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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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Commission file number 0-11973
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
Organized pursuant to the Laws of the State of Maryland
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Internal Revenue Service - Employer Identification No. 52-1321492
11200 Rockville Pike, Rockville, Maryland 20852
(301) 468-9200
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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 o
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CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2001
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
- June 30, 2001 and December 31, 2000....................... 1
Statements of Operations and Accumulated Losses
- for the three and six months ended June 30, 2001 and 2000. 2
Statements of Cash Flows
- for the six months ended June 30, 2001 and 2000........... 3
Notes to Financial Statements
- June 30, 2001 and 2000.................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................12
Part II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.................................15
Item 5. Other Information...............................................15
Item 6. Exhibits and Reports on Form 8-K................................17
Signature..................................................................18
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
June 30, December 31,
2001 2000
------------ ------------
(Unaudited)
Investments in and advances to partnerships ....................................... $ 842,196 $ 729,191
Investment in partnerships held for sale or transfer .............................. 15,154 79,579
Cash and cash equivalents ......................................................... 3,430,385 6,292,654
Acquisition fees, principally paid to related parties,
net of accumulated amortization of $252,792 and $245,626, respectively .......... 177,195 184,362
Property purchase costs,
net of accumulated amortization of $236,324 and $229,486, respectively .......... 173,962 180,800
Other assets ...................................................................... 621 2,538
------------ ------------
Total assets ................................................................. $ 4,639,513 $ 7,469,124
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships ................................................ $ 1,900,000 $ 5,050,000
Accrued interest payable .......................................................... 2,912,809 9,156,205
Accounts payable and accrued expenses ............................................. 82,964 176,350
------------ ------------
Total liabilities ............................................................ 4,895,773 14,382,555
------------ ------------
Commitments and contingencies
Partners' capital (deficit):
Capital paid in:
General Partners .............................................................. 2,000 2,000
Limited Partners .............................................................. 50,015,000 50,015,000
------------ ------------
50,017,000 50,017,000
Less:
Accumulated distributions to partners ......................................... (10,814,009) (7,569,859)
Offering costs ................................................................ (5,278,980) (5,278,980)
Accumulated losses ............................................................ (34,180,271) (44,081,592)
------------ ------------
Total partners' deficit ..................................................... (256,260) (6,913,431)
------------ ------------
Total liabilities and partners' deficit ..................................... $ 4,639,513 $ 7,469,124
============ ============
The accompanying notes are an
integral part of these
financial statements.
-1-
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
AND ACCUMULATED LOSSES
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Share of (loss) income from partnerships ........... $ (8,587) $ 17,401 $ 743,826 $ 669,661
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest ....................................... 44,822 116,312 124,028 223,845
------------ ------------ ------------ ------------
Expenses:
Interest ....................................... 135,543 231,649 280,103 506,715
Management fee ................................. 62,499 62,499 124,998 124,998
General and administrative ..................... 58,806 58,414 114,724 111,575
Professional fees .............................. 20,637 28,182 41,775 53,463
Amortization of deferred costs ................. 7,002 7,832 14,005 18,582
------------ ------------ ------------ ------------
284,487 388,576 575,605 815,333
------------ ------------ ------------ ------------
Total other revenue and expenses ............. (239,665) (272,264) (451,577) (591,488)
------------ ------------ ------------ ------------
(Loss) income before gain on disposition
of investments in partnerships ................... (248,252) (254,863) 292,249 78,173
(Loss) gain on disposition
of investments in partnerships ................... (56,217) 5,879,778 (56,217) 5,879,778
------------ ------------ ------------ ------------
(Loss) income before extraordinary gain
from extinguishment of debt ...................... (304,469) 5,624,915 236,032 5,957,951
Extraordinary gain from extinguishment of debt ..... 9,665,289 10,074,759 9,665,289 10,074,759
------------ ------------ ------------ ------------
Net income ......................................... 9,360,820 15,699,674 9,901,321 16,032,710
Accumulated losses, beginning of period ............ (43,541,091) (59,302,152) (44,081,592) (59,635,188)
------------ ------------ ------------ ------------
Accumulated losses, end of period .................. $(34,180,271) $(43,602,478) $(34,180,271) $(43,602,478)
============ ============ ============ ============
Net income allocated to General Partners (1.51%) ... $ 141,348 $ 237,065 $ 149,510 $ 242,094
============ ============ ============ ============
Net income allocated
to Initial and Special Limited Partners (1.49%) .. $ 139,476 $ 233,925 $ 147,530 $ 238,887
============ ============ ============ ============
Net income allocated
to Additional Limited Partners (97%) ............. $ 9,079,996 $ 15,228,684 $ 9,604,281 $ 15,551,729
============ ============ ============ ============
Net income per unit of Additional Limited
Partner Interest based on 50,000 units outstanding $ 181.60 $ 304.57 $ 192.09 $ 311.03
============ ============ ============ ============
The accompanying notes are an
integral part of these
financial statements.
-2-
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended
June 30,
-----------------------------
2001 2000
-----------------------------
Cash flows from operating activities:
Net income .................................................................. $ 9,901,321 $ 16,032,710
Adjustments to reconcile net income to net cash used in operating activities:
Share of income from partnerships ......................................... (743,826) (669,661)
Amortization of deferred costs ............................................ 14,005 18,582
Loss (gain) on disposition of investments in partnerships ................. 56,217 (5,879,778)
Extraordinary gain from extinguishment of debt ............................ (9,665,289) (10,074,759)
Changes in assets and liabilities:
Decrease (increase) in other assets ..................................... 1,917 (1,385)
Increase in accrued interest payable .................................... 280,103 506,715
Payment of purchase money note interest ................................. -- (175,000)
Decrease in accounts payable and accrued expenses ....................... (93,386) (43,554)
------------ ------------
Net cash used in operating activities ................................. (248,938) (286,130)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships .................................. 829,060 797,827
Proceeds from disposition of investments in partnerships .................... -- 5,993,661
Additional investment in partnership ........................................ (198,241) --
------------ ------------
Net cash provided by investing activities ............................. 630,819 6,791,488
------------ ------------
Cash flows from financing activities:
Payoff of purchase money notes and related interest ......................... -- (5,993,661)
Payment of purchase money note principal .................................... -- (50,000)
Distribution to Additional Limited Partners ................................. (3,244,150) (1,622,237)
------------ ------------
Net cash used in financing activities .................................. (3,244,150) (7,665,898)
------------ ------------
Net decrease in cash and cash equivalents ..................................... (2,862,269) (1,160,540)
Cash and cash equivalents, beginning of period ................................ 6,292,654 8,936,520
------------ ------------
Cash and cash equivalents, end of period ...................................... $ 3,430,385 $ 7,775,980
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest .................................... $ -- $ 3,919,914
============ ============
The accompanying notes are an
integral part of these
financial statements.
-3-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2001 and 2000
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited financial statements reflect all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position of Capital Realty Investors-II Limited Partnership (the Partnership) as
of June 30, 2001, and the results of its operations for the three and six months
ended June 30, 2001 and 2000, and its cash flows for the six months ended June
30, 2001 and 2000. The results of operations for the interim periods ended June
30, 2001, are not necessarily indicative of the results to be expected for the
full year.
The accompanying unaudited financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
and with the instructions to Form 10-QSB. Certain information and accounting
policies and footnote disclosures normally included in financial statements
prepared in conformity with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such instructions.
These condensed financial statements should be read in conjunction with the
financial statements and notes thereto included in the Partnership's annual
report on Form 10-KSB at December 31, 2000.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. Due on investments in partnerships and accrued interest payable
---------------------------------------------------------------
Purchase money notes
--------------------
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having an aggregate principal
balance of $1,900,000 plus aggregate accrued interest of $2,912,809 as of June
30, 2001, are payable in full upon the earliest of: (i) sale or refinancing of
the respective Local Partnership's rental property; (ii) payment in full of the
respective Local Partnership's permanent loan; or (iii) maturity.
The maturity dates of the purchase money notes related to the following
properties were extended during 2000.
Original Extended
Property Principal Maturity Maturity
-------- ---------- -------- --------
Princeton $ 500,000 01/01/99 01/01/04
Westgate $1,400,000 (1) 09/01/98 09/01/03
(1) Remaining principal after a partial payment.
The purchase money notes related to the following properties were paid off
at a discount, or the collateral that secured them was transferred to the
noteholder(s), during 2000 or 2001.
Property Principal Date Disposition
-------- --------- -------- -----------
Rolling Green at Amherst $1,927,500 May 2000 Paid Off
Rolling Green at Fall River $4,600,000 May 2000 Paid Off
Frenchman's Wharf II $3,150,000 June 2001 Transferred
-4-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2001 and 2000
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
The purchase money notes, which are nonrecourse to the Partnership, are
generally secured by the Partnership's interest in the respective Local
Partnerships. There is no assurance that the underlying properties will have
sufficient appreciation and equity to enable the Partnership to pay the purchase
money notes' principal and accrued interest when due. If a purchase money note
is not paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the respective Local Partnership. In the event that a purchase money note
remains unpaid upon maturity, the noteholder may have the right to foreclose on
the Partnership's interest in the related Local Partnership. In the event of a
foreclosure, the excess of the nonrecourse indebtedness over the carrying amount
of the Partnership's investment in the related Local Partnership would be deemed
cancellation of indebtedness income, which would be taxable to Limited Partners
at a federal tax rate of up to 39.6%. Additionally, in the event of a
foreclosure, the Partnership would lose its investment in the Local Partnership
and, likewise, its share of any future cash flow distributed by the Local
Partnership from rental operations, mortgage debt refinancings, or the sale of
the real estate.
The Partnership's inability to pay certain of the purchase money note
principal and accrued interest balances when due, and the resulting uncertainty
regarding the Partnership's continued ownership interest in the related Local
Partnerships, does not adversely impact the Partnership's financial condition
because the purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the related Local Partnerships. Therefore, should the
investment in any of the Local Partnerships with maturing purchase money notes
not produce sufficient value to satisfy the related purchase money notes, the
Partnership's exposure to loss is limited because the amount of the nonrecourse
indebtedness of each of the maturing purchase money notes exceeds the carrying
amount of the investment in, and advances to, each of the related Local
Partnerships. Thus, even a complete loss of the Partnership's interest in one of
these Local Partnerships would not have a material adverse impact on the
financial condition of the Partnership.
The Managing General Partner continues to address the maturity of its debt
obligations and to seek solutions that will provide the most favorable outcome
to the limited partners. However, there can be no assurance that these efforts
will be successful.
Interest expense on the Partnership's purchase money notes for the three
and six month periods ended June 30, 2001, was $135,543 and $280,103,
respectively, and $231,649 and $506,715 for the three and six month periods
ended June 30, 2000, respectively. The accrued interest payable on the purchase
money notes of $2,912,809 and $9,156,205 as of June 30, 2001 and December 31,
2000, respectively, is due on the respective maturity dates of the purchase
money notes or earlier, in some instances, if (and to the extent of a portion
thereof) the related Local Partnership has distributable net cash flow, as
defined in the relevant Local Partnership agreements.
-5-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2001 and 2000
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Frenchman's Wharf II
--------------------
The Partnership defaulted on its purchase money note related to Frenchman's
Wharf Associates II Limited Partnership (Frenchman's Wharf II) on June 1, 1998
when the note matured and was not paid. The default amount included principal
and accrued interest of $3,150,000 and $5,071,731, respectively. As of June 22,
2001, principal and accrued interest totaling $3,150,000 and $6,131,166,
respectively, were due. The purchase money note was initially due to mature on
June 1, 1988, but was extended to mature on June 1, 1998.
In 1996, the U. S. Department of Housing and Urban Development (HUD) sold
the mortgage loan on Frenchman's Wharf II to a third party lender. In May 2000,
the local managing general partner obtained a forbearance agreement from the
lender which was originally scheduled to expire on May 31, 2001 but which was
subsequently extended several times until June 25, 2001. The forbearance
agreement allowed for the discounted payoff of the mortgage loan.
In January 2001, the Local Partnership entered into a contract to sell the
property. However, the purchaser was unable to consummate the purchase. As a
result, in accordance with the forbearance agreement, on June 22, 2001, the
property was transferred to an assignee of the mortgagee. The transfer of the
property and resulting loss of the Partnership's interest in Frenchman's Wharf
II resulted in extraordinary gain from extinguishment of debt of $9,281,166 and
loss on disposition of investments in partnerships of $56,217 for financial
statement purposes in 2001, and a total gain of $16,392,623 for federal tax
purposes in 2001.
In recognition of the transfer of the Frenchman's Wharf II property, the
net unamortized amounts of acquisition fees and property purchase costs, which
totaled $56,217 as of December 31, 2000, were reclassified to investment in
partnerships held for sale or transfer in the accompanying balance sheet at
December 31, 2000.
Princeton
---------
The Partnership defaulted on its purchase money note related to Princeton
Community Village Associates (Princeton) on January 1, 1999 when the note
matured and was not paid. The default amount included principal and accrued
interest of $500,000 and $1,422,064, respectively. On August 9, 1999, the
noteholder filed a complaint seeking declaratory judgment that the Partnership
had forfeited its interest in Princeton to the noteholders. The litigation was
settled effective January 1, 2000, when the Managing General Partner entered
into an agreement with the noteholder which granted the noteholder four options
to purchase the Partnership's 98.99% limited partnership interest in Princeton
over a three and one-half year period, in exchange for the cancellation of
pro-rata portions of the then outstanding balance of the purchase money notes.
As part of the agreement, the noteholder extended the maturity date of the
purchase money note to January 1, 2004, and the Partnership made a payment to
the noteholder on April 21, 2000, which was applied against accrued interest
payable on the purchase money note.
-6-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2001 and 2000
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
On both May 31, 2001 and May 31, 2000, pursuant to the option agreement,
the noteholder purchased a 26% interest in Princeton from the Partnership, the
consideration for which was the cancellation of a like percentage of the
outstanding purchase money note accrued interest of $392,333 and $493,027,
respectively, resulting in extraordinary gain from extinguishment of debt of
$384,123 and $484,862 for financial statement purposes in 2001 and 2000,
respectively, and in cancellation of indebtedness income of $1,781,710 and
$1,960,030 for federal tax purposes in 2001 and 2000, respectively.
Due to the impending and likely transfer of the remaining 48% of the
Partnership's investment in Princeton over the next two years, the net
unamortized amounts of acquisition fees and property purchase costs related to
Princeton, which totaled $15,154 as of June 30, 2001 and $23,362 as of December
31, 2000, have been reclassified to investment in partnerships held for sale or
transfer in the accompanying balance sheets.
Rolling Green at Fall River and Rolling Green at Amherst
--------------------------------------------------------
On May 31, 2000, Rolling Green at Fall River sold its property. The entire
net sale proceeds to the Partnership were used to pay off, at a discount, the
Partnership's purchase money note obligation related to its investment in this
Local Partnership. The sale resulted in gain on disposition of investment in
partnerships of $3,542,933, and in extraordinary gain from extinguishment of
debt of $7,746,946 for financial statement purposes in 2000. The total federal
tax gain related to Rolling Green at Fall River was approximately $16.8 million
in 2000. The Managing General Partner of the Partnership and/or its affiliates
did not receive any fees relating to the sale.
On May 31, 2000, Rolling Green at Amherst sold its property. The entire net
sale proceeds to the Partnership were used to pay off, at a discount, the
Partnership's purchase money note obligation related to its investment in this
Local Partnership. The sale resulted in gain on disposition of investment in
partnership of $2,336,845, and in extraordinary gain from extinguishment of debt
of $1,786,750 for financial statement purposes in 2000. The total federal tax
gain related to Rolling Green at Amherst was approximately $6.3 million in 2000.
The Managing General Partner of the Partnership and/or its affiliates did not
receive any fees relating to the sale.
b. Advances to Local Partnerships
------------------------------
As of June 30, 2001 and December 31, 2000, the Partnership had advanced
funds to Local Partnerships totaling $150,000 and $474,410, respectively.
Accrued interest receivable on these advances was $0 and $187,372 as of June 30,
2001 and December 31, 2000, respectively. For financial reporting purposes,
these loans have been reduced to zero by the Partnership as a result of losses
at the related Local Partnership level during prior years.
-7-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2001 and 2000
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Frenchman's Wharf II
--------------------
To cover operating deficits incurred in prior years for Frenchman's Wharf
II, the Partnerships advanced funds totaling $324,410 as of December 31, 2000.
Accrued interest receivable was $187,372 as of December 31, 2000. See Note 2.a.,
above, concerning the transfer of the property related to Frenchman's Wharf II
on June 22, 2001.
Posada Vallarta Apartments
--------------------------
The Managing General Partner and the local managing general partner of
Posada Associates Limited Partnership (Posada Vallarta Apartments) refinanced
the property's mortgage loan on May 26, 1998. In connection with such
refinancing, the Partnership advanced the Local Partnership $450,000 for
application and rate lock fees. As of both June 30, 2001 and December 31, 2000,
$300,000 of the advances had been repaid to the Partnership. For financial
reporting purposes, the remaining advance has been reduced to zero by the
Partnership as a result of losses at the related Local Partnership level during
prior years.
c. Property matters
----------------
Chevy Chase
-----------
The Managing General Partner and the local managing general partner (CRHC,
an affiliate of the Managing General Partner) analyzed whether to refinance the
HUD Section 236 interest rate subsidized mortgage loan related to Chevy Chase or
to enter the Mark-up-to-Market program. The local managing general partner
agreed to HUD's analysis of the property and proposal for Mark-up-to-Market, and
the property has entered into the Mark-up-to-Market program effective September
2000, for a five year term, subject to the annual availability of funding by
Congress. HUD's analysis indicated that gross rents should increase by
approximately $475,000 per year.
Country Place II
----------------
The Section 8 Housing Assistance Payments (HAP) contract for the property
owned by Second Blackburn Ltd. Partnership (Country Place II) originally expired
August 29, 2000. The Section 8 HAP contract covers 20% of the property's
apartment units. The Local Partnership has caused the Section 8 HAP contract to
be renewed periodically, with the current renewal period expiring September 30,
2001. The Managing General Partner expects that this Section 8 HAP contract will
be renewed through May 2002, at which time the Local Partnership intends to opt
out of the HAP program.
Orangewood Plaza
----------------
The 1983 construction loan related to Orangewood Plaza, a 40-unit apartment
building in Orange Cove, California, was never formally converted to a permanent
loan. It is now anticipated that this loan will be restructured in 2001 as a
permanent loan, with no tax impact to either the Local Partnership or the
Partnership. There is no assurance that the restructuring will be
-8-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2001 and 2000
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
consummated. Accordingly, there is no assurance that the Partnership will be
able to retain its interest in Orangewood Plaza. This uncertainty does not
adversely impact the Partnership's financial condition, as discussed above.
In 1983, the Partnership pledged its interest in the Local Partnership as
security on an acquisition note, in the amount of $170,000, made by the Local
Partnership. The note matured on July 28, 1998 and was not paid when due. On May
7, 2001, the Partnership made a capital contribution of $198,241 to the Local
Partnership, which amount will be used to pay in full the principal and accrued
interest on the acquisition note.
Princeton
---------
Princeton defaulted on its project subsidy loan. The maturity date was
extended five years to January 1, 2004, as part of litigation settled effective
January 1, 2000, when the Managing General Partner and the noteholder entered
into an agreement extending the maturity date of the purchase money note, as
discussed above.
Rolling Green at Fall River and Rolling Green at Amherst
--------------------------------------------------------
On May 31, 2000, Rolling Green at Fall River and Rolling Green at Amherst
were sold. See Note 2.a. hereof for further information concerning these sales.
d. Summarized financial information
--------------------------------
Combined statements of operations for the 14 and 15 Local Partnerships in
which the Partnership was invested as of June 30, 2001 and 2000, respectively,
follow. The combined statements have been compiled from information supplied by
the management agents of the projects and are unaudited. The combined statements
of operations for the three and six months ended June 30, 2001 and 2000 include
information for the Local Partnerships through date of transfer or sale.
-9-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2001 and 2000
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ----------- ----------- ------------
Revenue:
Rental ...................... $ 4,861,055 $ 5,343,986 $ 9,722,795 $ 11,275,440
Other ....................... 224,326 208,332 435,717 421,842
------------ ------------ ------------ ------------
Total revenue ............. 5,085,381 5,552,318 10,158,512 11,697,282
------------ ------------ ------------ ------------
Expenses:
Operating ................... 2,650,317 2,944,474 5,640,518 6,653,546
Interest .................... 1,428,188 1,680,011 2,856,379 3,360,022
Depreciation and amortization 910,641 1,112,015 1,821,286 2,224,031
------------ ------------ ------------ ------------
Total expenses ............ 4,989,146 5,736,500 10,318,183 12,237,599
------------ ------------ ------------ ------------
Net income (loss) ............. $ 96,235 $ (184,182) $ (159,671) $ (540,317)
============ ============ ============ ============
As of June 30, 2001 and 2000, the Partnership's share of cumulative losses
to date for nine of the 14 and 15 Local Partnerships exceeded the amount of the
Partnership's investments in and advances to those Local Partnerships by
$20,695,689 and $25,127,919, respectively. As the Partnership has no further
obligation to advance funds or provide financing to these Local Partnerships,
the excess losses have not been reflected in the accompanying financial
statements.
3. AFFORDABLE HOUSING LEGISLATION
Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of project-based Section 8 Rental HAP provided by HUD pursuant to
Section 8 HAP contracts. Current legislation allows all expired Section 8 HAP
contracts with rents at less than 100% of fair market rents to be renewed for
one year. Expiring Section 8 HAP contracts with rents that exceed 100% of fair
market rents could be renewed for one year, but at rents reduced to 100% of fair
market rents (Mark-to-Market). All expiring Section 8 HAP contracts with rents
exceeding comparable market rents, and properties with mortgage loans insured by
the Federal Housing Administration (FHA), became subject to the Mark-to-Market
legislation.
Mark-to-Market implementation will reduce rental income at properties that
are currently subsidized at higher-than-market rental rates, and will therefore
lower cash flow available to meet mortgage payments and operating expenses. Each
affected property may undergo debt restructuring according to terms determined
by an individual property and operations evaluation. This may involve reducing
the first mortgage loan balance to an amount supportable by the property, taking
into account the property's operating expenses and reduced income. The balance
of the amount written down from the first mortgage loan will be converted to a
non-performing but accruing (soft) second mortgage loan.
-10-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2001 and 2000
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
Country Place II has a Section 8 HAP contract which covers 20% of the
property's apartments units, which contract expires during 2001. The Managing
General Partner expects that this Section 8 HAP contract will be renewed through
May 2002, at which time the Local Partnership intends to opt out of the HAP
program.
With the uncertainty of continued project-based Section 8 subsidies for
properties with expiring Section 8 HAP contracts, there is no assurance that
rental properties with Section 8 HAP contract rents in excess of fair market
rents will be able to maintain the rental income and occupancy levels necessary
to pay operating costs and debt service. However, for the year 2001, the number
of apartment units with expiring Section 8 subsidies is nominal and should have
little to no impact on the Partnership's investments in Local Partnerships at
this time. As of June 30, 2001, the Partnership's remaining investment in a
Local Partnership with a Section 8 HAP contract expiring in 2001 was $0.
4. RELATED PARTY TRANSACTIONS
In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to reimburse the Managing General Partner for its direct expenses
in connection with managing the Partnership. The Partnership paid $47,278 and
$89,248 for the three and six month periods ended June 30, 2001, respectively,
and $44,016 and $93,873 for the three and six month periods ended June 30, 2000,
respectively, to the Managing General Partner as direct reimbursement of
expenses incurred on behalf of the Partnership. Such expenses are included in
the accompanying statements of operations as general and administrative
expenses.
In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to pay the Managing General Partner an annual incentive management
fee (Management Fee) after all other expenses of the Partnership are paid. The
Partnership paid the Managing General Partner a Management Fee of $62,499 and
$124,998 for each of the three and six month periods ended June 30, 2001 and
2000.
The Managing General Partner and/or its affiliates may receive a fee of not
more than two percent of the sales price of an investment in a Local Partnership
or the property it owns, payable under certain conditions upon the sale of an
investment in a Local Partnership or the property it owns. The payment of the
fee is subject to certain restrictions, including the achievement of a certain
level of sales proceeds and making certain minimum distributions to limited
partners. No such fees were earned by the Managing General Partner or its
affiliates for the six month periods ended June 30, 2001 or 2000.
# # #
-11-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
-------------------------------------------------------
and Results of Operations
-------------------------
Capital Realty Investors-II Limited Partnership's (the Partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations section contains information that may be considered forward looking,
including statements regarding the effect of governmental regulations. Actual
results may differ materially from those described in the forward looking
statements and will be affected by a variety of factors including national and
local economic conditions, the general level of interest rates, governmental
regulations affecting the Partnership and interpretations of those regulations,
the competitive environment in which the Partnership operates, and the
availability of working capital.
General
-------
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has sold or refinanced,
and will continue to sell or refinance, certain properties pursuant to programs
developed by these agencies. These programs may include opportunities to sell a
property to a qualifying purchaser who would agree to maintain the property as
low to moderate income housing, or to refinance a property, or to obtain
supplemental financing. The Managing General Partner continues to monitor
certain state housing agency programs, and/or programs provided by certain
lenders, to ascertain whether the properties would qualify within the parameters
of a given program and whether these programs would provide an appropriate
economic benefit to the limited partners of the Partnership.
Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of project-based Section 8 Rental Housing Assistance Payments
(HAP) provided by the U.S. Department of Housing and Urban Development (HUD)
pursuant to Section 8 HAP contracts. Current legislation allows all expired
Section 8 HAP contracts with rents at less than 100% of fair market rents to be
renewed for one year. Expiring Section 8 HAP contracts with rents that exceed
100% of fair market rents could be renewed for one year, but at rents reduced to
100% of fair market rents (Mark-to-Market). All expiring Section 8 HAP contracts
with rents exceeding comparable market rents, and properties with mortgage loans
insured by the Federal Housing Administration (FHA), became subject to the
Mark-to-Market legislation.
Mark-to-Market implementation will reduce rental income at properties that
are currently subsidized at higher-than-market rental rates, and will therefore
lower cash flow available to meet mortgage payments and operating expenses. Each
affected property may undergo debt restructuring according to terms determined
by an individual property and operations evaluation. This may involve reducing
the first mortgage loan balance to an amount supportable by the property, taking
into account the property's operating expenses and reduced income. The balance
of the amount written down from the first mortgage loan will be converted to a
non-performing but accruing (soft) second mortgage loan.
In many instances, the Mark-to-Market rental rate restructuring may require
the write down of an FHA-insured mortgage loan, which would trigger cancellation
of indebtedness income to the partners, a taxable event, even though no actual
cash is received. Additionally, if the existing first mortgage loan is
bifurcated into a first and second mortgage loan, the newly created second
mortgage loan will accrue interest at a below-market rate. However, the Internal
Revenue Service issued a ruling in July 1998 that concluded that the
below-market rate of interest will not generate additional ordinary income. Each
property subject to Mark-to-Market will be affected in a different manner, and
it is very difficult to predict the exact form of restructuring, or potential
tax liabilities to the limited partners, at this time.
-12-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
-------------------------------------------------------
and Results of Operations - Continued
-------------------------
Under HUD's "Mark-up-to-Market" program, properties with expiring Section 8
HAP contracts that are located in high-rent areas as defined by HUD are eligible
for rent increases which would be necessary to bring Section 8 rents in line
with market rate rents. For properties that enter the program and have interest
rate subsidized FHA loans, the rents are adjusted to take into account the
benefits the property is already receiving from the below-market interest rate
by means of a HUD-determined Interest Subsidy Adjustment Factor. The purpose of
this program is to provide incentives to owners of properties with expiring
Section 8 HAP contracts not to convert these properties to market rate housing.
In return for receiving market rate rents under Mark-up-to-Market, the
property owner must enter into a five year conditional Section 8 HAP contract
with HUD, subject to the annual availability of funding by Congress. In
addition, property owners who enter into the Mark-up-to- Market program will
receive increased cash flow, as the limited dividend will be increased in an
amount equal to the increase in gross rental revenues.
The Managing General Partner is considering new strategies to deal with the
ever changing environment of affordable housing policy. The Section 236 and
Section 221(d)(3) mortgage loans may be eligible for pre-payment in their 18th
year or later. Properties with expiring Section 8 HAP contracts may become
convertible to market rate apartment properties. Currently, few lenders will
provide financing either to prepay existing mortgage loans of these types or
provide additional funds to allow a property to convert to market rate units.
Where opportunities exist, the Managing General Partner will continue to work
with the Local Partnerships to develop strategies that make economic sense for
all parties involved.
Financial Condition/Liquidity
-----------------------------
The Partnership's liquidity, with unrestricted cash resources of $3,430,385
as of June 30, 2001, along with anticipated future cash distributions from the
Local Partnerships, is expected to be adequate to meet its current and
anticipated operating cash needs. On May 2, 2001, the Partnership made a cash
distribution of $3,244,150 ($65 per Unit) to Additional Limited Partners, to
holders of record as of April 1, 2001. As of August 6, 2001, there were no
material commitments for capital expenditures.
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having an aggregate principal
balance of $1,900,000 plus aggregate accrued interest of $2,912,809 as of June
30, 2001, are payable in full upon the earliest of: (i) sale or refinancing of
the respective Local Partnership's rental property; (ii) payment in full of the
respective Local Partnership's permanent loan; or (iii) maturity.
The maturity dates of the purchase money notes related to the following
properties were extended during 2000.
Original Extended
Property Principal Maturity Maturity
-------- ---------- -------- --------
Princeton $ 500,000 01/01/99 01/01/04
Westgate $1,400,000 (1) 09/01/98 09/01/03
(1) Remaining principal after a partial payment.
-13-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
-------------------------------------------------------
and Results of Operations - Continued
-------------------------
The purchase money notes related to the following properties were paid off
at a discount, or the collateral that secured them was transferred to the
noteholder(s), during 2000 or 2001.
Property Principal Date Disposition
-------- --------- -------- -----------
Rolling Green at Amherst $1,927,500 May 2000 Paid Off
Rolling Green at Fall River $4,600,000 May 2000 Paid Off
Frenchman's Wharf II $3,150,000 June 2001 Transferred
See the notes to financial statements contained in Part I, Item 1, hereof,
for additional information concerning these purchase money notes.
The purchase money notes, which are nonrecourse to the Partnership, are
generally secured by the Partnership's interest in the respective Local
Partnerships. There is no assurance that the underlying properties will have
sufficient appreciation and equity to enable the Partnership to pay the purchase
money notes' principal and accrued interest when due. If a purchase money note
is not paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the respective Local Partnership. In the event that a purchase money note
remains unpaid upon maturity, the noteholder may have the right to foreclose on
the Partnership's interest in the related Local Partnerships. In the event of a
foreclosure, the excess of the nonrecourse indebtedness over the carrying amount
of the Partnership's investment in the related Local Partnership would be deemed
cancellation of indebtedness income, which would be taxable to Limited Partners
at a federal tax rate of up to 39.6%. Additionally, in the event of a
foreclosure, the Partnership would lose its investment in the Local Partnership
and, likewise, its share of any future cash flow distributed by the Local
Partnership from rental operations, mortgage debt refinancings, or the sale of
the real estate.
The Partnership's inability to pay certain of the purchase money note
principal and accrued interest balances when due, and the resulting uncertainty
regarding the Partnership's continued ownership interest in the related Local
Partnerships, does not adversely impact the Partnership's financial condition
because the purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the related Local Partnerships. Therefore, should the
investment in any of the Local Partnerships with maturing purchase money notes
not produce sufficient value to satisfy the related purchase money notes, the
Partnership's exposure to loss is limited because the amount of the nonrecourse
indebtedness of each of the maturing purchase money notes exceeds the carrying
amount of the investment in, and advances to, each of the related Local
Partnerships. Thus, even a complete loss of the Partnership's interest in one of
these Local Partnerships would not have a material adverse impact on the
financial condition of the Partnership.
The Managing General Partner continues to address the maturity of its debt
obligations and to seek solutions that will provide the most favorable outcome
to the limited partners. However, there can be no assurance that these efforts
will be successful.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the six month periods ended June 30, 2001 and 2000, the receipt of
distributions from Local Partnerships was adequate to support operating cash
requirements. Cash and cash equivalents decreased during the six month period
ended June 30, 2001, due primarily to a distribution to Additional Limited
Partners made on May 2, 2001. However, the receipt of distributions from
partnerships exceeded net cash used in operating activities.
-14-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
-------------------------------------------------------
and Results of Operations - Continued
-------------------------
Results of Operations
---------------------
The Partnership's net income for the three month period ended June 30,
2001, decreased from the corresponding period in 2000 primarily due to gain on
disposition of investments in partnerships and extraordinary gain from
extinguishment of debt related to the sales of Roberts Fall River Associates
(Rolling Green at Fall River) and Roberts Amherst Associates (Rolling Green at
Amherst) in 2000, which were larger than the corresponding amounts related to
the transfer of Frenchman's Wharf II in 2001. Contributing to the decrease in
the Partnership's net income were a decrease in interest revenue received due to
lower cash and cash equivalent balances and lower interest rates in 2001 and a
decrease in share of income from partnerships. Offsetting the decrease in the
Partnership's net income was a decrease in interest expense related to lower
purchase money note balances.
The Partnership's net income for the six month period ended June 30, 2001,
decreased from the corresponding period in 2000 primarily due to gain on
disposition of investments in partnerships and extraordinary gain from
extinguishment of debt, as discussed above. Contributing to the decrease were
lower interest revenue, as discussed above, and an increase in general and
administrative expense related to higher reimbursed payroll costs. Offsetting
the decrease in the Partnership's net income were a decrease in interest expense
and amortization of deferred costs associated with the sale or transfer of
properties, lower professional fees due to a decrease in legal fees, and an
increase in share of income from partnerships. The increase in share of income
from partnerships is generally related to higher distributions received at two
properties, income recognized at another property which had previously been
excluded due to unallowable losses, and the exclusion of loss at another
property in which the Partnership has reduced its investment to zero. Partially
offsetting the increase in share of income from partnerships was the offset of
the Partnership's additional investment in Orangewood Plaza, by unallowable
losses.
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As a
result, the Partnership's share of income from partnerships for the three and
six month periods ended June 30, 2001 did not include losses of $251,841 and
$523,785, respectively, compared to excluded losses of $272,321 and $743,301 for
the three and six month periods ended June 30, 2000, respectively.
No other significant changes in the Partnership's operations have taken
place during this period.
Part II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities - Continued
-------------------------------
See Note 2.a. of the notes to financial statements contained in Part I,
Item 1, hereof, for information concerning the Partnership's defaults on certain
purchase money notes.
Item 5. Other Information
-----------------
There is no established market for the purchase and sale of units of
additional limited partner interest (Units) in the Partnership, although various
informal secondary market services exist. Due to the limited markets, however,
investors may be unable to sell or otherwise dispose of their Units.
-15-
Part II. OTHER INFORMATION
Item 5. Other Information - Continued
-----------------
Tender offers
-------------
On March 13, 2001, Bond Purchase, L.L.C. (Bond) initiated an unregistered
tender offer to purchase approximately 2,475 of the outstanding Units in the
Partnership at a price of $53 per Unit; the offer expired April 30, 2001. Bond
is unaffiliated with the Partnership or the Managing General Partner. The price
offered was determined solely at the discretion of Bond and does not necessarily
represent the fair market value of each Unit.
The Managing General Partner did not express any opinion and remained
neutral toward the Bond offer for the purchase of Units described above.
On or about May 10, 2001, Limited Partners in Capital Realty Investors-II
Limited Partnership ("CRI-II") may have received an unregistered tender offer
from Peachtree Partners to purchase their units of Limited Partner interest for
the cost of the $100 transfer fee.
The Managing General Partner, recommended that Limited Partners reject the
Peachtree Partners offer because it concluded that the tender offer was
inadequate and not in the best interests of the Limited Partners.
On June 22, 2001, Equity Resources Lexington Fund Limited Partnership
(Lexington) initiated a registered tender offer to purchase up to 10,000 of the
outstanding Units in the Partnership at a price of $100 per Unit; the offer
expired July 23, 2001. Lexington is unaffiliated with the Partnership or the
Managing General Partner. The price offered was determined solely at the
discretion of Lexington and does not necessarily represent the fair market value
of each Unit.
In response to the Lexington tender offer, on July 5, 2001, the Managing
General Partner filed a Schedule 14D-9. In that filing, the Managing General
Partner recommended that Limited Partners reject the Lexington offer because it
viewed the offer price as inadequate.
If more than five percent of the total outstanding Units in the Partnership
are transferred due to sale in any one calendar year (not counting certain
exempt transfers), the Partnership could be taxed as a "publicly traded
partnership," with potentially severe tax implications for the Partnership and
its investors. Specifically, the Partnership could be taxed as a corporation
and, if so, the income and losses from the Partnership would no longer be
considered a passive activity. For the calendar year 2001 to August 6, 2001,
Units transferred have not exceeded 4.9% of the total outstanding Units,
therefore, the Partnership has not halted recognition of transfers.
Cash distributions
------------------
On May 2, 2001, the Partnership made a cash distribution of $3,244,150 ($65
per Unit) to Additional Limited Partners, who were holders of record as of April
1, 2001.
-16-
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K - Continued
--------------------------------
a. None
b. A report on Form 8-K was dated March 13, 2001, and filed April 3,
2001; the report discussed an unregistered tender offer initiated by
Bond Purchase, L.L.C. on March 13, 2001. See Part II, Item 5, hereof,
for additional information concerning the tender offer.
A Report on Form 8-K was dated May 10, 2001, and filed May 24, 2001;
the report discussed an unregistered tender offer initiated by
Peachtree Partners on or about May 10, 2001. See Part II, Item 5,
hereof, for additional information concerning the tender offer.
All other items are not applicable.
-17-
SIGNATURE
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.
CAPITAL REALTY INVESTORS-II LIMITED
PARTNERSHIP
-------------------------------------------------
(Registrant)
by: C.R.I., Inc.
--------------------------------------------
Managing General Partner
August 6, 2001 by: /s/ Michael J. Tuszka
- -------------- ---------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-18-