<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended DECEMBER 31, 1998
Commission File Number
0-09782
REAL ESTATE ASSOCIATES LIMITED II
A CALIFORNIA LIMITED PARTNERSHIP
I.R.S. Employer Identification No. 95-3547609
9090 WILSHIRE BLVD., SUITE 201, BEVERLY HILLS, CALIFORNIA 90211
Registrant's Telephone Number, Including Area Code (310) 278-2191
Securities Registered Pursuant to Section 12(b) or 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed with the Commission by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
<PAGE> 2
PART I.
ITEM 1. BUSINESS:
Real Estate Associates Limited II ("REAL II" or the "Partnership") is a limited
partnership which was formed under the laws of the State of California on
December 4, 1979. On March 17, 1980, REAL II offered 3,000 units consisting of
6,000 Limited Partnership Interests and Warrants to purchase a maximum of 6,000
Additional Limited Partnership Interests through a public offering managed by
E.F. Hutton Inc.
The general partners of REAL II are National Partnership Investments Corp.
("NAPICO"), a California Corporation (the "Corporate General Partner") and
National Partnership Investments Associates ("NAPIA"). NAPIA is a California
limited partnership and consists of Messrs. Nicholas G. Ciriello, an unrelated
individual, as general partner and Charles H. Boxenbaum as limited partner. The
business of REAL II is conducted primarily by NAPICO.
Prior to December 30, 1998, NAPICO was a wholly owned subsidiary of Casden
Investment Corporation ("CIC"), which is wholly owned by Alan I. Casden. On
December 30, 1998, Casden Properties Operating Partnership, L.P. (the "Operating
Partnership"), a majority owned subsidiary of Casden Properties Inc., a real
estate investment trust organized by Alan I. Casden, purchased a 95.25% economic
interest in NAPICO. The current members of NAPICO's Board of Directors are
Charles H. Boxenbaum, Bruce E. Nelson, Alan I. Casden and Henry C. Casden.
REAL II holds limited partnership interests in 13 local limited partnerships as
of December 31, 1998, after selling its interest in 7 local limited
partnerships, in December 1998, to the Operating Partnership. Each of the local
partnerships owns one or two low income housing projects which are subsidized
and/or have a mortgage note payable to or insured by agencies of the federal or
local government.
In order to stimulate private investment in low income housing, the federal
government and certain state and local agencies have provided significant
ownership incentives, including among others, interest subsidies, rent
supplements, and mortgage insurance, with the intent of reducing certain market
risks and providing investors with certain tax benefits, plus limited cash
distributions and the possibility of long-term capital gains. There remain,
however, significant risks. The long-term nature of investments in government
assisted housing limits the ability of REAL II to vary its portfolio in response
to changing economic, financial and investment conditions. Such investments are
also subject to changes in local economic circumstances and housing patterns, as
well as rising operating costs, vacancies, rent collection difficulties, energy
shortages and other factors which have an impact on real estate values. These
projects also require greater management expertise and may have higher operating
expenses than conventional housing projects.
Under recent adopted law and policy, the United States Department of Housing and
Urban Development ("HUD") has determined not to renew the Housing Assistance
Payment ("HAP") Contracts on a long term basis on the existing terms. In
connection with renewals of the HAP Contracts under such new law and policy, the
amount of rental assistance payments under renewed HAP Contracts will be based
on market rentals instead of above market rentals, which was generally the case
under existing HAP Contracts. The payments under the renewed HAP Contracts are
not expected to be in an amount that would provide sufficient cash flow to
permit owners of properties subject to HAP Contracts to meet the debt service
requirements of existing loans insured by the Federal Housing Administration of
HUD ("FHA") unless such mortgage loans are restructured. In order to address the
reduction in payments under HAP Contracts as a result of this new policy, the
Multi-family Assisted Housing Reform and Affordability Act of 1997 ( "MAHRAA"),
which was adopted in October 1997, provides for the restructuring of mortgage
loans insured by the FHA with respect to properties subject to the Section 8
program. Under MAHRAA, an FHA-insured mortgage loan can be restructured into a
first mortgage loan which will be amortized on a current basis and a low
interest second mortgage loan payable to FHA which
<PAGE> 3
will only be payable on maturity of the first mortgage loan. This restructuring
results in a reduction in annual debt service payable by the owner of the
FHA-insured mortgage loan and is expected to result in an insurance payment from
FHA to the holder of the FHA-insured loan due to the reduction in the principal
amount. MAHRAA also phases out project-based subsidies on selected properties
serving families not located in rental markets with limited supply, converting
such subsidies to a tenant-based subsidy.
MAHRAA provides that properties begin the restructuring process in federal
fiscal year 1999 (beginning October 1, 1998). On September 11, 1998, HUD issued
interim regulations implementing MAHRAA and final regulations are expected to be
issued in 1999. With respect to the local limited partnerships' expiring HAP
Contracts, it is expected that the HAP payments will be reduced or terminated
pursuant to the terms of MAHRAA.
When the HAP Contracts are subject to renewal, there can be no assurance that
the local limited partnerships in which the Partnership has an investment will
be permitted to restructure its mortgage indebtedness under MAHRAA. In addition,
the economic impact on the Partnership of the combination of the reduced
payments under the HAP Contracts and the restructuring of the existing
FHA-insured mortgage loans under MAHRAA is uncertain.
The partnerships in which REAL II has invested were, at least initially,
organized by private developers who acquired the sites, or options thereon, and
applied for applicable mortgage insurance and subsidies. REAL II became the
principal limited partner in these local limited partnerships pursuant to
arm's-length negotiations with these developers, or others, who act as general
partners. As a limited partner, REAL II's liability for obligations of the local
limited partnership is limited to its investment. The local general partner of
the local limited partnership retains responsibility for developing,
constructing, maintaining, operating and managing the Project. Under certain
circumstances of default, REAL II has the right to replace the general partner
of the local limited partnerships, but otherwise does not have control of sale
or refinancing, etc.
Although each of the partnerships in which REAL II has invested owns a project
which must compete in the market place for tenants, interest subsidies and rent
supplements from governmental agencies make it possible to offer these dwelling
units to eligible "low income" tenants at a cost significantly below the market
rate for comparable conventionally financed dwelling units in the area.
<PAGE> 4
During 1998, the projects in which REAL II had invested were substantially
rented. The following is a schedule of the status as of December 31, 1998, of
the projects owned by local limited partnerships in which REAL II is a limited
partner.
SCHEDULE OF PROJECTS OWNED BY LOCAL LIMITED PARTNERSHIPS
IN WHICH REAL II HAS AN INVESTMENT
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Units Authorized
For Rental
Assistance Under
Section 8 or
Other Rent
No. of Supplement Units Percentage of
Name & Location Units Program Occupied Total Units
- --------------- ----- ------- -------- -----------
<S> <C> <C> <C> <C>
Azalea Court 48 4/ 19 46 96%
Theodore, AL
Branford Elderly 38 38/ 0 37 97%
Branford, CT
Cherrywood Apts. 40 40/ 0 40 100%
Twin Falls, ID
Clearfield Manor 40 40/ 0 35 88%
Clearfield, KY
Crystal Springs 28 0/ 28 28 100%
Crystal Springs, MS
Lakeside Apts. 48 48/ 0 47 98%
Mishawaka, IN
Landmark Towers 40 40/ 0 40 100%
Nampa, ID
Magnolia State 60 0/ 38 51 85%
Gulfport, MS
Redfern Grove Apts. 72 72/ 0 72 100%
E. Providence, RI
Sugar River Mills 162 162/ 0 155 96%
Claremont, NH
Valebrook 151 151/ 0 149 99%
Lawrence, MA
</TABLE>
<PAGE> 5
SCHEDULE OF PROJECTS OWNED BY LOCAL LIMITED PARTNERSHIPS
IN WHICH REAL II HAS AN INVESTMENT
DECEMBER 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
Units Authorized
For Rental
Assistance Under
Section 8 or
Other Rent
No. of Supplement Units Percentage of
Name & Location Units Program Occupied Total Units
- --------------- ------ ------- -------- -----------
<S> <C> <C> <C> <C>
Westward Ho Apts. 290 289/ 0 267 92%
Phoenix, AZ
Willow Wick Apts. 24 0/ 5 12 50%
Centre, AL
----- ------- ----- --
TOTALS 1,041 844/ 90 979 94%
===== ======= =====
</TABLE>
<PAGE> 6
ITEM 2. PROPERTIES:
The local limited partnerships in which REAL II holds interests own various
multi-family rental properties. See Item 1 for information pertaining to these
properties.
ITEM 3. LEGAL PROCEEDINGS:
As of December 31, 1998, REAL II's Corporate General Partner was a plaintiff or
defendant in several lawsuits. In addition, REAL II is involved in the following
lawsuits. In the opinion of management and the Corporate General Partner, the
claims will not result in any material liability to the Partnership.
On August 27, 1998, two investors holding an aggregate of eight units of limited
partnership interests in Real Estate Associates Limited III (an affiliated
partnership in which NAPICO is the managing general partner) and two investors
holding an aggregate of five units of limited partnership interest in Real
Estate Associates Limited VI (another affiliated partnership in which NAPICO is
the managing general partner) commenced an action in the United States District
Court for the Central District of California against the Partnership, NAPICO and
certain other affiliated entities. The complaint alleges that the defendants
breached their fiduciary duty to the limited partners of certain NAPICO managed
partnerships and made materially false and misleading statements in the consent
solicitation statements sent to the limited partners of such partnerships
relating to approval of the transfer of partnership interests in limited
partnerships, owning certain of the properties, to the REIT organized by an
affiliate of NAPICO. The plaintiffs seek preliminary and permanent injunctive
relief and other equitable relief, as well as compensatory and punitive damages.
The managing general partner of such NAPICO managed partnerships and the other
defendants believe that the plaintiffs' claims are without merit and intend to
contest the action vigorously.
Joseph Alizio v. Peter Perpignano, New Haven Plaza Associates, Real Estate
Associates Limited II, National Partnership Investments Corp. and National
Partnership Associates, Supreme Court of the State of New York, County of
Nassau, Case No. 1776-94. This action was commenced by Joseph Alizio, a limited
partner in New Haven Plaza Associates ("New Haven Plaza"), alleging seven causes
of action. Plaintiff sought to recover his pro rata share of $280,000,
representing a portion of the purchase price of the partnership interest
purchased by Real Estate Associates Limited II ("REAL II"), as well as an
accounting. By order dated September 24, 1996, the Court dismissed the first
through fourth, sixth and seventh causes of action. On December 22, 1997, the
Appellate Division affirmed the dismissal of the first through fourth, sixth and
seventh causes of action. The fifth cause of action is still pending in which
plaintiff seeks his pro rata share of a $75,000 consultant's fee paid to
defendant Perpignano by Real II and its general partners.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
In August 1998, a consent solicitation statement was sent to the limited
partners setting forth the terms and conditions of the purchase of the limited
partners' interests, held for investment by the Partnership, by the Operating
Partnership, together with certain amendments to the Partnership Agreement and
other disclosures of various conflicts of interest in connection with the
proposed transaction. Prior to the sale of the partnership interests, the
consents of the limited partners to the sale and amendments to the Partnership
Agreement were obtained.
<PAGE> 7
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND RELATED
SECURITY HOLDER MATTERS:
The Limited Partnership Interests are not traded on a public exchange but were
sold through a public offering managed by E.F. Hutton Inc. It is not anticipated
that any public market will develop for the purchase and sale of any Partnership
interest. Limited Partnership Interests may be transferred only if certain
requirements are satisfied. At December 31, 1998 there were 1,600 registered
holders of units in REAL II. No distributions have been made from the inception
of the Partnership to December 31, 1998. The Partnership has invested in certain
government assisted projects under programs which in many instances restrict the
cash return available to project owners. The Partnership was not designed to
provide cash distributions to investors in circumstances other than refinancing
or disposition of its investments in limited partnerships. In March 1999, the
Partnership made distributions of $4,950,000 to the limited partners and $50,000
to the general partners, using proceeds from the sale of the partnership
interests.
<PAGE> 8
ITEM 6. SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Loss from operations $ (846,393) $ (666,499) $ (449,123) $ (474,179) $ (492,294)
Gain on Sale of Limited
Partnership Interests 4,002,592 -- -- -- --
Distributions from
Limited Partnerships
Recognized as Income 224,996 244,281 113,203 172,189 796,658
Equity in Income of
Limited Partnerships
and Amortization of
Acquisition Costs (2,562,191) 820,899 1,154,755 1,172,891 734,711
----------- ----------- ----------- ----------- -----------
Net Income $ 819,004 $ 398,681 $ 818,835 $ 870,901 $ 1,039,075
=========== =========== =========== =========== ===========
Net Income per limited
Partnership Interest $ 77 $ 37 $ 77 $ 81 $ 96
=========== =========== =========== =========== ===========
Total assets $ 5,946,785 $ 5,095,968 $ 4,630,145 $ 3,821,884 $ 2,917,236
=========== =========== =========== =========== ===========
Investments in Limited
Partnerships $ -- $ 3,493,251 $ 2,808,190 $ 1,959,173 $ 1,135,982
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
LIQUIDITY
The Partnership's primary sources of funds include interest income on money
market investments and certificates of deposit and distributions from local
partnerships in which the Partnership has invested. It is not expected that any
of the local limited partnerships in which the Partnership has invested will
generate cash flow sufficient to provide for distributions to the Partnership's
limited partners in any material amount. The Partnership made a cash
distribution to investors in March 1999, using proceeds from the disposition of
its investments in certain limited partnerships.
CAPITAL RESOURCES
REAL II received $13,365,000 in subscriptions for units of Limited Partnership
Interests (at $5,000 per unit) during the period March 17, 1979 to September 15,
1980, pursuant to a registration statement on Form S-11. As of December 31, 1981
REAL II had received an additional $13,365,000 in subscriptions pursuant to the
exercise of warrants and the sale of Additional Limited Partnership Interests.
RESULTS OF OPERATIONS
The Partnership was formed to provide various benefits to its partners as
discussed in Item 1. It is anticipated that the local limited partnerships in
which REAL II has invested could produce tax losses for as long as 20 years. Tax
benefits will decline over time as the advantages of accelerated depreciation
are greatest in the earlier years, as deductions for interest expense decrease
as mortgage principal is amortized, and as the Tax Reform Act of 1986 limits the
deductions available.
At December 31, 1998, the Partnership has investments in 13 limited
partnerships, which own 14 housing projects that were substantially all rented.
The Partnership sold its interests in 7 local partnerships in December 1998. The
Partnership, as a limited partner, is entitled to 85% to 99% of the profits and
losses of the local limited partnerships. The Partnership accounts for its
investments in the local limited partnerships on the equity method, thereby
adjusting its investment balance by its proportionate share of the income or
loss of the local limited partnerships. Equity in losses of limited partnerships
is recognized in the financial statements until the limited partnership
investment account are reduced to a zero balance. Losses incurred after the
limited partnership investment account is reduced to zero are not recognized.
Limited partners are not liable for losses beyond their contributed capital. At
December 31, 1997 and 1996, the Partnership had a positive investment balance in
only four and five local limited partnerships, respectively. At December 31,
1998, the Partnership does not have any positive investment balance.
Distributions received from limited partnerships are recognized as return of
capital until the investment balance has been reduced to zero or to a negative
amount equal to future capital contributions required. Subsequent distributions
received are recognized as income.
The total income from the 20 local limited partnerships that was allocated to
the Partnership was $609,000, $398,000 and $902,000 for the years ended December
31, 1998, 1997 and 1996, respectively. However, because losses incurred after
the investment account is reduced to a zero balance are not recognized and
subsequent income is not recognized until the investment account becomes
positive again, the Partnership recognized equity in (loss) income of limited
partnerships, substantially all from the partnerships with a positive investment
balance, of $(2,562,191), $820,899 and $1,154,755 for the years ended December
31, 1998, 1997 and 1996, respectively. The loss in 1998 is the result of an
impairment of $3,317,000 recognized to the carrying values of certain
investments in local limited partnerships. During the year ended December 31,
1997, the Partnership contributed $52,000 to a local limited partnership,
thereby allowing the Partnership to recognize a loss from this partnership in
that amount, which reduced the income recognized from the
<PAGE> 10
partnerships with positive investment balances. In addition, the income
recognized from one of the partnerships decreased from $217,000 in 1996 to
$3,000 in 1997, primarily as a result of increases in operating expenses. Also,
included in recognized equity in income of limited partnerships for 1996 is
$81,000 in income from partnerships in which the Partnership does not have a
positive investment balance, but it was able to recognized this income because
it received cash distributions from these partnerships equal to these amounts.
The cumulative amount of the unrecognized equity in losses of certain limited
partnerships was approximately $8,107,000 and $12,274,000 as of December 31,
1998 and 1997, respectively.
Distributions from the local limited partnerships in which the Partnership did
not have a positive investment balance were $224,996, $244,281 and $113,203 for
the years ended December 31, 1998, 1997 and 1996, respectively. These amounts
were recognized as income on the accompanying statements of operations, in
accordance with the equity method of accounting.
As of December 31, 1998, 1997 and 1996, the Partnership has cash and cash
equivalents of $696,785, $1,602,717, and $1,821,955, respectively. Substantially
all of these amounts are on deposit with two high credit quality financial
institutions, earning interest. This resulted in the Partnership earning
$66,041, $82,692 and $74,125 in interest income for the years ended December 31,
1998, 1997 and 1996, respectively. The amount of interest income varies with
market rates available on deposits and with the amount of funds available for
investment. Cash equivalents can be converted to cash to meet obligations of the
Partnership as they arise. The Partnership intends to continue investing
available funds in this manner.
A recurring partnership expense is the annual management fee. The fee is payable
to the Corporate General Partner of the Partnership and is calculated at .4
percent of the Partnership's invested assets. The management fee is paid to the
Corporate General Partner for its continuing management of partnership affairs.
The fee is payable beginning with the month following the Partnership's initial
investment in a local limited partnership. Since the invested assets did not
change until the end of the three year period ended December 31, 1998,
management fees have remained constant at $397,680 for each of these years.
Under recent adopted law and policy, the United States Department of Housing and
Urban Development ("HUD") has determined not to renew the Housing Assistance
Payment ("HAP") Contracts on a long term basis on the existing terms. In
connection with renewals of the HAP Contracts under such new law and policy, the
amount of rental assistance payments under renewed HAP Contracts will be based
on market rentals instead of above market rentals, which was generally the case
under existing HAP Contracts. The payments under the renewed HAP Contracts are
not expected to be in an amount that would provide sufficient cash flow to
permit owners of properties subject to HAP Contracts to meet the debt service
requirements of existing loans insured by the Federal Housing Administration of
HUD ("FHA") unless such mortgage loans are restructured. In order to address the
reduction in payments under HAP Contracts as a result of this new policy, the
Multi-family Assisted Housing Reform and Affordability Act of 1997 ( "MAHRAA"),
which was adopted in October 1997, provides for the restructuring of mortgage
loans insured by the FHA with respect to properties subject to the Section 8
program. Under MAHRAA, an FHA-insured mortgage loan can be restructured into a
first mortgage loan which will be amortized on a current basis and a low
interest second mortgage loan payable to FHA which will only be payable on
maturity of the first mortgage loan. This restructuring results in a reduction
in annual debt service payable by the owner of the FHA-insured mortgage loan and
is expected to result in an insurance payment from FHA to the holder of the
FHA-insured loan due to the reduction in the principal amount. MAHRAA also
phases out project-based subsidies on selected properties serving families not
located in rental markets with limited supply, converting such subsidies to a
tenant-based subsidy.
MAHRAA provides that properties begin the restructuring process in federal
fiscal year 1999 (beginning October 1, 1998). On September 11, 1998, HUD issued
interim regulations implementing MAHRAA and final regulations are expected to be
issued in 1999. With respect to the local limited partnerships' expiring HAP
Contracts, it is expected that the HAP payments will be reduced or terminated
pursuant to the terms of MAHRAA.
<PAGE> 11
When the HAP Contracts are subject to renewal, there can be no assurance that
the local limited partnerships in which the Partnership has an investment will
be permitted to restructure its mortgage indebtedness under MAHRAA. In addition,
the economic impact on the Partnership of the combination of the reduced
payments under the HAP Contracts and the restructuring of the existing
FHA-insured mortgage loans under MAHRAA is uncertain.
As a result of the foregoing, the Partnership in 1997 undertook an extensive
review of disposition, refinancing or re-engineering alternatives for the
properties in which the limited partnerships have invested and are subject to
HUD mortgage and rental subsidy programs. The Partnership has incurred expenses
in connection with this review by various third party professionals, including
accounting, legal, valuation, structural and engineering costs, which amounted
to $260,952 and $137,723 for the years ended December 31, 1998 and 1997,
respectively, and are included in general and administrative expenses.
On December 30, 1998, the Partnership sold its limited partnership interests in
7 local limited partnerships, with a total carrying value of $1,007,181 to the
Operating Partnership. The sale resulted in net cash proceeds to the Partnership
of $5,250,000 and a net gain of $4,002,592, after deducting selling costs. The
cash proceeds were held in escrow at December 31, 1998 and were collected
subsequent to year-end. In March 1999, the Partnership made cash distributions
of $4,950,000 to the limited partners and $50,000 to the general partners, using
proceeds from the sale of the partnership interests.
The Operating Partnership purchased such limited partner interests for cash,
which it raised in connection with a private placement of its equity securities.
The purchase was subject to, among other things, (i) the purchase of the general
partner interests in the local limited partnerships by the Operating
Partnership; (ii) the approval of HUD and certain state housing finance
agencies; and (iii) the consent of the limited partners to the sale of the local
limited partnership interests held for investment by the Partnership.
In August 1998, a consent solicitation statement was sent to the limited
partners setting forth the terms and conditions of the purchase of the limited
partners' interests held for investment by the Partnership, together with
certain amendments to the Partnership Agreement and other disclosures of various
conflicts of interest in connection with the proposed transaction. Prior to the
sale of the partnership interests, the consents of the limited partners to the
sale and amendments to the Partnership Agreement were obtained.
Operating expenses, other than management fees, consist of legal and accounting
fees for services rendered to the Partnership and administrative expenses. Legal
and accounting fees were $163,991, $132,650 and $62,320 for the years ended
December 31, 1998, 1997 and 1996, respectively. Legal and accounting fees
increased in 1998 and 1997 as a result of $59,000 in legal fees that were
incurred in 1998 in connection with the Partnership attempting to replace the
unrelated general partner of one of the local partnerships. Administrative
expenses were $350,763, $218,861 and $63,248 for the years ended December 31,
1998, 1997 and 1996, respectively. Included in administrative expenses are
reimbursements to NAPICO for certain expenses, which totaled $35,195, $35,194
and $31,948 for the years ended December 31, 1998, 1997 and 1996, respectively.
Also included in administrative expenses for 1998 and 1997 is $260,952 and
$137,723, respectively, related to the aforementioned third-party review of the
properties owned by the local partnerships.
The results of operations of the local limited partnerships were fairly constant
during the years ended December 31, 1998, 1997 and 1996. Contributing to the
relative stability of operations at the local partnerships is the fact that
substantially all of the local partnerships are operating apartment projects
which are subsidized and have mortgage notes payable to or insured by agencies
of the federal or local government.
Total revenue for the 20 local partnerships has remained fairly constant, and
was $23,097,000, $23,111,000 and $22,979,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
Total expenses for the 20 local partnerships remained fairly consistent, and
were $22,405,000, $22,627,000 and $21,946,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
<PAGE> 12
The total net income for the 20 local partnerships for 1998, 1997 and 1996
aggregated $694,000, $484,000 and $1,033,000, respectively. The net income
allocated to the Partnership was $609,000, $398,000 and $902,000 for 1998, 1997
and 1996, respectively.
The Partnership, as a Limited Partner in the local limited partnerships in which
it has invested, is subject to the risks incident to the construction,
management, and ownership of improved real estate. The Partnership investments
are also subject to adverse general economic conditions, and, accordingly, the
status of the national economy, including substantial unemployment, concurrent
inflation and changing legislation which could increase vacancy levels, rental
payment defaults, and operating expenses, which in turn, could substantially
increase the risk of operating losses for the projects.
The Partnership has assessed the potential impact of the Year 2000 computer
systems issue on its operations. The Partnership believes that no significant
actions are required to be taken by the Partnership to address the issue and
that the impact of the Year 2000 computer systems issue will not materially
affect the Partnership's future operating results or financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The Financial Statements and Supplementary Data are listed under Item 14.
ITEM 9. CHANGES WITH AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE:
Not applicable.
<PAGE> 13
REAL ESTATE ASSOCIATES LIMITED II
(A California limited partnership)
FINANCIAL STATEMENTS,
FINANCIAL STATEMENT SCHEDULES
AND INDEPENDENT PUBLIC ACCOUNTANTS' REPORT
DECEMBER 31, 1998
<PAGE> 14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Real Estate Associates Limited II
(A California limited partnership)
We have audited the accompanying balance sheets of Real Estate Associates
Limited II (a California limited partnership) as of December 31, 1998 and 1997,
and the related statements of operations, partners' equity (deficiency) and cash
flows for each of the three years in the period ended December 31, 1998. Our
audits also included the financial statement schedules listed in the index in
item 14. These financial statements and financial statement schedules are the
responsibility of the management of the Partnership. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits. We did not audit the financial statements of
certain limited partnerships, the investments in which are reflected in the
accompanying financial statements using the equity method of accounting. The
investments in these limited partnerships represent 0 percent and 27 percent of
total assets as of December 31, 1998 and 1997, respectively, and the equity in
income of these limited partnerships represents 9 percent, 22 percent and 33
percent of the total net income of the Partnership for the years ended December
31, 1998, 1997 and 1996, respectively, and represent a substantial portion of
the investee information in Note 2 and the financial statement schedules. The
financial statements of these limited partnerships are audited by other
auditors. Their reports have been furnished to us and our opinion, insofar as it
relates to the amounts included for these limited partnerships, is based solely
on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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
management, as well as evaluating the overall financial statement presentation.
We believe our audits and the reports of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Real Estate Associates Limited II as of December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, based on our
audits and the reports of other auditors, such financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 6, 1999
<PAGE> 15
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
New Haven Associates
Limited Partnership:
We have audited the accompanying balance sheet of New Haven Associates Limited
Partnership, as of December 31, 1997, and the related statements of profit and
loss, partners' capital, and cash flows for the year then ended. These
financial statements are the responsibility of the management of New Haven
Associates Limited Partnership. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of 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 involves examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New Haven Associates Limited
Partnership, as of December 31, 1997 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
In accordance with Government Auditing Standards, we have issued a report dated
January 30, 1998 on our consideration of New Haven Associates Limited
Partnership's internal control and a report dated January 30, 1998 on its
compliance with laws and regulations.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 30, 1998
<PAGE> 16
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
New Haven Associates
Limited Partnership:
We have audited the accompanying balance sheet of New Haven Associates Limited
Partnership, as of December 31, 1996, and the related statements of profit and
loss, partners' capital (deficiency), and cash flows for the year then ended.
These financial statements are the responsibility of the management of New Haven
Associates Limited Partnership. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of 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 involves examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New Haven Associates Limited
Partnership, as of December 31, 1996 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
In accordance with Government Auditing Standards, we have issued a report dated
January 31, 1997 on our consideration of New Haven Associates Limited
Partnership's internal control structure and a report dated January 31, 1997 on
its compliance with laws and regulations.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 31, 1997
<PAGE> 17
[DWORKEN, HILLMAN, LAMORTE & STERCZALA, P.C. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Partners
Branford Development Associates
(A Limited Partnership)
Branford, Connecticut
We have audited the accompanying balance sheet of Branford Development
Associates (a limited partnership), Project No. 78-055M as of December 31,
1997, and the related statements of profit and loss, partners' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and the standards applicable to financial audits contained in Government
Auditing Standards, issued by the Comptroller General of 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
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Branford Development
Associates (a limited partnership) as of December 31, 1997, and the results of
its operations and its cash flow for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying information contained on pages 12 through 16 is presented for
additional analysis in accordance with the regulations of the U.S. Department
of Housing and Urban Development and is not a required part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is presently fairly in all material respects in relation to the basic
financial statements taken as a whole.
In accordance with Government Auditing Standards, we have also issued a report
dated January 31, 1998 on our consideration of Branford Development Associates'
(a limited partnership) internal controls and a report dated January 31, 1998,
on its compliance with laws and regulations.
/s/ DWORKEN, HILLMAN, LAMORTE
& STERCZALA, P.C.
Bridgeport, Connecticut
January 31, 1998
Federal Tax ID#06-1308345
C. Robert Hillman, CPA, Principal
1-203-333-5133
<PAGE> 18
[DWORKEN, HILLMAN, LAMORTE & STERCZALA, P.C. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Partners
Branford Development Associates
(A Limited Partnership)
Branford, Connecticut
We have audited the accompanying balance sheet of Branford Development
Associates (a limited partnership), Project No. 78-055M as of December 31,
1996, and the related statements of profit and loss (HUD Form 92410), partners'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of 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 management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Branford Development
Associates (a limited partnership) as of December 31, 1996, and the results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
In accordance with Government Auditing Standards and the consolidated Audit
Guide for Audits of HUD Programs, issued by the U.S. Department of Housing and
Urban Development, we have also issued a report dated January 24, 1997, on our
consideration of Branford Development Associates' (a limited partnership)
internal control structure, and reports dated January 24, 1997, on its
compliance with specific requirements applicable to Affirmative Fair Housing,
and specific requirements applicable to nonmajor HUD program transactions.
The accompanying information contained on pages 12 through 16 is presented for
additional analysis in accordance with the regulations of the U.S. Department
of Housing and Urban Development and is not a required part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is presented fairly in all material respects in relation to the basic
financial statements taken as a whole.
Bridgeport, Connecticut /s/ DWORKEN, HILLMAN, LAMORTE & STERCZALA, P.C.
January 24, 1997
Federal Tax ID# 06-1308345
C. Robert Hillman, CPA, Principal
1-203-333-5133
<PAGE> 19
[KPMG PEAT MARWICK LLP LETTERHEAD]
REPORT ON AUDITED FINANCIAL STATEMENTS
AND SUPPLEMENTARY INFORMATION
INDEPENDENT AUDITORS' REPORT
The Partners
Redfern Grove Associates:
We have audited the accompanying balance sheet of Redfern Grove Associates (the
"Partnership"), HUD Project No. RI-43-HO23-102, as of July 31, 1997, and the
related statements of profit and loss (on HUD Form 92410), changes in partners'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of 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 management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Partnership as of July 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also issued reports
dated September 12, 1997 on: our consideration of the Partnership's internal
controls, the Partnership's compliance with specific requirements applicable to
major HUD programs, and the Partnership's compliance with specific requirements
applicable to fair housing and non-discrimination.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information included in Schedules 1 through 7 is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/ KPMG PEAT MARWICK LLP
Providence, Rhode Island
September 12, 1997
<PAGE> 20
[KPMG PEAT MARWICK LLP LETTERHEAD]
REPORT ON AUDITED FINANCIAL STATEMENTS
AND SUPPLEMENTARY INFORMATION
INDEPENDENT AUDITORS REPORT
The Partners
Redfern Grove Associates
(A Limited Partnership):
We have audited the accompanying balance sheet of Redfern Grove Associates (A
Limited Partnership) (the "Partnership"), HUD Project No. RI-43-HO23-102, as of
July 31, 1996, and the related statements of profit and loss (on HUD Form
92410), changes in partners' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of 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 management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Partnership as of July 31,
1996 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also issued reports
dated September 13, 1996 on: our consideration of the Partnership's internal
control structure, the Partnership's compliance with specific requirements
applicable to major HUD programs, and the Partnership's compliance with
specific requirements applicable to affirmative fair housing.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information included in Schedules 1 through 7 is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the financial statements
taken as a whole.
/s/ KPMG PEAT MARWICK LLP
Providence, Rhode Island
September 13, 1996
<PAGE> 21
[BDO SEIDMAN, LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Partners of
Valebrook Associates
We have audited the accompanying balance sheet of Valebrook Associates (A
Limited Partnership) FHA Project No. MA 74-120, as of December 31, 1997 and the
related statements of income, partners' equity (deficit) and cash flows for the
year then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of 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 management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valebrook Associates (A
Limited Partnership) FHA Project No. MA74-120 at December 31, 1997, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also issued a report
dated February 3, 1998, on our consideration of Valebrook Associates' internal
control structure, a reported dated February 3, 1998, on its compliance with
laws and regulations, and a report dated February 3, 1998, on its compliance
with specific requirements applicable to HUD programs.
/s/ BDO SEIDMAN, LLP
Boston, Massachusetts
February 3, 1998
<PAGE> 22
[BDO SEIDMAN, LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Partners of
Valebrook Associates
We have audited the accompanying balance sheet of Valebrook Associates (A
Limited Partnership) FHA Project No. MA 74-120, as of December 31, 1996 and the
related statements of income, partners' equity (deficit) and cash flows for the
year then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valebrook Associates (A
Limited Partnership) FHA Project No. MA74-120 at December 31, 1996, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
Boston, Massachusetts
February 5, 1997
<PAGE> 23
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ -- $ 3,493,251
CASH DUE FROM ESCROW (Note 2) 5,250,000 --
CASH AND CASH EQUIVALENTS (Note 1) 696,785 1,602,717
----------- -----------
TOTAL ASSETS $ 5,946,785 $ 5,095,968
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accounts payable $ 130,767 $ 98,954
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
PARTNERS' EQUITY (DEFICIENCY):
General partners (159,935) (168,125)
Limited partners 5,975,953 5,165,139
----------- -----------
5,816,018 4,997,014
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 5,946,785 $ 5,095,968
=========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements.
<PAGE> 24
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME $ 66,041 $ 82,692 $ 74,125
----------- ----------- -----------
OPERATING EXPENSES:
Legal and accounting 163,991 132,650 62,320
Management fees - general partner (Note 3) 397,680 397,680 397,680
Administrative (Note 3) 350,763 218,861 63,248
----------- ----------- -----------
Total operating expenses 912,434 749,191 523,248
----------- ----------- -----------
LOSS FROM OPERATIONS (846,393) (666,499) (449,123)
GAIN ON SALE OF LIMITED PARTNERSHIP
INTERESTS (Note 2) 4,002,592 -- --
DISTRIBUTIONS FROM LIMITED
PARTNERSHIPS RECOGNIZED AS
INCOME (Note 2) 224,996 244,281 113,203
EQUITY IN INCOME OF LIMITED
PARTNERSHIPS AND AMORTIZATION
OF ACQUISITION COSTS (Note 2) (2,562,191) 820,899 1,154,755
----------- ----------- -----------
NET INCOME $ 819,004 $ 398,681 $ 818,835
=========== =========== ===========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST (Note 1) $ 77 $ 37 $ 77
=========== =========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements.
<PAGE> 25
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
---------- ---------- ----------
<S> <C> <C> <C>
EQUITY (DEFICIENCY),
January 1, 1996 $ (180,300) $3,959,798 $3,779,498
Net income for 1996 8,188 810,647 818,835
---------- ---------- ----------
EQUITY (DEFICIENCY),
December 31, 1996 (172,112) 4,770,445 4,598,333
Net income for 1997 3,987 394,694 398,681
---------- ---------- ----------
EQUITY (DEFICIENCY),
December 31, 1997 (168,125) 5,165,139 4,997,014
Net income for 1998 8,190 810,814 819,004
---------- ---------- ----------
EQUITY (DEFICIENCY),
December 31, 1998 $ (159,935) $5,975,953 $5,816,018
========== ========== ==========
</TABLE>
The accompanying notes are integral part of these financial statements.
<PAGE> 26
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 819,004 $ 398,681 $ 818,835
Adjustments to reconcile net income to net cash used in
operating activities:
Gain on sale of partnership interest (4,002,592)
Equity in income of limited partnerships and amortization
of acquisition costs 2,562,191 (820,899) (1,154,755)
(Decrease) increase in accounts payable 31,813 67,142 (10,574)
----------- ----------- -----------
Net cash used in operating activities (589,584) (355,076) (346,494)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Costs related to sale of partnership interests (240,227)
Investments in limited partnerships:
Capital Contribution (134,900) (52,000) --
Distributions from limited partnerships recognized as return
of capital 58,779 187,838 305,738
----------- ----------- -----------
Net cash (used in) provided by investing activities (316,348) 135,838 305,738
----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (905,932) (219,238) (40,756)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,602,717 1,821,955 1,862,711
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 696,785 $ 1,602,717 $ 1,821,955
=========== =========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements.
<PAGE> 27
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Real Estate Associates Limited II (the Partnership) was formed under the
California Limited Partnership Act on December 4, 1979. The Partnership
was formed to invest in other limited partnerships which own and operate
primarily federal, state or local government-assisted housing projects.
The general partners are Coast Housing Investment Associates (CHIA), a
limited partnership, and National Partnership Investments Corp. (NAPICO),
the corporate general partner. The limited partner of CHIA is an officer
of NAPICO.
Prior to December 30, 1998, NAPICO was a wholly owned subsidiary of Casden
Investment Corporation ("CIC"), which is wholly owned by Alan I. Casden.
On December 30, 1998, Casden Properties Operating Partnership, L.P. (the
"Operating Partnership"), a majority owned subsidiary of Casden Properties
Inc., a real estate investment trust organized by Alan I. Casden,
purchased a 95.25% economic interest in NAPICO.
The Partnership offered 3,000 units and issued 2,673 units of limited
partner interests through a public offering. Each unit was comprised of
two limited partner interests and a warrant granting an investor the right
to purchase two additional limited partner interests. An additional 5,346
interests were issued from the exercise of the warrants and the sale of
interests associated with warrants not exercised. The general partners
have a 1 percent interest in the profits and losses of the Partnership.
The limited partners have the remaining 99 percent interest in proportion
to their respective investments.
The Partnership shall be dissolved only upon the expiration of 52 complete
calendar years (December 31, 2031) from the date of the formation of the
Partnership or the occurrence of various other events as specified in the
terms of the Partnership agreement.
Upon total or partial liquidation of the Partnership or the disposition or
partial disposition of a project or project interest and distribution of
the proceeds, the general partners will be entitled to a liquidation fee
as stipulated in the Partnership agreement. The limited partners will have
a priority return equal to their invested capital attributable to the
project(s) or project interest(s) sold and shall receive from the sale of
the project(s) or project interest(s) an amount sufficient to pay state
and federal income taxes, if any, calculated at the maximum rate then in
effect. The general partners' liquidation fee may accrue but shall not be
paid until the limited partners have received distributions equal to 100
percent of their capital contributions.
On December 30, 1998, the Partnership sold its interests in 7 local
limited partnerships for $5,250,000 to the Operating Partnership.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and
5
<PAGE> 28
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Method of Accounting for Investments in Limited Partnerships
The investments in limited partnerships are accounted for on the equity
method. Acquisition, selection and other costs related to the acquisition
of the projects were capitalized as part of the investment account and are
being amortized on a straight line basis over the estimated lives of the
underlying assets, which is generally 30 years.
Net Income Per Limited Partnership Interest
Net income per limited partnership interest was computed by dividing the
limited partners' share of net income by the number of limited partnership
interests outstanding during the year. The number of limited partnership
interests was 10,693 for all years presented.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and bank certificates of deposit
with an original maturity date of three months or less. The Partnership
has its cash and cash equivalents on deposit primarily with two high
credit quality financial institutions. Such cash and cash equivalents are
in excess of the FDIC insurance limit.
Impairment of Long-Lived Assets
The Partnership reviews long-lived assets to determine if there has been
any permanent impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. If
the sum of the expected future cash flows is less than the carrying amount
of the assets, the Partnership recognizes an impairment loss. During 1998,
the partnership recognized an impairment loss of $3,316,802 related to
certain investments in local limited partnerships, which has been included
in equity in loss of limited partnerships.
2. INVESTMENTS IN LIMITED PARTNERSHIPS
The Partnership holds limited partnership interests in 13 limited
partnerships as of December 31, 1998, after selling its interests in 7
limited partnerships. The limited partnerships owned as of December 31,
1998, residential low income rental projects consisting of 1041 apartment
units. The mortgage loans of these projects are payable to or insured by
various governmental agencies.
The Partnership, as a limited partner, is entitled to between 85 percent
and 99 percent of the profits and losses of the limited partnerships.
6
<PAGE> 29
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
Equity in losses of limited partnerships is recognized in the financial
statements until the limited partnership investment account is reduced to
a zero balance. Losses incurred after the limited partnership investment
account is reduced to zero are not recognized. The cumulative amount of
the unrecognized equity in losses of certain limited partnerships was
approximately $8,107,000 and $12,274,000 as of December 31, 1998 and 1997,
respectively. The decrease in 1998 is due to the sale of the investments
in certain local limited partnerships.
Distributions from limited partnerships are accounted for as a return of
capital until the investment balance is reduced to zero. Subsequent
distributions received are recognized as income.
The following is a summary of the investments in limited partnerships and
reconciliation to the limited partnership accounts:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Investment balance, beginning of year $ 3,493,251 $ 2,808,190
Capital contributions 134,900 52,000
Cash distributions recognized as a return of capital (58,779) (187,838)
Equity in (loss) income of limited partnerships (2,553,928) 829,162
Investment in limited partnerships sold (1,007,181)
Amortization of capitalized acquisition costs and fees (8,263) (8,263)
----------- -----------
Investment balance, end of year $ -- $ 3,493,251
=========== ===========
</TABLE>
The difference between the investment per the accompanying balance sheets
at December 31, 1998 and 1997, and the deficiency per the limited
partnerships' combined financial statements is due primarily to cumulative
unrecognized equity in losses of certain limited partnerships, costs
capitalized to the investment account and cumulative distributions
recognized as income.
Selected financial information from combining the financial statements of
the limited partnerships at December 31, 1998 and 1997 and for each of
three years in the period ended December 31, 1998 is as follows:
7
<PAGE> 30
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
<TABLE>
<CAPTION>
Balance Sheets
1998 1997
-------- --------
(in thousands)
<S> <C> <C> <C>
Land and buildings, net $ 18,727 $ 48,792
======== ========
Total assets $ 27,610 $ 65,330
======== ========
Mortgages payable $ 35,505 $ 80,218
======== ========
Total liabilities $ 36,859 $ 83,550
======== ========
Deficiency of Real Estate Associates
Limited II $ (7,527) $(13,507)
======== ========
Deficiency of other partners $ (1,722) $ (4,713)
======== ========
Statements of Operations
1998 1997 1996
-------- -------- --------
(in thousands)
Total revenue $ 23,097 $ 23,111 $ 22,979
======== ======== ========
Interest expense $ 6,451 $ 6,509 $ 7,339
======== ======== ========
Depreciation $ 3,204 $ 3,174 $ 3,292
======== ======== ========
Total expenses $ 22,403 $ 22,627 $ 21,946
======== ======== ========
Net income $ 694 $ 484 $ 1,033
======== ======== ========
Net income allocable to the Partnership $ 609 $ 398 $ 902
======== ======== ========
</TABLE>
Prior to the sale of certain partnership interests on December 30, 1998,
an affiliate of NAPICO was the general partner in three of the limited
partnerships included above, and another affiliate received property
management fees of approximately 5% of their revenue. The affiliate
received property management fees of $311,489, $310,109 and $309,874 in
1998, 1997 and 1996, respectively. The following sets forth the
significant data for these partnerships prior to the sale referred to
above, reflected in the accompanying financial statements using the
equity method of accounting:
8
<PAGE> 31
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Total assets $ -- $ 11,304
======== ========
Total liabilities $ -- $ 16,913
======== ========
Deficiency of Real Estate Associates Limited II $ -- $ (3,587)
======== ========
Deficiency of other partners $ -- $ (2,022)
======== ========
Total revenue $ 5,209 $ 5,157 $ 5,125
======== ======== ========
Net income $ (155) $ 14 $ 129
======== ======== ========
</TABLE>
These partnerships were sold to the Operating Partnership on December 30,
1998.
Under recent adopted law and policy, the United States Department of
Housing and Urban Development ("HUD") has determined not to renew the
Housing Assistance Payment ("HAP") Contracts on a long term basis on the
existing terms. In connection with renewals of the HAP Contracts under
such new law and policy, the amount of rental assistance payments under
renewed HAP Contracts will be based on market rentals instead of above
market rentals, which was generally the case under existing HAP
Contracts. The payments under the renewed HAP Contracts are not expected
to be in an amount that would provide sufficient cash flow to permit
owners of properties subject to HAP Contracts to meet the debt service
requirements of existing loans insured by the Federal Housing
Administration of HUD ("FHA") unless such mortgage loans are
restructured. In order to address the reduction in payments under HAP
Contracts as a result of this new policy, the Multi-family Assisted
Housing Reform and Affordability Act of 1997 ( "MAHRAA"), which was
adopted in October 1997, provides for the restructuring of mortgage loans
insured by the FHA with respect to properties subject to the Section 8
program. Under MAHRAA, an FHA-insured mortgage loan can be restructured
into a first mortgage loan which will be amortized on a current basis and
a low interest second mortgage loan payable to FHA which will only be
payable on maturity of the first mortgage loan. This restructuring
results in a reduction in annual debt service payable by the owner of the
FHA-insured mortgage loan and is expected to result in an insurance
payment from FHA to the holder of the FHA-insured loan due to the
reduction in the principal amount. MAHRAA also phases out project-based
subsidies on selected properties serving families not located in rental
markets with limited supply, converting such subsidies to a tenant-based
subsidy.
MAHRAA provides that properties begin the restructuring process in
federal fiscal year 1999 (beginning October 1, 1998). On September 11,
1998, HUD issued interim regulations implementing MAHRAA and final
regulations are expected to be issued in 1999. With respect to the local
limited
9
<PAGE> 32
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
partnerships' expiring HAP Contracts, it is expected that the HAP
payments will be reduced or terminated pursuant to the terms of MAHRAA.
2. INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
When the HAP Contracts are subject to renewal, there can be no assurance
that the local limited partnerships in which the Partnership has an
investment will be permitted to restructure its mortgage indebtedness
under MAHRAA. In addition, the economic impact on the Partnership of the
combination of the reduced payments under the HAP Contracts and the
restructuring of the existing FHA-insured mortgage loans under MAHRAA is
uncertain.
As a result of the foregoing, the Partnership in 1997 undertook an
extensive review of disposition, refinancing or re-engineering
alternatives for the properties in which the limited partnerships have
invested and are subject to HUD mortgage and rental subsidy programs. The
Partnership has incurred expenses in connection with this review by
various third party professionals, including accounting, legal,
valuation, structural and engineering costs, which amounted to $260,952
and $137,723 for the years ended December 31, 1998 and 1997,
respectively.
On December 30, 1998, the Partnership sold its limited partnership
interests in 7 local limited partnerships, with a total carrying value of
$1,007,181, to the Operating Partnership. The sale resulted in cash
proceeds to the Partnership of $5,250,000 and a net gain of $4,002,591
after deducting the selling costs. The cash proceeds were held in escrow
at December 31, 1998 and were collected subsequent to year-end. In March
1999, the Partnership made a cash distribution of $4,950,000 to the
limited partners and $50,000 to the general partners, using proceeds from
the sale of the partnership interests.
The Operating Partnership purchased such limited partner interests for
cash, which it raised in connection with a private placement of its
equity securities. The purchase was subject to, among other things, (i)
the purchase of the general partner interests in the local limited
partnerships by the Operating Partnership; (ii) the approval of HUD and
certain state housing finance agencies; and (iii) the consent of the
limited partners to the sale of the local limited partnership interests
held for investment by the Partnership.
In August 1998, a consent solicitation statement was sent to the limited
partners setting forth the terms and conditions of the purchase of the
limited partners' interests held for investment by the Partnership,
together with certain amendments to the Partnership Agreement and other
disclosures of various conflicts of interest in connection with the
proposed transaction. Prior to the sale of the partnership interests, the
consents of the limited partners to the sale and amendments to the
Partnership Agreement were obtained.
10
<PAGE> 33
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. FEES AND EXPENSES DUE TO GENERAL PARTNER
Under the terms of the Restated Certificate and Agreement of Limited
Partners, the Partnership is liable to NAPICO for an annual management
fee equal to .4 percent of the original invested assets of the limited
partnerships. Invested assets is defined as the costs of acquiring
project interests, including the proportionate amount of the mortgage
loans related to the Partnership's interest in the capital accounts of
the respective partnerships.
The Partnership reimburses NAPICO for certain expenses. The reimbursement
to NAPICO was $35,195, $35,194 and $31,948 in 1998, 1997 and 1996,
respectively, and is included in administrative expenses.
4. CONTINGENCIES
On August 27, 1998, two investors holding an aggregate of eight units of
limited partnership interests in Real Estate Associates Limited III (an
affiliated partnership in which NAPICO is the managing general partner)
and two investors holding an aggregate of five units of limited
partnership interest in Real Estate Associates Limited VI (another
affiliated partnership in which NAPICO is the managing general partner)
commenced an action in the United States District Court for the Central
District of California against the Partnership, NAPICO and certain other
affiliated entities. The complaint alleges that the defendants breached
their fiduciary duty to the limited partners of certain NAPICO managed
partnerships and made materially false and misleading statements in the
consent solicitation statements sent to the limited partners of such
partnerships relating to approval of the transfer of partnership
interests in limited partnerships, owning certain of the properties, to
the Operating Partnership organized by an affiliate of NAPICO. The
plaintiffs seek preliminary and permanent injunctive relief and other
equitable relief, as well as compensatory and punitive damages. The
managing general partner of such NAPICO managed partnerships and the
other defendants believe that the plaintiffs' claims are without merit
and intend to contest the action vigorously.
The corporate general partner of the Partnership is a plaintiff in
various lawsuits and has also been named a defendant in other lawsuits
arising from transactions in the ordinary course of business. In
addition, the Partnership is involved in a lawsuit. In the opinion of
management and the corporate general partner, the claims will not result
in any material liability to the Partnership.
The Partnership has assessed the potential impact of the Year 2000
computer systems issue on its operations. The Partnership believes that
no significant actions are required to be taken by the Partnership to
address the issue and that the impact of the Year 2000 computer systems
issue will not materially affect the Partnership's future operating
results or financial condition.
11
<PAGE> 34
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. INCOME TAXES
No provision has been made for income taxes in the accompanying financial
statements since such taxes, if any, are the liability of the individual
partners. The major differences in tax and financial reporting result
from the use of different bases and depreciation methods for the
properties held by the limited partnerships. Differences in tax and
financial losses also arise as losses are not recognized for financial
reporting purposes when the investment balance has been reduced to zero.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments. The carrying amount of assets
and liabilities reported on the balance sheets that require such
disclosure approximates fair value due to their short-term maturity.
7. FOURTH-QUARTER ADJUSTMENT
The Partnership's policy is to record its equity in the income of limited
partnerships on a quarterly basis, using estimated financial information
furnished by the various local operating general partners. The equity in
income of limited partnerships reflected in the accompanying annual
financial statements is based primarily upon audited financial statements
of the investee limited partnerships. The difference of approximately
$3,215,891, between the estimated nine-month equity in income and the
actual 1998 year end equity in income has been recorded in the fourth
quarter.
12
<PAGE> 35
SCHEDULE
REAL ESTATE ASSOCIATES LIMITED II
INVESTMENTS IN LIMITED PARTNERSHIPS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------------------------------------------------
Cash
Balance Distri- Equity Balance
January Capital butions in December
Limited Partnerships 1, 1998 Contributions Received Income Sale 31, 1998
- -------------------- ------- ------------- -------- --------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Azalea Court Apartments $ $ $ $ $ $ --
Berger Apartments* 726,715 280,466 (1,007,181)
Biltmore* 134,900 (134,900)
Branford Elderly Housing 367,174 (367,174)
Castlewood Apartments*
Cherrywood/Saturn Apartments
Clearfield Manor
Crystal Springs
East Farm Village*
Grant Park/Ormewood Park*
Lakeside Apartments
Landmark Towers
Magnolia State Apts
New Haven Plaza*
Pennbrook Apartments*
Redfern Grove Apartments 533,440 (31,862) (501,578)
Sugar River Mills
Valebrook 1,865,922 (26,917) (1,839,005)
Westward Ho Apartments
Willow Wick Apartments
----------- ----------- ----------- ----------- ------------ ------
$ 3,493,251 $ 134,900 $ (58,779) $(2,562,191) $ (1,007,181) $ --
=========== =========== =========== =========== ============ ======
</TABLE>
* Sold to the Operating Partnership in 1998
<PAGE> 36
SCHEDULE
(Continued)
REAL ESTATE ASSOCIATES LIMITED II
INVESTMENTS IN LIMITED PARTNERSHIPS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------------------------------------------
Cash
Balance Distri- Equity Balance
January Capital butions in December
Limited Partnerships 1, 1997 Contributions Received Income 31, 1997
- -------------------- ------- ------------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
Azalea Court Apartments $ $ $ $ $
Berger Apartments 514,942 211,773 726,715
Biltmore 52,000 (52,000)
Branford Elderly Housing 330,012 37,162 367,174
Castlewood Apartments
Cherrywood/Saturn Apartments
Clearfield Manor
Crystal Springs
East Farm Village
Grant Park/Ormewood Park
Lakeside Apartments
Landmark Towers
Magnolia State Apts.
New Haven Plaza 129,795 (132,640) 2,845
Pennbrook Apartments
Redfern Grove Apartments 432,950 (28,281) 128,771 533,440
Sugar River Mills
Valebrook 1,400,491 (26,917) 492,348 1,865,922
Westward Ho Apartments
Willow Wick Apartments
---------- ----------- ----------- ---------- -----------
$2,808,190 $ 52,000 $ (187,838) $ 820,899 $ 3,493,251
========== ========== =========== ========== ===========
</TABLE>
<PAGE> 37
SCHEDULE
(Continued)
REAL ESTATE ASSOCIATES LIMITED II
INVESTMENTS IN LIMITED PARTNERSHIPS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-------------------------------------------------------------------------
Cash
Balance Distri- Equity Balance
January Capital butions in December
Limited Partnerships 1, 1996 Contributions Received Income 31, 1996
- -------------------- ------- ------------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
Azalea Court Apartments $ $ $ $ $
Berger Apartments 339,210 (20,466) 196,198 514,942
Biltmore
Branford Elderly Housing 292,932 37,080 330,012
Castlewood Apartments
Cherrywood/Saturn Apartments (24,037) 24,037
Clearfield Manor
Crystal Springs
East Farm Village (57,226) 57,226
Grant Park/Ormewood Park
Lakeside Apartments
Landmark Towers
Magnolia State Apts.
New Haven Plaza 89,625 (177,092) 217,262 129,795
Pennbrook Apartments
Redfern Grove Apartments 328,124 104,826 432,950
Sugar River Mills
Valebrook 909,282 (26,917) 518,126 1,400,491
Westward Ho Apartments
Willow Wick Apartments
---------- ------------ --------- ---------- -----------
$1,959,173 $ -- $(305,738) $1,154,755 $ 2,808,190
========== ============ ========= ========== ===========
</TABLE>
<PAGE> 38
SCHEDULE
(Continued)
REAL ESTATE ASSOCIATES LIMITED II
INVESTMENTS IN, EQUITY IN EARNINGS OF AND DIVIDENDS
RECEIVED FROM AFFILIATES AND OTHER PERSONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTES: 1. Equity in losses represents the Partnership's allocable
share of the net loss from the limited partnerships for the
year. Equity in losses of the limited partnerships will be
recognized until the investment balance is reduced to zero
or a negative balance equal to further commitments by the
Partnership.
2. Cash distributions from the limited partnerships are
treated as a return on the investment and reduce the
investment balance until such time as the investment is
reduced to zero or a negative balance equal to further
commitments by the Partnership. Distributions subsequently
received will be recognized as income.
<PAGE> 39
SCHEDULE III
(Continued)
REAL ESTATE ASSOCIATES LIMITED II
REAL ESTATE AND ACCUMULATED DEPRECIATION OF PROPERTY
HELD BY LOCAL LIMITED PARTNERSHIPS IN
WHICH REAL II HAS INVESTMENTS
DECEMBER 31, 1998
NOTES: 1. Each local limited partnership has developed, owns and
operates the housing project. Substantially all project
costs, including construction period interest expense, were
capitalized by the limited partnerships.
2. Depreciation is provided for by various methods over the
estimated useful lives of the projects. The estimated
composite useful lives of the buildings are generally from
25 to 40 years.
3. Investments in property and equipment:
<TABLE>
<CAPTION>
Buildings,
Furnishings
And
Land Equipment Total
------------- ------------- -------------
<S> <C> <C> <C>
Balance at January 1, 1996 $ 5,322,809 $ 102,163,647 $ 107,486,456
Net additions during 1996 22,503 691,232 713,735
------------- ------------- -------------
Balance at December 31, 1996 5,345,312 102,854,879 108,200,191
Net additions during 1997 75,176 1,172,217 1,247,393
------------- ------------- -------------
Balance at December 31, 1997 5,420,488 104,027,096 109,447,584
Net additions during 1998 777,120 (1,883,647) (1,106,527)
Sale of properties during 1998 (3,856,786) (57,610,693) (61,467,479)
------------- ------------- -------------
Balance at December 31, 1998 $ 2,340,822 $ 44,532,756 $ 46,873,578
============= ============= =============
</TABLE>
<PAGE> 40
SCHEDULE III
(Continued)
REAL ESTATE ASSOCIATES LIMITED II
REAL ESTATE AND ACCUMULATED DEPRECIATION OF PROPERTY
HELD BY LOCAL LIMITED PARTNERSHIPS IN
WHICH REAL II HAS INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Buildings,
Furnishings
And
Equipment
------------
<S> <C>
Accumulated Depreciation:
Balance at January 1, 1996 $ 54,396,891
Net additions during 1996 3,199,147
------------
Balance at December 31, 1996 57,596,038
Net additions during 1997 3,059,440
------------
Balance at December 31, 1997 60,655,478
Net additions during 1998 1,242,752
Sale of properties during 1998 (33,751,348)
------------
Balance at December 31, 1998 $ 28,146,882
============
</TABLE>
<PAGE> 41
SCHEDULE III
REAL ESTATE ASSOCIATES LIMITED II
REAL ESTATE AND ACCUMULATED DEPRECIATION
OF PROPERTY HELD BY LOCAL LIMITED
PARTNERSHIPS
IN WHICH REAL II HAS INVESTMENTS
DECEMBER 31, 1993
<TABLE>
<CAPTION>
Buildings, Furnishings
& Equipment - Initial
Cost to Partnership
Number Outstanding and Amount Carried
of Mortgage at Close of Accumulated Construction
Partnership/Location Units Loan Land Period Total Depreciation Period
-------------------- ----- ----------- ----------- -------------------------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Azalea Court Apts 48 $ 996,053 $ 62,500 $ 1,288,693 $ 1,351,193 $ 792,130 10/80-3/81
Theodore, AL
Branford Elderly Hsng 38 969,299 138,000 1,559,747 1,697,747 615,396 6/80-4/81
Branford, Connecticut
Cherrywood/Saturn Apartments 40 3,155,132 146,186 2,502,068 2,648,254 1,825,964 9/79-4/80
Twin Falls/Idaho Falls, Idaho
Clearfield Manor 40 1,094,377 50,000 1,271,490 1,321,490 858,213 10/80-10/81
Clearfield, KY
Crystal Springs Apts 28 623,355 35,835 780,989 816,824 566,831 7/80-3/81
Crystal Springs, MS
Lakeside Apartments 48 1,670,000 115,366 1,557,304 1,672,670 1,521,320 10/80-6/81
Mishawaka, IN
Landmark Towers 40 895,759 38,700 1,565,765 1,604,465 1,337,082 4/79-10/80
Nampa, Idaho
Magnolia State Apts 60 1,206,309 57,165 1,595,237 1,652,402 962,421 3/80-8/80
Gulfport, MS
Redfern Grove Apts 72 1,574,218 245,502 2,715,611 2,961,113 1,827,539 7/80-7/81
E. Providence, RI
Sugar River Mills 162 7,200,866 301,007 9,293,072 9,594,079 4,950,182 2/81-4/82
Claremon, NH
Valebrook Assoc 151 3,585,416 88,886 4,831,665 4,920,551 3,770,276 2/79-7/80
Lawrence, Massachusetts
Westward Ho Apartments 290 12,105,467 1,040,000 14,948,798 15,988,798 8,648,082 4/80-12/81
Phoenix, Arizona
Willow Wick Apts 24 429,201 21,675 622,317 643,992 471,446 9/80-5/81
Centre, AL
----- ----------- ----------- ----------- ----------- ------------ ------------
TOTAL 1,041 $35,505,452 $ 2,340,822 $44,532,756 $46,873,578 $28,146,882
===== =========== =========== =========== =========== ===========
</TABLE>
<PAGE> 42
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
REAL ESTATE ASSOCIATES LIMITED II (the "Partnership") has no directors or
executive officers of its own.
Prior to December 30, 1998, NAPICO was a wholly owned subsidiary of Casden
Investment Corporation ("CIC"), which is wholly owned by Alan I. Casden. On
December 30, 1998, Casden Properties Operating Partnership, L.P., (the
"Operating Partnership") a majority owned subsidiary of Casden Properties Inc.,
a real estate investment trust organized by Alan I. Casden, purchased a 95.25%
economic interest in NAPICO. The following biographical information is presented
for the directors and executive officers of NAPICO with principal responsibility
for the Partnership's affairs.
CHARLES H. BOXENBAUM, 69, Chairman of the Board of Directors and Chief Executive
Officer of NAPICO.
Mr. Boxenbaum has been associated with NAPICO since its inception. He has been
active in the real estate industry since 1960, and prior to joining NAPICO was a
real estate broker with the Beverly Hills firm of Carl Rhodes Company.
Mr. Boxenbaum has been a guest lecturer at national and state realty
conventions, certified properties exchanger's seminars, Los Angeles Town Hall,
National Association of Home Builders, International Council of Shopping
Centers, Society of Conventional Appraisers, California Real Estate Association,
National Institute of Real Estate Brokers, Appraisal Institute, various mortgage
banking seminars, and the North American Property Forum held in London, England.
In 1963, he was the winner of the Snyder Award, the highest annual award offered
by the National Association of Real Estate Boards for Best Exchange. He is one
of the founders and a past director of the First Los Angeles Bank, organized in
November 1974. Mr. Boxenbaum was a member of the Board of Directors of the
National Housing Council. Mr. Boxenbaum received his Bachelor of Arts degree
from the University of Chicago.
BRUCE E. NELSON, 47, President and a director of NAPICO.
Mr. Nelson joined NAPICO in 1980 and became President in February 1989. He is
responsible for the operations of all NAPICO sponsored limited partnerships.
Prior to that he was primarily responsible for the securities aspects of the
publicly offered real estate investment programs. Mr. Nelson is also involved in
the identification, analysis, and negotiation of real estate investments.
From February 1979 to October 1980, Mr. Nelson held the position of Associate
General Counsel at Western Consulting Group, Inc., private residential and
commercial real estate syndicators. Prior to that time, Mr. Nelson was engaged
in the private practice of law in Los Angeles. Mr. Nelson received his Bachelor
of Arts degree from the University of Wisconsin and is a graduate of the
University of Colorado School of Law. He is a member of the State Bar of
California and is a licensed real estate broker in California and Texas.
ALAN I. CASDEN, 53, Chairman of Casden Properties Inc. and The Casden Company,
an affiliate of Casden Properties (formerly CoastFed Properties), a director and
member of the audit committee of NAPICO, and chairman of the Executive Committee
of NAPICO.
Mr. Casden is Chairman of the Board, Chief Executive Officer and sole
shareholder of The Casden Company and Casden Investment Company. He also became
the Chairman of the Board of Casden Properties Inc. in 1998. Previously, he was
the president and chairman of Mayer Group, Inc., which he joined in 1975. He is
also chairman of Mayer Management, Inc., a real estate management firm. Mr.
Casden has been involved in approximately $3 billion of real estate financings
and sales and has been responsible for the development and construction of more
than 12,000 apartment units and 5,000 single-family homes and condominiums.
<PAGE> 43
Mr. Casden is a member of the American Institute of Certified Public Accountants
and of the California Society of Certified Public Accountants. Mr. Casden is a
member of the advisory board of the National Multi-Family Housing Conference,
the Multi-Family Housing Council, and the President's Council of the California
Building Industry Association. He also serves on the advisory board to the
School of Accounting of the University of Southern California. He holds a
Bachelor of Science degree and a Masters in Business Administration degree from
the University of Southern California.
HENRY C. CASDEN, 55, President, Chief Operating Officer and Secretary of The
Casden Company and a director and secretary of NAPICO.
Mr. Casden has been President and Chief Operating Officer of The Casden Company,
as well as a director of NAPICO since February 1988. He became secretary of both
companies in late 1994. He also became the President of Casden Properties Inc.
in 1998. From 1982 to 1988, Mr. Casden was of counsel and a partner in the Los
Angeles law firm of Troy, Casden & Gould. From 1978 to 1981, he was of counsel
and a partner in the Los Angeles law firm of Loeb & Loeb. From 1972 to 1978, Mr.
Casden was a member of the Beverly Hills law firm of Fink & Casden, Professional
Corporation.
Mr. Casden received his Bachelor of Arts degree from the University of
California at Los Angeles, and is a graduate of the University of San Diego Law
School. Mr. Casden is a member of the State Bar of California and has numerous
professional affiliations.
PAUL PATIERNO, 42, Chief Financial Officer.
Mr. Patierno joined NAPICO in 1998 and is responsible for its financial affairs,
as well as the limited partnerships sponsored by it. From 1995 until joining
NAPICO in September 1998, Mr. Patierno was a senior manager in the affordable
housing group of Altschuler, Melvoin and Glasser LLP, a national public
accounting firm. From 1990 to 1995, he practiced public accounting with a firm
specializing in real estate syndication. Mr. Patierno received his bachelor of
science degree in accounting from California State University at Northridge, and
is a member of the American Institute of Certified Public Accountants and the
California Society of Certified Public Accountants.
PATRICIA W. TOY, 69, Senior Vice President - Communications and Assistant
Secretary
Mrs. Toy joined NAPICO in 1977, following her receipt of an MBA from the
Graduate School of Management, UCLA. From 1952 to 1956, Mrs. Toy served as a
U.S. Naval Officer in communications and personnel assignments. She holds a
Bachelor of Arts Degree from the University of Nebraska.
MARK L. WALTHER, 38, Executive Vice President, General Counsel and Assistant
Secretary.
Mr. Walther joined NAPICO in 1987 and is responsible for the legal affairs of
the NAPICO sponsored limited partnerships. Prior to joining NAPICO, Mr. Walther
worked in the San Francisco law firm of Browne and Kahn which specialized in
construction litigation. Mr. Walther received his Bachelor of Arts Degree in
Political Science from the University of California, Santa Barbara and is a
graduate of the University of California, Davis, School of Law. He is a member
of the State Bar of Hawaii.
NAPICO and several of its officers, directors and affiliates, including Charles
H. Boxenbaum, Bruce E. Nelson and Alan I. Casden, consented to the entry, on
June 25, 1997, of an administrative cease and desist order by the U.S.
Securities and Exchange Commission (the "Commission"), without admitting or
denying any of the findings made by the Commission. The Commission found that
NAPICO and others had violated certain federal securities laws in connection
with transactions unrelated to the Partnership. The Commission's order did not
impose any cost, burden or penalty on any partnership managed by NAPICO and does
not impact NAPICO's ability to serve as the Partnership's Managing General
Partner.
<PAGE> 44
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS:
Real Estate Associates Limited II has no officers, employees, or directors.
However, under the terms of the Restated Certificate and Agreement of Limited
Partnership, the Partnership is obligated to pay the Corporate General Partner
an annual management fee. The annual management fee is approximately equal to .4
percent of the invested assets, including the Partnership's allocable share of
the mortgages related to real estate properties held by local limited
partnerships. The fee is earned beginning in the month the Partnership makes its
initial contribution to the limited partnership. In addition, the Partnership
reimburses the Corporate General Partner for certain expenses.
An affiliate of the Corporate General Partner is responsible for the on-site
property management for certain properties owned by the limited partnerships in
which the Partnership has invested.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT:
(a) Security Ownership of Certain Beneficial Owners
The general partners own all of the outstanding general partnership
interests of REAL II; no person is known to own beneficially in excess
of 5% of the outstanding Limited Partnership Interests.
(b) At December 31, 1998, security ownership of management is as listed:
<TABLE>
<CAPTION>
Percentage of
Outstanding
Amount and Limited
Name of Nature of Partnership
Title of Class Owner Beneficial Owner Interests
- -------------- ----- ---------------- ---------
<S> <C> <C> <C>
Limited Charles H. Boxenbaum $ 30,000 *
Partnership 780 Latimer Road
Interest Santa Monica, CA 90402
Initial
Limited Patricia W. Toy 4,550 *
Partnership 1782 Westridge Road
Interest Los Angeles, CA 90049
</TABLE>
* Cumulative Limited Partnership Interest owned by corporate officers is less
than 1% of outstanding Limited Partnership Interests.
<PAGE> 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The Partnership has no officers, directors or employees of its own. All of its
affairs are managed by the Corporate General Partner, National Partnership
Investments Corp. The Partnership is obligated to NAPICO for an annual
management fee equal to .4 percent of the original invested assets of the
limited partnerships. Invested assets is defined as the costs of acquiring
project interests, including the proportionate amount of the mortgage loans
related to the Partnership's interest in the capital accounts of the respective
partnerships. The management fee was $397,680 for each of the three years in the
period ended December 31, 1998.
The Partnership reimburses NAPICO for certain expenses. The reimbursement to
NAPICO was $35,195, $35,194 and $31,948 in 1998, 1997 and 1996, respectively,
and is included in operating expenses.
Prior to the sale of certain partnership interest on December 30, 1998, an
affiliate of NAPICO was the general partner in three of the limited partnerships
in which the Partnership had an investment, and another affiliate received
property management fees of approximately 5 percent of their revenue. The
affiliate received property management fees of $311,489, $310,109 and $309,874
in 1998, 1997 and 1996, respectively.
On December 30, 1998, the Partnership sold its limited partnership interests in
7 local limited partnerships to the Operating Partnership. The sale resulted in
net cash proceeds to the Partnership of $5,250,000 and a net gain of $4,002,592
The cash proceeds were held in escrow at December 31, 1998 and were collected
subsequent to year-end. In March 1999, the Partnership made cash distributions
of $4,950,000 to the limited partners and $50,000 to the general partners, using
proceeds from the sale of the partnership interests.
The Operating Partnership purchased such limited partner interests for cash,
which it raised in connection with a private placement of its equity securities.
The purchase was subject to, among other things, (i) the purchase of the general
partner interests in the local limited partnerships by the Operating
Partnership; (ii) the approval of HUD and certain state housing finance
agencies; and (iii) the consent of the limited partners to the sale of the local
limited partnership interests held for investment by REAL II.
In August 1998, a consent solicitation statement was sent to the limited
partners setting forth the terms and conditions of the purchase of the limited
partners' interests held for investment by the Partnership, together with
certain amendments to the Partnership Agreement and other disclosures of various
conflicts of interest in connection with the proposed transaction. Prior to the
sale of the partnership interests, the consents of the limited partners to the
sale and amendments to the Partnership Agreement were obtained.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
FINANCIAL STATEMENTS
Reports of Independent Public Accountants.
Balance Sheets as of December 31, 1998 and 1997.
Statements of Operations for the years ended December 31, 1998, 1997 and 1996.
Statements of Partners' Equity (Deficiency) for the years ended December 31,
1998, 1997 and 1996.
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.
Notes to Financial Statements.
<PAGE> 46
FINANCIAL STATEMENT SCHEDULES
APPLICABLE TO REAL ESTATE ASSOCIATES LIMITED II AND TO THE LIMITED PARTNERSHIPS
IN WHICH REAL ESTATE ASSOCIATES LIMITED II HAS INVESTMENTS:
Schedule - Investments in Limited Partnerships, December 31, 1998, 1997 and
1996.
Schedule III - Real Estate and Accumulated Depreciation, December 31, 1998.
The remaining schedules are omitted because the required information is included
in the financial statements and notes thereto, or they are not applicable or not
required.
EXHIBITS
(3) Articles of incorporation and bylaws: The registrant is not
incorporated. The Partnership Agreement was filed with Form S-11
#266171 incorporated herein by reference.
(10) Material contracts: The registrant is not party to any material
contracts, other than the Restated Certificate and Agreement of Limited
Partnership dated December 4, 1979, and the twenty-one contracts
representing the Partnership investment in Local Limited Partnerships
as previously filed at the Securities and Exchange Commission, File
#266171, which is hereby incorporated by reference.
REPORTS ON FORM 8-K
A report on Form 8-K relating to an unsolicited offer to buy units of
limited partnership interests (the "Units"), as discussed below, was
filed with the Securities and Exchange Commission during the quarter
ended September 30, 1998.
On February 15, 1998, Bond Purchase, L.L.C. (the "Buyer") made an
unsolicited tender offer to buy a certain number of Units in the
Partnership for a price of $215 per Unit. The Buyer did not contact the
Corporate General Partner prior to commencing its tender offer. By
letter dated March 11, 1998, the Corporate General Partner advised
limited partners that it had determined not to take a position with
respect to the tender offer but cautioned limited partners to consider
certain items before determining whether to tender their Units to the
Buyer.
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Los Angeles,
State of California.
REAL ESTATE ASSOCIATES LIMITED II
By: NATIONAL PARTNERSHIP INVESTMENTS CORP.
General Partner
/s/ CHARLES H. BOXENBAUM
- ----------------------------------
Charles H. Boxenbaum
Chairman of the Board of Directors
and Chief Executive Officer
/s/ BRUCE E. NELSON
- ----------------------------------
Bruce E. Nelson
Director and President
/s/ ALAN I. CASDEN
- ----------------------------------
Alan I. Casden
Director
/s/ HENRY C. CASDEN
- ----------------------------------
Henry C. Casden
Director
/s/ PAUL PATIERNO
- ----------------------------------
Paul Patierno
Chief Financial Officer
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 696,785
<SECURITIES> 0
<RECEIVABLES> 5,250,000
<ALLOWANCES> 0
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<CURRENT-ASSETS> 5,946,785
<PP&E> 0
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<TOTAL-ASSETS> 5,946,785
<CURRENT-LIABILITIES> 130,767
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 5,816,018
<TOTAL-LIABILITY-AND-EQUITY> 5,946,785
<SALES> 0
<TOTAL-REVENUES> 1,731,438
<CGS> 0
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<OTHER-EXPENSES> 912,434
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 819,004
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