Capital Builders Development Properties Ii 10-Q 2001 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities and Exchange Act of 1934

For the Quarter endedSeptember 30, 2001

Commission File Number33-4682

CAPITAL BUILDERS DEVELOPMENT PROPERTIES II,

A CALIFORNIA LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

California 77-0111643

State or other jurisdiction I.R.S. Employer

of organization Identification No.

1130 Iron Point Road, Suite 170, Folsom, California 95630

(Address of Principal executive offices) (Zip Code)

Registrant's telephone number, including area code:(916) 353-0500

Former name, former address and former fiscal year, if changed since last year:

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 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.

YesX No ___

PART 1 - FINANCIAL INFORMATION
Capital Builders Development Properties II
(A California Limited Partnership)
BALANCE SHEETS
(unaudited)
	September 30,	December 31,
	2001	2000
ASSETS
Cash and cash equivalents	$498,719	$1,232,514
Accounts receivable, net	283,246	177,630
Investment property, at cost, net
of accumulated depreciation and
Amortization of $3,030,735 and
$2,648,467 at September 30, 2001,
and December 31, 2000, respectively	12,994,794	11,907,910
Lease commissions, net of accumulated amortization of $258,561
and $198,454 at September 30, 2001,
and December 31,2000, respectively	186,882	167,767
Other assets, net of accumulated
amortization of $166,817 and
$115,668 at September 30, 2001 and
December 31, 2000, respectively	120,891	140,547
Total assets	$14,084,532	$13,626,368
LIABILITIES AND PARTNERS' EQUITY
Notes payable	$10,255,180	$10,250,908
Accounts payable and accrued
Liabilities	537,518	30,058
Tenant deposits	126,457	112,289
Total liabilities	10,919,155	10,393,255
Commitments and Contingencies
Partners' Equity:
General partner	(64,177)	(63,500)
Limited partners	3,229,554	3,296,613
Total partners' equity	3,165,377	3,233,113
Total liabilities and partners' equity	$14,084,532	$13,626,368
See accompanying notes to the financial statements.

Capital Builders Development Properties II
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30,
(unaudited)
		2001			2000
	Three		Nine	Three		Nine
	Months		Months	Months		Months
	Ended		Ended	Ended		Ended
Revenues
Rental and other income	$658,454		$1,980,797	$578,908		$1,749,899
Interest income	5,383		26,473	3,565		10,411
Total revenues	663,837		2,007,270	582,473		1,760,310
Expenses
Operating expenses	146,021		393,627	113,962		320,561
Repairs and maintenance	126,578		288,713	86,382		232,365
Property taxes	37,431		114,847	35,800		113,940
Interest	214,465		645,006	217,557		637,151
General and administrative	47,673		154,913	45,295		134,589
Depreciation and
amortization	162,234		477,900	148,495		420,847
Total expenses	734,402		2,075,006	647,491		1,859,453
Net Loss	(70,565)		(67,736)	(65,018)		(99,143)
Allocated to general partner	(706)		(677)	(650)		(991)
Allocated to limited partners	($69,859)		($67,059)	($64,368)		($98,152)
Net loss per limited
partnership unit	($3.03)		($2.91)	($2.79)		($4.26)
Average units outstanding	23,030		23,030	23,030		23,030
See accompanying notes to the financial statements.

Capital Builders Development Properties II
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(unaudited)
	2001	2000
Cash flows from operating activities:
Net loss	($67,736)	($99,143)
Adjustments to reconcile net
loss to cash flow
provided by operating activities:
Depreciation and amortization	477,900	420,847
Changes in assets and liabilities:
Increase in accounts receivable	(105,616)	(5,136)
Increase in leasing commissions	(79,222)	(54,209)
Decrease in other assets	9,866	1,938
Increase in accounts payable
and accrued liabilities	161,572	45,413
Increase/(Decrease) in tenant deposits	14,168	(691)
Net cash provided by
operating activities	410,932	309,019
Cash flows from investing activities:
Improvements to investment properties	(1,123,264)	(127,982)
Net cash used in
investing activities	(1,123,264)	(127,982)
Cash flows from financing activities:
Proceeds from issuance of debt	112,774	124,399
Payments of debt	(108,502)	(100,329)
Payment of loan fees	(25,735)	(45,625)
Net cash used in
financing activities	(21,463)	(21,555)
Net (decrease)/increase in cash	(733,795)	159,482
Cash, beginning of period	1,232,514	216,269
Cash, end of period	$498,719	$375,751
Cash paid for Interest	$ 645,006	$ 637,151
Non-cash investing activites:
Capital Improvements financed through accounts payable and accrued liabilities	$ 345,888	$ - - -
See accompanying notes to the financial statements.

Capital Builders Development Properties II

(A California Limited Partnership)

NOTES TO FINANCIAL STATEMENTS

September 30, 2001

(unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION

A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows:

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they may not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of results expected for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Capital builders Development Properties II annual report to shareholders on Form 10-K for the year ended December 31, 2000.

Basis of Accounting

The financial statements of Capital Builders Development Properties II (The "Partnership") are prepared on the accrual basis of accounting and therefore revenue is recorded as earned and costs and expenses are recorded as incurred.

Organization

Capital Builders Development Properties II, a California Limited Partnership, is owned under the laws of the State of California. The Managing General Partner is Capital Builders, Inc., a California corporation (CB).

The Partnership is in the business of real estate development and is not a significant factor in its industry. The Partnership's investment properties are located near major urban areas and, accordingly, compete not only with similar properties in their immediate areas but with hundreds of properties throughout the urban areas. Such competition is primarily on the basis of locations, rents, services and amenities. In addition, the Partnership competes with significant numbers of individuals and organizations (including similar companies, real estate investment trusts and financial institutions) with respect to the purchase and sale of land, primarily on the basis of the prices and terms of such transactions.

Investment Properties

Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

The Partnership's investment property consists of commercial land, buildings and leasehold improvements that are carried net of accumulated depreciation. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives of three to forty years. The straight-line method of depreciation is followed for financial reporting purposes.

Other Assets

Included in other assets are loan fees. Loan fees are amortized over the life of the related note.

Lease Commissions

Lease commissions are costs associated with obtaining leases with terms in excess of one year. The Partnership capitalizes these costs and amortizes them on a straight line basis over their related lease term.

Income Taxes

The Partnership has no provision for income taxes since all income or losses are reported separately on the individual Partners' tax returns.

Revenue Recognition

Rental income is recognized on a straight-line basis over the life of the lease, which may differ from the scheduled rental payments.

Net Loss per Limited Partnership Unit

The net loss per Limited Partnership Unit is computed based on the weighted average number of Units outstanding of 23,030 during the periods ending September 30, 2001 and 2000.

Statement of Cash Flows

For purposes of the statement of cash flows, the Partnership considers all short-term investments with a maturity, at date of purchase, of three months or less to be cash equivalents.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 2 - RELATED PARTY EXPENSE REIMBURSEMENT AND FEE ARRANGEMENT

The Managing General Partner (Capital Builders, Inc.) and the Associate General Partners are entitled to reimbursement of expenses incurred on behalf of the Partnership and certain fees from the Partnership. These fees include: a portion of the sales commissions payable by the Partnership with respect to the sale of the Partnership Units; an acquisition fee of up to 12.5% of gross proceeds from the sale of the Partnership Units; a property management fee up to 6% of gross rental revenues realized by the Partnership with respect to its properties; a subordinated real estate commission of up to 3% of the gross sales price of the properties; and a subordinated 25% share of the Partnership's distributions of cash from sales or refinancing. The property management fee currently being charged is 5% of gross rental revenues collected.

All acquisition fees and expenses, all underwriting commissions, and all offering and organizational expenses which can be paid are limited to 20% of the gross proceeds from sales of Partnership Units provided the Partnership incurs no borrowing to develop its properties. However, these fees may increase to a maximum of 33% of the gross offering proceeds based upon the total acquisition and development costs, including borrowings. Since the formation of the Partnership, 27.5% of these fees were paid to the Partnership's related parties, leaving a remaining maximum of 5.5% ($633,325) of the gross offering proceeds. The ultimate amount of these costs will be determined once the properties are fully developed and leveraged.

The total management fees paid to the Managing General Partner were $98,328 and $86,405 for the nine months ended September 30, 2001 and 2000, respectively, while total reimbursement of expenses was $199,575 and $172,333, respectively.

Management fees are classified on the Statements of Operations as an Operating Expense. These fees are a normal cost of property operations and would be incurred whether they are charged by the affiliate General Partner or an outside management company. Reimbursement of expenses are also a normal operating cost of the Partnership. These expenses are primarily for investor services, preparation of SEC filings, audit coordination and other Partnership management functions. Expense reimbursements are classified as General and Administrative expenses on the Statements of Operations.

In accordance with the Partnership Agreement, the General Partner may hire outside consultants or perform the necessary accounting, reporting and investor service functions internally, and pass through the associated costs. It has been determined by the Managing General Partner that if outside consultants were to perform these functions, the related costs would be substantially higher to the Partnership.

The Managing General Partner will reduce its future participation in proceeds from sales by an amount equal to the loss on the abandonment of option fees in 1988 ($110,000) and interest on the amount at a rate equal to that of the borrowed funds rate as determined by construction or permanent funds utilized by the Partnership.

NOTE 3 - INVESTMENT PROPERTY

The components of the investment property account are as follows:

		September 30,	December 31,
		2001	2000
Land		$ 4,053,799	$ 4,053,799
Building and Improvements		9,251,744	9,201,129
Tenant Improvements		1,607,167	1,301,449
Construction in Progress		1,112,819	- - - - -
Investment property, at cost		16,025,529	14,556,377
Less:	Accumulated depreciation
	and amortization	(3,030,735)	(2,648,467)
Investment property, net		$ 12,994,794	$ 11,907,910

NOTE 4 - NOTES PAYABLE

Notes Payable consist of the following at:

	September	December
	30, 2001	31, 2000
A mini-permanent loan of $5,000,000 with a fixed 8.95% interest rate. The loan requires monthly principal and interest payments of $41,789 which is sufficient to amortize the loan over 25 years. The loan is due October 1, 2002. The note is collateralized by a First Deed of Trust on Highlands 80 Phase I land, buildings and improvements.	$4,569,246	$4,636,728
A construction loan of $1,930,000 with a variable interest rate of one month LIBOR plus 350 basis points (7% as of September 30, 2001). The loan requires monthly interest only payments and its due date is November 3, 2002. The Note provides for future draws of $403,046 for tenant improvement construction costs and leasing commissions for future lease-up of Phase II. The note is collateralized by a First Deed of Trust on Highlands 80 Phase II land, buildings and improvements.	1,526,954	1,414,180
A mortgage loan of $4,200,000 with a fixed interest rate of 7.97% and requiring monthly principal and interest payments of $32,333, which is sufficient to amortize the loan over 25 years. The loan is due January 10, 2006. The note is collateralized by a First Deed of Trust on Capital Professional Center's (CPC) land, buildings and improvements.	4,158,980	4,200,000
Total Notes Payable	$10,255,180	$10,250,908

The Partnership is in compliance with all restrictive debt covenants as of September 30, 2001.

Scheduled principal payments during the remainder of 2001, 2002, 2003, 2004, 2005 and thereafter are $36,547, $6,133,678, $64,324, $70,106, 75,904 and $3,874,621, respectively.

NOTE 5 - LEASES

The Partnership leases its properties under long term noncancelable operating leases to various tenants. The facilities are leased through agreements for rents based on the square footage leased. Minimum annual base rental payments under these leases for the years ending December 31 are as follows:

2001	$ 2,340,623
2002	2,012,373
2003	1,395,360
2004	802,240
2005	196,151
thereafter	24,696
Total	$ 6,771,443

NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Partnership in estimating its fair value disclosures for financial instruments.

Notes payable

The fair value of the Partnership's Notes Payable are estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Partnership for debt of the same remaining maturities.

The estimated fair values of the Partnership's financial instruments are as follows:

September 30, 2001 December 31, 2000

Carrying Estimated Carrying Estimated

AmountFair ValueAmountFair Value

Liabilities

Note payable $4,569,246 $4,569,246 $4,636,728 $4,636,728

Note payable $1,526,954 $1,526,954 $1,414,180 $1,414,180

Note payable $4,158,980 $4,158,980 $4,200,000 $4,200,000

NOTE 7 - ACCOUNTING FOR DERIVATIVE INVESTMENTS AND HEDGING ACTIVITIES

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 as amended is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 was adopted on January 1, 2001. The Partnership's inability to invest in such instruments as stated in the Partnership agreement results in SFAS No. 133 not having an impact to the Partnership.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

The Partnership is involved in litigation arising in the normal course of its business. In the opinion of management, the Partnership's recovery or liability if any, under any pending litigation would not materially affect its financial condition or results of operations.

ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

The Partnership commenced operations on May 22, 1986 upon the sale of the minimum number of Limited Partnership Units. The Partnership's initial source of cash was from the sale of Limited Partnership Units. Through the offering of Units, the Partnership raised $11,515,000 (represented by 23,030 Limited Partnership Units). Cash generated from the sale of Limited Partnership Units was used to acquire land and for the development of a mixed use commercial project and a 40% interest in a commercial office project. In May 1997, the remaining 60% interest in the project was acquired.

The Partnership's primary current sources of cash are from cash balances, property rental income and construction financing for Phase II improvements. As of September 30, 2001, the Partnership had $498,719 in cash and $403,046 in available construction loan draws for Highlands 80 Phase II. The Highlands 80 construction loan was restructured and now has an expiration date of November 3, 2002 and a lower interest rate (one month LIBOR plus 350 basis points). During the month of September 2001, Management was not only successful in restructuring its Phase II construction loan but also in obtaining a $2,390,000 Phase III construction loan. The terms of this loan also consist of a variable interest rate of one month LIBOR plus 350 basis points, and has a November 3, 2002 due date. As of September 30, 2001, there have been no draws taken on this loan.

It is the Partnership's investment goal to utilize existing capital resources for continued leasing operations (tenant improvements and leasing commissions) and further development of Highlands 80 Phase III. Both of the Partnership's projects have achieved occupancy and rental rates sufficient to meet its expected current and future debt service obligations.

Management began the development of Highlands 80 Phase III (a 27,663 square foot, 2-story full service office building) during the first quarter of 2001. The project's site and shell are estimated to be completed by the fourth quarter of 2001. The total cost for Phase III construction is estimated to be $3,573,000. Of the total cost, $1,112,819 had been incurred as of September 30, 2001. The Partnership will fund the remaining costs with the new $2,390,000 construction loan and existing cash reserves.

Cash decreased by $733,795 during the nine months ended September 30, 2001. This was primarily the result of cash used for improvements to the Partnership's properties. Improvement funds were primarily used for the development of Phase III, the remodel of Capital Professional center and re-tenanting costs for Capital Professional Center and Highlands 80. Additionally, costs were incurred for refurbishing the lobbies of Capital Professional Center's two buildings.

The total of $1,469,152 incurred for improvements to the investment properties were funded by accounts payable ($345,888), cash provided by operations ($410,932) and cash reserves ($712,332).

Management anticipates cash provided from operations to continue to improve in future quarters with the additional lease-up of the Highlands 80 Phase II and III. The Partnership's properties' occupancy rates as of September 30, 2001 are 96% for Highlands 80 and 100% for Capital Professional Center.

During the period ended September 30, 2001, the Partnership paid $98,328 in management fees to its Managing General Partner. Management fees are classified on the Statements of Operations as an Operating Expense. These fees would be incurred whether they are charged by the affiliate General Partner or by an outside management company. The General Partner is currently charging 5% of collected revenue.

The Partnership will continue to incur improvement costs as its properties are leased up. The total projected tenant improvement costs expected to be incurred during the remainder of fiscal year 2001 are estimated to be $72,000. These costs will be funded with construction loan draws.

The Partnership's ability to maintain or improve cash flow is dependent upon its ability to maintain and improve the occupancy of its investment properties. Management believes the Partnership's financial resources should be adequate to meet 2001's obligations and no adverse change in liquidity is foreseen. The Partnership's properties' current market values are in excess of its total liabilities. The Partnership should therefore meet its current and long-term obligations so long as the properties' occupancy and rental rates are maintained and the real estate investment market remains stable.

Results of Operations

During the nine months ended September 30, 2001 as compared to September 30, 2000, the Partnership's total revenues increased by $246,960 (14%), while its expenses increased by $215,553 (11.6%), resulting in a change in net loss of $67,736 from $99,143.

The increase in revenue is primarily due to an increase in occupancy for Highlands 80 and rent increases at Capital Professional Center.

Expenses increased for the nine months ended September 30, 2001, as compared to September 30, 2000, primarily due to the net effect of:

a) $73,066 (22.8%) increase in operating expenses due to an increase in property management salaries related to an increase in occupancy at Highlands 80, supervision costs for the refurbishing of Capital Professional Center's lobbies, and general wage increases ($41,477); an increase in property management fees due to increases in Highlands 80 occupancy and in rental rates at both H80 and CPC ($11,923); an increase in general liability insurance costs ($13,146); and an increase in utility costs ($6,182);

b) $56,348 (24.2%) increase in repairs and maintenance due to the refurbishment of Capital Professional Center's lobbies and building exteriors, plus the recarpeting and repainting of various suites at H80 and CPC;

c) $7,855 (1.2%) increase in interest due to an increase in loan proceeds taken when Capital Professional Center was refinanced;

d) $20,324 (15.1%) increase in general and administrative due to an increase in administrative costs associated with additional reporting requirements by the SEC and IRS, an increase in audit fees, and administrative costs associated with the development of Phase III; and

e) $57,053 (13.6%) increase in depreciation due to additional amortized costs for Highlands 80 tenant improvements.

During the third quarter ended September 30, 2001 as compared to September 30, 2000, revenues increased by $81,364 (14%) while expenses increased by $86,909 (13.4%). The increase in revenues is primarily due to an increase in occupancy at Highlands 80. The increase in expenses is primarily due to the net effect of:

a) $32,059 (28.1%) increase in operating expenses due to the same increases discussed in a) above;

b) $40,196 (46.5%) increase in repairs and maintenance due to the recarpeting and repainting of various interior suites at H80 and CPC; and

c) $13,739 (9.3%) increase in depreciation due to additional amortized costs for Highlands 80 tenant improvements.

The Partnership also has gone from a net income position of $2,829 for the six months ended June 30, 2001 to a net loss position of $67,736 for the nine months ended September 30, 2001, primarily due to the increase in repairs and maintenance expense.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

The Partnership does not have a material market risk due to financial instruments held by the Partnership. The Partnership's only variable rate instrument consists of a construction loan in the amount of $1,526,954 at September 30, 2001 and $1,414,180 at December 31, 2000. The Partnership also obtained a new $2,390,000 variable rate construction loan. As of September 30, 2001, there was no outstanding balance on this construction loan.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has dully caused this report to be signed on its behalf by the undersigned, hereunto dully authorized.

CAPITAL BUILDERS DEVELOPMENT PROPERTIES II

a California Limited Partnership

By: Capital Builders, Inc.

Its Corporate General Partner

Date: November 9, 2001 By:____________________________________

Michael J. Metzger

President

Date: November 9, 2001 By:____________________________________

Kenneth L. Buckler

Chief Financial Officer