-----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, Df66SujFkc781l8D1ox4gDbVa0cD2M1+KA4dlpxPj7HKMPwD2eDldqh2UCk3md3k 1Lv5HxEqoMSgsD4bXWgcfw== 0000705752-97-000009.txt : 19971113 0000705752-97-000009.hdr.sgml : 19971113 ACCESSION NUMBER: 0000705752-97-000009 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000750258 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 621207077 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-14483 FILM NUMBER: 97716905 BUSINESS ADDRESS: STREET 1: ONE INSIGNIA FINANCIAL PLZ STREET 2: P O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8642391513 MAIL ADDRESS: STREET 1: ONE INSIGNIA FINANCIAL PLZ STREET 2: P O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 FORMER COMPANY: FORMER CONFORMED NAME: FREEMAN DIVERSIFIED REAL ESTATE II LP DATE OF NAME CHANGE: 19910501 10QSB 1 FORM 10-QSB-QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 QUARTERLY OR TRANSITIONAL REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from.........to......... Commission file number 0-14483 DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP (Exact name of small business issuer as specified in its charter) Delaware 62-1207077 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Insignia Financial Plaza Greenville, South Carolina 29602 (Address of principal executive offices) (864) 239-1000 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No . PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS a) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEET (Unaudited) (in thousands, except unit data) September 30, 1997 Assets Cash and cash equivalents: Unrestricted $ 708 Restricted-tenant security deposits 191 Accounts receivable, net of allowance of $64 50 Escrow for taxes 550 Restricted escrows 1,233 Other assets 637 Investment properties: Land $ 2,878 Buildings and related personal property 41,539 44,417 Less accumulated depreciation (20,928) 23,489 $ 26,858 Liabilities and Partners' Deficit Liabilities Accounts payable $ 176 Tenant security deposits 191 Accrued property taxes 688 Other liabilities 237 Mortgage notes payable 26,946 Partners' Deficit General partners' $ (463) Limited partners' (1,224.25 units issued and outstanding) (917) (1,380) $ 26,858 See Accompanying Notes to Consolidated Financial Statements b) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except unit data) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Revenues: Rental income $ 2,005 $ 2,157 $ 6,194 $ 6,497 Other income 196 160 607 545 Casualty gain -- 66 -- 252 Total revenues 2,201 2,383 6,801 7,294 Expenses: Operating 802 817 2,372 2,393 General and administrative 71 76 204 236 Maintenance 336 407 860 875 Depreciation 518 495 1,515 1,448 Interest 588 627 1,846 1,870 Property taxes 187 192 540 537 Total expenses 2,502 2,614 7,337 7,359 Net loss $ (301) $ (231) $ (536) $ (65) Net loss allocated to general partners (2%) $ (6) $ (5) $ (11) $ (1) Net loss allocated to limited partners (98%) (295) (226) (525) (64) Net loss $ (301) $ (231) $ (536) $ (65) Net loss per limited partnership unit $(240.96) $(184.60) $(428.83) $ (52.28) See Accompanying Notes to Consolidated Financial Statements c) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' DEFICIT (Unaudited) (in thousands, except unit data) Limited Partnership General Limited Units Partners' Partners' Total Original capital contributions 1,224.25 $ 1 $24,485 $24,486 Partners' deficit at December 31, 1996 1,224.25 $ (450) $ (294) $ (744) Net loss for the nine months ended September 30, 1997 -- (11) (525) (536) Distributions paid -- (2) (98) (100) Partners' deficit at September 30, 1997 1,224.25 $ (463) $ (917) $(1,380) See Accompanying Notes to Consolidated Financial Statements d) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30, 1997 1996 Cash flows from operating activities: Net loss $ (536) $ (65) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 1,515 1,448 Amortization of loan costs, discounts and lease commissions 183 198 Casualty gain -- (252) Bad debt 64 -- Change in accounts: Restricted cash (9) (14) Accounts receivable (44) -- Escrow for taxes and insurance (173) (153) Other assets (56) (22) Accounts payable (32) 203 Tenant security deposit liabilities 8 10 Accrued property taxes 103 189 Other liabilities (10) (29) Net cash provided by operating activities 1,013 1,513 Cash flows from investing activities: Property improvements and replacements (638) (879) Deposits to restricted escrow (507) (353) Receipts from restricted escrow -- 44 Insurance proceeds from property damage -- 227 Net cash used in investing activities (1,145) (961) Cash flows from financing activities: Principal payments on notes payable (396) (349) Repayment of mortgage note payable (6,720) -- Proceeds from long-term borrowings 7,325 -- Loan costs paid (273) (4) Distributions to partners (100) (100) Net cash used in financing activities (164) (453) Net (decrease) increase in unrestricted cash (296) 99 and cash equivalents Unrestricted cash and cash equivalents at beginning of period 1,004 714 Unrestricted cash and cash equivalents at end of period $ 708 $ 813 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,650 $ 1,675 See Accompanying Notes to Consolidated Financial Statements e) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Davidson Diversified Real Estate II Limited Partnership (the "Partnership") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Davidson Diversified Properties, Inc. (the "Managing General Partner"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1997, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Partnership's annual report on Form 10-KSB for the fiscal year ended December 31, 1996. Certain reclassifications have been made to the 1996 information to conform to the 1997 presentation. NOTE B - TRANSACTIONS WITH AFFILIATED PARTIES The Partnership has no employees and is dependent on the Managing General Partner and its affiliates for the management and administration of all partnership activities. The Partnership Agreement provides for payments to affiliates for services and as reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The following amounts were paid or accrued to the Managing General Partner and affiliates in 1997 and 1996: Nine Months Ended September 30, 1997 1996 (in thousands) Property management fees (included in operating expenses) $330 $285 Reimbursement for services of affiliates, including approximately $31,000 and $17,000 of construction oversight reimbursements in 1997 and 1996, respectively (included in general and administrative expenses, maintenance expenses and investment properties) 172 182 During 1996, Shoppes At River Rock (formerly Outlet's Ltd. Mall) was managed by a third party. As of January 1997, an affiliate of the Managing General Partner assumed management of the day to day operations. For the period of January 1, 1996 to August 31, 1997, the Partnership insured its properties under a master policy through an agency and insurer unaffiliated with the Managing General Partner. An affiliate of the Managing General Partner acquired, in the acquisition of a business, certain financial obligations from an insurance agency which was later acquired by the agent who placed the master policy. The agent assumed the financial obligations to the affiliate of the Managing General Partner who received payments on these obligations from the agent. The amount of the Partnership's insurance premiums accruing to the benefit of the affiliate of the Managing General Partner by virtue of the agent's obligations is not significant. On September 26, 1997, an affiliate of the General Partner purchased Lehman Brothers' class "D" subordinated bonds of SASCO, 1992-M1. These bonds are secured by 55 multi-family apartment mortgage loan pairs held in Trust, including Big Walnut Apartments and Greensprings Manor Apartments owned by the Partnership. NOTE C - DISTRIBUTION TO PARTNERS In February 1997, the Partnership distributed approximately $100,000 to the partners. The limited partners received approximately $98,000 ($80.05 per limited partnership unit) and the general partners received approximately $2,000. NOTE D - MORTGAGE NOTES PAYABLE On August 6, 1997, the Partnership refinanced the mortgage note payable encumbering Lafontenay Apartments. The refinancing replaced indebtedness on Lafontenay in the amount of approximately $6,720,000 which carried an interest rate of 9.25% and had a maturity date of August 1, 1997. The new mortgage indebtedness of $7,325,000 carries a stated interest rate of 7.5% and matures on September 1, 2007. The MultiFamily Housing Revenue Bonds and Note Agreement collateralized by The Trails Apartments were called and, therefore, payable in full on February 1, 1997 in accordance with the terms of the agreements. On June 30, 1997 the Partnership entered into a Modification of Bond Documents with the issuer. Pursuant to the modification, the call notice was rescinded. The modification converted the monthly payments from interest only to principal and interest payments with an amortization period of twenty years. The note and bond mature on December 1, 2009 with a balloon payment. Pursuant to the modified terms, the Bondholder shall not exercise the call right of the Bond on a date prior to the fifth anniversary of the modification. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The Partnership's investment properties consist of four apartment complexes and one commercial property. The following table sets forth the average occupancy of the properties for each of the nine months ended September 30, 1997 and 1996: Average Occupancy 1997 1996 Big Walnut Apartments Columbus, Ohio 94% 96% Lafontenay Apartments Louisville, Kentucky 94% 94% The Trails Apartments Nashville, Tennessee 94% 93% Greensprings Manor Apartments Indianapolis, Indiana 87% 93% Shoppes At River Rock (Formerly Outlet's Ltd. Mall) Murfreesboro, Tennessee 73% 83% The Managing General Partner attributes the decrease in occupancy at Greensprings Manor Apartments to numerous evictions in the current quarter. Management is evicting tenants who are not complying with the collection policy in an effort to improve the tenant base. Occupancy at the Shoppes At River Rock has also decreased due to increased competition. The property is not located in the retail corridor which makes it difficult to position the property. The Managing General Partner is in the process of exploring different concepts such as "big box", entertainment, and specialty center in an effort to reposition the Mall in hopes of reestablishing occupancy levels. The Partnership's net loss for the three and nine month periods ended September 30, 1997, was approximately $301,000 and $536,000, respectively, compared to net losses of approximately $231,000 and $65,000, respectively, for the corresponding periods of 1996. The increase in net loss is primarily attributable to a decrease in rental income and a casualty gain of $252,000 for the nine months ended September 30, 1996. The decrease in rental income is due to decreases in occupancy at Shoppes At River Rock and Greensprings Manor, as discussed above. The Partnership recorded a net casualty gain in 1996 resulting from two fires at the Trails Apartments which destroyed four apartment units and caused minor smoke damage in one unit. The damage resulted in a net gain of approximately $252,000 as of September 30, 1996 arising from proceeds from the Partnership's insurance carrier which exceeded the basis of the property and expenses to reconstruct the four destroyed apartment units and to repair the other unit which incurred minor smoke damage. Offsetting the above increases to net loss is an increase in other income and a decrease in general and administrative expense. The increase in other income is due to increases in tenant charges at Greensprings Apartments and lease cancellation fees for Shoppes At River Rock. The decrease in general and administrative expense is attributable to a decrease in partnership administration cost reimbursements. Included in maintenance expense is approximately $118,000 of major repairs and maintenance comprised of new gas service lines, water saving devices, and window coverings for the nine months ended September 30, 1997. For the nine months ended September 30, 1996, approximately $237,000 of major repairs and maintenance is included in maintenance expense comprised of exterior building repairs, interior building improvements, and major landscaping. As part of the ongoing business plan of the Partnership, the Managing General Partner monitors the rental market environment of each of its investment properties to assess the feasibility of increasing rents, maintaining or increasing occupancy levels and protecting the Partnership from increases in expenses. As part of this plan, the Managing General Partner attempts to protect the Partnership from the burden of inflation-related increases in expenses by increasing rents and maintaining a high overall occupancy level. However, due to changing market conditions which can result in the use of rental concessions and rental reductions to offset softening market conditions, there is no guarantee that the Managing General Partner will be able to sustain such a plan. The Partnership had unrestricted cash and cash equivalents of approximately $708,000 at September 30, 1997, compared to unrestricted cash and cash equivalents of approximately $813,000 at September 30, 1996. Net cash provided by operating activities decreased primarily due to the increase in net loss as discussed above. Net cash used in investing activities increased due to the receipt in 1996 of insurance proceeds related to the casualty gain at The Trails as discussed above. Net cash used in financing activities decreased due to the refinancing of the mortgage on Lafontenay Apartments as discussed in Note D. The sufficiency of existing liquid assets to meet future liquidity and capital expenditure requirements is directly related to the level of capital expenditures required at the various properties to adequately maintain the physical assets and other operating needs of the Partnership. Such assets are currently thought to be sufficient for any near-term needs of the Partnership. The mortgage indebtedness of approximately $26,946,000, net of discount, with stated interest rates of 7.5% to 10.125%, has maturity dates ranging from January 2000 to December 2009. During the first nine months of 1996 distributions in the amount of $100,000 were paid. In February 1997, the Partnership distributed approximately $100,000 to the partners. The limited partners received approximately $98,000 ($80.05 per limited partnership unit) and the general partners received approximately $2,000. Future cash distributions will depend on the levels of net cash generated from operations, refinancings, property sales and the availability of the cash reserves. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 10 MM(a), Multifamily Note secured by a Mortgage or Deed of Trust dated August 6, 1997, between La Fontenay, L.L.C. and Patrician Financial Company Limited Partnership related to Lafontenay Apartments, is filed as an exhibit to this report. Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report. b) Reports on Form 8-K: None filed during the quarter ended September 30, 1997. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DAVIDSON DIVERSIFIED REAL ESTATE II By: Davidson Diversified Properties, Inc. Managing General Partner By: /s/ Carroll D. Vinson Carroll D. Vinson President By: /s/ Robert D. Long, Jr. Robert D. Long, Jr. Vice President/CAO Date: November 13, 1997 EX-27 2
5 This schedule contains summary financial information extracted from Davidson Diversified Real Estate II Limited Partnership 1997 Third Quarter 10-QSB and is qualified in its entirety by reference to such 10-QSB filing. 0000750258 DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP 1,000 9-MOS DEC-31-1997 SEP-30-1997 708 0 114 64 0 0 44,417 20,928 26,858 0 26,946 0 0 0 (1,380) 26,858 0 6,801 0 0 7,337 0 1,846 0 0 0 0 0 0 (536) (428.83) 0 Registrant has an unclassified balance sheet. Multiplier is 1.
EX-10.MM(A) 3 MULTIFAMILY NOTE US $7,325,000.00 Louisville, Kentucky City as of August 6, 1997 For Value Received, the undersigned promise to pay PATRICIAN FINANCIAL COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership or order, the principal sum of Seven Million Three Hundred Twenty-five Thousand and No/100ths Dollars, with interest on the unpaid principal balance from the date of this Note, until paid, at the rate of 7.5 percent per annum. The principal and interest shall be payable at 4550 Montgomery Avenue, Suite 1150, Bethesda, Maryland 20814, or such other place as the holder hereof may designate in writing, in consecutive monthly installments of Fifty-One Thousand Two Hundred Seventeen and 46/100ths Dollars (US $51,217.46) on the 1st day of each month beginning October 1, 1997 (herein "amortization commencement date"), until the entire indebtedness evidenced hereby is fully paid, except that any remaining indebtedness, if not sooner paid, shall be due and payable on September 1, 2007. If any installment under this Note is not paid when due, the entire principal amount outstanding hereunder and accrued interest thereon shall at once become due and payable, at the option of the holder hereof. The holder hereof may exercise this option to accelerate during any default by the undersigned regardless of any prior forbearance. In the event of any default in the payment of this Note, and if the same is referred to an attorney at law for collection or any action at law or in equity is brought with respect hereto, the undersigned shall pay the holder hereof all expenses and costs, including, but not limited to, attorney's fees. If any installment under this Note is not received by the holder hereof within ten (10) calendar days after the installment is due, the undersigned shall pay to the holder hereof a late charge of five (5) percent of such installment, such late charge to be immediately due and payable without demand by the holder hereof. If any installment under this Note remains past due for thirty (30) calendar days or more, the outstanding principal balance of this Note shall bear interest during the period in which the undersigned is in default at a rate of 11.5 percent per annum, or, if such increased rate of interest may not be collected from the undersigned under applicable law, then at the maximum increased rate of interest, if any, which may be collected from the undersigned under applicable law. From time to time, without affecting the obligation of the undersigned or the successors or assigns of the undersigned to pay the outstanding principal balance of this Note and observe the covenants of the undersigned contained herein, without affecting the guaranty of any person, corporation, partnership or other entity for payment of the outstanding principal balance of this Note, without giving notice to or obtaining the consent of the undersigned, the successors or assigns of the undersigned or guarantors, and without liability on the part of the holder hereof, the holder hereof may, at the option of the holder hereof, extend the time for payment of said outstanding principal balance or any part thereof, reduce the payments thereon, release anyone liable on any of said outstanding principal balance, accept a renewal of this Note, modify the terms and time of payment of said outstanding principal balance, join in any extension or subordination agreement, release any security given herefor, take or release other or additional security, and agree in writing with the undersigned to modify the rate of interest or period of amortization of this Note or change the amount of the monthly installments payable hereunder. Presentment, notice of dishonor, and protest are hereby waived by all makers, sureties, guarantors and endorsers hereof. This Note shall be the joint and several obligation of all makers, sureties, guarantors and endorsers, and shall be binding upon them and their successors and assigns. The indebtedness evidenced by this Note is secured by a Mortgage or Deed of Trust dated as of even date herewith, and reference is made thereto for rights as to acceleration of the indebtedness evidenced by this Note. This Note shall be governed by the law of the jurisdiction in which the Property subject to the Mortgage or Deed of Trust is located. The attached Addendum to Multifamily Note dated the date of this Note is incorporated into and are deemed to amend and supplement this Note. LA FONTENAY, L.L.C a South Carolina limited liability company BY: DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. a Delaware limited partnership Sole Member and Manager BY: DAVIDSON DIVERSIFIED PROPERTIES, INC., a Tennessee corporation, General Partner BY: /s/ Leigh A. Watters Leigh A. Watters Vice President ENDORSEMENT TO MULTIFAMILY NOTE dated as of August 6, 1997, given by LA FONTENAY, L.L.C. TO PATRICIAN FINANCIAL COMPANY LIMITED PARTNERSHIP in the original principal amount of $7,325,000.00 Pay to the order of BERKSHIRE MORTGAGE FINANCE LIMITED PARTNERSHIP, without recourse. PATRICIAN FINANCIAL COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership BY: BRF CORPORATION, a Massachusetts corporation, General Partner BY: /s/ Matthew Wherry Matthew Wherry Date: as of August 6, 1997 Authorized Signatory, Patrician Operations Pay to the order of ____________________________________________________, without recourse. BERKSHIRE MORTGAGE FINANCE LIMITED PATRNERSHIP, a Massachusetts limited partnership BY: BRF CORPORATION, a Massachusetts corporation, General Partner BY: /s/ Matthew Wherry Matthew Wherry Date: as of August 6, 1997 Authorized Signatory, Patrician Operations ADDENDUM TO MULTIFAMILY NOTE THIS ADDENDUM TO MULTIFAMILY NOTE (the "Addendum") is made as of this 6th day of August, 1997 and is incorporated into and shall be deemed to amend and supplement the Multifamily Note (the "Multifamily Note") made by the undersigned (the "Borrower") to PATRICIAN FINANCIAL COMPANY LIMITED PARTNERSHIP and its successors, assigns and transferees (the "Lender"), dated the same date as this Addendum (the Multifamily Note as amended and supplemented by this Addendum, any other addendum to the Multifamily Note, and any future amendments to the Multifamily Note is referred to as the "Note"). The debt evidenced by the Note is secured by a Multifamily Mortgage, Deed of Trust or Deed to Secure Debt of the same date (the "Multifamily Instrument"), covering the property described in the Multifamily Instrument and defined therein as the "Property," located at: 500 La Fontenay Court, Louisville, Kentucky 40223-3005 (Property Address) This Property is located entirely within the state of Kentucky [Insert name of state in which the property is located] (the "Property Jurisdiction"). The Multifamily Instrument is amended and supplemented by the Rider to Multifamily Instrument (the "Rider") and any other rider to Multifamily Instrument given by Borrower to Lender and dated the same date as the Multifamily Instrument. (The Multifamily Instrument as amended and supplemented by the Rider and any other rider to the Multifamily Instrument and any future amendments to the Instrument is referred to as the "Instrument".) The term "Loan Documents" when used in this Addendum shall mean, collectively, the following documents: (i) the Instrument, (ii) the Note, and (iii) all other documents or agreements, including any Collateral Agreements (as defined in the Rider) or O&M Agreement (as defined in the Rider), arising under, related to, or made in connection with, the loan evidenced by the Note, as such Loan Documents may be amended. The covenants and agreements of this Addendum, and the covenants and agreements of any other addendum to the Multifamily Note, shall be incorporated into and shall amend and supplement the covenants and agreements of the Multifamily Note as if this Addendum and other addenda were a part of the Multifamily Note, and all references to the Note in the Loan Documents shall mean the Note as so amended and supplemented. Any conflict between the provisions of the Multifamily Note and this Addendum shall be resolved in favor of this Addendum. ADDITIONAL COVENANTS. In addition to the covenants and agreements made in the Multifamily Note Borrower and Lender further covenant and agree as follows: A. PREPAYMENTS 1. YIELD MAINTENANCE PERIOD During the first 9.5 [insert applicable number of years] years of the Note term beginning with the date of the Note (the "Yield Maintenance Period") and upon giving Lender 60 days prior written notice, Borrower may prepay the entire unpaid principal balance of the Note on the last Business Day before a scheduled monthly payment date by paying, in addition to the entire unpaid principal balance, accrued interest and any other sums due Lender at the time of prepayment, a prepayment premium equal to the greater of: (a) 1% of the entire unpaid principal balance of the Note, or (b) The product obtained by multiplying (1) the entire unpaid principal balance of the Note at the time of prepayment, times (2) the difference obtained by subtracting from the interest rate on the Note the yield rate (the "Yield Rate") on the 6.625% U. S. Treasury Security due May, 2007 (the "Specified U.S. Treasury Security"), as the Yield Rate is reported in the Wall Street Journal on the fifth Business Day preceding (x) the date notice of prepayment is given to Lender where prepayment is voluntary, or (y) the date Lender accelerates the loan, times (3) the present value factor calculated using the following formula: 1 -(1 + r)-n r [r = Yield Rate n = the number of years, and any fraction thereof, remaining between the prepayment date and the expiration of the Yield Maintenance Period] In the event that no Yield Rate is published for the Specified U.S. Treasury Security, then the nearest equivalent U.S. Treasury Security shall be selected at Lender's sole discretion. If the publication of such Yield Rates in the Wall Street Journal is discontinued, Lender shall determine such Yield Rates from another source selected by Lender. Except as provided in paragraph A.3 of this Addendum, no partial prepayments are permitted. 2. AFTER YIELD MAINTENANCE PERIOD After the expiration of the Yield Maintenance Period and upon giving Lender 60 days prior written notice, Borrower may prepay the entire unpaid principal balance of the Note on the last Business Day before a scheduled monthly payment date by paying, in addition to the entire unpaid principal balance, accrued interest and any other sums due Lender at the time of prepayment, a prepayment premium equal to 1% of the entire unpaid principal balance of the Note. No prepayment premium shall be due for any full prepayment made by Borrower in accordance with the provisions of the preceding sentence within 90 days of the maturity date of the Note. Except as provided in paragraph A.3 of this Addendum, no partial prepayments are permitted. 3. PARTIAL PREPAYMENTS Borrower shall have no right to make a partial prepayment of the outstanding indebtedness during the Note term. However, in the event that Lender shall require a partial prepayment of the outstanding indebtedness after a default under the Note, the Instrument or any of the other Loan Documents, by applying funds held by Lender pursuant to any Collateral Agreement (as defined in Uniform Covenant 2B of the Instrument) against the indebtedness secured by the Instrument, or, if Lender shall for any other reason accept a partial prepayment by Borrower of the outstanding indebtedness, except as otherwise provided in paragraph A.4 of this Addendum, a prepayment premium shall be due and payable to Lender as follows: (a) After Yield Maintenance Period. If Lender shall require or accept a partial prepayment after the expiration of the Yield Maintenance Period, the partial prepayment shall be made on the last Business Day before a scheduled monthly payment date and a prepayment premium equal to 1% of the partial principal prepayment amount shall be due and payable to Lender. No prepayment premium shall be due for any partial prepayment made by Borrower in accordance with the provisions of the preceding sentence within 90 days of the maturity date of the Note. (b) During Yield Maintenance Period. If Lender shall require or accept a partial prepayment during the Yield Maintenance Period, the partial prepayment shall be made on the last Business Day before a scheduled monthly payment date and a prepayment premium shall be due and payable to Lender equal to the greater of: (i) 1% of the amount of principal being prepaid, or (ii)the product obtained by multiplying (A) the amount of the principal which is being prepaid, times (B) the difference obtained by subtracting from the interest rate on the Note the yield rate (the "Partial Prepayment Yield Rate") on the Specified U.S. Treasury Security, as the Partial Prepayment Yield Rate is reported in the Wall Street Journal on the fifth Business Day preceding (1) the day Lender accelerates the loan (in connection with any partial prepayment made in connection with an acceleration of the loan), or (2) the day Lender applies funds held under any Collateral Agreement (other than in connection with an acceleration of the loan), times (C) the present value factor calculated using the following formula: 1 - (1 + y)-n y [y = Partial Prepayment Yield Rate n = the number of years, and any fraction thereof, remaining between the prepayment date and the expiration of the Yield Maintenance Period] When the total amount to be applied toward the unpaid principal balance of the loan and the prepayment premium is known, but the amounts to be allocated toward the unpaid principal balance of the loan and the prepayment premium, respectively, are unknown, the Lender shall determine the allocation between the prepaid principal amount and the prepayment premium as follows: Given: a = total amount to be applied b = prepaid principal amount c = prepayment premium N = note rate F = present value factor = 1 - (1 + y)-n y ["y" and "n" have the same meanings as set forth in subparagraph (ii) above] Then: a = b + c b = a F (N-y) + 1 c = a - b Except as provided in the next sentence, any partial prepayment of the outstanding indebtedness shall not extend the due date of any subsequent monthly installments or change the amount of such installments, unless Lender shall otherwise agree in writing. Upon any partial prepayment, Lender shall have the option, in its sole and absolute discretion, to recast the monthly installments due under the Note so that the maturity date of the Note shall remain the same. 4. PREMIUM DUE WHETHER VOLUNTARY OR INVOLUNTARY PREPAYMENT; INSURANCE AND CONDEMNATION PROCEEDS Borrower shall pay the prepayment premium due under this paragraph A whether the prepayment is voluntary or involuntary (in connection with Lender's acceleration of the unpaid principal balance of the Note) or the Instrument is satisfied or released by foreclosure (whether by power of sale or judicial proceeding), deed in lieu of foreclosure or by any other means. Notwithstanding any other provision herein to the contrary, Borrower shall not be required to pay any prepayment premium in connection with any prepayment occurring as a result of the application of insurance proceeds or condemnation awards under the Instrument. 5. NOTICE; BUSINESS DAY Any notice to Lender provided for in this Addendum shall be given in the manner provided in the Instrument. The term "Business Day" means any day other than a Saturday, a Sunday, or any other day on which Lender is not open for business. B. BORROWER'S EXCULPATION Subject to the provisions of paragraph C and notwithstanding any other provision in the Note or Instrument, the personal liability of Borrower, any general partner of Borrower (if the Borrower is a partnership), and any "Key Principal" (collectively, the individual(s) whose name(s) is (are) set forth at the foot of this Addendum) to pay the principal of and interest on the debt evidenced by the Note and any other agreement evidencing Borrower's obligations under the Note and the Instrument shall be limited to (1) the real and personal property described as the "Property" in the Instrument, (2) the personal property described in or pledged under any Collateral Agreement (as defined in Uniform Covenant 2B of the Instrument) executed in connection with the loan evidenced by the Note, (3) the rents, profits, issues, products and income of the Property received or collected by or on behalf of Borrower (the "Rents and Profits") to the extent such receipts are necessary first, to pay the reasonable expenses of operating, managing, maintaining and repairing the Property, including but not limited to real estate taxes, utilities, assessments, insurance premiums, repairs, replacements and ground rents, if any (the "Operating Expenses") then due and payable as of the time of receipt of such Rents and Profits, and then, to pay the principal and interest due under the Note and any other sums due under the Instrument or any other Loan Document (including but not limited to deposits or reserves due under any Collateral Agreement), except to the extent that Borrower did not have the legal right, because of a bankruptcy, receivership or similar judicial proceeding, to direct the disbursement of such sums. Except as provided in Paragraph C, Lender shall not seek (a) any judgment for a deficiency against Borrower, any general partner of Borrower (if Borrower is a partnership) or any Key Principal, or Borrower's or any general partner's or Key Principal's heirs, legal representatives, successors or assigns, in any action to enforce any right or remedy under the Instrument, or (b) any judgment on the Note except as may be necessary in any action brought under the Instrument to enforce the lien against the Property or to exercise any remedies under any Collateral Agreement. C. EXCEPTIONS TO NON-RECOURSE LIABILITY If, without obtaining the Lender's prior written consent, (i) a Transfer shall occur which, pursuant to Uniform Covenant 19 of the Instrument, gives Lender the right, at its option, to declare all sums secured by the Instrument immediately due and payable, (ii) Borrower shall encumber the Property with the lien of any subordinate instrument in connection with any financing by Borrower, or, (iii) Borrower shall violate the single asset covenant of paragraph J of the Rider, any of such events shall constitute a default by Borrower under the Note, the Instrument and the other Loan Documents, and if such event shall continue for 30 days, Paragraph B shall not apply from and after the date which is 30 days after such event and the Borrower, any general partner of Borrower (if Borrower is a partnership) and Key Principal (each individually on a joint or several basis if more than one ) shall be personally liable on a joint and several basis for full recourse liability under the Note and the other Loan Documents. Notwithstanding paragraph B, Borrower, any general partner of Borrower (if Borrower is a partnership) and Key Principal (each individually on a joint and several basis if more than one) shall be personally liable on a joint and several basis, in the amount of any loss, damage or cost (including but not limited to attorneys fees) resulting from (A) fraud or intentional misrepresentation by Borrower or Borrower's agents or employees or any Key Principal or general partner of Borrower in connection with obtaining the loan evidenced by the Note, or in complying with any of Borrower's obligations under the Loan Documents, (B) insurance proceeds, condemnation awards, security deposits from tenants or other sums or payments received by or on behalf of the Borrower in its capacity as owner of the Property and not applied in accordance with the provisions of the Instrument (except to the extent that Borrower did not have the legal right because of a bankruptcy, receivership or similar judicial proceeding, to direct disbursement of such sums or payments, (C) all Rents and Profits, (except to the extent that Borrower did not have the legal right, because of a bankruptcy, receivership or similar judicial proceeding, to direct the disbursement of such sums), and not applied, first, to the payment of the reasonable Operating Expenses as such Operating Expenses become due and payable, and then, to the payment of principal and interest then due and payable under the Note and any other sums due under the Instrument and all other Loan Document (including but not limited to deposits or reserves payable under any Collateral Agreement), (D) Borrower's failure to pay transfer fees and charges due Lender under paragraph 19(c) of the Instrument, or (E) Borrower's failure following a default under any of the Loan Documents to deliver to Lender on demand all Rents and Profits, security deposits (except to the extent that Borrower did not have the legal right because of a bankruptcy, receivership or similar judicial proceeding to direct the disbursement of such sums), books and records relating to the Property. No provision of paragraphs B or C shall (i) affect any guaranty or similar agreement executed in connection with the debt evidenced by the Note, (ii) release or reduce the debt evidenced by the Note, (iii) impair the right of Lender to enforce the provisions of paragraph D of the Rider, (iv) impair the lien of the Instrument, or (v) impair the right of Lender to enforce the provisions of any Collateral Agreement. D. BUSINESS, COMMERCIAL OR INVESTMENT PURPOSE Borrower represents that the Loan evidenced by the Note is being made solely for business, commercial or investment purposes. E. GOVERNING LAW 1. CHOICE OF LAW The validity of the Note, and the other Loan Documents, each of their terms and provisions, and the rights and obligations of Borrower under the Note, and the other Loan Documents shall be governed by, interpreted, construed, and enforced pursuant to and in accordance with the laws of the Property Jurisdiction. 2. CONSENT TO JURISDICTION Borrower irrevocably consents to the exclusive jurisdiction of any and all state and federal courts with jurisdiction in the Property Jurisdiction over Borrower and Borrower's assets. Borrower agrees that such assets shall be used to first satisfy all claims of creditors organized or domiciled in the United States of America ("USA") and that no assets of the Borrower in the USA shall be considered part of any foreign bankruptcy estate. Borrower agrees that any controversy arising under or in relation to the Note, the Instrument or any of the other Loan Documents shall be litigated exclusively in the Property Jurisdiction. The state and federal courts and authorities with jurisdiction in the Property Jurisdiction shall have exclusive jurisdiction over all controversies which may arise under or in relation to the Note, including without limitation those controversies relating to the execution, interpretation, breach, enforcement, or compliance with the Note, the Instrument, or any other issue arising under, related to, or in connection with any of the Loan Documents. Borrower irrevocably consents to service, jurisdiction, and venue of such courts for any litigation arising from the Note, the Instrument or any of the other Loan Documents, and waives any other venue to which it might be entitled by virtue of domicile, habitual residence, or otherwise. F. SUCCESSORS AND ASSIGNS The provisions of the Note, the Instrument, and all other Loan Documents shall be binding on the successors and assigns, including, but not limited to, any receiver, trustee, representative or other person appointed under foreign or domestic bankruptcy, receivership, or similar proceedings of Borrower and any person having an interest in Borrower. G. NO THIRD PARTY BENEFICIARY Borrower acknowledges and agrees that (i) any loss sharing arrangement or arrangement for interim advancement of funds that originally is made by the Lender named in the Note to Federal National Mortgage Association is made pursuant to a contractual obligation of such Lender to Federal National Mortgage Association that is independent of, and separate and distinct from, the obligation of Borrower for the full and prompt payment of the indebtedness evidenced by the Note, (ii) Borrower shall not be deemed to be a third party beneficiary of such loss sharing arrangement or arrangement for interim advancement of funds, and (iii) no such loss sharing or interim advancement arrangement shall constitute any person or entity making such payment as a guarantor or surety of the Borrower's obligations, notwithstanding the fact that the obligations under any such loss sharing or interim advancement arrangement may be calculated with reference to amounts payable under the Note or other Loan Documents. BY SIGNING BELOW, Borrower accepts and agrees to the covenants and agreements contained in this Addendum. BORROWER: LA FONTENAY, L.L.C. a South Carolina limited liability company BY: DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. a Delaware limited partnership Sole Member and Manager BY: DAVIDSON DIVERSIFIED PROPERTIES, INC., a Tennessee corporation, General Partner BY: /s/ Leigh A. Watters Leigh A. Watters Vice President -----END PRIVACY-ENHANCED MESSAGE-----