Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
______________
FORM
10-Q
______________
(Mark
One)
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number 0-13782
INDEPENDENCE
TAX CREDIT PLUS L.P. II
(Exact
name of registrant as specified in its charter)
Delaware
|
13-3646846
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
625
Madison Avenue, New York, New York
|
10022
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code (212) 317-5700
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 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 þ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
|
Accelerated
filer
|
|
Non-accelerated
filer (Do not
check if a smaller reporting company)
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No þ
PART I –
Financial Information
Item
1. Financial Statements
INDEPENDENCE
TAX CREDIT PLUS L.P. II
AND
SUBSIDIARIES
Consolidated
Balance Sheets
September
30,
2009
|
March
31,
2009
|
||||||
(Unaudited)
|
(Audited)
|
||||||
ASSETS
|
|||||||
Property
and equipment at cost, net of accumulated depreciation of $46,890,457 and
$45,187,290, respectively
|
$
|
60,724,612
|
$
|
62,427,780
|
|||
Cash
and cash equivalents
|
1,311,643
|
1,300,092
|
|||||
Cash
held in escrow
|
3,306,590
|
2,970,379
|
|||||
Deferred
costs, net of accumulated amortization of $209,015 and $193,544,
respectively
|
197,990
|
213,461
|
|||||
Other
assets
|
465,144
|
397,259
|
|||||
Total
assets
|
$
|
66,005,979
|
$
|
67,308,971
|
|||
LIABILITIES
AND PARTNERS’ DEFICIT
|
|||||||
Liabilities:
|
|||||||
Mortgage
notes payable
|
$
|
56,616,560
|
$
|
56,945,695
|
|||
Accounts
payable
|
883,204
|
747,108
|
|||||
Security
deposit payable
|
458,961
|
457,037
|
|||||
Accrued
interest
|
23,131,876
|
22,239,687
|
|||||
Due
to local general partners and affiliates
|
2,477,278
|
2,545,330
|
|||||
Due
to general partner and affiliates
|
6,468,464
|
6,108,050
|
|||||
Total
liabilities
|
90,036,343
|
89,042,907
|
|||||
Commitments
and contingencies (Note 4)
|
|||||||
Partners’
deficit:
|
|||||||
Limited
partners (58,928 BACs issued and outstanding)
|
(21,397,101
|
)
|
(19,369,227
|
)
|
|||
General
partner
|
(744,890
|
)
|
(724,890
|
)
|
|||
Independence
Tax Credit Plus L.P. II total
|
(22,141,991
|
)
|
(20,094,117
|
)
|
|||
Noncontrolling
interests
|
(1,888,373
|
)
|
(1,639,819)
|
||||
Total
partners’ deficit
|
(24,030,364
|
)
|
(21,733,936
|
)
|
|||
Total
liabilities and partners’ deficit
|
$
|
66,005,979
|
$
|
67,308,971
|
|||
See
accompanying notes to consolidated financial statements.
|
- 2
-
INDEPENDENCE
TAX CREDIT PLUS L.P. II
AND
SUBSIDIARIES
Consolidated
Statements of Operations
(Unaudited)
Three
Months Ended
September
30,
|
Six
Months Ended
September
30,
|
||||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||
Revenues
|
|||||||||||||
Rental
income
|
$
|
2,840,173
|
$
|
2,674,817
|
$
|
5,694,910
|
$
|
5,355,631
|
|||||
Other
income
|
73,782
|
99,573
|
145,946
|
182,941
|
|||||||||
Total
revenues
|
2,913,955
|
2,774,390
|
5,840,856
|
5,538,572
|
|||||||||
Expenses
|
|||||||||||||
General
and administrative
|
636,730
|
614,803
|
1,438,198
|
1,331,393
|
|||||||||
General
and administrative-related parties (Note 2)
|
275,137
|
261,634
|
551,119
|
525,512
|
|||||||||
Repairs
and maintenance
|
679,748
|
738,121
|
1,370,026
|
1,453,535
|
|||||||||
Operating
|
335,177
|
382,528
|
756,671
|
817,110
|
|||||||||
Taxes
|
192,350
|
191,482
|
386,994
|
392,121
|
|||||||||
Insurance
|
167,482
|
167,329
|
328,266
|
339,675
|
|||||||||
Financial
|
680,356
|
676,890
|
1,354,738
|
1,362,341
|
|||||||||
Depreciation
and amortization
|
863,376
|
841,867
|
1,718,638
|
1,671,309
|
|||||||||
Total
expenses
|
3,830,356
|
3,874,654
|
7,904,650
|
7,892,996
|
|||||||||
Net
loss
|
(916,401
|
)
|
(1,100,264
|
)
|
(2,063,794
|
)
|
(2,354,424
|
)
|
|||||
Net
loss attributable to noncontrolling interests
|
6,790
|
2,616
|
15,920
|
6,054
|
|||||||||
Net
loss attributable to Independence Tax Credit Plus L.P. II
|
$
|
(909,611
|
)
|
$
|
(1,097,648
|
)
|
$
|
(2,047,874
|
)
|
$
|
(2,348,370
|
)
|
|
Net
loss-limited partners (BACs holders)
|
$
|
(900,515
|
)
|
$
|
(1,086,672
|
)
|
$
|
(2,027,395
|
)
|
$
|
(2,324,886
|
)
|
|
Number
of BACs outstanding
|
58,928
|
58,928
|
58,928
|
58,928
|
|||||||||
Net
loss per weighted average BAC
|
$
|
(15.28
|
)
|
$
|
(18.44
|
)
|
$
|
(34.40
|
)
|
$
|
(39.45
|
)
|
|
See
accompanying notes to consolidated financial
statements.
|
- 3
-
INDEPENDENCE
TAX CREDIT PLUS L.P. II
AND
SUBSIDIARIES
Consolidated
Statement of Changes in
Partners’
Deficit
(Unaudited)
Total
|
Limited
Partners
|
General
Partner
|
Noncontrolling
Interests
|
||||||||||
Partners’
deficit – April 1, 2009
|
$
|
(21,733,936
|
)
|
$
|
(19,369,227
|
)
|
$
|
(724,890
|
)
|
$
|
(1,639,819
|
)
|
|
Net
loss
|
(2,063,794
|
)
|
(2,027,874
|
)
|
(20,000
|
)
|
(15,920
|
)
|
|||||
Distributions
|
(232,634
|
)
|
-
|
-
|
(232,634
|
)
|
|||||||
Partners’
deficit – September 30, 2009
|
$
|
(24,030,364
|
)
|
$
|
(21,397,101
|
)
|
$
|
(744,890
|
)
|
$
|
(1,888,373
|
)
|
|
See accompanying notes to
consolidated financial
statements.
|
- 4
-
INDEPENDENCE
TAX CREDIT PLUS L.P. II
AND
SUBSIDIARIES
Consolidated
Statements of Cash Flows
(Unaudited)
Six
Months Ended
September
30,
|
|||||||
2009
|
2008*
|
||||||
Cash
flows from operating activities:
|
|||||||
Net
loss
|
$
|
(2,063,794
|
)
|
$
|
(2,354,424
|
)
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|||||||
Depreciation
and amortization
|
1,718,638
|
1,671,309
|
|||||
Increase
in accounts payable
|
136,096
|
28,098
|
|||||
Increase
in security deposit payable
|
1,924
|
11,561
|
|||||
Increase
in accrued interest
|
892,189
|
988,898
|
|||||
Increase
in cash held in escrow
|
(215,843
|
)
|
(233,940
|
)
|
|||
Increase
in other assets
|
(67,885
|
)
|
(29,795
|
)
|
|||
Increase
in due to local general partners and affiliates
|
1,106
|
31,433
|
|||||
Decrease
in due to local general partners and affiliates
|
(54,366
|
)
|
(9,639
|
)
|
|||
Increase
in due to general partner and affiliates
|
360,414
|
262,272
|
|||||
Total
adjustments
|
2,772,273
|
2,720,197
|
|||||
Net
cash provided by operating activities
|
708,479
|
365,773
|
|||||
Cash
flows from investing activities:
|
|||||||
Improvements
to property and equipment
|
-
|
(35,745
|
)
|
||||
Increase
in cash held in escrow
|
(120,368
|
)
|
(120,196
|
)
|
|||
Increase
in due to local general partners and affiliates
|
-
|
47,695
|
|||||
Net
cash used in investing activities
|
(120,368
|
)
|
(108,246
|
)
|
|||
Cash
flows from financing activities:
|
|||||||
Principal
payments of mortgage notes
|
(329,135
|
)
|
(303,098
|
)
|
|||
(Decrease)
increase in due to local general partners and affiliates
|
(14,791
|
)
|
1,813
|
||||
Decrease
in capitalization of consolidated subsidiaries attributable to
noncontrolling interests
|
(232,634
|
)
|
(32,046
|
)
|
|||
Net
cash used in financing activities
|
(576,560
|
)
|
(331,331
|
)
|
|||
Net
increase (decrease) in cash and cash equivalents
|
11,551
|
(75,804
|
)
|
||||
Cash
and cash equivalents at beginning of period
|
1,300,092
|
1,085,780
|
|||||
Cash
and cash equivalents at end of period
|
$
|
1,311,643
|
$
|
1,009,976
|
|||
*
Reclassified for comparative purposes.
See
accompanying notes to consolidated financial
statements.
|
- 5
-
INDEPENDENCE
TAX CREDIT PLUS L.P. II
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
September
30, 2009
(Unaudited)
NOTE 1 –
General
The
consolidated financial statements include the accounts of Independence Tax
Credit Plus L.P. II (the “Partnership”) and fifteen other limited partnerships
(“subsidiary partnerships”, “subsidiaries” or “Local Partnerships”) owning
leveraged apartment complexes that are eligible for the low-income housing tax
credit. The general partner of the Partnership is Related
Independence Associates L.P., a Delaware limited partnership (the “General
Partner”). Through the rights of the Partnership and/or an affiliate
of the General Partner, which affiliate has a contractual obligation to act on
behalf of the Partnership, to remove the general partner of the subsidiary
partnerships (each a “Local General Partner”) and to approve certain major
operating and financial decisions, the Partnership has a controlling financial
interest in the subsidiary partnerships.
For
financial reporting purposes, the Partnership’s fiscal quarter ends September
30. The Partnership’s fiscal quarter ends September 30, in order to
allow adequate time for the subsidiary partnerships’ financial statements to be
prepared and consolidated. All subsidiaries have fiscal quarters
ending June 30. Accounts of the subsidiary partnerships have been
adjusted for intercompany transactions from April 1 through September
30.
All
intercompany accounts and transactions with the subsidiary partnerships have
been eliminated in consolidation.
The
Partnership has adopted FASB ASC 810, Noncontrolling Interests in Consolidated
Financial Statements, which is effective for fiscal year ends beginning after
December 15, 2008. In accordance with FASB ASC 810, losses
attributable to noncontrolling interests amounted to approximately $7,000 and
$16,000 for the three and six months ended September 30, 2009. Prior
to the adoption of this ASC, losses attributable to noncontrolling interests
which exceeded the noncontrolling interests’ investment in a subsidiary
partnership were charged to the Partnership. Such losses aggregated
approximately $7,000 and $14,000 for the three and six months ended September
30, 2008. Increases (decreases) in the capitalization of consolidated
subsidiaries attributable to noncontrolling interest arise from cash
contributions from and cash distributions to the noncontrolling interest
partners. The Partnership’s investment in each subsidiary is equal to
the respective subsidiary’s partners’ equity less noncontrolling interest
capital, if any.
Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) have been omitted or
condensed. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Partnership’s Annual Report on Form 10-K for the year ended March 31,
2009.
The books
and records of the Partnership are maintained on the accrual basis of accounting
in accordance with GAAP. In the opinion of the General Partner of the
Partnership, the accompanying unaudited financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of the Partnership as of September 30,
2009, the results of operations for the three and six months ended September 30,
2009 and 2008 and its cash flows for the six months ended September 30, 2009 and
2008, respectively. However, the operating results for the three and
six months ended September 30, 2009 may not be indicative of the results for the
year.
Recent Accounting
Pronouncements
In June
2009, the FASB issued ASC 105-10 (formerly SFAS No. 168), “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles”. The objective of this statement is to replace SFAS No.
162 and to establish the FASB Accounting Standards Codification as the source of
the authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with GAAP. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. This ASC was effective for financial statements issued
for interim and annual periods ending after September 15, 2009 and was adopted
by the Partnership for its second quarter reporting. The adoption did
not have a significant impact on the reporting of our financial position,
results of operations or cash flows.
NOTE 2 –
Related Party Transactions
An
affiliate of the General Partner has a 0.01% interest as a special limited
partner in each of the Local Partnerships.
The costs
incurred to related parties for the three and six months ended September 30,
2009 and 2008 were as follows:
Three
Months Ended
September
30,
|
Six
Months Ended
September
30,
|
||||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||
Partnership
management fees (a)
|
$
|
136,500
|
$
|
136,500
|
$
|
273,000
|
$
|
273,000
|
|||||
Expense
reimbursement (b)
|
40,269
|
32,029
|
80,539
|
64,057
|
|||||||||
Local
administrative fee (c)
|
10,875
|
10,500
|
21,750
|
21,000
|
|||||||||
Total
general and administrative-General Partner
|
187,644
|
179,029
|
375,289
|
358,057
|
|||||||||
Property
management fees incurred to affiliates of the subsidiary partnerships'
general partners
|
87,493
|
82,605
|
175,830
|
167,455
|
|||||||||
Total
general and administrative-related parties
|
$
|
275,137
|
$
|
261,634
|
$
|
551,119
|
$
|
525,512
|
- 6
-
INDEPENDENCE
TAX CREDIT PLUS L.P. II
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
September
30, 2009
(Unaudited)
(a)
|
The
General Partner is entitled to receive a partnership management fee, after
payment of all Partnership expenses, which together with the annual local
administrative fees will not exceed a maximum of 0.5% per annum of
invested assets (as defined in the Partnership’s agreement of limited
partnership (the “Partnership Agreement”)), for administering the affairs
of the Partnership. Subject to the foregoing limitation, the
partnership management fee will be determined by the General Partner in
its sole discretion based upon its review of the Partnership’s
investments. Unpaid partnership management fees for any year
have been accrued without interest and will be payable from working
capital reserves or to the extent of available funds after the Partnership
has made distributions to the limited partners of sale or refinancing
proceeds equal to their original capital contributions plus a 10% priority
return thereon (to the extent not theretofore paid out of cash
flow). Partnership management fees owed to the General Partner
amounting to approximately $5,666,000 and $5,393,000 were accrued and
unpaid as of September 30, 2009 and March 31, 2009,
respectively. Without the General Partner’s advances and
continued accrual without payment of certain fees and expense
reimbursements, the Partnership would not be in a position to meet its
obligations.
|
(b)
|
The
Partnership reimburses the General Partner and its affiliates for actual
Partnership operating expenses incurred by the General Partner and its
affiliates on the Partnership’s behalf. The amount of
reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement. Another affiliate of the General Partner
performs asset monitoring for the Partnership. These services
include site visits and evaluations of the subsidiary partnerships’
performance.
|
(c)
|
Independence
SLP L.P., a special limited partner of the subsidiary partnerships, is
entitled to receive a local administrative fee of up to $5,000 per year
from each subsidiary partnership.
|
NOTE 3 –
Fair Value of Financial Instruments
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments (all of which are held for nontrading purposes)
for which it is practicable to estimate that value:
Cash and Cash Equivalents,
Investments Available-for-Sale and Cash Held in Escrow
The
carrying amount approximates fair value.
Mortgage Notes
Payable
The
Partnership adopted FASB ASC 820 – “Fair Value Measurements” for
financial assets and liabilities. ASC 820 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. ASC 820 applies to reported balances that
are required or permitted to be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any new fair value
measurements of reported balances.
As
permitted, we chose not to elect the fair value option as prescribed by FASB
SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities” – Including an
Amendment of FASB Statement No. 115, for our financial assets and liabilities
that had not been previously carried at fair value. Therefore, we did
not elect to fair value any additional items under SFAS No. 159.
The
estimated fair value of financial instruments has been determined using
available market information or other appropriate valuation
methodologies. However, considerable judgment is required in
interpreting market data to develop estimates of fair
value. Consequently, the estimates are not necessarily indicative of
the amounts that could be realized or would be paid in a current market
exchange. The following are financial instruments for which the
Partnership’s estimate of fair value differs from the carrying
amounts:
At
September 30, 2009
|
At
March 31, 2009
|
||||||||||||
Carrying
Amount |
Fair
Value
|
Carrying
Amount |
Fair
Value
|
||||||||||
LIABILITIES:
|
|||||||||||||
Mortgage
notes
|
$
|
56,616,560
|
$
|
41,074,174
|
$
|
56,945,695
|
$
|
39,563,316
|
For the
mortgage notes, fair value is calculated using present value cash flow models
based on a discount rate. It was determined that the Tender Option
Bond market, through which these bonds have been securitized in the past,
continued to see a dramatic slowdown with limited liquidity and significantly
reduced transaction levels. To assist in valuing these notes, the
Partnership held separate discussions with various third party investment banks
who are leaders in the municipal bond business. The discussions
produced assumptions that were based on market conditions as well as the credit
quality of the underlying property partnerships, which held the mortgage notes,
to determine what discount rates to utilize.
NOTE 4 –
Commitments and Contingencies
a)
|
Subsidiary
Partnerships – Going Concern
|
Creative Choice Homes VI
Ltd. (“Creative Choice”)
The Local
General Partner funded approximately $142,000 to cover operating costs during
the year ended 2008, and Creative Choice is in default of one of its subordinate
notes. These factors create an uncertainty about Creative Choice’s
ability to continue as a going concern. The ability of Creative
Choice to continue as a going concern is dependent on the Local General
Partner’s ability and willingness to continue funding operating
losses.
- 7
-
INDEPENDENCE
TAX CREDIT PLUS L.P. II
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
September
30, 2009
(Unaudited)
During
the year ended December 31, 2005, the property incurred hurricane
damage. The total cost to bring the units back into service was
approximately $1,800,000. Creative Choice contracted with Naimisha
Construction, a related party, for $1,600,000 to complete the repairs and
renovations of the buildings damaged. During 2005, emergency
insurance proceeds had been received by Creative Choice to offset the cost of
immediate repair work. In 2006, Washington Mutual, the mortgage
holder, received the remaining balance of the insurance proceeds which were
subsequently reimbursed to Creative Choice in the amount of
$1,433,817. As of September 30, 2009, all hurricane repairs and
renovations had been completed and a balance of approximately $634,500 remains
payable to Naimisha Construction.
Creative
Choice also suffered fire damage on June 20, 2006 affecting nine of its
units. As of September 30, 2009, $567,370 of its insurance proceeds
had been received to cover the cost of immediate repair work and securing the
location. Naimisha Construction, a related party, has been contracted
to complete the repairs for $673,889 and $206,519 remains payable as of
September 30, 2009 to Naimisha Construction.
The above
circumstances called into question the recoverability of the carrying amounts of
the building. As a result, during the year ended December 31, 2006,
pursuant to ASC 360, an impairment loss of $603,733 was recognized on the
building and improvements.
The
Partnership’s investment in Creative Choice at September 30, 2009 and March 31,
2009 was reduced to zero as a result of prior years’ losses and the
noncontrolling interest balance was $0 at each date. Creative
Choice’s net income (loss) after noncontrolling interests amounted to
approximately $300 and ($124,000) for the six months ended September 30, 2009
and 2008, respectively.
b)
|
Subsidiary
Partnerships – Other
|
Mansion Court Associates
(“Mansion Court”)
Mansion
Court had a net loss of $48,366 for the six months ended September 30,
2009. In prior years and in 2009, Mansion Court has sustained
operating losses and has not generated sufficient cash flow from operations to
meet its obligations, primarily payable to related parties. The Local
General Partner has provided funding in the past years; however there is no
obligation to do so. The property also has experienced a high number
of vacancies due to deteriorating conditions in the area. As of
September 30, 2009, the project had 22 vacant units. In addition,
Mansion Court’s physical inspection by the Pennsylvania Housing Finance Agency
(“PHFA”) noted 15 units for poor physical condition which would not meet a level
of living standard. Although the Local General Partner could make the
necessary repairs to improve the units to a living standard, vacancies continue
to increase due to declining conditions in the surrounding neighborhood, and the
expenditure of funds at this time to make improvements would not benefit the
project. The Local General Partner is exploring options to mitigate
increased crime and deteriorating neighborhood conditions. The
options include assistance from the local government housing agencies and
possible transfer of ownership.
During
the year ended March 31, 2009, in accordance with ASC 360, Property, Plant and Equipment,
the Partnership deemed the building of Mansion Court further impaired and
in addition to an earlier writedown of approximately $1,342,000, wrote it down
to its new reduced fair value of approximately $338,000, which resulted in a
further loss on impairment of approximately $463,000. Fair value was
obtained from an assessment made by the management after indications that the
carrying value of the assets were not recoverable, evidenced by a history of net
operating losses over the past few years as discussed above. In
addition, at September 30, 2009, Mansion Court was contingently liable in an
open letter of credit issued in favor of the PHFA in the amount of
$24,000.
The
Partnership’s investment in Mansion Court at September 30, 2009 and March 31,
2009 was zero as a result of prior years’ losses and the noncontrolling
interests balance was ($1,989) and ($1,500) at each date,
respectively. Mansion Court’s net loss after noncontrolling interests
amounted to approximately $48,000 and $63,000 for the six months ended September
30, 2009 and 2008, respectively.
c)
|
Uninsured
Cash and Cash Equivalents
|
The
Partnership maintains its cash and cash equivalents in various
banks. The accounts at each bank are guaranteed by the Federal
Deposit Insurance Corporation up to $250,000.
d)
|
Cash
Distributions
|
Cash
distributions from the Local Partnerships to the Partnership are restricted by
the provisions of the respective agreements of limited partnership of the Local
Partnerships and/or the U.S. Department of Housing and Urban
Development.
e)
|
Property
Management Fees
|
Property
management fees incurred by the Local Partnerships amounted to $200,521 and
$186,406 and $398,915 and $376,144 for the three and six months ended September
30, 2009 and 2008, respectively.
- 8
-
INDEPENDENCE
TAX CREDIT PLUS L.P. II
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
September
30, 2009
(Unaudited)
f)
|
Other
|
The
Partnership and Beneficial Assignment Certificates (“BACs”) holders began to
recognize the low-income housing credit (“Tax Credit”) with respect to an
apartment complex (“Property”) when the periods of the Partnership’s entitlement
to claim Tax Credits for such Property commenced (for each Property, generally
ten years from the date of investment or, if later, the date the Property is
placed in service) (“Credit Period”). Because of the time required
for the acquisition, completion and rent-up of Properties, the amount of Tax
Credits per BAC gradually increased over the first three years of the
Partnership’s existence. Tax Credits not recognized in the first
three years will be recognized in the 11th through 13th years. Once a
Local Partnership has become eligible to recognize Tax Credits, it may lose such
eligibility and suffer an event of “recapture” if its Property fails to remain
in compliance with the Tax Credit requirements during the 15-year period
commencing at the beginning of the Credit Period (“Compliance
Period”). None of the Local Partnerships in which the Partnership has
acquired an interest has suffered an event of recapture. As of
December 31, 2007, all the Local Partnerships had completed their Credit
Periods, and the Partnership had met its primary objective of generating Tax
Credits for qualified BACs holders. However, each Local Partnership
must continue to comply with the Tax Credit requirements until the end of the
Compliance Period in order to avoid recapture of the Tax Credits. The
Compliance Periods will continue through December 31, 2012 with respect to the
Properties depending upon when the Compliance Period commenced.
g)
|
Subsequent
Events
|
We
evaluated all subsequent events from the date of the balance sheet through
November 4, 2009, which represents the issuance date of these financial
statements. There were no events or transactions occurring during
this subsequent event reporting period which require recognition or disclosure
in the financial statements.
- 9
-
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital
Resources
As of
September 30, 2009, the Partnership has invested all of its net proceeds in
fifteen Local Partnerships. Approximately $282,000 of the purchase
price remains to be paid to the Local Partnerships (including approximately
$24,000 being held in escrow at the Partnership level).
Short-Term
The
Partnership’s primary sources of funds include working capital reserves,
interest earned on working capital reserves and distributions received from the
Local Partnerships. However, none of these sources provides a
material amount of funds.
For the
six months ended September 30, 2009, cash and cash equivalents of the
Partnership and its fifteen consolidated Local Partnerships increased
approximately $12,000. This increase was provided by operating
activities ($708,000), which exceeded principal payments of mortgage notes
($329,000), a decrease in capitalization of consolidated subsidiaries
attributable to minority interest ($233,000), an increase in cash held in escrow
relating to investing activities $(120,000) and a net decrease due to local
general partners and affiliates relating to financing activities
($15,000). Included in the adjustments to reconcile the net loss to
net cash provided by operating activities is depreciation and amortization
($1,719,000).
At
September 30, 2009, there was approximately $314,000 in the working capital
reserves at the Partnership level. For the six months ended September
30, 2009, the Partnership received approximately $103,000 in distributions from
the Local Partnerships. Management anticipates receiving additional
distributions in the future, although not to a level sufficient to return to the
limited partners their original investments. These distributions, if
any, as well as the working capital reserves referred to above and the deferral
of fees by the General Partner referred to below, will be used to meet the
operating expenses of the Partnership.
Total
expenses for the three and six months ended September 30, 2009 and 2008,
excluding depreciation and amortization, interest and general and
administrative–related parties, totaled $2,011,487 and $2,094,263 and $4,280,155
and $4,333,834, respectively.
Accounts
payable as of September 30, 2009 and March 31, 2009 were $883,204 and $747,108,
respectively. Accounts payable are short term liabilities which are
expected to be paid from operating cash flows, working capital balances at the
Local Partnership level, Local General Partner advances and, in certain
circumstances, advances from the Partnership. The Partnership
believes it (and the applicable Local Partnerships) has sufficient liquidity and
ability to generate cash and to meet existing and known or reasonably likely
future cash requirements over both the short and long term.
Security
deposits payable are offset by cash held in security deposits, which are
included in “Cash held in escrow” on the financial statements.
Accrued
interest payable as of September 30, 2009 and March 31, 2009 was $23,131,876 and
$22,239,687, respectively. Accrued interest payable represents the
accrued interest on all mortgage loans, which include primary and secondary
loans. Certain secondary loans have provisions such that interest is
accrued but not payable until a future date. The Partnership
anticipates the payment of accrued interest on the secondary loans (which make
up the majority of the accrued interest payable amount which has been
accumulating since the Partnership’s investment in the respective Local
Partnership) will be made from future refinancings or sales proceeds of the
respective Local Partnerships. In addition, each Local Partnership’s
mortgage notes are collateralized by the land and buildings of the respective
Local Partnership, and are without further recourse to the
Partnership.
Long-Term
Partnership
management fees owed to the General Partner amounting to approximately
$5,666,000 and $5,393,000 were accrued and unpaid as of September 30, 2009 and
March 31, 2009, respectively. Without the General Partner’s advances
and continued accrual without payment of certain fees and expense
reimbursements, the Partnership will not be in a position to meet its
obligations.
For a
discussion of contingencies affecting certain Local Partnerships, see Item 1,
Note 4. Since the maximum loss the Partnership would be liable for is
its net investment in the respective Local Partnerships, the resolution of the
existing contingencies is not anticipated to impact future results of
operations, liquidity or financial condition in a material
way. However, the Partnership’s loss of its investment in a Local
Partnership will eliminate the ability to generate future Tax Credits from such
Local Partnership and may also result in recapture of Tax Credits, if the
investment is lost before the expiration of the 15-year period commencing at the
beginning of the Credit Period (“Compliance Period”).
The Local
Partnerships are impacted by inflation in several ways. Inflation
allows for increases in rental rates generally to reflect the impact of higher
operating and replacement costs. Furthermore, inflation generally
does not impact the fixed long-term financing under which real property
investments were purchased. Inflation also affects the Local
Partnerships adversely by increasing operating costs, such as fuel, utilities,
and labor.
Management
is not aware of any trends or events, commitments or uncertainties which have
not otherwise been disclosed that will or are likely to impact liquidity in a
material way. Management believes the only impact would be from laws
that have not yet been adopted. The portfolio is diversified by the
location of the Properties around the United States so that if one area of the
country is experiencing downturns in the economy, the remaining Properties in
the portfolio may be experiencing upswings. However, the geographic
diversification of the portfolio may not protect against a general downturn in
the national economy. The Partnership has fully invested the proceeds
of its offering in fifteen Local Partnerships, all of which have fully utilized
their Tax Credits. As of December 31, 2007, all the Local
Partnerships had completed their tax credit periods, and the Partnership had met
its primary objective of generating Tax Credits for qualified BACs
holders. However, each Local Partnership must continue to comply with
the Tax Credit requirements until the end of the Compliance Period in order to
avoid recapture of the Tax Credits. The Compliance Periods will
continue through December 31, 2012 with respect to the Properties depending upon
when the Compliance Period commenced.
- 10
-
Off-Balance Sheet
Arrangements
The
Partnership has no off-balance sheet arrangements.
Tabular Disclosure of
Contractual Obligations
The
Partnership discloses in Item 7 of the Partnership’s Annual Report on Form 10-K
for the year ended March 31, 2009, the Partnership’s commitments to make future
payments under its debt agreements and other contractual
obligations. There are no material changes to such disclosure or
amounts as of September 30, 2009.
Fair Value
Measurements
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments (all of which are held for nontrading purposes)
for which it is practicable to estimate that value:
Cash and Cash Equivalents,
Investments Available-for-Sale and Cash Held in Escrow
The
carrying amount approximates fair value.
Mortgage Notes
Payable
The
Partnership adopted FASB ASC 820 – “Fair Value Measurements” for
financial assets and liabilities. ASC 820 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. ASC 820 applies to reported balances that
are required or permitted to be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any new fair value
measurements of reported balances.
As
permitted, we chose not to elect the fair value option as prescribed by FASB
SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities” – Including an
Amendment of FASB Statement No. 115, for our financial assets and liabilities
that had not been previously carried at fair value. Therefore, we did
not elect to fair value any additional items under SFAS No. 159.
The
estimated fair value of financial instruments has been determined using
available market information or other appropriate valuation
methodologies. However, considerable judgment is required in
interpreting market data to develop estimates of fair
value. Consequently, the estimates are not necessarily indicative of
the amounts that could be realized or would be paid in a current market
exchange. The following are financial instruments for which the
Partnership’s estimate of fair value differs from the carrying
amounts:
At
September 30, 2009
|
At
March 31, 2009
|
||||||||||||
Carrying
Amount |
Fair
Value
|
Carrying
Amount |
Fair
Value
|
||||||||||
LIABILITIES:
|
|||||||||||||
Mortgage
notes
|
$
|
56,616,560
|
$
|
41,074,174
|
$
|
56,945,695
|
$
|
39,563,316
|
For the
mortgage notes, fair value is calculated using present value cash flow models
based on a discount rate. It was determined that the Tender Option Bond market,
through which these bonds have been securitized in the past, continued to see a
dramatic slowdown with limited liquidity and significantly reduced transaction
levels. To assist in valuing these notes, the Partnership held
separate discussions with various third party investment banks who are leaders
in the municipal bond business. The discussions produced assumptions
that were based on market conditions as well as the credit quality of the
underlying property partnerships, which held the mortgage notes, to determine
what discount rates to utilize.
Critical Accounting Policies
and Estimates
The
preparation of consolidated financial statements requires management to make
estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those
estimates. The following is a summary of certain accounting estimates
considered critical by the Partnership. The summary should be read in
conjunction with the more complete discussion of the Partnership’s accounting
policies included in Item 8, Note 2 to the consolidated financial statements in
the Partnership’s Annual Report on Form 10-K for the year ended March 31,
2009.
Property and
Equipment
Property
and equipment to be held and used are carried at cost which includes the
purchase price, acquisition fees and expenses, construction period interest and
any other costs incurred in acquiring the Properties. The cost of
property and equipment is depreciated over their estimated useful lives using
accelerated and straight-line methods. Expenditures for repairs and
maintenance are charged to expense as incurred; major renewals and betterments
are capitalized. At the time property and equipment are retired or
otherwise disposed of, the cost and accumulated depreciation are eliminated from
the assets and accumulated depreciation accounts and the profit or loss on such
disposition is reflected in earnings. The Partnership complies with
ASC 360, Property, Plant and
Equipment. A loss on impairment of assets is recorded when
management estimates amounts recoverable through future operations and sale of
the Property on an undiscounted basis are below depreciated cost. At
that time, Property investments themselves are reduced to estimated fair value
(generally using discounted cash flows).
Through
September 30, 2009, the Partnership has recorded approximately $6,334,000 as an
aggregate loss on impairment of assets.
Revenue
Recognition
Rental
income is earned primarily under standard residential operating leases and is
typically due the first day of each month, but can vary by Property due to the
terms of the tenant leases. Rental income is recognized when earned
and charged to tenants’ accounts receivable if not received by the due
date. Rental payments received in advance of the due date are
deferred until earned. Rental subsidies are recognized as rental
income during the month in which it is earned.
- 11
-
Other
revenues are recorded when earned and consist of the following
items: interest income earned on cash and cash equivalent balances
and cash held in escrow balances, income from forfeited security deposits, late
charges, laundry and vending income and other rental related items.
Income
Taxes
The
Partnership is not required to provide for, or pay, any federal income
taxes. Net income or loss generated by the Partnership is passed
through to the partners and is required to be reported by them. The
Partnership may be subject to state and local taxes in jurisdictions in which it
operates. For income tax purposes, the Partnership has a fiscal year
ending December 31.
Results of
Operations
The
Partnership’s results of operations for the three and six months ended September
30, 2009 and 2008 consisted primarily of the results of the Partnership’s
investment in fifteen consolidated Local Partnerships. The majority
of Local Partnership income continues to be in the form of rental income with
the corresponding expenses being divided among operations, depreciation and
mortgage interest.
Rental
income increased approximately 6% for the three and six months ended September
30, 2009 as compared to the corresponding periods in 2008, primarily due to
decreases in vacancies at six Local Partnerships, an increase in Section 8
rental subsidy income at two Local Partnerships and increases in rental rates at
several Local Partnerships.
Other
income decreased approximately $26,000 and $37,000 for the three and six months
ended September 30, 2009 as compared to the corresponding periods in 2008,
primarily due to an insurance refund received in the prior year at one Local
Partnership and decreases in laundry, legal, miscellaneous and interest income
at a second Local Partnership.
Operating
expenses decreased approximately $(47,000) and $(60,000) for the three and six
months ended September 30, 2009 as compared to the corresponding periods in
2008, primarily due to a decrease in the purchase of gasoline in bulk at one
Local Partnership and a decrease in trash removal expense at a second Local
Partnership.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
The
Partnership has mortgage notes that are payable in aggregate monthly
installments including principal and interest at rates varying from 0% to 9.05%
per annum. The Partnership does not believe there is a material risk
associated with the various interest rates associated with the mortgage notes as
the majority of the Local Partnership mortgage notes have fixed
rates. The Partnership disclosed in Item 8, Note 3 to the
consolidated financial statements in the Partnership’s Annual Report on Form
10-K for the year ended March 31, 2009, as well as in Item 2, the fair value of
the mortgage notes payable. There are no material changes to such
disclosure or amounts as of September 30, 2009.
The
Partnership does not have any other market risk sensitive
instruments.
Item
4T. Controls and Procedures
(a) Evaluation of Disclosure Controls
and Procedures. The Chief Executive Officer and Chief
Financial Officer of Related Independence Associates, L.P., the general partner
of the Partnership, have evaluated the effectiveness of the Partnership’s
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange
Act”) as of the end of the period covered by this report. Based on
such evaluation, such officers have concluded that, as of the end of such
period, the Partnership’s disclosure controls and procedures are
effective.
(b) Management’s Annual Report on
Internal Control over Financial Reporting. Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). In evaluating the Partnership’s internal control over
financial reporting, management has adopted the framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring organizations
of the Treadway Commission (the “COSO Framework”). Under the
supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer of the General Partner, the
Partnership conducted an evaluation of the effectiveness of its internal control
over financial reporting as of March 31, 2009. The Partnership’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with generally accepted accounting principles. Internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of
the Partnership; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the Partnership are being made only in accordance with
authorizations of management and directors of the Partnership; and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Partnership’s assets
that could have a material effect on the financial
statements. However, because of inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Based on
management’s evaluation under the COSO Framework, it has concluded that the
Partnership’s internal control over financial reporting, was, as of March 31,
2009, (1) effective at the Partnership level, in that they provide reasonable
assurance that information required to be disclosed by the Partnership in the
reports it files or submits under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and (2) ineffective at the subsidiary level due to certain
deficiencies noted in the audit reports for such
subsidiaries. Management will attempt to cause the Local General
Partner’s to remedy such deficiencies; however, the General Partner does not
have control over the internal controls at the subsidiary
level. Management believes they have sufficient controls at the
Partnership level to mitigate these deficiencies, and such deficiencies do not
have a material impact on the consolidated financial statements.
- 12
-
The
Partnership’s Annual Report on Form 10-K did not include an attestation report
of the Partnership’s registered public accounting firm regarding internal
control over financial reporting. The Partnership’s internal control
over financial reporting was not subject to attestation by the Partnership’s
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Partnership to provide only this
report.
(c) Changes in Internal Controls over Financial
Reporting. Except as noted in (b) above, during the period
ended September 30, 2009, there were no changes in the Partnership’s internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Partnership’s internal control over
financial reporting.
- 13
-
PART
II. OTHER INFORMATION
Item
1.
|
Legal
Proceedings – None
|
|
Item
1A.
|
Risk
Factors – No Changes
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds – None
|
|
Item
3.
|
Defaults
Upon Senior Securities – None
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders – None
|
|
Item
5.
|
Other
Information – None
|
|
Item
6.
|
Exhibits
|
|
(3A)
|
Agreement
of Limited Partnership of Independence Tax Credit Plus L.P. II as adopted
on February 11, 1992*
|
|
(3B)
|
Form
of Amended and Restated Agreement of Limited Partnership of Independence
Tax Credit Plus L.P. II, attached to the Prospectus as Exhibit
A**
|
|
(3C)
|
Certificate
of Limited Partnership of Independence Tax Credit Plus L.P. II as filed on
February 11, 1992*
|
|
(10A)
|
Form
of Subscription Agreement attached to the Prospectus as Exhibit
B**
|
|
(10B)
|
Escrow
Agreement between Independence Tax Credit Plus L.P. II and Bankers Trust
Company*
|
|
(10C)
|
Form
of Purchase and Sales Agreement pertaining to the Partnership’s
acquisition of Local Partnership Interests*
|
|
(10D)
|
Form
of Amended and Restated Agreement of Limited Partnership of Local
Partnerships*
|
|
(31.1)
|
||
(31.2)
|
||
(32.1)
|
||
*
|
Incorporated
herein as an exhibit by reference to exhibits filed with Post-Effective
Amendment No. 4 to the Registration Statement on Form S-11 (Registration
No. 33-37704)
|
|
**
|
Incorporated
herein as an exhibit by reference to exhibits filed with Post-Effective
Amendment No. 8 to the Registration Statement on Form S-11 (Registration
No. 33-37704)
|
- 14
-
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.
INDEPENDENCE TAX CREDIT PLUS
L.P. II
(Registrant)
By:
|
RELATED
INDEPENDENCE ASSOCIATES L.P.,
|
|||||||
General
Partner
|
||||||||
By:
|
INDEPENDENCE
ASSOCIATES GP LLC,
|
|||||||
General
Partner
|
||||||||
Date:
|
November 6, 2009
|
By:
|
/s/ Robert L. Levy
|
|||||
Robert
L. Levy
|
||||||||
Chief
Financial Officer, Principal Accounting Officer and
Director
|
||||||||
Date:
|
November 6, 2009
|
By:
|
/s/ Andrew J. Weil
|
|||||
Andrew
J. Weil
|
||||||||
President
and Chief Executive Officer
|
- 15
-