edatax10k2008.htm
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
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:  000-24843

AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
(Exact name of registrant as specified in its charter)
Delaware
47-0810385
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
1004 Farnam Street, Suite 400
Omaha, Nebraska
68102
  (Address of principal executive offices)
  (Zip Code)
 
(402) 444-1630
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Beneficial Unit Certificates representing assignments of limited partnership interests in
America First Tax Exempt Investors, L.P. (the “BUCs)

Securities registered pursuant to Section 12(g) of the Act:
None

    Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES o   NO  x

    Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section (15) of the Act.
YES o   NO  x

    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  o

    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of the chapter) is not contained herein, and will not be contained, to the best of the 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]

    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 definition of “large accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer  x
Non- accelerated filer  o
Smaller reporting company  o
   
(do not check if a smaller reporting company)
 

    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 YES  o  NO  x

The aggregate market value of the registrant’s BUCs held by non-affiliates based on the final sales price of the BUCs on the last business day of the registrant’s most recently completed second fiscal quarter was $86,493,729.

DOCUMENTS INCORPORATED BY REFERENCE
None
 

 

INDEX


PART I

Business
 
1
Risk Factors
8
Unresolved Staff Comments
14
Properties
14
Legal Proceedings
15
Submission of Matters to a Vote of Security Holders
15

PART II

Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities
16
Selected Financial Data
17
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
Quantitative and Qualitative Disclosures About Market Risk
37
Financial Statements and Supplementary Data
40
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
72
Controls and Procedures
72
Other Information
74

PART III

Directors, Executive Officers and Corporate Governance
74
Executive Compensation
75
Security Ownership of Certain Beneficial Owners and Management
76
Certain Relationships and Related Transactions, and Director Independence
77
Principal Accountant Fee and Services
77

PART IV

Exhibits and Financial Statement Schedules
78

 
80


 
 

 
PART I

Forward-Looking Statements

This report (including, but not limited to, the information contained in “Management's Discussion and Analysis of Financial Condition and Results of Operations”) contains forward-looking statements that reflect management's current beliefs and estimates of future economic circumstances, industry conditions, America First Tax Exempt Investors, L.P.’s (the “Partnership”) performance and financial results. All statements, trend analysis and other information concerning possible or assumed future results of operations of the Partnership and the investments it has made constitute forward-looking statements. Beneficial Unit Certificate (“BUC”) holders and others should understand that these forward-looking statements are subject to numerous risks and uncertainties, and a number of factors could affect the future results of the Partnership and could cause those results to differ materially from those expressed in the forward-looking statements contained herein. These factors include general economic and business conditions such as the availability and credit worthiness of prospective tenants, lease rents, operating expenses, the terms and availability of financing for properties financed by the tax-exempt mortgage revenue bonds owned by the Partnership, adverse changes in the real estate markets from governmental or legislative forces, lack of availability and credit worthiness of counter parties to finance future acquisitions and interest rate fluctuations and other items discussed under “Risk Factors” in Item 1A of this report.

Item 1.  Business.

The Partnership was formed on April 2, 1998 under the Delaware Revised Uniform Limited Partnership Act for the purpose of acquiring, holding, selling and otherwise dealing with a portfolio of federally tax-exempt mortgage revenue bonds which have been issued to provide construction and/or permanent financing of multifamily residential properties.  Interest on these bonds is excludable from gross income for federal income tax purposes.  As a result, most of the income earned by the Partnership is exempt from federal income taxes.  Our general partner is America First Capital Associates Limited Partnership Two (“AFCA 2”), whose general partner is The Burlington Capital Group LLC (“Burlington”).  Since 1984, Burlington has specialized in the management of investment funds, many of which were formed to acquire real estate investments such as tax-exempt mortgage revenue bonds, mortgage securities and multifamily real estate properties.
 
As of December 31, 2008, the Partnership owned 17 federally tax-exempt mortgage revenue bonds which were issued to provide construction and/or permanent financing of 16 multifamily residential apartments located in the states of Florida, Indiana, Iowa, South Carolina, Texas, Nebraska, Kentucky, and Minnesota containing a total of 2,371 rental units, 388 rental units under construction in Texas and Kansas and a 142-bed student housing facility in Nebraska.  Each of these mortgage revenue bonds provides for the payment of fixed-rate base interest to the Partnership.  Additionally, nine of the bonds also provide for the payment of contingent interest based upon net cash flow and net capital appreciation of the underlying real estate properties.  As a result, these mortgage revenue bonds provide the Partnership with the potential to participate in future increases in the cash flow generated by the financed properties, either through operations or from their ultimate sale.  Ten of the 16 properties which collateralize the bonds owned by the Partnership are managed by America First Properties Management Company, L.L.C. (“Properties Management”), an affiliate of the Partnership.  Management believes that this relationship provides greater insight and understanding of the underlying property operations and the properties’ ability to meet debt service requirements.

The amount of interest income earned by the Partnership from its investment in tax-exempt mortgage revenue bonds is a function of the net operating income generated by the properties collateralizing the tax-exempt mortgage revenue bonds.  Net operating income from a multifamily residential property depends on the rental and occupancy rates of the property and the level of operating expenses.  Occupancy rates and rents are directly affected by the supply of, and demand for, apartments in the market areas in which a property is located.  This, in turn, is affected by several factors such as local or national economic conditions, the amount of new apartment construction and interest rates on single-family mortgage loans.  In addition, factors such as government regulation, inflation, real estate and other taxes, labor problems and natural disasters can affect the economic operations of a property.  Therefore, the return to the Partnership depends upon the economic performance of the multifamily residential properties which collateralize the tax-exempt mortgage revenue bonds.  For this reason, the Partnership's investments are dependent on the economic performance of such real estate and may be considered to be in competition with other income-producing real estate of the same type in the same geographic areas.
 
The Partnership may invest in other types of tax-exempt securities that may or may not be secured by real estate.  These tax-exempt securities must be rated in one of the four highest rating categories by at least one nationally recognized securities rating agency and may not represent more than 25% of the Partnership’s assets at the time of acquisition.  The Partnership may also make taxable mortgage loans secured by multifamily properties which were financed by tax-exempt mortgage revenue bonds that the Partnership holds.  The Partnership generally does not seek to acquire direct interests in real property as long term or permanent investments.  The Partnership may, however, acquire direct interests in real property in order to position itself for a future investment in tax-exempt bonds.  Additionally, it may acquire apartment complexes securing its revenue bonds or taxable mortgage loans through foreclosure in the event of a default.
 
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At December 31, 2008, the Partnership held an interest in eight multifamily apartment properties (“MF Properties”), containing 796 rental units, of which four are located in Ohio, two are located in Kentucky, one is located in Virginia, and one is located in Georgia.  The Partnership expects to ultimately restructure the property ownership through a sale of the MF Properties and a syndication of Low Income Housing Tax Credits under section 42 of the Code (“LIHTCs”).  The Partnership expects to provide the tax-exempt mortgage revenue bonds to the new property owners as part of the restructuring.  Such restructurings will generally be expected to be initiated within 36 months of the initial investment in MF Properties and will often coincide with the expiration of the compliance period relating to LIHTCs previously issued with respect to the MF Property.  Current credit markets and general economic issues have had a significant negative impact on these types of transactions.  At this time very few LIHTC syndication and tax-exempt bond financing transactions are being completed.  These types of transactions represent a long-term market opportunity for the Partnership and provide a significant future bond investment pipeline when the market for LIHTC syndications strengthens.  Until such a restructuring occurs the operations of the properties owned by the limited partnerships are consolidated with the Partnership.  The Partnership will not acquire LIHTCs in connection with these transactions.  All eight of these properties are managed by Properties Management.  Management believes that this relationship provides greater insight and understanding of the underlying property operations and the properties’ ability to meet debt service requirements.
 
Business Objectives and Strategy
 
Overview
 
The Partnership was formed for the primary purpose of acquiring, holding, selling and otherwise dealing with a portfolio of federally tax-exempt mortgage revenue bonds which have been issued to provide construction and/or permanent financing of multifamily residential apartments. The Partnership’s business objectives are to: (i) preserve and protect its capital; (ii) provide regular cash distributions to BUC holders; and (iii) provide a potential for an enhanced federally tax-exempt yield as a result of a participation interest in the net cash flow and net capital appreciation of the underlying real estate properties financed by the tax-exempt mortgage revenue bonds.

We are pursuing a business strategy of acquiring additional tax-exempt mortgage revenue bonds on a leveraged basis in order to (i) increase the amount of tax-exempt interest available for distribution to our BUC holders; (ii) reduce risk through asset diversification and interest rate hedging; and (iii) achieve economies of scale.  We are pursuing this growth strategy by investing in additional tax-exempt mortgage revenue bonds and related investments, taking advantage of attractive financing structures available in the tax-exempt securities market and entering into interest rate risk management instruments.  We may finance the acquisition of additional tax-exempt mortgage revenue bonds through the reinvestment of cash flow, the issuance of additional BUCs, or securitization financing using our existing portfolio of tax-exempt mortgage revenue bonds.  Our operating policy is to use securitizations or other forms of leverage to maintain a level of debt financing between 40% and 60% of the total par value of our mortgage bond portfolio.

In connection with our growth strategy, we are also assessing opportunities to reposition our existing portfolio of tax-exempt mortgage revenue bonds.  The principal objective of this repositioning initiative is to improve the quality and performance of our revenue bond portfolio and, ultimately, increase the amount of cash available for distribution to our shareholders.  In some cases, we may elect to redeem selected tax-exempt bonds that are secured by multifamily properties that have experienced significant appreciation.  Through the selective redemption of the bonds, a sale or refinancing of the underlying property will be required which, if sufficient sale or refinancing proceeds exist, will entitle the Partnership to receive payment of contingent interest on its bond investment.  In other cases, we may elect to sell bonds on properties that are in stagnant or declining markets.  The proceeds received from these transactions would be redeployed into other tax-exempt investments consistent with our investment objectives.  We may also be able to use a higher-quality investment portfolio to obtain higher leverage to be used to acquire additional investments.
 
In executing our growth strategy, we expect to invest primarily in bonds issued to provide affordable rental housing, but may also consider bonds issued to finance student housing projects and housing for senior citizens.  The four basic types of multifamily housing revenue bonds which we may acquire as investments are as follows:
 
1.  
Private activity bonds issued under Section 142(d) of the Internal Revenue Code of 1986, as amended (the “Code”);
 
2.  
Bonds issued under Section 145 of the Code by not-for-profit entities qualified under Section 501(c) 3 of the Code;
 
3.  
Essential function bonds issued by a public instrumentality to finance an apartment property owned by such instrumentality; and
 
4.  
Existing “80/20 bonds” that were issued under section 103(b)(4)(A) of the Internal Revenue Code of 1954.
 
Each of these bond structures permits the issuance of tax-exempt bonds to finance the construction or acquisition and rehabilitation of affordable rental housing.  Under applicable Treasury Regulations, any affordable apartment project financed with tax-exempt bonds must set aside a percentage of its total rental units for occupancy by tenants whose incomes do not exceed stated percentages of the median income in the local area.  In each case, the balance of the rental units in the apartment project may be rented at market rates.  With respect to private activity bonds issued under Section 142(d) of the Code, the owner of the apartment project may elect, at the time the bonds are issued, whether to set aside a minimum of 20% of the units for tenants making less than 50% of area median income (as adjusted for household size) or 40% of the units for tenants making less than 60% of the area median income (as adjusted for household size).  Multifamily housing bonds that were issued prior to the Tax Reform Act of 1986 (so called “80/20” bonds) require that 20% of the rental units be set aside for tenants whose income does not exceed 80% of the area median income, without adjustment for household size.
 
2

We expect that many of the private activity housing bonds that we evaluate for acquisition will be issued in conjunction with the syndication of LIHTCs by the owner of the financed apartment project.  Additionally, to facilitate our investment strategy of acquiring additional tax-exempt mortgage bonds secured by MF Properties, we may acquire ownership positions in the MF Properties.  We expect to ultimately restructure such property ownership through a sale of the MF Properties and a syndication of LIHTCs.
 
 Investment Types
 
Tax-Exempt Mortgage Revenue Bonds.  The Partnership invests in tax-exempt mortgage revenue bonds that are secured by a first mortgage or deed of trust on multifamily apartment projects.  Each of these bonds bears interest at a fixed annual base rate.  Nine of the 17 bonds owned by the Partnership also provide for the payment of contingent interest, which is payable out of the net cash flow and net capital appreciation of the underlying apartment properties.  As a result, the amount of interest earned by the Partnership from its investment in tax-exempt mortgage revenue bonds is a function of the net operating income generated by the properties collateralizing the tax-exempt mortgage revenue bonds.  Net operating income from a multifamily residential property depends on the rental and occupancy rates of the property and the level of operating expenses.

Other Tax-Exempt Securities.  The Partnership may invest in other types of tax-exempt securities that may or may not be secured by real estate.  These tax-exempt securities must be rated in one of the four highest rating categories by at least one nationally recognized securities rating agency and may not represent more than 25% of our assets at the time of acquisition.

Taxable Mortgage Loans.  The Partnership may also make taxable mortgage loans secured by multifamily properties which are financed by tax-exempt mortgage revenue bonds that are held by the Partnership.

Other Investments.  While the Partnership generally does not seek to acquire equity interests in real property as long-term or permanent investments, it may acquire apartment complexes securing its revenue bonds or taxable mortgage loans through foreclosure in the event of a default.  In addition, as part of its growth strategy, the Partnership may acquire direct or indirect interests in apartment complexes on a temporary basis in order to position itself for a future investment in tax-exempt mortgage revenue bonds issued to finance the acquisition or substantial rehabilitation of such apartment complexes by a new owner.  A new owner would typically seek to obtain LIHTCs in connection with the issuance of the new tax-exempt bonds, but if LIHTCs had previously been issued for the property, such a restructuring could not occur until the expiration of a 15-year compliance period for the initial LIHTCs.  The Partnership may acquire an interest in such apartment properties prior to the end of the LIHTC compliance period.  After the LIHTC compliance period, the Partnership would expect to sell such property to a new owner which could syndicate new LIHTCs and seek tax-exempt bond financing on the property which the Partnership could acquire.  Such restructurings will generally be expected to occur within 36 months of the acquisition by the Partnership of an interest in a property.  The Partnership will not acquire LIHTCs in connection with these transactions.
 
 The Market Opportunity - Current
 
The current credit crisis has severely disrupted the financial markets and, in our view, has also created potential investment opportunities for the Partnership.  For this reason, non-traditional participants in the multifamily housing debt sector are either reducing their participation in the market or are being forced to downsize their existing portfolio of investments.  We believe this is creating opportunities to acquire existing tax-exempt bonds from distressed entities at attractive yields.  We believe that  we are well-positioned as a result of our ability to acquire assets on the secondary market while maintaining the ability and willingness to also participate in primary market transactions.
 
The current credit crisis is also providing the potential for investments in quality real estate assets to be acquired from distressed owners and lenders.  Our ability to restructure existing debt together with the ability to improve the operations of the underlying apartment properties through our affiliated property management company, America First Property Management Company, L.L.C., results in a valuable tax-exempt bond investment which is supported by the valuable collateral and operations of the underlying real property.  We believe the Partnership is well-positioned to selectively acquire distressed assets, restructure debt and improve operations thereby creating value to shareholders in the form of a strong tax-exempt bond investment.

The Partnership is currently in the contractual due diligence period related to the acquisition a portfolio of four tax-exempt bonds.  The current market conditions discussed above have presented the opportunity to acquire these assets at attractive valuations.  In addition, the Partnership is evaluating four other bond or limited partnership interest acquisitions.  While we believe that we will consummate the acquisitions of the assets, we cannot assure you that we will, because consummation of the acquisitions remains subject to the completion of our due diligence and satisfaction of customary closing conditions.

The Market Opportunity – General

There is a significant unmet demand for affordable multifamily housing in the United States.  According to recent United States Department of Housing and Urban Development, or HUD reports, there are approximately 5.5 million American households in need of quality affordable housing.  The types of revenue bonds in which we invest offer developers of affordable housing a low-cost source of construction and permanent debt financing for these types of properties.  Investors purchase these bonds because the income paid on these bonds is exempt from federal income taxation.  The National Council of State Housing Agencies Fact Sheet and HUD have captured some key scale metrics and opportunities of this market:

 
HUD has provided over 1.0 million lower-income Americans with affordable rental housing opportunities;
 
3

 
Housing Finance Agencies, or HFAs, use multifamily tax-exempt housing bonds to finance an additional 130,000 apartments each year; and
 
 
The availability of tax-exempt bond financing for affordable multifamily housing to be owned by private, for-profit developers in each state in each calendar year is limited by the statewide volume cap distributed as described in Section 146 of the Code; this private activity bond is based on state population and indexed to inflation.
 
In addition to tax-exempt revenue bonds, the federal government promotes affordable housing through the use of LIHTCs for affordable multifamily rental housing.  Under this program, developers that receive an allocation of private activity bonds will also receive an allocation of federal LIHTCs as a method to encourage the development of affordable multifamily housing.  The LIHTCs are used for nearly 90% of the country’s new affordable rental housing.  To receive federal LIHTCs, a property must either be newly constructed or substantially rehabilitated and, therefore, may be less likely to become functionally obsolete in the near term than an older property.  There are various requirements in order to be eligible for federal LIHTCs, including rent and tenant income restrictions.  The National Council of State Housing Agencies Fact Sheet and HUD have captured some key scale metrics and opportunities of this market:

 
LIHTCs have helped finance approximately two million apartments for low-income families since Congress created it in 1986 and help finance 130,000 more apartments each year;
 
 
HUD has a stated goal to expand affordable rental housing by 1.4 million units through the LIHTC, CDBG, HOME, HOPWA, and IHBG funds by FY 2011; and
 
 
Each state’s annual LIHTC allocation is capped and indexed to inflation.  The Housing Assistance Tax Act of 2008, or the 2008 Housing Act, set the state allocation cap for 2009 at $2.20 times state population, with a state minimum of $2,325,000.  The 2009 state cap exceeds the amount that would have been in place if an inflation factor had been applied to the state cap in place prior to enactment of the 2008 Housing Act.  After 2009, the state allocation cap will revert to amounts reflecting the previous caps adjusted for inflation as if the provision in the 2008 Housing Act had not been enacted.
 
The 2008 Housing Act simplifies and expands the use of LIHTCs and tax-exempt bond financing for low-income multifamily housing industry.  Additionally, it exempts newly issued tax-exempt private activity bonds from Alternative Minimum Tax, or AMT.  Previously, these tax-exempt private activity bonds were AMT preference items for individual tax payers. We believe these changes are likely to enhance the Partnership’s opportunities for making investments in accordance with its investment criteria.
 
The syndication and sale of LIHTCs along with tax-exempt bond financing is an attractive plan of finance for developers and owners and a potential source of new tax-exempt bond investments for the Partnership.  Current credit markets and general economic issues have had a significant negative impact on these types of transactions.  At this time very few LIHTC syndication and tax-exempt bond financing transactions are being completed.  While these types of transactions represent a long-term market opportunity for the Partnership, they are not the current investment focus.  The current market opportunities discussed above are significant and are expected to provide ongoing investment opportunities for the Partnership until such time as the market for LIHTC syndication transactions increases.
 
Financing Arrangements
 
The Partnership may finance the acquisition of additional tax-exempt mortgage revenue bonds through the reinvestment of cash flow, the issuance of additional BUCs, or securitization financing using our existing portfolio of tax-exempt mortgage revenue bonds.  Our operating policy is to use securitizations or other forms of leverage to maintain a level of debt financing between 40% and 60% of the total par value of our mortgage bond portfolio.  The current amount of outstanding debt financing related to the Partnership’s $141.3 million par value bond investment portfolio is approximately $76.6 million which represents approximately 54% of the par value of its mortgage bond portfolio.  As of December 31, 2008, $57.0 million of the total outstanding debt related to the Partnership’s bond portfolio has been allocated to continuing operations $19.6 million has been allocated to discontinued operations.

The Partnership’s principal source of debt financing is provided under a tender option bond program sponsored by Bank of America, N.A., or the TOB Facility.  Under this financing arrangement, the Partnership placed 11 of its tax-exempt mortgage revenue bonds having an aggregate principal balance of $95.4 million into trusts, or the TOB Trusts, created between Bank of America and Deutsche Bank Trust Company Americas, as trustee.  The TOB Trusts issued senior securities, known as “Floater Certificates”, to unaffiliated institutional investors and subordinated residual interest securities, known as “Inverse Certificates”, to the Partnership.  Net proceeds generated from the sale of the Floater Certificates were applied by the Partnership to the repayment of our previous tender option bond financing that the Partnership obtained through the Merrill Lynch “P-Float” program.  The holders of the Floater Certificates issued by each TOB Trust are entitled to receive regular payments of interest from the TOB Trust at a variable rate which resets periodically and reflects prevailing short-term tax-exempt rates.  Payment of interest on a TOB Trust’s Floater Certificates is made on designated interest payment dates prior to any payments of interest on the Inverse Certificates issued by such TOB Trust.  As the holder of Inverse Certificates, the Partnership is entitled to receive the balance of the interest received by such TOB Trusts on the tax-exempt bonds held by it remaining available on interest payment dates after the payment of all interest due on the Floater Certificates issued by the TOB Trusts and the expenses of the TOB Trusts, including various fees.  Accordingly, the amount of interest paid to the Partnership on its Inverse Certificates is expected to vary over time, and could be eliminated altogether, due to fluctuations in the short-term interest rate payable on the Floater Certificates, expenses and other factors.  The Partnership retains a call option on the Floater Certificates which allows the Partnership to collapse the TOB Trusts at any time.  By retaining this level of control over the underlying tax-exempt mortgage revenue bonds, the Partnership is able to account for the TOB Facility as secured variable-rate borrowing.

4

Bank of America serves as liquidity provider to the TOB Trusts and if it is not fully reimbursed for funds advanced by it to make interest payments on the Floater Certificates or to redeem Floater Certificates that are tendered under the terms of the TOB Trust agreement, the Partnership is required to reimburse Bank of America for any such shortfalls.  The Partnership is also obligated to pay various fees to Bank of America.  In order to secure these obligations, the Partnership is required to pledge cash or certain highly-rated securities as collateral.  As security for the TOB Facility, the Partnership has pledged all of its Inverse Certificates, five additional tax-exempt mortgage bonds with an aggregate principal balance of $45.9 million and certain taxable mortgage loans made by it to the owners of apartment properties financed with tax-exempt mortgage revenue bonds held by it to secure its obligations under these arrangements.  The Partnership may be required to provide additional collateral during the term of the TOB Trusts due to variations in interest rates and in the value of the collateral provided by it and of the tax-exempt mortgage revenue bonds held by the TOB Trusts.
 
In connection with the TOB Facility, the Partnership acquired an interest rate cap derivative from US Bank, N.A. on July 7, 2008.  The interest rate cap derivative has a notional value of $60.0 million and an effective cap rate before remarketing, credit enhancement, liquidity and trustee fees of 2.5% per annum.  After considering the current TOB facility fees, the interest rate cap derivative caps $60.0 million of the Partnership’s variable rate debt under the TOB Facility at an effective rate of 4.15% per annum, thus reducing the Partnership’s exposure to significant increases in the variable interest rate paid on the TOB facility.
 
The TOB Facility is a one-year agreement with a one-year renewal option held by Bank of America.  Given the initial term of the TOB Facility, all amounts borrowed under this facility are due on July 3, 2009 unless the TOB facility is renewed.  We are currently negotiating with Bank of America and expect to renew the TOB Facility.  In addition, we are currently negotiating with other potential lenders to provide a facility similar to the current TOB Facility, except with a longer term, or another alternative form of financing.
 
In addition to this tender option bond financing, the Partnership has $30.9 million of mortgage debt related to apartment properties in Ohio, Kentucky, Virginia and Georgia owned by eight limited partnerships of which wholly-owned subsidiaries of the Partnership are the 99% limited partners.  Approximately $19.9 million in outstanding debt financing related to the properties located in Ohio and Kentucky is due in less than one year, however, the mortgage loan contains three one-year renewal options held by the Partnership.  The Partnership intends to provide appropriate notification to the lender and renew the mortgage for an additional year.  However, if the current illiquidity in the financial markets continues or further deteriorates, our ability to renew or refinance our outstanding TOB facility and mortgage debt financing may be negatively affected.

The Partnership intends to issue BUCs from time to time to raise additional equity capital as needed to fund investment opportunities.  In January 2007, the Partnership filed a Registration Statement on Form S-3 with the Securities and Exchange Commission (the “SEC”) relating to the sale of up to $100.0 million of its BUCs.  The Partnership intends to issue BUCs from time to time under this Registration Statement to raise additional equity capital as needed to fund investment opportunities.  Raising additional equity capital for deployment into new investment opportunities is part of our overall growth strategy outlined above.  Pursuant to this Registration Statement, in April 2007 the Partnership issued, through an underwritten public offering, a total of 3,675,000 BUCs at a public offering price of $8.06 per BUC.  Net proceeds realized by the Partnership from the issuance of the additional BUCs were approximately $27.5 million, after payment of an underwriter’s discount and other offering costs of approximately $2.1 million.  The proceeds were used to acquire additional tax-exempt revenue bonds and other investments meeting the Partnership’s investment criteria and for general working capital needs.  This Registration Statement remains active with the SEC and is available for the Partnership to conduct further underwritten public offerings.

In October 2008, the Partnership filed a Registration Statement on Form S-3 with the SEC relating to a Rights Offering.  Pursuant to this Registration Statement, the Partnership may issue Rights Certificates to existing BUC holders.  Each Rights Certificate will entitle the holder to purchase additional BUCs at a price established in the Rights Offering.  One Rights Certificate will be issued for every four BUCs owned at the time of the offering.  The Partnership has not yet determined when, or if, such a Rights Offering will be conducted.
 
Recent Developments
 
In February 2009, a wholly-owned subsidiary of the Partnership acquired the 99% limited partnership position in a property known as the Greens of Pine Glen (the “Greens”) for a total purchase price of $7.2 million, including transaction expenses.  The purchase price was funded through a first mortgage of $6.5 million and cash on hand of $0.7 million.  This represents the ninth MF Property owned by the Partnership.
 
In February 2009, we redeemed our tax-exempt mortgage revenue bonds securitized by Ashley Pointe at Eagle Crest in Evansville, Indiana, Woodbridge Apartments of Bloomington III in Bloomington, Indiana and Woodbridge Apartments of Louisville II, in Louisville, Kentucky.  The properties financed by these redeemed mortgage revenue bonds were required to be consolidated into our financial statements as VIEs under FIN 46R as described below under “Effects of Adoption of FIN 46R on Financial Reporting”.  In order to properly reflect the transaction under FIN 46R, the Company will record the sale of the properties as though they were owned by the Company.  The transaction was completed in the first quarter of 2009 for a total purchase price of $32.0 million resulting in an estimated gain on sale for GAAP reporting to the Company of approximately $26.0 million.  The redemption of the bonds did not result in a taxable gain to the Partnership.  The Company presented the VIEs as discontinued operations at December 31, 2008.  The redeemed bonds were collateral on the Partnership’s TOB facility.  As of the closing date of the redemption, the Company placed on deposit with Bank of America $23.6 million in cash as replacement collateral.  Such funds on deposit may be used to reduce the amount of debt outstanding on the TOB facility.  See Footnote 7 to the Consolidated Financial Statements for further discussion.

5

On a stand-alone basis, the Partnership received approximately $30.9 million of net proceeds from the bond redemption.  These proceeds represent the repayment of the bond par values plus accrued base interest and approximately $2.3 million of contingent interest.  The contingent interest, recognized in the first quarter of 2009, represents additional earnings to the Partnership beyond the recurring base interest earned on the bond portfolio.  The contingent interest also represents additional Cash Available for Distribution to the BUC holders of approximately $1.7 million, or $0.13 per unit.

In October 2008, a wholly-owned subsidiary of the Partnership acquired the 99% limited partnership position in a property known as Glynn Place for a total purchase price of $5.9 million, including transaction expenses.  The purchase price was funded through a first mortgage of $4.5 million and cash on hand of $1.4 million.  This represents the eighth MF Property owned by the Partnership.
 
Effects of Recent Changes in Credit Markets
 
Recent economic conditions have been unprecedented and challenging, with significantly tighter credit conditions and slower growth expected in 2009.  Throughout 2008, continued concerns about the systemic impact of inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S., European and other international mortgage markets and declining residential and commercial real estate markets contributed to increased market volatility and diminished expectations for the U.S., European and other economies. In the third quarter, added concerns fueled by the federal government conservatorship of the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, the declared bankruptcy of Lehman Brothers Holdings Inc., the U.S. government’s loan to American International Group Inc., as well as other federal government interventions in the U.S. credit markets and similar events in Europe and other regions led to increased uncertainty and instability in global capital and credit markets. These conditions, combined with volatile oil prices, declining business and consumer confidence and increased unemployment have contributed to global volatility of unprecedented levels.
 
As a result of these conditions, the cost and availability of credit has been, and may continue to be, adversely affected in all markets in which we operate. Concern about the stability of the markets generally, and the strength of counterparties specifically, has led many lenders and institutional investors to reduce, and in some cases, cease, to provide funding to borrowers. Continued turbulence in the U.S., European and other international markets and economies may adversely affect our liquidity and financial condition. If these market and economic conditions continue, they may limit our ability to replace or renew maturing liabilities on a timely basis, access the capital markets to meet liquidity and capital expenditure requirements and may result in adverse effects on our financial condition and results of operations.

Although the consequences of these events and their impact on our ability to pursue our plan to grow through investments in additional tax-exempt bonds secured by first mortgages on affordable multifamily housing projects are not fully known, we do not anticipate that our existing assets will be adversely affected in the long-term.  We believe that if there are continued defaults on subprime single family mortgages and a general contraction of credit available for single family mortgage loans, additional demand for affordable rental housing may be created and, as a result, may have a positive economic effect on apartment properties financed by the tax-exempt bonds held by the Partnership.  We believe the current tightening of credit may also create opportunities for additional investments consistent with the Partnership's investment strategy because it may result in fewer parties competing to acquire tax-exempt bonds issued to finance affordable housing.  There can be no assurance that we will be able to finance additional acquisitions of tax-exempt bonds through either additional equity or debt financing.

Management and Employees
 
The Partnership is managed by its general partner, America First Capital Associates Limited Partnership Two (“AFCA 2”).  The Partnership has no employees, executive officers or directors.  Certain services are provided to the Partnership by employees of Burlington, which is the general partner of AFCA 2, and the Partnership reimburses Burlington for its allocated share of these salaries and benefits.  The Partnership is not charged, and does not reimburse Burlington, for the services performed by executive officers of Burlington.
 
Competition
 
The Partnership competes with private investors, lending institutions, trust funds, investment partnerships and other entities with objectives similar to the Partnership for the acquisition of tax-exempt mortgage revenue bonds and other investments.  This competition could reduce the availability of tax-exempt mortgage revenue bonds for acquisition and reduce the interest rate that issuers pay on these bonds.
 
Because the Partnership holds tax-exempt mortgage revenue bonds secured entirely by multifamily residential properties and holds an interest in the MF Properties, the Partnership may be considered to be in competition with other residential real estate in the same geographic areas.  In each city in which the properties financed by the Partnership’s tax-exempt mortgage revenue bonds owned by the Partnership or MF Properties are located, such properties compete with a substantial number of other multifamily properties.  Multifamily properties also compete with single-family housing that is either owned or leased by potential tenants.  To compete effectively, the apartment properties financed or owned by the Partnership must offer quality apartments at competitive rental rates.  In order to maintain occupancy rates and attract quality tenants, the Partnership’s apartment properties may also offer rental concessions, such as free rent to new tenants for a stated period.  These apartment properties also compete by offering quality apartments in attractive locations and that provide tenants with amenities such as recreational facilities, garages and pleasant landscaping.
 
Environmental Matters
 
The Partnership believes that each of the MF Properties and the properties collateralizing its tax-exempt mortgage revenue bonds are in compliance, in all material respects, with federal, state and local regulations regarding hazardous waste and other environmental matters and is not aware of any environmental contamination at any of such properties that would require any material capital expenditure by the underlying properties and therefore the Partnership for the remediation thereof.
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Tax Status
 
The Partnership is classified as a partnership for federal income tax purposes and accordingly, it makes no provision for income taxes.  The distributive share of the Partnership’s income, deductions and credits is included in each BUC holder’s income tax return.
 
The Partnership’s subsidiaries are “C” corporations for income tax purposes and file a separate income tax returns.  Therefore, the Partnership is only subject to income taxes on this investment to the extent it receives dividends from the subsidiaries.
 
The VIEs which are reported on a consolidated basis with the Partnership for GAAP reporting purposes as described below under “Effect of Adoption of FIN 46R on Financial Reporting” are separate legal entities who record and report income taxes based upon their individual legal structure which may include corporations, limited partnerships and limited liability companies.  The Partnership does not presently believe that the consolidation of VIEs for reporting under GAAP will impact the Partnership’s tax status, amounts reported to BUC holders on IRS Form K-1, the Partnership’s ability to distribute tax-exempt income to BUC holders, the current level of quarterly distributions or the tax-exempt status of the underlying mortgage revenue bonds.
 
Effect of Adoption of FIN 46R on Financial Reporting
 
The Partnership is required to consolidate the assets, liabilities, results of operations and cash flows of certain entities that meet the definition of a “variable interest entity” (“VIE”) into the Partnership’s financial statements under the provisions of FIN 46R.  Management has determined that eight of the entities which own multifamily apartment properties financed by the Partnership’s tax-exempt mortgage revenue bonds are VIEs.  Because management determined that the Partnership is the primary beneficiary of each of these VIEs pursuant to the terms of each tax-exempt mortgage revenue bond and the criteria within FIN 46R, the Partnership consolidated the assets, liabilities and results of operations of these VIEs’ multifamily properties into the Partnership’s financial statements.  Transactions and accounts between the Partnership and the consolidated VIEs, including the indebtedness underlying the tax-exempt mortgage bonds secured by the properties owned by the VIEs, have been eliminated in consolidation.  As of December 31, 2008, five of these consolidated VIEs are included in the results from continuing operations while three are presented as discontinued operations.
 
All financial information in this Form 10-K presented on the basis of Accounting Principles Generally Accepted in the United States of America (GAAP), is that of the Partnership and the VIEs on a consolidated basis.  We refer to the Partnership, its wholly owned subsidiaries (each a “Holding Company”), and the consolidated VIEs throughout this Form 10-K as the “Company”.  We refer to the Partnership and Holding Company, without consolidation of the VIEs, as the “Partnership.”
 
General Information
 
We are a Delaware limited partnership.  Our general partner is AFCA 2, whose general partner is Burlington.  Since 1984, Burlington has specialized in the management of investment funds, many of which were formed to acquire real estate investments such as tax-exempt mortgage revenue bonds, mortgage securities and multifamily real estate properties.  Burlington maintains its principal executive offices at 1004 Farnam Street, Suite 400, Omaha, Nebraska 68102, and its telephone number is (402) 444-1630.

We do not have any employees of our own.  Employees of Burlington, acting through our general partner, are responsible for our operations and we reimburse Burlington for the allocated salaries and benefits of these employees and for other expenses incurred in running our business operations.  In connection with the operation of the Partnership, our general partner is entitled to an administrative fee in an amount equal to 0.45% per annum of principal amount of the revenue bonds, other tax-exempt investments and taxable mortgage loans held by the Partnership.  Nine of the tax-exempt revenue bonds held by the Partnership provide for the payment of this administrative fee to the general partner by the owner of the financed property.  When the administrative fee is payable by a property owner, it is subordinated to the payment of all base interest to the Partnership on the tax-exempt revenue bond on that property.  Our Agreement of Limited Partnership provides that the administrative fee will be paid directly by the Partnership with respect to any investments for which the administrative fee is not payable by the property owner or a third party.  In addition, our Agreement of Limited Partnership provides that the Partnership will pay the administrative fee to the general partner with respect to any foreclosed mortgage bonds.

Our general partner or its affiliates may also earn mortgage placement fees in connection with the identification and evaluation of additional investments that we acquire.  Any mortgage placement fees will be paid by the owners of the properties financed by the acquired mortgage revenue bonds out of bond proceeds.  The amount of mortgage placement fees, if any, will be subject to negotiation between the general partner or its affiliates and such property owners.

Properties Management is an affiliate of Burlington that is engaged in the management of apartment complexes.  Properties Management currently manages the eight MF Properties and ten of the properties whose tax-exempt bonds are held by the Partnership and earns a fee paid out of property revenues.  Properties Management may also seek to become the manager of apartment complexes financed by additional mortgage bonds acquired by the Partnership, subject to negotiation with the owners of such properties.  If the Partnership acquires ownership of any property through foreclosure of a revenue bond, Properties Management may provide property management services for such property and, in such case, earn a fee payable out of property revenues.

Our sole limited partner is America First Fiduciary Corporation Number Five, a Nebraska corporation. BUCs represent assignments by the sole limited partner of its rights and obligations as a limited partner.

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Information Available on Website

The Partnership’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and press releases are available free of charge at www.ataxfund.com as soon as reasonably practical after they are filed with the SEC.  The information on the website is not incorporated by reference into this Form 10-K.
 
Item 1A.  Risk Factors
 
The financial condition, results of operations and cash flows of the Partnership are affected by various factors, many of which are beyond the Partnership’s control.  These include the following:
 
There are risks associated with our participation in a tender option bond financing program.
 
Our principal source of debt financing is provided under a TOB Facility sponsored by Bank of America, N.A.  In order to obtain this debt financing, we have securitized many of our tax-exempt mortgage revenue bonds through the Bank of America tender option bond, or TOB, program.  The TOB program replaced our previous financing facility under the Merrill Lynch “P-Float” program.  Under the TOB program, we deposit tax-exempt mortgage revenue bonds into various trusts which then issue senior Floater Certificates to institutional investors and a residual interest (known as an Inverse Certificate) to us.  Each trust pays interest on its Floater Certificates at a variable rate from the interest payments received by it from its underlying tax-exempt mortgage revenue bonds.  The Company, as the holder of Inverse Certificates, is entitled to the amount of interest received by the each TOB trust after the trust has paid the full amount of interest due on the Floater Certificates and all of the expenses of the trust, including various fees to the trustee, remarketing agents and liquidity providers.  Specific risks associated with this program include the following:
 
Changes in short-term interest rates can adversely affect the cost of our tender option bond financing program and could result in a loss of assets pledged as collateral for this financing.
 
Payments on Inverse Certificates are subordinate to payments on the Floater Certificates and payment of trust expenses and no party guarantees the payment of any amounts under the Inverse Certificates.  The rate on the Floater Certificates will reset periodically, usually weekly.  As a result, increases in short-term interest rates could reduce or even eliminate the Company's return on the Inverse Certificates.  A decrease in the value of the bonds held by a TOB trust may make it necessary to increase the interest rate paid on the Floater Certificates in order to successfully remarket Floater Certificates which may be tendered back to the trust by the holders of Floater Certificates.  Any such increase in interest rates on the Floater Certificates will result in a lower return on the Inverse Certificates.
 
In addition, increases in interest rates generally may reduce the value of the bonds held by the TOB trusts and the other collateral we have pledged to Bank of America.  As a result, rising interest rates could require us to pledge additional collateral to the TOB trust’s liquidity providers.  If the Company is not able to provide sufficient additional collateral, it may have to liquidate one or more TOB trusts and sell the underlying bonds at unfavorable prices.
 
Termination of our tender option bond financing can occur for a number of reasons which could cause the Company to lose both the mortgage bonds and the other collateral.
 
A TOB trust can terminate for a number of different reasons relating to problems with the bonds or problems with the TOB trust itself.  Problems with the bonds that could cause the trust to collapse include payment or other defaults or a determination that the interest on the bonds is taxable.  Problems with a TOB trust include a downgrade in the investment rating of the Floater Certificates, a ratings downgrade of the liquidity provider for the TOB trusts, increases in short term interest rates in excess of the interest paid on the underlying bonds, declines in the value of the bonds and other collateral pledged to the TOB trust, an inability to remarket the Floater Certificates or an inability to obtain liquidity for the trust.
 
In order to obtain the TOB Facility, the Company is required to pledge additional collateral to Bank of America as liquidity provider for the TOB trusts.  A decline in either (i) the value of the bonds held in a TOB trust or (ii) the other collateral previously pledged by us to a trust’s liquidity provider may require us to pledge additional collateral to the liquidity provider.  If we fail to do so, the TOB trust may be terminated.
 
In addition, because the Floater Certificates can be tendered back to the trust by the holders on a weekly basis, the trusts may need to remarket the Floater Certificates from time to time.  If a trust is not able to remarket its Floater Certificates, its liquidity provider will be required to buy the Floater Certificates and may collapse the TOB trust and sell the bonds and other collateral in the TOB Trust to reimburse itself for the price it paid for the Floater Certificates.
 
In each of these cases, the TOB trusts will be collapsed and the bonds held by the trusts will be sold within days of the event causing the collapse.  If the proceeds from the sale of the bonds is not sufficient to pay the principal amount of the Floater Certificates with accrued interest and the other expenses of the TOB trusts, then the collateral pledged to the liquidity provider will also be sold.  As a result, the Company may not only lose its investment in the Inverse Certificates, but could also lose all or part of the collateral pledged in connection with one or more TOB trusts.
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If we are unable to extend or renew our tender option bond financing beyond its current term, the Company could lose both the mortgage bonds and the other collateral.
 
Our TOB Facility with Bank of America has a one year term and may be renewed for an additional year at the option of Bank of America.  The initial one-year term expires on July 3, 2009.  We are currently negotiating with Bank of America to renew the TOB Facility, but there can be no assurance that Bank of America will renew our TOB Facility.  In addition, we are currently negotiating with other potential lenders to provide a facility similar to the current TOB Facility, except with a longer term, or another alternative form of financing, but there can be no assurance that we will be able to refinance or replace our TOB Facility with another lender on satisfactory terms or at all, particularly in light of the current illiquidity in the financial markets.  If we are able to refinance with another lender, we may incur additional financing costs and higher interest expense in the future.  If we are unable to renew or replace our TOB Facility with another lender prior to July 3, 2009, we would be forced to terminate all of the TOB trusts and liquidate the trust assets under potentially adverse market conditions.  As a result, we could incur a loss of our entire investment in the Inverse Certificates and the other collateral pledged to Bank of America. If we refinance with another lender, we may incur additional financing costs and higher interest expense in the future.  .
 
An insolvency or receivership of Bank of America would cause the TOB trusts to collapse and could impair our ability to recover our collateral.
 
In the event Bank of America is determined to be insolvent, it could be placed in receivership by the Federal Deposit Insurance Corporation.  In that case, the FDIC will assume control over Bank of America and its operations.  In that situation, it is possible that the Company would not be able to obtain the mortgage bonds and other collateral pledged to the TOB trusts under our TOB Facility with Bank of America or receive the payments due from the TOB trusts in a timely fashion.  There can be no assurance that following any such insolvency or receivership the Company would ultimately receive the collateral pledged to the TOB trusts on demand, as required by the documents or at all.

The recent downturn in the credit markets has increased the cost of borrowing and has made financing difficult to obtain, each of which may have a material adverse effect on our results of operations and business.

Recent economic conditions have been unprecedented and challenging, with significantly tighter credit conditions and slower growth expected in 2009.  Throughout 2008, continued concerns about the systemic impact of inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S., European and other international mortgage markets and declining residential and commercial real estate markets contributed to increased market volatility and diminished expectations for the U.S., European and other economies. In the third quarter, added concerns fueled by the federal government conservatorship of the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, the declared bankruptcy of Lehman Brothers Holdings Inc., the U.S. government’s loan to American International Group Inc., as well as other federal government interventions in the U.S. credit markets and similar events in Europe and other regions led to increased uncertainty and instability in global capital and credit markets. These conditions, combined with volatile oil prices, declining business and consumer confidence and increased unemployment have contributed to global volatility of unprecedented levels.
 
As a result of these conditions, the cost and availability of credit has been, and may continue to be, adversely affected in all markets in which we operate. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease, to provide funding to borrowers. Continued turbulence in the U.S., European and other international markets and economies may adversely affect our liquidity and financial condition. If these market and economic conditions continue, they may limit our ability to replace or renew maturing liabilities on a timely basis, access the capital markets to meet liquidity requirements and result in adverse effects on our financial condition and results of operations.
 
There are risks associated with the acquisition of ownership interests in multifamily housing projects in anticipation of future tax-exempt bond financings of these projects.
 
To facilitate our investment strategy of acquiring additional tax-exempt mortgage bonds secured by multifamily apartment properties, we may acquire ownership positions in apartment properties that we expect to ultimately sell in a syndication of LIHTCs.  Our plan is to provide tax-exempt mortgage financing to the new property owners at the time of the LIHTC syndication after the expiration of the compliance period relating to LIHTCs previously issued with respect to the property.  During the time we own an interest, directly or indirectly, in such apartment properties, any net income earned by us from these properties will not be exempt from federal or state income taxation.  Current credit market and general economic conditions have had a significant negative effect on the market for LIHTC syndications.  At this time very few LIHTC syndications are being completed.  For this and other reasons, there is no assurance that we will be able to sell our interests in these properties at the end of the LIHTC compliance period or that we will not incur a loss upon the sale of these property interests.  In addition, there is no assurance that we will be able to acquire tax-exempt bonds on these properties even if we are able to sell our interests in the properties in connection with the syndication of new LHITCs.
 
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The receipt of interest and principal payments on our tax-exempt mortgage revenue bonds will be affected by the economic results of the underlying multifamily properties.
 
Although our tax-exempt mortgage revenue bonds are issued by state or local housing authorities, they are not obligations of these governmental entities and are not backed by any taxing authority.  Instead, each of these revenue bonds is backed by a non-recourse loan made to the owner of the underlying apartment complex and is secured by a first mortgage lien on the property.  Because of the non-recourse nature of the underlying mortgage loans, the sole source of cash to pay base and contingent interest on the revenue bond, and to ultimately pay the principal amount of the bond, is the net cash flow generated by the operation of the financed property and the net proceeds from the ultimate sale or refinancing of the property.  This makes our investments in these mortgage revenue bonds subject to the kinds of risks usually associated with direct investments in multifamily real estate.  If a property is unable to sustain net cash flow at a level necessary to pay its debt service obligations on our tax-exempt mortgage revenue bond on the property, a default may occur.  Net cash flow and net sale proceeds from a particular property are applied only to debt service payments of the particular mortgage revenue bond secured by that property and are not available to satisfy debt service obligations on other mortgage revenue bonds that we hold.  In addition, the value of a property at the time of its sale or refinancing will be a direct function of its perceived future profitability.  Therefore, the amount of base and contingent interest that we earn on our mortgage revenue bonds, and whether or not we will receive the entire principal balance of the bonds as and when due, will depend to a large degree on the economic results of the underlying apartment complexes.
 
The net cash flow from the operation of a property may be affected by many things, such as the number of tenants, the rental rates, operating expenses, the cost of repairs and maintenance, taxes, government regulation, competition from other apartment complexes, mortgage rates for single-family housing and general and local economic conditions.  In most of the markets in which the properties financed by our bonds are located, there is significant competition from other apartment complexes and from single-family housing that is either owned or leased by potential tenants.  Low mortgage interest rates make single-family housing more accessible to persons who may otherwise rent apartments.
 
In the event of a default on a mortgage revenue bond (or a taxable loan on the same property), we will have the right to foreclose on the mortgage or deed of trust securing the property.  If we take ownership of the property securing a defaulted revenue bond or taxable loan, we will be entitled to all net cash flow generated by the property.  However, such amounts will no longer represent tax-exempt interest to us.
 
The value of the properties is the only source of repayment of our tax-exempt mortgage revenue bonds.
 
The principal of most of our tax-exempt mortgage revenue bonds does not fully amortize over their terms.  This means that all or some of the balance of the mortgage loans underlying these bonds will be repaid as a lump-sum “balloon” payment at the end of the term.  The ability of the property owners to repay the mortgage loans with balloon payments is dependent upon their ability to sell the properties securing our tax-exempt mortgage revenue bonds or obtain adequate refinancing.  The mortgage revenue bonds are not personal obligations of the property owners, and we rely solely on the value of the properties securing these bonds for security.  Similarly, if a tax-exempt mortgage revenue bond goes into default, our only recourse is to foreclose on the underlying multifamily property.  If the value of the underlying property securing the bond is less than the outstanding principal balance and accrued interest on the bond, we will suffer a loss.
 
In the event a property securing a tax-exempt mortgage revenue bond is not sold prior to the maturity or remarketing of the bond, any contingent interest payable from the net sale or refinancing proceeds of the underlying property will be determined on the basis of the appraised value of the underlying property.  Real estate appraisals represent only an estimate of the value of the property being appraised and are based on subjective determinations, such as the extent to which the properties used for comparison purposes are comparable to the property being evaluated and the rate at which a prospective purchaser would capitalize the cash flow of the property to determine a purchase price.  Accordingly, such appraisals may result in us realizing less contingent interest from a tax-exempt mortgage revenue bond than we would have realized had the underlying property been sold.
 
There are a number of risks related to the construction of multifamily apartment properties that may affect the tax-exempt bonds issued to finance these properties.
 
Three of the tax-exempt revenue bonds the Partnership currently holds are secured by multifamily apartment properties which are still under construction.  The Partnership may acquire additional tax-exempt revenue bonds issued to finance apartment properties in various stages of construction.  Construction of such properties generally takes approximately 12 to 18 months.  The principal risk associated with construction lending is the risk that construction of the property will be substantially delayed or never completed.  This may occur for a number of reasons including (i) insufficient financing to complete the project due to underestimated construction costs or cost overruns; (ii) failure of contractors or subcontractors to perform under their agreements, (iii) inability to obtain governmental approvals; (iv) labor disputes, and (v) adverse weather and other unpredictable contingencies beyond the control of the developer.  While the Partnership may be able to protect itself from some of these risks by obtaining construction completion guarantees from developers, agreements of construction lenders to purchase its bonds if construction is not completed on time, and/or payment and performance bonds from contractors, the Partnership may not be able to do so in all cases or such guarantees or bonds may not fully protect it in the event a property is not completed.  In other cases, the Partnership may decide to forego certain types of available security if it determines that the security is not necessary or is too expensive to obtain in relation to the risks covered.  If a property is not completed, or costs more to complete than anticipated, it may cause the Partnership to receive less than the full amount of interest owed to it on the tax-exempt bond financing such property or otherwise result in a default under the mortgage loan that secures its tax-exempt bond on the property.  In such case, the Partnership may be forced to foreclose on the incomplete property and sell it in order to recover the principal and accrued interest on its tax-exempt bond and it may suffer a loss of capital as a result.  Alternatively, the Partnership may decide to finance the remaining construction of the property, in which event it will need to invest additional funds into the property, either as equity or as a taxable loan.  Any return on this additional investment would not be tax-exempt.  Also, if the Partnership forecloses on a property, it will no longer receive tax-exempt interest on the bond issued to finance the property.  In addition, the overall return to the Partnership from its investment in such property is likely to be less than if the construction had been completed on time or within budget.
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There are a number of risks related to the lease-up of newly constructed or renovated properties that may affect the tax-exempt bonds issued to finance these properties.
 
Three of the tax-exempt revenue bonds the Partnership currently invests in are secured by affordable multifamily apartment properties which are still under construction.  The Partnership may acquire additional tax-exempt revenue bonds issued to finance properties in various stages of construction or renovation.  As construction or renovation is completed, these properties will move into the lease-up phase.  The lease-up of these properties may not be completed on schedule or at anticipated rent levels, resulting in a greater risk that these investments may go into default than investments secured by mortgages on properties that are stabilized or fully leased-up.  The underlying property may not achieve expected occupancy or debt service coverage levels.   While the Partnership may require property developers to provide it with a guarantee covering operating deficits of the property during the lease-up phase, it may not be able to do so in all cases or such guarantees may not fully protect the Partnership in the event a property is not leased up to an adequate level of economic occupancy as anticipated.
 
There is additional credit risk when we make a taxable loan on a property.
 
Taxable mortgage loans which we make to owners of the properties which secure mortgage revenue bonds held by us are non-recourse obligations of the property owner.  As a result, the sole source of principal and interest payments on these taxable loans is the net cash flow generated by these properties or the net proceeds from the sale of these properties.  The net cash flow from the operation of a property may be affected by many things as discussed above.  If a property is unable to sustain net cash flow at a level necessary to pay current debt service obligations on our taxable loan on such property, a default may occur.  In addition, any payment of principal and interest on a taxable loan on a particular property will be subordinate to payment of all principal and interest (including contingent interest) on the mortgage revenue bond secured by the same property.  As a result, there may be a higher risk of default on the taxable loans than on the mortgage revenue bonds.
 
The properties financed by our tax-exempt bonds are not completely insured against damages from hurricanes and other major storms.
 
Three of the multifamily housing properties financed by tax-exempt bonds held by the Partnership are located in Florida in areas that are prone to damage from hurricanes and other major storms.  Due to the significant losses incurred by insurance companies on policies written on properties in Florida damaged by hurricanes, property and casualty insurers in Florida have modified their approach to underwriting policies.  As a result, the owners of these Florida properties now assume the risk of first loss on a larger percentage of their property’s value.  If any of these properties were damaged in a hurricane or other major storm, the losses incurred could be significant and would reduce the cash flow available to pay base or contingent interest on the Partnership’s tax-exempt bonds collateralized by these properties.  In general, the current insurance policies on these properties carry a 5% deductible for wind claims on the insurable value of the properties.  The current insurable value of the Florida properties is approximately $52.4 million.
 
The Company may be adversely impacted by economic factors beyond its control and may incur impairment charges to its investment portfolio.
 
The credit and capital markets have continued to deteriorate.  If uncertainties in these markets continue, the markets deteriorate further or the Company experiences deterioration in the values of its investment portfolio, the Company may incur impairments to its investment portfolio which could negatively impact the Company’s financial condition, cash flows, and reported earnings.
 
We may suffer adverse consequences from changing interest rates.
 
We have financed the acquisition of some of our assets using variable-rate debt financing.  The interest that we pay on this financing fluctuates with a specific interest rate index.  If the interest rate index increases, our interest expense will increase.  This will reduce the amount of cash we have available for distribution and may affect the market value of our BUCs.
 
An increase in interest rates could also decrease the value of our tax-exempt mortgage bonds.  A decrease in the value of our tax-exempt mortgage revenue bonds could cause the debt financing counterparty to demand additional collateral.  If additional collateral is not available, the debt financing could be terminated and some or all of the bonds collateralizing such financing may be sold to repay the debt.  In that case, we would lose the net interest income from these bonds.  A decrease in the value of our tax-exempt mortgage revenue bonds could also decrease the amount we could realize on the sale of our investments and would decrease the amount of funds available for distribution to our BUC holders.
 
Our tax-exempt mortgage revenue bonds are illiquid assets and their value may decrease.
 
The majority of our assets consist of our tax-exempt mortgage revenue bonds.  These mortgage revenue bonds are relatively illiquid, and there is no existing trading market for these mortgage revenue bonds.  As a result, there are no market makers, price quotations or other indications of a developed trading market for these mortgage revenue bonds.  In addition, no rating has been issued on any of the existing mortgage revenue bonds and we do not expect to obtain ratings on mortgage revenue bonds we may acquire in the future.  Accordingly, any buyer of these mortgage revenue bonds would need to perform its own due diligence prior to a purchase.  As a result, our ability to sell our tax-exempt mortgage revenue bonds, and the price we may receive upon their sale, will be affected by the number of potential buyers, the number of similar securities on the market at the time and a number of other market conditions.  As a result, such a sale could result in a loss to us.
 
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Direct ownership of apartment properties will subject the Company to all of the risks normally associated with the ownership of commercial real estate.
 
We may acquire ownership of apartment complexes financed by our tax-exempt bonds in the event of a default on such bonds.  Additionally, we have acquired indirect interests in several apartment properties in order to facilitate the eventual acquisition of tax-exempt mortgage revenue bonds on the properties.  In either case, during the time we own an apartment complex, it will generate taxable income or losses from the operations of such property rather than tax exempt interest.  In addition, we will be subject to all of the risks normally associated with the operation of commercial real estate including declines in property value, occupancy and rental rates and increases in operating expenses.  We may also be subject to government regulations, natural disasters and environmental issues, any of which could have an adverse affect on our financial results and ability to make distributions to BUC holders.
 
We have assumed certain potential liability relating to recapture of tax credits on apartment properties.
 
Subsidiaries of the Company have acquired limited partner interests in several limited partnerships that own apartment properties that generated LIHTCs for the previous partners in these partnerships.  In connection with the acquisition by our subsidiaries of partnership interests in these partnerships, we have agreed to reimburse the prior partners for any liabilities they incur due to recapture of these tax credits to the extent the recapture liability is due to the operation of the properties after our subsidiaries acquired an interest therein in a manner inconsistent with the laws and regulations relating to such tax credits.

The rent restrictions and occupant income limitations imposed on properties financed by tax-exempt mortgage revenue bonds or which generate LIHTCs may limit the revenues of such properties.
 
All of the properties securing our tax-exempt mortgage revenue bonds or in which our subsidiaries hold indirect interests are subject to certain federal, state and/or local requirements with respect to the permissible income of their tenants.  Since federal subsidies are not generally available on these properties, rents must be charged on a designated portion of the units at a level to permit these units to be continuously occupied by low or moderate income persons or families.  As a result, these rents may not be sufficient to cover all operating costs with respect to these units and debt service on the applicable tax-exempt mortgage revenue bond.  This may force the property owner to charge rents on the remaining units that are higher than they would be otherwise and may, therefore, exceed competitive rents which may adversely affect the occupancy rate of a property securing an investment and the property owner’s ability to service its debt.
 
The properties securing our revenue bonds or in which our subsidiaries hold indirect interests may be subject to liability for environmental contamination and thereby increase the risk of default on such bonds.
 
The owner or operator of real property may become liable for the costs of removal or remediation of hazardous substances released on its property.  Various federal, state and local laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances.  We cannot assure you that the properties that secure our revenue bonds, or in which our subsidiaries hold indirect interests, will not be contaminated.  The costs associated with the remediation of any such contamination may be significant and may exceed the value of a property or result in the property owner defaulting on the revenue bond secured by the property.
 
We could be adversely affected if counterparties are unable to fulfill their obligations under our derivative agreements.
 
We have used interest rate swaps and caps to help us mitigate our interest rate risks.  However, these derivative transactions do not fully insulate us from the interest rate risks to which we are exposed.  We cannot assure you that a liquid secondary market will exist for any instruments purchased or sold in those transactions, thus, we may be required to maintain a position until exercise or expiration, which could result in losses.  Moreover, the derivative instruments are required to be marked to market with the difference recognized in earnings as interest expense which can result in significant volatility to reported net income over the term of these instruments.  The counterparty to certain of these agreements has the right to convert them to fixed-rate agreements, and it is possible that such a conversion could result in our paying more interest than we would under our variable-rate financing.  There is also a risk that a counterparty to such agreements will be unable to perform its obligations under the agreement.
 
Any future issuances of additional BUCs could cause their market value to decline.
 
We have the authority to issue additional BUCs representing assigned limited partner interests in the Company, and we plan to issue such BUCs from time to time.  The issuance of additional BUCs could cause dilution of the existing BUCs and a decrease in the market price of the BUCs.
 
If additional BUCs are issued but the Company is unable to invest the additional equity capital in assets that generate tax-exempt income at levels at least equivalent to our existing assets, the amount of cash available for distribution to BUC holders may decline.
 
12

The Company is not registered under the Investment Company Act.
 
The Company is not required to register as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”), because it operates under an exemption therefrom.  As a result, none of the protections of the Investment Company Act (disinterested directors, custody requirements for securities, and regulation of the relationship between a fund and its advisor) will be applicable to the Company.
 
The Company engages in transactions with related parties.
 
Each of the executive officers of Burlington and four of the managers of Burlington hold equity positions in Burlington.  A subsidiary of Burlington acts as our general partner, manages our investments, performs administrative services for us and earns certain fees that are either paid by the properties financed by our tax-exempt mortgage revenue bonds or by us.  Another subsidiary of Burlington provides on-site management for many of the multifamily apartment properties that underlie our tax-exempt bonds or in which our subsidiaries hold ownership interests and earns fees from the property owners based on the gross revenues of these properties.  The BUC holders of the limited-purpose corporations which own five of the apartment properties financed with tax-exempt bonds and taxable loans held by the Company are employees of Burlington who are not involved in the operation or management of the Company and who are not executive officers or managers of Burlington.  Because of these relationships, our agreements with Burlington and its subsidiaries are related-party transactions.  By their nature, related-party transactions may not be considered to have been negotiated at arm’s-length.  These relationships may also cause a conflict of interest in other situations where we are negotiating with Burlington.
 
Tax Risks
 
BUC holders may incur tax liability if any of the interest on our tax-exempt mortgage revenue bonds is determined to be taxable.
 
Certain of our tax-exempt mortgage revenue bonds bear interest at rates which include contingent interest.  Payment of the contingent interest depends on the amount of net cash flow generated by, and net proceeds realized from a sale of, the property securing the bond.  Due to this contingent interest feature, an issue may arise as to whether the relationship between the property owner and us is that of debtor and creditor or whether we are engaged in a partnership or joint venture with the property owner.  If the IRS were to determine that tax-exempt mortgage revenue bonds represented an equity investment in the underlying property, the interest paid to us could be viewed as a taxable return on such investment and would not qualify as tax-exempt interest for federal income tax purposes.  We have obtained unqualified legal opinions to the effect that interest on our tax-exempt mortgage revenue bonds is excludable from gross income for federal income tax purposes which opinions provide that interest paid to a “substantial user” or “related person” (each as defined in the Internal Revenue Code) is not exempt from federal income taxation.  However, these legal opinions have no binding effect on the IRS or the courts, and no assurances can be given that the conclusions reached will not be contested by the IRS or, if contested, will be sustained by a court.
 
In addition, the tax-exempt status of the interest paid on our tax-exempt mortgage revenue bonds is subject to compliance by the underlying properties, and the owners thereof, with the bond documents and covenants required by the bond-issuing authority and the Internal Revenue Code.  Among these requirements are tenant income restrictions, regulatory agreement compliance, reporting requirements, use of proceeds restrictions and compliance with rules pertaining to arbitrage.  Each issuer of the revenue bonds, as well as each of the underlying property owners/borrowers, has covenanted to comply with procedures and guidelines designed to ensure satisfaction with the continuing requirements of the Internal Revenue Code.  Failure to comply with these continuing requirements of the Internal Revenue Code may cause the interest on our bonds to be includable in gross income for federal income tax purposes retroactively to the date of issuance, regardless of when such noncompliance occurs.
 
In addition, we hold residual interests issued under our TOB financing facility with Bank of America which entitle us to a share of the tax-exempt interest of the mortgage revenue bonds held by the underlying TOB trusts.  It is possible that the characterization of the residual interest in these TOB trusts could be challenged and the income that we receive through these instruments could be treated as ordinary taxable income includable in our gross income for federal tax purposes.
 
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department.  Changes to the tax law, which may have retroactive application, could adversely affect us and our BUC holders.  It cannot be predicted whether, when, in what forms or with what effective dates the tax law applicable to us will be changed.
 
Not all of the interest income of the Company is exempt from taxation.
 
We have made, and may make in the future, taxable mortgage loans to the owners of properties which are secured by tax-exempt mortgage revenue bonds that we hold.  BUC holders will be taxed on their allocable share of this taxable interest income.  In any case that interest earned by the Company is taxable, a BUC holder’s allocable share of this taxable interest income will be taxable to the BUC holder regardless of whether an amount of cash equal to such allocable BUC is actually distributed to the BUC holder.
 
13

If the Company was determined not to be a partnership for tax purposes, it will have adverse economic consequences for the Company and its BUC holders.
 
We are a Delaware limited partnership and have chosen to operate as a partnership for federal income tax purposes.  As a partnership, to the extent we generate taxable income, BUC holders will be individually liable for income tax on their proportionate share of this taxable income, whether or not we make cash distributions.  The ability of BUC holders to deduct their proportionate share of the losses and expenses we generate will be limited in certain cases, and certain transactions may result in the triggering of the Alternative Minimum Tax for BUC holders who are individuals.
 
If the Company is classified as an association taxable as a corporation rather than as a partnership, we will be taxed on our taxable income, if any, and all distributions made by us to our BUC holders would constitute ordinary dividend income taxable to such BUC holders to the extent of our earnings and profits, which would include tax-exempt income, as well as any taxable income we might have, and the payment of these dividends would not be deductible by us.  The listing of the Company’s BUCs on the NASDAQ Global Market causes the Company to be treated as a “publicly traded partnership” under Section 7704 of the Code.  A publicly traded partnership is generally taxable as a corporation unless 90% or more of its gross income is “qualifying” income.  Qualifying income includes interest, dividends, real property rents, gain from the sale or other disposition of real property, gain from the sale or other disposition of capital assets held for the production of interest or dividends and certain other items.  Substantially all of the Company’s gross income will continue to be tax-exempt interest income on mortgage bonds.  While we believe that all of this interest income is qualifying income, it is possible that some or all of our income could be determined not to be qualifying income.  In such a case, if more than 10% of our annual gross income in any year is not qualifying income, the Company will be taxable as a corporation rather than a partnership for federal income tax purposes.  We have not received, and do not intend to seek, a ruling from the Internal Revenue Service regarding our status as a partnership for tax purposes.
 
Item 1B.  Unresolved Staff Comments.

None

Item 2.  Properties.

Each of the Partnership’s tax-exempt mortgage revenue bonds is collateralized by a multifamily housing property.  The Partnership does not hold title or any other interest in these properties, other than the first mortgages securing the bonds.

As a result of FIN 46R, the Company is required to consolidate certain of the multifamily residential properties securing its bonds because the owners of those properties are treated as VIEs for which the Company is the primary beneficiary. The Company consolidated eight multifamily housing properties owned by VIEs located in Florida, Indiana, Iowa, South Carolina and Kentucky as of December 31, 2008.  Five of these consolidated VIEs are reported in the results from continuing operations and three are reported as discontinued operations.  The Partnership does not hold title to the properties owned by the VIEs.

In addition to the properties owned by VIEs, the Company reports the financial results of the MF Properties on a consolidated basis due to the 99% limited partnership interests held by its subsidiary in the partnerships that own the MF Properties.  The Company consolidated eight MF Properties located in Ohio, Kentucky, Virginia and Georgia as of December 31, 2008.

14

The following table sets forth certain information for each of the consolidated properties as of December 31, 2008:
 
MF Properties
 
                       
Buildings and Improvements
   
Carrying
 
     
Number of Units
 
Average Square Feet per Unit
         
Value at
 
Property Name
Location
   
Land
   
December 31, 2008
 
Eagle Ridge
Erlanger, KY
    64       1,183     $ 290,763     $ 2,393,762     $ 2,684,525  
Meadowview
Highland Heights, KY
    118       1,119       703,936       4,912,777       5,616,713  
Crescent Village
Cincinnati, OH
    90       1,226       353,117       4,312,152       4,665,269  
Willow Bend
Hilliard, OH
    92       1,221       580,130       3,006,278       3,586,408  
Postwoods I
Reynoldsburg, OH
    92       1,186       572,066       3,247,757       3,819,823  
Postwoods II
Reynoldsburg, OH
    88       1,186       576,438       3,272,331       3,848,769  
Churchland
Chesapeake, VA
    124       840       1,171,146       6,258,835       7,429,981  
Glynn Place
Brunswick, GA
    128       1188       743,996       4,473,767       5,217,763  
                                        36,869,251  
Less accumulated depreciation (depreciation expense of approximately $1.1 million in 2008)
                      (1,519,845 )
Balance at December 31, 2008
                                    $ 35,349,406  
                                           
VIEs - Continuing Operations
 
                             
Buildings and Improvements
   
Carrying
 
     
Number of Units
 
Average Square Feet per Unit
           
Value at
 
Property Name
Location
   
Land
   
December 31, 2008
 
Ashley Square
Des Moines, IA
    144       970     $ 650,000     $ 7,522,190     $ 8,172,190  
Bent Tree Apartments
Columbia, SC
    232       989       986,000       11,391,963       12,377,963  
Fairmont Oaks Apartments
Gainsville, FL
    178       1,139       850,400       8,162,077       9,012,477  
Iona Lakes Apartments
Ft. Myers, FL
    350       807       1,900,000       17,034,120       18,934,120  
Lake Forest Apartments
Daytona Beach, FL
    240       1,093       1,396,800       10,915,732       12,312,532  
                                        60,809,282  
Less accumulated depreciation (depreciation expense of approximately $2.3 million in 2008)
                      (15,979,825 )
Balance at December 31, 2008
                                      44,829,457  
Total Net Real Estate Asssets at December 31, 2008
                                  $ 80,178,863  

Item 3.  Legal Proceedings.

There are no material pending legal proceedings to which the Partnership is a party or to which any of the properties collateralizing the Partnership's tax-exempt mortgage revenue bonds are subject.
 
Item 4.  Submission of Matters to a Vote of Security Holders.

No matter was submitted during the fourth quarter of the fiscal year ended December 31, 2008 to a vote of the Partnership's security holders.



 
15

 

PART II

Item 5. Market for the Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities.

     (a)  Market Information. BUCs represent assignments by the sole limited partner of its rights and obligations as a limited partner. The rights and obligations of BUC holders are set forth in the Partnership’s Agreement of Limited Partnership. BUCs of the Partnership trade on the NASDAQ Global Market under the trading symbol "ATAX". The following table sets forth the high and low sale prices for the BUCs for each quarterly period from January 1, 2007 through December 31, 2008.


2008
 
High
 
Low
 
1st Quarter
  $ 7.50   $ 5.64  
2nd Quarter
  $ 7.50   $ 5.95  
3rd Quarter
  $ 6.95   $ 4.23  
4th Quarter
  $ 6.51   $ 4.25  
               
2007
 
High
 
Low
 
1st Quarter
  $ 8.50   $ 7.80  
2nd Quarter
  $ 8.36   $ 7.75  
3rd Quarter
  $ 8.16   $ 7.00  
4th Quarter
  $ 8.04   $ 6.35  


     (b) BUC Holders. The approximate number of BUC holders on December 31, 2008 was 4,600.


     (c) Distributions. Distributions to BUC holders were made on a quarterly basis during 2008, 2007, and 2006. Total distributions for the years ended December 31, 2008, 2007, and 2006 were $9,140,000, $6,801,000, and $5,312,000, respectively.   The distributions paid or accrued per BUC during the fiscal years ended December 31, 2008, 2007, and 2006 were as follows:


       
 
For the
For the
For the
 
Year Ended
Year Ended
Year Ended
 
Dec. 31, 2008
Dec. 31, 2007
Dec. 31, 2006
       
Cash Distributions
$0.5400 $0.5400 $0.5400


See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for information regarding the sources of funds that will be used for cash distributions and for a discussion of factors which may adversely affect the Partnership's ability to make cash distributions at the same levels in 2009 and thereafter.

 
16

 
(d) Sales of Unregistered Securities. None

(e) Issuer Purchases of Equity Securities.
 
The following table sets forth the purchase of BUCs made by Burlington during the fourth quarter of 2008.  All purchases were made by Burlington pursuant to a prearranged trading plan established in accordance with the guidelines specified by Rule 10b5-1 under the Securities Exchange Act of 1934.  This trading plan was publicly announced on December 20, 2007 and provided that Burlington may acquire up to $2.0 million of BUCs.  The Partnership made no purchases of BUCs during the period shown in the table and is not allowed to purchase BUCs under the terms of its Limited Partnership Agreement.
 
Issuer Purchases of Equity Securities

 
 
 
 
 
Period
 
 
 
(a)
Total Number of
BUCs purchased
 
 
 
(b)
Average price paid per BUC
 
(c)
Total number of BUCs purchased as part of publicly announced plans or programs
(d)
Maximum number (or approximate dollar value) of BUCs that may yet be purchased under the plans or programs
October 1 through October 30, 2008
25,000
$5.76
25,000
$445,000
November 5 through November 28, 2008
20,000
$5.15
20,000
$345,000
December 3 through December 26, 2008
20,000
$4.95
20,000
$245,000
Total
65,000
$5.32
65,000
$245,000

Item 6.  Selected Financial Data.

Set forth below is selected financial data for the Company as of and for the years ended December 31, 2004 through 2008. The information should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed in response to Item 8 of this report.  As discussed in Note 7, during 2008 certain operations of the Company were determined to be discontinued operations and, therefore, the selected financial data tables have been adjusted to reflect the discontinued operations.  In addition, please refer to the discussions in Item 1 and Item 7 regarding the adoption of FIN 46R and its effects on the presentation of financial data in this report on Form 10-K.

17

 
   
For the
   
For the
   
For the
   
For the
   
For the
 
   
Year Ended
   
Year Ended
   
Year Ended
   
Year Ended
   
Year Ended
 
   
Dec. 31, 2008
   
Dec. 31, 2007
   
Dec. 31, 2006
   
Dec. 31, 2005
   
Dec. 31, 2004
 
                               
Property revenue
  $ 13,773,801     $ 11,208,209     $ 9,266,223     $ 9,119,726     $ 8,278,578  
Real estate operating expenses
    (8,872,219 )     (7,299,257 )     (5,945,364 )     (5,733,147 )     (4,610,774 )
Depreciation and amortization expense
    (4,987,417 )     (3,611,249 )     (1,895,546 )     (1,874,146 )     (1,952,402 )
Mortgage revenue bond investment income
    4,230,205       3,227,254       1,418,289       1,061,242       923,108  
Other bond investment income
    -       -       4,891       73,179       321,750  
Other interest income
    150,786       751,797       337,008       102,474       78,367  
Gain (loss) on sale of securities
    (68,218 )     -       -       126,750       -  
Interest expense
    (4,106,072 )     (2,595,616 )     (1,303,760 )     (572,340 )     (786,638 )
Hurricane related expenses
    -       -       -       -       (771,666 )
General and administrative expenses
    (1,808,459 )     (1,577,551 )     (1,575,942 )     (2,028,366 )     (1,484,598 )
Minority interest
    9,364       13,030       -       -       -  
Income (loss) from continuing operations
    (1,678,229 )     116,617       305,799       275,372       (4,275 )
Income from discontinued operations, (including gain on sale of $11,667,246 and $18,771,497 in 2006 and 2005, respectively)
    646,989       824,249       12,470,936       19,289,770       317,219  
Income (loss) before cumulative effect of accounting change
    (1,031,240 )     940,866       12,776,735       19,565,142       312,944  
Cumulative effect of accounting change
    -       -       -       -       (38,023,001 )
                                         
Net income (loss)
    (1,031,240 )     940,866       12,776,735       19,565,142       (37,710,057 )
Less: general partners' interest in net income
    64,059       99,451       1,627,305       1,021,216       72,436  
Unallocated income (loss) related to variable interest entities
    (3,756,894 )     (3,452,591 )     3,863,226       1,443,519       (44,953,615 )
Limited partners' interest in net income
  $ 2,661,595     $ 4,294,006     $ 7,286,204     $ 17,100,407     $ 7,171,122  
Limited partners' interest in net income per unit (basic and diluted):
                                       
Income from continuing operations
  $ 0.20     $ 0.34     $ 0.74     $ 0.58     $ 0.52  
Income from discontinued operations, (including gain on sale of $1.91 per unit)
    -       -       -       1.16       -  
Income before cumulative effect of accounting change
    0.20       0.34       0.74       1.74       0.52  
Cumulative effect of accounting change
    -       -       -       -       0.21  
Net income, basic and diluted, per unit
  $ 0.20     $ 0.34     $ 0.74     $ 1.74     $ 0.73  
Distributions paid or accrued per BUC
  $ 0.5400     $ 0.5400     $ 0.5400     $ 0.8068     $ 0.5400  
Investments in tax-exempt mortgage
                                       
    revenue bonds, at estimated fair value
  $ 44,492,526     $ 66,167,116     $ 27,103,398     $ 17,033,964     $ 16,031,985  
Real estate assets, net
  $ 80,178,863     $ 70,246,514     $ 47,876,652     $ 47,788,007     $ 50,134,781  
Total assets
  $ 157,863,276     $ 164,879,008     $ 100,200,189     $ 111,574,124     $ 118,147,479  
Total debt-continuing operations
  $ 87,890,367     $ 72,464,333     $ 26,919,333     $ 27,139,333     $ 43,424,333  
Total debt-discontinued operations
  $ 19,583,660     $ 18,850,667     $ 18,850,667     $ 18,850,667     $ 18,850,667  
                                         
Cash flows provided by
                                       
     operating activities
  $ 4,445,215     $ 4,227,023     $ 5,637,095     $ 3,851,827     $ 5,128,258  
Cash flows provided by (used in)
                                       
     investing activities
  $ (16,598,170 )   $ (48,007,185 )   $ 6,396,786     $ 23,104,860     $ (5,264,436 )
Cash flows provided by (used in)
                                       
     financing activities
  $ 4,692,149     $ 50,125,180     $ (6,855,558 )   $ (25,975,424 )   $ (843,588 )
Cash Available for Distribution ("CAD")(1)
  $ 6,248,920     $ 6,062,931     $ 7,876,824     $ 14,919,367     $ 6,086,921  
Weighted average number of BUCs
                                       
     outstanding, basic and diluted
    13,512,928       12,491,490       9,837,928       9,837,928       9,837,928  
(1) To calculate CAD, amortization expense related to debt financing costs and bond reissuance costs, Tier 2 income due to the general partner (as defined in the Agreement of Limited Partnership), interest rate derivative income or expense (including adjustments to fair value), provision for loan losses, impairments on bonds, losses related to VIEs including the cumulative effect of accounting change, and depreciation and amortization expense on MF Property assets are added back to the Company’s net income (loss) as computed in accordance with GAAP. The Company uses CAD as a supplemental measurement of its ability to pay distributions.  The Company believes that CAD provides relevant information about its operations and is necessary along with net income (loss) for understanding its operating results.
18

Management utilizes a calculation of Cash Available for Distribution (“CAD”) as a means to determine the Partnership’s ability to make distributions to BUC holders.  The General Partner believes that CAD provides relevant information about the Company’s operations and is necessary along with net income for understanding its operating results.  There is no generally accepted methodology for computing CAD, and the Company’s computation of CAD may not be comparable to CAD reported by other companies.  Although the Company considers CAD to be a useful measure of its operating performance, CAD should not be considered as an alternative to net income or net cash flows from operating activities which are calculated in accordance with GAAP.

The following sets forth a reconciliation of the Company's net income (loss) as determined in accordance with GAAP and its CAD for the periods set forth.
                               
   
2008
   
2007
   
2006
   
2005
   
2004
 
Net income (loss)
  $ (1,031,240 )   $ 940,866     $ 12,776,735     $ 19,565,142     $ (37,710,057 )
Net (income) loss related to VIEs and eliminations due to consolidation
    3,756,894       3,452,591       (3,863,226 )     (1,443,519 )     4,867,444  
Cumulative effect of accounting change
    -       -       -       -       38,023,001  
Net income before impact of VIE consolidation
  $ 2,725,654     $ 4,393,457     $ 8,913,509     $ 18,121,623     $ 5,180,388  
Change in fair value of derivatives and interest rate derivative amortization
    721,102       249,026       210       (364,969 )     117,916  
Depreciation and amortization expense (Partnership only)
    2,840,500       1,478,278       25,605       24,467       196,122  
Tier 2 Income distributable to the General Partner (1)
    (38,336 )     (57,830 )     (1,062,500 )     (3,595,754 )     -  
Provision for loan losses
    -       -       -       734,000       217,654  
Impairment on tax-exempt mortgage revenue bonds
    -       -       -       -       374,841  
CAD
  $ 6,248,920     $ 6,062,931     $ 7,876,824     $ 14,919,367     $ 6,086,921  
Weighted average number of units outstanding,
                                       
basic and diluted
    13,512,928       12,491,490       9,837,928       9,837,928       9,837,928  
Net income, basic and diluted, per unit
  $ 0.20     $ 0.34     $ 0.74     $ 1.74     $ 0.52  
Total CAD per unit
  $ 0.46     $ 0.49     $ 0.80     $ 1.52     $ 0.62  
Distributions per unit
  $ 0.5400     $ 0.5400     $ 0.5400     $ 0.8068     $ 0.5400  
(1) As described in Note 3 to the consolidated financial statements, Net Interest Income representing contingent interest and Net Residual Proceeds representing contingent (Tier 2 income) will be distributed 75% to the BUC holders and 25% to the General Partner. This adjustment represents the 25% of Tier 2 income due to the General Partner. For 2008, Lake Forest generated approximately $45,000, Fairmont Oaks generated approximately $54,000, and Iona Lakes generated approximately $ 54,000 of Tier 2 income. For 2007, Lake Forest generated approximately $231,000 of Tier 2 income. For 2006, the Northwoods Lake Apartments provided for $4.25 million of Tier 2 income. For 2005, the Clear Lake sale resulted in approximately $14.4 million of Tier 2 income.
 
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

In this Management’s Discussion and Analysis, the “Partnership” refers to America First Tax Exempt Investors, L.P. and Subsidiaries (which own the MF Properties) on a consolidated basis and the “Company” refers to the consolidated financial information of the Partnership and certain entities that own multifamily apartment projects financed with mortgage revenue bonds held by the Partnership that are treated as “variable interest entities” (“VIEs”).  The Partnership has been determined to be the primary beneficiary of these VIEs and, although it does not hold an equity position in them, therefore must consolidate these entities. The consolidated financial statements of the Company include the accounts of the Partnership, the MF Properties and the VIEs. All significant transactions and accounts between the Partnership, the MF Properties and the VIEs have been eliminated in consolidation.

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Critical Accounting Policies

The preparation of financial statements in accordance with GAAP requires management of the Company to make a number of judgments, assumptions and estimates. The application of these judgments, assumptions and estimates can affect the amounts of assets, liabilities, revenues and expenses reported by the Company. All of the Company’s significant accounting policies are described in Note 2 to the Company’s consolidated financial statements included in Item 8 of this report. The Company considers the following to be its critical accounting policies because they involve judgments, assumptions and estimates by management that significantly affect the financial statements. If these estimates differ significantly from actual results, the impact on our Consolidated Financial Statements may be material.
 
Variable Interest Entities (“VIEs”)
 
When the Partnership invests in a tax-exempt mortgage revenue bond which is collateralized by the underlying multifamily property, the Partnership will evaluate the entity which owns the property securing the tax-exempt mortgage revenue bond to determine if it is a VIE as defined by FASB Financial Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”). FIN 46R is a complex standard that requires significant analysis and judgment. If it is determined that the entity is a VIE, the Partnership will then evaluate if it is the primary beneficiary of such VIE, by determining whether the Partnership will absorb the majority of the VIE’s expected losses, receive a majority of the VIE’s residual returns, or both. If the Partnership determines itself to be the primary beneficiary of the VIE, then the assets, liabilities and financial results of the related multifamily property will be consolidated in the Partnership’s financial statements. If management incorrectly applies the provisions of FIN 46R, the Company might improperly consolidate, or fail to consolidate, an entity.

Purchase Accounting

Pursuant to SFAS No. 141, Business Combinations, the Company allocates a portion of the total acquisition cost of a property acquired to leases in existence as of the date of acquisition. The estimated valuation of in-place leases is calculated by applying a risk-adjusted discount rate to the projected cash flow deficit at each property during an assumed lease-up period for these properties. This allocated cost is amortized over the average remaining term of the leases (approximately six to twelve months) and is included in the Statement of Operations under depreciation and amortization expense.

Investments in Tax-Exempt Mortgage Revenue Bonds and Other Tax-Exempt Bonds

Valuation - As all of the Company’s investments in tax-exempt mortgage revenue bonds are classified as available-for-sale securities, they are carried on the balance sheet at their estimated fair values.  The Company owns 100% of each of these bonds.  There is no active trading market for the bonds and price quotes for the bonds are not available.  As a result, the Company bases its estimate of fair value of the tax-exempt bonds using a discounted cash flow and yield to maturity analyses performed by the management. This calculation methodology encompasses judgment in its application.  If available, management may also consider price quotes on similar bonds or other information from external sources, such as pricing services or broker quotes.

As of December 31, 2008, all of the Company’s tax-exempt mortgage revenue bonds were valued using management’s discounted cash flow and yield to maturity analyses.  Pricing services, broker quotes and management’s analyses provide indicative pricing only.  Due to the limited market for the tax-exempt bonds, these estimates of fair value do not necessarily represent what the Company would actually receive in a sale of the bonds.  As of December 31, 2007, approximately $60.0 million of the Company’s tax-exempt mortgage revenue bonds were valued using broker quotes and approximately $5.7 million were valued using management’s discounted cash flow analyses.
 
The estimated future cash flow of each revenue bond depends on the operations of the underlying property and, therefore is subject to a significant amount of uncertainty in the estimation of future rental receipts, future real estate operating expenses, and future capital expenditures. Such estimates are affected by economic factors such as the rental markets and labor markets in which the property operates, the current capitalization rates for properties in the rental markets, and tax and insurance expenses. Different conditions or different assumptions applied to the calculation may provide different results.  The Partnership periodically compares its estimates with historical results to evaluate the reasonableness and accuracy of its estimates and adjusts its estimates accordingly.
 
Effect of classification of securities on earnings – As the Partnership’s investments in tax-exempt mortgage revenue bonds are classified as available-for-sale securities, changes in estimated fair values are recorded as adjustments to accumulated other comprehensive income, which is a component of partners’ capital, rather than through earnings. The Partnership does not intend to hold any of its securities for trading purposes; however, if the Partnership’s available-for-sale securities were classified as trading securities, there could be substantially greater volatility in the Partnership’s earnings because changes in estimated fair values would be reflected in the Partnership’s earnings.

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Review of securities for other-than-temporary impairment – The Partnership periodically reviews each of its mortgage revenue bonds for impairment by comparing the estimated fair value of the revenue bond to its carrying amount.  The estimated fair value of the revenue bond is calculated using a discounted cash flow model using interest rates for comparable investments. A security is considered other-than-temporarily impaired if evidence indicates that the cost of the investment is not recoverable within a reasonable period of time. If an other-than-temporary impairment exists, the cost basis of the mortgage bond is written down to its estimated fair value, with the amount of the write-down accounted for as a realized loss. The Company evaluates whether unrealized losses are considered to be other-than-temporary based on the duration and severity of the decline in fair value as well as the Company’s intent and ability to hold the securities until their value recovers or until maturity. The recognition of an other-than-temporary impairment and the potential impairment analysis are subject to a considerable degree of judgment, the results of which when applied under different conditions or assumptions could have a material impact on the financial statements. The credit and capital markets have continued to deteriorate.  If uncertainties in these markets continue, the markets deteriorate further or the Company experiences deterioration in the values of its investment portfolio, the Company may incur impairments to its investment portfolio which could negatively impact the Company’s financial condition, cash flows, and reported earnings.

Revenue recognition – The interest income received by the Partnership from its tax-exempt mortgage revenue bonds is dependent upon the net cash flow of the underlying properties. Base interest income on fully performing tax-exempt mortgage revenue bonds is recognized as it is earned. Base interest income on tax-exempt mortgage revenue bonds not fully performing is recognized as it is received. Past due base interest on tax-exempt mortgage revenue bonds, which are or were previously not fully performing, is recognized as it is earned. The Partnership reinstates the accrual of base interest once the tax-exempt mortgage revenue bond’s ability to perform is adequately demonstrated. Contingent interest income, which is only received by the Partnership if the property financed by a tax-exempt mortgage revenue bond that contains a contingent interest provision generates excess available cash flow as set forth in each bond, is recognized when realized or realizable.

Derivative Instruments and Hedging Activities

The Partnership’s investments in interest rate derivative agreements are accounted for under the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, (“SFAS No. 133”) as amended and interpreted.  SFAS No. 133 establishes accounting and reporting standards for derivative financial instruments, including certain derivative financial instruments embedded in other contracts, and for hedging activity. SFAS No. 133 requires the Partnership to recognize all derivatives as either assets or liabilities in its financial statements and record these instruments at their fair values. In order to achieve hedge accounting treatment, derivative instruments must be appropriately designated, documented and proven to be effective as a hedge pursuant to the provisions of SFAS No. 133.  The Partnership did not designate its current derivatives as qualifying hedges under SFAS No. 133.

The fair values of the interest rate derivatives at inception are their original cost. Changes in the fair value of the interest rate derivative agreements are recognized in earnings as interest expense. The fair value adjustment through earnings can cause a significant fluctuation in reported net income although it has no impact on the Partnership’s cash flows. Although the Company utilizes current price quotes by recognized dealers as a basis for estimating the fair value of its interest rate derivative agreements, the calculation of the fair value involves a considerable degree of judgment.

Executive Summary

Overview

The Partnership operates for the purpose of acquiring, holding, selling and otherwise dealing with a portfolio of federally tax-exempt mortgage revenue bonds which have been issued to provide construction and/or permanent financing of multifamily residential apartments. Each multifamily property financed with tax-exempt mortgage bonds held by the Partnership is owned by a separate entity.  The Partnership does not hold an ownership interest in any of these entities.  However, in some cases, these entities are treated as VIEs and, as a result, the assets, liabilities and financial results of the properties owned by these entities are consolidated with the Company.  Whether or not treated as a VIE, the owners of the properties financed by tax-exempt mortgage revenue bonds held by the Partnership have an operating goal to generate increasing amounts of net rental income from these properties that will allow them to service their debt on the Partnership’s bonds.  In order to achieve this goal, management of these multifamily apartment properties is focused on: (i) maintaining high economic occupancy and increasing rental rates through effective leasing, reduced turnover rates and providing quality maintenance and services to maximize resident satisfaction; (ii) managing operating expenses and achieving cost reductions through operating efficiencies and economies of scale generally inherent in the management of a portfolio of multiple properties; and (iii) emphasizing regular programs of repairs, maintenance and property improvements to enhance the competitive advantage and value of the properties in their respective market areas.

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At December 31, 2008, the Partnership held 17 tax-exempt mortgage bonds, eight of which are secured by properties held by VIEs and, therefore, eliminated in consolidation on the Company’s financial statements.  During the fourth quarter of 2008, three of these VIEs, Ashley Pointe at Eagle Crest in Evansville, Indiana, Woodbridge Apartment of Bloomington III in Bloomington, Indiana, and Woodbridge Apartments of Louisville II in Louisville, Kentucky, met the criteria for  discontinued operations under SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (“SFAS No. 144”), and they are classified as such in the consolidated financial statements for all periods presented.  The Company owned $28.3 million in bonds secured by the properties.  These properties are owned by third party limited partnerships unaffiliated with the Partnership.  During the fourth quarter of 2008, the Partnership provided written notification to the bond issuers, bond trustee and the borrowers that it was exercising its rights under the bond indenture to cause the mandatory redemption of the bonds.  The bonds were redeemed in February 2009.  As of December 31, 2008, the operations of these VIEs have been recorded by the Company as discontinued operations and the net assets are recorded as held for sale.

As noted above, the properties financed by these redeemed mortgage revenue bonds were required to be consolidated into our financial statements as VIEs under FIN 46R   In order to properly reflect the transaction under FIN 46R, the Company will record the sale of the properties as though they were owned by the Company.  The transaction was completed in the first quarter of 2009 for a total purchase price of $32.0 million resulting in an estimated gain on sale for GAAP reporting to the Company of approximately $26.0 million.  The redemption of the bonds did not result in a taxable gain to the Partnership.  See Footnote 7 to the Consolidated Financial Statements for further discussion.  The redeemed bonds were collateral on the Company’s TOB facility.  As of the closing date of the redemption, the Company placed on deposit with Bank of America $23.6 million in cash as replacement collateral.  Such funds on deposit may be used to reduce the amount of debt outstanding on the TOB facility.
 
On a stand-alone basis, the Partnership received approximately $30.9 million of net proceeds from the bond redemption.  These proceeds represent the repayment of the bond par values plus accrued base interest and approximately $2.3 million of contingent interest.  The contingent interest, recognized in the first quarter of 2009, represents additional earnings to the Partnership beyond the recurring base interest earned on the bond portfolio.  The contingent interest also represents additional Cash Available for Distribution to the BUC holders of approximately $1.7 million, or $0.13 per unit.
 
As of December 31, 2008 and 2007, the five consolidated VIE multifamily apartment properties reported in continuing operations contained a total of 1,144 rental units and three consolidated VIE multifamily apartment properties reported in discontinued operations contained 620 units.  The properties underlying the nine non-consolidated tax-exempt mortgage bonds contain a total of 1,137 rental units at December 31, 2008 and 1,286 rental units at December 31, 2007. At December 31, 2006, the Partnership held four non-consolidated tax-exempt mortgage bonds secured by apartment properties containing a total of 574 rental units.

To facilitate its investment strategy of acquiring additional tax exempt mortgage bonds secured by multifamily apartment properties, the Partnership may acquire ownership positions in apartment properties (“MF Properties”), in order to ultimately restructure the property ownership through a sale of the MF Properties and a syndication of low income housing tax credits (“LIHTCs”).  The syndication and sale of LIHTCs along with tax-exempt bond financing is an attractive plan of finance for developers and owners.  The Partnership expects to provide the tax-exempt mortgage revenue bonds to the new property owners as part of the restructuring.   Such restructurings will generally be expected to be initiated within 36 months of the Partnership’s investment in an MF Property and will often coincide with the expiration of the compliance period relating to LIHTCs previously issued with respect to the MF Property.  The Partnership will not acquire LIHTCs in connection with these transactions. As of December 31, 2008, the Partnership’s wholly-owned subsidiaries held limited partnership interests in eight entities that own MF Properties containing a total of 796 rental units.  Current credit markets and general economic issues have had a significant negative impact on these types of transactions.  At this time very few LIHTC syndication and tax-exempt bond financing transactions are being completed.  These types of transactions represent a long-term market opportunity for the Company and provide a significant future bond investment pipeline when the market for LIHTC syndications strengthens.  Until the Partnership restructures the property ownership as described above, the MF Properties operating goal is similar to that of the VIEs as described below.

Ten of the 16 properties which collateralize the bonds owned by the Partnership and all of the MF Properties are managed by America First Properties Management Company (“Properties Management”), an affiliate of the Partnership.  Management believes that this relationship provides greater insight and understanding of the underlying property operations and their ability to meet debt service requirements to the Partnership.  The properties not currently managed by Properties Management are Woodbridge Apartments of Bloomington, Woodbridge Apartments of Louisville, Bella Vista Apartments, Runnymede Apartments, Bridle Ridge and Woodlynn Village.

Recent economic conditions have been unprecedented and challenging, with significantly tighter credit conditions and slower growth expected in 2009.  As a result of these conditions, the cost and availability of credit has been, and may continue to be, adversely affected in all markets in which we operate. Concern about the stability of the markets generally, and the strength of counterparties specifically, has led many lenders and institutional investors to reduce, and in some cases, cease, to provide funding to borrowers. If these market and economic conditions continue, they may limit our ability to replace or renew maturing liabilities on a timely basis, access the capital markets to meet liquidity and capital expenditure requirements and may result in adverse effects on our financial condition and results of operations.

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Although the consequences of these conditions and their impact on our ability to pursue our plan to grow through investments in additional tax-exempt bonds secured by first mortgages on affordable multifamily housing projects are not fully known, we do not anticipate that our existing assets will be adversely affected in the long-term.  We believe that if there are continued defaults on subprime single family mortgages and a general contraction of credit available for single family mortgage loans, additional demand for affordable rental housing may be created and, as a result, may have a positive economic effect on apartment properties financed by the tax-exempt bonds held by the Partnership.  We believe the current tightening of credit may also create opportunities for additional investments consistent with the Partnership's investment strategy because it may result in fewer parties competing to acquire tax-exempt bonds issued to finance affordable housing.  There can be no assurance that we will be able to finance additional acquisitions of tax-exempt bonds through either additional equity or debt financing.

Discussion of the Apartment Properties securing the Partnership Bond Holdings and MF Properties as of December 31, 2008

The following discussion describes the operations and financial results of the individual apartment properties financed by the tax-exempt bonds held by the Partnership and the MF Properties in which it holds an ownership.  The discussion also outlines the bond holdings of the Partnership, discusses the significant terms of the bonds and identifies those ownership entities which are consolidated VIEs of the Company.
           
Number of Units
   
Percentage of Occupied Units as of December 31,
   
Economic Occupancy (1) for
 
     
Number
           
the period ended December 31,
 
Property Name
Location
 
of Units
   
Occupied
   
2008
   
2007
   
2008
   
2007
 
                                       
Non-Consolidated Properties
                                     
Clarkson College
Omaha, NE
    142       104       73 %     83 %     71 %     80 %
Bella Vista Apartments
Gainesville, TX
    144       141       98 %     92 %     94 %     72 %
Woodland Park     (2)
Topeka, KS
    236       n/a       n/a       n/a       0 %     n/a  
Runnymede Apartments     (3)
Austin, TX
    252       241       96 %     90 %     68 %     90 %
Gardens of DeCordova     (2)
Granbury, TX
    76       n/a       n/a       n/a       0 %     n/a  
Gardens of Weatherford     (2)
Weatherford, TX
    76       n/a       n/a       n/a       0 %     n/a  
Bridle Ridge Apartments     (3)
Greer, SC
    152       136       89 %     n/a       82 %     n/a  
Woodlynn Village     (3)
Maplewood, MN
    59       54       92 %     n/a       92 %     n/a  
        1,137       676       90 %     88 %     77 %     81 %
                                                   
VIEs - Continuing Operations
                                                 
Ashley Square
Des Moines, IA
    144       144       100 %     96 %     88 %     81 %
Bent Tree Apartments
Columbia, SC
    232       220       95 %     91 %     85 %     81 %
Fairmont Oaks Apartments
Gainsville, FL
    178       166       93 %     94 %     91 %     91 %
Iona Lakes Apartments
Ft. Myers, FL
    350       283       81 %     80 %     66 %     70 %
Lake Forest Apartments
Daytona Beach, FL
    240       220       92 %     94 %     94 %     98 %
        1,144       1033       90 %     91 %     81 %     93 %
                         
MF Properties
                                                 
Eagle Ridge
Erlanger, KY
    64       54       84 %     92 %     81 %     83 %
Meadowview
Highland Heights, KY
    118       104       88 %     96 %     92 %     90 %
Crescent Village
Cincinnati, OH
    90       75       83 %     90 %     85 %     90 %
Willow Bend
Columbus (Hilliard), OH
    92       84       91 %     98 %     89 %     93 %
Postwoods I
Reynoldsburg, OH
    92       85       92 %     90 %     90 %     83 %
Postwoods II
Reynoldsburg, OH
    88       85       97 %     93 %     91 %     83 %
Churchland (3)
Chesapeake, VA
    124       108       87 %     n/a       84 %     n/a  
Glynn Place (3)
Brunswick, GA
    128       109       85 %     n/a       91 %     n/a  
        796       704       88 %     90 %     104 %     88 %
                                                   
(1) Economic occupancy is presented for the twelve months ended December 31, 2008 and 2007, and is defined as the net rental income received divided by the maximum amount of rental income to be derived from each property. This statistic is reflective of rental concessions, delinquent rents and non-revenue units such as model units and employee units. Actual occupancy is a point in time measure while economic occupancy is a measurement over the period presented, therefore, economic occupancy for a period may exceed the actual occupancy at any point in time.
 
(2) These properties are still under construction as of December 31, 2008, and therefore have no occupancy data.
                                 
(3) Previous period occupancy numbers are not available, as this is a new investment.
                                         
 
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Non-Consolidated Properties

Clarkson College  – Clarkson College is a 142 bed student housing facility located in Omaha, Nebraska.  The tax-exempt mortgage revenue bonds owned by the Partnership were issued under Section 145 of the Code by a not-for-profit entity qualified under Section 501(c)(3) of the Code.  The bonds have an outstanding principal amount of $6.0 million and have a base interest rate of 6.0% per annum.  The bonds also contain a participation interest in any excess cash flow generated by the underlying property through the potential payment of contingent interest.  The bonds accrue contingent interest at a rate of 1.25% annually and such contingent interest is payable only if the underlying property generates excess operating cash flows or realizes excess cash through capital appreciation and a related sale or refinancing of the property.  To date, the property has not paid any contingent interest and the Partnership has not recognized any contingent interest income related to this bond.  Because the property is owned by a 501(c)(3) not-for-profit entity it is not a VIE.  Clarkson College’s operations resulted in net operating income of $432,000 and $499,000 on net revenue of approximately $623,000 and $695,000 in 2008 and 2007 respectively.  As shown in the table above, occupancy trends are negative as economic occupancy decreased from 2007 to 2008 driving the decreased net operating income.

Bella Vista  – Bella Vista Apartments is located in Gainesville, Texas and contains 144 units.  The tax-exempt mortgage revenue bonds owned by the Partnership are private activity housing bonds issued in conjunction with the syndication of LITHCs.  The bonds have an outstanding principal amount of $6.8 million and have a base interest rate of 6.15% per annum.  The bonds do not contain participation interests.  We have determined that the company that owns Bella Vista Apartments does not meet the definition of a VIE.  As a result, this property is not consolidated.  June 2007 was the first full month of operations at Bella Vista.  Bella Vista’s operations resulted in net operating income of $578,000 and $400,000 on net revenue of approximately $1.1 million and $793,000 in 2008 and 2007 respectively.

Woodland Park – Woodland Park Apartments began leasing its 236 units in Topeka, Kansas in November 2008.  The Partnership owns the Series A and Series B tax-exempt mortgage revenue bonds financing this project. A final completion of the project is expected by May 2009. The developer and principals have guaranteed completion and stabilization of the project.  The general contractor has a guaranteed maximum price contract and payment and performance bonds are in place.  The Series A bonds have an outstanding principal amount of $15.1 million and have a base interest rate of 6.0% per annum.  The Series B bonds have an outstanding principal amount of $0.65 million and have a base interest rate of 8.0% per annum.  The bonds do not contain participation interests.  We have determined that the company that owns Woodland Park Apartments does not meet the definition of a VIE.  As a result, this property is not consolidated.  Woodland Park has realized approximately $3,000 in net operating losses on revenue of $226,000 since November 2008.

Runnymede Apartments – Runnymede Apartments is located in Austin, Texas and contains 252 units. The tax-exempt mortgage revenue bonds owned by the Partnership are private activity housing bonds issued in conjunction with the syndication of LITHCs.  The bonds have an outstanding principal amount of $10.8 million and have a base interest rate of 6.00%.  The bonds do not contain participation interests.  We have determined that the company that owns Runnymede Apartments does not meet the definition of a VIE.  As a result, this property is not consolidated.  These bonds were purchased in October 2007.  Runnymede’s 2008 operations resulted in net operating income of $209,000 on net revenue of approximately $1.5 million.

Gardens of DeCordova – The Gardens of DeCordova Apartments is located in Granbury, Texas and began leasing its 76 units in November 2008. Full construction completion is scheduled for April 2009.  The originally scheduled completion date was August 2008.  The developer and principals have guaranteed completion and stabilization of the project.  The general contractor has a guaranteed maximum price contract and payment and performance bonds are in place.  The project currently has sufficient capitalized interest reserves to fund debt service beyond the expected date of completion.  The bonds have an outstanding principal amount of $4.9 million and have a base interest rate of 6.0% per annum.  The bonds do not contain participation interests.  We have determined that the company that owns The Gardens of DeCordova Apartments does not meet the definition of a VIE.  As a result, this property is not consolidated.

Gardens of Weatherford – The Gardens of Weatherford Apartments is currently under construction in Weatherford, Texas and will contain 76 units upon completion.  The Partnership owns the tax-exempt mortgage revenue bonds financing this project. The estimated final completion date is December 2009 with some units available for rent in July 2009. The developer and principals have guaranteed completion and stabilization of the project.  The general contractor has a guaranteed maximum price contract and payment and performance bonds are in place.  The project currently has sufficient capitalized interest reserves to fund debt service beyond the expected date of completion.  The bonds have an outstanding principal amount of $4.7 million and have a base interest rate of 6.0% per annum.  The bonds do not contain participation interests.  We have determined that the company that owns The Gardens of Weatherford Apartments does not meet the definition of a VIE.  As a result, this property is not consolidated.

Bridle Ridge – Bridle Ridge Apartments is located in Greer, South Carolina and contains 152 units.  The tax-exempt mortgage revenue bonds owned by the Partnership are private housing bonds issued in conjunction with the syndication of LITHCs.  The bonds have an outstanding principal amount of $7.9 million and have a base interest rate of 6.0% per annum.  The bonds do not contain participation interests.  We have determined that the company that owns Bridle Ridge Apartments does not meet the definition of a VIE.  As a result, this property is not consolidated.  February 2008 was the first full month of operations at Bridle Ridge.  Bridle Ridge’s operations resulted in net operating income of $752,000 on net revenue of approximately $1.1 million in 2008.

Woodlynn Village – Woodlynn Village is located in Maplewood, Minnesota and contains 59 units.  The tax-exempt mortgage revenue bonds owned by the Partnership are private housing bonds issued in conjunction with the syndication of LITHCs.  The bonds have an outstanding principal amount of $4.6 million and have a base interest rate of 6.0% per annum.  The bonds do not contain participation interests.  We have determined that the company that owns Woodlynn Village does not meet the definition of a VIE.  As a result, this property is not consolidated.  March 2008 was the first full month of operations at Woodlynn Village.  Woodlynn Village’s operations resulted in net operating income of $330,000 on net revenue of approximately $529,000 in 2008.
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VIEs – Continuing Operations

Ashley Square -  Ashley Square Apartments is located in Des Moines, Iowa and contains 144 units.  The tax-exempt mortgage revenue bonds owned by the Partnership are traditional “80/20” bonds issued prior to the Tax Reform Act of 1986.  These bonds require that 20% of the rental units be set aside for tenants whose income does not exceed 80% of the area median income, without adjustment for household size.  The bonds have an outstanding principal amount of $6.5 million and have a base interest rate of 7.5% per annum.  The bonds also contain a participation interest in any excess cash flow generated by the underlying property through the potential payment of contingent interest.  The bond accrues contingent interest at a rate of 3.0% annually and such contingent interest is payable only if the underlying property generates excess operating cash flows or realizes excess cash through capital appreciation and a related sale or refinancing of the property.  To date, the property has not paid any contingent interest and the Partnership has not recognized any contingent interest income related to this bond.  Because of its capital structure and the participation interests contained in the bond owned by the Partnership this property is a consolidated VIE.  Additionally, the equity ownership of this property was previously held by individuals or entities affiliated with the general partner.  In December 2008 the equity ownership of this property was transferred to Ashley Square Housing Cooperative, an Iowa Multiple Housing Cooperative, for the assumption of all outstanding liabilities.  Ashley Square’s operations resulted in net operating income of $302,000 and $189,000 on net revenue of approximately $1.2 million and $1.1 million in 2008 and 2007 respectively.  This improvement from 2007 is primarily the result of increased revenue from improved occupancy and a decrease in real estate taxes and repairs and maintenance.

Bent Tree – Bent Tree Apartments is located in Columbia, South Carolina and contains 232 units.  The tax-exempt mortgage revenue bonds owned by the Partnership are traditional “80/20” bonds issued prior to the Tax Reform Act of 1986.  These bonds require that 20% of the rental units be set aside for tenants whose income does not exceed 80% of the area median income, without adjustment for household size.  The bonds have an outstanding principal amount of $11.1 million and have a base interest rate of 7.1% per annum.  The bonds also contain a participation interest in any excess cash flow generated by the underlying property through the potential payment of contingent interest.  The bond accrues contingent interest at a rate of 1.9% annually and such contingent interest is payable only if the underlying property generates excess operating cash flows or realizes excess cash through capital appreciation and a related sale or refinancing of the property.  To date, the property has not paid any contingent interest and the Partnership has not recognized any contingent interest income related to this bond.  Because of its capital structure and the participation interests contained in the bond owned by the Partnership this property is a consolidated VIE.  Additionally, the equity ownership of this property is held by individuals or entities affiliated with the general partner. Bent Tree’s operations resulted in net operating income of $641,000 and $685,000 on net revenue of approximately $1.6 million and $1.5 million in 2008 and 2007 respectively.  Although there was an increase in net revenue due to improved occupancy in 2008, net operating income decreased primarily due to an increase in real estate taxes.

Fairmont Oaks - -  Fairmont Oaks Apartments is located in Gainesville, Florida and contains 178 units.  The tax-exempt mortgage revenue bonds owned by the Partnership are traditional “80/20” bonds issued prior to the Tax Reform Act of 1986.  These bonds require that 20% of the rental units be set aside for tenants whose income does not exceed 80% of the area median income, without adjustment for household size.  The bonds have an outstanding principal amount of $7.7 million and have a base interest rate of 6.3% per annum.  The bonds also contain a participation interest in any excess cash flow generated by the underlying property through the potential payment of contingent interest.  The bond accrues contingent interest at a rate of 2.2% annually and such contingent interest is payable only if the underlying property generates excess operating cash flows or realizes excess cash through capital appreciation and a related sale or refinancing of the property.  To date, the Partnership has realized $54,000 in contingent interest income related to this bond.  Because of its capital structure and the participation interests contained in the bond owned by the Partnership this property is a consolidated VIE.  Additionally, the equity ownership of this property is held by individuals or entities affiliated with the general partner.  Fairmont Oak’s operations resulted in net operating income of $750,000 and $808,000 on net revenue of approximately $1.6 million and $1.6 million in 2008 and 2007, respectively.  The decrease in net operating income is a result of increased property insurance costs.

Iona Lakes -  Iona Lakes Apartments is located in Fort Myers, Florida and contains 350 units.  The tax-exempt mortgage revenue bonds owned by the Partnership are traditional “80/20” bonds issued prior to the Tax Reform Act of 1986.  These bonds require that 20% of the rental units be set aside for tenants whose income does not exceed 80% of the area median income, without adjustment for household size.  The bonds have an outstanding principal amount of $16.2 million and have a base interest rate of 6.9% per annum.  The bonds also contain a participation interest in any excess cash flow generated by the underlying property through the potential payment of contingent interest.  The bond accrues contingent interest at a rate of 2.6% annually and such contingent interest is payable only if the underlying property generates excess operating cash flows or realizes excess cash through capital appreciation and a related sale or refinancing of the property.  To date, the property has paid $54,000 contingent interest and the Partnership has recognized $54,000 contingent interest income related to this bond.  Because of its capital structure and the participation interests contained in the bond owned by the Partnership this property is a consolidated VIE.  Additionally, the equity ownership of this property is held by individuals or entities affiliated with the general partner.  Iona Lake’s operations resulted in net operating income of $933,000 million and $1.1 million on net revenue of approximately $2.5 million and $2.6 million in 2008 and 2007, respectively.  The decrease in net operating income was a result of increased rent concessions and advertising expenses related to occupancy efforts as well as increased cost of utilities and property insurance.

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Lake Forest -  Lake Forest Apartments is located in Daytona Beach, Florida and contains 240 units.  The tax-exempt mortgage revenue bonds owned by the Partnership are traditional “80/20” bonds issued prior to the Tax Reform Act of 1986.  These bonds require that 20% of the rental units be set aside for tenants whose income does not exceed 80% of the area median income, without adjustment for household size.  The bonds have an outstanding principal amount of $10.1 million and have a base interest rate of 6.9% per annum.  The bonds also contain a participation interest in any excess cash flow generated by the underlying property through the potential payment of contingent interest.  The bond accrues contingent interest at a rate of 1.6% annually and such contingent interest is payable only if the underlying property generates excess operating cash flows or realizes excess cash through capital appreciation and a related sale or refinancing of the property.  To date, the Partnership has realized approximately $276,000 of contingent interest income related to this bond.  Because of its capital structure and the participation interests contained in the bond owned by the Partnership this property is a consolidated VIE.  Additionally, the equity ownership of this property is held by individuals or entities affiliated with the general partner.  Lake Forest’s operations resulted in net operating income of $950,000 and $1.1 million on net revenue of approximately $2.1 million and $2.1 million in 2008 and 2007, respectively.  The decrease in net operating income was a result of increased real estate taxes and property insurance costs.
 
MF Properties

Eagle Ridge – Eagle Ridge Townhomes is located in Erlanger, Kentucky and contains 64 units.  A wholly-owned subsidiary of the Partnership acquired a 99% limited partner in the partnership that owns this property in July 2007.  As a result, the financial statements of this property have been consolidated with those of the Partnership since that time.  The consolidation of Eagle Ridge’s operations resulted in recognition by the Partnership of net operating income of $181,000 and $109,000 on net revenue of approximately $455,000 and $230,000 in 2008 and 2007 respectively.  The increase from 2007 to 2008 is due primarily to including a full year of operating results from this property in 2008 compared to six months operating results in 2007.  There are no tax-exempt bonds currently secured by this property.

Meadowview – Meadowview Apartments is located in Highland Heights, Kentucky and contains 118 units.  A wholly-owned subsidiary of the Partnership acquired a 99% limited partner in the partnership that owns this property in July 2007.  As a result, the financial statements of this property have been consolidated with those of the Partnership since that time.  The consolidation of Meadowview’s operations resulted in recognition by the Partnership of net operating income of $488,000 and $190,000 on net revenue of approximately $909,000 and $429,000 in 2008 and 2007 respectively. The increase from 2007 to 2008 is due primarily to including a full year of operating results from this property in 2008 compared to six months operating results in 2007.  There are no tax-exempt bonds currently secured by this property.

Crescent Village – Crescent Village Townhomes is located in Cincinnati, Ohio and contains 90 units.  A wholly-owned subsidiary of the Partnership acquired a 99% limited partner in the partnership that owns this property in July 2007.  As a result, the financial statements of this property have been consolidated with those of the Partnership since that time.  The consolidation of Crescent Village’s operations resulted in recognition by the Partnership of net operating income of $340,000 and $190,000 on net revenue of approximately $731,000 and $386,000 in 2008 and 2007 respectively.  The increase from 2007 to 2008 is due primarily to including a full year of operating results from this property in 2008 compared to six months operating results in 2007.  There are no tax-exempt bonds currently secured by this property.

Willow Bend – Willow Bend Townhomes is located in Columbus (Hilliard), Ohio and contains 92 units.  A wholly-owned subsidiary of the Partnership acquired a 99% limited partner in the partnership that owns this property in July 2007.  As a result, the financial statements of this property have been consolidated with those of the Partnership since that time.  The consolidation of Willow Bend’s operations resulted in recognition by the Partnership of net operating income of $408,000 and $162,000 on net revenue of approximately $763,000 and $369,000 in 2008 and 2007, respectively.  The increase from 2007 to 2008 is due primarily to including a full year of operating results from this property in 2008 compared to six months operating results in 2007.  There are no tax-exempt bonds currently secured by this property.

Postwoods I –   Postwoods Townhomes is located in Reynoldsburg, Ohio and contains 92 units.  A wholly-owned subsidiary of the Partnership acquired a 99% limited partner in the partnership that owns this property in July 2007.  As a result, the financial statements of this property have been consolidated with those of the Partnership since that time.  The consolidation of Postwoods I’s operations resulted in the recognition by the Partnership of net operating income of $408,000 and $160,000 on net revenue of approximately $761,000 and $349,000 in 2008 and 2007, respectively.  The increase from 2007 to 2008 is due primarily to including a full year of operating results from this property in 2008 compared to six months operating results in 2007.  There are no tax-exempt bonds currently secured by this property.
 
Postwoods II – Postwoods Townhomes is located in Reynoldsburg, Ohio and contains 88 units.   A wholly-owned subsidiary of the Partnership acquired a 99% limited partner in the partnership that owns this property in July 2007.  As a result, the financial statements of this property have been consolidated with those of the Partnership since that time.  The consolidation of Postwoods II’s operations resulted in the recognition by the Partnership of net operating income of $382,000 and $109,000 on net revenue of approximately $682,000 and $303,000 in 2008 and 2007, respectively.  The increase from 2007 to 2008 is due primarily to including a full year of operating results from this property in 2008 compared to six months operating results in 2007.  There are no tax-exempt bonds currently secured by this property.

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Commons at Churchland – Commons at Churchland is located in Chesapeake, Virginia and contains 124 units.  A wholly-owned subsidiary of the Partnership acquired a 99% limited partner in the partnership that owns this property in August 2008.  As a result, the financial statements of this property have been consolidated with those of the Partnership since that time.  The consolidation of Commons at Churchland’s operations resulted in the recognition by the Partnership of approximately $158,000 in net operating income on revenue of $321,000 during 2008.

Glynn Place – Glynn Place Apartments is located in Brunswick, Georgia and contains 128 units.  A wholly-owned subsidiary of the Partnership acquired a 99% limited partner in the partnership that owns this property in October 2008.  As a result, the financial statements of this property have been consolidated with those of the Partnership since that time.  The consolidation of Glynn Place Apartment’s operations resulted in the recognition by the Partnership of approximately $81,000 of net operating income on revenue of $166,000 during 2008.
 
Results of Operations

The Consolidated Company

The table below compares the results of operations for the Company for 2008, 2007, and 2006:

   
For the
   
For the
   
For the
 
   
Year Ended
   
Year Ended
   
Year Ended
 
   
Dec. 31, 2008
   
Dec. 31, 2007
   
Dec. 31, 2006
 
Revenues:
                 
Property revenues
  $ 13,773,801     $ 11,208,209     $ 9,266,223  
Mortgage revenue bond investment income
    4,230,205       3,227,254       1,423,180  
Other interest income
    150,786       751,797       337,008  
Loss on the sale of securities
    (68,218 )     -       -  
     Total Revenues
    18,086,574       15,187,260       11,026,411  
                         
Expenses:
                       
Real estate operating (exclusive of items shown below)
    8,872,219       7,299,257       5,945,364  
Depreciation and amortization
    4,987,417       3,611,249       1,895,546  
Interest
    4,106,072       2,595,616       1,303,760  
General and administrative
    1,808,459       1,577,551       1,575,942  
    Total Expenses
    19,774,167       15,083,673       10,720,612  
                         
Minority interest in net loss of consolidated subsidiary
    9,364       13,030       -  
Income from continuing operations
    (1,678,229 )     116,617       305,799  
Income from discontinued operations, (including gain on sale of $11,667,246 in 2006)
    646,989       824,249       12,470,936  
Net income (loss)
  $ (1,031,240 )   $ 940,866     $ 12,776,735  

Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Property Revenues.  Property revenues of the Company consist of those of the MF Properties as well as the five VIEs treated as continuing operations during the periods.  Property revenues increased approximately $2.6 million for the year ended December 31, 2008 compared to the year ended December 31, 2007.  The entire amount of the increase is attributable to the acquisition of the MF Properties.  The six MF Properties in which an interest was acquired in 2007 reported six months of revenue in 2007 and 12 months of revenue in 2008.  Interests in two additional MF Properties, Commons at Churchland and Glynn Place Apartments, were purchased in the third and fourth quarters of 2008, respectively, and revenues from these MF Properties was recorded from those dates.  Property revenues for the VIEs were flat year over year.  Annual net rental revenues per unit related to the MF Properties increased from $7,427 per unit in 2007 to $7,667 in 2008.  The annual net rental revenues per unit related to the VIEs increased from approximately $7,534 in 2007 to approximately $7,664 in 2008, however, this increase was offset by an occupancy decline of 1% from 2007 to 2008.

Mortgage revenue bond investment income.  Mortgage revenue bond investment income of the Company consists of the interest income earned only on the mortgage revenue bonds that were not issued to finance properties owned by VIEs.  The $1.0 million increase in mortgage revenue bond investment income from 2007 to 2008 is primarily due to income generated by the tax-exempt mortgage bonds acquired early in 2008 plus a full year of income from bonds acquired during 2007. In 2008, two new bond investments were acquired with a total carrying value of approximately $12.4 million as of December 31, 2008.  Income from these new investments accounted for $700,000 of the total increase. The remaining increase of $1.1 million is attributable to a full year of income on bond investments acquired in 2007 less $800,000 of net revenue lost due to the sale of two bonds in 2008 which were held for the entire 2007 year.

Other interest income.  Other interest income represents interest earned on cash and cash equivalents. The decrease is attributable to higher average balances of cash and cash equivalents in 2007 which resulted from the issuance of additional BUCs in April 2007.  As these funds were invested in tax-exempt bonds or MF Properties in 2007 and 2008, the Company’s cash and cash equivalent balances declined.

Loss on sale of securities. The Chandler Creek and Deerfield bonds were sold in 2008 for par value plus accrued interest.  The loss resulted from the write off of unamortized deferred financing costs related to the bonds.
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Real estate operating expenses.  Real estate operating expenses increased approximately $1.6 million during 2008 as compared to 2007. Approximately $1.1 million of the increase is attributable to six of the MF Properties reporting six months activity in 2007 as compared to twelve months in 2008. In addition approximately $276,000 was incurred by Churchland and Glynn Place which were purchased in the third and fourth quarter of 2008, respectively. The remaining increase was directly related to an increase in the VIE fixed expenses including real estate taxes, property insurance expenses, professional fees and utilities.

Depreciation and amortization.  Depreciation and amortization increased approximately $1.4 million in 2008 compared to 2007. Depreciation is primarily associated with the apartment properties of the consolidated VIEs and the MF Properties. Approximately $306,000 of the increase is attributable to six of the MF Properties reporting six months of activity in 2007 as compared to twelve months in 2008.  The acquisition of Churchland and Glynn Place added approximately $294,000 of depreciation and amortization. In addition, the VIEs acquired capitalized assets in 2008 that resulted in an additional $200,000 of depreciation. Additionally, in 2008 the Company entered into a new TOB credit facility which resulted in approximately $600,000 of additional deferred finance cost amortization.
 
Interest expense.  Interest expense increased approximately $1.5 million during 2008 compared to 2007 due to higher levels of borrowing and fair value adjustments on our interest rate derivatives. Total outstanding debt from continuing operations increased from approximately $72.4 million at December 31, 2007 to approximately $87.9 million as of December 31, 2008.  Interest expense on the new debt accounted for approximately $764,000 of the overall increase. Approximately $472,000 of the remaining increase is attributable to the effect of marking our interest rate derivatives to fair value.  The remaining difference is due to a full year of interest expense on six of the eight MF Properties in 2008 versus six months in 2007 and additional interest expense related to Churchland and Glynn Place which were acquired in the third and fourth quarters of 2008.
 
General and administrative expenses.  General and administrative expenses were up approximately $231,000 in 2008. This increase was realized in professional fees and administration fees on bonds added to the investment portfolio.

Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

Property Revenues.  Property revenues increased approximately $2.0 million for the year ended December 31, 2007 compared to the same period of 2006. The increase is attributable to the acquisition of six MF Properties in July 2007 which contributed revenues of approximately $2.1 million in 2007.  Annual net rental revenues per unit related to the MF Properties were, on an annualized basis, $7,427 per unit in 2007.  Annual net rental revenues per unit related to the VIE’s decreased from approximately $7,632 in 2006 to approximately $7,534 in 2007, or $98 per unit.

Mortgage revenue bond investment income.  The increase in mortgage revenue bond investment income from 2006 to 2007 is primarily due to income generated by the tax-exempt mortgage bonds acquired in 2007 plus a full year of income from bonds acquired during 2006.  In 2007, a total of seven new bond investments were acquired with a total carrying value of approximately $42.0 million as of December 31, 2007.  Income from these new investments accounted for $1.3 million of the total increase.  The remaining increase is attributable to a full year of income on bond investments acquired in 2006.

Other interest income.  Other interest income represents interest earned on cash and cash equivalents. The increase is attributable to higher average balances of cash and cash equivalents during the year which resulted from the issuance of additional BUCs in April 2007.
  
Real estate operating expenses.  Real estate operating expenses increased approximately $1.3 million during 2007 compared to 2006. This increase is primarily attributable to the purchase of six MF Properties in July of 2007 which had operating expenses of approximately $1.2 million.

Depreciation and amortization.  Depreciation and amortization increased approximately $1.7 million in 2007 compared to 2006.  Depreciation is primarily associated with the apartment properties of the consolidated VIEs and the MF Properties.  Amortization is primarily associated with in-place lease assets recorded as part of the purchase accounting for the acquisition of six MF Properties in July of 2007.  Depreciation and amortization related to these MF Properties accounted for the majority of the increase as depreciation expense on the MF Properties was approximately $459,000 and amortization related to the MF Properties was approximately $984,000 in 2007.
 
Interest expense.  Interest expense increased approximately $1.3 million during 2007 compared to 2006 due to higher levels of borrowing and the fair value adjustments on our interest rate derivatives. Total outstanding debt increased from approximately $26.9 million at December 31, 2006 to approximately $72.4 million as of December 31, 2007.  Interest expense on the new debt accounted for approximately $1.3 million of the overall increase. The remaining increase is attributable to marking our interest rate derivatives to fair value.
 
General and administrative expenses.  General and administrative expenses were consistent between 2007 and 2006.

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Discontinued Operations

The assets, liabilities and results of operations of Ashley Pointe at Eagle Crest, Woodbridge Apartments of Bloomington III and Woodbridge Apartments of Louisville II, consolidated VIEs, are classified as discontinued operations under SFAS No. 144 – see Note 7 to the consolidated financial statements.  Additionally, the results of operations of Northwoods Lake Apartments in 2006 are classified as discontinued operations.  The following is a discussion of the transactions which precipitated the classification as discontinued operations, the transactions’ impact on the consolidated financial statements of the Company and the transactions’ impact on the Partnership.

During the fourth quarter of 2008, the Partnership provided written notification to the bond issuers, bond trustee and the borrowers for Ashley Pointe, Woodbridge Apartments of Bloomington III and Woodbridge Apartments of Louisville II that it was exercising its rights under the bond indenture to cause the mandatory redemption of the bonds.  The bonds were redeemed in February 2009.  As a result, these VIEs met the criteria for classification as discontinued operations.  In order to properly reflect the transaction under FIN 46R, the Company intends to record the redemption of the bonds as if it were a sale of properties owned by the Company.  As of December 31, 2008, Ashley Pointe, Woodbridge Apartments of Bloomington III, and Woodbridge Apartments of Louisville II reported assets of approximately $8.1 million and liabilities of approximately $23.3 million which are included in assets and liabilities of discontinued operations, respectively.  For the years ended December 31, 2008, 2007 and 2006 net income from these VIEs of approximately $647,000, $824,000 and $805,000, respectively, is included in the income or loss from discontinued operations.

During 2006, Northwoods Lake Apartments in Duluth, Georgia met the criteria as a discontinued operation under SFAS No. 144. During the third quarter of 2006 the property was sold to an unaffiliated third party.  In order to properly reflect the transaction under FIN 46R, the Company recorded the sale of the property in 2006 as though the property was owned by the Company. As such, in 2006, the Company recorded a gain on the sale of the property of $11.7 million.  Excluding the gain on sale, Northwoods contributed $113,000 of income from discontinued operations during the year ended December 31, 2006.  In conjunction with the property sale, the Partnership sold its investment in the bonds issued by the property owner at par value plus accrued interest.  Additionally, the property owner realized approximately $4.3 million in net cash proceeds from the sale of the property. These funds were used in their entirety to retire existing obligations of the property owner including accumulated tax exempt contingent interest earned by the Partnership on the bonds.  The sale of the bonds plus the receipt of accumulated contingent interest in 2006 resulted in total proceeds to the Partnership of approximately $10.4 million.

The Partnership

The Partnership was formed for the primary purpose of acquiring, holding, selling and otherwise dealing with a portfolio of federally tax-exempt mortgage revenue bonds which have been issued to provide construction and/or permanent financing of multifamily residential apartments. The Partnership’s business objectives are to: (i) preserve and protect its capital; (ii) provide regular cash distributions to BUC holders; and (iii) provide a potential for an enhanced federally tax-exempt yield as a result of a participation interest in the net cash flow and net capital appreciation of the underlying real estate properties financed by the tax-exempt mortgage revenue bonds.

The Partnership is pursuing a business strategy of acquiring additional tax-exempt mortgage revenue bonds on a leveraged basis in order to: (i) increase the amount of tax-exempt interest available for distribution to its BUC holders; (ii) reduce risk through asset diversification and interest rate hedging; and (iii) achieve economies of scale. The Partnership seeks to achieve its investment growth strategy by investing in additional tax-exempt mortgage revenue bonds and related investments, taking advantage of attractive financing structures available in the tax-exempt securities market and entering into interest rate risk management instruments.

Each of the tax-exempt mortgage revenue bonds bears tax-exempt interest at a fixed rate and nine of the bonds provide for the payment of additional contingent interest that is payable solely from available net cash flow generated by the financed property. At December 31, 2008, all of the Partnership’s tax-exempt mortgage revenue bonds were paying their full amount of base interest.  The Partnership has the ability and may restructure the terms of its tax-exempt mortgage revenue bond to reduce the base interest rate payable on these bonds.  The Partnership remains aware of this potential and continues to monitor the performance of the multifamily properties collateralizing its tax-exempt mortgage revenue bonds.

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The Partnership has financed the acquisition of tax-exempt mortgage bonds through the securitization of certain of its tax-exempt mortgage bonds under the Bank of America facility. As of December 31, 2008 the Partnership has securitized $76.6 million of its tax-exempt mortgage revenue bond portfolio. This total was allocated between continuing operations, $57.0 million, and discontinued operations, $19.6 million.  See the discussion of Liquidity and Capital Resources below for further discussion.

The Partnership may make taxable loans or acquire direct ownership interests in real property with the ultimate purpose of acquiring tax-exempt mortgage revenue bonds secured by the same property.  The Partnership may also make taxable loans to provide capital project funding to a property securing a tax-exempt mortgage revenue bond already owned by the Partnership. Therefore, the business purpose of the Partnership making taxable loans or acquiring direct property ownership interests is not solely to earn taxable income, but rather to acquire, either immediately or in the future, a tax-exempt mortgage revenue bond or to improve the condition of a property securing a tax-exempt mortgage revenue bond.

As of December 31, 2008, the Partnership’s wholly-owned subsidiaries held limited partnership interests in eight entities that own MF Properties containing a total of 796 rental units.  As noted above, the Partnership expects to ultimately restructure the property ownership through a sale of the MF Properties and a syndication of the associated LIHTCs.  The Partnership expects to provide the tax-exempt mortgage revenue bonds to the new property owners as part of the restructuring.  Current credit markets and general economic issues have had a significant negative impact on these types of transactions.  At this time very few LIHTC syndication and tax-exempt bond financing transactions are being completed.  These types of transactions represent a long-term market opportunity for the Company and provide a significant future bond investment pipeline when the market for LIHTC syndications strengthens.  Until such a restructuring occurs the operations of the properties owned by the limited partnerships are consolidated with the Partnership.
 
The following discussion of the Partnership’s results of operations for the years ended December 31, 2008, 2007 and 2006 reflects the operations of the Partnership without the consolidation of the VIEs required by FIN 46R. This information reflects the information used by management to analyze the Partnership’s operations and is reflective of the consolidated operations of the Tax-Exempt Bond Investments segment and the MF Properties segment as presented in Note 14 to the financial statements.
 
   
For the
   
For the
   
For the
 
   
Year Ended
   
Year Ended
   
Year Ended
 
   
Dec. 31, 2008
   
Dec. 31, 2007
   
Dec. 31, 2006
 
Revenues:
                 
Mortgage revenue bond investment income
  $ 10,102,802     $ 9,379,859     $ 12,188,552  
Property revenues
    4,793,535       2,066,487       -  
Other interest income
    150,786       751,797       432,796  
Loss on sale of securities
    (68,218 )     -       -  
   Total Revenues
    14,978,905       12,198,143       12,621,348  
Expenses:
                       
Real estate operating (exclusive of items shown below)
    2,628,606       1,230,694       -  
Interest expense
    5,097,454       3,531,192       2,106,292  
Depreciation and amortization expense
    2,728,096       1,478,279       25,604  
General and administrative
    1,808,459       1,577,551       1,575,942  
   Total Expenses
    12,262,615       7,817,716       3,707,838  
Minority interest in net loss of consolidated subsidiary
    9,364       13,030       -  
Net Income
  $ 2,725,654     $ 4,393,457     $ 8,913,510  
 
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Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Mortgage revenue bond investment income.  Mortgage revenue bond investment income of the Partnership consists of the interest income earned on the mortgage revenue bonds actually held by the Partnership during the respective periods without consideration as to whether the financed properties are owned by VIEs.  Mortgage revenue bond investment income increased approximately $723,000 in 2008 compared to 2007.  The increase is the net effect of an increase in base bond interest offset by a decrease in realized contingent interest income.  Base interest income on bonds increased approximately $1.8 million in 2008 associated with the mortgage revenue bonds acquired late in 2007 and early in 2008 offset by two bonds sold in 2008 resulting in a $1.0 million decrease in base bond interest income.  Contingent interest income recognized in 2008 was approximately $153,000 compared to approximately $231,000 in 2007, all of which was a result of the realization of contingent interest associated with the Partnership’s investment in Lake Forest, Fairmont Oaks and Iona Lakes.  Due to the uncertainty in collections of contingent interest, the Partnership recognizes this as income only when it is realized.

Property Revenues.  Property revenues of the Partnership consists only of those of the MF Properties.  Property revenues increased approximately $2.7 million for the year ended December 31, 2008 compared to the same period of 2007.  The six MF Properties in which an interest was acquired in 2007 reported six months of revenue in 2007 and 12 months of revenue in 2008.  Interests in two additional MF Properties, Commons at Churchland and Glynn Place Apartments, were purchased in the third and fourth quarters of 2008, respectively, and revenues from these MF Properties was recorded from those dates.  Annual net rental revenues per unit related to the MF Properties increased from $7,427 per unit in 2007 to $7,667 in 2008.

Other interest income.  Other interest income represents interest earned on cash and cash equivalents. The decrease is attributable to higher average balances of cash and cash equivalents in 2007 which resulted from the issuance of additional BUCs in April 2007.  As these funds were invested in tax-exempt bonds or MF Properties in 2007 and 2008, the Company’s cash and cash equivalent balances declined.

Loss on sale of securities. The Chandler Creek and Deerfield bonds were sold in 2008 for par value plus accrued interest.  The loss resulted from the write off of unamortized deferred financing costs related to the bonds.

Real estate operating expenses.  Real estate operating expenses increased approximately $1.4 million during 2008 as compared to 2007.  Approximately $1.1 million of the increase is attributable to six of the MF Properties reporting six months activity in 2007 as compared to twelve months in 2008. In addition approximately $276,000 was incurred by Churchland and Glynn Place which were purchased in the third and fourth quarter of 2008, respectively.

Depreciation and amortization.  Depreciation and amortization increased approximately $1.2 million in 2008 compared to 2007.  Depreciation is primarily associated with the MF Properties. Approximately $306,000 of the increase is attributable to six of the MF Properties reporting six months activity in 2007 as compared to twelve months in 2008.  The acquisition of Churchland and Glynn Place added approximately $294,000 of depreciation and amortization.  Additionally, in 2008 the Company entered into a new TOB credit facility which resulted in approximately $600,000 of additional deferred finance cost amortization.
 
Interest expense.  Interest expense increased approximately $1.6 million during 2008 compared to 2007 due to higher levels of borrowing and fair value adjustments on our interest rate derivatives. Total outstanding debt increased from approximately $91.3 million at December 31, 2007 to approximately $107.5 million as of December 31, 2008.  Interest expense on the new debt accounted for approximately $764,000 of the overall increase. Approximately $472,000 of the remaining increase is attributable to the effect of marking our interest rate derivatives to fair value.  The remaining difference is due to a full year of interest expense on six of the eight MF Properties in 2008 versus six months in 2007 and additional interest expense related to Churchland and Glynn Place which were acquired in the third and fourth quarters of 2008.

General and administrative expenses.  General and administrative expenses increased approximately $231,000 in 2008. This increase was realized in professional fees and administration fees on bonds added to the investment portfolio.

Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 
Mortgage revenue bond investment income.  Mortgage revenue bond investment income decreased approximately $2.3 million in 2007 compared to 2006.  The decrease is due to decreased collections of contingent interest offset by increased collections of base interest.  Contingent interest income recognized in 2007 was approximately $231,000 compared to approximately $4.3 million in 2006, all of which was a result of the receipt of previously unrecognized contingent interest associated with the Partnership’s previous investment in the Northwoods Lake mortgage revenue bond. Due to the uncertainty in collections of contingent interest, the Partnership recognizes this as income only when it is realized.  Base interest income on bonds increase approximately $1.8 million in 2007 as interest associated with the mortgage revenue bonds acquired in 2007 was approximately $1.3 million.  A full year of interest income on bonds acquired in 2006 accounted for the remaining increase in base interest.
 
Property Revenues.  Property revenues increased approximately $2.1 million for the year ended December 31, 2007 compared to the same period of 2006. The increase is attributable to the acquisition of the MF Properties which had 2007 revenue of approximately $2.1 million.  Annual net rental revenues per unit related to the MF Properties were, on an annualized basis, $7,427 per unit in 2007.
 
Other interest income.  Other interest income represents interest earned on the Partnership’s taxable loans and cash and cash equivalents.  The decrease is attributable to a decline in interest received on taxable loans offset by an increase in income on cash equivalent investments.  Interest on taxable loans decreased approximately $646,000.  The interest on taxable loans is recorded when realized or realizable.  Interest income on cash equivalents increased approximately $415,000 due to higher levels of cash equivalents during the year.
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Real estate operating expenses.  Real estate operating expenses increased during 2007 as a direct result of the purchase of the MF Properties which had operating expenses of approximately $1.2 million.

Depreciation and amortization.  Depreciation and amortization consists primarily of depreciation and amortization associated with the MF Properties acquired in 2007.

Interest expense.  Interest expense increased approximately $1.4 million during 2007 compared to 2006 due to higher levels of borrowing and the fair value adjustments on our interest rate derivatives. Total outstanding debt increased from approximately $45.8 million at December 31, 2006 to approximately $91.3 million as of December 31, 2007.  Interest expense on the new debt accounted for approximately $1.3 million of the overall increase. The remaining increase is attributable to marking our interest rate derivatives to fair value.

General and administrative expenses.  General and administrative expenses were consistent between 2007 and 2006.

Liquidity and Capital Resources

Partnership Liquidity

Tax-exempt interest earned on the mortgage revenue bonds, including those financing properties held by VIEs, represents the Partnership's principal source of cash flow.  The Partnership may also receive cash distributions from equity interests held in MF Properties.  Tax-exempt interest is primarily comprised of base interest payments received on the Partnership’s tax-exempt mortgage revenue bonds.  Certain of the tax-exempt mortgage revenue bonds may also generate payments of contingent interest to the Partnership from time to time when the underlying apartment properties generate excess cash flow.  Since base interest on each of the Partnership’s mortgage revenue bonds is fixed, the Partnership’s cash receipts tend to be fairly constant period to period unless the Partnership acquires or disposes of its investments in tax-exempt bonds.  Changes in the economic performance of the properties financed by tax-exempt bonds with a contingent interest provision will affect the amount of contingent interest, if any, paid to the Partnership.  The economic performance of a multifamily apartment property depends on the rental and occupancy rates of the property and on the level of operating expenses.  Occupancy rates and rents are directly affected by the supply of, and demand for, apartments in the market area in which a property is located.  This, in turn, is affected by several factors such as local or national economic conditions, the amount of new apartment construction and the affordability of single-family homes.  In addition, factors such as government regulation (such as zoning laws), inflation, real estate and other taxes, labor problems and natural disasters can affect the economic operations of an apartment property.  The primary uses of cash by apartment properties are: (i) the payment of operating expenses; and (ii) the payment of debt service.  Other sources of cash include debt financing and the sale of additional BUCs.
 
The Company intends to issue BUCs from time to time to raise additional equity capital as needed to fund investment opportunities.  Raising additional equity capital for deployment into new investment opportunities is part of our overall growth strategy. We believe that current market conditions have created significant investment opportunities, and by raising additional capital, we will seek to aggressively pursue those opportunities.  More specifically, the current credit crisis has severely disrupted the financial markets and, in our view, has also created potential investment opportunities for the Company.  Non-traditional participants in the multifamily housing debt sector are either reducing their participation in the market or are being forced to downsize their existing portfolio of investments.  We believe this is creating opportunities to acquire existing tax-exempt bonds from distressed entities at attractive yields.  We believe that we are well-positioned as a result of our ability to acquire assets on the secondary market while maintaining the ability and willingness to also participate in primary market transactions.
 
The current credit crisis is also providing the potential for investments in quality real estate assets to be acquired from distressed owners and lenders.  Our ability to restructure existing debt together with the ability to improve the operations of the underlying apartment properties through our affiliated property management company, America First Property Management Company, L.L.C., results in a valuable tax-exempt bond investment which is supported by the valuable collateral and operations of the underlying real property.  We believe the Company is well-positioned to selectively acquire distressed assets, restructure debt and improve operations thereby creating value to shareholders in the form of a strong tax-exempt bond investment.

In January 2007, the Company filed a Registration Statement on Form S-3 with the SEC relating to the sale of up to $100.0 million of its BUCs.  Pursuant to this Registration Statement, in April 2007 the Company issued, through an underwritten public offering, a total of 3,675,000 BUCs at a public offering price of $8.06 per BUC.  Net proceeds realized by the Company from the issuance of the additional BUCs were approximately $27.5 million, after payment of an underwriter’s discount and other offering costs of approximately $2.1 million.  The proceeds were used to acquire additional tax-exempt revenue bonds and other investments meeting the Partnership’s investment criteria, and for general working capital needs.  This Registration Statement remains active with the SEC and is available for the Company to conduct further underwritten public offerings.

In October 2008, the Company filed a Registration Statement on Form S-3 with the SEC relating to a Rights Offering.  Pursuant to this Registration Statement, the Company may issue Rights Certificates to existing BUC holders.  Each Rights Certificate will entitle the holder to purchase additional BUCs at a price established in the Rights Offering.  One Rights Certificate will be issued for every four BUCs owned at the time of the offering.  The Company has not yet determined when, or if, such a Rights Offering will be conducted.

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The Partnership’s principal uses of cash are the payment of distributions to BUC holders, interest and principal on debt financing and general and administrative expenses. The Partnership also uses cash to acquire additional investments. Distributions to BUC holders may increase or decrease at the determination of the General Partner. The Partnership is currently paying distributions at the rate of $0.54 per BUC per year. The General Partner determines the amount of the distributions based upon the projected future cash flows of the Partnership. Future distributions to BUC holders will depend upon the amount of base and contingent interest received on its tax-exempt mortgage revenue bonds and cash received from other investments (including MF Properties), the amount of its borrowings and the effective interest rate these borrowings, and the amount of the Partnership’s undistributed cash.

The Partnership believes that cash provided by its tax-exempt mortgage revenue bonds and other investments will be adequate to meet its projected long-term liquidity requirements, including the payment of expenses, interest and distributions to BUC holders.  Recently, income from investments has not been sufficient to fund such expenditures without utilizing cash reserves to supplement the deficit.  See discussion below regarding “Cash Available for Distribution.”

The credit and capital markets have continued to deteriorate.  If uncertainties in these markets continue, the markets deteriorate further or the Company experiences deterioration in the values of its investment portfolio, the Company may incur impairments to its investment portfolio which could negatively impact the Company’s financial condition, cash flows, and reported earnings.
 
VIE Liquidity

The VIEs’ primary source of cash is net rental revenues generated by their real estate investments. Net rental revenues from a multifamily apartment property depend on the rental and occupancy rates of the property and on the level of operating expenses. Occupancy rates and rents are directly affected by the supply of, and demand for, apartments in the market area in which a property is located. This, in turn, is affected by several factors such as local or national economic conditions, the amount of new apartment construction and the affordability of single-family homes. In addition, factors such as government regulation (such as zoning laws), inflation, real estate and other taxes, labor problems and natural disasters can affect the economic operations of an apartment property.

The VIEs’ primary uses of cash are: (i) the payment of operating expenses; and (ii) the payment of debt service on the VIEs’ bonds and mortgage notes payable which are held by the Partnership.

Consolidated Liquidity

On a consolidated basis, cash provided by operating activities for 2008 increased approximately $218,000 compared to 2007 and cash provided by operating activities for 2007 decreased approximately $1.4 million compared to 2006 mainly due to changes in working capital components.  Cash from investing activities increased approximately $31.4 million in 2008 compared to 2007. In 2008, cash used for investing activities resulted primarily from the purchase of the MF Properties, the acquisition of additional tax-exempt revenue bonds and an increase in restricted cash offset by the sale of the Deerfield and Chandler Creek bonds. Restricted cash increased in 2008 because the Company had to deposit additional cash collateral on its TOB facility of approximately $10.0 million. Cash from investing activities decreased approximately $54.4 million in 2007 compared to 2006 primarily due to the purchase of the MF Properties and the acquisition of additional tax-exempt revenue bonds in 2007.  In 2008, cash from financing activities decreased by $45.4 million as compared to 2007 as a result of lower net borrowings and the fact that no sales of additional BUCs were completed in 2008 as compared to 2007.  Cash from financing activities increased approximately $57.0 million in 2007 compared to 2006.  This is the result of the receipt of proceeds from the mortgage on the MF Properties, additional issuances of debt in the P-Float program, and the sale of additional BUCs offset by the payment of liabilities assumed.

Historically, our primary leverage vehicle has been the Merrill Lynch P-Float program.  Credit rating downgrades at Merrill Lynch resulted in a significant increase in Merrill Lynch’s cost of borrowing which, in turn, resulted in a significantly higher interest rate on the Company’s P-Float financing.  As discussed in Note 8 to the financial statements, on June 26, 2008, the Company effectively replaced the Merrill Lynch P-Float program by entering into an agreement for a TOB facility agreement with Bank of America.  The new TOB facility functions in much the same fashion as the P-Float program.  In connection with the TOB facility, tax-exempt mortgage revenue bonds are placed into trusts which issue senior securities (known as “Floater Certificates”) to unaffiliated institutional investors and subordinated residual interest securities (known as “Inverse Certificates”) to the Company.  Net proceeds generated by the sale of the Floater Certificates are then remitted to the Company and accounted for as secured borrowings and, in effect, provide variable-rate financing for the acquisition of tax-exempt mortgage revenue bonds and other investments meeting the Company’s investment criteria and for other purposes. The new TOB facility is a one year agreement with a one year renewal option held by Bank of America and bears a variable interest rate at a weekly floating bond rate, the SIFMA floating index, plus associated remarketing, credit enhancement, liquidity and trustee fees.

On June 26, 2008, as part of the new TOB facility, Bank of America funded a $65.1 million bridge loan which was used to retire the Merrill Lynch P-float program debt.  On July 3, 2008, the new TOB facility was closed and the resulting Floater Certificates were sold.  The closing of the TOB facility resulted in debt proceeds of approximately $76.7 million.  After repayment of the bridge loan and related fees and expenses, net proceeds of approximately $10.8 million were remitted to the Company for investment in additional tax-exempt mortgage bonds and other investments consistent with its investment policies and for other purposes.  The initial variable interest rate at closing of the TOB facility was 3.27% calculated as the SIFMA index of 1.62% plus fees of 1.65%. During 2008 and 2007, the Company’s average effective interest rate on the P-Float and TOB facility was approximately 4.5% and 4.4%, respectively.

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In connection with the acquisition of the MF Properties, the Company has a total of $30.9 million of mortgage loans outstanding.  In the third quarter of 2008 the Churchland acquisition was financed with first and second mortgage loans totaling approximately $6.5 million, a $5.5 million first mortgage and a $1.0 million second mortgage. The interest rate on the first mortgage loan is variable and is calculated as one month LIBOR plus 2.55%.  As of the transaction date, LIBOR was 2.471% and the interest on the mortgage loan was 5.021% per annum.  The first mortgage loan matures in September 2013.  The interest rate on the second mortgage loan is fixed for the first 36 months at 6.0% and then switches to LIBOR plus 3.0% for the remaining term.  The second mortgage loan matures in November 2013.  The fourth quarter 2008 acquisition of Glynn Place was financed with a mortgage loan of $4.5 million. The interest rate on the mortgage loan is variable and is calculated as daily LIBOR plus 2.50%. As of the first payment date, December 1, 2008, LIBOR was 1.43% and the interest on the mortgage loan was 3.93% per annum. The mortgage loan matures in November 2011.  In connection with the 2007 acquisition of the six MF Properties located in Ohio and Kentucky, a mortgage loan of approximately $19.9 million was obtained.  The interest rate on this mortgage loan is variable and is calculated as one month LIBOR plus 1.55%.  The mortgage loan matures in July 2009.  This mortgage loan contains three one-year renewal options held by the Company.  The Company intends to renew the mortgage for an additional year.  As of December 31, 2008, one month LIBOR was 4.86%.

In the long term, the General Partner believes that cash provided by the Company’s tax-exempt mortgage revenue bonds and other investments will be adequate to meet its projected liquidity requirements, including the payment of expenses, interest and distributions to BUC holders.  The Company’s regular annual distributions are currently equal to $0.54 per BUC, or $0.135 per quarter per BUC.  The General Partner currently expects to maintain the annual distribution amount of $0.54 per BUC.  See discussion below regarding “Cash Available for Distribution.”

 
Cash Available for Distribution

Management utilizes a calculation of Cash Available for Distribution (“CAD”) as a means to determine the Partnership’s ability to make distributions to BUC holders.  The General Partner believes that CAD provides relevant information about its operations and is necessary along with net income for understanding its operating results.  To calculate CAD, amortization expense related to debt financing costs and bond reissuance costs, Tier 2 income due to the General Partner as defined in the Agreement of Limited Partnership, interest rate derivative expense or income (including adjustments to fair value), provision for loan losses, impairments on bonds, losses related to VIEs including the cumulative effect of accounting change and depreciation and amortization expense are added back to the Company’s net income (loss) as computed in accordance with GAAP.  There is no generally accepted methodology for computing CAD, and the Company’s computation of CAD may not be comparable to CAD reported by other companies.  Although the Company considers CAD to be a useful measure of its operating performance, CAD should not be considered as an alternative to net income or net cash flows from operating activities which are calculated in accordance with GAAP.

The Partnership’s regular annual distributions are currently equal to $0.54 per unit.  At times recently CAD has not been sufficient to fully fund such distributions without utilizing cash reserves to supplement the deficit.  While the Partnership currently expects to maintain the annual distribution amount of $0.54 per BUC, if it is unable generate CAD at levels in excess of the annual distribution, such distribution amount may need to be reduced.

The following tables show the calculation of CAD for the years ended December 31, 2008, 2007 and 2006.

   
2008
   
2007
   
2006
 
Net income (loss)
  $ (1,031,240 )   $ 940,866     $ 12,776,735  
Net (income) loss related to VIEs and eliminations due to consolidation
    3,756,894       3,452,591       (3,863,226 )
Net income before impact of VIE consolidation
    2,725,654       4,393,457       8,913,509  
Change in fair value of derivatives and interest rate derivative amortization
    721,102       249,026       210  
Depreciation and amortization expense (Partnership only)
    2,840,500       1,478,278       25,605  
Tier 2 Income distributable to the General Partner (1)
    (38,336 )     (57,830 )