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America First Multifamily Investors (ATAX)

Filed: 27 Feb 18, 7:00pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File Number:  000-24843

AMERICA FIRST MULTIFAMILY INVESTORS, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

47-0810385

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

1004 Farnam Street, Suite 400

Omaha, Nebraska 68102

(Address of principal executive offices)

(Zip Code)

(402) 444-1630

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Name of each exchange on which registered

Beneficial Unit Certificates representing assignments of limited partnership interests in America First Multifamily Investors, L.P. (the “BUCs”)

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES      NO  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES      NO  

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      NO  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES      NO  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of the chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company.  See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non- accelerated filer

(do not check if a smaller reporting company)

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

The aggregate market value of the registrant’s BUCs held by non-affiliates based on the final sales price of the BUCs on the last business day of the registrant’s most recently completed second fiscal quarter was  $358,504,922

DOCUMENTS INCORPORATED BY REFERENCE

None

 

 

 

 


 

INDEX

 

 

 

PART I

 

 

 

 

 

Item 1

 

Business

4

Item 1A

 

Risk Factors

12

Item 1B

 

Unresolved Staff Comments

24

Item 2

 

Properties

24

Item 3

 

Legal Proceedings

24

Item 4

 

Mine Safety Disclosures

24

 

 

 

 

 

 

PART II

 

 

 

 

 

Item 5

 

Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities

25

Item 6

 

Selected Financial Data

27

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk

54

Item 8

 

Financial Statements and Supplementary Data

57

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

114

Item 9A

 

Controls and Procedures

114

Item 9B

 

Other Information

115

 

 

 

 

 

 

PART III

 

 

 

 

 

Item 10

 

Directors, Executive Officers and Corporate Governance

116

Item 11

 

Executive Compensation

119

Item 12

 

Security Ownership of Certain Beneficial Owners and Management

122

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

123

Item 14

 

Principal Accountant Fees and Services

124

 

 

 

 

 

 

PART IV

 

 

 

 

 

Item 15

 

Exhibits and Financial Statement Schedules

125

 

 

 

 

SIGNATURES

130

 

 

 

2


 

PART I

Forward-Looking Statements

This Annual Report (“report”) (including, but not limited to, the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) contains forward-looking statements. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. When used, statements which are not historical in nature, including those containing words such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” and similar expressions, are intended to identify forward-looking statements. We have based forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. This report also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data. This data involves several assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this report, and, accordingly, we cannot guarantee their accuracy or completeness. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described under the headings “Risk Factors” in Item 1A of this report.

These forward-looking statements are subject to various risks and uncertainties, including those relating to:

 

current maturities of our financing arrangements and our ability to renew or refinance such financing arrangements;

 

defaults on the mortgage loans securing our mortgage revenue bonds (“MRBs”);

 

the competitive environment in which we operate;

 

risks associated with investing in multifamily, student, senior citizen residential and commercial properties, including changes in business conditions and the general economy;

 

changes in interest rates;

 

our ability to use borrowings or obtain capital to finance our assets;

 

local, regional, national and international economic and credit market conditions;

 

recapture of previously issued Low Income Housing Tax Credits (“LIHTCs”) in accordance with Section 42 of the Internal Revenue Code;

 

changes in the United States Department of Housing and Urban Development’s Capital Fund Program (“HUD”);

 

geographic concentration with the MRB portfolio held by the Partnership;

 

appropriations risk related to the funding of federal housing programs, including HUD Section 8; and

 

changes in the U.S. corporate tax code and other government regulations affecting our business.

Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make. We are not obligated to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise.

All references to “we,” “us,” and the “Partnership” in this document mean America First Multifamily Investors, L.P. (“ATAX”) and its wholly-owned subsidiaries. As used in this document, the “Company” refers to the Partnership, its wholly-owned subsidiaries, and its consolidated variable interest entities (“Consolidated VIEs”).  See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of the Company’s report for additional details.

 


3


 

Item 1. Business.

The Partnership was formed for the primary purpose of acquiring a portfolio of MRBs that are issued by state and local housing authorities to provide construction and/or permanent financing for affordable multifamily and student housing (collectively “Residential Properties”) and commercial properties in their market areas. We expect and believe the interest received on these bonds is excludable from gross income for federal income tax purposes. Unitholders may incur tax liability if any interest earned on the Partnership’s MRBs is determined to be taxable.” See Item 1A, “Risk Factors” in the Company’s report for additional details.  

The Partnership has been in operation since 1998 and owns 87 MRBs with an aggregate outstanding principal amount of approximately $719.8 million as of December 31, 2017. The majority of these MRBs were issued by various state and local housing authorities in order to provide construction and/or permanent financing for 63 Residential Properties containing a total of 10,666 rental units located in 14 states in the United States.  Each MRB for the Residential Properties is secured by a mortgage or deed of trust.  One MRB is secured by a mortgage on the ground, facilities, and equipment of a commercial ancillary health care facility in Tennessee. Each of the MRBs provides for “base” interest payable at a fixed rate on a periodic basis. Additionally, the MRBs may also provide for the payment of contingent interest determined by the net cash flow and net capital appreciation of the underlying real estate properties. Such MRBs provide us with the potential to participate in future increases in the cash flow generated by the financed properties, either through operations, from the refinancing of the MRB or from their ultimate sale. Of the MRBs owned, 20 are owned directly by the Partnership. Nine of the MRBs are owned by ATAX TEBS I, LLC, 12 MRBs are owned by ATAX TEBS II, LLC, and 8 MRBs are owned by ATAX TEBS III, LLC. Each of these LLCs is a special purpose entity owned and controlled by the Partnership to facilitate Tax Exempt Bond Securitization (“TEBS”) Financings with Freddie Mac. Two MRBs are securitized and held by Deutsche Bank AG (“DB”) in Term Tender Option Bond (“Term TOB”) facilities. Thirty-six MRBs are securitized and held by DB in Term A/B Trust financing facilities. See Notes 2 and 17 to the Partnership’s consolidated financial statements for additional details.

The ability of the Residential Properties and the commercial property which collateralize our MRBs to make payments of base and contingent interest is a function of the net cash flow generated by these properties. Net cash flow from a multifamily, student, or senior citizen residential property depends on the rental and occupancy rates of the property and the level of operating expenses. Occupancy rates and rents are directly affected by the supply of, and demand for, apartments in the market areas in which a property is located. This, in turn, is affected by several factors such as the requirement that a certain percentage of the rental units be set aside for tenants who qualify as persons of low to moderate income, local or national economic conditions, and the amount of new apartment construction and interest rates on single-family mortgage loans. Net cash flow from the commercial property depends on the number of cancer patients which utilize the cancer therapy center and the ability to hire and retain key employees to provide the related cancer treatment. In addition, factors such as government regulation, inflation, real estate and other taxes, labor problems, and natural disasters can affect the economic operations of the properties which collateralize the MRBs. The return we realize from our investments in MRBs depends upon the economic performance of the Residential Properties and the commercial property which collateralize these MRBs. We may be considered to be in competition with other residential rental properties and commercial properties located in the same geographic areas as the properties financed with our MRBs.

We may also make taxable property loans secured by the Residential Properties which are financed by MRBs held by us. We do this to provide financing for capital improvements at these properties or to otherwise support property operations when we determine it is in our best long-term interest.

We may also invest in other types of securities that may or may not be secured by real estate to the extent allowed by ATAX’s First Amended and Restated Agreement of Limited Partnership dated September 15, 2015, as further amended (the “Amended and Restated LP Agreement”) and the conditions to the exemption from registration under the Investment Company Act of 1940 that are relied upon by us. Under the Amended and Restated LP Agreement, any tax-exempt investments, other than MRBs, that are not secured by a direct or indirect interest in a property must be rated in one of the four highest rating categories by at least one nationally recognized securities rating agency.  The Partnership’s acquisition of any tax-exempt investment or other investment may not cause the aggregate book value of such investments to exceed 25% of our assets at the time of acquisition. At December 31, 2017, we had one class of other tax-exempt investments, the Public Housing Capital Fund Trusts’ Certificates (“PHC Certificates”). The PHC Certificates had an aggregate outstanding principal amount of approximately $50.4 million at December 31, 2017. The PHC Certificates are securitized into three separate TOB financing facilities (“TOB Trusts”) with DB (“PHC Trusts”).  See Note 17 to the Company’s consolidated financial statements for additional details. The PHC Certificates held by the PHC Trusts consist of custodial receipts evidencing loans made to a number of public housing authorities. Principal and interest on these loans are payable by the respective public housing authorities out of annual appropriations to the public housing authorities by the United States Department of Housing and Urban Development (“HUD”) under HUD’s Capital Fund Program established under the Quality Housing and Work Responsibility Act of 1998 (the “Capital Fund Program”). The PHC Trusts have a first lien on these annual Capital Fund Program payments to secure the public housing authorities’ respective obligations to pay principal and interest on their loans.

4


 

At December 31, 2017, we own limited membership interests in certain unconsolidated entities (“Vantage Properties”). Our investments in the Vantage Properties are used to construct multifamily real estate properties. We do not have controlling interests in the Vantage Properties and account for the limited partnership interests under the equity method of accounting.  The Partnership earns a return on its investments accruing immediately on its contributed capital, which is guaranteed during the construction phase by an unrelated third party.  The limited membership interests entitle the Partnership to shares of certain cash flows generated by the Vantage Properties from operations or upon the occurrence of certain capital transactions, such as a sale or refinancing.

We may acquire interests in multifamily, student, and senior citizen apartment properties (“MF Properties”) to position ourselves for future investments in MRBs issued to finance these properties and which we expect and believe will generate tax-exempt interest. We currently hold interests in three MF Properties containing 1,013 rental units located in Nebraska, California, and Florida. In addition, we may acquire real estate securing our MRBs or taxable property loans through foreclosure in the event of a default.

To restructure each of the MF Properties into a MRB, we team with a third-party developer who works to secure a MRB issuance from the local housing authority. Once the developer receives the MRB commitment, we will sell the MF Property to a not-for-profit entity, public finance authority or to a for profit entity in connection with a syndication of LIHTCs under Section 42 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). We expect to acquire the MRBs issued to provide debt financing for these properties at the time the property ownership is restructured. Such restructurings will generally be expected to occur within 36 months of our initial investment in an MF Property and will often coincide with the expiration of the compliance period relating to LIHTCs previously issued with respect to the MF Property. We will not acquire LIHTCs in connection with these transactions. In the event that the MF Property cannot secure a MRB, we will operate the MF Property until the opportunity arises to sell it at what we believe is its optimal fair value. These types of transactions represent a long-term market opportunity for us and will provide us with a pipeline of future MRB investment opportunities.

At December 31, 2017, we have four reportable segments: (1) Mortgage Revenue Bond Investments, (2) MF Properties, (3) Public Housing Capital Fund Trust, and (4) Other Investments. In addition to the reportable segments, the Partnership also separately reports its consolidation and elimination information because it does not allocate certain items to the segments.  See Note 26 to the Company consolidated financial statements for additional details.

Properties Management. At December 31, 2017, eight of the 63 Residential Properties which collateralize the MRBs owned by us are managed by Burlington Capital Properties, LLC (“Properties Management”), an affiliate of the Partnership’s general partner, America First Capital Associates Limited Partnership Two (“AFCA 2” or the “General Partner”). In this regard, Properties Management provides property management services for Lake Forest Apartments, Cross Creek, Greens of Pine Glen (the “Greens Property”), Crescent Village, Willow Bend and Post Woods (collectively, the “Ohio Properties”), Rosewood Townhomes and South Point Apartments. Property Management also provides management services to each of the MF Properties, except for the Suites on Paseo. Management believes that this relationship provides greater insight and understanding of the underlying property operations and their ability to meet debt service requirements to us and helps assure these properties are being operated in compliance with operating restrictions imposed by the terms of the applicable bond financing and/or LIHTC.

Business Objectives and Strategy

Our business objectives are to (i) preserve and protect our capital, (ii) provide regular cash distributions to our Unitholders which we believe are substantially exempt from federal income tax, and (iii) generate additional returns from appreciation of real estate or the opportunistic sale of the asset investments. We have sought to meet these objectives by primarily investing in a portfolio of MRBs that were issued to finance, and are secured by mortgages on, multifamily, student, and senior citizen residential properties. Certain of these bonds may be structured to provide a potential for an enhanced yield through the payment of contingent interest which is payable out of net cash flow from operations and the realization of net capital appreciation of the financed multifamily residential properties. We expect and believe that any contingent interest we receive will be exempt from inclusion in gross income for federal income tax purposes.

We are pursuing a business strategy of acquiring additional MRBs and other investments on a leveraged basis to (i) increase the amount of interest available for distribution to our Unitholders; (ii) reduce risk through asset diversification and interest rate hedging; and (iii) achieve economies of scale. We are pursuing this growth strategy by investing in additional MRBs and other investments as permitted by the Amended and Restated LP Agreement, taking advantage of attractive financing structures available in the securities market, and entering into interest rate risk management instruments. We may finance the acquisition of additional MRBs and other investments through the reinvestment of cash flow, the issuance of additional Units, lines of credit, or securitization financing using our existing portfolio of MRBs. Our current operating policy is to use securitizations or other forms of leverage which will not exceed 75% of the total Partnership assets. The assets are defined as the carrying value of the MRBs, PHC Certificates, initial finance costs, and the MF Properties at cost.  See the discussion of financing arrangements and liquidity and capital resources in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

5


 

We continually assess opportunities to reposition our existing portfolio of MRBs. The principal objective of this assessment is to improve the quality and performance of our MRB portfolio and, ultimately, increase the amount of cash available for distribution to our Unitholders. In some cases, we may elect to redeem selected MRBs that have experienced significant appreciation. Through the selective redemption of the MRBs, a sale or refinancing of the underlying property will be required. If sufficient sale or refinancing proceeds exist, we may be entitled to receive payment of contingent interest on our investment. In other cases, we may elect to sell MRBs on properties that are in stagnant or declining markets. The proceeds received from these transactions would be redeployed into other investments consistent with our investment objectives.

We expect to invest primarily in MRBs issued to provide affordable rental housing, student housing projects, housing for senior citizens, and commercial property. The four basic types of MRBs which we may acquire as investments are as follows:

 

1.

Private activity bonds issued under Section 142(d) of the Internal Revenue Code;

 

2.

Bonds issued under Section 145 of the Internal Revenue Code by not-for-profit entities qualified under Section 501(c)(3) of the Internal Revenue Code;

 

3.

Essential function bonds issued by a public instrumentality to finance a multifamily residential property owned by such instrumentality; and

 

4.

Existing “80/20 bonds” that were issued under Section 103(b)(4)(A) of the Internal Revenue Code of 1954. 

Each of these structures permit the issuance of MRBs to finance the construction or acquisition and rehabilitation of affordable rental housing or other not-for-profit commercial property. Under applicable Treasury Regulations, any affordable multifamily residential project financed with MRBs that are purportedly tax-exempt must set aside a percentage of its total rental units for occupancy by tenants whose incomes do not exceed stated percentages of the median income in the local area. In each case, the balance of the rental units in the multifamily residential project may be rented at market rates (unless otherwise restricted by local housing authorities). With respect to private activity bonds issued under Section 142(d) of the Internal Revenue Code, the owner of the multifamily residential project may elect, at the time the MRBs are issued, whether to set aside a minimum of 20% of the units for tenants making less than 50% of area median income (as adjusted for household size) or 40% of the units for tenants making less than 60% of the area median income (as adjusted for household size). The MRBs that were secured by Residential Properties issued prior to the Tax Reform Act of 1986 (so called “80/20” bonds) require that 20% of the rental units be set aside for tenants whose income does not exceed 80% of the area median income, without adjustment for household size. There are no Treasury Regulations related to the MRBs which are collateralized by the commercial property.

We expect that many of the private activity housing MRBs that we evaluate for acquisition will be issued in conjunction with the syndication of LIHTCs by the owner of the financed multifamily residential project. Additionally, to facilitate our investment strategy of acquiring additional MRBs secured by MF Properties, we may acquire ownership positions in the MF Properties. We expect to acquire MRBs on these MF Properties in many cases at the time of a restructuring of the MF Property ownership. Such restructuring may involve the syndication of LIHTCs in conjunction with property rehabilitation.

Investment Types

Mortgage Revenue Bonds. We invest in MRBs that are secured by a mortgage or deed of trust on Residential Properties and a commercial property. Each of these bonds bears interest at a fixed annual base rate. One of the MRBs currently owned by us also provides for the payment of contingent interest, which is payable out of the net cash flow and net capital appreciation of the underlying multifamily residential property. The amount of interest earned by us from our investment in MRBs is a function of the net cash flow generated by the Residential Properties and the commercial property which collateralize the MRBs. Net cash flow from a residential property depends on the rental and occupancy rates of the property and the level of operating expenses. Net cash flow from the commercial property depends on the number of cancer patients that utilize the cancer therapy center and the ability to hire and retain key employees to provide the related cancer treatment.

Other Securities. We may invest in other types of securities that may or may not be secured by real estate. Other tax-exempt investments must be rated in one of the four highest rating categories by at least one nationally recognized securities rating agency. These tax-exempt investments and other securities may not represent more than 25% of our assets at the time of acquisition.

PHC Certificates. The PHC Certificates consist of custodial receipts evidencing loans made to numerous public housing authorities. Principal and interest on these loans are payable by the respective public housing authorities out of annual appropriations to be made to the public housing authorities by HUD under HUD’s Capital Fund Program. The PHC Certificates have a first lien on these annual Capital Fund Program payments to secure the public housing authorities’ respective obligations to pay principal and interest on their loans. The PHC Certificates rating by Standard & Poor’s is investment grade at December 31, 2017.

6


 

Other Investments. We also have a reportable segment consisting of ATAX Vantage Holdings, LLC, which, at December 31, 2017, is invested in the Vantage Properties, and has issued property loans due from Vantage at Brooks LLC and Vantage at New Braunfels LLC.

Property Loans. We may also make taxable property loans secured by Residential Properties which are financed by MRBs that are held by us.

Interests in Real Property. As part of our growth strategy, we may acquire direct or indirect interests in MF Properties to position ourselves for a future investment in MRBs issued to finance the acquisition or substantial rehabilitation of such MF Properties by a new owner.

Investment Opportunities and Business Challenges

There continues to be a significant unmet demand for affordable multifamily, student, and senior citizen residential housing in the United States. HUD reports that there is a high demand for quality affordable housing. The types of MRBs in which we invest offer developers of affordable housing a low-cost source of construction and permanent debt financing for these types of properties. Investors purchase these MRBs because the interest income paid on these bonds is expected to be exempt from federal income taxation.

The demand for affordable housing by qualified potential residents whose income does not exceed 50-60% of the area median income continues to increase. Government programs that provide direct rental support to residents has not kept up with the demand, therefore programs that support private sector development and support for affordable housing through MRBs, tax credits and grant funding to developers have become more prominent.

In addition to MRBs, the federal government promotes affordable housing using LIHTCs for affordable multifamily rental housing. The syndication and sale of LIHTCs along with MRB financing is attractive to developers of affordable housing because it helps them raise equity and debt financing for their projects. Under this program, developers that receive an allocation of private activity bonds will also receive an allocation of federal LIHTCs as a method to encourage the development of affordable multifamily housing. We do not invest in LIHTCs, but are attracted to MRBs that are issued in association with federal LIHTC syndications because in order to be eligible for federal LIHTCs a property must either be newly constructed or substantially rehabilitated and therefore, may be less likely to become functionally obsolete in the near term than an older property. There are various requirements to be eligible for federal LIHTCs, including rent and tenant income restrictions. In general, the property owner must elect to set aside either 40% or more of the property’s residential units for occupancy by households whose income is 60% or less (adjusted for family size) of the area median gross income or 20% or more of the property’s residential units for occupancy by households whose income is 50% or less (adjusted for family size) of the area median gross income. These units remain subject to these set aside requirements for a minimum of 30 years.

The inability to access debt financing may result in adverse effects on our financial condition and results of operations. There can be no assurance that we will be able to finance additional acquisitions of MRBs or other investments through either additional equity or debt financing. Although the consequences of market and economic conditions and their impact on our ability to pursue our plan to grow through investments in additional housing bonds are not fully known, we do not anticipate that our existing assets will be adversely affected in the long-term. In addition, the Residential Properties and MF Properties which have not reached stabilization (which is 90% occupancy for 90 days and the achievement of 1.15 times debt service coverage ratio on amortizing debt service during the period) will result in lower economic occupancy at the related properties.

Financing Arrangements

The Partnership may finance the acquisition of additional MRBs or other investments through the reinvestment of cash flow, use of available lines of credit, with debt financing collateralized by our existing portfolio of MRBs or other investments (including the securitization of these bonds), issuance of Preferred Units or the issuance of additional Beneficial Unit Certificates (“BUCs”).

Debt Financing. We utilize leverage to enhance investor rates of return. We use target constraints for each type of financing utilized by us to manage an overall 75% leverage constraint. The amount of leverage utilized is dependent upon several factors, including the assets being leveraged, the tenor of the leverage program, whether the financing is subject to market collateral calls, and the liquidity and marketability of the financing collateral. While short term variations from targeted levels may occur within financing classes, overall Partnership leverage will not exceed 75%. Our overall leverage ratio is calculated as total outstanding debt divided by total partnership assets using the carrying value of the MRBs, PHC Certificates, initial finance costs, and the MF Properties at cost. At December 31, 2017, our leverage ratio was approximately 64%.

7


 

Equity Financing. We may, from time to time, issue additional BUCs in the public market. In November 2016, a Registration Statement on Form S-3 (“Registration Statement”) was declared effective by the SEC under which the Partnership may offer up to $225.0 million of additional BUCs from time to time. The Registration Statement will expire in November 2019. In December 2017, the Partnership initiated an “at the market offering” to sell up to $75.0 million of BUCs at market prevailing on the date of sale. The $75 million available under the “at the market program” represents a portion of the $225 million Registration Statement. The Partnership sold 161,383 BUCs under the program for net proceeds of approximately $806,000, net of issuance costs, during the year ended December 31, 2017.

Preferred Equity. Under the Amended and Restated LP Agreement, we are authorized to issue partnership securities, including preferred units of limited partnership interests, containing certain designations, preferences, rights, powers, and duties.  In this regard, we previously authorized the issuance of up to $100 million of Series A Preferred Units pursuant to a private placement, and this offering was terminated as of October 25, 2017. Under this authorization, the Partnership issued approximately 9.5 million Series A Preferred Units to five financial institutions resulting in approximately $94.5 million in gross proceeds. The Partnership used the proceeds received to acquire MRBs that are issued by state and local housing authorities to provide construction and/or permanent financing for affordable multifamily, student housing, and commercial properties that are likely to receive consideration as “qualified investments” under the Community Reinvestment Act of 1977 (“CRA”).

 

8


 

Recent Developments

The following table presents information regarding the investment activity of the Partnership for the years ended December 31, 2017 and 2016:

 

Recent Investment Activity

 

#

 

Amount

(in 000's)

 

 

Retired Debt

or Note

(in 000's)

 

 

Tier 2 income

distributable to the

General Partner

(in 000's) (1)

 

 

Notes to the

Partnership's consolidated financial

statements

For the Three Months Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage revenue bond acquisitions

 

7

 

$

49,291

 

 

N/A

 

 

N/A

 

 

6

Mortgage revenue bond redemptions

 

5

 

 

40,391

 

 

$

38,592

 

 

$

732

 

 

6

Mortgage revenue bond restructured

 

1

 

 

510

 

 

N/A

 

 

N/A

 

 

6

MF Properties sold

 

3

 

 

32,775

 

 

 

14,741

 

 

 

197

 

 

9

Taxable mortgage revenue bond redemptions

 

2

 

 

1,510

 

 

N/A

 

 

N/A

 

 

13

Property loan advances

 

1

 

 

336

 

 

N/A

 

 

N/A

 

 

11

Property loan redemptions

 

4

 

 

1,667

 

 

N/A

 

 

N/A

 

 

11

Investment in unconsolidated entities

 

2

 

 

4,527

 

 

N/A

 

 

N/A

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage revenue bond acquisitions

 

2

 

$

12,471

 

 

N/A

 

 

N/A

 

 

6

Mortgage revenue bond redemption

 

1

 

 

1,997

 

 

$

1,700

 

 

N/A

 

 

6

Property loan advances

 

1

 

 

36

 

 

N/A

 

 

N/A

 

 

11

Property loan redemptions

 

1

 

 

500

 

 

N/A

 

 

N/A

 

 

11

Investment in unconsolidated entities

 

1

 

 

1,552

 

 

N/A

 

 

N/A

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land held for development sold

 

1

 

$

3,000

 

 

N/A

 

 

$

(5

)

 

9

Investment in unconsolidated entities

 

2

 

 

1,605

 

 

N/A

 

 

N/A

 

 

10

Property loan advances

 

2

 

 

639

 

 

N/A

 

 

N/A

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage revenue bond acquisitions

 

6

 

$

59,585

 

 

N/A

 

 

N/A

 

 

6

MF Property sold

 

1

 

 

13,750

 

 

N/A

 

 

$

1,071

 

 

9

Investments in unconsolidated entities

 

3

 

 

9,503

 

 

N/A

 

 

N/A

 

 

10

Property loan redemptions

 

1

 

 

500

 

 

N/A

 

 

N/A

 

 

11

Property loan advances

 

3

 

 

1,705

 

 

N/A

 

 

N/A

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage revenue bond acquisitions

 

17

 

$

110,335

 

 

N/A

 

 

N/A

 

 

6

Property loan redemption

 

1

 

 

2,797

 

 

N/A

 

 

$

345

 

 

11

Investment in unconsolidated entities

 

3

 

 

5,908

 

 

N/A

 

 

N/A

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable mortgage revenue bond redemption

 

1

 

$

499

 

 

$

-

 

 

$

-

 

 

13

Mortgage revenue bond acquisitions

 

4

 

 

8,785

 

 

N/A

 

 

N/A

 

 

6

Mortgage revenue bond restructured

 

3

 

 

5,885

 

 

N/A

 

 

N/A

 

 

6

Property loan issued

 

1

 

 

2,500

 

 

N/A

 

 

N/A

 

 

11

MF Property sold

 

1

 

 

15,650

 

 

 

7,501

 

 

 

276

 

 

9

MF Property acquisition

 

1

 

 

9,883

 

 

N/A

 

 

N/A

 

 

9

Investment in unconsolidated entities

 

3

 

 

9,471

 

 

N/A

 

 

N/A

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage revenue bond redemptions

 

4

 

$

5,172

 

 

$

-

 

 

$

-

 

 

6

MF Property sold

 

1

 

 

30,200

 

 

 

16,519

 

 

 

2,078

 

 

9

Investment in an unconsolidated entity

 

1

 

 

3,372

 

 

N/A

 

 

N/A

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MBS Securities sold

 

3

 

$

15,081

 

 

$

11,945

 

 

$

-

 

 

8

Mortgage revenue bond sold

 

1

 

 

9,479

 

 

 

8,375

 

 

 

-

 

 

6, 8

Mortgage revenue bond acquisitions

 

1

 

 

11,500

 

 

N/A

 

 

N/A

 

 

6

Investment in an unconsolidated entity

 

1

 

 

2,443

 

 

N/A

 

 

N/A

 

 

10

Property loan advances, net

 

2

 

 

5,828

 

 

N/A

 

 

N/A

 

 

11

 

(1)

See “Cash Available for Distribution” in Item 7.

9


 

 

Recent Financing Activities

The following table presents information regarding the debt financing, derivative and Series A Preferred Units activity of the Partnership for the years ended December 31, 2017 and 2016, exclusive of retired debt amounts listed in the investment activity table above:

 

Recent Financing, Derivative and Capital Activity

 

#

 

Amount of Change

in Debt, Derivative, or Preferred Units

(in 000's)

 

 

Secured

 

Maximum

SIFMA Cap

Rate (1)

 

 

Notes to the

Partnership's consolidated financial

statements

For the Three Months Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net borrowing on unsecured LOCs

 

1

 

$

37,529

 

 

No

 

N/A

 

 

15

Term A/B Financings with DB

 

1

 

 

9,000

 

 

Yes

 

N/A

 

 

17

Redeemable Series A preferred unit issuance

 

2

 

 

17,500

 

 

N/A

 

N/A

 

 

21

Issuance of Beneficial Unit Certificates, net of issuance costs

 

1

 

 

806

 

 

N/A

 

N/A

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net borrowing on unsecured LOCs

 

1

 

$

12,471

 

 

No

 

N/A

 

 

15

Interest rate derivative purchased

 

1

 

 

52

 

 

N/A

 

4.0%

 

 

19

Redeemable Series A preferred unit issuance

 

1

 

 

20,000

 

 

N/A

 

N/A

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate derivative purchased

 

2

 

$

497

 

 

N/A

 

1.5%

 

 

19

Refinance of Mortgages Payable

 

2

 

 

-

 

 

Yes

 

N/A

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net borrowing on unsecured LOCs

 

2

 

$

(40,000

)

 

No

 

N/A

 

 

15

Net borrowing on secured LOC

 

1

 

 

(20,000

)

 

Yes

 

N/A

 

 

16

New Term A/B Financings with DB

 

19

 

 

106,810

 

 

Yes

 

N/A

 

 

17

Refinance of Term A/B Financings with DB

 

4

 

 

(2,245

)

 

Yes

 

N/A

 

 

17

Redeemable Series A preferred unit issuance

 

2

 

 

16,131

 

 

N/A

 

N/A

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net borrowing on unsecured LOCs

 

2

 

$

40,000

 

 

No

 

N/A

 

 

15

Net borrowing on secured LOC

 

1

 

 

20,000

 

 

Yes

 

N/A

 

 

16

Term A/B Financings with DB

 

5

 

 

38,910

 

 

Yes

 

N/A

 

 

17

Redeemable Series A preferred unit issuance

 

1

 

 

7,000

 

 

N/A

 

N/A

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (repayments) on unsecured LOCs

 

2

 

$

(23,997

)

 

No

 

N/A

 

 

15

Mortgage payable related to MF Property acquisition

 

1

 

 

7,459

 

 

Yes

 

N/A

 

 

18

Term A/B Financings with DB

 

12

 

 

134,393

 

 

Yes

 

N/A

 

 

17

TOB Financing with DB paid in full and collapsed

 

7

 

 

(105,273

)

 

Yes

 

N/A

 

 

17

Redeemable Series A preferred unit issuance

 

1

 

 

10,000

 

 

N/A

 

N/A

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (repayments) on unsecured LOCs

 

2

 

$

(3,988

)

 

No

 

N/A

 

 

15

Redeemable Series A preferred unit issuance

 

1

 

 

13,869

 

 

N/A

 

N/A

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net borrowing on unsecured LOCs

 

3

 

$

10,488

 

 

No

 

N/A

 

 

15

TOB Financing with DB paid in full and collapsed

 

4

 

 

(20,320

)

 

Yes

 

N/A

 

 

17

Redeemable Series A preferred unit issuance

 

1

 

 

10,000

 

 

N/A

 

N/A

 

 

21

Interest rate derivative sold

 

1

 

 

(11,000

)

 

N/A

 

1.0%

 

 

19

 

(1)

See “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A.

10


 

 

Management and Employees

We are managed by our General Partner which is controlled by its general partner, Burlington Capital LLC (“Burlington”). The Board of Managers and certain employees of Burlington act as the managers (and effectively as the directors) and executive officers of the Partnership. Certain services are provided to us by employees of Burlington and we reimburse Burlington for its allocated share of these salaries and benefits. At December 31, 2017, the Partnership had no employees.

Competition

We compete with private investors, lending institutions, trust funds, investment partnerships, the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and other entities with objectives similar to ours for the acquisition of MRBs and other investments. This competition could reduce the availability of investments to the Partnership for acquisition and reduce the interest rate that issuers pay on these investments.

Because we hold MRBs secured by Residential Properties, a commercial property, and hold interests in the MF Properties, we may be in competition with other real estate in the same geographic areas. In each city in which the properties financed by the MRBs owned by us or MF Properties are located, such properties compete with a substantial number of other multifamily rental properties. Multifamily rental properties also compete with single-family housing that is either owned or leased by potential tenants. To compete effectively, the multifamily, student, and senior citizen residential properties financed or owned by us must offer quality apartments at competitive rental rates. To maintain occupancy rates and attract quality tenants, the Residential Properties and MF Properties may also offer rental concessions, such as free rent to new tenants for a stated period. These Residential Properties and MF Properties also compete by offering quality apartments in attractive locations and that provide tenants with amenities such as recreational facilities, garages and pleasant landscaping.

Environmental Matters

We believe each of the MF Properties, the Residential Properties, and the commercial property comply, in all material respects, with federal, state and local regulations regarding hazardous waste and other environmental matters. We are not aware of any environmental contamination at any of these properties that would require any material capital expenditure by the underlying properties, and therefore the Partnership, for the remediation thereof.

Tax Status

We are classified as a partnership for federal income tax purposes and accordingly, there is no provision for income taxes. The distributive share of our income, deductions and credits is included in each Unitholder’s income tax return.

We hold interests in MF Properties, except for the Suites on Paseo and Jade Park, through a wholly-owned subsidiary that is a “C” corporation for income tax purposes. The subsidiary files separate federal and state income tax returns and its income is subject to federal and state income taxes.

We consolidate separate legal entities who record, and report income taxes based upon their individual legal structure which may include corporations, limited partnerships, and limited liability companies. The Bent Tree and Fairmont Oaks Consolidated VIEs results of operations were reported as discontinued operations for all periods as presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for reporting purposes and are separate legal entities for all years presented. We do not believe the consolidation of VIEs for reporting under GAAP will impact our tax status, amounts reported to Unitholders on Internal Revenue Service (“IRS”) Form K-1, our ability to distribute income to Unitholders which we believe is tax-exempt, the current level of quarterly distributions, or the tax-exempt status of the underlying MRBs.

All financial information in this Annual Report on Form 10-K is presented on the basis of Accounting Principles Generally Accepted in the United States of America, with the exception of the Non-GAAP measure disclosed in Item 7.

General Information

The Partnership is a Delaware limited partnership. Our general partner is AFCA 2, whose general partner is Burlington. Since 1984, Burlington has specialized in the management of investment funds, many of which were formed to acquire real estate investments such as MRBs, mortgage-backed securities, and real estate properties, including multifamily, student and senior citizen housing. Burlington maintains its principal executive offices at 1004 Farnam Street, Suite 400, Omaha, Nebraska 68102, and its telephone number is (402) 444-1630.

11


 

The Partnership does not have any employees of its own. Employees of Burlington, acting through AFCA 2 (our General Partner), are responsible for our operations and we reimburse Burlington for the allocated salaries and benefits of these employees and for other expenses incurred in running our business operations. AFCA 2 is entitled to an administrative fee equal to 0.45% per annum of the outstanding principal balance of any MRBs, tax-exempt investments or other investments for which an unaffiliated party is not obligated to pay. When the administrative fee is payable by a property owner, it is subordinated to the payment of all base interest to the Partnership on the MRB on that property. Our Amended and Restated LP Agreement provides that the administrative fee will be paid directly by us with respect to any investments for which the administrative fee is not payable by the property owner or a third party. In addition, our Amended and Restated LP Agreement provides that we will pay the administrative fee to the General Partner with respect to any foreclosed MRBs.

AFCA 2 may also earn mortgage placement fees resulting from the identification and evaluation of additional investments that we acquire. In addition, an affiliate of AFCA 2, Farnam Capital Advisors, LLC (“FCA”), acts as an origination advisor and consultant to the borrowers when MRBs, other investments and financing facilities are acquired by the Partnership. Any such fees will be paid by the owners of the properties financed by the acquired MRBs or other investments out of their proceeds. Any fees related to the origination of financing facilities are paid by the Trustee out of the gross proceeds of the financing. The fees, if any, will be subject to negotiation between AFCA 2, its affiliate, and such property owners.

Properties Management is an affiliate of Burlington that is engaged in the management of multifamily, student and senior citizen residential properties. Properties Management earns a fee paid out of property revenues. Properties Management may also seek to become the manager of multifamily, student and senior citizen residential properties financed by additional MRBs acquired by the Partnership, subject to negotiation with the owners of such properties. If we acquire ownership of any property through foreclosure of an MRB, Properties Management may provide property management services for such property and receive a fee payable out of property revenues.

The Partnership’s sole limited partner is America First Fiduciary Corporation Number Five, a Nebraska corporation. BUCs represent assignments by the sole limited partner of its rights and obligations as a limited partner to outside third-party investors. Because each such outside third party effectively holds a share of the sole limited partner’s rights and obligations as a limited partner, BUCs are also referred to herein as “Units” for purposes of calculating amounts per BUC, and the holders thereof are referred to as “Unitholders.”

Information Available on Website

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, other reports filed with the SEC and press releases issued are available free of charge at www.ataxfund.com as soon as reasonably practical after they are filed with the SEC. The information on the website is not incorporated by reference into this Form 10-K.

 

 

Item 1A. Risk Factors

Our financial condition, results of operations, and cash flows are affected by various factors, many of which are beyond our control. These include the following:

Cash distributions from us may change depending on the amount of cash available for distribution.

Throughout 2017, cash distributions were made to Unitholders at an annual rate of $0.50 per Unit. The amount of the cash per Unit distributed by the Partnership may increase or decrease at the determination of AFCA 2 based on its assessment of the amount of cash available to us for this purpose, as well as other factors it may deem to be relevant. During the years ended December 31, 2017 and 2016, we generated Cash Available for Distribution of $0.60 and $0.50 per Unit, respectively. Although we may supplement our cash available for distribution with unrestricted cash, unless we can increase our cash receipts through completion of our current investment plans, we may need to reduce the level of cash distributions per unit from the current level. In addition, there is no assurance that we will be able to maintain our current level of annual cash distributions per unit even if we complete our current investment plans. Any change in our distribution policy could have a material adverse effect on the market price of our Units.

The receipt of interest and principal payments on our MRBs will be affected by the economic results of the underlying Residential Properties and a commercial property.

Although our MRBs are issued by state or local housing authorities, they are not obligations of these governmental entities and are not backed by any taxing authority. Instead, each of these MRBs is backed by a non-recourse loan made to the owner of the underlying Residential Properties and commercial property. Because of the non-recourse nature of the underlying mortgage loans, the sole source of cash to pay base and contingent interest on the MRB, and to ultimately pay the principal amount of the bond, is the net cash flow

12


 

generated by the operation of the financed property and the net proceeds from the ultimate sale or refinancing of the property, (except in cases where a property owner has provided a limited guarantee of certain payments). This makes our investments in these MRBs subject to risks usually associated with direct investments in multifamily real estate. If a property is unable to sustain net cash flow at a level necessary to pay its debt service obligations on our MRB on the property, a default may occur. Net cash flow and net sale proceeds from a property are applied only to debt service payments of the MRB secured by that property and are not available to satisfy debt service obligations on other MRBs that we hold. In addition, the value of a property at the time of its sale or refinancing will be a direct function of its perceived future profitability. Therefore, the amount of base and contingent interest that we earn on our MRBs, and whether or not we will receive the entire principal balance of the bonds as and when due, will depend to a large degree on the economic results of the underlying properties.

The net cash flow from the operation of a property may be affected by many things, such as the number of tenants, the rental and fee rates, operating expenses, the cost of repairs and maintenance, taxes, government regulation, competition from other similar multifamily, student, or senior citizen residential properties, mortgage rates for single-family housing, and general and local economic conditions. In most of the markets in which the properties financed by our MRBs are located, there is significant competition from other multifamily and single-family housing that is either owned or leased by potential tenants. Low mortgage interest rates and federal tax credits make single-family housing more accessible to persons who may otherwise rent apartments.

The only source of repayment of our MRBs is principally dependent upon proceeds from the sale or refinancing of the underlying properties.

The principal of most of our MRBs does not fully amortize over their terms. This means that all or some of the balance of the mortgage loans underlying these bonds will be repaid as a lump-sum “balloon” payment at the end of the term. The ability of the property owners to repay the mortgage loans with balloon payments is dependent upon their ability to sell the properties securing our MRBs or obtain adequate refinancing. The MRBs are not personal obligations of the property owners, and we rely solely on the value of the properties securing these bonds for security. Similarly, if a MRB goes into default, our only recourse is to foreclose on the underlying property. If the value of the underlying property securing the bond is less than the outstanding principal balance and accrued interest on the bond, we will incur a loss.

The properties securing the our MRBs are geographically dispersed throughout the United States, with significant concentrations in certain states.

The properties securing the our MRBs are geographically dispersed throughout the United States, with significant concentrations in certain states. Such concentrations expose us to potentially negative effects of local or regional economic downturns, which could prevent us from collecting interest and principal on our MRBs.

There is additional credit risk when we make a taxable loan on a property.

The taxable property loans that we make to owners of the Residential Properties that secure MRBs held by us are non-recourse obligations of the property owner. As a result, the sole source of principal and interest payments on these taxable property loans is the net cash flow generated by these properties or the net proceeds from the sale or refinance of these properties. The net cash flow from the operation of a property may be affected by many things as discussed above. In addition, any payment of principal and interest on a taxable property loan on a particular property will be subordinate to payment of all principal and interest (including contingent interest) on the MRB secured by the same property. As a result, there is a higher risk of default on the taxable property loans than on the associated MRBs. If a property is unable to sustain net cash flow at a level necessary to pay current debt service obligations on the taxable property loan on such property, a default may occur. While these taxable property loans are secured by the underlying properties, in general, we do not expect to pursue foreclosure or other remedies against a property upon default of a taxable property loan if the property is not in default on the MRBs financing the property.

There are risks associated with our strategy of acquiring ownership interests in MF Properties in anticipation of future bond financings of these projects.

To facilitate our investment strategy of acquiring additional MRBs secured by Residential Properties, we may acquire ownership positions in MF Properties that we expect to ultimately sell as part of a syndication of LIHTCs after the expiration of the compliance period relating to existing LIHTCs issued with respect to the MF Properties. Our plan is to provide MRB financing to the new property owners at the time of a syndication of new LIHTCs in connection with a rehabilitation of these MF Properties. The market for LIHTC syndications may be negatively affected from time to time by economic and market conditions, including the potential for corporate tax reform in the U.S. For this and other reasons, we may not be able to sell our interest in these MF Properties after the applicable LIHTC compliance period. In addition, the value of our interest in these MF Properties will be affected by the economic performance of the MF Properties and other factors generally affecting the value of residential rental properties. As a result, we may

13


 

incur a loss upon the sale of our interest in an MF Property. In addition, we may not be able to acquire MRBs on the MF Properties even if we are able to sell our interests in the MF Properties. During the time we own an interest in an MF Property, any net income we receive from these MF Properties will not be exempt from federal or state income taxation.

Any future issuances of additional BUCs could cause their market value to decline.

We may issue additional BUCs from time to time to raise additional equity capital. The issuance of additional BUCs will cause dilution of the existing BUCs and may cause a decrease in the market price of the BUCs. In addition, if additional units are issued but we are unable to invest the additional equity capital in assets that generate what we expect and believe to be tax-exempt income at levels at least equivalent to our existing assets, the amount of cash available for distribution on a per unit basis may decline.

We may suffer adverse consequences from changing interest rates.

We have financed the acquisition of some of our assets using variable-rate debt financing. The interest that we pay on these financings fluctuates with specific interest rate indices. Our MRBs bear interest at fixed rates and, notwithstanding the contingent interest feature on some of these bonds, the amount of interest we earn on these bonds will not increase with a general rise in interest rates. Accordingly, an increase in our interest expense due to an increase in the applicable interest rate index used for our variable rate debt financing will reduce the amount of cash we have available for distribution to Unitholders and may affect the market value of our BUCs. Our use of derivatives is designed to mitigate some but not all of the exposure to the negative impact of a higher cost of borrowing.

An increase in interest rates could also decrease the market value of assets owned by the Partnership. A decrease in the market value of assets owned by the Partnership could also decrease the amount we could realize on the sale of our investments and would thereby decrease the amount of funds available for distribution to our Unitholders. During periods of low prevailing interest rates, the interest rates we earn on new interest-bearing assets we acquire may be lower than the interest rates on our existing portfolio of interest-bearing assets.

To the extent we finance the acquisition of additional interest-bearing assets through the issuance of additional BUC’s, from the issuance of preferred units or from the proceeds from the sale of existing assets held by the Partnership and we earn a lower interest rate on these additional interest-bearing assets, the amount of cash available for distribution on a per unit basis may be reduced.

 

High interest rates may make it difficult for us to finance or refinance our debt obligations, which could reduce the number of investments we can acquire, our cash flow from operations and the amount of cash distributions we can make.

If debt is unavailable at reasonable rates, we may not be able to finance the purchase of additional investments. If we place debt on our investments, we run the risk of being unable to refinance the debt when it becomes due or of being unable to refinance on favorable terms. If interest rates are higher when we refinance, our income could be reduced. If any of these events occurs, our cash flow would be reduced. This, in turn, would reduce cash available for distribution and may hinder our ability to raise capital by issuing more stock or borrowing more money.

We are subject to various risks associated with our derivative agreements.

We use derivative instruments to mitigate some, but not all, of the risks to which we are exposed from changing interest rates. There is no assurance that these instruments will fully insulate us from the interest rate risks to which we are exposed. In addition, there are costs associated with these derivative instruments and these costs may not ultimately exceed the losses we would have suffered, if any, had these instruments not been in place. There is also a risk that the counterparty to such an instrument will be unable to perform its obligations to us. If a liquid secondary market does not exist for these instruments, we may be required to maintain a derivative position until exercise or expiration, which could result in losses to us. In addition, we are required to record the fair value of these derivative instruments on our financial statements by recording changes in their values as interest earnings or expense. This can result in significant period to period volatility in our reported net income over the term of these instruments.

There are risks associated with debt financing programs that involve securitization of our MRBs and PHC Certificates.

We have obtained debt financing through the securitization of our MRBs and PHC Certificates and may obtain this type of debt financing in the future. The terms of these securitization programs differ, but in general require our investment assets be placed into a trust or other special purpose entity that issues a senior security to unaffiliated investors and a residual interest to us. The trust or other entity receives all the interest payments from its underlying MRBs and PHC Certificates from which it pays interest on the senior security at a variable or fixed rate. As the holder of the residual interest, we are entitled to any remaining interest received by the trust

14


 

holding the securitized asset after it has paid the full amount of interest due on the senior security and all of the expenses of the trust, including various fees to the trustee, remarketing agents, credit providers, and liquidity providers. Specific risks generally associated with these asset securitization programs include the following:

Changes in short-term interest rates can adversely affect the cost of an asset securitization financing.

The interest rate payable on the senior securities resets periodically based on the weekly Securities Industry and Financial Markets Association (“SIFMA”) floating index usually tied to interest rates on short-term instruments. In addition, because the senior securities may typically be tendered back to the trust, causing the trust to remarket the senior securities from time to time, an increase in interest rates may require an increase to the interest rate paid on the senior securities in order to successfully remarket these securities. Any increase in interest rate payable on the senior securities will result in more of the underlying interest being used to pay interest on the senior securities leaving less interest available to us. Higher short-term interest rates will reduce, and could even eliminate, our return on a residual interest in this type of financing.

Payments on the residual interests in these financing structures are subordinate to payments on the senior securities and to payment of trust expenses and there are no party guarantees to the payment of any amounts under the residual interests.

We hold a residual interest (known as Class B interests in the TEBS Financing with Freddie Mac, Term TOB Trust and Term A/B Trust facilities with Deutsche Bank and residual participating interests (“LIFERs”) in the TOB financing facilities) in the securitization trusts established for the debt financing facilities. These residual interests are subordinate to the senior securities sold to investors. As a result, none of the interest received by such a trust will be paid to us as the holder of a residual interest until all payments currently due on the senior securities have been paid in full and other trust expenses satisfied. As the holder of a residual certificate in these trusts, we can look only to the assets of the trust remaining after payment of these senior obligations for payment on the residual certificates. No third party guarantees the payment of any amount on the residual certificates.

Termination of an asset securitization financing can occur for many reasons which could cause us to lose the assets and other collateral we pledged for such financing.

In general, the trust or other special purpose entity formed for an asset securitization financing can terminate for many different reasons relating to problems with the assets or problems with the trust itself. Problems with the assets that could cause the trust to collapse include payment or other defaults or a determination that the interest on the assets is taxable. Problems with a trust include a downgrade in the investment rating of the senior securities that it has issued, a ratings downgrade of the liquidity provider for the trust, increases in short term interest rates in excess of the interest paid on the underlying assets, an inability to remarket the senior securities or an inability to obtain credit or liquidity for the trust. In each of these cases, the trust will be collapsed and the MRBs and other collateral held by the trusts will be sold. If the proceeds from the sale of the trust collateral are not sufficient to pay the principal amount of the senior securities with accrued interest and the other expenses of the trusts then we will be required, through our guarantee of the trusts, to fund any such shortfall. The Partnership, as holder of the residual interest in the trust, may not only lose our investment in the residual certificates but could also realize additional losses to fully repay trust obligations to the senior securities.

An insolvency or receivership of the program sponsor could impair our ability to recover the assets and other collateral pledged by it in connection with a bond securitization financing.

In the event the sponsor of an asset securitization financing program becomes insolvent, it could be placed in receivership. In that situation, it is possible that we would not be able to recover the investment assets and other collateral it pledged in connection with the securitization financing or that it would not receive all or any of the payments due from the trust or other special purpose entity on the residual interest held by us in such trust or other entity.

Conditions in the tax credit markets due to known or potential changes in U.S. corporate tax rates may increase our cost of borrowing, make financing difficult to obtain or restrict our ability to invest in MRBs and other investments, each of which may have a material adverse effect on our results of operations and business.

Conditions in the tax credit market due to changes in the U.S. corporate tax rates have had, and may continue to have, an adverse impact on our cost of borrowings and may restrict our ability to invest in MRBs and other investments.  It is unclear when and how quickly conditions will stabilize in the tax credit markets. These conditions, the cost and availability of credit has been, and may continue to be, adversely affected in all markets in which we operate. Concern about the stability of the tax credit markets has led many lenders and institutional investors to reduce, and in some cases, cease, providing funding to borrowers. Our access to debt and equity financing may be adversely affected. Changes in the U.S. tax rates, and the resulting impacts to the tax credit market, may limit

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our ability to replace or renew maturing debt financing on a timely basis, may impair our ability to acquire MRBs and other investments and may impair our access to capital markets to meet our liquidity and growth requirements which may have an adverse effect on our financial condition and results of operations.

Federal regulations adopted under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may require us to unwind our tender option bond financing facilities.

The “Volcker Rule” adopted under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 limits the ability of banking entities to sponsor or invest in certain types of “covered funds” (such as private equity funds and hedge funds) or to engage in certain types of proprietary trading in the U.S. The Volcker Rule restricts banking entities from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with certain “covered funds.” As currently structured, TOB Trusts like those used as part of our TOB financing program with DB, fit within the definition of “covered funds” and will be affected by the Volcker Rule. The Volcker Rule does not apply to Freddie Mac or more specifically, the M24, M31 and M33 TEBS Financing facilities with Freddie Mac.

The regulators specifically noted that banks will need to evaluate if TOB Trusts are, in fact, covered funds and if so, whether an exception to the definition is available. The regulators declined to provide a specific exclusion from the definition of “covered funds” for TOB financing programs. The preamble also notes that participation in a TOB transaction is not prohibited per se, but is subject to the same restrictions on other covered funds.

Any downgrade, or perceived potential of a downgrade, of U.S. sovereign credit ratings or the credit ratings of the U.S. Government-sponsored entities (or GSEs) by the various credit rating agencies may materially adversely affect our business.

Our TEBS Financing facilities are an integral part of our business strategy and those financings are dependent upon an investment grade rating of Freddie Mac. If Freddie Mac were downgraded to below investment grade, it would have a negative effect on our ability to finance our bond portfolio on a longer-term basis and could negatively impact Cash Available for Distribution and our ability to continue distributions at current levels.

The federal conservatorship of Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Freddie Mac and the U.S. Government, may materially adversely affect our business.

The problems faced by Fannie Mae and Freddie Mac commencing in 2008 resulting in them being placed into federal conservatorship and receiving significant U.S. Government support have sparked serious debate among federal policy makers regarding the continued role of the U.S. Government in providing liquidity and credit enhancement for mortgage loans. The Trump administration has publicly indicated a desire to reform Fannie Mae and Freddie Mac, including their relationship with the federal government. As a result, the future roles of Fannie Mae and Freddie Mac are likely to be reduced (perhaps significantly) and the nature of their guarantee obligations could be considerably limited relative to historical measurements. Alternatively, it is still possible that Fannie Mae and Freddie Mac could be dissolved entirely or privatized, and, as mentioned above, the U.S. Government could determine to stop providing liquidity support of any kind to the mortgage market. Any changes to the nature of the GSEs or their guarantee obligations could have broad adverse implications for the market and our business, operations and financial condition. If Fannie Mae or Freddie Mac were to be eliminated, or their structures were to change radically (i.e., limitation or removal of the guarantee obligation), our ability to utilize TEBS Financings facilities would be materially and adversely impacted.

Our MRBs, PHC Certificates, property loans and investments in unconsolidated entities are illiquid assets and their value may decrease.

Our MRBs, PHC Certificates, property loans and investments in unconsolidated entities are relatively illiquid, and there is no existing trading market for them. There are no market makers, price quotations, or other indications of a developed trading market for these investments. In addition, no rating has been issued on any of the existing MRBs and we do not expect to obtain ratings on MRBs we may acquire in the future. Accordingly, any buyer of these MRBs would need to perform its own due diligence prior to a purchase. The Partnership’s ability to sell its MRBs, PHC Certificates, property loans and investments in unconsolidated entities and the price it may receive upon their sale, will be affected by the number of potential buyers, the number of similar securities on the market at the time and by other market conditions. Such a sale could result in a loss to the Partnership.

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Delay, reduction, or elimination of appropriations from the U.S. Department of Housing and Urban Development can result in payment defaults on our investments in PHC Trusts.

We have acquired interests, LIFERS, in three PHC TOB Trusts, which, in turn, hold PHC Certificates that have been issued by three PHC Trusts which hold custodial receipts evidencing loans made to numerous public housing authorities. Principal and interest on these loans are payable by the respective public housing authorities solely out of annual appropriations to be made to the public housing authorities by HUD under HUD’s Capital Fund Program. Annual appropriations for the Capital Fund Program must be determined by Congress each year, and there is no assurance that Congress will continue to make such appropriations at current levels or at all. If Congress fails to continue to make annual appropriations for the Capital Fund Program at or near current levels, or there is a delay in the approval of appropriations, the public housing authorities may not have funds from which to pay principal and interest on the loans underlying the PHC Certificates. The failure of public housing authorities to pay principal and interest on these loans will reduce or eliminate the payments received by us from the PHC TOB Trusts.

A reduction in the rating of PHC Certificates below investment grade would result in the liquidation of the investment in that TOB Trust

Our investment in PHC Certificates is made pursuant to the provision of our Amended and Restated LP Agreement that allows investment in securities that are not MRBs backed by multifamily housing projects provided that these alternative securities are rated investment grade in one of the four highest rating categories by at least one nationally recognized securities rating agency and provide what we expect and believe to be tax-exempt income. In the event the investment rating of any of the PHC Certificates held by a PHC TOB Trust was reduced to less than investment grade, the trustee of the TOB Trust has no obligation to divest of that securitized asset. Accordingly, we would be required to liquidate our LIFERS in that TOB Trust or liquidate the TOB Trust entirely. The TOB Trusts have no obligation to purchase the LIFERS and there is no established trading market for the LIFERS. Likewise, if we liquidate the TOB Trust, any downgrade in the investment rating of the PHC Certificates will likely decrease the value of the investment. The partnership may not be able to divest its position in these LIFERS or terminate the TOB Trusts without incurring a material loss.

The rent restrictions and occupant income limitations imposed on properties financed by our MRBs and on our MF Properties may limit the revenues of such properties.

All of the Residential Properties securing our MRBs and the MF Properties in which our subsidiaries hold indirect interests are subject to certain federal, state and/or local requirements with respect to the permissible income of their tenants. Since federal rent subsidies are not generally available on these properties, rents must be charged on a designated portion of the units at a level to permit these units to be continuously occupied by low or moderate-income persons or families. As a result, these rents may not be sufficient to cover all operating costs with respect to these units and debt service on the applicable MRB. This may force the property owner, when permissible, to charge rents on the remaining units that are higher than they would be otherwise and may, therefore, exceed competitive rents. This may adversely affect the occupancy rate of a property securing an investment and the property owner’s ability to service its debt.

The properties financed by some of our MRBs are not completely insured against damages from hurricanes and other major storms.

Two of the multifamily housing properties financed by MRBs held by us and one MF Property are in an area prone to damage from hurricanes and other major storms. Due to the significant losses incurred by insurance companies in recent years due to damages from hurricanes, many property and casualty insurers now require property owners to assume the risk of first loss on a larger percentage of their property’s value. In general, the current insurance policies on the property financed by us that is located in an area rated for hurricane and storm exposure carry a five percent deductible on the insurable value of the properties. As a result, if either of these properties were damaged in a hurricane or other major storm, the amount of uninsured losses could be significant, and the property owner may not have the resources to fully rebuild the property, which could result in a default on the MRBs secured by the property. In addition, the damages to a property may result in all or a portion of the rental units not being rentable for a period of time. Unless a property owner carries rental interruption insurance, this loss of rental income would reduce the cash flow available to pay base or contingent interest on our MRBs collateralized by these properties.

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The properties securing our MRBs or the MF Properties may be subject to liability for environmental contamination which could increase the risk of default on such bonds or loss of our investment.

The owner or operator of real property may become liable for the costs of removal or remediation of hazardous substances released on its property. Various federal, state and local laws often impose such liability without regard to whether the owner or operator of real property knew of, or was responsible for, the release of such hazardous substances. We cannot assure you that the properties that secure our MRBs or the MF Properties, in which our subsidiaries hold indirect interests, will not be contaminated. The costs associated with the remediation of any such contamination may be significant and may exceed the value of a property or result in the property owner defaulting on the revenue bond secured by the property or otherwise result in a loss of our investment in a property.

If we acquire ownership of Residential Properties, we will be subject to all of the risks normally associated with the ownership of commercial real estate.

We may acquire ownership of Residential Properties financed by MRBs held by us in the event of a default on such bonds. We may also acquire indirect ownership of MF Properties on a temporary basis in order to facilitate the eventual acquisition by us of MRBs on these MF Properties. In either case, during the time we own an MF Property, we will generate taxable income or losses from the operations of such property rather than tax exempt interest. In addition, we will be subject to all of the risks normally associated with the operation of commercial real estate including declines in property value, occupancy and rental rates, increases in operating expenses, and the ability to refinance if needed. We may also be subject to government regulations, natural disasters and environmental issues, any of which could have an adverse effect on our financial results and ability to make distributions to Unitholders.

There are many risks related to the construction of Residential Properties that may affect the MRBs issued to finance these properties and multifamily properties that underlie our Investments in Unconsolidated Entities.

We may invest in MRBs secured by residential housing properties, and we make equity investments in limited liability companies created to develop, construct and operate multifamily properties. Construction of such properties generally takes approximately twelve to eighteen months. The principal risk associated with these investment activities is that construction of the underlying properties may be substantially delayed or never completed. This may occur for many reasons including (i) insufficient financing to complete the project due to underestimated construction costs or cost overruns; (ii) failure of contractors or subcontractors to perform under their agreements; (iii) inability to obtain governmental approvals; (iv) labor disputes; and (v) adverse weather and other unpredictable contingencies beyond the control of the developer. While we may be able to protect ourselves from some of these risks by obtaining construction completion guarantees from developers, agreements of construction lenders to purchase our bonds if construction is not completed on time, and/or payment and performance bonds from contractors, we may not be able to do so in all cases or such guarantees or bonds may not fully protect us in the event a property is not completed. In other cases, we may decide to forego certain types of available security if we determine that the security is not necessary or is too expensive to obtain in relation to the risks covered.

If a property is not completed or costs more to complete than anticipated, it may cause us to receive less than the full amount of interest owed to us on the mortgage revenue bond financing such property or otherwise result in a default under the mortgage loan that secures our mortgage revenue bond on the property. In such case, we may be forced to foreclose on the incomplete property and sell it in order to recover the principal and accrued interest on our mortgage revenue bond and we may suffer a loss of capital as a result. Alternatively, we may decide to finance the remaining construction of the property, in which event we will need to invest additional funds into the property, either as equity or as a taxable property loan. Any return on this additional investment would be taxable. Also, if we foreclose on a property, we will no longer receive interest on the bond issued to finance the property. The overall return to us from our investment in such property is likely to be less than if the construction had been completed on time or within budget.

As it relates to our equity investments, if a property is not completed or costs more to complete than anticipated, it may cause us to receive less distributions than expected. Furthermore, we may be prevented from receiving a return on our investments or recovering our initial investment, which would likely adversely affect our results of operations.

There are many risks related to the lease-up of newly constructed or renovated properties that may affect the MRBs issued to finance these properties.

We may acquire MRBs issued to finance properties in various stages of construction or renovation. As construction or renovation is completed, these properties will move into the lease-up phase. The lease-up of these properties may not be completed on schedule or at anticipated rent levels, resulting in a greater risk these investments may go into default rather than investments secured by mortgages on properties that are stabilized or fully leased-up. The underlying property may not achieve expected occupancy or debt service coverage levels. While we may require property developers to provide us with a guarantee covering operating deficits of the property during the lease-up phase, we may not be able to do so in all cases or such guarantees may not fully protect us in the event a property is not leased to an adequate level of economic occupancy as anticipated.

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There are various risks associated with our Investments in Unconsolidated Entities.

Our Investments in Unconsolidated Entities represent equity investments in limited liability companies created to develop, construct and operate multifamily properties. We are entitled to certain distributions under the terms of the investees’ governing documents based on the availability of cash to pay such distributions. The only sources of cash flows for such distributions are either the net cash flows from the operation of the property, the cash proceeds from a sale of the property, or through the permanent financing in the form of a mortgage revenue bond. The net cash flow from the operation of a property may be affected by many factors, such as the number of tenants, the rental and fee rates, operating expenses, the cost of repairs and maintenance, taxes, debt service requirements, competition from other similar multifamily properties and general and local economic conditions. Sale proceeds are primarily dependent, among other things, on the value of a property to a prospective buyer at the time of its sale. If there are no net cash flows from operations or insufficient proceeds from a sale or a refinancing event, we are unlikely to receive distributions from our investees and we may be unable to recover our investments in these entities.

 

There is a risk associated with a third-party developer that has provided guarantees of our returns on Investments in Unconsolidated Entities.

One developer has provided a guarantee of returns on our Investments in Unconsolidated Entities during the period of construction of the underlying multifamily property.  The guarantees remain through the two-year anniversary of construction completion of each multifamily property up to a maximum amount for each investment. If the underlying multifamily properties do not generate sufficient cash proceeds, either through net cash flows from operations or upon a sale event or through the permanent financing in the form of a mortgage revenue bond, then we are entitled to enforce the guarantee against the developer. If the developer is unable to perform on the guarantee, we may be prevented from realizing our returns earned on our Investments in Unconsolidated Entities during the period of construction which may result in the recognition of losses.

We have assumed certain potential liabilities relating to recapture of tax credits on MF Properties.

We have acquired indirect interests in several MF Properties that generated LIHTCs for the previous investors in these properties. When we acquire an interest in an MF Property, we generally must agree to reimburse the prior partners for any liabilities they incur due to a recapture of LIHTCs that result from the failure to operate the MF Property in a manner consistent with the laws and regulations relating to LIHTCs after we acquired our interest in the MF Property. The amount of this recapture liability can be substantial and could negatively impact the financial performance of the MF Property.

We are not registered under the Investment Company Act.

We are not required to register as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”) because we operate under an exemption therefrom. As a result, none of the protections of the Investment Company Act (such as provisions relating to disinterested directors, custody requirements for securities, and regulation of the relationship between a fund and its advisor) will be applicable to us.

We engage in transactions with related parties.

The majority of executive officers of Burlington, the named executive officers of the Partnership, and four of the Managers of Burlington hold equity positions in Burlington. A subsidiary of Burlington acts as our General Partner and manages our investments and performs administrative services for us and earns certain fees that are either paid by the properties financed by our MRBs or by us. Another subsidiary of Burlington provides on-site management for some of the Residential Properties that underlie our MRBs and each of our MF Properties earns fees from the property owners based on the gross revenues of these properties. The owners of the limited-purpose corporations which own two of the Residential Properties financed with MRBs and taxable property loans held by us are employees of Burlington who are not involved in our operation or management and who are not executive officers or managers of Burlington. These two Residential Properties are Bent Tree and Fairmont Oaks, which were sold during 2015. Because of these relationships, our agreements with Burlington and its subsidiaries are related-party transactions. By their nature, related-party transactions may not be considered to have been negotiated at arm’s length. These relationships may also cause a conflict of interest in other situations where we are negotiating with Burlington.

Unitholders may incur tax liability if any of the interest on our MRBs or PHC Certificates is determined to be taxable.

In each MRB transaction, the governmental issuer, as well as the underlying borrower, has covenanted and agreed to comply with all applicable legal and regulatory requirements necessary to establish and maintain the tax-exempt status of interest earned on the MRBs. Failure to comply with such requirements may cause interest on the related issue of bonds to be includable in gross income for federal

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income tax purposes retroactive to the date of issuance, regardless of when such noncompliance occurs. Should the interest income on a MRB be deemed to be taxable, the bond documents include a variety of rights and remedies that we have concluded would help mitigate the economic impact of taxation of the interest income on the affected bonds. Under such circumstances, we would enforce all of such rights and remedies as set forth in the related bond documents as well as any other rights and remedies available under applicable law. In addition, in the event the tax-exemption of interest income on any MRB is challenged by the IRS, we would participate in the tax and legal proceedings to contest any such challenge and would, under appropriate circumstances, appeal any adverse final determinations. The loss of tax-exemption for any particular issue of bonds would not, in and of itself, result in the loss of tax-exemption for any unrelated issue of bonds. However, the loss of such tax-exemption could result in the distribution to our Unitholders of taxable income relating to such bonds.

Certain of our MRBs bear interest at rates which include contingent interest. Payment of the contingent interest depends on the amount of net cash flow generated by the property, net proceeds realized from the refinancing or sale of the property securing the bond. Due to this contingent interest feature, an issue may arise as to whether the relationship between the property owner and the Partnership is that of debtor and creditor or whether we are engaged in a partnership or joint venture with the property owner. If the IRS were to determine that these MRBs represented an equity investment in the underlying property, the interest paid to us could be viewed as a taxable return on such investment and would not qualify as tax-exempt interest for federal income tax purposes.

In addition, we have, and may in the future, obtain debt financing through asset securitization programs in which we place MRBs and PHC Certificates into trusts and are entitled to a share of the interest received by the trust on these bonds after the payment of interest on senior securities and related expenses issued by the trust. It is possible that the characterization of our residual interest in such a securitization trust could be challenged and the income that we receive through these instruments could be treated as ordinary taxable income includable in our gross income for federal tax purposes.

Not all the income received by us is exempt from taxation.

We have made, and may make in the future, taxable property loans to the owners of Residential Properties that collateralize our investments. The interest income earned by us on these taxable property loans is subject to federal and state income taxes. In addition, if we acquire direct or indirect interests in real estate, either through foreclosure of a property securing a MRB or a taxable property loan or through the acquisition of an MF Property, any income we receive from the property will be taxable income from the operation of real estate. In that case, the taxable income received by us will be allocated to our Unitholders and will represent taxable income to them regardless of whether an amount of cash equal to such allocable share of this taxable income is distributed to Unitholders.

Furthermore, income and gains generated by assets within a wholly-owned subsidiary (the “Greens Hold Co”) and its subsidiaries are subject to federal, state and local incomes as the Greens Hold Co is a “C” corporation for income tax purposes.

If we were determined to be an association taxable as a corporation, it will have adverse economic consequences for us and our Unitholders.

We have determined to be treated as a partnership for federal income tax purposes. The purpose of this determination is to eliminate federal and state income tax liability for us and allow us to pass through our interest income which we expect and believe to be tax-exempt to our Unitholders so that they are not subject to federal tax on this income. If our treatment as a partnership for tax purposes is successfully challenged, we would be classified as an association taxable as a corporation. This would result in the Partnership being taxed on its taxable income, if any, and, in addition, would result in all cash distributions made by us to Unitholders being treated as taxable dividend income to the extent of our earnings and profits. The payment of these dividends would not be deductible by us. The listing of our Units for trading on the NASDAQ causes us to be treated as a “publicly traded partnership” under Section 7704 of the Internal Revenue Code. A publicly traded partnership is generally taxable as a corporation unless 90% or more of its gross income is “qualifying” income. Qualifying income includes interest, dividends, real property rents, gain from the sale or other disposition of real property, gain from the sale or other disposition of capital assets held to produce interest or dividends, and certain other items. We expect and believe that substantially all of our gross income will continue to be tax-exempt interest income on our MRBs, but there can be no assurance that will be the case. While we believe that all of this interest income is qualifying income, it is possible that some or all of our income could be determined not to be qualifying income. In such a case, if more than ten percent of our annual gross income in any year is not qualifying income, we will be taxable as a corporation rather than a partnership for federal income tax purposes. We have not received, and do not intend to seek, a ruling from the Internal Revenue Service regarding our status as a partnership for tax purposes.

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To the extent we generate taxable income; Unitholders will be subject to income taxes on this income, whether or not they receive cash distributions.

As a partnership, our Unitholders will be individually liable for income tax on their proportionate share of any taxable income realized by us, whether or not we make cash distributions.

There are limits on the ability of our Unitholders to deduct Partnership losses and expenses allocated to them.

The ability of Unitholders to deduct their proportionate share of the losses and expenses generated by us will be limited in certain cases, and certain transactions may result in the triggering of the Alternative Minimum Tax for Unitholders who are individuals.

Holders of the Series A Preferred Units may be required to bear the risks of an investment for an indefinite period of time.

Holders of the Series A Preferred Units may be required to bear the financial risks of an investment in the Series A Preferred Units for an indefinite period of time.  In addition, the Series A Preferred Units will rank junior to all Partnership current and future indebtedness (including indebtedness outstanding under the Partnership’s senior bank credit facility) and other liabilities, and any other senior securities we may issue in the future with respect to assets available to satisfy claims against the Partnership.

The Series A Preferred Units are subordinated to existing and future debt obligations, and the interests could be diluted by the issuance of additional units, including additional Series A Preferred Units, and by other transactions.

The Series A Preferred Units are subordinated to all existing and future indebtedness, including indebtedness outstanding under any senior bank credit facility.  The Partnership may incur additional debt under its senior bank credit facility or future credit facilities.  The payment of principal and interest on its debt reduces cash available for distribution to Unitholders, including the Series A Preferred Units.

The issuance of additional units pari passu with or senior to the Series A Preferred Units would dilute the interests of the holders of the Series A Preferred Units, and any issuance of senior securities, parity securities, or additional indebtedness could affect the Partnership’s ability to pay distributions on or redeem the Series A Preferred Units.

Holders of Series A Preferred Units have extremely limited voting rights.

The voting rights as a holder of Series A Preferred Units will be extremely limited.  Our BUCs are the only class of our partnership interests carrying full voting rights.

Holders of Series A Preferred Units generally have no voting rights.  

There is no public market for the Series A Preferred Units, which may prevent an investor from liquidating its investment.

The Series A Preferred Units were offered in a private placement and the Partnership did not register the Series A Preferred Units with the SEC or any state securities commission.  The Series A Preferred Units may not be resold unless the Partnership registers the securities with the SEC or an exemption from the registration requirement is available.  It is not expected that any market for the Series A Preferred Units will develop or be sustained in the future.  The lack of any public market for the Series A Preferred Units severely limits the ability to liquidate the investment, except for the right to put the Series A Preferred Units to the Partnership under certain circumstances.

Market interest rates may adversely affect the value of the Series A Preferred Units.

One of the factors that will influence the value of the Series A Preferred Units will be the distribution rate on the Series A Preferred Units (as a percentage of the price of the units) relative to market interest rates.  An increase in market interest rates, which are currently at low levels relative to historical rates, may lower the value of the Series A Preferred Units and also would likely increase the Partnership’s borrowing costs.

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Holders of Series A Preferred Units may have liability to repay distributions.

Under certain circumstances, holders of the Series A Preferred Units may have to repay amounts wrongfully returned or distributed to them.  Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution if the distribution would cause the Partnership’s liabilities to exceed the fair value of its assets.  Liabilities to partners on account of their partnership interests and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

Delaware law provides that for a period of three years from the date of an impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount.  A purchaser of Series A Preferred Units who becomes a limited partner is liable for the obligations of the transferring limited partner to make contributions to the Partnership that are known to such purchaser of units at the time it became a limited partner and for unknown obligations if the liabilities could be determined from our Amended and Restated LP Agreement.

The Partnership’s portfolio investment decisions may create CRA strategy risks.

Portfolio investment decisions take into account the Partnership’s goal of holding MRBs and other securities in designated geographic areas and will not be exclusively based on the investment characteristics of such assets, which may or may not have an adverse effect on the Partnership’s investment performance.  CRA qualified assets in geographic areas sought by the Partnership may not provide as favorable return as CRA qualified assets in other geographic areas.  The Partnership may sell assets for reasons relating to CRA qualification at times when such sales may not be desirable and may hold short-term investments that produce relatively low yields pending the selection of long-term investments believed to be CRA-qualified.

Under certain circumstances, investors may not receive CRA credit for their investment in the Series A Preferred Units.

The CRA requires the three federal bank supervisory agencies, the FRB, the OCC, and the FDIC, to encourage the institutions they regulate to help meet the credit needs of their local communities, including low- and moderate-income neighborhoods.  Each agency has promulgated rules for evaluating and rating an institution’s CRA performance which, as the following summary indicates, vary according to an institution’s asset size.  An institution’s CRA performance can also be adversely affected by evidence of discriminatory credit practices regardless of its asset size.

For an institution to receive CRA credit with respect to an investment in the Series A Preferred Units, the Partnership must hold CRA-qualifying investments that relate to the institution’s delineated CRA assessment area.  The Partnership expects that an investment in its units will be considered a qualified investment under the CRA, but neither the Partnership nor the General Partner has received an interpretative letter from the Federal Financial Institutions Examination Council (“FFIEC”) stating that an investment in the Partnership is considered eligible for regulatory credit under the CRA.  Moreover, there is no guarantee that future changes to the CRA or future interpretations by the FFIEC will not affect the continuing eligibility of the Partnership’s investments.  So that the Partnership itself may be considered a qualified investment, the Partnership will seek to invest only in investments that meet the prevailing community investing standards put forth by U.S. regulatory agencies.  

In this regard, the Partnership expects that a majority of its investments will be considered eligible for regulatory credit under the CRA, but there is no guarantee that an investor will receive CRA credit for its investment in the Series A Preferred Units.  For example, a state banking regulator may not consider the Partnership eligible for regulatory credit.  If CRA credit is not given, there is a risk that an investor may not fulfill its CRA requirements.

The assets held by the Partnership may not be considered qualified investments under the CRA by the bank regulatory authorities.

In most cases, “qualified investments,” as defined by the CRA, are required to be responsive to the community development needs of a financial institution’s delineated CRA assessment area or a broader statewide or regional area that includes the institution’s assessment area.  For an institution to receive CRA credit with respect to the Series A Preferred Units, the Partnership must hold CRA qualifying investments that relate to the institution’s assessment area.

As defined in the CRA, qualified investments are any lawful investments, deposits, membership shares, or grants that have as their primary purpose community development.  The term “community development” is defined in the CRA as: (1) affordable housing (including multifamily rental housing) for low- to moderate-income individuals; (2) community services targeted to low- or moderate-income individuals; (3) activities that promote economic development by financing businesses or farms that meet the size eligibility standards of 13 C.F.R. §121.802(a)(2) and (3) or have gross annual revenues of $1 million or less; or (4) activities that revitalize or stabilize low- or moderate-income geographies, designated disaster areas, or distressed or underserved non-metropolitan middle-income geographies designated by the federal banking regulators.

22


 

Investments are not typically designated as qualifying investments at the time of issuance by any governmental agency.  Accordingly, the General Partner must evaluate whether each potential investment may be qualifying investments with respect to a specific Unitholder.  The final determinations that assets held by the Partnership are qualifying investments are made by the federal and, where applicable, state bank supervisory agencies during their periodic examinations of financial institutions.  There is no assurance that the agencies will concur with the General Partner’s evaluation of any of the Partnership’s assets as qualifying investments.

Each investor will be a limited partner of the Partnership, not just of the investments in its Designated Target Region(s).  The financial returns on an investor’s investment will be determined based on the performance of all the assets in the Partnership’s geographically diverse portfolio, not just by the performance of the assets in the Designated Target Region(s) selected by the investor.

In determining whether a particular investment is qualified, the General Partner will assess whether the investment has as its primary purpose community development.  The General Partner will consider whether the investment: (1) provides affordable housing for low- to moderate-income individuals; (2) provides community services targeted to low- to moderate-income individuals; (3) funds activities that (a) finance businesses or farms that meet the size eligibility standards of the Small Business Administration’s Development Company or Small Business Investment Company programs or have annual revenues of $1 million or less and (b) promote economic development; or (4) funds activities that revitalize or stabilize low- to moderate-income areas.  For institutions whose primary regulator is the FRB, OCC, or FDIC, the General Partner may also consider whether an investment revitalizes or stabilizes a designated disaster area, or an area designated by those agencies as a distressed or underserved non-metropolitan middle-income area.

An activity may be deemed to promote economic development if it supports permanent job creation, retention, and/or improvement for persons who are currently low- to moderate-income, or supports permanent job creation, retention, and/or improvement in low- to moderate-income areas targeted for redevelopment by federal, state, local, or tribal governments.  Activities that revitalize or stabilize a low- to moderate-income geography are activities that help attract and retain businesses and residents.  The General Partner maintains documentation, readily available to a financial institution or an examiner, supporting its determination that a Partnership asset is a qualifying investment for CRA purposes.

Obligations of U.S. Government agencies, authorities, instrumentalities, and sponsored enterprises (such as Fannie Mae and Freddie Mac) have historically involved little risk of loss of principal if held to maturity.  However, the maximum potential liability of the issuers of some of these securities may greatly exceed their current resources and no assurance can be given that the U.S. Government would provide financial support to any of these entities if it is not obligated to do so contractually or by law.

The investment in the Series A Preferred Units is not a deposit or obligation of, or insured or guaranteed by, any entity or person, including the U.S. Government and the FDIC.  The value of the Partnership’s assets will vary, reflecting changes in market conditions, interest rates, and other political and economic factors.  There is no assurance that the Partnership can achieve its investment objective, since all investments are inherently subject to market risk.  There also can be no assurance that either the Partnership’s investments or units of the Partnership will receive investment test credit under the CRA.

The Partnership faces legislative and regulatory risks in connection with its assets and operations, including under the CRA.

Many aspects of the Partnership’s investment objectives are directly affected by the national and local legal and regulatory environments.  Changes in laws, regulations, or the interpretation of regulations could all pose risks to the successful realization of the Partnership’s investment objectives.

It is not known what changes, if any, may be made to the CRA in the future and what impact these changes could have on regulators or the various states that have their own versions of the CRA.  Changes in the CRA might affect Partnership operations and might pose a risk to the successful realization of the Partnership’s investment objectives.  Repeal of the CRA would significantly reduce the attractiveness of an investment in the Partnership’s units for regulated investors.  There is no guarantee that an investor will receive CRA credit for is investment in the Series A Preferred Units.  If CRA credit is not given, there is a risk that an investor may not fulfill its CRA obligations.

We are increasingly dependent on information technology, and potential disruption, cyber-attacks, security problems, and expanding social media vehicles present new risks.

We are increasingly dependent on information technology networks and systems, including the Internet, to process, transmit, and store electronic and financial information, to manage and support a variety of business processes and activities, and to comply with regulatory, legal, and tax requirements. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure and to maintain and protect the related automated and manual control processes, we could be subject to billing and collection errors, business disruptions, or damage resulting from security breaches. If any of our significant information technology systems suffer severe damage, disruption, or shutdown, and our business continuity plans do not effectively resolve the

23


 

issues in a timely manner, our revenues, financial condition, and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results. In addition, there is a risk of business interruption, litigation risks, and reputational damage from leakage of confidential information or from systems conversions when, and if, they occur in the normal course of business.

The inappropriate use of certain media vehicles could cause brand damage or information leakage. Negative posts or comments about the Partnership on any social networking web site could seriously damage its reputation. In addition, the disclosure of non-public company sensitive information through external media channels could lead to information loss. Identifying new points of entry as social media continues to expand presents new challenges. Any business interruptions or damage to our reputation could negatively impact our financial condition, results of operations, and the market price of our BUCs.

 

 

Item 1B.  Unresolved Staff Comments.

None

 

 

Item 2.  Properties.

The Partnership conducts its business operations from and maintains its executive offices at 1004 Farnam Street, Omaha, Nebraska 68102. This property is owned by Burlington and the Partnership believes that this property is adequate to meet its business needs for the foreseeable future.

Each of the Partnership’s MRBs are collateralized by the Residential Properties or commercial property. The Partnership may have property loans that are also collateralized by the Residential Properties but does not hold title or any other interest in these properties.

At December 31, 2017, a wholly-owned subsidiary of the Partnership owns one MF Property – The 50/50. In addition, the Partnership owns the Suites on Paseo, Jade Park and land held for development directly.

The Partnerships’ Real Estate Assets are reported within the MF Properties segment at December 31, 2017 and are summarized as follows:

 

Real Estate Assets at December 31, 2017

 

Property Name

 

Location

 

Number of

Units (Unaudited)

 

 

Land and Land

Improvements

 

 

Buildings and

Improvements

 

 

Carrying Value on

December 31, 2017

 

Suites on Paseo

 

San Diego, CA

 

 

394

 

 

$

3,166,463

 

 

$

38,454,894

 

 

$

41,621,357

 

The 50/50 MF Property

 

Lincoln, NE

 

 

475

 

 

 

-

 

 

 

32,932,981

 

 

 

32,932,981

 

Jade Park

 

Daytona, FL

 

 

144

 

 

 

2,292,035

 

 

 

7,565,613

 

 

 

9,857,648

 

Land held for development

 

(1)

 

(1)

 

 

 

1,860,737

 

 

 

-

 

 

 

1,860,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

86,272,723

 

Less accumulated depreciation

 

 

 

(9,580,531

)

Total real estate assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

76,692,192

 

 

(1) Land held for development consists of parcels of land in Johnson County, KS and Richland County, SC and land development costs for a site in Douglas County, NE.

 

 

Item 3.  Legal Proceedings.

The Partnership is periodically involved in ordinary and routine litigation incidental to its business, including foreclosure actions relating to properties securing mortgage revenue bonds held by the Partnership. In our judgment, there are no material pending legal proceedings to which the Partnership is a party or to which any of the properties which collateralize the Partnership’s MRBs are subject a resolution which is expected to have a material adverse effect on the Partnership’s consolidated results of operations, cash flows, or financial condition.

 

 

Item 4.  Mine Safety Disclosures

Not Applicable.

 

24


 

PART II

Item 5.  Market for the Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities.

Market Information

The Partnership’s BUCs trade on the NASDAQ Global Select Market under the trading symbol “ATAX.”  On February 27, 2018, the closing price of our BUCs, as reported on the NASDAQ was $6.20. The following table sets forth, for the periods indicated, the high and low intraday sales prices of our BUCs and the distributions paid by us in each of the periods listed.

 

2017

 

High

 

 

Low

 

 

Distributions (1)

 

1st Quarter

 

$

5.80

 

 

$

5.40

 

 

$

0.125

 

2nd Quarter

 

$

6.05

 

 

$

5.60

 

 

$

0.125

 

3rd Quarter

 

$

6.25

 

 

$

5.85

 

 

$

0.125

 

4th Quarter

 

$

6.20

 

 

$

5.95

 

 

$

0.125

 

 

2016

 

High

 

 

Low

 

 

Distributions (1)

 

1st Quarter

 

$

5.38

 

 

$

4.51

 

 

$

0.125

 

2nd Quarter

 

$

5.55

 

 

$

5.13

 

 

$

0.125

 

3rd Quarter

 

$

6.09

 

 

$

5.50

 

 

$

0.125

 

4th Quarter

 

$

5.89

 

 

$

5.30

 

 

$

0.125

 

 

(1) Represents distributions declared, on a per unit basis, with respect to that quarter

Stockholder Information

As of December 31, 2017, we had 60,131,605 BUCs outstanding held by a total of approximately 12,000 holders of record. In addition, the Partnership also has unvested restricted unit awards for 242,069 BUCs held by ten individuals at December 31, 2017.

Distributions

Future distributions paid by the Partnership on the BUCs will be at the discretion of the Board of Managers and will be based upon financial, capital, and cash flow considerations. In addition, distributions on the BUCs rank junior to distributions on the Series A Preferred Units, and, therefore, such distributions may be considered to be limited under certain circumstances.  See note 21 to the consolidated financial statements for a further description.  

Distributions by quarter for the years ended December 31, 2017 and 2016, respectively, were as follows (amounts in thousands, except per unit amounts):

 

 

 

Distributions

 

2017

 

Declared per unit

 

 

Total Paid

 

1st Quarter

 

$

0.125

 

 

$

7,531,616

 

2nd Quarter

 

$

0.125

 

 

$

7,531,616

 

3rd Quarter

 

$

0.125

 

 

$

7,531,616

 

4th Quarter

 

$

0.125

 

 

$

7,549,910

 

 

 

 

Distributions

 

2016

 

Declared per unit

 

 

Total Paid

 

1st Quarter

 

$

0.125

 

 

$

7,531,616

 

2nd Quarter

 

$

0.125

 

 

$

7,531,616

 

3rd Quarter

 

$

0.125

 

 

$

7,531,616

 

4th Quarter

 

$

0.125

 

 

$

7,528,068

 

 

25


 

Equity Compensation Plan Information

 

The following table provides information with respect to compensation plans under which equity securities of the Partnership are currently authorized for issuance as of December 31, 2017:

 

 

 

Number of shares to be issued upon exercise of outstanding options, warrants, and rights

 

 

Weighted-average price of outstanding options, warrants, and rights

 

 

Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a))

 

 

Plan Category

 

(a)

 

 

(b)

 

 

(c)

 

 

Equity compensation plans

   approved by Unitholders

 

 

242,069

 

 

$

-

 

 

 

2,513,674

 

(1)

Equity compensation plan not

   approved by Unitholders

 

 

-

 

 

 

-

 

 

 

-

 

 

Total

 

 

242,069

 

 

$

-

 

 

 

2,513,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Represents the units which remain available for future issuance under the America First Multifamily Investors, L. P. 2015 Equity Incentive Plan

 

Unregistered Sale of Equity Securities

The Partnership did not sell any of its BUCs in 2017, 2016, or 2015 that were not registered under the Securities Act of 1933, as amended. The Partnership sold 5,363,100 and 4,086,900 Series A Preferred Units for gross proceeds of approximately $53.6 million and $40.9 million during 2017 and 2016, respectively, the information for which the Partnership previously disclosed in Current Reports on Form 8-K. The Partnership used the proceeds to acquire MRBs and other allowable investments provided for in the Amended and Restated LP Agreement.

The Partnership did not repurchase any outstanding BUCs during the fourth quarter of 2017.

 

 

26


 

Item 6.  Selected Financial Data.

Set forth below is selected financial data for the Company as of and for the years ended December 31, 2017 through 2013.  Item 6 should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and Notes filed in Item 8 of this report.  

 

 

 

For the Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Property revenue

 

$

13,499,645

 

 

$

17,404,439

 

 

$

17,789,125

 

 

$

14,250,572

 

 

$

13,115,858

 

Real estate operating expenses

 

 

(8,228,297

)

 

 

(9,223,108

)

 

 

(10,052,669

)

 

 

(7,796,761

)

 

 

(7,622,182

)

Depreciation and amortization expense

 

 

(5,212,859

)

 

 

(6,862,530

)

 

 

(6,505,011

)

 

 

(4,897,916

)

 

 

(4,790,892

)

Investment income

 

 

48,225,068

 

 

 

36,892,996

 

 

 

34,409,809

 

 

 

26,606,234

 

 

 

22,651,622

 

Contingent interest income

 

 

3,147,165

 

 

 

2,021,077

 

 

 

4,756,716

 

 

 

40,000

 

 

 

6,497,160

 

Other interest income

 

 

4,681,578

 

 

 

2,660,238

 

 

 

2,624,262

 

 

 

856,217

 

 

 

1,772,338

 

Gain on sale of securities

 

 

-

 

 

 

8,097

 

 

 

-

 

 

 

3,701,772

 

 

 

-

 

Gain on sale of real estate assets, net

 

 

17,753,303

 

 

 

14,072,317

 

 

 

4,599,109

 

 

 

-

 

 

 

-

 

Other income

 

 

828,089

 

 

 

-

 

 

 

373,379

 

 

 

188,000

 

 

 

250,000

 

Provision for loss on receivables

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(241,698

)

Provision for loan loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(75,000

)

 

 

(168,000

)

Realized loss on taxable property loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,557,741

)

Impairment of securities

 

 

(761,960

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Impairment charge on real estate assets

 

 

-

 

 

 

(61,506

)

 

 

-

 

 

 

-

 

 

 

-

 

Amortization of deferred financing costs

 

 

(2,324,535

)

 

 

(1,862,509

)

 

 

(1,622,789

)

 

 

(1,183,584

)

 

 

(1,032,585

)

Interest expense

 

 

(22,155,443

)

 

 

(15,469,639

)

 

 

(14,826,217

)

 

 

(11,165,911

)

 

 

(6,990,844

)

General and administrative expenses

 

 

(12,769,757

)

 

 

(10,837,188

)

 

 

(8,660,889

)

 

 

(5,547,208

)

 

 

(4,237,245

)

Income before income taxes

 

 

36,681,997

 

 

 

28,742,684

 

 

 

22,884,825

 

 

 

14,976,415

 

 

 

14,645,791

 

Income tax expense

 

 

(6,019,146

)

 

 

(4,959,000

)

 

 

-

 

 

 

-

 

 

 

-

 

Income from continuing operations

 

 

30,662,851

 

 

 

23,783,684

 

 

 

22,884,825

 

 

 

14,976,415

 

 

 

14,645,791

 

Income from discontinued operations, (including

   gain on sale of VIEs of approximately $3.2 million in 2015

   and MF Properties of approximately $3.2 million in 2013)

 

 

-

 

 

 

-

 

 

 

3,721,397

 

 

 

52,773

 

 

 

3,331,051

 

Net income

 

 

30,662,851

 

 

 

23,783,684

 

 

 

26,606,222

 

 

 

15,029,188

 

 

 

17,976,842

 

Less: net (loss) income attributable to noncontrolling interest

 

 

71,653

 

 

 

(823

)

 

 

(2,801

)

 

 

(4,673

)

 

 

261,923

 

Net income - America First Multifamily Investors, L. P.

 

 

30,591,198

 

 

 

23,784,507

 

 

 

26,609,023

 

 

 

15,033,861

 

 

 

17,714,919

 

Redeemable Series A preferred unit distribution and accretion

 

 

(1,982,538

)

 

 

(583,407

)

 

 

-

 

 

 

-

 

 

 

-

 

Net income available to Partners

 

 

28,608,660

 

 

 

23,201,100

 

 

 

26,609,023

 

 

 

15,033,861

 

 

 

17,714,919

 

Less: General Partnersʼ interest in net income

 

 

2,140,074

 

 

 

2,992,106

 

 

 

2,474,274

 

 

 

1,056,316

 

 

 

1,416,296

 

Less: Unallocated gain (loss) of Consolidated Property VIEs

 

 

-

 

 

 

-

 

 

 

3,721,397

 

 

 

(635,560

)

 

 

(1,116,262

)

Unitholdersʼ interest in net income

 

$

26,468,586

 

 

$

20,208,994

 

 

$

20,413,352

 

 

$

14,613,105

 

 

$

17,414,885

 

Unitholdersʼ Interest in net income per

   unit (basic and diluted):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.44

 

 

$

0.34

 

 

$

0.34

 

 

$

0.25

 

 

$

0.32

 

Income from discontinued operations

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

0.08

 

Net income, basic and diluted, per unit

 

$

0.44

 

 

$

0.34

 

 

$

0.34

 

 

$

0.25

 

 

$

0.40

 

Distributions paid or accrued per BUC

 

$

0.50

 

 

$

0.50

 

 

$

0.50

 

 

$

0.50

 

 

$

0.50

 

Weighted average number of BUCs outstanding, basic

 

 

59,895,229

 

 

 

60,182,264

 

 

 

60,252,928

 

 

 

59,431,010

 

 

 

43,453,476

 

Weighted average number of BUCs outstanding, diluted

 

 

59,895,229

 

 

 

60,182,264

 

 

 

60,252,928

 

 

 

59,431,010

 

 

 

43,453,476

 

Mortgage revenue bonds, at fair value

 

$

77,971,208

 

 

$

90,016,872

 

 

$

47,366,656

 

 

$

70,601,045

 

 

$

68,946,370

 

Mortgage revenue bonds held in trust, at fair value

 

$

710,867,447

 

 

$

590,194,179

 

 

$

536,316,481

 

 

$

378,423,092

 

 

$

216,371,801

 

Public housing capital fund trusts, at fair value

 

$

49,641,588

 

 

$

57,158,068

 

 

$

60,707,290

 

 

$

61,263,123

 

 

$

62,056,379

 

Mortgage-backed securities, at fair value

 

$

-

 

 

$

-

 

 

$

14,775,309

 

 

$

14,841,558

 

 

$

37,845,661

 

Real estate assets, net

 

$

76,692,192

 

 

$

114,226,600

 

 

$

141,017,390

 

 

$

110,351,512

 

 

$

90,112,037

 

Total assets held for sale

 

$

-

 

 

$

-

 

 

$

-

 

 

$

13,204,015

 

 

$

13,748,427

 

Total assets

 

$

1,069,767,999

 

 

$

944,113,674

 

 

$

867,110,483

 

 

$

739,823,986

 

 

$

531,880,602

 

Total debt of continuing operations

 

$

643,868,521

 

 

$

606,579,212

 

 

$

538,241,290

 

 

$

417,651,603

 

 

$

312,008,890

 

Cash flows provided by operating activities

 

$

17,139,527

 

 

$

15,231,531

 

 

$

19,387,418

 

 

$

17,444,171

 

 

$

14,232,724

 

Cash flows used in investing activities

 

$

(21,505,164

)

 

$

(83,052,386

)

 

$

(138,703,473

)

 

$

(105,887,640

)

 

$

(158,421,463

)

Cash flows provided by financing activities

 

$

53,214,815

 

 

$

71,533,594

 

 

$

87,158,494

 

 

$

126,318,797

 

 

$

125,175,254

 

 

 

 

27


 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

In this Management’s Discussion and Analysis, all references to “we,” “us,” and the “Partnership” refer to America First Multifamily Investors, L.P. and its wholly-owned subsidiaries at December 31, 2017. The “Company” refers to the Partnership and the Consolidated VIEs.

We were formed for the primary purpose of acquiring a portfolio of MRBs that are issued by state and local housing authorities to provide construction and/or permanent financing for affordable multifamily and student housing, the Residential Properties, and commercial properties in their market areas.  The Company includes the assets, liabilities, and results of operations of the Partnership, its wholly-owned subsidiaries and two other consolidated entities for which we do not hold an ownership interest and which are treated as VIEs of which we have been determined to be the primary beneficiary, the Consolidated VIEs.  Bent Tree and Fairmont Oaks, the two Consolidated VIEs, are presented as discontinued operations for all periods presented. All significant transactions and accounts between us and the Consolidated VIEs have been eliminated in consolidation. See Note 2 to the Company’s consolidated financial statements for additional details.

Executive Summary

The Partnership was formed for the primary purpose of acquiring a portfolio of MRBs that are issued by state and local housing authorities to provide construction and/or permanent financing for affordable multifamily and student housing (collectively “Residential Properties”) and commercial properties in their market areas. We expect and believe the interest received on these bonds is excludable from gross income for federal income tax purposes. We may also invest in other types of securities that may or may not be secured by real estate to the extent allowed by the America First Multifamily Investors, L.P. First Amended and Restated Agreement of Limited Partnership. We may acquire interests in multifamily, student, and senior citizen apartment properties (“MF Properties”) to position ourselves for future investments in bonds issued to finance these properties and which we expect and believe will generate tax-exempt interest.

At December 31, 2017, we have four reportable segments: (1) Mortgage Revenue Bond Investments, (2) MF Properties, (3) Public Housing Capital Fund Trust, and (4) Other Investments. In the first quarter of 2016, the Partnership sold its remaining three mortgage-backed securities (“MBS Securities”). The sale of the Partnership’s MBS Securities eliminated the MBS Securities Investment reportable segment. In addition to the reportable segments, the Company also separately reports its consolidation and elimination information because it does not allocate certain items to the segments.  See Notes 2 and 26 to the Company’s consolidated financial statements for additional details.

Mortgage Revenue Bond Investments Segment  

As of December 31, 2017, we owned 87 MRBs with an aggregate outstanding principal amount of $719.8 million.  The majority of these bonds were issued by various state and local housing authorities in order to provide construction and/or permanent financing for 63 Residential Properties containing a total of 10,666 rental units located in 14 states in the United States.  Each MRB for the Residential Properties is secured by a mortgage or deed of trust.  One MRB is secured by a mortgage on the ground, facilities, and equipment of a commercial ancillary health care facility in Tennessee.

As of December 31, 2016, we owned 83 mortgage revenue bonds with an aggregate outstanding principal amount of $648.4 million.  The majority of these bonds were issued by various state and local housing authorities in order to provide construction and/or permanent financing for 58 Residential Properties containing a total of 9,968 rental units located in 15 states in the United States.  Each mortgage revenue bond for the Residential Properties is secured by a mortgage or deed of trust on the Residential Properties.  One MRB is secured by ground, facility, and equipment of a commercial ancillary health care facility in Tennessee.

28


 

The following table compares total revenues, other income, total interest expense and net income for the Mortgage Revenue Bond Investments segment for the periods indicated (in thousands):

 

 

 

For the Years Ended December 31,

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

Mortgage Revenue Bond

   Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

49,100

 

 

$

36,673

 

 

$

12,427

 

 

 

33.9

%

 

$

36,673

 

 

$

38,773

 

 

$

(2,100

)

 

 

-5.4

%

Total interest expense

 

$

18,705

 

 

$

11,905

 

 

$

6,800

 

 

 

57.1

%

 

$

11,905

 

 

$

10,787

 

 

$

1,118

 

 

 

10.4

%

Net income

 

$

15,439

 

 

$

11,756

 

 

$

3,683

 

 

 

31.3

%

 

$

11,756

 

 

$

17,924

 

 

$

(6,168

)

 

 

-34.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparison of the years ended December 31, 2017 and 2016

 

The net increase in total revenue between 2017 and 2016 is comprised of the following factors:

 

An increase of approximately $9.9 million in recurring investment interest income related MRB acquisitions during 2017 and 2016. We acquired MRBs totaling approximately $121.3 million at a weighted-average base interest rate of approximately 6.5% in 2017 and approximately $130.6 million at a weighted-average base interest rate of approximately 5.3% in 2016. Approximately $110.3 million of the 2016 acquisitions occurred in the fourth quarter.

 

A decrease of approximately $948,000 in recurring investment income from MRB redemptions in 2016 and 2017. We had redemptions and sales of MRBs and taxable MRBs totaling approximately $43.9 million at a weighted-average base interest rate of 6.5% in 2017 and approximately $15.0 million at a weighted-average base interest rate of approximately 8.7% in 2016.

 

An increase of approximately $1.1 million in contingent interest. In 2017, we realized contingent interest of approximately $219,000 from excess cash flow on the Lake Forest MRBs and approximately $2.9 million of cash proceeds from redemption of the Ashley Square MRB. In 2016, we realized contingent interest of approximately $642,000 from excess cash flow on the Ashley Square and Lake Forest MRBs and approximately $1.4 million on excess cash proceeds from the sale of the property underlying the Foundation for Affordable Housing property loan.  

 

Approximately $1.7 million of other interest income received on the Ashley Square property loans in connection with the sale of the underlying property in the fourth quarter of 2017. The Ashley Square property loans were in non-accrual status during 2016, so there was no interest income for these property loans in 2016.

 

Approximately $624,000 of other income related to early redemptions of the MRBs for Vantage at Harlingen and Avistar at Chase Hill during the fourth quarter of 2017. No such income was recognized in 2016.

The net increase in total interest expense between 2017 and 2016 is due to the following factors:

 

An increase of approximately $2.0 million due to an increase of approximately $78.6 million in average principal outstanding, mostly due to new Term A/B Trusts.

 

An increase of approximately $4.5 million due to an increase of approximately 83 basis points in the average interest rate.

 

An increase of approximately $287,000 in expense related to mark to market adjustments on derivative financial instruments.

The increase in net income is due to the increase in total revenues and increase in interest expense described above, in addition to the following factors:

 

 

Amortization of deferred financing costs increased approximately $463,000 due to costs associated with Term A/B Trusts, mainly those created in September 2016 and February 2017.

 

 

General and administrative expenses increased approximately $1.3 million due to increased salary, benefits and restricted unit award compensation expense, increased approximately $858,000 from additional administrative fees on new investments in 2016 and 2017, offset by a decrease of approximately $287,000 in board and professional expenses.

29


 

 

Comparison of the years ended December 31, 2016 and 2015

 

The net decrease in total revenue between 2016 and 2015 is comprised of the following factors:

 

A decrease of approximately $2.7 million in contingent interest. In 2016, we realized contingent interest of approximately $642,000 from excess cash flow on the Ashley Square and Lake Forest MRBs and approximately $1.4 million on excess cash proceeds from the sale of the property underlying the Foundation for Affordable Housing property loan. In 2015, we realized approximately $4.8 million of contingent interest from the sale of the Bent Tree and Fairmont Oaks MRBs.

 

A decrease of approximately $2.6 million in recurring investment income from MRB redemptions in 2015 and 2016. We had redemptions and sales of MRBs totaling approximately $15.0 million at a weighted-average base interest rate of approximately 8.7% in 2016 and approximately $48.9 million at a weighted-average interest rate of approximately 6.6% in 2015. The 2015 sales and redemptions include approximately $41.0 million of bonds for the Suites on Paseo that were exchanged for the deed to the property.

 

An increase of approximately $4.5 million in recurring investment interest income related MRB acquisitions during 2015 and 2016. We acquired MRBs totaling approximately $130.6 million at a weighted-average base interest rate of approximately 5.3% in 2016 and approximately $188.1 million at a weighted-average interest rate of approximately 6.2% in 2015. Approximately $110.3 million of the 2016 acquisitions occurred in the fourth quarter.

 

A decrease of approximately $1.5 million in interest income from the Fairmont Oaks property loan that was paid in full in the fourth quarter of 2015.

The net increase in total interest expense between 2016 and 2015 is due to the following factors:

 

An increase of approximately $2.9 million in expense due to higher outstanding debt balances during 2016.

 

A decrease of approximately $1.8 million in expense related to market to market adjustments on derivative financial instruments. We recognized a net decrease in expense on the mark to market adjustments of approximately $18,000 during 2016 and a net increase in expense of approximately $1.8 million in 2015.

The decrease in net income from 2015 to 2016 is due to the decrease in total revenues and increase in interest expense described above. In addition, general and administrative expenses increased approximately $1.6 million due to increased salary, benefits and restricted unit award compensation expense and increased approximately $663,000 due to administrative and advisor fees related to the MRBs.

See Item 7, “Results of Operations” and Notes 5 and 17 to the Company’s consolidated financial statements for additional details.

Public Housing Capital Fund Trust Segment  

The PHC Certificates within this segment consist of custodial receipts evidencing loans made to public housing authorities.  Principal and interest on these loans are payable by the respective public housing authorities out of annual appropriations to be made to the public housing authorities by HUD under its Capital Fund Program.

The following table compares total revenues and net income for the PHC Trusts segment for the periods indicated (in thousands):

 

 

 

For the Years Ended December 31,

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

PHC Trusts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

2,952

 

 

$

2,888

 

 

$

64

 

 

 

2.2

%

 

$

2,888

 

 

$

2,994

 

 

$

(106

)

 

 

-3.5

%

Total interest expense

 

$

1,350

 

 

$

1,350

 

 

$

-

 

 

 

0.0

%

 

$

1,350

 

 

$

1,222

 

 

$

128

 

 

 

10.5

%

Net income

 

$

840

 

 

$

1,538

 

 

$

(698

)

 

 

-45.4

%

 

$

1,538

 

 

$

1,758

 

 

$

(220

)

 

 

-12.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30


 

Comparison of the years ended December 31, 2017 and 2016

 

The total revenues were consistent between 2017 and 2016. Total interest expense was consistent between 2017 and 2016 due to offsetting factors. Interest expense decreased due to the mark to market adjustments on our interest rate swaps, net of cash payments, of approximately $102,000 in 2017, which was offset by increasing interest rates on the related variable rate TOB financings. During 2017, we re-designated the interest rate swaps from the Mortgage Revenue Bond Investments segment to this segment as they are now intended to mitigate interest rate risk for debt financings related to the PHC Certificates.

 

The decrease in net income is primarily due to an impairment charge of approximately $762,000 recognized in 2017. No such impairment was recognized in 2016.

 

Comparison of the years ended December 31, 2016 and 2015

 

The decrease in total revenue between 2016 and 2015 is due to principal paydowns on the PHC Certificates totaling approximately $2.0 million during 2016, which resulted in lower interest income.

 

The decrease in net income between 2016 and 2015 is due to lower revenues discussed above and an increase in the average annual interest rate on the variable TOB Trust secured by the PHC Certificates from 2.3% for the year ended December 31, 2015 to 2.6% for the year ended December 31, 2016.

 

Former MBS Securities Investment Segment

 

The following table compares total revenues and net income for the MBS Securities segment for the periods indicated (in thousands):

 

 

 

For the Years Ended December 31,

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

MBS Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

-

 

 

$

18

 

 

$

(18

)

 

N/A

 

$

18

 

 

$

226

 

 

$

(208

)

 

 

-92.0

%

Total interest expense

 

$

-

 

 

$

15

 

 

$

(15

)

 

N/A

 

$

15

 

 

$

158

 

 

$

(143

)

 

 

-90.5

%

Net income

 

$

-

 

 

$

52

 

 

$

(52

)

 

N/A

 

$

52

 

 

$

68

 

 

$

(16

)

 

 

-23.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparison of the years ended December 31, 2017 and 2016

 

There were no operations in the MBS Securities Investments segment during the year ended December 31, 2017.

 

Comparison of the years ended December 31, 2016 and 2015

 

The decreases in total revenues and net income are due to the sale of the remaining MBS Securities in January 2016.

MF Properties Segment  

At December 31, 2017, the Partnership owns the Jade Park and Suites on Paseo MF Properties directly. The Partnership also owns, through the Greens Hold Co, a 100% interest in The 50/50 MF Property. These MF Properties contain a total of 1,013 rental units.

At December 31, 2016, the Partnership owned the Jade Park and Suites on Paseo MF Properties directly. The Partnership also owned, through the Greens Hold Co, 100% ownership interests in four MF Properties and a 99% limited partner position in Northern View. These MF Properties contain a total of 2,004 rental units.

31


 

The following table compares total revenues, other income, total interest expense and net income for the MF Properties segment for the periods indicated (in thousands):

 

 

 

For the Years Ended December 31,

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

MF Properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

13,678

 

 

$

17,404

 

 

$

(3,726

)

 

 

-21.4

%

 

$

17,404

 

 

$

17,789

 

 

$

(385

)

 

 

-2.2

%

Gain on sale of

   real estate assets, net

 

$

17,753

 

 

$

14,072

 

 

$

3,681

 

 

 

26.2

%

 

$

14,072

 

 

$

4,599

 

 

$

9,473

 

 

 

206.0

%

Total interest expense

 

$

2,100

 

 

$

2,201

 

 

$

(101

)

 

 

-4.6

%

 

$

2,201

 

 

$

2,659

 

 

$

(458

)

 

 

-17.2

%

Net income

 

$

9,668

 

 

$

8,444

 

 

$

1,224

 

 

 

14.5

%

 

$

8,444

 

 

$

2,967

 

 

$

5,477

 

 

 

184.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparison of the years ended December 31, 2017 and 2016

 

The net decrease in total revenue between 2017 and 2016 is comprised of the following factors:

 

A decrease of approximately $4.4 million in revenue due to sales of the Northern View in March 2017, sales of the Residences of Weatherford, Residences of DeCordova and Eagle Village in November 2017, and sales of the Arboretum and Woodland Park in 2016;

 

An increase of approximately $1.0 million in revenue due to the acquisition Jade Park in September 2016;

 

A decrease of approximately $458,000 in revenue from declining occupancy at The 50/50 MF Property. The decline was due to low occupancy during the 2016-2017 academic year. Physical occupancy is approximately 97% at December 31, 2017 as compared to 72% at December 31, 2016, so the Partnership expects increasing revenues at this property going forward; and

 

An increase of approximately $165,000 in other income for due diligence services provided in connection with the sales of MF properties during 2017. There were no such income items recognized in 2016.

 

The gains on sale of MF Properties in 2017 consists primarily of gains of approximately $7.2 million, $2.6 million, $5.2 million and $2.8 million from the sales of Northern View, Residences of Weatherford, Residences of DeCordova and Eagle Village, respectively. The gains on sale of MF Properties in 2016 consists of gains of approximately $12.4 million and $1.7 million from the sales of the Arboretum and Woodland Park, respectively.

 

Total interest expense between 2017 and 2016 decreased slightly due to settlement of mortgages payable at Residences of Weatherford, Residences of DeCordova, and Eagle Village upon sale of the properties in November 2017.

 

The net increase in net income is due to the changes in revenues, other income and interest expense described above. In addition, the following changes further contributed to the change in net income:

 

Increase of approximately $652,000 in real estate operating expenses and of approximately $330,000 in depreciation and amortization expenses related to the acquisition of Jade Park in September of 2016;

 

Decreases of approximately $2.3 million in real estate operating expenses and approximately $1.5 million in depreciation and amortization expenses related to the sales of Northern View in March 2017, sales of the Residences of Weatherford, Residences of DeCordova and Eagle Village in November 2017, and sales of the Arboretum and Woodland Park in 2016;

 

An increase of approximately $628,000 in real estate operating expenses at The 50/50 and Suites on Paseo MF Properties. The increase at The 50/50 is related to one-time expenses incurred in 2017 and not expected to recur in future periods. The increase at Suites on Paseo relates primarily to a one-time refund of real estate taxes in 2016 that did not recur in 2017; and

 

An increase of approximately $1.1 million in income tax expense related to MF property sales and operations in the Greens Hold Co.

32


 

 

Comparison of the years ended December 31, 2016 and 2015

 

The net decrease in total revenue between 2016 and 2015 is comprised of the following factors:

 

A decrease of approximately $4.0 million in revenue due to sales of the Arboretum and Woodland Park in 2016 and Glynn Place and the Colonial in 2015.

 

An increase of approximately $3.4 million in revenue due to the acquisition of the Suites on Paseo in 2015 and Jade Park in 2016; and

 

An increase of approximately $156,000 in revenue from improving operations at existing MF Properties.

 

The gain on sale of MF Properties in 2016 consists of gains of approximately $12.4 million and $1.7 million from the sales of the Arboretum and Woodland Park, respectively. The gain on sale of MF Properties in 2015 consists of gains of approximately $3.4 million and $1.2 million from the sales of the Colonial and Glynn Place in 2015, respectively.

 

The net increase in total interest expense between 2016 and 2015 is due primarily to increases in total outstanding debt during the year, which caused an increase in expense of approximately $461,000.

 

The net increase in net income is due to the changes in revenues, other income and interest expense described above. In addition, the following changes to general real estate operating expenses contributed to the change in net income:

 

An increase of approximately $1.7 million in expenses related to the acquisitions of the Suite on Paseo in September of 2015 and Jade Park in September of 2016;

 

A decrease of approximately $2.0 million in expenses related to the sales of the Arboretum and Woodland Park in 2016 and sales of the Colonial and Glynn Place in 2015; and

 

A decrease of approximately $470,000 in expenses related to tax increment financing proceeds received in 2016 that are accounted for as a reduction in real estate tax expense.

 

Other Investments Segment

The Other Investments segment consists of the operations of ATAX Vantage Holdings, LLC, which holds noncontrolling equity investments in certain multifamily projects and has issued property loans due from other multifamily projects.

The following table compares total revenues and net income for the Other Investments segment for the periods indicated (in thousands):

 

 

 

For the Years Ended December 31,

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

Other Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

4,652

 

 

$

1,995

 

 

$

2,657

 

 

 

133.2

%

 

$

1,995

 

 

$

171

 

 

$

1,824

 

 

 

1066.7

%

Net income

 

$

4,645

 

 

$

1,995

 

 

$

2,650

 

 

 

132.8

%

 

$

1,995

 

 

$

171

 

 

$

1,824

 

 

 

1066.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33


 

Comparison of the years ended December 31, 2017 and 2016

 

The increases in total revenue and net income between 2017 and 2016 is comprised of the following factors:

 

An increase of approximately $2.4 million in recurring investment interest income related to additional investments in unconsolidated entities during 2017 and 2016. We made investments in unconsolidated entities of totaling approximately $17.2 million and $18.8 million in 2017 and 2016, respectively; and

 

 

An increase of approximately $273,000 in recurring investment interest income related to additional advances on the Vantage at Brooks, LLC and Vantage at New Braunfels, LLC property loans during 2017 and 2016.

 

Comparison of the years ended December 31, 2016 and 2015

 

The first investments in this segment were made in the fourth quarter of 2015. The increase in total revenues and net income from 2015 to 2016 are due to additional investments in this segment, which total approximately $34.5 million at December 31, 2016.

 

Discontinued Operations  

The sales of the Consolidated VIEs were closed in the fourth quarter of 2015 with the gains and results of operations of the Consolidated VIEs reported as part of the discontinued operations in net income for all periods presented. The Company reported income from discontinued operations of approximately $3.7 million, inclusive of gains of sale of Consolidated VIEs of approximately $3.2 million, for the year ended December 31, 2015. No net income or loss from these properties operations or sale accrued to the Unitholders or the General Partner during 2015. There was no income from discontinued operations reported for the years ended December 31, 2017 and 2016.

Debt Financing

The following table summarizes the Partnership’s Debt Financing, net of deferred financing costs, at December 31, 2017 and 2016:

 

 

 

Outstanding Debt

Financings on

December 31, 2017, net

 

 

Restricted

Cash

 

 

Year

Acquired

 

Stated Maturities

 

Reset

Frequency

 

SIFMA

Based Rates

 

 

Facility Fees

 

 

Period End

Rates

 

TOB & Term A/B

   Trusts Securitization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed - Term TOB

 

$

46,787,036

 

 

$

-

 

 

2014

 

October 2019

 

N/A

 

N/A

 

 

N/A

 

 

4.01% - 4.39%

 

Fixed - Term A/B

 

 

279,533,565

 

 

 

-

 

 

2016 - 2017

 

June 2018 - November 2027

 

N/A

 

N/A

 

 

N/A

 

 

3.64% - 4.52%

 

Variable - TOB

 

 

38,130,000

 

 

 

850,327

 

 

2012

 

May 2018

 

Weekly

 

2.24 - 2.29%

 

 

1.67%

 

 

3.91 - 3.96%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TEBS Financings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable - TEBS I

 

 

55,468,000

 

 

 

372,222

 

 

2010

 

September 2020

 

Weekly

 

1.79%

 

 

1.85%

 

 

3.64%

 

Variable - TEBS II (1)

 

 

81,003,688

 

 

 

176,685

 

 

2014

 

July 2019

 

Weekly

 

1.77%

 

 

1.39%

 

 

3.16%

 

Variable - TEBS III (1)

 

 

57,406,058

 

 

 

57,364

 

 

2015

 

July 2020

 

Weekly

 

1.77%

 

 

1.16%

 

 

2.93%

 

Total Debt Financings

 

$

558,328,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Facility fees have a variable component.

 

 

 

Outstanding Debt

Financings on

December 31, 2016, net

 

 

Restricted

Cash

 

 

Year

Acquired

 

Stated Maturities

 

Reset

Frequency

 

SIFMA

Based Rates

 

 

Facility Fees

 

 

Period End

Rates

 

TOB & Term A/B

   Trusts Securitization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed - Term TOB

 

$

46,860,699

 

 

$

-

 

 

2014

 

July 2017 - July 2019

 

N/A

 

N/A

 

 

N/A

 

 

4.01% - 4.39%

 

Fixed - Term A/B

 

 

171,778,950

 

 

 

1,373,695

 

 

2016

 

March 2017 - December 2026

 

N/A

 

N/A

 

 

N/A

 

 

3.64% - 4.56%

 

Variable - TOB

 

 

42,455,000

 

 

 

-

 

 

2012

 

Dec 2016

 

Weekly

 

1.29 - 1.39%

 

 

1.62%

 

 

2.91 - 3.01%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TEBS Financings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable - TEBS I

 

 

60,430,991

 

 

 

396,412

 

 

2010

 

September 2017

 

Weekly

 

0.77%

 

 

1.85%

 

 

2.62%

 

Variable - TEBS II (1)

 

 

91,768,081

 

 

 

170,988

 

 

2014

 

July 2019

 

Weekly

 

0.75%

 

 

1.62%

 

 

2.37%

 

Variable - TEBS III (1)

 

 

82,089,312

 

 

 

3,495,592

 

 

2015

 

July 2020

 

Weekly

 

0.75%

 

 

1.39%

 

 

2.14%

 

Total Debt Financings

 

$

495,383,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34


 

(1)

Facility fees have a variable component.

The variable TOB Financings at December 31, 2017 and 2016 are secured by three PHC Trust Certificates.

The following table summarizes the individual Term TOB and Term A/B Trust securitizations at December 31, 2017:

 

 

 

Outstanding Financing at

December 31, 2017, net

 

 

Year

Acquired

 

Stated Maturity

 

Fixed Interest

Rate

 

Fixed - Term TOB Securitization

 

 

 

 

 

 

 

 

 

 

 

 

Live 929

 

$

37,777,036

 

 

2014

 

October 2019

 

 

4.39

%

Pro Nova 1

 

 

9,010,000

 

 

2014

 

October 2019

 

 

4.01

%

Total Fixed Term TOB

   Financing\ Weighted

   Average Period End Rate

 

$

46,787,036

 

 

 

 

 

 

 

4.31

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Term A/B Trusts Securitization

 

 

 

 

 

 

 

 

 

 

 

 

Willow Run

 

$

10,029,289

 

 

2016

 

September 2026

 

 

3.64

%

Columbia Gardens

 

 

10,172,857

 

 

2016

 

September 2026

 

 

3.64

%

Concord at Little York

 

 

11,315,538

 

 

2016

 

September 2026

 

 

3.64

%

Concord at Williamscrest

 

 

17,526,516

 

 

2016

 

September 2026

 

 

3.64

%

Concord at Gulfgate

 

 

16,154,584

 

 

2016

 

September 2026

 

 

3.64

%

Companion at Thornhill Apartment

 

 

9,608,733

 

 

2016

 

September 2026

 

 

3.64

%

Seasons at Simi Valley Apartments

 

 

3,675,323

 

 

2016

 

September 2026

 

 

3.64

%

Sycamore Walk

 

 

3,054,841

 

 

2016

 

September 2026

 

 

3.64

%

Decatur-Angle Apartments

 

 

21,276,657

 

 

2016

 

September 2026

 

 

3.64

%

Heights at 515

 

 

5,380,814

 

 

2016

 

September 2026

 

 

3.64

%

Crossing at 1415

 

 

6,344,418

 

 

2016

 

September 2026

 

 

3.64

%

Bruton Apartments

 

 

15,199,181

 

 

2016

 

September 2026

 

 

3.64

%

15 West Apartments

 

 

8,326,731

 

 

2016

 

December 2026

 

 

3.64

%

San Vicente - Series A

 

 

3,112,976

 

 

2017

 

February 2022

 

 

3.89

%

San Vicente - Series B

 

 

1,545,930

 

 

2017

 

June 2018

 

 

3.76

%

Las Palmas - Series A

 

 

1,507,389

 

 

2017

 

February 2022

 

 

3.89

%

Las Palmas - Series B

 

 

1,494,702

 

 

2017

 

June 2018

 

 

3.76

%

The Village at Madera - Series A

 

 

2,746,364

 

 

2017

 

February 2022

 

 

3.89

%

The Village at Madera - Series B

 

 

1,455,570

 

 

2017

 

July 2018

 

 

3.76

%

Harmony Court Bakersfield - Series A

 

 

3,322,157

 

 

2017

 

February 2022

 

 

3.89

%

Summerhill - Series A

 

 

5,730,185

 

 

2017

 

February 2022

 

 

3.89

%

Summerhill - Series B

 

 

2,855,809

 

 

2017

 

July 2018

 

 

3.76

%

Courtyard - Series A

 

 

9,131,896

 

 

2017

 

February 2022

 

 

3.89

%

Courtyard - Series B

 

 

5,272,090

 

 

2017

 

July 2018

 

 

3.76

%

Seasons Lakewood - Series A

 

 

6,555,646

 

 

2017

 

February 2022

 

 

3.89

%

Seasons Lakewood - Series B

 

 

4,453,076

 

 

2017

 

August 2018

 

 

3.76

%

Seasons San Juan Capistrano - Series A

 

 

11,047,869

 

 

2017

 

February 2022

 

 

3.89

%

Seasons San Juan Capistrano - Series B

 

 

5,564,539

 

 

2017

 

August 2018

 

 

3.76

%

Avistar at Wood Hollow - Series A

 

 

26,838,000

 

 

2017

 

February 2027

 

 

4.46

%

Avistar at Wilcrest - Series A

 

 

3,168,088

 

 

2017

 

February 2027

 

 

4.46

%

Avistar at Copperfield - Series A

 

 

8,414,834

 

 

2017

 

February 2027

 

 

4.46

%

Oaks at Georgetown - Series A

 

 

11,087,478

 

 

2017

 

March 2022

 

 

3.89

%

Oaks at Georgetown - Series B

 

 

4,686,120

 

 

2017

 

August 2018

 

 

3.76

%

Harmony Terrace - Series A

 

 

6,199,955

 

 

2017

 

March 2022

 

 

3.89

%

Harmony Terrace - Series B

 

 

6,284,318

 

 

2017

 

August 2018

 

 

3.76

%

Village at River's Edge

 

 

8,993,092

 

 

2017

 

November 2027

 

 

4.52

%

Total Fixed A/B Trust

   Financing\ Weighted

   Average Period End Rate

 

$

279,533,565

 

 

 

 

 

 

 

3.85

%

35


 

The following table summarizes the individual fixed rate Term TOB and Term A/B Trust securitizations at December 31, 2016:

 

 

 

Outstanding Financing at

December 31, 2016, net

 

 

Year

Acquired

 

Stated Maturity

 

Fixed Interest

Rate

 

Fixed - Term TOB Securitization

 

 

 

 

 

 

 

 

 

 

 

 

Live 929

 

$

37,851,960

 

 

2014

 

July 2019

 

 

4.39

%

Pro Nova 1

 

 

9,008,739

 

 

2014

 

July 2017

 

 

4.01

%

Total Fixed Term TOB

   Financing\ Weighted

   Average Period End Rate

 

$

46,860,699

 

 

 

 

 

 

 

4.31

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Term A/B Trusts Securitization

 

 

 

 

 

 

 

 

 

 

 

 

Willow Run

 

$

11,564,852

 

 

2016

 

September 2026

 

 

3.64

%

Columbia Gardens

 

 

11,565,068

 

 

2016

 

September 2026

 

 

3.64

%

Concord at Little York

 

 

11,301,031

 

 

2016

 

September 2026

 

 

3.64

%

Concord at Williamscrest

 

 

17,504,186

 

 

2016

 

September 2026

 

 

3.64

%

Concord at Gulfgate

 

 

16,133,987

 

 

2016

 

September 2026

 

 

3.64

%

Companion at Thornhill Apartment

 

 

9,666,656

 

 

2016

 

September 2026

 

 

3.64

%

Seasons at Simi Valley Apartments

 

 

3,678,770

 

 

2016

 

September 2026

 

 

3.64

%

Sycamore Walk

 

 

3,050,786

 

 

2016

 

September 2026

 

 

3.64

%

Decatur-Angle Apartments

 

 

21,387,126

 

 

2016

 

September 2026

 

 

3.64

%

Heights at 515

 

 

5,409,361

 

 

2016

 

September 2026

 

 

3.64

%

Crossing at 1415

 

 

6,378,482

 

 

2016

 

September 2026

 

 

3.64

%

Bruton Apartments

 

 

15,258,925

 

 

2016

 

September 2026

 

 

3.64

%

15 West Apartments

 

 

8,366,804

 

 

2016

 

December 2026

 

 

3.64

%

Oaks at Georgetown A

 

 

11,709,479

 

 

2016

 

March 2017

 

 

4.56

%

Harmony Terrace A

 

 

6,549,479

 

 

2016

 

March 2017

 

 

4.56

%

Oaks at Georgetown B

 

 

5,229,479

 

 

2016

 

March 2017

 

 

4.56

%

Harmony Terrace B

 

 

7,024,479

 

 

2016

 

March 2017

 

 

4.56

%

Total Fixed A/B Trust

   Financing\ Weighted

   Average Period End Rate

 

$

171,778,950

 

 

 

 

 

 

 

3.80

%

The Partnership is required to meet certain covenants under the Master Trust Agreement. At December 31, 2017, the most restrictive covenant requiring that cash available to distribute plus interest expense for the trailing twelve months must be at least twice the trailing twelve-month interest expense. On December 31, 2017, the Partnership was in compliance with all covenants. If the Partnership were to be out of compliance with any of these covenants, it would trigger a termination event of the financing facilities.

See Item 7a, “Quantitative and Qualitative Disclosures about Market Risk” and Note 17 to the Company’s consolidated financial statements for additional details.

Discussion of the Residential Properties Securing our Mortgage Revenue Bond Holdings and MF Properties as of December 31, 2017, 2016 and 2015

The following tables outline information regarding the Residential Properties on which we hold MRBs as investments. The tables also contain information about the MF Properties, but do not include information on the two Consolidated VIEs that have been sold and reported as discontinued operations for all periods presented. The narrative discussion that follows provides a brief operating analysis of each category for the years ended December 31, 2017, 2016 and 2015.

36


 

Non-Consolidated Properties - Stabilized

The owners of the following properties either do not meet the definition of a VIE and/or we have evaluated and determined we are not the primary beneficiary of the VIE.  As a result, we do not report the assets, liabilities and results of operations of these properties on a consolidated basis.  For the year ended December 31, 2017, these Residential Properties have met the stabilization criteria (see footnote 3 below the table). Debt service on our MRBs for the non-consolidated stabilized properties was current on December 31, 2017. The amounts presented below were obtained from records provided by the property owners and their related property management service providers.

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

Economic Occupancy (2)

 

 

 

 

 

of Units at

December 31,

 

 

Physical Occupancy (1) at December 31,

 

 

For the Years Ended December 31,

 

Property Name

 

State

 

2017

 

 

2017

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

2015

 

Non-Consolidated Properties-Stabilized (3)

 

 

 

 

 

Glenview Apartments

 

CA

 

 

88

 

 

 

97

%

 

 

98

%

 

 

100

%

 

 

97

%

 

 

99

%

 

 

99

%

Harden Ranch

 

CA

 

 

100

 

 

 

100

%

 

 

98

%

 

 

96

%

 

 

98

%

 

 

99

%

 

 

98

%

Montclair Apartments

 

CA

 

 

80

 

 

 

99

%

 

 

99

%

 

 

96

%

 

 

99

%

 

 

99

%

 

 

100

%

Santa Fe Apartments

 

CA

 

 

89

 

 

 

98

%

 

 

100

%

 

 

99

%

 

 

102

%

 

 

104

%

 

 

96

%

Seasons at Simi Valley

 

CA

 

 

69

 

 

 

99

%

 

 

100

%

 

 

100

%

 

 

125

%

 

 

135

%

 

 

137

%

Sycamore Walk (5)

 

CA

 

 

112

 

 

 

100

%

 

 

100

%

 

 

98

%

 

 

98

%

 

 

101

%

 

n/a

 

Tyler Park Townhomes

 

CA

 

 

88

 

 

 

97

%

 

 

99

%

 

 

98

%

 

 

97

%

 

 

99

%

 

 

99

%

Westside Village Market

 

CA

 

 

81

 

 

 

100

%

 

 

99

%

 

 

100

%

 

 

100

%

 

 

101

%

 

 

101

%

Lake Forest Apartments

 

FL

 

 

240

 

 

 

90

%

 

 

95

%

 

 

97

%

 

 

86

%

 

 

88

%

 

 

92

%

Ashley Square Apartments (7)

 

IA

 

n/a

 

 

n/a

 

 

 

92

%

 

 

95

%

 

n/a

 

 

 

91

%

 

 

93

%

Brookstone Apartments

 

IL

 

 

168

 

 

 

99

%

 

 

98

%

 

 

99

%

 

 

98

%

 

 

94

%

 

 

94

%

Copper Gate

 

IN

 

 

128

 

 

 

96

%

 

 

98

%

 

 

96

%

 

 

95

%

 

 

96

%

 

 

95

%

Renaissance Gateway

 

LA

 

 

208

 

 

 

96

%

 

 

97

%

 

 

96

%

 

 

96

%

 

 

103

%

 

 

94

%

Live 929 Apartments

 

MD

 

 

575

 

 

 

90

%

 

 

85

%

 

 

92

%

 

 

85

%

 

 

86

%

 

 

89

%

Woodlynn Village

 

MN

 

 

59

 

 

 

98

%

 

 

98

%

 

 

100

%

 

 

98

%

 

 

99

%

 

 

97

%

Greens of Pine Glen Apartments

 

NC

 

 

168

 

 

 

97

%

 

 

91

%

 

 

96

%

 

 

90

%

 

 

88

%

 

 

90

%

Silver Moon

 

NM

 

 

151

 

 

 

87

%

 

 

91

%

 

 

95

%

 

 

86

%

 

 

84

%

 

 

73

%

Ohio Properties (4)

 

OH

 

 

362

 

 

 

99

%

 

 

93

%

 

 

96

%

 

 

94

%

 

 

93

%

 

 

95

%

Bridle Ridge Apartments

 

SC

 

 

152

 

 

 

99

%

 

 

99

%

 

 

99

%

 

 

96

%

 

 

96

%

 

 

98

%

Columbia Gardens (5)

 

SC

 

 

188

 

 

 

98

%

 

 

73

%

 

 

86

%

 

 

96

%

 

 

75

%

 

n/a

 

Companion at Thornhill Apartments

 

SC

 

 

178

 

 

 

99

%

 

 

95

%

 

n/a

 

 

 

87

%

 

 

83

%

 

n/a

 

Cross Creek Apartments

 

SC

 

 

144

 

 

 

96

%

 

 

97

%

 

 

94

%

 

 

93

%

 

 

95

%

 

 

92

%

Palms at Premier Park

 

SC

 

 

240

 

 

 

94

%

 

 

94

%

 

 

93

%

 

 

87

%

 

 

82

%

 

 

94

%

Village at River's Edge (6)

 

SC

 

 

124

 

 

 

100

%

 

n/a

 

 

n/a

 

 

 

100

%

 

n/a

 

 

n/a

 

Willow Run (5)

 

SC

 

 

200

 

 

 

98

%

 

 

74

%

 

 

92

%

 

 

97

%

 

 

74

%

 

n/a

 

Arbors of Hickory Ridge

 

TN

 

 

348

 

 

 

94

%

 

 

86

%

 

 

87

%

 

 

81

%

 

 

81

%

 

 

85

%

Avistar at Chase Hill (7)

 

TX

 

n/a

 

 

n/a

 

 

 

85

%

 

 

89

%

 

n/a

 

 

 

76

%

 

 

83

%

Avistar at the Crest

 

TX

 

 

200

 

 

 

91

%

 

 

95

%

 

 

96

%

 

 

78

%

 

 

81

%

 

 

87

%

Avistar at the Oaks

 

TX

 

 

156

 

 

 

93

%

 

 

94

%

 

 

91

%

 

 

86

%

 

 

86

%

 

 

83

%

Avistar in 09

 

TX

 

 

133

 

 

 

93

%

 

 

92

%

 

 

95

%

 

 

86

%

 

 

85

%

 

 

87

%

Avistar on the Boulevard

 

TX

 

 

344

 

 

 

90

%

 

 

89

%

 

 

92

%

 

 

79

%

 

 

81

%

 

 

82

%

Avistar on the Hills

 

TX

 

 

129

 

 

 

95

%

 

 

95

%

 

 

95

%

 

 

87

%

 

 

89

%

 

 

89

%

Bella Vista Apartments

 

TX

 

 

144

 

 

 

92

%

 

 

92

%

 

 

96

%

 

 

91

%

 

 

94

%

 

 

93

%

Bruton Apartments

 

TX

 

 

264

 

 

 

85

%

 

 

97

%

 

n/a

 

 

 

86

%

 

 

42

%

 

n/a

 

Concord at Gulfgate

 

TX

 

 

288

 

 

 

93

%

 

 

98

%

 

 

75

%

 

 

88

%

 

 

86

%

 

 

74

%

Concord at Little York

 

TX

 

 

276

 

 

 

97

%

 

 

98

%

 

 

67

%

 

 

89

%

 

 

81

%

 

 

67

%

Concord at Williamcrest

 

TX

 

 

288

 

 

 

97

%

 

 

95

%

 

 

73

%

 

 

88

%

 

 

84

%

 

 

71

%

Crossing at 1415 (5)

 

TX

 

 

112

 

 

 

93

%

 

 

43

%

 

 

73

%

 

 

69

%

 

 

35

%

 

 

45

%

Decatur Angle

 

TX

 

 

302

 

 

 

94

%

 

 

95

%

 

n/a

 

 

 

86

%

 

 

69

%

 

n/a

 

Heights at 515 (5)

 

TX

 

 

96

 

 

 

93

%

 

 

77

%

 

 

82

%

 

 

79

%

 

 

57

%

 

 

75

%

Heritage Square Apartments

 

TX

 

 

204

 

 

 

91

%

 

 

95

%

 

 

91

%

 

 

80

%

 

 

83

%

 

 

58

%

Runnymede Apartments

 

TX

 

 

252

 

 

 

100

%

 

 

98

%

 

 

98

%

 

 

96

%

 

 

97

%

 

 

95

%

South Park Ranch Apartments

 

TX

 

 

192

 

 

 

99

%

 

 

100

%

 

 

100

%

 

 

96

%

 

 

97

%

 

 

97

%

Vantage at Harlingen (7)

 

TX

 

n/a

 

 

n/a

 

 

 

94

%

 

 

82

%

 

n/a

 

 

 

68

%

 

 

55

%

Vantage at Judson

 

TX

 

 

288

 

 

 

92

%

 

 

91

%

 

 

89

%

 

 

87

%

 

 

83

%

 

 

83

%

15 West Apartments (5)

 

WA

 

 

120

 

 

 

99

%

 

 

99

%

 

n/a

 

 

 

96

%

 

 

72

%

 

n/a

 

 

 

 

 

 

8,128

 

 

 

95

%

 

 

92

%

 

 

91

%

 

 

89

%

 

 

84

%

 

 

85

%

 

(1)

Physical occupancy is defined as the total number of units occupied divided by total units at the date of measurement.

(2)

Economic occupancy is defined as the net rental income received divided by the maximum amount of rental income to be derived from each property. This statistic is reflective of rental concessions, delinquent rents and non-revenue units such as model units and employee units. Physical occupancy is a point in time

37


 

measurement while economic occupancy is a measurement over the period presented. Therefore, economic occupancy for a period may exceed the actual occupancy at any point in time.

(3)

A property is considered stabilized once it reaches 90% occupancy for 90 days and an achievement of 1.15 times debt service coverage ratio on amortizing debt service.

(4)

We hold approximately $17.6 million of MRBs secured by the Ohio Properties. The Ohio Properties are: Crescent Village, located in Cincinnati, Ohio, Willow Bend, located in Columbus (Hilliard), Ohio and Postwoods, located in Reynoldsburg, Ohio.

(5)

Newly stabilized properties. Previous period results are not available.

(6)

The property relates to a forward bond purchase commitment that was executed in the fourth quarter of 2017. The property was considered stabilized when the MRB was acquired.

(7)

The MRB associated with the property was redeemed as of December 31, 2017, so the number of units and occupancy are not applicable as of and for the year ended December 31, 2017.

Overall physical occupancy increased from 2016 to 2017 primarily due to the stabilization of the Columbia Gardens, Willow Run, Heights at 515 and Crossing at 1415 properties during 2017. Overall physical occupancy for the stabilized Residential Properties increased from 2015 to 2016 primarily due to the stabilization of the Concord at Gulfgate, Concord at Little York, Concord at Williamcrest, Bruton Apartments and Decatur Angle properties during 2016. Physical occupancy also increased due to the addition of the Companion at Thornhill property during 2016.

Overall economic occupancy increased from 2016 to 2017 primarily due to the stabilization of the Columbia Gardens, Willow Run, Heights at 515 and Crossing at 1415 properties during 2017 and continued ramp up of occupancy at Bruton Apartments and Decatur Angle. Overall economic occupancy decreased slightly from 2015 to 2016. The decrease is due primarily to the recent stabilization of Bruton Apartments and Decatur Angle during 2016, which had no comparable prior year information.

Non-Consolidated Properties - Not Stabilized

The owners of the following properties either do not meet the definition of a VIE or we have evaluated and determined we are not the primary beneficiary of the VIE.  As a result, we do not report the assets, liabilities and results of operations of these properties on a consolidated basis.  For the year ended December 31, 2017, these Residential Properties have not met the stabilization criteria (see footnote 3 below the table). On December 31, 2017, debt service on our MRBs for the non-consolidated properties that are not stabilized was current. The amounts presented below were obtained from records provided by the property owners and their related property management service providers.

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

Economic Occupancy (2)

 

 

 

 

 

of Units at

December 31,

 

 

Physical Occupancy (1) at December 31,

 

 

For the Years Ended December 31,

 

Property Name

 

State

 

2017

 

 

2017

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

2015

 

Non-Consolidated Properties-Non Stabilized (3)

 

 

 

 

 

Courtyard Apartments  (4)

 

CA

 

 

108

 

 

 

100

%

 

 

100

%

 

n/a

 

 

 

100

%

 

 

101

%

 

n/a

 

Harmony Court Bakersfield  (4)

 

CA

 

 

96

 

 

 

99

%

 

 

95

%

 

n/a

 

 

 

94

%

 

 

96

%

 

n/a

 

Harmony Terrace (4)

 

CA

 

 

136

 

 

 

99

%

 

n/a

 

 

n/a

 

 

 

131

%

 

n/a

 

 

n/a

 

Las Palmas  (4)

 

CA

 

 

81

 

 

 

100

%

 

 

100

%

 

n/a

 

 

 

96

%

 

 

92

%

 

n/a

 

Montecito at Williams Ranch (5)

 

CA

 

 

132

 

 

 

98

%

 

n/a

 

 

n/a

 

 

 

93

%

 

n/a

 

 

n/a

 

San Vicente (4)

 

CA

 

 

50

 

 

 

94

%

 

 

98

%

 

n/a

 

 

 

97

%

 

 

97

%

 

n/a

 

Seasons Lakewood (4)

 

CA

 

 

85

 

 

 

99

%

 

n/a

 

 

n/a

 

 

 

107

%

 

n/a

 

 

n/a

 

Seasons San Juan Capistrano (4)

 

CA

 

 

112

 

 

 

96

%

 

n/a

 

 

n/a

 

 

 

98

%

 

n/a

 

 

n/a

 

Summerhill (4)

 

CA

 

 

128

 

 

 

96

%

 

 

97

%

 

n/a

 

 

 

97

%

 

 

96

%

 

n/a

 

The Village at Madera (4)

 

CA

 

 

75

 

 

 

95

%

 

 

99

%

 

n/a

 

 

 

96

%

 

 

99

%

 

n/a

 

Vineyard Gardens (5)

 

CA

 

 

62

 

 

 

100

%

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

Rosewood Townhomes (5)

 

SC

 

 

100

 

 

 

93

%

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

South Pointe Apartments (5)

 

SC

 

 

256

 

 

 

98

%

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

Avistar at Copperfield (5)

 

TX

 

 

192

 

 

 

81

%

 

n/a

 

 

n/a

 

 

 

64

%

 

n/a

 

 

n/a

 

Avistar at the Parkway

 

TX

 

 

236

 

 

 

92

%

 

 

89

%

 

 

47

%

 

 

75

%

 

 

59

%

 

 

53

%

Avistar at Wilcrest (5)

 

TX

 

 

88

 

 

 

74

%

 

n/a

 

 

n/a

 

 

 

57

%

 

n/a

 

 

n/a

 

Avistar at Wood Hollow (5)

 

TX

 

 

409

 

 

 

70

%

 

n/a

 

 

n/a

 

 

 

70

%

 

n/a

 

 

n/a

 

Oaks at Georgetown (4)

 

TX

 

 

192

 

 

 

93

%

 

n/a

 

 

n/a

 

 

 

83

%

 

n/a

 

 

n/a

 

 

 

 

 

 

2,538

 

 

 

90

%

 

 

95

%

 

 

47

%

 

 

86

%

 

 

68

%

 

 

53

%

 

(1)

Physical occupancy is defined as the total number of units occupied divided by total units at the date of measurement.

(2)

Economic occupancy is defined as the net rental income received divided by the maximum amount of rental income to be derived from each property. This statistic is reflective of rental concessions, delinquent rents and non-revenue units such as model units and employee units. Physical occupancy is a point in time measurement while economic occupancy is a measurement over the period presented. Therefore, economic occupancy for a period may exceed the actual occupancy at any point in time.

38


 

(3) During 2017, these properties were under construction or renovation.  As such, these properties are not considered stabilized as they have not met the criteria for stabilization. Stabilization is generally defined as 90% occupancy for 90 days and an achievement of 1.15 times debt service coverage ratio on amortizing debt service.

(4) Previous period occupancy numbers are not available as these were new investments in 2016. Properties indicating n/a in 2016 did not have financial information available for 2016.

(5) Previous period occupancy numbers are not available as these were new investments in 2017.

Physical occupancy decreased from 2016 to 2017 Primarily due to the addition of the Avistar at Copperfield, Avistar at Wilcrest and Avistar at Wood Hollow during 2017. These properties are currently undergoing major rehabilitations and will likely experience an increase in occupancy during 2018 as rehabilitations are completed. Economic occupancy increased from 2016 to 2017 due to new MRBs related to rehabilitation projects in California in 2017 and in December 2016. These properties had higher than normal occupancy for projects of this type due to a strong local market for multifamily housing.

Physical and economic occupancy increased from 2015 to 2016 primarily due to the addition of non-stabilized Residential Properties with high occupancy in 2016. These new Residential Properties may show a decline in physical and economic occupancy in the near term as the properties go through substantial rehabilitations.

MF Properties

At December 31, 2017, we owned three MF Properties. We report the assets, liabilities, and results of operations of these properties on a consolidated basis.  For the year ended December 31, 2017, all MF Properties have met the stabilization criteria (see footnote 3 below the table). The MF properties are encumbered by mortgage loans with an aggregate principal balance of $35.8 million at December 31, 2017.  Debt service on our mortgage payables was current at December 31, 2017. The amounts presented below were obtained from records provided by property management service providers.

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

Economic Occupancy (2)

 

 

 

 

 

of Units at

December 31,

 

 

Physical Occupancy (1) at December 31,

 

 

For the Years Ended December 31,

 

Property Name

 

State

 

2017

 

 

2017

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

2015

 

MF Properties-Stabilized (3)

 

 

 

 

 

Suites on Paseo

 

CA

 

 

394

 

 

 

91

%

 

 

96

%

 

 

89

%

 

 

94

%

 

 

80

%

 

 

83

%

Jade Park (4)

 

FL

 

 

144

 

 

 

91

%

 

 

89

%

 

n/a

 

 

 

81

%

 

 

83

%

 

n/a

 

Eagle Village (5)

 

IN

 

n/a

 

 

n/a

 

 

 

80

%

 

 

90

%

 

n/a

 

 

 

86

%

 

 

84

%

Woodland Park (6)

 

KS

 

n/a

 

 

n/a

 

 

n/a

 

 

 

95

%

 

n/a

 

 

n/a

 

 

 

90

%

Northern View (5)

 

KY

 

n/a

 

 

n/a

 

 

 

100

%

 

 

90

%

 

n/a

 

 

 

90

%

 

 

80

%

Arboretum (6)

 

NE

 

n/a

 

 

n/a

 

 

n/a

 

 

 

98

%

 

n/a

 

 

n/a

 

 

 

93

%

The 50/50 MF Property

 

NE

 

 

475

 

 

 

97

%

 

 

72

%

 

 

99

%

 

 

74

%

 

 

96

%

 

 

96

%

Residences of DeCordova (5)

 

TX

 

n/a

 

 

n/a

 

 

 

97

%

 

 

96

%

 

n/a

 

 

 

93

%

 

 

92

%

Residences of Weatherford (5)

 

TX

 

n/a

 

 

n/a

 

 

 

100

%

 

 

100

%

 

n/a

 

 

 

101

%

 

 

99

%

 

 

 

 

 

1,013

 

 

 

94

%

 

 

87

%

 

 

94

%

 

 

84

%

 

 

85

%

 

 

90

%

 

(1)

Total revenue is defined as net rental revenue plus other income from the properties.

(2)

Economic occupancy is presented for December 31, 2015 and 2014 and is defined as the net rental income received divided by the maximum amount of rental income to be derived from each property. This statistic is reflective of rental concessions, delinquent rents and non-revenue units such as model units and employee units. Actual occupancy is a point in time measurement while economic occupancy is a measurement over the period presented. Therefore, economic occupancy for a period may exceed the actual occupancy at any point in time.

(3)

Stabilization is generally defined as 90% occupancy for 90 days and an achievement of 1.15 times debt service coverage ratio on amortizing debt service for all MF Properties that are not student housing residential properties. Suites on Paseo, Eagle Village, Northern View, and The 50/50 MF Property are student housing residential properties.

(4)

Occupancy numbers for 2015 are not available as the MF property was acquired in September 2016.

(5)

The property was sold during 2017, so unit and occupancy amounts are not applicable as of and for the year ended December 31, 2017.

(6)

The property was sold during 2016, so unit and occupancy amounts are not applicable as of and for the year ended December 31, 2017 and 2016.

The overall increase in physical occupancy from 2016 to 2017 is due to a sharp increase in occupancy at The 50/50 during 2017, which is due to marketing and pricing changes implemented by the Partnership and Properties Management for fall 2017 lease-up. The overall decrease in physical occupancy from 2015 to 2016 is due to declining occupancy at the 50/50 MF Property during 2016 and the addition of Jade Park with a physical occupancy that is lower than the average of other MF Properties.

The overall increase in economic occupancy is a result of higher occupancy at the Suite on Paseo in 2017 as compared to 2016. This was somewhat offset by lower economic occupancy at The 50/50 due to the poor fall 2016 lease-up. The overall decrease in economic occupancy from 2015 to 2016 is due declining occupancy at The 50/50 MF Property during 2016 and the addition of Jade Park with an economic occupancy that is lower than the average of other MF Properties.

39


 

Results of Operations

The tables and following discussions of our change in total revenues, total expenses, and net income for the years ended December 31, 2017, 2016 and 2015 and should be read in conjunction with the Company’s consolidated financial statements and Notes thereto filed in Item 8 of this report.

The following table compares revenue and other income for the Partnership for the periods presented (in thousands):

 

 

 

For the Years Ended December 31,

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

Revenues and Other Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property revenues

 

$

13,500

 

 

$

17,405

 

 

$

(3,905

)

 

 

-22.4

%

 

$

17,405

 

 

$

17,789

 

 

$

(384

)

 

 

-2.2

%

Investment income

 

 

48,225

 

 

 

36,893

 

 

 

11,332

 

 

 

30.7

%

 

��

36,893

 

 

 

34,410

 

 

 

2,483

 

 

 

7.2

%

Contingent interest income

 

 

3,147

 

 

 

2,021

 

 

 

1,126

 

 

 

55.7

%

 

 

2,021

 

 

 

4,757

 

 

 

(2,736

)

 

 

-57.5

%

Other interest income

 

 

4,682

 

 

 

2,660

 

 

 

2,022

 

 

 

76.0

%

 

 

2,660

 

 

 

2,624

 

 

 

36

 

 

 

1.4

%

Other income

 

 

828

 

 

 

-

 

 

 

828

 

 

 

100.0

%

 

 

-

 

 

 

373

 

 

 

(373

)

 

N/A

 

Gain on sale of real

   estate assets, net

 

 

17,753

 

 

 

14,072

 

 

 

3,681

 

 

 

26.2

%

 

 

14,072

 

 

 

4,599

 

 

 

9,473

 

 

 

206.0

%

Gain on sale of securities

 

 

-

 

 

 

8

 

 

 

(8

)

 

N/A

 

 

 

8

 

 

 

-

 

 

 

8

 

 

 

100.0

%

Total Revenues and Other

   Income

 

$

88,135

 

 

$

73,059

 

 

$

15,076

 

 

 

20.6

%

 

$

73,059

 

 

$

64,552

 

 

$

8,507

 

 

 

13.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discussion of the Total Revenues for the Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016

 

Property revenues.  The net decrease in total revenue between 2017 and 2016 is comprised of the following factors:

 

A decrease of approximately $4.4 million in revenue due to sales of the Northern View in March 2017, sales of the Residences of Weatherford, Residences of DeCordova and Eagle Village in November 2017, and sales of the Arboretum and Woodland Park in 2016;

 

An increase of approximately $1.0 million in revenue due to the acquisition of Jade Park in September 2016; and

 

A decrease of approximately $458,000 in revenue from declining occupancy at The 50/50 MF Property. The decline was due to low occupancy during the 2016-2017 academic year. Physical occupancy is approximately 97% at December 31, 2017 as compared to 72% at December 31, 2016, so the Partnership expects increasing revenues at this property going forward.

 

Investment income. The net increase in investment income between 2017 and 2016 is comprised of the following factors:

 

An increase of approximately $9.9 million in recurring investment interest income related to MRB acquisitions during 2016 and 2017;

 

A decrease of approximately $948,000 in recurring investment income from MRB redemptions in 2016 and 2017; and

 

An increase of approximately $2.4 million in preferred return income from investments in unconsolidated entities.

Contingent interest income. In 2017, we realized contingent interest of approximately $219,000 from excess cash flow on the Lake Forest MRBs and approximately $2.9 million of cash proceeds from redemption of the Ashley Square MRB. In 2016, we realized contingent interest of approximately $642,000 from excess cash flow on the Ashley Square and Lake Forest MRBs and approximately $1.4 million on excess cash proceeds from the sale of the property underlying the Foundation for Affordable Housing property loan.

Other interest income. Other interest income is comprised mainly of interest income on taxable property loans held by us. The net increase between 2017 and 2016 is comprised of the following factors:

 

An increase of approximately $273,000 from property loans to the Vantage at Brooks and Vantage at Braunfels multifamily development projects due to additional advances in 2016 and 2017; and

 

Approximately $1.7 million of other interest income received on the Ashley Square property loans in connection with the sale of the underlying property in the fourth quarter of 2017. The Ashley Square property loans were in non-accrual status during 2016, so there was no interest income for these property loans in 2016.

40


 

Other income.  Other income recognized in 2017 consists of approximately $624,000 of fees related to early redemptions of the MRBs for Vantage at Harlingen and Avistar at Chase Hill during the fourth quarter, approximately $191,000 of fees for due diligence services for sales of properties in November 2017, and approximately $13,000 of miscellaneous non-recurring income items. There was no other income reported for 2016.

 

Gains on the sales of real estate assets and securities. The gains on sale of MF Properties in 2017 consists primarily of gains of approximately $7.2 million, $2.6 million, $5.2 million and $2.8 million from the sales of Northern View, Residences of Weatherford, Residences of DeCordova and Eagle Village, respectively. The gains on sale of MF Properties in 2016 consist of gains of approximately $12.4 million and $1.7 million from the sales of the Arboretum and Woodland Park, respectively. The gain on sale of securities for 2016 is from the sale of the Pro Nova 2014-2 MRB.

 

Discussion of the Total Revenues for the Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015

 

Property revenues.  The net decrease in total revenue between 2016 and 2015 is comprised of the following factors:

 

A decrease of approximately $4.0 million in revenue due to sales of the Arboretum and Woodland Park in 2016 and Glynn Place and the Colonial in 2015;

 

An increase of approximately $3.4 million in revenue due to the acquisition of the Suites on Paseo in 2015 and Jade Park in 2016; and

 

An increase of approximately $156,000 in revenue from improving operations at existing MF Properties.

 

Investment income. The net increase in investment income between 2016 and 2015 is comprised of the following factors:

 

An increase of approximately $4.5 million in recurring investment interest income related MRB acquisitions during 2015 and 2016;

 

A decrease of approximately $2.6 million in recurring investment income from MRB redemptions in 2015 and 2016;

 

A decrease of approximately $106,000 in interest income from PHC Certificates due to principal paydowns;

 

A decrease of approximately $208,000 in interest income from MBS Securities due to the sale of the remaining MBS Securities in the first quarter of 2016; and

 

An increase of approximately $719,000 in preferred return income from investments in unconsolidated entities.

Contingent interest income. In 2016, we realized contingent interest of approximately $642,000 from excess cash flow on the Ashley Square and Lake Forest MRBs and approximately $1.4 million on settlement of the Foundation for Affordable Housing property loan. In 2015, we realized approximately $4.8 million of contingent interest from the sale of the Bent Tree and Fairmont Oaks MRBs in the fourth quarter.

Other interest income. Other interest income is comprised mainly of interest income on taxable property loans held by us and was fairly consistent from 2015 to 2016. The net increase is due to various offsetting factors:

 

An increase of approximately $1.1 million from property loans to the Vantage at Brooks and Vantage at Braunfels multifamily development projects which began in the fourth quarter of 2015;

 

An increase of approximately $347,000 in interest on other property loans and a new loan with the Winston Group, Inc. in 2016; and

 

A decrease of approximately $1.4 million in interest income from the Fairmont Oaks property loan that was settled in the fourth quarter of 2015.

Other income.  Other income recognized in 2015 is predominately attributable to development fee income related to the Silver Moon Apartment project which was completed in 2015.  There was no other income reported for 2016.

Gains on the sales of real estate assets and securities. The gain on sale of MF Properties in 2016 consists of gains of approximately $12.4 million and $1.7 million from the sales of the Arboretum and Woodland Park, respectively. The gain on sale of MF Properties in 2015 consists of gains of approximately $3.4 million and $1.2 million from the sales of the Colonial and Glynn Place in 2015, respectively. The gain on sale of securities for 2016 is from the sale of the Pro Nova 2014-2 MRB.

41


 

The following table compares expenses for the Partnership for the periods presented (in thousands):

 

 

 

For the Years Ended December 31,

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate operating

   (exclusive of items shown

   below)

 

$

8,228

 

 

$

9,223

 

 

$

(995

)

 

 

-10.8

%

 

$

9,223

 

 

$

10,053

 

 

$

(830

)

 

 

-8.3

%

Impairment of securities

 

 

762

 

 

 

-

 

 

 

762

 

 

 

100.0

%

 

 

-

 

 

 

-

 

 

 

-

 

 

N/A