Capital Builders Development Properties Ii 10-Q 2002 Q1 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 endedMarch 31, 2002

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 ___

Capital Builders Development Properties II
(A California Limited Partnership)
BALANCE SHEETS
(unaudited)
	March 31,	December 31,
	2002	2001
ASSETS
Cash and cash equivalents	$531,114	$399,514
Accounts receivable, net	247,777	290,857
Investment property, at cost, net
of accumulated depreciation and
amortization of $3,306,294 and
$3,149,455 at March 31, 2002, and
December 31, 2001, respectively	14,002,569	13,935,483
Lease commissions, net of accumulated
amortization of $265,238 and $240,236
at March 31, 2002, and December 31,
2001, respectively	217,335	240,294
Other assets, net of accumulated
amortization of $154,635 and
$141,852 at March 31, 2002 and
December 31, 2001, respectively	100,124	116,659
Total assets	$15,098,919	$14,982,807
LIABILITIES AND PARTNERS' EQUITY
Notes payable	$11,786,246	$11,327,106
Accounts payable and accrued
liabilities	83,205	356,871
Tenant deposits	145,289	140,001
Total liabilities	12,014,740	11,823,978
Commitments and Contingencies
Partners' Equity:
General partner	(64,990)	(64,243)
Limited partners	3,149,169	3,223,072
Total partners' equity	3,084,179	3,158,829
Total liabilities and partners' equity	$15,098,919	$14,982,807
See accompanying notes to the financial statements.

Capital Builders Development Properties II
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
(unaudited)
	2002	2001
Revenues
Rental and other income	$667,159	$630,282
Interest income	1,944	11,353
Total revenues	669,103	641,635
Expenses
Operating expenses	137,438	109,666
Repairs and maintenance	87,351	69,960
Property taxes	40,733	39,519
Interest	206,170	222,910
General and administrative	77,437	73,883
Depreciation and
amortization	194,624	155,455
Total expenses	743,753	671,393
Net loss	(74,650)	(29,758)
Allocated to general partner	(747)	(298)
Allocated to limited partners	($73,903)	($29,460)
Net loss per limited partnership unit	($3.21)	($1.28)
Average units outstanding	23,030	23,030
See accompanying notes to the financial statements.

Capital Builders Development Properties II
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
(unaudited)
	2002	2001
Cash flows from operating activities:
Net loss	($74,650)	($29,758)
Adjustments to reconcile net loss
to cash flow provided by
operating activities:
Depreciation and amortization	194,624	155,455
Changes in assets and liabilities
Decrease/(Increase) in accounts receivable	43,080	(16,762)
Increase in leasing commissions	(2,043)	(13,125)
Decrease in other assets	3,752	2,933
Increase in accounts payable
and accrued liabilities	41,044	53,115
Increase in tenant deposits	5,288	3,235
Net cash provided by
operating activities	211,095	155,093
Cash flows from investing activities:
Improvements to investment properties	(538,635)	(142,316)
Net cash used in investing
activities	(538,635)	(142,316)
Cash flows from financing activities:
Proceeds from issuance of debt	497,416	- - -
Payments of debt	(38,276)	(35,435)
Net cash provided by
(used in) financing activities	459,140	(35,435)
Net increase/(decrease) in cash	131,600	(22,658)
Cash, beginning of period	399,514	1,232,514
Cash, end of period	$531,114	$1,209,856
Cash paid for interest	$ 206,170	$ 222,910
See accompanying notes to the financial statements.

Capital Builders Development Properties II

(A California Limited Partnership)

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2002

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 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 three months ending March 31, 2002 and 2001.

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 requires Partnership Management to make estimates and judgments that effect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Partnership Management evaluates its estimates, including those related to long lived assets, accounts receivable, and contingencies and litigation. Partnership Management bases its estimates on current information, historical experience and or various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recognition of revenue that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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 borrowing. 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 $33,136 and $31,952 for the three months ended March 31, 2002 and 2001, respectively, while total reimbursement of expenses was $74,708 and $58,143 respectively.

Management fees are classified on the Statements of Operations as an Operating Expense. Reimbursement of 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 Statement 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 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:

	March 31, 2002	December 31, 2001
Land	$ 4,053,799	$4,053,799
Building and Improvements	11,466,562	9,256,574
Tenant Improvements	1,788,502	1,772,746
Construction in Progress	- - - - -	2,001,819
Investment property, at cost	17,308,863	17,084,938
Less: accumulated depreciation and amortization	(3,306,294)	(3,149,455)
Investment property, net	$14,002,569	$13,935,483

NOTE 4 - NOTES PAYABLE

Notes Payable consist of the following at:March 31, December 31,

	2002	2001
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.	$4,518,602	$4,542,367
A construction loan of $1,930,000 with a variable interest rate of one month LIBOR plus 350 basis points (5.4% as of March 31, 2002). The loan requires monthly interest only payments and its due date is now November 3, 2002. The Note provides for future draws of $39,242 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.	1,890,758	1,863,759
A construction loan of $2,390,000 with a variable interest rate of one month LIBOR plus 350 basis points (5.4% as of March 31, 2002). The loan requires monthly interest only payments and is due February 13, 2003. The Note provides for future draws of $1,143,358 for the completion of the Phase III building, tenant improvements and lease commissions. The Note is collateralized by a First Deed of Trust on Highlands 80 Phase III land, buildings and improvements, and is cross collateralized by Highlands 80 Phase I and Phase II improvements.	1,246,642	776,225
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.	4,130,244	4,144,755
Total Notes Payable	$11,786,246	$11,327,106

The Partnership is in compliance with all restrictive debt covenants as of March 31, 2002.

Scheduled principal payments during the remainder of 2002 and 2003, 2004, 2005, 2006 and thereafter are $6,454,649, $1,310,966, $70,106, 75,904 and $3,874,621, respectively.

The Partnership's Highlands 80 Phase I mini-permanent and Phase II construction loans will become due during the fourth quarter of 2002. The properties secured by these loans currently have sufficient value and cash flow to either refinance on a short term or long-term basis. Management is currently evaluating strategies regarding the possible refinance or sale of these properties. Although no refinancing agreement has been executed, Partnership Management is currently discussing refinance options with their current lender and Partnership Management is confident that the debt will be refinanced as the property's cash flows and occupancy rates support such refinancing. Partnership Management has historically been successful in refinancing loan obligations if required.

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 full years ending December 31 are as follows:

2002	2,657,015
2003	2,007,594
2004	1,361,807
2005	699,542
2006	481,963
Total	$ 7,207,921

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:

	March 31, 2002		December 31, 2001
	Carrying	Estimated	Carrying	Estimated
	Amount	Fair Value	Amount	Fair Value
Liabilities
Note payable	$4,518,602	$4,518,602	$4,542,367	$4,542,367
Note payable	$1,890,758	$1,890,758	$1,863,759	$1,863,759
Note payable	$1,246,642	$1,246,642	$ 776,225	$ 776,225
Note payable	$4,130,244	$4,130,244	$4,144,755	$4,144,755

NOTE 7 - RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). This statement requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets. SFAS No. 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset, i.e., the associated asset retirement costs, and to depreciate that cost over the life of the asset. The liability is increased at the end of each period to reflect the passage of time, i.e., accretion expense, and changes in the estimated future cash flows underlying the initial fair value measurement. The Partnership is required to adopt SFAS No. 143 on January 1, 2003. This statement is not expected to have a material impact on the Partnership's financial reporting and related disclosures.

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 and Phase III improvements. As of March 31, 2002, the Partnership had $531,114 in cash and $1,182,600 in available construction loan draws for Highlands 80 Phase II and Phase III. 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.

The Partnership's scheduled principal and interest payments during the remainder of 2002 and 2003, 2004, 2005 and 2006 are $7,348,103, $1,643,052, $387,996, $387,996 and $3,900,355, respectively. The scheduled interest payments assume fixed rates of interest of 8.95% and 7.97% for fixed rate debt and a variable interest rate of 5.4% (effective as of March 31, 2002) for variable rate debt.

During the three months ended March 31, 2002, the Partnership expended $538,635 on improvements for both its properties. These improvements consisted of the construction of Highlands 80 Phase III (a 27,664 sq. foot office building) and tenant improvements for both of the Partnership's properties. The Partnership funded these improvements with $41,219 of cash provided by operations and $497,416 from construction loan proceeds. The Partnership's remaining cash provided from operations ($169,876) was utilized to pay scheduled principal payments on its permanent loans and increase its cash reserves by $131,600.

The Partnership could continue to incur improvement costs as the Phase III building is leased. The total projected building and tenant improvement costs expected to be incurred during the remainder of 2002 are estimated to be $500,000. These costs will be funded with construction loan draws.

Management anticipates cash provided from operations to continue to improve in future quarters with the additional lease-up of the Highlands 80 Phase III. The Partnership's properties' occupancy rates as of March 31, 2002 are 92% for Highlands 80 (not including the newly constructed Phase III building) and 100% for Capital Professional Center.

During the quarter ended March 31, 2002, the Partnership paid $33,136 in management fees to its Managing General Partner. Management fees are classified on the Statements of Operations as an Operating Expense. The General Partner is currently charging 5% of collected revenue.

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 2002's obligations and no adverse change in liquidity is foreseen. The Partnership's properties' current market values are in excess of its total liabilities.

During the first quarter of 2002, the Highlands 80 Phase III building shell and site were finalized, completing the development of the Highlands 80 project. The Partnership potentially could incur costs for the Phase III interior buildout (i.e. - tenant improvements and lobby corridors) since the building currently has no signed tenants; and, as lease-up occurs, costs will be incurred. Although leasing has not been completed for Phase III, Management has begun its strategy of dissolving the Partnership by selling the Partnership's properties and making the final distributions to its Limited Partners.

Management's strategy for the dissolution of the Partnership involves:

1) Parcelizing Highlands 80 so each building can potentially be sold to individual buyers, which could increase the Partnership's ability to achieve higher sales prices;

2) Preparing the properties for sale;

3) Listing the properties for sale with a major brokerage firm;

4) Begin selling the properties by the beginning of the third quarter 2002, potentially having all the buildings, including Capital Professional Center, sold by the end of first quarter 2003; and

5) Subsequent to the final property sale, distribute sales net proceeds, net of Partnership obligations, to limited partners (estimated to be during the first or second quarter of 2003).

During the quarter ended March 31, 2002, Management began preparing the properties for sale by identifying and partially completing maintenance and due diligence items required for the sale. Additionally, Management has reached an agreement with Cornish & Carey to be the broker for the sale of Highlands 80. Management also partially completed the parcelization of Highlands 80 and anticipates its completion by the end of the second quarter 2002. Once the parcelization has been completed, the listing broker will place the Highlands 80 parcels on the market for sale. After the sale of the Highlands 80 buildings are underway, Management will choose a listing broker for the sale of Capital Professional Center.

The Partnership's Highlands 80 Phase I mini-permanent and Phase II construction loans will become due in the fourth quarter of 2002, and the Phase III construction loan will become due in the first quarter of 2003. The properties secured by these loans currently have sufficient value and cash flow to refinance on a short-term basis. In case the sales of these buildings take longer than anticipated and the loans become due, Management has already started preliminary negotiations with the existing lender to extend the loan due dates.

Critical Accounting Policies and Estimates

The Partnership's discussion and analysis of its financial condition and results of operations are based upon the Partnership's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires Partnership Management to make estimates and judgments that effect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Partnership Management evaluates its estimates, including those related to long lived assets, accounts receivable, deferred revenue, and contingencies and litigation. Additionally, on an on-going basis Partnership Management also evaluates the debt obligations of the Partnership and evaluates the Partnership's ability to satisfy these obligations. Partnership Management bases its estimates on current information, historical experience and or various other assum ptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recognition of revenue that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Partnership believes the following critical accounting policy affects its more significant judgments and estimates used in the preparation of its financial statements:

Valuation of Investment Property (Long-Lived Assets):

Investment property is evaluated for impairment on a continual basis based on the property's occupancy levels, annual cash flows, and projected cash flows based on the rental market and other factors including prospective new tenants.

Debt Obligations:

Partnership management also believes that the evaluation of the Partnership's debt obligations and the Partnership's ability to satisfy these obligations is critical in the preparation of its financial statements.

Partnership Management evaluates the debt obligations of the Partnership continually and determines the Partnership's ability to satisfy debt obligations through either refinancing, repayment, or various other strategic methods including potential sale of the property.

Results of Operations

During the three months ended March 31, 2002 as compared to March 31, 2001, the Partnership's total revenues increased by $27,468 (4.3%), while its expenses increased by $72,360 (10.8%), resulting in an increase in net loss of $44,892 (151%).

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 three months ended March 31, 2002, as compared to March 31, 2001, primarily due to the net effect of:

a) $27,772 (25.3%) increase in operating expenses due to higher utility, insurance, marketing and project management costs associated with the Highlands 80 Phase II buildings and newly constructed Phase III building;

b) $17,391 (24.9%) increase in repairs and maintenance due to repairs performed on Highlands 80 in order to prepare the property for sale;

c) $16,740 (7.5%) decrease in interest due to lower variable loan costs associated with Highlands 80's Phase II construction loan; and

d) $39,169 (25.2%) increase in depreciation due to additional amortized costs for Highlands 80 Phase II tenant improvements and lease commissions.

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 has two variable rate instruments, both for Highlands 80 construction loans; the Phase II loan in the amount of $1,890,758 and $1,863,759 at March 31, 2002 and December 31, 2001, respectively and the Phase III loan in the amount of $1,246,642 and $776,225 at March 31, 2002 and December 31, 2001, respectively.

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: May 10, 2002 By:_____________________________________

Michael J. Metzger

President

Date: May 10, 2002 By:_____________________________________

Kenneth L. Buckler

Chief Financial Officer