Capital Builders Development Properties Ii 10-Q 2005 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 fiscal quarter ended September 30, 2005

Commission File Number33-4682

CAPITAL BUILDERS DEVELOPMENT PROPERTIES II,

A CALIFORNIA LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

California

(State or other jurisdiction of incorporation or organization)

77-0111643

(I.R.S. Employer 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

Securities registered pursuant to Section 12(b) of the Act:NONE

Securities registered pursuant to Section 12(g) of the Act:Limited Partnership Units

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. XYesNo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).Yes X No

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

As of September 30, 2005 the aggregate Limited Partnership Units held by nonaffiliates of the registrant was 23,030. There is no market for the Units.

Forward-Looking Statements

When used in this quarterly report, the words "believes," "anticipates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected, including, but not limited to, those set forth in the sections entitled "Potential Factors Affecting Future Operating Results" and "Qualitative and Quantitative Disclosures About Market Risks" below. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Partnership undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

PART 1 - FINANCIAL INFORMATION

Capital Builders Development Properties II
(A California Limited Partnership)
BALANCE SHEETS
[Discontinued Operations]
(unaudited)
	September 30,2005	December 31,2004
ASSETS
Cash	$671,811	$937,180
Accounts receivable, net of allowance for doubtful accounts of $360 at September 30, 2005 and December 31, 2004	18,962	75,057
Escrow proceeds in transit	8,520,868
Investment property, at cost, net of accumulated depreciation of $1,031,878 at December 31, 2004	---	5,772,804
Lease commissions, net of accumulated amortization of $97,516 at December 31, 2004	---	119,275
Other assets	21,583	9,388
Total assets	$9,233,224	$6,913,704
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued liabilities	77,060	158,256
Tenant deposits	---	43,845
Total liabilities	77,060	202,101
Commitments and contingencies
Partners' Equity:
General Partners	45,730	21,284
Limited Partners	9,110,434	6,690,319
Total Partners' equity	9,156,164	6,711,603
Total liabilities and Partners' equity	$9,233,224	$6,913,704
See accompanying notes to the financial statements.

Capital Builders Development Properties II
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
[Discontinued Operations]
(unaudited)
	September 30, 2005		September 30, 2004
	Three	Nine	Three	Nine
	Months	Months	Months	Months
	Ended	Ended	Ended	Ended
Revenues
Rental and other income	$208,814	$626,633	$190,253	$551,367
Interest income	1,669	3,890	1,810	5,289
Total revenues	210,483	630,523	192,063	556,656
Expenses
Operating expenses	56,429	150,143	58,159	150,041
Repairs and maintenance	25,704	72,640	22,897	70,362
Property taxes	16,239	48,717	16,238	49,423
General and administrative	96,001	247,118	56,352	189,291
Amortization	16,502	48,558	7,197	21,983
Total expenses	210,875	567,176	160,843	481,100
Gain from sale of properties	2,381,214	2,381,214	---	---
Net income from discontinued operations	2,380,822	2,444,561	31,220	75,556
Allocated to general partner	23,808	24,446	312	756
Allocated to limited partners	$2,357,014	$2,420,115	$30,908	$74,800
Net income per limited
partnership unit	$102.35	$105.09	$1.34	$3.25
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
NINE MONTHS ENDED SEPTEMBER 30,
[Discontinued Operations]
(unaudited)
	2005	2004
Cash flows from operating activities:
Net income	$ 2,444,561	$ 75,556
Adjustments to reconcile net income to net cash flow used in operating activities:
Depreciation and amortization	48,558	21,983
Gain from sale of investment property	(2,381,214)	0
Changes in operating assets and liabilities
Accounts receivable	56,095	(24,998)
Other assets	(12,195)	(11,143)
Accounts payable and accrued liabilities	(81,196)	3,113
Tenant security deposits	(43,845)	(3,565)
Net cash provided by operating activities	30,764	60,946
Cash flows from investing activities:
Improvements to investment properties	(346,133)	(196,013)
Net proceeds from sale of investment property	50,000	0
Increase in leasing commissions	0	(3,553)
Net cash used in investing activities	(296,133)	(199,566)
Net decrease in cash	(265,369)	(138,620)
Cash, beginning of period	937,180	1,104,912
Cash, end of period	$ 671,811	$966,292
Supplemental disclosure of non cash investing activities:
Sale of investment property	$ 8,520,868
Write off of lease commissions	$ (70,717)
See accompanying notes to the financial statements.

Capital Builders Development Properties II

(A California Limited Partnership)

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

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.

During July 2002, the Highlands 80 ("H80") buildings (eight individual buildings) were listed for sale, along with the Capital Professional Center project ("CPC") (two individual buildings). This resulted in all real estate assets of the Partnership being listed for sale since that time. As discussed in Note 3, all of the eight H80 buildings and CPC had been sold as of September 30, 2005.

In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), the current period results from operations and financial position of the entire entity, as well as all other periods presented, have been classified as discontinued operations as the Partnership had listed all assets for sale and the Partnership had met all of the other criteria of long-lived assets to be disposed of by sale. Depreciation was ceased on all buildings and projects when the buildings and projects were listed for sale in accordance with FAS 144.

On July 5, 2005, the Partnership entered into an Agreement of Purchase and Sale and Joint Escrow Instructions (the "Purchase Agreement") with Jake Schneider, Jay Schneider, Lincoln Snyder, Jon Snyder, and Ted Hart (collectively, the "Buyers"), pursuant to which the Partnership sold the three remaining H80 buildings, located at 4600, 4612, and 4616 Roseville Road, North Highlands, California, to the Buyers. The purchase price for the buildings was $9,000,000.

Pursuant to the Purchase Agreement, the Buyers placed deposits totaling $200,000 into escrow. Such deposits became non-refundable to the Buyers' upon their receipt of a loan commitment for the purchase of the buildings. The closing of the sale occurred on September 30, 2005.

The gain of $2,381,214 was recognized as it met the criteria noted in Statement of Financial Accounting Standards No. 66Accounting for Sales of Real Estate. The sale was consummated on September 30, 2005. On September 30, 2005, $50,000 was paid to the Partnership and the buyers had $8,520,868 in escrow for the purchase. There was no future subordination. On October 3, 2005 the Partnership received the remaining money from the escrow account. There were no other loan commitments that the Partnership is subject to and the Partnership has no continuing involvement in the property.

Management expects to utilize the cash proceeds from the sale to pay existing Partnership obligations and then begin distributions to the Limited Partners of available distributable cash.

Certain information in the financial statements for fiscal year 2004 has been reclassified for comparative purposes.

Organization

Capital Builders Development Properties II, a California Limited Partnership, was formed 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. The Partnership's investment properties were located near a major urban area and, accordingly, competed not only with similar properties in their immediate area but with properties throughout the urban area. Such competition was 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 buildings, primarily on the basis of the prices and terms of such transactions.

Investment Properties

Long-lived assets and certain identifiable intangibles were reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used was 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 were considered to be impaired, the impairment to be recognized was measured by the amount by which the carrying amount of the assets exceeded the fair value of the assets. Assets to be disposed of were reported at the lower of the carrying amount or fair value less costs to sell, and were no longer depreciated.

The Partnership's investment property consisted of commercial land, buildings and leasehold improvements that were carried net of accumulated depreciation. Depreciation was 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 was followed for financial reporting purposes. Depreciation and amortization was ceased when the corresponding real estate assets met the criteria to be accounted for as held for sale.

Lease Commissions

Lease commissions are costs associated with obtaining leases with terms in excess of one year. The Partnership capitalized these costs and amortized them on a straight line basis over their related lease term. On September 30, 2005, the remaining lease commissions relating to the properties sold on that date were written off. The total amount of the write off was $70,717, and was recorded as a reduction to the gain from sale of investment property.

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.

Gains from building sales are recognized using the full accrual method when title has passed to the buyer, the collectibility of the sales price is reasonably assured, the required minimum cash down payment has been received, and the Partnership has no continuing involvement with the property. When a sale does not meet the requirements for full profit recognition, the sale or a portion of the profit thereon is deferred until such requirements are met using the deposit, installment, or cost recovery method, as appropriate under the circumstances.

Allowance for Doubtful Accounts Receivable

The allowance for doubtful accounts is based upon analysis of possible losses from trade receivables. The allowance for doubtful accounts was $360 as of September 30, 2005, and December 31, 2004. The provision for losses during the three and nine month periods ended September 30, 2005, and September 30, 2004 was $-0-.

Net Income per Limited Partnership Unit

The net income per Limited Partnership Unit is computed based on the weighted average number of Units outstanding of 23,030.

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 affect 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 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 and expenses 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. None of the 3% subordinated real estate commission was earned or paid.

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, fees totaling 27.5% were paid to the Partnership's related parties, leaving a remaining maximum of 5.5% ($633,325) of the gross offering proceeds.

The General Partners had previously agreed to reduce their future General Partner 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.

On June 15, 2004, the Partnership entered into a settlement agreement with three of its Associate General Partners to pay a maximum of $45,000 ($15,000 each) only after the Limited Partners of the Partnership have received cumulative distributions of cash from sales equal to their capital contributions to the Partnership. No payment will be made to the claimants unless and until the Limited Partners have received cash from the sale of partnership assets equal to their remaining capital contributions. The settlement amount has been accrued for as of September 30, 2005, as management determined it probable based on the consummation of the sale of the properties.

The total management fees paid to the Managing General Partner were $29,007 and $24,869 for the nine months ended September 30, 2005 and 2004 respectively, while total reimbursement of expenses was $323,251and $314,463, respectively. During the third quarter of September 30, 2005 as compared to the third quarter of September 30, 2004 the management fees paid to the Managing General Partner were $10,204 and $10,127, respectively, while total reimbursement of expenses was $97,223 and $104,384, respectively.

Management fees are classified on the statements of operations as an operating expense. Reimbursement of expenses is primarily for investor services, preparation of SEC filings, audit coordination and other Partnership management functions. Expense reimbursements are classified as operating expenses and 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 General Partner that if outside consultants were to perform these functions, the related costs would be substantially higher to the Partnership.

NOTE 3 - INVESTMENT PROPERTY

The components of the investment property account are as follows:

		September 30, 2005	December 31, 2004
Land		$ ---	$ 1,165,958
Building and improvements		---	4,299,045
Tenant improvements		---	1,339,679
Investment property, at cost		---	6,804,682
Less:	accumulated depreciation
	and amortization	---	(1,031,878)
Investment property, net		$ ---	$ 5,772,804

During September 2005, the Partnership sold the final three out of the eight Highlands 80 buildings. Net proceeds of $ 8,570,868 after commissions and closing costs were put into a closing account by the buyer on September 30, 2005, and $50,000 was disbursed to the Partnership from the closing account on September 30, 2005. On October 3, 2005 the Partnership received the remaining net proceeds. The sale of these assets resulted in gain recognition of $ 2,381,214 during the quarter ended September 30, 2005. In conjunction with this sale, tenant security deposits were assumed by the buyers while the Partnership retained ownership of the accounts receivable.

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

During the month of July 2002, the Highlands 80 project (eight individual buildings) was listed for sale, and during the month of October 2002 the CPC project (two individual buildings) was listed for sale, which resulted in all real estate assets of the Partnership being listed for sale during the year ended December 31, 2002.

In accordance with the Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), the current period results from operations and financial position of the entire entity have been classified as discontinued operations as the Partnership had listed all assets for sale and the Partnership had met all of the other criteria of long-lived assets to be disposed of by sale. Additionally, all prior periods have been stated to reflect the entire entity as a discontinued operation. Depreciation was ceased on all buildings and projects when the buildings and projects were listed for sale in accordance with FAS 144.

On July 5, 2005, the Partnership entered into an Agreement of Purchase and Sale and Joint Escrow Instructions (the "Purchase Agreement") with Jake Schneider, Jay Schneider, Lincoln Snyder, Jon Snyder, and Ted Hart (collectively, the "Buyers"), pursuant to which the Partnership sold these three remaining H80 buildings, located at 4600, 4612, and 4616 Roseville Road, North Highlands, California, to the Buyers. The purchase price for the buildings was $9,000,000.

There is no material relationship between the Buyers and the Partnership, its Managing General Partner, or any of its affiliates, any directors or officers, or any associate of any director or officer.

Pursuant to the Purchase Agreement, the Buyers placed deposits totaling $200,000 into escrow. Such deposits became non-refundable to the Buyers' upon their receipt of a loan commitment for the purchase of the buildings. The closing of the sale occurred on September 30, 2005.

Management expects to utilize the cash proceeds from the sale to pay existing Partnership obligations and then begin distributions to the Limited Partners of available distributable cash.

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 sources of cash were from property rental income and proceeds from the sale of its assets. As of September 30, 2005, the Partnership had $671,811 in unrestricted cash. It is the Partnership's intention to utilize existing cash balances for existing Partnership obligations and then begin distributions to the Limited Partners of available distributable cash.

During the nine months ended September 30, 2005, the Partnership paid $346,133 for improvements relating to two new leases for its Highlands 80 property. The Partnership funded these costs with proceeds from rental operations and cash on-hand.

During the nine months ended September 30, 2005, the Partnership paid $29,007 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.

Management believes the Partnership's financial resources will be adequate to meet 2005's obligations due to the sale of the remaining properties and no adverse change in liquidity is foreseen.

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 affect 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. Partnership management bases its estimates on current information, historical experience and 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 rec ognition of revenue and expenses 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 policies affect 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. The partnership sold the remaining investment property on September 30, 2005.

Classification as Discontinued Operations:

All real estate assets of the Partnership had been listed for sale during the nine months ended September 30, 2005 and 2004 and have been sold as of September 30, 2005.

In accordance with the Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), the current period results from operations and financial position of the entire entity have been classified as discontinued operations as the Partnership had listed all assets for sale and the Partnership had met all of the other criteria of long-lived assets to be disposed of by sale. Additionally, all prior periods have been stated to reflect the entire entity as a discontinued operation. Depreciation was ceased on all buildings and projects when the buildings and projects were listed for sale in accordance with FAS 144.

Results of Operations

During the nine months ended September 30, 2005 as compared to September 30, 2004, the Partnership's total revenues increased by $73,867 (13.3%), while its expenses increased by $86,076 (17.9%). Additionally, the sale of the remaining 3 buildings resulted in a $2,381,214 gain.

The primary reason for the increase in revenue is due to annual rent increases for renewed leases and an increase in the occupied space at the Highlands 80 remaining buildings.

The increase in total expenses is primarily due to the following:

1. Increase in general and administrative of $57,827 (30.5%) due primarily to higher audit fees, and an accrual of a $45,000 liability to the general partners; and
2. Increase in amortization of $26,575 (120.9%) due to an increase in lease commissions being amortized.

During the third quarter of September 30, 2005 as compared to the third quarter of September 30, 2004 the Partnership's total revenues increased by $18,420 (9.6%), while its expenses increased by $50,029 (31.1%). Additionally, the sale of the remaining 3 buildings resulted in a $2,381,214 gain resulting in an increase in net income from discontinued operations of $2,380,822.

The primary reason for the increase in revenue is due to an increase in occupied space at the Highlands 80 Buildings.

The increase in total expenses is primarily due to net effect of the following:

1. Increase in general and administrative of $39,649 (70.4%) due to an accrual of a $45,000 liability to the general partners; and
2. Increase in amortization of $9,305 (129.3%) due to an increase of lease commissions being amortized; and
3. Increase in repairs & maintenance of $2,807 (12.3%) due to landscape renovations performed in 2005; and
4. Decrease in operating expenses of $1,733 (3.0%) primarily due to a decrease in insurance costs offset by increases in salary & benefits and utilities.

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.

ITEM 4.CONTROLS AND PROCEDURES

1. Disclosure Controls and Procedures

The undersigned principal executive officer and principal financial officer of Capital Builders, Inc. conclude that Capital Builders Development Properties II's disclosure controls and procedures are effective as of September 30, 2005 based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rule 15d-15.

2. Changes in Internal Control over Financial Reporting

There has been no change in Capital Builders Development Properties II's internal control over financial reporting that occurred during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, Capital Builders Development Properties II's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 6 - Exhibits and Reports on Form 10-Q

1. Exhibits

31.1 Rule 13a-14 Certification

31.2 Rule 13a-14 Certification

32.1 Section 1350 Certifications*

• This certification, required by Section 906 of the Sarbanes-Oxley Act of 2002, other than as required by Section 906, is deemed to be "filed" with the Commission or subject to the rules and regulations promulgated by the Commission under the Securities Exchange Act of 1934, as amended, or to the liabilities of Section 18 of said Act.

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 BUILDERS DEVELOPMENT PROPERTIES II

a California Limited Partnership

By: Capital Builders, Inc.

Its Corporate General Partner

Date: November 14, 2005

By:/s/ Michael J. Metzger

Michael J. Metzger

President

Date: November 14, 2005

By:/s/ Terri S. Bellini

Terri S. Bellini

Accounting/Finance Manager