<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended SEPTEMBER 30, 1999
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, CALIF. 90211
Registrant's Telephone Number,
Including Area Code (310) 278-2191
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
<PAGE> 2
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets, September 30, 1999 and December 31, 1998 .............1
Statements of Operations,
Nine and Three Months Ended, September 30, 1999 and 1998 .......2
Statement of Partners' Equity (Deficiency)
Nine Months Ended September 30, 1999 ...........................3
Statements of Cash Flows,
Nine Months Ended September 30, 1999 and 1998 ..................4
Notes to Financial Statements ........................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...........................12
PART II. OTHER INFORMATION
Item 1: Legal Proceedings...............................................15
Item 6: Exhibits and Reports and Form 8-K...............................15
Signatures...............................................................16
</TABLE>
<PAGE> 3
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
1999
(Unaudited) 1998
----------- -----------
<S> <C> <C>
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ -- $ --
CASH DUE FROM ESCROW (Note 2) -- 5,250,000
CASH AND CASH EQUIVALENTS (Note 1) 566,025 696,785
----------- -----------
TOTAL ASSETS $ 566,025 $ 5,946,785
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accounts payable (Note 2) $ 68 $ 130,767
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
PARTNERS' EQUITY (DEFICIENCY):
General partners (212,436) (159,935)
Limited partners 778,393 5,975,953
----------- -----------
565,957 5,816,018
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 566,025 $ 5,946,785
=========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements.
1
<PAGE> 4
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Nine months Three months Nine months Three months
ended ended ended ended
Sept 30, 1999 Sept 30, 1999 Sept 30, 1998 Sept 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME $ 24,018 $ 7,776 $ 53,869 $ 15,607
--------- --------- --------- ---------
OPERATING EXPENSES:
Legal and accounting 69,313 3,540 129,891 6,475
Management fees - general partner (Note 3) 187,881 62,627 298,260 99,420
Administrative (Notes 2 and 3) 113,432 19,214 304,400 158,509
--------- --------- --------- ---------
Total operating expenses 370,626 85,381 732,551 264,404
--------- --------- --------- ---------
LOSS FROM OPERATIONS (346,608) (77,605) (678,682) (248,797)
DISTRIBUTIONS FROM LIMITED
PARTNERSHIPS RECOGNIZED AS
INCOME (Note 2) 96,547 35,644 224,997 67,314
EQUITY IN INCOME OF LIMITED
PARTNERSHIPS AND AMORTIZATION
OF ACQUISITION COSTS (Note 2) -- -- 653,700 217,900
--------- --------- --------- ---------
NET (LOSS) INCOME $(250,061) $ (41,961) $ 200,015 $ 36,417
========= ========= ========= =========
NET (LOSS) INCOME PER LIMITED
PARTNERSHIP INTEREST (Note 1) $ (23) $ (4) $ 19 $ 3
========= ========= ========= =========
</TABLE>
The accompanying notes are integral part of these financial statements.
2
<PAGE> 5
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
----------- ----------- -----------
<S> <C> <C> <C>
PARTNERSHIP INTERESTS 10,688
===========
EQUITY (DEFICIENCY),
January 1, 1999 $ (159,935) $ 5,975,953 $ 5,816,018
Distributions (50,000) (4,950,000) (5,000,000)
Net loss for the nine months
ended September 30, 1999 (2,501) (247,560) (250,061)
----------- ----------- -----------
EQUITY (DEFICIENCY),
September 30, 1999 $ (212,436) $ 778,393 $ 565,957
=========== =========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements.
3
<PAGE> 6
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (250,061) $ 200,015
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Equity in income of limited partnerships
and amortization of acquisition costs -- (653,700)
Decrease in accounts payable (130,699) (3,406)
----------- -----------
Net cash used in operating activities (380,760) (457,091)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of limited partnership interests 5,250,000 --
Capital contributions (173,900)
Distributions from limited partnerships
recognized as return of capital -- 31,859
----------- -----------
Net cash provided by (used in) investing activities 5,250,000 (142,041)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (5,000,000) --
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (130,760) (599,132)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 696,785 1,602,717
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 566,025 $ 1,003,585
=========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements.
4
<PAGE> 7
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The information contained in the following notes to the financial statements is
condensed from that which would appear in the annual audited financial
statements; accordingly, the financial statements included herein should be
reviewed in conjunction with the financial statements and related notes thereto
contained in the annual report for the year ended December 31, 1998 prepared by
Real Estate Associates Limited II (the "Partnership"). Accounting measurements
at interim dates inherently involve greater reliance on estimates than at year
end. The results of operations for the interim period presented are not
necessarily indicative of the results for the entire year.
In the opinion of the Partnership, the accompanying unaudited financial
statements contain all adjustments (consisting primarily of normal recurring
accruals) necessary to present fairly the financial position as of September 30,
1999 and the results of operations for the nine and three months then ended and
changes in cash flows for the nine months then ended.
The general partners have a 1 percent interest in profits and losses of the
Partnership. The limited partners have the remaining 99 percent interest which
is allocated in proportion to their respective individual investments. National
Partnership Investments Corp. (NAPICO) is the corporate general partner of the
Partnership. Casden Properties Inc. owns a 95.25% economic interest in NAPICO,
with the balance owned by Casden Investment Corporation ("CIC"). CIC, which is
wholly owned by Alan I. Casden, owns 95% of the voting common stock of NAPICO.
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
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
5
<PAGE> 8
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
METHOD OF ACCOUNTING FOR INVESTMENT IN LIMITED PARTNERSHIPS
The investment in limited partnerships is accounted for on the equity method.
Acquisition fees, selection fees 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 (LOSS) PER LIMITED PARTNERSHIP INTEREST
Net income (loss) per limited partnership interest was computed by dividing the
limited partners' share of net income (loss) by the number of limited
partnership interests outstanding during the year. The number of limited
partnership interests was 10,688 for the periods presented.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and bank certificates of deposit with
an original maturity of three months or less. The Partnership has its cash and
cash equivalents are in excess of the FDIC insurance limit.
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.
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.
6
<PAGE> 9
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS
The Partnership holds limited partnership interests in 13 limited partnerships
as of September 30, 1999, after selling its interests in 7 limited partnerships
partnership in 1998. The limited partnerships as of September 30, 1999 own
residential low income rental projects consisting of 1,041 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.
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.
Distributions from the limited partnerships are accounted for as a return of
capital until the investment balance is reduced to zero or to a negative amount
equal to further capital contributions required. Subsequent distributions
received are recognized as income.
The Partnership has no carrying value in investments in limited partnerships as
of September 30, 1999 and December 31, 1998.
7
<PAGE> 10
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
The following are unaudited combined estimated statements of operations for the
nine and three months ended September 30, 1999 and 1998 for the limited
partnerships in which the Partnership has investments:
<TABLE>
<CAPTION>
Nine months Three months Nine months Three months
ended ended ended ended
Sept. 30, 1999 Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES
Rental and other $ 7,350,000 $ 2,450,000 $17,334,000 $ 5,778,000
----------- ----------- ----------- -----------
EXPENSES
Depreciation 1,089,000 363,000 2,382,000 794,000
Interest 2,223,000 741,000 4,881,000 1,627,000
Operating 3,783,000 1,261,000 9,708,000 3,236,000
----------- ----------- ----------- -----------
7,095,000 2,365,000 16,971,000 5,657,000
----------- ----------- ----------- -----------
NET INCOME $ 255,000 $ 85,000 $ 363,000 $ 121,000
=========== =========== =========== ===========
</TABLE>
NAPICO, or one of its affiliates, is the general partner and property management
agent for certain of the limited partnerships included above.
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.
8
<PAGE> 11
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
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.
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 $398,675 through December 31, 1998, including approximately $242,000 for the
nine months ended September 30, 1998. Additional costs amounting to
approximately $63,000 were incurred in the first quarter of 1999. Accounts
payable at December 31, 1998 includes approximately $98,000 of such costs.
On December 30, 1998, the Partnership sold its limited partnership interests in
7 local limited partnerships to Affiliates of Casden Properties Inc. ("CPI
Affiliates"). The sale resulted in cash proceeds to the Partnership of
$5,250,000 and a net gain of $4,002,591, after deducting selling costs. The cash
proceeds were held in escrow at December 31, 1998 and were collected in 1999.
9
<PAGE> 12
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
In March 1999, the Partnership made cash distributions of $4,950,000 to the
limited partners and $50,000 to the general partners, primarily using proceeds
from the sale of the partnership interests.
CPI Affiliates 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 Casden Properties Inc.;
(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.
NOTE 3 - MANAGEMENT FEE 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 are defined as the costs of acquiring project interests, including the
proportionate amount of the mortgage loans related to the Partnership's
interests in the capital accounts of the respective partnerships. For the nine
months ended September 30, 1999 and 1998, the fee was approximately $188,000 and
$298,000, respectively.
The Partnership reimburses NAPICO for certain expenses. The reimbursement paid
to NAPICO was approximately $18,000 and $26,000 for the nine months ended
September 30, 1999 and 1998, respectively, and is included in administrative
expenses.
NOTE 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
10
<PAGE> 13
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 4 - CONTINGENCIES (CONTINUED)
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 CPI Affiliates. The plaintiffs seek
equitable relief, as well as compensatory damages and litigation related costs.
On August 4, 1999, one investor holding one unit of limited partnership interest
in Housing Programs Limited commenced a virtually identical action in the United
States District Court for the Central District of California against the
Partnership, NAPICO and certain other affiliated entities. 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 actions
vigorously.
The corporate general partner is involved in various 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.
NOTE 5 - 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.
11
<PAGE> 14
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of funds include interest income earned from
investing available cash and distributions from limited 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 limited partners in any material
amount. The Partnership made a distribution to investors on March 12, 1999,
using proceeds from the disposition of its investments in certain limited
partnerships.
RESULTS OF OPERATIONS
Partnership revenues consist primarily of interest income earned on certificates
of deposit and other temporary investment of funds not required for investment
in local partnerships.
Operating expenses consist primarily of recurring general and administrative
expenses and professional fees for services rendered to the Partnership. In
addition, an annual Partnership management fee in an amount equal to .4 percent
of invested assets is payable to the corporate general partner.
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.
Losses incurred after the limited partnership investment account is reduced to
zero are not recognized in accordance with the equity accounting method.
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.
Except for certificates of deposit and money market funds the Partnership's
investments are entirely interests in other limited partnerships owning
government assisted projects. Available cash is invested in these funds earning
interest income as reflected in the statements of operations. These investments
can be converted to cash to meet obligations as they arise.
12
<PAGE> 15
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
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.
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.
13
<PAGE> 16
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
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 $398,675 through December 31, 1998, including approximately $242,000 for the
nine months ended September 30, 1998. Additional costs amounting to
approximately $63,000 were incurred in the first quarter of 1999. Accounts
payable at December 31, 1998 includes approximately $98,000 of such costs.
On December 30, 1998, the Partnership sold its limited partnership interests in
7 local limited partnerships to Affiliates of Casden Properties Inc. ("CPI
Affiliates"). The sale resulted in cash proceeds to the Partnership of
$5,250,000 and a net gain of $4,002,591, after deducting selling costs. The cash
proceeds were held in escrow at December 31, 1998 and were collected in 1999. In
March 1999, the Partnership made cash distributions of $4,950,000 to the limited
partners and $50,000 to the general partners, primarily using proceeds from the
sale of the partnership interests.
CPI Affiliates 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 Casden Properties Inc.;
(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.
14
<PAGE> 17
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1999
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 CPI Affiliates. The
plaintiffs seek equitable relief, as well as compensatory damages and litigation
related costs. On August 4, 1999, one investor holding one unit of limited
partnership interest in Housing Programs Limited commenced a virtually identical
action in the United States District Court for the Central District of
California against the Partnership, NAPICO and certain other affiliated
entities. 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 actions 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.
The corporate general partner is involved in various lawsuits. None of these
lawsuits are related to the partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are required per the provision of Item 7 of
regulation S-K.
15
<PAGE> 18
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1999
SIGNATURES
Pursuant to the requirements 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.
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
By: National Partnership Investments Corp.,
its General Partner
By: /s/ BRUCE NELSON
------------------------------------
Bruce Nelson
President
Date: November 17, 1999
------------------------------------
By: /s/ CHARLES H. BOXENBAUM
------------------------------------
Charles H. Boxenbaum
Chief Executive Officer
Date: November 17, 1999
------------------------------------
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PARTNERSHIP'S STATEMENTS OF EARNINGS AND BALANCE SHEETS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 566,025
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 566,025
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 566,025
<CURRENT-LIABILITIES> 68
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 565,957
<TOTAL-LIABILITY-AND-EQUITY> 566,025
<SALES> 0
<TOTAL-REVENUES> 120,565
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 370,626
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (250,061)
<INCOME-TAX> 0
<INCOME-CONTINUING> (250,061)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (250,061)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
