UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 2002
[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from _________to _________
Commission file number 0-14483
Davidson Diversified Real Estate II, L.P.
(Exact name of small business issuer as specified in its charter)
Delaware 62-1207077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
The issuer recently discovered that it had inadvertently omitted conformed
signatures on certain certifications included in its 10-QSB filing made November
14, 2002. Original signatures were complete and on file with the issuer at the
time the 10-QSB filing was made in November; however, due to a clerical error,
conformed signatures were not included in the electronic filing. This amendment
is being filed solely to correct this inadvertent clerical error.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Davidson Diversified Real Estate II, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 2002
Assets
Cash and cash equivalents $ 2,318
Receivables and deposits 793
Restricted escrows 85
Other assets 670
Investment properties:
Land $ 2,603
Buildings and related personal property 50,023
52,626
Less accumulated depreciation (26,754) 25,872
$ 29,738
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 443
Tenant security deposit liabilities 154
Accrued property taxes 555
Other liabilities 582
Due to affiliates 8,284
Mortgage notes payable 27,411
Partners' Deficit
General partners $ (589)
Limited partners (1,224.25 units issued and
outstanding) (7,102) (7,691)
$ 29,738
See Accompanying Notes to Consolidated Financial Statements
Davidson Diversified Real Estate II, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Revenues: (Restated)
Rental income $ 1,677 $ 1,543 $ 4,879 $ 4,651
Other income 154 141 476 473
Casualty gain 92 -- 92 --
Total revenues 1,923 1,684 5,447 5,124
Expenses:
Operating 635 872 2,414 2,522
General and administrative 86 97 261 304
Depreciation 491 521 1,490 1,516
Interest 358 511 1,169 1,555
Property taxes 115 129 344 294
Loss on early extinguishment of debt 17 -- 17 554
Total expenses 1,702 2,130 5,695 6,745
Net income (loss) $ 221 $ (446) $ (248) $ (1,621)
Net income (loss) allocated to general
partners (2%) $ 4 $ (9) $ (5) $ (32)
Net income (loss) allocated to limited
partners (98%) 217 (437) (243) (1,589)
$ 221 $ (446) $ (248) $ (1,621)
Net income (loss) per limited
partnership unit $ 177.25 $(356.96) $(198.49) $(1,297.94)
See Accompanying Notes to Consolidated Financial Statements
Davidson Diversified Real Estate II, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partners Partners Total
Original capital contributions 1,224.25 $ 1 $24,485 $24,486
Partners' deficit at
December 31, 2001 1,224.25 $ (584) $(6,859) $(7,443)
Net loss for the nine months
ended September 30, 2002 -- (5) (243) (248)
Partners' deficit at
September 30, 2002 1,224.25 $ (589) $(7,102) $(7,691)
See Accompanying Notes to Consolidated Financial Statements
Davidson Diversified Real Estate II, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
2002 2001
Cash flows from operating activities:
Net loss $ (248) $(1,621)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 1,490 1,516
Amortization of discounts and loan costs 233 219
Loss on early extinguishment of debt 17 554
Casualty gain (92) --
Change in accounts:
Receivables and deposits (468) (131)
Other assets (54) (59)
Accounts payable (273) 258
Tenant security deposit liabilities 15 6
Accrued property taxes 99 55
Other liabilities 225 (353)
Due to affiliate 266 --
Net cash provided by operating activities 1,210 444
Cash flows from investing activities:
Property improvements and replacements (5,291) (3,010)
Net withdrawals from restricted escrows 145 196
Net cash used in investing activities (5,146) (2,814)
Cash flows from financing activities:
Advances from affiliates 2,781 3,867
Payments on advances from affiliates (77) --
Payments on mortgage notes payable (386) (357)
Proceeds from mortgage notes payable 7,462 6,924
Repayment of mortgage notes payable (4,097) (7,812)
Prepayment penalty -- (359)
Loan costs paid (172) (469)
Net cash provided by financing activities 5,511 1,794
Net increase (decrease) in cash and cash equivalents 1,575 (576)
Cash and cash equivalents at beginning of period 743 1,130
Cash and cash equivalents at end of period $ 2,318 $ 554
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,208 $ 1,421
Supplemental disclosure of non-cash activity:
Property improvements and replacements in accounts payable $ -- $ 25
Insurance proceeds in receivables and deposits $ 132 $ --
At December 31, 2001 approximately $850,000 of property improvements and
replacements were included in accounts payable and are included in property
improvements and replacements at September 30, 2002.
See Accompanying Notes to Consolidated Financial Statements
Davidson Diversified Real Estate II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements of Davidson
Diversified Real Estate II, L.P. (the "Partnership" or "Registrant") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Davidson Diversified Properties, Inc.
(the "Managing General Partner"), all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended September
30, 2002 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Partnership's Annual Report on Form 10-KSB for the fiscal year ended December
31, 2001. The Managing General Partner is a subsidiary of Apartment Investment
and Management Company ("AIMCO"), a publicly traded real estate investment
trust.
Effective April 1, 2002, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44
and 64". SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt,"
required that all gains and losses from extinguishment of debt be aggregated
and, if material, classified as an extraordinary item. SFAS No. 145 rescinds
SFAS No. 4, and accordingly, gains and losses from extinguishment of debt should
only be classified as extraordinary if they are unusual in nature and occur
infrequently. Neither of these criteria applies to the Partnership. As a result,
the accompanying consolidated statements of operations reflect the loss on early
extinguishment of debt at Reflections Apartments (see "Note C") in operations
rather than as an extraordinary item.
Certain reclassifications have been made to the 2001 balances to conform to the
2002 presentation.
Note B - Transactions with Affiliated Parties
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
Partnership activities. The Partnership Agreement provides for (i) certain
payments to affiliates for services and (ii) reimbursement of certain expenses
incurred by affiliates on behalf of the Partnership.
During the nine months ended September 30, 2002 and 2001, affiliates of the
Managing General Partner were entitled to receive 5% of gross receipts from all
of the Registrant's properties for providing property management services. The
Registrant paid to such affiliates approximately $272,000 and $263,000 for the
nine months ended September 30, 2002 and 2001, respectively, which is included
in operating expenses.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $772,000 and
$355,000 for the nine months ended September 30, 2002 and 2001, respectively.
Included in these amounts are fees related to construction management services
provided by an affiliate of the Managing General Partner of approximately
$567,000 and $157,000 for the nine months ended September 30, 2002 and 2001,
respectively. The construction management fees are calculated based on a
percentage of current year additions to investment properties.
In addition to reimbursement for services to affiliates, the Partnership paid an
affiliate of the Managing General Partner approximately $57,000 for loan costs
related to the refinancing of Big Walnut Apartments during the nine months ended
September 30, 2002. These costs were capitalized and are included in other
assets on the consolidated balance sheet.
In accordance with the Partnership Agreement, the Managing General Partner has
loaned the Partnership funds to cover operational expenses and to assist in the
closing of the refinancing required at Reflections Apartments. At September 30,
2002, the amount of the outstanding loans and accrued interest to cover
operational expenses was approximately $4,451,000 and the amount of the
outstanding loan and accrued interest to assist the refinancing was
approximately $3,833,000. Both amounts are included in Due to affiliates on the
accompanying consolidated balance sheet. Interest is charged at prime plus 1%.
Interest expense was approximately $304,000 and $332,000 for the nine months
ended September 30, 2002 and 2001, respectively. The Managing General Partner is
considering the remedies it can pursue including accelerating repayment of the
outstanding loans it has made to the Partnership to cover operational expenses
and to assist in the refinancing of Reflections Apartments.
The Partnership accrued a real estate commission of $18,000 upon the sale of
Shoppes at River Rock due to the Managing General Partner during the year ended
December 31, 1999 which is included in other liabilities in the accompanying
consolidated balance sheet. Payment of this commission is subordinate to the
limited partners receiving their original invested capital plus a cumulative
non-compounded annual return of 8% on their adjusted invested capital.
Beginning in 2001, the Partnership began insuring its properties up to certain
limits through coverage provided by AIMCO which is generally self-insured for a
portion of losses and liabilities related to workers compensation, property
casualty and vehicle liability. The Partnership insures its properties above the
AIMCO limits through insurance policies obtained by AIMCO from insurers
unaffiliated with the Managing General Partner. During the nine months ended
September 30, 2002 and 2001, the Partnership was charged by AIMCO and its
affiliates approximately $105,000 and $116,000, respectively, for insurance
coverage and fees associated with policy claims administration.
Note C - Refinancing of Mortgage Notes Payable
On January 16, 2001, the mortgages encumbering Reflections Apartments were
refinanced in order to finance the rehabilitation of the property. The maximum
new loan amount is $13,600,000. Effective January 16, 2001, the lender made an
initial advance of $5,040,000. Prior to the initial advance, the Managing
General Partner loaned the Partnership approximately $3,673,000 in order for the
Partnership to close the refinancing of the property. This amount will be repaid
from the further refinancing that will occur after the completion of the
rehabilitation project, estimated to be July 2004. During the year ended
December 31, 2001, the lender advanced Reflections Apartments an additional
amount of approximately $3,845,000 and during the nine months ended September
30, 2002 the lender advanced Reflections Apartments an additional $1,742,000.
Subsequent advances of up to $2,973,000 will also be made to cover renovation
work that is needed at the property. The new loan matures in January 2004, with
2 one-year extension options. Interest payments started in February 2001 based
on LIBOR plus 280 basis points (4.62% at September 30, 2002). Due to the
rehabilitation project, approximately $564,000 and $188,000 of the interest
expense for the nine months ended September 30, 2002 and 2001, respectively, was
capitalized. In addition, monthly cash flow payments will be made to the lender
until the anticipated completion date of the renovations. If any amount remains
from these advances on the completion date of the renovation, it will be applied
to the principal balance. Principal payments will begin in February 2003, and
monthly deposits into a replacement reserve will be required. In connection with
the refinancing, the Partnership incurred loan costs of approximately $469,000
during the year ended December 31, 2001. Additional loan costs of approximately
$19,000 were incurred during the nine months ended September 30, 2002. These
loan costs are included in other assets in the accompanying consolidated balance
sheet and are being amortized over the life of the mortgage. In connection with
the refinancing, the assets and liabilities of the property were transferred
from one subsidiary, Big Walnut L.P., to a newly formed subsidiary, AIMCO
Greensprings L.P. The loan is collateralized by the property as well as the
interest of both the Partnership and Davidson Diversified Properties, Inc. in
AIMCO Greensprings L.P. The new mortgage replaced a first mortgage of
approximately $7,518,000 and a second mortgage of approximately $294,000. The
Partnership recognized a loss on early extinguishment of debt of approximately
$554,000 consisting of a prepayment penalty of approximately $359,000 and the
write-off of unamortized loan costs and mortgage discounts of approximately
$195,000.
During September 2002, the Partnership refinanced the mortgages encumbering Big
Walnut Apartments. The refinancing replaced a first mortgage of approximately
$3,930,000 and a second mortgage of approximately $167,000 with a new mortgage
of $5,720,000. Total capitalized loan costs were approximately $153,000 during
the nine months ended September 30, 2002. The Partnership recognized a loss on
the early extinguishment of debt of approximately $17,000 due to the write-off
of unamortized loan costs. In addition, $85,000 was deposited in an escrow
account to be used to complete required repairs.
Big Walnut Apartments was initially refinanced under an interim credit facility
("Interim Credit Facility") which has a term of three months. The Interim Credit
Facility includes properties in other partnerships that are affiliated with the
Partnership. However, the Interim Credit Facility creates separate loans for
each property that are not cross-collaterilized or cross-defaulted with the
other property loans. During the three month term of the Interim Credit
Facility, the properties will be required to make interest-only payments. The
first month's interest, which was paid at the date of the refinancing, was
calculated at LIBOR plus 70 basis points. Interest for the following two months
will be calculated at LIBOR plus 150 points and is due monthly.
The Managing General Partner anticipates that the Interim Credit Facility will
be transferred to a different lender before the end of the three-month term of
the Interim Credit Facility. The credit facility ("Permanent Credit Facility")
with the new lender will have a maturity of five years with one five-year
extension option. This Permanent Credit Facility will also create separate loans
for each property that are not cross-collaterilized or cross-defaulted with the
other property loans. Each note under this Permanent Credit Facility will begin
as a variable rate loan with the option of converting to a fixed rate loan after
three years. The interest rate on the variable rate loans will be 85 basis
points over the Fannie Mae discounted mortgage-backed security index, and the
rate will reset monthly. Each loan will automatically renew at the end of each
month. In addition, monthly principal payments will be required based on a
30-year amortizations schedule, using the interest rate in effect during the
first month that any property is on the Permanent Credit Facility. The loans
will be prepayable without penalty.
Note D - Casualty
During the nine months ended September 30, 2002, a net casualty gain was
recorded at Reflections Apartments. The casualty gain related to a fire that
occurred at Reflections Apartments in October 2001. The gain was the result of
insurance proceeds of approximately $132,000 less the net book value of the
damaged property of approximately $40,000. The proceeds are being held in escrow
by the lender until the repairs are completed and are included in receivables
and deposits on the accompanying consolidated balance sheet.
Note E - Legal Proceedings
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the
State of California for the County of San Mateo. The plaintiffs named as
defendants, among others, the Partnership, its Managing General Partner and
several of their affiliated partnerships and corporate entities. The action
purports to assert claims on behalf of a class of limited partners and
derivatively on behalf of a number of limited partnerships (including the
Partnership) which are named as nominal defendants, challenging, among other
things, the acquisition of interests in certain Managing General Partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one time, affiliates of Insignia; past tender offers by the Insignia
affiliates to acquire limited partnership units; management of the partnerships
by the Insignia affiliates; and the series of transactions which closed on
October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties
Trust, respectively, were merged into AIMCO. The plaintiffs seek monetary
damages and equitable relief, including judicial dissolution of the Partnership.
On June 25, 1998, the Managing General Partner filed a motion seeking dismissal
of the action. In lieu of responding to the motion, the plaintiffs filed an
amended complaint. The Managing General Partner filed demurrers to the amended
complaint which were heard February 1999.
Pending the ruling on such demurrers, settlement negotiations commenced. On
November 2, 1999, the parties executed and filed a Stipulation of Settlement,
settling claims, subject to court approval, on behalf of the Partnership and all
limited partners who owned units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Court, at which time
the Court set a final approval hearing for December 10, 1999. Prior to the
December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the Managing General Partner and its affiliates terminated
the proposed settlement. In February 2000, counsel for some of the named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated the settlement. On June 27, 2000, the Court entered an order
disqualifying them from the case and an appeal was taken from the order on
October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff
Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the
putative class. Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001, the Managing General Partner and its affiliates filed a
demurrer to the third amended complaint. On May 14, 2001, the Court heard the
demurrer to the third amended complaint. On July 10, 2001, the Court issued an
order sustaining defendants' demurrer on certain grounds. On July 20, 2001,
Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order
granting in part and denying in part defendants' demurrer. On September 7, 2001,
Plaintiffs filed a fourth amended class and derivative action complaint. On
September 12, 2001, the Court denied Plaintiffs' motion for reconsideration. On
October 5, 2001, the Managing General Partner and affiliated defendants filed a
demurrer to the fourth amended complaint, which was heard on December 11, 2001.
On February 2, 2002, the Court served its order granting in part the demurrer.
The Court has dismissed without leave to amend certain of the plaintiffs'
claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a
putative class comprised of all non-affiliated persons who own or have owned
units in the partnerships. The Managing General Partner and affiliated
defendants oppose the motion. On April 29, 2002, the Court held a hearing on
plaintiffs' motion for class certification and took the matter under submission
after further briefing, as ordered by the court, was submitted by the parties.
On July 10, 2002, the Court entered an order vacating the current trial date of
January 13, 2003 (as well as the pre-trial and discovery cut-off dates) and
stayed the case in its entirety through November 7, 2002 so that the parties can
have an opportunity to discuss settlement. On October 30, 2002, the court
entered an order extending the stay in effect through January 10, 2003.
During the third quarter of 2001, a complaint (the "Heller action") was filed
against the same defendants that are named in the Nuanes action, captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended complaint. The first amended complaint in the Heller action is
brought as a purported derivative action, and asserts claims for among other
things breach of fiduciary duty; unfair competition; conversion, unjust
enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a
motion to consolidate the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed without leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the Managing General Partner and affiliated
defendants moved to strike the first amended complaint in its entirety for
violating the Court's July 10, 2001 order granting in part and denying in part
defendants' demurrer in the Nuanes action, or alternatively, to strike certain
portions of the complaint based on the statute of limitations. Other defendants
in the action demurred to the fourth amended complaint, and, alternatively,
moved to strike the complaint. On December 11, 2001, the court heard argument on
the motions and took the matters under submission. On February 4, 2002, the
Court served notice of its order granting defendants' motion to strike the
Heller complaint as a violation of its July 10, 2001 order in the Nuanes action.
On March 27, 2002, the plaintiffs filed a notice appealing the order striking
the complaint. The parties are currently in the midst of briefing that appeal.
Note E - Legal Proceedings (continued)
The Managing General Partner does not anticipate that any costs, whether legal
or settlement costs, associated with these cases will be material to the
Partnership's overall operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. The matters discussed
in this report contain certain forward-looking statements, including, without
limitation, statements regarding future financial performance and the effect of
government regulations. The discussions of the Registrant's business and results
of operations, including forward-looking statements pertaining to such matters,
do not take into account the effects of any changes to the Registrant's business
and results of operations. Actual results may differ materially from those
described in the forward-looking statements and will be affected by a variety of
risks and factors including, without limitation: national and local economic
conditions; the terms of governmental regulations that affect the Registrant and
interpretations of those regulations; the competitive environment in which the
Registrant operates; financing risks, including the risk that cash flows from
operations may be insufficient to meet required payments of principal and
interest; real estate risks, including variations of real estate values and the
general economic climate in local markets and competition for tenants in such
markets; and possible environmental liabilities. Readers should carefully review
the Registrant's financial statements and the notes thereto, as well as the risk
factors described in the documents the Registrant files from time to time with
the Securities and Exchange Commission.
The Partnership's investment properties consist of four apartment complexes. The
following table sets forth the average occupancy of the properties for the nine
months ended September 30, 2002 and 2001:
Average Occupancy
2002 2001
Big Walnut Apartments
Columbus, Ohio (1) 96% 83%
LaFontenay I & II Apartments
Louisville, Kentucky (2) 87% 93%
The Trails Apartments
Nashville, Tennessee 94% 94%
Reflections Apartments (formerly
Greensprings Manor Apartments)
Indianapolis, Indiana (3) 43% 39%
(1) The Managing General Partner attributes the increase in occupancy at Big
Walnut Apartments to an improved job market and reduced average rental
rates.
(2) The Managing General Partner attributes the decrease in occupancy at
LaFontenany I & II Apartments to poor market conditions and tenants buying
homes due to low interest rates.
(3) The low occupancy at Reflections Apartments is due to rehabilitation at
the property. The property is currently undergoing a major renovation
project to enhance the appearance of the property to attract desirable
tenants. As of September 30, 2002 51.03% of the units cannot be rented due
to the rehabilitation. The increase in occupancy over the prior year is
due to the rental of rehabilitated apartment units.
Results of Operations
The Registrant's net loss for the nine months ended September 30, 2002 was
approximately $248,000 as compared to a net loss of approximately $1,621,000 for
the nine months ended September 30, 2001. The net income for the three months
ended September 30, 2002 was approximately $221,000 as compared to a net loss of
approximately $446,000 for the nine months ended September 30, 2001. The
decrease in net loss for the nine months ended September 30, 2002 was primarily
due to a decrease in total expenses and an increase in total revenues. The
increase in net income for the three months ended September 30, 2002 was due to
an increase in total revenues and a decrease in total expenses.
Total expenses decreased for the nine months ended September 30, 2002 due to
decreases in the loss from early extinguishment of debt, interest, operating,
and general and administrative expenses partially offset by an increase in
property tax expense. Total expenses decreased for the three months ended
September 30, 2002 due to decreases in interest and operating expenses. The loss
on early extinguishment of debt for both years relates to the refinancing of the
mortgages encumbering Reflections Apartments in January 2001 and Big Walnut
Apartments in September 2002 as discussed in "Liquidity and Capital Resources".
Interest expense decreased for the three and nine months ended September 30,
2002 due to the new financing at Reflections Apartments with variable rate
interest that is lower than the 7.60% rate on the old mortgage. In addition, a
portion of the interest on the debt at Reflections Apartments has been
capitalized as part of the renovation project. Interest on advances from the
Managing General Partner decreased even though the principal balance increased
due to a lower average interest rate. These decreases were partially offset by
increased loan cost amortization at Reflections Apartments. Operating expense
decreased for the three and nine months ended September 30, 2002 due to
decreases in administrative and maintenance expense partially offset by an
increase in property expense. Administrative expense decreased primarily due to
a decrease in contract security patrol expense at Reflections Apartments.
Maintenance expense decreased due to operating costs capitalized as part of the
renovation project at Reflections Apartments. Property expense increased due to
increases in utilities, commissions and bonuses and payroll and related benefits
expenses at Reflections Apartments partially offset by decreases in utility and
payroll expenses at Lafontenay Apartments. General and administrative expenses
decreased for the three and nine months ended September 30, 2002 primarily due
to reduced taxes and professional fees associated with administration of the
Partnership. Included in general and administrative expenses at both September
30, 2002 and 2001 are reimbursements to the Managing General Partner allowed
under the Partnership Agreement. Also included in general and administrative
expenses at both September 30, 2002 and 2001 are the costs associated with the
quarterly communications with investors and regulatory agencies and the annual
audit required by the Partnership Agreement. Property tax expense increased for
the nine months ended September 30, 2002 due to prior year tax refunds received
at Reflections and Big Walnut Apartments during 2001 and an increase in tax rate
and assessed value at The Trails Apartments.
Total revenues increased for the three and nine months ended September 30, 2002
primarily due to an increase in rental income and to a casualty gain recorded at
Reflections Apartments during 2002. Rental income increased due to an increase
in occupancy at Big Walnut Apartments and an increase in the average rental rate
at Reflections Apartments, which were partially offset by a decrease in
occupancy at Reflections and LaFontenay Apartments and a decrease in average
rental rates at Big Walnut, LaFontenay and The Trails Apartments.
During the nine months ended September 30, 2002, a net casualty gain was
recorded at Reflections Apartments. The casualty gain related to a fire that
occurred at Reflections Apartments in October 2001. The gain was the result of
insurance proceeds of approximately $132,000 less the net book value of the
damaged property of approximately $40,000. The proceeds are being held in escrow
by the lender until the repairs are completed and are included in receivables
and deposits on the accompanying consolidated balance sheet.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of the investment properties to
assess the feasibility of increasing rents, maintaining or increasing occupancy
levels and protecting the Partnership from increases in expense. As part of this
plan, the Managing General Partner attempts to protect the Partnership from the
burden of inflation-related increases in expenses by increasing rents and
maintaining a high overall occupancy level. However, due to changing market
conditions, which can result in the use of rental concessions and rental
reductions to offset softening market conditions, there is no guarantee that the
Managing General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
At September 30, 2002, the Partnership had cash and cash equivalents of
approximately $2,318,000 as compared to approximately $554,000 at September 30,
2001. Cash and cash equivalents increased approximately $1,575,000 since
December 31, 2001 primarily due to approximately $5,511,000 of cash provided by
financing activities and approximately $1,210,000 of cash provided by operating
activities, which was partially offset by approximately $5,146,000 of cash used
in investing activities. Cash provided by financing activities consisted of
advances from affiliates, additional proceeds from the construction note
encumbering Reflections Apartments, and proceeds from the refinance of Big
Walnut Apartments. This was partially offset by principal payments on the
mortgages encumbering the Partnership's properties, payments on advances from
affiliates, repayment of mortgage notes payable, and loan costs paid. Cash used
in investing activities consisted of property improvements and replacements,
partially offset by net withdrawals from restricted escrow accounts. The
Partnership invests its working capital reserves in interest bearing accounts.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the various properties to adequately maintain the
physical assets and other operating needs of the Partnership and to comply with
Federal, state, and local legal and regulatory requirements. The Managing
General Partner monitors developments in the area of legal and regulatory
compliance and is studying new federal laws, including the Sarbanes-Oxley Act of
2002. The Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance
measures with regard to governance, disclosure, audit and other areas. In light
of these changes, the Partnership expects that it will incur higher expenses
related to compliance, including increased legal and audit fees. Capital
improvements planned for each of the Partnership's properties are detailed
below.
Big Walnut Apartments: The property has budgeted, but is not limited to, capital
improvements of approximately $136,000 during the current year which consists of
structural improvements, appliances, air conditioning unit and floor covering
replacements, and heating and water/sewer upgrades. The Partnership has
completed approximately $146,000 in budgeted and unbudgeted capital expenditures
at Big Walnut Apartments during the nine months ended September 30, 2002
consisting primarily of floor covering replacements, structural improvements,
air conditioning unit replacements and survey fees. These improvements were
funded primarily from operating cash flow. Additional capital improvements may
be considered and will depend on the physical condition of the property as well
as the anticipated cash flow generated by the property and capital reserves.
LaFontenay I & II Apartments: The property has budgeted, but is not limited to,
capital improvements of approximately $99,000 during the current year which
consists of air conditioning unit, floor covering, and appliance replacements
and structural improvements. The Partnership has completed approximately
$168,000 in budgeted and unbudgeted capital expenditures at LaFontenay I & II
Apartments during the nine months ended September 30, 2002, consisting primarily
of structural improvements, HVAC, appliances, natural gas line upgrades and
floor covering and roofing replacements. These improvements were funded from
operating cash flow and replacement reserves. Additional capital improvements
may be considered and will depend on the physical condition of the property as
well as the anticipated cash flow generated by the property.
The Trails: The property has budgeted, but is not limited to, capital
improvements of approximately $105,000 during the current year which consists of
swimming pool improvements, water heater, appliance, window, and floor covering
replacements and major landscaping. The Partnership has completed approximately
$64,000 in capital expenditures at The Trails Apartments during the nine months
ended September 30, 2002, consisting primarily of floor covering replacements
and structural improvements. These improvements were funded primarily from
operating cash flow. Additional capital improvements may be considered and will
depend on the physical condition of the property as well as the anticipated cash
flow generated by the property.
Reflections: In January 2001, the Managing General Partner refinanced the
mortgage encumbering this property. The proceeds are being used to fund the
rehabilitation project for this property with an anticipated completion in July
2004. The Managing General Partner is currently evaluating the capital spending
required to complete the rehabilitation project during 2002. The Partnership has
completed approximately $4,063,000 in capital expenditures at Reflections
Apartments during the nine months ended September 30, 2002, consisting primarily
of architect and consultant fees, development services, building construction,
furniture and fixtures, water submetering and structural improvements. These
improvements were funded primarily from refinancing proceeds and operating cash
flow. Additional capital improvements may be considered and will depend on the
physical condition of the property as well as the anticipated cash flow
generated by the property and further refinancing proceeds.
The additional capital expenditures will be incurred only if cash is available
from operations, Partnership reserves or further refinancing proceeds. To the
extent that such budgeted capital improvements are completed, the Registrant's
distributable cash flow, if any, may be adversely affected at least in the short
term.
On January 16, 2001, the mortgages encumbering Reflections Apartments were
refinanced in order to finance the rehabilitation of the property. The maximum
new loan amount is $13,600,000. Effective January 16, 2001, the lender made an
initial advance of $5,040,000. Prior to the initial advance, the Managing
General Partner loaned the Partnership approximately $3,673,000 in order for the
Partnership to close the refinancing of the property. This amount will be repaid
from the further refinancing that will occur after the completion of the
rehabilitation project, estimated to be July 2004. During the year ended
December 31, 2001, the lender advanced Reflections Apartments an additional
amount of approximately $3,845,000 and during the nine months ended September
30, 2002 the lender advanced Reflections Apartments an additional $1,742,000.
Subsequent advances of up to $2,973,000 will also be made to cover renovation
work that is needed at the property. The new loan matures in January 2004, with
2 one-year extension options. Interest payments started in February 2001 based
on LIBOR plus 280 basis points (4.64% at September 30, 2002). Due to the
rehabilitation project, approximately $564,000 and $188,000 of the interest
expense for the nine months ended September 30, 2002 and 2001, respectively, was
capitalized. In addition, monthly cash flow payments will be made to the lender
until the anticipated completion date of the renovations. If any amount remains
from these advances on the completion date of the renovation, it will be applied
to the principal balance. Principal payments will begin in February 2003, and
monthly deposits into a replacement reserve will be required. In connection with
the refinancing, the Partnership incurred loan costs of approximately $469,000
during the year ended December 31, 2001. Additional loan costs of approximately
$19,000 were incurred during the nine months ended September 30, 2002. These
loan costs are included in other assets in the accompanying consolidated balance
sheet and are being amortized over the life of the mortgage. In connection with
the refinancing, the assets and liabilities of the property were transferred
from one subsidiary, Big Walnut L.P., to a newly formed subsidiary, AIMCO
Greensprings L.P. The loan is collateralized by the property as well as the
interest of both the Partnership and Davidson Diversified Properties, Inc. in
AIMCO Greensprings L.P. The new mortgage replaced a first mortgage of
approximately $7,518,000 and a second mortgage of approximately $294,000. The
Partnership recognized a loss on early extinguishment of debt of approximately
$554,000 consisting of a prepayment penalty of approximately $359,000 and the
write-off of unamortized loan costs and mortgage discounts of approximately
$195,000.
During September 2002, the Partnership refinanced the mortgages encumbering Big
Walnut Apartments. The refinancing replaced a first mortgage of approximately
$3,930,000 and a second mortgage of approximately $167,000 with a new mortgage
of $5,720,000. Total capitalized loan costs were approximately $153,000 during
the nine months ended September 30, 2002. The Partnership recognized a loss on
the early extinguishment of debt of approximately $17,000 due to the write-off
of unamortized loan costs. In addition, $85,000 was deposited in an escrow
account to be used to complete required repairs.
Big Walnut Apartments was initially refinanced under an interim credit facility
("Interim Credit Facility") which has a term of three months. The Interim Credit
Facility includes properties in other partnerships that are affiliated with the
Partnership. However, the Interim Credit Facility creates separate loans for
each property that are not cross-collaterilized or cross-defaulted with the
other property loans. During the three month term of the Interim Credit
Facility, the properties will be required to make interest-only payments. The
first month's interest, which was paid at the date of the refinancing, was
calculated at LIBOR plus 70 basis points. Interest for the following two months
will be calculated at LIBOR plus 150 points and is due monthly.
The Managing General Partner anticipates that the Interim Credit Facility will
be transferred to a different lender before the end of the three-month term of
the Interim Credit Facility. The credit facility ("Permanent Credit Facility")
with the new lender will have a maturity of five years with one five-year
extension option. This Permanent Credit Facility will also create separate loans
for each property that are not cross-collaterilized or cross-defaulted with the
other property loans. Each note under this Permanent Credit Facility will begin
as a variable rate loan with the option of converting to a fixed rate loan after
three years. The interest rate on the variable rate loans will be 85 basis
points over the Fannie Mae discounted mortgage-backed security index, and the
rate will reset monthly. Each loan will automatically renew at the end of each
month. In addition, monthly principal payments will be required based on a
30-year amortizations schedule, using the interest rate in effect during the
first month that any property is on the Permanent Credit Facility. The loans
will be prepayable without penalty.
The Registrant's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Registrant. The mortgage
indebtedness encumbering Reflections, The Trails and LaFontenay Apartments of
approximately $21,691,000, net of discount, is amortized over varying periods
with required balloon payments ranging from January 2004 to December 2009. The
Managing General Partner will attempt to refinance and/or sell the properties
prior to such maturity date. If the properties cannot be refinanced or sold for
a sufficient amount, the Partnership may risk losing such properties through
foreclosure.
Pursuant to the Partnership Agreement, the term of the Partnership is scheduled
to expire on December 31, 2008. Accordingly, prior to such date the Partnership
will need to either sell the investment properties or extend the term of the
Partnership.
No cash distributions were made during the nine months ended September 30, 2002
or 2001. The Registrant's cash available for distribution is reviewed on a
monthly basis. Future cash distributions will depend on the levels of net cash
generated from operations, the availability of cash reserves, and the timing of
debt maturities, refinancings and/or property sales. In light of the
rehabilitation project at Reflections Apartments and the significant amounts due
to the Managing General Partner at September 30, 2002, it is not anticipated
that the Partnership will make distributions in the foreseeable future.
Other
In addition to its indirect ownership of the managing and associate general
partner interest in the Partnership, AIMCO and its affiliates owned 620 limited
partnership units (the "Units") in the Partnership representing 50.64% of the
outstanding units at September 30, 2002. A number of these Units were acquired
pursuant to tender offers made by AIMCO or its affiliates. It is possible that
AIMCO or its affiliates will acquire additional Units of limited partnership
interest in the Partnership in exchange for cash or a combination of cash and
units in the operating partnership of AIMCO either through private purchases or
tender offers. Under the Partnership Agreement, unitholders holding a majority
of the Units are entitled to take action with respect to a variety of matters
which would include voting on certain amendments to the Partnership Agreement
and voting to remove the Managing General Partner. As a result of its ownership
of 50.64% of the outstanding Units, AIMCO is in a position to control all such
voting decisions with respect to the Registrant. Although the Managing General
Partner owes fiduciary duties to the limited partners of the Partnership, the
Managing General Partner also owes fiduciary duties to AIMCO as its sole
stockholder. As a result, the duties of the Managing General Partner, as
managing general partner, to the Partnership and its limited partners may come
into conflict with the duties of the Managing General Partner to AIMCO, as its
sole stockholder.
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States which require the Partnership
to make estimates and assumptions. The Partnership believes that of its
significant accounting policies, the following may involve a higher degree of
judgment and complexity.
Impairment of Long-Lived Assets
Investment properties are recorded at cost, less accumulated depreciation,
unless considered impaired. If events or circumstances indicate that the
carrying amount of a property may be impaired, the Partnership will make an
assessment of its recoverability by estimating the undiscounted future cash
flows, excluding interest charges, of the property. If the carrying amount
exceeds the aggregate future cash flows, the Partnership would recognize an
impairment loss to the extent the carrying amount exceeds the fair value of the
property.
Real property investments are subject to varying degrees of risk. Several
factors may adversely affect the economic performance and value of the
Partnership's investment properties. These factors include changes in the
national, regional and local economic climate; local conditions, such as an
oversupply of multifamily properties; competition from other available
multifamily property owners and changes in market rental rates. Any adverse
changes in these factors could cause an impairment in the Partnership's assets.
Revenue Recognition
The Partnership generally leases apartment units for twelve-month terms or less.
Rental income attributable to leases is recognized monthly as it is earned. The
Partnership will offer rental concessions during particularly slow months or in
response to heavy competition from other similar complexes in the area.
Concessions are charged to income as incurred.
ITEM 3. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of the Managing
General Partner, who are the equivalent of the Partnership's principal executive
officer and principal financial officer, respectively, have, within 90 days of
the filing date of this quarterly report, evaluated the effectiveness of the
Partnership's disclosure controls and procedures (as defined in Exchange Act
Rules (13a-14(c) and (15d-14(c)) and have determined that such disclosure
controls and procedures are adequate. There have been no significant changes in
the Partnership's internal controls or in other factors that could significantly
affect the Partnership's internal controls since the date of evaluation. The
Partnership does not believe any significant deficiencies or material weaknesses
exist in the Partnership's internal controls. Accordingly, no corrective actions
have been taken.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the
State of California for the County of San Mateo. The plaintiffs named as
defendants, among others, the Partnership, its Managing General Partner and
several of their affiliated partnerships and corporate entities. The action
purports to assert claims on behalf of a class of limited partners and
derivatively on behalf of a number of limited partnerships (including the
Partnership) which are named as nominal defendants, challenging, among other
things, the acquisition of interests in certain Managing General Partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one time, affiliates of Insignia; past tender offers by the Insignia
affiliates to acquire limited partnership units; management of the partnerships
by the Insignia affiliates; and the series of transactions which closed on
October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties
Trust, respectively, were merged into AIMCO. The plaintiffs seek monetary
damages and equitable relief, including judicial dissolution of the Partnership.
On June 25, 1998, the Managing General Partner filed a motion seeking dismissal
of the action. In lieu of responding to the motion, the plaintiffs filed an
amended complaint. The Managing General Partner filed demurrers to the amended
complaint which were heard February 1999.
Pending the ruling on such demurrers, settlement negotiations commenced. On
November 2, 1999, the parties executed and filed a Stipulation of Settlement,
settling claims, subject to court approval, on behalf of the Partnership and all
limited partners who owned units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Court, at which time
the Court set a final approval hearing for December 10, 1999. Prior to the
December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the Managing General Partner and its affiliates terminated
the proposed settlement. In February 2000, counsel for some of the named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated the settlement. On June 27, 2000, the Court entered an order
disqualifying them from the case and an appeal was taken from the order on
October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff
Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the
putative class. Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001, the Managing General Partner and its affiliates filed a
demurrer to the third amended complaint. On May 14, 2001, the Court heard the
demurrer to the third amended complaint. On July 10, 2001, the Court issued an
order sustaining defendants' demurrer on certain grounds. On July 20, 2001,
Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order
granting in part and denying in part defendants' demurrer. On September 7, 2001,
Plaintiffs filed a fourth amended class and derivative action complaint. On
September 12, 2001, the Court denied Plaintiffs' motion for reconsideration. On
October 5, 2001, the Managing General Partner and affiliated defendants filed a
demurrer to the fourth amended complaint, which was heard on December 11, 2001.
On February 2, 2002, the Court served its order granting in part the demurrer.
The Court has dismissed without leave to amend certain of the plaintiffs'
claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a
putative class comprised of all non-affiliated persons who own or have owned
units in the partnerships. The Managing General Partner and affiliated
defendants oppose the motion. On April 29, 2002, the Court held a hearing on
plaintiffs' motion for class certification and took the matter under submission
after further briefing, as ordered by the court, was submitted by the parties.
On July 10, 2002, the Court entered an order vacating the current trial date of
January 13, 2003 (as well as the pre-trial and discovery cut-off dates) and
stayed the case in its entirety through November 7, 2002 so that the parties can
have an opportunity to discuss settlement. On October 30, 2002, the court
entered an order extending the stay in effect through January 10, 2003.
During the third quarter of 2001, a complaint (the "Heller action") was filed
against the same defendants that are named in the Nuanes action, captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended complaint. The first amended complaint in the Heller action is
brought as a purported derivative action, and asserts claims for among other
things breach of fiduciary duty; unfair competition; conversion, unjust
enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a
motion to consolidate the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed without leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the Managing General Partner and affiliated
defendants moved to strike the first amended complaint in its entirety for
violating the Court's July 10, 2001 order granting in part and denying in part
defendants' demurrer in the Nuanes action, or alternatively, to strike certain
portions of the complaint based on the statute of limitations. Other defendants
in the action demurred to the fourth amended complaint, and, alternatively,
moved to strike the complaint. On December 11, 2001, the court heard argument on
the motions and took the matters under submission. On February 4, 2002, the
Court served notice of its order granting defendants' motion to strike the
Heller complaint as a violation of its July 10, 2001 order in the Nuanes action.
On March 27, 2002, the plaintiffs filed a notice appealing the order striking
the complaint. The parties are currently in the midst of briefing that appeal.
The Managing General Partner does not anticipate that any costs, whether legal
or settlement costs, associated with these cases will be material to the
Partnership's overall operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 3.1, Partnership Agreement dated June 11, 1984, as
amended is incorporated by reference to Exhibit A to the
Prospectus of the Registrant dated October 16, 1984 as filed
with the Commission pursuant to Rule 424(b) under the Act.
Exhibit 3.2, Amendment No. 1 to the Partnership dated August
1, 1985 is incorporated by reference to Exhibit 3B to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1985.
Exhibit 4.1, Certificate of Limited Partnership dated June 11,
1984 is incorporated by reference to Exhibit 4 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1987.
Exhibit 4.2, Certificate of Amendment of Limited Partnership
dated July 17, 1984 is incorporated by reference to Exhibit 4A
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987.
Exhibit 4.3, Restated Certificate of Limited Partnership dated
October 5, 1984 is incorporated by reference to Exhibit 4B to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987.
Exhibit 10OO, Multifamily Note secured by a Mortgage or Deed
of Trust dated September 16, 2002, between Big Walnut, L.P.
and GMAC Commercial Mortgage Corporation, a California
Corporation, related to Big Walnut Apartments.
Exhibit 99, Certification of Chief Executive Officer and Chief
Financial Officer.
b) Reports on Form 8-K:
None filed during the quarter ended September 30, 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
By: Davidson Diversified Properties, Inc.
Its Managing General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Thomas C. Novosel
Thomas C. Novosel
Senior Vice President
and Chief Accounting Officer
Date: January 9, 2003
CERTIFICATION
I, Patrick J. Foye, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Davidson Diversified
Real Estate II, L.P.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/Patrick J. Foye
Patrick J. Foye
Executive Vice President of Davidson
Diversified Properties, Inc., equivalent of the
chief executive officer of the Partnership
CERTIFICATION
I, Paul J. McAuliffe, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Davidson Diversified
Real Estate II, L.P.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/Paul J. McAuliffe
Paul J. McAuliffe
Executive Vice President and Chief Financial
Officer of Davidson Diversified Properties,
Inc., equivalent of the chief financial officer
of the Partnership
Exhibit 99
Certification of CEO and CFO
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-QSB of Davidson Diversified
Real Estate II, L.P. (the "Partnership"), for the quarterly period ended
September 30, 2002 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), Patrick J. Foye, as the equivalent of the chief
executive officer of the Partnership, and Paul J. McAuliffe, as the equivalent
of the chief financial officer of the Partnership, each hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
/s/ Patrick J. Foye
Name: Patrick J. Foye
Date: November 13, 2002
/s/ Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: November 13, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Partnership for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.