Item 1. Business (a) General Development of Business Urban Improvement Fund Limited 1974, a California limited partnership (the "Registrant"), was formed in 1974 for the purpose of investing, through local limited real estate 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 require tax shelter for income from other sources. The Registrant originally acquired equity interests as a limited partner in twelve (12) such LLPs. The Elk Grove Village property was sold through a resyndication in 1984. The Elk Grove Village partnership is still in existence with a note receivable for the sales proceeds of the property. The TDC & Associates property was donated in December 1985 to the Tenant's Development Association. The Logan-Washington Associates property foreclosed in 1993. The remaining nine (9) properties 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, 1998:
* Developed under the auspices of the Massachusetts Housing Finance Agency.
Mortgage indebtedness associated with each project is shown in Schedule XI of this report.
The following is a description of each of the above listed properties:
WEYERBACHER TERRACE ASSOCIATES (also known as Boulevard Terrace Associates) is a 296 unit project located in Indianapolis, Indiana consisting of four and five-story buildings of masonry construction. This project was formerly St. Vincent's Hospital and was extensively rehabilitated and converted into apartments designed for elderly tenants. The project was rehabilitated under Section 236 of the National Housing Act.
CAPITOL HILL ASSOCIATES, is a multi-site 121-unit project, located one mile from downtown Denver, Colorado. It is situated within an established area of the city that is evenly mixed with apartment complexes and single-family dwellings. The project was financed under the auspices of the United States Department of Housing and Urban Development (HUD).
The Partnership sold one of its buildings containing 26 rental units on December 31, 1986.
COMMUNITY APARTMENTS, LTD. is a 148-unit project located in Cleveland, Ohio. The project consists of two-story row-type buildings of wood frame construction with a masonry exterior. The project was rehabilitated under Section 221(d)(3) of the National Housing Act.
51st AND KING DRIVE PARTNERSHIP (also known as Cummings Building) is a 96-unit project located at 51st and King Drive in Chicago, Illinois, consisting of a four-story building of brick and masonry construction. The project was rehabilitated under Section 236 of the National Housing Act.
MET-PACA II ASSOCIATES is a multi-site 192-unit project located in New York City in the area bounded by East 118th and 123rd streets and Park and Lexington Avenues. The project consists of nine four- and five-story buildings of masonry and brick construction. The project was rehabilitated under Section 236 of the National Housing Act.
MONATIQUOT VILLAGE ASSOCIATES is a 324-unit project located in Braintree, Massachusetts consisting of 27 three-story buildings of pre-fabricated concrete construction. The project was constructed under the auspices of the Massachusetts Housing Finance Agency.
NORWAY HOUSING ASSOCIATES is a 136-unit project located in Boston, Massachusetts. It is situated in a fine residential area surrounded by the Fenway District and Northeastern University. The project was financed under the auspices of the Massachusetts Housing Finance Agency (MHFA).
NOTRE DAME APARTMENTS is a 205-unit project located in the Pacific Heights area of San Francisco, California, consisting of a five-story building of reinforced concrete, cement and plaster construction. The project is designed for elderly residents and is a converted hospital. The project was rehabili- tated under Section 236 of the National Housing Act.
SOUTHERN BOULEVARD PARTNERS II is a 175-unit project located in the Bronx, New York, consisting of 5 five- and six-story buildings of brick and masonry construction. The Project was rehabilitated under Section 236 of the National Housing Act.
Item 3.
Item 3. Legal Proceedings There are no material legal proceedings pending, 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) Market Information - There is not a ready market for the transfer of limited partnership interests. Limited partnership interests may be trans- ferred 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) Dividends - There were no distributions to partners during 1994, 1995, 1996, 1997 and 1998.
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 into short-term invest- ments. Interest income resulted from such short-term investments. The Part- nership 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 (including $2,253,035 in 1998 from the sale of Elk Grove Village). This trend is expected to continue. The Partnership has advanced funds to selected Local Limited Partnerships. The General Partner does not believe these net advances will 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 $146,065. (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 $57,020.) The Partnership recorded management fee expense of $57,020 per year from 1994 through 1998. 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 Partnership also paid an incentive management fee of $33,250 to one of the local limited partnership's general partnership. The incentive fee was equal to fifty percent of the distributable cash flow to the Partnership.
At December 31, 1998, the Partnership had investments in nine active real estate limited partnerships as a Limited Partner. The Partnership carries such investments on the equity method of accounting. The Partnership discon- tinues 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. The equity in income in Local Limited Partnerships resulted from several Local Limited Partnerships, whose investments have not been reduced to zero, reporting income from operations and/or 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 real estate of the Elk Grove Village Partnership was sold during 1984. The Partnership had a note receivable that was paid off during 1998. The components of the Partnership's equity in net income (loss) of the Local Limited Partnerships for 1998, 1997 and 1996 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. Much of the rental revenue of the Local Limited Partnerships is dependent on subsidy. The rents have increased for inflation and operating costs. In recent years, several Local Limited Partnerships increased operating expenses to fund repairs and maintenance on the projects. Such repairs are limited by available cash flow. The distributions to the Partnership from Local Limited Partnerships are the result of the profitable 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, however, 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 Partnership to exchange properties in a tax-free trans- action. 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 may 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 are made, it is
likely that the acquired properties will 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 with accountants 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 will continue to serve 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. 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 Part- nership 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 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security Ownership of Certain Beneficial Owners
(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 and Reports on Form 8-K.
(a) 1. Financial Statements:
Report of independent certified public accountants.
Balance Sheets at December 31, 1998 and 1997.
Statements of Income for the years ended December 31, 1998, 1997 and 1996.
Statements of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996.
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.
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 nine 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 Pre-Effective Amendment No. 2 to Registration Statement on Form S-11 filed July 1974.
3.A. Amended Certificate and Agreement of Limited Partnership, incorporated by reference from Pre- Effective Amendment No. 2 on form S-11 filed July 1974.
3.B. Amendment to Certificate of Limited Partnership, incorporated by reference from Pre-Effective Amendment No. 2 to Registration Statement on Form S-11 filed July 1974.
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 Pre-Effective Amendment No. 2 to Registration Statement on Form S-11 filed July 1974.
5.A. Opinion and Consent of Counsel, incorporated by reference from Pre-Effective Amendment No. 2 to Registration Statement on Form S-11 filed July 1974.
8.A. Opinion and Consent of special Tax Counsel, incorporated by reference from Pre-Effective Amendment No. 2 to Registration Statement on Form S-11 filed July 1974.
8.B-1 Tax Ruling from the Internal Revenue Service dated July 10, 1974, incorporated by reference from Pre- Effective Amendment No. 2 to Registration Statement on Form S-11 filed July 1974.
8.B-2 Supplemental Tax ruling from the Internal Revenue Service dated July 19, 1974, incorporated by reference from Pre-Effective Amendment No. 2 to Registration Statement on Form S-11 filed July 1974.
10.A. 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. 2 to Registration Statement on Form S-11 filed July 1974.
10.B. Extension of Maturity Date of promissory note dated April 18, 1990 on behalf of Elk Grove Village Associates by Elk Grove Investors, Ltd.
16.A. Copy of letter of Price Waterhouse & Co. regarding change in certifying accountant, incorporated by reference from Form 8-K filed July 1976.
28.A. Letter to investors dated August 28, 1974 regarding status of the offering, incorporated by reference from Post-Effective Amendment No. 1 to Registration Statement on Form S-11 filed August 1974.
28.B. Sticker Supplement dated August 28, 1974 to Prospectus dated July 23, 1974, incorporated by reference from Pre-Effective Amendment No. 1 to Registration Statement on Form S-11 filed August 1974.
28.C. Balance Sheet (unaudited) dated June 30, 1974 of Interfinancial Real Estate Management Company, incorporated by reference from Pre-Effective Amendment No. 1 to Registration Statement on Form S-11 filed August 1974.
28.D. Letters to Subscribers dated January 21, 1975 and February 7, 1975 relating to tax reporting information and status of the offering, incorporated by reference from Pre-Effective Amendment No. 2 to Registration Statement on Form S-11 filed February 1975.
28.E. Net worth statements by general partners of local limited partnerships, incorporated by reference from Pre-Effective Amendment No. 3 to Registration Statement on Form S-11 filed March 1975.
28.F. Table of limited partnership interests acquired in local distribution entities, incorporated by reference from Form 8-K filed December 1974.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the last quarter of 1998.
(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 - 1974 BY: INTERFINANCIAL REAL ESTATE MANAGEMENT COMPANY
Date: October 1, 1999 By: Paul H. Pfleger Paul H. Pfleger President Interfinancial Real Estate Management Company
Date: October 1, 1999 By: John M. Orehek 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.
By: Paul H. Pfleger October 1, 1999 Paul H. Pfleger, Director Date Interfinancial Real Estate Management Company
By: John M. Orehek October 1, 1999 John M. Orehek, Director Date Interfinancial Real Estate Management Company.
URBAN IMPROVEMENT FUND LIMITED - 1974 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, 1998
URBAN IMPROVEMENT FUND LIMITED - 1974 (A Limited Partnership) Form 10-K - Items 14(a)(1) and (2) Form 10-K - Item 14(d)
The following financial statements of Urban Improvement Fund Limited - 1974 are included in Item 8 and Item 14(a)(1)
Independent auditors' report . . . . . . . . . . . . . . . . . .
Balance sheets at December 31, 1998 and 1997 . . . . . . . . .
Statements of income (loss) for the years ended December 31, 1998, 1997 and 1996. . . . .
Statements of changes in partners' capital for the years ended December 31, 1998, 1997 and 1996. . . . .
Statements of cash flows for the years ended December 31, 1998, 1997 and 1996. . . . .
Notes to financial statements. . . . . . . . . . . . . . . . . .
The following financial statement schedules of Urban Improvement Fund Limited - 1974 are included in Item 14(a)(2) and 14(d):
IV. Indebtedness of and to Related Parties. . . . . . . . . . .F-22
XI. Real Estate and Accumulated Depreciation of Local Limited Partnerships. . . . . . . . . . . . . . . .F-23
All other schedules are omitted because they are not applicable or 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 nine 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 - 1974
We have audited the accompanying balance sheets of Urban Improvement Fund Limited - 1974 (a Limited Partnership), as of December 31, 1998 and 1997, and the related statements of changes in partners' capital, income (loss) and cash flows for the years ended December 31, 1998, 1997 and 1996 and the related schedules listed in Item 14(a)(2) of the annual report on Form 10-K of Urban Improvement Fund Limited - 1974 for the years ended December 31, 1998, 1997 and 1996. 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 the financial statements of seven of Urban Improvement Fund Limited 1974's investments in local limited partnerships whose combined financial statements are included 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's investment in these Partnerships represents zero of total assets at December 31, 1998, 1997 and 1996; and its equity in their operations represents three percent of the net income for 1998, twelve percent of the net income for 1997 and six percent of net income for 1996.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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, the financial statements referred to above present fairly, in all material respects, the financial position of Urban Improvement Fund Limited - 1974 as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years ended December 31, 1998, 1997 and 1996, 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 July 22, 1999
URBAN IMPROVEMENT FUND LIMITED - 1974 (A Limited Partnership)
BALANCE SHEETS
ASSETS
The Notes to Financial Statements are an integral part of these Statements.
URBAN IMPROVEMENT FUND LIMITED - 1974 (A Limited Partnership)
STATEMENTS OF INCOME (LOSS)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
The Notes to Financial Statements are an integral part of these Statements.
URBAN IMPROVEMENT FUND LIMITED - 1974 (A Limited Partnership)
STATEMENTS OF CASH FLOWS
The Notes to Financial Statements are an integral part of these Statements.
Note 1 - Organization and Accounting Policies
Organization
Urban Improvement Fund Limited (the Partnership) was formed under the California Uniform Limited Partnership Act on January 13, 1974, for the principal purpose of investing in other limited partnerships (Local Limited Partnerships), which own federal and state-assisted housing projects. The Partnership issued 11,404 units of limited partnership interest pursuant to a public offering of such units which terminated on December 31, 1974. The Partnership also issued 115 units of general partnership interest to Interfinancial Real Estate Management Company (the General Partner).
The Urban Improvement Fund Limited-1974 prospectus, dated July 23, 1974, specified that the General Partner will have at least a one percent interest in profits, losses and special allocations, and the limited partners will share the remainder of the interest in profits, losses and special allocations in proportion to their respective units of limited partnership interests. It is the General Partners' intention to allocate, for income tax and financial reporting purposes, the profits, losses and special allocations in the ratio of ninety-nine percent to the limited partners and one percent to the General Partner.
Investment in Local Limited Partnerships
As of December 31, 1998 and 1997, the Partnership had investments in nine 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 acquisi- tions less the Partnership's share in losses since the date of acquisition. The Partnership discontinues recognizing losses and amortizing cost of acquisi- tion 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 purposes, are capitalized as acquisition costs 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 (15 to 40 years) of the Local Limited Partnership properties. Amortization is discontinued when the investment is reduced to zero.
Note 1 - Organization and Accounting Policies - Continued
The Partnership had an investment in one Limited Partnership that sold its real estate during 1984 (Note 6). This Partnership (Elk Grove Elderly) held a note receivable for a portion of the sales proceeds. The note was paid off during 1998.
The Partnerships' equity in 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 since all taxable income or loss of the Partnership is allocated to the partners for inclusion in their respective tax returns.
Note 1 - Organization and Accounting Policies - Continued
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.
Fair Value of Financial Instruments and Use of Estimates
The Partnership estimates that the aggregate fair value of all financial instruments at December 31, 1998 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 Part- nership 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.
Note 2 - Reconciliation Between Net Income (Loss) and Partners' Capital (Deficit) of the Partnership For Financial Reporting Purposes and Income Tax Reporting Purposes
A reconciliation of the Partnership's income (loss)for financial reporting purposes and the Partnership's income (loss) for income tax reporting purposes follows:
Note 2 - Reconciliation Between Net Income (Loss) and Partners' Capital (Deficit) of the Partnership For Financial Reporting Purposes and Income Tax Reporting Purposes - Continued
A reconciliation between partners' capital 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' interest 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
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 $146,065. (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 $57,020.) In 1998, 1997 and 1996, the minimum annual management fee of $57,020 was earned and recorded as an expense of the Partnership. 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 Partnership also paid an incentive management fee of $33,250 to one of the local limited partnership's general partnership. The incentive fee was equal to fifty percent of the distributable cash flow to the Partnership.
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 1998, 1997 or 1996. In addition, as shown in the following table, PSI has become the General Partner in three of the Local Limited Partnerships in which the Partnership has or had investments:
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 stages of completion and/or occupancy.
Note 4 - Investments in Local Limited Partnerships Accounted for on the Equity Method - Continued
Investment in and advances to the Local Limited Partnerships accounted for on the equity method are as follows:
The combined balance sheets of the Local Limited Partnerships, accounted for on the equity method at December 31, 1998 and 1997, and the related combined statements of income, changes in partners capital (deficit) and cash flows and selected footnote disclosures from the audited financial statements for the years ended December 31, 1998, 1997 and 1996, are summarized as follows:
Note 4 - Investments in Local Limited Partnerships Accounted for on the Equity Method - Continued
COMBINED BALANCE SHEETS OF LOCAL LIMITED PARTNERSHIPS
Assets
Note 4 - Investments in Local Limited Partnerships Accounted for on the Equity Method - Continued
COMBINED STATEMENTS OF INCOME (LOSS) OF LOCAL LIMITED PARTNERSHIPS
Amortization of capitalized interest was $44,436 in 1998, 1997 and 1996.
Note 4 - Investments in Local Limited Partnerships Accounted for on the Equity Method - Continued
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) OF LOCAL LIMITED PARTNERSHIPS
STATEMENTS OF CASH FLOWS OF LOCAL LIMITED PARTNERSHIPS
Note 4 - Investments in Local Limited Partnerships Accounted for on the Equity Method - Continued
A reconciliation between the combined net income (loss) for financial reporting purposes and the combined income (loss) for income tax reporting purposes follows:
A reconciliation between combined partners' capital (deficit) for financial reporting purposes and combined partners' capital (deficit) for income tax reporting purposes follows:
Note 4 - Investments in Local Limited Partnerships Accounted for on the Equity Method - Continued
Cost of buildings
For financial statement purposes, the Local Limited Partnerships generally capitalized all project costs, including payments to the general partners, interest, taxes, carrying costs and operating expenses offset by incidental rental income during the construction period. For income tax purposes, certain of these amounts were deducted when paid.
Depreciation and amortization
For financial statement purposes, depreciation is computed using straight-line and various accelerated methods over useful lives of fifteen to forty years from the date of completion of the building or rehabilitation. For income tax purposes, buildings are depreciated over fifteen to forty years using various accelerated methods and certain rehabilitation costs are amortized on 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 partnerships 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 Partnerships have mortgages which are payable to or are insured by the Department of Housing and Urban Development (HUD) and the Massachusetts Housing Finance Agency (MHFA) totaling $30,691,987 at December 31, 1998 ($19,935,876 by HUD and $10,756,111 by MFHA) and $31,781,655 at December 31, 1997 ($20,517,357 by HUD and $11,264,298 by MFHA). The mortgage notes payable are secured by deeds of trust on rental property and bear interest at rates of seven to nine percent per annum. The mortgages are payable in monthly install- ments of principal and interest of approximately $269,000 over periods of forty years. HUD makes interest reduction payments on the mortgages insured under Section 236 in amounts which effectively reduce the mortgage payments to those required for mortgages carrying a one percent interest rate.
Note 4 - Investments in Local Limited Partnerships Accounted for on the Equity Method - Continued
Mortgage Notes Payable - Continued
The scheduled principal reductions for the next five years are as follows:
National 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, 1998, approximately $2,295,000 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 1998, the Local Limited Partnerships received approximately $5,500,000 in rent supplement and Section 8 funds.
Note 4 - Investments in Local Limited Partnerships Accounted for on the Equity Method - Continued
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 four percent to eleven percent of the gross revenues of the respective projects. The management agents are affiliated with the general partners of the Local Limited Partnerships.
Note 5 - Sale of the Assets of Elk Grove Village
The property of Elk Grove Village was sold during 1984. The sales price of $11,235,930 was composed of $5,855,464 for assumption of the underlying mortgage and installment payments as follows:
The final installment is due on December 31, 1999 along with accrued interest. Interest will continue to accrue at nine and one-half percent per annum and is payable on the anniversary date of the note to the extent that the property has distributable cash flow in excess of $10,000. The gain on the sale of the real estate is recognized on the cost recovery method to first recognize the recovery of the asset value, then recognize the gain as the proceeds are received. For each of the years ended December 31, 1997 and 1996, the Partnership received and recorded interest income of $15,217. During 1998, with the consent of the Part- nership, Elk Grove Village Associates agreed to discount the note to accept $4,500,000 in full satisfaction of the note and accrued interest. This resulted in a discount of approximately $3,520,000.
Note 6 - Recapitalization
In April 1995, Norway Housing Associates entered into an agreement with MHFA to borrow $2,623,679 under a second mortgage and to distribute the proceeds of this borrowing, together with the Partnership's surplus cash, as determined by MHFA. Approximately fifty-one percent of the available funds after payment of allowable fees and expenses were paid to MHFA and $2,787,584 was distributed to the partners.
Note 6 - Recapitalization - Continued
The MHFA required that approximately $348,000 be retained as debt service and operating reserves controlled by MHFA. $2,841,242, the amount paid to MHFA was of current requirements. Payment of these funds to MHFA has been treated as a charge against operations for financial and tax reporting purposes.
Note 7 - Investment in Met Paca II Associates
Met Paca II Associates has a severe working capital deficiency primarily resulting from the loss of its real estate tax abatement. This deficiency caused the Partnership to become delinquent in meeting its obligation under the mortgage note payable to HUD. Although the Partnership is attempting to obtain additional real estate tax abatements, there is no assurance that the Partnership will be successful. This raises substantial doubt about the Partnership's ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Partnership is unable to continue as a going concern.
Note 8 - Year 2000 Risk Assessment and Action Plan
The Partnership is aware of the current concerns throughout the business community of reliance upon computer software that does not properly recognize the year 2000 in date formats, often referred to as the "Year 2000 Problem." The Year 2000 Problem is the result of software being written using two digits rather than four digits to define the applicable year (i.e., "98" rather than "1998"). A failure by a business to properly identify and correct a Year 2000 Problem in its operations could result in system failures or miscalculations. In turn, this could result in disruptions of operations, including, among other things, a temporary inability to process transactions, or otherwise engage in routine business transactions on a day-to-day basis.
Operations of the Partnership are not dependent upon the successful operation on a daily basis of its computer software programs. The Partnership relies upon software purchased from third-party vendors rather than internally- generated software. In its analysis of software, and based upon its ongoing discussions with these vendors, a plan of action has been put in place by the Partnership to minimize its risk exposure to the Year 2000 Problem. The properties that the Partnership has invested in may be dependent upon the successful operation on a daily basis of its computer software programs. The Partnership has not been informed by any of these properties that they are not Year 2000 compliant.
URBAN IMPROVEMENT FUND LIMITED - 1974 (A Limited Partnership)
SCHEDULE IV
INDEBTEDNESS OF RELATED PARTIES
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 for Capitol Hill Associates because the investment in this partnership has been reduced to zero under the equity method of accounting.
URBAN IMPROVEMENT FUND LIMITED - 1974 (A Limited Partnership)
Schedule XI
REAL ESTATE AND ACCUMULATED DEPRECIATION OF LOCAL LIMITED PARTNERSHIPS
December 31, 1998
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 buildings for federal income tax purposes is approximately $49,000,000.