Item 1. Business
Gateway Tax Credit Fund III Ltd. (“Gateway”) is a Florida Limited Partnership. The general partners are Raymond James Tax Credit Funds, Inc., the Managing General Partner, and Raymond James Partners, Inc., (collectively the “General Partners”) both sponsors of Gateway Tax Credit Fund III Ltd. and wholly owned subsidiaries of Raymond James Financial, Inc. Gateway was formed October 17, 1991 and commenced operations July 16, 1992 with the first admission of Limited Partners.
Gateway is engaged in only one industry segment, to acquire limited partnership interests in unaffiliated limited partnerships (“Project Partnerships”), each of which owns and operates one or more apartment complexes eligible for Low-Income Housing Tax Credits (“Tax Credits”) under Section 42 of the Internal Revenue Code, received over a ten year period. Subject to certain limitations, Tax Credits may be used by Gateway's investors to reduce their income tax liability generated from other income sources. Gateway will terminate on December 31, 2040 or sooner, in accordance with the terms of its Limited Partnership Agreement. As of March 31, 2011, Gateway received capital contributions of $1,000 from the General Partners and from the Limited Partners: $10,395,000 in Series 7, $9,980,000 from Series 8, $6,254,000 from Series 9, $5,043,000 from Series 10 and $5,127,000 from Series 11.
Gateway offered Limited Partnership units in series. Each Series invests in a separate and distinct pool of Project Partnerships. Net proceeds from each Series were used to acquire Project Partnerships which are specifically allocated to such Series. Income or loss and all tax items from the Project Partnerships acquired by each Series are specifically allocated among the Limited Partners of such Series.
Operating profits and losses, cash distributions from operations and Tax Credits are allocated 99% to the Limited Partners and 1% to the General Partners. Profit or loss and cash distributions from sales of properties will be allocated as described in the Limited Partnership Agreement.
Gateway initially held investments in 133 Project Partnerships. As more fully described in Item 7 herein, Gateway is presently in the process of disposing of its interests in Project Partnerships. As of March 31, 2011, 21 Project Partnerships once held by Gateway have been sold. Project Partnership investments held by Series as of March 31, 2011 are as follows: 25 Project Partnerships for Series 7, 40 Project Partnerships for Series 8, 22 Project Partnerships for Series 9, 14 Project Partnerships for Series 10 and 11 Project Partnerships for Series 11. Gateway acquired its interests in the Project Partnerships by becoming a limited partner in the Project Partnerships that own the properties. As of March 31, 2011, the capital received for each Series was fully invested in Project Partnerships and management plans no new Project Partnership acquisitions.
The primary source of funds from the inception of each Series has been the capital contributions from Limited Partner investors. Gateway’s operating costs are funded using the reserves established for this purpose, the interest earned on these reserves and distributions received from Project Partnerships. Gateway has also received proceeds from the sale of Project Partnerships and made corresponding cash distributions to Limited Partners.
All but eight of the Project Partnerships are financed with mortgage loans from the Farmers Home Administration (now called United States Department of Agriculture - Rural Development) (“USDA-RD”) under Section 515 of the Housing Act of 1949. These mortgage loans are made at low interest rates for multi-family housing in rural and suburban areas, with the requirement that the interest savings be passed on to low income tenants in the form of lower rents. A significant portion of the project partnerships also receive rental assistance from USDA-RD to subsidize certain qualifying tenants. One Project Partnership in Series 7 received conventional financing. One Project Partnership in Series 9, two Project Partnerships in Series 10 and one Project Partnership in Series 11 are fully financed through the HOME Investment Partnerships Program. These HOME Program loans provide financing at rates of 0 % to 0.5% for a period of 15 to 42 years. One Project Partnership in Series 11 is partially financed by HOME. Two Project Partnerships in Series 11 received conventional financing.
The investment objectives of Gateway are to:
1) Provide tax benefits to Limited Partners in the form of Tax Credits during the period in which each Project is eligible
to claim Tax Credits;
2) Preserve and protect the capital of each Series.
The investment objectives and policies of Gateway are described in detail on pages 39 through 47 of the Prospectus under the caption “Investment Objectives and Policies” which is incorporated herein by reference.
Item 1. Business (Continued)
Gateway's goal is to invest in a diversified portfolio of Project Partnerships located in rural and suburban locations with a high demand for low income housing. As of March 31, 2011, each Series' investor capital contributions were successfully invested in Project Partnerships which met the investment criteria. The Tax Credits have been provided to Gateway’s investors and the fifteen year Tax Credit compliance period has expired for all of the Project Partnerships (see further information in the Exit Strategy discussion below). Gateway is now in the process of disposing of its remaining interests and distributing proceeds from those sales to the Limited Partners. Gateway’s objective is to sell Gateway’s interests in Project Partnerships which have exited the Tax Credit compliance period for fair market value and ultimately, liquidate the Project Partnerships and in turn liquidate Gateway.
Gateway has no direct employees. Services are performed by the Managing General Partner and its affiliates and by agents retained by it. The Managing General Partner has full and exclusive discretion in management and control of Gateway.
Exit Strategy Upon expiration of the Project Partnership Tax Credit Compliance Period
When Project Partnerships reach the end of their Tax Credit compliance period, Gateway initiates a process of disposing of its investments in the Project Partnerships. The objective is to sell Gateway’s interest in such properties for fair market value and ultimately, liquidate the Project Partnerships and in turn, when Gateway’s last Project Partnership investment is sold, liquidate Gateway.
The IRS compliance period for low-income housing Tax Credit properties is generally 15 years from occupancy following construction or rehabilitation completion.
All of the original 133 Project Partnership investments have reached the end of their Tax Credit compliance period as of December 31, 2010. As of March 31, 2011, 21 of the Project Partnership investments have been sold and, in accordance with the Gateway partnership agreement, the entire net proceeds received from these sales either have been or will be distributed to the Limited Partners of those Series. On a cumulative basis as of March 31, 2011, $338,877 of net sales proceeds representing $32.60 per Limited Partner unit in Series 7 and $67,964 of net sales proceeds representing $6.81 per Limited Partner unit in Series 8 have been distributed to the Limited Partners of the respective Series.
Item 1A.
Item 1A. Risk Factors
The General Partners do not believe the Project Partnerships are subject to the risks generally associated with conventionally financed nonsubsidized apartment properties. Risks related to the operations of Gateway are described in detail on pages 29 through 38 of the Prospectus, as supplemented, contained in the Registration Statement, File No. 33-44238 (“Prospectus”), under the Caption “Risk Factors” which is incorporated herein by reference.
Gateway, as a limited partner in the Project Partnerships, is subject to risks inherent in the ownership of property which are beyond its control, such as fluctuations in occupancy rates and operating expenses, variations in rental schedules, proper maintenance and continued eligibility of Tax Credits. If the cost of operating a property exceeds the rental income earned thereon, Gateway may deem it in its best interest to voluntarily provide funds in order to protect its investment. No such contributions have been made during fiscal year 2011, 2010 or 2009.
Investors eventually may be allocated profits for tax purposes which exceed any cash Gateway distributes to them. Under these circumstances, unless an investor has passive losses or credits to reduce such tax liability, the investor will have to pay federal income tax without a corresponding cash distribution from Gateway. Similarly, in the event of a sale or foreclosure of an apartment complex, an investor may be allocated taxable income, resulting in a tax liability in excess of any cash distributed to the investor as a result of such event.
There is no assurance that investors will receive any cash distributions from the sale or disposal of a Project Partnership. The price at which a Project Partnership is sold may not be sufficient to pay the mortgage and other expenses which must be paid at such time.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Gateway holds an interest in properties through its limited partnership investments in Project Partnerships. The largest single net investment as of March 31, 2011 in a Project Partnership for each respective Series is: Series 10, one Project Partnership investment constitutes 21.7% of the Series’ total assets, and in Series 11, one Project Partnership constitutes 22.5% of the Series’ total assets (the net investment for book purposes is zero for each Project Partnership in Series 7, 8 and 9). The following table provides certain summary information regarding the Project Partnerships in which Gateway held an interest as of December 31, 2010 (the Project Partnerships’ financial information contained herein is reported on a 3-month lag):
Item 2 - Properties (Continued)
Item 2 - Properties (Continued)
Item 2 - Properties (Continued)
Item 2 - Properties (Continued)
A summary of the book value of the fixed assets of the Project Partnerships as of December 31, 2010, 2009 and 2008 is as follows:
Item 2 - Properties (Continued)
Item 3.
Item 3. Legal Proceedings
Gateway is not a party to any material pending legal proceedings.
Item 4.
Item 4. (Removed and Reserved)
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Gateway's Limited Partnership interests are not publicly traded. There is no market for Gateway's Limited Partnership interests and it is unlikely that any will develop. No transfers of Limited Partnership Interests are permitted without the prior written consent of the Managing General Partner. There have been numerous transfers from inception to date with most being from individuals to their trusts or heirs. The Managing General Partner is not aware of the price at which Limited Partnership units are transferred. The criteria for and the details regarding transfers are found on pages A-28 and A-29 of the Limited Partnership Agreement under ARTICLE XII under the caption “Transfers of Units” found in the Prospectus, which is incorporated herein by reference.
(b) Approximate Number of Equity Security Holders:
Number of Record Holders
Title of Class
as of March 31, 2011
Limited Partnership Interest
2,048
General Partner Interest
Item 6.
Item 6. Selected Financial Data
FOR THE YEARS ENDED MARCH 31,
FOR THE YEARS ENDED MARCH 31,
Item 6. Selected Financial Data (Continued)
FOR THE YEARS ENDED MARCH 31,
FOR THE YEARS ENDED MARCH 31,
FOR THE YEARS ENDED MARCH 31,
FOR THE YEARS ENDED MARCH 31,
(A) The tax information is as of December 31, the year end for tax purposes.
The above selected financial data should be read in conjunction with the financial statements and related notes appearing elsewhere in this report. This statement is not covered by the auditor's opinion included elsewhere in this report.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Gateway. The MD&A is provided as a supplement to, and should be read in conjunction with the financial statements and accompanying footnotes to the financial statements contained elsewhere in this report.
The Managing General Partner monitors developments in the area of legal and regulatory compliance. For example, the Sarbanes-Oxley Act of 2002 (the “Act”) mandates or suggests additional compliance measures with regard to governance, disclosure, audit and other areas, and certain provisions of the Act have been implemented by Gateway and other provisions will be implemented by Gateway in subsequent years.
Gateway - All Series - The following discusses the overall results of operations, liquidity and capital resources for Gateway as a whole. A summary of the activity within each specific Series of Gateway then follows.
Results of Operations
As more fully detailed in the Exit Strategy discussion included within this MD&A, all of the Project Partnerships have delivered their Tax Credits to Gateway and the Tax Credit compliance period has expired for all 133 of the Project Partnerships initially held. Gateway is in the process of selling or disposing of its interests in Project Partnerships that have reached the end of their Tax Credit compliance period. Net proceeds received from the sales are in turn distributed to the Limited Partners. Once all Project Partnership interests have been sold or otherwise disposed of, Gateway will be liquidated. The target date for liquidation of Gateway is on or before December 31, 2012, although there is no certainty, and it may not even be considered likely at this time, that all the activities necessary to occur as of such date will have transpired.
Distribution income arises from any cash distributions received from Project Partnerships which have a zero investment balance for financial reporting purposes. Distribution income decreased 4% in fiscal year 2011 to $80,687, a decrease of $3,029 from the fiscal year 2010 distribution income of $83,716, which represented a $14,443 or 21% increase as compared to distribution income of $69,273 in fiscal year 2009. The decrease in distribution income for the year ended March 31, 2011 is a result of a reduction in distribution payments to Gateway by the Project Partnerships. The number of Project Partnerships with an investment balance decreased from 9 as of March 31, 2010 to 4 as of March 31, 2011. The gross distributions received from Project Partnerships decreased from $114,268 for the year ended March 31, 2010 to $95,789 for the year ended March 31, 2011. The increase in distribution income for the year ended March 31, 2010 is a result of fewer Project Partnerships with investment balances coupled with an increase of gross distributions received from Project Partnerships.
Gateway has no direct employees. The General Partners have full and exclusive discretion in management and control of Gateway. Total expenses of Gateway were $397,859 for the fiscal year ended March 31, 2011, a decrease of $275,542 as compared to the fiscal year 2010 total expenses of $673,401, which represented a $1,583,833 decrease in total expenses as compared to the fiscal year 2009 amount of $2,257,234. Impairment expense represents a significant component of total expenses in fiscal year 2009. Impairment expense is a non-cash charge that reflects a potential decline in the carrying value of Gateway’s interest in Project Partnerships. Historically, Gateway has considered the residual value of the Project Partnerships as one key component of its estimate of the present value of Gateway’s interest in any of its Project Partnerships. During fiscal year 2011, no impairment expense was recognized. During fiscal years 2010 and 2009, impairment expense was recorded in the aggregate amount of $28,099 and $1,340,110, respectively. Net of this impairment expense, expenses of Gateway decreased $247,443, or 38% in fiscal year 2011 versus fiscal year 2010. The decrease in fiscal year 2011 results primarily from decreases in 1) asset management fees and general and administrative expenses - General Partner due to sales of Project Partnerships (Gateway ceases accruing Asset Management Fees and General and Administrative Expenses - General Partner for sold Project Partnerships) along with the cessation of accruals for general and administrative expenses - General Partner in Series 8 (beginning in fiscal year 2010), Series 7, 9 and 10 (beginning in March 2010) and Series 11 (beginning in October 2010); 2) amortization expense (resulting from the suspension of amortization due to Project Partnership investment balances reaching zero or the acquisition fees and expense being fully amortized). The fiscal year 2010 expense represented a $271,822, or 30%, decrease from the fiscal year 2009 amount of $917,124 (net of impairment expense).
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
For the year ended March 31, 2011, Equity in Loss of Project Partnerships totaled $132,746 which represents a $16,289 increase as compared to the Equity in Loss of Project Partnerships for the year ended March 31, 2010 of $116,457. For the year ended March 31, 2009, Equity in Loss of Project Partnerships totaled $247,075. Equity in Loss of Project Partnerships increased for the year ended March 31, 2011 as compared to the year ended March 31, 2010 because of an increase in the losses from Project Partnerships with a positive investment balance. Because Gateway utilizes the equity method of accounting for its Project Partnerships, income or losses from Project Partnerships with a zero investment balance are not recognized in the Statement of Operations. For the year ended December 31, 2010 (Project Partnership financial information is reported on a three-month lag), Gateway’s share of the net loss was $2,197,029, of which $2,064,283 was suspended. For the year ended December 31, 2009, Gateway’s share of the net loss was $2,478,314, of which $2,361,857 was suspended. For the year ended December 31, 2008, Gateway’s share of the net loss was $2,548,187, of which $2,301,112 was suspended. Typically, it is customary in the low-income housing Tax Credit industry to experience losses for financial and tax reporting purposes because of the non-cash expenses of depreciation and amortization. As the Project Partnership investments mature and the Investments in Project Partnership balances decrease over time, the losses from Project Partnerships recorded by Gateway decrease.
In fiscal year 2011, the Gain on Sale of Project Partnerships amounted to $717,489, an increase of $373,971 over the fiscal year 2010 amount of $343,518, which in turn was an increase of $299,744 from the fiscal year 2009 Gain on Sale of Project Partnerships amount of $43,774. As more fully discussed herein, seven Project Partnership investments were sold during fiscal year 2010 as compared to nine in fiscal year 2010 and four in fiscal year 2009. The amount of the gain or loss from the sale of a Project Partnership and the year in which it is recognized on the Statement of Operations is dependent upon the specifics related to each sale or disposition transaction. Refer to the discussion of each Project Partnerships sold in the Exit Strategy section within this MD&A.
Interest income for the year ended March 31, 2011 of $124 represents a decrease of $4,628 or 97%, as compared to fiscal year 2010. Interest income in fiscal year 2010 of $4,752 was a decrease of $25,307 or 84% as compared to the fiscal year 2009 interest income of $30,059. The changes in interest income over the prior two fiscal years result primarily from the fluctuation of interest rates on short-term investments over that period, along with the maturation of several investments in securities over the same period. Investments in Securities were $0 as of March 31, 2011 and decreased to $0 as of March 31, 2010 from $79,337 as of March 31, 2009. This decrease was a result of the redemption of U.S. Treasury Security Strips in February 2010 and the reinvestment of these funds into cash and cash equivalents. Interest income is generally one source of funds available to pay administrative costs of Gateway.
Liquidity and Capital Resources
The capital resources of each Series are used to pay General and Administrative operating costs including personnel, supplies, data processing, travel, legal and accounting associated with the administration and monitoring of Gateway and the Project Partnerships. The capital resources are also used to pay the Asset Management Fee due the Managing General Partner, but only to the extent that Gateway's remaining resources are sufficient to fund Gateway's ongoing needs. (Payment of any Asset Management Fee unpaid at the time Gateway sells its interests in the Project Partnerships is subordinated to the Limited Partners’ return of their original capital contribution).
The sources of funds to pay the expenses of Gateway are cash and cash equivalents and the interest earnings thereon, and cash distributed to the Series from the operations of the Project Partnerships. Due to the rent limitations applicable to the Project Partnerships as a result of their qualifying for Low-Income Housing Tax Credits, Gateway does not expect there to be a significant increase in future rental income of the Project Partnerships. Therefore, cash distributions from the operations of the Project Partnerships are not expected to increase on a per project basis. However, operational factors of the Project Partnerships and the timing of distributions contribute to fluctuations of distributions from year to year. Management believes these sources of funds are sufficient to meet current and ongoing operating costs for the foreseeable future, and to pay part of the Asset Management Fee.
In total, Gateway reported a net loss of $267,695 from operations for the year ended March 31, 2011. Cash and Cash Equivalents increased by $744,627. Of the Cash and Cash Equivalents on hand as of March 31, 2011, $765,940 is payable to certain Series’ Limited Partners arising from the sale of Project Partnerships. After consideration of these sales proceeds, Cash and Cash Equivalents increased $27,138 as compared to the prior year-end balances.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The financial performance of each respective Series is summarized as follows:
Series 7 - Gateway closed this series on October 16, 1992 after receiving $10,395,000 from 635 Limited Partner investors. As of March 31, 2011, the Series had invested $4,648,444 in 25 Project Partnerships located in 8 states containing 737 apartment units. Average occupancy of the Project Partnerships was 94% at December 31, 2010.
Equity in Loss of Project Partnerships was $0 in fiscal year 2011. Equity in Income (Loss) of Project Partnerships decreased to $0 in fiscal year 2010 from income of $707 for fiscal year 2009. As presented in Note 4, the Project Partnerships generated a loss for the years ended December 31, 2010, 2009 and 2008 of $548,804, $695,025 and $597,535 on Rental and other income of $4,434,943, $5,284,523 and $6,397,144, respectively. Gateway’s share of the Project Partnerships’ net loss for the years ended December 31, 2010, 2009 and 2008 was $573,276, $701,101 and $617,777, of which $573,276, $701,101 and $618,484 were suspended, respectively. If not suspended, these losses would have reduced the Investments in Project Partnerships below zero. The suspended losses for the year ended December 31, 2008 of $618,484 exceed Gateway’s share of the total net loss of $617,777 because certain Project Partnerships with investment balances generated net income of $707. In general, it is common in the real estate industry to experience losses for financial and tax reporting purposes because of the non-cash expenses of depreciation and amortization. (These Project Partnerships reported depreciation and amortization of $847,923, $1,008,239 and $1,277,049 for the years ended December 31, 2010, 2009 and 2008, respectively). As a result, management expects that this Series, as well as the Series described below, will report its equity in Project Partnerships as a loss for tax and financial reporting purposes. Gateway reviews its investments in Project Partnerships to determine if there has been any permanent impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. There was no impairment expense for the fiscal years ended March 31, 2011 or 2010. For the fiscal year ended March 31, 2009, impairment expense of $183,299 was recognized. Overall management believes the Project Partnerships are operating as expected and have generated Tax Credits which met projections.
At March 31, 2011, the Series had $770,297 of short-term investments (Cash and Cash Equivalents). Management believes the sources of funds are sufficient to meet current and ongoing operating costs for the foreseeable future, and to pay part of the Asset Management Fee.
As disclosed on the statement of cash flows, the Series had net income of $473,439 for the year ended March 31, 2011. However, after considering the changes in operating assets and liabilities, net cash used in operating activities was $87,434. Cash provided by investing activities totaled $648,029 consisting of $22,635 in cash distributions from the Project Partnerships and $625,394 in net proceeds from the Sale of Project Partnerships (refer to the Exit Strategy section within this MD&A for more detailed discussion of these sales of Project Partnerships).
Series 8 - Gateway closed this Series on July 1, 1993 after receiving $9,980,000 from 664 Limited Partner investors. As of March 31, 2011, the Series had invested $6,965,669 in 40 Project Partnerships located in 17 states containing 1,121 apartment units. Average occupancy of the Project Partnerships was 92% at December 31, 2010.
Equity in Loss of Project Partnerships decreased to $0 in fiscal year 2011 from a loss of $2,631 for fiscal year 2010. Equity in Loss of Project Partnerships decreased $42,608 to $2,631 in fiscal year 2010 as compared to $45,239 in fiscal year 2009. As presented in Note 4, the Project Partnerships generated a loss for the years ended December 31, 2010, 2009 and 2008 of $723,487, $782,205 and $925,731 on Rental and other income of $6,793,755, $6,930,389 and $7,026,802, respectively. Gateway’s share of the Project Partnerships’ net loss for the years ended December 31, 2010, 2009 and 2008 was $717,967, $777,837 and $921,647, of which $717,967, $775,206 and $876,408 were suspended, respectively. If not suspended, these losses would have reduced the Investments in Project Partnerships below zero. In general, it is common in the real estate industry to experience losses for financial and tax reporting purposes because of the non-cash expenses of depreciation and amortization. (These Project Partnerships reported depreciation and amortization of $1,420,237, $1,397,733 and $1,498,607 for the years ended December 31, 2010, 2009 and 2008, respectively). Gateway reviews its investments in Project Partnerships to determine if there has been any permanent impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. There was no impairment expense for the fiscal year ended March 31, 2011. For the fiscal years ended March 31, 2010 and 2009, impairment expense of $8,681 and $221,243 was recognized, respectively. Overall management believes the Project Partnerships are operating as expected and have generated Tax Credits which met projections.
At March 31, 2011, the Series had $231,397 of short-term investments (Cash and Cash Equivalents). Management believes the sources of funds are sufficient to meet current and ongoing operating costs for the foreseeable future, and to pay part of the Asset Management Fee.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
As disclosed on the statement of cash flows, the Series had a net loss of $90,218 for the year ended March 31, 2011. However, after considering the changes in operating assets and liabilities, net cash used in operating activities was $36,253. Cash provided by investing activities totaled $28,662 consisting of $24,662 in cash distributions from the Project Partnerships and $4,000 in net proceeds from the Sale of Project Partnerships (refer to the Exit Strategy section within this MD&A for more detailed discussion of these sales of Project Partnerships).
Series 9 - Gateway closed this Series on September 30, 1993 after receiving $6,254,000 from 406 Limited Partner investors. As of March 31, 2011, the Series had invested $4,599,313 in 22 Project Partnerships located in 10 states containing 584 apartment units. Average occupancy of the Project Partnerships was 97% at December 31, 2010.
Equity in Loss of Project Partnerships decreased to $0 in fiscal year 2011 from a loss of $4,909 for fiscal year 2010. Equity in Loss of Project Partnerships decreased $82,779 to $4,909 in fiscal year 2010 as compared to $87,688 in fiscal year 2009. As presented in Note 4, the Project Partnerships generated a loss for the years ended December 31, 2010, 2009 and 2008 of $452,089, $552,678 and $540,476 on Rental and other income of $3,690,119, $3,633,336 and $3,756,581, respectively. Gateway’s share of the Project Partnerships’ net loss for the years ended December 31, 2010, 2009 and 2008 was $447,568, $547,151 and $542,656, of which $447,568, $542,242 and $454,968 were suspended, respectively. If not suspended, these losses would have reduced the Investments in Project Partnerships below zero. In general, it is common in the real estate industry to experience losses for financial and tax reporting purposes because of the non-cash expenses of depreciation and amortization. (These Project Partnerships reported depreciation and amortization of $733,144, $747,222 and $790,640 for the years ended December 31, 2010, 2009 and 2008, respectively). Gateway reviews its investments in Project Partnerships to determine if there has been any permanent impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. There was no impairment expense for the fiscal years ended March 31, 2011 or 2010. For the fiscal year ended March 31, 2009, impairment expense of $180,400 was recognized. Overall management believes the Project Partnerships are operating as expected and have generated Tax Credits which met projections.
At March 31, 2011, the Series had $142,196 of short-term investments (Cash and Cash Equivalents). Management believes the sources of funds are sufficient to meet current and ongoing operating costs for the foreseeable future, and to pay part of the Asset Management Fee.
As disclosed on the statement of cash flows, the Series had a net loss of $9,637 for the year ended March 31, 2011. However, after considering the changes in operating assets and liabilities, net cash used in operating activities was $15,748. Cash provided by investing activities totaled $61,032 consisting of $16,002 in cash distributions from the Project Partnerships and $45,030 in net proceeds from the Sale of Project Partnerships (refer to the Exit Strategy section within this MD&A for more detailed discussion of this sale of Project Partnership).
Series 10 - Gateway closed this Series on January 21, 1994 after receiving $5,043,000 from 325 Limited Partner investors. As of March 31, 2011, the Series had invested $3,716,106 in 14 Project Partnerships located in 9 states containing 385 apartment units. Average occupancy of the Project Partnerships was 97% at December 31, 2010.
Equity in Loss of Project Partnerships decreased $2,656 to $25,669 in fiscal year 2011 as compared to $28,325 in fiscal year 2010. Equity in (Loss) Income of Project Partnerships decreased $29,121 to a loss of $28,325 in fiscal year 2010 as compared to income of $796 for fiscal year 2009. As presented in Note 4, the Project Partnerships generated a loss for the years ended December 31, 2010, 2009 and 2008 of $144,571, $201,549 and $169,201 on Rental and other income of $2,307,400, $2,239,370 and $2,397,697, respectively. Gateway’s share of the Project Partnerships’ net loss for the years ended December 31, 2010, 2009 and 2008 was $163,491, $211,172 and $170,536, of which $137,822, $182,847 and $171,332 were suspended, respectively. If not suspended, these losses would have reduced the Investments in Project Partnerships below zero. The suspended losses for the year ended December 31, 2008 of $171,332 exceed Gateway’s share of the total net loss of $170,536 because certain Project Partnerships with investment balances generated net income of $796. In general, it is common in the real estate industry to experience losses for financial and tax reporting purposes because of the non-cash expenses of depreciation and amortization. (These Project Partnerships reported depreciation and amortization of $439,674, $439,815 and $486,635 for the years ended December 31, 2010, 2009 and 2008, respectively). Gateway reviews its investments in Project Partnerships to determine if there has been any permanent impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. There was no impairment expense for the fiscal year ended March 31, 2011 or 2010. For the fiscal year ended March 31, 2009, impairment expense of $506,918 was recognized. Overall, management believes the Project Partnerships are operating as expected and have generated Tax Credits which met projections.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
At March 31, 2011, the Series had $153,660 of short-term investments (Cash and Cash Equivalents). Management believes the sources of funds are sufficient to meet current and ongoing operating costs for the foreseeable future, and to pay part of the Asset Management Fee.
As disclosed on the statement of cash flows, the Series had a net loss of $60,829 for the year ended March 31, 2011. However, after considering the Equity in Loss of Project Partnerships of $25,669 and the changes in operating assets and liabilities, net cash used in operating activities was $21,822. Cash provided by investing activities totaled $21,844 consisting of $19,844 in cash distributions from the Project Partnerships and $2,000 in net proceeds from the Sale of Project Partnerships (refer to the Exit Strategy section within this MD&A for more detailed discussion of this sale of Project Partnership).
Series 11 - Gateway closed this Series on April 29, 1994 after receiving $5,127,000 from 330 Limited Partner investors. As of March 31, 2011 the Series had invested $3,832,294 in 11 Project Partnerships located in 6 states containing 329 apartment units. Average occupancy of the Project Partnerships was 91% at December 31, 2010.
Equity in Loss of Project Partnerships increased $26,485 to $107,077 in fiscal year 2011 as compared to $80,592 in fiscal year 2010. Equity in Loss of Project Partnerships decreased $35,059 to $80,592 in fiscal year 2010 as compared to $115,651 in fiscal year 2009. As presented in Note 4, the Project Partnerships generated a loss for the years ended December 31, 2010, 2009 and 2008 of $307,670, $246,604 and $279,740 on Rental and other income of $2,263,577, $2,231,664 and $2,161,398, respectively. Gateway’s share of the Project Partnerships’ net loss for the years ended December 31, 2010, 2009 and 2008 was $294,727, $241,053 and $295,571, of which $187,650, $160,461 and $179,920 were suspended, respectively. If not suspended, these losses would have reduced the Investments in Project Partnerships below zero. In general, it is common in the real estate industry to experience losses for financial and tax reporting purposes because of the non-cash expenses of depreciation and amortization. (These Project Partnerships reported depreciation and amortization of $525,157, $525,030 and $523,527 for the years ended December 31, 2010, 2009 and 2008, respectively). Gateway reviews its investments in Project Partnerships to determine if there has been any permanent impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. There was no impairment expense for the fiscal year ended March 31, 2011 For the fiscal years ended March 31, 2010 and 2009, impairment expense of $19,418 and $248,250 was recognized, respectively. Overall, management believes the Project Partnerships are operating as expected and have generated Tax Credits which met projections.
At March 31, 2011, the Series had $356,285 of short-term investments (Cash and Cash Equivalents). Management believes the sources of funds are sufficient to meet current and ongoing operating costs for the foreseeable future, and to pay part of the Asset Management Fee.
As disclosed on the statement of cash flows, the Series had a net loss of $45,060 for the year ended March 31, 2011. However, after considering the Equity in Loss of Project Partnerships of $107,077 and the changes in operating assets and liabilities, net cash used in operating activities was $41,996. Cash provided by investing activities totaled $188,313 consisting of $12,646 in cash distributions from the Project Partnerships and $175,667 in net proceeds from the Sale of Project Partnerships (refer to the Exit Strategy section within this MD&A for more detailed discussion of this sale of Project Partnership).
Critical Accounting Estimates
Gateway reviews its investments in Project Partnerships to determine if there has been any permanent impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the investment, Gateway recognizes an impairment loss. Gateway did not recognize any impairment expense for the year ended March 31, 2011. Impairment expense for the year ended March 31, 2010 totaled $28,099, comprised of $8,681 in Series 8 and $19,418 in Series 11. Impairment expense for the year ended March 31, 2009 totaled $1,340,110, comprised of $183,299 in Series 7, $221,243 in Series 8, $180,400 in Series 9, $506,918 in Series 10, and $248,250 in Series 11.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Recent Accounting Changes
In June 2009, the FASB issued amendments to the consolidation guidance applicable to variable interest entities which Gateway adopted effective April 1, 2010. The amendments had no impact on its financial statements for the year-ended March 31, 2011.
In May 2009, the FASB issued guidance regarding subsequent events, which was subsequently updated in February 2010. This guidance established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance was effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009, and was therefore adopted by Gateway for the quarter ended December 31, 2009. The adoption did not have a significant impact on the subsequent events that Gateway reports, either through recognition or disclosure, in the financial statements. In February 2010, the FASB amended its guidance on subsequent events to remove the requirement to disclose the date through which an entity has evaluated subsequent events, alleviating conflicts with current SEC guidance. This amendment was effective immediately and therefore Gateway did not include the disclosure in this Form 10-K.
Exit Strategy Upon Expiration of the Project Partnership Tax Credit Compliance Period
The IRS compliance period for low-income housing Tax Credit properties is generally 15 years from occupancy following construction or rehabilitation completion.When Project Partnerships reach the end of their Tax Credit compliance period, Gateway initiates the process of disposing of its investment in the Project Partnership; the objective of the process is to sell Gateway’s interest in the properties for fair market value and ultimately, when Gateway’s last Project Partnership investment is sold, liquidate Gateway. Generally, the market for Project Partnerships is limited. Some of the factors which negatively impact the marketability of these projects include (1) requirements by government agencies that the project’s mortgagor continue to maintain the property in the low-income housing program, and (2) the mortgage balance of the property is very near the initial balance as a result of the heavily subsidized debt of the Project Partnerships and lengthy (usually 50 year) amortization periods.
As of March 31, 2011, Gateway holds a limited partner interest in 112 Project Partnerships which own and operate government assisted multi-family housing complexes. Gateway at one time held investments in 133 Project Partnerships. As of December 31, 2010, all of the Project Partnerships had reached the end of their Tax Credit compliance period. As of March 31, 2011, 21 of the Project Partnerships have been sold (14 in Series 7, 3 in Series 8, 2 in Series 9, 1 in Series 10 and 1 in Series 11) and, in accordance with the Gateway partnership agreement, the entire net proceeds received from these sales either have been or will be distributed to the Limited Partners of the respective Series. A summary of the sale transactions for the Project Partnerships disposed during the past three fiscal years are summarized below:
Fiscal Year 2011 Disposition Activity:
Series 7
The net proceeds per LP unit from the sale of Pioneer Apartments, Lake Village Apartments, Savannah Park of Atoka, Savannah Park of Coalgate and Cardinal Apartments are a component of the Distribution Payable on the Balance Sheet as of March 31, 2011. These net proceeds, less the applicable state tax withholding, will be distributed to the Series 7 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Series 8
Gateway recognized an additional gain on sale of Project Partnerships in the amount of $4,000 resulting from the true-up of certain legal and other sale transaction closing expenses arising from Project Partnership sale transactions which closed in the prior fiscal year. This amount, less the applicable state tax withholding, will be distributed to the Series 8 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Series 9
The net proceeds per LP unit from the sale of Stilwell Properties III is a component of the Distribution Payable on the Balance Sheet as of March 31, 2011. These net proceeds, less the applicable state tax withholding, will be distributed to the Series 9 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Gateway recognized an additional gain on sale of Project Partnerships in the amount of $2,000 resulting from the true-up of certain legal and other sale transaction closing expenses arising from a Project Partnership sale transaction which closed in the prior fiscal year. This amount, less the applicable state tax withholding, will be distributed to the Series 9 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Series 10
Gateway recognized an additional gain on sale of Project Partnerships in the amount of $2,000 resulting from the true-up of certain legal and other sale transaction closing expenses arising from a Project Partnership sale transaction which closed in the prior fiscal year. This amount, less the applicable state tax withholding, will be distributed to the Series 10 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Series 11
The net proceeds per LP unit from the sale of Cardinal Apartments is a component of the Distribution Payable on the Balance Sheet as of March 31, 2011. These net proceeds, less the applicable state tax withholding, will be distributed to the Series 11 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Fiscal Year 2010 Disposition Activity:
Series 7
The net proceeds per LP unit from the sale of Mountain City Manor, Tazewell Village, Jamestown Village, Clinch View Manor, and Spring Creek Apartments II LP were distributed to the Series 7 Limited Partners in September 2009.
Series 8
The net proceeds per LP unit from the sale of South Brenchely and Cimmaron Station are a component of the Distribution Payable on the Balance Sheet as of March 31, 2010. These net proceeds, less the applicable state tax withholding, will be distributed to the Series 8 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Series 9
The net proceeds per LP unit from the sale of Mountain Glen are a component of the Distribution Payable on the Balance Sheet as of March 31, 2010. These net proceeds, less the applicable state tax withholding, will be distributed to the Series 9 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Series 10
The net proceeds per LP unit from the sale of Redstone are a component of the Distribution Payable on the Balance Sheet as of March 31, 2010. These net proceeds, less the applicable state tax withholding, will be distributed to the Series 10 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Fiscal Year 2009 Disposition Activity:
Series 7
The net proceeds per LP unit from the sale of Cedar Hollow Apartments, Sunrise I Apartments, Burbank Apartments, and Walnut Apartments were distributed to the Series 7 Limited Partners in December 2008.
Series 8
Gateway recognized an additional gain on sale of Project Partnerships in the amount of $349 resulting from the true-up of certain legal and other sale transaction closing expenses arising from a Project Partnership sale transaction which closed in the prior fiscal year. This amount, less the applicable state tax withholding, will be distributed to the Series 8 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Status Update on Unsold Project Partnerships:
The following summarizes the most recent status of the sale/disposal process for the Project Partnership investments held as of March 31, 2011:
Project Partnerships sold subsequent to March 31, 2011:
Series 7
Blue Ridge Elderly Housing, Ltd., L.P.
Lakeland II, L.P.
Meadow Run Apartments, L.P.
Mt. Vernon Rental Housing, L.P.
Subsequent to the March 31, 2011 year-end, Gateway sold its partnership interests in Blue Ridge Elderly Housing, Ltd., L.P., Lakeland II, L.P. Meadow Run Apartments, L.P., and Mt. Vernon Rental Housing, L.P. Gateway received approximately $114,400 in net proceeds (approximately $11.01 per beneficial assignee certificate) which also approximates the gain on sale of Project Partnerships. The gain will be recognized in the first quarter of fiscal year 2012 and available proceeds from these sale transactions, less the applicable state tax withholding, will be distributed to the Series 7 Assignees in a subsequent period at such time that state withholding tax liabilities have been settled.
Series 8
Cottondale Rental Housing, L.P.
Subsequent to the March 31, 2011 year-end, Gateway sold its partnership interests in Cottondale Rental Housing, L.P. Gateway received approximately $20,000 in net proceeds (approximately $2.00 per beneficial assignee certificate) which also approximates the gain on sale of Project Partnerships. The gain will be recognized in the first quarter of fiscal year 2012 and available proceeds from this sale transaction, less the applicable state tax withholding, will be distributed to the Series 8 Assignees in a subsequent period at such time that state withholding tax liabilities have been settled.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Series 9
Arbor Trace Apartments Phase I L.P.
Arbor Trace Apartments Phase II L.P.
Subsequent to the March 31, 2011 year-end, Gateway sold its partnership interests in Arbor Trace Apartments Phase I L.P. and Arbor Trace Apartments Phase II L.P. Gateway received approximately $52,800 in net proceeds (approximately $8.44 per beneficial assignee certificate) which also approximates the gain on sale of Project Partnerships. The gain will be recognized in the first quarter of fiscal year 2012 and available proceeds from these sale transactions, less the applicable state tax withholding, will be distributed to the Series 9 Assignees in a subsequent period at such time that state withholding tax liabilities have been settled.
Gateway has approved the sale to the general partner of the Project Partnership or a third party:
Series 8
Antlers Properties
Logan Heights, Ltd.
AAA Properties of Bentonville
Meadowview Properties Limited Partnership
Concordia Senior Housing, L.P.
Mountainburg Properties
Kirksville Senior Apartments, Limited Partnership
Wetumka Properties
These approvals are subject to a number of contingencies, the outcome of which cannot be predicted with certainty. However, utilizing the sales amounts as approved by Gateway, should all the transactions close without modification, the estimated net proceeds to Gateway from the sales of these Project Partnerships are estimated to be $572,000, or $57.31 per limited partnership unit. Sales proceeds would be available for distribution, less the applicable state tax withholding, to the Series 8 Limited Partners in a period subsequent to the closing of these sales transactions which would most likely occur within the next two years.
Series 9
Abernathy Properties
Jay Properties II
Boxwood Place Properties
Lamar Properties, L.P.
These approvals are subject to a number of contingencies, the outcome of which cannot be predicted with certainty. However, utilizing the sales amounts as approved by Gateway, should all the transactions close without modification, the estimated net proceeds to Gateway from the sales of these Project Partnerships are estimated to be $260,000, or $41.57 per limited partnership unit. Sales proceeds would be available for distribution, less the applicable state tax withholding, to the Series 9 Limited Partners in a period subsequent to the closing of these sales transactions which would most likely occur within the next two years.
Series 10
Stigler Properties
This approval is subject to a number of contingencies, the outcome of which cannot be predicted with certainty. However, utilizing the sale amount as approved by Gateway, should the transaction close without modification, the estimated net proceeds to Gateway from the sale of this Project Partnership is estimated to be $54,000, or $10.71 per limited partnership unit. Sales proceeds would be available for distribution, less the applicable state tax withholding, to the Series 10 Limited Partners in a period subsequent to the closing of this sales transaction which would most likely occur within the next two years.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Disclosure of Contractual Obligations
(1) The Other Liabilities represent the asset management fees and other general and administrative expense reimbursements owed to the General Partners as of March 31, 2011. This payable is unsecured, due on demand and, in accordance with the limited partnership agreement, non-interest bearing. As referred to in Note 3, the Managing General Partner does not intend to demand payment of the portion of this balance reflected as due later than one year within the next twelve months.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, no information is required.
Item 8.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of Gateway Tax Credit Fund III Ltd.
We have audited the accompanying balance sheets of Gateway Tax Credit Fund III Ltd. (a Florida Limited Partnership) - Series 7 through 11, in total and for each series, as of March 31, 2011 and 2010, and the related statements of operations, partners’ equity (deficit), and cash flows for the total partnership and for each of the series for each of the years in the three-year period ended March 31, 2011. Gateway’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Gateway is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Gateway’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gateway Tax Credit Fund III Ltd. - Series 7 through 11, in total and for each series, as of March 31, 2011 and 2010, and the results of its operations and its cash flows for the total partnership and for each of the series for each of the years in the three-year period ended March 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed under Item 15(a)(2) in the index are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, based on our audits and the reports of other auditors, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Reznick Group, P.C.
REZNICK GROUP, P.C.
Atlanta, Georgia
July 1, 2011
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2011, 2010 AND 2009
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2011, 2010 AND 2009
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2011, 2010 AND 2009
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2011, 2010 AND 2009
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2011, 2010 AND 2009
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2011, 2010 AND 2009
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2011, 2010 AND 2009
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2011, 2010 AND 2009
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2011, 2010 AND 2009
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2011, 2010 AND 2009
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2011, 2010 AND 2009
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2011, 2010 AND 2009
See accompanying notes to financial statements.
GATEWAY TAX CREDIT FUND III LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2011, 2010 AND 2009
NOTE 1 - ORGANIZATION:
Gateway Tax Credit Fund III Ltd. (“Gateway”), a Florida Limited Partnership, was formed October 17, 1991 under the laws of Florida. Gateway offered its limited partnership interests in Series (“Series”). The first Series for Gateway is Series 7. Operations commenced on July 16, 1992 for Series 7, January 4, 1993 for Series 8, September 30, 1993 for Series 9, January 21, 1994 for Series 10 and April 29, 1994 for Series 11. Each Series invests, as a limited partner, in other limited partnerships (“Project Partnerships”), each of which owns and operates apartment complexes eligible for Low-Income Housing Tax Credits (“Tax Credits”), provided for in Section 42 of the Internal Revenue Code of 1986. Gateway will terminate on December 31, 2040 or sooner, in accordance with the terms of the limited partnership agreement (the “Agreement”). As of March 31, 2011, Gateway had received capital contributions of $1,000 from the General Partners and $36,799,000 from the investor Limited Partners.
Raymond James Partners, Inc. and Raymond James Tax Credit Funds, Inc., wholly owned subsidiaries of Raymond James Financial, Inc., are the General Partner and Managing General Partner, respectively and collectively the General Partners.
Gateway received capital contributions of $10,395,000, $9,980,000, $6,254,000, $5,043,000 and $5,127,000 from the investor Limited Partners in Series 7, 8, 9, 10 and 11, respectively. Each Series will be treated as though it were a separate partnership, investing in a separate and distinct pool of Project Partnerships. Income or loss and all tax items from the Project Partnerships acquired by each Series are specifically allocated among the Limited Partners of such Series.
Operating profits and losses, cash distributions from operations and Tax Credits from each Series are generally allocated 99% to the Limited Partners in that Series and 1% to the General Partners. Profit or loss and cash distributions from sales of properties by each Series are allocated as specified in the Agreement.
When Project Partnerships reach the end of their Tax Credit compliance period, Gateway initiates a process of disposing of its investments in the Project Partnerships. The objective is to sell Gateway’s interest in such properties for fair market value and ultimately, liquidate the Project Partnerships and in turn, when Gateway’s last Project Partnership investment is sold, liquidate Gateway.
The IRS compliance period for low-income housing Tax Credit properties is generally 15 years from occupancy following construction or rehabilitation completion.
All of the original 133 Project Partnership investments have reached the end of their Tax Credit compliance period as of December 31, 2010. As of March 31, 2011, 21 of the Project Partnership investments have been sold and, in accordance with the Gateway partnership agreement, the entire net proceeds received from these sales either have been or will be distributed to the Limited Partners of those Series. On a cumulative basis as of March 31, 2011, $338,877 of net sales proceeds representing $32.60 per Limited Partner unit in Series 7 and $67,964 of net sales proceeds representing $6.81 per Limited Partner unit in Series 8 have been distributed to the Limited Partners of the respective Series.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
Basis of Accounting
Gateway utilizes the accrual basis of accounting whereby revenues are recognized as earned and expenses are recognized as obligations are incurred.
Gateway accounts for its investments as the limited partner in Project Partnerships (“Investments in Project Partnerships”) using the equity method of accounting, because management believes that Gateway does not have a majority control of the major operating and financial policies of the Project Partnerships in which it invests, and reports the equity in loss of the Project Partnerships on a 3-month lag in the Statements of Operations. Under the equity method, the Investments in Project Partnerships initially include:
1)
Gateway's capital contribution,
2)
Acquisition fees paid to the General Partner for services rendered in selecting properties for acquisition,
3)
Acquisition expenses including legal fees, travel and other miscellaneous costs relating to acquiring properties.
Quarterly the Investments in Project Partnerships are increased or decreased as follows:
1)
Increased for equity in income or decreased for equity in loss of the Project Partnerships,
2)
Decreased for cash distributions received from the Project Partnerships,
3)
Decreased for the amortization of the acquisition fees and expenses,
4)
Increased for loans or advances made to the Project Partnerships by Gateway,
5)
Decreased, where appropriate, for impairment.
Pursuant to the limited partnership agreements for the Project Partnerships, cash losses generated by the Project Partnerships are allocated to the general partners of those partnerships. In subsequent years, cash profits, if any, are first allocated to the general partners to the extent of the allocation of prior cash losses.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
Since Gateway invests as a limited partner, and therefore is not obligated to fund losses or make additional capital contributions, it does not recognize losses from individual Project Partnerships to the extent that these losses would reduce the investment in those Project Partnerships below zero. In accordance with generally accepted accounting principles (“GAAP”), once the net investment in a Project Partnership is reduced to zero, receivables due from the Project Partnership are decreased by Gateway’s share of Project Partnership losses. The suspended losses will be used to offset future income from the individual Project Partnerships. Any cash distributions received from Project Partnerships which have a zero investment balance are accounted for as distribution income in the period the cash distribution is received by Gateway.
Gateway reviews its investments in Project Partnerships to determine if there has been any permanent impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. If the sum of the expected remaining low-income housing tax credits and other tax benefits is less than the carrying amount of the investment, Gateway recognizes an impairment loss. Gateway has historically considered the residual value of the Project Partnerships as one key component of its analysis. No impairment expense was recognized for the year ended March 31, 2011. Impairment expense for the year ended March 31, 2010 totaled $28,099, comprised of $8,681 in Series 8 and $19,418 in Series 11. Impairment expense for the year ended March 31, 2009 totaled $1,340,110, comprised of $183,299 in Series 7, $221,243 in Series 8, $180,400 in Series 9, $506,918 in Series 10, and $248,250 in Series 11. Refer to Note 4 - Investments in Project Partnerships for further details regarding the components of the Investments in Project Partnerships balance. Gateway is continuing to execute its process of disposition of its interest in Project Partnerships that have reached the end of their Tax Credit compliance period, refer to Note 5 - Summary of Disposition Activities for the most recent update of those on-going activities.
Gateway, as a limited partner in the Project Partnerships, is subject to risks inherent in the ownership of property which are beyond its control, such as fluctuations in occupancy rates and operating expenses, variations in rental schedules, proper maintenance and continued eligibility for Tax Credits. If the cost of operating a property exceeds the rental income earned thereon, Gateway may deem it in its best interest to voluntarily provide funds in order to protect its investment. However, Gateway does not guarantee any of the mortgages or other debt of the Project Partnerships. No such funding to Project Partnerships occurred during fiscal years 2011, 2010, or 2009.
Cash and Cash Equivalents
Gateway's policy is to include short-term investments with an original maturity of three months or less in Cash and Cash Equivalents. Short-term investments are comprised of money market mutual funds.
Concentrations of Credit Risk
Financial instruments which potentially subject Gateway to concentrations of credit risk consist of cash investments in a money market mutual fund.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires the use of estimates that affect certain reported amounts and disclosures. These estimates are based on management's knowledge and experience. Accordingly, actual results could differ from these estimates.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
Investment in Securities
Gateway is required under GAAP to categorize its investments in debt securities as held-to-maturity, available-for-sale or trading securities, dependent upon Gateway's intent in holding the securities. Gateway's intent is to hold all of its debt securities (U.S. Treasury Security Strips) until maturity and to use these investments to fund Gateway's ongoing operations. Interest income is recognized ratably on the U.S. Treasury Security Strips using the effective yield to maturity. The U.S. Treasury Security Strips are carried at amortized cost, which approximates market value, and are adjusted for amortization of premiums and accretion of discounts to maturity. Such adjustments are included in interest income. There are no Investments in Securities as of March 31, 2011 and 2010.
Income Taxes
No provision for income taxes has been made in these financial statements, as income taxes are a liability of the partners rather than of Gateway. Gateway files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Gateway is no longer subject to U.S. federal examination by tax authorities for years prior to calendar year 2008. The income tax returns subject to state examination by tax authorities are generally consistent with the federal period.
Distribution Payable
Distribution payable consists of amounts received as net sales proceeds. These amounts, net of the applicable state tax withholding, are due and payable to the Assignees and will be distributed at such time that state tax withholding liabilities have been settled.
State Tax Withholding
Certain state tax jurisdictions impose a capital gains tax on the taxable gains associated with the sale of investments in partnerships. As General Partner of Gateway, it is Gateway’s obligation to calculate and withhold the applicable state taxes that are payable by the Partners of Gateway when Project Partnerships are sold or otherwise disposed by Gateway. In most cases, the state taxes are due regardless if proceeds are received from the sale of Project Partnerships. Therefore, Gateway has estimated the withholding taxes payable and the amount is included in Distribution Payable on the Balance Sheet.
Variable Interest Entities
In June 2009, the FASB issued new consolidation guidance applicable to variable interest entities. Gateway adopted this new guidance as of April 1, 2010. The adoption of this new guidance had no impact on Gateway’s financial statements.
Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics, (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the power to direct the activities of the entity that most significantly affect its economic performance, (ii) the obligation to absorb the expected losses or the right to receive the expected benefits of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. GAAP requires a VIE to be consolidated in the financial statements of the entity that is determined to be the primary beneficiary of the VIE. Determination of the primary beneficiary of each VIE requires judgment and is based on an analysis of control of the entity and economic factors. A VIE would be required to be consolidated if it has (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or receive benefits that could possibly be significant to the VIE. In the design of Project Partnership VIEs, the overriding concept centers around the premise that the limited partner invests solely for tax attributes associated with the property held by the VIE, while the general partner of the Project Partnership is responsible for overseeing its operations. Based upon its analysis of all the relevant facts and considerations, Gateway has concluded that the general partner of the Project Partnership has the power to direct the activities of the Project Partnership that most significantly impact its economic performance, and the obligation to absorb losses or receive benefits that could be significant to the Project Partnership and therefore, Gateway is not the primary beneficiary.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
Gateway holds variable interests in 112 VIEs, which consist of Project Partnerships (Refer to Note 1 - Organization for information about Gateway’s involvement in the Project Partnerships). Gateway is not the primary beneficiary of the VIEs. Since its inception, Gateway’s maximum exposure to loss as a result of its involvement with unconsolidated VIEs is limited to Gateway’s capital contributions to those VIEs, which is approximately $23,761,826 at March 31, 2011. Over the course of the investment and Tax Credit Cycle, this maximum exposure to loss was offset by actual losses experienced by the Project Partnerships recorded by Gateway in its equity accounting. Accordingly, at the current stage of the investment and Tax Credit Cycle, the carrying value of Gateway’s interest in the VIEs has been reduced to $310,560. Tabular disclosures within Note 4 - Investments in Project Partnerships detail total capital contributions to VIEs, the carrying amount of assets and liabilities related to Gateway’s VIEs and the aggregate assets, liabilities and Gateway’s exposure to loss from those VIEs. Gateway may be subject to additional losses to the extent of any financial support that Gateway voluntarily provides to those Project Partnerships in the future. Gateway does not currently intend to provide future financial support to the Project Partnerships.
Recent Accounting Changes
In June 2009, the FASB issued amendments to the consolidation guidance applicable to variable interest entities which Gateway adopted effective April 1, 2010. The amendments had no impact on its financial statements for the year-ended March 31, 2011.
In May 2009, the FASB issued guidance regarding subsequent events, which was subsequently updated in February 2010. This guidance established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance was effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009, and was therefore adopted by Gateway for the quarter ended December 31, 2009. The adoption did not have a significant impact on the subsequent events that Gateway reports, either through recognition or disclosure, in the financial statements. In February 2010, the FASB amended its guidance on subsequent events to remove the requirement to disclose the date through which an entity has evaluated subsequent events, alleviating conflicts with current SEC guidance. This amendment was effective immediately and therefore Gateway did not include the disclosure in this Form 10-K.
NOTE 3 - RELATED PARTY TRANSACTIONS:
The Payable to General Partners primarily represents the asset management fees and general and administrative expenses owed to the General Partners at the end of the period. It is unsecured, due on demand and, in accordance with the Agreement, non-interest bearing. Within the next 12 months, the Managing General Partner does not intend to demand payment on the portion of Asset Management Fees payable classified as long-term on the Balance Sheet.
Value Partners, Inc., an affiliate of Gateway, acquired the general partner interest in Logan Heights, one of the Project Partnerships in Series 8, in 2003 (see further discussion in Note 4).
For the years ended March 31, 2011, 2010 and 2009 the General Partners and affiliates are entitled to compensation and reimbursement for costs and expenses incurred by Gateway as follows:
NOTE 3 - RELATED PARTY TRANSACTIONS (Continued):
Asset Management Fee - The Managing General Partner is entitled to receive an annual asset management fee equal to the greater of (i) $2,000 for each limited partnership in which Gateway invests, or (ii) 0.275% of Gateway's gross proceeds from the sale of limited partnership interests. In either event (i) or (ii), the maximum amount may not exceed 0.2% of the aggregate cost (Gateway's capital contribution plus Gateway's share of the Properties' mortgage) of Gateway's interest in properties owned by the Project Partnerships. The asset management fee will be paid only after all other expenses of Gateway have been paid. These fees are included in the Statements of Operations.
General and Administrative Expenses - The Managing General Partner is reimbursed for general and administrative expenses of Gateway on an accountable basis. This expense is included in the Statements of Operations. During fiscal year 2011, the General Partner ceased further allocations of general and administrative expenses to Gateway.
Total unpaid asset management fees and administrative expenses payable to the General Partners, which are included on the Balance Sheet as of March 31, 2011 and 2010 are as follows:
NOTE 4 - INVESTMENTS IN PROJECT PARTNERSHIPS:
As of March 31, 2011, Gateway had acquired a 99% interest in the profits, losses, and Tax Credits as a limited partner in Project Partnerships (Series 7 - 25, Series 8 - 40, and Series 9 - 22) which own and operate government assisted multi-family housing complexes. Cash flows from operations are allocated according to each Project Partnership agreement. Upon dissolution, proceeds will be distributed according to each Project Partnership agreement.
The following is a summary of Investments in Project Partnerships as of:
NOTE 4 - INVESTMENTS IN PROJECT PARTNERSHIPS (Continued):
As of March 31, 2011, Gateway had acquired a 99% interest in the profits, losses, and Tax Credits as a limited partner in Project Partnerships (Series 10 - 14 and Series 11 - 11) which own and operate government assisted multi-family housing complexes. Cash flows from operations are allocated according to each Project Partnership agreement. Upon dissolution, proceeds will be distributed according to each Project Partnership agreement.
The following is a summary of Investments in Project Partnerships as of:
(1) In accordance with Gateway's accounting policy to not carry Investments in Project Partnerships below zero, cumulative suspended losses of $856,925 in Series 10 and $1,579,776 in Series 11 for the year ended March 31, 2011; and cumulative suspended losses of $719,103 in Series 10 and $1,392,126 in Series 11 for the year ended March 31, 2010 are not included.
NOTE 4 - INVESTMENTS IN PROJECT PARTNERSHIPS (Continued):
In accordance with Gateway’s policy of presenting the financial information of the Project Partnerships on a three month lag, below is the summarized balance sheets for the Project Partnerships of Series 7 as of December 31 and the summarized statements of operations for the year ended December 31 of each year:
NOTE 4 - INVESTMENTS IN PROJECT PARTNERSHIPS (Continued):
In accordance with Gateway’s policy of presenting the financial information of the Project Partnerships on a three month lag, below is the summarized balance sheets for the Project Partnerships of Series 8 as of December 31 and the summarized statements of operations for the year ended December 31 of each year:
NOTE 4 - INVESTMENTS IN PROJECT PARTNERSHIPS (Continued):
(1) As discussed in Note 3, an affiliate of the General Partner (Value Partners, Inc.) is the operating general partner in one of the Project Partnerships included in Series 8 above (Logan Heights). The Logan Heights Project Partnership is not consolidated in Gateway’s financial statements as Gateway’s investment in Logan Heights is accounted for under the equity method. The information below is included for related party disclosure purposes. The Project Partnership’s financial information for the years ending December 2010 and December 2009 is as follows:
NOTE 4 - INVESTMENTS IN PROJECT PARTNERSHIPS (Continued):
In accordance with Gateway’s policy of presenting the financial information of the Project Partnerships on a three month lag, below is the summarized balance sheets for the Project Partnerships of Series 9 as of December 31 and the summarized statements of operations for the year ended December 31 of each year:
NOTE 4 - INVESTMENTS IN PROJECT PARTNERSHIPS (Continued):
In accordance with Gateway’s policy of presenting the financial information of the Project Partnerships on a three month lag, below is the summarized balance sheets for the Project Partnerships of Series 10 as of December 31 and the summarized statements of operations for the year ended December 31 of each year:
NOTE 4 - INVESTMENTS IN PROJECT PARTNERSHIPS (Continued):
In accordance with Gateway’s policy of presenting the financial information of the Project Partnerships on a three month lag, below is the summarized balance sheets for the Project Partnerships of Series 11 as of December 31 and the summarized statements of operations for the year ended December 31 of each year:
NOTE 4 - INVESTMENTS IN PROJECT PARTNERSHIPS (Continued):
In accordance with Gateway’s policy of presenting the financial information of the Project Partnerships on a three month lag, below is the summarized balance sheets for the Project Partnerships of Series 7 through 11 as of December 31 and the summarized statements of operations for the year ended December 31 of each year:
NOTE 4 - INVESTMENTS IN PROJECT PARTNERSHIPS (Continued):
Gateway’s equity by Series as reflected by the Project Partnerships differs from the Investments in Project Partnerships before acquisition fees and expenses, amortization and impairment reserves by Series primarily because of suspended losses (refer to Note 2 for discussion of suspended losses).
By Series these differences are as follows:
The aggregate assets, liabilities and exposure to loss from the VIEs in which Gateway holds a variable interest, but has concluded that it is not the primary beneficiary, are provided in the table below (refer to Note 2 for discussion of variable interest entities).
NOTE 5 - SUMMARY OF DISPOSITION ACTIVITIES:
Gateway at one time held investments in 133 Project Partnerships (39 in Series 7, 43 in Series 8, 24 in Series 9, 15 in Series 10, and 12 in Series 11). As of March 31, 2011, Gateway has sold its interest in 21 Project Partnerships (14 in Series 7, 3 in Series 8, 2 in Series 9, 1 in Series 10 and 1 in Series 11). A summary of the sale transactions for the Project Partnerships disposed during the past three fiscal years are summarized below:
Fiscal Year 2011 Disposition Activity:
Series 7
The net proceeds per LP unit from the sale of Pioneer Apartments, Lake Village Apartments, Savannah Park of Atoka, Savannah Park of Coalgate and Cardinal Apartments are a component of the Distribution Payable on the Balance Sheet as of March 31, 2011. These net proceeds, less the applicable state tax withholding, will be distributed to the Series 7 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
NOTE 5 - SUMMARY OF DISPOSITION ACTIVITIES (Continued):
Series 8
Gateway recognized an additional gain on sale of Project Partnerships in the amount of $4,000 resulting from the true-up of certain legal and other sale transaction closing expenses arising from Project Partnership sale transactions which closed in the prior fiscal year. This amount, less the applicable state tax withholding, will be distributed to the Series 8 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Series 9
The net proceeds per LP unit from the sale of Stilwell Properties III is a component of the Distribution Payable on the Balance Sheet as of March 31, 2011. These net proceeds, less the applicable state tax withholding, will be distributed to the Series 9 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Gateway recognized an additional gain on sale of Project Partnerships in the amount of $2,000 resulting from the true-up of certain legal and other sale transaction closing expenses arising from a Project Partnership sale transaction which closed in the prior fiscal year. This amount, less the applicable state tax withholding, will be distributed to the Series 9 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Series 10
Gateway recognized an additional gain on sale of Project Partnerships in the amount of $2,000 resulting from the true-up of certain legal and other sale transaction closing expenses arising from a Project Partnership sale transaction which closed in the prior fiscal year. This amount, less the applicable state tax withholding, will be distributed to the Series 10 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Series 11
The net proceeds per LP unit from the sale of Cardinal Apartments is a component of the Distribution Payable on the Balance Sheet as of March 31, 2011. These net proceeds, less the applicable state tax withholding, will be distributed to the Series 11 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
NOTE 5 - SUMMARY OF DISPOSITION ACTIVITIES (Continued):
Fiscal Year 2010 Disposition Activity:
Series 7
The net proceeds per LP unit from the sale of Mountain City Manor, Tazewell Village, Jamestown Village, Clinch View Manor, and Spring Creek Apartments II LP were distributed to the Series 7 Limited Partners in September 2009.
Series 8
The net proceeds per LP unit from the sale of South Brenchely and Cimmaron Station are a component of the Distribution Payable on the Balance Sheet as of March 31, 2010. These net proceeds, less the applicable state tax withholding, will be distributed to the Series 8 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Series 9
The net proceeds per LP unit from the sale of Mountain Glen are a component of the Distribution Payable on the Balance Sheet as of March 31, 2010. These net proceeds, less the applicable state tax withholding, will be distributed to the Series 9 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
Series 10
The net proceeds per LP unit from the sale of Redstone are a component of the Distribution Payable on the Balance Sheet as of March 31, 2010. These net proceeds, less the applicable state tax withholding, will be distributed to the Series 10 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
NOTE 5 - SUMMARY OF DISPOSITION ACTIVITIES (Continued):
Fiscal Year 2009 Disposition Activity:
Series 7
The net proceeds per LP unit from the sale of Cedar Hollow Apartments, Sunrise I Apartments, Burbank Apartments, and Walnut Apartments were distributed to the Series 7 Limited Partners in December 2008.
Series 8
Gateway recognized an additional gain on sale of Project Partnerships in the amount of $349 resulting from the true-up of certain legal and other sale transaction closing expenses arising from a Project Partnership sale transaction which closed in the prior fiscal year. This amount, less the applicable state tax withholding, will be distributed to the Series 8 Limited Partners in a subsequent period at such time that state withholding tax liabilities have been settled.
NOTE 6 - SIGNIFICANT EQUITY INVESTEES:
Certain Project Partnerships constitute 20% or more of assets, equity or income (loss) from continuing operations of the respective Series in which they are held (“Significant Project Partnerships”). In accordance with Gateway’s policy of presenting the financial information of the Project Partnerships on a three month lag, below is the summarized results of operations as of December 31, 2010 for each Significant Project Partnership:
NOTE 7 - TAXABLE INCOME (LOSS):
The following is a reconciliation between net income (loss) as reported in the financial statements and Gateway’s income for tax purposes:
The differences in the assets and liabilities of the Series for financial reporting purposes and tax reporting purposes for the year ended March 31, 2011 are as follows:
NOTE 7 - TAXABLE INCOME (LOSS) (Continued):
The following is a reconciliation between net loss as reported in the financial statements and Gateway’s loss for tax purposes:
The differences in the assets and liabilities of the Series for financial reporting purposes and tax reporting purposes for the year ended March 31, 2011 are as follows:
NOTE 7 - TAXABLE INCOME (LOSS) (Continued):
The following is a reconciliation between net loss as reported in the financial statements and Gateway’s loss for tax purposes:
The differences in the assets and liabilities of the Series for financial reporting purposes and tax reporting purposes for the year ended March 31, 2011 are as follows:
NOTE 7 - TAXABLE INCOME (LOSS) (Continued):
The following is a reconciliation between net loss as reported in the financial statements and Gateway’s loss for tax purposes:
The differences in the assets and liabilities of the Series for financial reporting purposes and tax reporting purposes for the year ended March 31, 2011 are as follows:
NOTE 7 - TAXABLE INCOME (LOSS) (Continued):
The following is a reconciliation between net loss as reported in the financial statements and Gateway’s loss for tax purposes:
The differences in the assets and liabilities of the Series for financial reporting purposes and tax reporting purposes for the year ended March 31, 2011 are as follows:
NOTE 7 - TAXABLE INCOME (LOSS) (Continued):
The following is a reconciliation between net income (loss) as reported in the financial statements and Gateway’s loss for tax purposes:
The difference in the total value of Gateway’s Investments in Project Partnerships is approximately $7,131,561 higher for Series 7, $10,888,839 higher for Series 8, $5,341,819 higher for Series 9, $2,370,676 higher for Series 10, and $396,968 higher for Series 11 for financial reporting purposes than for tax return purposes because (i) there were depreciation differences between financial reporting purposes and tax return purposes and (ii) certain expenses are not deductible for tax return purposes.
The differences in the assets and liabilities of Gateway for financial reporting purposes and tax reporting purposes for the year ended March 31, 2011 are as follows:
NOTE 8 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
NOTE 8 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued):
NOTE 8 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued):
NOTE 9 - SUBSEQUENT EVENTS:
Series 7
Blue Ridge Elderly Housing, Ltd., L.P.
Lakeland II, L.P.
Meadow Run Apartments, L.P.
Mt. Vernon Rental Housing, L.P.
Subsequent to the March 31, 2011 year-end, Gateway sold its partnership interests in Blue Ridge Elderly Housing, Ltd., L.P., Lakeland II, L.P. Meadow Run Apartments, L.P., and Mt. Vernon Rental Housing, L.P. Gateway received approximately $114,400 in net proceeds (approximately $11.01 per beneficial assignee certificate) which also approximates the gain on sale of Project Partnerships. The gain will be recognized in the first quarter of fiscal year 2012 and available proceeds from these sale transactions, less the applicable state tax withholding, will be distributed to the Series 7 Assignees in a subsequent period at such time that state withholding tax liabilities have been settled.
NOTE 9 - SUBSEQUENT EVENTS (Continued):
Series 8
Cottondale Rental Housing, L.P.
Subsequent to the March 31, 2011 year-end, Gateway sold its partnership interests in Cottondale Rental Housing, L.P. Gateway received approximately $20,000 in net proceeds (approximately $2.00 per beneficial assignee certificate) which also approximates the gain on sale of Project Partnerships. The gain will be recognized in the first quarter of fiscal year 2012 and available proceeds from this sale transaction, less the applicable state tax withholding, will be distributed to the Series 8 Assignees in a subsequent period at such time that state withholding tax liabilities have been settled.
Series 9
Arbor Trace Apartments Phase I L.P.
Arbor Trace Apartments Phase II L.P.
Subsequent to the March 31, 2011 year-end, Gateway sold its partnership interests in Arbor Trace Apartments Phase I L.P. and Arbor Trace Apartments Phase II L.P. Gateway received approximately $52,800 in net proceeds (approximately $8.44 per beneficial assignee certificate) which also approximates the gain on sale of Project Partnerships. The gain will be recognized in the first quarter of fiscal year 2012 and available proceeds from these sale transactions, less the applicable state tax withholding, will be distributed to the Series 9 Assignees in a subsequent period at such time that state withholding tax liabilities have been settled.
Item 9.
Item 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosures
None
Item 9A.
Item 9A. Controls and Procedures
Not applicable to Gateway’s annual report for fiscal year ended March 31, 2011.
Item 9a(T). Controls and Procedures
Disclosure controls are procedures designed to ensure that information required to be disclosed in Gateway's reports filed under the Exchange Act, such as this report, is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, as Gateway's are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and with the participation of the Managing General Partner’s management, including the Chief Executive Officer and Chief Financial Officer, Gateway has evaluated the effectiveness of its disclosure controls and procedures applicable to each of the Series as well as to the total partnership pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures applicable to each of the Series as well as to the total partnership are effective. There were no changes in Gateway’s internal control over financial reporting during the year ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, Gateway’s internal control over financial reporting.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Gateway’s management is responsible for establishing and maintaining adequate internal control over financial reporting for Gateway. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of Gateway’s financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect Gateway’s transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of its financial statements; providing reasonable assurance that receipts and expenditures of Gateway’s assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Gateway’s assets that could have a material effect on Gateway’s financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of Gateway’s financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of Gateway’s internal control over financial reporting applicable to each of the Series as well as to the total partnership based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that Gateway’s internal control over financial reporting applicable to each of the Series as well as to the total partnership was effective as of March 31, 2011.
With respect to the Rule 13a-14(a)/15d-14(a) Certifications of the President and Chief Financial Officer, respectively, of the Managing General Partner of Gateway (see Exhibits 31.1 and 31.2 included herein), such certifications are applicable to each of the Series as well as to the total partnership.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Gateway has no directors or executive officers. Gateway's affairs are managed and controlled by the Managing General Partner. Certain information concerning the directors and certain officers of the Managing General Partner are set forth below.
Raymond James Tax Credit Funds, Inc. - Managing General Partner
Raymond James Tax Credit Funds, Inc. is the Managing General Partner and is responsible for decisions pertaining to the acquisition and sale of Gateway's interests in the Project Partnerships and other matters related to the business operations of Gateway. Certain officers and the directors of the Managing General Partner are as follows:
Ronald M. Diner, age 67, is President and a Director. He is a Senior Vice President of Raymond James & Associates, Inc., with whom he has been employed since June 1983. Mr. Diner received an MBA degree from Columbia University (1968) and a BS degree from Trinity College (1966). Prior to joining Raymond James & Associates, Inc., he managed the broker-dealer activities of Pittway Real Estate, Inc., a real estate development firm. He was previously a loan officer at Marine Midland Realty Credit Corp., and spent three years with Common, Dann & Co., a New York regional investment firm. He has served as a member of the Board of Directors of the Council for Rural Housing and Development, a national organization of developers, managers and syndicators of properties developed under the RECD Section 515 program, and is a member of the Board of Directors of the Florida Council for Rural Housing and Development. Mr. Diner has been a speaker and panel member at state and national seminars relating to the low-income housing credit.
J. Davenport Mosby III, age 55, is a Vice President and a Director. He is a Senior Managing Director of Raymond James & Associates, Inc. which he joined in 1982. Mr. Mosby received an MBA from the Harvard Business School (1982). He graduated magna cum laude with a BA from Vanderbilt University where he was elected to Phi Beta Kappa.
Raymond James Tax Credit Funds, Inc. is a wholly owned subsidiary of Raymond James Financial, Inc. (“RJF”). RJF has adopted a Business Ethics and Corporate Policy that is applicable to the officers and employees of Raymond James Tax Credit Funds, Inc., the Managing General Partner of Gateway. That policy is posted on RJF’s Internet website at http://www.raymondjames.com under “Our Company” --- Investor Relations --- Corporate Governance --- Employee Code of Ethics.
Raymond James Partners, Inc. -
Raymond James Partners, Inc. was formed to act as the general partner, with affiliated corporations, in limited partnerships sponsored by Raymond James Financial, Inc.
The officers and directors of Raymond James Partners, Inc. are as follows:
J. Davenport Mosby III is a Director and President.
Ronald M. Diner is a Director and Vice President.
Mary Jean Kissner is a Vice President.
Sandra Humphries is Secretary and Treasurer. She also serves in the same capacities for the Managing General Partner.
Item 11.
Item 11. Executive Compensation
Gateway has no directors or officers.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Neither of the General Partners own any units of the outstanding securities of Gateway as of March 31, 2011. Ronald M. Diner, President of Raymond James Tax Credit Funds, Inc. owns 5 units of Series 7. None of the other directors and officers own any units of the outstanding securities of Gateway as of March 31, 2011.
Gateway is a Limited Partnership and therefore does not have voting shares of stock. To the knowledge of Gateway, no person owns of record or beneficially, more than 5% of Gateway's outstanding units.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
Gateway has no officers or directors. However, under the terms of the public offering, various kinds of compensation and fees are payable to the General Partners and its affiliates during the organization and operations of Gateway. Additionally, the General Partners will receive distributions from Gateway if there is cash available for distribution or residual proceeds as defined in the Agreement. The amounts and kinds of compensation and fees are described on pages 24 to 26 of the Prospectus under the caption “Management Compensation”, which is incorporated herein by reference.
The Payable to General Partners primarily represents the asset management fees and general and administrative expenses owed to the General Partners at the end of the period. It is unsecured, due on demand and, in accordance with the Agreement, non-interest bearing. Within the next 12 months, the Managing General Partner does not intend to demand payment on the portion of Asset Management Fees payable classified as long-term on the Balance Sheet.
For the years ended March 31, 2011, 2010 and 2009 the General Partners and affiliates are entitled to compensation and reimbursement for costs and expenses incurred by Gateway as follows:
Asset Management Fee - The Managing General Partner is entitled to receive an annual asset management fee equal to the greater of (i) $2,000 for each limited partnership in which Gateway invests, or (ii) 0.275% of Gateway's gross proceeds from the sale of limited partnership interests. In either event (i) or (ii), the maximum amount may not exceed 0.2% of the aggregate cost (Gateway's capital contribution plus Gateway's share of the Properties' mortgage) of Gateway's interest in properties owned by the Project Partnerships. The asset management fee will be paid only after all other expenses of Gateway have been paid. These fees are included in the Statements of Operations.
General and Administrative Expenses - The Managing General Partner is reimbursed for general and administrative expenses of Gateway on an accountable basis. This expense is included in the Statements of Operations. During fiscal year 2011, the General Partner ceased further allocations of general and administrative expenses to Gateway.
Total unpaid asset management fees and administrative expenses payable to the General Partners, which are included on the Balance Sheet as of March 31, 2011 and 2010 are as follows:
Item 14.
Item 14. Principal Accounting Fees & Services
Audit Fees
The aggregate fees billed by Gateway’s principal accounting firm, Reznick Group, P.C., for professional services rendered for the audit of the annual financial statements, various matters related to SEC filings, and review of financial statements included in Gateway’s quarterly report on Form 10-Q amounted to $77,900 for the years ended March 31, 2011 and 2010.
Tax Fees
During fiscal 2011 and 2010, Spence, Marston, Bunch, Morris and Co. was engaged to prepare Gateway’s federal tax return, for which they billed $9,500 for the years ended March 31, 2011 and 2010, respectively.
Other Fees
The two members of Raymond James Tax Credit Funds, Inc. Board of Directors, Ronald M. Diner and J. Davenport Mosby III also serve as the members of the Audit Committee on behalf of Gateway. The audit committee charter requires that the committee approve the engagement of the principal accounting firm prior to the rendering of any audit or non-audit services. During fiscal 2011, 100% of the audit related and other services and 100% of the tax services were pre-approved by the Audit Committee.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
a. (1) Financial Statements
(2) Financial Statement Schedules -
Schedule III - Real Estate and Accumulated Depreciation of Property Owned by Project Partnerships
Schedule IV - Mortgage loans on real estate
All other schedules are omitted because they are not applicable or not required, or because the required information is shown either in the financial statements or the notes thereto.
(3) Exhibit Listing
Exhibit
Number Description
3.1
Amended Certificate of Limited Partnership of Gateway Tax Credit Fund III, Ltd. (Filed as an Exhibit to Registration Statement on Form S-11, File No. 33-44238, and incorporated herein by reference.)
4.1
The form of Partnership Agreement of the Partnership (included as Exhibit "A" to the Prospectus, File No. 33-44238, and incorporated herein by reference.)
31.1
Certification required by Rule 15d-14(a).(Filed herewith.)
31.2
Certification required by Rule 15d-14(a).(Filed herewith.)
Certification required by Rule 15d-14(b).(Filed herewith.)
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
NOTES TO SCHEDULE III
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
NOTES TO SCHEDULE III
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY OWNED BY PROJECT PARTNERSHIPS INVESTED IN
AS OF DECEMBER 31, 2010
NOTES TO SCHEDULE III
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 2010
GATEWAY TAX CREDIT FUND III LTD.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 2010
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
GATEWAY TAX CREDIT FUND III, LTD.
(A Florida Limited Partnership)
By: Raymond James Tax Credit Funds, Inc.
(the Managing General Partner)
Date: July 1, 2011
By:/s/ Ronald M. Diner
Ronald M. Diner
President and Director
Date: July 1, 2011
By:/s/ J. Davenport Mosby III
J. Davenport Mosby III
Director
Date: July 1, 2011
By:/s/ Toni S. Matthews
Toni S. Matthews
Vice President and Chief Financial Officer
Date: July 1, 2011
By:/s/ Sandra C. Humphreys
Sandra C. Humphreys
Secretary and Treasurer