United States Securities and Exchange Commission
May 20, 2005
Page 8 of 8
NATIONAL TAX CREDIT INVESTORS II
55 Beattie Place, P.O. Box 1089
Greenville, SC 29602
May 20, 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. Steven Jacobs
Re: National Tax Credit Investors II
Form 10-KSB for the year ended December 31, 2004 File No. 0-20610
Ladies and Gentlemen:
This letter responds to the comments of the staff of the Securities and Exchange
Commission (the "Staff") addressed to National Tax Credit Investors II, a
California limited partnership (the "Partnership"), in a letter dated April 26,
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
Financial Statements and Notes
Report of Independent Registered Public Accounting Firm
1. Comment: Please file the report(s) of the independent accountants
referenced by the principal accountants in their report, as required by
Rule 2-05 of Regulation S-X.
Response: In the Partnership's Annual Report on Form 10-KSB for the year
ended December 31, 2004, specifically in exhibit 99.1, the Partnership
filed the report of the independent accountants referenced by the principal
accountants in their report.
Note 1 - Organization and Summary of Significant Accounting Policies
Recent Accounting Pronouncements
2. Comment: You determined that seventeen of the entities in which the
Partnership holds an interest at December 31, 2004 are VIEs and the
Partnership is not the Primary Beneficiary of any of these entities. In a
supplemental response, please tell us how you determined seventeen of the
entities were VIEs and the remaining fourteen entities, of which the
Partnership holds an interest of greater than fifty-percent in eleven of
them after December 15, 2004, were not VIEs. In your response, please
address the authority and obligations of the general partner(s) of the
Local Limited Partnerships, and your relationship with the general
partners. Finally, please quantify the equity investment at risk for each
Local General Partner, net of any upfront fees received.
Response: The Partnership first became involved with the local limited
partnerships in the early 1990's. 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 ("NAPICO"),
the general partner of the Partnership. With the exception of one general
partner that is wholly owned by NAPICO and serves as the general partner of
three local limited partnerships, 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 the local limited partnerships in its adoption of FIN 46R 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 available and other information
that is currently available to the Partnership.
The Partnership's determination that the local limited partnerships are
variable interest entities ("VIE") was made based on consideration of
paragraphs 5, 9 and 10 of FIN 46R. The Partnership specifically determined
that fourteen of the local limited partnerships are VIEs based on paragraph
5(b)(1) and that three of the local limited partnerships are VIEs based on
paragraphs 5(a), 9 and 10.
With respect to the fourteen local limited partnerships that were
determined to be VIEs under paragraph 5(b)(1), the group of equity holders
at risk was comprised only of its limited partners (the group that
contributed the capital necessary to fund the acquisition of properties
owned by local limited partnerships). The general partners were not
considered to have equity at risk because their capital contributions were
insignificant. Based on the terms of the related local limited partnership
agreements, the limited partners were not deemed to have the right to make
decisions that have a significant effect on the operations or success of
the local limited partnership. Therefore, these fourteen local limited
partnerships were determined to be VIEs and no further evaluation under
paragraph 5 was necessary.
With respect to three local limited partnerships that were determined to be
VIEs under paragraphs 5(a), 9 and 10, the Partnership determined based on
review of the local limited partnership audited financial statements and
other available financial information, that each of the local limited
partnerships had insufficient equity investment at risk to permit the local
limited partnerships to finance their activities. Accordingly, these three
local limited partnerships were determined to be VIEs.
The Partnership's determination that fourteen of the local limited
partnerships are not VIE's was made based on consideration of paragraphs 5,
9 and 10 of FIN 46R.
With respect to these fourteen local limited partnerships, the Partnership
determined that the capital contributions of the general partners and
limited partners were significant and therefore the group of equity holders
at risk was comprised of both the general partner and the limited partner.
The Partnership further determined that the general partner controls and
manages the day-to-day activities of the local limited partnerships and
therefore the group of equity holders at risk were deemed to have the right
to make decisions that have a significant effect on the operations or
success of the local limited partnership.
The Partnership noted that the 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 partnerships;
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 partnerships
o The general partner is authorized to borrow funds, execute and issue
mortgage notes and other evidences of indebtedness
o The general partner shall operate the local limited partnerships
and shall cause the management agents to manage the properties in
such a manner that the properties will be eligible to receive
applicable tax credits
o The general partner shall promptly take any and all action which
may be necessary or appropriate to perfect and maintain the local
limited partnerships, 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 partnerships to
obtain and maintain at all times, insurance in such amounts and at
terms customary for a project similar to the local limited
partnerships
o The general partner is responsible for obtaining a management
agent for the respective local limited partnerships
In addition, the local limited partnership agreements each 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.
The Partnership next considered paragraph 5(b)(2) and determined based on review
of each of the local limited partnership agreements that the group of equity
holders at risk do not lack the ability to absorb expected losses, are not
protected from the expected losses and are not guaranteed a return.
The Partnership next considered paragraph 5(b)(3) and determined based on review
of each of the local limited partnership agreements that the group of equity
holders at risk do receive the expected residual returns and are not subject to
caps on expected returns.
The Partnership next considered paragraph 5(c) and determined based on review of
each of the local limited partnership agreements that the general partner is
generally the equity holder who is involved in the partnership activity of real
estate development and operations and also benefits through the receipt of fees
for services provided to the local limited partnerships and the right to receive
distributions from the local limited partnerships. Therefore the Partnership
does not believe that substantially all of the activities of the respective
local limited partnerships involve and are performed on behalf of the investor
(the limited partner) that has disproportionately few voting rights.
The Partnership next considered paragraph 5(a), 9 and 10 and determined based on
review of the local limited partnership audited financial statements and other
available financial information with respect to the local limited partnerships,
that each of the local limited partnerships had sufficient equity investment at
risk, as demonstrated by the ability of the local limited partnership to finance
its activities without additional subordinated financial support.
The Partnership concluded, based on its qualitative consideration of the factors
above, that the fourteen local limited partnerships are not VIEs.
The Partnership's approach to the quantification of the equity investment at
risk for each general partner of the local limited partnerships consisted of
reviewing the partnership agreements for the determination of the capital
contribution of the respective partners as a percentage of total capital
contributed. The partnership considered payments to the general partners of
certain fees as defined in the local limited partnership agreements that could
be considered a reduction of the capital contributed; however these fees were
generally in consideration of services performed by the general partner or
covenants provided by the general partner to fund development deficits and
operating deficits within a defined time period at the inception of each local
limited partnership, and were determined to be reasonable in relation to the
nature of the services provided. Therefore, the Partnership concluded that these
fees should not be considered a reduction of capital contributed by the general
partner.
3. Comment: You refer to the Partnership's maximum exposure to loss at December
31, 2004 relative to determining the primary beneficiary for the identified
VIEs. In a supplemental response, please tell us whether you evaluated the
Partnership's expected losses and residual returns and equity investment at risk
as applicable at the time the Partnership became involved with the Local Limited
Partnerships, as opposed to its equity at risk at December 31, 2004.
Additionally, please address whether you included the Partnership's rights to
tax credits in the expected cash flows.
Response: The Partnership refers to the maximum exposure to loss at December 31,
2004 as a result of its involvement with unconsolidated VIEs in order to comply
with the disclosure requirements of paragraph 24(c) of FIN 46R and not for
purposes of determining the primary beneficiary for the identified VIEs.
The Partnership evaluated the equity investment at risk based on the provisions
of the local limited partnership agreements in place and any subsequent
amendments to such local limited partnership agreements. As provided in
paragraph 38 of FIN 46R, the Partnership was unable to obtain all of the
information necessary to make its determination at the date the Partnership
first became involved with the local limited partnerships. The local limited
partnership agreements are considered "living" documents that capture changes in
structure and terms of the respective local limited partnerships. Accordingly,
the Partnership's evaluation of equity investment at risk was considered to be
performed as of the date on which FIN 46R was first applied, or December 31,
2004. 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 at December 31, 2004 it would have the greatest exposure
based on provisions in the local limited partnership agreements that provide for
allocations and distributions in accordance with ownership interest. The
Partnership considered this factor, together with other factors in paragraph 17
of FIN 46R, in the determination of the primary beneficiary of those local
limited partnerships determined to be VIEs.
The Partnership determined that the tax credit allocation period for each of the
thirty-one local limited partnerships had expired at December 31, 2004 and
investors were fully allocated their portion of tax credits. In addition, in the
event the amount of tax credits allocated to investors were less than the amount
originally provided to the investors, the general partner would have the
responsibility to make the investor whole. Therefore if a quantitative analysis
of the relative exposures of the Partnership to the expected losses and residual
returns had been performed at December 31, 2004, the Partnership's rights to tax
credits would not have been a factor in the expected cash flows.
Note 2 - Investments in Local Partnerships
4. Comment: It appears you applied the cost recovery method for the sale of
partial interests in Rancho Del Mar Limited Partnership and Wedgewood Commons
Limited Partnership in 2003. In a supplemental response, please advise us how
you analyzed the criteria in paragraph 5 of SFAS 66 and explain what paragraph
in SFAS 66 supports your accounting treatment. Additionally, if the sales price
of the partial interest was proportionately less than the carrying amount of the
interest sold, please tell us if you applied the relative fair market value of
your investment to your remaining basis to assess impairment.
Response: With respect to the Rancho del Mar Apartments Limited Partnership
("Rancho") transaction, the Partnership has determined in connection with its
consideration of the Staff's comment that the accounting treatment reflected in
the Partnership's 2003 financial statements was in error. That accounting
treatment was based on the Partnership's understanding that it had, in
substance, sold approximately a 33 percent economic interest in Rancho. Based on
its reconsideration of the accounting treatment, the Partnership determined that
the transaction, which involved an amendment of the cash flow distribution
provisions of the Rancho limited partnership agreement, was in substance a sale
of substantially all of the Partnership's economic interest in Rancho.
Accordingly, the Partnership has now determined that it should have recognized a
loss for the $1,320,000 excess of the carrying amount of its investment in
Rancho over the transaction proceeds on or prior to the date it agreed to the
terms of the Rancho transaction. Based on the foregoing analysis, the
Partnership intends to file an amended Form 10-KSB for the year ended December
31, 2004 containing restated financial statements that reflect treatment of the
Rancho transaction as discussed above.
In the Partnership's Annual Report on Form 10-KSB for the year ended December
31, 2002, specifically in Note 2 to the financial statements, the Partnership
disclosed an impairment of its investment in Wedgewood Commons Limited
Partnership ("Wedgewood") based on the pending dilution of the Partnership's
investment in Wedgewood. The impairment for $834,000 reduced the book value of
the Partnership's investment in Wedgewood to the relative fair value based on
the sales price for the portion of the investment sold in 2003. Therefore, in
2003 when the sale transaction was completed, the proceeds from the sale were
applied directly to the investment balance held by the Partnership and no gain
or loss was recognized by the Partnership related to this sale transaction.
* * * * *
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 general partner of National Tax
Credit Investors II
cc: Stephen B. Waters