UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

**Form 10-Q**

** **

(Mark One)

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 

 ACT OF 1934

 

For the quarterly period ended****June 30, 2009

 

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 0-10673

 

**REAL ESTATE ASSOCIATES LIMITED III**

(Exact Name of Registrant as Specified in Its Charter)

 
| California                      | 95-3547611          |
|---------------------------------|---------------------|
| (State or other jurisdiction of | (I.R.S. Employer    |
| incorporation or organization)  | Identification No.) |

 

55 Beattie Place, PO Box 1089

Greenville, South Carolina  29602

(Address of principal executive offices)

 

(864) 239-1000

(Registrant’s telephone number)

 

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.  [X] Yes  [ ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes  [ ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer [ ]                                               | Accelerated filer [ ]         |
|---------------------------------------------------------------------------|-------------------------------|
| Non-accelerated filer [ ] 

(Do not check if a smaller reporting company) | Smaller reporting company [X] |

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes  [X] No

 

**PART I - FINANCIAL INFORMATION**

** **

** **

** **

**ITEM 1.     FINANCIAL STATEMENTS**

 

 

 

REAL ESTATE ASSOCIATES LIMITED III

BALANCE SHEETS

 (in thousands)

 

 

 

 
|                                           | June 30,                          | December 31,                      |
|------------------------------------------------|-----------------------------------|-----------------------------------|
|                                           | 2009                              | 2008                              |
|                                           | (Unaudited)                       | (Note)                            |
| ASSETS                                         |                              |                              |
|                                           |                              |                              |
| Investments in Local Partnerships (Note 2)     |  $    --      |  $    --      |
| Cash and cash equivalents                      |    1,219                |    1,356                |
| Receivable – limited partners             |       15 |       15 |
| Total assets                                   |  $ 1,234                     |  $ 1,371                     |
|                                           |                              |                              |
| LIABILITIES AND PARTNERS' (DEFICIENCY) CAPITAL |                              |                              |
|                                           |                              |                              |
| Liabilities:                                   |                              |                              |
| Accounts payable and accrued expenses          |  $    21      |  $    33      |
|                                           |                              |                              |
| Contingencies (Note 5)                         |                              |                              |
|                                           |                              |                              |
| Partners' (deficiency) capital:                |                              |                              |
| General partners                               |     (114)          |     (113)          |
| Limited partners                               |    1,327                |    1,451                |
|                                           |    1,213                |    1,338                |
| Total liabilities and partners' (deficiency)   |                              |                              |
|   capital                                 |  $ 1,234                     |  $ 1,371                     |

 

 

 

 

Note: The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

See Accompanying Notes to Financial Statements

** **

** **

REAL ESTATE ASSOCIATES LIMITED III

 

STATEMENTS OF OPERATIONS

 (Unaudited)

(in thousands, except per interest data)

 

 

 
|                                        | Three Months Ended               | Six Months Ended                 |
|---------------------------------------------|----------------------------------|----------------------------------|
|                                        | June 30,                         | June 30,                         |
|                                        | 2009                             | 2008                             | 2009 | 2008 |
| Revenues:                                   |                             |                             |   |   |
| Interest income                             | $    --           | $     8      | $      1 |  $     24 |
|                                        |                             |                             |   |   |
| Operating expenses:                         |                             |                             |   |   |
|   Management fees – corporate     |              |              |   |   |
|     general partner (Note 3) |      14      |      16      |       28 |        31 |
|   General and administrative           |       2 |       3 |        6 |         8 |
|   Legal and accounting                 |      13      |      13      |       26 |        26 |
| Total operating expenses                    |      29      |      32      |       60 |        65 |
|                                        |                             |                             |   |   |
| Loss from partnership operations            |     (29)          |     (24)          |      (59) |       (41) |
| Advances made to Local Partnerships         |                             |                             |   |   |
|  recognized as expense (Note 2)        |     (66)          |     (10)          |      (66) |       (10) |
| Net loss                                    | $   (95)               | $   (34)               | $   (125) |  $    (51) |
|                                        |                             |                             |   |   |
| Net loss allocated to general               |                             |                             |   |   |
|  partners (1%)                         | $    (1)          | $    --           | $     (1) |  $     (1) |
| Net loss allocated to limited               |                             |                             |   |   |
|  partners (99%)                        |     (94)          |     (34)          |     (124) |      (50) |
|                                        |                             |                             |   |   |
|                                        | $   (95)               | $   (34)               |   $   (125) |  $    (51) |
| Net loss per limited partnership            |                             |                             |   |   |
|   interest (Note 1)                    | $ (8.23)                         | $ (2.98)                         | $ (10.86) |  $  (4.38) |

 

See Accompanying Notes to Financial Statements

 

** **

** **

REAL ESTATE ASSOCIATES LIMITED III

 

STATEMENT OF CHANGES IN PARTNERS' (DEFICIENCY) CAPITAL

 (Unaudited)

(in thousands, except interest data)

 

 

 
|                            | General                      | Limited                            |                          |
|---------------------------------|------------------------------|------------------------------------|-------------------------------|
|                            | Partners                     | Partners                           | Total                         |
|                            |                         |                               |                          |
| Partnership interests (A)       |                         |  11,420                       |                          |
|                            |                         |                               |                          |
| Partners' (deficiency) capital, |                         |                               |                          |
|   December 31, 2008        |  $ (113)                | $ 1,451                            | $ 1,338                       |
|                            |                         |                               |                          |
| Net loss for the six months     |                         |                               |                          |
|   ended June 30, 2009      |      (1) |     (124)      |     (125) |
|                            |                         |                               |                          |
| Partners' (deficiency) capital, |                         |                               |                          |
|   June 30, 2009            |  $ (114)                | $ 1,327                            | $ 1,213                       |
|                            |                         |                               |                          |
| Percentage interest at          |                         |                               |                          |
|  June 30, 2009             |      1%  |       99% |      100% |
|                            |                         |                               |                          |

 

(A)   Consists of 5,710 limited partnership units (the “Units”) or (11,420 limited partnership interests) at both June 30, 2009 and December 31, 2008. A Unit consists of two limited partnership interests.

 

See Accompanying Notes to Financial Statements

** **

** **

REAL ESTATE ASSOCIATES LIMITED III

 

STATEMENTS OF CASH FLOWS

 (Unaudited)

(in thousands)

 

 
|                                                      | Six Months Ended                  |
|-----------------------------------------------------------|-----------------------------------|
|                                                      | June 30,                          |
|                                                      | 2009                              | 2008 |
| Cash flows from operating activities:                     |                              |   |
| Net loss                                                  | $   (125)               | $    (51) |
| Adjustments to reconcile net loss to net cash used in     |                              |   |
| operating activities:                                     |                              |   |
| Advances made to local partnerships recognized as expense |       66 |       10 |
| Change in accounts:                                       |                              |   |
| Accounts payable and accrued expenses                     |      (12)     |      (11) |
| Net cash used in operating activities                     |      (71)     |      (52) |
|                                                      |                              |   |
| Cash flows used in investing activity:                    |                              |   |
| Advances to local partnerships                            |      (66)     |      (10) |
|                                                      |                              |   |
| Net decrease in cash and cash equivalents                 |     (137)          |      (62) |
|                                                      |                              |   |
| Cash and cash equivalents, beginning of period            |    1,356                |    1,467 |
|                                                      |                              |   |
| Cash and cash equivalents, end of period                  | $  1,219                     | $  1,405 |

 

See Accompanying Notes to Financial Statements

### REAL ESTATE ASSOCIATES LIMITED III

 

### NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

 

**Note 1 – Organization and Summary of Significant Accounting Policies**

**** 

General

 

The information contained in the following notes to the unaudited financial statements is condensed from that which would appear in the annual audited financial statements; accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and related notes thereto contained in the annual report for the fiscal year ended December 31, 2008 prepared by Real Estate Associates Limited III (the "Partnership" or "Registrant"). Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end.  The results of operations for the interim periods presented are not necessarily indicative of the results expected for the entire year.

 

In the opinion of the Partnership’s management, the accompanying unaudited financial statements contain all adjustments (consisting primarily of normal recurring accruals) necessary to present fairly the financial position as of June 30, 2009 and the results of operations and changes in cash flows for the six months ended June 30, 2009 and 2008, respectively.

 

The general partners collectively have a one percent interest in profits and losses of the Partnership.  The limited partners have the remaining 99 percent interest which is allocated in proportion to their respective individual investments.  The general partners of the Partnership are National Partnership Investments Corp. ("NAPICO" or the "Corporate General Partner") and National Partnership Investment Associates (“NAPIA”). The Corporate General Partner is a subsidiary of Apartment Investment and Management Company (“AIMCO”), a publicly traded real estate investment trust.

 

# Basis of Presentation

 

The accompanying unaudited financial statements have been prepared in conformity with accounting principles generally accepted in the United States.  

 

The Partnership’s management evaluated for subsequent events through the time this Quarterly Report on Form 10-Q was filed on August 13, 2009.

 

Method of Accounting for Investment in Local Partnerships

 

The investment in local limited partnerships (the “Local Partnerships”) is accounted for on the equity method.  

 

Net Loss Per Limited Partnership Interest

 

Net loss per limited partnership interest was computed by dividing the limited partners’ share of net loss by the number of limited partnership interests outstanding at the beginning of the period.  The number of limited partnership interests was 11,420 at January 1, 2009 and 2008.

 

Variable Interest Entities

 

As of December 31, 2004, the Partnership adopted FASB Interpretation No. 46 “Consolidation of Variable Interest Entities” (or “FIN 46”) and applied its requirements to all Local Partnerships in which the Partnership held a variable interest.  FIN 46 addresses the consolidation by business enterprises of variable interest entities.  Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics:  (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment atrisk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or

(iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.  FIN 46 requires a VIE to be consolidated in the financial statements of the entity that is determined to be the primary beneficiary of the VIE.  

 

At June 30, 2009 and December 31, 2008, the Partnership holds variable interests in six VIEs for which the Partnership is not the primary beneficiary.  The six VIEs consist of Local Partnerships in which the Partnership acquired an interest prior to the adoption of FIN 46 that are directly engaged in the ownership and management of six apartment properties with a total of 386 units.  The Partnership is involved with those VIEs as a non-controlling limited partner equity holder. The Partnership’s maximum exposure to loss as a result of its involvement with unconsolidated VIEs is limited to the Partnership’s recorded investments in and receivables from those VIEs, which was zero at June 30, 2009 and December 31, 2008.  The Partnership may be subject to additional losses to the extent of any financial support that the Partnership voluntarily provides in the future.

 

Recent Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 167,*Amendments to FASB Interpretation No. 46(R)*, or SFAS No. 167, which is effective for fiscal years beginning after November 15, 2009 and introduces a more qualitative approach to evaluating VIEs for consolidation.  SFAS No. 167 requires a company to perform an analysis to determine whether its variable interests gives it a controlling financial interest in a VIE.  This analysis identifies the primary beneficiary of a VIE as the entity that has (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.  In determining whether it has the power to direct the activities of the VIE that most significantly affect the VIE’s performance, SFAS No. 167 requires a company to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed.  SFAS No. 167 requires continuous reassessment of primary beneficiary status rather than periodic, event-driven assessments as previously required, and incorporates expanded disclosure requirements. The Partnership has not yet determined the effect that SFAS No. 167 will have on its financial statements.

 

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168,*The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162,* or SFAS No. 168, which is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  Upon the effective date of SFAS No. 168, the FASB Accounting Standards Codification, or the Codification, will become the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission, or SEC, under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.  Following SFAS No. 168, the FASB will issue Accounting Standards Updates that serve to update the Codification. The Partnership does not anticipate that SFAS No. 168 will have a significant effect on its financial statements.

##  

## Note 2 – Investments in Local Partnerships

 

As of June 30, 2009 and December 31, 2008, the Partnership holds limited partnership interests in six Local Partnerships. In addition, the Partnership holds a general partner interest in Real Estate Associates (“REA”). NAPICO is also a general partner in REA. The Local Partnerships own residential low income rental projects consisting of 386 apartment units.  The mortgage loans of these projects are payable to or insured byvarious governmental agencies.

 

The Partnership, as a limited partner, does not have a contractual relationship with the Local Partnerships or exercise control over the activities and operations, including refinancing or selling decisions, of the Local Partnerships that would require or allow for consolidation. Accordingly, the Partnership accounts for its investments in the Local Partnerships using the equity method. The Partnership is allocated profits and losses of the Local Partnerships based upon its respective ownership percentage (between 94% and 99%). The Partnership is also entitled to 99% of the profits and losses of REA.  Distributions of surplus cash from operations from most of the Local Partnerships are restricted by the Local Partnerships’ Regulatory Agreements with the United States Department of Housing and Urban Development (“HUD”). These restrictions limit the distribution to a portion, generally less than 10%, of the initial invested capital. The excess surplus cash is deposited into a residual receipts reserve, of which the ultimate realization by the Partnership is uncertain as HUD frequently retains it upon sale or dissolution of the Local Partnership. The Partnership is allocated profits and losses and receives distributions from refinancings and sales in accordance with the Local Partnerships’ partnership agreements. These agreements usually limit the Partnership’s distributions to an amount substantially less than its ownership percentage in the Local Partnership. 

 

The individual investments are carried at cost plus the Partnership’s share of the Local Partnership’s profits less the Partnership’s share of the Local Partnership’s losses, distributions and impairment charges. The Partnership is not legally liable for the obligations of the Local****Partnerships and is not otherwise committed to provide additional support to them. Therefore, it does not recognize losses once its investment in each of the Local Partnerships reaches zero.  Distributions from the Local Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. When the investment balance has been reduced to zero, subsequent distributions received are recognized as income in the accompanying statements of operations.  

 

For those investments where the Partnership has determined that the carrying value of its investments approximates the estimated fair value of those investments, the Partnership’s policy is to recognize equity in income of the Local Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Partnerships.  Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize.

 

At June 30, 2009 and December 31, 2008, the investment balance in all six of the Local Partnerships had been reduced to zero.

 

At times, advances are made to the Local Partnerships. Advances made by the Partnership to the individual Local Partnerships are considered part of the Partnership’s investment in the Local Partnerships. Advances to Local Partnerships for which the investment has been reduced to zero are charged to expense. During the six months ended June 30, 2009, the Partnership advanced approximately $66,000 to two Local Partnerships for entity taxes. During the six months ended June 30, 2008, the Partnership advanced approximately $10,000 to one Local Partnership.  During the six months ended June 30, 2009 and 2008, the Partnership recognized approximately $66,000 and $10,000 as expense for advances, respectively.

 

The following are unaudited condensed combined estimated statements of operations for the six months ended June 30, 2009 and 2008 for the Local Partnerships in which the Partnership has invested (in thousands):

 
|                                 | Three Months Ended       | Six Months Ended         |
|--------------------------------------|--------------------------|--------------------------|
|                                 | June 30,                 | June 30,                 |
|                                 | 2009                     | 2008                     | 2009 | 2008 |
|                                 |                     |                     |   |   |
| Rental and other income              | $   548        | $   567        | $ 1,172 | $ 1,183 |
|                                 |                     |                     |   |   |
| Expenses:                            |                     |                     |   |   |
|   Operating expenses            |     289   |     313   |     629 |     633 |
|   Financial expenses            |     225   |     228   |     450 |     456 |
|   Depreciation and amortization |     101   |     104   |     203 |     208 |
|                                 |     615   |     645   |   1,282 |   1,297 |
| Loss from continuing operations      |  $   (67) |  $   (78) |  $  (110) |  $  (114) |

 

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the 2008 amounts have been restated to exclude the operations of Westgate Apartments, Ltd., for which the Local Partnership sold its investment property in December 2008.

 

On December 10, 2008 one of the Local Partnerships, Westgate Apartments, Ltd., sold its investment property to a third party for approximately $703,000. The mortgage lender had commenced a foreclosure of the investment property owned by Westgate Apartments, Ltd. Although the sales price was less than the outstanding debt on the property, the lender accepted a discounted payoff. After payment to the lender and closing costs there were no sale proceeds available for distribution. The Partnership had no remaining investment balance in Westgate Apartments, Ltd. at June 30, 2009 and December 31, 2008. 

 

One Local Partnership, Lakeside Apartments, Ltd. (“Lakeside”), is currently marketing its investment property for sale. During May 2009, Lakeside entered into a sale contract with a third party for the sale of its investment property. Lakeside expects to close on this transaction during the fourth quarter of 2009. The Partnership has no investment balance remaining at June 30, 2009 and December 31, 2008 in Lakeside.

 

In addition to being the Corporate General Partner of the Partnership, NAPICO, or one of its affiliates is the local operating general partner for two of the Local Partnerships included above.

 

The current policy of the United States Department of Housing and Urban Development (“HUD”) is to not renew the Housing Assistance Payment (“HAP”) Contracts on a long-term basis on the existing terms.  In connection with renewals of the HAP Contracts under current law and policy, the amount of rental assistance payments under renewed HAP Contracts will be based on market rentals instead of above market rentals, which may be the case under existing HAP Contracts.  The payments under the renewed HAP Contracts may not be in an amount that would provide sufficient cash flow to permit owners of properties subject to HAP Contracts to meet the debt service requirements of existing loans insured by the Federal Housing Administration of HUD (“FHA”) unless such mortgage loans are restructured. In order to address the reduction in payments under HAP Contracts as a result of current policy, the Multi- family Assisted Housing Reform and Affordability Act of 1997 (“MAHRAA”) provides for the restructuring of mortgage loans insured by the FHA with respect to properties subject to the Section 8 program.  Under MAHRAA, an FHA-insured mortgage loan can be restructured into a first mortgage loan which will be amortized on a current basis and a low interest second mortgage loan payable to FHA which will only be payable on maturity of the first mortgage loan.  This restructuring results in a reduction in annual debt service payable to the owner of the FHA-insured mortgage loan and is expected to result in an insurance payment from FHA to the holder of the FHA-insured loan due to the reduction in the principal amount.  MAHRAA also phases out project-based subsidies on selected properties serving families not located in rental markets with limited supply, converting such subsidies to a tenant-based subsidy.

 

When the HAP Contracts are subject to renewal, there can be no assurance that the Local Partnerships in which the Partnership has an investment will be permitted to restructure their mortgage indebtedness under MAHRAA.  In addition, the economic impact on the Partnership of the combination of the reduced payments under the HAP Contracts and the restructuring of the existing FHA-insured mortgage loans under MAHRAA is uncertain.  

 

**Note 3 – Transactions with Affiliated Parties**

 

Under the terms of the Restated Certificate and Agreement of Limited Partnership, thePartnership is obligated to NAPICO for an annual management fee equal to 0.4 percent of the Partnership’s original remaining invested assets of the Local Partnerships and is calculated at the beginning of the year. Invested assets are defined as the costs of acquiring project interests, including the proportionate amount of the mortgage loans related to the Partnership's interest in the capital accounts of the respective Local Partnerships.  The management fee incurred for the six months ended June 30, 2009 and 2008 was approximately $28,000 and $31,000, respectively. 

 

**Note 4 – Fair Value of Financial Instruments**

**** 

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value is defined in the SFAS as the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. At June 30, 2009, the Partnership believes that the carrying amount of other assets and liabilities reported on the balance sheet that require such disclosure approximated their fair value.

 

**Note 5 - Contingencies**

 

The Corporate General Partner is involved in various lawsuits arising from transactions in the ordinary course of business. In the opinion of management and the Corporate General Partner, the claims will not result in any material liability to the Partnership.

 

**ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements in certain circumstances. Certain information included in this Quarterly Report contains or may contain information that is forward-looking, including, without limitation, statements regarding the Partnership’s future financial performance, and the effect of government regulations. Actual results may differ materially from those described in the forward-looking statements and, in addition, will be affected by a variety of risks and factors that are beyond the Partnership’s control including, without limitation: financing risks, including the availability and cost of financing and the risk that the Partnership’s cash flows from operations may be insufficient to meet required payments of principal and interest; national and local economic conditions; the general level of interest rates; the terms of governmental regulations that affect the Partnership and its investment in limited partnerships and interpretations of those regulations; the competitive environment in which the Partnership operates; real estate risks, including fluctuations inreal estate values and the general economic climate in local markets and competition for tenants in such markets; litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by the limited partnerships in which the Partnership has invested.Readers should carefully review the Partnership’s financial statements and the notes thereto and the other documents the Partnership files from time to time with the Securities and Exchange Commission.

 

The Corporate General Partner monitors developments in the area of legal and regulatory compliance.

 

Liquidity and Capital Resources

 

The Partnership's primary sources of funds include interest income earned from investing available cash and the receipt of distributions from the Local Partnerships in which the Partnership has invested. It is not expected that any of the Local Partnerships in which the Partnership has invested will generate cash flow from operations sufficient to provide for distributions to the Partnership's limited partners in any material amount.  An infrequent source of funds would be funds received by the Partnership as its share of any proceeds from the sale of a property owned by a Local Partnership or the Partnership’s sale of its interest in a Local Partnership.

 

The properties in which the Partnership has invested, through its investments in the Local Partnerships, receive one or more forms of assistance from the Federal Government. As a result, the Local Partnerships' ability to transfer funds either to the Partnership or among themselves in the form of cash distributions, loans or advances is generally restricted by these government assistance programs. These restrictions, however, are not expected to impact the Partnership's ability to meet its cash obligations.

 

As of June 30, 2009 and December 31, 2008, the Partnership had cash and cash equivalents of approximately $1,219,000 and $1,356,000, respectively. Cash and cash equivalents are on deposit with a financial institution earning interest at market rates.  Interest income earned during the six months ended June 30, 2009 and 2008 was approximately $1,000 and $24,000, respectively.  The amount of interest income varies with market rates available on deposits and with the amount of funds available for investment.  Cash equivalents can be converted to cash to meet obligations of the Partnership as they arise.  The Partnership intends to continue investing available funds in this manner.

 

Results of Operations

 

At June 30, 2009, the Partnership has investments in six Local Partnerships, all of which own housing projects that were substantially rented. The Partnership, as a limited partner, does not have a contractual relationship with the Local Partnerships or exercise control over the activities and operations, including refinancing or selling decisions of the Local Partnerships that would require or allow forconsolidation. Accordingly, the Partnership accounts for its investment in the Local Partnerships using the equity method.  Thus the individual investments are carried at cost plus the Partnership’s share of the Local Partnership’s profits less the Partnership’s share of the Local Partnership’s losses, distributions and impairment charges.  However, since the Partnership is not legally liable for the obligations of the Local Partnerships, or is not otherwise committed to provide additional support to them, it does not recognize losses once its investment in each of the Local Partnerships reaches zero.  Distributions from the Local Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero.  Subsequent distributions received are recognized as income in the accompanying statements of operations.  For those investments where the Partnership has determined that the carrying value of its investments approximates the estimated fair value of those investments, the Partnership’s policy is to recognize equity in income of the Local Partnerships only to the extent of distributions received, and amortization of acquisition costs from those Local Partnerships.  Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize. The Partnership did not recognize any equity in income or loss from Local Partnerships during the six months ended June 30, 2009 or 2008.  The Partnership did not receive any distributions from Local Partnerships during the six months ended June 30, 2009 or 2008.

 

At June 30, 2009, the investment balance in all six of the Local Partnerships had been reduced to zero.

 

Partnership revenues consist primarily of interest income earned on temporary investment of funds not required for investment in Local Partnerships. Interest income earned during the six months ended June 30, 2009 and 2008 was approximately $1,000 and $24,000, respectively. The decrease in interest income for the six months ended June 30, 2009 is due primarily to a decrease in interest rates.

 

An annual management fee is payable to the Corporate General Partner of the Partnership and is calculated at 0.4 percent of the Partnership's original remaining invested assets of the Local Partnerships and is calculated at the beginning of each year.  The management fee is paid to the Corporate General Partner for its continuing management of the Partnership's affairs. The fee is payable beginning with the month following the Partnership's initial investment in a Local Partnership. Management fees were approximately $28,000 and $31,000 for the six months ended June 30, 2009 and 2008, respectively.

 

Operating expenses, exclusive of the management fee, consist of legal and accountingfees for services rendered to the Partnership and general and administrative expenses. Legal and accounting fees were approximately $26,000 for both the six months ended June 30, 2009 and 2008 and approximately $13,000 for both the three months ended June 30, 2009 and 2008 respectively.  General and administrative expenses were approximately $6,000 and $8,000 for the six months ended June 30, 2009 and 2008, respectively, and approximately $2,000 and $3,000 for the three months ended June 30, 2009 and 2008, respectively.

 

At times, advances are made to the Local Partnerships. Advances made by the Partnership to the individual Local Partnerships are considered part of the Partnership’s investment in the Local Partnerships. Advances to Local Partnerships for which the investment has been reduced to zero are charged to expense. During the six months ended June 30, 2009, the Partnership advanced approximately $66,000 to two Local Partnerships for entity taxes. During the six months ended June 30, 2008, the Partnership advanced approximately $10,000 to one Local Partnership.  During the six months ended June 30, 2009 and 2008, the Partnership recognized approximately $66,000 and $10,000 as expense for advances, respectively.

 

The Partnership, as a limited partner in the Local Partnerships in which it has invested, is subject to the risks incident to the management and ownership of improved real estate.  The Partnership investments are also subject to adverse general economicconditions, and, accordingly, the status of the national legislation which could increase vacancy levels, rental payment defaults, and operating expenses, which in turn could substantially increase the risk of operating losses for the projects.

 

The current policy of the United States Department of Housing and Urban Development (“HUD”) is to not renew the Housing Assistance Payment (“HAP”) Contracts on a long-term basis on the existing terms.  In connection with renewals of the HAP Contracts under current law and policy, the amount of rental assistance payments under renewed HAP Contracts will be based on market rentals instead of above market rentals, which may be the case under existing HAP Contracts.  The payments under the renewed HAP Contracts may not be in an amount that would provide sufficient cash flow to permit owners of properties subject to HAP Contracts to meet the debt service requirements of existing loans insured by the Federal Housing Administration of HUD (“FHA”) unless such mortgage loans are restructured. In order to address the reduction in payments under HAP Contracts as a result of current policy, the Multi- family Assisted Housing Reform and Affordability Act of 1997 (“MAHRAA”) provides for the restructuring of mortgage loans insured by the FHA with respect to properties subject to the Section 8 program.  Under MAHRAA, an FHA-insured mortgage loan can be restructured into a first mortgage loan which will be amortized on a current basis and a low interest second mortgage loan payable to FHA which will only be payable on maturity of the first mortgage loan.  This restructuring results in a reduction in annual debt service payable to the owner of the FHA-insured mortgage loan and is expected to result in an insurance payment from FHA to the holder of the FHA-insured loan due to the reduction in the principal amount.  MAHRAA also phases out project-based subsidies on selected properties serving families not located in rental markets with limited supply, converting such subsidies to a tenant-based subsidy.

 

When the HAP Contracts are subject to renewal, there can be no assurance that the Local Partnerships in which the Partnership has an investment will be permitted to restructure their mortgage indebtedness under MAHRAA.  In addition, the economic impact on the Partnership of the combination of the reduced payments under the HAP Contracts and the restructuring of the existing FHA-insured mortgage loans under MAHRAA is uncertain.  

 

Off-Balance Sheet Arrangements

 

The Partnership owns limited partnership interests in unconsolidated Local Partnerships, in which the Partnership’s ownership percentage ranges from 94% to 99%.  However, based on the provisions of the relevant partnership agreements, the Partnership, as a limited partner, does not have control or a contractual relationship with the Local Partnerships that would require or allow for consolidation under accounting principles generally accepted in the United States (see “Note 1 – Organization and Summary of Significant Accounting Policies” of the financial statements in “Item 1. Financial Statements”).  There are no lines of credit, side agreements or any other derivative financial instruments between the Local Partnerships and the Partnership.  Accordingly the Partnership’s maximum risk of loss related to these unconsolidated Local Partnerships is limited to the recorded investments in and receivables from the Local Partnerships.  See “Note 2 – Investments in Local Partnerships” of the financial statements in “Item 1. Financial Statements” for additional information about the Partnership’s investments in unconsolidated Local Partnerships.

 

Other

 

In addition to its indirect ownership of the general partnership interest in the Partnership, AIMCO and its affiliates owned 492 limited partnership units (the "Units") (or 984 limited partnership interests) in the Partnership representing 8.62% of the outstanding Units as of June 30, 2009.  A Unit consists of two limited partnership interests. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional Units in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the Corporate General Partner. Although the Corporate General Partner owes fiduciary duties to the limited partners of the Partnership, theCorporate General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Corporate General Partner, as corporate general partner, to the Partnership and its limited partners may come into conflict with the duties of the Corporate General Partner to AIMCO as its sole stockholder.

 

###### Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Partnership to make estimates and assumptions. Judgments and assessments of uncertainties are required in applying the Partnership’s accounting policies in many areas.   The following may involve a higher degree of judgment and complexity.

 

###### Method of Accounting for Investments in Local Partnerships

 

The Partnership, as a limited partner, does not have a contractual relationship with the Local Partnerships or exercise control over the activities and operations, including refinancing or selling decisions, of the Local Partnerships that would require or allow for consolidation. Accordingly, the Partnership accounts for its investments in the Local Partnerships using the equity method. The Partnership is allocated profits and losses of the Local Partnerships based upon its respective ownership percentage (between 94% and 99%). The Partnership is also entitled to 99% of the profits and losses of REA.  Distributions of surplus cash from operations from most of the Local Partnerships are restricted by the Local Partnerships’ Regulatory Agreements with the United States Department of Housing and Urban Development (“HUD”). These restrictions limit the distribution to a portion, generally less than 10%, of the initial invested capital. The excess surplus cash is deposited into a residual receipts reserve, of which the ultimate realization by the Partnership is uncertain as HUD frequently retains it upon sale or dissolution of the Local Partnership. The Partnership is allocated profits and losses and receives distributions from refinancings and sales in accordance with the Local Partnerships’ partnership agreements. These agreements usually limit the Partnership’s distributions to an amount substantially less than its ownership percentage in the Local Partnership.  

 

The individual investments are carried at cost plus the Partnership’s share of the Local Partnership’s profits less the Partnership’s share of the Local Partnership’s losses, distributions and impairment charges. The Partnership is not legally liable for the obligations of the Local Partnerships and is not otherwise committed to provide additional support to them. Therefore, it does not recognize losses once its investment in each of the Local Partnerships reaches zero.  Distributions from the Local Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. When the investment balance has been reduced to zero, subsequent distributions received are recognized as income in the statements of operations.  

 

For those investments where the Partnership has determined that the carrying value of its investments approximates the estimated fair value of those investments, the Partnership’s policy is to recognize equity in income of the Local Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Partnerships.  Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize.

 

Variable Interest Entities

 

As of December 31, 2004, the Partnership adopted FASB Interpretation No. 46 “Consolidation of Variable Interest Entities” (or “FIN 46”) and applied its requirements to all Local Partnerships in which the Partnership held a variable interest.  FIN 46 addresses the consolidation by business enterprises of variable interest entities.  Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics:  (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or(iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.  FIN 46 requires a VIE to be consolidated in the financial statements of the entity that is determined to be the primary beneficiary of the VIE.

 

At June 30, 2009 and December 31, 2008, the Partnership holds variable interests in six VIEs for which the Partnership is not the primary beneficiary.  The six VIEs consist of Local Partnerships in which the Partnership acquired an interest prior to the adoption of FIN 46 that are directly engaged in the ownership and management of six apartment properties with a total of 386 units.  The Partnership is involved with those VIEs as a non-controlling limited partner equity holder. The Partnership’s maximum exposure to loss as a result of its involvement with unconsolidated VIEs is limited to the Partnership’s recorded investments in and receivables from those VIEs, which was zero at June 30, 2009 and December 31, 2008.  The Partnership may be subject to additional losses to the extent of any financial support that the Partnership voluntarily provides in the future.

 

**ITEM 4T.**   **CONTROLS AND PROCEDURES**

 

**(a)   Disclosure Controls and Procedures.**

 

The Partnership’s management, with the participation of the principal executive officer and principal financial officer of the Corporate General Partner, who are the equivalent of the Partnership’s principal executive officer and principal financial officer, respectively, has evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and principal financial officer of the Corporate General Partner, who are the equivalent of the Partnership’s principal executive officer and principal financial officer, respectively, have concluded that, as of the end of such period, the Partnership’s disclosure controls and procedures are effective.

 

**(b)   Changes in Internal Control Over Financial Reporting.**

 

There has been no change in the Partnership’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

**PART II - OTHER INFORMATION**

 

**ITEM 6.     EXHIBITS**

 

See Exhibit Index.

 

The agreements included as exhibits to this Form 10-Q contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

 
    -  should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; 

 
    -  have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; 

 
    -  may apply standards of materiality in a way that is different from what may be viewed as material to an investor; and 

 
    -  were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. 

 

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. The Partnership acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Form 10-Q not misleading. Additional information about the Partnership may be found elsewhere in this Form 10-Q and the Partnership’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.  

 

### SIGNATURES

 

 

 

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

 

 
|                  | REAL ESTATE ASSOCIATES LIMITED III                       |
|-----------------------|----------------------------------------------------------|
|                  | (a California Limited Partnership)                       |
|                  |                                                     |
|                  | By:   National Partnership Investments Corp.   |
|                  |       Corporate General Partner |
|                  |                                                     |
| Date: August 13, 2009 | By:  /s/Steven D. Cordes                       |
|                  |       Steven D. Cordes          |
|                  |       Senior Vice President     |
|                  |                                                     |
| Date: August 13, 2009 | By:  /s/Stephen B. Waters                      |
|                  |       Stephen B. Waters         |
|                  |       Senior Director           |

REAL ESTATE ASSOCIATES LIMITED III

EXHIBIT INDEX

 

 

Exhibit    Description of Exhibit

 

 

3           Restated Certificate and Agreement of Limited Partnership herein dated January 5, 1981 incorporated by reference to the Partnership's Form S-11 No. 268983.

 

3.1         Amendments to Restated Certificate and Agreement of Limited Partnership, incorporated by reference to the Registrant’s Form 8-K dated January 24, 2005. 

 

3.2         Restated Certificate and Agreement of Limited Partnership incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 24, 2005.

 

31.1        Certification of equivalent of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2        Certification of equivalent of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1        Certification of equivalent of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.