NATIONAL TAX CREDIT INVESTORS II
55 Beattie Place, P.O. Box 1089
Greenville, SC 29602
June 9, 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 May 25,
2005, which was sent in response to the Partnership's May 20, 2005 response to
the Staff's original comment letter dated April 26, 2005. 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: We note the report of the principal accountants states the
"financial statements of these limited partnerships were audited by
other auditors whose reports have been furnished to use..." Please
confirm the "reports" to which the principal auditors refer is limited
to the one report included in Exhibit 99.1 and does not include
additional, "Material Investees" referred to in Note 2 to the financial
statements.
Response: The Partnership's auditors have confirmed to us, and the
Partnership supplementally provides to the Staff, that the "reports"
that they referred to in their Report of Independent Registered Public
Accounting Firm is limited to only the report filed as Exhibit 99.1. The
Partnership's auditors did not rely on the reports of any other
auditors.
Note 1 - Summary of Partnership Organization and Significant Accounting
Policies
Recent Accounting Pronouncements
2. Comment: We have reviewed your response to prior comment 3 and it
remains unclear how you concluded that you were not the primary
beneficiary of the variable interest entities. Specifically, tell us
how you reached your conclusions in light of your response in which
you say that the Partnership "would have the greatest exposure based
on provisions in the local limited partnership" and relative to any
advances the Partnership has made on their behalf. In addition, tell
us how you have considered each of the criteria in paragraph 17 for
those variable interest entities in which the other investor is a
related party under paragraph 16.
Response: The Partnership made its determination of the primary
beneficiary of each of the seventeen local limited partnerships
identified as variable interest entities ("VIE") based on qualitative
analyses. In all cases, based on analysis that included consideration of
paragraphs 16 and 17 of FIN 46R, the Partnership was determined to be a
member of a related party group that held variable interests in the
local limited partnership.
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
("SFAS 57"), 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 other
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."
Applying paragraph 16 to the seventeen local limited partnerships that
the Partnership determined were VIEs resulted in the Partnership's
conclusion that the Partnership is a member of a related party group
that includes the general partner and the administrative general
partner. The administrative general partner is a wholly-owned subsidiary
of National Partnership Investments Corp. ("NAPICO"), and the general
partner of the Partnership is NAPICO. The Partnership concluded under
SFAS 57 that the administrative general partner and the limited partner
meet the definition of related parties since both entities are under the
common control of NAPICO. . The Partnership's analysis and conclusions
varied depending on the ownership structure of each local limited
partnership, as follows:
o In fourteen of the seventeen local limited partnerships
identified as VIEs in which an administrative general partner
exists, the general partner may not sell, assign, transfer,
mortgage, pledge or encumber all or any part of its interest
without the consent of the administrative general partner. As
contemplated in paragraph 16.d of FIN 46R, this provision of the
local limited partnership agreements establishes a de facto
agency relationship between the administrative general partner in
the local limited partnerships, and the respective general
partner of those local limited partnerships. Therefore, the
general partner, the administrative general partner and the
limited partner (the Partnership) are members of a related party
group.
o In three of the seventeen local limited partnerships identified
as VIEs, the administrative general partner has assumed the role
of general partner. The rights of the administrative general
partner did not revert/transition to the limited partner. The
general partner, formerly the administrative general partner and
the respective limited partner (the Partnership) are related
parties due to the common control of NAPICO. Therefore, the
general partner and the limited partner (the Partnership) are
members of a related party group.
Having determined under paragraph 16 that a related party relationship
exists between the Partnership, the general partner and the
administrative general partner of each local limited partnership
identified as a VIE, the Partnership considered the guidance in
paragraph 17 to identify the primary beneficiary of each 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
determined 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 considered the guidance in paragraph 17 of
FIN 46R to determine the party within the related party group that is
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 together in conjunction
with the structure of eachlocal limited partnership and how the
Partnership believes other entities would view the role of the general
partner, the administrative general partner and the limited partner
(i.e., the Partnership).
This consideration 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 that the Partnership considered to be most
relevant include:
o Although the de facto agency relationships that were identified
in connection with paragraph 16 do not clearly indicate which
party is principal or agent, the Partnership believes the general
partner and the administrative general partner have
characteristics that are commonly associated with the principal.
In this regard, the Partnership noted that the general partner
and the administrative general partner are the parties an outside
entity would contact regarding a local limited partnership
matter. For example, regulatory agencies, such as the Internal
Revenue Service or the United States Department of Housing and
Urban Development would contact either the general partner or the
administrative general partner when necessary. Similarly, the
mortgage lenders would also contact the general partner when
necessary. In all instances the general partner and/or the
administrative general partner acts with authority in addressing
these 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 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 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
In addition, the local limited partnership agreements state that the
Partnership, as limited partner, shall not take part in the management
or control of the business of the local limited partnerships or have the
authority to bind the local limited partnerships.
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 percent allocations and distributions to the limited
partner(s) in accordance with ownership interest. The Partnership
considered in this analysis the effects of any voluntary advances made
by the Partnership to the local limited partnerships. These advances are
designated a specific priority within the distribution provisions of the
local limited partnership agreements. The Partnership's exposure to
expected losses is greatly reduced for those local limited partnerships
in which the Partnership holds a limited partner interest of less than
50% and/or does not have any voluntary advances outstanding. Although
the Partnership's generally greater exposure to expected losses is a
factor that tends to indicate the Partnership is the primary
beneficiary, the Partnership concluded that this factor is not
sufficient to offset the other factors descried above which
predominately indicate 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 each local limited partnership
agreement.
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 seventeen local limited
partnerships identified as VIEs and is not required to consolidate any
of the local limited partnerships.
3. Comment: We note your response to our prior comment 4 and revisions in
your Form 10-KSB/A filed May 20, 2005. In a supplemental response,
please clarify the terms of your continuing involvement in Rancho del
Mar. Your involvement is unclear to us based on your disclosure in
Note 3 to the amended 10-K which continues to classify Rancho del Mar
as a "Material Investee", and the dilution of your investment from
99% to 66.4%, characterized as a sale of substantially all of your
economic interest in the partnership based on revised cash flow
distributions. Please refer to your application of paragraph 33 of
SFAS 66 in your response.
Response: The Partnership supplementally provides the Staff with the
following information: In legal form, the Partnership continues to own a
limited partnership interest in Rancho del Mar Limited Partnership
("Rancho"), which interest nominally provides for the allocation to the
Partnership of 66.4% of the income or losses generated by Rancho.
However, the distribution provisions in the limited partnership
agreement for Rancho were modified such that the Partnership no longer
expects to receive any significant distributions arising from Rancho's
operations or from a sale or refinancing transaction. Therefore, the
Partnership determined that its investment in Rancho, as modified, has
no further economic value, and recognized this decline in value by
writing off its entire investment in the restated financial statements
included in its Form 10-KSB/A filed May 20, 2005.
Given that there was no profit associated with the transaction that
resulted in write-off of the Partnership's investment in Rancho, the
Partnership does not believe that paragraph 33 of Statement of Financial
Accounting Standards No. 66 is applicable.
As a limited partner in Rancho, the Partnership has no obligation to
provide support or otherwise be involved in Rancho's future activities.
In view of its absence of continuing involvement and the write-off of
its entire investment in Rancho, the Partnership does not believe that
Rancho should be considered a material investee of the Partnership. In
future filings, the Partnership's disclosures will not refer to Rancho
as a "Material Investee".
* * * * *
As requested by the Staff in its letter dated April 26, 2005, the Partnership
again 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