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Partnership's Annual Report on Form 10-K for the year ended March 31, 2004. Rental income is recognized as rent becomes due and charged to tenants' accounts receivable if not received by the due date. Rental income is typically due the first day of each month, but can vary by property due to the terms of each tenant's lease. Rental payments received in advance of the due date are deferred until earned. Rental subsidies are recognized as rental income during the month in which it is received and applied. The related rental subsidy programs have 10 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 (Unaudited) expiration dates that terminate upon total disbursement of the assistance obligation. Note 2 - Related Party Transactions Liberty Associates IV L.P. ("Liberty Associates"), an affiliate of the General Partners, has a 1% and .998% interest as a special limited partner in 56 and 1 of the Local Partnerships, respectively. Affiliates of the General Partners also have a minority interest in certain Local Partnerships. The General Partners and their affiliates and the Local General Partners and their affiliates perform services for the Partnership and the Local General Partners, respectively. The costs incurred to related parties for the three and nine months ended December 31, 2004 and 2003 were as follows:

(a) The General Partners are entitled to receive a partnership management fee after payment of all Partnership expenses, which together with the annual local administrative fees will not exceed a maximum of 0.5% per annum of invested assets (as defined in the Partnership Agreement), for administering the affairs 11 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 (Unaudited) of the Partnership. The partnership management fee, subject to the foregoing limitation, will be determined by the General Partners in their sole discretion based upon their review of the Partnership's investments. Unpaid partnership management fees for any year will be accrued without interest and will be payable only to the extent of available funds after the Partnership has made distributions to the limited partners of sale or refinancing proceeds equal to their original capital contributions plus a 10% priority return thereon (to the extent not theretofore paid out of cash flow). Partnership management fees owed to the General Partners amounting to approximately $10,713,000 and $9,810,000 were accrued and unpaid at December 31, 2004 and March 31, 2004, respectively. Without the General Partners' continued accrual without payment of these fees and expense reimbursements, the Partnership will not be in a position to meet its obligations. The General Partners have allowed for the accrual without payment of these amounts but are under no obligation to continue to do so. (b) The Partnership reimburses the General Partners and their affiliates for actual Partnership operating expenses incurred by the General Partners and their affiliates on the Partnership's behalf. The amount of reimbursement from the Partnership is limited by the provisions of the Partnership Agreement. Another affiliate of the General Partners performs asset monitoring for the Partnership. These services include site visits and evaluations of the subsidiary partnerships' performance. (c) The subsidiary partnerships incurred property management fees amounting to $600,241 and $616,274 and $1,766,893 and $1,819,135 for the three and nine months ended December 31, 2004 and 2003, respectively, of which $420,043 and $421,041 and $1,209,120 and $1,204,784 for the three and nine months ended December 31, 2004 and 2003, respectively, were incurred to affiliates of the Local General Partners. There were no property management fees incurred to affiliates of the General Partners. (d) Liberty Associates IV L.P., a special limited partner of the subsidiary partnerships, is entitled to receive a local administrative fee of up to $2,500 per year from each subsidiary partnership. 12 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 (Unaudited) Note 3 - Sale of Properties The Partnership is currently in the process of disposing of its investments. It is anticipated that this process will take a number of years. As of December 31, 2004, the Partnership has sold its limited partnership interest in four Local Partnerships and the property and the related assets and liabilities of a fifth Local Partnership. In addition, on December 29, 2004, the Partnership entered into an agreement to sell its limited partnership interest in another Local Partnership. There may be no assurance as to when the Partnership will dispose of its remaining investments or the amount of proceeds which may be received. However, based on the historical operating results of the Local Partnerships and the current economic conditions including changes in tax laws, it is unlikely that the proceeds from such sales received by the Partnership will be sufficient to return to the limited partners their original investment. On December 29, 2004, the Partnership entered into an agreement for the sale of its Limited Partnership Interest in Lancashire Towers Associates, Ltd. ("Lancashire") to an affiliate of the Local General Partner for a purchase price of $800,000. The sales documents have been executed and the funds are being held in escrow waiting for approval of the sale from the Department of Housing and Urban Development ("HUD"). No assurances can be given that HUD will approve the sale. On October 7, 2004, the Partnership's limited partnership interest in Ashby Apartments, Ltd. ("Ashby") was sold to the Local General Partner for approximately $50,000, resulting in a gain in the amount of approximately $48,000 which will be recognized in the Partnership's Annual Report on Form 10-K for the year ended March 31, 2005. On October 7, 2004, the Partnership's limited partnership interest in Meridith Apartments ("Meridith") was sold to the Local General Partner for approximately $50,000, resulting in a loss in the amount of approximately $128,000 which will be recognized in the Partnership's Annual Report on Form 10-K for the year ended March 31, 2005. On October 7, 2004, the Partnership's limited partnership interest in Ritz Apartments LTD. ("Ritz") was sold to the Local General Partner for approximately $50,000, resulting in a loss in the amount of approximately $13,000 which will be recognized in the Partnership's Annual Report on Form 10-K for the year ended March 31, 2005. 13 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 (Unaudited) On July 15, 2004, the Partnership's limited partnership interest in WPL Associates XXIII ("Benjamin's Corner) was sold to an unaffiliated third party purchaser for approximately $690,000, resulting in a gain in the amount of approximately $2,124,000. On June 26, 2003, the property and the related assets and liabilities of Jefferson Place L.P. ("Jefferson Place") were sold to an unaffiliated third party for $13,650,000 resulting in a gain of approximately $13,943,000. Note 4 - Commitments and Contingencies R.P.P. Limited Dividend Housing Association Limited Partnership ("River Place") ------------------------------------------------------------------------------- River Place has been unable to generate sufficient cash flow to make the required principal and interest payments under its loan agreements. River Place's debt guarantor, General Retirement System of the City of Detroit ("GRS"), entered into an agreement with the Michigan State Housing Authority (the "Authority") to purchase these loans upon the occurrence of certain events. GRS has declared River Place in default under its obligation to make the required payments. During 1996, GRS agreed to waive its right of foreclosure under the mortgages, unless certain events occur, through February 1, 2006. GRS has made advances for debt service and has incurred certain fees relating to these loans. As of December 31, 2004, these advances and fees totaled $52,929,553, including accrued interest on such advances at a rate of 15%. Such amount is included in the amount due to debt guarantor on the balance sheet. Management anticipates that River Place will be unable to make all of the required debt service payments during 2005. However, there is no guarantee that GRS, or any other persons, will continue to make these payments on behalf of River Place. Brandywine Court Associates, L.P. ("Brandywine") ------------------------------------------------ Brandywine has had recurring net losses and continues to have a substantial working capital deficit. Furthermore, Brandywine's management continues to anticipate that the property will need a new roof in the near future, the cost of which is expected to exceed $150,000. Brandywine's HAP contract which was scheduled to expire in 2004 has been extended through August 31, 2005. Brandywine's management has determined that the Property is not eligible for financial relief from the United States Department of Housing and Urban 14 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 (Unaudited) Development ("HUD"), since the Property would require relief of debt in excess of the parameters allowed. Brandywine's management continues to seek a buyer for the Property. The property had been experiencing decreases in occupancy which reached a low of approximately 74% in August of 2004. However, the occupancy has increased to approximately 90% as of December 31, 2004. Gentle Pines - West Columbia Associates, L.P. ("Gentle Pines") -------------------------------------------------------------- Gentle Pines has had recurring net losses and continues to have a substantial working capital deficit. A material number of apartment units are no longer supported by project-based housing subsidies and the project-based HAP contract for the remaining units expired on May 31, 2004. As of June 1, 2004, Gentle Pines has been unable to make its mortgage payments and is in default on its loan. Management is seeking a nonprofit organization with an affordable housing mission to acquire Gentle Pines. The property has been experiencing decreases in occupancy which reached a low of approximately 40% in July of 2004. However, the occupancy has increased to approximately 70% as of December 31, 2004. Citrus Meadows Apartments, LTD. ("Citrus Meadows") -------------------------------------------------- Citrus Meadows incurred a net loss of approximately $568,000 for the year ended March 31, 2004 and approximately $270,000 for the nine months ended December 31, 2004 and has incurred a Partner's deficit since inception. Current economic conditions have limited the ability of Citrus Meadows to increase tenant occupancy. In response to these economic conditions the Local General Partners has made some building improvements, and management has implemented expense reductions and increased advertising to attract new tenants. Management feels that as a direct result of these recent changes their activity level and interest from potential residents has increased dramatically. Occupancy is now at 82% with fourteen new applications pending with seven of these approved for move-in in late January or during the month of February. In the interim, the local general partner is funding the deficit. It is unclear whether Citrus Meadows will be successful in accomplishing these objectives. 15 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 (Unaudited) Jefferson Limited Partnership ("Jefferson") ------------------------------------------- At December 31, 2004, Jefferson's current liabilities exceeded its current assets by over $134,000. However, approximately $65,000 of current liabilities at December 31, 2004 are to related parties which do not intend to pursue payment beyond Jefferson's ability to pay. Site H Development Co. ("Site H") --------------------------------- The Partnership has not been provided with the Site H audited financial statements for fiscal years 2003 and 2002 and as such has used estimates in its consolidated financial statements for both years. 16 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 (Unaudited) Note 5 - Discontinued Operations: The following table summarizes the financial position and results of operations of the Local Partnerships that are classified as discontinued operations. As of December 31, 2004 and for the three and nine month periods ended December 31, 2004, Ashby, Meredith, Ritz, Benjamin's Corner and Lancashire were classified as discontinued operations in the Consolidated Financial Statements. For the three and nine month periods ended December 31, 2003, Ashby, Meredith, Ritz, Benjamin's Corner, Lancashire and Jefferson Place were classified as discontinued operations on the consolidated financial statements.

17 LIBERTY TAX CREDIT PLUS III L.P. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 (Unaudited)

18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources ------------------------------- The Partnership's primary sources of funds include (i) working capital reserves, (ii) cash distributions from the operations of the Local Partnerships and (iii) sales proceeds. All of these sources of funds, none of which are significant, are available to meet the obligations of the Partnership. The Partnership has invested all of the net proceeds of its original offering in 62 Local Partnerships. Approximately $178,000 of the purchase price remains to be paid (which includes approximately $160,000 held in escrow). As of December 31, 2004, the Partnership has sold its limited partnership interest in four Local Partnerships and the property and the related assets and liabilities of a fifth Local Partnership were also sold. See Note 3 for a discussion of property sales. During the nine months ended December 31, 2004, cash and cash equivalents of the Partnership and its consolidated Local Partnerships decreased approximately $328,000. This decrease was attributable to acquisitions of property and equipment ($1,119,000), principal payments on mortgage notes payable ($2,950,000), a decrease in capitalization of consolidated subsidiaries attributable to minority interest ($65,000) and a net decrease in due to local general partners and affiliates relating to investing activities ($2,000) which exceeded cash provided by operating activities ($3,069,000), proceeds from sale of properties ($691,000) and a decrease in cash held in escrow relating to investing activities ($48,000). Included in the adjustments to reconcile the net loss to net cash provided by operating activities are income from discontinued operations (including gain (loss) on sale of properties) ($2,649,000), depreciation and amortization ($7,036,000) and an increase in due to debt guarantor ($2,971,000). The Partnership has a working capital reserve of approximately $210,000 at December 31, 2004. Cash distributions received from the Local Partnerships remain relatively immaterial. These distributions, as well as the working capital reserves referred to in the preceding paragraph, will be used towards the future operating expenses of the Partnership. During the nine months ended December 31, 2004, the amounts received from operations of the Local Partnerships approximated $24,000. Partnership management fees owed to the General Partners amounting to approximately $10,713,000 and $9,810,000 were accrued and unpaid at December 31, 2004 and March 31, 2004, respectively. Without the General Partners' continued 19 accrual without payment of these fees and expense reimbursements, the Partnership will not be in a position to meet its obligations. The General Partners have allowed for the accrual without payment of these amounts but are under no obligation to continue to do so. For a discussion of contingencies affecting certain Local Partnerships, see Note 4 to the financial statements. Since the maximum loss the Partnership would be liable for is its net investment in the respective Local Partnerships, the resolution of the existing contingencies is not anticipated to impact future results of operations, liquidity or financial condition in a material way. However, the Partnership's loss of its investment in a Local Partnership may also result in recapture of tax credits if the investment is lost prior to the end of the fifteenth anniversary after the beginning of the tax credit period. Management is not aware of any trends or events, commitments or uncertainties, which have not otherwise been disclosed, that will or are likely to impact liquidity in a material way. Management believes the only impact would be for laws that have not yet been adopted. The portfolio is diversified by the location of the properties around the United States so that if one area of the country is experiencing downturns in the economy, the remaining properties in the portfolio may be experiencing upswings. However, the geographic diversification of the portfolio may not protect against a general downturn in the national economy. Critical Accounting Policies ---------------------------- In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. The summary should be read in conjunction with the more complete discussion of the Company's accounting policies included in Note 2 to the consolidated financial statements which are included in the Partnership's annual report on Form 10-K for the year ended March 31, 2004. a) Property and Equipment Property and equipment to be held and used are carried at cost which includes the purchase price, acquisition fees and expenses, and any other costs incurred in acquiring the properties. The cost of property and equipment is depreciated over their estimated useful lives using accelerated and straight-line methods. Expenditures for repairs and maintenance are charged to expense as incurred; major renewals and betterments are capitalized. At the time property and equipment are retired or otherwise disposed of, the cost and accumulated 20 depreciation are eliminated from the assets and accumulated depreciation accounts and the profit or loss on such disposition is reflected in earnings. The Partnership complies with Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". A loss on impairment of assets is recorded when management estimates amounts recoverable through future operations and sale of the property on an undiscounted basis are below depreciated cost. At that time property investments themselves are reduced to estimated fair value (generally using discounted cash flows) when the property is considered to be impaired and the depreciated cost exceeds estimated fair value. b) Income Taxes No provision has been made for income taxes in the accompanying consolidated financial statements since such taxes, if any, are the responsibility of the individual partners. For income tax purposes, the Partnership has a fiscal year ending December 31. Results of Operations --------------------- The results of the operations of the Partnership, as well as the Local Partnerships remained fairly consistent during the three and nine months ended December 31, 2004 as compared to the corresponding periods in 2003, excluding other income and insurance. Rental income decreased approximately 3% and 2% for the three and nine months ended December 31, 2004 as compared to the corresponding periods in 2003, primarily due to decreases in occupancy at two Local Partnerships (see Note 4). Other income (decreased) increased approximately $(55,000) and $36,000 for the three and nine months ended December 31, 2004 as compared to the corresponding periods in 2003. The decrease for the three months ended December 31, 2004 is primarily due to the reversal of overaccruals of certain payables in the third quarter of 2003 at one Local Partnership and the increase for the nine months ended December 31, 2004 is primarily due to the return of escrow money held at a second Local Partnership. Total operating expenses, excluding insurance remained fairly consistent with decreases of approximately 1% and 2% for the three and nine months ended December 31, 2004 as compared to the corresponding periods in 2003. Insurance expense increased approximately $82,000 and $273,000 for the three and nine months ended December 31, 2004 as compared to the corresponding periods in 21 2003, primarily due to an underaccrual in 2003 and increases in insurance premiums at the Local Partnerships. Item 3. Quantitative and Qualitative Disclosures about Market Risk. The Partnership does not have any market risk sensitive instruments. Item 4. Controls and Procedures (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Chief Executive Officer and Chief Financial Officer of Related Credit Properties III Inc., the general partner of Related Credit Properties III L.P. and of Liberty GP III Inc., each of which is a general partner of the Partnership, has evaluated the effectiveness of the Partnership's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act") as of the end of the period covered by this report. Based on such evaluation, such officer has concluded that, as of the end of such period, the Partnership's disclosure controls and procedures are effective. (b) INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any changes in Partnership's internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Unregistered Sales of Equity in Securities and Use of Proceeds - 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 (3A) Form of Amended and Restated Agreement of Limited Partnership of Liberty Tax Credit Plus III L.P. (attached to Prospectus as Exhibit A)** (3B) Certificate of Limited Partnership of Liberty Tax Credit Plus III L.P., together with amendments filed on November 17, 1988** (4) Form of Subscription Agreement (attached to Prospectus as Exhibit B) (10A) Escrow Agreement between Registrant and Bankers Trust Company** (10B) Forms of Purchase Agreements for purchase of Local Partnership Interests** 31.1 Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a). 32.1 Certification Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Title 18 of the United States Code (18 U.S.C. 1350). ** Incorporated herein by reference to exhibits filed with Pre-Effective Amendment No. 1 to Liberty Tax Credit Plus III L.P.'s Registration Statement on Form S-11 (Registration No. 33-25732) 23 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 TAX CREDIT PLUS III L.P. -------------------------------- (Registrant) By: RELATED CREDIT PROPERTIES III L.P., a General Partner By: Related Credit Properties III Inc., its General Partner Date: February 11, 2005 By: /s/ Alan P. Hirmes ------------------ Alan P. Hirmes, Director, President, Chief Executive Officer and Chief Financial Officer Date: February 11, 2005 By: /s/ Glenn F. Hopps ------------------ Glenn F. Hopps, Treasurer (Principal Accounting Officer) By: LIBERTY GP III INC., a General Partner Date: February 11, 2005 By: /s/ Alan P. Hirmes ------------------ Alan P. Hirmes, Director, President, Chief Executive Officer and Chief Financial Officer Date: February 11, 2005 By: /s/ Glenn F. Hopps ------------------ Glenn F. Hopps, Treasurer (Principal Accounting Officer) Exhibit 31.1 CERTIFICATION PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a) I, Alan P. Hirmes, Chief Executive Officer and Chief Financial Officer of Related Credit Properties III Inc. the general partner of Related Credit Properties III L.P. and of Liberty GP III Inc., each of which is a General Partner of Liberty Tax Credit Plus III L.P. (the "Partnership"), hereby certify that: 1) I have reviewed this quarterly report on Form 10-Q for the period ending December 31, 2004 of the Partnership; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this quarterly report; 4) I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Partnership and I have: a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the Partnership including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report was being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and c) evaluated the effectiveness of the Partnership's disclosure controls and procedures and presented in this report my conclusion about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and d) disclosed in this quarterly report any change in the Partnership's internal control over financial reporting that occurred during the period ending December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Partnership's internal control over financial reporting; and 5) I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the Partnership's auditors and to the boards of directors of the General Partners: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Partnership's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Partnership's internal control over financial reporting. Date: February 11, 2005 ------------------ By: /s/ Alan P. Hirmes ------------------ Alan P. Hirmes Chief Executive Officer and Chief Financial Officer Exhibit 32.1 CERTIFICATION PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b) AND SECTION 1350 OF TITLE 18 OF THE UNITED STATES CODE (18 U.S.C. 1350) In connection with the Quarterly Report of Liberty Tax Credit Plus III L.P. (the "Partnership") on Form 10-Q for the period ending December 31, 2004 as filed with the Securities and Exchange Commission ("SEC") on the date hereof (the "Report"), I, Alan P. Hirmes, Chief Executive Officer and Chief Financial Officer of Related Credit Properties III Inc., the General Partner of Related Credit Properties III, L.P. and of Liberty GP III Inc., each of which is a general partner of the Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Partnership. A signed original of this written statement required by Section 906 has been provided to the Partnership and will be retained by the Partnership and furnished to the SEC or its staff upon request. By: /s/ Alan P. Hirmes ------------------ Alan P. Hirmes Chief Executive Officer and Chief Financial Officer February 11, 2005

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