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29
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the fiscal year ended Commission File Number
December 31, 1996 33-4682
CAPITAL BUILDERS DEVELOPMENT PROPERTIES II,
A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
California 77-0111643
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4700 Roseville Road, Suite 206, North Highlands, California 95660
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (916)331-8080
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Units
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or 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. X Yes No
As of December 31, 1996 the aggregate Limited Partnership Units
held by nonaffiliates of the registrant was 23,030. There is no
market for the Units.
Documents Incorporated by Reference
Limited Partnership Agreement dated February 6, 1986, filed as
Exhibit 3.3, and the Amendment to the Limited Partnership
Agreement dated May 22, 1986 filed as Exhibit 3.4 to Registration
Statement No. 33-4682 of Capital Builders Development Properties
II, A California Limited Partnership, are hereby incorporated by
reference into Part IV of this Form 10K.
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Capital Builders Development Properties II (the "Partnership") is
a publicly held limited partnership organized under the
provisions of the California Revised Limited Partnership Act
pursuant to the Limited Partnership Agreement dated February 6,
1986, as amended (the "Agreement"). The Partnership commenced on
May 22, 1986 and shall continue in full force and effect until
December 31, 2021 unless dissolved sooner by certain events as
described in the Agreement. The Managing General Partner is
Capital Builders, Inc., a California Corporation (CB). The
Associate General Partners are the sole shareholder, President
and Director of CB, and four founders of CB.
On October 6, 1986 the Partnership sold 2,407 Limited Partnership
Units for a total of $1,203,500. From October 6, 1986, through
May 21, 1988, the Partnership sold an additional 20,623 Units for
a total of 23,030 Units. On May 21, 1988, the Partnership was
closed to capital raising activity with a total of $11,515,000
proceeds raised from the offering. The General Partners have
contributed capital in the amount of $1,000 to the Partnership
for a 1% interest in the profits, losses, tax credits and
distributions of the Partnership.
(b) Financial Information about Industry Segments
The Partnership is in the business of real estate development and
is not a significant factor in its industry. The Partnership's
investment properties are located near major urban areas and,
accordingly, compete not only with similar properties in their
immediate areas but with hundreds of properties throughout the
urban areas. Such competition is primarily on the basis of
locations, rents, services and amenities. In addition, the
Partnership competes with significant numbers of individuals and
organizations (including similar partnerships, real estate
investment trusts and financial institutions) with respect to the
purchase and sale of land, primarily on the basis of the prices
and terms of such transactions.
(c) Narrative Description of the Business
The Partnership's business objective is to complete the
development of its existing land with light industrial and office
buildings for lease and eventual sale. The primary investment
objective of the Partnership is to realize capital appreciation
from the sale of the Properties developed by it some three to
five years after such Properties have been placed in service. A
secondary investment objective is to generate cash from the
leasing of Partnership Properties pending their sale for
distribution to the Limited Partners, although it is not
presently anticipated that the amount of such cash available for
distribution to the Limited Partners will be significant. Since
the Partnership has not sold its investment properties, it has
not achieved its investment goals as yet. Although investor
returns cannot be accurately determined until the investment
properties are sold, due to the additional time required to lease
up the investment properties, the decline in real estate values
and the California recession, it is anticipated that ultimate
returns will be less than initially projected. Funds obtained by
the Partnership from the sale of Limited Partnership Units have
been used to acquire equity interest in one piece of land for
development and a 40% equity interest in another for development
in accordance with its investment objective.
On April 10, 1987, the Partnership entered into a joint venture
called Capital Builders Roseville Venture ("JV") with Capital
Builders Development Properties ("CBDP"), a California limited
partnership. The Partnership and CBDP are affiliates as they
have the same General Partner, but there are no direct
transactions between the respective Partnerships. The
Partnership contributed $900,000 resulting in a 40% interest in
the profits, losses and cash distributions of the JV. CB, the
Managing General Partner of the Partnership, has the same rights
and obligations with respect to the JV's operations and
management as it may exercise as Managing General Partner of the
Partnership. The JV shall continue in full force and effect
until December 31, 2010 unless dissolved sooner by mutual
agreement, sale of the investment property, default by a joint
venture partner or by filing of bankruptcy by one of the joint
partners.
The acquisition of the real estate is consistent with the
Partnership objectives which are to acquire, develop, hold,
maintain, lease, sell, or otherwise dispose of real property
within the Western United States (including the states of
California, Oregon, Washington, Arizona, Nevada, New Mexico,
Utah, Colorado, Hawaii, and Alaska), including without
limitation, the acquisition of undeveloped land for development
and construction of research and development, light industrial,
commercial/retail, or office buildings thereon, and the
acquisition of partially completed commercial real property
developments for completion of development.
Although the Associate General Partners, Officers, and Directors
of the Managing General Partners are experienced in real property
operation and management, they also may utilize independent
advisors, agents, and workers, in addition to the Partnership
employees, to assist them in the operation, leasing, maintenance
and improvement of the Partnership's properties.
The Partnership has no full time employees but is managed by CB,
the Managing General Partner.
ITEM 2. PROPERTIES
The Partnership owns 100% equity interest in a property called
Highlands 80 Commerce Center ("H80") and a 40% joint venture
interest in another property called Capital Professional Center
("CPC"). H80 is a three phase development. Phase I is a
109,000 square foot office/industrial project consisting of five
multi-tenant buildings. Phase II consists of approximately
45,921 square feet of two, one-story light industrial/office
space buildings and Phase III consists of one 29,000 square foot
office building. The Partnership is currently proceeding with
the development of Phase II, in which one building consisting of
26,141 square feet was completed in early 1997. The remaining
19,780 square foot building of Phase II is estimated to start
construction during the second quarter of 1997. Remaining Phase
II development costs are estimated to be approximately
$1,590,000. Funds for these improvements will come from existing
cash reserves, property income, and additional borrowings.
Additional information about the individual properties follows:
H80 CPC
Ownership Percentage: 100% 40%
Acquisition Date: April 30, 1987 April 13, 1987
Location: North Highlands, CA Roseville, CA
Present Monthly
Effective Average
Base Rent Per Square Foot: $0.87 $1.53
Square Footage Mix:
Office 21,966 40,397
Industrial 87,119
Leased Occupancy at
December 31: 1996 78% 95%
1995 86% 95%
1994 84% 100%
1993 77% 96%
1992 80% 78%
Current Year Depreciation: $300,307 $178,025
Method of Depreciation: Straight Line Straight Line
Depreciation Life: 40 Years 40 Years
Bldg. Improvements Bldg. Improvements
Life of Lease Life of Lease
Tenant Improvements Tenant Improvements
Total cost: $8,912,355 $4,172,587
Encumbrances: $4,928,442 $3,455,591
Additional information about the individual properties follows:
(continued)
Tenant occupying more H80 CPC
than 10% of square
footage and nature of ESL, Inc. Coldwell Banker
business: (Defense (Residential Real
Contractors) Estate Brokerage)
USA Properties (Real Estate
Developer)
H80 is held subject to an encumbrance which is more fully
described under Note 6 of the Partnership's financial statements
included under Item 8 which is incorporated herein by reference.
CPC is held subject to a permanent loan in the original amount of
$3,500,000. The interest rate is fixed at 8.24%1 and is due and
payable on January 1, 2001. The balance of the loan at December
31, 1996 is $3,455,591. Payments are monthly principal and
interest amortized over 25 years. The note is collateralized by
a first deed of trust on the land, building and improvements.
Both properties are being leased to a wide variety of tenants in
a diversity of industries. Leases are typically three to five
years in term and provide for free rent periods, at inception,
equal to approximately one month per year of lease term. Some
leases contain options to extend the term of the lease.
The Partnership's investment properties are located in major
urban areas and, therefore, must compete with properties of
greater and lesser quality. Such competition is based primarily
on rent, location, services and amenities. The properties are
suitable for their current and anticipated use.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S LIMITED PARTNERSHIP INTERESTS
AND RELATED SECURITY HOLDER MATTERS
There is no public trading market for the Partnership's Limited
Partnership Units and it is not anticipated that a public trading
market will develop. Furthermore, the Partnership Agreement
prohibits Limited Partners from transferring Limited Partnership
Interests if such transfers would result in the dissolution of
the Partnership for tax purposes under Section 708 of the
Internal Revenue Code.
As of December 31, 1996, there were 1,906 holders and 23,030
Limited Partnership Units outstanding.
ITEM 6. SELECTED FINANCIAL DATA
The following constitutes a summary of selected consolidated
financial data for the following periods (000's omitted except
net loss per Limited Partnership Unit):
1996 1995 1994 1993 1992
Revenues $1,224 $1,208 $1,089 $1,079 $995
Net Loss ($268) ($583) ($697) ($1,173) ($643)
Net Loss per Limited
Partnership Unit ($11.54) ($25.05) ($29.97) ($50.41) ($27.65)
Total Assets $9,953 $9,934 $8,910 $9,441 $10,610
Notes and Loans
Payable $4,928 $4,986 $3,577 $3,598 $3,620
(See ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership commenced operations on May 22, 1986 upon the
sale of the minimum number of Limited Partnership Units. The
Partnership's initial source of cash was from the sale of Limited
Partnership Units. Through the offering of Units, the
Partnership has raised $11,515,000 (represented by 23,030 Limited
Partnership Units). Cash generated from the sale of Limited
Partnership Units has been used to acquire land and for the
development of a mixed use commercial project and a 40% interest
in a commercial office project.
During the fiscal year ended December 31, 1996, the Partnership
incurred a decrease in accounts receivable of $74,902 and an
increase of $85,171 in accounts payable and accrued liabilities,
which contributed towards $274,763 in cash provided by operating
activities.
In addition, the Partnership generated $22,050 in cash flow from
investing activities during 1996 as a result of the following:
1) The Partnership's investment of $1,214,118 in U.S. Treasury
Bills matured and was converted into cash, 2) $225,000 in
affiliate loan advances were provided to its joint venture, 3)
Tenant improvements to the Partnership's existing buildings of
approximately $99,500 and approximately $992,000 for the
development of Phase II was incurred (See Item 2 of the Form 10K
for further discussion), and 4) $124,480 of proportionate
ownership distributions were paid to the Partnership from the
Joint Venture.
The Partnership's primary current sources of cash are from excess
cash and property rental income.
It is the Partnership's investment goal to utilize existing
capital resources for continued leasing operations (tenant
improvements and leasing commissions) and further development of
its investment properties. The Partnership is currently
proceeding with the development of Phase II, consisting of
approximately 45,921 square feet of two, one-story Light
Industrial/Office space buildings. One building of Phase II,
consisting of 26,141 square feet has been completed. The
remaining 19,780 square foot building is estimated to start
construction during the second quarter of 1997. Remaining Phase
II development costs are estimated to be approximately
$1,590,000.
Funds for these improvements will come from existing cash
reserves, property income, and additional borrowings.
As of December 31, 1996, there is an uncertainty in the ability
of the Partnership's Joint Venture Partner, Capital Builders
Development Properties, to continue as a going concern. If
Capital Builders Development Properties failed to continue its
operations, then either the Joint Venture property would be sold
and all proceeds net of the Joint Venture's Note Payable would be
applied towards the payment of the Partnership's affiliate loan
(with any excess funds being distributed to the Joint Venture
Partners according to their ownership percentages), or the
Partnership would convert its affiliate loan to equity (based on
a current appraised value of the Joint Venture property), and any
remaining equity would be paid to Capital Builders Development
Properties in accordance with the Joint Venture agreement,
thereby dissolving the Joint Venture, with the Partnership
retaining 100% ownership of Capital Professional Center. If
either event occurred, there would not be an adverse impact on
the Partnership's liquidity.
The Partnership's ability to maintain or improve cash flow is
dependent upon its ability to maintain and improve the occupancy
of its investment properties. The Partnership's financial
resources appear to be adequate to meet current year's
obligations and no adverse change in liquidity is foreseen.
Results of Operations
1996 vs 1995
The Partnership's total revenues increased by $15,982 (1.3%) in
fiscal year 1996 compared to 1995. Total expenses exclusive of
depreciation also increased by $77,828 (7.9%), while depreciation
expense decreased by $297,560 (46.4%) in fiscal year 1996
compared to 1995. In addition, the loss on the investment in
joint venture decreased by $78,610 in 1996 compared to 1995, all
resulting in a decrease in net loss of $314,324 (53.9%) from
fiscal year 1996 to 1995.
The increase in revenues is primarily due to a $35,000 settlement
for past due rent which had been written-off in 1994.
The Sacramento market in which the property is located is
continuing to improve. Vacancy factors are beginning to decline,
while market rents are starting to increase. During the last
quarter of 1996, Highlands 80 recognized a temporary decline in
occupancy due to a large tenant downsizing, but interest by
potential tenants is increasing and it is Management's opinion
that the property should achieve a stabilized occupancy during
fiscal year 1997.
Expenses, exclusive of depreciation, increased for the fiscal
year 1996 compared to 1995, due to the net effect of :
a) $37,565 (15.7%) increase in operating expenses due to the
recognition of $16,944 in bad debt expense, an increase of
project manager supervision costs associated with the development
of Phase II, plus an increase in marketing costs associated with
Phase II,
b) $4,574 (2.9%) decrease in repairs and maintenance due to the
re-carpeting and repainting of the office building's common area
performed during 1995, which exceeded the cost of repainting the
entire project during 1996,
c) $8,189 (12.4%) increase in Property taxes due to a tax refund
received in 1995 as a result of a reduction in the property's
assessed value,
d) $15,541 (3.9%) increase in interest costs due to an increase
in the average outstanding loan balance during 1996 (the
additional loan proceeds have and will continue to be used to
fund additional Phase II improvements, see Liquidity and Capital
Resources for further discussion), and
e) $21,107 (16.6%) increase in general and administrative costs
due to an increase in investor services, and legal fees.
Total expenses including depreciation decreased by $219,732
(13.5%) for the fiscal year 1996 compared to 1995. The decrease
was primarily due to a decrease in depreciation expense of
$297,560 (46.4%). The reduction of depreciation was the result
of tenant improvement costs that were amortized during 1995,
became fully amortized during the last quarter of 1995 and the
first quarter of 1996. Many of the suites with fully amortized
improvements were either re-leased or their leases renewed
without requiring any major tenant improvement buildout,
therefore reducing the recorded amount of amortization taken
during fiscal year 1996.
1995 vs 1994
The Partnership's total revenues increased by $118,722 (10.9%) in
fiscal year 1995 compared to 1994. Total expenses exclusive of
depreciation also increased by $130,107 (15.2%) mainly due to an
increase in interest costs, while depreciation expense decreased
by $158,310 (19.8%) in fiscal year 1995 compared to 1994. In
addition, the loss on the investment in joint venture increased
by $32,570 in 1995 compared to 1994, all resulting in a decrease
in net loss of $114,355 (16.4%) from fiscal year 1995 to 1994,
respectively.
The increase in revenues is primarily due to an increase in
occupancy and rental rate increases. Highlands 80 occupancy for
the twelve months ended December 31, 1995 averaged 88% as
compared to 84% in 1994.
Expenses exclusive of depreciation increased from the fiscal year
1995 to 1994 due to the net effect of:
a) $16,888 (7.6%) increase in operating expenses due to an
increase in occupancy and the addition of two large tenants in
which janitorial and utilities were provided for in 1995, b)
$42,671 (37.9%) increase in repairs and maintenance expenses
mainly due to the re-carpeting and repainting of the office
building's common area, and also due to an increase in suite
turnover costs (carpet replacement and repainting of suites), c)
$9,756 (12.9%) decrease in property taxes due to a reduction in
the assessed value obtained from Sacramento County, d) $87,477
(27.9%) increase in interest due to the increase in the lending
bank's prime rate during the holding period of the variable rate
loan with Sumitomo Bank and the increase in the borrowings
outstanding in connection with the note payable refinancing (see
Note 6 of the Notes to the Financial Statements for discussion on
Note Payable), e) $7,173 (5.3%) decrease in general
administrative expenses due to improved efficiencies (see Note 2
of the Notes to the Financial Statements for discussion of
reimbursed expenses paid to Managing General Partner).
Total expenses including depreciation decreased by $28,203 (1.7%)
for the fiscal year 1995 compared to 1994. The decrease was
primarily due to a decrease in depreciation expense of $158,310
(19.8%). The reduction of depreciation was the result of tenant
improvement costs that were amortized during the first three
quarters of 1994 becoming fully amortized in the third quarter of
1994. Many of the suites with improvements fully amortized were
either leased or their leases renewed without requiring any major
tenant improvement buildout, therefore a minimal amount of
amortization was incurred for these suites in 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page Number
INDEPENDENT AUDITORS' REPORT 12
FINANCIAL STATEMENTS
13
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
STATEMENTS OF OPERATIONS 14
FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995, AND 1994
STATEMENTS OF PARTNERS' (DEFICIT) EQUITY 15
FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995, AND 1994
STATEMENTS OF CASH FLOWS 16
FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995, AND 1994
NOTES TO FINANCIAL STATEMENTS 17-25
SUPPLEMENTAL SCHEDULES
SCHEDULE III 30
REAL ESTATE AND ACCUMULATED DEPRECIATION
Financial schedules not included have been omitted because of the
absence of conditions under which they are required or because
the information is included elsewhere in this report.
Independent Auditors' Report
The Partners
Capital Builders Development Properties II:
We have audited the accompanying balance sheets of Capital
Builders Development Properties II, a California Limited
Partnership, as of December 31, 1996 and 1995, and the related
statements of operations, partners' (deficit) equity and cash
flows for each of the years in the three-year period ended
December 31, 1996. In connection with our audits of the
financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These
financial statements and financial statement schedule are the
responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Capital Builders Development Properties II as of December 31,
1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended
December 31, 1996 in conformity with generally accepted
accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As discussed in Notes 1 and 4 to the financial statements, the
Partnership adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118, Accounting by
Creditors for Impairment of a Loan-Income Recognition and
Disclosures on January 1, 1995.
Sacramento, California KPMG Peat Marwick LLP
February 5, 1997
PART 1 - FINANCIAL INFORMATION
Capital Builders Development Properties II
(A California Limited Partnership)
BALANCE SHEETS
December 31 December 31
1996 1995
ASSETS
Cash and cash equivalents $701,828 $462,947
Investment securities - - - - - 1,214,118
Accounts receivable, net 68,724 143,626
Due from joint venture 1,514,788 1,231,089
Investment property, at cost, net
of accumulated depreciation and
amortization of $1,426,812 and
$1,474,003 and valuation allowance
of $0 and $469,000 at December 31,
1996 and 1995, respectively 7,485,543 6,694,302
Lease commissions, net of
accumulated amortization of
$52,498 and $55,532 at December 31,
1996 and 1995, respectively 78,635 71,477
Other assets, net of accumulated
amortization of $19,419 and $3,885
at December 31, 1996 and 1995,
respectively 103,815 116,694
Total assets $9,953,333 $9,934,253
LIABILITIES AND PARTNERS' EQUITY
Note payable $4,928,442 $4,986,374
Accounts payable and accrued
liabilities 158,405 14,535
Tenant deposits 48,995 54,502
Share of joint venture deficit 695,094 487,968
Total liabilities 5,830,936 5,543,379
Commitments and contingencies
Partners' (Deficit) Equity:
General Partners (54,607) (51,922)
Limited Partners 4,177,004 4,442,796
Total Partners' equity $4,122,397 4,390,874
Total liabilities and
Partners' equity $9,953,333 $9,934,253
See accompanying notes to the financial statements.
Capital Builders Development Properties II
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1996 1995 1994
Revenues
Rental and other income $1,101,978 $1,051,084 $990,657
Interest income 121,977 156,889 98,594
Total revenues 1,223,955 1,207,973 1,089,251
Expenses
Operating expenses 276,165 238,600 221,712
Repairs and maintenance 150,718 155,292 112,621
Property taxes 74,323 66,134 75,890
Interest 416,264 400,723 313,246
General and administrative 148,543 127,436 134,609
Depreciation and
amortization 343,774 641,334 799,644
Total expenses 1,409,787 1,629,519 1,657,722
Loss before joint venture
interest (185,832) (421,546) (568,471)
Loss from investment in
joint venture (82,645) (161,255) (128,685)
Net loss (268,477) (582,801) (697,156)
Allocated to General Partners (2,685) (5,828) (6,971)
Allocated to Limited Partners($265,792) ($576,973) ($690,185)
Net loss per Limited
Partnership Unit ($11.54) ($25.05) ($29.97)
Average Units outstanding 23,030 23,030 23,030
See accompanying notes to the financial statements.
Capital Builders Development Properties II
(A California Limited Partnership)
STATEMENTS OF PARTNERS' (DEFICIT) EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Total
General Limited Partners'
Partners Partners Equity
Balance at December 31, 1993 (39,123) 5,709,954 5,670,831
Net loss (6,971) (690,185) (697,156)
Balance at December 31, 1994 (46,094) 5,019,769 4,973,675
Net Loss (5,828) (576,973) (582,801)
Balance at December 31, 1995 (51,922) 4,442,796 4,390,874
Net loss (2,685) (265,792) (268,477)
Balance at December 31, 1996,($54,607) $4,177,004 $4,122,397
See accompanying notes to the financial statements.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1996 1995 1994
Cash flows from operating activities:
Net loss ($268,477) ($582,801) ($697,156)
Adjustments to reconcile net
loss to cash flow provided by/
(used in) operating activities:
Depreciation and amortization 343,774 641,334 799,644
Equity in losses of Joint Venture 82,645 161,255 128,685
Uncollected interest earned from
Joint Venture - - - - (115,684) - - - -
Changes in operating assets and
liabilities
Decrease/(Increase) in accounts
receivable 74,902 8,514 (37,438)
Increase in leasing commissions (35,091) (28,785) (51,785)
Increase in other assets (2,654) (119,160) (331)
Increase in accounts payable
and accrued liabilities 85,171 554 3,653
Decrease in tenant deposits (5,507) (558) (8,455)
Net cash provided by/(used
in)operating activities 274,763 (35,331) 136,817
Cash flows from investing activities:
Proceeds from (Investment in)
securities 1,214,118 (1,214,118) - - - -
Increase in advances to joint venture (225,000) (105,000) (180,405)
Improvements to investment properties (1,091,548) (133,530) (317,966)
Distributions from joint venture 124,480 36,400 63,601
Net cash provided by/(used in)
investing activities 22,050 (1,416,248) (434,770)
Cash flows from financing activities:
Proceeds from issuance of debt - - - - 1,433,740 - - - -
Payments of debt (57,932) (24,306) (21,360)
Net cash (used in)/provided by
financing activities (57,932) 1,409,434 (21,360)
Net increase/(decrease) in cash
and cash equivalents 238,881 (42,145) (319,313)
Cash and cash equivalents, beG. of period 462,947 505,092 824,405
Cash and cash equivalents, end of period $701,828 $462,947 $505,092
Supplemental disclosure:
Cash paid for interest $416,264 $400,723 $313,246
See accompanying notes to the financial statements.
Capital Builders Development Properties II
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
ORGANIZATION
A summary of the significant accounting policies applied in the
preparation of the accompanying financial statements follows:
Basis of Accounting
The financial statements of Capital Builders Development
Properties II (The "Partnership") are prepared on the accrual
basis of accounting and therefore revenue is recorded as earned
and costs and expenses are recorded as incurred.
Organization
Capital Builders Development Properties II, a California Limited
Partnership, is owned under the laws of the State of California.
The Managing General Partner is Capital Builders, Inc., a
California corporation (CB).
The Partnership is in the business of real estate development and
is not a significant factor in its industry. The Partnership's
investment properties are located near major urban areas and,
accordingly, compete not only with similar properties in their
immediate areas but with hundreds of properties throughout the
urban areas. Such competition is primarily on the basis of
locations, rents, services and amenities. In addition, the
Partnership competes with significant numbers of individuals and
organizations (including similar companies, real estate
investment trusts and financial institutions) with respect to the
purchase and sale of land, primarily on the basis of the prices
and terms of such transactions.
Investment Securities
Investment securities at December 31, 1995 consisted of U.S.
Treasury Bills. As of December 31, 1995 the Partnership's
securities consisted of held-to-maturity securities having a
maturity date of less than one year. As of December 31, 1995,
the amortized cost of the securities approximates estimated
market value. Investment securities matured during 1996.
A decline in the market value of any held-to-maturity security
below cost that is deemed other than temporary results in a
reduction in carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is
established. Premiums and discounts are amortized or credited
over the life of the related held-to-maturity security as an
adjustment to yield using the effective interest method.
Interest income is recognized as earned. As of December 31,
1995, there have been no impairments, premiums or discounts
recognized.
Due from Joint Venture
The Partnership adopted the provisions of Statement of Financial
Accounting Standards No. 114 "Accounting by Creditors for
Impairment of a Loan", as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and
Disclosure", on January 1, 1995. Management, considering current
information and events regarding the borrowers ability to repay
their obligations, considers a note to be impaired when it is
probable that the Partnership will be unable to collect all
amounts due according to the contractual terms of the note
agreement. When a loan is considered to be impaired, the amount
of the impairment is measured based on the present value of
expected future cash flows discounted at the note's effective
interest rate, the fair market value of collateral securing the
note, if any or the note's observable market price. Impairment
losses are included in the allowance for doubtful accounts
through a charge to bad debt expense. Cash receipts on impaired
notes receivable are applied to reduce the principal amount of
such notes until the principal has been recovered and are
recognized as interest income, thereafter. Prior periods have
not been restated.
Investment Properties
The Partnership adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, on January 1, 1995. This
Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact
on the Partnership's financial position, results of operations,
or liquidity.
Prior to the adoption of SFAS No. 121, the Partnership recorded
a valuation allowance for losses which represented the excess
carrying value of individual properties over their estimated net
realizable value. The valuation allowance included in the
accompanying balance sheet at December 31, 1995 was $469,000.
During 1996, this valuation allowance was allocated against the
cost basis of the land and building and improvements to be
consistent with the methodology of SFAS No. 121.
The Partnership's investment property consists of commercial
land, buildings and leasehold improvements that are carried net
of accumulated depreciation. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives of three to forty
years. The straight-line method of depreciation is followed for
financial reporting purposes.
Other Assets
Included in other assets are loan fees. Loan fees are amortized
over the life of the related note.
Lease Commissions
Lease commissions are being amortized over the related lease
terms.
Income Taxes
The Partnership has no provision for income taxes since all
income or losses are reported separately on the individual
Partners' tax returns.
Investment in Joint Venture
Equity investments of 20 to 50% are accounted for by the equity
method. Under this method, the investments are recorded at
initial cost and increased or decreased for the Partnership's
share of income and losses, and decreased for distributions.
Revenue Recognition
Rental income is recognized on a straight-line basis over the
life of the lease, which may differ from the scheduled rental
payments.
Net Loss per Limited Partnership Unit
The net loss per Limited Partnership Unit is computed based on
the weighted average number of Units outstanding during the year
of 23,030 in 1996, 1995, and 1994.
Statement of Cash Flows
For purposes of the statement of cash flows, the Partnership
considers all short-term investments with a maturity, at date of
purchase, of three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2 - RELATED PARTY EXPENSE REIMBURSEMENT AND FEE
ARRANGEMENT
The Managing General Partner (Capital Builders, Inc.) and the
Associate General Partners are entitled to reimbursement of
expenses incurred on behalf of the Partnership and certain fees
from the Partnership. These fees include: a portion of the
sales commissions payable by the Partnership with respect to the
sale of the Partnership Units; an acquisition fee of up to 12.5%
of gross proceeds from the sale of the Partnership Units; a
property management fee up to 6% of gross rental revenues
realized by the Partnership with respect to its properties; a
subordinated real estate commission of up to 3% of the gross
sales price of the properties; and a subordinated 25% share of
the Partnership's distributions of cash from sales or
refinancing. The property management fee currently being charged
is 5% of gross rental revenues collected.
All acquisition fees and expenses, all underwriting commissions,
and all offering and organizational expenses which can be paid
are limited to 20% of the gross proceeds from sales of
Partnership Units provided the Partnership incurs no borrowing to
develop its properties. However, these fees may increase to a
maximum of 33% of the gross offering proceeds based upon the
total acquisition and development costs, including borrowing.
Since the formation of the Partnership, 27.5% of these fees were
paid to the Partnership's related parties, leaving a remaining
maximum of 5.5% ($633,325) of the gross offering proceeds. The
ultimate amount of these costs will be determined once the
properties are fully developed and leveraged.
The total management fees paid to the Managing General Partner
were $52,947, $51,310 and $46,928 for the years ended December
31, 1996, 1995, and 1994, respectively, while total reimbursement
of expenses were $176,641, $151,877 and $163,867, respectively.
The Managing General Partner will reduce its future participation
in proceeds from sales by an amount equal to the loss on the
abandonment of option fees in 1988 ($110,000) and interest on the
amount at a rate equal to that of the borrowed funds rate as
determined by construction or permanent funds utilized by the
Partnership.
NOTE 3 - INVESTMENT PROPERTY
The components of the investment property account at December 31,
are as follows:
1996 1995
Land $2,622,014 $2,774,392
Building and Improvements 5,449,418 4,744,102
Tenant Improvements 840,923 1,118,811
Investment property, at cost 8,912,355 8,637,305
Less: accumulated depreciation
and amortization (1,426,812) (1,474,003)
valuation allowance - - - - - (469,000)
Investment property, net $7,485,543 $6,694,302
NOTE 4 - DUE FROM JOINT VENTURE
The receivable represents funds advanced to Capital Builders
Roseville Venture (Note 5) which earns interest at 8.24% at
December 31, 1996 and 1995, approximately the same rate paid for
other borrowings. The receivable includes $58,699 of deferred
interest income included in accounts payable and accrued
liabilities at December 31, 1996. Interest income earned on the
note was $52,662, $115,684 and $78,425 for the years ended
December 31, 1996, 1995, and 1994, respectively. The receivable
is unsecured and is due and payable on demand.
The Partnership's management is currently evaluating the effect
of converting all or a portion of the affiliate loan to equity in
the Joint Venture based on the Joint Venture's current market
value. This would increase the Partnership's current 40%
ownership in the Joint Venture, would decrease or eliminate the
affiliate loan, and would decrease or eliminate the 60% ownership
of its Joint Venture Partner, Capital Builders Development
Properties.
As discussed in Note 1, the Partnership adopted the provisions of
Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan", as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures", effective January 1, 1995.
The note due from joint venture has been evaluated for
collectability under the provisions of this statement. Based on
management's analysis of the fair value of the underlying net
assets of the joint venture, no impairment loss is required to be
recognized.
NOTE 5 - INVESTMENT IN JOINT VENTURE
The investment in joint venture represents a 40% equity interest
in a joint venture with Capital Builders Development Property, an
affiliated Partnership which has the same General Partner. The
investment is accounted for on the equity method.
The balance sheets of the joint venture as of December 31, are
as follows:
1996 1995
Assets
Cash 23,657 $67,628
Accounts receivable 33,437 69,304
Land and buildings, net 3,163,465 3,318,113
Leasing commissions, net 42,234 47,265
Other assets, net 60,761 73,331
Total assets $3,323,554 $3,575,641
Liabilities and Equity
Note payable $3,455,591 $3,500,000
Loan payable to affiliate 1,514,788 1,231,089
Accounts payable and accrued
liabilities 37,292 9,412
Tenant deposits 53,611 55,059
Capital, CBDP (1,042,634) (731,951)
Capital, CBDP II (695,094) (487,968)
Total liabilities and capital $3,323,554 $3,575,641
The Statements of Operations for the joint venture for the years
ended December 31, are as follows:
1996 1995 1994
Revenues
Rental income $670,496 $ 611,202 $ 657,179
Interest income 1,029 1,468 1,190
Total income 671,525 612,670 658,369
Expenses
Operating expenses 125,917 122,821 137,115
Repairs and maintenance 82,447 75,195 66,557
Property taxes 44,842 43,800 42,885
Interest 397,068 471,939 370,594
General and administrative 8,894 6,768 3,823
Depreciation and amortization 218,968 295,284 359,108
Total expenses 878,136 1,015,807 980,082
Net loss ($206,611) ($403,137) ($321,713)
Capital Builders Development
Properties II share of
net loss ($82,645) ($161,255) ($128,685)
NOTE 6 - NOTE PAYABLE
A mini-permanent loan of $3,625,000 with interest at the bank's
prime rate (8.75% at September 22, 1995) plus 1 1/2% was
refinanced with a $5,000,000 mini-permanent fixed interest rate
loan on September 22, 1995. The loan's fixed interest rate is
8.95% and requires monthly principal and interest payments of
$41,789, which is sufficient to amortize the loan over 25 years.
The loan is due October 1, 2002. The note is collateralized by a
first deed of trust on Phase I land, building and improvements.
Scheduled principal payments during 1997, 1998, 1999, 2000, and
2001, and thereafter are $62,866, $68,728, $75,138, $82,146,
$89,807, and $4,549,757, respectively.
NOTE 7 - RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING
A reconciliation of the financial statement method of accounting
to the Federal income tax method of accounting for the years
ended December 31 are as follows:
1996 1995 1994
Net loss - financial ($268,477) ($582,801) ($697,156)
Adjustments
resulting from:
Book to tax difference in
depreciation and
amortization 236,810 452,864 589,634
Net loss - tax method ($31,667) ($129,937) ($107,522)
Partners' equity - financial $4,122,397 $4,390,874 $4,973,675
Increases
resulting from:
Book to tax difference in
depreciation and
amortization and
valuation allowances 2,861,161 2,624,351 2,171,487
Selling expenses for
Partnership Units 1,713,666 1,713,666 1,713,666
Partners' equity - tax $8,697,224 $8,728,891 $8,858,828
Taxable loss per Limited
Partnership Unit after
giving effect to the
taxable loss allocated
to the General Partner ($1.36) ($5.59) ($4.62)
NOTE 8 - LEASES
The Partnership leases its properties under long term
noncancelable operating leases to various tenants. The
facilities are leased through agreements for rents based on the
square footage leased. Minimum annual base rental payments under
these leases for the years ending December 31 are as follows:
1997 $619,802
1998 454,187
1999 253,715
2000 97,544
2001 39,950
Thereafter - 0 -
Total $1,465,198
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the
Partnership in estimating its fair value disclosures for
financial instruments.
Cash and cash equivalents, Investment securities and Due
from joint venture
The carrying amount approximates fair value because of the
short maturity and or liquid nature of these instruments.
Note payable
The fair value of the Partnership's Note Payable is
estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to the
Partnership for debt of the same remaining maturities.
The estimated fair values of the Partnership's financial
instruments as of December 31 are as follows:
1996 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Assets
Cash and cash
equivalents $701,828 $701,828 $462,947 $462,947
Investment
securities - - - - - - - - 1,214,118 1,214,118
Due from
joint venture 1,514,787 (A) 1,231,089 (A)
Liabilities
Note payable $4,928,442 $4,928,442 $4,986,374 $4,986,374
(A) It is not practicable to determine the fair value of the Due
from joint venture due to the related party nature of the
arrangement.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Partnership is involved in litigation arising in the normal
course of its business. In the opinion of management, the
Partnership's recovery or liability if any, under any pending
litigation would not materially affect its financial condition or
operations.
PART III
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors. The Partnership is managed by
Capital Builders, Inc. ("CB"), the Managing General Partner. The
following are the names and other information relating to the
Managing General Partner. No expiration date has been set for
the term during which the Managing General Partner is to serve.
MANAGING GENERAL PARTNER
The Partnership is being managed by CB, the Managing General
Partner. CB is a California corporation organized in May 1978,
with its executive offices at 4700 Roseville Road, Suite 206,
North Highlands, California 95660 (telephone number 916-331-
8080). To date, CB has organized ten partnerships to engage in
commercial real estate development. As the General Partner, CB
may be responsible for certain liabilities that a partnership it
manages is unable to pay. In addition, CB, in the normal course
of business, has guaranteed certain debt obligations of the
Partnerships it sponsored aggregating $3,440,000.
The officers, directors, and key personnel of CB are as follows:
Name Office
Michael J. Metzger President and Director
Mark J. Leggio Director
Ellen Wilcox Director
Michael J. Metzger: Mr. Metzger, 52, is responsible for the
general management of CB. Mr. Metzger assumed responsibility for
the management of CB in December 1986. He was formerly the
Executive Vice-President of The Elder-Nelson Company (EN) and its
subsidiary, the Elder-Nelson Equities Corporation - affiliated
companies which provided underwriting and administrative services
to CB. Prior to joining EN in 1977, Mr. Metzger was
Partner/General Manager for two years in his family's real estate
contracting, development and syndication business. Mr. Metzger
has also had five years of experience in manufacturing management
and served as an Army Officer for four years. Mr. Metzger holds
a B.S. degree in Business and Industrial Management as well as
licenses in Real Estate, Securities and Insurance.
Ellen Wilcox: Ellen Wilcox is the Owner/Manager of Wilcox
Financial Services, a Registered Investment Advisor in San Carlos
CA. She is licensed in General Securities and Insurance through
Linsco/Private Ledger, an NASD Registered Broker/Dealer. As an
Investment Advisor and Broker, Ms. Wilcox provides a full range
of investment products and services to individuals and small
business owners. She has been actively providing such services
since 1986. Ms. Wilcox teaches classes on retirement planning,
investment strategies, and basic money management. She is a
popular speaker and lecturer on financial topics, has authored
many published articles, and has appeared on several radio shows.
Mark J. Leggio: Mark Leggio is the Owner of Mark J. Leggio, CPA.
He provides tax accounting and business consultation services to
a wide variety of small and mid-size businesses. In addition, he
is the founding shareholder and chief financial officer of Green
Planet Juicery, Inc., located in the Sacramento area. From 1978
to 1995 he worked for KPMG Peat Marwick and was a managing
partner when he left. Mr. Leggio holds a Bachelor of Science
degree in Accounting from the University of Southern California,
where he graduated cum laude with a 4.0 grade point average in
his major.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have any officers or employees and,
therefore, does not pay compensation to such persons. The
Partnership's business is conducted by the Managing General
Partner which is entitled under Article IV of the Partnership
Agreement to receive underwriting commissions, acquisition fees,
property management fees, subordinated real estate commission,
share of distribution and an interest in the Partnership. The
Managing General Partner's fees totaled $52,947 in 1996,
consisting entirely of property management fees which are
calculated as 5% of gross rental revenues collected.
In addition to the fees described above, the General Partner is
entitled to reimbursement for out of pocket expenses incurred on
behalf of the Partnership. Such expenses aggregated $176,641 in
1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Managing General Partner contributed $1,000 to the
Partnership Capital accounts, however, no securities were issued
in respect thereof. No person is known to the Partnership to own
beneficially more than 5% of the Units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership agreement (see Part IV, Item 14(a)(4) Exhibits)
which was executed in 1985, authorized the compensation set forth
below to be paid to the Managing General Partner and to
affiliates of the Managing General Partner.
During the year ended December 31, 1996, the Managing General
Partner and/or its affiliate received $176,641 for reimbursement
of administrative services and $52,947 for property management
and administrative fees.
PART IV
ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
EXHIBIT
NUMBER EXHIBIT
(a) 1,2 See Item 8 of this Form 10-K for the
Consolidated Financial Statements of the
Partnership, Notes thereto, and Supplementary
Schedules. An index to Financial Statements and
Schedules is included and incorporated herein by
reference.
4 Limited Partnership Agreement dated February
6, 1986 filed as exhibit 3.3 and the Amendment to
the Limited Partnership Agreement dated May 22,
1986, filed as exhibit 3.4 to Registration
Statement No. 2-96042 of Capital Builders
Development Properties II, a California Limited
Partnership are hereby incorporated by reference.
11 Statement regarding computation of per Unit
earnings is not included because the computation
can be clearly determined from the material
contained in this report.
(b) Reports on Form 8-K
The Partnership filed an 8-K dated November
11, 1992.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Capital Builders Development Properties II
a California Limited Partnership
By CAPITAL BUILDERS, INC.,
The Managing General Partner,
For and On Behalf of the
Capital Builders Development Properties II
A California Limited Partnership
President
Michael J. Metzger Date
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
on the date indicated.
Signature Title Date
Associate General
Michael J. Metzger Partner; President and
Director of Capital Builders,
Inc. ("CB")
Chief Financial
Kenneth L. Buckler Officer of CB
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
The Partnership has not sent an annual report or proxy statements
to the Limited Partners and does not intend to send a proxy
statement to the Limited Partners. The Partnership will send the
Limited Partners an annual report and will furnish the Commission
with copies of the annual report on or before April 30, 1997
_______________________________
1