Common use of Liquidity and Capital Resources Clause in Contracts

Liquidity and Capital Resources. The Partnership relies upon purchases of Units, Mortgage Investment payoffs, borrowers' mortgage payments, and, to a lesser degree, its line of credit for the source of funds for Mortgage Investments. Currently, mortgage interest rates have declined somewhat from those available at the inception of the Partnership. If interest rates were to increase substantially, the yield of the Partnership's Mortgage Investments may provide lower yields than other comparable debt-related investments. As such, additional Limited Partner Unit purchases could decline, which would reduce the overall liquidity of the Partnership. Additionally, since the Partnership has made Mortgage Investments in primarily fixed rate loans, if interest rates were to rise, the likely result would be a slower prepayment rate for the Partnership. This could cause a lower degree of liquidity as well as a slowdown in the ability of the Partnership to invest in Mortgage Investments at the then current rate. Conversely, in the event interest rates were to decline, the Partnership could see both or either of a surge of unit purchases by prospective Limited Partners, and significant borrower prepayments, which, if the Partnership can only obtain the then existing lower rates of interest may cause a dilution of the Partnership's yield on Mortgage Investments, thereby lowering the Partnership's overall yield to the Limited Partners. The Partnership to a lessor degree relies upon its line of credit to fund Mortgage Investments. Generally, the Partnership's Mortgage Investments are fixed rate, whereas the credit line is a variable rate loan. In the event of a significant increase in overall interest rates, the credit line rate of interest could increase to a rate above the average portfolio rate of interest. Should such an event occur, the General Partners would desire to pay off the line of credit. Retirement of the line of credit would reduce the overall liquidity of the Partnership. CURRENT ECONOMIC CONDITIONS The Partnership has been affected by the current regional economic downturn; however the Partnership has not suffered any material losses to date. As of June 30, 1996, the Partnership did not own any real estate acquired through foreclosure and is experiencing delinquencies at the low end of General Partners expectations. It is now clear that the Northern California recession reached bottom in 1993. Since then, the California economy has been improving, slowly at first, but now, more vigorously. A wide variety of indicators suggest that the economy in California was strong in the first half of 1996, and the state is well positioned for fast growth in the second half of the year. This improvement is reflective in increasing property values, in job growth, personal income growth, etc., all of which translates into more loan activity. These positive factors for the California economy have also enticed many lenders with excess capital to invest in the residential and commercial lending markets. The entrance of new lenders, and an increase in capital devoted to mortgage lending by existing mortgage lenders, has created significant lending competition and demand for high quality loans. The competition is fiercest in the residential lending markets. This competition has led to a downward trend in both interest rates and fees charged to borrowers as well as liberalizing underwriting standards by the Partnership's competition. The result is a reduction in the residential loans available for the Partnership to invest in and a greater concentration of commercial loans.