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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-11973
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
Organized pursuant to the Laws of the State of Maryland
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Internal Revenue Service - Employer Identification No. 52-1321492
11200 Rockville Pike, Rockville, Maryland 20852
(301) 468-9200
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 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 |_|
The total number of shares of the registrant's Common Stock, outstanding on
September 30, 2000, is not applicable.
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<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
- September 30, 2000 and December 31, 1999 .................. 1
Statements of Operations and Accumulated Losses
- for the three and nine months ended
September 30, 2000 and 1999................................. 2
Statements of Cash Flows
- for the nine months ended September 30, 2000
and 1999.................................................... 3
Notes to Financial Statements
- September 30, 2000 and 1999................................ 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............ 18
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities................................. 22
Item 5. Other Information............................................... 22
Item 6. Exhibits and Reports on Form 8-K................................ 22
Signature ......................................................... 23
Exhibit Index ......................................................... 24
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships ............. $ 897,877 $ 966,378
Investment in partnership held for sale ................. 23,362 --
Cash and cash equivalents ............................... 7,781,601 8,936,520
Acquisition fees, principally paid to related
parties, net of accumulated amortization of
$299,436 and $408,934, respectively ................... 230,302 348,795
Property purchase costs, net of accumulated
amortization of $244,343 and $280,099,
respectively .......................................... 198,909 252,283
Other assets ............................................ 2,547 --
------------ ------------
Total assets ....................................... $ 9,134,598 $ 10,503,976
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships ...................... $ 4,920,000 $ 7,348,747
Accrued interest payable ................................ 9,142,874 22,374,877
Distribution payable .................................... 1,497,450 1,622,237
Accounts payable and accrued expenses ................... 99,822 127,692
------------ ------------
Total liabilities .................................. 15,660,146 31,473,553
------------ ------------
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 ............... (7,569,859) (6,072,409)
Offering costs ...................................... (5,278,980) (5,278,980)
Accumulated losses .................................. (43,693,709) (59,635,188)
------------ ------------
Total partners' deficit ........................... (6,525,548) (20,969,577)
------------ ------------
Total liabilities and partners' deficit ........... $ 9,134,598 $ 10,503,976
============ ============
</TABLE>
The accompanying notes are an
integral part of these
financial statements.
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
AND ACCUMULATED LOSSES
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income (loss) from partnerships ......... $ 125,867 $ (309,832) $ 795,528 $ 1,860,598
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income .................... 119,598 83,842 343,444 273,079
------------ ------------ ------------ ------------
Expenses:
Interest ..................................... 134,166 398,694 640,881 1,251,354
Management fee ............................... 62,499 62,499 187,497 187,497
General and administrative ................... 53,617 46,746 165,193 163,601
Professional fees ............................ 22,381 29,249 75,844 60,474
Amortization of deferred costs ............... 7,832 10,751 26,414 33,639
------------ ------------ ------------ ------------
280,495 547,939 1,095,829 1,696,565
------------ ------------ ------------ ------------
Total other revenue and expenses ........... (160,897) (464,097) (752,385) (1,423,486)
------------ ------------ ------------ ------------
(Loss) income before gain on disposition
of investments in partnerships ................. (35,030) (773,929) 43,143 437,112
Gain on disposition of investments in partnerships -- -- 5,879,778 --
------------ ------------ ------------ ------------
(Loss) income before extraordinary gain
from extinguishment of debt .................... (35,030) (773,929) 5,922,921 437,112
Extraordinary (loss) gain
from extinguishment of debt .................... (56,201) 4,771,567 10,018,558 5,296,561
------------ ------------ ------------ ------------
Net (loss) income ................................ (91,231) 3,997,638 15,941,479 5,733,673
Accumulated losses, beginning of period .......... (43,602,478) (70,977,652) (59,635,188) (72,713,687)
------------ ------------ ------------ ------------
Accumulated losses, end of period ................ $(43,693,709) $(66,980,014) $(43,693,709) $(66,980,014)
============ ============ ============ ============
Net (loss) income allocated
to General Partners (1.51%) .................... $ (1,378) $ 60,364 $ 240,716 $ 86,578
============ ============ ============ ============
Net (loss) income allocated
to Initial and Special Limited Partners (1.49%) $ (1,359) $ 59,565 $ 237,528 $ 85,432
============ ============ ============ ============
Net (loss) income allocated
to Additional Limited Partners (97%) ........... $ (88,494) $ 3,877,709 $ 15,463,235 $ 5,561,663
============ ============ ============ ============
Net (loss) income per unit of Additional Limited
Partner Interest based on 50,000 units
outstanding .................................... $ (1.77) $ 77.55 $ 309.26 $ 111.23
============ ============ ============ ============
</TABLE>
The accompanying notes are an
integral part of these
financial statements.
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
SEPTEMBER 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................................. $ 15,941,479 $ 5,733,673
Adjustments to reconcile net income to net cash used in operating activities:
Share of income from partnerships ......................................... (795,528) (1,860,598)
Amortization of deferred costs ............................................ 26,413 33,639
Gain on disposition of investments in partnerships ........................ (5,879,778) --
Extraordinary gain from extinguishment of debt ............................ (10,018,558) (5,296,561)
Changes in assets and liabilities:
(Increase) decrease in other assets ..................................... (2,547) 3,781
Increase in accrued interest payable .................................... 640,880 1,251,354
Payment of purchase money note interest ................................. (231,201) (25,322)
(Decrease) increase in accounts payable and accrued expenses ............ (27,870) 5,305
------------ ------------
Net cash used in operating activities ................................. (346,710) (154,729)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships .................................. 864,028 4,224,591
Proceeds from disposition of investments in partnerships .................... 5,993,661 --
Advances made to local partnerships ......................................... -- (120,642)
Collection of advances made to local partnerships ........................... -- 120,642
------------ ------------
Net cash provided by investing activities ............................. 6,857,689 4,224,591
------------ ------------
Cash flows from financing activities:
Payoff of purchase money notes and related interest ......................... (5,993,661) (1,410,000)
Payment of purchase money note principal and related interest ............... (50,000) (2,843,061)
Distribution to Additional Limited Partners ................................. (1,622,237) --
------------ ------------
Net cash used in financing activities ................................. (7,665,898) (4,253,061)
------------ ------------
Net decrease in cash and cash equivalents ..................................... (1,154,919) (183,199)
Cash and cash equivalents, beginning of period ................................ 8,936,520 7,596,031
------------ ------------
Cash and cash equivalents, end of period ...................................... $ 7,781,601 $ 7,412,832
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest .................................... $ 3,976,115 $ 4,096,626
============ ============
</TABLE>
The accompanying notes are an
integral part of these
financial statements.
-3-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited financial statements reflect all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position of Capital Realty Investors-II Limited Partnership (the Partnership) as
of September 30, 2000, and the results of its operations for the three and nine
months ended September 30, 2000 and 1999, and its cash flows for the nine months
ended September 30, 2000 and 1999. The results of operations for the interim
periods ended September 30, 2000, are not necessarily indicative of the results
to be expected for the full year.
The accompanying unaudited financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
and with the instructions to Form 10-QSB. Certain information and accounting
policies and footnote disclosures normally included in financial statements
prepared in conformity with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such instructions.
These condensed financial statements should be read in conjunction with the
financial statements and notes thereto included in the Partnership's annual
report on Form 10-KSB at December 31, 1999.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. DUE ON INVESTMENTS IN PARTNERSHIPS AND ACCRUED INTEREST PAYABLE
---------------------------------------------------------------
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having an aggregate principal
balance of $4,920,000 plus aggregate accrued interest of $9,142,874 as of
September 30, 2000, 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 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. A
purchase money note in the principal amount of $3,150,000 matured on June 1,
1998, and has not been paid or extended. Purchase money notes in the original
principal amounts of $4,600,000 and $1,927,500, with maturities extended to
August 31, 2003, were paid off, at a discount, on May 31, 2000. A purchase money
note in the original principal amount of $1,450,000 matured on September 1,
1998, was partially paid, and has been extended to September 1, 2003. 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. A purchase money
note in the original principal amount of $500,000 matured on January 1, 1999,
and was partially transferred to the noteholder, with the balance extended to
January 1, 2004, 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
-4-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 a purchase money
note which has matured and which remains unpaid or unextended as of November 7,
2000. Excluded from the following chart are purchase money notes which matured
through September 30, 2000, and which have been paid off, cancelled, or extended
on or before November 7, 2000.
<TABLE>
<CAPTION>
Aggregate Carrying Amount
Aggregate Accrued of Partnership's
Principal Interest Investments in
Number of Balance Balance and Advances to
Purchase Underlying as of as of Underlying Local
Money Note Local Percentage September Percentage September Percentage Partnerships as of Percentage
(PMN) MATURITY PARTNERSHIPS OF TOTAL 30, 2000 OF TOTAL 30, 2000 OF TOTAL SEPTEMBER 30, 2000 OF TOTAL
-------------- ------------ ---------- ----------- --------- ---------- ---------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2nd Quarter 1998 1 7% $3,150,000 64% $5,880,309 64% $ -- --%
==== ===== ========== ===== ========== ===== ======== =====
Total, Local
Partnerships 15 100% $4,920,000 100% $9,142,874 100% $897,877 100%
==== ===== ========== ===== ========== ===== ======== =====
</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, in the event that the purchase money notes remain unpaid upon maturity,
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
-5-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
the Local Partnership from rental operations, mortgage debt refinancings, or the
sale of the real estate. Of the 15 Local Partnerships in which the Partnership
is invested as of September 30, 2000, the one Local Partnership with an
associated purchase money note which has matured and which remains unpaid or
unextended as of November 7, 2000, represented none of the Partnership's total
distributions received from Local Partnerships and none of the share of income
from Local Partnerships for the immediately preceding two calendar years.
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 was $134,166
and $640,881 for the three and nine month periods ended September 30, 2000,
respectively, and $398,694 and $1,251,354 for the three and nine month periods
ended September 30, 1999, respectively. The accrued interest payable on the
purchase money notes of $9,142,874 and $22,374,877 as of September 30, 2000 and
December 31, 1999, 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 agreements.
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 notes' 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. 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 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
-6-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 were
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, for financial statement purposes in 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 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) 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 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
interest total 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
-7-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 for financial statement
purposes in 1999. The discounted payoff also resulted 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 cross- claimed against First March
Realty Corporation. The litigation has been settled, with no liability to the
Partnership.
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 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 for financial statement
purposes 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 note related to
Frenchman's Wharf Associates II Limited Partnership (Frenchman's Wharf II) on
June 1, 1998 when the note matured and was not paid. The default amount included
principal and accrued interest of $3,150,000 and $5,071,731, respectively. As of
November 7, 2000, principal and accrued interest totaling $3,150,000 and
$5,915,811, respectively, were due. The purchase money note was initially due to
mature on June 1, 1988, but was extended to mature on June 1, 1998. The holders
of the purchase money note initiated foreclosure proceedings this summer, but
have indicated they will not pursue the lawsuit while efforts to sell the
property are underway.
-8-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
In 1996, HUD sold the mortgage loan to a third party lender. The local
managing general partner has obtained a forbearance agreement from the lender
until January 31, 2001, with two 30-day extension periods available. The
forbearance agreement allows for the discounted payoff of the mortgage loan. The
Partnership recently received an offer to purchase the property, which is
currently being analyzed. Unless the sale can be consummated within the
forbearance period, it appears likely that the first mortgage lender will obtain
the Frenchman's Wharf real estate through deed-in-lieu of foreclosure in early
2001.
In the event of a foreclosure by the holders of the purchase money
note, or by the first mortgage lender, the Partnership would 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. Should
the Partnership lose its ownership interest in Frenchman's Wharf II, there would
be no adverse impact on the Partnership's financial condition, as discussed
above. However, there will be an adverse tax impact on the partners in the
Partnership. The total federal tax gain from cancellation of mortgage
indebtedness and purchase money note indebtedness related to Frenchman's Wharf
II is estimated to be approximately $16.3 million for the year 2001.
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. 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 litigation was
settled effective January 1, 2000, when the Managing General Partner entered
into an agreement with the noteholder which granted the noteholder four options
to purchase the Partnership's 98.99% limited partnership interest in Princeton
over a three and one-half year period, in exchange for the cancellation of
pro-rata portions of the then outstanding balance of the purchase money notes.
As part of the agreement, the noteholder extended the maturity date of the
purchase money note to January 1, 2004, and the Partnership made a payment to
the noteholder on April 21, 2000, which was applied against accrued interest
payable on the purchase money note.
On May 31, 2000, pursuant to the option agreement, the noteholder
purchased a 26% interest in Princeton from the Partnership, the consideration
for which was the cancellation of a like percentage of the outstanding purchase
money note principal and accrued interest of $130,000 and $363,072,
respectively, resulting in net extraordinary gain from extinguishment of debt of
$484,862 for financial statement purposes in 2000 and in cancellation of
indebtedness income of $1,960,030 for federal tax purposes in 2000.
Due to the impending and likely transfer of the remaining 74% of the
Partnership's investment in Princeton over the next three years, the investment
in and advances to partnerships plus net unamortized amounts of acquisition fees
and property purchase costs related to Princeton, which totaled $23,362, have
been reclassified to investment in partnerships held for sale in the
accompanying balance sheet at September 30, 2000.
-9-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 amounts 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
refinance their mortgage loans, which refinancings had previously been
completed. However, the noteholders had the right to accelerate the maturity of
the notes upon not less than one year's prior notice. 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 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.
On May 31, 2000, Rolling Green at Fall River sold its property. The
entire sale proceeds to the Partnership were used to pay off, at a discount, the
Partnership's purchase money note obligation related to its investment in this
Local Partnership. The sale resulted in gain on disposition of investment in
partnership of $3,542,933, and in extraordinary gain from extinguishment of debt
of $7,746,946 for financial statement purposes in 2000. The total federal tax
gain related to Rolling Green at Fall River is estimated to be approximately
$16.8 million in 2000. The Managing General Partner of the Partnership and/or
its affiliates will not receive any fees relating to the sale.
On May 31, 2000, Rolling Green at Amherst sold its property. The entire
sale proceeds to the Partnership were used to pay off, at a discount, the
Partnership's purchase money note obligation related to its investment in this
local partnership. The sale resulted in gain on disposition of investment in
partnership of $2,336,845, and in extraordinary gain from extinguishment of debt
of $1,786,750 for financial statement purposes in 2000. (A distribution of
surplus cash was made by the local managing general partner subsequent to the
sale date, in September 2000. Substantially all of the distribution was applied
to the purchase money note obligation with the effect of reducing the
extraordinary gain from extinguishment of debt previously recognized.) The total
federal tax gain related to Rolling Green at Amherst is estimated to be
approximately $6.3 million in 2000. The Managing General Partner of the
Partnership and/or its affiliates will not receive any fees relating to the
sale.
-10-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 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 for financial statement purposes 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.
In May 2000, the Partnership and the noteholder signed documents extending the
maturity date of the purchase money note to September 1, 2003, in exchange for a
payment applied against the outstanding principal balance of the purchase money
note.
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 discount, on September
30, 1999. The discounted payoff resulted in extraordinary gain from
extinguishment of debt of approximately $2.4 million for financial statement
purposes in 1999. The discounted payoff also resulted 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) against the Partnership, the Managing General Partner and
C.R.H.C., Incorporated (CRHC), an affiliate of the Managing General Partner, for
damages and 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
-11-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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.c., below, for further information concerning the sale.
b. ADVANCES TO LOCAL PARTNERSHIPS
As of both September 30, 2000 and December 31, 1999, the Partnership
had advanced funds to Local Partnerships totaling $474,410. Interest accrued on
these advances was $187,372 as of both September 30, 2000 and December 31, 1999.
For financial reporting purposes, these loans have been reduced to zero by the
Partnership as a result of losses from the related Local Partnerships.
CHEVY CHASE
On January 7, 1999, the Partnership advanced $120,642 to Chevy Chase to
cover required repairs and maintenance expenses pending reimbursement from a
capital improvement escrow. The advance was repaid to the Partnership on April
8, 1999.
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 September
30, 2000 and December 31, 1999. 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 September 30, 2000 and December 31, 1999, are
payable from cash flow of Frenchman's Wharf II after payment of first mortgage
debt service and after satisfaction by the Partnership of certain other interest
obligations on the purchase money notes relating to the Local Partnership. No
interest has been accrued since 1992 due to the uncertainty of future
collection. 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. See Note 2.a., above, concerning the potential foreclosure
on the real estate in early 2001.
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
-12-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 both September 30, 2000 and 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.
c. PROPERTY MATTERS
CHEVY CHASE
The Managing General Partner and the local managing general partner
(CRHC, an affiliate of the Managing General Partner, see Note 2.b., above)
considered 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 local
managing general partner agreed to HUD's analysis of the property and proposal
for Mark-up-to-Market, and the property has entered into the Mark-up-to-Market
program for a five year term, subject to the annual availability of funding by
Congress. HUD's analysis indicated that gross rents should increase by
approximately $475,000 per year.
FRENCHMAN'S WHARF II
The report of the auditors on the financial statements of Frenchman's
Wharf II for the year ended December 31, 1999 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. The
HAP contract subsequently was extended for another year. See Note 2.a., above,
concerning the potential foreclosure on the real estate in early 2001.
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 of approximately $163,000 for federal tax purposes in 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
consummated. 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.
-13-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
PRINCETON
Princeton defaulted on its project subsidy loan. The maturity date was
extended five years to January 1, 2004, as part of litigation settled effective
January 1, 2000, when the Managing General Partner and the noteholder entered
into an agreement extending the maturity date of the purchase money note, as
discussed above.
ROLLING GREEN AT FALL RIVER AND ROLLING GREEN AT AMHERST
On May 31, 2000, Rolling Green at Fall River and Rolling Green at Amherst
were sold. See Note 2.a., above, for further information concerning these sales.
WEXFORD RIDGE
On December 15, 1999, Wexford Ridge sold its property. The sale
resulted in a financial statement gain of $3,070,636 and an estimated federal
tax gain of approximately $6.3 million to the Partnership in 1999.
d. SUMMARIZED FINANCIAL INFORMATION
Combined statements of operations for the 15 and 20 Local Partnerships
in which the Partnership was invested as of September 30, 2000 and 1999,
respectively, follow. The combined statements have been compiled from
information supplied by the management agents of the projects and are unaudited.
The combined statements of operations for the nine months ended September 30,
2000, include information for Rolling Green at Fall River and Rolling Green at
Amherst through the dates of sale.
-14-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended For the nine months ended
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 4,730,118 $ 6,528,105 $ 16,005,558 $ 19,830,717
Other 231,457 313,137 653,299 981,061
----------- ------------ ------------ ------------
Total revenue 4,961,575 6,841,242 16,658,857 20,811,778
----------- ------------ ------------ ------------
Expenses:
Operating 3,113,854 4,833,101 9,767,400 13,366,697
Interest 1,431,546 1,624,329 4,791,568 4,873,006
Depreciation and amortization 925,287 1,213,663 3,149,318 3,640,989
----------- ------------ ------------ ------------
Total expenses 5,470,687 7,671,093 17,708,286 21,880,692
----------- ------------ ------------ ------------
Net loss $ (509,112) $ (829,851) $ (1,049,429) $ (1,068,914)
=========== ============ ============ ============
</TABLE>
As of September 30, 2000 and 1999, the Partnership's share of
cumulative losses to date for 10 and 9 of the 15 and 20 Local Partnerships,
respectively, exceeded the amount of the Partnership's investments in and
advances to those Local Partnerships by $25,721,927 and $24,799,013,
respectively. As 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.
3. 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.
-15-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
Mark-to-Market implementation will reduce rental income at properties
that 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, with the renewal expiring in 2000 or
2001.
<TABLE>
<CAPTION>
Units Authorized Original Renewed
Number for Rental Expiration of Expiration of
of Rental Assistance Under Section 8 Section 8
PROPERTY UNITS SECTION 8 HAP CONTRACT HAP CONTRACT
-------- --------- ---------------- ------------- ------------
<S> <C> <C> <C> <C>
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)
Troy Manor 50 50 10/29/99 10/29/00 (1)
----- -----
Total 556 167
===== =====
</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 September 30, 2000, the carrying amount of the Partnership's
investments in and advances to Local Partnerships with Section 8 HAP contracts
expiring in 2000 was $153,977.
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 that enter the program and have interest rate
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 increased cash flow as the limited
dividend will be increased in an amount equal to the increase in gross revenues.
-16-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
4. RELATED PARTY TRANSACTIONS
In accordance with the terms of the Partnership Agreement, the
Partnership is obligated to reimburse the Managing General Partner for its
direct expenses in connection with managing the Partnership. The Partnership
paid $35,040 and $128,913 for the three and nine month periods ended September
30, 2000, respectively, and $32,459 and $115,576 for the three and nine month
periods ended September 30, 1999, respectively, to the Managing General Partner
as direct reimbursement of expenses incurred on behalf of the Partnership. Such
expenses are included in the accompanying statements of operations as general
and administrative expenses.
In accordance with the terms of the Partnership Agreement, the
Partnership is obligated to pay the Managing General Partner an annual incentive
management fee (Management Fee), after all other expenses of the Partnership are
paid. The Partnership paid the Managing General Partner a Management Fee of
$62,499 and $187,497 for each of the three and nine month periods ended
September 30, 2000 and 1999, respectively.
The Managing General Partner and/or its affiliates may receive a fee of
not more than two percent of the sales price of an investment in a Local
Partnership or the property it owns, payable under certain conditions upon the
sale of an investment in a Local Partnership or the property it owns. The
payment of the fee is subject to certain restrictions, including the achievement
of a certain level of sales proceeds and making certain minimum distributions to
limited partners. No such fees were earned by the Managing General Partner or
its affiliates for the three and nine month periods ended September 30, 2000 or
1999.
-17-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion 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
Some of the rental properties owned by the Local Partnerships are
financed by state housing agencies. The Managing General Partner has sold or
refinanced, and will continue 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
that 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.
-18-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
and Results of Operations - Continued
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 that enter the program and have interest rate
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
increased cash flow as the limited dividend will be increased in an amount equal
to the increase in gross revenues.
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
The Partnership's liquidity, with unrestricted cash resources of
$7,781,601 as of September 30, 2000, along with anticipated future cash
distributions from the Local Partnerships, is expected to be adequate to meet
its current and anticipated operating cash needs. As of November 7, 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 an aggregate principal
balance of $4,920,000 plus aggregate accrued interest of $9,142,874 as of
September 30, 2000, 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 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. A
purchase money note in the principal amount of $3,150,000 matured on June 1,
1998, and has not been paid or extended. Purchase money notes in the original
principal amounts of $4,600,000 and $1,927,500, with maturities extended to
August 31, 2003, were paid off, at a discount, on May 31, 2000. A purchase money
note in the original principal amount of $1,450,000 matured on September 1,
1998, was partially paid and has been extended to September 1, 2003. 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. A purchase money
note in the original principal amount of $500,000 matured on January 1, 1999,
and was partially transferred to the noteholder, with the balance extended to
January 1, 2004. See the notes to the financial statements for additional
information concerning these purchase money notes.
-19-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
and Results of Operations - Continued
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 a purchase money
note which has matured and which remains unpaid or unextended as of November 7,
2000. Excluded from the following chart are purchase money notes which matured
through September 30, 2000, and which have been paid off, cancelled, or extended
on or before November 7, 2000.
<TABLE>
<CAPTION>
Aggregate Carrying Amount
Aggregate Accrued of Partnership's
Principal Interest Investments in
Number of Balance Balance and Advances to
Purchase Underlying as of as of Underlying Local
Money Note Local Percentage September Percentage September Percentage Partnerships as of Percentage
(PMN) MATURITY PARTNERSHIPS OF TOTAL 30, 2000 OF TOTAL 30, 2000 OF TOTAL SEPTEMBER 30, 2000 OF TOTAL
-------------- ------------ ---------- ----------- --------- ---------- ---------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
2nd Quarter 1998 1 7% $3,150,000 64% $5,880,309 64% $ -- --%
==== ===== ========== ===== ========== ===== ========= =====
Total, Local
Partnerships 15 100% $4,920,000 100% $9,142,874 100% $ 897,877 100%
==== ===== ========== ===== ========== ===== ========= =====
</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, in the event that the purchase money notes remain unpaid upon maturity,
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 15 Local Partnerships in which the Partnership is invested as of
September 30, 2000, the one Local Partnership with an associated purchase money
note which has matured and
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
and Results of Operations - Continued
which remains unpaid or unextended as of November 7, 2000, represented none of
the Partnership's total distributions received from Local Partnerships and none
of the share of income from Local Partnerships for the immediately preceding two
calendar years.
The Partnership closely monitors its cash flow and liquidity position
in an effort to ensure that sufficient cash is available for operating
requirements. For the nine month periods ended September 30, 2000 and 1999, the
receipt of distributions from Local Partnerships was adequate to support
operating cash requirements. Cash and cash equivalents decreased during the nine
month period ended September 30, 2000, as the distribution to Additional Limited
Partners, made in January 2000 out of the proceeds of the 1999 sale of Wexford
Ridge Associates (Wexford Ridge), plus cash used for other financing activities,
exceeded cash flow distributions received from partnerships during the period.
RESULTS OF OPERATIONS
The Partnership recognized a net loss for the three month period ended
September 30, 2000, as compared to net income during the corresponding period in
1999 primarily due to the extraordinary gain from extinguishment of debt related
to the discounted payoffs of the Chevy Chase Park Limited (Chevy Chase) and
Wexford Ridge purchase money notes in September 1999. Contributing to the net
loss were an additional extraordinary loss related to the sale of Roberts
Amherst Associates (Rolling Green at Amherst) in May 2000, as discussed in the
notes to financial statements, and an increase in general and administrative
expenses related to higher reimbursed payroll costs. Offsetting the net loss
were an increase in share of income from partnerships primarily due to the sale
in May 2000 of Robert Fall River Associates (Rolling Green at Fall River), which
had recorded a negative share of income during the 1999 period, a decrease in
interest expense due to lower purchase money note balances and an increase in
interest income due to higher cash and cash equivalent balances and higher
interest rates during 2000.
The Partnership's net income for the nine month period ended September
30, 2000 increased as compared to the corresponding period in 1999 primarily due
to gain on disposition of investments in partnerships and extraordinary gain
from extinguishment of debt related to the sales of Rolling Green at Fall River,
Rolling Green at Amherst and the partial transfer of the Partnership's interest
in Princeton Community Village Associates (Princeton), as discussed in the notes
to the financial statements. Contributing to the increase in net income were a
decrease in interest expense due to lower purchase money note balances as the
result of payments, the extinguishment of debt and a decrease in amortization of
deferred costs associated with the sales of properties, and an increase in
interest income as discussed above. Offsetting the increase in the Partnership's
net income was a decrease in share of income from partnerships, primarily due to
the receipt in the first quarter of 1999 of larger distributions from Arrowhead
Apartments Associates Limited Partnership (Arrowhead) and Moorings Apartments
Associates Limited Partnership (Moorings) (since the Partnership's investments
in Arrowhead and Moorings had previously been reduced to zero); contributing to
the decrease in share of income from partnerships was reduced income from
Rolling Green at Amherst due to its sale in May 2000. Higher professional fees
related to the Princeton litigation also offset the increase in the
Partnership's net income.
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
and Results of Operations - Continued
For financial reporting purposes, the Partnership, as a limited partner
in the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As a
result, the Partnership's share of income from partnerships for the three and
nine month periods ended September 30, 2000 did not include losses of $411,392
and $1,154,693, respectively, compared to excluded losses of $509,357 and
$1,269,668 for the three and nine month periods ended September 30, 1999,
respectively.
No other significant changes in the Partnership's operations have taken
place during this period.
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
See Note 2.a. of the notes to financial statements contained in Part I,
Item 1, hereof, for information concerning the Partnership's defaults on certain
purchase money notes.
Item 5. Other Information
a. On April 2, 2000, Peachtree Partners (Peachtree) initiated an
unregistered tender offer to purchase approximately 2,450 of the
outstanding units of additional limited partnership interest (Units)
in the Partnership at a price of $50 per Unit; the offer expired May
19, 2000. Peachtree is unaffiliated with the Managing General Partner.
The price offered was determined solely at the discretion of Peachtree
and does not necessarily represent the fair market value of each Unit.
There is no established market for the purchase and sale of Units in
the Partnership, although various informal secondary market services
exist. Due to the limited markets, however, investors may be unable to
sell or otherwise dispose of their Units in the Partnership.
b. On October 30, 2000, the Partnership made a cash distribution of
$1,497,450 ($30.00 per Unit) to Additional Limited Partners, to
holders of record as of September 30, 2000. The distribution was a
result of cash resources accumulated from operations and distributions
from partnerships.
Item 6. Exhibits and Reports on Form 8-K
a. None
b. No Reports on Form 8-K were filed with the Commission during the
quarter ended September 30, 2000.
All other items are not applicable.
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<PAGE>
SIGNATURE
In accordance with the requirements 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
NOVEMBER 7, 2000 by: /S/ MICHAEL J. TUSZKA
---------------- ------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
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<PAGE>
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
------- -------------------------------
27 Financial Data Schedule Filed herewith electronically
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