Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM l0-Q

Quarterly Report Under Section 13 or 15(d)
of The Securities Exchange Act of 1934

For Quarter Ended September 30, 2003

Commission file number O-17248

OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
(Exact Name of Registrant as Specified In Its Charter)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      X      No            

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Consolidated Balance Sheets

September 30, 2003 and December 31, 2002

The accompanying notes are an integral part of these financial statements

OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 2003 and 2002 (Unaudited)

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

OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2003 and 2002
(UNAUDITED)

See notes 2, 3 and 8 for supplemental disclosure of non-cash investing activities.

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

OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements

September 30, 2003

(1)     Summary of Significant Accounting Policies

(2)     Loans Secured by Trust Deeds and Allowance for Loan Losses

(3)     Real Estate Held for Sale

(4)     Real Estate Held for Investment

(5)     Transactions with Affiliates

(6)     Note Payable

(7)     Line of Credit Payable

(8)     Supplemental Disclosure of Non-Cash Operating and Investing Activities

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

Forward Looking Statements

        Some of the information in this Form 10-Q may contain forward-looking statements. Such statements can be identified by the use of forward-looking words such as “may,” “will,” “expect,” “anticipate,” “estimate,”“continue” or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial conditions 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 the Partnership’s Form 10-Q. Although management of the Partnership believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, there are certain factors, in addition to these risk factors and cautioning statements, such as general economic conditions, local real estate conditions, adequacy of reserves, or weather and other natural occurrences that might cause a difference between actual results and those forward-looking statements.

Results of Operations

Three Months Ended September 30, 2003 Compared to 2002

The net income increase of $240,000 (4.6%) for 2003 compared to 2002 was due to:

The net income increase in 2003 as compared to 2002 was offset by:

        Gain on sale of real estate increased by $194,000 (88.7%) for the three months ended September 30, 2003, as compared to the same period in 2002, due to increased gains from the sale of interests in the second ocean house in Oregon Leisure Homes, LLC (OLH) during the three months ended September 30, 2003.

        The decrease in rental and other expenses on real estate properties of $300,000 (43.8%) between the quarter ended September 30, 2003 and 2002 was primarily the result of a decrease in expenses from the Partnership’s investment in OLH of approximately $61,000 as sales and operations wind down for that property and due to the sale of the commercial building located in Monterey, California in March 2003 and the sale of the hotel property located in Phoenix, Arizona in June 2003.

        The decrease in the provision for loan losses of $343,000 (100%) was the result of the net increase in specific reserves on loans in the total amount of $343,000 during the quarter ended September 30, 2002. There was no specific or general allowance established on loans during the quarter ended September 30, 2003.

        Interest income on loans secured by trust deeds decreased $75,000 (1.1%) for the quarter ended September 30, 2003, as compared to the same period in 2002. This decrease was a result of a decrease in the weighted average yield of the loan portfolio from 11.8% for the quarter ended September 30, 2002 to 11.3% for the quarter ended September 30, 2003 as a result of the continued decline in general market interest rates over the past year and the required decrease in the interest rate on a $12,500,000 delinquent loan from 12.5% to 7.0% pursuant to the stipulation of the bankruptcy court (see “Financial Condition – Loan Portfolio below). The decrease in interest income resulting from the decrease in the weighted average yield of the loan portfolio was partially offset by an increase in the weighted balance of the loan portfolio of 1.2% during the quarter ended September 30, 2003 as compared to 2002.

        The decrease in rental and other income from real estate properties of $96,000 (11.9%) was due primarily to the sale of a commercial building located in Monterey, California in March 2003 and the sale of a hotel property located in Phoenix, Arizona in June 2003.

        Interest income on investments (other income) decreased by $21,000 (41.8%) for the quarter ended September 30, 2003, as compared to the same period in 2002 due primarily to a decrease in the weighted average yield of the Partnership’s money market investments from approximately 1.9% for the quarter ended September 30, 2002 to approximately 0.9% during the quarter ended September 30, 2003.

        Management fees to the General Partner are paid pursuant to the Partnership Agreement and are determined at the sole discretion of the General Partner. The increase in management fees of $437,000 (32.1%) during the quarter ended September 30, 2003 as compared to 2002 was partially a result of the growth in the average loan portfolio of approximately 1.2% during the quarter ended September 30, 2003 as compared to the quarter ended September 30, 2002 and also due to collections on delinquent loans during the quarter ended September 30, 2003.

        The maximum management fee permitted under the Partnership Agreement is 2 ¾% per year of the average unpaid balance of mortgage loans. For the years 2000, 2001 and 2002 and the nine months ended September 30, 2003 (annualized), the management fees were 1.85%, 1.48%, 1.46% and 1.84% of the average unpaid balance of mortgage loans, respectively.

        In determining the management fees and hence the yield to the partners, the General Partner may consider a number of factors, including current market yields, delinquency experience, uninvested cash and real estate activities. The General Partner expects that the management fees that it receives from the Partnership will vary in amount and percentage from period to period, and it is highly likely that the General Partner will again receive less than the maximum management fees in the future. However, if the General Partner chooses to take the maximum allowable management fees in the future, the yield paid to limited partners may be reduced.

        If the maximum management fees had been paid to the General Partner during the nine months ended September 30, 2003, the management fees would have been $5,221,000 (increase of $1,705,000), which would have reduced net income allocated to limited partners by approximately 10.5%, and net income allocated to limited partners per weighted average limited partner unit by the same percentage to $.05.

Nine Months Ended September 30, 2003 Compared to 2002

The net income increase of $270,000 (1.7%) for 2003 compared to 2002 was due to:

The net income increase in 2003 as compared to 2002 was offset by:

        Interest income on loans secured by trust deeds increased $1,635,000 (8.5%) for the nine months ended September 30, 2003, as compared to the same period in 2002. This increase was a result of a 6.0% growth in the total loan portfolio during the nine months ended September 30, 2003 as compared to 2002 and the collection of interest on certain delinquent loans during the nine month period. The increase in the loan portfolio was partially offset by a decrease in the weighted average yield of the loan portfolio from 11.9% for the nine months ended September 30, 2002 to 11.5% for the nine months ended September 30, 2003.

        Gain on sale of real estate increased by $283,000 (25.0%) for the nine months ended September 30, 2003, as compared to the same period in 2002 due to increased sales at the manufactured home subdivision development located in Ione, California and increased gain from the sale of the interests in the ocean houses in OLH during the nine months ended September 30, 2003.

        The decrease in legal and accounting expenses of $43,000 (25.3%) was due to professional fees incurred in the first quarter 2002 as a result of a new S-11 filing (registration of new units) with the Securities and Exchange Commission in January 2002 and the S-11 Post-Effective Amendment filing in April 2002. No registration of new units was made during the nine months ended September 30, 2003.

        The decrease in the provision for loan losses of $705,000 (50.9%) was the result of the net increase in specific and general reserves on loans in the total amount of $1,384,000 during the nine months ended September 30, 2002. Specific reserves were established on two loans in the total amount of $679,000 during the nine months ended September 30, 2003.

        The decrease in rental and other income from real estate properties of $296,000 (12.1%) was due primarily to the sale of a commercial building located in Monterey, California in March 2003 and the sale of a hotel property located in Phoenix, Arizona in June 2003.

        Interest income on investments (other income) decreased by $172,000 (57.9%) for the nine months ended September 30, 2003, as compared to the same period in 2002 due to a decrease of approximately $14,600,000 in the average amount of cash and equivalents held by the Partnership during the nine months ended September 30, 2003 as compared to 2002, and a decrease in the weighted average yield of the Partnership’s money market investments from approximately 1.6% for the nine months ended September 30, 2002 to approximately 1.3% for the nine months ended September 30, 2003.

        Management fees to the General Partner are paid pursuant to the Partnership Agreement and are determined at the sole discretion of the General Partner. The increase in management fees of $874,000 (33.1%) during the nine months ended September 30, 2003 as compared to 2002 was partially a result of an increase in interest income collected on delinquent loans during the nine month period and the growth in the loan portfolio of approximately 6.0%.

        The maximum management fee permitted under the Partnership Agreement is 2 ¾% per year of the average unpaid balance of mortgage loans. For the years 2000, 2001 and 2002 and the nine months ended September 30, 2003 (annualized), the management fees were 1.85%, 1.48%, 1.46% and 1.84% of the average unpaid balance of mortgage loans, respectively.

        In determining the management fees and hence the yield to the partners, the General Partner may consider a number of factors, including current market yields, delinquency experience, uninvested cash and real estate activities. The General Partner expects that the management fees that it receives from the Partnership will vary in amount and percentage from period to period, and it is highly likely that the General Partner will again receive less than the maximum management fees in the future. However, if the General Partner chooses to take the maximum allowable management fees in the future, the yield paid to limited partners may be reduced.

        If the maximum management fees had been paid to the General Partner during the nine months ended September 30, 2003, the management fees would have been $5,221,000 (increase of $1,705,000), which would have reduced net income allocated to limited partners by approximately 10.5%, and net income allocated to limited partners per weighted average limited partner unit by the same percentage to $.05.

        The increase in rental and other expenses on real estate properties of $153,000 (7.5%) between the nine months ended September 30, 2003 and 2002 was primarily the result of the following:

        These increases were partially offset by decreases in rental expenses of approximately $240,000 as a result of the sales of the commercial building located in Monterey, California in March 2003 and hotel property located in Phoenix, Arizona in June 2003, continued lot and house sales at the manufactured home subdivision development in Ione, California, and other properties sold during 2002.

        The increase in the provision for losses on real estate held for sale of $898,000 was due to the creation of reserves on two properties in the total amount of $585,000 during the nine months ended September 30, 2003. During the nine months ended September 30, 2002, an allowance established on a manufactured home subdivision development located in Ione, California was reversed resulting in a net recovery of losses on real estate held for sale of $314,000.

Financial Condition

September 30, 2003 and December 31, 2002

Loan Portfolio

        The number of Partnership mortgage investments decreased from 100 to 97, and the average loan balance increased from $2,602,000 to $2,722,000 between December 31, 2002 and September 30, 2003.

        Approximately $17,129,000 (6.5%) and $26,327,000 (10.1%) of the loans invested in by the Partnership were more than 90 days delinquent in monthly payments as of September 30, 2003 and December 31, 2002, respectively. Of these amounts, approximately $3,450,000 (1.3%) and $6,503,000 (2.5%), respectively, were in the process of foreclosure, and approximately $1,600,000 (0.6%) and $4,300,000 (1.7%), respectively, involved loans to borrowers who were in bankruptcy. In addition, the Partnership’s investment in loans that were past maturity (delinquent in principal) but current in monthly payments was approximately $25,682,000 (9.7%) and $42,126,000 (16.2%) as of September 30, 2003 and December 31, 2002, respectively. Of the total past maturity loans as of September 30, 2003, $16,700,000 was paid off subsequent to quarter end.

        Loans in the process of foreclosure as of December 31, 2002 consisted of five loans, of which one loan in the amount of $353,000 was written off by the Partnership during the nine months ended September 30, 2003, the borrower of one loan in the amount of $1,600,000 entered into bankruptcy, one loan in the amount of $1,100,000 became current and is no longer in foreclosure, and two loans in the total amount of $3,450,000 are still delinquent and in foreclosure.

        Loans to borrowers who were in bankruptcy as of December 31, 2002 consisted of two loans, one in the amount of $2,000,000 was foreclosed upon during the nine months ended September 30, 2003 and one loan in the amount of $2,300,000 was foreclosed upon and the property sold during the nine months ended September 30, 2003. In addition, one loan in the amount of $1,600,000 was reclassified from a loan in the process of foreclosure to a loan subject to bankruptcy during the nine months ended September 30, 2003.

        As of September 30, 2003 and December 31, 2002, the Partnership held the following types of mortgages:

        As of September 30, 2003 and December 31, 2002, approximately 43% of the Partnership’s mortgage loans are secured by real property located in Northern California and approximately 51% and 55%, respectively, of the Partnership’s mortgage loans are secured by real property located in all of California.

        The Partnership’s investment in construction loans increased by $13,427,000 (106%) since December 31, 2002. This increase was primarily due to additional construction advances made on existing loans and two new construction loans in the total amount of approximately $7,500,000 funded during the nine months ended September 30, 2003.

        The Partnership’s investment in loans on unimproved land decreased by $2,907,000 (17.2%) since December 31, 2002. This decrease was the result of the repayment of six loans in the total amount of $14,300,000 during the nine months ended September 30, 2003, net of eight new loans on unimproved land in the total amount of $11,390,000.

        Changes in the allowance for loan losses for the quarter ended September 30, 2003 and 2002 were as follows:

        In June 2003, the borrower of a participated loan, with a principal balance outstanding to the Partnership of $12,500,000 (which represents a 62.5% pari pasu interest in a first trust deed of $20,000,000), filed bankruptcy. In July 2003, a stipulation of the bankruptcy court was executed, whereby the terms of the original loan were modified as follows: 1) an additional $2,000,000 was advanced to the borrower ($1,375,000 by the Partnership) in August 2003 for operating purposes; 2) the interest rate on the loan was reduced from 12.5% to 7.0% effective July 17, 2003; 3) interest payments have been accrued and deferred through October 31, 2003, with such deferred interest to be payable upon maturity; 4) interest payments are to recommence monthly on November 15, 2003; and 5) the maturity date was extended from June 14, 2003 to June 14, 2005. In the event of default of the stipulation by the borrower, the automatic bankruptcy stay will be lifted and the participants will be allowed to complete a foreclosure sale of the collateral. The Partnership has accrued interest in the amount of $258,000 as of September 30, 2003. No specific reserve has been provided for this loan based on the underlying collateral value.

Real Estate Properties Held for Sale and Investment

        The Partnership currently holds title to 14 properties that were foreclosed on or purchased by the Partnership since 1994 in the amount of $29,680,000 (including properties held in three limited liability companies), net of allowance for losses of $660,000 and accumulated depreciation and amortization of $727,000. As of September 30, 2003, properties held for sale total $13,851,000 and properties held for investment total $15,829,000. When the Partnership acquires property by foreclosure, it typically earns less income on those properties than could be earned on mortgage loans and may not be able to sell the properties in a timely manner.

        During the quarter ended September 30, 2003, six lots (three including houses) located in a manufactured home subdivision development located in Ione, California (that was acquired along with other improved lots by the Partnership through foreclosure in 1997) was sold for $528,000, resulting in a gain to the Partnership of approximately $122,000.

        During the quarter ended September 30, 2003, the Partnership advanced an additional $748,000 to OLH for continued development and marketing of the condominium units and houses that have been for sale and received repayment of advances of $693,000 from sales and collections on notes receivable. During the quarter ended September 30, 2003, OLH sold seven interests in the second ocean house for cash proceeds of $586,000 and notes taken back in the amount of $420,000, resulting in gains in the total amount of $291,000. Both ocean houses have been fully sold as of September 30, 2003. During the quarter ended September 30, 2003, OLH bought back the interests in three of the condominium units previously sold in 2002 for a total of $74,000 to allow OLH to sell the condominiums individually. The net income to the Partnership (including gains on sales) was approximately $242,000 for the quarter ended September 30, 2003. The Partnership’s investment in OLH real property was approximately $1,137,000 as of September 30, 2003.

        Changes in the allowance for real estate losses for the quarters ended September 30, 2003 and 2002 were as follows:

        Seven of the Partnership’s fourteen properties do not currently generate revenue. Expenses from rental properties have decreased from approximately $685,000 to $385,000 (43.8%) for the quarter ended September 30, 2002 and 2003, respectively, and revenues associated with these properties have decreased from $809,000 to $713,000 (11.9%), respectively.

        The decrease in expenses between the quarter ended September 30, 2003 and 2002 was primarily the result of a decrease in expenses from the Partnership’s investment in OLH of approximately $62,000 as sales and operations wind down for that property and due to the sale of the commercial building located in Monterey, California in March 2003 and the sale of the hotel property located in Phoenix, Arizona in June 2003.

        The decrease in income between the quarter ended September 30, 2003 and 2002 was due primarily to the sale of the commercial building located in Monterey, California in March 2003 and the sale of the hotel property located in Phoenix, Arizona in June 2003.

Cash and Cash Equivalents

        Cash and cash equivalents decreased from approximately $6,684,000 as of December 31, 2002 to $5,854,000 as of September 30, 2003 ($830,000 or 12.4%) due to a greater amount of new loans funded or purchased than repayments received on loans during the nine months ended September 30, 2003.

Interest and Other Receivables

        Interest and other receivables increased from approximately $3,177,000 as of December 31, 2002 to $3,311,000 as of September 30, 2003 ($134,000 or 4.2%) due primarily to the following:

        The increases above were offset by 1) a decrease in the weighted average yield on the loan portfolio from 11.7% as of December 31, 2002 to 11.2% as of September 30, 2003, which resulted in a decrease in monthly interest receivable from trust deeds of approximately $121,000 during the nine months ended September 30, 2003 and 2) the collection of a receivable in the amount of $188,000 from the Partnership’s investment in 720 University.

Due to General Partner

        Due to General Partner increased from approximately $957,000 as of December 31, 2002 to $1,367,000 as of September 30, 2003 ($411,000 or 42.9%) due to increased management fees owed to the General Partner as of September 30, 2003 pursuant to the Partnership Agreement (see “Results of Operations” above).

Note Payable

        Note payable increased from approximately $8,190,000 as of December 31, 2002 to $8,818,000 ($628,000 or 7.7%) as of September 30, 2003 due to additional advances made on the note payable securing the Greeley, Colorado retail complex to complete improvements to the property. There is an additional $82,000 to be advanced from the note for construction and tenant improvements.

Line of Credit Payable

        Line of credit payable decreased from $6,867,000 as of December 31, 2002 to a $4,000,000 balance outstanding as of September 30, 2003 as a result of the repayment of loans during the nine months ended September 30, 2003. There was $36,000,000 available to be advanced from the line of credit as of September 30, 2003.

Asset Quality

        Some losses are normal when lending money and the amounts of losses vary as the loan portfolio is affected by changing economic conditions and financial experiences of borrowers. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on particular segments of the loan portfolio.

        The conclusion that a Partnership loan may become uncollectible, in whole or in part, is a matter of judgment. Although lenders such as banks and savings and loans are subject to regulations that require them to perform ongoing analyses of their loan portfolios (including analyses of loan to value ratios, reserves, etc.), and to obtain current information regarding its borrowers and the securing properties, the Partnership is not subject to these regulations and has not adopted these practices. Rather, management of the General Partner, in connection with the quarterly closing of the accounting records of the Partnership and the preparation of the financial statements, evaluates the Partnership’s mortgage loan portfolio. The allowance for loan losses is established through a provision for loan losses based on the General Partner’s evaluation of the risk inherent in the Partnership’s loan portfolio and current economic conditions. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters:

        Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover potential losses of the Partnership. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Loan losses deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses. The following is a summary of actual losses realized on loans and real estate for the nine months ended September 30, 2003 and the years ended December 31, 2002, 2001, 2000, 1999 and 1998.

        The loss on real estate in the amount of $712,000 during the year ended December 31, 1998 was a result of the sale of a foreclosed property to the General Partner at its fair market value.

        As of September 30, 2003, management believes that the allowance for loan losses of $4,100,000 and the allowance for real estate losses in the amount of $660,000 are adequate.

Liquidity and Capital Resources

        Sales of Units to investors and portfolio loan payoffs provide the capital for new mortgage investments. If general market interest rates were to rise substantially, investors might turn to interest-yielding investments other than Partnership Units, which would reduce the liquidity of the Partnership and its ability to make additional mortgage investments to take advantage of the generally higher interest rates. In contrast, a significant increase in the dollar amount of loan payoffs and additional limited partner investments without the origination of new loans of the same amount would increase the liquidity of the Partnership. This increase in liquidity could result in a decrease in the yield paid to limited partners as the Partnership would be required to invest the additional funds in lower yielding, short term investments.

        Withdrawal percentages have been 7.33%, 7.99%, 6.64%, 5.45%, 3.32% and 4.27% (annualized) for the years ended December 31, 1998, 1999, 2000, 2001 and 2002, and the nine months ended September 30, 2003, respectively. These percentages are the annual average of the limited partners’ capital withdrawals in each calendar quarter divided by the total limited partner capital as of the end of each quarter.

        The limited partners may withdraw, or partially withdraw, from the Partnership and obtain the return of their outstanding capital accounts at $1.00 per Unit within 61 to 91 days after written notices are delivered to the General Partner, subject to the following limitations, among others:

        In March 2001, the Partnership amended its Limited Partnership Agreement, with the consent of a majority of limited partners, to allow the Partnership to incur indebtedness for the purpose of investing in mortgage loans. The total amount of indebtedness incurred by the Partnership cannot exceed the sum of 50% of the aggregate fair market value of all Partnership loans. The Partnership finalized a line of credit agreement with a bank in August 2001, which provides interim financing on mortgage loans invested in by the Partnership. The amount of credit available under this line of credit is $40,000,000. There was a balance of $4,000,000 outstanding on the line of credit as of September 30, 2003.

Contingency Reserves

        The Partnership maintains cash, cash equivalents and marketable securities as contingency reserves in an aggregate amount of 2% of the limited partners’ capital accounts to cover expenses in excess of revenues or other unforeseen obligations of the Partnership. Although the General Partner believes that contingency reserves are adequate, it could become necessary for the Partnership to sell or otherwise liquidate certain of its investments to cover such contingencies on terms which might not be favorable to the Partnership.

Current Economic Conditions

        The recent slowdown in the economic climate in Northern California and the Western United States has appeared to stabilize. Although interest rates have leveled off in recent months, several key indices are at the lowest levels in decades. Despite the Partnership’s historical ability to make or purchase mortgage loans with relatively strong yields, increased competition by other mortgage lenders or changes in the economy could have the effect of reducing mortgage yields in the future. Present loans with relatively high yields could be replaced with loans with lower yields, which in turn could reduce the net yield paid to the limited partners. In addition, if there is less demand by borrowers for loans and, thus, fewer loans for the Partnership to invest in, the Partnership may be required to invest its excess cash in short-term alternative investments yielding considerably less than investments in mortgage loans. The Partnership has been closed to most new limited partner investments since September 2001. The Partnership has remained closed during this time because there have not been enough suitable mortgage investments for the Partnership to invest in to allow the Partnership to remain fully invested in loans. Remaining closed to limited partner investments prevents the Partnership from having to invest its excess cash in lower yielding investments, which could have the effect of decreasing the yield paid to existing limited partners.

        The Partnership Agreement permits the General Partner to purchase delinquent loans from the Partnership as long as certain criteria are met. Although the General Partner has purchased some delinquent loans from the Partnership in the past, it is not required to do so. Therefore, if the General Partner does not choose to purchase delinquent loans of the Partnership, the Partnership could sustain losses with respect to loans secured by properties located in areas of declining real estate values. This could result in a reduction of the net income of the Partnership and possible loss of principal for a year in which those losses occur.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

        The following table contains information about the cash held in money market accounts, commercial paper, loans held in the Partnership’s portfolio and a note payable securing a real estate property owned by the Partnership as of September 30, 2003. The presentation, for each category of information, aggregates the assets and liabilities by their maturity dates for maturities occurring in each of the years 2004 through 2008 and separately aggregates the information for all maturities arising after 2008. The carrying values of these assets and liabilities approximate their fair values as of September 30, 2003.

Interest Earning Assets and Interest Bearing Liabilities,
Aggregated by Maturity Date
Twelve Months Ended September 30,

Market Risk

        Market risk is the exposure to loss resulting from changes in interest rates, equity prices and real estate values. The Partnership’s note payable bears interest at a variable rate, tied to the LIBOR rate of interest. As a result, the Partnership’s primary market risk exposure is to changes in interest rates, which will affect the interest cost of outstanding amounts on the note payable.

        The majority of the Partnership’s mortgage loans (88.4% as of September 30, 2003) earn interest at fixed rates. Changes in interest rates may also affect the value of the Partnership’s investment in mortgage loans and the rates at which the Partnership reinvests funds obtained from loan repayments and new capital contributions from limited partners. As interest rates increase, although the interest rates the Partnership obtains from reinvested funds will generally increase, the value of the Partnership’s existing loans at fixed rates will generally tend to decrease. As interest rates decrease, the amounts becoming available to the Partnership for investment due to repayment of Partnership loans may be invested at lower rates than the Partnership had been able to obtain in prior investments, or than the rates on the repaid loans.

        The Partnership does not hedge or otherwise seek to manage interest rate risk. The Partnership does not enter into risk sensitive instruments for trading purposes.

Item 4. Controls and Procedures

        Within the 90 days prior to the date of this report, the General Partner of the Partnership carried out an evaluation, under the supervision and with the participation of the General Partner’s management, including the General Partner’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Office and Chief Financial Officer of the General Partner concluded that the Partnership’s disclosure controls and procedures are effective. There were no significant changes in the Partnership’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Partnership is not presently involved in any material legal proceedings.

Item 6(b). Reports on Form 8-K

No reports on Form 8-K have been filed during the quarter for which this report is filed.

SIGNATURES

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