Item 1. Business
(a) General Development of Business Burger King Limited Partnership III (the "Partnership") was formed as a limited partnership on November 22, 1983 under the partnership laws of the State of New York. The general partner of the Partnership is BK III Restaurants Inc. (formerly Shearson/BK Restaurants, Inc.), a New York corporation (the "General Partner") and an affiliate of Lehman Brothers Inc. ("Lehman"), formerly Shearson Lehman Brothers, Inc. ("Shearson") (see Item 10). The Partnership engages in the business of acquiring, constructing, improving, holding and maintaining Burger King restaurants (each referred to as a "Property", collectively, the "Properties"). The Properties are leased on a net basis to franchisees of Burger King Corporation ("BKC").
(b) Financial Information About Industry Segment The Partnership's sole business is leasing the Properties to franchisees of BKC. All of the Partnership's revenues, operating profit or losses and assets relate solely to such industry segment.
(c) Narrative Description of Business The Properties consist of the buildings, fixtures and improvements and, in some cases, the underlying land. The Properties are net leased to franchisees of BKC. For a Property located on land owned by the Partnership, the annual rent is the greater of (i) 14.5% of the Partnership's investment (which equals the cost of land acquisition plus construction costs, as estimated at the date the lease is executed, and capitalized interest) or (ii) 8.5% of the Property's annual gross sales. For a Property located on land leased by the Partnership, the annual rent is the greater of (i) 14.5% of the Partnership's investment plus the annual ground rent paid by the Partnership to BKC which, in turn, pays rent to the owner of the underlying land or (ii) 8.5% of the Property's annual gross sales. The Partnership's principal investment objectives are to:
(1) provide regular cash distributions, a portion of which will be "tax sheltered;" and
(2) provide realization of the long-term appreciation in the value of the Properties, consistent in all cases with the preservation of partners' capital.
BKC had the option to purchase any or all of the restaurants at fair market value from May 17, 1991 through May 16, 1994 at which time the option expired unexercised. After a careful evaluation of market conditions, the General Partner has decided to commence efforts to market the Partnership's remaining 23 Properties for a bulk sale during 1997. Until the Properties are sold, the Partnership will continue to operate, and it is intended that cash flow from operations will be distributed to the partners in accordance with the terms of the Agreement of Limited Partnership dated as of November 22, 1983 (the "Partnership Agreement"). While the General Partner is hopeful that a sale of the remaining Properties can be completed during 1997, there can be no assurance that such efforts will be successful. Prior to December 31, 1996, the Partnership sold or conveyed four Properties. Please refer to Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K, and Notes 4 and 5 in the Notes to the Financial Statements of the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, which is filed as an exhibit under Item 14 and incorporated herein by reference, for additional information regarding Property sales or conveyances to third parties.
Employees The Partnership has no employees.
Competition Percentage rents received by the Partnership from the leases with the franchisees at the Properties are based on the food and beverage sales generated by the Properties. Competition in the fast food industry has generally become more intense as the number of chains competing for the consumer's business has increased. For most chains, in 1997, the primary source of revenue growth will continue to be the development of new restaurants or the acquisition of existing restaurants. As a result, intense price competition and aggressive marketing promotions have become essential ingredients in increasing sales from existing restaurants. Other factors which influence sales include, but are not limited to, product quality, customer service, and the diversity of menu offerings.
Item 2.

Item 2. Properties.
For the year ended December 31, 1996, no individual Property generated rental revenues of 10% or more of the Partnership's total rental revenues. Additionally, no individual Property represented 10% or more of the Partnership's total assets for the year ended December 31, 1996.
For additional information concerning the Partnership's Properties, reference is made to the section captioned "Partnership's Restaurants" on the Table of Contents page and Note 4 captioned "Real Estate" in the Notes to the Financial Statements of the Partnership's 1996 Annual Report to Unitholders, and Schedule III on pages through following the signature pages of this Form 10-K.
Item 3.

Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5.

Item 5. Market for the Partnership's Limited Partnership Units and Related Security Holder Matters.
(a) Market Information There is no established trading market for the limited partnership units (the "Units").
(b) Holders As of December 31, 1996, there were 2,540 holders of record (the "Unitholders") of the Units.
(c) Distributions The following table illustrates the per Unit quarterly cash distributions paid to Unitholders during the past two years:
Quarter Declared 1996 1995 First Quarter $ 28.20 $ 32.46 Second Quarter 26.02 24.02 Third Quarter 27.29 26.69 Fourth Quarter 59.53 (1) 25.59 Total Cash Distributions $141.04 $108.76
(1) Includes a distribution of $33.46 from the sale of one Property in November 1996.
Reference is also made to Note 3, captioned "Partnership Allocations" and Note 6 captioned "Distributions" of the Notes to Financial Statements in the Partnership's 1996 Annual Report to Unitholders for additional information concerning cash distributions paid by the Partnership.
Item 6.

Item 6. Selected Financial Data.
The information set forth below should be read in conjunction with the Partnership's financial statements and notes thereto and Item 7

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources At December 31, 1996, the Partnership had a cash and cash equivalents balance of $1,022,064, compared to $502,341 at December 31, 1995. The increase is primarily due to net proceeds in the amount of $507,000 which were received from the sale of the Partnership's leasehold interest in a Property located in Delhi Township, Ohio on November 15, 1996. The net proceeds from this sale were distributed to the partners of the Partnership on January 30, 1997. The remaining balance of the Partnership's cash and cash equivalents consisted primarily of the Partnership's working capital and cash flow from operations for the fourth quarter of 1996.
Rent receivable totaled $80,880 at December 31, 1996, compared to $50,447 at December 31, 1995. The increase is primarily attributable to the timing of receipt of rents paid to the Partnership.
Due from BKC decreased from $50,977 at December 31, 1995 to $0 at December 31, 1996. The decrease is attributable to a refund of a portion of BKC's management fees paid by the Partnership during 1995 which was received during the first quarter of 1996. In accordance with the terms of the property management agreement between BKC and the Partnership (the "Agreement"), BKC is required to refund all or a portion of the annual management fee paid by the Partnership if rents from the Properties do not provide an annual return of 15.5% on the Partnership's initial investment, as defined in the Agreement. For the year ended December 31, 1996, rents received by the Partnership from the Properties exceeded the annual return of 15.5% and, therefore, BKC was not required to refund any of its management fee to the Partnership.
Distributions payable, which totaled $918,562 at December 31, 1996, were paid on January 30, 1997. Such amount includes net proceeds of $507,000 from the aforementioned sale of the leasehold interest in the Delhi Property on November 15, 1996.
Unitholders received distributions of $141.04 per Unit for 1996, including the Partnership's fourth quarter distribution in the amount of $59.53 per Unit which was paid on January 30, 1997. This distribution included net proceeds of $33.46 per Unit from the sale of the leasehold interest in the Delhi Property.
Since the inception of the Partnership, cumulative cash distributions to the Unitholders have totaled $1,470.16 per original $1,000 Unit. This total includes distributions of net cash flow from operations in the amount of $1,350.24 per Unit and distributions of net proceeds from the sale of Properties in the amount of $119.92 per Unit. Distributions of net proceeds from the sales of Properties represent a return of capital, which has reduced each Unit from $1,000 to $880.08.
After a careful evaluation of market conditions, the General Partner has decided to commence efforts to market the Partnership's remaining 23 Properties for a bulk sale during 1997. Until all of the Properties are sold, the Partnership intends to continue operating the Properties and distributing cash flow from operations to the partners in accordance with the terms of the Partnership Agreement. As a result of the Partnership's intention to market the Properties for sale, the net amount of the land, building, and fixtures and equipment less the related accumulated depreciation has been reclassified on the Partnership's balance sheet as real estate held for sale.
On February 15, 1996, based upon, among other things, the advice of legal counsel, Skadden, Arps, Slate, Meagher & Flom, the General Partner adopted a resolution that states, among other things, if a Change of Control (as defined below) occurs, the General Partner may distribute the Partnership's cash balances not required for its ordinary course day-to-day operations. "Change of Control" means any purchase or offer to purchase more than 10% of the Units that is not approved in advance by the General Partner. In determining the amount of the distribution, the General Partner may take into account all material factors. In addition, the Partnership will not be obligated to make any distribution to any partner, and no partner will be entitled to receive any distribution, until the General Partner has declared the distribution and established a record date and distribution date for the distribution. The Partnership filed a Form 8-K disclosing this resolution on February 29, 1996.
Results of Operations
1996 vs. 1995 The Partnership generated net income for the year ended December 31, 1996 of $1,787,581, compared to $1,328,509 for the year ended December 31, 1995. The increase in net income is primarily due to a gain on the sale of the leasehold interest in the Delhi Property recognized by the Partnership during the fourth quarter of 1996 totaling $383,193. Excluding this gain, the Partnership generated income from operations totaling $1,404,388 for the year ended December 31, 1996, compared to $1,328,509 for the year ended December 31, 1995. The slight increase in income from operations from 1995 to 1996 is primarily attributable to an increase in rental income received from the Properties.
Rental income for the year ended December 31, 1996 was $2,257,335, compared to $2,159,733 for the corresponding period in 1995. The increase in rental income is primarily attributable to an increase in food and beverage sales at the Properties which resulted in an increase in percentage rental income and, to a lesser extent, scheduled escalations in ground lease rents at the leasehold Properties. Ground lease rent escalations which are included in the minimum base rent amounts charged to the franchisees also result in a corresponding increase in the ground lease rents paid by the Partnership to BKC. Management fees, which are based on the amount of rental income received by the Partnership, were higher for the year ended December 31, 1996 due to the increase in percentage rental income. As discussed above, BKC was not required to refund any management fees to the Partnership for the year ended December 31, 1996.
General and administrative expenses for the year ended December 31, 1996 totaled $82,159, compared to $90,545 for the corresponding period in 1995. The decrease is primarily attributable to a decrease in environmental consulting fees incurred by the Partnership during 1996.
1995 vs. 1994 The Partnership generated net income for the year ended December 31, 1995 of $1,328,509 compared to $1,418,073 for the year ended December 31, 1994. The decrease in net income was primarily attributable to an increase in management fees paid to BKC.
Rental income for the year ended December 31, 1995 was $2,159,733 compared to $2,044,028 for the year ended December 31, 1994. The increase was primarily a result of increased food and beverage sales at the Properties resulting in an increase in percentage rental income and, to a lesser extent, scheduled rent escalations in the Partnership's ground leases. Ground lease rent escalations are passed on to the franchisees in the form of higher minimum base rents.
Interest income for the year ended December 31, 1995 was $26,299 compared to $16,366 for the year ended December 31, 1994. The increase in interest income was primarily attributable to a rise in interest rates earned on the Partnership's cash balances during the 1995 period.
Total expenses for the year ended December 31, 1995 were $859,688 compared to $646,097 for the year ended December 31, 1994. The increase was primarily attributable to an increase in the management fee paid to BKC which is attributable to the increase in percentage rental income received by the Partnership as a result of an increase in sales at the Properties. Also contributing to the increase in expenses for the year ended December 31, 1995, was higher ground lease rent resulting from scheduled rent escalations on three of the Partnership's leased Properties.
Item 8.

Item 8. Financial Statements and Supplementary Data.
Incorporated by reference to the Partnership's 1996 Annual Report to Unitholders.
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 Partnership.
The General Partner is a New York corporation and an affiliate of Lehman.
On July 31, 1993, Shearson sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to this sale, Shearson changed its name to Lehman Brothers Inc. The transaction did not affect the ownership of the Partnership or the General Partner. However, the assets acquired by Smith Barney included the name "Shearson." Consequently, effective January 24, 1994, the General Partner changed its name from Shearson/BK Restaurants, Inc. to BK III Restaurants Inc. to delete any reference to "Shearson."
The Partnership has no officers and directors. The General Partner manages and controls the affairs of the Partnership and has general responsibility and authority in all matters affecting its business. Certain officers and the director of the General Partner are now serving (or in the past have served) as officers or directors of entities which act as general partners of a number of real estate limited partnerships which have sought protection under the provisions of the Federal Bankruptcy Code. The partnerships which have filed bankruptcy petitions own real estate which has been adversely affected by the economic conditions in the markets in which that real estate is located and, consequently, the partnerships sought the protection of the bankruptcy laws to protect the partnerships' assets from loss through foreclosure.
The director and executive officers of the General Partner as of December 31, 1996 are set forth below. There are no family relationships between or among any officer and any other officer or director.
Name Age Office Rocco F. Andriola 38 Director, President and Chief Financial Officer Kenneth F. Boyle 33 Vice President Timothy E. Needham 28 Vice President
The foregoing director has been elected to serve as director until the annual meeting of the General Partner to be held in October 1997. The business experience of the director and each of the officers of the General Partner is as follows:
Rocco F. Andriola is a Managing Director of Lehman Brothers in its Diversified Asset Group and has held such position since October 1996. Since joining Lehman Brothers in 1986, Mr. Andriola has been involved in a wide range of restructuring and asset management activities involving real estate and other direct investment transactions. From June 1991 through September 1996, Mr. Andriola held the position of Senior Vice President in Lehman's Diversified Asset Group. From June 1989 through May 1991, Mr. Andriola held the position of First Vice President in Lehman's Capital Preservation and Restructuring Group. From 1986-89, Mr. Andriola served as a Vice President in the Corporate Transactions Group of Shearson Lehman Brothers' office of the general counsel. Prior to joining Lehman Brothers, Mr. Andriola practiced corporate and securities law at Donovan Leisure Newton & Irvine in New York. Mr. Andriola received a B.A. from Fordham University, a J.D. from New York University School of Law, and an LL.M in Corporate Law from New York University's Graduate School of Law.
Kenneth F. Boyle is a Vice President of Lehman Brothers' Diversified Asset Group. Mr. Boyle joined Lehman Brothers in January 1991. Mr. Boyle is a Certified Public Accountant and was employed by the accounting firm of KPMG Peat Marwick LLP from 1985 to 1990. Mr. Boyle graduated from the State University of New York at Binghamton with a B.S. degree in Accounting.
Timothy E. Needham is an Associate of Lehman Brothers and assists in the management of commercial real estate in the Diversified Asset Group. Mr. Needham joined Lehman Brothers in September 1995. Prior to joining Lehman Brothers Mr. Needham was a consultant with KPMG Peat Marwick LLP in the Banking and Investment Services Group from 1994- 1995. Mr. Needham received his master's degree in international management from the American Graduate School of International Management in December of 1993. Previous to entering graduate school, Mr. Needham worked in Tokyo, for approximately one year doing market research for a Japanese firm (1991). In addition, Mr. Needham is currently a candidate for the designation of Chartered Financial Analyst, Level III.
Item 11.

Item 11. Executive Compensation.
Officers and the director of the General Partner are employees of Lehman and are not compensated by the Partnership or the General Partner for services rendered in connection with the Partnership.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security ownership of certain beneficial owners The Partnership knows of no person who beneficially owns more than 5% of the Units.
(b) Security ownership of management Under the terms of the Partnership Agreement, the Partnership's affairs are managed by the General Partner. The General Partner owns the equivalent of one Unit. No director or officers of the General Partner own any Units.
(c) Changes in control None.
Item 13.

Item 13. Certain Relationships and Related Transactions.
(a) Transactions with Management and Others Amounts reimbursed to the General Partner and its affiliates for out of pocket expenses during the years ended December 31, 1996, 1995 and 1994 were $2,341, $80 and $53, respectively.
(b) Certain Business Relationships There have been no business transactions between the director and officers of the General Partner and the Partnership.
(c) Indebtedness of Management No management person is indebted in any amount to the Partnership.
(d) Transactions with Promoters There have been no transactions with promoters.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following are filed as part of this report:
1. Financial Statements
BURGER KING LIMITED PARTNERSHIP III (a New York limited partnership)
Independent Auditors' Report (1)
Balance Sheets at December 31, 1996 and 1995 (1)
Statements of Partners' Capital (Deficit) for the years ended December 31, 1996, 1995 and 1994 (1)
Statements of Operations for the years ended December 31, 1996, 1995 and 1994 (1)
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 (1)
Notes to the Financial Statements (1)
(1) Incorporated by reference to the Partnership's 1996 Annual Report to Unitholders.
2. Financial Statement Schedule
Independent Auditors' Report on Schedule III (F-1)
Schedule III - Real Estate and Accumulated Depreciation (F-2)
3. Exhibits
(13) 1996 Annual Report to Unitholders
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the year ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 1997 BURGER KING LIMITED PARTNERSHIP III
BY: BK III Restaurants Inc. General Partner
BY: /s/ Rocco F. Andriola Name: Rocco F. Andriola Title: Director, President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
BK III RESTAURANTS INC. General Partner
Dated: March 31, 1997 BY: /s/ Rocco F. Andriola Rocco F. Andriola Director, President and Chief Financial Officer
Dated: March 31, 1997 BY: /s/ Kenneth F. Boyle Kenneth F. Boyle Vice President
Dated: March 31, 1997 BY: /s/ Timothy E. Needham Timothy E. Needham Vice President
INDEPENDENT AUDITORS' REPORT
The Partners Burger King Limited Partnership III:
Under date of January 31, 1997 we reported on the balance sheets of Burger King Limited Partnership III (a New York limited partnership) as of December 31, 1996 and 1995, and the related statements of operations, partners' capital (deficit) and cash flows for each of the years in the three-year period ended December 31, 1996, as contained in the 1996 Annual Report to Unitholders. These financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Partnership's management. Our responsibility is to express an opinion of the financial statement schedule based on our audits.
In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Boston, Massachusetts January 31, 1997
BURGER KING LIMITED PARTNERSHIP III (a New York limited partnership) Schedule III - Real Estate and Accumulated Depreciation
December 31, 1996
Costs Capitalized Subsequent Initial Costs To Acquisition
Buildings and Buildings and Description (A) Encumbrances Land Improvements Improvements Largo, FL $ _ $210,000 $276,604 $ _ Mounds View, MN _ 120,000 330,988 _ Sulphur Springs, TX _ 112,000 309,767 _ Atlanta, GA _ 250,000 362,443 _ Albuquerque, NM _ (B) 286,252 _ Montgomery, AL _ (B) 288,273 _ Covina, CA _ 270,000 346,210 _ Federal Heights, CO _ (B) 231,001 _ Gallatin, TN _ 131,500 270,748 _ Edison, NJ _ 150,000 534,340 _ Cleburne, TX _ 129,588 336,846 _ Chattanooga, TN _ 180,000 309,706 _ Shelbyville, TN _ 139,000 359,891 _ Gary, IN _ 207,000 409,521 _ Wilson, NC _ 135,000 381,867 _ Memphis, TN _ 225,000 398,988 _ North Augusta, SC _ 160,000 329,445 _ Columbus, IN _ 175,000 360,545 _ Brooklyn Park, MD _ (B) 289,307 _ Fayetteville, NC _ (B) 371,762 _ San Bernadino, CA _ (B) 325,297 _ Frankfort, KY _ 175,000 400,684 _ Nashville, TN _ 212,000 399,849 _ ___________________________________________________ $ _ $2,981,088 $7,910,334 $ _
BURGER KING LIMITED PARTNERSHIP III (a New York limited partnership) Schedule III - Real Estate and Accumulated Depreciation
December 31, 1996
Cost Basis at December 31, 1996
Buildings and Accumulated Description (A) Land Improvements Totals Depreciation Largo, FL $210,000 $276,604 $486,604 $206,985 Mounds View, MN 120,000 330,988 450,988 248,645 Sulphur Springs, TX 112,000 309,767 421,767 232,943 Atlanta, GA 250,000 362,443 612,443 268,830 Albuquerque, NM 286,252 286,252 212,140 Montgomery, AL 288,273 288,273 214,728 Covina, CA 270,000 346,210 616,210 254,465 Federal Heights, CO 231,001 231,001 171,532 Gallatin, TN 131,500 270,748 402,248 199,531 Edison, NJ 150,000 534,340 684,340 383,724 Cleburne, TX 129,588 336,846 466,434 246,383 Chattanooga, TN 180,000 309,706 489,706 224,623 Shelbyville, TN 139,000 359,891 498,891 260,746 Gary, IN 207,000 409,521 616,521 293,207 Wilson, NC 135,000 381,867 516,867 272,995 Memphis, TN 225,000 398,988 623,988 282,281 North Augusta, SC 160,000 329,445 489,445 233,139 Columbus, IN 175,000 360,545 535,545 255,823 Brooklyn Park, MD 289,307 289,307 214,067 Fayetteville, NC 371,762 371,762 262,808 San Bernadino, CA 325,297 325,297 226,912 Frankfort, KY 175,000 400,684 575,684 276,864 Nashville, TN 212,000 399,849 611,849 272,647 _______________________________________________________ $2,981,088 $7,910,334 $10,891,422 (D) $5,716,018 (C)
BURGER KING LIMITED PARTNERSHIP III (a New York limited partnership) Schedule III - Real Estate and Accumulated Depreciation
December 31, 1996
Years of Dates Estimated Description (A) Construction Acquired Useful Lives Largo, FL 1984 04/03/84 7 - 20 years Mounds View, MN 1984 04/13/84 7 - 20 years Sulphur Springs, TX 1984 03/08/84 7 - 20 years Atlanta, GA 1984 06/15/84 7 - 20 years Albuquerque, NM 1984 07/10/84 7 - 20 years Montgomery, AL 1984 07/16/84 7 - 20 years Covina, CA 1984 05/31/84 7 - 20 years Federal Heights, CO 1984 08/31/84 7 - 20 years Gallatin, TN 1984 10/11/84 7 - 20 years Edison, NJ 1984 10/31/84 7 - 20 years Cleburne, TX 1984 10/18/84 7 - 20 years Chattanooga, TN 1985 01/18/85 7 - 20 years Shelbyville, TN 1985 02/07/85 7 - 20 years Gary, IN 1985 05/09/85 7 - 20 years Wilson, NC 1985 05/16/85 7 - 20 years Memphis, TN 1985 08/01/85 7 - 20 years North Augusta, SC 1985 08/02/85 7 - 20 years Columbus, IN 1985 07/23/85 7 - 20 years Brooklyn Park, MD 1985 02/20/85 7 - 20 years Fayetteville, NC 1985 08/26/85 7 - 20 years San Bernadino, CA 1985 12/11/85 7 - 20 years Frankfort, KY 1986 02/27/86 7 - 20 years Nashville, TN 1985 10/22/85 7 - 20 years
(A) Represents Burger King restaurants. (B) Properties operated under a ground lease. (C) Depreciation is computed under the straight-line method. (D) Federal income tax basis of the real estate is $10,845,640 at December 31, 1996.
BURGER KING LIMITED PARTNERSHIP III (a New York limited partnership) Schedule III - Real Estate and Accumulated Depreciation
December 31, 1996
Real estate held for investment and corresponding accumulated depreciation for the three years ended December 31, 1996, 1995 and 1994 is as follows:
Real estate investments: 1996 1995 1994 Beginning of year $11,278,049 $11,278,049 $11,278,049 Deduct: real estate sold 386,627 0 0 End of year $10,891,422 $11,278,049 $11,278,049
Accumulated depreciation: Beginning of year $ 5,702,818 $ 5,425,179 $ 5,147,540 Add: depreciation expense 276,020 277,639 277,639 Deduct: real estate sold 262,820 0 0 End of year $ 5,716,018 $ 5,702,818 $ 5,425,179
As of December 31, 1996, the Partnership's real estate investments which had a carrying value of $5,175,404, were reclassified as real estate held for sale and depreciation will be suspended in accordance with FAS 121.


Item 1. Business
(a) General Development of Business Urban Improvement Fund Limited 1973-II, a California limited partnership (the "Registrant"), was formed in 1973 for the purpose of investing, through Local Limited Partnerships (LLP's), in federally and state-assisted low and moderate income housing projects. Units of Limited Partnership Interest were sold in a public offering to investors who required tax shelter for income from other sources. The Registrant acquired equity interests as a limited partner in eleven (11) such Local Limited Partnerships. One of these projects was sold in 1978 through a trustee's sale (foreclosure). Two of these properties, Mott Haven Apartment VII and Mott Haven Apartments VIII are either in default on their mortgage or technical default due to physical condition of property.
Despite the efforts of the General Partner, the owners and managers of Mott Haven Apartments VII and Mott Haven Apartments VIII to preserve the developments and provide decent and affordable housing, the financial stability of the developments is threatened by the imminent expiration of the Section 8 loan management set-aside contracts and the likelihood that they will not be renewed on this property for federal budget and policy reasons. HUD, the owners and the General Partner of Mott Haven Apartments VII and Mott Haven Apartments VIII believe that it is in the best interests of the developments and their tenants that the projects be renovated and reconfigured, and that such result can best be accomplished through replacement of the existing management and ownership structure with community-based owners and managers. The General Partner has taken steps to transfer these properties to HUD. The remaining eight (8) partnerships are described in Item 2

Item 2. Properties.
The Registrant owns equity interests as a Limited Partner in the following real estate projects as of December 31, 1996:
*Developed under auspices of Massachusetts Housing Finance Agency.
Mortgage indebtedness associated with each project is shown in Schedule XI of this report.
The following properties were assigned to HUD at December 31, 1996:
The following is a description of each of the above listed properties:
COMMUNITY CIRCLE is a 160-unit project located in Cleveland, Ohio, consisting of seven frame and brick two-story buildings and one masonry and pre-cast concrete ten-story building. The project was constructed under Section 236 of the National Housing Act.
CROWNINSHIELD APARTMENTS consists of 284 rental units rehabilitated under the auspices of the Massachusetts Housing Finance Agency. The project is located in Peabody, Massachusetts.
HOLLY STREET is a 71-unit project located in the cities of Methuen and Lawrence, Massachusetts, consisting of eleven two-, three- and four-story buildings of frame and brick construction. The project was rehabilitated pursuant to authority granted by the Massachusetts Housing Finance Agency, with subsidy under Section 236 of the National Housing Act.
KING DRIVE APARTMENTS is a 315-unit project located in Chicago, Illinois. It is a 22-story building of concrete construction. The building contains space for two commercial shops. The project was constructed under Section 236 of the National Housing Act.
808 MEMORIAL DRIVE ASSOCIATES is a 301-unit project located in Cambridge, Massachusetts, consisting of two buildings of steel and brick construction and a five-level parking structure. The buildings are eleven and twenty stories and they are centrally air-conditioned. The project has two small landscaped plazas. There is approximately 57,000 square feet of commercial space and 2,000 square feet of retail spaces. The project was constructed under the auspices of the Massachusetts Housing Finance Agency.
MET-PACA I consists of 37 units in four buildings rehabilitated under Section 236 of the National Housing Act. This project is located in New York City, New York.
MORRISANIA II ASSOCIATES is a 161-unit project located at 1104-1148 Clay Avenue, Bronx, New York, consisting of twelve five-story buildings of brick construction. The development was rehabilitated under Section 236 of the National Housing Act.
SOUTHERN BOULEVARD REHAB PHASE I is a 72-unit project located in the Bronx, New York, consisting of two six-story, wood joist and brick exterior buildings. The project is located in the same area as Mott Haven 7. The project was rehabilitated under Section 236 of the National Housing Act.
The following properties were assigned to HUD at December 31, 1996:
MOTT HAVEN 7 is a 165-unit project located in the Bronx, New York, and consists of four-, five- and six-story buildings of brick and masonry construction. The project was rehabilitated under Section 236 of the National Housing Act.
MOTT HAVEN 8 is a 171-unit project located in the Bronx, New York, consisting of four-, five- and six-story buildings of brick and masonry construction. The project is located in the same area as Mott Haven 7. The project was rehabilitated under Section 236 of the National Housing Act.
Item 3.

Item 3. Legal Proceedings. There are no material pending legal proceedings at this time, other than ordinary routine litigation incidental to the Partnership's business, including the Local Limited Partnerships in which the Partnership is a Limited Partner.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise.
PART II
Item 5.

Item 5. Market for the Registrant's Securities and Related Security Holder Matters. (a) There is not a ready market for the transfer of limited partnership interests. Limited partnership interests may be transferred between individuals with the consent of the General Partner. (b) Holders
The Registrant has no officers or directors. Interfinancial Real Estate Management Company, the General Partner of the Registrant, is a corporation.
(c) There have been no distributions to partners during the five year period ending December 31, 1996.
Item 6.

Item 6. Selected Financial Data
These statements do not include all disclosures required under generally accepted accounting principles; however, when read in conjunction with the related financial statements and notes thereto included under Item 8, the statements include all generally accepted accounting principles disclosures for the latest three years.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Partnership has followed the practice of investing available funds, not used in the purchase of properties or in operations, in short-term investments. Interest income resulted from such short- term investments. The Partnership is dependent upon interest earned and the distributions and repayment of advances from Local Limited Partnerships for cash flow. As shown in the table below, the Partnership has received distributions in recent years. This trend is expected to continue. The Partnership has advanced funds to and received repayments of such advances from selected Local Limited Partnerships. The General Partner believes these net advances will not significantly affect the operations of the Partnership.
Under the terms of the Limited Partnership Agreement, the Partnership is required to pay the General Partner an annual management fee equal to one-quarter of one percent of invested assets or $136,548. (The fee will not be more than fifty percent of the Partnership's annual net cash flow, as defined, subject to an annual minimum of $70,000.) The Partnership recorded management fee expense of $70,000 per year from 1991 through 1996. The Partnership will also pay the General Partner a liquidation fee for the sale of projects. The liquidation fee is the lesser of (i) ten percent of the net proceeds to the Partnership from the sale of a project(s) or (ii) one percent of the sales price plus three percent of the net proceeds after deducting an amount sufficient to pay long-term capital gains taxes. No part of such fee shall accrue or be paid unless: (i) the Limited Partners' share of the proceeds has been distributed to them, (ii) the Limited Partners shall have first received an amount equal to their invested capital attributable to the project(s) sold, and (iii) the Limited Partners have received an amount sufficient to pay long-term capital gains taxes from the sale of the project(s), if any, calculated at the maximum rate then in effect.
During the period 1992 to 1995, the Partnership paid incentive management fees to the General Partner of a Local Limited Partnership. These fees were paid from distributions received from this Local Limited Partnership.
At December 31, 1996, the Partnership had investments in eight active real estate limited partnerships as a Limited Partner. The Partnership carries such investments on the equity method of accounting. The Partnership discontinues recording losses for financial reporting purposes when its investment in a particular Local Limited Partnership is reduced to zero, unless the Partnership intends to commit additional funds to the Local Limited Partnership. At year-end, all of the investments were reduced to zero. The equity in income in Local Limited Partnerships resulted from either Local Limited Partnerships, whose investments have not been reduced to zero, reporting income from operations and Local Limited Partnerships, whose investments have been reduced to zero, who paid distributions or repaid an advance. Additional advances to Local Limited Partnerships, after an investment is reduced to zero, are recorded as losses.
The components of the Partnership's equity in net income (loss) of the Local Limited Partnerships for 1996, 1995 and 1994 is summarized as follows:
The actual combined losses of Local Limited Partnerships will generally decrease as depreciation and interest decreases and the projects achieve stable operations. The distributions to the Partnership from Local Limited Partnerships are the result of positive cash flow from the operations of these projects.
Liquidity The Partnership is dependent upon distributions from its investments in Local Limited Partnerships for cash flow. The Partnership may not be able to generate sufficient cash flow from operations or from distributions from its interests in Local Limited Partnerships to pay future obligations as they become due without additional financing or advances from the General Partner. The General Partner is under no obligation to advance additional funds to the Partnership. The General Partner is monitoring the operations of the Local Limited Partnerships to ensure that sufficient cash will be received from the Local Limited Partnerships to sustain operations. The General Partner anticipates it will receive adequate distributions from the Local Limited Partnerships to maintain operations.
Capital Resources The General Partner believes that situations may arise where it would be advantageous to the Partners to exchange properties in a tax-free transaction. The Partnership's basis in its properties has been reduced through depreciation deductions and other losses to levels substantially below the amount of debt secured by the properties. Additionally, the rental properties owned and operated by the Local Limited Partnerships have typically computed depreciation for financial reporting purposes using the straight-line method over the estimated economic useful life of the property. For income tax reporting purposes, depreciation generally has been computed over the same or shorter periods using accelerated methods. As a result, the carrying values of the Partnership's investments in Local Limited Partnerships are substantially greater for financial reporting purposes than for income tax reporting purposes. Upon sale or other disposition of a property by the Local Limited Partnership, the gain recognized by the Partnership for income tax reporting purposes may be substantially greater than the gain recorded for financial reporting purposes. Accordingly, if the properties are sold, the Partnership, in all likelihood, would recognize taxable gain in excess of the cash available for distribution. If sale proceeds are reinvested in a manner which permits the original sale to be treated as a like-kind exchange, the Partnership can defer this gain until the new property is sold. Additionally, the Partnership will receive the benefit of any cash flow or appreciation in value of the new property. If reinvestments were made, it is likely that the acquired properties would be conventional, multi-family residential projects. The Partnership has had inquiries about the sale or exchange of properties in its portfolio, but no offers have been made.
The Partnership has made no material commitments for capital expenditures.
Item 8.

Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in a separate section of this report.
Item 9.

Item 9. Change in and Disagreements With Accountants on Accounting and Financial Disclosure
There have been no disagreements on any matters of accounting principles or practices or financial statement disclosure.
PART III Item 10.

Item 10. Directors and Executive Officers of the Registrant (a) The General Partner of the Registrant is Interfinancial Real Estate Management Company. The Registrant does not have directors as such. The following is a listing of the Directors of the General Partner of the Registrant. These Directors are elected to serve one-year terms and until their successors are duly elected and qualified as directors.
(b) The General Partner of the Registrant is Interfinancial Real Estate Management Company. The Registrant does not have executive officers as such. The following is a listing of the executive officers of the General Partner of the Registrant. These executive officers are elected to serve one-year terms and will continue to serve until their successors are duly elected and qualified as executive officers.
(c) The Registrant has no employees. (d) There are no family relationships between any directors or executive officers. (e) The principal occupation and employment of each of the executive officers and directors of the General Partner are as follows:
Paul H. Pfleger, President/Director. Mr. Pfleger organized and was Chairman of the Board of Security Properties Inc. (formerly Security Pacific, Inc.) from 1969 to the present, except for a period between 1984 and 1986. Farmers Savings acquired Security Properties Inc. as a wholly-owned subsidiary during 1984 and sold the company back to the original owners during 1987. The major line of business of Security Properties Inc. is the administration of previously syndicated, subsidized multifamily residential real estate. Mr. Pfleger was first elected an officer and director of the General Partner, Interfinancial Real Estate Management Company, in July 1981 and has maintained his dual status since that time.
Mr. Pfleger is the General Partner in over 280 properties with approximately 38,000 housing units throughout the United States.
John M. Orehek, Senior Vice President. Mr. Orehek is the Chief Executive Officer and President of Security Properties Investment Inc. From 1982 to 1987, he was employed by Security Properties Inc. (SPI) as President of First Columbia Corporation, its affiliated broker/dealer, and Senior Vice President of SPI. From 1987 to 1991, when he rejoined SPI, he was President of Hallmark Capital Partners, Ltd., a Seattle real estate development corporation. From 1979 to 1982 he was a member of the tax department in the Cleveland, Ohio and Seattle, Washington offices of Arthur Andersen & Co., Certified Public Accountants. He received a B.S. degree in Economics from Allegheny College, Meadville, Pennsylvania and a law degree from Case Western Reserve University School of Law. Mr. Orehek was first elected a director of the General Partner, Interfinancial Real Estate Management Company, during 1992.
Michael Fulbright, Secretary. Mr. Fulbright is General Counsel for Security Properties Inc. (SPI). He joined the Company in 1989 as Special Counsel responsible for new development activities and sales and financing transactions in the syndication portfolio. Prior to joining SPI, he was a partner at Tousley Brain, a Seattle law firm that specializes in commercial real estate matters. His practice there included representation of lenders, institutional investors and commercial developers. He received a Masters of Business Administration degree from Texas A&M and a law degree from the University of Washington. He is a member of the Washington State Bar Association. Mr. Fulbright was first elected an officer of the General Partner, Interfinancial Real Estate Management Company, during 1994.
(f) Section 20 of the Amended Certificate and Agreement of Limited Partnership of the Registrant provides for the indemnification of the General Partner and its designees and nominees against liability resulting from errors in judgment or any acts or omissions, whether or not disclosed, unless caused by a breach of fiduciary duty of such parties to the Registrant or its Limited Partners. None of the officers or directors of the General Partner of the Registrant have filed a petition under the federal bankruptcy laws or any state insolvency act, nor have they been engaged in any acts over the past five years that would impair their ability or integrity as directors or executive officers of the General Partner of the Registrant.
Item II. Executive Compensation (a) The Registrant will not pay directly any salary or other remuneration to the officers of the General Partner of the Registrant.
(b) The Registrant has no plan or arrangement to pay directly any salary or other remuneration to the officers in the future.
(c) There are no such options, warrants, rights or any other remuneration available to the General Partner of the Registrant.
(d) The Registrant will not pay directly any salary or other remuneration to the directors of the General Partner of the Registrant.
(e) There are no such retirement benefit plans or other remuneration that would result from the resignation, retirement, termination or any other change in control of any officer or director of the General Partner of the Registrant.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
(b) Holders
(b) No officers or directors of the General Partner of the Registrant own a Partnership interest.
(c) No change in control of the Registrant is anticipated.
Item 13.

Item 13. Certain Relationships and Related Transactions
(a) There are no transactions in which the directors or officers of the General Partner or security holder of the Registrant have a material interest.
(b) There are no transactions in which the directors of the General Partner have a material interest.
(c) There is no indebtedness of the management of the General Partner of the Registrant to the Registrant.
PART IV
Item 14.

Item 14. Exhibits, Financial Statements, Schedules, Exhibits and Reports on Form 8-K.
(a) 1. Financial Statements:
Report of independent certified public accountants.
Balance Sheets at December 31, 1996 and 1995.
Statements of Income (Loss) for the years ended December 31, 1996, 1995 and 1994.
Statements of Changes in Partners' Capital for the years ended December 31, 1996, 1995 and 1994.
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994.
Notes to Financial Statements.
(a) 2. Financial Statement Schedules:
IV Indebtedness of and to Related Parties
XI Real Estate and Accumulated Depreciation and Amortization of Local Limited Partnerships. All other schedules are omitted because they are not applicable or the required information is included in the Financial Statements or the notes thereto.
FINANCIAL STATEMENTS OF UNCONSOLIDATED SUBSIDIARIES FIFTY PERCENT OWNED PERSONS OR OTHER UNCONSOLIDATED PERSONS ACCOUNTED FOR ON THE EQUITY METHOD
Separate financial statements of the ten limited partnerships accounted for on the equity method have been omitted because combined financial statements are included in Note 4 to the financial statements.
(a) 3. Exhibits:
1.A. Form of proposed Selling Brokers' Agreement, incorporated by reference from Registration Statement on Form S-11 filed August, 1973.
3.A. Amended Certificate and Agreement of Limited Partnership, incorporated by reference from Registration Statement on Form S-11 filed August, 1973.
3.B. Amendment to Certificate of Limited Partnership, incorporated by reference from Registration Statement on Form S-11 filed August, 1973.
3.C. Amendment to certificate of Limited Partnership. Incorporated by reference from proxy statement filed September 18, 1991.
4.A. Subscription agreement incorporated by reference from Registration Statement on Form S-11 filed August, 1973.
5.A. Opinion and Consent of Counsel, incorporated by reference from Pre-Effective Amendment No. 1 to Registration Statement on Form S-11 filed October, 1973.
8.A. Opinion and Consent of Tax Counsel, incorporated by reference from Pre-Effective Amendment No. 1 to Registration Statement on Form S-11 filed October, 1973.
8.B. Tax Ruling request, incorporated by reference from Pre-Effective Amendment No. 1 to Registration Statement on Form S-11 filed October, 1973.
10.A. Copy of Agreement between Registrant, the General Partner and Income-Equities Corporation with respect to certain commitments made on behalf of the Registrant, incorporated by reference from Pre-Effective Amendment No. 1 to Registration Statement on Form S-11 filed October, 1973.
10.B. Copy of the Management Agreement between the Registrant and Income-Equities Corporation, incorporated by reference from Registration Statement on Form S-11 filed August, 1973.
10.C. Correspondence between the Management Company on behalf of the General Partner, with various developers, constituting agreements to invest in Local Limited Partnerships, incorporated by reference from Pre-Effective Amendment No. 1 to Registration Statement on Form S-11 filed October, 1973.
10.D. Copy of form of Limited Partnership Agreement between the Registrant and Local Limited Partnerships in which it becomes a limited partner, incorporated by reference from Registration Statement on Form S-11 filed August, 1973.
28.A. Letters dated August 2, 1974 and August 15, 1974 to investors from the General Partner and Management Company regarding tax information matters, incorporated by reference from Form 8-K filed August, 1974.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the last quarter of 1995.
(c) Exhibits:
Form 12b-25
(d) Financial Statement Schedules:
IV Indebtedness of and to Related Parties
XI Real Estate and Accumulated Depreciation and Amortization of Local Limited Partnerships.
All other schedules are omitted because they are not applicable or the required information is included in the financial statements or the notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed, on its behalf by the undersigned, thereunto duly authorized.
(REGISTRANT) URBAN IMPROVEMENT FUND LIMITED 1973-II BY: INTERFINANCIAL REAL ESTATE MANAGEMENT COMPANY
Date: 08-22-97 By: Paul H. Pfleger President Interfinancial Real Estate Management Company
Date: 08-22-97 By: John M. Orehek Senior Vice President Interfinancial Real Estate Management Company
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: 08-22-97 By: Paul H. Pfleger, Director Interfinancial Real Estate Management Company
Date: 08-22-97 By: John M. Orehek, Director Interfinancial Real Estate Management Company.
URBAN IMPROVEMENT FUND LIMITED 1973-II SEATTLE, WASHINGTON
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2) AND ITEM 14(d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED December 31, 1996
Form 10-K Items 14(a)(1) and (2) Form 10-K Item 14(d)
Urban Improvement Fund Limited 1973-II (A Limited Partnership)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of Urban Improvement Fund Limited 1973-II are included in Item 8 and Item 14(a)(1)
Independent Auditors' Report . . . . . . . . . . . . . . . . . .
Balance sheets at December 31, 1996 and 1995 . . . . . . . . . .
Statements of income (loss) for the years ended December 31, 1996, 1995 and 1994. . . . . . . . . . . . . .
Statements of changes in partners' capital (deficit) for the years ended December 31, 1996, 1995 and 1994. . .. .F-5
Statements of cash flows for the years ended December 31, 1996, 1995 and 1994. . . . . . . . . . . . . .
Notes to financial statements. . . . . . . . . . . . . . . . . .
The following financial statement schedules of Urban Improvement Fund Limited 1973-II are included in Item 14(a)(2) and 14(d):
IV. Indebtedness of and to Related Parties. . . . . . . . . . .F-21
XI. Real Estate and Accumulated Depreciation of Local Limited Partnerships. . . . . . . . . . . . .F-22
All other schedules are omitted because they are not applicable. Required information is shown in the financial statements or notes thereto.
FINANCIAL STATEMENTS OF UNCONSOLIDATED SUBSIDIARIES FIFTY PERCENT OWNED PERSONS OR OTHER UNCONSOLIDATED PERSONS ACCOUNTED FOR ON THE EQUITY METHOD
Separate financial statements of the eight limited partnerships accounted for on the equity method have been omitted because combined financial statements are included in Note 4 to the financial statements.
INDEPENDENT AUDITORS' REPORT
To the Partners Urban Improvement Fund Limited 1973-II
We have audited the accompanying balance sheets of Urban Improvement Fund Limited 1973-II (a Limited Partnership) as of December 31, 1996 and 1995, and the related statements of income (loss), changes in partners' capital (deficit) and cash flows for the years ended December 31, 1996, 1995 and 1994, and the related schedules listed in Item 14(a)(2) of the annual report on Form 10-K of Urban Improvement Fund Limited 1973-II for the years ended December 31, 1996, 1995 and 1994. These financial statements and financial statement schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We did not audit four in 1996 and six in 1995 of the financial statements of Urban Improvement Fund Limited 1973-II's Local Limited Partnership investments whose combined financial statements are shown in Note 4. These statements were audited by other auditors whose reports have been furnished to us, and our opinion, to the extent it relates to the amounts included for these Local Limited Partnership investments, is based solely on the reports of the other auditors. Urban Investment Fund Limited 1973-II's investment in these partnerships has been reduced to zero.
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 provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Urban Improvement Fund Limited 1973-II as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. In addition, in our opinion, based upon our audits and the reports of other auditors, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required therein.
Atlanta, Georgia June 4, 1997
URBAN IMPROVEMENT FUND LIMITED 1973-II (A Limited Partnership)
BALANCE SHEETS
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
The Notes to Financial Statements are an integral part of these Statements.
URBAN IMPROVEMENT FUND LIMITED 1973-II (A Limited Partnership)
STATEMENTS OF INCOME (LOSS)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
The Notes to Financial Statements are an integral part of these Statements.
URBAN IMPROVEMENT FUND LIMITED 1973-II (A Limited Partnership)
STATEMENTS OF CASH FLOWS
The Notes to Financial Statements are an integral part of these Statements.
URBAN IMPROVEMENT FUND LIMITED 1973-II (A Limited Partnership)
Notes to Financial Statements
Note 1 Organization and Accounting Policies
Organization
Urban Improvement Fund Limited 1973-II (the Partnership) was formed under the California Uniform Limited Partnership Act on July 1, 1973, for the principal purpose of investing in other limited partnerships (Local Limited Partnerships), which own federal and state-assisted housing projects. The Partnership issued 11,335 units of limited partnership interests pursuant to a public offering of such units which terminated on December 31, 1973. The Partnership also issued 100 units of general partnership interests to Interfinancial Real Estate Management Company (the General Partner).
The Urban Improvement Fund Limited 1973-II prospectus, dated October 24, 1973, specified that the General Partner has a five percent interest in profits, losses and special allocations, and the limited partners will share the remaining 95 percent interest in profits, losses and special allocations in proportion to their respective units of limited partnership interests.
Investment in Local Limited Partnerships
As of December 31, 1996, the Partnership has investments in eight active real estate limited partnerships (Local Limited Partnerships), which are accounted for on the equity method (Note 4). The investment account represents the sum of the capital investment and unamortized cost of acquisition less the Partnership's share in losses since the date of acquisition. The Partnership discontinues recognizing losses and amortizing cost of acquisition under the equity method when the investment in a particular Local Limited Partnership is reduced to zero, unless the Partnership intends to commit additional funds to the Local Limited Partnership. Repayment of advances and cash distributions by the Local Limited Partnerships, after the Partnership investment has been reduced to zero, are recognized as income by the Partnership in the year received. Additional advances to a Local Limited Partnership, after an investment is reduced to zero, are recognized as losses.
Initial rent-up fees paid by the Partnership to the General Partner, deducted when paid for income tax reporting purposes (Note 2), are capitalized as costs of acquisition of the Local Limited Partnerships for financial reporting purposes. These costs and other costs of acquisition are amortized using the straight-line method over the lives (fifteen to forty years) of the Local Limited Partnerships' properties. Amortization is discontinued when the investment is reduced to zero.
The Partnerships' equity in net income (loss) of the Local Limited Partnerships is summarized as follows:
Significant accounting policies followed by the Local Limited Partnerships are summarized in Note 4.
Taxes on Income
No provision for taxes on income has been recorded in the financial statements, since all taxable income or loss of the Partnership is allocated to the partners for inclusion in their respective tax returns.
Fair Value of Financial Instruments and Use of Estimates
The Partnership estimates that the aggregate fair value of all financial instruments at December 31, 1996 does not differ materially from the aggregate carrying values of its financial instruments recorded in the balance sheet. These estimates are not necessarily indicative of the amounts that the Partnership could realize in a current market exchange. The preparation of financial statements requires the use of estimates and assumptions. Actual results could differ from those estimates.
Cash Equivalents
Marketable securities that are highly liquid and have maturities of three months or less at the date of purchase are classified as cash equivalents.
Note 2 Reconciliation Between Net Loss and Partners' Capital (Deficit) of the Partnership For Financial Reporting Purposes and Income Tax Reporting Purposes
A reconciliation of the Partnership's loss for financial reporting purposes and the Partnership's loss for income tax reporting purposes follows:
A reconciliation of partners' capital (deficit) for financial reporting purposes and partners' capital (deficit) for income tax reporting purposes follows:
The Partnership has received a ruling from the Internal Revenue Service that the basis of the limited partners' interests in the Partnership will include the Partnership's allocable share of basis resulting from mortgage debt of the Local Limited Partnerships under Section 752 of the Internal Revenue Code.
Note 3 Management of Urban Improvement Fund Limited 1973-II
Under the terms of the Limited Partnership Agreement, the Partnership is required to pay the General Partner an annual management fee equal to one-quarter of one percent of invested assets or $136,548. (The fee will not be more than fifty percent of the Partnership's annual net cash flow, as defined, subject to an annual minimum of $70,000.) This fee was not payable during the first six years unless annual tax deductions plus cash distributions aggregated $550 per unit. The required level of tax deductions was not achieved in these years and, accordingly, the fee was not paid for those years. However, fees of $350,000 have been recorded as a liability to the General Partner. Management fees payable to the General Partner for subsequent years have been accrued if cash flow was not sufficient to pay the fee in the year incurred. At December 31, 1996, additional management fees of $683,167 have been recorded as a liability to the General Partner. Upon liquidation, unpaid management fees will have first priority to the proceeds. The Partnership will also pay the General Partner a liquidation fee for the sale of projects. The liquidation fee is the lesser of (i) ten percent of the net proceeds to the Partnership from the sale of a project(s) or (ii) one percent of the sales price plus three percent of the net proceeds after deducting an amount sufficient to pay long-term capital gains taxes. No part of such fee shall accrue or be paid unless: (i) the Limited Partners' share of the proceeds has been distributed to them, (ii) the Limited Partners shall have first received an amount equal to their invested capital attributable to the project(s) sold, and (iii) the Limited Partners have received an amount sufficient to pay long-term capital gains taxes from the sale of the project(s), if any, calculated at the maximum rate then in effect.
The General Partner of the Partnership is a corporation in which Paul H. Pfleger owns a majority interest. Partnership Services, Inc. (PSI), another corporation in which Paul H. Pfleger is a majority shareholder, has contracted with the General Partner and the Partnership to provide certain management and other services to any projects in which the Partnership has an interest. No fees were paid to PSI during 1996, 1995 or 1994. In addition, PSI has become the General Partner in two of the Local Limited Partnerships in which the Partnership has investments: Community Circle, Limited and 808 Memorial Drive Associates.
Note 4 Investments in Local Limited Partnerships Accounted for on the Equity Method
The Partnership has ninety-five percent to ninety-nine percent interests in profits and losses of the Local Limited Partnerships. Investments in these Local Limited Partnerships were made in installments based typically on the stage of completion and/or occupancy.
Investment in and advances to the Local Limited Partnerships accounted for on the equity method are as follows:
Note 4 Investments in Local Limited Partnerships Accounted for on the Equity Method
A reconciliation to combined statement of partners' deficits follows:
The combined balance sheets of the Local Limited Partnerships, accounted for on the equity method at December 31, 1996 and 1995, and the related combined statements of operations, changes in partners' capital (deficit), cash flows and selected footnote disclosures from the audited financial statements of the Local Limited Partnerships for the years ended December 31, 1996, 1995 and 1994 are summarized as follows:
COMBINED BALANCE SHEETS OF LOCAL LIMITED PARTNERSHIPS
Assets
Liabilities and Partners' Capital (Deficit)
COMBINED STATEMENTS OF OPERATIONS OF LOCAL LIMITED PARTNERSHIPS
Amortization of capitalized interest amounted to $32,716 in 1996, 1995 and 1994.
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) OF LOCAL LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS OF LOCAL LIMITED PARTNERSHIPS
SUPPLEMENTAL INFORMATION REGARDING INTEREST PAYMENTS IS AS FOLLOWS:
Interest paid $ 740,682 $ 805,812 $ 841,961
A reconciliation between combined net loss for financial reporting purposes and the combined net income for income tax reporting purposes follows:
A reconciliation of combined partners' capital (deficit) for financial reporting purposes and combined partners' capital (deficit) for income tax reporting purposes follows:
Cost of Buildings
For financial statement purposes, the Local Limited Partnerships generally capitalize all project costs, including payments to the general partners, interest, taxes, carrying costs and operating expenses offset by incidental rental income, up to the cutoff date for cost certification purposes. For income tax reporting purposes, certain of these amounts were deducted when paid.
Depreciation and Amortization
For financial statement purposes, depreciation is computed using the straight-line and various accelerated methods over useful lives of fifteen to forty years from the date of completion of the building or rehabilitation, and three to twelve years for equipment and land improvements. For income tax reporting purposes, provisions for depreciation are generally computed over the same or shorter periods using accelerated methods and certain rehabilitation costs are amortized using the straight-line method over sixty months under the provisions of Section 167(k) of the Internal Revenue Code.
Certain expenses related to obtaining permanent financing for the projects have been deferred and are being amortized for financial reporting purposes using the straight-line method over periods of five to forty years.
Mortgage Notes Payable
The Local Limited Partnerships have mortgages which are payable to or are insured by the Department of Housing and Urban Development (HUD) and the Massachusetts Housing Financing Agency (MHFA) totaling $31,995,371 at December 31, 1996 ($12,384,030 by HUD and $19,611,341 by MHFA) and $38,277,103 at December 31, 1995 ($20,584,297 by HUD and $17,692,806 by MHFA). The mortgage notes payable are secured by deeds of trust on rental property and bear interest at the rate of seven percent to thirteen and one half percent per annum. The mortgages will be repaid in monthly installments of principal and interest aggregating approximately $217,000 over periods of forty years. HUD will make interest assistance payments to eight Local Limited Partnerships whose mortgages are insured under Section 236 in amounts which will reduce the mortgage payments to those required for mortgages carrying a one percent interest rate.
The scheduled principal reductions for the next five years are as follows:
Notes Payable
Notes payable include a residual receipts note of $250,000 that is payable to a former General Partner of a Local Limited Partnership. The residual receipts note is non-interest bearing and subordinated to the insured mortgages. A Local Limited Partnership has a low interest rate flexible subsidy note payable in the amount of $36,085. The note is payable from surplus cash.
National Approved Housing Act Subsidies and Restrictions
Under terms of the regulatory agreements with HUD and MHFA, the Local Limited Partnerships cannot make cash distributions to partners of the Local Limited Partnerships in excess of six percent per annum of stated equity in the respective partnerships. Such distributions are cumulative but can only be paid from "surplus cash," as defined in the agreements. The Local Limited Partnerships must deposit all cash in excess of the distributable amounts into residual receipts funds which are under the control of the mortgagees, and from which disbursements must be approved by the respective agencies. As of December 31, 1996, approximately $407,576 could be paid to partners of the Local Limited Partnerships as surplus cash becomes available.
Under terms of the regulatory agreements, the Local Limited Partnerships are required to make monthly deposits into replacement funds which are under the control of the mortgagees. Such deposits commence with the initial principal payments on the mortgage loans. Expenditures from the replacement funds must be approved by the respective agencies.
All of the Local Limited Partnerships have entered into rent supplement and/or Section 8 contracts with HUD or state agencies to provide financial assistance to qualified tenants of the apartment units. Under terms of these contracts, HUD will pay a portion of the rent on behalf of qualified tenants. The maximum dollar amount of these payments is limited by HUD. A substantial portion of rental income is collected through these contracts. During 1996, 1995 and 1994, the Local Limited Partnerships received approximately $4,991,121, $4,618,000 and $4,438,878, respectively, in Section 8 and rent supplement funds.
Management
The Local Limited Partnerships have entered into property management contracts with various agents under which the agents are paid property management fees of approximately five percent to ten and one-half percent of the gross revenues of the respective projects. The management agents are affiliated with or are the general partners of the Local Limited Partnerships.
Note 5 Investment in Mott Haven VII and Mott Haven VIII
Mott Haven VII and Mott Haven VIII have experienced cash flow deficits from operations. Mott Haven VIII has incurred financial default and Mott Haven VII may be in non-monetary default due to the physical condition of the project. Despite the efforts of the General Partner, the owners and managers to preserve the developments and provide decent and affordable housing, the financial stability of the developments is threatened by the imminent expiration of the Section 8 loan management set-aside contracts and the likelihood that they will not be renewed on this property for federal budget and policy reasons. HUD, the owners and the General Partner believe that it is in the best interests of the development and its tenants that the projects be renovated and reconfigured, and that such result can best be accomplished through replacement of the existing management and ownership structure with community-based owners and managers. The General Partner has taken steps to transfer the property to HUD.
For financial reporting purposes, the Partnership has recorded the disposition of its investment in Mott Haven VII and Mott Haven VIII during November 1996. The components of the gain on the transfer of property to HUD is summarized as follows:
Assets transferred:
The General Partner believes that if the Partnership did not consent to the Workout Agreement (transfer of properties to HUD), it is more likely than not that HUD would take the necessary steps to sell the properties at foreclosure sales during 1997. Such foreclosure sales will most probably not result in the return of any cash to the Limited Partners but would result in the recognition of a significant taxable gain by each limited partner. The taxable gain for the limited partners or Urban Improvement Fund Limited '73-II in the aggregate is estimated to be $5,167,883 or approximately $429.55 for each unit. This gain would be passive in nature and could be offset by any suspended passive loss carryforwards. It is estimated that the maximum tax due on this gain would total approximately $1,990,927 for all limited partners or $165.48 per unit.
URBAN IMPROVEMENT FUND LIMITED 1973-II (A Limited Partnership)
SCHEDULE IV
INDEBTEDNESS OF RELATED PARTIES
(A) All advances are included in the balance sheet caption "Investments in and advances to Local Limited Partnerships accounted for on the equity method." See Note 4 to the financial statements. The advances have been reduced to zero on the books of the Partnership because the investment in these partnerships have been reduced to zero under the equity method of accounting.
URBAN IMPROVEMENT FUND LIMITED 1973-II (A Limited Partnership)
Schedule XI
REAL ESTATE AND ACCUMULATED DEPRECIATION OF LOCAL LIMITED PARTNERSHIPS COMBINED WORKPAPERS
December 31, 1996
NOTE: Capital improvements since original construction or rehabilitation are not material to the combined financial statements and, as such, are not disclosed separately. The financial statement category of buildings and improvements is composed substantially of cost plus the initial renovation upon acquisition. Total cost of land and building for federal income tax purposes amounts to approximately $38,172,000.