-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NOIYaaEl4RQyYUakBlSuenjbvJVqQa0JHZY/2dfEbMkDdQ0Rctlj1LVKWfuDstZI 57H+o8wZ7ZBU7GS6tlcaYA== 0000713571-97-000002.txt : 19970325 0000713571-97-000002.hdr.sgml : 19970325 ACCESSION NUMBER: 0000713571-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970324 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL REALTY INVESTORS II LTD PARTNERSHIP CENTRAL INDEX KEY: 0000713571 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 521321492 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11973 FILM NUMBER: 97561326 BUSINESS ADDRESS: STREET 1: 11200 ROCKVILLE PIKE STREET 2: 5TH CITY: ROCKVILLE STATE: MD ZIP: 20852 BUSINESS PHONE: 3014689200 MAIL ADDRESS: STREET 1: 11200 ROCKVILLE PIKE STREET 2: 5TH FLOOR CITY: ROCKVILLE STATE: MD ZIP: 20852 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 ----------------- Commission file number 0-11973 ----------------- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Maryland 52-1321492 - ------------------------------------------ -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11200 Rockville Pike, Rockville, Maryland 20852 - ------------------------------------------ -------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (301) 468-9200 -------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------------------------------ --------------------- NONE N/A Securities registered pursuant to Section 12(g) of the Act: LIMITED PARTNERSHIP UNITS - ------------------------------------------------------------------------------- (Title of class) 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 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K (X) The partnership interests of the Registrant are not traded in any market. Therefore, the partnership interests had neither a market selling price nor an average bid or asked price within the 60 days prior to the date of this filing. CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP 1996 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I ------ Page ---- Item 1. Business . . . . . . . . . . . . . . . . . . . . I-1 Item 2. Properties . . . . . . . . . . . . . . . . . . . I-6 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . I-7 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . I-7 PART II ------- Item 5. Market for the Registrant's Partnership Interests and Related Partnership Matters . . . II-1 Item 6. Selected Financial Data . . . . . . . . . . . . . II-2 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . II-3 Item 8. Financial Statements and Supplementary Data . . . II-14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . II-14 PART III -------- Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . III-1 Item 11. Executive Compensation . . . . . . . . . . . . . III-2 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . III-3 Item 13. Certain Relationships and Related Transactions . III-4 PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . IV-1 Signatures . . . . . . . . . . . . . . . . . . . . . . . . IV-3 Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . IV-33 PART I ------ ITEM 1. BUSINESS -------- Capital Realty Investors-II Limited Partnership (the Partnership) is a limited partnership which was formed under the Maryland Revised Uniform Limited Partnership Act on March 23, 1983. On May 6, 1983, the Partnership commenced offering 50,000 limited partnership interests through a public offering which was managed by Merrill Lynch, Pierce, Fenner and Smith, Incorporated. The Partnership closed the offering on June 20, 1983 when it became fully subscribed. The General Partners of the Partnership are C.R.I., Inc. (CRI), which is the Managing General Partner, and current and former shareholders of CRI. Services for the Partnership are performed by CRI, as the Partnership has no employees of its own. The Partnership was formed to invest in real estate, which is the Partnership's principal business activity, by acquiring and holding a limited partnership interest in limited partnerships (Local Partnerships). As of December 31, 1996, the Partnership had investments in twenty-two Local Partnerships. Each of these Local Partnerships owns a federal or state government-assisted or conventionally financed apartment complex, which provides housing principally to the elderly or to individuals and families of low or moderate income. The original objectives of these investments, not necessarily in order of importance, were to: (1) preserve and protect the Partnership's capital; (2) provide, during the early years of the Partnership's operations, current tax benefits to the partners in the form of tax losses which the partners may use to offset income from other sources; (3) provide capital appreciation through increases in the value of the Partnership's investments and increased equity through periodic payments on the indebtedness on the apartment complexes; and (4) provide cash distributions from sale or refinancing of the Partnership's investments and, on a limited basis, from rental operations. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of factors affecting the original investment objectives. The Local Partnerships in which the Partnership has invested were organized by private developers who acquired the sites, or options thereon, applied for applicable mortgage insurance and/or subsidies, and remain as the local general partners in the Local Partnerships. The Partnership became the principal limited partner in these Local Partnerships pursuant to negotiations with these developers who act as the local general partners. However, in the event of non-compliance with the Local Partnerships' partnership agreements, the local general partner may be removed and replaced with another local general partner or with an affiliate of the Partnership's Managing General Partner. As a limited partner, the Partnership's legal liability for obligations of the Local Partnership is limited to its investment. An affiliate of the Managing General Partner of the Partnership is also generally a general partner of the Local Partnerships. In most cases, the local general partners of the Local Partnerships retain responsibility for developing, constructing, maintaining, operating and managing the project. Additionally, the local general partners and affiliates of the Managing General Partner may operate other apartment complexes which may be in competition for eligible tenants with the Local Partnerships' apartment complexes. I-1 PART I ------ ITEM 1. BUSINESS - Continued -------- Although each of the Local Partnerships in which the Partnership has invested owns an apartment complex which must compete in the market place for tenants, interest subsidies and/or rent supplements from governmental agencies generally make it possible to offer certain of these dwelling units to eligible tenants at a cost significantly below the market rate for comparable conventionally financed dwelling units. Based on available data, the General Partners believe there to be no material risk of market competition in the operations of the apartment complexes described below which adversely impact the Partnership, except in specific circumstances as described in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. The following is a schedule of the apartment complexes owned by Local Partnerships in which the Partnership is a limited partner: I-2 SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP HAS AN INVESTMENT(1)
Units Expiration Mortgage Authorized for of Name and Location Payable at Financed and/or Insured Number of Rental Asst. Section 8 of Apartment Complex 12/31/96 (2) and/or Subsidized Under Rental Units Under Sec. 8 HAP Contract - -------------------- ------------ ----------------------------- ------------ -------------- ------------- Arrowhead Apts. $ 3,927,242 Illinois Housing Development 200 40 05/31/01 Palatine, IL Authority (IHDA) Beech Hill I 2,894,810 Federal National Mortgage 200 39 08/31/98 (4) Manchester, NH Association (FNMA)/236 Beech Hill II 1,625,533 FNMA/236 120 24 08/31/98 (4) Manchester, NH Chevy Chase Park 3,754,306 Metropolitan Savings Bank 232 228 09/23/97 (4) Centerville, OH (MSB)/236 Country Place I 4,942,034 Maryland Community Development 192 38 08/09/99 Burtonsville, MD Administration Section 221(d)(4) of the National Housing Act (NHA) Country Place II 3,597,873 Reilly Mortgage Group/Section 120 24 08/29/00 Burtonsville, MD 221 (d)(4) of the NHA Deer Grove Apts. 10,041,687 FNMA/Housing and Urban Development/ 448 0 -- Palatine, IL Section 221(d)(4) of the NHA Four Winds West 1,007,795 GMAC HUD Insured through Section 62 62 10/17/97 Birmingham, AL 221 (d)(4) of the NHA/Section 8 Frenchman's Wharf II 7,923,103 Department of Housing and Urban 324 31 09/30/98 (4) New Orleans, LA Development Golden Acres 1,266,516 California Housing Finance Agency 46 45 09/28/13 Chowchilla, CA (CHFA) Mercy Terrace 8,643,120 Section 221(d)(4) of the NHA/ 158 158 01/30/03 San Francisco, CA Section 8 The Moorings 3,662,743 IHDA 216 44 05/31/01 Roselle, IL Orangewood 1,826,500 CHFA 40 0 -- Orange Cove, CA Posada Vallarta 14,246,760 Conventional 336 70 02/16/04 Phoenix, AZ Princeton Community 8,345,020 New Jersey Housing Finance Agency 239 26 01/01/98 (4) Village Princeton, NJ Rock Glen 3,787,748 Section 221(d)(4) of the NHA 241 0 -- Baltimore, MD
I-3 SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP HAS AN INVESTMENT(1)
Units Expiration Mortgage Authorized for of Name and Location Payable at Financed and/or Insured Number of Rental Asst. Section 8 of Apartment Complex 12/31/96 (2) and/or Subsidized Under Rental Units Under Sec. 8 HAP Contract - -------------------- ------------ ----------------------------- ------------ -------------- ------------- Rolling Green at $ 2,336,586 Massachusetts Housing Finance 204 15 03/01/12 Amherst Agency (MHFA)/236 Amherst, MA Rolling Green at 5,267,856 MHFA/236 404 77 01/10/12 Fall River Fall River, MA Tanglewood II 1,521,991 FNMA/Section 221(d)(3) of the NHA 192 0 -- Westwego, LA Troy Manor Apts. 855,409 Farmers Home Administration Section 50 50 10/22/99 Troy, AL 5/ Section 8 Westgate Tower Apts. 2,110,510 Michigan Sate Housing Develop- 148 43 12/01/13 Westland, MI ment Authority/236 Wexford Ridge 4,087,097 MSB/236 246 242 09/30/98 (4) Madison, WI - -------------------- ------------ -------- -------- Totals(3) 22 $ 97,672,239 4,418 1,256 ============ ======== ========
I-4 SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP HAS AN INVESTMENT(1) - Continued
Average Effective Annual Units Occupied As Rental Per Unit Percentage of Total Units for the Years Ended As of December 31, December 31, Name and Location --------------------------------- ----------------------------------------------------- of Apartment Complex 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992 - -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- -------- Arrowhead Apts. 91% 93% 90% 83% 88% $ 9,205 $ 9,025 $ 9,282 $ 8,534 $ 8,465 Palatine, IL Beech Hill I 99% 100% 99% 99% 100% 5,351 5,343 5,352 5,220 4,798 Manchester, NH Beech Hill II 99% 98% 100% 98% 99% 4,788 4,836 4,411 4,519 4,447 Manchester, NH Chevy Chase Park 97% 99% 98% 100% 99% 4,232 4,224 3,938 3,953 3,771 Centerville, OH Country Place I 96% 92% 95% 91% 91% 8,922 8,902 8,783 8,780 8,570 Burtonsville, MD Country Place II 93% 93% 95% 94% 89% 9,192 8,833 8,965 8,903 8,878 Burtonsville, MD Deer Grove Apts. 91% 93% 95% 96% 96% 8,426 8,383 7,831 7,714 7,274 Palatine, IL Four Winds West 99% 98% 95% 97% 100% 4,899 4,537 4,512 5,822 4,267 Birmingham, AL Frenchman's Wharf II 89% 90% 88% 88% 92% 4,295 4,171 4,156 4,235 4,192 New Orleans, LA Golden Acres 100% 100% 100% 100% 100% 6,297 6,271 6,191 6,011 5,905 Chowchilla, CA Mercy Terrace 100% 100% 100% 100% 100% 15,045 15,898 15,585 15,381 14,985 San Francisco, CA The Moorings 97% 97% 97% 97% 94% 9,231 8,577 8,688 8,078 7,980 Roselle, IL Orangewood 100% 100% 98% 100% 100% 2,353 2,700 2,852 2,900 2,987 Orange Cove, CA Posada Vallarta 89% 96% 97% 99% 90% 6,808 6,616 6,257 5,807 5,714 Phoenix, AZ Princeton Community Village 98% 97% 97% 98% 100% 6,785 6,510 6,244 6,072 5,942 Princeton, NJ Rock Glen 97% 94% 96% 95% 89% 4,724 4,864 4,862 4,778 4,923 Baltimore, MD
I-5 SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP HAS AN INVESTMENT(1) - Continued
Average Effective Annual Units Occupied As Rental Per Unit Percentage of Total Units for the Years Ended As of December 31, December 31, Name and Location --------------------------------- ----------------------------------------------------- of Apartment Complex 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992 - -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- -------- Rolling Green at Amherst 100% 100% 100 100% 100% $ 7,333 $ 7,314 $ 7,091 $ 6,961 $ 6,683 Amherst, MA Rolling Green at 96% 98% 99% 98% 98% 7,163 7,177 7,222 7,080 5,797 Fall River Fall River, MA Tanglewood II 98% 98% 99% 100% 100% 4,290 4,112 3,923 3,914 3,913 Westwego, LA Troy Manor Apts. 100% 100% 100% 100% 100% 4,680 4,681 4,596 5,261 4,365 Troy, AL Westgate Tower Apts. 100% 99% 98% 99% 100% 3,551 3,471 3,438 3,261 3,161 Westland, MI Wexford Ridge 98% 98% 100% 100% 100% 4,509 4,517 4,413 4,182 4,055 Madison, WI ---- ---- ---- ---- ---- -------- -------- -------- -------- -------- Totals(3) 22 97% 97% 97% 97% 97% $ 6,458 $ 6,407 $ 6,300 $ 6,244 $ 5,958 ==== ==== ==== ==== ==== ======== ======== ======== ======== ========
(1) All properties are multifamily housing complexes. No single tenant/resident rents 10% or more of the rentable square footage. Residential leases are typically one year or less in length, with varying expiration dates, and substantially all rentable space is for residential purposes. (2) The amounts provided are the balances of first mortgage loans payable by the Local Partnerships as of December 31, 1996. (3) The totals for the percentage of units occupied and the average effective annual rental per unit are based on a simple average. (4) The Section 8 contract expiration date reflects a one-year extension from the original expiration date, in accordance with Congressional legislation. For additional information regarding the real estate of Local Partnerships in which the Partnership has invested, see Part IV, Schedule III - "Real Estate and Accumulated Depreciation of Local Partnerships in which Capital Realty Investors-II Limited Partnership has invested." On February 19, 1997, Tanglewood Apartments Associates II Limited Partnership sold Tanglewood II to a non-profit entity. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and the notes to the financial statements for additional information pertaining to the sale. I-6 PART I ------ ITEM 1. BUSINESS - Continued -------- On March 18, 1997, Palatine-Barrington Associates Limited Partnership sold Deer Grove to an unaffiliated entity. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and the notes to the financial statements for additional information pertaining to the sale. ITEM 2. PROPERTIES ---------- Through its ownership of limited partnership interests in Local Partnerships, Capital Realty Investors-II Limited Partnership indirectly holds an interest in the underlying real estate. See Part I, Item 1 and Schedule III of Part IV, Item 14 for information pertaining to these properties. ITEM 3. LEGAL PROCEEDINGS ----------------- There are no material legal proceedings to which the Partnership is a party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of 1996. I-7 PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND ----------------------------------------------------- RELATED PARTNERSHIP MATTERS --------------------------- (a) On August 29, 1996, Equity Resource Bay Fund (Bay Fund), a Massachusetts Limited Partnership which is affiliated with Equity Resources Group, the general partner of various partnerships that are Additional Limited Partners in the Partnership, initiated a tender offer to purchase 1,500 additional units in the Partnership at a price of $10 per Additional Limited Partner unit. Bay Fund, which is unaffiliated with CRI, stated that it made the offer for the express purpose of holding the limited partnership units for investment purposes and not with a view to resale. The purchase offer was determined solely at the discretion of Bay Fund and did not necessarily represent the fair market value of each Additional Limited Partner unit. The Bay Fund offer expired on September 29, 1996, and as of March 10, 1997, Bay Fund held approximately 2.2% of the Additional Limited Partner units of the Partnership. Other than the Bay Fund tender offer, it is not anticipated that there will be any formal market for resale of interests in the Partnership. As a result, investors may be unable to sell or otherwise dispose of their interests in the Partnership. (b) As of March 10, 1997 there were approximately 4,000 registered holders of limited partnership interests in the Partnership. (c) No distributions were declared or paid by the Partnership during 1996 or 1995. The Partnership received distributions of $996,557 and $870,339 from Local Partnerships during 1996 and 1995, respectively. Some of the Local Partnerships operate under restrictions imposed by the pertinent government agencies that limit the cash return available to the Partnership. II-1 PART II ------- ITEM 6. SELECTED FINANCIAL DATA -----------------------
For the years ended December 31, 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------ Share of income (loss) from partnerships $ 303,378 $ 238,823 $ (121,724) $ 343,278 $ (455,139) Interest income 104,989 181,845 125,477 100,172 120,086 Expenses (6,127,668) (6,268,596) (5,605,037) (5,148,865) (4,499,106) ------------ ------------ ------------ ------------ ------------ Loss before extraordinary gain from extinguishment of debt (5,719,301) (5,847,928) (5,601,284) (4,705,415) (4,834,159) ------------ ------------ ------------ ------------ ------------ Extraordinary gain from extinguishment of debt 1,803,902 -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net loss $ (3,915,399) $ (5,847,928) $ (5,601,284) $ (4,705,415) $ (4,834,159) ============ ============ ============ ============ ============ Loss allocated to Additional Limited Partners (97%) $ (3,797,937) $ (5,672,490) $ (5,433,246) $ (4,564,252) $ (4,689,134) ============ ============ ============ ============ ============ Loss per unit of Additional Limited Partnership Interest based on 50,000 units outstanding $ (75.96) $ (113.45) $ (108.66) $ (91.29) $ (93.78) ============ ============ ============ ============ ============ Cash distribution per unit of Additional Limited Partnership Interest based on 50,000 units outstanding $ -- $ -- $ -- $ -- $ -- ============ ============ ============ ============ ============ Total assets $ 9,740,065 $ 11,550,373 $ 11,854,627 $ 12,953,688 $ 13,698,771 ============ ============ ============ ============ ============ Total remaining due on investments, including accrued interest on purchase money notes $ 50,725,540 $ 51,676,902 $ 49,371,965 $ 47,346,894 $ 45,293,505 ============ ============ ============ ============ ============
II-2 PART II ------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- General ------- The Partnership has invested, through Local Partnerships, primarily in federal or state government-assisted apartment complexes intended to provide housing to low and moderate income tenants. In conjunction with such government assistance, which includes federal and/or state financing at below-market interest rates and rental subsidies, the Local Partnerships agreed to regulatory limitations on (i) cash distributions, (ii) use of the properties and (iii) sale or refinancing. These limitations typically were designed to remain in place for the life of the mortgage. The original investment objectives of the Partnership primarily were to deliver tax benefits, as well as cash proceeds upon disposition of the properties through the Partnership's investment in local limited partnerships. Only limited annual cash distributions from property operations were projected because of the regulatory restrictions on cash distributions from the properties. The original investment objectives of the Partnership have been affected by the Tax Reform Act of 1986, which virtually eliminated many of the incentives for the new construction or the sale of existing low income housing properties by limiting the use of passive loss deductions. Therefore, the Managing General Partner continues to concentrate on transferring the source of investment yield from tax benefits to cash flow wherever possible and potentially enhancing the ability of the Partnership to share in the appreciated value of the properties. The acquisition of interests in certain Local Partnerships resulted in purchase money note obligations of the Partnership. The purchase money notes are non-recourse obligations of the Partnership which typically mature fifteen years from the dates of acquisition of the interests in particular Local Partnerships. The Managing General Partner has been working to develop a strategy to sell certain properties by utilizing opportunities presented by federal affordable housing legislation, favorable financing terms and preservation incentives available to nonprofit purchasers. The Managing General Partner intends to utilize part or all of the Partnership's net proceeds (after a 50% distribution to limited partners) received from the sale of properties to fund reserves for paying at maturity, prepaying or purchasing prior to maturity, at a discount where possible, currently outstanding purchase money notes. The Managing General Partner believes that this represents an opportunity to reduce the Partnership's long-term obligations. Some of the rental properties owned by the Local Partnerships have mortgages which are federally insured under Section 236 or Section 221(d)(3)of the National Housing Act, as amended. The Low Income Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA), which provided property owners with restricted opportunities to sell low income housing, ended effective September 30, 1996. However, the U.S. Department of Housing and Urban Development (HUD) received approximately $175 million to fund sales of qualifying properties under the LIHPRHA program during the federal government's fiscal year 1997, which began October 1, 1996. Continued funding of the LIHPRHA II-3 PART II ------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued ----------------------------------- program after fiscal year 1997 is uncertain. There is no assurance that a sale of any properties that previously qualified under the LIHPRHA program will occur, except for Tanglewood II, as discussed below. Some of the rental properties owned by the Local Partnerships are financed by state housing agencies. The Managing General Partner has been working to develop strategies to sell or refinance certain properties pursuant to programs developed by these agencies or other potential buyers. These programs may include opportunities to sell the property to a qualifying purchaser who would agree to maintain the property as low to moderate income housing in perpetuity, or to refinance the 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 HUD pursuant to HAP contracts. In 1995 and 1996, HUD released its Reinvention Blueprint and a revision to its Reinvention Blueprint which contained proposals that have come to be known as "Mark-to-Market". Congress, HUD and the Clinton Administration continue to struggle with the Mark-to-Market initiative. This initiative was intended to deal with HUD's increasing burden of funding HAP contracts. Under the initiative, HUD would eliminate the project-based subsidy and provide the residents with "sticky vouchers" which would allow residents to move to other developments should they so choose. However, with the elimination of the HAP contract, there is no assurance that rental properties would be able to maintain the rental income and occupancy levels necessary to pay operating costs and debt service. The initiative will impact those properties that have HAP contracts with shorter terms than that of the underlying property mortgage. For instance, some properties may have a 20- year HAP contract while the underlying mortgage has a 40-year term. In the interim, Congress has authorized one-year extensions for properties with HAP contracts expiring during the government's fiscal year 1997, which began October 1, 1996. In light of recent political scrutiny of appropriations for HUD programs, continued funding of annual renewals for Section 8 HAP contracts expiring after fiscal year 1997 is uncertain. With the ending of the LIHPRHA program and with the uncertainty surrounding renewals of expiring Section 8 HAP contracts, the Managing General Partner is developing new strategies to deal with the ever changing environment of affordable housing policy. Section 236 and Section 221(d)(3) properties that are in the 18th year of their mortgage may be eligible for pre-payment of the mortgage. Properties with expiring Section 8 HAP contracts may become convertible to market-rate apartment properties. Currently, there are a few lenders that will provide financing either to prepay the existing mortgage or provide additional funds to allow the property to convert to market rate units. Where opportunities exist, the Managing General Partner will continue to work with the Local Partnerships to develop a strategy that makes economic sense for all parties involved. In 1990, CRI, as managing general partner of the Partnership and various other entities, subcontracted certain property-level asset management functions II-4 PART II ------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued ----------------------------------- for certain properties to Capital Management Strategies, Inc. (CMS). Among these properties were properties owned by some of the Local Partnerships in which the Partnership invested. CMS was formed by Martin C. Schwartzberg, a nominal general partner of the Partnership and a former stockholder of CRI, when he retired from CRI and its related businesses as of January 1, 1990. Mr. Schwartzberg agreed not to act as a general partner with respect to any of the CRI-sponsored partnerships, including this Partnership, and has not done so since that time. In late 1995, a dispute arose between CRI and CMS over the funding level of the 1996 contract for CMS. On November 9, 1995, CRI filed a complaint against CMS to determine the proper amount of fees to be paid in 1996 under the asset management agreement. CMS answered on January 10, 1996, but asserted no counterclaims. Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be designated as managing general partner of approximately 125 private partnerships sponsored by CRI. On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the Circuit Court of Montgomery County, Maryland (the Circuit Court), against CRI and Messrs. Dockser and Willoughby (who are general partners of the Partnership) alleging, among other things, that CRI and Messrs. Dockser and Willoughby breached the asset management agreement pursuant to which Mr. Schwartzberg's company, CMS, agreed to perform limited functions related to property-level issues for a portion of CRI's subsidized housing portfolio (including some of the properties in which the Partnership invested), by reducing the proposed budget for 1996. The Partnership was not named as a defendant in this action. Messrs. Dockser and Willoughby entered an answer denying all of Mr. Schwartzberg's claims. On February 6, 1996, CRI terminated the CMS contract for cause. (CRI subsequently retained an independent asset management company to perform functions previously performed by CMS.) Mr. Schwartzberg and CMS responded to the contract termination by filing a motion for injunctive relief in the Circuit Court, asking the court to enjoin CRI from terminating the contract. In a ruling issued on February 12, 1996, the Circuit Court, among other things, refused to grant the injunction requested by CMS. On February 12, 1996, the Circuit Court also issued a memorandum opinion and order enjoining CMS and Mr. Schwartzberg from disclosing information made confidential under the asset management agreement. Following subsequent litigation, none of which involved the Partnership, on June 12, 1996, Mr. Schwartzberg, CRI and others entered an agreement (which contemplates the execution of a subsequent definitive agreement) to resolve the disputes between CRI and CMS. The Partnership was not a signatory to the agreement. As part of the resolution, Mr. Schwartzberg withdrew any derogatory statements he made about CRI and its principals. Upon execution of the definitive agreement, Mr. Schwartzberg shall withdraw as a General Partner of this Partnership and his interest will become that of a Special Limited Partner. As of March 10, 1997, CRI and Mr. Schwartzberg were unable to agree on the language of various provisions of the definitive agreement and have agreed to submit the open issues to arbitration. The Partnership is not a party to the arbitration proceeding. Financial Condition/Liquidity ----------------------------- As of December 31, 1996, the Partnership had approximately 4,000 investors who subscribed to a total of 50,000 units of limited partnership interests in II-5 PART II ------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued ----------------------------------- the original amount of $50,000,000. The Partnership has made investments in twenty-two Local Partnerships. The Partnership's liquidity, with unrestricted cash resources of $2,128,849 as of December 31, 1996, along with anticipated future cash distributions from the Local Partnerships, is expected to meet its current and anticipated operating cash needs. The Partnership has determined that the carrying amount of its cash and cash equivalents approximates fair value. As of March 10, 1997, there were no material commitments for capital expenditures. During 1996, 1995 and 1994, the Partnership received cash distributions of $996,557, $870,339 and $793,007, respectively, from the Local Partnerships. The Partnership's obligations with respect to its investments in Local Partnerships, in the form of purchase money notes having a principal balance of $20,140,678 (exclusive of unamortized discount on purchase money notes of $5,159,494) plus accrued interest of $30,584,862 as of December 31, 1996, are payable in full upon the earliest of: (1) sale or refinancing of the respective Local Partnership's rental property; (2) payment in full of the respective Local Partnership's permanent loan; or (3) maturity. Purchase money notes in an aggregate principal amount of $2,100,000 matured on December 31, 1996, as discussed below. Purchase money notes in an aggregate principal amount of $1,900,000 mature on December 31, 1997, as discussed below. The remaining purchase money notes mature in 1998 and 1999. The purchase money notes are generally secured by the Partnership's interest in the respective Local Partnership. 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 Local Partnership. The Managing General Partner is continuing to investigate possible alternatives to reduce the Partnership's long-term debt obligations. These alternatives include, among others, retaining the cash available for distribution to meet the purchase money note requirements, buying out certain purchase money notes at a discounted price, extending the due dates of certain purchase money notes, or refinancing the respective properties' underlying debt and using the Partnership's share of the proceeds to pay off or buy down certain purchase money note obligations. Purchase money notes relating to Wexford Ridge Associates in the principal amount of $1,900,000 mature on December 31, 1997. The Managing General Partner anticipates negotiating with the purchase money note holders for a five year extension on the purchase money notes. There is no assurance that the Managing General Partner will reach an agreement of any kind with the noteholders. Accordingly, there can be no assurance that the Partnership will be able to retain its interest in the Local Partnership. The uncertainty about the continued ownership of the Partnership's interest in the related Local Partnership does not impact the Partnership's financial condition because the related purchase money notes are nonrecourse and secured solely by the Partnership's interest in the Local Partnership. Therefore, should the investment in Wexford Ridge not produce sufficient value to satisfy the purchase money notes related to Wexford Ridge, the Partnership's exposure to loss is limited since the amount of the nonrecourse indebtedness exceeds the carrying II-6 PART II ------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued ----------------------------------- amount of the investment in and advances to the Local Partnership. Thus, even a complete loss of this investment would not have a material impact on the operations of the Partnership. On May 23, 1994, the local general partner of Tanglewood Apartments Associates II Limited Partnership (Tanglewood II) filed a notice of intent to participate under LIHPRHA. On July 11, 1996, the local managing general partner's plan of action regarding the sale of Tanglewood II under the LIHPRHA program was approved by HUD. On February 19, 1997, Tanglewood II sold the property, a 192-unit apartment complex located in Westwego, Louisiana, under the LIHPRHA program. The sale of the property generated net cash proceeds to the Partnership of $933,987. The proceeds were net of $1,385,154 used to retire, at a discount, the Partnership's purchase money note obligation with respect to the property. The sale provided proceeds to the Partnership in excess of its investment in the Local Partnership, and will result in a net financial statement gain in 1997 of approximately $3.2 million, of which approximately $1.7 million will result from the retirement of the purchase money note obligation with respect to the property. The federal tax gain is estimated to be approximately $4.9 million. The Managing General Partner of the Partnership and/or its affiliates will not receive fees relating to the sale. The Partnership defaulted on its purchase money note relating to Rock Glen Limited Partnership (Rock Glen) on August 1, 1995 when the note matured and was not paid. The noteholder signed a standstill agreement which expired on October 31, 1995. The Managing General Partner made an offer to the noteholder to extend the purchase money note due date to August 2000. This offer was rejected by the noteholder. On January 11, 1996, the Partnership paid off the purchase money note at a discount, resulting in a gain on extinguishment of debt of $1,803,902. The Partnership defaulted on its purchase money notes relating to Beech Hill Development Co. (Beech Hill I) and Beech Hill Development Co. II (Beech Hill II) on August 1, 1995 when the notes matured and were not paid. On March 29, 1996, the noteholders agreed to extend the purchase money note due dates to January 1, 1998. Under the agreement, the Partnership will pay the purchase money noteholders of Beech Hill I and Beech Hill II all annual cash flow distributions received from the related Local Partnerships in excess of $5,000 and $2,500, respectively. The Partnership received cash flow distributions of $5,000 and $2,500 from Beech Hill I and II, respectively, during the year ended December 31, 1996. Cash flow distributions of $60,365 and $27,500 were paid directly by Beech Hill I and Beech Hill II, respectively, to the purchase money note holders during the year ended December 31, 1996. There were no annual cash flow distributions made to the Partnership from the related Local Partnerships during the year ended December 31, 1995. Also under the agreement, documents transferring the Partnership's interests in the related Local Partnerships to the noteholders have been placed in escrow and would be released to the noteholders upon a future default by the Partnership on the respective purchase money notes. The Partnership defaulted on its purchase money notes relating to Chevy Chase Park, Limited (Chevy Chase) on December 31, 1996 when the notes matured and were not paid. The default amount included principal and accrued interest of $2,100,000 and $3,553,912, respectively. As of March 10, 1997 principal and accrued interest totalling $2,100,000 and $3,608,885, respectively, were due. II-7 PART II ------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued ----------------------------------- The Managing General Partner is currently negotiating a five year extension of the purchase money notes with the noteholders. The Managing General Partner is also awaiting the potential future sale of the property under the LIHPRHA program. There is no assurance that a sale will take place under the LIHPRHA program, nor is there any assurance that any agreement will be reached with the noteholders. As such, there is no assurance that the Partnership will be able to retain its interest in Chevy Chase. The uncertainty regarding the continued ownership of the Partnership's interests in Chevy Chase does not impact the Partnership's financial condition because the related purchase money notes are nonrecourse and secured solely by the Partnership's interest in the related Local Partnership. Therefore, should the investment in Chevy Chase not produce sufficient value to satisfy the related purchase money notes, the Partnership's exposure to loss is limited since the amount of the nonrecourse indebtedness exceeds the carrying amount of the investment in and advances to the Local Partnership. Thus, even a complete loss of this investment would not have a material impact on the operations of the Partnership. The Partnership has determined that it is not practicable to estimate the fair value of the purchase money notes, either individually or in the aggregate, due to: (1) the lack of an active market for this type of financial instrument, (2) the variable nature of purchase money note interest payments as a result of fluctuating cash flow distributions received from the related Local Partnerships, and (3) the excessive costs associated with an independent appraisal of the purchase money notes. The Partnership closely monitors its cash flow and liquidity position in an effort to ensure that sufficient cash is available for operating requirements. In 1996 and 1995, the receipt of distributions from Local Partnerships was adequate to support operating cash requirements. Cash and cash equivalents decreased during 1996 as a result of the pay-off of the Rock Glen purchase money note, as discussed above. Results of Operations --------------------- The Partnership's net loss decreased in 1996 from 1995 primarily due to the extraordinary gain on extinguishment of the Rock Glen purchase money note, as discussed above. Contributing to the decrease in net loss was a decrease in interest expense which was also due to the extinguishment of the Rock Glen purchase money note, as discussed above. Also contributing to the decrease in net loss was an increase in share of income from partnerships primarily due to decreased depreciation and maintenance expense at two properties. Partially offsetting the decrease in net loss was a decrease in interest income as a result of decreased cash and cash equivalent balances in 1996 and an increase in professional fees due to legal fees incurred in connection with the Arrowhead and Moorings litigation, as discussed below. The Partnership's net loss increased in 1995 from 1994 primarily due to an increase in interest expense as a result of the amortization of imputed interest. Partially offsetting the increase in net loss was an increase in share of income from Local Partnerships principally due to the loss in 1994 resulting from the pay-off of the remaining Country Place I and II purchase II-8 PART II ------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued ----------------------------------- money notes, as discussed below. Also partially offsetting the increase in net loss was an increase in interest income resulting from increased yields on investments and higher cash balances during 1995. The purchase money notes originated from 1983 through 1984. When they were issued, the market interest rate was approximately 15%, while the stated interest rates ranged from 9% to 12%. The notes were discounted as required by Generally Accepted Accounting Principles, and a simple/compound method was used at the stated interest rate for tax purposes and the compound method at the market interest rate was used for book purposes. As the book interest is being compounded, the interest expense for book purposes will eventually surpass the interest expense for tax purposes, thereby reducing the discount and increasing the interest expense. In fiscal year 1996, all properties with purchase money notes that has not previously matured had book interest which exceeded the tax interest. This increase in interest expense and the resulting reduction in the discount is expected to increase in future years. 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 recognized losses for the years ended December 31, 1996, 1995 and 1994 did not include losses of $3,526,546, $3,522,606 and $3,493,216, respectively. The Partnership's net loss recognized from the Local Partnerships is generally expected to decrease in subsequent years as the Partnership's investments in the Local Partnerships are reduced to zero. Accord- ingly, excludable losses are generally expected to increase. Distributions of $247,917, $248,235 and $113,392, received from eight, six and five Local Partnerships, respectively, during 1996, 1995 and 1994, respectively, were offset against the respective years' recorded losses because these amounts were in excess of the Partnership's investment. The local general partner of Lake Properties Limited Partnership (Frenchman's Wharf II), in conjunction with the Managing General Partner, engaged in extensive negotiations with HUD, holder of the mortgage on the property, to extend the previous workout arrangement related to the mortgage loan on the property, which expired December 1990. On April 30, 1996, the local general partner received approval from HUD for a four-year workout. Under the workout agreement, Frenchman's Wharf II will make minimum monthly payments to HUD, consisting of a service charge and tax escrow. Additionally, Frenchman's Wharf II will make monthly interest payments representing approximately 50%, 65%, 85% and 100% of the interest due on the outstanding principal balance of the note for the periods July 1 through June 30 during the years 1996 through 2000, respectively. As of March 10, 1997, Frenchman's Wharf II had made all monthly payments in accordance with the workout arrangement. There is, however, no assurance that the Local Partnership will be able to comply with the terms of the workout arrangement. To cover operating deficits incurred in prior years for Frenchman's Wharf II, the Partnership advanced funds totalling $324,410 as of both December 31, 1996 and December 31, 1995. The last advance was made to Frenchman's Wharf II in March 1987. The Partnership does not expect to advance any additional funds in connection with Frenchman's Wharf II's loan workout with HUD. These loans, together with accrued interest of $187,372 as of both December 31, 1996 and II-9 PART II ------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued ----------------------------------- December 31, 1995, are payable from cash flow of Frenchman's Wharf II after payment of first-mortgage debt service and after satisfaction by the Partnership of certain other interest obligations on the purchase money notes relating to the Local Partnership. There is no assurance that the Local Partnership, upon expiration of the workout, will be able to repay the loans in accordance with the terms. The purchase money notes related to Frenchman's Wharf II in the principal amount of $3,150,000 which were initially due to mature on June 1, 1988 have been extended to mature on June 1, 1998. In conjunction with the four-year workout agreement, the Partnership is currently negotiating with the purchase money note holders to reach an extension agreement which would be coterminous with the expiration of the HUD workout arrangement. There is no assurance that the noteholders will consent to an extension agreement. As of March 10, 1997, the noteholders had not given consent to an extension agreement. The report of the auditors on the financial statements of Frenchman's Wharf II for the year ended December 31, 1996 indicated that substantial doubt exists about the ability of the Local Partnership to continue as a going concern due to the Local Partnership's default on its mortgage and the expiration of its Section 8 HAP contract with HUD on November 30, 1997. The report of the auditors on the financial statements of Frenchman's Wharf II for the year ended December 31, 1995 indicated that substantial doubt exists about the ability of the Local Partnership to continue as a going concern due to the property's recurring operating deficits and the Local Partnership's default on its mortgage. The uncertainty about the Local Partnership's continued ownership of the property does not impact the Partnership's financial condition because the related purchase money note is nonrecourse and secured solely by the Partnership's interest in the Local Partnership. Therefore, should the investment in Frenchman's Wharf II not produce sufficient value to satisfy the related purchase money note, the Partnership's exposure to loss is limited since the amount of the nonrecourse indebtedness exceeds the carrying amount of the investment in and advances to the Local Partnership. Thus, even a complete loss of this investment would not have a material impact on the operations of the Partnership. On January 31, 1996, the local managing general partner of Palatine- Barrington Associates Limited Partnership (Deer Grove) received an offer to sell the property to an unaffiliated entity. This offer was rejected by the local managing general partner. On September 13, 1996, the local managing general partner of Deer Grove received another offer to sell the property. The local managing general partner accepted the offer and, on March 18, 1997, Deer Grove sold the property, a 448-unit apartment complex located in Palatine, Illinois. The sale of the property generated cash proceeds to the Partnership of $3.4 million at closing. The Partnership anticipates receiving additional proceeds upon final release of the property's reserves. The proceeds received at closing were in excess of the Partnership's investment in the Local Partnership and will result in a net financial statement gain in 1997 of approximately $3.4 million. The tax gain is estimated to be approximately $17.8 million. Posada Associates Limited Partnership (Posada Vallarta Apartments) was operating under an extension of a three-year workout agreement with HUD, the holder of the mortgage. The workout provided for, among other things, a minimum monthly debt service payment, with excess cash, if any, being applied to II-10 PART II ------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued ----------------------------------- delinquent interest. All debt service payments were made in accordance with the workout. In June 1995, the three-year workout which originally expired on October 1, 1995 was extended to October 1, 1996. In June 1996, HUD sold the mortgage loan to a third party. The new mortgagee issued a notice of default and acceleration of the loan to Posada Vallarta Apartments. The notice was determined to be in error, and on July 8, 1996 the notice of default and acceleration was withdrawn by the new mortgagee. The workout agreement related to Posada Vallarta Apartments provided that upon cancellation of the workout agreement, the loan would be recast at an annual interest rate of 7.5%, if certain conditions are satisfied. As of October 1, 1996, the expiration of the workout agreement, the local managing general partner and the new mortgagee were disputing whether or not those conditions had been satisfied. On October 1, 1996, the Local Partnership made a monthly payment, and has continued to make such monthly payments, on the debt in the amount which would be due if the loan is recast at a 7.5% annual interest rate. The new mortgagee made an offer to extend the workout agreement for two years. The local managing general partner made a counter-offer to extend the workout agreement for ten years. On February 6, 1997, the local managing general partner and the new mortgagee reached an agreement in principle to recast the loan at a 7.5% annual interest rate with a ten-year call provision, as stated in the workout agreement. As of March 10, 1997, the parties are negotiating revised loan documents implementing their agreement. There is no assurance that a final agreement will be reached on these documents. Should the mortgagee begin foreclosure proceedings, the Partnership intends to vigorously defend such action. The report of the auditors on the financial statements of Posada Vallarta Apartments for the year ended December 31, 1996 indicates that substantial doubt exists about the ability of Posada Vallarta Apartments to continue as a going concern due to the uncertainty about the Local Partnership's continued ownership of the property due to the potential foreclosure of the property. The uncertainty about the Local Partnership's continued ownership of the property does not impact the Partnership's financial condition because the related purchase money note is nonrecourse and secured solely by the Partnership's interest in the Local Partnership. Therefore, should the investment in Posada Vallarta Apartments not produce sufficient value to satisfy the related purchase money note, the Partnership's exposure to loss is limited since the amount of nonrecourse indebtedness exceeds the carrying amount of the investment in and advances to the Local Partnership. Thus, even a complete loss of this investment would not have a material impact on the operations of the Partnership. Wexford Ridge Associates Local Partnership (located in Madison, Wisconsin), its local general partner, and its management agent have been named in eight sexual harassment and discrimination complaints filed with HUD. The Managing General Partner believes the claims will have no aggregate material effect on the financial statements of the Partnership and that legal costs associated with the claims will be borne by the management agent. On May 1, 1996, C.R.H.C., Incorporated (CRHC), an affiliate of the Managing General Partner, notified the local managing general partner of Arrowhead Apartments Associates Limited Partnership (Arrowhead) and Moorings Apartments Associates Limited Partnership (Moorings) that it was in default under the Partnership Agreements and threatened to remove him as managing general partner of the Local Partnerships. The managing agent of Arrowhead and Moorings, which II-11 PART II ------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued ----------------------------------- is an affiliate of the local managing general partner, filed arbitration against CRHC seeking, among other things, a declaration that the allegations set forth in CRHC's notice did not constitute grounds for removal of the local managing general partner. CRHC subsequently filed for arbitration against the local managing general partner seeking his removal. On September 3, 1996, CRHC filed an emergency petition in the arbitration to have a trustee appointed to serve as local managing general partner and managing agent of the Local Partnerships until the arbitration hearings are held. The emergency petition was denied. As of March 10, 1997, the litigation is in discovery, and the parties are negotiating the terms of a settlement. There is no assurance that a settlement of the arbitration will occur. The hearing is scheduled for July 1997. In 1994, the Partnership purchased the remaining six purchase money notes for Country Place I and II, two at a discount, with an aggregate original principal amount of $495,000, resulting in an aggregate loss from extinguishment of debt of $117,353. The loss from extinguishment of debt is included in share of loss from partnerships in the statements of operations. The local general partners of the following properties have each filed a notice of intent to participate under the LIHPRHA program: II-12 PART II ------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
Property Date of Filing -------- ----------------- Rolling Green at Amherst June 5, 1992 (1) Tanglewood II May 23, 1994 (2) Chevy Chase Park July 18, 1994 Wexford Ridge July 27, 1994 Beech Hill I December 21, 1994 (1) Beech Hill II December 21, 1994 (1) Rolling Green at Fall River March 1, 1995 (1)
(1) The plan of actions for these properties were not approved by HUD, therefore, these properties are no longer eligible to participate in what remains of the LIHPRHA program. (2) Tanglewood II was sold under the LIHPRHA program on February 19, 1997. The LIHPRHA program is discussed above in the General section. As discussed above, there is no assurance that a sale or refinancing of the remaining properties will occur due to the federal government's limited funding or appropriations to the LIHPRHA program. Of the properties listed above, only Chevy Chase and Wexford Ridge are ranked on the master funding list, which is subject to future government appropriations. Inflation --------- Inflation allows for increases in rental rates, usually offsetting any higher operating and replacement costs. Furthermore, inflation generally does not impact the fixed rate long-term financing under which real property investments were purchased. Future inflation could allow for appreciated values of the Local Partnerships' properties over an extended period of time as rental revenues and replacement values gradually increase. The following table reflects the combined rental revenues of the properties for the five years ended December 31, 1996: II-13 PART II ------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
For the years ended December 31, 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Combined Rental Revenue $29,638,904 $29,343,786 $28,130,763 $27,551,120 $26,823,399 Annual Percentage Increase 1.0% 4.31% 2.10% 2.71%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- The information required by this item is contained in Part IV. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ----------------------------------------------------------- AND FINANCIAL DISCLOSURE ------------------------ None. II-14 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- (a), (b) and (c) The Partnership has no directors, executive officers or significant employees of its own. (a), (b), (c) and (e) The names, ages and business experience of the directors and executive officers of C.R.I., Inc. (CRI), the Managing General Partner of the Partnership, are as follows: William B. Dockser, 60, has been the Chairman of the Board of CRI and a Director since 1974. Prior to forming CRI, he served as President of Kaufman and Broad Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed a number of publicly held limited partnerships created to invest in low and moderate income multifamily apartment complexes. For a period of 2-1/2 years prior to joining Kaufman and Broad, he served in various positions at HUD, culminating in the post of Deputy FHA Commissioner and Deputy Assistant Secretary for Housing Production and Mortgage Credit, where he was responsible for all federally insured housing production programs. Before coming to Washington, Mr. Dockser was a practicing attorney in Boston and also was a special Assistant Attorney General for the Commonwealth of Massachusetts. He holds a Bachelor of Laws degree from Yale University Law School and a Bachelor of Arts degree, cum laude, from Harvard University. He is also Chairman of the Board of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT, Inc. H. William Willoughby, 50, President, Secretary and a Director of CRI since January 1990 and Senior Executive Vice President, Secretary and a Director of CRI from 1974 to 1989. He is principally responsible for the financial management of CRI and its associated partnerships. Prior to joining CRI in 1974, he was Vice President of Shelter Corporation of America and a number of its subsidiaries dealing principally with real estate development and equity financing. Before joining Shelter Corporation, he was a Senior Tax Accountant with Arthur Andersen & Company. He holds a Juris Doctorate degree, a Master of Business Administration degree and a Bachelor of Science degree in Business Administration from the University of South Dakota. He is also a Director and executive officer of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT, Inc. Ronald W. Thompson, 50, Group Executive Vice President-Hotel Asset Management. Prior to joining CRI in 1985, he was employed at the Hyatt Organization where he most recently served as the General Manager of the Hyatt Regency in Flint, Michigan. During his nine year tenure with Hyatt, he held senior management positions with the Hyatt Regency in Dearborn, Michigan, the Hyatt in Richmond, Virginia, the Hyatt in Winston-Salem, North Carolina and the Hyatt Regency in Atlanta, Georgia. Before joining Hyatt, Mr. Thompson worked in London, England for the English Tourist Board as well as holding management positions in Europe, Australia, and New Zealand in the hotel industry. Mr. Thompson received his education in England where he received a business degree in Hotel Administration from Winston College. Susan R. Campbell, 38, Senior Vice President-CRI Realty Services. Prior to joining CRI in March 1985, she was a budget analyst for the B. F. Saul Advisory Company. She holds a Bachelor of Science degree in General Business from the University of Maryland. Melissa Cecil Lackey, 41, Senior Vice President and General Counsel. Prior to joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder, Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in III-1 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued -------------------------------------------------- Houston, Texas. She holds a Juris Doctorate from the University of Virginia School of Law and a Bachelor of Arts degree from the College of William & Mary. (d) There is no family relationship between any of the foregoing directors and executive officers. (f) Involvement in certain legal proceedings. None. (g) Promoters and control persons. Not applicable. ITEM 11. EXECUTIVE COMPENSATION ---------------------- (a), (b), (c), (d), (e), (f), (g), (i), (j), (k) and (l) The Partnership has no officers or directors. However, in accordance with the Partnership Agreement, and as disclosed in the public offering, various kinds of compensation and fees were paid or are payable to the General Partners and their affiliates. Additional information required in these sections is included in Notes 3 and 4 of the financial statements contained in Part IV, Item 14. Additionally, the General Partners may receive an annual distribution from the Partnership if there is cash available for distribution, as defined in the Partnership Agreement. The General Partners are also entitled to the following payments: (1) Annual incentive management fee for managing the affairs and business of the Partnership in an amount not to exceed .25% of invested assets, including the Partnership's allocable share of the mortgages, payable first, in an annual amount equal to $250,000; and second, after distributions to investors in the amount of 1% of the gross proceeds of the offering, the balance of such .25% of invested assets. The annual incentive management fee amounted to $249,996 for each of the years ended December 31, 1996, 1995 and 1994. (2) 15% of sale and refinancing proceeds remaining after the limited partners have received a return of all their capital contributions, adjusted as provided in the Partnership Agreement, and the General Partners have received a return of all their capital contributions and the property disposition fees described below. The General Partners may also receive a return of their capital contributions and repayment of any loans made to the Partnership. No sale or refinancing proceeds were paid to the General Partners during the years ended December 31, 1996, 1995 and 1994. III-2 PART III -------- ITEM 11. EXECUTIVE COMPENSATION - Continued ---------------------- (3) 1% of the aggregate selling prices, including any amounts previously unpaid upon prior sales of apartment complexes, payable after the limited partners have received a return of all their capital contributions, adjusted as provided in the Partnership Agreement. This amount and any other commissions or fees payable upon the sale of apartment complexes shall not in the aggregate exceed the lesser of the competitive rate or 6% of the sales price of the apartment complexes. No such amounts were paid to the General Partners during the years ended December 31, 1996, 1995 and 1994. (4) In addition, the Managing General Partner and/or its affiliates may receive a fee in an amount of not more than 2% of the sales price of the investment in a Local Partnership or the property it owns. The fee would only be payable upon the sale of the investment in a Local Partnership or the property it owns and would be subject to certain restrictions, including achievement of a certain level of sales proceeds and making certain minimum distributions to limited partners. No such fees were paid to the Managing General Partner and/or its affiliates during the years ending December 31, 1996, 1995 and 1994. (h) Termination of employment and change in control arrangements. None. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND --------------------------------------------------- MANAGEMENT ---------- (a) Security ownership of certain beneficial owners. No person or "group", as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, is known by the Partnership to be the beneficial owner of more than 5% of the issued and outstanding partnership units at December 31, 1996. (b) Security ownership of management. The following table sets forth certain information concerning all units beneficially owned, as of December 31, 1996, by each director and by all directors and officers as a group of the Managing General Partner of the Partnership. III-3 PART III -------- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND --------------------------------------------------- MANAGEMENT - Continued ----------- Name of Amount and Nature % of total Beneficial Owner of Beneficial Ownership Units issued ---------------- ----------------------- ------------ William B. Dockser None 0% H. William Willoughby None 0% All Directors and Officers as a Group (5 persons) None 0% (c) Changes in control. There exists no arrangement known to the Partnership, the operation of which may, at a subsequent date, result in a change in control of the Partnership. There is a provision in the Limited Partnership Agreement which allows, under certain circumstances, the ability to change control. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- (a) Transactions with management and others. The Partnership has no directors or officers. In addition, the Partnership has had no transactions with individual officers or directors of the Managing General Partner of the Partnership other than any indirect interest such officers and directors may have in the amounts paid to the Managing General Partner or its affiliates by virtue of their stock ownership in CRI. Item 11 of this report, which contains a discussion of the fees and other compensation paid or accrued by the Partnership to the General Partners or their affiliates, is incorporated herein by reference. Note 3 of the notes to financial statements, which contains disclosure of related party transactions, is also incorporated herein by reference. (b) Certain business relationships. The Partnership's response to Item 13(a) is incorporated herein by reference. In addition, the Partnership has no business relationship with entities of which the officers and directors of the Managing General Partner of the Partnership are officers, directors or equity owners other than as set forth in the Partnership's response to Item 13(a). (c) Indebtedness of management. None. (d) Transactions with promoters. Not applicable. III-4 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON ------------------------------------------------------ FORM 8-K -------- (a) 1. Financial Statements Page -------------------- ---- Report of Independent Certified Public Accountants - Capital Realty Investors-II Limited Partnership IV-4 Reports of Independent Certified Public Accountants - Local Partnerships in which Capital Realty Investors-II Limited Partnership has invested IV-5 Balance Sheets as of December 31, 1996 and 1995 IV-6 Statements of Operations for the years ended December 31, 1996, 1995 and 1994 IV-7 Statements of Changes in Partners' Deficit for the years ended December 31, 1996, 1995 and 1994 IV-8 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 IV-9 Notes to Financial Statements IV-10 (a) 2. Financial Statement Schedules ----------------------------- Included in Part IV of this report are the following schedules for the year ended December 31, 1996, which are applicable to the Local Partnerships in which Capital Realty Investors-II Limited Partnership has invested: Report of Independent Certified Public Accountants on Financial Statement Schedule IV-29 Schedule III - Real Estate and Accumulated Depreciation IV-30 The remaining schedules are omitted because the required information is included in the financial statements and notes thereto or they are not applicable or not required. (a) 3. Exhibits (listed according to the number assigned in the table in Item 601 of Regulation S-K) Exhibit No. 3. - Articles of Incorporation and Bylaws IV-1 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON ------------------------------------------------------ FORM 8-K - Continued -------- a. Certificate of Limited Partnership of Capital Realty Investors-II Limited Partnership. (Incorporated by reference from Exhibit 4 to Registrant's Registration Statement on Form S-11, as amended, dated April 28, 1983.) Exhibit No. 4. - Instruments defining rights of security holders including indentures. a. Limited Partnership Agreement of Capital Realty Investors-II Limited Partnership. (Incorporated by reference from Exhibit 4 to Registrant's Registration Statement on Form S-11, as amended, dated April 28, 1983.) Exhibit No. 10. - Material contracts a. Management Services Agreement between CRI and Capital Realty Investors-II Limited Partnership. (Incorporated by reference from Exhibit 10B to Registrant's Registration Statement on Form S-11, as amended, dated April 28, 1983.) Exhibit No. 27 - Financial Data Schedule Exhibit No. 99 - Additional Exhibits a. Prospectus of the Partnership, dated May 6, 1983 (Incorporated by reference to the Registrant's Registration Statement on Form S-11, as amended, dated April 28, 1983). (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the quarter ended December 31, 1996. (c) Exhibits -------- The list of Exhibits required by Item 601 of Regulation S-K is included in Item (a)3., above. (d) Financial Statement Schedules ----------------------------- See Item (a)2., above. IV-2 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. Capital Realty Investors-II Limited Partnership By: C.R.I., Inc. Managing General Partner March 24, 1997 /s/ William B. Dockser - --------------------------- -------------------------------- DATE William B. Dockser, Director, Chairman of the Board, Treasurer and Principal Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: March 24, 1997 /s/ H. William Willoughby - --------------------------- -------------------------------- DATE H. William Willoughby Director, President and Secretary March 24, 1997 /s/ Deborah K. Browning - --------------------------- -------------------------------- DATE Deborah K. Browning Vice President, Chief Accounting Officer, Principal Financial and Principal Accounting Officer IV-3 REPORT OF INDEPENDENT CERTIFIED ------------------------------ PUBLIC ACCOUNTANTS ------------------- To the Partners Capital Realty Investors-II Limited Partnership We have audited the balance sheets of Capital Realty Investors-II Limited Partnership as of December 31, 1996 and 1995, and the related statements of operations, changes in partners' deficit and cash flows for the years ended December 31, 1996, 1995 and 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of certain Local Partnerships. The Partnership's share of income or loss from these Local Partnerships constitutes $55,461 of income in 1996, $181,378 of losses in 1995 and $315,608 of losses in 1994 included in the Partnership's net loss. The financial statements of these Local Partnerships were audited by other auditors whose reports thereon have been furnished to us, and our opinion expressed herein, insofar as it relates to the amount included for these Local Partnerships, is based solely upon the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based upon our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Capital Realty Investors-II Limited Partnership as of December 31, 1996 and 1995, and the results of its operations, changes in partners' deficit and cash flows for the years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. Grant Thornton LLP Vienna, VA March 10, 1997 (except for Note 2.c., as to which the date is March 18, 1997) IV-4 REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS - LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP HAS INVESTED* * The reports of independent certified public accountants - Local Partnerships in which Capital Realty Investors-II Limited Partnership has invested were filed in paper format under Form SE on March 20, 1997, in accordance with the Securities and Exchange Commission's continuing hardship exemption granted December 19, 1996. IV-5 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP BALANCE SHEETS ASSETS
December 31, ----------------------------- 1996 1995 ------------ ------------ Investments in and advances to partnerships $ 5,962,920 $ 7,358,510 Assets held for sale 789,258 -- Cash and cash equivalents 2,128,849 3,192,539 Acquisition fees, principally paid to related parties, net of accumulated amortization of $393,948 and $407,496, respectively 501,003 592,504 Property purchase costs, net of accumulated amortization of $258,870 and $258,343 respectively 348,378 398,969 Other assets 9,657 7,851 ------------ ------------ Total assets $ 9,740,065 $ 11,550,373 ============ ============ LIABILITIES AND PARTNERS' DEFICIT Due on investments in partnerships $ 14,981,184 $ 14,213,825 Accrued interest payable 30,584,862 29,256,224 Accounts payable and accrued expenses 91,418 82,324 ------------ ------------ Total liabilities 45,657,464 43,552,373 ------------ ------------ 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 (1,254,612) (1,254,612) Offering costs (5,278,980) (5,278,980) Accumulated losses (79,400,807) (75,485,408) ------------ ------------ Total partners' deficit (35,917,399) (32,002,000) ------------ ------------ Total liabilities and partners' deficit $ 9,740,065 $ 11,550,373 ============ ============
The accompanying notes are an integral part of these financial statements. IV-6 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS
For the years ended December 31, 1996 1995 1994 ----------- ----------- ----------- Share of income (loss) from partnerships $ 303,378 $ 238,823 $ (121,724) ----------- ----------- ----------- Other revenue and expenses: Revenue Interest income 104,989 181,845 125,477 ----------- ----------- ----------- Expenses Interest 5,552,780 5,759,461 5,113,326 Management fee 249,996 249,996 249,996 General and administrative 143,529 128,588 104,500 Professional fees 126,118 75,306 81,970 Amortization 55,245 55,245 55,245 ----------- ----------- ----------- 6,127,668 6,268,596 5,605,037 ----------- ----------- ----------- Total other revenue and expenses (6,022,679) (6,086,751) (5,479,560) ----------- ----------- ----------- Loss before extraordinary gain from extinguishment of debt (5,719,301) (5,847,928) (5,601,284) ----------- ----------- ----------- Extraordinary gain from extinguishment of debt 1,803,902 -- -- ----------- ----------- ----------- Net Loss $(3,915,399) $(5,847,928) $(5,601,284) =========== =========== =========== Loss allocated to General Partners (1.51%) $ (59,123) $ (88,304) $ (84,579) =========== =========== =========== Loss allocated to Initial and Special Limited Partners (1.49%) $ (58,339) $ (87,134) $ (83,459) =========== =========== =========== Loss allocated to Additional Limited Partners (97%) $(3,797,937) $(5,672,490) $(5,433,246) =========== =========== =========== Loss per unit of Additional Limited Partnership Interest based on 50,000 units outstanding $ (75.96) $ (113.45) $ (108.66) =========== =========== ===========
The accompanying notes are an integral part of these financial statements. IV-7 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' DEFICIT For the years ended December 31, 1996, 1995 and 1994
Initial and Special Additional General Limited Limited Partners Partners Partners Total ----------- ----------- ------------ ------------ Partners' deficit January 1, 1994 $ (980,936) $ (954,396) $(18,617,456) $(20,552,788) Net loss (84,579) (83,459) (5,433,246) (5,601,284) ----------- ----------- ------------ ------------ Partners' deficit December 31, 1994 (1,065,515) (1,037,855) (24,050,702) (26,154,072) Net loss (88,304) (87,134) (5,672,490) (5,847,928) ----------- ----------- ------------ ------------ Partners' deficit December 31, 1995 (1,153,819) (1,124,989) (29,723,192) (32,002,000) Net loss (59,123) (58,339) (3,797,937) (3,915,399) ----------- ----------- ------------ ------------ Partners' deficit December 31, 1996 $(1,212,942) $(1,183,328) $(33,521,129) $(35,917,399) =========== =========== ============ ============
The accompanying notes are an integral part of these financial statements. IV-8 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996 1995 1994 ----------- ----------- ----------- Cash flows from operating activities: Net loss $(3,915,399) $(5,847,928) $(5,601,284) Adjustments to reconcile net loss to net cash used in operating activities: Share of (income) loss from partnerships (303,378) (238,823) 121,724 Payment of purchase money note interest (152,881) (227,722) (226,464) Amortization of discount on purchase money notes 3,047,359 3,226,802 2,366,790 Amortization of deferred costs 55,245 55,245 55,245 Gain on extinguishment of debt (1,803,902) -- -- Changes in assets and liabilities: Increase in other assets (1,806) (2,545) (2,406) Increase in accrued interest payable 2,505,421 2,532,659 2,746,535 Increase (decrease) in accounts payable 9,094 11,935 (23,383) ----------- ----------- ----------- Net cash used in operating activities (560,247) (490,377) (563,243) ----------- ----------- ----------- Cash flows from investing activities: Receipt of distributions from partnerships 996,557 870,339 793,007 ----------- ----------- ----------- Net cash provided by investing activities 996,557 870,339 793,007 ----------- ----------- ----------- Cash flows from financing activities: Pay-off of purchase money note (1,500,000) -- (485,250) ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (1,063,690) 379,962 (255,486) Cash and cash equivalents, beginning of year 3,192,539 2,812,577 3,068,063 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 2,128,849 $ 3,192,539 $ 2,812,577 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. IV-9 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Organization ------------ Capital Realty Investors-II Limited Partnership (the Partnership) was formed under the Maryland Revised Uniform Limited Partnership Act on March 23, 1983 and shall continue until December 31, 2037 unless sooner dissolved in accordance with the Partnership Agreement. The Partnership was formed to invest in real estate by acquiring and holding a limited partnership interest in limited partnerships (Local Partnerships) which own and operate federal or state government-assisted or conventionally financed apartment complexes throughout the United States, which provide housing principally to the elderly and to individuals and families of low or moderate income. The General Partners of the Partnership are C.R.I., Inc. (CRI), which is the Managing General Partner, and current and former shareholders of CRI. The Initial Limited Partner is Rockville Pike Associates Limited Partnership-II, a limited partnership which includes certain officers and former employees of CRI or its affiliates. The Special Limited Partner is Two Broadway Associates II, a limited partnership comprised of an affiliate and employees of Merrill Lynch, Pierce, Fenner & Smith, Incorporated. The Partnership sold 50,000 units at $1,000 per unit of Additional Limited Partnership Interest through a public offering. The offering period was terminated on June 20, 1983. b. Method of accounting -------------------- The financial statements of the Partnership are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. c. Investments in and advances to partnerships ------------------------------------------- The investments in and advances to Local Partnerships (see Note 2) are accounted for by the equity method because the Partnership is a limited partner in the Local Partnerships. Under this method, the carrying amount of the investments in and advances to Local Partnerships is (i) reduced by distributions received and (ii) increased or reduced by the Partnership's share of earnings or losses, respectively, of the Local Partnerships. As of December 31, 1996 and 1995, the Partnership's share of cumulative losses of eleven and nine, of the Local Partnerships, respectively, exceeds the amount of the Partnership's investments in and advances to those Local Partnerships by $28,225,703 and $24,699,157, respectively. Since 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. As of December 31, 1996 and 1995, cumulative cash distributions of approximately IV-10 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued $2,148,566 and $1,900,649, respectively, have been received from the Local Partnerships for which the Partnership's carrying value is zero. These distributions are recorded as increases in the Partnership's share of income from partnerships. Costs incurred in connection with acquiring these investments have been capitalized and are being amortized using the straight-line method over the estimated useful lives of the properties owned by the Local Partnerships, with the exception of those costs relating to Tanglewood Associates II Limited Partnership (Tanglewood II) and Palatine-Barrington Associates Limited Partnership (Deer Grove), which are no longer being amortized as a result of its classification as an asset held for sale as of December 31, 1996, as discussed below. d. Cash and cash equivalents ------------------------- Cash and cash equivalents consist of all money market funds, repurchase agreements and commercial paper with original maturities of three months or less. The Partnership has determined that the carrying amount of its cash and cash equivalents approximates fair value. e. Offering costs -------------- The Partnership incurred certain costs in connection with the offering and selling of limited partnership interests. Such costs were recorded as a reduction of partner's capital when incurred. f. Income taxes ------------ For federal and state income tax purposes, each partner reports on his or her personal income tax return his or her share of the Partnership's income or loss as determined for tax purposes. Accordingly, no provision (credit) has been made for income taxes in these financial statements. g. Use of estimates ---------------- In preparing financial statements in conformity with generally accepted accounting principles, the Partnership is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. IV-11 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued h. Asset held for sale ------------------- On February 19, 1997, and March 18, 1997, the local general partners of Tanglewood II and Deer Grove, respectively, sold the respective properties, as discussed in Note 2. Accordingly, the Partnership's investment in these Local Partnerships was classified as an investment in partnerships held for sale on the balance sheets as of December 31, 1996. Assets held for sale are not recorded in excess of their estimated net realizable value. 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS a. Due on investments in partnerships ---------------------------------- As of December 31, 1996 and 1995, the Partnership had acquired limited partnership interests in twenty-two Local Partnerships, which were organized to develop, construct, own, maintain and operate apartment complexes which provide housing principally to the elderly and to individuals and families of low or moderate income. The remaining principal amounts due on investments in the Local Partnerships as of December 31, 1996 and 1995 are as follows:
1996 1995 ----------- ----------- Purchase money notes due: 1995 $ -- $ 4,660,000 1996 2,100,000 2,100,000 1997 1,900,000 1,900,000 1998 14,800,500 12,420,500 1999 1,340,178 1,340,178 Less: unamortized discount (5,159,494) (8,206,853) ----------- ----------- $14,981,184 $14,213,825 =========== ===========
The purchase money notes have stated interest rates ranging from 9% to 12%, certain of which are compounded annually. Unamortized discounts are based upon an imputed interest rate of 15% to reflect market interest rates which prevailed when the notes were issued. The resulting discount has been recorded by the Partnership and is being amortized to interest expense over the life of the respective purchase money notes using the effective interest method. The purchase money notes are payable upon the earliest of: (1) sale or refinancing of the respective Local Partnership's rental property; (2) payment in full of the respective Local Partnership's permanent loan; or (3) maturity. Purchase money notes in an aggregate principal amount of $2,100,000 matured on December 31, 1996, as discussed below. Purchase money notes in an aggregate principal amount of $1,900,000 mature on December 31, 1997, as discussed below. The remaining purchase money notes mature in 1998 and 1999. The purchase money notes are generally secured by the Partnership's interest in the respective Local IV-12 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued Partnership. 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 Local Partnership. The Managing General Partner is continuing to investigate possible alternatives to reduce the Partnership's long-term debt obligations. These alternatives include, among others, retaining the cash available for distribution to meet the purchase money note requirements, buying out certain purchase money notes at a discounted price, extending the due dates of certain purchase money notes, or refinancing the respective properties' underlying debt and using the Partnership's share of the proceeds to pay off or buy down certain purchase money note obligations. Interest expense on the Partnership's purchase money notes for the years ended December 31, 1996, 1995 and 1994 was $5,552,780, $5,759,461 and $5,113,326, respectively. The accrued interest on the purchase money notes of $30,584,862 and $29,256,224 as of December 31, 1996 and 1995, respectively, is due on the respective maturity dates of the purchase money notes or earlier if the Local Partnerships have distributable net cash flow, as defined in the relevant Local Partnership agreements. Purchase money notes relating to Wexford Ridge Associates in the principal amount of $1,900,000 mature on December 31, 1997. The Managing General Partner anticipates negotiating with the purchase money note holders for a five year extension on the purchase money notes. There is no assurance that the Managing General Partner will reach an agreement of any kind with the noteholders. Accordingly, there can be no assurance that the Partnership will be able to retain its interest in the Local Partnership. The uncertainty about the continued ownership of the Partnership's interest in the related Local Partnership does not impact the Partnership's financial condition because the related purchase money notes are nonrecourse and secured solely by the Partnership's interest in the Local Partnership. Therefore, should the investment in Wexford Ridge not produce sufficient value to satisfy the purchase money notes related to Wexford Ridge, the Partnership's exposure to loss is limited since the amount of the nonrecourse indebtedness exceeds the carrying amount of the investment in and advances to the Local Partnership. Thus, even a complete loss of this investment would not have a material impact on the operations of the Partnership. On February 19, 1997, the Partnership paid off the purchase money note relating to Tanglewood II at a discount, as discussed below. The Partnership defaulted on its purchase money note relating to Rock Glen Limited Partnership (Rock Glen) on August 1, 1995 when the note matured and was not paid. The noteholder signed a standstill agreement which expired on October 31, 1995. The Managing General Partner made an offer to the noteholder to extend the purchase money note due date to August 2000. This offer was rejected by the noteholder. On January 11, 1996, the Partnership paid off the purchase money note at a discount, resulting in a gain on extinguishment of debt of $1,803,902. The Partnership defaulted on its purchase money notes relating to Beech Hill Development Co. (Beech Hill I) and Beech Hill Development Co. II IV-13 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued (Beech Hill II) on August 1, 1995 when the notes matured and were not paid. On March 29, 1996, the noteholders agreed to extend the purchase money note due dates to January 1, 1998. Under the agreement, the Partnership will pay the purchase money noteholders of Beech Hill I and Beech Hill II all annual cash flow distributions received from the related Local Partnerships in excess of $5,000 and $2,500, respectively. The Partnership received cash flow distributions of $5,000 and $2,500 from Beech Hill I and II, respectively, during the year ended December 31, 1996. Cash flow distributions of $60,365 and $27,500 were paid directly by Beech Hill I and Beech Hill II, respectively, to the purchase money note holders during the year ended December 31, 1996. There were no annual cash flow distributions made to the Partnership from the related Local Partnerships during the year ended December 31, 1995. Also under the agreement, documents transferring the Partnership's interests in the related Local Partnerships to the noteholders have been placed in escrow and would be released to the noteholders upon a future default by the Partnership on the respective purchase money notes. The Partnership defaulted on its purchase money notes relating to Chevy Chase Park, Limited (Chevy Chase) on December 31, 1996 when the notes matured and were not paid. The default amount included principal and accrued interest of $2,100,000 and $3,553,912, respectively. As of March 10, 1997 principal and accrued interest totalling $2,100,000 and $3,608,885, respectively, were due. The Managing General Partner is currently negotiating a five year extension of the purchase money notes with the noteholders. The Managing General Partner is also awaiting the potential future sale of the property under the LIHPRHA program. There is no assurance that a sale will take place under the LIHPRHA program, nor is there any assurance that any agreement will be reached with the noteholders. As such, there is no assurance that the Partnership will be able to retain its interest in Chevy Chase. The uncertainty regarding the continued ownership of the Partnership's interests in Chevy Chase does not impact the Partnership's financial condition because the related purchase money notes are nonrecourse and secured solely by the Partnership's interest in the related Local Partnership. Therefore, should the investment in Chevy Chase not produce sufficient value to satisfy the related purchase money notes, the Partnership's exposure to loss is limited since the amount of the nonrecourse indebtedness exceeds the carrying amount of the investment in and advances to the Local Partnership. Thus, even a complete loss of this investment would not have a material impact on the operations of the Partnership. In 1994, the Partnership purchased the remaining six purchase money notes for Country Place I and II, two at a discount, with an aggregate original principal amount of $495,000, resulting in an aggregate loss from IV-14 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued extinguishment of debt of $117,353. The loss from extinguishment of debt is included in share of loss from partnerships in the statements of operations. The Partnership has determined that it is not practicable to estimate the fair value of the purchase money notes, either individually or in the aggregate, due to: (1) the lack of an active market for this type of financial instrument, (2) the variable nature of purchase money note interest payments as a result of fluctuating cash flow distributions received from the related Local Partnerships, and (3) the excessive costs associated with an independent appraisal of the purchase money notes. b. Interests in profits, losses and cash distributions --------------------------------------------------- The Partnership has a 92.99% to 98.99% interest in profits, losses and cash distributions (as restricted by various federal and state housing agencies) of each Local Partnership. An affiliate of the General Partners of the Partnership is also a general partner of each Local Partnership. The Partnership received cash distributions from the rental operations of the Local Partnerships of $996,557, $870,339 and $793,007 during the years ended December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996 and 1995, seventeen of the Local Partnerships had surplus cash, as defined by their respective agencies, in the amount of $2,005,402 and $2,475,456, respectively, which is available for distribution in accordance with their respective agencies' regulations. The cash distributions to the Partnership from the operations of the rental properties may be limited by HUD regulations. Such regulations limit annual cash distributions to a percentage of the owner's equity investment in a rental property. Funds in excess of those which may be distributed to owners are required to be placed in a residual receipts account held by the governing state or federal agency for the benefit of the property. Upon sale or refinancing of the property owned by the Local Partnerships or upon the liquidation of each Local Partnership, the proceeds from the sale, refinancing or liquidation shall be distributed in accordance with the respective provisions of each Local Partnership's partnership agreement. In accordance with such provisions, the Partnership would receive from such proceeds its respective percentage interest of any remaining proceeds, after payment of (1) all debts and liabilities of the Local Partnership and certain other items, (2) the Partnership's capital contributions plus certain specified amounts as outlined in each partnership agreement, and (3) certain special distributions to general partners and related entities of the Local Partnership. c. Property matters ---------------- The following table reflects the amounts of advances made to the Local Partnerships as of December 31, 1996 and 1995. IV-15 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
December 31, 1996 1995 ----------- ----------- Local Partnership ----------------- Frenchman's Wharf II: Principal amount of funds advanced $ 324,410 $ 324,410 Accrued interest on advances 187,372 187,372 ----------- ----------- Total $ 511,782 $ 511,782 =========== ===========
The local general partner of Lake Properties Limited Partnership (Frenchman's Wharf II), in conjunction with the Managing General Partner, engaged in extensive negotiations with HUD, holder of the mortgage on the property, to extend the previous workout arrangement related to the mortgage loan on the property, which expired December 1990. On April 30, 1996, the local general partner received approval from HUD for a four-year workout. Under the workout agreement, Frenchman's Wharf II will make minimum monthly payments to HUD, consisting of a service charge and tax escrow. Additionally, Frenchman's Wharf II will make monthly interest payments representing approximately 50%, 65%, 85% and 100% of the interest due on the outstanding principal balance of the note for the periods July 1 through June 30 during the years 1996 through 2000, respectively. As of March 10, 1997, Frenchman's Wharf II had made all monthly payments in accordance with the workout arrangement. There is, however, no assurance that the Local Partnership will be able to comply with the terms of the workout arrangement. To cover operating deficits incurred in prior years for Frenchman's Wharf II, the Partnership advanced funds totalling $324,410 as of both December 31, 1996 and December 31, 1995. The last advance was made to Frenchman's Wharf II in March 1987. The Partnership does not expect to advance any additional funds in connection with Frenchman's Wharf II's loan workout with HUD. These loans, together with accrued interest of $187,372 as of both December 31, 1996 and December 31, 1995, are payable from cash flow of Frenchman's Wharf II after payment of first-mortgage debt service and after satisfaction by the Partnership of certain other interest obligations on the purchase money notes relating to the Local Partnership. There is no assurance that the Local Partnership, upon expiration of the workout, will be able to repay the loans in accordance with the terms. The purchase money notes related to Frenchman's Wharf II in the principal amount of $3,150,000 which were initially due to mature on June 1, 1988 have been extended to mature on June 1, 1998. In conjunction with the four-year workout agreement, the Partnership is currently negotiating with the purchase money note holders to reach an extension agreement which would be coterminous with the expiration of the HUD workout arrangement. There is no assurance that the noteholders will consent to an extension agreement. As of March 10, 1997, the noteholders had not given consent to an extension agreement. IV-16 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued The report of the auditors on the financial statements of Frenchman's Wharf II for the year ended December 31, 1996 indicated that substantial doubt exists about the ability of the Local Partnership to continue as a going concern due to the Local Partnership's default on its mortgage and the expiration of its Section 8 Rental Housing Assistance Payments (HAP) contract with HUD on November 30, 1997. The report of the auditors on the financial statements of Frenchman's Wharf II for the year ended December 31, 1995 indicated that substantial doubt exists about the ability of the Local Partnership to continue as a going concern due to the property's recurring operating deficits and the Local Partnership's default on its mortgage. The uncertainty about the Local Partnership's continued ownership of the property does not impact the Partnership's financial condition because the related purchase money note is nonrecourse and secured solely by the Partnership's interest in the Local Partnership. Therefore, should the investment in Frenchman's Wharf II not produce sufficient value to satisfy the related purchase money note, the Partnership's exposure to loss is limited since the amount of the nonrecourse indebtedness exceeds the carrying amount of the investment in and advances to the Local Partnership. Thus, even a complete loss of this investment would not have a material impact on the operations of the Partnership. On May 23, 1994, the local general partner of Tanglewood II filed a notice of intent to participate under the Low Income Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA). On July 11, 1996, the local managing general partner's plan of action regarding the sale of Tanglewood II under the LIHPRHA program was approved by HUD. On February 19, 1997, Tanglewood II sold the property, a 192-unit apartment complex located in Westwego, Louisiana, under the LIHPRHA program. The sale of the property generated net cash proceeds to the Partnership of $933,987. The proceeds were net of $1,385,154 used to retire, at a discount, the Partnership's purchase money note obligation with respect to the property. The sale provided proceeds to the Partnership in excess of its investment in the Local Partnership, and will result in a net financial statement gain in 1997 of approximately $3.2 million, of which approximately $1.7 million will result from the retirement of the purchase money note obligation with respect to the property. The federal tax gain is estimated to be approximately $4.9 million. The Managing General Partner of the Partnership and/or its affiliates will not receive fees relating to the sale. On January 31, 1996, the local managing general partner of Palatine- Barrington Associates Limited Partnership (Deer Grove) received an offer to sell the property to an unaffiliated entity. This offer was rejected by the local managing general partner. On September 13, 1996, the local managing general partner of Deer Grove received another offer to sell the property. The local managing general partner accepted the offer and on March 18, 1997, Deer Grove sold the property, a 448-unit apartment complex located in Palatine, Illinois. The sale of the property generated cash proceeds to the Partnership of $3.4 million at closing. The Partnership anticipates receiving additional proceeds upon final release of the property's reserves. The proceeds received at closing were in excess of the Partnership's investment in the Local Partnership and will result in a net financial statement gain in 1997 of approximately $3.4 million. The tax gain is estimated to be approximately $17.8 million. IV-17 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued Posada Associates Limited Partnership (Posada Vallarta Apartments) was operating under an extension of a three-year workout agreement with HUD, the holder of the mortgage. The workout provided for, among other things, a minimum monthly debt service payment, with excess cash, if any, being applied to delinquent interest. All debt service payments were made in accordance with the workout. In June 1995, the three-year workout which originally expired on October 1, 1995 was extended to October 1, 1996. In June 1996, HUD sold the mortgage loan to a third party. The new mortgagee issued a notice of default and acceleration of the loan to Posada Vallarta Apartments. The notice was determined to be in error, and on July 8, 1996 the notice of default and acceleration was withdrawn by the new mortgagee. The workout agreement related to Posada Vallarta Apartments provided that upon cancellation of the workout agreement, the loan would be recast at an annual interest rate of 7.5%, if certain conditions are satisfied. As of October 1, 1996, the expiration of the workout agreement, the local managing general partner and the new mortgagee were disputing whether or not those conditions had been satisfied. On October 1, 1996, the Local Partnership made a monthly payment, and has continued to make such monthly payments, on the debt in the amount which would be due if the loan is recast at a 7.5% annual interest rate. The new mortgagee made an offer to extend the workout agreement for two years. The local managing general partner made a counter-offer to extend the workout agreement for ten years. On February 6, 1997, the local managing general partner and the new mortgagee reached an agreement in principle to recast the loan at a 7.5% annual interest rate with a ten-year call provision, as stated in the workout agreement. As of March 10, 1997, the parties are negotiating revised loan documents implementing their agreement. There is no assurance that a final agreement will be reached on these documents. Should the mortgagee begin foreclosure proceedings, the Partnership intends to vigorously defend such action. The report of the auditors on the financial statements of Posada Vallarta Apartments for the year ended December 31, 1996 indicates that substantial doubt exists about the ability of Posada Vallarta Apartments to continue as a going concern due to the uncertainty about the Local Partnership's continued ownership of the property due to the potential foreclosure of the property. The uncertainty about the Local Partnership's continued ownership of the property does not impact the Partnership's financial condition because the related purchase money note is nonrecourse and secured solely by the Partnership's interest in the Local Partnership. Therefore, should the investment in Posada Vallarta Apartments not produce sufficient value to satisfy the related purchase money note, the Partnership's exposure to loss is limited since the amount of nonrecourse indebtedness exceeds the carrying amount of the investment in and advances to the Local Partnership. Thus, even a complete loss of this investment would not have a material impact on the operations of the Partnership. Wexford Ridge Associates Local Partnership (located in Madison, Wisconsin), its local general partner, and its management agent have been named in eight sexual harassment and discrimination complaints filed with HUD. The Managing General Partner believes the claims will have no aggregate material effect on the financial statements of the Partnership and that legal costs associated with the claims will be borne by the management agent. IV-18 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued On May 1, 1996, C.R.H.C., Incorporated (CRHC), an affiliate of the Managing General Partner, notified the local managing general partner of Arrowhead Apartments Associates Limited Partnership (Arrowhead) and Moorings Apartments Associates Limited Partnership (Moorings) that it was in default under the Partnership Agreements and threatened to remove him as managing general partner of the Local Partnerships. The managing agent of Arrowhead and Moorings, which is an affiliate of the local managing general partner, filed arbitration against CRHC seeking, among other things, a declaration that the allegations set forth in CRHC's notice did not constitute grounds for removal of the local managing general partner. CRHC subsequently filed for arbitration against the local managing general partner seeking his removal. On September 3, 1996, CRHC filed an emergency petition in the arbitration to have a trustee appointed to serve as local managing general partner and managing agent of the Local Partnerships until the arbitration hearings are held. The emergency petition was denied. As of March 10, 1997, the litigation is in discovery, and the parties are negotiating the terms of a settlement. There is no assurance that a settlement of the arbitration will occur. The hearing is scheduled for July 1997. Some of the rental properties owned by the Local Partnerships have mortgages which are federally insured under Section 236 or Section 221(d)(3)of the National Housing Act, as amended. The LIHPRHA program, which provided property owners with restricted opportunities to sell low income housing, ended effective September 30, 1996. However, HUD received approximately $175 million to fund sales of qualifying properties under the LIHPRHA program during the federal government's fiscal year 1997, which began October 1, 1996. Continued funding of the LIHPRHA program after fiscal year 1997 is uncertain. There is no assurance that a sale of any properties that previously qualified under the LIHPRHA program will occur, except for Tanglewood II, as discussed above. The local general partners of the following properties have each filed a notice of intent to participate under the LIHPRHA program: IV-19 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Property Date of Filing -------- -------------- Rolling Green at Amherst June 5, 1992 (1) Tanglewood II May 23, 1994 (2) Chevy Chase Park July 18, 1994 Wexford Ridge July 27, 1994 Beech Hill I December 21, 1994 (1) Beech Hill II December 21, 1994 (1) Rolling Green at Fall River March 1, 1995 (1)
(1) The plan of actions for these properties were not approved by HUD, therefore, these properties are no longer eligible to participate in what remains of the LIHPRHA program. (2) Tanglewood II was sold under the LIHPRHA program on February 19, 1997. The LIHPRHA program is discussed above. As discussed above, there is no assurance that a sale or refinancing of the remaining properties will occur due to the federal government's limited funding or appropriations to the LIHPRHA program. Of the properties listed above, only Chevy Chase and Wexford Ridge are ranked on the master funding list, which is subject to future government appropriations. Some of the rental properties owned by the Local Partnerships are financed by state housing agencies. The Managing General Partner has been working to develop strategies to sell or refinance certain properties pursuant to programs developed by these agencies or other potential buyers. These programs may include opportunities to sell the property to a qualifying purchaser who would agree to maintain the property as low to moderate income housing in perpetuity, or to refinance the 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 HUD pursuant to HAP contracts. In 1995 and 1996, HUD released its Reinvention Blueprint and a revision to its Reinvention Blueprint which contained proposals that have come to be known as "Mark-to-Market". Congress, HUD and the Clinton Administration continue to struggle with the Mark-to-Market initiative. This initiative was intended to deal with HUD's increasing burden of funding HAP contracts. Under the initiative, HUD would eliminate the project-based subsidy and provide the residents with "sticky vouchers" which would allow residents to move to other developments should they so choose. However, with the elimination of the HAP contract, there is no assurance that rental properties would be able to maintain the rental income and occupancy levels necessary to pay operating costs and debt service. The initiative will IV-20 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued impact those properties that have HAP contracts with shorter terms than that of the underlying property mortgage. For instance, some properties may have a 20-year HAP contract while the underlying mortgage has a 40-year term. In the interim, Congress has authorized one-year extensions for properties with HAP contracts expiring during the government's fiscal year 1997, which began October 1, 1996. In light of recent political scrutiny of appropriations for HUD programs, continued funding of annual renewals for Section 8 HAP contracts expiring after fiscal year 1997 is uncertain. With the ending of the LIHPRHA program and with the uncertainty surrounding renewals of expiring Section 8 HAP contracts, the Managing General Partner is developing new strategies to deal with the ever changing environment of affordable housing policy. Section 236 and Section 221(d)(3) properties that are in the 18th year of their mortgage may be eligible for pre-payment of the mortgage. Properties with expiring Section 8 HAP contracts may become convertible to market-rate apartment properties. Currently, there are a few lenders that will provide financing either to prepay the existing mortgage or provide additional funds to allow the property to convert to market rate units. Where opportunities exist, the Managing General Partner will continue to work with the Local Partnerships to develop a strategy that makes economic sense for all parties involved. d. Summarized financial information -------------------------------- Summarized financial information for the Local Partnerships as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994 is included below. Certain amounts have been reclassified to conform to the 1996 presentation. IV-21 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued COMBINED BALANCE SHEETS
December 31, 1996 1995 ------------ ------------ Rental property, at cost, net of accumulated depreciation of $71,778,854 and $66,489,684, respectively $ 79,183,226 $ 83,048,981 Land 11,322,282 11,322,193 Other assets 16,059,121 15,209,498 ------------ ------------ Total assets $106,564,629 $109,580,672 ============ ============ Mortgage notes payable $ 97,672,239 $ 98,202,350 Other liabilities 29,414,000 27,564,786 Due to general partners 6,681,390 6,463,830 ------------ ------------ Total liabilities 133,767,629 132,230,966 Partners' deficit (27,203,000) (22,650,294) ------------ ------------ Total liabilities and partners' deficit $106,564,629 $109,580,672 ============ ============
COMBINED STATEMENTS OF OPERATIONS
For the years ended December 31, 1996 1995 1994 ------------ ------------ ------------ Revenue: Rental $ 29,638,904 $ 29,343,786 $ 28,130,763 Interest 550,964 474,539 1,071,492 Other 795,885 778,072 567,967 ------------ ------------ ------------ Total revenue 30,985,753 30,596,397 29,770,222 ------------ ------------ ------------ Expenses: Operating 20,622,338 20,231,119 19,663,285 Interest 8,284,244 8,458,907 8,389,307 Depreciation 5,468,433 5,435,953 5,346,581 Amortization 78,547 78,173 60,689 ------------ ------------ ------------ Total expenses 34,453,562 34,204,152 33,459,862 ------------ ------------ ------------ Net loss $ (3,467,809) $ (3,607,755) $ (3,689,640) ============ ============ ============
IV-22 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued e. Reconciliation of the Local Partnerships' financial statement net ----------------------------------------------------------------- loss to income tax loss ----------------------- For federal income tax purposes, the Local Partnerships report on a basis whereby: (1) certain revenue and the related assets are recorded when received rather than when earned; (2) certain costs are expensed when paid or incurred rather than capitalized and amortized over the period of benefit; and (3) a shorter life is used to compute depreciation of the property for tax purposes as permitted by Internal Revenue Service (IRS) Regulations. These returns are subject to audit and, therefore, possible adjustment by the IRS. A reconciliation of the Local Partnerships' financial statement net loss reflected above to the taxable loss for the years ended December 31, 1996, 1995 and 1994 is as follows: IV-23 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
For the years ended December 31, 1996 1995 1994 ------------ ------------ ------------ Financial statement net loss $ (3,467,809) $ (3,607,755) $ (3,689,640) Adjustments: Additional tax depreciation using accelerated methods, net of depreciation on construction period expenses capitalized for financial statement purposes (2,013,453) (2,301,340) (2,534,797) Amortization for tax purposes not deducted for financial statement purposes 52,851 33,122 34,805 Miscellaneous, net 2,121,566 1,061,976 876,666 ------------ ------------ ------------ Taxable loss $ (3,306,845) $ (4,813,997) $ (5,312,966) ============ ============ ============
3. RELATED-PARTY TRANSACTIONS In accordance with the Partnership Agreement, the Partnership paid the Managing General Partner a fee for services in connection with the review, selection, evaluation, negotiation and acquisition of the interests in the Local Partnerships. The fee amounted to $1,000,000 which is equal to 2% of the Additional Limited Partners' capital contributions to the Partnership. The acquisition fee was capitalized and is being amortized over a thirty-year period using the straight-line method. IV-24 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 3. RELATED-PARTY TRANSACTIONS - Continued In accordance with the terms of the Partnership Agreement, the Partnership is obligated to reimburse the Managing General Partner for its direct expenses in managing the Partnership. For the years ended December 31, 1996, 1995 and 1994, the Partnership paid $109,463, $84,613 and $87,104, respectively, as direct reimbursement of expenses incurred on behalf of the Partnership. Such expenses are included in the statements of operations as general and administrative expenses. In addition, in accordance with the terms of the Partnership Agreement, the Partnership is obligated to pay the Managing General Partner an annual incentive management fee (the Management Fee), after all other expenses of the of the Partnership are paid. The amount of the Management Fee shall not exceed .25% of invested assets, as defined in the Partnership Agreement, and shall be payable from the Partnership's cash available for distribution, as defined in the Partnership Agreement, as of the end of each calendar year, as follows: a. First, on a monthly basis as an operating expense before any distributions to limited partners in the amount computed as described in the Partnership Agreement, provided that such amount shall not be greater than $250,000 and; b. Second, after distributions to the limited partners in the amount of 1% of the gross proceeds of the offering, the balance of such .25% of invested assets. For each of the years ended December 31, 1996, 1995 and 1994, the Partnership paid the Managing General Partner a Management Fee of $249,996. 4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS All profits and losses prior to the first date on which Additional Limited Partners were admitted were allocated 98.49% to the Initial Limited Partner and 1.51% to the General Partners. Upon admission of the Special Limited Partner and the Additional Limited Partners, the interest of the Initial Limited Partner was reduced to .49%. The net proceeds resulting from the liquidation of the Partnership or the Partnership's share of the net proceeds from any sale or refinancing of the projects or their rental properties which are not reinvested shall be distributed and applied as follows: (i) to the payment of debts and liabilities of the Partnership (including all expenses of the Partnership incident to the sale or refinancing) other than loans or other debts and liabilities of the Partnership to any partner or any affiliate, such debts and liabilities, in the case of a non-liquidating distribution, to be only those which are then required to be paid or, in the judgment of the Managing General Partner, required to be provided for; (ii) to the establishment of any reserves which the Managing General Partner deems reasonably necessary for contingent, unmatured or unforeseen liabilities or obligations of the Partnership; (iii) to each partner in an amount equal to the positive balance in his capital account as of the date of the sale or refinancing, adjusted for operations and distributions to that date, but before allocation of any profits for tax purposes realized from such sale or refinancing and allocated pursuant to the Partnership Agreement; (iv) to the Additional Limited Partners (A) an aggregate amount of IV-25 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued proceeds from sale or refinancing and all prior sales or refinancings equal to their capital contributions, without reduction for prior cash distributions other than prior distributions of sale and refinancing proceeds, plus (B) an additional amount equal to a cumulative non-compounded 6% return on each limited partner's capital contribution, reduced, but not below zero, by (1) an amount equal to 50% of the losses for tax purposes plus tax credits allocated to such limited partner and (2) distributions of net cash flow to each limited partner, such return, losses for tax purposes and net cash flow distributions commencing on the first day of the month in which the capital contribution was made; (v) to the repayment of any unrepaid loans theretofore made by any partner or any affiliate to the Partnership for Partnership obligations and to the payment of any unpaid amounts owing to the General Partners pursuant to the Partnership Agreement; (vi) to the General Partners in the amount of their capital contributions; (vii) thereafter, for their services to the Partnership, in equal shares to certain general partners (or their designees), whether or not any is then a general partner, an aggregate fee of 1% of the gross proceeds resulting from (A) such sale (if the proceeds are from a sale rather than a refinancing) and (B) any prior sales from which such 1% fee was not paid to the General Partners or their designees and, (viii) the remainder, 12% to the General Partners (or their assignees), 3% to the Special Limited Partner and 85% to the Initial and Additional Limited Partners (or their assignees). Fees payable to certain general partners (or their designees) under (vii) above, together with all other property disposition fees and any other commissions or fees payable upon the sale of apartment complexes, shall not in the aggregate exceed the lesser of the competitive rate or 6% of the sales price of the apartment complexes. In addition, the Managing General Partner and/or its affiliates may receive a fee in an amount of not more than 2% of the sales price of the investment in a Local Partnership or the property it owns. The fee would only be payable upon the sale of the investment in a Local Partnership or the property it owns and would be subject to certain restrictions, including achievement of a certain level of sales proceeds and making certain minimum distributions to limited partners. No such amounts were paid to the Managing General Partner and/or its affiliates during 1996, 1995 and 1994. Pursuant to the Partnership Agreement, all cash available for distribution, as defined, shall be distributed, not less frequently than annually, 97% to the Additional Limited Partners, 1% to the Special Limited Partner, .49% to the Initial Limited Partner and 1.51% to the General Partners after payment of the Management Fee, as specified in the Partnership Agreement. As defined in the Partnership Agreement, prior to the establishment of any reserves deemed necessary by the Managing General Partner and after payment of the Management Fee, the Partnership had cash available for distribution of approximately $432,000, $368,000 and $253,000 for the years ended December 31, 1996, 1995 and 1994, respectively. No distributions were declared or paid during 1996, 1995 or 1994 because any cash available for distribution is currently being retained by the Partnership, as previously discussed. IV-26 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET LOSS TO INCOME TAX LOSS For federal income tax purposes, the Partnership reports on a basis whereby: (1) certain expenses are amortized rather than expensed when incurred; (2) certain costs are amortized over a shorter period for tax purposes, as permitted by IRS Regulations, and (3) certain costs are amortized over a longer period for tax purposes. The Partnership records its share of losses from its investments in limited partnerships for federal income tax purposes as reported on the Local Partnerships' federal income tax returns (see Note 2e), including losses in excess of related investments amounts. In addition, adjustments arising from the imputation of interest on the Partnership's purchase money notes for financial reporting purposes are eliminated for income tax purposes (see Note 2a). These returns are subject to audit and, therefore, possible adjustment by the IRS. A reconciliation of the Partnership's financial statement net loss to the taxable loss for the years ended December 31, 1996, 1995 and 1994 is as follows: IV-27 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET LOSS TO INCOME TAX LOSS - Continued
For the years ended December 31, 1996 1995 1994 ------------ ------------ ------------ Financial statement net loss $ (3,915,399) $ (5,847,928) $ (5,601,284) Adjustments: Differences between the income tax losses and financial statement losses related to the Partnership's equity in the Local Partnerships' losses (see Note 2e) (3,248,881) (4,798,458) (5,030,386) Costs amortized over a shorter period for income tax purposes (59,560) (59,561) (59,560) Effect of imputed interest on purchase money notes for financial reporting purposes (see Note 2a) 3,035,893 3,031,352 2,366,789 ------------ ------------ ------------ Taxable loss $ (4,187,947) $ (7,674,595) $ (8,324,441) ============ ============ ============
6. CONTINGENCIES In 1990, CRI, as managing general partner of the Partnership and various other entities, subcontracted certain property-level asset management functions for certain properties to Capital Management Strategies, Inc. (CMS). Among these properties were properties owned by some of the Local Partnerships in which the Partnership invested. CMS was formed by Martin C. Schwartzberg, a nominal general partner of the Partnership and a former stockholder of CRI, when he retired from CRI and its related businesses as of January 1, 1990. Mr. Schwartzberg agreed not to act as a general partner with respect to any of the CRI-sponsored partnerships, including this Partnership, and has not done so since that time. In late 1995, a dispute arose between CRI and CMS over the funding level of the 1996 contract for CMS. On November 9, 1995, CRI filed a complaint against CMS to determine the proper amount of fees to be paid in 1996 under the asset management agreement. CMS answered on January 10, 1996, but asserted no counterclaims. Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be designated as managing general partner of approximately 125 private partnerships sponsored by CRI. On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the Circuit Court of Montgomery County, Maryland (the Circuit Court), against CRI and Messrs. Dockser and Willoughby (who are general partners of the Partnership) alleging, among other things, that CRI and Messrs. Dockser and Willoughby breached the asset management agreement pursuant to which Mr. Schwartzberg's company, CMS, agreed to perform limited functions related to property-level issues for a portion of CRI's subsidized housing portfolio (including some of the properties in which the Partnership invested), by reducing the proposed budget for 1996. The Partnership was not named as a defendant in this action. Messrs. Dockser and Willoughby entered an answer denying all of Mr. Schwartzberg's claims. On February 6, 1996, CRI terminated IV-28 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 6. CONTINGENCIES - Continued the CMS contract for cause. (CRI subsequently retained an independent asset management company to perform functions previously performed by CMS.) Mr. Schwartzberg and CMS responded to the contract termination by filing a motion for injunctive relief in the Circuit Court, asking the court to enjoin CRI from terminating the contract. In a ruling issued on February 12, 1996, the Circuit Court, among other things, refused to grant the injunction requested by CMS. On February 12, 1996, the Circuit Court also issued a memorandum opinion and order enjoining CMS and Mr. Schwartzberg from disclosing information made confidential under the asset management agreement. Following subsequent litigation, none of which involved the Partnership, on June 12, 1996, Mr. Schwartzberg, CRI and others entered an agreement (which contemplates the execution of a subsequent definitive agreement) to resolve the disputes between CRI and CMS. The Partnership was not a signatory to the agreement. As part of the resolution, Mr. Schwartzberg withdrew any derogatory statements he made about CRI and its principals. Upon execution of the definitive agreement, Mr. Schwartzberg shall withdraw as a General Partner of this Partnership and his interest will become that of a Special Limited Partner. As of March 10, 1997, CRI and Mr. Schwartzberg were unable to agree on the language of various provisions of the definitive agreement and have agreed to submit the open issues to arbitration. The Partnership is not a party to the arbitration proceeding. IV-29 FINANCIAL STATEMENT SCHEDULES IV-30 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON ----------------------------------------------------- FINANCIAL STATEMENT SCHEDULE ----------------------------- Partners Capital Realty Investors-II Limited Partnership In connection with our audit of the financial statements of Capital Realty Investors-II Limited Partnership referred to in our report dated March 10, 1997, which is included in this Form 10-K, we have also audited Schedule III as of December 31, 1996, 1995 and 1994. We did not audit the financial statements for certain of the Local Partnerships in 1996, 1995 and 1994, which are accounted for as described in Note 1c. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. Grant Thornton LLP Vienna, VA March 10, 1997 IV-31 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP HAS INVESTED December 31, 1996
COL. A COL. B COL. C COL. D - -------------------- ------- ------------------------------- ------------------------------- Initial Costs Capitalized Cost to Local Subsequent Partnership to Acquisition ------------------------------- ------------------------------- Building Description Encum- and Carrying Operating Properties brances Land Improvements Improvements Costs (B) - -------------------- ------- ----------- ------------ ------------- ----------- Deer Grove Apartments (A) $ 1,691,558 $ 15,098,195 $ 1,437,162 $ -- Palatine, IL (448 units-family apartment complex) Frenchman's Wharf II (A) 2,543,310 6,099,825 483,131 -- New Orleans, LA (324 units-family apartment complex) Mercy Terrace (A) -- 12,696,941 1,578,347 -- San Francisco, CA (158 units-family apartment complex) Posada Vallarta (A) 936,579 -- 15,416,636 1,113,666 Phoenix, AZ (336 units-family apartment complex) Princeton Community (A) 572,228 10,469,952 1,465,439 -- Village Princeton, NJ (239 units-family apartment complex) Rolling Green at Fall River (A) 473,263 10,377,418 2,597,283 -- Fall River, MA (404 units-family apartment complex) Aggregate of remain- ing properties which are individually less than 5% of the total of Column E 4,837,474 61,807,672 10,492,622 95,661 ----------- ------------ ------------- ----------- Total $11,054,412 $116,550,003 $ 33,470,620 $ 1,209,327 =========== ============ ============= ===========
IV-32 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP HAS INVESTED - Continued December 31, 1996
COL. A COL. E COL. F COL. G COL. H COL. I - -------------------- ------------------------------------------- ------------ ------- ------- ---------------- Gross amount at which Life upon carried at close of period which dep- ------------------------------------------- Date reciation in Building Accumulated of latest income Description and depreciation Const- Date statement is Operating Properties Land Improvements Total (C) (D) (D) ruction Acquired computed (years) - -------------------- ----------- ------------ ------------- ------------ ------- -------- ---------------- Deer Grove Apartments $ 1,692,651 $ 16,534,264 $ 18,226,915 $(7,674,372) 1979 8/83 5-30 Palatine, IL (448 units-family apartment complex) Frenchman's Wharf II 2,543,310 6,582,956 9,126,266 (5,316,854) 1981 6/83 25 New Orleans, LA (324 units-family apartment complex) Mercy Terrace -- 14,275,288 14,275,288 (6,525,540) 1983 6/83 3-30 San Francisco, CA (158 units-family apartment complex) Posada Vallarta 908,458 16,558,423 17,466,881 (4,704,437) 1984 4/83 5-40 Phoenix, AZ (336 units-family apartment complex) Princeton Community 572,228 11,935,391 12,507,619 (5,811,964) 1971 9/83 3-40 Village Princeton, NJ (239 units-family apartment complex) Rolling Green at Fall River 473,396 12,974,568 13,447,964 (6,329,426) 1975 2/84 5-25 Fall River, MA (404 units-family apartment complex) Aggregate of remain- ing properties which are individually less than 5% of the total of Column E 5,132,239 72,101,190 77,233,429 (35,416,261) ----------- ------------ ------------ ------------ Total $11,322,282 $150,962,080 $162,284,362 $(71,778,854) =========== ============ ============ ============
IV-33 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP HAS INVESTED December 31, 1996 (A) Secured by mortgage loans. (B) Consists of capitalized construction period interest and real estate taxes during construction. (C) The aggregate cost of land for federal income tax purposes is $12,967,031 and the aggregate costs of buildings and improvements for federal income tax purposes is $162,683,582. The total of the above- mentioned items is $175,650,613. (D) Reconciliation of real estate -----------------------------
For the years ended December 31, 1996 1995 1994 ------------ ------------ ------------ Balance at beginning of period $160,860,858 $158,911,927 $157,439,291 Improvements during period 1,602,926 2,304,108 2,193,200 Deletions during period (179,422) (355,177) (720,564) ------------ ------------ ------------ Balance at end of period $162,284,362 $160,860,858 $158,911,927 ============ ============ ============
Reconciliation of accumulated depreciation ------------------------------------------
For the years ended December 31, 1996 1995 1994 ------------ ------------ ------------ Balance at beginning of period $ 66,489,684 $ 61,408,908 $ 56,782,505 Depreciation expense for the period, net of deletions 5,289,170 5,080,776 4,626,403 ------------ ------------ ------------ Balance at end of period $ 71,778,854 $ 66,489,684 $ 61,408,908 ============ ============ ============
IV-34 EXHIBIT INDEX ------------- Exhibit Method of Filing - ------- ----------------------------- 27 Financial Data Schedule Filed herewith electronically IV-35 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-K. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,128,849 0 0 0 0 0 0 0 9,740,065 0 45,566,046 0 0 0 (35,917,399) 9,740,065 0 408,367 0 0 574,888 0 5,552,780 (5,719,301) 0 (5,719,301) 0 1,803,902 0 (3,915,399) (75.96) (75.96)
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