<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, 1999
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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (301) 468-9200
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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 PARTNERSHIP INTERESTS
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(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 $5,950,412.
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)
1999 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
Page
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PART I
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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
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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-3
Item 7. Financial Statements . . . . . . . . . . . . . . II-10
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . II-10
PART III
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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-9
<PAGE>
<PAGE>
PART I
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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 partnership 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, 1999,
the Partnership had investments in 17 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, in general remain as the
local general partners in the 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 result
of its investment in the Local Partnerships, the Partnership became the
principal limited partner in these Local Partnerships. 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 projects. 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
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ITEM 1. BUSINESS - Continued
--------
Although each of the Local Partnerships in which the Partnership has
invested owns an apartment complex that 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.
I-2
<PAGE>
PART I
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ITEM 1. BUSINESS - Continued
--------
A schedule of the apartment complexes owned by Local Partnerships in
which the Partnership has an investment follows.
SCHEDULE OF APARTMENT COMPLEXES 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 12/31/99 (2) and/or Subsidized Under Rental Units Under Sec. 8 HAP Contract
- -------------------- ------------ ----------------------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Arrowhead Apts. $ 6,898,329 Illinois Housing Development 200 40 05/31/01
Palatine, IL Authority (IHDA)
Chevy Chase Park 3,420,049 Metropolitan Savings Bank 232 228 04/22/00 (4)
Centerville, OH (MSB)/FHA
Country Place I 7,244,088 Maryland Community Development 192 38 08/10/09
Burtonsville, MD Administration (MCDA)
Country Place II 4,390,356 HUD 120 24 08/29/00
Burtonsville, MD
Four Winds West 943,288 GMAC HUD Insured through Section 62 62 10/14/00 (4)
Birmingham, AL 221 (d)(4) of the NHA/Section 8
Frenchman's Wharf II 7,923,103 FHA 324 31 11/30/00 (4)
New Orleans, LA
Golden Acres 1,218,319 California Housing Finance Agency 46 45 12/30/12
Chowchilla, CA (CHFA)/Section 8
Mercy Terrace 8,503,960 Section 221(d)(4) of the NHA/ 158 157 11/30/03
San Francisco, CA Section 8
The Moorings 8,179,447 IHDA 216 44 03/31/17
Roselle, IL
Orangewood Plaza 1,826,500 CHFA 40 33 07/01/14 (5)
Orange Cove, CA
Posada Vallarta 14,792,231 Conventional 336 70 02/16/04
Phoenix, AZ
Princeton Community 7,963,343 New Jersey Housing & Mortgage 239 26 10/01/24 (4)
Village Finance Agency
Princeton, NJ
</TABLE>
(Continued)
I-3
<PAGE>
SCHEDULE OF APARTMENT COMPLEXES 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 12/31/99 (2) and/or Subsidized Under Rental Units Under Sec. 8 HAP Contract
- -------------------- ------------ ----------------------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Rock Glen $ 3,615,316 Section 221(d)(4) of the NHA 241 0 --
Baltimore, MD
Rolling Green at 4,382,759 Massachusetts Housing Finance 204 97 03/01/12
Amherst Agency (MHFA)/236
Amherst, MA
Rolling Green at 8,763,574 MHFA/236 404 284 10/10/12
Fall River
Fall River, MA
Troy Manor Apts. 841,205 Rural Housing & Community 50 50 10/29/00
Troy, AL Development Services (RHCD)/Section 8
Westgate Tower Apts. 1,929,369 Michigan Sate Housing Develop- 148 39 12/01/14
Westland, MI ment Authority/236
- -------------------- ----------- -------- --------
Totals(3) 17 $92,835,236 3,212 1,268
=========== ======== ========
</TABLE>
I-4
<PAGE>
SCHEDULE OF APARTMENT COMPLEXES 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 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arrowhead Apts. 98% 97% 99% 91% 93% $ 9,852 $ 9,755 $ 9,044 $ 9,205 $ 9,025
Palatine, IL
Chevy Chase Park 96% 92% 97% 97% 99% 4,077 4,291 4,360 4,232 4,224
Centerville, OH
Country Place I 98% 97% 96% 96% 92% 9,819 9,557 9,330 8,922 8,902
Burtonsville, MD
Country Place II 97% 98% 97% 93% 93% 10,002 9,821 9,484 9,192 8,833
Burtonsville, MD
Four Winds West 98% 99% 97% 99% 98% 5,006 5,075 5,079 4,899 4,537
Birmingham, AL
Frenchman's Wharf II 95% 94% 92% 89% 90% 4,965 4,753 4,681 4,295 4,171
New Orleans, LA
Golden Acres 87% 98% 100% 100% 100% 6,324 6,443 6,495 6,297 6,271
Chowchilla, CA
Mercy Terrace 100% 100% 99% 100% 100% 14,820 14,836 14,801 15,045 15,898
San Francisco, CA
The Moorings 96% 100% 94% 97% 97% 9,679 9,693 9,372 9,231 8,577
Roselle, IL
Orangewood Plaza 100% 100% 100% 100% 100% 2,382 2,414 2,419 2,353 2,700
Orange Cove, CA
Posada Vallarta 87% 86% 96% 89% 96% 6,868 7,193 6,623 6,808 6,616
Phoenix, AZ
Princeton Community
Village 97% 96% 93% 98% 97% 7,126 7,036 7,132 6,785 6,510
Princeton, NJ
Rock Glen 97% 99% 99% 97% 94% 5,354 5,176 5,011 4,724 4,864
Baltimore, MD
Rolling Green at Amherst 100% 100% 100% 100% 100% 8,998 7,532 7,345 7,333 7,314
Amherst, MA
</TABLE>
(Continued)
I-5
<PAGE>
SCHEDULE OF APARTMENT COMPLEXES 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 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rolling Green at 97% 96% 99% 96% 98% $ 7,661 $ 7,028 $ 7,233 $ 7,163 $ 7,177
Fall River
Fall River, MA
Troy Manor Apts. 100% 100% 100% 100% 100% 4,664 4,681 4,677 4,680 4,681
Troy, AL
Westgate Tower Apts. 95% 96% 98% 100% 99% 3,618 3,633 3,702 3,551 3,471
Westland, MI
---- ---- ---- ---- ---- -------- -------- -------- -------- --------
Totals(3) 17 96% 97% 97% 97% 97% $ 7,130 $ 6,995 $ 6,870 $ 6,748 $ 6,692
==== ==== ==== ==== ==== ======== ======== ======== ======== ========
</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, 1999.
(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, 1998 and March 18, 1998, 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 concerning
these sales.
On October 5, 1999, the Partnership's interests in Beech Hill I and Beech
Hill II were transferred to the purchase money noteholders, due to the non-
payment on the related purchase money notes. See the notes to the financial
statements for additional information concerning these interests.
On December 15, 1999, the Partnership sold its interest in Wexford Ridge.
See the notes to the consolidated financial statements for additional
information concerning the sale.
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 concerning 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.
On August 9, 1999, the noteholder filed a complaint seeking declaratory
judgement that the Partnership has forfeited to the noteholders its interest in
Princeton. The parties are negotiating a settlement of the litigation.
On December 30, 1999, the Partnership was served with a complaint by
certain alleged beneficiaries of one of the purchase money notes related to
Chevy Chase (First Chase Note) for, among other relief, their portion of
payments made to First March Realty Corporation on the First Chase Note. The
Managing General Partner is vigorously defending its position that all such
payments were made to the proper parties, and that it has no further
responsibility or liability for payments made on the First Chase Note.
See the notes to the financial statements for additional information
concerning 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 1999.
I-7
<PAGE>
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND
-----------------------------------------------------
RELATED PARTNERSHIP MATTERS
---------------------------
(a) On November 1, 1999, Odd Lot Liquidity Fund, LLC (Odd Lot), an
affiliate of an additional limited partner of the Partnership,
initiated an unregistered tender offer to purchase no more than 4.9%
of the outstanding units of additional limited partnership interest
(Units) of the Partnership at a price of $50 per Unit. Odd Lot, which
is unaffiliated with the Partnership, stated that it made the offer
for the express purpose of holding the Units for investment purposes
and not with a view to resale. The price offered was determined
solely at the discretion of Odd Lot and did not necessarily represent
the fair market value of each Unit. The Odd Lot offer expired on
December 3, 1999, and as of March 30, 2000, the entity to which Odd
Lot assigned its newly acquired Units held 1.6% of the Units in the
Partnership. Other than any other tender offers, it is not
anticipated that there will be any formal market for resale of Units.
As a result, investors may be unable to sell or otherwise dispose of
their Units in the Partnership.
During 1999, a number of investors sold their Units in the Partnership
to other investors, as a result of an unregistered tender offer made
in December 1998. If more than 5% of the total outstanding Units in
the Partnership are transferred in any one calendar year (not counting
certain exempt transfers), the Partnership could be taxed as a
"publicly traded partnership," with potentially severe tax
implications for the Partnership and its investors. Specifically, the
Partnership would be taxed as a corporation and the income and losses
from the Partnership would no longer be considered a passive activity.
From January 1, 1999 through June 1, 1999, approximately 4.9% of
outstanding Units were sold. Accordingly, to remain within the 5%
safe harbor, effective June 1, 1999, the General Partner of the
Partnership halted recognition of any transfers that would exceed the
safe harbor limit through December 31, 1999. As a result, transfers
of Units due to sales transactions were not recognized by the
Partnership between June 1 and December 31, 1999.
(b) As of March 30, 2000 there were approximately 3,700 registered holders
of additional limited partnership interests in the Partnership.
(c) For the year ended December 31, 1999, the Partnership made a cash
distribution of $1,697,110 ($34.00 per additional limited partnership
interest) to the Additional Limited Partners on October 29, 1999, to
holders of record as of October 1, 1999. Additionally, the
Partnership made a cash distribution of $1,622,237 ($32.50 per
additional limited partnership interest) to the Additional Limited
Partners on January 28, 2000, to holders of record as of December 15,
1999; this distribution was a result of the sale of Wexford Ridge.
II-1
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND
-----------------------------------------------------
RELATED PARTNERSHIP MATTERS - Continued
---------------------------
For the year ended December 31, 1998, the Partnership made a cash
distribution of $499,350 ($10.00 per additional limited partnership
interest) to the Additional Limited Partners on November 18, 1998.
The distribution was a result of the refinancing of the Arrowhead and
Moorings mortgage loans.
The Partnership received distributions of $4,156,788 and $7,672,840
from Local Partnerships during 1999 and 1998, respectively. Some of
the Local Partnerships operate under restrictions imposed by the
pertinent governmental agencies that limit the cash return available
to the Partnership.
II-2
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Capital Realty Investors-II Limited Partnership's (the Partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations section contains information that may be considered forward looking,
including statements regarding the effect of governmental regulations. Actual
results may differ materially from those described in the forward looking
statements and will be affected by a variety of factors including national and
local economic conditions, the general level of interest rates, governmental
regulations affecting the Partnership and interpretations of those regulations,
the competitive environment in which the Partnership operates, and the
availability of working capital.
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.
C.R.I., Inc. (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 not-for-profit purchasers. The Managing
General Partner intends to utilize all or part 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
II-3
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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. 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 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 Section 8 Rental Housing Assistance Payments
(HAP) provided by the U.S. Department of Housing and Urban Development (HUD)
pursuant to Section 8 HAP contracts. Current legislation allows all expired
Section 8 HAP contracts with rents at less than 100% of fair market rents to be
renewed for one year. Expiring Section 8 HAP contracts with rents that exceed
100% of fair market rents could be renewed for one year, but at rents reduced to
100% of fair market rents (Mark-to-Market). All expiring Section 8 HAP
contracts with rents exceeding comparable market rents, and properties with
mortgage loans insured by the Federal Housing Administration (FHA), became
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 may undergo debt restructuring according to terms
determined by an individual property and operations evaluation. This may
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 loan
will be converted to a non-performing but accruing (soft) second mortgage loan.
In many instances, the Mark-to-Market rental rate restructuring may require
the write down of an FHA-insured mortgage loan, which would trigger cancellation
of indebtedness income to the partners, a taxable event, even though no actual
cash is received. Additionally, if the existing first mortgage loan is
bifurcated into a first and second mortgage loan, the newly created second
mortgage loan will accrue interest at a below-market rate; 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.
There is a new HUD-sponsored program generally referred to as "Mark-up-to-
Market". Under this program, properties with expiring Section 8 contracts that
are located in high-rent areas as defined by HUD are eligible for rent increases
which would be necessary to bring Section 8 rents in line with market rate
rents. For properties which enter the program and which have subsidized FHA
II-4
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
loans, the rents are adjusted to take into account the benefits the property is
already receiving from the below-market interest rate by means of a HUD
determined Interest Subsidy Adjustment Factor. The purpose of this program is
to incentivize owners of properties with expiring Section 8 contracts not to
convert these properties to market rate housing.
In return for receiving market rate rents under Mark-up-to-Market, the
property owner must enter into a five year conditional Section 8 contract with
HUD, subject to the annual availability of funding by Congress. In addition,
property owners who enter into the Mark-up-to-Market program will receive a
waiver from the cash flow restriction imposed on the property by the limited
dividend limitation.
The Managing General Partner is considering new strategies to deal with the
ever changing environment of affordable housing policy. The Section 236 and
Section 221(d)(3) mortgage loans may be eligible for pre-payment in their 18th
year or later. 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 existing mortgage loans of
these types 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, 1999, the Partnership had approximately 3,700 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 17 remain at December 31, 1999. The Part-
nership's liquidity, with unrestricted cash resources of $8,936,520 as of
December 31, 1999, along with anticipated future cash distributions from the
Local Partnerships, is expected to be adequate to meet its current and
anticipated operating cash needs. During 1999 and 1998, the Partnership
received cash distributions of $4,156,788 and $7,672,840, respectively, from the
Local Partnerships. As of March 30, 2000, 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
$7,348,747 plus accrued interest of $22,374,877 as of December 31, 1999, 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
principal amounts of $1,050,000 and $950,000 matured on December 31, 1996 and
December 31, 1997, respectively, and were paid off, at a discount, on October 5,
1998. Purchase money notes in the principal amounts of $1,050,000 and $950,000
matured on December 31, 1996 and 1997, respectively, and were extended to
January 5, 2001, but were paid off, at a discount, on September 30, 1999.
Purchase money notes in the aggregate principal amount of $2,380,000 matured on
January 1, 1998, and were written off on October 5, 1999 when the related local
partnership interests, held by the Partnership, were transferred to the
noteholders in full satisfaction of the purchase money notes' principal and
accrued interest. Purchase money notes in the aggregate principal amount of
II-5
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
$3,150,000 matured on June 1, 1998, and have not been paid or extended.
Purchase money notes in the original principal amounts of $4,600,000 and
$1,927,500 matured on August 31, 1998, were partially paid down, with the
balances extended to August 31, 2003. A purchase money note in the principal
amount of $1,450,000 matured on September 1, 1998, and has not been paid or
extended. 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. See the notes to
the financial statements for additional information concerning 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 respective 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 the Partnership's interest in one of these Local Partnerships would not
have a material adverse impact on the financial condition of the Partnership.
The following chart presents information related to purchase money notes
which have matured through December 31, 1999, and which remain unpaid or
unextended as of March 30, 2000. Excluded from the following chart are purchase
money notes which matured through December 31, 1999, and which have been paid
off, cancelled, or extended on or before March 30, 2000.
II-6
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
Carrying Amount
Aggregate of Partnership's
Aggregate Accrued Investment in
Principal Interest and Advances to
Number of Balance Balance Underlying Local
Underlying as of as of Partnerships as
Purchase Money Local Percentage December Percentage December Percentage of December Percentage
Note Maturity Partnerships of Total 31, 1999 of Total 31, 1999 of Total 31, 1999 of Total
- ---------------- ------------ ---------- ----------- ---------- ------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2nd Quarter 1998 1 6% $ 3,150,000 43% $ 5,620,434 25% -- --
3rd Quarter 1998 1 6% 1,450,000 20% 2,131,262 9% $ 710,881 74%
1st Quarter 1999 1 6% 500,000 7% 1,527,514 7% -- --
---- ----- ----------- ----- ----------- ----- ---------- -----
3 18% $ 5,100,000 70% $ 9,279,210 41% $ 710,881 74%
==== ===== =========== ===== =========== ===== ========== =====
Total, Local
Partnerships 17 100% $ 7,348,747 100% $22,374,877 100% $ 966,378 100%
==== ===== =========== ===== =========== ===== ========== =====
</TABLE>
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, paying off 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 be successful in the future.
If the Managing General Partner is unable to negotiate an extension or
discounted payoff, upon maturity of the purchase money notes, if the purchase
money notes remain unpaid, the noteholders may 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 be deemed
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 any future cash flow distributed by the Local
Partnership from rental operations, mortgage debt refinancings, or the sale of
the real estate. Of the 17 Local Partnerships in which the Partnership is
invested as of December 31, 1999, the three local Partnerships with associated
purchase money notes which have matured and which remain unpaid or unextended
as of March 30, 2000, represent the following percentages of the Partnership's
total distributions received from Local Partnerships and share of income from
Local Partnerships.
II-7
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
Percentage of Total Partnership's Share of
Distributions Received Income (loss) from
For the Years Ending from Local Partnerships Local Partnerships
-------------------- ----------------------- ----------------------
<S> <C> <C>
December 31, 1999 1% $ 17,578
December 31, 1998 1% 234,121
</TABLE>
The Managing General Partner continues to address the maturity and
impending maturity of its debt obligations and to seek strategies which will
provide the most favorable outcome to the 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 1999 and 1998, the receipt of distributions from Local Partnerships was
adequate to support operating cash requirements. Cash and cash equivalents
increased during 1999, as net cash used in operating activities and to pay off
or pay down five of the Partnership's purchase money notes was less than cash
provided by investing activities.
The Partnership made a cash distribution of $1,697,110 ($34.00 per
additional limited partnership interest) to the Additional Limited Partners on
October 29, 1999, to holders of record as of October 1, 1999. Additionally, the
Partnership made a cash distribution of $1,622,237 ($32.50 per additional
limited partnership interest) to the Additional Limited Partners on January 28,
2000, to holders of record as of December 15, 1999; this distribution was as a
result of the sale of Wexford Ridge. The Managing General Partner intends to
reserve all of the Partnership's remaining undistributed cash for the possible
repayment, prepayment or retirement of the Partnership's outstanding purchase
money notes related to the Local Partnerships.
Results of Operations
---------------------
1999 Versus 1998
- ----------------
The Partnership's net income for the year ended December 31, 1999 increased
from the year ended December 31, 1998 primarily due to extraordinary gain from
extinguishment of debt related to the discounted payoffs of the Four Winds West
and Troy Manor purchase money notes during the first quarter, and the discounted
payoffs of the Chevy Chase and Wexford Ridge purchase money notes in September
1999, as discussed in the notes to the financial statements. Contributing to
the increase was a gain on disposition of investment in partnership related to
the sale of the Partnership's interest in Wexford Ridge in December 1999. Also
contributing to the increase in the Partnership's net income were a decrease in
interest expense due to the discount on purchase money notes being fully
amortized as of December 31, 1998, a decrease in general and administrative
II-8
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
expenses due to lower reimbursed payroll costs, and a decrease in professional
fees primarily due to a decrease in legal fees related to the Chevy Chase and
Wexford Ridge litigation in 1998. Offsetting the increase in the Partnership's
net income was a decrease in share of income from partnerships due to the
receipt of proceeds from the refinancing of the first mortgage loans on
Arrowhead and Moorings during the second quarter of 1998, and a decrease in
interest and other income due to generally lower rates earned on cash and cash
equivalents and lower cash and cash equivalents balances during 1999.
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 included in share of income from
partnerships for the years ended December 31, 1999 and 1998 did not include
losses of $1,883,929 and $1,594,602, 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 $1,609,522 and $6,040,363, received from seven and
nine Local Partnerships during 1999 and 1998, respectively, 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 the Partnership's 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, 1999. Combined rental revenue amounts for
years prior to 1999 have been adjusted to exclude rental revenues from those
properties in which the Partnership no longer is invested at December 31, 1999.
II-9
<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,
----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Rental
Revenue $23,725,806 $23,138,967 $22,679,566 $22,286,601 $22,038,444
Annual Percentage
Increase 2.5% 2.0% 1.8% 1.1%
</TABLE>
Year 2000 Computer Issue
------------------------
The Partnership experienced little to no interruption in its computer
operations, or otherwise, as a result of the transition from the year 1999 to
2000. The Partnership's expenses associated with upgrading and testing its
internal hardware and software systems, data interfaces, business operations and
non-information technology functions which could have been affected by the
transition were not 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-10
<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, follow.
William B. Dockser, 63, 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, 53, 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.
Susan R. Campbell, 41, 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, 44, 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.
III-1
<PAGE>
PART III
--------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued
--------------------------------------------------------------
(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 required in these sections 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.
The following table sets forth certain information concerning any
person (including any "group") who is known to the Partnership to be
the beneficial owner of more than five percent of the issued and
outstanding units of additional limited partnership interest (Units),
at March 30, 2000.
III-2
<PAGE>
PART III
--------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT - Continued
-----------
Name and Address of Amount and Nature % of total
Beneficial Owner of Beneficial Ownership Units issued
------------------- ----------------------- -----------
Equity Resources Group, 3,324 units 6.6%
Incorporated, et. al.
14 Story Street
Cambridge, MA 02138
(b) Security ownership of management.
The following table sets forth certain information concerning all
Units beneficially owned, as of March 30, 2000, by each director and
by all directors and officers as a group of the Managing General
Partner of the Partnership.
Name of Amount and Nature % of total
Beneficial Owner of Beneficial Ownership Units issued
---------------- ----------------------- ------------
William B. Dockser None 0%
H. William Willoughby None 0%
All Directors and Officers
as a Group (4 persons) None 0%
(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.
III-3
<PAGE>
PART III
--------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued
----------------------------------------------
(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.
(d) Transactions with promoters.
Not applicable.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(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.
III-4
<PAGE>
PART III
--------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K - Continued
--------------------------------
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, 1999.
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, 2000 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, 2000 by: /s/ H. William Willoughby
- ----------------- ---------------------------------------
DATE H. William Willoughby,
Director, President
and Secretary
March 30, 2000 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, 1999 and 1998, and the related statements of
operations, changes in partners' deficit and cash flows for the years ended
December 31, 1999 and 1998. 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 $767,601 and $89,034 of income in 1999
and 1998, 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by 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, 1999 and 1998, and the results of its operations,
changes in partners' deficit and cash flows for the years ended December 31,
1999 and 1998, in conformity with accounting principles generally accepted in
the United States.
Grant Thornton LLP
Vienna, VA
March 30, 2000
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, 2000, in
accordance with the Securities and Exchange Commission's continuing
hardship exemption granted January 14, 2000.
III-8
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Investments in and advances to partnerships $ 966,378 $ 3,218,015
Partnership interests held in escrow -- 1,044,007
Cash and cash equivalents 8,936,520 7,596,031
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $408,934 and $416,201, respectively 348,795 405,472
Property purchase costs, net of accumulated amortization of
$280,099 and $271,968, respectively 252,283 279,650
Other assets -- 3,781
------------ ------------
Total assets $ 10,503,976 $ 12,546,956
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 7,348,747 $ 15,344,182
Accrued interest payable 22,374,877 27,810,849
Distribution payable 1,622,237 --
Accounts payable and accrued expenses 127,692 120,654
------------ ------------
Total liabilities 31,473,553 43,275,685
------------ ------------
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 (6,072,409) (2,753,062)
Offering costs (5,278,980) (5,278,980)
Accumulated losses (59,635,188) (72,713,687)
------------ ------------
Total partners' deficit (20,969,577) (30,728,729)
------------ ------------
Total liabilities and partners' deficit $ 10,503,976 $ 12,546,956
============ ============
</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,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Share of income from partnerships $ 2,520,032 $ 6,129,573
----------- -----------
Other revenue and expenses:
Revenue:
Interest and other income 359,744 510,789
----------- -----------
Expenses:
Interest 1,532,386 3,729,871
Management fee 249,996 249,996
General and administrative 203,296 241,774
Professional fees 73,466 136,335
Amortization of deferred costs 44,390 45,777
----------- -----------
2,103,534 4,403,753
----------- -----------
Total other revenue and expenses (1,743,790) (3,892,964)
----------- -----------
Income before gain on disposition of investment in partnership 776,242 2,236,609
Gain on disposition of investment in partnership 3,070,636 --
----------- -----------
Income before extraordinary gain from extinguishment of debt 3,846,878 2,236,609
Extraordinary gain from extinguishment of debt 9,231,621 772,571
----------- -----------
Net income $13,078,499 $ 3,009,180
=========== ===========
Net income allocated to General Partners (1.51%) $ 197,485 $ 45,439
=========== ===========
Net income allocated to Initial and Special Limited Partners (1.49%) $ 194,870 $ 44,837
=========== ===========
Net income allocated to Additional Limited Partners (97%) $12,686,144 $ 2,918,904
=========== ===========
Net income per unit of Additional Limited Partner
Interest based on 50,000 units outstanding $ 253.72 $ 58.38
=========== ===========
</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, 1998 $(1,157,405) $(1,128,527) $(30,952,627) $(33,238,559)
Distribution of $10.00 per unit of
Additional Limited Partnership 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)
Distributions of $34.00 and $32.50 per unit of
Additional Limited Partnership Interest (3,319,347) (3,319,347)
Net income 197,485 194,870 12,686,144 13,078,499
----------- ----------- ------------ ------------
Partners' deficit, December 31, 1999 $ (914,481) $ (888,820) $(19,166,276) $(20,969,577)
=========== =========== ============ ============
</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>
For the years ended
December 31,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $13,078,499 $ 3,009,180
Adjustments to reconcile net income to net cash
used in operating activities:
Share of income from partnerships (2,520,032) (6,129,573)
Amortization of deferred costs 44,390 45,777
Amortization of discount on purchase money notes -- 1,488,064
Gain on disposition of investment in partnership (3,070,636) --
Extraordinary gain from extinguishment of debt (9,231,621) (772,571)
Changes in assets and liabilities:
Decrease in other assets 3,781 87,247
Increase in accrued interest payable 1,532,386 2,289,762
Payment of purchase money note interest (25,322) (851,884)
Increase in accounts payable and accrued expenses 7,038 40,221
----------- -----------
Net cash used in operating activities (181,517) (793,777)
----------- -----------
Cash flows from investing activities:
Receipt of distributions from partnerships 4,156,788 7,672,840
Proceeds from disposition of investment in partnership 3,247,585 --
Advances made to local partnerships -- (803,313)
Repayment of advances to local partnerships -- 653,313
----------- -----------
Net cash provided by investing activities 7,404,373 7,522,840
----------- -----------
Cash flows from financing activities:
Payoff of purchase money notes and related interest (1,410,000) (5,100,001)
Payment of purchase money note principal (2,775,257) (1,503,496)
Distribution to Additional Limited Partners (1,697,110) (499,350)
----------- -----------
Net cash used in financing activities (5,882,367) (7,102,847)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,340,489 (373,784)
Cash and cash equivalents, beginning of year 7,596,031 7,969,815
----------- -----------
Cash and cash equivalents, end of year $ 8,936,520 $ 7,596,031
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 595,144 $ 4,724,456
=========== ===========
</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 or 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 partnership 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 conformity with accounting principles
generally accepted in the United States.
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, 1999 and 1998, the Partnership's share of cumulative losses
of 11 and 12 of the Local Partnerships exceeded the amount of the
Partnership's investments in and advances to those Local Partnerships by
$24,972,119 and $23,529,345, 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, 1999 and 1998, cumulative cash
distributions of $13,110,928 and $11,501,406, 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, time and
demand deposits, 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
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, 1999, 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 December 31, 1999 and 1998, the Partnership held limited partner
interests in 17 and 20 Local Partnerships, respectively, which were
organized to develop, construct, own, maintain and operate rental apartment
properties which provide housing principally to the elderly or to
individuals and families of low or moderate income. The remaining
principal amounts due on investments in the Local Partnerships follow.
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Purchase money notes due in:
1998 $ 4,600,000 $ 6,980,000
1999 500,000 1,340,178
2001 -- 2,000,000
2003 2,248,747 5,024,004
----------- -----------
Total $ 7,348,747 $15,344,182
=========== ===========
</TABLE>
The purchase money notes have stated interest rates ranging from 9% to
12%, certain of which are compounded annually. The purchase money notes
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 amounts of $1,050,000 and $950,000
matured on December 31, 1996 and December 31, 1997, respectively, and were
paid off, at a discount, on October 5, 1998, as discussed below. Purchase
money notes in the principal amounts of $1,050,000 and $950,000 matured on
December 31, 1996 and 1997, respectively, were extended to January 5, 2001,
but were paid off, at a discount, on September 30, 1999, as discussed
below. Purchase money notes in the aggregate principal amount of
$2,380,000 matured on January 1, 1998, and were written off on October 5,
1999 when the related local partnership interests, held by the Partnership,
were transferred to the noteholders in full satisfaction of the purchase
money notes' principal and accrued interest. Purchase money notes in the
aggregate principal amount of $3,150,000 matured on June 1, 1998, and have
not been paid or extended, as discussed below. Purchase money notes in the
original principal amounts of $4,600,000 and $1,927,500 matured on August
31, 1998, were partially paid down, with the balances extended to August
31, 2003, as discussed below. A purchase money note in the principal
amount of $1,450,000 matured on September 1, 1998, and has not been paid
or extended, as discussed below. Purchase money notes in the aggregate
principal amount of $840,178 matured on January 1, 1999 and were paid off,
III-15
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 respective 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 the Partnership's interest in 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,
below.
The following chart presents information related to purchase money
notes which have matured through December 31, 1999, and which remain unpaid
or unextended as of March 30, 2000. Excluded from the following chart are
purchase money notes which matured through December 31, 1999, and which
have been paid off, cancelled, or extended on or before March 30, 2000.
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
Aggregate of Partnership's
Aggregate Accrued Investment in
Principal Interest and Advances to
Number of Balance Balance Underlying Local
Underlying as of as of Partnerships as
Purchase Money Local Percentage December Percentage December Percentage of December Percentage
Note Maturity Partnerships of Total 31, 1999 of Total 31, 1999 of Total 31, 1999 of Total
- ---------------- ------------ ---------- ----------- ---------- ------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2nd Quarter 1998 1 6% $ 3,150,000 43% $ 5,620,434 25% -- --
3rd Quarter 1998 1 6% 1,450,000 20% 2,131,262 9% $ 710,881 74%
1st Quarter 1999 1 6% 500,000 7% 1,527,514 7% -- --
---- ----- ----------- ----- ----------- ----- ---------- -----
3 18% $ 5,100,000 70% $ 9,279,210 41% $ 710,881 74%
==== ===== =========== ===== =========== ===== ========== =====
Total, Local
Partnerships 17 100% $ 7,348,747 100% $22,374,877 100% $ 966,378 100%
==== ===== =========== ===== =========== ===== ========== =====
</TABLE>
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, paying off
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 be successful in the future. If
the Managing General Partner is unable to negotiate an extension or
discounted payoff, upon maturity of the purchase money notes, if the
purchase money notes remain unpaid, the noteholders may 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 be deemed 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 any future
cash flow distributed by the Local Partnership from rental operations,
mortgage debt refinancings, or the sale of the real estate. Of the 17
Local Partnerships in which the Partnership is invested as of December 31,
1999, the three Local Partnerships with associated purchase money notes
which have matured and which remain unpaid or unextended as of March 30,
2000, represent the following percentages of the Partnership's total
distributions received from Local Partnerships and share of income from
Local Partnerships.
III-17
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
Percentage of Total Partnership's Share of
Distributions Received Income (loss) from
For the Years Ending from Local Partnerships Local Partnerships
-------------------- ----------------------- ----------------------
<S> <C> <C>
December 31, 1999 1% $ 17,578
December 31, 1998 1% $234,121
</TABLE>
The Managing General Partner continues to address the maturity and
impending maturity of its debt obligations and to seek strategies which
will provide the most favorable outcome to the 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, 1999 and 1998 was $1,532,386 and $3,729,871,
respectively. Amortization of discount on purchase money notes increased
interest expense by $1,488,064 during 1998. There was no amortization of
discount on purchase money notes during 1999 as all discounts on purchase
money notes were fully amortized as of December 31, 1998. The accrued
interest payable on the purchase money notes of $22,374,877 and $27,810,849
as of December 31, 1999 and 1998, respectively, is due on the respective
maturity dates of the purchase money notes or earlier, in some instances,
if (and to the extent of a portion thereof) the related 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 paid 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, to be applied
against the notes. The Partnership did not receive any cash flow
distributions from Beech Hill I or Beech Hill II during 1999 or 1998. Cash
flow distributions of $0 and $30,694 were paid directly by Beech Hill I to
the purchase money noteholders during the years ended December 31, 1999 and
1998, respectively. Cash flow distributions of $0 and $29,687 were paid
directly by Beech Hill II to the purchase money noteholders during the
years ended December 31, 1999 and 1998, respectively. Annual cash flow
distributions of $0 and $5,000 from Beech Hill I, and $0 and $2,500 from
Beech Hill II, were received during the years ended December 31, 1999 and
1998, respectively.
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
III-18
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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. On
September 30, 1999, the noteholders instructed the escrow agent to release
to them the transfer documents on October 5, 1999, and the escrow agent
complied with those instructions. Accordingly, the Partnership's interests
in Beech Hill I and Beech Hill II were transferred to the noteholders on
October 5, 1999. As of that date, principal and accrued interest totaling
$1,480,000 and $1,891,535, respectively, related to Beech Hill I and
$900,000 and $1,185,119, respectively, related to Beech Hill II were due.
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 loss of ownership interest in the
Local Partnerships resulted in extraordinary gain from extinguishment of
debt of approximately $2.4 million and $1.5 million for Beech Hill I and
Beech Hill II, respectively, during 1999. The release of the Partnership's
purchase money note obligations resulted in cancellation of indebtedness
income of approximately $3.4 million and $2.1 million for Beech Hill I and
Beech Hill II, respectively, for federal tax purposes in 1999.
Chevy Chase
-----------
The Partnership defaulted on its two purchase money notes related 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 further extend the maturity date to January
5, 2001 by making an additional payment, applied to accrued interest, to
the noteholder.
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
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
III-19
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
an affiliate of the local general partners, was terminated 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%. On May 28, 1999, the Partnership filed suit against the holder of
the First Chase Note, seeking payment of the Partnership's 10.808% share of
payments made on the First Chase Note since October 1, 1997. On September
30, 1999, as part of the settlement of the litigation, the Partnership paid
off, at a discount, the First Chase Note. The discounted payoff resulted
in extraordinary gain from extinguishment of debt of approximately $2.4
million in 1999. The discounted payoff will also result in cancellation of
indebtedness income of approximately $2.4 million for federal tax purposes
in 1999.
On December 30, 1999, the Partnership was served with a complaint by
certain alleged beneficiaries of the First Chase Note for, among other
relief, their portion of payments made to First March Realty Corporation on
the First Chase Note. The Managing General Partner is vigorously defending
its position that all such payments were made to the proper parties, and
that it has no further responsibility or liability for payments made on the
First Chase Note.
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 payoff resulted in
extraordinary gain from extinguishment of debt of approximately $305,000 in
1999. The discounted payoff also resulted in cancellation of indebtedness
income of approximately $305,000 for federal tax purposes 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. As of March 30, 2000, principal and accrued
interest totaling $3,150,000 and $5,705,872, respectively, were due. The
purchase money notes were initially due to mature on June 1, 1988, but were
extended to mature on June 1, 1998. The Partnership requested another
extension of the maturity date of the purchase money notes until May 2000,
to be coterminous with the expiration of the Local Partnership's
provisional workout agreement with HUD related to its mortgage loan. In
1996, HUD sold the mortgage loan to a third party lender. The local
managing general partner has had several conversations with the lender
regarding the upcoming maturity of the workout. There is no assurance
these discussions will achieve a solution and it is possible the lender
III-20
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
will initiate a foreclosure action. As of March 30, 2000, the local
managing general partner is still awaiting a response from the purchase
money noteholders and the lender.
Due to the uncertainties regarding the outcome of an extension of the
maturity date of the purchase money note, and the possibility of a
foreclosure proceeding on the Local Partnership's mortgage loan, there is
no assurance that the Partnership will be able to retain its interest in
Frenchman's Wharf II. In the event of a foreclosure, the Partnership would
also lose its share of any future cash flow distributed by the Local
Partnership from rental operations, mortgage debt refinancings, or the sale
of the real estate. The uncertainty regarding the continued ownership of
the Partnership's interest in Frenchman's Wharf II does not adversely
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
30, 2000, principal and accrued interest of $500,000 and $1,553,588,
respectively, were due.
On August 9, 1999, the noteholder filed a complaint seeking
declaratory judgment that the Partnership has forfeited its interest in
Princeton to the noteholders. The parties are negotiating a settlement of
the litigation. There is no assurance that any agreement will be reached.
The uncertainty regarding the continued ownership of the Partnership's
interest in Princeton does not adversely impact the Partnership's financial
condition, as discussed above.
Rolling Green at Fall River and Rolling Green at Amherst
--------------------------------------------------------
The Partnership defaulted on its purchase money notes related 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 refinancings have occurred. 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 refinancing mortgage loan 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
notes, and further agreed to waive certain rights granted in the respective
III-21
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Local Partnerships' limited partnership agreements. The mortgage loan on
Rolling Green at Fall River was refinanced in March 1999; refinancing
proceeds of $2,725,257 were used to pay down purchase money note principal
and capitalized interest in March 1999. The mortgage loan on Rolling Green
at Amherst was refinanced in August 1998; refinancing proceeds of
$1,503,496 were used to pay down purchase money note principal and
capitalized interest in 1998.
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 payoff resulted in extraordinary
gain from extinguishment of debt of approximately $220,000 in 1999. The
discounted payoff also resulted in cancellation of indebtedness income of
approximately $220,000 for federal tax purposes in 1999.
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,
2000, principal and accrued interest of $1,450,000 and $2,163,440,
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 noteholder has
since agreed to execute the documentation formally extending the maturity
date, but as of March 30, 2000, has not yet done so. 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 adversely 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; the First Wexford Note was paid off, at a
III-22
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
discount, on September 30, 1999. The discounted payoff resulted in
extraordinary gain from extinguishment of debt of approximately $2.4
million in 1999. The discounted payoff will also result in cancellation of
indebtedness income of approximately $2.4 million for federal tax purposes
in 1999.
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
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%. On May 28, 1999, the Partnership filed suit against
the holder of the First Wexford Note, seeking payment of the Partnership's
4.85% share of payments made on the First Wexford Note since October 1,
1997. On September 30, 1999, as part of the settlement of the litigation,
the Partnership paid off, at a discount, the First Wexford Note (see
above).
On December 15, 1999, the Local Partnership sold its property. See
Note 2.d., below, for further information concerning the sale.
b. Interests in profits, losses and cash distributions
---------------------------------------------------
made by Local Partnerships
--------------------------
The Partnership has a 92.99% to 98.99% interest in profits, losses and
cash distributions (as restricted by various federal and state housing
agencies) of each Local Partnership. An affiliate of the Managing General
Partner 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
$4,156,788 and $7,672,840 during the years ended December 31, 1999 and
1998, respectively. As of December 31, 1999 and 1998, 12 and 14 of the
Local Partnerships had surplus cash, as defined by their respective
regulatory agencies, in the amounts of $1,327,052 and $2,092,142,
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 the agencies' regulations. Such
III-23
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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.
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<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 150,000 150,000
Accrued interest on advances -- --
----------- -----------
Total $ 661,782 $ 661,782
=========== ===========
</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, 1999 and 1998. 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, 1999 and 1998, 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
III-24
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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, 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.
d. Property matters
----------------
Arrowhead and Moorings
----------------------
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 resulted in cancellation of indebtedness income for the
Partnership's 1998 tax year. Additionally, during the second and third
quarters of 1998, the Partnership received $1,536,059 and $3,511,550 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.
Chevy Chase
-----------
The Managing General Partner and the local managing general partner
are both 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, or to enter the Mark-up-to-Market
program. The Managing General Partner and local managing general partner
are awaiting HUD's analysis of the property and proposal for Mark-up-to-
Market. In the event that the property does not enter the Mark-up-to-
Market program, consideration will be given to converting the property to
market rate over the next 12 to 18 months. There is no assurance that a
refinancing of the mortgage loan will occur, that the property will enter
the mark-up-to-market program, or that it will be converted to market rate.
III-25
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Frenchman's Wharf II
--------------------
The reports of the auditors on the financial statements of Frenchman's
Wharf II for the years ended December 31, 1999 and 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 contract
subsequently was extended for another year. The uncertainty about the
Local Partnership's continued ownership of the property does not adversely
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, and that the restructuring may result in cancellation of
indebtedness income to the Partnership in the amount of approximately
$163,000 during 2000. Additionally, the Partnership had pledged its
interest in the Local Partnership as security on a promissory note, in the
amount of $170,000, made by the Local Partnership. The note, which matured
on August 5, 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
adversely 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, 1999, and March 30, 2000, $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-26
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Princeton
---------
Princeton Community Village Associates (Princeton) has defaulted on
its project subsidy loan, and the possibility exists that the local
partnership could lose its ownership of the property should there be a
foreclosure action. The parties are presently negotiating an extension of
the project subsidy loan. The uncertainty about the Local Partnership's
continued ownership of the property does not adversely impact the
Partnership's financial condition, as discussed above.
Rolling Green at Amherst
------------------------
The mortgage loan on Rolling Green at Amherst was refinanced in August
1998; refinancing proceeds of $1,503,496 were used to pay down purchase
money note principal and capitalized interest in August 1998. See the
discussion above for additional information concerning this refinancing and
pay down. The Local Managing General Partner is negotiating a contract to
sell Rolling Green at Amherst. There is no assurance that a contract will
be successfully negotiated or that a sale will take place.
Rolling Green at Fall River
---------------------------
The mortgage loan on Rolling Green at Fall River was refinanced in
March 1999; refinancing proceeds of $2,725,257 were used to pay down
purchase money note principal and capitalized interest in March 1999. See
the discussion above for additional information concerning this refinancing
and pay down. The Local Managing General Partner is negotiating a contract
to sell Rolling Green at Fall River. There is no assurance that a contract
will be successfully negotiated or that a sale will take place.
Wexford Ridge
-------------
On December 15, 1999, Wexford Ridge Associates (Wexford Ridge) sold
its property. The sale resulted in a financial statement gain of
$3,070,636, an estimated federal tax gain of approximately $6.3 million, an
net cash proceeds of $3,247,585 to the Partnership.
e. Affordable Housing Legislation
------------------------------
Some of the rental properties owned by the Local Partnerships are
dependent on the receipt of project-based Section 8 Rental Housing
Assistance Payments (HAP) provided by the U.S. Department of Housing and
Urban Development (HUD) pursuant to Section 8 HAP contracts. Current
legislation allows all expired Section 8 HAP contracts with rents at less
than 100% of fair market rents to be renewed for one year. Expiring
Section 8 HAP contracts with rents that exceed 100% of fair market rents
could be renewed for one year, but at rents reduced to 100% of fair market
rents (Mark-to-Market). All expiring Section 8 HAP contracts with rents
exceeding comparable market rents, and properties with mortgage loans
insured by the Federal Housing Administration (FHA), became subject to the
Mark-to-Market legislation.
III-27
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 may undergo debt restructuring according
to terms determined by an individual property and operations evaluation.
This may 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 loan will be converted to a non-performing but accruing
(soft) second mortgage loan.
The Section 8 HAP contracts for the following properties initially
expired during the government's fiscal year 1998 or 1999 or will expire
during 2000, 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>
Chevy Chase 232 228 03/23/98 04/22/00 (1)
Country Place II 120 24 08/29/00 (1)
Four Winds West 62 62 04/14/98 10/14/00 (1)
Frenchman's Wharf II 324 31 11/30/98 11/30/00 (1)
Princeton Community Village 239 26 07/01/98 10/01/24
Troy Manor 50 50 10/29/99 10/29/00 (1)
----- ---
Total 1,027 421
===== ===
</TABLE>
(1) The Managing General Partner expects that these Section 8 HAP Contracts
will be renewed for one year upon expiration.
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. As a
result, it is not possible to predict the impact on the Local Partnerships'
operations and the resulting impact on the Partnership's investments in the
Local Partnerships at this time. As of December 31, 1999, the
Partnership's investments in and advances to Local Partnerships with
Section 8 HAP contracts expiring in 2000 was $176,509.
There is a new HUD-sponsored program generally referred to as "Mark-
up-to-Market." Under this program, properties with expiring Section 8
contracts that are located in high-rent areas as defined by HUD are
eligible for rent increases which would be necessary to bring Section 8
rents in line with market rate rents. For properties with subsidized FHA
loans, the rents are adjusted to take into account the benefits the
property is already receiving from the below-market interest rate by means
of a HUD determined Interest Subsidy Adjustment Factor. The purpose of
this program is to incentivize owners of properties with expiring Section 8
contracts not to convert these properties to market rate housing.
In return for receiving market rate rents under Mark-up-to-Market, the
property owner must enter into a five year conditional Section 8 contract
with HUD, subject to the annual availability of funding by Congress. In
addition, property owners who enter into the Mark-up-to-Market program will
receive a waiver from the cash flow restriction imposed on the property by
the limited dividend limitation.
f. Summarized financial information
--------------------------------
Summarized financial information for the Local Partnerships at
December 31, 1999 and 1998 and for the years ended December 31, 1999 and
1998 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,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Rental property, at cost, net of accumulated
depreciation of $67,535,066 and $71,480,347,
respectively $ 52,767,596 $ 62,000,194
Land 8,295,473 9,387,934
Other assets 12,923,043 13,818,251
------------ ------------
Total assets $ 73,986,112 $ 85,206,379
============ ============
Mortgage notes payable $ 92,835,236 $ 98,088,051
Other liabilities 16,032,972 15,686,522
Due to general partners 4,507,399 4,507,399
------------ ------------
Total liabilities 113,375,607 118,281,972
Partners' deficit (39,389,495) (33,075,593)
------------ ------------
Total liabilities and partners' deficit $ 73,986,112 $ 85,206,379
============ ============
</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,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue:
Rental $ 26,446,608 $ 26,203,326
Interest 330,644 512,900
Other 569,069 837,182
------------ ------------
Total revenue 27,346,321 27,553,408
------------ ------------
Expenses:
Operating 16,559,620 17,375,844
Interest 6,722,186 6,497,341
Depreciation 4,523,878 4,772,182
Amortization 99,202 82,463
------------ ------------
Total expenses 27,904,886 28,727,830
------------ ------------
Loss before extraordinary gain from extinguishment
of debt (558,565) (1,174,422)
Extraordinary gain from extinguishment of debt 3,493,219 1,100,198
------------ ------------
Net income (loss) $ 2,934,654 $ (74,224)
============ ============
</TABLE>
g. Reconciliation of the Local Partnerships' financial statement
-------------------------------------------------------------
net income (loss) to taxable income
-----------------------------------
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.
III-31
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
A reconciliation of the Local Partnerships' financial statement net
income (loss) reflected above to taxable income follows.
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Financial statement net income (loss) $ 2,934,654 $ (74,224)
Adjustments:
Additional book depreciation,
net of depreciation on construction period expenses
capitalized for financial statement purposes 3,083,683 532,798
Amortization for financial statement purposes
not deducted for income tax purposes 3,154 171,181
Difference in gain on disposition of investment in
partnership 2,812,906 --
Miscellaneous, net 112,452 471,640
------------ ------------
Taxable income $ 8,946,849 $ 1,101,395
============ ============
</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 30-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, 1999 and 1998,
the Partnership paid $147,720 and $197,108, 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:
III-32
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. RELATED-PARTY TRANSACTIONS - Continued
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 annual amount shall
not be greater than $250,000 and;
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, 1999 and 1998, the Partnership
paid the Managing General Partner a Management Fee of $249,996.
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. In accordance with the distribution provision of the Moorings local
partnership agreement, CRHC, a wholly-owned affiliate of the Managing General
Partner, was paid an additional incentive management fee of $331,073 on August
7, 1998. The Managing General Partner was paid a disposition fee of $147,600 on
December 27, 1999, for the sale of Wexford Ridge.
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 0.49%. 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 Local Partnerships 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-33
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
(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 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.
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. In accordance with the distribution provision of the Moorings local
partnership agreement, CRHC, a wholly-owned affiliate of the Managing General
Partner, was paid an additional incentive management fee of $331,073 on August
7, 1998. CRI was paid a disposition fee of $147,600 on December 27, 1999, for
the sale of Wexford Ridge.
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, 0.49% 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. On
III-34
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
January 28, 2000, the Managing General Partner distributed $1,622,237 ($32.50
per additional limited partnership interest) to the Additional Limited Partners
from the proceeds of the sale of Wexford Ridge, to holders of record as of
December 15, 1999. On October 29, 1999, the Managing General Partner
distributed $1,697,110 ($34.00 per additional limited partnership interest) to
the Additional Limited Partners, to holders of record as of October 1, 1999. On
November 20, 1998, the Managing General Partner distributed $499,350 ($10.00 per
additional limited partnership interest) to the Additional Limited Partners from
the proceeds of the refinancing of Arrowhead and Moorings mortgage loans, to
holders of record as of September 30, 1998.
As defined in the Partnership Agreement, after the payment of distributions
to Additional Limited Partners as described in the previous paragraph, after the
establishment of any reserves deemed necessary by the Managing General Partner
and after payment of the Management Fee, the Partnership had no remaining cash
available for distribution for the years ended December 31, 1999 and 1998. The
Managing General Partner intends to reserve all of the Partnership's remaining
undistributed cash for the possible repayment, prepayment or retirement of the
Partnership's outstanding purchase money notes related to the Local
Partnerships.
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET INCOME
TO TAXABLE INCOME (LOSS)
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. 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 INCOME (LOSS) - Continued
A reconciliation of the Partnership's financial statement net income
to taxable income (loss) follows.
<TABLE>
<CAPTION>
For the years ended
December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Financial statement net income $ 13,078,499 $ 3,009,180
Adjustments:
Differences between taxable income (loss) and financial
statement net income related to the Partnership's
equity in the Local Partnerships' income or losses 7,610,814 (5,264,715)
Costs amortized over a shorter period for income
tax purposes 40,804 (16,748)
Effect of amortization of discount on purchase money notes
for financial statement purposes (268,797) 1,071,687
------------ ------------
Taxable income (loss) $ 20,461,320 $ (1,200,596)
============ ============
</TABLE>
III-36
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
III-37
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,936,520
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,503,976
<CURRENT-LIABILITIES> 0
<BONDS> 29,723,624
0
0
<COMMON> 0
<OTHER-SE> (20,969,577)
<TOTAL-LIABILITY-AND-EQUITY> 10,503,976
<SALES> 0
<TOTAL-REVENUES> 5,950,412
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 571,148
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,532,386
<INCOME-PRETAX> 3,846,878
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,846,878
<DISCONTINUED> 0
<EXTRAORDINARY> 9,231,621
<CHANGES> 0
<NET-INCOME> 13,078,499
<EPS-BASIC> 253.72
<EPS-DILUTED> 253.72
</TABLE>
