March 28, 2000
United States
Securities and Exchange Commission
Washington, D.C. 20549
RE: Davidson Diversified Real Estate II, L.P.
Form 10-KSB
File No. 0-14483
To Whom it May Concern:
The accompanying Form 10-KSB for the year ended December 31, 1999 describes a
change in the method of accounting to capitalize exterior painting and major
landscaping, which would have been expensed under the old policy. The
Partnership believes that this accounting principle change is preferable because
it provides a better matching of expenses with the related benefit of the
expenditures and it is consistent with industry practice and the policies of the
Managing General Partner.
Please do not hesitate to contact the undersigned with any questions or comments
that you might have.
Very truly yours,
Stephen Waters
Real Estate Controller
<PAGE>
FORM 10-KSB--ANNUAL OR TRANSITIONAL REPORT UNDER
SECTION 13 OR 15(d)
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [No Fee Required]
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [No Fee Required]
For the transition period from _________to _________
Commission file number 0-14483
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
(Name of small business issuer in its charter)
Delaware 62-1207077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, PO Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
Issuer's telephone number
(864) 239-1000
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Units of Limited Partnership
(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 there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the 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.
State issuer's revenues for its most recent fiscal year. $8,079,000
State the aggregate market value of the voting partnership interests held by
non-affiliates computed by reference to the price at which the partnership
interests were sold, or the average bid and asked prices of such partnership
interests as of December 31, 1999. No market exists for the limited partnership
interests of the Registrant, and, therefore, no aggregate market value can be
determined.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Description of Business
Davidson Diversified Real Estate II, L.P. (the "Partnership" or "Registrant") is
a Delaware limited partnership organized in June 1984. The general partners of
the Partnership are Davidson Diversified Properties, Inc., a Tennessee
corporation ("Managing General Partner"); Davidson Equities, Limited,
("Associate General Partner"); and David W. Talley ("Individual General
Partner") (collectively, the "General Partners"). Prior to February 25, 1998,
the Managing General Partner was a wholly-owned subsidiary of MAE GP Corporation
("MAE GP"). Effective February 25, 1998, MAE GP was merged into Insignia
Properties Trust ("IPT"), which was merged into Apartment Investment and
Management Company ("AIMCO") effective February 26, 1999. Thus, the Managing
General Partner is now a wholly-owned subsidiary of AIMCO. The Partnership
Agreement provides that the Partnership is to terminate on December 31, 2008,
unless terminated prior to such date.
The offering of the Registrant's limited partnership units ("Units") commenced
on October 16, 1984, and terminated on October 15, 1985. The Registrant received
gross proceeds from the offering of $24,485,000 and net proceeds of $21,760,500.
Upon termination of the offering, the Registrant had accepted subscriptions for
1,224.25 Units. All of the net proceeds of the offering were invested in the
Registrant's original eight properties, of which two have been sold and two have
been foreclosed. Since its initial offering, the Registrant has not received,
nor are limited partners required to make, additional capital contributions.
The Registrant is engaged in the business of operating and holding real estate
properties for investment. In 1984 and 1985, during its acquisition phase, the
Registrant acquired eight existing apartment and commercial properties. The
remaining commercial shopping center was sold on December 30, 1999. The
Registrant continues to own and operate four of these properties. See "Item 2.
Description of Properties".
The Registrant has no employees. Management and administrative services are
provided by the Managing General Partner and by agents retained by the Managing
General Partner. With respect to the Partnership's residential properties these
services were provided by affiliates of the Managing General Partner for the
years ended December 31, 1999 and 1998. With respect to the Partnership's
commercial property these services were provided by affiliates of the Managing
General Partner for the nine months ended September 30, 1998. As of October 1,
1998 the management services were provided by an unaffiliated party for the
commercial property.
The real estate business in which the Partnership is engaged is highly
competitive. There are other residential properties within the market area of
the Registrant's residential properties. The number and quality of competitive
properties, including those which may be managed by an affiliate of the Managing
General Partner in such market area could have a material effect on the rental
market for the apartments at the Registrant's properties and the rents that may
be charged for such apartments. While the Managing General Partner and its
affiliates own and/or control a significant number of apartment units in the
United States, such units represent an insignificant percentage of total
apartment units in the United States and competition for the apartments is
local.
Both the income and expenses of operating the properties owned by the Registrant
are subject to factors outside of the Registrant's control, such as changes in
the supply and demand for similar properties resulting from various market
conditions, increases/decreases in unemployment or population shifts, changes in
the availability of permanent mortgage financing, changes in zoning laws, or
changes in patterns or needs of users. In addition, there are risks inherent in
owning and operating residential properties because such properties are
susceptible to the impact of economic and other conditions outside of the
control of the Registrant.
There have been, and it is possible there may be other, Federal, state and local
legislation and regulations enacted relating to the protection of the
environment. The Partnership is unable to predict the extent, if any, to which
such new legislation or regulations might occur and the degree to which such
existing or new legislation or regulations might adversely affect the properties
owned by the Partnership.
The Partnership monitors its properties for evidence of pollutants, toxins and
other dangerous substances, including the presence of asbestos. In certain cases
environmental testing has been performed which resulted in no material adverse
conditions or liabilities. In no case has the Partnership received notice that
it is a potentially responsible party with respect to an environmental clean up
site.
A further description of the Partnership's business is included in "Management's
Discussion and Analysis or Plan of Operation" included in "Item 6." of this
Form 10-KSB.
Transfer of Control
Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia Financial Group, Inc. and IPT merged into AIMCO, a
publicly traded real estate investment trust, with AIMCO being the surviving
corporation (the "Insignia Merger"). As a result, AIMCO acquired 100% ownership
interest in the Managing General Partner. The Managing General Partner does not
believe that this transaction has had or will have a material effect on the
affairs and operations of the Partnership.
<PAGE>
Item 2. Description of Properties:
The following table sets forth the Registrant's investments in properties as of
December 31, 1999:
Date of
Property Purchase Type of Ownership Use
Big Walnut Apartments 03/28/85 Fee ownership subject to Apartment -
Columbus, Ohio first and second 251 units
mortgages (1)
LaFontenay Apartments 10/31/84 Fee ownership subject to Apartment -
(Phase I and II) first mortgage (1) 260 units
Louisville, Kentucky
The Trails Apartments 08/30/85 Fee ownership subject to Apartment -
Nashville, Tennessee first mortgage (1) 248 units
Greensprings Manor Apartments 09/30/85 Fee ownership subject to Apartment -
Indianapolis, Indiana first and second 582 units
mortgages (1)
(1) The property is held by a Limited Partnership in which the Registrant owns
a 99.90% interest.
Schedule of Properties:
Set forth below for each of the Registrant's properties is the gross carrying
value, accumulated depreciation, depreciable life, method of depreciation and
Federal tax basis.
Gross
Carrying Accumulated Federal
Property Value Depreciation Rate Method Tax Basis
(in thousands) (in thousands)
Big Walnut Apartments $ 8,693 $ 4,871 5-25 yrs S/L $ 2,234
LaFontaney I & II 9,829 5,085 5-25 yrs S/L 3,275
Apartments
The Trails Apartments 9,218 4,484 5-25 yrs S/L 3,108
Greensprings Manor
Apartments 12,534 6,986 5-25 yrs S/L 3,961
$40,274 $21,426 $12,578
See "Note A" to the consolidated financial statements included in "Item 7 -
Financial Statements" for a description of the Partnership's depreciation policy
and "Note K - Change in Accounting Principle".
Schedule of Property Indebtedness:
The following table sets forth certain information relating to the loans
encumbering the Registrant's properties.
<TABLE>
<CAPTION>
Principal Principal
Balance At Stated Balance
December 31, Interest Period Maturity Due At
Property 1999 Rate Amortized Date Maturity (2)
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
Big Walnut Apartments
1st mortgage $ 4,456 7.60% 257 months 11/15/02 $ 3,912
2nd mortgage 167 7.60% None 11/15/02 167
LaFontenay I & II
Apartments
1st mortgage 7,166 7.50% 360 months 09/01/07 6,369
The Trails Apartments
1st mortgage 5,565 (1) 240 months 12/01/09 3,015
Greensprings Manor
Apartments
1st mortgage 7,833 7.60% 257 months 11/15/02 6,875
2nd mortgage 294 7.60% None 11/15/02 294
Totals 25,481 $20,632
Less unamortized
discounts (1,394)
Total $24,087
</TABLE>
(1) Adjustable rate based on 75% of the interest rate on new-issue long-term
A-rate utility bonds as determined on the first day of each calendar
quarter. The rate at December 31, 1999 was 5.7375%.
(2) See "Item 7. Financial Statements - Note D" for information with respect
to the Registrant's ability to repay these loans and other specific
details about the loans.
Rental Rates and Occupancy:
Average annual rental rates and occupancy for 1999 and 1998 for each property:
Average Annual Average
Rental Rates Occupancy
(per unit)
Property 1999 1998 1999 1998
Big Walnut Apartments $6,772 $6,577 92% 94%
Lafontenay I & II Apartments 7,494 7,347 94% 92%
The Trails Apartments 7,310 7,044 94% 92%
Greensprings Manor Apartments 5,279 4,934 89% 88%
As noted under "Item 1. Description of Business", the real estate industry is
highly competitive. All of the properties are subject to competition from other
residential apartment complexes in the area. The Managing General Partner
believes that all of the properties are adequately insured. Each property is an
apartment complex which leases units for terms of one year or less. As of
December 31, 1999, no residential tenant leases 10% or more of the available
rental space. All of the properties are in good condition subject to normal
depreciation and deterioration as is typical for assets of this type and age.
Schedule of Real Estate Taxes and Rates:
Real estate taxes and rates in 1999 for each property were:
1999 1999
Billing Rate
(in thousands)
Big Walnut Apartments $ 128 6.18%
LaFontenay I & II Apartments 56 .93%
The Trails Apartments 112 3.56%
Greensprings Manor Apartments 274 7.61%
Capital Improvements:
Big Walnut Apartments: The Partnership completed approximately $189,000 in
capital expenditures at Big Walnut Apartments as of December 31, 1999,
consisting primarily of roof replacement and appliance and floor covering
replacement, swimming pool and tennis court enhancements and electrical
improvements. These improvements were funded primarily from property reserves
and operations. The Partnership is currently evaluating the capital improvement
needs of the property for the upcoming year. The minimum amount to be budgeted
is expected to be $300 per unit or $75,300. Additional improvements may be
considered and will depend on the physical condition of the property as well as
replacement reserves and anticipated cash flow generated by the property.
LaFontenay I & II Apartments: The Partnership completed approximately $577,000
in capital expenditures at LaFontenay I & II Apartments as of December 31, 1999,
consisting primarily of roof improvements, appliance and floor covering
replacements, HVAC, electrical and structural building improvements and major
landscaping. These improvements were funded primarily from property reserves and
operations. The Partnership is currently evaluating the capital improvement
needs of the property for the upcoming year. The minimum amount to be budgeted
is expected to be $300 per unit or $78,000. Additional improvements may be
considered and will depend on the physical condition of the property as well as
replacement reserves and anticipated cash flow generated by the property.
The Trails: The Partnership completed approximately $275,000 in capital
expenditures at The Trails Apartments as of December 31, 1999, consisting
primarily of interior building improvements, appliance and floor covering
replacements, major landscaping and parking lot improvements. These improvements
were funded primarily from property operations. The Partnership is currently
evaluating the capital improvement needs of the property for the upcoming year.
The minimum amount to be budgeted is expected to be $300 per unit or $74,400.
Additional improvements may be considered and will depend on the physical
condition of the property as well as replacement reserves and anticipated cash
flow generated by the property.
Greensprings Manor: The Partnership completed approximately $342,000 in capital
expenditures at Greensprings Manor Apartments as of December 31, 1999,
consisting primarily of appliance and floor covering replacements, HVAC and
building enhancements. These improvements were funded primarily from property
operations. The Partnership is currently evaluating the capital improvement
needs of the property for the upcoming year. The minimum amount to be budgeted
is expected to be $300 per unit or $174,600. Additional improvements may be
considered and will depend on the physical condition of the property as well as
replacement reserves and anticipated cash flow generated by the property.
Shoppes at River Rock: The Partnership completed approximately $13,000 in
capital expenditures at Shoppes at River Rock during 1999 before its sale on
December 30, 1999. These improvements consisted of tenant improvements and were
funded from operating cash flow.
Item 3. Legal Proceedings
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The action purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates and the Insignia Merger (see
"Item 7. Financial Statements, Note B - Transfer of Control"). The plaintiffs
seek monetary damages and equitable relief, including judicial dissolution of
the Partnership. On June 25, 1998, the Managing General Partner filed a motion
seeking dismissal of the action. In lieu of responding to the motion, the
plaintiffs have filed an amended complaint. The Managing General Partner filed
demurrers to the amended complaint which were heard February 1999. Pending the
ruling on such demurrers, settlement negotiations commenced. On November 2,
1999, the parties executed and filed a Stipulation of Settlement settling
claims, subject to final court approval, on behalf of the Partnership and all
limited partners who own units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Superior Court of the
State of California, County of San Mateo, at which time the Court set a final
approval hearing for December 10, 1999. Prior to the December 10, 1999 hearing
the Court received various objections to the settlement, including a challenge
to the Court's preliminary approval based upon the alleged lack of authority of
class plaintiffs' counsel to enter the settlement. On December 14, 1999, the
Managing General Partner and its affiliates terminated the proposed settlement.
Certain plaintiffs have filed a motion to disqualify some of the plaintiffs'
counsel in the action. The Managing General Partner does not anticipate that
costs associated with this case will be material to the Partnership's overall
operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 1999, no matters were submitted to a vote
of Unit holders through the solicitation of proxies or otherwise.
PART II
Item 5. Market for the Partnership Equity and Related Partner Matters
The Partnership, a publicly-held limited partnership, offered and sold 1,224.25
limited partnership units aggregating $24,485,000. As of December 31, 1999 there
were 1,010 holders of record owning an aggregate of 1,224.25 Units. Affiliates
of the Managing General Partner owned 462.75 units or approximately 37.80% at
December 31, 1999. There is no established market for the Units and it is not
anticipated that any will develop in the future.
No distributions were made to the partners during 1999 and 1998. Future cash
distributions will depend on the levels of net cash generated from operations,
the availability of cash reserves and timing of debt maturities, refinancings
and/or property sales. The Partnership's distribution policy is reviewed on a
semi-annual basis. There can be no assurance, however, that the Partnership will
generate sufficient funds from operations after required capital expenditures to
permit distributions to its partners in 2000 or subsequent periods. See "Item 2.
Description of Properties - Capital Improvements" for information relating to
anticipated capital expenditures at the properties. In addition, the Partnership
may be restricted from making distributions if the amount in the reserve account
for Big Walnut Apartments and Greensprings Manor Apartments is less than $400
per apartment unit or $333,000 in total. As of December 31, 1999, the account
balances were $239,400 for Big Walnut Apartments and $239,600 for Greensprings
Manor Apartments.
Several tender offers were made by various parties, including affiliates of the
general partners, during the years ended December 31, 1999 and 1998. As a result
of these tender offers at December 31, 1999, AIMCO and its affiliates own 462.75
limited partnership units in the Partnership representing approximately 37.80%
of the outstanding units. It is possible that AIMCO or its affiliates will make
one or more additional offers to acquire additional limited partnership
interests in the Partnership for cash or in exchange for units in the operating
partnership of AIMCO. Under the Partnership Agreement, unitholders holding a
majority of the Units are entitled to take action with respect to a variety of
matters. When voting on matters, AIMCO would in all likelihood vote the Units it
acquired in a manner favorable to the interest of the Managing General Partner
because of their affiliation with the Managing General Partner.
Item 6. Management's Discussion and Analysis or Plan of Operation
The matters discussed in this Form 10-KSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-KSB and the other filings with the
Securities and Exchange Commission made by the Registrant from time to time. The
discussion of the Registrant's business and results of operations, including
forward-looking statements pertaining to such matters, does not take into
account the effects of any changes to the Registrant's business and results of
operations. Accordingly, actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those identified herein.
This item should be read in conjunction with the consolidated financial
statements and other items contained elsewhere in this report.
Results of Operations
The Registrant had a loss from continuing operations of approximately $589,000
for the year ended December 31, 1999 as compared to a loss of approximately
$654,000 for the year ended December 31, 1998. The decrease in the loss for the
year ended December 31, 1999 is the result of an increase in total revenues and
a decrease in total expenses at the Partnership's residential properties. The
increase in total revenues is attributable to the increase in rental revenues at
the Partnership's residential properties, partially offset by a casualty gain
recognized in 1998. Rental revenues increased due to an increase in average
rental rates at all the residential properties and an increase in occupancy at
all of the Partnership's residential properties except Big Walnut as noted in
"Item 2. Description of Properties". The increase in other income is the result
of larger cash balances being maintained in the Partnership's interest bearing
accounts. During 1998 a gain on casualty event was recognized as a result of
fire damage at The Trails Apartments. No such casualty occurred at the
Partnership's properties during the year ended December 31, 1999.
The decrease in total expenses is primarily the result of a reduction in loss on
disposal of property, general and administrative and interest expense, which was
partially offset by an increase in operating expense, depreciation expense and
property tax expense.
During 1998 a loss on disposal of property at LaFontenay I & II Apartments was
recognized due to the write-off of the undepreciated value of roofs that were
replaced and a loss on disposal of property at The Trails Apartments was
recognized due to the write-off of the undepreciated value of the building
destroyed by fire. Also, contributing to the decrease in expenses, was insurance
proceeds received during 1999 from water damage incurred due to structural
deficiencies at Big Walnut Apartments and insurance proceeds received from storm
damage at LaFontenay I & II Apartments.
Operating expense increased due to increases in advertising. Advertising
expenses increased as a result of management's efforts to increase occupancy at
all of its properties. The increase in operating expense was partially offset by
a decrease in insurance expense. The decrease in insurance expense is the result
of lower premiums due to a change in the policy carrier for the residential
properties during the fourth quarter of 1998.
Property taxes increased primarily due to the increase in the tax rate assessed
by the taxing authorities at all the residential properties excluding LaFontenay
which remained stable. General and administrative expense remained stable due
primarily to a decrease in general partners reimbursement fees, which was offset
by an increase in legal fees. Legal fees increased as a result of the settlement
of an outstanding litigation case in the first quarter of 1999. Also included in
general and administrative expenses were costs associated with the quarterly and
annual communications with investors and regulatory agencies and the annual
audit required by the Partnership agreement. Depreciation expense increased as a
result of the additional capital improvements which occurred in 1999.
The Partnership's net loss for the year ended December 31, 1999 was
approximately $2,366,000 as compared to a net loss of approximately $783,000 for
the year ended December 31, 1998. (See "Note E" of the financial statements for
a reconciliation of these amounts to the Partnership's federal taxable loss).
The increase in net loss is primarily attributable to the loss on sale of
discontinued operations of approximately $834,000 realized on the sale of
Shoppes at River Rock. On December 30, 1999, Shoppes at River Rock, located in
Murfreesboro, Tennessee, was sold to an unaffiliated third party for $1,600,000.
After closing expenses of approximately $103,000 the net proceeds received by
the Partnership were approximately $1,497,000. The Partnership used the proceeds
from the sale of the property to pay down the remaining debt encumbering the
property of approximately $1,491,000. Also contributing to the increase in net
loss is the recording of approximately $660,000 of an impairment loss on the
Shoppes of River Rock during September 1999. During September 1999, the
Partnership determined that the Shoppes at River Rock's carrying value was
overstated in accordance with Financial Accounting Standards Board Statement No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". Accordingly an impairment loss was recognized to
reflect the estimated fair value of the Shoppes at River Rock at September 30,
1999. The fair value was based upon current economic conditions and projected
future operational cash flows.
Effective January 1, 1999, the Partnership changed its method of accounting to
capitalize the cost of exterior painting and major landscaping on a prospective
basis. The Partnership believes that this accounting principle change is
preferable because it provides a better matching of expenses with the related
benefit of the expenditures and it is consistent with industry practice and the
policies of the Managing General Partner. The effect of the change in 1999 was
not material. The cumulative effect, had this change been applied to prior
periods, is not material. The accounting principle change will not have an
effect on cash flow, funds available for distributions or fees payable to the
Managing General Partner or affiliates.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Partnership from increases in
expenses. As part of this plan, the Managing General Partner attempts to protect
the Partnership from the burden of inflation-related increases in expenses by
increasing rents and maintaining a high overall occupancy level. However, due to
changing market conditions, which can result in the use of rental concessions
and rental reductions to offset softening market conditions, there is no
guarantee that the Managing General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
At December 31, 1999 the Partnership had cash and cash equivalents of
approximately $1,398,000 compared to approximately $971,000 at December 31,
1998. The increase in cash and cash equivalents of approximately $427,000 is
primarily due to $1,921,000 of cash provided by operating activities and
approximately $292,000 of cash provided by investing activities which was
partially offset by $1,786,000 of cash used in financing activities. Cash
provided by investing activities consisted of proceeds from the sale of the
commercial property (see discussion above) and net withdrawals from restricted
escrows partially offset by property improvements and replacements. Cash used in
financing activities consisted primarily of the repayment of the mortgage
encumbering the commercial property and payments on the mortgages encumbering
the Partnership's residential properties.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the investment properties to adequately maintain the
physical assets and other operating needs of the Registrant and to comply with
Federal, state, local, legal and regulatory requirements. The Partnership is
currently evaluating the capital improvement needs of the properties for the
upcoming year. The minimum amount to be budgeted is expected to be $300 per unit
or $402,300. Additional improvements may be considered and will depend on the
physical condition of the properties as well as replacement reserves and
anticipated cash flow generated by the properties.
The additional capital expenditures will be incurred only if cash is available
from operations and Partnership reserves. To the extent that such budgeted
capital improvements are completed the Registrant's distributable cash flow, if
any, may be adversely affected at least in the short term.
The Registrant's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Registrant. The mortgage
indebtedness of approximately $24,087,000, net of discount, is amortized over
varying periods with required balloon payments ranging from November 15, 2002 to
December 1, 2009. The Managing General Partner will attempt to refinance such
indebtedness and/or sell the properties prior to such maturity date. If a
property cannot be refinanced or sold for a sufficient amount, the Registrant
will risk losing such property through foreclosure.
No distributions were made to the partners during 1999 and 1998. Future cash
distributions will depend on the levels of net cash generated from operations,
the availability of cash reserves and timing of debt maturities, refinancings
and/or property sales. The Partnership's distribution policy is reviewed on a
semi-annual basis. There can be no assurance, however, that the Partnership will
generate sufficient funds from operations after required capital expenditures to
permit further distributions to its partners in 2000 or subsequent periods. In
addition, the Partnership may be restricted from making distributions if the
amount in the reserve account for Big Walnut Apartments and Greensprings Manor
Apartments is less than $400 per apartment unit or $333,000 in total. As of
December 31, 1999, the account balances were $239,400 for Big Walnut Apartments
and $239,600 for Greensprings Manor Apartments.
Tender Offer
Several tender offers were made by various parties, including affiliates of the
general partners, during the fiscal years ended December 31, 1999 and 1998. As a
result of these tender offers at December 31, 1999, AIMCO and its affiliates own
462.75 limited partnership units in the Partnership representing approximately
37.80% of the outstanding units. It is possible that AIMCO or its affiliates
will make one or more additional offers to acquire additional limited
partnership interests in the Partnership for cash or in exchange for units in
the operating partnership of AIMCO. Under the Partnership Agreement, unitholders
holding a majority of the Units are entitled to take action with respect to a
variety of matters. When voting on matters, AIMCO would in all likelihood vote
the Units it acquired in a manner favorable to the interest of the Managing
General Partner because of their affiliation with the Managing General Partner.
Year 2000 Compliance
General Description
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership is
dependent upon the Managing General Partner and its affiliates for management
and administrative services ("Managing Agent"). Any of the Managing Agent's
computer programs or hardware that had date-sensitive software or embedded chips
might have recognized a date using "00" as the year 1900 rather than the year
2000. This could have resulted in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Computer Hardware, Software and Operating Equipment
In 1999, the Managing Agent completed all phases of its Year 2000 program by
completing the replacement and repair of any hardware or software system or
operating equipment that was not yet Year 2000 compliant. The Managing Agent's
hardware and software systems and its operating equipment are now Year 2000
compliant. No material failure or erroneous results have occurred in the
Managing Agent's computer applications related to the failure to reference the
Year 2000 to date.
Third Parties
To date, the Managing Agent is not aware of any significant supplier or
subcontractor (external agent) or financial institution of the Partnership that
has a Year 2000 issue that would have a material impact on the Partnership's
results of operations, liquidity or capital resources. However, the Managing
Agent has no means of ensuring or determining the Year 2000 compliance of
external agents. At this time, the Managing Agent does not believe that a Year
2000 issue of any non-compliant external agent will have a material impact on
the Partnership's financial position or results of operations.
Costs
The total cost of the Managing Agent's Year 2000 project was approximately $3.2
million and was funded from operating cash flows.
Risks Associated with the Year 2000
The Managing Agent completed all necessary phases of its Year 2000 program in
1999, and did not experience system or equipment malfunctions related to a
failure to reference the Year 2000. The Managing Agent or Partnership have not
been materially adversely effected by disruptions in the economy generally
resulting from the Year 2000 issue.
At this time, the Managing Agent does not believe that the Partnership's
businesses, results of operations or financial condition will be materially
adversely effected by the Year 2000 issue.
Contingency Plans Associated with the Year 2000
The Managing Agent has not had to implement contingency plans such as manual
workarounds or selecting new relationships for its banking or elevator operation
activities in order to avoid the Year 2000 issue.
Item 7. Financial Statements
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
LIST OF FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheet - December 31, 1999
Consolidated Statements of Operations - Years ended December 31, 1999 and 1998
Consolidated Statements of Changes in Partners' Deficit - Years ended December
31, 1999 and 1998
Consolidated Statements of Cash Flows - Years ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Partners
Davidson Diversified Real Estate II, L.P.
We have audited the accompanying consolidated balance sheet of Davidson
Diversified Real Estate II, L.P. as of December 31, 1999, and the related
consolidated statements of operations, changes in partners' deficit and cash
flows for each of the two years in the period ended December 31, 1999. 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 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 the Partnership's 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Davidson
Diversified Real Estate II, L.P. at December 31, 1999, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Greenville, South Carolina
February 25, 2000
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)
December 31, 1999
<TABLE>
<CAPTION>
Assets
<S> <C> <C>
Cash and cash equivalents $ 1,398
Receivables and deposits 580
Restricted escrows 512
Other assets 357
Investment properties (Notes D & G):
Land $ 2,603
Buildings and related personal property 37,671
40,274
Less accumulated depreciation (21,426) 18,848
$21,695
Liabilities and Partners' Deficit
Liabilities
Accounts payable 485
Tenant security deposit payable 167
Accrued property taxes 599
Other liabilities 667
Due to Managing General Partner (Note F) 502
Mortgage notes payable (Note D) 24,087
Partners' Deficit
General partners $ (531)
Limited partners (1,224.25 units issued and
outstanding) (4,281) (4,812)
$21,695
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
<S> <C> <C>
Revenues: (restated)
Rental income $ 7,552 $ 7,189
Other income 527 516
Casualty gain (Note I) -- 328
Total revenues 8,079 8,033
Expenses:
Operating 3,878 3,845
General and administrative 323 339
Depreciation 1,795 1,664
Interest 2,050 2,075
Property taxes 622 605
Loss on disposal of property -- 159
Total expenses 8,668 8,687
Loss from continuing operations (589) (654)
Loss from discontinued operation (Note C) (943) (129)
Loss on sale of discontinued operation (Note C) (834) --
Net loss $ (2,366) $ (783)
Net loss allocated to general partners (2%) $ (47) $ (16)
Net loss allocated to limited partners (98%) (2,319) (767)
$ (2,366) $ (783)
Per limited partnership unit:
Loss from continuing operations $ (471.31) $ (523.59)
Loss from discontinued operation (755.30) (102.92)
Loss on sale of discontinued operation (667.61) --
Net loss $(1,894.22) $ (626.51)
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(in thousands, except unit data)
<TABLE>
<CAPTION>
Limited
Partnership General Limited
Units Partners Partners Total
<S> <C> <C> <C> <C>
Original capital contributions 1,224.25 $ 1 $24,485 $24,486
Partners' deficit at
December 31, 1997 1,224.25 $ (468) $(1,195) $(1,663)
Net loss for the year ended
December 31, 1998 -- (16) (767) (783)
Partners' deficit at
December 31, 1998 1,224.25 (484) (1,962) (2,446)
Net loss for the year ended
December 31, 1999 -- (47) (2,319) (2,366)
Partners' deficit at
December 31, 1999 1,224.25 $ (531) $(4,281) $(4,812)
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLDIATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (2,366) $ (783)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 2,133 2,038
Amortization of discounts and loan costs 239 228
Casualty gain -- (328)
Impairment loss on property - discontinued operations 660 --
Loss on disposal of property -- 159
Loss on sale of discontinued operations 834 --
Change in accounts:
Receivables and deposits 234 124
Other assets (23) 16
Accounts payable 160 8
Tenant security deposit liabilities (21) (1)
Accrued property taxes (98) 6
Other liabilities 169 227
Net cash provided by operating activities 1,921 1,694
Cash flows from investing activities:
Net proceeds from sale of investment property 1,497 --
Property improvements and replacements (1,305) (1,461)
Net withdrawals from restricted escrows 100 285
Insurance proceeds from casualty event -- 358
Lease commissions -- (44)
Net cash provided by (used in) investing activities 292 (862)
Cash flows from financing activities:
Advances from Managing General Partner 502 --
Payments on mortgage notes payable (797) (746)
Repayment of mortgage note payable (1,491) --
Net cash used in financing activities (1,786) (746)
Net increase in unrestricted cash
and cash equivalents 427 86
Cash and cash equivalents at beginning of the year 971 885
Cash and cash equivalents at end of year $ 1,398 $ 971
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,004 $2,029
Supplemental disclosure of noncash activity:
Property improvements and replacements in accounts payable $ 91 $ --
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
Notes to Consolidated Financial Statements
December 31, 1999
Note A - Organization and Significant Accounting Policies
Organization
Davidson Diversified Real Estate II, L.P. (the "Partnership" or "Registrant") is
a Delaware limited partnership organized in June 1984 to acquire and operate
residential and commercial real estate properties. The Partnership's Managing
General Partner is Davidson Diversified Properties, Inc (the "Managing General
Partner"). Prior to February 25, 1998, the Managing General Partner was a
wholly-owned subsidiary of MAE GP Corporation ("MAE GP"). Effective February 25,
1998, MAE GP merged into Insignia Properties Trust ("IPT"), which was merged
into Apartment Investment and Management Company ("AIMCO") effective February
26, 1999. Thus the Managing General Partner is now a wholly-owned subsidiary of
AIMCO. See "Note B" Transfer of Control". The directors and officers of the
Managing General Partner also serve as executive officers of AIMCO. The
Partnership commenced operations on October 16, 1984, and completed its
acquisition of investment properties prior to December 31, 1985. The Partnership
Agreement provides that the Partnership is to terminate on December 31, 2008
unless terminated prior to such date. The Partnership's remaining commercial
property, Shoppes at River Rock, was sold on December 30, 1999. As of December
31, 1999, the Partnership operates four apartment properties located in or near
major urban areas in the United States.
Principles of Consolidation
The financial statements include all the accounts of the Partnership and its
four 99.9% owned partnerships. The Managing General Partner of the consolidated
partnerships is Davidson Diversified Properties, Inc. Davidson Diversified
Properties, Inc. may be removed as the general partner of the consolidated
partnership by the Registrant; therefore, the consolidated partnerships are
controlled and consolidated by the Registrant. All significant interpartnership
balances have been eliminated.
Allocations of Profits, Gains & Losses
Net income, other than that arising from the occurrence of a sale or
refinancing, and net loss shall be allocated 2% to the general partners and 98%
to the limited partners.
Cash from sales or refinancings shall be distributed in the following order of
priority:
First, to the limited partners, an amount which when added to all prior
distributions of cash from sales or refinancings shall equal their original
invested capital, plus an amount which, when added to all prior distributions to
the limited partners (excluding distributions which are deducted in the
calculation of adjusted invested capital), will equal 8% per annum cumulative
noncompounded on the adjusted invested capital, commencing the last day of the
calendar quarter in which each limited partner is admitted to the Partnership
through the date of payment; and second, after payment to an affiliate of the
general partners of an amount equal to its subordinated real estate commissions,
85% of the remaining cash from sales or refinancings to the limited partners and
15% of the remaining cash from sales or refinancings to the general partners.
Allocation of Cash Distributions
Cash distributions by the Partnership are allocated between general and limited
partners in accordance with the Partnership Agreement. The Partnership Agreement
provides that 98% of distributions of adjusted cash from operations are
allocated to the limited partners and 2% to the general partners. Cash from
operations is defined as the excess of cash received from operations less
operating expenses paid, adjusted for certain specified items which primarily
include mortgage payments on debt, property improvements and replacements not
previously reserved, and the effects of other adjustments to reserves including
reserve amounts deemed necessary by the Managing General Partner.
Distributions made from reserves no longer considered necessary by the general
partners are considered to be additional adjusted cash from operations for
allocation purposes. No cash distributions to the partners were made during the
years ended December 31, 1999 and 1998.
Cash from sales or refinancings (as defined in the Partnership Agreement) shall
be distributed to the limited partners until each limited partner has received
an amount equal to a cumulative 8% per annum of the average of the limited
partners' adjusted invested capital, less any prior distributions. The general
partners are then entitled to receive 3% of the selling price of properties sold
where they acted as a broker. The limited partners will then be allocated 85% of
any remaining distributions and the general partners will receive 15%.
Distributions may be restricted by the requirement to deposit net operating
income (as defined in the mortgage note) from Greensprings Manor Apartments and
Big Walnut Apartments into the Reserve Account until the Reserve Account is
funded in an amount equal to a minimum of $400 per apartment up to a maximum of
$1,000 per apartment ($333,000 to $833,000). As of December 31, 1999, the
Partnership has deposits of approximately $479,000 in its Reserve Accounts.
Restricted Escrows
Reserve Account - A general Reserve Account of $203,000 was established
with the refinancing proceeds for Big Walnut Apartments and Greensprings
Manor Apartments. These funds were established to cover necessary repairs
and replacements of existing improvements, debt service, out-of-pocket
expenses incurred for ordinary and necessary administrative tasks, and
payment of real property taxes and insurance premiums. The Partnership is
required to deposit net operating income (as defined in the mortgage note)
from each refinanced property to the respective reserve account until the
reserve accounts equal to $400 per apartment unit or approximately
$333,000 in total. At December 31, 1999, the account balances were
approximately $239,400 for Big Walnut Apartments and approximately
$239,600 for Greensprings Manor Apartments.
Replacement Reserve - LaFontenay Apartments has a replacement reserve as
required by its lender of approximately $27,000 at December 31, 1999, for
capital improvements.
Other Reserve - The Trails has another reserve which has a balance of
approximately $6,000 at December 31, 1999 for capital improvements.
Investment Properties
Investment properties consist of four apartment complexes and are stated at
cost. Acquisition fees are capitalized as a cost of real estate. In accordance
with Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
the Partnership records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. Costs of apartment
properties that have been permanently impaired have been written down to
appraised value. No adjustments for impairment of value were recorded in the
years ended December 31, 1999 and 1998 for the Partnership's residential
properties. During September 1999, the Partnership determined that the Shoppes
at River Rock, a commercial property, located in Murfreesboro, Tennessee with a
carrying value of $2,988,000 was impaired and its value was written down by
approximately $660,000 to reflect its fair value at September 30, 1999 of
approximately $2,328,000. The fair value was based upon current economic
conditions and projected future operational cash flows. This property was sold
on December 30, 1999 (see Note C).
Depreciation
Depreciation is provided by the straight-line method over the estimated lives of
the apartment properties and related personal property. For Federal income tax
purposes, the accelerated cost recovery method is used (1) for real property
over 15 years for additions prior to March 16, 1984; 18 years for additions
after March 15, 1984, and before May 9, 1985, and 19 years for additions after
May 8, 1985, and before January 1, 1987, and (2) for personal property over 5
years for additions prior to January 1, 1987. As a result of the Tax Reform Act
of 1986, for additions after December 31, 1986, the modified accelerated cost
recovery method is used for depreciation of (1) real property additions over 27
1/2 years, and (2) personal property additions over 5 years.
Effective January 1, 1999, the Partnership changed its method to capitalize the
cost of exterior painting and major landscaping (see Note K).
Loan Costs
Loan costs of approximately $614,000 less accumulated amortization of
approximately $340,000 are included in other assets and are being amortized on a
straight-line basis over the life of the respective loans.
Cash and Cash Equivalents
Includes cash on hand and in banks, and money market accounts. At certain times,
the amount of cash deposited at a bank may exceed the limit on insured deposits.
Tenant Security Deposits
The Partnership requires security deposits from lessees for the duration of the
lease and such deposits are included in receivables and deposits. The security
deposits are refunded when the tenant vacates, provided the tenant has not
damaged its space and is current on rental payments.
Leases
The Partnership generally leases apartment units for twelve-month terms or less.
The Partnership recognizes income as earned on its leases. In addition, the
Managing General Partner's policy is to offer rental concessions during
particularly slow months or in response to heavy competition from other similar
complexes in the area. Concessions are charged against rental income as
incurred.
Advertising Costs
Advertising costs of approximately $173,000 and approximately $133,000 for the
years ended December 31, 1999 and 1998, respectively, are charged to operating
expense as incurred.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about
Fair Value of Financial Instruments", as amended by SFAS No. 119, "Disclosures
about Derivative Financial Instruments and Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Fair value is defined in the SFAS as the amount at which
the instruments could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The Partnership believes
that the carrying amount of its financial instruments (except for long term
debt) approximates their fair value due to the short term maturity of these
instruments. The fair value of the Partnership's long term debt, after
discounting the scheduled loan payments to maturity, approximates its carrying
balance.
Segment Reporting
SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information
established standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. See "Note H"
for required disclosures.
Uses of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 1998 balances to conform to the
1999 presentation.
Note B - Transfer of Control
Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia Financial Group, Inc. and IPT merged into AIMCO, a
publicly traded real estate investment trust, with AIMCO being the surviving
corporation (the "Insignia Merger"). As a result, AIMCO acquired 100% ownership
interest in the Managing General Partner. The Managing General Partner does not
believe that this transaction has had or will have a material effect on the
affairs and operations of the Partnership.
Note C - Disposition of Property/Operating Segment
On December 30, 1999, Shoppes at River Rock, located in Mufreesboro, Tennessee,
was sold to an unaffiliated third party for $1,600,000. After closing expenses
of approximately $103,000 the net proceeds received by the Partnership were
approximately $1,497,000. The Partnership used the proceeds from the sale of the
property to pay off the remaining debt encumbering the property of approximately
$1,491,000.
Shoppes at River Rock was the only commercial property owned by the Partnership
and represented one segment of the Partnership's operations. Due to the sale of
the property on December 30, 1999, the results of the commercial segment have
been shown as loss from discontinued operations and loss on sale of discontinued
operations as of December 31, 1999 and 1998 and accordingly, the statements of
operations have been restated to reflect this presentation. Revenues of this
property were approximately $762,000 and $1,110,000 for 1999 and 1998,
respectively. Loss from operations were approximately $943,000 (including the
impairment loss of $660,000 mentioned in Note A) and $129,000 for 1999 and 1998,
respectively.
Note D - Mortgage Notes Payable
<TABLE>
<CAPTION>
Principal Monthly Principal
Balance At Payment Stated Balance
December 31, Including Interest Maturity Due At
Property 1999 Interest Rate Date Maturity
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
Big Walnut Apartments
1st mortgage $ 4,456 $ 43 7.60% 11/15/02 $ 3,912
2nd mortgage 167 1 7.60% 11/15/02 167
LaFontenay I & II
Apartments
1st mortgage 7,166 51 7.50% 09/01/07 6,369
The Trails Apartments
1st mortgage 5,565 41 (1) 12/01/09 3,015
Greensprings Manor
Apartments
1st mortgage 7,833 75 7.60% 11/15/02 6,875
2nd mortgage 294 2 7.60% 11/15/02 294
$25,481 $ 213 $20,632
Less unamortized
discounts (1,394)
Total $24,087
</TABLE>
(1) Adjustable rate based on 75% of the interest rate on new-issue long-term
A-rated utility bonds as determined on the first day of each calendar
quarter. The rate at December 31, 1999 was 5.7375%.
The discount is reflected as a reduction of the mortgage notes payable and
increases the effective rate of the debt to 8.76% for Big Walnut Apartments and
Greensprings Manor Apartments and 8.00% for The Trails Apartments.
The MultiFamily Housing Revenue Bonds and Note Agreement collateralized by The
Trails Apartments were called and, therefore, payable in full on February 1,
1997 in accordance with the terms of the agreements. On June 30, 1997 the
Partnership entered into a Modification of Bond Documents with the issuer.
Pursuant to the modification, the call notice was rescinded. The modification
converted the monthly payments from interest only to principal and interest
payments with an amortization period of twenty years. The note and bond mature
on December 1, 2009 with a balloon payment. Pursuant to the modified terms, the
Bondholder shall not exercise the call right on the Bond on a date prior to the
fifth anniversary of the modification.
Mortgages are nonrecourse and are collateralized by the related property and
improvements and by pledge of revenues from the property and improvements of the
Partnership. Certain of the notes require prepayment penalties if repaid prior
to maturity and prohibit resale of the properties subject to existing
indebtedness.
Scheduled principal payments of the mortgage notes payable subsequent to
December 31, 1999, are as follows (in thousands):
2000 $ 761
2001 817
2002 12,027
2003 322
2004 343
Thereafter 11,211
$25,481
Note E - Income Taxes
The Partnership received a ruling from the Internal Revenue Service that it is
to be classified as a partnership for Federal income tax purposes. Accordingly,
no provision for income taxes is made in the consolidated financial statements
of the Partnership. Taxable income or loss of the Partnership is reported in the
income tax returns of its partners.
The following is a reconciliation of reported net loss and Federal taxable loss
(in thousands, except per unit data):
1999 1998
Net loss as reported $ (2,366) $ (783)
Add (deduct)
Depreciation differences (107) (2)
Asset removals 204 159
Amortization of discounts 53 47
Casualty gain -- (519)
Unearned income 78 8
Miscellaneous 74 61
Federal taxable loss $ (2,064) $ (1,029)
Federal taxable loss per
limited partnership unit $(1,651.62) $ (823.83)
The following is a reconciliation between the Partnership's reported amounts and
Federal tax basis of net assets and liabilities (in thousands):
Net liabilities as reported $ (4,812)
Land and buildings 3,497
Accumulated depreciation (9,767)
Other (816)
Net deficit - Federal tax basis $(11,898)
Note F - Transactions with Affiliated Parties
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
Partnership activities. The Partnership Agreement provides for (i) certain
payments to affiliates for services and (ii) reimbursement of certain expenses
incurred by affiliates on behalf of the Partnership. The following amounts were
paid or accrued to the Managing General Partner and its affiliates during the
years ended December 31, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in
operating expenses) $ 411 $ 421
Reimbursement for services of affiliates
(included in general and administrative
expense, operating expense and
investment properties) 221 390
Real estate commission on the sale of
Shoppes at River Rock 48 --
During the years ended December 31, 1999 and 1998, affiliates of the Managing
General Partner were entitled to receive 5% of gross receipts from all of the
Registrant's residential properties for providing property management services.
The Registrant paid to such affiliates $411,000 and $390,000 for the years ended
December 31, 1999 and 1998, respectively. For the nine months ended September
30, 1998 affiliates of the Managing General Partner were entitled to receive
varying percentages of gross receipt from the Registrant's commercial property
for providing management services. The Registrant paid to such affiliates
$31,000 for the nine months ending September 30, 1998. No such fees were paid
for the year ended December 31, 1999 as these services were provided by an
unrelated third party effective October 1, 1998.
An affiliate of the Managing General Partner was entitled to receive
reimbursement of accountable administrative expenses amounting to approximately
$221,000 and $390,000 for the years ended December 31, 1999 and 1998,
respectively. Included in these amounts are approximately $43,000 and $111,000
for reimbursement for construction oversight costs in 1999 and 1998,
respectively. Also included is approximately $40,000 of lease commissions for
1998. No such costs were incurred during 1999. As of December 31, 1999 and 1998,
$226,000 and $142,000, respectively, of these balances have not been paid and
are reflected in other liabilities.
During 1999 the Managing General Partner loaned the Partnership approximately
$502,000 to cover operational expenses required at Greensprings Manor
Apartments. This loan was made in accordance with the terms of the Partnership
Agreement. Interest is charged at prime plus 1%.
The Partnership accrued a real estate commission of $48,000 upon the sale of
Shoppes at River Rock due to the Managing General Partner. Payment of this
commission is subordinate to the limited partners receiving their original
invested capital plus a cumulative non-compounded annual return of 8% on their
adjusted invested capital.
Several tender offers were made by various parties, including affiliates of the
general partners, during the years ended December 31, 1999 and 1998. As a result
of these tender offers at December 31, 1999, AIMCO and its affiliates own 462.75
limited partnership units in the Partnership representing approximately 37.80%
of the outstanding units. It is possible that AIMCO or its affiliates will make
one or more additional offers to acquire additional limited partnership
interests in the Partnership for cash or in exchange for units in the operating
partnership of AIMCO. Under the Partnership Agreement, unitholders holding a
majority of the Units are entitled to take action with respect to a variety of
matters. When voting on matters, AIMCO would in all likelihood vote the Units it
acquired in a manner favorable to the interest of the Managing General Partner
because of their affiliation with the Managing General Partner.
Note G - Investment Properties and Accumulated Depreciation
<TABLE>
<CAPTION>
Initial Cost
To Partnership
(in thousands)
Buildings Net Cost
and Related Capitalized
Personal Subsequent to
Apartment Properties Encumbrances Land Property Acquisition
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Big Walnut Apartments $ 4,623 $ 520 $ 6,505 $ 1,668
LaFontenay Apartments 7,166 650 6,719 2,460
The Trails Apartments 5,565 586 7,054 1,578
Greensprings Manor
Apartments 8,127 847 9,684 2,003
25,481
Less unamortized discounts (1,394)
Total $24,087 $ 2,603 $29,962 $ 7,709
</TABLE>
Gross Amount At Which Carried
At December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Buildings
And
Related
Personal Accumulated Date of Date Depreciable
Description Land Property Total Depreciation Construction Acquired Life-Years
Apartment Properties
<S> <C> <C> <C> <C> <C> <C> <C>
Big Walnut $ 520 $ 8,173 $ 8,693 $ 4,871 1971 03/28/85 5/25
LaFontenay 650 9,179 9,829 5,085 1971-1973 10/31/84 5/25
The Trails 586 8,632 9,218 4,484 1984-1985 08/30/85 5/25
Greensprings Manor 847 11,687 12,534 6,986 1970-1975 09/30/85 5/25
Totals $2,603 $37,671 $40,274 $21,426
</TABLE>
Reconciliation of "Investment Properties and Accumulated Depreciation"
Years Ended December 31,
1999 1998
(in thousands)
Real Estate
Balance at beginning of year $45,605 $44,544
Property improvements 1,396 1,461
Disposals of property (6,727) (400)
Balance at end of year $40,274 $45,605
Accumulated Depreciation
Balance at beginning of year $23,090 $21,263
Additions charged to expense 2,133 2,038
Disposal of property (3,797) (211)
Balance at end of year $21,426 $23,090
The aggregate cost of the real estate for Federal income tax purposes at
December 31, 1999 and 1998, is approximately $43,771,000 and $49,314,000,
respectively. The accumulated depreciation taken for Federal income tax purposes
at December 31, 1999 and 1998, is approximately $31,193,000 and $33,150,000,
respectively.
Note H - Segment Reporting
Description of the types of products and services from which the reportable
segment derives its revenues:
The Partnership had two reportable segments: residential properties and
commercial properties. The Partnership's residential property segment consists
of four apartment complexes located in Ohio, Kentucky, Tennessee, and Indiana.
The Partnership rents apartment units to tenants for terms that are typically
twelve months or less. The commercial property segment consisted of a shopping
center located in Tennessee, which was sold on December 30, 1999. As a result of
the sale of the commercial property during 1999 the commercial segment is shown
as discontinued operations.
Measurement of segment profit and loss:
The Partnership evaluates performance based on segment profit (loss) before
depreciation. The accounting policies of the reportable segment are the same as
those described in the summary of significant accounting policies.
Factors management used to identify the enterprise's reportable segment:
The Partnership's reportable segment consists of investment properties that
offer different products and services. The reportable segments are each managed
separately because they provide distinct services with different types of
products and customers.
Segment information for the years ended December 31, 1999 and 1998 is shown in
the tables below. The "Other" column includes partnership administration related
items and income and expense not allocated to the reportable segment (in
thousands).
<TABLE>
<CAPTION>
1999
Residential Commercial Other Totals
(discontinued)
<S> <C> <C> <C> <C>
Rental income $ 7,552 $ -- $ -- $ 7,552
Other income 507 -- 20 527
Interest expense 2,050 -- -- 2,050
Depreciation 1,795 -- -- 1,795
General and administrative expense -- -- 323 323
Loss from discontinued operations -- (943) -- (943)
Loss on sale of discontinued
operations -- (834) -- (834)
Segment loss (286) (1,777) (303) (2,366)
Total assets 20,972 -- 723 21,695
Capital expenditures for investment
properties 1,383 13 -- 1,396
1998
Residential Commercial Other Totals
(discontinued)
Rental income $ 7,189 $ -- $ -- $ 7,189
Other income 497 -- 19 516
Interest expense 2,075 -- -- 2,075
Depreciation 1,664 -- -- 1,664
General and administrative expense -- -- 339 339
Gain (loss) on casualty event 328 -- -- 328
Gain (loss) on disposal of assets 159 -- -- 159
Loss from discontinued operations -- (129) -- (129)
Segment loss (334) (129) (320) (783)
Total assets 21,364 3,662 360 25,386
Capital expenditures for investment
properties 1,442 19 -- 1,461
</TABLE>
Note I - Casualty Event
In December 1997, a fire destroyed one building at The Trails Apartments. As a
result, the asset and related accumulated depreciation were written off in 1997.
At December 31, 1997, the proceeds received on the casualty approximated the
loss on write-off of the fire-damaged asset, with the difference of
approximately $9,000 being recorded as an insurance receivable. Therefore, no
gain or loss relating to this fire was recognized in 1997. The reconstruction of
the destroyed building was completed in 1998 with the costs reflected in
investment properties. The Partnership recognized a casualty gain of
approximately $328,000 in 1998, with insurance proceeds received totaling
$358,000.
Note J - Legal Proceedings
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The action purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates and the Insignia Merger (see
"Note B - Transfer of Control"). The plaintiffs seek monetary damages and
equitable relief, including judicial dissolution of the Partnership. On June 25,
1998, the Managing General Partner filed a motion seeking dismissal of the
action. In lieu of responding to the motion, the plaintiffs have filed an
amended complaint. The Managing General Partner filed demurrers to the amended
complaint which were heard February 1999. Pending the ruling on such demurrers,
settlement negotiations commenced. On November 2, 1999, the parties executed and
filed a Stipulation of Settlement settling claims, subject to final court
approval, on behalf of the Partnership and all limited partners who own units as
of November 3, 1999. Preliminary approval of the settlement was obtained on
November 3, 1999 from the Superior Court of the State of California, County of
San Mateo, at which time the Court set a final approval hearing for December 10,
1999. Prior to the December 10, 1999 hearing the Court received various
objections to the settlement, including a challenge to the Court's preliminary
approval based upon the alleged lack of authority of class plaintiffs' counsel
to enter the settlement. On December 14, 1999, the Managing General Partner and
its affiliates terminated the proposed settlement. Certain plaintiffs have filed
a motion to disqualify some of the plaintiffs' counsel in the action. The
Managing General Partner does not anticipate that costs associated with this
case will be material to the Partnership's overall operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
Note K - Change in Accounting Principle
Effective January 1, 1999, the Partnership changed its method of accounting to
capitalize the cost of exterior painting and major landscaping on a prospective
basis. The Partnership believes that this accounting principle change is
preferable because it provides a better matching of expenses with the related
benefit of the expenditures and it is consistent with industry practice and the
policies of the Managing General Partner. The effect of the change in 1999 was
not material. The cumulative effect, had this change been applied to prior
periods, is not material. The accounting principle change will not have an
effect on cash flow, funds available for distributions or fees payable to the
Managing General Partner or affiliates.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The Registrant has no directors or officers. The Managing General Partner of the
Registrant is Davidson Diversified Properties, Inc. The names and ages of, as
well as the position and officers held by the present executive officers and
directors of the Managing General Partner are set forth below. There are no
family relationships between or among any officers or directors.
Name Age Position
Patrick J. Foye 42 Executive Vice President and Director
Martha L. Long 40 Senior Vice President and Controller
Patrick J. Foye has been Executive Vice President and Director of the Managing
General Partner since October 1, 1998. Mr. Foye has served as Executive Vice
President of AIMCO since May 1998. Prior to joining AIMCO, Mr. Foye was a
partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to
1998 and was Managing Partner of the firm's Brussels, Budapest and Moscow
offices from 1992 through 1994. Mr. Foye is also Deputy Chairman of the Long
Island Power Authority and serves as a member of the New York State
Privatization Council. He received a B.A. from Fordham College and a J.D. from
Fordham University Law School.
Martha L. Long has been Senior Vice President and Controller of the Managing
General Partner and AIMCO since October 1998, as a result of the acquisition of
Insignia Financial Group, Inc. From June 1994 until January 1997, she was the
Controller for Insignia, and was promoted to Senior Vice President - Finance and
Controller in January 1997, retaining that title until October 1998. From 1988
to June 1994, Ms. Long was Senior Vice President and Controller for The First
Savings Bank, FSB in Greenville, South Carolina.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Registrant under Rule 16a-3(e) during the Registrant's most recent fiscal
year and Form 5 and amendments thereto furnished to the Registrant with respect
to its most recent fiscal year, the Registrant is not aware of any director,
officer, beneficial owner of more than ten percent of the units of limited
partnership interest in the Registrant that failed to file on a timely basis, as
disclosed in the above Forms, reports required by section 16(a) of the Exchange
Act during the most recent fiscal year or prior fiscal years except as follows:
AIMCO Properties, L.P. and its joint filers failed to timely file a Form 3 with
respect to its acquisition of Units and AIMCO and its joint filers failed to
timely file a Form 4 with respect to its acquisition of Units.
Item 10. Executive Compensation
None of the directors and officers of the Managing General Partner received any
remuneration from the Registrant.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Except as noted below, no person or entity was known by the Registrant to be the
beneficial owner of more than 5% of the Limited Partnership Units of the
Registrant as of December 31, 1999.
Entity Number of Units Percentage
Cooper River Properties, LLC 122.75 10.03%
(an affiliate of AIMCO)
Insignia Properties, LP 35.75 2.92%
(an affiliate of AIMCO)
Davidson Diversified Properties, Inc. .25 .02%
(an affiliate of AIMCO)
AIMCO Properties, LP 304.00 24.83%
(an affiliate of AIMCO)
Cooper River Properties, LLC, Insignia Properties, LP, and Davidson Diversified
Properties, Inc., are indirectly ultimately owned by AIMCO. Their business
address is 55 Beattie Place, Greenville, SC 29602.
AIMCO Properties LP is indirectly ultimately controlled by AIMCO. Its business
address is 2000 South Colorado Boulevard, Denver, Colorado 80222.
No director or officer of the Managing General Partner owns any Units.
Item 12. Certain Relationships and Related Transactions
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
Partnership activities. The Partnership Agreement provides for (i) certain
payments to affiliates for services and (ii) reimbursement of certain expenses
incurred by affiliates on behalf of the Partnership. The following amounts were
paid or accrued to the Managing General Partner and its affiliates during the
years ended December 31, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in
operating expenses) $ 411 $ 421
Reimbursement for services of affiliates
(included in general and administrative
expense, operating expenses and
investment properties) 221 390
Real estate commission on the sale of
Shoppes at River Rock 48 --
During the years ended December 31, 1999 and 1998, affiliates of the Managing
General Partner were entitled to receive 5% of gross receipts from all of the
Registrant's residential properties for providing property management services.
The Registrant paid to such affiliates $411,000 and $390,000 for the years ended
December 31, 1999 and 1998, respectively. For the nine months ended September
30, 1998 affiliates of the Managing General Partner were entitled to receive
varying percentages of gross receipt from the Registrant's commercial property
for providing management services. The Registrant paid to such affiliates
$31,000 for the nine months ending September 30, 1998. No such fees were paid
for the year ended December 31, 1999 as these services were provided by an
unrelated third party effective October 1, 1998.
An affiliate of the Managing General Partner was entitled to receive
reimbursement of accountable administrative expenses amounting to approximately
$221,000 and $390,000 for the years ended December 31, 1999 and 1998,
respectively. Included in these amounts are approximately $43,000 and $111,000
for reimbursement for construction oversight costs in 1999 and 1998,
respectively. Also included is approximately $40,000 of lease commissions for
1998. No such costs were incurred during 1999. As of December 31, 1999 and 1998,
$226,000 and $142,000, respectively, of these balances have not been paid and
are reflected in other liabilities.
During 1999 the Managing General Partner loaned the Partnership approximately
$502,000 to cover operational expenses required at Greensprings Manor
Apartments. This loan was made in accordance with the terms of the Partnership
Agreement. Interest is charged at prime plus 1%.
The Partnership accrued a real estate commission of $48,000 upon the sale of
Shoppes at River Rock due to the Managing General Partner. Payment of this
commission is subordinate to the limited partners receiving their original
invested capital plus a cumulative non-compounded annual return of 8% on their
adjusted invested capital.
Several tender offers were made by various parties, including affiliates of the
general partners, during the years ended December 31, 1999 and 1998. As a result
of these tender offers at December 31, 1999, AIMCO and its affiliates own 462.75
limited partnership units in the Partnership representing approximately 37.80%
of the outstanding units. It is possible that AIMCO or its affiliates will make
one or more additional offers to acquire additional limited partnership
interests in the Partnership for cash or in exchange for units in the operating
partnership of AIMCO. Under the Partnership Agreement, unitholders holding a
majority of the Units are entitled to take action with respect to a variety of
matters. When voting on matters, AIMCO would in all likelihood vote the Units it
acquired in a manner favorable to the interest of the Managing General Partner
because of their affiliation with the Managing General Partner.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 18, Independent Accountants' Preferability Letter for Change
in Accounting Principle, is filed as an exhibit to this report.
Exhibit 27, Financial Data Schedule, is filed as an exhibit to this
report.
(b) Reports on Form 8-K filed in the fourth quarter of calendar year 1999:
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
By: Davidson Diversified Properties, Inc.
Managing General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Martha L. Long
Martha L. Long
Senior Vice President
and Controller
Date:
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Partnership and in the capacities and on the
dates indicated.
/s/Patrick J. Foye Executive Vice President Date:
Patrick J. Foye and Director
/s/Martha L. Long Senior Vice President Date:
Martha L. Long and Controller
<PAGE>
DAVIDSON DIVERSIFIED REAL ESTATE II, LP
EXHIBIT INDEX
Exhibit Number Description of Exhibit
2.1 Agreement and Plan of Merger, dated as of October 1, 1998, by
and between AIMCO and IPT (incorporated by reference to
Exhibit 2.1 of IPT's Current Report on Form 8-K, File No.
1-14179, dated October 1, 1998).
3 Partnership Agreement dated June 11, 1984, as amended is
incorporated by reference to Exhibit A to the Prospectus of
the Registrant dated October 16, 1984 as filed with the
Commission pursuant to Rule 424(b) under the Act.
3B Amendment No. 1 to the Partnership dated August 1, 1985 is
incorporated by reference to Exhibit 3B to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1985.
4 Certificate of Limited Partnership dated June 11, 1984 is
incorporated by reference to Exhibit 4 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1987.
4A Certificate of Amendment to Limited Partnership dated July 17,
1984 is incorporated by reference to Exhibit 4A to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1987.
4B Restated Certificate of Limited Partnership dated October 5,
1984 is incorporated by reference to Exhibit 4B to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1987.
10A Agent's Agreement dated October 16, 1984 between the
Registrant and Harvey Freeman & Sons, Inc. is incorporated by
reference to Exhibit 10B to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1984.
10B Agreement among Agents dated October 16, 1984 by and among
Harvey Freeman & Sons, Inc., Harvey Freeman & Sons, Inc. of
Arkansas, Harvey Freeman & Sons, Inc. of Florida, Harvey
Freeman & Sons, Inc. of Georgia, Harvey Freeman & Sons, Inc.
of Indiana, Harvey Freeman & Sons, Inc. of Kentucky, Harvey
Freeman & Sons, Inc. of Mississippi, Harvey Freeman & Sons,
Inc. of North Carolina, Harvey Freeman & Sons, Inc. of Ohio,
and Harvey Freeman & Sons, Inc. of South Carolina, is
incorporated by reference to Exhibit 10C to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1984.
10C Acquisition and Disposition Services Agreement dated October
16, 1984 between the Registrant and Criswell Freeman Company
is incorporated by reference to Exhibit 10D to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1984.
10D Purchase Agreement Phases I and II dated October 3, 1984
between NTS-LaFontenay Partners and Tennessee Trust Company,
Trustee, is incorporated by reference to Exhibit 10E to
Amendment No. 1 to the Registrant's Registration Statement on
Form S-11 (Registration No. 2-92313) as filed on October 15,
1984.
10E Modification of Purchase Agreements dated October 31, 1984 by
and among NTS-LaFontenay Partners, the Registrant and
LaFontenay Associates is incorporated by reference to Exhibit
10F to Post-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-11 (Registration No. 2-92313)
as filed on January 15, 1985.
10F Contract for Sale of Real Estate for Outlets Ltd. Mall dated
November 15, 1984 between Company Stores Development Corp.
and Tennessee Trust Company, as Trustee, is incorporated by
reference to Exhibit 10G to Post-Effective Amendment No. 1
to the Registrant's Registration Statement on Form S-11
(Registration No. 2-92313) as filed on January 15, 1985.
10G Submanagement Agreement dated December 31, 1984 between Harvey
Freeman & Sons, Inc., Company Stores Management Corp. and the
Registrant is incorporated by reference to Exhibit 10H to
Post-Effective Amendment No.1 to the Registrant's Registration
Statement on Form S-11 (Registration No. 2-92313) as filed on
January 15, 1985.
10H Assignment of Purchase Agreement dated October 25, 1984
between Tennessee Trust Company, Trustee, and the Registrant
relating to assignment of Purchase Agreement for LaFontenay
Apartments is incorporated by reference to Exhibit 10I to
Post-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-11 (Registration No. 2-92313)
as filed on January 15, 1985.
10I Contract for Sale of Real Estate for Big Walnut Apartments
dated December 6, 1984 between Community Development Company,
an Ohio limited partnership and Tennessee Trust Company, as
Trustee is incorporated by reference to Exhibit 10(b) to the
Registrant's Current Report on Form 8-K dated March 28, 1985.
10J Assignment of Contract for Sale of Real Estate dated March 22,
1985 between Tennessee Trust Company, Trustee, and the
Registrant, relating to assignment of Purchase Agreement for
Big Walnut Apartments is incorporated by reference to Exhibit
10(a) to the Registrant's Current Report on Form 8-K dated
March 28, 1985.
10K Contract for Sale of Real Estate for The Trails Apartments
dated July 31, 1985 between Trails of Nashville Associates,
Ltd., a Tennessee limited partnership by reference to Exhibit
10(b) to the Registrant's Current Report on Form 8-K dated
August 30, 1985.
10L Assignment of Contract for Sale of Real Estate dated August
28, 1985 between Tennessee Trust Company, as Trustee and the
Registrant, relating to assignment of Contract for Sale of
Real Estate for The Trails Apartments is incorporated by
reference to Exhibit 10(a) to the Registrant's Current Report
on Form 8-K dated August 30, 1985.
10M Contract for Sale of Real Estate for Greenspring Manor
Apartments dated July 15, 1985 between Greenspring Apartments
Associates, an Indiana limited partnership and Tennessee Trust
Company, as Trustee, is incorporated by reference to Exhibit
20(d) to the Registrant's Current Report on Form 8-K dated
August 30, 1985.
10N Assignment of Contract for Sale of Real Estate dated August
28, 1985 between Tennessee Trust Company, as Trustee and the
Registrant, relating to assignment of Contract for Sale of
Real Estate for Greenspring Manor Apartments is incorporated
by reference to Exhibit 10(c) to the Registrant's Current
Report on Form 8-K dated August 30, 1985.
10O Tennessee Note dated September 25, 1980 executed by Company
Stores Development Corp. payable to TVB Mortgage Corporation
relating to Outlets, Ltd. Mall is incorporated by reference to
Exhibit 10GG to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1985.
10P Deed of Trust and Security Agreement dated September 25, 1980
between Company Stores Development Corp. and TVB Mortgage
Corporation relating to Outlets, Ltd. Mall is incorporated by
reference to Exhibit 10HH to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1985.
10Q Note secured by Real Estate dated October 21, 1985 payable to
First American National Bank of Nashville executed by the
Registrant relating to Outlet's, Ltd. Mall is incorporated by
reference to Exhibit 10II to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1985.
10R Deed of Trust and Security Agreement dated October 21, 1985
executed by the Registrant in favor of First American National
Bank of Nashville relating to Outlet's Ltd. Mall is
incorporated by reference to Exhibit 10EE to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1986.
10S Mortgage Note dated March 27, 1985 executed by the Registrant
payable to The Great-West Life Assurance Company relating to
Big Walnut Apartments is incorporated by reference to Exhibit
10KK to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.
10T Mortgage and Security Agreement dated March 27, 1985 between
the Registrant and The Great-West Life Assurance Company
relating to Big Walnut Apartments is incorporated by reference
to Exhibit 10LL to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1985.
10U Mortgage Note dated March 27, 1985 executed by the Registrant
payable to BANCOhio National Bank relating to Big Walnut
Apartments is incorporated by reference to Exhibit 10MM to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1985.
10V Open-End Mortgage and Security Agreement dated March 27, 1985
between the Registrant and BANCOhio National Bank relating to
Big Walnut Apartments is incorporated by reference to Exhibit
10NN to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.
10W Deed of Trust and Security Agreement dated December 1, 1984
between Trails of Nashville Associates, Ltd., and Capital
Holding Corporation relating to The Trails Apartments is
incorporated by reference to Exhibit 10QQ to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1985.
10X Note dated December 28, 1984 executed by Trails of Nashville
Associates, Ltd., payable to The Industrial Development Board
of the Metropolitan Government of Nashville and Davidson
County relating to The Trails Apartments is incorporated by
reference to Exhibit 10RR to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1985.
10Y Wraparound Mortgage Note dated September 30, 1985 payable to
Greenspring Apartments Associates executed by the Registrant
relating to Greenspring Manor Apartments is incorporated by
reference to Exhibit 10SS to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1985.
10Z Wraparound Mortgage Note dated September 30, 1985 between
Greenspring Apartments Associates and the Registrant relating
to Greenspring Manor Apartments is incorporated by reference
to Exhibit 10TT to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1985.
10AA Memorandum of Understanding among SEC Realty Corp., Tennessee
Properties, L.P., Freeman Mortgage Corporation, J. Richard
Freeman, W. Criswell Freeman and Jacques-Miller Properties,
Inc. is incorporated by reference to Exhibit 10DDD to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988.
10BB Partnership Administration and Consultation Agreement among
Freeman Properties, Inc., Freeman Diversified Properties,Inc.,
Residual Equities Limited and Jacques-Miller Properties, Inc.
is incorporated by reference to Exhibit 10EEE to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988.
10CC Partnership Agreement of LaFontenay, L.P. dated may 15, 1990
owned 99.9% by the Registrant relating to refinancing of
LaFontenay Apartments is incorporated by reference to Exhibit
10FFF to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990.
10DD Multifamily Note with Addendum dated May 24, 1990 executed by
LaFontenay, payable to the Patrician Mortgage Company relating
to LaFontenay, L.P. payable to the Patrician Mortgage Company
relating to LaFontenay Apartments is incorporated by reference
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990.
10EE Multifamily Mortgage with Rider dated May 24, 1990 executed by
LaFontenay, L.P. in favor of the Patrician Mortgage Company
relating to LaFontenay Apartments is incorporated by reference
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990.
10FF Termination Agreement, dated December 31, 1991 among
Jacques-Miller, Inc., Jacques-Miller Property Management,
Davidson Diversified Properties, Inc., and Supar, Inc. is
incorporated by reference to Exhibit 10JJJ to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31,1991.
10GG Assignment of Limited Partnership Interest of Freeman
Equities, Limited, dated December 31, 1991 between Davidson
Diversified Propeties, Inc. and Insignia Jacques-Miller, L.P.
is incorporated by reference to Exhibit 10KKK to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
10HH Assignment of General Partner Interests of Freeman Equities,
Limited, dated December 31, 1991 between Davidson Diversified
Propeties, Inc. and MAE GP Corporation is incorporated by
reference to Exhibit 10LLL to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.
10II Stock certificate, dated December 31, 1991 showing ownership
of 1,000 shares of Davidson Diversified Properties, Inc. by
MAE GP Corporation is incorporated by reference to Exhibit
10MMM to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
10JJ (a) First Deeds of Trust and Security Agreements dated October
28, 1992 between Big Walnut, L.P. and First Commonwealth
Realty Credit Corporation,a Virginia Corporation, securing
Greensprings Manor is incorporated by reference to Exhibit
10JJ (a) to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1992.
(b) Second Deeds of Trust and Security Agreements dated
October 28, 1992 between Big Walnut, L.P. and First
Commonwealth Realty Credit Corporation, a Virginia
Corporation, securing Greensprings Manor is incorporated
by reference to Exhibit 10JJ (b) to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992.
(c) First Assignments of Leases and Rents dated October 28,
1992 between Big Walnut, L.P. and First Commonwealth
Realty Credit Corporation, a Virginia Corporation,
securing Greensprings Manor is incorporated by reference
to Exhibit 10JJ (c) to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1992.
(d) Second Assignments of Leases and Rents dated October 28,
1992 between Big Walnut, L.P. and First Commonwealth
Realty Credit Corporation, a Virginia Corporation,
securing Greensprings Manor is incorporated by reference
to Exhibit 10JJ (d) to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1992.
(e) First Deeds of Trust Notes dated October 28, 1992
between Big Walnut, L.P. and First Commonwealth Realty
Credit Corporation relating to Greensprings Manor is
incorporated by reference to Exhibit 10JJ (e) to the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1992.
(f) Second Deeds of Trust Notes dated October 28, 1992
between Big Walnut, L.P. and First Commonwealth Realty
Credit Corporation relating to Greensprings Manor is
incorporated by reference to Exhibit 10JJ (f) to the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1992.
10KK (a)First Deeds of Trust and Security Agreements dated
October 28, 1992 between Big Walnut, L.P. and First
Commonwealth Realty Credit Corporation, a Virginia
Corporation, securing Big Walnut is incorporated by
reference to Exhibit 10KK (a) to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1992.
(b) Second Deeds of Trust and Security Agreements dated
October 28, 1992 between Big Walnut, L.P. and First
Commonwealth Realty Credit Corporation, a Virginia
Corporation, securing Big Walnut is incorporated by
reference to Exhibit 10KK (b) to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December
31, 1992.
(c) First Assignments of Leases and Rents dated October 28,
1992 between Big Walnut, L.P. and First Commonwealth
Realty Credit Corporation, a Virginia Corporation,
securing Big Walnut is incorporated by reference to
Exhibit 10KK (c) to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1992.
(d) Second Assignments of Leases and Rents dated October 28,
1992 between Big Walnut, L.P. and First Commonwealth
Realty Credit Corporation, a Virginia Corporation,
securing Big Walnut is incorporated by reference to
Exhibit 10KK (d) to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1992.
(e) First Deeds of Trust Notes dated October 28, 1992
between Big Walnut, L.P. and First Commonwealth Realty
Credit Corporation relating to Big Walnut is
incorporated by reference to Exhibit 10KK (e) to the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1992.
(f) Second Deeds of Trust Notes dated October 28, 1992
between Big Walnut, L.P. and First Commonwealth Realty
Credit Corporation relating to Big Walnut is
incorporated by reference to Exhibit 10KK (f) to the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1992.
10LL (a) Loan Agreement dated June 30, 1993 between Outlet's
Mall, L.P. and First American National Bank setting
forth the terms and conditions of the loan, as a
condition of extending the maturity date.
(b) Renewal Note Secured by Real Estate dated June 30,
1993, between Outlet's Mall, L.P. and First American
National Bank to extend the maturity date of the loan
until April 1, 1995.
(c) Loan modification and agreement dated January 18, 1995,
between Outlet's Mall, L.P. and First American National
Bank setting forth the new terms and conditions of the
loan.
10MM Multifamily Note secured by a Mortgage or Deed of Trust dated
August 6, 1997, between LaFontenay, L.L.C. and Patrician
Financial Company Limited Partnership related to LaFontenay
Apartments, is filed as an exhibit to this report.
10.1 Contract for sale of real estate for Outlet Mall, Ltd. dated
December 30, 1999,between Davidson Diversified Real Estate II,
a Delaware limited partnership and The Cadle Company.(as filed
on January 6, 2000).
10.2 First amendment to contract for sale of real estate for Outlet
Mall,Ltd. dated December 30,1999, between Davidson Diversified
Real Estate II, a Delaware limited partnership and The Cadle
Company. (as filed on January 6, 2000).
10.3 Second amendment to contract for sale of real estate for
Outlet Mall, Ltd. dated December 30, 1999, between Davidson
Diversified Real Estate II, a Delaware limited partnership
and The Cadle Company. (as filed on January 6, 2000).
16 Letter from theRegistrant's former independent accountant
regarding its concurrence with the statements made by the
Registrant is incorporated by reference to the exhibit filed
with Form 8-K dated September 30, 1992.
18 Independent Accountants' Preferability Letter for Change in
Accounting Principle.
27 Financial Data Schedule
99A Agreement of Limited Partnership for Big Walnut, L.P.
between Davidson Diversified Properties, Inc. and Davidson
Diversified Real Estate II, L.P. entered into on August 23,
1991 is incorporated by reference to Exhibit 99A to the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1992.
99B Agreement of Limited Partnership for Outlet's Mall, L.P.
between Outlet's Mall GP Limited Partnership and Davidson
Diversified Real Estate II, L.P. is incorporated by
reference to Exhibit 99B to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1992.
Exhibit 18
February 7, 2000
Mr. Patrick J. Foye
Executive Vice President
Davidson Diversified Properties, Inc.
Managing General Partner for Davidson Diversified Real Estate II, L.P.
55 Beattie Place
P.O. Box 1089
Greenville, South Carolina 29602
Dear Mr. Foye:
Note K of Notes to the Consolidated Financial Statements of Davidson Diversified
Real Estate II, L.P. included in its Form 10-KSB for the year ended December 31,
1999 describes a change in the method of accounting to capitalize exterior
painting and major landscaping, which would have been expensed under the old
policy. You have advised us that you believe that the change is to a preferable
method in your circumstances because it provides a better matching of expenses
with the related benefit of the expenditures and is consistent with policies
currently being used by your industry and conforms to the policies of the
Managing General Partner.
There are no authoritative criteria for determining a preferable method based on
the particular circumstances; however, we conclude that the change in the method
of accounting for exterior painting and major landscaping is to an acceptable
alternative method which, based on your business judgment to make this change
for the reasons cited above, is preferable in your circumstances.
Very truly yours,
/s/ Ernst & Young LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Diversified Real Estate II, L.P. 1999 Fourth Quarter 10-KSB and is qualified in
its entirety by reference to such 10-KSB filing.
</LEGEND>
<CIK> 0000750258
<NAME> Davidson Diversified Real Estate II, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,398
<SECURITIES> 0
<RECEIVABLES> 580
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 40,274
<DEPRECIATION> 22,426
<TOTAL-ASSETS> 21,695
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 24,087
0
0
<COMMON> 0
<OTHER-SE> (4,812)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 8,079
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,668
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,050
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,366)
<EPS-BASIC> (1,894.22)<F2>
<EPS-DILUTED> 0
<FN>
<F1> Registrant has an unclassified balance sheet. <F2> Multiplier is 1.
</FN>
</TABLE>
