UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________to _________
Commission file number 0-14483
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
(Exact name of small business issuer as specified in its charter)
Delaware 62-1207077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
March 31, 2005
Assets
Cash and cash equivalents $ 432
Receivables and deposits 536
Restricted escrows 86
Other assets 518
Investment properties:
Land $ 1,953
Buildings and related personal property 49,116
51,069
Less accumulated depreciation (25,768) 25,301
$ 26,873
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 241
Tenant security deposit liabilities 131
Accrued property taxes 343
Other liabilities 298
Due to affiliates (Note B) 8,770
Mortgage notes payable 22,268
Partners' Deficit
General partners $ (221)
Limited partners (1,224.25 units issued and
outstanding) (4,957) (5,178)
$ 26,873
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
March 31,
2005 2004
Revenues:
Rental income $ 1,556 $ 1,442
Other income 133 166
Casualty gain (Note C) -- 9
Total revenues 1,689 1,617
Expenses:
Operating 867 793
General and administrative 67 62
Depreciation 632 524
Interest 413 356
Property taxes 90 123
Total expenses 2,069 1,858
Net loss $ (380) $ (241)
Net loss allocated to general partners (2%) $ (8) $ (5)
Net loss allocated to limited partners (98%) (372) (236)
$ (380) $ (241)
Net loss per limited partnership unit $ (303.86) $ (192.77)
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, 2004 1,224.25 $ (213) $(4,585) $(4,798)
Net loss for the three months
ended March 31, 2005 -- (8) (372) (380)
Partners' deficit at
March 31, 2005 1,224.25 $ (221) $(4,957) $(5,178)
See Accompanying Notes to Consolidated Financial Statements
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
2005 2004
Cash flows from operating activities:
Net loss $ (380) $ (241)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 632 524
Amortization of discounts and loan costs 41 27
Casualty gain -- (9)
Change in accounts:
Receivables and deposits 33 300
Other assets (90) (196)
Accounts payable 87 (135)
Tenant security deposit liabilities (9) (4)
Accrued property taxes (85) (71)
Other liabilities (156) 15
Due to affiliates 85 (27)
Net cash provided by operating activities 158 183
Cash flows from investing activities:
Property improvements and replacements (213) (86)
Insurance proceeds received -- 9
Net cash used in investing activities (213) (77)
Cash flows from financing activities:
Advances from affiliates -- 145
Payments on advances from affiliates -- (648)
Payments on mortgage notes payable (209) (149)
Net cash used in financing activities (209) (652)
Net decrease in cash and cash equivalents (264) (546)
Cash and cash equivalents at beginning of period 696 746
Cash and cash equivalents at end of period $ 432 $ 200
Supplemental disclosure of cash flow information:
Cash paid for interest $ 279 $ 291
Supplemental disclosure of non-cash activity:
Property improvements and replacements in accounts payable $ 52 $ --
At December 31, 2004, approximately $44,000 of property improvements and
replacements were included in accounts payable and are included in property
improvements and replacements at March 31, 2005.
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 months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2005. 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, 2004. The Managing
General Partner is a subsidiary of Apartment Investment and Management Company
("AIMCO"), a publicly traded real estate investment trust.
Certain 2004 balances have been reclassified to conform with the 2005
presentation.
Note B - Transactions with Affiliated Parties
The Partnership has no employees and depends 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 receive 5% of gross receipts from all
of the Partnership's properties for providing property management services. The
Partnership paid to such affiliates approximately $83,000 and $81,000 for the
three months ended March 31, 2005 and 2004, respectively, which is included in
operating expenses.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $67,000 and
$45,000 for the three months ended March 31, 2005 and 2004, respectively, which
is included in general and administrative expenses and investment properties.
The portion of these reimbursements included in investment properties for the
three months ended March 31, 2005 are fees related to construction management
services provided by an affiliate of the Managing General Partner of
approximately $14,000. There were no such fees during the three months ended
March 31, 2004. The fees are calculated based on a percentage of current
additions to investment properties.
In accordance with the Partnership Agreement, the Managing General Partner
advanced the Partnership approximately $145,000 during the three months ended
March 31, 2004, to cover operational expenses and to assist in the closing of
the refinancing required at Reflections Apartments. The Partnership repaid
approximately $648,000 during the same period. At March 31, 2005, the amount of
the outstanding loans and accrued interest was approximately $8,770,000.
Interest is charged at prime plus 1%, or 6.75% at March 31, 2005. Interest
expense was approximately $138,000 and $110,000 for the three months ended March
31, 2005 and 2004, 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.
The Partnership accrued a real estate commission due to the Managing General
Partner of $48,000 upon the sale of Shoppes at River Rock during the year ended
December 31, 1999. Approximately $18,000 is accrued at March 31, 2005 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 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 three months ended March 31, 2005, the
Partnership was charged by AIMCO and its affiliates approximately $49,000 for
hazard insurance coverage and fees associated with policy claims administration.
Additional charges will be incurred by the Partnership during 2005 as other
insurance policies renew later in the year. The Partnership was charged by AIMCO
and its affiliates approximately $85,000 for insurance coverage and fees
associated with policy claims administration during the year ended December 31,
2004.
Note C - Casualty Gain
During the three months ended March 31, 2004, a net casualty gain of
approximately $9,000 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 additional insurance
proceeds of approximately $9,000 received during the three months ended March
31, 2004.
Note D - Indiana Property Taxes
During 2003, the state of Indiana implemented a reassessment of property tax
values. During 2004, the Partnership successfully appealed the reassessed
property tax value of Reflections Apartments. In the state of Indiana property
tax bills are paid one year in arrears. Thus, the 2003 property tax bills were
received and paid in 2004. Due to the Partnership's appeal of the reassessed
property value, the property tax accrual for the first quarter of 2004 was based
on the property tax value as estimated by a third party property tax specialist.
During September 2004, the Partnership was successful in its appeal and the
assessed value of Reflections Apartments was reduced for tax years 2002, 2003
and 2004. For the first quarter of 2005, the property tax accrual was based on
the settled value.
Note E - Contingencies
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 captioned Heller v.
Insignia Financial Group (the "Heller action") was filed against the same
defendants that are named in the Nuanes action. 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 28, 2002, the trial court granted defendants
motion to strike the complaint.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action.
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
("Objector") filed an appeal (the "Appeal") seeking to vacate and/or reverse the
order approving the settlement and entering judgment thereto. On May 4, 2004 the
Objector filed a second appeal challenging the court's use of a referee and its
order requiring Objector to pay those fees.
On March 21, 2005, the Court of Appeals issued opinions in both pending appeals.
With regard to the settlement and judgment entered thereto, the Court of Appeals
vacated the trial court's order and remanded to the trial court for further
findings on the basis that the "state of the record is insufficient to permit
meaningful appellate review". With regard to the second appeal, the Court of
Appeals reversed the order requiring the Objector to pay referee fees. On April
26, 2005, the Court of Appeals lifted the stay of a pending appeal related to
the Heller action and the trial court's order striking the complaint. On April
28, 2005, the Objector filed a Petition for Review with the California Supreme
Court in connection with the opinion vacating the order approving settlement and
remanding for further findings. The Managing General Partner and its affiliates
are currently scheduled to file an answer to Objector's petition on May 18,
2005.
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.
AIMCO Properties L.P. and NHP Management Company, both affiliates of the
Managing General Partner, are defendants in a lawsuit alleging that they
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 attempts to bring 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. and NHP
Management Company failed to compensate maintenance workers for time that they
were required to be "on-call." Additionally, the complaint alleges AIMCO
Properties L.P. and NHP Management Company failed to comply with the FLSA in
compensating maintenance workers for time that they worked in responding to a
call while "on-call." The defendants have filed an answer to the amended
complaint denying the substantive allegations. Oral argument relating to the
certification of the collective action took place on May 12, 2005 and the
parties await a ruling from the Court. Although the outcome of any litigation is
uncertain, AIMCO Properties, L.P. does not believe that the ultimate outcome
will have a material adverse effect on its consolidated financial condition or
results of operations. Similarly, the Managing General Partner does not believe
that the ultimate outcome will have a material adverse effect on the
Partnership's consolidated financial condition or results of operations.
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.
Environmental
Various Federal, state and local laws subject property owners or operators to
liability for management, and the costs of removal or remediation, of certain
hazardous substances present on a property. Such laws often impose liability
without regard to whether the owner or operator knew of, or was responsible for,
the release or presence of the hazardous substances. The presence of, or the
failure to manage or remedy properly, hazardous substances may adversely affect
occupancy at affected apartment communities and the ability to sell or finance
affected properties. In addition to the costs associated with investigation and
remediation actions brought by government agencies, the presence of hazardous
substances on a property could result in claims by private plaintiffs for
personal injury, disease, disability or other infirmities. Various laws also
impose liability for the cost of removal, remediation or disposal of hazardous
substances through a licensed disposal or treatment facility. Anyone who
arranges for the disposal or treatment of hazardous substances is potentially
liable under such laws. These laws often impose liability whether or not the
person arranging for the disposal ever owned or operated the disposal facility.
In connection with the ownership and operation of its properties, the
Partnership could potentially be liable for environmental liabilities or costs
associated with its properties.
Mold
The Partnership is aware of lawsuits against owners and managers of multifamily
properties asserting claims of personal injury and property damage caused by the
presence of mold, some of which have resulted in substantial monetary judgments
or settlements. The Partnership has only limited insurance coverage for property
damage loss claims arising from the presence of mold and for personal injury
claims related to mold exposure. Affiliates of the Managing General Partner have
implemented a national policy and procedures to prevent or eliminate mold from
its properties and the Managing General Partner believes that these measures
will eliminate, or at least minimize, the effects that mold could have on
residents. To date, the Partnership has not incurred any material costs or
liabilities relating to claims of mold exposure or to abate mold conditions.
Because the law regarding mold is unsettled and subject to change the Managing
General Partner can make no assurance that liabilities resulting from the
presence of or exposure to mold will not have a material adverse effect on the
Partnership's consolidated financial condition or results of operations.
SEC Investigation
The Central Regional Office of the United States Securities and Exchange
Commission (the "SEC") is conducting a formal investigation relating to certain
matters. Although the staff of the SEC is not limited in the areas that it may
investigate, AIMCO believes the areas of investigation include AIMCO's
miscalculated monthly net rental income figures in third quarter 2003,
forecasted guidance, accounts payable, rent concessions, vendor rebates,
capitalization of payroll and certain other costs, and tax credit transactions.
At the end of the first quarter of 2005, the SEC added certain tender offers for
limited partnership interests as an area of investigation. AIMCO is cooperating
fully. AIMCO is not able to predict when the investigation will be resolved.
AIMCO does not believe that the ultimate outcome will have a material adverse
effect on its consolidated financial condition or results of operations.
Similarly, the Managing General Partner does not believe that the ultimate
outcome will have a material adverse effect on the Partnership's consolidated
financial condition or results of operations.
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 Partnership's financial
statements and the notes thereto, as well as the risk factors described in the
documents the Partnership 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
three months ended March 31, 2005 and 2004:
Average Occupancy
2005 2004
Big Walnut Apartments
Columbus, Ohio (1) 70% 86%
The Trails Apartments
Nashville, Tennessee (2) 95% 92%
Reflections Apartments
Indianapolis, Indiana (3) 90% 81%
(1) The Managing General Partner attributes the decrease in occupancy at Big
Walnut Apartments to a slow economy in the Columbus, Ohio area.
(2) The Managing General Partner attributes the increase in occupancy at The
Trails Apartments to a new pricing structure, which is more competitive in
the local market.
(3) The Managing General Partner attributes the increase in occupancy at
Reflections Apartments to the completion of a major renovation project
during 2003. The project enhanced the appearance of the property to
attract desirable tenants.
The Partnership's financial results depend upon a number of factors including
the ability to attract and maintain tenants at the investment properties,
interest rates on mortgage loans, costs incurred to operate the investment
properties, general economic conditions and weather. As part of the ongoing
business plan of the Partnership, the Managing General Partner monitors the
rental market environment of its investment properties to assess the feasibility
of increasing rents, maintaining or increasing occupancy levels and protecting
the Partnership from increases in expenses. 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. Further, a number of factors that are
outside the control of the Partnership such as the local economic climate and
weather can adversely or positively affect the Partnership's financial results.
Results of Operations
The Partnership's net loss for the three months ended March 31, 2005 was
approximately $380,000 compared to net loss of approximately $241,000 for the
three months ended March 31, 2004. The increase in net loss was due to an
increase in total expenses partially offset by an increase in total revenues.
The increase in total expenses is due to increases in operating, depreciation
and interest expenses partially offset by a decrease in property tax expense.
Operating expenses increased due to an increase in property expense partially
offset by a decrease in advertising expense. Property expense increased due to
an increase in payroll and related benefits at all of the investment properties
partially offset by a decrease in utility costs at Reflections and Big Walnut
Apartments. Advertising expense decreased due to a decrease in marketing efforts
at Reflections Apartments after completion of the renovation project.
Depreciation expense increased due to fixed assets being placed into service
over the past year at Reflections Apartments as a result of the renovation
project. Interest expense increased due to higher average loan balances due to
an affiliate of the Managing General Partner in 2005 and an increase in the
variable interest rate on the mortgage at Big Walnut Apartments. Property tax
expense decreased due to the successful appeal of the property value assessment
at Reflections Apartments.
Total revenues increased due to an increase in rental income partially offset by
a decrease in other income. Rental income increased due to an increase in
occupancy at Reflections and The Trails Apartments, an increase in the average
rental rates at all of the investment properties, and a decrease in bad debt
expense at Reflections and Big Walnut Apartments partially offset by a decrease
in occupancy at Big Walnut Apartments. Other income decreased due to decreases
in lease cancellation fees at Big Walnut and Reflections Apartments and in late
charges at Reflections Apartments.
Included in general and administrative expenses for the three months ended March
31, 2005 and 2004 are management reimbursements to the Managing General Partner
as allowed under the Partnership Agreement. Also included in general and
administrative expenses are the costs associated with the quarterly and annual
communications with investors and regulatory agencies and the annual audit
required by the Partnership Agreement.
During the three months ended March 31, 2004, a net casualty gain of
approximately $9,000 was recorded at Big Walnut Apartments. The casualty gain
was related to a fire that occurred at Big Walnut Apartments that damaged two
apartments in March 2003. The gain was the result of additional insurance
proceeds of approximately $9,000 received during the three months ended March
31, 2004.
Liquidity and Capital Resources
At March 31, 2005, the Partnership had cash and cash equivalents of
approximately $432,000 compared to approximately $200,000 at March 31, 2004.
Cash and cash equivalents decreased approximately $264,000 since December 31,
2004 due to approximately $213,000 of cash used in investing activities and
approximately $209,000 of cash used in financing activities partially offset by
approximately $158,000 of cash provided by operating activities. Cash used in
investing activities consisted of property improvements and replacements. Cash
used in financing activities consisted of principal payments on the mortgages
encumbering the Partnership's properties. 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 Partnership's 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. For example, 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. Capital improvements planned for
each of the Partnership's properties are detailed below.
Big Walnut Apartments
During the three months ended March 31, 2005, the Partnership completed
approximately $113,000 of capital expenditures at Big Walnut Apartments
consisting of furniture and fixtures and floor covering replacements. These
improvements were funded from operating cash flow. The Partnership regularly
evaluates the capital improvement needs of the property. While the Partnership
has no material commitments for property improvements and replacements, certain
routine capital expenditures are anticipated during 2005. Such capital
expenditures will depend on the physical condition of the property as well as
replacement reserves and anticipated cash flow generated by the property.
The Trails Apartments
During the three months ended March 31, 2005, the Partnership completed
approximately $69,000 of capital expenditures at The Trails Apartments
consisting primarily of fire safety upgrades. These improvements were funded
from operating cash flow. The Partnership regularly evaluates the capital
improvement needs of the property. While the Partnership has no material
commitments for property improvements and replacements, certain routine capital
expenditures are anticipated during 2005. Such capital expenditures will depend
on the physical condition of the property as well as anticipated cash flow
generated by the property.
Reflections Apartments
During the three months ended March 31, 2005, the Partnership completed
approximately $39,000 of capital expenditures at Reflections Apartments
consisting primarily of floor covering replacements. These improvements were
funded from operating cash flow. The Partnership regularly evaluates the capital
improvement needs of the property. While the Partnership has no material
commitments for property improvements and replacements, certain routine capital
expenditures are anticipated during 2005. Such capital expenditures will depend
on the physical condition of the property as well as anticipated cash flow
generated by the property.
Capital expenditures will be incurred only if cash is available from operations
or from Partnership reserves. To the extent that capital improvements are
completed, the Partnership's distributable cash flow, if any, may be adversely
affected at least in the short term.
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 Reflections Apartments of approximately $13,106,000
matures in January 2029 at which time the loan is scheduled to be fully
amortized. The mortgage note has a call option which allows for the lender to
declare the outstanding principal of the loan due and payable on February 1,
2009 and on every fifth anniversary thereafter. The mortgage indebtedness
encumbering The Trails and Big Walnut Apartments of approximately $9,795,000
matures in 2007 and 2009 at which time balloon payments are required. The
Managing General Partner has the option to extend the maturity on the Big Walnut
Apartments loan for another five years. 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.
In accordance with the Partnership Agreement, the Managing General Partner
advanced the Partnership approximately $145,000 during the three months ended
March 31, 2004, to cover operational expenses and to assist in the closing of
the refinancing required at Reflections Apartments. The Partnership repaid
approximately $648,000 during the same period. At March 31, 2005, the amount of
the outstanding loans and accrued interest was approximately $8,770,000.
Interest is charged at prime plus 1%, or 6.75% at March 31, 2005. Interest
expense was approximately $138,000 and $110,000 for the three months ended March
31, 2005 and 2004, 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.
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 three months ended March 31, 2005 or
2004. Future cash distributions will depend on the levels of net cash generated
from operations, and the timing of debt maturities, property sales and/or
refinancings. The Partnership's cash available for distribution is reviewed on a
monthly basis. In light of the significant amounts due to the Managing General
Partner at March 31, 2005, it is not anticipated that the Partnership will make
any 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 656.50
limited partnership units ("Units") in the Partnership representing 53.63% of
the outstanding Units at March 31, 2005. 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 53.63% of the outstanding Units, AIMCO is 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.
The Partnership will offer rental concessions during particularly slow months or
in response to heavy competition from other similar complexes in the area.
Rental income attributable to leases, net of any concessions, is recognized on a
straight-line basis over the term of the lease. The Partnership evaluates all
accounts receivable from residents and establishes an allowance, after the
application of security deposits, for accounts greater than 30 days past due on
current tenants and all receivables due from former tenants.
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 captioned Heller v.
Insignia Financial Group (the "Heller action") was filed against the same
defendants that are named in the Nuanes action. 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 28, 2002, the trial court granted defendants
motion to strike the complaint.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action.
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
("Objector") filed an appeal (the "Appeal") seeking to vacate and/or reverse the
order approving the settlement and entering judgment thereto. On May 4, 2004 the
Objector filed a second appeal challenging the court's use of a referee and its
order requiring Objector to pay those fees.
On March 21, 2005, the Court of Appeals issued opinions in both pending appeals.
With regard to the settlement and judgment entered thereto, the Court of Appeals
vacated the trial court's order and remanded to the trial court for further
findings on the basis that the "state of the record is insufficient to permit
meaningful appellate review". With regard to the second appeal, the Court of
Appeals reversed the order requiring the Objector to pay referee fees. On April
26, 2005, the Court of Appeals lifted the stay of a pending appeal related to
the Heller action and the trial court's order striking the complaint. On April
28, 2005, the Objector filed a Petition for Review with the California Supreme
Court in connection with the opinion vacating the order approving settlement and
remanding for further findings. The Managing General Partner and its affiliates
are currently scheduled to file an answer to Objector's petition on May 18,
2005.
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.
AIMCO Properties L.P. and NHP Management Company, both affiliates of the
Managing General Partner, are defendants in a lawsuit alleging that they
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 attempts to bring 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. and NHP
Management Company failed to compensate maintenance workers for time that they
were required to be "on-call." Additionally, the complaint alleges AIMCO
Properties L.P. and NHP Management Company failed to comply with the FLSA in
compensating maintenance workers for time that they worked in responding to a
call while "on-call." The defendants have filed an answer to the amended
complaint denying the substantive allegations. Oral argument relating to the
certification of the collective action took place on May 12, 2005 and the
parties await a ruling from the Court. Although the outcome of any litigation is
uncertain, AIMCO Properties, L.P. does not believe that the ultimate outcome
will have a material adverse effect on its consolidated financial condition or
results of operations. Similarly, the Managing General Partner does not believe
that the ultimate outcome will have a material adverse effect on the
Partnership's consolidated financial condition or results of operations.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
See Exhibit Index.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
By: Davidson Diversified Properties, Inc.
Its Managing General Partner
By: /s/Martha L. Long
Martha L. Long
Senior Vice President
By: /s/Stephen B. Waters
Stephen B. Waters
Vice President
Date: May 13, 2005
DAVIDSON DIVERSIFIED REAL ESTATE II, LP
EXHIBIT INDEX
Exhibit Number Description of Exhibit
3 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.
3B 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.
4 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.
4A Certificate of Amendment to 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.
4B 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.
10I Contract for Sale of Real Estate for Big Walnut Apartments
dated December 6, 1984 between Community Development Company,
an Ohio limited partnership and Tennessee Trust Company, as
Trustee is incorporated by reference to Exhibit 10(b) to the
Registrant's Current Report on Form 8-K dated March 28, 1985.
10J Assignment of Contract for Sale of Real Estate dated March 22,
1985 between Tennessee Trust Company, Trustee, and the
Registrant, relating to assignment of Purchase Agreement for
Big Walnut Apartments is incorporated by reference to Exhibit
10(a) to the Registrant's Current Report on Form 8-K dated
March 28, 1985.
10K Contract for Sale of Real Estate for The Trails Apartments
dated July 31, 1985 between Trails of Nashville Associates,
Ltd., a Tennessee limited partnership by reference to Exhibit
10(b) to the Registrant's Current Report on Form 8-K dated
August 30, 1985.
10L Assignment of Contract for Sale of Real Estate dated August
28, 1985 between Tennessee Trust Company, as Trustee and the
Registrant, relating to assignment of Contract for Sale of
Real Estate for The Trails Apartments is incorporated by
reference to Exhibit 10(a) to the Registrant's Current Report
on Form 8-K dated August 30, 1985.
10M Contract for Sale of Real Estate for Greensprings Manor
Apartments dated July 15, 1985 between Greensprings Apartments
Associates, an Indiana limited partnership and Tennessee Trust
Company, as Trustee, is incorporated by reference to Exhibit
20(d) to the Registrant's Current Report on Form 8-K dated
August 30, 1985.
10N Assignment of Contract for Sale of Real Estate dated August
28, 1985 between Tennessee Trust Company, as Trustee and
the Registrant, relating to assignment of Contract for Sale
of Real Estate for Greensprings Manor Apartments is
incorporated by reference to Exhibit 10(c) to the
Registrant's Current Report on Form 8-K dated August 30,
1985.
10W Deed of Trust and Security Agreement dated December 1, 1984
between Trails of Nashville Associates, Ltd., and Capital
Holding Corporation relating to The Trails Apartments is
incorporated by reference to Exhibit 10QQ to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1985.
10X Note dated December 28, 1984 executed by Trails of
Nashville Associates, Ltd., payable to The Industrial
Development Board of the Metropolitan Government of
Nashville and Davidson County relating to The Trails
Apartments is incorporated by reference to Exhibit 10RR to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1985.
10GG Assignment of Limited Partnership Interest of Freeman
Equities, Limited, dated December 31, 1991 between Davidson
Diversified Properties, Inc. and Insignia Jacques-Miller, L.P.
is incorporated by reference to Exhibit 10KKK to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
10HH Assignment of General Partner Interests of Freeman Equities,
Limited, dated December 31, 1991 between Davidson Diversified
Properties, Inc. and MAE GP Corporation is incorporated by
reference to Exhibit 10LLL to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.
10II Stock certificate, dated December 31, 1991 showing ownership
of 1,000 shares of Davidson Diversified Properties, Inc. by
MAE GP Corporation is incorporated by reference to Exhibit
10MMM to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
10OO Multifamily Note secured by a Mortgage or Deed of Trust dated
September 16, 2002, between Big Walnut, L.P. and GMAC
Commercial Mortgage Corporation, a California Corporation,
related to Big Walnut Apartments is incorporated by reference
to the exhibit filed with the Form 10-QSB dated September 30,
2002.
10.6 Promissory Note dated December 11, 2003 between AIMCO
Greenspring L.P., a Delaware limited partnership, and Golden
American Life Insurance Company, a Delaware corporation
incorporated by reference to the Registrant's Current Report
on Form 8-K dated December 11, 2003.
10.7 Mortgage, Security Agreement, Financing Statement and Fixture
Filing dated December 11, 2003 between AIMCO Greenspring L.P.,
a Delaware limited partnership, and Golden American Life
Insurance Company, a Delaware corporation incorporated by
reference to the Registrant's Current Report on Form 8-K dated
December 11, 2003.
10.8 Assignment of Rents and Leases dated December 11, 2003 between
AIMCO Greenspring L.P., a Delaware limited partnership, and
Golden American Life Insurance Company, a Delaware corporation
incorporated by reference to the Registrant's Current Report
on Form 8-K dated December 11, 2003.
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.
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.
32.1 Certification of the equivalent of the Chief Executive Officer
and Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99A Agreement of Limited Partnership for Big Walnut, L.P.
between Davidson Diversified Properties, Inc. and Davidson
Diversified Real Estate II, L.P. entered into on August 23,
1991 is incorporated by reference to Exhibit 99A to the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1992.
Exhibit 31.1
CERTIFICATION
I, Martha L. Long, 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 small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer'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 small business issuer 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
small business issuer, 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 small business issuer'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 small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer'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 small business issuer'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 small business
issuer's internal control over financial reporting.
Date: May 13, 2005
/s/Martha L. Long
Martha L. Long
Senior Vice President of
Davidson Diversified
Properties, Inc., equivalent
of the chief executive officer
of the Partnership
Exhibit 31.2
CERTIFICATION
I, Stephen B. Waters, 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 small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer'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 small business issuer 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
small business issuer, 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 small business issuer'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 small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer'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 small business issuer'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 small business
issuer's internal control over financial reporting.
Date: May 13, 2005
/s/Stephen B. Waters
Stephen B. Waters
Vice President 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 March
31, 2005 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), Martha L. Long, as the equivalent of the chief executive officer
of the Partnership, and Stephen B. Waters, 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/Martha L. Long
Name: Martha L. Long
Date: May 13, 2005
/s/Stephen B. Waters
Name: Stephen B. Waters
Date: May 13, 2005
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.