UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission File Number: 000-24843

 

AMERICA FIRST TAX EXEMPT INVESTORS, L.P.

(Exact name of registrant as specified in its Agreement of Limited Partnership)

 

 

(402) 444-1630

(Registrant’s telephone number, including area code)

 

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

None

 

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

 

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

 

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

 

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 o     No þ

 

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 þ     No o

 

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.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and larger accelerated” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated filer o     Non-accelerated filer þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

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 $73,095,805.

 

DOCUMENTS INCORPORATED BY REFERENCE

None

 

 

AMERICA FIRST TAX EXEMPT INVESTORS, L.P.

 

TABLE OF CONTENTS

 

 

Forward-Looking Statements

 

This 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 that reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, the Partnership’s performance and financial results. All statements, trend analysis and other information concerning possible or assumed future results of operations of the Partnership and the investments it has made constitute forward-looking statements. Beneficial Unit Certificate (“BUC”) holders and others should understand that these forward-looking statements are subject to numerous risks and uncertainties, and a number of factors could affect the future results of the Partnership and could cause those results to differ materially from those expressed in the forward-looking statements contained herein. These factors include general economic and business conditions such as the availability and credit worthiness of prospective tenants, lease rents, operating expenses, the terms and availability of financing for properties financed by the tax-exempt mortgage revenue bonds owned by the Partnership, adverse changes in the real estate markets from governmental or legislative forces, lack of availability and credit worthiness of counter parties to finance future acquisitions and interest rate fluctuations and other items discussed under “Risk Factors” in Item 1 of this report.

 

America First Tax Exempt Investors, L.P. (the “Partnership”) was formed on April 2, 1998 under the Delaware Revised Uniform Limited Partnership Act for the purpose of acquiring, holding, selling and otherwise dealing with a portfolio of federally tax-exempt mortgage revenue bonds which have been issued to provide construction and/or permanent financing of multifamily residential properties. Interest on these bonds is excludable from gross income for federal income tax purposes. As a result, most of the income earned by the Partnership is exempt from federal income taxes.

 

As of December 31, 2005, the Partnership owned eleven tax-exempt mortgage revenue bonds. The tax-exempt mortgage revenue bonds were issued by state and local housing authorities to provide for permanent financing of multifamily residential property and one student housing property. These properties are located in the states of Florida, Indiana, Iowa, South Carolina, Texas, Nebraska, Georgia and Kentucky and contain a total of 2,614 rental units.

 

The revenue bonds provide for the payment of fixed-rate base interest to the Partnership and for the payment of contingent interest based upon net cash flow and net capital appreciation of the underlying real estate properties. The amount of interest income earned by the Partnership from its investment in tax-exempt mortgage revenue bonds is a function of the net operating income generated by the properties collateralizing the tax-exempt mortgage revenue bonds. Net operating income from a multifamily 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 local or national economic conditions, the amount of new apartment construction and interest rates on single-family mortgage loans. In addition, factors such as government regulation (such as zoning laws), inflation, real estate and other taxes, labor problems and natural disasters can affect the economic operations of a property. Therefore, the return to the Partnership depends upon the economic performance of the multifamily residential properties which collateralize the tax-exempt mortgage revenue bonds. For this reason, the Partnership’s investments are dependent on the economic performance of such real estate and may be considered to be in competition with other income-producing real estate of the same type in the same geographic areas.

 

The Partnership may also invest in other types of tax-exempt securities that may or may not be secured by real estate. These tax-exempt securities must be rated in one of the highest four rating categories by at least one nationally recognized securities rating agency and may not represent more than 25% of the Partnership’s assets at the time of acquisition. The Partnership may also acquire taxable mortgage loans secured by multifamily properties which collateralize tax-exempt mortgage revenue bonds secured by the same property.

Business Objectives and Strategy

 

Overview

 

The Partnership’s business objectives are to: (i) preserve and protect its capital; (ii) provide regular cash distributions to BUC holders; and (iii) provide a potential for an enhanced federally tax-exempt yield as a result of a participation interest in the net cash flow and net capital appreciation of the underlying real estate properties through the structure of the tax-exempt mortgage revenue bonds which finance the properties.

 

The Partnership is pursuing a business strategy of acquiring additional tax-exempt mortgage revenue bonds on a leveraged basis in order to: (i) increase the amount of tax-exempt interest available for distribution to its BUC holders; (ii) reduce risk through asset diversification and interest rate hedging; and (iii) achieve economies of scale.

 

The Partnership seeks to achieve its investment growth strategy by investing in additional tax-exempt mortgage revenue bonds and related investments, taking advantage of attractive financing structures available in the tax-exempt securities market and entering into interest rate risk management instruments. The Partnership may finance the acquisition of additional tax-exempt mortgage revenue bonds through the reinvestment of cash flow, the issuance of additional BUCs, and securitization financing arising from its existing portfolio of tax-exempt mortgage revenue bonds. The Partnership’s operating policy is to use securitizations or other forms of leverage to maintain a level of debt financing between 40% and 60% of the total fair value of its assets.

 

To date, the Partnership has financed acquisitions of additional revenue bonds through a securitization transaction offered through the Merrill Lynch proprietary residual interest tax-exempt securities and puttable floating option tax-exempt receipts “P-Float” program. In a securitization transaction, the Partnership deposits a tax-exempt mortgage revenue bond into a trust which issues two types of securities, senior securities (“P-Floats”) and subordinated residual interest securities (“RITES”). The P-Floats are floating rate securities representing a beneficial ownership interest in the outstanding principal and interest of the tax-exempt mortgage revenue bond credit enhanced by Merrill Lynch (or a Merrill Lynch affiliate) and sold to institutional investors. The Partnership receives the net proceeds from the sale of the P-Floats and may use these funds to make additional investments. The RITES are issued to the Partnership and represent a beneficial ownership interest in the remaining interest on the underlying tax-exempt mortgage revenue bond. The Partnership maintains a call right on the senior P-Float securities and this allows it to collapse the trusts and retain a level of control over the underlying revenue bond. These transactions are accounted for by the Partnership as secured borrowings, and, in effect, provide the Partnership with variable-rate financing. Accordingly, these senior certificates are recorded by the Partnership as debt financing, the revenue bonds as investment securities held in trust, and the RITES as investment securities. The cash basis cost of funds relating to the P-Floats/RITES program (calculated as interest expense as a percentage of the weighted average face amount of the P-Floats), excluding the effect of marking the interest rate cap agreements to market, was approximately 2.98% for the year ended December 31, 2005.

 

Discussion of Recent Transactions

 

On December 15, 2003, the Partnership acquired the tax-exempt mortgage revenue bonds secured by the multifamily residential property know as Chandler Creek Apartments. The owner of Chandler Creek Apartments is an unaffiliated, 501c(3) not-for-profit organization. On January 30, 2004, the Partnership entered into a Forbearance Agreement with the owners of Chandler Creek Apartments which sets forth the terms under which the Partnership agrees to forbear from the exercise of remedies against the Chandler Creek Apartments owners due to certain continuing defaults under the documents securing the bonds. Among the conditions to forbearance is (i) the payment of interest on the entire outstanding principal amount of the bonds, $15,795,000, at 4.56% per annum; (ii) the appointment of America First Properties Management Company (a related party to the General Partner) as the property manager of the Chandler Creek Apartments; and (iii) the payment of a mortgage placement fee of $120,000 paid by Chandler Creek Apartments to the General Partner. The Forbearance Agreement will terminate upon the earlier of (i) a restructuring of the bonds; (ii) the date of cancellation of the bond indenture; (iii) the date of termination of the Forbearance Agreement by the bond trustee; (iv) the date of an owner default under the Forbearance Agreement; (v) the date of termination of the property management agreement; (vi) the termination date agreed upon by the Partnership and the owner; or (vii) June 15, 2006.

In connection with the Forbearance Agreement, the Partnership also entered into a Custody Agreement under which the Partnership’s right to payment of interest on the entire $15,795,000 of the Chandler Creek tax-exempt mortgage revenue bonds will be placed into a trust that will issue senior certificates in the notional amounts of $11,500,000 and $500,000 to the Partnership and an unaffiliated third party, respectively. The senior certificates will pay up to approximately 6.00% on a notional amount of $12,000,000 on a senior priority basis. The trust will issue a subordinate junior certificate in a notional principal of $3,795,000 to a separate unaffiliated third party. The junior certificate will pay up to approximately 6.00% on the notional amount of $3,795,000 on a subordinate priority basis. Interest paid on the certificates above 6.00% up to the bond’s stated rate of 7.60% will be paid on a parity basis among the Partnership and the other certificate holders based upon the notional amount of their certificates. The senior priority interest payment of 6% on a $12,000,000 notional amount is equal to $720,000 of the total interest to be deposited into the trust equal to 4.56% of $15,795,000, or $720,252. This Custody Agreement effectively allows the Partnership to capture all interest payments on the bonds during the forbearance period.

 

In June 2004, the terms of $25,250,000 of Northwoods Lake Apartments tax-exempt mortgage revenue bonds, for which the Partnership held an investment in, were restructured to reduce the base interest rate from 7.5% to 5.0% and to create two separate issue series, Series A for $19,100,000 and Series B for $6,150,000. The Series B bonds are subordinate to the Series A bonds. The Partnership subsequently sold $19,100,000 (Series A) of its investment in the tax-exempt mortgage revenue bonds and used a portion of the proceeds to repay $14,000,000 in debt financing. The bonds mature in June 2034.

 

On July 22, 2005, the Partnership entered into a purchase and sale agreement (the “Agreement”) to sell a 316-unit multi-family housing project located in West Palm Beach, Florida known as Clear Lake Colony Apartments (the “Project”). The project was sold to Development Resources Group, LLC, a Florida limited liability company. There is no affiliation between Development Resources Group, LLC and the Partnership or of its affiliates or any officer or manager of The Burlington Capital Group, LLC (the general partner of the Partnership’s general partner). The Agreement provided for a sales price of $33,375,000 for all of the land, buildings, building improvements, certain personal property, current lease agreements and other assets associated with the Project. On November 10, 2005, the sale closed resulting in an estimated taxable gain to the Partnership of approximately $12.4 million. The Partnership received cash proceeds of approximately $32.2 million, net of transaction related costs. Because Clear Lake Colony Acquisition Corp, the owner of the Project (“Clear Lake”), defaulted on its bond obligations to the Partnership, the Partnership acquired sole ownership of the Project by way of deed in lieu of foreclosure immediately prior to the Partnership’s sale of the Project to the Purchaser. There are no material relationships between the Partnership and the Purchaser or any of its affiliates, other than the Agreement.

 

In conjunction with the Clear Lake transaction, the general partner’s Board of Managers approved a special distribution to the BUC holders. All distributions to the BUC holders are governed by the Limited Partnership Agreement. In accordance with the Limited Partnership Agreement, this special distribution is considered a distribution of Net Residual Proceeds. All of the Clear Lake sale proceeds are classified as Tier 2 Net Residual Proceeds. The Board approved a special distribution of $3.5 million from the Net Residual Proceeds from the Clear Lake Colony sale. As this was a Tier 2 distribution, approximately $2.6 million or 75% of the total distribution was paid to the BUC holders of record as of November 30, 2005 and approximately $0.9 million was paid to the General Partner.

 

In addition to the one-time distribution to BUC holders and the General Partner, a portion of the proceeds were used to pay $359,000 of deferred administrative fees to the General Partner. The General Partner has deferred payment of these administrative fees without interest since 1989. Due to the gain realized on this transaction, the General Partner now has elected to receive these previously earned fees. As previously disclosed in our annual reports on Form 10-K, this amount was to be accrued when it was probable that payment would occur. The Partnership accrued $359,000 of administrative expense in the quarter ended September 30, 2005 as the payment was probable as of September 30, 2005. The remaining proceeds from the sale will be reinvested in accordance with the Partnership’s investment strategy.

Effect of Adoption of FIN 46R on Financial Reporting

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities — an interpretation of ARB 51 (“FIN 46”). A modification to FIN 46 was issued in December 2003 (“FIN 46R”). The Partnership adopted FIN 46R as of January 1, 2004 and, as a result, it is now required to consolidate the assets, liabilities, results of operations and cash flows of certain entities that meet the definition of a “variable interest entity” (a “VIE”) into the Partnership’s financial statements. Management has determined that all but two of the entities which own multifamily apartment properties financed by the Partnership’s tax-exempt mortgage revenue bonds are VIEs of the Partnership. Because management determined that the Partnership is the primary beneficiary of each of these VIEs pursuant to the terms of each tax-exempt mortgage revenue bond and the criteria within FIN 46R, the Partnership consolidated the assets, liabilities and results of these VIEs multifamily properties into the Partnership’s financial statements. Transactions and accounts between the Partnership and the consolidated VIEs, including the indebtedness underlying the tax-exempt mortgage bonds secured by the properties owned by the VIEs, have been eliminated in consolidation. Because each of the consolidated VIEs was created before January 1, 2004, the assets and liabilities of the VIEs have initially been measured at their carrying amounts with the net amount added to the Partnership’s balance sheet being recognized as the cumulative effect of a change in accounting principle in the consolidated statement of operations. A $38.0 million loss was recorded as of January 1, 2004 from the cumulative effect of the change in accounting principle as a result of recording the net deficit allocable to the Partnership’s variable interest in the VIEs.

 

All 2004 and 2005 financial information in this Form 10-K presented on the basis of Generally Accepted Accounting Principles (GAAP), is that of the Partnership and the VIEs on a consolidated basis. We refer to the Partnership and the consolidated VIEs throughout this Form 10-K as the “Company”. We refer to the Partnership as a stand-alone entity without consolidation of the VIEs as the “Partnership.”

 

Discussion of Historical and Current Business Strategy

 

The Partnership, along with its predecessor partnership, has been in existence and operating continuously since 1987. During its entire history the Partnership has been successful in carrying out its business objectives as described above. The Partnership is intended to be a tax exempt bond fund making mortgage investments in multifamily real estate, collecting interest and principal payments, managing the investments of the Partnership and distributing the preponderance of Cash Available for Distribution (“CAD”) to BUC holders. The Partnership has distributed over $42.2 million since 1998. This represents the majority of CAD over the same time period, thereby, very little excess CAD has been retained within the Partnership. For a further discussion of CAD, see Item 6. Selected Financial Data. On a tax reporting basis the Partnership has been, and remains, the “purest” multifamily tax exempt bond fund among its peer group, typically generating close to 100% tax exempt income from continuing operations compared to 70% to 80% for peer entities.

 

The Partnership has historically operated by investing in Pre-1986 “80/20” Multifamily Revenue Bonds. These bonds were issued prior to the Tax Reform Act of 1986 and require each property financed with these bonds to set aside 20% of their units for residents making no more than 80% of median area income. These bonds held by the Partnership represent a first mortgage with very high leverage, often times approaching 100% of property value. This high leverage has been intentional, as our objective has been to maximize the tax-exempt income generated from each of our investments.

 

Beginning in 1997, the Partnership began to use leverage for the first time to enhance the generation of CAD. The majority of its borrowings are at variable interest rates. While its ultimate interest rate exposure is capped through interest rate hedging strategies, CAD performance is subject to increases in variable borrowing rates up to the level capped by the hedging strategy. Additionally, as high leverage mortgage investors in multifamily real estate, the Partnership has been directly affected in the last four years by declining property performance. This decline is attributable to increased vacancy and rental concession losses caused by increased home ownership in the United States as discussed in previous filings. CAD generated by the Partnership has been, and continues to be, under pressure due to declines in property performance (which translates into less cash available for payment of base interest due under the bonds), increased short term borrowing rates, and increased operating expenses attributable in great part to the cost of the Partnership complying with FIN 46R and Sarbanes-Oxley. CAD, on a

recurring basis by excluding the impact of the Clear Lake Colonies transaction, for 2005 was $0.42 per BUC compared to distributions of $0.54 per BUC for the year ended December 31, 2005. While property performance has been declining over the last several years, property values are at all time highs in terms of cap rates.

 

The Partnership acquired bonds that are structured to provide an enhanced federally tax-exempt yield as a result of a participation interest in the net cash flow and net capital appreciation through the payment of both base interest and contingent interest. As a result of the structure of the bonds, FIN 46R, as discussed above, requires the Partnership to consolidate the financial statements of the multifamily properties which secure the bonds owned by the Partnership. Management believes that the consolidation of these VIEs makes the Partnership’s GAAP financial statements confusing to many BUC holders and does not represent the true intent of the business strategy of the Partnership.

 

Given all of the Partnership dynamics discussed above, the General Partner believes it is appropriate to reposition the Partnership’s investment portfolio. The objective of this repositioning is to improve the quality and performance of the bond portfolio. Additionally, the General Partner believes it is possible to redeploy funds into investments that would not need to be consolidated under FIN 46R. If successful in this redeployment the Partnership will own a higher quality investment portfolio of tax-exempt mortgage revenue bonds that will be more clearly presented in the Partnership’s financial statements. Such financial statements would present financial information more in line with the stated objectives of the Partnership. The General Partner believes this would be a significant event for the Partnership and would substantially increase the understandability and transparency of the Partnership’s financial reports.

 

The General Partner of the Partnership remains committed to continuing to deliver on the Partnership’s business objectives. First and foremost, the General Partner intends to perpetuate the Partnership for the foreseeable future and there are no intentions to liquidate the Partnership at this time.

 

In order to achieve the objective of repositioning the Partnership’s investment portfolio the following may occur.

 

1. In order to capitalize on current multifamily property valuations the Partnership may call most of its bond investments thereby requiring a sale or refinancing to occur. This would allow the Partnership to realize additional returns up to the amount of accrued contingent interest on its bond investment. It may also allow the Partnership to realize payment of taxable loans outstanding which are currently considered under-performing or non-performing assets,

 

2. The proceeds received from these transactions would be redeployed into other tax exempt multifamily oriented investments. Through this redeployment CAD is expected to increase by investing in assets that have the potential to generate a higher income as compared to some current investments. The Partnership will likely expand its bond investments well beyond traditional “80/20” bonds, and

 

3. The Partnership may be able to use a higher quality investment portfolio to obtain higher leverage to be used to acquire additional investments.

 

By triggering a terminal event for many of the Partnership’s investments:

 

1. The Partnership will be able to monetize its upside potential inherent in the current bond structures and increase the total assets of the Partnership,

 

2. Through the redeployment of proceeds received the Partnership may increase CAD through an expanded asset base and through the elimination of current under-performing or non-performing assets,

 

3. The Partnership’s accounting and financial reporting may be simplified by eliminating the VIEs currently consolidated by the Partnership under FIN 46R, and

 

4. By perpetuating the Partnership’s historically high dividend payout ratio, investor distributions will increase as CAD increases.

 

The Partnership continues to explore ways to grow which may include the filing of a registration statement in order to raise additional equity for the Partnership. Equity raises may allow the Partnership to realize better

economies of scale and further enhance the generation of CAD. Growing the Partnership is critical in order to justify being a publicly traded entity and being able to spread the significantly increased costs of being public across a larger income base.

 

Management and Employees

 

The Partnership is managed by its General Partner, America First Capital Associates Limited Partnership Two (“AFCA 2”). The Partnership has no employees. Certain services are provided to the Partnership by employees of The Burlington Capital Group LLC (“Burlington”), f/k/a America First Companies L.L.C., which is the general partner of AFCA 2, and the Partnership reimburses Burlington for its allocated share of these salaries and benefits. The Partnership is not charged, and does not reimburse Burlington, for the services performed by executive officers of Burlington.

 

Competition

 

The Partnership, from time to time, may be in competition with private investors, lending institutions, trust funds, investment partnerships and other entities with objectives similar to the Partnership for the acquisition of tax-exempt mortgage revenue bonds and other investments. This competition could reduce the availability of tax-exempt mortgage revenue bonds for acquisition and reduce the interest rate that issuers pay on these bonds.

 

Because the Partnership’s return on its tax-exempt mortgage revenue bonds depends on the economic performance of the multifamily residential properties financed by these bonds, the Partnership may be considered to be in competition with other residential real estate in the same geographic areas. In each city in which the properties collateralized by the tax-exempt mortgage revenue bonds owned by the Partnership are located, such properties compete with a substantial number of other multifamily properties. Multifamily properties also compete with single-family housing that is either owned or leased by potential tenants. To compete effectively, the apartment properties financed by the Partnership must offer quality apartments at competitive rental rates. In order to maintain occupancy rates and attract quality tenants, the apartment properties may also offer rental concessions, such as free rent to new tenants for a stated period. These apartment 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

 

The Partnership believes that each of the properties collateralizing its tax-exempt mortgage revenue bonds is in compliance, in all material respects, with federal, state and local regulations regarding hazardous waste and other environmental matters and is not aware of any environmental contamination at any of such properties that would require any material capital expenditure by the underlying properties and therefore the Partnership for the remediation thereof.

 

Tax Status

 

The Partnership is classified as a partnership for federal income tax purposes and accordingly, it makes no provision for income taxes. The distributive share of the Partnership’s income, deductions and credits is included in each BUC holder’s income tax return.

 

The VIEs consolidated with the Partnership for GAAP reporting purposes are 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 Partnership does not presently believe that the consolidation of VIEs for reporting under GAAP will impact the Partnership’s tax status, amounts reported to BUC holders on IRS Form K-1, the Partnership’s ability to distribute tax-exempt income to BUC holders, the current level of quarterly distributions or the tax-exempt status of the underlying mortgage revenue bonds.

Information Available on Website

 

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and press releases are available free of charge at www.ataxz.com as soon as reasonably practical after they are filed with the Securities and Exchange Commission (“SEC”). The information on the website is not incorporated by reference into this Form 10-K.

 

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

 

 

 

 

 

None

 

The Partnership does not own or lease any physical properties. The Partnership’s ownership in tax-exempt mortgage revenue bonds is collateralized by underlying multi-family housing properties.

 

As a result of the adoption of FIN 46R, the Company is required to consolidate the multifamily residential properties owned by the VIEs for which the Company is the primary beneficiary into the Company’s financial

statements. The Company consolidated nine multifamily housing properties located in Florida, Indiana, Iowa, South Carolina, Georgia, and Kentucky as of December 31, 2005.

 

There are no material pending legal proceedings to which the Partnership is a party or to which any of the properties collateralizing the Partnership’s tax-exempt mortgage revenue bonds are subject.

 

No matter was submitted during the fourth quarter of the fiscal year ended December 31, 2005 to a vote of the Partnership’s security holders.

 

 

(a) Market Information.  BUCs represent assignments by the sole limited partner of its rights and obligations as a limited partner. The rights and obligations of BUC holders are set forth in the Partnership’s Agreement of Limited Partnership. BUCs of the Partnership trade on the NASDAQ National Market System under the trading symbol “ATAXZ”. The following table sets forth the high and low sale prices for the BUCs for each quarterly period from January 1, 2004 through December 31, 2005.

 

 

 

(b) BUC Holders.  The approximate number of BUC holders on March 4, 2006 was 5,500.

 

(c) Distributions.  Distributions to Unit holders were made on a quarterly basis during 2005 and 2004 with a special distribution in December 2005. Total distributions as of December 31, 2005 and 2004 equaled $7,937,241 and $5,312,482, respectively. The distributions paid or accrued per BUC during the fiscal years ended December 31, 2005 and 2004 were as follows:

 

 

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for information regarding the sources of funds that will be used for cash distributions and for a discussion of factors which may adversely affect the Partnership’s ability to make cash distributions at the same levels in 2006 and thereafter.

 

(d) Securities Authorized for Issuance Under Equity Compensation Plans.  The Partnership does not maintain any equity compensation plans.

 

Sales of Unregistered Securities. None

 

Issuer Purchases of Equity Securities. None

 

Set forth below is selected financial data for the Company as of and for the years ended December 31, 2005 and 2004 and for the Partnership as of and for the years ended December 31, 2001 through December 31, 2003. The information should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed in response to Item 8 of this report. In addition, please refer to the discussions in Item 1 and Item 7 regarding the adoption of FIN 46R and its effects on the presentation of financial data in this report on Form 10-K.

 

 

 

 

 

General

 

In this Management’s Discussion and Analysis, the “Partnership” refers to America First Tax Exempt Investors, L.P. as a stand-alone entity and the “Company” refers to the consolidated financial information of the Partnership and certain entities that own multifamily apartment projects financed with mortgage revenue bonds held by the Partnership that are treated as “variable interest entities” (“VIEs”) because the Partnership has been determined to be the primary beneficiary.

 

Critical Accounting Policies

 

The preparation of financial statements in accordance with GAAP requires management of the Company to make a number of judgments, assumptions and estimates. The application of these judgments, assumptions and estimates can affect the amounts of assets, liabilities, revenues and expenses reported by the Company. All of the Company’s significant accounting policies are described in Note 2 to the Company’s consolidated financial statements filed included in Item 8 of this report. The Company considers the following to be its critical accounting policies as they involve judgments, assumptions and estimates that significantly affect the preparation of its financial statements.

 

Variable Interest Entities (“VIEs”)

 

When the Partnership invests in a tax-exempt mortgage revenue bond which is collateralized by the underlying multifamily property, the Partnership will evaluate the entity which owns the property securing the tax-exempt mortgage revenue bond to determine if it is a VIE as defined by FIN 46R. FIN 46R is a complex standard that requires significant analysis and judgment. If it is determined that the entity is a VIE, the Partnership will then evaluate if it is the primary beneficiary of such VIE, by determining whether the Partnership will absorb the majority of the VIE’s expected losses, receive a majority of the VIE’s residual returns, or both. If the Partnership determines itself to be the primary beneficiary of the VIE, then the assets, liabilities and financial results of the related multifamily property will be consolidated in the Partnership’s financial statements. As a result of such consolidation, the tax-exempt or taxable debt financing provided by the Partnership to such consolidated VIE will be eliminated as part of the consolidation process. However, the Partnership will continue to receive interest and principal payments on such debt and these payments will retain their characterization as either tax-exempt or taxable interest for income tax reporting purposes.

 

Investments in Tax-Exempt Mortgage Revenue Bonds and Other Tax-Exempt Bonds

 

Valuation — As all of the Partnership’s investments in tax-exempt mortgage revenue bonds are classified as available-for-sale securities, they are carried on the balance sheet at their estimated fair values. The tax-exempt mortgage revenue bonds have a limited market. As such, the Partnership estimates the fair value for each bond as the present value of its expected cash flows using a discount rate for comparable tax-exempt investments. This calculation methodology encompasses judgment in its application, especially in the determination of the discount rate. A decrease or increase in the discount rate increases or decreases, respectively, the estimate of fair value. Furthermore, volatility in interest rates and the impact it has on the bond markets may also likely cause uncertainty in the estimated fair values.

 

Effect of classification of securities on earnings — As the Partnership’s investments in tax-exempt mortgage revenue bonds are classified as available-for-sale securities, changes in estimated fair values are recorded as adjustments to accumulated other comprehensive income, which is a component of partners’ capital, rather than through earnings. The Partnership does not intend to hold any of its securities for trading purposes; however, if the Partnership’s available-for-sale securities were classified as trading securities, there could be substantially greater volatility in the Partnership’s earnings because changes in estimated fair values would be reflected in the Partnership’s earnings.

 

Review of securities for other-than-temporary impairment — The Partnership periodically reviews each of its mortgage revenue bonds for impairment by the estimated fair value of the revenue bond compared to its carrying

amount. The estimated fair value of the revenue bond is calculated using a discounted cash flow model using interest rates for comparable investments. A security is considered other than temporarily impaired if evidence indicates that the cost of the investment is not recoverable within a reasonable period of time. If an other-than-temporary-impairment exists, the cost basis of the mortgage bond is written down to its estimated fair value, with the amount of the write-down accounted for as a realized loss. The recognition of an other-than-temporary impairment and the potential impairment analysis are subject to a considerable degree of judgment, the results of which when applied under different conditions or assumptions could have a material impact on the financial statements. The estimated future cash flow of each revenue bond depends on the operations of the underlying property and, therefore is subject to a significant amount of uncertainty in the estimation of future rental receipts, future real estate operating expenses, and future capital expenditures. Such estimates are affected by economic factors such as the rental markets and labor markets in which the property operates, the current capitalization rates for properties in the rental markets, and tax and insurance expenses. Different conditions or different assumptions applied to the calculation may result in different results. The Partnership periodically compares its estimates with historical results to evaluate the reasonableness and accuracy of its estimates and adjusts its estimates accordingly.

 

Revenue recognition — The interest income received by the Partnership from its tax-exempt mortgage revenue bonds is dependent upon the net cash flow of the underlying properties. Base interest income on fully performing tax-exempt mortgage revenue bonds is recognized as it is accrued. Base interest income on tax-exempt mortgage revenue bonds not fully performing is recognized as it is received. Past due base interest on tax-exempt mortgage revenue bonds, which are or were previously not fully performing, is recognized as received. The Partnership reinstates the accrual of base interest once the tax-exempt mortgage revenue bond’s ability to perform is adequately demonstrated. Contingent interest income, which is only received by the Partnership if the properties financed by the tax-exempt mortgage revenue bonds generate excess available cash flow as set forth in each bond, is recognized as received.

 

Derivative Instruments and Hedging Activities

 

The Partnership’s investments in interest rate cap agreements are accounted for under the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards for derivative financial instruments, including certain derivative financial instruments embedded in other contracts, and for hedging activity. SFAS No. 133 requires the Partnership to recognize all derivatives as either assets or liabilities in its financial statements and record these instruments at their fair values. In order to achieve hedge accounting treatment, hedging activities must be appropriately designated, documented and proven to be effective as a hedge pursuant to the provisions of SFAS No. 133. The Partnership did not designate its current hedges as qualifying hedges under SFAS No. 133.

 

The fair values of the caps at inception are their original cost. The Partnership’s debt financings currently bear interest based on the Bond Market Association (“BMA”) floating rate index. Changes in the fair value of the caps are marked to market with the difference recognized in earnings as interest expense. The mark to market adjustment through earnings can cause a significant fluctuation in reported net income although it has no impact on the Partnership’s cash flows. In addition, the calculation of the fair value of the caps involves a considerable degree of judgment.

 

Results of Operations

 

As a result of its adoption of FIN 46R on January 1, 2004, the Company began reporting results of operations on a consolidated basis for two reportable segments, the Partnership and VIEs. In addition to the two reportable segments, the Company also separately reports its consolidating and eliminating entries in order to properly reflect the operations of its two reportable segments.

 

The Partnership operates for the purpose of acquiring, holding, selling and otherwise dealing with a portfolio of federally tax-exempt mortgage revenue bonds which have been issued to provide construction and/or permanent financing of multifamily residential apartments. Prior to 2004, the Partnership was the only reportable segment of the Company.

The VIEs primary operating strategy focuses on multifamily apartment properties as long-term investments. Each VIE owns one multifamily apartment property that has been financed by a tax-exempt mortgage revenue bond held by the Partnership. The VIEs operating goal is to generate increasing amounts of net rental income from these properties that will allow it to service debt. In order to achieve this goal, management of these multifamily apartment properties is focused on: (i) maintaining high economic occupancy and increasing rental rates through effective leasing, reduced turnover rates and providing quality maintenance and services to maximize resident satisfaction; (ii) managing operating expenses and achieving cost reductions through operating efficiencies and economies of scale generally inherent in the management of a portfolio of multiple properties; and (iii) emphasizing regular programs of repairs, maintenance and property improvements to enhance the competitive advantage and value of its properties in their respective market areas. As of December 31, 2005, the Company consolidated nine VIE multifamily apartment properties containing a total of 2,256 rental units. As of December 31, 2004, the Company consolidated 10 VIE multifamily apartment properties containing a total of 2,572 rental units. The VIEs’ multifamily apartment properties are located in the states of Iowa, Indiana, Florida, Georgia, Kentucky and South Carolina.

 

The tables below compare the results of operations for the Company for 2005 and 2004 and the Partnership for 2003:

 

 

The Consolidated Company

 

Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004

 

Rental Revenues.  Rental revenues increased approximately $671,000 for the year ended December 31, 2005 compared to the same period of 2004. The increase is attributable to increased occupancy as physical occupancy

increased to 93% as of December 31, 2005 compared to 88% as of December 31, 2004. The increase in physical occupancy resulted in a net increase in rental revenues of approximately $297 per unit for the year ended December 31, 2005 compared to the year ended December 31, 2004. The majority of the increase in physical occupancy occurred in the second half of the year. The largest increases in per unit rents were realized at Iona Lakes and Lake Forest where the properties combined to increase rental revenues by approximately $572,000 or $969 per unit for the year ended December 31, 2005 compared to December 31, 2004.

 

Mortgage revenue bond investment income.  The increase in mortgage revenue bond investment income from 2004 to 2005 is primarily due to holding the Clarkson College tax-exempt mortgage bonds for a full year in 2005 compared to only eight months in 2004. The interest income associated with Clarkson College contributed approximately $165,000 of additional income for year ended December 31, 2005 compared with the same period of 2004.

 

Other bond investment income.  During the first quarter of 2005, the Company sold its investment in Museum Tower tax-exempt bond. As a result of the sale, interest income from these bonds decreased by approximately $286,000 in 2005.

 

Other interest income.  Other interest income represents income earned on cash and cash equivalents. The increase is attributable to higher average balances of cash and cash equivalents.

 

Gain on sale of securities.  The Company sold its entire interest in the Museum Tower bonds during the first quarter of 2005. The carrying cost of the investment was $3,900,000 and the net proceeds from the sale were $4,026,750 resulting in a gain on the sale of securities of $126,750. Approximately $600,000 of the cash proceeds is being held as collateral for debt financings and is classified as restricted cash on the consolidated balance sheet of the Company. The remaining cash proceeds were unrestricted.

 

Real estate operating expenses.  Real estate operating expense increased during 2005 compared to 2004. This increase is related to spending on repairs and maintenance during the second half of 2005 to increase in order to make the properties more attractive to current and potential tenants. Additionally, the properties realized increased utility costs.

 

Interest expense.  Interest expense increased by approximately $319,000 during 2005 compared to 2004. The increase is attributable to a bridge loan that was entered into during the third quarter of 2005 to facilitate the sale of Clear Lake Colony Apartments. Prior to July 2005, the Partnership’s $16,000,000 investment in the Clear Lake bonds was used as collateral for the Partnership’s variable debt financing. The Partnership entered into a bridge loan in order to refinance the existing debt and remove the collateral restriction on the bonds. In order to obtain the bridge loan, the Partnership paid origination fees of $160,000. All of those fees were amortized to interest expense during 2005. In addition to the origination fees, the bridge loan carried interest at a higher variable rate as compared to the debt it replaced. This resulted in approximately $299,000 higher interest expense in 2005 compared to 2004.

 

General and administrative expenses.  General and administrative expenses were higher during 2005 compared to the same period in 2004 primarily as a result of the payment of $359,000 of deferred administrative fees. These fees were previously deferred by the General Partner, however, in conjunction with the sale of Clear Lake Colony Apartments, these fees were paid in December 2005. The sale ultimately closed on November 10, 2005 and is more fully described in the discussion of Liquidity and Capital Resources in this Form 10-K. Salaries and benefits expense increased approximately $151,000 for the year ended December 31, 2005 compared to 2004 due to the hiring of a dedicated fund manager and investment analyst. Legal fees increased by approximately $107,000 and Board of Manager fees increased by approximately $83,000 in 2005 compared to 2004. Offsetting these expenses were reductions in accounting related expenses of approximately $65,000 related to preparatory work associated with Sarbanes-Oxley compliance incurred in 2004 along with a decrease in miscellaneous other administrative expenses.

 

Hurricane related expenses.  These expenses relate to the hurricane damages sustained by certain properties located in the areas of Florida and Georgia that were affected by the various hurricanes that hit during 2004. There were no such expenses in 2005 affecting the properties.

Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003

 

Rental Revenues.  All of the rental revenue reported by Company for the year ended December 31, 2004 is the result of consolidating the results of operations of the VIEs. No rental income was recorded in 2003 since the Partnership did not report the VIEs’ financial results on a consolidated basis in 2003. Average physical occupancy for 2004 was approximately 88% for the consolidated properties.

 

Mortgage revenue bond investment income.  The decrease in mortgage revenue bond investment income from 2003 to 2004 is due primarily to the elimination of the interest income resulting from the consolidation of the VIEs. The income relates directly to the tax-exempt mortgage revenue bond expense of the underlying properties which are owned by the VIEs. The mortgage revenue bond investment income earned by the Company in 2004 was from the tax-exempt mortgage revenue bond on Chandler Creek Apartments which was acquired in April of 2004.

 

Real estate operating expenses.  Real estate operating expenses for the year ended December 31, 2004 are the result of consolidating the VIEs. No rental operating expenses were recorded in 2003 since the Partnership did not report the VIEs’ financial results on a consolidated basis in 2003. Real estate operating expenses are comprised principally of real estate taxes, property insurance, utilities, property management fees, repairs and maintenance, and salaries and related employee expenses of on-site employees. A portion of real estate operating expenses are fixed in nature, thus a decrease in rental revenue would result in a reduction in real estate operating margins. Conversely, as rental revenue increases, the fixed nature of these expenses will increase real estate operating margins as these real estate operating expenses would not increase at the same rate.

 

Depreciation and amortization expense.  Depreciation expense on real estate assets for the year ended December 31, 2004 is the result of consolidating the financial results of VIEs. No depreciation expense was recorded in 2003 since the Partnership did not report the VIEs’ financial results on a consolidated basis in 2003.

 

Interest expense.  Interest expense increased in 2004, primarily due to the interest expense associated with $25.3 million of Northwoods Lake bonds that were restructured to create two separate issue series, Series A for $19,100,000 and Series B for $6,150,000. The Partnership sold its investment in the Series A bonds to an unaffiliated third party for $19,100,000. Because the Company continues to consolidate Northwoods Lake Apartments under FIN 46R, the Company consolidates this obligation related to the Series A bonds. Therefore, the interest associated with this obligation is also now consolidated in the Company’s consolidated financial statements.

 

General and administrative expenses.  General and administrative expenses increased due primarily to an increase in accounting fees, salaries and related expenses. In addition, the Company incurred costs related to preliminary work associated with Sarbanes-Oxley compliance. Higher administrative fees paid to the General Partner resulting from the acquisition of additional tax-exempt investments by the Partnership in accordance with its investment strategy also contributed to the increase.

 

Hurricane related expenses.  The expenses for the year ended December 31, 2004 relate to damages sustained by certain properties located in the areas of Florida and Georgia that were affected by the various hurricanes that hit during 2004. No such expenses were incurred in 2003.

 

The Partnership

 

The Partnership was formed for the primary purpose of acquiring, holding, selling and otherwise dealing with a portfolio of federally tax-exempt mortgage revenue bonds which have been issued to provide construction and/or permanent financing of multifamily residential apartments. The Partnership’s business objectives are to: (i) preserve and protect its capital; (ii) provide regular cash distributions to BUC holders; and (iii) provide a potential for an enhanced federally tax-exempt yield as a result of a participation interest in the net cash flow and net capital appreciation of the underlying real estate properties financed by the tax-exempt mortgage revenue bonds.

 

The Partnership is pursuing a business strategy of acquiring additional tax-exempt mortgage revenue bonds on a leveraged basis in order to: (i) increase the amount of tax-exempt interest available for distribution to its BUC holders; (ii) reduce risk through asset diversification and interest rate hedging; and (iii) achieve economies of scale. The Partnership seeks to achieve its investment growth strategy by investing in additional tax-exempt mortgage

revenue bonds and related investments, taking advantage of attractive financing structures available in the tax-exempt securities market and entering into interest rate risk management instruments.

 

As described in Item 1, Effect of Adoption of FIN 46R on Financial Reporting the consolidated financial statements of the Company include certain of the underlying properties that secure the bonds that are owned by the Partnership. On November 10, 2005, the Partnership foreclosed on the Clear Lake Colony Apartments Bonds, took possession of the property and sold the property to a third party. As result of the sale of the property, Clear Lake is reflected as a discontinued operation in the consolidated financial statements of the Company for the years ended December 31, 2005 and December 31, 2004. A description of the multifamily housing properties, excluding Clear Lake Colony Apartments, collateralizing the tax-exempt mortgage revenue bonds owned by the Partnership as of December 31, 2005 is as follows:

 

 

 

 

Each of the tax-exempt mortgage revenue bonds bears tax-exempt interest at a fixed rate and provides for the payment of additional contingent interest that is payable solely from available net cash flow generated by the financed property. The principal amounts of seven of the bonds do not amortize over their respective terms. The terms of the remaining four bonds provide for semiannual payments of principal and interest out of operating cash flow.

 

At December 31, 2005, all of the Partnership’s tax-exempt mortgage revenue bonds were paying their full amount of base interest. The Partnership has the ability and may restructure the terms of its tax-exempt mortgage

revenue bond to reduce the base interest rate payable on these bonds. The Partnership remains aware of this potential and continues to monitor the performance of the multifamily properties collateralizing its tax-exempt mortgage revenue bonds.

 

As of December 31, 2005 the Partnership has securitized $45,990,000 of its tax-exempt mortgage revenue bond portfolio. The Partnership uses the proceeds from these securitization transactions to acquire additional tax-exempt mortgage revenue bonds and other investments.

 

The Partnership may make taxable loans for the purpose of acquiring the tax-exempt mortgage revenue bonds secured by the same property or to provide capital project funding to a property securing a tax-exempt mortgage revenue bond already owned by the Partnership. Therefore, the business purpose of the Partnership making the taxable loans is not solely to earn taxable income, but rather to acquire a tax-exempt mortgage revenue bond or to improve the condition of a property securing a tax-exempt mortgage revenue bond. In most cases, the taxable loans are subordinate to the tax-exempt mortgage revenue bonds. The interest payable on the taxable loan is only paid by the property after the payment of: (i) the tax-exempt base interest on the tax-exempt bond along with any required principal payments; and (ii) the tax-exempt contingent interest on the tax-exempt mortgage revenue bond. Due to the current market conditions of the multifamily industry, certain of the underlying properties are not generating enough cash flow to cover the interest on the taxable mortgage loans, although the underlying properties are fully servicing the base interest on the tax-exempt mortgage revenue bonds.

 

In contrast to the Partnership, the assets of the Company consist primarily of the nine multifamily properties owned by the VIEs and the tax-exempt bonds on the remaining properties, Chandler Creek and Clarkson College student housing, which are not held by VIEs. All tax-exempt and taxable loans representing debt from the VIEs to the Partnership are eliminated in consolidation on the financial statements of the Company.

 

The following discussion of the Partnership’s results of operations for the years ended December 31, 2005, 2004 and 2003 reflects the operations of the Partnership prior to the consolidation of the VIEs, which was required with the implementation of FIN 46R effective January 1, 2004. This information reflects the information used by management to analyze its operations and is reflective of the segment data discussed in Note 13 to the audited financial statements.

 

Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004

 

 

Mortgage revenue bond investment income.  Mortgage revenue bond investment income increased approximately $1,389,000 in 2005 compared to 2004. The increase is due to previously unrecognized contingent interest

and deferred contingent interest associated with the Partnership’s investment in the Clear Lake mortgage revenue bond. Total contingent interest and deferred contingent interest amounted to approximately $2,072,000 and was received and recognized in the fourth quarter of 2005. Due to the uncertainty in collections of contingent interest, the Partnership recognizes this as income only when it is realized. Interest associated with Clarkson Student Housing bonds increased income by approximately $164,000 due to a full year of ownership of the bonds in 2005 compared to a partial year of owning the bonds in 2004. Offsetting the increase associated with Clear Lake and Clarkson were decreases in mortgage revenue bond investment income related to a decrease in base interest on the Clear Lake bonds as the bonds were outstanding through November 15, 2005 compared to an entire year in 2004. The reduced base interest income amounted to approximately $138,000 in 2005. Additional reductions in interest income occurred from the Northwoods bond restructuring in 2004 whereby the Partnership reduced its ownership in the Northwoods bonds from a principal investment of approximately $25,250,000 at the beginning of 2004 to $6,150,000 in June 2004. The reduced ownership resulted in approximately $661,000 of lower interest income in 2005. Further reductions in interest income of approximately $48,000 were due to principal payments made during 2005 on the other investments of the Partnership.

 

Other bond investment income.  During the first quarter of 2005, the Company sold its investment in Museum Tower tax-exempt bond. As a result of the sale, interest income from this bond decreased by approximately $286,000 in 2005. Offsetting this decrease was approximately $37,000 of additional bond interest income from the investment in bonds of approximately $600,000 during 2005.

 

Other interest income.  Other interest income represents income earned on the Partnership’s taxable loans and cash and cash equivalents. The increase is primarily attributable to interest received on a taxable loan to Clear Lake Colony Apartment of approximately $312,000. The interest on this taxable loan was previously not recorded due to the risk of collection.

 

Bond impairment and provision for loan losses.  The Partnership is required to periodically test its tax-exempt mortgage bonds for impairment by determining if the fair value of a bond is less than its cost. If a bond is impaired on other than a temporary basis, an impairment charge is recorded against earnings in the period. Similarly, the Partnership is required to recognize a provision for loan losses against earnings when it determines that the full amount of principal and interest on its taxable loans may not be fully recoverable. The Partnership recorded a bond impairment of $0 and a provision for loan losses of $734,000 for the year ended December 31, 2005 compared with a bond impairment of approximately $375,000 and a provision for loan losses of approximately $218,000 for the year ended December 31, 2004.

 

Interest expense.  Interest expense increased by approximately $374,000 during 2005 compared to 2004. The increase is attributable to a bridge loan that was entered into during the third quarter of 2005 to facilitate the sale of Clear Lake Colony Apartments. Prior to July of 2005, the Partnership’s $16,000,000 investment in the Clear Lake bonds was used as collateral for the Partnership’s variable debt financing. The Partnership entered into a bridge loan in order to refinance the existing debt and remove the collateral restriction on the bonds. In order to obtain the bridge loan, the Partnership paid origination fees of $160,000. All of those fees were amortized to interest expense during 2005. In addition to the origination fees, the bridge loan carried interest at variable rate and was approximately $299,000 higher in 2005 compared to 2004.

 

Amortization expense.  Amortization expense decreased approximately $172,000 primarily due to the bond and debt financing costs expensed on the restructure of the Northwood Lakes bonds in 2004.

 

General and administrative expenses.  General and administrative expenses were higher during 2005 compared to the same period in 2004 primarily as a result of $359,000 of deferred administrative fees. These fees were previously deferred by the General Partner, however, in conjunction with the sale of Clear Lake Colony Apartments, these fees were paid during 2005. The sale ultimately closed on November 10, 2005 and is more fully described in the discussion of Liquidity and Capital Resources in this Form 10-K. Salaries and benefits expense increased approximately $151,000 for the year ended December 31, 2005 compared to 2004. Legal fees increased by approximately $107,000 and Board of Manager fees increased by approximately $83,000 in 2005 compared to 2004. Offsetting these expenses were reductions in accounting related expenses of approximately $65,000 along with a decrease in miscellaneous other administrative expenses.

Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003

 

 

Mortgage revenue bond investment income.  Mortgage revenue bond investment income increased $10,543 in 2004 compared to 2003 due to: (i) interest earned on the Chandler Creek Apartments bond which was acquired in December 2003; (ii) an increase in interest earned on Fairmont Oaks Apartments tax-exempt mortgage bonds due to a full year of interest earned in 2004 compared to a partial year of interest earned in 2003 as the bonds were acquired in April 2003; and (iii) interest earned on the acquisition of the Clarkson College tax-exempt bonds acquired in April 2004. Chandler Creek Apartments contributed $716,325 in interest income in 2004 compared to $30,000 of interest income in 2003. Fairmont Oaks Apartments tax-exempt mortgage bonds earned interest income of $494,140 in 2004 compared to $369,780 in 2003. Clarkson College contributed $206,783 to interest income during 2004. These increases were offset by a decrease of $913,677 in interest earned on $19.1 million of the Northwoods Lake Apartments tax-exempt mortgage revenue bonds sold in June 2004. The original $25,250,000 Northwoods Lake bonds were restructured to reduce the base interest rate from 7.5% to 5.0% and to create two separate series of bonds. The Partnership sold the $19.1 million Series A bonds and retained the $6,150,000 Series B bonds. Further offsetting the increase in mortgage revenue bond investment income were decreases associated with past-due interest earned in 2004 compared to 2003.

 

Other interest income.  Other interest income represents income earned on the Partnership’s taxable loans and cash and cash equivalents. The increase is attributable to interest earned on the taxable loan to Clarkson College. The taxable loan was converted into tax-exempt bonds in April 2004.

 

Bond impairment and provision for loan losses.  The tax-exempt mortgage revenue bonds have a limited market. As such, the Partnership estimates the fair value for each bond as the present value of its expected cash flows using a discount rate for comparable tax-exempt investments. Provisions for loan losses are estimated using the present value of the expected cash flows of the underlying properties to which the loan relates. The Partnership recorded impairments on its bonds and taxable loans in 2004 of $592,495 compared to impairments of $1,810,000 in 2003.

 

Interest expense.  Interest expense increased $159,723 due primarily to higher average debt levels in 2004 compared to 2003.

 

Amortization expense.  Amortization expense increased $147,967 primarily due to the bond and debt financing costs incurred in connection with the restructuring of the Northwood Lakes bonds.

 

General and administrative expenses.  General and administrative expenses increased due primarily to an increase in accounting fees, salaries and related expenses. In addition, the Partnership incurred costs related to preliminary work associated with Sarbanes-Oxley compliance. Higher administrative fees paid to the General

Partner resulting from the acquisition of additional tax-exempt investments by the Partnership in accordance with its investment strategy also contributed to the increase.

 

Liquidity and Capital Resources

 

Tax-exempt interest earned on the mortgage revenue bonds represents the Partnership’s principal source of cash flow. Tax-exempt interest is primarily comprised of base interest on the mortgage revenue bonds. The Partnership will also receive from time to time contingent interest on the mortgage revenue bonds. Contingent interest is only paid when the underlying properties generate excess cash flow. Therefore, cash in-flows are fairly fixed in nature and increase when the underlying properties have strong economic performances and when the Partnership acquires additional tax-exempt mortgage revenue bonds.

 

The Partnership’s principal uses of cash are the payment of distributions to BUC holders, interest on debt financing and general and administrative expenses. The Partnership also uses cash to acquire additional investments. Distributions to BUC holders may increase or decrease at the determination of the General Partner. The Partnership is currently paying regular distributions at the rate of $0.54 per BUC per year. As previously discussed, the Partnership paid a special distribution of approximately $0.27 per BUC during 2005 in conjunction with the Clear Lake transaction. The General Partner determines the amount of the distributions based upon the projected future cash flows of the Partnership. Future distributions to BUC holders will depend upon the amount of base and contingent interest received on the tax-exempt mortgage revenue bonds and other investments, the effective interest rate on the Partnership’s variable-rate debt financing, and the amount of the Partnership’s undistributed cash.

 

The Partnership believes that cash provided by net interest income from its tax-exempt mortgage revenue bonds and other investments will be adequate to meet its projected long-term liquidity requirements, including the payment of expenses, interest and distributions to BUC holders. Recently, income from investments has not been sufficient to fund such expenditures without utilizing cash reserves to supplement the deficit. See discussion below regarding “Historical and Current Business Strategy”.

 

The VIEs’ primary source of cash is net rental revenues generated by their real estate investments. Net rental revenues from a multifamily apartment property depend on the rental and occupancy rates of the property and on the level of operating expenses. Occupancy rates and rents are directly affected by the supply of, and demand for, apartments in the market area in which a property is located. This, in turn, is affected by several factors such as local or national economic conditions, the amount of new apartment construction and the affordability of single-family homes. In addition, factors such as government regulation (such as zoning laws), inflation, real estate and other taxes, labor problems and natural disasters can affect the economic operations of an apartment property.

 

The VIEs’ primary uses of cash are: (i) the payment of operating expenses; and (ii) the payment of debt service on the VIEs’ bonds and mortgage notes payable.

 

Cash flows provided by operating activities decreased $1,276,431 in 2005 compared to 2004 due primarily to the timing of payments in accounts payable

 

Cash provided by investing activities increased $28,369,296 in 2005 compared to 2004 due to the sale of Clear Lake Colony Apartments and Museum Towers. Total proceeds from these two transactions amounted to $36,223,633. Offsetting the increase in proceeds was the additional use of cash for the acquisition of tax-exempt bonds. In 2005, the Company used an additional $8,623,248 for the acquisition of tax-exempt bonds compared to 2004.

 

Cash used in financing activities increased $25,131,836 in 2005 compared to 2004 due to increased distributions, higher debt financings and no new financings in 2005.

 

Historical and Current Business Strategy

 

The Partnership, along with its predecessor partnership, has been in existence and operating continuously since 1987. During its entire history the Partnership has been successful in carrying out its business objectives as described above. The Partnership is intended to be a tax exempt bond fund making mortgage investments in multifamily real estate, collecting interest and principal payments, managing the investments of the Partnership and

distributing the preponderance of Cash Available for Distribution (“CAD”) to BUC holders. The Partnership has distributed over $42.2 million since 1998. This represents the majority of CAD over the same time period, thereby, very little excess CAD has been retained within the Partnership. For a further discussion of CAD, see Item 6. Selected Financial Data. On a tax reporting basis the Partnership has been, and remains, the “purest” multifamily tax exempt bond fund among its peer group, typically generating close to 100% tax exempt income from continuing operations compared to 70% to 80% for peer entities.

 

The Partnership has historically operated by investing in Pre-1986 “80/20” Multifamily Revenue Bonds. These bonds were issued prior to the Tax Reform Act of 1986 and require each property financed with these bonds to set aside 20% of their units for residents making no more than 80% of median area income. These bonds held by the Partnership represent a first mortgage with very high leverage, often times approaching 100% of property value. This high leverage has been intentional, as our objective has been to maximize the tax-exempt income generated from each of our investments.

 

Beginning in 1997, the Partnership began to use leverage for the first time to enhance the generation of CAD. The majority of its borrowings are at variable interest rates. While its ultimate interest rate exposure is capped through interest rate hedging strategies, CAD performance is subject to increases in variable borrowing rates up to the level capped by the hedging strategy. Additionally, as high leverage mortgage investors in multifamily real estate, the Partnership has been directly affected in the last four years by declining property performance. This decline is attributable to increased vacancy and rental concession losses caused by increased home ownership in the United States as discussed in previous filings. CAD generated by the Partnership has been, and continues to be, under pressure due to declines in property performance (which translates into less cash available for payment of base interest due under the bonds), increased short term borrowing rates, and increased operating expenses attributable in great part to the cost of the Partnership complying with FIN 46R and Sarbanes-Oxley. CAD, on a recurring basis by excluding the impact of the Clear Lake Colonies transaction, for 2005 was $0.42 per BUC compared to distributions of $0.54 per BUC for the year ended December 31, 2005. While property performance has been declining over the last several years, property values are at all time highs in terms of cap rates.

 

The Partnership acquired bonds that are structured to provide an enhanced federally tax-exempt yield as a result of a participation interest in the net cash flow and net capital appreciation through the payment of both base interest and contingent interest. As a result of the structure of the bonds, FIN 46R, as discussed above, requires the Partnership to consolidate the financial statements of the multifamily properties which secure the bonds owned by the Partnership. Management believes that the consolidation of these VIEs makes the Partnership’s GAAP financial statements confusing to many BUC holders and does not represent the true intent of the business strategy of the Partnership.

 

Given all of the Partnership dynamics discussed above, the General Partner believes it is appropriate to reposition the Partnership’s investment portfolio. The objective of this repositioning is to improve the quality and performance of the bond portfolio. Additionally, the General Partner believes it is possible to redeploy funds into investments that would not need to be consolidated under FIN 46R. If successful in this redeployment the Partnership will own a higher quality investment portfolio of tax-exempt mortgage revenue bonds that will be more clearly presented in the Partnership’s financial statements. Such financial statements would present financial information more in line with the stated objectives of the Partnership. The General Partner believes this would be a significant event for the Partnership and would substantially increase the understandability and transparency of the Partnership’s financial reports.

 

The General Partner of the Partnership remains committed to continuing to deliver on the Partnership’s business objectives. First and foremost, the General Partner intends to perpetuate the Partnership for the foreseeable future and there are no intentions to liquidate the Partnership at this time.

 

In order to achieve the objective of repositioning the Partnership’s investment portfolio the following may occur.

 

1. In order to capitalize on current multifamily property valuations the Partnership may call most of its bond investments thereby requiring a sale or refinancing to occur. This would allow the Partnership to realize additional returns up to the amount of accrued contingent interest on its bond investment. It may also allow the

Partnership to realize payment of taxable loans outstanding which are currently considered under-performing or non-performing assets,

 

2. The proceeds received from these transactions would be redeployed into other tax exempt multifamily oriented investments. Through this redeployment CAD is expected to increase by investing in assets that have the potential to generate a higher income as compared to some current investments. The Partnership will likely expand its bond investments well beyond traditional “80/20” bonds, and

 

3. The Partnership may be able to use a higher quality investment portfolio to obtain higher leverage to be used to acquire additional investments.

 

By triggering a terminal event for many of the Partnership’s investments:

 

1. The Partnership will be able to monetize its upside potential inherent in the current bond structures and increase the total assets of the Partnership,

 

2. Through the redeployment of proceeds received the Partnership may increase CAD through an expanded asset base and through the elimination of current under-performing or non-performing assets,

 

3. The Partnership’s accounting and financial reporting may be simplified by eliminating the VIEs currently consolidated by the Partnership under FIN 46R, and

 

4. By perpetuating the Partnership’s historically high dividend payout ratio, investor distributions will increase as CAD increases.

 

The Partnership continues to explore ways to grow which may include the filing of a registration statement in order to raise additional equity for the Partnership. Equity raises may allow the Partnership to realize better economies of scale and further enhance the generation of CAD. Growing the Partnership is critical in order to justify being a publicly traded entity and being able to spread the significantly increased costs of being public across a larger income base.

 

Off Balance Sheet Arrangements

 

As of December 31, 2005 and 2004, the Partnership invested in tax-exempt mortgage revenue bonds which are collateralized by multifamily housing projects. The multifamily housing projects are owned by entities that are not controlled by the Partnership. The Partnership has no equity interest in these entities and does not guarantee any obligations of these entities. The VIEs that are consolidated by the Partnership do not have off-balance sheet arrangements. The Partnership has financed the acquisition of some of its tax-exempt revenue bonds using the Merrill Lynch P-Float program. Although this financing involves placing the mortgage revenue bonds in trust in exchange for an interest in the trust, the transaction is treated as a leveraged financing and not a sale of the mortgage revenue bonds. Therefore, the Partnership continues to reflect the mortgage revenue bonds as assets in its balance sheet and does not have any off-balance sheet arrangements. The Partnership does not engage in trading activities involving non-exchange traded contracts. As such, the Partnership is not materially exposed to any financing, liquidity, market, or credit risk that could arise if it had engaged in such relationships. The Partnership does not have any relationships or transactions with persons or entities that derive benefits from their non-independent relationships with the Company or its related parties other than what is disclosed in Note 9 to the Company’s Financial Statements.

 

Contractual Obligations

 

The Company has the following contractual obligations as of December 31, 2005:

 

 

The Company is also contractually obligated to pay interest on its long-term debt obligations.

Inflation

 

With respect to the financial results of the Partnership’s investment in tax-exempt mortgage revenue bonds, substantially all of the resident leases at the multifamily residential properties, which collateralize the Partnership’s tax-exempt mortgage revenue bonds, allow, at the time of renewal, for adjustments in the rent payable there under, and thus may enable the properties to seek rent increases. The substantial majority of these leases are for one year or less. The short-term nature of these leases generally serves to reduce the risk to the properties of the adverse effects of inflation; however, market conditions may prevent the properties from increasing rental rates in amounts sufficient to offset higher operating expenses. Inflation did not have a significant impact on the Partnership’s financial results for the years presented in this report.

 

Recent Accounting Pronouncements

 

There are no accounting pronouncements or interpretations that have been issued but not yet adopted by the Company that are expected to have a material impact on the consolidated financial statements.

 

The Partnership’s primary market risk exposures are interest rate risk and credit risk. The Partnership’s exposure to market risks relates primarily to its investments in tax-exempt mortgage revenue bonds and its debt financing.

 

Interest Rate Risk

 

Interest rates are highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Partnership’s control. The nature of the Partnership’s investment in the tax-exempt mortgage revenue bonds and the debt financing used to finance these investments exposes the Partnership to financial risk due to fluctuations in market interest rates. The tax-exempt mortgage revenue bonds bear base interest at fixed rates and may additionally pay contingent interest which fluctuates based upon the cash flows of the underlying property. As of December 31, 2005, the weighted average base rate of the tax-exempt mortgage revenue bonds was 6.7%. Accordingly, the interest income generated by the tax-exempt mortgage revenue bonds is generally fixed, except to the extent the underlying properties generate enough excess cash flow to pay contingent interest. Each of the bonds matures after 2010. Conversely, the interest rates on the Partnership’s floating rate debt financing fluctuate based on the BMA Index Rate, which resets weekly. Accordingly, the Partnership’s cost of borrowing will increase as the BMA Index Rate increases. As of December 31, 2005, the Partnership had total debt financing outstanding of $45,990,000. The weighted average effective interest rate for 2005 on the debt outstanding as of December 31, 2005 was approximately 3.2%. If the average BMA Index Rate, including fees, had increased or decreased by 100 basis points for the year ended December 31, 2005, the interest expense payments on this variable-rate debt financing would have increased or decreased by approximately $460,000, respectively.

 

In the event of a significant unfavorable fluctuation in interest rates, the Partnership may collapse each of its financing transactions by exercising the call feature of the respective bond securitization. The BMA Index Rate, net of any fees, ranged from 1.48% to 3.51% during the year ended December 31, 2004, while the base rates of the securitized tax-exempt mortgage revenue bonds range from 5.00% to 7.50% as of December 31, 2005. In the event that the BMA Index Rate rises dramatically and exceeds the base rate of the securitized tax-exempt mortgage revenue bonds, the trust would be collapsed as a result of insufficient interest from the underlying fixed-rate tax-exempt mortgage bond to service the floating rate senior interest obligations of the P-Float. Upon collapse of the trust, the Company would have to either refinance or sell the tax-exempt mortgage revenue bonds. A decrease in the net interest income earned through the structure of the securitizations would decrease cash available for distributions.

The Partnership is managing its interest rate risk on its debt financing by entering into interest rate cap agreements that cap the amount of interest expense it could pay on its floating rate debt financing as follows:

 

 

 

 

Using the cap agreements, the Partnership is able to benefit from a low interest rate environment, while still remaining protected from a significant increase in the floating rates. Bank of America does have the right to convert two of the cap agreements to a fixed rate swap, in which case the Partnership’s interest expense would be fixed, but at higher interest rates than the current floating rate. Should the BMA Index Rate continue to remain low or further decline, Bank of America could exercise such option. The cap agreements are required to be marked to market with the difference recognized in earnings as interest expense which can result in significant volatility to reported net income over the term of the caps. The weighted-average effective rate on the debt financing, excluding the effect of marking the interest rate cap agreements to market, was 2.98% for the year ended December 31, 2005. Therefore, the average BMA Index Rate, including fees, would have had to increase by approximately 92 basis points during 2005 in order to reach the lowest level of the Partnership’s interest rate cap agreements.

 

The fair value of the Partnership’s investments in tax-exempt mortgage revenue bonds, which bear fixed base interest rates, is also directly impacted by changes in market interest rates. An increase in rates will cause the fair value of the bonds to decrease. If the fair value of the bonds decreases, the Partnership may need to provide additional collateral for its debt financing.

 

Credit Risk

 

The Partnership’s primary credit risk is the risk of default on its portfolio of tax-exempt mortgage revenue bonds and taxable loans collateralized by the multifamily properties. The tax-exempt mortgage revenue bonds are not direct obligations of the governmental authorities that issued the bonds and are not guaranteed by such authorities or any insurer or other party. In addition, the tax-exempt mortgage revenue bonds and the associated taxable loans are non-recourse obligations of the property owner. As a result, the sole source of principal and interest payments (including both base and contingent interest) on the tax-exempt mortgage revenue bonds and the taxable loans is the net rental revenues generated by these properties or the net proceeds from the sale of these properties.

 

If a property is unable to sustain net rental revenues at a level necessary to pay current debt service obligations on the Partnership’s tax-exempt mortgage revenue bond or taxable loan on such property, a default may occur. A property’s ability to generate net rental income is subject to a wide variety of factors, including 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 area in which a property is located. This, in turn, is affected by several factors such as local or national economic conditions, the amount of new apartment construction and the affordability of single-family homes. In addition, factors such as government regulation (such as zoning laws), inflation, real estate and other taxes, labor problems and natural disasters can affect the economic operations of an apartment property.

 

Defaults on its tax-exempt mortgage revenue bonds and taxable loans may reduce the amount of future cash available for distribution to BUC holders. In addition, if a property’s net rental income declines, it may affect the market value of the property. If the market value of a property deteriorates, the amount of net proceeds from the

ultimate sale or refinancing of the property may be insufficient to repay the entire principal balance of the tax-exempt mortgage revenue bond or taxable loan secured by the property.

 

In the event of a default on a tax-exempt mortgage revenue bond or taxable loan, the Partnership will have the right to foreclose on the mortgage or deed of trust securing the property. If the Partnership takes ownership of the property securing a defaulted tax-exempt mortgage revenue bond, it will be entitled to all net rental revenues generated by the property. However, such amounts will no longer represent tax-exempt interest to the Partnership.

 

The Partnership’s primary method of managing the credit risks associated with its tax-exempt mortgage revenue bonds and taxable loans is to perform a complete due diligence and underwriting process of the properties securing these mortgage bonds and loans and to carefully monitor the performance of such property on a continuous basis.

 

The Partnership is also exposed to credit risk with respect to its debt financing. All of the Partnership’s debt financing has been obtained using securitizations issued through the Merrill Lynch P-Float program. In this program, the senior interests sold are credit enhanced by Merrill Lynch or its affiliate. The inability of Merrill Lynch or its affiliate to perform under the program or impairment of the credit enhancement may terminate the transaction and cause the Partnership to lose the net interest income earned as a result. The Partnership recognizes the concentration of financing with this institution and periodically monitors its ability to continue to perform. In addition, the Partnership’s interest rate cap agreements are with two other counterparties. The $20 million interest rate cap agreement is with Bear Stearns and the $10 million and $15 million interest rate cap agreements are with Bank of America.

 

As the above information incorporates only those material positions or exposures that existed as of December 31, 2005, it does not consider those exposures or positions that could arise after that date. The ultimate economic impact of these market risks on the Partnership will depend on the exposures that arise during the period, the Partnership’s risk mitigating strategies at that time and overall business and economic environment.

 

Cash Concentrations of Credit Risk

 

The Partnership’s cash and cash equivalents are deposited primarily in a trust account at a single financial institution and are not covered by the Federal Deposit Insurance Corporation.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Partners of

America First Tax Exempt Investors, L.P.

 

We have audited the accompanying consolidated balance sheets of America First Tax Exempt Investors, L.P. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, partners’ capital and comprehensive income (loss), and cash flows for each of two years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Woodbridge Apartments of Louisville II, L.P. and Woodbridge Apartments of Bloomington III, L.P. (consolidated variable interest entities), which statements reflect total assets constituting 8% and 8% of consolidated total assets as of December 31, 2005 and 2004, respectively and total revenues constituting 17% and 18% of consolidated total revenues for the years ended December 31, 2005 and 2004, respectively. Such financial statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Woodbridge Apartments of Louisville II, L.P. and Woodbridge Apartments of Bloomington III, L.P., is based solely on the reports of such other auditors.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.

 

In our opinion, based on our audits and the reports of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of America First Tax Exempt Investors, L.P. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 2 to the consolidated financial statements, on January 1, 2004, the Company adopted FASB Interpretation No. 46R “Accounting for Variable Interest Entities”.

 

/s/  DELOITTE & TOUCHE LLP

 

Omaha, Nebraska

March 31, 2006

Report of Independent Auditors

 

To the Partners

Woodbridge Apartments of Louisville II, L.P.

 

We have audited the accompanying balance sheet of Woodbridge Apartments of Louisville II, L.P., a limited partnership, as of December 31, 2005, and the related statements of profit and loss, changes in partners’ capital (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Woodbridge Apartments of Louisville II, L.P. at December 31, 2005, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.

 

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supporting data listed on the contents page are presented for purposes of additional analysis and are not a required part of the basic financial statements of the Partnership. Such data has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, are fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.

 

/s/  Katz, Sapper & Miller, LLP

 

Indianapolis, Indiana

January 28, 2006

Report of Independent Auditors

 

To the Partners

Woodbridge Apartments of Bloomington III, L.P.

 

We have audited the accompanying balance sheet of Woodbridge Apartments of Bloomington III, L.P., a limited partnership, as of December 31, 2005, and the related statements of profit and loss, changes in partners’ capital (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Woodbridge Apartments of Bloomington III, L.P. at December 31, 2005, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.

 

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supporting data listed on the contents page are presented for purposes of additional analysis and are not a required part of the basic financial statements of the Partnership. Such data has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, are fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.

 

/s/  Katz, Sapper & Miller, LLP

 

Indianapolis, Indiana

January 28, 2006

 

To the Partners

America First Tax Exempt Investors, L.P.:

 

We have audited the accompanying statements of operations, partners’ capital and comprehensive income (loss), and cash flows of America First Tax Exempt Investors, L.P. for the year ended December 31, 2003. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of America First Tax Exempt Investors, L.P. for the year ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.

 

/s/  KPMG LLP

 

Omaha, Nebraska

April 14, 2004

AMERICA FIRST TAX EXEMPT INVESTORS, L.P.

 

CONSOLIDATED BALANCE SHEETS

 

 

The accompanying notes are an integral part of the consolidated financial statements.

AMERICA FIRST TAX EXEMPT INVESTORS, L.P.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

The accompanying notes are an integral part of the consolidated financial statements.

AMERICA FIRST TAX EXEMPT INVESTORS, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS, CAPITAL AND
COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2005, 2004 and 2003