14
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Three Months ended March 31, 1996 Commission File Number 33-4682
CAPITAL BUILDERS DEVELOPMENT PROPERTIES II,
A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
California 77-0111643
State or other jurisdiction I.R.S. Employer
of organization Identification No.
4700 Roseville Road, Suite 206, North Highlands, California 95660
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (916) 331-8080
Former name, former address and former fiscal year, if changed since
last year:
4700 Roseville Road, Suite 101, North Highlands, CA 95660
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or 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 1 - FINANCIAL INFORMATION
Capital Builders Development Properties II
(A California Limited Partnership)
BALANCE SHEETS
March 31 December 31
1996 1995
ASSETS
Cash and cash equivalents 393,920 462,947
Investment securities 1,229,236 1,214,118
Accounts receivable, net 134,637 143,626
Due from Joint Venture 1,231,089 1,231,089
Investment property, at cost,
net of accumulated depreciation
and amortization of $1,481,263
and $1,474,003 at March 31, 1996,
and December 31, 1995, respec-
tively, and a valuation allowance
of $742,000 6,679,328 6,694,302
Lease commissions, net of accumulated
amortization of $55,830 and $55,532
at March 31, 1996, and December 31,
1995, respectively 80,975 71,477
Other assets, net of accumulated
amortization of $5,236 and
$3,885 at March 31, 1996 and
December 31, 1995, respectively 133,075 116,694
Total assets 9,882,260 9,934,253
LIABILITIES AND PARTNERS' EQUITY
Note payable 4,972,372 4,986,374
Accounts payable and accrued
liabilities 13,114 14,535
Tenant deposits 56,770 54,502
Share of Joint Venture deficit 536,953 487,968
Total liabilities 5,579,209 5,543,379
Partners' Equity:
General partner (52,800) (51,922)
Limited partners 4,355,851 4,442,796
Total partners' equity 4,303,051 4,390,874
Commitments and contingencies
Total liabilities and
partners' equity 9,882,260 9,934,253
See accompanying notes to the financial
statements.
Capital Builders Development Properties II
(A California Limited Partnership)
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
1996 1995
Revenues
Rental and other income 260,963 250,291
Interest income 46,152 31,749
Total revenues 307,115 282,040
Expenses
Operating expenses 57,121 56,359
Repairs and maintenance 39,982 31,344
Property taxes 18,581 16,456
Interest 111,469 92,117
General administrative 43,064 40,155
Depreciation and
amortization 98,216 164,264
Total expenses 368,433 400,695
Loss before Joint Venture (61,318) (118,655)
Loss on investment in Joint Venture (26,504) (35,440)
Net income (loss) (87,822) (154,095)
Allocated to general partners (878) (1,541)
Allocated to limited partners (86,944) (152,554)
Net loss per limited partnership unit (4) (7)
Average units outstanding 23,030 23,030
See accompanying notes to the financial
statements
\TABLE
Capital Builders Development Properties II
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
ORGANIZATION
A summary of the significant accounting policies applied in the
preparation of the accompanying financial statements follows:
Basis of Accounting
The financial statements of Capital Builders Development Properties II
(The "Partnership") are prepared on the accrual basis of accounting and
therefore revenue is recorded as earned and costs and expenses are
recorded as incurred.
Organization
Capital Builders Development Properties II, a California Limited
Partnership, is owned under the laws of the State of California. The
Managing General Partner is Capital Builders, Inc., a California
corporation (CB). The Associate General Partners are: 1) the sole
shareholder, President and Director of CB, 2) four founders of CB.
The Partnership is in the business of real estate development and is
not a significant factor in its industry. The Partnership's investment
properties are located near major urban areas and, accordingly, compete
not only with similar properties in their immediate areas but with
hundreds of properties throughout the urban areas. Such competition is
primarily on the basis of locations, rents, services and amenities. In
addition, the Partnership competes with significant numbers of
individuals or organizations (including similar partnerships, real
estate investment trusts and financial institutions) with respect to
the purchase and sale of land, primarily on the basis of the prices and
terms of such transactions.
Investment Securities
Investment securities at March 31, 1996 consist of U.S. Treasury Bills.
Under the provisions of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities", the Partnership is required to classify any of its debt or
equity securities in one of three categories: trading, available-for-
sale, or held-to-maturity. As of March 31, 1996, the Partnership's
securities consist of held-to-maturity securities having a maturity
date of less than one year. These are securities in which the
Partnership has the ability and intent to hold the security until
maturity. As of December 31, 1995, the amortized cost of the
securities approximates estimated market value.
A decline in the market value of any held-to-maturity security below
cost that is deemed other than temporary results in a reduction in
carrying amount to fair value. The impairment is charged to earnings
and a new cost basis for the security is established. Premiums and
discounts are amortized or accredited over the life of the related held-
to-maturity security as an adjustment to yield using the effective
interest method. Interest income is recognized as earned. As of
December 31, 1995, there have been no impairments, premiums or
discounts recognized.
Due from Joint Venture
The Partnership adopted the provisions of Statement of Financial
Accounting Standards No. 114 "Accounting by Creditors for Impairment of
a Loan", as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosure", on January 1,
1995. Management, considering current information and events regarding
the borrowers ability to repay their obligations, considers a note to
be impaired when it is probable that the Partnership will be unable to
collect all amounts due according to the contractual terms of the note
agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future
cash flows discounted at the note's effective interest rate, the fair
market value of collateral securing the note, if any or the note's
observable market price. Impairment losses are included in the
allowance for doubtful accounts through a charge to bad debt expense.
Cash receipts on impaired notes receivable are applied to reduce the
principal amount of such notes until the principal has been recovered
and are recognized as interest income, thereafter. Prior periods have
not been restated.
Investment Properties
The Partnership's investment property account consists of commercial
land and buildings that are carried at the lower of cost, net of
accumulated depreciation and amortization less valuation allowance for
possible investment losses. The valuation allowance represents the
excess carrying value of individual properties over their estimated net
realizable value. The additions to the valuation allowance for
possible investment losses are recorded after consideration of various
external factors, particularly the lack of credit available to
purchasers of real estate and overbuilt real estate markets, both of
which adversely affect real estate. A gain or loss will be recorded to
the extent that the amounts ultimately realized from property sales
differ from those currently estimated. In the event economic
conditions for real estate continue to decline, additional valuation
losses may be recognized. Net realizable value is based upon an
appraisal of the property by an independent appraiser and management's
assessment of current market conditions. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives of three to forty years.
The straight-line method of depreciation is followed for financial
reporting purposes.
Other Assets
Included in other assets are loan fees. Loan fees are amortized over
the life of the related note.
Lease Commissions
Lease commissions are being amortized over the related lease terms.
Income Taxes
The Partnership has no provision for income taxes since all income or
losses are reported separately on the individual partners' tax returns.
Investment in Joint Venture
Partnership investments of 20 to 50 percent are accounted for by the
equity method. Under this method, the investments are recorded at
initial cost and increased for partnership income and decreased for
partnership losses and distributions.
Revenue Recognition
Rental income is recognized on a straight-line basis over the life of
the lease, which may differ from the scheduled rental payments.
Net Loss per Limited Partnership Unit
The net loss per limited partnership unit is computed based on the
weighted average number of units outstanding during the year of 23,030
in 1996 and 1995.
Statement of Cash Flows
For purposes of statement of cash flows, the Partnership considers all
short-term investments with a maturity, at date of purchase, of three
months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 2 - RELATED PARTY EXPENSE REIMBURSEMENT AND FEE ARRANGEMENT
The Managing General Partner (Capital Builders, Inc.) and the Associate
General Partners are entitled to reimbursement of expenses incurred on
behalf of the Partnership and certain fees from the Partnership. These
fees consist of an acquisition fee of up to 12.5 percent of gross
proceeds from the sale of the Partnership units; a property management
fee up to 6 percent of gross revenues realized by the Partnership with
respect to its properties; a subordinated real estate commission of up
to 3 percent of the gross sales price of the properties; and a
subordinated 25 percent share of the Partnership's distributions of
cash from sales or refinancing. The property management fee currently
being charged is 5 percent of gross revenues collected.
All acquisition fees and expenses, all underwriting commissions, and
all offering and organizational expenses which can be paid are limited
to 20 percent of the gross proceeds from sales of partnership units
provided the Partnership incurs no borrowing to develop its properties.
However, these fees may increase to a maximum of 33 percent of the
gross offering proceeds based upon the total acquisition and
development costs, including borrowing. Since the formation of the
partnership, 27.5% of these fees were paid to the partnership's related
parties, leaving a remaining maximum of 5.5% ($633,325) of the gross
offering proceeds. The ultimate amount of these costs will be
determined once the properties are fully developed and leveraged.
The total management fees paid to the Managing General Partner were
$13,054 and $12,147 for the three months ending March 31, 1996, and
1995, respectively, while total reimbursement of expenses were $42,820
and $35,987, respectively.
The Managing General Partner will reduce its future participation in
proceeds from sales by an amount equal to the loss on the abandonment
of option fees in 1988 ($110,000) and interest on the amount at a rate
equal to that of the borrowed funds rate as determined by construction
or permanent funds utilized by the Partnership.
NOTE 3 - INVESTMENT PROPERTY
The components of the investment property account at March 31, 1996 and
December 31, 1995 are as follows:
March 31, December 31,
1996 1995
Land $2,774,392 $2,774,392
Building and Improvements 4,753,403 4,744,102
Tenant Improvements 1,101,796 1,118,811
Investment property, at cost 8,629,591 8,637,305
Less: accumulated depreciation
and amortization (1,481,263) (1,474,003)
valuation allowance (469,000) (469,000)
Investment property, net $6,679,328 $6,694,302
NOTE 4 - DUE FROM JOINT VENTURE
The receivable represents funds advanced to Capital Builders Roseville
Venture (Note 5) which earns interest at 8.24 and 10.5 percent at March
31, 1996 and 1995, approximately the same rate paid for similar
borrowings. The receivable includes $121,088 and $25,290 of accrued
interest at March 31, 1996, and December 31, 1995. Interest income
earned on the note was $25,291 and $25,555 for the three months ended
March 31, 1996 and 1995, respectively. The receivable is unsecured and
is due and payable on demand.
The note due from Joint Venture has been evaluated for collectability
under the provisions of this statement. Based on the evaluation
performed, no impairment has been recognized as of March 31, 1996.
NOTE 5 - INVESTMENT IN JOINT VENTURE
The investment in Joint Venture represents a 40 percent equity interest
in a Joint Venture with Capital Builders Development Property, a
related partnership which has the same general partner. The investment
is accounted for on the equity method.
The balance sheets of the Joint Venture as of March 31, 1996, and
December 31, 1995, are as follows:
March 31, December 31,
1995 1995
Assets
Cash $ 13,369 $ 67,628
Accounts receivable 61,412 69,304
Land and buildings, net 3,268,684 3,318,113
Leasing commissions, net 41,191 47,265
Other assets, net 69,988 73,331
Total assets $3,454,644 $3,575,641
Liabilities and Equity
Notes Payable $3,489,239 $3,500,000
Loan payable to affiliate 1,231,089 1,231,089
Accounts payable and accrued
liabilities 27,757 9,412
Tenant deposits 48,941 55,059
Capital, CBDP (805,429) (731,951)
Capital, CBDP II (536,953) (487,968)
Total liabilities and equity $3,454,644 $3,575,641
The Statement of Operations for Joint Venture for the years ended March
31, are as follows:
Three Months Ended March 31
1996 1995
Revenues
Rental income $155,084 $157,639
Interest income 378 503
Total income 155,462 158,142
Expenses
Operating expenses 31,491 27,993
Repairs and maintenance 16,934 13,494
Property taxes 11,039 10,861
Interest 96,085 111,849
General and administrative 7,185 4,110
Depreciation and amortization 58,988 78,436
Total expenses 221,722 246,743
Net loss $(66,260) $(88,601)
Capital Builders Development
Properties II share of net loss $(26,504) $(35,440)
NOTE 6 - NOTE PAYABLE
The mini-permanent loan of $3,625,000 with interest at the bank's prime
rate (8.75 percent at September 22, 1995) plus 1 1/2 percent was
refinanced with a $5,000,000 mini-permanent fixed interest rate loan on
September 22, 1995. The loan's fixed interest rate is 8.89% and
requires monthly principal and interest payments of $41,789, which is
sufficient to amortize the loan over 25 years. The loan is due October
1, 2002. The note is collateralized by a first deed of trust on Phase
I land, building and improvements.
NOTE 7 - RENTAL LEASES
The Partnership leases its properties under long term non-cancelable
operating leases to various tenants. The facilities are leased through
agreements for rents based on the square footage leased. Minimum
annual base rental payments under these leases for the years ending
December 31 are as follows:
1996 $ 762,496
1997 467,679
1998 353,685
1999 210,105
2000 24,880
Thereafter 51,377
Total $1,870,222
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Partnership in
estimating its fair value disclosures for financial instruments.
Cash and cash equivalents, Investment securities, Accounts
receivable, net, Due from Joint Venture, Accounts payable and
accrued liabilities
The carrying amount approximates fair value because of the short
maturity of these instruments.
Note payable
The fair value of the Partnership's Note Payable is estimated
based on the quoted market prices for the same or similar issues
or on the current rates offered to the Partnership for debt of the
same remaining maturities.
The estimated fair values of the Partnership's financial instruments as
of December 31, 1995 are as follows:
Carrying Estimated
Amount Fair Value
Assets
Cash and cash equivalents $ 393,420 $ 393,920
Investment securities 1,229,236 1,229,236
Accounts receivable, net 134,637 134,637
Due from Joint Venture 1,231,089 1,231,089
Liabilities
Note payable 4,972,372 4,972,372
Accounts payable and accrued
liabilities $ 13,114 $ 13,114
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Partnership is involved in litigation arising in the normal course
of its business. In the opinion of management, the Partnership's
recovery or liability if any, under any pending litigation would not
materially affect its financial condition or operations.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership commenced operations on May 22, 1986, upon the sale of
the minimum number of Limited Partnership Units. The Partnership's
initial source of cash was from the sale of Limited Partnership Units.
Through the offering of Units, the Partnership has raised $11,515,000
(represented by 23,030 Limited Partnership Units). Cash generated from
the sale of Limited Partnership Units has been used to acquire land and
for the development of a mixed use commercial project and a 40 percent
interest in a commercial office project.
The Partnership's primary current sources of cash are from cash
reserves, property rental income. As of March 31, 1996, the
Partnership had $393,420 in cash reserves.
It is the Partnership's investment goal to utilize existing capital
resources for continued leasing operations (tenant improvements and
leasing commissions) and further development of its investment
properties. The Partnership is currently proceeding with the
development of Phase II, consisting of approximately 45,620 square feet
of two, one-story Light Industrial/Office space buildings. The total
development cost of Phase II is estimated to be approximately
$2,800,000. Funds for these improvements will come from existing cash
reserves, property income, additional borrowings, and proceeds from
maturing investment securities.
The Partnership's ability to maintain or improve cash flow is dependent
upon its ability to maintain and improve the occupancy of its
investment properties. The Partnership's financial resources appear to
be adequate to meet current year's obligations and no adverse change in
liquidity is foreseen.
Results of Operations
The Partnership's total revenues increased by $25,075 (8.9%) for the
three months ended March 31, 1996, as compared to March 31, 1995.
Total expenses, net of depreciation, also increased by $33,786 (14.3%)
primarily due to an increase in interest costs, while depreciation
expense decreased by $66,048 (40.2%) for the three months ended March
31, 1996, as compared to March 31, 1995. In addition, the loss on the
investment in Joint Venture decreased by $8,936 in 1996 as compared to
1995, all resulting in a decrease of net loss of $66,273 (43%) for the
three months ended March 31, 1996, as compared to March 31, 1995.
The increase in revenues is primarily due to an increase in occupancy.
During the first quarter of 1996, Highlands 80 averaged an occupancy
rate of approximately 92%, whereas during the first quarter of 1995,
the property averaged only 90%.
Expenses, net of depreciation, increased for the three months ended
March 31, 1996, as compared to March 1995, due to the net effect of: a)
$8,638 (27.5%) increase in repairs and maintenance due to major roof
repairs performed on the project's buildings, b) $19,352 (21%) increase
in interest costs due to an increase in the loan balance (the
additional loan proceeds are to be used to fund additional Phase II
improvements, see Liquidity and Capital Resources for further
discussion), and c) $2,909 (7.2%) increase due to an increase in
investor services and accounting costs.
PART II - OTHER INFORMATION
Item 1 - Legal Proceeding
The Partnership is not a party to, nor is the Partnership's property
the subject of, any material pending legal proceedings.
Item 2 - Not applicable
Item 3 - Not applicable
Item 4 - Not applicable
Item 5 - Not applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has dully caused this report to be signed on its behalf
by the undersigned, hereunto dully authorized.
CAPITAL BUILDERS DEVELOPMENT PROPERTIES II
a California Limited Partnership
By: Capital Builders, Inc.
Its Corporate General Partner
Date: May 10, 1996 By:_____________________________________
Michael J. Metzger
President
Date: May 10, 1996 By:______________________________________
Kenneth L. Buckler
Chief Financial Officer