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 September 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)
September 30, 2003
Assets
Cash and cash equivalents $ 572
Receivables and deposits 236
Restricted escrows 85
Other assets 431
Investment properties:
Land $ 1,953
Buildings and related personal property 48,168
50,121
Less accumulated depreciation (21,718) 28,403
$ 29,727
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 1,131
Tenant security deposit liabilities 159
Accrued property taxes 606
Other liabilities 479
Due to affiliates 9,610
Mortgage notes payable 19,964
Partners' Deficit
General partners $ (162)
Limited partners (1,224.25 units issued and
outstanding) (2,060) (2,222)
$ 29,727
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,
2003 2002 2003 2002
Revenues: (Restated) (Restated)
Rental income $ 1,405 $ 1,254 $ 4,008 $ 3,621
Other income 127 119 412 357
Casualty gain (Note D) -- 92 8 92
Total revenues 1,532 1,465 4,428 4,070
Expenses:
Operating 824 445 1,990 1,752
General and administrative 71 86 227 261
Depreciation 330 363 1,085 1,104
Interest 258 224 636 766
Property taxes 157 93 440 277
Loss on early extinguishment
of debt (Note E) -- 17 -- 17
Total expenses 1,640 1,228 4,378 4,177
(Loss) income from continuing
operations (108) 237 50 (107)
Loss from discontinued operations (6) (16) (208) (141)
Gain on sale of discontinued
operations (Note C) 2 -- 5,545 --
Net (loss) income $ (112) $ 221 $ 5,387 $ (248)
Net (loss) income allocated to general
partners $ (2) $ 4 $ 425 $ (5)
Net (loss) income allocated to limited
partners (110) 217 4,962 (243)
$ (112) $ 221 $ 5,387 $ (248)
Per limited partnership unit:
(Loss) income from continuing
operations $ (86.60) $ 189.50 $ 40.03 $ (85.77)
Loss from discontinued operations (4.90) (12.25) (166.63) (112.72)
Gain on sale of discontinued operations 1.63 -- 4,179.70 --
Net (loss) income $ (89.87) $ 177.25 $4,053.10 $ (198.49)
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 nine months
ended September 30, 2003 -- 425 4,962 5,387
Partners' deficit at
September 30, 2003 1,224.25 $ (162) $(2,060) $(2,222)
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,
2003 2002
Cash flows from operating activities:
Net income (loss) $ 5,387 $ (248)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 1,129 1,490
Casualty gain (8) (92)
Gain on sale of discontinued operations (5,545) --
Loss on early extinguishment of debt 68 17
Amortization of debt discounts and loan costs 208 233
Change in accounts:
Receivables and deposits 245 (468)
Other assets (106) (54)
Accounts payable (102) (273)
Tenant security deposit liabilities 2 15
Accrued property taxes 78 99
Other liabilities (25) 225
Due to affiliate 223 266
Net cash provided by operating activities 1,554 1,210
Cash flows from investing activities:
Property improvements and replacements (5,860) (5,291)
Net proceeds from sale of investment property 2,547 --
Insurance proceeds received 13 --
Net withdrawals from restricted escrows -- 145
Net cash used in investing activities (3,300) (5,146)
Cash flows from financing activities:
Advances from affiliates 5,190 2,781
Payments on advances from affiliates (2,936) (77)
Payments on mortgage notes payable (517) (386)
Proceeds from mortgage note payable -- 7,462
Repayment on mortgage notes payable -- (4,097)
Loan costs paid (10) (172)
Net cash provided by financing activities 1,727 5,511
Net (decrease) increase in cash and cash equivalents (19) 1,575
Cash and cash equivalents at beginning of period 591 743
Cash and cash equivalents at end of period $ 572 $ 2,318
Supplemental disclosure of cash flow information:
Cash paid for interest $ 729 $ 1,208
Supplemental disclosure of non-cash activity:
Property improvements and replacements in accounts payable $ 1,057 $ --
Mortgage assumed by buyer on sale of investment property $ 6,899 $ --
Insurance proceeds in receivables and deposits $ -- $ 132
At December 31, 2002 and 2001, approximately $527,000 and $850,000 of property
improvements and replacements were included in accounts payable and are included
in property improvements and replacements at September 30, 2003 and 2002,
respectively.
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 months ended September 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 statement of operations for the period ended September
30, 2002 has 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.
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.
Affiliates of the Managing General Partner are entitled to receive 5% of gross
receipts from all of the Partnership's properties as compensation for providing
property management services. The Partnership paid to such affiliates
approximately $233,000 and $272,000 for the nine months ended September 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 $174,000 and
$772,000 for the nine months ended September 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 $567,000 for the nine months ended September 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 September 30,
2003, the amount of the outstanding loans and accrued interest to cover
operational expenses and the required refinancing at Reflections Apartments was
approximately $9,610,000. These amounts are included in due to affiliates on the
accompanying consolidated balance sheet. Interest is charged at prime plus 1% or
5.00% at September 30, 2003. Interest expense was approximately $297,000 and
$304,000 for the nine months ended September 30, 2003 and 2002, 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. Proceeds from the sale of LaFontenay I and II Apartments and funds
received from the operating cash flow of Big Walnut and The Trails Apartments
were used to make payments of approximately $2,936,000 on the outstanding loans
to the Managing General Partner during the nine months ended September 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 September 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 nine months ended September 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 obtained
insurance coverage for Reflections Apartments from an unaffiliated insurance
company.
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 of discontinued operations of approximately $5,545,000 for the nine months
ended September 30, 2003. 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 consolidated 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 three and nine months ended September 30, 2003 and 2002. The property's
operations, a loss of approximately $208,000 and $141,000 for the nine months
ended September 30, 2003 and 2002, respectively, are included in loss from
discontinued operations on the accompanying consolidated statements of
operations and include revenues of approximately $179,000 and $1,377,000,
respectively.
Note D - Casualty Gains
During the nine months ended September 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.
During the three and nine months ended September 30, 2002, a net casualty gain
of approximately $92,000 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.
Note E - Refinancing Mortgage Payable
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 $10,000 was capitalized
during the nine months ended September 30, 2003. The Partnership recognized a
loss on the early extinguishment of debt of approximately $17,000 due to the
write-off of unamortized loan costs during the three and nine months ended
September 30, 2002.
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 1.9% at September 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.
Note F - 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.
In addition, 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.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action.
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
at least one round of tender offers 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. On August 12, 2003, an objector
filed an appeal seeking to vacate and/or reverse the order approving the
settlement and entering judgment thereto. The Managing General Partner intends
to file a respondent's brief in support of the order approving settlement and
entering judgment thereto.
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.
On August 8, 2003 AIMCO Properties L.P., an affiliate of the Managing General
Partner, was served with a Complaint in the United States District Court,
District of Columbia alleging that AIMCO Properties L.P. willfully violated the
Fair Labor Standards Act (FLSA) by failing to pay maintenance workers overtime
for all hours worked in excess of forty per week. The Complaint is styled as a
Collective Action under the FLSA and seeks to certify state subclasses in
California, Maryland, and the District of Columbia. Specifically, the plaintiffs
contend that AIMCO Properties L.P. failed to compensate maintenance workers for
time that they were required to be "on-call". Additionally, the Complaint
alleges AIMCO Properties L.P. failed to comply with the FLSA in compensating
maintenance workers for time that they worked in responding to a call while
"on-call". The Complaint also attempts to certify a subclass for salaried
service directors who are challenging their classification as exempt from the
overtime provisions of the FLSA. AIMCO Properties L.P. has filed an answer to
the Complaint denying the substantive allegations. Although the outcome of any
litigation is uncertain, in the opinion of the Managing General Partner the
claims will not result in any material liability to the Partnership.
The Partnership is unaware of any other pending or outstanding litigation
matters involving it or its investment properties that are 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
nine months ended September 30, 2003 and 2002:
Average Occupancy
2003 2002
Big Walnut Apartments
Columbus, Ohio (1) 92% 96%
The Trails Apartments
Nashville, Tennessee 95% 94%
Reflections Apartments
Indianapolis, Indiana (2) 62% 43%
(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 has completed a major renovation project to
enhance the appearance of the property to attract desirable tenants. The
increase in occupancy over the prior year is due to the completion of the
rehabilitated apartment units.
Results of Operations
The Partnership's net income for the nine months ended September 30, 2003 was
approximately $5,387,000 as compared to a net loss of approximately $248,000 for
the nine months ended September 30, 2002. The Partnership had a net loss of
approximately $112,000 for the three months ended September 30, 2003 as compared
to net income of approximately $221,000 for the three months ended September 30,
2002. The increase in net income for the nine months ended September 30, 2003
was primarily due to a gain on the sale of LaFontenay I and II Apartments.
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 statement of operations for the period ended September
30, 2002 has been restated as of January 1, 2002 to reflect the operations of
LaFontenay I and II Apartments as loss from discontinued operations.
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 of discontinued operations of approximately $5,545,000 for the nine months
ended September 30, 2003. 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 consolidated financial
statements. The property's operations, a loss of approximately $208,000 and
$141,000 for the nine months ended September 30, 2003 and 2002, respectively,
are included in loss from discontinued operations on the accompanying
consolidated statements of operations. The Partnership used the proceeds
received from the sale to make payments on the loan balances due to the Managing
General Partner.
The income from continuing operations for the nine months ended September 30,
2003 was approximately $50,000 compared to a loss of approximately $107,000 for
the nine months ended September 30, 2002. The loss from continuing operations
for the three months ended September 30, 2003 was approximately $108,000
compared to income from continuing operations of approximately $237,000 for the
three months ended September 30, 2002. The increase in income from continuing
operations for the nine months ended September 30, 2003 was due to an increase
in total revenues partially offset by an increase in total expenses. The
increase in loss from continuing operations for the three months ended September
30, 2003 was due to an increase in total expenses partially offset by an
increase in total revenues.
Total revenues increased for the three and nine months ended September 30, 2003
due to an increase in rental income and other income partially offset by a
decrease in casualty gain. Rental income increased due to increases in occupancy
at Reflections and The Trails Apartments and average rental rates at Big Walnut
Apartments partially offset by a decrease in occupancy and an increase in bad
debt expense at Big Walnut Apartments and reduced rental rates at The Trails
Apartments. Other income increased due to increases in utility reimbursements at
Reflections Apartments and increased lease cancellation fees at Big Walnut
Apartments and The Trails Apartments, partially offset by a decrease in lease
cancellation fees at Reflections Apartments.
During the nine months ended September 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.
During the three and nine months ended September 30, 2002, a net casualty gain
of approximately $92,000 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.
Total expenses for the nine months ended September 30, 2003 increased due to
increases in operating and property tax expenses partially offset by decreases
in interest and general and administrative expenses. Total expenses for the
three months ended September 30, 2003 increased due to increases in operating
and property tax expenses partially by a decrease in general and administrative
expenses. Operating expenses increased primarily due to increases in insurance
and maintenance expenses partially offset by decreases in advertising and
property expenses. Insurance expense increased due to an increase in hazard
insurance premiums at all of the Partnership's investment properties.
Maintenance expense increased primarily due to a decrease in operating costs
capitalized as part of the renovation project at Reflections Apartments due to
units being completed and becoming available for tenants. Advertising expense
decreased due to decreases in periodical advertising and referral fees at
Reflections Apartments due to units being completed and becoming available for
tenants. Property expense decreased primarily due to decreases in utilities,
commissions and bonuses and payroll and related benefits expenses at Reflections
Apartments. Property tax expense increased due to increases in the assessed
value of Big Walnut Apartments and the tax rate at Reflections Apartments, which
is located in Indianapolis, Indiana. During 2003, Indiana has adjusted its
methodology for assessing property tax values and tax rates, which has resulted
in a significant increase in property tax expense. Interest expense for the nine
months ended September 30, 2003 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.
General and administrative expenses decreased due to a decrease in
reimbursements to the Managing General Partner allowed under the Partnership
Agreement. Also included in general and administrative expenses for the nine
months ended September 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, the Managing General
Partner may use rental concessions and rental rate reductions to offset
softening market conditions, accordingly, there is no guarantee that the
Managing General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
At September 30, 2003, the Partnership had cash and cash equivalents of
approximately $572,000 as compared to approximately $2,318,000 at September 30,
2002. Cash and cash equivalents decreased approximately $19,000 since December
31, 2002 primarily due to approximately $3,300,000 of cash used in investing
activities which was partially offset by approximately $1,554,000 of cash
provided by operating activities and approximately $1,727,000 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
mortgage indebtedness 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 nine months ended September 30, 2003, the Partnership completed
approximately $137,000 of capital improvements at Big Walnut Apartments,
consisting primarily of swimming pool improvements, floor covering and appliance
replacements, heating 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 $20,000 in capital improvements during the remainder of
2003. The additional capital improvements will consist primarily of floor
covering and air conditioning unit replacements. 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 nine months ended September 30, 2003, the Partnership completed
approximately $76,000 of capital improvements at The Trails Apartments,
consisting primarily of appliance and floor covering replacements, water and
sewer line improvements 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 $21,000 in capital improvements during the remainder of
2003. The additional capital improvements will consist primarily of floor
covering, appliance and air conditioning unit replacements. 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
This property has been undergoing a major rehabilitation project. All units were
completed and available for rent at September 30, 2003. During the nine months
ended September 30, 2003, the Partnership completed approximately $6,153,000 of
capital improvements at Reflections Apartments, consisting primarily of building
construction, furniture and fixtures, and floor covering replacements. These
expenditures included capitalized construction period interest of approximately
$436,000, tax and insurance expenses of approximately $84,000 and other
construction period expenses of approximately $132,000. 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 $1,191,000 in capital
improvements during the remainder of 2003. The additional capital improvements
will consist primarily of floor covering and roofing replacements and remaining
costs related to the reconstruction 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 nine months ended September 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 $10,000 was capitalized
during the nine months ended September 30, 2003. The Partnership recognized a
loss on the early extinguishment of debt of approximately $17,000 due to the
write-off of unamortized loan costs during the three and nine months ended
September 30, 2002.
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 1.9% at September 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 encumbering the Partnership's investment properties of
approximately $19,964,000, 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 nine months ended September 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 September 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 September 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 AIMCO Properties, L.P., 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, but are not limited
to, 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 impairment of 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.
In addition, 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.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action.
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
at least one round of tender offers 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. On August 12, 2003, an objector
filed an appeal seeking to vacate and/or reverse the order approving the
settlement and entering judgment thereto. The Managing General Partner intends
to file a respondent's brief in support of the order approving settlement and
entering judgment thereto.
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.
On August 8, 2003 AIMCO Properties L.P., an affiliate of the Managing General
Partner, was served with a Complaint in the United States District Court,
District of Columbia alleging that AIMCO Properties L.P. willfully violated the
Fair Labor Standards Act (FLSA) by failing to pay maintenance workers overtime
for all hours worked in excess of forty per week. The Complaint is styled as a
Collective Action under the FLSA and seeks to certify state subclasses in
California, Maryland, and the District of Columbia. Specifically, the plaintiffs
contend that AIMCO Properties L.P. failed to compensate maintenance workers for
time that they were required to be "on-call". Additionally, the Complaint
alleges AIMCO Properties L.P. failed to comply with the FLSA in compensating
maintenance workers for time that they worked in responding to a call while
"on-call". The Complaint also attempts to certify a subclass for salaried
service directors who are challenging their classification as exempt from the
overtime provisions of the FLSA. AIMCO Properties L.P. has filed an answer to
the Complaint denying the substantive allegations. Although the outcome of any
litigation is uncertain, in the opinion of the Managing General Partner the
claims will not result in any material liability to the Partnership.
The Partnership is unaware of any other pending or outstanding litigation
matters involving it or its investment properties that are not of a routine
nature arising in the ordinary course of business.
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:
None filed during the quarter ended September 30, 2003.
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/Paul J. McAuliffe
Paul J. McAuliffe
Executive Vice President and
Chief Financial Officer
Date: November 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: November 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: November 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
September 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: November 13, 2003
/s/Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: November 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.