Item 1. Business
The Partnership
The Partnership is a North Carolina limited partnership formed in December, 1987, and will end on December 31, 2038, unless terminated sooner under the provisions of its Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"). A copy of the Partnership Agreement is Exhibit A to the Prospectus that is part of the Registration Statement on Form S-11, Number 33-19316 and effective May 20, 1988, the final form of which was filed on May 20, 1988 pursuant to Rule 424(b). The Partnership was formed to invest in multi-family rental housing properties (the "Properties") qualifying for Low Income Housing Tax Credits and, in certain circumstances, the Rehabilitation Tax Credit, which may be applied against the federal income tax liabilities of the Partnership's limited partners (the "Limited Partners"). Each of the Properties is owned and operated by a limited partnership (an "Operating Partnership") of which the Partnership is a limited partner. The Partnership currently has no employees.
General Partners and Affiliates
The General Partners of the Partnership are Frederick Investment Corporation, a North Carolina corporation (the "Managing General Partner"), and George F. Marshall (the "Class A General Partner"). The business address of the General Partners is the same as that of the Partnership.
Management of the Partnership
The Managing General Partner has authority for the overall management and control of the Partnership and has responsibility for supervising the Partnership's selection of, and investment in, Operating Partnerships. Generally, subject to applicable governmental approvals, the Managing General Partner is a general partner of each Operating Partnership, but management of the Operating Partnerships is vested in the other general partners of the Operating Partnerships (the "Local General Partners"). The Partnership has limited voting rights with respect to each Operating Partnership and the Managing General Partner may take management control of an Operating Partnership under certain circumstances.
Partnership Objectives
In making investments, the Partnerships' primary objectives are to (i) preserve and protect the Limited Partners' capital; (ii) generate tax benefits primarily consisting of Tax Credits that the Limited Partners may use to offset tax liabilities on income from other sources, and (iii) recognize appreciation in the value of the Partnership's investments through cash distributions resulting from sales or refinancings of the Partnership's properties.
An objective of the Partnership is to invest in Operating Partnerships with a view to generating Tax Credits and Cash Available for Distribution annually averaging 14% to 16% of each Limited Partner's investment over ten of the first twelve years of the Partnership, assuming, among other things, (a) the applicability of current tax laws and regulations and the continuation of current interpretations of such laws and regulations by the courts, (b) the Properties of such Operating Partnerships are occupied at least 80% by qualifying tenants beginning in the period from 1988 through 1989 and throughout the succeeding 15 years, (c) the inclusion of all construction and development related costs (excluding land acquisition costs) and of certain fees and expenses in each Operating Partnership's tax basis in its Property for purposes of calculating Tax Credits, and (d) interests in Operating Partnerships can be acquired for amounts varying between 17% and 23% of the permanent mortgage financing anticipated to be incurred by such Operating Partnerships. Low Income Housing Tax Credits are not available for a Property until the Property has been placed in service and its apartment units are occupied by tenants qualifying under applicable tax regulations (the "Qualifying Tenants").
The Offering
The Partnership's public offering of up to 25,000 units of limited partnership interests (the "Units") at $1,000 per Unit (the "Offering") commenced May 20, 1988 and terminated on August 25, 1989. The Partnership sold 3,123 and 5,550 units during 1989 and 1988, respectively. Net of offering costs aggregating $879,000, capital of $7,794,000 was generated from the public offering of limited partnership Units.
Partnership Business
The Partnership invested the net proceeds of the Offering after payment of offering costs and certain fees and expenses in Operating Partnerships owning existing Properties, or Properties being constructed or rehabilitated, that are eligible for Tax Credits. Each of these Properties receives direct government assistance (such as rental assistance and mortgage subsidies under various federal, state or local programs). The Operating Partnerships are responsible for construction, rehabilitation, and management of the Properties. The Properties are located primarily in the Mid-Atlantic and Southeastern regions of the United States.
By investing its funds in Operating Partnerships owning Properties, the Partnership is providing its Limited Partners with Tax Credits that, subject to certain limitations, may be used to reduce federal income tax liability over a ten-year period. Additional investment return, if any, will consist of small cash distributions on an annual basis and proceeds realized on disposition of one or more of the Properties or one or more of the Partnership's interests in Operating Partnerships. Furthermore, Limited Partners with sufficient passive income may utilize passive losses that may be generated by the Partnership's investments to reduce such passive income.
As of December 31, 2003, the Partnership had invested in twenty-seven Operating Partnerships. The Partnership does not intend to invest in any more Operating Partnerships.
Item 2.
Item 2. Properties
As of December 31, 2003, Qualified Housing Partners Limited Partnership had invested in twenty-seven Operating Partnerships owning Properties that qualify for the Low Income Housing Tax Credit.
A summary of those investments is as follows:
Cape Fear Apartments Lillington, NC 24 units Placed in service in January, 1988 Acquired by QHP in November, 1988 QHP contributed $164,350 Total Acquisition Cost of $1,016,932
Myrtle Grove Myrtle, MS 24 units Placed in service in November, 1988 Acquired by QHP in November, 1988 QHP contributed $204,500 Total Acquisition Cost of $971,648
Holly Estates Holly Springs, MS 24 units Placed in service in November, 1988 Acquired by QHP in November, 1988 QHP contributed $190,140 Total Acquisition Cost of $954,947
Parkland Apartments Eden, NC 40 units Placed in service in June, 1988 Acquired by QHP in November, 1988 QHP contributed $335,504 Total Acquisition Cost of $1,731,922
Southgate Apartments Reidsville, NC 32 units Placed in service in June, 1987 Acquired by QHP in November, 1988 QHP contributed $188,828 Total Acquisition Cost of $1,368,146
Glen Cove Apartments Dumas, AR 20 units Placed in service in March, 1988 Acquired by QHP in November, 1988 QHP contributed $110,687 Total Acquisition Cost of $739,967
Tuscarora Acres Port Royal, PA 17 units Placed in service in July, 1988 Acquired by QHP in November, 1988 QHP contributed $132,639 Total Acquisition Cost of $840,226
Forest Oaks Apartments Albemarle, NC 32 units Placed in service in April, 1989 Acquired by QHP in November, 1988 QHP contributed $295,465 Total Acquisition Cost of $1,511,920
Fayette Acres McAlisterville, PA 10 units Placed in service in November, 1988 Acquired by QHP in December, 1988 QHP contributed $84,456 Total Acquisition Cost of $497,130
Silverleaf Apartments Haskell, OK 24 units Placed in service in November, 1988 Acquired by QHP in January, 1989 QHP contributed $128,515 Total Acquisition Cost of $756,331
Carthage Heights II Carthage, TX 40 units Placed in service in September, 1988 Acquired by QHP in January, 1989 QHP contributed $184,400 Total Acquisition Cost of $1,131,195
North Street Manor Mifflintown, PA 30 units Placed in service in June, 1989 Acquired by QHP in December, 1988 QHP contributed $272,059 Total Acquisition Cost of $1,510,791
Baldwyn Estates Baldwyn, MS 24 units Placed in service in April, 1988 Acquired by QHP in January, 1989 QHP contributed $154,605 Total Acquisition Cost of $877,380
Gainesville Gardens Gainesville, TX 40 units Placed in service in February, 1989 Acquired by QHP in February, 1989 QHP contributed $176,200 Total Acquisition Cost of $1,104,265
Rayne Villas Rayne, LA 32 units Placed in service in February, 1989 Acquired by QHP in February, 1989 QHP contributed $218,079 Total Acquisition Cost of $1,327,135
Mountain View Villas Mountain View, AR 27 units Placed in service in December, 1988 Acquired by QHP in February, 1989 QHP contributed $188,761 Total Acquisition Cost of $1,098,968
Royal Hills, Phase II Front Royal, VA 42 units Placed in service in April, 1989 Acquired by QHP in March, 1989 QHP contributed $283,147 Total Acquisition Cost of $1,792,813
Dimmitt Senior Citizens Housing Dimmitt, TX 24 units Placed in service in May, 1989 Acquired by QHP in March, 1989 QHP contributed $131,229 Total Acquisition Cost of $748,689
Timber Ridge Apartments Rockingham, NC 32 units Placed in service in November, 1989 Acquired by QHP in April, 1989 QHP contributed $275,750 Total Acquisition Cost of $1,496,399
Village Green Apartments Decatur, IN 30 units Placed in service in November, 1989 Acquired by QHP in November, 1989 QHP contributed $169,600 Total Acquisition Cost of $1,108,658
Cedar Creek Apartments, Phase II Middletown, VA 42 units Placed in service in February, 1989 Acquired by QHP in February, 1989 QHP contributed $318,146 Total Acquisition Cost of $1,804,154
Booneville Manor Booneville, MS 24 units Placed in service in June, 1989 Acquired by QHP in March, 1989 QHP contributed $152,375 Total Acquisition Cost of $861,843
Northwood Apartments Irvine, KY 24 units Placed in service in May, 1989 Acquired by QHP in April, 1989 QHP contributed $161,070 Total Acquisition Cost of $972,314
Bloomfield Senior Apartments Bloomfield, IN 24 units Placed in service in May, 1989 Acquired by QHP in September, 1989 QHP contributed $141,300 Total Acquisition Cost of $857,287
Tschudi Court Amory, MS 48 units Placed in service in December, 1989 Acquired by QHP in December, 1989 QHP contributed $296,063 Total Acquisition Cost of $1,757,150
Woodstock Village, Phase II Woodstock, VA 42 units Placed in service in April, 1989 Acquired by QHP in March, 1989 QHP contributed $319,254 Total Acquisition Cost of $1,829,220
Litton Apartments Nashville, TN 162 units Placed in service in May, 1989 Acquired by QHP in August, 1989 QHP contributed $1,642,846 Total Acquisition Cost of $6,177,010
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholders' Matters
a. Market Information
The Partnership Agreement provides that no Unit may be sold or otherwise transferred on or through an established securities market, secondary market, or the substantial equivalent of a secondary market, within the meaning of Section 7704 of the Internal Revenue Code, and otherwise provides substantial restrictions upon transferability of a Unit. Thus, there is no market for the Units.
b. Holders
As of December 31, 2003, the Partnership had 405 Limited Partners and two General Partners.
c. Dividends
The Partnership does not pay dividends. Generally, Profits, Losses and Tax Credits of the Partnership (as defined in the Partnership Agreement) are allocated 99% to the Limited Partners and 1% to the General Partners. Cash Available for Distribution (as defined in the Partnership Agreement) is generally distributed according to the same percentages.
Item 6.
Item 6. Selected Financial Data
At December 31, 2003, 2002, 2001, 2000 and 1999 and for the years then ended:
CONSOLIDATED FINANCIAL CONDITION
2003 2002 2001 2000 1999
Total Assets $27,145,011 $27,955,438 $28,855,351 $29,432,085 $30,069,507
Total Liabilities $25,395,945 $25,838,616 $26,249,559 $26,286,077 $26,604,161
Partners' Capital General Partners (75,126) (71,482) (66,634) (61,774) (58,622) Limited Partners $126,116 $486,833 $966,811 $1,447,971 $1,760,066
CONSOLIDATED RESULTS OF OPERATIONS
Rental Income $4,122,924 $3,958,881 $3,899,681 $3,849,364 $3,728,140
Rental Expense 4,415,653 4,328,413 4,271,165 4,044,435 4,179,773
Loss from Rental Activities (292,729) (369,532) (371,484) (195,071) (451,633)
Interest Income 71 271 493 374 414
Other Expenses (74,660) (119,297) (118,781) (122,520) (121,758)
Minority Interests In Losses of Subsidary Operating Partnerships 2,957 3,732 3,752 1,970 4,560
Net Loss ($364,361) ($484,826) ($486,020) ($315,247) ($568,417)
NET LOSS PER LIMITED PARTNERSHIP UNIT ($41.59) ($55.34) ($55.48) ($35.98) ($64.88)
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Net of the Subsidiary Operating Partnerships, QHP held approximately $5,800 in cash and liquid investments at December 31, 2003. These assets will be held as working capital. The only source of cash for QHP is annual cash distributions from the Subsidiary Operating Partnerships. Anticipated receipts for 2004 total approximately $67,000. Administrative expenses of QHP other than the Partnership Management Fee are expected to total $40,000 in 2004. The annual Partnership Management Fee equals $84,562. The General Partners, or one of their affiliates, will either defer a portion of their Partnership Management Fee or advance the Partnership sufficient funds to cover the shortfall in 2004. If advanced, interest will accrue at the prime rate charged from time to time at Wachovia Bank of North Carolina. The loan plus interest will be repayable within one year of the advance. In previous years, the General Partners have deferred a portion of their fees. The balance owed as of December 31, 2003 is $390,794.
Of the 27 Operating Partnerships, 16 distributed cash to QHP during 2003 totaling $70,000. QHP utilized its working capital to pay $29,000 of the Partnership Management Fee and to pay all other expenses of the Partnership.
RESULTS OF OPERATIONS
Income for 2003 increased as a result of rent increases received by fifteen of the twenty-seven properties. Maintenance expenses continue to increase as the properties age. Significant maintenance expenditures include painting, re- carpeting, heating and air conditioning repairs, and new siding on some of the properties. Other Expenses continue to increase because of rising costs of property liability insurance. Other variances were a result of normal business fluctuations.
Occupancy of the 934 apartment units at December 31, 2003, decreased from a total of 852 units on December 31, 2002 to 831 units one year later. The weighted average occupancy rate for 2003 was approximately 91%. At December 31, 2002, nine (9) properties had average occupancies of less than 90%, an increase of two properties over the same period in 2002.
The 24-unit property located in Dimmitt, Texas, representing approximately 2.5% of QHP's assets, continues to have vacancy problems as a result of a diminishing rental market. As of December 31, the property had a 50% vacancy rate. The property has not paid its 2003 property taxes. The local management will attempt to negotiate a payment plan with the taxing authority. However, if occupancy does not increase, it is doubtful the property will be able to cover the payments.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD 1 to 3 Years 4 to 5 Years After 5 Years Long-Term Debt $336,637 $281,077 $23,452,899
For further descriptions of the Company's obligations, see Footnote D to the Financial Statements.
RELATED PARTY TRANSACTIONS
Details of related party transactions can be found in Note F to the consolidated financial statements.
TAX CREDIT
One of the Partnership's primary investment objectives has been to generate tax benefits through Low Income Housing Tax Credits. The Tax Credits were available over a ten-year period beginning in the year the properties were placed in service, or at the option of QHP, one year later. The ten-year credit period for all 27 properties expired by early 2000. However, pursuant to IRS Code Section 42, a small number of apartment units are generating tax credits over a fifteen-year period rather than ten years. This has produced an insignificant amount of tax credits through 2003.
FUTURE OUTLOOK
It is unlikely that the properties owned by the Subsidiary Operating Partnerships will be sold in the foreseeable future. Although the ten-year tax credit period has expired, the Subsidiary Operating Partnerships are required to maintain the properties as tax credit qualified rentals for 15 years (the "Compliance Period"). Future sale of one or all of the 27 properties relies on factors such as the economy, local real estate market conditions and tax laws. No market exists for these properties at this time.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both very important to the portrayal of the Partnership's financial condition and results, and requires management's most difficult, subjective or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. QHP has no critical accounting policies.
FORWARD-LOOKING INFORMATION
This Annual Report to partners contains certain forward-looking statements consisting of estimates and assumptions with respect to cash distributions from the Subsidiary Operating Partnerships, administrative and other expenses and other business of QHP that are subject to various factors which could cause actual results to differ materially from these estimates and assumptions. Factors which could influence these estimates and assumptions primarily include changes in the multi-family rental housing market in the local markets in which the Subsidiary Operating Partnerships operate.
OFF-BALANCE SHEET ARRANGEMENTS
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities (SPEs), which generally are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2003, we are not involved in any unconsolidated SPE transactions.
Item 8.
Item 8. Financial Statements and Supplementary Information
CONSOLIDATED BALANCE SHEETS December 31, 2003 and 2002
ASSETS 2003 2002
RENTAL PROPERTIES Land $ 1,326,402 $ 1,326,402 Buildings 34,757,798 34,654,470 Furniture and Fixtures 2,352,006 2,147,070 38,436,206 38,127,942 Accumulated Depreciation (13,484,052) (12,590,134)
24,952,154 25,537,808
CASH 305,114 211,526
OTHER ASSETS 1,887,743 2,206,104
$27,145,011 $27,955,438
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES APPLICABLE TO RENTAL PROPERTIES $24,070,613 $24,578,133
OTHER LIABILITIES 1,325,332 1,260,483
TOTAL LIABILITIES 25,395,945 25,838,616
MINORITY INTERESTS IN SUBSIDIARY OPERATING PARTNERSHIPS 1,698,076 1,701,471
PARTNERS' CAPITAL 50,990 415,351
$27,145,011 $27,955,438
*See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME AND EXPENSES Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
RENTAL INCOME $4,122,924 $3,958,881 $3,899,681
RENTAL EXPENSES Interest 568,067 624,189 656,164 Depreciation 896,558 875,977 891,714 Repairs and Maintenance 1,106,730 1,063,844 1,009,162 Utilities 361,469 386,878 371,246 Real Estate Taxes 378,000 370,143 360,856 Management Fees 469,008 428,651 445,422 Other 635,821 578,731 536,601
4,415,653 4,328,413 4,271,165
LOSS FROM RENTAL ACTIVITIES (292,729) (369,532) (371,484)
OTHER INCOME (EXPENSES) Interest Income 71 271 493 Management Fees (29,000) (84,562) (84,562) Administrative Costs (45,660) (34,735) (34,219)
LOSS BEFORE DEDUCTING MINORITY INTERESTS IN LOSSES OF SUBSIDIARY OPERATING PARTNERSHIPS (367,318) (488,558) (489,772)
MINORITY INTERESTS IN LOSSES OF SUBSIDIARY OPERATING PARTNERSHIPS 2,957 3,732 3,752
NET LOSS $(364,361) $(484,826) $(486,020)
NET LOSS ALLOCATED TO GENERAL PARTNERS $ (3,644) $ (4,848) $ (4,860) NET LOSS ALLOCATED TO LIMITED PARTNERS (360,717) (479,978) (481,160)
NET LOSS $(364,361) $(484,826) $(486,020)
NET LOSS PER LIMITED PARTNERSHIP UNIT $ (41.59) $ (55.34) $ (55.48)
AVERAGE NUMBER OF LIMITED PARTNERSHIP UNITS OUTSTANDING 8,673 8,673 8,673
*See accompanying notes.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL Years Ended December 31, 2003, 2002, and 2001
General Limited Partners Partners Total
PARTNERS' CAPITAL, January 1, 2001 $(61,774) 1,447,971 1,386,197
Net Loss (4,860) (481,160) (486,020)
PARTNERS' CAPITAL, December 31, 2001 $(66,634) 966,811 900,177
Net Loss (4,848) (479,978) (484,826)
PARTNERS' CAPTIAL, December 31, 2002 $(71,482) $ 486,833 $ 415,351
Net Loss (3,644) (360,717) (364,361)
PARTNERS' CAPTIAL, December 31, 2003 $(75,126) $ 126,116 $ 50,990
*See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(364,361) $(484,826) $(486,020)
Adjustments to Reconcile Net Loss to Net Cash Provided By Operating Activities
Depreciation 896,558 875,977 891,714
Minority Interests in Losses of Subsidiary Operating Partnership (2,957) (3,732) (3,752)
Change in Assets and Liabilities (Increase) Decrease in Other Assets 318,361 95,195 (73,507) Increase in Other Liabilities 64,849 49,204 105,634
NET CASH PROVIDED BY OPERATING ACITIVITES 912,450 531,818 434,069
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Rental Properties (310,904) (187,149) (274,677)
NET CASH USED BY INVESTING ACTIVITIES (310,904) (187,149) (274,677)
CASH FLOWS FROM FINANCING ACTIVITES
Net Cash Contribution from Minority Investors -- -- 23,879
Net Cash Distribution from Minority Investors (438) (412) (50,444)
Proceeds From Long-Term Borrowing -- -- 246,186
Principal Payments on Long-Term Borrowings (507,520) (460,147) (412,217)
NET CASH USED BY FINANCING ACTIVITIES (507,958) (460,559) (192,596)
NET INCREASE (DECREASE) IN CASH 93,588 (115,890) (33,204)
CASH, BEGINNING 211,526 327,416 360,620 CASH, ENDING $ 305,114 $ 211,526 $ 327,416
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for Interest $ 573,717 $ 624,576 $ 660,749
*See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003, 2002 and 2001
Note A Organization
Qualified Housing Partners Limited Partnership ("QHP" or the "Partnership") was formed under the laws of the State of North Carolina on December 22, 1987. One unit of limited partnership interest (a "Unit") was issued for $1,000 to the original Limited Partner and $1,000 was contributed for the General Partners' continuing interest. The Partnership commenced operations in 1988.
The Partnership was formed for the purpose of investing in multi-family rental housing properties qualifying for the Low Income Housing Tax Credit and, in certain circumstances, the Rehabilitation Tax Credit, which tax credits may be applied against the federal income tax liabilities of the Partnership's partners. The Partnership's investment is in the form of limited partnership interests in limited partnerships (the "Subsidiary Operating Partnerships") that own the rental properties. Frederick Investment Corporation, a North Carolina corporation (the "Managing General Partner"), and George F. Marshall are the general partners (the "General Partners") of the Partnership.
Subsidiary Operating Partnerships, which receive either rental assistance or mortgage subsidies from governmental agencies, are subject to regulations restricting their ability to distribute significant cash flow to the Partnership. Therefore, it is not anticipated that the Operating Partnerships will distribute significant amounts of cash to the Partnership. The Partnership is generally entitled to between 75% and 98.99% of the distributable cash flow of the Operating Partnerships in which it invests.
The Partnership Agreement provides that profits, losses and tax credits of the Partnership generally will be allocated 99% to the Limited Partners and 1% to the General Partners. A complete description of the provisions of the Partnership Agreement governing allocations of profits, losses, tax credits, cash flows and other items to the partners is included in the public offering prospectus dated May 20, 1988, the supplements thereto dated October 18, 1988 and December 23, 1988, and the amendment thereto dated August 25, 1989.
As more fully discussed in Note C, the Partnership acquired interests in twenty-seven Operating Partnerships during 1988 and 1989. No additional Operating Partnership interests were acquired subsequent to 1989.
Note B Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The Partnership owns 98.99% limited partnership interests in twenty-six Subsidiary Operating Partnerships and a 94.99% limited partnership interest in one Subsidiary Operating Partnership. The consolidated financial statements include the accounts of Qualified Housing Partners Limited Partnership and those twenty-seven majority-owned Subsidiary Partnerships. The Partnership's minority interests on the consolidated balance sheets includes the minority owned interests related to its twenty-seven subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
RENTAL PROPERTIES
Rental properties are recorded at their respective costs to the Partnership, which costs include certain fees paid to an outside party for consulting with the Managing General Partner in its selection of the Partnership's investments in Subsidiary Operating Partnerships. Depreciation is determined by the straight-line method over the estimated useful lives of the rental properties. Estimated useful lives are 25 to 50 years for buildings and 10 to 12 years for furniture and fixtures. The costs of major improvements are capitalized while the costs of ordinary maintenance and repairs are charged to expense as incurred. When properties are sold or retired, their costs and the related accumulated depreciation will be removed from the accounts and the gain or loss reflected in income. The Partnership periodically reviews long-lived assets for impairment, when indicators of impairment exist, and an impairment loss will be recognized if the value of assets is impaired.
REVENUE RECOGNITION
Revenues from rents are recognized for residential units as they accrue. Advance receipts of rental income will be deferred until earned. All leases between the operating partnerships and tenants are operating leases.
INCOME TAXES
No provision has been made for federal or state income taxes because income, gains, losses and credits of the Partnership are reportable by the partners under the partnership form of organization.
RECENT ACCOUNTING PRONOUNCEMENTS
On May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified by the Company after May 31, 2003, and is effective at the beginning of the first interim period beginning after June 15, 2003. However, the FASB has deferred indefinitely the classification and measurement provisions as they related to certain mandatorily redeemable noncontrolling interest. The adoption of Statement 150 did not have a material impact on the consolidated financial statements.
OTHER ASSETS Other Assets at December 31, 2003 and 2002 consist of the following:
2003 2002
Accounts Receivable $ 137,020 $ 124,472
Prepayments and Deferred Charges 115,967 100,158
Restricted Cash Consisting Principally of Reserves, Tenant Deposits and Certain Escrow Balances of Operating Partnerships 1,634,756 1,981,474
$1,887,743 $2,206,104
NET LOSS PER LIMITED PARTNERSHIP UNIT
Net loss per Limited Partnership Unit is based upon the net loss allocated to the limited partners and is computed using the weighted average number of Units outstanding of 8,673 Units.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Note C Operating Partnerships
Commencing on the date of the initial closing of the public offering, the Partnership began acquiring majority ownership interests in Subsidiary Operating Partnerships in transactions accounted for as purchases. The Partnership completed the acquisition of the 27 Subsidiary Operating Partnerships in August, 1989. Since the acquisitions occurred either during or within a short period after the completion of the development or rehabilitation phase of each Subsidiary Operating Partnership, the fair values of net assets of the Subsidiary Operating Partnerships approximated historical costs. The Subsidiary Operating Partnerships generally allocate 98.99% of income or loss and tax credits, and from 75% to 98.99% of distributable cash to the Partnership.
Note D Liabilities Applicable to Rental Properties
Liabilities applicable to rental properties consist of the following at December 31, 2003 and 2002: 2003 2002 Rural Development financed mortgage loans to Subsidiary Operating Partnerships collateralized by deeds of trust on the rental properties and assignments of all rents, profits and income of the respective Subsidiary Operating Partnerships. Loans are payable in various monthly amounts which include interest at stated rates of 8.5% and 9.5%. The effective rate of interest on each mortgage loan is reduced by interest subsidies to 1% as long as the respective Subsidiary Operating Partnership remains in compliance with the provisions of the mortgage loan agreement....................$24,070,613 $24,164,042
Conventional mortgage loan with an interest rate of 10% amortized over 149 months.......... -- 414,091
$24,070,613 $24,578,133
The estimated future maturities of mortgage loan obligations as of December 31, 2002 are as follows:
2004 102,177 2005 111,901 2006 122,559 2007 134,163 2008 146,914 Thereafter 23,452,899
$24,070,613
Note E Fair Value of Financial Instruments
The carrying amounts reflected in the consolidated balance sheets for cash and restricted cash approximate their respective fair values because of the short maturities of these instruments. Management believes it is not practicable to estimate the fair value of liabilities applicable to rental properties, which consist primarily of Rural Development financed mortgage loans, because programs with similar characteristics are not currently available.
Note F Related Party Transactions
The accompanying consolidated financial statements reflect transactions between the Partnership and its General Partners or their affiliates and between the various Subsidiary Operating Partnerships and their general partners. Frederick Investment Corporation, the Managing General Partner of QHP, is a general or special limited partner in each of the Subsidiary Operating Partnerships. Each Subsidiary Operating Partnership also has one or more other general partners (the "Local General Partners"). Following is a summary of related party transactions for 2003, 2002 and 2001:
QHP General General Partners of Partners Operating Partnerships 2003 or Affiliates or Affiliates ITEMS PAID OR PAYABLE BY QHP Management Fees $ 29,000 $ -- Reimbursable Operating Expenses 28,097 -- ITEMS PAID OR PAYABLE BY SUBSIDIARY PARTNERSHIPS Property Management/Service Fees -- $ 434,004
$ 57,097 $ 434,004 PAYABLE BALANCES AT DECEMBER 31 By QHP $ 340,146 -- By Subsidiary Partnerships -- $ 329,711
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ITEMS PAID OR PAYABLE BY QHP Management Fees $ 84,562 $ -- Reimbursable Operating Expenses 21,685 -- ITEMS PAID OR PAYABLE BY SUBSIDIARY PARTNERSHIPS Property Management/Service Fees -- $ 391,161
$ 106,247 $ 391,161 PAYABLE BALANCES AT DECEMBER 31 By QHP $ 337,756 -- By Subsidiary Partnerships -- $ 325,886
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ITEMS PAID OR PAYABLE BY QHP Management Fees $ 84,562 $ -- Reimbursable Operating Expenses 26,449 -- ITEMS PAID OR PAYABLE BY SUBSIDIARY PARTNERSHIPS Property Management/Service Fees -- $ 405,813
$ 106,011 $ 405,813 PAYABLE BALANCES AT DECEMBER 31 By QHP $ 283,926 -- By Subsidiary Partnerships -- $ 318,467
The Partnership pays annual management fees to a related party for services performed. The annual management fee under the Partnership Management fee agreement has historically been $84,562. Payment of the management fee in any given year is contingent upon QHP's cash flows, which are derived from the annual cash flow of the properties and any future sale of those properties. Most of the properties are located in small rural towns and do not currently have a market for sale. Additionally, the governmental program under which the properties were constructed strictly limits the distribution of annual cash flow. Therefore, as of January 1, 2003, QHP began expensing only the portion of the fee that will be paid in a given year. The maximum amount payable under this management fee arrangement as of December 31, 2003 is $390,794, of which $340,146 is accrued in the consolidated financial statements.
Most of the rental properties were constructed or rehabilitated by the respective Local General Partner(s) or affiliated entities. Pursuant to the operating partnership agreements, the Local General Partner must lend the Subsidiary Operating Partnership funds sufficient to establish a working capital reserve equal to 2% of the project's development costs and such additional operating loans as needed. At December 31, 2003, 2002, and 2001 such loans in the amount of $295,233, $295,233 and $296,433 respectively, were included in Other Liabilities.
QHP's tax credits have been exhausted, and most investors have no remaining tax benefits. In November, the general partners offered an exit strategy, whereby many investors could divest and obtain a one-time tax benefit. As of December 31, 2003, 240 investors owning 3,344 units have assigned their interest to one of the general partners (unaudited).
Note G Income Taxes
The Managing General Partner believes the Partnership is a partnership for federal income tax purposes. Accordingly, no provision has been made for federal or state income taxes because income, gains, deductions, losses and credits of the Partnership are reportable by the partners under the partnership form of organization. The following is a reconciliation of loss before deducting minority interest in Subsidiary Operating Partnerships for financial reporting purposes to loss allocated to QHP's limited partners for federal income tax purposes:
2003 2002 2001
Loss Before Deducting Minority Interest In Subsidiary Partnerships $ 367,318 $ 488,558 $ 489,772
Excess of Depreciation for Federal Income Tax Purposes over Depreciation for Financial Reporting Purposes 520,272 473,438 431,101
Other Differences (23,209) (80,159) (8,676)
Combined Losses for Federal Income Tax Purposes of QHP and its Subsidiary Partnerships 864,381 881,837 912,197
Loss Allocated to the General Partners of QHP and its Subsidiary Partnerships, Net (16,541) (16,446) (17,060)
Loss Allocated to QHP's Limited Partners for Federal Income Tax Purposes $ 847,840 $ 865,391 $ 895,137
At December 31, 2003 and 2002, the Partnership's reported net assets exceeded their tax base by approximately $6,800,000 and $6,300,000, respectively.
Note H Selected Quarterly Financial Data (unaudited)
1st Qtr 2003 2nd Qtr 2003 3rd Qtr 2003 4th Qtr 2003
Rental Income $1,028,514 $1,056,493 $1,039,605 $998,312
Loss From Rental Activities (64,057) (97,167) (58,625) (72,881) Net Loss (105,804) (123,752) (87,893) (46,912) Net Loss per Limited Partnership Unit ($12.08) ($14.13) ($10.03) ($5.35)
1st Qtr 2002 2nd Qtr 2002 3rd Qtr 2002 4th Qtr 2002
Rental Income $990,330 $985,306 $ 991,804 $991,441
Loss From Rental Activities (86,731) (121,173) (69,667) (91,631) Net Loss (126,065) (146,816) (95,263) (116,682) Net Loss per Limited Partnership Unit ($14.39) ($16.76) ($10.87) ($13.32)
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A:
Item 9A: Controls and Procedures
The Partnership carried out an evaluation under the supervision and with the participation of the Partnership's management, including the Partnership's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures as of December 31, 2003, pursuant to Securities Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Partnership's disclosure controls and procedures are effective in timely alerting them to material information relating to the Partnership required to be included in the Partnership's periodic SEC Filings. There were no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls during the most recent fiscal quarter.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Managing General Partner, Frederick Investment Corporation ("FIC"), is responsible for managing the Partnership and its operations. It was incorporated in North Carolina in 1976 and its executive officers are George F. Marshall (who is also the Class A General Partner), Jenny C. Petri and Hoyt S. (Brad) Bradshaw, Jr. Mr. Marshall, age 64 is the President and Director of FIC. He graduated from Washington and Lee University, and received an M.B.A. from the University of North Carolina at Chapel Hill.
Ms. Petri, age 45 has been an employee of FIC since 1981 and since 1984 has served as its Vice President/General Manager and Director. She is also the Executive Vice President and Director of One Management, Inc. Ms. Petri is a 1981 graduate of the University of North Carolina at Chapel Hill, with a B.S. degree in Business Administration.
Mr. Bradshaw, age 45 has served as its Assistant Secretary since 1993 and as Director since 1998. He is also the Controller, Secretary and Director of One Management, Inc. Mr. Bradshaw is a 1982 graduate of the University of North Carolina at Chapel Hill, with a B.S. degree in Business Administration with emphasis in Accounting.
One Management, Inc. was incorporated in 1991 and is involved primarily in rendering services in connection with real estate development and management. Beginning in 1993, it provided the administrative support needed by FIC in the performance of its duties as Managing General Partner.
Code of Ethics
The Partnership has adopted the Code of Ethics of the Managing General Partner, Frederick Investment Corporation. This Code of Ethics is designed to ensure that the general partners of the Partnership, and any of their directors, executive officers, and employees, meet the highest standards of ethical conduct. The Code of Ethics requires that the general partners of the Partnership, and any of their directors, executive officers, and employees, avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in our best interest. Under the terms of the Code of Ethics, the general partners of the Partnership, and any of their directors, executive officers, and employees, are required to report any conduct that they believe in good faith to be an actual or apparent violation of the Code of Ethics.
As a mechanism to encourage compliance with the Code of Ethics, the Partnership has adopted a policy regarding the method of receiving, retaining and treating complaints received regarding accounting, internal accounting controls or auditing matters. This policy ensures that concerns may be submitted in good faith regarding questionable accounting or auditing matters in a confidential and anonymous manner without fear of dismissal or retaliation of any kind.
The Code of Ethics is posted in the workroom of FIC's corporate office, and can also be provided, free of charge, by contacting Ramona Logan, Asset Manager, (919) 787-4243.
Item 11.
Item 11. Executive Compensation
The General Partners are entitled to receive reimbursement of Organization and Offering Expenses, Acquisition Expenses, Development Expenses and expenses and costs advanced by them, or either of them, and payment of Development Fees and a Partnership Management Fee, all as provided for and defined in the Partnership Agreement. A copy of the Partnership Agreement is Exhibit A to the Prospectus that is part of the Registration Statement on Form S-11, Number 33-19316 and effective May 20, 1988, the final form of which was filed on May 20, 1988 pursuant to Rule 424(b).
ITEMS PAID OR PAYABLE BY THE PARTNERSHIP IN 2003 Management fees..........$84,562
During 2003, the Partnership's Managing General Partner incurred various reimbursable operating expenses aggregating approximately $28,097 on behalf of the Partnership.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Class A General Partner, who is also President and a Director of the Managing General Partner, owned 20 units (0.2% of units outstanding) at December 30, 2003. Effective 11:59pm on December 31, 2003, 240 partners transferred 3,344 units to the Class A General Partner. Therefore, the Class A General Partner owns 3,364 units (38.78% of units outstanding) at December 31, 2003. No other executive officer or director of the Managing General Partner owns any Units.
Amount and Name and Address Nature of Title of of Beneficial Beneficial Percent Class Owner Ownership of Class
Limited George F. Marshall 3,364 Units 38.78% Partner 4700 Homewood Court Suite 220 Raleigh, NC 27609
Item 13.
Item 13. Certain Relationships and Related Transactions
See Items 1 and 11 above which are incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services
The Managing General Partner has selected Dixon Hughes, PLLC, to continue as independent auditors to audit the financial statements of the Partnership for the year ended December 31, 2003.
Audit Fees
Fees for audit services totaled approximately $26,450 in 2003 and approximately $24,025 in 2002, including fees associated with the annual audit, the reviews of the Partnership's quarterly reports on Form 10-Q and audits of some of the Subsidiary Operating Partnerships.
Audit-Related Fees
There are no aggregate fees billed in either of the last two fiscal years for assurance and related services provided by the principal accountant that are reasonably related to the performance of the audit or review of the registrant's financial statements and are not reported under Item 9(e)(1) of Schedule 14A.
Tax Fees
Fees for preparing tax returns are incorporated in the audit fees. No further fees were billed for tax services.
All Other Fees
There have been no aggregate fees billed in either of the last two fiscal years for products and services provided by the principal accountant other than the services reported in Items 9(e)(1) through 9(e)(3) of Schedule 14A.
Pre-Approval Policies and Procedures
The Managing General Partner has adopted a policy that requires advance approval of all audit, audit-related, tax services, and other services performed by the independent auditor. The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the Managing General Partner must approve the permitted service before the independent auditor is engaged to perform it. Any member of the Managing General Partner is authorized to approve permitted services.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. Consolidated Financial Statements
See Item 8 above which is incorporated herein by reference.
b. Independent Auditors' Report
To the Partners Qualified Housing Partners Limited Partnership Raleigh, North Carolina
We have audited the accompanying consolidated balance sheets of Qualified Housing Partners Limited Partnership and subsidiary operating partnerships as of December 31, 2003 and 2002 and the related consolidated statements of income and expenses, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Qualified Housing Partners Limited Partnership and subsidiary operating partnerships as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.
/s/ DIXON HUGHES PLLC
Raleigh, North Carolina March 5, 2004
c. Financial Statement Schedules
All financial statement schedules are omitted because the required information is either not applicable, is immaterial, or is included in the consolidated financial statements of the Partnership and the notes thereto.
d. Exhibits
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Rule 13a-14(a)/15d-14(a) Certification
I, George F. Marshall, certify that:
I have reviewed this annual report on Form 10-K of Qualified Housing Partners Limited Partnership, a North Carolina limited partnership (the "registrant");
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: March 30, 2004 By: /s/ George F. Marshall George F. Marshall, General Partner Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Section 302 Certification
I, Jenny C. Petri, certify that:
I have reviewed this annual report on Form 10-K of Qualified Housing Partners Limited Partnership, a North Carolina limited partnership (the "registrant");
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
FREDERICK INVESTMENT CORPORATION
Date: March 30, 2004 By: /s/ Jenny C. Petri Jenny C. Petri, Vice President (Chief Financial Officer)
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United Stated Code (18 U.S.C. 1350)
Pursuant to Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United Stated Code (18 U.S.C. 1350), the undersigned, George F. Marshall, Chief Executive Officer of Qualified Housing Partners Limited Partnership, a North Carolina limited partnership, does hereby certify, to his knowledge, that:
The Annual Report on Form 10-K for the period ended December 31, 2003 of the Partnership (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.
Date: March 30, 2004 By: /s/ George F. Marshall George F. Marshall General Partner (Chief Executive Officer)
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United Stated Code (18 U.S.C. 1350)
Pursuant to Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United Stated Code (18 U.S.C. 1350), the undersigned, Jenny C. Petri, Chief Financial Officer of Qualified Housing Partners Limited Partnership, a North Carolina limited partnership, does hereby certify, to her knowledge, that:
The Annual Report on Form 10-K for the period ended December 31, 2003 of the Partnership (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.
FREDERICK INVESTMENT CORPORATION
Date: March 30, 2004 By: /s/ Jenny C. Petri Jenny C. Petri, Vice President (Chief Financial Officer)
e. Reports on Form 8-K
The Partnership filed no report Form 8-K in 2003.