FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



X Quarterly report pursuant to Section 13 or 15(d) of the Securities
  Exchange

Act of 1934



For the quarterly period ended June 30, 2001 or



Transition report pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934



For the transition period from to



Commission File Number: 000-32227



AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.

(Exact name of registrant as specified in its Agreement of Limited

Partnership)



Delaware 39-1965590

(State or other jurisdiction (IRS Employer

of incorporation or organization) Identification No.)





Suite 400, 1004 Farnam Street, Omaha, Nebraska 68102

(Address of principal executive offices) (Zip Code)





(402) 444-1630

(Registrant's telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed
  all reports

required to be filed by Section 13 or 15(d) of the Securities
  Exchange Act of

1934 during the preceding 12 months (or for such shorter period
  that the

registrant was required to file such reports), and (2) has been
  subject to

such filing requirements for the past 90 days.



YES X NO















-i-







Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS



AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.

BALANCE SHEETS





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AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

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AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.

STATEMENT OF PARTNERS CAPITAL (DEFICIT)

FOR THE SIX MONTHS ENDED JUNE 30, 2001

(UNAUDITED)

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AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

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1.  Organization

America First Real Estate Investment Partners, L.P. (the "Company") was formed on June 18,1999, under the Delaware Revised Uniform Limited Partnership Act for the purpose of acquiring, holding, operating, selling and otherwise dealing primarily with multifamily residential properties, including the acquisition of debt and equity securities of entities engaged in similar activities.  The general partner of the Company is America First Capital Source I L.L.C.  The Company commenced operations concurrent with the December 31, 2000 merger described below.



On December 31, 2000, the Company merged with Capital Source L.P. ("Cap Source I") and Capital Source II L.P.-A, ("Cap Source II", and together with Cap Source I, the "Partnerships"), (the "Merger") with the Company being the surviving entity.  The Merger was approved by a majority in interest of the holders of the beneficial assignment certificates (the "BACs") representing assigned limited partner interests in each of the respective Partnerships. In connection with the Merger, the outstanding BACs of Cap Source I were converted into, at the election of the BAC holders made in connection with the solicitation of consents to the Merger, 4,386,143 Units of assigned limited partner interests in the Company (the "Units") and $3,155,000 in aggregate principal amount of Variable Rate Junior Notes Callable on or After the Date of Issuance, due January 15, 2008, Series A (the "Series A Notes").  In connection with the Merger, the BACs of Cap Source II were converted into, at the election of the BAC holders made in connection with the solicitation of consents to the Merger, 2,965,069 Units and $874,000 in aggregate principal amount of Variable Rate Junior Notes Callable on or After the Date of Issuance, due January 15, 2008, Series B (the "Series B Notes" and together with the Series A Notes, the "Notes").  Units issued in connection with the Merger were issued in whole numbers only.  For each investor entitled to a fractional unit, the Company made a cash payment to that investor on or around January 16, 2001, equal to $10 multiplied by the fraction.  The Notes were issued in incremental denominations of $1,000.  Notes issued in connection with the Merger were issued in whole numbers only.  For each investor entitled to a fractional Note, the Company made a cash payment to that investor on or around January 16, 2001, equal to $1,000 multiplied by the fraction.



For financial accounting purposes, Cap Source I (the "Predecessor") was deemed to be the acquirer of Cap Source II under the purchase method of accounting because its investors were allocated the largest number of Units.  Accordingly, the transaction resulted, for financial accounting purposes, in the effective purchase by Cap Source I of all of the BACs of Cap Source II.  As the surviving entity for financial accounting purposes, the assets and liabilities of Cap Source I were recorded by the Company at their historical cost and the assets and liabilities of Cap Source II were recorded at their estimated fair values.  Together, the combined entities are now known as America First Real Estate Investment Partners, L.P.



In connection with the Merger, and in accordance with the Stipulation of Settlement (the "Settlement") dated April 24, 2000, which was approved by the Delaware Court of Chancery on December 19, 2000, the Company made a distribution of approximately $0.75 per Unit on or about January 16, 2001, to holders of record as of December 31, 2000.  The Company also made a distribution of approximately $75.01 per Note (see Note 7) on or about January 16, 2001, to Note holders of record as of December 31, 2000.   This distribution to Note holders constituted a prepayment of principal on the Notes, and reduced the principal amount outstanding on the Notes accordingly.  The Company also made a second cash distribution of approximately  $0.66 per Unit (consisting of a special distribution of approximately $0.51 per Unit and a regular quarterly distribution of $0.15 per Unit), and approximately $51.33 per Note, on or about April 30, 2001, to holders of record on March 30, 2001.  In accordance with the Settlement, the Company is also attempting to purchase $3,500,000 in Units on the open market during 2001.  In the event that less than $3,500,000 in Units are purchased by the Company during 2001, the difference will be distributed in cash to Unit holders after the close of the fiscal year.  Through June 30, 2001, the Company purchased 533,257 Units at an aggregate cost of $3,384,326.  Such amount was included as part of the $3,500,000 which was accrued and reflected in Statement of Partners' Capital (Deficit) at December 31, 2000, as part of the Settlement.

The exchange values, which were intended to fairly represent the value of the assets of the Partnerships, used to determine the allocation of Units and Notes among the Partnerships were based on (a) the principal amount of GNMA certificates and the FHA loans as shown in the Partnerships' audited financial



statements for the period ended December 31, 1998, (b) the value of the Partnerships' limited partner interests in the Operating Partnerships, and (c) the market value of the Partnerships' remaining net assets as shown in the Partnerships' audited financial statements for the period ended December 31, 1998.  The fair market value of the real estate held by the Operating Partnerships, as determined by real estate appraisals dated December 31, 1998, was the value assigned to the real estate for the purpose of determining the exchange values.



America First Capital Source I L.L.C., the Company's general partner (the "General Partner"), was a general partner of Cap Source I and is the successor by merger to Insured Mortgage Equities, Inc., the other Cap Source I general partner, and America First Capital Source II L.L.C., one of the Cap Source II general partners.  The assets and liabilities of the other Cap Source II general partner were acquired by the General Partner.  The General Partner is controlled by the same entity, America First Companies L.L.C. ("America First"), that controlled the general partners of the Partnerships.  Neither America First nor the general partners of the Partnerships were issued any Units or Notes in connection with the Merger.  The General Partner owns a 1% general partner interest in the Company.



As a result of the Merger, the Company became the limited partner of ten limited partnerships ("Operating Partnerships") which own apartment complexes (the "Apartment Complexes") located throughout the United States, including three in North Carolina, two each in Florida and Michigan, and one each in Ohio, Virginia and Illinois.  The Company owns a 98.99% limited partnership interest in nine of these Operating Partnerships and a 99.99% interest in the tenth Operating Partnership.  Either CS Properties I, Inc. or CS Properties II, Inc., both of which are owned by the General Partner, serve as the Special Limited Partner for each of the Operating Partnerships.  In the case of The Ponds at Georgetown, CS Properties I, Inc. and CS Properties II, Inc. each serve as a Special Limited Partner.  The Special Limited Partner has the power, among other things, to remove the general partners of the Operating Partnerships under certain circumstances and to consent to the sale of the Operating Partnerships' assets.  CS Properties I, Inc. also serves as the general partner of Misty Springs Apartments, Waterman's Crossing and Fox Hollow Apartments and, along with CS Properties II, Inc., as a co-general partner of The Ponds at Georgetown.   Effective in April 2001, CS Properties II, Inc. also serves as the general partner of Delta Crossing and Monticello Apartments.  In addition, the Company also became the owner of: (a) six mortgage-backed securities guaranteed as to principal and interest by the Government National Mortgage Association ("GNMA"), and collateralized by first mortgage loans on six of the Apartment Complexes, (b) three first mortgage loans on three Apartment Complexes insured as to principal and interest by the Federal Home Loan Mortgage Administration ("FHA") (the "FHA loans"), one of which was paid to the Company in full in June 2001, and (c) certain GNMA securities backed by pools of single-family mortgages.



2.  Basis of Presentation

The accompanying financial statements include the accounts of the Company and, prior to the Merger, the accounts of the Predecessor.  The interim unaudited financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.  The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000.  In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial position at June 30, 2001 and results of operations for all periods presented have been made.  The results of operations for the three and six month periods ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.







3.  Partnership Income, Expenses and Cash Distributions



The Partnership Agreement of the Company contains provisions for the distribution of Net Operating Income, Net Sale Proceeds and Liquidation Proceeds and for the allocation of income and expenses for tax purposes among the General Partner and Unit holders.  Income and losses will be allocated to each Unit holder on a periodic basis based on the number of Units held by each Unit holder as of the last day of the period for which such allocation is to be made.  If either the General Partner or the Unit holders have a deficit capital balance as of the last day of any fiscal year, then all items of Income shall first be allocated pro rata to the General Partner or the Unit holders in the manner necessary to eliminate such deficit capital balances and thereafter 99% to the Unit holders and 1% to the General Partner.  Distributions of Net Operating Income and Net Sale Proceeds will be made to each Unit holder of record on the last day of each distribution period based on the number of Units held by each Unit holder as of such date.



Net Operating Income, as defined in the Limited Partnership Agreement, in each distribution period will be distributed 99% to the Unit holders and 1% to the General Partner.



Net Sale Proceeds, as defined in the Limited Partnership Agreement, will be distributed 99% to the Unit holders and 1% to the General Partner.



Liquidation Proceeds, as defined in the Limited Partnership Agreement, remaining after repayment of any debts or obligations of the Company (including loans from the General Partner or its affiliates) and after the establishment of any reserve the General Partner deems necessary, will be distributed to the General Partner and Unit holders to the extent of positive balances in their capital accounts.  Any remaining Liquidation Proceeds will be distributed in the same manner as the Net Sale Proceeds.



The Company plans to make cash distributions on a quarterly basis; however, distributions may be made on a monthly or semiannual basis if the General Partner so elects.  With regard to the Predecessor, profits and losses from continuing operations and cash available for distribution were generally allocated 99% to the BAC holders and 1% to the General Partners.  Cash distributions of the Predecessor included in the financial statements represent the actual cash distributions made during each period and the change in cash distributions accrued at the end of each period.

4.  Investment in Mortgage-Backed Securities

The Company has classified all of its mortgage-backed securities investments as available-for-sale.  At June 30, 2001, the total amortized cost, gross unrealized holding gains, and aggregate fair value of available-for-sale mortgage-backed securities were $55,020,936, $42,893 and $55,063,829, respectively. At December 31, 2000, the total amortized cost, gross unrealized holdings gains and aggregate fair value of available-for-sale mortgage-backed securities were $61,732,016, $39,566 and $61,771,582, respectively.





































Descriptions of the Company's mortgage-backed securities held at June 30, 2001

are as follows:

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Reconciliation of the carrying amount of the mortgage-backed securities is as follows:

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5.  Investment in Corporate Equity Securities

The Company has classified its corporate equity security investments as available-for-sale.  At June 30, 2001, the cost, gross unrealized gains and fair value of the corporate equity securities were $1,025,734, $105,966, and $1,131,700, respectively.  The Company did not have an investment in corporate equity securities at December 31, 2000.

Reconciliation of the carrying amount of the corporate equity securities is as follows:

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6.  Investment in Operating Partnerships

The Company's Investment in Operating Partnerships consists of interests in limited partnerships which own multifamily properties financed by certain GNMA Certificates and FHA Loans held by the Company.  The limited partnership agreements provide for the payment of certain amounts out of a portion of the net cash flow or net sale or refinancing proceeds of the properties, subject to various priority payments.

Descriptions of the Operating Partnerships held at June 30, 2001, are as follows:

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Reconciliation of the carrying amount of the investment in Operating Partnerships is as follows:

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7.  Notes Payable

Notes payable of the Company consist of Variable Rate Junior Notes Callable on or after December 31, 2000, due January 15, 2008, (the "Notes") issued to BAC holders of Cap Source I and Cap Source II who elected to receive such notes in exchange for their BACs of the respective Partnership in connection with the Merger.  At June 30, 2001, and December 31, 2000, the Notes had an aggregate principal balance of $3,519,976 and $4,029,000, respectively, consisting of $2,756,397 and $3,155,000, respectively, of Notes issued to former BAC holders of Cap Source I and $763,579 and $874,000, respectively, of Notes issued to former BAC holders of Cap Source II.

The Notes bear interest at the rate equal to 120% of the annual applicable federal rate for debt instruments with a term of not over three years as determined by the Internal Revenue Code and applicable regulations thereunder.  At June 30, 2001, and December 31, 2000, such rate was 4.99% and 7.34% per annum, respectively.  The annual interest rate on the Notes is calculated by averaging such interest rates for each month.  The average interest rate for the six months ended June 30, 2001, was 5.81% per annum. (5.23% per annum for the three months ended June 30, 2001.)  The Notes provide for annual installments of accrued interest payable on the 15th of each January, beginning January 15, 2001.  The unpaid principal balance and accrued but unpaid interest is due January 15, 2008.

The Company may, at its option, redeem all or any portion of the Notes at any time at a price equal to 100% of the outstanding principal balance of the Notes together with accrued interest to the date fixed for redemption.

The Company is required to use 80% of the net proceeds as defined in the indenture of trust related to such Notes from sales or refinancings of assets of the Company that were owned by Cap Source I or Cap Source II prior to the transaction ("Designated Assets") to prepay the Notes.  The Company is required to deposit such proceeds into a segregated trust account established under the indenture, and when the funds in the account equal or exceed $5 million, the proceeds will be used to redeem the Notes as provided in the indenture.  Eighty percent of the net proceeds from sales or refinancings of Cap Source I Designated Assets will be used to prepay the Notes held by former Cap Source I investors.  Eighty percent of the net proceeds from sales or refinancings of Cap Source II Designated Assets will be used to prepay the Notes held by former Cap Source II Investors.

The indenture related to the Notes prohibits the Company from incurring any indebtedness if the new indebtedness would cause the Company's aggregate principal amount of indebtedness then outstanding to exceed 70% of the greater of (1) the value which is placed by an independent appraiser on all the assets of the Company as of the date of the transaction, and (2) the value placed by an independent appraiser on all assets of the Company as of the date of determination.

During the six months ended June 30, 2001, the Company made total principal payments of $509,024 ($126.34 per Note) on the Notes pursuant to the Settlement ($206,809 or $51.33 per Note for the three months ended June 30, 2001).   (See Note 1.)



8.  Borrowings Under Repurchase Agreement

During the six months ended June 30, 2001, the Company entered into two repurchase agreements to provide financing for the distributions and Unit buy-backs pursuant to the Settlement and implementation of its investment strategy.  As of June 30, 2001, the repurchase agreements had an aggregate outstanding balance of $16,475,000, which consists of one repurchase agreement with an outstanding principal balance of $9,500,000 that bears interest at 5.41% per annum and matures on January 18, 2002, and one repurchase agreement with an outstanding principal balance of $6,975,000 that bears interest at 3.94% and matures on June 26, 2002.  The repurchase agreements are collateralized by two of the Company's mortgage-backed securities which had an aggregate carrying value of $17,367,331 at June 30, 2001.

9.  Transactions with Related Parties

The Company will pay the General Partner an acquisition fee in connection with the identification, evaluation and acquisition of new assets and the financing thereof in an amount equal to 1.25% of the aggregate purchase price paid by the Company for such new assets.  The acquisition fee with respect to an acquisition of a new asset will be payable at the time of the closing of the acquisition.  No acquisition fees were paid or accrued during this period.



The Company pays the General Partner an administrative fee in connection with the ongoing administration of the business of the Company in an amount equal to 0.50%, per annum, of the sum of (i) the fair market value on the Merger date of the original assets that are still owned by the Company, plus, (ii) the purchase price paid by the Company for new assets that are then held by the Company.  The first $100,000 of the administrative fee shall be payable each year, with the balance payable only during years that funds from operations ("FFO"), calculated before administrative fees, exceeds 7% of the Unit holders' average capital for that year.  FFO represents net income (or loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets) and after adjustments for unconsolidated partnerships and joint ventures.  Such administrative fees are payable on a monthly basis.  Administrative fees payable to the General Partner for the six months ended June 30, 2001, were $165,300 ($85,200 for the three months ended June 30, 2001).

An affiliate of the Company's General Partner was retained to provide property management services for Fox Hollow Apartments, Misty Springs Apartments, the Ponds at Georgetown, Waterman's Crossing,  Delta Crossing (beginning in April 2001) and Monticello Apartments (beginning in April 2001). The property management fee paid with respect to any property may not exceed 5% of the gross revenues of such property (in the case of residential property) or 6% of the gross revenues of such property (in the case of industrial or commercial property); provided, however, that the property management fee shall not exceed an amount that would be charged by unaffiliated parties rendering similar services in the same geographic location and for comparable property.  Property management fees payable to an affiliate of the General Partner totaled $139,711 for the six months ended June 30, 2001 ($77,042 for the three months ended June 30, 2001).



Substantially all of the Company's general and administrative expenses and certain costs capitalized by the Company are paid by the General Partner or an affiliate and reimbursed by the Company.  The amount of such expenses and costs reimbursed to the General Partner for the six months ended June 30, 2001, was $869,861 ($392,860 for the three months ended June 30, 2001).  Such reimbursed expenses included in this footnote are presented on a cash basis and do not reflect accruals made at quarter end which are reflected in the accompanying financial statements.















10.  Pro Forma Financial Statements (Unaudited)



The following summary pro forma information includes the effects of the Merger.  The pro forma operating data for the six months ended June 30, 2000 are presented as if the Merger had been completed on January 1, 2000.



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Item 2. Management's Discussion and Analysis of Financial
  Condition and Results of Operations.



The following discussion should be read in conjunction with
  all of the financial statements and notes included in Item 1 of this report
  as well as the Partnership's Annual Report on Form 10-K for the year ended December
  31, 2000.



General



The Company was formed on June 18, 1999 under the Delaware
  Revised Uniform Limited Partnership Act for the purpose of acquiring, holding,
  operating, selling and otherwise dealing primarily with multifamily residential
  properties, including the acquisition of debt and equity securities of entities
  engaged in similar activities.



The Company began operations on December 31, 2000, when it
  merged with Capital Source L.P. ("Cap Source I") and Capital Source II L.P.-A,
  ("Cap Source II", and together with Cap Source I, the "Partnerships"), (the
  "Merger") with the Company being the surviving entity. The Merger was approved
  by a majority in interest of the holders of the beneficial assignment certificates
  (the "BACs") representing assigned limited partner interests in each of the
  respective Partnerships. In connection with the Merger, the outstanding BACs
  of Cap Source I were converted into, at the election of the BAC holders made
  in connection with the solicitation of consents to the Merger, 4,386,143 Units
  of assigned limited partner interests in the Company (the "Units") and $3,155,000
  in aggregate principal amount of Variable Rate Junior Notes Callable on or After
  the Date of Issuance, due January 15, 2008, Series A (the "Series A Notes").
  In connection with the Merger, the BACs of Cap Source II were converted into,
  at the election of the BAC holders made in connection with the solicitation
  of consents to the Merger, 2,965,069 Units and $874,000 in aggregate principal
  amount of Variable Rate Junior Notes Callable on or After the Date of Issuance,
  due January 15, 2008, Series B (the "Series B Notes" and together with the Series
  A Notes, the "Notes"). Units issued in connection with the Merger were issued
  in whole numbers only. For each investor entitled to a fractional unit, the
  Company made a cash payment to that investor on or around January 16, 2001,
  equal to $10 multiplied by the fraction. The Notes were issued in incremental
  denominations of $1,000. Notes issued in connection with the Merger were issued
  in whole numbers only. For each investor entitled to a fractional Note, the
  Company made a cash payment to that investor on or around January 16, 2001,
  equal to $1,000 multiplied by the fraction.

For financial accounting purposes, Cap Source I (the "Predecessor")
  was deemed to be the acquirer of Cap Source II under the purchase method of
  accounting because its investors were allocated the largest number of Units.
  Accordingly, the transaction resulted, for financial accounting purposes, in
  the effective purchase by Cap Source I of all of the BACs of Cap Source II.
  As the surviving entity for financial accounting purposes, the assets and liabilities
  of Cap Source I were recorded by the Company at their historical cost and the
  assets and liabilities of Cap Source II were recorded at their estimated fair
  values. Together, the combined entities are now known as America First Real
  Estate Investment Partners, L.P.

Liquidity and Capital Resources

In connection with the Merger, and in accordance with the Stipulation
  of Settlement (the "Settlement") dated April 24, 2000, which was approved by
  the Delaware Court of Chancery on December 19, 2000, the Company made a distribution
  of approximately $0.75 per Unit on or about January 16, 2001, to holders of
  record as of December 31, 2000. The Company also made a distribution of approximately
  $75.01 per Note on or about January 16, 2001, to Note holders of record as of
  December 31, 2000. This distribution to Note holders constituted a prepayment
  of principal on the Notes, and reduced the principal amount outstanding on the
  Notes accordingly. The Company also made a second cash distribution of approximately
  $0.66 per Unit (consisting of a special distribution of approximately $0.51
  per Unit and a regular quarterly distribution of $0.15 per Unit), and approximately
  $51.33 per Note, on or about April 30, 2001, to holders of record on or about
  March 30, 2001. In accordance with the Settlement, the Company is also attempting
  to purchase $3,500,000 in Units on the open market at various times during 2001.
  In the event that less than $3,500,000 in Units are purchased by the Company
  during 2001, the difference will be distributed in cash to Unit holders after
  the close of the fiscal year. Through June 30, 2001, the Company purchased 533,257
  Units at an aggregate cost of $3,384,326.

As a result of the Merger, the Company became the limited partner
  of ten limited partnerships ("Operating Partnerships") which own apartment complexes
  (the "Apartment Complexes") located throughout the United States, including
  three in North Carolina, two each in Florida and Michigan, and one each in Ohio,
  Virginia and Illinois. The Company owns a 98.99% limited partnership interest
  in nine of these Operating Partnerships and a 99.99% limited partnership interest
  in the tenth Operating Partnership. Either CS Properties I, Inc. or CS Properties
  II, Inc., both of which are owned by the General Partner, serve as the Special
  Limited Partner for each of the Operating Partnerships. In the case of one Operating
  Partnership, CS Properties I, Inc. and CS Properties II, Inc. each serve as
  a Special Limited Partner. The Special Limited Partner has the power, among
  other things, to remove the general partners of the Operating Partnerships under
  certain circumstances and to consent to the sale of the Operating Partnerships'
  assets. CS Properties I, Inc. also serves as the general partner of three Operating
  Partnerships and, along with CS Properties II Inc., as a co-general partner
  of one Operating Partnership. Effective in April 2001, CS Properties II, Inc.
  also serves as the general partner of Delta Crossing and Monticello Apartments.



In addition, the Company also became the owner of: (a) six
  mortgage-backed securities guaranteed as to principal and interest by the Government
  National Mortgage Association ("GNMA"), and collateralized by first mortgage
  loans on six of the Apartment Complexes, (b) three first mortgage loans on three
  Apartment Complexes insured as to principal and interest by the Federal Housing
  Administration ("FHA") ("the FHA Loans"), one of which was paid to the Company
  in full in June 2001, and (c) certain GNMA securities backed by pools of single-family
  mortgages.

Unlike the Partnerships, the Company has the ability to acquire
  additional multifamily residential properties as well as debt and equity securities
  of entities engaged in similar activities. In addition, the Company has the
  ability to more actively manage the makeup of its real estate portfolio as compared
  to the Partnerships. The Company's investment strategy will be funded initially
  from available cash and short-term investments and from (1) borrowing against
  or sale of the existing properties, (2) borrowing against or sale of the GNMA
  Certificates and the FHA Loans, and (3) borrowing against the additional properties
  acquired by the Company following the transaction. The Company may also use
  additional sources of financing, both debt and equity, to further its business
  objectives and investment strategies.



In keeping with its investment strategy, during the three months
  ended June 30, 2001, the Company borrowed $6,975,000 against one of its GNMA
  Certificates through the utilization of a repurchase agreement. The repurchase
  agreement bears interest at 3.94% per annum and had an original term of one
  year. The repurchase agreement matures in June 2002. The Company also sold corporate
  equity securities for $125,000. In addition, the Company received distributions
  of $127,455 from two of its Operating Partnership investments and made an additional
  investment of $6,454,331 in one of its Operating Partnership investments. The
  Operating Partnership utilized the proceeds of such additional investment to
  pay off its mortgage loan, including accrued interest. The Company, in turn,
  was then paid the full amount of principal and accrued interest due on its related
  FHA Loan investment.



The Merger and the implementation of the change in investment
  strategy will materially affect the Company's future operations as compared
  to those of the Predecessor. Accordingly, the currently reported financial information
  is not necessarily indicative of the Company's future operating results or financial
  condition.

The Company believes it has adequate financial resources, including
  the ability to borrow funds, to meet its obligations as they become due, including
  funding committed distributions and Unit purchases pursuant to the Settlement,
  as well as to actively pursue its investment strategy.



Asset Quality



Except as discussed above, the overall status of the Company's
  investments has remained relatively constant since March 31, 2001.

The following table shows the occupancy levels of the properties financed by
  the Company at June 30, 2001:

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Results of Operations

As more fully described herein, the results of operations for periods prior to the Merger include only the historical operating results of the Predecessor, i.e. Cap Source I, and, therefore, do not include the historical operating results of Cap Source II.  Also refer to the pro forma Statement of Operations for the six months ended June 30, 2000, included in Note 10 to the accompanying interim financial statements.



Comparison of the Three Months Ended June 30, 2001 and June 30, 2000



Mortgage-backed securities income of the Company increased $558,975 for the three months ended June 30, 2001, compared to mortgage-backed securities income of the Predecessor during the same period in 2000. Such increase is due to the Merger which resulted in an increase of approximately 76% in the Company's mortgage-backed securities portfolio, which was slightly offset by the continued amortization of the principal balances of the Company's mortgage-backed securities.



Interest income on cash and cash equivalents of the Company decreased $80,573 for the three months ended June 30, 2001, compared to that of the Predecessor for the same period in 2000 due to a reduction in the average cash balance resulting from the payment of distributions pursuant to the Settlement Agreement.



The Company recognized dividend income of $27,376 during the three months ended June 30, 2001, on its investments in corporate equity securities.  The Predecessor did not invest in such securities and, therefore, did not recognize dividend income during the comparable period of 2000.



The Company recorded equity in earnings of Operating Partnerships of $98,129 for the three months ended June 30, 2001.   Such equity in earnings consists of equity in earnings of Operating Partnership investments formerly held by the Predecessor of $127,455 representing distributions received from two of such Operating Partnerships and equity in losses of $29,326 on Operating Partnership investments acquired as a result of the Merger.  The equity in losses represents the Company's pro rata share of the Operating Partnerships' income or losses.  During the comparable period of 2000, the Predecessor recorded equity in earnings of Operating Partnerships of $49,500, representing a distribution received from one of the Operating Partnerships.  Accordingly, equity in earnings of Operating Partnerships increased $48,629 from 2000 to 2001.



Operating and administrative expenses of the Company increased $114,847 for the three months ended June 30, 2001, compared to those of the Predecessor for the same period in 2000.  Such increase is primarily due to the Merger, including administrative fees payable to the General Partner.

The Company recognized interest expense of $180,424 during the three months ended June 30, 2001, consisting of interest expense of $132,968 on repurchase agreement obligations of $9,500,000 and $6,975,000 entered into in January and June of 2001, respectively, and $47,456 of interest expense on notes payable originated in connection with the Merger.  The Predecessor did not have such obligations and, therefore, did not recognize interest expense during the comparable period of 2000.



Comparison of the Six Months Ended June 30, 2001 and June 30, 2000

Mortgage-backed securities income of the Company increased $1,123,909 for the six months ended June 30, 2001, compared to mortgage-backed securities income of the Predecessor during the same period in 2000. Such increase is due to the Merger which resulted in an increase of approximately 76% in the Company's mortgage-backed securities portfolio, which was slightly offset by the continued amortization of the principal balances of the Company's mortgage-backed securities.



Interest income on cash and cash equivalents of the Company decreased $71,496 for the six months ended June 30, 2001, compared to that of the Predecessor for the same period in 2000 due to a reduction in the average cash balance resulting from the payment of distributions pursuant to the Settlement Agreement.



The Company recognized dividend income of $40,520 during the six months ended June 30, 2001, on its investments in corporate equity securities.  The Predecessor did not invest in such securities and, therefore, did not recognize dividend income during the comparable period of 2000.



The Company recorded equity in earnings of Operating Partnerships of $68,312 for the six months ended June 30, 2001.  Such equity in earnings consists of equity in earnings of Operating Partnership investments formerly held by the Predecessor of $127,455 representing distributions received from two of such Operating Partnerships and equity in losses of $59,143 on Operating Partnership investments acquired as a result of the Merger.  The equity in losses represents the Company's pro rata share of the Operating Partnerships' income or losses.  During the comparable period of 2000, the Predecessor recorded equity in earnings of Operating Partnerships of $64,988, representing distributions received from two of the Operating Partnerships.  Accordingly, equity in earnings  of Operating Partnerships increased $3,324 from 2000 to 2001.



Operating and administrative expenses of the Company increased $315,949 for the six months ended June 30, 2001, compared to those of the Predecessor for the same period in 2000.  Such increase is primarily due to the Merger, including administrative fees payable to the General Partner.

The Company recognized interest expense of $345,712 during the six months ended June 30, 2001, consisting of interest expense of $237,186 on repurchase agreement obligations of $9,500,000 and $6,975,000 entered into in January and June of 2001, respectively, and $108,526 of interest expense on notes payable originated in connection with the Merger.  The Predecessor did not have such obligations and, therefore, did not recognize interest expense during the comparable period of 2000.



The Company recognized a gain of $5,847 on the sale of corporate equity securities during the six months ended June 30, 2001.  The Predecessor did not invest in such securities and, therefore, did not recognize any gains or losses resulting from related sales during the comparable period of 2000.

New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Financial Accounting Standards (FAS) No. 141, "Business Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets" which provide guidance on how entities are to account for business combinations and for the goodwill and other intangible assets that arise from those combinations or are acquired otherwise.  These standards are effective for the Company on January 1, 2002.



FAS 142 will require that goodwill no longer be amortized, but instead be tested for impairment at least annually.  As of the date of adoption, the Company expects to have unamortized goodwill of approximately $863,000.  Amortization expense related to such goodwill was approximately $18,000 for the six month period ended June 30, 2001, and is expected to be approximately $36,000 for the year ended December 31, 2001.  Management does not believe the impact of adoption of the new pronouncements will have a significant effect on the financial statements.

Forward Looking Statements

This report contains forward looking statements that reflect
  management's current beliefs and estimates of future economic circumstances,
  industry conditions, the Company's performance and financial results. All statements,
  trend analysis and other information concerning possible or assumed future results
  of operations of the Company and the real estate investments it has made (including,
  but not limited to, the information contained in "Management's Discussion and
  Analysis of Financial Condition and Results of Operations"), constitute forward-looking
  statements. Unit holders and others should understand that these forward looking
  statements are subject to numerous risks and uncertainties and a number of factors
  could affect the future results of the Company and could cause those results
  to differ materially from those expressed in the forward looking statements
  contained herein.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in the Company's	market risk since December 31, 2000, except as noted below.

During January 2001 and June 2001, the Company borrowed $9,500,000  and $6,975,000 against two of its GNMA Certificates through the utilization of repurchase agreements.  One GNMA Certificate had a carrying value of $10,022,979 at June 30, 2001, bears interest at a fixed rate of 8.75% per annum, and has a final maturity date of December 15, 2030.  The other GNMA Certificate had a carrying value of $7,344,352 at June 30, 2001, bears interest at 7.5% and has a final maturity date of December 15, 2029.  The $9,500,000 repurchase agreement bears interest at a fixed rate of 5.41% per annum and matures on January 18, 2002.  The $6,975,000 repurchase agreement bears interest at a fixed rate of 3.94% and matures on June 26, 2002.



Part II. OTHER INFORMATION

Item 1.  Legal Proceedings.

In connection with the Merger, and in accordance with the Stipulation of Settlement (the "Settlement") dated April 24, 2000, which was approved by the Delaware Court of Chancery on December 19, 2000, the Company made a distribution of approximately $0.75 per Unit on or about January 16, 2001, to holders of record as of December 31, 2000.  The Company also made a distribution of approximately $75.01 per Note on or about January 16, 2001, to Note holders of record as of December 31, 2000.   This distribution to Note holders constituted a prepayment of principal on the Notes, and reduced the principal amount outstanding on the Notes accordingly.  The Company also made a second cash distribution of approximately $0.66 per Unit (consisting of a special distribution of approximately $0.51 per Unit and a regular quarterly distribution of $0.15 per Unit), and approximately $51.33 per Note, on or about April 30, 2001, to holders of record on March 30, 2001.  In accordance with the Settlement, the Company is also attempting to purchase $3,500,000 in Units on the open market during 2001.  In the event that less than $3,500,000 in Units are purchased by the Company during 2001, the difference will be distributed in cash to Unit holders after the close of the fiscal year.  Through June 30, 2001, the Company purchased 533,257 Units at an aggregate cost of $3,384,326.

There are no other material pending legal proceedings to which the Company is a party or to which any of its property is subject.

Item 6.  Exhibits and Reports on Form 8-K.

(a).   Exhibits.



The following exhibits are filed as required by this report.

Exhibit numbers refer to the paragraph numbers under Item 601

of Regulation S-K:

2(a)	Agreement and Plan of Merger among the

Company and Cap Source and Cap Source II

incorporated by reference to Appendix A to the Prospectus

included in Registration Statement on Form S-4 (No. 333-52117)

filed by the Registrant on November 8, 1999).

4(a)	Certificate of Limited Partnership of the Company

(incorporated by reference to Exhibit 3.01 to Registration Statement

on Form S-4 (No. 333-52117) 	filed by Registrant on July 21, 1999).

4(b)	Amended and Restated Agreement of Limited Partnership of the Company

(incorporated by reference to Exhibit 3.02 to the Registration Statement on

Form S-4 (No. 333-52117) filed by the Registrant on July 21, 1999).

4(c) 	Form of Indenture between Company and U.S. Bank Trust National Association,

as trustee, (incorporated by reference to Exhibit 4.02 to the Registration

Statement on Form S-4 (No. 333-52117) filed by the Registrant on May 7, 1998).

4(d) 	Form of Unit Certificate of the Registrant incorporated by reference to Exhibit 4.03 to the

Registration Statement on Form S-4 (No. 333-52117) filed by the Registrant on

September 28, 1999).



4(e) 	Form of Variable Rate Junior Notes are included in Exhibit 4.02 (incorporated by

reference to Exhibit 	4.04 to the Registration Statement on Form S-4

(No. 333-52117) filed by the Registrant on May 7, 	1998).

10(a) 	Stipulation of Settlement.

IN THE CASE OF

ALVIN M. PANZER and

SANDRA G. PANZER

Plaintiffs,		   										                v.

INSURED MORTGAGE EQUITIES, INC., 								                INSURED MORTGAGE EQUITIES II

LP., AMERICA FIRST CAPITAL

SOURCE I, LLC., AMERICA FIRST

CAPITAL SOURCE II, LLC, AMERICA

FIRST	COMPANIES, LLC, AMERICA

FIRST REAL ESTATE INVESTMENT

PARTNERS, 	L.P., LEHMAN

BROTHERS, INC., CAPITAL SOURCE

L.P., PAUL L. ABBOTT, and CAPITAL

SOURCE II, L.P.,

Defendants.

(incorporated herein by reference to Form 10-Q dated

March 31, 2000 filed pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934 by the

Registrant (Commission File No.  333-52117)).

(b)  Reports on Form 8-K

The Registrant did not file any reports on Form 8-K during

the quarter for which this report is filed.













SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



AMERICA FIRST REAL ESTATE INVESTMENT

PARTNERS, L.P.



By	America First Capital

Source I, L.L.C., General

Partner of the Registrant



By	/s/ Michael Thesing

Michael Thesing,

Vice President and

Principal Financial Officer

Date:  August 10, 2001