LEAF Equipment Leasing Income Fund III, L.P. - FORM 10-Q

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EX-31.1 - SECTION 302 CEO CERTIFICATION - LEAF Equipment Leasing Income Fund III, L.P.	dex311.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - LEAF Equipment Leasing Income Fund III, L.P.	dex322.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - LEAF Equipment Leasing Income Fund III, L.P.	dex312.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - LEAF Equipment Leasing Income Fund III, L.P.	dex321.htm
EX-10.14 - AMENDMENT NO. 1 TO RECEIVABLES LOAN AND SECURITY AGT - LEAF Equipment Leasing Income Fund III, L.P.	dex1014.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-53174

LEAF EQUIPMENT LEASING INCOME FUND III, L.P.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

20-5455968

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

110 South Poplar Street, Suite 101, Wilmington Delaware 19801

(Address of principal executive offices)

(800) 819-5556

(Registrant’s telephone number, including area code)

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

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

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

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

There is no public market for the Registrant’s securities.

DOCUMENTS INCORPORATED BY REFERENCE

None

LEAF EQUIPMENT LEASING INCOME FUND III, L.P.

INDEX TO QUARTERLY REPORT

ON FORM 10-Q


		PAGE
PART I	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Consolidated Balance Sheets – March 31, 2010 and December 31, 2009 (Unaudited)	3
	Consolidated Statements of Operations – Three Months Ended March 31, 2010 and 2009 (Unaudited)	4
	Consolidated Statement of Changes in Partners’ (Deficit) Capital – Three Months Ended March 31, 2010 (Unaudited)	5
	Consolidated Statements of Cash Flows – Three Months Ended March 31, 2010 and 2009 (Unaudited)	6

	Notes to Consolidated Financial Statements – March 31, 2010 (Unaudited)	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	24
ITEM 4.	Controls and Procedures	24

PART II	OTHER INFORMATION
ITEM 6.	Exhibits	25

SIGNATURES		27

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

(Unaudited)


	March 31, 2010			December 31, 2009
ASSETS
Cash	$	43		$	21
Restricted cash		21,617			24,795
Accounts receivable		337			258
Investment in leases and loans, net		301,182			334,452
Deferred financing costs, net		2,854			3,575
Investment in affiliated leasing partnerships		1,056			864
Other assets		361			585

Total assets	$	327,450		$	364,550

LIABILITIES AND PARTNERS’ CAPITAL
Liabilities:
Bank debt	$	281,678		$	314,420
Accounts payable and accrued expenses		1,406			1,556
Other liabilities		828			1,125
Derivative liabilities at fair value		6,862			7,562
Due to affiliates		20,440			14,728

Total liabilities	$	311,214		$	339,391

Commitments and contingencies

Partners’ (Deficit) Capital:
General partner		(785	)		(686	)
Limited partners		26,285			36,106
Accumulated other comprehensive loss		(9,264	)		(10,261	)

Total partners’ capital		16,236			25,159

Total liabilities and partners’ capital	$	327,450		$	364,550

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

LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except unit and per unit data)

(Unaudited)


	Three Months Ended March 31,
	2010			2009
Revenues:
Interest on equipment financings	$	6,610		$	15,570
Rental income		1,320			1,119
(Losses) gains on sales of equipment and lease dispositions, net		(43	)		276
Other		830			1,250

		8,717			18,215

Expenses:
Interest expense		4,499			12,957
Loss (gain) on derivative activities		600			(169	)
Depreciation on operating leases		1,082			922
Provision for credit losses		7,026			6,222
General and administrative expenses		802			1,527
Administrative expenses reimbursed to affiliate		1,159			1,712
Management fees to affiliate		1,104			1,703

		16,272			24,874

Loss before equity in earnings of affiliate		(7,555	)		(6,659	)
Equity in earnings of affiliate		168			—

Net loss		(7,387	)		(6,659	)
Less: Net loss attributable to the noncontrolling interest		—			1,200

Net loss attributable to LEAF III’s partners	$	(7,387	)	$	(5,459	)

Net loss allocated to LEAF III’s limited partners	$	(7,313	)	$	(5,404	)

Weighted average number of limited partner units outstanding during the period		1,196,631			1,197,902

Net loss per weighted average limited partner unit	$	(6.11	)	$	(4.51	)

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

LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Consolidated Statement of Changes in Partners’ (Deficit) Capital

(In thousands, except unit data)

(Unaudited)


	General Partner Amount							Accumulated Other Comprehensive Income (Loss)			Total Partners’ Capital			Comprehensive Income (Loss)
				Limited Partners
				Units	Amount
Balance, January 1, 2010	$	(686	)	1,196,631	$	36,106		$	(10,261	)	$	25,159
Cash distributions		(25	)	—		(2,508	)		—			(2,533	)
Net loss		(74	)	—		(7,313	)		—			(7,387	)	$	(7,387	)
Unrealized gains on financial derivatives		—		—		—			997			997			997

Balance, March 31, 2010	$	(785	)	1,196,631	$	26,285		$	(9,264	)	$	16,236		$	(6,390	)

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

LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2010			2009
Cash flows from operating activities:
Net loss attributable to LEAF III’s Partners	$	(7,387	)	$	(6,659	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Losses (gains) on sales of equipment and lease dispositions, net		43			(276	)
Equity in earnings of affiliate		(168	)		—
Depreciation on operating leases		1,082			922
Provision for credit losses		7,026			6,222
Amortization of deferred financing costs		800			1,987
Amortization of loss on financial derivative		265			262
Amortization of interest rate caps		4			4
Gains on derivative hedging activities		30			(169	)
Changes in operating assets and liabilities:
Accounts receivable		(79	)		56
Other assets		222			(26	)
Accounts payable and accrued expenses and other liabilities		(471	)		23
Due to affiliates, net		5,712			4,910

Net cash provided by operating activities		7,079			7,256

Cash flows from investing activities:
Purchases of leases and loans		(11,858	)		(36,867	)
Proceeds from leases and loans		37,128			67,686
Proceeds from sale of leases and loans to third parties		—			(1,064	)
Security deposits collected, net of returns		(151	)		—
Investment in LEAF Funds JV2		—			(280	)

Net cash provided by investing activities		25,119			29,475

Cash flows from financing activities:
Borrowings of bank debt		6,482			32,841
Repayment of bank debt		(39,224	)		(71,170	)
Decrease in restricted cash		3,178			2,836
Increase in deferred financing costs		(79	)		(1,315	)
Redemption of Limited Partners’ capital		—			(48	)
Cash distributions to partners		(2,533	)		(2,536	)
Issuance of subsidiary shares to noncontrolling interest		—			735

Net cash used in financing activities		(32,176	)		(38,657	)

Increase (decrease) in cash		22			(1,926	)
Cash, beginning of year		21			3,236

Cash, end of period	$	43		$	1,310

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

LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

March 31, 2010

(Unaudited)

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

LEAF Equipment Leasing Income Fund III, L.P. (the “Fund”) is a Delaware limited partnership formed on May 16, 2006 by its General Partner, LEAF Asset Management, LLC (the “General Partner”), which manages the Fund. The General Partner is a Delaware limited liability company, and subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of April 24, 2008, the Fund raised $120.0 million by selling 1.2 million of its limited partner units. It commenced operations in March 2007.

The Fund is expected to have a nine-year life, consisting of an offering period of up to two years, a five-year reinvestment period and a subsequent maturity period of two years, during which the Fund’s leases and secured loans will either mature or be sold. In the event the Fund is unable to sell its leases and loans during the maturity period, the Fund expects to continue to return capital to its partners as those leases and loans mature. Substantially all of the Fund’s leases and loans mature by the end of 2014. The Fund expects to enter its maturity period beginning in April 2013. The Fund will terminate on December 31, 2031, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.

The Fund acquires diversified portfolios of equipment to finance to end users throughout the United States as well as the District of Columbia and Puerto Rico. The Fund also acquires existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily from LEAF Financial Corporation (“LEAF Financial”), an affiliate of its General Partner and a subsidiary of RAI. The primary objective of the Fund is to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.

In addition to its 1% general partnership interest, the General Partner has also invested $1.1 million for a 1.0% limited partnership interest in the Fund.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Fund and its wholly owned subsidiaries LEAF Fund III, LLC, LEAF III A SPE, LLC, LEAF III B SPE, LLC, and LEAF III C SPE, LLC. All intercompany accounts and transactions have been eliminated in consolidation.

The Fund owns approximately 4% ownership interest in LEAF Funding, LLC (“Funding LLC”). The Fund accounts for its interest in Funding LLC under the equity method of accounting.

In March 2009, the Fund entered into an agreement with LEAF Equipment Finance Fund 4, L.P. (“LEAF 4”) to form LEAF Funds Joint Venture 2, LLC (“LEAF Funds JV2”). Through March 31, 2010, the Fund invested $428,000 in LEAF Funds JV2, representing a 2% interest. The Fund accounts for its investment in LEAF Funds JV2 under the cost method of accounting. Under the cost method, the Fund does not include its share of the income or losses of LEAF Funds JV2 in the Fund’s consolidated statements of operations.

The accompanying unaudited financial statements reflect all adjustments that are, in the opinion of management, of a normal and recurring nature and necessary for a fair statement of the Fund’s financial position as of March 31, 2010, and the results of its operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of results of the Fund’s operations for the 2010 fiscal year. The Fund has evaluated subsequent events through the date the financial statements were issued. The financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. These interim financial statements should be read in conjunction with the Fund’s financial statements and notes thereto presented in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on April 2, 2010.

Significant Accounting Policies

Investments in Leases and Loans

The Fund’s investment in leases and loans consist of direct financing leases, operating leases and loans.

Direct Financing Leases. Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable plus the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted payments plus the estimated unguaranteed residual value over the cost of the related equipment.

Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s senior management’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.

Operating Leases. Leases not meeting any of the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis.

Generally, during the lease terms of existing operating leases, the Fund will not recover all of the cost and related expenses of its rental equipment and, therefore, it is prepared to remarket the equipment in future years. The Fund’s policy is to review, on a quarterly basis, the expected economic life of its rental equipment in order to determine the recoverability of its undepreciated cost. The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds such value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment. There were no write-downs of equipment during the three months ended March 31, 2010 and 2009.

Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the related equipment. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.

Allowance for Credit Losses. The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends, and equipment finance portfolio characteristics, adjusted for expected recoveries. In evaluating historic performance, the Fund performs a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due, it is generally fully reserved less an estimated recovery amount and referred to our internal recovery group consisting of a team of credit specialists and collectors. The group utilizes several resources in an attempt to maximize recoveries on charged-off accounts including: 1) initiating litigation against the end user customer and any personal guarantor, 2) referring the account to an outside law firm or collection agency and/or 3) repossessing and remarketing the equipment through third parties. The Fund’s policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote.

The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due. As of March 31, 2010 and December 31, 2009, the Fund had $15.5 million and $23.5 million, respectively, of leases and loans on non-accrual status. Fees from delinquent payments are recognized when received and are included in other income.

Recent Accounting Standards

Newly Adopted Accounting Principles

The Fund adopted the following accounting standards during the quarter ended March 31, 2010:

Subsequent Events. In February 2010, the FASB issued guidance which removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either a correction of error or retrospective application of U.S. GAAP. This guidance was effective upon issuance.

Fair Value Measurements. In January 2010, the FASB issued guidance that requires new disclosures and clarifies some existing disclosure requirements about fair value measurements. The new pronouncement requires a reporting entity: (1) to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and (2) to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs. In addition, it clarifies the requirements of the following existing disclosures: (1) for purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and (2) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this guidance did not have a material effect on the Fund’s consolidated financial position or consolidated results of operations.

NOTE 3 – SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosure of cash flow information (in thousands):

NOTE 4 – INVESTMENT IN LEASES AND LOANS

The Fund’s investment in leases and loans, net, consists of the following (in thousands):


	March 31, 2010			December 31, 2009
Direct financing leases ^(a)	$	207,816		$	239,651
Loans ^(b)		93,878			103,021
Operating leases		9,918			9,180

		311,612			351,852
Allowance for credit losses		(10,430	)		(17,400	)

	$	301,182		$	334,452

(a)	The Fund’s direct financing leases are for initial lease terms generally ranging from 24 to 84 months.

(b)	The interest rates on loans generally range from 7% to 15%.

The components of direct financing leases and loans are as follows (in thousands):


	March 31, 2010						December 31, 2009
	Leases			Loans			Leases			Loans
Total future minimum lease payments	$	226,408		$	110,001		$	262,844		$	121,785
Unearned income		(25,707	)		(14,975	)		(30,474	)		(17,447	)
Residuals, net of unearned residual income ^(a)		8,142			—			8,401			—
Security deposits ^(b)		(1,027	)		(1,148	)		(1,120	)		(1,317	)

	$	207,816		$	93,878		$	239,651		$	103,021

(a)	Unguaranteed residuals for direct financing leases represent the estimated amounts recoverable at lease termination from extensions or disposition of the equipment.

(b)	Included in security deposits are security deposits on leases as well as amounts held back from customers.

The Fund’s investment in operating leases, net, consists of the following (in thousands):


	March 31, 2010			December 31, 2009
Equipment	$	18,238		$	16,189
Accumulated depreciation		(8,187	)		(6,890	)
Security deposits		(133	)		(119	)

	$	9,918		$	9,180

The following is a summary of the Fund’s allowance for credit losses (in thousands):


	Three Months Ended March 31,
	2010			2009
Allowance for credit losses, beginning of period	$	17,400		$	10,374
Provision for credit losses		7,026			6,222
Charge-offs		(14,285	)		(4,261	)
Recoveries		289			355

Allowance for credit losses, end of period	$	10,430		$	12,690

The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due (“non-accrual”). As of March 31, 2010 and December 31, 2009, the Fund had $15.5 million or 4.9% and $23.5 million or 6.7%, respectively, of leases and loans on non-accrual status.

NOTE 5 – DEFERRED FINANCING COSTS

As of March 31, 2010 and December 31, 2009, deferred financing costs include $2.9 million, and $3.6 million, respectively, of unamortized deferred financing costs which are being amortized over the estimated useful life of the related debt. Accumulated amortization as of March 31, 2010 and December 31, 2009 is $2.0 million and $1.2 million, respectively. Estimated amortization expense of the Fund’s existing deferred financing costs for the years ending March 31, are as follows (in thousands):


2011	$	819
2012		745
2013		745
2014		498
2015		47

	$	2,854

NOTE 6 – BANK DEBT

The Fund’s bank debt consists of the following (in thousands):


	Type	Maturity Date	March 31, 2010
	Type	Maturity Date	Amount of Facility		Outstanding Balance		Available (2)		Interest rate per annum	Interest rate per annum adjusted for swaps (4)		December 31, 2009 Outstanding Balance
WestLB, AG (1)	Revolving	June 2010	$	175,000	$	129,955	$	45,045	One month LIBOR + 0.95%	5.3	%	$	144,194
DZ Bank (1) (3)	Revolving	November 2013		140,000		103,735		36,265	(3)	4.1	%		116,649
Key Equipment Finance (1)	Term	June 2013		47,988		47,988		—	One month Commercial Paper 1.55%	8.2	%		53,577


			$	362,988	$	281,678	$	81,310				$	314,420

(1)	Collateralized by specific leases and loans and related equipment. As of March 31, 2010, $307.1 million of leases and loans and $18.9 million of restricted cash were pledged as collateral under the Fund’s credit facilities. WestLB also requires a 1% credit reserve on the outstanding line of credit.

(2)	Availability under these loans is subject to having eligible leases or loans to pledge as collateral, compliance with covenants and the borrowing base formula.

(3)	Interest on each borrowing is calculated at the commercial paper rate for the lender at the time of such borrowing plus 1.75% per annum. Facility limit has been reduced to $140.0 million effective April 14, 2010.

(4)	To mitigate fluctuations in interest rates, the Fund entered into interest rate swap agreements. The interest rate swap agreements terminate on various dates and fix the interest rate.

West LB

In February 2010, the Fund amended its revolving credit facility with WestLB AG. This amendment changed certain performance covenants in light of the current economic recession and its potential effect on future delinquencies. Interest on this facility is the London Interbank Offered Rate (“LIBOR”) plus 2.50% per annum for all borrowings subsequent to March 2009 and at LIBOR plus 0.95% per annum for prior borrowings. In addition, these amendments reduced the availability under the facility to $175 million and adjusted the borrowing base formula, requiring a larger portion of the Fund’s cash flow advance to be pledged as collateral on borrowings. Lastly, if the WestLB facility is not extended at the time of renewal (June 2010), the Fund would not be required to make full repayment at the time of renewal. Rather, the Fund would repay the outstanding debt as payments are received on the underlying leases and loans pledged as collateral. Interest and principal are due monthly.

DZ Bank

On April 13, 2010, the Fund amended its revolving credit facility with DZ Bank. This amendment provides a permanent waiver for two covenants that had previously been waived temporarily. It also changes certain performance covenants in light of the current economic recession and its potential effect on future delinquencies. The amendment reduced the availability under the facility from $150 million to $140 million and adjusted the borrowing base formula, requiring a larger portion of the Fund’s cash flow advance to be pledged as collateral on borrowings.

The Fund is subject to financial covenants under its debt facilities, including minimum tangible net worth, maximum leverage ratios and portfolio delinquency, that are intended to measure the Fund’s financial viability, limit the amount the Fund can borrow based on measuring its debt to net worth and measure performance of the Fund’s portfolio. In addition, the Fund’s debt facilities include financial covenants covering LEAF Financial, the servicer of the Fund’s portfolio. These covenants exist to provide the lender with information about the financial viability of the entity that services the Fund’s portfolio. These covenants are similar in nature to the covenants discussed above that are applicable to the Fund, and are related to such things as the Fund’s servicer’s minimum tangible net worth, maximum leverage ratios, managed portfolio delinquency and compliance of the debt terms of all of LEAF Financial’s managed entities.

As of March 31, 2010, the Fund was in compliance with the covenants under its debt facilities except for two covenant breaches relating to LEAF Financial, the servicer of the Fund’s portfolio. One covenant is regarding minimum tangible net worth as per the WestLB agreement. The second is regarding managed portfolio delinquency as per the Key Equipment Finance agreement.

The Fund has requested waivers from both WestLB and Key Equipment Finance with respect to these breaches. Due to these breaches, WestLB and Key Equipment have various remedies under their loan agreements such as allowing repayment of the outstanding balance as payments are received on the underlying leases and loans or selling the pledged leases and loans in a commercially reasonable manner. Although the Fund expects to obtain waivers or to amend the covenants in its loan agreements with WestLB and Key Equipment, there can be no assurance that such waivers or amendments will be executed. If waivers or amendments are not obtained, it is likely that LEAF Financial would not be in compliance with the same covenants at June 30, 2010. In addition, these breaches could create defaults under the Fund’s other debt facilities and those lenders have remedies similar to that of WestLB and Key Equipment.

A default could occur that would have an adverse effect on its operations and could force it to liquidate all or a portion of its portfolio securing its debt facilities. If required, a sale of a portfolio, or any portion thereof, could be at prices lower than its carrying value, which could result in losses and reduce the Fund’s income and distributions to its partners. The lenders’ recourse under these facilities is limited to leases and loans and restricted cash pledged as collateral.

Debt repayments Estimated annual principal payments based on the lenders waiving covenant breaches on the Fund’s aggregate borrowings over the years ended March 31, are as follows (in thousands):


2011	$	127,592
2012		80,555
2013		47,327
2014		18,790
2015		5,917
Thereafter		1,497

	$	281,678

NOTE 7 – DERIVATIVE INSTRUMENTS

The majority of the Fund’s assets and liabilities are financial contracts with fixed and variable rates. Any mismatch between the repricing and maturity characteristics of the Fund’s assets and liabilities exposes it to interest rate risk when interest rates fluctuate. For example, the Fund’s assets are structured on a fixed-rate basis, but since funds borrowed through warehouse facilities are obtained on a floating-rate basis, the Fund is exposed to a certain degree of risk if interest rates rise, which in turn will increase the Fund’s borrowing costs. In addition, when the Fund acquires assets, it bases its pricing in part on the spread it expects to achieve between the interest rate it charges its customers and the effective interest cost the Fund will pay when it funds those loans. Increases in interest rates that increase the Fund’s permanent funding costs between the time the assets are originated and the time they are funded could narrow, eliminate or even reverse this spread.

To manage interest rate risk, the Fund employs a hedging strategy using derivative financial instruments such as interest rate swaps, $160.2 million notional amount of which are designated and qualify as cash flow hedges and $97.5 million of which are economic hedges to the DZ Bank facility but do not meet the strict hedge accounting requirements and are, therefore, undesignated as of March 31, 2010. For derivatives designated and qualifying as cash flow hedges, the effective portion of changes in fair value of those derivatives are recorded in accumulated other comprehensive loss and are subsequently reclassified into earnings when the hedged forecasted interest payments are recognized in earnings. For derivatives that are undesignated, changes in the fair value of those derivatives are recorded directly to earnings as they occur. The Fund does not use derivative financial instruments for trading or speculative purposes. The Fund manages the credit risk of possible counterparty default in these derivative transactions by dealing primarily with counterparties with investment grade ratings. The Fund has agreements with certain of its derivative counterparties that contain a provision where if the Fund defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Fund could also be declared in default on its derivative obligations. The Fund has agreements with certain of its derivative counterparties that incorporates the loan covenant provisions of the Fund’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Fund being in default on any derivative instrument obligations covered by the agreement. As of March 31, 2010, the fair value of derivatives in a net liability position, which excludes any adjustment for nonperformance risk related to these agreements, was $7.2 million. As of March 31, 2010, the Fund has not posted any collateral related to these agreements. If the Fund had breached any of these provisions at March 31, 2010, it could have been required to settle its obligations under the agreements at their termination value of $7.2 million.

Before entering into a derivative transaction for hedging purposes, the Fund determines whether a high degree of initial effectiveness exists between the change in the value of the hedged forecasted transactions and the change in the value of the derivative from a movement in interest rates. High effectiveness means that the change in the value of the derivative is expected to provide a high degree of offset against changes in the value of the hedged forecasted transactions caused by changes in interest rate risk. The Fund measures the effectiveness of each cash flow hedge throughout the hedge period. Any hedge ineffectiveness on cash flow hedging relationships, as defined by U.S. GAAP, is recognized in the consolidated statements of operations.

The following tables present the fair value of the Fund’s derivative financial instruments as well as their classification on the consolidated balance sheet as of March 31, 2010 and on the consolidated statement of operations for the three months ended March 31, 2010 and 2009 (in thousands):


	Notional Amount		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate cap contracts	$	2,687	Other assets	$	1
Interest rate swap contracts		157,519	Derivative liabilities at fair value		(5,322	)

		160,206
Derivatives not designated as hedging instruments
Interest rate swap contracts		97,456	Derivative liabilities at fair value	$	(1,540	)

	$	257,662


	Amount of Gain or Loss Recognized in OCI on Derivatives (Effective Portion)				Location and Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)
	Three Months Ended March 31,					Three Months Ended March 31,
	2010		2009			2010			2009
Derivatives Designated as Cash Flow Hedging Relationships
Interest rate products	$	651	$	1,758	Interest expense	$	(1,648	)	$	(3,497	)


	Notional Amount			Three Months Ended March 31,
	Notional Amount		Statement of Operations Location	2010			2009
Derivatives not designated as hedging instruments
Interest rate swap contracts	$	97,456	(Loss) gain on derivative activities	$	(600	)	$	169

The Fund terminated interest rate swap agreements in 2008 simultaneously with executing new loan agreements, resulting in a loss of $5.2 million which was recorded in accumulated other comprehensive loss. The Fund is amortizing the loss to interest expense over the remaining term of the terminated swap agreements. For the three months ended March 31, 2010, $265,000 was recognized in accumulated other comprehensive gain and, $265,000 was recognized in interest expense. As of March 31, 2010, the unamortized balance of $3.8 million is included in accumulated other comprehensive loss.

Assuming market rates remain constant with the rates as of March 31, 2010, $4.2 million of the $5.4 million in accumulated other comprehensive loss is expected to be charged to earnings over the next 12 months.

NOTE 8 – FAIR VALUE MEASUREMENT

For cash, receivables and payables, the carrying amounts approximate fair values because of the short term maturity of these instruments. The carrying value of debt approximates fair market value since interest rates approximate current market rates.

It is not practicable for the Fund to estimate the fair value of the Fund’s leases and loans. They are comprised of a large number of transactions with commercial customers in different businesses, and may be secured by liens on various types of equipment and may be guaranteed by third parties and cross-collateralized. Any difference between the carrying value and fair value of each transaction would be affected by a potential buyer’s assessment of the transaction’s credit quality, collateral value, guarantees, payment history, yield, term, documents and other legal matters, and other subjective considerations. Value received in a fair market sale of a transaction would be based on the terms of the sale, the Fund’s and the buyer’s views of economic and industry conditions, the Fund’s and the buyer’s tax considerations, and other factors.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of

unobservable inputs when measuring fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.

•

Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

•

Level 2 – Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

•

Level 3 – Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

The Fund employs a hedging strategy to manage exposure to the effects of changes in market interest rates. All derivatives are recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Because the Fund’s derivatives are not listed on an exchange, these instruments are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although the Fund has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, the Fund has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Fund has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Assets and (liabilities) measured at fair value on a recurring basis included the following (in thousands):


Liabilities:	Fair Value Measurements Using							Liabilities At Fair Value
	Level 1		Level 2			Level 3		Liabilities At Fair Value
Interest rate caps at March 31, 2010	$	—	$	1		$	—	$	1
Interest rate swaps at March 31, 2010	$	—	$	(6,862	)	$	—	$	(6,862	)
Interest rate caps at December 31, 2009	$	—	$	3		$	—	$	3
Interest rate swaps at December 31, 2009	$	—	$	(7,562	)	$	—	$	(7,562	)

NOTE 9 – CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH AFFILIATES

The Fund relies on the General Partner and its affiliates to manage the Fund’s operations and pays the General Partner or its affiliate fees to manage the Fund. The following is a summary of fees and costs of services charged by the General Partner or its affiliates (in thousands):


	Three Months Ended March 31,
	2010		2009
Acquisition fees	$	233	$	726
Management fees		1,104		1,703
Administrative expenses		1,159		1,712

Acquisition Fees. The General Partner is paid a fee for assisting the Fund in acquiring equipment subject to existing equipment leases equal to up to 2% of the purchase price the Fund pays for the equipment or portfolio of equipment subject to existing equipment financing.

Management Fees. The General Partner is paid a subordinated annual asset management fee equal to 4% or 2% of gross rental payments for operating leases or full payout leases, respectively, or a competitive fee, whichever is less. During the Fund’s five-year investment period, the management fees will be subordinated to the payment to the Fund’s limited partners of a cumulative annual distribution of 8.5% of their capital contributions, as adjusted by distributions deemed to be a return of capital.

Administrative Expenses. The General Partner and its affiliates are reimbursed by the Fund for certain costs of services and materials used by or for the Fund except those items covered by the above-mentioned fees.

Due to Affiliates. Due to affiliates includes amounts due to the General Partner related to acquiring and managing portfolios of equipment from its General Partner, management fees and reimbursed expenses.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

In connection with a sale of leases and loans to a third party, the Fund agreed to repurchase delinquent leases up to a maximum of 7.5% of total proceeds received from the sale (“Repurchase Liability”). The Fund’s initial maximum Repurchase Commitment was $327,000 and the Repurchase Commitment at March 31, 2010 and 2009 was $132,000 and $206,000, respectively. As of March 31, 2010 and 2009, the Fund has recorded a liability of $116,000 and $63,000, respectively, to reflect the estimate of losses it expects to incur on lease and loan repurchases under this arrangement. This liability is included in other liabilities on the consolidated balance sheets.

The Fund is party to various routine legal proceedings arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Fund’s financial condition or results of operations.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When used in this Form 10-Q, the words “believes” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in Item 1A, under the caption “Risks Inherent in Our Business,” in our annual report on Form 10-K for the year ended December 31, 2009. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

The following discussion provides an analysis of our operating results, an overview of our liquidity and capital resources and other items related to us. The following discussion and analysis should be read in conjunction with (i) the accompanying interim financial statements and related notes and (ii) Our consolidated financial statements, related notes, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2009.

As used herein, the terms “we,” “us,” or “our” refer to Lease Equipment Leasing Income Fund III, L.P. and Subsidiaries.

General

We are a Delaware limited partnership formed on May 16, 2006 by our General Partner, LEAF Asset Management, LLC (the “General Partner”), which manages us. Our General Partner is a Delaware limited liability company and a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through our offering termination date of April 24, 2008 we raised $120.0 million by selling 1.2 million of our limited partner units. We commenced operations in March 2007.

We are expected to have a nine-year life, consisting of an offering period of up to two years, a five year reinvestment period and a subsequent maturity period of two years, during which our leases and secured loans will either mature or be sold. In the event we are unable to sell our leases and loans during the maturity period, we expect to continue to return capital to our partners as those leases and loans mature. Substantially all of our leases and loans mature by the end of 2014. We expect to enter our maturity period beginning in April 2013. We will terminate on December 31, 2031, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.

We acquire a diversified portfolio of new, used or reconditioned equipment that we lease to third parties. We also acquire portfolios of equipment subject to existing leases from other equipment lessors. Our financings are typically acquired from LEAF Financial Corporation (“LEAF”), an affiliate of our General Partner and a subsidiary of RAI. In addition, we may make secured loans to end users to finance their purchase of equipment. We attempt to structure our secured loans so that, in an economic sense, there is no difference to us between a secured loan and a full payout equipment lease. We finance business-essential equipment including, but not limited to computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focus on the small to mid-size business market, which generally includes businesses with:

•

500 or fewer employees;

•

$1.0 billion or less in total assets; or

•

$100.0 million or less in total annual sales.

Our principal objective is to generate regular cash distributions to our limited partners.

Our leases consist of direct financing and operating leases as defined by U.S. GAAP. Under the direct financing method of accounting, interest income (the excess of the aggregate future rentals and estimated unguaranteed residuals upon expiration of the lease over the related equipment cost) is recognized over the life of the lease using the interest method. Under the operating method, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over its estimated useful life. Rental income on operating leases consists primarily of monthly periodic rentals due under the terms of the leases. Generally, during the lease terms of existing operating leases, we will not recover all of the cost and related expenses of rental equipment and, therefore, we are prepared to remarket the equipment in future years. We discontinue the recognition of revenue for leases and loans for which payments are more than 90 days past due. These assets are classified as non-accrual.

Overview

We continued to be impacted by market uncertainties in the first quarter of 2010. As further discussed in the “Finance Receivables and Asset Quality” section below, the current economic recession in the United States has adversely affected our operations, resulting in higher delinquencies in our portfolio of leases and loans, which may continue until the economy recovers. Additionally, as discussed in the “Liquidity and Capital Resources” section below, the on-going dislocation in the debt markets has also created challenges in maintaining our existing debt facilities.

Finance Receivables and Asset Quality

Information about our portfolio of leases and loans is as follows (dollars in thousands):

Information about Lease Portfolio


	March 31, 2010			December 31, 2009
Investment in leases and loans, net	$	301,182		$	334,452

Number of contracts		44,600			47,000
Number of individual end users ^(a)		36,200			38,000
Average original equipment cost	$	15.0		$	14.5
Average initial term (in months)		51			51

States accounting for more than 10% of lease and loan portfolio:
California		14	%		14	%

Types of equipment accounting for more than 10% of lease and loan portfolio:
Industrial Equipment		41	%		41	%
Office Equipment		14	%		13	%

Types of businesses accounting for more than 10% of lease and loan portfolio:
Services		39	%		38	%
Transportation/Communication/Energy		13	%		13	%
Retail Trade		12	%		12	%
Manufacturing		10	%		10	%

(a)	Located in the 50 states as well as the District of Columbia and Puerto Rico. No individual end user or single piece of equipment accounted for more than 1% of our portfolio based on original cost of the equipment.

We utilize debt in addition to our equity to fund the acquisitions of lease portfolios. As of March 31, 2010 and December 31, 2009, our outstanding debt was $281.7 million and $314.4 million, respectively.

The performance of our lease portfolio is a measure of our General Partner’s underwriting and collection standards, skills, policies and procedures and is an indication of asset quality. The table below provides information about our finance receivables including non-performing assets, which are those assets that are not accruing income due to non-performance or impairment (dollars in thousands):


	As of and for the Three Months Ended March 31,											As of and for Year Ended December 31,
							Change					As of and for Year Ended December 31,
	2010			2009			$			%		2009
Investment in leases and loans before allowance for credit losses	$	311,612		$	657,258		$	(345,646	)	(53	)%	$	351,852
Less: allowance for credit losses		10,430			12,690			(2,260	)	(18	)%		17,400
Investment in leases and loans, net		301,182			644,568			(343,386	)	(53	)%		334,452
Weighted average investment in direct financing leases and loans before allowance for credit losses		328,991			653,494			(324,503	)	(50	)%		477,176
Non-performing assets		15,454			26,612			(11,158	)	(42	)%		23,521
Charge-offs, net of recoveries		13,996			3,906			10,090		258	%		20,494
As a percentage of finance receivables:
Allowance for credit losses		3.35	%		1.93	%							4.95	%
Non-performing assets		4.96	%		4.05	%							6.68	%
As a percentage of weighted average finance receivables:
Charge-offs, net of recoveries		4.25	%		0.60	%							4.29	%

We manage our credit risk by adhering to strict credit policies and procedures, and closely monitoring our receivables. Our General Partner, the servicer of our leases and loans, has responded to the current economic recession by increasing the number of employees in its collection department and implementing earlier intervention techniques in collection procedures. Our General Partner has also increased its credit standards and limited the amount of business we do with respect to certain industries, geographic locations and equipment types. Because of the current scarcity of credit available to small and mid size businesses, we have been able to increase our credit standards without reducing the interest rate we charge on our leases and loans.

Our allowance for credit losses is our estimate of losses inherent in our commercial finance receivables. The allowance is based on factors which include our historical loss experience on equipment finance portfolios we manage, an analysis of contractual delinquencies, current economic conditions and trends and equipment finance portfolio characteristics, adjusted for recoveries. In evaluating historic performance, we perform a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. Our policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote. Substantially all of our assets are collateral for our debt and, therefore, significantly greater delinquencies than anticipated will have an adverse impact on our cash flow and distributions to our partners.

The equipment we finance includes computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focus on financing equipment used by small to mid-sized businesses. The current economic recession in the US has made it more difficult for some of our customers to make payments on their financings with us on a timely basis, which has adversely affected our operations in the form of higher delinquencies. These higher delinquencies may continue until the US economy recovers. The increase in delinquencies, as well as the current economic trends, has caused us to conclude that a greater allowance for credit loss is necessary.

Our net charge-offs increased in 2010 period compared to 2009 period due to the aging of our portfolio of leases and loans as well as the current economic recession as discussed above.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value and effectiveness of interest rate swaps. We base our estimates on historical experience, current economic conditions and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For a complete discussion of our critical accounting policies and estimates, see our annual report on Form 10-K for fiscal 2009 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”

Results of Operations

Three Months Ended March 31, 2010 compared to the Three Months Ended March 31, 2009


							Increase (Decrease)
	2010			2009			$			%
Revenues:
Interest on equipment financings	$	6,610		$	15,570		$	(8,960	)	(58	)%
Rental income		1,320			1,119			201		18	%

(Losses) gains on sales of equipment and lease dispositions, net		(43	)		276			(319	)	(116	)%
Other		830			1,250			(420	)	(34	)%

		8,717			18,215			(9,498	)	(52	)%

Expenses:
Interest expense		4,499			12,957			(8,458	)	(65	)%

Loss (gain) on derivative activities		600			(169	)		769		(455	)%
Depreciation on operating leases		1,082			922			160		17	%
Provision for credit losses		7,026			6,222			804		13	%
General and administrative expenses		802			1,527			(725	)	(47	)%
Administrative expenses reimbursed to affiliate		1,159			1,712			(553	)	(32	)%
Management fees to affiliate		1,104			1,703			(599	)	(35	)%

		16,272			24,874			(8,602	)	(35	)%

Loss before equity in earnings of affiliate		(7,555	)		(6,659	)		(896	)	13	%
Equity in earnings of affiliate		168			—			168		—	%

Net loss		(7,387	)		(6,659	)		(728	)	11	%

Less: Net loss attributable to the noncontrolling interest		—			1,200			(1,200	)	(100	)%

Net loss attributable to LEAF III	$	(7,387	)	$	(5,459	)	$	(1,928	)	35	%

Net loss allocated to LEAF III’s limited partners	$	(7,313	)	$	(5,404	)	$	(1,909	)	35	%

The decrease in total revenues was primarily attributable to the following:

•

a decrease in interest income on equipment financings. Our weighted average net investment in financing assets decreased to $329.0 million for the three months ended March 31, 2010 as compared to $653.5 million for the three months ended March 31, 2009, a decrease of $324.5 million (50%). This decrease was primarily due to the deconsolidation of Funding LLC.

•

a decrease in gains on sales of equipment and lease dispositions. Gains and losses on sales of equipment may vary significantly from period to period.

•

a decrease in other income, which consists primarily of late fee income. Late fee income has decreased due to the decrease of the equipment financing portfolio.

These decreases in total revenues were partially offset by the following:

•

an increase in rental income which was principally the result of an increase in our investment in operating leases in the 2010 period compared to the 2009 period.

The decrease in total expenses was a result of the following:

•

a decrease in interest due to our decrease in average debt outstanding. Average borrowings for the three months ended March 31, 2010 and March 31, 2009 were $299.4 million and $619.3 million, respectively, at an effective interest rate of 6.4% and 7.1%, respectively. This decrease was primarily due to deconsolidation of Funding, LLC.

•

a decrease in management fees attributable to the decrease in our portfolio of equipment financing assets, since management fees are paid based on lease payments received.

•

a decrease in administrative expenses reimbursed to affiliate due to the decrease in the size of our portfolio.

•

a decrease in general and administrative expenses principally due to a decrease in professional fees and storage expenses.

These decreases in total expenses were partially offset by the following:

•

an increase in depreciation on operating leases related to our increase in our investment in operating leases.

•

an increase in our provision for credit losses. We provide for credit losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions. Our provision for credit losses has increased due to the impact of the economic recession in the United States on our customer’s ability to make payments on their leases and loans, resulting in an increase in non-performing assets as a percentage of finance receivables to 4.96% as of March 31, 2010 as compared to 4.05% as of March 31, 2009.

•

an increase in losses on derivative hedging activities. The lease assets we originate are almost entirely fixed-rate, while the funds borrowed through our credit facilities are obtained on a floating-rate basis. Accordingly, we employ a hedging strategy using derivative financial instruments such as interest rate swaps, to fix the rate on our debt and attempt to lock in our interest rate spread between interest received on our financings and the interest we pay on our debt. Under U.S. GAAP, we are required to recognize all derivatives on the balance sheet at fair value, and to the extent the derivative is effective, the change in fair value is recorded directly to equity. Certain of our hedges entered into do not qualify for hedge accounting. Therefore, any change in the fair value of these derivative instruments is recognized immediately in gain (loss) on derivatives and hedging activities. These losses are based on the value of the derivative contracts at March 31, 2010 in a volatile market that is changing daily, and will not necessarily reflect the cash amount to be paid at settlement. We expect that certain hedges that we will enter into in the future also will not qualify for hedge accounting. This will create volatility in our results of operations, as the market value of our derivative financial instruments changes over time, and this volatility may adversely impact our results of operations and financial condition. The net loss per limited partner unit, after the loss allocated to our General Partner, for the three months ended March 31, 2010 and 2009 was $6.11 and $4.51, respectively, based on a weighted average number of limited partner units outstanding of 1,196,631 and 1,197,902, respectively.

Liquidity and Capital Resources

Our major source of liquidity is excess cash derived from the collection of lease payments after payments of debt principal and interest on debt. Our primary cash requirements, in addition to normal operating expenses, are for debt service, investment in leases and loans and distributions to partners. In addition to cash generated from operations, we plan to meet our cash requirements through borrowings from additional credit facilities.

The following table sets forth our sources and uses of cash for the periods indicated (in thousands):


	Three Months Ended March 31,
	2010			2009
Net cash provided by operating activities	$	7,079		$	7,256
Net cash provided by investing activities		25,119			29,475
Net cash used in financing activities		(32,176	)		(38,657	)

Increase (decrease) in cash	$	22		$	(1,926	)

Partners’ distributions paid for the three months ended March 31, 2010 and 2009 were $2.5 million and $2.5 million, respectively. Distributions to limited partners were paid at a rate of 8.5% per annum of invested capital. Cumulative partner distributions paid from our inception to March 31, 2010 were approximately $24.3 million.

Future cash distributions are dependent on our performance and are impacted by a number of factors which include: our ability to obtain and maintain debt financing on acceptable terms to build and maintain our equipment finance portfolio; lease and loan defaults by our customers; and prevailing economic conditions. Due to the prolonged economic recession we continue to see a scarcity of available debt on terms beneficial to the partnership and higher than expected and loan defaults resulting in poorer fund performance than projected.

Cash increased by $22,000, which was primarily due to an increase in amounts due to affiliates of $5.7 million and a decrease in restricted cash of $3.2 million. These were offset by a net debt repayment of $7.5 million (net of purchases of and proceeds from leases and loans), and distributions to our partners of $2.5 million. As a result of increased delinquencies, the amount of borrowing availability under our leases and loans was reduced, resulting in a net debt repayment in 2010.

In August 2009, we sold a 47% interest in Funding LLC to LEAF 4, its joint venture partner, for $8.5 million. As a result of this transaction, $138.6 million in leases and loans and $126.2 million in the associated secured, non-recourse debt to Morgan Stanley/RBS were deconsolidated from our consolidated balance sheet. The proceeds from this transaction were used to help fund delevering commitments and fees due to West LB, one of our lenders.

Borrowings

Our borrowing relationships each require the pledging of eligible leases and loans to secure amounts advanced. Borrowings outstanding under our credit facilities were as follows as of March 31, 2010 (in thousands):


	Type	Maturity	Maximum Facility Amount		Amount Outstanding		Amount Available (1)		Amount of Collateral (2)
WestLB	Revolving	June 2010	$	175,000	$	129,955	$	45,045	$	148,564
DZ Bank	Revolving	November 2013		140,000		103,735		36,265		120,668
Key Equipment Finance	Term	June 2013		47,988		47,988		—		56,729

			$	362,988	$	281,678	$	81,310	$	325,961

(1)	Availability under these debt facilities is subject to having eligible leases or loans (as defined in the respective agreements) to pledge as collateral, compliance with covenants and the borrowing base formula.

(2)	Recourse under these facilities is limited to the amount of collateral pledged, and with respect to the DZ Bank facility, an additional 5% of the outstanding debt balance, or $5.2 million as of March 31, 2010. All facilities are collateralized by specific leases and loans and related equipment.

West LB

In February 2010, we amended our revolving credit facility with WestLB AG. This amendment changed certain performance covenants in light of the current economic recession and its potential effect on future delinquencies. Interest on this facility is LIBOR plus 2.50% per annum for all borrowings subsequent to March 2009 and at LIBOR plus 0.95% per annum for prior borrowings. In addition, this amendment reduced the availability under the facility to $175 million and adjusted the borrowing base formula, requiring a larger portion of our cash flow advance to be pledged as collateral on borrowings. This revolving line of credit is collateralized by specific leases and loans and related equipment, with a 1% credit reserve on the outstanding line of credit. To mitigate fluctuations in interest rates, we entered into interest rate swap agreements. As of March 31, 2010, the interest rate swap agreements fixed the interest rate on the outstanding balance at 5.3%. The interest rate swaps terminate on various dates ranging from January 2013 to August 2015. Interest and principal are due monthly.

DZ Bank

In November 2008, we entered into a $150 million revolving credit facility with Deutsche Zentral-Genossenschaftsbank (“DZ Bank”). Interest on each borrowing under this facility is calculated at the commercial paper rate for the lender at the time of such borrowing plus 1.75% per annum. In April 2010, we amended our revolving credit facility. These amendments changed certain performance covenants in light of the current economic recession and its potential effect on future delinquencies. In addition, these amendments reduced the availability under the facility to $140 million and adjusted our borrowing base formula, requiring a larger portion of our cash flow advance to be pledged as collateral on borrowings. To mitigate fluctuations in interest rates, we entered into interest rate swap agreements. As of March 31, 2010, the interest rate swap agreements fixed the interest rate on the outstanding balance at 4.1% and terminate on various dates ranging from February 2012 to September 2013.

Key Equipment Finance

In May 2008, we entered into a non-recourse loan agreement with Key Equipment Finance, Inc. Interest on this facility is calculated at one month commercial paper rate of lender plus 1.55% per annum. To mitigate fluctuations in interest rates, we have entered into interest rate swap agreements. The interest rate swap agreements terminate in June 2013. As of March 31, 2010, the interest rate swap agreements fixed the interest rate on the outstanding balance at 8.2%.

We are subject to financial covenants under our debt facilities, including minimum tangible net worth, maximum leverage ratios and portfolio delinquency, that are intended to measure our financial viability, limit the amount we can borrow based on measuring our debt to net worth and measure performance of our portfolio. In addition, our debt facilities include financial covenants covering

LEAF Financial, an affiliate of our General Partner and the servicer of our portfolio. These covenants exist to provide the lender with information about the financial viability of the entity that services our portfolio. These covenants are similar in nature to the covenants discussed above that are applicable to us, and are related to such things as our servicer’s minimum tangible net worth, maximum leverage ratios, managed portfolio delinquency and compliance of the debt terms of all of LEAF Financial’s managed entities.

As of March 31, 2010, we were in compliance with the covenants under its debt facilities except for two covenant breaches relating to LEAF Financial, the servicer of our portfolio. One covenant was regarding minimum tangible net worth as per the WestLB agreement. The second was regarding managed portfolio delinquency as per the Key Equipment Finance agreement.

We have requested waivers from both WestLB and Key Equipment Finance with respect to these breaches. Due to these breaches, WestLB and Key Equipment have various remedies under our loan agreements such as allowing repayment of the outstanding balance as payments are received on the underlying leases and loans or selling the pledged leases and loans in a commercially reasonable manner. Although we expect to obtain waivers or to amend the covenants in our loan agreements with WestLB and Key Equipment, there can be no assurance that such waivers or amendments will be executed. If waivers or amendments are not obtained, it is likely that LEAF Financial would not be in compliance with the same covenants at June 30, 2010. In addition, these breaches could create defaults under our other debt facilities and those lenders have remedies similar to that of WestLB and Key Equipment.

If we do not meet the requirements of the financial covenants under our debt facilities in the future, a default could occur that would have an adverse effect on our operations and could force us to liquidate all or a portion of our portfolio securing our debt facilities. If required, a sale of a portfolio, or any portion thereof, could be at prices lower than its carrying value, which could result in losses and reduce our income and distributions to our partners.

Liquidity Summary

We use debt to acquire leases and loans. Repayment of our debt is based on the payments we receive from our customers. When a lease or loan becomes delinquent we may repay our lender in order for us to maintain compliance with our debt covenants.

Our liquidity would be adversely affected by higher than expected equipment lease defaults, which would result in a loss of anticipated revenues. These losses may adversely affect our ability to make distributions to our partners and, if the level of defaults is sufficiently large, may result in our inability to fully recover our investment in the underlying equipment. In evaluating our allowance for losses on uncollectible leases, we consider our contractual delinquencies, economic conditions and trends, lease portfolio characteristics and our General Partner’s management’s prior experience with similar lease assets. At March 31, 2010, our credit evaluation indicated a need for an allowance for credit losses of $17.4 million. As our lease portfolio ages, and if the economy in the United States deteriorates even further or the recession continues for a substantial period of time, we anticipate the need to increase our allowance for credit losses.

Our liquidity is affected by our ability to leverage our portfolio through the use of debt facilities. Our ability to obtain debt financing needed to execute our investment strategies has been impacted by the continued tightening of the credit markets. Specifically, we rely on both revolving and term debt facilities to fund our acquisitions of equipment financings. If we are unable to obtain new debt that will allow us to invest the repayments of existing leases and loans into new investments, the volume of our leases and loans will be reduced.

To date, we have been successful in either extending or refinancing our credit facilities prior to their maturities; however, there can be no assurance that we will be able to continue to do so, as such activities are dependent on many factors beyond our control, including general economic and credit conditions. We continue to seek additional sources of financing, including expanded bank financing and use of joint venture strategies that will enable us to originate investments and generate income while preserving capital. We expect that future financings may be at higher interest rates with lower leverage. As a result, our profitability may be negatively impacted if we are unable to increase our lease and loan rates to offset increases in borrowing rates.

Contractual Obligations and Commercial Commitments

The following table sets forth our obligations and commitments as of March 31, 2010 (in thousands):


			Payments Due by Period
	Total		Less than 1 Year		1 – 3 Years		4 – 5 Years		After 5 Years
Bank debt (1)	$	281,678	$	127,592	$	127,882	$	24,707	$	1,497

(1)

To mitigate interest rate risk on the variable rate debt, we employ a hedging strategy using derivative financial instruments such as interest rate swaps and caps which fix the weighted average interest rates. Not included in the table above are estimated interest payments calculated at rates in effect at March 31, 2010: Less than 1 year: $11.6 million; 1-3 years: $8.3 million; 4-5 years: $1.0 million; and after 5 years: $34,000.

The above table does not include expected payments related to the Repurchase Commitment (defined below) as of December 31, 2009. In connection with a sale of leases and loans to a third party, we agreed to repurchase delinquent leases up to maximum of 7.5% of total proceeds received from the sale (the “Repurchase Commitment”). Our maximum exposure under the Repurchase Commitment at March 31, 2010 is $132,000.

Legal Proceedings

We are a party to various routine legal proceedings arising out of the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of losses arising from changes in values of financial instruments. We are exposed to market risks associated with changes in interest rates and our earnings may fluctuate with changes in interest rates. The lease assets we originate are almost entirely fixed-rate. Accordingly, we seek to finance these assets with fixed interest rate debt. At March 31, 2010, our outstanding debt totaled $281.7 million which consists of variable rate debt. To mitigate interest rate risk on the variable rate debt, we employ a hedging strategy using derivative financial instruments such as interest rate swaps and caps, which fixes the interest rates at 5.3%, 4.1% and 8.2%, for the WestLB, DZ Bank and Key Equipment Finance, Inc. debt facilities, respectively. At March 31, 2010, the notional amounts of the 22 interest rate swaps were $257.7 million. The interest rate swap agreements terminate on various dates ranging from February 2012 to August 2015.

The following sensitivity analysis table shows, at March 31, 2010, the estimated impact on the fair value of our interest rate-sensitive investments and liabilities of changes in interest rates, assuming rates instantaneously fall 100 basis points and rise 100 basis points (dollars in thousands):


	Interest rates fall 100 basis points			Unchanged			Interest rates rise 100 basis points
Hedging instruments
Fair value	$	(9,814	)	$	(6,861	)	$	(4,181	)
Change in fair value	$	(2,953	)		—		$	2,680
Change as a percent of fair value		43	%		—			(39	)%

It is important to note that the impact of changing interest rates on fair value can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the fair value of our assets could increase significantly when interest rates change beyond 100 basis points from current levels. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and adverse to our partners.

ITEM 4 – CONTROLS AND PROCEDURES

Disclosure Controls

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our General Partner’s chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level discussed above.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the three months ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 6 – EXHIBITS


Exhibit No.		Description

3.1		Certificate of Limited Partnership (1)

3.2		Amended and Restated Agreement of Limited Partnership of LEAF Equipment Leasing Income Fund III, L.P. (1)

4.1		Forms of letters sent to limited partners confirming their investment (1)

10.1		Origination and Servicing Agreement among LEAF Equipment Leasing Income Fund III, L.P., LEAF Financial Corporation and LEAF Funding Inc., dated February 12, 2007 (1)

10.2		Receivables Loan and Security Agreement, dated as of November 21, 2008, among LEAF III C SPE, LLC, LEAF Funding, Inc., LEAF Financial Corporation, LEAF Equipment Leasing Income Fund III, L.P., Autobahn Funding Company LLC, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, U.S. Bank, National Association, and Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services) (2)

10.3		Seventh Amendment to the Receivables Loan and Security Agreement dated as of November 13, 2008, among LEAF Capital Funding III, LLC, LEAF Financial Corporation, Morgan Stanley Bank, Morgan Stanley Asset Funding Inc., The Royal Bank of Scotland PLC, U.S. Bank National Association, and Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services) (2)

10.4		Secured Loan Agreement dated as of June 19, 2007 among LEAF Fund III, LLC, LEAF Funding, Inc., LEAF Equipment Leasing Income Fund III, L.P., LEAF Financial Corporation, U.S. Bank National Association, and WestLB AG, New York Branch (3)

10.5		Amendment No. 1 to Secured Loan Agreement dated as of September 24, 2007, among WestLB AG, New York Branch, U.S. Bank National Association, LEAF Equipment Leasing Income Fund III, L.P., LEAF Financial Corporation, LEAF Funding, Inc., and LEAF Fund III, LLC (4)

10.6		Amendment No. 2 to Secured Loan Agreement dated as of December 21, 2007 among WestLB AG, New York Branch, U.S. Bank National Association, LEAF Equipment Leasing Income Fund III, L.P., LEAF Financial Corporation, LEAF Funding, Inc., and LEAF Fund III, LLC (4)

10.7		Amendment No. 4 to Secured Loan Agreement dated as of June 1, 2008, among WestLB AG, New York Branch, U.S. Bank National Association, LEAF Equipment Leasing Income Fund III, L.P., LEAF Financial Corporation, LEAF Funding, Inc., and LEAF Fund III, LLC (6)

10.8		Amendment No. 5 to Secured Loan Agreement dated as of March 6, 2009, among WestLB AG, New York Branch, U.S. Bank National Association, LEAF Equipment Leasing Income Fund III, L.P., LEAF Financial Corporation, LEAF Funding, Inc., and LEAF Fund III, LLC (2)

10.9		Loan and Security Agreement among LEAF III B SPE, LLC, U.S. Bank National Association and Key Equipment Finance Inc., dated as of May 30, 2008 (6)

10.10		Membership Interest Purchase Agreement dated as of April 22, 2008 between LEAF Funding, Inc. and LEAF Equipment Leasing Income Fund III, L.P. (5)

10.11		First Amendment to Loan and Security Agreement dated as of February 23, 2009 among LEAF III B SPE, LLC and Key Equipment Finance Inc. (7)

10.12		Amendment No. 5 to Secured Loan Agreement dated as of June 26, 2009, among WestLB AG, New York Branch, U.S. Bank National Association, LEAF Equipment Leasing Income Fund III, L.P., LEAF Financial Corporation, LEAF Funding, Inc., and LEAF Fund III, LLC (8)

10.13		Amendment No. 6 to Secured Loan Agreement dated as of February 25, 2010, among West LB AG, New York Branch, U.S. Bank National Association, LEAF Equipment Leasing Income Fund III, L.P., LEAF Financial Corporation, LEAF Funding, Inc., and LEAF Fund III, LLC (9)



10.14		Amendment No. 1 to Receivables Loan and Security Agreement, dated as of April 14, 2010 among LEAF III C SPE, LEAF Funding, Inc., LEAF Financial Corporation, LEAF Equipment Leasing Income Fund III, L.P. and Autobahn Funding Company LLC, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

32.2		Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Filed previously as an exhibit to our Registration Statement on Form S-1 filed on October 2, 2006 and by this reference incorporated herein.

(2)	Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2008 and by this reference incorporated herein.

(3)	Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and by this reference incorporated herein.

(4)	Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2007 and by this reference incorporated herein.

(5)	Filed previously as an exhibit to our Current Report on Form 8-K dated as of April 28, 2008 and by this reference incorporated herein.

(6)	Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 and by this reference incorporated herein.

(7)	Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 and by this reference incorporated herein.

(8)	Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and by this reference incorporated herein.

(9)	Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2009 and by this reference incorporated herein.

SIGNATURES

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


				LEAF EQUIPMENT LEASING INCOME FUND III, L.P.
				A Delaware Limited Partnership

				By: LEAF Asset Management, LLC, its General Partner

				By: /s/ CRIT S. DEMENT
May 21, 2010				Crit S. Dement
				Chairman and Chief Executive Officer

				By: /s/ ROBERT K. MOSKOVITZ
May 21, 2010				Robert K. Moskovitz
				Chief Financial Officer

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