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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-21895
WNC HOUSING TAX CREDIT FUND V, L.P., SERIES 3
California 33-6163848
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17782 Sky Park Circle, Irvine CA 92614-6404
(714) 662-5565
3158 Redhill Avenue, Suite 120, Cosa Mesa CA 92626
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section12(b) of the Act:
NONE
Securities registered pursuant to section12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
1
Indicate by check mark whether the registrant is an accelerated filer.
Yes No X
----------- ---------------
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter.
INAPPLICABLE
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
NONE
2
PART I.
Item 1. Business
Organization
WNC Housing Tax Credit Fund V, L.P., Series 3 (the "Partnership") is a
California Limited Partnership formed under the laws of the State of California
on March 28, 1995, and commenced operations on October 24, 1995. The Partnership
was formed to acquire limited partnership interests in other limited
partnerships or limited liability companies ("Local Limited Partnerships") which
own multifamily apartment complexes that are eligible for low-income housing
federal and, in some cases, California income tax credits (the "Low Income
Housing Credit").
The general partner of the Partnership is WNC & Associates, Inc. (the "General
Partner" or "Associates" or "WNC"). The chairman and the president own
substantially all of the outstanding stock of Associates. The business of the
Partnership is conducted primarily through the General Partner as the
Partnership has no employees of its own.
Pursuant to a registration statement filed with the Securities and Exchange
Commission on July 26, 1995, the Partnership commenced a public offering of
25,000 Units of Limited Partnership Interest ("Units") at a price of $1,000 per
Unit. As of the close of the public offering, January 21, 1996 a total of 18,000
Limited Partnership Interests representing $17,558,985 had been sold.
Sempra Energy Financial, a California corporation, which is not an affiliate of
the Partnership or General Partner, has purchased 4,560 Units, which represents
25.3% of the Units outstanding for the Partnership. Sempra Energy Financial
invested $4,282,600. A discount of $277,400 was allowed due to a volume
discount. Western Financial Savings Bank, which is not an affiliate of the
Partnership or General Partner, has purchased 1,068 units, which represent 5.9%
of the Units outstanding for the Partnership. Western Financial Savings Bank
invested $1,000,000. A discount of $68,000 was allowed due to a volume discount.
See Item 12(a) in this 10-K.
Description of Business
The Partnership's principal business objective is to provide its Limited
Partners with Low Income Housing Credits. The Partnership's principal business
therefore consists of investing as a limited partner or non-managing member in
Local Limited Partnerships each of which will own and operate a multi-family
housing complex (the "Housing Complex") which will qualify for the Low Income
Housing Credit. In general, under Section 42 of the Internal Revenue Code, an
owner of low-income housing can receive the Low Income Housing Credit to be used
to reduce Federal taxes otherwise due in each year of a ten-year period. In
general, under Section 17058 of the California Revenue and Taxation Code, an
owner of low-income housing can receive the Low Income Housing Credit to be used
against California taxes otherwise due in each year of a four-year period. The
Housing Complex is subject to a fifteen-year compliance period (the "Compliance
Period"), and under state law may have to be maintained as low income housing
for 30 or more years.
In general, in order to avoid recapture of Low Income Housing Credits, the
Partnership does not expect that it will dispose of its interests in Local
Limited Partnerships ("Local Limited Partnership Interests") or approve the sale
by any Local Limited Partnership of its Housing Complex prior to the end of the
applicable Compliance Period. Because of (i) the nature of the Housing
Complexes, (ii) the difficulty of predicting the resale market for low-income
housing 15 or more years in the future, and (iii) the ability of government
lenders to disapprove of transfer, it is not possible at this time to predict
whether the liquidation of the Partnership's assets and the disposition of the
proceeds, if any, in accordance with the Partnership's Agreement of Limited
Partnership, dated December 31, 1995 (the "Partnership Agreement"), will be able
to be accomplished promptly at the end of the 15-year period. If a Local Limited
Partnership is unable to sell its Housing Complex, it is anticipated that the
local general partner ("Local General Partner") will either continue to operate
such Housing Complex or take such other actions as the Local General Partner
believes to be in the best interest of the Local Limited Partnership.
Notwithstanding the preceding, circumstances beyond the control of the General
Partner or the Local General Partners may occur during the Compliance Period,
which would require the Partnership to approve the disposition of a Housing
Complex prior to the end thereof, possibly resulting in recapture of Low Income
Housing Credits.
3
As of March 31, 2003, the Partnership had invested in seventeen Local Limited
Partnerships. Each of these Local Limited Partnerships owns a Housing Complex
that is eligible for the federal Low Income Housing Credit. Certain Local
Limited Partnerships may also benefit from government programs promoting low- or
moderate-income housing.
Certain Risks and Uncertainties
An investment in the Partnership and the Partnership's investments in Local
Limited Partnerships and their Housing Complexes are subject to risks. These
risks may impact the tax benefits of an investment in the Partnership, and the
amount of proceeds available for distribution to the Limited Partners, if any,
on liquidation of the Partnership's investments. Some of those risks include the
following:
The Low Income Housing Credit rules are extremely complicated. Noncompliance
with these rules results in the loss of future Low Income Housing Credit s and
the fractional recapture of Low Income Housing Credits already taken. In most
cases the annual amount of Low Income Housing Credits that an individual can use
is limited to the tax liability due on the person's last $25,000 of taxable
income. The Local Limited Partnerships may be unable to sell the Housing
Complexes at a profit. Accordingly, the Partnership may be unable to distribute
any cash to its investors. Low Income Housing Credits may be the only benefit
from an investment in the Partnership.
The Partnership has invested in a limited number of Local Limited Partnerships.
Such limited diversity means that the results of operation of each single
Housing Complex will have a greater impact on the Partnership. With limited
diversity, poor performance of one Housing Complex could impair the
Partnership's ability to satisfy its investment objectives. Each Housing Complex
is subject to mortgage indebtedness. If a Local Limited Partnership failed to
pay its mortgage, it could lose its Housing Complex in foreclosure. If
foreclosure were to occur during the first 15 years, the loss of any remaining
future Low Income Housing Credits, a fractional recapture of prior Low Income
Housing Credits, and a loss of the Partnership's investment in the Housing
Complex would occur. The Partnership is a limited partner or non-managing member
of each Local Limited Partnership. Accordingly, the Partnership will have very
limited rights with respect to management of the Local Limited Partnerships. The
Partnership will rely totally on the Local General Partners. Neither the
Partnership's investments in Local Limited Partnerships, nor the Local Limited
Partnerships' investments in Housing Complexes, are readily marketable. To the
extent the Housing Complexes receive government financing or operating
subsidies, they may be subject to one or more of the following risks:
difficulties in obtaining tenants for the Housing Complexes; difficulties in
obtaining rent increases; limitations on cash distributions; limitations on
sales or refinancing of Housing Complexes; limitations on transfers of interests
in Local Limited Partnerships; limitations on removal of Local General Partners;
limitations on subsidy programs; and possible changes in applicable regulations.
Uninsured casualties could result in loss of property and Low Income Housing
Credits and recapture of Low Income Housing Credits previously taken. The value
of real estate is subject to risks from fluctuating economic conditions,
including employment rates, inflation, tax, environmental, land use and zoning
policies, supply and demand of similar properties, and neighborhood conditions,
among others.
The ability of Limited Partners to claim tax losses from the Partnership is
limited. The IRS may audit the Partnership or a Local Limited Partnership and
challenge the tax treatment of tax items. The amount of Low Income Housing
Credits and tax losses allocable to the investors could be reduced if the IRS
were successful in such a challenge. The alternative minimum tax could reduce
tax benefits from an investment in the Partnership. Changes in tax laws could
also impact the tax benefits from an investment in the Partnership and/or the
value of the Housing Complexes.
No trading market for the Units exists or is expected to develop. Investors may
be unable to sell their Units except at a discount and should consider their
Units to be a long-term investment. Individual investors will have no recourse
if they disagree with actions authorized by a vote of the majority of Limited
Partners.
Exit Strategy
The IRS compliance period for low-income housing tax credit properties is
generally 15 years from occupancy following construction or rehabilitation
completion. WNC was one of the first in the industry to offer investments using
the tax credit. Now these very first programs are completing their compliance
period.
4
With that in mind, we are continuing our review of the Partnership's holdings,
with special emphasis on the more mature properties such as any that have
satisfied the IRS compliance requirements. Our review will consider many factors
including extended use requirements on the property (such as those due to
mortgage restrictions or state compliance agreements), the condition of the
property, and the tax consequences to the investors from the sale of the
property.
Upon identifying those properties with the highest potential for a successful
sale, refinancing or syndication, we expect to proceed with efforts to liquidate
those properties. Our objective is to maximize the investors' return wherever
possible and, ultimately, to wind down those funds that no longer provide tax
benefits to investors. To date no properties in the Partnership have been
selected.
Item 2. Properties
Through its investments in Local Limited Partnerships, the Partnership holds
limited partnership interests in the Housing Complexes. The following table
reflects the status of the seventeen Housing Complexes as of the dates and for
the periods indicated:
5
---------------------------------- -----------------------------------------------
As of March 31, 2003 As of December 31, 2002
---------------------------------- -----------------------------------------------
Partnership's Original
Total Original Estimated Low Encumbrances
Investment in Amount of Income of Local
General Partner Local Limited Investment Number Housing Limited
Partnership Name Location Name Partnerships Paid to Date of Units Occupancy Credits Partnerships
- ------------------------------------------------------------------------------------------------------------------------------------
Alliance
Apartments Retro
I Limited Alliance, Development,
Partnership Nebraska Inc. $ 604,000 $ 604,000 19 95% $ 363,000 $ 591,000
Blessed Rock El Monte, Everland,
of El Monte California Inc. 2,511,000 2,511,000 137 100% 8,899,000 3,686,000
Trianon -
Broadway,
Broadway LLC, a New
Apartments, Mexico Limited
Limited Hobbs, New Liability
Partnership Mexico Company 2,029,000 2,029,000 78 71% 2,335,000 1,358,000
Urban
Residential
Cascade Management,
Pines, Atlanta, Inc., a Georgia
L.P. II Georgia Corporation 1,347,000 1,347,000 376 82% 2,533,000 *
Curtis Joseph A.
Associates Curtis, Shepard and
I,L.P. Nebraska Kenneth M. Vitor 88,000 88,000 12 100% 156,000 421,000
Escatawpa
Village
Associates,
Limited Escatawpa, Clifford E.
Partnership Mississippi Olsen 249,000 249,000 32 100% 458,000 887,000
Retro
Development,
Inc. of
Oklahoma
Hastings and Most
Apartments Worshipful
I, Limited Hastings, Prince Hall
Partnership Nebraska Grand Lodge 542,000 542,000 18 83% 1,005,000 584,000
Heritage Joseph A.
Apartments Berkeley, Shepard and
I, L.P. Missouri Kenneth M. Vitor 752,000 752,000 30 90% 1,333,000 635,000
Hillcrest
Associates,
A Limited Ontario,
Partnership Oregon Riley J. Hill 354,000 354,000 28 93% 683,000 1,287,000
Patten Towers, Chattanooga, Patten Towers
L.P. II Tennessee Partners, LLC 2,154,000 2,154,000 221 94% 3,938,000 6,258,000
* Results of Cascade Pines, L.P. II have not been audited for 2002 and thus have been excluded. See Note 3 to the financial
statements and report of independent certified public accountants.
6
---------------------------------- -----------------------------------------------
As of March 31, 2003 As of December 31, 2002
---------------------------------- -----------------------------------------------
Partnership's Original
Total Original Estimated Low Encumbrances
Investment in Amount of Income of Local
General Partner Local Limited Investment Number Housing Limited
Partnership Name Location Name Partnerships Paid to Date of Units Occupancy Credits Partnerships
- ------------------------------------------------------------------------------------------------------------------------------------
Prairieland
Properties
of Syracuse Syracuse, Kenneth M.
II, L.P. Kansas Vitor 85,000 85,000 8 88% 152,000 330,000
Raymond S.
King
Apartments Greensboro, Project
Limited North Homestead,
Partnership Carolina Inc. 437,000 437,000 23 91% 883,000 782,000
Rosedale Silver Deke Noftsker
Limited City, and ABO
Partnership New Mexico Corporation 309,000 309,000 32 94% 547,000 1,310,000
Shepherd South
Apartments Shepherd, Donald W.
I, Ltd. Texas Sowell 121,000 121,000 24 96% 223,000 562,000
Joseph A.
Solomon Shepard
Associates Solomon, and Kenneth
I,L.P. Kansas M. Vitor 138,000 138,000 16 81% 250,000 564,000
Apartment
Talladega Developers,
County Inc. and
Housing Talladega, Thomas H.
Ltd. Alabama Cooksey 653,000 653,000 30 93% 1,200,000 786,000
John C.
Loving,
Gordon D.
The Willows Brown, Jr.
Apartments Morganton, and Western
Limited North N.C.Housing
Partnership Carolina Partnership 841,000 841,000 36 100% 1,545,000 1,080,000
----------- ------------ ----- ---- ------------ -----------
$13,214,000 $ 13,214,000 1,120 91% $ 26,503,000 $21,121,000
=========== ============ ===== ==== ============ ===========
7
-------------------------------------------------------------------------------
For the year ended December 31, 2002
-------------------------------------------------------------------------------
Low Income Housing
Credits Allocated to
Partnership Name Rental Income Net (Loss) Income Partnership
- --------------------------------------------------------------------------------------------------------------------
Alliance Apartments I Limited
Partnership $ 72,000 $ (37,000) 99%
Blessed Rock of El Monte 796,000 (49,000) 49.49%
Broadway Apartments, Limited
Partnership 218,000 (207,000) 99%
Cascade Pines, L.P. II * * 98%
Curtis Associates I, L.P. 46,000 (11,000) 99%
Escatawpa Village Associates,
Limited Partnership 137,000 (34,000) 99%
Hastings Apartments I, Limited
Partnership 70,000 (38,000) 99%
Heritage Apartments I, L.P. 122,000 (38,000) 98.9%
Hillcrest Associates, A Limited
Partnership 187,000 (17,000) 99%
Patten Towers, L.P. II 1,190,000 (760,000) 99%
Prairieland Properties of Syracuse
II, L.P. 36,000 (9,000) 99%
Raymond S. King Apartments Limited
Partnership 73,000 (123,000) 99%
Rosedale Limited Partnership 134,000 (37,000) 99%
Shepherd South Apartments I, Ltd. 103,000 9,000 99%
Solomon Associates I, L.P. 55,000 (20,000) 99%
Talladega County Housing Ltd. 95,000 (47,000) 99%
The Willows Apartments Limited
Partnership 126,000 (37,000) 99%
------------ -------------
$ 3,460,000 $ (1,455,000)
============ =============
* Results of Cascade Pines, L.P. II have not been audited for 2002 and thus have been excluded. See
Note 3 to the financial statements and report of independent certified public accountants.
8
Item 3. Legal Proceedings
During 2000, Associates identified a potential problem with a developer who, at
the time, was the local general partner in six Local Limited Partnerships. The
Partnership has a 99% limited partnership interest in three of those six Local
Limited Partnerships. Those investments are Alliance Apartments I, Evergreen
Apartments I and Hastings Apartments I. All the properties continue to
experience operating deficits. The local general partner ceased funding the
operating deficits, which placed the Local Limited Partnerships in jeopardy of
foreclosure. Consequently, Associates voted to remove the local general partner
and the management company from the Local Limited Partnerships. After the local
general partner contested its removal, Associates commenced legal action on
behalf of the Local Limited Partnerships and was successful in getting a
receiver appointed to manage the Local Limited Partnerships and an unaffiliated
entity appointed as property manager. Associates was subsequently successful in
attaining a summary judgment to confirm the removal of the local general
partner, the receiver was discharged and Associates now controls all six of the
Local Limited Partnerships.
The six Local Limited Partnerships (hereinafter referred to as "Defendants")
were defendants in a separate lawsuit. The lawsuit was filed by eight other
partnerships in which the local general partner of the Local Limited
Partnerships is or was involved (the "Plaintiffs"). The Plaintiffs alleged that
the local general partner accepted funds from the Plaintiffs and improperly
loaned these funds to the Defendants. In July 2001, this lawsuit was settled for
an aggregate amount of $35,000, of which the Partnership's share was
approximately $17,500.
The Partnership has a 99% limited partnership investment in Cascade Pines, L.P.
II ("Cascade"). Cascade was a defendant in a wrongful death lawsuit and related
injury lawsuits. Cascade carries general liability and extended liability
insurance. The wrongful death claim has been compromised, released and
dismissed. Liability insurance covered the settlement. In the related injury
lawsuits, the insurers for both the general liability, limited to $2 million,
and extended liability insurance, limited to a further $15 million, have
acknowledged coverage for the potential loss, should the outcome be unfavorable.
Discovery for the related injury lawsuits is ongoing, but the management of
Cascade and WNC are unable to determine the outcome of these lawsuits at this
time or their impact, if any, on the Partnership's financial statements.
The Partnership has a 99% limited partnership investment in Heritage Apartments,
L.P. ("Heritage"). Heritage is a defendant in several wrongful death lawsuits
and related injury lawsuits. Heritage carries general liability and extended
liability insurance. Discovery for these lawsuits is ongoing, but the management
of Heritage and WNC are unable to determine the outcome of these lawsuits at
this time or their impact, if any, on the Partnership's financial statements.
Should Heritage be unsuccessful in its defense and the insurer denies coverage
or the insurance coverage proves to be inadequate, the Partnership may be
required to sell its investment or may otherwise lose its investment in
Heritage. Loss of the Heritage investment could result in the cessation and
recapture of tax credits and certain prior tax deductions.
The Partnership has a 99% limited partnership interest in Patten Towers, LP, II
("Patten Towers"). The Local General Partner, Patten Towers, LLC, of Patten
Towers was replaced. During the removal process, various unspecified claims were
made by members of Patten Towers, LLC against Patten Towers regarding such
removal. To date, those claims have not been specified. Accordingly, the
management of Patten Towers and WNC cannot assess the outcome of this lawsuit or
its impact, if any, on the Partnership's financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
NONE.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 5a.
(a) The Units are not traded on a public exchange but were sold through a
public offering. It is not anticipated that any public market will develop
for the purchase and sale of any Unit and none exists. Units can be
assigned only if certain requirements in the Partnership Agreement are
satisfied.
9
(b) At March 31, 2003, there were 853 Limited Partners.
(c) The Partnership was not designed to provide cash distributions to Limited
Partners in circumstances other than refinancing or disposition of its
investments in Local Limited Partnerships.
(d) No unregistered securities were sold by the Partnership during the year
ended March 31, 2003.
Item 5b.
NOT APPLICABLE
Item 6. Selected Financial Data
Selected balance sheet information for the Partnership is as follows:
March 31 December 31
------------------------------------------------------------------------ --------------
2003 2002 2001 2000 1999 1998
----------- ----------- ------------ ------------ ------------- --------------
ASSETS
Cash and cash equivalents $ 18,348 $ 78,098 $ 20,126 $ 365,942 $ 911,080 $ 950,372
Investments in limited
partnerships, net 6,780,198 8,970,406 10,245,015 10,968,078 12,250,789 12,559,525
Receivable from limited
partnerships 133,268 - - - - -
----------- ----------- ------------ ------------ ------------- --------------
$ 6,931,814 $ 9,048,504 $ 10,265,141 $ 11,334,020 $ 13,161,869 $ 13,509,897
=========== =========== ============ ============ ============= ==============
LIABILITIES
Payables to limited
partnerships $ - $ - $ - $ 72,938 $ 95,030 $ 95,030
Accrued expenses 4,000 6,067 82,699 149,735 - -
Accrued fees and expenses
due to general partner and
affiliates 273,603 87,990 39,531 26,540 28,677 62,496
PARTNERS' EQUITY 6,654,211 8,954,447 10,142,911 11,084,807 13,038,162 13,352,371
----------- ----------- ------------ ------------ ------------- --------------
$ 6,931,814 $ 9,048,504 $ 10,265,141 $ 11,334,020 $ 13,161,869 $ 13,509,897
=========== =========== ============ ============ ============= ==============
Selected results of operations, cash flows, and other information for the Partnership is as follows:
For the
For the Years Ended For the Three Months Year Ended
March 31 Ended March 31 December 31
----------------------------------------------------- ------------------------ -------------
2003 2002 2001 2000 1999 1998 1998
---------- ---------- ---------- ----------- --------- ----------- -------------
(Unaudited)
Income (loss) from
operations (Note 1) $ (153,994) $ (132,420) $ (285,185)$ (1,099,531)$ (20,391)$ (10,209)$ (52,065)
Equity in losses of
limited partnerships (2,146,242) (1,225,735) (656,711) (853,824) (293,818) (170,900) (1,175,333)
Gain on sale of investment
in limited partnership
interest - 169,691 - - - - -
---------- ---------- ---------- ----------- --------- ----------- -------------
Net loss $(2,300,236) $ (1,188,464) $ (941,896)$ (1,953,355)$ (314,209)$ (181,109)$ (1,227,398)
========== ========== ========== =========== ========= =========== =============
Net loss allocated to:
General partner $ (23,002 )$ (11,885) $ (9,419)$ (19,534)$ (3,142)$ (1,811)$ (12,274)
========== ========== ========== =========== ========= =========== =============
Limited partners $ (2,277,234)$ (1,176,579) $ (932,477)$ (1,933,821)$ (311,067)$ (179,298)$ (1,215,124)
========== ========== ========== =========== ========= =========== =============
Net loss per limited
partner unit $ (126.51 )$ (65.37) $ (51.80)$ (107.43)$ (17.28)$ (9.96)$ (67.51)
========== ========== ========== =========== ========= =========== =============
Outstanding weighted
limited partner units 18,000 18,000 18,000 18,000 18,000 18,000 18,000
========== ========== ========== =========== ========= =========== =============
10
Note 1 - Loss from operations in 2000 includes a charge for impairment losses on investments in limited partnerships of $955,804.
(See Note 2 to the audited financial statements.)
For the
For the Years Ended For the Three Months Years Ended
March 31 Ended March 31 December 31
-------------------------------------------------- ----------------------- ------------
2003 2002 2001 2000 1999 1998 1998
---------- ----------- ---------- --------- --------- ---------- ------------
(Unaudited)
Net cash provided by
(used in):
Operating activities $ (15,136) $ (122,013) $ (295,186) $ (59,825) $ (45,335) $ 27,295 $ 60,991
Investing activities (44,614) 179,985 (50,630) (485,313) 6,043 (515,359) (1,129,210)
---------- ----------- ---------- --------- --------- ---------- ------------
Net change in cash and
cash equivalents (59,750) 57,972 (345,816) (545,138) (39,292) (488,064) (1,068,219)
Cash and cash
equivalents, beginning
of period 78,098 20,126 365,942 911,080 950,372 2,018,591 2,018,591
---------- ----------- ---------- --------- --------- ---------- ------------
Cash and cash
equivalents, end of
period $ 18,348 $ 78,098 $ 20,126 $ 365,942 $ 911,080 $ 1,530,527 $ 950,372
========== =========== ========== ========= ========= ========== ============
Low Income Housing Credit per Unit was as follows for the years ended December 31:
2002 2001 2000 1999 1998
----------- ------------ ----------- ------------ -----------
Federal $ 131 $ 134 $ 136 $ 137 $ 131
State - - - - -
----------- ------------ ----------- ------------ -----------
Total $ 131 $ 134 $ 136 $ 137 $ 131
=========== ============ =========== ============ ===========
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
With the exception of the discussion regarding historical information,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other discussions elsewhere in this Form 10-K contain forward
looking statements. Such statements are based on current expectations subject to
uncertainties and other factors which may involve known and unknown risks that
could cause actual results of operations to differ materially from those
projected or implied. Further, certain forward-looking statements are based upon
assumptions about future events which may not prove to be accurate.
Risks and uncertainties inherent in forward looking statements include, but are
not limited to, our future cash flows and ability to obtain sufficient
financing, level of operating expenses, conditions in the low income housing tax
credit property market and the economy in general, as well as legal proceedings.
Historical results are not necessarily indicative of the operating results for
any future period.
Subsequent written and oral forward looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by
cautionary statements in this Form 10-K and in other reports we filed with the
Securities and Exchange Commission. The following discussion should be read in
conjunction with the Financial Statements and the Notes thereto included
elsewhere in this filing.
11
Critical Accounting Policies and Certain Risks and Uncertainties
The Company believes that the following discussion addresses the Partnership's
most significant accounting policies, which are the most critical to aid in
fully understanding and evaluating the Company's reported financial results, and
certain of the Partnership's risks and uncertainties.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could materially differ from those
estimates.
Method of Accounting For Investments in Limited Partnerships
The Partnership accounts for its investments in limited partnerships using the
equity method of accounting, whereby the Partnership adjusts its investment
balance for its share of the Local Limited Partnerships' results of operations
and for any contributions made or distributions received. The Partnership
reviews the carrying amount of an individual investment in a Local Limited
Partnership for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of such investment may not be recoverable.
Recoverability of such investment is measured by a comparison of the carrying
amount to future undiscounted net cash flows expected to be generated. If an
investment is considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the investment exceeds
fair value. The accounting policies of the Local Limited Partnerships are
generally consistent with those of the Partnership. Costs incurred by the
Partnership in acquiring the investments are capitalized as part of the
investment account and are being amortized over 30 years.
Equity in losses of the Local Limited Partnerships for each year ended March 31
have been recorded by the Partnership based on nine months of reported results
provided by the Local Limited Partnerships for each year ended December 31 and
on three months of results estimated by management of the Partnership for each
three-month period ended March 31. Management's estimate for the three-month
period is based on either actual unaudited results reported by the Local Limited
Partnerships or historical trends in the operations of the Local Limited
Partnerships. Equity in losses of the Local Limited Partnerships are recognized
in the financial statements until the related investment account is reduced to a
zero balance. Losses incurred after the investment account is reduced to zero
are not recognized. If the Local Limited Partnerships report net income in
future years, the Partnership will resume applying the equity method only after
its share of such net income equals the share of net losses not recognized
during the period(s) the equity method was suspended.
Distributions received from the Local Limited Partnerships are accounted for as
a reduction of the investment balance. Distributions received after the
investment has reached zero are recognized as income.
Income Taxes
No provision for income taxes has been recorded in the financial statements as
any liability for income taxes is the obligation of the partners of the
Partnership.
Certain Risks and Uncertainties
An investment in the Partnership and the Partnership's investments in Local
Limited Partnerships and their Housing Complexes are subject to risks. These
risks may impact the tax benefits of an investment in the Partnership, and the
amount of proceeds available for distribution to the Limited Partners, if any,
on liquidation of the Partnership's investments. Some of those risks include the
following:
The Low Income Housing Credit rules are extremely complicated. Noncompliance
with these rules results in the loss of future Low Income Housing Credit s and
the fractional recapture of Low Income Housing Credits already taken. In most
cases the annual amount of Low Income Housing Credits that an individual can use
is limited to the
12
tax liability due on the person's last $25,000 of taxable income. The Local
Limited Partnerships may be unable to sell the Housing Complexes at a profit.
Accordingly, the Partnership may be unable to distribute any cash to its
investors. Low Income Housing Credits may be the only benefit from an investment
in the Partnership.
The Partnership has invested in a limited number of Local Limited Partnerships.
Such limited diversity means that the results of operation of each single
Housing Complex will have a greater impact on the Partnership. With limited
diversity, poor performance of one Housing Complex could impair the
Partnership's ability to satisfy its investment objectives. Each Housing Complex
is subject to mortgage indebtedness. If a Local Limited Partnership failed to
pay its mortgage, it could lose its Housing Complex in foreclosure. If
foreclosure were to occur during the first 15 years, the loss of any remaining
future Low Income Housing Credits, a fractional recapture of prior Low Income
Housing Credits, and a loss of the Partnership's investment in the Housing
Complex would occur. The Partnership is a limited partner or non-managing member
of each Local Limited Partnership. Accordingly, the Partnership will have very
limited rights with respect to management of the Local Limited Partnerships. The
Partnership will rely totally on the Local General Partners. Neither the
Partnership's investments in Local Limited Partnerships, nor the Local Limited
Partnerships' investments in Housing Complexes, are readily marketable. To the
extent the Housing Complexes receive government financing or operating
subsidies, they may be subject to one or more of the following risks:
difficulties in obtaining tenants for the Housing Complexes; difficulties in
obtaining rent increases; limitations on cash distributions; limitations on
sales or refinancing of Housing Complexes; limitations on transfers of interests
in Local Limited Partnerships; limitations on removal of Local General Partners;
limitations on subsidy programs; and possible changes in applicable regulations.
Uninsured casualties could result in loss of property and Low Income Housing
Credits and recapture of Low Income Housing Credits previously taken. The value
of real estate is subject to risks from fluctuating economic conditions,
including employment rates, inflation, tax, environmental, land use and zoning
policies, supply and demand of similar properties, and neighborhood conditions,
among others.
The ability of Limited Partners to claim tax losses from the Partnership is
limited. The IRS may audit the Partnership or a Local Limited Partnership and
challenge the tax treatment of tax items. The amount of Low Income Housing
Credits and tax losses allocable to the investors could be reduced if the IRS
were successful in such a challenge. The alternative minimum tax could reduce
tax benefits from an investment in the Partnership. Changes in tax laws could
also impact the tax benefits from an investment in the Partnership and/or the
value of the Housing Complexes.
No trading market for the Units exists or is expected to develop. Investors may
be unable to sell their Units except at a discount and should consider their
Units to be a long-term investment. Individual investors will have no recourse
if they disagree with actions authorized by a vote of the majority of Limited
Partners.
To date, certain Local Limited Partnerships have incurred significant operating
losses and have working capital deficiencies. In the event these Local Limited
Partnerships continue to incur significant operating losses, additional capital
contributions by the Partnership and/or the Local General Partner may be
required to sustain the operations of such Local Limited Partnerships. If
additional capital contributions are not made when they are required, the
Partnership's investment in certain of such Local Limited Partnerships could be
impaired, and the loss and recapture of the related tax credits could occur.
Uncertainty and Commitments with Respect to Investments in Alliance and Hastings
The Partnership has two investments accounted for under the equity method,
consisting of 99% limited partnership interests in each of Alliance Apartments
I, Limited Partnership ("Alliance") and Hastings Apartments I, Limited
Partnership ("Hastings"), and previously had a 99% limited partnership
investment in Evergreen Apartments I, Limited Partnership ("Evergreen").
During the year ended March 31, 2000, Alliance, Evergreen and Hastings were
experiencing operational difficulties and negative cash flows from operations,
and ceased paying their lenders. Foreclosure procedures were commenced by these
three Local Limited Partnerships' lenders. Management performed an evaluation of
the Partnership's remaining investment balances in Alliance, Evergreen and
Hastings, including any anticipated costs and determined that an impairment
adjustment was necessary. An impairment loss of $995,804 was recognized at March
31, 2000. This impairment loss included $644,589 in remaining book value of the
Partnership's investments in Alliance, Evergreen and Hastings, $205,080 and
$74,631 of cash advances, a $50,000 accrual for anticipated legal costs, and
$21,504 of estimated accounting and other related costs.
13
As a result of the foregoing, the Partnership, Alliance, Hastings, and a WNC
subsidiary executed a work-out agreement with their lender (the "Agreement"),
which was effective December 14, 2001. The balance of the indebtedness due and
owing to the lender by Alliance was satisfied by the execution of two promissory
notes. The first note totals $116,000, bears interest at 7% per annum, and
requires principal and interest payments totaling $800 per month through
February 2011, at which date the unpaid principal balance is due. The second
note totals $328,000, bears interest at 1% per annum, and has payments due
monthly out of available cash flow, as defined, with the unpaid principal
balance due February 2011. The balance of the indebtedness due and owing to the
lender by Hastings was also satisfied by the execution of two promissory notes.
The first note totals $165,000, bears interest at 7% per annum, and requires
principal and interest payments totaling $1,100 per month through September
2011, at which date the unpaid principal is due. The second note totals
$261,000, bears interest at 1% per annum, and has payments due monthly out of
available cash flow, as defined, with the unpaid principal balance due September
2011. The Partnership and a WNC subsidiary have executed a guarantee for the
payment of both notes of Alliance and Hastings. In addition, several other
commitments were made. Alliance and Hastings executed a grant deed to the lender
in the event that either entity defaults under the terms and provisions of the
notes. The deeds are held in escrow, and if Alliance or Hastings defaults on
either note, the lender may, at its option, record the respective deed. In
addition, the Partnership has given the lender as additional collateral all of
its residual value interests, as defined, in all of the Local Limited
Partnerships. The Partnership and the Local Limited Partnerships are prohibited
from selling, assigning, transferring or further encumbering the Housing
Complexes retained by each Local Limited Partnership.
As a result of the operating difficulties mentioned above, there is uncertainty
as to additional costs, if any, that the Partnership may incur in connection
with its investment in Alliance and Hastings and as to whether the Partnership
will ultimately retain its interest in these Local Limited Partnerships. In the
event the Partnership does not successfully retain its interest in Alliance and
Hastings, the Partnership would be exposed to the cessation and recapture of the
related tax credits. The Partnership's financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
On July 19, 2001, Evergreen's Housing Complex was sold for a gross sales price
of $1,300,000, which after payment of its outstanding loans and closing costs,
yielded net proceeds to the Partnership of approximately $170,000 in the form of
a return of advances. As the investment in Evergreen together with cash advances
had been previously impaired, the entire proceeds were reflected as a gain on
sale of investments in Local Limited Partnerships of $169,691, for the period
ended March 31, 2002. Due to the sale of the property, approximately $428,000
(unaudited) of tax credits are no longer available to the Partnership's
investors ($23.80 per Limited Partner Unit). In addition, there can be no
assurance that tax credits and loss deductions previously taken will not be
subject to recapture in the future.
Uncertainty with Respect to Investments in Cascade, Patten Towers and Heritage
The Partnership has a 99% limited partnership investment in Cascade Pines, L.P.
II ("Cascade"). Cascade is a defendant in a wrongful death lawsuit and related
injury lawsuits. Cascade carries general liability and extended liability
insurance. The wrongful death claim has been compromised, released and
dismissed. Liability insurance covered the settlement. In the related injury
lawsuits, the insurers for both the general liability, limited to $2 million,
and extended liability insurance, limited to a further $15 million, have
acknowledged coverage for the potential loss, should the outcome be unfavorable.
Discovery for the related injury lawsuits is ongoing; management of Cascade and
WNC are unable to determine the outcome of these lawsuits at this time or their
impact, if any, on the Partnership's financial statements. Should Cascade be
unsuccessful in its defense and the insurance coverage proves to be inadequate,
Cascade's assets could be subject to an adverse judgment. This could result in
the loss of the Cascade investment, which could result in the recapture of tax
credits and certain prior tax deductions. The carrying value of its investment
in Cascade is $0 at March 31, 2003. The Partnership's financial statements,
presented elsewhere herein, do not reflect any adjustments that may result from
any unfavorable outcome that may occur upon the ultimate resolution of this
uncertainty.
14
One Local Limited Partnership, Patten Towers, in which the Partnership owns a
99% interest, has a promissory note payable aggregating approximately $6,025,000
as of December 31, 2002 which was funded with proceeds from the issuance of
Multifamily Housing Revenue Bonds. Patten Towers failed to make timely principal
payments of approximately $200,000 for the year ended December 31, 2002 in
accordance with the note payable. Consequently, the Local Limited Partnership is
in default of its bond covenants and the property could be foreclosed on by the
Bond Trustee to satisfy its obligations under the bonds. These conditions raise
substantial doubt as to the Local Limited Partnership's ability to continue as a
going concern. Patten Towers is attempting to negotiate a refinance of the
bonds, but as of July 8, 2003 the past due principal payments owed have not been
paid and the bonds are fully payable under the event of a default. The lender is
working with Patten Towers to assist in improving property operations and has
held off pursuing foreclosure action against the property. There can be no
assurances that Patten Towers will be successful in its negotiations.
Accordingly, Patten Towers is subject to the risk of foreclosure and sale of the
property by the lender which would result in the loss and potential cessation
and recapture of certain tax losses and the tax credits. As a result, there is
an uncertainty as to the Partnership's ability to ultimately realize the
carrying value of its investment in Patten Towers, which approximated $806,000
at March 31, 2003. The Partnership's financial statements, presented elsewhere
herein, do not reflect any adjustments that may result from any unfavorable
outcome that may occur upon the ultimate resolution of this uncertainty. At
March 31, 2003, the Partnership had advanced $133,268 to Patten Towers to
facilitate a workout plan. A promissory note was executed by the Partnership and
Patten Towers for the aforementioned advance totaling $132,473 plus interest
equal to 10% per annum, payable by Patten Towers on demand or by August 9, 2012.
The Partnership has a 99% limited partnership investment in Heritage Apartments,
L.P. ("Heritage"). Heritage is a defendant in several wrongful death lawsuits
and related injury lawsuits. Heritage carries general liability and extended
liability insurance. Discovery for these lawsuits is ongoing, but the management
of Heritage and WNC are unable to determine the outcome of these lawsuits at
this time or their impact, if any, on the Partnership's financial statements.
Should Heritage be unsuccessful in its defense and the insurer denies coverage
or the insurance coverage proves to be inadequate, the Partnership may be
required to sell its investment or may otherwise lose its investment in
Heritage, which approximated $485,000 at March 31, 2003. Loss of the Heritage
investment could result in the cessation and recapture of tax credits and
certain prior tax deductions.
Financial Condition
The Partnership's assets at March 31, 2003 consisted primarily of $18,000 in
cash and aggregate investments in the 17 Local Limited Partnerships of
$6,780,000 and receivables of $133,000. Liabilities at March 31, 2003 primarily
consisted of $4,000 of accrued expenses and $274,000 due to general partner or
affiliates for advances.
Results of Operations
Year Ended March 31, 2003 Compared to Year Ended March 31, 2002 The
Partnership's net loss for the year ended March 31, 2003 was $(2,300,000),
reflecting an increase of $(1,112,000) from the net loss experienced for the
year ended March 31, 2000 of $(1,188,000). The increase in net loss is due,
primarily to an increase in the equity in losses of limited partnerships which
increased by $(920,000) along with a decrease in income of $14,000 and gain on
sale of investment of $170,000 and an increase in other operating expenses of
$7,000.
Year Ended March 31, 2002 Compared to Year Ended March 31, 2001 The Partnerships
net loss for the year ended March 31, 2001 was $(1,188,000), reflecting an
increase of $(246,000) from the net loss experienced for the year ended March
31, 2000 of $(942,000). The increase in net loss is due, primarily to an
increase in the equity in losses of limited partnerships which increased by
$(569,000) offset by an increase in income of $171,000 and a decrease in other
operating expenses of $151,000.
15
Liquidity and Capital Resources
Year Ended March 31, 2003 Compared to Year Ended March 31, 2002 Net decrease in
cash for the year ended March 31, 2003 was $(60,000) compared to a net increase
in cash for the year ended March 31, 2002 of $58,000. The change of $(118,000)
was due primarily to the change of $(225,000) in investing activities along with
change of $107,000 in cash provided by operating activities. The change in
investing activities resulted primarily from the proceeds of $170,000 from the
sale of the Evergreen investment in the prior year, along with the decrease in
cash advances to limited partnerships of $73,000 offset by a decrease in
capitalized acquisition cost of $10,000 and decrease of $2,000 in distributions
from limited partnership. The change in operating activities was caused
primarily by the decrease in other operating expenses of $145,000.
Year Ended March 31, 2002 Compared to Year Ended March 31, 2001 Net increase in
cash for the year ended March 31, 2001 was $58,000 compared to a net decrease in
cash for the year ended March 31, 2000 of $(346,000). The change of $404,000 was
due primarily to the change of $173,000 in operating activities along with
change of $231,000 in cash provided by investing activities. The change in
investing activities resulted primarily from the proceeds of $170,000 from the
sale of the Evergreen investment along with the decrease in cash advances to
limited partnerships of $73,000 offset by a decrease in capitalized acquisition
cost of $10,000 and decrease of $2,000 in distributions from limited
partnership. The change in operating activities was caused primarily by the
decrease in other operating expenses of $145,000.
During the year ended March 31, 2003 and 2002, accrued payables, which consist
primarily of related party management fees due to the General Partner, increased
by $186,000 and $48,000, respectively. The General Partner does not anticipate
that these accrued fees will be paid in full until such time as capital reserves
are in excess of future foreseeable working capital requirements of the
Partnership.
The Partnership does not expect its future cash flows, together with its net
available assets at March 31, 2003, to be sufficient to meet all currently
foreseeable future cash requirements. Accordingly, WNC has agreed to provide
advances sufficient to fund the operations and working capital requirements of
the Partnership through September 30, 2004.
Future Contractual Cash Obligations
The following table summarizes our future contractual cash obligations as of March 31, 2003:
2004 2005 2006 2007 2008 Thereafter Total
--------- ---------- ---------- --------- --------- ----------- ------------
Asset Management Fees $ 185,625 $ 49,500 $ 49,500 $ 49,500 $ 49,500 $ 2,079,000 $ 2,462,625
Capital Contributions
Payable to Lower Tier
Partnerships - - - - - - -
--------- ---------- ---------- --------- --------- ----------- ------------
Total contractual cash
obligations $ 185,625 $ 49,500 $ 49,500 $ 49,500 $ 49,500 $ 2,079,000 $ 2,462,625
========= ========== ========== ========= ========= =========== ============
(1) Asset Management Fees are payable annually until termination of the
Partnership, which is to occur no later than 2050. The estimate of the fees
payable included herein assumes the retention of the Partnership's interest
in all Housing Complexes until 2050. Amounts due to the General Partners as
of March 31, 2003 have been included in the 2004 column. The General
Partner does not anticipate that these fees will be paid until such time as
capital reserves are in excess of the future foreseeable working capital
requirements of the Partnership.
For additional information on our Asset Management Fees to Lower Tier
Partnerships, see Note 4 to the financial statements included elsewhere herein.
16
Exit Strategy
The IRS compliance period for low-income housing tax credit properties is
generally 15 years from occupancy following construction or rehabilitation
completion. WNC was one of the first in the industry to offer investments using
the tax credit. Now these very first programs are completing their compliance
period.
With that in mind, we are continuing our review of the Partnership's holdings,
with special emphasis on the more mature properties including those that have
satisfied the IRS compliance requirements. Our review will consider many factors
including extended use requirements on the property (such as those due to
mortgage restrictions or state compliance agreements), the condition of the
property, and the tax consequences to the investors from the sale of the
property.
Upon identifying those properties with the highest potential for a successful
sale, refinancing or syndication, we expect to proceed with efforts to liquidate
those properties. Our objective is to maximize the investors' return wherever
possible and, ultimately, to wind down those funds that no longer provide tax
benefits to investors. To date no properties in the Partnership have been
selected.
Impact of New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations", which requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred with the associated asset retirement costs being capitalized as a part
of the carrying amount of the long-lived asset. SFAS No. 143 also includes
disclosure requirements that provide a description of asset retirement
obligations and reconciliation of changes in the components of those
obligations. The statement is effective for fiscal years beginning after June
15, 2002. The adoption of SFAS No. 143 did not have a material effect on the
Partnerhip's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets," which addresses accounting and financial reporting for the
impairment or disposal of long-lived assets. This standard was effective for the
Partnership's financial statements beginning January 1, 2002. The implementation
of SFAS No. 144 did not have a material impact on the Partnership's financial
position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinded three previously issued statements and amended SFAS No.
13, "Accounting for Leases." The statement provides reporting standards for debt
extinguishments and provides accounting standards for certain lease
modifications that have economic effects similar to sale-leaseback transactions.
The statement is effective for certain lease transactions occurring after May
15, 2002 and all other provisions of the statement shall be effective for
financial statements issued on or after May 15, 2002. The implementation of SFAS
No. 145 did not have a material impact on the Partnership's financial position
or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which updates accounting and reporting
standards for personnel and operational restructurings. The Partnership adopted
SFAS No. 146 for exit, disposal or other restructuring activities initiated
after December 31, 2002. The adoption of SFAS No. 146 did not have a material
effect on the Partnership's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The adoption of FIN 45 did not have a
material impact on the Partnership's finacial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to SFAS No. 123." SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method on accounting for stock-based employee compensation. The
implementation of SFAS No. 148 did not have a material effect on the
Partnership's financial position or results of operations.
17
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." The partnership is currently
evaluating whether FIN 46 will have a material impact on the Partnership's
financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
NOT APPLICABLE
Item 8. Financial Statements and Supplementary Data
18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
WNC Housing Tax Credit Fund V, L.P., Series 3
We have audited the accompanying balance sheets of WNC Housing Tax Credit Fund
V, L.P., Series 3 (a California Limited Partnership) (the "Partnership") as of
March 31, 2003 and 2002, and the related statements of operations, partners'
equity (deficit) and cash flows for the years ended March 31, 2003, 2002 and
2001. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. A significant portion of the financial
statements of the limited partnerships in which the Partnership is a limited
partner were audited by other auditors whose reports have been furnished to us.
As discussed in Note 3 to the financial statements, the Partnership accounts for
its investments in limited partnerships using the equity method. The portion of
the Partnership's investment in limited partnerships audited by other auditors
represented 85% and 87% of the total assets of the Partnership at March 31, 2003
and 2002, respectively, and 98%, 96% and 68% of the Partnership's equity in
losses of limited partnerships for the years ended March 31, 2003, 2002 and
2001, respectively. Our opinion, insofar as it relates to the amounts included
in the financial statements for the limited partnerships which were audited by
others, is based solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
the other auditors provide a reasonable basis for our opinion.
As more thoroughly discussed in Note 3 to the financial statements, the
Partnership was unable to obtain audited financial statements for one of its
investments, Cascade Pines, L.P., II, ("Cascade Pines"), as of and for the year
ended December 31, 2002. The Partnership's investment in Cascade Pines had a
zero balance (unaudited) as of March 31, 2003. The results of operations
recorded by the Partnership with respect to its investment in Cascade Pines
during the year ended March 31, 2003, totaled $1,239,000 (unaudited), of which
it recorded $567,000 (unaudited) to reduce its investment in Cascade to zero.
In our opinion, except for the effects of such adjustments and disclosures, if
any, as might have been determined to be necessary had an audit of the 2002
financial statements of Cascade Pines been obtained, the financial statements
referred to above present fairly, in all material respects, the financial
position of WNC Housing Tax Credit Fund V, L.P., Series 3 (a California Limited
Partnership) as of March 31, 2003 and 2002, and the results of its operations
and its cash flows for the years ended March 31, 2003, 2002 and 2001, in
conformity with accounting principles generally accepted in the United States of
America.
As further discussed in Note 7 to the accompanying financial statements, the
Partnership retains an interest in two partnerships, Heritage and Patten Towers.
The carrying value of the Partnership's interest in the two partnerships
aggregated $1,291,000 at March 31, 2003. Certain issues exist that create
uncertainty as to the ability of each Partnership to ultimately realize its
investment in such Local Limited Partnerships.
The Partnership currently has insufficient working capital to fund its
operations. As discussed in Note 7 to the accompanying financial statements, WNC
& Associates, Inc., has agreed to provide advances sufficient enough to fund the
operations and working capital requirements of the Partnership through September
30, 2004.
/s/ BDO SEIDMAN, LLP
Costa Mesa, California
July 8, 2003
19
WNC HOUSING TAX CREDIT FUND V, L.P., SERIES 3
(A California Limited Partnership)
BALANCE SHEETS
March 31
---------------------------------
2003 2002
------------- ----------------
ASSETS
Cash and cash equivalents $ 18,348 $ 78,098
Investments in limited partnerships, net (Notes 2, 3, 4, and 7) 6,780,198 8,970,406
Receivables from Limited Partners 133,268 -
------------- ----------------
$ 6,931,814 $ 9,048,504
============= ================
LIABILITIES AND PARTNERS' EQUITY
(DEFICIT)
Liabilities:
Accrued expenses $ 4,000 $ 6,067
Accrued fees and advances due to General
Partner and affiliates (Note 4) 273,603 87,990
------------- ----------------
Total liabilities 277,603 94,057
------------- ----------------
Commitments and contingencies (Notes 2, 3 and 7)
Partners' equity (deficit):
General partner (108,949) (85,947)
Limited partners (25,000 units authorized,
18,000 units issued and outstanding) 6,763,160 9,040,394
------------- ----------------
Total partners' equity 6,654,211 8,954,447
------------- ----------------
$ 6,931,814 $ 9,048,504
============= ================
See report of independent certified public accountants and accompanying notes to financial statements.
20
WNC HOUSING TAX CREDIT FUND V, L.P., SERIES 3
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
For the Years Ended
March 31
-----------------------------------------------
2003 2002 2001
------------ ------------- ----------------
Interest income $ 402 $ 2,008 $ 9,790
Reporting fees 14,823 27,078 18,049
------------ ------------- ----------------
Total income 15,225 29,086 27,839
------------ ------------- ----------------
Operating expenses:
Amortization (Notes 3 and 4) 38,580 38,580 44,044
Asset management fees (Note 4) 49,500 49,500 50,152
Legal, accounting and other 81,139 73,426 218,828
------------ ------------- ----------------
Total operating expenses 169,219 161,506 313,024
------------ ------------- ----------------
Loss from operations (153,994) (132,420) (285,185)
Equity in losses of limited
partnerships (Note 3) (2,146,242) (1,225,735) (656,711)
Gain on sale of investment in limited
partnership interest (Note 2) - 169,691 -
------------ ------------- ----------------
Net loss $ (2,300,236) $ (1,188,464)$ (941,896)
============ ============= ================
Net loss allocated to:
General partner $ (23,002) $ (11,885)$ (9,419)
============ ============= ================
Limited partners $ (2,277,234) $ (1,176,579)$ (932,477)
============ ============= ================
Net loss per limited partner unit $ (126.51) $ (65.37)$ (51.80)
============ ============= ================
Outstanding weighted limited
partner units 18,000 18,000 18,000
============ ============= ================
See report of independent certified public accountants and accompanying notes to financial statements.
21
WNC HOUSING TAX CREDIT FUND V, L.P., SERIES 3
(A California Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
For The Years Ended March 31, 2003, 2002 and 2001
General Limited Total
Partner Partners
--------------- --------------- ---------------
Partners' equity (deficit) at March 31, 2000 $ (64,643) $ 11,149,450 $ 11,084,807
Net loss (9,419) (932,477) (941,896)
--------------- --------------- ---------------
Partners' equity (deficit) at March 31, 2001 (74,062) 10,216,973 10,142,911
Net loss (11,885) (1,176,579) (1,188,464)
--------------- --------------- ---------------
Partners' equity (deficit) at March 31, 2002 (85,947) 9,040,394 8,954,447
Net loss (23,002) (2,277,234) (2,300,236)
--------------- --------------- ---------------
Partners' equity (deficit) at March 31, 2003 $ (108,949) $ 6,763,160 $ 6,654,211
=============== =============== ===============
See report of independent certified public accountants and accompanying notes to financial statements.
22
WNC HOUSING TAX CREDIT FUND V, L.P., SERIES 3
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended
March 31
------------------------------------------------
2003 2002 2001
------------ ------------ --------------
Cash flows from operating activities:
Net loss $ (2,300,236) $ (1,188,464) $ (941,896)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization 38,580 38,580 44,044
Equity in losses of limited
partnerships 2,146,242 1,225,735 656,711
Gain on sale of investment in Limited
Partnership - (169,691) -
Change in accrued fees and
expenses due to General Partner
and affiliates 102,345 48,459 12,991
Change in accrued expenses (2,067) (76,632) (67,036)
------------ ------------ --------------
Net cash used in operating activities (15,136) (122,013) (295,186)
------------ ------------ --------------
Cash flows from investing activities:
Investments in limited partnerships, net - - (72,938)
Capitalized acquisition costs and fees - - 10,452
Distributions from limited
partnerships 5,386 10,294 11,856
Proceeds on sale of investment is Limited
Partnership, net - 169,691 -
Advances to Local Limited Partnerships (133,268) - -
Advances from WNC 83,268 - -
------------ ------------ --------------
Net cash provided by (used in)
investing activities (44,614) 179,985 (50,630)
------------ ------------ --------------
Net increase (decrease) in cash and cash
equivalents (59,750) 57,972 (345,816)
Cash and cash equivalents, beginning of period 78,098 20,126 365,942
------------ ------------ --------------
Cash and cash equivalents, end of period $ 18,348 $ 78,098 $ 20,126
============ ============ ==============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION
Taxes paid $ 800 $ 800 $ 800
============ ============ ==============
See report of independent certified public accountants and accompanying notes to financial statements.
23
WNC HOUSING TAX CREDIT FUND V, L.P., SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For The Years Ended March 31, 2003, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Organization
- ------------
WNC Housing Tax Credit Fund V, L.P., Series 3, a California Limited Partnership
(the "Partnership"), was formed on March 28, 1995, under the laws of the state
of California. The Partnership was formed to invest primarily in other limited
partnerships (the "Local Limited Partnerships") which own and operate
multi-family housing complexes (the "Housing Complex") that are eligible for low
income housing credits. The local general partners (the "Local General
Partners") of each Local Limited Partnership retain responsibility for
maintaining, operating and managing the Housing Complex.
The general partner is WNC & Associates, Inc. ("WNC"). The chairman and
president own substantially all of the outstanding stock of WNC. The business of
the Partnership is conducted primarily through WNC, as the Partnership has no
employees of its own.
The Partnership shall continue in full force and effect until December 31, 2050
unless terminated prior to that date pursuant to the partnership agreement or
law.
The financial statements include only activity relating to the business of the
Partnership, and do not give effect to any assets that the partners may have
outside of their interests in the Partnership, or to any obligations, including
income taxes, of the partners.
The partnership agreement authorized the sale of up to 25,000 units at $1,000
per Unit ("Units"). The offering of Units concluded in January 1996, at which
time 18,000 Units representing subscriptions in the amount of $17,558,985, net
of $441,015 of discounts for volume purchases, had been accepted. The General
Partner has a 1% interest in operating profits and losses, taxable income and
losses, cash available for distribution from the Partnership and tax credits.
The limited partners will be allocated the remaining 99% of these items in
proportion to their respective investments.
After the limited partners have received proceeds from a sale or refinancing
equal to their capital contributions and their return on investment (as defined
in the Partnership Agreement) and the General Partner has received proceeds
equal to its capital contribution and a subordinated disposition fee (as
described in Note 3) from the remainder, any additional sale or refinancing
proceeds will be distributed 90% to the limited partners (in proportion to their
respective investments) and 10% to the General Partner.
24
WNC HOUSING TAX CREDIT FUND V, L.P., SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended March 31, 2003, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Risks and Uncertainties
- -----------------------
An investment in the Partnership and the Partnership's investments in Local
Limited Partnerships and their Housing Complexes are subject to risks. These
risks may impact the tax benefits of an investment in the Partnership, and the
amount of proceeds available for distribution to the Limited Partners, if any,
on liquidation of the Partnership's investments. Some of those risks include the
following:
The Low Income Housing Credit rules are extremely complicated. Noncompliance
with these rules results in the loss of future Low Income Housing Credit s and
the fractional recapture of Low Income Housing Credits already taken. In most
cases the annual amount of Low Income Housing Credits that an individual can use
is limited to the tax liability due on the person's last $25,000 of taxable
income. The Local Limited Partnerships may be unable to sell the Housing
Complexes at a profit. Accordingly, the Partnership may be unable to distribute
any cash to its investors. Low Income Housing Credits may be the only benefit
from an investment in the Partnership.
The Partnership has invested in a limited number of Local Limited Partnerships.
Such limited diversity means that the results of operation of each single
Housing Complex will have a greater impact on the Partnership. With limited
diversity, poor performance of one Housing Complex could impair the
Partnership's ability to satisfy its investment objectives. Each Housing Complex
is subject to mortgage indebtedness. If a Local Limited Partnership failed to
pay its mortgage, it could lose its Housing Complex in foreclosure. If
foreclosure were to occur during the first 15 years, the loss of any remaining
future Low Income Housing Credits, a fractional recapture of prior Low Income
Housing Credits, and a loss of the Partnership's investment in the Housing
Complex would occur. The Partnership is a limited partner or non-managing member
of each Local Limited Partnership. Accordingly, the Partnership will have very
limited rights with respect to management of the Local Limited Partnerships. The
Partnership will rely totally on the Local General Partners. Neither the
Partnership's investments in Local Limited Partnerships, nor the Local Limited
Partnerships' investments in Housing Complexes, are readily marketable. To the
extent the Housing Complexes receive government financing or operating
subsidies, they may be subject to one or more of the following risks:
difficulties in obtaining tenants for the Housing Complexes; difficulties in
obtaining rent increases; limitations on cash distributions; limitations on
sales or refinancing of Housing Complexes; limitations on transfers of interests
in Local Limited Partnerships; limitations on removal of Local General Partners;
limitations on subsidy programs; and possible changes in applicable regulations.
Uninsured casualties could result in loss of property and Low Income Housing
Credits and recapture of Low Income Housing Credits previously taken. The value
of real estate is subject to risks from fluctuating economic conditions,
including employment rates, inflation, tax, environmental, land use and zoning
policies, supply and demand of similar properties, and neighborhood conditions,
among others.
The ability of Limited Partners to claim tax losses from the Partnership is
limited. The IRS may audit the Partnership or a Local Limited Partnership and
challenge the tax treatment of tax items. The amount of Low Income Housing
Credits and tax losses allocable to the investors could be reduced if the IRS
were successful in such a challenge. The alternative minimum tax could reduce
tax benefits from an investment in the Partnership. Changes in tax laws could
also impact the tax benefits from an investment in the Partnership and/or the
value of the Housing Complexes.
No trading market for the Units exists or is expected to develop. Investors may
be unable to sell their Units except at a discount and should consider their
Units to be a long-term investment. Individual investors will have no recourse
if they disagree with actions authorized by a vote of the majority of Limited
Partners.
25
WNC HOUSING TAX CREDIT FUND V, L.P., SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For The Years Ended March 31, 2003, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Exit Strategy
- -------------
The IRS compliance period for low-income housing tax credit properties is
generally 15 years from occupancy following construction or rehabilitation
completion. WNC was one of the first in the industry to offer investments using
the tax credit. Now these very first programs are completing their compliance
period.
With that in mind, the Partnership is continuing to review the Partnership's
holdings, with special emphasis on the more mature properties including those
that have satisfied the IRS compliance requirements. The Partnership's review
will consider many factors including extended use requirements on the property
(such as those due to mortgage restrictions or state compliance agreements), the
condition of the property, and the tax consequences to the investors from the
sale of the property.
Upon identifying those properties with the highest potential for a successful
sale, refinancing or syndication, the Partnership expects to proceed with
efforts to liquidate those properties. The Partnership's objective is to
maximize the investors' return wherever possible and, ultimately, to wind down
those funds that no longer provide tax benefits to investors. To date no
properties in the Partnership have been selected.
Method of Accounting For Investments in Limited Partnerships
- ------------------------------------------------------------
The Partnership accounts for its investments in limited partnerships using the
equity method of accounting, whereby the Partnership adjusts its investment
balance for its share of the Local Limited Partnership's results of operations
and for any contributions made and distributions received. The Partnership
reviews the carrying amount of an individual investment in a Local Limited
Partnership for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of such investment may not be recoverable.
Recoverability of such investment is measured by a comparison of the carrying
amount to future undiscounted net cash flows expected to be generated. If an
investment is considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the investment exceeds
fair value. The accounting policies of the Local Limited Partnerships are
generally consistent with those of the Partnership. Costs incurred by the
Partnership in acquiring the investments are capitalized as part of the
investment account and are being amortized over 30 years (see Notes 3 and 4).
Losses from Local Limited Partnerships for the years ended March 31, 2003, 2002
and 2001 have been recorded by the Partnership based on nine months of reported
results provided by the Local Limited Partnerships and on three months of
results estimated by management of the Partnership. Management's estimate for
the three-month period is based on either actual unaudited results reported by
the Local Limited Partnerships or historical trends in the operations of the
Local Limited Partnerships. Losses from the Local Limited Partnerships allocated
to the Partnership will not be recognized to the extent that the investment
balance would be adjusted below zero. As soon as the investment balance reaches
zero, amortization of the related costs of acquiring the investment are
accelerated to the extent of losses available.
26
WNC HOUSING TAX CREDIT FUND V, L.P., SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For The Years Ended March 31, 2003, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Offering Expenses
- -----------------
Offering expenses consist of underwriting commissions, legal fees, printing,
filing and recordation fees, and other costs incurred in connection with selling
limited partnership interests in the Partnership. The General Partner is
obligated to pay all offering and organization costs in excess of 15% (including
sales commissions) of the total offering proceeds. Offering expenses are
reflected as a reduction of limited partners' capital and amounted to $2,132,000
at the end of all periods presented.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could materially differ from those
estimates.
Cash and Cash Equivalents
- -------------------------
The Partnership considers highly liquid investments with remaining maturities of
three months or less when purchased to be cash equivalents. As of March 31, 2003
and 2002, the Partnership had no cash equivalents.
Net Loss Per Limited Partner Unit
- ---------------------------------
Net loss per limited partner unit is calculated pursuant to Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Net loss per unit
includes no dilution and is computed by dividing loss available to limited
partners by the weighted average number of units outstanding during the period.
Calculation of diluted net income per unit is not required.
Reporting Comprehensive Income
- ------------------------------
The Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income established standards for the reporting and display of
comprehensive income (loss) and its components in a full set of general-purpose
financial statements. The Partnership had no items of other comprehensive income
during the years ended March 31, 2003, 2002 and 2001, as defined by SFAS No.
130.
New Accounting Pronouncements
- -----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations", which requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred with the associated asset retirement costs being capitalized as a part
of the carrying amount of the long-lived asset. SFAS No. 143 also includes
disclosure requirements that provide a description of asset retirement
obligations and reconciliation of changes in the components of those
obligations. The statement is effective for fiscal years beginning after June
15, 2002. The adoption of SFAS No. 143 did not have a material effect on the
Partnerhip's financial position or results of operations.
27
WNC HOUSING TAX CREDIT FUND V, L.P., SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For The Years Ended March 31, 2003, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
In August 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets," which addresses accounting and financial reporting for the
impairment or disposal of long-lived assets. This standard was effective for the
Partnership's financial statements beginning January 1, 2002. The implementation
of SFAS No. 144 did not have a material impact on the Partnership's financial
position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinded three previously issued statements and amended SFAS No.
13, "Accounting for Leases." The statement provides reporting standards for debt
extinguishments and provides accounting standards for certain lease
modifications that have economic effects similar to sale-leaseback transactions.
The statement is effective for certain lease transactions occurring after May
15, 2002 and all other provisions of the statement shall be effective for
financial statements issued on or after May 15, 2002. The implementation of SFAS
No. 145 did not have a material impact on the Partnership's financial position
or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which updates accounting and reporting
standards for personnel and operational restructurings. The Partnership adopted
SFAS No. 146 for exit, disposal or other restructuring activities initiated
after December 31, 2002. The adoption of SFAS No. 146 did not have a material
effect on the Partnership's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The adoption of FIN 45 did not have a
material impact on the Partnership's finacial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to SFAS No. 123." SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method on accounting for stock-based employee compensation. The
implementation of SFAS No. 148 did not have a material effect on the
Partnership's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." The partnership is currently
evaluating whether FIN 46 will have a material impact on the Partnership's
financial position or results of operations.
28
WNC HOUSING TAX CREDIT FUND V, L.P., SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For The Years Ended March 31, 2003, 2002 and 2001
NOTE 2 - UNCERTAINTY AND COMMITMENTS WITH RESPECT TO INVESTMENTS IN ALLIANCE AND
- --------------------------------------------------------------------------------
HASTINGS
--------
The Partnership has two investments accounted for under the equity method,
consisting of 99% limited partnership interests in each of Alliance Apartments
I, Limited Partnership ("Alliance") and Hastings Apartments I, Limited
Partnership ("Hastings"), and previously had a 99% limited partnership
investment in Evergreen Apartments I, Limited Partnership ("Evergreen").
During the year ended March 31, 2000, Alliance, Evergreen and Hastings were
experiencing operational difficulties and negative cash flows from operations,
and ceased paying their lenders. Foreclosure procedures were commenced by these
two Local Limited Partnerships' lenders. Management performed an evaluation of
the Partnership's remaining investment balances in Alliance, Evergreen and
Hastings, including the cash advances noted above and other anticipated costs
and determined that an impairment adjustment was necessary. An impairment loss
of $995,804 was recognized at March 31, 2000. This impairment loss included
$644,589 in remaining book value of the Partnership's investments in Alliance,
Evergreen and Hastings, $205,080 and $74,631 of cash advances, a $50,000 accrual
for anticipated legal costs, and $21,504 of estimated accounting and other
related costs.
Due to the operational difficulties and negative cash flows in 2000, the lender
of these two Local Limited Partnerships commenced foreclosure procedures. As a
result, the Partnership, Alliance, Hastings, and a WNC subsidiary executed a
workout agreement with their lender (the "Agreement"), which was effective
December 14, 2001. The balance of the indebtedness due and owing to the lender
by Alliance was satisfied by the execution of two promissory notes. The first
note totals $116,000, bears interest at 7% per annum, and requires principal and
interest payments totaling $800 per month through February 2011, at which date
the unpaid principal balance is due. The second note totals $328,000, bears
interest at 1% per annum, and has payments due monthly out of available cash
flow, as defined, with the unpaid principal balance due February 2011. The
balance of the indebtedness due and owing to the lender by Hastings was also
satisfied by the execution of two promissory notes. The first note totals
$165,000, bears interest at 7% per annum, and requires principal and interest
payments totaling $1,100 per month through September 2011, at which date the
unpaid principal is due. The second note totals $261,000, bears interest at 1%
per annum, and has payments due monthly out of available cash flow, as defined,
with the unpaid principal balance due September 2011. The Partnership and a WNC
subsidiary have executed a guarantee for the payment of both notes of Alliance
and Hastings. In addition, several other commitments were made. Alliance and
Hastings executed a grant deed to the lender in the event that either entity
defaults under the terms and provisions of the notes. The deeds are held in
escrow, and if Alliance or Hastings defaults on either note, the lender may, at
its option, record the respective deed. In addition, the Partnership has
assigned the lender as additional collateral its residual value interests, as
defined, in all of the Local Limited Partnerships. The Partnership and the Local
Limited Partnerships are prohibited from selling, assigning, transferring or
further encumbering the Housing Complexes retained by each Local Limited
Partnership.
As a result of the operating difficulties mentioned above, there is uncertainty
as to additional costs, if any, that the Partnership may incur in connection
with its investment in Alliance and Hastings and as to whether the Partnership
will ultimately retain its interest in these Local Limited Partnerships. In the
event the Partnership does not successfully retain its interest in Alliance and
Hastings, the Partnership would be exposed to the cessation and recapture of the
related tax credits. The Partnership's financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
On July 19, 2001, Evergreen's Housing Complex was sold for a gross sales price
of $1,300,000, which after payment of its outstanding loans and closing costs,
yielded net proceeds to the Partnership of approximately $170,000 in the form of
a return of advances. As the investment in Evergreen together with cash advances
had been previously impaired, the entire proceeds were reflected as a gain on
sale of investments in Limited Partnerships of $169,691, for the year ended
March 31, 2002. Due to the sale of the property, approximately $428,000
(unaudited) of tax credits is no longer available to the Partnership's investors
($23.80 per Limited Partner Unit). In addition, there can be no assurance that
tax credits and loss deductions previously taken will not be subject to
recapture in the future.
29
WNC HOUSING TAX CREDIT FUND V, L.P., SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For The Years Ended March 31, 2003, 2002 and 2001
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS
- --------------------------------------------
As of March 31, 2003, the Partnership has acquired limited partnership interests
in 17 Local Limited Partnerships, each of which owns one Housing Complex
consisting of an aggregate of 1,120 apartment units. The respective Local
General Partners of the Local Limited Partnerships manage the day to day
operations of the entities. Significant Local Limited Partnership business
decisions require approval from the Partnership. The Partnership, as a limited
partner, is generally entitled to 99%, as specified in the Local Limited
Partnership agreements, of the operating profits and losses, taxable income and
losses and tax credits of the Local Limited Partnerships, except for one of the
investments in which it is entitled to 49.49% of such amounts.
As of July 8, 2003, the Partnership had not obtained audited financial
statements for one of its investments, Cascade Pines, L.P., II ("Cascade
Pines"), as of and for the year ended December 31, 2002. As a result, the
Partnership has not included the financial information of Cascade Pines in the
combined condensed financial statements presented herein. The Partnership's
investment in Cascade Pines totaled $0 (unaudited) at March 31, 2003. The
Partnership's estimate of its interest in the results of operations of Cascade
Pines totaled $(1,239,000) (unaudited) for the year ended March 31, 2003, of
which it recorded $567,000 (unaudited) to reduce its investment in Cascade to
zero. The combined condensed financial information presented in this footnote
for 2001 and 2000 has been restated to also exclude the amounts of Cascade
Pines. The combined condensed financial statements presented herein for December
31, 2001 previously included total assets of $8,871,000 and net losses of
$(452,000) for Cascade Pines. The combined condensed financial statements
presented herein for December 31, 2000 previously included net losses of
$(1,000) for Cascade Pines.
The Partnership's investments in Local Limited Partnerships as reflected in the
balance sheet at March 31, 2003 and 2002, are approximately $96,000 and
$863,000, respectively, greater than the Partnership's equity as shown in the
Local Limited Partnerships' combined financial statements presented below. This
difference is partially due to acquisition costs related to the acquisition of
the investments that have been capitalized in the Partnership's investment
account, unrecorded losses and capital contributions payable to the limited
partnerships which were netted against partner capital in the Local Limited
Partnerships' financial statements. The Partnership's investment is lower than
the Partnership's equity as shown in the Local Limited Partnership's combined
financial statements due to the losses recorded by the Partnership for the three
month period ended March 31, and the impairment of two Local Limited
Partnerships (see Note 2). The Partnership's investment is higher than the
Partnership's equity as shown in the Local Limited Partnership's combined
financial statements as Cascade Pines has been excluded from such statements.
Equity in losses of Local Limited Partnerships is recognized in the financial
statements until the related investment account is reduced to a zero balance.
Losses incurred after the investment account is reduced to zero are not
recognized. If the Local Limited Partnerships report net income in future years,
the Partnership will resume applying the equity method only after its share of
such net income equals the share of net losses not recognized during the
period(s) the equity method was suspended.
Distributions received by limited partners are accounted for as a reduction of
the investment balance. Distributions received after the investment has reached
zero are recognized as income.
At March 31, 2003, the investment accounts in certain Local Limited Partnerships
have reached a zero balance. Consequently, a portion of the Partnership's
estimate of its share of losses for the years ended March 31, 2003, 2002 and
2001 amounting to approximately $583,000, $6,000 and $92,000, respectively, have
not been recognized. As of March 31, 2003, the aggregate share of net losses not
recognized by the Partnership amounted to $681,000.
30
WNC HOUSING TAX CREDIT FUND V, L.P., SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For The Years Ended March 31, 2003, 2002 and 2001
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS, continued
- -------------------------------------------------------
Following is a summary of the equity method activity of the investments in Local
Limited Partnerships for the periods presented:
For the Years Ended
March 31
---------------------------------------------------
2003 2002 2001
------------- --------------- ----------------
Investments per balance sheet, beginning of period $ 8,970,406 $ 10,245,015 10,968,078
Capitalized acquisition fees and costs - - (10,452)
Distributions received (5,386) (10,294) (11,856)
Equity in losses of limited partnerships (2,146,242) (1,225,735) (656,711)
Amortization of capitalized acquisition fees
and costs (38,580) (38,580)