UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2012

 

OR

 

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

 

Commission File Number 1-13237

 


 

CENTERLINE HOLDING COMPANY

(Exact name of registrant as specified in its charter)

 


 

Delaware   13-3949418
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
100 Church Street, New York, New York   10007
(Address of principal executive offices)   (Zip Code)

 

(212) 317-5700

Registrant’s telephone number

 

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

 

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

 

Large accelerated filer ¨   Accelerated filer ¨
         
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company þ

 

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

 

As of November 12, 2012, there were 349.2 million outstanding shares of the registrant’s common shares of beneficial interest.

 

 


 

 
 

 

EXPLANATORY NOTE

 

On November 14, 2012, the United States Securities and Exchange Commission, in Securities Exchange Act of 1934 Release No. 68224, issued an exemptive order (the “Order”), exempting registrants, under certain conditions, from any requirement to file or furnish materials under certain Exchange Act Sections for the period from and including October 29, 2012 to November 20, 2012.

 

As a result of Hurricane Sandy, the corporate headquarters for Centerline Holding Company (the “Company”) was without power, closed and inaccessible by Company employees from October 29, 2012 through November 4, 2012. Widespread power and communications outages in the region further disrupted the ability of key personnel in the financial reporting and accounting function of the Company to access personnel and information technology resources needed to prepare and review the Company’s Form 10-Q for the quarterly period ended September 30, 2012 (the “Form 10-Q”). Accordingly, the Company was unable, in good faith, to file the Form 10-Q on a timely basis and, in filing the Form 10-Q on November 19, 2012 is relying on the exemption included in the Order.

  

 

 

 

 
 

 

Table of Contents

 

CENTERLINE HOLDING COMPANY

 

FORM 10-Q

 

  Page
PART I – Financial Information  
         
  Item 1 Financial Statements  
      Condensed Consolidated Balance Sheets 4
      Condensed Consolidated Statements of Operations 5
      Condensed Consolidated Statements of Comprehensive Income 6
      Condensed Consolidated Statement of Changes in Equity 7
      Condensed Consolidated Statements of Cash Flows 8
         
    Notes to Condensed Consolidated Financial Statements  
      Note 1 – Description of Business and Basis of Presentation 10
      Note 2 – Fair Value Measurement 11
      Note 3 – Available-for-Sale Investments 18
      Note 4 – Assets Pledged as Collateral 23
      Note 5 – Equity Method Investments 24
      Note 6 – Mortgage Loans Held for Sale and Other 24
      Note 7 – Mortgage Servicing Rights, Net 25
      Note 8 – Deferred Costs and Other Assets, Net 26
      Note 9 – Consolidated Partnerships 26
      Note 10 – Notes Payable and Other Borrowings 30
      Note 11 – Secured Financing 33
      Note 12 – Accounts Payable, Accrued Expenses and Other Liabilities 33
      Note 13 – Redeemable Securities 34
      Note 14 – Non-Controlling Interests 35
      Note 15 – General and Administrative Expenses 36
      Note 16 – Provision for (Recovery of) Losses 36
      Note 17 – Earnings per Share 37
      Note 18 – Financial Risk Management and Derivatives 38
      Note 19 – Related Party Transactions 39
      Note 20 – Business Segments 41
      Note 21 – Commitments and Contingencies 45
      Note 22 – Subsequent Events 49
         
  Item 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations 51
         
  Item 3   Quantitative and Qualitative Disclosures about Market Risk 84
         
  Item 4   Controls and Procedures 84
         
PART II – Other Information  
         
  Item 1   Legal Proceedings 85
         
  Item 1A   Risk Factors 85
         
  Item 2   Unregistered Sales of Equity Securities and Use of Proceeds 86
         
  Item 3   Defaults Upon Senior Securities 86
         
  Item 4   Mine Safety Disclosures 86
         
  Item 5   Other Information 86
         
  Item 6   Exhibits 86
         
SIGNATURES  

 

- 3 -
 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

CENTERLINE HOLDING COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

   September 30,   December 31, 
   2012   2011 
   (Unaudited)     
         
Assets:          
Cash and cash equivalents  $95,334   $95,992 
Restricted cash   17,233    16,185 
Investments:          
Available-for-sale   401,018    394,355 
Equity method   13,026    8,794 
Mortgage loans held for sale and other   187,725    190,192 
Investments in and loans to affiliates, net   4,313    5,641 
Intangible assets, net   8,333    8,784 
Mortgage servicing rights, net   84,332    72,520 
Deferred costs and other assets, net   52,265    75,791 
Consolidated partnerships:          
Equity method investments   2,773,437    3,079,803 
Land, buildings and improvements, net   415,742    460,804 
Other assets   243,521    264,437 
           
Total assets  $4,296,279   $4,673,298 
           
           
Liabilities:          
Notes payable and other borrowings  $327,922   $322,849 
Secured financing   520,096    618,163 
Accounts payable, accrued expenses and other liabilities   184,946    187,230 
Preferred shares of subsidiary (subject to mandatory repurchase)   55,000    55,000 
Redeemable securities   6,000    - 
Consolidated partnerships:          
Notes payable   161,792    156,643 
Due to tax credit property partnerships   82,913    132,246 
Other liabilities   449,045    319,256 
           
Total liabilities   1,787,714    1,791,387 
           
Redeemable securities   -    6,000 
           
Commitments and contingencies          
           
Equity:          
Centerline Holding Company beneficial owners’ equity:          
Special preferred voting shares; no par value; 11,867 shares issued and outstanding in 2012 and 2011   119    119 
Common shares; no par value; 800,000 shares authorized; 356,226 issued and 349,166 outstanding in 2012 and 2011   196,631    209,735 
Treasury shares of beneficial interest – common, at cost; 7,060 shares in 2012 and 2011   (65,764)   (65,764)
Accumulated other comprehensive income   90,608    66,661 
           
Centerline Holding Company total   221,594    210,751 
           
Non-controlling interests   2,286,971    2,665,160 
           
Total equity   2,508,565    2,875,911 
           
Total liabilities and equity  $4,296,279   $4,673,298 

 

See accompanying notes to condensed consolidated financial statements.

 

- 4 -
 

 

CENTERLINE HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
Revenues:                    
Interest income  $11,072   $9,955   $33,973   $30,048 
Fee income   9,757    8,379    28,966    24,938 
Gain on sale of mortgage loans   15,361    7,398    36,743    20,869 
Other   673    393    3,012    1,962 
Consolidated partnerships                    
Interest income, net   312    255    (701)   940 
Rental income   26,170    26,022    81,754    77,719 
Other   327    262    537    1,352 
Total revenues   63,672    52,664    184,284    157,828 
                     
Expenses:                    
General and administrative   23,467    25,981    77,380    71,873 
Provision for (recovery of) losses   14,738    (39,644)   20,502    (48,305)
Interest   14,007    21,599    44,192    51,173 
Interest – distributions to preferred shareholders of subsidiary   960    960    2,880    2,880 
Depreciation and amortization   3,696    3,712    11,948    10,966 
Consolidated partnerships                    
Interest   6,630    4,919    16,152    13,584 
Loss on impairment of assets   -    -    678    60,349 
Other expenses   95,291    45,603    203,361    163,937 
Total expenses   158,789    63,130    377,093    326,457 
                     
Loss before other (loss) income   (95,117)   (10,466)   (192,809)   (168,629)
                     
Other (loss) income:                    
Equity and other income, net   55    -    113    - 
Gain on settlement of liabilities   493    -    493    4,368 
Gain from repayment or sale of investments   598    132    1,419    1,456 
Other losses from consolidated partnerships   (56,684)   (53,798)   (277,403)   (237,834)
                     
Loss from continuing operations before income tax provision   (150,655)   (64,132)   (468,187)   (400,639)
Income tax benefit (provision) – continuing operations   652    87    505    (93)
                     
Net loss from continuing operations   (150,003)   (64,045)   (467,682)   (400,732)
                     
Discontinued operations:                    
Net income from discontinued operations   -    -    -    253 
                     
Net loss   (150,003)   (64,045)   (467,682)   (400,479)
                     
Net loss attributable to non-controlling interests   144,240    87,860    454,578    434,738 
                     
Net (loss) income attributable to Centerline Holding Company shareholders  $(5,763)  $23,815   $(13,104)  $34,259 
                     
Net (loss) income per share                    
Basic and Diluted                    
(Loss) income from continuing operations  $(0.02)  $0.07   $(0.04)  $0.10 
(Loss) income from discontinued operations  $-   $-   $-   $-(1)
                     
Weighted average shares outstanding                    
Basic and Diluted   349,166    349,166    349,166    348,995 

 

(1) Amount calculates to zero when rounded.

 

See accompanying notes to condensed consolidated financial statements.

 

- 5 -
 

 

CENTERLINE HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
                 
Net Loss  $(150,003)  $(64,045)  $(467,682)  $(400,479)
                     
Other comprehensive (loss)income - unrealized gains (losses), net   (5,785)   (14,036)   23,952    (11,943)
                     
Comprehensive loss   (155,788)   (78,081)   (443,730)   (412,422)
                     
Less: Other comprehensive loss attributable to non-controlling interests   144,249    87,865    454,573    434,762 
                     
Comprehensive (loss) income attributable to Centerline Holding Company shareholders  $(11,539)  $9,784   $10,843   $22,340 

 

See accompanying notes to condensed consolidated financial statements.

 

- 6 -
 

 

CENTERLINE HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(in thousands)

(Unaudited)

 

                   Accumulated         
   Special               Other   Non-     
   Preferred               Comprehensive   Controlling     
   Voting Shares   Common Shares   Treasury Shares   Income   Interests   Total 
       Shares                     
                             
January 1, 2012  $119    349,166   $209,735   $(65,764)  $66,661   $2,665,160   $2,875,911 
Net loss   -    -    (13,104)   -    -    (454,578)   (467,682)
Unrealized gains, net   -    -    -    -    23,947    5    23,952 
Contributions from limited partners for LIHTC transactions   -    -    -    -    -    84,538    84,538 
Net decrease due to newly consolidated general partnerships   -    -    -    -    -    (990)   (990)
Distributions   -    -    -    -    -    (7,164)   (7,164)
September 30, 2012  $119    349,166   $196,631   $(65,764)  $90,608   $2,286,971   $2,508,565 

 

See accompanying notes to condensed consolidated financial statements.

 

- 7 -
 

 

CENTERLINE HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

   Nine Months Ended 
   September 30, 
   2012   2011 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(467,682)  $(400,479)
Adjustments to reconcile net loss to cash flows (used in) provided by operating activities:          
Non-cash loss from consolidated partnerships   458,556    444,951 
Gain from repayment or sale of investments   (1,419)   (1,456)
Gain on settlement of liabilities   (493)   (4,368)
Lease termination costs   3,318    (1,081)
Credit intermediation assumption fees   2,402    3,599 
Reserves for bad debts, net of reversals   47,337    8,076 
Affordable Housing loss reserve recovery   (7,750)   (57,700)
Stabilization escrow reserve recovery   (23,549)   - 
(Recovery of) provision for risk-sharing obligations   (1,017)   238
Other provision for losses   2,163    - 
Depreciation and amortization   11,948    10,966 
Share-based compensation expense   -    62 
Change in fair value of derivatives   4,395    9,817 
Non-cash expense, net   7,459    10,759 
Capitalization of mortgage servicing rights   (21,482)   (12,646)
Changes in operating assets and liabilities:          
Mortgage loans held for sale   2,467    (3,842)
Fund advances and other receivables   (53,112)   (1,569)
Other assets   (453)   (865)
Deferred revenues   1,143    (2,448)
Accounts payable, accrued expenses and other liabilities   (5,149)   (964)
           
Net cash flow (used in) provided by operating activities   (40,918)   1,050 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Sale and repayment of available-for-sale securities   151    147 
Repayment of mortgage loans held for investment   -    322 
Acquisition of equity interests in Tax Credit Property Partnerships   (13,610)   (15,475)
Proceeds from sale of equity interests to Tax Credit Fund Partnerships   9,776    14,564 
Acquisition of investment properties   (4,393)   - 
Proceeds from sale of investment properties   4,572    - 
Deferred investment acquisition cost   (199)   - 
Decrease (increase) in restricted cash, escrows and other cash collateral   44,577    (2,013)
Acquisition of furniture, fixtures and leasehold improvements   (619)   (1,524)
Equity investments and other investing activities   7    (949)
           
Net cash flow provided by (used in) investing activities   40,262    (4,928)

 

See accompanying notes to condensed consolidated financial statements.

 

- 8 -
 

 

CENTERLINE HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

   Nine Months Ended 
   September 30, 
   2012   2011 
         
CASH FLOWS FROM FINANCING ACTIVITIES:          
Distributions to equity holders   (4,669)   (4,669)
Repayments of term loan   (8,929)   - 
Repayment of Centerline Financial Holding Credit Facility   -    (20,000)
Increase (decrease) in mortgage banking warehouse and repurchase facilities   953    (179)
Increase in revolving credit facility   9,800    6,100 
Proceeds from Freddie Mac loan   3,899    - 
Repayments of Freddie Mac loan   (650)   - 
Redemption of Convertible CRA Shares   -    (161)
Deferred financing and other offering costs   (406)   (271)
           
Net cash flow used in financing activities   (2)   (19,180)
           
Net decrease in cash and cash equivalents   (658)   (23,058)
Cash and cash equivalents at the beginning of the period   95,992    119,616 
           
Cash and cash equivalents at end of period  $95,334   $96,558 
           
Non-cash investing and financing activities:          
Net change in re-securitized mortgage revenue bonds:          
Secured financing liability  $98,067   $(44,182)
Mortgage revenue bonds  $(101,636)  $48,779 
Decrease (increase) in Series B Freddie Mac Certificates  $1,511   $(2,164)
Decrease (increase) in Series A-1 Freddie Mac Certificates  $2,058   $(2,433)
Exchange of Convertible Special Common Units to Common Shares  $-   $7,102 

 

See accompanying notes to condensed consolidated financial statements.

 

- 9 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – Description of Business and Basis of Presentation

 

A.Description of Business

 

Centerline Holding Company (“CHC”), through its subsidiaries, provides real estate financing and asset management services, focused on affordable and conventional multifamily housing. We offer a range of both debt financing and equity investment products, as well as asset management services to developers, owners, and investors. We are structured to originate, underwrite, service, manage, refinance or sell assets through all phases of the asset’s life cycle. As a leading sponsor of Low-Income Housing Tax Credit (“LIHTC”) funds, we have raised more than $10 billion in equity across 137 funds. Today we manage $9.2 billion of investor equity within 115 funds and invested in approximately 1,200 assets located in 45 U.S. states. Our multifamily lending platform services $11.5 billion in loans and mortgage revenue bonds. A substantial portion of our business is conducted through our subsidiaries, generally under the designation Centerline Capital Group LLC (“CCG”). The term “we” (“us”, “our” or “the Company”) as used throughout this document may refer to a subsidiary or the business as a whole.

 

We manage our operations through six reportable segments. Our reportable segments consist of four core business segments and two additional segments: Corporate and Consolidated Partnerships. Our four core business segments are:

 

Affordable Housing Equity provides LIHTC equity financing products for affordable multifamily housing, offers investment opportunities and fund management services to investors in affordable multifamily equity and manages the disposition of assets through the end of the fund’s life;

 

Affordable Housing Debt provides financing to developers and owners of affordable multifamily properties and manages our retained interests from the December 2007 re-securitization of our mortgage revenue bond portfolio with the Federal Home Loan Mortgage Corporation (“Freddie Mac”);

 

Mortgage Banking provides conventional mortgage financing for multifamily housing, manufactured housing and student housing; bridge and preferred equity offered through capital partners; and commercial mortgage-backed securities execution offered through capital partners for a variety of asset classes; and

 

Asset Management provides active management of multifamily real estate assets owned by our Affordable Housing Equity investment funds by managing construction risk during the construction process, managing specially serviced assets, and monitoring our real estate owned portfolio. For Affordable Housing Debt loans, Asset Management manages construction risk during the construction process and actively manages specially serviced assets.

 

Our Corporate segment includes: Finance and Accounting, Treasury, Legal, Marketing and Investor Relations, Operations and Risk Management, supporting our four core business segments.

 

Consolidated Partnerships comprise certain investment funds we control, regardless of the fact that we have virtually no economic interest in such entities. Consolidated Partnerships include the LIHTC investment fund partnerships we originate and manage through the Affordable Housing Equity segment (“Tax Credit Fund Partnerships”) and property-level partnerships for which we have assumed the role of general partner or for which we have foreclosed upon the property (“Tax Credit Property Partnerships”), all of which we are required to consolidate in accordance with the authoritative accounting guidance.

 

B.Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements were prepared consistent with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, the condensed consolidated financial statements contain all adjustments (only normal recurring adjustments) necessary to present fairly the financial statements of interim periods. Given that our businesses may have a higher volume of transactions in some quarterly periods rather than others, the operating results for interim periods may not be indicative of full year results.

 

These unaudited condensed consolidated financial statements are intended to be read in conjunction with the audited consolidated financial statements and notes included in our Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”), which contains a summary of our significant accounting policies. Certain footnote detail is omitted from the condensed consolidated financial statements unless there is a material change from the information included in the 2011 Form 10-K.

 

- 10 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

C.Recently Issued and Adopted Accounting Pronouncements

 

During the nine months ended September 30, 2012 we adopted the following new accounting pronouncements:

 

·On January 1, 2012, we adopted Accounting Standards Update (“ASU”) No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. This update revises the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The adoption of ASU 2011-03 did not have a material impact on our consolidated financial statements.

 

·On January 1, 2012, we adopted ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This update amends the existing fair value guidance to improve consistency in the application and disclosure of fair value measurements in GAAP and International Financial Reporting Standards. ASU 2011-04 provides certain clarifications to the existing guidance, changes certain fair value principles, and enhances disclosure requirements. While requiring additional disclosures, the adoption of ASU 2011-04 did not have an impact on our financial condition, results of operations or cash flows.

 

·On January 1, 2012, we adopted ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 removes the option to present the components of other comprehensive income (“OCI”) as part of the statement of changes in equity. In addition, ASU 2011-05 requires consecutive presentation of the statement of operations and OCI and presentation of reclassification adjustments on the face of the financial statements from OCI to net income. The adoption of ASU 2011-05 impacts presentation of a separate financial statement only and did not have an impact on our financial condition, results of operations or cash flows.

 

·On January 1, 2012, we adopted ASU No. 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, to defer the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and OCI until the Financial Accounting Standards Board is able to reconsider the applicable provisions. The adoption of ASU 2011-12 impacts presentation only and did not have an impact on our financial condition, results of operations or cash flows.

 

During the nine months ended September 30, 2012, no new accounting pronouncements were issued that would impact the Company.

 

NOTE 2 – Fair Value Measurement

 

A.General

 

Certain assets are recorded at fair value every reporting period (i.e., on a recurring basis) in accordance with GAAP. Other assets are carried at amortized cost (such as mortgage loans held for investment), are initially recorded at fair value and amortized (such as Mortgage Servicing Rights (“MSRs”)) or are carried at the lower of cost or fair value (mortgage loans held for sale); these are tested for impairment periodically and would be adjusted to fair value if impaired (i.e., measured at fair value on a non-recurring basis).

 

We have an established process for determining fair values. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on internally developed models that consider relevant transaction data such as maturity and use as inputs, market-based or independently sourced market parameters. We have controls in place intended to ensure that our fair values are appropriate. Our Finance and Accounting group, independent from business operations ensures quarterly that observable market prices and market based parameters are used for valuation whenever possible. For those products with material parameter risk for which observable market levels do not exist, an independent review of the assumptions made on pricing is performed on a quarterly basis. Any changes to valuation methodology are reviewed by management to confirm that the changes are justified.

 

The methods described above to estimate fair value may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

- 11 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

B.Valuation Hierarchy

 

A three-level valuation hierarchy has been established under GAAP for disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

·Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.

 

·Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

 

·Level 3 inputs are unobservable and typically based on our own assumptions, including situations where there is little, if any, market activity.

 

A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.

 

C.Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The assets and liabilities that we measure at fair value on a recurring basis and the valuation methodologies and inputs used by us are as follows:

 

Series A-1 Freddie Mac Certificates We generally determine fair value based on observable market transactions of similar instruments when available.  Because these certificates typically have a limited or inactive market, and in the absence of observable market transactions, we estimate fair value for each certificate utilizing the present value of the expected cash flows of the scheduled interest payments on each certificate discounted at a rate for comparable tax-exempt investments and then compare it against any similar market transactions.
   
Series B Freddie Mac Certificates We determine fair value of the Series B Freddie Mac Certificates, which represent the residual interests of the re-securitized portfolio, based upon a discounted cash flow model that follows the contractual provisions of the certificates.  The significant assumptions of the valuation which impact the cash flow and thus the valuation include:
     
  · estimating the constant default rate (“CDR”) and the prepayment rates of the mortgage revenue bonds in the managed portfolio, estimates which are based on our historical experience and industry studies related to properties comparable to those underlying the bonds;
  · estimating the loss severity, upon default, associated with the mortgage revenue bonds collateral;
  · estimating the extent to which other parties involved in our planned restructuring of the bonds underlying the certificates will participate and the timing of that restructuring; and
  · applying an appropriate discount rate, which we consider in comparison to comparable residual interests, along with consideration of the tax-exempt nature of the associated income.

 

- 12 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Mortgage revenue bonds As mortgage revenue bonds typically have a limited or inactive market, in the absence of observable market transactions, we estimate fair value for bonds secured by performing properties (“Performing Assets”) by calculating the net present value based on the contractual amounts due, utilizing a discount rate for comparable tax-exempt investments as obtained from relevant market makers. For bonds secured by properties with substandard performance (“Non-performing Assets”), the fair value is determined by utilizing the direct capitalization methodology on the underlying real estate asset and applying a capitalization rate obtained from market data for comparative tax exempt investments to assumed stabilized net operating income levels.  Management uses judgment based on individual property markets to determine stabilized net operating income.
   
Interest rate derivatives The fair values of interest rate derivatives are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curve) derived from observable market interest rate curves.  In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as thresholds and guarantees. 

 

The following tables present the assets and liabilities measured at fair value as of September 30, 2012 and December 31, 2011, and indicate the fair value hierarchy of the valuation techniques we utilize to determine fair value:

 

               Balance 
               as of 
               September 30, 
(in thousands)  Level 1   Level 2   Level 3   2012 
                 
Assets                    
Available-for-sale investments:                    
Freddie Mac Certificates:                    
Series A-1  $-   $-   $136,047   $136,047 
Series B   -    -    61,680    61,680 
Mortgage revenue bonds   -    -    203,291    203,291 
Total available-for-sale investments  $-   $-   $401,018   $401,018 
                     
Interest rate derivatives(1)  $-   $1,781   $-   $1,781 
                     
Liabilities                    
Interest rate derivatives(2)  $-   $33,424   $-   $33,424 

 

(1)Included in “Deferred costs and other assets, net” on the Condensed Consolidated Balance Sheets.
(2)Included in “Accounts payable, accrued expenses and other liabilities” on the Condensed Consolidated Balance Sheets.

 

- 13 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

               Balance 
               as of 
               December 31, 
(in thousands)  Level 1   Level 2   Level 3   2011 
                 
Assets                    
Available-for-sale investments:                    
Freddie Mac Certificates:                    
Series A-1  $-   $-   $134,360   $134,360 
Series B   -    -    64,857    64,857 
Mortgage revenue bonds   -    -    195,138    195,138 
Total available-for-sale investments  $-   $-   $394,355   $394,355 
                     
Interest rate derivatives  $-   $1,488   $-   $1,488 
                     
Liabilities                    
Interest rate derivatives  $-   $28,737   $-   $28,737 

 

For key fair value assumptions used in measuring Level 3 assets and for the sensitivity of the fair value to changes in these assumptions (see Note 3).

 

- 14 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following tables include a rollforward of assets measured at fair value on a recurring basis and for which we utilized Level 3 inputs to determine fair value:

 

   Three Months Ended September 30, 2012 
   Series A-1   Series B   Mortgage     
   Freddie Mac   Freddie Mac   Revenue     
(in thousands)  Certificates   Certificates   Bonds   Total 
                 
Balance at July 1, 2012  $135,291   $63,852   $215,394   $414,537 
Total realized and unrealized gains or (losses):                    
Realized gain recognized in earnings   -    -    -    - 
Unrealized gain (loss) recorded in other comprehensive income (loss)   19    (2,918)   (2,877)   (5,776)
Amortization or accretion   (3)   746    42    785 
Purchases, sales, issuances, settlements and other adjustments(1)   740    -    (9,268)(2)   (8,528)
Net transfers in and/or out of Level 3   -    -    -    - 
Balance at September 30, 2012  $136,047   $61,680   $203,291   $401,018 
                     
Amount of total gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2012  $-   $-   $-   $- 

 

   Nine Months Ended September 30, 2012 
   Series A-1   Series B   Mortgage     
   Freddie Mac   Freddie Mac   Revenue     
(in thousands)  Certificates   Certificates   Bonds   Total 
                 
Balance at January 1, 2012  $134,360   $64,857   $195,138   $394,355 
Total realized and unrealized gains or (losses):                    
Realized gain recognized in earnings   -    795(3)   -    795 
Unrealized (loss) gain recorded in other comprehensive income (loss)   (361)   (3,697)   28,004    23,946 
Amortization or accretion   (10)   (1,786)   127    (1,669)
Purchases, sales, issuances, settlements and other adjustments(1)   2,058    1,511    (19,978)(4)   (16,409)
Net transfers in and/or out of Level 3   -    -    -    - 
Balance at September 30, 2012  $136,047   $61,680   $203,291   $401,018 
                     
Amount of total gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2012  $-   $795   $-   $795 

 

- 15 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

   Three Months Ended September 30, 2011 
   Series A-1   Series B   Mortgage     
   Freddie Mac   Freddie Mac   Revenue     
(in thousands)  Certificates   Certificates   Bonds   Total 
                 
Balance at July 1, 2011  $132,473   $63,237   $260,975   $456,685 
Total realized and unrealized gains or (losses):                    
Realized gain recognized in earnings   -    151(3)   -    151 
Unrealized gain (loss) recorded in other comprehensive income (loss)   3,386    994    (21,677)   (17,297)
Amortization or accretion   (3)   (1,638)   45    (1,596)
Purchases, sales, issuances, settlements and other adjustments(1)   -    274    (3,528)(5)   (3,254)
Net transfers in and/or out of Level 3   -    -    -    - 
Balance at September 30, 2011  $135,856   $63,018   $235,815   $434,689 
                     
Amount of total gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2011  $-   $151   $-   $151 

 

   Nine Months Ended September 30, 2011 
   Series A-1   Series B   Mortgage     
   Freddie Mac   Freddie Mac   Revenue     
(in thousands)  Certificates   Certificates   Bonds   Total 
                 
Balance at January 1, 2011  $129,406   $63,215   $292,659   $485,280 
Total realized and unrealized gains or (losses):                    
Realized gain recognized in earnings   -    1,186(3)   -    1,186 
Unrealized gain (loss) recorded in other comprehensive income (loss)   4,027    4,693    (25,126)   (16,406)
Amortization or accretion   (10)   (8,240)   140    (8,110)
Purchases, sales, issuances, settlements and other adjustments(1)   2,433    2,164    (31,858)(6)   (27,261)
Net transfers in and/or out of Level 3   -    -    -    - 
Balance at September 30, 2011  $135,856   $63,018   $235,815   $434,689 
                     
Amount of total gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2011  $-   $1,186   $-   $1,186 

 

(1)No purchases, sales, issuances or settlements occurred during the reporting period.
(2)Reflects de-recognition of mortgage revenue bond which was transferred out of special servicing net of re-recognition of mortgage revenue bonds in the 2007 re-securitization as assets.
(3)Includes amounts recorded in “Gain from repayment or sale of investments” in the Condensed Consolidated Statements of Operations.
(4)Reflects principal paydowns due to the June 2012 bond restructuring (see Note 21) as well as de-recognition of mortgage revenue bond which was transferred out of special servicing net of re-recognition of mortgage revenue bonds in the 2007 re-securitization as assets.
(5)Reflects elimination in consolidation of one mortgage revenue bond as a result of the consolidation of the underlying property upon obtaining control of the related Tax Credit Property Partnership as well as principal amortization.
(6)Reflects de-recognition of three mortgage revenue bonds, elimination in consolidation of four mortgage revenue bonds as a result of the consolidation of the underlying properties upon obtaining control of the related Tax Credit Property Partnerships, net of re-recognition of mortgage revenue bonds in the 2007 re-securitization as assets (see Note 3).

 

- 16 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

D.Assets and Liabilities Not Measured at Fair Value

 

For cash and cash equivalents, restricted cash, accounts receivable, equity method investments, stabilization escrow, accounts payable, accrued expenses and other liabilities as well as variable-rate notes payable and other borrowings, recorded values approximate fair value due to their terms, or their liquid or short-term nature.

 

In accordance with GAAP, certain financial assets and liabilities are included on our Condensed Consolidated Balance Sheets at amounts other than fair value. A description of those assets and liabilities is as follows:

 

Mortgage loans held for investment Fair value is determined by using a combination of updated appraised values and broker quotes or services supplying market and sales data in various geographical locations where the collateral is located.
   
Mortgage loans held for sale Fair value is estimated by calculating the assumed gain/loss of the contracted loan sale to the buyer, the expected net future cash flows associated with the servicing of the loan and the effects of interest rate movements between the date of rate lock and the balance sheet date. 
   
MSRs We estimate the fair value through a discounted cash flow analysis utilizing market information obtained with the assistance of third-party valuation specialists.  Inputs into this analysis include contractual servicing fees, our projected cost to service as well as estimates of default rates, prepayment speeds and an appropriate discount rate.  While certain of the inputs such as fee rates and discount rates are observable, most of the other inputs are based on historical company data.
   
Freddie Mac loan Fair value is estimated by utilizing the present value of the expected cash flows discounted at a rate for comparable obligations.
   
Secured financing Fair value is estimated using either quoted market prices or discounted cash flow analyses based on our current borrowing rates for similar types of borrowing arrangements, which reflect our current credit standing. 
   
Preferred shares of subsidiary (subject to mandatory repurchase) As the preferred shares are economically defeased by the Series A-1 Freddie Mac Certificates, the fair value is determined in a manner consistent with the Series A-1 Freddie Mac Certificates.  As these instruments typically have a limited or inactive market, and in the absence of observable market transactions, we estimate the fair value utilizing the present value of the expected cash flows discounted at a rate for comparable tax-exempt investments.
   
Fixed-rate notes payable Fair value is estimated by utilizing the present value of the expected cash flows discounted at a rate for comparable tax-exempt investments.

 

- 17 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents information about our more significant assets and liabilities that are not carried at fair value:

 

      September 30, 2012   December 31, 2011 
   Fair Value                
   Hierarchy  Carrying       Carrying     
(in thousands)  Level  Value   Fair Value   Value   Fair Value 
                    
Mortgage loans held for investment  3  $1,291   $1,291   $1,335   $1,335 
Mortgage loans held for sale  2   186,432    196,771    188,855    196,669 
MSRs  3   84,332    92,607    72,520    78,814 
Freddie Mac loan  3   3,249    3,118    -    - 
Secured financing  3   520,096    476,373    618,163    474,968 
Preferred shares of subsidiary (subject to mandatory repurchase)  3   55,000    60,608    55,000    61,981 
Redeemable securities  3   6,000    1,425    -    - 
                        
Consolidated Partnerships:                       
Fixed-rate notes payable  3   161,792    99,100    156,643    99,527 

 

NOTE 3 – Available-for-Sale Investments

 

Available-for-sale investments consisted of:

 

   September 30,   December 31, 
(in thousands)  2012   2011 
         
Freddie Mac Certificates:          
Series A-1  $136,047   $134,360 
Series B   61,680    64,857 
Mortgage revenue bonds   203,291    195,138 
           
Total  $401,018   $394,355 

 

A.Freddie Mac Certificates

 

We retained Series A-1 and Series B Freddie Mac Certificates in connection with the December 2007 re-securitization of the mortgage revenue bond portfolio with Freddie Mac. The Series A-1 Freddie Mac Certificates are fixed rate securities, whereas the Series B Freddie Mac Certificates are residual interests of the re-securitization trust.

 

Series A-1

 

Information with respect to the Series A-1 Freddie Mac Certificates is as follows:

 

   September 30,   December 31, 
(in thousands)  2012   2011 
         
Amortized cost  $177,569   $177,579 
Gross unrealized gains   20,439    21,344 
Fair value   198,008    198,923 
Less: eliminations(1)   (61,961)   (64,563)
           
Consolidated fair value  $136,047   $134,360 

 

(1)A portion of the Series A-1 Freddie Mac Certificates relate to re-securitized mortgage revenue bonds that are not reflected as sold for GAAP purposes. Accordingly, that portion is eliminated in consolidation.  

 

- 18 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

During the nine months ended September 30, 2012 and 2011, we received $8.1 million in cash interest from the Series A-1 Freddie Mac Certificates ($2.7 million in the third quarter of 2012 and 2011).

 

In measuring the fair value of the Series A-1 Freddie Mac Certificates, we used an average discount rate of 2.64% as of September 30, 2012 and 3.04% as of December 31, 2011.

 

The fair value and the sensitivity of the fair value to immediate adverse changes in those assumptions are as follows:

 

   September 30, 
(in thousands)  2012 
     
Fair value of Freddie Mac A-1 Certificates  $136,047 
      
Discount rate:     
Fair value after impact of 200 bps adverse change   127,527 
Fair value after impact of 400 bps adverse change   119,842 

 

These sensitivities are hypothetical changes in fair value and cannot be extrapolated because the relationship of the changes in assumption to the changes in fair value may not be linear. Accordingly, no assurance can be given that actual results would be consistent with the results of these estimates.

 

Series B

 

Information with respect to the Series B Freddie Mac Certificates is as follows:

 

   September 30,   December 31, 
(in thousands)  2012   2011 
         
Amortized cost basis  $25,055   $30,915 
Gross unrealized gains   51,893    35,573 
Subtotal/fair value(1)   76,948    66,488 
Less: eliminations(2)   (15,268)   (1,631)
           
Consolidated fair value  $61,680   $64,857 

 

(1)The fair value of the Series B Freddie Mac Certificates increased primarily due to the increase in the September 30, 2012 projected cash flows as a result of the June 2012 bond restructuring (see Note 21).  
(2)A portion of the Series B Freddie Mac Certificates relates to re-securitized mortgage revenue bonds that were not reflected as sold. Accordingly, that portion is eliminated in consolidation.  

 

During the nine months ended September 30, 2012 and 2011, we received $21.3 million and $20.3 million in cash, respectively, as interest from the Series B Freddie Mac Certificates ($5.2 million and $7.0 million in the third quarter of 2012 and 2011, respectively).

 

Delinquent collateral loans underlying the certificates had an unpaid principal balance of $144.9 million and $120.2 million at September 30, 2012 and December 31, 2011, respectively; projected remaining losses are estimated at 3.23% or $78.8 million of the underlying securitization. During the nine months ended September 30, 2012, there were no actual losses in the underlying securitization. No impairments were recorded for the nine months ended September 30, 2012 and 2011.

 

- 19 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Key unobservable inputs in measuring the Series B Freddie Mac Certificates are provided in the table below:

 

   September 30,   December 31, 
   2012   2011 
         
Weighted average discount rate   26.0%   26.0%
Constant prepayment rate   90.0%   90.0%
Weighted average life   7.6 years   8.3 years
Constant default rate   2.0%   2.0%
Default severity rate   21.0%   21.0%

 

The weighted average life of the assets in the pool that can be prepaid was 7.4 years as of September 30, 2012 and 8.1 years as of December 31, 2011.

 

The fair value and the sensitivity of the fair value to immediate adverse changes in those assumptions are as follows:

 

   September 30, 
(in thousands)  2012 
     
Fair value of Freddie Mac B Certificates  $61,680 
      
Constant prepayment rate:     
Fair value after impact of 500 bps adverse change   61,451 
Fair value after impact of 1,000 bps adverse change   60,695 
      
Discount rate:     
Fair value after impact of 500 bps adverse change   53,389 
Fair value after impact of 1,000 bps adverse change   46,999 
      
Constant default rate:     
Fair value after impact of 100 bps adverse change   55,382 
Fair value after impact of 200 bps adverse change   49,351 
      
Default severity rate:     
Fair value after impact of 500 bps adverse change   60,186 
Fair value after impact of 1,000 bps adverse change   58,693 

 

These sensitivities are hypothetical changes in fair value and cannot be extrapolated because the relationship of the changes in assumption to the changes in fair value may not be linear. Accordingly, no assurance can be given that actual results would be consistent with the results of these estimates. Increases (decreases) in any of the above inputs in isolation would result in a lower (higher) fair value measurement.  Generally, a change in the assumption used for constant default rate would be accompanied by a directionally opposite change in the assumption used for constant prepayment rate and discount rate.

 

B. Mortgage Revenue Bonds

 

The following table summarizes our mortgage revenue bond portfolio:

 

   September 30,   December 31, 
(in thousands)  2012   2011 
         
Securitized:          
Included in December 2007 re-securitization transaction and accounted for as financed  $199,780   $191,564 
Not securitized   3,511    3,574 
           
Total at fair value  $203,291   $195,138 

 

- 20 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Our mortgage revenue bond portfolio decreased from 43 bonds as of December 31, 2011 to 42 bonds as of September 30, 2012. The increase in the value of our mortgage revenue bond portfolio is primarily the result of an increase in value of $28.0 million due to an improvement in observed capitalization rates in certain markets pertaining to improved market conditions as well as improvements in performance in certain underlying properties and two mortgage revenue bonds in the 2007 re-securitization in the amount of $7.1 million which were re-recognized as assets as they were transferred into special servicing. This is offset by the repayment of two mortgage revenue bonds in the amount of $1.6 million, principal paydowns of $10.9 million ($8.1 million of which was a result of the June 2012 bond restructuring, see Note 21) and the de-recognition of a mortgage revenue bond which was transferred out of special servicing in the amount of $14.6 million.

 

The amortized cost basis of our portfolio of mortgage revenue bonds and the related unrealized gains and losses are as follows:

 

   September 30,   December 31, 
(in thousands)  2012   2011 
         
Amortized cost basis  $199,617   $219,469 
Gross unrealized gains   24,271    18,960 
Gross unrealized losses   (20,597)   (43,291)
           
Fair value  $203,291   $195,138 

 

Key fair value assumptions used in measuring the mortgage revenue bonds are provided in the table below:

 

   September 30,   December 31, 
   2012   2011 
         
Capitalization rate range (Non-performing Assets)   6.45-9.15%   6.95-9.15%
           
Discount Rate (Performing Assets)   6.5%   6.5%

 

The fair value and the sensitivity of the fair value to the immediate adverse changes in those assumptions are as follows:

 

   September 30, 
(in thousands)  2012 
     
Fair value of Mortgage revenue bonds  $203,291 
      
Capitalization rate (Non-performing Assets):     
Fair value after impact of 100 bps adverse change   184,873 
Fair value after impact of 200 bps adverse change   170,389 
      
Discount rate (Performing Assets):     
Fair value after impact of 100 bps adverse change   200,313 
Fair value after impact of 200 bps adverse change   197,550 

 

These sensitivities are hypothetical changes in fair value and cannot be extrapolated because the relationship of the changes in assumption to the changes in fair value may not be linear. Accordingly, no assurance can be given that actual results would be consistent with the results of these estimates.

 

- 21 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

For mortgage revenue bonds in an unrealized loss position as of the dates presented, the fair value and gross unrealized losses, aggregated by length of time that individual bonds have been in a continuous unrealized loss position, is summarized in the table below:

 

   Less than   12 Months     
(dollars in thousands)  12 Months   or More   Total 
             
September 30, 2012               
                
Number   5    14    19 
Fair value  $22,219   $42,683   $64,902 
Gross unrealized losses  $3,153   $17,444   $20,597 
                
December 31, 2011               
                
Number   11    14    25 
Fair value  $43,098   $42,021   $85,119 
Gross unrealized losses  $14,622   $28,669   $43,291 

 

We have evaluated the nature of the unrealized losses above and have concluded that they are temporary as de-recognition of these bonds, should it occur, would not result in a loss.

 

- 22 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4 – Assets Pledged as Collateral

 

In connection with our Term Loan and Revolving Credit Agreement (as subsequently amended, our “Credit Agreement”) (Note 10), the stock of substantially all of our subsidiaries is pledged as collateral. In addition, substantially all of our other assets are pledged as collateral for our Credit Agreement subject to the liens detailed below. The following table details assets we have specifically pledged as collateral for various debt facilities or other contractual arrangements that provide first liens ahead of the Credit Agreement:

 

      Carrying    
      Amount of    
      Collateral at    
      September 30,    
      2012    
Collateral  Balance Sheet Classification  (in thousands)   Associated Debt Facility/Liability
           
Cash at Centerline Mortgage Capital Inc. (“CMC”)  Restricted cash  $13,398   Mortgage loan loss sharing agreements (Note 21)
            
Cash at Centerline Financial LLC ("CFin" or "Centerline Financial")  Cash and cash equivalents  $66,154   Affordable Housing Yield transactions (Note 21) and Centerline Financial undrawn credit facility (Note 10)(1)
            
Cash at Centerline Financial Holdings LLC ("CFin Holdings")  Cash and cash equivalents  $4,936   Affordable Housing Yield transactions (Note 21)(2)
            
Series A-1 Freddie Mac certificates at Centerline Equity Issuer Trust ("Equity Issuer")  Investments – available-for-sale – Freddie Mac certificates (Note 3)  $116,354   Preferred shares of subsidiary (3)
            
Series A-1 Freddie Mac Certificates at Centerline Guaranteed Holdings LLC ("Guaranteed Holdings")  Investments – available-for-sale – Freddie Mac certificates (Note 3)  $19,693   Affordable Housing Yield transactions (Note 21)(4)
            
Series B Freddie Mac certificates  Investments – available-for-sale – Freddie Mac certificates(Note 3)  $61,680   Freddie Mac loan (Note 10)
            
Mortgage loans at CMC and Centerline Mortgage Partners Inc. (“CMP”)  Other investments – mortgage loans held for sale (Note 6)  $186,432   Mortgage Banking warehouse facilities
            
Collateral posted with counterparties at Guaranteed Holdings  Deferred costs and other assets, net (Note 8)  $21,836   Affordable Housing Yield transactions (Note 21)(4)

 

(1)These assets are subject to a priority lien related to the Affordable Housing Yield transactions and a subordinated lien related to the Centerline Financial undrawn credit facility.
(2)Substantially all of CFin Holdings’ other assets including its investment in subsidiaries, fee receivables, deferred costs and derivative instruments are pledged as collateral to the Affordable Housing Yield transactions.
(3)While not collateral, these assets economically defease the preferred shares of subsidiary.
(4)Substantially all of Guaranteed Holdings’ other assets including its cash and cash equivalents, voluntary loans and fee receivables are pledged as collateral to the Affordable Housing Yield transactions.

 

We are required as part of our mortgage loan loss sharing agreements with Freddie Mac to provide security for payment of the reimbursement obligation. The collateral can include a combination of the net worth of one of our Mortgage Banking subsidiaries, a letter of credit and/or cash. To meet this collateral requirement, we have provided to Freddie Mac letters of credit totaling $12.0 million issued by Bank of America as a part of our Revolving Credit Facility (see Note 21).

 

In accordance with the requirements of its operating agreement, Centerline Financial has a cash balance of $66.2 million as of September 30, 2012 in order to maintain its minimum capital requirements. In addition, in accordance with the requirements of the Centerline Financial operating agreement, one of our subsidiaries pledged two taxable bonds with an aggregate notional amount of $3.2 million and the associated cash received on these bonds to Centerline Financial in order to maintain its minimum capital requirements. As these assets are pledged between two of our subsidiaries they were excluded from the table above.

 

- 23 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5 – Equity Method Investments

 

The table below provides the components of equity method investments as of:

 

   September 30,   December 31, 
(in thousands)  2012   2011 
         
Equity interests in Tax Credit Property Partnerships  $13,026   $8,794 

 

We acquire interests in entities that own tax credit properties. We generally hold these investments on a short-term basis for inclusion in future investment fund offerings and expect to sell these investments at cost into Tax Credit Fund Partnerships. During 2012, we also sold some of these investments to external investors for a gain of $0.4 million. During the nine months ended September 30, 2012, we acquired interests in seven entities that own tax credit properties in the total amount of $13.6 million and sold five properties in the total amount of $9.8 million.

 

NOTE 6 – Mortgage Loans Held for Sale and Other

 

The table below provides the components of other investments as of:

 

   September 30,   December 31, 
(in thousands)  2012   2011 
         
Mortgage loans held for sale  $186,432   $188,855 
Mortgage loans held for investment   1,291    1,335 
Stabilization escrow   2    2 
           
Total  $187,725   $190,192 

 

A.Mortgage Loans Held for Sale

 

Mortgage loans held for sale include originated loans pre-sold to Government Sponsored Enterprises (“GSEs”), such as Federal National Mortgage Association (“Fannie Mae”) and Freddie Mac or to the Government National Mortgage Association (“Ginnie Mae”) under contractual sale obligations that normally settle within 30 days of origination. In most cases, the loans sold to the GSEs are used as collateral for single asset or pooled mortgage-backed securities issued and either partially or fully guaranteed by the GSEs and traded in the open market. Mortgage loans held for sale can differ widely from period to period depending on the timing and size of originated mortgages and variances in holding periods prior to sale. Loans closed and funded during the nine months ended September 30, 2012 were $1.1 billion. Loans sold and settled during the nine months ended September 30, 2012 were $1.1 billion.

 

B.Mortgage Loans Held for Investment

 

Mortgage loans held for investment are made up primarily of promissory notes that we hold net of any reserve for uncollectibility.

 

C.Stabilization Escrow

 

In connection with management’s strategy to manage the risks arising from the operations of certain Tax Credit Property Partnerships (see Affordable Housing Transactions in Note 21), we expect the stabilization escrow’s cash balance of $16.1 million to be used to restructure the debt of those Tax Credit Property Partnerships. Accordingly, it was fully reserved. In June 2012, CHC, Merrill Lynch and Freddie Mac executed the restructuring of 21 mortgage revenue bonds collateralized with 17 underlying properties (the “Merrill Restructuring”). In connection with the Merrill Restructuring, $23.5 million of stabilization escrow was released and contributed to Guaranteed Holdings and then advanced to the Tax Credit Fund Partnerships to allow them to make supplemental loans to the Tax Credit Property Partnerships to buy down bonds in order to achieve stabilization (see Note 21).

 

- 24 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 7 – Mortgage Servicing Rights, Net

 

The components of the change in MSRs and related reserves were as follows:

 

   (in thousands) 
     
Balance at January 1, 2011  $65,614 
MSRs capitalized   12,646 
Amortization   (8,385)
Balance at September 30, 2011  $69,875 
      
Balance at January 1, 2012  $72,520 
MSRs capitalized   21,482 
Amortization   (9,670)
Balance at September 30, 2012  $84,332 

 

While the balances above reflect our policy to record MSRs initially at fair value and amortize those amounts, presented below is information regarding the fair value of the MSRs. The fair value and significant assumptions used in estimating it are as follows:

 

   September 30,   December 31, 
   2012   2011 
         
Fair value of MSRs  $92,607   $78,814 
Weighted average discount rate   17.60%   17.64%
Weighted average pre-pay speed   9.46%   9.50%
Weighted average lockout period (years)   4.2    4.1 
Weighted average default rate   0.80%   0.72%
Cost to service loans  $2,474   $2,284 
Acquisition cost (per loan)  $1,485   $1,484 

 

The table below illustrates hypothetical fair values of MSRs, caused by assumed immediate changes to key assumptions that are used to determine fair value.

 

   September 30, 
(in thousands)  2012 
     
Fair value of MSRs  $92,607 
      
Prepayment speed:     
Fair value after impact of 10% adverse change   92,230 
Fair value after impact of 20% adverse change   91,600 
      
Discount rate:     
Fair value after impact of 10% adverse change   88,366 
Fair value after impact of 20% adverse change   84,262 
      
Default rate:     
Fair value after impact of 10% adverse change   92,486 
Fair value after impact of 20% adverse change   92,356 

 

These sensitivities are hypothetical changes in fair value and cannot be extrapolated because the relationship of the changes in assumption to the changes in fair value may not be linear. Also, the effect of a variation in a particular assumption is calculated without changing any other assumption, whereas change in one factor may result in changes to another. Accordingly, no assurance can be given that actual results would be consistent with the results of these estimates.

 

- 25 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Servicing fees we earned as well as those received with respect to the December 2007 re-securitization transaction (all of which are included in “Fee Income” in our Condensed Consolidated Statements of Operations) were as follows:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
(in thousands)  2012   2011   2012   2011 
                 
Total servicing fees  $6,807   $6,223   $19,802   $18,199 
Servicing fees from securitized assets                    
(included in Total servicing fees)  $491   $528   $1,531   $1,596 

 

NOTE 8 – Deferred Costs and Other Assets, Net

 

The table below provides the components of deferred costs and other assets, net as of the dates presented:

 

(in thousands)  September 30,
2012
   December 31,
2011
 
         
Deferred financing and other costs(1)  $ 11,264   $ 11,854 
Less: Accumulated amortization   (4,880)   (4,041)
           
Net deferred costs   6,384    7,813 
           
Collateral posted with counterparties   21,868    44,763 
Interest and fees receivable, net   6,181    6,102 
Other receivables   6,584    6,443 
Furniture, fixtures and leasehold improvements, net   3,869    3,926 
Other   7,379    6,744 
           
Total  $52,265   $75,791 

 

(1) Excludes items included in deferred financing and other costs that have been fully amortized.

 

Collateral Posted with Counterparties

 

Collateral in the amount of $22.1 million was utilized in June 2012 for the Merrill Restructuring (see further discussion in Note 21 under Loss Reserve Relating to Yield Transactions). The remaining decrease is related to advances that were made to property partnerships that had operating deficits.

 

NOTE 9 – Consolidated Partnerships

 

The Company, through its Affordable Housing Equity segment, originates and manages Tax Credit Fund Partnerships. The Company, through one of its affiliates, controls special limited partnership (“SLP”) interests in each of the Tax Credit Property Partnerships acquired by the Tax Credit Fund Partnerships. In our role as SLP, we are able to remove the existing general partner from the Tax Credit Property Partnerships and assume control only for due cause related to the nonperformance of the general partner. The Tax Credit Fund Partnerships and Tax Credit Property Partnerships, in which the Company has a substantive controlling general partner or managing member interest or in which it has concluded it is the primary beneficiary of a variable interest entity (“VIE”), are being consolidated although the Company has practically no economic interest in such entities. These Tax Credit Fund Partnerships and Tax Credit Property Partnerships are included within our Consolidated Partnerships.

 

The analysis as to whether the entity is a VIE and whether we consolidate it is subject to significant judgment. Some of the criteria we are required to consider include, among others, determination of the degree of control over an entity by its various equity holders, design of the entity, relationships between equity holders, determination of the primary beneficiary and the ability to replace general partners.

 

Financial information presented for September 30, 2012 for certain of the Tax Credit Fund Partnerships and Tax Credit Property Partnerships is as of June 30, 2012 and for the three and nine months ended June 30, 2012 and 2011, the most recent date for which information is available. Similarly, the financial information presented for December 31, 2011 for those partnerships is as of September 30, 2011.

 

- 26 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Assets, liabilities and equity of Consolidated Partnerships consist of the following:

 

(in thousands)  September 30,
2012
   December 31,
2011
 
         
Assets:          
Equity interests in Tax Credit Property Partnerships  $2,773,437   $3,079,803 
Land, buildings and improvements, net   415,742    460,804 
Other assets   243,521    264,437 
           
Total assets  $3,432,700   $3,805,044 
           
Liabilities:          
Notes payable  $161,792   $156,643 
Due to Tax Credit Property Partnerships   82,913    132,246 
Other liabilities   449,045    319,256 
Total liabilities  $693,750   $608,145 
           
Net eliminations(1)   488,703    557,444 
           
Equity:          
Non-controlling interests   2,256,106    2,633,604 
Centerline Holding Company   (5,859)   5,851 
Total equity   2,250,247    2,639,455 
           
Total liabilities and equity  $3,432,700   $3,805,044 

 

(1) Reflects the impact on assets and liabilities for transactions eliminated between the Company and Consolidated Partnerships.

 

Consolidated Partnerships for the nine months ended September 30, 2012, experienced a decrease in Tax Credit Property Partnerships of sixteen properties due to sale or foreclosure. We also liquidated a public Tax Credit Fund Partnership during 2012.

 

Equity Interests in Tax Credit Property Partnerships

 

The Tax Credit Fund Partnerships invest in low-income housing property-level partnerships that generate tax credits and tax losses. Neither we nor the Tax Credit Fund Partnerships control these Tax Credit Property Partnerships and, therefore, we do not consolidate them in our financial statements. “Equity interests in Tax Credit Property Partnerships” represents the limited partner investments in those Tax Credit Property Partnerships, which the Tax Credit Fund Partnerships carry on the equity method of accounting.

 

The reduction for the current period is due primarily to the equity losses of $308.1 million (primarily resulting from non-cash depreciation expense and impairments) recognized in the current period, cash distributions of $9.0 million to the limited partners, and the sale of Tax Credit Property Partnerships with carrying value of $3.3 million, partially offset by an increase in investment in new Tax Credit Property Partnerships of $16.8 million.

 

Land, Buildings and Improvements, Net

 

Land, buildings and improvements are attributable to the Tax Credit Property Partnerships we consolidate as a result of gaining significant control over their general partner. Land, buildings and improvements to be held and used are carried at cost which includes the purchase price, acquisition fees and expenses, construction period interest and any other costs incurred in acquiring and developing the properties. The cost is depreciated over the estimated useful lives using primarily the straight-line method. Expenditures for repairs and maintenance are charged to expense as incurred; major renewals and betterments are capitalized. At the time of retirement and otherwise disposal, the cost (net of accumulated depreciation) and related liabilities are eliminated and the profit or loss on such disposition is reflected in earnings.

 

- 27 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Land, buildings and improvements are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The determination of asset impairment is a two-step process. First, the carrying amount of the asset is deemed not recoverable if it exceeds the sum of the undiscounted cash flows and the projected cash proceeds from the eventual sale of the asset. If such estimates are below the carrying amount, the impairment loss is measured as the amount by which the carrying amount of the asset exceeds fair value, which is determined by a direct capitalization method by applying a capitalization rate obtained from market data for comparative investments to stabilized net operating income levels.

 

The decrease for the current period is primarily due to $31.2 million related to properties that were sold or foreclosed upon, current period depreciation of $18.3 million and net fixed asset additions of $1.4 million for certain properties during 2012.

 

Other Assets

 

Assets other than those discussed above include cash, fees and interest receivable, prepaid expenses and operating receivables of the funds.

 

Notes Payable

 

Notes payable pertain to mortgages and notes held at the Tax Credit Property Partnerships, as well as borrowings that bridge the time between when subscribed investments are received and when the funds deploy capital (“Bridge Loans”) for Tax Credit Fund Partnerships.

 

The increase is primarily due to four properties whose mortgage revenue bonds and other liabilities of $28.1 million are no longer eliminated in consolidation as a result of the bonds being de-recognized after being removed from special servicing, borrowings by Tax Credit Property Partnerships of $5.4 million offset by the sale of properties with mortgage balances of $24.3 million and repayments of mortgages of $2.1 million.

 

Other Liabilities

 

The increase in other liabilities is primarily due to fees accrued for the current period offset by an increase in the elimination of other liabilities between Tax Credit Fund Partnerships and the Company. The increase is also due to amounts owed by minority interest related to reserves on outstanding receivable balances.

 

Due to Tax Credit Property Partnerships

 

The partnership agreements of the Tax Credit Property Partnerships stipulate the amount of capital to be funded and the timing of payments of that capital. “Due to Tax Credit Property Partnerships” represents the unfunded portion of those capital commitments. The decrease for the current period pertains to funding of capital commitments of $54.0 million to the Tax Credit Property Partnerships offset by property acquisitions by the Tax Credit Fund Partnerships increasing commitments by $0.9 million.

 

- 28 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Revenues and expenses of Consolidated Partnerships consisted of the following:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
(in thousands)  2012   2011   2012   2011 
                 
Interest income, net  $312   $255   $(701)  $940 
Rental income   26,170    26,022    81,754    77,719 
Other revenues   327    262    537    1,352 
                     
Total revenues  $26,809   $26,539   $81,590   $80,011 
                     
Interest expense  $6,630   $4,919   $16,152   $13,584 
Loss on impairment of assets   -    -    678    60,349 
Other expenses:                    
Asset management fees   9,604    10,257    28,436    31,080 
Property operating expenses   10,069    9,990    30,821    30,276 
General and administrative expenses   6,989    8,413    29,881    27,045 
Depreciation and amortization   14,296    13,850    44,117    42,379 
Other   54,333    3,093    70,106    33,157 
Total other expenses   95,291    45,603    203,361    163,937 
                     
Total expenses  $101,921   $50,522   $220,191   $237,870 
                     
Other losses from consolidated partnerships, net  $(56,684)  $(53,798)  $(277,403)  $(237,834)
                     
Net loss   (131,796)   (77,781)   (416,004)   (395,693)
                     
Net eliminations(1)   (13,125)   (15,752)   (42,559)   (49,265)
                     
Net loss attributable to non-controlling interests   (144,920)   (93,530)   (458,556)   (444,951)
                     
Net loss attributable to Centerline Holding Company shareholders  $(1)  $(3)  $(7)  $(7)

 

(1) Reflects the transactions eliminated between the Company and Consolidated Partnerships.

 

Interest income, net reflects accrued interest recorded on the loans issued to Tax Credit Property Partnerships relating to property advances offset by interest income reversals of $4.5 million and $2.1 million during the nine months ended September 30, 2012 and 2011, respectively. The interest income reversals relate to previously accrued interest which has been deemed to be uncollectible.

 

The increase in other expenses primarily relates to an increase of $51.5 million and $37.3 million in the provision for bad debt for the three and nine months ended September 30, 2012 and a decrease of $59.7 million in impairments on land, buildings and improvements of Tax Credit Property Partnerships for the nine months ended September 30, 2012.

 

Other losses principally represent the equity losses that Tax Credit Fund Partnerships recognize in connection with their equity investments in non-consolidated Tax Credit Property Partnerships. The increase in losses during the three months ended September 30, 2012 primarily resulted from an increase of approximately $2.1 million of losses due to properties being sold or foreclosed during the third quarter of 2012 and an increase of $0.4 million in expenses recognized by certain Tax Credit Property Partnerships pertaining to the change in value of their interest rate derivatives and by an increase of $1.6 million in recognized gains, net of losses on the sale of property investments during 2012, offset by a reduction of $2.1 million in equity losses of Tax Credit Fund Partnerships whose equity investment balances in certain Tax Credit Property Partnerships have reached a zero balance. Therefore no additional losses have been recorded. The increase in losses during the nine months ended September 30, 2012 primarily resulted from an increase of $59.7 million related to impairments recognized on Tax Credit Property Partnership equity investments, an increase of $24.4 million in expenses recognized by certain Tax Credit Property Partnerships pertaining to the change in value of their interest rate derivatives and an increase of approximately $7.1 million of losses due to properties being sold or foreclosed during 2012, offset by a decrease of $30.7 million in recognized gains, net of losses on the sale of property investments during 2012 and a reduction of $27.9 million in equity losses of Tax Credit Fund Partnerships whose equity investment balances in certain Tax Credit Property Partnerships have reached a zero balance.

 

- 29 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

NOTE 10 – Notes Payable and Other Borrowings

 

The table below provides the components of notes payable and other borrowings as of the dates presented:

 

(in thousands)  Interest Rate at
September 30,
2012
   September 30,
2012
   December 31,
2011
 
             
Term loan   3.23%  $116,085   $125,014 
Revolving credit facility   3.23    21,900    12,100 
Mortgage Banking warehouse facilities   2.28    96,512    105,615 
Mortgage Banking repurchase facilities   -    -    8,450 
Multifamily ASAP facility   1.80    90,176    71,670 
Freddie Mac loan   -    3,249    - 
                
Total       $327,922   $322,849 

  

A.Term Loan and Revolving Credit Facility

 

Our Term Loan under our Credit Agreement matures in March 2017 and has an interest rate of 3.00% over either the prime rate or LIBOR at our election (which currently is LIBOR). We must repay $2.98 million in principal per quarter until maturity, at which time the remaining principal is due.

 

The Revolving Credit Facility under our Credit Agreement has a total capacity of $37.0 million. The Revolving Credit Facility matures in March 2015 and bears interest at 3.00% over either the prime rate or LIBOR at our election (which currently is LIBOR). Currently, the Revolving Credit Facility may only be used for LIHTC property investments. As of September 30, 2012, $21.9 million was drawn and $13.8 million in letters of credit were issued under the Revolving Credit Facility. Once terminated, $12.0 million of the Revolving Credit Facility associated with these letters of credit cannot be redrawn. At September 30, 2012, the undrawn balance of the Revolving Credit Facility was $1.3 million.

 

The Credit Agreement has the following customary financial covenants:

 

·minimum ratio of consolidated EBITDA to fixed charges, which became effective for us as of June 30, 2011; and

 

·maximum ratio of funded debt to consolidated EBITDA, which became effective for us as of June 30, 2012.

 

The Credit Agreement contains restrictions on distributions. Under the Credit Agreement, we generally are not permitted to make any distributions or redeem or purchase any of our shares, including Series A Convertible Reinvestment Act Preferred Shares (“Convertible CRA Shares”), except in certain circumstances, such as distributions to the holders of preferred shares of Equity Issuer, a subsidiary of the Company, if and to the extent that such distributions are made solely out of funds received from Freddie Mac as contemplated by a specified transaction (“EIT Preferred Share Distributions”).

 

In 2011 we entered into a waiver to the Credit Agreement (the “Waiver”) and two subsequent amendments to the Waiver, which among other things, added covenants to the Credit Agreement that restrict (i) the use of proceeds drawn from our Revolving Credit Facility solely to LIHTC investments, (ii) contracts and transactions with Island Centerline Manager LLC, an entity owned and operated by a subsidiary of Island Capital Group LLC (collectively, “Island”), The Related Companies LP (“TRCLP”), and C-III Capital Partners, LLC (“C-III”) and their affiliates, subject to certain carve-outs, and (iii) other specified material and non-ordinary course contracts and transactions, including property management contracts with Island, TRCLP and C-III and their affiliates.

 

On February 28, 2012, we entered into a third amendment to the Waiver, which among other things:

 

·extended the deadline by which we were required to deliver certain specified financial data and other information to the administrative agent under the Credit Facility and, in certain cases, to the lenders under the Credit Agreement;

 

- 30 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

·included certain conditions subsequent requiring us to deliver additional specified financial data and other information to the administrative agent by certain dates;

 

·granted a waiver of our noncompliance with the Credit Agreement’s consolidated EBITDA to fixed charges ratio solely with respect to the quarter ended December 31, 2011, although we have determined that we were in compliance with such ratio with respect to the quarter ended December 31, 2011;

 

·required us to pay certain costs and expenses incurred by the administrative agent in administering the Credit Agreement; and

 

·required us to pay prescribed monthly consulting fees to the administrative agent’s consultant.

 

On May 18, 2012, we entered into a fourth amendment to the Waiver, which among other things:

 

·granted a waiver through July 16, 2012 of our noncompliance with the Consolidated EBITDA to Fixed Charges Ratio covenant contained in our Credit Agreement with respect to the fiscal quarter ended September 30, 2011 which was necessitated by our failure to deliver certain 2012 projections that demonstrate compliance with the financial covenant set forth in the prior waiver;

 

·granted a waiver through July 16, 2012 of our noncompliance with the Consolidated EBITDA to Fixed Charges Ratio covenant contained in our Credit Agreement with respect to the fiscal quarter ended March 31, 2012; and

 

·waived the requirement that we provide the lenders under our Credit Agreement with certain 2012 projections that demonstrate compliance with the financial covenant.

 

On July 16, 2012, we entered into a fifth amendment to the Waiver, which among other things:

 

·granted a waiver through October 5, 2012 of our noncompliance with the Consolidated EBITDA to Fixed Charges Ratio covenant contained in our Credit Agreement with respect to the fiscal quarters ended September 30, 2011, March 31, 2012 and June 30, 2012;

 

·granted a waiver through October 5, 2012 of our noncompliance with the Total Debt to Consolidated EBITDA Ratio covenant contained in our Credit Agreement with respect to the fiscal quarter ended June 30, 2012;

 

·required us to pay certain costs and expenses incurred by the administrative agent in administering the Credit Agreement;

 

·requires us to provide certain additional information regarding our Affordable Equity business; and

 

·removed the terms in the Credit Agreement that restricted our ability to repurchase the Convertible CRA Shares, allowing at any time prior to August 15, 2012, subject to specified terms, for the negotiation and redemption of all outstanding Convertible CRA Shares and settling, retiring and terminating any contractual obligations to certain former holders (the “Former Preferred Holders”) of our preferred shares, including the Convertible CRA Shares (collectively, the “Preferred Shares”), who previously agreed to the redemption of their Preferred Shares (see Note 13).

 

B.Mortgage Banking Warehouse Facilities

 

We have five warehouse facilities that we use to fund our loan originations. Mortgages financed by these facilities (see Note 6), as well as the related servicing and other rights (see Note 7) have been pledged as security under these warehouse facilities. All loans securing these facilities have firm sale commitments with the GSEs or the Federal Housing Administration (“FHA”). Our warehouse facilities are as follows:

 

·We have a $100.0 million committed warehouse facility that matures in September 2013 and bears interest at a rate of LIBOR plus 1.90%. The interest rate on the warehouse facility was 2.12% as of September 30, 2012 and 2.80% as of December 31, 2011.

 

·We have a $50.0 million committed warehouse facility that matures in November 2012 and bears interest at a rate of LIBOR plus a minimum of 2.75% and a maximum of 4.25%. There was no outstanding balance on the warehouse facility as of September 30, 2012. The interest rate on the warehouse facility was 3.05% as of December 31, 2011 (see Note 22 for renewal of this warehouse facility).

 

- 31 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

·We have a $75.0 million committed warehouse facility that matures in April 2013 and bears interest at a rate of LIBOR plus a minimum of 2.50% and a maximum of 3.50%. The interest rate on the warehouse facility was 2.71% as of September 30, 2012.

 

·We have an uncommitted warehouse repurchase facility that provides us with additional resources for warehousing of mortgage loans with Fannie Mae. This agreement was scheduled to mature in November 2012 and bore interest at a rate of LIBOR plus 3.50% with a minimum of 4.50% (see Note 22 for renewal of this warehouse facility). Our lender under an uncommitted warehouse repurchase facility that provided us with additional resources for warehousing of mortgage loans with Freddie Mac no longer operates master purchase and sale agreements to fund Freddie Mac loans with any new or existing counterparties. Accordingly, this agreement was terminated as of September 14, 2012.

 

·We have an uncommitted facility with Fannie Mae under its Multifamily As Soon As Pooled (“ASAP”) Facility funding program. This facility has no maturity date. After approval of certain loan documents, Fannie Mae will fund loans after closing and the advances are used to repay our warehouse facilities. Subsequently, Fannie Mae funds approximately 99% of the loan and CMC funds the remaining 1%. CMC is later reimbursed by Fannie Mae when the assets are sold. Effective June 2012, interest on this facility accrues at a rate of LIBOR plus 1.45% with a minimum rate of 1.80%. The interest rate on this facility was 1.80% as of September 30, 2012 and 1.70% as of December 31, 2011.

 

Unless otherwise stated, we expect, depending on our business needs, to renew our warehouse facilities annually, although any such renewal will be at the discretion of our warehouse lenders and subject to our compliance with the applicable covenants.

 

C.Freddie Mac Loan

 

In connection with the Merrill Restructuring (see Note 21) Freddie Mac provided CHC with a loan that is to be repaid in 18 equal monthly installments beginning on July 15, 2012. Proceeds of this loan were used to repay principal on bonds included in the 2007 re-securitization to allow those bonds to stabilize. The loan is non-interest bearing to the extent there are no defaults on installment payments. Repayment of the loan is secured only by the Series B Freddie Mac Certificates.

 

D.Centerline Financial Credit Facility

 

In June 2006, Centerline Financial entered into a senior credit agreement. Under the terms of the agreement, Centerline Financial is permitted to borrow up to $30.0 million until its maturity in June 2036, if needed to meet payment or reimbursement requirements under the yield transactions of Centerline Financial (see Note 21). Borrowings under the agreement will bear interest at our election of either:

 

·LIBOR plus 0.65% or;

 

·1.40% plus the higher of the prime rate or the federal funds effective rate plus 0.75%.

 

As of September 30, 2012, no amounts were borrowed under this facility and as a result we did not make an interest rate election. Neither CHC nor its subsidiaries are guarantors of this facility. Due to a wind-down event caused by a capital deficiency under the Centerline Financial operating agreement that occurred in 2010, the Centerline Financial senior credit facility is in default as of September 30, 2012. Amounts under the Centerline Financial senior credit facility are still available to be drawn, and we do not believe this default has a material impact on our consolidated financial statements or operations.

 

Also as a result of the wind-down event, Centerline Financial is restricted from making any member distributions and is also restricted from engaging in any new business.

 

E.Covenants

 

We are subject to customary covenants with respect to our various notes payable and warehouse facilities.

 

As noted above, there is a declared default under our Centerline Financial senior credit facility.

 

We had previously pledged certain receivables as collateral to secure our obligations under our Credit Agreement. We inadvertently closed the account into which those receivables were to be paid, which resulted in a technical default under our Credit Agreement. We have now reopened the account and are working with Bank of America, N.A., as administrative agent under the Credit Agreement, to obtain a written waiver of this technical default. This technical default may result in technical cross-defaults under certain of our warehouse facilities. We are in discussions with the lenders for these warehouse facilities to remedy, or obtain a waiver with respect to, any cross defaults that may exist.

- 32 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

On October 5, 2012, we entered into a sixth amendment to the waiver to the Credit Agreement, which among other things included a waiver through January 11, 2013 of our noncompliance with the Consolidated EBITDA to Fixed Charges Ratio covenant contained in our Credit Agreement with respect to the fiscal quarters ended September 30, 2011, March 31, 2012, June 30, 2012 and September 30, 2012 and a waiver through January 11, 2013 of our noncompliance with the Total Debt to Consolidated EBITDA Ratio covenant contained in our Credit Agreement with respect to the fiscal quarters ended June 30, 2012 and September 30, 2012 (see Note 22). Our ability to obtain any additional waivers or concessions from our lenders will be impacted by the continued satisfaction of our covenants and obligations under the Credit Agreement, including those requiring scheduled amortization payments. Should we not comply with the covenants and obligations in the Credit Agreement or our other loan agreements, our lenders have the right to declare a default and exercise their remedies, including acceleration of our debt obligations with them. In addition, a default under our Credit Agreement would result in a cross default under our mortgage banking warehouse facilities.

 

Except as noted above, as of September 30, 2012, we believe we are in compliance with all other covenants contained in our credit facilities.

 

NOTE 11 – Secured Financing

 

The table below provides the secured financing as of the dates presented:

 

(in thousands)  September 30,
2012
   December 31,
2011
 
           
Freddie Mac secured financing  $520,096   $618,163 

  

The Freddie Mac secured financing liability relates to mortgage revenue bonds that we re-securitized with Freddie Mac but for which the transaction was not recognized as a sale as well as to bonds that are within our “effective control” and, therefore, we may remove the bond from the securitization even if we do not intend to do so. Such “effective control” may result when a subsidiary controls the general partner of the underlying Tax Credit Property Partnerships or may exercise the right to assume such control, or our role as servicer of the bonds would allow us to foreclose on a bond in default or special servicing. The liability based on the fair value of the mortgage revenue bonds at the time at which sale treatment was precluded and the bonds were recorded on our balance sheet.

 

The decrease in this balance during the nine months ended September 30, 2012 is primarily due to the Merrill Restructuring and de-recognition of five mortgage revenue bonds as a result of the transfer out of special servicing (see Note 21).

 

NOTE 12 – Accounts Payable, Accrued Expenses and Other Liabilities

 

Accounts payable, accrued expenses and other liabilities consisted of the following:

 

(in thousands)  September 30,
2012
   December 31,
2011
 
         
Deferred revenues  $33,964   $34,614 
Allowance for risk-sharing obligations (Note 21)   20,698    21,715 
Affordable Housing loss reserve   24,550    32,300 
Accrued expenses   6,824    5,583 
Accounts payable   1,487    1,545 
Accrued credit intermediation assumption fees   31,197    28,795 
Interest rate derivatives (Note 18)   33,424    28,737 
Salaries and benefits payable   11,718    15,067 
Accrued interest payable   4,170    4,546 
Lease termination costs and deferred rent   7,137    4,158 
Other   9,777    10,170 
           
Total  $184,946   $187,230 

 

- 33 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

A.Affordable Housing Loss Reserve

 

We have estimated the payments required to be made in order to complete the restructuring amongst parties that have an economic interest in the properties that secure mortgage revenue bonds associated with our credit intermediation agreements. We have also estimated the net payments that are probable to either be made under our credit intermediation agreements, or to cover shortfalls at Tax Credit Property Partnerships in order to ensure that the limited partners in the Tax Credit Fund Partnerships do not lose their tax benefits. Changes to the reserve in 2012 reflect buy down of principal of certain mortgage revenue bonds that were made during June 2012 utilizing collateral held by counterparties, in order to complete the Merrill Restructuring, partially offset by an increase in payments expected to be made under our credit intermediation agreements due to a probable property foreclosure as well as an increase in payments expected to be made over the life of these investments to cover shortfalls at Tax Credit Property Partnerships (see further discussion in Note 21 under Loss Reserve Relating to Yield Transactions).

 

B.Accrued Credit Intermediation Assumption Fees

 

The accrued credit intermediation assumption fees of $31.2 million relate to the restructuring of certain credit intermediation agreements and are due upon the termination of certain yield transactions. The fees are calculated as 50% of the value of the collateral securing Guaranteed Holdings’ obligations under these yield transactions but not to exceed $42.0 million. The increase during 2012 is primarily a result of the Merrill Restructuring and the assigned receivables from affiliates.

 

C.Interest Rate Derivatives

 

The increase in the interest rate derivatives during 2012 is due to unfavorable changes in the fair value of our free-standing derivatives as the market expectation of future Securities Industry and Financial Markets Association (‘SIFMA”) rates decreased.

 

D.Lease Termination Costs and Deferred Rent

 

The increase in lease termination costs and deferred rent during 2012 is primarily due to the Surrender Agreement and the fact that we vacated the remainder of our former headquarters at 625 Madison Avenue (see Note 16).

 

NOTE 13 - Redeemable Securities

 

The table below provides the components of redeemable securities as of the dates presented:

 

(in thousands)  September 30, 2012   December 31, 2011 
           Number of           Number of 
           Common           Common 
   Carrying   Number of   Shares if   Carrying   Number of   Shares if 
Series  Value   Shares   converted   Value   Shares   converted 
                               
Convertible CRA Shares  $6,000    320    320   $6,000    320    320 

  

As of September 30, 2012, we had 320,291 Convertible CRA Shares outstanding. As we had not repurchased these Convertible CRA Shares as of January 1, 2012, the holders of the Convertible CRA Shares have the option to require us to redeem the Convertible CRA Shares for the original gross issuance price per share, which totals $6.0 million. The two holders of Convertible CRA Shares have exercised their option. However, we have been restricted from meeting this requirement pursuant to the terms of the Credit Agreement. In addition, the redemption of the Convertible CRA Shares held by the current holders thereof may trigger rights we granted to certain Former Preferred Holders that were previously redeemed to be treated no less favorably with respect to the redemption of their Preferred Shares than any holder of Convertible CRA Shares that is subsequently redeemed (“Most Favored Nation Rights”). Certain of the Former Preferred Holders also have anti-dilution rights (the “Anti-Dilution Rights”), which, for a specified period of time, prohibit us from issuing securities if such issuance would reduce such Former Preferred Holders’ ownership of our common shares below specified percentages.

 

Effective January 1, 2012, as we are required to purchase the Convertible CRA Shares upon the holders exercising their option, we classified the Convertible CRA Shares as liabilities.

 

- 34 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Fifth Amendment to the Waiver (see Note 10), for which Bank of America, N.A. is the administrative agent, removed the terms in the Credit Agreement that restricted our ability to repurchase the Convertible CRA Shares, and permitted us to engage in negotiations with current and former holders of the Convertible CRA Shares in an effort to redeem the outstanding Convertible CRA Shares and otherwise settle, retire and terminate other contractual rights of certain Former CRA Holders including the Most Favored Nation Rights and the Anti-Dilution Rights and allowed us to effect such redemptions and elimination of rights at any time prior to August 15, 2012; provided, however, that the costs of such redemptions and elimination of rights did not exceed specified amounts, which amounts are significantly less than the amount required to redeem the Convertible CRA Shares pursuant to their terms. Bank of America, N.A. (we believe acting other than in its capacity as administrative agent under the Credit Agreement) and certain of its affiliates (collectively, the “BofA Entities”) are former Preferred Holders and have Most Favored Nation Rights and Anti-Dilution Rights (see Note 22 relating to the sixth amendment to the Waiver and its terms for redemption of the Convertible CRA Shares).

 

Pursuant to the Fifth Amendment to the Waiver, on July 20, 2012, we sent the BofA Entities a proposal pursuant to which they would, in exchange for a fee, waive their Most Favored Nation Rights and terminate their Anti-Dilution Rights in connection with the redemption of the last two holders of Convertible CRA Shares. The proposed fee was within the parameters specified in the Fifth Amendment to the Waiver. The BofA Entities did not accept our proposal, and instead, by letter dated, August 6, 2012, invoked their Most Favored Nation Rights relating to a prior redemption of Convertible CRA Shares, which may require a payment of $4.0 million, an amount that exceeded the total amounts that had been permitted to be paid to redeem the remaining Convertible CRA Shares and settle the existing Most Favored Nation Rights and Anti-Dilution Rights under the Fifth Amendment to the Waiver.

 

We recorded a $2.2 million provision for losses to cover potential expenses of settling Most Favored Nation Rights claims by former holders of the Convertible CRA Shares.

 

NOTE 14 – Non-controlling Interests

 

The table below provides the components of non-controlling interests as of the dates presented:

 

(in thousands)  September 30,
2012
   December 31,
2011
 
         
Limited partners interests in consolidated partnerships  $2,256,106   $2,633,604 
Preferred shares of a subsidiary (not subject to mandatory repurchase)(1)   104,000    104,000 
Convertible Special Common Units (“SCUs”) of a subsidiary; 11,867 outstanding in 2012 and 2011   (82,356)   (82,356)
Other(2)   9,221    9,912 
           
Total  $2,286,971   $2,665,160 

 

(1)For detail of the terms of these securities (as well as Preferred shares of a subsidiary (subject to mandatory repurchase)) refer to the 2011 Form 10-K.

(2)“Other” non-controlling interests represent the 10.0% interest in CFin Holdings owned by Natixis Capital Markets North America Inc. (“Natixis”).

 

Loss (income) attributable to non-controlling interests was as follows:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
(in thousands)  2012   2011   2012   2011 
                 
Limited partners interests in consolidated partnerships  $144,920   $93,530   $458,556   $444,951 
Preferred shares of a subsidiary (not subject to mandatory repurchase)   (1,556)   (1,556)   (4,669)   (4,669)
Other   876    (4,114)   691    (5,544)
                     
Total loss attributable to non-controlling interests  $144,240   $87,860   $454,578   $434,738 

 

- 35 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

NOTE 15 – General and Administrative Expenses

 

The table below provides the components of general and administrative expenses for the periods presented:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
(in thousands)  2012   2011   2012   2011 
                 
Salaries and benefits  $12,614   $12,987   $38,519   $34,791 
                     
Other:                    
Credit intermediation assumption and other fees   (1,193)   1,371    2,681    3,803 
Professional fees   3,439    1,903    10,261    6,299 
Site visits and acquisition fees   1,897    1,263    4,088    3,572 
Advisory fees   1,250    1,250    3,750    3,750 
Subservicing fees   1,838    1,777    5,471    5,245 
Rent expense   803    1,892    2,619    4,549 
Miscellaneous   2,819    3,538    9,991    9,864 
                     
Total  $23,467   $25,981   $77,380   $71,873 

  

A.Salaries and Benefits

 

Salaries and benefits for the year increased primarily due to our initiative to expand our Affordable Housing Debt and Mortgage Banking platforms by hiring additional employees in certain geographical locations nationwide as well as due to an increase in commission expenses reflecting the increase in our mortgage originations.

 

B.Professional fees

 

Professional fees increased primarily due to legal fees that we incurred and advisory fees that we were required to reimburse to our lenders relating to the amendments to our Credit Agreement which we entered into during 2012.

 

C.Advisory Fees

 

We have an advisory agreement with Island Centerline Manager LLC, an entity owned and operated by a subsidiary of Island Capital Group LLC (collectively, “Island”), whereby it provides us with strategic and general advisory services. Pursuant to the agreement, we pay a $5.0 million annual base advisory fee, payable in quarterly installments of $1.25 million (see also Note 19).

 

NOTE 16 – Provision for (Recovery of) Losses

 

The table below provides the components of the provision for (recovery of) losses for the periods presented:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
(in thousands)  2012   2011   2012   2011 
                 
Affordable Housing loss reserve (recovery) (see Note 21)  $13,349   $(41,700)  $(7,750)  $(57,700)
Stabilization escrow reserve recovery (see Note 21)   -    -    (23,549)   - 
(Reversal of) reserves for bad debt (see Note 21)   (1,294)   975    47,337    8,076 
Lease termination costs   -    1,081    3,318    1,081 
Other provision for losses   2,163    -    2,163    - 
Provision for (recovery of) risk-sharing obligations  (see Note 21)   520    -    (1,017)   238 
                     
Total  $14,738   $(39,644)  $20,502   $(48,305)

 

- 36 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

A.Affordable Housing Loss Reserve Recovery, Stabilization Escrow Reserve Recovery and Bad Debt Reserves

 

In 2011, as we worked with parties that have an economic interest in the properties that secure mortgage revenue bonds associated with our credit intermediation agreements, we estimated the payments that were required to be made from various sources, in order to complete the restructuring and reduce the principal balance of certain mortgage revenue bonds at levels below the amounts reached in the March 2010 agreements with such counterparties.

 

In the second quarter of 2012, as part of the Merrill Restructuring, we advanced funds to certain Tax Credit Fund Partnerships to allow them to make supplemental loans to the applicable Tax Credit Property Partnerships in which they invest to allow them to repay their debt. A substantial portion of these advances were made using the collateral held by counterparties and stabilization escrow which had been previously reserved. Such reserves were reversed upon utilization in the Merrill Restructuring. Affordable Housing loss reserves recorded in the third quarter of 2012 relate primarily to payments expected to be made under our credit intermediation agreements due to a probable property foreclosure as well as an increase in payments expected to be made over the life of these investments to cover shortfalls at Tax Credit Property Partnerships. Bad debt reserves represent advances or supplemental loans we do not expect to collect, mainly relating to the advances made as part of the Merrill Restructuring (see further discussion in Note 21 under Loss Reserve Relating to Yield Transactions).

 

B.Lease Termination Costs

 

In connection with the Surrender Agreement relating to our former New York headquarters at 625 Madison Avenue, in August 2011 we vacated a portion of the office space and recorded net lease termination costs of $1.1 million. In February 2012 we vacated the remainder of the space as required per the Surrender Agreement. Simultaneously, we moved to our new headquarters at 100 Church Street. At that time, we recorded net lease termination costs of $3.3 million.

 

C.Other Provision for Losses

 

Other provision for losses in 2012 is for potential expenses to be incurred by the Company for settling Most Favored Nation Rights claims by former holders of Convertible CRA Shares (see Note 13).

 

NOTE 17 - Earnings per Share

 

The calculation of basic and diluted net income (loss) per share is as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2012   2011   2012   2011 
(in thousands, except per share amounts)  Continuing
Operations
   Continuing
Operations
   Continuing
Operations
   Continuing
Operations
   Discontinued
Operations
 
                     
Numerator:                         
Net (loss) income attributable to Centerline Holding Company shareholders  $(5,763)  $23,815   $(13,104)  $34,006   $253 
Undistributed earnings attributable to redeemable securities   -    (40)   -    (58)   - 
Effect of redeemable share conversions   -    (113)   -    (340)   - 
Net (loss) income attributable to Centerline Holding Company shareholders used for EPS calculations – basic and diluted  $(5,763)  $23,662   $(13,104)  $33,608   $253 
                          
Denominator:                         
Weighted average shares outstanding                         
Basic and diluted   349,166    349,166    349,166    348,995    348,995 
                          
Calculation of EPS:                         
Net (loss) income attributable to Centerline Holding Company shareholders – basic and diluted  $(5,763)  $23,662   $(13,104)  $33,608   $253 
Weighted average shares outstanding – basic and diluted   349,166    349,166    349,166    348,995    348,995 
Net (loss) income per share attributable to Centerline Holding Company shareholders – basic and diluted  $(0.02)  $0.07   $(0.04)  $0.10   $-(1)

 

(1) Amount calculates to zero when rounded.

 

- 37 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

NOTE 18 – Financial Risk Management and Derivatives

 

A.General

 

The Company is exposed to financial risks arising from our business operations and economic conditions. We manage interest-rate risk by hedging. We evaluate our interest-rate risk on an ongoing basis to determine if it would be advantageous to engage in any additional derivative transactions. We do not use derivatives for speculative purposes. We manage liquidity risk by extending term and maturity on debt, by reducing the amount of debt outstanding, and by producing cash flow from operations. We manage credit risk by developing and implementing strong credit and underwriting procedures.

 

B.Derivative Positions

 

As of September 30, 2012, we held the following derivative positions:

 

·We are party to 17 interest rate derivative agreements with the developers of properties relating to certain mortgage revenue bonds we previously owned. We entered into these derivative agreements to effectively convert the fixed rate of interest (per the terms of the mortgage revenue bond) to a variable rate. Under the terms of these agreements, we pay fixed interest rates equal to those of the related bonds and receive interest at a variable rate (based on the SIFMA index). Since the December 2007 re-securitization transaction, these derivatives are now deemed to be free-standing derivatives. At September 30, 2012, these derivatives had an aggregate notional amount of $156.6 million, a weighted average interest rate of 5.72% and a weighted average remaining term of 10.2 years.

 

·Our Affordable Housing Equity segment is party to an interest rate derivative whereby we pay a variable rate of interest (based on the SIFMA index) and receive interest at a fixed rate of 3.83%. This derivative is a free-standing derivative. At September 30, 2012, the derivative had a notional amount of $9.5 million, with a variable interest rate of 0.80% payable to a third party and remaining term of 10.7 years.

 

Quantitative information regarding the derivatives to which we are or were a party (including those agreements on behalf of Consolidated Partnerships) is detailed below.

 

C.Financial Statement Impact

 

Interest rate derivatives in a net liability position (“out of the money”) are recorded in accounts payable, accrued expenses and other liabilities and those in a net asset position (“in the money”) are recorded in deferred costs and other assets. None of the derivatives were designated as hedges as of the dates presented. The amounts recorded are as follows:

 

(in thousands)  September 30,
2012
   December 31,
2011
 
         
Net liability position  $33,424   $28,737 
Net asset position   1,781    1,488 

  

Presented below are amounts included in interest expense in the Condensed Consolidated Statements of Operations related to the derivatives described above:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
(in thousands)  2012   2011   2012   2011 
                 
Not designated as hedges:                    
Interest payments  $2,494   $2,502   $7,524   $7,530 
Interest receipts   (939)   (946)   (2,815)   (2,889)
Change in fair value   1,445    8,279    4,395    9,817 
Included in interest expense  $3,000   $9,835   $9,104   $14,458 

 

- 38 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

NOTE 19 – Related Party Transactions

 

Investments in and Loans to Affiliates

 

The table below provides the components of investments in and loans to affiliates as of the dates presented:

 

(in thousands)  September 30,
2012
   December 31,
2011
 
         
Fund advances related to Tax Credit Property Partnerships, net(1)  $78,475   $64,067 
Advances to Tax Credit Fund Partnerships, net   2,600    1,871 
Fees receivable and other, net   20,929    29,166 
Subtotal   102,004    95,104 
Less: Eliminations(2)   (97,691)   (89,463)
           
Total  $4,313   $5,641 

 

(1)Net of reserves of $84.2 million at September 30, 2012 and $38.5 million at December 31, 2011.

(2)For management purposes, we treat Consolidated Partnerships as equity investments in evaluating our results. As we consolidate the Consolidated Partnerships, we eliminate the investments for presentation in the condensed consolidated financial statements. In addition, any fees or advances receivable from Consolidated Partnerships are eliminated in consolidation.

 

Impact to Statements of Operations

 

Our Condensed Consolidated Statements of Operations included the following amounts pertaining to related party transactions:

 

   Included in following line item  Three Months Ended   Nine Months Ended 
   on Condensed Consolidated  September 30,   September 30, 
(in thousands)  Statements of Operations  2012   2011   2012   2011 
                    
Expenses for advisory services provided by  General and Administrative  $1,250   $1,250   $3,750    4,637 
Island and procedures review payments made                       
to Island                       
                        
Expenses for subservicing of and net referral  General and Administrative   1,883    1,766    5,959    5,453 
fees for mortgage loans by C-III Capital                       
Partners, LLC (“C-III”)                       
                        
Sublease charges to C-III  General and Administrative   (418)   (419)   (1,221)   (1,246)
                        
Expenses for consulting and advisory services  General and Administrative   38    41    120    121 
provided by The Related Companies LP                       
(“TRCLP”)                       
                        
Expense for property management services  Other Losses from Consolidated   1,527    1,536    4,728    4,528 
provided by TRCLP  Partnerships                    
                        
Net interest rate derivative payments to  Interest Expense   631    638    1,902    1,902 
property developers controlled by TRCLP                       

  

A.Island Centerline Manager LLC (the “Advisor”) and C-III

 

We have an advisory agreement with Island Centerline Manager LLC. The agreement provides for an initial five year term and, subject to a fairness review of advisory fees, for successive one year renewal terms. Pursuant to the agreement:

 

·The Advisor provides strategic and general advisory services to us; and

 

- 39 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

·we paid $5.0 million for procedures review fees over a 12 month period from the date of the agreement for certain fund management review services. We have also paid and will pay a $5.0 million annual base advisory fee and will pay an annual incentive fee if and once certain EBITDA thresholds are met (as defined in the agreement).

 

The agreement provides each party with various rights of termination, which in our case under certain circumstances would require the payment of a termination fee in an amount equal to three times the base and incentive fee earned during the previous year.

 

We have subservicing agreements with C-III pursuant to which C-III services and administers mortgage loans on our behalf. During the nine months ended September 30, 2012 and 2011, we paid a total amount of $5.4 million and $5.2 million, respectively ($1.8 million for the third quarter of 2012 and 2011), for these services. In addition, during the nine months ended September 30, 2012 and 2011 we paid a total amount of $0.6 million and $0.3 million, respectively to C-III for referral fees for mortgage loans financed by us for borrowers referred to us by C-III, net of fees received for referrals made by us to C-III.

 

We have a sublease agreement with C-III for the leased space in Irving, Texas that we occupied in the past and which has been used by C-III since March 2010.

 

B.The Related Companies L.P.

 

A subsidiary of TRCLP earned fees for performing property management services for various properties held in Tax Credit Fund Partnerships we manage.

 

In addition, in March 2010 another affiliate of TRCLP entered into a loan agreement with our lenders (the “TRCLP Loan Agreement”) pursuant to which it assumed $5.0 million of our debt outstanding under our Credit Agreement (the “TRCLP Indebtedness”) in connection with CCG’s entering into a consulting and advisory agreement with the TRCLP affiliate (the “TRCLP Consultant”).

 

Pursuant to the consulting and advisory agreement, the TRCLP Consultant performs certain consulting and advisory services in consideration for which CCG granted the TRCLP Consultant, among other things, certain rights of first refusal and first offer with respect to the transfer of real property owned by a Tax Credit Property Partnership controlled by CCG as well as the transfer of equity interests in Tax Credit Property Partnerships and agreed to pay the TRCLP Consultant certain fees and expenses. The fee payable by CCG to the TRCLP Consultant is payable quarterly in an amount equal to the interest incurred on the TRCLP Indebtedness for such quarter, which is LIBOR plus 3.00%. The consulting and advisory agreement has a three-year term and automatically renews for one year terms unless CCG provides timely written notice of non-renewal to the TRCLP Consultant.

 

The consulting and advisory agreement is terminable by CCG and the TRCLP Consultant by mutual consent as specified in the consulting and advisory agreement. If the consulting and advisory agreement is terminated by CCG due to a change of control of the Company, CCG is obligated to pay the TRCLP Consultant a termination fee in the amount of the fair market value of the TRCLP Consultant’s remaining rights under the consulting and advisory agreement determined in accordance with procedures specified in the agreement. If the consulting and advisory agreement is terminated by CCG because the TRCLP Consultant or any of its affiliates engaged in a specified competitive business, the Company or CCG would assume all obligations under the TRCLP Loan Agreement and indemnify the TRCLP Consultant and its affiliates for any loss, cost and expense incurred from and after the date of such assumption.

 

If CCG and the TRCLP Consultant mutually agree to terminate the consulting and advisory agreement, each party (and certain of their respective affiliates) would be obligated to pay 50% of the outstanding obligations under the TRCLP Indebtedness. If the TRCLP Consultant terminates the consulting and advisory agreement by prior written notice to CCG absent a continuing default by CCG, the TRCLP Consultant and certain of its affiliates would be obligated to pay the outstanding obligations under the TRCLP Loan Agreement. If the TRCLP Consultant terminates the consulting and advisory agreement in the event of a continuing default under the agreement by CCG, the Company and CCG would be jointly and severally obligated to pay the outstanding obligations under the TRCLP Loan Agreement. If CCG terminates the consulting and advisory agreement in the event of a continuing default under the agreement by the TRCLP Consultant or in the event the TRCLP Consultant has not reasonably performed its duties under the agreement, the TRCLP Consultant and certain of its affiliates would be jointly and severally obligated to pay the outstanding obligations under the TRCLP Loan Agreement. If CCG terminates the consulting and advisory agreement in the event of a change in control of the Company or in the event the TRCLP Consultant or any of its affiliates enters into specified competitive businesses, the Company and CCG would be jointly and severally obligated to pay the outstanding obligations under the TRCLP Loan Agreement.

 

The $5.0 million of debt assumed by TRCLP was recorded as an extinguishment of debt for which we deferred a $5.0 million gain. The deferred gain will be recognized into income over the life of the consulting agreement as payments of the assumed debt are made by TRCLP. As of September 30, 2012 and December 31, 2011, the unrecognized balance was $4.48 million and $4.97 million, respectively. This amount is included in “Deferred revenues” within “Accounts payable, accrued expense and other liabilities” on our Condensed Consolidated Balance Sheets.

- 40 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

C.Fund Advances Related to Tax Credit Property Partnerships, Net

 

Fund advances related to Tax Credit Property Partnerships represent monies we loaned to certain Tax Credit Fund Partnerships to allow them to provide financial support to Tax Credit Property Partnerships in which they invest. We expect the Tax Credit Fund Partnerships will repay those loans from the release of reserves, proceeds from asset sales and other operating sources. Fund advances we made (net of recoveries) were $60.1 million and $11.1 million in the nine months ended September 30, 2012 and 2011, respectively ($2.0 million and $3.4 million in the third quarters of 2012 and 2011, respectively). In connection with the restructuring of certain credit intermediation agreements in 2010, certain of these fund advances were contributed to our Guaranteed Holdings and CFin Holdings subsidiaries (See Tax Credit Property Partnerships in Note 21).

 

D.Other

 

Substantially all fund origination revenues in the Affordable Housing Equity segment are received from Tax Credit Fund Partnerships we have originated and manage, many of which comprise the partnerships that we consolidate. While our affiliates hold equity interests in the investment funds’ general partner and/or managing member/advisor, we have no direct investments in these entities and we do not guarantee their obligations. We have agreements with these entities to provide ongoing services on behalf of the general partners and/or managing members/advisors and we receive all fee income to which these entities are entitled.

 

NOTE 20 – Business Segments

 

Business segment results include all direct and contractual revenues and expenses of each business segment and allocations of certain indirect expenses based on specific methodologies. These reportable business segments are strategic business units that primarily generate revenue streams that are distinctly different from one another and are managed separately. Transactions between business segments are accounted for as third-party arrangements for the purposes of presenting business segment results of operations. Typical intersegment eliminations include fees earned from Consolidated Partnerships and intercompany interest.

 

Prior period business segment results were reclassified to reflect the presentation of Affordable Housing Equity and Affordable Housing Debt as reportable segments in 2011 and the Company’s 2011 decision to allocate certain Corporate overhead, such as Human Resources, Information Technology, and Finance and Accounting to the Affordable Housing Equity, Affordable Housing Debt, Mortgage Banking and Asset Management segments.

 

- 41 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

   Three Months Ended September 30, 2012 
   Affordable   Affordable                     
   Housing   Housing   Mortgage   Asset       Consolidated     
(in thousands)  Equity   Debt   Banking   Management   Corporate   Partnerships   Total 
                             
Revenues                                   
Interest income  $1,095   $15,830   $1,133   $-   $10   $312   $18,380 
Non-interest income   7,407    3,139    21,964    5,583    100    26,497    64,690 
Total Revenues  $8,502   $18,969   $23,097   $5,583   $110   $26,809   $83,070 
                                    
Expenses                                   
Interest expense  $(44)  $13,003   $711   $-   $1,323   $13,552   $28,545 
G&A expense   5,156    3,128    8,274    2,332    10,751    -    29,641 
Provision for/(recovery of) losses   12,055    (363)   883    -    2,163    -    14,738 
Depreciation and amortization   37    385    2,948    53    273    -    3,696 
Other expense   -    -    -    -    -    101,494    101,494 
Total Expenses  $17,204   $16,153   $12,816   $2,385   $14,510   $115,046   $178,114 
                                    
Other income(loss)   475    -    178    -    493    (56,684)   (55,538)
                                    
Income tax benefit   -    -    -    -    652    -    652 
                                    
Net (loss) income   (8,227)   2,816    10,459    3,198    (13,255)   (144,921)   (149,930)
                                    
Net (loss) income attributable to non-controlling interests   (876)   1,556    -    -    -    (144,920)   (144,240)
                                    
Intersegment expense allocations   2,051    3,539    2,912    2,656    (11,158)   -    - 
Net (loss) income attributable to Centerline Holding Company Shareholders  $(9,402)  $(2,279)  $7,547   $542   $(2,097)  $(1)  $(5,690)
                                    
Below is the reconciliation of the segment results to the consolidated results:                               
                                    
Net loss from reportable segments  $(5,690)                              
Elimination and adjustment items                                   
Interest income   (6,996)                              
Non-interest income   (12,402)                              
Interest expense   6,948                               
Non-interest expense   12,377                               
Consolidated Net loss attributable to Centerline Holding Company shareholders  $(5,763)                              

 

- 42 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

   Three Months Ended September 30, 2011 
   Affordable   Affordable                     
   Housing   Housing   Mortgage   Asset       Consolidated     
(in thousands)  Equity   Debt   Banking   Management   Corporate   Partnerships   Total 
                             
Revenues                                   
Interest income  $706   $16,162   $965   $-   $27   $255   $18,115 
Non-interest income   9,512    1,156    13,718    5,783    101    26,284    56,554 
Total Revenues  $10,218   $17,318   $14,683   $5,783   $128   $26,539   $74,669 
                                    
Expenses                                   
Interest expense  $(485)  $21,542   $380   $-   $1,353   $12,723   $35,513 
G&A expense   9,002    2,887    5,801    2,914    11,461    -    32,065 
Recovery of losses   (40,725)   -    -    -    1,081    -    (39,644)
Depreciation and amortization   53    295    2,874    80    410    -    3,712 
Other expense   -    -    -    -    -    53,551    53,551 
Total Expenses  $(32,155)  $24,724   $9,055   $2,994   $14,305   $66,274   $85,197 
                                    
Other income(loss)   (18)   150    -    -    -    (53,798)   (53,666)
                                    
Income tax benefit   -    -    -    -    87    -    87 
                                    
Net income (loss)   42,355    (7,256)   5,628    2,789    (14,090)   (93,533)   (64,107)
                                    
Net income (loss) attributable to non-controlling interests   4,114    1,556    -    -    -    (93,530)   (87,860)
                                    
Intersegment expense allocations   2,535    2,244    3,142    3,696    (11,617)   -    - 
Net income (loss) attributable to Centerline Holding Company Shareholders  $35,706   $(11,056)  $2,486   $(907)  $(2,473)  $(3)  $23,753 
                                    
Below is the reconciliation of the segment results to the consolidated results:                               
                                    
Net income from reportable segments  $23,753                               
Elimination and adjustment items                                   
Interest income   (7,905)                              
Non-interest income   (14,100)                              
Interest expense   8,035                               
Non-interest expense   14,032                               
Consolidated Net income attributable to Centerline Holding Company shareholders  $23,815                               

 

- 43 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

   Nine Months Ended September 30, 2012 
   Affordable   Affordable                     
   Housing   Housing   Mortgage   Asset       Consolidated     
(in thousands)  Equity   Debt   Banking   Management   Corporate   Partnerships   Total 
                             
Revenues                                   
Interest income  $3,353   $51,561   $3,261   $-   $26   $(701)  $57,500 
Non-interest income   23,075    9,495    55,636    16,830    358    82,291    187,685 
Total Revenues  $26,428   $61,056   $58,897   $16,830   $384   $81,590   $245,185 
                                    
Expenses                                   
Interest expense  $89   $41,366   $1,874   $-   $3,945   $40,140   $87,414 
G&A expense   22,419    9,672    23,005    7,240    33,071    -    95,407 
Provision for/(recovery of) losses   39,585    (23,912)   (654)   -    5,481    -    20,500 
Depreciation and amortization   110    1,268    9,544    146    880    -    11,948 
Other expense   -    -    -    -    -    222,610    222,610 
Total Expenses  $62,203   $28,394   $33,769   $7,386   $43,377   $262,750   $437,879 
                                    
Other income(loss)   558    795    179    -    493    (277,403)   (275,378)
                                    
Income tax benefit   -    -    -    -    505    -    505 
                                    
Net (loss) income   (35,217)   33,457    25,307    9,444    (41,995)   (458,563)   (467,567)
                                    
Net (loss) income attributable to non-controlling interests   (691)   4,669    -    -    -    (458,556)   (454,578)
                                    
Intersegment expense allocations   6,658    9,144    8,903    9,165    (33,870)   -    - 
Net (loss) income attributable to Centerline Holding Company Shareholders  $(41,184)  $19,644   $16,404   $279   $(8,125)  $(7)  $(12,989)
                                    
Below is the reconciliation of the segment results to the consolidated results:                               
                                    
Net loss from reportable segments  $(12,989)                              
Elimination and adjustment items                                   
Interest income   (24,228)                              
Non-interest income   (36,673)                              
Interest expense   24,190                               
Non-interest expense   36,596                               
Consolidated Net loss attributable to Centerline Holding Company shareholders  $(13,104)                              

 

- 44 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

   Nine Months Ended September 30, 2011 
   Affordable   Affordable                     
   Housing   Housing   Mortgage   Asset       Consolidated     
(in thousands)  Equity   Debt   Banking   Management   Corporate   Partnerships   Total 
                             
Revenues                                   
Interest income  $2,675   $49,089   $2,867   $-   $63   $940   $55,634 
Non-interest income   29,894    4,981    38,450    17,629    302    79,071    170,327 
Total Revenues  $32,569   $54,070   $41,317   $17,629   $365   $80,011   $225,961 
                                    
Expenses                                   
Interest expense  $646   $49,114   $1,021   $-   $3,956   $37,925   $92,662 
G&A expense   26,684    7,585    16,788    7,663    31,662    -    90,382 
(Recovery of)/provision for losses   (49,624)   238    -    -    1,081    -    (48,305)
Depreciation and amortization   134    1,136    8,285    193    1,218    -    10,966 
Other expense   -    -    -    -    -    249,210    249,210 
Total Expenses  $(22,160)  $58,073   $26,094   $7,856   $37,917   $287,135   $394,915 
                                    
Other income(loss)   2,748    1,320    -    -    1,756    (237,834)   (232,010)
                                    
Income tax provision   -    -    -    -    (93)   -    (93)
                                    
Net income (loss) - continuing operations   57,477    (2,683)   15,223    9,773    (35,889)   (444,958)   (401,057)
                                    
Net income (loss) attributable to non-controlling interests   5,544    4,669    -    -    -    (444,951)   (434,738)
                                    
Intersegment expense allocations   6,567    5,776    7,900    9,742    (29,985)   -    - 
Net income (loss) attributable to Centerline Holding Company Shareholders – continuing operations  $45,366   $(13,128)  $7,323   $31   $(5,904)  $(7)  $33,681 
                                    
Below is the reconciliation of the segment results to the consolidated results:                               
                                    
Net income from reportable segments  $33,681                               
Elimination and adjustment items                                   
Interest income   (24,646)                              
Non-interest income   (43,487)                              
Interest expense   25,025                               
Non-interest expense   43,433                               
Net income attributable to CHC-shareholders - discontinued operations   253                               
Consolidated Net income attributable to Centerline Holding Company shareholders  $34,259                               

  

NOTE 21 – Commitments and Contingencies

 

A.Affordable Housing Transactions

 

Yield Transactions

 

Through the isolated special purpose entities described below, we have entered into several credit intermediation agreements with either Natixis or Merrill Lynch & Co., Inc. (“Merrill Lynch”) (each a “Primary Intermediator”) to provide agreed-upon rates of return to third-party investors for pools of multifamily properties in certain Tax Credit Fund Partnerships. In return, we have received, or will receive fees, generally at the start of each credit intermediation period. There are a total of 20 outstanding agreements to provide the specified returns through the construction and lease-up phases and through the operating phase of the properties.

 

Total potential exposure pursuant to these credit intermediation agreements at September 30, 2012 is $1.2 billion, assuming the Tax Credit Fund Partnerships achieve no return whatsoever beyond the September 30, 2012 measurement date (assuming that all underlying properties fail and are foreclosed upon, causing us to invoke the “calamity call” provision in each fund on September 30, 2012). Of this total:

 

·Five of the agreements (comprising $530.4 million of the total potential exposure) are with our subsidiary, Centerline Financial, an isolated special purpose entity wholly owned by CFin Holdings.

 

·Seven of the agreements (comprising $387.6 million of the total potential exposure) are with our subsidiary, CFin Holdings, an isolated special purpose entity owned 90% by CCG and 10% by Natixis.

 

- 45 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

·Eight of the credit intermediation agreements (comprising $317.0 million of the total potential exposure) are with Guaranteed Holdings, an isolated special purpose entity and wholly owned subsidiary of CCG.

 

In connection with the Master Novation, Stabilization, Assignment, Allocation, Servicing and Asset Management Agreement with Natixis (“Natixis Master Agreement”), all current and future voluntary loans, receivables, and SLP fees associated with all Natixis Credit Enhanced Funds are assigned to CFin Holdings (see Tax Credit Property Partnerships below). As part of the Natixis Master Agreement, if certain conditions are met, we and Natixis have agreed to terms for the restructuring of certain bonds that were part of the Freddie Mac Re-securitization and Natixis has agreed to allow certain assets of CFin Holdings to be used for these bond restructurings.

 

In connection with the Master Assignment, Stabilization, Assignment Allocation and Asset Management Agreement with Merrill Lynch (the “Merrill Master Agreement”), CHC entered into a Reaffirmation of Guarantee in favor of Merrill Lynch whereby under certain circumstances CHC will indemnify Merrill Lynch for losses incurred under the yield transactions to the extent these losses are caused by events that occurred prior to the execution of the Merrill Master Agreement. In connection with the Merrill Master Agreement, we accrued $2.4 million and $3.6 million in credit intermediation assumption fees for the nine months ended September 30, 2012 and 2011, respectively, included in “Accounts Payable, accrued expenses and other liabilities” on our Condensed Consolidated Balance Sheets and included in “Other Fees” within “General and Administrative Expenses” on our Condensed Consolidated Statements of Operations. The fee is due upon the termination of certain yield transactions and is calculated as 50% of the value of the collateral securing Guaranteed Holdings’ obligations under these yield transactions but not to exceed $42.0 million.

 

The carrying value of all the above obligations under credit intermediation agreements, representing the deferral of the fee income over the obligation periods, was $17.7 million as of September 30, 2012 and $19.5 million as of December 31, 2011. This amount is included in “Deferred revenues” within “Accounts payable, accrued expense and other liabilities” on our Condensed Consolidated Balance Sheets.

 

Loss Reserve Relating to Yield Transactions

 

For many of the properties in the pools associated with the credit intermediation agreements described under “Yield Transactions” above, mortgage revenue bonds were included in the December 2007 re-securitization transaction. Certain credit intermediated funds have equity investments in the properties underlying some of the bonds that require restructuring. If the required principal buy downs are not made for these bonds, the underlying properties can be foreclosed upon which could cause a substantial recapture of LIHTCs, thereby reducing the rate of return earned by the limited partners of the funds. A reduction in the rate of return below the rate specified at inception of the investment fund would trigger a default event that could require a payment to be made by the Primary Intermediators to the limited partners of the funds.

 

We developed a strategy to address a marked decline in the operating performance of many of the non-stabilized properties underlying our affordable housing investments to manage our exposure under the yield transactions described above and to address the declining cash flows to our Series B Freddie Mac Certificates. As part of that, in June 2012 we executed the Merrill Restructuring. The Merrill Restructuring resulted in the principal buy down of mortgage revenue bonds in the amount of $60.3 million and the funding of related expenses of $1.0 million. The sources of the buy downs included $23.5 million of stabilization escrow, $22.1 million from collateral deposits of Guaranteed Holdings, $11.7 million from other sources primarily from unfunded equity contributions held by certain Tax Credit Fund Partnerships which hold equity investments in the underlying properties being restructured, with the remaining source of $3.9 million provided by Freddie Mac in the form of a loan. The stabilization escrow release and the Freddie Mac Loan proceeds were advanced to the Tax Credit Fund Partnerships along with the $22.1 million of collateral deposits to allow them to make supplemental loans to the Tax Credit Property Partnerships. The Merrill Restructuring also included a reduction in the must-pay interest portion of the debt service to an interest rate of 4.75% on 17 properties. The difference between the must-pay amount and the stated interest rate of the bond which range from 6.50% to 7.45% will be treated as soft interest to be paid out of available cash flows of the property partnership. In addition, in connection with the Natixis Master Agreement, if certain conditions are met, we have agreed to terms for the restructuring of certain of other mortgage revenue bonds. This strategy entails cash infusions, which could approximate $59.6 million, from us and other parties with an economic interest in the properties, or may result in a reduction in the principal balance of our Series B Freddie Mac Certificates.

 

Should the Primary Intermediators expend cash to execute restructurings, CFin Holdings, CFin or Guaranteed Holdings may have to reimburse them or they may have to forfeit cash and other assets that we have deposited as collateral. Should the Primary Intermediators not expend cash to the extent we have projected, we could incur additional impairments of our Series B Freddie Mac Certificates. In addition, in certain instances, CFin Holdings, CFin or Guaranteed Holdings may advance funds to a Tax Credit Fund Partnership to cover shortfalls at Tax Credit Property Partnerships in order to ensure that the limited partners in the Tax Credit Fund Partnerships do not lose their expected tax benefits. We have analyzed the expected operations of the underlying properties and, as of September 30, 2012, we have estimated that payments by us totaling $27.3 million will need to be made in order to complete the restructuring to reduce the principal balance of mortgage debt on specified properties, and estimated net payments over the life of the investments of $13.3 million will need to be made to cover shortfalls at Tax Credit Property Partnerships or to make payments under the yield transaction obligations. This mortgage reduction and any payments to cover shortfalls are expected to reduce our exposure under the yield guarantee arrangements. Of the expected payments to be made, $24.5 million is accrued as part of “Accounts payable, accrued expenses and other liabilities” on the Condensed Consolidated Balance Sheets. The remaining $16.1 million will be funded from the stabilization escrow established in connection with the 2007 re-securitization transaction, which has been fully reserved in prior years.

 

- 46 -
 

 

CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

We have not yet been called upon to make payment under the yield transaction obligations. However, certain cash and other assets were pledged as collateral to Merrill Lynch and Natixis by CFin, CFin Holdings, and Guaranteed Holdings. As of September 30, 2012, Guaranteed Holdings remaining collateral subsequent to the June 2012 transaction to satisfy Merrill Lynch’s collateral requirements, consisted mainly of cash and cash deposits of $21.9 million which are included in “Deferred costs and other assets, net” on our Condensed Consolidated Balance Sheets and $19.7 million in investments in Series A-1 Freddie Mac Certificates included in “Available-for-sale investments” on our Condensed Consolidated Balance Sheets. In addition, as of September 30, 2012, Centerline Financial and CFin Holdings maintained a cash balance of $71.1 million included in “Cash and cash equivalents” as a capital requirement in support of its exposure under its credit intermediation agreements.

 

Tax Credit Property Partnerships

 

To manage our exposure to risk of loss, we are able to remove the existing general partner from the Tax Credit Property Partnerships and assume control only for due cause related to the nonperformance of the general partner. We assumed these general partnership interests to preserve our direct or indirect investments in mortgage revenue bonds or the equity investments in Tax Credit Property Partnerships on behalf of Tax Credit Fund Partnerships that we manage.

 

We have hired qualified property managers for each of the Tax Credit Property Partnerships in order to improve the performances of these partnerships. During our holding period, we may need to support the Tax Credit Property Partnerships if they have not yet reached stabilization or we may choose to fund deficits as needed, to protect our interests. The assets continue to be actively managed to minimize the necessary cash flow outlays and maximize the performance of each asset. Due to the uncertain nature of cash needs at these Tax Credit Property Partnerships, we cannot estimate how much may ultimately be advanced while we own the general partner and co-general partner interests.

 

In addition, we may advance funds to Tax Credit Fund Partnerships to allow them to make supplemental loans for Tax Credit Property Partnerships in which they invest. These advances are then repaid to us from cash flows, if any, at the Tax Credit Fund Partnership level. Under the terms of our Term Loan and Revolving Credit Facility, we are, in certain cases, limited in the amount of advances that can be made.

 

As of September 30, 2012, we had a $78.5 million receivable for advances as described above, net of a $84.2 million reserve for bad debt (see Note 19). $44.7 million of bad debt reserves were recorded in connection with $51.3 million in advances made in the second quarter of 2012 in connection with the Merrill Restructuring. This includes $26.2 million (net of a $10.7 million reserve) recorded in Centerline Affordable Housing Advisors LLC’s (“CAHA”) books and $52.3 million (net of a $73.5 million reserve) recorded in our isolated special purpose entities’ CFin Holdings and Guaranteed Holdings financial statements.

 

B.Funding Commitments

 

As of September 30, 2012, we had commitments to sell mortgages that were subsequently sold to the GSEs totaling $186.7 million, which are included in “Mortgage loans held for sale and other” on the Condensed Consolidated Balance Sheets.

 

C.Mortgage Loan Loss Sharing Agreements

 

Under the Fannie Mae Delegated Underwriting Servicer (“DUS”) program, we originate loans through one of our subsidiaries that are thereafter purchased or credit enhanced by Fannie Mae and sold to third party investors. Pursuant to a master loss sharing agreement with Fannie Mae, we retain a first loss position with respect to the loans that we originate and sell under this program. For these loss sharing loans, we assume responsibility for a portion of any loss that may result from borrower defaults, based on the Fannie Mae loss sharing formulas, and Fannie Mae risk Levels I, II or III, with Level III loans being the most risky and for which we must assume the greatest share of loss. There is one Level III loan with an unpaid principal balance of $2.3 million, all of the remaining 1,154 loss sharing loans in this program as of September 30, 2012, were Level I loans. For a majority of these loans, if a default occurs, we are responsible for the first 5% of the unpaid principal balance and a portion of any additional losses to a maximum of 20% of the original principal balance; any remaining loss is borne by Fannie Mae. A modified risk sharing arrangement is applied to 95 loans in which our risk share is reduced to 0% to 75% of our overall share of the loss. Pursuant to this agreement, we are responsible for funding 100% of mortgagor delinquency (principal and interest) for a period of four months and servicing advances (taxes, insurance and foreclosure costs) until the amounts advanced exceed 5% of the unpaid principal balance at the date of default. Thereafter, no further fundings are required until final settlement under the master loss sharing agreement.

 

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CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

We also participate in loss sharing transactions under Freddie Mac’s Delegated Underwriting Initiative (“DUI”) program whereby we have originated loans that were purchased by Freddie Mac. Under the terms of our master agreement with Freddie Mac, we are obligated to reimburse Freddie Mac for a portion of any loss that may result from borrower defaults in DUI transactions. For such loans, if a default occurs, our share of the standard loss will be the first 5% of the unpaid principal balance and 25% of the next 20% of the remaining unpaid principal balance to a maximum of 10% of the unpaid principal balance. The loss on a defaulted loan is calculated as the unpaid principal amount due, unpaid interest due and default resolutions costs (taxes, insurance, operation and foreclosure costs) less recoveries. As of September 30, 2012, we had 59 loss sharing loans in this program.

 

Our maximum exposure at September 30, 2012, pursuant to these agreements, was $906.3 million (representing what we would owe in accordance with the loss sharing percentages with Fannie Mae and Freddie Mac described above if every loan defaulted and losses were incurred in amounts equal to or greater than these levels for which we are responsible), although we believe this amount is not indicative of our likely potential losses. We maintain an allowance for risk-sharing obligations for loans originated under these product lines at a level that, in management’s judgment, is adequate to provide for estimated losses. At September 30, 2012 and December 31, 2011, that reserve was $20.7 million and $21.7 million, respectively. The reserve is recorded in “Accounts payable, accrued expenses and other liabilities” (see Note 12) on our Condensed Consolidated Balance Sheets.

 

The components of the change in the allowance for risk-sharing obligations were as follows:

 

   (in thousands) 
     
Balance at January 1, 2011  $29,924 
Provision recorded during the period   238 
Realized losses on risk-sharing obligations   (1,398)
      
Balance at September 30, 2011  $28,764 
      
Balance at January 1, 2012  $21,715 
Recovery of provision during the period   (1,017)
Realized losses on risk-sharing obligations   - 
      
Balance at September 30, 2012  $20,698 

  

As of September 30, 2012, we maintained collateral consisting of money market and short-term investments of $13.4 million, which is included in “Restricted cash” on our Condensed Consolidated Balance Sheets, to satisfy the Fannie Mae collateral requirements with which we were in compliance at September 30, 2012. In addition, we maintain cash balances of these subsidiaries in excess of program requirements.

 

We are also required by the master agreement with Freddie Mac to provide collateral as security for payment of the reimbursement obligation. The collateral can include a combination of the net worth of one of our Mortgage Banking subsidiaries, a letter of credit and/or cash. To meet this collateral requirement, we have a letter of credit arrangement with Bank of America as a part of our Revolving Credit Facility (see Note 10). At September 30, 2012, commitments under this agreement totaled $12.0 million.

 

At September 30, 2012, the Mortgage Banking subsidiaries held $11.3 million of cash in excess of program requirements.

 

D.Legal Contingencies

 

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s condensed consolidated financial statements and therefore no accrual is required as of September 30, 2012 and December 31, 2011.

 

E.Other Contingent Liabilities

 

We have entered into several transactions pursuant to the terms of which we will provide credit support to construction lenders for project completion and Fannie Mae conversion. In some instances, we have also agreed to acquire subordinated bonds to the extent the construction period bonds do not fully convert. In some instances, we also provide payment, operating deficit, recapture and replacement reserve guarantees as business requirements for developers to obtain construction financing. Our maximum aggregate exposure relating to these transactions was $171.9 million as of September 30, 2012. To date, we have had minimal exposure to losses under these transactions and anticipate no material liquidity requirements in satisfaction of any guarantee issued.

 

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CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

  

In addition, we have entered into a number of indemnification agreements whereby we will indemnify a purchaser of the general partner (“GP”) interests in Tax Credit Property Partnerships for unspecified losses they may incur as a result of certain acts, including those that occurred while we served as the GP. Although some of the indemnification agreements do not explicitly provide a cap on our exposure, to date we have had minimal exposure to losses under these transactions and anticipate no material liquidity requirements in satisfaction of any indemnities issued.

 

Centerline Financial has two credit intermediation agreements to provide for monthly principal and interest debt service payments for debt owed by Tax Credit Property Partnerships owned by third parties, to the extent there is a shortfall in payment from the underlying property. In return, we receive fees monthly based on a fixed rate until the expiration of the agreements that occur in 2023 and 2025. Total potential exposure pursuant to these transactions is $33.7 million as well as monthly interest obligations, assuming the bonds default and cannot be sold. The recourse upon default would be to acquire the bond and foreclose on the underlying property at which point the property would be rehabilitated or sold. Deferred fee income over the obligation period was $0.8 million based on the fair value of the obligations as of September 30, 2012. This amount is included in “Deferred revenues” within “Accounts payable, accrued expenses and other liabilities” on our Condensed Consolidated Balance Sheets.

 

As indicated in Note 19, an affiliate of TRCLP assumed $5.0 million of the debt under our Term Loan and Revolving Credit Facility in connection with a consulting and advisory agreement we entered into with the TRCLP affiliate. Under the consulting agreement, we are obligated to pay fees to the TRCLP affiliate equal to the interest payable on the TRCLP Loan.

 

Under the terms of the agreement and as detailed in Note 19, in some cases, if we terminate the agreement we may be obligated to immediately repay the remaining principal balance of the TRCLP loan.

 

NOTE 22 – Subsequent Events

 

·On October 5, 2012, we entered into a sixth amendment to the waiver to the Credit Agreement, for which Bank of America, N.A. is the administrative agent, (the “Sixth Amendment to the Waiver”), which among other things: (i) granted a waiver through January 11, 2013 of our noncompliance with the Consolidated EBITDA to Fixed Charges Ratio covenant contained in our Credit Agreement with respect to the fiscal quarters ended September 30, 2011, March 31, 2012, June 30, 2012 and September 30, 2012; (ii) granted a waiver through January 11, 2013 of our noncompliance with the Total Debt to Consolidated EBITDA Ratio covenant contained in our Credit Agreement with respect to the fiscal quarters ended June 30, 2012 and September 30, 2012; (iii) required us to pay certain costs and expenses incurred by the administrative agent in administering the Credit Agreement; and (iv) removed the terms in the Credit Agreement that restricted our ability to repurchase the Convertible CRA Shares, allowing for, at any time prior to January 11, 2013, subject to specified terms, the redemption of all outstanding Convertible CRA Shares and settling, retiring and terminating of all contractual rights of certain Former Preferred Holders, who previously agreed to the redemption of their Preferred Shares provided, however, that the costs of such redemptions and termination of rights do not exceed specified amounts, which amounts are significantly less than the amount required to redeem the Convertible CRA Shares pursuant to their terms.
   
·In October 2012, we entered into an agreement with one of our warehouse lenders pursuant to which we have been granted a $100.0 million temporary increase to our existing $50.0 million committed warehouse facility for a period of 30 days commencing on the earlier of (i) November 14, 2012 or (ii) upon the date of the initial advance by the lender to us for purpose of originating a loan or loans secured by certain scheduled properties. Advances in an amount up to and including $100.0 million made to us by the lender with respect to certain scheduled loans shall bear interest at a rate of LIBOR plus 2.10%. Advances in an amount in excess of $100.0 million or for loans other than those scheduled advances shall bear an interest rate of LIBOR plus 2.75%.

 

·In November 2012, we signed a renewal of a $50.0 million committed warehouse facility that matures in November 2013 and bears interest at a rate of LIBOR plus a minimum of 1.90% and a maximum of 3.40%.

 

·On November 1, 2012, the holder of 214,247 Convertible CRA Shares, which in January 2012 exercised a put option to sell all of its Convertible CRA Shares to the Company (see Note 13), submitted to the American Arbitration Association a demand for arbitration based on the Company’s alleged failure to comply with its obligation under the option agreement to pay the gross issuance price of the Convertible CRA Shares. The arbitration claim is for approximately $4.0 million.

 

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CENTERLINE HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On November 5, 2012, the holder of the remaining 106,044 Convertible CRA Shares, which in June 2012 exercised a put option to sell all of their Convertible CRA Shares to the Company (see Note 13), submitted to the American Arbitration Association a demand for arbitration based on the Company’s alleged failure to comply with its obligation under the option agreement to pay the gross issuance price of the Convertible CRA Shares. The arbitration claim is for approximately $2.0 million.

 

Our Credit Agreement contains restrictions on distributions. Under the Credit Agreement, we generally are not permitted to make any distributions or redeem or purchase any of our shares, including Convertible CRA Shares.

 

The Sixth Amendment to the Waiver which the Company entered into on October 5, 2012, removes, through January 11, 2013, subject to specified terms, the restrictions in the Credit Agreement relating to our ability to repurchase the Convertible CRA Shares. The Company is engaged in negotiations with the holders of the outstanding Convertible CRA Shares in an effort to redeem, subject to specified conditions, and cancel these shares and their rights in exchange for an amount significantly less than the gross issuance price.

 

·In November 2012 we signed a renewal of the uncommitted warehouse repurchase facility for warehousing of mortgage loans with Fannie Mae. The renewed warehouse facility is scheduled to mature in November 2013 and bears interest at a rate of LIBOR plus 3.50% with a minimum of 4.50%.

 

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

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Centerline Holding Company. MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying notes.

 

This MD&A contains forward-looking statements; please see page 83 for more information

 

Significant components of the MD&A section include: Page
   
SECTION 1 – Overview  
The overview section provides a summary of the Company and our reportable business segments.  We also include a discussion of factors affecting our consolidated results of operations as well as items specific to each business segment. 52
   
SECTION 2 – Consolidated Results of Operations  
The consolidated results of operations section provides an analysis of our consolidated results on a reportable segment basis for the three and nine months ended September 30, 2012, against the comparable prior year periods.  Significant subsections within this section are as follows: 53
   
Summary Consolidated Results 53
Comparability of Results 57
Affordable Housing Equity 57
Affordable Housing Debt 62
Mortgage Banking 66
Asset Management 70
Corporate 71
Consolidated Partnerships 73
Expense Allocation 74
Eliminations and Adjustments 74
Income Taxes 75
Accounting Developments 75
Inflation 75
   
SECTON 3 - Financial Condition  
The financial condition section discusses our ability to generate adequate amounts of cash to meet our current and future needs.  Significant subsections within this section are as follows: 76
   
Liquidity 76
Cash Flows 77
Capital Resources 78
Redeemable Securities 82
Commitments and Contingencies 83
   
SECTION 4 – Forward Looking Statements 83

 

- 51 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

SECTION 1 – OVERVIEW

 

Centerline Holding Company (OTC: CLNH), through its subsidiaries, provides real estate financing and asset management services focused on affordable and conventional multifamily housing. We offer a range of both debt financing and equity investment products, as well as asset management services to developers, owners, and investors. We are structured to originate, underwrite, service, manage, refinance or sell assets through all phases of the asset’s life cycle. As a leading sponsor of Low-Income Housing Tax Credit (“LIHTC”) funds, we have raised more than $10 billion in equity across 137 funds. Today we manage $9.2 billion of investor equity within 115 funds and invested in approximately 1,200 assets located in 45 U.S. states. Our multifamily lending platform services $11.5 billion in loans and mortgage revenue bonds that we manage on behalf of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), known collectively as Government-Sponsored Enterprises (“GSEs”), as well as the Government National Mortgage Association (“Ginnie Mae”), and the Federal Housing Administration (“FHA”). Centerline Holding Company, or its predecessor entities, has been in continuous operation since 1972. Organized as a statutory trust created under the laws of Delaware, we conduct substantially all of our business through our subsidiaries, generally under the designation Centerline Capital Group. The terms “we”, “us”, “our” or “the Company” as used throughout this document refer to the business as a whole, or a subsidiary, while the term “parent trust” refers only to Centerline Holding Company as a stand-alone entity.

 

We manage our operations through six reportable segments. Our reportable segments include four core business segments and two additional segments: Corporate and Consolidated Partnerships. The four core business segments are: Affordable Housing Equity, Affordable Housing Debt, Mortgage Banking and Asset Management. Our Corporate segment includes: Finance and Accounting, Treasury, Legal, Marketing and Investor Relations, Operations and Risk Management, supporting our four core business segments. In our Consolidated Partnerships segment, we consolidate certain funds we control, notwithstanding the fact that we may have only a minority, and in most cases, negligible, economic interest.

 

Our professional staff has a unique blend of capital markets and real estate expertise, experience, and creativity to provide highly practical, customized solutions for real estate investors, developers, and owners. We pride ourselves on our strong underwriting protocols, solid credit processes and procedures, a superior asset management platform, creativity, flexibility, and the ability to react quickly to our customers’ needs. We built a growing debt origination platform with strong sponsor relationships, access to a variety of capital sources, and a stable fund management business with deep investor relationships. Most importantly, we have recruited and retained a team of talented professionals to manage, run, and build our businesses.

 

- 52 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

SECTION 2 – CONSOLIDATED RESULTS OF OPERATIONS

 

Summary Consolidated Results

 

Our summary consolidated results of operations for the three and nine months ended September 30, 2012 and 2011 are presented below.

 

    Three Months Ended September 30,    
    2012  2011    
                                                            
    Affordable  Affordable              Eliminations        Affordable  Affordable              Eliminations          
    Housing  Housing  Mortgage  Asset     Consolidated  and     % of  Housing  Housing  Mortgage  Asset     Consolidated  and     % of    
(in thousands)   Equity  Debt  Banking  Management  Corporate  Partnerships  Adjustments  Total  Revenues  Equity  Debt  Banking  Management  Corporate  Partnerships  Adjustments  Total  Revenues  % Change 
                                                            
Revenues                                                                              
Mortgage revenue bonds   $141  $10,116  $-  $-  $-  $-  $(6,707) $3,550   5.6% $151  $11,170  $-  $-  $-  $-  $(7,788) $3,533   6.7%  0.5%
Other interest income    954   5,714   1,133   -   10   -   (289)  7,522   11.8   555   4,992   965   -   27   -   (117)  6,422   12.2   17.1 
Interest income    1,095   15,830   1,133   -   10   -   (6,996)  11,072   17.4   706   16,162   965   -   27   -   (7,905)  9,955   18.9   11.2 
                                                                               
Fund sponsorship    4,922   -   -   -   -   -   (3,864)  1,058   1.7   6,316   -   -   -   -   -   (4,912)  1,404   2.7   (24.6)
Application and processing fees    -   48   -   -   -   -   -   48   0.1   -   26   -   -   -   -   -   26   -   84.6 
Asset management fees    -   -   -   5,523   -   -   (5,523)  -   -   -   -   -   5,775   -   -   (5,775)  -   -   - 
Mortgage origination fees    -   375   1,537   -   -   -   -   1,912   3.0   -   50   836   -   -   -   -   886   1.7   115.8 
Mortgage servicing fees    -   1,047   5,671   -   -   -   -   6,718   10.5   -   923   5,205   -   -   -   (208)  5,920   11.2   13.5 
Credit intermediation fees    594   -   -   -   -   -   (564)  30   -   1,170   -   -   -   -   -   (1,139)  31   0.1   (3.2)
Other fee income    -   253   288   -   -   -   (550)  (9)  -   -   -   112   -   -   -   -   112   0.2   (108.9)
Fee income    5,516   1,723   7,496   5,523   -   -   (10,501)  9,757   15.3   7,486   999   6,153   5,775   -   -   (12,034)  8,379   15.9   16.4 
                                                                               
Gain on sale of mortgage loans    -   1,338   14,023   -   -   -   -   15,361   24.1   -   94   7,304   -   -   -   -   7,398   14.1   107.6 
                                                                               
Prepayment penalties    -   -   372   -   -   -   -   372   0.6   -   -   106   -   -   -   -   106   0.2   250.9 
Expense reimbursement    1,800   -   -   -   100   -   (1,900)  -   -   1,921   -   -   -   100   -   (2,021)  -   -   - 
Miscellaneous    91   78   73   60   -   -   (1)  301   0.5   105   63   155   8   1   -   (45)  287   0.5   4.9 
Other revenues    1,891   78   445   60   100   -   (1,901)  673   1.1   2,026   63   261   8   101   -   (2,066)  393   0.7   71.2 
                                                                               
Revenues - consolidated partnerships    -   -   -   -   -   26,809   -   26,809   42.1   -   -   -   -   -   26,539   -   26,539   50.4   0.1 
Total revenues   $8,502  $18,969  $23,097  $5,583  $110  $26,809  $(19,398) $63,672   100.0% $10,218  $17,318  $14,683  $5,783  $128  $26,539  $(22,005) $52,664   100.0%  20.9%
                                                                               
Expenses                                                                              
Salary   $1,565  $957  $4,322  $1,757  $4,013  $-  $-  $12,614   19.8% $2,247  $460  $3,253  $2,549  $4,478  $-  $-  $12,987   24.7%  (2.9)%
Other general and administrative    3,591   2,171   3,952   575   6,738   -   (6,174)  10,853   17.0   6,755   2,427   2,548   365   6,983   -   (6,084)  12,994   24.7   (16.5)
General and administrative    5,156   3,128   8,274   2,332   10,751   -   (6,174)  23,467   36.8   9,002   2,887   5,801   2,914   11,461   -   (6,084)  25,981   49.4   (9.7)
                                                                               
Affordable Housing loss reserve (recovery)    13,349   -   -   -   -   -   -   13,349   21.0   (41,700)  -   -   -   -   -   -   (41,700)  (79.2)  (132.0)
(Reversal of) reserve for bad debt    (1,294)  -   -   -   -   -   -   (1,294)  (2.0)  975   -   -   -   -   -   -   975   1.9   (232.7)
(Recovery of) provision for risk-sharing obligations    -   (363)  883   -   -   -   -   520   0.8   -   -   -   -   -   -   -   -   -   N/A 
Stabilization escrow reserve recovery    -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Other provision for losses    -   -   -   -   2,163   -   -   2,163   3.4   -   -   -   -   -   -   -   -   -   N/A 
Lease termination costs    -   -   -   -   -   -   -   -   -   -   -   -   -   1,081   -   -   1,081   2.0   (100.0)
Provision for (recovery of) losses    12,055   (363)  883   -   2,163   -   -   14,738   23.2   (40,725)  -   -   -   1,081   -   -   (39,644)  (75.3)  (137.2)
                                                                               
Borrowing and financing    54   10,500   711   -   1,323   -   (26)  12,562   19.7   129   11,689   380   -   1,353   -   (231)  13,320   25.3   (5.7)
Derivatives - change in fair value    (98)  1,543   -   -   -   -   -   1,445   2.3   (614)  8,893   -   -   -   -   -   8,279   15.7   (82.5)
Preferred shares of subsidiary    -   960   -   -   -   -   -   960   1.5   -   960   -   -   -   -   -   960   1.8   - 
Interest expense    (44)  13,003   711   -   1,323   -   (26)  14,967   23.5   (485)  21,542   380   -   1,353   -   (231)  22,559   42.8   (33.7)
                                                                               
Depreciation and amortization    37   385   2,948   53   273   -   -   3,696   5.8   53   295   2,874   80   410   -   -   3,712   7.0   (0.4)
Interest expense - consolidated partnerships    -   -   -   -   -   13,552   (6,922)  6,630   10.4   -   -   -   -   -   12,723   (7,804)  4,919   9.3   34.8 
Other expense - consolidated partnerships    -   -   -   -   -   101,494   (6,203)  95,291   149.7   -   -   -   -   -   53,551   (7,948)  45,603   86.6   109.0 
Total expenses   $17,204  $16,153  $12,816  $2,385  $14,510  $115,046  $(19,325) $158,789   249.4% $(32,155) $24,724  $9,055  $2,994  $14,305  $66,274  $(22,067) $63,130   119.8%  151.5%

 

- 53 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

    Three Months Ended September 30,    
    2012  2011    
    Affordable  Affordable              Eliminations        Affordable  Affordable              Eliminations          
    Housing  Housing  Mortgage  Asset     Consolidated  and     % of  Housing  Housing  Mortgage  Asset     Consolidated  and     % of    
(in thousands)   Equity  Debt  Banking  Management  Corporate  Partnerships  Adjustments  Total  Revenues  Equity  Debt  Banking  Management  Corporate  Partnerships  Adjustments  Total  Revenues  % Change 
                                                            
Equity and other income (loss)   $55  $-  $-  $-  $-  $-  $-  $55   0.1% $-  $-  $-  $-  $-  $-  $-  $-   -%  N/A %
Gain on settlement of liabilities    -   -   -   -   493   -   -   493   0.8   -   -   -   -   -   -   -   -   -   N/A 
Gain from repayment or sale of investments    420   -   178   -   -   -   -   598   0.9   (18)  150   -   -   -   -   -   132   0.3   353.0 
Other losses – consolidated partnerships    -   -   -   -   -   (56,684)  -   (56,684)  (89.0)  -   -   -   -   -   (53,798)  -   (53,798)  (102.2)  5.4 
Other income (loss)    475   -   178   -   493   (56,684)  -   (55,538)  (87.2)  (18)  150   -   -   -   (53,798)  -   (53,666)  (101.9)  3.5 
                                                                               
Income tax benefit    -   -   -   -   652   -   -   652   1.0   -   -   -   -   87   -   -   87   0.1   N/M 
Net (loss) income    (8,227)  2,816   10,459   3,198   (13,255)  (144,921)  (73)  (150,003)  (235.6)  42,355   (7,256)  5,628   2,789   (14,090)  (93,533)  62   (64,045)  (121.6)  134.2 
Allocation – preferred shares    -   1,556   -   -   -   -   -   1,556   2.4   -   1,556   -   -   -   -   -   1,556   3.0   - 
Allocation – non-controlling interests    (876)  -   -   -   -   -   -   (876)  (1.4)  4,114   -   -   -   -   -   -   4,114   7.8   (121.3)
Allocation – consolidated partnerships    -   -   -   -   -   (144,920)  -   (144,920)  (227.6)  -   -   -   -   -   (93,530)  -   (93,530)  (177.6)  54.9 
Net (income) loss attributable to non-controlling interest    (876)  1,556   -   -   -   (144,920)  -   (144,240)  (226.6)  4,114   1,556   -   -   -   (93,530)  -   (87,860)  (166.8)  64.2 
Net (loss) income attributable to Centerline Holding Company shareholders, pre-allocations    (7,351)  1,260   10,459   3,198   (13,255)  (1)  (73)  (5,763)  (9.0)  38,241   (8,812)  5,628   2,789   (14,090)  (3)  62   23,815   45.2   (124.2)
Inter-segment expense allocation    2,051   3,539   2,912   2,656   (11,158)  -   -   -   -   2,535   2,244   3,142   3,696   (11,617)  -   -   -   -   - 
Net  (loss) income attributable to Centerline Holding Company shareholders   $(9,402) $(2,279) $7,547  $542  $(2,097) $(1) $(73) $(5,763)  (9.0)% $35,706  $(11,056) $2,486  $(907) $(2,473) $(3) $62  $23,815   45.2%  (124.2)%

 

N/M – Not meaningful.

N/A – Not applicable.

 

- 54 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

    Nine Months Ended September 30,    
    2012  2011    
                                                            
    Affordable  Affordable              Eliminations        Affordable  Affordable              Eliminations          
    Housing  Housing  Mortgage  Asset     Consolidated  and     % of  Housing  Housing  Mortgage  Asset     Consolidated  and     % of    
(in thousands)   Equity  Debt  Banking  Management  Corporate  Partnerships  Adjustments  Total  Revenues  Equity  Debt  Banking  Management  Corporate  Partnerships  Adjustments  Total  Revenues  % Change 
                                                            
Revenues                                                                              
Mortgage revenue bonds   $431  $35,852  $-  $-  $-  $-  $(23,198) $13,085   7.1% $463  $36,468  $-  $-  $-  $-  $(24,296) $12,635   8.0%  3.6%
Other interest income    2,922   15,709   3,261   -   26   -   (1,030)  20,888   11.3   2,212   12,621   2,867   -   63   -   (350)  17,413   11.0   20.0 
Interest income    3,353   51,561   3,261   -   26   -   (24,228)  33,973   18.4   2,675   49,089   2,867   -   63   -   (24,646)  30,048   19.0   13.1 
                                                                               
Fund sponsorship    15,572   -   -   -   -   -   (11,763)  3,809   2.1   19,908   -   -   -   -   -   (16,126)  3,782   2.4   0.7 
Application and processing fees    -   148   -   -   -   -   -   148   0.1   -   139   -   -   -   -   -   139   0.1   6.5 
Asset management fees    -   -   -   16,765   -   -   (16,765)  -   -   -   -   -   17,552   -   -   (17,552)  -   -   - 
Mortgage origination fees    -   1,157   4,314   -   -   -   -   5,471   3.0   -   421   2,787   -   -   -   -   3,208   2.0   70.5 
Mortgage servicing fees    -   3,022   16,486   -   -   -   -   19,508   10.6   -   2,758   15,172   -   -   -   (623)  17,307   10.9   12.7 
Credit intermediation fees    2,007   -   -   -   -   -   (1,917)  90   -   3,507   -   -   -   -   -   (3,417)  90   0.1   - 
Other fee income    -   253   646   -   -   -   (959)  (60)  -   -   -   412   -   -   -   -   412   0.3   (114.6)
Fee income    17,579   4,580   21,446   16,765   -   -   (31,404)  28,966   15.8   23,415   3,318   18,371   17,552   -   -   (37,718)  24,938   15.8   16.2 
                                                                               
Gain on sale of mortgage loans    -   4,730   32,013   -   -   -   -   36,743   19.9   -   1,535   19,334   -   -   -   -   20,869   13.2   76.1 
                                                                               
Prepayment penalties    -   -   932   -   -   -   -   932   0.5   -   -   265   -   -   -   -   265   0.2   251.7 
Expense reimbursement    4,966   -   -   -   300   -   (5,266)  -   -   5,968   -   -   -   300   -   (5,769)  499   0.3   (100.0)
Miscellaneous    530   185   1,245   65   58   -   (3)  2,080   1.1   511   128   480   77   2   -   -   1,198   0.8   73.6 
Other revenues    5,496   185   2,177   65   358   -   (5,269)  3,012   1.6   6,479   128   745   77   302   -   (5,769)  1,962   1.3   53.5 
                                                                               
Revenues - consolidated partnerships    -   -   -   -   -   81,590   -   81,590   44.3   -   -   -   -   -   80,011   -   80,011   50.7   2.0 
Total revenues   $26,428  $61,056  $58,897  $16,830  $384  $81,590  $(60,901) $184,284   100.0% $32,569  $54,070  $41,317  $17,629  $365  $80,011  $(68,133) $157,828   100.0%  16.8%
                                                                               
Expenses                                                                              
Salary   $5,219  $3,196  $12,697  $5,568  $11,839  $-  $-  $38,519   20.9% $6,070  $975  $9,331  $6,255  $12,160  $-  $-  $34,791   22.0%  10.7%
Other general and administrative    17,200   6,476   10,308   1,672   21,232   -   (18,027)  38,861   21.1   20,614   6,610   7,457   1,408   19,502   -   (18,509)  37,082   23.5   4.8 
General and administrative    22,419   9,672   23,005   7,240   33,071   -   (18,027)  77,380   42.0   26,684   7,585   16,788   7,663   31,662   -   (18,509)  71,873   45.5   7.7 
                                                                               
Affordable Housing loss reserve recovery    (7,750)  -   -   -   -   -   -   (7,750)  (4.2)  (57,700)  -   -   -   -   -   -   (57,700)  (36.6)  (86.6)
Bad debt reserves    47,335   -   -   -   -   -   2   47,337   25.7   8,076   -   -   -   -   -   -   8,076   5.1   486.1 
(Recovery of) provision for risk-sharing obligations    -   (363)  (654)  -   -   -   -   (1,017)  (0.6)  -   238   -   -   -   -   -   238   0.2   N/M 
Stabilization escrow reserve recovery    -   (23,549)  -   -   -   -   -   (23,549)  (12.8)  -   -   -   -   -   -   -   -   -   N/A 
Other provision for losses    -   -   -   -   2,163   -   -   2,163   1.2   -   -   -   -   -   -   -   -   -   N/A 
Lease termination costs    -   -   -   -   3,318   -   -   3,318   1.8   -   -   -   -   1,081   -   -   1,081   0.7   206.9 
Provision for (recovery of) losses    39,585   (23,912)  (654)  -   5,481   -   2   20,502   11.1   (49,624)  238   -   -   1,081   -   -   (48,305)  (30.6)  (142.4)
                                                                               
Borrowing and financing    381   33,799   1,874   -   3,945   -   (202)  39,797   21.6   1,398   35,665   1,021   -   3,956   -   (684)  41,356   26.2   (3.8)
Derivatives - change in fair value    (292)  4,687   -   -   -   -   -   4,395   2.4   (752)  10,569   -   -   -   -   -   9,817   6.2   (55.2)
Preferred shares of subsidiary    -   2,880   -   -   -   -   -   2,880   1.6   -   2,880   -   -   -   -   -   2,880   1.8   - 
Interest expense    89   41,366   1,874   -   3,945   -   (202)  47,072   25.6   646   49,114   1,021   -   3,956   -   (684)  54,053   34.2   (12.9)
                                                                               
Depreciation and amortization    110   1,268   9,544   146   880   -   -   11,948   6.5   134   1,136   8,285   193   1,218   -   -   10,966   6.9   9.0 
Interest expense - consolidated partnerships    -   -   -   -   -   40,140   (23,988)  16,152   8.8   -   -   -   -   -   37,925   (24,341)  13,584   8.6   18.9 
Other expense - consolidated partnerships    -   -   -   -   -   222,610   (18,571)  204,039   110.7   -   -   -   -   -   249,210   (24,924)  224,286   142.1   (9.0)
Total expenses   $62,203  $28,394  $33,769  $7,386  $43,377  $262,750  $(60,786) $377,093   204.7% $(22,160) $58,073  $26,094  $7,856  $37,917  $287,135  $(68,458) $326,457   206.7%  15.5%

 

- 55 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

    Nine Months Ended September 30,    
    2012  2011    
                                                            
    Affordable  Affordable              Eliminations        Affordable  Affordable              Eliminations          
    Housing  Housing  Mortgage  Asset     Consolidated  and     % of  Housing  Housing  Mortgage  Asset     Consolidated  and     % of    
(in thousands)   Equity  Debt  Banking  Management  Corporate  Partnerships  Adjustments  Total  Revenues  Equity  Debt  Banking  Management  Corporate  Partnerships  Adjustments  Total  Revenues  % Change 
                                                            
Equity and other income (loss)   $113  $-  $-  $-  $-  $-  $-  $113   0.1% $-  $-  $-  $-  $-  $-  $-  $-   - %  N/A%
Gain on settlement of liabilities    -   -   -   -   493   -   -   493   0.3   2,612   -   -   -   1,756   -   -   4,368   2.8   (88.7)
Gain from repayment or sale of investments    445   795   179   -   -   -   -   1,419   0.8   136   1,320   -   -   -   -   -   1,456   0.9   (2.5)
Other losses – consolidated partnerships    -   -   -   -   -   (277,403)  -   (277,403)  (150.5)  -   -   -   -   -   (237,834)  -   (237,834)  (150.7)  16.6 
Other income (loss)    558   795   179   -   493   (277,403)  -   (275,378)  (149.3)  2,748   1,320   -   -   1,756   (237,834)  -   (232,010)  (147.0)  18.7 
                                                                               
Income tax benefit/(provision)– continuing operations    -   -   -   -   505   -   -   505   0.3   -   -   -   -   (93)  -   -   (93)  (0.1)  N/M 
Net (loss) income  continuing operations    (35,217)  33,457   25,307   9,444   (41,995)  (458,563)  (115)  (467,682)  (253.7)  57,477   (2,683)  15,223   9,773   (35,889)  (444,958)  325   (400,732)  (253.8)  16.7 
Allocation – preferred shares    -   4,669   -   -   -   -       4,669   2.5   -   4,669   -   -   -   -   -   4,669   3.0   - 
Allocation – non-controlling interests    (691)  -   -   -   -   -       (691)  (0.4)  5,544   -   -   -   -   -   -   5,544   3.5   (112.5)
Allocation – consolidated partnerships    -   -   -   -   -   (458,556)      (458,556)  (248.8)  -   -   -   -   -   (444,951)  -   (444,951)  (281.9)  3.1 
Net (income) loss attributable to non-controlling interest – continuing operations    (691)  4,669   -   -   -   (458,556)  -   (454,578)  (246.7)  5,544   4,669   -   -   -   (444,951)  -   (434,738)  (275.4)  4.6 
Net (loss) income attributable to Centerline Holding Company shareholders - continuing operations, pre-allocations    (34,526)  28,788   25,307   9,444   (41,995)  (7)  (115)  (13,104)  (7.0)  51,933   (7,352)  15,223   9,773   (35,889)  (7)  325   34,006   21.4   (138.5)
Inter-segment expense allocation    6,658   9,144   8,903   9,165   (33,870)  -   -   -   -   6,567   5,776   7,900   9,742   (29,985)  -   -   -   -   - 
Net (loss) income attributable to Centerline Holding Company shareholders – continuing operations   $(41,184) $19,644  $16,404  $279  $(8,125) $(7) $(115) $(13,104)  (7.0)% $45,366  $(13,128) $7,323  $31  $(5,904) $(7) $325  $34,006   21.4%  (138.5)%
                                                                               
Net income attributable to Centerline Holding Company shareholders – discontinued operations                                -                                   253   0.2   (100.0)
Total (loss) income attributable to Centerline Holding Company shareholders                               $(13,104)  (7.0)%                             $34,259   21.6%  (138.2)%

 

N/M – Not meaningful.

N/A – Not applicable.

 

- 56 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Comparability of Results

 

Prior period segment results were reclassified to reflect the presentation of Affordable Housing Equity and Affordable Housing Debt as reportable segments in 2011 and the Company’s 2011 decision to allocate certain Corporate overhead to the Affordable Housing Equity, Affordable Housing Debt, Mortgage Banking and Asset Management segments.

 

Net income or loss is defined as the net result of total company operations, prior to allocation of income or loss to non-controlling interests. As the funds our Affordable Housing Equity segment originates and manages (“Tax Credit Fund Partnerships”) by design generate non-cash losses, primarily related to depreciation expense on real estate assets, we expect to record net losses for the foreseeable future as they represent a significant portion of our consolidated operations. After allocation of income or loss to non-controlling interests, we recorded net loss attributable to our shareholders for the three and nine months ended September 30, 2012 and net income attributable to our shareholders for the three and nine months ended September 30, 2011. For the periods presented, we highlight in the table below those items, principally non-cash in nature, which impact the comparability of results from period to period. Such items are shown prior to any adjustments for tax and allocations to non-controlling interests and are discussed within this section:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(in thousands)  2012   2011   2012   2011 
                 
Reduction/(Increase) to net income:                    
                     
Other items:                    
Affordable Housing Equity segment:                    
Affordable housing loss reserve (recovery)  $13,349   $(41,700)  $(7,750)  $(57,700)
(Reversals of) reserves for bad debt   (1,294)   975    47,335    8,076 
Assumption fee relating to restructuring of credit intermediation agreements   (1,270)   1,307    2,402    3,599 
Change in fair value of derivatives   (98)   (614)   (292)   (752)
Gain on settlement of liabilities   -    -    -    (2,612)
                     
Affordable Housing Debt segment:                    
Stabilization escrow reserve recovery   -    -    (23,549)   - 
(Recovery of) provision for risk-sharing obligations   (363)   -    (363)   238 
Change in fair value of derivatives   1,543    8,893    4,687    10,569 
                     
Mortgage Banking segment:                    
Provision for (recovery of) risk sharing obligations   883    -    (654)   - 
                     
Corporate segment:                    
Gain on settlement of liabilities   (493)   -    (493)   (1,756)
Lease termination costs   -    1,081    3,318    1,081 
Other provision for losses   2,163    -    2,163    - 

 

Affordable Housing Equity

 

Our Affordable Housing Equity segment provides equity financing to properties that benefit from the LIHTC or other financial structures (collectively “Tax Credit”) intended to promote development of affordable multifamily housing properties. We sponsor and manage Tax Credit Fund Partnerships for institutional and retail investors who invest in affordable housing properties nationwide. During 2011 and the nine months ended September 30, 2012 we raised $142.2 million and $1.4 million, respectively, of gross equity for these new Tax Credit Fund Partnerships, of which we have invested $124.7 million and $18.9 million in property acquisitions during 2011 and the nine months ended September 30, 2012, respectively. We have closed one fund during 2012. We will continue to actively pursue new opportunities going forward and have been acquiring limited partnership interests in entities that own tax credit properties for potential inclusion in future Tax Credit Fund Partnership offerings. Due to current market conditions and the increased capital needed to effectively aggregate product for multi-investor structures which we do not currently have available to us, we expect that our Tax Credit Fund Partnership offerings in the near term will be single-investor structures. We will consider multi-investor structures should market conditions and our liquidity position permit. Further, investors’ concerns related to our inability to comply with certain covenants contained in our Credit Agreement and its long-term impact on our financial position has negatively impacted our ability to raise equity for single-investor and multi-investor structures.

 

- 57 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

In addition, we began syndicating tax credit products that we do not have any continuing involvement in since we will not manage, control or retain any interest in these tax credit products going forward. These syndications will generate origination fees that will be recognized as fund sponsorship fee income.

 

The Tax Credit Fund Partnerships are required to hold their investments in property-level partnerships until the end of their LIHTC compliance period which is generally 15 years. In 2011, there were a large volume of property dispositions as a result of an increase in properties reaching the end of their compliance period. These dispositions generated significant cash proceeds resulting in the recognition of asset management fees and expense reimbursements previously deemed to be uncollectable as well as an increase in the recognition of disposition fees. We anticipate that there will continue to be a volume of dispositions in the coming year that is consistent with prior years, although there is no certainty as to the level of proceeds to be generated as a result of these dispositions.

 

Revenues

 

For a description of our revenue recognition policies, see Note 2 to our 2011 Form 10-K.

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
Interest income:                              
Mortgage revenue bond interest income  $141   $151    (6.6)%  $431   $463    (6.9)%
Other interest income   954    555    71.9    2,922    2,212    32.1 
Fee income:                              
Fund sponsorship   4,922    6,316    (22.1)   15,572    19,908    (21.8)
Credit intermediation fees   594    1,170    (49.2)   2,007    3,507    (42.8)
Other revenue:                              
Expense reimbursements   1,800    1,921    (6.3)   4,966    5,968    (16.8)
Miscellaneous   91    105    (13.3)   530    511    3.7 
                               
Total revenues  $8,502   $10,218    (16.8)%  $26,428   $32,569    (18.9)%

 

Interest Income

 

Other Interest Income

 

Other interest income includes interest on voluntary loans provided to Tax Credit Fund Partnerships related to property advances, as well as interest earned on short term and other investments.

 

Fee Income

 

Fee income in our Affordable Housing Equity segment includes income generated from Consolidated Partnerships which is eliminated in consolidation.

 

- 58 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Fund Sponsorship

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
Fees based on equity invested                              
Property acquisition fees  $160   $292    (45.2)%  $394   $2,053    (80.8)%
Organization, offering and acquisition allowance fees   143    259    (44.8)   506    1,825    (72.3)
                               
Fees based on management of sponsored Tax Credit Fund Partnerships                              
Partnership management fees   531    1,197    (55.6)   2,122    3,899    (45.6)
Asset management fees   2,718    2,151    26.4    7,567    6,364    18.9 
Other fee income   1,370    2,417    (43.3)   4,983    5,767    (13.6)
                               
Total fund sponsorship fee income  $4,922   $6,316    (22.1)%  $15,572   $19,908    (21.8)%
                               
Assets under management – Tax Credit Fund Partnerships  $9,184,108   $9,262,343    (0.8)%               
Equity raised by Tax Credit Fund Partnerships  $-   $3,990    (100.0)%  $1,417   $123,240    (98.9)%
Equity invested by Tax Credit Fund Partnerships(1)  $7,128   $16,950    (57.9)%  $18,943   $95,248    (80.1)%

 

(1)Excludes warehoused properties that have not yet closed into a Tax Credit Fund Partnership.

 

Fees Based on Equity Invested

 

While we may acquire properties on an ongoing basis throughout the year and recognize revenue based on equity invested, we do not recognize property acquisition fees until we place the property into a sponsored Tax Credit Fund Partnership. Therefore, a change in timing of a Tax Credit Fund Partnership closure may impact the level of revenues we recognize in a given period. Additionally, the type of Tax Credit Fund Partnership originated (whether for a single investor, multiple investors or one with specified rates of return) can affect the level of revenues as the fee rate for each varies. The decrease in fees based on equity invested is the result of the decrease in equity invested and property acquisitions.

 

Fees Based on Management of Sponsored Tax Credit Fund Partnerships

 

We collect partnership management fees at the time a Tax Credit Fund Partnership closes and recognize them over the first five years of a Tax Credit Fund Partnership’s life. Due to the expiration of the five-year service period for certain Tax Credit Fund Partnerships, these fees have decreased for the three and nine months ended September 30, 2012 and will continue to decrease throughout 2012. These decreases would be partially offset should we originate any new Tax Credit Fund Partnerships.

 

Asset management fees are collected over the life of a Tax Credit Fund Partnership and recognized as earned to the extent that the Tax Credit Fund Partnership has available cash flow. The increase in asset management fees in 2012 was primarily related to fees collected from certain investment funds which have an increase in available cash flow from the disposition of property-level partnerships. Although we anticipate a consistent level of property dispositions to continue within the coming year, due to the volatility in the real estate market, there is uncertainty in the amount of proceeds the Tax Credit Fund Partnerships will receive and the amount of fees that will be generated.

 

Other fund management fee income includes administrative fees, disposition fees and credit intermediation fees. The decrease in 2012 as compared to 2011 is primarily a result of fewer dispositions during 2012.

 

Credit Intermediation Fees

 

We collect credit intermediation fees at the time a Tax Credit Fund Partnership closes and recognize them over the fund’s life based on risk weighted periods on a straight-line basis. As the Affordable Housing Equity segment no longer provides credit intermediation for any new Tax Credit Fund Partnerships or any other new business, this fee stream will continue to decline as the revenue recognition period ends for certain Tax Credit Fund Partnerships.

 

- 59 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Other Revenues

 

The decrease of $0.1 million and $1.0 million for the three and nine months ended September 30, 2012 was primarily related to a reduction in expense reimbursements due to a decrease in the number of Tax Credit Fund Partnerships with available cash flow to pay expense reimbursements.

 

Expenses

 

Expenses for the Affordable Housing Equity segment for the periods ended September 30 were as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
General and administrative expenses:                              
Salaries and benefits  $1,565   $2,247    (30.4)%  $5,219   $6,070    (14.0)%
Other   3,591    6,755    (46.8)   17,200    20,614    (16.6)
Total general and administrative   5,156    9,002    (42.7)   22,419    26,684    (16.0)
Provision for (recovery of) losses   12,055    (40,725)   (129.6)   39,585    (49,624)   (179.8)
Interest expense:                              
Borrowings and financings   54    129    (58.1)   381    1,398    (72.7)
Derivatives – change in fair value   (98)   (614)   (84.0)   (292)   (752)   (61.2)
Depreciation and amortization   37    53    (30.2)   110    134    (17.9)
                               
Total expenses  $17,204   $(32,155)   (153.5)%  $62,203   $(22,160)   (380.7)%

 

General and Administrative

 

Other

 

Assumption fees decreased by $2.6 million and $1.2 million for the three and nine months ended September 30, 2012, respectively, due to a decrease in the net assets of a subsidiary on which the fee is based (see further discussion in Note 21 under Affordable Housing Transactions to the condensed consolidated financial statements).

 

Other general and administrative expenses decreased by $0.6 million and $2.8 million for the three and nine months ended September 30, 2012, respectively primarily due to a decrease in acquisition expenses resulting from a decrease in property acquisitions.

 

Provision for (recovery of) Losses

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
Affordable Housing loss reserve (recovery)  $13,349   $(41,700)   (132.0)%  $(7,750)  $(57,700)   (86.6)%
(Reversal of) reserve for bad debt   (1,294)   975    (232.7)   47,335    8,076    486.1 
                               
Total provision for (recovery of) losses  $12,055   $(40,725)   (129.6)%  $39,585   $(49,624)   (179.8)%

 

Affordable Housing loss reserve pertains to our expectation to restructure certain mortgage revenue bonds held by property-level partnerships for which we have assumed the role of general partner or for which we have foreclosed upon the property (“Tax Credit Property Partnerships”) which are owned by our Tax Credit Fund Partnerships which have entered into credit intermediation agreements made by our subsidiaries. The reserve also pertains to probable payments we would either make under our credit intermediation agreements, or to cover shortfalls at Tax Credit Property Partnerships in order to ensure that the limited partners in the Tax Credit Fund Partnerships do not lose their tax benefits. In 2011, as we worked with parties that have an economic interest in the properties that secure mortgage revenue bonds associated with our credit intermediation agreements, we estimated the payments that were required to be made from various sources in order to reduce the principal balance of certain mortgage revenue bonds to levels agreed to in the March 2010 agreements with such counterparties. Bad debt expenses recorded in 2011 are primarily the result of the increase in reserve recorded against property advances to Tax Credit Fund Partnerships.

 

- 60 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

In 2012, changes to the Affordable Housing loss reserve is a result of payments that were made during June 2012 in order to complete the restructuring of 21 mortgage revenue bonds collateralized with 17 underlying properties (the “Merrill Restructuring”) utilizing collateral held by counterparties for which reserves were previously recorded. As a result, this portion of the Affordable Housing loss reserve was reversed. Partly offsetting this reversal is a $13.3 million increase in the Affordable Housing loss reserve resulting from payments expected to be made under our credit intermediation agreements due to a probable property foreclosure as well as an increase in payments expected to be made over the life of these investments to cover shortfalls at Tax Credit Property Partnerships. As part of the Merrill Restructuring we advanced funds to certain Tax Credit Fund Partnerships to allow them to make supplemental loans to the applicable Tax Credit Property Partnerships in which they invest to allow them to repay their debt. Bad debt reserves represent advances or supplemental loans we do not expect to collect, mainly relating to the advances made as part of the Merrill Restructuring.

 

Partially offsetting the increase in provision for losses in the Affordable Housing Equity segment in 2012 is the $23.5 million recovery of stabilization escrow used in the Merrill Restructuring and recorded in the Affordable Housing Debt segment.

 

Interest Expense

 

Interest expense on borrowings and financings decreased by $0.1 million and $1.0 million for the three and nine months ended September 30, respectively, primarily due to the payoff of the Centerline Financial Holdings LLC (“CFin Holdings”) credit facility in June 2011.

 

Other Income

 

Other income for the Affordable Housing Equity segment for the periods ended September 30 were as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
Equity and other income  $55   $-    N/A%  $113   $-    N/A%
Gain on settlement of liabilities   -    -    -    -    2,612    (100.0)
Gain from repayment or sales of investments   420    (18)   N/M    445    136    227.2 
                               
Total other income (loss)  $475   $(18)   N/M%  $558   $2,748    (79.7)%

 

N/A - Not applicable.

N/M - Not meaningful.

 

Gain on settlement of liabilities

 

The $2.6 million recorded during 2011 relates to previously accrued and capitalized interest on the CFin Holdings credit facility, which was waived upon the payment of the original principal amount of the facility and its subsequent termination.

 

- 61 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Profitability

 

Profitability for the Affordable Housing Equity segment for the periods ended September 30 was as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
(Loss) income before other allocations  $(8,227)  $42,355    (119.4)%  $(35,217)  $57,477    (161.3)%
Net (loss) income  $(9,402)  $35,706    (126.3)%  $(41,184)  $45,366    (190.8)%

 

The change in income before other allocations reflects the revenues and expense changes discussed above. Incremental costs incorporated in net income include allocations to the perpetual Centerline Equity Issuer Trust (“Equity Issuer”) preferred shares.

 

Affordable Housing Debt

 

The Affordable Housing Debt segment is responsible for providing financing to developers and owners of affordable multifamily properties. We originate and service affordable housing multifamily loans under the GSE and FHA programs. We have risk-sharing obligations on most loans we originate under the Fannie Mae Delegated Underwriting Servicer (“DUS”) program. For a majority of loans originated under the DUS program, we absorb the first 5% of any losses on the unpaid principal balance of a loan if a default occurs; above 5% we share a percentage of the loss with Fannie Mae, with our maximum loss capped at 20% of the unpaid principal balance of a loan. We also have risk-sharing obligations on loans we originated under the Freddie Mac Delegated Underwriting Initiative (“DUI”) program. For loans that we originated under the DUI program, we are obligated to reimburse Freddie Mac for a portion of any loss that may result from borrower defaults in DUI transactions. For such loans, our share of the standard loss will be the first 5% of the unpaid principal balance and 25% of the next 20% of the remaining unpaid principal balance to a maximum of 10% of the unpaid principal balance. We are no longer originating loans under DUI, as this program is no longer available. Future loans originated under the Freddie Mac Targeted Affordable Housing (“TAH”) program will not have a risk-sharing obligation from the Company.

 

Historically, we acquired mortgage revenue bonds that financed affordable multifamily housing projects, using our balance sheet for the initial acquisition. In December 2007, we re-securitized a major portion of our affordable housing mortgage revenue bond portfolio with Freddie Mac, which for accounting purposes, was treated as a sale with the exception of mortgage revenue bonds that were transferred into special servicing. We retained senior Freddie Mac credit-enhanced certificates that collateralize the preferred shares of one of our subsidiaries, a high-yielding residual interest in the portfolio, and servicing rights, as part of the re-securitization transaction. As a result of the re-securitization transaction, we earn interest income on the retained certificates, the interest income allocated to the high-yielding residual interest, and ongoing servicing fees.

 

In an effort to expand our affordable debt platform and accelerate our production volume, we have recruited a highly experienced FHA and affordable debt team. We believe that expanding our affordable debt platform will also provide further expertise and diversification of our product offering which will directly benefit our LIHTC equity business. The Affordable Housing Debt segment currently has origination personnel in New York, Atlanta, Denver, Minneapolis, and Dallas with underwriting in New York, Atlanta, Birmingham and Dallas.

 

- 62 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Revenues

 

For a description of our revenue recognition policies, see Note 2 to our 2011 Form 10-K.

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
Interest income:                              
Mortgage revenue bond interest income  $10,116   $11,170    (9.4)%  $35,852   $36,468    (1.7)%
Other interest income   5,714    4,992    14.5    15,709    12,621    24.5 
Fee income:                              
Application and processing fees   48    26    84.6    148    139    6.5 
Mortgage origination fees   375    50    N/M    1,157    421    174.8 
Mortgage servicing fees   1,047    923    13.4    3,022    2,758    9.6 
Other fee income   253    -    N/A    253    -    N/A 
Other revenues:                              
Gain on sale of mortgage loans   1,338    94    N/M    4,730    1,535    208.1 
Miscellaneous   78    63    23.8    185    128    44.5 
                               
Total revenues  $18,969   $17,318    9.5%  $61,056   $54,070    12.9%

 

N/A - Not applicable.

N/M - Not meaningful.

 

Interest Income

 

Mortgage Revenue Bond Interest Income

 

Our role as special servicer of the mortgage revenue bonds allows us to repurchase those bonds from the December 2007 re-securitization that are in special servicing. Accordingly, we re-recognize bonds as assets when transferring them into special servicing and de-recognize bonds when transferring them out of special servicing. The decrease in mortgage revenue bond interest income for the three and nine months ended September 30, 2012, is primarily due to the decrease in the average unpaid principal balance (as shown in the table below).

 

The following table presents information related to our mortgage revenue bond interest income:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
Average number of bonds on the balance sheet not receiving sale recognition   88    96    (8.3)%   92    96    (4.2)%
Average balance (unpaid principal balance)  $737,221   $835,581    (11.8)%  $787,896   $851,408    (7.5)%
Weighted average yield   5.49%   5.35%        6.07%   5.71%     

 

Other Interest Income

 

Other interest income includes the interest recorded on retained interests from the 2007 re-securitization transaction primarily related to the Series A-1 Freddie Mac Certificates in the amount of $5.5 million and Series B Freddie Mac Certificates in the amount of $9.9 million. The increase in other interest income of $3.1 million for the nine months ended September 30, 2012 is primarily due to an increase in the effective yield of the Series B Freddie Mac certificates from 40.32% in 2011 to 78.28% in 2012 due to the increase in projected cash flows subsequent to the impairments recorded in prior years as a result of the restructuring of certain bonds.

 

- 63 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Fee Income

 

Mortgage Origination Fees

 

Affordable Housing Debt mortgage loan originations for the periods ended September 30 were as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2012       2011   % Change   2012       2011   % Change 
                                 
Total mortgage origination activity(1)  $40,241        $4,060    891.2%  $89,126        $19,507    356.9%
Mortgages originated in prior periods  and sold during the period   4,911         -         54,557         17,000      
Less: mortgages originated but not yet sold(2)   (10,856)        (2,560)        (10,855)        (2,560)     
Total mortgage origination activity recognized for GAAP and for which revenue is recognized  $34,296        $1,500    2,186.4%  $132,828        $33,947    291.3%
                                         
         % of Total         % of Total         % of Total         % of Total 
                                         
Fannie Mae  $29,385    85.7%  $1,500    100.0%  $127,917    96.3%  $33,947    100.0%
FHA(3)   4,911    14.3    -    -    4,911    3.7    -    - 
   $34,296    100.0%  $1,500    100.0%  $132,828    100.0%  $33,947    100.0%

 

(1)Includes all mortgages funded during the period.
(2)Included in Other Investments – mortgage loans held for sale.
(3)Includes a $2.5 million construction loan, of which $1.9 million had been funded through September 30, 2012.

 

Our mortgage origination volume recognized for generally accepted accounting principles (“GAAP”) purposes increased by 2,186% and 291% for the three and nine months ended September 30, 2012, respectively, primarily due to the hiring of a highly experienced affordable debt team during the second half of 2011, resulting in increased loan origination capabilities and execution. We have several affordable housing debt origination and underwriting teams, geographically disbursed, to help us achieve future origination goals. For the three and nine months ended September 30, 2012, we originated 7 and 22 loans in the aggregate amount of $34.3 million and $132.8 million, respectively, as compared to 1 and 9 loans in the aggregate amount of $1.5 million and $33.9 million during the same periods of 2011. Primarily due to pricing, our 2012 originations earned higher trading premiums, which resulted in mortgage origination revenue not increasing proportionally to origination volume.

 

Mortgage Servicing Fees

 

Mortgage servicing fees increased in the three and nine months ended September 30, 2012 due to an increase in the Affordable Housing Debt loan servicing portfolio year over year. These increases can be attributed to an increase in new originations towards the end of 2011 and into 2012, creating a larger portfolio balance and an increase in servicing fee revenue. Originations made in 2012 were adequate to offset loan payoffs and maturities in the portfolio.

 

Other Fee Income

 

Other fee income represents revenue received from the mortgage banking segment for market rate loan referrals.  During 2012, the affordable debt originators referred two market rate loans with an aggregate unpaid principal balance of $12.4 million to mortgage banking, earning $0.3 million in fees.  There were no such loan referrals made in prior periods.

 

Our portfolio balances at September 30, 2012 and 2011 were as follows:

 

   September 30, 
(dollars in thousands)  2012   2011   % Change 
                
Primary servicing portfolio  $646,935   $475,752    36.0%

 

- 64 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Other Revenues

 

Gain on Sale of Mortgage Loans

 

We experienced an increase in gain on sales of loans for the three and nine months ended September 30, 2012 as compared to the same periods in 2011 due to an increase in mortgage servicing rights (“MSR”) balances and premium revenues received on new loans originated.  The valuation of new MSRs resulted in increased revenue of $0.8 million and $2.0 million and premium revenues increased by $0.5 million and $1.2 million, respectively, in the 2012 periods as compared to the 2011 periods primarily as the result of an overall increase in origination volume.

 

Expenses

 

Expenses for the Affordable Housing Debt segment for the periods ended September 30 were as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
General and administrative expenses:                              
Salaries and benefits  $957   $460    108.0%  $3,196   $975    227.8%
Other   2,171    2,427    (10.5)   6,476    6,610    (2.0)
Total general and administrative   3,128    2,887    8.3    9,672    7,585    27.5 
(Recovery of) provision for risk-sharing obligations   (363)   -    N/A    (363)   238    (252.5)
Stabilization escrow reserve recovery   -    -    -    (23,549)   -    N/A 
Interest expense:                              
Borrowings and financings   10,500    11,689    (10.2)   33,799    35,665    (5.2)
Derivatives – change in fair value   1,543    8,893    (82.6)   4,687    10,569    (55.7)
Preferred shares of subsidiary   960    960    -    2,880    2,880    - 
Depreciation and amortization   385    295    30.5    1,268    1,136    11.6 
                               
Total expenses  $16,153   $24,724    (34.7)%  $28,394   $58,073    (51.1)%
                               
Average borrowing rate   6.70%   6.42%        6.60%   6.35%     
Average SIFMA rate   0.15%   0.14%        0.16%   0.20%     
                               
N/A – Not applicable.                              

 

General and Administrative

 

General and administrative expense increased by $0.2 million and $2.1 million for the three and nine months ended September 30, 2012, respectively, primarily due to an increase in salaries and benefits from hiring an experienced Affordable Housing Debt team in the second half of 2011.

 

(Recovery of) Provision for Risk-Sharing Obligations

 

During the third quarter of 2012, we reduced our allowance on risk-sharing obligations by $0.4 million as a result of isolated property improvements in the portfolio.

 

- 65 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Stabilization Escrow Reserve Recovery

 

Changes in 2012 relate to the $23.5 million of stabilization escrow used to complete the Merrill Restructuring for which reserves were previously recorded. As a result, the reserve relating to the stabilization escrow was reversed (see Note 21 under Loss Reserve Relating to Yield Transactions to the condensed consolidated financial statements).

 

Interest Expense

 

Interest expense represents direct financing costs, including on-balance sheet securitizations of mortgage revenue bonds and distributions on preferred shares of Equity Issuer. The decrease in interest expense is primarily due to a decrease in the outstanding secured financing weighted average principal balance from $646.3 million at September 30, 2011 to $586.9 million at September 30, 2012.

 

Derivatives – change in fair value

 

The decrease in interest rate derivatives during 2012 is due to favorable changes in the fair value of our free-standing derivatives as the market expectation of future SIFMA rates increased.

 

Other Income

 

Other income for the Affordable Housing Debt segment for the periods ended September 30 was as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
Gain from repayment or sales of investments  $-   $150    (100.0)%  $795   $1,320    (39.7)%
Total other income  $-   $150    (100.0)%  $795   $1,320    (39.7)%

 

Gain from repayment or sales of investments

 

The $0.8 million recorded for 2012 reflects gain recognized for four bonds that received sale treatment. The $1.3 million recorded for 2011 reflects gain recognized for six bonds that received sale treatment.

 

Profitability

 

Profitability for the Affordable Housing Debt segment for the periods ended September 30 was as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
Income (loss) before other allocations  $2,816   $(7,256)   (138.8)%  $33,457   $(2,683)   N/M %
Net (loss) income  $(2,279)  $(11,056)   (79.4)%  $19,644   $(13,128)   (249.6)%

 

N/M - Not meaningful.

 

The change in income before other allocations and net income (loss) reflects the revenue and expense changes discussed above. Incremental costs incorporated in net income (loss) include allocations to the perpetual Equity Issuer preferred shares.

 

Mortgage Banking

 

The primary business function of the Mortgage Banking segment is to underwrite, originate, and service conventional multifamily loans under the GSE, Ginnie Mae and FHA programs. Originated loans are pre-sold to the GSEs and in many cases, are used as collateral for mortgage-backed securities issued and guaranteed by the GSE and traded in the open market. We earn origination fees and trading-premium revenues. We also recognize MSR revenues on loans we originate as in most cases we retain the servicing rights. Trading premiums and MSR values are recorded as gains on sale of mortgage loans on our Condensed Consolidated Statements of Operations. During 2012, we experienced an increase in origination volume as compared to 2011 primarily due to the efforts to increase our origination capabilities over the past year that included the growth of our small loan business and the increase in our loan origination teams located in offices nationwide. Recently, we opened new offices in Boston and Chicago in 2011 and Los Angeles and Dallas in 2012 and added small loan production representatives in Dallas and Irvine. As a result, origination fees, trading-premium revenues and MSR revenues increased during 2012.

 

- 66 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

During the first quarter of 2012, we initiated several steps to diversify products we can offer to our customer base. These steps included: (i) negotiating origination agreements with several commercial mortgage-backed securities (“CMBS”) finance companies so that we can offer CMBS mortgage loan products to our clients; (ii) completing discussions to source joint venture equity opportunities on multifamily properties for a third party in exchange for first look opportunities to provide debt financing; and (iii) adding an origination capability for financing small multifamily properties on a correspondent basis for a life insurance company. During the third quarter of 2012, we closed a $2.7 million commercial loan and sold it to a related party. This commercial loan will be used to securitize CMBS securities. We expect these initiatives to grow and be fully implemented during the fourth quarter of 2012 and throughout the early part of 2013.

 

We earn mortgage-servicing fees on our servicing portfolio of approximately 1,450 loans. Our servicing fees provide a stable revenue stream. Servicing fees are based on contractual terms and earned over the life of a loan. In addition, we earn interest income from escrow deposits held on behalf of borrowers and on loans while they are being financed by our warehouse line, as well as late charges, prepayments of loans and other ancillary fees.

 

We have risk-sharing obligations on most loans we originate under the Fannie Mae DUS program. For a majority of loans originated under the DUS program, we absorb the first 5% of any losses on the unpaid principal balance of a loan if a default occurs; above 5% we share a percentage of the loss with Fannie Mae, with our maximum loss capped at 20% of the unpaid principal balance of a loan.

 

Our servicing fees for risk-sharing loans include compensation for the risk-sharing obligations and are larger than the servicing fees we receive for loans with no risk-sharing obligations. We receive a lower servicing fee for loans with modified risk-sharing than for loans with full risk-sharing. While our origination volume increased significantly from the third quarter of 2011 through the third quarter of 2012, our servicing portfolio only increased slightly due to the increases in originations occurring at a similar rate that loan maturities and payoffs occurred. However, because our risk-sharing product and the rate of related servicing fees have increased in recent years, we have experienced an increase in our overall servicing fees in 2012.

 

Revenues

 

For a description of our revenue recognition policies, see Note 2 to our 2011 Form 10-K.

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
Interest income  $1,133   $965    17.4%  $3,261   $2,867    13.7%
Fee income:                              
Mortgage origination fees   1,537    836    83.9    4,314    2,787    54.8 
Mortgage servicing fees   5,671    5,205    9.0    16,486    15,172    8.7 
Other fee income   288    112    157.1    646    412    56.8 
Other revenues:                              
Gain on sale of mortgage loans   14,023    7,304    92.0    32,013    19,334    65.6 
Prepayment penalties   372    106    250.9    932    265    251.7 
Other   73    155    (52.9)   1,245    480    159.4 
                               
Total revenues  $23,097   $14,683    57.3%  $58,897   $41,317    42.5%

 

Interest Income

 

The increase in interest income is primarily due to an increase in the interest earned on loans while being financed on the warehouse line. Although average interest rates on multifamily mortgage loans are lower in 2012 as compared to 2011, interest income earned increased due to the increase in origination volume achieved during 2012 and the resulting increase in the average balance of loans warehoused.

 

- 67 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Fee Income

 

Mortgage Origination Fees

 

Mortgage originations for the periods ended September 30 were as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012       2011   % Change   2012       2011   % Change 
                                 
Total mortgage origination activity (1)  $417,612        $217,178    92.3%  $1,040,153        $645,078    61.2%
Mortgages originated in prior periods and sold during the period   120,552         93,536         134,727         58,460      
Less: mortgages originated but not yet sold(2)   (175,867)        (76,657)        (175,867)        (76,657)     
Total mortgage origination activity recognized for GAAP and for                                        
which revenue is recognized  $362,297        $234,057    54.8%  $999,013        $626,881    59.4%
                                         
         % of Total         % of Total         % of Total         % of Total 
                                         
Fannie Mae  $296,800    81.9%  $192,791    82.4%  $721,271    72.2%  $525,884    83.9%
Freddie Mac   62,797    17.3    32,700    14.0    233,481    23.4    85,700    13.7 
FHA   -    -    8,566    3.6    41,561    4.1    15,297    2.4 
Conduit(3)   2,700    0.8    -    -    2,700    0.3    -    - 
   $362,297    100.0%  $234,057    100.0%  $999,013    100.0%  $626,881    100.0%

 

(1)Includes all mortgages funded during the period.
(2)Included in Other Investments – mortgage loans held for sale.
(3)Conduit loan was sold to a related party and will be used to securitize CMBS.

 

Our mortgage origination volume recognized for GAAP purposes increased by 54.8% and 59.4% for the three and nine months ended September 30, 2012, respectively, primarily due to an increase in our origination capabilities. The increase in our origination capabilities includes increasing our origination teams throughout 2011 and 2012, and the expansion of our small loans initiative, which began in the fourth quarter of 2009, to underwrite and originate smaller loans under our Fannie Mae DUS program. The small loan division increased originations by 14.6% and 29.7% for the three and nine months ended September 30, 2012 compared to the same periods in 2011.

 

Mortgage Servicing Fees

 

As previously noted, mortgage servicing fees are a significant source of revenue for us. Our portfolio of loans has increased due to increases in originations occurring at a higher rate than loan maturities, payoffs and refinancing occurred. While it has been, and will continue to be, a priority of ours to retain maturing loans and refinances in our portfolio, we are experiencing an increase in competition from lenders that had not been active in prior periods, such as banks and life insurance companies. During the next twenty-four months, 151 loans with an outstanding principal balance of $0.9 billion (which represents 10.8% of the servicing portfolio) are due to mature.

 

Our portfolio balances were as follows:

 

   September 30,     
(dollars in thousands)  2012   2011   % Change 
                
Primary servicing portfolio  $8,613,579   $8,131,758    5.9%

 

The portfolio has increased by 5.9% over the past year; however, due to the nature of more recent originations, we have experienced a greater increase in servicing fees earned from the portfolio. We currently earn higher servicing fees because we are originating more shared-risk product than in the past. Loans that are currently being paid off are those with lower servicing fee rates, resulting in a higher weighted-average servicing fee being earned on the portfolio. Weighted-average servicing rates increased from 25.1 basis points at September 30, 2011 to 27.1 basis points at September 30, 2012.

 

- 68 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Other Fee Income

 

Other fee income includes revenue received from the affordable housing debt segment for affordable housing loan referrals.

 

Other Revenues

 

Gain on Sale of Mortgage Loans

 

We experienced an increase in gain on sales of loans for the three and nine months ended September 30, 2012 as compared to the same periods in 2011 due to an increase in MSR balances and premium revenues received on new loans originated.  The valuation of new MSRs resulted in increased revenue of $3.9 million and $6.8 million and premium revenues increased by $2.8 million and $5.9 million in the 2012 periods as compared to the 2011 periods primarily as the result of an overall increase in origination volume.

 

Other

 

Other revenues consist primarily of securitization profits on certain of our Freddie Mac loans if Freddie Mac packages the loan into a securitization pool.  During the three and nine months ended September 30, 2012, we received fees on securitizations of loans with a total unpaid principal balance of $29.1 million and $399.9 million as compared to $23.1 million and $118.3 million in the comparable 2011 periods, earning approximately $0.7 million in additional revenues related to this program for the nine month period ended September 30, 2012 as compared to 2011.  Revenues for the three month periods were comparable. During the third quarter of 2012, we exercised our option to purchase a defaulted property under the Fannie Mae program for a purchase price of $4.4 million.  We immediately sold the property to a third party for $4.6 million, recognizing a gain on this transaction of approximately $0.2 million.  There were no such transactions during the 2011 periods.

 

Expenses

 

Interest expense in the Mortgage Banking segment represents direct financing costs, including asset-backed warehouse lines (used for mortgage loans we originate). Other major expenses include amortization of MSRs, salaries and other costs of employees working directly in this business.

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
General and administrative expenses:                              
Salaries and benefits  $4,322   $3,253    32.9%  $12,697   $9,331    36.1%
Other   3,952    2,548    55.1    10,308    7,457    38.2 
Total general and administrative   8,274    5,801    42.6    23,005    16,788    37.0 
                               
Provision for (recovery of) risk-sharing obligations   883    -    N/A    (654)   -    N/A 
Interest expense   711    380    87.1    1,874    1,021    83.5 
Depreciation and amortization   2,948    2,874    2.6    9,544    8,285    15.2 
                               
Total expenses  $12,816   $9,055    41.5%  $33,769   $26,094    29.4%

 

N/A - Not applicable.

 

General and Administrative

 

General and administrative expense increased by $2.5 million and $6.2 million for the three and nine months ended September 30, 2012, primarily due to a $1.1 million and $3.4 million increase in salaries and benefit related costs due to the initiatives made throughout 2011 and 2012 to increase origination activity by adding origination teams in certain geographical locations nationwide, as well as continued growth in the team supporting our small loan group. The number of employees increased by 20 from September 30, 2011 to September 30, 2012. We also experienced an increase of $0.4 million and $0.7 million related to fees paid for the referral of loans from external related parties (see Note 19 to the condensed consolidated financial statements) and internally across segments. The remaining variance of $1.0 million and $2.1 million for the three and nine months ended September 30, 2012, respectively, is attributed to increases in various expense items directly related to the increased volume of mortgage loan originations and increased headcount within the segment. These items include broker fees, recruiting costs, subservicing expenses and other allocable employee related costs.

 

- 69 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Provision for (recovery of) Risk-Sharing Obligations

 

Provision for risk-sharing obligations reflects our estimated portion of losses on DUS loans in our loss sharing program with Fannie Mae (see Note 21 to the condensed consolidated financial statements). During the second quarter of 2012, as a result of payoffs and improved property performance on loans in our risk-sharing program with Fannie Mae in the past year, we reduced our provision for risk-sharing obligations by $1.5 million. However, during the third quarter of 2012, primarily the result of performance declines on a portfolio of loans financing a southern real estate acquisition, we increased our provision for risk-sharing obligations by $0.9 million.

 

Interest Expense

 

Interest expense increased by approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2012 primarily due to a greater number of loans being warehoused during 2012 as a direct result of increased originations.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased by approximately $1.3 million for the nine months ended September 30, 2012 primarily due to greater MSR values on a larger number of loans in the portfolio being amortized as compared to the same period in 2011.

 

Profitability

 

Profitability for the Mortgage Banking segment for the periods ended September 30 was as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
Income before other allocations  $10,459   $5,628    85.8%  $25,307   $15,223    66.2%
Net income  $7,547   $2,486    203.6%  $16,404   $7,323    124.0%

 

The change in income before other allocations reflects the revenues and expense changes discussed above.

 

Asset Management

 

The Asset Management segment is responsible for the active management of multifamily real estate assets owned by our Affordable Housing Equity Tax Credit Fund Partnerships. We report on asset performance, manage construction risk during the construction process, actively manage specially serviced assets, including assets where affiliates of ours has taken over the general partner (“GP”) interest, assets that have gone into default or are in workout, or assets that have been foreclosed on and maximize the value of each asset up to the disposition of assets at the end of the fund’s life. The Asset Management segment manages construction risk during the construction process and actively manages specially serviced assets for Affordable Housing Debt loans.

 

For these services the Asset Management segment receives agreed upon fees from the Affordable Housing Equity and Affordable Housing Debt segments.

 

We continue to upgrade and restructure the Asset Management platform to enhance its reporting and management capabilities by (i) recruiting highly skilled real estate professionals who have significant experience in real estate investment management, (ii) placing our professionals closer to the assets and developer partners, enhancing the ability to manage, mitigate and solve issues that may occur with assets under management, and (iii) instituting a more extensive series of site and sponsor visits which has enhanced our relationship with developer partners, facilitating greater transparency, information sharing and shared problem solving when issues occur. Further we have made significant improvement in our technology systems. We have ensured the integrity of our data, and the enhancements to our systems have provided us with enhanced ability to analyze our portfolio in many ways to better report to our investors and to be able to identify both problems and opportunities with the portfolio.

 

- 70 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Revenues

 

For a description of our revenue recognition policies, see Note 2 of our 2011 Form 10-K.

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
Asset management fees  $5,523   $5,775    (4.4)%  $16,765   $17,552    (4.5)%
Other revenues   60    8    N/M    65    77    (15.6)
                               
Total revenues  $5,583   $5,783    (3.5)%  $16,830   $17,629    (4.5)%
                               
N/M - Not meaningful.                              

 

Asset Management Fees

 

The decrease in asset management fees is due to the lower number of properties managed in 2012 as compared to the same period in 2011.

 

Expenses

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
General and administrative expenses:                              
Salaries and benefits  $1,757   $2,549    (31.1)%  $5,568   $6,255    (11.0)%
Other   575    365    57.5    1,672    1,408    18.8 
Total general and administrative   2,332    2,914    (20.0)   7,240    7,663    (5.5)
Depreciation and amortization   53    80    (33.8)   146    193    (24.4)
Total expenses  $2,385   $2,994    (20.3)%  $7,386   $7,856    (6.0)%

 

Profitability

 

Profitability for the Asset Management segment for the periods ended September 30 was as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
Income before other allocations  $3,198   $2,789    14.7%  $9,444   $9,773    (3.4)%
Net income (loss)  $542   $(907)   (159.8)%  $279   $31    N/M

 

 

N/M - Not meaningful.

 

The change in income before other allocations reflects the revenue and expense changes presented above.

 

Corporate

 

Expenses in our Corporate segment include central business functions such as Executive, Finance and Accounting, Treasury, Marketing and Investor Relations, Operations and Risk Management, and Legal, as well as costs related to general corporate debt. Because we consider all acquisition-related intangible assets to be Corporate segment assets, the related amortization are also included in this segment.

 

- 71 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                         
General and administrative expenses:                              
Salaries and benefits  $4,013   $4,478    (10.4)%  $11,839   $12,160    (2.6)%
Other   6,738    6,983    (3.5)   21,232    19,502    8.9 
Total general and administrative   10,751    11,461    (6.2)   33,071    31,662    4.5 
Interest expense:                              
Borrowings and financings   1,323    1,353    (2.2)   3,945    3,956    (0.3)
Other provision for losses   2,163    -    N/A    2,163    -    N/A 
Lease termination costs   -    1,081    (100.0)   3,318    1,081    206.9 
Depreciation and amortization   273    410    (33.4)   880    1,218    (27.8)
                               
Total expenses  $14,510   $14,305    1.4%  $43,377   $37,917    14.4%

 

N/A - Not applicable.

 

General and Administrative

 

Other

 

Other general and administrative expenses increased for the nine months ended September 30, 2012 mainly due to legal fees that we incurred and advisory fees that we were required to reimburse to our lenders relating to the amendments to our Second Amended and Restated Revolving Credit and Term Loan Agreement (as amended, the “Credit Agreement”) which we entered into during 2012 as well as expenses we incurred relating to the move to our new headquarters. These were partially offset by the decrease in rent expense upon on move to the new headquarters. For the three months ended September 30, 2012 we have also seen a decrease in office related expenses, admin fees, travel expenses and advertising cost which contributed to the overall decrease in other general and administrative expenses.

 

Other Provision for Losses

 

Other provision for losses recorded in 2012 is for potential expenses to be incurred by the Company for settling Most Favored Nation Rights claims by former holders of Convertible CRA Shares (see Note 13 to the condensed consolidated financial statements).

 

Lease Termination Costs

 

Lease termination costs recorded in 2011 and 2012 were in connection with the Surrender Agreement and the fact that we vacated our former headquarters in August 2011 and February 2012.

 

Depreciation and Amortization

 

Depreciation and amortization expense decreased mainly due to certain fixed assets and certain intangible assets that were fully depreciated in 2011 partially offset by the additional leasehold improvements and other fixed assets that we acquired relating to our move to the new headquarters which we started depreciating in February 2012.

 

Other income

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(dollars in thousands)  2012   2011   % Change   2012   2011   % Change 
                               
Gain on settlement of liabilities  $493   $-    N/A   $493   $1,756    (71.9)%

 

N/A - Not applicable.

 

- 72 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

The gain on settlement of liabilities recorded in 2011 is a result of the redemption of Series A Convertible Community Reinvestment Act Preferred Shares (“Convertible CRA Shares”) for cash. The cash payments were less than the carrying value of the convertible shares resulting in a $1.8 million gain on settlement of such liabilities. The gain on settlement of liabilities recorded in 2012 represents a partial recognition of deferred gains relating to the assumption of debt by The Related Companies LP (“TRCLP”) in March 2010.

 

Consolidated Partnerships

 

Consolidated Partnerships include entities in which we have a substantive controlling general partner or managing member interest or in which we have concluded we are the primary beneficiary of a variable interest entity (“VIE”). With respect to the Tax Credit Fund Partnerships and Tax Credit Property Partnerships, we have, in most cases, little or no equity interest.

 

A summary of the impact the Tax Credit Fund Partnerships and Tax Credit Property Partnerships have on our Condensed Consolidated Statements of Operations is as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(in thousands)  2012   2011   2012   2011 
                 
Revenues  $26,809   $26,539   $81,590   $80,011 
Interest expense   (13,552)   (12,723)   (40,140)   (37,925)
Other expenses   (101,494)   (53,551)   (222,610)   (249,210)
Other losses   (56,684)   (53,798)   (277,403)   (237,834)
Allocations to limited partners   144,920    93,530    458,556    444,951 
                     
Net impact  $(1)  $(3)  $(7)  $(7)

 

The following table summarizes the number of Consolidated Partnerships at September 30:

 

   2012   2011 
         
Tax Credit Fund Partnerships   141    141 
Tax Credit Property Partnerships   89    87 

 

Our Affordable Housing Equity segment earns fees from the Tax Credit Fund Partnerships, and our Affordable Housing Debt segment earns interest on mortgage revenue bonds for which Tax Credit Property Partnerships are the obligors. The Tax Credit Fund Partnerships are tax credit equity investment funds we sponsor and manage. The Tax Credit Property Partnerships are partnerships for which we have assumed the role of general partner of the property-owning partnership.

 

Our revenue from Consolidated Partnerships is from assets held in funds that we manage as well as rental income from properties in partnerships we consolidate. Interest expense is from borrowings to bridge timing differences between when funds deploy capital and when subscribed investments are received for Tax Credit Fund Partnerships (“Bridge Loans”), as well as mortgages and notes held at the Tax Credit Property Partnerships. The increase in other expenses primarily relates to an increase of $51.5 million and $37.3 million in the provision for bad debt and a decrease of $59.7 million in impairments on land, buildings and improvements of Tax Credit Property Partnerships for the three and nine months ended September 30, 2012.

 

Other losses principally represent the equity losses that Tax Credit Fund Partnerships recognize in connection with their investments in non-consolidated Tax Credit Property Partnerships. The increase in losses during the three months ended September 30, 2012 primarily resulted from an increase of approximately $2.1 million of losses due to properties being sold or foreclosed during the third quarter of 2012 and an increase of $0.4 million in expenses recognized by certain Tax Credit Property Partnerships pertaining to the change in value of their interest rate derivatives and by an increase of $1.6 million in recognized gains, net of losses on the sale of property investments during 2012 offset by a reduction of $2.1 million in equity losses of Tax Credit Fund Partnerships whose equity investment balances in certain Tax Credit Property Partnerships have reached a zero balance. Therefore no additional losses have been recorded. The increase in losses during the nine months ended September 30, 2012 primarily resulted from an increase of $59.7 million related to impairments recognized on Tax Credit Property Partnership equity investments, an increase of $24.4 million in expenses recognized by certain Tax Credit Property Partnerships pertaining to the change in value of their interest rate derivatives and an increase of approximately $7.1 million of losses due to properties being sold or foreclosed during 2012, offset by a decrease of $30.7 million in recognized gains, net of losses on the sale of property investments during 2012 and a reduction of $27.9 million in equity losses of Tax Credit Fund Partnerships whose equity investment balances in certain Tax Credit Property Partnerships have reached a zero balance.

 

- 73 -
 

 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

As third-party investors hold substantially all of the equity interests in most of these entities, we allocate results of operations of these partnerships to third-party investors except for the amounts shown in the table above, which represent our nominal ownership. Net impact represents the equity loss we earn on our co-investments that is included in our net income (loss).

 

Expense Allocation

 

As previously indicated, the Company made a decision in 2011 to allocate certain corporate overhead expenses to the Affordable Housing Equity, Affordable Housing Debt, Mortgage Banking and Asset Management segments. Corporate expense allocations are presented separately from the direct results of each segment.

 

Eliminations and Adjustments

 

Transactions between business segments are accounted for as third-party arrangements for the purposes of presenting business segment results of operations. Inter-segment eliminations include:

 

·fee income and expense reimbursement for fund management activities that are recorded in our Affordable Housing Equity segment and earned from Consolidated Partnerships;

 

·Asset Management fees that are recorded in our Asset Management segment and earned from Affordable Housing Equity;

 

·interest on mortgage revenue bonds that are not reflected as sold in Affordable Housing Equity and for which Tax Credit Property Partnerships within Consolidated Partnerships are the obligors; and

 

·interest charges on outstanding intercompany balances; overhead and other operational charges between segments.

 

- 74 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Income Taxes

 

The following table details the taxable and non-taxable components of our reported income (loss) for the periods ended:

 

   Three Months Ended September 30, 
       % of       % of     
(dollars in thousands)  2012   Revenues   2011   Revenues   % Change 
                     
(Loss) Income subject to tax  $(4,581)   (7.2)%  $20,826    39.5%   (122.0)%
Loss not subject to tax  $(146,074)   (229.4)%  $(84,958)   (161.3)%   71.9%
                          
Loss before income taxes  $(150,655)   (236.6)%  $(64,132)   (121.8)%   134.9%
                          
Income tax benefit  $652    1.0%  $87    0.2%   N/M
                          
Effective tax rate – consolidated basis   (0.43)%        0.14%          
                          
Effective tax rate for corporate subsidiaries subject to tax   (14.23)%        (0.42)%          

 

   Nine Months Ended September 30, 
       % of       % of     
(dollars in thousands)  2012   Revenues   2011   Revenues   % Change 
                     
(Loss) Income subject to tax  $(12,595)   (6.8)%  $30,021    19.0%   (142.0)%
Loss not subject to tax  $(455,592)   (247.2)%  $(430,407)   (272.7)%   5.9%
                          
Loss before income taxes  $(468,187)   (254.1)%  $(400,386)   (253.7)%   16.9%
                          
Income tax benefit (provision)  $505    0.3%  $(93)   (0.1)%   N/M
                          
Effective tax rate – consolidated basis   (0.11)%        0.02%          
                          
Effective tax rate for corporate subsidiaries subject to tax   (4.01)%        (0.31)%          

 

N/M – Not meaningful.

 

Management has determined that, in light of projected taxable losses for the foreseeable future, any benefit from current losses and deferred tax assets likely will not be realized; hence, a full valuation allowance has been recorded.

 

Accounting Developments

 

See the Recently Issued and Adopted Accounting Standards section of Note 1 to the condensed consolidated financial statements in Part I Item 1 of this Form 10-Q.

 

Inflation

 

Inflation did not have a material effect on our results of operations for the periods presented.

 

- 75 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

SECTION 3 – FINANCIAL CONDITION

 

Liquidity

 

The primary objective of managing our liquidity is to ensure that we have adequate resources to accommodate growth of assets under management within our respective businesses, fund and maintain investments as needed, meet all ongoing funding commitments and contractual payment obligations, and pay general operating expenses and compensation. Liquidity management involves forecasting funding requirements and maintaining sufficient capital to meet the fluctuating needs inherent in our business operations and ensure adequate capital resources to meet unanticipated events.

 

Our primary short term business needs include payment of compensation and general business expenses, facilitating debt and equity originations, fund management and asset management activities, and funding commitments and contractual payment obligations including debt amortization. We fund these short-term business needs primarily with cash provided by operations, revolving credit facilities and asset-backed warehouse credit facilities. Our long term liquidity needs include capital needed for potential strategic acquisitions or the development of new businesses, increased financing capacity to meet growth in our businesses, and the repayment of long-term debt. Our primary sources of capital to meet long-term liquidity needs include cash provided by operations, term loan and revolver debt. Currently, our long term liquidity is constrained and in particular we have limited liquidity for potential strategic acquisitions or the development of new businesses or to enable growth in our businesses. Our limited liquidity restricts our ability to warehouse investments within our LIHTC equity business. Continued constraints on our long term liquidity, should it negatively impact our ability to grow our businesses, could increase the risk of loss of members of our executive management team and other key employees or otherwise impact our operations, which could have a material adverse effect on our ability to operate our business effectively and generate operating cash flow. We have been out of compliance with covenants contained in the Credit Agreement and have obtained successive waivers from the lenders as described in this Form 10-Q. We continue to work with the lenders under the Credit Agreement to more permanently resolve our covenant issues, and we expect to pursue any options available to us in order to avoid the consequences of covenant non-compliance (such as obtaining additional waivers for covenant non-compliance, working with our lenders to extend, modify or restructure our debt obligations, dispose of our assets or adjust our business, or otherwise pursue strategic and financial alternatives available to us in order to preserve enterprise value). However, we can provide no assurance that such efforts would enable us to avoid defaults on or the acceleration of our obligations or, if implemented, will not involve a substantial restructuring or alteration of our business operations or capital structure. We are unable to project with certainty whether our long term cash flow from operations will be sufficient to repay our long-term debt when it comes due or to meet operating needs. If our long term cash flow is insufficient, then we may need to refinance such debt or otherwise amend its terms to extend the maturity dates or delay amortization payments. We cannot make any assurances that such refinancing or amendments would be available at attractive terms, if at all. If we do not comply with the covenants and obligations in our Credit Agreement or our other loan agreements, our lenders may choose to declare a default and exercise their remedies, including acceleration of the debt obligations, and as a consequence we may determine it advisable to seek protection under the provisions of the U.S. Bankruptcy Code in order to preserve enterprise value.

 

In addition, our liquidity is currently restricted due to:

 

·the low price of our common shares which has made obtaining equity capital through equity offerings extremely difficult and uneconomical for us;

 

·the lower level of debt financing available to us; and

 

·current restrictions on our Revolving Credit Facility under the Credit Agreement which allow us to make draws only for LIHTC investments.

 

The mortgage loans originated in our Mortgage Banking and Affordable Housing Debt segments are closed in our name using cash borrowed from warehousing and repurchase lenders and sold within one week to three months following the loan closing to the GSEs or to the market as mortgage-backed securities guaranteed by Fannie Mae or Ginnie Mae and are backed by loans that we originate and are generally AAA rated securities. We use the cash received from the sale to repay the warehouse borrowings. At September 30, 2012, we had an aggregate outstanding balance of $186.7 million on our warehouse facilities with an average interest rate of 2.05%.

 

Fannie Mae has established benchmark standards for capital adequacy, and reserves the right to terminate the Company’s servicing authority for all or some of the portfolio, if at any time it determines that the Company’s financial condition is not adequate to support its obligation under the DUS agreement. We fund any growth in our Fannie Mae required operational liquidity and collateral requirements from our working capital. We believe that the Company has sufficient capital to meet the requirements under the DUS agreement.

 

- 76 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

We continue to actively pursue strategies to maintain and improve our cash flow from operations, including:

 

·increasing revenues through increased volume of mortgage originations, fund originations, and growth of assets under management;

 

·instituting measures to reduce general and administrative expenses;

 

·continuing to sell and/or monetize investments that do not meet our long-term investment criteria;

 

·reducing our risk of loss by continuing to improve our Asset Management infrastructure;

 

·increasing access to asset-backed warehouse facilities;

 

·improving collection of Tax Credit Fund Partnership fees through improved monitoring and asset disposition; and

 

·restructuring and execution of agreements to increase cash flow from our Freddie Mac B Certificates.

 

Notwithstanding current market conditions, management believes cash flows from operations, amounts available to be borrowed under our Revolving Credit Facility under the Credit Agreement, and capacity available under our warehouse facilities are sufficient to meet our current short term liquidity needs.

 

Cash Flows

 

   Nine Months Ended 
   September 30, 
(in thousands)  2012   2011 
         
Cash flow (used in) provided by operating activities  $(40,918)  $1,050 
Cash flow provided by (used in) investing activities   40,262    (4,928)
Cash flow used in financing activities   (2)   (19,180)
           
Net decrease in cash and cash equivalents  $(658)  $(23,058)

 

Operating Activities

 

Operating cash flows include the warehousing of mortgage loans that we originate and sell to Fannie Mae and Freddie Mac, each of which has an associated sale commitment that allows us to recoup the full amount expended. During the nine months ended September 30, 2012, net proceeds from mortgage loans sold were $2.4 million compared to $3.8 million of net loans purchased in the nine months ended September 30, 2011. Excluding these amounts from both years, cash flows used in operating activities were $43.4 million in the nine months ended September 30, 2012 as compared to cash flow provided by operating activities of $4.9 million in the same period in 2011. Operating cash flow in 2011 was higher than in 2012 primarily due to $6.6 million collected during 2011 upon the closing of LIHTC funds and in 2012 the cash used for fund advances to certain Tax Credit Fund Partnerships, including those that we made as part of the Merrill Restructuring.

 

Investing Activities

 

Investing cash flows in 2012 were higher than in 2011 primarily as a result of a $23.5 million release of the stabilization escrow and the release of $22.1 million of collateral posted with counterparties as part of the Merrill Restructuring, partially offset by an increase in cash used in acquisition of equity interest in Tax Credit Property Partnerships net of proceeds from sale of equity interests in Tax Credit Property Partnerships.

 

- 77 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Financing Activities

 

The level of financing inflows and outflows is partially impacted by the level of mortgage originations which also impacts operating cash flows as described above. During the nine months ended September 30, 2012, we had net draws on our warehouse facilities of $0.9 million compared to a net repayment of $0.2 million during the same period of 2011. Excluding these amounts from both years, cash flows used in financing activities in the nine months ended September 30, 2012 were $1.0 million as compared to $19.0 million in the nine months ended September 30, 2011. The decrease in cash used in financing activities was mainly a result of the $20.0 million repayment of CFin Holding credit facility in 2011 as compared to a $8.9 million payment on our term loan in 2012, partially offset by the $3.9 million Freddie Mac loan that we received in 2012 as part of the Merrill Restructuring and the increase of $3.7 million on the revolving credit facility.

 

Capital Resources

 

To fund our operations, we use cash provided by our operations as well as borrowings and other financing arrangements used as capital resources.

 

The table below reflects our financing obligations at the dates presented:

 

           September 30, 2012 
   September 30,   December 31,   Available to   Maximum 
(in thousands)  2012   2011   Borrow   Commitment 
                 
Term loan  $116,085   $125,014   $-   $116,085 
Revolving credit facility   21,900    12,100    1,328(1)   37,000 
Mortgage Banking committed warehouse facilities   96,512    105,615    128,488(2)   225,000 
Mortgage Banking repurchase facilities   -    8,450    -(2)   N/A 
Multifamily ASAP facility   90,176    71,670    -(2)   N/A 
Freddie Mac loan   3,249    -    -    3,249 
Centerline Financial LLC ("CFin" or "Centerline Financial") credit facility   -    -    30,000    30,000 
Subtotal   327,922    322,849    159,816      
                     
Freddie Mac Secured Financing(3)   520,096    618,163    N/A    N/A 
Subtotal (excluding Consolidated Partnerships)   848,018    941,012    159,816      
                     
Consolidated Partnerships   161,792    156,643    N/A    N/A 
                     
Total  $1,009,810   $1,097,655   $159,816      

 

N/A – Not applicable.

 

(1)   Borrowing availability reduced by outstanding letters of credit in the amount of $13.8 million. Once these letters of credit are terminated, $12.0 million associated with these letters of credit may not be redrawn. Currently, this faciltiy may only be used for LIHTC property investments.
(2)   Borrowings under these facilities are limited to qualified mortgage loans, which serve as collateral.
(3)   Relates to mortgage revenue bonds that we re-securitized but have not been accounted for as sold for accounting purposes (see Note 11 to the condensed consolidated financial statements).

 

Term Loan and Revolving Credit Facility

 

Our Term Loan under our Credit Agreement matures in March 2017 and has an interest rate of 3.00% over either the prime rate or LIBOR at our election (which currently is LIBOR). We must repay $2.98 million in principal per quarter until maturity, at which time the remaining principal is due.

 

- 78 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

The Revolving Credit Facility under our Credit Agreement has a total capacity of $37.0 million. The Revolving Credit Facility matures in March 2015 and bears interest at 3.00% over either the prime rate or LIBOR at our election (which currently is LIBOR). Currently, the Revolving Credit Facility may only be used for LIHTC property investments. As of September 30, 2012, $21.9 million was drawn and $13.8 million in letters of credit were issued under the Revolving Credit Facility. Once terminated, $12.0 million of the Revolving Credit Facility associated with these letters of credit cannot be redrawn. At September 30, 2012, the undrawn balance of the Revolving Credit Facility was $1.3 million.

 

The Credit Agreement has the following customary financial covenants:

 

·minimum ratio of consolidated EBITDA to fixed charges, which became effective for us as of June 30, 2011; and

 

·maximum ratio of funded debt to consolidated EBITDA, which became effective for us as of June 30, 2012.

 

The Credit Agreement contains restrictions on distributions. We generally are not permitted to make any distributions or redeem or purchase any of our shares, including Convertible CRA Shares, except in certain circumstances, such as distributions to the holders of preferred shares of Equity Issuer, a subsidiary of the Company, if and to the extent that such distributions are made solely out of funds received from Freddie Mac as contemplated by a specified transaction (“EIT Preferred Share Distributions”).

 

In 2011, we entered into a waiver to the Credit Agreement (the “Waiver”) and two subsequent amendments to the Waiver, which among other things, added covenants to the Credit Agreement that restrict (i) the use of proceeds drawn from our Revolving Credit Facility solely to LIHTC investments, (ii) contracts and transactions with Island Centerline Manager LLC, an entity owned and operated by a subsidiary of Island Capital Group LLC (collectively, “Island”), The Related Compaies LP (“TRCLP”), and C-III Capital Partners, LLP (“C-III”) and their affiliates, subject to certain carve-outs, and (iii) other specified material and non-ordinary course contracts and transactions, including property management contracts with Island, TRCLP and C-III and their affiliates.

 

On February 28, 2012, we entered into a third amendment to the Waiver, which among other things: (i) extended the deadline by which we were required to deliver certain specified financial data and other information to the administrative agent under the Credit Facility and, in certain cases, to the lenders under the Credit Agreement; (ii) included certain conditions subsequent requiring us to deliver additional specified financial data and other information to the administrative agent by certain dates; (iii) granted a waiver of our noncompliance with the Credit Agreement’s Consolidated EBITDA to Fixed Charges Ratio solely with respect to the quarter ended December 31, 2011, although we have determined that we were in compliance with such ratio with respect to the quarter ended December 31, 2011; (iv) required us to pay certain costs and expenses incurred by the administrative agent in administering the Credit Agreement; and (v) requires us to pay prescribed monthly consulting fees to the administrative agent’s consultant.

 

On May 18, 2012, we entered into a fourth amendment to the Waiver, which among other things: (i) granted a waiver through July 16, 2012 of our noncompliance with the Consolidated EBITDA to Fixed Charges Ratio covenant contained in our Credit Agreement with respect to the fiscal quarter ended September 30, 2011 which was necessitated by our failure to deliver certain 2012 projections that demonstrate compliance with the financial covenant set forth in the prior waiver; (ii) granted a waiver through July 16, 2012 of our noncompliance with the Consolidated EBITDA to Fixed Charges Ratio covenant contained in our Credit Agreement with respect to the fiscal quarter ended March 31, 2012; and (iii) waived the requirement that we provide the lenders under our Credit Agreement with certain 2012 projections that demonstrate compliance with the financial covenant.

 

On July 16, 2012, we entered into a fifth amendment to the waiver to the Credit Agreement, for which Bank of America, N.A. is the administrative agent, (the “Fifth Amendment to the Waiver”), which among other things: (i) granted a waiver through October 5, 2012 of our noncompliance with the Consolidated EBITDA to Fixed Charges Ratio covenant contained in our Credit Agreement with respect to the fiscal quarters ended September 30, 2011, March 31, 2012 and June 30, 2012; (ii) granted a waiver through October 5, 2012 of our noncompliance with the Total Debt to Consolidated EBITDA Ratio covenant contained in our Credit Agreement with respect to the fiscal quarter ended June 30, 2012; (iii) required us to pay certain costs and expenses incurred by the administrative agent in administering the Credit Agreement; (iv) requires us to provide certain additional information regarding our Affordable Equity business; and (v) removed the terms in the Credit Agreement that restricted our ability to repurchase the Convertible CRA Shares, allowing at any time prior to August 15, 2012, subject to specified terms, for the redemption of all outstanding Convertible CRA Shares and settling, retiring and terminating any contractual obligations to certain former holders (the “Former Preferred Holders”) of our preferred shares, including the Convertible CRA Shares (collectively, the “Preferred Shares”), who previously agreed to the redemption of their Preferred Shares.

 

- 79 -
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

On October 5, 2012, we entered into a sixth amendment to the waiver to the Credit Agreement, for which Bank of America, N.A. is the administrative agent, (the “Sixth Amendment to the Waiver”), which among other things: (i) granted a waiver through January 11, 2013 of our noncompliance with the Consolidated EBITDA to Fixed Charges Ratio covenant contained in our Credit Agreement with respect to the fiscal quarters ended September 30, 2011, March 31, 2012, June 30, 2012 and September 30, 2012; (ii) granted a waiver through January 11, 2013 of our noncompliance with the Total Debt to Consolidated EBITDA Ratio covenant contained in our Credit Agreement with respect to the fiscal quarters ended June 30, 2012 and September 30, 2012; (iii) required us to pay certain costs and expenses incurred by the administrative agent in administering the Credit Agreement; and (iv) removed the terms in the Credit Agreement that restricted our ability to repurchase the Convertible CRA Shares, allowing for, at any time prior to January 11, 2013, subject to specified terms, the redemption of all outstanding Convertible CRA Shares and settling, retiring and terminating of all contractual rights of certain Former Preferred Holders, who previously agreed to the redemption of their Preferred Shares provided, however, that the costs of such redemptions and termination of rights do not exceed specified amounts, which amounts are significantly less than the amount required to redeem the Convertible CRA Shares pursuant to their terms.

 

The redemption of the Convertible CRA Shares held by the current holders thereof may trigger rights we granted to the Former Preferred Holders that were previously redeemed to be treated no less favorably with respect to the redemption of their Preferred Shares than any holder of Convertible CRA Shares that is subsequently redeemed (“Most Favored Nation Rights”). Certain of the Former Preferred Holders also have anti-dilution rights (the “Anti-Dilution Rights”), which, for a specified period of time, prohibit us from issuing securities if such issuance would reduce such Former Preferred Holders’ ownership of our common shares below specified percentages. The Sixth Amendment to the Waiver requires us to negotiate in good faith to redeem the outstanding Convertible CRA Shares and eliminate the Most Favored Nation Rights and the Anti-Dilution Rights and allows us to effect such redemptions and elimination of rights at any time prior to January 11, 2013; provided, however, that the costs of such redemptions and elimination of rights do not exceed specified amounts, which amounts are significantly less than the amount required to redeem the Convertible CRA Shares pursuant to their terms. Bank of America, N.A. (we believe acting other than in its capacity as administrative agent under the Credit Agreement) and certain of its affiliates (collectively, the “BofA Entities”) are former Preferred Holders and have Most Favored Nation Rights and Anti-Dilution Rights.

 

Pursuant to the Fifth Amendment to the Waiver, on July 20, 2012, we sent the BofA Entities a proposal pursuant to which they would, in exchange for a fee, waive their Most Favored Nation Rights and terminate their Anti-Dilution Rights in connection with the redemption of the last two holders of Convertible CRA Shares. The proposed fee was within the parameters specified in the Fifth Amendment to the Waiver. The BofA Entities did not accept our proposal, and instead, by letter dated, August 6, 2012, invoked their Most Favored Nation Rights relating to a prior redemption of Convertible CRA Shares, which may require a payment of $4.0 million, which exceeds the total amounts permitted to be paid to redeem the remaining Convertible CRA Shares and settle the existing Most Favored Nation Rights and Anti-Dilution Rights under the Sixth Amendment to the Waiver. Accordingly, we are not sure, at the current time, if we will be able to redeem the remaining outstanding Convertible CRA Shares and terminate the Most Favored Nation Rights and the Anti-Dilution Rights prior to the January 11, 2013 deadline specified in the Sixth Amendment to the Waiver.

 

We had previously pledged certain receivables as collateral to secure our obligations under our Credit Agreement. We inadvertently closed the account into which those receivables were to be paid, which resulted in a technical default under our Credit Agreement. We have now reopened the account and are working with Bank of America, N.A., as administrative agent under the Credit Agreement, to obtain a written waiver of this technical default. This technical default may result in technical cross-defaults under certain of our warehouse facilities. We are in discussions with the lenders for these warehouse facilities to remedy, or obtain a waiver with respect to, any cross defaults that may exist.

 

The waivers granted in the Sixth Amendment to the Waiver will expire on January 11, 2013, and it is expected that we will not be in compliance with the Consolidated EBITDA to Fixed Charges Ratio covenant and Funded Debt to Consolidated EBITDA Ratio covenant in future periods. While we would pursue any options available to us in order to avoid the consequences of covenant non-compliance (such as obtaining additional waivers for covenant non-compliance, working with our lenders to extend, modify or restructure our debt obligations, dispose of our assets or adjust our business, or otherwise pursue strategic and financial alternatives available to us in order to preserve enterprise value), we can provide no assurance that such efforts would enable us to avoid defaults on or the acceleration of our obligations or if implemented will not involve a substantial restructuring or alteration of our business operations or capital structure. Our ability to obtain any additional waivers or concessions from our lenders will be impacted by the continued satisfaction of our covenants and obligations under the Credit Agreement, including those requiring scheduled amortization payments. In addition, a default under our Credit Agreement would result in a cross default under our mortgage banking warehouse facilities, which could eliminate our ability to originate mortgage loans, a development that would have a material adverse effect on our business, financial condition and results of operations. If we do not comply with the covenants and obligations in the Credit Agreement or our other loan agreements, our lenders may choose to declare a default and exercise their remedies, including acceleration of the debt obligations, and as a consequence we may determine it advisable to seek protection under the provisions of the U.S. Bankruptcy Code in order to preserve enterprise value.

 

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Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Mortgage Banking Warehouse and Repurchase Facilities

 

On September 30, 2012, we had five warehouse facilities we use to fund our loan originations. Mortgages financed by these facilities (see Note 6 to the condensed consolidated financial statements), as well as the related servicing and other rights (see Note 7 to the condensed consolidated financial statements) have been pledged as security under these warehouse facilities. All loans securing these facilities have firm sale commitments with the GSEs or the FHA. Our warehouse facilities include:

 

·A $100.0 million committed warehouse facility that matures in September 2013 and bears interest at a rate of LIBOR plus 1.90%. The interest rate on the warehouse facility was 2.12% as of September 30, 2012 and 2.80% as of December 31, 2011.

 

·A $50.0 million committed warehouse facility that matures in November 2013 and bears interest at a rate of LIBOR plus a minimum of 1.90% and a maximum of 3.40%. There was no outstanding balance on the warehouse facility as of September 30, 2012. The interest rate on the warehouse facility was 3.05% as of December 31, 2011.

 

·A $75.0 million committed warehouse facility that matures in April 2013 and bears interest at a rate of LIBOR plus a minimum of 2.50% and a maximum of 3.50%. The interest rate on the warehouse facility was 2.71% as of September 30, 2012.

 

·An uncommitted warehouse repurchase facility that provides additional resources for warehousing of mortgage loans with Fannie Mae. This facility is scheduled to mature in November 2013 and bears interest at a rate of LIBOR plus 3.50% with a minimum of 4.50%. Our lender under an uncommitted warehouse repurchase facility that provided us with additional resources for warehousing of mortgage loans with Freddie Mac, no longer operates master purchase and sale agreements to fund Freddie Mac loans with any new or existing counterparties. Accordingly, this agreement was terminated as of September 14, 2012.

 

·An uncommitted facility with Fannie Mae under its Multifamily As Soon As Pooled Facility funding program. This facility has no maturity date. After approval of certain loan documents, Fannie Mae will fund loans after closing and the advances are used to repay our warehouse facilities. Subsequently, Fannie Mae funds approximately 99% of the loan and Centerline Mortgage Capital Inc. (“CMC”) funds the remaining 1%. CMC is later reimbursed by Fannie Mae when the assets are sold. Effective June 2012, interest on this facility currently accrues at a rate of LIBOR plus 1.45%, with a minimum rate of 1.80%. The interest rate on this facility was 1.80% as of September 30, 2012 and 1.70% as of December 31, 2011.

 

Unless otherwise stated, we expect, depending on our business needs, to renew our warehouse facilities annually. Our ability to originate mortgage loans depends upon our ability to secure and maintain these types of short-term financings on acceptable terms. We believe that our existing warehouse lines and working capital will be sufficient to meet all of our borrowers' needs.

 

Freddie Mac Loan

 

In connection with the Merrill Restructuring (see Note 21 to the condensed consolidated financial statements), Freddie Mac provided Centerline Holding Company with a loan that is to be repaid in 18 equal monthly installments. Proceeds of this loan were used to repay principal on bonds included in the 2007 re-securitization to allow those bonds to stabilize. The loan is non-interest bearing to the extent there are no defaults on installment payments. Repayment of the loan is secured only by our Series B Freddie Mac Certificates.

 

Centerline Financial Credit Facility

 

In June 2006, Centerline Financial entered into a senior credit agreement. Under the terms of the agreement, Centerline Financial is permitted to borrow up to $30.0 million until its maturity in June 2036, if needed to meet payment or reimbursement requirements under the yield transactions of Centerline Financial (see Note 21 to the condensed consolidated financial statements). Borrowings under the agreement will bear interest at our election of either:

 

·LIBOR plus 0.65%; or

 

·1.40% plus the higher of the prime rate or the federal funds effective rate plus 0.75%.

 

As of September 30, 2012, no amounts were borrowed under this facility. Neither Centerline Holding Company nor its subsidiaries are guarantors of this facility. Due to a wind-down event caused by a capital deficiency under Centerline Financial’s operating agreement, which occurred in 2010, the Centerline Financial senior credit facility continues to be in default as of September 30, 2012. Amounts under the Centerline Financial senior credit facility are still available to be drawn, and we do not believe this default has a material impact on our financial statements or operations.

 

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Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Also as a result of the wind-down event, Centerline Financial is restricted from making any member distributions and is restricted from engaging in any new business.

 

Consolidated Partnerships

 

As of September 30, 2012 and December 31, 2011, the capital structure of our Consolidated Partnerships comprised debt facilities that are non-recourse to us, including:

 

·notes payable by the Tax Credit Fund Partnerships collateralized either by the funds’ limited partners’ equity subscriptions or by the underlying investments of the funds; and

 

·mortgages and notes payable on properties.

 

Further information about our financing obligations is included under Commitments and Contingencies later in this section.

 

Management is not aware of any trends or events, commitments or uncertainties, which have not otherwise been disclosed, that will or are likely to impact liquidity in a material way.

 

Redeemable Securities

 

As of September 30, 2012, we had 320,291 Convertible CRA Shares outstanding. As we had not repurchased these Convertible CRA Shares as of January 1, 2012, the holders of the Convertible CRA Shares have the option to require us to redeem the Convertible CRA Shares for the original gross issuance price per share, which totals $6.0 million. The two holders of Convertible CRA Shares have exercised their option. However, we have been restricted from meeting this requirement pursuant to the terms of the Credit Agreement. In addition, the redemption of the Convertible CRA Shares held by the current holders thereof may trigger rights we granted to certain Former Preferred Holders that were previously redeemed to be treated no less favorably with respect to the redemption of their Preferred Shares than any holder of Convertible CRA Shares that is subsequently redeemed (“Most Favored Nation Rights”). Certain of the Former Preferred Holders also have anti-dilution rights (the “Anti-Dilution Rights”), which, for a specified period of time, prohibit us from issuing securities if such issuance would reduce such Former Preferred Holders’ ownership of our common shares below specified percentages. See “—Capital Resources—Term Loan and Revolving Credit Facility” for additional information regarding the Convertible CRA Shares outstanding and the rights of the Former Preferred Holders.

 

On November 1, 2012, the holder of 214,247 Convertible CRA Shares, which in January 2012 exercised a put option to sell all of its Convertible CRA Shares to the Company, submitted to the American Arbitration Association a demand for arbitration based on the Company’s alleged failure to comply with its obligation under the option agreement to pay the gross issuance price of the Convertible CRA Shares. The arbitration claim is for approximately $4.0 million.

 

On November 5, 2012, the holder of the remaining 106,044 Convertible CRA Shares, which in June 2012 exercised a put option to sell all of its Convertible CRA Shares to the Company, submitted to the American Arbitration Association a demand for arbitration based on the Company’s alleged failure to comply with its obligation under the option agreement to pay the gross issuance price of the Convertible CRA Shares. The arbitration claim is for approximately $2.0 million.

 

Our Credit Agreement contains restrictions on distributions. Under the Credit Agreement, we generally are not permitted to make any distributions or redeem or purchase any of our shares, including Convertible CRA Shares.

 

The Sixth Amendment to the Waiver which the Company entered into on October 5, 2012, removes, through January 11, 2013, the terms in the Credit Agreement that restrict our ability to repurchase the Convertible CRA Shares subject to specified conditions. The Company is engaged in negotiations with the holders of the Convertible CRA Shares in an effort to redeem the outstanding Convertible CRA Shares and cancel these shares and their rights in exchange for an amount significantly less than the gross issuance price.

 

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Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Commitments and Contingencies

 

Off Balance Sheet Arrangements

 

The following table reflects our maximum exposure and the carrying amounts recorded to account payable, accrued expenses and other liabilities as of September 30, 2012 for guarantees we and our subsidiaries have entered into and other contingent liabilities:

 

   Maximum   Carrying 
(in thousands)  Exposure   Amount 
         
Tax Credit Fund Partnerships credit intermediation(1)  $1,235,025   $17,674 
Mortgage banking loss sharing agreements(2)   906,282    20,698 
Credit support to developers(3)   171,897    - 
Centerline Financial credit intermediation(4)   33,715    816 
Letters of credit   13,772    - 
General Partner property indemnifications   11,568    - 
Contingent liabilities at the Consolidated Partnerships   11,270    - 
           
   $2,383,529   $39,188 

 

(1)Through isolated special purpose entities, these transactions were undertaken to expand the Affordable Housing Equity business by offering agreed-upon rates of return to third-party investors for pools of multifamily properties in certain Tax Credit Fund Partnerships. The carrying values of $17.7 million disclosed above relate to the deferred fees we earn for the transactions that we recognize over the period until maturity of these credit intermediations.
(2)The loss sharing agreements with Fannie Mae and Freddie Mac are a normal part of the DUS and DUI lender programs. The carrying value disclosed above is our estimate of potential exposure under the guarantees. Based on current expectations of defaults in the portfolio of loans, we anticipate that we may be required to pay between $3.0 and $4.2 million in the next 12 months.
(3)Generally relates to business requirements for developers to obtain construction financing. As part of our role as co-developer of certain properties, we issue these guarantees in order to secure properties as assets for the Tax Credit Fund Partnerships we manage. To date, we have had minimal exposure to losses under these guarantees.
(4)These transactions were undertaken to expand our Credit Risk Products business by offering credit intermediation to third-party customers. To date, we have had minimal exposure to losses and anticipate no material liquidity requirements in satisfaction of any arrangement. The carrying values of $0.8 million disclosed above relates to the deferred fees we earn for the transactions that we recognize over the period until maturity of these derivatives.

 

The maximum exposure amount is not indicative of our expected losses under the guarantees. For details of these transactions, see Note 21 to the condensed consolidated financial statements.

 

SECTION 4 – FORWARD LOOKING STATEMENTS

 

Certain statements made in this report may constitute, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are not historical facts, but rather our beliefs and expectations that are based on our current estimates, projections and assumptions about our Company and industry. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Some of these risks include, among other things:

 

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Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

·business limitations caused by adverse changes in real estate and credit markets and general economic and business conditions;

 

·risks related to the form and structure of our financing arrangements;

 

·our ability to generate new income sources, raise capital for investment funds and maintain business relationships with providers and users of capital;

 

·changes in applicable laws and regulations;

 

·our tax treatment, the tax treatment of our subsidiaries and the tax treatment of our investments;

 

·competition with other companies;

 

·risk of loss associated with our mortgage originations;

 

·risks associated with providing credit intermediation; and

 

·risks associated with enforcement by our creditors of any rights or remedies which they may possess.

 

These risks are more fully described in our 2011 Form 10-K. We caution against placing undue reliance on these forward-looking statements, which reflect our view only as of the date of this report. We are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions, or circumstances on which any such statement is based.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not required.

 

Item 4. Controls and Procedures.

 

a)Evaluation of Disclosure Controls and Procedures

 

Our President and Chief Operating Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act as of the end of the period covered by this quarterly report. Based on such evaluation, they have concluded that our disclosure controls and procedures as of the end of the period covered by this quarterly report were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and to ensure that such information is accumulated and communicated to our management, including the President and Chief Operating Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

b)Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s condensed consolidated financial statements and therefore no accrual is required as of September 30, 2012.

 

Item 1A. Risk Factors.

 

The following risk factor amends and supersedes the risk factor entitled “We may be unable to raise capital or access financing on favorable terms, or at all, and we may also be unable to repay or refinance our debt obligations,” contained in our 2011 Form 10-K. Other than the change to the risk factor noted above, there have been no material changes to the risk factors previously disclosed in our 2011 Form 10-K. In addition to the other information discussed in this quarterly report on Form 10-Q, please consider the risk factor set forth below and those set forth in our 2011 Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition or operating results.

 

We may be unable to raise capital or access financing on favorable terms, or at all, and we may also be unable to repay or refinance our debt obligations, which could result in our seeking protection under the provisions of the U.S. Bankruptcy Code

 

Our outstanding debt could limit our operational flexibility, limit our ability to raise additional capital, limit our ability to invest in new businesses, limit our ability to take advantage of opportunities to diversify and acquire other companies or otherwise adversely affect our financial condition. Capital limitations could affect our ability to grow assets under management, a major aspect of our business plan, as we achieve at least part of this growth by initially warehousing investments for new Tax Credit Fund Partnerships, which requires capital. Furthermore, our ability to raise capital has been negatively impacted by our low common share price and the lower level of debt financing available in the marketplace.

 

We are subject to the risks normally associated with outstanding debt, including the risks that:

 

·our cash flow from operations may be insufficient to make required payments of principal and interest;

 

·our vulnerability to downturns in our business is increased, requiring us to reduce expenditures we need to expand our businesses;

 

·we may be unable to refinance existing indebtedness; and the terms of any refinancing may be less favorable than the terms of existing indebtedness; and

 

·we may be unable to satisfy ongoing financial and other covenants, which if not waived or amended by our lenders, could lead to accelerations of, and cross-defaults on, our debt obligations.

 

In March 2010, we entered into the Credit Agreement and have subsequently entered into the Waiver and six amendments to the Waiver. The Credit Agreement places certain restrictions on our activities, including, among other things:

 

·limitations on our incurring additional unsecured indebtedness without lender approval;

 

·restrictions on our ability to make any distributions or redeem or purchase any of our shares including Convertible CRA Shares, except in certain circumstances, such as EIT Preferred Share Distributions;

 

·limitations on our ability to make new business investments without lender approval; and

 

·restrictions on our ability to conduct transactions with our affiliates.

 

We must repay $2.98 million in principal per quarter on our Term Loan under our Credit Agreement until maturity in March 2017 at which time the remaining principal is due. Our Revolving Credit Facility under our Credit Agreement matures in March 2015.

 

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We were out of compliance with the Consolidated EBITDA to Fixed Charges Ratio covenant of the Credit Agreement with respect to the quarters ended September 30, 2011, March 31, 2012, June 30, 2012 and September 30, 2012 and the Funded Debt to Consolidated EBITDA Ratio covenant for June 30, 2012 and September 30, 2012, and have received waivers with respect to such noncompliance from the lenders under the Credit Agreement. The current waiver will expire on January 11, 2013, and it is expected that we will not be in compliance with the Consolidated EBITDA to Fixed Charges Ratio and Funded Debt to Consolidated EDITDA ratio covenants in future periods. While we would pursue any options available to us in order to avoid the consequences of covenant non-compliance (such as obtaining additional waivers for covenant non-compliance, working with our lenders to extend, modify or restructure our debt obligations, dispose of our assets or adjust our business, or otherwise pursue strategic and financial alternatives available to us in order to preserve enterprise value), we can provide no assurance that such efforts would enable us to avoid defaults on or the acceleration of our obligations or if implemented will not involve a substantial restructuring or alteration of our business operations or capital structure. Our ability to obtain any additional waivers or concessions from our lenders will be impacted by the continued satisfaction of our covenants and obligations under the Credit Agreement, including those requiring scheduled amortization payments, such as the payment due December 31, 2012. In addition, a default under our Credit Agreement would result in a cross default under our mortgage banking warehouse facilities, which could eliminate our ability to originate mortgage loans, a development that would have a material adverse effect on our business, financial condition and results of operations. If we do not comply with the covenants and obligations in the Credit Agreement or our other loan agreements, our lenders may choose to declare a default and exercise their remedies, including acceleration of the debt obligations, and as a consequence we may determine it advisable to seek protection under the provisions of the U.S. Bankruptcy Code in order to preserve enterprise value.

 

See the description of our existing facilities under Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – SECTION 3 – Financial Condition.

 

We rely on debt capital to finance our business. If the lower level of debt financing available in the marketplace continues, we may be unable to achieve our strategic goals. Any debt we may be able to arrange may carry a higher rate of interest than our current debt, thereby decreasing our net income and cash flows. As a result, certain growth initiatives could prove more costly or not economically feasible. A failure to meet required amortization payments under, or satisfy covenants imposed by, our debt facilities, renew our existing credit facilities, to increase our capacity under our existing facilities or to add new or replacement debt facilities could have a material adverse effect on our business, financial condition and results of operations.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Equity Securities Purchased By Us

 

The Board of Trustees has authorized a common share repurchase plan, enabling us to repurchase, from time to time, up to 3.0 million common shares in the open market; however, under the terms of our Credit Agreement, we were restricted from acquiring capital stock while such facilities were outstanding. We did not repurchase any of our equity securities during the third quarter of 2012. The maximum number of shares that may yet be purchased under the plan is 303,854.

 

Unregistered Sales of Equity Securities

 

During the third quarter of 2012, we did not sell any equity securities that were not registered under the Securities Act of 1933.

 

Item 3.   Defaults upon Senior Securities. None.

 

Item 4.   Mine Safety Disclosures. Not applicable

 

Item 5.   Other Information. None.

 

Item 6.   Exhibits.

 

The Exhibit Index appearing after the signature page of the Quarterly Report on Form 10-Q is incorporated herein by reference.

 

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SIGNATURES

 

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

 

CENTERLINE HOLDING COMPANY

(Registrant)

 

Date: November 19, 2012 By: /s/ Robert L. Levy
    Robert L. Levy
    President and Chief Operating Officer
    (Principal Executive Officer)

 

Date: November 19, 2012 By: /s/ Michael P. Larsen
    Michael P. Larsen
    Chief Financial Officer
    (Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit No.   Description
     
3(a)   The Restated Certificate of Trust of Centerline, dated February 26, 2002, as filed in the office of the Secretary of State on February 26, 2002 (incorporated by reference to Exhibit 3.(i)a to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed with the Securities and Exchange Commission (the “Commission”) on March 31, 2010).
     
3(b)   Certificate of Amendment of the Restated Certificate of Business Trust, dated as of November 17, 2003 (incorporated by reference to Exhibit 3.3 of our Registration Statement on Form S-8, filed with the Commission on November 25, 2003).
     
3(c)   Certificate of Amendment of the Restated Certificate of Trust, effective April 2, 2009 and dated March 28, 2009 (incorporated by reference to Exhibit 3.3 of our Current Report on Form 8-K filed with the Commission on April 6, 2007).
     
3(d)   Third Amended and Restated Trust Agreement, dated October 6, 2010 (incorporated by reference to Appendix B to our Definitive Proxy Statement on Schedule 14A, filed with the Commission on August 24, 2010)
     
3(e)   Certificate of Designation of special preferred voting shares, dated November 17, 2003 (incorporated by reference to Exhibit 99.4 of our Current Report on Form 8-K, filed with the Commission on December 1, 2003).
     
3(f)   Amendment No. 1 to the Certificate of Designation of special preferred voting shares of Centerline Holding Company, effective May 4, 2007 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the Commission on May 10, 2007).
     
3(g)   Amendment No. 2 to the Certificate of Designation of the special preferred voting shares, dated as of March 5, 2010 (incorporated by reference to Exhibit 3.6 of our Current Report on Form 8-K filed with the Commission on March 11, 2010).
     
3(h)   Certificate of Designation relating to the creation of the Special Series B Shares, dated as of March 5, 2010 (incorporated by reference to Exhibit 3.5 of our Current Report on Form 8-K filed with the Commission on March 11, 2010).
     
3(i)   Sixth Amended and Restated Bylaws of Centerline Holding Company, dated October 6, 2010 (incorporated by reference to Appendix D our Definitive Proxy Statement on Schedule 14A, filed with the Commission on August 24, 2010).
     
10(a)   Fourth Amended and Restated Warehousing Credit and Security Agreement, dated as of September 25, 2012, among Centerline Mortgage Capital Inc. and Centerline Mortgage Partners Inc. and Bank of America, N.A., as agent for the lender, and as lender (incorporated by reference to our Current Report on Form 8-K filed with the Commission on September 28, 2012).
     
10(b)   First Amendment to Mortgage Warehouse Loan and Security Agreement, dated as of October 19, 2012, by and among Centerline Mortgage Capital Inc. and Centerline Mortgage Partners Inc. and Manufacturers and Traders Trust Company as lender (incorporated by reference to our Current Report on Form 8-K filed with the Commission on October 24, 2012).

 

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10(c)   Second Amendment to Mortgage Warehouse Loan and Security Agreement, dated as of November 9, 2012, by and among Centerline Mortgage Capital Inc. and Centerline Mortgage Partners Inc. and Manufacturers and Traders Trust Company, as lender (incorporated by reference to our Current Report on Form 8-K filed with the Commission on November 14, 2012).
     
31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
     
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
     
32.1   Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
     
101   Interactive Data File*
     
*   Filed herewith.

 

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