-----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, FOqR5fWw4ky+2P14TPLeNJ+1fo2Xjo8P1dnHe1etVmJt7zywRkUw6sLW4nu4sNts uronbpa0B9JCc9NB4wtFag== 0000711642-01-000057.txt : 20010402 0000711642-01-000057.hdr.sgml : 20010402 ACCESSION NUMBER: 0000711642-01-000057 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-14483 FILM NUMBER: 1585291 BUSINESS ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: POST OFFICE BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8642391000 MAIL ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 FORMER COMPANY: FORMER CONFORMED NAME: FREEMAN DIVERSIFIED REAL ESTATE II LP DATE OF NAME CHANGE: 19910501 10KSB 1 0001.txt FORM 10-KSB FORM 10-KSB--ANNUAL OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) Form 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the fiscal year ended December 31, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from _________to _________ Commission file number 0-14483 DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. (Name of small business issuer in its charter) Delaware 62-1207077 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 Beattie Place, PO Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) Issuer's telephone number (864) 239-1000 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Units of Limited Partnership (Title of class) 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___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year. $7,203,000 State the aggregate market value of the voting partnership interests held by non-affiliates computed by reference to the price at which the partnership interests were sold, or the average bid and asked prices of such partnership interests as of December 31, 2000. No market exists for the limited partnership interests of the Registrant, and, therefore, no aggregate market value can be determined. DOCUMENTS INCORPORATED BY REFERENCE None PART I Item 1. Description of Business Davidson Diversified Real Estate II, L.P. (the "Partnership" or "Registrant") is a Delaware limited partnership organized in June 1984. The general partners of the Partnership are Davidson Diversified Properties, Inc., a Tennessee corporation ("Managing General Partner"); Davidson Equities, Limited, ("Associate General Partner"); and David W. Talley ("Individual General Partner") (collectively, the "General Partners"). Prior to February 25, 1998, the Managing General Partner was a wholly-owned subsidiary of MAE GP Corporation ("MAE GP"). Effective February 25, 1998, MAE GP was merged into Insignia Properties Trust ("IPT"), which was merged into Apartment Investment and Management Company ("AIMCO") effective February 26, 1999. Thus, the Managing General Partner is now a wholly-owned subsidiary of AIMCO. The Partnership Agreement provides that the Partnership is to terminate on December 31, 2008, unless terminated prior to such date. The offering of the Registrant's limited partnership units ("Units") commenced on October 16, 1984, and terminated on October 15, 1985. The Registrant received gross proceeds from the offering of $24,485,000 and net proceeds of $21,760,500. Upon termination of the offering, the Registrant had accepted subscriptions for 1,224.25 Units. All of the net proceeds of the offering were invested in the Registrant's original eight properties, of which two have been sold and two have been foreclosed. Since its initial offering, the Registrant has not received, nor are limited partners required to make, additional capital contributions. The Registrant is engaged in the business of operating and holding real estate properties for investment. In 1984 and 1985, during its acquisition phase, the Registrant acquired eight existing apartment and commercial properties. The last commercial shopping center was sold on December 30, 1999. The Registrant continues to own and operate four of these properties. See "Item 2. Description of Properties". The Registrant has no employees. Management and administrative services are provided by the Managing General Partner. With respect to the Partnership's residential properties these services were provided by affiliates of the Managing General Partner for the years ended December 31, 2000 and 1999. With respect to the Partnership's commercial property these services were provided by an unaffiliated party during 1999. The real estate business in which the Partnership is engaged is highly competitive. There are other residential properties within the market area of the Registrant's residential properties. The number and quality of competitive properties, including those which may be managed by an affiliate of the Managing General Partner in such market area could have a material effect on the rental market for the apartments at the Registrant's properties and the rents that may be charged for such apartments. While the Managing General Partner and its affiliates own and/or control a significant number of apartment units in the United States, such units represent an insignificant percentage of total apartment units in the United States and competition for the apartments is local. Both the income and expenses of operating the properties owned by the Registrant are subject to factors outside of the Registrant's control, such as changes in the supply and demand for similar properties resulting from various market conditions, increases/decreases in unemployment or population shifts, changes in the availability of permanent mortgage financing, changes in zoning laws, or changes in patterns or needs of users. In addition, there are risks inherent in owning and operating residential properties because such properties are susceptible to the impact of economic and other conditions outside of the control of the Registrant. There have been, and it is possible there may be other, Federal, state and local legislation and regulations enacted relating to the protection of the environment. The Partnership is unable to predict the extent, if any, to which such new legislation or regulations might occur and the degree to which such existing or new legislation or regulations might adversely affect the properties owned by the Partnership. The Registrant monitors its properties for evidence of pollutants, toxins and other dangerous substances, including the presence of asbestos. In certain cases environmental testing has been performed which resulted in no material adverse conditions or liabilities. In no case has the Partnership received notice that it is a potentially responsible party with respect to an environmental clean up site. A further description of the Registrant's business is included in "Management's Discussion and Analysis or Plan of Operation" included in "Item 6." of this Form 10-KSB. Transfer of Control Pursuant to a series of transactions which closed on October 1, 1998 and February 26, 1999, Insignia Financial Group, Inc. and IPT merged into AIMCO, a publicly traded real estate investment trust, with AIMCO being the surviving corporation (the "Insignia Merger"). As a result, AIMCO acquired 100% ownership interest in the Managing General Partner. The Managing General Partner does not believe that this transaction has had or will have a material effect on the affairs and operations of the Partnership. Item 2. Description of Properties The following table sets forth the Registrant's investments in properties as of December 31, 2000:
Date of Property Purchase Type of Ownership Use Big Walnut Apartments 03/28/85 Fee ownership subject to Apartment - Columbus, Ohio first and second 251 units mortgages (1) LaFontenay Apartments 10/31/84 Fee ownership subject to Apartment - (Phase I and II) first mortgage (1) 260 units Louisville, Kentucky The Trails Apartments 08/30/85 Fee ownership subject to Apartment - Nashville, Tennessee first mortgage (1) 248 units Greensprings Manor Apartments 09/30/85 Fee ownership subject to Apartment - Indianapolis, Indiana first and second 582 units mortgages (1) (2)
(1) The property is held by a Limited Partnership in which the Registrant owns a 99.90% interest. (2) Effective January 16, 2001, fee ownership subject to first mortgage only due to the refinance of the debt. Schedule of Properties Set forth below for each of the Registrant's properties is the gross carrying value, accumulated depreciation, depreciable life, method of depreciation and Federal tax basis.
Gross Carrying Accumulated Federal Property Value Depreciation Rate Method Tax Basis (in thousands) (in thousands) Big Walnut Apartments $ 9,591 $ 5,294 5-25 yrs S/L $ 2,704 LaFontaney I & II Apartments 10,035 5,577 5-25 yrs S/L 2,948 The Trails Apartments 9,430 4,913 5-25 yrs S/L 2,824 Greensprings Manor Apartments 12,867 7,555 5-25 yrs S/L 3,869 $41,923 $23,339 $12,345
See "Note A" to the consolidated financial statements included in "Item 7 - Financial Statements" for a description of the Registrant's depreciation policy. Schedule of Property Indebtedness The following table sets forth certain information relating to the loans encumbering the Registrant's properties.
Principal Principal Balance At Stated Balance December 31, Interest Period Maturity Due At Property 2000 Rate Amortized Date Maturity (2) (in thousands) (in thousands) Big Walnut Apartments 1st mortgage $ 4,277 7.60% 257 months 11/15/02 $ 3,912 2nd mortgage 167 7.60% None 11/15/02 167 LaFontenay I & II Apartments 1st mortgage 7,085 7.50% 360 months 09/01/07 6,369 The Trails Apartments 1st mortgage 5,383 (1) 240 months 12/01/09 3,015 Greensprings Manor Apartments 1st mortgage (3) 7,518 7.60% 257 months 11/15/02 6,875 2nd mortgage (3) 294 7.60% None 11/15/02 294 Totals 24,724 $20,632 Less unamortized Discounts (1,218) Total $23,506
(1) Adjustable rate based on 75% of the interest rate on new-issue long-term A-rate utility bonds as determined on the first day of each calendar quarter. The rate at December 31, 2000 was 6.0225%. (2) See "Item 7. Financial Statements - Note D" for information with respect to the Registrant's ability to repay these loans and other specific details about the loans. (3) On January 16, 2001, the mortgages encumbering Greensprings Manor were refinanced. The maximum new loan amount is $13,600,000. Effective January 16, 2001, the lender made an initial advance of $5,040,000. Prior to the initial advance, the Managing General Partner loaned the Partnership approximately $3,673,000 in order for the Partnership to close the refinancing of the property. This amount will be repaid with a subsequent advance from the lender. Subsequent advances of up to $8,560,000 will also be made to cover renovation work that is needed at the property. The new loan matures in January 2004, with 2 one-year extension options. Interest payments start in February 2001 based on LIBOR plus 280 basis points. In addition, monthly cash flow payments will be made to the lender until the anticipated completion date of the renovations, which is September 2002. If any amount remains from these advances on the completion date of the renovation, it will be applied to the principal balance. Principal payments will begin in February 2003, and monthly deposits into a replacement reserve will be required. In connection with the refinancing, the assets and liabilities of the property were transferred from one subsidiary, Big Walnut L.P., to a newly formed subsidiary, AIMCO Greensprings L.P. The partners of AIMCO Greensprings L.P. are the Partnership, with 99.9% interest, and Davidson Diversified Properties, Inc., with 0.1% ownership. The loan is collateralized by the property as well as the interest of both the Partnership and Davidson Diversified Properties, Inc. in AIMCO Greensprings L.P. Rental Rates and Occupancy Average annual rental rates and occupancy for 2000 and 1999 for each property: Average Annual Average Rental Rates Occupancy (per unit) Property 2000 1999 2000 1999 Big Walnut Apartments $7,006 $6,772 91% 92% Lafontenay I & II Apartments 7,749 7,494 93% 94% The Trails Apartments 7,477 7,310 95% 94% Greensprings Manor Apartments (1) 5,478 5,279 50% 89% (1) The Managing General Partner attributes the decrease in occupancy at Greensprings Manor Apartments to construction at the property. The property is currently undergoing a major renovation project to enhance the appearance of the property to attract additional tenants. At December 31, 2000, 43.47% of the units cannot be rented due to the construction. As noted under "Item 1. Description of Business", the real estate industry is highly competitive. All of the properties are subject to competition from other residential apartment complexes in the area. The Managing General Partner believes that all of the properties are adequately insured. Each property is an apartment complex which leases units for terms of one year or less. As of December 31, 2000, no residential tenant leases 10% or more of the available rental space. All of the properties are in good condition subject to normal depreciation and deterioration as is typical for assets of this type and age. Schedule of Real Estate Taxes and Rates Real estate taxes and rates in 2000 for each property were: 2000 2000 Billing Rate (in thousands) Big Walnut Apartments $ 134 6.12% LaFontenay I & II Apartments 89 1.06% The Trails Apartments 106 3.39% Greensprings Manor Apartments 229 8.14% Capital Improvements Big Walnut Apartments: The Partnership completed approximately $898,000 in capital expenditures at Big Walnut Apartments as of December 31, 2000, consisting primarily of roof replacement and appliance and floor covering replacement, swimming pool improvements, plumbing enhancements, and other property enhancements. These improvements were funded primarily from operating cash flow. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $275 per unit or $69,025. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. LaFontenay I & II Apartments: The Partnership completed approximately $206,000 in capital expenditures at LaFontenay I & II Apartments as of December 31, 2000, consisting primarily of appliance and floor covering replacements, HVAC, plumbing fixtures, and structural building improvements. These improvements were funded primarily from property reserves and operating cash flow. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $275 per unit or $71,500. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. The Trails: The Partnership completed approximately $212,000 in capital expenditures at The Trails Apartments as of December 31, 2000, consisting primarily of appliance and floor covering replacements, HVAC, pool and structural building improvements, and major landscaping. These improvements were funded primarily from operating cash flow. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $275 per unit or $68,200. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Greensprings Manor: The Partnership completed approximately $333,000 in capital expenditures at Greensprings Manor Apartments as of December 31, 2000, consisting primarily of appliance and floor covering replacements, HVAC and building enhancements. These improvements were funded primarily from operating cash flow. Subsequent to December 31, 2000, the Managing General Partner acquired refinancing of the mortgage encumbering this property. The proceeds will be used to fund the rehabilitation project that is planned for this property. This project is expected to cost approximately $7,645,000 with anticipated completion in September 2002. Item 3. Legal Proceedings In March 1998, several putative unit holders of limited partnership units of the Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia Financial Group, Inc., et al. in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, its Managing General Partner and several of their affiliated partnerships and corporate entities. The action purports to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) which are named as nominal defendants, challenging, among other things, the acquisition of interests in certain general partner entities by Insignia Financial Group, Inc. ("Insignia") and entities which were, at one time, affiliates of Insignia; past tender offers by the Insignia affiliates to acquire limited partnership units; management of the partnerships by the Insignia affiliates; and the Insignia Merger. The plaintiffs seek monetary damages and equitable relief, including judicial dissolution of the Partnership. On June 25, 1998, the Managing General Partner filed a motion seeking dismissal of the action. In lieu of responding to the motion, the plaintiffs filed an amended complaint. The Managing General Partner filed demurrers to the amended complaint which were heard February 1999. Pending the ruling on such demurrers, settlement negotiations commenced. On November 2, 1999, the parties executed and filed a Stipulation of Settlement, settling claims, subject to court approval, on behalf of the Partnership and all limited partners who owned units as of November 3, 1999. Preliminary approval of the settlement was obtained on November 3, 1999 from the Court, at which time the Court set a final approval hearing for December 10, 1999. Prior to the December 10, 1999 hearing, the Court received various objections to the settlement, including a challenge to the Court's preliminary approval based upon the alleged lack of authority of prior lead counsel to enter the settlement. On December 14, 1999, the Managing General Partner and its affiliates terminated the proposed settlement. In February 2000, counsel for some of the named plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who negotiated the settlement. On June 27, 2000, the Court entered an order disqualifying them from the case and an appeal was taken from the order on October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the putative class. Plaintiffs filed a third amended complaint on January 19, 2001. On March 2, 2001, the Managing General Partner and its affiliates filed a demurrer to the third amended complaint. The Managing General Partner does not anticipate that costs associated with this case will be material to the Partnership's overall operations. The Partnership is unaware of any other pending or outstanding litigation that is not of a routine nature arising in the ordinary course of business. Item 4. Submission of Matters to a Vote of Security Holders During the quarter ended December 31, 2000, no matters were submitted to a vote of Unit holders through the solicitation of proxies or otherwise. PART II Item 5. Market for the Partnership Equity and Related Partner Matters The Partnership, a publicly-held limited partnership, offered and sold 1,224.25 limited partnership units aggregating $24,485,000. As of December 31, 2000 there were 884 holders of record owning an aggregate of 1,224.25 Units. Affiliates of the Managing General Partner owned 588.50 units or 48.07% at December 31, 2000. There is no established market for the Units and it is not anticipated that any will develop in the future. No distributions were made to the partners during 2000 and 1999. Future cash distributions will depend on the levels of net cash generated from operations, the availability of cash reserves and timing of debt maturities, refinancings and/or property sales. The Registrant's distribution policy is reviewed on a quarterly basis. There can be no assurance, however, that the Partnership will generate sufficient funds from operations after required capital expenditures to permit distributions to its partners in 2001 or subsequent periods. See "Item 2. Description of Properties - Capital Improvements" for information relating to anticipated capital expenditures at the properties. In addition, the Partnership may be restricted from making distributions by the requirement to deposit net operating income (as defined in the mortgage note) into the reserve account until the reserve account is funded in an amount equal to a minimum of $400 and a maximum of $1,000 per apartment unit for Big Walnut Apartments for a total of approximately $100,000 to $251,000. As of December 31, 2000, the account balance was approximately $175,000 for Big Walnut Apartments. During the year ended December 31, 2000 the Partnership was restricted from making distributions by the requirement to deposit net operating income (as defined in the mortgage note) into the reserve account until the reserve account is funded in an amount equal to a minimum of $400 and a maximum of $1,000 per apartment unit for Greensprings Manor Apartments for a total of approximately $233,000 to $582,000. As of December 31, 2000, the account balance was approximately $235,000 for Greensprings Manor Apartments. Subsequent to December 31, 2000, Greensprings Manor Apartments was refinanced. With the refinancing of the mortgage encumbering Greensprings Manor Apartments, this reserve is no longer a requirement. The prior lender released the reserve account balance in February 2001. In addition to its indirect ownership of the general partner interest in the Partnership, AIMCO and its affiliates owned 588.50 limited partnership units in the Partnership representing 48.07% of the outstanding units at December 31, 2000. A number of these units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional limited partnership interests in the Partnership for cash or in exchange for units in the operating partnership of AIMCO either through private purchases or tender offers. In this regard, on February 9, 2001, AIMCO Properties, L.P., commenced a tender offer to acquire all of the Units not owned by affiliates of AIMCO for a purchase price of $4,228 per Unit. Pursuant to this offer, AIMCO acquired an additional 11.5 units resulting in its total ownership being increased to 600 units or 49.01% of the total outstanding units. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters, which would include without limitation, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 49.01% of the outstanding units, AIMCO is in a position to significantly influence all voting decisions with respect to the Registrant. When voting on matters, AIMCO would in all likelihood vote the Units it acquired in a manner favorable to the interest of the Managing General Partner because of their affiliation with the Managing General Partner. Item 6. Management's Discussion and Analysis or Plan of Operation The matters discussed in this Form 10-KSB contain certain forward-looking statements and involve risks and uncertainties (including changing market conditions, competitive and regulatory matters, etc.) detailed in the disclosures contained in this Form 10-KSB and the other filings with the Securities and Exchange Commission made by the Registrant from time to time. The discussion of the Registrant's business and results of operations, including forward-looking statements pertaining to such matters, does not take into account the effects of any changes to the Registrant's business and results of operations. Accordingly, actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. This item should be read in conjunction with the consolidated financial statements and other items contained elsewhere in this report. Results of Operations The Registrant's net loss was approximately $1,183,000 and $2,366,000 for the years ended December 31, 2000 and 1999, respectively. (See "Note E" of the financial statements for a reconciliation of these amounts to the Partnership's federal taxable loss.) The decrease in the net loss was partially due to the loss from discontinued operations and a loss on the sale of discontinued operations recognized during the year ended December 31, 1999. Shoppes at River Rock was the only commercial property owned by the Partnership and represented one segment of the Partnership's operations. Due to the sale of this property on December 30, 1999, the results of the commercial segment have been shown as loss from discontinued operations for the year ended December 31, 1999. The Registrant had a loss from continuing operations of approximately $1,183,000 for the year ended December 31, 2000 as compared to a loss of approximately $589,000 for the year ended December 31, 1999. The increase in the loss from continuing operations for the year ended December 31, 2000 is the result of a decrease in total revenues partially offset by a decrease in total expenses at the Registrant's residential properties. The decrease in total revenues is attributable to the decrease in rental revenues at the Registrant's residential properties. Rental revenues decreased primarily due to a decrease in occupancy at Greensprings Manor Apartments as noted in "Item 2. Description of Properties". Other income remained relatively stable. The increase in interest income was offset by a decrease in late charges, pet fees, and lease cancellation fees, primarily at Greensprings Manor. The decrease in total expenses is primarily the result of a reduction in operating expense, property tax expense, and interest expense, which was partially offset by an increase in depreciation expense and general and administrative expense. Operating expenses decreased primarily due to the renovation project to enhance the appearance of Greensprings Manor Apartments. During the construction, 43.47% of the units cannot be rented causing a decrease in advertising, property, and maintenance expense. This decrease at Greensprings Manor Apartments was partially offset by small increases at the Registrant's other properties. Property tax expense decreased primarily due to a decrease in the assessed value of Greensprings Manor Apartments and a tax refund received at LaFontenay I & II Apartments. Big Walnut Apartments' and The Trails Apartments' property taxes remained stable. Interest expense decreased primarily due to a portion of the interest on the debt encumbering Greensprings Manor Apartments being capitalized. This is the result of the extensive rehabilitation that occurred during 2000 and will continue into 2001 which has affected the property's ability to rent 43.47% of the total apartment units of the property. General and administrative expenses increased primarily due to an increase in the cost of services included in the management reimbursements to the Managing General Partner as allowed under the Partnership Agreement. Also included in general and administrative expenses were costs associated with the quarterly and annual communications with investors and regulatory agencies and the annual audit required by the Partnership Agreement. Depreciation expense increased due to capital improvements placed into service during the year ended December 31, 2000. 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. Liquidity and Capital Resources At December 31, 2000 the Partnership had cash and cash equivalents of approximately $1,130,000 compared to approximately $1,398,000 at December 31, 1999. The decrease in cash and cash equivalents of approximately $268,000 is primarily due to $1,657,000 of cash used in investing activities partially offset by approximately $1,183,000 of cash provided by operating activities and approximately $206,000 of cash provided by financing activities. Cash used in investing activities consisted of property improvements and replacements partially offset by net withdrawals from restricted escrows. Cash provided by financing activities consisted of advances from the Managing General Partner partially offset by loan costs paid and payments of principal made on the mortgages encumbering the Partnership's properties. The Partnership invests its working capital reserve in interest bearing accounts. 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 investment properties to adequately maintain the physical assets and other operating needs of the Registrant and to comply with Federal, state, and local legal and regulatory requirements. The Partnership is currently evaluating the capital improvement needs of the properties for the upcoming year. The minimum amount to be budgeted is expected to be $275 per unit or $208,725 at Big Walnut Apartments, LaFontenay I and II Apartments and The Trails Apartments. Subsequent to December 31, 2000, the Managing General Partner acquired refinancing of the mortgage encumbering Greensprings Manor Apartments. The proceeds will be used to fund the rehabilitation project that is planned for this property. This project is expected to cost approximately $7,645,000 with anticipated completion in September 2002. Additional improvements may be considered and will depend on the physical condition of the properties as well as replacement reserves and anticipated cash flow generated by the properties. The additional capital expenditures will be incurred only if cash is available from operations and Partnership reserves. To the extent that such budgeted capital improvements are completed, the Registrant's distributable cash flow, if any, may be adversely affected at least in the short term. The Registrant's current assets are thought to be sufficient for any near-term needs (exclusive of capital improvements) of the Registrant. The mortgage indebtedness of approximately $23,506,000, net of discount, is amortized over varying periods with required balloon payments ranging from November 15, 2002 to December 1, 2009. The Managing General Partner will attempt to refinance such indebtedness and/or sell the properties prior to such maturity dates. If a property cannot be refinanced or sold for a sufficient amount, the Registrant will risk losing such property through foreclosure. On January 16, 2001, the mortgages encumbering Greensprings Manor were refinanced. The maximum new loan amount is $13,600,000. Effective January 16, 2001, the lender made an initial advance of $5,040,000. Prior to the initial advance, the Managing General Partner loaned the Partnership approximately $3,673,000 in order for the Partnership to close the refinancing of the property. This amount will be repaid with a subsequent advance from the lender. Subsequent advances of up to $8,560,000 will also be made to cover renovation work that is needed at the property. The new loan matures in January 2004, with 2 one-year extension options. Interest payments start in February 2001 based on LIBOR plus 280 basis points. In addition, monthly cash flow payments will be made to the lender until the anticipated completion date of the renovations, which is September 2002. If any amount remains from these advances on the completion date of the renovation, it will be applied to the principal balance. Principal payments will begin in February 2003, and monthly deposits into a replacement reserve will be required. In connection with the refinancing, the assets and liabilities of the property were transferred from one subsidiary, Big Walnut L.P., to a newly formed subsidiary, AIMCO Greensprings L.P. The partners of AIMCO Greensprings L.P. are the Partnership, with 99.9% interest, and Davidson Diversified Properties, Inc., with 0.1% ownership. The loan is collateralized by the property as well as the interest of both the Partnership and Davidson Diversified Properties, Inc. in AIMCO Greensprings L.P. No distributions were made to the partners during 2000 and 1999. Future cash distributions will depend on the levels of net cash generated from operations, the availability of cash reserves and timing of debt maturities, refinancings and/or property sales. The Registrant's distribution policy is reviewed on a quarterly basis. There can be no assurance, however, that the Partnership will generate sufficient funds from operations after required capital expenditures to permit distributions to its partners in 2001 or subsequent periods. See "Item 2. Description of Properties - Capital Improvements" for information relating to anticipated capital expenditures at the properties. In addition, the Partnership may be restricted from making distributions by the requirement to deposit net operating income (as defined in the mortgage note) into the reserve account until the reserve account is funded in an amount equal to a minimum of $400 and a maximum of $1,000 per apartment unit for Big Walnut Apartments for a total of approximately $100,000 to $251,000. As of December 31, 2000, the account balance was approximately $175,000 for Big Walnut Apartments. During the year ended December 31, 2000 the Partnership was restricted from making distributions by the requirement to deposit net operating income (as defined in the mortgage note) into the reserve account until the reserve account is funded in an amount equal to a minimum of $400 and a maximum of $1,000 per apartment unit for Greensprings Manor Apartments for a total of approximately $233,000 to $582,000. As of December 31, 2000, the account balance was approximately $235,000 for Greensprings Manor Apartments. Subsequent to December 31, 2000, Greensprings Manor Apartments was refinanced. With the refinancing of the mortgage encumbering Greensprings Manor Apartments, this reserve is no longer a requirement. The prior lender released the reserve account balance in February 2001. In addition to its indirect ownership of the general partner interest in the Partnership, AIMCO and its affiliates owned 588.50 limited partnership units in the Partnership representing 48.07% of the outstanding units at December 31, 2000. A number of these units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional limited partnership interests in the Partnership for cash or in exchange for units in the operating partnership of AIMCO either through private purchases or tender offers. In this regard, on February 9, 2001, AIMCO Properties, L.P., commenced a tender offer to acquire all of the Units not owned by affiliates of AIMCO for a purchase price of $4,228 per Unit. Pursuant to this offer, AIMCO acquired an additional 11.5 units resulting in its total ownership being increased to 600 units or 49.01% of the total outstanding units. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters, which would include without limitation, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 49.01% of the outstanding units, AIMCO is in a position to significantly influence all voting decisions with respect to the Registrant. When voting on matters, AIMCO would in all likelihood vote the Units it acquired in a manner favorable to the interest of the Managing General Partner because of their affiliation with the Managing General Partner. Item 7. Financial Statements DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. LIST OF FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors Consolidated Balance Sheet - December 31, 2000 Consolidated Statements of Operations - Years ended December 31, 2000 and 1999 Consolidated Statements of Changes in Partners' Deficit - Years ended December 31, 2000 and 1999 Consolidated Statements of Cash Flows - Years ended December 31, 2000 and 1999 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors The Partners Davidson Diversified Real Estate II, L.P. We have audited the accompanying consolidated balance sheet of Davidson Diversified Real Estate II, L.P. as of December 31, 2000, and the related consolidated statements of operations, changes in partners' deficit, and cash flows for each of the two years in the period ended December 31, 2000. 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit 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 the Partnership's 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Davidson Diversified Real Estate II, L.P. at December 31, 2000, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ERNST & YOUNG LLP Greenville, South Carolina March 15, 2001 DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. CONSOLIDATED BALANCE SHEET (in thousands, except unit data) December 31, 2000
Assets Cash and cash equivalents $ 1,130 Receivables and deposits 186 Restricted escrows 429 Other assets 396 Investment properties (Notes D & G): Land $ 2,603 Buildings and related personal property 39,320 41,923 Less accumulated depreciation (23,339) 18,584 $ 20,725 Liabilities and Partners' Deficit Liabilities Accounts payable 365 Tenant security deposit payable 142 Accrued property taxes 488 Other liabilities 664 Due to Managing General Partner (Note F) 1,555 Mortgage notes payable (Note D) 23,506 Partners' Deficit General partners $ (555) Limited partners (1,224.25 units issued and outstanding) (5,440) (5,995) $ 20,725
See Accompanying Notes to Consolidated Financial Statements DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except unit data)
Years Ended December 31, 2000 1999 Revenues: Rental income $ 6,673 $ 7,552 Other income 530 527 Total revenues 7,203 8,079 Expenses: Operating 3,764 3,878 General and administrative 359 323 Depreciation 1,913 1,795 Interest 2,031 2,050 Property taxes 319 622 Total expenses 8,386 8,668 Loss from continuing operations (1,183) (589) Loss from discontinued operation (Note C) -- (943) Loss on sale of discontinued operation (Note C) -- (834) Net loss (Note E) $ (1,183) $ (2,366) Net loss allocated to general partners (2%) $ (24) $ (47) Net loss allocated to limited partners (98%) (1,159) (2,319) $ (1,183) $ (2,366) Per limited partnership unit: Loss from continuing operations $(946.70) $ (471.31) Loss from discontinued operation -- (755.30) Loss on sale of discontinued operation -- (667.61) Net loss $(946.70) $(1,894.22)
See Accompanying Notes to Consolidated Financial Statements DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT (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, 1998 1,224.25 $ (484) $(1,962) $(2,446) Net loss for the year ended December 31, 1999 -- (47) (2,319) (2,366) Partners' deficit at December 31, 1999 1,224.25 (531) (4,281) (4,812) Net loss for the year ended December 31, 2000 -- (24) (1,159) (1,183) Partners' deficit at December 31, 2000 1,224.25 $ (555) $(5,440) $(5,995)
See Accompanying Notes to Consolidated Financial Statements DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, 2000 1999 Cash flows from operating activities: Net loss $(1,183) $(2,366) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 1,913 2,133 Amortization of discounts and loan costs 236 239 Impairment loss on property - discontinued operations -- 660 Loss on sale of discontinued operations -- 834 Change in accounts: Receivables and deposits 394 234 Other assets (9) (23) Accounts payable (29) 160 Tenant security deposit liabilities (25) (21) Accrued property taxes (111) (98) Other liabilities (3) 169 Net cash provided by operating activities 1,183 1,921 Cash flows from investing activities: Net proceeds from sale of investment property -- 1,497 Property improvements and replacements (1,740) (1,305) Net withdrawals from restricted escrows 83 100 Net cash (used in) provided by investing activities (1,657) 292 Cash flows from financing activities: Advances from Managing General Partner 1,053 502 Payments on mortgage notes payable (757) (797) Loan costs paid (90) -- Repayment of mortgage note payable -- (1,491) Net cash provided by (used in) financing activities 206 (1,786) Net (decrease) increase in cash and cash equivalents (268) 427 Cash and cash equivalents at beginning of the year 1,398 971 Cash and cash equivalents at end of the year $ 1,130 $ 1,398 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,803 $ 2,004 Supplemental disclosure of noncash activity: Property improvements and replacements in accounts payable $ -- $ 91
See Accompanying Notes to Consolidated Financial Statements DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note A - Organization and Significant Accounting Policies Organization Davidson Diversified Real Estate II, L.P. (the "Partnership" or "Registrant") is a Delaware limited partnership organized in June 1984 to acquire and operate residential and commercial real estate properties. The Partnership's managing general partner is Davidson Diversified Properties, Inc (the "Managing General Partner"). Prior to February 25, 1998, the Managing General Partner was a wholly-owned subsidiary of MAE GP Corporation ("MAE GP"). Effective February 25, 1998, MAE GP merged into Insignia Properties Trust ("IPT"), which was merged into Apartment Investment and Management Company ("AIMCO") effective February 26, 1999. Thus the Managing General Partner is now a wholly-owned subsidiary of AIMCO. See "Note B - Transfer of Control". The directors and officers of the Managing General Partner also serve as executive officers of AIMCO. The Partnership commenced operations on October 16, 1984, and completed its acquisition of investment properties prior to December 31, 1985. The Partnership Agreement provides that the Partnership is to terminate on December 31, 2008 unless terminated prior to such date. The Partnership's last commercial property, Shoppes at River Rock, was sold on December 30, 1999. As of December 31, 2000, the Partnership operates four apartment properties located in or near major urban areas in the United States. Principles of Consolidation The financial statements include all the accounts of the Partnership and its three 99.9% owned partnerships. The managing general partner of the consolidated partnerships is Davidson Diversified Properties, Inc. Davidson Diversified Properties, Inc. may be removed as the general partner of the consolidated partnership by the Registrant; therefore, the consolidated partnerships are controlled and consolidated by the Registrant. All significant interpartnership balances have been eliminated. Allocations of Profits, Gains & Losses Net income, other than that arising from the occurrence of a sale or refinancing, and net loss shall be allocated 2% to the general partners and 98% to the limited partners. Allocation of Cash Distributions Cash distributions by the Partnership are allocated between general and limited partners in accordance with the Partnership Agreement. The Partnership Agreement provides that 98% of distributions of adjusted cash from operations are allocated to the limited partners and 2% to the general partners. Cash from operations is defined as the excess of cash received from operations less operating expenses paid, adjusted for certain specified items which primarily include mortgage payments on debt, property improvements and replacements not previously reserved, and the effects of other adjustments to reserves including reserve amounts deemed necessary by the Managing General Partner. Distributions made from reserves no longer considered necessary by the general partners are considered to be additional adjusted cash from operations for allocation purposes. No cash distributions to the partners were made during the years ended December 31, 2000 and 1999. Cash from sales or refinancings (as defined in the Partnership Agreement) shall be distributed to the limited partners until each limited partner has received his original invested capital plus an amount equal to a cumulative 8% per annum of the average of the limited partners' adjusted invested capital, less any prior distributions. The general partners are then entitled to receive 3% of the selling price of properties sold where they acted as a broker. The limited partners will then be allocated 85% of any remaining distributions and the general partners will receive 15%. Distributions may be restricted by the requirement to deposit net operating income (as defined in the mortgage note) from Greensprings Manor Apartments and Big Walnut Apartments into the Reserve Account until the Reserve Account is funded in an amount equal to a minimum of $400 per apartment up to a maximum of $1,000 per apartment ($333,000 to $833,000). As of December 31, 2000, the Partnership has deposits of approximately $410,000 in its Reserve Accounts. Restricted Escrows Reserve Account - A general Reserve Account of $203,000 was established with the refinancing proceeds for Big Walnut Apartments and Greensprings Manor Apartments. These funds were established to cover necessary repairs and replacements of existing improvements, debt service, out-of-pocket expenses incurred for ordinary and necessary administrative tasks, and payment of real property taxes and insurance premiums. The Partnership is required to deposit net operating income (as defined in the mortgage note) from each refinanced property to the respective reserve account until the reserve accounts equal to a minimum of $400 per apartment up to a maximum of $1,000 per apartment ($333,000 to $833,000). At December 31, 2000, the account balances were approximately $175,000 for Big Walnut Apartments and approximately $235,000 for Greensprings Manor Apartments. With the refinancing of the mortgage encumbering Greensprings Manor Apartments, this reserve is no longer a requirement. The prior lender released the reserve account balance in February 2001. Replacement Reserve - LaFontenay Apartments has a replacement reserve as required by its lender of approximately $19,000 at December 31, 2000, for capital improvements. Investment Properties Investment properties consist of four apartment complexes and are stated at cost. Acquisition fees are capitalized as a cost of real estate. The Partnership capitalized interest cost of approximately $129,000 during the year ended December 31, 2000 with respect to the renovation project that is currently in process at Greensprings Manor Apartments. Total interest expense incurred before recognition of the capitalized amount was approximately $2,145,000 for the year ended December 31, 2000. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Partnership records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Costs of apartment properties that have been permanently impaired have been written down to appraised value. No adjustments for impairment of value were recorded in the years ended December 31, 2000 and 1999 for the Partnership's residential properties. During 1999, the Partnership determined that the Shoppes at River Rock, a commercial property, located in Murfreesboro, Tennessee with a carrying value of $2,988,000 was impaired and its value was written down by approximately $660,000 to reflect its fair value at September 30, 1999 of approximately $2,328,000. The fair value was based upon current economic conditions and projected future operational cash flows. This property was sold on December 30, 1999 (see "Note C"). Depreciation Depreciation is provided by the straight-line method over the estimated lives of the apartment properties and related personal property. For Federal income tax purposes, the accelerated cost recovery method is used (1) for real property over 15 years for additions prior to March 16, 1984; 18 years for additions after March 15, 1984, and before May 9, 1985, and 19 years for additions after May 8, 1985, and before January 1, 1987, and (2) for personal property over 5 years for additions prior to January 1, 1987. As a result of the Tax Reform Act of 1986, for additions after December 31, 1986, the modified accelerated cost recovery method is used for depreciation of (1) real property additions over 27 1/2 years, and (2) personal property additions over 5 years. Loan Costs Loan costs of approximately $704,000 less accumulated amortization of approximately $400,000 are included in other assets and are being amortized on a straight-line basis over the life of the respective loans. Cash and Cash Equivalents Includes cash on hand, in banks, and money market accounts. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Cash balances include approximately $777,000 at December 31, 2000 that are maintained by the affiliated management company on behalf of affiliated entities in cash concentration accounts. Tenant Security Deposits The Partnership requires security deposits from lessees for the duration of the lease and such deposits are included in receivables and deposits. The security deposits are refunded when the tenant vacates, provided the tenant has not damaged its space and is current on rental payments. Leases The Partnership generally leases apartment units for twelve-month terms or less. The Partnership recognizes income as earned on its leases. In addition, the Managing General Partner's policy is to offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Concessions are charged against rental income as incurred. Advertising Costs Advertising costs of approximately $130,000 and $173,000 for the years ended December 31, 2000 and 1999, respectively, are charged to operating expense as incurred. Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", as amended by SFAS No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value is defined in the SFAS as the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Partnership believes that the carrying amount of its financial instruments (except for long term debt) approximates their fair value due to the short term maturity of these instruments. The fair value of the Partnership's long term debt, after discounting the scheduled loan payments to maturity, approximates its carrying balance. Segment Reporting SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. See "Note H" for required disclosures. Uses of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Note B - Transfer of Control Pursuant to a series of transactions which closed on October 1, 1998 and February 26, 1999, Insignia Financial Group, Inc. and IPT merged into AIMCO, a publicly traded real estate investment trust, with AIMCO being the surviving corporation (the "Insignia Merger"). As a result, AIMCO acquired 100% ownership interest in the Managing General Partner. The Managing General Partner does not believe that this transaction has had or will have a material effect on the affairs and operations of the Partnership. Note C - Disposition of Property/Operating Segment On December 30, 1999, Shoppes at River Rock, located in Mufreesboro, Tennessee, was sold to an unaffiliated third party for $1,600,000. After closing expenses of approximately $103,000 the net proceeds received by the Partnership were approximately $1,497,000. The Partnership used the proceeds from the sale of the property to pay off the remaining debt encumbering the property of approximately $1,491,000. Shoppes at River Rock was the only commercial property owned by the Partnership and represented one segment of the Partnership's operations. Due to the sale of the property on December 30, 1999, the results of the commercial segment have been shown as loss from discontinued operations and loss on sale of discontinued operations as of December 31, 1999. Revenues of this property were approximately $772,000 for 1999. The loss from discontinued operations was approximately $943,000 (including the impairment loss of $660,000 mentioned in Note A) for 1999. Note D - Mortgage Notes Payable
Principal Monthly Principal Balance At Payment Stated Balance December 31, Including Interest Maturity Due At Property 2000 Interest Rate Date Maturity (in thousands) (in thousands) Big Walnut Apartments 1st mortgage $ 4,277 $ 43 7.60% 11/15/02 $ 3,912 2nd mortgage 167 1 7.60% 11/15/02 167 LaFontenay I & II Apartments 1st mortgage 7,085 51 7.50% 09/01/07 6,369 The Trails Apartments 1st mortgage 5,383 41 (1) 12/01/09 3,015 Greensprings Manor Apartments 1st mortgage 7,518 75 7.60% 11/15/02 6,875 2nd mortgage 294 2 7.60% 11/15/02 294 24,724 $ 213 $20,632 Less unamortized discounts (1,218) Total $23,506
(1) Adjustable rate based on 75% of the interest rate on new-issue long-term A-rated utility bonds as determined on the first day of each calendar quarter. The rate at December 31, 2000 was 6.0225%. The discount is reflected as a reduction of the mortgage notes payable and increases the effective rate of the debt to 8.76% for Big Walnut Apartments and Greensprings Manor Apartments and 8.00% for The Trails Apartments. 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 on the Bond on a date prior to the fifth anniversary of the modification. On January 16, 2001, the mortgages encumbering Greensprings Manor were refinanced. The maximum new loan amount is $13,600,000. Effective January 16, 2001, the lender made an initial advance of $5,040,000. Prior to the initial advance, the Managing General Partner loaned the Partnership approximately $3,673,000 in order for the Partnership to close the refinancing of the property. This amount will be repaid with a subsequent advance from the lender. Subsequent advances of up to $8,560,000 will also be made to cover renovation work that is needed at the property. The new loan matures in January 2004, with 2 one-year extension options. Interest payments start in February 2001 based on LIBOR plus 280 basis points. In addition, monthly cash flow payments will be made to the lender until the anticipated completion date of the renovations, which is September 2002. If any amount remains from these advances on the completion date of the renovation, it will be applied to the principal balance. Principal payments will begin in February 2003, and monthly deposits into a replacement reserve will be required. In connection with the refinancing, the assets and liabilities of the property were transferred from one subsidiary, Big Walnut L.P., to a newly formed subsidiary, AIMCO Greensprings L.P. The partners of AIMCO Greensprings L.P. are the Partnership, with 99.9% interest, and Davidson Diversified Properties, Inc., with 0.1% ownership. The loan is collateralized by the property as well as the interest of both the Partnership and Davidson Diversified Properties, Inc. in AIMCO Greensprings L.P. Mortgages are nonrecourse and are collateralized by the related property and improvements and by pledge of revenues from the property and improvements of the Partnership. Certain of the notes require prepayment penalties if repaid prior to maturity and prohibit resale of the properties subject to existing indebtedness. Scheduled principal payments of the mortgage notes payable subsequent to December 31, 2000, are as follows (in thousands): 2001 $ 8,196 2002 4,460 2003 225 2004 240 2005 248 Thereafter 11,355 $24,724 Since the mortgage encumbering Greensprings Manor Apartments at December 31, 2000 was subsequently refinanced, its principal payment is included in the year 2001 in the presentation above. Note E - Income Taxes The Partnership received a ruling from the Internal Revenue Service that it is to be classified as a partnership for Federal income tax purposes. Accordingly, no provision for income taxes is made in the consolidated financial statements of the Partnership. Taxable income or loss of the Partnership is reported in the income tax returns of its partners. The following is a reconciliation of reported net loss and Federal taxable loss (in thousands, except per unit data): 2000 1999 Net loss as reported $ (1,183) $ (2,366) Add (deduct) Depreciation differences 21 (107) Asset removals -- 204 Amortization of discounts 69 53 Unearned income (82) 78 Miscellaneous (14) 74 Federal taxable loss $ (1,189) $ (2,064) Federal taxable loss per limited partnership unit $ (951.78) $(1,651.62) The following is a reconciliation between the Partnership's reported amounts and Federal tax basis of net assets and liabilities (in thousands): Net liabilities as reported $ (5,995) Land and buildings 3,520 Accumulated depreciation (9,759) Other (852) Net liabilities - Federal tax basis $(13,086) Note F - 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 (i) certain payments to affiliates for services and (ii) 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 its affiliates during the years ended December 31, 2000 and 1999: 2000 1999 (in thousands) Property management fees (included in operating expenses) $ 363 $ 411 Reimbursement for services of affiliates (included in general and administrative expense, operating expense and investment properties) 320 221 Real estate commission on the sale of Shoppes at River Rock -- 48 Due to Managing General Partner 1,555 502 During the years ended December 31, 2000 and 1999, affiliates of the Managing General Partner were entitled to receive 5% of gross receipts from all of the Registrant's residential properties for providing property management services. The Registrant paid to such affiliates $363,000 and $411,000 for the years ended December 31, 2000 and 1999, respectively. An affiliate of the Managing General Partner was entitled to receive reimbursement of accountable administrative expenses amounting to approximately $320,000 and $221,000 for the years ended December 31, 2000 and 1999, respectively. A portion of both the current and prior years fees were not able to be paid due to the Partnership's cash flow. Accordingly, as of December 31, 2000, a liability of approximately $63,000 exists and is reflected in other liabilities. In accordance with the Partnership Agreement, the Managing General Partner has loaned the Partnership funds to cover operational expenses required at Greensprings Manor Apartments. These loans were made in accordance with the terms of the Partnership Agreement. At December 31, 2000, the amount of the outstanding loans and interest was approximately $1,555,000 and is included in Due to Managing General Partner. Interest is charged at prime plus 1%. Interest expense was approximately $109,000 for the year ending December 31, 2000 and is included in interest expense. The Partnership accrued a real estate commission of $48,000 upon the sale of Shoppes at River Rock due to the Managing General Partner during the year ending December 31, 1999. During the year ended December 31, 2000, approximately $30,000 of this commission was paid to an outside party for brokerage services. Therefore, approximately $18,000 is accrued at December 31, 2000. Payment of this commission is subordinate to the limited partners receiving their original invested capital plus a cumulative non-compounded annual return of 8% on their adjusted invested capital. In addition to its indirect ownership of the general partner interest in the Partnership, AIMCO and its affiliates owned 588.50 limited partnership units in the Partnership representing 48.07% of the outstanding units at December 31, 2000. A number of these units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional limited partnership interests in the Partnership for cash or in exchange for units in the operating partnership of AIMCO either through private purchases or tender offers. In this regard, on February 9, 2001, AIMCO Properties, L.P., commenced a tender offer to acquire all of the Units not owned by affiliates of AIMCO for a purchase price of $4,228 per Unit. Pursuant to this offer, AIMCO acquired an additional 11.5 units resulting in its total ownership being increased to 600 units or 49.01% of the total outstanding units. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters, which would include without limitation, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 49.01% of the outstanding units, AIMCO is in a position to significantly influence all voting decisions with respect to the Registrant. When voting on matters, AIMCO would in all likelihood vote the Units it acquired in a manner favorable to the interest of the Managing General Partner because of their affiliation with the Managing General Partner. Note G - Investment Properties and Accumulated Depreciation
Initial Cost To Partnership (in thousands) Buildings Net Cost and Related Capitalized Personal Subsequent to Apartment Properties Encumbrances Land Property Acquisition (in thousands) (in thousands) Big Walnut Apartments $ 4,444 $ 520 $ 6,505 $ 2,566 LaFontenay Apartments 7,085 650 6,719 2,666 The Trails Apartments 5,383 586 7,054 1,790 Greensprings Manor Apartments 7,812 847 9,684 2,336 24,724 Less unamortized discounts (1,218) Total $23,506 $ 2,603 $29,962 $ 9,358
Gross Amount At Which Carried At December 31, 2000 (in thousands) Buildings And Related Personal Accumulated Date of Date Depreciable Description Land Property Total Depreciation Construction Acquired Life-Years Apartment Properties Big Walnut $ 520 $ 9,071 $ 9,591 $ 5,294 1971 03/28/85 5/25 LaFontenay 650 9,385 10,035 5,577 1971-1973 10/31/84 5/25 The Trails 586 8,844 9,430 4,913 1984-1985 08/30/85 5/25 Greensprings Manor 847 12,020 12,867 7,555 1970-1975 09/30/85 5/25 Totals $2,603 $39,320 $41,923 $23,339
Reconciliation of "Investment Properties and Accumulated Depreciation" Years Ended December 31, 2000 1999 (in thousands) Real Estate Balance at beginning of year $40,274 $45,605 Property improvements 1,649 1,396 Disposals of property -- (6,727) Balance at end of year $41,923 $40,274 Accumulated Depreciation Balance at beginning of year $21,426 $23,090 Additions charged to expense 1,913 2,133 Disposal of property -- (3,797) Balance at end of year $23,339 $21,426 The aggregate cost of the real estate for Federal income tax purposes at December 31, 2000 and 1999, is approximately $45,443,000 and $43,771,000, respectively. The accumulated depreciation taken for Federal income tax purposes at December 31, 2000 and 1999, is approximately $33,098,000 and $31,193,000, respectively. Note H - Segment Reporting Description of the types of products and services from which the reportable segment derives its revenues: The Partnership had two reportable segments: residential properties and commercial properties. The Partnership's residential property segment consists of four apartment complexes, one each located in Ohio, Kentucky, Tennessee, and Indiana. The Partnership rents apartment units to tenants for terms that are typically twelve months or less. The commercial property segment consisted of a shopping center located in Tennessee, which was sold on December 30, 1999. As a result of the sale of the commercial property during 1999 the commercial segment is shown as discontinued operations. Measurement of segment profit and loss: The Partnership evaluates performance based on segment profit (loss) before depreciation. The accounting policies of the reportable segment are the same as those described in the summary of significant accounting policies. Factors management used to identify the enterprise's reportable segment: The Partnership's reportable segment consists of investment properties that offer different products and services. The reportable segments are each managed separately because they provide distinct services with different types of products and customers. Segment information for the years ended December 31, 2000 and 1999 is shown in the tables below. The "Other" column includes Partnership administration related items and income and expense not allocated to the reportable segment (in thousands).
2000 Residential Other Totals Rental income $ 6,673 $ -- $ 6,673 Other income 506 24 530 Interest expense 2,031 -- 2,031 Depreciation 1,913 -- 1,913 General and administrative expense -- 359 359 Segment loss (848) (335) (1,183) Total assets 20,454 271 20,725 Capital expenditures for investment properties 1,649 -- 1,649
1999 Residential Commercial Other Totals (discontinued) Rental income $ 7,552 $ -- $ -- $ 7,552 Other income 507 -- 20 527 Interest expense 2,050 -- -- 2,050 Depreciation 1,795 -- -- 1,795 General and administrative expense -- -- 323 323 Loss from discontinued operations -- (943) -- (943) Loss on sale of discontinued operations -- (834) -- (834) Segment loss (286) (1,777) (303) (2,366) Total assets 20,972 -- 723 21,695 Capital expenditures for investment properties 1,383 13 -- 1,396
Note I - Legal Proceedings In March 1998, several putative unit holders of limited partnership units of the Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia Financial Group, Inc., et al. in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, its Managing General Partner and several of their affiliated partnerships and corporate entities. The action purports to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) which are named as nominal defendants, challenging, among other things, the acquisition of interests in certain general partner entities by Insignia Financial Group, Inc. ("Insignia") and entities which were, at one time, affiliates of Insignia; past tender offers by the Insignia affiliates to acquire limited partnership units; management of the partnerships by the Insignia affiliates; and the Insignia Merger. The plaintiffs seek monetary damages and equitable relief, including judicial dissolution of the Partnership. On June 25, 1998, the Managing General Partner filed a motion seeking dismissal of the action. In lieu of responding to the motion, the plaintiffs filed an amended complaint. The Managing General Partner filed demurrers to the amended complaint which were heard February 1999. Pending the ruling on such demurrers, settlement negotiations commenced. On November 2, 1999, the parties executed and filed a Stipulation of Settlement, settling claims, subject to court approval, on behalf of the Partnership and all limited partners who owned units as of November 3, 1999. Preliminary approval of the settlement was obtained on November 3, 1999 from the Court, at which time the Court set a final approval hearing for December 10, 1999. Prior to the December 10, 1999 hearing, the Court received various objections to the settlement, including a challenge to the Court's preliminary approval based upon the alleged lack of authority of prior lead counsel to enter the settlement. On December 14, 1999, the Managing General Partner and its affiliates terminated the proposed settlement. In February 2000, counsel for some of the named plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who negotiated the settlement. On June 27, 2000, the Court entered an order disqualifying them from the case and an appeal was taken from the order on October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the putative class. Plaintiffs filed a third amended complaint on January 19, 2001. On March 2, 2001, the Managing General Partner and its affiliates filed a demurrer to the third amended complaint. The Managing General Partner does not anticipate that costs associated with this case will be material to the Partnership's overall operations. The Partnership is unaware of any other pending or outstanding litigation that is not of a routine nature arising in the ordinary course of business. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The Registrant has no directors or officers. The Managing General Partner of the Registrant is Davidson Diversified Properties, Inc. The names and ages of, as well as the position and officers held by the present executive officers and directors of the Managing General Partner are set forth below. There are no family relationships between or among any officers or directors. Name Age Position Patrick J. Foye 43 Executive Vice President and Director Martha L. Long 41 Senior Vice President and Controller Patrick J. Foye has been Executive Vice President and Director of the Managing General Partner since October 1, 1998. Mr. Foye has served as Executive Vice President of AIMCO since May 1998. Prior to joining AIMCO, Mr. Foye was a partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to 1998 and was Managing Partner of the firm's Brussels, Budapest and Moscow offices from 1992 through 1994. Mr. Foye is also Deputy Chairman of the Long Island Power Authority and serves as a member of the New York State Privatization Council. He received a B.A. from Fordham College and a J.D. from Fordham University Law School. Martha L. Long has been Senior Vice President and Controller of the Managing General Partner since October 1998 as a result of the acquisition of Insignia Financial Group, Inc. As of February 2001, Ms. Long was also appointed head of the service business for AIMCO. From June 1994 until January 1998, she was the Controller for Insignia, and was promoted to Senior Vice President - Finance and Controller in January 1998, retaining that title until October 1998. From 1988 to June 1994, Ms. Long was Senior Vice President and Controller for The First Savings Bank, FSB in Greenville, South Carolina. One or more of the above persons are also directors and/or officers of a general partner (or general partner of a general partner) of limited partnerships which either have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15(d) of such Act: Further, one or more of the above persons are also directors and/or officers of Apartment Investment and Management Company and the general partner of AIMCO Properties, L.P., entities that have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15 (d) of such Act. The executive officers and director of the Managing General Partner fulfill the obligations of the Audit Committee and oversee the Partnership's financial reporting process on behalf of the Managing General Partner. Management has the primary responsibility for the financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the executive officers and director of the Managing General Partner reviewed the audited financial statements with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. The executive officers and director of the Managing General Partner reviewed with the independent auditors, who are responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of the Partnership's accounting principles and such other matters as are required to be discussed with the Audit Committee or its equivalent under generally accepted auditing standards. In addition, the Partnership has discussed with the independent auditors the auditors' independence from management and the Partnership including the matters in the written disclosures required by the Independence Standards Board and considered the compatibility of non-audit services with the auditors' independence. The executive officers and director of the Managing General Partner discussed with the Partnership's independent auditors the overall scope and plans for their audit. In reliance on the reviews and discussions referred to above, the executive officers and director of the Managing General Partner has approved the inclusion of the audited financial statements in the Form 10-KSB for the year ended December 31, 2000 for filing with the Securities and Exchange Commission. The Managing General Partner has reappointed Ernst & Young LLP as independent auditors to audit the financial statements of the Partnership for the current fiscal year. Fees for the last fiscal year were annual audit services of approximately $48,000 and non-audit services (principally tax-related) of approximately $24,000. Item 10. Executive Compensation None of the directors and officers of the Managing General Partner received any remuneration from the Registrant. Item 11. Security Ownership of Certain Beneficial Owners and Management Except as noted below, no person or entity was known by the Registrant to be the beneficial owner of more than 5% of the Limited Partnership Units of the Registrant as of December 31, 2000. Entity Number of Units Percentage Cooper River Properties, LLC 122.75 10.03% (an affiliate of AIMCO) Insignia Properties, LP 35.75 2.92% (an affiliate of AIMCO) Davidson Diversified Properties, Inc. 0.25 0.02% (an affiliate of AIMCO) AIMCO Properties, LP 429.75 35.10% (an affiliate of AIMCO) Cooper River Properties, LLC, Insignia Properties, LP, and Davidson Diversified Properties, Inc., are indirectly ultimately owned by AIMCO. Their business address is 55 Beattie Place, Greenville, SC 29602. AIMCO Properties LP is indirectly ultimately controlled by AIMCO. Its business address is 2000 South Colorado Boulevard, Denver, Colorado 80222. No director or officer of the Managing General Partner owns any Units. Item 12. Certain Relationships and Related Transactions 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 (i) certain payments to affiliates for services and (ii) 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 its affiliates during the years ended December 31, 2000 and 1999: 2000 1999 (in thousands) Property management fees $ 363 $ 411 Reimbursement for services of affiliates 320 221 Real estate commission on the sale of Shoppes at River Rock -- 48 Due to Managing General Partner 1,555 502 During the years ended December 31, 2000 and 1999, affiliates of the Managing General Partner were entitled to receive 5% of gross receipts from all of the Registrant's residential properties for providing property management services. The Registrant paid to such affiliates $363,000 and $411,000 for the years ended December 31, 2000 and 1999, respectively. An affiliate of the Managing General Partner was entitled to receive reimbursement of accountable administrative expenses amounting to approximately $320,000 and $221,000 for the years ended December 31, 2000 and 1999, respectively. A portion of both the current and prior years fees were not able to be paid due to the Partnership's cash flow. Accordingly, as of December 31, 2000, a liability of approximately $63,000 exists and is reflected in other liabilities. In accordance with the Partnership Agreement, the Managing General Partner has loaned the Partnership funds to cover operational expenses required at Greensprings Manor Apartments. These loans were made in accordance with the terms of the Partnership Agreement. At December 31, 2000, the amount of the outstanding loans and interest was approximately $1,555,000 and is included in Due to Managing General Partner. Interest is charged at prime plus 1%. Interest expense was approximately $109,000 for the year ending December 31, 2000 and is included in interest expense. The Partnership accrued a real estate commission of $48,000 upon the sale of Shoppes at River Rock due to the Managing General Partner during the year ending December 31, 1999. During the year ended December 31, 2000, approximately $30,000 of this commission was paid to an outside party for brokerage services. Therefore, approximately $18,000 is accrued at December 31, 2000. Payment of this commission is subordinate to the limited partners receiving their original invested capital plus a cumulative non-compounded annual return of 8% on their adjusted invested capital. In addition to its indirect ownership of the general partner interest in the Partnership, AIMCO and its affiliates owned 588.50 limited partnership units in the Partnership representing 48.07% of the outstanding units at December 31, 2000. A number of these units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional limited partnership interests in the Partnership for cash or in exchange for units in the operating partnership of AIMCO either through private purchases or tender offers. In this regard, on February 9, 2001, AIMCO Properties, L.P., commenced a tender offer to acquire all of the Units not owned by affiliates of AIMCO for a purchase price of $4,228 per Unit. Pursuant to this offer, AIMCO acquired an additional 11.5 units resulting in its total ownership being increased to 600 units or 49.01% of the total outstanding units. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters, which would include without limitation, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 49.01% of the outstanding units, AIMCO is in a position to significantly influence all voting decisions with respect to the Registrant. When voting on matters, AIMCO would in all likelihood vote the Units it acquired in a manner favorable to the interest of the Managing General Partner because of their affiliation with the Managing General Partner. Item 13. Exhibits and Reports on Form 8-K (a) Exhibits: None. (b) Reports on Form 8-K filed in the fourth quarter of calendar year 2000: None. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. By: Davidson Diversified Properties, Inc. Managing General Partner By: /s/Patrick J. Foye Patrick J. Foye Executive Vice President By: /s/Martha L. Long Martha L. Long Senior Vice President and Controller Date: In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Partnership and in the capacities and on the dates indicated. /s/Patrick J. Foye Executive Vice President Date: Patrick J. Foye and Director /s/Martha L. Long Senior Vice President Date: Martha L. Long and Controller DAVIDSON DIVERSIFIED REAL ESTATE II, LP EXHIBIT INDEX Exhibit Number Description of Exhibit 2.1 Agreement and Plan of Merger, dated as of October 1, 1999, by and between AIMCO and IPT (incorporated by reference to Exhibit 2.1 of IPT's Current Report on Form 8-K, File No. 1-14179, dated October 1, 1999). 3 Partnership Agreement dated June 11, 1984, as amended is incorporated by reference to Exhibit A to the Prospectus of the Registrant dated October 16, 1984 as filed with the Commission pursuant to Rule 424(b) under the Act. 3B Amendment No. 1 to the Partnership dated August 1, 1985 is incorporated by reference to Exhibit 3B to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 4 Certificate of Limited Partnership dated June 11, 1984 is incorporated by reference to Exhibit 4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. 4A Certificate of Amendment to Limited Partnership dated July 17, 1984 is incorporated by reference to Exhibit 4A to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. 4B Restated Certificate of Limited Partnership dated October 5, 1984 is incorporated by reference to Exhibit 4B to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. 10A Agent's Agreement dated October 16, 1984 between the Registrant and Harvey Freeman & Sons, Inc. is incorporated by reference to Exhibit 10B to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1984. 10B Agreement among Agents dated October 16, 1984 by and among Harvey Freeman & Sons, Inc., Harvey Freeman & Sons, Inc. of Arkansas, Harvey Freeman & Sons, Inc. of Florida, Harvey Freeman & Sons, Inc. of Georgia, Harvey Freeman & Sons, Inc. of Indiana, Harvey Freeman & Sons, Inc. of Kentucky, Harvey Freeman & Sons, Inc. of Mississippi, Harvey Freeman & Sons, Inc. of North Carolina, Harvey Freeman & Sons, Inc. of Ohio, and Harvey Freeman & Sons, Inc. of South Carolina, is incorporated by reference to Exhibit 10C to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1984. 10C Acquisition and Disposition Services Agreement dated October 16, 1984 between the Registrant and Criswell Freeman Company is incorporated by reference to Exhibit 10D to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1984. 10D Purchase Agreement Phases I and II dated October 3, 1984 between NTS-LaFontenay Partners and Tennessee Trust Company, Trustee, is incorporated by reference to Exhibit 10E to Amendment No. 1 to the Registrant's Registration Statement on Form S-11 (Registration No. 2-92313) as filed on October 15, 1984. 10E Modification of Purchase Agreements dated October 31, 1984 by and among NTS-LaFontenay Partners, the Registrant and LaFontenay Associates is incorporated by reference to Exhibit 10F to Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-11 (Registration No. 2-92313) as filed on January 15, 1985. 10F Contract for Sale of Real Estate for Outlets Ltd. Mall dated November 15, 1984 between Company Stores Development Corp. and Tennessee Trust Company, as Trustee, is incorporated by reference to Exhibit 10G to Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-11 (Registration No. 2-92313) as filed on January 15, 1985. 10G Submanagement Agreement dated December 31, 1984 between Harvey Freeman & Sons, Inc., Company Stores Management Corp. and the Registrant is incorporated by reference to Exhibit 10H to Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-11 (Registration No. 2-92313) as filed on January 15, 1985. 10H Assignment of Purchase Agreement dated October 25, 1984 between Tennessee Trust Company, Trustee, and the Registrant relating to assignment of Purchase Agreement for LaFontenay Apartments is incorporated by reference to Exhibit 10I to Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-11 (Registration No. 2-92313) as filed on January 15, 1985. 10I Contract for Sale of Real Estate for Big Walnut Apartments dated December 6, 1984 between Community Development Company, an Ohio limited partnership and Tennessee Trust Company, as Trustee is incorporated by reference to Exhibit 10(b) to the Registrant's Current Report on Form 8-K dated March 28, 1985. 10J Assignment of Contract for Sale of Real Estate dated March 22, 1985 between Tennessee Trust Company, Trustee, and the Registrant, relating to assignment of Purchase Agreement for Big Walnut Apartments is incorporated by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated March 28, 1985. 10K Contract for Sale of Real Estate for The Trails Apartments dated July 31, 1985 between Trails of Nashville Associates, Ltd., a Tennessee limited partnership by reference to Exhibit 10(b) to the Registrant's Current Report on Form 8-K dated August 30, 1985. 10L Assignment of Contract for Sale of Real Estate dated August 28, 1985 between Tennessee Trust Company, as Trustee and the Registrant, relating to assignment of Contract for Sale of Real Estate for The Trails Apartments is incorporated by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated August 30, 1985. 10M Contract for Sale of Real Estate for Greensprings Manor Apartments dated July 15, 1985 between Greensprings Apartments Associates, an Indiana limited partnership and Tennessee Trust Company, as Trustee, is incorporated by reference to Exhibit 20(d) to the Registrant's Current Report on Form 8-K dated August 30, 1985. 10N Assignment of Contract for Sale of Real Estate dated August 28, 1985 between Tennessee Trust Company, as Trustee and the Registrant, relating to assignment of Contract for Sale of Real Estate for Greensprings Manor Apartments is incorporated by reference to Exhibit 10(c) to the Registrant's Current Report on Form 8-K dated August 30, 1985. 10O Tennessee Note dated September 25, 1980 executed by Company Stores Development Corp. payable to TVB Mortgage Corporation relating to Outlets, Ltd. Mall is incorporated by reference to Exhibit 10GG to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10P Deed of Trust and Security Agreement dated September 25, 1980 between Company Stores Development Corp. and TVB Mortgage Corporation relating to Outlets, Ltd. Mall is incorporated by reference to Exhibit 10HH to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10Q Note secured by Real Estate dated October 21, 1985 payable to First American National Bank of Nashville executed by the Registrant relating to Outlet's, Ltd. Mall is incorporated by reference to Exhibit 10II to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10R Deed of Trust and Security Agreement dated October 21, 1985 executed by the Registrant in favor of First American National Bank of Nashville relating to Outlet's Ltd. Mall is incorporated by reference to Exhibit 10EE to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. 10S Mortgage Note dated March 27, 1985 executed by the Registrant payable to The Great-West Life Assurance Company relating to Big Walnut Apartments is incorporated by reference to Exhibit 10KK to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10T Mortgage and Security Agreement dated March 27, 1985 between the Registrant and The Great-West Life Assurance Company relating to Big Walnut Apartments is incorporated by reference to Exhibit 10LL to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10U Mortgage Note dated March 27, 1985 executed by the Registrant payable to BANCOhio National Bank relating to Big Walnut Apartments is incorporated by reference to Exhibit 10MM to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10V Open-End Mortgage and Security Agreement dated March 27, 1985 between the Registrant and BANCOhio National Bank relating to Big Walnut Apartments is incorporated by reference to Exhibit 10NN to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10W Deed of Trust and Security Agreement dated December 1, 1984 between Trails of Nashville Associates, Ltd., and Capital Holding Corporation relating to The Trails Apartments is incorporated by reference to Exhibit 10QQ to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10X Note dated December 28, 1984 executed by Trails of Nashville Associates, Ltd., payable to The Industrial Development Board of the Metropolitan Government of Nashville and Davidson County relating to The Trails Apartments is incorporated by reference to Exhibit 10RR to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10Y Wraparound Mortgage Note dated September 30, 1985 payable to Greensprings Apartments Associates executed by the Registrant relating to Greensprings Manor Apartments is incorporated by reference to Exhibit 10SS to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10Z Wraparound Mortgage Note dated September 30, 1985 between Greensprings Apartments Associates and the Registrant relating to Greensprings Manor Apartments is incorporated by reference to Exhibit 10TT to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10AA Memorandum of Understanding among SEC Realty Corp., Tennessee Properties, L.P., Freeman Mortgage Corporation, J. Richard Freeman, W. Criswell Freeman and Jacques-Miller Properties, Inc. is incorporated by reference to Exhibit 10DDD to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 10BB Partnership Administration and Consultation Agreement among Freeman Properties, Inc., Freeman Diversified Properties, Inc., Residual Equities Limited and Jacques-Miller Properties, Inc. is incorporated by reference to Exhibit 10EEE to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 10CC Partnership Agreement of LaFontenay, L.P. dated may 15, 1990 owned 99.9% by the Registrant relating to refinancing of LaFontenay Apartments is incorporated by reference to Exhibit 10FFF to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. 10DD Multifamily Note with Addendum dated May 24, 1990 executed by LaFontenay, payable to the Patrician Mortgage Company relating to LaFontenay, L.P. payable to the Patrician Mortgage Company relating to LaFontenay Apartments is incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. 10EE Multifamily Mortgage with Rider dated May 24, 1990 executed by LaFontenay, L.P. in favor of the Patrician Mortgage Company relating to LaFontenay Apartments is incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. 10FF Termination Agreement, dated December 31, 1991 among Jacques-Miller, Inc., Jacques-Miller Property Management, Davidson Diversified Properties, Inc., and Supar, Inc. is incorporated by reference to Exhibit 10JJJ to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10GG Assignment of Limited Partnership Interest of Freeman Equities, Limited, dated December 31, 1991 between Davidson Diversified Propeties, Inc. and Insignia Jacques-Miller, L.P. is incorporated by reference to Exhibit 10KKK to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10HH Assignment of General Partner Interests of Freeman Equities, Limited, dated December 31, 1991 between Davidson Diversified Propeties, Inc. and MAE GP Corporation is incorporated by reference to Exhibit 10LLL to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10II Stock certificate, dated December 31, 1991 showing ownership of 1,000 shares of Davidson Diversified Properties, Inc. by MAE GP Corporation is incorporated by reference to Exhibit 10MMM to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10JJ (a) First Deeds of Trust and Security Agreements dated October 28, 1992 between Big Walnut, L.P. and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing Greensprings Manor is incorporated by reference to Exhibit 10JJ (a) to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (b) Second Deeds of Trust and Security Agreements dated October 28, 1992 between Big Walnut, L.P. and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing Greensprings Manor is incorporated by reference to Exhibit 10JJ (b) to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (c) First Assignments of Leases and Rents dated October 28, 1992 between Big Walnut, L.P. and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing Greensprings Manor is incorporated by reference to Exhibit 10JJ (c) to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (d) Second Assignments of Leases and Rents dated October 28, 1992 between Big Walnut, L.P. and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing Greensprings Manor is incorporated by reference to Exhibit 10JJ (d) to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (e) First Deeds of Trust Notes dated October 28, 1992 between Big Walnut, L.P. and First Commonwealth Realty Credit Corporation relating to Greensprings Manor is incorporated by reference to Exhibit 10JJ (e) to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (f) Second Deeds of Trust Notes dated October 28, 1992 between Big Walnut, L.P. and First Commonwealth Realty Credit Corporation relating to Greensprings Manor is incorporated by reference to Exhibit 10JJ (f) to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. 10KK (a) First Deeds of Trust and Security Agreements dated October 28, 1992 between Big Walnut, L.P. and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing Big Walnut is incorporated by reference to Exhibit 10KK (a) to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (b) Second Deeds of Trust and Security Agreements dated October 28, 1992 between Big Walnut, L.P. and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing Big Walnut is incorporated by reference to Exhibit 10KK (b) to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (c) First Assignments of Leases and Rents dated October 28, 1992 between Big Walnut, L.P. and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing Big Walnut is incorporated by reference to Exhibit 10KK (c) to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (d) Second Assignments of Leases and Rents dated October 28, 1992 between Big Walnut, L.P. and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing Big Walnut is incorporated by reference to Exhibit 10KK (d) to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (e) First Deeds of Trust Notes dated October 28, 1992 between Big Walnut, L.P. and First Commonwealth Realty Credit Corporation relating to Big Walnut is incorporated by reference to Exhibit 10KK (e) to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (f) Second Deeds of Trust Notes dated October 28, 1992 between Big Walnut, L.P. and First Commonwealth Realty Credit Corporation relating to Big Walnut is incorporated by reference to Exhibit 10KK (f) to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. 10LL (a) Loan Agreement dated June 30, 1993 between Outlet's Mall, L.P. and First American National Bank setting forth the terms and conditions of the loan, as a condition of extending the maturity date. (b) Renewal Note Secured by Real Estate dated June 30, 1993, between Outlet's Mall, L.P. and First American National Bank to extend the maturity date of the loan until April 1, 1995. (c) Loan modification and agreement dated January 18, 1995, between Outlet's Mall, L.P. and First American National Bank setting forth the new terms and conditions of the loan. 10MM Multifamily Note secured by a Mortgage or Deed of Trust dated August 6, 1997, between LaFontenay, L.L.C. and Patrician Financial Company Limited Partnership related to LaFontenay Apartments, is incorporated by reference to the exhibit filed with the Form 10-QSB dated September 30, 1997. 10.1 Contract for sale of real estate for Outlet Mall, Ltd. dated December 30, 2000, between Davidson Diversified Real Estate II, a Delaware limited partnership and The Cadle Company is incorporated by reference to the exhibit filed with Form 8-K dated January 6, 2000. 10.2 First amendment to contract for sale of real estate for Outlet Mall, Ltd. dated December 30, 2000, between Davidson Diversified Real Estate II, a Delaware limited partnership and The Cadle Company is incorporated by reference to the exhibit filed with Form 8-K dated January 6, 2000. 10.3 Second amendment to contract for sale of real estate for Outlet Mall, Ltd. dated December 30, 2000, between Davidson Diversified Real Estate II, a Delaware limited partnership and The Cadle Company is incorporated by reference to the exhibit filed with Form 8-K dated January 6, 2000. 16 Letter from the Registrant's former independent accountant regarding its concurrence with the statements made by the Registrant is incorporated by reference to the exhibit filed with Form 8-K dated September 30, 1992. 99A Agreement of Limited Partnership for Big Walnut, L.P. between Davidson Diversified Properties, Inc. and Davidson Diversified Real Estate II, L.P. entered into on August 23, 1991 is incorporated by reference to Exhibit 99A to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. 99B Agreement of Limited Partnership for Outlet's Mall, L.P. between Outlet's Mall GP Limited Partnership and Davidson Diversified Real Estate II, L.P. is incorporated by reference to Exhibit 99B to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. -----END PRIVACY-ENHANCED MESSAGE-----