UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-K





(Mark One)





R
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December 31, 2010





£
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 000-53174





LEAF EQUIPMENT LEASING INCOME FUND III, L.P.


(Exact Name of Registrant as Specified in Its Charter)




Delaware

20-5455968(State or other jurisdiction of

(I.R.S. Employer Identification No.)incorporation or organization)




110 South Poplar Street, Suite 101, Wilmington Delaware 19801


(Address of principal executive offices)





(800) 819-5556


(Registrant’s telephone number, including area code)





Securities registered pursuant to Section 12 (b) of the Act:




Title of Each Class

Name of Each Exchange on Which RegisteredNone

Not applicable





Securities registered pursuant to Section 12 (g) of the Act:


Limited Partner Units





Title of Each Class




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. £ Yes   R No
 
 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. £ Yes   R No
 
 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. R Yes £ No
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  £ Yes   £ No
 
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer £
Accelerated filer £
Non-accelerated filer £
Smaller Reporting Company R(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 Act). £ Yes   R No





State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.





There is no public market for the Registrant’s securities.





DOCUMENTS INCORPORATED BY REFERENCE


None










LEAF EQUIPMENT LEASING INCOME FUND III, L.P.


INDEX TO ANNUAL REPORT


ON FORM 10-K




PagePART IITEM 1:
Business
3ITEM 1A:
Risk Factors
4ITEM 1B:
Unresolved Staff Comments
4ITEM 2:
Properties
4ITEM 3:
Legal Proceedings
4ITEM 4:
Removed and Reserved
4PART IIITEM 5:
Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
5ITEM 6:
Selected Financial Data
5ITEM 7:
Management’s Discussion and Analysis of Financial Condition and Results of Operation
6ITEM 7A:
Quantitative and Qualitative Disclosures about Market Risk
14ITEM 8:
Financial Statements and Supplementary Data
15ITEM 9:
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
32ITEM 9A:
Controls and Procedures
32ITEM 9B:
Other Information
32PART IIIITEM 10:
Directors and Executive Officers of the Registrant
33ITEM 11:
Executive Compensation
34ITEM 12:
Security Ownership of Certain Beneficial Owners and Management and Related Unit Holder Matters
34ITEM 13:
Certain Relationships and Related Transactions
35ITEM 14:
Principal Accountant Fees and Services
36PART IVITEM 15:
Exhibits, Financial Statement Schedules
36SIGNATURES


2
 Table Of Contents




PART I




ITEM 1 – BUSINESS




General




We are a Delaware limited partnership formed on May 16, 2006 by our General Partner, LEAF Asset Management, LLC (the “General Partner”), which manages us. The General Partner is a Delaware limited liability company, and subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through our offering termination date of April 24, 2008 we raised $120.0 million by selling 1.2 million of our limited partner units. We commenced operations in March 2007.





We are expected to have a nine-year life, consisting of an offering period of up to two years, a five year reinvestment period and a subsequent maturity period of two years, during which our leases and secured loans will either mature or be sold. In the event we are unable to sell our leases and loans during the maturity period, we expect to continue to return capital to our partners as those leases and loans mature. Substantially all of our leases and loans mature by the end of 2014. We expect to enter our liquidation period beginning in April 2013. We will terminate on December 31, 2031, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.




We acquire a diversified portfolio of new, used or reconditioned equipment that we lease to third parties. We also acquire portfolios of equipment subject to existing leases from other equipment lessors. Our financings are typically acquired from LEAF Financial Corporation (“LEAF”), an affiliate of our General Partner and a subsidiary of RAI. In addition, we may make secured loans to end users to finance their purchase of equipment. We attempt to structure our secured loans so that, in an economic sense, there is no difference to us between a secured loan and a full payout equipment lease. We finance business-essential equipment including, but not limited to computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focus on the small to mid-size business market, which generally includes businesses with:




●
500 or fewer employees;




●
$1.0 billion or less in total assets; or




●
$100.0 million or less in total annual sales.




Our principal objective is to generate regular cash distributions to our limited partners.




Our leases consist of direct financing and operating leases as defined by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Under the direct financing method of accounting, interest income (the excess of the aggregate future rentals and estimated unguaranteed residuals upon expiration of the lease over the related equipment cost) is recognized over the life of the lease using the interest method. Under the operating method, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over its estimated useful life. Rental income on operating leases consists primarily of monthly periodic rentals due under the terms of the leases. Generally, during the lease terms of existing operating leases, we will not recover all of the cost and related expenses of rental equipment and, therefore, we are prepared to remarket the equipment in future years. We discontinue the recognition of revenue for leases and loans for which payments are more than 90 days past due. These assets are classified as non-accrual.




As discussed further in ITEM 7, the recent economic recession in the United States has adversely affected our operations as a result of higher delinquencies and may continue to do so as the economy recovers.




Debt Facilities




We have augmented the proceeds of our original offering with debt, and intend to finance a significant portion of the cost of the equipment we acquire. We are not limited in the amount of debt, including financings through securitizations, we may incur. Our ability to obtain financing will, however, depend upon our General Partner’s assessment of whether funds are available at rates and upon terms that are economically advantageous to us. As a result, the amount of our financings may vary significantly from our expectations.




The tightening of the credit markets has adversely affected our ability to obtain debt financing needed to execute our investment strategies. Specifically, we rely on both revolving and term debt facilities to fund our acquisitions of equipment financings. If our banks do not renew a revolving facility upon maturity, the debt facility would convert to a term facility and we would not be able to borrow additional amounts under the line of credit. A term debt facility is a loan that is contractually repaid over a period of time. If we are unable to obtain new debt that will allow us to invest the repayments of existing leases and loans into new investments, the volume of our leases and loans will be reduced.




3
 Table Of Contents




Available Information




We file annual, quarterly and current reports and other information with the SEC. The public may read and copy information we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, D.C. 20549, on official business days during the hours of 10:00 am and 3:00 pm. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The internet address of the SEC site is http://www.sec.gov. Our General Partner’s internet address is http://www.LEAFnow.com. We make our SEC filings available free of charge on or through our General Partner’s internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We are not incorporating by reference in this report any material from our General Partner’s website.




Agreements with our General Partner




We do not directly employ any persons to manage or operate our business. These functions are provided by our General Partner and employees of our General Partner and/or its affiliates. We reimburse our General Partner and/or its affiliates for all direct and indirect costs of services provided, including the cost of employees and benefits properly allocable to us and all other expenses necessary or appropriate for the conduct of our business. Our General Partner and its affiliates receive fees and other compensation from. See ITEM 13 for a further discussion.




Competition




The equipment leasing business is highly fragmented and competitive. We acquire equipment from our General Partner and its affiliates. Our General Partner and its affiliates compete with:




●
a large number of national, regional and local banks, savings banks, leasing companies and other financial institutions;




●
captive finance and leasing companies affiliated with major equipment manufacturers; and




●
other sources of equipment lease financing, including other publicly-offered partnerships.




Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we have. Competition with these entities may reduce the creditworthiness of potential lessees or borrowers to whom we have access or decrease our yields. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. A lower cost of funds could enable a competitor to offer leases or loans at rates which are less than ours, potentially forcing us to lower our rates or lose origination volume.




Employees




As is commonly the case with limited partnerships, we do not directly employ any of the persons responsible for our management or operations. Rather, the personnel of our General Partner and/or its affiliates manage and operate our business. Officers of our General Partner may spend a substantial amount of time managing the business and affairs of our General Partner and its affiliates and may face a conflict regarding the allocation of their time between our business and affairs and their other business interests. The officers of our General Partner who provide services to us are not required to work full time on our affairs. These officers may devote significant time to the affairs of our General Partner’s affiliates and be compensated by these affiliates for the services rendered to them. There may be significant conflicts between us and affiliates of our General Partner regarding the availability of these officers to manage us.




ITEM 1A – RISK FACTORS




Risk factors have been omitted as permitted under rules applicable to smaller reporting companies.




ITEM 1B – UNRESOLVED STAFF COMMENTS




None.




ITEM 2 – PROPERTIES




We do not own or lease any real property.




ITEM 3 – LEGAL PROCEEDINGS




We are not subject to any pending material legal proceedings.




ITEM 4 – REMOVED AND RESERVED




Removed and reserved pursuant to SEC Release 33-9089A


4
 Table Of Contents




PART II




ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES




Our limited partner units are not publicly traded. There is no market for our limited partner units and it is unlikely that any will develop. The following table shows the number of equity security holders, including our General Partner with respect to limited partner units it purchased.




Title of Class

Number of Partners as of

December 31, 2010Limited Partners

2,536General Partner

1




Total distributions paid to limited partners for the years ended December 31, 2010, 2009 and 2008 were $ 6.9 million, $10.2 million, $9.1 million, respectively. These distributions were paid on a monthly basis to our limited partners at an annualized rate of approximately 8.5% of their original capital contribution to us.




ITEM 6 – SELECTED FINANCIAL DATA




The following selected financial data should be read together with our consolidated financial statements, the notes to our financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 in this report. We derived the selected consolidated financial data below from our consolidated financial statements appearing elsewhere in this report, which has been audited by Grant Thornton LLP, an independent registered public accounting firm. We deem March 13, 2007 to be the commencement of our operations and we refer to the period from that date through December 31, 2007 as the period ended December 31, 2007 (in thousands, except unit and per unit data).




Years Ended December 31,


Period Ended December 31,2010


2009


2008


2007Revenues

$
30,490


$
59,178


$
74,088


$
15,816Interest expense


18,700



37,192



44,943



10,949Provision for credit losses


19,602



30,790



26,054



1,428Other expenses


18,285



23,040



23,157



3,807Total expenses


56,587



91,022



94,154



16,184Equity in (loss) earnings of affiliate


(25
)


(212
)


1,812



-Noncontrolling interest


-



3,261



600



-Net loss

$
(26,122
)

$
(28,795
)

$
(17,654
)

$
(368
)Net loss allocated to limited partners

$
(25,861
)

$
(28,507
)

$
(17,477
)

$
(364
)Distributions to partners

$
6,977


$
10,278


$
9,205


$
2,304Weighted average number of limited partner units outstanding during the year


1,196,001



1,197,029



1,114,102



384,672Net loss per weighted average limited partner unit

$
(21.62
)

$
(23.81
)

$
(15.69
)

$
(0.95
)
   December 31,2010



2009



2008



2007Investment in leases and loans, net

$
187,892


$
334,452


$
682,458


$
499,704Total assets


205,873



364,550



738,422



536,442Debt  and note payable


184,668



314,420



644,223



467,625Partners’ (deficit) capital:General partner


(1,017
)


(686
)


(295
)


(26
)Limited partners


3,256



36,106



74,914



61,879Accumulated other comprehensive loss


-



(10,261
)


(18,563
)


(6,803
)Total partners’ capital

$
2,239


$
25,159


$
56,056


$
55,050




5
 Table Of Contents




ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The following discussion provides an analysis of our operating results, an overview of our liquidity and capital resources and other items related to us.  This discussion and analysis should be read in conjunction with Item 1 and the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for the year ended December 31, 2010.




As used herein, the terms “we,” “us,” or “our” refer to Lease Equipment Leasing Income Fund III, L.P. and its subsidiaries.





Fund Summary




As discussed in more detail in Item 1, we acquire a diversified portfolio of new, used or reconditioned equipment that we lease to third parties. We also acquire portfolios of equipment subject to existing leases from other equipment lessors. Our financings are typically acquired from our General Partner. In addition, we may make secured loans to end users to finance their purchase of equipment.




At the time of our commencement, the United States economy was experiencing strong growth, an abundance of liquidity in the debt markets and historically low credit losses.  It is widely believed that the United States economy over the past few years has suffered through the worst economic recession in over 75 years.  The recession has been severe and its consequences broadly felt.  Many well-known major financial institutions failed and others had to be bailed out.   Unemployment soared to generational highs and has remained at such levels.  Bank lending was severely reduced and became more expensive.   In recent years, banks became much more reluctant to lend, and when they did it became more expensive to borrow.   If existing loans came up for renewal and were extended, they were written for reduced amounts and at higher interest rates. Also, lenders insisted on ever-tighter covenants around delinquencies and write-offs that made it more difficult to remain in compliance. As our primary credit facilities matured and we had to extend, renew or refinance them, our costs increased.  Most significantly, we had to reduce our debt on the leases previously financed.  The money to pay down the debt had to come from lease payments and those amounts were no longer available to re-invest in new leases.  The lenders’ higher fees and costs also had to be paid from funds that were then unavailable to re-invest in new leases.    All of this happened while losses increased.  The small businesses that represent our typical leasing customer have suffered through the recession.  The increase in write-offs also created an additional burden on the cash available to re-invest.




Our losses, while greater than projected, were still modest considering the magnitude of the economic storm.  In fact, the General Partner changed its underwriting standards early in 2008, and the portfolio of leases written since then have performed as well as originally modeled.We proactively negotiated with our lender to prevent them from foreclosing on any collateral, or requiring a fire sale of leases that would have badly impaired capital. We sought new forms of capital, and were able to arrange debt for us at a time when lenders were not generally providing new facilities. In December of 2010, we completed a term securitization totaling approximately $202 million in which we were able to issue asset-backed notes and pay-off three of our existing lenders with the proceeds.




Our General Partner has deferred payment of fees and reimbursement of expenses totaling approximately $17.6 million from inception through December 31, 2010, in order to preserve cash for us.  Additionally, the General Partner has also waived all future management fees.




To date, limited partners have received total distributions ranging from approximately 19% to 28% of their original amount invested, depending upon when the investment was made.   Our General Partner is working to maximize the amount that can be distributed to limited partners in the future. However, we could not continue to support 8.5% distributions, and beginning in August 2010, distributions were lowered to 2.0%.  The July 2010 distribution was made at the 8.5% rate.





General Economic Overview




Our portfolio performance continued to be negatively impacted by the economic problems facing the United States.   The small and mid-size companies that are our loan and lease customers are especially sensitive to macro-economic trends. Key indicators of economic activity show a stalled economy.  At December 31, 2010, several key economic indicators continued to show a weak economy, however a slight decline in the national unemployment rate and improved manufacturing and credit indices provide the first signs of possible improvement in the economy.




●
The national unemployment rate at December 31, 2010 was down slightly at 9.4% but still historically high with no meaningful decline in the unemployment rate in the near future.  High unemployment results in reduced demand for goods and services and that leads to decreased revenues for the small business customers in our portfolio thereby impacting their ability to repay loan or lease obligations.
  ●
The U.S. housing market, historically a significant contributor to economic growth and wealth, continues to be depressed. The National Association of Realtors reported that the December 2010 existing home sales seasonally adjusted annual rate of 5.22 million units continued the recent month over month downward trend.  The S&P/Case-Shiller Home Price Report for December 31, 2010 shows a continued decline in home prices in the fourth quarter of 2010 as compared to the third quarter of 2010 with prices down 3.9%. The continuing housing problem, both home sales and home prices, affects the small to mid-size business community in two ways: 1) the lack of new construction has eliminated an important source of business activity for small business; and 2) home equity that historically has provided credit availability to small business owners  has either disappeared or become scarce.


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●
Nationwide, as reported by the Administrative Office of the U.S. Courts, bankruptcies continued to rise during 2010 with 1,593,081 filed in the twelve month period ending December 31, 2010 as compared to 1,473,675 filed in the twelve month period ending December 31, 2009.  Increased bankruptcies affect our performance in two ways: 1) small business customers in the portfolio may default due to bankruptcy; and 2) good performing small business customers may face reduced revenues due to bankruptcies among their customers thereby impacting their ability to repay loan or lease obligations.




●
The Institute of Supply Management reports that its manufacturing index improved slightly in December 2010 as did the National Association of Credit Managers index.  Taken together these suggest marginal improvement in the economic climate.




The various national economic problems have manifested themselves in our portfolio performance.  We are seeing delinquency trends in the portfolio that are consistent with delinquency trends reported by industry groups, including the Monthly Lease and Finance Index, that track lease and loan portfolio performance.  The overall delinquency trend in our portfolio is that delinquent balances are declining, but as stated above, the economy is still unsettled and periodic swings in performance may still be expected.







Finance Receivables and Asset Quality




Information about our portfolio of leases and loans is as follows (dollars in thousands):




December 31,2010


2009Investment in leases and loans, net

$
187,892


$
334,452Number of contracts


35,500



47,000Number of individual end users (a)


29,400



38,000Average original equipment cost

$
16.1


$
14.5Average initial lease term (in months)


54



51Average remaining lease term (in months)


18



-States accounting for more than 10% of lease and loan portfolio:California


13
%


14
%Types of equipment accounting for more than 10% of lease and loan portfolio:Industrial Equipment


38
%


41
%Office Equipment


15
%


13
%Medical Equipment


11
%


9
%Types of businesses accounting for more than 10% of lease and loan portfolio:Services


40
%


38
%Transportation/Communication/Energy


13
%


13
%Retail Trade


12
%


12
%Manufacturing


9
%


10
%




(a)
Located in the 50 states as well as the District of Columbia and Puerto Rico. No individual end user or single piece of equipment accounted for more than 1% of our portfolio based on original cost of the equipment.





We utilize debt in addition to our equity to fund the acquisitions of lease portfolios. As of December 31, 2010 and 2009, our outstanding bank debt was $183.9 million and $314.4 million, respectively.


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The performance of our lease portfolio is a measure of our General Partner’s underwriting and collection standards, skills, policies and procedures and is an indication of asset quality. The table below provides information about our finance receivables including non-performing assets, which are those assets that are not accruing income due to non-performance or impairment (dollars in thousands):




As of and for theYears Ended December 31,Change2010


2009


$


%Investment in leases and loans before allowance for credit losses

$
197,072


$
351,852


$
(154,780
)


(44
)%Less: allowance for credit losses


9,180



17,400



(8,220
)


(47
)%Investment in leases and loans, net

$
187,892


$
334,452


$
(146,560
)


(44
)%Weighted average investment in direct financing leases and loans before allowance for credit losses

$
267,155


$
477,176


$
(210,021
)


(44
)%Non-performing assets

$
11,303


$
23,521


$
(12,218
)


(52
)%Charge-offs, net of recoveries

$
27,822


$
20,494


$
7,328



36
%As a percentage of finance receivables:Allowance for credit losses


4.66
%


4.95
%Non-performing assets


5.74
%


6.68
%As a percentage of weighted average finance receivables:Charge-offs, net of recoveries


10.41
%


4.29
%




We manage our credit risk by adhering to strict credit policies and procedures, and closely monitoring our receivables. Our General Partner, the servicer of our leases and loans, responded to the recent economic recession in part, by implementing early intervention techniques in collection procedures. Our General Partner has also increased its credit standards and limited the amount of business we do with respect to certain industries, geographic locations and equipment types. Because of the current scarcity of credit available to small and mid size businesses, we have been able to increase our credit standards without reducing the interest rate we charge on our leases and loans.




Our allowance for credit losses is our estimate of losses inherent in our commercial finance receivables. The allowance is based on factors which include our historical loss experience on equipment finance portfolios we manage, an analysis of contractual delinquencies, current economic conditions and trends and equipment finance portfolio characteristics, adjusted for recoveries. In evaluating historic performance, we perform a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. Our policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote. Substantially all of our assets are collateral for our debt and, therefore, significantly greater delinquencies than anticipated will have an adverse impact on our cash flow and distributions to our partners.




We focus on financing equipment used by small to mid-sized businesses. The recent economic recession in the U.S has made it more difficult for some of our customers to make payments on their financings with us on a timely basis, which has adversely affected our operations in the form of higher delinquencies. These higher delinquencies may continue as the U.S. economy recovers. The increase in delinquencies, as well as recent economic trends has caused us to conclude that an allowance for credit losses of $9.2 million is necessary at December 31, 2010.




Our net charge-offs increased in the 2010 period compared to the 2009 period due to the aging of our portfolio of leases and loans as well as the recent economic recession as discussed above.




Critical Accounting Policies




The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value and effectiveness of interest rate swaps. We base our estimates on historical experience, current economic conditions and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.




We have identified the following policies as critical to our business operations and the understanding of our results of operations.





Investments in Leases and Loans




The Fund’s investment in leases and loans consist of direct financing leases, operating leases and loans.




Direct Financing Leases.Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable plus the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted payments plus the estimated unguaranteed residual value over the cost of the related equipment.




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Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s senior management’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.




Operating Leases.Leases not meeting any of the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis.




Generally, during the lease terms of existing operating leases, the Fund will not recover all of the cost and related expenses of its rental equipment and, therefore, it is prepared to remarket the equipment in future years. The Fund’s policy is to review, on a quarterly basis, the expected economic life of its rental equipment in order to determine the recoverability of its undepreciated cost. The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds such value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment. There were no write-downs of equipment during the years ended December 31, 2010, 2009and 2008.




Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the related equipment. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.




Allowance for Credit Losses.The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends, and equipment finance portfolio characteristics, adjusted for expected recoveries. In evaluating historic performance, the Fund performs a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due any remaining balance is fully-reserved less an estimated recovery amount. Generally, the account is then referred to our internal recovery group consisting of a team of credit specialists and collectors. The group utilizes several resources in an attempt to maximize recoveries on charged-off accounts including: 1) initiating litigation against the end user customer and any personal guarantor, 2) referring the account to an outside law firm or collection agency and/or 3) repossessing and remarketing the equipment through third parties. The Fund’s policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote.




The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due. As of December 31, 2010 and December 31, 2009, the Fund had $11.3 million and $23.5 million, respectively, of leases and loans on non-accrual status. Fees from delinquent payments are recognized when received and are included in Other income.


9
 Table Of Contents




Results of Operations




Year Ended December 31, 2010 compared to the Year Ended December 31, 2009




Increase (Decrease)2010


2009


$


%Revenues:Interest on equipment financings

$
22,368


$
49,089


$
(26,721
)


(54
)%Rental income


4,757



4,722



35



1
%Gains on sales of equipment and lease dispositions, net


182



1,190



(1,008
)


(85
)%Other


3,183



4,177



(994
)


(24
)%30,490



59,178



(28,688
)


(48
)%Expenses:Interest expense


18,700



37,192



(18,492
)


(50
)%Losses on derivative activities


5,611



1,777



3,834



-
%Depreciation on operating leases


3,935



3,910



25



1
%Provision for credit losses


19,602



30,790



(11,188
)


(36
)%General and administrative expenses


2,372



5,192



(2,820
)


(54
)%Administrative expenses reimbursed to affiliate


3,889



6,162



(2,273
)


(37
)%Management fees to affiliate


2,478



5,999



(3,521
)


(59
)%56,587



91,022



(34,435
)


(38
)%Loss before equity in loss of affiliate


(26,097
)


(31,844
)


5,747Equity in loss of affiliate


(25
)


(212
)


187Net loss


(26,122
)


(32,056
)


5,934Less: Net loss attributable to the noncontrolling interest


-



3,261



(3,261
)Net loss attributable to LEAF III

$
(26,122
)

$
(28,795
)

$
2,673Net loss allocated to LEAF III's limited partners

$
(25,861
)

$
(28,507
)

$
2,646




The decrease in total revenues was primarily attributable to the following:
  ●
A decrease in interest income on equipment financings. Our weighted average net investment in financing assets decreased to $267.2 million for the year ended December 31, 2010 as compared to $477.2 million for the year ended December 31, 2009, a decrease of $210.0 million (44%). This decrease was primarily due to the deconsolidation of LEAF Funding, LLC (“Funding LLC”) following an asset sale, coupled with runoff of our portfolio of leases and loans.  See “- Liquidity and Capital Resources.”
  ●
A decrease in other income, which consists primarily of late fee income. Late fee income has decreased due to the decrease of the equipment financing portfolio.
  ●
A decrease in gains on sales of equipment and lease dispositions. Gains and losses on sales of equipment may vary significantly from period to period.
 
 The decrease in total expenses was a result of the following:
  ●
A decrease in interest due to our decrease in average debt outstanding. Average borrowings for the year ended December 31, 2010 and December 31, 2009 were $232.5 million and $438.4 million, respectively. This decrease was primarily due to deconsolidation of Funding LLC. The interest expense reduction was also driven by accelerated debt payments required by our lenders.
  ●
A decrease in management fees attributable to the decrease in our portfolio of equipment financing assets, since management fees are paid based on lease payments received. In addition, beginning August 1, 2010 our General Partner waived asset management fees of $1.5 million for the year ended December 31, 2010. The General Partner has also waived all future management fees.
  ●
A decrease in administrative expenses reimbursed to affiliate due to the decrease in the size of our portfolio.
  ●
A decrease in general and administrative expenses principally due to a decrease in professional fees and storage expenses.
  ●
A decrease in our provision for credit losses principally due to a decrease of our equipment financing portfolio.
  These decreases in expenses were offset, in part, by the following:
 ●
Losses on derivative hedging activities include cash payments or receipts relating to our hedging activities and the changes in the fair value of our derivative financial instruments. For the year ended December 31, 2010, net cash payments were $6.4 million and the change in fair value resulted in a non-cash gain of $742,000. Gains (losses) we incur related to derivative hedging activities are based on the value of the derivative contracts at the respective balance sheet date and, in a volatile market that is changing daily, may not necessarily reflect the cash amount to be paid at settlement. Such gains (losses) can create volatility in our results of operations, as the market value of our derivative financial instruments changes over time, and this volatility may adversely impact our results of operations and financial condition.


10
 Table Of Contents




The net loss per limited partner unit, after the loss allocated to our General Partner, for the year ended December 31 2010 and 2009 was $21.62 and $23.81 respectively, based on a weighted average number of limited partner units outstanding of 1,196,001 and 1,197,029 respectively.




Year Ended December 31, 2009 compared to the Year Ended December 31, 2008




Increase (Decrease)2009


2008


$


%Revenues:Interest on equipment financings

$
49,089


$
61,401


$
(12,312
)


(20
)%Rental income


4,722



3,001



1,721



57
%Gains on sales of equipment and lease dispositions, net


1,190



4,394



(3,204
)


(73
)%Other


4,177



5,292



(1,115
)


(21
)%59,178



74,088



(14,910
)


(20
)%Expenses:Interest expense


37,192



44,943



(7,751
)


(17
)%Losses on derivative activities


1,777



1,486



291



20
%Depreciation on operating leases


3,910



2,484



1,426



57
%Provision for credit losses


30,790



26,054



4,736



18
%General and administrative expenses


5,192



3,804



1,388



36
%Administrative expenses reimbursed to affiliate


6,162



7,019



(857
)


(12
)%Management fees to affiliate


5,999



8,364



(2,365
)


(28
)%91,022



94,154



(3,132
)


(3
)%Loss before equity in (loss) earnings of affiliate


(31,844
)


(20,066
)


(11,778
)Equity in (loss) earnings of affiliate


(212
)


1,812



(2,024
)Net loss


(32,056
)


(18,254
)


(13,802
)Less: Net loss attributable to the noncontrolling interest


3,261



600



2,661Net loss attributable to LEAF III

$
(28,795
)

$
(17,654
)

$
(11,141
)Net loss allocated to LEAF III's limited partners

$
(28,507
)

$
(17,477
)

$
(11,030
)




The following summarizes our results of operations for the years ended December 31, 2009 and 2008 (dollars in thousands):




In January 2008, we acquired a 49% interest in a pool of leases held by Funding LLC for $10.2 million. We accounted for Funding LLC under the equity method of accounting since we had the ability to exercise significant influence over operating and financial decisions of this entity. Equity in earnings of affiliate represents our 49% share of Funding LLC’s income for the period we accounted for it under the equity method. In April 2008, we acquired the remaining 51% interest in this pool of leases. As a result of this transaction, Funding LLC became a wholly-owned subsidiary and its financial results were consolidated with our results beginning in April 2008. In November 2008, we sold a 49% interest in Funding LLC to LEAF Equipment Finance Fund 4, L.P. (“LEAF 4”), a fund sponsored by our General Partner, for $11.6 million. No gain or loss was recorded on this sale. In August 2009, we sold an additional interest of approximately 47% in Funding LLC to LEAF 4. Effective August 2009, we no longer consolidate the financial results of Funding LLC due to our approximate 4% ownership interest. We account for our interest in Funding LLC under the equity method of accounting beginning August 31, 2009.




The decrease in total revenues was primarily attributable to the following:




●
a decrease in interest income on equipment financings. Our weighted average net investment in financing assets decreased to $477.2 million for the year ended December 31, 2009 as compared to $664.4 million for the year ended December 31, 2008, a decrease of $187.2 million (28%). This decrease was primarily due to the deconsolidation of Funding LLC.
  ●
a decrease in gains on sales of equipment and lease dispositions. Gains and losses on sales of equipment may vary significantly from period to period. Included in gains for the year ended December 31, 2008 is a gain of $1.5 million related to the sale of a pool of leases to an unrelated third party.




11
 Table Of Contents




●
a decrease in other income, which consists primarily of late fee income. Late fee income has decreased due to the decrease of the equipment financing portfolio.
  These decreases in total revenues were partially offset by the following:
  ●
an increase in rental income which was principally the result of an increase in our investment in operating leases in the 2009 period compared to the 2008 period.
  The decrease in total expenses was a result of the following:
  ●
a decrease in interest due to our decrease in average debt outstanding. Average borrowings for the year ended December 31, 2009 and December 31, 2008 were $555.0 million and $635.4 million, respectively, at an effective interest rate of 7.2% and 6.9%, respectively.
  ●
a decrease in management fees attributable to the decrease in our portfolio of equipment financing assets, since management fees are paid based on lease payments received.
  ●
a decrease in administrative expenses reimbursed to affiliate due to the decrease in the size of our portfolio.
  These decreases in total expenses were partially offset by the following:
  ●
an increase in depreciation on operating leases related to our increase in our investment in operating leases.
  ●
an increase in our provision for credit losses. We provide for credit losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions. Our provision for credit losses has increased due to the impact of the economic recession in the United States on our customer’s ability to make payments on their leases and loans, resulting in an increase in non-performing assets as a percentage of finance receivables to 6.86% as of December 31, 2009 as compared to 2.92% as of December 31, 2008.
  ●
an increase in losses on derivative hedging activities. The lease assets we originate are almost entirely fixed-rate, while the funds borrowed through our credit facilities are obtained on a floating-rate basis. Accordingly, we employ a hedging strategy using derivative financial instruments such as interest rate swaps, to fix the rate on our debt and attempt to lock in our interest rate spread between interest received on our financings and the interest we pay on our debt. Under U.S. GAAP, we are required to recognize all derivatives on the balance sheet at fair value, and to the extent the derivative is effective, the change in fair value is recorded directly to equity. Certain of our hedges entered into do not qualify for hedge accounting. Therefore, any change in the fair value of these derivative instruments is recognized immediately in gain (loss) on derivatives and hedging activities. These losses are based on the value of the derivative contracts at December 31, 2009 in a volatile market that is changing daily, and will not necessarily reflect the cash amount to be paid at settlement. We expect that certain hedges that we will enter into in the future also will not qualify for hedge accounting. This will create volatility in our results of operations, as the market value of our derivative financial instruments changes over time, and this volatility may adversely impact our results of operations and financial condition.
  ●
an increase in general and administrative expenses principally due to an increase in professional fees and storage expenses.




The net loss per limited partner unit, after the loss allocated to our General Partner, for the years ended December 31, 2009 and 2008 was $(23.81) and $(15.69), respectively, based on a weighted average number of limited partner units outstanding of 1,197,029 and 1,114,102, respectively.





Liquidity and Capital Resources




Our major source of liquidity is excess cash derived from the collection of lease payments after payments of debt principal and interest on debt. Our primary cash requirements, in addition to normal operating expenses, are for debt service, investment in leases and loans and distributions to partners. In addition to cash generated from operations, we plan to meet our cash requirements through borrowings from credit facilities.




The following table sets forth our sources and uses of cash for the periods indicated (in thousands):




Years Ended December 31,2010


2009


2008Net cash provided by operating activities

$
10,729


$
20,046


$
7,172Net cash provided by investing activities


123,205



181,021



126,563Net cash used in financing activities


(133,429
)


(204,282
)


(136,082
)Increase (decrease) in cash

$
505


$
(3,215
)

$
(2,347
)




Partners’ distributions paid for the years ended December 31, 2010 and 2009 were $7.0 million and $10.3 million, respectively. Distributions to limited partners were paid at a rate of 8.5% per annum of invested capital through July of 2010 and were lowered to 2% in August.  Cumulative partner distributions paid from our inception to December 31, 2010 were approximately $28.8 million.




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 Table Of Contents




Future cash distributions are dependent on our performance and are impacted by a number of factors which include: our ability to obtain and maintain debt financing on acceptable terms to build and maintain our equipment finance portfolio; lease and loan defaults by our customers; and prevailing economic conditions. Due to the prolonged economic recession we continue to see a scarcity of available debt on terms beneficial to the partnership and higher than expected lease and loan defaults resulting in poorer fund performance than projected.




Beginning August 1, 2010 our General Partner waived asset management fees of $1.5 million for the year ended December 31, 2010. It is expected that our General Partner will also waive all future management fees.  The cash savings on management fees and distributions is expected to be used to pay down our liabilities.




Cash increased by $505,000 which was primarily due to an increase in amounts due to affiliates of $2.8 million and a decrease in restricted cash of $11.8 million. These were offset by a net debt repayment of $6.5 million (net of purchases of and proceeds from leases and loans), and distributions to our partners of $7.0 million. As a result of increased delinquencies, the amount of borrowing availability was reduced, resulting in a net debt repayment in 2010.





In August 2009, we sold a 47% interest in Funding LLC to LEAF Equipment Leasing Income Fund 4 L.P. (“LEAF 4”), its joint venture partner, for $8.5 million. As a result of this transaction, $138.6 million in leases and loans and $126.2 million in the associated secured, non-recourse debt to Morgan Stanley/RBS were deconsolidated from our consolidated balance sheet. The proceeds from this transaction were used to help fund commitments and fees due to West LB, one of our lenders.




Borrowings




Our borrowing relationships each require the pledging of eligible leases and loans to secure amounts advanced. Borrowings outstanding under our credit facilities were as follows as of December 31, 2010 (in thousands):





Type

Maturity


Maximum Facility

Amount


Amount

Outstanding


Amount

Available (1)


Amount of

Collateral (2)DZ Bank
Revolving

November 2013


$
140,000


$
-


$
-


$
-2010-4 Term Securitization
Term

(3)



183,972



183,972



N/A



195,918$
323,972


$
183,972


$
140,000


$
195,918


(1)
Availability under these credit facilities is subject to having eligible leases or loans (as defined in the respective agreements) to pledge as collateral, compliance with covenants and the borrowing base formula.


(2)
Recourse under these facilities is limited to the amount of collateral pledged, and with respect to the DZ Bank facility, an additional 5% of the outstanding debt balance, or $0 as of December 31, 2010. All facilities are collateralized by specific leases and loans and related equipment.


(3)
WestLB, DZ Bank and Key Equipment Finance were paid off on December 8, 2010 with the proceeds from the 2010-4 Term Securitization in which 6 tranches of asset-backed notes were issued, one that matures in August 2018 and 5 that mature in January 2019, respectively. The asset-backed notes total $ 201.9 million and bear interest at stated, fixed rates ranging from 1.7% to 5.5% and were issued at an original discount of approximately $ 7.2 million.




West LB




This facility was terminated as of December 8, 2010 and the outstanding balance of $84.7 million was paid off with the proceeds from the 2010-4 Term Securitization.  Interest on this facility was LIBOR plus 2.50% per annum for all borrowings subsequent to March 2009 and at LIBOR plus 0.95% per annum for prior borrowings.




DZ Bank




The outstanding balance of $ 72.9 million was paid off on December 8, 2010 with the proceeds from the 2010-4 Term Securitization.  This facility has not been terminated.  Interest on each borrowing on this facility is calculated at the commercial paper rate for the lender at the time of such borrowing plus 1.75% per annum.




We are subject to certain financial covenants related to our DZ Bank facility.  As of December 31, 2010, we had incurred multiple breaches under the covenants on its credit facility with DZ Bank and covenant breaches relating to the affiliate that services our leases and loans.  We have requested waivers from DZ Bank with respect to these breaches. As of December 31, 2010 no amounts are outstanding under this borrowing arrangement.




Key Equipment Finance




This facility was terminated as of December 8, 2010 and the outstanding balance of $27.3 million was paid off with the proceeds from the 2010-4 Term Securitization. Interest on this facility was calculated at one month commercial paper rate of lender plus 1.55% per annum.




13
 Table Of Contents




Broadpoint Products Corp./ Guggenheim Note Payable




In April 2010, we entered into a $5 million term loan with Broadpoint Products Corp. Interest payments were made on a monthly basis at a rate of 10% per annum.  This term loan was paid-off on December 8, 2010 in part, with proceeds from the 2010-4 Term Securitization and replaced with a note payable to Guggenheim in the amount of $1.3 million which matured on November 19, 2011 and bore interest at 12% annually.  This note was issued with an original issue discount of $445,000.The Guggenheim note was paid off on March 21, 2011.




Liquidity Summary




We use debt to acquire leases and loans. Repayment of our debt is based on the payments we receive from our customers. When a lease or loan becomes delinquent we may repay our lender in order for us to maintain compliance with our debt covenants.




Our liquidity would be adversely affected by higher than expected equipment lease defaults, which would result in a loss of anticipated revenues. These losses may adversely affect our ability to make distributions to our partners and, if the level of defaults is sufficiently large, may result in our inability to fully recover our investment in the underlying equipment. In evaluating our allowance for losses on uncollectible leases, we consider our contractual delinquencies, economic conditions and trends, lease portfolio characteristics and our General Partner’s management’s prior experience with similar lease assets. At December 31, 2010, our credit evaluation indicated a need for an allowance for credit losses of $9.2 million. As our lease portfolio ages, and if the economy in the United States deteriorates even further or the recession continues for a substantial period of time, we anticipate the need to increase our allowance for credit losses.




Our liquidity is affected by our ability to leverage our portfolio through the use of credit facilities. Our ability to obtain debt financing needed to execute our investment strategies has been impacted by the continued tightening of the credit markets. Specifically, we rely on both revolving and term debt facilities to fund our acquisitions of equipment financings. If we are unable to obtain new debt that will allow us to invest the repayments of existing leases and loans into new investments, the volume of our leases and loans will be reduced.




To date, we have been successful in either extending or refinancing our credit facilities prior to their maturities; however, there can be no assurance that we will be able to continue to do so, as such activities are dependent on many factors beyond our control, including general economic and credit conditions. We continue to seek additional sources of financing, including expanded bank financing and use of joint venture strategies that will enable us to originate investments and generate income while preserving capital. We expect that future financings may be at higher interest rates with lower leverage. As a result, our profitability may be negatively impacted if we are unable to increase our lease and loan rates to offset increases in borrowing rates.




Legal Proceedings




We are a party to various routine legal proceedings arising out of the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.




Recently Issued Accounting Pronouncements




See Note 2 in the Notes to Consolidated Financial Statements for a description of certain new accounting pronouncements that will or may affect our consolidated financial statements.




ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Quantitative and Qualitative Disclosures about Market Risk have been omitted as permitted under rules applicable to smaller reporting companies.


14
 Table Of Contents




ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The Partners


Leaf Equipment Leasing Income Fund III, L.P. and Subsidiaries




We have audited the accompanying consolidated balance sheets of Leaf Equipment Leasing Income Fund III, L.P. and subsidiaries (the “Fund”), as of December 31, 2010 and 2009 and the related consolidated statements of operations, changes in partners’ capital (deficit) and cash flows for each of the three years in the period ended December 31, 2010.  These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits.




We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.




In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Leaf Equipment Leasing Income Fund III, L.P. and subsidiaries as of December 31, 2010 and 2009 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.




/s/ GRANT THORNTON LLP




Philadelphia, Pennsylvania




March 31, 2011


15
 Table Of Contents




LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES


Consolidated Balance Sheets


(In thousands)





December 31,2010


2009ASSETSCash

$
526


$
21Restricted cash


13,019



24,795Accounts receivable


201



258Investment in leases and loans, net


187,892



334,452Deferred financing costs, net


3,132



3,575Investment in affiliated leasing partnerships


863



864Other assets


240



585Total assets

$
205,873


$
364,550LIABILITIES AND PARTNERS’ (DEFICIT) CAPITALLiabilities:Debt

$
183,972


$
314,420Note payable


696



-Accounts payable and accrued expenses


529



1,556Other liabilities


877



1,125Derivative liabilities, at fair value


-



7,562Due to affiliates


17,560



14,728Total liabilities


203,634



339,391Commitments and contingenciesPartners’ (Deficit) Capital:General partner


(1,017
)


(686
)Limited partners


3,256



36,106Accumulated other comprehensive loss


-



(10,261
)Total partners’ capital


2,239



25,159Total liabilities and partners' capital

$
205,873


$
364,550




The accompanying notes are an integral part of these consolidated financial statements.




16
 Table Of Contents





LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES


Consolidated Statements of Operations


(In thousands, except unit and per unit data)




Years Ended December 31,2010


2009


2008Revenues:Interest on equipment financings

$
22,368


$
49,089


$
61,401Rental income


4,757



4,722



3,001Gains on sales of equipment and lease dispositions, net


182



1,190



4,394Other


3,183



4,177



5,29230,490



59,178



74,088Expenses:Interest expense


18,700



37,192



44,943Losses on derivative activities


5,611



1,777



1,486Depreciation on operating leases


3,935



3,910



2,484Provision for credit losses


19,602



30,790



26,054General and administrative expenses


2,372



5,192



3,804Administrative expenses reimbursed to affiliate


3,889



6,162



7,019Management fees to affiliate


2,478



5,999



8,36456,587



91,022



94,154Loss before equity in (loss) earnings of affiliate


(26,097
)


(31,844
)


(20,066
)Equity in (loss) earnings of affiliate


(25
)


(212
)


1,812Net loss


(26,122
)


(32,056
)


(18,254
)Less: Net loss attributable to the noncontrolling interest


-



3,261



600Net loss attributable to LEAF III

$
(26,122
)

$
(28,795
)

$
(17,654
)Net loss allocated to LEAF III's limited partners

$
(25,861
)

$
(28,507
)

$
(17,477
)Weighted average number of limited partner unitsoutstanding during the period


1,196,001



1,197,029



1,114,102Net loss per weighted average limited partner unit

$
(21.62
)

$
(23.81
)

$
(15.69
)




The accompanying notes are an integral part of these consolidated financial statements.




17
 Table Of Contents




LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES


Consolidated Statements of Changes in Partners’ Capital (Deficit)


(In thousands except unit data)




Limited PartnersGeneral

Partner Amount


Units


Amount


Accumulated

Other

Comprehensive Income (Loss)


Total LEAF III

Partners'

Capital


Noncontrolling Interest


Total

Partners' Capital


Comprehensive Income (Loss)Balance, Janurary 1, 2008

$
(26
)


742,272


$
61,879


$
(6,803
)

$
55,050


$
-


$
55,050Limited Partners’ contributions


-



457,733



45,612



-



45,612



-



45,612Offering costs related to the sale of partnership units


-



-



(5,814
)


-



(5,814
)


-



(5,814
)Cash distributions paid


(92
)


-



(9,113
)


-



(9,205
)


-



(9,205
)Redemption of limited partnership units


-



(1,937
)


(173
)


-



(173
)


-



(173
)Issuance of subsidiary shares to noncontrolling interest


-



-



-



-



-



10,466



10,466Net loss


(177
)


-



(17,477
)


-



(17,654
)


-



(17,654
)

$
(17,654
)Unrealized losses on financial derivatives


-



-



-



(11,989
)


(11,989
)


-



(11,989
)


(11,989
)Amortization of loss on financial derivatives


-



-



-



229



229



-



229



229Balance, December 31, 2008


(295
)


1,198,068



74,914



(18,563
)


56,056



10,466



66,522


$
(29,414
)Cash distributions paid


(103
)


-



(10,175
)


-



(10,278
)


-



(10,278
)Redemption of limited partnership units


-



(1,437
)


(126
)


-



(126
)


-



(126
)Issuance of subsidiary shares to noncontrolling interest


-



-



-



-



-



1,225



1,225Comprehensive LossNet loss


(288
)


-



(28,507
)


-



(28,795
)


(3,261
)


(32,056
)

$
(32,056
)Unrealized gains on financial derivatives


-



-



-



4,463



4,463



1,346



5,809



5,809Amortization of loss on financial derivatives


-



-



-



1,060



1,060



-



1,060



1,060Other comprehensive income


-



-



-



-



-



-



-



6,869Comprehensive loss


-



-



-



-



-



-



-



(25,187
)Deconsolidation of LEAF Funding, LLC


-



-



-



2,779



2,779



(9,776
)


(6,997
)


-Comprehensive loss attributable to noncontrolling interest


-



-



-



-



-



-



-



1,915Comprehensive loss attributable to LEAF III


-



-



-



-



-



-



-


$
(23,272
)Balance, December 31, 2009


(686
)


1,196,631



36,106



(10,261
)


25,159



-



25,159Cash distributions paid


(70
)


-



(6,907
)


-



(6,977
)


-



(6,977
)Redemption of limited partnership units


-



(1,000
)


(82
)


-



(82
)


-



(82
)Net loss


(261
)


-



(25,861
)


-



(26,122
)


-



(26,122
)

$
(26,122
)Unrealized gains on financial derivatives


-



-



-



2,680



5,119



-



5,119



5,119Realized loss on financial derivatives


-



-



-



6,503



4,064



-



4,064



4,064Amortization of loss on financial derivatives


-



-



-



1,078



1,078



-



1,078



1,078Balance, December 31, 2010

$
(1,017
)


1,195,631


$
3,256


$
-


$
2,239


$
-


$
2,239


$
(15,861
)




The accompanying notes are an integral part of these consolidated financial statements.


18
 Table Of Contents





LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES


Consolidated Statements of Cash Flows


(In thousands)




Years Ended December 31,Cash flows from operating activities:

2010


2009


2008Net loss

$
(26,122
)

$
(28,795
)

$
(17,654
)Adjustments to reconcile net loss to net cash provided by operating activities:Net loss attributable to noncontrolling interest


-



(3,261
)


(600
)Gains on sales of equipment and lease dispositions, net


(182
)


(1,190
)


(4,394
)Equity in (loss) earnings of affiliate


25



212



(1,812
)Depreciation on operating leases


3,935



3,910



2,484Provision for credit losses


19,602



30,790



26,054Amortization of deferred charges and discount on debt


4,020



5,917



2,894Amortization and loss on financial derivative


8,258



1,060



229Amortization of interest rate caps


3



15



8(Gains) losses  on derivative hedging activities


(742
)


(1,021
)


1,486Changes in operating assets and liabilities:Accounts receivable


57



60



(138
)Other assets


342



(321
)


(168
)Accounts payable and accrued expenses and other liabilities


(1,299
)


(567
)


(2,913
)Due to affiliates


2,832



13,237



1,696Net cash provided by operating activities


10,729



20,046



7,172Cash flows from investing activities:Purchases of leases and loans


(11,858
)


(52,043
)


(207,562
)Proceeds from leases and loans


135,604



227,319



312,641Proceeds from sale of leases and loans to third parties


-



-



30,735Security deposits collected, net of returns


(541
)


(2,209
)


2,006Acquisition of LEAF Funding, LLC


-



-



(22,890
)Investment in LEAF Funds JV2


-



(428
)


-Proceeds from sale of interest in LEAF Funding, LLC, net of cash sold


-



8,382



11,633Net cash provided by investing activities


123,205



181,021



126,563Cash flows from financing activities:Borrowings of debt


201,194



42,208



182,906Repayment of debt


(332,084
)


(245,795
)


(347,966
)Borrowings on note payable


5,860



-



-Repayment of note payable


(5,178
)


-



-Decrease in restricted cash


11,776



9,884



8,388Increase in deferred financing costs


(3,121
)


(1,400
)


(4,436
)Acquisition of financial derivative


-



-



(76
)Payment on termination of financial derivative


(4,817
)


-



(5,318
)Limited Partners' capital contributions


-



-



45,612Redemption of Limited Partners' capital


(82
)


(126
)


(173
)Payment of offering costs incurred for the sale of partnership units


-



-



(5,814
)Cash distributions to partners


(6,977
)


(10,278
)


(9,205
)Issuance of subsidiary shares to noncontrolling interest


-



1,225



-Net cash used in financing activities


(133,429
)


(204,282
)


(136,082
)Increase (decrease) in cash


505



(3,215
)


(2,347
)Cash, beginning of period


21



3,236



5,583Cash, end of period

$
526


$
21


$
3,236




The accompanying notes are an integral part of these consolidated financial statements.




19
 Table Of Contents




LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES


Notes To Consolidated Financial Statements


December 31 2010




NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS




LEAF Equipment Leasing Income Fund III, L.P. (the “Fund”) is a Delaware limited partnership formed on May 16, 2006 by its General Partner, LEAF Asset Management, LLC (the “General Partner”), which manages the Fund. The General Partner is a Delaware limited liability company, and a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of April 24, 2008, the Fund raised $120.0 million by selling 1.2 million of its limited partner units. It commenced operations in March 2007.




The Fund is expected to have a nine-year life, consisting of an offering period of up to two years, a five-year reinvestment period and a subsequent maturity period of two years, during which the Fund’s leases and secured loans will either mature or be sold. In the event the Fund is unable to sell its leases and loans during the maturity period, the Fund expects to continue to return capital to its partners as those leases and loans mature. Substantially all of the Fund’s leases and loans mature by the end of 2014. The Fund expects to enter its maturity period beginning in April 2013. The Fund will terminate on December 31, 2031, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.




The Fund acquires diversified portfolios of equipment to finance to end users throughout the United States as well as the District of Columbia and Puerto Rico. The Fund also acquires existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily from LEAF Financial Corporation (“LEAF Financial”), an affiliate of its General Partner and a subsidiary of RAI. The primary objective of the Fund is to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.




In addition to its 1% general partnership interest, the General Partner has also invested $1.1 million for a 1.0% limited partnership interest in the Fund.




The Fund has evaluated its December 31, 2010 financial statements for subsequent events through the date the financial statements were issued.  The Fund is not aware of any subsequent events which would require recognition or disclosure in the financial statements, except as discussed in Note 8.




NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Basis of Presentation




The consolidated financial statements include the accounts of the Fund and its wholly owned subsidiaries LEAF Fund III, LLC,  LEAF III B SPE, LLC, LEAF III C SPE, LLC, and LEAF Receivables Funding 5, LLC.  All intercompany accounts and transactions have been eliminated in consolidation.




The Fund owns approximately a 4% ownership interest in LEAF Funding, LLC (“Funding LLC”). The Fund accounts for its interest in Funding LLC under the equity method of accounting.




In March 2009, the Fund entered into an agreement with LEAF Equipment Finance Fund 4, L.P. (“LEAF 4”) to form LEAF Funds Joint Venture 2, LLC (“LEAF Funds JV2”). Through September 30, 2010, the Fund invested $428,000 in LEAF Funds JV2, representing a 2% interest. The Fund accounts for its investment in LEAF Funds JV2 under the cost method of accounting. Under the cost method, the Fund does not include its share of the income or losses of LEAF Funds JV2 in the Fund’s consolidated statements of operations.




The Fund has evaluated subsequent events through the date the financial statements were issued.


20
 Table Of Contents




Reclassification




A reclassification has been made to the 2009 and 2008 consolidated financial statements to conform to the 2010 presentation.  In the statement of operations, renewal income of approximately $75,000 and $ 231,000 for the years ended December 31, 2009 and 2008, that was previously included in “Interest on equipment financings” has been reclassified to “Other” revenues.




Use of Estimates




Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value and effectiveness of interest rate swaps and caps. The Fund bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.





Restricted Cash




Restricted cash includes cash being held in reserve by the Fund’s lenders. Restricted cash also includes approximately $619,000 of customer payments deposited into a lockbox shared with the General Partner and other entities serviced by the Fund’s General Partner. The lockbox is in the name of U.S. Bank NA as trustee under an inter-creditor agreement amongst the Fund’s General Partner, the other entities and their respective lenders. These amounts, which are recorded as restricted cash on the consolidated balance sheets, represent customer payments received by the lockbox, applied to the respective customer’s accounts, but not transferred to the Fund’s bank account.




Concentration of Credit Risk




Financial instruments which potentially subject the Fund to concentrations of credit risk consist of excess cash. The Fund deposits its excess cash in high-quality short-term money market instruments with high-quality financial institutions. As of December 31, 2010, the Fund had deposits totaling $13.7 million of which $13.2 million was over the $250,000 insurance limit of the Federal Deposit Insurance Corporation (“FDIC”). No losses have been experienced on such deposits.




As of December 31, 2010, 13% of the Fund’s net investment in direct financing leases and loans were located in California.





Investments in Leases and Loans




The Fund’s investment in leases and loans consist of direct financing leases, operating leases and loans.




Direct Financing Leases.Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable plus the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted payments plus the estimated unguaranteed residual value over the cost of the related equipment.




Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s senior management’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.




Operating Leases.Leases not meeting any of the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis.




Generally, during the lease terms of existing operating leases, the Fund will not recover all of the cost and related expenses of its rental equipment and, therefore, it is prepared to remarket the equipment in future years. The Fund’s policy is to review, on a quarterly basis, the expected economic life of its rental equipment in order to determine the recoverability of its undepreciated cost. The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds such value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment. There were no write-downs of equipment during the years ended December 31, 2010, 2009 and 2008.




21
 Table Of Contents




Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the related equipment. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.




Allowance for Credit Losses.The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends, and equipment finance portfolio characteristics, adjusted for expected recoveries. In evaluating historic performance, the Fund performs a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due any remaining balance is fully-reserved less an estimated recovery amount. Generally, the account is then referred to our internal recovery group consisting of a team of credit specialists and collectors. The group utilizes several resources in an attempt to maximize recoveries on charged-off accounts including: 1) initiating litigation against the end user customer and any personal guarantor, 2) referring the account to an outside law firm or collection agency and/or 3) repossessing and remarketing the equipment through third parties. The Fund’s policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote.




The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due. As of December 31, 2010 and December 31, 2009, the Fund had $11.3 million and $23.5 million, respectively, of leases and loans on non-accrual status. Fees from delinquent payments are recognized when received and are included in other income.




Transfers of Financial Assets




In connection with establishing its credit facilities with its banks, the Fund has formed bankruptcy remote special purpose entities through which the financings are arranged. The Fund’s transfers of assets to these special purpose entities do not qualify for sales accounting treatment due to certain call provisions that the Fund maintains. Accordingly, assets and related debt of the special purpose entities are included in the Fund’s consolidated balance sheets. The Fund’s leases and restricted cash are assigned as collateral for these borrowings and there is no further recourse to the general credit of the Fund. Collateral in excess of these borrowings represents the Fund’s maximum loss exposure.




The Fund may sell leases to third parties. Leases are accounted for as sold when control of the lease is surrendered. Control over the leases are deemed surrendered when (1) the leases have been isolated from the Fund, (2) the buyer has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the leases and (3) the Fund does not maintain effective control over the leases through either (a) an agreement that entitles and obligates the Fund to repurchase or redeem the leases before maturity, or (b) the ability to unilaterally cause the buyer to return specific leases. In connection with these sales, the Fund’s General Partner, the servicer of the leases prior to the sale, may continue to service the leases for the third party in exchange for “adequate compensation” as defined under U.S. GAAP. The Fund accrues liabilities for obligations associated with leases and loans sold which the Fund may be required to repurchase due to breaches of representations and warranties and early payment defaults. The Fund periodically evaluates the estimates used in calculating expected losses and adjustments are reported in earnings. To obtain fair values, the Fund generally estimates fair value based on the present value of future cash flows estimated using management’s best estimates of key assumptions, including credit losses and discount rates commensurate with the risks involved. As theses estimates are influenced by factors outside the Fund’s control and as uncertainty is inherent in these estimates, actual amounts charged off could differ from amounts recorded. The provision for repurchases is recorded as a component of gain on sales of leases and loans.




Derivative Instruments




The Fund recognizes all derivatives at fair value as either assets or liabilities in the Consolidated Balance Sheets. The accounting for subsequent changes in the fair value of these derivatives depended on whether the derivative had been designated and qualified for hedge accounting treatment pursuant to U.S. GAAP.





Prior to October 1, 2010, the Fund entered into derivative contracts, including interest rate swaps, substantially all of which were accounted for as cash flow hedges.  Under hedge accounting, the effective portion of the gain or loss on a derivative designated as a cash flow hedge was reported in accumulated other comprehensive income on the Consolidated Balance Sheets and then was then reclassified into earnings as an adjustment to interest expense over the term of the related borrowing.





Effective October 1, 2010, the Fund discontinued the use of hedge accounting. Therefore, any subsequent changes in the fair value of derivative instruments, including those that had previously been accounted for under hedge accounting, is recognized immediately in loss on derivatives. While the Fund will continue to use derivative financial instruments to reduce exposure to changing interest rates, this accounting change may create volatility in Fund’s results of operations, as the fair value of Fund’s derivative financial instruments change




For the forecasted transactions that are probable of occurring, the derivative gain or loss remaining in accumulated other comprehensive income as of  September 30, 2010 is being reclassified into earnings as an adjustment to interest expense over the terms of the related forecasted borrowings, consistent with hedge accounting treatment. In the event that the related forecasted borrowing is no longer probable of occurring, the related gain or loss in accumulated other comprehensive income will be recognized in earnings immediately.




22
 Table Of Contents




Income Taxes




Federal and state income tax laws provide that the income or losses of the Fund are reportable by the Partners on their individual income tax returns. Accordingly, no provision for such taxes has been made in the accompanying financial statements.




Comprehensive Income (Loss)




Comprehensive income (loss) includes net income (loss) and all other changes in the equity of a business during a period from transactions and other events and circumstances from non-owner sources. These changes, other than net income (loss) are referred to as “other comprehensive income (loss)” and for the Fund only includes unrealized changes in the fair value of hedging derivatives.




Allocation of Partnership Income, Loss and Cash Distributions




Cash available for distributions, if any, are made monthly as follows: 99% to the Limited Partners and 1% to the General Partner until the Limited Partners have received an amount equal to their unpaid cumulative return (8.5%) of their adjusted capital contribution and thereafter, to investment and reinvestment in investments or, if the General Partner elects not to invest or reinvest such distributable cash, 99% to the Limited Partners and 1% to the General Partner.





Net income for any fiscal period during the reinvestment period (beginning February 7, 2007) is allocated 99% to the Limited Partners and 1% to the General Partner. Income during the liquidation period, as defined in the Partnership Agreement, will be allocated first to the partners in proportion to and to the extent of the deficit balances, if any, in their respective capital accounts. Thereafter, net income will be allocated 99% to the Limited Partners and 1% to the General Partner.




Net Loss Per Limited Partner Unit




Net loss per limited partner unit is computed by dividing net loss allocated to the Fund’s Limited Partners by the weighted average number of limited partner units outstanding during the period. The weighted average number of limited partner units outstanding during the period is computed based on the number of limited partnership units issued during the period weighted for the days outstanding during the period.


23
 Table Of Contents




Recent Accounting Standards





Newly Adopted Accounting Principles




The Fund adopted the following accounting guidance during the year ended December 31, 2010:





Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.In July 2010, the Financial Accounting Standards Board (“FASB”) issued guidance that will require SEC filers to provide more information about the credit quality of their financing receivables in the disclosures to financial statements including, but not limited to, significant purchases and sales of financing receivables, aging information and credit quality indicators.  The guidance is effective for the Fund as of December 15, 2010.  The Fund has provided the required disclosures in the notes to its consolidated financial statements (See Note 5).





Subsequent Events.In February 2010, FASB issued guidance which removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either a correction of error or retrospective application of U.S. GAAP.  This guidance was effective upon issuance.The adoption of this guidance did not have a material effect on the Fund’s consolidated financial statements.





Fair Value Measurements. In January 2010, the FASB issued guidance that requires new disclosures and clarifies some existing disclosure requirements about fair value measurements. The new pronouncement requires a reporting entity: (1) to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and (2) to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs. In addition, it clarifies the requirements of the following existing disclosures: (1) for purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and (2) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this guidance did not have a material effect on the Fund’s consolidated financial statements.





Transfers of financial assets.In June 2009, the FASB issued guidance for accounting for transfers of financial assets.  The guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires greater transparency of related disclosures.  This statement is effective for fiscal years beginning after November 15, 2009.  Adoption of this statement did not have a material impact on the Fund’s consolidated financial statements.




NOTE 3 – SUPPLEMENTAL CASH FLOW INFORMATION




Supplemental disclosure of cash flow information (in thousands):





Years Ended December 31,2010


2009


2008Cash paid for:Interest

$
17,730


$
33,749


$
41,874Non-cash activities:Borrowings under Key Equipment Finance loan agreement

$
-


$
-


$
131,425Repayment of National City line of credit


-



-



(131,425
)Borrowings under DZ Bank credit facility


-



31,310



127,896Repayment of Merrill Lynch credit facility


-



-



(101,443
)Acquisition of leases


-



(31,310
)


(25,896
)Payment of DZ bank debt issuance costs


-



-



(557
)


24
 Table Of Contents





NOTE 4 – INVESTMENT IN LEASES AND LOANS




The Fund’s investment in leases and loans, net, consists of the following (in thousands):





December 31,2010


2009Direct financing leases (a)

$
125,728


$
239,651Loans (b)


65,129



103,021Operating leases


6,215



9,180197,072



351,852Allowance for credit losses


(9,180
)


(17,400
)$
187,892


$
334,452


(a)
The Fund’s direct financing leases are for initial lease terms generally ranging from 24 to 84 months.


(b)
The interest rates on loans generally range from 7% to 14%.




The components of direct financing leases and loans are as follows (in thousands):


December 31,2010


2009Leases


Loans


Leases


LoansTotal future minimum lease payments

$
133,992


$
75,255


$
262,844


$
121,785Unearned income


(13,718
)


(9,196
)


(30,474
)


(17,447
)Residuals, net of unearned residual income (a)


6,273



-



8,401



-Security deposits


(819
)


(930
)


(1,120
)


(1,317
)$
125,728


$
65,129


$
239,651


$
103,021


(a)
Unguaranteed residuals for direct financing leases represent the estimated amounts recoverable at lease termination from extensions or disposition of the equipment.




The Fund’s investment in operating leases, net, consists of the following (in thousands):




December 31,2010


2009Equipment on operating leases

$
15,346


$
16,189Accumulated depreciation


(9,094
)


(6,890
)Security deposits


(37
)


(119
)$
6,215


$
9,180




At December 31, 2010, the future payments scheduled to be received on non-cancelable leases and loans for each of the five succeeding annual periods ending December 31 and thereafter are as follows (in thousands):




Financing Leases


Loans


Operating Leases (a)


Total2011

$
73,097


$
30,396


$
3,215


$
106,7082012


40,429



23,062



823



64,3142013


15,885



12,757



83



28,7252014


3,492



6,235



21



9,7482015 and thereafter


1,089



2,805



-



3,894$
133,992


$
75,255


$
4,142


$
213,389




(a)
Operating lease amounts as shown are net of the residual value, if any, at the end of the lease term.





The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due.  As of December 31, 2010 and December 31, 2009, the Fund had $11.3 million and $23.5 million, respectively, of leases and loans on non-accrual status.


25
 Table Of Contents




NOTE 5-ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY





The disclosures in this footnote follow new guidance issued by the FASB that requires companies to provide more information about the credit quality of their financing receivables including, but not limited to, significant purchases and sales of financing receivables, aging information and credit quality indicators.





The following table is an age analysis of the Fund’s receivables from investments in leases and loans (presented gross of allowance for credit losses of $9.2 million (in thousands):





The Fund had $11.3 million and $23.5 million of leases and loans on non-accrual status as of December 31, 2010 and 2009, respectfully. The credit quality of the Fund’s investment in leases and loans as of December 31, 2010 is as follows (in thousands):




Age of receivable

Investment in leases and loans


%Current

$
180,564



91.6
%Delinquent:31 to 91 days past due


5,205



2.6
%Greater than 91 days (a)


11,303



5.8
%$
197,072



100.0
%




(a)
Balances in this age category are collectivelly evaluated for impairment.






The Fund had $11.3 million and $23.5 million of leases and loans on non-accrual status as of December 31, 2010 and 2009, respectfully. The credit quality of the Fund’s investment in leases and loans as of December 31, 2010 is as follows (in thousands):


Performing

$
185,769Nonperforming


11,303$
197,072
  The following table summarizes the annual activity in the allowance for credit losses (in thousands):


Years Ended December 31,2010


2009


2008Allowance for credit losses, beginning of year

$
17,400


$
10,374


$
1,300Provision for credit losses


19,602



30,790



26,054Charge-offs


(30,859
)


(22,003
)


(17,997
)Recoveries


3,037



1,509



1,017Deconsolidation of LEAF Funding, LLC


-



(3,270
)


-Allowance for credit losses, end of year (a)

$
9,180


$
17,400


$
10,374




(a)
End of year balances were collectively evaluated for impairment.




26
 Table Of Contents




NOTE 6 – DEFERRED FINANCING COSTS




As of December 31, 2010 and December 31, 2009, deferred financing costs include $3.1 million and $3.6 million, respectively, of unamortized deferred financing costs which are being amortized over the estimated useful life of the related debt. Accumulated amortization as of December 31, 2010 and December 31, 2009 is $965,000 and $1.2 million, respectively. Estimated amortization expense of the Fund’s existing deferred financing costs for the years ending December 31, and thereafter are as follows (in thousands):




2011

$
1,5422012


9392013


5672014


602015


16Thereafter


8$
3,132


NOTE 7 –DEBT




The Fund’s bank debt consists of the following (dollars in thousands):


December 31, 2010


December 31,

2009Type

Maturity Date

Amount of

Facility


Outstanding

Balance


Available


Interest rate per annum


Outstanding

Balance2010-4 Term Securitization (1) (3)
Term


(1)


$
183,972


$
183,972



N/A


1.70% to 5.50%



N/ADZ Bank  (1) (2)
Revolving

November 2013


140,000



-



-



(3)




116,649WestLB, AG (1)
Revolving


N/A



N/A



N/A



N/A


One month LIBOR +  2.50%


$
144,194Key Equipment Finance  (1)
Term


N/A



N/A



N/A



N/A


One month Commercial Paper + 1.55%



53,577$
323,972


$
183,972


$
140,000







$
314,420


(1)
WestLB, DZ Bank and Key Equipment Finance were paid off on December 8, 2010 with the proceeds from the 2010-4 Term Securitization in which 6 tranches of asset-backed notes were issued, one that matures in August 2018 and 5 that mature in January 2019, respectively. The asset-backed notes total $ 201.9 million and bear interest at stated, fixed  rates ranging from 1.7% to 5.5% and were issued at an original discount of approximately $ 7.2 million.


(2)
Availability under this loan is subject to having eligible leases or loans (as defined in the respective agreements) to pledge as collateral, compliance with covenants and the borrowing base formula.


(3)
Collateralized by specific leases and loans and related equipment. As of December 31, 2010, $187.5 million of leases and loans and $12.6 million of restricted cash were pledged as collateral under the Fund’s credit facilities.





West LB




This facility was terminated as of December 8, 2010 and the outstanding balance of $84.7 million was paid off with the proceeds from the 2010-4 Term Securitization.  Interest on this facility was LIBOR plus 2.50% per annum for all borrowings subsequent to March 2009 and at LIBOR plus 0.95% per annum for prior borrowings. This revolving line of credit was collateralized by specific leases and loans and related equipment, with a 1% credit reserve on the outstanding line of credit.




DZ Bank




The outstanding balance of $ 72.9 million was paid off on December 8, 2010 with the proceeds from the 2010-4 Term Securitization.  This facility has not been terminated.  Interest on each borrowing on this facility is calculated at the commercial paper rate for the lender at the time of such borrowing plus 1.75% per annum.




The Fund is subject to certain financial covenants related to our DZ Bank facility.  As of December 31, 2010, the Fund had incurred multiple breaches under the covenants on its credit facility with DZ Bank and covenant breaches relating to the affiliate that services the Fund’s leases and loans.  The Fund has requested waivers from DZ Bank with respect to these breaches. As of December 31, 2010 no amounts are outstanding under this borrowing arrangement.




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 Table Of Contents




Key Equipment Finance




This facility was terminated as of December 8, 2010 and the outstanding balance of $27.3 million was paid off with the proceeds from the 2010-4 Term Securitization. Interest on this facility was calculated at one month commercial paper rate of lender plus 1.55% per annum.




Debt Repayments: Estimated annual principal payments on the Fund’s aggregate borrowings (assuming that the lenders noted above waive the aforementioned covenant breaches) over the next five years ended December 31, and thereafter, are as follows (in thousands):






2011

$
83,1742012


59,8432013


27,8262014


9,4142015


2,647Thereafter


1,068$
183,972




NOTE 8 – NOTE PAYABLE




Guggenheim Note Payable: The note payable to Broadpoint Products was paid off on December 8, 2010, in part, with the proceeds from the 2010-4 Term Securitization and replaced with the Guggenheim Note Payable, which matured on November 19, 2011.  The Guggenheim note totaled $ 1.3 million and bore interest at 12% per annum and was issued at an original issue discount of $445,000. The Guggenheim note was paid off on March 21, 2011.




NOTE 9 – DERIVATIVE INSTRUMENTS




Since the Fund’s assets are structured on a fixed-rate basis, and funds borrowed through bank debt are obtained on a floating-rate basis, the Fund is exposed to interest rate risk if rates rise because it will increase the Fund’s borrowing costs. In addition, when the Fund acquires assets, it bases its pricing in part on the spread it expects to achieve between the interest rate it charges its customers and the effective interest cost the Fund will pay when it funds those loans. Increases in interest rates that increase the Fund’s permanent funding costs between the time the assets are originated and the time they are funded could narrow, eliminate or even reverse this spread.




To manage interest rate risk, the Fund employs a hedging strategy using derivative financial instruments such as interest rate swaps.  As discussed previously, effective October 1, 2010, the Fund has elected not to use hedge accounting.  The Fund does not use derivative financial instruments for trading or speculative purposes. The Fund manages the credit risk of possible counterparty default in these derivative transactions by dealing primarily with counterparties with investment grade ratings. The Fund has agreements with certain of its derivative counterparties that contain a provision where if the Fund defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Fund could also be declared in default on its derivative obligations. The Fund has agreements with certain of its derivative counterparties that incorporate the loan covenant provisions of the Fund’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Fund being in default on any derivative instrument obligations covered by the agreement. As of December 31, 2010, the Fund has not posted any collateral related to these agreements.


28
 Table Of Contents





The following tables present the fair value of the Fund’s derivative financial instruments not designated as derivative hedges as well as their classification on the consolidated balance sheet as of December 31, 2010 and 2009, and on the consolidated statements of operations for the years ended December 31, 2010 and 2009 (in thousands):




Notional Amount



Fair ValueDecember 31,



December 31,2010


2009

Balance Sheet Location

2010


2009Derivatives not designated as hedging instrumentsInterest rate caps

$
1,398


$
-

Other assets

$
-


$
-Interest rate swap contracts


-



109,716

Derivative liabilities at fair value


-



(1,510
)$
1,398


$
109,716



$
-


$
(1,510
)






Amount of Gain or (Loss)Recognized in OCI on



Location and Amount of Loss Reclassified fromDerivatives



Accumulated OCI into IncomeYears Ended

December 31,



Years Ended

December31,2010


2009



2010


2009Derivatives not Designated as Cash Flow Hedging RelationshipsInterest rate products

$
6,062


$
(2,319
)
Interest expense

$
(4,199
)

$
(11,187
)




The following table presents the fair value of the Fund’s derivative financial instruments designated as hedging instruments as well as their classification on the consolidated balance sheets as of December 31, 2009.  There were no derivative financial instruments which were designated as hedging instruments as of December 31, 2010.




Notional Amount

Balance Sheet Location

Fair ValueDerivatives designated as hedging instrumentsInterest rate caps

$
3,245

Other assets

$
3Interest rate swap contracts


181,828

Derivative liabilities at fair value


(6,052
)$
185,073



$
(6,049
)




In the fourth quarter of 2010, the Fund made an election to discontinue the use of hedge accounting for its derivative financial instruments. While this change may create future volatility in the Fund’s reported income statement results it is not expected to have any impact on the Fund’s future cash flows.





Certain of the agreements were terminated simultaneously with the pricing of the 2010-4 Term Securitization transaction.  For the year ended December 31, 2010, $3.0 million and $480,000 of losses on related cash flow hedges were reclassified from accumulated comprehensive loss into interest expense and losses on derivative activities, respectively in the consolidated statement of operations.




NOTE 10 – FAIR VALUE MEASUREMENT




For cash, receivables and payables, the carrying amounts approximate fair values because of the short term maturity of these instruments. The carrying value of debt approximates fair market value since interest rates approximate current market rates.




It is not practicable for the Fund to estimate the fair value of the Fund’s leases and loans. They are comprised of a large number of transactions with commercial customers in different businesses, and may be secured by liens on various types of equipment and may be guaranteed by third parties and cross-collateralized. Any difference between the carrying value and fair value of each transaction would be affected by a potential buyer’s assessment of the transaction’s credit quality, collateral value, guarantees, payment history, yield, term, documents and other legal matters, and other subjective considerations. Value received in a fair market sale of a transaction would be based on the terms of the sale, the Fund’s and the buyer’s views of economic and industry conditions, the Fund’s and the buyer’s tax considerations, and other factors.




Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.




29
 Table Of Contents




·
Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.




·
Level 2 – Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.




·
Level 3 – Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.




The Fund employs a hedging strategy to manage exposure to the effects of changes in market interest rates. All derivatives are recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Because the Fund’s derivatives are not listed on an exchange, these instruments are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although the Fund has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, the Fund has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Fund has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.




Liabilities measured at fair value on a recurring basis included the following (in thousands):




Fair Value Measurements UsingLevel 1


Level 2


Level 3


TOTALInterest rate caps at December 31, 2010

$
-


$
-


$
-


$
-Interest rate swaps at December 31, 2010


-



-



-



-Interest rate caps at December 31, 2009


-



3



-



3Interest rate swaps at December 31, 2009


-



(7,562
)


-



(7,562
)




NOTE 11 – CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH AFFILIATES




The Fund relies on the General Partner and its affiliates to manage the Fund’s operations and pays the General Partner or its affiliates fees to manage the Fund. The following is a summary of fees and costs of services charged by the General Partner or its affiliates (in thousands):




Years Ended December 31,2010


2009


2008Acquisition fees

$
233


$
1,022


$
10,613Management fees


2,478



5,999



8,364Administrative expenses


3,889



6,162



7,019Organization and offering expense allowance


-



-



1,371Underwriting fees


-



-



4,443





Acquisition Fees.The General Partner is paid a fee for assisting the Fund in acquiring equipment subject to existing equipment leases equal to up to 2% of the purchase price the Fund pays for the equipment or portfolio of equipment subject to existing equipment financing.




Management Fees. The General Partner is paid a subordinated annual asset management fee equal to 4% of gross rental payments for operating leases or 2% for full payout leases or a competitive fee, whichever is less. During the Fund’s five-year investment period, the management fees will be subordinated to the payment to the Fund’s limited partners of a cumulative annual distribution of 8.5% of their capital contributions, as adjusted by distributions deemed to be a return of capital. Beginning August 1, 2009, the General Partner waived asset management fees.  Approximately $1.5 million of management fees were waived for the year ended December 31, 2010.  The General Partner has also waived all future management fees.




Administrative Expenses. The General Partner and its affiliates are reimbursed by the Fund for certain costs of services and materials used by or for the Fund except those items covered by the above-mentioned fees.




Organization and Offering Expense Allowance and Underwriting Fees. The Fund paid the General Partner and Chadwick Securities, Inc. (“Chadwick”), a wholly owned subsidiary of RAI, an organization and offering expense allowance based on a sliding scale of the offering proceeds raised. This amount includes reimbursement to Chadwick to use for the selling dealers’ bona fide accountable due diligence expenses of up to 0.5% of the proceeds of each unit sold by them. These charges were recorded by the Fund as offering costs related to the sale of partnership units.




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Chadwick was paid an underwriting fee of 3% of the offering proceeds for obtaining and managing the group of selling broker-dealers who sold the units in the offering. Chadwick also received sales commissions of 7% of the proceeds of each unit that they sold. Chadwick did not sell any units and did not retain sales commissions through December 31, 2010.




Due to Affiliates. Due to affiliates includes amounts due to the General Partner related to acquiring and managing portfolios of equipment from its General Partner, management fees and reimbursed expenses.




Distributions.The General Partner owns a 1% general partner interest and a 0.97% limited partner interest in the Fund. The General Partner was paid cash distributions of $70,000 and $67,000 respectively, for its general partner and limited partner interests in the Fund in 2010




NOTE 12 – COMMITMENTS AND CONTINGENCIES




In connection with a sale of leases and loans to a third-party in July of 2008, the Fund contractually agreed to repurchase delinquent leases up to a maximum of $327,000 calculated as 7.5% of total proceeds received from the sale (“Repurchase Commitment”).  As of December 31, 2010 the Fund has $162,000 remaining Repurchase Commitment.




The Fund is party to various routine legal proceedings arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Fund’s financial condition or results of operations.


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ITEM 9 – CHANGES IN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE




NONE.




ITEM 9A – CONTROLS AND PROCEDURES




Disclosure Controls




We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.




Under the supervision of our General Partner’s chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level discussed above.




Management’s Report on Internal Control over Financial Reporting




Our General Partner’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.




Our General Partner’s management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control – Integrated Framework. Based upon this assessment, our General Partner’s management concluded that, as of December 31, 2010, our internal control over financial reporting is effective.




This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only our General Partner’s management report in this annual report.




Changes in Internal Control over Financial Reporting




There has been no change in our internal control over financial reporting that occurred during the three months ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




ITEM 9B – OTHER INFORMATION




NONE.


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PART III




ITEM 10 – DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT




Our General Partner manages our activities. Although our limited partners have limited voting rights under our partnership agreement, they do not directly or indirectly participate in our management or operations or have actual or apparent authority to enter into contracts on our behalf or to otherwise bind us. Our General Partner will be liable, as General Partner, for all of our debts to the extent not paid, except to the extent that indebtedness or other obligations incurred by it are specifically with recourse only to our assets. Whenever possible, our General Partner intends to make any of our indebtedness or other obligations with recourse only to our assets.




As is commonly the case with limited partnerships, we do not directly employ any of the persons responsible for our management or operation. Rather, our General Partner’s personnel manage and operate our business. Officers of our General Partner may spend a substantial amount of time managing the business and affairs of our General Partner and its affiliates and may face a conflict regarding the allocation of their time between our business and affairs and their other business interests.




The following table sets forth information with respect to the directors and executive officers of our General Partner:





Name

Age

PositionCrit S. DeMent

58

Chairman of the Board of Directors and Chief Executive OfficerMiles Herman

51

President, Chief Operating Officer, Director and SecretaryJonathan Z. Cohen

40

DirectorJeffrey F. Brotman

47

DirectorRobert K. Moskovitz

54

Chief Financial Officer, and Assistant SecretaryDavid H. English

60

Executive Vice President and Chief Investment Officer




Crit S. DeMenthas been Chairman of the Board of Directors and Chief Executive Officer of LEAF Financial since November 2001. Mr. DeMent has also served as Chairman of the Board of Directors and Chief Executive Officer of LEAF Asset Management since it was formed in August 2006, Chairman of the Board of Directors and Chief Executive Officer of LEAF Funding since March 2003, a Senior Vice President of Resource America since 2005 and Senior Vice President – Equipment Leasing of Resource Capital Corp. since March 2005.  Beginning January 1, 2011, Mr. DeMent serves as the Chairman of the Board of Directors and Chief Executive Officer of LEAF Commercial Capital, Inc, a new LEAF formed subsidiary of LEAF Financial.  Before that, he was President of Fidelity Leasing, Inc. and its successor, the Technology Finance Group of Citi-Capital Vendor Finance from 1998 to 2001. Mr. DeMent was Vice President of Marketing for Tokai Financial Services from 1987 through 1996. Mr. DeMent serves on the Executive Committee of the Board of Directors of the Equipment Leasing and Finance Association.




Miles Hermanhas been President, Chief Operating Officer, and a Director of LEAF Financial since January 2002, and Secretary of LEAF Financial since March 2008. Mr. Herman also serves as President, Chief Operating Officer and as a Director of LEAF Asset Management since 2006 and Secretary since March 2008, and as Senior Vice President and a Director of LEAF Funding since January 2004. Beginning January 1, 2011, Mr. Herman serves as the Chief Operating Officer, and a Director of LEAF Commercial Capital, Inc, a new LEAF formed subsidiary of LEAF Financial.  Mr. Herman held various senior operational offices with Fidelity Leasing, Inc. and its successor from 1998 to 2001, ending as Senior Vice President. From 1990 to 1998, he held various operational, marketing, program management, business development and sales positions with Tokai Financial, most recently as Director of Capital Markets.  Before that, he served as Vice President, Operations and Sales at LSI Leasing Services, Inc. from 1989 to 1990, and as a manager of operations at Master Lease Corporation from 1984 to 1989. Mr. Herman holds a Bachelor of Science degree from Villanova University.




Jonathan Z. Cohenhas been a Director of LEAF Financial Corporation since January 2002, and a Director of LEAF Asset Management since it was formed in August 2006. Mr. Cohen also serves, or has served, in the following positions with Resource America: a Director since 2002, President since 2003, Chief Executive Officer since 2004, Chief Operating Officer from 2002 to 2004, Executive Vice President from 2001 to 2003, and Senior Vice President from 1999 to 2001. In addition, Mr. Cohen serves as Chief Executive Officer, President and a Director of Resource Capital Corp. (a publicly-traded real estate investment trust) since its formation in 2005. Mr. Cohen also serves as Vice Chairman of the Managing Board of Atlas Pipeline Partners GP, LLC since its formation in 1999, Vice Chairman and a Director of Atlas America, Inc. since its formation in 2000, Vice Chairman of Atlas Pipeline Holdings GP, LLC since its formation in 2006 and Vice Chairman of Atlas Energy Resources, LLC (a publicly-traded energy company) since its formation in 2006.




Jeffrey F. Brotman has been a Director of LEAF Financial since April 2008. Mr. Brotman has also been Executive Vice President of Resource America since June 2007. Mr. Brotman was a co-founder of Ledgewood, P.C. (a Philadelphia-based law firm) and was affiliated with the firm from 1992 until June 2007, serving as its managing partner from 1995 until March 2006. Mr. Brotman is also a non-active Certified Public Accountant and an Adjunct Professor at the University of Pennsylvania Law School. Mr. Brotman was Chairman of the Board of Directors of TRM Corporation (a publicly-traded consumer services company) from September 2006 until September 2008 and was its President and Chief Executive Officer from March 2006 through June 2007.




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The board of directors of our General Partner has not adopted specific minimum qualifications for service on the board, but rather seeks a mixture of skills that are relevant to our business. The following presents a brief summary of the attributes of each director that led to the conclusion that such person should serve as a director:




Mr. DeMent has lengthy and extensive experience in the equipment leasing and finance industry.




Mr. Herman has lengthy and extensive experience in the equipment leasing and finance industry.




Mr. Cohen has extensive financial and operational experience, including as the chief executive officer of our general partner’s publicly traded parent company.




Mr. Brotman has significant experience in finance, as an attorney, and as the chief executive officer of a public company.




Robert K. Moskovitzhas been Chief Financial Officer of LEAF Financial since February 2004, Treasurer of LEAF Financial from September 2004 until April 2009 and Assistant Secretary of LEAF Financial since June 2007. Mr. Moskovitz also serves as Chief Financial Officer, and Assistant Secretary of LEAF Asset Management since it was formed in August 2006, and Chief Financial Officer and a Director of LEAF Funding since May 2004. Beginning January 1, 2011, Mr. Moskovitz serves as the Chief Financial Officer of LEAF Commercial Capital, Inc, a new LEAF formed subsidiary of LEAF Financial.  He has over twenty years of experience as the Chief Financial Officer of both publicly and privately owned companies. From 2002 to 2004, Mr. Moskovitz was an independent consultant on performance management initiatives, primarily to the financial services industry. From 2001 to 2002 he was Executive Vice President and Chief Financial Officer of ImpactRx, Inc., which provides advanced sales and marketing intelligence to pharmaceutical companies. From 1983 to 2001 Mr. Moskovitz held senior executive level financial positions with several high growth public and privately held companies. He began his professional career with Deloitte & Touché (formerly Touché Ross & Co). Mr. Moskovitz holds a B.S. degree in Business Administration from Drexel University.




David H. Englishhas been an Executive Vice President and Chief Investment Officer of LEAF Financial since April 2003 and Assistant Secretary of LEAF Financial since June 2007. Mr. English also serves Executive Vice President and Chief Investment Officer of LEAF Asset Management since it was formed in August 2006, as President and a Director of LEAF Funding since May 2003. Beginning January 1, 2011, Mr. English serves as the Executive Vice President and Chief Investment Officer of LEAF Commercial Capital, Inc, a new LEAF formed subsidiary of LEAF Financial.  From 1996 until joining LEAF Financial, Mr. English was the Senior Vice President-Risk Management for Citi-Capital Vendor Finance’s Technology Finance Group, and its predecessor, Fidelity Leasing, Inc., where he held a similar position. From 1991 to 1996 Mr. English held various credit and operational management positions with Tokai Financial Services, Inc., including Director of Credit for the small ticket leasing division. Mr. English served in credit management positions with the Commercial Finance Division of General Electric Capital Corporation from 1990 to 1991 and with Equitable Life Leasing Corporation from 1985 through 1990. Mr. English began his career with Household Finance Corporation in 1974. Mr. English is a 1975 graduate of the University of Pittsburgh with a B.S. degree in Mathematics.




Code of Business Conduct and Ethics




Because we do not directly employ any persons, we rely on a Code of Business Conduct and Ethics adopted by Resource America, Inc. that applies to the principal executive officer and principal financial officer of our General Partner, as well as to persons performing services for us generally. You may obtain a copy of this code of ethics by a request to our General Partner at LEAF Asset Management, LLC, One Commerce Square, 2005 Market Street, 14th Floor, Philadelphia, Pennsylvania 19103.




ITEM 11 – EXECUTIVE COMPENSATION




We do not have, and do not expect to have, any employees as discussed in Item 10 — “Directors and Executive Officers of the Registrant.” Instead, our management and day-to-day activities are provided by the employees of our General Partner and its affiliates. No officer or director of our General Partner will receive any direct remuneration from us. Those persons will receive compensation solely from our General Partner or its affiliates other than us.




ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNIT HOLDER MATTERS




(a)
We had 2,536 limited partners as of December 31, 2010.




(b)
In 2006, our General Partner contributed $1,000 to our capital as our General Partner and received its General Partner interest in us. As of December 31, 2010, our General Partner owned 12,068 of our limited partner units. These purchases of limited partner units by our General Partner and its affiliates were at a price discounted by the 7% sales commission which was paid by most of our other limited partners.




(c)
We know of no arrangements that would, at any date subsequent to the date of this report, result in a change in control of us.




(d)
Our General Partner’s name and address is LEAF Asset Management, LLC, One Commerce Square, 2005 Market Street, 14th Floor, Philadelphia, Pennsylvania 19103.




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ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS




We do not directly employ any persons to manage or operate our business. These functions are provided by our General Partner and employees of our General Partner and/or its affiliates. We reimburse our General Partner and/or its affiliates for all direct and indirect costs of services provided, including the cost of employees and benefits properly allocable to us and all other expenses necessary or appropriate for the conduct of our business. The following is a summary of fees and costs of services charged by the General Partner or its affiliates (in thousands):




Years Ended December 31,2010


2009


2008Acquisition fees

$
233


$
1,022


$
10,613Management fees


2,478



5,999



8,364Administrative expenses


3,889



6,162



7,019Organization and offering expense allowance


-



-



1,371Underwriting fees


-



-



4,443





Acquisition Fees.The General Partner is paid a fee for assisting the Fund in acquiring equipment subject to existing equipment leases equal to up to 2% of the purchase price the Fund pays for the equipment or portfolio of equipment subject to existing equipment financing.




Management Fees. The General Partner is paid a subordinated annual asset management fee equal to 4% of gross rental payments for operating leases or 2% for full payout leases or a competitive fee, whichever is less. During the Fund’s five-year investment period, the management fees will be subordinated to the payment to the Fund’s limited partners of a cumulative annual distribution of 8.5% of their capital contributions, as adjusted by distributions deemed to be a return of capital. Beginning August 1, 2009, the General Partner waived asset management fees.  Approximately $1.5 million of management fees were waived for the year ended December 31, 2010. The General Partner has also waived all future management fees.




Our General Partner may also receive up to 3% of the proceeds from the sale of our equipment for services and activities to be performed in connection with arranging for the sale of our equipment after the expiration of lease. The payment of this sales fee is deferred until the Limited Partners have received cash distributions equal to the purchase price of their units plus an 8.5% cumulative compounded priority return.




Administrative Expenses. The General Partner and its affiliates are reimbursed by the Fund for certain costs of services and materials used by or for the Fund except those items covered by the above-mentioned fees.




Organization and Offering Expense Allowance and Underwriting Fees. The Fund paid the General Partner and Chadwick Securities, Inc. (“Chadwick”), a wholly owned subsidiary of RAI, an organization and offering expense allowance based on a sliding scale of the offering proceeds raised. This amount includes reimbursement to Chadwick to use for the selling dealers’ bona fide accountable due diligence expenses of up to 0.5% of the proceeds of each unit sold by them. These charges were recorded by the Fund as offering costs related to the sale of partnership units.




Chadwick was paid an underwriting fee of 3% of the offering proceeds for obtaining and managing the group of selling broker-dealers who sold the units in the offering. Chadwick also received sales commissions of 7% of the proceeds of each unit that they sold. Chadwick did not sell any units and did not retain sales commissions through December 31, 2010.




Due to Affiliates. Due to affiliates includes amounts due to the General Partner related to acquiring and managing portfolios of equipment from its General Partner, management fees and reimbursed expenses.




Distributions.Our General Partner owns a 1% general partner interest and a 0.97% limited partner interest in us. The General Partner was paid cash distributions of $70,000 and $67,000 respectively, for its general partner and limited partner interests in us in 2010.




Additionally, our General Partner is entitled to the following fees (if applicable):


×
Up to 3% of the proceeds from the sale of our equipment for services and activities to be performed in connection with arranging for the sale of our equipment after the expiration of lease. The payment of this sales fee is deferred until the Limited Partners have received cash distributions equal to the purchase price of their units plus an 8.5% cumulative compounded priority return.




Because we are not listed on any national securities exchange or inter-dealer quotation system, we have elected to use the Nasdaq National Stock Market’s definition of “independent director” in evaluating whether any of our General Partner’s directors are independent. Under this definition, the board of directors of our General Partner has determined that our General Partner does not have any independent directors, nor are we required to have any.




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ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES




Audit Fees.The aggregate fees billed by our independent auditors, Grant Thornton, LLP were $153,000, $190,000 and $342,041 in the years ended December 31, 2010, 2009 and 2008, respectively.




Audit-Related Fees.We did not incur fees in 2010 for other services not included above.




Tax Fees.We did not incur fees in 2010 for other services not included above.




All Other Fees.We did not incur fees in 2010 for other services not included above.




Procedures for Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor.




Our General Partner’s Board of Directors reviews and approves in advance any audit and any permissible non-audit engagement or relationship between us and our independent auditors.





PART IV




ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES




The following documents are filed as part of this Annual Report on Form 10-K:




1.
Financial Statements




The financial statements required by this Item are set forth in Item 8 – “Financial Statements and Supplementary Data.”




2.
Financial Statement Schedules




No schedules are required to be presented in this report under Regulation S-X promulgated by the SEC.




3.
Exhibits


ExhibitNo.

Description3.2


Amended and Restated Agreement of Limited Partnership of LEAF Equipment Leasing Income Fund III, L.P. (1)4.1


Forms of letters sent to limited partners confirming their investment (1)10.1


Origination and Servicing Agreement among LEAF Equipment Leasing Income Fund III, L.P., LEAF Financial Corporation and LEAF Funding Inc., dated February 12, 2007 (1)10.2


Receivables Loan and Security Agreement, dated as of November 21, 2008, among LEAF III C SPE, LLC, LEAF Funding, Inc., LEAF Financial Corporation, LEAF Equipment Leasing Income Fund III, L.P., Autobahn Funding Company LLC, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, U.S. Bank, National Association, and Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services) (2)10.3


Amendment No. 1 to Receivables Loan and Security Agreement, dated as of April 13, 2010 among LEAF III C SPE, LEAF Funding, Inc., LEAF Financial Corporation, LEAF Equipment Leasing Income Fund III, L.P., Autobahn Funding Company LLC, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main (3)10.4


Agreement dated as of April 30, 2010 between LEAF Equipment Leasing Income Fund III, L.P. and Broadpoint Products Corp. (4)10.5


Indenture between LEAF Receivables Funding 5, LLC and U.S. Bank National Association dated as of November 5, 201031.1


Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2


Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1


Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2


Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(1)
Filed previously as an exhibit to our Registration Statement on Form S-1 filed on October 2, 2006 and by this reference incorporated herein.


(2)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2008 and by this reference incorporated herein.


(3)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and by this reference incorporated herein.


(4)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 and by this reference incorporated herein.


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SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




LEAF EQUIPMENT LEASING INCOME FUND III, L.P.A Delaware Limited PartnershipBy:
LEAF Asset Management, LLC, the General PartnerMarch 31, 2011
By:
/s/ CRIT S. DEMENTCrit S. DementChairman and Chief Executive Officer




Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated.




/s/ Crit S. DeMent

Chairman of the Board and Chief Executive Officer of the General Partner
March 31, 2011CRIT S. DEMENT

(Principal Executive Officer)/s/ Miles Herman

President, Chief Operating Officer and Director of the General Partner
March 31, 2011MILES HERMAN/s/ Robert K. Moskovitz

Chief Financial Officer
March 31, 2011ROBERT K. MOSKOVITZ

(Principal Accounting and Financial Officer)/s/ Jonathan Z. Cohen

Director of the General Partner
March 31, 2011JONATHAN Z. COHEN/s/ Jeffrey F. Brotman

Director of the General Partner
March 31, 2011JEFFREY F. BROTMAN








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