Item 1. Business. Capital Source L.P. (the "Registrant" or the "Partnership") was formed in August 1985 under the Delaware Revised Uniform Limited Partnership Act to invest principally in federally-insured mortgages on multifamily housing properties and to acquire, hold, sell, dispose of and otherwise deal with limited partnership interests ("Partnership Equity Investments") in the limited partnerships (the "Operating Partnerships") which construct and operate these properties. The Registrant's investment objectives are to: (i) achieve long-term capital appreciation through increases in the value of the Partnership Equity Investments; (ii) provide quarterly cash distributions to investors; (iii) provide investors with federal income tax deductions that may offset, in part, taxable cash distributions subsequent to the initial closing on Beneficial Assignment Certificates ("BACs") representing a beneficial assignment of limited partnership interests in the Registrant; (iv) provide the potential for increases in cash distributions from income from Operating Partnerships and sale of the multifamily housing properties; and (v) preserve and protect the Registrant's capital. The Partnership originally intended to qualify the BACs for quotation on NASDAQ within 24 to 36 months after it commenced operations in order to make the BACs freely transferable. However, at a Special Meeting of BAC Holders on May 17, 1990, an amendment to the Partnership Agreement was approved to only allow limited transferability of BACs to preserve the tax status of the Partnership and avoid being designated as a "publicly traded partnership".
	 A total of 3,374,222 BACs were sold at $20 per BAC for total capital contributions of $67,484,440 prior to the payment of certain organization and offering costs.
	 The Registrant originally acquired (i) five mortgage-backed securities (the "GNMA Certificates") guaranteed as to principal and interest by the Government National Mortgage Association ("GNMA") collateralized by first mortgage loans on multifamily housing properties located in five states, (ii) three first mortgage loans insured by the Federal Housing Administration (the "FHA Loans") on multifamily housing properties located in two states and (iii) Partnership Equity Investments in eight limited partnerships which own the multifamily housing properties financed by the GNMA Certificates and the FHA Loans. The Partnership has been repaid by the FHA on one of its first mortgage loans. The Partnership has also been repaid by GNMA on one of its GNMA Certificates. The Partnership no longer holds a Partnership Equity Investment in the Operating Partnership which owned the property collateralizing the repaid GNMA Certificate. Collectively, the remaining GNMA Certificates, the FHA Loans and the Partnership Equity Investments are referred to as the "Permanent Investments." A description of the properties financed by the Registrant at December 31, 1997, appears in Item 7 hereof. The Partnership has also invested amounts held in its reserve account in certain GNMA securities backed by pools of single-family mortgages ("Reserve Investments").
While principal of and interest on the GNMA Certificates and the FHA Loan are ultimately guaranteed by the United States government, the amount of cash distributions received by the Registrant from the Partnership Equity Investments is a function of the net rental revenues generated by the properties owned by the Operating Partnerships. Net rental revenues from a multifamily apartment complex depend on the rental and occupancy rates of the property and on the level of operating expenses. Occupancy rate and rents are directly affected by the supply of, and demand for, apartments in the market area in which a property is located. This, in turn, is affected by several factors such as local or national economic conditions, the amount of new apartment construction and interest rates on single-family mortgage loans. In addition, factors such as government regulation (such as zoning laws), inflation, real estate and other taxes, labor problems and natural disasters can affect the economic operations of a property.
In each city in which the Registrant's properties are located, such properties compete with a substantial number of other apartment complexes. Apartment complexes also compete with single-family housing that is either owned or leased by potential tenants. The principal method of competition is to offer competitive rental rates. The Registrant's properties also compete by emphasizing regular maintenance and property amenities.
- 1 - The Registrant believes that each of its properties is in compliance in all material respects with federal, state and local regulations regarding hazardous waste and other environmental matters and the Registrant is not aware of any environmental contamination at any of such properties that would require any material capital expenditure by the Registrant for the remediation thereof.
The Registrant is engaged solely in the business of owning mortgages and holding equity interests in real estate limited partnerships. Accordingly, the presentation of information about industry segments is not applicable and would not be material to an understanding of the Registrant's business taken as a whole.
	 The Registrant has one employee. In addition to this employee, certain services are provided to the Registrant by employees of an affiliate of the managing general partner of the Registrant, and the Registrant reimburses such affiliate for such services at cost. The Registrant is not charged and does not reimburse for the services performed by managers and officers of the managing general partner of the Registrant.
	 Item 2.
Item 2. Properties. The Registrant does not directly own or lease any physical properties. However, by virtue of its interest in the Partnership Equity Investments in the Operating Partnerships, the Registrant indirectly owns up to a 99% interest in six multifamily apartment projects. In addition, the Registrant owns a 30.29% interest in another multifamily apartment project known as The Ponds at Georgetown. The multifamily apartment projects are described in the following table:
Depreciation is taken on each property on a straight-line basis over the estimated useful lives of the various components of the properties ranging from five to 40 years.
The average annual occupancy rate and average effective rental rate per unit for each of the properties for each of the last five years are listed in the following table:
- 2 -
In the opinion of the Partnership's management, each of the properties is adequately covered by insurance. For additional information concerning the properties, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 6 to the Partnership's Financial Statements. A discussion of general competitive conditions to which these properties are subject is included in Item 1 hereof.
	 Item 3.
Item 3. Legal Proceedings. There are no material pending legal proceedings to which the Registrant is a party or to which any of its property is subject.
	 Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of 1997 to a vote of the Registrant's security holders.
	 PART II
	 Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
		 (a)	Market Information. The BACs are subject to various transfer restrictions imposed to prevent the Registrant from being treated as a publicly traded partnership for federal income tax purposes and, accordingly, there is no public trading market for the BACs.
In the event the General Partners have reason to believe that a requested sale, transfer or assignment of BACs would cause the Partnership to be characterized as a publicly traded partnership for federal income tax purposes, the General Partners will, pursuant to their powers under Section 5.09 of the Partnership Agreement, refuse to process such requested sale, transfer or assignment unless the General Partners receive an unqualified opinion of Counsel to the effect that such sale, transfer or assignment of BACs, would not cause the Partnership to be characterized as a publicly traded partnership for federal income tax purposes. Neither the General Partners nor the Partnership may be held liable for any losses resulting to a holder of BACs or a purchaser of Units as a result of a requested sale, transfer or assignment of BACs not being processed due to these limitations.
- 3 - The foregoing restrictions are intended to prevent the trading volume of BACs from reaching a level that would cause the Partnership to be characterized as a publicly traded partnership under Section 7704 of the Code. In the event the Partnership were characterized as a publicly traded partnership, the Partnership could be subject to entity level taxation. In such event, amounts otherwise distributable to holders of BACs would be used to satisfy federal income tax liabilities of the Partnership and, thus, amounts received by holders of BACs would be less than anticipated.
		 (b)	Investors. The approximate number of BAC Holders on December 31, 1997, was 5,822.
		 (c)	Distributions. Cash distributions are paid on a quarterly basis to the record holders of BACs as of the last day of each month. Total cash distributions paid or accrued to BAC Holders during the fiscal years ended December 31, 1997, and December 31, 1996, equaled $3,407,965 each year. The cash distributions paid per BAC during the fiscal years ended December 31, 1997, and December 31, 1996 were as follows:
See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for information regarding the sources of funds used for cash distributions and for a discussion of factors, if any, which may adversely affect the Registrant's ability to make cash distributions at the same levels in 1998 and thereafter.
- 4 - Item 6.
Item 6. Selected Financial Data. Set forth below is selected financial data for the Partnership. The information set forth below should be read in conjunction with the Financial Statements and Notes thereto filed in response to Item 8 hereof.										
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
The Partnership originally acquired: (i) five mortgage-backed securities guaranteed as to principal and interest by the Government National Mortgage Association (GNMA) collateralized by first mortgage loans on multifamily housing properties located in five states; (ii) three first mortgage loans insured as to principal and interest by the Federal Housing Administration (FHA) on multifamily housing properties located in two states; and (iii) Partnership Equity Investments in eight limited partnerships which own the multifamily properties financed by the GNMA Certificates and FHA Loans. The Partnership subsequently received FHA Debentures in payment of the FHA Loan on Fox Hollow Apartments which were paid in full in 1993. In 1994, foreclosure proceedings were initiated on Falcon Point Apartments and, accordingly, the Partnership no longer holds a Partnership Equity Investment in this property. In addition, during 1995, the GNMA Certificate related to Falcon Point Apartments was paid-in-full to the Partnership. Collectively, the remaining GNMA Certificates, FHA Loans and Partnership Equity Investments are referred to as the "Permanent Investments". The Partnership has also invested amounts held in its reserve account in certain GNMA securities backed by pools of single-family mortgages (Reserve Investments). The obligations of GNMA and FHA are backed by the full faith and credit of the United States government.
- 5 - The FHA Loans, GNMA Certificates and Partnership Equity Investments in Operating Partnerships represent the Partnership's principal assets as shown in the Parent Company Only Financial Information in Note 6 to the financial statements. The parent company information is presented using the equity method of accounting for the investment in Operating Partnerships. Generally accepted accounting principles, however, require that the Partnership's financial statements consolidate the Operating Partnerships, since the Partnership holds a majority ownership in each Operating Partnership and can influence decisions of the general partners in certain circumstances.
The following FHA Loans and GNMA Certificates were owned by the Partnership at December 31, 1997.
(1) Represents yield to the Partnership.
Distributions
Cash distributions paid or accrued per BAC were as follows:
Regular quarterly distributions to BAC Holders consist primarily of interest received on FHA Loans and GNMA Certificates. Additional cash for distributions is received from other temporary investments. The Partnership may draw on reserves to pay operating expenses or to supplement cash distributions to BAC Holders. The Partnership is permitted to replenish reserves with cash flows in excess of distributions paid. For the year ended December 31, 1997, a net amount of $189,014 of undistributed cash flow was added to reserves. The total amount held in reserves at December 31, 1997, was $10,787,058 of which $1,088,526 was invested in GNMA Certificates.
The Partnership believes that cash provided by operating activities and, if necessary, withdrawals from the Partnership's reserves will be adequate to meet its short-term and long-term liquidity requirements, including the payments of distributions to BAC Holders. Under the terms of its Partnership Agreement, the Partnership has the authority to enter into short-term and long-term debt financing arrangements; however, the Partnership currently does not anticipate entering into such arrangements. The Partnership is not authorized to issue additional BACs to meet short-term and long-term liquidity requirements.
- 6 - America First Capital Source I, L.L.C., and Insured Mortgage Equities, Inc. (referred to as the "General Partners") have conducted a review of their computer systems to identify those areas that could be affected by the "Year 2000" issue and have developed a plan to resolve the issue. The General Partners believe the Year 2000 problem can be resolved without significant operational difficulties. The Partnership does not maintain its own computer systems and does not reimburse the General Partners for any capital expenses associated with computer systems. Therefore, no material effect to the Partnership's results of operations, financial position or cash flows is anticipated from the "Year 2000" issue or its resolution.
Asset Quality
The FHA Loans and GNMA Certificates owned by the Partnership are guaranteed as to principal and interest by FHA and GNMA, respectively. The obligations of FHA and GNMA are backed by the full faith and credit of the United States government. The Partnership Equity Investments, however, are not insured or guaranteed. The value of these investments is a function of the value of the real estate owned by the Operating Partnerships.
The following table shows the occupancy levels of the properties financed by the Partnership at December 31, 1997:
Bluff Ridge Apartments
Bluff Ridge Apartments is a 108-unit complex located in Jacksonville, North Carolina. Average occupancy was 96% in 1997, compared to 94% in 1996. Operations at Bluff Ridge are heavily dependent on demand from the local military personnel. The Jacksonville rental market has remained relatively stable throughout 1997. An increase in operating revenue resulting from rental rate increases and an increase in average occupancy was virtually offset by an increase in property operating costs. The increase in operating costs was largely due to property improvements made during the year. As a result net cash generated by the property in 1997, excluding interest, approximated that of 1996. The property was current on its debt service payments during 1997 and generated cash flow in excess of debt service.
Fox Hollow Apartments
Fox Hollow Apartments is a 184-unit apartment community located in High Point, North Carolina. Average occupancy was 96% in 1997, compared to 95% in 1996. Excluding interest, net cash flow generated by Fox Hollow Apartments decreased approximately 12% from 1996 to 1997. This decrease is primarily due to increases of approximately 27% in repairs and maintenance expenses and property improvements and 18% in property taxes which were partially offset by a slight increase in operating revenue. Not withstanding the decrease in net cash flow, the property remained in compliance with the terms of the Loan Modification Agreement (LMA) entered into with a mortgage holder in 1996. While there can be no assurance that the modified terms of the Fox Hollow mortgage will enable the property to remain current on its mortgage obligations, the restructuring allows the Partnership to retain its Partnership Equity Investment in the Fox Hollow Apartments and improves the property's ability to make its required mortgage payments from operating cash flow.
- 7 - Highland Park Apartments
Highland Park Apartments contains 252 luxury garden apartments and is located in Columbus, Ohio. Average occupancy was 93% in 1997, compared to 95% in 1996. Excluding interest, net cash flow generated by Highland Park Apartments, increased approximately 7% from 1996 to 1997. This increase is due to a 3% increase in operating revenue resulting from rental rate increases and a 4% decrease in real estate operating expenses, primarily property improvements. The property remained current on its mortgage obligations throughout 1997 and generated cash flow in excess of debt service.
Misty Springs Apartments
Misty Springs Apartments is a 128-unit apartment community located in Daytona Beach, Florida. Average occupancy was 98% in 1997, compared to 94% in 1996. The net cash flow generated by the property, excluding interest, was approximately 22% higher in 1997, compared to 1996, due to an increase of approximately 9% in operating revenue accompanied by a decrease of approximately 2% in real estate operating expenses. The increase in operating revenue was due to the increase in average occupancy and rental rate increases. Real estate operating expenses were lower primarily due to a decrease in property taxes.
At December 31, 1997, the Operating Partnership was in compliance with the terms of a Reinstatement Agreement entered into in 1993. The Operating Partnership was current on its debt service payments on its mortgage loan during 1997, with a shortfall of $30,000 being funded by Partnership reserves.
The Ponds at Georgetown
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor, Michigan. Average occupancy was 97% in 1997 compared to 95% in 1996. Operating revenue increased approximately 8% in 1997, compared to 1996, primarily due to the increase in average occupancy, rental rate increases and an increase in corporate unit rentals. Despite the increase in operating revenue the Operating Partnership remains in default on its mortgage loan and is delinquent in paying property taxes and insurance. The Partnership continues to explore a number of alternatives with the mortgage holder to determine the best course of action to pursue, including a possible restructuring of the mortgage loan.
Waterman's Crossing
Waterman's Crossing is a 260-unit apartment community located in Newport News, Virginia. Average occupancy was 98% in 1997, compared to 96% in 1996. The Operating Partnership remains current on its mortgage obligations; however shortfalls of $95,000 were funded by Partnership reserves in 1997. An increase in operating revenue resulting from an increase in average occupancy and rental rate increases was virtually offset by an increase in repairs and maintenance expenses and property improvements. As a result, net cash flow generated by the property in 1997, excluding interest, approximated that of 1996.
Water's Edge Apartments
Water's Edge Apartments is a 108-unit apartment complex located in Lake Villa, Illinois. Average occupancy was 96% in 1997, compared to 91% in 1996. The property's net cash flow, excluding interest, increased approximately 5% in 1997 compared to 1996. This increase resulted from a 7% increase in operating revenue due to the increase in average occupancy and rental rate increases which was partially offset by a 10% increase in real estate operating expenses, primarily real estate taxes. The Operating Partnership remained current on its mortgage obligations in 1997.
- 8 - Results of Operations
The tables below compare the results of operations for each year shown.
- 9 - Rental income is recognized net of any vacancy losses and rental concessions offered. Rental income, net of real estate operating expenses, depreciation and amortization, increased $52,286 from 1996 to 1997. This increase is due to an increase in rental income which was partially offset by increases in real estate operating expenses, primarily repairs and maintenance expenses and property improvements. The increase in rental income consisted of an increase of approximately $223,000 due to rental rate increases and approximately $129,000 due to increases in average occupancy at six of the properties.
Rental income, net of real estate operating expenses, depreciation and amortization decreased $49,006 from 1995 to 1996. The decrease is due to a slight decrease in rental income accompanied by increases in real estate operating expenses, primarily repairs and maintenance expenses and property improvements. The decrease in rental income consisted of a decrease of approximately $115,000 due to decreases in average occupancy at four of the properties which was partially offset by an increase in revenue of approximately $108,000 resulting from rental rate increases.
Mortgage-backed securities income decreased $21,862 from 1997 to 1996 and $20,029 from 1995 to 1996 due to the continued amortization of the principal balance of the mortgage-backed securities.
Interest on temporary cash investments and U.S. government securities increased $33,282 from 1996 to 1997 due to an increase in the Partnership's cash reserve as additional cash was placed in reserves during 1996 and 1997. Interest on temporary cash investments and U.S. government securities increased $325,464 from 1995 to 1996. This increase is the result of investing proceeds received from the payoff of the GNMA Certificate related to Falcon Point Apartments in November 1995 and to additions made to the Partnership's reserves during 1996.
Other income consists primarily of corporate unit rentals, garage rentals, washer/dryer, and vending income generated by the Partnership's properties. Income from such sources decreased $18,075 from 1996 to 1997, due primarily to decreases in corporate unit rentals at Fox Hollow Apartments and Waterman's Crossing Apartments, partially offset by increases in corporate unit rentals at Water's Edge Apartments and The Ponds at Georgetown Apartments. Income from such sources increased $50,756 from 1995 to 1996, due primarily to an increase in corporate unit rentals at Fox Hollow Apartments.
Investor servicing costs increased $153,628 from 1996 to 1997 and $63,027 from 1995 to 1996. The increase from 1996 to 1997 was due to: (i) an increase of approximately $137,000 in salaries and related expenses, (ii) an increase of approximately $6,000 in printing and servicing expenses and (iii) an increase of approximately $11,000 in other investor servicing expenses. The increase from 1995 to 1996 was due to: (i) an increase of approximately $49,000 in salaries and related expenses, (ii) an increase of approximately $5,000 in printing and servicing expenses, (iii) an increase of approximately $3,000 in insurance expenses and (iv) an increase of approximately $6,000 in other investor servicing expenses.
Professional fees increased $43,786 from 1996 to 1997, primarily due to costs incurred in connection with a review of various options available to the Partnership to improve total investment returns and provide liquidity to the Partnership's investors. Professional fees decreased $2,957 from 1995 to 1996, primarily due to a decrease in legal fees.
The Partnership recorded an extraordinary gain of $82,216 in 1996 due to the forgiveness of accrued interest on the Fox Hollow Apartments mortgage. The interest was forgiven in conjunction with a Loan Modification Agreement entered into in January 1996.
This report contains forward looking statements that reflect management's current beliefs and estimates of future economic circumstances, industry conditions, the Partnership's performance and financial results. All statements, trend analysis and other information concerning possible or assumed future results of operations of the Partnership and the real estate investments it has made (including, but not limited to, the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations"), constitute forward-looking statements. BAC Holders and others should understand that these forward looking statements are subject to numerous risks and uncertainties and a number of factors could affect the future results of the Partnership and could cause those results to differ materially from those expressed in the forward looking statements contained herein.
- 10 - Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The requirements of Item 7A of Form 10-K are not applicable to the Partnership prior to its Annual Report on Form 10-K for the year ended December 31, 1998.
	 Item 8.
Item 8. Financial Statements and Supplementary Data. The Financial Statements and supporting schedules of the Registrant are set forth in Item 14 hereof and are incorporated herein by reference.
	 Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. There were no disagreements with the Registrant's independent accountants on accounting principles and practices or financial disclosure during the fiscal years ended December 31, 1997 and 1996.
	 PART III
	 Item 10.
Item 10. Directors and Executive Officers of Registrant. The Registrant has no directors or officers. The general partners of the Registrant are America First Capital Source I, L.L.C. (the "America First General Partner") and Insured Mortgage Equities Inc. (the "IME General Partner"), each of which is controlled by America First Companies L.L.C. ("America First"). Collectively, the America First General Partner and the IME General Partner are referred to as the "General Partners".
	 The following individuals are the officers and directors of the General Partners and the officers and managers of America First, and each serves for a term of one year.
	 Michael B. Yanney, 64, has served as the Chairman, President and Chief Executive Officer of America First Companies L.L.C. and its predecessors since 1984. From 1977 until the organization of the first such fund in 1984, Mr. Yanney was principally engaged in the ownership and management of commercial banks. Mr. Yanney also has investments in private corporations engaged in a variety of businesses. From 1961 to 1977, Mr. Yanney was employed by Omaha National Bank and Omaha National Corporation (now part of U.S. Bank), where he held various positions, including the position of Executive Vice President and Treasurer of the holding company. Mr. Yanney also serves as a member of the boards of directors of Burlington Northern Santa Fe Corporation, Forest Oil Corporation, Lozier Corporation, Freedom Communications, Inc., Magnum Resources, RCN Corporation, Rio Grande Medical Technologies, Inc. and PKS Information Services, Inc..
	 Paul L. Abbott, 52, joined America First in 1997. From 1988 until 1997, Mr. Abbott was a Managing Director of Lehman Brothers, Inc. ("Lehman Brothers"). At Lehman Brothers, Mr. Abbott served as chief executive of over 50 investment funds controlled by Lehman Brothers. The assets owned by those funds included 50,000 multifamily units; 5,100 manufactured housing sites; 5 million square feet of retail; 950,000 feet of self-service storage; and a variety of other debt and equity real estate investments. His responsibilities included acquisitions, financings, planning, investment management and workouts. Mr. Abbott served on various committees responsible for approving acquisitions, financings, sales, workouts and similar decisions. Prior to joining Lehman Brothers, from 1983 until 1988, Mr. Abbott was a Senior Vice President of Daseke & Co., Inc., a predecessor to Walden Residential, a NYSE-traded real estate investment trust. At Daseke, Mr. Abbott was responsible for asset management of 20,000 multifamily units and arranging over $500 million of financings.
	 Michael Thesing, 43, has been Vice President and Chief Financial Officer of affiliates of America First Companies L.L.C. since July 1984. From January 1984 until July 1984 he was employed by various companies controlled by Mr. Yanney. He was a certified public accountant with Coopers & Lybrand from 1977 through 1983.
	 William S. Carter, M.D., 71, is a retired physician. Dr. Carter practiced medicine for 30 years in Omaha, Nebraska, specializing in otolaryngology (disorders of the ears, nose and throat).
	 George Kubat, 52, is the President and Chief Executive Officer of Phillips Manufacturing Co., an Omaha, Nebraska, based manufacturer of drywall metals and construction materials. Prior to assuming that position in November 1992, Mr. Kubat was a certified public accountant with Coopers & Lybrand in Omaha, Nebraska, from 1969. He was the tax partner in charge of the Omaha office from 1981 to 1992. Mr. Kubat currently serves on the board of directors of Sitel Corporation and American Business Information, Inc..
	 Martin A. Massengale, 64, is President Emeritus of the University of Nebraska, Director of the Center for Grassland Studies and Foundation Distinguished Professor. Prior to becoming President in 1991, he served as Interim President from 1989, as Chancellor of the University of Nebraska Lincoln from 1981 until 1990 and as Vice Chancellor for Agriculture and Natural Resources from 1976 to 1981. Prior to that time, he was a professor and associate dean of the College of Agriculture at the University of Arizona. Dr. Massengale currently serves on the board of directors of Woodmen Accident & Life Insurance Company and IBP, Inc. and is a member of the Board of Trustees of the Great Plains Funds, Inc..
	 Alan Baer, 75, is presently Chairman of Alan Baer & Associates, Inc., a management company located in Omaha, Nebraska. He is also Chairman of Lancer Hockey, Inc., Baer Travel Services, Wessan Telemarketing, Total Security Systems, Inc. and several other businesses. Mr. Baer is the former Chairman and Chief Executive Officer of the Brandeis Department Store chain which, before its acquisition, was one of the larger retailers in the Midwest. Mr. Baer has also owned and served on the board of directors of several banks in Nebraska and Illinois.
	 Gail Walling Yanney, 61, is a retired physician. Dr. Walling practiced anesthesia and was most recently the Executive Director of the Clarkson Foundation until October of 1995. In addition, she was a director of FirsTier Bank, N.A., Omaha prior to its merger with First Bank, N.A.. Ms. Yanney is the wife of Michael B. Yanney.
- 12 - 	 Mariann Byerwalter, 37, is Vice President of Business Affairs and Chief Financial Officer of Stanford University. Ms. Byerwalter was Executive Vice President of America First Eureka Holdings, Inc. ("AFEH") and EurekaBank from 1988 to January 1996. Ms. Byerwalter was Chief Financial Officer and Chief Operating Officer of AFEH, and Chief Financial Officer of EurekaBank from 1993 to January 1996. She was an officer of BankAmerica Corporation and its venture capital subsidiary from 1984 to 1987. She served as Vice President and Executive Assistant to the President of Bank of America and was a Vice President in the bank's Corporate Planning and Development Department.
	 Item 11.
Item 11. Executive Compensation. The Registrant does not have any directors or officers. None of the directors or officers of the General Partners or the managers or officers of America First receive compensation from the Registrant and neither General Partner receives reimbursement from the Registrant for any portion of their salaries. Remuneration paid by the Registrant to the General Partners pursuant to the terms of its agreement of limited partnership during the period ending December 31, 1997, is described in Note 4 to the Notes to the Financial Statements filed in response to Item 8 hereof.
	 Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) No person is known by Registrant to own beneficially more than 5% of the BACs.
	 (b)	No director or officers of the General Partners or managers or officers of America First own any BACs.
(c) There are no arrangements known to the Registrant, the operation of which may at any subsequent date result in a change of control of the Registrant.
	 Item 13.
Item 13. Certain Relationships and Related Transactions. The members of the America First General Partner are America First Companies L.L.C. and Mr. Yanney. The IME General Partner is owned by America First. Except as described herein, the Registrant is not a party to any transaction or proposed transaction with either General Partner or with any person who is: (i) a member, director, or officer of the General Partners or manager or officer of America First; (ii) a nominee for election as a director or manager of a General Partner or a manager of America First; (iii) an owner of more than 5% of the BACs; or, (iv) a member of the immediate family of any of the foregoing persons.
The Operating Partnership's general partners provide various on-site property development and management services. There were no property development and management fees incurred during 1997.
	 The General Partners are entitled to receive an asset management and partnership administrative fee equal to 0.5% of invested assets per annum, payable only during such years that an 8% return has been paid to investors on a noncumulative basis. Any unpaid amounts will accrue and be payable only after a 13% annual return to investors has been paid on a cumulative basis and the investors have received the return of their capital contributions. During 1997, distributions to investors represented less than an 8% return; accordingly, no fees were paid or accrued during 1997.
	 During 1997, the Registrant paid or reimbursed the General Partners $533,419 for certain costs and expenses incurred in connection with the operation of the Registrant, including legal and accounting fees and investor communication costs, such as printing and mailing charges. See Note 4 to Notes to Consolidated Financial Statements filed in response to Item 8 hereof for a description of these costs and expenses.
- 13 - America First Properties Management Company, L.L.C. (the "Manager") has been retained to provide property management services with respect to the day-to-day operation of Waterman's Crossing, Misty Springs, Fox Hollow Apartments and The Ponds at Georgetown. The property management agreements provide that the Manager is entitled to receive a management fee equal to a stated percentage of the gross revenues generated by the property under management. Management fees payable to the Manager range from 3% to 5% of gross revenues. Because the Manager is an affiliate of the General Partners, the management fees payable by the Registrant to the Manager may not exceed the lesser of (i) the rates that the Registrant would pay an unaffiliated manager for similar services in the same geographic location or (ii) the Manager's actual cost for providing such services. During the year ended December 31, 1997, the Registrant paid the Manager property management fees of $183,069.
	 PART IV
	 Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as part of this report:
1.	Financial Statements. The following financial statements are included in response to Item 8 of this report:
		 Independent Accountants' Report.
		 Consolidated Balance Sheets of the Registrant as of December 31, 1997, and December 31, 1996.
		 Consolidated Statements of Income of the Registrant for the years ended December 31, 1997, December 31, 1996, and December 31, 1995.
		 Consolidated Statements of Partners' Capital of the Registrant for the years ended December 31, 1997, December 31, 1996, and December 31, 1995.
		 Consolidated Statements of Cash Flows of the Registrant for the years ended December 31, 1997, December 31, 1996, and December 31, 1995.
		 Notes to Consolidated Financial Statements of the Registrant.
		 Schedule III--Real Estate and Accumulated Depreciation for the years ended December 31, 1997, and December 31, 1996.
		 2.	Financial Statement Schedules. The information required to be set forth in the financial statement schedules is included in the Financial Statements filed in response to Item 14(a)(1) hereof.
		 3.	Exhibits. The following exhibits were filed as required by Item 14(c) of this report. Exhibit numbers refer to the paragraph numbers under Item 601 of Regulation S-K:
			 4(a). Agreement of Limited Partnership of Capital Source L.P. (incorporated herein by reference from Exhibit A of the Prospectus contained in the Registrant's Post Effective Amendment No. 3 dated May 15, 1986, to the Registration Statement on Form S-11 (Commission File No. 0-16497)).
			 4(b). Beneficial Assignment Certificate (incorporated by reference to page 47 of Form 10-K for the fiscal year ended December 31, 1989, filed with the Securities and Exchange Commission by the Registrant (Commission File No. 0-16497)).
			 24.	Power of Attorney.
	 (b)	The Registrant did not file any reports on Form 8-K during the last quarter of the period covered by this report.
- 14 - INDEPENDENT ACCOUNTANTS' REPORT
To the Partners Capital Source L.P.:
We have audited the accompanying consolidated balance sheets of Capital Source L.P. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, partners' capital, and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capital Source L.P. and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Omaha, Nebraska March 26, 1998			 /s/Coopers & Lybrand L.L.P.
To the Partners Capital Source L.P.
Our report on the financial statements of Capital Source L.P. and subsidiaries is included in this Form 10-K. In connection with our audit of such consolidated financial statements, we have also audited the related consolidated financial statement schedule listed in Item 14.
In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material aspects, the information required to be included therein.
Omaha, Nebraska March 26, 1998 /s/Coopers & Lybrand L.L.P.
- 15 - Part I. Financial Information Item 1. Financial Statements CAPITAL SOURCE L.P. CONSOLIDATED BALANCE SHEETS
- 16 - CAPITAL SOURCE L.P. CONSOLIDATED STATEMENTS OF INCOME
- 17 - CAPITAL SOURCE L.P. CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) FROM DECEMBER 31, 1994, TO DECEMBER 31, 1997
- 18 - CAPITAL SOURCE L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS
Substantially all of the Partnership's general and administrative expenses and certain costs capitalized by the Partnership are paid by a General Partner or an affiliate and reimbursed by the Partnership. The amount of such expenses reimbursed to the General Partner was $533,419, $347,522, and $309,826 for the years ended December 31, 1997, 1996 and 1995, respectively. Reimbursed expenses are presented on a cash basis and do not reflect accruals made at each year end.
An affiliate of America First Capital Source I, L.L.C. has been retained to provide property management services for Waterman's Crossing, Misty Springs Apartments, Fox Hollow Apartments (beginning in June 1995) and The Ponds at Georgetown (beginning in November 1996). The fees for services provided were $183,069, $165,721 and $136,529 for 1997, 1996 and 1995, respectively, and represented the lower of costs incurred in providing management of the property or customary fees for such services determined on a competitive basis.
- 22 - CAPITAL SOURCE L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997
5.	Partnership Reserve Account
The Partnership maintains a reserve account which consisted of the following at December 31, 1997:
The reserve account was established to maintain working capital for the Partnership and is available for distribution to BAC Holders and for any contingencies related to Permanent Investments and the operation of the Partnership. The GNMA Certificates mature between 2007 and 2009.
At December 31, 1997, the total amortized cost, gross unrealized holding gains and aggregate fair value of available-for-sale securities were $1,044,910, $43,616 and $1,088,526, respectively. At December 31, 1996, the total amortized cost, gross unrealized holding gains and aggregate fair value of available-for-sale securities were $1,285,894, $41,502 and $1,327,396 respectively.
Prior to June 30, 1995, the Partnership classified all investment securities as held-to-maturity. However, during the quarter ending June 30, 1995, the Partnership reassessed the appropriateness of the classification of securities held in the reserve account. The Partnership concluded, given the nature of the reserve account, it would be more appropriate to classify securities held in the reserve account as available-for-sale rather than as held-to-maturity. Accordingly, on June 30, 1995, the Partnership transferred all securities held in the reserve account from the held-to-maturity classification to the available-for-sale classification. The total amortized cost, gross unrealized holding gains and aggregate fair value of the securities transferred were $2,740,792, $57,052 and $2,797,844, respectively.
6.	Parent Company Only Financial Information
Generally accepted accounting principles require that the Partnership's financial statements consolidate the Operating Partnerships since the Partnership holds a majority ownership interest and, through CS Properties I, Inc. can influence the decisions of the general partners in certain circumstances. In the consolidated financial statements, the Partnership's investment in FHA Loans and GNMA Certificates is eliminated against the related mortgage payable recorded by the Operating Partnership. If a mortgage loan goes into default and is foreclosed upon by FHA or GNMA, the respective agency may, at their discretion, repay the FHA Loan or the GNMA Certificate. If this occurs, the Partnership's investment in the Operating Partnership would be eliminated, resulting in the recognition of a gain on the Partnership's financial statements. This arises because consolidation accounting does not allow the Partnership to stop recording losses from the Operating Partnerships when the net investment is reduced to zero.
The parent company only financial information below represents the condensed financial information of the Partnership using the equity method of accounting for the investment in Operating Partnerships, rather than the consolidation of those partnerships. Under the equity method of accounting, the Partnership's capital contributions are adjusted to reflect its share of operating partnership profits or losses and distributions. The investment in Operating Partnerships represents the Partnership's limited partnership interest in the accumulated deficits of those Operating Partnerships. The parent company only information is provided to more clearly present the Partnership's investment in the Operating Partnerships. Since the Partnership is not a general partner, it is not obligated to fund the negative balances. If the investments in all Operating Partnerships were eliminated at December 31, 1997, Partnership capital would increase by $13,686,936 ($4.02 per BAC).
- 23 - CAPITAL SOURCE L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997
The FHA Loans and the GNMA Certificates are collateralized by first mortgage loans on the properties owned by the Operating Partnerships and are guaranteed or insured as to principal and interest by FHA or GNMA. The FHA insured mortgage loans are subject to a 1% assignment fee. The obligations of FHA and GNMA are backed by the full faith and credit of the United States government.
Parent Company Only Condensed Balance Sheets
Parent Company Only Condensed Statements of Income
- 24 - CAPITAL SOURCE L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997
Parent Company Only Condensed Statements of Cash Flows
7.	Mortgage Loan Payable and Extraordinary Item
The mortgage is an 8.86% loan collateralized by Fox Hollow Apartments. Prior to May 12, 1995 HUD was the mortgage holder, and the Operating Partnership operated under a Provisional Workout Agreement (PWA). A Loan Modification Agreement (LMA) dated January 8, 1996, was signed between the Operating Partnership and the new mortgage holder, dissolving the PWA and modifying certain terms and conditions of the mortgage payable. The new mortgage holder agreed to accept $229,745 (of which $161,745 was paid by the Partnership and $68,000 was paid by the property) as payment of accrued unpaid interest, thereby forgiving $82,216 of accrued interest. Further, commencing on January 1, 1996, installments of interest and principal in the amount of $49,947 are due on the first day of each month, with the balance of principal and accrued interest due and payable no later than October 1, 2028. The mortgage loan payable is recorded on the consolidated balance sheet, since it is no longer eliminated in consolidation. The mortgage is an obligation of the Operating Partnership which owns the property. Principal maturities on the mortgage loan are as follows:
Year Amount ---------- ------------- 1998 $ 41,053 1999 44,841 2000 48,980 2001 53,500 2002 58,437 Thereafter 6,073,265 ------------- $ 6,320,076 =============
- 25 - CAPITAL SOURCE L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997
8. Fair Value of Financial Instruments
The following methods and assumptions were used by the Partnership in estimating the fair value of its financial instruments:
Cash and temporary cash investments: Fair value approximates the carrying value of such assets.
Investment in mortgage-backed securities: Fair values are amounts based on obtained from an independent pricing source.
Mortgage loan payable: Fair value is not readily determinable as certain terms of the mortgage loan have recently been revised under a loan modification agreement.
9.	Summary of Unaudited Quarterly Results of Operations													
- 26 - CAPITAL SOURCE L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997
- 27 - Schedule III
CAPITAL SOURCE L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
- 28 - Schedule III
CAPITAL SOURCE L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
- 29 - Schedule III
CAPITAL SOURCE L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 and 1996
(a) The Partnership has no encumbrances against this property. Encumbrances recorded by the operating partnerships are eliminated in the consolidated financial statements of the Partnership.						 (b) The Partnership has a mortgage obligation which totaled $6,320,076 at December 31, 1997, and $6,354,657 at December 31, 1996. The mortgage obligation is collateralized solely by this property. Pursuant to the terms of a Loan Modification Agreement (LMA) entered into on January 8, 1996, installments of principal and interest of $49,947 are due monthly with the balance due and payable no later than October 1, 2028. The mortgage loan bears interest at 8.86%. The mortgage loan was in compliance with the terms of the LMA as of December 31, 1997. (c) Carrying costs include legal fees, appraisal fees, title costs and other related professional fees. (d) The aggregate cost for Federal income tax purposes is the same as for financial reporting purposes. (e) Reconciliation of Real Estate:
(f)	Reconciliation of Accumulated Depreciation:						
- 30 - 	 SIGNATURES
	 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
		 CAPITAL SOURCE L.P.
		 By	America First Capital 			 Source I, L.L.C., General 			 Partner of the Registrant
	 	By	/s/ Michael Thesing 			 Michael Thesing, 			 Vice President and Principal Financial Officer
Date: March 27, 1998
- 31 - 	 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: March 27, 1998	 By	/s/ Michael B. Yanney* 			 Michael B. Yanney, 			 Chairman and Chief Executive Officer of the America First General Partner (Principal Executive Officer)
Chairman of the Board, President, Chief Executive Officer and Manager of America First Companies L.L.C.
Date: March 27, 1998	 By	/s/ Michael Thesing 			 Michael Thesing, Vice 			 President, Secretary and 			 Treasurer (Principal Financial Officer) of the America First General Partner
Vice President, Secretary, Treasurer and Manager of America First Companies L.L.C.
Date: March 27, 1998	 By	/s/ William S. Carter, M.D.* 			 William S. Carter, M.D. Manager of America First Companies L.L.C.
Date: March 27, 1998	 By	/s/ George Kubat* 			 George Kubat Manager of America First Companies L.L.C.
Date: March 27, 1998	 By	/s/ Martin A. Massengale* 			 Martin A. Massengale Manager of America First Companies L.L.C.
Date: March 27, 1998	 By	/s/ Alan Baer* 			 Alan Baer Manager of America First Companies L.L.C.
Date: March 27, 1998	 By	/s/ Gail Walling Yanney* 			 Gail Walling Yanney Manager of America First Companies L.L.C.
Date: March 27, 1998	 By	/s/ Mariann Byerwalter* 			 Mariann Byerwalter Manager of America First Companies L.L.C.
*By Michael Thesing, Attorney in Fact
/s/ Michael Thesing Michael Thesing
- 32 -
EXHIBIT 24
POWER OF ATTORNEY
- 33 - POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and attorney-in-fact for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 1997, and any amendments thereto, required to be filed with the Securities and Exchange Commission by the following persons:
	America First Tax-Exempt Mortgage Fund Limited Partnership 	America First Apartment Investors, L.P. America First Participating/Preferred Equity Mortgage Fund and America First Participating/Preferred Equity Mortgage Fund Limited Partnership 	America First PREP Fund 2 Limited Partnership 	America First PREP Fund 2 Pension Series Limited Partnership 	Capital Source L.P. 	Capital Source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 1st day of February, 1998.
							 /s/ Michael B. Yanney 							Michael B. Yanney
- 34 - POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and attorney-in-fact for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 1997, and any amendments thereto, required to be filed with the Securities and Exchange Commission by the following persons:
America First Tax-Exempt Mortgage Fund Limited Partnership America First Apartment Investors, L.P. America First Participating/Preferred Equity Mortgage Fund and America First Participating/Preferred Equity Mortgage Fund Limited Partnership America First PREP Fund 2 Limited Partnership America First PREP Fund 2 Pension Series Limited Partnership Capital Source L.P. Capital Source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 1st day of February, 1998.
					 /s/ Gail Walling Yanney 							Gail Walling Yanney
- 35 - POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and attorney-in-fact for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 1997, and any amendments thereto, required to be filed with the Securities and Exchange Commission by the following persons:
America First Tax-Exempt Mortgage Fund Limited Partnership America First Apartment Investors, L.P. America First Participating/Preferred Equity Mortgage Fund and America First Participating/Preferred Equity Mortgage Fund Limited Partnership America First PREP Fund 2 Limited Partnership America First PREP Fund 2 Pension Series Limited Partnership Capital Source L.P. Capital Source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 1st day of February, 1998.
					 /s/ George Kubat 							George Kubat
- 36 - POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and attorney-in-fact for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 1997, and any amendments thereto, required to be filed with the Securities and Exchange Commission by the following persons:
America First Tax-Exempt Mortgage Fund Limited Partnership America First Apartment Investors, L.P. America First Participating/Preferred Equity Mortgage Fund and America First Participating/Preferred Equity Mortgage Fund Limited Partnership America First PREP Fund 2 Limited Partnership America First PREP Fund 2 Pension Series Limited Partnership Capital Source L.P. Capital Source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 1st day of February, 1998.
				 /s/ Martin A. Massengale 				Martin A. Massengale
- 37 - POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and attorney-in-fact for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 1997, and any amendments thereto, required to be filed with the Securities and Exchange Commission by the following persons:
America First Tax-Exempt Mortgage Fund Limited Partnership America First Apartment Investors, L.P. America First Participating/Preferred Equity Mortgage Fund and America First Participating/Preferred Equity Mortgage Fund Limited Partnership America First PREP Fund 2 Limited Partnership America First PREP Fund 2 Pension Series Limited Partnership Capital Source L.P. Capital Source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 1st day of February, 1998.
							 /s/ Alan Baer 							Alan Baer
- 38 - POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and attorney-in-fact for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 1997, and any amendments thereto, required to be filed with the Securities and Exchange Commission by the following persons:
America First Tax-Exempt Mortgage Fund Limited Partnership America First Apartment Investors, L.P. America First Participating/Preferred Equity Mortgage Fund and America First Participating/Preferred Equity Mortgage Fund Limited Partnership America First PREP Fund 2 Limited Partnership America First PREP Fund 2 Pension Series Limited Partnership Capital Source L.P. Capital Source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 1st day of February, 1998.
/s/ Mariann Byerwalter Mariann Byerwalter
- 39 - POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and attorney-in-fact for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 1997, and any amendments thereto, required to be filed with the Securities and Exchange Commission by the following persons:
America First Tax-Exempt Mortgage Fund Limited Partnership America First Apartment Investors, L.P. America First Participating/Preferred Equity Mortgage Fund and America First Participating/Preferred Equity Mortgage Fund Limited Partnership America First PREP Fund 2 Limited Partnership America First PREP Fund 2 Pension Series Limited Partnership Capital Source L.P. Capital Source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 1st day of February, 1998.
/s/ William S. Carter, M.D. William S. Carter, M.D.
- 40 -