DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2012

NOTE 7 – DERIVATIVE INSTRUMENTS

Since the Fund's assets are structured on a fixed-rate basis and funds borrowed through bank debt are obtained on a floating-rate basis, the Fund is exposed to interest rate risk if rates rise because it will increase the Fund's borrowing costs. To manage interest rate risk, the Fund employs a hedging strategy using derivative financial instruments such as interest rate swaps. The Fund does not use derivative financial instruments for trading or speculative purposes. The Fund manages the credit risk of possible counterparty default in these derivative transactions by dealing primarily with counterparties with investment grade ratings. The Fund has agreements with certain of its derivative counterparties that contain a provision where if the Fund defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Fund could also be declared in default on its derivative obligations. As of September 30, 2012, the Fund has not posted any collateral related to these agreements. If the Fund had breached any of these provisions at September 30, 2012, it could be required to settle its obligations under the agreements at their termination value of $155,000.

At September 30, 2012, the Fund had 22 interest rate swap contracts that terminate on various dates ranging from November 2012 to June 2015 which generally coincide with the maturity period of our portfolio of leases and loans which collateralize the credit facility.

In the fourth quarter of 2010, the Fund made an election to discontinue the use of hedge accounting for its derivative financial instruments whereby any subsequent changes in the fair value of derivative instruments, including those that had previously been accounted for under hedge accounting, are recognized immediately in the accompanying consolidated statements of operations. While this change may create future volatility in the Fund's reported income statement results, it is not expected to have any impact on the Fund's future cash flows.

For the forecasted transactions that are probable of occurring, the derivative loss remaining in accumulated other comprehensive loss as of September 30, 2012 is being reclassified into earnings over the terms of the related forecasted borrowings, consistent with hedge accounting treatment. In July 2012 the Fund prospectively revised its estimate on amortization of accumulated other comprehensive loss which will accelerate amortization and more closely align the recognition of accumulated other comprehensive loss with projected repayments of the Fund's borrowings. This increased the Fund's net loss and interest expense by $144,000 for the three and nine month periods ended September 30, 2012, respectively, and increased the net loss per limited partner unit by $0.83 and $0.84 per share for the three and nine month periods ended September 30, 2012, respectively.

The following tables present the fair value of the Fund's derivative financial instruments as well as their classification on the consolidated balance sheets as of September 30, 2012 and December 31, 2011 and on the consolidated statements of operations for the nine months ended September 30, 2012 and 2011 (dollars in thousands):

	2012			2011
Fixed swaps (notional amount)	$	5,262		$	12,657
Range of receive rate		0.21% - 0.24	%		0.23% - 0.57	%
Range of pay rate		2.90% - 5.74	%		2.90% - 5.74	%

The following table indicates the fair value of the derivative contracts as of September 30, 2012 and December 31, 2011(in thousands):

	Balance Sheet Location	Derivative Assets		Derivative Liabilities
2012	Derivative liabilities, at fair value	$	-	$	146
2011	Derivative liabilities, at fair value	$	-	$	381

The following table summarizes the effect of the interest rate swaps on the consolidated statement of operations and other comprehensive income for the nine months ended September 30, 2012 and 2011 (in thousands):

	Location of loss reclassified from OCI to the statement of operations	Amount of loss reclassified from OCI to the statements of operations		Location of loss recognized in the statements of operations	Amount of loss recognized in the statements of operations
2012	(a)	$	439	(b)	$	35
2011	(a)	$	335	(b)	$	107

(a)

Losses reclassified from accumulated other comprehensive loss were realized in interest expense on the accompanying statements of operations.

(b)

All changes in fair value of derivatives subsequent to dedesignation as cash flow hedges were realized in loss on derivative activities on the accompanying statements of operations.

As of September 30, 2012, $330,000 of the remaining balance in accumulated other comprehensive loss is expected to be charged to earnings over the next 12 months.

- Definition

The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items.

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+ Details

LEASE EQUITY APPRECIATION FUND I LP 10-Q