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EXCEL - IDEA: XBRL DOCUMENT - NATIONAL TAX CREDIT INVESTORS II | Financial_Report.xls |
EX-32.1 - CERTIFICATION - NATIONAL TAX CREDIT INVESTORS II | ntci2_ex32z1.htm |
EX-31.2 - CERTIFICATION - NATIONAL TAX CREDIT INVESTORS II | ntci2_ex31z2.htm |
EX-31.1 - CERTIFICATION - NATIONAL TAX CREDIT INVESTORS II | ntci2_ex31z1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
[ ] 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 0-20610
NATIONAL TAX CREDIT INVESTORS II
(Exact name of registrant as specified in its charter)
California | 93-1017959 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
PO Box 91274 |
Los Angeles, California 90009 |
(Address of principal executive offices) |
|
(720) 387-8135 |
(Registrants telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interests
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 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). [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
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 S |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting partnership units held by non-affiliates computed by reference to the price at which the partnership units were last sold, or the average bid and asked price of such partnership units as of the last business day of the registrants most recently completed second fiscal quarter. No market exists for the limited partnership units of the Registrant, and, therefore, no aggregate market value can be determined.
DOCUMENTS INCORPORATED BY REFERENCE
None
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements in certain circumstances. Certain information included in this Annual Report contains or may contain information that is forward-looking within the meaning of the federal securities laws. Actual results may differ materially from those described in these forward-looking statements and, in addition, will be affected by a variety of risks and factors, some of which are beyond the Partnerships control, including, without limitation: financing risks, including the availability and cost of financing and the risk that the Partnerships cash flows from operations may be insufficient to meet required payments of principal and interest; national and local economic conditions, including the pace of job growth and the level of unemployment; the terms of governmental regulations that affect the Partnership and its investment in limited partnerships and interpretations of those regulations; the competitive environment in which the Partnership operates; real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for residents in such markets; litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by the limited partnerships in which the Partnership has invested. Readers should carefully review the Partnerships financial statements and the notes thereto, as well as the other documents the Partnership files from time to time with the Securities and Exchange Commission.
Item 1.
Business
National Tax Credit Investors II (NTCI-II or the Partnership) is a limited partnership formed under the California Revised Local Partnership Act as of January 12, 1990. The Partnership was formed to invest primarily in other limited partnerships (Local Partnerships) which own and operate multifamily housing complexes that are eligible for low income housing federal income tax credits (the Housing Tax Credit). The general partner of the Partnership is National Partnership Investments, LLC (the General Partner or NAPICO), a California limited liability company. The General Partner is a subsidiary of Bethesda Holdings II, LLC, a privately held real estate asset management company (Bethesda). Bethesda acquired the General Partner on December 19, 2012, pursuant to an option agreement with Aimco/Bethesda Holdings, Inc., a subsidiary of Apartment Investment and Management Company (Aimco), a publicly traded real estate investment trust. The business of the Partnership is conducted primarily by NAPICO. The Partnership shall continue in full force and effect until December 31, 2030, unless terminated earlier pursuant to the Partnership Agreement or law.
On April 23, 1990, the Partnership offered 100,000 Units of Limited Partnership Interests (Units) at $1,000 per Unit through a public offering managed by Paine Webber Incorporated. The term of the offering expired on April 22, 1992, at which date a total of 72,404 Units had been sold amounting to $72,404,000 in capital contributions. Offering expenses of approximately $9,413,000 were incurred in connection with the sale of such limited partner interests. Since its initial offering, the Partnership has not received, nor are limited partners required to make additional capital contributions.
The Partnership has no employees. Services are performed for the Partnership by the General Partner and agents retained by the General Partner.
In general, an owner of a low-income housing project is entitled to receive the Housing Tax Credit in each year of a ten-year period (the "Credit Period"). The projects are subject to a minimum compliance period of not less than fifteen years (the "Compliance Period"). Tax Credits are available to the limited partners to reduce their federal
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income taxes. The ability of a limited partner to utilize such credits may be restricted by the passive activity loss limitation and the general business tax credit limitation rules. NTCI-II has made capital contributions to 37 Local Partnerships.
Prior to 2011, the Partnership lost its interest in 28 Local Partnerships through the sale of the property held by the Local Partnership, foreclosure, or the sale of Partnership interests. During 2011, the Partnership sold its limited partnership interest in four of the Local Partnerships owning residential projects consisting of 237 apartment units. During 2012, the Partnership sold its limited partnership interest in one of the Local Partnerships owning residential projects consisting of 180 apartment units. During 2013, the Partnership assigned its Partnership interest in two Local Partnerships owning residential projects consisting of 139 units. As of December 31, 2014, the Partnership held limited partnership interests in two Local Partnerships located in two states. Each of these Local Partnerships owns a project that is eligible for the Housing Tax Credit. One of the Local Partnerships also benefits from government programs promoting low or moderate income housing.
The projects owned by the Local Partnerships in which NTCI-II has invested were developed by the local operating general partners (the Local Operating General Partners) who acquired the sites and applied for applicable mortgages and subsidies, if any. NTCI-II became the principal limited partner in these Local Partnerships pursuant to arm's-length negotiations with the Local Operating General Partners. As a limited partner, NTCI-II's liability for obligations of the Local Partnership is limited to NTCI-IIs investment. The Local Operating General Partner of the Local Partnership retains responsibility for developing, constructing, maintaining, operating and managing the Projects. Under certain circumstances, an affiliate of NAPICO or NTCI-II may act as the Local Operating General Partner. An affiliate of NAPICO, National Tax Credit Inc. II ("NTC-II") is acting either as a special limited partner or non-managing administrative general partner (the Administrative General Partner) of each Local Partnership in which the Partnership has an investment.
A further description of the Partnership's business is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Form 10-K.
Item 1A.
Risk Factors
Not applicable.
2
Item 2.
Properties
During 2014, most of the projects in which NTCI-II had invested were substantially rented. The following is a schedule of the occupancy status as of December 31, 2014 and 2014 of the projects owned by Local Partnerships in which NTCI-II is a limited partner.
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH NTCI-II HAS AN INVESTMENT
DECEMBER 31, 2014
(A)
The mortgage is insured by HUD.
The following table details the Partnerships ownership percentages of the Local Partnerships and the cost of acquisition of such ownership. All interests are limited partner interests. The total mortgage and other encumbrances on each property for each of the Local Partnerships as of December 31, 2014 are also included.
| NTCI-II | Original Cost |
|
|
| Percentage | of Ownership | Mortgage | Notes |
Name and Location | Interest | Interest | Notes | Payable |
|
| (in thousands) | (in thousands) | (in thousands) |
Lincoln Grove Apartments |
|
|
|
|
Greensboro, NC | 99.00% | $ 840 | $ 2,047 | $ 0 |
Michigan Beach Apartments |
|
|
|
|
Chicago, IL | 98.90% | $ 1,575 | $ 12,561 | $ 7,224 |
Although each Local Partnership in which the Partnership has invested owns a project that must compete with other projects for tenants, government mortgage interest and rent subsidies make it possible for some of the Local Partnerships to rent units to eligible tenants at below market rates. In general, the Partnership believes this insulates the properties from market competition.
In October 2013, the Partnership assigned its limited partnership interest in Jamestown Terrace to an affiliate of the operating General Partner for a total of $10,000. This amount was recognized as a gain on sales of limited partnership interest in Local Partnerships during the year ended December 31, 2013 as the Partnership had no investment balance remaining at the date of the assignment.
In November 2013, the Partnership assigned its limited partnership interest in Virginia Park Meadows to an affiliate of the operating General Partner for no consideration. This agreement was subject to the Partnership paying a $3,000 transfer fee to the state of Michigan. The Partnership had no investment balance remaining as of the date of the agreement.
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During September 2013, the Partnership entered into an Assignment and Assumption Agreement to assign its limited partnership interest in Michigan Beach to a third party for a total amount of $10.00. Additionally, during September 2013, the Partnership entered into a Loan Purchase Agreement with the same third party, to sell the second mortgage held by the Partnership for an amount equal to the outstanding principal on the Loan. In April 2014 and December 2014, the Partnership entered into an amendment and a second amendment to each of the Assignment and Assumption Agreement and the Loan Purchase Agreement to, among other things, extend the closing date for the transaction to December 31, 2014 and March 31, 2015, respectively. As of December 31, 2014, the outstanding principal balance on the Loan was $3,596,000. The Registrants investment balance in Michigan Beach was reduced to zero. The assignment and the Loan purchase are expected to close during 2015 and are subject to i) the consent of the United States Department of Housing and Urban Development and ii) the consent of Midland Loan Services, Inc. If either condition is not met prior to March 31, 2015, then the Assignment Agreement and the Loan Agreement would terminate. In the event that the closing does not timely occur due to the default by Assignee of its obligations under the Assignment Agreement or the Loan Agreement, then the Registrant will be entitled to keep the $1,000 escrow deposit made by Assignee in connection with the Loan Agreement. In the event that the closing does not timely occur due to the default by the Partnership, then the rights and obligations of both parties under both agreements terminate, except for certain indemnification rights.
Item 3.
Legal Proceedings
The General Partner is involved in various lawsuits arising from transactions in the ordinary course of business. In the opinion of management and the General Partner, the claims will not result in any material liability to the Partnership.
Item 4.
Mine Safety Disclosures
Not applicable.
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PART II
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The limited partnership interests (the Units) are not traded on a public exchange but were sold through a public offering managed by PaineWebber Incorporated. It is not anticipated that any active public market will develop for the purchase and sale of any limited partnership interest, therefore an investor may be unable to sell or otherwise dispose of his or her interest in the Partnership. A Unit may not be transferred but can be assigned only if certain requirements in the Partnership Agreement are satisfied. At December 31, 2014, there were 2,688 registered holders of 72,007 Units in the Partnership. The Partnership has invested in certain government assisted projects under programs which in many instances restrict the cash return available to project owners. The Partnership was not designed to provide cash distributions to limited partners in circumstances other than refinancing or disposition of its investments in Local Partnerships. There were no distributions from the Partnership during the years ended December 31, 2014 and 2013.
Bethesda and its affiliates owned 1,133 Units in the Partnership representing 1.57% of the outstanding Units in the Partnership at December 31, 2014. It is possible that Bethesda or its affiliates will acquire additional Units in the Partnership either through private purchases or tender offers. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the General Partner. Although the General Partner owes fiduciary duties to the limited partners of the Partnership, the General Partner also owes fiduciary duties to Bethesda as its sole stockholder. As a result, the duties of the General Partner, as general partner, to the Partnership and its limited partners may come into conflict with the duties of the General Partner to Bethesda as its sole stockholder.
Item 6.
Selected Financial Data
Not applicable.
Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations
This item should be read in conjunction with the financial statements and other items contained elsewhere in this report.
The General Partner monitors developments in the area of legal and regulatory compliance.
Liquidity and Capital Resources
Some of the properties in which the Partnership has invested, through the Partnerships investment in Local Partnerships, receive one or more forms of assistance from the Federal Government. As a result, a Local Partnerships ability to transfer funds either to the Partnership or among the Local Partnerships in the form of cash distributions, loans or advances may be restricted by these government assistance programs. These restrictions, however, are not expected to impact the Partnerships ability to meet its cash obligations.
As of December 31, 2014 and 2013, the Partnership had cash and cash equivalents of approximately $3,023,000 and $3,577,000, respectively. The decrease in cash and cash equivalents of approximately $554,000 was due to approximately $306,000 of cash used in investing activities for advances, and approximately $248,000 of cash used in operating activities.
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The Partnerships primary source of funds is the receipt of distributions from Local Partnerships in which the Partnership has invested. It is not expected that any of the Local Partnerships in which the Partnership invests will generate cash from operations sufficient to provide distributions to the Limited Partners in any material amount. Such cash from operations, if any, would first be used to meet operating expenses of the Local Partnership. The Partnership's investments are not readily marketable and may be affected by adverse general economic conditions which, in turn, could substantially increase the risk of operating losses for the projects, the Local Partnerships and the Partnership. These problems may result from a number of factors, many of which cannot be controlled by the General Partner.
The General Partner is not obligated to advance funds to the Partnership for operations or to fund Partnership advances to Local Partnerships, but may voluntarily do so from time to time. There were no advances received by the Partnership during the years ended December 31, 2014 and 2013. The Partnership may receive future advances of funds from the General Partner, although the General Partner is not obligated to provide such advances.
The General Partner has the right to cause distributions received by the Partnership from the Local Partnerships (that would otherwise be available for distributions as cash flow) to be dedicated to the increase or replenishment of reserves at the Partnership level. The reserves will generally be available to satisfy working capital or operating expense needs of the Partnership (including payment of partnership management fees) and will also be available to pay any excess third-party costs or expenses incurred by the Partnership in connection with the administration of the Partnership, the preparation of reports to the Limited Partners and other investor servicing obligations of the Partnership. At the discretion of the General Partner, reserves may be available for advances to the Local Partnerships.
The Partnership does not have the ability to assess Limited Partners for additional capital contributions to provide capital if needed by the Partnership or Local Partnerships. Accordingly, if circumstances arise that cause the Local Partnerships to require capital in addition to that contributed by the Partnership and any equity of the local general partners, the only sources from which such capital needs will be able to be satisfied (other than the limited reserves available at the Partnership level) will be (i) third-party debt financing (which may not be available if, as expected, the projects owned by the Local Partnerships are already substantially leveraged), (ii) other equity sources (which could adversely affect the Partnership's interest in operating cash flow and/or proceeds of sale or refinancing of the projects which would result in adverse tax consequences to the Limited Partners), or (iii) the sale or disposition of projects. There can be no assurance that any of such sources would be readily available in sufficient proportions to fund the capital requirements of the Local Partnerships. If such sources are not available, the Local Partnerships would risk foreclosure on their projects if they were unable to renegotiate the terms of their first mortgages and any other debt secured by the projects, which would have significant adverse tax consequences to the Limited Partners.
Results of Operations
The Partnership, as a limited partner, does not have a contractual relationship with the Local Partnerships or exercise control over the activities and operations, including refinancing or selling decisions of the Local Partnerships that would require or allow for consolidation. Accordingly, the Partnership accounts for its investment in the Local Partnerships using the equity method. Thus the individual investments are carried at cost plus the Partnerships share of the Local Partnerships profits less the Partnerships share of the Local Partnerships losses, distributions and impairment charges. However, since the Partnership is not legally liable for the obligations of the Local Partnerships, or is not otherwise committed to provide additional support to them, it does not recognize losses once the Partnerships investment in each of the Local Partnerships reaches zero. Distributions from the Local Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. Subsequent distributions received are recognized as income in the statements of operations. For those investments where the Partnership has determined that the carrying value of the Partnerships investments approximates the estimated fair value of those investments, the Partnerships policy is to recognize equity in income of the Local Partnerships only to the extent of distributions received, and amortization of acquisition costs from those Local Partnerships. During the years ended December 31, 2014 and 2013, the Partnership recognized equity in loss of approximately $0 and $55,000, respectively, from one Local Partnership, Michigan Beach, that reduced the carrying amount of the mortgage note receivable due from the Local Partnership. There were no distributions received in 2014 or 2013.
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At times, advances are made to Local Partnerships. Advances made by the Partnership to the individual Local Partnerships are considered part of the Partnerships investment in limited partnerships. Advances made to Local Partnerships in which the investment balance has been reduced to zero are charged to expense. The Partnership made advances of approximately $306,000 and $1,344,000 to Michigan Beach during the years ended December 31, 2014 and 2013, respectively, for deferred capital needs. While not obligated to make advances to any of the Local Partnerships, the Partnership may make future advances in order to protect its economic investment in the Local Partnerships.
At December 31, 2014, the investment balance in the Local Partnerships had been reduced to zero.
The Partnerships net loss for the years ended December 31, 2014 and 2013 was approximately $542,000 and $1,633,000, respectively. The decrease in net loss for the year ended December 31, 2014 is due to a decrease in advances made to local partnerships that are charged to expense.
A recurring Partnership expense is the annual partnership management fee. The fee, as defined in the Partnership Agreement, is payable to the General Partner and is calculated at 0.5% of the Partnerships invested assets as of the beginning of the year. The management fee represents the annual recurring fee which will be paid to the General Partner for the General Partners management of the Partnerships affairs. For the years ended December 31, 2014 and 2013, management fees were approximately $64,000 and $107,000, respectively.
Operating expenses, exclusive of the management fee, consist of legal and accounting expenses for services rendered to the Partnership, tax expense and general and administrative expenses. Legal and accounting expenses were approximately $79,000 and $83,000 for the years ended December 31, 2014 and 2013, respectively. General and administrative expenses were approximately $93,000 and $54,000 for the years ended December 31, 2014 and 2013, respectively.
In October 2013, the Partnership assigned its limited partnership interest in Jamestown Terrace to an affiliate of the operating General Partner for a total of $10,000. This amount was recognized as a gain on sales of limited partnership interest in Local Partnerships during the year ended December 31, 2013 as the Partnership had no investment balance remaining at the date of the assignment.
In November 2013, the Partnership assigned its limited partnership interest in Virginia Park Meadows to an affiliate of the operating General Partner for no consideration. This agreement was subject to the Partnership paying a $3,000 transfer fee to the state of Michigan. The Partnership had no investment balance remaining as of the date of the agreement.
The Partnership, as a limited partner in the Local Partnerships in which it has invested, is subject to the risks incident to the management and ownership of improved real estate. The Partnership investments are also subject to adverse general economic conditions, and accordingly, the status of the national economy, including substantial unemployment and concurrent inflation, could increase vacancy levels, rental payment defaults, and operating expenses, which in turn, could substantially increase the risk of operating losses for the projects.
Because of (i) the nature of the apartment complexes, (ii) the difficulty of predicting the resale market for low-income housing in the future, and (iii) the inability of the Partnership to directly cause the sale of apartment complexes by local general partners, but generally only to require such local general partners to use their respective best efforts to find a purchaser for the apartment complexes, it is not possible at this time to predict whether the liquidation of substantially all of the Partnerships assets and the disposition of the proceeds, if any, in accordance with the Partnership Agreement will occur. If a Local Partnership is unable to sell an apartment complex, it is anticipated that the local general partner will either continue to operate such apartment complexes or take such other actions as the local general partner believes to be in the best interest of the Local Partnership.
Off-Balance Sheet Arrangements
The Partnership owns limited partnership interests in unconsolidated Local Partnerships, in which the Partnerships
7
ownership percentage ranges from 98.90% to 99%. However, based on the provisions of the relevant partnership agreements, the Partnership, as a limited partner, does not have control or a contractual relationship with the Local Partnerships that would require or allow for consolidation under accounting principles generally accepted in the United States (see Note 1 Organization and Summary of Significant Accounting Policies of the financial statements in Item 8. Financial Statements and Supplementary Data). There are no lines of credit, side agreements or any other derivative financial instruments between the Local Partnerships and the Partnership. Accordingly the Partnerships maximum risk of loss related to these unconsolidated Local Partnerships is limited to the recorded investments in and receivables from the Local Partnerships. See Note 2 Investments in and Advances to Local Partnerships of the financial statements in Item 8. Financial Statements and Supplementary Data for additional information about the Partnerships investments in unconsolidated Local Partnerships.
Variable Interest Entities
The Partnership consolidates any variable interest entities in which the Partnership holds a variable interest and is the primary beneficiary. Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entitys activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entitys activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The primary beneficiary of a VIE is generally the entity that has (a) the power to direct the activities of the VIE that most significantly impact the VIEs economic performance, and (b) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
In determining whether it is the primary beneficiary of a VIE, the Partnership considers qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIEs economic performance and which party controls such activities; the amount and characteristics of the Partnerships investment; the obligation or likelihood for the Partnership or other investors to provide financial support; and the similarity with and significance to the business activities of the Partnership and the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of real estate held by these VIEs and general market conditions.
At December 31, 2014 and 2013, the Partnership held variable interests in two VIEs for which the Partnership was not the primary beneficiary. The Partnership has concluded, based on its qualitative consideration of the partnership agreement, the partnership structure and the role of the general partner in each of the Local Partnerships, that the general partner of each of the Local Partnerships is the primary beneficiary of the respective Local Partnership. In making this determination, the Partnership considered the following factors:
·
the general partners conduct and manage the business of the Local Partnerships;
·
the general partners have the responsibility for and sole discretion over selecting a property management agent for the Local Partnerships underlying real estate properties;
·
the general partners are responsible for approving operating and capital budgets for the properties owned by the Local Partnerships;
·
the general partners are obligated to fund any recourse obligations of the Local Partnerships;
·
the general partners are authorized to borrow funds on behalf of the Local Partnerships; and
·
the Partnership, as a limited partner in each of the Local Partnerships, does not have the ability to direct or otherwise significantly influence the activities of the Local Partnerships that most significantly impact such entities economic performance.
The two VIEs at December 31, 2014 consisted of Local Partnerships that were directly engaged in the ownership and management of two apartment properties with a total of 355 units. The Partnership is involved with those VIEs as a non-controlling limited partner equity holder. The Partnerships maximum exposure to loss as a result of its involvement with
8
the unconsolidated VIEs is limited to the Partnerships recorded investments in and receivables from these VIEs, which was approximately $3,478,000 at December 31, 2014 and 2013. The Partnership may be subject to additional losses to the extent of any financial support that the Partnership voluntarily provides in the future.
Critical Accounting Policies and Estimates
A summary of the Partnerships significant accounting policies is included in "Note 1 Organization and Summary of Significant Accounting Policies" which is included in the financial statements in "Item 8. Financial Statements and Supplementary Data". The General Partner believes that the consistent application of these policies enables the Partnership to provide readers of the financial statements with useful and reliable information about the Partnerships operating results and financial condition. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Partnership to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Judgments and assessments of uncertainties are required in applying the Partnerships accounting policies in many areas. The Partnership believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.
Method of Accounting for Investments in Limited Partnerships
The Partnership, as a limited partner, does not have a contractual relationship with the Local Partnerships or exercise control over the activities and operations, including refinancing or selling decisions, of the Local Partnerships that would require or allow for consolidation. Accordingly, the Partnership accounts for its investments in the Local Partnerships using the equity method. The Partnership is allocated profits and losses of the Local Partnerships based upon its respective ownership percentage of 98.90% to 99%. Distributions of surplus cash from operations of the Local Partnerships are restricted by the Local Partnerships Regulatory Agreements with the United States Department of Housing and Urban Development (HUD). These restrictions limit the distribution to a percentage, generally less than 10%, of the initial invested capital. The excess surplus cash is deposited into a residual receipts reserve, of which the ultimate realization by the Partnership is uncertain as HUD frequently retains it upon sale or dissolution of the Local Partnership. For the other Local Partnership, distributions of surplus cash are not restricted. The Partnership is allocated profits and losses and receives distributions from refinancings and sales in accordance with the Local Partnerships partnership agreements. These agreements usually limit the Partnerships distributions to an amount substantially less than its ownership percentage in the Local Partnership.
The individual investments are carried at cost plus the Partnerships share of the Local Partnerships profits less the Partnerships share of the Local Partnerships losses, distributions and impairment charges. See Item 8. Financial Statements and Supplementary Data Note 1 Organization and Summary of Significant Accounting Policies for a description of the Partnerships impairment policy. The Partnership is not legally liable for the obligations of the Local Partnerships and is not otherwise committed to provide additional support to them. Therefore, it does not recognize losses once the Partnerships investment in each of the Local Partnerships reaches zero. Distributions from the Local Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. When the investment balance has been reduced to zero, subsequent distributions received are recognized as income in the statements of operations.
For those investments where the Partnership has determined that the carrying value of the Partnerships investments approximates the estimated fair value of those investments, the Partnerships policy is to recognize equity in income of the Local Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Partnerships. Therefore, the Partnership limits its recognition of equity earnings to the amount the Partnership expects to ultimately realize.
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Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
10
Item 8.
Financial Statements and Supplementary Data
NATIONAL TAX CREDIT INVESTORS II
LIST OF FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Balance Sheets December 31, 2014 and 2013
Statements of Operations Years ended December 31, 2014 and 2013
Statements of Changes in Partners Capital (Deficiency) Years ended December 31, 2014 and 2013
Statements of Cash Flows Years ended December 31, 2014 and 2013
Notes to Financial Statements
11
Report of Independent Registered Public Accounting Firm
The Partners
National Tax Credit Investors II
We have audited the accompanying balance sheets of National Tax Credit Investors II as of December 31, 2014 and 2013, and the related statements of operations, changes in partners' capital(deficiency) and cash flows for the years ended December 31, 2014 and 2013. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnerships internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnerships internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audit, the financial statements referred to above present fairly, in all material respects, the financial position of National Tax Credit Investors II at December 31, 2014 and 2013, and the results of its operations and its cash flows for the years ended December 31, 2014 and 2013, in conformity with U.S. generally accepted accounting principles.
Destin, Florida
March 31, 2015
12
NATIONAL TAX CREDIT INVESTORS II
BALANCE SHEETS
(In thousands)
| December 31, | ||
| 2014 |
| 2013 |
ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents | $ 3,023 |
| $ 3,577 |
Mortgage note receivable | 3,478 |
| 3,478 |
Accounts receivable limited partners | 181 |
| 181 |
Other assets | 54 |
| 54 |
Total assets | $ 6,736 |
| $ 7,290 |
|
|
|
|
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY) |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
Accounts payable and accrued expenses | $ 20 |
| $ 32 |
|
|
|
|
Partners' capital (deficiency): |
|
|
|
General partner | (561) |
| (556) |
Limited partners | 7,277 |
| 7,814 |
Total partners capital (deficiency) | 6,716 |
| 7,258 |
Total liabilities and partners' capital (deficiency) | $ 6,736 |
| $ 7,290 |
See Accompanying Notes to Financial Statements
13
NATIONAL TAX CREDIT INVESTORS II
STATEMENTS OF OPERATIONS
(In thousands, except per interest data)
| Years Ended | ||
| December 31, | ||
| 2014 |
| 2013 |
|
|
|
|
Revenues |
|
|
|
Interest income | $ -- |
| $ -- |
Other income | -- |
| -- |
Total revenues |
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
Management fees General Partner | 64 |
| 107 |
General and administrative | 93 |
| 54 |
Legal and accounting | 79 |
| 83 |
Total operating expenses | 236 |
| 244 |
|
|
|
|
Loss from partnership operations | (236) |
| (244) |
Gain on sales of limited partnership interests |
|
|
|
In Local Partnerships | -- |
| 10 |
Advance recognized as expense as income (loss) | (306) |
| (1,344) |
Equity in loss of Local Partnerships | -- |
| (55) |
|
|
|
|
Net income (loss) | $ (542) |
| $ (1,633) |
|
|
|
|
Net income (loss) allocated to general partners (1%) | $ (5) |
| $ (16) |
Net income (loss) allocated to limited partners (99%) | $ (537) |
| $ (1,617) |
|
|
|
|
Net income (loss) per limited partnership interest | $ (7.46) |
| $ (22.45) |
|
|
|
|
See Accompanying Notes to Financial Statements
14
NATIONAL TAX CREDIT INVESTORS II
STATEMENTS OF CHANGES IN PARTNERS'(DEFICIENCY) CAPITAL
(In thousands)
|
|
|
|
|
|
| General |
| Limited |
|
|
| Partners |
| Partners |
| Total |
|
|
|
|
|
|
Partners' capital (deficiency), January 1, 2013 | $ (540) |
| $ 9,431 |
| $ 8,891 |
|
|
|
|
|
|
Net income (loss) for the year ended December 31, 2013 | (16) |
| (1,617) |
| (1,633) |
|
|
|
|
|
|
Partners' capital (deficiency), December 31, 2013 | (556) |
| 7,814 |
| 7,258 |
|
|
|
|
|
|
Net income (loss) for the year ended December 31, 2014 | (5) |
| (537) |
| (542) |
|
|
|
|
|
|
Partners capital (deficiency), December 31, 2014 | $ (561) |
| $ 7,277 |
| $ 6,716 |
See Accompanying Notes to Financial Statements
15
NATIONAL TAX CREDIT INVESTORS II
STATEMENTS OF CASH FLOWS
(In thousands)
| Years Ended | ||
| December 31, | ||
| 2014 |
| 2013 |
|
|
|
|
Cash flows from operating activities: |
|
|
|
Net income (loss) | $ (542) |
| $ (1,633) |
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
Gain from sales of limited partnership |
|
|
|
interests in Local Partnerships | -- |
| (10) |
Advances made to Local Partnerships recognized as expense | 306 |
| 1,344 |
Equity in loss of Local Partnerships |
|
| 55 |
Change in accounts: |
|
|
|
Accounts payable and accrued expenses | (12) |
| (8) |
Net cash (used in)operating activities | (248) |
| (252) |
|
|
|
|
Cash flows from investing activities: |
|
|
|
Advance to Local Partnership | (306) |
| (1,344) |
Proceeds from sales of limited partnership interests in Local Partnerships | -- |
| 10 |
Net cash provided by investing activities | (306) |
| (1,334) |
|
|
|
|
Net increase (decrease) in cash and cash equivalents | (554) |
| (1,586) |
Cash and cash equivalents, beginning of year | 3,577 |
| 5,163 |
Cash and cash equivalents, end of year | $ 3,023 |
| $ 3,577 |
See Accompanying Notes to Financial Statements
16
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2014
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
National Tax Credit Investors II (NTCI II or the Partnership) is a limited partnership formed under the California Revised Local Partnership Act as of January 12, 1990. The Partnership was formed to invest primarily in other limited partnerships (Local Partnerships) which own and operate multifamily housing complexes that are eligible for low income housing federal income tax credits (the Housing Tax Credit). The general partner of the Partnership is National Partnership Investments, LLC (the General Partner or NAPICO), a California limited liability company. The General Partner is a subsidiary of Bethesda Holdings II, LLC, a privately held real estate asset management company (Bethesda). Bethesda acquired the General Partner on December 19, 2012, pursuant to an option agreement with Aimco/Bethesda Holdings, Inc., a subsidiary of Apartment Investment and Management Company (Aimco), a publicly traded real estate investment trust. The business of NTCI II is conducted primarily by NAPICO. The Partnership shall continue in full force and effect until December 31, 2030, unless terminated earlier pursuant to the Partnership Agreement or law.
The General Partner has a one percent interest in operating profits and losses of the Partnership. The limited partners will be allocated the remaining 99 percent interest in proportion to their respective investments.
Upon total or partial liquidation of the Partnership or the disposition or partial disposition of a project or project interest and distribution of the proceeds, the General Partner will be entitled to a property disposition fee as mentioned in the partnership agreement. The limited partners will have a priority item equal to their invested capital plus 6 percent priority return as defined in the partnership agreement. This property disposition fee may accrue but shall not be paid until the limited partners have received distributions equal to 100 percent of their capital contributions plus the 6 percent priority return. No disposition fees have been paid or accrued.
At December 31, 2014 and 2013, the Partnership had outstanding 72,007 and 72,017 limited partnership interests, respectively.
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits.
Method of Accounting for Investments in Local Partnerships
The investments in Local Partnerships are accounted for using the equity method. Acquisition fees, selection fees and other costs related to the acquisition of the projects have been capitalized as part of the investment account and are being amortized by the straight line method over the estimated lives of the underlying assets, which is generally 30 years.
17
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Net Income (loss)and distribution Per Limited Partnership Interest
Net income (loss) per limited partnership interest and distribution per limited partnership interest was computed by dividing the limited partners' share of net income (loss) and distributions by the number of limited partnership interests outstanding at the beginning of the year. The number of limited partnership interests used was 72,017 and 72,032 for the years ended December 31, 2014 and 2013, respectively.
Abandoned Interests
During 2014 and 2013, the number of limited partnership interests decreased by 10 and 15 units, respectively, due to limited partners abandoning their interests. In abandoning his or her partnership interests, a limited partner relinquishes all right, title and interest in the Partnership as of the date of the abandonment.
Mortgage Note Receivable
The Partnership reviews its mortgage note receivable whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Partnership has recorded its mortgage note receivable at December 31, 2014 and December 31, 2013 at the amount at which the Partnership ultimately expects to receive. See Note 3 Mortgage Note Receivable for further information.
Impairment of Long-Lived Assets
The Partnership reviews long-lived assets to determine if there has been any impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the assets, the Partnership recognizes an impairment loss. There were no impairment losses recognized during the years ended December 31, 2014 and 2013.
Fair Value of Financial Instruments
Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value is defined as the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. At December 31, 2014, the Partnership believes that the carrying amount of other assets and liabilities reported on the balance sheet that require such disclosure approximated their fair value due to the short-term maturity of these instruments.
18
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Segment Reporting
ASC Topic 280-10, Segment Reporting, established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. ASC Topic 280-10 also established standards for related disclosures about products and services, geographic areas, and major customers. As defined in ASC Topic 280-10, the Partnership has only one reportable segment.
Variable Interest Entities
The Partnership consolidates any variable interest entities in which the Partnership holds a variable interest and is the primary beneficiary. Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entitys activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entitys activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The primary beneficiary of a VIE is generally the entity that has (a) the power to direct the activities of the VIE that most significantly impact the VIEs economic performance, and (b) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
In determining whether it is the primary beneficiary of a VIE, the Partnership considers qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIEs economic performance and which party controls such activities; the amount and characteristics of the Partnerships investment; the obligation or likelihood for the Partnership or other investors to provide financial support; and the similarity with and significance to the business activities of the Partnership and the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of real estate held by these VIEs and general market conditions.
At December 31, 2014 and 2013, the Partnership held variable interests in two VIEs for which the Partnership was not the primary beneficiary. The Partnership has concluded, based on its qualitative consideration of the partnership agreement, the partnership structure and the role of the general partner in each of the Local Partnerships, that the general partner of each of the Local Partnerships is the primary beneficiary of the respective Local Partnership. In making this determination, the Partnership considered the following factors:
·
the general partners conduct and manage the business of the Local Partnerships;
·
the general partners have the responsibility for and sole discretion over selecting a property management agent for the Local Partnerships underlying real estate properties;
·
the general partners are responsible for approving operating and capital budgets for the properties owned by the Local Partnerships;
·
the general partners are obligated to fund any recourse obligations of the Local Partnerships;
19
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
·
the general partners are authorized to borrow funds on behalf of the Local Partnerships; and
·
the Partnership, as a limited partner in each of the Local Partnerships, does not have the ability to direct or otherwise significantly influence the activities of the Local Partnerships that most significantly impact such entities economic performance.
The two VIEs at December 31, 2014 consisted of Local Partnerships that were directly engaged in the ownership and management of two apartment properties with a total of 355 units. The Partnership is involved with those VIEs as a non-controlling limited partner equity holder. The Partnerships maximum exposure to loss as a result of its involvement with the unconsolidated VIEs is limited to the Partnerships recorded investments in and receivables from these VIEs, which was approximately $3,478,000 at December 31, 2014 and 2013. The Partnership may be subject to additional losses to the extent of any financial support that the Partnership voluntarily provides in the future.
Note 2 - Investments In and Advances to Local Partnerships
As of December 31, 2014 and 2013, the Partnership holds limited partnership interests in two Local Partnerships, located in two states. As a limited partner of the Local Partnerships, the Partnership does not have authority over day-to-day management of the Local Partnerships or their properties (the "Apartment Complexes"). The general partners responsible for management of the Local Partnerships (the "Local Operating General Partners") are not affiliated with the General Partner of the Partnership, except as discussed below.
At December 31, 2014 and 2013, the Local Partnerships own residential projects consisting of 355 apartment units. During the year ended December 31, 2013, the Partnership sold its limited partnership interest in two of the Local Partnerships owning residential projects consisting of 139 apartment units.
The projects owned by the Local Partnerships in which the Partnership has invested were developed by the Local Operating General Partners who acquired the sites and applied for applicable mortgages and subsidies, if any. The Partnership became the principal limited partner in these Local Partnerships pursuant to arm's-length negotiations with the Local Operating General Partners. As a limited partner, the Partnerships liability for obligations of the Local Partnerships is limited to its investment. The Local Operating General Partner of the Local Partnerships retains responsibility for developing, constructing, maintaining, operating and managing the Projects. Under certain circumstances, an affiliate of NAPICO or the Partnership may act as the Local Operating General Partner. An affiliate of NAPICO, National Tax Credit Inc. II ("NTC-II") is acting either as a special limited partner or non-managing administrative general partner (the Administrative General Partner) of each Local Partnership in which the Partnership had an investment.
The Partnership, as a limited partner, does not have a contractual relationship with the Local Partnerships or exercise control over the activities and operations, including refinancing or selling decisions, of the Local Partnerships that would require or allow for consolidation. Accordingly, the Partnership accounts for its investments in the Local Partnerships using the equity method. The Partnership is allocated profits and losses of the Local Partnerships based upon its respective ownership percentage (between 98.90% and 99%). The Partnership is allocated profits and losses and receives distributions from refinancings and sales in accordance with the Local Partnerships partnership agreements. These agreements usually limit the Partnerships distributions to an amount substantially less than its ownership percentage in the Local Partnership.
20
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Note 2 - Investments In and Advances to Local Partnerships (continued)
The individual investments are carried at cost plus the Partnerships share of the Local Partnerships profits less the Partnerships share of the Local Partnerships losses, distributions and impairment charges. See Note 1 Organization and Summary of Significant Accounting Policies for a description of the impairment policy. The Partnership is not legally liable for the obligations of the Local Partnerships and is not otherwise committed to provide additional support to them. Therefore, the Partnership does not recognize losses once the Partnerships investment in each of the Local Partnerships reaches zero. Distributions from the Local Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. When the investment balance has been reduced to zero, subsequent distributions received are recognized as income in the accompanying statements of operations. During the year ended December 31, 2014 and 2013, there were no such distributions received.
For those investments where the Partnership has determined that the carrying value of the Partnerships investments approximates the estimated fair value of those investments, the Partnerships policy is to recognize equity in income of the Local Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Partnerships. Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize.
In October 2013, the Partnership assigned its limited partnership interest in Jamestown Terrace to an affiliate of the Local Operating General Partner for a total of $10,000. This amount was recognized as a gain on sales of limited partnership interest in Local Partnerships during the year ended December 31, 2013 as the Partnership had no investment balance remaining at the date of the assignment.
In November 2013, the Partnership assigned its limited partnership interest in Virginia Park Meadows to an affiliate of the Local Operating General Partner for no consideration. This agreement was subject to the Partnership paying a $3,000 transfer fee to the state of Michigan. The Partnership had no investment balance remaining as of the date of the agreement.
During September 2013, the Partnership entered into an Assignment and Assumption Agreement to assign its limited partnership interest in Michigan Beach to a third party for a total amount of $10.00. Additionally, during September 2013, the Partnership entered into a Loan Purchase Agreement with the same third party, to sell the second mortgage held by the Partnership for an amount equal to the outstanding principal on the Loan. In April 2014 and December 2014, the Partnership entered into an amendment and a second amendment to each of the Assignment and Assumption Agreement and the Loan Purchase Agreement to, among other things, extend the closing date for the transaction to December 31, 2014 and March 31, 2015, respectively. As of December 31, 2014, the outstanding principal balance on the Loan was $3,596,000. The Registrants investment balance in Michigan Beach was reduced to zero. The assignment and the Loan purchase are expected to close during 2015 and are subject to i) the consent of the United States Department of Housing and Urban Development and ii) the consent of Midland Loan Services, Inc. If either condition is not met prior to March 31, 2015, then the Assignment Agreement and the Loan Agreement would terminate. In the event that the closing does not timely occur due to the default by Assignee of its obligations under the Assignment Agreement or the Loan Agreement, then the Registrant will be entitled to keep the $1,000 escrow deposit made by Assignee in connection with the Loan Agreement. In the event that the closing does not timely occur due to the default by the Partnership, then the rights and obligations of both parties under both agreements terminate, except for certain indemnification rights.
As of December 31, 2014 and 2013, the investment balance in one of the two Local Partnerships had been reduced to zero. The Partnerships remaining investment balance relates to the mortgage note receivable, which is discussed in Note 3 Mortgage Note Receivable.
At times, advances are made to Local Partnerships. Advances made by the Partnership to the individual Local Partnerships
21
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS - CONTINUED
are considered part of the Partnerships investment in limited partnerships. Advances made to Local Partnerships in which the investment balance has been reduced to zero are charged to expense. The Partnership made advances of approximately $306,000 and $1,344,000 to Michigan Beach during the years ended December 31, 2014 and 2013, respectively, for deferred capital needs. While not obligated to make advances to any of the Local Partnerships, the Partnership may make future advances in order to protect its economic investment in the Local Partnerships.
The difference between the investment per the accompanying balance sheets at December 31, 2014 and 2013 and the equity per the Local Partnerships' condensed combined financial statements is due primarily to cumulative unrecognized equity in losses of certain Local Partnerships, costs capitalized to the investment account, and cumulative distributions recognized as income.
The Partnerships value of its investments and its equity in the income/loss and/or distributions from the Local Partnerships are, for certain Local Partnerships, individually, not material to the overall financial position of the Partnership. The financial information from the unaudited condensed combined financial statements of such Local Partnerships at December 31, 2014 and 2013 and for each of the two years in the period then ended is presented below. The Partnerships value of its investment in Michigan Beach Limited Partnership, (the Material Investee) is considered material to the Partnerships financial position and amounts included below for the Material Investee are included on an audited basis.
22
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Note 2 - Investments In and Advances to Local Partnerships (continued)
The following are estimated unaudited condensed combined statements of operations for the years ended December 31, 2014 and 2013 for the Local Partnerships in which the Partnership has investments. The 2013 amounts exclude Jamestown and Virginia Park, for which the Partnership assigned its limited partnership interest in October 2013.
Condensed Combined Balance Sheets of the Local Partnerships | ||||||
(in thousands) | ||||||
| December 31, 2014 | |||||
| Unaudited |
| Material Investee |
| Total | |
|
|
|
|
|
| |
Assets: |
|
|
|
|
| |
Land | $ 112 |
| $ 1,013 |
| $ 1,125 | |
Building and improvements | 4,109 |
| 10,599 |
| 14,708 | |
Accumulated depreciation | (2,462) |
| (4,821) |
| (7,283) | |
Other assets | 37 |
| 595 |
| 632 | |
Total assets | $ 1,796 |
| $ 7,386 |
| $ 9,182 | |
|
|
|
|
|
| |
Liabilities and Partners Deficit: |
|
|
|
|
| |
Liabilities: |
|
|
|
|
| |
Mortgage notes payable and interest | $ 2,047 |
| $ 19,785 |
| $ 21,832 | |
Other liabilities | 277 |
| 366 |
| 643 | |
Partners deficit | (528) |
| (12,765) |
| (13,293) | |
|
|
|
|
|
| |
Total liabilities and partners' deficit | $ 1,796 |
| $ 7,386 |
| $ 9,182 |
Condensed Combined Balance Sheets of the Local Partnerships | ||||||
(in thousands) | ||||||
| December 31, 2013 | |||||
| Unaudited |
| Material Investee |
| Total | |
|
|
|
|
|
| |
Assets: |
|
|
|
|
| |
Land | $ 112 |
| $ 1,010 |
| $ 1,122 | |
Building and improvements | 4,109 |
| 9,751 |
| 13,860 | |
Accumulated depreciation | (2,355) |
| (4,393) |
| (6,748) | |
Other assets | 67 |
| 588 |
| 655 | |
Total assets | $ 1,933 |
| $ 6,956 |
| $ 8,889 | |
|
|
|
|
|
| |
Liabilities and Partners Deficit: |
|
|
|
|
| |
Liabilities: |
|
|
|
|
| |
Mortgage notes payable and interest | $ 2,047 |
| $ 19,046 |
| $ 21,093 | |
Other liabilities | 284 |
| 422 |
| 706 | |
Partners deficit | (398) |
| (12,512) |
| (12,910) | |
|
|
|
|
|
| |
Total liabilities and partners' deficit | $ 1,933 |
| $ 6,956 |
| $ 8,889 |
23
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Note 2 - Investments In and Advances to Local Partnerships (continued)
Condensed Combined Results of Operations of the Local Partnerships | ||||||
(in thousands) | ||||||
| December 31, 2014 | |||||
| Unaudited |
| Material Investee |
| Total | |
|
|
|
|
|
| |
Rental and other | $ 412 |
| $ 2,708 |
| $ 3,120 | |
|
|
|
|
|
| |
Expenses: |
|
|
|
|
| |
Operating expenses | 413 |
| 1,882 |
| 2,295 | |
Interest and entity expenses | 24 |
| 645 |
| 669 | |
|
|
|
|
|
| |
Depreciation and amortization | 107 |
| 434 |
| 541 | |
Total expenses | 544 |
| 2,961 |
| 3,505 | |
|
|
|
|
|
| |
Income (loss) from continuing operations | $ (132) |
| $ (253) |
| $ (385) |
Condensed Combined Results of Operations of the Local Partnerships | |||||||
(in thousands) | |||||||
| December 31, 2013 | ||||||
| Unaudited |
| Material Investee |
| Total | ||
|
|
|
|
|
| ||
Rental and other | $ 430 |
| $ 2,433 |
| $ 2,863 | ||
|
|
|
|
|
| ||
Expenses: |
|
|
|
|
| ||
Operating expenses | 384 |
| 1,648 |
| 2,032 | ||
Interest and entity expenses | 24 |
| 599 |
| 623 | ||
|
|
|
|
|
| ||
Depreciation and amortization | 114 |
| 430 |
| 544 | ||
Total expenses | 522 |
| 2,677 |
| 3,199 | ||
|
|
|
|
|
| ||
Income (loss) from continuing operations | $ (92) |
| $ (244) |
| $ (336) |
24
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Real Estate and Accumulated Depreciation of Local Partnerships
The following tables exclude the Local Partnerships sold in 2014 and 2013 as described above.
(1) Schedule of Encumbrances and Investment Properties (all amounts unaudited except for those amounts relative to the Material Investee and are the gross amounts at which carried at December 31, 2014) (in thousands):
Description | Encumbrances |
| Land |
| Buildings And |
| Total |
| Accumulated |
Lincoln Grove | $ 2,047 |
| $ 112 |
| $ 4,109 |
| $ 4,221 |
| $ 2,462 |
Michigan Beach | 19,785 |
| 1,013 |
| 10,599 |
| 11,612 |
| 4,821 |
Total | $ 21,832 |
| $ 1,125 |
| $ 14,708 |
| $ 15,833 |
| $ 7,283 |
(2) Reconciliation of real estate (all amounts unaudited except for those amounts relative to the Material Investee) (in thousands): | |||||||
| |||||||
| December 31, 2014 | ||||||
| Unaudited |
| Material Investee |
| Total | ||
|
|
|
|
|
| ||
Real Estate: |
|
|
|
|
| ||
Balance at beginning of year | $ 4,221 |
| $ 10,761 |
| $ 14,982 | ||
Improvements | 0 |
| 851 |
| 851 | ||
Balance at end of year | $ 4,221 |
| $ 11,612 |
| $ 15,833 |
| December 31, 2013 | ||||
| Unaudited |
| Material Investee |
| Total |
|
|
|
|
|
|
Real Estate: |
|
|
|
|
|
Balance at beginning of year | $ 4,210 |
| $ 9,065 |
| $ 13,275 |
Improvements | 11 |
| 1,696 |
| 1,707 |
Balance at end of year | $ 4,221 |
| $ 10,761 |
| $ 14,982 |
25
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Note 2 - Investments In and Advances to Local Partnerships (continued)
(3) Reconciliation of accumulated depreciation (all amounts unaudited except for those amounts relative to the Material Investee) (in thousands): | ||||||
| ||||||
| December 31, 2014 | |||||
| Unaudited |
| Material Investee |
| Total | |
|
|
|
|
|
| |
Accumulated depreciation: |
|
|
|
|
| |
Balance at beginning of year | $ 2,355 |
| $ 4,393 |
| $ 6,748 | |
Depreciation expense | 107 |
| 428 |
| 535 | |
Balance at end of year | $ 2,462 |
| $ 4,821 |
| $ 7,283 |
| December 31, 2013 | |||||
| Unaudited |
| Material Investee |
| Total | |
|
|
|
|
|
| |
Accumulated depreciation: |
|
|
|
|
| |
Balance at beginning of year | $ 2,241 |
| $ 3,967 |
| $ 6,208 | |
Depreciation expense | 114 |
| 426 |
| 540 | |
Balance at end of year | $ 2,355 |
| $ 4,393 |
| $ 6,748 |
An affiliate of the General Partner is currently the Local Operating General Partner in one of the Partnerships two Local Partnerships included above.
Note 3 Mortgage Note Receivable
On May 30, 2006, the Partnership purchased the second mortgage for a Local Partnership, Michigan Beach, from the second mortgage holder, PAMI Midatlantic, LLC (PAMI) for a purchase price of $4,320,000. The second mortgage had a principal balance of approximately $3,596,000 and accrued interest outstanding at the time of the purchase. PAMI had filed an action for foreclosure and the appointment of a receiver for the alleged failure to make surplus cash payments and provide required financial reporting. As a result of the purchase, the Partnership was substituted in place of PAMI in the foreclosure action and then the Partnership dismissed the foreclosure action with prejudice on June 9, 2006. The Partnership is the sole limited partner in Michigan Beach.
The second mortgage accrues interest at a fixed rate of 6.11%. Semiannual payments from 50% of surplus cash are required and the note matures in July of 2031. There is an option to the noteholder to accelerate maturity of the second mortgage after October of 2008. There have been no payments made on the loan. The Partnership recognized approximately $0 and $55,000 in equity in loss from Michigan Beach during the years ended December 31, 2014 and 2013, respectively, and reduced the carrying value of the mortgage note receivable. With respect to the second mortgage from Michigan Beach, the Partnership has fully reserved any accrued interest.
26
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS - CONTINUED
The following is a summary of the mortgage note receivable activity for the years ended December 31, 2014 and 2013 (in thousands): | |||
| 2014 |
| 2013 |
Mortgage note receivable balance, beginning of year | $ 3,478 |
| $ 3,533 |
Equity in losses of Local Partnership | -- |
| (55) |
Mortgage note receivable balance, end of year | $ 3,478 |
| $ 3,478 |
27
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Note 4 Transactions with Affiliated Parties
Under the terms of its Partnership Agreement, the Partnership is obligated to the General Partner for the following fees:
(a)
An annual Partnership management fee in an amount equal to 0.5 percent of invested assets (as defined in the Partnership Agreement) at the beginning of the year is payable to the General Partner. For the years ended December 31, 2014 and 2013, partnership management fees in the amount of approximately $64,000 and $107,000, respectively, were recorded as an expense.
(b)
A property disposition fee is payable to the General Partner in an amount equal to the lesser of (i) one-half of the competitive real estate commission that would have been charged by unaffiliated third parties providing comparable services in the area where the apartment complex is located, or (ii) 3 percent of the sale price received in connection with the sale or disposition of the apartment complex or local partnership interest, but in no event will the property disposition fee and all amounts payable to unaffiliated real estate brokers in connection with any such sale exceed in the aggregate, the lesser of the competitive rate (as described above) or 6 percent of such sale price. Receipt of the property disposition fee will be subordinated to the distribution of sale or refinancing proceeds by the Partnership until the limited partners have received distributions of sale or refinancing proceeds in an aggregate amount equal to (i) their 6 percent priority return for any year not theretofore satisfied (as defined in the Partnership Agreement) and (ii) an amount equal to the aggregate adjusted investment (as defined in the Partnership Agreement) of the limited partners. No disposition fees have been paid or accrued.
(c)
The Partnership reimburses NAPICO for certain expenses. The reimbursement to NAPICO was approximately $29,000 for the years ended December 31, 2014 and 2013, and is included in general and administrative expenses.
NTC-II is typically either a special limited partner or an administrative general partner in each Local Partnership in which the Partnership has an investment.
The General Partner is not obligated to advance funds to the Partnership for operations or to fund Partnership advances to Local Partnerships, but may voluntarily do so from time to time. There were no advances received by the Partnership during the years ended December 31, 2014 and 2013. The Partnership may receive future advances of funds from the General Partner although the General Partner is not obligated to provide such advances.
Bethesda and its affiliates owned 1,133 limited partnership interests (the "Units") in the Partnership representing 1.57% of the outstanding Units in the Partnership at December 31, 2014. It is possible that Bethesda or its affiliates will acquire additional Units in the Partnership either through private purchases or tender offers. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to
28
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Note 4 Transactions with Affiliated Parties - continued
remove the General Partner. Although the General Partner owes fiduciary duties to the limited partners of the Partnership, the General Partner also owes fiduciary duties to Bethesda as its sole stockholder. As a result, the duties of the General Partner, as general partner, to the Partnership and its limited partners may come into conflict with the duties of the General Partner to Bethesda as its sole stockholder.
Note 5 - Income Taxes
The Partnership is not taxed on its income. The partners are taxed in their individual capacities based upon their distributive share of the Partnership's taxable income or loss and are allowed the benefits to be derived from off-setting their distributive share of the tax losses against taxable income from other sources subject to passive loss limitations. The taxable income or loss differs from amounts included in the statements of operations because different methods are used in determining the losses of the Local Partnerships as discussed below. The taxable income or loss is allocated to the partner groups in accordance with Section 704(b) of the Internal Revenue Code and therefore is not necessarily proportionate to the interest percentage owned.
A reconciliation between the Partnerships reported net income and the net income (loss) per tax return follows (in thousands, except per limited partnership interest): | |||||
|
|
| |||
| Years Ended December 31, | ||||
| 2014 |
| 2013 | ||
|
|
|
| ||
Net income (loss) per financial statements | $ (542) |
| $ (1,633) | ||
Investment in Local Partnerships | 1,094 |
| 4,903 | ||
Net income (loss) per tax return | $ 552 |
| $ 3,270 | ||
Net income (loss) per limited partnership interest | $ 7.59 |
| $ 44.95 |
The following is a reconciliation between the Partnerships reported amounts and the Federal tax basis of net assets at December 31, 2014 and 2013 (in thousands): | ||||
| 2014 |
| 2013 | |
|
|
|
| |
Net assets as reported | $ 6,716 |
| $ 7,258 | |
Add (deduct): |
|
|
| |
Deferred offering costs and intangibles | 12,323 |
| 12,500 | |
Investment in Local Partnerships | (7,907) |
| (8,073) | |
Other | 95 |
| 95 | |
Net assets Federal tax basis | $ 11,227 |
| $ 11,780 |
The Partnership was subject to a New Jersey tax based upon the number of resident and non-resident limited partners and apportionment of income related to the Partnerships investment in certain Local Partnerships. For the year ended December 31, 2012 the expense related to this tax is reflected in tax expense in the accompanying statements of operations. During the year ended December 31, 2012, the Partnership paid approximately $66,000 as a required deposit for estimated 2012 New Jersey taxes, which was based on half of the previous years taxes. However, the Partnerships estimate of the actual tax due for 2012 was approximately $12,000. The remaining balance paid of approximately $54,000 is reflected as another asset on the accompanying balance sheet at December 31, 2014 and 2013. As a result of the sale of Countryside during 2012, the Partnership is no longer subject to pay New Jersey taxes.
29
NATIONAL TAX CREDIT INVESTORS II
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Note 6 - Contingencies
The General Partner is involved in various lawsuits arising from transactions in the ordinary course of business. In the opinion of management and the General Partner, the claims will not result in any material liability to the Partnership.
Note 7 - Subsequent Events
The Partnerships management evaluated subsequent events through the time this Annual Report on Form 10-K was filed.
30
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Effective June 7, 2013, the Registrant dismissed its prior independent registered public accounting firm, Ernst & Young LLP and retained as its new independent registered public accounting firm, Carter & Company, CPA, LLC. The reports of Ernst & Young LLP on the financial statements of the Registrant as of and for the years ended December 31, 2012 and 2011 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. The decision to change independent accountants was approved by the board of directors of the Managing General Partner of the Partnership. During the two fiscal years ended 2012 and through June 7, 2013, there were no disagreements with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which disagreements if not resolved to the satisfaction of Ernst & Young LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its reports on the Partnership's financial statements for the fiscal years ended December 31, 2012 and 2011.
Effective June 7, 2013, the Registrant engaged Carter & Company, CPA, LLC as its independent registered public accounting firm. During the Partnership's two fiscal years ended December 31, 2012 and the subsequent interim period through June 7, 2013, the Registrant did not consult with Carter & Company, CPA, LLC with respect to the application of accounting principles to a specialized transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Partnership's financial statements, or any other matters or reportable events as set forth in Items 304(a)(2) of Regulation S-K.
Item 9A.
Controls and Procedures
(a)
Disclosure Controls and Procedures
The Partnerships management, with the participation of the Senior Managing Director and VP of Finance/CFO of National Partnership Investments, LLC, who are the equivalent of the Partnerships principal executive officer and principal financial officer, respectively, has evaluated the effectiveness of the Partnerships disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Senior Managing Director and VP of Finance/CFO of National Partnership Investments, LLC, who are the equivalent of the Partnerships principal executive officer and principal financial officer, respectively, have concluded that, as of the end of such period, the Partnerships disclosure controls and procedures are effective.
Managements Report on Internal Control Over Financial Reporting
The Partnerships management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Senior Managing Director and Director of Reporting of Bethesda, who are the equivalent of the Partnerships principal executive officer and principal financial officer, respectively, and effected by the Partnerships management and other personnel, including third-party public accountants engaged by Bethesda to provide such services, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets;
·
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 are being made only in accordance with authorizations of the Partnerships management; and
31
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Partnerships management assessed the effectiveness of the Partnerships internal control over financial reporting as of December 31, 2014. In making this assessment, the Partnerships management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on the Partnerships managements assessment, the Partnerships management concluded that, as of December 31, 2014, the Partnerships internal control over financial reporting is effective.
This annual report does not include an attestation report of the Partnerships registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Partnerships registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Partnership to provide only managements report in this annual report.
(b)
Changes in Internal Control Over Financial Reporting
There has been no change in the Partnerships internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2014 that has materially affected, or is reasonably likely to materially affect, the Partnerships internal control over financial reporting.
Item 9B.
Other Information
None.
32
PART III
Item 10.
Directors, Executive Officers, and Corporate Governance.
National Tax Credit Investors II (the Partnership or the Registrant) has no directors. The general partner responsible for conducting the business of the Partnership is National Partnership Investments, LLC, a California limited liability company (NAPICO or the General Partner).
The names and ages of, as well as the positions and offices held by, the present officers of NAPICO are set forth below: The General Partner manages and controls substantially all of the Partnerships affairs and has general responsibility and ultimate authority in all matters affecting its business. There are no family relationships between or among any officers.
Name | Age | Position |
Brian Flaherty | 46 | Senior Managing Director |
Joseph Dryden | 53 | VP of Finance/CFO |
Brian Flaherty is the Senior Managing Director of the General Partner and Bethesda Holdings II, LLC and has served as the equivalent of the chief executive officer of the Partnership since December 19, 2012. In February 2012, Mr. Flaherty was appointed to Senior Managing Director with McGrath Investment Management, LLC with responsibilities for asset management and transactions. Previously, Mr. Flaherty served in various positions at Aimco, which he joined in 2002, most recently serving as Senior Vice President with responsibilities for asset management and transactions, from January 2009 to February 2012, and in various acquisition, asset management, and disposition functions within Aimco covering both conventional and affordable portfolios from 2002 through 2012. Prior to joining Aimco, Mr. Flaherty was Vice President of Acquisitions for NAPICO, responsible for originating, structuring, and underwriting equity investments in multi-family Low Income Housing Tax Credit Projects.
Mr. Joseph Dryden is the VP of Finance/CFO of the general partner of the Partnership and of Bethesda Holdings, II, LLC, and the Chief Financial Officer of the Partnership since October 3, 2013. Since August 2013, Mr. Dryden has worked with McGrath Investment Management, LLC, most recently as CFO. Mr. Dryden joins the Partnership from Republic-Financial, a multinational finance and private equity firm he joined in March 2010, where he served as Republics Corporate Controller. As the Corporate Controller, Mr. Dryden was responsible for the development and management of highly complex multi-level consolidated audited financial statements. Prior to Republic, Mr. Dryden was the CFO for Decision Display, a Denver based audio visual company specializing in high tech command centers and control rooms he joined in 2005. In this role Mr. Dryden was responsible for all accounting and finance functions including all financial reporting, detailed cash management and forecasting and also managed the companys banking relationships. Additionally, from 2007 to 2010 Mr. Dryden was the President of Dryden Consulting, an accounting and management consulting firm specializing in GAAP and SEC reporting, internal and external audit assistance and Sarbanes-Oxley compliance. Dryden Consultings client list included 1st Data, AIMCO, Crocs, Woodward Governor, McData, and several other large publicly traded companies. Mr. Drydens expertise in GAAP financial reporting, SEC reporting, cash management and process improvement will enable him to create immediate value for the company. Mr. Dryden received a Bachelor of Arts Degree in Accounting from Clarke University in 1984.
The Registrant is not aware of the involvement in any legal proceedings with respect to the executive officers listed in this Item 10.
The General Partner does not have a separate audit committee. As such, the officers of the General Partner fulfill the functions of an audit committee. The General Partner has determined that Joseph Dryden meets the requirement of an "audit committee financial expert".
The Partnership has adopted a code of ethics that is attached hereto as Exhibit 14.
33
Item 11.
Executive Compensation
None of the officers received any remuneration from the Partnership for the year ended December 31, 2014.
34
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
(a)
Security Ownership of Certain Beneficial Owners
The General Partner owns all of the outstanding general partnership interests of the Partnership. One person controlling three entities is known to own beneficially in excess of 5 percent of the outstanding limited partnership interests.
Entity | Units | Percentage |
Bethesda Holdings II, LLC | 1,133 | 1.57% |
Ira J. Gaines | 4,569 | 6.35% |
(b)
None of the officers of the General Partner own directly or beneficially any limited partnership interests in the Partnership.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Under the terms of its Partnership Agreement, the Partnership is obligated to the General Partner for the following fees:
(a)
An annual Partnership management fee in an amount equal to 0.5 percent of invested assets (as defined in the Partnership Agreement) at the beginning of the year is payable to the General Partner. For the years ended December 31, 2014 and 2013, partnership management fees in the amount of approximately $64,000 and $107,000, respectively, were recorded as an expense.
(b)
A property disposition fee is payable to the General Partner in an amount equal to the lesser of (i) one-half of the competitive real estate commission that would have been charged by unaffiliated third parties providing comparable services in the area where the apartment complex is located, or (ii) 3 percent of the sale price received in connection with the sale or disposition of the apartment complex or local partnership interest, but in no event will the property disposition fee and all amounts payable to unaffiliated real estate brokers in connection with any such sale exceed in the aggregate, the lesser of the competitive rate (as described above) or 6 percent of such sale price. Receipt of the property disposition fee will be subordinated to the distribution of sale or refinancing proceeds by the Partnership until the limited partners have received distributions of sale or refinancing proceeds in an aggregate amount equal to (i) their 6 percent priority return for any year not theretofore satisfied (as defined in the partnership agreement) and (ii) an amount equal to the aggregate adjusted investment (as defined in the Partnership Agreement) of the limited partners. No disposition fees have been paid or accrued.
(c)
The Partnership reimburses NAPICO for certain expenses. The reimbursement to NAPICO was approximately $29,000 for the years ended December 31, 2014 and 2013, and is included in general and administrative expenses.
NTC-II is typically either a special limited partner or an administrative general partner in each Local Partnership in which the Partnership has an investment.
The General Partner is not obligated to advance funds to the Partnership for operations or to fund Partnership advances to Local Partnerships, but may voluntarily do so from time to time. There were no advances received by the Partnership during the years ended December 31, 2014 and 2013. The Partnership may receive future advances of funds from the General Partner, although the General Partner is not obligated to provide such advances.
35
Bethesda and its affiliates owned 1,133 limited partnership interests (the "Units") in the Partnership representing 1.57% of the outstanding Units in the Partnership at December 31, 2014. It is possible that Bethesda or its affiliates will acquire additional Units in the Partnership either through private purchases or tender offers. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the General Partner. Although the General Partner owes fiduciary duties to the limited partners of the Partnership, the General Partner also owes fiduciary duties to Bethesda as its sole stockholder. As a result, the duties of the General Partner, as general partner, to the Partnership and its limited partners may come into conflict with the duties of the General Partner to Bethesda as its sole stockholder.
The General Partner has no directors.
Item 14.
Principal Accounting Fees and Services
Ernst & Young LLP was previously the independent registered public accounting firm for the Partnership. On June 7, 2013, that firm was dismissed and Carter & Company CPA, LLC was engaged as independent auditors for the year ended December 31, 2013. The managing General Partner has reappointed Carter & Company, CPA, LLC as independent auditors to audit the financial statements of the Partnership for 2014. The aggregate fees billed for services rendered for 2014 and 2013 are described below:
Audit Fees. Fees for audit services totaled approximately $14,500 and $20,000 for 2014 and 2013, respectively. Fees for audit services also include fees for the reviews of the Partnerships Quarterly Reports on Form 10-Q.
Tax Fees. Fees for tax services totaled approximately $10,000 and $10,000 for 2014 and 2013, respectively.
36
PART IV
Item 15.
Exhibits, Financial Statement Schedules
(a)
The following financial statements of the Partnership are included in Item 8:
Balance Sheets - December 31, 2014 and 2013.
Statements of Operations - Years ended December 31, 2014 and 2013.
Statements of Changes in Partners' (Deficiency) Capital - Years ended December 31, 2014 and 2013.
Statements of Cash Flows - Years ended December 31, 2014 and 2013.
Notes to Financial Statements.
Schedules are omitted for the reason that they are inapplicable or equivalent information has been included elsewhere herein.
(b)
Exhibits:
See Exhibit Index.
The agreements included as exhibits to this Form 10-K contain representations and warranties by each of the parties to each applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
·
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
·
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
·
may apply standards of materiality in a way that is different from what may be viewed as material to an investor; and
·
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
Accordingly, such representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. The Partnership acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Form 10-K not misleading. Additional information about the Partnership may be found elsewhere in this Form 10-K and the Partnerships other public filings, which are available without charge through the SECs website at http://www.sec.gov.
37
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) 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.
| NATIONAL TAX CREDIT INVESTORS II |
| (a California limited partnership) |
|
|
| By: NATIONAL PARTNERSHIP INVESTMENTS, LLC. |
| General Partner |
|
|
Date: March 31,2015 | By: /s/Brian Flaherty |
| Brian Flaherty |
| Senior Managing Director |
|
|
Date: March 31, 2015 | By: /s/Joseph Dryden |
| Joseph Dryden |
| VP of Finance/CFO |
|
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/Brian Flaherty | Senior Managing Director | Date: March 31, 2015 |
Brian Flaherty |
|
|
|
|
|
/s/Joseph Dryden | VP of Finance/CFO | Date: March 31, 2015 |
Joseph Dryden |
|
|
38
NATIONAL TAX CREDIT INVESTORS II
EXHIBIT INDEX
Exhibit
Description of Exhibit
3
Partnership Agreement (herein incorporated by reference to the Partnership's Form S-11 Registration No. 33-27658)
10
Loan Sale Agreement between Pami Midatlantic LLC, a Delaware limited liability company and National Tax Credit Investors II, a California limited partnership dated May 30, 2006. Incorporated by reference to the Partnerships Current Report on Form 8-K dated May 30, 2006.
14
Code of Ethics of National Tax Credit Investors II. Incorporated by reference to the Partnership's Annual Report on Form 10-K dated April 1, 2013.
31.1
Certification of equivalent of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of equivalent of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the equivalent of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
XBRL (Extensible Business Reporting Language). The following materials from National Tax Credit Investors IIs Annual Report on Form 10-K for the fiscal year ended December 31, 2014, formatted in XBRL: (i) balance sheets, (ii) statements of operations, (iii) statements of changes in partners (deficiency) capital, (iv) statements of cash flows, and (v) notes to financial statements (1)
(1)
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
39