UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO

COMMISSION FILE NUMBER: 0-19220

 

Inland Land Appreciation Fund II, L.P.

(Exact name of registrant as specified in its charter)

 

 

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

 

2901 Butterfield Road, Oak Brook, IL 60523

(Address of principal executive offices)(Zip Code)

630-218-8000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x        No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨				Accelerated filer ¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		x

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

Yes ¨     No x

 

 

 

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Balance Sheets

September 30, 2016 and December 31, 2015

(unaudited)

 

		2016				2015
Assets
Current assets:
Cash and cash equivalents (Note 1)		$	2,012,069				2,134,457
Accounts receivable			13,580				0
Other assets			424				2,319
Total current assets			2,026,073				2,136,776
Investment properties at cost (Note 4):
Land and improvements			4,122,425				11,063,438
Investment property held for sale (Note 2)			2,061,813				0
Total assets		$	8,210,311				13,200,214
Liabilities and Partners’ Capital
Current liabilities:
Accounts payable		$	8,733				0
Accrued real estate taxes			7,797				33,175
Due to affiliates (Note 3)			9,838				7,640
Total current liabilities			26,368				40,815
Liabilities associated with investment property held for sale			11,500				0
Total liabilities			37,868				40,815
Partners’ capital:
General Partner:
Capital contribution			500				500
Cumulative net income			14,070,409				14,072,087
Cumulative cash distributions			(13,713,195	)			(13,713,195	)
			357,714				359,392
Limited Partners:
Units of $1,000. Authorized 60,000 Units, 50,068 Units outstanding at September 30, 2016 and December 31, 2015, (net of offering costs of $7,532,439, of which $2,535,445 was paid to affiliates)			42,559,909				42,559,909
Cumulative net income			63,285,665				66,717,754
Cumulative cash distributions			(98,030,845	)			(96,477,656	)
			7,814,729				12,800,007
Total Partners’ capital			8,172,443				13,159,399
Total liabilities and Partners’ capital		$	8,210,311				13,200,214

 

See accompanying notes to financial statements.

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Statements of Operations

For the three and nine months ended September 30, 2016 and 2015

(unaudited)

 

		Three months				Three months				Nine months				Nine months
		ended				ended				ended				ended
		September 30, 2016				September 30, 2015				September 30, 2016				September 30, 2015
Revenues:
Rental income (Note 5)		$	28,721				36,941				55,570				109,619
Total revenues			28,721				36,941				55,570				109,619
Expenses:
Professional services to affiliates			8,296				7,866				41,215				28,386
Professional services to non-affiliates			23,249				22,509				91,664				105,544
General and administrative expenses to affiliates			8,265				1,153				26,621				14,316
General and administrative expenses to non-affiliates			(2,279	)			3,506				14,009				24,312
Land operating expenses to affiliates			1,445				411				3,020				1,144
Land operating expenses to non-affiliates			8,332				14,221				54,902				32,950
Provision for loss on investment property held for sale			265,000				0				585,937				0
Impairment loss on land			0				0				2,680,000				0
Total expenses			312,308				49,666				3,497,368				206,652
Operating loss			(283,587	)			(12,725	)			(3,441,798	)			(97,033	)
Interest income			1,113				1,397				4,381				4,169
Other income			1,850				6,900				3,650				48,650
Net loss		$	(280,624	)			(4,428	)			(3,433,767	)			(44,214	)
Net loss allocated to:
General Partner		$	(156	)			(44	)			(1,678	)			(442	)
Limited Partners			(280,468	)			(4,384	)			(3,432,089	)			(43,772	)
Net loss		$	(280,624	)			(4,428	)			(3,433,767	)			(44,214	)
Net loss allocated to the one General Partner Unit		$	(156	)			(44	)			(1,678	)			(442	)
Net loss per Unit, allocated to Limited Partners per weighted average Limited Partnership Units (50,068 for the three and nine months ended September 30, 2016 and 2015):		$	(5.60	)			(.09	)			(68.55	)			(.88	)

 

See accompanying notes to financial statements.

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Statements of Cash Flows

For the nine months ended September 30, 2016 and 2015

(unaudited)

 

		2016				2015
Cash flows from operating activities:
Net loss		$	(3,433,767	)			(44,214	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for loss on investment property held for sale			585,937				0
Impairment loss on investment property			2,680,000				0
Changes in assets and liabilities:
Accounts receivable			(13,580	)			0
Other assets			1,895				2,943
Accounts payable			8,733				15,437
Accrued real estate taxes			(25,378	)			(5,215	)
Due to affiliates			2,198				(6,772	)
Unearned income			0				36,941
Liabilities associated with investment property held for sale			11,500				0
Net cash used in operating activities			(182,462	)			(880	)
Cash flows from investing activities:
Additions to investment properties			(1,289	)			(2,697	)
Proceeds from sale of investment property			1,614,552				0
Net cash provided by (used in) investing activities			1,613,263				(2,697	)
Cash flows from financing activities
Distributions			(1,553,189	)			(46,811	)
Net cash used in financing activities			(1,553,189	)			(46,811	)
Net decrease in cash and cash equivalents			(122,388	)			(50,388	)
Cash and cash equivalents at beginning of period			2,134,457				2,282,333
Cash and cash equivalents at end of period		$	2,012,069				2,231,945

 

See accompanying notes to financial statements.

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

September 30, 2016

(unaudited)

Readers of this quarterly report should refer to the Partnership’s audited financial statements for the fiscal year ended December 31, 2015, which are included in the Partnership’s 2015 annual report, as certain footnote disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report.

(1) Organization and Basis of Accounting

The Registrant, Inland Land Appreciation Fund II, L.P. (the “Partnership”), is a limited partnership formed on June 28, 1989, pursuant to the Delaware Revised Uniform Limited Partnership Act, to invest in undeveloped land on an all-cash basis and realize appreciation of such land upon resale. Between October 25, 1989 and October 24, 1991, the Partnership sold 50,476.17 Limited Partnership Units (“Units”) at $1,000 per Unit resulting in gross offering proceeds of $50,476,170, not including the General Partner’s capital contribution of $500. The Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) provides for Inland Real Estate Investment Corporation to be the General Partner. Through September 30, 2016, the Partnership had repurchased a total of 408.65 Units for $383,822 from various Limited Partners through a unit repurchase program.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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

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

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

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

The Partnership used the area method of allocation, whereby a per acre price was used as the standard allocation method for land purchases and sales. The total cost of the parcel was divided by the total number of acres to arrive at a per acre price. The one remaining parcel has been written down to its estimated fair market value. Repairs and maintenance expenses are charged to operations as incurred.

Recently Issued Accounting Guidance

In February 2016 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02 Leases, which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying assets for the term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. The new guidance is effective for annual periods

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

September 30, 2016

(unaudited)

 

 

beginning after December 15, 2018, and interim periods therein. Early application is permitted. The impact of the adoption of this new accounting standard on the Partnership’s financials statements is currently being evaluated.

In April 2014, the FASB issued ASU 2014-08, which includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations - that is, a major effect on the organization’s operations and financial results—should be presented as discontinued operations. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. Additionally, the ASU requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The guidance is effective for transactions that occur in annual periods beginning on or after December 15, 2014, and in interim periods within those years. The Partnership has adopted the new guidance and sales of parcels are no longer recorded as discontinued operations.

In May 2014, the FASB issued ASU 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Partnership is currently evaluating the new guidance to determine the impact it will have on its financial statements.

(2) Investment Property Held for Sale

During the quarter ended March 31, 2016, the carrying value of the investment property held for sale, Parcel 8, was reduced to its fair value based on the actual sale which occurred in April 2016 and resulted in a provision for loss on investment property held for sale of $320,937. On September 23, 2016, the Partnership entered into a Real Estate Purchase and Sale Agreement with a third party purchaser to sell approximately 318 acres of the farm portion of Parcel 20 for a sales price of $2,200,000. This portion of Parcel 20 was classified as investment property held for sale at September 30, 2016. Provided the buyer performs pursuant to the terms of the contract, the sale will result in estimated net sales proceeds after closing costs of $2,061,813. The Partnership presently intends to retain a portion of the net sales proceeds for Partnership operations and to distribute the balance to Partners. The closing is expected to occur in the fourth quarter of 2016. As of September 30, 2016, the carrying value of the investment property held for sale was reduced to its fair value of $2,061,813 resulting in a provision for loss on investment property held for sale of $265,000. For the nine months ended September 30, 2016, the provision for loss on investment property held for sale totaled $585,937 in regards to Parcel 8 and the farm portion of Parcel 20. See Note 4 for a discussion regarding the valuation of the remaining portion of Parcel 20.

(3) Transactions with Affiliates

The General Partner and its affiliates are entitled to reimbursement for salaries and expenses of employees of the General Partner and its affiliates relating to the administration of the Partnership. Such costs of $67,836 and $42,702 have been incurred and are included in professional services to affiliates and general and administrative expenses to affiliates for the nine months ended September 30, 2016 and 2015, respectively. There are $8,158 and $7,260 in unpaid professional services to affiliates and general and administrative expenses to affiliates as of September 30, 2016 and December 31, 2015, respectively.

An affiliate of the General Partner performed land improvements, rezoning, annexation and other activities to prepare the Partnership’s investment properties for sale and was reimbursed (as set forth under terms of the Partnership Agreement)

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

September 30, 2016

(unaudited)

 

 

for salaries and direct costs. Such costs of $1,289 and $2,656 have been incurred for the nine months ended September 30, 2016 and 2015, respectively. Such costs are included in investment properties, of which $0 and $380 was unpaid as of September 30, 2016 and December 31, 2015, respectively. Also, an affiliate of the General Partner supervises the maintenance of the parcels. Such costs of $3,020 and $1,144 are included in land operating expenses to affiliates for the nine months ended September 30, 2016 and 2015, respectively, of which $1,680 and $0 was unpaid as of September 30, 2016 and December 31, 2015, respectively.

As of September 30, 2016, the Partnership held all cash and cash equivalents with Inland Bank and Trust, an affiliate of the General Partner.

(4) Investment Properties

As of September 30, 2016, the Partnership owned one parcel of land consisting of approximately 362 acres. On April 15, 2016, the Partnership sold the remaining acreage of Parcel 8, resulting in net sales proceeds of $1,614,552. During the nine months ended September 30, 2015, there were no land sales.

 

(a)

The Partnership has taken the steps necessary to reduce costs and maintain sufficient reserves of cash and cash equivalents to cover all costs for an extended period of time. During April 2016, a farm lease was signed for the tillable portion of Parcel 20. It is expected that the rental income from this lease will cover the real estate taxes and insurance expense for 2016. There were farm leases in place during 2015 which generated sufficient income to cover the costs of insurance expense and real estate taxes. Our general partner has agreed to make a supplemental capital contribution to the Partnership if and to the extent that real estate taxes and insurance payable with respect to our land during a given year exceed the revenue earned by us from leasing our land during such year. Any supplemental capital contribution will be repaid only after limited partners have received, over the life of our Partnership, a return of their original capital plus the 15% cumulative return. Our remaining land is not encumbered by debt and is located in an area that we believe is in the path of future development. As such, the Partnership has the ability to hold on to the remaining parcel until such time as a reasonable and acceptable offer is received; however, management has formally changed its intent from holding the remaining parcel for an indefinite period of time to attempting to sell the parcel in the next year, if possible.

In addition, on a quarterly basis, the Partnership reviews impairment indicators and if necessary, conducts an impairment analysis to ensure that the carrying value of the investment property does not exceed its estimated fair value. If this were to occur, the Partnership would be required to record an impairment loss equal to the excess of the carrying value over the estimated fair value.

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

The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management’s continuous process of analyzing each property. During the first quarter of 2016, management formally changed its intent from holding the remaining parcels for an indefinite period of time to attempting to sell the parcels in the next year, if possible. Management deemed the change in intent as a trigger for impairment. In addition, as a result of the sale of Parcel 8 on April 15, 2016, the Partnership has only one remaining land parcel. Based on offers and the knowledge of the real estate market gathered for the auction of Parcel 20,

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

September 30, 2016

(unaudited)

 

 

management determined the value of the parcel was impaired. For the nine months ended September 30, 2016 and 2015, the Partnership recorded an impairment of $2,680,000 and $0, respectively on Parcel 20, which reduced the remaining book value to the estimated fair value. Subsequent costs incurred above the estimated fair value for the parcel that may be deemed to be impaired will be expensed and included in land operating expenses.

 

(b)	Reconciliation of investment properties owned:

 

		September 30, 2016				December 31, 2015
Balance at January 1,		$	11,063,438				11,038,345
Additions during period			1,289				25,093
Provision for loss on investment property held for sale			(585,937	)			0
Impairment loss on land			(2,680,000	)			0
Sale of investment property			(1,614,552	)			0
Balance at end of period,		$	6,184,238				11,063,438

Level 3 inputs were used in the determination of fair value for purposes of calculating the impairment loss associated with investment property owned.

(5) Rental Income

The Partnership has determined that all leases relating to the farm parcels are operating leases. Accordingly, rental income is reported when earned.

As of September 30, 2016, there was one farm lease in place which expires on December 31, 2016 for approximately 258 of the approximately 362 acres owned. The farm rent is paid in two installments. The first installment has been collected and the second installment is pending receipt at September 30, 2016. As of September 30, 2015, the Partnership had farm leases of generally one year in duration for approximately 426 acres of the approximately 544 acres then owned. These leases expired on December 31, 2015.

(6) Subsequent Events

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

 

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

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

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

Critical Accounting Policies

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

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

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

The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management’s continuous process of analyzing each property. During the first quarter of 2016, management formally changed its intent from holding the remaining parcels for an indefinite period of time to attempting to sell the parcels in the next year, if possible. Management deemed the change in intent as a trigger for impairment. In addition, as a result of the sale of Parcel 8 on April 15, 2016, the Partnership has only one remaining land parcel. Based on offers and the knowledge of the real estate market gathered for the auction of Parcel 20, management determined the value of the parcel was impaired. For the nine months ended September 30, 2016 and 2015, the Partnership recorded an impairment of $2,680,000 and $0, respectively on Parcel 20, which reduced the remaining book value to the estimated fair

 

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value. Subsequent costs incurred above the estimated fair value for the parcel that may be deemed to be impaired will be expensed and included in land operating expenses.

All other assets and liabilities are valued at cost, which approximates fair value.

The Partnership follows Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, which establishes a fair value hierarchy that requires the Partnership to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. ASC 820 establishes the following three levels of inputs that may be used to measure fair value:

Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.

Cost Allocation – We used the area method of cost allocation, whereby a per acre price was used as the standard allocation method for land purchases and sales. The total cost of the parcel was divided by the total number of acres to arrive at a per acre price. The one remaining parcel has been written down to its estimated fair market value.

Revenue Recognition—We recognize income from the sale of land parcels in accordance with the full accrual method of accounting. Rental revenue is recognized as earned.

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

If all of the above criteria are met, we classify the asset as held for sale. The assets and liabilities associated with those assets that are held for sale are classified separately on the balance sheets for the most recent reporting period. During the quarter ended March 31, 2016, the carrying value of the investment property held for sale, Parcel 8, was reduced to its fair value based on the actual sale which occurred in April 2016 and resulted in a provision for loss on investment property held for sale of $320,937. As of September 30, 2016, we have classified $2,061,813 for the farm portion of Parcel 20, as investment property held for sale. During the quarter ended September 30, 2016, the carrying value of the investment property held for sale, the farm portion of Parcel 20, was reduced to its fair value based on a projected net sales proceeds for the sale scheduled to close in the fourth quarter of 2016 and resulted in an additional provision for loss on investment property held for sale of $265,000, resulting in $585,937 provision for loss on investment property held for sale for the nine months ending September 30, 2016. For the year ended December 31, 2015, there was no investment property classified as assets held for sale.

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

Liquidity and Capital Resources

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

 

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We used $41,314,301 of gross offering proceeds to purchase, on an all-cash basis, twenty-seven parcels of undeveloped land and two buildings. These investments include the payment of the purchase price, acquisition fees and acquisition costs of such properties. Three of the parcels were purchased during 1990, sixteen during 1991, four during 1992, and four during 1993. On September 16, 2002, we completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28). Through September 30, 2016, we had multiple sales, exchange transactions, and conveyances through which we disposed of the buildings and approximately 4,168 acres of the approximately 4,530 acres originally owned. As of September 30, 2016, cumulative distributions have totaled $98,030,845 to the limited partners, which is equivalent to 195% of the original capital raised which was $50,476,170, and $13,713,195 to the general partner. Of the $98,030,845 distributed to the limited partners, $97,309,845 was net sales proceeds and $721,000 was from operations. As of September 30, 2016, we have used $47,504,983 of working capital for rezoning and other activities. Such amounts have been capitalized and are included in investment properties.

Our capital needs and resources will vary depending upon a number of factors, including the extent to which we conduct rezoning and other activities relating to utility access, the installation of roads, subdivision and/or annexation of land to a municipality, changes in real estate taxes affecting our land, and the amount of revenue received from leasing. As of September 30, 2016, there was one farm lease in place which expires on December 31, 2016 for approximately 258 of the approximately 362 acres owned. Our general partner has agreed to make a supplemental capital contribution to the Partnership, if and to the extent that real estate taxes and insurance payable with respect to our land during a given year exceed the revenue earned by us from leasing our land during such year.

On April 15, 2016, we sold the remaining acreage of Parcel 8, resulting in net sales proceeds of $1,614,552. During the nine months ended September 30, 2015, there were no land sales.

At September 30, 2016, we had cash and cash equivalents of $2,012,069. The remaining cash balance is available to be used for our costs and liabilities and other activities with respect to our remaining land parcel. On June 17, 2016 the Partnership made a distribution to the limited partners of $1,600,000 less the $46,811 Illinois non-resident withholding repayment for a total distribution of $1,553,189.

The Partnership listed portions of Parcel 20 for sale utilizing a real estate sealed bid auction platform in an effort to procure a buyer or buyers interested in purchasing property zoned for multifamily, retail and/or agricultural farm land. The Partnership opted to utilize the sealed bid auction format which gives the Partnership the ability to accept or reject offers from prospective buyers. The auction call for offers did not yield any offers.

On September 23, 2016, the Partnership entered into a Real Estate Purchase and Sale Agreement with a third party purchaser to sell approximately 318 acres of the farm portion of Parcel 20 for a sales price of $2,200,000. This portion of Parcel 20 was classified as investment property held for sale at September 30, 2016. Provided the buyer performs pursuant to the terms of the contract, the sale will result in estimated net sales proceeds after closing costs of $2,061,813. As of September 30, 2016, the carrying value of the investment property held for sale was reduced to its fair value of $2,061,813 resulting in a provision for loss on investment property held for sale of $265,000. The Partnership presently intends to retain a portion of the net sales proceeds for Partnership operations and to distribute the balance to Partners. The closing is expected to occur in the fourth quarter of 2016.

We continue to closely monitor the real estate market trends, especially within the area where our remaining parcel is located. We have seen modest improvements in the residential real estate market including the completion of stalled residential communities with national homebuilders. There have been farm parcel sales in surrounding communities from both speculators looking to hold land until the market fully rebounds as well as farmers looking to increase their farming businesses. We believe we have taken the steps necessary to reduce costs and maintain sufficient reserves of cash and cash equivalents to cover all our costs for an extended period of time as we continue to market the remaining parcel for sale. Our remaining parcel is not encumbered by debt and is located in an area that we believe is in the path of future development. During the first quarter of 2016, management formally changed its intent from holding the remaining parcels for an indefinite period of time to attempting to sell the parcels in the next year, if possible.

Transactions with Related Parties

The General Partner and its affiliates are entitled to reimbursement for salaries and expenses of employees of the General Partner and its affiliates relating to the administration of the Partnership. Such costs of $67,836 and $42,702 have been incurred and are included in professional services to affiliates and general and administrative expenses to affiliates for the

 

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nine months ended September 30, 2016 and 2015, respectively. There are $8,158 and $7,260 in unpaid professional services to affiliates and general and administrative expenses to affiliates as of September 30, 2016 and December 31, 2015, respectively.

An affiliate of the General Partner performed land improvements, rezoning, annexation and other activities to prepare the Partnership’s investment properties for sale and was reimbursed (as set forth under terms of the Partnership Agreement) for salaries and direct costs. Such costs of $1,289 and $2,656 have been incurred for the nine months ended September 30, 2016 and 2015, respectively. Such costs are included in investment properties, of which $0 and $380 was unpaid as of September 30, 2016 and December 31, 2015, respectively. Also, an affiliate of the General Partner supervises the maintenance of the parcels. Such costs of $3,020 and $1,144 are included in land operating expenses to affiliates for the nine months ended September 30, 2016 and 2015, respectively, of which $1,680 and $0 was unpaid as of September 30, 2016 and December 31, 2015, respectively.

As of September 30, 2016, the Partnership held all cash and cash equivalents with Inland Bank and Trust, an affiliate of the General Partner.

Results of Operations

As of September 30, 2016, we own, in part, one parcel, consisting of approximately 362 acres. As of September 30, 2016, there is one farm lease in place. It is expected that the rental income from this lease will cover the real estate taxes and insurance expense for 2016. Rental income was $55,570 and $109,619 for the nine months ended September 30, 2016 and 2015, respectively. The farm rent is paid in two installments. The first installment has been collected and the second installment is currently pending receipt. Rental income for 2016 decreased due to the sale of Parcel 8.

Professional services to affiliates and non-affiliates were $132,879 and $133,930 for the nine months ended September 30, 2016 and 2015, respectively. Professional services to affiliates and non-affiliates include accounting and legal services. The decrease is due primarily to a decrease in legal fees due to the lack of litigation costs in 2016, which is offset by an increase in accounting and tax fees.

General and administrative expenses to affiliates and non-affiliates were $40,630 and $38,628 for the nine months ended September 30, 2016 and 2015, respectively. General and administrative expenses include data processing costs, postage, printing expenses, farm management fees and investor services. The increase is due to the processing of the distribution in 2016, offset by not engaging a farm management service in 2016.

Land operating expenses to affiliates and non-affiliates were $57,922 and $34,094 for the nine months ended September 30, 2016 and 2015, respectively. These costs typically include real estate tax expense and insurance; however, the increase in 2016 is due to the cost of a survey for Parcel 20, offset by lower real estate taxes due to the sale of Parcel 8.

Interest income was $4,381 and $4,169 for the nine months ended September 30, 2016 and 2015, respectively. Interest income is primarily a result of cash available to invest on a short term basis during the year as a result of sales proceeds received.

Other income was $3,650 and $48,650 for the nine months ended September 30, 2016 and 2015, respectively. The decrease in 2016 is due to a refund received in 2015 from the Village of Montgomery for various fees paid during the development of Parcel 3/27 which was sold in prior years.

 

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Investment Properties

We acquired fee ownership of the following real property investments. The following table summarizes the detail activity of all the parcels owned by the Partnership from the purchase date through the nine months ended September 30, 2016.

Investment properties activity:

 

						Gross Acres Purchased				Purchase/Sales				Initial Costs								Costs Capitalized Subsequent to				Costs of Property				Total Remaining Costs of Parcels at
Parcel		Illinois												Original Costs				Acquisition Costs		Total Costs
#		County				(Sold)				Date												Acquisition				Sold/Impaired				9/30/2016
1			McHenry				372.7590				04/25/90			$	2,114,295			114,070		2,228,365			630,703				2,859,068				0
							(372.7590	)			02/23/04
2			Kendall				41.1180				07/06/90				549,639			43,889		593,528			75,199				668,727				0
							(3.4730	)			08/29/03
							(37.6450	)			02/17/05
3/27			Kendall				120.8170				11/06/90				2,591,268			156,709		2,747,977			9,880,850				12,628,827				0
							83.5250				03/11/93
							(3.3900	)			05/17/05
							(31.0000	)			07/14/05
							(74.7000	)			Var 2006
							(36.8500	)			Var 2007
							(6.6000	)			Var 2008
							(36.1262	)			Var 2009
							(1.7230	)			06/25/10
							(3.1200	)			12/28/10
							(10.8328	)			06/10/13
4			Kendall				299.0250				06/28/91				1,442,059			77,804		1,519,863			539,750				2,059,613				0
							(299.0250	)			03/14/14
5			Kane				189.0468				02/28/91				1,954,629			94,569		2,049,198			349,845				2,399,043				0
							(189.0468	)			05/16/01
6			Lake				57.3345				04/16/91				904,337			71,199		975,536			55,628				1,031,164				0
							(.2580	)			10/01/94
							(57.0765	)			03/22/07
7			McHenry				56.7094				04/22/91				680,513			44,444		724,957			3,210,451				3,935,408				0
							(12.6506	)			Var 1997
							(15.7041	)			Var 1998
							(19.6296	)			Var 1999
							(8.7251	)			Var 2000
8			Kane				325.3940				06/14/91				3,496,700			262,275		3,758,975			85,548				3,844,523				0
							(.8700	)			04/03/96
							(63.0000	)			01/23/01
							(80.0000	)			05/11/04
							(181.524	)			04/15/16

 

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Investment properties activity (continued):

 

				Gross Acres Purchased				Purchase/Sales				Initial Costs												Costs Capitalized Subsequent to				Costs of Property				Total Remaining Costs of Parcels at
Parcel		Illinois										Original Costs				Acquisition Costs				Total Costs
#		County		(Sold)				Date																Acquisition				Sold/Impaired				9/30/2016
9 (c)		Will			9.8670				08/13/91			$	0				0				0				0				0				0
					(9.8670	)			09/16/02
10		Will			150.6600				08/20/91				1,866,716				89,333				1,956,049				23,897				1,979,946				0
					(150.6600	)			01/10/05
11		Will			138.4470				08/20/91				289,914				20,376				310,290				2,700				312,990				0
					(138.4470	)			05/03/93
12 (c)		Will			44.7320				08/20/91				0				0				0				0				0				0
					(44.7320	)			09/16/02
13		Will			6.3420				09/23/91				139,524				172				139,696				0				139,696				0
					(6.3420	)			05/03/93
14		Kendall			44.4030				09/03/91				888,060				68,210				956,270				1,259,583				2,215,853				0
					(15.3920	)			04/16/01
					(14.2110	)			Var 2002
					(13.6000	)			04/11/03
					(1.2000	)			02/19/04
15		Kendall			100.3640				09/04/91				1,050,000				52,694				1,102,694				117,829				1,220,523				0
					(5.0000	)			09/01/93
					(11.0000	)			12/01/94
					(84.3640	)			08/14/98
16		McHenry			168.9050				09/13/91				1,402,058				69,731				1,471,789				97,766				1,569,555				0
					(168.9050	)			08/03/01
17		Kendall			3.4620				10/30/91				435,000				22,326				457,326				113,135				570,461				0
					(2.1130	)			03/06/01
					(1.3490	)			08/23/02

 

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Investment properties activity (continued):

 

				Gross Acres Purchased				Purchase/Sales				Initial Costs												Costs Capitalized Subsequent to				Costs of Property Sold/Impaired				Total Remaining Costs of Parcels at
Parcel		Illinois										Original Costs				Acquisition Costs				Total Costs
#		County		(Sold)				Date																Acquisition								9/30/2016
18		McHenry			139.1697				11/07/91			$	1,160,301				58,190				1,218,491				9,456,992				10,675,483			0
					(9.2500	)			Var 2004
					(33.3197	)			Var 2005
					(62.0200	)			Var 2006
					(12.8800	)			Var 2007
					(2.2400	)			Var 2008
					.2188				03/02/11
					(19.6788	)			11/18/13
19		Kane			436.2360				12/13/91				4,362,360				321,250				4,683,610				187,211				4,870,821			0
					(436.2360	)			05/16/01
20		Kane &
		Kendall			400.1290				01/31/92				1,692,623				101,318				1,793,941				9,525,572				5,135,275			6,184,238
					(21.1380	)			06/30/99
					(7.0000	)			07/21/08
					(3.1085	)			03/21/11
					(4.0770	)			09/19/12
					(2.3160	)			08/16/13
21		Kendall			15.0130				05/26/92				250,000				23,844				273,844				43,063				316,907			0
					(1.0000	)			03/16/99
					(14.0130	)			09/06/06
22		Kendall			391.9590				10/30/92				3,870,000				283,186				4,153,186				1,763,629				5,916,815			0
					(10.0000	)			01/06/94
					(5.5380	)			01/05/96
					(2.4000	)			07/27/99
					(73.3950	)			Var 2001
					(136.0000	)			08/14/02
					(34.1400	)			05/27/03
					(101.4900	)			01/09/04
					(28.9960	)			11/13/13

 

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Investment properties activity (continued):

 

				Gross Acres Purchased				Purchase/Sales				Initial Costs												Costs Capitalized Subsequent to				Costs of Property				Total Remaining Costs of Parcels at
Parcel		Illinois										Original				Acquisition				Total
#		County		(Sold)				Date				Costs				Costs				Costs				Acquisition				Sold/Impaired				9/30/2016
23		Kendall			133.2074				10/30/92			$	3,231,942				251,373				3,483,315				4,665,998				8,149,313				0
					(11.5250	)			07/16/93
					(44.0700	)			Var 1995
					(8.2500	)			Var 1996
					(2.6100	)			Var 1997
					(10.6624	)			Var 1998
					(5.8752	)			Var 1999
					(49.0120	)			Var 2000
					(.2028	)			Var 2001
					(1.0000	)			Var 2002
23A(a)		Kendall			.2676				10/30/92				170,072				12,641				182,713				0				182,713				0
					(.2676	)			03/16/93
24		Kendall			3.9080				01/21/93				645,000				56,316				701,316				30,436				731,752				0
					(3.9080	)			04/16/01
24A(b)		Kendall			.4060				01/21/93				155,000				13,533				168,533				0				168,533				0
					(.4060	)			04/16/01
25		Kendall			656.6870				01/28/93				1,625,000				82,536				1,707,536				22,673				1,730,209				0
					(656.6870	)			10/31/95
26		Kane			89.5110				03/10/93				1,181,555				89,312				1,270,867				5,135,895				6,406,762				0
					(2.1080	)			Var 1999
					(34.2550	)			Var 2000
					(7.8000	)			Var 2001
					(29.1200	)			Var 2002
					(11.3100	)			Var 2003
					(4.9180	)			01/28/04
28(c)		Kendall			50.0000				09/16/02				661,460				22,976				684,436				230,630				915,066				0
					(50.0000	)			04/17/12
												$	38,810,025				2,504,276				41,314,301				47,504,983				82,635,046				6,184,238

 

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(a)

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

 

(b)

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

 

(c)

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

Subsequent Events

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

Other Items

In accordance with Article XVI Section 16.1 of the Inland Land Appreciation Fund II, L.P. Partnership Agreement and Treasury Regulation Section 1.7704-1(j), we have not reached the maximum threshold of limited partnership units that may be transferred/assigned directly between parties during 2016. Therefore, we may authorize additional sales of partnership units directly between parties during 2016. For the benefit of interested limited partners, we have a relationship with a “qualified matching service” as defined under Treasury Regulation Section 1.7704-1(g). In accordance with this Treasury Regulation and the IRS private letter ruling obtained by the “qualified matching service”, we understand that limited partnership units may be transferred/assigned up to a separate maximum threshold each taxable year (in addition to the maximum threshold that may be transferred/assigned directly between parties discussed above). However, there can be no assurance that the IRS private letter ruling will apply to transfers of our units, or that any particular transfer will not violate the transfer restrictions contained in our partnership agreement or the provisions of Treasury Regulation Section 1.7704-1(g). If you have any interest in participating in a transfer/assignment of partnership units through this “qualified matching service,” please contact American Partnership Board directly at 800-736-9797. You are strongly encouraged to consult your personal legal, financial and tax advisors in connection with any such transfer/assignment.

The Illinois Department of Revenue regulates Illinois income tax withholding requirements for nonresident partners. We are also required to pay a withholding tax to the Internal Revenue Service with respect to a partner’s allocable share of our taxable net income, if the partner is a foreign person. We will first pay the withholding tax from the distributions to any nonresident and/or foreign partners, and to the extent that the tax exceeds the amount of distributions withheld, or if there have been no distributions to withhold, the excess will be accounted for as a distribution to such nonresident and/or foreign partners. For the nine months ended September 30, 2016, there were no withholdings required.

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

None

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

 

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Based on management’s evaluation as of September 30, 2016, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework (1992), our management concluded that our internal control over financial reporting was effective as of September 30, 2016. This quarterly report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.

There were no changes to our internal controls over financial reporting during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – Other Information

Items 1 through 5 are omitted because of the absence of conditions under which they are required.

Item 6. Exhibits

Exhibits:

 

		10.1		Real Estate Purchase and Sale Agreement (re: Inland Land Appreciation Fund II, L.P. Parcel 20), by and between Inland Land Appreciation Fund II, L.P. and JG Properties dated September 23, 2016.
		31.1		Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer
		31.2		Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer
		32.1		Section 1350 Certification by Principal Executive Officer
		32.2		Section 1350 Certification by Principal Financial Officer
		101		The following financial information from our Quarterly Report on Form 10-Q for the nine months ended September 30, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows and (iv) related notes.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

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