<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
-----------------
Commission file number 0-11973
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CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
- -----------------------------------------------------------------------
(Name of small business issuer in its charter)
Maryland 52-1321492
- ----------------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (301) 468-9200
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
NONE N/A
- ----------------------------------------- ---------------------
Securities registered pursuant to Section 12(g) of the Act:
LIMITED PARTNER UNITS
- -----------------------------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB [X]
State issuer's revenues for its most recent fiscal year $6,640,362.
The limited partner interests of the Registrant are not traded in any
market. Therefore, the limited partner interests had neither a market selling
price nor an average bid or asked price within the 60 days prior to the date of
this filing.
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
(a limited partnership)
1998 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
Page
----
PART I
------
Item 1. Business . . . . . . . . . . . . . . . . . . . . I-1
Item 2. Properties . . . . . . . . . . . . . . . . . . . I-5
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . I-5
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . I-6
PART II
-------
Item 5. Market for the Registrant's Partnership
Interests and Related Partnership Matters . . II-1
Item 6. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . II-2
Item 7. Financial Statements . . . . . . . . . . . . . . II-9
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . II-9
PART III
--------
Item 9. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . . III-1
Item 10. Executive Compensation . . . . . . . . . . . . . III-2
Item 11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . III-2
Item 12. Certain Relationships and Related Transactions . III-3
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . III-4
Signatures . . . . . . . . . . . . . . . . . . . . . . . . III-6
Financial Statements . . . . . . . . . . . . . . . . . . . III-7
<PAGE>
PART I
------
ITEM 1. BUSINESS
--------
Capital Realty Investors-II Limited Partnership (the Partnership) is a
limited partnership which was formed under the Maryland Revised Uniform Limited
Partnership Act on March 23, 1983. On May 6, 1983, the Partnership commenced
offering 50,000 limited partner interests through a public offering which was
managed by Merrill Lynch, Pierce, Fenner and Smith, Incorporated. The
Partnership closed the offering on June 20, 1983 when it became fully
subscribed.
The General Partners of the Partnership are C.R.I., Inc. (CRI), which is
the Managing General Partner, and current and former shareholders of CRI.
Services for the Partnership are performed by CRI, as the Partnership has no
employees of its own.
The Partnership was formed to invest in real estate, which is the
Partnership's principal business activity, by acquiring and holding a limited
partner interest in limited partnerships (Local Partnerships). The Partnership
originally made investments in 22 Local Partnerships. As of December 31, 1998,
the Partnership had investments in 20 Local Partnerships. Each of these Local
Partnerships owns a federal or state government-assisted or conventionally
financed apartment complex, which provides housing principally to the elderly or
to individuals and families of low or moderate income. The original objectives
of these investments, not necessarily in order of importance, were to:
(1) preserve and protect the Partnership's capital;
(2) provide, during the early years of the Partnership's operations,
current tax benefits to the partners in the form of tax losses which
the partners may use to offset income from other sources;
(3) provide capital appreciation through increases in the value of the
Partnership's investments and increased equity through periodic
payments on the indebtedness on the apartment complexes; and
(4) provide cash distributions from sale or refinancing of the
Partnership's investments and, on a limited basis, from rental
operations.
See Part II, Item 6, Management's Discussion and Analysis of Financial Condition
and Results of Operations, for a discussion of factors affecting the original
investment objectives.
The Local Partnerships in which the Partnership has invested were organized
by private developers who acquired the sites, or options thereon, applied for
applicable mortgage insurance and/or subsidies, and remain as the local general
partners in the Local Partnerships. The Partnership became the principal
limited partner in these Local Partnerships. However, in the event of
non-compliance with the Local Partnerships' partnership agreements, the local
general partner may be removed and replaced with another local general partner
or with an affiliate of the Partnership's Managing General Partner. As a
limited partner, the Partnership's legal liability for obligations of the Local
Partnerships is limited to its investment. In most cases, an affiliate of the
Managing General Partner of the Partnership is also a general partner of the
Local Partnerships. In most cases, the local general partners of the Local
Partnerships retain responsibility for developing, constructing, maintaining,
operating and managing the project. Additionally, the local general partners
and affiliates of the Managing General Partner may operate other apartment
complexes which may be in competition for eligible tenants with the Local
Partnerships' apartment complexes.
I-1
<PAGE>
PART I
------
ITEM 1. BUSINESS - Continued
--------
Although each of the Local Partnerships in which the Partnership has
invested owns an apartment complex which must compete in the market place for
tenants, interest subsidies and/or rent supplements from governmental agencies
generally make it possible to offer certain of these dwelling units to eligible
tenants at a cost significantly below the market rate for comparable
conventionally financed dwelling units. Based on available data, the Managing
General Partner believes there to be no material risk of market competition in
the operations of the apartment complexes described below which would adversely
impact the Partnership, except in specific circumstances as described in Part
II, Item 6, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
A schedule of the apartment complexes owned by Local Partnerships in which
the Partnership has an investment follows.
I-2
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
HAS AN INVESTMENT(1)
<TABLE>
<CAPTION>
Units Expiration
Mortgage Authorized for of
Name and Location Payable at Financed and/or Insured Number of Rental Asst. Section 8
of Apartment Complex 12/31/98 (2) and/or Subsidized Under Rental Units Under Sec. 8 HAP Contract
- -------------------- ------------ ----------------------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Arrowhead Apts. $ 6,964,820 Conventional 200 40 05/31/16
Palatine, IL
Beech Hill I 2,703,713 HUD/Section 236 200 39 02/29/00
Manchester, NH
Beech Hill II 1,510,041 HUD/Section 236 120 24 02/29/00
Manchester, NH
Chevy Chase Park 3,539,329 Metropolitan Savings Bank 232 228 09/22/99 (4)
Centerville, OH (MSB)/236
Country Place I 7,325,922 Conventional 192 38 08/10/09
Burtonsville, MD
Country Place II 4,439,934 Conventional 120 24 08/29/00
Burtonsville, MD
Four Winds West 966,417 GMAC HUD Insured through Section 62 62 10/14/99 (4)
Birmingham, AL 221 (d)(4) of the NHA/Section 8
Frenchman's Wharf II 7,923,103 Conventional 324 31 11/30/99 (4)
New Orleans, LA
Golden Acres 1,235,814 California Housing Finance Agency 46 45 12/30/12
Chowchilla, CA (CHFA)/Section 8
Mercy Terrace 8,555,982 Section 221(d)(4) of the NHA/ 158 157 11/30/03
San Francisco, CA Section 8
The Moorings 8,258,286 Conventional 216 44 03/31/17
Roselle, IL
Orangewood Plaza 1,826,500 CHFA 40 33 07/01/14 (5)
Orange Cove, CA
Posada Vallarta 14,934,174 Conventional 336 70 02/16/04
Phoenix, AZ
Princeton Community 8,098,583 New Jersey Housing & Mortgage 239 26 10/01/24 (4)
Village Finance Agency
Princeton, NJ
Rock Glen 3,677,140 Section 221(d)(4) of the NHA 241 0 --
Baltimore, MD
Rolling Green at 4,521,716 Massachusetts Housing Finance 204 97 03/01/12
Amherst Agency (MHFA)/236
Amherst, MA
</TABLE>
(continued)
I-3
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Units Expiration
Mortgage Authorized for of
Name and Location Payable at Financed and/or Insured Number of Rental Asst. Section 8
of Apartment Complex 12/31/98 (2) and/or Subsidized Under Rental Units Under Sec. 8 HAP Contract
- -------------------- ------------ ----------------------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Rolling Green at 4,844,571 MHFA/236 404 7 10/10/12
Fall River
Fall River, MA
Troy Manor Apts. 846,515 Rural Housing & Community 50 50 10/29/99
Troy, AL Development Services (RHCD)
/Section 8
Westgate Tower Apts. 1,994,523 Michigan Sate Housing Develop- 148 41 12/01/14
Westland, MI ment Authority/236
Wexford Ridge 3,920,968 MSB/236/Section 8 246 242 09/30/99 (4)
Madison, WI
- -------------------- ------------ -------- --------
Totals(3) 20 $ 98,088,051 3,778 1,298
============ ======== ========
</TABLE>
I-4
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Average Effective Annual
Units Occupied As Rental Per Unit
Percentage of Total Units for the Years Ended
As of December 31, December 31,
Name and Location --------------------------------- -----------------------------------------------------
of Apartment Complex 1998 1997 1996 1995 1994 1998 1997 1996 1995 1994
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arrowhead Apts. 97% 99% 91% 93% 90% $ 9,755 $ 9,044 $ 9,205 $ 9,025 $ 9,282
Palatine, IL
Beech Hill I 99% 99% 99% 100% 99% 6,032 5,672 5,351 5,343 5,352
Manchester, NH
Beech Hill II 98% 100% 99% 98% 100% 5,401 5,098 4,788 4,836 4,411
Manchester, NH
Chevy Chase Park 92% 97% 97% 99% 98% 4,291 4,360 4,232 4,224 3,938
Centerville, OH
Country Place I 97% 96% 96% 92% 95% 9,557 9,330 8,922 8,902 8,783
Burtonsville, MD
Country Place II 98% 97% 93% 93% 95% 9,821 9,484 9,192 8,833 8,965
Burtonsville, MD
Four Winds West 99% 97% 99% 98% 95% 5,075 5,079 4,899 4,537 4,512
Birmingham, AL
Frenchman's Wharf II 94% 92% 89% 90% 88% 4,753 4,681 4,295 4,171 4,156
New Orleans, LA
Golden Acres 98% 100% 100% 100% 100% 6,443 6,495 6,297 6,271 6,191
Chowchilla, CA
Mercy Terrace 100% 99% 100% 100% 100% 14,836 14,801 15,045 15,898 15,585
San Francisco, CA
The Moorings 100% 94% 97% 97% 97% 9,693 9,372 9,231 8,577 8,688
Roselle, IL
Orangewood Plaza 100% 100% 100% 100% 98% 2,414 2,419 2,353 2,700 2,852
Orange Cove, CA
Posada Vallarta 86% 96% 89% 96% 97% 7,193 6,623 6,808 6,616 6,257
Phoenix, AZ
Princeton Community
Village 96% 93% 98% 97% 97% 7,036 7,132 6,785 6,510 6,244
Princeton, NJ
Rock Glen 99% 99% 97% 94% 96% 5,176 5,011 4,724 4,864 4,862
Baltimore, MD
Rolling Green at Amherst 100% 100% 100% 100% 100% 7,532 7,345 7,333 7,314 7,091
Amherst, MA
</TABLE>
(continued)
I-5
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Average Effective Annual
Units Occupied As Rental Per Unit
Percentage of Total Units for the Years Ended
As of December 31, December 31,
Name and Location --------------------------------- -----------------------------------------------------
of Apartment Complex 1998 1997 1996 1995 1994 1998 1997 1996 1995 1994
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rolling Green at 96% 99% 96% 98% 99% 7,028 7,233 7,163 7,177 7,222
Fall River
Fall River, MA
Troy Manor Apts. 100% 100% 100% 100% 100% 4,681 4,677 4,680 4,681 4,596
Troy, AL
Westgate Tower Apts. 96% 98% 100% 99% 98% 3,633 3,702 3,551 3,471 3,438
Westland, MI
Wexford Ridge 100% 97% 98% 98% 100% 4,918 4,792 4,509 4,517 4,413
Madison, WI
---- ---- ---- ---- ---- -------- -------- -------- -------- --------
Totals(3) 20 97% 98% 97% 97% 97% $ 6,763 $ 6,618 $ 6,468 $ 6,424 $ 6,342
==== ==== ==== ==== ==== ======== ======== ======== ======== ========
</TABLE>
(1) All properties are multifamily housing complexes. No single
tenant/resident rents 10% or more of the rentable square footage.
Residential leases are typically one year or less in length, with varying
expiration dates, and substantially all rentable space is for residential
purposes.
(2) The amounts provided are the balances of first mortgage loans payable by
the Local Partnerships as of December 31, 1998.
(3) The totals for the percentage of units occupied and the average effective
annual rental per unit are based on a simple average.
(4) The Section 8 contract expiration date reflects an extension from the
original expiration date, in accordance with Federal legislation.
(5) Expiration of CHFA subsidy.
On February 19, 1997 and March 18, 1997, the local managing general
partners of Tanglewood II and Deer Grove, respectively, sold the properties.
See the notes to the financial statements for additional information pertaining
to the sales.
As of March 30, 1999, the Partnership's interests in Beech Hill I and Beech
Hill II were held in escrow to be transferred to the purchase money note
holders, at their election, due to the non-payment on the related purchase money
notes. See the notes to the financial statements for additional information.
The local managing general partner of Wexford Ridge has agreed to the sale
of the property to a potential buyer and the parties are currently negotiating a
sales contract. There is no assurance that a sale will take place.
I-6
<PAGE>
PART I
------
ITEM 2. PROPERTIES
----------
Through its ownership of limited partner interests in Local Partnerships,
Capital Realty Investors-II Limited Partnership indirectly holds an interest in
the underlying real estate. See Part I, Item 1 for information pertaining to
these properties.
ITEM 3. LEGAL PROCEEDINGS
-----------------
On February 10, 1998, the Partnership was served with a complaint by the
two holders of one of the purchase money notes related to Chevy Chase suing the
Partnership, Managing General Partner and C.R.H.C., Incorporated (CRHC), an
affiliate of the Managing General Partner, for damages and seeking foreclosure
on the Partnership's interest in the Local Partnership. The Managing General
Partner successfully negotiated an agreement with the holders of the purchase
money note and the note was paid off, at a discount, on October 5, 1998. As
part of this agreement, the complaint was dismissed.
On April 7, 1998, the Partnership was served with a complaint by the holder
of two purchase money notes related to Wexford Ridge suing the Partnership,
Managing General Partner and CRHC for damages and seeking foreclosure on the
Partnership's interest in the Local Partnership. The Managing General Partner
successfully negotiated an agreement with the holder of the notes and the notes
were paid off, at a discount, on October 5, 1998. As part of this agreement
with the noteholder, the complaint was dismissed.
See the notes to the financial statements for additional information
pertaining to these legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
I-7
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND
-----------------------------------------------------
RELATED PARTNERSHIP MATTERS
---------------------------
(a) On November 25, 1998, Equity Resource Boston Fund (Boston Fund), a
Massachusetts Limited Partnership which is affiliated with Equity
Resources Group, the general partner of various partnerships that are
Additional Limited Partners in the Partnership, initiated a tender
offer to purchase 1,300 additional units in the Partnership at a price
of $25.00 per Additional Limited Partner unit. Boston Fund, which is
unaffiliated with CRI, stated that it made the offer for the express
purpose of holding the limited partner units for investment purposes
and not with a view to resale. The price offered was determined
solely at the discretion of Boston Fund and did not necessarily
represent the fair market value of each Additional Limited Partner
unit. The Boston Fund offer expired on December 23, 1998, and as of
March 30, 1999, Boston Fund held approximately 3.8% of the Additional
Limited Partner units of the Partnership. Other than the Boston Fund
tender offer, it is not anticipated that there will be any formal
market for resale of interests in the Partnership. As a result,
investors may be unable to sell or otherwise dispose of their
interests in the Partnership.
(b) As of March 30, 1999 there were approximately 4,000 registered holders
of limited partner interests in the Partnership.
(c) For the year ended December 31, 1998, the Partnership made a cash
distribution of $499,350 ($10.00 per Additional Limited Partner Unit)
to the Additional Limited Partners on November 18, 1998. The
distribution was a result of the refinancing of the Arrowhead and
Moorings mortgage loans. For the year ended December 31, 1997, the
Partnership made a cash distribution of $999,100 ($20.00 per
Additional Limited Partner unit) to the Additional Limited Partners on
November 4, 1997. The distribution was a result of the sales of Deer
Grove Apts. and Tanglewood II.
The Partnership received distributions of $7,672,840 and $3,683,465
from Local Partnerships during 1998 and 1997, respectively. Some of
the Local Partnerships operate under restrictions imposed by the
pertinent government agencies that limit the cash return available to
the Partnership.
II-1
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
General
-------
The Partnership has invested, through Local Partnerships, primarily in
federal or state government-assisted apartment complexes (the "properties")
intended to provide housing to low and moderate income tenants. In conjunction
with such governmental assistance, which includes federal and/or state financing
at below-market interest rates and rental subsidies, the Local Partnerships
agreed to regulatory limitations on (i) cash distributions, (ii) use of the
properties and (iii) sale or refinancing. These limitations typically were
designed to remain in place for the life of the mortgage.
The original investment objectives of the Partnership primarily were to
deliver tax benefits, as well as cash proceeds upon disposition of the
properties through the Partnership's investment in local limited partnerships.
Only limited annual cash distributions from property operations were projected
because of the regulatory restrictions on cash distributions from the
properties.
The original investment objectives of the Partnership have been affected by
the Tax Reform Act of 1986, which virtually eliminated many of the incentives
for the new construction or the sale of existing low income housing properties
by limiting the use of passive loss deductions. Therefore, the Managing General
Partner continues to concentrate on transferring the source of investment yield
from tax benefits to cash flow wherever possible, and on potentially enhancing
the ability of the Partnership to share in the appreciated value of the
properties.
The acquisition of interests in certain Local Partnerships was paid for in
part by purchase money notes of the Partnership. The purchase money notes are
nonrecourse obligations of the Partnership which typically mature 15 years from
the date of acquisition of the interest in a particular Local Partnership, and
are generally secured by the Partnership's interest in the Local Partnership.
The Managing General Partner has been working to develop a strategy to sell
certain properties by utilizing opportunities presented by federal affordable
housing legislation, favorable financing terms and preservation incentives
available to nonprofit purchasers. The Managing General Partner intends to
utilize part or all of the Partnership's net proceeds (after a partial
distribution to limited partners) received from the sales of properties to fund
reserves for paying at maturity, prepaying or purchasing prior to maturity, at a
discount where possible, currently outstanding purchase money notes. The
Managing General Partner believes that this represents an opportunity to reduce
the Partnership's long-term obligations.
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has been working to
develop strategies to sell or refinance certain properties pursuant to programs
developed by these agencies or other potential buyers. These programs may
include opportunities to sell a property to a qualifying purchaser who would
agree to maintain the property as low to moderate income housing in perpetuity,
or to refinance a property, or to obtain supplemental financing. The Managing
General Partner continues to monitor certain state housing agency programs
and/or programs provided by certain lenders, to ascertain whether the properties
would qualify within the parameters of a given program and whether these
II-2
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
programs would provide an appropriate economic benefit to the limited partners
of the Partnership.
Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of project-based rental Housing Assistance Payments (HAP)
provided by the U.S. Department of Housing and Urban Development (HUD) pursuant
to Section 8 HAP contracts. President Clinton signed the Fiscal Year 1998 HUD
appropriations bill into law, effective October 1, 1997. The legislation
allowed all Section 8 contracts with rents at less than 120% of fair market
rents which expire between October 1997 and September 1998 to be renewed for one
year. In the event that these rents exceed 120% of fair market rents, these
rents will be reduced to 120% of fair market rents. At the beginning of Fiscal
Year 1999 (October 1, 1998), all expiring contracts with rents exceeding
comparable market rents and whose mortgages are insured by the Federal Housing
Administration (FHA) are subject to the Mark-to-Market legislation.
Mark-to-Market implementation will reduce rental income at properties which
are currently subsidized at higher-than-market rental rates, and will therefore
lower cash flow available to meet mortgage payments and operating expenses.
Each affected property will undergo debt restructuring according to terms
determined by an individual property and operations evaluation. This will
involve reducing the first mortgage loan balance to an amount supportable by the
property, taking into account the property's operating expenses and reduced
income. The balance of the amount written down from the first mortgage will be
converted to a non-performing but accruing (soft) second mortgage.
Under current law, the write down of an FHA-insured mortgage under Mark-to-
Market would trigger cancellation of debt income to the partners, a taxable
event, even though no actual cash is received. Additionally, the newly created
second mortgage will accrue interest at a rate below- market; however, the
Internal Revenue Service issued a ruling in July 1998 that concluded that the
below-market rate of interest will not generate additional ordinary income.
Each property subject to Mark-to-Market will be affected in a different manner,
and it is very difficult to predict the exact form of restructuring, or
potential tax liabilities to the limited partners, at this time.
The Managing General Partner is considering new strategies to deal with the
ever changing environment of affordable housing policy. The mortgage loans on
Section 236 and Section 221(d)(3) properties that are in the 18th year of their
mortgage may be eligible for pre-payment. Properties with expiring Section 8
HAP contracts may become convertible to market-rate apartment properties.
Currently, there are few lenders that will provide financing either to prepay
the existing mortgage or provide additional funds to allow a property to convert
to market-rate units. Where opportunities exist, the Managing General Partner
will continue to work with the Local Partnerships to develop strategies that
make economic sense for all parties involved.
Financial Condition/Liquidity
-----------------------------
As of December 31, 1998, the Partnership had approximately 4,000 investors
who subscribed to a total of 50,000 units of limited partner interests in the
original amount of $50,000,000. The Partnership originally made investments in
22 Local Partnerships of which 20 remain at December 31, 1998. The Part-
nership's liquidity, with unrestricted cash resources of $7,596,031 as of
II-3
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
December 31, 1998, along with anticipated future cash distributions from the
Local Partnerships, is expected to meet its current and anticipated operating
cash needs. During 1998 and 1997, the Partnership received cash distributions
of $7,672,840 and $3,683,465, respectively, from the Local Partnerships. As of
March 30, 1999, there were no material commitments for capital expenditures.
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having a principal balance of
$15,344,182 and accrued interest of $27,810,849 as of December 31, 1998, are
payable in full upon the earliest of: (1) sale or refinancing of the respective
Local Partnership's rental property; (2) payment in full of the respective Local
Partnership's permanent loan; or (3) maturity. Purchase money notes in the
aggregate principal amount of $1,050,000 and $950,000 matured on December 31,
1996 and 1997, respectively, and have been extended to January 5, 2001, as
discussed below. Purchase money notes in the aggregate principal amounts of
$1,050,000 and $950,000 matured on December 31, 1996 and December 31, 1997,
respectively, and were paid off on October 5, 1998, as discussed below.
Purchase money notes in the aggregate principal amounts of $2,380,000 and
$3,150,000 matured on January 1, 1998 and June 1, 1998, respectively, and have
not paid or extended, as discussed below. Purchase money notes in the aggregate
principal amounts of $4,600,000 and $424,000 matured on August 31, 1998 and have
been extended to August 31, 2003 as discussed below. Purchase money notes in
the aggregate principal amount $1,450,000 matured on September 1, 1998, and the
Managing General Partner is involved in negotiations to extend these notes until
September 1, 2003, as discussed below. Purchase money notes in the aggregate
principal amount of $840,178 matured on January 1, 1999 and were paid off, at a
discount, on February 5, 1999. Purchase money notes in the aggregate principal
amount of $500,000 matured on January 1, 1999 and have not been paid or
extended, as discussed below. See the notes to the financial statements for
additional information pertaining to these purchase money notes.
The purchase money notes, which are nonrecourse to the partnership, are
generally secured by the Partnership's interest in the respective Local
Partnerships. There is no assurance that the underlying properties will have
sufficient appreciation and equity to enable the Partnership to pay the purchase
money notes' principal and accrued interest when due. If a purchase money note
is not paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the Local Partnership. The Partnership's inability to pay certain of the
purchase money note principal and accrued interest balances when due, and the
resulting uncertainty regarding the Partnership's continued ownership interest
in the related Local Partnerships, does not adversely impact the Partnership's
financial condition because the purchase money notes are nonrecourse and secured
solely by the Partnership's interest in the related Local Partnerships.
Therefore, should the investment in any of the Local Partnerships with maturing
purchase money notes not produce sufficient value to satisfy the related
purchase money notes, the Partnership's exposure to loss is limited because the
amount of the nonrecourse indebtedness of each of the maturing purchase money
notes exceeds the carrying amount of the investment in and advances to each of
the related Local Partnerships. Thus, even a complete loss of one of these
Local Partnerships would not have a material adverse impact on the financial
condition of the Partnership. See further discussion of certain purchase money
notes in the notes to the financial statements.
II-4
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The following chart presents information related to purchase money notes
which mature through December 31, 1999, or which have matured and remain unpaid
or unextended as of March 30, 1999.
<TABLE>
<CAPTION>
Carrying Amount
of Partnership's
Investment in Aggregate
and Advances to Principal Aggregate
Number of Underlying Local Balance Interest
Underlying Partnerships as as of Balance as of
Purchase Money Local Percentage of December Percentage December Percentage December Percentage
Note Maturity Partnerships of Total 31, 1998 of Total 31, 1998 of Total 31, 1998 of Total
- ---------------- ------------ ---------- ---------------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 1998 2 10% $ -- -- $ 2,380,000 16% $ 2,913,510 11%
2nd Quarter 1998 1 5% -- -- 3,150,000 21% 5,273,934 19%
3rd Quarter 1998 1 5% 726,775 23% 1,450,000 9% 2,000,762 7%
1st Quarter 1999 1 5% -- -- 500,000 3% 1,421,774 5%
---- ----- --------------- ----- ----------- ----- ------------- -----
5 25% $ 726,775 23% $ 7,480,000 49% $ 11,609,980 42%
==== ===== =============== ===== =========== ===== ============= =====
Total 20 100% $ 3,218,015 100% $15,344,182 100% $ 27,810,849 100%
==== ===== =============== ===== =========== ===== ============= =====
</TABLE>
The above chart does not include purchase money notes aggregating $840,178
which matured on January 1, 1999 and were paid off, at a discount, on February
5, 1999. Please see the notes to the financial statements for information
pertaining to these purchase money notes.
The Managing General Partner is continuing to investigate possible
alternatives to reduce the Partnership's debt obligations. These alternatives
include, among others, retaining the cash available for distribution to meet the
purchase money note requirements, buying out certain purchase money notes at a
discounted price, extending the due dates of certain purchase money notes,
refinancing the respective properties' underlying debt or selling the underlying
real estate and using the Partnership's share of the proceeds to pay, in full or
at a discount, or buy down, certain purchase money note obligations. Although
the Managing General Partner has had some success applying these strategies in
the past, the Managing General Partner cannot assure that these strategies will
always be successful. Based on preliminary discussions with the holders of
purchase money notes maturing through December 31, 1999, the Managing General
Partner anticipates that, at least in some instances, the noteholders may not be
willing to negotiate using any of the strategies mentioned above. In such
instances, upon maturity of the purchase money notes, the noteholders have the
right to foreclose on the Partnership's interest in the related Local
Partnerships. In the event of a foreclosure, the excess of the nonrecourse
indebtedness over the carrying amount of the Partnership's investment in the
related Local Partnership would result in cancellation of indebtedness income
which would be taxable to Limited Partners at a federal tax rate of up to 39.6%.
Additionally, in the event of a foreclosure, the Partnership would lose its
II-5
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
investment in the Local Partnership and, likewise, its share of the future cash
flow distributed by the Local Partnership from rental operations, sales or
refinancings. Of the 20 Local Partnerships in which the Partnership is invested
as of both December 31, 1998 and 1997, the five Local Partnerships with
associated purchase money notes which mature through December 31, 1999 and
remain unpaid or unextended as of March 30, 1999, represent the following
percentages of the Partnership's total distributions received from Local
Partnerships and share of income from Local Partnerships.
<TABLE>
<CAPTION>
Percentage of Total Partnership's Share of
Distributions Received Income from
For Periods Ending from Local Partnerships Local Partnerships
------------------ ----------------------- ----------------------
<S> <C> <C>
December 31, 1998 1% $ 234,121
December 31, 1997 3% 95,197
</TABLE>
The Managing General Partner continues to address the impending maturity of
its debt obligations and seeks strategies which will provide the most favorable
outcome to the Additional Limited Partners. However, there can be no assurance
that these strategies will be successful.
The Partnership closely monitors its cash flow and liquidity position
in an effort to ensure that sufficient cash is available for operating
requirements. In 1998 and 1997, the receipt of distributions from Local
Partnerships was adequate to support operating cash requirements. Cash and cash
equivalents increased during 1998 primarily as a result of proceeds generated
from the refinancings of the Arrowhead and Moorings mortgage loans.
Results of Operations
---------------------
1998 Versus 1997
- ----------------
The Partnership's net income decreased in 1998 from 1997 primarily due to
gain on disposition of investments in partnerships and a decrease in
extraordinary gain from extinguishment of debt related to the Tanglewood II and
Deer Grove sales in 1997. Partially offsetting the decrease in the
Partnership's net income was an increase in share of income from partnerships
primarily due to the receipt of proceeds from the refinancing of the first
mortgage loans of Arrowhead and Moorings, as discussed in the notes to the
financial statements (since the Partnership's investments in Arrowhead and
Moorings had previously been reduced to zero), a decrease in interest expense, a
decrease in litigation settlement fee related to Arrowhead and Moorings
litigation during 1997 and an increase in interest income due to higher cash and
cash equivalent balances during 1998.
II-6
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized losses for the years ended December 31,
1998 and 1997 did not include losses of $1,594,602 and $2,764,357, respectively.
The Partnership's net loss recognized from the Local Partnerships is generally
expected to decrease in subsequent years as the Partnership's investments in the
Local Partnerships are reduced to zero. Accordingly, excludable losses are
generally expected to increase. Distributions of $6,040,363 and $3,312,477,
received from nine Local Partnerships during 1998 and 1997, were offset against
the respective years' recorded losses because these amounts were in excess of
the Partnership's investment.
Inflation
---------
Inflation allows for increases in rental rates, usually offsetting any
higher operating and replacement costs. Furthermore, inflation generally does
not impact the fixed rate long-term financing under which real property
investments were purchased. Future inflation could allow for appreciated values
of the Local Partnerships' properties over an extended period of time as rental
revenues and replacement values gradually increase.
The following table reflects the combined rental revenues of the properties
for the five years ended December 31, 1998. Combined rental revenue amounts for
years prior to 1998 have been adjusted to reflect property sales of Tanglewood
II and Deer Grove in 1997, as discussed in the notes to the financial
statements.
II-7
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Rental
Revenue $26,203,326 $25,604,498 $25,040,671 $24,798,659 $23,869,482
Annual Percentage
Increase 2.3% 2.3% 1.0% 3.9%
</TABLE>
Year 2000 Computer Issue
------------------------
The Year 2000 ("Y2K") computer issue refers to the inability of many
computer systems in use today to recognize "00" in the date field as the year
2000 and to recognize the year 2000 as a leap year. The Y2K problem arose
because, for many years, computer software programs, including programs embedded
in hardware, utilized only the last two digits to specify the year with the
assumption that the first two digits were "19." As a result, such programs may
not be able to recognize and process dates beyond 1999; rather they may
recognize and process "00," "01," "02,", etc., incorrectly as 1900, 1901, 1902,
instead of as 2000, 2001, 2002. In the opinion of computer experts, this could
cause such programs to create erroneous results, malfunction, or fail completely
unless corrective measures are taken.
The Partnership utilizes software and related computer technologies
essential to its operations that will be affected by the Y2K issue. To address
the issue, the Managing General Partner has developed and is currently
implementing a plan (the "Y2K Project") designed to ensure that the Y2K date
change will not have an adverse impact on the Partnership's operations. The Y2K
Project is on schedule and the Managing General Partner expects completion by
the end of 1999. The Y2K Project consists of four phases -- Planning,
Assessment, Implementation and Testing. The Planning Phase began early in 1998
and is complete. Under the Planning Phase, the Managing General Partner
conducted an inventory of all internal hardware and software systems, data
interfaces, business operations and non-information technology functions which
may be susceptible to the Y2K issue. This phase was completed at the end of
November, 1998. Under the next phase, the Assessment Phase, all applications
and functions identified in the Planning Phase were analyzed to determine Y2K
compliance and the materiality of each identified risk. In the event of
noncompliance, for material risks, timetables for corrective action, as well as
estimated costs to achieve compliance, were determined. This phase was
completed during the first quarter of 1999. The Implementation Phase is now
underway. Renovation and replacement of existing internal hardware and software
systems has begun and completion is expected by June 1999. Additionally, the
Managing General Partner is currently working with third party vendors, service
providers, Local Partnership managing general partners, and Local Partnership
property managers to verify their Y2K compliance, with completion expected by
June 1999. The Testing Phase, which will include testing of internal
applications as well as some third party systems, began during January 1999 and
II-8
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
will continue throughout 1999. Contingency planning commenced during the fourth
quarter 1998 and will be completed by year-end 1999. The Managing General
Partner does not expect the expense associated with the Y2K Project to be
material.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The information required by this item is contained in Part III.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
None.
II-9
<PAGE>
PART III
--------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
(a), (b) and (c)
The Partnership has no directors, executive officers or significant
employees of its own.
(a), (b), (c) and (e)
The names, ages and business experience of the directors and executive
officers of C.R.I., Inc. (CRI), the Managing General Partner of the
Partnership, are as follows:
William B. Dockser, 62, has been the Chairman of the Board of CRI and a Director
since 1974. Prior to forming CRI, he served as President of Kaufman and Broad
Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed a
number of publicly held limited partnerships created to invest in low and
moderate income multifamily apartment properties. For a period of 2-1/2 years
prior to joining Kaufman and Broad, he served in various positions at HUD,
culminating in the post of Deputy FHA Commissioner and Deputy Assistant
Secretary for Housing Production and Mortgage Credit, where he was responsible
for all federally insured housing production programs. Before coming to
Washington, Mr. Dockser was a practicing attorney in Boston and also was a
special Assistant Attorney General for the Commonwealth of Massachusetts. He
holds a Bachelor of Laws degree from Yale University Law School and a Bachelor
of Arts degree, cum laude, from Harvard University. He is also Chairman of the
Board and a Director of CRIIMI MAE Inc. and CRIIMI, Inc.
H. William Willoughby, 52, has been President, Secretary and a Director of CRI
since January 1990 and Senior Executive Vice President, Secretary and a Director
of CRI from 1974 to 1989. He is principally responsible for the financial
management of CRI and its associated partnerships. Prior to joining CRI in
1974, he was Vice President of Shelter Corporation of America and a number of
its subsidiaries dealing principally with real estate development and equity
financing. Before joining Shelter Corporation, he was a senior tax accountant
with Arthur Andersen & Co. He holds a Juris Doctor degree, a Master of Business
Administration degree and a Bachelor of Science degree in Business
Administration from the University of South Dakota. He is also a Director and
executive officer of CRIIMI MAE Inc. and CRIIMI, Inc.
Ronald W. Thompson, 52, is Group Executive Vice President-Hotel Asset
Management. Prior to joining CRI in 1985, he was employed at the Hyatt
Organization where he most recently served as the General Manager of the Hyatt
Regency in Flint, Michigan. During his nine year tenure with Hyatt, he held
senior management positions with the Hyatt Regency in Dearborn, Michigan, the
Hyatt in Richmond, Virginia, the Hyatt in Winston-Salem, North Carolina and the
Hyatt Regency in Atlanta, Georgia. Before joining Hyatt, Mr. Thompson worked in
London, England for the English Tourist Board as well as holding management
positions in Europe, Australia, and New Zealand in the hotel industry. Mr.
Thompson received his education in England where he received a business degree
in Hotel Administration from Winston College.
III-1
<PAGE>
PART III
--------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued
--------------------------------------------------------------
Susan R. Campbell, 40, is Executive Vice President and Chief Operating Officer.
Prior to joining CRI in March 1985, she was a budget analyst for the B. F. Saul
Advisory Company. She holds a Bachelor of Science degree in General Business
from the University of Maryland.
Melissa Cecil Lackey, 43, is Senior Vice President and General Counsel. Prior
to joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder,
Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in
Houston, Texas. She holds a Juris Doctor degree from the University of Virginia
School of Law and a Bachelor of Arts degree from the College of William & Mary.
(d) There is no family relationship between any of the foregoing directors
and executive officers.
(f) Involvement in certain legal proceedings.
None.
(g) Promoters and control persons.
Not applicable.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
(a), (b), (c), (d), (e), (f), (g), (i), (j), (k) and (l)
The Partnership has no officers or directors. However, in accordance
with the Partnership Agreement, and as disclosed in the public
offering, various kinds of compensation and fees were paid or are
payable to the General Partners and their affiliates. Additional
information is incorporated herein by reference to Notes 3 and 4 of
the notes to the financial statements contained in Part III.
(h) Termination of employment and change in control arrangements.
None.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
(a) Security ownership of certain beneficial owners.
No person or "group," as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, is known by the Partnership to be the
beneficial owner of more than 5% of the issued and outstanding partner
units at December 31, 1998.
(b) Security ownership of management.
The following table sets forth certain information concerning all
units beneficially owned, as of December 31, 1998, by each director
and by all directors and officers as a group of the Managing General
III-2
<PAGE>
PART III
--------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT - Continued
-----------
Partner of the Partnership.
<TABLE>
<CAPTION>
Name of Amount and Nature % of total
Beneficial Owner of Beneficial Ownership Units issued
---------------- ----------------------- ------------
<S> <C> <C>
William B. Dockser None 0%
H. William Willoughby None 0%
All Directors and Officers
as a Group (5 persons) None 0%
</TABLE>
(c) Changes in control.
There exists no arrangement known to the Partnership, the operation of
which may, at a subsequent date, result in a change in control of the
Partnership. There is a provision in the Limited Partnership
Agreement which allows, under certain circumstances, the ability to
change control.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions with management and others.
The Partnership has no directors or officers. In addition, the
Partnership has had no transactions with individual officers or
directors of the Managing General Partner of the Partnership other
than any indirect interest such officers and directors may have in the
amounts paid to the Managing General Partner or its affiliates by
virtue of their stock ownership in CRI. Item 10 of this report, which
contains a discussion of the fees and other compensation paid or
accrued by the Partnership to the General Partners or their
affiliates, is incorporated herein by reference. Note 3 of the notes
to financial statements, which contains disclosure of related party
transactions, is also incorporated herein by reference.
(b) Certain business relationships.
The Partnership's response to Item 12(a) is incorporated herein by
reference. In addition, the Partnership has no business relationship
with entities of which the officers and directors of the Managing
General Partner of the Partnership are officers, directors or equity
owners other than as set forth in the Partnership's response to Item
12(a).
(c) Indebtedness of management.
None.
III-3
<PAGE>
PART III
--------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued
----------------------------------------------
(d) Transactions with promoters.
Not applicable.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Financial Statements Page
-------------------- ----
Report of Independent Certified Public
Accountants - Capital Realty Investors-II
Limited Partnership III-7
Reports of Independent Certified Public
Accountants - Local Partnerships in which
Capital Realty Investors-II Limited
Partnership has invested III-8
Balance Sheets as of December 31, 1998 and 1997 III-9
Statements of Operations for the years ended
December 31, 1998 and 1997 III-10
Statements of Changes in Partners' Deficit for
the years ended December 31, 1998 and 1997 III-11
Statements of Cash Flows for the years ended
December 31, 1998 and 1997 III-12
Notes to Financial Statements III-13
III-4
<PAGE>
PART III
--------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K - Continued
--------------------------------
(a) Index of Exhibits (Listed according to the number assigned in the
table in Item 601 of Regulation S-B.)
Exhibit No. 3 - Articles of Incorporation and bylaws.
a. Certificate of Limited Partnership of Capital Realty Investors-II
Limited Partnership. (Incorporated by reference from Exhibit No.
4 to Registrant's Registration Statement on Form S-11, as
amended, dated April 28, 1983.)
Exhibit No. 4 - Instruments defining the rights of security holders,
including indentures.
a. Limited Partnership Agreement of Capital Realty Investors-II
Limited Partnership. (Incorporated by reference from Exhibit No.
4 to Registrant's Registration Statement on Form S-11, as
amended, dated April 28, 1983.)
Exhibit No. 10 - Material Contracts.
a. Management Services Agreement between CRI and Capital Realty
Investors-II Limited Partnership. (Incorporated by reference
from Exhibit No. 10(b) to Registrant's Registration Statement on
Form S-11, as amended, dated April 28, 1983.)
Exhibit No. 27 - Financial Data Schedule.
a. Filed herewith electronically.
Exhibit No. 99 - Additional Exhibits.
a. Prospectus of the Partnership, dated May 6, 1983. (Incorporated
by reference to Registrant's Registration Statement on Form S-11,
as amended, dated April 28, 1983.)
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
III-5
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
-----------------------------------------------
(Registrant)
by: C.R.I., Inc.
-------------------------------------------
Managing General Partner
March 30, 1999 by: /s/ William B. Dockser
- ----------------- ---------------------------------------
DATE William B. Dockser, Director
Chairman of the Board,
and Treasurer
(Principal Executive Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
March 30, 1999 by: /s/ H. William Willoughby
- ----------------- ---------------------------------------
DATE H. William Willoughby,
Director, President
and Secretary
March 30, 1999 by: /s/ Michael J. Tuszka
- ----------------- ---------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
III-6
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
-------------------------------
PUBLIC ACCOUNTANTS
------------------
To the Partners
Capital Realty Investors-II
Limited Partnership
We have audited the balance sheets of Capital Realty Investors-II Limited
Partnership as of December 31, 1998 and 1997, and the related statements of
operations, changes in partners' deficit and cash flows for the years ended
December 31, 1998 and 1997. These financial statements are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the financial
statements of certain Local Partnerships. The Partnership's share of income
from these Local Partnerships constitutes $89,034 and $7,866 of income in 1998
and 1997, respectively, included in the Partnership's net income. The financial
statements of these Local Partnerships were audited by other auditors whose
reports thereon have been furnished to us, and our opinion expressed herein,
insofar as it relates to the amount included for these Local Partnerships, is
based solely upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Capital Realty Investors-II Limited
Partnership as of December 31, 1998 and 1997, and the results of its operations,
changes in partners' deficit and cash flows for the years ended December 31,
1998 and 1997, in conformity with generally accepted accounting principles.
Grant Thornton LLP
Vienna, VA
March 9, 1999
III-7
<PAGE>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -
LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
HAS INVESTED*
* The reports of independent certified public accountants - Local
Partnerships in which Capital Realty Investors-II Limited Partnership has
invested were filed in paper format under Form SE on March 30, 1999, in
accordance with the Securities and Exchange Commission's continuing
hardship exemption granted March 5, 1999.
III-8
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Investments in and advances to partnerships $ 3,218,015 $ 4,737,362
Partnership interests held in escrow 1,044,007 917,927
Cash and cash equivalents 7,596,031 7,969,815
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $416,201 and $388,811, respectively 405,472 432,876
Property purchase costs, net of accumulated amortization of
$271,968 and $253,580, respectively 279,650 298,022
Other assets 3,781 91,028
------------ ------------
Total assets $ 12,546,956 $ 14,447,030
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 15,344,182 $ 17,359,614
Accrued interest payable 27,810,849 30,245,542
Accounts payable and accrued expenses 120,654 80,433
------------ ------------
Total liabilities 43,275,685 47,685,589
------------ ------------
Commitments and contingencies
Partners' capital (deficit):
Capital paid in:
General Partners 2,000 2,000
Limited Partners 50,015,000 50,015,000
------------ ------------
50,017,000 50,017,000
Less:
Accumulated distributions to partners (2,753,062) (2,253,712)
Offering costs (5,278,980) (5,278,980)
Accumulated losses (72,713,687) (75,722,867)
------------ ------------
Total partners' deficit (30,728,729) (33,238,559)
------------ ------------
Total liabilities and partners' deficit $ 12,546,956 $ 14,447,030
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
III-9
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Share of income from partnerships $ 6,129,573 $ 3,320,343
----------- -----------
Other revenue and expenses:
Revenue:
Interest income 510,789 346,204
----------- -----------
Expenses:
Interest 3,729,871 5,664,830
Management fee 249,996 249,996
Litigation settlement fee -- 210,000
General and administrative 241,774 206,442
Professional fees 136,335 145,188
Amortization 45,777 50,072
----------- -----------
4,403,753 6,526,528
----------- -----------
Total other revenue and expenses (3,892,964) (6,180,324)
----------- -----------
Income (loss) before gain on disposition of investments in partnerships 2,236,609 (2,859,981)
Gain on disposition of investments in partnerships -- 4,884,825
----------- -----------
Income before extraordinary gain from extinguishment of debt 2,236,609 2,024,844
Extraordinary gain from extinguishment of debt 772,571 1,653,096
----------- -----------
Net income $ 3,009,180 $ 3,677,940
=========== ===========
Net income allocated to General Partners (1.51%) $ 45,439 $ 55,537
=========== ===========
Net income allocated to Initial and Special Limited Partners (1.49%) $ 44,837 $ 54,801
=========== ===========
Net income allocated to Additional Limited Partners (97%) $ 2,918,904 $ 3,567,602
=========== ===========
Net income per unit of Additional Limited Partner
Interest based on 50,000 units outstanding $ 58.38 $ 71.35
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
III-10
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
<TABLE>
<CAPTION>
Initial and
Special Additional
General Limited Limited
Partners Partners Partners Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Partners' deficit, January 1, 1997 $(1,212,942) $(1,183,328) $(33,521,129) $(35,917,399)
Cash distribution of $20.00 per unit of
Additional Limited Partner Interest -- -- (999,100) (999,100)
Net income 55,537 54,801 3,567,602 3,677,940
----------- ----------- ------------ ------------
Partners' deficit, December 31, 1997 (1,157,405) (1,128,527) (30,952,627) (33,238,559)
Cash distribution of $10.00 per unit of
Additional Limited Partner Interest -- -- (499,350) (499,350)
Net income 45,439 44,837 2,918,904 3,009,180
----------- ----------- ------------ ------------
Partners' deficit, December 31, 1998 $(1,111,966) $(1,083,690) $(28,533,073) $(30,728,729)
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
III-11
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,009,180 $ 3,677,940
Adjustments to reconcile net income to net cash
used in operating activities:
Share of income from partnerships (6,129,573) (3,320,343)
Amortization of deferred costs 45,777 50,072
Amortization of discount on purchase money notes 1,488,064 3,287,800
Payment of purchase money note interest (851,884) (587,740)
Gain on disposition of investments in partnership -- (4,884,825)
Extraordinary gain from extinguishment of debt (772,571) (1,653,096)
Changes in assets and liabilities:
Decrease (increase) in other assets 87,247 (81,371)
Increase in accrued interest payable 2,289,762 2,372,875
Increase (decrease) in accounts payable and accrued expenses 40,221 (10,985)
----------- -----------
Net cash used in operating activities (793,777) (1,149,673)
----------- -----------
Cash flows from investing activities:
Receipt of distributions from partnerships 7,672,840 3,683,465
Proceeds from disposition of investments in partnerships -- 5,693,131
Advances made to local partnerships (803,313) (148,953)
Repayment of advances to local partnerships 653,313 147,250
----------- -----------
Net cash provided by investing activities 7,522,840 9,374,893
----------- -----------
Cash flows from financing activities:
Pay-off of purchase money notes and related interest (5,100,001) (1,385,154)
Cash distribution to Additional Limited Partners (499,350) (999,100)
Payment of purchase money note principal (1,503,496) --
----------- -----------
Net cash used in financing activities (7,102,847) (2,384,254)
----------- -----------
Net (decrease) increase in cash and cash equivalents (373,784) 5,840,966
Cash and cash equivalents, beginning of year 7,969,815 2,128,849
----------- -----------
Cash and cash equivalents, end of year $ 7,596,031 $ 7,969,815
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 4,724,456 $ 679,894
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
III-12
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
------------
Capital Realty Investors-II Limited Partnership (the Partnership) was
formed under the Maryland Revised Uniform Limited Partnership Act on March
23, 1983 and shall continue until December 31, 2037 unless sooner dissolved
in accordance with the Partnership Agreement. The Partnership was formed
to invest in real estate by acquiring and holding a limited partner
interest in limited partnerships (Local Partnerships) which own and operate
federal or state government-assisted or conventionally financed apartment
properties located throughout the United States, which provide housing
principally to the elderly and to individuals and families of low or
moderate income.
The General Partners of the Partnership are C.R.I., Inc. (CRI), which
is the Managing General Partner, and current and former shareholders of
CRI. The Initial Limited Partner is Rockville Pike Associates Limited
Partnership-II, a limited partnership which includes certain officers and
former employees of CRI or its affiliates. The Special Limited Partner is
Two Broadway Associates II, a limited partnership comprised of an affiliate
and employees of Merrill Lynch, Pierce, Fenner & Smith, Incorporated.
The Partnership sold 50,000 units at $1,000 per unit of Additional
Limited Partner Interest through a public offering. The offering period
was terminated on June 20, 1983.
b. Method of accounting
--------------------
The financial statements of the Partnership are prepared on the
accrual basis of accounting in accordance with generally accepted
accounting principles.
c. Investments in and advances to partnerships
-------------------------------------------
The investments in and advances to Local Partnerships (see Note 2) are
accounted for by the equity method because the Partnership is a limited
partner in the Local Partnerships. Under this method, the carrying amount
of the investments in and advances to Local Partnerships is (i) reduced by
distributions received and (ii) increased or reduced by the Partnership's
share of earnings or losses, respectively, of the Local Partnerships. As
of December 31, 1998 and 1997, the Partnership's share of cumulative losses
of 12 of the Local Partnerships exceeds the amount of the Partnership's
investments in and advances to those Local Partnerships by $23,529,345 and
$23,324,214, respectively. Since the Partnership has no further obligation
to advance funds or provide financing to these Local Partnerships, the
excess losses have not been reflected in the accompanying financial
statements. As of December 31, 1998 and 1997, cumulative cash
distributions of $11,501,406 and $5,461,043, respectively, have been
received from the Local Partnerships for which the Partnership's carrying
value is zero. These distributions are recorded as increases in the
Partnership's share of income from partnerships.
III-13
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Costs incurred in connection with acquiring these investments have
been capitalized and are being amortized using the straight-line method
over the estimated useful lives of the properties owned by the Local
Partnerships.
d. Cash and cash equivalents
-------------------------
Cash and cash equivalents consist of all money market funds,
repurchase agreements and commercial paper with original maturities of
three months or less.
e. Offering costs
--------------
The Partnership incurred certain costs in connection with the offering
and selling of limited partner interests. Such costs were recorded as a
reduction of partners' capital when incurred.
f. Income taxes
------------
For federal and state income tax purposes, each partner reports on his
or her personal income tax return his or her share of the Partnership's
income or loss as determined for tax purposes. Accordingly, no provision
(credit) has been made for income taxes in these financial statements.
g. Use of estimates
----------------
In preparing financial statements in conformity with generally
accepted accounting principles, the Partnership is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, and of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
h. Fair Value of Financial Instruments
-----------------------------------
The financial statements include estimated fair value information as
of December 31, 1998, as required by Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosure About Fair Value of Financial
Instruments." Such information, which pertains to the Partnership's
financial instruments (primarily cash and cash equivalents and purchase
money notes), is based on the requirements set forth in SFAS No. 107 and
does not purport to represent the aggregate net fair value of the
Partnership.
The balance sheet carrying amounts for cash and cash equivalents
approximate estimated fair values of such assets.
The Partnership has determined that it is not practicable to estimate
the fair value of the purchase money notes, either individually or in the
aggregate, due to: (1) the lack of an active market for this type of
financial instrument, (2) the variable nature of purchase money note
interest payments as a result of fluctuating cash flow distributions
III-14
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
received from the related Local Partnerships, and (3) the excessive costs
associated with an independent appraisal of the purchase money notes.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. Due on investments in partnerships
----------------------------------
As of both December 31, 1998 and 1997, the Partnership held limited
partner interests in 20 Local Partnerships which were organized to develop,
construct, own, maintain and operate rental apartment properties which
provide housing principally to the elderly and to individuals and families
of low or moderate income. The remaining principal amounts due on
investments in the Local Partnerships were as follows.
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Purchase money notes due in:
1996 $ -- $ 1,050,000
1997 -- 1,900,000
1998 6,980,000 13,507,500
1999 1,340,178 1,340,178
2000 -- 1,050,000
2001 2,000,000 --
2003 5,024,004 --
Less: unamortized discount -- (1,488,064)
----------- -----------
Total $15,344,182 $17,359,614
=========== ===========
</TABLE>
The purchase money notes have stated interest rates ranging from 9% to
12%, certain of which are compounded annually. Unamortized discounts are
based on an imputed interest rate of 15% to reflect market interest rates
which prevailed when the notes were issued. The resulting discount has
been recorded by the Partnership and is being amortized to interest expense
over the life of the respective purchase money notes using the effective
interest method. The purchase money notes are payable upon the earliest
of: (1) sale or refinancing of the respective Local Partnership's rental
property; (2) payment in full of the respective Local Partnership's
permanent loan; or (3) maturity. Purchase money notes in the aggregate
principal amount of $1,050,000 and $950,000 matured on December 31, 1996
and 1997, respectively, and have been extended to January 5, 2001, as
discussed below. Purchase money notes in the aggregate principal amounts
of $1,050,000 and $950,000 matured on December 31, 1996 and December 31,
1997, respectively, and were paid off on October 5, 1998, as discussed
below. Purchase money notes in the aggregate principal amounts of
$2,380,000 and $3,150,000 matured on January 1, 1998 and June 1, 1998,
respectively, and have not paid or extended, as discussed below. Purchase
money notes in the aggregate principal amounts of $4,600,000 and $424,000
matured on August 31, 1998 and have been extended to August 31, 2003 as
III-15
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
discussed below. Purchase money notes in the aggregate principal amount
$1,450,000 matured on September 1, 1998, and the Managing General Partner
is involved in negotiations to extend these notes until September 1, 2003,
as discussed below. Purchase money notes in the aggregate principal amount
of $840,178 matured on January 1, 1999 and were paid off, at a discount, on
February 5, 1999. Purchase money notes in the aggregate principal amount
of $500,000 matured on January 1, 1999 and have not been paid or extended,
as discussed below.
The purchase money notes, which are nonrecourse to the Partnership,
are generally secured by the Partnership's interest in the respective Local
Partnerships. There is no assurance that the underlying properties will
have sufficient appreciation and equity to enable the Partnership to pay
the purchase money notes' principal and accrued interest when due. If a
purchase money note is not paid in accordance with its terms, the
Partnership will either have to renegotiate the terms of repayment or risk
losing its partnership interest in the Local Partnership. The
Partnership's inability to pay certain of the purchase money note principal
and accrued interest balances when due, and the resulting uncertainty
regarding the Partnership's continued ownership interest in the related
Local Partnerships, does not impact the Partnership's financial condition
because the purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the related Local Partnerships. Therefore,
should the investment in any of the Local Partnerships with maturing
purchase money notes not produce sufficient value to satisfy the related
purchase money notes, the Partnership's exposure to loss is limited because
the amount of the nonrecourse indebtedness of each of the maturing purchase
money notes exceeds the carrying amount of the investment in and advances
to the related Local Partnerships. Thus, even a complete loss of one of
these Local Partnerships would not have a material impact on the financial
condition of the Partnership.
The following chart presents information related to purchase money
notes which mature through December 31, 1999, or which have matured and
remain unpaid or unextended as of March 30, 1999.
III-16
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
Carrying Amount
of Partnership's
Investment in Aggregate
and Advances to Principal Aggregate
Number of Underlying Local Balance Interest
Underlying Partnerships as as of Balance as of
Purchase Money Local Percentage of December Percentage December Percentage December Percentage
Note Maturity Partnerships of Total 31, 1998 of Total 31, 1998 of Total 31, 1998 of Total
- ---------------- ------------ ---------- ---------------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 1998 2 10% $ -- -- $ 2,380,000 16% $ 2,913,510 11%
2nd Quarter 1998 1 5% -- -- 3,150,000 21% 5,273,934 19%
3rd Quarter 1998 1 5% 726,775 23% 1,450,000 9% 2,000,762 7%
1st Quarter 1999 1 5% -- -- 500,000 3% 1,421,774 5%
---- ----- --------------- ----- ----------- ----- ------------- -----
5 25% $ 726,775 23% $ 7,480,000 49% $ 11,609,980 42%
==== ===== =============== ===== =========== ===== ============= =====
Total 20 100% $ 3,218,015 100% $15,344,182 100% $ 27,810,849 100%
==== ===== =============== ===== =========== ===== ============= =====
</TABLE>
The above chart does not include purchase money notes aggregating
$840,178 which matured on January 1, 1999 and were paid off, at a discount,
on February 5, 1999. Please see below for information pertaining to these
purchase money notes.
The Managing General Partner is continuing to investigate possible
alternatives to reduce the Partnership's debt obligations. These
alternatives include, among others, retaining the cash available for
distribution to meet the purchase money note requirements, buying out
certain purchase money notes at a discounted price, extending the due dates
of certain purchase money notes, refinancing the respective properties'
underlying debt or selling the underlying real estate and using the
Partnership's share of the proceeds to pay or buy down certain purchase
money note obligations. Although the Managing General Partner has had some
success applying these strategies in the past, the Managing General Partner
cannot assure that these strategies will always be successful. Based on
preliminary discussions with the holders of purchase money notes maturing
through December 31, 1999, the Managing General Partner anticipates that,
at least in some instances, the noteholders may not be willing to negotiate
using any of the strategies mentioned above. In such instances, upon
maturity of the purchase money notes, the noteholders have the right to
foreclose on the Partnership's interest in the related Local Partnerships.
In the event of a foreclosure, the excess of the nonrecourse indebtedness
over the carrying amount of the Partnership's investment in the related
Local Partnership would result in cancellation of indebtedness income which
would be taxable to Limited Partners at a federal tax rate of up to 39.6%.
Additionally, in the event of a foreclosure, the Partnership would lose its
investment in the Local Partnership and, likewise, its share of the future
cash flow distributed by the Local Partnership from rental operations, and
sales or refinancings. Of the 20 Local Partnerships in which the
Partnership is invested as of both December 31, 1998 and 1997, the five
III-17
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
local Partnerships with associated purchase money notes which mature
through December 31, 1999 and remain unpaid or unextended as of March 30,
1999, represent the following percentages of the Partnership's total
distributions received from Local Partnerships and share of income from
Local Partnerships.
<TABLE>
<CAPTION>
Percentage of Total Partnership's Share of
Distributions Received Income from
For Periods Ending from Local Partnerships Local Partnerships
------------------ ----------------------- ----------------------
<S> <C> <C>
December 31, 1998 1% $ 234,121
December 31, 1997 3% 95,197
</TABLE>
The Managing General Partner continues to address the impending
maturity of its debt obligations and seeks strategies which will provide
the most favorable outcome to the Additional Limited Partners. However,
there can be no assurance that these strategies will be successful.
Interest expense on the Partnership's purchase money notes for the
years ended December 31, 1998 and 1997 was $3,729,871 and $5,664,830,
respectively. The accrued interest payable on the purchase money notes of
$27,810,849 and $30,245,542 as of December 31, 1998 and 1997, respectively,
is due on the respective maturity dates of the purchase money notes or
earlier, in some instances, if the pertinent Local Partnership has
distributable net cash flow, as defined in the relevant Local Partnership
agreement.
Beech Hill I and II
-------------------
The Partnership defaulted on its purchase money notes aggregating
$2,380,000 related to Beech Hill Development Co. (Beech Hill I) and Beech
Hill Development Co. II (Beech Hill II) on August 1, 1995 when the notes
matured and were not paid. On March 29, 1996, the noteholders agreed to
extend the purchase money note due dates to January 1, 1998. Under the
agreement, the Partnership pays the noteholders of Beech Hill I and Beech
Hill II all annual cash flow distributions received from the related Local
Partnerships in excess of $5,000 and $2,500, respectively. The Partnership
did not receive any cash flow distributions from Beech Hill I or Beech Hill
II during 1998. The Partnership received cash flow distributions of $5,000
and $2,500 from Beech Hill I and Beech Hill II, respectively, during the
year ended December 31, 1997. Cash flow distributions of $30,694 and
$47,760 were paid directly by Beech Hill I to the purchase money
noteholders during the years ended December 31, 1998 and 1997,
respectively. Cash flow distributions of $29,687 and $1,369 were paid
directly by Beech Hill II to the purchase money noteholders during the
years ended December 31, 1998 and 1997, respectively. Annual cash flow
distributions of $30,694 and $5,000 from Beech Hill I were received during
the twelve months ended December 31, 1998 and 1997, respectively, and
$29,687 and $2,500, respectively, from Beech Hill II.
III-18
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Under the extension agreement, documents transferring the
Partnership's interests in Beech Hill I and Beech Hill II to the
noteholders were placed in escrow to be released to the noteholders upon a
future default by the Partnership on the respective purchase money notes.
On January 1, 1998, the Partnership defaulted on its purchase money notes
related to Beech Hill I and Beech Hill II when the notes, as extended,
matured and were not paid. The default amount included principal and
accrued interest of $1,480,000 and $1,687,578, respectively, for Beech Hill
I and $900,000 and $1,072,113, respectively, for Beech Hill II. As of
March 30, 1999, the Partnership's interests in Beech Hill I and Beech Hill
II have not been transferred to the noteholders, and the transfer documents
remain in escrow. As of March 30, 1999, principal and accrued interest
totaling $1,480,000 and $1,819,643, respectively, related to Beech Hill I
and $900,000 and $1,141,401, respectively, related to Beech Hill II were
due.
Due to the impending likely transfer of the Partnership's interest in
the Local Partnerships to the noteholders, the Partnership's basis in these
Local Partnerships as of December 31, 1998, which were $634,938 and
$409,069 for Beech Hill I and Beech Hill II, respectively, were classified
as partnership interests held in escrow in the accompanying financial
statements.
The purchase money notes related to Beech Hill I and Beech Hill II are
nonrecourse and secured solely by the Partnership's interests in the
related Local Partnerships. The release of the Partnership's purchase
money note obligations as a result of the impending likely loss of
ownership interest in the Local Partnerships would result in a net
financial statement gain of approximately $2.8 million and $1.6 million for
Beech Hill I and Beech Hill II, respectively. The federal tax gains are
estimated to be approximately $4.9 million and $3.0 million for Beech Hill
I and Beech Hill II, respectively.
Chevy Chase
-----------
The Partnership defaulted on its two purchase money notes relating to
Chevy Chase Park, Limited (Chevy Chase) on December 31, 1996 when the notes
matured and were not paid. The aggregate default amount included principal
and accrued interest of $2,100,000 and $3,553,912, respectively. The
Managing General Partner successfully negotiated an extension of one of the
purchase money notes (First Chase Note) in the principal amount of
$1,050,000 effective December 1, 1997. In connection with the extension
agreement, the Partnership made an interest payment to the noteholder. The
terms of the extension agreement extended the maturity date to January 2,
2000. On December 17, 1998, the Partnership exercised its right, pursuant
to the extension agreement, to extend the maturity date to January 5, 2001
by making an additional payment, applied to accrued interest, to the
noteholder. The Partnership has the further option to purchase the
purchase money note for a specified amount if it gives notice of such
exercise by January 5, 2000.
On February 10, 1998, the Partnership was served with a complaint by
the two holders of the second purchase money note (Second Chase Note)
filing suit against the Partnership, the Managing General Partner and
C.R.H.C., Incorporated (CRHC), an affiliate of the Managing General
Partner, for damages and seeking foreclosure on the Partnership's interest
III-19
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
in the Local Partnership. On July 29, 1998, the parties agreed to a
settlement which involved a discounted payoff to the holders of the Second
Chase Note, subject to the Partnership's satisfaction with the results of
its due diligence. On October 5, 1998, pursuant to such settlement
agreement, the Partnership paid the holders of the Second Chase Note a
discounted amount in full settlement of the Second Chase Note and the
lawsuit. In connection with this settlement, the local general partners
withdrew from the Local Partnership, assigning their combined one percent
interests (which were converted to a limited partner interest) in the Local
Partnership to the Partnership, and the property management agent, which is
an affiliate of the local general partners, agreed to a termination of the
property management agreement effective April 1, 1999. CRHC is the sole
remaining general partner of the Local Partnership. Further, the
Partnership received the interests of the local general partners, the
holders of the Second Chase Note, and their respective affiliates in the
First Chase Note, which is approximately 10.808%.
Four Winds West
---------------
The Partnership defaulted on its purchase money note related to Four
Winds West Company Limited (Four Winds West) on January 1, 1999 when the
note matured and was not paid. The default amount included aggregate
principal and accrued interest of $462,178 and $532,673, respectively. On
February 5, 1999, the Partnership paid off, at a discount, the purchase
money note related to Four Winds West. The discounted pay off will result
in cancellation of indebtedness income of approximately $300,000 in 1999.
Frenchman's Wharf II
--------------------
The Partnership defaulted on its purchase money notes related to
Frenchman's Wharf Associates II Limited Partnership (Frenchman's Wharf II)
on June 1, 1998 when the notes matured and were not paid. The default
amount included principal and accrued interest of $3,150,000 and
$5,071,731, respectively. The purchase money notes, initially due to
mature on June 1, 1988, were extended to mature on June 1, 1998. As of
March 30, 1999, principal and accrued interest totaling $3,150,000 and
$5,347,981, respectively, were due. In conjunction with the four-year
workout agreement for the Local Partnership's mortgage loan, the
Partnership is currently negotiating with the noteholders to extend the
notes to be coterminous with the workout agreement, which is scheduled to
expire on May 31, 2000. As of March 30, 1999, the noteholders had not
consented to an extension agreement and there is no assurance that any
agreement will be reached with the noteholders. There is no assurance that
the Partnership will be able to retain its interest in Frenchman's Wharf
II. The uncertainty regarding the continued ownership of the Partnership's
interest in Frenchman's Wharf II does not impact the Partnership's
financial condition, as discussed above.
Princeton
---------
The Partnership defaulted on its purchase money note related to
Princeton Community Village Associates (Princeton) on January 1, 1999 when
the note matured and was not paid. The default amount included principal
and accrued interest of $500,000 and $1,422,064, respectively. As of March
III-20
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
30, 1999, principal and accrued interest of $500,000 and $1,444,371,
respectively, were due.
The Managing General Partner is currently negotiating with the
noteholders to extend the maturity date of the purchase money note related
to Princeton. There is no assurance that a final agreement for an
extension of the purchase money note will be obtained. During September
1998, the Managing General Partner received an offer from a third party to
purchase its partnership interest in the related Local Partnership. The
offer was not accepted by the local managing general partner.
Rolling Green at Fall River and Rolling Green at Amherst
--------------------------------------------------------
The Partnership defaulted on its purchase money notes relating to
Roberts Fall River Associates (Rolling Green at Fall River) and Roberts
Amherst Associates (Rolling Green at Amherst) on August 31, 1998 when the
notes matured and were not paid. The default amount included principal and
accrued interest of $4,600,000 and $8,750,764, respectively, for Rolling
Green at Fall River and $1,927,500 and $3,661,147, respectively, for
Rolling Green at Amherst. The Managing General Partner and the trustees
representing the noteholders agreed to extend the maturity dates of the
purchase money notes to February 28, 2001, subject to a further extension
to August 31, 2003 if the Local Partnerships complete a refinancing of
their mortgage loans, which has occurred for both Rolling Green at Fall
River and Rolling Green at Amherst. However, the noteholders have the
right to accelerate the maturity of the notes upon not less than one year's
prior notice. Accordingly, the purchase money notes for Rolling Green at
Fall River and Rolling Green at Amherst presently mature on August 31,
2003, subject to the respective noteholder's right to accelerate the
maturity. As part of the agreement, the Partnership agreed that all loans
proceeds payable to the Partnership by the respective Local Partnerships,
as well as all net cash flow payable to the Partnership from the respective
Local Partnerships in excess of $10,000 per year, shall be applied to the
balance of the respective purchase money note. The Partnership further
agreed to waive certain rights granted in the respective Local
Partnerships' limited partnership agreements.
Tanglewood II
-------------
In conjunction with the sale of the property, on February 17, 1997,
the Partnership paid the purchase money note related to Tanglewood
Apartments Associates II Limited Partnership (Tanglewood II) at a discount,
as discussed below.
Troy Manor
----------
The Partnership defaulted on its purchase money note related to Troy
Apartments Limited (Troy Manor) on January 1, 1999 when the note matured
and was not paid. The default amount included aggregate principal and
accrued interest of $378,000 and $227,420, respectively. On February 5,
1999, the Partnership paid off, at a discount, the purchase money note
related to Troy Manor. The discounted pay off will result in cancellation
of indebtedness income of approximately $220,000 in 1999.
III-21
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Westgate
--------
In June, 1998, the holder of the purchase money note related to
Westgate Tower Limited Dividend Housing Associates (Westgate) accepted the
Managing General Partner's offer to extend the maturity date of the
purchase money note for five years from its scheduled maturity date of
September 1, 1998. However, the noteholder has since refused to execute
the documentation formally extending the maturity date. As of March 30,
1999, principal and accrued interest of $1,450,000 and $2,028,650,
respectively, were due. In December, 1998, the noteholder's attorney
notified the Managing General Partner of its position, which the Managing
General Partner disputes, that the noteholder's prior agreement to extend
the maturity date is not binding on the noteholder. The parties are
exploring settlement possibilities, but the Managing General Partner is
prepared to vigorously defend its position that the agreement to extend the
maturity date for five years is binding on the noteholder. There is no
assurance that the parties will be able to settle this dispute or that the
Partnership would prevail in any resulting litigation if a settlement is
not reached. Accordingly, there can be no assurance that the Partnership
will be able to retain its interest in the Local Partnership. The
uncertainty about the continued ownership of the Partnership's interest in
the related Local Partnership does not impact the Partnership's financial
condition, as discussed above.
Wexford Ridge
-------------
The Partnership defaulted on its three purchase money notes relating
to Wexford Ridge Associates (Wexford Ridge) on December 31, 1997 when the
notes matured and were not paid. The aggregate default amount included
principal and accrued interest of $1,900,000 and $3,478,549, respectively.
The Managing General Partner successfully negotiated an extension on one of
the purchase money notes (First Wexford Note) in the principal amount of
$950,000 effective April 9, 1998. In connection with the extension
agreement, the Partnership made an interest payment to the noteholder.
Under the terms of the extension agreement, the maturity date is January 5,
2001. Additionally, the Partnership has the right and option, but not the
obligation, to extend the maturity date to January 5, 2002 by making an
additional payment to the noteholder on or before January 5, 2000. Such
payment shall be applied to accrued interest. The Partnership, if it
exercises this option to further extend the maturity date, shall thereafter
have the option to purchase the purchase money note if it gives notice of
such exercise by January 5, 2001.
On April 7, 1998, the Partnership was served with a complaint by the
holder of the second and third purchase money notes (collectively, Second
and Third Wexford Notes) filing suit against the Partnership, the Managing
General Partner and C.R.H.C., Incorporated (CRHC), an affiliate of the
Managing General Partner, for damages and seeking foreclosure on the
Partnership's interest in the Local Partnership. On July 29, 1998, the
parties agreed to a settlement which involved a discounted payoff to the
holder of the Second and Third Wexford Notes, subject to the Partnership's
satisfaction with the results of its due diligence. On October 5, 1998,
pursuant to such settlement agreement, the Partnership paid the holder of
the Second and Third Wexford Notes a discounted amount in full settlement
of the Second and Third Wexford Notes and the lawsuit. In connection with
III-22
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
this settlement, the local general partner withdrew from the Local
Partnership, assigning his one percent interest (which was converted to a
limited partner interest) in the Local Partnership to the Partnership, and
the property management agent, which is an affiliate of the local general
partner, agreed to a termination of the property management agreement
effective April 1, 1999. CRHC is the sole remaining general partner of the
Local Partnership. Further, the Partnership received the interests of the
local general partner, the holder of the Second and Third Wexford Notes,
and their respective affiliates in the First Wexford Note, which is
approximately 4.85%.
b. Interests in profits, losses and cash distributions
---------------------------------------------------
made by Local Partnerships
--------------------------
The Partnership has a 92.99% to 99.99% interest in profits, losses and
cash distributions (as restricted by various federal and state housing
agencies) of each Local Partnership. An affiliate of the General Partners
of the Partnership is also a general partner of each Local Partnership.
The Partnership received cash distributions from the rental operations and
mortgage refinancings of the Local Partnerships totaling $7,672,840 and
$3,683,465 during the years ended December 31, 1998 and 1997, respectively.
As of December 31, 1998 and 1997, 14 of the Local Partnerships had surplus
cash, as defined by their respective regulatory agencies, in the amounts of
$2,092,142 and $2,747,197, respectively, which may be available for
distribution in accordance with their respective regulatory agencies'
regulations.
The cash distributions to the Partnership from the operations of the
rental properties may be limited by HUD regulations. Such regulations
limit annual cash distributions to a percentage of the owner's equity
investment in a rental property. Funds in excess of those which may be
distributed to owners are generally required to be placed in a residual
receipts account held by the governing state or federal agency for the
benefit of the property.
Upon sale or refinancing of a property owned by a Local Partnership,
or upon the liquidation of a Local Partnership, the proceeds from such
sale, refinancing or liquidation shall be distributed in accordance with
the respective provisions of each Local Partnership's partnership
agreement. In accordance with such provisions, the Partnership would
receive from such proceeds its respective percentage interest of any
remaining proceeds, after payment of (1) all debts and liabilities of the
Local Partnership and certain other items, (2) the Partnership's capital
contributions plus certain specified amounts as outlined in each
partnership agreement, and (3) certain special distributions to general
partners and related entities of the Local Partnership.
c. Advances to Local Partnerships
------------------------------
The advances, and accrued interest thereon, made to the Local
Partnerships were as follows.
III-23
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Local Partnership
-----------------
Frenchman's Wharf II:
Principal amount of funds advanced $ 324,410 $ 324,410
Accrued interest on advances 187,372 187,372
Posada Vallarta:
Principal amount of funds advanced 150,000 --
Accrued interest on advances -- --
----------- -----------
Total $ 661,782 $ 511,782
=========== ===========
</TABLE>
Frenchman's Wharf II
--------------------
To cover operating deficits incurred in prior years for Frenchman's
Wharf II, the Partnership advanced funds totaling $324,410 as of both
December 31, 1998 and 1997. No advances have been made to Frenchman's
Wharf II since March 1987, and the Partnership does not expect to advance
any additional funds to the Local Partnership. These loans, together with
accrued interest of $187,372 as of both December 31, 1998 and 1997, are
payable from cash flow of Frenchman's Wharf II after payment of first
mortgage debt service and after satisfaction by the Partnership of certain
other interest obligations on the purchase money notes relating to the
Local Partnership. No interest has been accrued since 1992 due to the
uncertainty of future collection. There is no assurance that the Local
Partnership, upon expiration of the workout of its mortgage loan, will be
able to repay the loans in accordance with the terms thereof. For
financial reporting purposes, these loans have been reduced to zero by the
Partnership as a result of losses at the Local Partnership level during
prior years.
Posada Vallarta Apartments
--------------------------
The Managing General Partner and the local managing general partner of
Posada Associates Limited Partnership (Posada Vallarta Apartments)
refinanced the property's mortgage loan on May 26, 1998. In connection
with such refinancing, the Partnership advanced the Local Partnership
$450,000 for application and rate lock fees. As of December 31, 1998, and
March 30, 1999, $300,000 of the advances had been repaid to the
Partnership. For financial reporting purposes, the remaining advance has
been reduced to zero by the Partnership as a result of losses at the Local
Partnership level.
III-24
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
d. Property matters
----------------
Arrowhead and Moorings
-----------------------
On May 1, 1996, CRHC notified the local managing general partner of
Arrowhead Apartments Associates Limited Partnership (Arrowhead) and
Moorings Apartments Associates Limited Partnership (Moorings) that he was
in default under the Partnership Agreements and threatened to remove him as
managing general partner of the Local Partnerships. The managing agent of
Arrowhead and Moorings, which was an affiliate of the local managing
general partner, filed a petition for arbitration against CRHC seeking,
among other things, a declaration that the allegations set forth in CRHC's
notice did not constitute grounds for removal of the local managing general
partner. CRHC subsequently filed for arbitration against the local
managing general partner seeking his removal. On September 3, 1996, CRHC
filed an emergency petition in the arbitration to have a trustee appointed
to serve as local managing general partner and managing agent of the Local
Partnerships until the arbitration hearings were held. The emergency
petition was denied. On May 7, 1997, the parties reached a settlement
whereby the property management agent was replaced and the local managing
general partner was removed from the Local Partnerships in exchange for
$210,000. The settlement was paid by the Partnership during 1997 and is
included as litigation settlement fee in the accompanying financial
statements.
On May 7, 1998, Arrowhead Apartments Associates Limited Partnership
(Arrowhead) and Moorings Apartments Associates Limited Partnership
(Moorings) closed on refinancings of their respective first mortgage loans.
A portion of the proceeds were subsequently used to pay, at a discount,
purchase money note obligations of the related Local Partnerships. These
discounted payoffs will result in cancellation of indebtedness income for
the Partnership's 1998 tax year. Additionally, the Partnership received
$1,536,059 and $3,511,550 as of March 30, 1999 from Arrowhead and Moorings,
respectively, from the net proceeds of the refinancings. The aggregate
refinancing proceeds received by the Partnership exceeded the Partnership's
remaining investments in Arrowhead and Moorings by approximately $1.4
million and $3.3 million, respectively, and have been included in share of
income from partnerships in the 1998 statement of operations.
In accordance with the distribution provisions of the Moorings Local
Partnership agreement, CRHC was paid an additional incentive management fee
of $331,073 on August 7, 1998. No such fee was paid as a result of the
Arrowhead mortgage loan refinancing.
Chevy Chase
-----------
The Managing General Partner and CRHC are exploring various options to
refinance the U. S. Department of Housing and Urban Development (HUD)
Section 236 interest rate subsidized mortgage loan related to Chevy Chase
Park, Limited (Chevy Chase). Additionally, the Managing General Partner
commissioned a rental market study and is evaluating the feasibility of
III-25
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
converting the property to market-rate. No conclusion has been reached as
of March 30, 1999. At this time, there is no assurance that the property
will be converted, nor is there any assurance that a refinancing of the
mortgage loan will occur.
Country Place I and II
----------------------
On May 5, 1997, the local managing general partner of Blackburn
Limited Partnership (Country Place I) and Second Blackburn Limited
Partnership (Country Place II) and the Managing General Partner submitted
an application to refinance the first mortgage loans of the Local
Partnerships. On July 18, 1997, the Partnership and the lender signed a
loan commitment and the Partnership paid a $74,250 and $45,000 loan
commitment fee for Country Place I and Country Place II, respectively. On
August 1, 1997, the local managing general partner closed on the
refinancing loans. In connection with the refinancings, on August 4, 1997,
the Partnership received $1,889,909 and $609,428 related to Country Place I
and Country Place II, respectively. Additionally, on August 14, 1997, the
Partnership received $471,106 and $159,211 which related to the release of
funds held in escrow for Country Place I and Country Place II,
respectively. The aggregate refinancing proceeds received by the
Partnership exceeded the Partnership's remaining investments in the
respective Local Partnerships by approximately $3.1 million, and have been
included in share of income from partnerships in the accompanying 1997
consolidated statement of operations.
Deer Grove
----------
On March 18, 1997, the local managing general partner of Palatine-
Barrington Associates Limited Partnership (Deer Grove) sold the property, a
448-unit apartment complex located in Palatine, Illinois. The sale of the
property generated cash proceeds to the Partnership of $3.4 million at
closing. The sale resulted in a net financial statement gain in 1997 of
approximately $3.4 million. The federal tax gain was approximately $17.8
million.
Frenchman's Wharf II
--------------------
The report of the auditors on the financial statements of Frenchman's
Wharf II for the year ended December 31, 1998 indicated that substantial
doubt exists about the ability of the Local Partnership to continue as a
going concern due to the Local Partnership's default on its mortgage loan
and the expiration of its Section 8 Rental Housing Assistance Payments
(HAP) contract with HUD on November 30, 1999. The uncertainty about the
Local Partnership's continued ownership of the property does not impact the
Partnership's financial condition, as discussed above.
Orangewood Plaza
----------------
The 1983 construction loan related to Orangewood Plaza, a 40-unit
apartment building in Orange Cove, California, was never formally converted
to a permanent loan. It is anticipated that this loan will be restructured
during 1999, and that the restructuring may result in cancellation of
III-26
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
indebtedness income to the Partnership in the amount of approximately
$163,000 during 1999. Additionally, the Partnership had pledged its
interest in the Local Partnership as security on another promissory note,
in the amount of $170,000, made by the Local Partnership. The note, which
matured on July 28, 1998, is currently in default. The parties are
currently negotiating a restructuring of this loan, which is anticipated to
be formalized concurrent with the restructuring of the construction loan.
There is no assurance that either restructuring will be formalized.
Accordingly, there is no assurance that the Partnership will be able to
retain its interest in Orangewood Plaza. This uncertainty does not impact
the Partnership's financial condition, as discussed above.
Posada Vallarta Apartments
--------------------------
The Managing General Partner and the local managing general partner of
Posada Vallarta Apartments refinanced the property's mortgage loan on May
26, 1998. In connection with such refinancing, the Partnership advanced
the Local Partnership $450,000 for application and rate lock fees. As of
December 31, 1998, and March 30, 1999, $300,000 of the advances had been
repaid to the Partnership. For financial reporting purposes, the remaining
advance has been reduced to zero by the Partnership as a result of losses
at the Local Partnership level.
Princeton
---------
The report of the auditors on the financial statements of Princeton
for the year ended December 31, 1998 indicated that substantial doubt
exists about the ability of the Local Partnership to continue as a going
concern due to the Local Partnership's default on its mortgage loan from
the former owner of the apartment complex and the Partnership's default on
the purchase money notes related to this Local Partnership, as discussed
above. The uncertainty about the Local Partnership's continued ownership
of the property does not impact the Partnership's financial condition, also
as discussed above.
Tanglewood II
-------------
On February 19, 1997, Tanglewood II, a 192-unit apartment complex
located in Westwego, Louisiana was sold. The sale of the property
generated net cash proceeds to the Partnership of $933,987. The proceeds
were net of funds used to retire, at a discount, the Partnership's purchase
money note obligation with respect to the property. The sale resulted in a
net financial statement gain of approximately $3.2 million, of which
approximately $1.7 million resulted from the retirement of the purchase
money note obligation with respect to the property. The federal tax gain
was approximately $4.9 million.
Wexford Ridge
-------------
The local managing general partner of Wexford Ridge has agreed to the
sale of the property to a potential buyer and the parties are currently
negotiating a sales contract. There is no assurance that a sale will take
place.
III-27
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
e. Affordable Housing Legislation
------------------------------
President Clinton signed the Fiscal Year 1998 HUD appropriations bill
into law, effective October 1, 1997. The legislation allowed all Section 8
HAP contracts with rents at less than 120% of fair market rents which
expired between October 1997 and September 1998 to be renewed for one year.
In the event that these rents exceeded 120% of fair market rents, these
rents were reduced to 120% of fair market rents (Mark-to-Market). As of
the beginning of Fiscal Year 1999 (October 1, 1998), all expiring contracts
with rents exceeding comparable market rents and whose mortgages are
insured by FHA will be subject to the Mark-to-Market legislation.
Mark-to-Market implementation will reduce rental income at properties
which are currently subsidized at higher-than-market rental rates, and will
therefore lower cash flow available to meet mortgage payments and operating
expenses. Each affected property will undergo debt restructuring according
to terms determined by an individual property and operations evaluation.
This will involve reducing the first mortgage loan balance to an amount
supportable by the property, taking into account the property's operating
expenses and reduced income. The balance of the amount written down from
the first mortgage will be converted to a non-performing but accruing
(soft) second mortgage.
The Section 8 HAP contracts for the following properties have expired
or will expire during the government's fiscal year 1998 or 1999, and have
been renewed as indicated.
III-28
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
Units Authorized for Original Renewed
Number of Rental Assistance Under Expiration of Section 8 Expiration of Section 8
Property Rental Units Section 8 HAP Contract HAP Contract
- -------- ------------ ----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Beech Hill I (1) 200 39 08/31/98 02/29/00
Beech Hill II (1) 120 24 08/31/98 02/29/00
Chevy Chase Park 232 228 03/23/98 09/22/99
Four Winds West 62 62 04/14/98 10/14/99
Frenchman's Wharf II 324 31 11/30/98 09/30/99
Princeton Community Village 239 26 07/01/98 10/01/99
Wexford Ridge 246 242 09/30/98 09/30/99
----- ---
Total 1,423 652
===== ===
</TABLE>
(1) As discussed previously, the Partnership's interests in these Local
Partnerships are being held in escrow to be transferred to the
noteholders, at their election, due to non-payment on the related
purchase money notes.
With the uncertainty of continued project-based Section 8 subsidies for
properties with expiring HAP contracts, there is no assurance that these
rental properties will be able to maintain the rental income and occupancy
levels necessary to pay operating costs and debt service. It is difficult
to predict the impact on the Local Partnerships and the resulting impact on
the Partnership at this time.
f. Summarized financial information
--------------------------------
Summarized financial information for the Local Partnerships at
December 31, 1998 and 1997 and for the years ended December 31, 1998 and
1997 follows.
III-29
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Rental property, at cost, net of accumulated
depreciation of $71,480,347 and $66,719,563,
respectively $ 62,000,194 $ 65,117,350
Land 9,387,934 9,387,934
Other assets 13,818,251 16,540,104
------------ ------------
Total assets $ 85,206,379 $ 91,045,388
============ ============
Mortgage notes payable $ 98,088,051 $ 88,199,562
Other liabilities 15,686,522 22,350,998
Due to general partners 4,507,399 6,891,949
------------ ------------
Total liabilities 118,281,972 117,442,509
Partners' deficit (33,075,593) (26,397,121)
------------ ------------
Total liabilities and partners' deficit $ 85,206,379 $ 91,045,388
============ ============
</TABLE>
III-30
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended
December 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenue:
Rental $ 26,203,326 $ 26,530,666
Interest 512,900 547,825
Other 837,182 671,368
------------ ------------
Total revenue 27,553,408 27,749,859
------------ ------------
Expenses:
Operating 17,375,844 18,448,594
Interest 6,497,341 7,015,834
Depreciation 4,772,182 4,902,544
Amortization 82,463 201,895
------------ ------------
Total expenses 28,727,830 30,568,867
------------ ------------
Loss before extraordinary gain from extinguishment
of debt (1,174,422) (2,819,008)
Extraordinary gain from extinguishment of debt 1,100,198 --
------------ ------------
Net loss $ (74,224) $ (2,819,008)
============ ============
</TABLE>
g. Reconciliation of the Local Partnerships' financial statement
-------------------------------------------------------------
net loss to taxable income (loss)
---------------------------------
For federal income tax purposes, the Local Partnerships report on a
basis whereby: (1) certain revenue and the related assets are recorded
when received rather than when earned; (2) certain costs are expensed when
paid or incurred rather than capitalized and amortized over the period of
benefit; and (3) a shorter life is used to compute depreciation on the
property as permitted by Internal Revenue Service (IRS) Regulations. These
returns are subject to audit and, therefore, possible adjustment by the
IRS.
A reconciliation of the Local Partnerships' financial statement net
loss reflected above to taxable income (loss) follows.
III-31
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Financial statement net loss $ (74,224) $ (2,819,008)
Adjustments:
Additional book (tax) depreciation,
net of depreciation on construction period expenses
capitalized for financial statement purposes 532,798 (950,281)
Amortization for financial statement purposes
not deducted for income tax purposes 171,181 27,383
Miscellaneous, net 471,640 838,450
------------ ------------
Taxable income (loss) $ 1,101,395 $ (2,903,456)
============ ============
</TABLE>
3. RELATED-PARTY TRANSACTIONS
In accordance with the Partnership Agreement, the Partnership paid the
Managing General Partner a fee for services in connection with the review,
selection, evaluation, negotiation and acquisition of the interests in the Local
Partnerships. The fee amounted to $1,000,000 which is equal to 2% of the
Additional Limited Partners' capital contributions to the Partnership. The
acquisition fee was capitalized and is being amortized over a thirty-year period
using the straight-line method.
In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to reimburse the Managing General Partner for its direct expenses
in managing the Partnership. For the years ended December 31, 1998 and 1997,
the Partnership paid $197,108 and $150,443, respectively, as direct
reimbursement of expenses incurred on behalf of the Partnership. Such expenses
are included in the statements of operations as general and administrative
expenses.
In addition, in accordance with the terms of the Partnership Agreement, the
Partnership is obligated to pay the Managing General Partner an annual incentive
management fee (the Management Fee), after all other expenses of the Partnership
are paid. The amount of the Management Fee shall not exceed .25% of invested
assets, as defined in the Partnership Agreement, and shall be payable from the
Partnership's cash available for distribution, as defined in the Partnership
Agreement, as of the end of each calendar year, as follows:
a. First, on a monthly basis as an operating expense before any
distributions to limited partners in the amount computed as described
in the Partnership Agreement, provided that such amount shall not be
greater than $250,000 and;
III-32
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. RELATED-PARTY TRANSACTIONS - Continued
b. Second, after distributions to the limited partners in the amount of
1% of the gross proceeds of the offering, the balance of such .25% of
invested assets.
For each of the years ended December 31, 1998 and 1997, the Partnership
paid the Managing General Partner a Management Fee of $250,000.
The Managing General Partner and/or its affiliates may receive a fee of not
more than 2% of the sales price of an investment in a Local Partnership or the
property it owns, payable under certain conditions upon the sale of an
investment in a Local Partnership or the property it owns. The payment of the
fee is subject to certain restrictions, including the achievement of a certain
level of sales proceeds and making certain minimum distributions to limited
partners. No such amounts were paid to the Managing General Partner and/or its
affiliates during 1997. In accordance with the distribution provisions of the
Moorings Local Partnership agreement, CRHC was paid an additional incentive
management fee of $331,073 on August 7, 1998.
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS
All profits and losses prior to the first date on which Additional Limited
Partners were admitted were allocated 98.49% to the Initial Limited Partner and
1.51% to the General Partners. Upon admission of the Special Limited Partner
and the Additional Limited Partners, the interest of the Initial Limited Partner
was reduced to .49%. The net proceeds resulting from the liquidation of the
Partnership or the Partnership's share of the net proceeds from any sale or
refinancing of the projects or their rental properties which are not reinvested
shall be distributed and applied as follows:
(i) to the payment of debts and liabilities of the Partnership
(including all expenses of the Partnership incident to the sale
or refinancing) other than loans or other debts and liabilities
of the Partnership to any partner or any affiliate; such debts
and liabilities, in the case of a non-liquidating distribution,
to be only those which are then required to be paid or, in the
judgment of the Managing General Partner, required to be provided
for;
(ii) to the establishment of any reserves which the Managing General
Partner deems reasonably necessary for contingent, unmatured or
unforeseen liabilities or obligations of the Partnership;
(iii) to each partner in an amount equal to the positive balance in his
capital account as of the date of the sale or refinancing,
adjusted for operations and distributions to that date, but
before allocation of any profits for tax purposes realized from
such sale or refinancing and allocated pursuant to the
Partnership Agreement;
(iv) to the Additional Limited Partners (A) an aggregate amount of
proceeds from sale or refinancing and all prior sales or
refinancings equal to their capital contributions, without
reduction for prior cash distributions other than prior
distributions of sale and refinancing proceeds, plus (B) an
additional amount equal to a cumulative non-compounded 6% return
on each limited partner's capital contribution, reduced, but not
below zero, by (1) an amount equal to 50% of the losses for tax
purposes plus tax credits allocated to such limited partner and
(2) distributions of net cash flow to each limited partner, such
III-33
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
return, losses for tax purposes and net cash flow distributions
commencing on the first day of the month in which the capital
contribution was made;
(v) to the repayment of any unrepaid loans theretofore made by any
partner or any affiliate to the Partnership for Partnership
obligations and to the payment of any unpaid amounts owing to the
General Partners pursuant to the Partnership Agreement;
(vi) to the General Partners in the amount of their capital
contributions;
(vii) thereafter, for their services to the Partnership, in equal
shares to certain general partners (or their designees), whether
or not any is then a general partner, an aggregate fee of 1% of
the gross proceeds resulting from (A) such sale (if the proceeds
are from a sale rather than a refinancing) and (B) any prior
sales from which such 1% fee was not paid to the General Partners
or their designees and,
(viii) the remainder, 12% to the General Partners (or their assignees),
3% to the Special Limited Partner and 85% to the Initial and
Additional Limited Partners (or their assignees).
Fees payable to certain general partners (or their designees) under (vii)
above, together with all other property disposition fees and any other
commissions or fees payable upon the sale of apartment properties, shall not in
the aggregate exceed the lesser of the competitive rate or 6% of the sales price
of the apartment properties.
In addition, the Managing General Partner and/or its affiliates may receive
a fee in an amount of not more than 2% of the sales price of the investment in a
Local Partnership or the property it owns. The fee would only be payable upon
the sale of the investment in a Local Partnership or the property it owns and
would be subject to certain restrictions, including achievement of a certain
level of sales proceeds and making certain minimum distributions to limited
partners. No such amounts were paid to the Managing General Partner and/or its
affiliates during 1997.
In accordance with the distribution provisions of the Moorings Local
Partnership agreement, CRHC was paid an additional incentive management fee of
$331,073 on August 7, 1998.
Pursuant to the Partnership Agreement, all cash available for distribution,
as defined, shall be distributed, not less frequently than annually, 97% to the
Additional Limited Partners, 1% to the Special Limited Partner, .49% to the
Initial Limited Partner and 1.51% to the General Partners after payment of the
Management Fee (see Note 3), as specified in the Partnership Agreement. As
defined in the Partnership Agreement, after the establishment of any reserves
deemed necessary by the Managing General Partner and after payment of the
Management Fee, the Partnership's cash available for distribution was $0 for
both of the years ended December 31, 1998 and 1997.
On November 20, 1998, the Managing General Partner distributed $499,350
($10.00 per Additional Limited Partner Unit) to the Additional Limited Partners
from the proceeds of the refinancing of Arrowhead and Moorings mortgage loans,
to holders or record as of September 30, 1998. On November 4, 1997, the
Managing General Partner distributed $999,100 ($20.00 per Additional Limited
Partner Unit) to the Additional Limited Partners from the proceeds of the sales
of Deer Grove and Tanglewood II to holders of record as of September 30, 1997.
The Managing General Partner intends to retain all of the Partnership's
III-34
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
remaining undistributed net sales proceeds for the possible repayment,
prepayment or purchase of the Partnership's outstanding purchase money notes
related to other Local Partnerships.
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET INCOME
TO TAXABLE (LOSS) INCOME
For federal income tax purposes, the Partnership reports on a basis
whereby: (1) certain expenses are amortized rather than expensed when incurred;
(2) certain costs are amortized over a shorter period for tax purposes, as
permitted by IRS Regulations, and (3) certain costs are amortized over a longer
period for tax purposes. The Partnership records its share of losses from its
investments in limited partnerships for federal income tax purposes as reported
on the Local Partnerships' federal income tax returns (see Note 2.g.), including
losses in excess of related investment amounts. In addition, adjustments
arising from the imputation of interest on the Partnership's purchase money
notes for financial reporting purposes are eliminated for income tax purposes
(see Note 2.a.). These returns are subject to examination and, therefore,
possible adjustment by the IRS.
III-35
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET INCOME
TO TAXABLE (LOSS) INCOME - Continued
A reconciliation of the Partnership's financial statement net income
to taxable (loss) income follows.
<TABLE>
<CAPTION>
For the years ended
December 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Financial statement net income $ 3,009,180 $ 3,677,940
Adjustments:
Differences between
taxable (loss) income and financial statement
net income related to the Partnership's
equity in the Local Partnerships' (losses) income (5,264,715) 11,650,148
Costs amortized over a shorter period for income
tax purposes (16,748) (55,911)
Effect of imputed interest on purchase money notes
for financial reporting purposes 1,071,687 3,241,722
------------ ------------
Taxable (loss) income $ (1,200,596) $ 18,513,899
============ ============
</TABLE>
III-36
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,596,031
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
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0
0
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</TABLE>
