REAL ESTATE ASSOCIATES LIMITED II
55 Beattie Place, P.O. Box 1089
Greenville, SC 29602
May 10, 2005
Correspondence Filing Via Edgar and Overnight Delivery
United States Securities and Exchange Commission
Division of Corporation Finance
Mail Stop 0409
450 Fifth Street, NW
Washington, D.C. 20549
Attn: Mr. Daniel Gordon
Re: Real Estate Associates Limited II
Form 10-KSB for the year ended December 31, 2004 File No. 0-09782
Ladies and Gentlemen:
This letter responds to the comments of the staff of the Securities and Exchange
Commission (the "Staff") addressed to Real Estate Associates Limited II, a
California limited partnership (the "Partnership"), in a letter dated April 14,
2005. The Partnership appreciates the Staff's willingness to provide an
extension of time for this response. The Partnership's response to the Staff's
comments are set forth below and are numbered to correspond to the numbering of
the Staff's comments in the Staff's letter.
* * * * *
Form 10-KSB for the year ended December 31, 2004
Note 1 - Organization and Summary of Significant Accounting Policies
Recent Accounting Pronouncements
1. Comment: We note that you adopted FIN 46(R) and you determined that you
held variable interests in 11 VIE's for which the Partnership was not
the primary beneficiary. In a supplemental response tell us how you
determined that you were not considered the primary beneficiary
considering that you own 95 to 99% of the local limited partnerships.
Reference is made to paragraphs 14-17 of FIN 46(R).
Response: The Partnership first became involved with the local limited
partnerships in the early 1980s. The Partnership historically has used
the equity method of accounting for its investments in local limited
partnerships. The individuals involved with the creation of the
Partnership are no longer employed by National Partnership Investments
Corp, the general partner of the Partnership. The general partners of
the local limited partnerships are not affiliated with the Partnership
or National Partnership Investments Corp. Accordingly, the Partnership's
initial consideration of the requirements of FASB Interpretation No. 46
(Revised December 2003), Consolidation of Variable Interest Entities
(FIN 46R) was based primarily on documents related to the formation of
the Partnership and financial information available as of December 31,
2003 and 2004. There may be other facts and circumstances related to the
Partnership's involvement with the local limited partnerships that might
be relevant in making determinations required by FIN 46R; however, the
Partnership necessarily based its determination upon those written
documents and other information that are currently available to the
Partnership.
The Partnership made its determination of the primary beneficiary of the
11 local limited partnerships identified as variable interest entities
("VIE") based on a qualitative analysis with reference to paragraphs 16
and 17 of FIN 46R.
Paragraph 16 of FIN 46R states, in part, "For purposes of determining
whether it is the primary beneficiary of a variable interest entity, an
enterprise with a variable interest shall treat variable interests in
that same entity held by its related parties as its own interests. For
purposes of this Interpretation, the term related parties includes those
parties identified in FASB Statement No. 57, Related Party Disclosures,
and certain other parties that are acting as de facto agents or de facto
principals of the variable interest holder." Paragraph 16(d) further
provides that de facto agents of an enterprise include "A party that has
(1) an agreement that it cannot sell, transfer, or encumber its interest
in the entity without the prior approval of the enterprise...The right
of prior approval creates a de facto agency relationship only if that
right could constrain the others party's ability to manage the economic
risks or realize the economic rewards from its interests in a variable
interest entity through the sale, transfer, or encumbrance of those
interests."
With respect to the 11 local limited partnerships identified as VIEs, a
provision of each of the partnership agreements prohibits the general
partner from selling, assigning, transferring, mortgaging, pledging, or
otherwise encumbering or disposing of its interest in the local limited
partnership for which it serves as the general partner. Accordingly, in
order for the general partner to take any of these actions, a
modification of the local limited partnership agreement would be
necessary and such modification would require written consent or vote of
a majority in interest of the general partner and the limited partner,
voting as one class, in proportion to ownership interest. Another
provision of each of the partnership agreements for the 11 local limited
partnerships prohibits any limited partner from assigning in whole or
any part of its interest in a local limited partnership unless the
limited partner first receives consent of the general partner of the
local limited partnership (which consent may be withheld at the sole
discretion of the general partner). These provisions of the partnership
agreements establish de facto agency relationships, as contemplated in
paragraph 16(d) of FIN 46R, between the Partnership, as limited partner
in the local limited partnerships, and the respective general partners
of the local limited partnerships.
Having determined under paragraph 16 that the Partnership and the
respective general partners of the local limited partnerships are a
related party group for purposes of FIN 46R, the Partnership considered
the guidance in paragraph 17 to identify the primary beneficiary of each
local limited partnership. Paragraph 17 of FIN 46R states, "If two or
more related parties (including the de facto agents described in
paragraph 16) hold variable interests in the same variable interest
entity, and the aggregate variable interest held by those parties would,
if held by a single party, identify that party as the primary
beneficiary, then the party, within the related party group, that is
most closely associated with the variable interest entity is the primary
beneficiary". The Partnership believes that the variable interests held
by the related party group, consisting of the Partnership and the
general partners, would, if held by a single party, identify that party
as the primary beneficiary. Accordingly, the Partnership believes that
based on qualitative evaluation, that a party within the related party
group must be the primary beneficiary.
Paragraph 17 goes on to state that "the determination of which party
within the related party group is most closely associated with the
variable interest entity requires judgment and shall be based on an
analysis of all relevant facts and circumstances, including:
a. The existence of a principal-agency relationship between parties
within the related party group
b. The relationship and significance of the activities of the variable
interest entity to the various parties within the related party group
c. A party's exposure to the expected losses of the variable interest
entity
d. The design of the variable interest entity."
The Partnership believes that in the application of paragraph 17 of FIN
46R, the factors listed need to be considered in conjunction with the
structure of each local limited partnership and how the Partnership
believes other entities would view the role of the general partner and
the limited partner (i.e. the Partnership).
The Partnership's consideration of the requirements of paragraph 17
revealed factors that individually could identify either the general
partner or the Partnership as the party with the characteristics most
closely associated with the respective local limited partnerships.
Ultimately, as discussed below, the Partnership concluded that the
general partner is the party within the related party group that has the
characteristics most closely associated with the local limited
partnerships. Factors considered most relevant include:
o Although the de facto agency relationship that was identified in
connection with paragraph 16 does not clearly indicate which party is
principal or agent, the Partnership believes the general partner has
characteristics that are commonly associated with the principal. In
this regard, the Partnership noted that the general partner is the
party an outside entity would contact regarding a local limited
partnership matter. For example, the United States Department of
Housing and Urban Development, or one of its agencies, ("HUD"), is the
outside entity with the most direct contact and or communication with
the local limited partnerships due to the interest and tenant
subsidies and mortgage insurance that exist at the local limited
partnership level. In all instances HUD contacts the general partner
with respect to matters involving the local limited partnership and
the general partner acts with authority in addressing those matters.
o The Partnership noted that each general partner's relationship with
the local limited partnerships involves the following significant
activities related to its rights and obligations under the related
limited partnership agreements:
o The general partner shall manage and conduct the business of the local
limited partnership;
o Employees of the general partner (or its affiliates) are actively
involved in managing the operations of the local limited partnerships
o The general partner has the obligation to fund any recourse
obligations of the local limited partnership
o The general partner is authorized to develop land acquired by the
local limited partnership with off-site and on-site improvements, and
to construct, rehabilitate, maintain, operate and manage the housing
units and other facilities of the respective local limited partnership
o The general partner is authorized to borrow funds, execute and issue
mortgage notes and other evidences of indebtedness.
o The general partner is authorized to apply for and obtain from the
respective government agency, contracts for leasing, interest
subsidies, tax abatement and tax limitation, as well as other
supplemental payments and subsidies
o The general partner shall promptly take any and all action which may
be necessary or appropriate to perfect and maintain the local limited
partnership, as a limited partnership under state law, and to develop,
maintain, and operate the respective local limited partnerships in
accordance with provisions of the local limited partnership agreement
and applicable Federal, state and local laws and regulations
o The general partner shall cause the local limited partnership
to obtain and maintain at all times, insurance in such amounts
and at terms customary for a project similar to the local
limited partnership
o The general partner is responsible for obtaining a management
agent for the respective local limited partnership
o In addition, the local limited partnership agreements state that the
Partnership, as limited partner, shall not take part in the management
of the local limited partnership's business or transact any business
for the local limited partnership, nor have any power to sign for or
to bind the local limited partnership or to subject the local limited
partnership to any liability or obligation.
These factors strongly indicate that the general partner is the party
most closely associated with the local limited partnerships.
Although the Partnership has not performed a quantitative analysis to
determine the relative exposures of the Partnership and general partners
to the expected losses of the respective local limited partnerships, the
Partnership generally believes that it would have the greatest exposure
based on provisions in the local limited partnership agreements that
provide for 95-99 percent allocations and distributions to the limited
partner. However, this factor is not sufficient to offset the above
indicators that the general partner is the party most closely associated
with the local limited partnerships.
As an additional note, the Partnership is unable to make a clear
determination as to which parties were more involved with the design of
the local limited partnerships due to the length of time since the local
limited partnerships were created and the lack of individuals associated
with that process available for consultation. The Partnership presumes
that both the general partner and the Partnership were highly involved
in the negotiation of local limited partnership provisions. Those
negotiations ultimately resulted in the general partner having more
substantial rights and obligations under the local limited partnership
agreements.
The Partnership concluded, based on its qualitative consideration of the
factors in paragraph 17 of FIN 46R as noted above, that the general
partner is the party in the related party group that is most closely
associated with, and therefore is the primary beneficiary of, the
respective local limited partnership. Accordingly, the Partnership is
not the primary beneficiary of any of the 11 local limited partnerships
identified as VIEs and is not required to consolidate any of the local
limited partnerships.
* * * * *
As requested by the Staff, the Partnership acknowledges that: (a) the
Partnership is responsible for the adequacy and accuracy of the disclosure in
its filings; (b) Staff comments or changes to disclosure in response to Staff
comments do not foreclose the Commission from taking any action with respect to
the filings; and (c) the Partnership may not assert Staff comments as a defense
in any proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
If you have further questions regarding the information provided, please contact
the undersigned or Stephen Waters. Mr. Waters can be reached directly at (864)
239-1554 or by fax at (864) 239-5824.
Sincerely,
/s/ David R. Robertson
David R. Robertson
President and Chief Executive Officer
National Partnership Investments Corp.,
the corporate general partner of Real
Estate Associates Limited II
cc: Stephen B. Waters