Attached files
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EXCEL - IDEA: XBRL DOCUMENT - INDEPENDENCE TAX CREDIT PLUS LP IV | Financial_Report.xls |
EX-31.1 - EX-31.1 - INDEPENDENCE TAX CREDIT PLUS LP IV | v328217_ex31-1.htm |
EX-32.1 - EX-32.1 - INDEPENDENCE TAX CREDIT PLUS LP IV | v328217_ex32-1.htm |
EX-32.2 - EX-32.2 - INDEPENDENCE TAX CREDIT PLUS LP IV | v328217_ex32-2.htm |
EX-31.2 - EX-31.2 - INDEPENDENCE TAX CREDIT PLUS LP IV | v328217_ex31-2.htm |
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
______________
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012
OR
o | 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 0-17015
INDEPENDENCE TAX CREDIT PLUS L.P. IV
(Exact name of registrant as specified
in its charter)
Delaware | 13-3809869 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
100 Church Street, New York, New York | 10007 | |
(Address of principal executive offices) | (Zip Code) |
(212) 317-5700 |
Registrant’s telephone number, including area code |
(Former name, former address and former fiscal year, if changed since last report) |
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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
INDEPENDENCE TAX CREDIT PLUS L.P. IV
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, | March 31, | |||||||
2012 | 2012 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
Operating assets | ||||||||
Property and equipment - (at cost, net of accumulated depreciation of $22,358,596 and $22,093,893, respectively) | $ | 12,195,731 | $ | 12,793,411 | ||||
Cash and cash equivalents | 1,437,990 | 793,022 | ||||||
Cash held in escrow | 1,558,944 | 1,565,843 | ||||||
Deferred costs (net of accumulated amortization of $680,713 and $788,767, respectively) | 365,279 | 398,033 | ||||||
Due from local general partners and affiliates (Note 2) | 479,553 | 522,314 | ||||||
Other assets | 342,047 | 392,931 | ||||||
Total operating assets | 16,379,544 | 16,465,554 | ||||||
Assets from discontinued operations (Note 5) | ||||||||
Property and equipment held for sale, net of accumulated depreciation of $0 and $1,509,057, respectively | - | 1,381,810 | ||||||
Net assets held for sale | 324,718 | 411,857 | ||||||
Total assets from discontinued operations | 324,718 | 1,793,667 | ||||||
Total assets | $ | 16,704,262 | $ | 18,259,221 | ||||
LIABILITIES AND PARTNERS’ CAPITAL (DEFICIT) | ||||||||
Operating liabilities | ||||||||
Mortgage notes payable | $ | 20,786,777 | $ | 22,839,106 | ||||
Accounts payable | 309,785 | 375,336 | ||||||
Accrued interest payable | 6,039,259 | 6,316,039 | ||||||
Security deposits payable | 296,958 | 299,493 | ||||||
Interest rate swap (Note 3) | 77,000 | 76,000 | ||||||
Due to local general partners and affiliates (Note 2) | 1,436,233 | 1,582,351 | ||||||
Due to general partners and affiliates (Note 2) | 3,050,474 | 2,782,529 | ||||||
Total operating liabilities | 31,996,486 | 34,270,854 | ||||||
Liabilities from discontinued operations (Note 5) | ||||||||
Mortgage notes payable of assets held for sale | - | 562,445 | ||||||
Net liabilities held for sale | 42,818 | 228,155 | ||||||
Total liabilities from discontinued operations | 42,818 | 790,600 | ||||||
Total liabilities | 32,039,304 | 35,061,454 | ||||||
Commitments and contingencies (Note 6) | ||||||||
Partners’ capital (deficit) | ||||||||
Limited partners (45,844 BACs issued and outstanding) | (15,029,678 | ) | (17,112,707 | ) | ||||
General partners | (558,466 | ) | (579,507 | ) | ||||
Independence Tax Credit Plus L.P. IV total | (15,588,144 | ) | (17,692,214 | ) | ||||
Noncontrolling interests | 253,102 | 889,981 | ||||||
Total partners’ capital (deficit) | (15,335,042 | ) | (16,802,233 | ) | ||||
Total liabilities and partners’ capital (deficit) | $ | 16,704,262 | $ | 18,259,221 |
See accompanying notes to consolidated financial statements.
- 2 - |
INDEPENDENCE TAX CREDIT PLUS L.P. IV
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2012 | 2011 * | 2012 | 2011 * | |||||||||||||
Revenues | ||||||||||||||||
Rental income | $ | 1,138,186 | $ | 1,094,726 | $ | 2,246,466 | $ | 2,166,015 | ||||||||
Other | 11,829 | 19,474 | 38,902 | 42,991 | ||||||||||||
Total revenues | 1,150,015 | 1,114,200 | 2,285,368 | 2,209,006 | ||||||||||||
Expenses | ||||||||||||||||
General and administrative | 295,780 | 280,385 | 616,451 | 589,473 | ||||||||||||
General and administrative-related parties (Note 2) | 188,574 | 152,858 | 341,591 | 302,012 | ||||||||||||
Repairs and maintenance | 167,888 | 199,012 | 338,988 | 382,629 | ||||||||||||
Operating and other | 168,140 | 171,280 | 349,376 | 342,408 | ||||||||||||
Real estate taxes | 30,575 | 29,008 | 63,892 | 60,907 | ||||||||||||
Insurance | 42,319 | 50,733 | 83,711 | 92,151 | ||||||||||||
Interest | 273,378 | 320,411 | 544,668 | 599,439 | ||||||||||||
Change in fair value of interest rate swap (Note 3) | - | 45,367 | 1,000 | 77,601 | ||||||||||||
Depreciation and amortization | 193,907 | 196,133 | 387,816 | 385,102 | ||||||||||||
Total expenses from operations | 1,360,561 | 1,445,187 | 2,727,493 | 2,831,722 | ||||||||||||
Loss from operations | (210,546 | ) | (330,987 | ) | (442,125 | ) | (622,716 | ) | ||||||||
Income (loss) from discontinued operations (including gain on sale of properties) (Note 5) | 817,497 | 28,268 | 3,007,693 | (4,155 | ) | |||||||||||
Net income (loss) | 606,951 | (302,719 | ) | 2,565,568 | (626,871 | ) | ||||||||||
Net (income) loss attributable to noncontrolling interests from operations | (78 | ) | 935 | 311 | 1,115 | |||||||||||
Net income attributable to noncontrolling interests from discontinued operations | (436,293 | ) | (26,436 | ) | (461,809 | ) | (26,517 | ) | ||||||||
Net income attributable to noncontrolling interests | (436,371 | ) | (25,501 | ) | (461,498 | ) | (25,402 | ) | ||||||||
Net income (loss) attributable to Independence Tax Credit Plus L.P. IV | $ | 170,580 | $ | (328,220 | ) | $ | 2,104,070 | $ | (652,273 | ) | ||||||
Loss from operations – limited partners | (208,518 | ) | (326,752 | ) | (437,396 | ) | (615,385 | ) | ||||||||
Income (loss) from discontinued operations – limited partners | 377,392 | 1,814 | 2,520,425 | (30,365 | ) | |||||||||||
Net income (loss) – limited partners | $ | 168,874 | $ | (324,938 | ) | $ | 2,083,029 | $ | (645,750 | ) | ||||||
Number of BACs outstanding | 45,844 | 45,844 | 45,844 | 45,844 | ||||||||||||
Loss from operations– limited partners-per weighted average BAC | $ | (4.55 | ) | $ | (7.13 | ) | $ | (9.54 | ) | $ | (13.43 | ) | ||||
Income (loss) from discontinued operations– limited partners- per weighted average BAC | 8.24 | 0.04 | 54.98 | (0.66 | ) | |||||||||||
Net income (loss)– limited partners- per weighted average BAC | $ | 3.69 | $ | (7.09 | ) | $ | 45.44 | $ | (14.09 | ) |
* Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
- 3 - |
INDEPENDENCE TAX CREDIT PLUS L.P. IV
AND SUBSIDIARIES
Consolidated Statement of Changes in Partners’ Capital (Deficit)
(Unaudited)
Limited | General | Noncontrolling | ||||||||||||||
Total | Partners | Partner | Interests | |||||||||||||
Partners’ capital (deficit) – April 1, 2012 | $ | (16,802,233 | ) | $ | (17,112,707 | ) | $ | (579,507 | ) | $ | 889,981 | |||||
Net income | 2,565,568 | 2,083,029 | 21,041 | 461,498 | ||||||||||||
Distributions | (1,289,447 | ) | - | - | (1,289,447 | ) | ||||||||||
Contributions – write-off of related party debt | 191,070 | - | - | 191,070 | ||||||||||||
Partners’ capital (deficit) – September 30, 2012 | $ | (15,335,042 | ) | $ | (15,029,678 | ) | $ | (558,466 | ) | $ | 253,102 |
See accompanying notes to consolidated financial statements.
- 4 - |
INDEPENDENCE TAX CREDIT PLUS L.P. IV
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended | ||||||||
September 30, | ||||||||
2012 | 2011 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 2,565,568 | $ | (626,871 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 389,522 | 441,884 | ||||||
Gain on sale of properties | (2,917,069 | ) | - | |||||
Change in fair value of rate swap | 1,000 | 77,601 | ||||||
Changes in assets and liabilities: | ||||||||
Increase in cash held in escrow | (85,479 | ) | (39,080 | ) | ||||
Decrease (increase) in other assets | 47,596 | (213,678 | ) | |||||
Decrease in accounts payable | (122,582 | ) | (44,186 | ) | ||||
Increase in accrued interest payable | 106,599 | 261,463 | ||||||
Increase (decrease) in security deposit payable | 7,410 | (500 | ) | |||||
Decrease (increase) in due from general partner and affiliates | 42,761 | (65,751 | ) | |||||
Increase (decrease) in due to local general partners and affiliates | 11,683 | (16,777 | ) | |||||
Increase in due to general partner and affiliates | 263,945 | 148,425 | ||||||
Total adjustments | (2,254,614 | ) | 549,401 | |||||
Net cash provided by (used in) operating activities | 310,954 | (77,470 | ) | |||||
Cash flows from investing activities: | ||||||||
Decrease (increase) in cash held in escrow | 7,780 | (71,454 | ) | |||||
Acquisition of property and equipment | - | (4,149 | ) | |||||
Proceeds from sale of property | 2,450,000 | - | ||||||
Costs paid relating to sale of property | (547,846 | ) | - | |||||
Net repayments to local general partners and affiliates | (122,770 | ) | 3,940 | |||||
Net cash provided by (used in) investing activities | 1,787,164 | (71,663 | ) | |||||
Cash flows from financing activities: | ||||||||
Repayments of mortgage notes | (235,806 | ) | (233,485 | ) | ||||
Distributions to noncontrolling interests | (1,289,447 | ) | (77,653 | ) | ||||
Net cash used in financing activities | (1,525,253 | ) | (311,138 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 572,865 | (460,271 | ) | |||||
Cash and cash equivalents at beginning of period | 893,534 | 1,402,683 | ||||||
Cash and cash equivalents at end of period* | $ | 1,466,399 | $ | 942,412 | ||||
Summarized below are the components of the gain on sale of properties: | ||||||||
Proceeds from sale of property- net | $ | (1,902,154 | ) | $ | - | |||
Property and equipment, net of accumulated depreciation | 1,431,525 | - | ||||||
Deferred costs | 191,199 | - | ||||||
Other assets | 13,835 | - | ||||||
Cash held in escrow | 89,087 | - | ||||||
Accounts payable | 86,830 | - | ||||||
Mortgage payable | (2,378,968 | ) | - | |||||
Accrued interest | (386,661 | ) | - | |||||
Security deposits | (23,562 | ) | - | |||||
Due to local general partners and affiliates | (38,200 | ) | - |
* Cash and cash equivalents at end of period, includes cash and cash equivalents from discontinued operations of $28,409 and $0, respectively.
See accompanying notes to consolidated financial statements.
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INDEPENDENCE TAX CREDIT PLUS L.P. IV
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
NOTE 1 – General
The consolidated financial statements, as of September 30, 2012, include the accounts of Independence Tax Credit Plus L.P. IV (the “Partnership”) and eleven other limited partnerships (“subsidiary partnerships”, “subsidiaries” or “Local Partnerships”) owning affordable apartment complexes (“Properties”) that are eligible for the low-income housing tax credits. Some of the Properties may also be eligible for the historic rehabilitation tax credits. The general partner of the Partnership is Related Independence L.L.C., a Delaware limited liability company (the “General Partner”), which is managed by an affiliate of Centerline Holding Company (“Centerline”), the ultimate parent of the manager of the general partner of the General Partner. For information on Centerline’s audited balance sheet for the most recent fiscal year, see http://sec.gov. Through the rights of the Partnership and/or an affiliate of the General Partner, which affiliate has a contractual obligation to act on behalf of the Partnership to remove the general partner of the subsidiary partnerships (“Local General Partners”) and to approve certain major operating and financial decisions, the Partnership has a controlling financial interest in the subsidiary partnerships.
For financial reporting purposes, the Partnership’s second fiscal quarter ends September 30th. The second quarter for all subsidiaries ends June 30th. Accounts of the subsidiaries have been adjusted for intercompany transactions from July 1st through September 30th. The Partnership’s fiscal quarter ends three months after the subsidiaries in order to allow adequate time for the subsidiaries’ financial statements to be prepared and consolidated. All intercompany accounts and transactions with the subsidiary partnerships have been eliminated in consolidation.
In accordance with Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” (“ASC 810”), income attributable to noncontrolling interests amounted to approximately $436,000 and $26,000 and $461,000 and $25,000 for the three and six months ended September 30, 2012 and 2011, respectively. The Partnership’s investment in each subsidiary is equal to the respective subsidiary’s partners’ equity less noncontrolling interest capital, if any.
Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted or condensed. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Partnership’s Annual Report on Form 10-K for the year ended March 31, 2012.
The books and records of the Partnership are maintained on the accrual basis of accounting in accordance with GAAP. In the opinion of the General Partner of the Partnership, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position of the Partnership as of September 30, 2012, the results of its operations for the three and six months ended September 30, 2012 and 2011 and its cash flows for the six months ended September 30, 2012 and 2011. However, the operating results and cash flows for the six months ended September 30, 2012 may not be indicative of the results for the entire year.
Recent Accounting Pronouncements
In June 2012, the FASB issued under Accounting Standards update No. 2012-02 “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” The objective of these amendments in this ASU is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments are effective for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this accounting standard will not have a material effect on the Partnership’s condensed consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
NOTE 2 – Related Party Transactions
A) | Related Party Expenses |
An affiliate of the General Partner has a 0.01% interest as a special limited partner in each of the Local Partnerships.
The costs incurred to related parties from operations for the three and six months ended September 30, 2012 and 2011 were as follows:
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INDEPENDENCE TAX CREDIT PLUS L.P. IV
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2012 | 2011 * | 2012 | 2011 * | |||||||||||||
Partnership management fees (a) | $ | 66,550 | $ | 73,500 | $ | 136,125 | $ | 147,175 | ||||||||
Expense reimbursement (b) | 74,350 | 32,312 | 110,624 | 64,625 | ||||||||||||
Local administrative fee (c) | 11,000 | 8,375 | 21,000 | 16,750 | ||||||||||||
Total general and administrative-General Partners | 151,900 | 114,187 | 267,749 | 228,550 | ||||||||||||
Property management fees incurred to affiliates of the subsidiary partnerships’ general partners | 36,674 | 38,671 | 73,842 | 73,462 | ||||||||||||
Total general and administrative-related parties | $ | 188,574 | $ | 152,858 | $ | 341,591 | $ | 302,012 |
* Reclassified for comparative purposes.
The costs incurred to related parties from discontinued operations for the three and six months ended September 30, 2012 and 2011 were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2012 | 2011 * | 2012 | 2011 * | |||||||||||||
Local administrative fee (c) | $ | 1,000 | $ | 1,625 | $ | 2,000 | $ | 3,250 | ||||||||
Total general and administrative-General Partner | 1,000 | 1,625 | 2,000 | 3,250 | ||||||||||||
Property management fees incurred to affiliates of the subsidiary partnerships' general partners | 14,898 | 15,236 | 31,350 | 29,469 | ||||||||||||
Total general and administrative-related parties | $ | 15,898 | $ | 16,861 | $ | 33,350 | $ | 32,719 |
* Reclassified for comparative purposes.
(a) | The General Partner is entitled to receive a partnership management fee, after payment of all Partnership expenses, which together with the annual local administrative fees will not exceed a maximum of 0.5% per annum of invested assets (as defined in the Partnership Agreement), for administering the affairs of the Partnership. Subject to the foregoing limitation, the partnership management fee will be determined by the General Partner in its sole discretion based upon its review of the Partnership’s investments. Unpaid partnership management fees for any year are deferred without interest and will be payable out of sales or refinancing proceeds only to the extent of available funds after payments on all Partnership liabilities have been made other than those owed to the General Partner and its affiliates. Partnership management fees owed to the General Partner amounting to approximately $2,524,000 and $2,388,000 were accrued and unpaid as of September 30, 2012 and March 31, 2012, respectively. Current year partnership management fees may be paid out of operating reserves or refinancing and sales proceeds. However, the General Partner cannot demand payment of the deferred fees beyond the Partnership’s ability to pay them. |
(b) | The Partnership reimburses the General Partner and its affiliates for actual Partnership operating expenses incurred by the General Partner and its affiliates on the Partnership’s behalf. The amount of reimbursement from the Partnership is limited by the provisions of the Partnership Agreement. Another affiliate of the General Partner performs asset monitoring for the Partnership. These services include site visits and evaluations of the subsidiary partnerships’ performance. Expense reimbursements and asset monitoring fees owed to the General Partner and its affiliates amounting to approximately $237,000 and $127,000 were accrued and unpaid as of September 30, 2012 and March 31, 2012, respectively. The General Partner does not intend to demand payment of the deferred payables beyond the Partnership’s ability to pay them. The Partnership anticipates that these will be paid, if at all, from working capital reserves or future sales proceeds. |
(c) | Independence SLP IV L.P., a special limited partner of the subsidiary partnerships, is entitled to receive a local administrative fee of up to $5,000 per year from each subsidiary partnership. Local administrative fees owed to Independence SLP IV L.P. amounting to $289,000 and $272,000 were accrued and unpaid as of September 30, 2012 and March 31, 2012, respectively. These fees have been deferred in certain cases and the Partnership anticipates that they will be paid, if at all, from working capital reserves or future sales proceeds. |
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INDEPENDENCE TAX CREDIT PLUS L.P. IV
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
As of September 30, 2012 and March 31, 2012, the Partnership owed the General Partner and its affiliates approximately $0 and $191,000, respectively for advances made by the General Partner and its affiliates to a Local Partnership. These advances represented historical amounts loaned in conjunction with the initial capital contributions to the Local Partnerships. Such amounts were written off during the quarter ended September 30, 2012 in conjunction with the sale of one Local Partnership (see Note 4).
B) Due to/from Local General Partners and Affiliates
The amounts due to Local General Partners and affiliates from operating liabilities consist of the following:
September 30, | March 31, | |||||||
2012 | 2012 | |||||||
Development fee payable | $ | 1,091,118 | $ | 1,091,118 | ||||
Construction costs payable | 50,000 | 50,000 | ||||||
Operating advances | 270,017 | 430,987 | ||||||
Management and other fees | 25,098 | 10,246 | ||||||
$ | 1,436,233 | $ | 1,582,351 |
The amounts due to Local General Partners and affiliates from discontinued liabilities consist of the following:
September 30, | March 31, | |||||||
2012 | 2012 | |||||||
Management and other fees | $ | 4,000 | $ | 7,169 |
Due from Local General Partners and affiliates from operating assets consists of the following:
September 30, | March 31, | |||||||
2012 | 2012 | |||||||
Local general partner loan receivable | $ | 479,553 | $ | 522,314 |
NOTE 3– Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments (all of which are held for nontrading purposes) for which it is practicable to estimate that value:
Cash and Cash Equivalents, Investments Available-for-Sale and Cash Held in Escrow
The carrying amount approximates fair value.
Mortgage Notes Payable
The Partnership adopted FASB ASC 820 – “Fair Value Measurements” for financial assets and liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances, but discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). This standard provides for a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: | Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. |
Level 2: | Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
Level 3: | Unobservable inputs that reflect the Partnership’s own assumptions. |
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INDEPENDENCE TAX CREDIT PLUS L.P. IV
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
As permitted, the Partnership chose not to elect the fair value option as prescribed by ASC 825 – “Financial Instruments” – Including an Amendment of ASC 320 – “Investments – Debt and Equity Securities”, for our financial assets and liabilities that had not been previously carried at fair value. Therefore, the Partnership did not elect to fair value any additional items under ASC 825.
The estimated fair value of financial instruments has been determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The following are financial instruments for which the Partnership’s estimate of fair value differs from the carrying amounts:
At September 30, 2012 | At March 31, 2012 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount* | Fair Value | |||||||||||||
LIABILITIES: | ||||||||||||||||
Mortgage notes | $ | 20,786,777 | $ | 12,144,004 | $ | 23,401,551 | $ | 13,194,441 |
* Reclassified for comparative purpose.
For the mortgage notes, fair value is estimated using Level 3 inputs and calculated using present value cash flow models based on a discount rate. It was determined that the Tender Option Bond market, through which these bonds have been securitized in the past, continued to see a dramatic slowdown with limited liquidity and significantly reduced transaction levels. To assist in valuing these notes, the Partnership held separate discussions with various third party investment banks who are leaders in the municipal bond business. The discussions produced assumptions that were based on market conditions as well as the credit quality of the underlying property partnerships, which held the mortgage notes, to determine what discount rates to utilize.
Interest Rate Swap Agreement
For the interest rate swap, in the absence of readily determinable fair values, the fair value is estimated by the Partnership with the assistance of valuations obtained from the Bank of Hawaii (the “Bank”), at which the swap transaction is held. The interest rate swap is valued based on the Bank’s estimate of the net present value of the expected cash flows from each transaction subject to the interest rate swap using relevant mid-market data inputs and based on the assumption of no unusual market conditions or forced liquidation. The preceding method described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Partnership believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
On August 24, 2010, GP Kaneohe Limited Partnership (“Kaneohe”), a subsidiary partnership, entered into an interest rate swap agreement with the Bank as a prerequisite for obtaining refinancing on its original mortgage note payable in the amount of $2,297,000. The agreement provides a fixed rate of interest on the notional amount, as provided in the agreement, in exchange for the variable rate. The swap contract became effective September 1, 2010. The following are the terms under the swap:
Fixed swap – notional amount | $ | 3,050,000 | ||
Fixed rate | 4.65 | % | ||
Variable rate at June 30, 2012 | 3.75 | % | ||
Termination date | September 1, 2015 |
Fair value for the interest rate swap is estimated using Level 2 inputs. At September 30, 2012, the fair value of the interest rate swap was a reduction of the mortgage note liability of approximately $1,000.
Pursuant to ASC Topic 815-10, Derivative Instruments (“ASC 815-10”), derivative instruments not meeting the criteria for hedge accounting (or for which an entity elects not to apply hedge accounting to the derivative in the event that the criteria are met) are recorded at fair value with any change in fair value reflected in the statement of operations in the period of change.
- 9 - |
INDEPENDENCE TAX CREDIT PLUS L.P. IV
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
NOTE 4 – Sale of Properties
The Partnership is currently in the process of developing a plan to dispose of all of its investments. It is anticipated that this process will continue to take a number of years. During the six months ended September 30, 2012, the Partnership sold its limited partnership interest in one Local Partnership and one Local Partnership sold its property and the related assets and liabilities. Through September 30, 2012, the Partnership sold its limited partnership interest in three Local Partnerships and the property and the related assets and liabilities of two Local Partnerships have been sold. There can be no assurance as to when the Partnership will dispose of its remaining investments or the amount of proceeds which may be received. However, based on the historical operating results of the Local Partnerships and the current economic conditions, including changes in tax laws, it is unlikely that the proceeds from such sales received by the Partnership will be sufficient to return to the limited partners their original investments. All gains and losses on sales are included in discontinued operations.
On September 28, 2012, the property and the related assets and liabilities of New Zion Limited Partnership (“New Zion”) were sold to an unaffiliated third party purchaser for a sales price of $2,450,000. The Partnership received $663,560 as distributions from this sale after the repayment of the mortgages, other liabilities, closing costs and distributions to other partners of approximately $1,786,000. The sale resulted in a gain of approximately $883,000 which was recorded during the quarter ended September 30, 2012. In addition, the sale resulted in a write-off of operating advances of approximately $191,000 owed to an affiliate of the General Partner.
On June 11, 2012, the Partnership sold its limited partnership interest in Marlton Housing Partnership, L.P (“Marlton”) to an affiliate of the Local General Partner for a sales price of $1. The sale resulted in a gain of approximately $2,125,000 resulting from the write-off of the deficit basis in the Local Partnership of the same amount at the date of sale, which was recorded during the quarter ended June 30, 2012. An adjustment to the gain of approximately $(91,000) was recorded during the quarter ended September 30, 2012, resulting in an overall gain of approximately $2,034,000.
NOTE 5 – Discontinued Operations
The following table summarizes the financial position of the Local Partnerships that are classified as discontinued operations because the respective Local Partnerships were classified as assets held for sale or were sold. As of September 30, 2012, New Zion, which was sold during the current period, was classified as a discontinued operation on the consolidated balance sheets. As of March 31, 2012, Sojourner Douglass which was sold during the year ended March 31, 2012 and New Zion, which was classified as an asset held for sale, were classified as discontinued operations on the consolidated balance sheets.
Consolidated Balance Sheets:
September 30, | March 31, | |||||||
2012 | 2012 | |||||||
Assets | ||||||||
Property and equipment – less accumulated depreciation of $0 and $1,509,057, respectively | $ | - | $ | 1,381,810 | ||||
Cash and cash equivalents | 28,409 | 100,512 | ||||||
Cash held in escrow | 296,309 | 300,798 | ||||||
Other assets | - | 10,547 | ||||||
Total assets | $ | 324,718 | $ | 1,793,667 | ||||
Liabilities | ||||||||
Mortgage notes payable | $ | - | $ | 562,445 | ||||
Accounts payable | 38,818 | 9,017 | ||||||
Accrued interest payable | - | 3,282 | ||||||
Security deposit payable | - | 13,617 | ||||||
Due to Local general partners and affiliates | 4,000 | 7,169 | ||||||
Due to general partners and affiliates | - | 195,070 | ||||||
Total liabilities | $ | 42,818 | $ | 790,600 |
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INDEPENDENCE TAX CREDIT PLUS L.P. IV
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
The following table summarizes the results of operations of the Local Partnerships that are classified as discontinued operations. For the three and six months ended September 30, 2012, Marlton and New Zion, which were sold during the period were classified as discontinued operations in the consolidated financial statements. For the three and six months ended September 30, 2011, Sojourner Douglass which was sold during the year ended March 31, 2012, and Marlton and New Zion, in order to present comparable results to the three months ended September 30, 2012, were classified as discontinued operations in the consolidated financial statements.
Consolidated Statements of Discontinued Operations:
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2012 | 2011 * | 2012 | 2011 * | |||||||||||||
Revenues | ||||||||||||||||
Rental income | $ | 192,133 | $ | 266,971 | $ | 401,554 | $ | 481,662 | ||||||||
Other | 27,893 | 7,196 | 34,291 | 11,726 | ||||||||||||
Gain on sale of properties(Note 4) | 791,990 | - | 2,917,069 | - | ||||||||||||
Total revenue | 1,012,016 | 274,167 | 3,352,914 | 493,388 | ||||||||||||
Expenses | ||||||||||||||||
General and administrative | 74,294 | 74,674 | 130,505 | 157,622 | ||||||||||||
General and administrative-related parties (Note 2) | 15,898 | 16,861 | 33,350 | 32,719 | ||||||||||||
Repairs and maintenance | 60,836 | 51,416 | 86,133 | 92,538 | ||||||||||||
Operating and other | 19,427 | 28,665 | 40,750 | 70,292 | ||||||||||||
Real estate taxes | 3,302 | 5,613 | 7,366 | 11,538 | ||||||||||||
Insurance | 3,371 | 13,361 | 10,184 | 25,378 | ||||||||||||
Interest | 16,904 | 26,919 | 35,227 | 50,674 | ||||||||||||
Depreciation and amortization | 487 | 28,390 | 1,706 | 56,782 | ||||||||||||
Total expenses | 194,519 | 245,899 | 345,221 | 497,543 | ||||||||||||
Income (loss) from discontinued operations | 817,497 | 28,268 | 3,007,693 | (4,155 | ) | |||||||||||
Noncontrolling interest in income of subsidiaries from discontinued operations | (436,293 | ) | (26,436 | ) | (461,809 | ) | (26,517 | ) | ||||||||
Income (loss) from discontinued operations – Independence Tax Credit Plus IV | $ | 381,204 | $ | 1,832 | $ | 2,545,884 | $ | (30,672 | ) | |||||||
Income (loss) from discontinued operations – limited partners | $ | 377,392 | $ | 1,814 | $ | 2,520,425 | $ | (30,365 | ) | |||||||
Number of BACs outstanding | 45,844 | 45,844 | 45,844 | 45,844 | ||||||||||||
Income (loss) from discontinued operations– limited partners- per weighted average BAC | $ | 8.24 | $ | 0.04 | $ | 54.98 | $ | (0.66 | ) |
* Reclassified for comparative purpose.
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INDEPENDENCE TAX CREDIT PLUS L.P. IV
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
Cash Flows from Discontinued Operations: | ||||||||
Six Months Ended | ||||||||
September 30, | ||||||||
2012 | 2011 * | |||||||
Net cash used in operating activities | $ | (330,515 | ) | $ | (51,099 | ) | ||
Net cash provided by investing activities | $ | 284,947 | $ | 17,222 | ||||
Net cash used in financing activities | $ | (45,502 | ) | $ | (38,947 | ) |
* Reclassified for comparative purposes.
NOTE 6 – Commitments and Contingencies
a) Going Concern Consideration
At September 30, 2012, the Partnership’s liabilities exceeded assets by $15,335,042 and for the six months ended September 30, 2012, had net income of $ 2,565,568, including gain on sale of properties of $2,917,069. These factors raise substantial doubt about the Partnership’s ability to continue as a going concern. As discussed in Note 2, partnership management fees of approximately $2,524,000 will be payable out of sales or refinancing proceeds only to the extent of available funds after payments on all other Partnership liabilities have been made other than those owed to the General Partner and its affiliates. As such, the General Partner cannot demand payment of these deferred fees beyond the Partnership’s ability to pay them.
All of the mortgage payable balance of $20,786,777 and the accrued interest payable balance of $6,039,259 is of a nonrecourse nature and secured by the respective properties. The Partnership is currently in the process of developing a plan to dispose of all of its investments. Historically, the mortgage notes and accrued interest thereon have been assumed by the buyer in instances of sales of the Partnership’s interest or have been paid off from sales proceeds in instances of sales of the property. In most instances when the Partnership’s interest was sold and liabilities were assumed, the Partnership recognized a gain from the sale. The Partnership owns the limited partner interest in all its investments, and as such has no financial responsibility to fund operating losses incurred by the Local Partnerships. The maximum loss the Partnership would incur is its net investment in the respective Local Partnerships and the potential recapture of the Tax Credits if the investment is lost before the expiration of the Compliance Period. Dispositions of any investment in a Local Partnership should not impact the future results of operations, liquidity, or financial condition of the Partnership.
The Partnership has working capital reserves of approximately $871,000 at September 30, 2012. Such amount is considered sufficient to cover the Partnership’s day to day operating expenses, excluding fees to the General Partner, for at least the next year. The Partnership’s operating expenses, excluding the Local Partnerships’ expenses and related party expenses amounted to approximately $76,000 for the six months ended September 30, 2012.
Management believes the above mitigating factors enable the Partnership to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
b) Uninsured Cash and Cash Equivalents
The Partnership maintains its cash and cash equivalents in various banks. The accounts at each bank are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”).
c) Leases
Certain subsidiary partnerships have land lease arrangements whereby they are obligated to pay $1 per annum through June 2054.
d) Cash Distributions
Cash distributions from the Local Partnerships to the Partnership are restricted by the provisions of the respective agreements of limited partnership of the Local Partnerships and/or the U.S. Department of Housing and Urban Development.
e) Property Management Fees
Property management fees incurred by the Local Partnerships amounted to $98,978 and $104,956 and $179,110 and $176,995 for the three and six months ended September 30, 2012 and 2011, respectively. Of these fees, $51,572 and $53,907 and $105,192 and $102,931 were incurred to the Local General Partners for the three and six months ended September 30, 2012 and 2011, respectively, which include $14,898 and $15,236 and $31,350 and $29,469 of fees relating to discontinued operations for the three and six months ended September 30, 2012 and 2011, respectively.
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INDEPENDENCE TAX CREDIT PLUS L.P. IV
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)
f) Other
The Partnership is subject to risks incident to potential losses arising from the management and ownership of real estate. The Partnership can also be affected by poor economic conditions generally; however no more than (22%) of the properties are located in any single state. There are also substantial risks associated with owning properties receiving government assistance, for example the possibility that Congress may not appropriate funds to enable the U.S. Department of Housing and Urban Development (“HUD”) to make rental assistance payments. HUD also restricts annual cash distributions to partners based on operating results and a percentage of the owners’ equity contribution. The Partnership cannot sell or substantially liquidate its investments in subsidiary partnerships during the period that the subsidy agreements are in existence without HUD’s approval. Furthermore there may not be market demand for apartments at full market rents when the rental assistance contract expires.
The Partnership and BACs holders began to recognize Tax Credits with respect to a Property when the Credit Period for such Property commenced (generally ten years from the date of investment or, if later, the date the Property is leased to qualified tenants). Because of the time required for the acquisition, completion and rent-up of Properties, the amount of Tax Credits per BAC gradually increased over the first three years of the Partnership. Tax Credits not recognized in the first three years were recognized in the 11th through 13th years. As of December 31, 2011, all the Local Partnerships had completed their Credit Periods, except for one Local Partnership which is expected to complete its Credit Period on December 31, 2012. However, each Local Partnership must continue to comply with the Tax Credit requirements until the end of the Compliance Period in order to avoid recapture of the Tax Credits. The Compliance Periods will continue through December 31, 2017 with respect to the Properties depending upon when the Compliance Period commenced.
g) Subsequent Events
We evaluated all subsequent events from the date of the balance sheet through the issuance date of this report and determined that there were no events or transactions occurring during the subsequent event reporting period which require recognition or disclosure in the financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
The Partnership originally invested all of its net proceeds in fourteen Local Partnerships of which, approximately $148,000 remains to be paid to the Local Partnerships (including approximately $123,000 being held in escrow). The Partnership is currently in the process of developing a plan to dispose of all its investments. During the six months ended September 30, 2012, the Partnership sold its limited partnership interest in one Local Partnership and one Local Partnership sold its property and the related assets and liabilities. Through September 30, 2012, the Partnership sold its limited partnership interests in three Local Partnerships and the property and the related assets and liabilities of two Local Partnerships have been sold. There can be no assurance as to when the Partnership will dispose of its remaining investments or the amount of proceeds which may be received. However, based on the historical operating results of the Local Partnerships and the current economic conditions, including changes in tax laws, it is unlikely that the proceeds from such sales received by the Partnership will be sufficient to return to the limited partners their original investments. All gains and losses on sales are included in discontinued operations.
Short-Term
The Partnership’s primary sources of funds include: (i) working capital reserves; (ii) interest earned on the working capital reserves; (iii) cash distributions from operations of the Local Partnerships; and (iv) sales and/or refinance proceeds and distributions. Such funds, although minimal (other than possible sales and/or refinance proceeds and distributions), are available to meet the obligations of the Partnership. During the six months ended September 30, 2012, and 2011, distributions from operations of the Local Partnerships amounted to approximately $12,000 and $15,000, respectively. In addition, during the six months ended September 30, 2012, and 2011, distributions to the Partnership from sales proceeds amounted to approximately $664,000 and $0, respectively. The Partnership does not anticipate providing cash distributions to BACs holders in circumstances other than refinancing or sales.
During the six months ended September 30, 2012, cash and cash equivalents of the Partnership and its consolidated Local Partnerships increased approximately ($573,000). This increase was primarily due to net cash provided by operating activities ($311,000), proceeds from sale of property ($2,450,000) and a decrease in cash held in escrow relating to investing activities ($8,000), which exceeded costs paid relating to sale of property ($548,000), repayment of mortgage notes ($236,000), net repayments to local general partners and affiliates ($123,000) and distributions to noncontrolling interests ($1,289,000). Included in the adjustments to reconcile the net income to net cash provided in operating activities is depreciation and amortization in the amount of approximately $390,000, gain on sale of properties of approximately $2,917,000 and a change from interest rate swap of approximately $1,000.
Total expenses from operations for the three and six months ended September 30, 2012, and 2011, excluding depreciation and amortization, interest, unrealized loss on interest rate swap and general and administrative-related parties, totaled $704,702 and $730,418 and $1,452,418 and $1,467,568, respectively.
Accounts payable from operations as of September 30, 2012 and March 31, 2012 were $309,785 and $375,336, respectively. Accounts payable are short term liabilities which are expected to be paid from operating cash flows, working capital balances at the Local Partnership level, Local General Partner advances and in certain circumstances advances from the Partnership. Accounts payable from discontinued operations totaled $38,818 and $9,017 as of September 30, 2012 and March 31, 2012, respectively. Accrued interest payable from operations as of September 30, 2012 and March 31, 2011 was $6,039,259 and $6,316,039, respectively. Accrued interest payable from discontinued operations totaled $0 and $3,282 as of September 30, 2012 and March 31, 2011, respectively. Such amount represents the accrued interest on all mortgage loans, which include primary and secondary loans. Certain secondary loans have provisions such that interest is accrued but not payable until a future date. The Partnership anticipates the payment of accrued interest on the secondary loans (which make up the majority of the accrued interest payable amount and which have been accumulating since the Partnership’s investment in the respective Local Partnership) will be made from future refinancings or sales proceeds of the respective Local Partnerships. In addition, each Local Partnership’s mortgage notes are collateralized by the land and buildings of the respective Local Partnership, and are without further recourse to the Partnership.
Because the provisions of the secondary loans defer the payment of accrued interest of the respective Local Partnerships, and the General Partner continues to defer the payment of fees as discussed below and in Note 2 to the Financial Statements, the Partnership (and the applicable Local Partnerships) believes it has sufficient liquidity and ability to generate cash and to meet existing and known or reasonably likely future cash requirements over both the short and long term.
The Partnership has an unconsolidated working capital reserve of approximately $871,000 at September 30, 2012.
Long-Term
Partnership management fees owed to the General Partner amounting to approximately $2,524,000 and $2,388,000 were accrued and unpaid as of September 30, 2012, and March 31, 2012, respectively, and are included in the line item Due to general partners and affiliates in the consolidated balance sheets. Unpaid partnership management fees for any year are to be deferred without interest and will be payable out of sales or refinancing proceeds only to the extent of available funds after payments on all Partnership liabilities have been made other than to those owed to the General Partner and its affiliates.
All other payables are expected to be paid, if at all, from working capital reserves. See Note 2 in Item 1 for further discussion of amounts due to the General Partner and its affiliates. The General Partner does not anticipate making any future advances of operating funds to any of the Local Partnerships in which the Partnership has invested. Even if a situation arose where the General Partner and its affiliates needed to but were not able to make operating advances in the future due to lack of funds, the only impact on the Partnership would be that it would lose its investment in that particular Local Partnership. The Partnership’s ability to continue its operations would not be affected.
Based on the foregoing, the Partnership’s going concern consideration is mitigated by factors as discussed in Note 6a in Item 1.
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Since the maximum loss the Partnership would be liable for is its net investment in the respective subsidiary partnerships, the resolution of any existing contingencies is not anticipated to impact future results of operations, liquidity or financial condition in a material way. However, the Partnership’s loss of its investment in a Local Partnership may result in recapture of Tax Credits if the investment is lost before expiration of the Compliance Period.
Except as described above, management is not aware of any trends or events, commitments or uncertainties, which have not otherwise been disclosed that will or are likely to impact liquidity in a material way. Management believes the only impact would be from laws that have not yet been adopted. The portfolio is diversified by the location of the Properties around the United States so that if one area of the country is experiencing downturns in the economy, the remaining Properties in the portfolio may be experiencing upswings. However the geographic diversification of the portfolio may not protect against a general downturn in the national economy. The Partnership had originally invested the proceeds of its Offering in 14 Local Partnerships, all of which had their Tax Credits fully in place during the Credit Periods. As of December 31, 2011, all the Local Partnerships had completed their Credit Periods, except for one Local Partnership which is expected to complete its Credit Period on December 31, 2012. However, each Local Partnership must continue to comply with the Tax Credit requirements until the end of the Compliance Period in order to avoid recapture of the Tax Credits. The Compliance Periods will continue through December 31, 2017 with respect to the Properties depending upon when the Compliance Period commenced.
Off-Balance Sheet Arrangements
The Partnership has no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of certain accounting estimates considered critical by the Partnership. The summary should be read in conjunction with the more complete discussion of the Partnership’s accounting policies included in Item 8, Note 2 to the consolidated financial statements in the Partnership’s Annual Report on Form 10-K for the year ended March 31, 2012.
Fair Value Measurements
The following methods and assumptions were used to estimate the fair value of each class of financial instruments (all of which are held for nontrading purposes) for which it is practicable to estimate that value:
Cash and Cash Equivalents, Investments Available-for-Sale and Cash Held in Escrow
The carrying amount approximates fair value.
Mortgage Notes Payable
The Partnership adopted FASB ASC 820 – “Fair Value Measurements” for financial assets and liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances, but discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). This standard provides for a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: | Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. |
Level 2: | Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
Level 3: | Unobservable inputs that reflect the Partnership’s own assumptions. |
As permitted, the Partnership chose not to elect the fair value option as prescribed by ASC 825 – “Financial Instruments” – Including an Amendment of ASC 320 – “Investments – Debt and Equity Securities”, for our financial assets and liabilities that had not been previously carried at fair value. Therefore, the Partnership did not elect to fair value any additional items under ASC 825.
The estimated fair value of financial instruments has been determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The following are financial instruments for which the Partnership’s estimate of fair value differs from the carrying amounts:
At September 30, 2012 | At March 31, 2012 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount* | Fair Value | |||||||||||||
LIABILITIES: | ||||||||||||||||
Mortgage notes | $ | 20,786,777 | $ | 12,144,004 | $ | 23,401,551 | $ | 13,194,441 |
* Reclassified for comparative purpose.
- 15 - |
For the mortgage notes, fair value is estimated using Level 3 inputs and calculated using present value cash flow models based on a discount rate. It was determined that the Tender Option Bond market, through which these bonds have been securitized in the past, continued to see a dramatic slowdown with limited liquidity and significantly reduced transaction levels. To assist in valuing these notes, the Partnership held separate discussions with various third party investment banks who are leaders in the municipal bond business. The discussions produced assumptions that were based on market conditions as well as the credit quality of the underlying property partnerships, which held the mortgage notes, to determine what discount rates to utilize.
Interest Rate Swap Agreement
For the interest rate swap, in the absence of readily determinable fair values, the fair value is estimated by the Partnership with the assistance of valuations obtained from the Bank of Hawaii (the “Bank”), at which the swap transaction is held. The interest rate swap is valued based on the Bank’s estimate of the net present value of the expected cash flows from each transaction subject to the interest rate swap using relevant mid-market data inputs and based on the assumption of no unusual market conditions or forced liquidation. The preceding method described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Partnership believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
On August 24, 2010, GP Kaneohe Limited Partnership (“Kaneohe”), a subsidiary partnership, entered into an interest rate swap agreement with the Bank as a prerequisite for obtaining refinancing on its original mortgage note payable in the amount of $2,297,000. The agreement provides a fixed rate of interest on the notional amount, as provided in the agreement, in exchange for the variable rate. The swap contract became effective September 1, 2010. The following are the terms under the swap:
Fixed swap – notional amount | $ | 3,050,000 | ||
Fixed rate | 4.65 | % | ||
Variable rate at June 30, 2012 | 3.75 | % | ||
Termination date | September 1, 2015 |
Fair value for the interest rate swap is estimated using Level 2 inputs. At September 30, 2012, the fair value of the interest rate swap was a reduction of the mortgage note liability of approximately $1,000.
Pursuant to ASC Topic 815-10, Derivative Instruments (“ASC 815-10”), derivative instruments not meeting the criteria for hedge accounting (or for which an entity elects not to apply hedge accounting to the derivative in the event that the criteria are met) are recorded at fair value with any change in fair value reflected in the statement of operations in the period of change.
Property and Equipment
Property and equipment to be held and used are carried at cost which includes the purchase price, acquisition fees and expenses, construction period interest and any other costs incurred in acquiring the Properties. The cost of property and equipment is depreciated over their estimated useful lives using accelerated and straight-line methods. Expenditures for repairs and maintenance are charged to expense as incurred; major renewals and betterments are capitalized. At the time property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the assets and accumulated depreciation accounts and the profit or loss on such disposition is reflected in earnings. The Partnership complies with ASC 360, Property, Plant and Equipment. A loss on impairment of assets is recorded when management estimates amounts recoverable through future operations and sale of the Property on an undiscounted basis are below depreciated cost. At that time, Property investments themselves are reduced to estimated fair value (generally using the direct capitalization method) when the Property is considered to be impaired and the depreciated cost exceeds estimated fair value.
At the time management commits to a plan to dispose of a specific asset, said asset is adjusted to the lower of carrying amount or fair value less costs to sell. These assets are classified as property and equipment-held for sale and are not depreciated. Property and equipment that are held for sale are included in discontinued operations. There are no assets classified as property and equipment-held for sale as of September 30, 2012.
During the six months ended September 30, 2012, the Partnership has not recorded any loss on impairment of assets. Through September 30, 2012, the Partnership has recorded approximately $27,947,000 as an aggregate loss on impairment of property.
Revenue Recognition
Rental income is earned primarily under standard residential operating leases and is typically due the first day of each month, but can vary by Property due to the terms of the tenant leases. Rental income is recognized when earned and charged to tenants’ accounts receivable if not received by the due date. Rental payments received in advance of the due date are deferred until earned. Rental subsidies are recognized as rental income during the month in which it is earned.
Other revenues are recorded when earned and consist of the following items: interest income earned on cash and cash equivalent balances and cash held in escrow balances, income from forfeited security deposits, late charges, laundry and vending income and other rental related items.
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Income Taxes
The Partnership is not required to provide for, or pay, any federal income taxes. Net income or loss generated by the Partnership is passed through to the partners and is required to be reported by them. The Partnership may be subject to state and local taxes in jurisdictions in which it operates. For income tax purposes, the Partnership has a fiscal year ending December 31.
Results of Operations
The results of operations for the three and six months ended September 30, 2012 and 2011, consisted primarily of the results of the Partnership’s investment in Local Partnerships. The following discussion excludes the Partnership’s results of its discontinued operations, which are not reflected below.
Rental income increased approximately 4% for the three and six months ended September 30, 2012, as compared to the corresponding periods in 2011, primarily due to an increase in occupancies and rental rates at several Local Partnerships.
Total expenses, excluding general and administrative-related parties, repairs and maintenance, interest and unrealized loss on interest rate swap remained fairly consistent, with an increase of approximately 1% and 2% for the three and six months ended September 30, 2012 as compared to the corresponding periods in 2011.
General and administrative-related parties expenses increased approximately $36,000 and $40,000 for the three and six months ended September 30, 2012 as compared to the corresponding periods in 2011, primarily due to an increase in expense reimbursements to the General Partner and affiliates by the Partnership.
Repairs and maintenance expense decreased approximately $31,000 and $44,000 for the three and six months ended September 30, 2012 as compared to the corresponding periods in 2011, primarily due to decreases in painting and décor and monitoring and protection service upgrades at one Local Partnership, decreases in roof and gutter repairs at a second Local Partnership and a decrease in repair materials and contracts at a third Local Partnership.
Interest expense decreased approximately $47,000 and $55,000 for the three and six months ended September 30, 2012 as compared to the corresponding periods in 2011, primarily as a result of a refinance of mortgage at a Local Partnership.
Change in fair value of interest rate swap decreased by approximately $45,000 and $77,000 for the three and six months ended September 30, 2012 as compared to the corresponding periods in 2011, primarily due to the change in fair value of the interest rate swap agreement at one Local Partnership.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. The Chief Executive Officer and Chief Financial Officer of Related Independence L.L.C, the general partner of the Partnership, have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of the end of such period, the Partnership’s disclosure controls and procedures are effective.
(b) Changes in Internal Controls over Financial Reporting. During the period ended September 30, 2012, there were no changes in the Partnership’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
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PART II. OTHER INFORMATION | ||
Item 1. | Legal Proceedings. – None | |
Item 1A. | Risk Factors. – No changes | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. – None | |
Item 3. | Defaults upon Senior Securities. – None | |
Item 4. | Mine Safety Disclsoures. – None | |
Item 5. | Other Information. – None | |
Item 6. | Exhibits. | |
(4) | Form of Amended and Restated Agreement of Limited Partnership of the Partnership (attached to the Prospectus as Exhibit A)* | |
(10A) | Form of Subscription Agreement (attached to the Prospectus as Exhibit B)* | |
(10B) | Form of Escrow Agreement between the Partnership and the Escrow Agent** | |
(10C) | Form of Purchase and Sales Agreement pertaining to the Partnership’s acquisition of Local Partnership Interests** | |
(10D) | Form of Amended and Restated Agreement of Limited Partnership of Local Partnerships** | |
(31.1)+ | Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) | |
(31.2)+ | Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) | |
(32.1)+ | Certification Pursuant to Section 1350 of Title 18 of the United States Code (18 U.S.C. 1350) | |
(32.2)+ | Certification Pursuant to Section 1350 of Title 18 of the United States Code (18 U.S.C. 1350) | |
* | Incorporated herein by reference to the final Prospectus as filed pursuant to Rule 424 under the Securities Act of 1933. | |
** | Filed as an exhibit to the Registration Statement on Form S-11 of the Partnership (File No. 33-89968) and incorporated herein by reference thereto. | |
+ | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INDEPENDENCE TAX CREDIT PLUS L.P. IV
(Registrant)
By: | RELATED INDEPENDENCE L.L.C., | ||||||
a General Partner | |||||||
Date: | November 13, 2012 | By: | /s/ Robert A. Pace | ||||
Robert A. Pace | |||||||
Chief Financial Officer and Principal Accounting Officer | |||||||
Date: | November 13, 2012 | By: | /s/ Robert L. Levy | ||||
Robert L. Levy | |||||||
President and Chief Executive Officer |
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