Item 1. Business
National Housing Partnership Realty Fund Two, a Maryland Limited Partnership (the Partnership), was formed under the Maryland Revised Uniform Limited Partnership Act as of January 22, 1985. On March 15, 1985, the Partnership commenced offering 18,300 limited partnership interests, at a price of $1,000 per interest, through a public offering registered with the Securities and Exchange Commission (the Offering). The Offering was managed by Dean Witter Reynolds, Inc. and was terminated on May 22, 1985, with subscriptions for all 18,300 limited partnership interests.
The General Partner with a 1% interest in the Partnership is The National Housing Partnership (NHP), a District of Columbia limited partnership, whose sole general partner (0.2%) is National Corporation for Housing Partnerships (NCHP). Following a corporate reorganization in August 1995, which involved an initial public offering of NHP Incorporated's management-related service companies (the "Reorganization"), the remaining 99.8% of NHP's limited partnership interest is owned by NHP Partners Two Limited Partnership (Partners Two), a Delaware limited partnership. NCHP is wholly owned by NHP Partners, Inc. (Partners), a Delaware corporation. Notwithstanding the Reorganization, control of NCHP, Partners Two and Partners remains with Demeter Holdings Corporation (a Massachusetts nonprofit corporation, which is wholly-owned/controlled by the President and Fellows of Harvard College, a Massachusetts educational corporation created by the constitution of Massachusetts), Capricorn Investors, L.P. (a Delaware investment limited partnership, whose general partner is Capricorn Holdings, G.P., a Delaware general partnership), and J. Roderick Heller, III (Chairman, President and Chief Executive Officer of NCHP and Partners).
The Original Limited Partner of the Partnership is 1133 Fifteenth Street Two Associates, a Maryland limited partnership, whose general partner is NHP and whose limited partners were key employees of NCHP at the time the Partnership was formed. The Original Limited Partner holds a 1% interest in the Partnership.
The remaining 98% limited partnership interests in the Partnership are held by the investors who subscribed to the Offering.
The Partnership's business is to hold limited partnership interests in twenty-one limited partnerships (Local Limited Partnerships), each of which owns and operates multi-family rental housing properties (Properties) which receive one or more forms of assistance from the Federal Government. In each instance NHP is the general partner of the Local Limited Partnership and the Partnership is the principal limited partner. As a limited partner, the Partnership's liability for obligations of the Local Limited Partnerships is limited to its investment, and the Partnership does not exercise control over the activities of the Local Limited Partnerships in accordance with the partnership agreements.
The Partnership's investment objectives are to:
(1) preserve and protect Partnership capital;
(2) provide current tax benefits to Limited Partners to the extent permitted by law, including, but not limited to, deductions that Limited Partners may use to offset otherwise taxable income from other sources;
(3) provide capital appreciation through increase in value of the Partnership's investments, subject to considerations of capital preservation and tax planning; and
(4) provide potential cash distributions from sales or refinancings of the Partnership's investments and, on a limited basis, from operations.
The Partnership does not have any employees. Services are performed for the Partnership by the General Partner and agents retained by it.
The following is a schedule of the Properties owned by the Local Limited Partnerships in which the Partnership is a limited partner:
SCHEDULE OF PROPERTIES OWNED BY LOCAL LIMITED PARTNERSHIPS IN WHICH NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO HAS AN INVESTMENT
(A) The mortgage is insured by the Federal Housing Administration under the provisions of Section 236 of the National Housing Act.
(B) The mortgage is insured by the Federal Housing Administration under the provisions of Section 221(d)(3) of the National Housing Act.
(C) Section 8 of Title II of the Housing and Community Development Act of 1974.
Although each Local Limited Partnership in which the Partnership has invested owns an apartment complex which must compete with other apartment complexes for tenants, government mortgage interest and rent subsidies make it possible to rent units to eligible tenants at below market rates. In general, this insulates the Properties from market competition.
The following tables indicates the year within the Section 8 rent subsidy contracts expire:
Of the contracts above expiring during 1997, contracts for 578 units expire prior to September 30, 1997. Congress has passed legislation which will provide a one-year renewal contract to replace those contracts.
The contracts covering the remaining 433 units expire in October and November, 1997. It is uncertain whether the agreement will be renewed, as well as contracts expiring after 1997, and if so, on what terms.
For the past several years, various proposals have been advanced by HUD, the Congress and others proposing the restructuring of the Section 8. These proposals generally seek to lower subsidized rents to market levels and to lower required debt service costs as needed to ensure financial viability at the reduced rents, but vary greatly as to how that result is to be achieved. Some proposals include a phase-out of project-based subsidies on a property-by-property basis upon expiration of a property's HAP Contract, with a conversion to a tenant-based subsidy. Under a tenant-based system, rent vouchers would be issued to qualified tenants who then could elect to reside at a property of their choice, provided the tenant has the financial ability to pay the difference between the selected property's monthly rent and the value of the voucher, which would be established based on HUD's regulated fair market rent for that geographic area.
Congress has not yet accepted any of these restructuring proposals and instead has elected to renew expiring Section 8 HAP Contracts for one year terms, generally at existing rents. While the Partnership does not believe that the proposed changes would result in a significant number of tenants relocating from properties owned by the Local Limited Partnerships, there can be no assurance that the proposed changes would not significantly affect the operations of the properties of the Local Limited Partnerships. Furthermore, there can be no assurance that changes in federal subsidies will not be more restrictive than those currently proposed or that other changes in policy will not occur. Any such changes could have an adverse effect on the operation of the Partnership.
During 1995 and 1994, three Local Limited Partnerships entered into grant agreements with HUD under the Drug Elimination Grant Program (the Program) to assist in the elimination of illegal drugs and the associated crime at the properties. The grant agreements are dated September 1994, and June and July 1995. The total award amount of the
grants is $422,493. During 1996, 1995 and 1994, the Partnerships incurred $78,691, $24,221 and $148,272 of costs under the Program of which $194,034 has been capitalized in rental property during 1996, 1995 and 1994. Drug Elimination Grant revenue in the amount of $62,223, $24,221 and $148,272 is included in other revenue in the accompanying Local Limited Partnerships' combined statements of operations.
In December 1996, a fire occurred at the Meadows East project site. The fire damages and loss of rents were estimated to be $277,500. Management believes that all damages will be recovered through insurance proceeds less a $2,500 deductible. As of December 31, 1996, no adjustments related to the fire have been reflected in the financial statements (see Note 16 to the Local Limited Partnership's combined financial statements).
Operations at all other Properties were generally satisfactory during the period.
National Corporation for Housing Partnerships (NCHP) was a significant participant in the drafting and passage of the Low Income Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA). LIHPRHA creates a procedure under which owners of properties assisted under the HUD Section 236 or 221(d)(3) program may be eligible to receive financial incentives in return for agreeing to extend their property's use as low income housing. The appropriation for the Department of Housing and Urban Development (which administers LIHPRHA) for the 1997 fiscal year was recently approved and is insufficient to meet existing program demand. As part of this appropriation, Congress directed HUD to suspend processing of any property which had not received approval of a sale or refinancing under LIHPRHA as of the date of enactment of the appropriation, which occurred on September 26, 1996. None of the Local Limited Partnerships received approval of a sale or refinancing under the program within the requisite timeframe and, therefore, none are expected to receive incentives under LIHPRHA in the future. This could have a negative impact on the Partnership's future available capital resources.
As discussed in Note 7 to the Local Limited Partnerships' combined financial statements, nineteen of the Local Limited Partnerships in which the Partnership has invested carry deferred acquisition notes due to the original owner of each Property. With the exception of West Oak Village, these notes will reach final maturity between 1997 and 1999. These notes are secured by both the Partnership's and NHP's interests in the Local Limited Partnerships. In the event of a default on the notes, the note holders would be able to assume NHP's and the Partnership's interests in the Local Limited Partnerships.
The West Oak Village note finally matured on November 30, 1996. The General Partner is negotiating with the note holders to extend the maturity date of the note to protect the interests of the Partnership. In addition (as discussed in Note 15 to the combined financial statements of the Local Limited Partnerships), the deferred acquisition notes of eight of the other Local Limited Partnerships mature during 1997. Due to the weakness in the rental market conditions where some of the Properties are located, the General Partner believes the amount due on the deferred acquisition notes may likely exceed the value to be obtained through sale or refinancing opportunities. The General Partner intends to continue negotiations with the note holders to extend the maturity date of the notes and/or to structure an arrangement under which both the note holders and the partners can receive a financial benefit by having the eligible Properties participate in sale or refinancing opportunities. Should no agreement be reached and the notes mature without sufficient funds from sale or refinancing to repay the notes, the Partnership may lose its interest in these Local Limited Partnerships. Should the Partnership lose its interest in a Local Limited Partnership, partners in the Partnership may incur adverse tax consequences. The impact of the tax consequence is dependent upon each partner's individual tax situation.
The following details the Partnership's ownership percentages of the Local Limited Partnerships and the cost of acquisition of such ownership. All interests are limited partner interests. Also included is the total mortgage encumbrance and deferred acquisition notes and accrued interest on each Property for each of the Local Limited Partnerships as of December 31, 1996:
(a)Deferred acquisition notes on this property are held by the Partnership and not by the Local Limited Partnership.
Item 2.

Item 2. Properties
See Item 1 for the real estate owned by the Partnership through the ownership of limited partnership interests in Local Limited Partnerships.
Item 3.

Item 3. Legal Proceedings
The Partnership is not involved in any material legal proceedings.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted.
PART II
Item 5.

Item 5. Market for the Registrant's Partnership Interests and Related Partnership Matters
(a) Interests in the Partnership were sold through a public offering managed by Dean Witter Reynolds, Inc. There is no established market for resale of interests in the Partnership. Accordingly, an investor may be unable to sell or otherwise dispose of his interest in the Partnership.
(b) As of December 31, 1996, there were 1,297 registered holders of limited partnership interests (in addition to 1133 Fifteenth Street Two Associates - See Item 1).
(c) No cash dividends or distributions have been declared from the inception of the Partnership through December 31, 1996.
Item 6.

Item 6. Selected Financial Data
(A) The Partnership holds limited partnership interests in the Local Limited Partnerships, and since its liability for obligations is limited to its original investment, its investment account is not reduced below zero (creating a liability) for the investments in Local Limited Partnerships. As a result, during 1996, 1995, 1994, 1993 and 1992, $3,251,206, $1,453,945, $4,942,486, $2,022,792, and $1,728,255, respectively, of losses from seventeen, nineteen, nineteen, nineteen and nineteen Local Limited Partnerships, have not been recognized by
the Partnership. During 1996, the Partnership's share of profits in two Local Limited Partnerships in the amount of $156,104 was offset against prior year losses not taken.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements in certain circumstances. Certain information included in this Report and other Partnership filings (collectively "SEC Filings") under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (as well as information communicated orally or in writing between the dates of such SEC Filings) contains or may contain information that is forward looking, including statements regarding the effect of government regulations. Actual results may differ materially from those described in the forward looking statements and will be affected by a variety of factors including national and local economic conditions, the general level of interest rates, terms of governmental regulations that affect the Partnership and interpretations of those regulations, the competitive environment in which the properties owned by the Local Limited Partnerships operate, the availability of working capital and dispositions of properties owned by the Partnership.
Liquidity and Capital Resources
The properties in which the Partnership has invested, through its investments in the Local Limited Partnerships, receive one or more forms of assistance from the Federal Government. As a result, the Local Limited Partnerships' ability to transfer funds either to the Partnership or among themselves in the form of cash distributions, loans or advances is generally restricted by these government assistance programs. These restrictions could impact the Partnership's ability to meet its cash obligations given the low level of reserves at the Partnership level.
Nineteen of the Local Limited Partnerships in which the Partnership has invested carry deferred acquisition notes due to the original owners of the Properties. In the event of a default on these notes, the note holders would re-assume both NHP's and the Partnership's interests in the Local Limited Partnerships.
The West Oak Village note finally matured on November 30, 1996. The General Partner is negotiating with the note holders to extend the maturity date of the note to protect the interests of the Partnership. In addition (as discussed in Note 15 to the combined financial statements of the Local Limited Partnerships), the deferred acquisition notes of eight of the other Local Limited Partnerships mature during 1997. Due to the weakness in the rental market conditions where some of the Properties are located, the General Partner believes the amount due on the deferred acquisition notes may likely exceed the value to be obtained through sale or refinancing opportunities. The General Partner intends to continue negotiations with the note holders to extend the maturity date of the notes and/or to structure an arrangement under which both the note holders and the partners can receive a financial benefit by having the eligible Properties participate in sale or refinancing opportunities. Should no agreement be reached and the notes mature without sufficient funds from sale or refinancing to repay the notes, the Partnership may lose its interest in these Local Limited Partnerships. Should the Partnership lose its interest in a Local Limited Partnership, partners in the Partnership may incur adverse tax consequences. The impact of the tax consequence is dependent upon each partner's individual tax situation.
All other notes have final maturity dates in 1999.
During 1996, 1995 and 1994, the Partnership repaid borrowings of $27,700, $170,111 and $6,001 to NHP. At December 31, 1996 and 1995, the Partnership owed zero and $27,700, respectively, to NHP. In 1996, 1995 and 1994, $2,447, $32,097 and $66,998 of interest owed was paid to NHP. Interest is charged on borrowings at the Chase Manhattan Bank prime interest rate plus 2%. Interest accrued for the years ended December 31, 1996, 1995 and 1994 was $1,587, $22,769 and $21,359, respectively. At December 31, 1996 and 1995, the Partnership owed NHP interest of zero and $860, respectively.
During 1994, the Partnership advanced a total of $6,673 to three Local Limited Partnerships for payment of expenses related to the LIHPRHA program and for working capital. No advances were made during 1996 and 1995. Advances of $3,438, $8,583 and $29,648 were repaid to the Partnership in 1996, 1995 and 1994, respectively. In addition, accrued interest of $793, $1,586 and $1,796 was received in 1996, 1995 and 1994, respectively.
In prior years, NHP had advanced funds to the Local Limited Partnerships pursuant to its now expired operating deficit guarantee commitment. No such advances were made during 1996. During 1995 and 1994, NHP advanced $53,819 and $22,460 to seven and six Local Limited Partnerships, respectively, for expenses incurred relating to potential sales or refinancing under the LIHPRHA program. The Local Limited Partnerships paid $38,163, $10,952 and $3,370 in loans during 1996, 1995 and 1994, respectively, and $212,729, $3,946 and $26,388 in interest on these loans during 1996, 1995, and 1994, respectively. The balances owed to NHP by nine and twelve Local Limited Partnerships at December 31, 1996 and 1995, was $544,622 and $582,785. Interest is charged at a rate equal to the Chase Manhattan Bank prime interest rate plus 2%.
Net cash provided by operations for the year ended December 31, 1996, was $31,485 as compared to $147,209 in 1995 and to net cash used in operations of $8,065 in 1994. The decrease in cash provided by operations from 1996 to 1995 resulted from a decrease in distributions received from the Local Limited Partnerships, and by the payment of administration and reporting fees to the General Partner. The increase in cash provided by operations from
1995 to 1994 was primarily the result of an increase in distributions received from the Local Limited Partnerships, and a decrease in the payment of interest on partner loans.
Distributions in excess of investment in Local Limited Partnerships and distributions from Local Limited Partnerships typically represent the Partnership's proportionate share of the excess cash available for distribution from the Local Limited Partnerships. As a result of the use of the equity method of accounting for the Partnership's investment in Local Limited Partnerships, certain investments' carrying values have been reduced to zero. For investments in Local Limited Partnerships which have been reduced to zero, cash distributions received are recorded in revenues as distributions in excess of investment in Local Limited Partnerships. For investments in Local Limited Partnerships which have not been reduced to zero, cash distributions received are recorded as distributions from Local Limited Partnerships in the statements of cash flows and reduce the Partnership's investment on the statement of financial position. Cash distributions totaling $164,326, $222,210 and $103,778 were received from six, four and four Local Limited Partnerships, respectively, during the years ended December 31, 1996, 1995 and 1994, respectively. The receipt of distributions in future years is dependent on the operations of the underlying properties of the Local Limited Partnerships.
Cash amounted to $37,396 at December 31, 1996. The ability of the Partnership to meet its on-going cash requirements in excess of cash on hand at December 31, 1996 is dependent on distributions received from the Local Limited Partnerships and proceeds from sales or refinancings of the underlying Properties. The combined underlying operations of the Local Limited Partnerships are projected to generate sufficient excess cash in the form of distributions to continue to fund the operations of the Partnership. However, should the operations of one or more Properties deteriorate, the Partnership may not have the financial capability to support those Properties without assistance from the General Partner. The General Partner is not required to provide funding to the Partnership. Therefore, there can be no assurance that the Partnership or its underlying Properties will have sufficient cash in the future.
As of December 31, 1996, the Partnership owes the General Partner $1,018,803 for administrative and reporting services performed. The payment of the unpaid administrative and reporting fees is predicated on the operations and/or sale or refinancing of the underlying Properties of the Local Limited Partnerships.
Results of Operations
The Partnership invested as a limited partner in Local Limited Partnerships which operate twenty-one rental housing properties. To the extent the Partnership still has a carrying basis in a respective Local Limited Partnership, results of operations are significantly impacted by the Partnership's share of the profits or losses in the Local Limited Partnership. These profits or losses include depreciation and accrued deferred acquisition note interest expense which are noncash in nature. As of December 31, 1996 and 1995, the Partnership had no carrying basis in nineteen of the Local Limited Partnerships and therefore reflected no results of operations, for its share of losses for these Local Limited Partnerships.
The Partnership incurred a net loss of $247,703 in 1996 compared to a net profit of $24,240 in 1995. Net loss per unit of limited partnership interest decreased to $13 in 1996 from a net profit of $1 in 1995 for the 18,300 units outstanding throughout both years. This was primarily due to a decrease in the Partnership's share of income and distributions in excess of investment in Local Limited Partnerships. The Partnership did not recognize $3,251,206 of its allocated share of losses from seventeen Local Limited Partnerships, as the Partnership's net book investment in them was reduced to zero prior to 1996 (see Note 3 to the Partnership's financial statements). During 1996, the Partnership's share of profits of two Local Limited Partnerships in the amount of $156,104 was offset against prior year losses not taken. The Partnership's share of losses from the Local Limited Partnerships, if not limited to its investment account balance, would have increased $1,899,096 between years. This increase was the primary result of two of the Local Limited Partnerships recognizing impairment losses on their rental property in the amount of $1,625,000 in 1996 (see Note 3 to the Partnership's financial statements).
The Partnership's net profit increased to $24,240 in 1995 from a net loss of $215,915 in 1994. Net profit per unit of limited partnership interest increased to $1 in 1995 from a net loss per unit of $12 in 1994 for the 18,300 units outstanding throughout both years. This increase was primarily due to an increase in the Partnership's share of income
from Local Limited Partnerships and distributions received in excess of investment in Local Limited Partnerships. Additionally, the Partnership did not recognize $1,453,945 of its allocated share of losses from nineteen Local Limited Partnerships, as the Partnership's net book investment in them was reduced to zero prior to 1996 (see Note 3 to the Partnership's financial statements). The Partnership's share of losses from the Local Limited Partnerships, if not limited to its investment account balance, would have decreased by $3,618,759 between years. This decrease was primarily the result of an increase in rental income and a decrease in losses on reduction of carrying value of rental property.
In December 1996, a fire occurred at the Meadows East project site. The fire damages and lost rents are estimated to be $277,500. Management believes that all damages will be recovered through insurance proceeds less a $2,500 deductible. As of December 31, 1996, no adjustments related to the fire have been reflected in the financial statements (see Note 16 to the Local Limited Partnership's combined financial statements).
Item 8.

Item 8. Financial Statements and Supplementary Data
The financial statements and supplemental schedule of the Partnership are included on pages 13 through 30 of this report.
Independent Auditors' Report
To The Partners of National Housing Partnership Realty Fund Two Vienna, VA
We have audited the accompanying statements of financial position of National Housing Partnership Realty Fund Two (the Partnership) as of December 31, 1996 and 1995, and the related statements of operations, partners' deficit, and cash flows for each of the three years in the period ended December 31, 1996, and the supporting schedule listed in the Index at Item 14. These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the financial statements of Hurbell I Limited Partnership and Rodeo Drive Limited Partnership (investees of the Partnership) for the years ended December 31, 1996, 1995 and 1994 and did not audit Kimberton Apartments Associates Limited Partnership and Windsor Apartments Associates Limited Partnership for the years ended December 31, 1995 and 1994. The Partnership's investment of zero and $4,227,334 in the net assets of these investees as of December 31, 1996 and 1995, respectively, and of zero, $257,939 and $134,558 in the net income of these investees for the years ended December 31, 1996, 1995 and 1994, are included in the accompanying financial statements. The financial statements of these investees were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to amounts included for these investees, is based solely upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. 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 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 other auditors, such financial statements present fairly, in all material respects, the financial position of National Housing Partnership Realty Fund Two as of December 31, 1996 and 1995, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, based on our audits and the reports of other auditors, such financial statement schedule, when considered in relation to the financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Deloitte & Touche LLP Washington, D.C. March 3, 1997
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
STATEMENTS OF FINANCIAL POSITION
See notes to financial statements.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
See notes to financial statements.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' DEFICIT
(A) General Partner (B) Original Limited Partner (C) Consists of 18,300 investment units held by 1,297 investors. Each unit represents a .0054% ownership interest.
See notes to financial statements.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
See notes to financial statements.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(CONTINUED)
See notes to financial statements.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF PARTNERSHIP ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
National Housing Partnership Realty Fund Two (the Partnership) is a limited partnership organized under the laws of the State of Maryland under the Maryland Revised Uniform Limited Partnership Act on January 22, 1985. The Partnership was formed for the purpose of raising capital by offering and selling limited partnership interests and then investing in limited partnerships (Local Limited Partnerships), each of which owns and operates an existing rental housing project which is financed and/or operated with one or more forms of rental assistance or financial assistance from the U.S. Department of Housing and Urban Development (HUD). On April 30, 1985, the Partnership began raising capital and acquiring interests in Local Limited Partnerships.
The General Partner was authorized to raise capital for the Partnership by offering and selling to additional limited partners not more than 18,300 interests at a price of $1,000 per interest. During 1985, the sale of interests was closed after the sale of 18,300 interests to limited partners.
During 1985, the Partnership acquired limited partnership interests of 94.5% (98% with respect to allocation of losses) in twenty-one Local Limited Partnerships, nineteen of which were organized in 1984 to acquire and operate existing rental housing projects. The remaining two Local Limited Partnerships were formed in 1972 and 1973 to construct and operate rental housing projects.
Significant Accounting Policies
The financial statements of the Partnership are prepared on the accrual basis of accounting. Direct costs of acquisition, including acquisition fees and reimbursable acquisition expenses paid to the General Partner, have been capitalized as investments in the Local Limited Partnerships. Other fees and expenditures of the Partnership are recognized as expenses in the period the related services are performed.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investments in Local Limited Partnerships are accounted for using the equity method and thus are carried at cost less the Partnership's share of the Local Limited Partnerships' losses and distributions or plus the Partnership's share of the Local Limited Partnerships' profits (see Note 3). An investment account is maintained for each of the limited partnership investments and losses are not taken once an investment account has decreased to zero. Cash distributions are limited by the Regulatory Agreements between the Local Limited Partnerships and HUD to the extent of surplus cash as defined by HUD. Distributions received from Local Limited Partnerships in which the Partnership's investment account has decreased to zero are recorded as revenue in the year received. Advances to Local Limited Partnerships are included with Investments in Local Limited Partnerships to the extent that the advances are not temporary advances of working capital.
For purposes of the Statement of Cash Flows, the Partnership considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
3. INVESTMENTS IN AND ADVANCES TO LOCAL LIMITED PARTNERSHIPS
The Partnership owns a 94.5% limited partnership interest (98% with respect to allocation of losses) in twenty-one Local Limited Partnerships: Meadows Apartments Limited Partnership, Esbro Limited Partnership, Rodeo Drive Limited Partnership, Menlo Limited Partnership, Mayfair Manor Limited Partnership, Hurbell I Limited Partnership, Hurbell II Limited Partnership, Hurbell III Limited Partnership, Tinker Creek Limited Partnership, Rockwell Limited Partnership, Meadows East Apartments Limited Partnership, Kimberton Apartments Associates Limited Partnership, San Juan del Centro Limited Partnership, Gulfway Limited Partnership, Caroline Arms Limited Partnership, Hilltop Limited Partnership, Harold House Limited Partnership, Park Avenue West I Limited Partnership, West Oak Village Limited Partnership, Park Avenue West II Limited Partnership, and Windsor Apartments Associates Limited Partnership. Since the Partnership, as a limited partner, does not exercise control over the activities of the Local Limited Partnerships in accordance with the partnership agreements, these investments are accounted for using the equity method. Thus, the investments are carried at cost less the Partnership's share of the Local Limited Partnerships' losses and distributions or plus the Partnership's share of Local Limited Partnerships' profits. However, since the Partnership is not legally liable for the obligations of the Local Limited Partnerships, and is not otherwise committed to provide additional support to them, it does not recognize losses once its investment in each of the individual Local Limited Partnerships reduced for its share of losses and cash distributions, reaches zero. As a result, the Partnership did not recognize $3,251,206, $1,453,945 and $4,942,486 of losses from seventeen, nineteen and nineteen Local Limited Partnerships during 1996, 1995 and 1994, respectively. During 1996, the Partnership's share of profits in two Local Limited Partnerships in the amount of $156,104 was offset against prior year losses not taken. As of December 31, 1996 and 1995, the Partnership has not recognized $20,965,269 and $17,870,167, respectively, of its allocated cumulative share of losses from nineteen Local Limited Partnerships in which its investment has been reduced to zero.
During 1994, the Partnership advanced $6,673 to three Local Limited Partnerships for payment of expenses related to the LIHPRHA program and for working capital. No advances were made during 1996 and 1995. Advances of $3,438, $8,583 and $29,648 were repaid to the Partnership in 1996, 1995 and 1994, respectively. In addition, accrued interest of $793, $1,586 and $1,796 was received in 1996, 1995 and 1994, respectively. During 1993 the Partnership re-evaluated the timing of the collectibility of the advances and determined, based on the Local Limited Partnerships' operations, that such advances are not likely to be collected. For accounting purposes, the Partnership treated the advance balance as additional investments in the Local Limited Partnerships. The balance was then reduced to zero, with a corresponding charge to operations (shown as "Loss on Investment in Local Limited Partnerships" in the Statements of Operations) to reflect a portion of the previously unrecognized losses on investments.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Advances to the Local Limited Partnership remain due and payable to the Partnership. Interest is calculated at the Chase Manhattan Bank prime rate plus 2%. Payment of principal and interest is contingent upon the Local Limited Partnerships having available surplus cash, as defined by HUD regulations, from operations or from the sale or refinancing of the Local Limited Partnership Properties. Any future repayment of advances or interest will be reflected as Partnership income when received.
Summaries of the combined financial position of the aforementioned Local Limited Partnerships as of December 31, 1996 and 1995, and the combined results of operations for each of the three years in the period ended December 31, 1996, are as follows:
COMBINED FINANCIAL POSITION OF THE LOCAL LIMITED PARTNERSHIPS
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
COMBINED RESULTS OF OPERATIONS OF THE LOCAL LIMITED PARTNERSHIPS
The combined financial statements of the Local Limited Partnerships are prepared on the accrual basis of accounting. Eighteen Local Limited Partnerships operate rental housing projects organized under Section 236 of the National Housing Act. The remaining three Local Limited Partnerships operate projects organized under Section 221(d)(3) of the National Housing Act. Each of the Local Limited Partnerships receives some form of rental assistance from HUD.
The following tables indicates the year within the Section 8 rent subsidy contracts expire:
Of the contracts above expiring during 1997, contracts for 578 units expire prior to September 30, 1997. Congress has passed legislation which will provide a one-year renewal contract to replace those contracts.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The contract covering the remaining 433 units expires in October and November, 1997. It is uncertain whether the agreement will be renewed, as well as the remaining contracts that expire after 1997, and if so, on what terms.
For the past several years, various proposals have been advanced by HUD, the Congress and others proposing the restructuring of the Section 8. These proposals generally seek to lower subsidized rents to market levels and to lower required debt service costs as needed to ensure financial viability at the reduced rents, but vary greatly as to how that result is to be achieved. Some proposals include a phase-out of project-based subsidies on a property-by-property basis upon expiration of a property's HAP Contract, with a conversion to a tenant-based subsidy. Under a tenant-based system, rent vouchers would be issued to qualified tenants who then could elect to reside at a property of their choice, provided the tenant has the financial ability to pay the difference between the selected property's monthly rent and the value of the voucher, which would be established based on HUD's regulated fair market rent for that geographic area.
Congress has not yet accepted any of these restructuring proposals and instead has elected to renew expiring Section 8 HAP Contracts for one year terms, generally at existing rents. While the Partnership does not believe that the proposed changes would result in a significant number of tenants relocating from properties owned by the Local Limited Partnerships, there can be no assurance that the proposed changes would not significantly affect the operations of the properties of the Local Limited Partnerships. Furthermore, there can be no assurance that changes in federal subsidies will not be more restrictive than those currently proposed or that other changes in policy will not occur. Any such changes could have an adverse effect on the operation of the Partnership.
Depreciation of the buildings and improvements for seventeen of the Local Limited Partnerships is computed on a straight-line method assuming a 50-year life from the date of initial occupancy at the time of construction or after substantial rehabilitation, whereas the depreciation of the buildings and improvements for three Local Limited Partnerships is computed using the straight-line method assuming a 30-year life and a 30% salvage value. Depreciation for one Local Limited Partnership is computed using the straight-line method, assuming a 40-year life. Depreciation of equipment is calculated using accelerated methods over estimated useful lives of five to 27 years.
The mortgage notes payable are insured by the Federal Housing Administration (FHA) and collateralized by first deeds of trust on the rental properties. The notes bear interest at rates ranging from 3% to 8.5% per annum. For the eighteen rental housing projects insured under Section 236, FHA makes subsidy payments directly to the mortgage lender reducing the monthly principal and interest payments of the project owner to an effective interest rate of 1% over the forty-year term of the notes. The liability of the Local Limited Partnerships under the mortgage notes is limited to the underlying value of the real estate collateral plus other amounts deposited with lenders.
Deferred acquisition notes of $21,855,789 at both December 31, 1996 and 1995 bear simple interest at rates of 9% or 10% per annum. These notes are collateralized by security interests in all partnership interests of the Local Limited Partnerships. All principal and accrued interest are payable upon the earlier of the sale, transfer or refinancing of the project or dates ranging from November 1996 to December 1999. The notes may be prepaid in part or in whole at any time without penalty.
Nine of the Local Limited Partnerships continued existence as a going concern is dependent on the Local Limited Partnerships' ability to pay principal and interest obligations under their deferred acquisition notes or negotiate further amendments of the terms of the notes. One note, in the amount of $4,267,881 which includes accrued interest, became due during 1996. The remaining eight notes, in the amount of $21,641,958 including accrued interest as of
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
December 31, 1996, will become due in 1997. The total assets, deficit, revenues and net loss of these Local Limited Partnerships with deferred acquisition notes due in 1996 and 1997, represent 49%, 76%, 51% and 28%, respectively, of the applicable amounts included in the accompanying combined financial statements as of December 31, 1996 and for the year then ended. As a result, resources available to the Partnership, primarily in the form of distributions, would be reduced if the Partnership were to lose its interest in the Local Limited Partnerships. NHP's intentions are to extend the deferred acquisition notes relating to these Local Limited Partnerships or renegotiate its terms with the lenders. However, there can be no assurance that NHP will be successful in achieving either of these alternatives.
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" (the "Statement") effective for financial statements for fiscal years beginning after December 15, 1995. Adoption of this Statement during the year ended December 31, 1996 required an impairment loss to be recognized if the sum of estimated future cash flows (undiscounted and without interest charges) is less than the carrying amount of rental property. The impairment loss would be the amount by which the carrying value exceeds the fair value of the rental property. If the rental property is to be disposed of, fair value is calculated net of costs to sell.
Park Avenue West II and Hilltop Limited Partnerships recognized impairment losses (noncash) on their rental property in the amounts of $600,000 and $1,025,000, respectively. The Local Limited Partnerships used the Direct Capitalization Method to estimate the fair value of the rental property. Using this Method, estimated annual cash flow generated by the property is divided by an overall capitalization rate to estimate the rental property's fair value. The impairment losses had no impact on the Partnership's operations since its investment in Park Avenue II and Hilltop Limited Partnership had been reduced to zero in a prior year.
Prior to 1996 and the Statement, generally accepted accounting principles (GAAP) required that the Local Limited Partnerships evaluate whether it was probable that the estimated undiscounted future cash flows of each of its property, plus cash projected to be received upon an assumed sale of the property (Net Realizable Value) was less than the net carrying value of the property. If such a shortfall existed, was material and deemed to be other than temporary in nature, then a write-down equal to the shortfall was warranted. The Local Limited Partnerships performed such evaluations on an ongoing basis. During 1994, using a methodology consistent with GAAP, three of the Local Limited Partnerships, determined that the book value of their rental property exceeded the rental property's estimated net realizable value. As required by GAAP, the Local Limited Partnerships recorded an adjustment of $3,196,900 to reduce the carrying value of the rental property to its estimated net realizable value for the year ended December 31, 1994.
Additionally, regardless of whether an impairment loss of an individual property has been recorded or not, the carrying value of each of the rental properties may still exceed their fair market value as of December 31, 1996. Should a Local Limited Partnership be forced to dispose of any of its properties, it could incur a loss.
4. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES OF THE GENERAL PARTNER
The General Partner of the Partnership is The National Housing Partnership (NHP). National Corporation for Housing Partnerships (NCHP) is the sole general partner of NHP and NHP Partners Two LP is the sole limited partner of NHP. The Original Limited Partner of the Partnership is 1133 Fifteenth Street Two Associates, whose limited partners were key employees of NCHP at the time the Partnership was formed and whose general partner is NHP.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The Partnership accrued administrative and reporting fees payable to the General Partner of $137,248 annually during 1996, 1995 and 1994. During 1996, the Partnership paid the General Partner $79,179 for these fees. No payments were made during 1996, 1995 or 1994 for these fees. The balances owed to NHP for these fees were $1,018,803 and $960,734 as of December 31, 1996 and 1995, respectively.
During 1996, 1995 and 1994, the Partnership repaid borrowings of $27,700, $170,111 and $6,001 to NHP. At December 31, 1996 and 1995, the Partnership owed zero and $27,700, respectively, to NHP. In 1996, 1995 and 1994, $2,447, $32,097 and $66,998 of interest owed was paid to NHP. Interest is charged on borrowings at the Chase Manhattan Bank prime interest rate plus 2%. Interest accrued for the years ended December 31, 1996, 1995 and 1994 was $1,587, $22,769 and $21,359, respectively. At December 31, 1996 and 1995, the Partnership owed NHP interest of zero and $860, respectively. The advances will be repaid to NHP as cash flow permits or from the sale or refinancing of the Local Limited Partnerships.
An affiliate of the General Partner, NHP Management Company (NHPMC), is the project management agent for the projects operated by fifteen of the Local Limited Partnerships under agreements which, under certain conditions, extend to the year 2020. NHPMC and other affiliates of NCHP earned $1,356,728, $1,388,078 and $1,306,241 from the Local Limited Partnerships for management fees and other services provided to the Local Limited Partnerships during 1996, 1995 and 1994, respectively.
Beginning January 1, 1996, personnel working at the project sites, which are managed by NHPMC, were NHP Incorporated employees and, therefore, the projects reimbursed NHP Incorporated for the actual salaries and related benefits. Prior to January 1, 1996, project employees were employees of NCHP. At December 31 1996 and 1995, trade payables include $8,288 and $985 due to NHP Incorporated and NCHP, respectively. Total reimbursements earned for salaries and benefits for the years ended December 31, 1996, 1995 and 1994, were approximately $1,609,000, $1,597,000 and $1,645,000, respectively.
5. DEFERRED ACQUISITION NOTES PAYABLE
The deferred acquisition notes payable by the Partnership bear simple interest at a rate of 10% per annum. The notes are payable to NHP in the same amount and same terms as notes executed by NHP to former project owners, are nonrecourse, and are collateralized by the Partnership's interests in Windsor Apartments Associates Limited Partnership and Kimberton Apartments Associates Limited Partnership. Neither principal nor interest are payable currently; all principal and accrued interest is payable upon the earlier of the sale, transfer or refinancing of Windsor Apartments or Kimberton Apartments, or October 24, 1999. The notes may be prepaid in part or in whole at any time without penalty.
6. INCOME TAXES
The Partnership is not taxed on its income. The partners are taxed in their individual capacities upon their distributive share of the Partnership's taxable income and are allowed the benefits to be derived from off-setting their distributive share of the tax losses against taxable income from other sources subject to passive loss rule limitations. The taxable income or loss differs from amounts included in the statements of operations because of different methods used in determining the losses of the Local Limited Partnerships as discussed below. The tax loss is allocated to partner groups in accordance with Section 704(b) of the Internal Revenue Code and therefore is not necessarily proportionate to the interest percentage owned.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
For Federal income tax purposes, the twenty-one Local Limited Partnerships compute depreciation of the buildings and improvements using the Accelerated Cost Recovery System (ACRS) and the Modified Accelerated Cost Recovery System (MACRS), while for financial statement purposes, depreciation is computed using the straight-line method, assuming a 30-year life and a 30% salvage value, a 40-year life, or a 50-year life. Interest expense on the deferred acquisition notes payable by the Partnership and the Local Limited Partnerships is computed for Federal income tax purposes using the economic accrual method; while for financial statement purposes, interest is computed using a simple interest rate. The Partnership's allocable share of losses from the Local Limited Partnerships are not recognized for financial statement purposes once the investment account is decreased to zero while, for income tax purposes, losses continue to be recognized. Other differences result from allocation of tax losses in accordance with Section 704(b) of the Internal Revenue Code.
A reconciliation follows:
7. ALLOCATION OF RESULTS OF OPERATIONS, CASH DISTRIBUTIONS AND GAINS AND LOSSES FROM SALE OR REFINANCING
Cash received from the sale or refinancing of any underlying property of the Local Limited Partnerships, after payment of the applicable mortgage debt and the payment of all expenses related to the transaction, is to be distributed in the following manner:
First, to the General Partner for any unrepaid loans to the Partnership and any unpaid fees (other than disposition and refinancing fees);
Second, to the Limited Partners, until the Limited Partners have received a return of their capital contributions, after deduction for prior cash distributions from sales or refinancing, but without deduction for prior cash distribution from operations;
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Third, to the Limited Partners, until each Limited Partner has received an amount equal to a cumulative noncompounded 12% annual return on its capital contribution, after deduction of (a) an amount equal to 50% of the tax losses allocated to the Limited Partner and (b) prior cash distributions from operations and prior cash distributions from sales or refinancing;
Fourth, to the General Partner until the General Partner has received a return of its capital contributions, after deduction for prior cash distributions from sales or refinancing, but without deduction for prior cash distributions from operations;
Fifth, to the General Partner for disposition and refinancing fees, including prior disposition and refinancing fees which have been accrued but are unpaid;
Sixth, to the partners with positive capital accounts to bring such accounts to zero; and
Finally, 85% of the remaining sales proceeds to the Limited Partners and 15% to the General Partner.
Net income or loss from operations of the Partnership is allocated 98% to the Limited Partners, 1% to the General Partner and 1% to the Original Limited Partner. Cash distributions from operations, after payment of certain obligations (including reimbursement on a cumulative basis of direct expenses incurred by the General Partner or its affiliates in managing the properties) and payment of annual cumulative administrative and reporting fees, is distributed 98% to the Limited Partners, 1% to the General Partner and 1% to the Original Limited Partner.
Gain for Federal income tax purposes realized in the event of dissolution of the Partnership or upon sale of interests in a Local Limited Partnership or underlying property will be allocated in the following manner:
First, to the Limited Partners in an amount up to the negative balances of the capital accounts of Limited Partners in the same proportion as each Limited Partner's negative capital account bears to such aggregate negative capital accounts;
Second, to the General Partner in an amount up to the General Partner's negative capital account, if any;
Third, to the Limited Partners, up to the aggregate amount of capital contributions of the Limited Partners, after deduction for prior cash distributions from sales or refinancing, but without deduction for prior cash distributions from operations, in the same proportion that such Limited Partner's capital contribution bears to the aggregate of all Limited Partners' capital contributions;
Fourth, to the Limited Partners, until each Limited Partner has been allocated such an amount equal to a cumulative noncompounded 12% annual return on their capital contribution, after deduction of (a) an amount equal to 50% of the tax losses allocated to the Limited Partner and (b) prior cash distributions from operations and prior cash distributions from sales or refinancing;
Fifth, to the General Partner, up to the aggregate amount of capital contributions made by the General Partner, after deduction for prior cash distributions from sales or refinancing, but without deduction for prior cash distributions from operations; and
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Finally, 85% of the remaining gain to the Limited Partners and 15% to the General Partner.
Losses for Federal income tax purposes realized in the event of dissolution of the Partnership or upon sale of interest in a Local Limited Partnership or underlying property will be allocated 85% to the Limited Partners and 15% to the General Partner.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, when it is practicable to estimate that value and excessive cost would not be incurred. A reasonable estimate of fair value of the deferred acquisition notes payable and related accrued interest could not be made without incurring excessive costs. The carrying amount of other assets and liabilities reported on the statement of financial position that require such disclosure approximates fair value.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO A LIMITED PARTNERSHIP SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION OF LOCAL LIMITED PARTNERSHIPS IN WHICH NHP REALTY FUND TWO HAS INVESTED DECEMBER 31, 1996
See notes to Schedule XI.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO A LIMITED PARTNERSHIP SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION OF LOCAL LIMITED PARTNERSHIPS IN WHICH NHP REALTY FUND TWO HAS INVESTED DECEMBER 31, 1996
See notes to Schedule XI.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
NOTES TO SCHEDULE XI - REAL ESTATE AND
ACCUMULATED DEPRECIATION OF LOCAL LIMITED
PARTNERSHIPS IN WHICH NHP REALTY FUND TWO HAS INVESTED
DECEMBER 31, 1996
(1) Schedule of Encumbrances
(a) Deferred acquisition notes on this property are held by the Partnership and not by the Local Limited Partnership.
(2) The aggregate cost of land for Federal income tax purposes is $5,836,000, and the aggregate costs of buildings and improvements for Federal income tax purposes is $78,707,490. The total of the above-mentioned is $84,543,490.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
A LIMITED PARTNERSHIP
NOTES TO SCHEDULE XI - REAL ESTATE AND
ACCUMULATED DEPRECIATION OF LOCAL LIMITED
PARTNERSHIPS IN WHICH NHP REALTY FUND TWO HAS INVESTED
DECEMBER 31, 1996
(CONTINUED)
(3) Reconciliation of real estate
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant
(a), (b) and (c). The Partnership has no directors, executive officers or significant employees of its own.
(a), (b), (c), (e) and (f). The names, ages, business experience and involvement in legal proceedings of the directors and executive officers of National Corporation for Housing Partnerships (NCHP), the sole general partner of The National Housing Partnership, the sole general partner of the Partnership, and certain of its affiliates, are as follows:
Directors of NCHP
Seven individuals comprise the Board of Directors of NCHP. Three directors were appointed by the President of the United States, by and with the advice and consent of the Senate.
J. Roderick Heller, III (age 59) was elected President, Chief Operating Officer and a Director of NCHP in 1985, Chief Executive Officer of NCHP in 1986, and Chairman in 1988. He currently serves as Chairman, President and Chief Executive Officer of NCHP and its affiliate NHP Incorporated. From 1982 until 1985, Mr. Heller served as President and Chief Executive Officer of Bristol Compressors, Inc., a Bristol, Virginia-based company involved in the manufacturing of air conditioning compressors. From 1971 until 1982, he was a partner in the Washington, D.C. law firm of Wilmer, Cutler & Pickering. Mr. Heller was elected Chairman of the Board of public television station WETA in Washington, D.C., and is a director of Auto-Trol Technology Corporation. Mr. Heller completed his term as a director of a number of nonprofit organizations, including the National Trust for Historic Preservation in 1996 after nine years of service and was Chairman of the Board of The Civil War Trust from 1991 to March 1997.
Susan R. Baron (age 45) is an attorney specializing in conventional and government-assisted real estate development and finance in the residential and commercial markets. From 1978 to 1993 she was with the Washington, D.C. law firm of Dunnells, Duvall & Porter. Ms. Baron serves on the of Seeds of Peace Advisory Board and is a past president of the National Leased Housing Association. She was appointed to the Board of Directors by the President of the United States in September 1994 to complete a term expiring in October 1994 and continues to serve until the appointment of a successor.
Danny K. Davis (age 55) has been a Commissioner on the Cook County Board of Commissioners since November 1990. Prior to his service on the Cook County Board, he served as an Alderman on the Chicago City Council for 11 years. Mr. Davis is also a member of numerous civic and professional organizations. He was appointed to the Board of Directors by the President of the United States in September 1994 and continues to serve until the appointment of a successor.
Alan A. Diamonstein (age 65) has been a member of the Virginia House of Delegates since 1967, currently serving as Chairman of the General Laws Committee and a member of the standing committees on Appropriations, Education and Rules. He is chairman of the Virginia Housing Study Commission and is a member of the Peninsula Board of Advisors for Signet Bank, the Jamestown-Yorktown Board of Trustees, as well as a number of educational and civic organizations. Mr. Diamonstein is the senior partner in the law firm of Diamonstein, Becker and Staley. He was appointed to the Board of Directors by the President of the United States in October 1994 and continues to serve until the appointment of a successor.
Michael R. Eisenson (age 41) is the President and Chief Executive Officer of Harvard Private Capital Group, Inc. ("Harvard Capital"), which manages the direct investment and private equities portfolio of the Harvard University endowment fund. Harvard Capital is the investment advisor for Demeter. Mr. Eisenson joined Harvard Capital in 1986. Mr. Eisenson is a director of ImmunoGen, Inc., Harken Energy Corporation, and Somatix Therapy Corporation. Under a Shareholders Agreement between NHP Incorporated, Demeter Holdings Corporation and
Capricorn Investors, L.P. (see Item 1 above), Demeter is entitled to elect two members of the NCHP Board of Directors. Pursuant to this agreement, Mr. Eisenson was re-elected to the Board of Directors in 1992 and continues to serve.
Tim R. Palmer (age 39) joined Harvard Capital in 1990 and is currently Managing Director. From 1987 to 1990, Mr. Palmer was Manager, Business Development, at The Field Corporation, a private investment firm. Mr. Palmer is a director of PriCellular Corporation. Under a Shareholders Agreement between NHP Incorporated, Demeter Holdings Corporation and Capricorn Investors, L.P. (see Item 1 above), Demeter is entitled to elect two members of the NCHP Board of Directors. Pursuant to this agreement, Mr. Palmer was re-elected to the Board of Directors in 1994 and continues to serve.
Herbert S. Winokur, Jr. (age 53) has served as the President of Winokur & Associates, Inc., an investment and management services firm, and Winokur Holdings, Inc., which is the managing general partner of Capricorn, a private investment partnership, since 1987. Mr. Winokur is the past Chairman of DynCorp and serves as a director of Enron Corporation and NacRe Corporation. Under a Shareholders Agreement between NHP Incorporated, Demeter Holdings Corporation and Capricorn Investors, L.P. (see Item 1 above), Capricorn is entitled to elect one member of the NCHP Board of Directors. Pursuant to this agreement, Mr. Winokur was re-elected to the Board of Directors in 1992 and continues to serve.
EXECUTIVE OFFICERS
The current executive officers of NCHP and a description of their principal occupations in recent years are listed below.
J. Roderick Heller, III (age 59). See "Directors of NCHP."
Ann Torre Grant (age 39) has served as Executive Vice President, Chief Financial Officer and Treasurer of NCHP since February 1995. She was Vice President and Treasurer of USAir, Inc. and USAir Group, Inc. from 1991 through January 1995, and held other finance positions at the airline between 1988 and 1991. From 1983 to 1988, she held various finance positions with American Airlines, Inc. Ms. Grant serves as a director of the Franklin Mutual Series Funds.
Joel F. Bonder (age 48) has served as Senior Vice President and General Counsel of NCHP since April 1994. Mr. Bonder also served as Vice President and Deputy General Counsel from June 1991 to March 1994, as Associate General Counsel from 1986 to 1991, and as Assistant General Counsel from 1985 to 1986. From 1983 to 1985, he was with the Washington, D.C. law firm of Lane & Edson, P.C. From 1979 to 1983, Mr. Bonder practiced with the Chicago law firm of Ross and Hardies.
Eric N. Ross (age 35) has served as Vice President, Asset Management of NCHP since May 1996. He is responsible for delivery of asset management services to NCHP's affiliated ownership organization and to other multifamily owners. Previously, Mr. Ross served as Vice President, Finance, from March 1995 to May 1996 and Vice President, Asset Management, from September 1992 to March 1995. Prior to joining NHP in 1992, Mr. Ross was Assistant Vice President in Asset Management for Winthrop Financial Associates.
Charles S. Wilkins, Jr. (age 46) has served as Senior Vice President of NHP since September 1988 and is currently responsible for legislative and regulatory affairs. He was formerly responsible for asset and property management of the affordable multifamily portfolio. Prior to joining NCHP, Mr. Wilkins was Senior Vice President of Westminster Company, a regional real estate development firm where he was responsible for the property management of a diverse portfolio of properties. Mr. Wilkins is immediate past-president of the National Assisted Housing Management Association and is a director of the National Leased Housing Association as well as various regulatory committees, including the Executive Committee of the HUD Occupancy Task Force.
Jeffrey J. Ochs (age 39) has served as Vice President and Chief Accounting Officer of NCHP since September 1995. From 1994 until September 1995, Mr. Ochs was Assistant Controller of USAir, Inc. From 1987 to 1994, he held various accounting positions with USAir, Inc.
Eugene H. Goodsell (age 43) serves as Vice President and Controller of NCHP. He has been with NCHP since 1983. Prior to joining NHP, Mr. Goodsell, a CPA, was an audit manager with the public accounting firm of Arthur Andersen LLP.
(d) There is no family relationship between any of the foregoing directors and executive officers.
Item 11.

Item 11. Executive Compensation
National Housing Partnership Realty Fund Two has no officers or directors. However, as outlined in the prospectus, various fees and reimbursements are paid to the General Partner and its affiliates. Following is a summary of such fees paid or accrued during the year ended December 31, 1996:
(i) Administrative and reporting fees of $137,248 payable but not yet paid to the General Partner for managing the affairs of the Partnership and for investor services in 1996.
(ii) Annual partnership administration fees of $157,500 to the General Partner for its services as General Partner of the Local Limited Partnerships. During 1996, $317,094 was paid to the General Partner by the Local Limited Partnerships.
(iii) An affiliate of the General Partner, NHP Management Company (NHPMC), is the project management agent for the projects operated by fifteen of the Local Limited Partnerships. During 1995, NHPMC and other affiliates of NHP Incorporated earned $1,356,728 for management fees and other services provided to the Local Limited Partnerships.
(iv) The Local Limited Partnerships paid NHP $212,729 in interest on operating deficit loans during 1996.
(v) In 1996, personnel working at the project sites which were managed by NHPMC were NHP Incorporated employees, and therefore the projects reimbursed NHP Incorporated for the actual salaries and related benefits. Total reimbursements for salaries and benefits earned for the year ended December 31, 1996, was approximately $1,609,000.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
1133 Fifteenth Street Two Associates, a Maryland Limited Partnership, whose general partner is NHP and whose limited partners were employees of NCHP at the time the partnership was formed, owns a 1% interest in the Partnership.
NHP is also the sole general partner of NHP Investment Partners I and NHP Investment Partners III. NHP Investment Partners III, a limited partnership, holds a 4.5% limited partnership interest (1% with respect to losses) in Hurbell I Limited Partnership, Hurbell III Limited Partnership, and Hilltop Limited Partnerships. NHP Investment Partners I, a limited partnership, holds a 4.5% limited partnership interest (1% for allocation of losses) in the remaining eighteen Local Limited Partnerships. Prior to the admittance of the Partnership into the Local Limited Partnerships, NHP Investment Partners I and NHP Investment Partners III held a 1% general partnership interest and 98% limited partnership interest in the Local Limited Partnerships.
Item 13.

Item 13. Certain Relationships and Related Transactions
The Partnership had no material transactions or business relationships with NHP or its affiliates except as described in Items 8, 10 and 11, above.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
1. Financial statements
The financial statements, notes and reports listed below are included herein:
2. Financial statement schedules
Financial statement schedules for the Registrant:
Schedule XI is included in the financial statements listed under Item 14(a)(1). All other schedules have been omitted as the required information is inapplicable or the information is presented in the financial statements or notes thereto.
Financial statements required by Regulation S-X which are excluded from the annual report to shareholders by Rule 14a-3(b): See 3 below.
3. Exhibits
The following combined financial statements of the Local Limited Partnerships in which the Partnership has invested are included as an exhibit to this report and are incorporated herein:
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
National Housing Partnership Realty Fund Two By: The National Housing Partnership, its sole general partner By: National Corporation for Housing Partnerships, its sole general partner
March 26, 1997 /s/ J. Roderick Heller, III - -------------- ---------------------------------------------- Date J. Roderick Heller, III, Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
March 26, 1997 /s/ J. Roderick Heller, III - -------------- ---------------------------------------------- Date J. Roderick Heller, III, Chairman, President and Chief Executive Officer
March 26, 1997 /s/ Ann Torre Grant - -------------- ---------------------------------------------- Date Ann Torre Grant Executive Vice President, Chief Financial Officer and Treasurer
March 26, 1997 /s/ Jeffrey J. Ochs - -------------- ---------------------------------------------- Date Jeffrey J. Ochs Vice President and Chief Accounting Officer
March 26, 1997 * - -------------- ---------------------------------------------- Date Susan R. Baron, Director
March 26, 1997 * - -------------- ---------------------------------------------- Date Michael R. Eisenson, Director
March 26, 1997 * - -------------- ---------------------------------------------- Date Danny K. Davis, Director
March 26, 1997 * - -------------- ---------------------------------------------- Date Tim R. Palmer, Director
March 26, 1997 * - -------------- ---------------------------------------------- Date Alan A. Diamonstein, Director
March 26, 1997 * - -------------- ---------------------------------------------- Date Herbert S. Winokur, Jr., Director
This registrant is a limited partnership whose sole general partner, The National Housing Partnership, is also a limited partnership. The sole general partner of The National Housing Partnership is National Corporation for Housing Partnerships. The persons indicated are Directors of National Corporation for Housing Partnerships. Powers of Attorney are on file in Registration Statement No. 33-1141 and as Exhibit 25 to the Partnership's Form 10-K for the fiscal years ended December 31, 1987, December 31, 1988, December 31, 1990 and December 31, 1991. Other than the Form 10-K report, no annual report or proxy materials have been sent to security holders.
*By J. Roderick Heller, III pursuant to Power of Attorney.
/s/ J. Roderick Heller, III ---------------------------
Independent Auditors' Report
To The Partners of National Housing Partnership Realty Fund Two Vienna, VA
We have audited the accompanying combined statements of financial position of the Local Limited Partnerships in which National Housing Partnership Realty Fund Two (the Partnership) holds a limited partnership interest as of December 31, 1996 and 1995 and the related combined statements of operations, partners' deficit, and cash flows for each of the three years in the period ended December 31, 1996. 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 audits. We did not audit the financial statements of Hurbell I Limited Partnership, Kimberton Apartments Associates Limited Partnership, Rodeo Drive Limited Partnership and Windsor Apartments Associates for the years ended December 31, 1996, 1995 and 1994, which statements represent total assets constituting $13,378,926 and $13,510,746 of combined total assets at December 31, 1996 and 1995, respectively, and net (losses) income of $(32,625), $129,637 and $13,228 of the combined net loss for the three years ended December 31, 1996, 1995 and 1994, respectively. The financial statements of these investees were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for these investees, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. 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 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 other auditors, such financial statements present fairly, in all material respects, the combined financial position of the Local Limited Partnerships in which National Housing Partnership Realty Fund Two holds a limited partnership interest as of December 31, 1996 and 1995 and the combined results of their operations and cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that nine Local Limited Partnerships will continue as going concerns. As discussed in Note 15, conditions exist which raise substantial doubt about the ability of the Local Limited Partnerships to continue as going concerns unless they are able to repay, refinance, or restructure their deferred acquisition notes payable which became due in 1996 or will become due in 1997. Management's plans in regard to this matter are described in Note 15. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP Washington, D.C. March 3, 1997
Independent Auditor's Report
Partners Hurbell I Limited Partnership - Holly Oak Park Apartments Vienna, VA
We have audited the accompanying statement of financial position of Hurbell I Limited Partnership (Holly Oak Park Apartments), A Limited Partnership. FHA Project No. 053-44202-LDP-SUP, as of December 31, 1996, and the related statements of profit and loss (on HUD Form No. 92410), changes in partners' equity (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 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 generally accepted auditing standards, and Government Auditing Standards, issued by the Comptroller General of 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 Hurbell I Limited Partnership (Holly Oak Park Apartments), A Limited Partnership, at December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
In accordance with Government Auditing Standards and the Consolidated Audit Guide for Audits of HUD Programs issued by the U.S. Department of Housing and Urban Development, we have also issued reports dated January 25, 1997 on our consideration of the partnership's internal control structure, on its compliance with laws and regulations applicable to the basic financial statements, the major HUD programs, and Affirmative Fair Housing.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information, as referred to in the Table of Contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.
Russell, Thompson, Butler & Houston Mobile, Alabama January 25, 1997
Independent Auditor's Report
Partners Hurbell I Limited Partnership - Holly Oak Park Apartments Reston, VA
We have audited the accompanying statement of financial position of Hurbell I Limited Partnership (Holly Oak Park Apartments), A Limited Partnership, FHA Project No. 053-44202-LDP-SUP, as of December 31, 1995, and the related statements of profit and loss (on HUD Form No. 92410), changes in partners' equity (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 generally accepted auditing standards, Government Auditing Standards, issued by the Comptroller General of the United States, and the Consolidated Audit Guide for Audits of HUD Programs, issued by the U.S. Department of Housing and Urban Development, Office of Inspector General, in July 1993. 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 Hurbell I Limited Partnership (Holly Oak Apartments), A Limited Partnership, at December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information, as referred to in the Table of Contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.
Russell, Thompson, Butler & Houston Mobile, Alabama January 20, 1996
Independent Auditor's Report
Partners Hurbell I Limited Partnership - Holly Oak Park Apartments Reston, VA
We have audited the accompanying statement of financial position of Hurbell I Limited Partnership (Holly Oak Park Apartments), A Limited Partnership, FHA Project No. 053-44202-LDP-SUP, as of December 31, 1994, and the related statements of profit and loss (on HUD Form No. 92410), changes in partners' equity (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 generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of 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 Hurbell I Limited Partnership (Holly Oak Park Apartments), A Limited Partnership, at December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information, as referred to in the Table of Contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.
Russell, Thompson, Butler & Houston Mobile, Alabama January 21, 1995
Independent Auditor's Report
Partners Kimberton Apartments Associates Washington, D.C.
We have audited the accompanying statement of financial position of Kimberton Apartments Associates, FHA Project No.032-44013-LD, A Limited Partnership, as of December 31, 1996, and the related statements of profit and loss (on HUD Form No. 92410), partners' equity, 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 generally accepted auditing standards and Government Auditing Standards issued by the Comptroller General of 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 Kimberton Apartments Associates at December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also issued reports dated February 12, 1997 on our consideration of Kimberton Apartments Associates' internal control structure and a report dated February 12, 1997 on its compliance with laws and regulations.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information, as referred to in the Table of Contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.
J. A. Plumer & Co., P.A. Bethesda, Maryland February 12, 1997
Independent Auditors' Report
Partners Kimberton Apartments Associates Washington, D.C.
We have audited the accompanying statement of financial position of Kimberton Apartments Associates, FHA Project No. 032-44013-LD, A Limited Partnership, as of December 31, 1995, and the related statements of profit and loss (on HUD Form No. 92410), partners' equity (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 generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of 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 Kimberton Apartments Associates as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
J. A. Plumer & Co., P.A. Bethesda, Maryland February 22, 1996
Independent Auditors' Report
Partners Kimberton Apartments Associates Washington, D.C.
We have audited the accompanying balance sheet of KIMBERTON APARTMENTS ASSOCIATES (A Limited Partnership), HUD Project No. 032-44013-LD, as of December 31, 1994, and the related statements of profit and loss (on HUD Form No. 92410), of partners' deficit (deficiency) and of 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 generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of 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 KIMBERTON APARTMENTS ASSOCIATES (A Limited Partnership) as of December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
Goldenberg Rosenthal Friedlander Jenkintown, Pennsylvania January 18, 1995
Independent Auditor's Report
To the Partners Rodeo Drive Limited Partnership Vienna, VA
We have audited the accompanying statement of financial position of Rodeo Drive Limited Partnership (a California limited partnership), FHA Project No. 122-44452-LDP, as of December 31, 1996, and the related statements of profit and loss (on HUD Form No. 92410), partners' 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 generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of 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 Rodeo Drive Limited Partnership as of December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also issued a report dated January 15, 1997 on our consideration of Rodeo Drive Limited Partnership's internal control structure.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information, as referred to in the Table of Contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.
Hansen, Hunter & Kibbee, P.C. Portland, Oregon January 15, 1997
Independent Auditor's Report
Partners Rodeo Drive Limited Partnership Reston, VA
We have audited the accompanying statement of financial position of Rodeo Drive Limited Partnership (a California limited partnership), FHA Project No. 122-44452-LDP, as of December 31, 1995, and the related statements of profit and loss (on HUD Form No. 92410), partners' 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 generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of 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 Rodeo Drive Limited Partnership as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also issued a report dated January 12, 1996 on our consideration of Rodeo Drive Limited Partnership's internal control structure.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information, as referred to in the Table of Contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.
Hansen, Hunter & Kibbee, P.C. Portland, Oregon January 12, 1996
Independent Auditor's Report
Partners Rodeo Drive Limited Partnership Reston, VA
We have audited the accompanying statement of financial position of Rodeo Drive Limited Partnership (a California limited partnership), FHA Project No. 122-44452-LDP, as of December 31, 1994, and the related statements of profit and loss (on HUD Form No. 92410), partners' 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 generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of 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 Rodeo Drive Limited Partnership as of December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also issued a report dated January 11, 1995 on our consideration of Rodeo Drive Limited Partnership's internal control structure and a report dated January 11, 1995 on its compliance with laws and regulations.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information, as referred to in the Table of Contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.
Hansen, Hunter & Kibbee, P.C. Portland, Oregon January 11, 1995
Independent Auditors' Report
Partners Windsor Apartments Associates Washington, D.C.
We have audited the accompanying statement of financial position of Windsor Apartments Associates, FHA Project No. 032-44012-LD-WAH-SUP, A Limited Partnership, as of December 31, 1996, and the related statements of profit and loss (on HUD Form No. 92410), partners' equity (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 generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of 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 Windsor Apartments Associates as of December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also issued a report dated February 12, 1997 on our consideration of Windsor Apartments Associates' internal control structure and a report dated February 12, 1997 on its compliance with laws and regulations.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information, as referred to in the Table of Contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.
J. A. Plumer & Co., P.A. Bethesda, Maryland February 16, 1997
Independent Auditors' Report
Partners Windsor Apartments Associates Washington, D.C.
We have audited the accompanying statement of financial position of Windsor Apartments Associates, FHA Project No. 032-44012-LD-WAH-SUP, A Limited Partnership, as of December 31, 1995, and the related statements of profit and loss (on HUD Form No. 92410), partners' equity (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 generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of 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 Windsor Apartments Associates as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
J. A. Plumer & Co., P.A. Bethesda, Maryland February 16, 1996
Independent Auditors' Report
Partners Windsor Apartments Associates Washington, D.C.
We have audited the accompanying balance sheet of WINDSOR APARTMENTS ASSOCIATES (A Limited Partnership), HUD Project No. 032-44012-LD-WAH-SUP, as of December 31, 1994, and the related statements of profit and loss (on HUD Form No. 92410), of partners' deficit (deficiency) and of 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 generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of 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 WINDSOR APARTMENTS ASSOCIATES (A Limited Partnership) as of December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
Goldenberg Rosenthal Friedlander Jenkintown, Pennsylvania January 18, 1995
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF FINANCIAL POSITION
See notes to combined financial statements.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
See notes to combined financial statements.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF PARTNERS' DEFICIT
(A) Holds a 94.5% limited partnership interest (98% with respect to allocation of losses) in twenty-one Local Limited Partnerships.
(B) Holds a 1% general partnership interest in twenty-one Local Limited Partnerships.
(C) Holds a 4.5% limited partnership interest (1% with respect to allocation of losses) in eighteen Local Limited Partnerships.
(D) Holds a 4.5% limited partnership interest (1% with respect to allocation of losses) in three Local Limited Partnerships.
See notes to combined financial statements.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO LOCAL LIMITED PARTNERSHIPS COMBINED STATEMENTS OF CASH FLOWS
See notes to combined financial statements.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO LOCAL LIMITED PARTNERSHIPS COMBINED STATEMENTS OF CASH FLOWS
(Continued)
See notes to combined financial statements.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF PARTNERSHIP ORGANIZATION, BASIS OF COMBINATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
National Housing Partnership Realty Fund Two (the Partnership) is a limited partnership organized under the laws of the State of Maryland under the Maryland Revised Uniform Limited Partnership Act on January 22, 1985. The Partnership was formed for the purpose of raising capital by offering and selling limited partnership interests and then investing in limited partnerships (Local Limited Partnerships), each of which owns and operates an existing rental housing project which is financed and/or operated with one or more forms of rental assistance or financial assistance from the U.S. Department of Housing and Urban Development (HUD). On April 30, 1985, the Partnership began raising capital and acquiring interests in Local Limited Partnerships.
During 1985, the Partnership acquired limited partnership interests of 94.5% (98% with respect to losses) in twenty-one Local Limited Partnerships, nineteen of which were organized in 1984 to acquire and operate existing rental housing projects. The remaining two Local Limited Partnerships were formed in 1972 and 1973 to construct and operate rental housing projects. Eighteen of the Local Limited Partnerships were originally organized under Section 236 of the National Housing Act and three were originally organized under Section 221(d)(3)of the Act. As a limited partner in these Local Limited Partnerships, the Partnership does not exercise control or influence over the activities of the Local Limited Partnerships in accordance with the partnership agreements.
Basis of Combination
The combined financial statements include the accounts of the following twenty-one Local Limited Partnerships in which the Partnership holds a limited partnership interest:
Caroline Arms Limited Partnership Esbro Limited Partnership Gulfway Limited Partnership Harold House Limited Partnership Hilltop Limited Partnership Hurbell I Limited Partnership Hurbell II Limited Partnership Hurbell III Limited Partnership Kimberton Apartments Associates Limited Partnership Mayfair Manor Limited Partnership Meadows Apartments Limited Partnership Meadows East Apartments Limited Partnership Menlo Limited Partnership Park Avenue West I Limited Partnership Park Avenue West II Limited Partnership Rockwell Limited Partnership Rodeo Drive Limited Partnership San Juan del Centro Limited Partnership Tinker Creek Limited Partnership West Oak Village Limited Partnership Windsor Apartments Associates Limited Partnership
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
Significant Accounting Policies
The combined financial statements of the Local Limited Partnerships are prepared on the accrual basis of accounting. Depreciation of buildings and improvements for seventeen of the Local Limited Partnerships is computed using the straight-line method assuming a 50-year life from the date of initial occupancy, whereas depreciation of buildings and improvements is computed using the straight-line method, assuming a 30-year life and 30% salvage value for three Local Limited Partnerships. Depreciation for one Local Limited Partnership is computed using the straight-line method, assuming a 40-year life. Depreciation of equipment is calculated using accelerated methods over estimated useful lives of five to 27 years. Cash distributions are limited by the Regulatory Agreements between the partnerships and HUD to the extent of surplus cash as defined by HUD. Undistributed amounts are cumulative and may be distributed in subsequent years if future operations provide surplus cash in excess of current requirements. Deferred finance costs are amortized over the appropriate loan period on a straight-line basis.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
For purposes of the statements of cash flows, the Local Limited Partnerships consider all highly liquid debt instruments purchased with initial maturities of three months or less to be cash equivalents.
2. CHANGE IN ESTIMATE
During 1996, depreciation of the building owned by Hurbell I Limited Partnership has been computed using the straight-line method assuming a 40-year life from the date of initial occupancy at the time of construction or after substantial rehabilitation of the building. Depreciation of the building in prior years was computed using the straight-line method, assuming a 50-year life. This change in estimate did not have a significant impact on the accompanying combined statement of operations.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
4. HOUSING ASSISTANCE AGREEMENTS
The Federal Housing Administration (FHA) has contracted with nineteen rental projects under Section 8 of Title II of the Housing and Community Development Act of 1974, to make housing assistance payments to the respective Local Limited Partnership on behalf of qualified tenants. The terms of the agreements are five years, with two or five-year renewal options. The agreements expire at various dates over the next twelve years. Each Local Limited Partnership has an agreement in effect during 1996. Section 8 contracts are scheduled to expire between 1997 and 2008. The Local Limited Partnerships received a total of $9,131,418, $9,275,659 and $8,828,089 in the form of housing assistance payments during 1996, 1995 and 1994, respectively, which is included in "Rental Income" on the combined statements of operations.
The following table indicates the year within the Section 8 rent subsidy contracts expire:
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
Of the contracts above expiring during 1997, contracts for 578 units expire prior to September 30, 1997. Congress has passed legislation which will provide a one-year renewal contract to replace those contracts.
The contracts covering the remaining 433 units expire in October and November, 1997. It is uncertain whether the agreements will be renewed, as well as contracts expiring after 1997, and if so, on what terms.
For the past several years, various proposals have been advanced by HUD, the Congress and others proposing the restructuring of the Section 8. These proposals generally seek to lower subsidized rents to market levels and to lower required debt service costs as needed to ensure financial viability at the reduced rents, but vary greatly as to how that result is to be achieved. Some proposals include a phase-out of project-based subsidies on a property-by-property basis upon expiration of a property's HAP Contract, with a conversion to a tenant-based subsidy. Under a tenant-based system, rent vouchers would be issued to qualified tenants who then could elect to reside at a property of their choice, provided the tenant has the financial ability to pay the difference between the selected property's monthly rent and the value of the voucher, which would be established based on HUD's regulated fair market rent for that geographic area.
Congress has not yet accepted any of these restructuring proposals and instead has elected to renew expiring Section 8 HAP Contracts for one year terms, generally at existing rents. While the Partnership does not believe that the proposed changes would result in a significant number of tenants relocating from properties owned by the Local Limited Partnerships, there can be no assurance that the proposed changes would not significantly affect the operations of the properties of the Local Limited Partnerships. Furthermore, there can be no assurance that changes in federal subsidies will not be more restrictive than those currently proposed or that other changes in policy will not occur. Any such changes could have an adverse effect on the operation of the Partnership.
5. RENTAL PROPERTY
Rental property consists of the following:
6. MORTGAGE NOTES PAYABLE
The mortgage notes payable are insured by FHA and collateralized by first deeds of trust on the rental properties. The notes bear interest at rates ranging from 3% to 8.5% per annum. However, FHA, under an interest reduction contract with the eighteen Section 236 properties, makes subsidy payments directly to the mortgage lender reducing the monthly principal and interest payments of the project owner to an effective interest rate of 1% over the
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
forty-year terms of the notes. The liability of the Local Limited Partnerships under the mortgage notes is limited to the underlying value of the real estate collateral, plus other amounts deposited with the lenders.
Under agreements with the mortgage lenders and FHA, the Local Limited Partnerships are required to make monthly escrow deposits for taxes, insurance, and reserves for the replacement of project assets and are subject to restrictions as to operating policies, rental charges, operating expenditures, and distributions to partners.
Approximate maturities of mortgage notes payable for the next five years and, therefore, are as follows:
7. DEFERRED ACQUISITION NOTES PAYABLE
The deferred acquisition notes bear simple interest at rates of 9% or 10% per annum. These notes are nonrecourse and are collateralized by partnership interests in the Local Limited Partnerships. All principal and accrued interest are payable upon the earlier of the sale, transfer, or refinancing of the projects or dates ranging from December 1996 to December 1999. The notes may be prepaid in whole or in part at any time without penalty.
Maturities of deferred acquisition notes payable as of December 31, 1996 are as follows:
8. DUE TO PARTNERS
The Local Limited Partnerships accrued annual partnership administration fees payable to the General Partner, NHP, of $157,500 annually during 1996, 1995 and 1994. Payments of these fees are made to NHP without interest from surplus cash available for distribution to partners pursuant to HUD regulations. During 1996, 1995 and 1994, the Local Limited Partnerships paid $317,094, $135,623 and $200,470, respectively. During 1996, the General Partner returned to one Local Limited Partnership $7,485 representing an overdistribution in 1994. The overdistribution was previously treated as a payment of partnership administration fees. The balances owed to NHP for these fees were $689,378 and $841,487 at December 31, 1996 and 1995, respectively.
During 1995 and 1994, NHP advanced $53,819 and $22,460 to seven and six Local Limited Partnerships for expenses incurred relating to potential sales or refinancing under the LIHPRHA program. No advances were made
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
during 1996. The Local Limited Partnerships paid $38,163, $10,952 and $3,370 in loans during 1996, 1995 and 1994, respectively, and $212,729, $3,946 and $26,388 in interest on these loans during 1996, 1995, and 1994, respectively. The balances owed to NHP by nine and twelve Local Limited Partnerships at December 31, 1996 and 1995, was $544,622 and $582,785. Interest is charged at a rate equal to the Chase Manhattan Bank prime interest rate plus 2%.
During 1994, the Partnership advanced $6,673 to one Local Limited Partnership. No advances were made during 1996 and 1995. Advances of $3,701, $2,850 and $28,782 in 1996, 1995 and 1994, respectively, were repaid to the Partnership. In addition, accrued interest of $793, $1,586 and $1,931 was paid in 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995, the Partnership's net working capital advances amounted to $592,927 and $596,628, respectively. Interest is charged at the Chase Manhattan Bank prime interest rate plus 2%.
Interest of $248,931, $227,462 and $192,983 was accrued in 1996, 1995 and 1994, respectively, on the above.
All advances and accumulated interest will be paid in conformity with HUD and/or other regulatory requirements and applicable partnership agreements.
9. FEDERAL AND STATE INCOME TAXES
The Local Limited Partnerships are not taxed on their income. The partners are taxed in their individual capacities upon their distributive share of the partnerships' taxable income and are allowed the benefits to be derived from off-setting their distributive share of the tax losses against taxable income from other sources subject to passive loss rule limitations. The taxable income or loss differs from amounts included in the statement of operations primarily because of different methods used in determining depreciation expense and interest on acquisition notes for tax purposes.
For Federal income tax purposes, the Local Limited Partnerships compute depreciation of the buildings and improvements using the Accelerated Cost Recovery System (ACRS) and the Modified Accelerated Cost Recovery System (MACRS), while for financial statement purposes, depreciation is computed using the straight-line method, assuming a 30-year life and a 30% salvage value, a 40-year life, or a 50-year life. Rent received in advance is included as income in determining the taxable income or loss for Federal income tax purposes, while for financial statement purposes, it is considered a liability. In addition, interest expense on the acquisition notes payable by the Local Limited Partnerships is computed for Federal income tax purposes using the economic accrual method; while for financial statement purposes, interest is computed using a simple interest rate.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
A reconciliation follows:
10. RELATED PARTY TRANSACTIONS
The General Partner of the Partnership is The National Housing Partnership (NHP). National Corporation for Housing Partnerships (NCHP) is the sole general partner of NHP. NHP is the sole general partner of the Local Limited Partnerships. NHP is also the sole general partner of NHP Investment Partners I and NHP Investment Partners III. NHP Investment Partners III, a limited partnership, holds a 4.5% limited partnership interest (1% with respect to losses) in Hurbell I Limited Partnership, Hurbell III Limited Partnership, and Hilltop Limited Partnerships. NHP Investment Partners I, a limited partnership, holds a 4.5% limited partnership interest (1% for allocation of losses) in the remaining eighteen Local Limited Partnerships. Prior to the admittance of the Partnership into the Local Limited Partnerships, NHP Investment Partners I and NHP Investment Partners III held a 1% general partnership interest and 98% limited partnership interest in the Local Limited Partnerships.
An affiliate of the general partner, NHP Management Company (NHPMC), is the project management agent for the projects operated by fifteen of the Local Limited Partnerships under agreements which, subject to certain conditions, extend to the year 2020. NHPMC and other affiliates of NCHP earned $1,356,728, $1,388,078 and $1,306,241 for management fees and other services provided to the Local Limited Partnerships during 1996, 1995 and 1994, respectively. As of December 31, 1996 and 1995, amounts due NHPMC and unpaid by the Local Limited Partnerships amounted to $93,836 and $85,301, respectively.
Beginning January 1, 1996, personnel working at the project sites, which are managed by NHPMC, were NHP Incorporated employees and, therefore, the projects reimbursed NHP Incorporated for the actual salaries and related benefits. Prior to January 1, 1996, project employees were employees of NCHP. At December 31 1996 and 1995, trade payables include $8,288 and $985 due to NHP Incorporated and NCHP, respectively. Total reimbursements earned for salaries and benefits for the years ended December 31, 1996, 1995 and 1994, were approximately $1,609,000, $1,597,000 and $1,645,000, respectively.
Legal services amounting to $2,219 and $5,826 regarding tenant matters were provided to one of the Local Limited Partnerships in during 1996 and 1994, respectively, by Ann S. Barker, Attorney at Law, a related party to Barker Management Incorporated, the management agent for the project operated by that Local Limited Partnership.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
11. IMPAIRMENT LOSS ON RENTAL PROPERTY
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" (the "Statement") effective for financial statements for fiscal years beginning after December 15, 1995. Adoption of this Statement during the year ended December 31, 1996, required an impairment loss to be recognized if the sum of estimated future cash flows (undiscounted and without interest charges) is less than the carrying amount of rental property. The impairment loss would be the amount by which the coming amount exceeds the fair value of the rental property. If the rental property is to be disposed of, fair value is calculated net of costs to sell.
Park Avenue West II and Hilltop Limited Partnerships recognized impairment losses (noncash) on their rental property in the amounts of $600,000 and $1,025,000, respectively. The Local Limited Partnerships used the Direct Capitalization Method to estimate the fair value of the rental property. Using this Method, estimated annual cash flow generated by the property is divided by an overall capitalization rate to estimate the rental property's fair value.
Prior to 1996 and the Statement, generally accepted accounting principles (GAAP) required that the Local Limited Partnerships evaluate whether it was probable that the estimated undiscounted future cash flows of this property, plus cash projected to be received upon an assumed sale of the property (Net Realizable Value) was less than the net carrying value of the property. If such a shortfall existed, was material and deemed to be other than temporary in nature, then a write-down equal to the shortfall was warranted. The Local Limited Partnerships performed such evaluations on an ongoing basis. During 1994, using a methodology consistent with GAAP, three of the Local Limited Partnerships determined that the net book value of its rental property exceeded the rental property's estimated net realizable value. As required by GAAP, the Partnership recorded adjustments of $3,196,900 to reduce the carrying value of the rental properties to their estimated net realizable value.
Additionally, regardless of whether an impairment loss of an individual property has been recorded or not, the carrying value of each of the rental properties may still exceed their fair market value as of December 31, 1996. Should a Local Limited Partnership be forced to dispose of any of its properties, it could incur a loss.
12. NONCASH INVESTING ACTIVITY
During 1996, five of the Local Limited Partnerships incurred costs in the aggregate of $118,014 for buildings and equipment which are included in trade payables as of December 31, 1996. Included in trade payables as of December 31, 1995 is $133,008 of such costs incurred by five of the Local Limited Partnerships.
13. DRUG ELIMINATION GRANT PROGRAM
Three of the Local Limited Partnerships have entered into a grant agreement with HUD under the Drug Elimination Grant Program (the Program) to assist in the elimination of illegal drugs and the associated crime at the property. The grant agreements are dated September 1994, June and July 1995, respectively. The total awards amount of the grants is $422,493. During 1996, 1995 and 1994, respectively, the Partnerships incurred $78,691, $24,221 and $148,272 of costs under the Program of which $194,034 have been capitalized in rental property and revenue in the amount of $62,223, $24,221 and $148,272 under the Program is included in other revenue. The Partnership records any allowable unreimbursed expenses as a receivable and any funds received in excess of expenses as deferred revenue.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, when it is practicable to estimate that value. The mortgage notes payable are insured by the FHA and are secured by the rental property. The operations generated by the rental property are
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
subject to various government rules, regulations and restrictions which make it impracticable to obtain the information to estimate the fair value of the mortgage notes and the partner loans and related accrued interest. For the deferred acquisition notes payable and related accrued interest, a reasonable estimate of fair value could not be made without incurring excessive costs. The carrying amount of other assets and liabilities reported on the statement of financial position that require such disclosure approximates fair value.
15. FUTURE OPERATIONS AND CASH FLOWS
Nine of the Local Limited Partnerships continued existence as a going concern is dependent on the Local Limited Partnerships' ability to pay principal and interest obligations under their deferred acquisition notes or negotiate further amendments of the terms of the notes. One note, in the amount of $4,267,881 which includes accrued interest, became due during 1996. The remaining eight notes, in the amount of $21,641,958 including accrued interest as of December 31, 1996, will become due in 1997. The total assets, deficit, revenues and net loss of these Local Limited Partnerships with deferred acquisition notes due in 1996 and 1997, represent 49%, 76%, 51% and 28%, respectively, of the applicable amounts included in the accompanying combined financial statements as of December 31, 1996 and for the year then ended.
Management's intentions are to negotiate with the lenders to extend or potentially buy the note at a discounted amount. There are no assurances that management's efforts to negotiate will be successful. Should the Local Limited Partnerships default on the deferred acquisition note, the note holders can assume all the interest in the Local Limited Partnerships, and the partners in the Local Limited Partnerships may incur adverse tax consequences. The impact of the tax consequences is dependent on each partner's individual tax situation.
16. FIRE LOSS CONTINGENCY
In December 1996, a fire occurred at the Meadows East project site. The fire damages and lost rents are estimated to be $277,500. Management believes that all damages will be recovered through insurance proceeds less a $2,500 deductible. As of December 31, 1996, no adjustments related to the fire have been reflected in the financial statements.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
LOCAL LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
17. CONTINGENCY
In accordance with the FASB Statement No. 121 (the "Statement"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Local Limited Partnerships record impairment losses on their rental properties when events and circumstances indicate that the asset might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Local Limited Partnerships, listed below, estimates of cash flows anticipate that they will be able to successfully refinance, restructure, or renegotiate their deferred acquisition notes payable which are becoming due at dates ranging from 1996 to 1999. If the Local Limited Partnerships are unsuccessful in their efforts, the Local Limited Partnerships' estimates of undiscounted cash flows will change resulting in the need to write down the rental properties to fair value.
Hurbell II Limited Partnership Esbro Limited Partnership Meadows East Apartments Limited Partnership Menlo Limited Partnership Rockwell Limited Partnership Hurbell III Limited Partnership San Juan Del Centro Limited Partnership Tinker Creek Limited Partnership West Oak Village Limited Partnership