** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-K**

 

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

 

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| **For the fiscal year ended December 31, 2003** |   | **Commission file number 1-11059** |
|-------------------------------------------------|--------|------------------------------------|

 

**AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.**

(Exact name of registrant as specified in itscharter)

 

| **California**                                                                                                                       |   | **13-3257662**                        |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  Incorporation or organization)                                                                      |   | (I.R.S. Employer  Identification No.) |
|                                                                                                                                 |   |                                  |
| **11200 Rockville Pike  Rockville, Maryland  20852  (301) 816-2300**                                                            |
| (Address, including zip code, and telephone  number,  including area code, of registrant’s principal executive offices)

  |

 

**Securities registered pursuant to Section12(b) of the Act:**

 

| **Title of each class**                           |   | **Name of each exchange on  which registered** |
|---------------------------------------------------|--------|------------------------------------------------|
| Depositary Units of Limited  Partnership Interest |   | American Stock Exchange                        |

 

Securities registered pursuant to Section12(g) of the Act:

 

**None**

 

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Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes   ý     No   o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.   o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2).  Yes   o       No   ý

 

As of December 31, 2003, 12,079,514 depositary units of limitedpartnership interest were outstanding. The aggregate market value of such units held by non-affiliates of theRegistrant, based on the last reported sale price on June 30, 2003, was$64,724,755.

 

**Documents incorporated by Reference**

 

**None**

 

 

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**AMERICAN INSURED MORTGAGE INVESTORS - SERIES85, L.P.**

 

**2003 ANNUAL REPORT ON FORM 10-K**

 

**TABLE OF CONTENTS**

 
| **PART I**   |                                                                                        |
|--------------|---------------------------------------------------------------------------------------------|
|         |                                                                                        |   |
| Item 1.      | Business                                                                                    |   |
| Item 2.      | Properties                                                                                  |   |
| Item 3.      | Legal Proceedings                                                                           |   |
| Item 4.      | Submission of Matters to a Vote of Security  Holders                                        |   |
|         |                                                                                        |   |
| **PART II**  |                                                                                        |
|         |                                                                                        |   |
| Item 5.      | Market for Registrant’s Securities and  Related Security Holder Matters                |   |
| Item 6.      | Selected Financial Data                                                                     |   |
| Item 7.      | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
| Item 7A.     | Qualitative and Quantitative Disclosures about  Market Risk                                 |   |
| Item 8.      | Financial Statements and Supplementary Data                                                 |   |
| Item 9.      | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure       |   |
| Item 9a.     | Controls and Procedures                                                                     |   |
|         |                                                                                        |   |
| **PART III** |                                                                                        |
|         |                                                                                        |   |
| Item 10.     | Directors and Executive Officers of the  Registrant                                         |   |
| Item 11.     | Executive Compensation                                                                      |   |
| Item 12.     | Security Ownership of Certain Beneficial Owners,  Management and Related Unitholder Matters |   |
| Item 13.     | Certain Relationships and Related  Transactions                                             |   |
| Item 14.     | Principal Accountant Fees and Services                                                      |   |
|         |                                                                                        |   |
| **PART IV**  |                                                                                        |
|         |                                                                                        |   |
| Item  15.    | Exhibits,  Financial Statement Schedules and Reports on Form 8-K                            |   |
|         |                                                                                        |   |
| Signatures   |                                                                                        |   |

 

2

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**PARTI**

 

ITEM 1.     BUSINESS

 

**FORWARD-LOOKINGSTATEMENTS.  When used in this AnnualReport on Form 10-K, the words “believe,” “anticipate,” “expect,”“contemplate,” “may,” “will,” and similar expressions are intended to identifyforward-looking statements.  Statementslooking forward in time are included in this Annual Report on Form 10-Kpursuant to the “safe harbor” provision of the Private Securities LitigationReform Act of 1995.  Such statements aresubject to certain risks and uncertainties, which could cause actual results todiffer materially.  Accordingly, thefollowing information contains or may contain forward-looking statements:  (1) information included in this AnnualReport on Form 10-K, including, without limitation, statements made under Item7, Management’s Discussion and Analysis of Financial Condition and Results ofOperations, (2) information included or incorporated by reference in prior andfuture filings by the Partnership (defined below) with the Securities andExchange Commission (“SEC”) including, without limitation, statements withrespect to growth, projected revenues, earnings, returns and yields on itsportfolio of mortgage assets, the impact of interest rates, costs and businessstrategies and plans and (3) information contained in written material,releases and oral statements issued by or on behalf of, the Partnership,including, without limitation, statements with respect to growth, projectedrevenues, earnings, returns and yields on its portfolio of mortgage assets, theimpact of interest rates, costs and business strategies and plans.  Factors which may cause actual results todiffer materially from those contained in the forward-looking statements identifiedabove include, but are not limited to (i) regulatory and litigation matters,(ii) interest rates, (iii) trends in the economy, (iv) prepayment of mortgages,(v) defaulted mortgages, (vi) errors in servicing defaulted mortgages and (vii)sales of mortgage investments below fair market value.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only of the datehereof.  The Partnership undertakes noobligation to publicly revise these forward-looking statements to reflectevents or circumstances occurring after the date hereof or to reflect theoccurrence of unanticipated events.**

 

### Development andDescription of Business

 

American Insured Mortgage Investors - Series85, L.P. (the “Partnership”) was formed pursuant to a limited partnershipagreement (“Partnership Agreement”) under the Uniform Limited Partnership Actof the state of California on June 26, 1984. The Partnership’s business consists of holding government insuredmortgage investments primarily on multifamily housing properties, and distributingthe payments of principal and interest on such mortgage investments, includingdebentures issued by the United States Department of Housing and UrbanDevelopment (“HUD”) in exchange for such mortgages, to the holders of itsdepository units of limited partnership interests (“Unitholders”).  During the period from March 8, 1985 (theinitial closing date of the Partnership’s public offering) through January 27,1986 (the termination date of the offering), the Partnership, pursuant to itspublic offering of 12,079,389 Depository Units of limited partnership interest(“Units”) raised a total of $241,587,780 in gross proceeds.  In addition, the initial limited partnercontributed $2,500 to the capital of the Partnership in exchange for 125 unitsof limited partnership interest.

 

CRIIMI, Inc., a wholly-owned subsidiary ofCRIIMI MAE Inc. (“CRIIMI MAE”), acts as the General Partner (the “GeneralPartner”) for the Partnership and holds a partnership interest of 3.9%.  The General Partner provides management andadministrative services on behalf of the Partnership.  AIM Acquisition Partners L.P. serves as the advisor (the“Advisor”) to the Partnership.  Thegeneral partner of the Advisor is AIM Acquisition Corporation (“AIMAcquisition”) and the limited partners include, but are not limited to, TheGoldman Sachs Group, L.P., Sun America Investments, Inc. (successor to Broad,Inc.) and CRI/AIM Investment, L.P., a subsidiary of CRIIMI MAE, over whichCRIIMI MAE exercises 100% voting control. AIM Acquisition is a Delaware corporation that is primarily owned by SunAmerica Investments, Inc. and The Goldman Sachs Group, L.P.

 

3

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Pursuant to the terms of certain originationand acquisition services, management services and disposition servicesagreements between the Advisor and the Partnership (collectively the “AdvisoryAgreements”), the Advisor renders services to the Partnership, including butnot limited to, the management of the Partnership’s portfolio of mortgages andthe disposition of the Partnership’s mortgages.  Such services are subject to the review and ultimate authority ofthe General Partner.  However, theGeneral Partner is required to receive the consent of the Advisor prior totaking certain significant actions, including but not limited to thedisposition of mortgages, any transaction or agreement with the General Partneror its affiliates, or any material change as to policies regardingdistributions or reserves of the Partnership (collectively the “ConsentRights”).  The Advisor is permitted toand has delegated the performance of services to CRIIMI MAE Services LimitedPartnership (“CMSLP”), a subsidiary of CRIIMI MAE, pursuant to a sub-managementagreement (the “Sub-Advisory Agreement”). The general partner and limited partner of CMSLP are wholly-ownedsubsidiaries of CRIIMI MAE.  Thedelegation of such services by the Advisor to CMSLP does not relieve theAdvisor of its obligation to perform such services.  Furthermore, the Advisor has retained its Consent Rights.

 

The General Partner also served as theGeneral Partner for American Insured Mortgage Investors (“AIM 84”), AmericanInsured Mortgage Investors L.P. – Series 86 (“AIM 86”) and American InsuredMortgage Investors L.P. – Series 88 (“AIM 88”).  The Partnership, AIM 84, AIM 86 and AIM 88 are collectivelyreferred to as the “AIM Limited Partnerships.” AIM 84, AIM 86 and AIM 88 were liquidated and dissolved in February2004.

 

Prior to December 1993, the Partnership wasengaged in the business of originating government insured mortgage loans(“Originated Insured Mortgages”) and acquiring government insured mortgageloans (“Acquired Insured Mortgages” and, together with Originated InsuredMortgages, referred to herein as “Insured Mortgages”).  In accordance with the terms of thePartnership Agreement, the Partnership is no longer authorized to originate oracquire Insured Mortgages and, consequently, its primary objective is to manageits portfolio of mortgage investments, all of which are insured under Section221(d)(4) or Section 231 of the National Housing Act of 1937, as amended (the“National Housing Act”).  ThePartnership Agreement states that the Partnership will terminate on December31, 2009, unless terminated earlier under the provisions thereof.  The Partnership is required, pursuant to thePartnership Agreement, to dispose of its assets prior to this date.

 

Additional information concerning thebusiness of the Partnership is contained in Part II, Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations and inNotes 1, 5, 6, 7 and 8 of the Notes to Financial Statements (included in Item 8hereof).  See also Schedule IV-MortgageLoans on Real Estate for the table of the Partnership’s Insured Mortgages as ofDecember 31, 2003.

 

### Employees and Managementof the Partnership

 

The Partnership has no employees.  The business of the Partnership is managedby its General Partner while its portfolio of mortgages is managed by theAdvisor and CMSLP pursuant to the Advisory Agreements and Sub-AdvisoryAgreement, respectively, as discussed above. An affiliate of the General Partner, CRIIMI MAE Management, Inc.provides personnel and administrative services to the Partnership on behalf ofthe General Partner.  The Partnershipreimburses CRIIMI MAE Management, Inc. for these services on an actual costbasis pursuant to the terms of the Partnership Agreement.

 

The fee paid by the Partnership to theAdvisor for services performed under the Advisory Agreements (the “AdvisoryFee”), is equal to 0.95% of the Partnership’s Total Invested Assets (as definedin the Partnership Agreement, “Total Invested Assets,” generally means theaggregate original face value of the Partnership’s current mortgageinvestments.)  The Advisor pays CMSLP,as sub-advisor, a fee of 0.28% (the “Sub-Advisory Fee”) of Total InvestedAssets for services performed under the Sub-Advisory Agreement from itsAdvisory Fee.  The Partnership is notliable for paying the Sub-Advisory Fee to CMSLP.  Additional information concerning these fees is contained in PartII, Item 7, Management’s Discussion and Analysis of Financial Condition andResults of Operations and in Note 8 of the Notes to Financial Statements(included in Item 8 hereof).

 

4

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### Competition

 

The Partnership may elect to dispose of itsmortgage investments through a sale to third parties subject to the consent ofthe Advisor.  In disposing of mortgageinvestments, the Partnership competes with private investors, mortgage bankingcompanies, mortgage brokers, state and local government agencies, lendinginstitutions, trust funds, pension funds, and other entities, some with similarobjectives to those of the Partnership and some of which are or may be affiliatesof the Partnership, its General Partner, the Advisor, CMSLP or their respectiveaffiliates.  Some of these entities mayhave substantially greater capital resources and experience in disposing ofmortgages investments than the Partnership.

 

CRIIMI MAE and its affiliates also may serveas general partners or managers of real estate limited partnerships, realestate investment trusts or other similar entities in the future.  The Partnership may attempt to dispose ofmortgages at or about the same time that CRIIMI MAE and/or other entitiesmanaged by CRIIMI MAE or its affiliates, or the Advisor or its affiliates, areattempting to dispose of mortgages.  Asa result of market conditions that could have the effect of limiting the numberof mortgage dispositions or adversely affecting the proceeds received from suchdispositions, CMSLP, the General Partner and the Advisor and their affiliatescould be faced with conflicts of interest in determining which mortgages wouldbe disposed of and at which price. CMSLP, the General Partner and the Advisor, however, are required toexercise their fiduciary duties of good faith, care and loyalty when evaluatingthe appropriate action to be taken when faced with such conflicts.

 

The GeneralPartner maintains a website for the Partnership at www.americaninsuredmortgage.com.Select AIM 85 to view the Partnership’s annual reports, quarterlyreports and dividend history.  Selectthe AMEX button to access current and historical stock price data forthe Partnership.  Any other informationmay be obtained by writing to the General Partner in care of the Partnership atCRIIMI, Inc., 11200 Rockville, 4th Floor, Rockville, MD  20852 or email aimfunds@criimi.com.

 

ITEM 2.     PROPERTIES

 

The Partnership does not own anyproperties.  Generally, the mortgagesunderlying the Partnership’s mortgage investments are non-recourse first lienson multifamily residential developments or retirement homes.

 

ITEM 3.     LEGAL PROCEEDINGS

 

There are no material legal proceedings towhich the Partnership is a party.

 

ITEM 4.     SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of thePartnership’s Unitholders during the fourth quarter of 2003.

 

5

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**PART II**

 

ITEM 5.     MARKET FOR REGISTRANT’SSECURITIES AND RELATED SECURITY HOLDER MATTERS

 

### Principal Market andMarket Price for Units and Distributions

 

The depository units of Limited Partnershipinterests (“Limited Partnership Units”) are listed for trading on the AmericanStock Exchange (“AMEX”) under the trading symbol of “AII.”  The high and low trade prices for the Unitsas reported on AMEX and the distributions, as applicable, for each quarterlyperiod in 2003 and 2002 were as follows:

 
| **Quarter Ended** |   |    |   | **Amount of  Distribution  Per Unit** |   |
|-------------------|--------|---------|--------|---------------------------------------|--------|
| **2003**          |
| **High**          |   | **Low** |
| March 31          |   | $       | 5.90   |                                  | $      | 5.43 |   | $ | 0.310 |   |
| June 30           |   | 5.50    |   | 5.36                                  |   | 0.255 |   |
| September 30      |   | 5.50    |   | 4.86                                  |   | 0.130 |   |
| December 31       |   | 4.95    |   | 4.58                                  |   | 0.200 |   |
|              |   |    |   |                                  |   | $ | 0.895 |   |
|                   |        |         |        |                                       |        |  |  |  |  |  |

 
| **Quarter Ended** |   |    |   | **Amount of  Distribution  Per Unit** |   |
|-------------------|--------|---------|--------|---------------------------------------|--------|
| **2002**          |
| **High**          |   | **Low** |
| March 31          |   | $       | 8.00   |                                  | $      | 6.38 |   | $ | 1.325 |   |
| June 30           |   | 6.63    |   | 6.30                                  |   | 0.210 |   |
| September 30      |   | 6.67    |   | 6.06                                  |   | 0.410 |   |
| December 31       |   | 6.43    |   | 5.77                                  |   | 0.810 |   |
|              |   |    |   |                                  |   | $ | 2.755 |   |
|                   |        |         |        |                                       |        |  |  |  |  |  |

 

Detailed information regarding quarterlydistributions is contained in Note 9 of the Notes to Financial Statements(included in Item 8 hereof.)

 

There are no material legal restrictions uponthe Partnership’s present or future ability to make distributions in accordancewith the provisions of the Partnership Agreement.

 

The basis for paying distributions toUnitholders is net proceeds from mortgage dispositions, if any, and cash flowfrom operations, which includes regular interest income and principal fromInsured Mortgages.  Although the Partnership’sInsured Mortgages pay a fixed monthly mortgage payment, the cash distributionspaid to the Unitholders will vary during each quarter due to (1) thefluctuating yields in the short-term money market in which the monthly mortgagepayment receipts are temporarily invested prior to the payment of quarterlydistributions, (2) the reduction in the asset base resulting from monthlymortgage payments received or mortgage dispositions, (3) variations in the cashflow attributable to the delinquency or default of Insured Mortgages, thetiming of receipt of debentures, the interest rate on debentures and debentureredemptions, and (4) changes in the Partnership’s operating expenses.  As the Partnership continues to liquidateits mortgage investments and Unitholders receive distributions of return ofcapital and taxable gains, Unitholders should expect a reduction in earningsand distributions due to the decreasing mortgage base.  Upon the termination and liquidation of thePartnership, on or before December 31, 2009, distributions to Unitholders willbe made in accordance with the terms of the Partnership Agreement, asamended.  A final distribution toUnitholders will be based on the Partnership’s remaining net assets, and suchdistribution to Unitholders is likely to be substantially less than the amountreferenced in limited partners’equity in the Partnership’s financialstatements.

 

As of December 31, 2003, there wereapproximately 10,850 Unitholders.

 

The Partnership has no compensation plans orindividual compensation arrangements under which equity securities of thePartnership are authorized for issuance.

 

6

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ITEM 6.        SELECTED FINANCIAL DATA

(Dollars in thousands, except per Unit amounts)

 
|                                                   |   | **For the  Years Ended December 31,** |   |
|--------------------------------------------------------|--------|---------------------------------------|--------|
|                                                   |   | **2003**                              |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                   |   |                                  |   |   |   |   |   |   |   |   |   |
| Income                                                 |   | $                                     | 5,080  |   | $ | 6,443 |   | $ | 8,526 |   | $ | 9,979 |   | $ | 12,230 |   |
|                                                   |   |                                  |   |   |   |   |   |   |   |   |   |
| Net gains on mortgage dispositions                     |   | 1,498                                 |   | 1,851 |   | 1,785 |   | 428 |   | 857 |   |
| Net earnings                                           |   | 5,573                                 |   | 7,138 |   | 8,969 |   | 8,866 |   | 11,225 |   |
| Net earnings per Limited Partnership Unit -  Basic (1) |   | $                                     | 0.44   |   | $ | 0.57 |   | $ | 0.71 |   | $ | 0.71 |   | $ | 0.89 |   |
|                                                   |   |                                  |   |   |   |   |   |   |   |   |   |
| Distributions per Limited Partnership Unit  (1)(2)     |   | $                                     | 0.895  |   | $ | 2.755 |   | $ | 1.91 |   | $ | 1.61 |   | $ | 3.09 |   |

 
|                  |   | **As of December 31,** | ** ** |
|-----------------------|--------|------------------------|------------|
|                  |   | **2003**               |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                  |   |                   |       |   |   |   |   |   |   |   |   |
| Total assets          |   | $                      | 69,048     |   | $ | 78,238 |   | $ | 98,070 |   | $ | 118,621 |   | $ | 143,470 |   |
| Partners’ equity |   | 61,142                 |       | 67,940 |   | 94,828 |   | 110,982 |   | 120,445 |   |
|                       |        |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)     Calculated based upon the weighted averagenumber of Limited Partnership Units outstanding.

(2)     Includes distributions due the Unitholders for the Partnership’s fiscalyears ended December 31, 2003, 2002, 2001, 2000 and 1999 which were partiallypaid subsequent to year end.  See Notes8 and 9 of the Notes to Financial Statements.

 

The selected income statement data presentedabove for the years ended December 31, 2003, 2002, 2001, and the selectedbalance sheet data as of December 31, 2003 and 2002, are derived from, and arequalified by, reference to the Partnership’s financial statements, which areincluded elsewhere in this Annual Report on Form 10-K.  The selected income statement data for theyears ended December 31, 2000 and 1999, and the selected balance sheet data asof December 31, 2001, 2000 and 1999 are derived from audited financial statementsnot included as part of this Annual Report on Form 10-K.  This data should be read in conjunction withthe financial statements and the notes thereto.

 

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

### General

 

The Partnership’s business consists ofholding government insured mortgage investments primarily on multifamilyhousing properties, and distributing the payments of principal and interest onsuch mortgage investments, including debentures issued by the United StatesDepartment of Housing and Urban Development (“HUD”) in exchange for suchmortgages, to the holders of its depository units of limited partnershipinterests (“Unitholders”).  CRIIMI,Inc., a wholly-owned subsidiary of CRIIMI MAE Inc. (“CRIIMI MAE”), acts as theGeneral Partner (the “General Partner”) for the Partnership and holds apartnership interest of 3.9%.  ThePartnership’s primary source of revenue and cash is mortgage interest incomefrom its Insured Mortgages.

 

As the Partnership continues to liquidate itsmortgage investments and Unitholders receive distributions of return of capitaland taxable gains, Unitholders should expect a reduction in earnings anddistributions due to the decreasing mortgage base.  The magnitude of the decrease will depend upon the size of theInsured Mortgages which are prepaid, sold or assigned for insurance proceeds.

 

7

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### Mortgage Investments

 

As of December 31, 2003, the Partnership hadinvested in 15 Insured Mortgages and five debentures, with an aggregateamortized cost of approximately $51.5 million, a face value of approximately$51.6 million and a fair value of approximately $52.4 million, as discussedbelow.  In February 2004, thePartnership sold two Insured Mortgages, which had an aggregate face value ofapproximately $10.7 million as of December 31, 2003, as discussed below.

 

The Partnership’s investment in Insured Mortgages is comprised ofparticipation certificates evidencing a 100% undivided beneficial interest ingovernment insured multifamily mortgages issued or sold pursuant to the FederalHousing Administration Programs (“FHA”) programs (“FHA-Insured Certificates”),mortgage-backed securities guaranteed by the Government National Mortgage Association(“GNMA”) (“GNMA Mortgage-Backed Securities”) and FHA-insured mortgage loans(“FHA-Insured Loans”). The mortgages underlying the FHA-Insured Certificates,GNMA Mortgage-Backed Securities and FHA-Insured Loans are non-recourse firstliens on multifamily residential developments or retirement homes.

 

The following is a discussion of the types ofthe Partnership’s mortgage investments:

 

### GNMA Mortgage-BackedSecurities and FHA-Insured Certificates

 

Listed below is the Partnership’s aggregateinvestment in GNMA Mortgage-Backed Securities and FHA-Insured Certificates:

 
|                                                   |   | **December  31,** |       |
|--------------------------------------------------------|--------|-------------------|------------|
|                                                   |   | **2003**          |       | **2002** |   |
|                                                   |   |              |       |   |   |
| Acquired Mortgages:                                    |   |              |       |   |   |
| Number of                                              |   |              |       |   |   |
| GNMA Mortgage-Backed Securities (7)                    |   | 1                 |       | 2 |   |
| FHA-Insured Certificates (1) through (6),  (8) and (9) |   | 9                 |       | 17 |   |
| Amortized Cost                                         |   | $                 | 19,053,403 |   | $ | 32,449,759 |   |
| Face Value                                             |   | 19,122,101        |       | 33,076,449 |   |
| Fair Value                                             |   | 19,398,501        |       | 33,849,089 |   |
|                                                   |   |              |       |   |   |
| Originated Mortgages:                                  |   |              |       |   |   |
| Number of                                              |   |              |       |   |   |
| GNMA Mortgage-Backed Securities                        |   | 1                 |       | 1 |   |
| FHA-Insured Certificates                               |   | 1                 |       | 1 |   |
| Amortized Cost                                         |   | $                 | 15,803,978 |   | $ | 15,974,329 |   |
| Face Value                                             |   | 15,803,977        |       | 15,974,328 |   |
| Fair Value                                             |   | 15,897,752        |       | 15,986,295 |   |

 

Listed below is a summary of Insured Mortgageprepayments during 2003:

 

(Dollars in thousands, except per unit amounts)
| **Complex Name**                         |   | **Net  Proceeds** |   | **Date  Proceeds  Received** |     | **Gain/  (Loss)** |   | **Dist./  Unit** |   | **Declaration  Date** |   | **Distribution  Payment  Date** |     |
|------------------------------------------|--------|-------------------|--------|------------------------------|----------|-------------------|--------|------------------|--------|-----------------------|--------|---------------------------------|----------|
| (1)  Stonebridge Apartments         |   | $                 | 950    |                         | Mar 2003 |              | $      | 93               |   | $                     | 0.075  |                            | Apr 2003 |   | Aug 2003 |   |
| (2)  Willow Dayton                  |   | 929               |   | May 2003                     |     | 107               |   | 0.070            |   | Jun 2003              |   | Aug 2003                        |     |
| (3)  Magnolia Place Apartments      |   | 295               |   | May 2003                     |     | 29                |   | 0.020            |   | Jun 2003              |   | Aug 2003                        |     |
| (4)  Ashley Oaks Apartments         |   | 525               |   | Jun 2003                     |     | 60                |   | 0.040            |   | Jul 2003              |   | Nov 2003                        |     |
| (5)  Rainbow Terrace Apartments     |   | 296               |   | Nov 2003                     |     | 34                |   | 0.020            |   | Dec 2003              |   | Feb 2004                        |     |
| (6)  Village Knoll Apartments       |   | 967               |   | Nov 2003                     |     | 92                |   | 0.080            |   | Dec 2003              |   | Feb 2004                        |     |
| (7)  Stone Hedge Village Apartments |   | 1,694             |   | Dec 2003                     |     | (11               | )      | 0.135            |   | Jan 2004              |   | May 2004                        |     |
| (8)  Pleasant View Nursing Home     |   | 7,163             |   | Dec 2003                     |     | 9                 |   | 0.570            |   | Jan 2004              |   | May 2004                        |     |
|                                          |        |                   |        |                              |          |                   |        |                  |        |                       |        |                                 |          |  |  |  |

 

(9)                                  InMay 2003, HUD issued assignment proceeds in the form of a 6.375% debenture inexchange for the mortgage on The Executive House.  Since the mortgage on The Executive House was beneficially owned70.39% by the Partnership and the remainder by unrelated third parties, thedebenture was held by an unrelated third party and the face amount due to thePartnership was included in Receivables and other assets on the Partnership’sbalance sheet at December 31, 2003.  Seefurther discussion in “Investments in debentures and due to affiliate.”

 

8

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As of March 1, 2004, all of the fully insuredGNMA Mortgage-Backed Securities and FHA-Insured Certificates are current withrespect to the payment of principal and interest.

 

FHA-Insured Loans

 

Listed below is the Partnership’s aggregateinvestment in FHA-Insured Loans:
|                            |   | **December  31,** |      |
|---------------------------------|--------|-------------------|-----------|
|                            |   | **2003**          |      | **2002** |   |
|                            |   |              |      |   |   |
| Acquired Loans:                 |   |              |      |   |   |
| Number of Loans (1) through (6) |   | 1                 |      | 6 |   |
| Amortized Cost                  |   | $                 | 1,436,670 |   | $ | 7,176,274 |   |
| Face Value                      |   | 1,701,956         |      | 8,519,762 |   |
| Fair Value                      |   | 1,705,241         |      | 8,513,052 |   |
|                            |   |              |      |   |   |
| Originated Loans:               |   |              |      |   |   |
| Number of Loans (7)             |   | 2                 |      | 2 |   |
| Amortized Cost                  |   | $                 | 9,191,407 |   | $ | 9,311,907 |   |
| Face Value                      |   | 8,950,266         |      | 9,059,734 |   |
| Fair Value                      |   | 9,586,924         |      | 9,470,182 |   |

 

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(1)   In January 2003, the Partnership received assignment proceeds from HUDfor the mortgage on Westbrook Apartments. The servicer of this mortgage filed a Notice of Election to Assign inNovember 2002 as a result of principal and interest payments being over 60 daysdelinquent.  The Partnership receivednet proceeds of approximately $1.5 million, which included 90% of the unpaidprincipal balance of this mortgage, plus interest at the debenture rate of 9.875%from September 2002 through January 2003. The remaining net amount of approximately $165,000 (representing 9% ofthe net unpaid principal balance, plus accrued interest) was received inOctober 2003.  The Partnershiprecognized a gain of approximately $228,000 for the year ended December 31,2003.  A distribution of approximately$0.12 per Unit related to the 90% of this mortgage was declared in February2003 and paid to Unitholders in May 2003. A distribution of approximately $0.015 per Unit related to the 9% ofthis mortgage was declared in November 2003 and paid to Unitholders in February2004.

(2)   InFebruary 2003, HUD transferred assignment proceeds to the Partnership in theform of a 6.375% debenture, with a face value of approximately $1.8 million, inexchange for the mortgage on Baypoint Shoreline Apartments.  Since the mortgage on Baypoint ShorelineApartments was beneficially owned 50% by the Partnership and 50% by AIM 84,approximately $906,000 of the debenture face was due to AIM 84.  See further discussion in below in“Investment in debentures and due to affiliate.”

(3)   InJuly 2003, HUD transferred assignment proceeds to the Partnership in the formof a 5.75% debenture, with a face value of approximately $2.6 million, inexchange for the mortgage on College Green Apartments.  Since the mortgage on College GreenApartments was beneficially owned 50% by the Partnership and 50% by AIM 84,approximately $1.3 million of the debenture face was due to AIM 84.  See further discussion in below in “Investmentin debentures and due to affiliate.”

(4)   InAugust 2003, HUD transferred assignment proceeds to the Partnership in the formof a 5.75% debenture, with a face value of approximately $4.8 million, inexchange for the mortgage on Brougham Estates II.  Since the mortgage on Brougham Estates II was beneficially owned50% by the Partnership and 50% by AIM 84, approximately $2.4 million of thedebenture face was due to AIM 84.  Seefurther discussion in below in “Investment in debentures and due to affiliate.”

(5)   InAugust 2003, HUD transferred assignment proceeds to the Partnership in the formof a 5.75% debenture, with a face value of approximately $1.2 million, inexchange for the mortgage on Town Park Apartments.  Since the mortgage on Town Park Apartments was beneficially owned50% by the Partnership and 50% by AIM 84, approximately $589,000 of thedebenture face was due to AIM 84.  Seefurther discussion in below in “Investment in debentures and due to affiliate.”

(6)   InJanuary 2004, HUD transferred assignment proceeds to the Partnership in theform of a 5.75% debenture, with a face value of approximately $3.5 million, inexchange for the mortgage on Kaynorth Apartments.  Since the mortgage on Kaynorth Apartments was beneficially owned50% by the Partnership and 50% by AIM 84, approximately $1.7 million of thedebenture face was due to AIM 84.  Seefurther discussion in below in Investment “Investment in debentures and due toaffiliate.”

(7)   InFebruary 2004, the mortgages on Cobblestone Apartments and The Plantation weresold, with the consent of the advisor. The Partnership received aggregate net proceeds of approximately $9.6million and expects to recognized aggregate gains of approximately $387,000 in2004.  The aggregate distribution ofapproximately $0.76 per Unit related to the sale of these two mortgages wasdeclared in February 2004 and is expected to be paid to Unitholders in May2004.

 

As of March 1, 2004, the Partnership hasdisposed of all of its investments in fully insured FHA-Insured Loans.

 

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In addition to base interest payments underFHA Insured Loans that were Originated Insured Mortgages, the Partnership wasentitled to additional interest based on a percentage of the net cash flow fromthe underlying development (referred to as “Participations.”)  During the years ended December 31, 2003,2002 and 2001, the Partnership received $0, $8,396, and $53,424, respectively,from the Participations.  These amountsare included in mortgage investment income on the Statements of Income andComprehensive Income in Item 8 of this Annual Report on Form 10-K.

 

Investments in debentures and due to affiliate

 

The Partnership as the mortgagee had theright to assign mortgages to the United States Department of Housing and UrbanDevelopment (“HUD”) under the Section 221(g)(4) program of the National HousingAct (the “Section 221 Program”) at the expiration of 20 years from the date offinal endorsement (“Anniversary Date”). The Partnership as the mortgagee could exercise its option to put amortgage to HUD during the one year period subsequent to the AnniversaryDate.  This assignment procedure wasapplicable to an Insured Mortgage which had a firm or conditional commitmentfor HUD insurance benefits on or before November 30, 1983.  A mortgagee electing to assign an InsuredMortgage to HUD received, in exchange therefore, a debenture.  As of December 31, 2003, the Partnership nolonger holds mortgage investments eligible for assignment to HUD under the Section221 program.

 

In January 2003, HUD redeemed a 7.5%debenture with a face amount of approximately $758,000, issued in July 2002 inexchange for the mortgage on Fairlawn II. A distribution of approximately $0.06 per Unit related to the debentureproceeds was declared in February 2003 and was paid to Unitholders in May2003.  The accrued interest ofapproximately $28,000 related to this debenture was also received in January2003 and was distributed through regular cash flow distributions.  This amount was included in Receivables andOther Assets on the Partnership’s balance sheet at December 31, 2002.

 

Listed below are debentures issued to thePartnership by HUD in exchange for mortgages assigned to HUD under the Section221 program as of December 31, 2003.  Asindicated in the table below, these debentures were redeemed by HUD in January2004.  The Partnership receivedaggregate proceeds of approximately $10.6 million, which included the facevalue of the debentures, plus accrued interest.  A distribution of approximately $0.42 per Unit was declared inJanuary 2004 and is expected to be paid to Unitholders in May 2004.  The application date was the date theservicer of the respective mortgage filed an application for insurance benefitsunder the Section 221 Program.  Thereceipt date was the date the Partnership received the debenture and reported again related to the assignment of the respective mortgage.  The debentures paid interest semi-annuallyon January 1 and July 1.  Since themortgages listed were beneficially owned 50% by the Partnership and 50% by AIM84, approximately $5.3 million of the proceeds were transferred to AIM 84 andwas included in Due to affiliate on the Partnership’s balance sheet at December31, 2003.

 

(Dollars in thousands)
| **Debenture for mortgage on:** |   | **Redemption****Date** |   | **Interest  Rate** |   | **Face****Value** |   | **Due to****Affiliate** |   | **Amount  Due to the  Partnership** |   | **Application  Date** |   | **Receipt  Date** |   | **Gain on  Assignment  Of mortgage** |   |
|--------------------------------|--------|------------------------|--------|--------------------|--------|-------------------|--------|-------------------------|--------|-------------------------------------|--------|-----------------------|--------|-------------------|--------|--------------------------------------|--------|
| Baypoint Shoreline Apartments  |   | 01/01/2004             |   | 6.375              | %      | $                 | 1,813  |                    | $      | 906                                 |   | $                     | 906    |              | Jun-02 |                                 | Feb-03 |   | $ | 131 |   |
|                           |   |                   |   |               |   |              |   |                    |   |                                |   |                  |   |              |   |                                 |   |
| College Green Apartments       |   | 01/01/2004             |   | 5.750              | %      | 2,571             |   | 1,286                   |   | 1,286                               |   | Feb-03                |   | Jul-03            |   | 192                                  |   |
|                           |   |                   |   |               |   |              |   |                    |   |                                |   |                  |   |              |   |                                 |   |
| Brougham Estates II            |   | 01/01/2004             |   | 5.750              | %      | 4,774             |   | 2,387                   |   | 2,387                               |   | Feb-03                |   | Aug-03            |   | 349                                  |   |
|                           |   |                   |   |               |   |              |   |                    |   |                                |   |                  |   |              |   |                                 |   |
| Town Park Apartments           |   | 01/01/2004             |   | 5.750              | %      | 1,178             |   | 589                     |   | 589                                 |   | Feb-03                |   | Aug-03            |   | 87                                   |   |
|                           |   |                   |   |               |   |              |   |                    |   |                                |   |                  |   |              |   |                                 |   |
| Total debentures               |   |                   |   |               |   | $                 | 10,336 |                    | $      | 5,168                               |   | $                     | 5,168  |              |   |                                 |   |   | $ | 759 |   |

 

In May 2003, HUD issuedassignment proceeds to a third party beneficiary, in the form of a 6.375%debenture in exchange for the mortgage on The Executive House.  The mortgage on The

 

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Executive House was put to HUD under the Section 221 Program by theservicer in April 2002.  In January2004, the debenture was redeemed by HUD and the Partnership received proceedsof approximately $836,000 which included the Partnership’s portion of the facevalue of the debenture, plus accrued interest. A distribution of approximately $0.065 per Unit was declared in February2004 and is expected to be paid to Unitholders in May 2004.  The Partnership recognized a gain ofapproximately $97,000 during the year ended December 31, 2003.  Since the Partnership only owned 70.39% ofthe FHA insured certificate secured by the mortgage on The Executive House andthe remainder was held by unrelated third parties, the debenture was held by anunrelated third party and the face amount of approximately $811,000 due to thePartnership was included in Receivables and other assets on the Partnership’sbalance sheet as of December 31, 2003.

 

In January 2004, HUD issued a5.75% debenture to the Partnership in exchange for the mortgage on KaynorthApartments.  In April 2003, the servicerof this mortgage filed an application to put this mortgage to HUD under theSection 221 Program.  The face value ofthe debenture was approximately $3.5 million and pays interest semi-annually onJanuary 1 and July 1.  The Partnershipexpects to recognize a gain of approximately $246,000 in the first quarter of2004 related to this assignment.  Thismortgage was beneficially owned 50% by the Partnership and 50% by AIM 84.  In February 2004, the Partnership, with theconsent of the advisor, sold AIM 84’s 50% interest in this debenture andsubsequently transferred the cash proceeds of approximately $1.8 million to AIM84.  The amortized cost of thismortgage, of approximately $1.4 million, was included in Investment inFHA-Insured Loans on the Partnership’s balance sheet as of December 31, 2003.

 

### Results of Operations

2003 compared to 2002

 

Net earnings decreased byapproximately $1.6 million for 2003 as compared to 2002, primarily due to anapproximate $1.3 million decrease in mortgage investment income resulting fromthe reduction in the mortgage base.  Themortgage base decreased as a result of 14 mortgage dispositions with anaggregate principal balance of approximately $19 million, representing anapproximate 21% decrease in the aggregate principal balance of the total mortgageportfolio since December 2002.  Seefurther discussion above in “GNMA Mortgage-Backed Securities and FHA-InsuredCertificates” and “FHA-Insured Loans” for more information on the mortgagedispositions.

 

Interest and other incomedecreased by approximately $41,000 for 2003 as compared to 2002, primarily dueto the timing and amount of the investment of mortgage proceeds prior to thedistribution to Unitholders.

 

Asset management fees decreasedby approximately $133,000 for 2003 as compared to 2002, primarily due to thereduction in the mortgage base discussed above.

 

General and administrativeexpenses decreased by approximately $18,000 for 2003 as compared to 2002,primarily due to the decrease in the mortgage base.

 

Gains on mortgage dispositionsdecreased by approximately $351,000 for 2003 as compared to 2002.  Gains were recognized on seven mortgageprepayments and six mortgage assignments in 2003, as discussed above, comparedto gains recognized on six mortgage prepayments and four mortgage assignmentsin 2002.  A loss was recognized on onemortgage prepayment in 2003, as discussed above.  A loss was recognized on one mortgage prepayment in 2002.

 

2002 compared to 2001

 

Net earnings decreased byapproximately $1.8 million for 2002 as compared to 2001, primarily due to anapproximate $1.8 million decrease in mortgage investment income resulting fromthe reduction in the mortgage base.  Themortgage base decreased as a result of 11 mortgage dispositions with anaggregate principal balance of approximately $18 million, representing anapproximate 20% decrease in the aggregate principal balance of the totalmortgage portfolio from December 2001.

 

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Interest and other incomedecreased by approximately $268,000 for 2002 as compared to 2001, primarily dueto the timing and amount of the investment of mortgage proceeds prior to thedistribution to Unitholders.

 

Asset management fees decreasedby approximately $215,000 for 2002 as compared to 2001, primarily due to thereduction in the mortgage base discussed above.

 

General and administrativeexpenses increased by approximately $29,000 for 2002 as compared to 2001,primarily due to an increase in professional fees.

 

Gains on mortgage dispositionsincreased by approximately $74,000 for 2002 as compared to 2001 as a result ofgains recognized on six mortgage prepayments and four mortgage assignments in2002, as discussed above, compared to gains recognized on seven mortgageprepayments and five mortgage assignments in 2001.  A loss was recognized on one mortgage prepayment in 2002 asdiscussed above.  No losses wererecognized in 2001.

 

### Liquidity and CapitalResources

 

The Partnership’s operatingcash receipts, derived from payments of principal and interest on InsuredMortgages plus cash receipts from interest on short-term investments, are thePartnership’s principal sources of cash flows, and were sufficient for theyears ended December 31, 2003, 2002 and 2001 to meet operating expenserequirements.  The Partnershipanticipates its cash flows will be sufficient to meet operating expenserequirements for 2004.

 

The basis for payingdistributions to Unitholders is net proceeds from mortgage dispositions, ifany, and cash flow from operations, which includes regular interest income andprincipal from Insured Mortgages. Although the Partnership’s Insured Mortgages pay a fixed monthlymortgage payment, the cash distributions paid to the Unitholders will varyduring each quarter due to (1) the fluctuating yields in the short-term moneymarket in which the monthly mortgage payment receipts are temporarily investedprior to the payment of quarterly distributions, (2) the reduction in the assetbase resulting from monthly mortgage payments received or mortgage dispositions,(3) variations in the cash flow attributable to the delinquency or default ofInsured Mortgages, the timing of receipt of debentures, the interest rate ondebentures and debenture redemptions, and (4) changes in the Partnership’soperating expenses.  As the Partnershipcontinues to liquidate its mortgage investments and Unitholders receivedistributions of return of capital and taxable gains, Unitholders should expecta reduction in earnings and distributions due to the decreasing mortgage base.  Upon the termination and liquidation of thePartnership, on or before December 31, 2009, distributions to Unitholders willbe made in accordance with the terms of the Partnership Agreement, asamended.  A final distribution toUnitholders will be based on the Partnership’s remaining net assets, and suchdistribution to Unitholders is likely to be substantially less than the amountreferenced in limited partners’equity in the Partnership’s financialstatements.

 

Since the Partnership isobligated to distribute the proceeds of mortgage prepayments, sales andinsurance on Insured Mortgages (as defined in the Partnership Agreement) to itsUnitholders, the size of the Partnership’s portfolio will continue todecrease.  The magnitude of the decreasewill depend upon the size of the Insured Mortgages which are prepaid, sold orassigned for insurance proceeds.

 

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Contractual Obligations

 

The following is a summary ofthe Partnership’s contractual obligations as of December 31, 2003:

 

(Dollarsin thousands)
|                     |   | **Payments  due by period** |   |
|--------------------------|--------|-----------------------------|--------|
|                     |   | **Total**                   |   | **2004** |   | **2005-2006** |   | **2007-2008** |   | **Thereafter** |   |
|                     |   |                        |   |   |   |   |   |   |   |   |   |
| Asset Management Fee (1) |   | $                           | 2,724  |   | $ | 454 |   | $ | 908 |   | $ | 908 |   | $ | 454 |   |
|                          |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)   The Asset Management Fee declines as the mortgage base declines.

 

### Cash flow - 2003 comparedto 2002

 

Net cash provided by operatingactivities decreased by approximately $2.0 million in 2003 compared to 2002primarily due to a decrease in the receipt of interest previously accrued onmortgages awaiting assignment from HUD under the Section 221 program and areduction in mortgage investment income.

 

Net cash provided by investingactivities decreased by approximately $10.6 million in 2003 compared to 2002,primarily due to decreases in net proceeds received from mortgage assignments,mortgage prepayments and redemption of debentures.

 

Net cash used in financingactivities decreased by approximately $7.4 million in 2003 compared to 2002 dueto a reduction in the amount of distributions paid to partners in 2003 comparedto 2002.  The decrease in distributionsis the result of lower proceeds from mortgage assignments and prepayments in2003, as discussed above.

 

### Cash flow - 2002 comparedto 2001

 

Net cash provided by operatingactivities decreased by approximately $718,000 in 2002 compared to 2001,primarily due to lower mortgage investment income resulting from a reduction inthe mortgage base, partially offset by a decrease in receivables and otherassets.  The decrease in receivables andother assets is primarily due to the receipt of principal and interestpreviously accrued on the mortgages awaiting assignment from HUD under theSection 221 Program during 2002.

 

Net cash provided by investingactivities increased by approximately $6.0 million in 2002 compared to2001.  This increase is primarily due toan increase in proceeds received from mortgage assignments and the net proceedsfrom the debentures, partially offset by a decrease in proceeds received fromthe prepayment of mortgages.

 

Net cash used in financingactivities decreased by approximately $2.1 million in 2002 compared to 2001 dueto a reduction in the amount of distributions paid to partners in 2002 comparedto 2001.

 

### Critical AccountingPolicies

 

The preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the financial statements, and the reported amountsof revenues and expenses during the reporting periods.  The Partnership continually evaluates theestimates used to prepare the financial statements, and updates those estimatesas necessary.  In general, management’sestimates are based on historical experience, on information from thirdparties, and other various assumptions that are believed to be reasonable underthe facts and circumstances.  Actualresults could differ materially from those estimates.

 

Management considers an accounting estimate to be critical if:

 

•    it requiresassumptions to be made that were uncertain at the time the estimate was made;and

 

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•    changes in theestimate or different estimates that could have been selected could have amaterial impact on the Partnership’s results of operations or financialcondition.

 

The Partnership’s critical accountingestimates include the determination of fair values for Insured Mortgages:

 

•    Fair Value ofInsured Mortgages – The Partnership estimates the fair value of its InsuredMortgages internally.  The Partnershipuses a discounted cash flow methodology to estimate the fair value.  This requires the Partnership to makecertain estimates regarding discount rates and expected prepayments.  The cash flows were discounted using adiscount rate that, in the Partnership’s view, was commensurate with themarket’s perception of risk and value. The Partnership used a variety of sources to determine its discount rateincluding: (i) institutionally-available research reports, (ii) communicationswith dealers and active insured mortgage security investors regarding thevaluation of comparable securities and (iii) recent transactions.  Increases in the discount rate used by thePartnership would generally result in a corresponding decrease in the fairvalue of the Partnership’s insured mortgages. Decreases in the discount rate used by the Partnership would generallyresult in a corresponding increase in the fair value of the Partnership’sinsured mortgages.  The Partnership alsomakes certain assumptions regarding the prepayment speeds of its InsuredMortgages.  In a low interest rateenvironment, mortgages are more likely to prepay even if the mortgage containsprepayment penalties.  In general, ifthe Partnership increases its assumed prepayment speed, the fair value of theInsured Mortgages will decrease.  If thePartnership decreases its assumed prepayment speed, the fair value of theInsured Mortgages will increase.

 

ITEM 7A.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUTMARKET RISK

 

The Partnership’s principal market risk isexposure to changes in interest rates in the U.S. Treasury market.  The Partnership will experience fluctuationsin the market value of its assets related to (i) changes in the interest ratesof U.S. Treasury securities, (ii) changes in the spread between the interestrates on U.S. Treasury securities and the interest rates on the Partnership’sInsured Mortgages, and (iii) changes in the weighted average life of theInsured Mortgages, determined by reviewing the attributes of the InsuredMortgages in relation to the current market interest rates.  There would not be a material change in thefair value of the Partnership’s Insured Mortgages if the Partnership assumedthat the discount rate used to determine the fair values increased by 100 basispoints and 200 basis points as of December 31, 2003 since the mortgages aregenerally pre-payable and have weighted average lives of less than one year.

 

ITEM 8.      FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

 

The information required bythis Item is set forth in this Annual Report on Form 10-K commencing on page 24.

 

ITEM 9.      CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

 

On May 8, 2002, the Board of Directors of theGeneral Partner of the Partnership dismissed Arthur Andersen LLP (“ArthurAndersen”) as the Partnership’s independent auditors.  Arthur Andersen had served as the Partnership’s independentaccountants since 1991.

 

Arthur Andersen’s reports onthe Partnership’s financial statements for each of the past two fiscal yearsdid not contain an adverse opinion or disclaimer of opinion, nor were suchreports qualified or modified as to uncertainty, audit scope or accountingprinciples.

 

During each of thePartnership’s two most recent fiscal years and through the date of ArthurAndersen’s

 

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dismissal, there were: (i) no disagreements with Arthur Andersen on anymatter of accounting principles or practices, financial statements disclosure,or auditing scope or procedure which, if not resolved to Arthur Andersen’ssatisfaction, would have caused them to make reference to the subject matter inconnection with their report on the Partnership’s financial statements for suchyears; and (ii) there were no reportable events as defined in Item 304(a)(1)(v)of Regulation S-K.

 

The Partnership has providedArthur Andersen with a copy of the foregoing disclosure.  The Partnership requested Arthur Andersen tofurnish it with a letter addressed to the SEC stating whether it agrees withthe above statements.  A copy of thatletter dated May 9, 2002 was filed as Exhibit 16 to the Form 8-K filed with theSEC by the Partnership on May 10, 2002.

 

On June 5, 2002, the GeneralPartner of the Partnership appointed Ernst & Young LLP to audit thePartnership’s financial statements for the year ending December 31, 2002.  During the years ended December 31, 2001 and2000 and the subsequent interim period through June 5, 2002, neither thePartnership nor anyone on its behalf consulted Ernst & Young LLP withrespect to the application of accounting principles to a specified transactioneither completed or proposed, or the type of audit opinion that might berendered on the Partnership’s financial statements or any other matters orreportable events listed in Items 304(a)(2)(1) and (11) of Regulation S-K.

 

ITEM 9A.    CONTROLS AND PROCEDURES

 

The General Partner carried outan evaluation, under the supervision and with the participation of the GeneralPartner’s management, including the General Partner’s principal executiveofficer and the principal financial officer, of the effectiveness of the designand operation of its disclosure controls and procedures, as that term isdefined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, asamended.  Based on that evaluation, theGeneral Partner’s principal executive officer and principal financial officerconcluded that as of December 31, 2003, which is the end of the period coveredby the Annual Report on Form 10-K, the General Partner’s disclosure controlsand procedures are effective.

 

There have been no significantchanges in the General Partner’s internal controls over financial reporting inthe fiscal quarter ended December 31, 2003 that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial reporting.

 

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**PART III**

 

ITEM 10.  DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT

 

The Partnership has noexecutive officers or directors.  ThePartnership does not directly employ any persons responsible for managing oroperating the Partnership or for providing services relating to day to daybusiness affairs.  The affairs of thePartnership are managed by its General Partner, CRIIMI, Inc. a wholly-ownedsubsidiary of CRIIMI MAE, a corporation whose shares are listed on the New YorkStock Exchange.  CRIIMI, Inc. holds ageneral partnership interest of 3.9%.

 

The business of the Partnershipis managed by its General Partner while its portfolio of mortgages is managedby the Advisor and CMSLP pursuant to the Advisory Agreements and Sub-AdvisoryAgreement, respectively, as discussed above. A wholly-owned subsidiary of CRIIMI MAE, CRIIMI MAE Management, Inc.,provides personnel and administrative services to the Partnership on behalf ofthe General Partner.

 

The General Partner is also thegeneral partner of AIM 84, AIM 86 and AIM 88 limited partnerships, which, priorto their dissolution in February 2004, had investment objectives similar tothose of the Partnership.

 

The Board of Directors of theGeneral Partner has established an Audit Committee and has affirmativelydetermined that such Audit Committee consists of independent directors (asdefined in Section 121A of the AMEX Company Guide and Rule 10A-3 under theSecurities Exchange Act of 1934, as amended.) The Audit Committee is currently comprised of Authur N. Haut, Robert J.Merrick and Robert E. Woods, each of whom is an audit committee financial expertas defined in the SEC rules.  The AuditCommittee of the General Partner has appointed Ernst & Young LLP as thePartnership’s independent public accountants of the Partnership for the fiscalyear ending December 31, 2004, such appointment to continue at the discretionof the Audit Committee.  The charter ofthe Audit Committee of the General Partner is available upon request by writingto the General Partner at 11200 Rockville Pike, 4th Floor,Rockville, MD 20852.  The AuditCommittee met 7 times and acted by unanimous consent zero times.

 

The General Partner adopted aCode of Business Conduct and Ethics that applies to the Partnership’s principalexecutive officer and principal financial and accounting officer.  A copy of the Code of Business Conduct and Ethicsis available upon request by writing to the General Partner at 11200 RockvillePike, 4th Floor, Rockville, MD 20852.  Any waivers of the Code of Business Conduct and Ethics by theBoard of Directors of the General Partner will be disclosed in an SEC Form 8-Kfiled within five days.

 

All directors of the GeneralPartner are elected annually by CRIIMI MAE. All executive officers of the General Partner serve at the discretion ofthe Board of Directors of the General Partner. There are no family relationships among any directors or executiveofficers of the General Partner.

 

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The following table sets forthinformation concerning the executive officers and the directors of the GeneralPartner as of March 1, 2004:

 
| **Name**            |   | **Age** |   | **Position**                                                    |   |
|---------------------|--------|---------|--------|-----------------------------------------------------------------|--------|
|                |   |    |   |                                                            |   |
| Barry S. Blattman   |   | 41      |   | Chairman of the Board of Directors and Chief Executive Officer  |   |
|                |   |    |   |                                                            |   |
| Mark R. Jarrell     |   | 43      |   | President and Chief Operating  Officer and a Director           |   |
|                |   |    |   |                                                            |   |
| Cynthia O. Azzara   |   | 44      |   | Executive Vice President, Chief Financial Officer and Treasurer |   |
|                |   |    |   |                                                            |   |
| Stephen M. Abelman  |   | 42      |   | Executive Vice President, Asset Management                      |   |
|                |   |    |   |                                                            |   |
| Daniel P. Warcholak |   | 43      |   | Senior Vice President, Fixed  Income Capital Markets            |   |
|                |   |    |   |                                                            |   |
| Arthur N. Haut      |   | 68      |   | Director                                                        |   |
|                |   |    |   |                                                            |   |
| Robert J. Merrick   |   | 58      |   | Director                                                        |   |
|                |   |    |   |                                                            |   |
| Robert E. Woods     |   | 56      |   | Director                                                        |   |

 

Barry S. Blattman has been Chairman of theBoard of Directors and Chief Executive Officer of the General Partner sinceJanuary 23, 2003.  From January 23, 2003until September 15, 2003, he served as President of the General Partner.  Mr. Blattman has been the Managing Partner ofBrascan Real Estate Financial Partners LLC since 2002.  From 1996 through December 2001, Mr.Blattman was a Managing Director of Real Estate Investment Banking at MerrillLynch, where he oversaw the real-estate debt group which was responsible forUnited States and Canadian conduit loan programs, large-loan originations,syndicated lending, mezzanine lending, third-party portfolio financing andsecuritizations, unsecured bond and preferred equity issuances, and ratingagency advisory services.  Mr. Blattmanreceived a Master of Business Administration degree from New York Universityand Bachelor of Arts degree from the University of Michigan.

 

Mark R. Jarrell has been President and Chief Operating Officer of theGeneral Partner since September 15, 2003.  Mr. Jarrell served as a director of CRIIMIMAE from January 23, 2003 to August 13, 2003. From April 2002 to August 2003, Mr. Jarrell served as Senior VicePresident and head of the Debt Group at The Community Development Trust, Inc.(“CDT”), a private hybrid REIT focused on debt and equity investments inprojects that support affordable housing and community development. As head ofthe Debt Group at CDT, he was responsible for all debt origination,underwriting and capital markets activities and was a member of the REIT’sManagement Committee. Prior to joining CDT, Mr. Jarrell spent fifteen years inthe commercial mortgage-backed securities (CMBS) industry at a number of WallStreet firms. From 1997 to 2002, he was a Senior Vice President at GreenwichCapital Markets, Inc., where he headed that firm’s conduit loan production andsecuritization effort. Mr. Jarrell received his Bachelor of Arts degree inUrban Studies (summa cum laude) from Columbia College and Master of PublicAffairs degree from the Woodrow Wilson School at Princeton University.

 

Cynthia O. Azzara has been Executive Vice President of the GeneralPartner since September 2003, Chief Financial Officer of the General Partnersince 1994, and Treasurer of the General Partner since 1997. She was a SeniorVice President of the General Partner from 1995 to September 2003. Ms. Azzarais responsible for accounting, financial and treasury matters of the GeneralPartner.  Priorto 1994, she held various senior positions overseeing the accounting andfinancial functions for numerous public companies that invested, directly orindirectly, in commercial and multi-family mortgage assets. Ms. Azzara has over15 years of experience in accounting, corporate finance and regulatorymatters.  Ms. Azzara is a CertifiedPublic Accountant and holds a Bachelor of Business Administration degree inAccounting from James Madison University, Magna Cum Laude.

 

17

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Stephen M. Abelman has been Executive VicePresident, Asset Management of the General Partner since October 2003.  Mr. Abelman is responsible for all assetmanagement functions, including surveillance, loan management and specialservicing. From 1993 to 2003, Mr. Abelman served with Archon Group, awholly-owned subsidiary of Goldman Sachs, most recently as Vice Presidentresponsible for the asset management of real estate, real estate debt, andmezzanine and preferred equity investments owned by Goldman and its WhitehallStreet Funds. Mr. Abelman was also responsible for asset and portfolioprojections and performance, including investments in mortgage-backedsecurities and real estate. From 1997 to 2001, he managed Archon’s $1billion-plus northeast portfolio, comprised primarily of real estate andnon-performing loans from Washington, D.C. through New England.  Mr. Abelman received a Bachelor of Sciencein Business Administration from Boston University and a Master of BusinessAdministration from Rice University.

 

Daniel P. Warcholak has been Senior VicePresident, Fixed Income Capital Markets of the General Partner since September2003. He is responsible for structured finance, corporate finance transactionanalytics, securities trading, and derivatives based interest rate riskmanagement.Joiningthe General Partner in 1998, he has held the positions of Group Vice Presidentand Vice President, focusing on financial restructuring and transactionanalytics. From 1995to 1998, he held various positions in financial services, software, and systemsconsulting, most recently with KPMG Peat Marwick. From 1988 to 1995, Mr.Warcholak was Vice President with JHM Financial Services Corp and JHM Capital Management,a portfolio investment management firm which specializes in mortgage-backedsecurities. Mr. Warcholak holds a Bachelor of Science degree from DrexelUniversity, is a Certified Public Accountant, and is currently a Level IIICandidate in the CFA Program.

 

Arthur N. Haut was elected as a director of the General Partner at theGeneral 2003 Annual Shareholders’ Meeting held on June 6, 2003.  Since 1999, Mr. Haut has served as director of Business Valuation Services inCenterprise Advisors Litigation and Valuation Support Group (“Centerprise”)where he is responsible for the valuation of minority and controlling interestsfor purposes of estate and financial planning, purchase or sale of a businessand employee stock ownership plans.  Healso provides assistance in structuring, planning and implementing businesscombinations.  From 1978 until he joinedCenterprise, Mr. Haut operated his own business valuation firm.  Prior to 1978, Mr. Haut was a partner in theinternational accounting firm, Coopers and Lybrand.  Since 1975, Mr. Haut has taught various courses in accounting,federal income taxes and corporate financial reporting and valuation at theYale School of Management, Yale Law School and Yale College.

 

Robert J. Merrick has served as Director of the General Partner since1997.  Since February 1998, Mr. Merrickhas served as the Chief Credit Officer and Director of MCG Capital Corporationwhere he is responsible for approval of all of MCG’s loans and investments.  From 1985 to 1997, he served as ExecutiveVice President and Chief Credit Officer of Signet Banking Company(“Signet”).  While at Signet, Mr.Merrick also served as Chairman of the Credit Policy Committee and was a memberof the Asset and Liability Committee, and the Management Committee.  Mr. Merrick currently serves as a director ofthe Bank of Richmond.

 

Robert E. Woods has served as Director of the General Partner since1998.  He is currently the ManagingDirector and Head of Debt Syndicate at Societe Generale in New York where he isresponsible for structuring, underwriting and distribution of private andpublic debt in North and South America, and Vice Chairman of the Debt ScreeningCommittee.  He has served in thatposition since 1997.  From 1991 to 1997,Mr. Woods was Managing Director and Head of the Real Estate Capital Markets andMortgage-Backed Securities division of Citicorp where he was also a SeniorCredit and Securities Officer.  From1990 to 1991, he was Global Portfolio Manager of Citicorp’s Global CorporateFinance business.

 

Section 16(a) Beneficial Ownership Reporting Compliance– Section 16 of the Securities Exchange Act of 1934, as amended, (the “ExchangeAct”) requires each director and executive officer of the General Partner andeach person who owns more than 10% of the Partnership’s Units to report to theSEC by a specified date, his, her or its beneficial ownership of, and certaintransactions in the Partnership’s Units. Based solely on its review of Forms 3, 4 and 5 and amendments theretofurnished to the Partnership, and written representations from certainreporting persons that no Form 5’s were required for those persons, thePartnership believes that all directors, executive officers and beneficialowners of more than 10% of the Partnership’s Units have filed on a timely basisForms 3, 4 and 5 as required in the fiscal year ended December 31, 2003.

 

18

----

 

ITEM 11.        EXECUTIVECOMPENSATION

 

The Partnership does not have any directors or executive officers.  The Partnership does not directly employ anypersons responsible for managing or operating the Partnership or for providingservices relating to day to day business affairs.  The CRIIMI MAE Management, Inc. an affiliate of the GeneralPartner provides personnel and administrative services to the Partnership.  None of the directors or executive officersof the General Partner, however, received compensation from the Partnership,and the General Partner does not receive reimbursement from the Partnership forany portion of their salaries or other compensation.  The Partnership reimburses CRIIMI MAE Management, Inc. for theseservices on an actual cost basis.

 

ITEM 12.                       SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS, MANAGEMENT AND RELATED UNITHOLDER MATTERS

 

As of March 1, 2004, no person was known by the Partnership to be thebeneficial owner of more than five percent (5%) of the outstanding Units of thePartnership.

 

The following table sets forthcertain information regarding the beneficial ownership of the Partnership’sUnits as of March 1, 2004 byeach person known by the Partnership to be the beneficial owner of more than 5%of its Units, each director of the General Partner, each named executiveofficer of the General Partner, and by affiliates of the Partnership.  Unless otherwise indicated, each Unitholderhas sole voting and investment power with respect to the Units beneficiallyowned.

 
| **Name**        |   | **Amount and Nature  of Units  Beneficially Owned** |   | **Percentage of Units  Outstanding** |   |
|-----------------|--------|-----------------------------------------------------|--------|--------------------------------------|--------|
|            |   |                                                |   |                                 |   |
| CRIIMI MAE Inc. |   | 4,000                                               |   | *                                    |   |

 

----

*      Less than 1%

 

There are no arrangements known to the Partnership, the operation ofwhich may at any subsequent date result in a change in control of thePartnership.

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

 

The Partnership’s portfolio of mortgages is managed by the Advisor andCMSLP pursuant to the Advisory Agreements and Sub-Advisory Agreement,respectively, as discussed above.  Thefee paid by the Partnership to the Advisor for services performed under theAdvisory Agreements (the “Advisory Fee”), is equal to 0.95% of thePartnership’s Total Invested Assets (as defined in the PartnershipAgreement.)  The Advisor pays CMSLP assub-advisor, a fee of 0.28% (the “Sub-Advisory Fee”) of Total Invested Assetsfor services performed under the Sub-Advisory Agreement from its AdvisoryFee.  The Partnership is not liable forpaying the Sub-Advisory Fee to CMSLP. Additional information concerning these fees is contained in Part II,Item 7, Management’s Discussion and Analysis of Financial Condition and Resultsof Operations and in Note 8 of the Notes to Financial Statements (included inItem 8 hereof.)

 

19

----

 

ITEM 14.      PRINCIPALACCOUNTANT FEES AND SERVICES

 

The following table provides the amount of fees for professionalservices provided by the Partnership’s independent auditor, Ernst & YoungLLP, in each of the last two years ended December 31, 2003 and 2002:

 
|           |   | **2003** |   | **2002** |   |
|----------------|--------|----------|--------|----------|--------|
|           |   |     |   |     |   |
| Audit Fees     |   | $        | 59,110 |     | $      | 97,539 | (1) |
| Tax Fees (2)   |   | 11,065   |   | 16,654   |   |
| All Other Fees |   | —   |   | —   |   |
|                |        |          |        |          |        |  |  |

 

----

(1)          Fees for audit services in 2002 do not include$5,000 paid to Arthur Andersen LLP in connection with the review of thePartnership’s quarterly report for the quarter ended March 31, 2002.

(2)          The Audit Committee has considered whether theprovision of these services is compatible with maintaining the principalaccountant’s independence and has approved Ernst & Young LLP to providethese services to the Partnership.

 

Fees for audit services included fees associated with the annual auditand the reviews of the Partnership’s quarterly reports on Form 10-Q.  Tax fees included fees associated with taxcompliance.

 

20

----

 

**PART IV**

 

ITEM 15.        EXHIBITS, FINANCIALSTATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

(a)(1)       Financial Statements:

 
| **Description**                                                                                      |                               |
|------------------------------------------------------------------------------------------------------|------------------------------------|
|                                                                                                 |                               |
| Balance  Sheets as of December 31, 2003 and 2002                                                     |                               |
|                                                                                                 |                               |
| Statements of Income and Comprehensive  Income for the years ended December 31, 2003, 2002, and 2001 |                               |
|                                                                                                 |                               |
| Statements of Changes in Partners’ Equity  for the years ended December 31, 2003, 2002 and 2001 |                               |
|                                                                                                 |                               |
| Statements of Cash Flows for the years  ended December 31, 2003, 2002 and 2001                       |                               |
|                                                                                                 |                               |
| Notes to Financial Statements                                                                        |                               |
|                                                                                                 |                               |
| (a)(2)  Financial Statement  Schedules:                                                         |                               |
|                                                                                                 |                               |
|                                                                                                 | IV - Mortgage Loans on Real Estate |   |
|                                                                                                      |                                    |  |

 

All other schedules have been omitted becausethey are not applicable, not required, or the information is included in theFinancial Statements or Notes thereto.

 

(a)(3) Exhibits:

 
| 4.0    |   | Amended and Restated Certificates of Limited Partnership are  incorporated by reference to Exhibit 4(a) to the Registration Statement on  Form S-11 (No. 2-93294) dated January 28, 1985 (such Registration Statement,  as amended, is referred to herein as the “Registration Statement”). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                  |
| 4.1    |   | Second Amended and Restated Partnership Agreement is incorporated by  reference to Exhibit 3 to the Registration Statement.                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 4.2    |   | Amendment No. 1 to the Second Amended and Restated Partnership  Agreement is incorporated by reference to Exhibit 4(a) to the Partnership’s  Annual Report on Form 10-K for the year ended December 31, 1986.                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 4.3    |   | Amendment No. 2 to the Second Amended and Restated Partnership  Agreement is incorporated by reference to Exhibit 4(b) to the Partnership’s  Annual Report on Form 10-K for the year ended December 31, 1986.                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 4.4    |   | Amendment No. 3 dated February 12, 1990, to the Second Amended and  Restated Agreement of Limited Partnership of the Partnership incorporated by  reference to Exhibit 4(c) to the Partnership’s Annual Report on Form 10-K for  the year ended December 31, 1989.                               |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 4.5    |   | Amendment No. 4 dated September 4, 1991, to the Second Amended and  Restated Agreement of Limited Partnership of the Partnership incorporated by  reference to Exhibit 28(c), to the Partnership’s Annual Report on Form 10-K  for the year ended December 31, 1991.                             |

 

21

----

 
| 10.1   |   | Reinvestment Plan, incorporated by reference to the Prospectus  contained in the Registration Statement.                                                                                                                                                                                                                                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2   |   | Sub-Management Agreement by and between AIM Acquisition and CRI/AIM  Management, Inc., dated as of March 1, 1991, incorporated by reference to  Exhibit 28(f) to the Partnership’s Annual Report on Form 10-K for the year  ended December 31, 1992.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 14.0   |   | Code of Ethics (Filed herewith).                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 16.0   |   | Letter from Arthur Andersen LLP to the Securities and Exchange  Commission dated May 9, 2002, regarding the General Partner’s decision to  change its certifying accountant, incorporated by reference to Exhibit 16 to  the Partnership’s Form 8-K filed on May 10, 2002.                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 31.1   |   | Certification pursuant to the Exchange Act Rule 13a-14(a) from Barry  S. Blattman, Chairman of the Board and Chief Executive Officer of the General  Partner (Filed herewith).                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 31.2   |   | Certification pursuant to the Exchange Act Rule 13a-14(a) from  Cynthia O. Azzara, Executive Vice President, Chief Financial Officer and  Treasurer of the General Partner (Filed herewith).                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 32.1   |   | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 from Barry S. Blattman, Chairman of the Board and Chief Executive  Officer of the General Partner (Furnished herewith).                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 32.2   |   | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  from Cynthia O. Azzara, Executive Vice President, Chief Financial Officer and  Treasurer of the General Partner (Furnished herewith).                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 99.0   |   | Letter to Securities and Exchange Commission from the Partnership  dated March 20, 2002, regarding the representation received from Arthur  Andersen LLP in performing the audit of the December 31, 2001 financial  statements, incorporated by reference to Exhibit 99.0 to the Partnership’s  Annual Report on Form 10-K for the year ended December 31, 2001. |

 

(b)                                 Reportson Form 8-K filed during the last quarter of the fiscal year:

 
| **Date**          |   |                                                                                                                                    |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                    |
| October 23, 2003  |   | To report a press release issued on October 22, 2003 announcing the  October 2003 distribution to the Partnership’s Unitholders.   |
|              |   |                                                                                                                                    |
| November 13, 2003 |   | To report a press release issued on November 12, 2003 announcing the  Partnership’s third quarter financial results.               |
|              |   |                                                                                                                                    |
| November 18, 2003 |   | To report a press release issued on November 18, 2003 announcing the  November 2003 distribution to the Partnership’s Unitholders. |
|              |   |                                                                                                                                    |
| December 22, 2003 |   | To report a press release issued on December 19, 2003 announcing the  December 2003 distribution to the Partnership’s Unitholders. |

 

22

----

 

SIGNATURES

 

KNOW ALL PERSONS BY THESE PRESENTS, that eachperson whose signature appears below constitutes and appoints Barry S.Blattman, his attorney-in-fact, each with the power of substitution for him inany and all capacities, to sign any amendments to this Annual Report on Form10-K and to file the same with exhibits thereto and other documents inconnection therewith, with the Securities and Exchange Commission, herebyratifying and confirming all that each said attorney-in-fact, or his substituteor substitutes, may do or cause to be done by virtue hereof.

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, Registrant has duly caused this Report to be signed onits behalf by the undersigned, thereunto duly authorized.

 
|                | AMERICAN INSURED MORTGAGE  INVESTORS — SERIES 85, L.P.  (Registrant)                                      |
|---------------------|----------------------------------------------------------------------------------------------------------------|
|                |                                                                                                           |
|                | By:                                                                                                            | CRIIMI, Inc. |
|                |                                                                                                           | General Partner |
|                |                                                                                                           |
|                |                                                                                                           |
| March 19, 2004 |                                                                                                           | /s/ Barry S. Blattman |   |
| DATE                | Barry S. Blattman                                                                                              |
|                | Chairman of the Board and  Chief Executive Officer  (Principal Executive Officer)                              |
|                |                                                                                                           |
|                |                                                                                                           |
| March 19, 2004 |                                                                                                           | /s/ Cynthia O. Azzara |   |
| DATE                | Cynthia O. Azzara                                                                                              |
|                | Executive Vice President,  Chief Financial Officer and Treasurer  Principal Financial and Accounting  Officer) |
|                |                                                                                                           |
|                |                                                                                                           |
| March 18, 2004 |                                                                                                           | /s/ Mark R. Jarrell |   |
| DATE                | Mark R. Jarrell                                                                                                |
|                | President and Chief Operating Officer  and a Director                                                          |
|                |                                                                                                           |
|                |                                                                                                           |
| March 18, 2004      |                                                                                                           | /s/ Arthur N. Haut |   |
| DATE                | Arthur N. Haut                                                                                                 |
|                | Director                                                                                                       |
|                |                                                                                                           |
|                |                                                                                                           |
| March 18, 2004      |                                                                                                           | /s/ Robert J. Merrick |   |
| DATE                | Robert J. Merrick                                                                                              |
|                | Director                                                                                                       |
|                |                                                                                                           |
|                |                                                                                                           |
| March 18, 2004      |                                                                                                           | /s/ Robert E. Woods |   |
| DATE                | Robert E. Woods                                                                                                |
|                | Director                                                                                                       |
|                     |                                                                                                                |  |  |  |  |  |

 

23

----

 

**AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.**

 

 

**Financial Statements**

 

**as of December 31, 2003 and 2002**

 

**and for the Years Ended**

 

**December 31, 2003, 2002 and 2001**

 

24

----

 

REPORT OF INDEPENDENT AUDITORS

 

Partners

American Insured Mortgage Investors - Series85, L.P.

 

We have audited the accompanying balance sheets of American InsuredMortgage Investors - Series 85, L.P. (the Partnership) as of December 31,2003 and 2002 and the related statements of income and comprehensive income,changes in partners’ equity, and cash flows for the years then ended.  Our audit also included the financialstatement schedule listed in the Index at Item 15(a)(2).  These financial statements andschedule are the responsibility of the Partnership’s management.  Our responsibility is to express an opinionon these financial statements and schedule based on our audits.  The financial statements of the Partnershipas of December 31, 2001, and for the year then ended, were audited byother auditors who have ceased operations and whose report dated March 4,2002, expressed an unqualified opinion on those statements.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States. Those standards require that we plan and performthe audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the 2003 and 2002 financial statements referred toabove present fairly, in all material respects, the financial position of thePartnership at December 31, 2003 and 2002, and the results of itsoperations and its cash flows for the years then ended in conformity withaccounting principles generally accepted in the United States.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

 
| Ernst & Young LLP |
|-----------------------|
| McLean, Virginia      |
| March 5, 2004    |

 

25

----

 

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

 

To the Partners of American Insured Mortgage Investors - Series 85,L.P.:

 

We have audited the accompanying balance sheets of American InsuredMortgage Investors - Series 85, L.P. (the “Partnership”) as ofDecember 31, 2001 and 2000, and the related statements of income andcomprehensive income, changes in partners’ equity and cash flows for the yearsended December 31, 2001, 2000 and 1999. These financial statements and the schedule referred to below arethe responsibility of the Partnership’s management.  Our responsibility is to express an opinion on these financialstatements and the schedule based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of the Partnership asof December 31, 2001 and 2000, and the results of its operations and itscash flows for the years ended December 31, 2001, 2000 and 1999 in conformitywith accounting principles generally accepted in the United States.

 

Our audits were made for the purpose of forming an opinion on the basicfinancial statements taken as a whole. Schedule IV-Mortgage Loans on Real Estate as of December 31,2001 is presented for purposes of complying with the Securities and ExchangeCommission’s rules and regulations and is not a required part of the basicfinancial statements.  The informationin this schedule has been subjected to the auditing procedures applied inour audits of the basic financial statements and, in our opinion, is fairlystated in all material respects in relation to the basic financial statementstaken as a whole.

 

 
| Arthur Andersen LLP |
|---------------------|
| Vienna, Virginia    |
| March 4, 2002  |

 

 

This is a copy of the audit report previouslyissued by Arthur Andersen LLP in connection with the Partnership’s filing ofits Annual Report on Form 10-K for the year ended December 31, 2001.  This audit report has not been reissued byArthur Andersen LLP in connection with this Annual Report on Form 10-K.  See exhibit 16.0 for further discussion.

 

26

----

 

AMERICANINSURED MORTGAGE INVESTORS - SERIES 85, L.P.

 

BALANCE SHEETS

 
|                                                                                                 |   | **December 31,  2003** |       | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|-----------------------------|--------|
|                                                                                                 |   |                        |       |                        |   |
| **ASSETS**                                                                                           |   |
|                                                                                                 |   |                        |       |                        |   |
| Investment in FHA-Insured Certificates and  GNMA Mortgage-Backed Securities, at fair value:          |   |                        |       |                        |   |
| Acquired insured mortgages                                                                           |   | $                           | 19,264,433 |                        | $      | 33,849,089 |   |
| Originated insured mortgages                                                                         |   | 15,882,997                  |       | 15,986,295                  |   |
|                                                                                                 |   |                        |       |                        |   |
|                                                                                                 |   | 35,147,430                  |       | 49,835,384                  |   |
| Investment in FHA-Insured Loans, at  amortized cost, net of unamortized discount and premium:        |   |                        |       |                        |   |
| Acquired insured mortgages                                                                           |   | 1,436,670                   |       | 7,176,274                   |   |
| Originated insured mortgages                                                                         |   | 9,191,407                   |       | 9,311,907                   |   |
|                                                                                                 |   | 10,628,077                  |       | 16,488,181                  |   |
|                                                                                                 |   |                        |       |                        |   |
| Investment in debentures, at fair value                                                              |   | 10,335,670                  |       | —                      |   |
|                                                                                                 |   |                        |       |                        |   |
| Cash and cash equivalents                                                                            |   | 11,345,058                  |       | 10,448,516                  |   |
|                                                                                                 |   |                        |       |                        |   |
| Receivables and other assets                                                                         |   | 1,592,192                   |       | 1,465,453                   |   |
|                                                                                                 |   |                        |       |                        |   |
| Total assets                                                                                         |   | $                           | 69,048,427 |                        | $      | 78,237,534 |   |
|                                                                                                 |   |                        |       |                        |   |
| **LIABILITIES AND PARTNERS’ EQUITY**                                                            |   |
|                                                                                                 |   |                        |       |                        |   |
| Distributions payable                                                                                |   | $                           | 2,513,947  |                        | $      | 10,181,484 |   |
|                                                                                                 |   |                        |       |                        |   |
| Accounts payable and accrued expenses                                                                |   | 73,460                      |       | 115,799                     |   |
|                                                                                                 |   |                        |       |                        |   |
| Due to affiliate                                                                                     |   | 5,319,243                   |       | —                      |   |
|                                                                                                 |   |                        |       |                        |   |
| Total liabilities                                                                                    |   | 7,906,650                   |       | 10,297,283                  |   |
|                                                                                                 |   |                        |       |                        |   |
| Partners’ equity:                                                                               |   |                        |       |                        |   |
| Limited partners’ equity, 15,000,000 Units  authorized, 12,079,514 Units issued and outstanding |   | 67,926,439                  |       | 73,382,252                  |   |
| General partner’s deficit                                                                       |   | (7,074,710                  | )          | (6,853,298                  | )      |
| Accumulated other comprehensive income                                                               |   | 290,048                     |       | 1,411,297                   |   |
|                                                                                                 |   |                        |       |                        |   |
| Total partners’ equity                                                                          |   | 61,141,777                  |       | 67,940,251                  |   |
|                                                                                                 |   |                        |       |                        |   |
| Total liabilities and partners’ equity                                                          |   | $                           | 69,048,427 |                        | $      | 78,237,534 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

27

----

 

AMERICAN INSURED MORTGAGEINVESTORS - SERIES 85, L.P.

 

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 
|                                                                                                               |   | **For the  years ended December 31,** |      |
|--------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|-----------|
|                                                                                                               |   | **2003**                                   |      | **2002** |   | **2001** |   |
|                                                                                                               |   |                                       |      |   |   |   |   |
| Income:                                                                                                            |   |                                       |      |   |   |   |   |
| Mortgage investment income                                                                                         |   | $                                          | 4,846,437 |   | $ | 6,168,254 |   | $ | 7,983,600 |   |
| Interest and other income                                                                                          |   | 233,299                                    |      | 274,342 |   | 541,979 |   |
|                                                                                                               |   |                                       |      |   |   |   |   |
|                                                                                                               |   | 5,079,736                                  |      | 6,442,596 |   | 8,525,579 |   |
|                                                                                                               |   |                                       |      |   |   |   |   |
| Expenses:                                                                                                          |   |                                       |      |   |   |   |   |
| Asset management fee to related parties                                                                            |   | 611,417                                    |      | 744,733 |   | 959,934 |   |
| General and administrative                                                                                         |   | 393,410                                    |      | 411,226 |   | 382,296 |   |
|                                                                                                               |   |                                       |      |   |   |   |   |
|                                                                                                               |   | 1,004,827                                  |      | 1,155,959 |   | 1,342,230 |   |
|                                                                                                               |   |                                       |      |   |   |   |   |
| Earnings before gains (losses) on mortgage  dispositions                                                           |   | 4,074,909                                  |      | 5,286,637 |   | 7,183,349 |   |
|                                                                                                               |   |                                       |      |   |   |   |   |
| Mortgage dispositions                                                                                              |   |                                       |      |   |   |   |   |
| Gains                                                                                                              |   | 1,509,197                                  |      | 1,859,749 |   | 1,785,376 |   |
| Losses                                                                                                             |   | (11,415                                    | )         | (8,498 | ) | — |   |
|                                                                                                               |   |                                       |      |   |   |   |   |
| Net earnings                                                                                                       |   | $                                          | 5,572,691 |   | $ | 7,137,888 |   | $ | 8,968,725 |   |
|                                                                                                               |   |                                       |      |   |   |   |   |
| Other comprehensive (loss) income -  adjustment to unrealized gains and losses on investments in insured mortgages |   | (1,121,249                                 | )         | 604,237 |   | (1,114,340 | ) |
|                                                                                                               |   |                                       |      |   |   |   |   |
| Comprehensive income                                                                                               |   | $                                          | 4,451,442 |   | $ | 7,742,125 |   | $ | 7,854,385 |   |
|                                                                                                               |   |                                       |      |   |   |   |   |
| Net earnings allocated to:                                                                                         |   |                                       |      |   |   |   |   |
| Limited partners - 96.1%                                                                                           |   | $                                          | 5,355,356 |   | $ | 6,859,510 |   | $ | 8,618,945 |   |
| General partner - 3.9%                                                                                             |   | 217,335                                    |      | 278,378 |   | 349,780 |   |
|                                                                                                               |   |                                       |      |   |   |   |   |
|                                                                                                               |   | $                                          | 5,572,691 |   | $ | 7,137,888 |   | $ | 8,968,725 |   |
|                                                                                                               |   |                                       |      |   |   |   |   |
| Net earnings per Limited Partnership Unit -  Basic                                                                 |   | $                                          | 0.44      |   | $ | 0.57 |   | $ | 0.71 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

28

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AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

 

STATEMENTSOF CHANGES IN PARTNERS’ EQUITY

 

For the years ended December 31, 2003, 2002 and2001

 

 
|                                                                                                                |   | **General  Partner** |       | **Limited  Partners** |   | **Accumulated  Other  Comprehensive  Income** |   | **Total**   |      |
|---------------------------------------------------------------------------------------------------------------------|--------|----------------------|------------|-----------------------|--------|-----------------------------------------------|--------|-------------|-----------|
|                                                                                                                |   |                 |       |                  |   |                                          |   |        |      |
| Balance, January 1, 2001                                                                                       |   | $                    | (5,194,582 | )                     | $      | 114,254,731                                   |   | $           | 1,921,400 |   | $ | 110,981,549 |   |
|                                                                                                                |   |                 |       |                  |   |                                          |   |        |      |
| Net Earnings                                                                                                        |   | 349,780              |       | 8,618,945             |   | —                                        |   | 8,968,725   |      |
| Adjustment to unrealized gains and losses  on investments in insured mortgages                                      |   | —               |       | —                |   | (1,114,340                                    | )      | (1,114,340  | )         |
| Distributions paid or accrued of $1.91 per  Unit, including return of capital of $1.20 per Unit                     |   | (936,319             | )          | (23,071,871           | )      | —                                        |   | (24,008,190 | )         |
|                                                                                                                |   |                 |       |                  |   |                                          |   |        |      |
| Balance, December 31, 2001                                                                                     |   | (5,781,121           | )          | 99,801,805            |   | 807,060                                       |   | 94,827,744  |      |
|                                                                                                                |   |                 |       |                  |   |                                          |   |        |      |
| Net Earnings                                                                                                        |   | 278,378              |       | 6,859,510             |   | —                                        |   | 7,137,888   |      |
| Adjustment to unrealized gains and losses  on investments in insured mortgages                                      |   | —               |       | —                |   | 604,237                                       |   | 604,237     |      |
| Distributions paid or accrued of $2.755 per  Unit, including return of capital of $2.185 per Unit                   |   | (1,350,555           | )          | (33,279,063           | )      | —                                        |   | (34,629,618 | )         |
|                                                                                                                |   |                 |       |                  |   |                                          |   |        |      |
| Balance, December 31, 2002                                                                                     |   | (6,853,298           | )          | 73,382,252            |   | 1,411,297                                     |   | 67,940,251  |      |
|                                                                                                                |   |                 |       |                  |   |                                          |   |        |      |
| Net Earnings                                                                                                        |   | 217,335              |       | 5,355,356             |   | —                                        |   | 5,572,691   |      |
| Adjustment to unrealized gains and losses  on investments in insured mortgages                                      |   | —               |       | —                |   | (1,121,249                                    | )      | (1,121,249  | )         |
| Distributions paid or accrued of $0.895 per  Unit, including return of capital of $0.455 per Unit                   |   | (438,747             | )          | (10,811,169           | )      | —                                        |   | (11,249,916 | )         |
|                                                                                                                |   |                 |       |                  |   |                                          |   |        |      |
| Balance, December 31, 2003                                                                                     |   | $                    | (7,074,710 | )                     | $      | 67,926,439                                    |   | $           | 290,048   |   | $ | 61,141,777 |   |
|                                                                                                                |   |                 |       |                  |   |                                          |   |        |      |
| Limited Partnership Units outstanding -  Basic, as of and for the years ended December 31, 2003, 2002 and 2001 |   |                 |       | 12,079,514            |   |                                          |   |        |      |

 

The accompanying notes are an integral part of these financialstatements.

 

29

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AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

 

STATEMENTS OF CASH FLOWS

 

 
|                                                                                 |   | **For the  years ended December 31,** |       |
|--------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                 |   | **2003**                                   |       | **2002** |   | **2001** |   |
|                                                                                 |   |                                       |       |   |   |   |   |
| Cash flows from operating activities:                                                |   |                                       |       |   |   |   |   |
| Net earnings                                                                         |   | $                                          | 5,572,691  |   | $ | 7,137,888 |   | $ | 8,968,725 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities: |   |                                       |       |   |   |   |   |
| Losses on mortgage dispositions                                                      |   | 11,415                                     |       | 8,498 |   | — |   |
| Gains on mortgage dispositions                                                       |   | (1,509,197                                 | )          | (1,859,749 | ) | (1,785,376 | ) |
| Changes in assets and liabilities:                                                   |   |                                       |       |   |   |   |   |
| (Increase) decrease in receivables and  other assets                                 |   | (60,238                                    | )          | 913,856 |   | (315,436 | ) |
| (Decrease) increase in accounts payable and  accrued expenses                        |   | (42,339                                    | )          | (5,860 | ) | 8,795 |   |
| Increase (decrease) in due to affiliate                                              |   | 151,408                                    |       | (42,487 | ) | (7,003 | ) |
|                                                                                 |   |                                       |       |   |   |   |   |
| Net cash provided by operating activities                                            |   | 4,123,740                                  |       | 6,152,146 |   | 6,869,705 |   |
|                                                                                 |   |                                       |       |   |   |   |   |
| Cash flows from investing activities:                                                |   |                                       |       |   |   |   |   |
| Proceeds from mortgage prepayments                                                   |   | 12,794,305                                 |       | 14,111,131 |   | 19,316,901 |   |
| Proceeds from mortgage assignments                                                   |   | 2,291,423                                  |       | 10,190,539 |   | — |   |
| Receipt of mortgage principal from  scheduled payments                               |   | 604,527                                    |       | 769,593 |   | 955,959 |   |
| Proceeds from redemption of debenture                                                |   | —                                     |       | 2,385,233 |   | — |   |
| Debenture proceeds paid to affiliate                                                 |   | —                                     |       | (1,192,617 | ) | — |   |
|                                                                                 |   |                                       |       |   |   |   |   |
| Net cash provided by investing activities                                            |   | 15,690,255                                 |       | 26,263,879 |   | 20,272,860 |   |
|                                                                                 |   |                                       |       |   |   |   |   |
| Cash flows from financing activities:                                                |   |                                       |       |   |   |   |   |
| Distributions paid to partners                                                       |   | (18,917,453                                | )          | (26,333,594 | ) | (28,407,597 | ) |
|                                                                                 |   |                                       |       |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                |   | 896,542                                    |       | 6,082,431 |   | (1,265,032 | ) |
| Cash and cash equivalents, beginning of  year                                        |   | 10,448,516                                 |       | 4,366,085 |   | 5,631,117 |   |
|                                                                                 |   |                                       |       |   |   |   |   |
| Cash and cash equivalents, end of year                                               |   | $                                          | 11,345,058 |   | $ | 10,448,516 |   | $ | 4,366,085 |   |
|                                                                                 |   |                                       |       |   |   |   |   |
| Non-cash investing activity:                                                         |   |                                       |       |   |   |   |   |
| Portion of debentures due from a third  party in exchange for assigned mortgages     |   | $                                          | 810,660    |   | $ | 744,159 |   | $ | 6,759,242 |   |
| Debentures received from HUD in exchange  for assigned mortgages                     |   | 10,335,670                                 |       | — |   | — |   |
| Portion of debentures due to an affiliate                                            |   | (5,167,835                                 | )          | — |   | — |   |

 

The accompanying notes are an integral part of these financialstatements.

 

30

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AMERICANINSURED MORTGAGE INVESTORS - SERIES 85, L.P.

 

NOTES TOFINANCIAL STATEMENTS

 

1.                     ORGANIZATION

 

American Insured Mortgage Investors - Series85, L.P. (the “Partnership”) was formed pursuant to a limited partnershipagreement (“Partnership Agreement”) under the Uniform Limited Partnership Actof the state of California on June 26, 1984.  During the period from March 8, 1985 (the initial closingdate of the Partnership’s public offering) through January 27, 1986 (thetermination date of the offering), the Partnership, pursuant to its publicoffering of 12,079,389 Depository Units of limited partnership interest(“Units”) raised a total of $241,587,780 in gross proceeds.  In addition, the initial limited partnercontributed $2,500 to the capital of the Partnership in exchange for 125 unitsof limited partnership interest.

 

CRIIMI, Inc., a wholly-owned subsidiary ofCRIIMI MAE Inc. (“CRIIMI MAE”), acts as the General Partner (the “GeneralPartner”) for the Partnership and holds a partnership interest of 3.9%.  The General Partner provides management andadministrative services on behalf of the Partnership.  AIM Acquisition Partners L.P. serves as the advisor (the“Advisor”) to the Partnership.  Thegeneral partner of the Advisor is AIM Acquisition Corporation (“AIMAcquisition”) and the limited partners include, but are not limited to, TheGoldman Sachs Group, L.P., Sun America Investments, Inc. (successor to Broad,Inc.) and CRI/AIM Investment, L.P., a subsidiary of CRIIMI MAE, over whichCRIIMI MAE exercises 100% voting control. AIM Acquisition is a Delaware corporation that is primarily owned by SunAmerica Investments, Inc. and The Goldman Sachs Group, L.P.

 

Pursuant to the terms of certain originationand acquisition services, management services and disposition servicesagreements between the Advisor and the Partnership (collectively the “AdvisoryAgreements”), the Advisor renders services to the Partnership, including butnot limited to, the management of the Partnership’s portfolio of mortgages andthe disposition of the Partnership’s mortgages.  Such services are subject to the review and ultimate authority ofthe General Partner.  However, theGeneral Partner is required to receive the consent of the Advisor prior totaking certain significant actions, including but not limited to thedisposition of mortgages, any transaction or agreement with the General Partneror its affiliates, or any material change as to policies regarding distributionsor reserves of the Partnership (collectively the “Consent Rights”).  The Advisor is permitted and has delegatedthe performance of services to CRIIMI MAE Services Limited Partnership(“CMSLP”), a subsidiary of CRIIMI MAE, pursuant to a sub-management agreement(the “Sub-Advisory Agreement”).  Thegeneral partner and limited partner of CMSLP are wholly-owned subsidiaries ofCRIIMI MAE.  The delegation of suchservices by the Advisor to CMSLP does not relieve the Advisor of its obligationto perform such services.  Furthermore,the Advisor has retained its Consent Rights.

 

The General Partner also serves as theGeneral Partner for American Insured Mortgage Investors (“AIM 84”), AmericanInsured Mortgage Investors L.P. – Series 86 (“AIM 86”) and American InsuredMortgage Investors L.P. – Series 88 (“AIM 88”) and owns general partnerinterests therein of 2.9%, 4.9% and 4.9%, respectively.  The Partnership, AIM 84, AIM 86 and AIM 88are collectively referred to as the “AIM Limited Partnerships”.  AIM 84, AIM 86 and AIM 88 were liquidatedand dissolved in February 2004.

 

Prior to December 1993, the Partnershipwas engaged in the business of originating government insured mortgage loans(“Originated Insured Mortgages”) and acquiring government insured mortgageloans (“Acquired Insured Mortgages” and, together with Originated InsuredMortgages, referred to herein as “Insured Mortgages”).  In accordance with the terms of thePartnership Agreement, the Partnership is no longer authorized to originate oracquire Insured Mortgages and, consequently, its primary objective is to manageits portfolio of mortgage investments, all of which are insured underSection 221(d)(4) or Section 231 of the National Housing Act of 1937,as amended (the “National Housing Act”).  The Partnership Agreement states that the Partnership willterminate on December 31, 2009, unless terminated earlier under theprovisions thereof.  The Partnership isrequired, pursuant to the Partnership Agreement, to dispose of its assets priorto this date.

 

31

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2.               SIGNIFICANTACCOUNTING POLICIES

 

Method of Accounting

 

The Partnership’sfinancial statements are prepared on the accrual basis of accounting inaccordance with accounting principles generally accepted in the United States(“GAAP”).  The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

 

Investment in Insured Mortgages

 

The Partnership’sinvestment in Insured Mortgages is comprised of participation certificatesevidencing a 100% undivided beneficial interest in government insuredmultifamily mortgages issued or sold pursuant to Federal Housing Administration(“FHA”) programs (“FHA-Insured Certificates”), mortgage-backed securitiesguaranteed by the Government National Mortgage Association (“GNMA”) (“GNMAMortgage-Backed Securities”) and FHA-insured mortgage loans (“FHA-InsuredLoans”).  The mortgages underlying theFHA-Insured Certificates, GNMA Mortgage-Backed Securities and FHA-Insured Loansare primarily non-recourse first liens on multifamily residential developmentsor retirement homes.

 

Payments ofprincipal and interest on FHA-Insured Certificates and FHA-Insured Loans areinsured by the United States Department of Housing and Urban Development(“HUD”) pursuant to Title 2 of the National Housing Act.  Payments of principal and interest on GNMAMortgage-Backed Securities are guaranteed by GNMA pursuant to Title 3 of theNational Housing Act.

 

As ofDecember 31, 2003, the weighted average remaining term of thePartnership’s investments in GNMA Mortgage-Backed Securities and FHA-InsuredCertificates is approximately 27 years. However, the Partnership Agreement states that the Partnership willterminate in approximately 6 years on December 31, 2009, unless terminatedearlier under the provisions of the Partnership Agreement.  As the Partnership is anticipated toterminate prior to the weighted average remaining term of its investments inGNMA Mortgage-Backed Securities and FHA-Insured Certificates, the Partnershipdoes not have the ability or intent, at this time, to hold these investments tomaturity.  Consequently, the GeneralPartner believes that the Partnership’s investments in GNMA Mortgage-BackedSecurities and FHA-Insured Certificates should be classified as available forsale.

 

In connection withthis classification, all of the Partnership’s investments in GNMAMortgage-Backed Securities and FHA-Insured Certificates are recorded at fairvalue as of December 31, 2003 and 2002, with the net unrealized gains andlosses on these assets reported as other comprehensive income and as a separatecomponent of partners’ equity. Subsequent increases or decreases in the fair value of GNMAMortgage-Backed Securities and FHA-Insured Certificates, classified as availablefor sale, will be included as a separate component of partners’ equity.  Realized gains and losses on GNMAMortgage-Backed Securities and FHA-Insured Certificates, classified asavailable for sale, will continue to be reported in earnings.

 

As of December 31,2003 and 2002, the Partnership’s Investment in FHA-Insured Loans is recorded atamortized cost.

 

The amortized costof the investments in GNMA Mortgage-Backed Securities, FHA-Insured Certificatesand FHA-Insured Loans is adjusted for amortization of discounts and premiums tomaturity.  Such amortization is includedin mortgage investment income.

 

32

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Income Recognition

 

Mortgageinvestment income consists of amortization of the discount or premiums plus thestated mortgage interest payments received or accrued.  The difference between the cost and theunpaid principal balance at the time of purchase is carried as a discount orpremium and amortized over the remaining contractual life of the mortgage usingthe effective interest method.  Theeffective interest method provides a constant yield of income over the term ofthe mortgage.

 

Gains fromdispositions of mortgage investments are recognized upon the receipt of cash ordebentures.

 

Losses ondispositions of mortgage investments are recognized when it becomes probablethat a mortgage will be disposed of and that the disposition will result in aloss.  In the case of Insured Mortgagesfully insured by HUD, the Partnership’s maximum exposure for purposes ofdetermining the loan losses would generally be an assignment fee charged by HUDrepresenting approximately 1% of the unpaid principal balance of the InsuredMortgage at the date of default, plus the unamortized balance of acquisitionfees and closing costs paid in connection with the acquisition of the InsuredMortgage and the loss of approximately 30 days accrued interest.

 

Impairment

 

The Partnershipmakes an assessment of each Insured Mortgage for other than temporaryimpairment when the fair market value of the asset declines below amortizedcost for a significant period of time and it is concludes that the Partnershipno longer has the ability to hold the Insured Mortgage through the marketdownturn.  An impairment loss ismeasured by comparing the fair value of an Insured Mortgage to its currentamortized cost basis, with the difference recognized as a loss in the incomestatement.  The Partnership did notrecognize an impairment loss on any Insured Mortgage during the years endedDecember 31, 2003, 2002 and 2001.

 

AtDecember 31, 2003, some of the Insured Mortgage had fair values belowtheir current amortized cost basis.  Thefair value and cost basis of these insured mortgages which have been inunrealized loss positions for greater than 12 months was approximately $716,000and $736,000, respectively, resulting in approximately $20,000 in unrealizedlosses.  The fair value and cost basisof Insured Mortgages which have been in an unrealized loss position for lessthan 12 months was approximately $4.4 million, resulting in approximately$3,000 in unrealized losses. Considering the nature of these investments and the severity andduration of the unrealized losses, and based on our assessment as describedabove, we do not believe these insured mortgages are impaired atDecember 31, 2003.

 

Investment in Debenture

 

The Partnershiphas received debentures by assigning mortgages to HUD under theSection 221 program, as discussed in Note 7.  In addition, the Partnership may receive debentures by assigninga defaulted mortgage to HUD in order to collect the amount of delinquentprincipal and interest.  In the case ofa default assignment, the mortgagee may elect to have the claim settled in cashor by the issuance of a debenture. Debentures are obligations of the mortgage insurance funds and areunconditionally guaranteed by the United States government.  The term of these debentures are generally10 years and the interest rate is set based upon the interest rate in effect atthe commitment date to provide insurance or at the final endorsement date,whichever is greater.  The Partnershipclassifies its Investment in FHA Debenture as an available for sale debtsecurity with changes in fair value recorded as an adjustment to equity andother comprehensive income.

 

33

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Cash and Cash Equivalents

 

Cash and cashequivalents consist of cash and money market funds.

 

Income Taxes

 

No provision hasbeen made for Federal, state or local income taxes in the accompanying statementsof income and comprehensive income since, as a pass-through entity, all incometaxes assessed on the Partnership’s income are the responsibility of itsUnitholders.

 

3.                    FAIR VALUE OFFINANCIAL INSTRUMENTS

 

The following estimatedfair values of the Partnership’s financial instruments are presented inaccordance with GAAP which define fair value as the amount at which a financialinstrument could be exchanged in a current transaction between willing parties,other than in a forced or liquidation sale. These estimated fair values, however, do not represent the liquidationvalue or the market value of the Partnership.

 
|                                                                         |   | **As of  December 31, 2003** |       | **As of  December 31, 2002** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------|------------|-----------------------------------|--------|
|                                                                         |   | **Amortized  Cost**               |       | **Fair  Value**                   |   | **Amortized  Cost** |   | **Fair  Value** |   |
|                                                                         |   |                              |       |                              |   |   |   |   |   |
| Investment in FHA-Insured Certificates and  GNMA Mortgage-Backed Securities: |   |                              |       |                              |   |   |   |   |   |
| Acquired Insured Mortgages(1)                                                |   | $                                 | 19,053,403 |                              | $      | 19,264,433 |   | $ | 32,449,759 |   | $ | 33,849,089 |   |
| Originated Insured Mortgages(1)                                              |   | 15,803,978                        |       | 15,882,997                        |   | 15,974,329 |   | 15,986,295 |   |
|                                                                         |   |                              |       |                              |   |   |   |   |   |
|                                                                         |   | $                                 | 34,857,381 |                              | $      | 35,147,430 |   | $ | 48,424,088 |   | $ | 49,835,384 |   |
| Investment in FHA-Insured Loans:                                             |   |                              |       |                              |   |   |   |   |   |
| Acquired Insured Mortgages                                                   |   | 1,436,670                         |       | 1,701,956                         |   | 7,176,274 |   | 8,513,052 |   |
| Originated Insured Mortgages                                                 |   | 9,191,407                         |       | 9,576,785                         |   | 9,311,907 |   | 9,470,182 |   |
|                                                                         |   |                              |       |                              |   |   |   |   |   |
|                                                                         |   | $                                 | 10,628,077 |                              | $      | 11,278,741 |   | $ | 16,488,181 |   | $ | 17,983,234 |   |
|                                                                         |   |                              |       |                              |   |   |   |   |   |
| Cash and cash equivalents                                                    |   | $                                 | 11,345,058 |                              | $      | 11,345,058 |   | $ | 10,448,516 |   | $ | 10,448,516 |   |
|                                                                         |   |                              |       |                              |   |   |   |   |   |
| Investment in Debentures                                                     |   | $                                 | 10,335,670 |                              | $      | 10,335,670 |   | $ | — |   | $ | — |   |

 

----

(1)  Carried at fair value on the Partnership’sbalance sheet 

 

The following methods andassumptions were used to estimate the fair value of each class of financialinstrument:

 

Investment in FHA-Insured Certificates, GNMAMortgage-Backed Securities, FHA-Insured Loans and Debentures

 

The fair values of the FHA-InsuredCertificates, GNMA Mortgage-Backed Securities and FHA-Insured Loans are pricedinternally.  The Partnership used adiscounted cash flow methodology to estimate the fair values; the cash flowswere discounted using a discount rate that, in the Partnership’s view, wascommensurate with the market’s perception of risk and value.  The Partnership used a variety of sources toestimate its fair values including: (i) institutionally-available researchreports, (ii) communications with dealers and active insured mortgage securityinvestors regarding the valuation of comparable securities and (iii) recenttransactions.  Since the Partnership’sdebentures were redeemed by HUD, at face value, on January 1, 2004, theface value of the debentures is equivalent to the fair value of the debentures.

 

34

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Cash and cash equivalents

 

The carryingamount approximates fair value because of the short maturity of theseinstruments.

 

4.                     COMPREHENSIVEINCOME

 

Comprehensive income includes net earnings as currently reported by thePartnership adjusted for other comprehensive income.  Other comprehensive income for the Partnership consists ofchanges in unrealized gains and losses related to the Partnership’s InsuredMortgages and debentures accounted for as available for sale.  The table below details other comprehensiveincome for the periods presented into the following two categories:  (1) the change to unrealized gains andlosses that relate to Insured Mortgages which were disposed of during theperiod with the resulting realized gain or loss reflected in net earnings(reclassification adjustments) and (2) the change in the unrealized gains orlosses related to those investments that were not disposed of during theperiod.

 
|                                                          |   | **2003** |       | **2002**  |   | **2001** |   |
|---------------------------------------------------------------|--------|----------|------------|-----------|--------|----------|--------|
| Reclassification adjustment for gains  included in net income |   | $        | (578,360   | )         | $      | (768,721 | )      | $ | (1,149,729 | ) |
| Unrealized holding (losses) gains arising  during the period  |   | (542,889 | )          | 1,372,958 |   | 35,389   |   |
|                                                          |   |     |       |      |   |     |   |
| Net adjustment to unrealized gains                            |   | $        | (1,121,249 | )         | $      | 604,237  |   | $ | (1,114,340 | ) |

 

5.                     INVESTMENT INFHA-INSURED CERTIFICATES AND GNMA MORTGAGE-BACKED SECURITIES

 

Listed below is the Partnership’s aggregateinvestment in GNMA Mortgage-Backed Securities and FHA-Insured Certificates:

 
|                                                   |   | **December 31,** |       |
|--------------------------------------------------------|--------|-----------------------|------------|
|                                                   |   | **2003**              |       | **2002** |   |
|                                                   |   |                  |       |   |   |
| Acquired Mortgages:                                    |   |                  |       |   |   |
| Number of                                              |   |                  |       |   |   |
| GNMA Mortgage-Backed Securities (7)                    |   | 1                     |       | 2 |   |
| FHA-Insured Certificates (1) through (6),  (8) and (9) |   | 9                     |       | 17 |   |
| Amortized Cost                                         |   | $                     | 19,053,403 |   | $ | 32,449,759 |   |
| Face Value                                             |   | 19,122,101            |       | 33,076,449 |   |
| Fair Value                                             |   | 19,264,433            |       | 33,849,089 |   |
|                                                   |   |                  |       |   |   |
| Originated Mortgages:                                  |   |                  |       |   |   |
| Number of                                              |   |                  |       |   |   |
| GNMA Mortgage-Backed Securities                        |   | 1                     |       | 1 |   |
| FHA-Insured Certificates                               |   | 1                     |       | 1 |   |
| Amortized Cost                                         |   | $                     | 15,803,978 |   | $ | 15,974,329 |   |
| Face Value                                             |   | 15,803,977            |       | 15,974,328 |   |
| Fair Value                                             |   | 15,882,997            |       | 15,986,295 |   |

 

35

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Listed below is a summary of Insured Mortgageprepayments during 2003:

 

(Dollars in thousands, except per unit amounts)

 
| **Complex Name**                   |   | **Net  Proceeds** |   | **Date  Proceeds  Received** |     | **Gain /  (Loss)** |   | **Dist./  Unit** |   | **Declaration  Date** |   | **Distribution  Payment  Date** |     |
|------------------------------------|--------|-------------------|--------|------------------------------|----------|--------------------|--------|------------------|--------|-----------------------|--------|---------------------------------|----------|
| (1) Stonebridge Apartments         |   | $                 | 950    |                         | Mar 2003 |               | $      | 93               |   | $                     | 0.075  |                            | Apr 2003 |   | Aug 2003 |   |
| (2) Willow Dayton                  |   | 929               |   | May 2003                     |     | 107                |   | 0.070            |   | Jun 2003              |   | Aug 2003                        |     |
| (3) Magnolia Place Apartments      |   | 295               |   | May 2003                     |     | 29                 |   | 0.020            |   | Jun 2003              |   | Aug 2003                        |     |
| (4) Ashley Oaks Apartments         |   | 525               |   | Jun 2003                     |     | 60                 |   | 0.040            |   | Jul 2003              |   | Nov 2003                        |     |
| (5) Rainbow Terrace Apartments     |   | 296               |   | Nov 2003                     |     | 34                 |   | 0.020            |   | Dec 2003              |   | Feb 2004                        |     |
| (6) Village Knoll Apartments       |   | 967               |   | Nov 2003                     |     | 92                 |   | 0.080            |   | Dec 2003              |   | Feb 2004                        |     |
| (7) Stone Hedge Village Apartments |   | 1,694             |   | Dec 2003                     |     | (11                | )      | 0.135            |   | Jan 2004              |   | May 2004                        |     |
| (8) Pleasant View Nursing Home     |   | 7,163             |   | Dec 2003                     |     | 9                  |   | 0.570            |   | Jan 2004              |   | May 2004                        |     |
|                                    |        |                   |        |                              |          |                    |        |                  |        |                       |        |                                 |          |  |  |  |

 
| (9) In May 2003, HUD issued assignment  proceeds in the form of a 6.375% debenture in exchange for the mortgage on  The Executive House. Since the mortgage on The Executive House was  beneficially owned 70.39% by the Partnership and the remainder by unrelated  third parties, the debenture was held by an unrelated third party and the  face amount due to the Partnership was included in Receivables and other  assets on the Partnership’s balance sheet. See further discussion in Note 7. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

As of March 1, 2004, all of the fullyinsured GNMA Mortgage-Backed Securities and FHA-Insured Certificates arecurrent with respect to the payment of principal and interest.

 

6.                    INVESTMENT INFHA-INSURED LOANS

 

Listed below is the Partnership’s aggregateinvestment in FHA-Insured Loans:
|                            |   | **December 31,** |      |
|---------------------------------|--------|-----------------------|-----------|
|                            |   | **2003**              |      | **2002** |   |
|                            |   |                  |      |   |   |
| Acquired Loans:                 |   |                  |      |   |   |
| Number of Loans (1) through (6) |   | 1                     |      | 6 |   |
| Amortized Cost                  |   | $                     | 1,436,670 |   | $ | 7,176,274 |   |
| Face Value                      |   | 1,701,956             |      | 8,519,762 |   |
| Fair Value                      |   | 1,701,956             |      | 8,513,052 |   |
|                            |   |                  |      |   |   |
| Originated Loans:               |   |                  |      |   |   |
| Number of Loans (7)             |   | 2                     |      | 2 |   |
| Amortized Cost                  |   | $                     | 9,191,407 |   | $ | 9,311,907 |   |
| Face Value                      |   | 8,950,266             |      | 9,059,734 |   |
| Fair Value                      |   | 9,576,785             |      | 9,470,182 |   |

 

----

(1)          In January 2003, the Partnership received assignment proceeds fromHUD for the mortgage on Westbrook Apartments. The servicer of this mortgage filed a Notice of Election to Assign inNovember 2002 as a result of principal and interest payments being over 60days delinquent.  The Partnershipreceived net proceeds of approximately $1.5 million, which included 90% of theunpaid principal balance of this mortgage, plus interest at the debenture rateof 9.875% from September 2002 through January 2003.  The remaining net amount of approximately$165,000 (representing 9% of the net unpaid principal balance, plus accruedinterest) was received in October 2003. The Partnership recognized a gain of approximately $228,000 for the yearended December 31, 2003.  Adistribution of approximately $0.12 per Unit related to the 90% of thismortgage was declared in February 2003 and paid to Unitholders in May2003.  A distribution of approximately$0.015 per Unit related to the 9% of this mortgage was declared in November 2003and paid to Unitholders in February 2004.

(2)          InFebruary 2003, HUD transferred assignment proceeds to the Partnership inthe form of a 6.375% debenture, with a face value of approximately $1.8million, in exchange for the mortgage on Baypoint Shoreline Apartments.  Since the mortgage on Baypoint ShorelineApartments was beneficially owned 50% by the Partnership and 50% by AIM 84,approximately $906,000 of the debenture face was due to AIM 84.  See further discussion in Note 7.

(3)          InJuly 2003, HUD transferred assignment proceeds to the Partnership in theform of a 5.75% debenture, with a face value of approximately $2.6 million, inexchange for the mortgage on College Green Apartments.  Since the mortgage on College 

 

36

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Green Apartments was beneficially owned 50%by the Partnership and 50% by AIM 84, approximately $1.3 million of thedebenture face was due to AIM 84.  Seefurther discussion in Note 7.

(4)          InAugust 2003, HUD transferred assignment proceeds to the Partnership in theform of a 5.75% debenture, with a face value of approximately $4.8 million, inexchange for the mortgage on Brougham Estates II.  Since the mortgage on Brougham Estates II was beneficially owned50% by the Partnership and 50% by AIM 84, approximately $2.4 million of thedebenture face was due to AIM 84.  Seefurther discussion in Note 7.

(5)          InAugust 2003, HUD transferred assignment proceeds to the Partnership in theform of a 5.75% debenture, with a face value of approximately $1.2 million, inexchange for the mortgage on Town Park Apartments.  Since the mortgage on Town Park Apartments was beneficially owned50% by the Partnership and 50% by AIM 84, approximately $589,000 of the debentureface was due to AIM 84.  See furtherdiscussion in Note 7.

(6)          InJanuary 2004, HUD transferred assignment proceeds to the Partnership inthe form of a 5.75% debenture, with a face value of approximately $3.5 million,in exchange for the mortgage on Kaynorth Apartments.  Since the mortgage on Kaynorth Apartments was beneficially owned50% by the Partnership and 50% by AIM 84, approximately $1.7 million of thedebenture face was due to AIM 84.  Seefurther discussion in Note 7.

(7)          InFebruary 2004, the mortgages on Cobblestone Apartments and The Plantationwere sold, with the consent of the advisor. The Partnership received aggregate net proceeds of approximately $9.6million and expects to recognized aggregate gains of approximately $387,000 in2004.  The aggregate distribution ofapproximately $0.76 per Unit related to the sale of these two mortgages wasdeclared in February 2004 and is expected to be paid to Unitholders in May2004.

 

As of March 1, 2004, the Partnership hasdisposed of all of its investments in fully insured FHA-Insured Loans.

 

In addition to base interest payments underFHA Insured Loans that were Originated Insured Mortgages, the Partnership wasentitled to additional interest based on a percentage of the net cash flow fromthe underlying development (referred to as “Participations).”  During the years ended December 31,2003, 2002 and 2001, the Partnership received $0, $8,396, and $53,424,respectively, from the Participations. These amounts are included in mortgage investment income on theaccompanying statements of income and comprehensive income.

 

7.                    INVESTMENTS INDEBENTURES AND DUE TO AFFILIATE

 

The Partnership as the mortgagee had theright to assign mortgages to the United States Department of Housing and UrbanDevelopment (“HUD”) under the Section 221(g)(4) program of the NationalHousing Act (the “Section 221 Program.”) at the expiration of 20 yearsfrom the date of final endorsement (“Anniversary Date”).  The Partnership as the mortgagee couldexercise its option to put a mortgage to HUD during the one year periodsubsequent to the Anniversary Date. This assignment procedure was applicable to an Insured Mortgage whichhad a firm or conditional commitment for HUD insurance benefits on or beforeNovember 30, 1983.  A mortgageeelecting to assign an Insured Mortgage to HUD received, in exchange therefore,a debenture.  As of December 31,2003, the Partnership no longer holds mortgage investments eligible forassignment to HUD under the Section 221 program.

 

In January 2003, HUD redeemed a 7.5%debenture with a face amount of approximately $758,000, issued inJuly 2002 in exchange for the mortgage on Fairlawn II.  A distribution of approximately $0.06 perUnit related to the debenture proceeds was declared in February 2003 andwas paid to Unitholders in May 2003.  Theaccrued interest of approximately $28,000 related to this debenture was alsoreceived in January 2003 and was distributed through regular cash flowdistributions.  This amount was includedin Receivables and Other Assets on the Partnership’s balance sheet atDecember 31, 2002.

 

Listed below are debentures issued to thePartnership by HUD in exchange for mortgages assigned to HUD under theSection 221 program as of December 31, 2003.  As indicated in the table below, thesedebentures were redeemed by HUD in January 2004.  The Partnership received aggregate proceeds of approximately$10.6 million, which included the face value of the debentures, plus accruedinterest.  A distribution ofapproximately $0.42 per Unit was declared in January 2004 and is expectedto be paid to Unitholders in May 2004. The application date was the date the servicer of the respectivemortgage filed an application for insurance benefits under the Section 221Program.  The

 

37

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receipt date was the date the Partnership received the debenture andreported a gain related to the assignment of the respective mortgage.  The debentures paid interest semi-annuallyon January 1 and July 1. Since the mortgages listed were beneficially owned 50% by thePartnership and 50% by AIM 84, approximately $5.3 million of the proceeds weretransferred to AIM 84 and was included in Due to affiliate on the Partnership’sbalance sheet at December 31, 2003.

 

(Dollars in thousands, except per unit amounts)

 
| **Debenture for mortgage on:** |   | **Redemption  Date** |   | **Interest  Rate** |   | **Face  Value** |   | **Due to  Affiliate** |   | **Amount  Due to the  Partnership** |   | **Application  Date** |   | **Receipt  Date** |   | **Gain on  Assignment  Of mortgage** |   |
|--------------------------------|--------|----------------------|--------|--------------------|--------|-----------------|--------|-----------------------|--------|-------------------------------------|--------|-----------------------|--------|-------------------|--------|--------------------------------------|--------|
| Baypoint Shoreline  Apartments |   | 01/01/2004           |   | 6.375              | %      | $               | 1,813  |                  | $      | 906                                 |   | $                     | 906    |              | Jun-02 |                                 | Feb-03 |   | $ | 131 |   |
|                           |   |                 |   |               |   |            |   |                  |   |                                |   |                  |   |              |   |                                 |   |
| College  Green Apartments      |   | 01/01/2004           |   | 5.750              | %      | 2,571           |   | 1,286                 |   | 1,286                               |   | Feb-03                |   | Jul-03            |   | 192                                  |   |
|                           |   |                 |   |               |   |            |   |                  |   |                                |   |                  |   |              |   |                                 |   |
| Brougham  Estates II           |   | 01/01/2004           |   | 5.750              | %      | 4,774           |   | 2,387                 |   | 2,387                               |   | Feb-03                |   | Aug-03            |   | 349                                  |   |
|                           |   |                 |   |               |   |            |   |                  |   |                                |   |                  |   |              |   |                                 |   |
| Town  Park Apartments          |   | 01/01/2004           |   | 5.750              | %      | 1,178           |   | 589                   |   | 589                                 |   | Feb-03                |   | Aug-03            |   | 87                                   |   |
|                           |   |                 |   |               |   |            |   |                  |   |                                |   |                  |   |              |   |                                 |   |
| Total  debentures              |   |                 |   |               |   | $               | 10,336 |                  | $      | 5,168                               |   | $                     | 5,168  |              |   |                                 |   |   | $ | 759 |   |

 

In May 2003, HUD issued assignment proceedsto a third party beneficiary, in the form of a 6.375% debenture in exchange forthe mortgage on The Executive House. The mortgage on The Executive House was put to HUD under theSection 221 Program by the servicer in April 2002.  In January 2004, the debenture was redeemedby HUD and the Partnership received proceeds of approximately $836,000 whichincluded the Partnership’s portion of the face value of the debenture, plusaccrued interest.  A distribution ofapproximately $0.065 per Unit was declared in February 2004 and isexpected to be paid to Unitholders in May 2004.  The Partnership recognized a gain of approximately $97,000 duringthe year ended December 31, 2003. Since the Partnership only owned 70.39% of the FHA insured certificatesecured by the mortgage on The Executive House and the remainder was held byunrelated third parties, the debenture was held by an unrelated third party andthe face amount of approximately $811,000 due to the Partnership was includedin Receivables and other assets on the Partnership’s balance sheet as ofDecember 31, 2003.

 

In January 2004, HUD issued a 5.75%debenture to the Partnership in exchange for the mortgage on KaynorthApartments.  In April 2003, theservicer of this mortgage filed an application to put this mortgage to HUDunder the Section 221 Program.  Theface value of the debenture was approximately $3.5 million and pays interestsemi-annually on January 1 and July 1.  The Partnership expects to recognize a gain of approximately$246,000 in the first quarter of 2004 related to this assignment.  This mortgage was beneficially owned 50% bythe Partnership and 50% by AIM 84.  InFebruary 2004, the Partnership, with the consent of the advisor, sold AIM84’s 50% interest in this debenture and subsequently transferred the cashproceeds of approximately $1.8 million to AIM 84.  The amortized cost of this mortgage, of approximately $1.4million, was included in Investment in FHA-Insured Loans on the Partnership’sbalance sheet as of December 31, 2003.

 

38

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8.                    TRANSACTIONSWITH RELATED PARTIES

 

The principal executive officers of theGeneral Partner did not receive fees for serving as executive officers of theGeneral Partner during the years ended December 31, 2003, 2002 and 2001, norare any fees expected to be paid to the executive officers in the future.  The General Partner, CMSLP and certainaffiliated entities have, during the years ended December 31, 2003, 2002and 2001, earned or received compensation or payments for services from thePartnership as follows:

 

COMPENSATION PAID OR ACCRUEDTO RELATED PARTIES

 

|                               |   |                                 |   | **For the  year ended December 31,** |    |
|------------------------------------|--------|--------------------------------------|--------|-------------------------------------------|---------|
| **Name of Recipient**              |   | **Capacity  in Which Served/Item**   |   | **2003**                                  |    | **2002** |   | **2001** |   |
|                               |   |                                 |   |                                      |    |   |   |   |   |
| CRIIMI, Inc. (1)                   |   | General Partner/Distribution         |   | $                                         | 438,747 |   | $ | 1,350,555 |   | $ | 936,319 |   |
|                               |   |                                 |   |                                      |    |   |   |   |   |
| AIM Acquisition Partners, L.P. (2) |   | Advisor/Asset Management Fee         |   | 611,417                                   |    | 744,733 |   | 959,934 |   |
|                               |   |                                 |   |                                      |    |   |   |   |   |
| CRIIMI MAE Management, Inc. (3)    |   | Affiliate of General Partner/Expense |   | 69,820                                    |    | 55,487 |   | 44,951 |   |
|                                    |        |                                      |        |                                           |         |  |  |  |  |  |  |  |

 

----

(1)          The General Partner is entitled to receive 3.9% of the Partnership’sincome, loss, capital and distributions, including, without limitation, thePartnership’s adjusted cash from operations and proceeds of mortgageprepayments, sales or insurance (both as defined in the Partnership Agreement).

 

(2)          The Advisor  is entitled to anasset management fee equal to 0.95% of Total Invested Assets (as defined in thePartnership Agreement).  CMSLP isentitled to a fee equal to 0.28% of total invested assets from the Advisor’sasset management fee.  Of the amountspaid to the Advisor, CMSLP earned fees equal to $180,190, $219,496, and$282,943 during the years ended December 31, 2003, 2002, and 2001, respectively.  The general partner and limited partner ofCMSLP are wholly-owned subsidiaries of CRIIMI MAE.

 

(3)          CRIIMI MAE Management, Inc., an affiliate of the General Partner, isreimbursed for personnel and administrative services on an actual cost basis.

 

39

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9.               DISTRIBUTIONS TOUNITHOLDERS

 

The distributions paid or accrued to Unitholders on a per Unit basisduring the years ended December 31, 2003, 2002 and 2001 are as follows:

 
|                             |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                             |   |     |   |     |   |     |   |
| Quarter ended March 31      |   | $        | 0.310  | (1)      | $      | 1.325    | (5)    | $ | 0.68 | (9) |
| Quarter ended June 30       |   | 0.255    | (2)    | 0.210    | (6)    | 0.37     | (10)   |
| Quarter ended  September 30 |   | 0.130    | (3)    | 0.410    | (7)    | 0.71     | (11)   |
| Quarter ended December 31   |   | 0.200    | (4)    | 0.810    | (8)    | 0.15     |   |
|                             |   |     |   |     |   |     |   |
|                             |   | $        | 0.895  |     | $      | 2.755    |   | $ | 1.91 |   |

 

 

The following disposition proceeds areincluded in the distributions listed above:

 
| **Complex Name(s)**                                                                                                                                                                                                          |   | **Date  Proceeds  Received** |   | **Type of  Disposition** |   | **Net  Proceeds  Per Unit** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|--------------------------|--------|-----------------------------|--------|
| (1) Quarter ended March 31, 2003:                                                                                                                                                                                       |   |                         |   |                     |   |                        |   |
| Walnut Hills                                                                                                                                                                                                                 |   | Dec 2002                     |   | Prepayment               |   | $                           | 0.040  |   |
| Westbrook Apartments (90%)                                                                                                                                                                                                   |   | Jan 2003                     |   | Assignment               |   | 0.120                       |   |
| Fairlawn II (redemption of 7.5% debenture)                                                                                                                                                                                   |   | Jan 2003                     |   | Assignment               |   | 0.060                       |   |
| (2) Quarter ended June 30, 2003:                                                                                                                                                                                        |   |                         |   |                     |   |                        |   |
| Stonebridge Apartments                                                                                                                                                                                                       |   | Mar 2003                     |   | Prepayment               |   | 0.075                       |   |
| Magnolia Place Apartments                                                                                                                                                                                                    |   | May 2003                     |   | Prepayment               |   | 0.020                       |   |
| Willow Dayton                                                                                                                                                                                                                |   | May 2003                     |   | Prepayment               |   | 0.070                       |   |
| (3) Quarter ended September 30, 2003:                                                                                                                                                                                   |   |                         |   |                     |   |                        |   |
| Ashley Oaks Apartments                                                                                                                                                                                                       |   | Jun 2003                     |   | Prepayment               |   | 0.040                       |   |
| (4) Quarter ended December 31, 2003:                                                                                                                                                                                    |   |                         |   |                     |   |                        |   |
| Rainbow Terrace Apartments and Village Knoll  Apartments                                                                                                                                                                     |   | Nov 2003                     |   | Prepayment               |   | 0.100                       |   |
| Westbrook Apartments (9%)                                                                                                                                                                                                    |   | Nov 2003                     |   | Assignment               |   | 0.015                       |   |
| (5) Quarter ended March 31, 2002:                                                                                                                                                                                       |   |                         |   |                     |   |                        |   |
| The Gate House Apartments                                                                                                                                                                                                    |   | Dec 2001                     |   | Prepayment               |   | 0.220                       |   |
| Longleaf Lodge                                                                                                                                                                                                               |   | Jan 2002                     |   | Prepayment               |   | 0.290                       |   |
| Fox Run Apartments                                                                                                                                                                                                           |   | Jan 2002                     |   | Assignment               |   | 0.090                       |   |
| Interest on debentures related to the mortgages on  Summit Square Manor, Park Place, Park Hill Apartments, Fairfax House,  Woodland Villas, Country Club Terrace Apartments, Dunhaven Apartments and  Nevada Hill Apartments |   | Jan-Feb2002                  |   | Assignment               |   | 0.060                       |   |
| Summit Square Manor                                                                                                                                                                                                          |   | Jan 2002                     |   | Assignment               |   | 0.150                       |   |
| Park Place                                                                                                                                                                                                                   |   | Jan 2002                     |   | Assignment               |   | 0.060                       |   |
| Park Hill Apartments                                                                                                                                                                                                         |   | Jan 2002                     |   | Assignment               |   | 0.140                       |   |
| Fairfax House                                                                                                                                                                                                                |   | Jan 2002                     |   | Assignment               |   | 0.170                       |   |
| Woodland Villas                                                                                                                                                                                                              |   | Jan 2002                     |   | Assignment               |   | 0.025                       |   |
| (6) Quarter ended June 30, 2002:                                                                                                                                                                                        |   |                         |   |                     |   |                        |   |
| Garden Court Apartments                                                                                                                                                                                                      |   | Apr 2002                     |   | Prepayment               |   | 0.090                       |   |
| (7) Quarter ended September 30, 2002:                                                                                                                                                                                   |   |                         |   |                     |   |                        |   |
| Interest on debenture related to the mortgage on  Fairlawn II                                                                                                                                                                |   | Jul 2002                     |   | Assignment               |   | 0.010                       |   |
| Country Club Terrace Apartments                                                                                                                                                                                              |   | Jul 2002                     |   | Assignment               |   | 0.120                       |   |
| Nevada Hill Apartments                                                                                                                                                                                                       |   | Jul 2002                     |   | Assignment               |   | 0.090                       |   |
| Dunhaven Apartments                                                                                                                                                                                                          |   | Jul 2002                     |   | Assignment               |   | 0.070                       |   |
| (8) Quarter ended December 31, 2002:                                                                                                                                                                                    |   |                         |   |                     |   |                        |   |
| Franklin Plaza                                                                                                                                                                                                               |   | Sep 2002                     |   | Prepayment               |   | 0.400                       |   |
| Rock Glen Apartments                                                                                                                                                                                                         |   | Oct 2002                     |   | Prepayment               |   | 0.080                       |   |
| Highland Oaks Apartments                                                                                                                                                                                                     |   | Nov 2002                     |   | Prepayment               |   | 0.070                       |   |
| Bay Pointe Apartments                                                                                                                                                                                                        |   | Dec 2002                     |   | Prepayment               |   | 0.150                       |   |
| (9) Quarter ended March 31, 2001:                                                                                                                                                                                       |   |                         |   |                     |   |                        |   |
| The Meadows of Livonia                                                                                                                                                                                                       |   | Jan 2001                     |   | Prepayment               |   | 0.530                       |   |
| (10) Quarter ended June 30, 2001:                                                                                                                                                                                       |   |                         |   |                     |   |                        |   |
| Gold Key Village Apartments                                                                                                                                                                                                  |   | Mar 2001                     |   | Prepayment               |   | 0.220                       |   |
| (11) Quarter ended September 30, 2001:                                                                                                                                                                                  |   |                         |   |                     |   |                        |   |
| Cedar Ridge Apartments                                                                                                                                                                                                       |   | Jun 2001                     |   | Prepayment               |   | 0.210                       |   |
| Carlisle Apartments                                                                                                                                                                                                          |   | Jun 2001                     |   | Prepayment               |   | 0.170                       |   |
| Afton Square Apartments                                                                                                                                                                                                      |   | Jul 2001                     |   | Prepayment               |   | 0.080                       |   |
| Berryhill Apartments                                                                                                                                                                                                         |   | Sep 2001                     |   | Prepayment               |   | 0.100                       |   |
|                                                                                                                                                                                                                              |        |                              |        |                          |        |                             |        |  |

 

40

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The basis for paying distributions toUnitholders is net proceeds from mortgage dispositions, if any, and cash flowfrom operations, which includes regular interest income and principal fromInsured Mortgages.  Although thePartnership’s Insured Mortgages pay a fixed monthly mortgage payment, the cashdistributions paid to the Unitholders will vary during each quarter due to (1)the fluctuating yields in the short-term money market in which the monthlymortgage payment receipts are temporarily invested prior to the payment ofquarterly distributions, (2) the reduction in the asset base resulting frommonthly mortgage payments received or mortgage dispositions, (3) variations inthe cash flow attributable to the delinquency or default of Insured Mortgages,the timing of receipt of debentures, the interest rate on debentures anddebenture redemptions, and (4) changes in the Partnership’s operatingexpenses.  As the Partnership continuesto liquidate its mortgage investments and Unitholders receive distributions ofreturn of capital and taxable gains, Unitholders should expect a reduction inearnings and distributions due to the decreasing mortgage base.  Upon the termination and liquidation of thePartnership, on or before December 31, 2009, distributions to Unitholderswill be made in accordance with the terms of the Partnership Agreement, asamended.  A final distribution toUnitholders will be based on the Partnership’s remaining net assets, and suchdistribution to Unitholders is likely to be substantially less than the amountreferenced in limited partners’equity in the Partnership’s financialstatements.

 

10.         PARTNERS’EQUITY

 

Depositary Units representing economic rightsin limited partnership interests (“Units”) were issued at a stated value of$20.  A total of 12,079,389 Units wereissued prior to February 1986 for an aggregate capital contribution of$241,587,780.  In addition, the initiallimited partner contributed $2,500 to the capital of the Partnership inexchange for 125 Units.

 

41

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11.         SUMMARY OF QUARTERLY RESULTS OF OPERATIONS(UNAUDITED)

 

The following is a summary of unauditedquarterly results of operations for the years ended December 31, 2003,2002 and 2001.

 

(In Thousands, Except Per Unit Data)

 

 
|                                              |   | **2003  Quarter ended** |        |
|---------------------------------------------------|--------|-------------------------|-------------|
|                                              |   | **March 31**       |        | **June 30** |   | **September 30** |   | **December 31** |   |
|                                              |   |                    |        |   |   |   |   |   |   |
| Income                                            |   | $                       |  1,345 |   | $ |  1,302 |   | $ |  1,239 |   | $ |  1,194 |   |
| Net gains from  mortgage dispositions             |   | 453                     |        | 293 |   | 627 |   | 125 |   |
| Net earnings                                      |   | 1,528                   |        | 1,322 |   | 1,612 |   | 1,111 |   |
| Net earnings per Limited Partnership Unit - Basic |   | 0.12                    |        | 0.11 |   | 0.13 |   | 0.08 |   |
|                                              |   |                    |        |   |   |   |   |   |   |
|                                                   |        |                         |             |  |  |  |  |  |  |  |  |  |  |

 
|                                              |   | **2002  Quarter ended** |        |
|---------------------------------------------------|--------|-------------------------|-------------|
|                                              |   | **March 31**       |        | **June 30** |   | **September 30** |   | **December 31** |   |
|                                              |   |                    |        |   |   |   |   |   |   |
| Income                                            |   | $                       |  1,727 |   | $ |  1,668 |   | $ |  1,591 |   | $ |  1,457 |   |
| Net gains from mortgage dispositions              |   | 1,169                   |        | 9 |   | 87 |   | 586 |   |
| Net earnings                                      |   | 2,607                   |        | 1,361 |   | 1,390 |   | 1,780 |   |
| Net earnings per Limited Partnership Unit - Basic |   | 0.21                    |        | 0.11 |   | 0.11 |   | 0.14 |   |
|                                                   |        |                         |             |  |  |  |  |  |  |  |  |  |  |

 
|                                              |   | **2001  Quarter ended** |        |
|---------------------------------------------------|--------|-------------------------|-------------|
|                                              |   | **March 31**       |        | **June 30** |   | **September 30** |   | **December 31** |   |
|                                              |   |                    |        |   |   |   |   |   |   |
| Income                                            |   | $                       |  2,295 |   | $ |  2,216 |   | $ |  2,044 |   | $ |  1,971 |   |
| Net gains from  mortgage dispositions             |   | 262                     |        | 723 |   | 219 |   | 581 |   |
| Net earnings                                      |   | 2,196                   |        | 2,599 |   | 1,940 |   | 2,234 |   |
| Net earnings per Limited Partnership Unit - Basic |   | 0.17                    |        | 0.21 |   | 0.15 |   | 0.18 |   |
|                                              |   |                    |        |   |   |   |   |   |   |
|                                                   |        |                         |             |  |  |  |  |  |  |  |  |  |  |

 

 

 

42

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AMERICAN INSURED MORTGAGE INVESTORS - SERIES85, L.P.

 

SCHEDULE IV- MORTGAGE LOANS ON REAL ESTATE

 

December 31, 2003

 
| **Development Name/Location**                                                                             |   | **Maturity  Date** |   | **Put  Date** |   | **Interest  Rate on  Mortgage  (4)** |   | **Face  Value of  Mortgage (3)** |       | **Net  CarryingValue  (3)(9)(10)** |   | **Annual  Payment  (Principal and  Interest)(8)** |   |
|-----------------------------------------------------------------------------------------------------------|--------|--------------------|--------|---------------|--------|--------------------------------------|--------|----------------------------------|------------|------------------------------------|--------|---------------------------------------------------|--------|
|                                                                                                      |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| ACQUIRED  INSURED MORTGAGES                                                                               |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| FHA-Insured  Certificates (carried at fair value)                                                         |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
|                                                                                                      |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| Steeplechase  Apts., Aiken, SC                                                                            |   | 9/18               |   | N/A           |   | 7.5                                  | %      | $                                | 449,335    |                               | $      | 451,581                                           |   | $ | 50,921 | (5) |
| Executive  Tower, Toledo, OH                                                                              |   | 3/27               |   | N/A           |   | 8.75                                 | %      | 2,725,586                        |       | 2,739,214                          |   | 275,283                                           |   |
| Sangnok  Villa, Los Angeles, CA                                                                           |   | 1/30               |   | N/A           |   | 10.25                                | %      | 878,138                          |       | 892,451                            |   | 96,825                                            |   |
| Eaglewood  Villa Apts., Springfield, OH                                                                   |   | 2/27               |   | N/A           |   | 8.875                                | %      | 2,595,217                        |       | 2,608,193                          |   | 264,707                                           |   |
| Stafford  Towers, Baltimore, MD                                                                           |   | 8/16               |   | N/A           |   | 9.50                                 | %      | 307,821                          |       | 309,361                            |   | 42,613                                            |   |
| Northwood  Place, Meridian, MS                                                                            |   | 6/34               |   | N/A           |   | 8.75                                 | %      | 4,383,246                        |       | 4,405,163                          |   | 412,635                                           |   |
| Cheswick  Apts., Indianapolis, IN                                                                         |   | 9/27               |   | N/A           |   | 8.75                                 | %      | 2,950,498                        |       | 2,965,251                          |   | 295,736                                           |   |
| Bradley  Road Nursing, Bay Village, OH                                                                    |   | 5/34               |   | N/A           |   | 8.875                                | %      | 2,453,176                        |       | 2,502,240                          |   | 233,708                                           |   |
| Heritage  Heights Apts., Harrison, AR                                                                     |   | 4/32               |   | N/A           |   | 9.50                                 | %      | 404,855                          |       | 406,879                            |   | 41,313                                            |   |
|                                                                                                      |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| Total  FHA-Insured Certificates - Acquired Insured Mortgages, carried at fair value                       |   |               |   |          |   |                                 |   | 17,147,872                       |       | 17,280,333                         |   |                                              |   |
|                                                                                                      |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| GNMA  Mortgage-Backed Securities (carried at fair value)                                                  |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
|                                                                                                      |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| Pine  Tree Lodge, Pasadena, TX                                                                            |   | 12/33              |   | N/A           |   | 9.25                                 | %      | 1,974,229                        |       | 1,984,100                          |   | 194,399                                           |   |
|                                                                                                      |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| Total  investment in Acquired Insured Mortgages, carried at fair value                                    |   |               |   |          |   |                                 |   | $                                | 19,122,101 |                               | $      | 19,264,433                                        |   |   |   |
|                                                                                                      |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| ORIGINATED  INSURED MORTGAGES                                                                             |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| GNMA  Mortgage-Backed Security (carried at fair value)                                                    |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
|                                                                                                      |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| Oak  Forest Apts. II, Ocoee, FL                                                                           |   | 12/31              |   | 11/09  (1     | )      | 7.25                                 | %      | $                                | 10,116,651 |                               | $      | 10,167,234                                        |   | 840,860 |   |
|                                                                                                      |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| FHA-Insured  Certificate (carried at fair value)                                                          |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
|                                                                                                      |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| Waterford  Green Apts., South St. Paul, MN                                                                |   | 11/30              |   | 12/04  (1     | )      | 7.25                                 | %(7)   | 5,687,326                        |       | 5,715,763                          |   | 481,564                                           |   |
|                                                                                                      |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| Total  investment in Originated Insured Mortgages, carried at fair value                                  |   |               |   |          |   |                                 |   | $                                | 15,803,977 |                               | $      | 15,882,997                                        |   |   |   |
|                                                                                                      |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |   |
| Total  investment in FHA-Insured Certificates and GNMA Mortgage-Backed Securities,  carried at fair value |   |               |   |          |   |                                 |   | $                                | 34,926,078 |                               | $      | 35,147,430                                        |   |   |   |
|                                                                                                           |        |                    |        |               |        |                                      |        |                                  |            |                                    |        |                                                   |        |  |  |  |

 

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| **Development Name/Location**                                                                    |   | **Maturity  Date** |   | **Put  Date** |   | **Interest  Rate on  Mortgage  (4)** |   | **Face  Value of  Mortgage (3)** |       | **Net  CarryingValue  (3)(9)(10)** |   | **Annual  Payment  (Principal and  Interest)(8)** |      |
|--------------------------------------------------------------------------------------------------|--------|--------------------|--------|---------------|--------|--------------------------------------|--------|----------------------------------|------------|------------------------------------|--------|---------------------------------------------------|-----------|
|                                                                                             |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |      |
| ACQUIRED INSURED MORTGAGES                                                                       |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |      |
| FHA-Insured  Loans (carried at amortized cost) (2)                                               |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |      |
|                                                                                             |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |      |
| Kaynorth  Apts., Lansing, MI (11)                                                                |   | 4/23               |   | 9/02          |   | 7.5                                  | %      | $                                | 1,701,956  |                               | $      | 1,436,670                                         |      | 167,318 | (6) |
|                                                                                             |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |      |
| ORIGINATED  INSURED MORTGAGES                                                                    |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |      |
| FHA-Insured  Loans (carried at amortized cost) (2)                                               |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |      |
|                                                                                             |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |      |
| Cobblestone  Apts., Fayetteville, NC (12)                                                        |   | 3/28               |   | 12/02         | (1)    | 8.50%                                | (7)    | 4,740,624                        |       | 4,859,107                          |   | 462,703                                           |      |
| The  Plantation, Greenville, NC (12)                                                             |   | 4/28               |   | 4/03          | (1)    | 8.25%                                | (7)    | 4,209,642                        |       | 4,332,300                          |   | 402,046                                           |      |
|                                                                                             |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |      |
| Total  investment in Originated Insured Mortgages, FHA-Insured Loans, carried at  amortized cost |   |               |   |          |   |                                 |   | $                                | 8,950,266  |                               | $      | 9,191,407                                         |      |   |   |
|                                                                                             |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |      |
| Total  investment in FHA-Insured Loans, carried at amortized cost                                |   |               |   |          |   |                                 |   | $                                | 10,652,222 |                               | $      | 10,628,077                                        |      |   |   |
|                                                                                             |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |      |
| TOTAL  INVESTMENT IN INSURED MORTGAGES                                                           |   |               |   |          |   |                                 |   | $                                | 45,578,300 |                               | $      | 45,775,507                                        |      |   |   |
|                                                                                             |   |               |   |          |   |                                 |   |                             |       |                               |   |                                              |      |
| TOTAL  ANNUAL PRINCIPAL AND INTEREST                                                             |   |               |   |          |   |                                 |   |                             |       |                               |   | $                                                 | 4,262,631 |   |
|                                                                                                  |        |                    |        |               |        |                                      |        |                                  |            |                                    |        |                                                   |           |  |  |  |

 

44

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NOTESTO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

 

December 31,2003

 

 

(1)                                  Certainmortgages contain a special assignment option, in certain Insured Mortgagedocuments, which allow the Partnership, anytime after this date, the option torequire payment from the borrower of the unpaid principal balance of theInsured Mortgages.  Upon such requestfrom the Partnership, the borrowers must make payment to the Partnership, orthe Partnership, at its option, may cancel the FHA insurance and instituteforeclosure proceedings.

 

(2)                                  Inclusiveof closing costs and acquisition fees.

 

(3)                                  Themortgages underlying the Partnership’s investments in FHA-Insured Certificates,GNMA Mortgage-Backed Securities and FHA-Insured Loans are primarilynon-recourse first liens on multifamily residential developments and retirementhomes.  Prepayment of these InsuredMortgages would be based upon the unpaid principal balance at the time of prepayment.

 

(4)                                  Inaddition, the servicer or the sub-servicer of the Insured Mortgage, primarilyunaffiliated third parties, is entitled to receive compensation for certainservices rendered.

 

(5)                                  InJune 1985 and February 1986, the Partnership purchased pass-throughcertificates representing undivided fractional interests of 317/392 and 11/392,respectively, in a pool of 13 FHA-Insured Mortgages.  In January and February 1988, the Partnership soldundivided fractional interests of 100/392 and 104/392, respectively, in thispool.  Accordingly, the Partnership nowowns an undivided fractional interest aggregating 124/392, or approximately31.6%, in this pool.  For purposes ofillustration only, the amounts shown in this table represent the Partnership’sshare of these items as if an undivided interest in each mortgage was acquired.

 

(6)                                  Thisamount represents the Partnership’s 50% interest in this mortgage.  The remaining 50% interest was acquired byAmerican Insured Mortgage Investors, an affiliate of the Partnership.

 

(7)                                  Thisrepresents the base interest rate during the permanent phase of these InsuredMortgages.  Additional interest(referred to as “Participations”) measured as a percentage of the net cash flowfrom the development and the net proceeds from the sale, refinancing or otherdisposition of the underlying development (as defined in the ParticipationAgreements), will also be due.  Duringthe years ended December 31, 2003, 2002 and 2001, the Partnership receivedadditional interest of $0, $8,396, and $53,424, respectively, from theParticipations.

 

(8)                                  Principaland interest are payable at level amounts over the life of the mortgages.

 

45

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(9)                                  Areconciliation of the carrying value of Insured Mortgages for the years endedDecember 31, 2003 and 2002, is as follows:

 
|                                                                                 |   | **2003**    |       | **2002**    | ** ** |
|--------------------------------------------------------------------------------------|--------|-------------|------------|-------------|------------|
|                                                                                 |   |        |       |        |       |
| Beginning balance                                                                    |   | $           | 66,323,565 |        | $          | 82,924,257 |   |
|                                                                                 |   |        |       |        |       |
| Principal receipts on mortgages                                                      |   | (604,527    | )          | (769,593    | )          |
|                                                                                 |   |        |       |        |       |
| Proceeds from mortgage prepayments                                                   |   | (12,794,305 | )          | (14,111,131 | )          |
|                                                                                 |   |        |       |        |       |
| Proceeds from mortgage assignments                                                   |   | (1,547,264  | )          | (3,431,297  | )          |
|                                                                                 |   |        |       |        |       |
| Net gains on mortgage dispositions                                                   |   | 1,497,782   |       | 1,851,251   |       |
|                                                                                 |   |        |       |        |       |
| Portion of debentures due from a third party in  exchange for assigned the mortgages |   | (810,660    | )          | (744,159    | )          |
|                                                                                 |   |        |       |        |       |
| Debentures due from HUD                                                              |   | (10,335,670 | )          | —      |       |
|                                                                                 |   |        |       |        |       |
| Portion of debentures due to affiliate                                               |   | 5,167,835   |       | —      |       |
|                                                                                 |   |        |       |        |       |
| (Decrease) increase to unrealized gains on  Investments in Insured Mortgages         |   | (1,121,249  | )          | 604,237     |       |
|                                                                                 |   |        |       |        |       |
| Ending balance                                                                       |   | $           | 45,775,507 |        | $          | 66,323,565 |   |

 

(10)         As of December 31,2003 and 2002, the tax basis of the Insured Mortgages was approximately $45.3million and $65.1 million, respectively.

(11)         The Partnership receivedHUD assignment proceeds for this mortgage subsequent to December 31, 2003.  Detail information is included in Note 7 ofthe Notes to Financial Statements.

(12)         The Partnership soldthese mortgages subsequent to December 31, 2003.  Detail information is included in Note 6 of the Notes toFinancial Statements

 

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