INLAND LAND APPRECIATION FUND II LP - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - INLAND LAND APPRECIATION FUND II LP	Financial_Report.xls
EX-32.2 - SECTION 1350 CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER - INLAND LAND APPRECIATION FUND II LP	d509276dex322.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER - INLAND LAND APPRECIATION FUND II LP	d509276dex312.htm
EX-32.1 - SECTION 1350 CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER - INLAND LAND APPRECIATION FUND II LP	d509276dex321.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER - INLAND LAND APPRECIATION FUND II LP	d509276dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 0-19220

Inland Land Appreciation Fund II, L.P.

(Exact name of registrant as specified in its charter)


Delaware		36-3664407
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2901 Butterfield Road, Oak Brook, IL 60523

(Address of principal executive offices)(Zip Code)

630-218-8000

(Registrant’s telephone number, including area code)

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 X No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 X 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 X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No X

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Balance Sheets

March 31, 2013 and December 31, 2012

(unaudited)


Assets		2013			2012

Current assets:
Cash and cash equivalents (Note 1)	$		3,170,310			3,039,229
Other assets			3,282			4,492


Total current assets			3,173,592			3,043,721


Investment properties at cost (including acquisition fees paid to affiliates of $339,956 at March 31, 2013 and December 31, 2012, respectively) (Note 4):
Land and improvements			16,100,388			16,093,679


Total assets	$		19,273,980			19,137,400


Liabilities and Partners’ Capital
Current liabilities:
Accounts payable	$		12,583			34,992
Accrued expenses			1,300,000			1,300,000
Accrued real estate taxes			38,057			29,849
Due to affiliates (Note 3)			30,164			26,454
Unearned income			186,551			0


Total current liabilities			1,567,355			1,391,295


Partners’ capital:
General Partner:
Capital contribution			500			500
Cumulative net income			13,674,125			13,674,520
Cumulative cash distributions			(13,313,195	)		(13,313,195)


			361,430			361,825


Limited Partners:
Units of $1,000. Authorized 60,000 Units, 50,068 Units outstanding at March 31, 2013 and December 31, 2012, (net of offering costs of $7,532,439, of which $2,535,445 was paid to affiliates)			42,559,909			42,559,909
Cumulative net income			65,117,298			65,156,383
Cumulative cash distributions			(90,332,012	)		(90,332,012)


			17,345,195			17,384,280


Total Partners’ capital			17,706,625			17,746,105


Total liabilities and Partners’ capital	$		19,273,980			19,137,400

See accompanying notes to financial statements.

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Statements of Operations

For the three months ended March 31, 2013 and 2012

(unaudited)


		2013			2012

Revenues:
Rental income (Note 5)	$		60,676			50,764


Total revenues			60,676			50,764


Expenses:
Professional services to affiliates			13,223			17,238
Professional services to non-affiliates			42,386			37,921
General and administrative expenses to affiliates			5,571			4,621
General and administrative expenses to non-affiliates			14,205			14,422
Marketing expenses to affiliates			609			755
Land operating expenses to affiliates			7,440			8,355
Land operating expenses to non-affiliates			21,371			13,836


Total expenses			104,805			97,148


Operating loss			(44,129	)		(46,384)

Interest income			1,799			2,368
Other income			2,850			5,700


Loss from continuing operations			(39,480	)		(38,316	)

Discontinued operations (Note 2):
Income from discontinued operations			0			3,859
Provision for loss on investment property held for sale			0			(170,666)

Loss from discontinued operations			0			(166,807	)

Net loss	$		(39,480	)		(205,123)


Net loss allocated to:
General Partner	$		(395	)		(345)
Limited Partners			(39,085	)		(204,778)


Net loss	$		(39,480	)		(205,123)


Net loss allocated to the one General Partner Unit	$		(395	)		(345)


Net loss per Unit, allocated to Limited Partners per weighted average Limited Partnership Units (50,068 for the three months ended March 31, 2013 and 2012):
Continuing operations	$		(.78	)		(.76)
Discontinued operations			0			(3.33)


	$		(.78	)		(4.09)

See accompanying notes to financial statements.

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Statements of Cash Flows

For the three months ended March 31, 2013 and 2012

(unaudited)


		2013			2012

Cash flows from operating activities:
Net loss	$		(39,480	)		(205,123)
Adjustments to reconcile net loss to net cash provided by operating activities (including discontinued operations):
Provision for loss on investment property held for sale			0			170,666
Changes in assets and liabilities:
Accounts receivable			0			7,682
Accounts receivable associated with investment property held for sale			0			(4,854)
Other assets			1,210			0
Accounts payable			(5,633	)		(3,750)
Accrued real estate taxes			8,208			3,977
Due to affiliates			3,710			7,599
Liabilities associated with investment property held for sale			0			4,314
Unearned income			186,551			156,658


Net cash provided by operating activities			154,566			137,169


Cash flows from investing activities:
Additions to investment properties			(23,485	)		(7,521)


Net cash used in investing activities			(23,485	)		(7,521)


Net increase in cash and cash equivalents			131,081			129,648
Cash and cash equivalents at beginning of period			3,039,229			1,952,586


Cash and cash equivalents at end of period	$		3,170,310			2,082,234

See accompanying notes to financial statements.

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

March 31, 2013

(unaudited)

Readers of this quarterly report should refer to the Partnership’s audited financial statements for the fiscal year ended December 31, 2012, which are included in the Partnership’s 2012 annual report, as certain footnote disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report.

(1) Organization and Basis of Accounting

The Registrant, Inland Land Appreciation Fund II, L.P. (the “Partnership”), is a limited partnership formed on June 28, 1989, pursuant to the Delaware Revised Uniform Limited Partnership Act, to invest in undeveloped land on an all-cash basis and realize appreciation of such land upon resale. Between October 25, 1989 and October 24, 1991, the Partnership sold 50,476.17 Limited Partnership Units (“Units”) at $1,000 per Unit resulting in gross offering proceeds of $50,476,170, not including the General Partner’s capital contribution of $500. The Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) provides for Inland Real Estate Investment Corporation to be the General Partner. Through March 31, 2013, the Partnership had repurchased a total of 408.65 Units for $383,822 from various Limited Partners through a unit repurchase program.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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. Certain reclassifications were made to the 2012 financial statements to conform with the 2013 presentation.

In the opinion of management, the financial statements contain all the adjustments necessary to present fairly the financial position and results of operations for the periods presented herein. Results of interim periods are not necessarily indicative of results to be expected for the year.

The Partnership considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents and are carried at cost, which approximates market value. The Partnership maintains its cash and cash equivalents at a financial institution. The account balances at the financial institution exceed the Federal Depository Insurance Corporation (“FDIC”) insurance coverage of $250,000 on accounts and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Partnership believes that the risk is not significant, and the Partnership does not anticipate the financial institution’s non-performance.

The Partnership recognizes income from the sale of land parcels in accordance with the full accrual method of accounting.

The Partnership’s escrow agent holds earnest money deposits from a prospective purchaser when an agreement for sale is executed. Generally, these funds are not the Partnership’s until the closing has occurred or the buyer under the sale agreement has committed a default which would entitle the Partnership to the earnest money.

The Partnership uses the area method of allocation, whereby a per acre price is used as the standard allocation method for land purchases and sales. The total cost of the parcel is divided by the total number of acres to arrive at a per acre price. Repairs and maintenance expenses are charged to operations as incurred.

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

March 31, 2013

(unaudited)

(2) Discontinued Operations and Investment Property Held for Sale

There were no investment properties held for sale or discontinued operations for the three months ended March 31, 2013. On April 17, 2012, the Partnership sold approximately 50 acres of Parcel 28 resulting in net sales proceeds of $744,400. This property qualified for held for sale accounting treatment under GAAP during the first quarter of 2012. As such, the assets and liabilities were separately classified as investment property held for sale on the balance sheet as of March 31, 2012. As of March 31, 2012, the carrying value of the investment property held for sale was reduced to its fair value of $744,400 resulting in a provision for loss on investment property held for sale of $170,666. The operations for the three months ended March 31, 2012 are included in discontinued operations on the accompanying statements of operations for the three months ended March 31, 2012.

(3) Transactions with Affiliates

The General Partner and its affiliates are entitled to reimbursement for salaries and expenses of employees of the General Partner and its affiliates relating to the administration of the Partnership. Such costs of $18,794 and $21,859 have been incurred and are included in professional services to affiliates and general and administrative expenses to affiliates for the three months ended March 31, 2013 and 2012, respectively, of which $25,764 and $21,754 was unpaid as of March 31, 2013 and December 31, 2012, respectively.

An affiliate of the General Partner performed marketing and advertising services for the Partnership and was reimbursed (as set forth under terms of the Partnership Agreement) for direct costs. Such costs of $609 and $755 have been incurred and are included in marketing expenses to affiliates for the three months ended March 31, 2013 and 2012, respectively, of which $200 was unpaid as of March 31, 2013 and December 31, 2012.

An affiliate of the General Partner performed land improvements, rezoning, annexation and other activities to prepare the Partnership’s investment properties for sale and was reimbursed (as set forth under terms of the Partnership Agreement) for salaries and direct costs. Such costs of $6,309 and $6,066 have been incurred for the three months ended March 31, 2013 and 2012, respectively. Such costs are included in investment properties, of which $2,100 and $1,800 was unpaid as of March 31, 2013 and December 31, 2012, respectively. In addition, the costs related to Parcel 3/27 and Parcel 18 totaled $7,440 and $8,355 for the three months ended March 31, 2013 and 2012, respectively, and are included in land operating expenses to affiliates, of which $2,100 and $2,700 was unpaid as of March 31, 2013 and December 31, 2012, respectively. The affiliate did not recognize a profit on any project.

As of March 31, 2013, the Partnership held all cash and cash equivalents with Inland Bank and Trust, an affiliate of the General Partner.

(4) Investment Properties

As of March 31, 2013, the Partnership owned six parcels of land consisting of approximately 905 acres.

(a)

The Partnership has taken the steps necessary to reduce costs and maintain sufficient reserves of cash and cash equivalents to cover all our costs for an extended period of time. We have farm leases in place which generate sufficient income to cover the costs of insurance expense and real estate taxes. Our remaining land is not encumbered by debt and is located in areas that we believe are in the paths of future development. As such, the Partnership has the ability and management has the intent to hold on to the remaining parcels until such time as reasonable and acceptable offers are received. In addition, on a quarterly basis, the Partnership reviews impairment indicators and if necessary, conducts an impairment analysis to ensure that the carrying value of each investment property does not exceed its estimated fair value. If this were to occur, the Partnership would be required to record an impairment loss equal to the excess of the carrying value over the estimated fair value.

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

March 31, 2013

(unaudited)

In determining the value of an investment property and whether the property is impaired, management considers several indicators which require difficult, complex and/or subjective judgments, such as projected sales prices, capital expenditures, assessment of current economic conditions, and management’s intent to hold on to the remaining parcels until such time as reasonable and acceptable offers are received. The aforementioned indicators are considered by management in determining the value of any particular property. The value of any particular property is sensitive to the actual results of any of these uncertain indicators, either individually or taken as a whole. Should the actual results differ from management’s judgment, the valuation could be negatively or positively affected.

The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management’s continuous process of analyzing each property. For the three months ended March 31, 2013 and 2012, respectively, the Partnership had recorded no such impairment.

(b)	Reconciliation of investment properties owned:


		March 31, 2013		December 31, 2012


Balance at January 1,	$		16,093,679		17,560,744
Additions during period			6,709		46,469
Provision for loss on investment property held for sale			0		(170,666	)
Sales during period			0		(1,342,868	)


Balance at end of period,	$		16,100,388		16,093,679

(5) Rental Income

The Partnership has determined that all leases relating to the farm parcels are operating leases. Accordingly, rental income is reported when earned. Farm rent is fully collected during the first quarter. As such, a portion of the farm rent is classified as unearned income. As of March 31, 2013, unearned income was $186,551.

As of March 31, 2013, the Partnership had farm leases of generally one year in duration, for approximately 674 acres of the approximately 905 acres owned.

(6) Litigation

On or about April 8, 2010, the Partnership received notification from the attorneys for the Village of Elburn that in effect demanded completion of certain land improvements. The Partnership is a co-indemnitor of the subdivision bonds that secure completion of the land improvements on Parcels 5 and 19 of the Blackberry Subdivision in Elburn, IL. On April 22, 2010, the Partnership received notice from the bonding companies demanding completion and satisfaction of such obligations. Based on information provided by the bonding companies, the Partnership is estimating that the maximum balance of the outstanding subdivision bonds and related fees is approximately $2.7 million. The Partnership believes the actual costs of the remaining improvements of the subdivision for the work related to the called bonds are less than the outstanding bond amounts. The Partnership has been working with a representative of the bonding company who has been working with the Village of Elburn on this matter. A meeting was held to obtain a common understanding of the scope of remaining work required to be completed. The parties determined that it was necessary to hire an engineer to provide an updated punch list of required work. The Partnership received a final updated punch list of required work, as well as bids for the actual cost to complete the required improvements. The Partnership is currently working on a settlement

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

March 31, 2013

(unaudited)

agreement with the bonding company. The details of the settlement agreement are still being negotiated; however, based on information received from the bonding company, the estimated cost of the improvements for the work related to the bonds including Bond legal and administrative expenses is approximately $1.3 million. Based on this information, as of March 31, 2013, the Partnership has accrued $1.3 million for the estimated cost of the improvements and associated expenses.

On or about December 16, 2011, the Partnership received service of a Third Party Complaint filed by Bond Safeguard Insurance Company (“Bond”) against the Partnership and Inland Real Estate Investment Corporation along with six other third party defendants. The lawsuit has been brought in the Circuit Court of the Sixteenth Judicial Circuit in Kane County, Illinois (the “Lawsuit”). In the Lawsuit, the County of Kane (the “County”) alleges that B&B Enterprises and/or Blackberry Creek Development Corporation (collectively “B&B”) are responsible for the relocation of approximately twenty-three power poles at an alleged cost of $819,740. Alternatively, the County alleges that either Bond or Commonwealth Edison Company (“ComEd”) is responsible for the cost of the pole relocation. On November 23, 2011, Bond filed an Answer denying the County’s allegations and has pled five affirmative defenses. The affirmative defenses generally allege that the bond did not cover the pole relocation, that only one pole needs to be relocated at significantly less cost, and alternatively, that ComEd is responsible for any pole relocation costs. As alternative relief, Bond filed a Counterclaim against B&B and ComEd and a Third Party Complaint against the Partnership and four individuals (the “Individuals”) contending that, if Bond is deemed responsible for or settles the County’s allegations, then B&B, the Partnership, and/or the Individuals bear some or all of this responsibility under a General Agreement of Indemnity. Bond also seeks its attorneys’ fees based on such General Agreement of Indemnity.

On February 21, 2012, the Partnership filed an Answer and Affirmative Defenses denying the material allegations asserted by Bond. Bond has not replied to the Affirmative Defenses. The County has served discovery requests to B&B, Bond and ComEd. Bond has served discovery requests on the County. The County has produced a limited amount of documents to Bond, which have been provided to us, but has not yet completed its production. In addition, the County has served its interrogatory responses as previously expected. The County’s counsel also has informed counsel for the other parties that between five and eight of the light poles at issue have been moved by ComEd as part of a different project. Thus, these light poles are not expected to be a continued issue in this case. ComEd was ordered by the Court to respond to pending discovery requests from Bond and the County by no later than March 15, 2013. ComEd produced limited documents and responses in March 2013. ComEd’s counsel has asked for the parties to sign a protective order before further production but has not circulated a proposed protective order. The County, and Bond to a lesser extent, continue to pursue ComEd about its deficient discovery responses.

The investigation of the claims and defenses in the Lawsuit is ongoing. Due to the early stages of discovery, it is not possible at this time to evaluate the likelihood of an outcome. For this same reason, any effort to estimate the range of potential loss is limited, other than $0 (based on a judgment in favor of the Partnership), to the approximately $819,740 alleged by the County in its Complaint for the relocation of the poles plus Bond’s allegations for attorneys’ fees.

(7) Subsequent Events

The Partnership evaluates subsequent events occurring between the most recent balance sheet date and the date that the financial statements are available to be issued in order to determine whether the subsequent events are to be recorded in and/or disclosed in the Partnership’s financial statements and footnotes. The financial statements are considered to be available to be issued at the time that they are filed with the Securities and Exchange Commission. There are no subsequent events to report that would have a material impact on the Partnership’s financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this quarterly report on Form 10-Q constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward looking statements. These factors include, among other things, adverse changes in real estate, financing and general economic or local conditions; the ability to obtain annexation and zoning approvals required to develop our properties; the approval of local governing bodies to develop our properties; successful lobbying of local “no growth” or limited development homeowner groups; eminent domain proceedings; changes in the environmental conditions or changes in the environmental positions of governmental bodies; and potential conflicts of interest between us and our affiliates, including our general partner.

We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (SEC). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains an Internet site at (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

Critical Accounting Policies

The SEC previously issued Financial Reporting Release (FRR) or FRR No. 60 “Cautionary Advice Regarding Disclosure About Critical Accounting Policies.” A critical accounting policy is one that would materially affect our operations or financial condition, and requires management to make estimates or judgments in certain circumstances. We believe that our most critical accounting policies relate to how we value, classify and allocate costs of our investment properties and revenue recognition. These judgments often result from the need to make estimates about the effect of matters that are inherently uncertain. The purpose of the FRR is to provide investors with an understanding of how management forms these policies. Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordance with accounting principles generally accepted in the United States of America or GAAP. GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates. The following disclosure discusses judgments known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.

Valuation of Investment Properties - On a quarterly basis, we review impairment indicators and if necessary, conduct an impairment analysis to ensure that the carrying value of each investment property does not exceed its estimated fair value. If an investment property is considered impaired, we would be required to record an impairment loss equal to the excess of carrying value over the estimated fair value.

In determining the value of an investment property and whether the property is impaired, management considers several indicators which require difficult, complex and/or subjective judgments, such as projected sales prices, capital expenditures, assessment of current economic conditions and management’s intent to hold the remaining parcels until such time as reasonable and acceptable offers are received. These indicators are considered by management in determining the value of any particular property. The value of any particular property is sensitive to the actual results of any of these uncertain indicators, either individually or taken as a whole. Should the actual results differ from management’s judgment, the valuation could be negatively or positively affected.

Cost Allocation –We use the area method of cost allocation, whereby a per acre price is used as the standard allocation method for land purchases and sales. The total cost of the parcel is divided by the total number of acres to arrive at a per acre price.

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Revenue Recognition - We recognize income from the sale of land parcels in accordance with the full accrual method of accounting.

Assets Held for Sale - In determining whether to classify an asset as held for sale, we consider whether: (i) management has committed to a plan to sell the asset; (ii) the asset is available for immediate sale in its present condition; (iii) we have initiated a program to locate a buyer; (iv) we believe that the sale of the asset is probable; (v) the due diligence period per the sales agreement has expired and a closing date has been set; (vi) we are actively marketing the asset for sale at a price that is reasonable in relation to its current value; and (vii) actions required for us to complete the plan indicate that it is unlikely that any significant changes will be made to the plan.

If all of the above criteria are met, we classify the asset as held for sale. The assets and liabilities associated with those assets that are held for sale are classified separately on the balance sheets for the most recent reporting period. Additionally, the operations for the periods presented are included in the statements of operations as discontinued operations for all periods presented. As of March 31, 2013 and December 31, 2012, we have not classified any investment properties as held for sale.

From time to time, we may determine that a “held for sale property” no longer meets the criteria to continue to be classified as held for sale. If this occurs, we record the property at the lower of the carrying amount before the property was classified as held for sale or the fair value at the decision date not to sell.

Liquidity and Capital Resources

Between October 25, 1989 and October 24, 1991, we sold 50,476.17 limited partnership units to the public at $1,000 per unit resulting in $50,476,170 in gross offering proceeds, not including the general partner’s capital contribution of $500.

We used $41,314,301 of gross offering proceeds to purchase, on an all-cash basis, 27 parcels of undeveloped land and two buildings. These investments include the payment of the purchase price, acquisition fees and acquisition costs of such properties. Three of the parcels were purchased during 1990, sixteen during 1991, four during 1992, and four during 1993. On September 16, 2002, we completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28). Through March 31, 2013, we have had multiple sales, exchange transactions, and conveyances through which we have disposed of the buildings and approximately 3,625 acres of the approximately 4,530 acres originally owned. As of March 31, 2013, cumulative distributions have totaled $90,332,012 to the limited partners, which is equivalent to 179% of the original capital raised which was $50,476,170, and $13,313,195 to the general partner. Of the $90,332,012 distributed to the limited partners, $89,611,012 was net sales proceeds and $721,000 was from operations. As of March 31, 2013, we have used $47,403,908 of working capital for rezoning and other activities. Such amounts have been capitalized and are included in investment properties.

Our capital needs and resources will vary depending upon a number of factors, including the extent to which we conduct rezoning and other activities relating to utility access, the installation of roads, subdivision and/or annexation of land to a municipality, changes in real estate taxes affecting our land, and the amount of revenue received from leasing. As of March 31, 2013, we own, in whole or in part, six parcels, consisting of approximately 905 acres of which 674 are leased to local farmers and are generating sufficient cash flow from leases to cover real estate taxes and insurance expense.

At March 31, 2013, we had cash and cash equivalents of $3,170,310 which is available to be used for our costs and liabilities, cash distributions to partners and other activities with respect to some or all of our land parcels.

During the three months ended March 31, 2013 and 2012, respectively, we had no land sales. Net sales proceeds, including previously undistributed net sales proceeds, will be used to fund our operations, including land improvements and land use activities. We will evaluate our cash needs throughout the year to determine any future distributions.

Parcel 18 has been zoned and planned for residential use. During the second quarter of 2012, we mailed information regarding the residential lots to several local and national homebuilders. Initial response has been favorable and we remain optimistic that the recent improvements in the economy and residential real estate markets will enable the Partnership to find a builder willing to acquire some if not all of our residential lots.

Parcel 3/27 consists of two contiguous parcels which are being jointly developed as two residential subdivisions. Each subdivision lies within the boundaries of both parcels. In February 2013, we entered into two separate contracts with a

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third party purchaser for the sale of the remaining 57 lots of Parcel 3/27. Provided the purchaser completes its due diligence of the properties, obtains the necessary municipal approvals outlined in the contract and waives on all of its contingencies, the transaction could potentially close during 2013.

We plan to enhance the value of our remaining land through pre-development activities such as rezoning, annexation and land planning. We have already been successful in, or are in the process of, pre-development activity on several of our land investments. Parcel 20 has been granted rezoning which will permit additional land to be used for development. During the third quarter of 2012, we entered into a purchase agreement to sell approximately 2 acres of Parcel 20 to an unaffiliated third party; however, the agreement is contingent upon the buyer obtaining various corporate and governmental approvals. The agreement provides for a 9-month feasibility period to accomplish these items. Provided the buyer waives or satisfies the contingencies, the transaction could potentially close in the summer of 2013.

We continue to closely monitor the real estate market trends, especially within the areas where our remaining parcels are located. We have seen modest improvements in the residential resale real estate market, however, new home starts in these middle class communities remain weak. That, coupled with strict lender requirements, continues to impact sales activity, especially sales of residential lots and sales of vacant land for retail purposes. There have been reports of farm parcel sales in surrounding communities from both speculators looking to hold land until the market rebounds as well as farmers looking to increase their farming businesses. We believe we have taken the steps necessary to reduce costs and maintain sufficient reserves of cash and cash equivalents to cover all our costs for an extended period of time as we continue to market the remaining parcels for sale. We have farm leases in place which generate sufficient income to cover the costs of insurance expense and real estate taxes. Our remaining land is not encumbered by debt and is located in areas that we believe are in the paths of future development. As such, the Partnership has the ability and management has the intent to hold the remaining parcels until such time as reasonable and acceptable offers are received.

Transactions with Related Parties

Our general partner and its affiliates are entitled to reimbursement for salaries and expenses of employees of the general partner and its affiliates relating to our administration. Such costs of $18,794 and $21,859 have been incurred and are included in professional services to affiliates and general and administrative expenses to affiliates for the three months ended March 31, 2013 and 2012, respectively, of which $25,764 and $21,754 was unpaid as of March 31, 2013 and December 31, 2012, respectively.

An affiliate of our general partner performed marketing and advertising services for us and was reimbursed for direct costs. Such costs of $609 and $755 have been incurred and are included in marketing expenses to affiliates for the three months ended March 31, 2013 and 2012, respectively, of which $200 was unpaid as of March 31, 2013 and December 31, 2012.

An affiliate of our general partner performed land improvements, rezoning, annexation and other activities to prepare our investment properties for sale and was reimbursed for salaries and direct costs. Such costs of $6,309 and $6,066 have been incurred for the three months ended March 31, 2013 and 2012, respectively. Such costs are included in investment properties, of which $2,100 and $1,800 was unpaid as of March 31, 2013 and December 31, 2012, respectively. In addition, the costs related to Parcel 3/27 and Parcel 18 totaled $7,440 and $8,355 for the three months ended March 31, 2013 and 2012, respectively, and are included in land operating expenses to affiliates, of which $2,100 and $2,700 was unpaid as of March 31, 2013 and December 31, 2012, respectively. The affiliate did not recognize a profit on any project.

As of March 31, 2013, the Partnership held all cash and cash equivalents with Inland Bank and Trust, an affiliate of the General Partner.

Results of Operations

As of March 31, 2013, we owned six parcels of land consisting of approximately 905 acres. Of the approximately 905 acres owned, 674 acres are tillable, leased to local farmers and generate sufficient cash flow to cover real estate taxes and insurance expense. Rental income was $60,676 and $50,764 for the three months ended March 31, 2013 and 2012, respectively. Rental income increased due to an increase in the farm rental rates. Farm rent is fully collected during the first quarter. As such, a portion of the farm rent is classified as unearned income. As of March 31, 2013, unearned income was $186,551.

-11-

Professional services to affiliates and non-affiliates were $55,609 and $55,159 for the three months ended March 31, 2013 and 2012, respectively. Professional services to affiliates and non-affiliates include accounting and legal services.

General and administrative expenses to affiliates and non-affiliates were $19,776 and $19,043 for the three months ended March 31, 2013 and 2012, respectively. General and administrative expenses primarily include data processing costs, postage, printing expenses and farm management fees.

Marketing expenses to affiliates were $609 and $755 for the three months ended March 31, 2013 and 2012, respectively. Marketing expenses to affiliates are costs incurred for preparing and marketing parcels for sale.

Land operating expenses to affiliates and non-affiliates were $28,811 and $22,191 for the three months ended March 31, 2013 and 2012, respectively. These costs typically include real estate tax expense, grounds maintenance expense, insurance and the Partnership’s proportionate share of the homeowners association fees. The increase for 2013 is due primarily to an increase in subdivision bond expenses.

Interest income was $1,799 and $2,368 for the three months ended March 31, 2013 and 2012, respectively. Interest income is primarily a result of cash available to invest on a short term basis during the year as a result of sales proceeds received. Interest income decreased due to lower interest rates.

Other income was $2,850 and $5,700 for the three months ended March 31, 2013 and 2012, respectively. Other income is due primarily to transfer fee income as a result of the number of completed unit transfers. The decrease in 2013 is due to less transfer fee income as a result of a decreased number of completed unit transfers.

Income from discontinued operations was $0 and $3,859 for the three months ended March 31, 2013 and 2012, respectively. Included in income from discontinued operations are the rental income, insurance and real estate taxes pertaining to Parcel 28 which was classified as investment property held for sale at March 31, 2012 and subsequently sold on April 17, 2012. In addition, during the first quarter of 2012, the carrying value of Parcel 28 was reduced to its fair value of $744,400 resulting in a provision for loss on investment property held for sale of $170,666.

-12-

Investment Properties

We acquired fee ownership of the following real property investments. The following table summarizes the detail activity of all the parcels owned by the Partnership from the purchase date through the quarter ended March 31, 2013.

Investment properties activity:


Parcel #	Illinois County	Gross Acres Purchased (Sold)			Purchase/ Sales Date		Initial Costs							Costs Capitalized Subsequent to Acquisition		Costs of Property Sold/Impaired		Total Remaining Costs of Parcels at 03/31/13		Current Year Gain (Loss) on Sale Recognized
Parcel #	Illinois County	Gross Acres Purchased (Sold)			Purchase/ Sales Date			Original Costs		Acquisition Costs		Total Costs		Costs Capitalized Subsequent to Acquisition		Costs of Property Sold/Impaired		Total Remaining Costs of Parcels at 03/31/13		Current Year Gain (Loss) on Sale Recognized
1	McHenry		372.7590			04/25/90	$		2,114,295		114,070		2,228,365		630,703		2,859,068		0		0
			(372.7590	)		02/23/04

2	Kendall		41.1180			07/06/90			549,639		43,889		593,528		75,199		668,727		0		0
			(3.4730	)		08/29/03
			(37.6450	)		02/17/05

3/27	Kendall		120.8170			11/06/90			2,591,268		156,709		2,747,977		9,880,850		10,690,827		1,938,000		0
			83.5250			03/11/93
			(3.3900	)		05/17/05
			(31.0000	)		07/14/05
			(74.7000	)		Var 2006
			(36.8500	)		Var 2007
			(6.6000	)		Var 2008
			(36.1262	)		Var 2009
			(1.7230	)		06/25/10
			(3.12	)		12/28/10

4	Kendall		299.0250			06/28/91			1,442,059		77,804		1,519,863		535,901		0		2,055,764		0

5	Kane		189.0468			02/28/91			1,954,629		94,569		2,049,198		349,845		2,399,043		0		0
			(189.0468	)		05/16/01

6	Lake		57.3345			04/16/91			904,337		71,199		975,536		55,628		1,031,164		0		0
			(.2580	)		10/01/94
			(57.0765	)		03/22/07

7	McHenry		56.7094			04/22/91			680,513		44,444		724,957		3,210,451		3,935,408		0		0
			(12.6506	)		Var 1997
			(15.7041	)		Var 1998
			(19.6296	)		Var 1999
			(8.7251	)		Var 2000

8	Kane		325.3940			06/14/91			3,496,700		262,275		3,758,975		75,420		1,909,034		1,925,361		0
			(.8700	)		04/03/96
			(63.0000	)		01/23/01
			(80.0000	)		05/11/04

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Investment properties activity (continued):


Parcel #	Illinois County	Gross Acres Purchased (Sold)			Purchase/ Sales Date		Initial Costs							Costs Capitalized Subsequent to Acquisition		Costs of Property Sold/Impaired		Total Remaining Costs of Parcels at 03/31/13		Current Year Gain (Loss) on Sale Recognized
Parcel #	Illinois County	Gross Acres Purchased (Sold)			Purchase/ Sales Date			Original Costs		Acquisition Costs		Total Costs		Costs Capitalized Subsequent to Acquisition		Costs of Property Sold/Impaired		Total Remaining Costs of Parcels at 03/31/13		Current Year Gain (Loss) on Sale Recognized
9 (c)	Will		9.8670			08/13/91	$		0		0		0		0		0		0		0
			(9.8670	)		09/16/02

10	Will		150.6600			08/20/91			1,866,716		89,333		1,956,049		23,897		1,979,946		0		0
			(150.6600	)		01/10/05

11	Will		138.4470			08/20/91			289,914		20,376		310,290		2,700		312,990		0		0
			(138.4470	)		05/03/93

12 (c)	Will		44.7320			08/20/91			0		0		0		0		0		0		0
			(44.7320	)		09/16/02

13	Will		6.3420			09/23/91			139,524		172		139,696		0		139,696		0		0
			(6.3420	)		05/03/93

14	Kendall		44.4030			09/03/91			888,060		68,210		956,270		1,259,583		2,215,853		0		0
			(15.3920	)		04/16/01
			(14.2110	)		Var 2002
			(13.6000	)		04/11/03
			(1.2000	)		02/19/04

15	Kendall		100.3640			09/04/91			1,050,000		52,694		1,102,694		117,829		1,220,523		0		0
			(5.0000	)		09/01/93
			(11.0000	)		12/01/94
			(84.3640	)		08/14/98

16	McHenry		168.9050			09/13/91			1,402,058		69,731		1,471,789		97,766		1,569,555		0		0
			(168.9050	)		08/03/01

17	Kendall		3.4620			10/30/91			435,000		22,326		457,326		113,135		570,461		0		0
			(2.1130	)		03/06/01
			(1.3490	)		08/23/02

-14-

Investment properties activity (continued):


Parcel #	Illinois County	Gross Acres Purchased (Sold)			Purchase/ Sales Date		Initial Costs							Costs Capitalized Subsequent to Acquisition		Costs of Property Sold/Impaired		Total Remaining Costs of Parcels at 03/31/13		Current Year Gain (Loss) on Sale Recognized
Parcel #	Illinois County	Gross Acres Purchased (Sold)			Purchase/ Sales Date			Original Costs		Acquisition Costs		Total Costs		Costs Capitalized Subsequent to Acquisition		Costs of Property Sold/Impaired		Total Remaining Costs of Parcels at 03/31/13		Current Year Gain (Loss) on Sale Recognized
18	McHenry		139.1697			11/07/91	$		1,160,301		58,190		1,218,491		9,456,992		10,237,983		437,500		0
			(9.2500	)		Var 2004
			(33.3197	)		Var 2005
			(62.0200	)		Var 2006
			(12.8800	)		Var 2007
			(2.2400	)		Var 2008
			.2188			03/02/11

19	Kane		436.2360			12/13/91			4,362,360		321,250		4,683,610		187,211		4,870,821		0		0
			(436.2360	)		05/16/01

20	Kane &
	Kendall		400.1290			01/31/92			1,692,623		101,318		1,793,941		9,438,474		1,848,937		9,383,478		0
			(21.1380	)		06/30/99
			(7.0000	)		07/21/08
			(3.1085	)		03/21/11
			(4.0770	)		09/19/12

21	Kendall		15.0130			05/26/92			250,000		23,844		273,844		43,063		316,907		0		0
			(1.0000	)		03/16/99
			(14.0130	)		09/06/06

22	Kendall		391.9590			10/30/92			3,870,000		283,186		4,153,186		1,763,629		5,556,530		360,285		0
			(10.0000	)		01/06/94
			(5.5380	)		01/05/96
			(2.4000	)		07/27/99
			(73.3950	)		Var 2001
			(136.0000	)		08/14/02
			(34.1400	)		05/27/03
			(101.4900	)		01/09/04

-15-

Investment properties activity (continued):


Parcel #	Illinois County	Gross Acres Purchased (Sold)			Purchase/ Sales Date		Initial Costs							Costs Capitalized Subsequent to Acquisition		Costs of Property Sold/Impaired		Total Remaining Costs of Parcels at 03/31/13		Current Year Gain (Loss) on Sale Recognized
Parcel #	Illinois County	Gross Acres Purchased (Sold)			Purchase/ Sales Date			Original Costs		Acquisition Costs		Total Costs		Costs Capitalized Subsequent to Acquisition		Costs of Property Sold/Impaired		Total Remaining Costs of Parcels at 03/31/13		Current Year Gain (Loss) on Sale Recognized
23	Kendall		133.2074			10/30/92	$		3,231,942		251,373		3,483,315		4,665,998		8,149,313		0		0
			(11.5250	)		07/16/93
			(44.0700	)		Var 1995
			(8.2500	)		Var 1996
			(2.6100	)		Var 1997
			(10.6624	)		Var 1998
			(5.8752	)		Var 1999
			(49.0120	)		Var 2000
			(.2028	)		Var 2001
			(1.0000	)		Var 2002

23A(a)	Kendall		.2676			10/30/92			170,072		12,641		182,713		0		182,713		0		0
			(.2676	)		03/16/93

24	Kendall		3.9080			01/21/93			645,000		56,316		701,316		30,436		731,752		0		0
			(3.9080	)		04/16/01

24A(b)	Kendall		.4060			01/21/93			155,000		13,533		168,533		0		168,533		0		0
			(.4060	)		04/16/01

25	Kendall		656.6870			01/28/93			1,625,000		82,536		1,707,536		22,673		1,730,209		0		0
			(656.6870	)		10/31/95

26	Kane		89.5110			03/10/93			1,181,555		89,312		1,270,867		5,135,895		6,406,762		0		0
			(2.1080	)		Var 1999
			(34.2550	)		Var 2000
			(7.8000	)		Var 2001
			(29.1200	)		Var 2002
			(11.3100	)		Var 2003
			(4.9180	)		01/28/04

28 (c)	Kendall		50.0000			09/16/02			661,460		22,976		684,436		230,630		915,066		0		0
			(50.0000	)		04/17/12

							$		38,810,025		2,504,276		41,314,301		47,403,908		72,617,821		16,100,388		0

-16-

(a)

Included in the purchase of Parcel 23 was a newly constructed 2,500 square foot house. The house was sold in March 1993.

(b)

Included in the purchase of Parcel 24 was a 2,400 square foot office building. The building was sold in 2001.

(c)

On September 16, 2002, the Partnership completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28).

Subsequent Events

Other Items

In accordance with Article XVI Section 16.1 of the Inland Land Appreciation Fund II, L.P. Partnership Agreement and Treasury Regulation Section 1.7704-1(j), we have not reached the maximum threshold of limited partnership units that may be transferred/assigned directly between parties during 2013. Therefore, we may authorize additional sales of partnership units directly between parties during 2013. For the benefit of interested limited partners, we have a relationship with a “qualified matching service” as defined under Treasury Regulation Section 1.7704-1(g). In accordance with this Treasury Regulation and the IRS private letter ruling obtained by the “qualified matching service”, we understand that limited partnership units may be transferred/assigned up to a separate maximum threshold each taxable year (in addition to the maximum threshold that may be transferred/assigned directly between parties discussed above). However, there can be no assurance that the IRS private letter ruling will apply to transfers of our units, or that any particular transfer will not violate the transfer restrictions contained in our partnership agreement or the provisions of Treasury Regulation Section 1.7704-1(g). If you have any interest in participating in a transfer/assignment of partnership units through this “qualified matching service,” please contact American Partnership Board directly at 800-736-9797. You are strongly encouraged to consult your personal legal, financial and tax advisors in connection with any such transfer/assignment.

The Illinois Department of Revenue regulates Illinois income tax withholding requirements for nonresident partners. For the taxable year ending December 31, 2012 and 2011, respectively, there were no withholdings required. We are also required to pay a withholding tax to the Internal Revenue Service with respect to a partner’s allocable share of our taxable net income, if the partner is a foreign person. We will first pay the withholding tax from the distributions to any nonresident and/or foreign partners, and to the extent that the tax exceeds the amount of distributions withheld, or if there have been no distributions to withhold, the excess will be accounted for as a distribution to such nonresident and/or foreign partners. For the three months ended March 31, 2013 and 2012, respectively, there were no withholdings paid.

Off-Balance Sheet Arrangements, Contractual Obligations, Liabilities and Contracts and Commitments

None

Litigation

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working with the Village of Elburn on this matter. A meeting was held to obtain a common understanding of the scope of remaining work required to be completed. The parties determined that it was necessary to hire an engineer to provide an updated punch list of required work. The Partnership received a final updated punch list of required work, as well as bids for the actual cost to complete the required improvements. The Partnership is currently working on a settlement agreement with the bonding company. The details of the settlement agreement are still being negotiated; however, based on information received from the bonding company, the estimated cost of the improvements for the work related to the bonds including Bond legal and administrative expenses is approximately $1.3 million. Based on this information, as of March 31, 2013, the Partnership has accrued $1.3 million for the estimated cost of the improvements and associated expenses.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to us is made known to the members of senior management and the Audit Committee.

Based on management’s evaluation as of March 31, 2013, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

-18-

Management’s 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 Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of March 31, 2013. This quarterly report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.

There were no changes to our internal controls over financial reporting during the three months ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – Other Information

Item 1. Legal Proceedings

-19-

Items 2 through 5 are omitted because of the absence of conditions under which they are required.

Item 6. Exhibits

Exhibits:


31.1		Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer

32.1		Section 1350 Certification by Principal Executive Officer

32.2		Section 1350 Certification by Principal Financial Officer

101		The following financial information from our Quarterly Report on Form 10-Q for the three months ended March 31, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows and (iv) related notes. This information is furnished but should not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

-20-

SIGNATURES

Pursuant to the requirements 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.


				INLAND LAND APPRECIATION FUND II, L.P.

		By:		Inland Real Estate Investment Corporation
		Its:		General Partner

		By:		/S/ BRENDA G. GUJRAL

		By:		Brenda G. Gujral
		Its:		Principal Executive Officer with respect to Inland Land Appreciation Fund II, L.P.
		Date:		May 7, 2013

		By:		/S/ GUADALUPE GRIFFIN

		By:		Guadalupe Griffin
		Its:		Senior Vice President
		Date:		May 7, 2013

		By:		/S/ DONNA URBAIN

		By:		Donna Urbain
		Its:		Principal Financial Officer with respect to Inland Land Appreciation Fund II, L.P.
		Date:		May 7, 2013

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INLAND LAND APPRECIATION FUND II LP - FORM 10-Q - May 7, 2013

Attached files

INLAND LAND APPRECIATION FUND II LP Reports