UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO 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 registrant 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)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Davidson Diversified Real Estate II, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
June 30, 2003
Assets
Cash and cash equivalents $ 511
Receivables and deposits 567
Restricted escrows 85
Other assets 466
Investment properties:
Land $ 1,953
Buildings and related personal property 45,620
47,573
Less accumulated depreciation (21,388) 26,185
$ 27,814
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 908
Tenant security deposit liabilities 136
Accrued property taxes 604
Other liabilities 378
Due to affiliates 7,650
Mortgage notes payable 20,248
Partners' Deficit
General partners $ (161)
Limited partners (1,224.25 units issued and
outstanding) (1,949) (2,110)
$ 27,814
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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Revenues: (Restated) (Restated)
Rental income $ 1,342 $ 1,220 $ 2,603 $ 2,367
Other income 70 116 285 238
Casualty gain (Note D) 8 -- 8 --
Total revenues 1,420 1,336 2,896 2,605
Expenses:
Operating 564 792 1,166 1,307
General and administrative 75 85 156 175
Depreciation 379 372 755 741
Interest 223 279 378 542
Property taxes 151 92 283 184
Total expenses 1,392 1,620 2,738 2,949
Income (loss) from continuing
operations 28 (284) 158 (344)
Loss from discontinued operations -- (49) (202) (125)
Gain on sale of discontinued
operations (Note C) 73 -- 5,543 --
Net income (loss) $ 101 $ (333) $ 5,499 $ (469)
Net income (loss) allocated to general
partners $ 6 $ (6) $ 426 $ (9)
Net income (loss) allocated to limited
partners 95 (327) 5,073 (460)
$ 101 $ (333) $ 5,499 $ (469)
Per limited partnership unit:
Income (loss) from continuing
operations $ 22.05 $(227.89) $ 126.61 $ (275.27)
Loss from discontinued operations -- (39.21) (161.73) (100.47)
Gain on sale of discontinued operations 55.55 -- 4,178.88 --
Net income (loss) $ 77.60 $(267.10) $4,143.76 $ (375.74)
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, 2002 1,224.25 $ (587) $(7,022) $(7,609)
Net income for the six months
ended June 30, 2003 -- 426 5,073 5,499
Partners' deficit at
June 30, 2003 1,224.25 $ (161) $(1,949) $(2,110)
See Accompanying Notes to Consolidated Financial Statements
Davidson Diversified Real Estate II, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
2003 2002
Cash flows from operating activities:
Net income (loss) $ 5,499 $ (469)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 799 999
Casualty gain (8) --
Gain on sale of discontinued operations (5,543) --
Loss on early extinguishment of debt 68 --
Amortization of debt discounts and loan costs 141 184
Change in accounts:
Receivables and deposits (86) (181)
Other assets (88) (94)
Accounts payable (126) (396)
Tenant security deposit liabilities (21) 16
Accrued property taxes 76 (91)
Other liabilities (126) 132
Due to affiliate 119 149
Net cash provided by operating activities 704 249
Cash flows from investing activities:
Property improvements and replacements (3,513) (4,182)
Net proceeds from sale of investment property 2,547 --
Insurance proceeds received 13 --
Net deposits to restricted escrows -- (49)
Net cash used in investing activities (953) (4,231)
Cash flows from financing activities:
Advances from affiliates 3,176 2,587
Payments on advances from affiliates (2,778) (77)
Payments on mortgage notes payable (221) (255)
Proceeds from mortgage note payable -- 1,742
Loan costs paid (8) (19)
Net cash provided by financing activities 169 3,978
Net decrease in cash and cash equivalents (80) (4)
Cash and cash equivalents at beginning of period 591 743
Cash and cash equivalents at end of period $ 511 $ 739
Supplemental disclosure of cash flow information:
Cash paid for interest $ 580 $ 807
Supplemental disclosure of non-cash activity:
Property improvements and replacements in accounts payable $ 856 $ --
Mortgage assumed by buyer on sale of investment property $ 6,899 $ --
At December 31, 2002 approximately $527,000 of property improvements and
replacements were included in accounts payable and are included in property
improvements and replacements at June 30, 2003.
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 six months ended June 30, 2003 are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2003. 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, 2002. The Managing General Partner is a subsidiary of Apartment Investment
and Management Company ("AIMCO"), a publicly traded real estate investment
trust.
Effective January 1, 2002, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which established standards for the way that
public business enterprises report information about long-lived assets that are
either being held for sale or have already been disposed of by sale or other
means. The standard requires that results of operations for a long-lived asset
that is being held for sale or has already been disposed of be reported as a
discontinued operation on the statement of operations. As a result, the
accompanying consolidated statements of operations have been restated as of
January 1, 2002 to reflect the operations of LaFontenay I and II Apartments,
which was sold January 2003 (see Note C), as loss from discontinued operations.
Effective April 1, 2002, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44
and 64" which requires that 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 LaFontenay I and II Apartments (see "Note C") in loss
from discontinued operations rather than as an extraordinary item.
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) payments to
affiliates for services and (ii) reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership.
During the six months ended June 30, 2003 and 2002, affiliates of the Managing
General Partner were entitled to receive 5% of gross receipts from all of the
Partnership's properties for providing property management services. The
Partnership paid to such affiliates approximately $144,000 and $178,000 for the
six months ended June 30, 2003 and 2002, respectively, which is included in
operating expenses and loss from discontinued operations.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $117,000 and
$730,000 for the six months ended June 30, 2003 and 2002, respectively, which is
included in general and administrative expenses and investment properties.
Included in these amounts are fees related to construction management services
provided by an affiliate of the Managing General Partner of approximately $3,000
and $560,000 for the six months ended June 30, 2003 and 2002, respectively. The
fees are calculated based on a percentage of current year additions to
investment properties.
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 June 30, 2003,
the amount of the outstanding loans and accrued interest to cover operational
expenses was approximately $3,010,000 and the amount of the outstanding loan and
accrued interest to assist with the refinancing was approximately $4,640,000.
Both amounts are included in due to affiliates on the accompanying consolidated
balance sheet. Interest is charged at prime plus 1% or 5.25% at June 30, 2003.
Interest expense was approximately $186,000 for both of the six month periods
ended June 30, 2003 and 2002. 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. In connection with the sale of
LaFontenay I and II Apartments and funds received from the operating cash flow
of Big Walnut and The Trails Apartments, payments of approximately $2,778,000
were made on the outstanding loans to the Managing General Partner during the
six months ended June 30, 2003.
The Partnership accrued a real estate commission of $48,000 upon the sale of
Shoppes at River Rock due to the Managing General Partner during the year ended
December 31, 1999. Approximately $18,000 is accrued at June 30, 2003 and is
included in other liabilities in the accompanying consolidated balance sheet.
Payment of the remaining accrued 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.
The Partnership insures most of 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 six months ended June 30, 2003 and 2002,
the Partnership was charged by AIMCO and its affiliates approximately $54,000
and $155,000, respectively, for insurance coverage and fees associated with
policy claims administration. During 2003 the Partnership did not pay AIMCO or
its affiliates for insurance coverage for Reflections Apartments, which was
issued by an unaffiliated insurance company, Royal Insurance.
Note C - Sale of Investment Property
On January 30, 2003, the Partnership sold LaFontenay I and II Apartments to an
unaffiliated third party for $9,700,000. After payment of closing costs of
approximately $254,000, and the assumption of the mortgage debt of approximately
$6,899,000 by the purchaser, the net proceeds received by the Partnership were
approximately $2,547,000. The sale of the property resulted in a gain on the
sale during the first half of 2003 of approximately $5,543,000. The additional
gain of approximately $73,000 recorded during the three months ended June 30,
2003 was due to the write off of an accrual for additional sale related expenses
that was not needed. In addition, the Partnership recorded a loss on early
extinguishment of debt of approximately $68,000 as a result of the write off of
unamortized loan costs. The loss on early extinguishment of debt is included in
the loss from discontinued operations in the accompanying financial statements.
The Partnership used the proceeds received from the sale to make payments on the
loan balances due to the Managing General Partner (see "Note B"). In accordance
with Statement of Financial Accounting Standards No. 144, the operations of the
property have been shown as loss from discontinued operations for the six months
ended June 30, 2003 and 2002.
Note D - Casualty
During the six months ended June 30, 2003 a net casualty gain of approximately
$8,000 was recorded at Big Walnut Apartments. The casualty gain related to a
fire that occurred at Big Walnut Apartments that damaged two apartments in March
2003. The gain was the result of insurance proceeds received of approximately
$13,000 less the net book value of the damaged property of approximately $
5,000.
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
purported to assert claims on behalf of a class of limited partners and
derivatively on behalf of a number of limited partnerships (including the
Partnership) that 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 that 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 sought 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 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 opposed 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 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 could 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 Heller action was brought as a purported
derivative action, and asserted 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. Before completing
briefing on the appeal, the parties stayed further proceedings in the appeal in
light of a settlement.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action described below.
In general terms, the proposed settlement provides for certification for
settlement purposes of a settlement class consisting of all limited partners in
this Partnership and others (the "Partnerships") as of December 20, 2002, the
dismissal with prejudice and release of claims in the Nuanes and Heller
litigation, payment by AIMCO of $9.9 million (which shall be distributed to
settlement class members after deduction of attorney fees and costs of class
counsel and certain costs of settlement) and up to $1 million toward the cost of
independent appraisals of the Partnerships' properties by a Court appointed
appraiser. An affiliate of the Managing General Partner has also agreed to make
a tender offer to purchase all of the partnership interests in the Partnerships
within one year of final approval, if it is granted, and to provide partners
with the independent appraisals at the time of these tenders. The proposed
settlement also provided for the limitation of the allowable costs which the
Managing General Partner or its affiliates will charge the Partnerships in
connection with this litigation and imposes limits on the class counsel fees and
costs in this litigation. On April 11, 2003, notice was distributed to limited
partners providing the details of the proposed settlement.
On June 13, 2003, the Court granted final approval of the settlement and entered
judgment in both the Nuanes and Heller actions.
The Managing General Partner does not anticipate that any costs to the
Partnership, 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 matters discussed in this report contain certain forward-looking statements,
including, without limitation, statements regarding future financial performance
and the effect of government regulations. 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; litigation, including costs associated with prosecuting and
defending claims and any adverse outcomes, 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 three apartment complexes.
The following table sets forth the average occupancy of the properties for the
six months ended June 30, 2003 and 2002:
Average Occupancy
2003 2002
Big Walnut Apartments
Columbus, Ohio (1) 93% 96%
The Trails Apartments
Nashville, Tennessee 94% 94%
Reflections Apartments
Indianapolis, Indiana (2) 59% 41%
(1) The Managing General Partner attributes the decrease in occupancy at Big
Walnut Apartments to a slow economy in the Columbus, Ohio area and lower
mortgage rates.
(2) 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 June 30, 2003, 20.62% of the units cannot be rented due to
the rehabilitation. The increase in occupancy over the prior year is due
to the completion of some of the rehabilitated apartment units.
Results of Operations
The Partnership's net income for the six months ended June 30, 2003 was
approximately $5,499,000 as compared to a net loss of approximately $469,000 for
the six months ended June 30, 2002. The Partnership had net income of
approximately $101,000 for the three months ended June 30, 2003 as compared to a
net loss of approximately $333,000 for the three months ended June 30, 2002. The
increase in net income for the six months ended June 30, 2003 was primarily due
to a gain on the sale of LaFontenay I and II Apartments.
On January 30, 2003, the Partnership sold LaFontenay I and II Apartments to an
unaffiliated third party for $9,700,000. After payment of closing costs of
approximately $254,000, and the assumption of the mortgage debt of approximately
$6,899,000 by the purchaser, the net proceeds received by the Partnership were
approximately $2,547,000. The sale of the property resulted in a gain on the
sale during the first half of 2003 of approximately $5,543,000. In addition, the
Partnership recorded a loss on early extinguishment of debt of approximately
$68,000 as a result of the write off of unamortized loan costs. The Partnership
used the proceeds received from the sale to make payments on the loan balances
due to the Managing General Partner. The additional gain of approximately
$73,000 that was recorded during the three months ended June 30, 2003 was due to
the write off of an accrual for additional sale related expenses that was not
needed.
Effective January 1, 2002, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which established standards for the way that
public business enterprises report information about long-lived assets that are
either being held for sale or have already been disposed of by sale or other
means. The standard requires that results of operations for a long-lived asset
that is being held for sale or has already been disposed of be reported as a
discontinued operation on the statement of operations. As a result, the
accompanying consolidated statements of operations have been restated as of
January 1, 2002 to reflect the operations of LaFontenay I and II Apartments as
loss from discontinued operations.
Effective April 1, 2002, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44
and 64" which requires that 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 LaFontenay I and II Apartments in loss from
discontinued operations rather than as an extraordinary item.
The income from continuing operations for the six months ended June 30, 2003 was
approximately $158,000 as compared to a loss of approximately $344,000 for the
six months ended June 30, 2002. The income from continuing operations for the
three months ended June 30, 2003 was approximately $28,000 as compared to a loss
of approximately $284,000 for the three months ended June 30, 2002. The increase
in income from continuing operations for the three and six months ended June 30,
2003 was due to a decrease in total expenses and an increase in total revenues.
Total revenues increased for the six months ended June 30, 2003 primarily due to
an increase in rental income and other income. Total revenues increased for the
three months ended June 30, 2003 primarily due to an increase in rental income
partially offset by a decrease in other income. Rental income increased for both
the three and six month periods primarily due to an increase in occupancy at
Reflections Apartments and an increase in the average rental rate at Big Walnut
Apartments, which was partially offset by a decrease in occupancy at Big Walnut
Apartments, a decrease in average rental rates at Reflections and The Trails
Apartments, an increase in bad debt expense at Big Walnut Apartments and an
increase in concessions at all of the Partnership's properties. Other income
increased for the six months ended June 30, 2003 due primarily to increases in
utility reimbursements at Reflections Apartments and increased lease
cancellation fees at Big Walnut Apartments, partially offset by reduced lease
cancellation fees at Reflections Apartments. Other income decreased for the
three months ended June 30, 2003 due to reduced late charges at Big Walnut
Apartments and reduced lease cancellation fees at Reflections Apartments
partially offset by increased utility reimbursements at Reflections Apartments.
Total expenses decreased for the three and six months ended June 30, 2003 due to
decreases in operating, interest and general and administrative expenses
partially offset by an increase in property tax expense. Operating expenses
decreased due to decreased property expenses partially offset by an increase in
maintenance expense. Property expense decreased primarily due to decreases in
utilities, commissions and bonuses and payroll and related benefits expenses at
Reflections Apartments. Maintenance expenses increased primarily due to reduced
operating costs capitalized as part of the renovation project at Reflections
Apartments. Interest expense decreased due to variable rate interest mortgages
at all of the Partnership's properties whereby the interest rates were lower in
2003 compared to 2002. Property tax expense increased for the three and six
months ended June 30, 2003 at Reflections Apartments, which is located in
Indiana. During 2003, Indiana has adjusted its methodology for assessing
property taxable values and tax rates, which has resulted in a significant
increase in property tax expense.
General and administrative expenses decreased for the three and six months ended
June 30, 2003 primarily due to reduced taxes and professional fees associated
with administration of the Partnership. Included in general and administrative
expenses at both June 30, 2003 and 2002 are reimbursements to the Managing
General Partner allowed under the Partnership Agreement. Also included in
general and administrative expenses at both June 30, 2003 and 2002 are the costs
associated with the quarterly communications with investors and regulatory
agencies and the annual audit required by the Partnership Agreement.
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 June 30, 2003, the Partnership had cash and cash equivalents of approximately
$511,000 as compared to approximately $739,000 at June 30, 2002. Cash and cash
equivalents decreased approximately $80,000 since December 31, 2002 primarily
due to approximately $953,000 of cash used in investing activities which was
partially offset by approximately $704,000 of cash provided by operating
activities and approximately $169,000 of cash provided by financing activities.
Cash used in investing activities consisted of property improvements and
replacements partially offset by proceeds from the sale of LaFontenay I and II
Apartments and the receipt of insurance proceeds. Cash provided by financing
activities consisted of advances from affiliates partially offset by payments on
advances from affiliates, principal payments on the mortgages encumbering the
Partnership's properties and loan costs paid. 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
During the six months ended June 30, 2003, the Partnership completed
approximately $71,000 of capital improvements at Big Walnut Apartments,
consisting primarily of floor covering and roofing replacements, heating and
plumbing fixture upgrades and building repairs relating to the March 2003
casualty at Big Walnut Apartments. These improvements were funded from operating
cash flow and insurance proceeds. The Partnership evaluates the capital
improvement needs of the property during the year and currently expects to
complete an additional $51,000 in capital improvements during the remainder of
2003. The additional capital improvements will consist primarily of floor
covering and air conditioning unit replacements, fencing upgrades, and
structural improvements. 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 Apartments
During the six months ended June 30, 2003, the Partnership completed
approximately $41,000 of capital improvements at The Trails Apartments,
consisting primarily of floor covering replacements, water heater upgrades,
major landscaping, and structural improvements. These improvements were funded
from operating cash flow. The Partnership evaluates the capital improvement
needs of the property during the year and currently expects to complete an
additional $47,000 in capital improvements during the remainder of 2003. The
additional capital improvements will consist primarily of floor covering,
appliance, air conditioning unit, and cabinet replacements and parking lot and
swimming pool upgrades. 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 Apartments
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 anticipated completion by the end
of 2003. During the six months ended June 30, 2003, the Partnership completed
approximately $3,706,000 of capital improvements at Reflections Apartments,
consisting primarily of development services, building construction, furniture
and fixtures, and floor covering replacements. These expenditures included
capitalized construction period interest of approximately $338,000, tax and
insurance expenses of approximately $77,000 and other construction period
expenses of approximately $118,000. These improvements were funded from loans
from the Managing General Partner and operating cash flow. The Partnership
evaluates the capital improvement needs of the property during the year and
currently expects to complete an additional $4,573,000 in capital improvements
during the remainder of 2003. The additional capital improvements will consist
primarily of floor covering and roofing replacements and completion of the
rehabilitation project. 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.
LaFontenay I and II Apartments
During the six months ended June 30, 2003, the Partnership completed
approximately $24,000 of capital improvements at LaFontenay I and II Apartments
consisting primarily of floor covering replacements. These improvements were
funded from operating cash flow. The property was sold January 30, 2003.
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 September 16, 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 $155,000 during
the year ended December 31, 2002 and an additional $8,000 was capitalized during
the six months ended June 30, 2003.
Big Walnut Apartments was initially refinanced under an interim credit facility
("Interim Credit Facility") which had a term of six months. The Interim Credit
Facility included properties in other partnerships that are affiliated with the
Partnership. However, the Interim Credit Facility created separate loans for
each property that were not cross-collateralized or cross-defaulted with the
other property loans. During the six month term of the Interim Credit Facility,
the properties were 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 was calculated at
LIBOR plus 150 points and was due monthly.
During December 2002, the Interim Credit Facility encumbering Big Walnut
Apartments was sold to Fannie Mae under a permanent credit facility ("Permanent
Credit Facility"). The Permanent Credit Facility has a maturity of five years,
with one five-year extension option. This Permanent Credit Facility also creates
separate loans for each property that are not cross-collateralized 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
loan is the Fannie Mae discounted mortgage-backed security index plus 85 basis
points. The rate was 2.06% at June 30, 2003 and will reset monthly. Each loan
will automatically renew at the end of each month. In addition, monthly
principal payments are required based on a 30-year amortization schedule, using
the interest rate in effect during the first month that any property is on the
Permanent Credit Facility. The loans are prepayable without penalty.
The Partnership's assets are thought to be sufficient for any near-term needs
(exclusive of capital improvements) of the Partnership. The mortgage
indebtedness of approximately $20,248,000, 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 dates. 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 six months ended June 30, 2003 or
2002. The Partnership'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 June 30, 2003, 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 620.25
limited partnership units ("Units") in the Partnership representing 50.66% of
the outstanding units at June 30, 2003. 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 in exchange for cash or a
combination of cash and units in the operating partnership of AIMCO either
through private purchases or tender offers. Pursuant to the Partnership
Agreement, unitholders holding a majority of the Units are entitled to take
action with respect to a variety of matters that include, but are not limited
to, voting on certain amendments to the Partnership Agreement and voting to
remove the Managing General Partner. As a result of its ownership of 50.66% of
the outstanding Units, AIMCO and its affiliates are in a position to control all
such voting decisions with respect to the Partnership. 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 and
the Partnership fully reserves all balances outstanding over thirty days. The
Partnership will offer rental concessions during particularly slow months or in
response to heavy competition from other similar complexes in the area. Any
concessions given at the inception of the lease are amortized over the life of
the lease.
ITEM 3. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Partnership's management, with the
participation of 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, has
evaluated the effectiveness of the Partnership's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this report. Based on such evaluation, 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 concluded that, as of the
end of such period, the Partnership's disclosure controls and procedures are
effective.
(b) Internal Control Over Financial Reporting. There have not been any changes
in the Partnership's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Partnership's internal control
over financial reporting.
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
purported to assert claims on behalf of a class of limited partners and
derivatively on behalf of a number of limited partnerships (including the
Partnership) that 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 that 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 sought 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 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 opposed 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 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 could 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 Heller action was brought as a purported
derivative action, and asserted 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. Before completing
briefing on the appeal, the parties stayed further proceedings in the appeal in
light of a settlement.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action described below.
In general terms, the proposed settlement provides for certification for
settlement purposes of a settlement class consisting of all limited partners in
this Partnership and others (the "Partnerships") as of December 20, 2002, the
dismissal with prejudice and release of claims in the Nuanes and Heller
litigation, payment by AIMCO of $9.9 million (which shall be distributed to
settlement class members after deduction of attorney fees and costs of class
counsel and certain costs of settlement) and up to $1 million toward the cost of
independent appraisals of the Partnerships' properties by a Court appointed
appraiser. An affiliate of the Managing General Partner has also agreed to make
a tender offer to purchase all of the partnership interests in the Partnerships
within one year of final approval, if it is granted, and to provide partners
with the independent appraisals at the time of these tenders. The proposed
settlement also provided for the limitation of the allowable costs which the
Managing General Partner or its affiliates will charge the Partnerships in
connection with this litigation and imposes limits on the class counsel fees and
costs in this litigation. On April 11, 2003, notice was distributed to limited
partners providing the details of the proposed settlement.
On June 13, 2003, the Court granted final approval of the settlement and entered
judgment in both the Nuanes and Heller actions.
The Managing General Partner does not anticipate that any costs to the
Partnership, 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 Agreement
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 31.1, Certification of equivalent of Chief Executive
Officer pursuant to Securities Exchange Act Rules
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2, Certification of equivalent of Chief Financial
Officer pursuant to Securities Exchange Act Rules
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1, Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
b) Reports on Form 8-K filed during the quarter ended June 30, 2003:
None.
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.
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: August 13, 2003
Exhibit 31.1
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
/s/Patrick J. Foye
Patrick J. Foye
Executive Vice President of Davidson
Diversified Properties, Inc., equivalent of the
chief executive officer of the Partnership
Exhibit 31.2
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
/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 32.1
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 June
30, 2003 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: August 13, 2003
/s/Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: August 13, 2003
This certification is furnished with this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Partnership for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.