e424b3
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-136801
PROSPECTUS
APARTMENT INVESTMENT AND
MANAGEMENT COMPANY
AIMCO PROPERTIES, L.P.
NOTICE OF OFFER TO ACQUIRE
SEVEN PROPERTIES OWNED BY VMS NATIONAL PROPERTIES JOINT VENTURE
FOR PARTNERSHIP COMMON UNITS OR CASH
NOTICE OF INTENT TO SELL EIGHT
PROPERTIES TO UNAFFILIATED THIRD PARTIES
VMS National Properties Joint Venture, or VMS, entered into an
agreement to contribute certain of its properties to AIMCO
Properties, LLC, a wholly owned subsidiary of AIMCO Properties,
L.P. in a transaction pursuant to which you may elect to receive
partnership common units of AIMCO Properties, L.P. or cash or a
combination of units and cash. The properties to be contributed
are Casa de Monterey, Buena Vista Apartments, Crosswood Park,
Mountain View Apartments, Pathfinder Village Apartments,
Scotchollow Apartments, and The Towers of Westchester Park.
Separately, VMS intends to sell its other eight properties to
one or more unaffiliated third parties in one or more sales. The
properties to be sold to third parties are North Park
Apartments, Chapelle Le Grande, Terrace Gardens, Forest Ridge
Apartments, The Bluffs, Watergate Apartments, Shadowood
Apartments and Vista Village Apartments. On November 22,
2006, VMS entered into an agreement to sell Watergate Apartments
to an unaffiliated third party for a total purchase price of
$7,710,000. On November 28, 2006, VMS entered into an
agreement to sell Shadowood Apartments to an unaffiliated third
party for a total purchase price of $5,300,000. On
December 4, 2006, VMS entered into agreements to sell
Terrace Gardens and The Bluffs to unaffiliated third parties for
total purchase prices of $7,200,000 and $9,650,000,
respectively. On December 11, 2006, VMS entered into an
agreement to sell Vista Village Apartments to an unaffiliated
third party for a total purchase price of $7,250,000. On
December 12, 2006, VMS entered into an agreement to sell
Chappelle Le Grande to an unaffiliated third party for a total
purchase price of $5,250,000. The terms of the two remaining
third party sales are not yet defined as purchase agreements
have not been entered into. However, VMS has received offers at
specific offer prices to purchase the two remaining Unaffiliated
Sale Properties. Both transactions are described more fully in
this proxy statement-prospectus.
Limited partners electing to waive any portion of the cash
distribution and receive Common OP Units instead of all or
a portion of cash otherwise distributable to them will receive
that number of Common OP Units equal to (i) the amount
of the cash distribution waived by such limited partner divided
by (ii) the average daily closing price of a share of
Class A Common Stock on the NYSE over the twenty
trading-day period ended two days prior to consummation of the
Affiliated Contribution. Although the Managing General Partner
of VMS has provided estimates of the potential cash
distributions to limited partners resulting from the Affiliated
Contribution, a limited partner will not know the precise amount
of the cash distribution or Common OP Units to be received
at the time of such limited partners election to receive
cash, Common OP Units or a combination thereof.
VMS will not complete either of the transactions summarized
above if limited partners owning more than 50% of the aggregate
units of VMS National Residential Portfolio I and VMS National
Residential Portfolio II, the sole participants of VMS
National Properties Joint Venture, give written notice of
objection to that transaction prior to March 28, 2007. VMS
National Residential Portfolio I has 669 limited partners
and VMS National Residential Portfolio II has 257 limited
partners. The process for objecting is more fully described in
this proxy statement-prospectus.
You should read this entire proxy statement-prospectus carefully
because it contains important information about the transactions.
In particular, you should read carefully the information
under the section entitled Risk Factors, beginning
on page 44.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this proxy statement-prospectus is February 21,
2007 and is first being mailed to limited partners on or about
February 22, 2007.
WE ARE CURRENTLY SEEKING QUALIFICATION TO ALLOW ALL HOLDERS
OF PARTNERSHIP INTERESTS IN VMS THE ABILITY TO ELECT TO RECEIVE
COMMON OP UNITS IN CONNECTION WITH THE AFFILIATED CONTRIBUTION.
HOWEVER, AT THE PRESENT TIME, IF YOU ARE A RESIDENT OF ONE OF
THE FOLLOWING STATES, YOU ARE NOT PERMITTED TO ELECT TO RECEIVE
COMMON OP UNITS IN CONNECTION WITH THE AFFILIATED
CONTRIBUTION:
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ALABAMA
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NEW JERSEY
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ALASKA
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NEW
YORK
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IF YOU ARE NOT A RESIDENT OF ONE OF THESE STATES, YOU MAY
ELECT TO WAIVE YOUR RIGHT TO RECEIVE ANY PORTION OF THE CASH
DISTRIBUTION WITH RESPECT TO THE AFFILIATED CONTRIBUTION AND TO
RECEIVE COMMON OP UNITS DIRECTLY FROM AIMCO PROPERTIES, L.P., AS
DESCRIBED HEREIN.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE DELAWARE SECURITIES ACT BUT RATHER VIA AN EXEMPTION TO
THE REGISTRATION REQUIREMENTS OF SUCH ACT. THE SUBSEQUENT RESALE
OR TRANSFER OF THESE SECURITIES IN THE STATE OF DELAWARE CAN
ONLY BE MADE PURSUANT TO THE PROVISIONS OF THE DELAWARE
SECURITIES ACT OR A VALID EXEMPTION PROMULGATED
THEREUNDER.
THESE SECURITIES ARE OFFERED IN THE STATE OF MARYLAND
PURSUANT TO REGISTRATION WITH THE DIVISION OF SECURITIES OF
THE DEPARTMENT OF LAW OF MARYLAND, BUT REGISTRATION IS
PERMISSIVE ONLY AND DOES NOT CONSTITUTE A FINDING THAT THIS
PROSPECTUS IS TRUE, COMPLETE, AND NOT MISLEADING, NOR HAS THE
DIVISION OF SECURITIES PASSED IN ANY WAY UPON THE MERITS
OF, RECOMMENDED, OR GIVEN APPROVAL TO THESE SECURITIES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE CORPORATION AND SECURITIES BUREAU, MICHIGAN
DEPARTMENT OF COMMERCE. THE DEPARTMENT HAS NOT UNDERTAKEN TO
PASS UPON THE VALUE OF THESE SECURITIES NOR TO MAKE ANY
RECOMMENDATIONS AS TO THEIR PURCHASE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED
ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
HOW TO
OBTAIN ADDITIONAL INFORMATION
This proxy statement-prospectus incorporates important business
and financial information about VMS, the Aimco Operating
Partnership and Aimco, that is not included in, or delivered
with, this document. This information is described on
page 117 under INFORMATION INCORPORATED BY
REFERENCE. VMS, the Aimco Operating Partnership and Aimco
file annual, quarterly and current reports, and other statements
with the Securities and Exchange Commission (the
Commission or the SEC). You may read and
copy any filed document at the Commissions public
reference room located at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330
for further information on the public reference room. Documents
filed with the Commission are also available to the public at
the Commissions website at http://www.sec.gov. VMS, the
Aimco Operating Partnership or Aimco, as appropriate, will
furnish without charge to you, upon written or oral request, a
copy of any or all of the documents incorporated by reference,
including the exhibits or schedules to these documents. You
should direct any such requests to The Altman Group, Inc., 1200
Wall Street,
3rd Floor,
Lyndhurst, New Jersey 07071; by fax at
(201) 460-0050
or by telephone at
(800) 217-9608.
PLEASE
NOTE
Aimco and the Aimco Operating Partnership have not authorized
anyone to provide you with any information or to make any
representation other than as is contained or incorporated by
reference in this proxy statement-prospectus. You must not rely
upon any information or representation not contained or
incorporated by reference in this proxy statement-prospectus.
You should not assume that the information contained in this
proxy statement-prospectus is accurate on any date subsequent to
the date set forth on the front of the document or that any
information incorporated by reference is correct on any date
subsequent to the date of the document incorporated by
reference, even though this proxy statement-prospectus is
delivered or securities are sold on a later date.
VMS
NATIONAL RESIDENTIAL PORTFOLIO I
VMS NATIONAL RESIDENTIAL PORTFOLIO II
(participants in VMS National Properties Joint Venture)
February 21, 2007
Dear Limited Partner:
VMS National Properties Joint Venture (VMS) entered
into an agreement (the Contribution Agreement) to
contribute certain of its properties to AIMCO Properties, LLC
(Aimco Properties, LLC), a wholly owned subsidiary
of AIMCO Properties, L.P. (the Aimco Operating
Partnership), in a transaction pursuant to which you may
elect to receive partnership common units (Common
OP Units) of the Aimco Operating Partnership, cash or
a combination of Common OP Units and cash (the
Affiliated Contribution). The properties to be
contributed in the Affiliated Contribution are Casa de Monterey,
Buena Vista Apartments, Crosswood Park, Mountain View
Apartments, Pathfinder Village Apartments, Scotchollow
Apartments, and The Towers of Westchester Park (collectively,
the Affiliated Contribution Properties), and are
described in more detail below.
Limited partners electing to waive any portion of the cash
distribution and receive Common OP Units instead of all or
a portion of cash otherwise distributable to them will receive
that number of Common OP Units equal to (i) the amount
of the cash distribution waived by such limited partner divided
by (ii) the average daily closing price of a share of
Class A Common Stock on the NYSE over the twenty
trading-day period ended two days prior to consummation of the
Affiliated Contribution. Although the Managing General Partner
of VMS has provided estimates of the potential cash
distributions to limited partners resulting from the Affiliated
Contribution, a limited partner will not know the precise amount
of the cash distribution or Common OP Units to be received
at the time of such limited partners election to receive
cash, Common OP Units or a combination thereof.
Separately, and as a condition to the Affiliated Contribution,
VMS intends to sell its other eight properties to one or more
unaffiliated third parties in one or more sales (the
Unaffiliated Sales, and together with the Affiliated
Contribution, the Transactions). The properties to
be sold in the Unaffiliated Sales are North Park Apartments,
Chapelle Le Grande, Terrace Gardens, Forest Ridge Apartments,
The Bluffs, Watergate Apartments, Shadowood Apartments and Vista
Village Apartments (collectively, the Unaffiliated Sale
Properties and together with the Affiliated Contribution
Properties, the Properties), and are described in
more detail below. On November 22, 2006, VMS entered into
an agreement to sell Watergate Apartments to an unaffiliated
third party for a total purchase price of $7,710,000. On
November 28, 2006, VMS entered into an agreement to sell
Shadowood Apartments to an unaffiliated third party for a total
purchase price of $5,300,000. On December 4, 2006, VMS
entered into agreements to sell Terrace Gardens and The Bluffs
to unaffiliated third parties for total purchase prices of
$7,200,000 and $9,650,000, respectively. On December 11,
2006, VMS entered into an agreement to sell Vista Village
Apartments to an unaffiliated third party for a total purchase
price of $7,250,000. On December 12, 2006, VMS entered into
an agreement to sell Chapelle Le Grande to an unaffiliated third
party for a total purchase price of $5,250,000. The terms of the
two remaining Unaffiliated Sales are not yet defined as purchase
agreements have not been entered into. However, VMS has received
offers at specific offer prices to purchase the two remaining
Unaffiliated Sale Properties.
We will not complete the Affiliated Contribution if limited
partners owning more than 50% of the aggregate units of VMS
National Residential Portfolio I (Portfolio I) and
VMS National Residential Portfolio II
(Portfolio II, and together with
Portfolio I, the Partnerships) give written
notice of objection prior to March 28, 2007. A holder of
limited partnership interests in either of the Partnerships may
object to the Affiliated Contribution by following the
procedures set forth in the proxy statement-prospectus on
page 66. If the Affiliated Contribution is not consummated,
VMS will continue to own the Affiliated Contribution Properties
and remain responsible for the related mortgage debt. The
Affiliated Contribution is more fully described in this proxy
statement-prospectus.
Likewise, we will not complete the Unaffiliated Sales if limited
partners owning more than 50% of the aggregate units of the
Partnerships give written notice of objection prior to
March 28, 2007. A holder of limited partnership interests
in either of the Partnerships may object to the Unaffiliated
Sales by following the procedures set forth in the proxy
statement-prospectus on page 66. Further, we will not
complete an Unaffiliated Sale if the purchase price for such
Unaffiliated Sale Property does not exceed eighty-five percent
(85%) of (i) the purchase price for such Property set forth in
the applicable purchase agreement described above or (ii) the
highest offer price for a Property for which a contract has not
yet been executed (each, the Minimum Unaffiliated Sale
Price and, collectively, the Minimum Unaffiliated
Sale Prices) or $60,188,500 in the aggregate. If any of
the Unaffiliated Sales are not consummated, VMS will continue to
own the Unaffiliated Sale Properties not sold, the Affiliated
Contribution will not be completed and VMS will remain
responsible for the related mortgage debt for the Properties it
continues to own. The Unaffiliated Sales are more fully
described in this proxy statement-prospectus.
In the event that the Transactions are consummated, immediately
after the completion of the Affiliated Contribution, VMS shall
liquidate and shall be dissolved, pursuant to the terms of the
Joint Venture Agreement of VMS.
On January 19, 2007, MAERIL, Inc., the managing general
partner (the Managing General Partner), refinanced
the then-existing mortgage indebtedness encumbering the
Properties. Notwithstanding the refinancing, if a disposition of
the Properties is not consummated, there will be an increased
risk that VMS will not be able to repay or refinance the
mortgage and other debt on acceptable terms or fund any
deficits, capital expenditures, or other costs and therefore an
increased risk that VMS will default upon its indebtedness in
the future, and perhaps lose its Properties in the future
through mortgage foreclosure. Were VMS to lose any of its
Properties, partners could recognize taxable gain and likely
would not receive distributions sufficient to pay the tax then
due.
Aimco Properties, LLC is an affiliate of ours. As a result, we
had significant conflicts of interest in approving the
Affiliated Contribution. However, as the managing general
partner of the Partnerships, we approved the Transactions after
determining that the Transactions are fair to, and in the best
interests of, VMS, the Partnerships and the limited partners. In
making this determination, we evaluated the tax consequences to
the limited partners of a sale to a third party for cash, as
well as the likely financial consequences of continuing to
operate the Properties. In reaching a determination regarding
the fairness of the consideration to be received in the
Affiliated Contribution, we relied on appraisals of the
Affiliated Contribution Properties prepared by KTR Valuation and
Consulting Services, LLC, an independent appraisal firm, and our
own internal valuations.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT
TO SEND US A PROXY.
As more fully discussed in the proxy statement-prospectus,
limited partners of the Partnerships are not entitled to
appraisal rights under applicable law permitting them to seek a
judicial determination of the value of their Partnership
interests in lieu of accepting the distributions resulting from
the Transactions. However, pursuant to the Contribution
Agreement, VMS, the Partnerships and Aimco Properties, LLC have
provided each limited partner with contractual dissenters
appraisal rights with respect to the Affiliated Contribution
that are generally based upon the dissenters appraisal
rights that a limited partner would have were it a shareholder
in a corporate merger under the corporation laws of Illinois,
the state of the Partnerships organization. See
APPRAISAL RIGHTS.
If you want to object to either, or both, the Affiliated
Contribution or the Unaffiliated Sales, please complete and sign
the Notice of Objection included with this proxy
statement-prospectus and return it to us at the address
indicated on the Notice of Objection. Any Notice of Objection
received after March 28, 2007 will not be considered. The
Managing General Partner currently anticipates that the
Affiliated Contribution will be consummated no later than
June 30, 2007. If you want to receive Common OP Units
rather than cash for the Affiliated Contribution, please
complete and sign the Consideration Election Form included with
this proxy statement-prospectus and return it to us at the
address indicated on the Consideration Election Form. Any
Consideration Election Form received after April 20, 2007
will not be considered, unless the Managing General Partner
elects, in its sole discretion, to extend the time for
submission thereof. If you have any questions regarding this
proxy statement-prospectus, please contact our information
agent, The Altman Group, Inc., at
(800) 217-9608
(toll-free).
Very truly yours,
MAERIL, Inc.
Managing General Partner of the Partnerships
TABLE OF
CONTENTS
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SUMMARY
This summary highlights material terms of the proposed
transactions in this proxy statement-prospectus. We urge you to
read this entire proxy statement-prospectus, including the
information and the financial statements and notes thereto that
are incorporated herein by reference. See Where You Can
Find More Information.
In this proxy statement-prospectus, interests in the Aimco
Operating Partnership are sometimes referred to as
OP Units, with Partnership Common Units
referred to as Common OP Units, Partnership
Preferred Units referred to as Preferred
OP Units and High Performance Partnership Units
referred to as High Performance Units or
HPUs. Preferred OP Units are interests in the
Aimco Operating Partnership that have distribution rights, or
rights upon liquidation, winding up or dissolution, that are
superior or prior to the Common OP Units. Holders of
OP Units are sometimes referred to as OP
Unitholders and holders of Common OP Units are
referred to as Common OP Unitholders. Class A
Common Stock of Apartment Investment and Management Company
(Aimco) is referred to as Class A Common
Stock. Finally, references to we and
us refer to Aimco and the Aimco Operating
Partnership as joint filers of this proxy
statement-prospectus.
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The Transactions. On August 21, 2006, VMS
and Aimco Properties, LLC entered into an agreement (the
Contribution Agreement) pursuant to which VMS agreed
to the Affiliated Contribution. The Properties to be contributed
in the Affiliated Contribution are Casa de Monterey, Buena Vista
Apartments, Crosswood Park Apartments, Mountain View Apartments,
Pathfinder Village Apartments, Scotchollow Apartments, and The
Towers of Westchester Park. The value of the consideration to be
received by VMS for each of the Affiliated Contribution
Properties is $230,078,260, which is equal to the greater of the
appraised market value of the fee simple interest in such
Properties and internal valuations prepared annually by Aimco.
Separately, and as a condition to the Affiliated Contribution,
VMS intends to complete the Unaffiliated Sales. On
November 22, 2006, VMS entered into an agreement to sell
Watergate Apartments to an unaffiliated third party for a total
purchase price of $7,710,000. On November 28, 2006, VMS
entered into an agreement to sell Shadowood Apartments to an
unaffiliated third party for a total purchase price of
$5,300,000. On December 4, 2006, VMS entered into
agreements to sell Terrace Gardens and The Bluffs to
unaffiliated third parties for total purchase prices of
$7,200,000 and $9,650,000, respectively. On December 11,
2006, VMS entered into an agreement to sell Vista Village
Apartments to an unaffiliated third party for a total purchase
price of $7,250,000. On December 12, 2006, VMS entered into
an agreement to sell Chappelle Le Grande to an unaffiliated
third party for a total purchase price of $5,250,000. The terms
of the two remaining Unaffiliated Sales are currently unknown as
purchase agreements have not been entered into. However, VMS has
received offers at specific offer prices to purchase the two
remaining Unaffiliated Sale Properties. VMS will not complete an
Unaffiliated Sale if the purchase price for such Unaffiliated
Sale Property does not exceed eighty-five percent (85%) of (i)
the purchase price of such Property set forth in the applicable
agreement described above, or (ii) the highest offer price for a
Property for which a purchase agreement has not yet been
executed, or $60,188,500 in the aggregate. We refer to the
Affiliated Contribution and the Unaffiliated Sales collectively
as the Transactions and individually as a
Transaction in this proxy statement-prospectus. See
SPECIAL FACTORS BACKGROUND AND REASONS FOR THE
TRANSACTIONS, THE TRANSACTIONS, VMS AND
THE PARTNERSHIPS Capital Replacement, and
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
TRANSACTIONS.
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Limited Partners Right to Object. In
accordance with the terms of the VMS joint venture agreement and
the partnership agreements of each of the Partnerships, VMS will
not complete a Transaction if limited partners owning more than
50% of the aggregate units of the Partnerships give written
notice of objection to that Transaction prior to March 28,
2007. For additional information, see PROCEDURE FOR
OBJECTING TO A TRANSACTION.
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Choice of Consideration. The limited partners
of the Partnerships are being given a choice as to the
consideration they will receive with respect to the Affiliated
Contribution. The limited partners may elect to waive the right
to receive any portion of the cash distribution with respect to
the Affiliated Contribution and receive that portion of the
distributable proceeds from the Affiliated Contribution as
Common OP Units instead. Those who so elect and those that
do not make an election will receive their portion of the
distributable proceeds in cash. The choice of consideration with
respect to the Affiliated Contribution is more fully described
under THE TRANSACTIONS. After the first anniversary
of becoming a holder of
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Common OP Units, each holder has the right, subject to the
terms and conditions set forth in the Aimco Operating
Partnerships agreement of limited partnership ( the
Aimco Operating Partnership Agreement), to require
the Aimco Operating Partnership to redeem all or a portion of
the Common OP Units held by such party in exchange for
shares of Class A Common Stock or a cash amount equal to
the value of such shares, as the Aimco Operating Partnership may
elect. See DESCRIPTION OF COMMON OP UNITS for
additional information.
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Advantages of the Transactions. The Managing
General Partner believes that the Transactions have the
following principal advantages:
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Limited partners that elect to receive Common OP Units as
consideration may be entitled to defer a portion of their
taxable gain and have the opportunity to participate in the
Aimco Operating Partnerships enterprise.
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Limited partners that do not elect to receive Common
OP Units will forego the potential deferral of taxable gain
that may result from receipt of Common OP Units, but will
receive a cash distribution of approximately $28,940 per
Portfolio I nondefaulted unit and $28,716 per
Portfolio II nondefaulted unit from the Affiliated
Contribution.
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The Unaffiliated Sales will result in cash distributions to the
limited partners of approximately $10,007 per Portfolio I
nondefaulted unit and $9,930 per Portfolio II nondefaulted
unit, assuming the Minimum Unaffiliated Sale Price for each
Unaffiliated Sale Property is achieved.
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The Affiliated Contribution provides greater certainty than
sales to third parties, due to, among other things, the short
feasibility period and abbreviated conditions to closing.
Simultaneous approval of the Unaffiliated Sales will permit the
Partnerships to avoid the costs and delay of subsequent
notifications to the partners.
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There are various costs associated with being a public reporting
company, including costs associated with preparing, auditing and
filing periodic reports with the SEC, which would be eliminated
if VMS were to terminate its registration and therefore its
obligation to file annual, quarterly and other reports with the
SEC pursuant to the Securities Exchange Act of 1934, as amended
(the Exchange Act). The Managing General Partner
estimates these expenses to be approximately $87,000 per
year. This represents approximately 13% of VMSs general
and administrative expenses and 0.20% of its total expenses
(based on 2005 expenses of approximately $686,000 and
$42,508,000, respectively). In addition, as a result of the
Sarbanes-Oxley Act of 2002, the Managing General Partner
estimates these costs will increase by approximately 10%
beginning in 2007.
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All of the Properties currently require capital expenditures for
which existing resources are not adequate. The refinancing of
the Properties, while beneficial to the debt structure of the
Partnerships and the Transactions, did not generate sufficient
cash to fund the required capital expenditures.
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The tax benefits of continued investment in the Properties have
been reduced for most limited partners.
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Disadvantages of the Transactions. The
Managing General Partner believes that the Transactions have the
following disadvantages:
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The Unaffiliated Sales will result in taxable gain to the
limited partners, and distributable proceeds to the limited
partners will likely be insufficient to pay the resulting tax
liability.
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To the extent that limited partners in the Partnerships receive
cash in connection with the Affiliated Contribution, all limited
partners in the Partnership, including limited partners
receiving Common OP Units and no cash, will recognize taxable
gain.
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The Managing General Partner is an affiliate of Aimco
Properties, LLC, and the terms of the Affiliated Contribution,
including the amount of consideration, were determined without
an arms-length negotiation. VMS might obtain greater
consideration in a sale to a third party or another transaction
that involved independent third-party negotiations.
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In structuring the Affiliated Contribution, no one separately
represented the interests of the limited partners. Although the
Managing General Partner has a fiduciary duty to the limited
partners, it also has responsibilities to its stockholder, which
is affiliated with Aimco Properties, LLC, resulting in a
conflict of interest.
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For those limited partners that elect to receive solely Common
OP Units as consideration, the Affiliated Contribution will not
result in any immediate cash distribution.
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For additional information, see RISK FACTORS,
SPECIAL FACTORS BACKGROUND AND REASONS FOR THE
TRANSACTIONS Expected Benefits of the
Transactions and SPECIAL FACTORS
BACKGROUND AND REASONS FOR THE TRANSACTIONS Expected
Detriments of the Transactions.
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Conflicts of Interest. Apartment Investment
and Management Company (Aimco) beneficially owns
both the Managing General Partner of the Partnerships and the
general partnership interest and approximately ninety percent
(90%) of the common partnership units and equivalents of the
Aimco Operating Partnership, as of September 30, 2006. The
Aimco Operating Partnership is the sole member of Aimco
Properties, LLC and is also a limited partner in the
Partnerships. The Managing General Partner has fiduciary duties
to the limited partners of the Partnerships, on the one hand,
and to Aimco, as its sole stockholder, on the other. As a
result, in considering the Affiliated Contribution, the Managing
General Partner has substantial conflicts of interest.
Dissolution of the partnership would result in the loss of
management fees to the Managing General Partner and its
affiliates. Prior to the refinancing, Aimco or its affiliates
also held the junior mortgage and certain other indebtedness and
bankruptcy claims, including a mortgage participation, general
partner loans and other accrued fees in an aggregate amount of
$91,009,991 that were repaid as a part of the refinancing. See
RISK FACTORS, CONFLICTS OF INTEREST and
VMS AND THE PARTNERSHIPS Transactions with
Affiliates for additional information.
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Fairness of the Transactions. Although the
Managing General Partner has interests that may conflict with
those of the limited partners of the Partnerships, the Managing
General Partner is of the opinion that each Transaction,
considered independently, is fair to the limited partners in
view of the factors listed below and described in greater detail
under FAIRNESS OF THE TRANSACTIONS.
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The consideration for the Affiliated Contribution Properties is
equal in value to the greater of the appraised market value of
the Properties and internal valuations prepared annually by
Aimco.
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VMS will not complete a Transaction if limited partners owning
more than 50% of the aggregate units of the Partnerships give
written notice of objection to that Transaction prior to
March 28, 2007.
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The Managing General Partner arrived at the Minimum Unaffiliated
Sale Prices by applying a 15% discount to (i) the purchase price
for each Unaffiliated Sale Property contained in the purchase
agreement for such Property described elsewhere herein, or (ii)
the highest offer price for a Property for which a purchase
agreement has not yet been executed.
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Limited partners that elect to receive Common OP Units as
consideration for the Affiliated Contribution may be entitled to
defer a portion of their taxable gain and would have the
opportunity to participate in the Aimco Operating
Partnerships enterprise.
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Pursuant to the Contribution Agreement, VMS, the Partnerships
and Aimco Properties, LLC have provided each limited partner
with contractual dissenters appraisal rights with respect
to the Affiliated Contribution that are generally based upon the
dissenters appraisal rights that a limited partner would
have were it a shareholder in a corporate merger under the
corporation laws of Illinois, the state of the
Partnerships organization.
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3
The factors considered by the Managing General Partner in
evaluating the fairness of the Transactions are more fully
described under FAIRNESS OF THE TRANSACTIONS.
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After the Transactions are Consummated. After
completion of the Transactions, any available proceeds will be
distributed to the partners in accordance with the joint venture
and partnership agreements (including default provisions with
respect to limited partners failing to satisfy certain
obligations thereunder), and the elections, if any, of the
limited partners as to the nature of the consideration desired,
and VMS and the Partnerships will be dissolved in accordance
with the terms of their respective venture and partnership
agreements. Upon dissolution of VMS, the Managing General
Partner intends to file a notice with the SEC that will result
in a termination of VMSs obligation to file annual,
quarterly and other reports with the SEC pursuant to the
Exchange Act. There are various costs associated with being a
public reporting company, including costs associated with
preparing, auditing and filing periodic reports with the SEC,
which would be eliminated if VMS were to terminate its
registration under the Exchange Act. For additional information,
see PLANS AFTER THE TRANSACTIONS ARE CONSUMMATED.
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VMS and the Partnerships. The general partners
of VMS are Portfolio I and Portfolio II. VMS is owned
70.69% by Portfolio I and 29.31% by Portfolio II. There are
currently 644 units of Portfolio I and 267 units of
Portfolio II issued and outstanding, which are held of
record by 669 and 257 limited partners, respectively. VMSs
investment portfolio currently consists of the following 15
residential apartment complexes: Buena Vista Apartments, a
92-unit
complex in Pasadena, California; Casa de Monterey, a
144-unit
complex in Norwalk, California; Crosswood Park Apartments, a
180-unit
complex in Citrus Heights, California; Mountain View Apartments,
a 168-unit
complex in San Dimas, California; Pathfinder Village
Apartments, a
246-unit
complex in Fremont, California; Scotchollow Apartments, a
418-unit
complex in San Mateo, California; The Bluffs, a
137-unit
complex in Milwaukee, Oregon; Vista Village Apartments, a
220-unit
complex in El Paso, Texas; Chapelle Le Grande, a
105-unit
complex in Merrillville, Indiana; Shadowood Apartments, a
120-unit
complex in Monroe, Louisiana; The Towers of Westchester Park, a
303-unit
complex in College Park, Maryland; Terrace Gardens, a
126-unit
complex in Omaha, Nebraska; North Park Apartments, a
284-unit
complex in Evansville, Indiana; Watergate Apartments, a
140-unit
complex in Little Rock, Arkansas; and Forest Ridge Apartments, a
278-unit
complex in Flagstaff, Arizona. An affiliate of the Aimco
Operating Partnership currently serves as manager of the
Properties. The principal executive offices of the Managing
General Partner, the Partnerships and VMS are located at 55
Beattie Place, P.O. Box 1089, Greenville, South Carolina
29602, telephone
(864) 239-1000.
For additional information about VMS and the Partnerships, see
VMS AND THE PARTNERSHIPS and GENERAL
INFORMATION.
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The Aimco Operating Partnership and Aimco. The
Aimco Operating Partnership is a Delaware limited partnership
that conducts substantially all of the operations of Aimco. As
of September 30, 2006, Aimco beneficially owns
approximately ninety percent (90%) of the Common OP Units
and equivalents of the Aimco Operating Partnership. Aimco is a
real estate investment trust (a REIT) that owns and
manages multifamily apartment properties throughout the United
States. The Aimco Operating Partnership, through its operating
divisions and subsidiaries, holds substantially all of
Aimcos assets and manages the daily operations of
Aimcos business and assets. As of September 30, 2006,
the Aimco Operating Partnership owned or managed a portfolio of
1,290 apartment properties containing 224,837 apartment units
located in 47 states, the District of Columbia and Puerto
Rico. Based on apartment unit data compiled by the National
Multi Housing Council, as of January 1, 2006, Aimco is the
largest owner of multifamily apartment properties in the United
States. The general partner of the Aimco Operating Partnership
is AIMCO-GP, Inc., a Delaware corporation, which is a wholly
owned subsidiary of Aimco. The Aimco Operating Partnership is
the sole member of Aimco Properties, LLC. The principal
executive offices of Aimco, the Aimco Operating Partnership and
Aimco Properties, LLC are located at 4582 South Ulster Street
Parkway, Suite 1100, Denver, Colorado 80237, and their
telephone number is
(303) 757-8101.
For additional information about Aimco, the Aimco Operating
Partnership and Aimco Properties, LLC, see INFORMATION
CONCERNING AIMCO AND THE AIMCO OPERATING PARTNERSHIP.
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Tax Consequences of the Transactions. The
Unaffiliated Sales will be taxable transactions for United
States federal income tax purposes and likely for state and
local income tax purposes as well. To the extent
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4
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that limited partners receive cash in connection with the
Affiliated Contribution, the Affiliated Contribution will also
be in part a taxable transaction for such tax purposes because
VMS will receive cash in the Affiliated Contribution. Any
taxable income from the Unaffiliated Sales and the Affiliated
Contribution will pass through, and be taxable, to the partners.
Taxable income from the Affiliated Contribution will pass
through, and be taxable, to all limited partners, including
those who elect to receive Common OP Units rather than cash
in connection with the Affiliated Contribution. Additional gain
may be recognized in connection with actual or deemed
distributions of cash by VMS and the Partnerships. There are
also other tax considerations related to the Affiliated
Contribution and to investment in the Aimco Operating
Partnership and Aimco that you should consider. See UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTIONS
for additional information.
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Appraisal Rights. Pursuant to the Contribution
Agreement, VMS, the Partnerships and Aimco Properties, LLC have
provided each limited partner with contractual dissenters
appraisal rights with respect to the Affiliated Contribution
that are generally based upon the dissenters appraisal
rights that a limited partner would have were it a shareholder
in a corporate merger under the corporation laws of Illinois,
the state of the Partnerships organization. To exercise
this right, you must take the necessary steps provided by the
Contribution Agreement. See APPRAISAL RIGHTS for
additional information.
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5
SPECIAL
FACTORS
BACKGROUND
AND REASONS FOR THE TRANSACTIONS
General. VMS was formed as a general
partnership pursuant to the Uniform Venture Act of the State of
Illinois and a joint venture agreement dated September 27,
1984, between Portfolio I and Portfolio II. Its primary
business is real estate ownership and related operations. VMS
was formed for the purpose of making investments in various
types of real properties that offer potential capital
appreciation and cash distributions to its partners. Effective
December 12, 1997, the managing general partner of each of
the Partnerships was transferred from VMS Realty Investment,
Ltd. (formerly VMS Realty Partners) to MAERIL, Inc., a
wholly-owned subsidiary of MAE GP Corporation and an affiliate
of Insignia Financial Group, Inc. (Insignia).
Effective February 25, 1998, MAE GP Corporation was merged
with Insignia Properties Trust (IPT), which was an
affiliate of Insignia. Insignia and IPT were merged into Aimco
effective October 1, 1998 and February 26, 1999,
respectively. Thus, the Managing General Partner is now a
wholly-owned subsidiary of Aimco.
Since that time, Aimco and the Managing General Partner have
sought to maximize the operating results and, ultimately, the
net realizable value of each of VMSs holdings in order to
achieve the best possible return for the investors. The Managing
General Partner regularly analyzes the effects of each
Propertys operating performance on the financial position
of VMS and whether additional capital expenditures on these
Properties or investments in alternative assets would benefit
VMSs financial position. The Managing General Partner
periodically evaluates the physical improvement requirements of
the Properties and the availability of favorable financing
opportunities to fund these requirements. In addition, the
Managing General Partner monitors the conditions of the real
estate markets affecting the Properties, considering whether a
disposition of any of the Properties would further the
Partnerships best interests.
Prior to the refinancing completed on January 19, 2007, the
terms of the senior mortgages encumbering the Properties
contemplated the payment of an agreed valuation amount of
$110,000,000 for such indebtedness, which was less than the
applicable face amount of $152,225,000, if repayment occurred
after January 1, 2007 and on or prior to January 1,
2008, the maturity date. The structure, including an agreed
valuation amount and a face amount, was based on the VMS
bankruptcy plan. The structure of certain secured notes
originally held by the FDIC contemplated preservation of the
full principal amount, in this case $152,225,000, and an agreed
valuation amount of $110,000,000 that could be paid if there
were no defaults. The discounted payoff was based on the actual
value of the collateral underlying the notes from June, 1992, as
determined in the bankruptcy proceeding. In addition, the
mortgage indebtedness provided that if a default occurred with
respect to a particular mortgage and that mortgage was
subsequently repaid prior to January 1, 2008, then an
additional prepayment premium (sometimes known as yield
maintenance and referred to as the Prepayment
Consideration) of not less than 1% of the agreed valuation
amount would also be owed. The Prepayment Consideration was
equal to the greater of (x) one percent of the agreed
valuation amount; and (y) the present value of a series of
payments, each equal to the Payment Differential (as defined
below) and payable on each monthly payment date over the
remaining original term of the Amended, Restated, and
Consolidated Senior Notes and on January 1, 2008,
discounted at the Reinvestment Yield (as defined below) for the
number of months remaining from the date prepayment is received
through and including January 1, 2008.
With respect to the calculation of the Prepayment Consideration,
(i) Reinvestment Yield meant the lesser of
(a) the yield on the US treasury issue (primary issue) with
a maturity date closest to January 1, 2008, and
(b) the yield on the US Treasury issue (primary issue) with
a term equal to the remaining average life of the Debt, with
each such yield being based on the bid price for such issue as
published in the WSJ on the date that is 14 days prior to
the date prepayment is received (or if such bid price is not
published on that date, the next preceding date on which that
bid price is so published); and (ii) Payment
Differential meant the difference between 8.5% per
annum and the Reinvestment Yield, divided by 12, and then
multiplied by the agreed valuation amount or such other lesser
amount being prepaid in order to reinstate the debt) on the date
prepayment was actually made. In no event was it to be less than
zero.
In any event, if any of the mortgages were not paid on or before
January 1, 2008, a default would have occurred and the full
face amount of that mortgage, rather than the agreed valuation
amount, would have become due.
6
Prior to the refinancing completed on January 19, 2007, the
terms of the existing outstanding mortgage indebtedness
encumbering the Properties included prohibitions on repayment
prior to January 1, 2007. Therefore, completion of either
Transaction prior to that date would have required the consent
of the holders of that indebtedness. Thus, because of the note
provision precluding prepayment, the consent of the holders of
the note was required. Further, a contrived default could not
enable the notes to be prepaid without payment of the Prepayment
Consideration outlined above.
Additionally, as a result of limits on cash available for
capital expenditures imposed by the terms of the senior mortgage
indebtedness existing prior to the refinancing completed on
January 19, 2007, which limited such expenditures to an
annual limit of $300 per unit per Property, VMS did not
have sufficient funds to pay for necessary capital expenditures.
As noted below in ESTIMATED DISTRIBUTIONS AND TAX
CONSEQUENCES, the proceeds of the refinancing available
for distribution to the limited partners is approximately
$11,482,289, assuming the limited partners do not object to the
Transactions. Even if VMS did not distribute those estimated
proceeds, estimated capital expenditure needs of approximately
$32,100,498, described in more detail on
pages 63-65
below, would exceed those proceeds by approximately $20,000,000.
As a result, the Managing General Partner believes that
operations will be insufficient, even following the refinancing,
to finance these necessary capital expenditures. If either
Transaction does not occur and VMS continues to own some or all
of the Properties, the proceeds of the refinancing received by
VMS after repayment of existing indebtedness and bankruptcy
claims will be retained by VMS to pay for a portion of the
necessary capital expenditures.
On April 4, 2006, Mr. Terry Considine, Mr. Thomas
Herzog, Mr. Harry Alcock, Mr. Robert Walker,
Ms. Martha Long, Mr. Scott Anderson and Mr. Derek
McCandless convened to discuss the VMS debt and bankruptcy
structure, including the impending maturity of the
then-outstanding indebtedness and potential alternatives for
addressing the shortfall in cash necessary for capital
expenditures.
The attendees also discussed Aimcos potential interest in
acquiring certain of the properties, as well as its fiduciary
duties to the limited partners if such a transaction were
undertaken. In light of the fiduciary duties owed to the
unaffiliated limited partners, the group decided that the
minimum purchase price for any property that Aimco acquired
would be the valuation ascribed to such property by Aimcos
internal valuations. The decision was made to obtain appraisals
to confirm the value of the properties that Aimco had expressed
an interest in acquiring. The decision was also made to evaluate
the proceeds to limited partners in the event of a sale of such
properties, as well as the tax consequences to limited partners
from such a sale.
On May 4, 2006, Aimcos outside counsel distributed a
draft purchase agreement containing terms upon which Aimco would
purchase the Affiliated Contribution Properties for cash.
On May 16, 2006, Mr. Alcock, Ms. Long and
Ms. Danielle McClure reviewed the results of the appraisals
in light of the fiduciary duties owed to unaffiliated limited
partners and Aimcos investment criteria. Mr. Alcock
determined that Aimco would pay an aggregate purchase price that
included the full appraised values of the six Affiliated
Contribution Properties with appraised values higher than
Aimcos internal values. Mr. Alcock also confirmed
that the aggregate purchase price would include Aimcos
full internal value of the one property with an Aimco internal
value higher than its appraised value.
On May 23, 2006, Mr. Anderson relayed to
Mr. McCandless that the estimated tax consequences to
limited partners of a cash sale of all of the Properties would
require payment by limited partners of state and federal taxes
of approximately $12,000 per limited partnership unit above
anticipated sales proceeds, assuming for purposes of this
calculation that a sale price of approximately
$56.0 million was achieved for the Unaffiliated Sale
Properties. This assumption was based on broker estimates of
value obtained by the Managing General Partner prior to the
marketing of the Unaffiliated Sale Properties. Mr. Anderson
and Mr. McCandless discussed possible alternative
transaction structures that might improve the negative tax
situation facing limited partners in the event of an all-cash
sale of the Properties. Mr. Anderson and
Mr. McCandless also discussed these alternative transaction
structures with members of Aimcos tax department.
Mr. Considine, Mr. Miles Cortez and
Mr. McCandless discussed the potential for improved tax
consequences to limited partners in the event of a transaction
involving Common OP Units as consideration.
Mr. Considine
7
decided to pursue a transaction that would provide limited
partners the opportunity to elect Common OP Units in lieu
of cash.
On July 5, 2006, Mr. Alcock, Mr. Anderson,
Mr. McCandless, Ms. Long and Mr. Jeff Ogden met
to discuss the possibility of a refinancing accompanied by a
cash distribution to limited partners. After discussing the
consequences of an interim cash distribution resulting from a
refinancing and the fact that a refinancing would assist with
the sale and contribution of the Properties by eliminating the
cross-collateralization features of the existing indebtedness,
Mr. Alcock and Mr. Ogden decided to proceed with a
refinancing prior to the sale and the contribution.
On August 17, 2006, Aimcos outside counsel circulated
a revised draft of the purchase agreement containing provisions
contemplating the structure described herein, whereby limited
partners will be able to waive the right to receive cash and
receive Common OP Units instead.
Given the time period that had elapsed since the previously
received appraisals, in November 2006 Ms. Long, on behalf
of the Managing General Partner, requested that KTR, the
independent appraiser who had delivered the appraisals, perform
and submit updated appraisals.
In November and December 2006, KTR delivered updated appraisals
which reflected an increase in the appraised value for each of
the Affiliated Contribution Properties. On December 18,
2006, Mr. Alcock and Ms. Long reviewed the results of
the new appraisals in light of the fiduciary duties owed to
unaffiliated limited partners and Aimcos investment
criteria. Mr. Alcock determined that Aimco would pay the
higher aggregate purchase price that included the updated full
appraised values of the six Affiliated Contribution Properties
with appraised values higher than Aimcos internal values.
Mr. Alcock also confirmed that the aggregate purchase price
would include Aimcos full internal value of the one
property that continued to have a higher Aimco internal value
than its appraised value.
As a result of the foregoing, the Managing General Partner
determined to refinance the then-outstanding indebtedness to
implement a debt structure that would provide greater
flexibility than the then-existing indebtedness and would result
in a cash distribution to limited partners, assuming the limited
partners do not object to the Transactions. In the event that
either Transaction does not occur and VMS continues to own some
or all of the Properties, the proceeds of the refinancing
received by VMS after repayment of existing indebtedness and
bankruptcy claims will be retained by VMS to pay for a portion
of the necessary capital expenditures. The refinancing provided
sufficient funds to repay the senior and junior mortgages on all
of the Properties, loans made by the Managing General Partner
and its affiliates to VMS, and other indebtedness owed to
affiliates of the Managing General Partner and to fund the cash
distribution to limited partners, all as described herein. As
noted above, the refinancing did not generate sufficient funds
to fund the necessary capital expenditures required by the
Properties, even if a cash distribution to limited partners did
not occur. Therefore, even following the refinancing, the
Managing General Partner believes it is in the best interests of
the limited partners of the Partnerships for VMS to dispose of
the Properties. In light of the existing and ongoing capital
expenditure needs of the Properties, the Managing General
Partner does not believe that continuing to operate the
Properties indefinitely is feasible.
In light of the foregoing, the Managing General Partners
review of existing market conditions for real estate such as the
Affiliated Contribution Properties, Aimcos agreement to
pay consideration equal to the greater of the appraised value or
Aimcos internal valuation for each of the Affiliated
Contribution Properties, the ability for limited partners to
defer a certain amount of adverse tax consequences by electing
to receive Common OP Units and the other benefits of the
Affiliated Contribution described herein, the Managing General
Partner agreed to the terms of the Affiliated Contribution.
As discussed above, the limited partners of the Partnerships are
being given a choice as to the consideration they will receive
with respect to the Affiliated Contribution. The
Partnerships partnership agreements do not permit the
Partnerships to distribute any consideration other than cash in
liquidation of the interest of a limited partner. However, the
limited partners may elect to waive the right to receive any
portion of the cash distribution with respect to the Affiliated
Contribution and receive Common OP Units directly from the
Aimco Operating Partnership instead. Aimco and its affiliates
which own limited partnership interests in the Partnerships
currently intend to waive their right to receive any portion of
the cash distribution with respect to the Affiliated
Contribution and receive Common OP Units instead. The
Partnerships partnership agreements also do not permit a
special allocation
8
of gain to the limited partners receiving cash, even if such
special allocation would be permitted under applicable law.
Thus, the receipt of cash by some limited partners will have an
adverse tax consequence on those limited partners who choose to
waive any portion of the cash distribution and receive Common
OP Units instead.
ESTIMATED
DISTRIBUTIONS AND TAX CONSEQUENCES
If the Transactions occur, it is anticipated that distributions
to the limited partners will result from each of (i) the
refinancing, (ii) the Unaffiliated Sales, and
(iii) the Affiliated Contribution. In addition, each of the
three items has or will have tax consequences to the limited
partners. The following discussion and tables summarize the
estimated distributions as well as the anticipated tax
consequences. After the summaries of the estimated distributions
with respect to each item, and of the anticipated tax
consequences with respect to each item, there is an overall
summary that combines the estimated distributions and tax
consequences for all three items.
In a series of transactions from November 1999 until
March 30, 2001, an affiliate of the Aimco Operating
Partnership acquired a portion of the
Class 3-C
Claim, an unsecured claim under the confirmed VMS
bankruptcy plan, for an aggregate cost of approximately
$13,809,159, and the MF VMS Interest, an additional
claim under the confirmed VMS bankruptcy plan for an aggregate
cost of approximately $9,800,000. An affiliate of the Aimco
Operating Partnership, as owner of a portion of the
Class 3-C
Claim, received approximately $37,175,145 from the proceeds of
the refinancing. Under the confirmed VMS bankruptcy plan, after
the
Class 3-C
Claim was paid, the owner of the MF VMS Interest also received
25% of any surplus in the partnership advance account
established under the confirmed VMS bankruptcy plan utilized to
pay the
Class 3-C
Claim (the PAA). The surplus was approximately
$11,394,386. Accordingly, 25% of the PAA surplus was
approximately $2,848,597. The remaining 75% of that surplus was
paid to Portfolio I and Portfolio II. After the payments
from the PAA were made, half of any remaining proceeds was paid
to Aimco as the owner of the MF VMS Interest, and half to VMS.
This payment equaled $57,566,131 from the proceeds of the
refinancing and the Transactions. These estimates assume that
the Properties are contributed or sold as described herein,
although there can be no assurance that these estimates will be
accurate when the Transactions actually occur.
Non-resident withholding tax paid by the Partnerships on behalf
of a partner to a state tax jurisdiction should be creditable
against the tax liability of that partner in the jurisdiction.
Limited partners are advised to consult their tax advisors.
Unless otherwise expressly stated, amounts relate to units of
each Partnership that are not in default under the applicable
partnership agreement (nondefaulted units). The
Managing General Partner has determined that roughly 5% of the
units of each Partnership are in default (defaulted
units). See Special Considerations for Defaulted
Units.
Estimated
Distributions
Proceeds of Refinancing. The Managing General
Partner completed the refinancing on January 19, 2007.
Proceeds of the refinancing were used to satisfy the outstanding
mortgage and other indebtedness of VMS. Assuming the limited
partners do not object to the Transactions, available proceeds
of $11,482,289 will be distributed to the partners in accordance
with the joint venture and partnership agreements (including
default provisions with respect to limited partners failing to
satisfy certain obligations thereunder) and applicable law. In
the event that either Transaction does not occur and VMS
continues to own some or all of the Properties, the proceeds of
the refinancing received by VMS after repayment of existing
indebtedness and bankruptcy claims will be retained by VMS to
pay for a portion of the necessary capital expenditures.
The first table below summarizes the total proceeds of the
refinancing. The two succeeding tables break down the total
between the two portfolios, and summarize the proceeds of the
refinancing per unit of Portfolio I and per unit of
Portfolio II.
For more detail regarding payments to Aimco and its affiliates,
see CONFLICTS OF INTEREST.
9
TOTAL
ESTIMATED DISTRIBUTIONS
FROM REFINANCING
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New mortgage principal
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|
$
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206,245,874
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Less: Estimated closing costs
|
|
|
(2,454,224
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)
|
Less: Pay off of senior mortgages
|
|
|
(95,513,953
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)
|
Less: Pay off of junior mortgages,
including accrued interest
|
|
|
(20,504,607
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)
|
Less:
Class 3-C
Claim under Bankruptcy Plan
|
|
|
(42,138,221
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)
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Less: MF VMS Interest from
Partnership Advance Account
|
|
|
(2,848,597
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)
|
Less: 50% of residual to MF VMS
Interest
|
|
|
(17,120,241
|
)
|
Less: Pay off of affiliate-loans
|
|
|
(13,361,401
|
)
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Less: Estimated non-resident
withholding taxes
|
|
|
(822,341
|
)
|
|
|
|
|
|
Distributable to Portfolio
I & Portfolio II
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|
$
|
11,482,289
|
|
|
|
|
|
|
ESTIMATED
DISTRIBUTIONS
FROM REFINANCING
PER UNIT OF PORTFOLIO I
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|
|
|
|
Distributable to Portfolio
I & Portfolio II
|
|
$
|
11,482,289
|
|
Percentage to Portfolio I
|
|
|
70.69
|
%
|
|
|
|
|
|
Distributable to Portfolio I
|
|
|
8,116,830
|
|
Total number of Portfolio I units
|
|
|
611.25
|
|
|
|
|
|
|
Distributable per Portfolio I
unit
|
|
$
|
13,279
|
|
|
|
|
|
|
ESTIMATED
DISTRIBUTIONS
FROM REFINANCING
PER UNIT OF PORTFOLIO II
|
|
|
|
|
Distributable to Portfolio
I & Portfolio II
|
|
$
|
11,482,289
|
|
Percentage to Portfolio II
|
|
|
29.31
|
%
|
|
|
|
|
|
Distributable to Portfolio II
|
|
|
3,365,459
|
|
Total number of Portfolio II
units
|
|
|
255.42
|
|
|
|
|
|
|
Distributable per
Portfolio II unit
|
|
$
|
13,176
|
|
|
|
|
|
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Proceeds of Unaffiliated Sales. Following the
completion of the Unaffiliated Sales, which is a condition to
the Affiliated Contribution and which may occur on a
property-by-property
basis, any available proceeds will be distributed to the
partners in accordance with the joint venture and partnership
agreements (including default provisions with respect to limited
partners failing to satisfy certain obligations thereunder) and
applicable law.
The first table below summarizes the total estimated proceeds of
the Unaffiliated Sales. The two succeeding tables break down the
total between the two portfolios, and summarize the estimated
proceeds of the Unaffiliated Sales per unit of Portfolio I and
per unit of Portfolio II.
10
The three tables below assume the Transaction was completed on
September 30, 2006 and that proceeds from the Unaffiliated
Sales were equal to the Minimum Unaffiliated Sale Prices. These
calculations are estimates based upon information available to
the Managing General Partner as of September 30, 2006. VMS
will not proceed with an Unaffiliated Sale, however, if it is
unable to attain at least the Minimum Unaffiliated Sale Price
with respect to such Property.
TOTAL
ESTIMATED DISTRIBUTIONS
FROM UNAFFILIATED SALES
|
|
|
|
|
Gross purchase price
|
|
$
|
60,188,500
|
|
Plus: Cash and cash equivalents
|
|
|
545,458
|
|
Plus: Other partnership assets
|
|
|
1,024,361
|
|
Less: Mortgage debt including
accrued interest
|
|
|
(38,245,874
|
)
|
Less: Due to affiliates
|
|
|
(52,734
|
)
|
Less: 50% of residual proceeds to
MF VMS Interest
|
|
|
(9,898,399
|
)
|
Less: Accounts payable, accrued
expenses and other liabilities
|
|
|
(1,998,277
|
)
|
Less: Reserve for contingencies
|
|
|
(214,719
|
)
|
Less: Closing costs
|
|
|
(1,203,770
|
)
|
Less: Estimated non-resident
withholding taxes
|
|
|
(1,245,308
|
)
|
Less: Estimated transfer taxes
|
|
|
(35,397
|
)
|
Less: Estimated state entity taxes
|
|
|
(210,751
|
)
|
|
|
|
|
|
Distributable to Portfolio
I & Portfolio II
|
|
$
|
8,653,090
|
|
|
|
|
|
|
ESTIMATED
DISTRIBUTIONS
FROM UNAFFILIATED SALES
PER UNIT OF PORTFOLIO I
|
|
|
|
|
Distributable to Portfolio
I & Portfolio II
|
|
$
|
8,653.090
|
|
Percentage to Portfolio I
|
|
|
70.69
|
%
|
|
|
|
|
|
Distributable to Portfolio I
|
|
|
6,116,869
|
|
Total number of Portfolio I units
|
|
|
611.25
|
|
|
|
|
|
|
Distributable per Portfolio I
unit
|
|
$
|
10,007
|
|
|
|
|
|
|
ESTIMATED
DISTRIBUTIONS
FROM UNAFFILIATED SALES
PER UNIT OF PORTFOLIO II
|
|
|
|
|
Distributable to Portfolio
I & Portfolio II
|
|
$
|
8,653,090
|
|
Percentage to Portfolio II
|
|
|
29.31
|
%
|
|
|
|
|
|
Distributable to Portfolio II
|
|
|
2,536,221
|
|
Total number of Portfolio II
units
|
|
|
255.42
|
|
|
|
|
|
|
Distributable per
Portfolio II unit
|
|
$
|
9,930
|
|
|
|
|
|
|
Proceeds of Affiliated Contribution. Following
the completion of the Affiliated Contribution, the cash proceeds
will be distributed to the partners in accordance with the joint
venture and partnership agreements (including default provisions
with respect to limited partners failing to satisfy certain
obligations thereunder), and the elections, if any, of the
limited partners as to the nature of the consideration desired.
11
The first table below summarizes the estimated distribution to
the limited partners that would have taken place if the
Affiliated Contribution had been completed on September 30,
2006. Limited partners electing to receive Common OP Units
instead of cash will receive Common OP Units. The number of
Common OP Units will be equal to the amount of the cash
distribution waived, divided by the average daily closing price
of a share of Class A Common Stock on the NYSE over the
twenty trading-day period ended two days prior to consummation
of the Affiliated Contribution. Limited partners are instructed
to contact The Altman Group, Inc. with any direct questions or
requests for information, including an estimate of Common
OP Units issuable with respect to waivers of particular
cash amounts, as of the most recent practicable date. Please see
the information set forth under HOW TO OBTAIN ADDITIONAL
INFORMATION.
The calculations reflected in the tables below are estimates
based upon information available to the Managing General Partner
as of September 30, 2006. There can be no assurance that
these estimates will prove accurate, particularly as relates to
limited partners that elect to waive any portion of the cash
distribution and receive Common OP Units instead, since the
number of Common OP Units to be issued in exchange for the
contribution of the Affiliated Contribution Properties will be
fixed at the time the Affiliated Contribution is consummated as
described above, and the market value of the Class A Common
Stock will likely fluctuate between that date and the date
Common OP Units are received by limited partners. The
amount of state tax withholding will vary depending on the
percentage of limited partners that elect to receive Common OP
Units, and this variation may affect the amount of the cash
distributions. However, such variation is not expected to be
material.
ESTIMATED
DISTRIBUTIONS
FROM AFFILIATED CONTRIBUTION
|
|
|
|
|
Gross purchase price
|
|
$
|
230,078,260
|
|
Plus: Cash and cash equivalents
|
|
|
1,080,373
|
|
Plus: Other partnership assets
|
|
|
2,726,585
|
|
Less: Mortgage debt including
accrued interest
|
|
|
(168,000,000
|
)
|
Less: Due to affiliates
|
|
|
(58,008
|
)
|
Less: 50% of residual proceeds to
holder of MF VMS Interest
|
|
|
(30,547,491
|
)
|
Less: Accounts payable, accrued
expenses and other liabilities
|
|
|
(2,342,610
|
)
|
Less: Reserve for Contingencies
|
|
|
(820,792
|
)
|
Less: Estimated non-resident
withholding taxes
|
|
|
(5,521,358
|
)
|
Less: Estimated transfer taxes
|
|
|
(1,568,826
|
)
|
Less: Estimated state entity taxes
|
|
|
(1,600
|
)
|
|
|
|
|
|
Distributable to Portfolio
I & Portfolio II
|
|
$
|
25,024,533
|
|
|
|
|
|
|
ESTIMATED
DISTRIBUTIONS
FROM AFFILIATED CONTRIBUTION
PER UNIT OF PORTFOLIO I
|
|
|
|
|
Distributable to Portfolio
I & Portfolio II
|
|
$
|
25,024,533
|
|
Percentage to Portfolio I
|
|
|
70.69
|
%
|
|
|
|
|
|
Distributable to Portfolio I
|
|
|
17,689,842
|
|
Total number of Portfolio I units
|
|
|
611.25
|
|
|
|
|
|
|
Distributable per Portfolio I
unit
|
|
$
|
28,940
|
|
|
|
|
|
|
12
ESTIMATED
DISTRIBUTIONS
FROM AFFILIATED CONTRIBUTION
PER UNIT OF PORTFOLIO II
|
|
|
|
|
Distributable to Portfolio
I & Portfolio II
|
|
$
|
25,024,533
|
|
Percentage to Portfolio II
|
|
|
29.31
|
%
|
|
|
|
|
|
Distributable to Portfolio II
|
|
|
7,334,691
|
|
Total number of Portfolio II
units
|
|
|
255.42
|
|
|
|
|
|
|
Distributable per
Portfolio II unit
|
|
$
|
28,716
|
|
|
|
|
|
|
The table below indicates the number of Common OP Units
that would be issuable in lieu of specified amounts of cash
distributions that a limited partner might waive with respect to
a Portfolio I or Portfolio II unit. On February 20,
2007, the last reported sale price of Class A Common Stock
on the NYSE was $61.99. The number of Common OP Units
actually issuable with respect to a particular amount of cash
waived may differ from the numbers set forth in the table below.
NUMBER OF
COMMON OP UNITS
ISSUED FOR WAIVED CASH AMOUNTS
AT ASSUMED CLASS A COMMON STOCK PRICES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Class
|
|
|
|
A Common
|
|
|
|
Stock Prices
|
|
Potential Waived Cash Amounts
|
|
|
|
|
$
|
13,000
|
|
|
$
|
16,000
|
|
|
$
|
19,000
|
|
|
$
|
22,000
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$35.00
|
|
|
371.4286
|
|
|
|
457.1429
|
|
|
|
542.8571
|
|
|
|
628.5714
|
|
|
|
714.2857
|
|
$40.00
|
|
|
325
|
|
|
|
400
|
|
|
|
475
|
|
|
|
550
|
|
|
|
625
|
|
$45.00
|
|
|
288.8889
|
|
|
|
355.5556
|
|
|
|
422.2222
|
|
|
|
488.8889
|
|
|
|
555.5556
|
|
$50.00
|
|
|
260
|
|
|
|
320
|
|
|
|
380
|
|
|
|
440
|
|
|
|
500
|
|
$55.00
|
|
|
236.3636
|
|
|
|
290.9091
|
|
|
|
345.4545
|
|
|
|
400
|
|
|
|
454.5455
|
|
$60.00
|
|
|
216.6667
|
|
|
|
266.6667
|
|
|
|
316.6667
|
|
|
|
366.6667
|
|
|
|
416.6667
|
|
$65.00
|
|
|
200
|
|
|
|
246.1538
|
|
|
|
292.3077
|
|
|
|
338.4615
|
|
|
|
384.6154
|
|
Estimated
Tax Consequences
Refinancing. Repayment of the senior debt at
the agreed valuation amount, rather than at the applicable face
amount, resulted in cancellation of indebtedness
(COD) income allocable to limited partners. COD
income is generally taxable as ordinary income, and increases
the tax basis of the partner in its partnership interest.
However, the COD income should be offset, in part, by deductible
interest expense, which reduces the partners tax basis in
its partnership interest.
It is estimated that the COD income, after taking into account
the offsetting interest expense, is $11,847 per unit of
Portfolio I and $11,818 per unit of Portfolio II.
Assuming the limited partners do not object to the Transactions,
it is anticipated that a portion of the refinancing proceeds
will be distributed to the limited partners, and that such
distribution would be at least sufficient to enable the limited
partners to pay any tax due on COD income allocated to them.
A partners basis in its partnership interest is also
affected by any net increase or decrease in allocations of any
new debt to such partner as compared with the amounts of repaid
liabilities that had been allocated to such partner. An
increased share of partnership liabilities increases a
partners basis in its partnership interest. A decreased
share of partnership liabilities is treated as a cash
distribution that decreases a partners basis in its
partnership interest. An actual distribution of refinancing
proceeds to a partner will be applied against any basis the
partner has in its partnership interest, but, to the extent the
proceeds are in excess of such basis, will be taxable gain.
13
Unaffiliated Sales. In connection with the
Unaffiliated Sales, the Partnerships and the limited partners
will recognize taxable gain. The Unaffiliated Sales will
generate taxable gain to the Partnerships, which will be
allocated to all of the partners of the Partnerships, including
the limited partners. Accordingly, partners will recognize gain
in the Unaffiliated Sales as a result. The resulting tax
liabilities are expected to exceed the cash distribution.
Assuming a purchase price (including assumed liabilities) of
$60,188,500, and basis of the properties as of
September 30, 2006, the Managing General Partner estimates
that the unrecaptured section 1250 gain per unit will be
$42,516 per unit of Portfolio I and $42,394 per unit
of Portfolio II. When viewing the Unaffiliated Sales on a
stand alone basis, the unrecaptured section 1250 gain per
unit will be limited to the estimated gain on the sales of
$38,344 per Portfolio I nondefaulted unit and $38,231 per
Portfolio II nondefaulted unit. It is not expected that
there will be any additional taxable gain per unit beyond the
unrecaptured section 1250 gain.
Tax consequences to particular limited partners may vary
depending on the effect of (i) adjustments to the basis of
Partnership property with respect to a limited partner that
received its interest in the Partnership as a transferee and
(ii) the difference between the tax basis of property of
the Partnerships or VMS and the fair market value of such
property at the time such property was contributed to or
revalued by the Partnerships or VMS.
These calculations are estimates based upon information
currently available to the Managing General Partner. The amounts
to be allocated to the partners may vary depending on the
reserves established to satisfy future obligations, if any,
actual transaction costs, and factors beyond the control of the
Managing General Partner. Each limited partner should consult
his or her tax advisor regarding the tax consequences to him or
her. See UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF
THE TRANSACTIONS for additional information.
Affiliated Contribution. To the extent that
any limited partners receive cash with respect to the Affiliated
Contribution, VMS will receive cash from Aimco Properties, LLC,
and as a result will recognize taxable income. On the other
hand, to the extent that limited partners elect to receive
Common OP Units, VMS is not expected to recognize taxable
income. Taxable income recognized by VMS will pass through to
the Partnerships, and from the Partnerships to the partners, and
therefore will be taxable to the partners, including limited
partners who elect to receive Common OP Units. Thus the
amount of taxable income recognized by a limited partner who
elects to receive Common OP Units will depend, in part, on
the extent to which other limited partners receive cash or
Common OP Units in connection with the Affiliated
Contribution.
The amounts to be allocated to the partners may vary depending
on transaction costs and factors beyond the control of the
Managing General Partner. Additionally, tax consequences to
particular limited partners may vary depending on the effect of
(i) adjustments to the basis of Partnership property with
respect to a limited partner that received its interest in the
Partnership as a transferee and (ii) the difference between
the tax basis of property of the Partnerships or VMS and the
fair market value of such property at the time such property was
contributed to or received by the Partnerships or VMS.
The total amount of net taxable gain recognized by a limited
partner who receives cash is not expected to vary depending on
the extent to which other limited partners receive cash or
Common OP Units, although the character of such gain may
vary. The Managing General Partner estimates that, with respect
to units that receive cash, the total taxable gain per unit will
be $179,166 per unit of Portfolio I and $177,095 per
unit of Portfolio II. Of that amount, the unrecaptured 1250
gain per unit is estimated to be $75,591 per unit of
Portfolio I and $75,270 per unit of Portfolio II.
Units that receive cash generally should expect to recognize the
same amount of taxable gain regardless of the percentage of
other units that elect to receive Common OP Units.
With respect to limited partners that elect to receive Common
OP Units, the number of Common OP Units to be issued
will be fixed at the time the Affiliated Contribution is
consummated, and the market value of the Class A Common
Stock will likely fluctuate between that date and the date of
any distribution of Common OP Units to limited partners.
Each limited partner should consult his or her tax advisor
regarding the tax consequences to him or her. See UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTIONS
for additional information.
14
The following table is a summary of the estimated allocation to
the limited partners of taxable gain from the Affiliated
Contribution, assuming that the Transaction was completed
September 30, 2006. No position is taken as to the
character of such gain as capital gain or ordinary income. These
calculations are estimates based upon information currently
available to the Managing General Partner. The amount of
estimated non-resident withholding tax decreases to the extent
limited partners elect to receive Common OP Units as
consideration.
ESTIMATED
GAIN FROM AFFILIATED CONTRIBUTION
PER UNIT RECEIVING COMMON OP UNITS
|
|
|
|
|
|
|
|
|
|
|
Cash Percentage
|
|
Gain per Unit
|
|
Portfolio I
|
|
|
Portfolio II
|
|
|
25% Cash
|
|
Total Gain
|
|
$
|
49,598
|
|
|
$
|
49,206
|
|
|
|
Unrecaptured 1250 Gain
|
|
|
44,295
|
|
|
|
44,364
|
|
50% Cash
|
|
Total Gain
|
|
|
99,196
|
|
|
|
98,411
|
|
|
|
Unrecaptured 1250 Gain
|
|
|
52,868
|
|
|
|
52,888
|
|
75% Cash
|
|
Total Gain
|
|
|
148,795
|
|
|
|
147,617
|
|
|
|
Unrecaptured 1250 Gain
|
|
|
64,558
|
|
|
|
64,588
|
|
Estimated Distributions and Tax Consequences
Combined. The tables below summarize the
estimated distributions and tax consequences to the limited
partners of taxable gain from the refinancing and the
Transactions, assuming that (i) the Transactions were
completed on September 30, 2006 and (ii) the indicated
percentage of cash was received by the limited partners with
respect to the Affiliated Contribution.
The first table below summarizes the estimated cash and taxable
gain per unit receiving cash. The amount of state tax
withholding will vary depending on the percentage of limited
partners that elect to receive Common OP Units, and this
variation may affect the amount of the cash distributions.
However, such variation is not expected to be material. The
second table summarizes the estimated taxable gain per unit
receiving Common OP Units rather than cash. As noted above,
the amount of taxable income recognized by a limited partner who
elects to receive Common OP Units will depend, in part, on
the extent to which other limited partners receive cash or
Common OP Units in connection with the Affiliated
Contribution.
ESTIMATED
CASH AND GAIN
PER UNIT RECEIVING CASH
|
|
|
|
|
|
|
|
|
|
|
Portfolio I
|
|
|
Portfolio II
|
|
|
Total gain per unit receiving cash
|
|
$
|
229,356
|
|
|
$
|
227,144
|
|
Unrecaptured 1250 gain per unit
receiving cash
|
|
|
118,108
|
|
|
|
117,664
|
|
Cash distribution per unit
|
|
|
52,206
|
|
|
|
51,836
|
|
ESTIMATED
GAIN
PER UNIT RECEIVING COMMON OP UNITS
|
|
|
|
|
|
|
|
|
|
|
Cash Percentage
|
|
Gain per Unit
|
|
Portfolio I
|
|
|
Portfolio II
|
|
|
25% Cash
|
|
Total Gain
|
|
$
|
99,789
|
|
|
$
|
99,255
|
|
|
|
Unrecaptured 1250 Gain
|
|
|
86,613
|
|
|
|
86,757
|
|
50% Cash
|
|
Total Gain
|
|
|
149,387
|
|
|
|
148,461
|
|
|
|
Unrecaptured 1250 Gain
|
|
|
91,293
|
|
|
|
91,367
|
|
75% Cash
|
|
Total Gain
|
|
|
198,985
|
|
|
|
197,666
|
|
|
|
Unrecaptured 1250 Gain
|
|
|
104,148
|
|
|
|
104,221
|
|
Special
Considerations for Defaulted Units
The estimated distributions and tax consequences described above
relate to units of each Partnership that are not in default
under the applicable partnership agreement (nondefaulted
units). The Managing General Partner has determined,
however, that roughly 5% of the units of each Partnership are in
default (defaulted units). The Managing General
Partner does not expect that any distribution of cash will be
made with respect to defaulted units. However, the holders of
defaulted units generally will recognize taxable gain. The
Managing General Partner estimates that, with respect to
defaulted units, the total taxable gain per unit will be
$72,687 per unit of Portfolio I
15
and $74,713 per unit of Portfolio II. Of that amount,
the unrecaptured 1250 gain per unit is estimated to be
$45,460 per unit of Portfolio I and $46,827 per unit
of Portfolio II. The Partnerships will be required to
withhold state tax with respect to defaulted units, and such
withheld tax should be creditable against the tax liability of
that partner in the jurisdiction. Limited partners are urged to
consult their tax advisors.
Alternatives
Considered
The following is a brief discussion of the benefits and
disadvantages of the alternatives to the Transactions considered
by VMS, the Partnerships, the Managing General Partner,
AIMCO/IPT, Inc. (AIMCO/IPT), Aimco Properties, LLC,
the Aimco Operating Partnership, AIMCO-GP, Inc.
(AIMCO-GP) and Aimco (collectively, the VMS
Related Parties) that could have been pursued by the
Managing General Partner.
Continue
to Hold All VMS Properties
Benefits of Continuing to Hold All VMS
Properties. There are several potential benefits
associated with retaining the Properties for the foreseeable
future. Under certain circumstances, including the refinancing
of the VMS bankruptcy debt that has now been completed by the
Managing General Partner, and improving rental market
conditions, the level of distributions from the Properties might
increase over time. Additionally, the refinancing of the VMS
bankruptcy debt could result in improved cash flow in the
future, which could result in increased distributions in the
future. It is also possible that the resale market for apartment
properties could improve over time and the disposition of the
Properties at some point in the future could result in greater
consideration. VMSs continuing to hold the Properties
would allow you to continue to participate in any net income
from the Properties and any net proceeds from the future sale of
the Properties.
Disadvantages of Continuing to Hold All VMS
Properties. There are several risks and
disadvantages associated with retaining the Properties for the
foreseeable future. Based on the estimates of the Managing
General Partner, the Properties need substantial capital
expenditures to be attractive to tenants. Without these
expenditures, the condition of the Properties (and their
expected rental income) is expected to deteriorate. Due to the
terms of the mortgage indebtedness encumbering the Properties
prior to the refinancing, including prohibitions on repayment
prior to January 1, 2007, refinancing any of the Properties
prior to January 1, 2007 would have required the consent of
the holders of that indebtedness. Although a refinancing of the
existing mortgage indebtedness was completed on January 19,
2007, such refinancing did not generate sufficient cash to
satisfy the required capital expenditures and operating
requirements of the Properties. The failure of the refinancing
to satisfy such capital expenditure and operating requirements
led the Managing General Partner to reject the option to hold
the Properties for the foreseeable future.
In addition, you are likely to continue to receive allocations
of taxable income from the Partnerships without any
corresponding distributions. Unless you have losses from passive
investments (including VMS) or other tax attributes to offset
such taxable income, you may be required to pay taxes in respect
of such income without any corresponding receipt of cash. This
situation has arisen primarily because of the declining
depreciation deductions of the Properties in which the
Partnerships have invested through VMS. All of the cash flow is
currently dedicated to the payment of operating expenses,
capital expenditures and debt service.
Sale
of all the Properties to Third-Party Purchasers
Benefits of Selling All of the Properties to Third
Parties. As an alternative to contributing some
of the Properties to Aimco Properties, LLC, the VMS Related
Parties considered selling all the Properties to third parties.
A sale to a third party would not have the conflicts of interest
that are inherent in a transaction with an affiliate. The terms
of such a transaction would be negotiated at arms length, which
could result in greater consideration to VMS. The limited
partners would benefit from this alternative by receiving a cash
distribution from the net proceeds of the sale and from no
longer continuing to recognize taxable income on their limited
partnership interests after the liquidation and distribution.
Disadvantages of Selling All of the Properties to Third
Parties. A sale of all of the Properties for cash
would likely result in greater immediate taxable gain for the
limited partners who elect to receive Common OP Units
rather than cash with respect to the Affiliated Contribution.
The market for the Properties is uncertain, and thus it is
possible that a sale of all the Properties to third parties
could result in prices lower than the value of the consideration
offered in the Affiliated Contribution. There would be increased
costs associated with marketing and selling fifteen
16
rather than eight Properties to third parties. The Partnerships
would incur some costs they would not incur in a contribution to
Aimco Properties, LLC such as brokerage fees and fees associated
with the full negotiation of purchase agreements with third
parties, which the Managing General Partner expects would total
approximately $3,000,000 and which would reduce the net sale
proceeds to the Partnerships. Similarly, a sale of the
Properties to third parties would likely result in less speed
and certainty of closing the transactions as compared to a
quicker and more certain closing of a contribution to Aimco
Properties, LLC. Each of the above factors led the Managing
General Partner to ultimately reject the option of selling all
the Properties to third parties.
Other
Possible Transactions
The VMS Related Parties considered other potential transactions,
such as selling all the Properties to Aimco Properties, LLC or a
merger of VMS with another entity. The costs of marketing and
selling to third parties, such as brokerage fees, would be
reduced or eliminated and closing of sales to Aimco Properties,
LLC would likely be quicker and more certain than sales to
unaffiliated third parties. Given the geographical locations of
the Properties, the existence of a suitable merger partner is
uncertain, and thus it is possible that a merger could result in
prices lower than the value of the consideration that could be
obtained through a transaction with Aimco Properties, LLC.
Considerable obstacles to these transactions existed however,
such as Aimco Properties, LLCs lack of interest in all of
the Properties and the necessity, and potential cost, of
identifying a merger partner interested in all of the
Properties. Additionally, in light of the large number of
holders of limited partnership interests in the Partnerships,
the Managing General Partner believes that the unanimous
approval of a merger required by Illinois law was unlikely. As a
result, these transactions were eliminated from consideration.
Expected
Benefits of the Transactions
The VMS Related Parties believe that the Transactions have the
following principal advantages to the unaffiliated limited
partners:
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Potential Tax Deferral. Limited partners that
elect to receive Common OP Units as consideration may be
entitled to defer a portion of their taxable gain.
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Realization of Return on Investment. The tax
benefits of continued investment in the Properties have been
substantially eliminated for most limited partners due
principally to declining depreciation deductions from the
Properties. The Unaffiliated Sales would allow partners to
realize return on their investment through immediate cash
distribution to the partners from the sale proceeds. The
Affiliated Contribution would give partners the choice to
realize return on their investment through immediate cash
distribution or to receive Common OP Units as consideration.
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Allows VMS to Avoid Risk of Default and
Foreclosure. Even after completion of the
refinancing on January 19, 2007, if a disposition of the
Properties is not consummated, there will be an increased risk
that VMS will not be able to repay some of its debt or fund
necessary deficits, capital expenditures, or other costs, and
therefore an increased risk that VMS will default upon its
indebtedness in the future, and perhaps lose its Properties in
the future through mortgage foreclosure.
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No More Tax Allocations Without
Distributions. Without the completion of the
Transactions, at existing rent levels at the Properties, the
Partnerships may generate taxable income but will probably not
distribute sufficient cash to limited partners to pay resulting
tax liabilities for the foreseeable future.
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Elimination of Management Fees. Affiliates of
Aimco are contractually entitled to receive annual compensation
for real estate advisory services and asset management services
of $300,000, adjusted annually by the consumer price index,
reimbursement of expenses not to exceed $100,000 per year and 4%
of the gross receipts from all of the Properties as compensation
for providing property management fees. Asset management fees of
approximately $257,000, $351,000, $323,000 and $325,000 were
charged by affiliates of the Managing General Partner for the
nine months ended September 30, 2006 and years ended
December 31, 2005, 2004 and 2003, respectively. VMS paid,
or accrued for payment, property management fees to such
affiliates of approximately $1,024,000, $1,278,000, $1,201,000
and $1,253,000 for the nine months ended September 30, 2006
and years ended December 31, 2005, 2004 and 2003. See
VMS AND THE PARTNERSHIPS VMS
Transactions with Affiliates. Following the transfer of a
Property in a Transaction, VMS, and indirectly, the limited
partners, will no longer be required to bear the cost of these
fees.
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Disposition at Appraised Value. The value of
the consideration for each of the Affiliated Contribution
Properties is equal to the greater of the appraised market value
of the fee simple interest in such Properties based on
appraisals dated November and December 2006 and internal
valuations prepared annually by Aimco, and last updated February
2006. A sale of the Affiliated Contribution Properties to a
third party could result in a lesser purchase price
and/or could
impose additional costs that do not exist in the Affiliated
Contribution, which could lower the net proceeds to the
Partnerships.
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Growth Potential. The Aimco Operating
Partnerships assets, organizational structure and access
to capital enable it to pursue acquisition and development
opportunities that are not available to VMS. Limited partners
that elect to receive Common OP Units would have the
opportunity to participate in the Aimco Operating
Partnerships enterprise and could benefit from any future
increase in the Class A Common Stock price and from any
future increase in distributions on the Common OP Units.
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Diversification. The Aimco Operating
Partnerships portfolio of apartment properties is
substantially larger and more diverse than the portfolio of
properties that VMS proposes to contribute in the Affiliated
Contribution. This exchange would therefore substantially
diversify the portfolio of any limited partner that elected to
receive Common OP Units as consideration for the Affiliated
Contribution.
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Elimination of Costs Associated with SEC Filing
Requirements. There are various costs associated
with being a public reporting company, including costs
associated with preparing, auditing and filing periodic reports
with the SEC, which would be eliminated if VMS were to terminate
its registration under the Exchange Act. The Managing General
Partner estimates these expenses to be approximately $87,000 per
year. This represents approximately 13% of VMSs general
and administrative expenses and 0.20% of its total expenses
(based on 2005 expenses of approximately $686,000 and
$42,508,000, respectively). In addition, as a result of the
Sarbanes-Oxley Act of 2002, the Managing General Partner
estimates VMSs costs will increase by approximately 10%
beginning in 2007.
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Disposition of Unaffiliated Sale Properties Pursuant to
Arms-Length Marketing Process. The Unaffiliated
Sale Properties were marketed to unaffiliated third parties and
the purchase price for the Unaffiliated Sales was attained
through arms-length negotiation.
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The VMS Related Parties believe that the Transactions have the
following principal advantages to VMS and the Partnerships:
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Allows VMS to Avoid Risk of Default and
Foreclosure. Even after completion of the
refinancing on January 19, 2007, if a disposition of the
Properties is not consummated, there will be an increased risk
that VMS will not be able to repay some of its debt or fund
necessary deficits, capital expenditures, or other costs, and
therefore an increased risk that VMS will default upon its
indebtedness in the future, and perhaps lose its Properties in
the future through mortgage foreclosure.
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Elimination of Management Fees. Affiliates of
Aimco are contractually entitled to receive annual compensation
for real estate advisory services and asset management services
of $300,000, adjusted annually by the consumer price index,
reimbursement of expenses not to exceed $100,000 per year and 4%
of the gross receipts from all of the Properties as compensation
for providing property management fees. Asset management fees of
approximately $257,000, $351,000, $323,000 and $325,000 were
charged by affiliates of the Managing General Partner for the
nine months ended September 30, 2006 and years ended
December 31, 2005, 2004 and 2003, respectively. VMS paid,
or accrued for payment, property management fees to such
affiliates of approximately $1,024,000, $1,278,000, $1,201,000
and $1,253,000 for the nine months ended September 30, 2006
and years ended December 31, 2005, 2004 and 2003. See
VMS AND THE PARTNERSHIPS VMS
Transactions with Affiliates. Following the transfer of a
Property in a Transaction, VMS, and indirectly, the
Partnerships, will no longer be required to bear the cost of
these fees.
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Disposition at Appraised Value. The value of
the consideration for each of the Affiliated Contribution
Properties is equal to the greater of the appraised market value
of the fee simple interest in such Properties based on
appraisals dated November and December 2006 and internal
valuations prepared annually by Aimco, and last updated February
2006. A sale of the Affiliated Contribution Properties to a
third party could
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result in a lesser purchase price
and/or could
impose additional costs that do not exist in the Affiliated
Contribution, which could lower the net proceeds to the
Partnerships.
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Disposition of Unaffiliated Sale Properties Pursuant to
Arms-Length Marketing Process. The Unaffiliated
Sale Properties were marketed to unaffiliated third parties and
the purchase price for the Unaffiliated Sales was attained
through arms-length negotiation.
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The VMS Related Parties believe that the Transactions have the
following principal advantages to the Managing General Partner:
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Allows VMS to Avoid Risk of Default and
Foreclosure. Even after completion of the
refinancing on January 19, 2007, if a disposition of the
Properties is not consummated, there will be an increased risk
that VMS will not be able to repay some of its debt or fund
necessary deficits, capital expenditures, or other costs, and
therefore an increased risk that VMS will default upon its
indebtedness in the future, and perhaps lose its Properties in
the future through mortgage foreclosure.
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Elimination of Ultimate Liability as General
Partner. As the managing general partner of the
Partnerships, the Managing General Partner is ultimately
responsible for liabilities incurred by the Partnerships, to the
extent any such liability is not a non-recourse loan and a
claimant may pursue claims and any security pledged as
collateral for any such liability. Upon completion of the
Transactions, the Partnerships will be dissolved pursuant to
their respective partnership agreements and the Managing General
Partners liability with respect to the Partnerships will
cease to exist.
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Benefits as an Affiliate of Aimco. As an
affiliate of Aimco, the Managing General Partner will receive
the indirect benefits of the Transactions that are received by
Aimco and its other affiliates.
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Disposition at Appraised Value. The value of
the consideration for each of the Affiliated Contribution
Properties is equal to the greater of the appraised market value
of the fee simple interest in such Properties based on
appraisals dated November and December 2006 and internal
valuations prepared annually by Aimco, and last updated February
2006. A sale of the Affiliated Contribution Properties to a
third party could result in a lesser purchase price
and/or could
impose additional costs that do not exist in the Affiliated
Contribution, which could lower the net proceeds to the
Partnerships.
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The VMS Related Parties believe that the Transactions have the
following principal advantages to AIMCO/IPT:
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Benefit as an Affiliate of Aimco. As a
shareholder of the Managing General Partner and an affiliate of
Aimco, AIMCO/IPT will indirectly receive benefits of the
Transactions that are received by the Managing General Partner
and Aimco.
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The VMS Related Parties believe that the Transactions have the
following principal advantages to the Aimco Operating
Partnership, in addition to the benefits the Aimco Operating
Partnership, as a limited partner, will share with the
unaffiliated limited partners as described above:
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Future Appreciation of the Properties. The
Aimco Operating Partnership will receive the benefit of any
future appreciation of the Affiliated Contribution Properties
that will be held by Aimco Properties, LLC, its wholly owned
subsidiary, after consummation of the Affiliated Contribution.
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Sales Proceeds from Unaffiliated Sales. The
Aimco Operating Partnership will receive its proportional share
of proceeds from the consummation of the Unaffiliated Sales.
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Opportunity to Acquire Assets Without Cash. To
the extent that the limited partners elect to receive OP Units
rather than cash pursuant to the Affiliated Contribution, the
Aimco Operating Partnership will acquire the Affiliated
Contribution Properties without the payment of cash as
compensation.
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Increased Operating Flexibility. Following the
completion of the Affiliated Contribution, the Affiliated
Contribution Properties will be
wholly-owned
by the Aimco Operating Partnership, which will permit greater
flexibility in operating and financing the Affiliated
Contribution Properties than currently is possible under the
existing ownership structure.
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The interests of Aimco GP, Inc., Aimco Properties, LLC and Aimco
are generally aligned with those of the Aimco Operating
Partnership. Therefore, the benefits of the Aimco Operating
Partnership, described above, are shared by Aimco GP, Inc.,
Aimco Properties, LLC and Aimco.
Expected
Detriments of the Transaction
The VMS Related Parties believe that the Transactions have the
following principal detriments to the unaffiliated limited
partners:
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No Separate Representation of Limited Partners in the
Affiliated Contribution. The Managing General
Partner is an affiliate of Aimco Properties, LLC. In structuring
the Affiliated Contribution and the consideration, no one
separately represented the interests of the limited partners and
the amount of consideration and the terms of the Affiliated
Contribution were determined without an arms-length negotiation.
Although the Managing General Partner has a fiduciary duty to
the limited partners, it also has responsibilities to its equity
holders that could conflict with the interests of the limited
partners. The Managing General Partner did not appoint, nor did
Aimco Properties, LLC ask it to appoint, a party to represent
only the interests of the limited partners. The terms of the
Affiliated Contribution, including the value of the
consideration, could differ if they were subject to independent
negotiations.
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Taxable Gain to the Limited Partners. The
Unaffiliated Sales will be considered taxable under
United States federal tax laws and will result in taxable
gain to the limited partners. Also, to the extent that any
limited partners receive cash with respect to the Affiliated
Contribution, VMS will receive cash from Aimco Properties, LLC,
which will result in taxable income to the limited partners,
including the limited partners who receive Common OP Units
in the Affiliated Contribution. In addition, tax consequences to
particular limited partners may vary depending on the effect of:
(i) adjustments to the basis of Partnership property with
respect to a limited partner that received its interest in the
Partnership as a transferee and (ii) the difference between
the tax basis of property of the Partnerships or VMS and the
fair market value of such property at the time such property was
contributed to or revalued by the Partnerships or VMS. Limited
partners are urged to consult their tax advisors as to their
particular situations and tax consequences.
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Uncertain Future Value of Common OP Units and
Distributions. In the Affiliated Contribution,
limited partners have the option to receive Common OP Units
as consideration. Each Common OP Unit is redeemable, at the
option of its holder, after a one-year holding period, for one
share of Class A Common Stock or cash equal to the market
value of one share of Class A Common Stock at the time of
redemption, as the Aimco Operating Partnership may elect. For a
detailed description of these redemption rights, see
DESCRIPTION OF COMMON OP UNITS Redemption
Rights of Qualifying Partners. The number of Common
OP Units to be issued to those that elected to waive any
portion of the cash distribution and receive Common
OP Units instead will be equal to (i) the amount of
the cash distribution waived by such limited partner divided by
(ii) the average daily closing price of a share of
Class A Common Stock on the NYSE over the twenty
trading-day period ended two days prior to consummation of the
Affiliated Contribution. On February 20, 2007, the last
reported sale price of Class A Common Stock on the NYSE was
$61.99. During the period January 1, 2007 to
February 20, 2007, the high and low sales prices of the
Class A Common Stock on the NYSE were $65.79 and $54.14,
respectively. Limited partners are instructed to contact The
Altman Group, Inc. with any questions or requests for
information, including an estimate of Common OP Units
issuable with respect to waivers of particular cash amounts, as
of the most recent practicable date. Please see the information
set forth under HOW TO OBTAIN ADDITIONAL
INFORMATION. The market price of Class A Common Stock
varies from time to time. These variations may be caused by a
number of factors, including changes in Aimcos business,
operations or prospects, regulatory considerations and general
market and economic considerations. The number of Common
OP Units will not be adjusted for any change in the market
price of Class A Common Stock. Accordingly, if the market
value of Class A Common stock and, correspondingly, Common
OP Units declines after the Affiliated Contribution is
consummated, the value of the consideration to be received will
decline. In addition, because the date that the Affiliated
Contribution is completed will be later than the date prior to
which limited partners may object to it, limited partners will
not know the exact value of the Common OP Units that will
be issued in the Affiliated Contribution at the time they
determine what form of consideration to elect. In addition,
although the Aimco Operating Partnership makes quarterly
distributions on its Common OP Units, there can be no
assurance
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regarding the amounts of available cash that the Aimco Operating
Partnership will generate or the portion that its general
partner will choose to distribute. The following table presents
the distributions declared and made by the Aimco Operating
Partnership on its Common OP Units with respect to the
specified periods:
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Quarter Ended
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Distributions per Unit
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December 31, 2001
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$
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0.82
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March 31, 2002
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$
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0.82
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June 30, 2002
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$
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0.82
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September 30, 2002
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$
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0.82
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December 31, 2002
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$
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0.82
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March 31, 2003
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$
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0.82
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June 30, 2003
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$
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0.82
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September 30, 2003
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$
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0.60
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December 31, 2003
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$
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0.60
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March 31, 2004
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$
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0.60
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June 30, 2004
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$
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0.60
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September 30, 2004
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$
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0.60
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December 31, 2004
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$
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0.60
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March 31, 2005
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$
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0.60
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June 30, 2005
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$
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0.60
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September 30, 2005
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$
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0.60
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December 31, 2005
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$
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0.60
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March 31, 2006
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$
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0.60
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June 30, 2006
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$
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0.60
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September 30, 2006
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$
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0.60
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December 31, 2006
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$
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0.60
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No Participation in Possible Increase in Value of Sold
Properties. The Properties may generate increased
net income or cash flow or increase in value after their
disposition. Because VMS will no longer own the Properties after
completion of the Transactions, limited partners will not be
able to participate in the net income or cash flow from the
Properties or any net proceeds from the future sale of the
Properties, although limited partners who elect to receive
Common OP Units in lieu of cash will continue to
participate indirectly with respect to the Affiliated
Contribution Properties.
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The VMS Related Parties believe that the Transactions have the
following principal detriments to VMS and the Partnerships:
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No Separate Representation of Limited Partners in the
Affiliated Contribution. The Managing General
Partner is an affiliate of Aimco Properties, LLC. In structuring
the Affiliated Contribution and the consideration, no one
separately represented the interests of the limited partners and
the amount of consideration and the terms of the Affiliated
Contribution were determined without an arms-length negotiation.
Although the Managing General Partner has a fiduciary duty to
the limited partners, it also has responsibilities to its equity
holders that could conflict with the interests of the limited
partners. The Managing General Partner did not appoint, nor did
Aimco Properties, LLC ask it to appoint, a party to represent
only the interests of the limited partners. The terms of the
Affiliated Contribution, including the value of the
consideration, could differ if they were subject to independent
negotiations.
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VMS and the Partnerships Will Be Dissolved and Will Cease to
Exist. Because the Properties are the sole assets
of VMS, and the interests of VMS are the sole assets of the
Partnerships, upon completion of the Transactions the
Partnerships and VMS will be dissolved in accordance with the
terms of their respective partnership agreements.
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The VMS Related Parties believe that the Transactions have the
following principal detriments to the Managing General Partner:
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Loss of Ownership Interest in the
Properties. Upon completion of the Transactions,
the Managing General Partner will no longer hold an ownership
interest in the Properties.
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Discontinued Receipt of Management Fees. After
consummation of the Transactions, the Managing General Partner
will no longer be entitled to receive asset management fees and
potential future fees from VMS.
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The VMS Related Parties believe that the Transactions have the
following principal detriments to the Aimco Operating
Partnership:
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Responsible for All Future Losses. As the sole
member of Aimco Properties, LLC, the Aimco Operating Partnership
will be responsible for all future losses or decreases in value
of the Affiliated Contribution Properties.
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Discontinued Receipt of Management Fees. After
consummation of the Transactions, the Aimco Operating
Partnership will no longer indirectly receive asset management
fees and potential future fees from VMS.
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Property Management Fees. After consummation
of the Transactions, an affiliate of the Aimco Operating
Partnership will continue to receive a property management fee
on the Affiliated Contribution Properties, but such fee will be
borne completely by the Aimco Operating Partnership and will no
longer be shared with the limited partners.
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Reimbursement for Services. After consummation
of the Transactions, affiliates of the Aimco Operating
Partnership will not be reimbursed for services provided on
behalf of the Aimco Operating Partnership with respect to the
Unaffiliated Sale Properties, including administrative and
bookkeeping expenses, as well as construction management
expenses.
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The interests of Aimco GP, Inc., Aimco Properties, LLC,
AIMCO/IPT and Aimco are generally aligned with those of the
Aimco Operating Partnership. Therefore, the detriments of the
Aimco Operating Partnership, described above, are shared by
AIMCO GP, Inc., Aimco Properties, LLC, AIMCO/IPT and Aimco.
In addition to the benefits and detriments for each VMS Related
Party described above, the following summarizes the accounting
treatment in connection with the Transactions:
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Accounting by Aimco and the Aimco Operating
Partnership. Effective January 1, 2006,
Aimco and the Aimco Operating Partnership account for VMS and
the Partnerships as consolidated subsidiaries. Accordingly, the
assets, liabilities, revenues and expenses of VMS and the
Partnerships are reported in the consolidated financial
statements of Aimco and the Aimco Operating Partnership. The
carrying amounts of the Properties as reported in such
consolidated financial statements differ from the corresponding
amounts reported in the combined financial statements of the
Partnerships due to certain valuation adjustments that were
recorded by the Managing General Partner and the Aimco Operating
Partnership in connection with their acquisitions of equity
interests in the Partnerships in prior years. Units of the
Partnerships held by limited partners other than the Aimco
Operating Partnership are reported as minority interest in the
consolidated financial statements of Aimco and the
Aimco Operating Partnership; however the carrying amount of
the minority interest is zero and Aimco does not allocate any
losses of VMS and the Partnerships to the minority interest.
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Aimco and the Aimco Operating Partnership will account for the
Affiliated Contribution as an acquisition of a noncontrolling
interest in a subsidiary in accordance with Statement of
Financial Accounting Standards No. 141, Business
Combinations. This accounting treatment will result in
increases in the carrying amounts of the Affiliated Contribution
Properties by an aggregate amount equal to (i) the
aggregate amount of cash and fair value of Common OP Units
received by VMS and the limited partners in exchange for the
Affiliated Contribution Properties, multiplied by (ii) the
aggregate percentage interest in the Partnerships held by
limited partners other than the Aimco Operating Partnership. The
Aimco Operating Partnership will record
22
corresponding increases in partners capital and minority
interest in consolidated real estate partnerships based on the
relative proportions of the total consideration for the
Affiliated Contribution Properties comprised by Common OP Units
and cash, respectively. Aimcos accounting for the
Affiliated Contribution will be identical to the accounting
applied by the Aimco Operating Partnership, except that the
increase in partners capital described in the preceding
sentence will be reported by Aimco as an increase in minority
interest in the Aimco Operating Partnership. No gain or loss
will be recognized by Aimco or the Aimco Operating Partnership
in connection with the Affiliated Contribution.
The Unaffiliated Sales are expected to be accounted for as real
estate sales using the full accrual method in accordance with
statement of Financial Accounting Standards No. 66,
Accounting for Sales of Real
Estate. Accordingly, upon completion of the
Unaffiliated Sales, which may occur on a
property-by-property
basis, Aimco and the Aimco Operating Partnership will no longer
report the carrying amounts of the Unaffiliated Sale Properties
in their consolidated financial statements and will recognize
gain or loss for the difference between such carrying amounts
and the related net sales proceeds. Based on the current
carrying amounts and estimated fair values of the Unaffiliated
Sale Properties, Aimco and the Aimco Operating Partnership
expect to recognize a net gain upon completion of the
Unaffiliated Sales.
The Affiliated Contribution, together with the repayment or
assumption of related debt and the distribution of any cash
proceeds received in the Transaction, will result in a decrease
in the partners deficit of VMS equal to the deficit
attributable to the Affiliated Contribution Properties and
related debt. Based on net book values of the Affiliated
Contribution Properties and related debt balances as of
September 30, 2006, the Affiliated Contribution and related
transactions will result in a decrease of approximately
$129,914,425 in the partners deficit of VMS. The amount of
the decrease attributable to Aimco and the Aimco Operating
Partnership, based on their equity ownership of 22.05% in VMS,
is approximately $28,648,661. The Affiliated Contribution will
result in a decrease in the net loss of VMS equal to the
aggregate net loss of the Affiliated Contribution Properties.
Based on the net losses of VMS and the Affiliated Contribution
Properties for the nine months ended September 30, 2006,
the Affiliated Contribution and related transactions will result
in a decrease of $10,546,302 in the net loss of VMS. The
estimated amount attributable to Aimco and the Aimco Operating
Partnership, based on their equity ownership of 22.05% in VMS,
is a decrease of approximately $2,325,665 for the nine months
ended September 30, 2006.
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Accounting by the Partnerships. For accounting
purposes, VMS, the Partnerships and Aimco Properties, LLC are
deemed to be entities under common control. Generally accepted
accounting principles ordinarily preclude recognition of gains
by the transferor entity in a transfer of assets between
entities under common control. Accordingly, the Partnerships
will not recognize any gain in connection with the transfer of
the Affiliated Contribution Properties from VMS to Aimco
Properties, LLC. The excess of (i) the aggregate amount of
cash and fair value of Common OP Units received by VMS and
the limited partners in exchange for the Affiliated Contribution
Properties over (ii) the Partnerships aggregate
carrying amount of the Affiliated Contribution Properties will
be treated by the Partnerships as capital contributions from the
Aimco Operating Partnership and be credited to partners
deficit in the Partnerships combined financial statements.
An offsetting charge to partners deficit will be
recognized for the fair value of Common OP Units
distributed to limited partners.
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The Partnerships will account for the Unaffiliated Sales as
sales of real estate and recognize a net gain upon completion of
the sales, as described above for Aimco and the Aimco Operating
Partnership. The amount of the net gain recognized by the
Partnerships will differ from the amount recognized by Aimco and
the Aimco Operating Partnership due to certain valuation
adjustments recorded by the Managing General Partner and the
Aimco Operating Partnership in connection with their
acquisitions of equity interests in the Partnerships in prior
years.
FAIRNESS
OF THE TRANSACTIONS
The VMS Related Parties believe that each Transaction is fair to
VMS, the Partnerships and all unaffiliated limited partners of
the Partnerships.
23
Affiliated
Contribution
In evaluating the fairness of the Affiliated Contribution, the
VMS Related Parties considered the following factors and
information:
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The fact that limited partners electing to receive Common
OP Units may be able to achieve more favorable tax results
than would be the case upon receipt of the cash distribution to
which such limited partner would otherwise be entitled, as
further described in UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF THE TRANSACTIONS.
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The fact that limited partners can elect to waive any portion of
the cash distribution to be received in connection with the
Affiliated Contribution and receive Common OP Units
directly from the Aimco Operating Partnership instead, thereby
providing limited partners the potential for more favorable tax
results arising from the receipt of Common OP Units.
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The fact that the Managing General Partner has significant
conflicts of interest with respect to the Affiliated
Contribution resulting from the fiduciary duties it owes to its
sole stockholder, whose affiliate has an interest in obtaining
the lowest price possible for the Affiliated Contribution
Properties, and the fiduciary duties it owes to the limited
partners of the Partnerships, which have an interest in
maximizing the consideration to be received for the Affiliated
Contribution Properties.
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The appraisals provided by KTR, which are described in detail
under DETERMINATION OF CONSIDERATION BASED ON INDEPENDENT
APPRAISALS, the Aimco internal valuations of the
Affiliated Contribution Properties, and the consideration to be
received by VMS and the limited partners for the Affiliated
Contribution in cash
and/or
Common OP Units equal to approximately $230,078,260, which
is equal to the greater of the appraised market value of the fee
simple interest in the Affiliated Contribution Properties and
the internal valuations prepared by Aimco. The Aimco internal
valuation for Casa De Monterey is $17,369,746, whereas the
appraised market value is $18,200,000. The Aimco internal
valuation for Buena Vista Apartments is $19,028,260, whereas the
appraised market value is $17,900,000. The Aimco internal
valuation for Mountain View Apartments is $28,482,135, whereas
the appraised market value is $30,800,000. The Aimco internal
valuation for Pathfinder Village Apartments is $32,036,484,
whereas the appraised market value is $34,700,000. The Aimco
internal valuation for Scotchollow Apartments is $64,502,581,
whereas the appraised market value is $67,800,000. The Aimco
internal valuation for Crosswood Park is $14,792,788, whereas
the appraised market value is $15,750,000. The Aimco internal
valuation for Towers of Westchester Park is $35,557,852, whereas
the appraised market value is $43,800,000. After receipt of
KTRs appraisals, the VMS Related parties considered the
valuation approaches, methodologies and analyses described by
KTR and determined that such valuation approaches, methodologies
and analyses were appropriate in fairly valuing real estate
assets such as the Affiliated Contribution Properties. Because
the consideration for the Affiliated Contribution Properties was
based on the greater of the appraised values for each of the
Affiliated Contribution Properties and Aimcos internal
valuation for each such property, the VMS Related Parties then
adopted the valuations established by the appraisals as the
consideration for each Affiliated Contribution Property for
which such appraised value exceeded Aimcos internal
valuation for such Property, resulting in a total consideration
valued at approximately $230,078,260. The VMS Related Parties
believe that the payment of the greater of the value determined
by Aimco in connection with its annual financial reporting
process and the value determined by an independent appraiser in
the business of valuing properties like the Affiliated
Contribution Properties increases the likelihood that the
consideration is fair.
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The fact that KTR has performed work for Aimco and its
affiliates in the past and that this pre-existing relationship
between KTR and Aimco could negatively impact KTRs
independence. As noted elsewhere in this proxy
statement-prospectus, the VMS Related Parties believe that this
relationship had no effect on the results of the appraisals.
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The absence of an unaffiliated representative to act solely on
behalf of the Partnerships or the limited partners in
negotiating the terms of the Affiliated Contribution on an
independent, arms-length basis, which might have resulted in
greater consideration for the Affiliated Contribution Properties.
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The lack of a requirement that the Affiliated Contribution be
approved by a majority of the limited partners unaffiliated with
the Managing General Partner or Aimco, resulting in the direct
application of the provisions of the Partnership Agreements
which, in light of the limited partnership interests held by
Aimco and its affiliates, requires 62.9% of the unaffiliated
limited partners to object in order to prevent the Affiliated
Contribution from occurring, rather than a simple majority.
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An evaluation of the market price of Class A Common Stock,
which is traded on the New York Stock Exchange, as compared to
the units of the Partnerships, which are not listed on any
national securities exchange or quoted on the NASDAQ system, the
Electronic Bulletin Board or the Pink Sheets,
and therefore have no established public trading market for the
units. For more information, see VMS AND THE
PARTNERSHIPS Distributions and Transfers of
Units.
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The fact that current quarterly distributions with respect to
the Common OP Units are $0.60 per unit, that since
1993 the Partnerships have paid no distributions and that
limited partners electing to waive cash and receive Common OP
Units instead would be entitled to receive such distributions in
the future.
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Pursuant to the Contribution Agreement, VMS, the Partnerships
and Aimco Properties, LLC have provided each limited partner
with contractual dissenters appraisal rights with respect
to the Affiliated Contribution that are generally based upon the
dissenters appraisal rights that a limited partner would
have were it a shareholder in a corporate merger under the
corporation laws of the state of the Partnerships
organization.
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Unaffiliated
Sales
In evaluating the fairness of the Unaffiliated Sales, the VMS
Related Parties considered the fact that the Unaffiliated Sale
Properties were marketed to unaffiliated third parties and the
purchase price for each Unaffiliated Sale Property was attained
through arms-length negotiation. In addition, the VMS Related
Parties considered the fact that the consideration to be
received for the Unaffiliated Sales would exceed the aggregate
Minimum Unaffiliated Sale Price of $60,188,500. Based on these
considerations, the VMS Related Parties determined that the
Unaffiliated Sales are fair to VMS, the Partnerships and all
unaffiliated limited partners of the Partnerships.
The
Transactions
In addition to evaluating the Affiliated Contribution and the
Unaffiliated Sales independently, the VMS Related Parties
considered the following factors and information in determining
that the Transactions, taken as a whole, are fair to VMS, the
Partnerships and all unaffiliated limited partners of the
Partnerships, regardless of whether such limited partners
receive cash or Common OP Units with respect to the Affiliated
Contribution:
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The fact that completion of the refinancing, which occurred on
January 19, 2007, and repayment of the senior mortgages
outstanding prior to the refinancing, prior to any default on or
before January 1, 2008 will result in greater proceeds to
the limited partners than would otherwise be the case.
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An analysis of the possible alternatives, including continuation
without the proposed disposition of Properties, which included
an evaluation of the condition and operating performance of the
Properties and the need for substantial capital expenditures.
Based on estimates made by the Managing General Partner, the
Properties require approximately $32.1 million in capital
expenditures, an amount significantly in excess of the net
proceeds of the refinancing. The VMS Related Parties believe
that the completion of the Transactions, in light of the
available alternatives, creates more certain value for the
limited partners and the potential for more favorable tax
treatment than any of the available alternatives.
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The fact that favorable loans from third parties or the Managing
General Partner are not currently available to finance necessary
capital expenditures and may not be available in the future or,
when available, may not be on terms and conditions acceptable to
the Managing General Partner or favorable to the Partnerships,
which could result in increased stress on the operations of VMS
as the Properties continue to deteriorate.
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In evaluating these factors, except as set forth above or in the
referenced sections of this proxy statement-prospectus, the VMS
Related Parties did not quantify or otherwise attach particular
weight to any of them. In similar transactions, the
determination of fairness is sometimes evaluated based on other
factors, such as current market
25
prices of the units, net book value of the properties, going
concern value of the Partnerships, liquidation value of the
Partnerships and purchase price paid for units in previous
purchases. The VMS Related Parties did not consider these
factors in the evaluation of either of the Affiliated
Contribution or the Unaffiliated Sales. The VMS Related Parties
did not consider these factors in the evaluation of the
Unaffiliated Sales because the Unaffiliated Sales were
negotiated at arms-length with unaffiliated third parties
following extensive marketing efforts.
With respect to the Affiliated Contribution, the VMS Related
Parties did not consider secondary market sales information
because they are of the opinion that secondary market sales
information is not a reliable measure of value in light of the
limited number of reported trades. The VMS Related Parties did
not consider purchase prices paid in previous purchases because
there were no previous purchases to consider. The VMS Related
Parties are also of the opinion that independent appraisals,
which account for a reasonable marketing period, are a more
accurate indicator of value for real estate assets such as the
Affiliated Contribution Properties than net book value, because
accumulated depreciation with respect to the Affiliated
Contribution Properties, together with the failure to account
for depreciation, if any, in the market value of Properties,
results in an understated valuation on a net book value basis.
For example, the aggregate net book value of the Affiliated
Contribution Properties is $32,011,000, as compared to the
aggregate appraised value of $228,950,000 and the Affiliated
Contribution consideration of $230,078,260. The VMS Related
Parties are also of the opinion that the valuations for the
Affiliated Contribution Properties set forth in the appraisals,
based on a sales comparison analysis and a gross income
multiplier analysis, are a reasonable approximation of the going
concern and liquidation values for such Properties. In its sales
comparison analysis, the appraiser considered sales of
comparable properties in competitive markets and adjusted for
differences in location and physical characteristics, which is
analogous to a liquidation analysis in the context of a real
estate asset. Likewise, in its gross income multiplier analysis,
the appraiser valued the Affiliated Contribution Properties
based on a review of the relationship between the sale price and
the effective gross income of a Property, which is analogous to
a going concern valuation in the context of a real estate asset.
Procedural Fairness. Each of the parties to
the Affiliated Contribution is aware that Aimco and its
affiliates have interests in the Affiliated Contribution or have
relationships that present conflicts of interest in connection
with the Affiliated Contribution and considered these conflicts
of interest along with the other factors enumerated above in
making its determination. See CONFLICTS OF INTEREST.
In light of the conflicts of interest with respect to the
Affiliated Contribution, the VMS Related Parties took into
account the absence of the following procedural safeguards:
(1) an unaffiliated representative to act solely on behalf
of the Partnerships or the unaffiliated limited partners in
negotiating the terms of the Affiliated Contribution and
(2) the approval of the Affiliated Contribution by a
majority of the limited partners unaffiliated with the Managing
General Partner or Aimco. The Aimco Operating Partnership is a
partnership managed by the Managing General Partner rather than
a board of directors. The Managing General Partner is a
corporation, the board of which is comprised entirely of
affiliates of the VMS Related Parties. As a result, there were
no unaffiliated parties available to act as, or to hire, an
unaffiliated representative of the unaffiliated limited
partners. The VMS Related Parties did not believe any of the
procedural safeguards were necessary with respect to the
Unaffiliated Sales because the Unaffiliated Sales were
negotiated at arms-length with unaffiliated third parties
following extensive marketing efforts. Despite the absence of
these procedural safeguards, the VMS Related Parties are of the
opinion that the Affiliated Contribution is procedurally fair to
the unaffiliated limited partners because:
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An appraisal of the Affiliated Contribution Properties was
obtained from an independent third party appraiser. In each
case, the consideration as of the closing date of the Affiliated
Contribution for the Affiliated Contribution Properties is at
least equal in value to the greater of the appraised value and
the Aimco internal valuations. Aimco Properties, LLC has
indicated that it would not have paid more for the Affiliated
Contribution Properties than the greater of these two amounts,
even if an unaffiliated representative had been engaged to
represent the interests of the unaffiliated limited partners.
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By providing the information required by
Form S-4
and Schedules 13E-3 and 14A of the Exchange Act, the Managing
General Partner has provided sufficient information to each
limited partner to make its own decision with respect to
objecting to or electing the form of consideration for the
Affiliated Contribution.
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The Affiliated Contribution will not be consummated if limited
partners holding a majority of the aggregate units of the
Partnerships object in writing in the manner described herein.
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The limited partners of the Partnerships have been given their
choice of the form of consideration to be received with respect
to their distributable portion of the Affiliated Contribution
proceeds to give them an opportunity to defer certain tax
liability as well as participate in the growth of the Aimco
Operating Partnership enterprise.
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Pursuant to the Contribution Agreement, VMS, the Partnerships
and Aimco Properties, LLC have provided each limited partner
with contractual dissenters appraisal rights with respect
to the Affiliated Contribution that are generally based upon the
dissenters appraisal rights that a limited partner would
have were it a shareholder in a corporate merger under the
corporation laws of Illinois, the state of the
Partnerships organization. To exercise this right, you
must take the necessary steps provided by the Contribution
Agreement. See APPRAISAL RIGHTS.
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In evaluating these factors, the VMS Related Parties did not
quantify or otherwise attach particular weight to any of them.
DETERMINATION
OF CONSIDERATION BASED ON INDEPENDENT APPRAISALS
Selection and Qualifications of Independent
Appraiser. The Managing General Partner, an
affiliate of the Aimco Operating Partnership, in its capacity as
the managing general partner of VMS, retained the services of
KTR Valuation and Consulting Services, LLC (KTR), an
independent third party, to appraise the market value of the
Affiliated Contribution Properties. Although the Managing
General Partner briefly considered other appraisers, it
considered KTRs responsiveness, demonstrated on prior
engagements with affiliates of the Managing General Partner, to
be of particular importance in light of the impending maturity
of the then-existing outstanding mortgage indebtedness and the
potential need for quick responses and turnarounds on the
initial appraisal and subsequent updates. Additionally, due to
the geographically dispersed locations of the Properties, the
Managing General Partner elected to retain a valuation
consulting firm with a national presence. KTR is an experienced
independent valuation consulting firm with offices in five
U.S. cities. The Managing General Partner selected KTR
based on these qualifications.
Factors Considered. KTR performed complete
appraisals of each of the Affiliated Contribution Properties.
KTR has represented that its report was prepared in conformity
with the Uniform Standards of Professional Appraisal Practice,
the Code of Professional Ethics and Standards of Professional
Appraisal Practice of the Appraisal Institute. VMS furnished the
appraiser with all of the necessary information requested by it
in connection with the appraisal and represented to KTR that the
information was true, correct and complete in all material
respects. No limitations were imposed on KTR by VMS, Aimco
Properties, LLC or any of their affiliates. In preparing its
valuation of the Affiliated Contribution Properties, KTR, among
other things:
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Inspected the Properties;
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Interviewed County and City officials regarding taxes, zoning
requirements, flood zone information, demographic data, planned
construction, recently completed developments, and other
economic impacting events;
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Consulted market participants, including real estate brokers and
property managers, regarding market parameters and activity;
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Consulted with lenders and investor surveys regarding investment
parameters;
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Interviewed leasing agents for competitive complexes for
property specific information;
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Analyzed supply and demand factors affecting the local market
for each Property;
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Reviewed historical income and expense statements;
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Reviewed the current rent roll; and
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Reviewed other relevant financial and market information.
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Summary of Approaches and Methodologies
Employed. The following summary describes the
approaches and analyses employed by KTR in preparing the
appraisals. KTR principally relied on two approaches to
valuation: (i) the sales comparison approach and
(ii) the income capitalization approach.
Using the sales comparison approach technique, an appraiser
reaches a determination of a propertys value by comparing
the subject to similar, nearby properties that have recently
sold. Essentially, the procedure entails gathering information
regarding bona fide, recent arms length sales of
comparable properties and comparing the most important
characteristics of the sales to the subject. Adjustments are
then made to the comparable properties for differences such as
terms of financing, date of sale, location and physical
characteristics. Attaining data with a high degree of
comparability is most important when this technique is utilized.
The reliability of this approach depends upon availability of
comparable sales data, verification of the sales data, the
degree of comparability and extent of adjustment necessary for
differences and the absence of non-typical conditions affecting
the sales price.
As part of the sales comparison approach, KTR performed an
effective gross income multiplier (EGIM) analysis.
The EGIM analysis measures the relationship between the sale
price of a property and its effective gross income, which is the
total annual income that a property would produce after an
allowance for vacancy and credit loss.
The income capitalization approach is a process by which the
anticipated flow of future benefits is capitalized into a value
indication. KTR reported that the income capitalization approach
is widely applied in appraising income producing properties. The
reliability of this technique depends upon the reliability of
the net income estimate and the capitalization rate. According
to the KTR reports, the value derived from the income
capitalization approach is well documented and market oriented.
Because the Affiliated Contribution Properties are income
producing realty and anticipated to continue to be so, KTR
employed this approach in the valuation of the Properties.
As part of the income capitalization approach, KTR used a direct
capitalization analysis to derive value for the Affiliated
Contribution Properties. According to KTRs report, the
basic steps in the direct capitalization analysis are as
follows: (i) calculate potential gross income from the
dwelling units; (ii) estimate vacancy and credit loss to
arrive at effective gross income; (iii) estimate operating
expenses to arrive at the stabilized net operating income
(NOI); (iv) develop the overall capitalization
rate; and (v) divide NOI by the capitalization rate to
arrive at the value.
The final step in the appraisal process is the reconciliation of
the value indicators into a single value estimate. KTR
considered the relative applicability of each of the approaches,
examined the range between the value indications and placed
major emphasis on the approach that appeared to produce the most
reliable solution to the specific appraisal problem. The purpose
of the appraisal, the type of property and the adequacy and
reliability of the data were analyzed and appropriate weight was
given to each of the approaches to value.
For the appraisal of the Affiliated Contribution Properties, KTR
relied principally on the income capitalization approach to
valuation and secondarily on the sales comparison approach.
According to KTRs report, although the sales comparison
approach is considered a reliable method for valuing property,
KTR believes that the income capitalization approach is the
primary approach used for valuing income producing property,
such as the Properties.
Summary of Independent Appraisals of the
Properties. KTR performed complete appraisals of
the seven Affiliated Contribution Properties to be contributed
in the Affiliated Contribution. The appraisals were first
conducted in April of 2006 and were subsequently updated by KTR
in November and December of 2006. The summaries set forth below
describe the material conclusions reached by KTR in April, 2006
and November and December, 2006, based on the values determined
under the valuation approaches and subject to the assumptions
and limitations described below. The estimated aggregate
as is market value of the fee simple estate of the
Affiliated Contribution Properties is $228,950,000, which is the
sum of the higher of the appraised values determined by KTR for
each of the Affiliated Contribution Properties.
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CASA DE
MONTEREY
The following is a summary of the appraisal of Casa de Monterey
dated November 28, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
five multifamily apartment properties in the competitive market.
The sales reflected per unit unadjusted sales prices ranging
from $124,116 to $168,304. After adjustment, the comparable
sales illustrated a range from $126,334 to $134,643 per unit
with an average of $128,827 per unit. According to KTRs
report, a few of the sales required minor adjustments for
location as well as adjustment because of superior and inferior
physical characteristics. Based on the adjustments considered
and indicators exhibited by the sales data with primary emphasis
placed on three of the sales, KTR estimated a value of $126,000
per unit for Casa de Monterey. Applied to Casa de
Montereys 144 units, this resulted in KTRs
total value estimate of approximately $18,100,000.
KTR also performed an EGIM analysis. KTR estimated the operating
expense ratio of Casa de Monterey to be 47%, with the
expense ratio of the five comparable properties ranging from 33%
to 40%, with EGIMs ranging from 10.9 to 11.9. KTR concluded an
EGIM of 9.5 for Casa de Monterey and applied the EGIM to
the effective gross income for Casa de Monterey
($1,965,336), resulting in a value indication of approximately
$18,700,000.
KTR estimated the value using the price per unit analysis at
$18,100,000 and the value using EGIM analysis at $18,700,000.
Due to the similarity of the resulting value indicators, KTR
gave relatively equal consideration to both techniques when it
concluded a final value via the sales comparison approach of
$18,400,000.
Valuation Under the Income Capitalization
Approach. Using the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for Casa de Monterey. The assumptions
employed by KTR to determine the value of Casa de Monterey
under the income capitalization approach included:
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monthly economic rent potential of $172,432 and annual gross
rent potential of $2,069,184;
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a loss to lease expense of 5.0%;
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a concession loss of 0.5%;
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a combined vacancy and credit loss allowance of 7.0%;
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estimated utility income of $475 per unit;
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other income of 4.3% of the gross rent potential or $86,400;
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total expenses of $919,173; and
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capitalization rate of 5.75%.
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $1,046,163 at 5.75%, resulting
in a value conclusion for Casa de Monterey of approximately
$18,200,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $18,400,000, and the income capitalization approach
resulted in a value of $18,200,000. KTR reported that the local
market is active in terms of investment sales of similar
apartment complexes and sufficient sales data was available to
develop a defensible value via the sales comparison approach.
KTR also stated in its report that the value derived through the
use of the sales comparison approach supports the value
concluded for the property via the income capitalization
approach. Due to the income producing nature of Casa de
Monterey, KTR emphasized the income capitalization approach when
it determined a final estimate of value for Casa de
Monterey of $18,200,000.
The following is a summary of the appraisal of Casa de Monterey
dated April 11, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
five multifamily apartment properties in the competitive market.
The sales reflected per unit unadjusted sales prices ranging
from $124,116 to $167,157. After adjustment, the comparable
sales illustrated a range from $120,469 to $130,322 per
unit with an average of $125,433 per unit. According to
KTRs report, a few of the sales required minor adjustments
for location as well as adjustment because of superior and
inferior physical characteristics. Based on the adjustments
considered and indicators exhibited by the sales data with
primary emphasis placed on four of the
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sales, KTR estimated a value of $125,000 per unit for Casa
de Monterey. Applied to Casa de Montereys 144 units,
this resulted in KTRs total value estimate of
approximately $18,000,000.
KTR also performed an EGIM analysis. KTR estimated the operating
expense ratio of Casa de Monterey to be 47%, with the expense
ratio of the five comparable properties ranging from 35% to 47%,
with EGIMs ranging from 9.2 to 12.5. KTR concluded an EGIM of
9.5 for Casa de Monterey and applied the EGIM to the effective
gross income for Casa de Monterey ($1,951,068), resulting in a
value indication of approximately $18,500,000.
KTR estimated the value using the price per unit analysis at
$18,000,000 and the value using EGIM analysis at $18,500,000.
Due to the similarity of the resulting value indicators, KTR
gave relatively equal consideration to both techniques when it
concluded a final value via the sales comparison approach of
$18,250,000.
Valuation Under the Income Capitalization
Approach. Using the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for Casa de Monterey. The assumptions employed by
KTR to determine the value of Casa de Monterey under the income
capitalization approach included:
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monthly economic rent potential of $168,864 and annual gross
rent potential of $2,026,368;
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a loss to lease expense of 4.0%;
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a concession loss of 0.5%;
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a combined vacancy and credit loss allowance of 6.5%;
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estimated utility income of $425 per unit;
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other income of 4.3% of the gross rent potential or $86,400;
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total expenses of $918,603; and
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capitalization rate of 5.75%.
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $1,032,465 at 5.75%, resulting
in a value conclusion for Casa de Monterey of approximately
$18,000,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $18,250,000, and the income capitalization approach
resulted in a value of $18,000,000. KTR reported that the local
market is active in terms of investment sales of similar
apartment complexes and sufficient sales data was available to
develop a defensible value via the sales comparison approach.
KTR also stated in its report that the value derived through the
use of the sales comparison approach supports the value
concluded for the property via the income capitalization
approach. Due to the income producing nature of Casa de
Monterey, KTR emphasized the income capitalization approach when
it determined a final estimate of value for Casa de Monterey of
$18,000,000.
BUENA
VISTA APARTMENTS
The following is a summary of the appraisal of Buena Vista
Apartments dated December 8, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
five multifamily apartment properties in the competitive market.
The sales reflected per unit adjusted sales prices ranging from
$168,304 to $222,619. After adjustment, the comparable sales
illustrated a range from $176,719 to $211,488 per unit with an
average of $193,090 per unit. According to KTRs report,
three of the five sales required adjustments for location. Three
of the sales required adjustment for superior average unit size.
One of the sales required adjustment because of superior age and
condition. Based on the adjustments considered and indicators
exhibited by the sales data and equal emphasis placed on all of
the sales, KTR estimated a value of $192,000 per unit for Buena
Vista Apartments. Applied to Buena Vista Apartments
92 units, this resulted in KTRs total value estimate
of approximately $17,700,000.
KTR also performed an EGIM analysis. KTR estimated the operating
expense ratio of Buena Vista Apartments to be 40%, with the
expense ratio of the five comparable properties ranging from 30%
to 34%, with EGIMs ranging from 11.4 to 13.4. KTR concluded an
EGIM of 10.5 for Buena Vista Apartments and applied the EGIM to
the
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effective gross income for Buena Vista Apartments ($1,706,033),
resulting in a value indication of approximately $17,900,000.
KTR estimated the value using the price per unit analysis at
$17,700,000 and the value using EGIM analysis at $17,900,000.
Due to the similarity of the resulting value indicators,
relatively equal consideration was given to both techniques when
KTR concluded a final value via the sales comparison approach of
$17,800,000.
Valuation Under the Income Capitalization
Approach. Using the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for Buena Vista Apartments. The assumptions
employed by KTR to determine the value of Buena Vista Apartments
under the income capitalization approach included:
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monthly economic rent potential of $143,678 and annual gross
rent potential of $1,724,136;
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a loss to lease expense of 3.0%;
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a concession loss of 1.0%;
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a combined vacancy and credit loss allowance of 2.5%;
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estimated utility income of $272 per unit;
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other income of 3.0% of the gross rent potential or $51,724;
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total expenses of $679,351; and
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capitalization rate of 5.75%.
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $986,094 at 5.75%, resulting
in a value conclusion for Buena Vista Apartments of
approximately $17,900,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $17,800,000, and the income capitalization approach
resulted in a value of $17,900,000. KTR reported that the local
market is active in terms of investment sales of similar
apartment complexes and sufficient sales data was available to
develop a defensible value via the sales comparison approach.
KTR also stated in its report that the value derived through the
use of the sales comparison approach supports the value
concluded for the property via the income capitalization
approach. Due to the income producing nature of Buena Vista
Apartments, KTR emphasized the income capitalization approach
when it determined a final estimate of value for Buena Vista
Apartments of $17,900,000.
The following is a summary of the appraisal of Buena Vista
Apartments dated April 11, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
five multifamily apartment properties in the competitive market.
The sales reflected per unit unadjusted sales prices ranging
from $160,214 to $229,190. After adjustment, the comparable
sales illustrated a range from $178,317 to $200,656 per
unit with an average of $190,733 per unit. According to
KTRs report, most of the sales required adjustments for
location. Two of the sales required adjustments because of
superior physical characteristics. Based on the adjustments
considered and indicators exhibited by the sales data and equal
emphasis placed on all of the sales, KTR estimated a value of
$191,000 per unit for Buena Vista Apartments. Applied to
Buena Vista Apartments 92 units, this resulted in
KTRs total value estimate of approximately $17,500,000.
KTR also performed an EGIM analysis. KTR estimated the operating
expense ratio of Buena Vista Apartments to be 40%, with the
expense ratio of the five comparable properties ranging from 28%
to 47%, with EGIMs ranging from 9.2 to 13.4. KTR concluded an
EGIM of 10.25 for Buena Vista Apartments and applied the EGIM to
the effective gross income for Buena Vista Apartments
($1,623,821), resulting in a value indication of approximately
$16,600,000.
KTR estimated the value using the price per unit analysis at
$17,500,000 and the value using EGIM analysis at $16,600,000.
Due to the similarity of the resulting value indicators,
relatively equal consideration was given to both techniques when
KTR concluded a final value via the sales comparison approach of
$17,000,000.
31
Valuation Under the Income Capitalization
Approach. Using the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for Buena Vista Apartments. The assumptions
employed by KTR to determine the value of Buena Vista Apartments
under the income capitalization approach included:
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monthly economic rent potential of $141,144 and annual gross
rent potential of $1,693,728;
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a loss to lease expense of 3.0%;
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a concession loss of 1.5%;
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a combined vacancy and credit loss allowance of 4.0%;
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estimated utility income of $255 per unit;
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other income of 3.0% of the gross rent potential or $50,600;
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total expenses of $650,492; and
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capitalization rate of 5.75%.
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $973,329 at 5.75%, resulting
in a value conclusion for Buena Vista Apartments of
approximately $16,900,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $17,000,000, and the income capitalization approach
resulted in a value of $16,900,000. KTR reported that the local
market is active in terms of investment sales of similar
apartment complexes and sufficient sales data was available to
develop a defensible value via the sales comparison approach.
KTR also stated in its report that the value derived through the
use of the sales comparison approach supports the value
concluded for the property via the income capitalization
approach. Due to the income producing nature of Buena Vista
Apartments, KTR emphasized the income capitalization approach
when it determined a final estimate of value for Buena Vista
Apartments of $16,900,000.
CROSSWOOD
PARK
The following is a summary of the appraisal of Crosswood Park
dated December 8, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
five multifamily apartment properties in the competitive market.
The sales reflected per unit prices ranging from $70,238 to
$116,327. All of the five sales examined by KTR represent sales
of apartments that are of similar construction componentry to
Crosswood Park. All of the sales are similar in terms of
location and physical condition. Two of the comparable sales are
newer than Crosswood Park. Minor differences exist as to the
specific location of each comparable sale and Crosswood Park.
The primary difference between the comparable sales and
Crosswood Park are location, age and average unit size. The most
value influencing difference between Crosswood Park and the
comparable sales is the amount of net operating income generated
on a per unit basis. In an attempt to qualify appropriate
adjustments to the prices indicated by the comparable sales. KTR
analyzed the difference between the net operating income (NOI)
per unit of the comparable sales relative to the NOI of
Crosswood Park and adjusted the sale price of the comparable
sales based on percentage differences in net income. The
adjusted range of per unit prices is $74,124 to $96,636, and the
mean adjusted per unit price is $86,087. As no one sale required
a significant degree of adjustment, KTR placed equal emphasis on
each in concluding a value of $87,100 per unit for Crosswood
Park.
Applied to Crosswood Parks 180 units, this resulted in
KTRs total value estimate of $15,500,000.
KTR also performed an EGIM analysis. KTR estimated the operating
expense ratio of Crosswood Park to be 53.8%, with the expense
ratio of the five comparable properties ranging from 35% to 47%,
with EGIMs ranging from 7.80 to 10.26. KTR concluded an EGIM of
7.8 for Crosswood Park and applied the EGIM to the effective
gross income for Crosswood Park ($2,044,793), resulting in a
value indication of approximately $16,000,000.
32
KTR estimated the value using the price per unit analysis at
$15,500,000 and the EGIM analysis at $16,000,000. Due to the
similarity of the resulting value indicators, KTR gave
relatively equal consideration to both techniques when it
concluded a final value via the sales comparison approach of
$15,750,000.
Valuation Under the Income Capitalization
Approach. Using the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for Crosswood Park. The assumptions employed by
KTR to determine the value of Crosswood Park under the income
capitalization approach included:
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monthly economic rent potential of $185,325 and annual gross
rent potential of $2,223,900;
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a loss to lease expense of 3.5%;
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a concession loss of 2.0%;
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a combined vacancy and credit loss allowance of 7.5%;
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estimated utility income of $64,000;
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other income of 2.5% of the gross rent potential;
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total expenses of $1,099,368; and
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capitalization rate of 6.0%;
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $945,425 at 6.0%, resulting in
a value conclusion for Crosswood Park of approximately
$15,750,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $15,750,000, and the income capitalization approach
resulted in a value of $15,750,000. KTR reported that the local
market is active in terms of investment sales of similar
apartment complexes and sufficient sales data was available to
develop a defensible value via the sales comparison approach.
KTR also stated in its report that the value derived through the
use of the sales comparison approach supports the value
concluded for the property via the income capitalization
approach when it determined a final estimate of value for
Crosswood Park of $15,750,000.
The following is a summary of the appraisal of Crosswood Park
dated April 20, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
five multifamily apartment properties in the competitive market.
The sales reflected per unit prices ranging from $75,280 to
$104,779. All of the five sales examined by KTR represent sales
of apartments that are of similar construction componentry to
Crosswood Park. All of the sales are similar in terms of
location and physical condition. Two of the comparable sales are
newer than Crosswood Park. Minor differences exist as to the
specific location of each comparable sale and Crosswood Park.
The primary difference between the comparable sales and
Crosswood Park are age and average unit size. The most value
influencing difference between Crosswood Park and the comparable
sales is the amount of net operating income generated on a per
unit basis. In an attempt to quantify appropriate adjustments to
the prices indicated by the comparable sales, KTR analyzed the
difference between the net operating income (NOI) per unit of
the comparable sales relative to the NOI of Crosswood Park and
adjusted the sale price of the comparable sales based on
percentage differences in net income. The adjusted range of per
unit prices is $77,004 to $94,301, and the mean adjusted per
unit price is $85,279. As no one sale required a significant
degree of adjustment, KTR placed equal emphasis on each in
concluding a value of $85,000 per unit for Crosswood Park.
Applied to Crosswood Parks 180 units, this resulted
in KTRs total value estimate of $15,300,000.
KTR also performed an EGIM analysis. KTR estimated the operating
expense ratio of Crosswood Park to be 51%, with the expense
ratio of the five comparable properties ranging from 42% to 47%,
with EGIMs ranging from 8.34 to 10.18. KTR concluded an EGIM of
7.75 for Crosswood Park and applied the EGIM to the effective
gross income for Crosswood Park ($1,998,730), resulting in a
value indication of approximately $15,500,000.
KTR estimated the value using the price per unit analysis at
$15,300,000 and the EGIM analysis at $15,500,000. Due to the
similarity of the resulting value indicators, KTR gave
relatively equal consideration to both techniques when it
concluded a final value via the sales comparison approach of
$15,400,000.
33
Valuation Under the Income Capitalization
Approach. Using the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for Crosswood Park. The assumptions employed by
KTR to determine the value of Crosswood Park under the income
capitalization approach included:
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monthly economic rent potential of $184,260 and annual gross
rent potential of $2,211,120;
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a loss to lease expense of 3.5%;
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a concession loss of 4.0%;
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a combined vacancy and credit loss allowance of 7.5%;
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estimated utility income of $64,000;
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other income of 2.5% of the gross rent potential;
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total expenses of $1,083,549; and
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capitalization rate of 6.0%.
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $915,181 at 6.0%, resulting in
a value conclusion for Crosswood Park of approximately
$15,300,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $15,400,000, and the income capitalization approach
resulted in a value of $15,300,000. KTR reported that the local
market is active in terms of investment sales of similar
apartment complexes and sufficient sales data was available to
develop a defensible value via the sales comparison approach.
KTR also stated in its report that the value derived through the
use of the sales comparison approach supports the value
concluded for the property via the income capitalization
approach. Due to the income producing nature of Crosswood Park,
KTR emphasized the income capitalization approach when it
determined a final estimate of value for Crosswood Park of
$15,300,000.
MOUNTAIN
VIEW APARTMENTS
The following is a summary of the appraisal of Mountain View
Apartments dated December 8, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
five multifamily apartment properties in the competitive market.
The sales reflected per unit prices ranging from $168,304 to
$222,619. According to KTRs report, all of the sales
required adjustments for location. One of the sales required
adjustment because of superior age and condition and one of the
sales required adjustment for superior average unit size. The
adjusted unit prices range from $176,719 to $189,226. The
average adjusted unit price is $182,483. Based on the
adjustments considered and equal emphasis placed on all five
similar sales, KTR estimated a value of $182,500 per unit
for Mountain View Apartments. Applied to Mountain View
Apartments 168 units, this resulted in KTRs
total value estimate of approximately $30,700,000.
KTR also performed an EGIM analysis. KTR estimated the operating
expense ratio of Mountain View Apartments to be 43%, with the
expense ratio of the five comparable properties ranging from 30%
to 34%, with EGIMs ranging from 11.4 to 13.4. KTR concluded an
EGIM of 10.5 for Mountain View Apartments and applied the EGIM
to the effective gross income for Mountain View Apartments
($2,986,855), resulting in a value indication of approximately
$31,400,000.
KTR estimated the value using the price per unit analysis at
$30,700,000 and the value using EGIM analysis at $31,400,000.
Due to the similarity of the resulting value indicators, KTR
gave relatively equal consideration to both techniques when it
concluded a final value via the sales comparison approach of
$31,000,000.
Valuation Under the Income Capitalization
Approach. Using the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for Mountain View Apartments. The assumptions
34
employed by KTR to determine the value of Mountain View
Apartments under the income capitalization approach included:
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monthly economic rent potential of $268,424 and annual gross
rent potential of $3,168,768;
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a loss to lease expense of 5.5%;
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a concession loss of 1.0%;
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a combined vacancy and credit loss allowance of 7.5%;
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estimated utility income of $440 per unit;
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other income of 4.5% of the gross rent potential or $142,800;
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total expenses of $1,295,541; and
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capitalization rate of 5.5%.
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $1,691,314 at 5.5%, resulting
in a value conclusion for Mountain View Apartments of
approximately $30,800,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $31,000,000, and the income capitalization approach
resulted in a value of $30,800,000. KTR reported that the local
market is active in terms of investment sales of similar
apartment complexes and sufficient sales data was available to
develop a defensible value via the sales comparison approach.
KTR also stated in its report that the value derived through the
use of the sales comparison approach supports the value
concluded for the property via the income capitalization
approach. Due to the income producing nature of Mountain View
Apartments, KTR emphasized the income capitalization approach
when it determined a final estimate of value for Mountain View
Apartments of $30,800,000.
The following is a summary of the appraisal of Mountain View
Apartments dated April 11, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
five multifamily apartment properties in the competitive market.
The sales reflected per unit prices ranging from $160,214 to
$229,190. According to KTRs report, all of the sales
required adjustments for location. Two of the sales required
adjustments because of superior physical characteristics. The
three sales that required the least overall adjustments produced
an average adjusted price of $182,682 per unit. Based on
the adjustments considered and indicators exhibited by the sales
data and equal emphasis placed on the three most similar sales,
KTR estimated a value of $182,500 per unit for Mountain
View Apartments. Applied to Mountain View Apartments
168 units, this resulted in KTRs total value estimate
of approximately $30,700,000.
KTR also performed an EGIM analysis. KTR estimated the operating
expense ratio of Mountain View Apartments to be 43%, with the
expense ratio of the five comparable properties ranging from 28%
to 47%, with EGIMs ranging from 9.2 to 13.4. KTR concluded an
EGIM of 10.25 for Mountain View Apartments and applied the EGIM
to the effective gross income for Mountain View Apartments
($2,926,740), resulting in a value indication of approximately
$30,000,000.
KTR estimated the value using the price per unit analysis at
$30,700,000 and the value using EGIM analysis at $30,000,000.
Due to the similarity of the resulting value indicators, KTR
gave relatively equal consideration to both techniques when it
concluded a final value via the sales comparison approach of
$30,350,000.
Valuation Under the Income Capitalization
Approach. Using the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for Mountain View Apartments. The assumptions
employed by KTR to determine the value of Mountain View
Apartments under the income capitalization approach included:
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monthly economic rent potential of $264,064 and annual gross
rent potential of $3,168,768;
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35
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a loss to lease expense of 6.0%;
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a concession loss of 1.0%;
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a combined vacancy and credit loss allowance of 7.0%;
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estimated utility income of $400 per unit;
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other income of 4.2% of the gross rent potential or $134,400;
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total expenses of $1,263,286; and
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capitalization rate of 5.5%.
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $1,663,454 at 5.5%, resulting
in a value conclusion for Mountain View Apartments of
approximately $30,200,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $30,350,000, and the income capitalization approach
resulted in a value of $30,200,000. KTR reported that the local
market is active in terms of investment sales of similar
apartment complexes and sufficient sales data was available to
develop a defensible value via the sales comparison approach.
KTR also stated in its report that the value derived through the
use of the sales comparison approach supports the value
concluded for the property via the income capitalization
approach. Due to the income producing nature of Mountain View
Apartments, KTR emphasized the income capitalization approach
when it determined a final estimate of value for Mountain View
Apartments of $30,200,000.
PATHFINDER
VILLAGE APARTMENTS
The following is a summary of the appraisal of Pathfinder
Village Apartments dated December 8, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
five multifamily apartment properties in the competitive market.
The sales reflected per unit prices ranging from $121,875 to
$180,444. The sales data was analyzed and compared to Pathfinder
Village Apartments for such items as time, location, size,
amenities and condition. The primary difference between the
comparable sales and Pathfinder Village Apartments are
age/condition, average unit size and amenities. The adjusted
unit prices range from $121,875 to $139,664. The average
adjusted unit price is $136,941. None of the sales required a
significant degree of adjustment and KTR placed on equal
emphasis on each in concluding to a value of $137,000 per unit
for Pathfinder Village Apartments. Applied to Pathfinder Village
Apartments 246 units, this resulted in KTRs total
value estimate of $33,700,000.
KTR also performed an EGIM analysis. KTR estimated the operating
expense ratio of Pathfinder Village Apartments to be 52.5%, with
the expense ratio of the five comparable properties ranging from
36.8% to 52.2%, with EGIMs ranging from 9.3 to 11.0. KTR
concluded an EGIM of 9.0 for Pathfinder Village Apartments and
applied the EGIM to the effective gross income for Pathfinder
Village Apartments ($4,012,908), resulting in a value indication
of approximately $36,100,000.
KTR estimated the value using the price per unit analysis at
$33,700,000 and the value using EGIM analysis at $36,100,000.
Due to the similarity of the resulting value indicators, KTR
gave relatively equal consideration to both techniques when it
concluded a final value via the sales comparison approach of
$34,900,000.
Valuation Under the Income Capitalization
Approach. Under the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for Pathfinder Village Apartments. The
assumptions employed by KTR to determine the value of Pathfinder
Village Apartments under the income capitalization approach
included:
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monthly economic rent potential of $356,760 and annual gross
rent potential of $4,281,120;
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a loss to lease expense of 5.0%;
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a concession loss of 5.0%;
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a combined vacancy and credit loss allowance of 5.0%;
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estimated utility income of $650 per unit;
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other income of 5.0% of the gross rent potential or $214,056;
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total expenses of $2,105,766; and
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capitalization rate of 5.5%.
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $1,907,142 at 5.5%, resulting
in a value conclusion for Pathfinder Village Apartments of
approximately $34,700,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $34,900,000, and the income capitalization approach
resulted in a value of $34,700,000. KTR reported that the local
market is active in terms of investment sales of similar
apartment complexes and sufficient sales data was available to
develop a defensible value via the sales comparison approach.
KTR also stated in its report that the value derived through the
use of the sales comparison approach supports the value
concluded for the property via the income capitalization
approach. Due to the income producing nature of Pathfinder
Village Apartments, KTR emphasized the income capitalization
approach when it determined a final estimate of value for
Pathfinder Village Apartments of $34,700,000.
The following is a summary of the appraisal of Pathfinder
Village Apartments dated April 14, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
six multifamily apartment properties in the competitive market.
The sales reflected per unit prices ranging from $108,824 to
$147,015. All of the comparable sales represent sales of
apartments that are of similar construction to Pathfinder
Village Apartments and are of the same general vintage and
similar in terms of physical condition to Pathfinder Village
Apartments. Minor differences exist as to the specific location
of each comparable sale and Pathfinder Village Apartments. The
primary difference between the comparable sales and Pathfinder
Village Apartments are location and average unit size. The most
value influencing difference between Pathfinder Village
Apartments and the comparable sales is the amount of net
operating income generated on a per unit basis. In an attempt to
quantify appropriate adjustments to the prices indicated by the
comparable sales, KTR analyzed the difference between the net
operating income (NOI) per unit of the comparable sales relative
to the NOI of Pathfinder Village Apartments. KTR adjusted the
sale price of the comparable sales based on percentage
differences in net income. The adjusted unit prices range from
$110,156 to $145,031. The mean and median adjusted unit price is
$125,452 and $121,791. KTR placed an emphasis on all of the
sales due to their similarity compared to Pathfinder Village in
concluding to a value of $125,000 per unit for Pathfinder
Village Apartments. Applied to Pathfinder Village
Apartments 246 units, this resulted in KTRs
total value estimate of $30,750,000.
KTR also performed an EGIM analysis. KTR estimated the operating
expense ratio of Pathfinder Village Apartments to be 53%, with
the expense ratio of the six comparable properties ranging from
42% to 53%, with EGIMs ranging from 8.2 to 9.4. KTR concluded an
EGIM of 9.25 for Pathfinder Village Apartments and applied the
EGIM to the effective gross income for Pathfinder Village
Apartments ($3,837,984), resulting in a value indication of
approximately $35,500,000.
KTR estimated the value using the price per unit analysis at
$30,750,000 and the value using EGIM analysis at $35,500,000.
Due to the similarity of the resulting value indicators, KTR
gave relatively equal consideration to both techniques when it
concluded a final value via the sales comparison approach of
$33,100,000.
Valuation Under the Income Capitalization
Approach. Under the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for Pathfinder Village Apartments. The
assumptions
37
employed by KTR to determine the value of Pathfinder Village
Apartments under the income capitalization approach included:
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monthly economic rent potential of $337,384 and annual gross
rent potential of $4,408,608;
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a loss to lease expense of 3.0%;
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a concession loss of 5.0%;
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a combined vacancy and credit loss allowance of 6.0%;
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estimated utility income of $625 per unit;
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other income of 5.0% of the gross rent potential or $202,430;
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total expenses of $2,044,799; and
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capitalization rate of 5.5%.
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $1,793,185 at 5.5%, resulting
in a value conclusion for Pathfinder Village Apartments of
approximately $32,600,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $33,100,000, and the income capitalization approach
resulted in a value of $32,600,000. KTR reported that the local
market is active in terms of investment sales of similar
apartment complexes and sufficient sales data was available to
develop a defensible value via the sales comparison approach.
KTR also stated in its report that the value derived through the
use of the sales comparison approach supports the value
concluded for the property via the income capitalization
approach. Due to the income producing nature of Pathfinder
Village Apartments, KTR emphasized the income capitalization
approach when it determined a final estimate of value for
Pathfinder Village Apartments of $32,600,000.
SCOTCHOLLOW
APARTMENTS
The following is a summary of the appraisal of Scotchollow
Apartments dated December 8, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
five multifamily apartment properties in the competitive market.
The sales reflected per unit prices ranging from $156,250 to
$184,615. All of the comparable sales represent sales of
apartments that are of similar construction componentry to
Scotchollow Apartments and are of the same general vintage and
similar in terms of physical condition to Scotchollow
Apartments. Minor differences exist as to the specific location
of each comparable and Scotchollow Apartments. The primary
difference between the comparable sales and Scotchollow
Apartments are location, age/physical condition and average unit
size. The adjusted unit prices range from $155,077 to $156,250
with an average of $156,078 per unit. The average adjusted unit
price is $156,078. None of the sales required a significant
degree of adjustment and KTR placed an equal emphasis on each in
concluding to a value of $156,000 per unit for Scotchollow
Apartments. Applied to Scotchollow Apartments
418 units, this resulted in KTRs total value estimate
of approximately $65,200,000.
KTR also performed an EGIM analysis. KTR estimated the operating
expense ratio of Scotchollow Apartments to be 47%, with the
expense ratio of the five comparable properties ranging from 35%
to 46%, with EGIMs ranging from 10.4 to 11.6. KTR concluded an
EGIM of 10.0 for Scotchollow Apartments and applied the EGIM to
the effective gross income for Scotchollow Apartments
($7,003,543), resulting in a value conclusion of approximately
$70,000,000.
KTR estimated the value using the price per unit analysis at
$65,200,000 and the value using EGIM analysis at $70,000,000.
Due to the similarity of the resulting value indicators, KTR
gave relatively equal consideration to both techniques when it
concluded a final value via the sales comparison approach of
$67,600,000.
38
Valuation Under the Income Capitalization
Approach. Under the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for Scotchollow Apartments. The assumptions
employed by KTR to determine the value of Scotchollow Apartments
under the income capitalization approach included:
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monthly economic rent potential of $637,504 and annual gross
rent potential of $7,650,048;
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a loss to lease expense of 8.0%;
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a concession loss of 2.0%;
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a combined vacancy and credit loss allowance of 4.0%;
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estimated utility income of $375 per unit;
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other income of 3.5% of the gross rent potential or $267,752;
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total expenses of $3,274,622; and
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capitalization rate of 5.75%.
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $3,728,921 at 5.5%, resulting
in a value conclusion for Scotchollow Apartments of
approximately $67,800,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $67,600,000, and the income capitalization approach
resulted in a value of $67,800,000. KTR reported that the local
market is active in terms of investment sales of similar
apartment complexes and sufficient sales data was available to
develop a defensible value via the sales comparison approach.
KTR also stated in its report that the value derived through the
use of the sales comparison approach supports the value
concluded for the property via the income capitalization
approach. Due to the income producing nature of Scotchollow
Apartments, KTR emphasized the income capitalization approach
when it determined a final estimate of value for Scotchollow
Apartments of $67,800,000.
The following is a summary of the appraisal of Scotchollow
Apartments dated April 13, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
six multifamily apartment properties in the competitive market.
The sales reflected per unit prices ranging from $126,818 to
$171,877. All of the comparable sales represent sales of
apartments that are of similar construction to Scotchollow
Apartments and are of the same general vintage and similar in
terms of physical condition to Scotchollow Apartments. Minor
differences exist as to the specific location of each comparable
and Scotchollow Apartments. The primary difference between the
comparable sales and Scotchollow Apartments are location and
average unit size. The most value influencing difference between
the subject and the comparable sales is the amount of net
operating income generated on a per unit basis. In an attempt to
quantify appropriate adjustments to the prices indicated by the
comparable sales, KTR analyzed the difference between the net
operating income (NOI) per unit of the comparable sales relative
to the NOI of Scotchollow Apartments. KTR adjusted the sale
price of the comparable sales based on percentage differences in
net income. The adjusted unit prices range from $137,252 to
$177,033. The mean and median adjusted unit price is $157,338
and $154,394. KTR placed an emphasis on all of the sales in
concluding to a value of $155,000 per unit for Scotchollow
Apartments. Applied to Scotchollow Apartments
418 units, this resulted in KTRs total value estimate
of $64,790,000.
KTR also performed an EGIM analysis. KTR estimated the operating
expense ratio of Scotchollow Apartments to be 46%, with the
expense ratio of the six comparable properties ranging from 42%
to 52%, with EGIMs ranging from 9.3 to 10.8. KTR concluded an
EGIM of 9.75 for Scotchollow Apartments and applied the EGIM to
the stabilized effective gross income for Scotchollow Apartments
($6,659,729), resulting in a value conclusion of approximately
$64,900,000.
KTR estimated the value using the price per unit analysis at
$64,800,000 and the value using EGIM analysis at $64,900,000.
Due to the similarity of the resulting value indicators, KTR
gave relatively equal consideration to both techniques when it
concluded a final value via the sales comparison approach of
$64,850,000.
39
Valuation Under the Income Capitalization
Approach. Under the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for Scotchollow Apartments. The assumptions
employed by KTR to determine the value of Scotchollow Apartments
under the income capitalization approach included:
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monthly economic rent potential of $597,042 and annual gross
rent potential of $7,164,504;
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a loss to lease expense of 4.0%;
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a concession loss of 4.0%;
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a combined vacancy and credit loss allowance of 6.0%;
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estimated utility income of $335 per unit;
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other income of 5.0% of the gross rent potential or $358,225;
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total expenses of $3,061,039; and
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capitalization rate of 5.75%.
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $3,598,690 at 5.5%, resulting
in a value conclusion for Scotchollow Apartments of
approximately $65,400,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $64,850,000, and the income capitalization approach
resulted in a value of $65,400,000. KTR reported that the local
market is active in terms of investment sales of similar
apartment complexes and sufficient sales data was available to
develop a defensible value via the sales comparison approach.
KTR also stated in its report that the value derived through the
use of the sales comparison approach supports the value
concluded for the property via the income capitalization
approach. Due to the income producing nature of Scotchollow
Apartments, KTR emphasized the income capitalization approach
when it determined a final estimate of value for Scotchollow
Apartments of $65,400,000.
THE
TOWERS OF WESTCHESTER PARK
The following is a summary of the appraisal of The Towers of
Westchester Park dated December 4, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
five multifamily apartment properties in the competitive market.
The sales reflect per unit prices ranging from $101,124 to
$172,743. The primary differences between the comparable sales
and The Towers of Westchester Park are location, quality,
condition and average unit size. The most value influencing
difference between The Towers of Westchester Park and the
comparable sales is the amount of net operating income generated
on a per unit basis. In an attempt to quantify appropriate
adjustments to the prices indicated by the comparable sales, KTR
analyzed the difference between the NOI per unit of the
comparable sales relative to the NOI of The Towers of
Westchester Park. KTR adjusted the sale price of the comparable
sales based on percentage differences in net income. The
adjusted unit prices range from $122,370 to $193,985 with an
average of $151,573. KTR estimated that the capitalization rate
for The Towers of Westchester Park was 5.5% which is just below
the capitalization rate reflected in one of the comparable
sales, which reflect adjusted unit prices of $142,044. KTR
concluded that The Towers of Westchester Park had a value
slightly above this adjusted unit price. Accordingly, KTR
estimated the unit value for The Towers of Westchester Park to
be $144,000. Applied to The Towers of Westchester Parks
303 units, this resulted in KTRs total value estimate
of approximately $43,600,000.
Valuation Under the Income Capitalization
Approach. Under the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for The Towers of Westchester Park. The
assumptions
40
employed by KTR to determine the value of The Towers of
Westchester Park under the income capitalization approach
included:
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based on current average contract rents and estimated annual
market rent growth due to inflation, KTR estimated potential
rental income of $4,920,087 for the upcoming year;
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a combined vacancy and credit loss of 5.0%;
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a concession loss of 2.0%;
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estimated utility reimbursement income of $400 per unit for the
upcoming year;
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other income of $650 per unit for the upcoming year;
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total expenses of $2,483,860 or $8,198 per unit inclusive
of reserves; and
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capitalization rate of 5.5%.
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $2,409,971 at 5.5%, resulting
in a value conclusion for The Towers of Westchester Park of
approximately $43,800,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $43,600,000, and the income capitalization approach
resulted in a value of $43,800,000. KTR reported that
sufficient sales data was available from the local and regional
markets in order to develop a sales comparison approach. KTR
also stated in its report that the value derived through the use
of the sales comparison approach supports the value concluded
for the property via the income capitalization approach. Due to
the income producing nature of the subject property, KTR
emphasized the income capitalization approach when it determined
a final estimate of value for The Towers of Westchester Park of
$43,800,000.
The following is a summary of the appraisal of The Towers of
Westchester Park dated April 20, 2006:
Valuation Under the Sales Comparison
Approach. KTR examined and analyzed the sales of
five multifamily apartment properties in the competitive market.
The sales reflect per unit prices ranging from $117,555 to
$177,083. The primary difference between the comparable sales
and The Towers of Westchester Park are location, quality,
condition and average unit size. The most value influencing
difference between The Towers of Westchester Park and the
comparable sales is the amount of net operating income generated
on a per unit basis. In an attempt to quantify appropriate
adjustments to the prices indicated by the comparable sales, KTR
analyzed the difference between the NOI per unit of the
comparable sales relative to the NOI of The Towers of
Westchester Park. KTR adjusted the sale price of the comparable
sales based on percentage differences in net income. The
adjusted unit prices range from $116,802 to $169,253 with an
average of $144,023. KTR estimated that the capitalization rate
for The Towers of Westchester Park was 5.75% which is most
similar to the capitalization rate reflected in two of the
comparable sales, which reflect adjusted unit prices of $142,987
and $142,974. KTR concluded that The Towers of Westchester Park
had a value slightly above these adjusted unit prices.
Accordingly, KTR estimated the unit value for The Towers of
Westchester Park to be $144,000. Applied to The Towers of
Westchester Parks 303 units, this resulted in
KTRs total value estimate of approximately $43,600,000.
Valuation Under the Income Capitalization
Approach. Under the income capitalization
approach, KTR performed a direct capitalization analysis to
derive a value for The Towers of Westchester Park. The
assumptions employed by KTR to determine the value of The Towers
of Westchester Park under the income capitalization approach
included:
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based on current average contract rents and estimated annual
market rent growth due to inflation, KTR estimated potential
rental income of $4,772,977 for the upcoming year;
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a combined vacancy and credit loss of 5.0%;
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a concession loss of 1.0%;
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41
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estimated utility reimbursement income of $475 per unit for
the upcoming year;
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other income of $600 per unit for the upcoming year;
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total expenses of $2,284,477 or $7,540 per unit inclusive
of reserves; and
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capitalization rate of 5.75%.
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Using the income capitalization approach, KTR capitalized the
estimated net operating income of $2,512,696 at 5.75%, resulting
in a value conclusion for The Towers of Westchester Park of
approximately $43,700,000.
Reconciliation of Values and Conclusions of
KTR. The sales comparison approach resulted in a
value of $43,600,000, and the income capitalization approach
resulted in a value of $43,700,000. KTR reported that sufficient
sales data was available from the local and regional markets in
order to develop a sales comparison approach. KTR also stated in
its report that the value derived through the use of the sales
comparison approach supports the value concluded for the
property via the income capitalization approach. Due to the
income producing nature of the subject property, KTR emphasized
the income capitalization approach when it determined a final
estimate of value for The Towers of Westchester Park of
$43,700,000.
Assumptions, Limitations and Qualifications of KTRs
Valuation. In preparing each of the appraisals,
KTR relied, without independent verification, on the accuracy
and completeness of all information supplied or otherwise made
available to it by or on behalf of VMS. In arriving at each of
the appraisals, KTR assumed: that all information known to VMS
and relative to the valuation had been accurately furnished and
that there were no undisclosed leases, agreements, liens or
other encumbrances affecting the use of the Properties; that
ownership and management are competent and in responsible hands;
no responsibility beyond reasonableness for matters of a legal
nature, whether existing or pending; and information furnished
or prepared by others was reliable.
Compensation of Appraiser. KTRs fee for
the appraisals was approximately $108,000. Because appraisals to
establish the amount of consideration to be paid would not have
been necessary in a sale to unrelated third parties, the parties
agreed that Aimco Properties, LLC would pay the appraisal fees.
In addition to the appraisals performed in connection with the
Affiliated Contribution, during the prior two years, KTR has
been paid approximately $231,000 for appraisal services by the
Aimco Operating Partnership and its affiliates. Except as set
forth above, during the prior two years, no material
relationship has existed between KTR and VMS or the Aimco
Operating Partnership or any of their affiliates. The Managing
General Partner believes that its relationship with KTR had no
negative impact on its independence in conducting its appraisals.
Availability of Appraisal Reports. You may
obtain a full copy of KTRs appraisals upon request,
without charge, by contacting the information agent at
(800) 217-9608
(toll-free). Copies of the appraisals for the Affiliated
Contribution Properties are also available for inspection and
copying at the principal executive offices of VMS during regular
business hours by any interested limited partner or his or her
designated representative at his or her cost. In addition, a
copy of the appraisals has been filed with the SEC.
42
Determination of Consideration. After receipt
of KTRs appraisals, the VMS Related Parties considered the
valuation approaches, methodologies and analyses described by
KTR and determined that such valuation approaches, methodologies
and analyses were appropriate in fairly valuing real estate
assets such as the Affiliated Contribution Properties. Because
the consideration for the Affiliated Contribution Properties was
based on the greater of the appraised values for each of the
Affiliated Contribution Properties noted above and Aimcos
internal valuation for each such property, the VMS Related
Parties then adopted the valuations established by the
appraisals as the consideration for each Affiliated Contribution
Property for which such appraised value exceeded Aimcos
internal valuation for such Property, resulting in a total
consideration valued at approximately $230,078,260. In only one
case, Buena Vista Apartments, was Aimcos internal
valuation of $19,028,260 higher than the appraised value of
$17,900,000 and used in arriving at the Consideration. In the
case of the remaining six Affiliated Contribution Properties,
the aggregate valuation established by the appraisals for such
properties exceeded the aggregate valuation established by
Aimcos internal valuations by $17,180,154. The agreement
by Aimco Properties, LLC to the Consideration is also based on
the receipt of all seven properties described above in one
transaction. Aimco Properties, LLC did not allocate the
Consideration separately, but rather used the information
described above as a basis for the Consideration for all seven
Affiliated Contribution Properties. There can be no assurances
that Aimco Properties, LLC would be willing to purchase less
than all seven Affiliated Contribution Properties on the same
basis, or at all.
43
RISK
FACTORS
The Transactions have certain risks and disadvantages. Before
deciding whether or not to object to either of the Transactions,
you should carefully consider the risks described below.
Some of the information in this proxy statement-prospectus may
contain forward-looking statements. Such statements can be
identified by the use of forward-looking words such as
may, will, expect,
believe, anticipate,
estimate, continue or other similar
words. These statements discuss future expectations, contain
projections of results of operations or financial condition or
state other forward-looking information. When
considering such forward-looking statements, you should keep in
mind the risk factors and other cautionary statements in or
incorporated by reference into this proxy statement-prospectus.
The risk factors noted in this section and other factors noted
throughout this proxy statement-prospectus or incorporated
herein, including specific risks and uncertainties, could cause
the actual results to differ materially from those contained in
any forward-looking statement.
Risks
Related to the Transactions
The Terms of the Affiliated Contribution Were Not Determined
Based on Arms-Length Negotiations. The Managing
General Partner is an affiliate of Aimco Properties, LLC. As a
result, the Managing General Partner has substantial conflicts
of interest with respect to the Affiliated Contribution.
Although the Managing General Partner believes that the
aggregate consideration for these Properties is fair, it is
possible that a non-affiliated purchaser might purchase the
Properties for a higher price.
The Managing General Partner Did Not Undertake Certain
Procedural Safeguards. The Managing General
Partner has not retained an unaffiliated representative to act
on behalf of the limited partners of the Partnerships in
negotiating the terms of the Affiliated Contribution. If an
unaffiliated representative had been retained, it is possible
that such representative could have negotiated greater
consideration or a higher price for the Affiliated Contribution
Properties from third parties or Aimco. Additionally, the
Transactions were structured so as to require the approval of a
majority of limited partners, including the Managing General
Partner and Aimco, rather than a majority of limited partners
unaffiliated with the Managing General Partner or Aimco.
Limited Partners Will Not Participate in the Future Income,
Cash Flow or Price Appreciation of the Sold
Properties. Under the existing debt structure,
even after the refinancing of VMSs indebtedness described
herein, the recent operating performance of the Properties has
not been sufficient to generate cash available for distributions
to limited partners. However, in the future, the operating
performance and value of the Properties could increase, which
could result in greater cash flow available for distributions in
the future. After the completion of the Transactions, limited
partners will not participate in any future income, cash flow or
appreciation in value of the Properties, although limited
partners who elect to receive Common OP Units in lieu of
cash will continue to participate indirectly with respect to the
Affiliated Contribution Properties.
VMS Will Be Changing Fundamentally the Nature of a
Significant Portion of its Investment. Although
the Managing General Partner intends to complete both the
Affiliated Contribution and the Unaffiliated Sales
simultaneously, if the Transactions are not completed
simultaneously, VMS will have changed fundamentally the nature
of a significant portion of its investment. A change in
VMSs property portfolio could result in a negative impact
on the net cash flow from operations of the Properties remaining
in the portfolio.
The Future Value of the Common OP Units Will
Fluctuate. In the Affiliated Contribution,
limited partners may elect to receive Common OP Units. Each
Common OP Unit is redeemable, after a one-year holding
period, for one share of Class A Common Stock or cash equal
to the market value of one share of Class A Common Stock at
the time of redemption, as the Aimco Operating Partnership may
elect. The number of Common OP Units to be issued to those
that elected to waive any portion of the cash distribution and
receive Common OP Units instead will be equal to
(i) the amount of the cash distribution waived by such
limited partner divided by (ii) the average daily closing
price of a share of Class A Common Stock on the NYSE over
the twenty trading-day period ended two days prior to
consummation of the Affiliated Contribution. On
February 20, 2007, the last reported sale price of
Class A Common Stock on the NYSE was $61.99. During the
period January 1, 2007 to February 20, 2007, the high
and low sales prices of the Class A Common Stock on the
NYSE were $65.79 and $54.14, respectively. Limited partners are
44
instructed to contact The Altman Group, Inc. with any direct
questions or requests for information, including an estimate of
Common OP Units issuable with respect to waivers of
particular cash amounts, as of the most recent practicable date.
Please see the information set forth under HOW TO OBTAIN
ADDITIONAL INFORMATION. The market price of Class A
Common Stock varies from time to time. These variations may be
caused by a number of factors, including changes in Aimcos
business, operations or prospects, regulatory considerations and
general market and economic considerations. The number of Common
OP Units will not be adjusted for any change in the market
price of Class A Common Stock. Accordingly, if the market
value of Common OP Units declines prior to the time the
distribution with respect to the Affiliated Contribution occurs,
the value of the consideration to be received by limited
partners will decline. In addition, because the date that the
Affiliated Contribution is completed will be later than the date
prior to which limited partners may object to the Affiliated
Contribution, limited partners will not know the exact value of
the Common OP Units that will be issued in the Affiliated
Contribution at the time they determine what form of
consideration to elect. Because of these factors, at the time of
distribution, limited partners electing to receive Common OP
Units could receive less current value than would have been
received if such limited partner had elected to receive cash. In
addition, although the Aimco Operating Partnership makes
quarterly distributions on its Common OP Units, there can
be no assurance regarding the amounts of available cash that the
Aimco Operating Partnership will generate or the portion that
its general partner will choose to distribute.
Limited Partners Will Recognize Gain Upon a Sale of the
Unaffiliated Sale Properties. Limited partners
will recognize gain upon the sale of the Unaffiliated Sale
Properties. When the Unaffiliated Sale Properties are sold, each
of the Partnerships, as a result of the sales, will recognize
gain equal to their respective shares of the sum of the cash
received for the Properties plus the amount of liabilities
assumed by the purchaser, minus VMSs adjusted basis in the
Properties. This gain recognized with respect to the Properties
will be allocated by the Partnerships to the general partners
and the limited partners, in accordance with the terms of the
partnership agreements. Assuming a purchase price (including
assumed liabilities) of $60,188,500, and basis of the properties
as of September 30, 2006, the Managing General Partner
estimates that the unrecaptured section 1250 gain per unit
will be $42,516 per unit of Portfolio I and
$42,394 per unit of Portfolio II. When viewing the
Unaffiliated Sales on a stand alone basis, the unrecaptured
section 1250 gain per unit will be limited to the estimated
gain on the sales of $38,344 per Portfolio I nondefaulted
unit and $38,231 per Portfolio II nondefaulted unit. It is
not expected that there will be any additional taxable gain per
unit beyond the unrecaptured section 1250 gain. The cash
proceeds distributable are estimated to be $10,007 per
Portfolio I nondefaulted unit and $9,930 per
Portfolio II nondefaulted unit, an amount that may be
insufficient to pay taxes on the gain, as is discussed below.
These estimates are based upon information currently available
to the Managing General Partner. There can be no assurance that
these estimates will prove accurate. In addition, tax
consequences to particular limited partners may vary depending
on the effect of (i) adjustments to the basis of
Partnership property with respect to a limited partner that
received its interest in the Partnership as a transferee and
(ii) the difference between the tax basis of property of
the Partnerships or VMS and the fair market value of such
property at the time such property was contributed to or
revalued by the Partnerships or VMS. Limited partners are urged
to consult their tax advisors as to their particular situations
and tax consequences. See UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF THE TRANSACTIONS.
Limited Partners Will Recognize Gain to the Extent That the
Affiliated Contribution Properties Are Sold for Cash to Aimco
Properties, LLC. To the extent that any limited
partners receive cash with respect to the Affiliated
Contribution, VMS will receive cash from Aimco Properties, LLC,
and as a result will recognize taxable income. On the other
hand, to the extent that limited partners elect to receive
Common OP Units, VMS is not expected to recognize taxable
income. Taxable income recognized by VMS will pass through to
the Partnerships, and from the Partnerships to the partners, and
therefore will be taxable to the partners, including limited
partners who elect to receive Common OP Units. The amount
of the taxable gain recognized by VMS, and passed through to the
partners, will depend on the extent to which limited partners
receive cash in connection with the Affiliated Contribution and
the amount and status of liabilities assumed by the Aimco
Operating Partnership. In addition, tax consequences to
particular limited partners may vary depending on the effect of
(i) adjustments to the basis of Partnership property with
respect to a limited partner that received its interest in the
Partnership as a transferee and (ii) the difference between
the tax basis of property of the Partnerships or VMS and the
fair market value of such property at the time such property was
contributed to or received by the Partnerships or VMS. Each
limited partner should consult his or her tax advisor regarding
the tax consequences to him or her. See UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTIONS.
45
Limited Partners May Recognize Gain Upon Liquidation of VMS
and the Partnerships. The Partnerships will
recognize gain or loss on the liquidation of VMS equal to the
difference, if any, between the sum of the amount of cash
distributed to the Partnerships and the Partnerships
adjusted basis in their interests in VMS after adjustment for
any gain or loss from operation of VMS, including from the
contribution and sale of the Properties, through the liquidation
of VMS. Any such gain or loss will be passed through, and will
be taxable, to the partners, including the limited partners. A
partner who receives cash in connection with the Transactions
will recognize gain or loss on the liquidation of his or her
interest in the Partnership equal to the difference between the
sum of the amount of cash and other property distributed to the
partner and the partners adjusted basis in his or her
Partnership interest after adjustment for any gain or loss from
operation of the Partnership, including from the contribution
and sale of the Properties and the liquidation of VMS, through
the Partnerships liquidation. See UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTIONS.
A Partners Tax Liabilities from Disposition of the
Properties and the Liquidations of VMS and the Partnerships May
Exceed the Cash Proceeds Available for
Distribution. Proceeds available for distribution
to a partner from the disposition of the Properties will likely
be less than the tax liability of the partner resulting from the
Transactions and the liquidations of VMS and the Partnerships.
Accordingly, partners may be required to use funds from sources
other than distributions from the Partnership to pay income tax
attributable to a sale of the Properties or liquidation of a
partners interest in the Partnership.
Limited Partners May Have State, Local and Other Tax
Liabilities. In addition to United States federal
income taxes, there may be state, local and other tax
considerations. You are urged to consult your tax advisor
regarding the United States federal, state, local and foreign
tax consequences of the Transactions.
Risks
Related to an Investment in Common OP Units
There Are Significant Restrictions on the Ability to Transfer
Common OP Units. There is no public market for
the Common OP Units. In addition, the agreement of limited
partnership of the Aimco Operating Partnership restricts the
transferability of Common OP Units. Until the expiration of
a one-year holding period, subject to certain exceptions,
investors may not transfer Common OP Units without the
consent of the general partner of the Aimco Operating
Partnership. Thereafter investors may transfer such Common
OP Units subject to the general partners right of
first refusal. The Aimco Operating Partnership has no plans to
list the Common OP Units on a securities exchange. It is
unlikely that any person will make a market in the Common
OP Units, or that an active market for the Common
OP Units will develop. If a market for the Common
OP Units develops and the Common OP Units are
considered readily tradable on a secondary
market (or the substantial equivalent thereof), the Aimco
Operating Partnership would be classified as a publicly traded
partnership for United States federal income tax purposes, which
could have a material adverse effect on the Aimco Operating
Partnership.
Cash Distributions by the Aimco Operating Partnership Are Not
Guaranteed and May Fluctuate with Partnership
Performance. Although the Aimco Operating
Partnership makes quarterly distributions on its Common
OP Units, there can be no assurance regarding the amounts
of available cash that the Aimco Operating Partnership will
generate or the portion that its general partner will choose to
distribute. The actual amounts of available cash will depend
upon numerous factors, including profitability of operations,
required principal and interest payments on the Aimco Operating
Partnerships debt, the cost of acquisitions (including
related debt service payments), the Aimco Operating
Partnerships issuance of debt and equity securities,
fluctuations in working capital, capital expenditures,
adjustments in reserves, prevailing economic conditions and
financial, business and other factors, some of which may be
beyond the Aimco Operating Partnerships control. The Aimco
Operating Partnership makes quarterly distributions to holders
of Common OP Units (on a per unit basis) that generally are
equal to the dividends paid on the Class A Common Stock (on
a per share basis). However, such distributions will not
necessarily continue to be equal to such dividends. The Aimco
Operating Partnerships agreement of limited partnership
gives the Aimco general partner discretion in establishing
reserves for the proper conduct of the partnerships
business that will affect the amount of available cash. The
Aimco Operating Partnership is required to make reserves for the
future payment of principal and interest under its credit
facilities and other indebtedness. In addition, its credit
facility limits the Aimco Operating Partnerships ability
to distribute cash to holders of Common OP Units. As a
result of these and other factors, there can be no assurance
regarding actual levels of cash
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distributions on Common OP Units, and the Aimco Operating
Partnerships ability to distribute cash may be limited
during the existence of any events of default under any of its
debt instruments.
Holders of Common OP Units Are Limited in Their Ability
to Effect a Change of Control. In order to comply
with specific REIT tax requirements, Aimcos charter has
restrictions on the ownership of its equity securities. The
limited partners of the Aimco Operating Partnership are unable
to remove the general partner of the Aimco Operating Partnership
or to vote in the election of Aimcos directors unless they
own shares of Aimco. As a result, limited partners and
stockholders are limited in their ability to effect a change of
control of the Aimco Operating Partnership and Aimco.
Holders of Common OP Units Have Limited Voting
Rights. The Aimco Operating Partnership is
managed and operated by its general partner. Unlike the holders
of common stock in a corporation, holders of Common
OP Units have only limited voting rights on matters
affecting the Aimco Operating Partnerships business. Such
matters relate to certain amendments of the partnership
agreement and certain transactions such as the institution of
bankruptcy proceedings, an assignment for the benefit of
creditors and certain transfers by the general partner of its
interest in the Aimco Operating Partnership or the admission of
a successor general partner. Holders of Common OP Units
have no right to elect the general partner on an annual or other
continuing basis, or to remove the general partner. As a result,
holders of Common OP Units have limited influence on
matters affecting the operation of the Aimco Operating
Partnership, and third parties may find it difficult to attempt
to gain control or influence the activities of the Aimco
Operating Partnership.
Holders of Common OP Units Are Subject to
Dilution. The Aimco Operating Partnership may
issue an unlimited number of additional Common OP Units or
other securities for such consideration and on such terms as it
may establish, without the approval of the OP Unitholders.
Such securities could have priority over the Common
OP Units as to cash flow, distributions and liquidation
proceeds. The effect of any such issuance may be to dilute the
interests of holders of Common OP Units.
Aimco May Have Conflicts of Interest with Holders of Common
OP Units. Conflicts of interest have arisen
and could arise in the future as a result of the relationships
between the Aimco Operating Partnerships general partner
and its affiliates (including Aimco), on the one hand, and the
Aimco Operating Partnership or any partner thereof, on the
other. The directors and officers of the general partner have
fiduciary duties to manage the general partner in a manner
beneficial to Aimco, as the sole stockholder of the general
partner. At the same time, the general partner, as the general
partner, has fiduciary duties to manage the Aimco Operating
Partnership in a manner beneficial to the Aimco Operating
Partnership and its partners. The duties of the general partner,
as general partner, to the Aimco Operating Partnership and its
partners may therefore come into conflict with the duties of the
directors and officers of the general partner to its sole
stockholder, Aimco. Such conflicts of interest might arise in
the following situations, among others:
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Decisions of the general partner with respect to the amount and
timing of cash expenditures, borrowings, issuances of additional
interests and reserves in any quarter will affect whether or the
extent to which there is available cash to make distributions in
a given quarter.
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Under the terms of its agreement of limited partnership, the
Aimco Operating Partnership will reimburse its general partner
and its general partners affiliates for costs incurred in
managing and operating the Aimco Operating Partnership,
including compensation of officers and employees.
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Whenever possible, the general partner seeks to limit the Aimco
Operating Partnerships liability under contractual
arrangements to all or particular assets of the Aimco Operating
Partnership, with the other party thereto to have no recourse
against the general partner or its assets.
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Any agreements between the Aimco Operating Partnership and its
general partner and its general partners affiliates will
not grant to the Common OP Unitholders, separate and apart
from the Aimco Operating Partnership, the right to enforce the
obligations of the general partner and such affiliates in favor
of the Aimco Operating Partnership. Therefore, the general
partner, in its capacity as the general partner of the Aimco
Operating Partnership, will be primarily responsible for
enforcing such obligations.
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Under the terms of the Aimco Operating Partnerships
agreement of limited partnership, the general partner is not
restricted from causing the Aimco Operating Partnership to pay
the general partner or its affiliates for any services rendered
on terms that are fair and reasonable to the Aimco Operating
Partnership or entering into additional contractual arrangements
with any of such entities on behalf of the Aimco Operating
Partnership. Neither the agreement of limited partnership nor
any of the other agreements, contracts and arrangements between
the Aimco Operating Partnership, on the one hand, and the
general partner and its affiliates, on the other, are or will be
the result of arms-length negotiations.
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Provisions in the Agreement of Limited Partnership May Limit
the Ability of a Holder of Common OP Units to Challenge
Actions Taken by the General Partner. Unless
otherwise provided for in the relevant partnership agreement,
Delaware law generally requires a general partner of a Delaware
limited partnership to adhere to fiduciary duty standards under
which it owes its limited partners the highest duties of good
faith, fairness and loyalty and which generally prohibit such
general partner from taking any action or engaging in any
transaction as to which it has a conflict of interest. The Aimco
Operating Partnerships agreement of limited partnership
expressly authorizes the general partner to enter into, on
behalf of the Aimco Operating Partnership, a right of first
opportunity arrangement and other conflict avoidance agreements
with various affiliates of the Aimco Operating Partnership and
its general partner, on such terms as the general partner, in
its sole and absolute discretion, believes are advisable. The
latitude given in the agreement of limited partnership to the
general partner in resolving conflicts of interest may
significantly limit the ability of a holder of Common
OP Units to challenge what might otherwise be a breach of
fiduciary duty. The general partner believes, however, that such
latitude is necessary and appropriate to enable it to serve as
the general partner of the Aimco Operating Partnership without
undue risk of liability.
The Agreement of Limited Partnership Limits the Liability of
the General Partner for Actions Taken in Good
Faith. The Aimco Operating Partnerships
agreement of limited partnership expressly limits the liability
of the general partner by providing that the general partner,
and its officers and directors will not be liable or accountable
in damages to the Aimco Operating Partnership, the limited
partners or assignees for errors in judgment or mistakes of fact
or law or of any act or omission if the general partner or such
director or officer acted in good faith. In addition, the Aimco
Operating Partnership is required to indemnify the general
partner, its affiliates and their respective officers,
directors, employees and agents to the fullest extent permitted
by applicable law, against any and all losses, claims, damages,
liabilities, joint or several, expenses, judgments, fines and
other actions incurred by the general partner or such other
persons, provided that the Aimco Operating Partnership will not
indemnify for (i) willful misconduct or a knowing violation
of the law or (ii) for any transaction for which such
person received an improper personal benefit in violation or
breach of any provision of the partnership agreement. The
provisions of Delaware law that allow the common law fiduciary
duties of a general partner to be modified by a partnership
agreement have not been resolved in a court of law, and the
general partner has not obtained an opinion of counsel covering
the provisions set forth in the Aimco Operating
Partnerships agreement of limited partnership that purport
to waive or restrict the fiduciary duties of the Aimco General
Partner that would be in effect under common law were it not for
the agreement of limited partnership.
Certain
United States Tax Risks Associated with an Investment in the
Common OP Units.
For a general discussion of certain United States federal income
tax consequences resulting from acquiring, holding, exchanging,
and otherwise disposing of Common OP Units, see
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
TRANSACTIONS.
Consequences of Exchanging Property for Common
OP Units. No gain or loss generally will be
recognized for United States federal income tax purposes by VMS
in contributing property to Aimco Properties, LLC for which
Common OP Units are issued to the limited partners. If,
however, in connection with such a contribution of property, VMS
receives, or is deemed to receive, cash or other consideration,
the receipt or deemed receipt of such cash or other
consideration will be treated as part of a sale (including, in
some instances, a disguised sale). In that case, VMS
would be treated as having sold, in a taxable transaction, a
portion of the Affiliated Contribution Properties to Aimco
Properties, LLC in exchange for such cash or other
consideration; the balance of the Affiliated Contribution
Properties would, however, remain eligible for the tax-free
contribution treatment described above. To the extent that
limited partners receive cash in connection with the Affiliated
Contribution, VMS will receive, in part, cash in the Affiliated
Contribution, and the Affiliated Contribution will be treated,
at least in part, as a taxable sale. Taxable
48
income recognized by VMS will pass through to the Partnerships,
and from the Partnerships to the partners, and therefore will be
taxable to the partners, including limited partners who elect to
receive Common OP Units.
The disguised sale rules may also apply where VMS contributes
property to Aimco Properties, LLC subject to one or more
liabilities. If the liabilities are non-qualified
liabilities, then VMS will be treated as receiving taxable
disguised sale proceeds in an amount equal to the excess of
VMSs share of such liability immediately before the
contribution over its share of such liability immediately after
the contribution. If the liabilities are qualified
liabilities, then VMS will not be treated as engaging in a
disguised sale unless it receives, or is deemed to receive, some
other item of cash or disguised sale consideration (including
disguised sale consideration attributable to a reduction in
VMSs share of a non-qualified liability) in connection
with such contribution.
Even if VMS does not recognize gain under the disguised sale
rules with respect to a qualified liability that is assumed by
Aimco Properties, LLC or otherwise encumbers property
contributed to such partnership, VMS will recognize gain in
connection with the deemed contribution of such property under
the liability allocation rules if VMSs share of such
liability exceeds the amount of all Aimco Properties, LLC
liabilities allocated to VMS as determined immediately after the
transfer. Such excess is generally treated as a deemed
distribution of cash to VMS from Aimco Properties, LLC which, in
turn, is treated as a nontaxable return of capital to the extent
of VMSs adjusted tax basis in its Common OP Units and
thereafter as gain.
No assurances can be given that the liabilities of VMS, the
owner of the Properties, will be qualified
liabilities under the disguised sale rules at the time of the
Affiliated Contribution. Accordingly, no assurance can be given
that all or a portion of any such liability will not be treated
as taxable disguised sale proceeds deemed to be received by one
or more limited partners of the Partnerships. However, at
present Aimco management expects such liabilities to be
qualified.
If VMS transfers property to Aimco Properties, LLC and less than
all built-in gain or built-in loss is recognized, then Aimco
Properties, LLC tax items must be specially allocated, for
United States federal income tax purposes, in a manner such that
the partners who receive Common OP Units in the Affiliated
Contribution are charged with and must recognize the unrealized
gain, or benefits from the unrealized loss, associated with the
property at the time of the contribution. Treasury Regulations
provide Aimco Properties, LLC with several alternative methods,
and Aimco Properties, LLC may adopt any other reasonable method,
to make such special allocations. The general partner of the
Aimco Operating Partnership (the sole member of Aimco
Properties, LLC), in its sole and absolute discretion and in a
manner consistent with Treasury Regulations, will select and
adopt a method for making such special allocations. In this
regard, the general partner, while acting in its capacity as
general partner of the Aimco Operating Partnership, is not
required to take into account the tax consequences to the
holders of Common OP Units of its action in such capacity
and may elect a method for making special allocations that is
less favorable to holders of Common OP Units than other
methods. As a result of such special allocations, the amount of
net taxable income allocated to limited partners that receive
Common OP Units in the Affiliated Contribution may exceed
the amount of cash distributions to which such partners are
entitled.
In addition, there are a variety of transactions that Aimco
Properties, LLC may in its sole discretion undertake following
such contribution with respect to the contributed property or
the debt securing such property that could cause the partners
that receive Common OP Units in the Affiliated Contribution
to recognize taxable gain, even though little or no cash is
distributable to them as a result thereof. Such transactions
include but are not limited to (i) the sale of a particular
property of Affiliated Contribution Property, which could result
in an allocation of gain only to those holders of Common
OP Units who received Common OP Units in connection
with the contribution of such Property (even if cash
attributable to sale proceeds were distributed proportionately
to all holders of Common OP Units); and (ii) a
reduction in the nonrecourse debt allocable to Affiliated
Contribution Property (because, among other events, such debt
becomes a recourse liability or is paid off with cash flow, new
equity, or proceeds of debt secured by other property of Aimco
Properties, LLC), which would result in a deemed distribution of
money and recognition of taxable gain to the holders of Common
OP Units who received Common OP Units for such
Affiliated Contribution Property as well as to the other holders
of Common OP Units. The Aimco Operating Partnership
Agreement grants the general partner broad authority to
undertake such transactions and does not grant the holders of
Common OP Units affected by these actions any rights to
prevent the general partner from taking such actions. Even if
the general partner of the Aimco Operating Partnership does not
intend to sell or otherwise dispose
49
of contributed property or to reduce the debt, if any, securing
such property within any specified time period after VMS
transfers such property to Aimco Properties, LLC, it is possible
that future economic, market, legal, tax or other considerations
may cause Aimco Properties, LLC to dispose of the contributed
property or to reduce its debt. In this regard, the Aimco
Operating Partnership Agreement provides that the general
partner, while acting in its capacity as general partner of the
Aimco Operating Partnership, may, but is not required to, take
into account the tax consequences to the holders of Common
OP Units of its actions in such capacity. The general
partner intends to make decisions in its capacity as general
partner of the Aimco Operating Partnership so as to maximize the
profitability of Aimco Properties, LLC as a whole, independent
of the tax effects on individual holders of Common OP Units.
Tax Treatment Is Dependent on Partnership Status; Publicly
Traded Partnership Risks. An investment in the
Aimco Operating Partnership depends on the classification of the
Aimco Operating Partnership as a partnership for United States
federal income tax purposes. No advance ruling has been or will
be sought from the IRS as to the classification of the Aimco
Operating Partnership as a partnership. No assurance can be
given that the IRS will not challenge the status of the Aimco
Operating Partnership as a partnership.
If a market for any OP Units develops and such Units are
considered readily tradable on a secondary
market (or the substantial equivalent thereof), the Aimco
Operating Partnership would be classified as a publicly traded
partnership for United States federal income tax purposes. The
Aimco Operating Partnership believes and currently intends to
take the position that it should not be classified as a publicly
traded partnership because (i) the OP Units are not traded
on an established securities market and (ii) the Aimco
Operating Partnership believes the OP Units should not be
considered readily tradable on a secondary market or the
substantial equivalent thereof. The determination of whether
interests in a partnership are readily tradable on a secondary
market or the substantial equivalent thereof, however, depends
on various facts and circumstances (including facts that are not
within the control of the Aimco Operating Partnership). Although
regulations promulgated by the U.S. Treasury Department
under the Internal Revenue Code of 1986, as amended (the
Internal Revenue Code), and an IRS pronouncement
provide limited safe harbors, which, if satisfied, will prevent
a partnerships interests from being treated as readily
tradable on a secondary market or the substantial equivalent
thereof, the Aimco Operating Partnership may not have satisfied
these safe harbors in a previous or current tax year. In
addition, because the Aimco Operating Partnerships ability
to satisfy a safe harbor may involve facts that are not within
its control, it is not possible to predict whether the Aimco
Operating Partnership will satisfy a safe harbor in the current
or a future tax year. Such safe harbors are not intended to be
substantive rules for the determination of whether partnership
interests are readily tradable on a secondary market or the
substantial equivalent thereof, and consequently, the failure to
meet these safe harbors will not necessarily cause the Aimco
Operating Partnership to be treated as a publicly traded
partnership. No assurance can be given, however, that the IRS
will not assert that partnerships such as the Aimco Operating
Partnership constitute publicly traded partnerships, or that
facts and circumstances will not develop which could result in
the Aimco Operating Partnership being treated as a publicly
traded partnership.
If the Aimco Operating Partnership were classified as a publicly
traded partnership, it would nevertheless not be taxable as a
corporation as long as 90% or more of its gross income consists
of qualifying income. In general, qualifying income
includes interest, dividends, real property rents (as defined by
section 856 of the Internal Revenue Code) and gain from the
sale or disposition of real property. The Aimco Operating
Partnership believes that more than 90% of its gross income
consists of qualifying income and the Aimco Operating
Partnership expects that more than 90% of its gross income in
future tax years will consist of qualifying income. As such,
even if the Aimco Operating Partnership were characterized as a
publicly traded partnership, it would not be taxable as a
corporation. If the Aimco Operating Partnership were
characterized as a publicly traded partnership, however, each
holder of Common OP Units would be subject to special rules
under section 469 of the Internal Revenue Code. No
assurance can be given that the actual results of the Aimco
Operating Partnerships operations for any one taxable year
will enable it to satisfy the qualifying income exception.
If the Aimco Operating Partnership were classified as an
association or publicly traded partnership taxable as a
corporation (because it did not meet the qualifying income
exception discussed above), it would be subject to tax at the
entity level as a regular corporation and holders of Common
OP Units would be subject to tax in the same manner as
stockholders of a corporation. The classification of the Aimco
Operating Partnership as an association or publicly traded
partnership taxable as a corporation could also result in a
substantial tax liability to holders of
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Common OP Units. In addition, the Aimco Operating
Partnership would be subject to United States federal income tax
(and possibly additional state and local taxes) on its net
income, determined without reduction for any distributions made
to Common OP Unitholders, at regular United States federal
corporate income tax rates, thereby reducing the amount of any
cash available for distribution to holders of Common
OP Units, which reduction could also materially and
adversely impact the value of the Common OP Units. In addition,
the Aimco Operating Partnerships items of income, gain,
loss, deduction and expense would not be passed through to
holders of Common OP Units, and holders of Common OP Units
would not be subject to tax on the income earned by the Aimco
Operating Partnership. Distributions received by a holder of
Common OP Units from the Aimco Operating Partnership,
however, would be treated as dividend income for United States
federal income tax purposes, subject to tax at reduced rates
applicable to dividends received by individuals and at ordinary
income rates for taxpayers that are not individuals to the
extent of current and accumulated earnings and profits of the
Aimco Operating Partnership, and the excess, if any, as a
nontaxable return of capital to the extent of the holders
adjusted tax basis in his Aimco Operating Partnership interest
(without taking into account partnership liabilities), and
thereafter as gain from the sale of a capital asset.
Classification of the Aimco Operating Partnership as an
association or publicly traded partnership taxable as a
corporation would mean that Aimco would not qualify as a REIT
for United States federal income tax purposes, which would have
a material adverse impact on Aimco. No assurances can be given
that the IRS would not challenge the status of the Aimco
Operating Partnership as a partnership which is not
publicly traded for United States federal income tax
purposes or that a court would not reach a result contrary to
such positions. Accordingly, you are urged to consult your tax
advisor regarding the classification and treatment of the Aimco
Operating Partnership as a partnership for United
States federal income tax purposes.
Limited Partners May Recognize a Tax Gain or Loss on
Disposition of Common OP Units. If a limited
partner sells, exchanges or redeems Common OP Units, it
will recognize gain or loss equal to the difference between the
amount realized (including its share of Aimco Operating
Partnership liabilities) and its adjusted tax basis in such
Common OP Units, and the cash received may be substantially
less than the resulting tax liability to the partner. Thus,
prior Aimco Operating Partnership distributions in excess of
cumulative net taxable income in respect of a Common
OP Unit that decreased the partners tax basis in such
Common OP Unit will, in effect, become taxable income if
the Common OP Unit is sold at a price greater than the
partners tax basis in such Common OP Units, even if the
price is less than its original cost. A portion of the amount
realized (whether or not representing gain) may be ordinary
income.
The Tax Liability Associated with the Common OP Units
Could Exceed the Cash Distributions Received on Such Common
OP Units. The limited partners who elected
to receive Common OP Units as consideration for the
Affiliated Contribution will be required to pay United States
federal income tax on their allocable share of the Aimco
Operating Partnerships income, even if such partners
receive no cash distributions from the Aimco Operating
Partnership. No assurance can be given that holders of Common
OP Units will receive cash distributions equal to the
allocable share of taxable income from the Aimco Operating
Partnership or even the tax liability resulting from that
income. Further, upon the sale, exchange or redemption of any
Common OP Units, or upon the special allocation at the
liquidation of the Aimco Operating Partnership, such partners
may incur a tax liability in excess of the amount of cash
received.
The Ability to Deduct Losses Related to Common OP Units
May Be Limited under Applicable Tax Laws. The
ability of limited partners to use their allocable share of
losses, if any, from the Aimco Operating Partnership at the end
of the taxable year in which the loss is incurred will be
limited by specific provisions of the Internal Revenue Code.
Holders of Common OP Units Are Subject to Liabilities
Arising from Audits of Tax Returns. The Aimco
Operating Partnerships tax return may be audited, and any
such audit could result in an audit of a Common
OP Unitholders tax return as well as increased
liabilities for taxes because of adjustments resulting from the
audit. No assurance can be given that the Aimco Operating
Partnership will not be audited by the IRS or various state
authorities or that tax adjustments will not be made. Any
adjustments in the Aimco Operating Partnerships tax return
will lead to adjustments in a Common OP Unitholders
tax return and may lead to audits of a Common
OP Unitholders tax return and adjustments of items
unrelated to the Aimco Operating Partnership. The Common
OP Unitholder would bear the cost of any expenses incurred
in connection with an examination of its tax return.
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State, Local and Other Tax Considerations May Affect an
Investment in Common OP Units. In addition
to United States federal income taxes, the Aimco Operating
Partnership and Common OP Unitholders may be subject to
state, local and foreign taxation, and may be required to file
tax returns, in various jurisdictions in which the Aimco
Operating Partnership does business, owns property or resides.
You are urged to consult your tax advisor regarding the United
States federal, state, local and foreign tax consequences of an
investment in Common OP Units.
Risks
Related to an Investment in Aimco
Failure to Generate Sufficient Net Operating Income May Limit
Aimcos Ability to Pay
Dividends. Aimcos ability to make payments
to its investors depends on its ability to generate net
operating income in excess of required debt payments and capital
expenditure requirements. Net operating income may be adversely
affected by events or conditions beyond Aimcos control,
including:
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the general economic climate;
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competition from other apartment communities and other housing
options;
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local conditions, such as loss of jobs or an increase in the
supply of apartments, that might adversely affect apartment
occupancy or rental rates;
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changes in governmental regulations and the related costs of
compliance;
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increases in operating costs (including real estate taxes) due
to inflation and other factors, which may not be offset by
increased rents;
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changes in tax laws and housing laws, including the enactment of
rent control laws or other laws regulating multifamily housing;
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changes in interest rates and the availability of
financing; and
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the relative illiquidity of real estate investments.
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If Aimco is Not Able Successfully to Acquire, Operate,
Redevelop and Expand Properties, Its Results of Operations Will
Be Adversely Affected. The selective acquisition,
redevelopment and expansion of properties are components of
Aimcos strategy. However, Aimco may not be able to
complete transactions successfully in the future. Although Aimco
seeks to acquire, operate, redevelop and expand properties only
when such activities increase its net income on a per share
basis, such transactions may fail to perform in accordance with
its expectations. When Aimco redevelops or expands properties,
it is subject to the risks that:
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costs may exceed original estimates;
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occupancy and rental rates at the property may be below its
projections;
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financing may not be available on favorable terms or at all;
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redevelopment and leasing of the properties may not be completed
on schedule; and
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Aimco may experience difficulty or delays in obtaining necessary
zoning, land-use, building, occupancy and other governmental
permits and authorizations.
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Aimcos Existing and Future Debt Financing Could Render
Aimco Unable to Operate, Result in Foreclosure on Its Properties
or Prevent It From Making Distributions on Its
Equity. Aimcos strategy is generally to
incur debt to increase the return on its equity while
maintaining acceptable interest coverage ratios. For the year
ended December 31, 2005, Aimco had a ratio of free cash
flow (net operating income less spending for capital
replacements) to combined interest expense and preferred stock
dividends of 1.4:1. Aimcos organizational documents do not
limit the amount of debt that it may incur, and Aimco has
significant amounts of debt outstanding. Payments of principal
and interest may leave Aimco with insufficient cash resources to
operate its properties or pay distributions required to be paid
in order to maintain its qualification as a REIT. Aimco is also
subject to the risk that its cash flow from operations will be
insufficient to make required payments of principal and
interest, and the risk that existing indebtedness may not be
refinanced or that the terms of any refinancing will not be as
favorable as the terms of existing indebtedness. If Aimco fails
to make required payments of principal and
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interest on secured debt, its lenders could foreclose on the
properties securing such debt, which would result in loss of
income and asset value to it. As of December 31, 2005,
substantially all of the properties that Aimco owned or
controlled were encumbered by debt.
Increases in Interest Rates Would Increase Aimcos
Interest Expense. As of December 31, 2005,
Aimco had approximately $2,010.5 million of variable-rate
indebtedness outstanding. Of the total debt subject to variable
interest rates, floating rate tax-exempt bond financing was
$726.1 million. Floating rate tax-exempt bond financing is
benchmarked against the BMA Index, which since 1981 has averaged
68.0% of
30-day
LIBOR. If this relationship continues, an increase in the
30-day
LIBOR, of 1% (0.68% in tax-exempt interest rates) would result
in Aimcos income before minority interests and cash flows
being reduced by $17.8 million on an annual basis. This
would be offset by variable rate interest income earned on
certain assets, including cash and cash equivalents and notes
receivable, as well as interest that is capitalized on a portion
of this variable rate debt incurred in connection with
redevelopment activities. Considering these offsets, the same
increase in the
30-day LIBOR
would result in Aimcos income before minority interests
being reduced by $8.9 million on an annual basis.
Covenant Restrictions May Limit Aimcos Ability to Make
Payments to Its Investors. Some of Aimcos
debt and other securities contain covenants that restrict its
ability to make distributions or other payments to its investors
unless certain financial tests or other criteria are satisfied.
Aimcos credit facility provides, among other things, that
Aimco may make distributions to its investors during any four
consecutive fiscal quarters in an aggregate amount that does not
exceed the greater of 95% of its funds from operations for such
period or such amount as may be necessary to maintain
Aimcos REIT status. Aimcos outstanding classes of
preferred stock prohibit the payment of dividends on its Common
Stock if Aimco fails to pay the dividends to which the holders
of the preferred stock are entitled.
Aimco Depends on Distributions and Other Payments from Its
Subsidiaries That They May Be Prohibited from Making to
Aimco. All of Aimcos properties are owned,
and all of its operations are conducted, by the Aimco Operating
Partnership and its other subsidiaries. As a result, Aimco
depends on distributions and other payments from its
subsidiaries in order to satisfy its financial obligations and
make payments to its investors. The ability of its subsidiaries
to make such distributions and other payments depends on their
earnings and may be subject to statutory or contractual
limitations. As an equity investor in its subsidiaries,
Aimcos right to receive assets upon their liquidation or
reorganization will be effectively subordinated to the claims of
their creditors. To the extent that Aimco is recognized as a
creditor of such subsidiaries, its claims may still be
subordinate to any security interest in or other lien on their
assets and to any of their debt or other obligations that are
senior to Aimcos claims.
Aimco May Be Subject to Litigation Associated with
Partnership Acquisitions That Could Increase Its Expenses and
Prevent Completion of Beneficial
Transactions. Aimco has engaged in, and intends
to continue to engage in, the selective acquisition of interests
in partnerships that own apartment properties. In some cases,
Aimco has acquired the general partner of a partnership and then
made an offer to acquire the limited partners interests in
the partnership. In these transactions, Aimco may be subject to
litigation based on claims that it, as the general partner, has
breached its fiduciary duty to its limited partners or that the
transaction violates the relevant partnership agreement or state
law. Although Aimco intends to comply with its fiduciary
obligations and the relevant partnership agreements, it may
incur additional costs in connection with the defense or
settlement of this type of litigation. In some cases, this type
of litigation may adversely affect Aimcos desire to
proceed with, or its ability to complete, a particular
transaction. Any litigation of this type could also have a
material adverse effect on Aimcos financial condition or
results of operations.
The Marketplace for Insurance Coverage is Uncertain and in
Some Cases Insurance Is Becoming More Expensive and More
Difficult to Obtain. The insurance market is
characterized by volatility with respect to premiums,
deductibles and coverage. Although Aimco makes use of many
alternative methods of risk financing that enable it to insulate
itself to some degree from variations in coverage and cost,
sustained deterioration in insurance marketplace conditions may
have a negative effect on its operating results.
The FBI Has Issued Alerts Regarding Potential Terrorist
Threats Involving Apartment Buildings. From time
to time, the Federal Bureau of Investigation, or FBI, and the
United States Department of Homeland Security issue alerts
regarding potential terrorist threats involving apartment
buildings. Threats of future terrorist attacks, such as those
announced by the FBI and the Department of Homeland Security,
could have a negative effect on rent and
53
occupancy levels at Aimcos properties. The effect that
future terrorist activities or threats of such activities could
have on Aimcos business is uncertain and unpredictable. If
Aimco incurs a loss at a property as a result of an act of
terrorism, it could lose all or a portion of the capital it has
invested in the property, as well as the future revenue from the
property.
Aimco Depends on Its Senior
Management. Aimcos success depends upon the
retention of its senior management, including Terry Considine,
Aimcos chief executive officer and president. There are no
assurances that Aimco would be able to find qualified
replacements for the individuals who make up its senior
management if their services were no longer available. The loss
of services of one or more members of its senior management team
could have a material adverse effect on its business, financial
condition and results of operations. Aimco does not currently
maintain key-man life insurance for any of its employees. The
loss of any member of senior management could adversely affect
its ability to pursue effectively its business strategy.
Affordable Housing Regulations May Limit the Opportunities at
Some of Aimcos Properties, Reducing Its Revenue and, in
Some Cases, Causing Aimco to Sell Properties That it Might
Otherwise Continue to Own. Aimco owns an equity
interest in certain affordable properties and manages for third
parties and affiliates other properties that benefit from
governmental programs intended to provide housing to people with
low or moderate incomes. These programs, which are usually
administered by HUD or state housing finance agencies, typically
provide mortgage insurance, favorable financing terms or rental
assistance payments to the property owners. As a condition of
the receipt of assistance under these programs, the properties
must comply with various requirements, which typically limit
rents to pre-approved amounts. If permitted rents on a property
are insufficient to cover costs, a sale of the property may
become necessary, which could result in a loss of management fee
revenue. Aimco usually needs to obtain the approval of HUD in
order to manage, or acquire a significant interest in, a
HUD-assisted property. Aimco may not always receive such
approval.
Laws Benefiting Disabled Persons May Result in Aimcos
Incurrence of Unanticipated Costs. Under the
Americans with Disabilities Act of 1990, or ADA, all places
intended to be used by the public are required to meet certain
Federal requirements related to access and use by disabled
persons. Likewise, the Fair Housing Amendments Act of 1988, or
FHAA, requires apartment properties first occupied after
March 13, 1990 to be accessible to the handicapped. These
and other Federal, state and local laws may require
modifications to Aimcos properties, or restrict
renovations of the properties. Noncompliance with these laws
could result in the imposition of fines or an award of damages
to private litigants and also could result in an order to
correct any non-complying feature, which could result in
substantial capital expenditures. Although Aimco believes that
its properties are substantially in compliance with present
requirements, it may incur unanticipated expenses to comply with
the ADA and the FHAA.
Aimco May Fail to Qualify as a REIT. If Aimco
fails to qualify as a REIT it may not be allowed a deduction for
dividends paid to its stockholders in computing its taxable
income, and Aimco will be subject to Federal income tax at
regular corporate rates, including any applicable alternative
tax. This would substantially reduce the funds available for
payment to Aimcos investors. Unless entitled to relief
under certain provisions of the Internal Revenue Code, Aimco
also would be disqualified from taxation as a REIT for the four
years following the year during which Aimco ceased to qualify as
a REIT. In addition, Aimcos failure to qualify as a REIT
would trigger the following consequences:
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Aimco would be obligated to repurchase certain classes of its
preferred stock; and
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Aimco would be in default under its primary credit facilities
and certain other loan agreements.
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Aimco believes that it operates, and has always operated, in a
manner that enables it to meet the requirements for
qualification as a REIT for Federal income tax purposes.
Aimcos continued qualification as a REIT will depend on
satisfaction of certain asset, income, investment,
organizational, distribution, stockholder ownership and other
requirements on a continuing basis. Aimcos ability to
satisfy the asset tests depends upon its analysis of the fair
market values of its assets, some of which are not susceptible
to a precise determination, and for which Aimco will not obtain
independent appraisals. Aimcos compliance with the REIT
income and quarterly asset requirements also depends upon its
ability to manage successfully the composition of its income and
assets on an ongoing basis. Moreover, the proper classification
of an instrument as debt or equity for Federal income tax
purposes may be
54
uncertain in some circumstances, which could affect the
application of the REIT qualification requirements. Accordingly,
there can be no assurance that the Internal Revenue Service, or
the IRS, will not contend that Aimcos interests in
subsidiaries or other issuers constitutes a violation of the
REIT requirements. Moreover, future economic, market, legal, tax
or other considerations may cause Aimco to fail to qualify as a
REIT, or Aimcos Board of Directors may determine to revoke
its REIT status.
REIT Distribution Requirements Limit Aimcos Available
Cash. As a REIT, Aimco is subject to annual
distribution requirements which limit the amount of cash Aimco
may retain for other business purposes, including amounts to
fund its growth. Aimco generally must distribute annually at
least 90% of its net REIT taxable income, excluding any net
capital gain, in order for its distributed earnings not to be
subject to corporate income tax. Aimco intends to make
distributions to its stockholders to comply with the
requirements of the Internal Revenue Code. However, differences
in timing between the recognition of taxable income and the
actual receipt of cash could require Aimco to sell assets or
borrow funds on a short-term or long-term basis to meet the 90%
distribution requirement of the Internal Revenue Code.
Limits on Ownership of Shares in Aimcos Charter May
Result in the Loss of Economic and Voting Rights by Purchasers
That Violate Those Limits. Aimcos charter
limits ownership of Aimco Common Stock by any single stockholder
(applying certain beneficial ownership rules under
Federal securities laws) to 8.7% of the outstanding shares of
Aimco Common Stock, or 15% in the case of certain pension
trusts, registered investment companies and Mr. Considine.
The charter also limits ownership of Aimcos Common Stock
and preferred stock by any single stockholder to 8.7% of the
value of the outstanding Aimco Common Stock and preferred stock,
or 15% in the case of certain pension trusts, registered
investment companies and Mr. Considine. The charter also
prohibits anyone from buying shares of Aimcos capital
stock if the purchase would result in Aimco losing its REIT
status. This could happen if a transaction results in fewer than
100 persons owning all of Aimcos shares or results in five
or fewer persons (applying certain attribution rules of the
Internal Revenue Code) owning 50% or more of the value of all of
Aimcos shares. If anyone acquires shares in excess of the
ownership limit or in violation of the ownership requirements of
the Internal Revenue Code for REITs:
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the transfer will be considered null and void;
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Aimco will not reflect the transaction on its books;
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Aimco may institute legal action to enjoin the transaction;
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Aimco may demand repayment of any dividends received by the
affected person on those shares;
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Aimco may redeem the shares;
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the affected person will not have any voting rights for those
shares; and
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the shares (and all voting and dividend rights of the shares)
will be held in trust for the benefit of one or more charitable
organizations designated by Aimco.
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Aimco may purchase the shares held in trust at a price equal to
the lesser of the price paid by the transferee of the shares or
the then current market price. If the trust transfers any of the
shares of capital stock, the affected person will receive the
lesser of the price paid for the shares or the then current
market price. An individual who acquires shares of capital stock
that violate the above rules bears the risk that the individual:
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may lose control over the power to dispose of such shares;
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may not recognize profit from the sale of such shares if the
market price of the shares increases;
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may be required to recognize a loss from the sale of such shares
if the market price decreases; and
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may be required to repay to Aimco any distributions received
from Aimco as a result of his or her ownership of the shares.
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55
Aimcos
Charter May Limit the Ability of a Third Party to Acquire
Control of Aimco.
The 8.7% ownership limit discussed above may have the effect of
precluding acquisition of control of Aimco by a third party
without the consent of Aimcos board of directors.
Aimcos charter authorizes its board of directors to issue
up to 510,587,500 shares of capital stock. As of
September 30, 2006, 426,157,736 shares were classified
as Class A Common Stock, of which 95,909,969 were
outstanding, and 84,429,704 shares were classified as
preferred stock, of which 33,794,962 were outstanding. Under
Aimcos charter, its board of directors has the authority
to classify and reclassify any of Aimcos unissued shares
of capital stock into shares of capital stock with such
preferences, rights, powers and restrictions as Aimcos
board of directors may determine. The authorization and issuance
of a new class of capital stock could have the effect of
delaying or preventing someone from taking control of Aimco,
even if a change in control were in stockholders best
interests.
Maryland Business Statutes May Limit the Ability of a Third
Party to Acquire Control of Aimco. As a Maryland
corporation, Aimco is subject to various Maryland laws that may
have the effect of discouraging offers to acquire Aimco and of
increasing the difficulty of consummating any such offers, even
if an acquisition would be in the best interests of Aimco
stockholders. The Maryland General Corporation Law restricts
mergers and other business combination transactions between
Aimco and any person who acquires beneficial ownership of shares
of its stock representing 10% or more of the voting power
without the Aimco Board of Directors prior approval. Any
such business combination transaction could not be completed
until five years after the person acquired such voting power,
and generally only with the approval of stockholders
representing 80% of all votes entitled to be cast and
662/3%
of the votes entitled to be cast, excluding the interested
stockholder, or upon payment of a fair price. Maryland law also
provides generally that a person who acquires shares of
Aimcos capital stock that represent 10% or more of the
voting power in electing directors will have no voting rights
unless approved by a vote of two-thirds of the shares eligible
to vote. Additionally, Maryland law provides, among other
things, that the board of directors has broad discretion in
adopting stockholders rights plans and has the sole power
to fix the record date, time and place for special meetings of
the stockholders. In addition, Maryland law provides that
corporations that:
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have at least three directors who are not employees of the
entity or related to an acquiring person; and
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are subject to the reporting requirements of the Securities
Exchange Act of 1934, may elect in their charter or bylaws or by
resolution of the board of directors to be subject to all or
part of a special subtitle that provides that:
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the corporation will have a staggered board of directors;
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any director may be removed only for cause and by the vote of
two-thirds of the votes entitled to be cast in the election of
directors generally, even if a lesser proportion is provided in
the charter or bylaws;
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the number of directors may only be set by the board of
directors, even if the procedure is contrary to the charter or
bylaws;
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vacancies may only be filled by the remaining directors, even if
the procedure is contrary to the charter or bylaws; and
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the secretary of the corporation may call a special meeting of
stockholders at the request of stockholders only on the written
request of the stockholders entitled to cast at least a majority
of all the votes entitled to be cast at the meeting, even if the
procedure is contrary to the charter or bylaws.
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To date, Aimco has not made any of the elections described above.
NO
RECOMMENDATION BY THE MANAGING GENERAL PARTNER
The Managing General Partner and Aimco Properties, LLC are
affiliates of, and may be deemed to be under common control
with, Aimco. Accordingly, the Managing General Partner has a
substantial conflict of interest with respect to the proposed
Affiliated Contribution, because Aimco Properties, LLC has an
interest in obtaining the Affiliated Contribution Properties at
a low price while the Partnerships have an interest in receiving
the highest consideration possible. In addition, continuation of
VMS could result in the Managing General Partner and its
affiliates continuing to receive management fees from the
Partnerships if the Transactions are not consummated as
56
described in this proxy statement-prospectus. Although the
Managing General Partner is of the opinion that the Transactions
described herein are fair to the Partnerships and the limited
partners, as a result of these conflicts, the Managing General
Partner does not make any recommendation as to whether or not
limited partners should object to the Transactions.
THE
TRANSACTIONS
On August 21, 2006, VMS entered into a Contribution
Agreement with Aimco Properties, LLC under which VMS has agreed
to complete the Affiliated Contribution, subject to certain
conditions, including the absence of objections filed by limited
partners owning more than 50% of the aggregate units of the
Partnerships. The value of the consideration for each of the
Affiliated Contribution Properties is equal to the greater of
the appraised market values of the fee simple interest in such
Properties based on appraisals dated April 2006 and updated in
November and December, 2006 and internal valuations prepared at
least annually by Aimco in connection with Aimcos and
VMSs financial reporting process. These internal
valuations were last updated February 2006 and were
completed independently of the Affiliated Contribution. The
Contribution Agreement was amended on January 16, 2007 to
increase the purchase price based on the results of the updated
appraisals. The limited partners of the Partnerships may elect
to waive the right to receive any portion of the cash
distribution with respect to the Affiliated Contribution and
receive Common OP Units directly from the Aimco Operating
Partnership instead, with those that do not make an election
receiving cash. Aimco and its affiliates which own limited
partnership interests in the Partnerships currently intend to
waive their right to receive any portion of the cash
distribution with respect to the Affiliated Contribution and
receive Common OP Units instead.
In addition, and as a condition to the Affiliated Contribution,
VMS intends to sell the Unaffiliated Sale Properties to one or
more third parties in one or more sales. On November 22,
2006, VMS entered into an agreement to sell Watergate Apartments
to an unaffiliated third party for a total purchase price of
$7,710,000. On November 28, 2006, VMS entered into an
agreement to sell Shadowood Apartments to an unaffiliated
third party for a total purchase price of $5,300,000. On
December 4, 2006, VMS entered into agreements to sell
Terrace Gardens and The Bluffs to unaffiliated third parties for
total purchase prices of $7,200,000 and $9,650,000,
respectively. On December 11, 2006, VMS entered into an
agreement to sell Vista Village Apartments to an unaffiliated
third party for a total purchase price of $7,250,000. On
December 12, 2006, VMS entered into an agreement to sell
Chapelle Le Grande to an unaffiliated third party for a total
purchase price of $5,250,000. The terms of the two remaining
Unaffiliated Sales are not yet defined, as purchase agreements
have not been entered into. However, VMS has received offers at
specific offer prices to purchase the two remaining Unaffiliated
Sale Properties. The Unaffiliated Sale Properties are being
marketed by VMS to unaffiliated third parties through
arms-length negotiation. However, no Unaffiliated Sale will be
completed if the purchase price for such Unaffiliated Sale
Property does not exceed the Minimum Unaffiliated Sale Price.
VMS engaged CB Richard Ellis (CBRE) as the broker to
market the Unaffiliated Sale Properties. The Managing General
Partner selected CBRE based on its reputation in the industry
and its ability to market multiple Properties in diverse
markets. In the prior two years, CBRE has been paid
approximately $4.4 million for broker services by the
Aimco Operating Partnership and its affiliates. Except as set
forth above, during the prior two years, no material
relationship has existed between CBRE and VMS or the Aimco
Operating Partnership or any of their affiliates. Prior to
commencing marketing efforts for the Unaffiliated Sale
Properties and consistent with CBREs standard operating
procedure, CBRE provided estimates of value for each of the
Unaffiliated Sale Properties which, at the time, VMS expected to
use as a basis for establishing a minimum sales price for the
Unaffiliated Sale Properties for purposes of notifying limited
partners of the proposed sales and providing the opportunity to
object as required by the Partnership Agreements. As noted
elsewhere herein, the Managing General Partner ultimately
decided to use for such purposes 85% of (i) actual, arms-length
negotiated purchase prices contained in purchase agreements
entered into for such sales or (ii) the highest offer prices for
those properties not yet subject to contract.
CBRE based its estimates of value upon a review of the operating
performance for each Property on both an income and expense
basis, including a review of monthly performance in each of the
12 trailing months and a review of annual operating performance
on each basis during the most recently completed calendar years.
In each case, CBRE specifically evaluated gross potential rent,
net rental income, components of economic loss (vacancy,
57
concessions, employee/model units and bad debt), other income,
utility reimbursement income, and operating expenses.
CBRE adjusted the various components of net rental income in
order to reflect the growth currently reflected in the market,
as demonstrated by recent bids made by competitive buying
groups. CBREs evaluation of expenses was based on a review
of the applicable Propertys historical performance of
variable expenses, with appropriate adjustments made up or down
to reflect the overall market. CBREs evaluation of utility
expense reflected the trailing 12 month figures, while
insurance estimates reflected average annual premiums in the
appropriate market for each Property. CBRE also estimated a
reassessment of real estate taxes for capitalization rate
purposes in those markets where a reassessment could result in
the near future upon a sale of the Property.
In preparing its estimate of value for each of the Unaffiliated
Sale Properties, CBRE relied, without independent verification,
on the accuracy and completeness of information supplied or
otherwise made available to it by or on behalf of VMS. In
arriving at the estimates of value, CBRE assumed that all
information known to VMS and relative to the valuation had been
accurately furnished and that there were no undisclosed leases,
agreements, liens or other encumbrances affecting the use of the
Properties.
Based on the foregoing analysis, CBRE provided the following
estimates of value for each of the Unaffiliated Sale Properties:
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Watergate Apartments
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$
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7,216,000
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Shadowood Apartments
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$
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5,043,000
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Terrace Gardens
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$
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7,335,000
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The Bluffs
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$
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8,895,000
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Vista Village Apartments
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$
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6,252,000
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Chapelle Le Grande
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$
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5,089,000
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North Park Apartments
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$
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9,942,000
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Forest Ridge
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$
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16,980,000
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You may obtain a full copy of the estimates of value provided by
CBRE for the Unaffiliated Sale Properties upon request, without
charge, by contacting the information agent at
(800) 217-9608
(toll-free). Copies of the estimates of value for the
Unaffiliated Sale Properties are also available for inspection
and copying at the principal executive offices of VMS during
regular business hours by any interested limited partner or his
or her designated representative at his or her cost. In
addition, copies of the estimates of value have been filed with
the SEC.
Upon closing, CBRE will be paid commissions totaling
approximately $1,090,350, pursuant to a listing agreement with
the Managing General Partner. Approximately $723,600 will be
paid with respect to the six Properties currently under contract
and approximately $366,750 will be paid with respect to the two
remaining Properties. The Managing General Partner negotiated
the foregoing commission rates taking into account market
commission rates for single property sales and then negotiated a
discount in light of the fact that eight properties were being
marketed for sale.
By sending this proxy statement-prospectus to the limited
partners of the Partnerships, the Managing General Partner is
providing the limited partners with notice of the Transactions.
VMS will not complete a Transaction if limited partners owning
more than 50% of the aggregate units of the Partnerships give
written notice of objection to that Transaction prior to
March 28, 2007. The Managing General Partner currently
anticipates that the Affiliated Contribution will be consummated
no later than June 30, 2007. If one of the Transactions is
not consummated, VMS will continue to own the Properties that
were to be contributed or sold in that Transaction and remain
responsible for the related mortgage debt.
58
The following is a summary of the terms and conditions of the
Contribution Agreement, which may be amended or superseded at
any time and from time to time by the parties; provided,
however, that if any amendment materially changes the terms or
conditions of the Affiliated Contribution, the Managing General
Partner will provide an extended opportunity for the
unaffiliated limited partners to object to the Affiliated
Contribution.
Consideration. The consideration for the
Affiliated Sale Properties is $230,078,260 (the
Consideration), subject to adjustments as provided
in the Contribution Agreement, allocated between the Properties
based on the appraised values noted above in all cases other
than the $19,028,260 valuation based on Aimcos internal
valuation for Buena Vista Apartments as follows:
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Property
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Consideration
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Casa de Monterey
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$
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18,200,000
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Buena Vista Apartments
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$
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19,028,260
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Crosswood Park Apartments
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$
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15,750,000
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Mountain View Apartments
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$
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30,800,000
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Pathfinder Village Apartments
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$
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34,700,000
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Scotchollow Apartments
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$
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67,800,000
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The Towers of Westchester Park
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$
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43,800,000
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VMS and the Partnerships are providing herewith an opportunity
for limited partners to waive their right to receive any portion
of the cash distribution with respect to the Affiliated
Contribution and receive Common OP Units directly from the
Aimco Operating Partnership instead. The Aimco Operating
Partnership has agreed to issue and deliver directly to each
limited partner that provides such a waiver and election that
number of Common OP Units equal to (i) the amount of
the cash distribution waived by such limited partner divided by
(ii) the average of the closing prices per share of the
Class A Common Stock on the NYSE for the twenty consecutive
trading days in which such shares are traded ending on the
second trading day prior to but not including the Closing Date
(as defined below), so long as such issuance and delivery does
not violate any state securities laws. Limited partners are
instructed to contact The Altman Group, Inc. with any direct
questions or requests for information, including an estimate of
Common OP Units issuable with respect to waivers of
particular cash amounts, as of the most recent practicable date.
Please see the information set forth under HOW TO OBTAIN
ADDITIONAL INFORMATION. In the event such issuance and
delivery is deemed to violate the securities laws of any state,
the parties to the Contribution Agreement shall be entitled to
disregard such waiver and election and proceed with the
Contribution and resulting cash distributions as if such waiver
and election had not been delivered by such limited partner.
At the consummation of the contribution of the Affiliated
Contribution Properties (the Closing), the cash
Consideration payable to VMS must be paid by Aimco Properties,
LLC through escrow with Stewart Title Guaranty Company (the
Escrow Agent or the Title Insurer)
as of the date of Closing (the Closing Date).
Inspections. Aimco Properties, LLC and its
attorneys, architects, engineers, surveyors, and other
representatives (collectively, Consultants) have
been provided reasonable access to the Affiliated Contribution
Properties and all records and files relating thereto for the
purposes of inspections, preparations of plans, taking of
measurements, making of surveys, making of appraisals, and
generally for the ascertainment of the condition of the
Affiliated Contribution Properties (collectively, the
Inspections) concerning the Affiliated Contribution
Properties; provided, however, that Aimco Properties, LLC may
not, for any reason, terminate the Contribution Agreement as a
result of such Inspections.
Affiliated Contribution Properties
Materials. Prior to the Closing Date, and to the
extent in VMSs actual possession and located at the
Affiliated Contribution Properties, VMS agreed to make certain
Affiliated Contribution Properties-related documents (the
Materials) available for review by Aimco Properties,
LLC. Aimco Properties, LLC has acknowledged receipt of the
Materials prior to the effective date of the Contribution
Agreement.
59
Affiliated Contribution Properties
Contracts. A list of Affiliated Contribution
Properties contracts that Aimco Properties, LLC desires to
terminate at closing is attached to the Contribution Agreement
(the Terminated Contracts). The effective date of
such termination after Closing will be subject to the express
terms of the Terminated Contracts (and, to the extent that the
effective date of termination of any Terminated Contract is
after the Closing Date, Aimco Properties, LLC will be deemed to
have assumed all of VMSs obligations under such Terminated
Contract as of the Closing Date). If any Affiliated Contribution
Properties contract cannot by its terms be terminated, it will
be assumed by Aimco Properties, LLC and, to the extent that any
Terminated Contract requires payment of a penalty or premium for
cancellation, Aimco Properties, LLC will be solely responsible
for the payment of the cancellation fees or penalties. If any
Affiliated Contribution Properties contract to be assumed by
Aimco Properties, LLC is assignable but requires the applicable
vendor to consent to the assignment or assumption of the
Affiliated Contribution Properties contract, then, prior to the
Closing, Aimco Properties, LLC will be responsible for obtaining
from each applicable vendor a consent to the assignment of the
Affiliated Contribution Properties contract.
Permitted Exceptions. The deed delivered
pursuant to the Contribution Agreement will be subject to
customary permitted exceptions such as written tenant leases for
apartment units at the Property and covenants, conditions and
restrictions on public record.
Closing Date. Closing shall occur on such date
as is mutually agreed upon by VMS and Aimco Properties, LLC;
provided, however, that the Closing Date shall not occur any
later than December 31, 2007.
Closing Prorations. All normal and customarily
proratable items, such as title insurance, will be prorated as
of the Closing Date.
Closing Costs. Aimco Properties, LLC must pay
all recordation and documentary fees, stamps and taxes imposed
on the deed, any premiums or fees required to be paid by Aimco
Properties, LLC with respect to the Title Policy in excess
of the base premium for the title policy, and one-half of the
customary closing costs of the Escrow Agent. VMS will pay the
base premium for the title policy and one-half of the customary
closing costs of the Escrow Agent.
Closing Documents. Each of VMS and Aimco
Properties, LLC must deliver closing documents customary for
transactions of this kind at Closing.
Partnership Representations and
Warranties. VMS has made customary
representations and warranties, including, but not limited to,
representations and warranties related to ownership,
citizenship, legal proceedings and default, conflict or
violation of contract or law, and the representations and
warranties of VMS survive Closing for a period of six
(6) months (the Survival Period). VMS shall
have no liability under the Contribution Agreement after the
Survival Period except to the extent that Aimco Properties, LLC
has requested arbitration against VMS during the Survival Period
for a misrepresentation. VMSs liability for
misrepresentations is capped at $250,000.00, and Aimco
Properties, LLC cannot bring any related claim unless the claim
for damage (either in the aggregate or as to any individual
claim) by Aimco Properties, LLC exceeds $50,000.00.
Aimco Properties, LLC Representations and
Warranties. Aimco Properties, LLC has made
customary representations and warranties, including, but not
limited to, authority and enforceability, and the
representations and warranties of Aimco Properties, LLC survive
Closing for a period of six (6) months.
Pre-Closing Operations. During the period of
time from the Effective Date to the Closing Date, VMS shall
manage, operate, maintain and repair the Affiliated Contribution
Properties in the same manner as the Affiliated Contribution
Properties have been managed, operated, maintained and repaired
prior to the Effective Date.
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Aimco Properties, LLCs Conditions to
Closing. Aimco Properties, LLCs obligation
to close is subject to the fulfillment of the following
conditions precedent:
(a) Each of VMSs representations and warranties must
be true and correct as of the Closing Date;
(b) VMS must have performed each of the covenants,
agreements and conditions to be performed by VMS prior to or as
of the Closing Date; and
(c) if necessary, VMS shall have obtained written consent
to the Transaction from the holders of the mortgage indebtedness
encumbering the Affiliated Contribution Properties.
If any condition set forth in clause (a) or (b) is not
met, Aimco Properties, LLC may (i) terminate Aimco
Properties, LLCs obligations under the Contribution
Agreement, (ii) complete the Closing notwithstanding the
unsatisfied condition, or (iii) adjourn the Closing to a
date not later than thirty (30) days after the scheduled
Closing Date, during which period VMS shall use its reasonable
efforts to satisfy any unsatisfied conditions within VMSs
reasonable power to satisfy.
Brokers. VMS and Aimco Properties, LLC have
each represented and warranted to the other that it has not
utilized the services of any other real estate broker, sales
person or finder in connection with the Contribution Agreement,
and each party agreed to indemnify, defend and hold harmless the
other party from and against all losses relating to brokerage
commissions and finders fees arising from or attributable
to the acts or omissions of the indemnifying party.
Aimco Properties, LLC Default. If Aimco
Properties, LLC, without the right to do so and in default of
its obligations under the Contribution Agreement, fails to
complete the Closing, VMS shall have the right to terminate the
Contribution Agreement by written notice to Aimco Properties,
LLC whereupon neither party shall have any further rights or
obligations under the Contribution Agreement except for those
that expressly survive termination of the Contribution Agreement.
VMS Default. If VMS, without the right to do
so and in default of its obligations under the Contribution
Agreement, fails to complete the Closing, Aimco Properties, LLC
shall have the right either to terminate the Contribution
Agreement by written notice to VMS, whereupon neither party
shall have any further rights or obligations under the
Contribution Agreement except for those that expressly survive
termination of the Contribution Agreement, or to seek specific
performance of VMSs obligations under the Contribution
Agreement. VMS will not be obligated to close (i) if, as
provided by the partnership agreement, limited partners owning
more than 50% of the aggregate units of Portfolio I and
Portfolio II give timely written notice of objection of the
Affiliated Contribution or (ii) if the Unaffiliated Sales
have not been closed. Aimco Properties, LLC waives any right to
any and all other remedies for VMSs breach of the
Contribution Agreement permitted by law or in equity against VMS
or any of its affiliates, parent and subsidiary entities,
successors, assigns, partners, managers, members, employees,
officers, directors, trustees, shareholders, counsel,
representatives, or agents, including any right to damages.
Casualty. If any of the Affiliated
Contribution Properties are damaged or destroyed by fire or
other casualty prior to closing, and the cost of repair is more
than $500,000.00, then VMS must notify Aimco Properties, LLC in
writing of such damage or destruction (the Damage
Notice). Within thirty (30) days after Aimco
Properties, LLCs receipt of the Damage Notice, Aimco
Properties, LLC may elect at its option to terminate the
Contribution Agreement. If Aimco Properties, LLC fails to
terminate the Contribution Agreement, (i) any deductibles
and the net proceeds of any insurance with respect to the
Affiliated Contribution Properties paid to VMS between the date
of the Contribution Agreement and the Closing Date and not used
by VMS for repairs to the Affiliated Contribution Properties in
connection with such casualty shall be paid to Aimco Properties,
LLC at the time of Closing, and (ii) all unpaid claims and
rights in connection with losses to the Affiliated Contribution
Properties shall be assigned to Aimco Properties, LLC at Closing
without in any manner affecting the Consideration. If any of the
Affiliated Contribution Properties are damaged or destroyed by
fire or other casualty prior to the Closing, and the cost of
repair is less than $500,000.00, the contribution will be closed
in accordance with the terms of the Contribution
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Agreement, and VMS will make such repairs to the extent of any
recovery from insurance carried on the Affiliated Contribution
Properties if they can be reasonably effected before the
Closing. If VMS is unable to effect such repairs, then at
Closing, Aimco Properties, LLC shall be paid (i) any
deductibles and the net proceeds of any insurance with respect
to the Affiliated Contribution Properties paid to VMS between
the date of the Contribution Agreement and the Closing Date and
not used by VMS for repairs to the Affiliated Contribution
Properties in connection with such casualty and (ii) all
unpaid claims and rights in connection with losses to the
Affiliated Contribution Properties shall be assigned to Aimco
Properties, LLC at Closing without in any manner affecting the
Consideration.
Condemnation. If at any time prior to the
Closing Date, any pending or threatened condemnation or eminent
domain proceeding in connection with the Affiliated Contribution
Properties (a Taking) affects all or any part of the
Affiliated Contribution Properties, if any proceeding for a
Taking is commenced, or if written notice of the contemplated
commencement of a Taking is given, VMS shall promptly give
written notice (Taking Notice) thereof to Aimco
Properties, LLC. Aimco Properties, LLC shall have the right, at
its sole option, of terminating the Contribution Agreement by
written notice to VMS within thirty (30) days after receipt
by Aimco Properties, LLC of the Taking Notice. If Aimco
Properties, LLC does not terminate the Contribution Agreement,
the Consideration shall be reduced by the total amount of any
awards or damages received by VMS and VMS shall, at Closing, be
deemed to have assigned to Aimco Properties, LLC all of
VMSs right, title and interest in and to any awards or
damages to which VMS may have become entitled or may thereafter
be entitled by reason of any exercise of the power of eminent
domain or condemnation with respect to or for the Taking of the
Affiliated Contribution Properties or any portion thereof.
Appraisal Rights. Limited partners are not
entitled to statutory appraisal rights permitting them to seek a
judicial determination of the value of their Partnership
interests under applicable law, in lieu of accepting the
distributions resulting from the Transactions. Pursuant to the
Contribution Agreement, VMS, the Partnerships and Aimco
Properties, LLC have provided each limited partner with
contractual dissenters appraisal rights with respect to
the Affiliated Contribution that are generally based upon the
statutory dissenters appraisal rights that a limited
partner would have were it a shareholder in a corporate merger
under the corporation laws of Illinois, the state of the
Partnerships organization. See APPRAISAL
RIGHTS. A description of the appraisal rights being
provided, and the procedures that a limited partner must follow
to seek such rights, is attached to this proxy
statement-prospectus as Annex C.
Assignability. Aimco Properties, LLC shall
have the absolute right to assign the Contribution Agreement and
its rights thereunder and any assignee of Aimco Properties, LLC
shall be entitled to exercise all of the rights and powers of
Aimco Properties, LLC thereunder.
Governing Law and Venue. The laws of the State
of Illinois govern the validity, construction, enforcement, and
interpretation of the Contribution Agreement. Subject to the
dispute resolution procedures set forth in the Contribution
Agreement, all claims, disputes and other matters in question
arising out of or relating to the Contribution Agreement must be
decided by proceedings instituted and litigated in a court of
competent jurisdiction in that state, and the parties expressly
consented to the venue and jurisdiction of such court.
Amendments. The Contribution Agreement cannot
be amended, altered, changed, modified, supplemented or
rescinded in any manner except by a written contract executed by
all of the parties.
No Personal Liability of Officers, Trustees or Directors of
VMSs Partners. Aimco Properties, LLC agreed
that none of VMS, its affiliates, parent and subsidiary
entities, successors, assigns, partners, managers, members,
employees, officers, directors, trustees, shareholders, counsel,
representatives, and agents shall have any personal liability
under the Contribution Agreement or any document executed in
connection with the transactions contemplated by the
Contribution Agreement.
Termination Right. The Contribution Agreement
may be terminated at any time prior to the Closing Date
(a) by mutual written consent of VMS and Aimco Properties,
LLC, or (b) by either VMS or Aimco Properties, LLC,
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by written notice to the non-terminating party: (i) if any
action restraining, enjoining or otherwise prohibiting
consummation of the Transaction shall be threatened by any
party; or (ii) the terminating party reasonably determines
it is necessary to terminate the Contribution Agreement in order
to satisfy its fiduciary obligations to its investors. In the
event of such a termination of the Contribution Agreement, the
Contribution Agreement shall become void and of no effect with
no liability on the part of any party thereto, except for any
obligations that expressly survive termination of the
Contribution Agreement.
The Affiliated Contribution Properties are as follows:
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Casa de Monterey, a
144-unit
complex in Norwalk, California. Based on the estimates of the
Managing General Partner, Casa de Monterey is currently in need
of $1,035,240 in capital expenditures to, among other things,
repair north wall fence and unit patio fences, add lighting in
parking areas, replace natural gas lines, repair a swimming pool
deck, repair sidewalks, replace wood walkway columns, replace
all catwalks, treat for termites, replace portion of roof,
repair roof drains, repair carport footing and replace carport
fascia and post, replace hot water boilers, paint the exteriors,
replace exterior wooden trim, stripe parking lot, stucco
repairs, replace pool furniture, install area drains at
mailboxes, replace HVAC units, replace sliding glass doors, and
complete refurbishment of unit interiors.
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Buena Vista Apartments, a
92-unit
complex in Pasadena, California. Based on the estimates of the
Managing General Partner, Buena Vista Apartments is currently in
need of $402,645 in capital expenditures to, among other things,
repair subfloors, replace elevator controllers and code, replace
hot water boilers, clear sanitary sewer lines, add lighting in
parking areas, replace mailboxes, resurface a swimming pool,
repair sidewalks, stripe parking lot, repair gutters and
downspouts, replace HVAC and forced air units, upgrade kitchen
and bathroom outlets, replace pool furniture, replace sliding
glass doors/screens, and complete refurbishment of unit
interiors.
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Crosswood Park Apartments, a
180-unit
complex in Citrus Heights, California. Based on the estimates of
the Managing General Partner, Crosswood Park is currently in
need of $4,452,299 in capital expenditures to, among other
things, replace roof, replace and repair perimeter fencing,
replace site lighting, replace landscaping, replace site signage
and building numbers, repair water features, repair sidewalks,
repair carports, repair wood balconies and stair rails, repair
entry landings, replace in-unit laundry room doors,
repair/replace wooden siding, replace gutters and downspouts,
replace pool furniture, treat for termites, replace fitness
equipment, repair parking area paving, stripe parking lot,
replace HVAC and forced air units, replace unit hot water
heaters, upgrade kitchen and bathroom outlets, replace sliding
glass doors/screens, and complete refurbishment of unit
interiors.
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Mountain View Apartments, a
168-unit
complex in San Dimas, California. Based on the estimates of
the Managing General Partner, Mountain View Apartments is
currently in need of $1,374,679 in capital expenditures to,
among other things, replace roofs, replace carport structures,
replace hot water boiler, repair south block wall, construct
retaining wall, add lighting in parking areas, clear sanitary
sewer lines, repair area drains, repair landscape irrigation,
resurface and repair a swimming pool and spa, repair sidewalks,
replace pool fence, replace playground equipment, replace pool
furniture, treat for termites, replace exterior wooden trim,
stripe parking lot, replace HVAC and forced air units, upgrade
kitchen and bathroom outlets, and complete refurbishment of unit
interiors.
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Pathfinder Village Apartments, a
246-unit
complex in Fremont, California. Based on the estimates of the
Managing General Partner, Pathfinder Village is currently in
need of $4,377,737 in capital expenditures to, among other
things, replace roofs, repair roof deck and roof framing,
replace and repair perimeter fencing, replace elevators, replace
site lighting, paint the exteriors, replace landscaping, replace
site signage and building numbers, repair/replace asphalt
paving, repair retaining walls, replace water recirculation
piping system, clear sanitary sewer lines, repair storm sewer
piping, repair swimming pool, replace/repair sidewalks,
resurface decking, repair/replace wood balconies and framing,
replace fitness equipment, replace balcony railings, replace
stair rails, repair stair treads and stringers, conduct full
termite remediation, replace
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gutters and downspouts, repair carports, refurbish and repair
laundry rooms, repair utility panel boxes, replace hot water
boilers, stripe parking lot, replace AC units, upgrade kitchen
and bathroom outlets, and complete refurbishment of unit
interiors.
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Scotchollow Apartments, a
418-unit
complex in San Mateo, California. Based on the estimates of
the Managing General Partner, Scotchollow is currently in need
of $6,771,062 in capital expenditures to, among other things,
replace roofs, repair roof deck and roof framing, repair
fencing, replace elevators, replace site lighting, paint the
exteriors, replace landscaping and repair landscape irrigation,
replace site signage and building numbers, resurface creek and
replace pumps, replace asphalt walkways with concrete, repair
structural damage to buildings caused by sinkholes, refurbish
perimeter carports and convert into garage units, to clear
sanitary sewer lines, repair water recirculation piping,
resurface and repair swimming pools and spas, repair sidewalks,
repair/replace wood balconies, balcony railings, stair rails,
stair treads and stringers, treat for termites, replace fitness
equipment, replace gutters and downspouts, replace hot water
boilers, stripe and power wash parking lot, replace AC units,
upgrade kitchen and bathroom outlets, and complete refurbishment
of unit interiors.
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The Towers of Westchester Park, a
303-unit
complex in College Park, Maryland. Based on the estimates of the
Managing General Partner, The Towers of Westchester Park is
currently in need of $872,328 in capital expenditures to, among
other things, clear sanitary sewer lines, repair a swimming
pool, repair sidewalks, replace gutters and downspouts, upgrade
electrical panels, repair parking area paving, replace windows,
repair and replace balconies, resurface decks, and upgrade
kitchen and bathroom outlets.
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The Unaffiliated Sale Properties are as follows:
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North Park Apartments, a
284-unit
complex in Evansville, Indiana. Based on the estimates of the
Managing General Partner, North Park Apartments is currently in
need of $4,670,980 in capital expenditures to, among other
things, repair add lighting in parking areas, clear sanitary
sewer lines, repair a swimming pool, replace gutters and
downspouts, upgrade electrical panels, repair parking area
paving, repair a storm drainage system, resurface tennis courts,
trim trees, replace windows, repair and replace balconies,
resurface decks, and upgrade kitchen and bathroom outlets.
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Chapelle Le Grande, a
105-unit
complex in Merrillville, Indiana. Based on the estimates of the
Managing General Partner, Chapelle Le Grande is currently in
need of $487,171 in capital expenditures to, among other things,
repair fencing, add lighting in parking areas, clear sanitary
sewer lines, repair a swimming pool, repair sidewalks, repair a
wood balcony and stair rails, replace gutters and downspouts,
repair roofs, upgrade electrical panels, repair parking area
paving, resurface tennis courts, trim trees, replace windows,
repair and replace balconies, resurface decks, and upgrade
kitchen and bathroom outlets.
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Terrace Gardens, a
126-unit
complex in Omaha, Nebraska. Based on the estimates of the
Managing General Partner, Terrace Gardens is currently in need
of $3,518,890 in capital expenditures to, among other things,
repair fencing, clear sanitary sewer lines, repair a swimming
pool, repair sidewalks, repair a wood balcony and stair rails,
replace gutters and downspouts, repair roofs, upgrade electrical
panels, repair parking area paving, repair a storm drainage
system, resurface tennis courts, trim trees, replace windows,
repair and replace balconies, resurface decks, and upgrade
kitchen and bathroom outlets.
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Forest Ridge Apartments, a
278-unit
complex in Flagstaff, Arizona. Based on the estimates of the
Managing General Partner, Forest Ridge Apartments is currently
in need of $1,175,736 in capital expenditures to, among other
things, repair fencing, add lighting in parking areas, clear
sanitary sewer lines, repair a swimming pool, repair sidewalks,
repair a wood balcony and stair rails, treat for termites,
replace gutters and downspouts, repair roofs, upgrade electrical
panels, repair parking area paving, repair a storm drainage
system, trim trees, replace windows, repair and replace
balconies, resurface decks, and upgrade kitchen and bathroom
outlets.
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The Bluffs, a
137-unit
complex in Milwaukee, Oregon. Based on the estimates of the
Managing General Partner, The Bluffs is currently in need of
$630,921 in capital expenditures to, among other things, repair
fencing, add lighting in parking areas, clear sanitary sewer
lines, repair a swimming pool, repair sidewalks, repair a wood
balcony and stair rails, replace gutters and downspouts, repair
roofs, upgrade electrical panels, repair parking area paving,
trim trees, replace windows, repair and replace balconies,
resurface decks, and upgrade kitchen and bathroom outlets.
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Watergate Apartments, a
140-unit
complex in Little Rock, Arkansas. Based on the estimates of the
Managing General Partner, Watergate Apartments is currently in
need of $775,600 in capital expenditures to, among other things,
add lighting in parking areas, repair a swimming pool, repair
sidewalks, replace gutters and downspouts, repair roofs, upgrade
electrical panels, replace windows, resurface decks, and upgrade
kitchen and bathroom outlets.
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Shadowood Apartments, a
120-unit
complex in Monroe, Louisiana. Based on the estimates of the
Managing General Partner, Shadowood Apartments is currently in
need of $380,745 in capital expenditures to, among other things,
add lighting in parking areas, clear sanitary sewer lines,
repair a swimming pool, repair roofs, upgrade electrical panels,
repair a storm drainage system, replace windows, resurface
decks, and upgrade kitchen and bathroom outlets.
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Vista Village Apartments, a
220-unit
complex in El Paso, Texas. Based on the estimates of the
Managing General Partner, Vista Village Apartments is currently
in need of $1,174,464 in capital expenditures to, among other
things, repair chain link fencing, add lighting in parking
areas, repair a swimming pool, repair sidewalks, repair wood
fences, repair a wood balcony and stair rails, treat for
termites, repair roofs, upgrade electrical panels, repair
parking area paving, repair a storm drainage system, replace
windows, repair and replace balconies, resurface decks, and
upgrade kitchen and bathroom outlets.
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In addition to the mortgage indebtedness for each Property noted
above and the other indebtedness described elsewhere herein, the
aggregate amount of all capital expenditure needs noted above is
$32,100,498 as of December 31, 2005.
PROCEDURE
FOR ELECTION OF AFFILIATED CONTRIBUTION CONSIDERATION
Limited partners who desire to waive their right to receive any
portion of the cash distribution with respect to the Affiliated
Contribution and receive Common OP Units directly from the
Aimco Operating partnership instead should complete, sign, date
and deliver the Consideration Election Form included herewith to
the Information Agent by mail in the self-addressed,
postage-paid envelope enclosed for that purpose by overnight
courier or by facsimile at the address or facsimile number set
forth on the Consideration Election Form prior to
5:00 P.M., New York City time, on April 20, 2007,
all in accordance with the instructions contained therein. A
limited partner may change an election previously made by
completing, signing, dating and delivering a revised
Consideration Election Form, as specified above, prior to
5:00 P.M., New York City time, on April 20, 2007.
APPROVALS
REQUIRED
Partnership
Approvals
This proxy statement-prospectus is the Managing General
Partners written notice to the limited partners of the
Partnerships of the Transactions. As provided in the joint
venture and partnership agreements, VMS will not complete a
Transaction if limited partners owning more than 50% of the
aggregate units of the Partnerships object to such Transaction
by providing written notice to the Managing General Partner by
March 28, 2007.
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Other
Approvals
The Managing General Partner intends to solicit any lender
consents that may be required in connection with the
Transactions. The Transactions are conditioned on obtaining any
such lender consents that may be necessary.
PROCEDURE
FOR OBJECTING TO A TRANSACTION
LIMITED PARTNERS WHO DESIRE TO OBJECT TO ONE OF THE TRANSACTIONS
SHOULD DO SO BY COMPLETING AND SIGNING, DATING AND DELIVERING
THE NOTICE OF OBJECTION INCLUDED HEREWITH TO THE INFORMATION
AGENT BY MAIL IN THE SELF-ADDRESSED, POSTAGE-PAID ENVELOPE
ENCLOSED FOR THAT PURPOSE, BY OVERNIGHT COURIER OR BY FACSIMILE
AT THE ADDRESS OR FACSIMILE NUMBER SET FORTH ON THE NOTICE OF
OBJECTION, ALL IN ACCORDANCE WITH THE
INSTRUCTIONS CONTAINED HEREIN AND THEREIN.
All Notices of Objection that are properly completed, signed and
delivered to the information agent and not properly revoked
prior to March 28, 2007 (the Expiration Date),
will be given effect in accordance with the specifications
thereof. See Revocation of Instructions below.
Notices of Objection must be executed in exactly the same manner
as the name(s) in which ownership of the partnership interest is
registered. If the partnership interest to which a Notice of
Objection relates is held by two or more joint holders, all such
holders should sign the Notice of Objection. If a Notice of
Objection is signed by a trustee, partner, executor,
administrator, guardian,
attorney-in-fact,
officer of a corporation or other person acting in a fiduciary,
agency or representative capacity, such person must so indicate
when signing and submit with the Notice of Objection evidence
satisfactory to the Partnership of authority to execute the
Notice of Objection.
The execution and delivery of a Notice of Objection will not
affect a limited partners right to sell or transfer its
partnership interest. All Notices of Objection received by the
information agent (and not properly revoked) prior to the
Expiration Date will be effective and binding on transferees
notwithstanding a record transfer of such partnership interest
by the transferor limited partner subsequent to the delivery of
the Notice of Objection, unless the transferee limited partner
revokes such Notice of Objection prior to 5:00 p.m., New
York City time, on the Expiration Date by following the
procedures set forth under Revocation of
Instructions below.
All questions as to the validity, form and eligibility
(including time of receipt) regarding Notices of Objection will
be determined by the Managing General Partner in its sole
discretion, which determination will be conclusive and binding.
The Managing General Partner reserves the right to reject any or
all Notices of Objection that are not in proper form. The
Managing General Partner also reserves the right to waive any
defects, irregularities or conditions of delivery as to
particular Notices of Objection. Unless waived, all such defects
or irregularities in connection with the deliveries of Notices
of Objection must be cured within such time as the Managing
General Partner determines. Neither the Managing General Partner
nor any of its affiliates or any other persons shall be under
any duty to give any notification of any such defects,
irregularities or waivers, nor shall any of them incur any
liability for failure to give such notification. Deliveries of
Notices of Objection will not be deemed to have been made until
any irregularities or defects therein have been cured or waived.
The interpretations of the terms and conditions of this proposal
by the Managing General Partner shall be conclusive and binding.
Revocation
of Instructions
Any limited partner who has delivered a Notice of Objection to
the information agent may revoke the instructions set forth in
such Notice of Objection by delivering to the information agent
a written notice of revocation prior to 5:00 p.m., New York
City time, on the Expiration Date. In order to be effective, a
notice of revocation of the instructions set forth in a Notice
of Objection must (i) contain the name of the person who
delivered the Notice of Objection, (ii) be in the form of a
written notice delivered to the information agent stating that
the prior Notice of Objection is revoked, (iii) be signed
by the limited partner in the same manner as the original
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signature on the Notice of Objection, and (iv) be received
by the information agent prior to 5:00 p.m. New York City
time, on the Expiration Date at one of its addresses or fax
number set forth on the Notice of Objection. A purported notice
of revocation that lacks any of the required information, is
dispatched to an improper address or telephone number or is not
received in a timely manner will not be effective to revoke the
instructions set forth in a Notice of Objection previously
given. A revocation of the instructions set forth in a Notice of
Objection can only be accomplished in accordance with the
foregoing procedures. NO LIMITED PARTNER MAY REVOKE THE
INSTRUCTIONS SET FORTH IN A NOTICE OF OBJECTION AFTER
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
PLANS
AFTER THE TRANSACTIONS ARE CONSUMMATED
If the Transactions are consummated, with seven Properties being
contributed to Aimco Properties, LLC and eight being sold to one
or more third parties, VMS will no longer own and operate any
Properties. Therefore, VMS will make the distributions discussed
elsewhere herein and dissolve in accordance with the terms of
its joint venture agreement. Similarly, because interests in the
joint venture are the sole assets of the Partnerships, the
Partnerships will be dissolved in accordance with the terms of
their respective partnership agreements.
Upon dissolution of VMS, the Managing General Partner intends to
file a notice with the SEC that will result in a termination of
VMSs obligation to file annual, quarterly and other
reports with the SEC pursuant to the Exchange Act. The Managing
General Partner has determined that VMS is incurring
approximately $87,000 in administrative and accounting expenses
annually relating to the preparation and filing of periodic
reports for VMS with the SEC. Upon completion of the disposition
of the Properties, VMS will no longer incur these expenses.
VMS AND
THE PARTNERSHIPS
VMS
VMS was formed as a general partnership pursuant to the Uniform
Venture Act of the State of Illinois and a joint venture
agreement dated September 27, 1984, between Portfolio I and
Portfolio II. Its primary business is real estate ownership
and related operations. VMS was formed for the purpose of making
investments in various types of real properties which offer
potential capital appreciation and cash distributions to its
partners. Effective December 12, 1997, the managing general
partner of each of the Partnerships was transferred from VMS
Realty Investment, Ltd. (formerly VMS Realty Partners) to
MAERIL, Inc., a wholly-owned subsidiary of MAE GP Corporation
and an affiliate of Insignia Financial Group, Inc.
(Insignia). Effective February 25, 1998, MAE GP
Corporation was merged with Insignia Properties Trust
(IPT), which was an affiliate of Insignia. Effective
October 1, 1998 and February 26, 1999, Insignia and
IPT were respectively merged into Aimco. Thus, the Managing
General Partner is now a wholly-owned subsidiary of Aimco.
VMS originally acquired 51 residential apartment properties with
funds raised by offering units in the Partnerships. Prior to the
Managing General Partner becoming a wholly-owned subsidiary of
Aimco, VMS filed for Chapter 11 bankruptcy protection and
39 of VMSs properties were foreclosed. Of the 51
properties that VMS originally acquired, four were foreclosed
prior to 1993. In February 1991, VMS filed for Chapter 11
bankruptcy protection. The VMS plan of reorganization became
effective in September 1993. Under the plan of reorganization,
19 of the VMS properties were foreclosed in 1993, four
properties were foreclosed in 1994, five properties were
foreclosed in 1995 and two properties were foreclosed in 1996.
VMS sold two properties during 1996. VMS continues to own and
operate 15 of the remaining apartment complexes which are the
Properties being contributed and sold as described in the proxy
statement-prospectus. The Managing General Partner seeks to
maximize the operating results and, ultimately, the net
realizable value of each of VMSs holdings in order to
achieve the best possible return for its investors and evaluates
them periodically to determine the most appropriate strategy for
each of the assets.
67
The
Partnerships and the VMS Properties
The general partners of VMS are Portfolio I and
Portfolio II. Portfolio I owns a 70.69% participation
interest in VMS and Portfolio II owns a 29.31%
participation interest in VMS. The Managing General Partner of
the Partnerships is a subsidiary of Aimco. An affiliate of the
Aimco Operating Partnership serves as manager of the Properties.
There are currently 644 units of Portfolio I and
267 units of Portfolio II issued and outstanding,
which are held of record by 669 and 257 limited partners,
respectively.
The following chart represents the organizational structure of
the VMS Related Parties:
VMSs investment portfolio currently consists of the
following 15 residential apartment complexes: Buena Vista, a
92-unit
complex in Pasadena, California; Casa de Monterey, a
144-unit
complex in Norwalk, California; Crosswood Park, a
180-unit
complex in Citrus Heights, California; Mountain View, a
168-unit
complex in San Dimas, California; Pathfinder Village, a
246-unit
complex in Fremont, California; Scotchollow, a
418-unit
complex in San Mateo, California; The Bluffs, a
137-unit
complex in Milwaukee, Oregon; Vista Village, a
220-unit
complex in El Paso, Texas; Chapelle Le Grande, a
105-unit
complex in Merrillville, Indiana; Shadowood, a
120-unit
complex in Monroe, Louisiana; The Towers of Westchester Park, a
303-unit
complex in College Park, Maryland; Terrace Gardens, a
126-unit
complex in Omaha, Nebraska; North Park Apartments, a
284-unit
complex in Evansville, Indiana; Watergate Apartments, a
140-unit
complex in Little Rock, Arkansas; and Forest Ridge, a
278-unit
complex in Flagstaff, Arizona.
VMSs, the Partnerships and the Managing General
Partners principal executive offices are located at
55 Beattie Place, P.O. Box 1089, Greenville, South
Carolina 29602, and their phone number is
(864) 239-1029.
For additional information about the Partnerships and VMS,
please refer to the VMS Annual Report on
Form 10-K
for the year ended December 31, 2005, which is incorporated
herein by reference, particularly Item 2 of
68
the
Form 10-K,
which contains detailed information regarding the Properties,
including mortgages, rental rates and taxes. See GENERAL
INFORMATION.
Property
Management
The Properties are managed by an affiliate of Aimco Properties,
LLC. Pursuant to the management agreement between the property
manager and VMS, the property manager operates the Properties,
establishes rental policies and rates, and directs marketing
activities. The property manager also is responsible for
maintenance, the purchase of equipment and supplies, and the
selection and engagement of all vendors, suppliers and
independent contractors.
Investment
Objectives and Policies; Sale or Financing of
Investments
Under each Partnerships agreement of limited partnership,
neither Partnership is permitted to raise new equity or reinvest
cash in new properties. Consequently, the Partnerships are
limited in their ability to expand their investment portfolio or
make improvements to properties through additional equity
investments. Each Partnership will terminate on
December 31, 2030, unless earlier dissolved. Prior to the
refinancing completed on January 19, 2007, the terms of the
senior mortgages encumbering the Properties contemplated the
payment of an agreed valuation amount of $110,000,000
(approximately $12,763,000 of which had already been repaid) for
such indebtedness, which was less than the applicable face
amount of $152,225,000, if repayment occurs after
January 1, 2007 and on or prior to January 1, 2008,
the maturity date. If a default occurred with respect to a
particular mortgage and that mortgage was subsequently repaid
prior to January 1, 2008, an additional prepayment penalty
of not less than 1% of the agreed valuation amount would have
also been owed.
Generally, VMS is authorized to acquire, develop, improve, own
and operate its Properties as an investment and for income
producing purposes. The investment portfolio of VMS is limited
to the assets acquired with the initial equity raised through
the sale of units to the limited partners of the Partnerships or
the assets initially contributed to VMS by the limited partners
of the Partnerships, as well as the debt financing obtained by
VMS within the established borrowing restrictions.
An investment in each Partnership is a finite life investment,
with the partners to receive regular cash distributions out of
such Partnerships distributable cash flow, if available,
and to receive cash distributions upon liquidation of real
estate investments, if available.
In general, the Managing General Partner evaluates the
Properties by considering various factors, such as the
partnerships financial position and real estate and
capital markets conditions. The Managing General Partner
monitors each Propertys specific locale and sub-market
conditions, evaluating current trends, competition, new
construction and economic changes. The Managing General Partner
oversees each assets operating performance and
periodically evaluates the physical improvement requirements. In
addition, the financing structure for each Property, including
any prepayment penalties, tax implications, availability of
attractive mortgage financing to a purchaser, and the investment
climate are all considered. Any of these factors, and possibly
others, could potentially contribute to any decision by the
Managing General Partner to sell, refinance, upgrade with
capital improvements or hold a particular Property.
The Properties have in the past needed, and currently need,
significant capital expenditures to maintain or improve their
habitability and thereby maintain or improve rents and occupancy
rates. VMS does not have sufficient funds to pay for these
capital expenditures, and the Managing General Partner has been
unable to obtain favorable third-party loans to finance these
capital expenditures due to the borrowing and prepayment
restrictions imposed by the previous senior mortgages. The
Managing General Partner refinanced the Properties to satisfy
the previous senior and junior mortgages and certain other
indebtedness; however, such refinancing did not generate
sufficient funds to fund the needed capital expenditures at the
Properties. As a result, the Managing General Partner considered
a number of alternative transactions and determined to proceed
with the Transactions.
69
Capital
Replacement
Pursuant to the terms of its mortgage indebtedness prior to the
refinancing completed on January 19, 2007, VMS was
generally restricted to annual capital improvements of
$300 per unit or approximately $888,000 for all of its
Properties. Such amount was equal to the required replacement
reserve funding of such previous senior debt. As VMS identified
Properties which needed additional capital improvements above
$300 per unit, approval of the holders of the prior junior
and senior debt was required due to the restriction imposed by
the terms of the debt. As such VMS identified during the third
quarter of 2004 approximately $6,440,000 of capital improvements
that needed to be made to the Properties as a result of life
safety issues, compliance with Americans with Disabilities Act
requirements and general updating of the Properties. On
November 2, 2004, VMS, the holder of the senior debt and
the Aimco Operating Partnership, which was the holder of the
junior debt, agreed that the Aimco Operating Partnership would
loan up to approximately $6,440,000 to VMS (the New
Mezzanine Loan) to fund the above mentioned capital
improvements. Such Mezzanine Loan maintained interest at a rate
of prime plus 3% with unpaid interest being compounded monthly.
VMS, the holder of the then-outstanding senior debt and the
Aimco Operating Partnership also agreed that cash flow that
would otherwise have been used to repay the junior debt would
instead be used to repay the New Mezzanine Loan, until such time
as the New Mezzanine Loan and all accrued interest thereon was
paid in full. The Managing General Partner believed that the
payment of such amounts to reduce the New Mezzanine Loan instead
of the junior debt reduced the amount of the junior debt
amortized prior to its maturity (therefore increasing the amount
due) by an amount at least equal to the principal and interest
on the Mezzanine Loan.
Legal
Proceedings
The Partnerships or VMS may be a party to a variety of legal
proceedings related to the Properties and management and leasing
business arising in the ordinary course of the business, which
are not expected to have a material adverse effect on the
Partnerships or VMS.
Fiduciary
Responsibility of the Managing General Partner of the
Partnerships
Under applicable law, the Managing General Partner is
accountable to the Partnerships as a fiduciary. Under each
Partnerships agreement of limited partnership, the
Managing General Partner will not incur any liability to either
Partnership or any other partner for any mistakes or errors in
judgment or for any act or omission believed by it in good faith
to be within the scope of authority conferred upon it by the
Partnerships partnership agreements. As a result,
unitholders might have a more limited right of action in certain
circumstances than they would have in the absence of such a
provision. The Managing General Partner is a subsidiary of
Aimco. See CONFLICTS OF INTEREST.
Each Partnership will, to the extent permitted by law, indemnify
and save harmless the Managing General Partner against and from
any personal loss, liability, including attorneys fees, or
damage incurred by it as the result of any act or omission in
its capacity as Managing General Partner unless such loss,
liability or damage results from bad faith, breach of fiduciary
duty, gross negligence or intentional misconduct of the Managing
General Partner.
Distributions
and Transfers of Units
Distributions
From 1993 through the present, the Partnerships have paid no
distributions. All of the cash flow from VMS and the
Partnerships is currently dedicated to the payment of operating
expenses, capital expenditures and debt service. The
Partnerships partnership agreements do not permit the
Partnerships to distribute any consideration other than cash in
liquidation of the interest of a limited partner. However, the
limited partners of the Partnerships may elect to waive the
right to receive any portion of the cash distribution with
respect to the Affiliated Contribution and receive Common OP
Units directly from the Aimco Operating Partnership instead. The
Partnerships partnership
70
agreements also do not permit a special allocation of gain to
the limited partners receiving cash, even if such special
allocation would be permitted under applicable law. Thus, the
receipt of cash by some limited partners will have an adverse
tax consequence on those limited partners who choose to waive
any portion of the cash distribution and receive Common OP Units
instead.
Transfers
The units of the Partnerships are not listed on any national
securities exchange or quoted on the NASDAQ System, the
Electronic Bulletin Board or the pink sheets,
and there is no established public trading market for the units.
Secondary sales activity for the units has been limited and
sporadic. The Managing General Partner monitors transfers of the
units (a) because the admission of a transferee as a
substitute limited partner requires the consent of the general
partner, and (b) in order to track compliance with safe
harbor provisions to avoid treatment as a publicly traded
partnership for tax purposes. However, the Managing
General Partner does not monitor or regularly receive or
maintain information regarding the prices at which secondary
sale transactions in the units have been effectuated. The
Managing General Partner estimates, based solely on the transfer
records of the Partnerships, that the number of units
transferred in privately negotiated transactions or in
transactions believed to be between related parties, family
members or the same beneficial owner was as follows:
Portfolio
I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Percentage of
|
|
|
|
|
|
|
of
|
|
|
Outstanding
|
|
|
Number of
|
|
Year
|
|
Units
|
|
|
Units
|
|
|
Transactions
|
|
|
2002
|
|
|
53.75
|
|
|
|
8.35
|
%
|
|
|
76
|
|
2003
|
|
|
3
|
|
|
|
.47
|
%
|
|
|
6
|
|
2004
|
|
|
2
|
|
|
|
.31
|
%
|
|
|
3
|
|
2005
|
|
|
4
|
|
|
|
.62
|
%
|
|
|
11
|
|
2006
|
|
|
2
|
|
|
|
.31
|
%
|
|
|
2
|
|
Portfolio II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Percentage of
|
|
|
|
|
|
|
of
|
|
|
Outstanding
|
|
|
Number of
|
|
Year
|
|
Units
|
|
|
Units
|
|
|
Transactions
|
|
|
2002
|
|
|
28.5833
|
|
|
|
10.71
|
%
|
|
|
33
|
|
2003
|
|
|
4
|
|
|
|
1.5
|
%
|
|
|
3
|
|
2004
|
|
|
.5
|
|
|
|
.19
|
%
|
|
|
1
|
|
2005
|
|
|
1.5
|
|
|
|
.56
|
%
|
|
|
2
|
|
2006
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Neither Aimco nor any of its affiliates have made any purchases
of interests in either Partnership by Aimco or its affiliates
within the past two years.
71
Beneficial
Ownership of Interests in Your Partnership
Through subsidiaries, the Aimco Operating Partnership and its
affiliates currently own 119 units of limited partnership
interest in Portfolio I representing 18.48% of the outstanding
limited partnership interests, along with the 1.99% general
partner interest for a combined ownership in Portfolio I of
20.47%. The Aimco Operating Partnership and its affiliates
currently own 67.42 units of limited partnership interest
in Portfolio II representing 25.25% of the outstanding
limited partnership interests, along with the 2% general partner
interest for a combined ownership in Portfolio II of
27.25%. VMS is owned 70.69% by Portfolio I and 29.31% by
Portfolio II which results in the Aimco Operating
Partnership and its affiliates currently owning 22.47% of VMS.
Except as set forth in this proxy statement-prospectus, neither
the Aimco Operating Partnership nor, to the best of its
knowledge, any of its affiliates, (i) beneficially owns or
has a right to acquire any units, (ii) has effected any
transactions in the units in the past two years, or
(iii) has any contract, arrangement, understanding or
relationship with any other person with respect to any
securities of your partnership, including, but not limited to,
contracts, arrangements, understandings or relationships
concerning transfer or voting thereof, joint ventures, loan or
option arrangements, puts or calls, guarantees of loans,
guarantees against loss or the giving or withholding of proxies.
In addition, to the knowledge of the Managing General Partner,
no other person or entity owns of record or beneficially more
than 5% of the outstanding interest of either Portfolio I or
Portfolio II as of December 31, 2005.
Compensation
Paid to the Managing General Partner and its
Affiliates
The following table shows, for each of the years indicated,
compensation paid to your Managing General Partner and its
affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
|
|
|
|
|
|
|
|
Fees,
|
|
|
Property
|
|
|
|
|
|
|
Expense and
|
|
|
Management
|
|
|
|
|
Year
|
|
Interest(1)
|
|
|
Fees
|
|
|
Total
|
|
|
2002
|
|
$
|
4,750,000
|
|
|
$
|
1,289,000
|
|
|
$
|
6,039,000
|
|
2003
|
|
|
3,973,000
|
|
|
|
1,253,000
|
|
|
|
5,222,000
|
|
2004
|
|
|
3,855,000
|
|
|
|
1,201,000
|
|
|
|
5,056,000
|
|
2005
|
|
|
4,507,000
|
|
|
|
1,278,000
|
|
|
|
5,785,000
|
|
2006 (through September 30
unaudited)
|
|
|
4,224,000
|
|
|
|
1,024,000
|
|
|
|
5,248,000
|
|
|
|
|
(1) |
|
Excludes amortization of the mortgage participation liability.
See Selected Financial Information of VMS for more
information. |
Management
VMS and the Partnerships have no directors or officers. The
Managing General Partner manages substantially all of the
affairs and has general responsibility in all matters affecting
the business of VMS. The names of the directors and executive
officers of the Managing General Partner, their ages and the
nature of all positions with the Managing General Partner
presently held by them are set forth on Annex A and are
incorporated herein by reference. There are no family
relationships between or among any directors or officers.
The directors and officers of the Managing General Partner with
authority over VMS are all employees of subsidiaries of Aimco.
Aimco has adopted a code of ethics that applies to such
directors and officers that is posted on Aimcos website
(www.aimco.com). Aimcos website is not incorporated by
reference to this filing.
Transactions
with Affiliates
VMS has no employees and depends on the Managing General Partner
and its affiliates for the management and administration of all
VMS activities. The Revised and Amended Asset Management
Agreement provides for (i) certain payments to affiliates
for real estate advisory services and asset management of
Properties for an annual compensation of $300,000, adjusted
annually by the consumer price index and (ii) reimbursement
of certain expenses incurred by affiliates on behalf of VMS up
to $100,000 per annum.
72
Asset management fees of approximately $257,000, $351,000,
$323,000 and $325,000 were charged by affiliates of the Managing
General Partner for the nine months ended September 30,
2006 and years ended December 31, 2005, 2004 and 2003,
respectively. At September 30, 2006, approximately $86,000
of such fees were owed.
Affiliates of the Managing General Partner receive a percentage
of the gross receipts from all of the Properties as compensation
for providing property management services. VMS paid, or accrued
for payment, to such affiliates approximately $1,024,000,
$1,278,000, $1,201,000 and $1,253,000 for the nine months ended
September 30, 2006 and years ended December 31, 2005,
2004 and 2003, respectively. At September 30, 2006, no such
fees were owed.
Affiliates of the Managing General Partner charged VMS
reimbursement of accountable administrative expenses amounting
to approximately $75,000 for the nine months ended
September 30, 2006 and $100,000 for each of the years ended
December 31, 2005, 2004 and 2003. At September 30,
2006, approximately $25,000 of such reimbursements were owed.
During the nine months ended September 30, 2006, and years
ended December 31, 2005, 2004 and 2003, an affiliate of the
Managing General Partner provided construction management
services to the Partnership in connection with necessary capital
improvements to the Properties. The Managing General Partner
charged fees related to its provision of these construction
management services of approximately $235,000, $174,000, $35,000
and $130,000, respectively, net of the refunds discussed below.
The construction management service fees are calculated based on
a percentage of additions to investment properties. During the
third quarter of 2005, the Managing General Partner determined
that approximately $398,000 of such fees previously charged in
2005 and approximately $133,000 of such fees previously charged
in 2004 should not have been charged under the terms of the
Partnerships agreements of limited partnership and
refunded the total to VMS during the first quarter of 2006.
Prior to December 31, 2005, approximately $239,000 of the
total amount that was mistakenly charged was refunded. At
December 31, 2005, the amount to be refunded of
approximately $292,000 was included in receivables and deposits.
The junior mortgage indebtedness of approximately $21,498,000,
$22,674,000 and $22,123,000 at September 30, 2006,
December 31, 2005 and 2004, respectively, is held by an
affiliate of the Managing General Partner. The monthly principal
and interest payments are based on monthly excess cash flow for
each Property, as defined in the mortgage agreement. During the
nine months ended September 30, 2006 and years ended
December 31, 2005, 2004 and 2003, VMS recognized interest
expense with respect to such junior mortgage indebtedness of
approximately $1,822,000, $2,454,000, $2,444,000, and
$2,534,000, respectively.
An affiliate of the Managing General Partner received
bookkeeping reimbursements in the amount of approximately
$93,000 for the nine months ended September 30, 2006 and
$123,000 for each of the years ended December 31, 2005,
2004, and 2003.
At September 30, 2006, VMS owed loans of approximately
$10,526,000 to an affiliate of the Managing General Partner plus
accrued interest thereon of approximately $1,875,000. These
loans were made in accordance with the Joint Venture Agreement
of VMS and accrue interest at the prime rate plus 3% (11.25% at
September 30, 2006). VMS recognized interest expense of
approximately $942,000, $848,000, $407,000 and $287,000 during
the nine months ended September 30, 2006 and years ended
December 31, 2005, 2004 and 2003, respectively. During the
nine months ended September 30, 2006, an affiliate of the
Managing General Partner loaned five of the properties
approximately $1,432,000 to cover outstanding capital
improvement payables and two properties approximately $311,000
to cover operating expenses. During the nine months ended
September 30, 2006 and year ended December 31, 2005,
VMS paid approximately $856,000 and $2,841,000, respectively, of
principal and approximately $6,000 and $895,000, respectively,
of accrued interest on loans owed to an affiliate of the
Managing General Partner. No amounts were paid during the year
ended December 31, 2004.
Prepetition property management fees were approved by the
Bankruptcy Court for payment to a former affiliate. This allowed
claim may be paid only from available VMS cash. At
September 30, 2006, the outstanding balance of
approximately $79,000 was included in other liabilities.
Certain affiliates of the former general partners and the
VMS/Stout Venture may be entitled to receive various fees upon
disposition of the Properties. These fees will be paid from the
disposition proceeds and are subordinated
73
to the distributions required by the bankruptcy plan. There were
no property dispositions for which proceeds were received during
the nine months ended September 30, 2006 and years ended
December 31, 2005, 2004, and 2003. The Managing General
Partner does not expect that these fees will be paid as a result
of the Transactions.
VMS insures its properties up to certain limits through coverage
provided by Aimco which is generally self-insured for a portion
of losses and liabilities related to workers compensation,
property casualty, general liability and vehicle liability. VMS
insures its properties above the Aimco limits through insurance
policies obtained by Aimco from insurers unaffiliated with its
Managing General Partner. During the nine months ended
September 30, 2006 and 2005, Aimco and its affiliates
charged VMS approximately $800,000 and $457,000, respectively,
for insurance coverage and fees associated with policy claims
administration.
SELECTED
FINANCIAL INFORMATION OF VMS
The summarized financial information of VMS set forth below for
the years ended December 31, 2005, 2004 and 2003 is based
on audited financial statements that are contained in VMSs
Annual Report on
Form 10-K.
The summarized financial information set forth below for the
nine months ended September 30, 2006 is based on the
unaudited financial statements that are contained in VMSs
Quarterly Report on
Form 10-Q.
This information should be read in conjunction with such
financial statements, including the notes thereto, and
Managements Discussion and Analysis or Plan of
Operation in VMSs Annual Report on
Form 10-K
for the year ended December 31, 2005 and Quarterly Report
on
Form 10-Q
for the nine months ended September 30, 2006.
VMS
National Properties Joint Venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Operating Data:
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per unit data)
|
|
|
Total Revenues
|
|
$
|
26,696
|
|
|
$
|
24,420
|
|
|
$
|
33,053
|
|
|
$
|
30,574
|
|
|
$
|
31,531
|
|
Loss from Continuing Operations
|
|
|
(15,776
|
)
|
|
|
(7,166
|
)
|
|
|
(9,455
|
)
|
|
|
(9,202
|
)
|
|
|
(7,134
|
)
|
Net loss
|
|
|
(15,776
|
)
|
|
|
(7,166
|
)
|
|
|
(9,455
|
)
|
|
|
(9,202
|
)
|
|
|
(7,134
|
)
|
Loss from Continuing Operations
per NRP I unit
|
|
|
(16,970
|
)
|
|
|
(7,710
|
)
|
|
|
(10,171
|
)
|
|
|
(9,899
|
)
|
|
|
(7,674
|
)
|
Loss from Continuing Operations
per NRP II unit
|
|
|
(16,970
|
)
|
|
|
(7,708
|
)
|
|
|
(10,172
|
)
|
|
|
(9,898
|
)
|
|
|
(7,674
|
)
|
Net loss per NRP I unit
|
|
|
(16,970
|
)
|
|
|
(7,710
|
)
|
|
|
(10,171
|
)
|
|
|
(9,899
|
)
|
|
|
(7,674
|
)
|
Net loss per NRP II unit
|
|
|
(16,970
|
)
|
|
|
(7,708
|
)
|
|
|
(10,172
|
)
|
|
|
(9,898
|
)
|
|
|
(7,674
|
)
|
Distributions per NRP I unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions per NRP II unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit of earnings to fixed
charges
|
|
$
|
(15,744
|
)
|
|
$
|
(7,188
|
)
|
|
$
|
(9,473
|
)
|
|
$
|
(9,202
|
)
|
|
$
|
(7,146
|
)
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
1,864
|
|
|
$
|
2,136
|
|
|
$
|
2,419
|
|
|
$
|
2,064
|
|
|
$
|
1,761
|
|
Real Estate, Net of Accumulated
Depreciation
|
|
|
46,250
|
|
|
|
49,525
|
|
|
|
49,024
|
|
|
|
49,354
|
|
|
|
53,059
|
|
Total Assets
|
|
|
51,975
|
|
|
|
56,119
|
|
|
|
54,823
|
|
|
|
55,279
|
|
|
|
58,010
|
|
Mortgage Notes Payable
|
|
|
117,704
|
(1)
|
|
|
120,514
|
(2)
|
|
|
120,561
|
(3)
|
|
|
121,992
|
(4)
|
|
|
124,242
|
(5)
|
Mortgage Participation
Liability(6)
|
|
|
39,742
|
|
|
|
23,864
|
|
|
|
25,505
|
|
|
|
19,265
|
|
|
|
13,732
|
|
Notes Payable(7)
|
|
|
42,060
|
|
|
|
42,060
|
|
|
|
42,060
|
|
|
|
42,060
|
|
|
|
42,060
|
|
Deferred Gain on Extinguishment of
Debt(8)
|
|
|
42,225
|
|
|
|
42,225
|
|
|
|
42,225
|
|
|
|
42,225
|
|
|
|
42,225
|
|
VMS National Residential Portfolio
I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Partners Deficit
|
|
|
(4,229
|
)
|
|
|
(3,973
|
)
|
|
|
(4,006
|
)
|
|
|
(3,872
|
)
|
|
|
(3,742
|
)
|
Limited Partners Deficit
|
|
|
(141,667
|
)
|
|
|
(129,153
|
)
|
|
|
(130,738
|
)
|
|
|
(124,188
|
)
|
|
|
(117,813
|
)
|
Partners Deficit
|
|
|
(145,896
|
)
|
|
|
(133,126
|
)
|
|
|
(134,744
|
)
|
|
|
(128,060
|
)
|
|
|
(121,555
|
)
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Operating Data:
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per unit data)
|
|
|
VMS National Residential
Portfolio II:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Partners Deficit
|
|
|
(1,768
|
)
|
|
|
(1,662
|
)
|
|
|
(1,675
|
)
|
|
|
(1,620
|
)
|
|
|
(1,566
|
)
|
Limited Partners Deficit
|
|
|
(59,430
|
)
|
|
|
(54,241
|
)
|
|
|
(54,899
|
)
|
|
|
(52,183
|
)
|
|
|
(49,540
|
)
|
Partners Deficit
|
|
|
(61,198
|
)
|
|
|
(55,903
|
)
|
|
|
(56,574
|
)
|
|
|
(53,803
|
)
|
|
|
(51,106
|
)
|
Total Partners Deficit
|
|
$
|
(207,094
|
)
|
|
$
|
(189,029
|
)
|
|
$
|
(191,318
|
)
|
|
$
|
(181,863
|
)
|
|
$
|
(172,661
|
)
|
Total Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per NRP I unit
|
|
$
|
(219,980
|
)
|
|
$
|
(200,548
|
)
|
|
$
|
(203,009
|
)
|
|
$
|
(192,839
|
)
|
|
$
|
(182,939
|
)
|
Book value per NRP II unit
|
|
$
|
(222,584
|
)
|
|
$
|
(203,150
|
)
|
|
$
|
(205,614
|
)
|
|
$
|
(195,442
|
)
|
|
$
|
(185,543
|
)
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
$
|
(555
|
)
|
|
$
|
72
|
|
|
$
|
355
|
|
|
$
|
303
|
|
|
$
|
(1,048
|
)
|
Net cash provided by operating
activities
|
|
|
5,254
|
|
|
|
3,442
|
|
|
|
6,257
|
|
|
|
5,003
|
|
|
|
6,387
|
|
|
|
|
(1) |
|
Includes junior mortgages of $21,498 due to an affiliate |
|
(2) |
|
Includes junior mortgages of $22,104 due to an affiliate |
|
(3) |
|
Includes junior mortgages of $22,674 due to an affiliate |
|
(4) |
|
Includes junior mortgages of $22,123 due to an affiliate |
|
(5) |
|
Includes junior mortgages of $22,521 due to an affiliate |
|
(6) |
|
Represents 50% of the excess of the estimated fair market value
of the Properties after payment of certain claims. See
VMSs
Form 10-Q
for the period ended September 30, 2006 and
Form 10-K
for the year ended December 31, 2005 for further
information. |
|
(7) |
|
Represents amounts due to holders of the
Class 3-C
Claim under the Bankruptcy Plan. See VMSs
Form 10-Q
for the period ended September 30, 2006 and
Form 10-K
for the year ended December 31, 2005 for further
information. |
|
(8) |
|
Represents the difference between the face amount ($152,225) and
agreed valuation ($110,000) of the senior mortgages encumbering
the properties. This amount will become due if the Venture
cannot repay the agreed valuation amount upon maturity. See
VMSs
Form 10-Q
for the period ended September 30, 2006 and
Form 10-K
for the year ended December 31, 2005 for further
information. |
CONFLICTS
OF INTEREST
Aimco owns both the Managing General Partner of the Partnerships
and the general partner of the Aimco Operating Partnership, the
sole member of Aimco Properties, LLC. The Managing General
Partner has fiduciary duties to the limited partners of the
Partnerships, on the one hand, and to Aimco, as its sole
shareholder, on the other. As a result, in considering the
Affiliated Contribution, the Managing General Partner has
substantial conflicts of interest. As the Managing General
Partner of the Partnerships, it is obligated to seek a
transaction that is in the best interests of the limited
partners. In the Transactions, in which assets of VMS are to be
transferred, the Managing General Partner is obligated to seek
the greatest consideration for VMS. However, as a subsidiary of
Aimco, it seeks to minimize the cost to Aimco Properties, LLC
and its affiliates of acquiring the Affiliated Contribution
Properties. Dissolution of VMS would result in the loss of
management fees to the Managing General Partner and its
affiliates. Aimco or its affiliates also held the previously
outstanding junior mortgage and certain other indebtedness and
bankruptcy claims, including a mortgage participation, general
partner loans and other accrued fees, as further described
below, in an aggregate amount of $91,009,991 that was repaid as
a part of the refinancing of VMSs outstanding indebtedness
on January 19, 2007.
The Aimco Operating Partnership purchased the junior mortgages,
with an aggregate principal amount of $29,727,624, on
November 19, 1999 for $25,987,241. VMS has made the
required payments of principal and interest and, as of
January 19, 2007, the amount required to repay the
outstanding junior mortgages upon the closing
75
of the mortgage indebtedness of the Properties was an aggregate
amount of approximately $20,388,000 plus accrued interest of
approximately $117,000, which totals approximately $20,505,000.
See SPECIAL FACTORS RISK FACTORS and
VMS AND THE PARTNERSHIPS Transactions with
Affiliates.
In a series of transactions from November 1999 until
March 30, 2001, an affiliate of the Aimco Operating
Partnership acquired a portion of the
Class 3-C
Claim, an unsecured claim under the confirmed VMS
bankruptcy plan, for an aggregate cost of approximately
$13,809,159, and the MF VMS Interest, an additional
claim under the confirmed VMS bankruptcy plan for an aggregate
cost of approximately $9,800,000. An affiliate of the Aimco
Operating Partnership, as owner of a portion of the
Class 3-C
Claim, received approximately $37,175,145 from the proceeds of
the refinancing. Under the confirmed VMS bankruptcy plan, after
the
Class 3-C
Claim was paid, the owner of the MF VMS Interest also received
25% of any surplus in the partnership advance account
established under the confirmed VMS bankruptcy plan utilized to
pay the
Class 3-C
Claim (the PAA), which was $2,848,597. The remaining
75% of that surplus was paid to Portfolio I and
Portfolio II. After such payments were made, half of the
remaining sales proceeds were paid to Aimco as the owner of the
MF VMS Interest, and half of the remaining sales proceeds were
paid to VMS. This payment equaled $57,566,131 from the proceeds
of the refinancing and the Transactions. These estimates assume
that the Properties are contributed or sold as described herein,
although there can be no assurance that these estimates will be
accurate when the Transactions actually occur.
The general partner loans, and accrued interest on such loans,
are approximately $13.4 million as of September 30,
2006, including loans by an affiliate of the Managing General
Partner to certain of the Properties intended to cover
outstanding capital improvement payables. When the refinancing
described herein was obtained by VMS, these general partner
loans were paid off. See VMS AND THE
PARTNERSHIPS Transactions with Affiliates.
INFORMATION
CONCERNING AIMCO AND THE AIMCO OPERATING PARTNERSHIP
Aimco Properties, LLC is a Delaware limited liability company
whose sole member is the Aimco Operating Partnership. Through
Aimcos wholly owned subsidiaries, AIMCO-GP, Inc., the
managing general partner of the Aimco Operating Partnership, and
AIMCO-LP, Inc., Aimco holds approximately 90% of the Common
OP Units and equivalents of the Aimco Operating Partnership
as of September 30, 2006. Aimco conducts substantially all
of its business and owns substantially all of its assets through
the Aimco Operating Partnership.
Aimco is a Maryland corporation formed on January 10, 1994.
Aimco is a self-administered and self-managed real estate
investment trust engaged in the acquisition, ownership,
management and redevelopment of apartment properties. As of
September 30, 2006, Aimco owned or managed a portfolio of
1,290 apartment properties containing 224,837 apartment units
located in 47 states, the District of Columbia and Puerto
Rico. Based on apartment unit data compiled by the National
Multi Housing Council, as of January 1, 2006, Aimco was the
largest owner of multifamily apartment properties in the United
States. Aimcos portfolio includes garden style, mid-rise
and high-rise properties and Aimco serves approximately one
million residents per year.
Aimco owns an equity interest in, and consolidates the majority
of, the properties in its owned real estate portfolio. These
properties represent the consolidated real estate holdings in
its financial statements (consolidated properties).
In addition, Aimco has an equity interest in, but does not
consolidate, certain properties that are accounted for under the
equity method. These properties represent the investment in
unconsolidated real estate partnerships in its financial
statements (unconsolidated properties).
Additionally, Aimco manages (both property and asset) but does
not own an equity interest in other properties, although in
certain cases Aimco may indirectly
76
own generally less than one percent of the operations of such
properties through a partnership syndication or other fund. The
equity holdings and managed properties are as follows as of
September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio
|
|
|
|
Properties
|
|
|
Units
|
|
|
Consolidated properties (of which
Aimco manages 166,802 units)
|
|
|
721
|
|
|
|
167,305
|
|
Unconsolidated properties (of
which Aimco manages 8,799 units)
|
|
|
109
|
|
|
|
14,644
|
|
Property managed for third parties
|
|
|
42
|
|
|
|
3,610
|
|
Asset managed for third parties
|
|
|
418
|
|
|
|
39,278
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,290
|
|
|
|
224,837
|
|
|
|
|
|
|
|
|
|
|
The Managing General Partner is a wholly-owned subsidiary of
AIMCO/IPT, a Delaware corporation. AIMCO/IPT is a wholly-owned
subsidiary of Aimco.
The principal executive offices of Aimco, the Aimco Operating
Partnership, Aimco Properties, LLC,
AIMCO-GP,
and AIMCO/IPT are located at 4582 South Ulster Street Parkway,
Suite 1100, Denver, Colorado 80237, and their telephone
number is
(303) 757-8101.
The names, positions and business addresses of the directors and
executive officers of Aimco, the Aimco Operating Partnership,
Aimco Properties, LLC, AIMCO-GP and AIMCO/IPT, as well as a
biographical summary of the experience of such persons for the
past five years or more, are set forth on Annex A attached
hereto and are incorporated in this proxy statement-prospectus
by reference.
During the past five years, none of the VMS Related Parties nor,
to the best of their knowledge, any of the persons listed in
Annex A (i) has been convicted in a criminal
proceeding (excluding traffic violations or similar
misdemeanors), or (ii) was a party to a civil proceeding of
a judicial or administrative body of competent jurisdiction and
as a result of such proceeding was or is subject to a judgment,
decree or final order enjoining future violations of, or
prohibiting activities subject to, federal or state securities
laws, or finding any violation with respect to such laws.
UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
TRANSACTIONS
The following is a discussion of the material United States
federal income tax consequences of the sales of the Unaffiliated
Sale Properties, the contribution and sale of the Affiliated
Contribution Properties, and related transactions, and is based
upon the current Internal Revenue Code, the Treasury
Regulations, rulings issued by the IRS, and judicial decisions,
all in effect as of the date of this proxy statement-prospectus
and all of which are subject to change or differing
interpretations, possibly with retroactive effect. This summary
does not purport to discuss all aspects of United States federal
income taxation which may be important to a particular investor
in light of its investment or tax circumstances, or to certain
types of investors subject to special tax rules (including
financial institutions, broker-dealers, insurance companies, and
tax-exempt organizations and foreign investors, as determined
for United States federal income tax purposes). This summary is
also based on the assumptions that the operation of Aimco, the
Aimco Operating Partnership, Aimco Properties, LLC and the
limited liability companies and limited partnerships in which
they own controlling interests (collectively, the
Subsidiary Partnerships) will be in accordance with
their respective organizational documents and partnership
agreements. This summary assumes that investors will hold their
Common OP Units as capital assets (generally, property held
for investment). No advance ruling from the IRS has been or will
be sought regarding the tax status of the Aimco Operating
Partnership, or the tax consequences relating to the Aimco
Operating Partnership or an investment in Common OP Units.
No assurance can be given that the IRS would not assert, or that
a court would not sustain, a position contrary to any of the tax
aspects set forth below. In addition, this discussion does not
address any state, local, or other tax consequences. A limited
partner could be subject, however, to income taxation by state,
local, or other taxing authorities where the Properties are
located or where the limited partner resides. The Partnerships
also may be obligated to withhold state or local income taxes
from any proceeds allocated or distributed to a limited partner,
which may be creditable against the tax liability of a limited
partner. Limited partners are urged to consult their tax
advisors as to the specific tax consequences to them of the
sales of the Properties and related transactions.
77
Sale of
the Unaffiliated Sale Properties
If the Unaffiliated Sale Properties are sold, which sales may
occur on a
property-by-property
basis, VMS will recognize gain as a result of the sales. The
amount of gain recognized by VMS will be equal to the excess of
the sum of the cash and other property received in exchange for
the Unaffiliated Sale Properties plus the amount of liabilities
assumed by the purchasers, over VMS adjusted basis in the
Unaffiliated Sale Properties. The gain recognized with respect
to the Unaffiliated Sale Properties will be allocated to the
Partnerships, and from the Partnerships to the partners,
including limited partners, in accordance with the relevant
partnership agreements. The total amount of gain that will be
recognized by limited partners in the event the Unaffiliated
Sale Properties are sold is estimated to be $38,344 per
Portfolio I nondefaulted unit, $17,382 per Portfolio I
defaulted unit, $38,231 per Portfolio II nondefaulted unit
and $17,884 per Portfolio II defaulted unit, assuming
a purchase price (including assumed liabilities) of $60,188,500
and basis of the properties as of September 30, 2006. In
addition, tax consequences to particular limited partners may
vary depending on the effect of: (i) adjustments to the
basis of Partnership property with respect to a limited partner
that received its interest in the Partnership as a transferee
and (ii) the difference between the tax basis of property
of the Partnerships or VMS and the fair market value of such
property at the time such property was contributed to or
revalued by the Partnerships or VMS. Limited partners are urged
to consult their tax advisors as to their particular situations
and tax consequences.
Gain from a sale of real property such as the Unaffiliated Sale
Properties is generally taxed as Section 1231 gain that is
taxed at the same rates as capital gain income (generally 15%
for United States federal income tax purposes in the case of
individuals, trusts and estates). However, gain attributable to
unrealized receivables, including depreciation
recapture, will be treated as ordinary income. Additionally,
under special rules that apply to real property that has been
depreciated, it is expected that a substantial amount of the
gain from the sales will be taxed as unrecaptured
section 1250 gain. The maximum rate of tax that
unrecaptured section 1250 gain may be taxed at
is generally 25% for United States federal income tax purposes
in the case of individuals, trusts, and estates. The amounts of
unrecaptured section 1250 gain from the sales
are estimated to be $42,516 per Portfolio I nondefaulted
unit, $19,274 per Portfolio I defaulted unit,
$42,394 per Portfolio II nondefaulted unit and
$19,831 per Portfolio II defaulted unit, assuming a
purchase price (including assumed liabilities) of $60,188,500
and basis of the properties as of September 30, 2006. These
estimates are based upon information currently available to the
Managing General Partner. There can be no assurance that these
estimates will prove accurate. Each limited partner should
consult his or her tax advisor regarding the tax consequences to
him or her.
Gain in excess of depreciation recapture gain and unrecaptured
section 1250 gain generally will be taxed as
section 1231 gain, which may be taxed at capital gain rates
depending upon a limited partners individual tax
circumstances. If there were any section 1231 gain, the
special capital gains tax rate would apply only to individuals,
trusts, and estates.
The Partnerships will also recognize gain or loss equal to the
difference between: (i) the sum of the amount of cash
(including a deemed distribution of cash equal to the
Partnerships share, under applicable tax principles, of
the liabilities of VMS) and any other property distributed to
the Partnerships by VMS; and (ii) the Partnerships
adjusted basis in their interests in VMS after adjustment for
their share of any gain or loss from the operations of VMS and
from the sales. Gain or loss described in this paragraph
generally will be capital gain or loss. Such gain or loss will
be allocated to the Partnerships, and from the Partnerships to
the partners, including the limited partners.
A limited partner also will recognize gain or loss on the
liquidation of his or her interest in the Partnership to the
extent of the difference between: (i) the sum of the amount
of cash (including a deemed distribution of cash equal to the
limited partners share, under applicable tax principles,
of the liabilities of the Partnership) and other property
distributed to the limited partner by the Partnership; and
(ii) the limited partners adjusted basis in his or
her Partnership interest after adjustment for such
partners share of any gain or loss from the Partnership,
including gain or loss arising from the allocation of gain or
loss from VMS and the distribution or deemed distribution of
cash from VMS. Gain or loss recognized on the liquidation of a
limited partners interest generally will be treated as
capital gain or loss.
If a limited partner possesses suspended tax losses, tax
credits, or other items of tax benefit, such items may
potentially be used to reduce any tax liability that arises with
respect to the gain recognized as a result of the sales. The
determination of whether a limited partner possesses suspended
tax losses, tax credits, or other items of tax
78
benefit that may be used to reduce any gain resulting from the
sales will depend upon each limited partners individual
circumstances. Limited partners are urged to consult with their
tax advisors in this regard.
Distributions to a limited partner from the proceeds of the
sales, including any deemed distribution of cash to a limited
partner resulting from any assumption of VMS indebtedness in
connection with the sale of the Unaffiliated Sale Properties or
the repayment of VMS indebtedness, will be treated as a
nontaxable return of capital to the extent of such limited
partners basis in his interest in the Partnerships and
then as gain from the sale or exchange of such Partnership
interest to the extent in excess of such basis. A limited
partner may include in his basis in his Partnership interest any
gain recognized as a result of the sale of the Unaffiliated Sale
Properties. Generally, any gain recognized as a result of
distributions, including deemed distributions, by the
Partnerships will be capital gain except to the extent the gain
is considered to be attributable to unrealized receivables of
the Partnership or depreciation claimed with respect to the
Properties. In addition, proceeds available for distribution to
the limited partners from the sales after repayment of debts may
be less than the gain recognized by the Partnership that is
allocable to the partners, any gain that is recognized by a
limited partner as a result of the distributions made by the
Partnerships, and any tax liability resulting therefrom.
Accordingly, the limited partners may be required to use funds
from sources other than distributions from the Partnerships in
order to pay any tax liabilities that may arise as a result of
the foregoing.
The Unaffiliated Sale Properties have been substantially or
fully depreciated for United States federal income tax purposes.
As a result, it is likely that continued operation of the
Unaffiliated Sale Properties will likely generate income that
will be taxable to the limited partners because it is unlikely
that there will be adequate depreciation and other deductions
equal to or greater than the income generated from the
Unaffiliated Sale Properties. However, it is anticipated that
there will not be any cash available for distribution to the
limited partners because it is expected that all or
substantially all of the Unaffiliated Sale Properties cash
flow will be used to service VMSs liabilities. The
Partnerships also will continue to incur the administrative
costs of operation, including the cost of preparing and filing a
partnership tax return. If a limited partner possesses suspended
tax losses, tax credits, or other items of tax benefit, such
items may potentially be used to reduce any tax liability that
arises with respect to any net income taxable to the limited
partner as a result of the continued operation of the
Unaffiliated Sale Properties by the Partnerships. Limited
partners are urged to consult their tax advisors in this regard.
Each limited partner is urged to consult his or her tax
advisor regarding the specific tax consequences of the sales and
related transactions, including the application of federal,
state, local, foreign and other tax laws.
Contribution
and Sale of the Affiliated Contribution Properties
Generally, section 721 of the Internal Revenue Code
provides that neither VMS, as the contributing partner, nor
Aimco Properties, LLC will recognize a gain or loss, for United
States federal income tax purposes, upon a contribution of
property to Aimco Properties, LLC in exchange for Common OP
Units. However, to the extent that any limited partners receive
cash with respect to the Affiliated Contribution, VMS will
receive cash from Aimco Properties, LLC, and as a result will
recognize taxable income. No position is taken as to the
character of such taxable income as capital gain or ordinary
income. On the other hand, to the extent that limited partners
elect to receive Common OP Units, VMS is not expected to
recognize taxable income. Taxable income recognized by VMS as a
result of cash it received and liabilities assumed by the Aimco
Operating Partnership will pass through to the Partnerships, and
from the Partnerships to the partners, and therefore will be
taxable to the partners, including limited partners who elect to
receive Common OP Units. Thus the amount of taxable income
passed through from VMS to a limited partner who elects to
receive Common OP Units will depend, in part, on the extent
to which other limited partners receive cash or Common
OP Units in connection with the Affiliated Contribution.
The Partnerships will recognize gain or loss on the liquidation
of VMS equal to the difference between the sum of the amount of
cash distributed to the Partnerships and the Partnerships
adjusted basis in their Partnership interests after adjustment
for any gain or loss from operation of VMS, including from the
contribution of the Affiliated Contribution Properties and sale
of the Unaffiliated Sale Properties, through the liquidation of
VMS. Such gain or loss will be passed through, and will be
taxable, to the partners, including the limited partners who
receive Common OP Units.
A partner who receives cash in connection with the Affiliated
Contribution will recognize gain or loss on the liquidation of
his or her interest in the Partnership equal to the difference
between the sum of the amount of cash and
79
the partners adjusted basis in his or her Partnership
interest after adjustment for any gain or loss from operation of
the Partnership, including from the contribution and sale of the
Affiliated Contribution Properties and the liquidation of VMS,
through the Partnerships liquidation. The net gain or loss
recognized by a limited partner who receives cash is not
expected to vary depending on the extent to which other limited
partners receive cash or Common OP Units. Even if a limited
partner receiving cash has the same net gain or loss regardless
of the extent to which other limited partners receive cash or
Common OP Units, the character of that gain or loss may
vary. For example, gain recognized on the liquidation of a
limited partners interest generally will be treated as
capital gain, but will not be characterized as unrecaptured
section 1250 gain, even if a taxable sale of the underlying
assets would have given rise to unrecaptured section 1250
gain.
As discussed above, the limited partners of the Partnerships are
being given a choice as to the consideration they will receive
with respect to the Affiliated Contribution. The
Partnerships partnership agreements do not permit the
Partnerships to distribute any consideration other than cash in
liquidation of the interest of a limited partner. However, the
limited partners of the Partnerships may elect to waive the
right to receive any portion of the cash distribution with
respect to the Affiliated Contribution and receive Common OP
Units directly from the Aimco Operating Partnership instead.
Aimco and its affiliates which own limited partnership interests
in the Partnerships currently intend to waive their right to
receive any portion of the cash distribution with respect to the
Affiliated Contribution and receive Common OP Units instead.
Even though such limited partners will receive Common
OP Units directly from the Aimco Operating Partnership, it
is anticipated that applicable regulations will require the
limited partners to be treated as if they received the Common
OP Units as distributions from the Partnerships. VMS is
expected to be treated for tax purposes as if it transferred the
Affiliated Contribution Properties to the Aimco Operating
Partnership in exchange for both cash and Common OP Units,
and distributed the cash and Common OP Units to the
Partnerships, which distributed the cash and Common
OP Units to the limited partners. The Partnerships
partnership agreements also do not permit a special allocation
of gain to the limited partners receiving cash, even if such
special allocation would be permitted under applicable law.
Thus, VMS will recognize gain in connection with the Affiliated
Contribution to the extent that it requires cash to distribute
to the Partnerships and to the limited partners, and such gain
will be passed through, and will be taxable, to the partners,
including the limited partners who receive Common OP Units.
As a result, the receipt of cash by some limited partners will
have an adverse tax consequence on those limited partners who
choose to waive any portion of the cash distribution and receive
Common OP Units instead. In addition, tax consequences to
particular limited partners may vary depending on the effect of
(i) adjustments to the basis of Partnership property with
respect to a limited partner that received its interest in the
Partnership as a transferee and (ii) the difference between
the tax basis of property of the Partnerships or VMS and the
fair market value of such property at the time such property was
contributed to or received by the Partnerships or VMS. Limited
partners are urged to consult their tax advisors as to these
particular situations and tax consequences. If VMS and the
Partnerships have not disposed of all the Unaffiliated Sale
Properties at the time of the Affiliated Contribution, the
applicable regulations may not require that limited partners who
receive Common OP Units directly from the Aimco Operating
Partnership be treated for tax purposes as if they received the
Common OP Units instead from the Partnerships. In that
event, such limited partners might defer more gain than
otherwise would be possible, but more of the gain of the limited
partners who receive cash in connection with the Affiliated
Contribution might be characterized as unrecaptured
section 1250 gain than would otherwise have been required.
It is expected, however, that VMS will dispose of all the
Unaffiliated Sale Properties prior to the Affiliated
Contribution.
UNITED
STATES FEDERAL INCOME TAXATION OF THE AIMCO OPERATING
PARTNERSHIP AND COMMON OP UNITHOLDERS
THE UNITED STATES FEDERAL INCOME TAX TREATMENT OF HOLDERS OF
COMMON OP UNITS DEPENDS UPON DETERMINATIONS OF FACT AND
INTERPRETATIONS OF COMPLEX PROVISIONS OF UNITED STATES FEDERAL
INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE
AVAILABLE. ACCORDINGLY, YOU ARE URGED TO CONSULT YOUR TAX
ADVISOR REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL, AND
FOREIGN TAX CONSEQUENCES OF ACQUIRING, HOLDING, EXCHANGING, OR
OTHERWISE DISPOSING OF COMMON
80
OP UNITS AND OF AIMCOS ELECTION TO BE SUBJECT TO TAX, FOR
UNITED STATES FEDERAL INCOME TAX PURPOSES, AS A REAL ESTATE
INVESTMENT TRUST.
Partnership
Status
Aimco believes that the Aimco Operating Partnership is
classified as a partnership for United States federal income tax
purposes, and not as an association taxable as a corporation. No
assurance can be given, however, that the IRS will not challenge
the status of the Aimco Operating Partnership as a partnership.
Some partnerships are, for United States federal income tax
purposes, characterized not as partnerships but as associations
taxable as corporations or as publicly traded
partnerships taxable as corporations. A partnership will
be classified as a publicly traded partnership if interests
therein are traded on an established securities
market or are readily tradable on a
secondary market (or the substantial equivalent
thereof).
The Aimco Operating Partnership believes and intends to take the
position that the Aimco Operating Partnership should not be
classified as a publicly traded partnership because (i) the
OP Units are not traded on an established securities market
and (ii) the Aimco Operating Partnership currently believes
the OP Units should not be considered readily tradable on a
secondary market or the substantial equivalent thereof. The
determination of whether interests in a partnership are readily
tradable on a secondary market or the substantial equivalent
thereof, however, depends on various facts and circumstances
(including facts that are not within the control of the Aimco
Operating Partnership). Treasury Regulations generally effective
for taxable years beginning after December 31, 1995 (the
PTP Regulations) provide limited safe harbors,
which, if satisfied, will prevent a partnerships interests
from being treated as readily tradable on a secondary market or
the substantial equivalent thereof. Under a grandfather rule,
certain existing partnerships may rely on safe harbors contained
in IRS Notice 88-75 rather than on the safe harbors contained in
the PTP Regulations for all taxable years of the partnership
beginning before January l, 2006. The Aimco Operating
Partnership believes that it is subject to such grandfather
rule. The Aimco Operating Partnership may not have satisfied any
of the safe harbors in Notice 88-75 in its previous tax years.
In addition, because the Aimco Operating Partnerships
ability to satisfy a safe harbor in Notice 88-75 (or to the
extent applicable, a safe harbor in the PTP Regulations) may
involve facts that are not within its control, it is not
possible to predict whether the Aimco Operating Partnership will
satisfy a safe harbor in future tax years. The safe harbors are
not intended to be substantive rules for the determination of
whether partnership interests are readily tradable on a
secondary market or the substantial equivalent thereof, and
consequently, the failure to meet these safe harbors will not
necessarily cause the Aimco Operating Partnership to be treated
as a publicly traded partnership. No assurance can be given,
however, that the IRS will not assert that partnerships such as
the Aimco Operating Partnership constitute publicly traded
partnerships, or that facts and circumstances will not develop
which could result in the Aimco Operating Partnership being
treated as a publicly traded partnership.
If the Aimco Operating Partnership were classified as a publicly
traded partnership, it would nevertheless not be taxable as a
corporation as long as 90% or more of its gross income consists
of qualifying income. In general, qualifying income
includes interest, dividends, real property rents
(as defined by section 856 of the Internal Revenue Code)
and gain from the sale or disposition of real property. The
Aimco Operating Partnership believes that more than 90% of its
gross income consists of qualifying income and expects that more
than 90% of its gross income in future tax years will consist of
qualifying income. In such event, even if the Aimco Operating
Partnership were characterized as a publicly traded partnership,
it would not be taxable as a corporation. If the Aimco Operating
Partnership were characterized as a publicly traded partnership,
however, each Common OP Unitholder would be subject to
special rules under section 469 of the Internal Revenue
Code. No assurance can be given that the actual results of the
Aimco Operating Partnership operations for any one taxable year
will enable it to satisfy the qualifying income exception.
If the Aimco Operating Partnership were classified as an
association or publicly traded partnership taxable as a
corporation (because it did not meet the qualifying income
exception discussed above), it would be subject to tax at the
entity level as a regular corporation and Common
OP Unitholders would be subject to tax in the same manner
as stockholders of a corporation. The classification of the
Aimco Operating Partnership as an association or publicly traded
partnership taxable as a corporation could also result in a
substantial liability to Common OP Unitholders. Thus, the
Aimco Operating Partnership would be subject to United States
federal tax (and possibly increased state
81
and local taxes) on its net income, determined without reduction
for any distributions made to the Common OP Unitholders, at
regular United States federal corporate income tax rates,
thereby reducing the amount of any cash available for
distribution to the Common OP Unitholders, which reduction
could also materially and adversely impact the liquidity and
value of the Common OP Units. In addition, the Aimco
Operating Partnerships items of income, gain, loss,
deduction and expense would not be passed through to the Common
OP Unitholders and the Common OP Unitholders would not
be subject to tax on the income earned by the Aimco Operating
Partnership. Distributions received by a Common OP Unitholder
from the Aimco Operating Partnership, however, would be treated
as dividend income for United States federal income tax
purposes, subject to tax at reduced rates applicable to
dividends received by individuals and at ordinary income rates
for taxpayers that are not individuals to the extent of current
and accumulated earnings and profits of the Aimco Operating
Partnership, and the excess, if any, as a nontaxable return of
capital to the extent of the Common OP Unitholders
adjusted tax basis in his Aimco Operating Partnership interest
(without taking into account Partnership liabilities), and
thereafter as gain from the sale of a capital asset.
Characterization of the Aimco Operating Partnership as an
association or publicly traded partnership taxable as a
corporation would also result in the termination of Aimcos
status as a REIT for United States federal income tax purposes,
which would have a material adverse impact on Aimco.
No assurances can be given that the IRS would not challenge the
status of the Aimco Operating Partnership as a
partnership which is not publicly traded
for United States federal income tax purposes or that a court
would not reach a result contrary to such positions.
Accordingly, each prospective investor is urged to consult his
tax advisor regarding the classification and treatment of the
Aimco Operating Partnership as a partnership for
United States federal income tax purposes.
The following discussion assumes that the Aimco Operating
Partnership is, and will continue to be, classified and taxed as
a partnership for United States federal income tax purposes.
Taxation
of Common OP Unitholder
In general, a partnership is treated as a
pass-through entity for United States federal income
tax purposes and is not itself subject to United States federal
income taxation. Each partner of a partnership, however, is
subject to tax on his allocable share of partnership tax items,
including partnership income, gains, losses, deductions, and
expenses (Partnership Tax Items) for each taxable
year of the partnership ending within or with such taxable year
of the partner, regardless of whether he receives any actual
distributions from the partnership during the taxable year.
Generally, the characterization of any particular Partnership
Tax Item is determined at the partnership, rather than at the
partner level, and the amount of a partners allocable
share of such item is governed by the terms of the partnership
agreement.
No United States federal income tax will be payable by the Aimco
Operating Partnership. Instead, each Common OP Unitholder
will be (i) required to include in income his allocable
share of any Aimco Operating Partnership income or gains and
(ii) entitled to deduct his allocable share of any Aimco
Operating Partnership deductions or losses, but only to the
extent of the Common OP Unitholders adjusted tax basis in
his Aimco Operating Partnership interest and subject to the
at risk and passive activity loss rules
discussed below under the heading Limitations on
Deductibility of Losses. A Common OP Unitholders
allocable share of the Aimco Operating Partnerships
taxable income may exceed the cash distributions to the Common
OP Unitholder for any year if the Aimco Operating
Partnership retains its profits rather than distributing them.
Allocations
of the Aimco Operating Partnership Profits and Losses
For United States federal income tax purposes, a Common
OP Unitholders allocable share of the Aimco Operating
Partnerships Partnership Tax Items will be determined by
the Aimco Operating Partnership agreement if such allocations
either have substantial economic effect or are
determined to be in accordance with the Common
OP Unitholders interests in the Aimco Operating
Partnership. The manner in which Partnership Tax Items of the
Aimco Operating Partnership are allocated is described above. If
the allocations provided by the Aimco Operating Partnership
agreement were successfully challenged by the IRS, the
redetermination of the allocations to a particular Common
OP Unitholder for United States federal income tax purposes
may be less favorable than the allocation set forth in the Aimco
Operating Partnership agreement.
82
Tax Basis
of a Partnership Interest
A partners adjusted tax basis in his partnership interest
is relevant, among other things, for determining (i) gain
or loss upon a taxable disposition of his partnership interest,
(ii) gain upon the receipt of partnership distributions,
and (iii) the limitations imposed on the use of partnership
deductions and losses allocable to such partner. Generally, the
adjusted tax basis of a Common OP Unitholders
interest in the Aimco Operating Partnership is equal to
(A) the sum of the adjusted tax basis of the property
contributed by the Common OP Unitholder to the Aimco
Operating Partnership in exchange for an interest in the Aimco
Operating Partnership and the amount of cash, if any,
contributed by the Common OP Unitholder to the Aimco
Operating Partnership, (B) reduced, but not below zero, by
the Common OP Unitholders allocable share of Aimco
Operating Partnership distributions, deductions, and losses,
(C) increased by the Common OP Unitholders
allocable share of Aimco Operating Partnership income and gains,
and (D) increased by the OP Unitholders
allocable share of Aimco Operating Partnership liabilities and
decreased by the Common OP Unitholders liabilities
assumed by the Aimco Operating Partnership. However, in the case
of Common OP Units received in connection with the
Affiliated Contribution, instead of the adjusted tax basis of
the property contributed by the Common OP Unitholder in
(A) above, the determination under (A) would be based
on the adjusted basis of the Common OP Unitholders
basis in the Partnership immediately before the receipt of such
units as adjusted by any gain allocable to such partner with
respect to the Affiliated Contribution or distributions from VMS
and the Partnerships.
Cash
Distributions
Cash distributions received from a partnership do not
necessarily correlate with income earned by the partnership as
determined for United States federal income tax purposes. Thus,
a Common OP Unitholders United States federal
income tax liability in respect of his allocable share of the
Aimco Operating Partnership taxable income for a particular
taxable year may exceed the amount of cash, if any, received by
the Common OP Unitholder from the Aimco Operating
Partnership during such year.
If cash distributions, including a deemed cash
distribution as discussed below, received by a Common
OP Unitholder in any taxable year exceed his allocable
share of the Aimco Operating Partnership taxable income for the
year, the excess will constitute, for United States federal
income tax purposes, a return of capital to the extent of such
Common OP Unitholders adjusted tax basis in his Aimco
Operating Partnership interest. Such return of capital will
reduce, but not below zero, the adjusted tax basis of the Aimco
Operating Partnership interest held by the Common
OP Unitholder. If a Common OP Unitholders tax basis
in his Aimco Operating Partnership interest is reduced to zero,
a subsequent cash distribution received by the Common
OP Unitholder will be subject to tax as capital gain
and/or
ordinary income, but only if, and to the extent that, such
distribution exceeds the subsequent positive adjustments, if
any, to the tax basis of the Common OP Unitholders
Aimco Operating Partnership interest as determined at the end of
the taxable year during which such distribution is received. A
decrease in a Common OP Unitholders share of the
Aimco Operating Partnership liabilities resulting from the
payment or other settlement, or reallocation of such liabilities
is generally treated, for United States federal income tax
purposes, as a deemed cash distribution. A decrease in a Common
OP Unitholders percentage interest in the Aimco
Operating Partnership because of the issuance by the Aimco
Operating Partnership of additional Common OP Units or
otherwise, may decrease a Common OP Unitholders share
of nonrecourse liabilities of the Aimco Operating Partnership
and thus, may result in a corresponding deemed distribution of
cash.
A non-pro rata distribution (or deemed distribution) of money or
property may result in ordinary income to a Common
OP Unitholder, regardless of such Common
OP Unitholders tax basis in his Common OP Units,
if the distribution reduces such Common
OP Unitholders share of the Aimco Operating
Partnerships Section 751 Assets.
Section 751 Assets are defined by the Internal
Revenue Code to include unrealized receivables or
inventory items. Among other things,
unrealized receivables include amounts attributable
to previously claimed depreciation deductions on certain types
of property. To the extent that such a reduction in a Common
OP Unitholders share of Section 751 Assets
occurs, the Aimco Operating Partnership will be deemed to have
distributed a proportionate share of the Section 751 Assets
to the Common OP Unitholder followed by a deemed exchange
of such assets with the Aimco Operating Partnership in return
for the non-pro rata portion of the actual distribution made to
such Common OP Unitholder. This deemed exchange will
generally result in the realization of ordinary income under
Section 751(b) by the Common OP Unitholder. Such income
will equal the excess of (1) the
83
non-pro rata portion of such distribution over (2) the
Common OP Unitholders tax basis in such Common
OP Unitholders share of such Section 751 Assets
deemed relinquished in the exchange.
Tax
Consequences Relating to Contributed Assets.
If VMS is deemed, for tax purposes, to transfer property to the
Aimco Operating Partnership in exchange for a Common
OP Unit, and the adjusted tax basis of such property
differs from its fair market value, the Aimco Operating
Partnership Tax Items must be allocated in a manner such that
VMS (or the partners who receive Common OP Units in the
Affiliated Contribution) are charged with, or benefits from, the
unrealized gain or unrealized loss associated with such property
at the time of the contribution. Where a partner contributes
cash to a partnership that holds appreciated property, Treasury
Regulations provide for a similar allocation of such items to
the other partners. These rules may apply to a contribution by
Aimco to the Aimco Operating Partnership of cash proceeds
received by Aimco from the offering of its stock. Such
allocations are solely for United States federal income tax
purposes and do not affect the book capital accounts or other
economic or legal arrangements among the Common
OP Unitholders. The general purpose underlying this
provision is to specially allocate certain Partnership Tax Items
in order to place both the noncontributing partners and VMS (or
the partners who receive Common OP Units in the Affiliated
Contribution) in the same tax position that they would have been
in had VMS contributed property with an adjusted tax basis equal
to its fair market value. Treasury Regulations provide the Aimco
Operating Partnership with several alternative methods and allow
the Aimco Operating Partnership to adopt any other reasonable
method to make allocations to reduce or eliminate Book-Tax
Differences (as defined below). The general partner, in its sole
and absolute discretion and in a manner consistent with Treasury
Regulations, will select and adopt a method of allocating Aimco
Operating Partnership Tax Items for purposes of eliminating such
disparities. In this regard, the general partner, while acting
in its capacity as general partner of the Aimco Operating
Partnership, is not required to take into account the tax
consequences to the holders of Common OP Units of its
action in such capacity, and may elect a method that is less
favorable to holders of Common OP Units than other methods.
In general, certain Common OP Unitholders will be allocated
lower amounts of depreciation deductions for tax purposes and
increased amounts of taxable income and gain on the sale by the
Aimco Operating Partnership or other Subsidiary Partnerships of
the Affiliated Contribution Properties. Accordingly, in the
event the Aimco Operating Partnership disposes of an Affiliated
Contribution Property, income attributable to the Book-Tax
Difference of such contributed property generally will be
allocated to VMS (or the partners who receive Common
OP Units in the Affiliated Contribution), and all Common OP
Unitholders generally will be allocated only their share of
gains attributable to appreciation, if any, occurring after the
contribution of the contributed property. These incremental
allocations of income will not result in additional cash
distributions to VMS (or the partners who receive Common
OP Units in the Affiliated Contribution), with the result
that VMS (or the partners who receive Common OP Units in
the Affiliated Contribution) may not receive cash sufficient to
pay the taxes attributable to such income. These allocations
will tend to eliminate the Book-Tax Differences with respect to
the contributed property over the life of the Aimco Operating
Partnership. However, the special allocation rules of
section 704(c) do not always entirely rectify the Book-Tax
Difference on an annual basis or with respect to a specific
taxable transaction such as a sale. Thus, the carryover basis of
the contributed property in the hands of the Aimco Operating
Partnership may cause a noncontributing Common OP Unitholder to
be allocated lower amounts of depreciation and other deductions
for tax purposes than would be allocated to such Common
OP Unitholder if the contributed property had a tax basis
equal to its fair market value at the time of contribution, and
possibly to be allocated taxable gain in the event of a sale of
the contributed property in excess of the economic or book
income allocated to it as a result of such sale.
Disguised
Sale Rules
As described above, if the partners who receive Common
OP Units in the Affiliated Contribution receive or are
deemed to receive for United States federal income tax purposes,
cash or other consideration in addition to Common OP Units
upon the contribution of property to the Aimco Operating
Partnership and for at least two years thereafter (other than
certain safe harbor distributions), the transaction will likely
be treated as part contribution of property and part sale of
property under the disguised sale rules. The
disguised sale rules may also apply where property is
transferred to the Aimco Operating Partnership subject to
certain liabilities. In such event, the contributing partner
84
will recognize gain or loss with respect to the portion of the
property that is deemed to be sold to the Aimco Operating
Partnership. If the disguised sale rules apply, all or a portion
of the liabilities associated with the contributed property may
be treated as consideration received by the partners who receive
Common OP Units in the Affiliated Contribution in a sale of
the property to the Aimco Operating Partnership. The disguised
sale rules may apply if the issuance of Common OP Units in
connection with the Contribution Agreement is integrated with
any other acquisition between Aimco and VMS or any related
party. For example, the IRS may assert that any redemption or
exchange for several years between the Aimco Operating
Partnership and VMS constitutes an integrated disguised
sale that may result in taxation. No assurances can be
given that the IRS would not be successful in such an assertion.
You are urged to consult your tax advisor regarding the
application of the disguised sale rules.
Limitations
on Deductibility of Losses
Basis Limitation. To the extent that a Common
OP Unitholders allocable share of Aimco Operating
Partnership deductions and losses exceeds his adjusted tax basis
in his Aimco Operating Partnership interest at the end of the
taxable year in which the losses and deductions flow through,
the excess losses and deductions cannot be utilized, for United
States federal income tax purposes, by the Common
OP Unitholder in such year. The excess losses and
deductions may, however, be utilized in the first succeeding
taxable year in which, and to the extent that, there is an
increase in the tax basis of the Aimco Operating Partnership
interest held by such Common OP Unitholder, but only to the
extent permitted under the at risk and passive
activity loss rules discussed below.
At Risk Limitation. Under the
at risk rules of section 465 of the Internal
Revenue Code, a noncorporate taxpayer and a closely held
corporate taxpayer are generally not permitted to claim a
deduction, for United States federal income tax purposes, in
respect of a loss from an activity, whether conducted directly
by the taxpayer or through an investment in a partnership, to
the extent that the loss exceeds the aggregate dollar amount
which the taxpayer has at risk in such activity at
the close of the taxable year. To the extent that losses are not
permitted to be used in any taxable year, such losses may be
carried over to subsequent taxable years and may be claimed as a
deduction by the taxpayer if, and to the extent that, the amount
which the taxpayer has at risk is increased.
Provided certain requirements are met, the at risk
rules generally do not apply to losses arising from any activity
that constitutes the holding of real property, which
the holders of a Common OP Unit generally should constitute.
Passive Activity Loss
Limitation. The passive activity loss rules of
section 469 of the Internal Revenue Code limit the use of
losses derived from passive activities, which generally includes
an investment in limited partnership interests such as the
Common OP Units. If an investment in a Common OP Unit
is treated as a passive activity, a Common OP Unitholder who is
an individual investor, as well as certain other types of
investors, would not be able to use losses from the Aimco
Operating Partnership to offset nonpassive activity income,
including salary, business income, and portfolio income (e.g.,
dividends, interest, royalties, and gain on the disposition of
portfolio investments) received during the taxable year. Passive
activity losses that are disallowed for a particular taxable
year may, however, be carried forward to offset passive activity
income earned by the Common OP Unitholder in future taxable
years. In addition, such disallowed losses may be claimed as a
deduction, subject to the basis and at risk limitations
discussed above, upon a taxable disposition of a Common
OP Unitholders entire interest in the Aimco Operating
Partnership, regardless of whether such Common OP Unitholder has
received any passive activity income during the year of
disposition.
If the Aimco Operating Partnership were characterized as a
publicly traded partnership, each Common OP Unitholder
would be required to treat any loss derived from the Aimco
Operating Partnership separately from any income or loss derived
from any other publicly traded partnership, as well as from
income or loss derived from other passive activities. In such
case, any net losses or credits attributable to the Aimco
Operating Partnership which are carried forward may only be
offset against future income of the Aimco Operating Partnership.
Moreover, unlike other passive activity losses, suspended losses
attributable to the Aimco Operating Partnership would only be
allowed upon the complete disposition of the Common
OP Unitholders entire interest in the
Aimco Operating Partnership.
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Section 754
Election
The Aimco Operating Partnership has made the election permitted
by section 754 of the Internal Revenue Code. Such election
is irrevocable without the consent of the IRS. The election will
generally permit a purchaser of Common OP Units, such as Aimco
when it acquires Common OP Units from Common OP
Unitholders, to adjust its share of the basis in the Aimco
Operating Partnerships properties pursuant to
section 743(b) of the Internal Revenue Code to fair market
value (as reflected by the value of consideration paid for the
Common OP Units), as if such purchaser had acquired a
direct interest in the Aimco Operating Partnership assets. The
section 743(b) adjustment is attributed solely to a
purchaser of Common OP Units and is not added to the bases
of the Aimco Operating Partnerships assets associated with
all of the Common OP Unitholders in the Aimco Operating
Partnership.
Depreciation
Section 168(i)(7) of the Internal Revenue Code provides
that in the case of property transferred to a partnership in a
section 721 transaction, the transferee shall be treated as
the transferor for purposes of computing the depreciation
deduction with respect to so much of the basis in the hands of
the transferee as does not exceed the adjusted basis in the
hands of the transferor. The effect of this rule would be to
continue the historic basis, placed in service dates and methods
with respect to the depreciation of the properties being
contributed by a contributing partner to the Aimco Operating
Partnership in exchange for Common OP Units. However, an
acquirer of Common OP Units that obtains a section 743(b)
adjustment by reason of such acquisition (see
Section 754 Election, above) generally will be
allowed depreciation with respect to such adjustment beginning
as of the date of the exchange as if it were new property placed
in service as of that date.
Sale,
Redemption, or Exchange of OP Units
A Common OP Unitholder will recognize a gain or loss upon a
sale of a Common OP Unit, a redemption of a Common
OP Unit for cash, an exchange of a Common OP Unit for
shares of Class A Common Stock or other taxable disposition
of a Common OP Unit. At the time of redemption of Common
OP Units, the Aimco Operating Partnership shall determine
whether cash, Class A Common Stock, or a combination
thereof is paid to limited partners. Gain or loss recognized
upon a sale or exchange of a Common OP Unit will be equal
to the difference between (i) the amount realized in the
transaction (i.e., the sum of the cash and the fair market value
of any property received for the Common OP Unit plus the
amount of the Aimco Operating Partnership liabilities allocable
to the Common OP Unit at such time) and(ii) the
Common OP Unitholders tax basis in the Common
OP Unit disposed of, which tax basis will be adjusted for
the Common OP Unitholders allocable share of the
Aimco Operating Partnerships income or loss for the
taxable year of the disposition. The tax liability resulting
from the gain recognized on a disposition of a Common
OP Unit could exceed the amount of cash and the fair market
value of property received.
If the Aimco Operating Partnership redeems a Common
OP Unitholders Common OP Units for cash (which
is not contributed by Aimco to effect the redemption), the tax
consequences generally would be the same as described in the
preceding paragraphs, except that if the Aimco Operating
Partnership redeems less than all of a Common
OP Unitholders Common OP Units, the Common
OP Unitholder would recognize no taxable loss and would
recognize taxable gain only to the extent that the cash, plus
the amount of the Aimco Operating Partnership liabilities
allocable to the redeemed Common OP Units, exceeded the
Common OP Unitholders adjusted tax basis in all of
such Common OP Unitholders Common OP Units
immediately before the redemption.
Capital gains recognized by individuals and certain other
noncorporate taxpayers upon the sale or disposition of a Common
OP Unit will be subject to a maximum United States federal
income tax rate of 15% (through 2010) if the Common
OP Unit is held for more than 12 months and will be
taxed at ordinary income tax rates if the Common OP Unit is
held for 12 months or less. Gains recognized by
stockholders that are corporations are subject to United States
federal income tax at a maximum rate of 35%, whether or not
classified as long-term capital gains. Generally, gain or loss
recognized by a Common OP Unitholder on the sale or other
taxable disposition of a Common OP Unit will be taxable as
capital gain or loss. However, to the extent that the amount
realized upon the sale or other taxable disposition of a Common
OP Unit attributable to a Common OP Unitholders
share of unrealized receivables of
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the Aimco Operating Partnership exceeds the basis attributable
to those assets, such excess will be treated as ordinary income.
Among other things, unrealized receivables include
amounts attributable to previously claimed depreciation
deductions on certain types of property.
Termination
of the Aimco Operating Partnership
In the event of the dissolution of the Aimco Operating
Partnership, a distribution of partnership property (other than
money and marketable securities) will not result in taxable gain
to a Common OP Unitholder (except to the extent provided in
section 737 of the Internal Revenue Code for liquidations
occurring within seven years of the date of contribution by a
Common OP Unitholder of property to the Aimco Operating
Partnership), and the Common OP Unitholder will hold such
distributed property with a basis equal to the adjusted basis of
such Common OP Units exchanged therefor, reduced by any
money distributed in liquidation. Further, the liquidation of
the Aimco Operating Partnership generally will be taxable to a
holder of Common OP Units to the extent that the value of
any money and marketable securities distributed in liquidation
(including any money deemed distributed as a result of relief
from liabilities) exceeds such Common OP Unitholders
tax basis in his Common OP Units.
Alternative
Minimum Tax
The Internal Revenue Code contains different sets of minimum tax
rules applicable to corporate and noncorporate investors. The
discussion below relates only to the alternative minimum tax
applicable to noncorporate taxpayers. Accordingly, corporate
investors should consult with their tax advisors with respect to
the effect of the corporate minimum tax provisions that may be
applicable to them. Noncorporate taxpayers are subject to an
alternative minimum tax to the extent the tentative minimum tax
(TMT) exceeds the regular income tax otherwise
payable. The rate of tax imposed on the alternative minimum
taxable income (AMTI) in computing TMT is 26% on the
first $175,000 of alternative minimum taxable income in excess
of an exemption amount and 28% on any additional alternative
minimum taxable income of noncorporate investors. In general,
AMTI consists of the taxpayers taxable income, determined
with certain adjustments, plus his items of tax preference. For
example, alternative minimum taxable income is calculated using
an alternative cost recovery (depreciation) system that is not
as favorable as the methods provided for under section 168
of the Internal Revenue Code which the Aimco Operating
Partnership will use in computing its income for regular United
States federal income tax purposes. Accordingly, a Common
OP Unitholders AMTI derived from the Aimco Operating
Partnership may be higher than such Common
OP Unitholders share of the Aimco Operating
Partnerships net taxable income. You should consult your
tax advisor as to the impact of an investment in Common
OP Units on their liability for the alternative minimum tax.
Information
Returns and Audit Procedures
The Aimco Operating Partnership will use all reasonable efforts
to furnish to each Common OP Unitholder within 90 days
of the close of each taxable year of the Aimco Operating
Partnership, certain tax information, including a
Schedule K-l,
which sets forth each Common OP Unitholders allocable
share of the Aimco Operating Partnerships Partnership Tax
Items. In preparing this information the Aimco General Partner
will use various accounting and reporting conventions to
determine the respective Common OP Unitholders
allocable share of Partnership Tax Items. The Aimco General
Partner cannot assure a current or prospective Common
OP Unitholder that the IRS will not successfully contend in
court that such accounting and reporting conventions are
impermissible.
No assurance can be given that the Aimco Operating Partnership
will not be audited by the IRS or that tax adjustments will not
be made. Further, any adjustments in the Aimco Operating
Partnerships tax returns will lead to adjustments in
Common OP Unitholders tax returns and may lead to
audits of their returns and adjustments of items unrelated to
the Aimco Operating Partnership. Each Common OP Unitholder
would bear the cost of any expenses incurred in connection with
an examination of such Common OP Unitholders personal
tax return.
Partnerships generally are treated as separate entities for
purposes of United States federal income tax, judicial review of
administrative adjustments by the IRS and tax settlement
proceedings. The tax treatment of Partnership Tax Items
generally is determined at the partnership level in a unified
partnership proceeding rather than in separate
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proceedings with the partners. The Internal Revenue Code
provides for one partner to be designated as the Tax Matters
Partner for these purposes.
The Tax Matters Partner is authorized, but not required, to take
certain actions on behalf of the Aimco Operating Partnership and
Common OP Unitholders and can extend the statute of
limitations for assessment of tax deficiencies against Common
OP Unitholders with respect to the Aimco Operating
Partnership Tax Items. The Tax Matters Partner may bind a Common
OP Unitholder with less than a l% profits interest in the
Aimco Operating Partnership to a settlement with the IRS, unless
such Common OP Unitholder elects, by filing a statement
with the IRS, not to give such authority to the Tax Matters
Partner. The Tax Matters Partner may seek judicial review (to
which all the Common OP Unitholders are bound) of a final
partnership administrative adjustment and, if the Tax Matters
Partner fails to seek judicial review, such review may be sought
by any Common OP Unitholder having at least a 1% interest
in the profits of the Aimco Operating Partnership or by Common
OP Unitholders having in the aggregate at least a 5%
profits interest. However, only one action for judicial review
will go forward, and each Common OP Unitholder with an
interest in the outcome may participate.
Tax
Return Disclosure and Investor List Requirements
Recently promulgated Treasury regulations require participants
in a reportable transaction to disclose certain
information about the transaction to the IRS with their tax
returns and retain certain information relating to the
transaction (the Disclosure Requirement). In
addition, organizers, sellers, and certain advisors of a
reportable transaction are required to maintain certain records,
including lists identifying the investors in a transaction, and
to furnish those records, as well as detailed information
regarding the transaction, to the IRS upon demand (the
List Maintenance Requirement). While the Disclosure
Requirement and the List Maintenance Requirement are directed
towards tax shelters, the regulations are written
quite broadly, and apply to transactions that would not
typically be considered tax shelters. In addition, legislative
proposals have been introduced in Congress, that, if enacted,
would impose significant penalties for failure to comply with
these requirements.
A transaction may be a reportable transaction based upon any of
several indicia, including, among other things, if it could
result in book-tax differences in excess of prescribed
thresholds. The transaction contemplated herein results in
book-tax differences in excess of prescribed thresholds and as
such, is a reportable transaction under the recently adopted
Treasury Regulations involving tax shelters. Characterization of
this transaction as a reportable transaction may increase the
likelihood of an audit by the IRS. You will be required to
attach a completed IRS Form 8886, the Reportable
Transaction Disclosure Statement, to your tax return for
the taxable year of the transaction, as well as provide a copy
of this form to the Office of Tax Shelter Analysis at the same
time that such statement is first filed with the IRS. You should
consult your tax advisers concerning these disclosure
obligations with respect to the receipt or disposition of Common
OP Units, or transactions that might be undertaken directly or
indirectly by the Aimco Operating Partnership. Moreover, you
should be aware that the Aimco Operating Partnership and other
participants in the transactions involving the Aimco Operating
Partnership (including their advisors) will be subject to the
Disclosure Requirement
and/or the
List Maintenance Requirement.
UNITED
STATES FEDERAL INCOME TAXATION OF AIMCO AND AIMCO
STOCKHOLDERS
The following is a summary of certain United States federal
income tax consequences resulting from the acquisition of,
holding, exchanging, and otherwise disposing of Aimco common
stock. This discussion is based upon the Internal Revenue Code,
Treasury Regulations, rulings issued by the IRS, and judicial
decisions, all in effect as of the date of this memorandum and
all of which are subject to change or differing interpretations,
possibly retroactively. Such summary is also based on the
assumptions that the operation of Aimco, the Aimco Operating
Partnership and the Subsidiary Partnerships will be in
accordance with their respective organizational documents and
partnership agreements. This summary is for general information
only and does not purport to discuss all aspects of United
States federal income taxation which may be important to a
particular investor in light of its investment or tax
circumstances, or to certain types of investors subject to
special tax rules (including financial institutions,
broker-dealers, insurance companies, and except to the extent
discussed below, tax-exempt organizations and foreign investors,
as determined for United States federal income tax purposes).
This summary assumes that investors will hold their Aimco stock
as capital assets (generally, property held for investment). No
advance
88
ruling has been or will be sought from the IRS regarding any
matter discussed in this memorandum. Counsel has not rendered
any legal opinion regarding the status of Aimco as a REIT, or
the tax consequences relating to Aimco or an investment in Aimco
stock in connection with this memorandum. No assurance can be
given that the IRS would not assert, or that a court would not
sustain, a position contrary to any of the tax aspects set forth
below.
THE UNITED STATES FEDERAL INCOME TAX TREATMENT OF HOLDERS OF
AIMCO STOCK DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT
AND INTERPRETATIONS OF COMPLEX PROVISIONS OF UNITED STATES
FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY
MAY BE AVAILABLE. ACCORDINGLY, YOU ARE URGED TO CONSULT YOUR TAX
ADVISOR REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES OF ACQUIRING, HOLDING, EXCHANGING, OR
OTHERWISE DISPOSING OF AIMCO STOCK AND OF AIMCOS ELECTION
TO BE SUBJECT TO TAX, FOR UNITED STATES FEDERAL INCOME TAX
PURPOSES, AS A REAL ESTATE INVESTMENT TRUST.
General
The REIT provisions of the Internal Revenue Code are highly
technical and complex. The following summary sets forth certain
aspects of the provisions of the Internal Revenue Code that
govern the United States federal income tax treatment of a REIT
and its stockholders. This summary is qualified in its entirety
by the applicable Internal Revenue Code provisions, Treasury
Regulations, and administrative and judicial interpretations
thereof, all of which are subject to change, possibly with
retroactive effect.
Aimco has elected to be taxed as a REIT under the Internal
Revenue Code commencing with its taxable year ending
December 31, 1994, and Aimco intends to continue such
election. Although Aimco believes that, commencing with the
Aimcos initial taxable year ended December 31, 1994,
Aimco was organized in conformity with the requirements for
qualification as a REIT, and its actual method of operation has
enabled, and its proposed method of operation will enable, it to
meet the requirements for qualification and taxation as a REIT
under the Internal Revenue Code, no assurance can be given that
Aimco has been or will remain so qualified. Such qualification
and taxation as a REIT depends upon Aimcos ability to
meet, through actual annual operating results, distribution
levels and diversity of stock ownership, the various
qualification tests imposed under the Internal Revenue Code as
discussed below. Aimcos compliance with the REIT income
and quarterly asset requirements depends upon Aimcos
ability to successfully manage the composition of its income and
assets on an ongoing basis. Aimcos ability to qualify as a
REIT also requires that it satisfies certain asset tests, some
of which depend upon the fair market value of assets directly or
indirectly owned by Aimco. Such values may not be susceptible to
a precise determination, and Aimco will not obtain independent
appraisals. No assurance can be given that the actual results of
Aimcos operation for any taxable year satisfy such
requirements. No assurance can be given that the IRS will not
challenge Aimcos eligibility for taxation as a REIT.
Provided Aimco qualifies for taxation as a REIT, it will
generally not be subject to United States federal corporate
income tax on its net income that is currently distributed to
its stockholders. This treatment substantially eliminates the
double taxation (at the corporate and stockholder
levels) that generally results from investment in a corporation.
Rather, income generated by a REIT generally is taxed only at
the stockholder level upon a distribution of dividends by the
REIT. The maximum rate at which individual stockholders are
taxed on corporate dividends generally is 15% (the same as
long-term capital gains) through 2010. Dividends received by
stockholders from Aimco or from other entities that are taxed as
REITs, however, are generally not eligible for the reduced rates
and will continue to be taxed at rates applicable to ordinary
income. Net operating losses, foreign tax credits and other tax
attributes of a REIT generally do not pass through to the
stockholders of the REIT, subject to special rules for certain
items such as capital gains recognized by REITs.
However, notwithstanding Aimcos qualification as a REIT,
Aimco will be subject to United States federal income tax as
follows:
(a) First, Aimco will be taxed at regular corporate rates
on any undistributed REIT taxable income, including
undistributed net capital gains.
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(b) Second, under certain circumstances, Aimco may be
subject to the alternative minimum tax on its items
of tax preference, including any deductions of net operating
losses.
(c) Third, if Aimco has net income from the sale or other
disposition of foreclosure property that Aimco holds
primarily for sale to customers in the ordinary course of
business or other non-qualifying income from foreclosure
property, it will be subject to tax at the highest corporate
rate on such income.
(d) Fourth, if Aimco has net income from prohibited
transactions (which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in
the ordinary course of business, other than foreclosure
property), such income will be subject to a 100% tax.
(e) Fifth, if Aimco should fail to satisfy the 75% gross
income test or the 95% gross income test (as discussed below),
but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be
subject to a 100% tax on an amount based on the magnitude of the
failure adjusted to reflect Aimcos profitability.
(f) Sixth, if Aimco fails to satisfy any of the asset tests
described below or any of the REIT qualification requirements
other than the gross income and asset tests and such failure is
due to reasonable cause, Aimco may avoid disqualification as a
REIT by, among other things, paying a penalty of $50,000 or more
in certain cases.
(g) Seventh, if Aimco should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital
gain net income for such year (other than certain long-term
capital gains that Aimco elects to retain and pay the tax
thereon), and (iii) any undistributed taxable income from
prior periods, Aimco would be subjected to a 4% excise tax on
the excess of such required distribution over the sum of
(a) amounts actually distributed plus (b) retained
amounts on which income tax is paid at the corporate level.
(h) Eighth, a 100% excise tax may be imposed on some items
of income expense that are directly or constructively paid
between a REIT and a taxable REIT subsidiary (as described
below) if and to the extent that the IRS successfully adjusts
the reported amounts of these items.
(i) Ninth, if Aimco acquires assets from a corporation that
is not a REIT (a subchapter C corporation) in a
transaction in which the adjusted tax basis of the assets in the
hands of Aimco is determined by reference to the adjusted tax
basis of such assets in the hands of the subchapter C
corporation, under Treasury Regulations, Aimco may be subject to
tax at the highest regular corporate tax rate on any gain it
recognizes on the disposition of any such asset during the
ten-year period beginning on the day on which Aimco acquires
such asset to the extent of the excess, if any, of the fair
market value over the adjusted basis of such asset as of its
acquisition date (Built-in Gain). It should be noted
that Aimco has acquired (and may acquire in the future) a
significant amount of assets with Built-in Gain and a taxable
disposition by Aimco of any of these assets within ten years of
their acquisitions would subject Aimco to tax under the
foregoing rule.
(j) Tenth, Aimco may be required to pay monetary penalties
to the IRS in certain circumstances, including if it fails to
meet record keeping requirements intended to monitor its
compliance with rules relating to the composition of a
REITs stockholders.
(k) Eleventh, certain of Aimcos subsidiaries are
subchapter C corporations, the earnings of which are subject to
United States federal corporate income tax.
(l) Twelfth, Aimco could be subject to foreign taxes on its
investments and activities in foreign jurisdictions. In
addition, Aimco could also be subject to tax in certain
situations and on certain transactions not presently
contemplated.
Requirements for Qualification. The Internal
Revenue Code defines a REIT as a corporation, trust or
association:
(a) that is managed by one or more trustees or directors;
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(b) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of
beneficial interest;
(c) which would be taxable as a domestic corporation, but
for the special Internal Revenue Code provisions applicable to
REITs;
(d) that is neither a financial institution nor an
insurance company subject to certain provisions of the Internal
Revenue Code;
(e) the beneficial ownership of which is held by 100 or
more persons;
(f) in which, during the last half of each taxable year,
not more than 50% in value of the outstanding stock is owned,
directly or indirectly, by five or fewer individuals (as defined
in the Internal Revenue Code to include certain
entities); and
(g) which meets certain other tests described below
(including with respect to the nature of its income and assets).
The Internal Revenue Code provides that the first four
conditions must be met during the entire taxable year and that
the fifth condition must be met during at least 335 days of
a taxable year of 12 months or during a proportionate part
of a taxable year of less than 12 months. Aimcos
charter provides certain restrictions regarding transfers of its
shares, which provisions are intended to assist Aimco in
satisfying the share ownership requirements described in the
fifth and sixth conditions above.
To monitor Aimcos compliance with the share ownership
requirements, Aimco is required to maintain records regarding
the actual ownership of its shares. To do so, Aimco must demand
written statements each year from the record holders of certain
percentages of its stock in which the record holders are to
disclose the actual owners of the shares (i.e., the persons
required to include in gross income the REIT dividends). A list
of those persons failing or refusing to comply with this demand
must be maintained as part of Aimcos records. Failure by
Aimco to comply with these record keeping requirements could
subject it to monetary penalties. A stockholder who fails or
refuses to comply with the demand must submit a statement with
its tax return disclosing the actual ownership of the shares and
certain other information.
In addition, a corporation may not elect to become a REIT unless
its taxable year is the calendar year. Aimco satisfies this
requirement.
Ownership of Partnership Interests. In
the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its
proportionate share of the partnerships assets and to earn
its proportionate share of the partnerships income. In
addition, the assets and gross income of the partnership are
deemed to retain the same character in the hands of the REIT for
purposes of the gross income and asset tests applicable to REITs
as described below. Thus, Aimcos proportionate share of
the assets, liabilities and items of income of the Subsidiary
Partnerships will be treated as assets, liabilities and items of
income of Aimco for purposes of applying the REIT requirements
described herein. A summary of certain rules governing the
United States federal income taxation of partnerships and their
partners is provided below in Tax Aspects of
Aimcos Investments in Partnerships.
Income Tests. In order to maintain
qualification as a REIT, Aimco annually must satisfy two gross
income requirements:
(a) First, at least 75% of Aimcos gross income
(excluding gross income from prohibited
transactions, i.e., certain sales of property held
primarily for sale to customers in the ordinary course of
business) for each taxable year must be derived directly or
indirectly from investments relating to real property or
mortgages on real property (including rents from real
property, gains from the sale of real estate assets and,
in certain circumstances, interest) or from certain types of
temporary investments.
(b) Second, at least 95% of Aimcos gross income
(excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property
investments, and from dividends, interest and gain from the sale
or disposition of stock or securities (or from any combination
of the foregoing).
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Rents received by Aimco through the Subsidiary Partnerships will
qualify as rents from real property in satisfying
the gross income requirements described above, only if several
conditions are met, including the following. Amounts received
from the rental of up to 10% of a property to a taxable REIT
subsidiary will qualify as rents from real property
so long as the rents received from the taxable REIT subsidiary
are substantially comparable to rents received from other
tenants of the property for comparable space. Otherwise, neither
Aimco nor an owner of 10% or more of Aimcos shares may own
10% or more of a tenant. Rents may not be based in whole or in
part on the income or profits of any person, although rents may
be based on a fixed percentage of receipts or sales. If rent
attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent
received under the lease, then the portion of rent attributable
to such personal property will not qualify as rents from
real property. Moreover, for rents received to qualify as
rents from real property, the REIT generally must
not furnish or render services to the tenants of such property,
other than through an independent contractor from
which the REIT derives no revenue or through a taxable REIT
subsidiary. Aimco (or its affiliates) is also permitted to
directly perform services that are usually or customarily
rendered in connection with the rental of space for
occupancy only and are not otherwise considered rendered to the
occupant of the property. In addition, Aimco (or its affiliates)
may directly or indirectly provide non-customary services to
tenants of its properties without disqualifying all of the rent
from the property if the payment for such services does not
exceed 1% of the total gross income from the property. For
purposes of this test, the income received from such
non-customary services is deemed to be at least 150% of the
direct cost of providing the services.
If any amount of interest, rent, or other deductions of a
taxable REIT subsidiary for amounts paid to Aimco is determined
by the IRS to be other than at arms length, a
100 percent excise tax is imposed on the portion that is
excessive.
Aimco manages apartment properties for third parties and
affiliates through subsidiaries that Aimco refers to as the
management companies. The management companies
receive management fees and other income. Distributions from the
management companies to Aimco are classified as dividend income
to the extent of the earnings and profits of the management
companies. Such distributions will generally qualify under the
95% gross income test but not under the 75% gross income test.
If Aimco fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify
as a REIT for such year if it is entitled to relief under
certain provisions of the Internal Revenue Code. These relief
provisions will be generally available if Aimcos failure
to meet such tests was due to reasonable cause and not due to
willful neglect and Aimco files a disclosure schedule with the
IRS. If these relief provisions are inapplicable to a particular
set of circumstances involving Aimco, Aimco will not qualify as
a REIT. As discussed above, even where these relief provisions
apply, a tax is imposed with respect to the excess net income.
Asset Tests. Aimco, at the close of each
quarter of its taxable year, must also satisfy four tests
relating to the nature of its assets:
(a) First, at least 75% of the value of Aimcos total
assets must be represented by real estate assets (including its
allocable share of real estate assets held by the Subsidiary
Partnerships), certain stock or debt instruments purchased by
Aimco with new capital, cash, cash items and
U.S. government securities.
(b) Second, not more than 25% of Aimcos total assets
may be represented by securities other than those in the 75%
asset class.
(c) Third, of the investments included in the 25% asset
class, the value of any one issuers securities owned by
Aimco may not exceed 5% of the value of Aimcos total
assets, and Aimco may not own more than 10% of the total value
or the total voting power of the outstanding securities of any
one issuer, including an individual, partnership or non-REIT C
corporation that is not taxed as a taxable REIT subsidiary.
(d) The value of securities held by Aimco in its taxable
REIT subsidiaries (including the management companies) will not
exceed, in the aggregate, 20% of the value of Aimcos total
assets.
The 5% and 10% asset limitations described above do not apply to
electing taxable REIT subsidiary corporations. The
10% value test does not apply to straight debt
having specified characteristics and in general does not apply
to a loan to an individual or estate, certain non-related party
rental agreements, obligations to pay
92
rents from real property, certain state or
government issued securities, securities issued by a REIT, or
any other arrangements as determined by the Secretary of the
Treasury. In addition, special rules apply for indebtedness
issued by a partnership for purposes of the 10% value test.
Aimco believes that the value of the securities held by Aimco in
its taxable REIT subsidiaries (including the management
companies) will not exceed, in the aggregate, 20% of the value
of Aimcos total assets.
No independent appraisals have been obtained to support
Aimcos conclusions as to the value of the Aimco Operating
Partnerships total assets and the value of the Aimco
Operating Partnerships interest in the taxable REIT
subsidiaries and these values are subject to change in the
future. Furthermore, the proper classification of an instrument
as debt or equity for United States federal income tax purposes
may be uncertain in some circumstances, which could affect the
application of the REIT asset test requirements. Accordingly,
there can be no assurance that the IRS will not contend that
Aimcos interests in its subsidiaries or in the securities
of other issuers will cause a violation of the REIT asset
requirements and loss of REIT status.
Aimco indirectly owns interests in the management companies. As
set forth above, the ownership of more than 10% of the total
value or the total voting power of the outstanding voting
securities of any one issuer by a REIT, or the investment of
more than 5% of the REITs total assets in any one
issuers securities, is prohibited by the asset tests.
Aimco believes that its indirect ownership interests in the
management companies qualify under the asset tests set forth
above. However, no independent appraisals have been obtained to
support Aimcos conclusions as to the value of the Aimco
Operating Partnerships total assets and the value of the
Aimco Operating Partnerships interest in the management
companies and these values are subject to change in the future.
Furthermore, the operation or management of a health care or
lodging facility precludes qualification as a taxable REIT
subsidiary, and therefore precludes the REIT from relying upon
this exception to the 10% ownership restriction. Consequently,
if any of the management companies were deemed to operate or
manage a health care or lodging facility, such management
companies would fail to qualify as taxable REIT subsidiaries,
and Aimco would fail to qualify as a REIT. Aimco believes that,
as of January 1, 2001, none of the management companies
operate or manage any health care or lodging facilities.
However, the statute provides little guidance as to the
definition of a health care or lodging facility. Accordingly,
there can be no assurances that the IRS will not contend that
any of the management companies operate or manage a health care
or lodging facility, disqualifying it from treatment as a
taxable REIT subsidiary, and thereby resulting in the
disqualification of Aimco as a REIT.
Aimcos indirect interests in the Aimco Operating
Partnership and other Subsidiary Partnerships are held through
wholly owned corporate subsidiaries of Aimco organized and
operated as qualified REIT subsidiaries within the
meaning of the Internal Revenue Code. Qualified REIT
subsidiaries are not treated as separate entities from their
parent REIT for United States federal income tax purposes.
Instead, all assets, liabilities and items of income, deduction
and credit of each qualified REIT subsidiary are treated as
assets, liabilities and items of Aimco. Each qualified REIT
subsidiary therefore is not subject to United States federal
corporate income taxation, although it may be subject to state
or local taxation. A qualified REIT subsidiary is any
corporation, other than a taxable REIT subsidiary,
that is wholly-owned by a REIT, or by other disregarded
subsidiaries, or by a combination of the two. In addition,
Aimcos ownership of the stock of each qualified REIT
subsidiary does not violate the general restriction against
ownership of more than 10% of the total value or total voting
power of the outstanding securities of any issuer.
After initially meeting the asset tests at the end of any
quarter, Aimco will not lose its status as a REIT for failure to
satisfy the asset tests at the end of a later quarter solely by
reason of changes in asset values. If the failure to satisfy the
asset tests results from an acquisition of securities or other
property during the quarter, Aimco may cure the failure by
disposing of a sufficient amount of non-qualifying assets within
30 days after the close of the quarter.
After the
30-day cure
period, a REIT may avoid disqualification as a REIT by disposing
of sufficient assets to cure such a violation that does not
exceed the lesser of 1% of the REITs assets at the end of
the relevant quarter or $10,000,000, provided that the
disposition occurs within 6 months following the last day
of the quarter in which the REIT first identified the violation.
For violations of any of the asset tests due to reasonable cause
that are larger than this de minimis provision, a REIT may avoid
disqualification as a REIT after the
30-day cure
period by taking certain steps, including the disposition of
sufficient assets within the
6-month
period described above to meet the applicable asset test, paying
a tax equal to the greater of $50,000 or the highest corporate
tax rate multiplied by the
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net income generated by the nonqualifying assets during the
period the assets were held as non-qualifying assets, and filing
a schedule with the IRS that describes the non-qualifying assets.
Annual Distribution Requirements. In order for
Aimco to qualify as a REIT, Aimco is required to distribute
dividends (other than capital gain dividends) to its
stockholders in an amount at least equal to:
(i) 90% of Aimcos REIT taxable income
(computed without regard to the dividends-paid deduction and
Aimcos net capital gain, i.e., the excess of net long-term
capital gain over net short-term capital loss) and
(ii) 90% of the net income (after tax), if any, from
foreclosure property, minus
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the sum of certain items of noncash income.
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Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before
Aimco timely files its tax return for such year and if paid with
or before the first regular dividend payment after such
declaration. In order for distributions to be counted for this
purpose, and to give rise to a tax deduction by Aimco, they must
not be preferential dividends. A dividend is not a
preferential dividend if it is pro rata among all outstanding
shares of stock within a particular class, and is in accordance
with the preferences among different classes of stock as set
forth in Aimco organizational documents. To the extent that
Aimco distributes at least 90%, but less than 100%, of its
REIT taxable income, as adjusted, it will be subject
to tax thereon at ordinary corporate tax rates. Aimco may elect
to retain, rather than distribute, its net long-term capital
gains and pay tax on such gains. In such a case, Aimcos
stockholders would include their proportionate share of such
undistributed long-term capital gains in income and receive a
credit for their share of the tax paid by Aimco. Aimcos
stockholders would then increase the adjusted basis of their
Aimco shares by the difference between the designated amounts
included in their long-term capital gains and the tax deemed
paid with respect to their shares. If Aimco should fail to
distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year and
(ii) 95% of its REIT capital gain net income for such year
(excluding retained long-term capital gains), and
(iii) any undistributed taxable income from prior periods,
Aimco would be subject to a 4% excise tax on the excess of such
required distribution over the sum of (a) amounts actually
distributed plus (b) retained amounts on which income tax
is paid at the corporate level. Aimco believes that it has made,
and intends to make, timely distributions sufficient to satisfy
these annual distribution requirements.
It is possible that Aimco, from time to time, may not have
sufficient cash to meet the 90% distribution requirement due to
timing differences between (i) the actual receipt of cash
(including receipt of distributions from the Aimco Operating
Partnership) and (ii) the inclusion of certain items in
income by Aimco for United States federal income tax purposes.
In the event that such timing differences occur, in order to
meet the 90% distribution requirement, Aimco may find it
necessary to arrange for short-term, or possibly long-term,
borrowings, or to pay dividends in the form of taxable
distributions of property.
Under certain circumstances, Aimco may be able to rectify a
failure to meet the distribution requirement for a year by
paying deficiency dividends to stockholders in a
later year, which may be included in Aimcos deduction for
dividends paid for the earlier year. Thus, Aimco may be able to
avoid losing its REIT status or being taxed on amounts
distributed as deficiency dividends; however, Aimco will be
required pay interest and a penalty based on the amount of any
deduction taken for deficiency dividends.
Failure to Qualify. For violations of REIT
requirements other than the gross income and asset tests, Aimco
may maintain its REIT status if the violation is due to
reasonable cause and not willful neglect and Aimco pays a
$50,000 penalty for each such failure.
If Aimco fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, Aimco will be
subject to tax (including any applicable alternative minimum
tax) on its taxable income at regular
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corporate rates. Distributions to stockholders in any year in
which Aimco fails to qualify will not be deductible by Aimco nor
will they be required to be made. In such event, to the extent
of current and accumulated earnings and profits, all
distributions to stockholders that are individuals will
generally be taxable at capital gains rates (through 2010), and,
subject to certain limitations of the Internal Revenue Code,
corporate distributees may be eligible for the dividends
received deduction. Unless Aimco is entitled to relief under
specific statutory provisions, Aimco would also be disqualified
from taxation as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to
state whether in all circumstances Aimco would be entitled to
such statutory relief.
Tax
Aspects of Aimcos Investments in Partnerships
General. Substantially all of Aimcos
investments are held indirectly through the Aimco Operating
Partnership. In general, partnerships are
pass-through entities that are not subject to United
States federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss,
deduction and credit of a partnership, and are potentially
subject to tax thereon, without regard to whether the partners
receive a distribution from the partnership. Aimco will include
in its income its proportionate share of the foregoing
partnership items for purposes of the various REIT income tests
and in the computation of its REIT taxable income. Moreover, for
purposes of the REIT asset tests, Aimco will include its
proportionate share of assets held by the Subsidiary
Partnerships.
Entity Classification. Aimcos direct and
indirect investment in partnerships involves special tax
considerations, including the possibility of a challenge by the
IRS of the status of any of the Subsidiary Partnerships as a
partnership (as opposed to as an association taxable as a
corporation) for United States federal income tax purposes. If
any of these entities were treated as an association for United
States federal income tax purposes, it would be subject to an
entity-level tax on its income. In such a situation, the
character of Aimcos assets and items of gross income would
change and could preclude Aimco from satisfying the asset tests
and the income tests, and in turn could prevent Aimco from
qualifying as a REIT. See above for a discussion of the effect
of Aimcos failure to meet such tests for a taxable year.
In addition, any change in the status of any of the Subsidiary
Partnerships for tax purposes might be treated as a taxable
event, in which case Aimco might incur a tax liability without
any related cash distributions.
Tax Allocations with Respect to the
Properties. Under the Internal Revenue Code and
the Treasury Regulations, income, gain, loss and deduction
attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the
partnership must be allocated in a manner such that the
contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of
such unrealized gain or unrealized loss is generally equal to
the difference between the fair market value of the contributed
property at the time of contribution, and the adjusted tax basis
of such property at the time of contribution (a Book-Tax
Difference). Such allocations are solely for United States
federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the
partners. The Aimco Operating Partnership was formed by way of
contributions of appreciated property. Consequently, allocations
must be made in a manner consistent with these requirements.
Where a partner contributes cash to a partnership that holds
appreciated property, Treasury Regulations provide for a similar
allocation of such items to the other partners. These rules
apply to the contribution by Aimco to the Aimco Operating
Partnership of the cash proceeds received in any offerings of
its stock.
In general, certain Common OP Unitholders will be allocated
lower amounts of depreciation deductions for tax purposes and
increased taxable income and gain on the sale by the Aimco
Operating Partnership or other Subsidiary Partnerships of the
contributed properties. This will tend to eliminate the Book-Tax
Difference over the life of these partnerships. However, the
special allocations do not always entirely rectify the Book-Tax
Difference on an annual basis or with respect to a specific
taxable transaction such as a sale. Thus, the carryover basis of
the contributed properties in the hands of the Aimco Operating
Partnership or other Subsidiary Partnerships may cause Aimco to
be allocated lower depreciation and other deductions, and
possibly greater amounts of taxable income in the event of a
sale of such contributed assets in excess of the economic or
book income allocated to it as a result of such sale. This may
cause Aimco to recognize taxable income in excess of cash
proceeds, which might adversely affect Aimcos ability to
comply with the REIT distribution requirements.
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With respect to any property purchased or to be purchased by any
of the Subsidiary Partnerships (other than through the issuance
of OP Units) subsequent to the formation of Aimco, such
property will initially have a tax basis equal to its fair
market value and the special allocation provisions described
above will not apply.
Sale of the Properties. Aimcos share of
any gain realized by the Aimco Operating Partnership or any
other Subsidiary Partnership on the sale of any property held as
inventory or primarily for sale to customers in the ordinary
course of business will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Under
existing law, whether property is held as inventory or primarily
for sale to customers in the ordinary course of a
partnerships trade or business is a question of fact that
depends on all the facts and circumstances with respect to the
particular transaction. The Aimco Operating Partnership and the
other Subsidiary Partnerships intend to hold their properties
for investment with a view to long-term appreciation, to engage
in the business of acquiring, developing, owning and operating
the properties and to make such occasional sales of the
properties, including peripheral land, as are consistent with
Aimcos investment objectives. However, no assurance can be
given that any property sold by Aimco will not be treated as
property held for sale to customers, or that Aimco can comply
with certain safe-harbor provisions of the Internal Revenue Code
that would prevent such treatment.
Taxation
of Management Companies
A portion of the amounts to be used to fund distributions to
stockholders is expected to come from distributions made by the
management companies to the Aimco Operating Partnership, and
interest paid by the management companies on certain notes held
by the Aimco Operating Partnership. In general, the management
companies pay United States federal, state and local income
taxes on their taxable income at normal corporate rates. Any
United States federal, state or local income taxes that the
management companies are required to pay will reduce
Aimcos cash flow from operating activities and its ability
to make payments to holders of its securities.
Taxation
of Taxable Domestic Stockholders
Distributions. Provided that Aimco qualifies
as a REIT, distributions made to Aimcos taxable domestic
stockholders out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken
into account by them as ordinary income and will not be eligible
for the dividends received deduction for corporations. With
limited exceptions, dividends received from REITs are not
eligible for taxation at the preferential 15% income tax rates
for qualified dividends received by individuals from taxable C
corporations. Stockholders that are individuals, however, are
taxed at the preferential rates on dividends designated by and
received from REITs to the extent that the dividends are
attributable to (i) income retained by the REIT in the
prior taxable year on which the REIT was subject to corporate
level income tax, (ii) dividends received by the REIT from
taxable C corporations, or (iii) income from the sales of
appreciated property acquired by the REIT from C corporations in
carryover basis transactions. Distributions (and retained
long-term capital gains) that are designated as capital gain
dividends will be taxed as long-term capital gains (to the
extent that they do not exceed Aimcos actual net capital
gain for the taxable year) without regard to the period for
which the stockholder has held its stock. However, corporate
stockholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Long-term capital
gains are generally taxable at maximum United States federal
rates of 15% (through 2010) in the case of stockholders who
are individuals, and 35% in the case of stockholders that are
corporations. In addition, net capital gains attributable to the
sale of depreciable real property held for more than
12 months are subject to a 25% maximum United States
federal income tax rate for taxpayers who are individuals to the
extent of previously claimed real property depreciation.
Distributions in excess of current and accumulated earnings and
profits will not be taxable to a stockholder to the extent that
they do not exceed the adjusted basis of the stockholders
shares in respect of which the distributions were made, but
rather will reduce the adjusted basis of such shares. To the
extent that such distributions exceed the adjusted basis of a
stockholders shares in respect of which the distributions
were made, they will be included in income as long-term capital
gain (or short-term capital gain if the shares have been held
for one year or less) provided that the shares are a capital
asset in the hands of the stockholder. In addition, any dividend
declared by Aimco in October, November or December of any year
and payable to a stockholder of record on a specified date in
any such month will be treated as both paid by Aimco and
received by the stockholder on December 31 of such year,
96
provided that the dividend is actually paid by Aimco during
January of the following calendar year. Stockholders may not
include in their individual income tax returns any net operating
losses or capital losses of Aimco.
Dispositions of Aimco Stock. In general,
capital gains recognized by individuals and other non-corporate
taxpayers upon the sale or disposition of Aimco stock will be
subject to a maximum United States federal income tax rate of
15% (through 2010) if the Aimco Stock is held for more than
12 months and will be taxed at ordinary income rates (of up
to 35% through 2010) if the Aimco stock is held for
12 months or less. Capital losses recognized by a
stockholder upon the disposition of Aimco stock held for more
than one year at the time of disposition will be a long-term
capital loss. In addition, any loss upon a sale or exchange of
shares of Aimco stock by a stockholder who has held such shares
for six months or less (after applying certain holding period
rules) will be treated as a long-term capital loss to the extent
of distributions from Aimco required to be treated by such
stockholder as long-term capital gain.
Taxation
of Tax-Exempt Stockholders
Tax-exempt entities, including qualified employee pension and
profit sharing trusts and individual retirement accounts
(Exempt Organizations), generally are exempt from
United States federal income taxation. However, they are subject
to taxation on their unrelated business taxable income
(UBTI). The IRS has privately ruled that dividend
distributions from a REIT to an exempt employee pension trust do
not constitute UBTI, provided that the shares of the REIT are
not otherwise used in an unrelated trade or business of the
exempt employee pension trust. Based on that ruling, Aimco
believes that amounts distributed by Aimco to Exempt
Organizations should generally not constitute UBTI. If an Exempt
Organization finances its acquisition of Aimco stock with debt,
however, a portion of its income from Aimco will constitute UBTI
pursuant to the debt-financed property rules.
Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and
qualified group legal services plans that are exempt from
taxation under paragraphs (7), (9), (17) and (20),
respectively, of Section 501(c) of the Internal Revenue
Code are subject to different UBTI rules, which generally will
require them to characterize distributions from Aimco as UBTI.
In addition, in certain circumstances, a pension trust that owns
more than 10% of Aimcos stock is required to treat a
percentage of the dividends from Aimco as UBTI (the UBTI
Percentage). The UBTI Percentage is the gross income
derived by Aimco from an unrelated trade or business (determined
as if Aimco were a pension trust) divided by the gross income of
Aimco for the year in which the dividends are paid. The UBTI
rule applies to a pension trust holding more than 10% of
Aimcos stock only if:
(a) the UBTI Percentage is at least 5%,
(b) Aimco qualifies as a REIT by reason of the modification
of the 5/50 Rule that allows the beneficiaries of the pension
trust to be treated as holding shares of Aimco in proportion to
their actuarial interest in the pension trust, and
(c) either (A) one pension trust owns more than 25% of
the value of Aimcos stock or (B) a group of pension
trusts each individually holding more than 10% of the value of
Aimcos stock collectively owns more that 50% of the value
of Aimcos stock.
The restrictions on ownership and transfer of Aimcos stock
should prevent an Exempt Organization from owning more than 10%
of the value of Aimcos stock.
State, Local and Foreign Taxes. The Aimco
Operating Partnership, OP Unitholders, Aimco and Aimco
stockholders may be subject to state, local or foreign taxation
in various jurisdictions, including those in which it or they
transact business, own property or reside. It should be noted
that the Aimco Operating Partnership owns properties located in
a number of states and local jurisdictions, and the Aimco
Operating Partnership and OP Unitholders may be required to
file income tax returns in some or all of those jurisdictions.
The state, local or foreign tax treatment of the Aimco Operating
Partnership and OP Unitholders and of Aimco and its stockholders
may not conform to the United States federal income tax
consequences discussed above. Consequently, prospective
investors are urged to consult their tax advisors regarding the
application and effect of state, local foreign tax laws on an
investment in the Aimco Operating Partnership or Aimco.
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Each limited partner is urged to consult his or her tax
advisor regarding the specific tax consequences of the sales and
related transactions, including the application of United States
federal, state, local, foreign and other tax laws.
DESCRIPTION
OF COMMON OP UNITS
The following description sets forth some general terms and
provisions of the Common OP Units and the agreement of
limited partnership of the Aimco Operating Partnership.
General. The Aimco Operating Partnership is a
limited partnership organized under the provisions of the
Delaware Revised Uniform Limited Partnership Act (as amended
from time to time, or any successor to such statute, the
Delaware LP Act) and upon the terms and subject to
the conditions set forth in its agreement of limited
partnership. AIMCO-GP, Inc., a Delaware corporation and a wholly
owned subsidiary of Aimco, is the sole general partner of the
Aimco Operating Partnership. Another wholly owned subsidiary of
Aimco, AIMCO-LP, Inc., a Delaware corporation (the Special
Limited Partner), is a limited partner in the Aimco
Operating Partnership. The term of the Aimco Operating
Partnership commenced on May 16, 1994, and will continue
indefinitely, unless the Aimco Operating Partnership is
dissolved sooner under the provisions of the partnership
agreement or as otherwise provided by law.
Purpose and Business. The purpose and nature
of the Aimco Operating Partnership is to conduct any business,
enterprise or activity permitted by or under the Delaware LP
Act, including, but not limited to, (i) to conduct the
business of ownership, construction, development and operation
of multifamily rental apartment communities, (ii) to enter
into any partnership, joint venture, business trust arrangement,
limited liability company or other similar arrangement to engage
in any business permitted by or under the Delaware LP Act, or to
own interests in any entity engaged in any business permitted by
or under the Delaware LP Act, (iii) to conduct the business
of providing property and asset management and brokerage
services, whether directly or through one or more partnerships,
joint ventures, subsidiaries, business trusts, limited liability
companies or other similar arrangements, and (iv) to do
anything necessary or incidental to the foregoing; provided,
however, such business and arrangements and interests may be
limited to and conducted in such a manner as to permit Aimco, in
the sole and absolute discretion of AIMCO-GP, at all times to be
classified as a REIT.
Management by the General Partner. Except as
otherwise expressly provided in the partnership agreement, all
management powers over the business and affairs of the Aimco
Operating Partnership are exclusively vested in AIMCO-GP. No
limited partner of the Aimco Operating Partnership or any other
person to whom one or more Common OP Units have been
transferred (each, an Assignee) may take part in the
operations, management or control (within the meaning of the
Delaware LP Act) of the Aimco Operating Partnerships
business, transact any business in the Aimco Operating
Partnerships name or have the power to sign documents for
or otherwise bind the Aimco Operating Partnership. The general
partner may not be removed by the limited partners with or
without cause, except with the consent of AIMCO-GP. In addition
to the powers granted a general partner of a limited partnership
under applicable law or that are granted to AIMCO-GP under any
other provision of the partnership agreement, AIMCO-GP, subject
to the other provisions of the partnership agreement, has full
power and authority to do all things deemed necessary or
desirable by it to conduct the business of the Aimco Operating
Partnership, to exercise all powers of the Aimco Operating
Partnership and to effectuate the purposes of the Aimco
Operating Partnership. The Aimco Operating Partnership may incur
debt or enter into other similar credit, guarantee, financing or
refinancing arrangements for any purpose (including, without
limitation, in connection with any acquisition of properties)
upon such terms as AIMCO-GP determines to be appropriate. The
general partner is authorized to execute, deliver and perform
specific agreements and transactions on behalf of the Aimco
Operating Partnership without any further act, approval or vote
of the limited partners.
Restrictions on General Partners
Authority. The general partner may not take any
action in contravention of the partnership agreement. The
general partner may not, without the prior consent of the
limited partners, undertake, on behalf of the Aimco Operating
Partnership, any of the following actions or enter into any
transaction that would have the effect of such transactions:
(i) except as provided in the partnership agreement, amend,
modify or terminate the partnership agreement other than to
reflect the admission, substitution, termination or withdrawal
of partners; (ii) make a general assignment for the benefit
of creditors or appoint or acquiesce in the appointment of a
custodian, receiver or trustee for all or any part of the assets
of the Aimco Operating Partnership; (iii) institute any
proceeding for bankruptcy on behalf of the Aimco Operating
Partnership; or (iv) subject to specific exceptions,
approve or
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acquiesce to the transfer of the Aimco Operating Partnership
interest of AIMCO-GP, or admit into the Aimco Operating
Partnership any additional or successor general partners.
Additional Limited Partners. The general
partner is authorized to admit additional limited partners to
the Aimco Operating Partnership from time to time, on terms and
conditions and for such capital contributions as may be
established by AIMCO-GP in its reasonable discretion. The net
capital contribution need not be equal for all partners. No
action or consent by the limited partners is required in
connection with the admission of any additional limited partner.
The general partner is expressly authorized to cause the Aimco
Operating Partnership to issue additional interests
(i) upon the conversion, redemption or exchange of any
debt, Common OP Units or other securities issued by the
Aimco Operating Partnership, (ii) for less than fair market
value, so long as AIMCO-GP concludes in good faith that such
issuance is in the best interests of AIMCO-GP and the Aimco
Operating Partnership, and (iii) in connection with any
merger of any other entity into the Aimco Operating Partnership
if the applicable merger agreement provides that persons are to
receive interests in the Aimco Operating Partnership in exchange
for their interests in the entity merging into the Aimco
Operating Partnership. Subject to Delaware law, any additional
partnership interests may be issued in one or more classes, or
one or more series of any of such classes, with such
designations, preferences and relative, participating, optional
or other special rights, powers and duties as shall be
determined by AIMCO-GP, in its sole and absolute discretion
without the approval of any limited partner, and set forth in a
written document thereafter attached to and made an exhibit to
the partnership agreement. Without limiting the generality of
the foregoing, AIMCO-GP has authority to specify (a) the
allocations of items of partnership income, gain, loss,
deduction and credit to each such class or series of partnership
interests; (b) the right of each such class or series of
partnership interests to share in distributions; (c) the
rights of each such class or series of partnership interests
upon dissolution and liquidation of the Aimco Operating
Partnership; (d) the voting rights, if any, of each such
class or series of partnership interests; and (e) the
conversion, redemption or exchange rights applicable to each
such class or series of partnership interests. No person may be
admitted as an additional limited partner without the consent of
AIMCO-GP, which consent may be given or withheld in
AIMCO-GPs sole and absolute discretion.
Outstanding Classes of Units. As of
September 30, 2006, the Aimco Operating Partnership had
issued and outstanding the following partnership interests:
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Class
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Interests Outstanding
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Partnership Common Units
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103,705,873
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Class G Partnership Preferred
Units
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4,050,000
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Class T Partnership Preferred
Units
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6,000,000
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Class U Partnership Preferred
Units
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8,000,000
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Class V Partnership Preferred
Units
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3,450,000
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Class W Partnership Preferred
Units
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1,904,762
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Class Y Partnership Preferred
Units
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3,450,000
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Class One Partnership
Preferred Units
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90,000
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Class Two Partnership
Preferred Units
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52,718
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Class Three Partnership
Preferred Units
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1,464,173
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Class Four Partnership
Preferred Units
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755,999
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Class Five Partnership
Preferred Units
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68,671
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Class Six Partnership
Preferred Units
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802,453
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Class Seven Partnership
Preferred Units
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27,960
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Class Eight Partnership
Preferred Units
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6,250
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Class I High Performance
Partnership Units
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2,379,084
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Class VII High Performance
Partnership Units
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4,109
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Class VIII High Performance
Partnership Units
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5,000
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Series A Community
Reinvestment Act Perpetual Preferred Units
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200
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Class IX High Performance
Partnership Units
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5,000
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Distributions. Subject to the rights of
holders of any outstanding Preferred OP Units, the partnership
agreement requires AIMCO-GP to cause the Aimco Operating
Partnership to distribute quarterly all, or such portion
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as AIMCO-GP may in its sole and absolute discretion determine,
of Available Cash (as defined in the partnership agreement)
generated by the Aimco Operating Partnership during such quarter
to AIMCO-GP, AIMCO-LP and the other holders of Common
OP Units on the record date established by AIMCO-GP with
respect to such quarter, in accordance with their respective
interests in the Aimco Operating Partnership on such record
date. Holders of any other Preferred OP Units issued in the
future may have priority over AIMCO-GP, AIMCO-LP and holders of
Common OP Units with respect to distributions of Available
Cash, distributions upon liquidation or other distributions.
Distributions payable with respect to any interest in the Aimco
Operating Partnership that was not outstanding during the entire
quarterly period in respect of which any distribution is made
will be prorated based on the portion of the period that such
interest was outstanding. The general partner in its sole and
absolute discretion may distribute to the limited partners
Available Cash on a more frequent basis and provide for an
appropriate record date. The partnership agreement requires
AIMCO-GP to take such reasonable efforts, as determined by it in
its sole and absolute discretion and consistent with the
requirements for qualification as a REIT, to cause the Aimco
Operating Partnership to distribute sufficient amounts to enable
AIMCO-GP to transfer funds to Aimco and enable Aimco to pay
stockholder dividends that will (i) satisfy the
requirements (the REIT Requirements) for qualifying
as a REIT under the Internal Revenue Code and the applicable
Treasury Regulations and (ii) avoid any United States
Federal income or excise tax liability of Aimco.
While some of the debt instruments to which the Aimco Operating
Partnership is a party, including its credit facilities, contain
restrictions on the payment of distributions to
OP Unitholders, the debt instruments allow the Aimco
Operating Partnership to distribute sufficient amounts to enable
AIMCO-GP and the Special Limited Partner to transfer funds to
Aimco which are then used to pay stockholder dividends thereby
allowing Aimco to meet the REIT Requirements.
Distributions in Kind. No Common
OP Unitholder has any right to demand or receive property
other than cash as provided in the partnership agreement. The
general partner may determine, in its sole and absolute
discretion, to make a distribution in kind of partnership assets
to the Common OP Unitholders, and such assets will be
distributed in such a fashion as to ensure that the fair market
value is distributed and allocated in accordance with the
partnership agreement.
Distributions Upon Liquidation. Subject to the
rights of holders of any outstanding Preferred OP Units,
net proceeds from the sale or other disposition of all or
substantially all of the assets of the Aimco Operating
Partnership or a related series of transactions that, taken
together, result in the sale or other disposition of all or
substantially all of the assets of the Aimco Operating
Partnership (a Terminating Capital Transaction), and
any other cash received or reductions in reserves made after
commencement of the liquidation of the Aimco Operating
Partnership, will be distributed to the Common OP Unitholders in
accordance with the partnership agreement.
Restricted Distributions. The partnership
agreement prohibits the Aimco Operating Partnership and
AIMCO-GP, on behalf of the Aimco Operating Partnership, from
making a distribution to any Common OP Unitholder on
account of its interest in Common OP Units if such
distribution would violate
Section 17-607
of the Delaware LP Act or other applicable law.
Allocations of Net Income and Net Loss to
OP Unitholders. Net Income (as defined in
the partnership agreement) and Net Loss (as defined in the
partnership agreement) of the Aimco Operating Partnership will
be determined and allocated with respect to each fiscal year of
the Aimco Operating Partnership as of the end of each such year.
Except as otherwise provided in the partnership agreement, an
allocation to a Common OP Unitholder of a share of Net
Income or Net Loss will be treated as an allocation of the same
share of each item of income, gain, loss or deduction that is
taken into account in computing Net Income or Net Loss. Except
as otherwise provided in the partnership agreement and subject
to the terms of any outstanding Preferred OP Units, Net Income
and Net Loss will be allocated to the holders of Common OP Units
in accordance with their respective Common OP Units at the
end of each fiscal year. The partnership agreement contains
provisions for special allocations intended to comply with
certain regulatory requirements, including the requirements of
Treasury Regulations
Sections 1.704-1(b)
and 1.704-2. Except as otherwise provided in the partnership
agreement and subject to the terms of any outstanding Preferred
OP Units, for United States Federal income tax purposes
under the Internal Revenue Code and the Treasury Regulations,
each partnership item of income, gain, loss and deduction will
be allocated among the
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Common OP Unitholders in the same manner as its correlative
item of book income, gain, loss or deduction is
allocated under the partnership agreement.
Withholding. The Aimco Operating Partnership
is authorized to withhold from or pay on behalf of or with
respect to each limited partner any amount of United States
federal, state, local or foreign taxes that AIMCO-GP determines
that the Aimco Operating Partnership is required to withhold or
pay with respect to any amount distributable or allocable to
such limited partner under the partnership agreement.
Return of Capital. No partner is entitled to
interest on its capital contribution or on such partners
capital account. Except (i) under the rights of redemption
set forth in the partnership agreement, (ii) as provided by
law, or (iii) under the terms of any outstanding Preferred
OP Units, no partner has any right to demand or receive the
withdrawal or return of its capital contribution from the Aimco
Operating Partnership, except to the extent of distributions
made under the partnership agreement or upon termination of the
Aimco Operating Partnership. Except to the extent otherwise
expressly provided in the partnership agreement and subject to
the terms of any outstanding Preferred OP Units, no limited
partner or Assignee will have priority over any other limited
partner or Assignee either as to the return of capital
contributions or as to profits, losses or distributions.
Redemption Rights of Qualifying
Parties. At any time after the first anniversary
of becoming a holder of Common OP Units, each Common
OP Unitholder and some Assignees have the right, subject to
the terms and conditions set forth in the partnership agreement,
to require the Aimco Operating Partnership to redeem all or a
portion of the Common OP Units held by such party in
exchange for shares of Class A Common Stock or a cash
amount equal to the value of such shares, as the Aimco Operating
Partnership may elect (a Redemption). On or before
the close of business on the fifth business day after a Common
OP Unitholder gives AIMCO-GP a Notice of Redemption, the Aimco
Operating Partnership may, in its sole and absolute discretion
but subject to the restrictions on the ownership of Aimco stock
imposed under Aimcos charter and the transfer restrictions
and other limitations thereof, elect to cause Aimco to acquire
some or all of the tendered Common OP Units from the
tendering party in exchange for Class A Common Stock, based
on an exchange ratio of one share of Class A Common Stock
for each Common OP Unit, subject to antidilution
adjustments as set forth in the partnership agreement. The
partnership agreement does not obligate Aimco or AIMCO-GP to
register, qualify or list any Class A Common Stock issued
in exchange for Common OP Units with the SEC, with any
state securities commissioner, department or agency, or with any
stock exchange. In the absence of a future registration of the
Common OP Units issued in the Affiliated Contribution,
Class A Common Stock issued in exchange for Common
OP Units under the partnership agreement will contain
legends regarding restrictions under the Securities Act of 1933
and applicable state securities laws as are necessary or
advisable in order to ensure compliance with securities laws.
Partnership Right to Call Limited Partner
Interest. Notwithstanding any other provision of
the partnership agreement, on and after the date on which the
aggregate percentage interests of the limited partners, other
than AIMCO-LP, are less than one percent (1%), the Aimco
Operating Partnership will have the right, but not the
obligation, from time to time and at any time to redeem any and
all outstanding limited partner interests (other than
AIMCO-LPs interest) by treating any limited partner as if
such limited partner had tendered for Redemption under the
partnership agreement the amount of Common OP Units
specified by AIMCO-GP, in its sole and absolute discretion, by
notice to the limited partner.
Transfers
and Withdrawals.
Restrictions on Transfer. The partnership
agreement restricts the transferability of Common OP Units.
Any transfer or purported transfer of a Common OP Unit not
made in accordance with the partnership agreement will be null
and void ab initio. Until the expiration of one year from the
date on which a Common OP Unitholder acquired Common
OP Units, subject to some exceptions, such Common
OP Unitholder may not transfer all or any portion of its
Common OP Units to any transferee without the consent of
AIMCO-GP, which consent may be withheld in its sole and absolute
discretion. After the expiration of one year from the date on
which a Common OP Unitholder acquired Common OP Units,
such Common OP Unitholder has the right to transfer all or
any portion of its Common OP Units to any person, subject
to the satisfaction of specific conditions specified in the
partnership agreement, including AIMCO-GPs right of first
refusal.
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It is a condition to any transfer (whether or not such transfer
is effected before or after the one year holding period) that
the transferee assumes by operation of law or express agreement
all of the obligations of the transferor limited partner under
the partnership agreement with respect to such Common
OP Units, and no such transfer (other than under a
statutory merger or consolidation wherein all obligations and
liabilities of the transferor Partner are assumed by a successor
corporation by operation of law) will relieve the transferor
Partner of its obligations under the partnership agreement
without the approval of AIMCO-GP, in its sole and absolute
discretion.
In connection with any transfer of Common OP Units,
AIMCO-GP will have the right to receive an opinion of counsel
reasonably satisfactory to it to the effect that the proposed
transfer may be effected without registration under the
Securities Act of 1933, and will not otherwise violate any
United States federal or state securities laws or regulations
applicable to the Aimco Operating Partnership or the Common
OP Units transferred.
No transfer by a limited partner of its Common OP Units
(including any Redemption or any acquisition of Common
OP Units by AIMCO-GP or by the Aimco Operating Partnership)
may be made to any person if (i) in the opinion of legal
counsel for the Aimco Operating Partnership, it would result in
the Aimco Operating Partnership being treated as an association
taxable as a corporation, or (ii) such transfer is
effectuated through an established securities market
or a secondary market (or the substantial equivalent
thereof) within the meaning of the Internal Revenue Code
Section 7704.
Substituted Limited Partners. No limited
partner will have the right to substitute a transferee as a
limited partner in its place. A transferee of the interest of a
limited partner may be admitted as a substituted limited partner
only with the consent of AIMCO-GP, which consent may be given or
withheld by AIMCO-GP in its sole and absolute discretion. If
AIMCO-GP, in its sole and absolute discretion, does not consent
to the admission of any permitted transferee as a substituted
limited partner, such transferee will be considered an Assignee
for purposes of the partnership agreement. An Assignee will be
entitled to all the rights of an assignee of a limited
partnership interest under the Delaware LP Act, including the
right to receive distributions from the Aimco Operating
Partnership and the share of net income, net losses and other
items of income, gain, loss, deduction and credit of the Aimco
Operating Partnership attributable to the Common OP Units
assigned to such transferee and the rights to transfer the
Common OP Units provided in the partnership agreement, but
will not be deemed to be a holder of Common OP Units for
any other purpose under the partnership agreement, and will not
be entitled to effect a consent or vote with respect to such
Common OP Units on any matter presented to the limited
partners for approval (such right to consent or vote, to the
extent provided in this partnership agreement or under the
Delaware LP Act, fully remaining with the transferor limited
partner).
Withdrawals. No limited partner may withdraw
from the Aimco Operating Partnership other than as a result of a
permitted transfer of all of such limited partners Common
OP Units in accordance with the partnership agreement, with
respect to which the transferee becomes a substituted limited
partner, or under a Redemption (or acquisition by Aimco) of all
of such limited partners Common OP Units.
Restrictions on the General Partner. The
general partner may not transfer any of its general partner
interest or withdraw from the Aimco Operating Partnership unless
(i) the limited partners consent or
(ii) immediately after a merger of AIMCO-GP into another
entity, substantially all of the assets of the surviving entity,
other than the general partnership interest in the Aimco
Operating Partnership held by AIMCO-GP, are contributed to the
Aimco Operating Partnership as a capital contribution in
exchange for Common OP Units.
Amendment
of the Partnership Agreement.
By the General Partner Without the Consent of the Limited
Partners. The general partner has the power,
without the consent of the limited partners, to amend the
partnership agreement as may be required to facilitate or
implement any of the following purposes: (1) to add to the
obligations of AIMCO-GP or surrender any right or power granted
to AIMCO-GP or any affiliate of AIMCO-GP for the benefit of the
limited partners; (2) to reflect the admission,
substitution or withdrawal of partners or the termination of the
Aimco Operating Partnership in accordance with the partnership
agreement; (3) to reflect a change that is of an
inconsequential nature and does not adversely affect the limited
partners in any material respect, or to cure any ambiguity,
correct or supplement any provision in the partnership agreement
not inconsistent with law or with other provisions, or make
other changes with respect to matters arising under the
partnership agreement that will not be inconsistent with law or
with the provisions of the partnership agreement; (4) to
satisfy any requirements, conditions or guidelines contained in
any
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order, directive, opinion, ruling or regulation of a United
States federal or state agency or contained in United States
federal or state law; (5) to reflect such changes as are
reasonably necessary for Aimco to maintain its status as a REIT;
and (6) to modify the manner in which capital accounts are
computed (but only to the extent set forth in the definition of
Capital Account in the partnership agreement or
contemplated by the Internal Revenue Code or the Treasury
Regulations).
With the Consent of the Limited
Partners. Amendments to the partnership agreement
may be proposed by AIMCO-GP or by holders of a majority of the
outstanding Common OP Units and other classes of units
which have the same voting rights as holders of Common
OP Units, excluding AIMCO-LP (a Majority in
Interest). Following such proposal, AIMCO-GP will submit
any proposed amendment to the limited partners. The general
partner will seek the written consent of a Majority in Interest
of the limited partners on the proposed amendment or will call a
meeting to vote thereon and to transact any other business that
AIMCO-GP may deem appropriate.
Procedures For Actions and Consents of
Partners. Meetings of the partners may be called
by AIMCO-GP and will be called upon the receipt by AIMCO-GP of a
written request by a Majority in Interest of the limited
partners. Notice of any such meeting will be given to all
partners not less than seven (7) days nor more than thirty
(30) days prior to the date of such meeting. Partners may
vote in person or by proxy at such meeting. Each meeting of
partners will be conducted by AIMCO-GP or such other person as
AIMCO-GP may appoint under such rules for the conduct of the
meeting as AIMCO-GP or such other person deems appropriate in
its sole and absolute discretion. Whenever the vote or consent
of partners is permitted or required under the partnership
agreement, such vote or consent may be given at a meeting of
partners or may be given by written consent. Any action required
or permitted to be taken at a meeting of the partners may be
taken without a meeting if a written consent setting forth the
action so taken is signed by partners holding a majority of
outstanding Common OP Units (or such other percentage as is
expressly required by the partnership agreement for the action
in question).
Records and Accounting; Fiscal Year. The
partnership agreement requires AIMCO-GP to keep or cause to be
kept at the principal office of the Aimco Operating Partnership
those records and documents required to be maintained by the
Delaware LP Act and other books and records deemed by AIMCO-GP
to be appropriate with respect to the Aimco Operating
Partnerships business. The books of the Aimco Operating
Partnership will be maintained, for financial and tax reporting
purposes, on an accrual basis in accordance with generally
accepted accounting principles, or on such other basis as
AIMCO-GP determines to be necessary or appropriate. To the
extent permitted by sound accounting practices and principles,
the Aimco Operating Partnership, AIMCO-GP and Aimco may operate
with integrated or consolidated accounting records, operations
and principles. The fiscal year of the Aimco Operating
Partnership is the calendar year.
Reports. As soon as practicable, but in no
event later than one hundred and five (105) days after the
close of each calendar quarter and each fiscal year, AIMCO-GP
will cause to be mailed to each limited partner, of record as of
the last day of the calendar quarter or as of the close of the
fiscal year, as the case may be, a report containing financial
statements of the Aimco Operating Partnership, or of Aimco if
such statements are prepared solely on a consolidated basis with
Aimco, for such calendar quarter or fiscal year, as the case may
be, presented in accordance with generally accepted accounting
principles, and such other information as may be required by
applicable law or regulation or as AIMCO-GP determines to be
appropriate. Statements included in quarterly reports are not
audited. Statements included in annual reports are audited by a
nationally recognized firm of independent public accountants
selected by AIMCO-GP.
Tax Matters Partner. The general partner is
the tax matters partner of the Aimco Operating
Partnership for United States Federal income tax purposes. The
tax matters partner is authorized, but not required, to take
certain actions on behalf of the Aimco Operating Partnership
with respect to tax matters. In addition, AIMCO-GP will arrange
for the preparation and timely filing of all returns with
respect to partnership income, gains, deductions, losses and
other items required of the Aimco Operating Partnership for
United States federal and state income tax purposes and will use
all reasonable effort to furnish, within ninety (90) days
of the close of each taxable year, the tax information
reasonably required by limited partners for United States
federal and state income tax reporting purposes. The limited
partners will promptly provide AIMCO-GP with such information as
may be reasonably requested by AIMCO-GP from time to time.
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Dissolution
and Winding Up.
Dissolution. The Aimco Operating Partnership
will dissolve, and its affairs will be wound up, upon the first
to occur of any of the following (each, a Liquidating
Event): (i) December 31, 2093; (ii) an
event of withdrawal, as defined in the Delaware LP Act
(including, without limitation, bankruptcy), of the sole general
partner unless, within ninety (90) days after the
withdrawal, a majority in interest (as such phrase
is used in
Section 17-801(3)
of the Delaware LP Act) of the remaining partners agree in
writing, in their sole and absolute discretion, to continue the
business of the Aimco Operating Partnership and to the
appointment, effective as of the date of withdrawal, of a
successor general partner; (iii) an election to dissolve
the Aimco Operating Partnership made by AIMCO-GP in its sole and
absolute discretion, with or without the consent of the limited
partners; (iv) entry of a decree of judicial dissolution of
the Aimco Operating Partnership under the provisions of the
Delaware LP Act; (v) the occurrence of a Terminating
Capital Transaction (as defined in the Aimco Operating
Partnership Agreement; or (vi) the Redemption (or
acquisition by Aimco, AIMCO-GP
and/or
AIMCO-LP) of all Common OP Units other than Common OP Units
held by AIMCO-GP or AIMCO-LP.
Winding Up. Upon the occurrence of a
Liquidating Event, the Aimco Operating Partnership will continue
solely for the purposes of winding up its affairs in an orderly
manner, liquidating its assets and satisfying the claims of its
creditors and partners. The general partner (or, in the event
that there is no remaining general partner or AIMCO-GP has
dissolved, become bankrupt within the meaning of the Delaware LP
Act or ceased to operate, any person elected by a Majority in
Interest of the limited partners) will be responsible for
overseeing the winding up and dissolution of the Aimco Operating
Partnership and will take full account of the Aimco Operating
Partnerships liabilities and property, and the Aimco
Operating Partnership property will be liquidated as promptly as
is consistent with obtaining the fair value thereof, and the
proceeds therefrom (which may, to the extent determined by
AIMCO-GP, include Aimco stock) will be applied and distributed
in the following order: (i) first, to the satisfaction of
all of the Aimco Operating Partnerships debts and
liabilities to creditors other than the partners and their
Assignees (whether by payment or the making of reasonable
provision for payment thereof); (ii) second, to the
satisfaction of all the Aimco Operating Partnerships debts
and liabilities to AIMCO-GP (whether by payment or the making of
reasonable provision for payment thereof), including, but not
limited to, amounts due as reimbursements under the partnership
agreement; (ii) third, to the satisfaction of all of the
Aimco Operating Partnerships debts and liabilities to the
other partners and any Assignees (whether by payment or the
making of reasonable provision for payment thereof);
(iv) fourth, to the satisfaction of all liquidation
preferences of outstanding Preferred OP Units, if any; and
(v) the balance, if any, to AIMCO-GP, the limited partners
and any Assignees in accordance with and in proportion to their
positive capital account balances, after giving effect to all
contributions, distributions and allocations for all periods.
DESCRIPTION
OF CLASS A COMMON STOCK
General. As of September 30, 2006,
Aimcos charter authorizes the issuance of up to
510,587,500 shares of capital stock with a par value of
$0.01 per share, of which 426,157,736 shares were
classified as Class A Common Stock. As of
September 30, 2006, there were 95,909,969 shares of
Class A Common Stock issued and outstanding. The
Class A Common Stock is traded on the NYSE under the symbol
AIV. Computershare Trust Company, N.A. serves as
transfer agent and registrar of the Class A Common Stock.
Holders of the Class A Common Stock are entitled to receive
dividends, when and as declared by Aimcos Board of
Directors, out of funds legally available therefor. The holders
of shares of Class A Common Stock, upon any liquidation,
dissolution or winding up of Aimco, are entitled to receive
ratably any assets remaining after payment in full of all
liabilities of Aimco and any liquidation preferences of
preferred stock and equity stock. The shares of Class A
Common Stock possess ordinary voting rights for the election of
directors of Aimco and in respect of other corporate matters,
each share entitling the holder thereof to one vote. Holders of
shares of Class A Common Stock do not have cumulative
voting rights in the election of directors, which means that
holders of more than 50% of the shares of Class A Common
Stock voting for the election of directors can elect all of the
directors if they choose to do so and the holders of the
remaining shares cannot elect any directors. Holders of shares
of Class A Common Stock do not have preemptive rights which
means they have no right to acquire any additional shares of
Class A Common Stock that may be issued by Aimco at a
subsequent date.
Restrictions on Ownership and Transfer. For
Aimco to qualify as a REIT under the Internal Revenue Code, not
more than 50% in value of its outstanding capital stock may be
owned, directly or indirectly, by five or fewer
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individuals (as defined in the Internal Revenue Code to include
certain entities) during the last half of a taxable year, and
the shares of capital stock must be beneficially owned by 100 or
more persons during at least 335 days of a taxable year of
12 months or during a proportionate part of a shorter
taxable year. Because Aimcos Board of Directors believes
that it is essential for Aimco to continue to qualify as a REIT
and to provide additional protection for Aimcos
stockholders in the event of certain transactions, Aimcos
Board of Directors has adopted provisions of the charter
restricting the acquisition of shares of Class A Common
Stock. Subject to certain exceptions specified in the charter,
no holder may own, or be deemed to own by virtue of various
attribution and constructive ownership provisions of the
Internal Revenue Code and
Rule 13d-3
under the Exchange Act, more than 8.7% (or 15% in the case of
certain pension trusts described in the Internal Revenue Code,
investment companies registered under the Investment Company Act
of 1940 and Mr. Considine) of the outstanding shares of
Class A Common Stock. For purposes of calculating the
amount of stock owned by a given individual, the
individuals Class A Common Stock and Common
OP Units are aggregated. Under certain conditions,
Aimcos Board of Directors may waive the ownership limit.
However, in no event may such holders direct or indirect
ownership of Class A Common Stock exceed 9.8% of the total
outstanding shares of Class A Common Stock. As a condition
of such waiver, the Aimco Board of Directors may require
opinions of counsel satisfactory to it
and/or an
undertaking from the applicant with respect to preserving the
REIT status of Aimco. If shares of Class A Common Stock in
excess of the ownership limit, or shares of Class A Common
Stock that would cause the REIT to be beneficially owned by
fewer than 100 persons, or that would result in Aimco being
closely held, within the meaning of
Section 856(h) of the Internal Revenue Code, or that would
otherwise result in Aimco failing to qualify as a REIT, are
issued or transferred to any person, such issuance or transfer
shall be null and void to the intended transferee, and the
intended transferee would acquire no rights to the stock. Shares
of Class A Common Stock transferred in excess of the
ownership limit or other applicable limitations will
automatically be transferred to a trust for the exclusive
benefit of one or more qualifying charitable organizations to be
designated by Aimco. Shares transferred to such trust will
remain outstanding, and the trustee of the trust will have all
voting and dividend rights pertaining to such shares. The
trustee of such trust may transfer such shares to a person whose
ownership of such shares does not violate the ownership limit or
other applicable limitation. Upon a sale of such shares by the
trustee, the interest of the charitable beneficiary will
terminate, and the sales proceeds would be paid, first, to the
original intended transferee, to the extent of the lesser of
(i) such transferees original purchase price (or the
market value of such shares on the date of the violative
transfer if purportedly acquired by gift or devise) and
(ii) the price received by the trustee, and, second, any
remainder to the charitable beneficiary. In addition, shares of
stock held in such trust are purchasable by Aimco for a
90-day
period at a price equal to the lesser of the price paid for the
stock by the original intended transferee (or the original
market value of such shares if purportedly acquired by gift or
devise) and the market price for the stock on the date that
Aimco determines to purchase the stock. The
90-day
period commences on the date of the violative transfer or the
date that Aimcos Board of Directors determines in good
faith that a violative transfer has occurred, whichever is
later. All certificates representing shares of Class A
Common Stock bear a legend referring to the restrictions
described above.
All persons who own, directly or by virtue of the attribution
provisions of the Internal Revenue Code and
Rule 13d-3
under the Exchange Act, more than a specified percentage of the
outstanding shares of Class A Common Stock must file a
written statement or an affidavit with Aimco containing the
information specified in the Aimco charter within 30 days
after January 1 of each year. In addition, each stockholder
shall upon demand be required to disclose to Aimco in writing
such information with respect to the direct, indirect and
constructive ownership of shares as Aimcos Board of
Directors deems necessary to comply with the provisions of the
Internal Revenue Code applicable to a REIT or to comply with the
requirements of any taxing authority or governmental agency.
The ownership limitations may have the effect of precluding
acquisition of control of Aimco by a third party unless
Aimcos Board of Directors determines that maintenance of
REIT status is no longer in the best interests of Aimco.
Provisions
of Maryland Law Applicable to Capital Stock.
Business Combinations. Under Maryland law,
certain business combinations (including a merger,
consolidation, share exchange or, in certain circumstances, an
asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and any person who
beneficially owns 10% or more of the voting power of the
corporations shares or an affiliate or associate of the
corporation who, at any time within the two-year period
105
prior to the date in question, was the beneficial owner of 10%
or more of the voting power of the then-outstanding voting stock
of the corporation (an Interested Stockholder) or an
affiliate or associate thereof are prohibited for five years
after the most recent date on which the Interested Stockholder
became an Interested Stockholder. Thereafter, any such business
combination must be recommended by the Board of Directors of the
corporation and approved by the affirmative vote of at least
(i) 80% of the votes entitled to be cast by holders of
outstanding voting shares of the corporation, voting together as
a single voting group, and (ii) two-thirds of the votes
entitled to be cast by holders of outstanding voting shares of
the corporation other than shares held by the Interested
Stockholder or an affiliate or associate of the Interested
Stockholder with whom the business combination is to be
effected, unless, among other conditions, the corporations
stockholders receive a specified minimum price for their shares
and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares.
For purposes of determining whether a person is an Interested
Stockholder of Aimco, ownership of Common OP Units will be
treated as beneficial ownership of the shares of Class A
Common Stock which may be issued in exchange for the Common
OP Units when such Common OP Units are tendered for
redemption. The business combination statute could have the
effect of discouraging offers to acquire Aimco and of increasing
the difficulty of consummating any such offer. These provisions
of Maryland law do not apply, however, to business combinations
that are approved or exempted by the Board of Directors of the
corporation prior to the time that the Interested Stockholder
becomes an Interested Stockholder. The Aimco Board of Directors
has not passed such a resolution.
Control Share Acquisitions. Maryland law
provides that control shares of a Maryland
corporation acquired in a control share acquisition
have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers
or directors who are employees of the corporation. Control
shares are voting shares of stock that, if aggregated with
all other shares of stock previously acquired by that person,
would entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of voting power:
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one-tenth or more but less than one-third;
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one-third or more but less than a majority; or
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a majority or more of all voting power.
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Control shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained
stockholder approval. For purposes of determining whether a
person or entity is an Interested Stockholder of Aimco,
ownership of Common OP Units will be treated as beneficial
ownership of the shares of Class A Common Stock which may
be issued in exchange for the Common OP Units when such
Common OP Units are tendered for redemption. A
control share acquisition means the acquisition of
control shares, subject to certain exceptions. A person who has
made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to
pay expenses), may compel the corporations Board of
Directors to call a special meeting of stockholders, to be held
within 50 days of demand, to consider the voting rights of
the shares. If no request for a meeting is made, the corporation
may itself present the question at any stockholders meeting. If
voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person
statement as required by the statute, then, subject to
certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting
rights have previously been approved) for fair value, determined
without regard to the absence of voting rights, as of the date
of the last control share acquisition or of any meeting of
stockholders at which the voting rights of such shares were
considered and not approved. If voting rights for control shares
are approved at a stockholders meeting and the acquiror becomes
entitled to vote a majority of the shares entitled to vote, all
other stockholders may exercise appraisal rights. The fair value
of the shares as determined for purposes of the appraisal rights
may not be less than the highest price per share paid in the
control share acquisition, and certain limitations and
restrictions otherwise applicable to the exercise of
dissenters rights do not apply in the context of a control
share acquisition.
The control share acquisition statute does not apply to shares
acquired in a merger, consolidation or share exchange if the
corporation is a party to the transaction, or to acquisitions
approved or exempted by the corporations articles of
incorporation or bylaws prior to the control share acquisition.
No such exemption appears in Aimcos charter or bylaws. The
control share acquisition statute could have the effect of
discouraging offers to acquire Aimco and of increasing the
difficulty of consummating any such offer.
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COMPARISON
OF YOUR PARTNERSHIP AND THE AIMCO OPERATING
PARTNERSHIP
The information below highlights a number of the significant
differences between your partnership and the Aimco Operating
Partnership relating to, among other things, form of
organization, permitted investments, policies and restrictions,
management structure, compensation and fees, and investor
rights. These comparisons are intended to assist you in
understanding how your investment will change after completion
of the Transactions and liquidation and dissolution of your
partnership, if you elect to receive Common OP Units in
lieu of cash with respect to the Affiliated Contribution.
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Your Partnership
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Aimco Operating Partnership
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Form of Organization and Assets
Owned
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Your Partnership is a limited
partnership organized under Illinois law. VMS is a general
partnership organized under Illinois law.
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The Aimco Operating Partnership is
organized as a Delaware limited partnership. The Aimco Operating
Partnership owns interests (either as a Delaware limited
partnership directly or through subsidiaries) in numerous
multifamily apartment properties. The Aimco Operating
Partnership conducts substantially all of the operations of
Aimco, a corporation organized under Maryland and as a REIT.
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Duration of Existence
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Your Partnership was presented to
limited partners as a finite life investment, with limited
partners to receive regular cash distributions out of your
partnerships profits and losses. The termination date of
your partnership is December 31, 2030. The termination date
of VMS is September 26, 2044. If VMS cannot refinance or
repay its indebtedness at or prior to maturity on
January 1, 2008, your partnership and VMS will be required
to sell the Properties and liquidate under the VMS plan of
reorganization.
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The term of the Aimco Operating
Partnership continues indefinitely, unless the Aimco Operating
Partnership is dissolved sooner pursuant to the terms of the
Aimco Operating Partnership Agreement or as provided by law.
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Purpose and Permitted Activities
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Your Partnership was formed for
the purpose of serving as general partner of VMS. VMS was formed
for the purpose of making investments in various types of real
properties which offer potential capital appreciation and cash
distributions to its limited partners.
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The purpose of the Aimco Operating
Partnership is to conduct any business that may be lawfully
conducted by a limited partnership organized pursuant to the
Delaware LP Act, provided that such business is to be conducted
in a manner that permits Aimco to be qualified as a REIT, unless
Aimco ceases to qualify as a REIT. The Aimco Operating
Partnership is authorized to perform any and all acts for the
furtherance of the purposes and business of the Aimco Operating
Partnership, provided that the Aimco Operating Partnership may
not take, or refrain from taking, any action which, in the
judgment of its general partner could (i) adversely
affect the ability of Aimco to continue to qualify as a REIT,
(ii) subject Aimco to certain income and excise taxes, or
(iii) violate any law or regulation of any governmental
body or agency (unless such action, or inaction, is specifically
consented to by Aimco). Subject to the foregoing, the Aimco
Operating Partnership may invest in or enter into partnerships,
joint ventures, or similar arrangements. The Aimco Operating
Partnership currently invests, and intends to continue to
invest, in a real estate portfolio primarily consisting of
multifamily rental apartment properties.
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Your Partnership
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Aimco Operating Partnership
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Additional Equity
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The Managing General Partner of
your Partnership is authorized to issue additional limited
partnership interests in your Partnership and may admit
additional limited partners up to an aggregate capital
contribution of $136,800,000 by all limited partners of the
Partnerships. The capital contribution need not be equal for all
limited partners.
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The general partner is authorized
to issue additional partnership interests in the Aimco Operating
Partnership for any partnership purpose from time to time to the
limited partners and to other persons, and to admit such other
persons as additional limited partners, on terms and conditions
and for such capital contributions as may be established by the
general partner in its sole discretion. The net capital
contribution need not be equal for all OP Unitholders. No
action or consent by the Common OP Unitholders is required in
connection with the admission of any additional
OP Unitholder. Subject to Delaware law, any additional
partnership interests may be issued in one or more classes, or
one or more series of any of such classes, with such
designations, preferences and relative, participating, optional
or other special rights, powers and duties as shall be
determined by the general partner, in its sole and absolute
discretion without the approval of any OP Unitholder, and set
forth in a written document thereafter attached to and made an
exhibit to the Aimco Operating Partnership Agreement.
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Restrictions Upon Related Party
Transactions
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Except for loans made by your
Managing General Partner or its affiliates to your Partnership,
your agreement of limited partnership does not restrict related
party transactions.
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The Aimco Operating Partnership
may lend or contribute funds or other assets to its subsidiaries
or other persons in which it has an equity investment, and such
persons may borrow funds from the Aimco Operating Partnership,
on terms and conditions established in the sole and absolute
discretion of the general partner. To the extent consistent with
the business purpose of the Aimco Operating Partnership and the
permitted activities of the general partner, the Aimco Operating
Partnership may transfer assets to joint ventures, limited
liability companies, partnerships, corporations, business trusts
or other business entities in which it is or thereby becomes a
participant upon such terms and subject to such conditions
consistent with the Aimco Operating Partnership Agreement and
applicable law as the general partner, in its sole and absolute
discretion, believes to be advisable. Except as expressly
permitted by the Aimco Operating Partnership Agreement, neither
the general partner nor any of its affiliates may sell, transfer
or convey any property to the Aimco Operating Partnership,
directly or indirectly, except pursuant to transactions that are
determined by the general partner in good faith to be fair and
reasonable.
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Borrowing Policies
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The Managing General Partner of
your Partnership is authorized to borrow money in the ordinary
course of business and as security therefor to mortgage all or
any part of the Properties in addition to obtaining
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The Aimco Operating Partnership
Agreement contains no restrictions on borrowings, and the
general partner has full power and authority to borrow money on
behalf of the Aimco Operating Partnership. The Aimco Operating
Partnership has credit agreements
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Your Partnership
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Aimco Operating Partnership
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loans specifically provided for
in your Partnerships agreement of limited partnership.
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that restrict, among other
things, its ability to incur indebtedness.
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Review of Investor Lists
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Your Partnerships agreement
of limited partnership entitles the limited partners to have
access to the current list of the names and addresses of all
limited partners at all reasonable times at the principal office
of your Partnership.
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Each Common OP Unitholder has
the right, upon written demand with a statement of the purpose
of such demand and at such Common OP Unitholders own
expense, to obtain a current list of the name and last known
business, residence or mailing address of the general partner
and each other Common OP Unitholder.
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Management Control
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Subject to the limitations set
forth under applicable law and the terms of your
Partnerships agreement of limited partnership, the
Managing General Partner of your Partnership has the power to do
all things set forth in your Partnerships agreement of
limited partnership. The Managing General Partner represents
your Partnership in all transactions with third parties. No
limited partner has any right or power to take part in any way
in the management of your Partnership business except as may be
expressly provided in your Partnerships agreement of
limited partnership or by applicable statutes.
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All management powers over the
business and affairs of the Aimco Operating Partnership are
vested in AIMCO-GP, Inc., which is the general partner. No
Common OP Unitholder has any right to participate in or
exercise control or management power over the business and
affairs of the Aimco Operating Partnership. The Common
OP Unitholders have the right to vote on certain matters
described below. The general partner may not be removed by the
OP Unitholders with or without cause. In addition to the
powers granted a general partner of a limited partnership under
applicable law or that are granted to the general partner under
any other provision of the Aimco Operating Partnership
Agreement, the general partner, subject to the other provisions
of the Aimco Operating Partnership Agreement, has full power and
authority to do all things deemed necessary or desirable by it
to conduct the business of the Aimco Operating Partnership, to
exercise all powers of the Aimco Operating Partnership and to
effectuate the purposes of the Aimco Operating Partnership. The
Aimco Operating Partnership may incur debt or enter into other
similar credit, guarantee, financing or refinancing arrangements
for any purpose upon such terms as the general partner
determines to be appropriate, and may perform such other acts
and duties for and on behalf of the Aimco Operating Partnership
as are provided in the Aimco Operating Partnership Agreement.
The general partner is authorized to execute, deliver and
perform certain agreements and transactions on behalf of the
Aimco Operating Partnership without any further act, approval or
vote of the OP Unitholders.
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Management Liability and
Indemnification
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Under your Partnerships
agreement of limited partnership, the Managing General Partner
will not incur any liability to your Partnership or any other
partner for any mistakes or errors in judgment or for any act or
omission believed by it in good faith to be within the scope of
authority conferred upon it by your Partnerships agreement
of limited partnership. In addition, your Partnership will, to
the extent permitted by law, indemnify the Managing General
Partner against and from any personal loss, liability
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Notwithstanding anything to the
contrary set forth in the Aimco Operating Partnership Agreement,
the general partner is not liable to the Aimco Operating
Partnership for losses sustained, liabilities incurred or
benefits not derived as a result of errors in judgment or
mistakes of fact or law of any act or omission if the general
partner acted in good faith. The Aimco Operating Partnership
Agreement provides for indemnification of Aimco, or any director
or officer of Aimco (in its capacity as the previous general
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Your Partnership
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Aimco Operating Partnership
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(including attorneys fees)
or damage incurred by it as the result of any act or omission in
its capacity as managing general partner unless such loss,
liability or damage results from fraud, malfeasance, bad faith,
breach of fiduciary duty, gross negligence or intentional
misconduct of the Managing General Partner.
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partner of the Aimco Operating
Partnership), the general partner, any officer or director of
the general partner or the Aimco Operating Partnership and such
other persons as the general partner may designate from and
against all losses, claims, damages, liabilities, joint or
several, expenses (including legal fees), fines, settlements and
other amounts incurred in connection with any actions relating
to the operations of the Aimco Operating Partnership, as set
forth in the Aimco Operating Partnership Agreement. The Delaware
LP Act provides that subject to the standards and restrictions,
if any, set forth in its partnership agreement, a limited
partnership may, and shall have the power to, indemnify and hold
harmless any partner or other person from and against any and
all claims and demands whatsoever. It is the position of the SEC
and certain state securities administrations that
indemnification of directors and officers for liabilities
arising under the Securities Act of 1933 is against public
policy and is unenforceable pursuant to Section 14 of the
Securities Act of 1933 and their respective state securities
laws.
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Anti-Takeover Provisions
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Under your Partnerships
agreement of limited partnership, the limited partners may
remove a general partner for cause following written notice to
the general partner and upon a vote of the limited partners
owning 50% or more of the outstanding units. A limited partner
may not transfer his interests without the written consent of
the general partner which may be withheld at the sole discretion
of the general partner.
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Except in limited circumstances,
the general partner has exclusive management power over the
business and affairs of the Aimco Operating Partnership. The
general partner may not be removed as general partner of the
Aimco Operating Partnership by the OP Unitholders with or
without cause. Under the Aimco Operating Partnership Agreement,
the general partner may, in its sole discretion, prevent a
transferee of a Common OP Unit from becoming a substituted
limited partner pursuant to the Aimco Operating Partnership
Agreement. The general partner may exercise this right of
approval to deter, delay or hamper attempts by persons to
acquire a controlling interest in the Aimco Operating
Partnership. Additionally, the Aimco Operating Partnership
Agreement contains restrictions on the ability of Common
OP Unitholders to transfer their Common OP Units.
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Amendment of Your Partnership
Agreement
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The Managing General Partner may,
and, at the request of a limited partner owning at least 10% of
the units, shall, submit any proposed amendment to your
partnership agreement. The Managing General Partner may include
its recommendation as to such proposal. Limited partners owning
51% or more of the units must approve any proposed amendment,
except that any amendment that causes a reduction in the limited
partners rights and interests requires the consent of
limited partners owning 100% of the units.
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With the exception of certain
circumstances set forth in the Aimco Operating Partnership
Agreement, whereby the general partner may, without the consent
of the Common OP Unitholders, amend the Aimco Operating
Partnership Agreement, amendments to the Aimco Operating
Partnership Agreement require the consent of the holders of a
majority of the outstanding Common OP Units, excluding
Aimco and certain other limited exclusions (a Majority in
Interest). Amendments to the Aimco Operating Partnership
Agreement may be proposed by the general partner or by holders
of a Majority in Interest. Following such proposal, the general
partner will submit any proposed amendment to the OP
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Your Partnership
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Aimco Operating Partnership
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Unitholders. The general partner
will seek the written consent of the OP Unitholders on the
proposed amendment or will call a meeting to vote thereon.
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Compensation and Fees
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In addition to the right to
distributions in respect of its partnership interest and
reimbursement for
out-of-pocket
expenses as set forth in your Partnerships agreement of
limited partnership, the Managing General Partner and its
affiliates may receive fees for services rendered to your
Partnership or VMS.
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The general partner does not
receive compensation for its services as general partner of the
Aimco Operating Partnership. However, the general partner is
entitled to payments, allocations and distributions in its
capacity as general partner of the Aimco Operating Partnership.
In addition, the Aimco Operating Partnership is responsible for
all expenses incurred relating to the Aimco Operating
Partnerships ownership of its assets and the operation of
the Aimco Operating Partnership and reimburses the general
partner for such expenses paid by the general partner. The
employees of the Aimco Operating Partnership receive
compensation for their services.
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Liability of Investors
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Under your Partnerships
agreement of limited partnership, the liability of each of the
limited partners for its share of the losses or debts of your
Partnership is limited to the total capital contribution of such
limited partner.
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Except for fraud, willful
misconduct or gross negligence, no OP Unitholder has personal
liability for the Aimco Operating Partnerships debts and
obligations, and liability of the OP Unitholders for the
Aimco Operating Partnerships debts and obligations is
generally limited to the amount of their investment in the Aimco
Operating Partnership. However, the limitations on the liability
of limited partners for the obligations of a limited partnership
have not been clearly established in some states. If it were
determined that the Aimco Operating Partnership had been
conducting business in any state without compliance with the
applicable limited partnership statute, or that the right or the
exercise of the right by the holders of Common OP Units as
a group to make certain amendments to the Aimco Operating
Partnership Agreement or to take other action pursuant to the
Aimco Operating Partnership Agreement constituted participation
in the control of the Aimco Operating
Partnerships business, then a holder of Common
OP Units could be held liable under certain circumstances
for the Aimco Operating Partnerships obligations to the
same extent as the general partner.
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Fiduciary Duties
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Under your Partnerships
agreement of limited partnership, the Managing General Partner
must act as a fiduciary with respect of the assets and business
of the Partnership. The Managing General Partner must use its
best efforts to do all things and perform such duties as may be
reasonably necessary to the successful operation of your
Partnership. The Managing General Partner must devote such of
its time to your Partnership business as may be reasonably
necessary to carry on and conduct your Partnerships
business. However, except as
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Unless otherwise provided for in
the relevant partnership agreement, Delaware law generally
requires a general partner of a Delaware limited partnership to
adhere to fiduciary duty standards under which it owes its
limited partners the highest duties of good faith, fairness and
loyalty and which generally prohibit such general partner from
taking any action or engaging in any transaction as to which it
has a conflict of interest. The Aimco Operating Partnership
Agreement expressly authorizes the general partner to enter
into, on behalf of the Aimco
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Your Partnership
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Aimco Operating Partnership
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specifically provided in your Partnerships agreement of limited partnership, the partners may engage in whatever activities they choose, whether the same be competitive with your Partnership or otherwise, including without limitation, the acquisition, ownership, financing, syndication, development, improvement, leasing, operation, management and brokerage of real
property. In general, your partnerships agreement of limited partnership and the Aimco Operating Partnersh |