UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] 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 0-11723
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
(Exact name of registrant as specified in its charter)
California 94-2883067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, PO Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Partnership was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No___
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
BALANCE SHEETS
(in thousands, except unit data)
September 30, December 31,
2002 2001
(Unaudited) (Note)
Assets
Cash and cash equivalents $ 121 $ 381
Accounts receivable 547 100
Restricted escrows 96 --
Other assets 21 21
Investment in affiliated partnerships 899 --
Investment properties 26,946 --
Investment in Master Loan to affiliate 10,222 39,423
Less: allowance for impairment loss -- (28,129)
10,222 11,294
$ 38,852 $ 11,796
Liabilities and Partners' (Deficit) Capital
Liabilities
Accounts payable $ 15 $ --
Other liabilities 245 45
Distributions payable 141 141
Accrued property taxes 315 --
Due to affiliate 6,798 --
Tenant security deposit liabilities 104 --
Mortgage notes payable 16,603 --
24,221 186
Partners' (Deficit) Capital
General partner (377) (407)
Limited partners (909,123.60 units issued and
outstanding) 15,008 12,017
14,631 11,610
$ 38,852 $ 11,796
Note: The balance sheet at December 31, 2001, has been derived from the audited
financial statements at that date, but does not include all the
information and footnotes required by generally accepted accounting
principles in the United States for complete financial statements.
See Accompanying Notes to Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Revenues:
Rental income $ 382 $ -- $ 382 $ --
Other income 54 -- 54 --
Interest income on investments in Master
Loan -- -- 1 904
Reduction of provision for impairment loss -- 1,000 3,800 1,000
Interest income -- 2 -- 27
Total revenues 436 1,002 4,237 1,931
Expenses:
Operating 109 -- 109 --
General and administrative 133 132 404 475
Depreciation 63 -- 63 --
Interest 204 -- 257 --
Property taxes 40 -- 40 --
Total expenses 549 132 873 475
(Loss) income from continuing operations (113) 870 3,364 1,456
Loss on foreclosure of real estate (343) -- (343) --
Net income $ (456) $ 870 $ 3,021 $ 1,456
Net (loss) income allocated to general
partner (1%) $ (5) $ 9 $ 30 $ 15
Net (loss) income allocated to limited
partners (99%) (451) 861 2,991 1,441
$ (456) $ 870 $ 3,021 $ 1,456
Net (loss) income per limited partnership unit:
(Loss) income from continuing operations $ (0.12) $ 0.95 $ 3.66 $ 1.59
Loss on foreclosure of real estate (0.37) -- (0.37) --
$ (0.49) $ 0.95 $ 3.29 $ 1.59
Distribution per limited partnership unit $ -- $ -- $ -- $ 2.67
See Accompanying Notes to Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner Partners Total
Original capital contributions 912,182 $ 1 $228,046 $228,047
Partners' (deficit) capital
at December 31, 2000 909,124 $ (421) $ 13,038 $ 12,617
Net income for the nine months
ended September 30, 2001 -- 15 1,441 1,456
Distributions to partners -- -- (2,428) (2,428)
Partners' (deficit) capital
at September 30, 2001 909,124 $ (406) $ 12,051 $ 11,645
Partners' (deficit) capital
at December 31, 2001 909,124 $ (407) $ 12,017 $ 11,610
Net income for the nine months
ended September 30, 2002 -- 30 2,991 3,021
Partners' (deficit) capital at
September 30, 2002 909,124 $ (377) $ 15,008 $ 14,631
See Accompanying Notes to Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
2002 2001
Cash flows from operating activities:
Net income $ 3,021 $ 1,456
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Reduction of provision for impairment loss (3,800) (1,000)
Depreciation 63 --
Loss on foreclosure of real estate 343 --
Change in accounts:
Receivables and deposits (201) --
Other assets 1 --
Accounts payable 11 (1)
Accrued property taxes 40 --
Due to affiliates 354 --
Other liabilities 79 26
Net cash (used in) provided by operating
activities (89) 481
Cash flows from investing activities:
Advances on Master Loan (6,781) --
Principal receipts on Master Loan 88 336
Property improvements and replacements (9) --
Investments in affiliated partnerships 19 --
Net cash (used in) provided by investing
activities (6,683) 336
Cash flows from financing activities:
Advances from affiliates 6,644 --
Principal payments on advances from affiliates (100) --
Distributions to partners -- (2,428)
Principal payments on mortgage notes payable (32) --
Net cash provided by (used in) financing
activities 6,512 (2,428)
Net decrease in cash and cash equivalents (260) (1,611)
Cash and cash equivalents at beginning of period 381 2,143
Cash and cash equivalents at end of period $ 121 $ 532
Supplemental disclosure of cash flow information:
Cash paid for interest $ 101 $ --
See Accompanying Notes to Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(in thousands)
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
Foreclosure
During the nine months ended September 30, 2002, Canyon Crest Apartments,
Highcrest Townhomes, and Windemere Apartments were foreclosed upon by the
Partnership. In connection with these foreclosures, the following accounts were
adjusted by the non-cash amounts noted below:
2002
Accounts receivable $ (346)
Master Loan 11,565
Restricted escrows (96)
Other assets (1)
Investment properties (27,000)
Investment in affiliated
partnerships (918)
Accounts payable 4
Tenant security deposit
liabilities 104
Accrued property taxes 275
Other liabilities 121
Mortgage notes payable 16,635
Loss on foreclosure of
real estate $ 343
See Accompanying Notes to Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited financial statements of Consolidated Capital
Institutional Properties/2 (the "Partnership" or "Registrant") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of ConCap Equities, Inc. (the "General
Partner"), all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 2002, are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2002. For further information, refer to the financial statements
and footnotes thereto included in the Partnership's Annual Report on Form 10-K
for the year ended December 31, 2001. The General Partner is a subsidiary of
Apartment Investment and Management Company ("AIMCO"), a publicly traded real
estate investment trust.
Note B - Net Investment in Master Loan and Loss on Foreclosure Real Estate
The Partnership was formed for the benefit of its limited partners to lend funds
to Consolidated Capital Equity Partners/Two, L.P. ("CCEP/2"), a California
general partnership. The general partner of CCEP/2 is an affiliate of the
General Partner. The Partnership loaned funds to CCEP/2 subject to a
non-recourse note with a participation interest (the "Master Loan"). The loans
were made to, and the real properties that secure the Master Loan were purchased
and are owned by, Consolidated Capital Equity Partners/Two, L.P. ("CCEP/2").
The Master Loan matured in November 2000. The General Partner had been
negotiating with CCEP/2 with respect to its options which included foreclosing
on the properties that collateralize the Master Loan or extending the terms of
the Master Loan. The General Partner decided to foreclose on the properties that
collaterize the Master Loan. During March 2002, the Partnership Agreement was
amended to allow the Partnership to directly or indirectly own investment
properties. The General Partner executed deeds in lieu of foreclosure during the
third quarter of 2002 on the three active properties of CCEP/2. The deed in lieu
of foreclosure on the fourth property, which is currently being rebuilt, will be
executed at a later date. As the deeds were executed, title in the properties
previously owned by CCEP/2 were vested in the Partnership, subject to the
existing liens on such properties including the first mortgage loans. As a
result, during the nine months ended September 30, 2002 the Partnership assumed
responsibility for the operations of such properties.
The following table sets forth the Partnership's non-cash activities during the
nine months ended September 30, 2002 with respect to the foreclosure of Canyon
Crest Apartments, Highcrest Townhomes and Windemere Apartments:
Investment properties (a) $ 27,000
Investments in affiliated partnerships (b) 918
Mortgage notes payable (c) (16,635)
Master loan, net of allowance (d) (11,565)
Other liabilities received, net of
other assets assumed (61)
Loss on foreclosure of real estate $ (343)
(a) Amount represents the estimated fair value of the properties. The fair
value was determined by an appraisal obtained in September 2000 from an
independent third party which have been updated by management using the
net operating income of all of the collateral properties capitalized at a
rate deemed reasonable for the type of property and adjusted by management
for current market conditions, physical condition of each respective
property, and other factors.
(b) See Note D.
(c) Amount represents the present value of the mortgages encumbering the
investment properties discounted at a rate currently available to the
Partnership.
(d) Amount represents the amount of the Master Loan associated with the three
properties of $35,894 net of the allowance for impairment loss of $24,329.
Proforma results of operations assuming the foreclosure of Canyon Crest
Apartments, Highcrest Townhomes, and Windemere Apartments occurred at January 1,
2001 are as follows (in thousands, except per unit data):
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
Revenues $1,215 $1,262 $3,725 $3,752
Net income (41) 70 35 29
Net income per
limited
partnership
unit $(0.04) $ 0.08 $ 0.04 $ 0.03
At September 30, 2002, the recorded investment in the Master Loan is considered
to be impaired under "Statement of Financial Accounting Standards No. 114 ("SFAS
114"), "Accounting by Creditors for Impairment of a Loan". The Partnership
measures the impairment of the loan based upon the fair value of the collateral
due to the fact that repayment of the loan is expected to be provided solely by
the collateral. For the nine months ended September 30, 2002, the Partnership
recorded approximately $3,800,000 in income based upon an increase in the fair
value of the collateral. The increase in the fair value of the collateral is due
to the reconstruction of Glenbridge Manor Apartments. For the nine month period
ended September 30, 2001, there was no change in the fair value of the
collateral and accordingly no income was recognized.
The fair value of the remaining collateral property, which secures the Master
Loan is based on the cost of reconstruction which management believes
approximates the fair value.
The principal balance of the Master Loan due to the Partnership totaled
approximately $10,222,000 at September 30, 2002. This amount represents the fair
market value of the remaining property owned by CCEP/2, less the net liabilities
owed by the property. Interest, calculated on the accrual basis, due to the
Partnership pursuant to the terms of the Master Loan Agreement, but not
recognized in the income statements due to the impairment of the loan, totaled
approximately $19,096,000 for the nine months ended September 30, 2002. Interest
income is recognized on the cash basis in accordance with SFAS 114. At September
30, 2002 and December 31, 2001, such cumulative unrecognized interest totaled
approximately $268,815,000 and $249,719,000, respectively, and was not included
in the balance of the investment in Master Loan. The cumulative unrecognized
interest owed on the Master Loan was forgiven by the Partnership for those
properties which were foreclosed on during the third quarter of 2002.
During the nine months ended September 30, 2002, the Partnership advanced
approximately $6,781,000 on the Master Loan to CCEP/2 to cover reconstruction
costs of Glenbridge Manor Apartments. During the nine months ended September 30,
2002 and 2001, the Partnership received approximately $88,000 and $366,000,
respectively, as principal payments on the Master Loan consisting of funds
received by CCEP/2 from certain investments. These funds are required to be
transferred to the Partnership under the terms of the Master Loan.
Note C - Related Party Transactions
CCIP/2 has no employees and is dependent on the General Partner and its
affiliates for the management and administration of all partnership activities.
Affiliates of the General Partner provide property management and asset
management services to the Partnership. CCIP/2 paid property management fees
based upon collected gross rental revenues for property management services for
the nine months ended September 30, 2002. The Partnership Agreement (the
"Agreement") also provides for reimbursement to the General Partner and its
affiliates for costs incurred in connection with the administration of CCIP/2's
activities.
During the nine months ended September 30, 2002, affiliates of the General
Partner were entitled to receive 5% of gross receipts from the Registrant's
residential properties for providing property management services. The
Registrant paid to such affiliates approximately $13,000 for the nine months
ended September 30, 2002 which is included in operating expense. No fees were
paid in 2001.
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $296,000 and $351,000 for the
nine months ended September 30, 2002 and 2001, respectively, which is included
in general and administrative expenses.
In accordance with the Partnership Agreement, the General Partner has loaned the
Partnership approximately $6,644,000 during the nine months ended September 30,
2002 so that the Partnership could make advances on a non-recourse note with a
participation interest (see "Note B") to assist in the reconstruction of
Glenbridge Manor Apartments. Of this $6,644,000, the Partnership paid
approximately $100,000 in principal payments during the nine months ended
September 30, 2002. Interest is charged at the prime rate plus 2%. Interest
expense was approximately $155,000 for the nine months ended September 30, 2002.
Note D - Investment in Affiliated Partnerships
The Partnership has investments in the following affiliated partnerships:
Estimated
Ownership Net Realizable
Partnership Type of Ownership Percentage Value
Consolidated Capital Non-controlling
Growth Fund General Partner 0.40% $ 47
Consolidated Capital Non-controlling
Properties III General Partner 1.85% 27
Consolidated Capital Non-controlling
Properties IV General Partner 1.85% 825
$ 899
These investments were assumed during the foreclosure of investment properties
from CCEP/2 (see "Note B") and are accounted for on the equity method of
accounting. Subsequent to the foreclosure, the Partnership received a
distribution of approximately $19,000 from one of the affiliated partnerships.
Note E - Legal Proceedings
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the
State of California for the County of San Mateo. The plaintiffs named as
defendants, among others, the Partnership, its General Partner and several of
their affiliated partnerships and corporate entities. The action purports to
assert claims on behalf of a class of limited partners and derivatively on
behalf of a number of limited partnerships (including the Partnership) which are
named as nominal defendants, challenging, among other things, the acquisition of
interests in certain General Partner entities by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia; past
tender offers by the Insignia affiliates to acquire limited partnership units;
management of the partnerships by the Insignia affiliates; and the series of
transactions which closed on October 1, 1998 and February 26, 1999 whereby
Insignia and Insignia Properties Trust, respectively, were merged into AIMCO.
The plaintiffs seek monetary damages and equitable relief, including judicial
dissolution of the Partnership. On June 25, 1998, the General Partner filed a
motion seeking dismissal of the action. In lieu of responding to the motion, the
plaintiffs filed an amended complaint. The General Partner filed demurrers to
the amended complaint which were heard February 1999.
Pending the ruling on such demurrers, settlement negotiations commenced. On
November 2, 1999, the parties executed and filed a Stipulation of Settlement,
settling claims, subject to court approval, on behalf of the Partnership and all
limited partners who owned units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Court, at which time
the Court set a final approval hearing for December 10, 1999. Prior to the
December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the General Partner and its affiliates terminated the
proposed settlement. In February 2000, counsel for some of the named plaintiffs
filed a motion to disqualify plaintiff's lead and liaison counsel who negotiated
the settlement. On June 27, 2000, the Court entered an order disqualifying them
from the case and an appeal was taken from the order on October 5, 2000. On
December 4, 2000, the Court appointed the law firm of Lieff Cabraser Heimann &
Bernstein LLP as new lead counsel for plaintiffs and the putative class.
Plaintiffs filed a third amended complaint on January 19, 2001. On March 2,
2001, the General Partner and its affiliates filed a demurrer to the third
amended complaint. On May 14, 2001, the Court heard the demurrer to the third
amended complaint. On July 10, 2001, the Court issued an order sustaining
defendants' demurrer on certain grounds. On July 20, 2001, Plaintiffs filed a
motion for reconsideration of the Court's July 10, 2001 order granting in part
and denying in part defendants' demurrer. On September 7, 2001, Plaintiffs filed
a fourth amended class and derivative action complaint. On September 12, 2001,
the Court denied Plaintiffs' motion for reconsideration. On October 5, 2001, the
General Partner and affiliated defendants filed a demurrer to the fourth amended
complaint, which was heard on December 11, 2001. On February 2, 2002, the Court
served its order granting in part the demurrer. The Court has dismissed without
leave to amend certain of the plaintiffs' claims. On February 11, 2002,
plaintiffs filed a motion seeking to certify a putative class comprised of all
non-affiliated persons who own or have owned units in the partnerships. The
General Partner and affiliated defendants oppose the motion. On April 29, 2002,
the Court held a hearing on plaintiffs' motion for class certification and took
the matter under submission after further briefing, as ordered by the court, was
submitted by the parties. On July 10, 2002, the Court entered an order vacating
the current trial date of January 13, 2003 (as well as the pre-trial and
discovery cut-off dates) and stayed the case in its entirety through November 7,
2002 so that the parties can have an opportunity to discuss settlement. On
October 30, 2002, the court entered an order extending the stay in effect
through January 10, 2003.
During the third quarter of 2001, a complaint (the "Heller action") was filed
against the same defendants that are named in the Nuanes action, captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended complaint. The first amended complaint in the Heller action is
brought as a purported derivative action, and asserts claims for among other
things breach of fiduciary duty; unfair competition; conversion, unjust
enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a
motion to consolidate the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed without leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the General Partner and affiliated defendants
moved to strike the first amended complaint in its entirety for violating the
Court's July 10, 2001 order granting in part and denying in part defendants'
demurrer in the Nuanes action, or alternatively, to strike certain portions of
the complaint based on the statute of limitations. Other defendants in the
action demurred to the fourth amended complaint, and, alternatively, moved to
strike the complaint. On December 11, 2001, the court heard argument on the
motions and took the matters under submission. On February 4, 2002, the Court
served notice of its order granting defendants' motion to strike the Heller
complaint as a violation of its July 10, 2001 order in the Nuanes action. On
March 27, 2002, the plaintiffs filed a notice appealing the order striking the
complaint. The parties are currently in the midst of briefing that appeal.
The General Partner does not anticipate that any costs, whether legal or
settlement costs, associated with these cases will be material to the
Partnership's overall operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
September 30, 2002 and 2001
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
CONSOLIDATED STATEMENT OF NET LIABILITIES IN LIQUIDATION
(Unaudited)
(in thousands)
September 30, 2002
Assets
Cash and cash equivalents $ 513
Receivables and deposits 212
Other assets 73
Investment property 12,823
13,621
Liabilities
Liabilities
Accounts payable 3,275
Accrued property taxes 34
Tenant security deposit liabilities 6
Other liabilities 52
Master loan and interest payable 10,254
13,621
Net liabilities in liquidation $ --
See Accompanying Notes to Consolidated Financial Statements
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN NET LIABILITIES IN LIQUIDATION
(Unaudited)
(in thousands)
Six Months Ended September 30, 2002
Net liabilities in liquidation at March 31, 2002 $ --
Changes in net liabilities in liquidation attributed to:
Decrease in cash and cash equivalents (213)
Increase in receivables and deposits 8
Decrease in restricted escrows (105)
Decrease in other assets (62)
Decrease in investments in affiliated partnerships (1,371)
Decrease in investment properties (18,657)
Increase in accounts payable (1,905)
Decrease in accrued property taxes 379
Decrease in tenant security deposits 101
Decrease in other liabilities 238
Decrease in mortgage notes payable 15,998
Decrease in Master Loan and interest payable 5,589
Net liabilities in liquidation at September 30, 2002 $ --
See Accompanying Notes to Consolidated Financial Statements
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands)
December 31,
2001
(Note)
Assets
Cash and cash equivalents $ 1,307
Receivables and deposits 210
Restricted escrows 104
Other assets 416
Investment properties:
Land 2,731
Buildings and related personal property 20,617
23,348
Less accumulated depreciation (13,615)
9,733
$ 11,770
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 328
Accrued property taxes 535
Tenant security deposit liabilities 109
Other liabilities 194
Mortgage notes 16,094
Master loan and interest payable 289,142
306,402
Partners' Deficit
General partner (2,932)
Limited partners (291,700)
(294,632)
$ 11,770
Note: The balance sheet at December 31, 2001, has been derived from the audited
consolidated financial statements at that date, but does not include all
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
See Accompanying Notes to Consolidated Financial Statements
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
Three Months Ended Nine Months Ended
March 31, September 30, September 30,
2002 2001 2001
Revenues:
Rental income $ 1,124 $ 1,162 $ 3,419
Other income 132 539 856
Total revenues 1,256 1,701 4,275
Expenses:
Operating 428 444 1,356
General and administrative 76 108 219
Depreciation 301 291 881
Interest 7,652 6,970 20,954
Property taxes 112 103 327
Total expenses 8,569 7,916 23,737
Net loss $(7,313) $(6,215) $(19,462)
Net loss allocated to general partner (1%) $ (73) $ (62) $ (195)
Net loss allocated to limited partners (99%) (7,240) (6,153) (19,267)
$(7,313) $(6,215) $(19,462)
See Accompanying Notes to Consolidated Financial Statements
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT/NET LIABILITIES IN LIQUIDATION
(Unaudited)
(in thousands)
General Limited
Partner Partners Total
Partners' deficit at
December 31, 2000 $(2,670) $(265,744) $(268,414)
Net loss for the nine months
ended September 30, 2001 (195) (19,267) (19,462)
Partners' deficit at
September 30, 2001 $(2,865) $(285,011) $(287,876)
Partners' deficit at
December 31, 2001 $(2,932) $(291,700) $(294,632)
Net loss for the three months
ended March 31, 2002 (73) (7,240) (7,313)
Partners' deficit at
March 31, 2002 $(3,005) $(298,940) (301,945)
Adjustment to liquidation basis
(Note C) 301,945
Net liabilities in liquidation
at March 31, 2002 $ --
See Accompanying Notes to Consolidated Financial Statements
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Nine Months
Ended Ended
March 31, 2002 September 30, 2001
Cash flows from operating activities:
Net loss $ (7,313) $(19,462)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 301 881
Amortization of loan costs 5 24
Change in accounts:
Receivables and deposits 6 70
Other assets (179) (29)
Accounts payable 487 15
Accrued property taxes (122) (133)
Tenant security deposit liabilities (2) (1)
Other liabilities 96 (42)
Interest on Master Loan 7,339 19,096
Net cash provided by operating activities 618 419
Cash flows from investing activities:
Insurance proceeds received -- 172
Net (deposits to) withdrawals from restricted escrows (1) 303
Property improvements and replacements (1,933) (1,235)
Net cash used in investing activities (1,934) (760)
Cash flows from financing activities:
Loan costs paid -- (29)
Advances on Master Loan 831 --
Principal payments on mortgage notes payable (96) (264)
Principal payments on Master Loan -- (336)
Net cash provided by (used in) financing
activities 735 (629)
Net decrease in cash and cash equivalents (581) (970)
Cash and cash equivalents at beginning of period 1,307 2,972
Cash and cash equivalents at end of period $ 726 $ 2,002
Supplemental disclosure of cash flow information:
Cash paid for interest $ 306 $ 1,817
Supplemental disclosure of non-cash activity:
Property improvements and replacements in accounts
payable $ 985 $ --
At March 31, 2002 and December 31, 2001, accounts payable and property
improvements and replacements were adjusted by approximately $430,000.
See Accompanying Notes to Consolidated Financial Statements
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
On March 31, 2002, Consolidated Capital Equity Partners/Two, L.P. ("CCEP/2")
adopted the liquidation basis of accounting as a result of the Partnership
receiving notification from Consolidated Capital Institutional Properties/2
("CCIP/2"), the holder of the nonrecourse note ("Master Loan") and a related
party, of its intention to exercise its remedy under the Master Loan Agreement
and to execute deeds in lieu of foreclosure on the investment properties held by
the Partnership. The Master Loan matured in November 2000. The Partnership does
not have the means with which to satisfy its obligation under the Master Loan.
No other sources of additional financing have been identified by the
Partnership, nor does Concap Holdings, Inc. (the "General Partner") have any
other plans to remedy the liquidity problems the Partnership is currently
experiencing. Upon completion of the execution of the deeds in lieu of
foreclosure, the Partnership will cease to exist as a going concern and will be
dissolved. The General Partner is ultimately owned by Apartment Investment and
Management Company ("AIMCO"), a publicly traded real estate investment trust.
As a result of the decision to liquidate the Partnership, the Partnership
changed its basis of accounting for its consolidated financial statements at
March 31, 2002, to the liquidation basis of accounting. Consequently, assets
have been valued at estimated net realizable value and liabilities are presented
at their estimated settlement amounts, including estimated costs associated with
completing the liquidation and estimated operations of the investment
properties. The valuation of assets and liabilities necessarily requires many
estimates and assumptions and there are substantial uncertainties in carrying
out the liquidation. The actual realization of assets and settlement of
liabilities could be higher or lower than amounts indicated and is based upon
estimates of the General Partner as of the date of the consolidated financial
statements.
Note B - Master Loan and Accrued Interest Payable
The General Partner had been in negotiations with CCIP/2 with respect to its
options which include CCIP/2 foreclosing on the properties in CCEP/2 which
collateralize the Master Loan or extending the terms of the Master Loan. CCIP/2
decided to foreclose on the properties that collaterize the Master Loan. During
the nine months ended September 30, 2002, the Partnership Agreement of CCIP/2
was amended to allow CCIP/2 to directly or indirectly own investment properties.
CCIP/2 executed deeds in lieu of foreclosure during the third quarter of 2002 on
the three active properties of the Partnership. The deed in lieu of foreclosure
on the fourth property, which is currently being rebuilt (see "Note C"), will be
executed at a later date. As the deeds were executed, title in the properties
previously owned by the Partnership were vested in CCIP/2, subject to the
existing liens on the properties including the first mortgage loans. As a
result, during the nine months ended September 30, 2002, CCIP/2 assumed
responsibility for the operations of such properties. When the Partnership no
longer has title to the remaining property, the Partnership will be dissolved.
Subsequent to the foreclosure, the Master Loan principal and accrued interest
payable balances at September 30, 2002 was approximately $10,254,000. As a
result of the foreclosure, the additional amounts owed under the Master Loan
were forgiven on the properties that were foreclosed upon. At December 31, 2001,
the Master Loan principal and accrued interest payable balance was approximately
$289,142,000.
Interest accrues at 10% per annum and payments are due quarterly in an amount
equal to Excess Cash Flow, generally defined in the Master Loan Agreement as net
cash flow from operations after capital improvements and third-party debt
service. If such Excess Cash Flow payments are less than the current accrued
interest during the quarterly period, the unpaid interest is added to principal,
compounded annually, and is payable at the loan's maturity. If such Excess Cash
Flow payments are greater than the currently payable interest, the excess amount
is applied to the principal balance of the loan. Any net proceeds from the sale
or refinancing of any of CCEP/2's properties are paid to CCIP/2 under the terms
of the Master Loan Agreement.
Effective January 1, 1993, CCEP/2 and CCIP/2 amended the Master Loan Agreement
to stipulate that Excess Cash Flow would be computed net of capital
improvements. Such expenditures were formerly funded from advances on the Master
Loan from CCIP/2 to CCEP/2. This amendment and change in the definition of
Excess Cash Flow will have the effect of reducing Master Loan payments to CCIP/2
by the amount of CCEP/2's capital expenditures since such amounts were
previously excluded from Excess Cash Flow. The amendment will have no effect on
the computation of interest expense on the Master Loan.
During the nine months ended September 30, 2002, CCIP/2 advanced approximately
$6,781,000 on the Master Loan to the Partnership to cover reconstruction costs
of Glenbridge Manor Apartments.
Note C - Casualty Event
In April 1999, one of the Partnership's residential properties, Glenbridge Manor
Apartments, was completely destroyed by a tornado. It is estimated that the
property sustained approximately $16,000,000 in damages. As of September 30,
2002, $11,302,000 in insurance proceeds have been received. These proceeds were
used to repay the first mortgage and to pay down the Master Loan. All of the
property's fixed assets and related accumulated depreciation were written off as
a result of this casualty. The General Partner began reconstruction of the
property during the third quarter of 2001 and the project is expected to be
completed in the first quarter of 2003. The ultimate remaining insurance
proceeds to be received is currently being disputed by the insurance carrier and
the Partnership. The Partnership is seeking an additional $3,500,000, however,
there can be no assurance that any additional amounts will be received. The
Partnership's General Partner is working with the insurance companies to resolve
this matter.
Note D - Adjustment to Liquidation Basis of Accounting
At March 31, 2002, in accordance with the liquidation basis of accounting,
assets were adjusted to their estimated net realizable value and liabilities
were adjusted to their estimated settlement amount. The net adjustment required
to convert to the liquidation basis of accounting was a decrease in net
liabilities of approximately $301,945,000 which is included in the Statement of
Changes in Partners' Deficit/Net Liabilities In Liquidation. The adjustments are
summarized as follows:
Increase in
Net Assets
(in thousands)
Adjustment of book value of property and
improvements to estimated net realizable value $ 19,560
Adjustment for estimated net realizable value of
investment in affiliated partnerships 1,371
Adjustment of master loan and accrued interest to
estimated settlement amount 281,469
Adjustment of other assets and liabilities, net (455)
Decrease in net liabilities $301,945
Note E - Related Party Transactions
CCEP/2 has no employees and is dependent on the General Partner and its
affiliates for the management and administration of all partnership activities.
Affiliates of the General Partner provide property management and asset
management services to the Partnership. CCEP/2 paid property management fees
based upon collected gross rental revenues for property management services for
the nine months ended September 30, 2002 and 2001. The Partnership Agreement
(the "Agreement") also provides for reimbursement to the General Partner and its
affiliates for costs incurred in connection with the administration of CCEP/2's
activities.
Also, CCEP/2 is subject to an Investment Advisory Agreement between CCEP/2 and
an affiliate of the General Partner. This agreement provides for an annual fee,
payable in monthly installments, to an affiliate of the General Partner for
advising and consulting services for CCEP/2's properties.
During the nine months ended September 30, 2002 and 2001, affiliates of the
General Partner were entitled to receive 5% of gross receipts from the
Registrant's residential properties for providing property management services.
The Registrant paid to such affiliates approximately $171,000 and $187,000 for
the nine months ended September 30, 2002 and 2001, respectively.
An affiliate of the General Partner received investment advisory fees amounting
to approximately $27,000 and $51,000 for the nine months ended September 30,
2002 and 2001, respectively.
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $146,000 and $401,000 for the
nine months ended September 30, 2002 and 2001, respectively. Included in these
amounts are fees related to construction management services provided by an
affiliate of the General Partner of approximately $25,000 and $276,000 for the
nine months ended September 30, 2002 and 2001, respectively. The construction
management service fees are calculated based on a percentage of current year
additions to the investment properties.
Beginning in 2001, the Partnership began insuring its properties up to certain
limits through coverage provided by AIMCO which is generally self-insured for a
portion of losses and liabilities related to workers compensation, property
casualty and vehicle liability. The Partnership insures its properties above the
AIMCO limits through insurance policies obtained by AIMCO from insurers
unaffiliated with the General Partner. During the nine months ended September
30, 2002 and 2001, the Partnership was charged by AIMCO and its affiliates
approximately $98,000 and $106,000, respectively, for insurance coverage and
fees associated with policy claims administration.
In addition to the compensation and reimbursements described above, interest
payments are made to and loan advances are received from CCIP/2 pursuant to the
Master Loan Agreement. Such interest payments totaled approximately $904,000 for
the nine months ended September 30, 2001. CCEP/2 made no interest payments
during the nine months ended September 30, 2002. These payments were based upon
the results of operations for the Partnership's properties. CCEP/2 made
principal payments on the Master Loan of $88,000 and $336,000 during the nine
months ended September 30, 2002 and 2001, respectively. These funds were
received from distributions from three affiliated partnerships.
Note F - Investment in Affiliated Partnerships
The Partnership has investments in the following affiliated partnerships:
Estimated
Ownership Net Realizable
Partnership Type of Ownership Percentage Value
Consolidated Capital Non-controlling
Growth Fund General Partner 0.40% $ 47
Consolidated Capital Non-controlling
Properties III General Partner 1.85% 27
Consolidated Capital Non-controlling
Properties IV General Partner 1.85% 1,297
$1,371
Prior to the adoption of the liquidation basis of accounting, the Partnership
did not recognize an investment in these affiliated partnerships in its
consolidated financial statements as these investment balances had been reduced
to zero as a result of the receipt of distributions from the affiliated
partnerships in prior periods exceeding the investment balance of the
Partnership. However, due to the adoption of the liquidation basis of
accounting, the investments in these affiliated partnerships have been valued at
their estimated fair value and included in the Consolidated Statement of Net
Liabilities in Liquidation as of September 30, 2002. During the three months
ended September 30, 2002 these investments were assigned to CCIP/2 as part of
the foreclosure process of the assets of CCEP/2.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. The matters discussed
in this report contain certain forward-looking statements, including, without
limitation, statements regarding future financial performance and the effect of
government regulations. The discussions of the Registrant's business and results
of operations, including forward-looking statements pertaining to such matters,
do not take into account the effects of any changes to the Registrant's business
and results of operations. Actual results may differ materially from those
described in the forward-looking statements and will be affected by a variety of
risks and factors including, without limitation: national and local economic
conditions; the terms of governmental regulations that affect the Registrant and
interpretations of those regulations; the competitive environment in which the
Registrant operates; financing risks, including the risk that cash flows from
operations may be insufficient to meet required payments of principal and
interest; real estate risks, including variations of real estate values and the
general economic climate in local markets and competition for tenants in such
markets; and possible environmental liabilities. Readers should carefully review
the Registrant's financial statements and the notes thereto, as well as the risk
factors described in the documents the Registrant files from time to time with
the Securities and Exchange Commission.
The Partnership's investment properties consist of three apartment complexes.
The following table sets forth the average occupancy of the properties for the
nine months ended September 30, 2002 and 2001:
Average Occupancy
Property 2002 2001 (1)
Canyon Crest Apartments 91% 97%
Littleton, Colorado
Windemere Apartments 88% 90%
Houston, Texas
Highcrest Townhomes 95% 97%
Wood Ridge, Illinois
(1) The Partnership foreclosed on the investment properties during the third
quarter of 2002.
Results of Operations
The Partnership's net income for the nine months ended September 30, 2002 and
2001 was approximately $3,021,000 and $1,456,000, respectively. The
Partnership's net loss for the three months ended September 30, 2002 was
approximately $456,000 compared to net income of approximately $870,000 for the
corresponding period in 2001. Net income for the nine month period increased due
to an increase in total revenues offset by the recognition of a loss on
foreclosure and an increase in total expenses. The increase in total revenues is
due to an increase in the reduction of provision for impairment loss on the
investment in the Master Loan and the rental revenue of the foreclosed
properties partially offset by a decrease in interest income on the investment
in the Master Loan. Interest income on investments in the Master Loan was not
recognized during 2002 due to no operating cash payments being received from
CCEP/2. Total expenses increased due to operations of the foreclosed properties
offset by a decrease in general and administrative expenses.
Net income for the three month period decreased due to an increase in total
expenses and by the recognition of a loss on foreclosure and by a decrease in
total revenue. Total expenses increased due to the operations of the foreclosed
properties. Total revenue decreased due to a decrease in the reduction of
provision for impairment loss on the investment in the Master Loan partially
offset by the rental revenue of the foreclosed properties.
General and administrative expenses decreased for the nine months ended
September 30, 2002 due to a decrease in the costs of services included in the
management reimbursements to the General Partner as allowed under the
Partnership Agreement. Also included in the general and administrative expenses
for the three and nine months ended September 30, 2002 and 2001, are costs
associated with the quarterly and annual communications with investors and
regulatory agencies and the annual audit required by the Partnership Agreement.
As part of the ongoing business plan of the Partnership, the General Partner
monitors the rental market environment of each of its investment properties to
assess the feasibility of increasing rents, maintaining or increasing occupancy
levels and protecting the Partnership from increases in expense. As part of this
plan, the Managing General Partner attempts to protect the Partnership from the
burden of inflation-related increases in expenses by increasing rents and
maintaining a high overall occupancy level. However, due to changing market
conditions, which can result in the use of rental concessions and rental
reductions to offset softening market conditions, there is no guarantee that the
General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
At September 30, 2002, the Partnership had cash and cash equivalents of
approximately $121,000 as compared to approximately $532,000 at September 30,
2001. The decrease in cash and cash equivalents of approximately $260,000 for
the nine months ended September 30, 2002, from the Partnership's calendar year
end is due to approximately $6,683,000 and $89,000 of cash used in investing and
operating activities, respectively, which was partially offset by approximately
$6,512,000 of cash provided by financing activities. Cash used in investing
activities consisted of advances on the Master Loan and property improvements
and replacements slightly offset by principal receipts on the Master Loan and
distributions from the investments in the affiliated partnerships. Cash provided
by financing activities consisted of loans from an affiliate of the General
Partner partially offset by payments on the loan from affiliates and principal
payments on the mortgages encumbering the investment properties. The Partnership
invests its working capital reserves in interest bearing accounts.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of expenditures
required to meet the ongoing operating needs of the Partnership and to comply
with Federal, state and local legal and regulatory requirements. Such assets are
currently thought to be sufficient for any near-term needs of the Partnership.
See "CCEP/2 Property Operations" below for discussion on CCEP/2's ability to
provide future cash flow as Master Loan debt service. The General Partner
monitors developments in the area of legal and regulatory compliance and is
studying new federal laws, including the Sarbanes-Oxley Act of 2002. The
Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures
with regard to governance, disclosure, audit and other areas. In light of these
changes, the Partnership expects that it will incur higher expenses related to
compliance, including increased legal and audit fees. Capital improvements
planned for the Partnership's properties are detailed below.
Canyon Crest Apartments: Approximately $14,000 is budgeted for the fourth
quarter of 2002 for capital improvements at Canyon Crest Apartments, consisting
primarily of floor covering replacements, appliance replacements, and plumbing
improvements. The Partnership completed approximately $3,000 in capital
expenditures at Canyon Crest Apartments as of September 30, 2002, consisting
primarily of miscellaneous fixed assets. These improvements were funded from
operating cash flow. Additional improvements may be considered and will depend
on the physical condition of the property as well as replacement reserves and
anticipated cash flow generated by the property.
Windemere Apartments: Approximately $44,000 is budgeted for the fourth quarter
of 2002 for capital improvements at Windemere Apartments, consisting primarily
of floor covering, appliance and air conditioning replacements, and structural
improvements. The Partnership completed approximately $6,000 in capital
expenditures at Windemere Apartments as of September 30, 2002, consisting of
appliance replacements. These improvements were funded from operating cash flow.
Additional improvements may be considered and will depend on the physical
condition of the property as well as anticipated cash flow generated by the
property.
Highcrest Townhomes: Approximately $26,000 is budgeted for the fourth quarter of
2002 for capital improvements at Highcrest Townhomes, consisting primarily of
floor covering, appliance, and roof replacements. The Partnership did not
complete any improvements as of September 30, 2002. Additional improvements may
be considered and will depend on the physical condition of the property as well
as replacement reserves and anticipated cash flow generated by the property.
The additional capital expenditures will be incurred only if cash is available
from operations or from Partnership reserves. To the extent that such budgeted
capital improvements are completed, the Partnership's distributable cash flow,
if any, may be adversely affected at least in the short term.
The Partnership's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Partnership. The mortgage
indebtedness of approximately $16,603,000 is being amortized over 240 months
with balloon payments due in 2010 and 2011.
During the nine months ended September 30, 2002 and 2001, the Partnership
received approximately $88,000 and $336,000, respectively, as principal payments
on the Master Loan consisting of funds received by CCEP/2 from certain
investments. These funds are required to be transferred to the Partnership under
the terms of the Master Loan.
The Partnership distributed the following amounts during the nine months ended
September 30, 2002 and 2001 (in thousands, except per unit data):
Nine Months Per Limited Nine Months Per Limited
Ended Partnership Ended Partnership
September 30, 2002 Unit September 30, 2001 Unit
Refinancing (1) $ -- $ -- $1,299 $ 1.43
Surplus cash (2) -- -- 1,129 1.24
$ -- $ -- $2,428 $ 2.67
(1) Proceeds from refinancing of CCEP/2 properties.
(2) Receipt of interest income on Master Loan.
The Partnership's cash available for distribution is reviewed on a monthly
basis. Future cash distributions will depend on the levels of net cash generated
from operations, the availability of cash reserves, and the timing of debt
maturities, refinancings and/or property sales. There can be no assurance,
however, that the Partnership will generate sufficient funds from operations
after required capital improvements to permit further distributions to its
partners during the remainder of 2002 or subsequent periods.
CCEP/2 Property Operations
CCIP/2 has foreclosed on three of the four properties that collaterize the
Master Loan (see "Note B"). During the nine months ended September 30, 2002, the
Partnership Agreement of CCIP/2 was amended to allow CCIP/2 to directly or
indirectly own investment properties. CCIP/2 executed deeds in lieu of
foreclosure during the third quarter of 2002 on the three active properties of
CCEP/2. The deed in lieu of foreclosure on the fourth property, which is
currently being rebuilt, will be executed at a later date. As the deeds were
executed, title in the properties previously owned by CCEP/2 became vested in
CCIP/2, subject to the existing liens on the properties including the first
mortgage loans. When CCEP/2 no longer has title to the remaining property, it
will be dissolved.
As a result of the decision to liquidate, CCEP/2 changed its basis of accounting
for its financial statements at March 31, 2002, to the liquidation basis of
accounting. Consequently, assets have been valued at estimated net realizable
value and liabilities are presented at their estimated settlement amounts. The
valuation of assets and liabilities necessarily requires many estimates and
assumptions and there are substantial uncertainties in carrying out the
liquidation. The actual realization of assets and settlement of liabilities
could be higher or lower than amounts indicated and is based upon estimates of
the General Partner of CCEP/2 as of the date of the consolidated financial
statements.
During the six month period from March 31, 2002 to September 30, 2002, the net
change in liabilities remained constant, but was affected by an increase in cash
and cash equivalents, investment properties, and the Master Loan and interest.
The decrease in cash and cash equivalents is primarily due to the foreclosures,
offset by operating cash generated by the Partnership's investment properties
and advances on the Master Loan from CCIP/2. The decrease in the investment
properties is due to the foreclosures offset by fixed asset additions. The
decrease in the Master Loan is due to the foreclosures, offset by advances
received on the Master Loan.
Other
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 450,006.60 limited partnership units
in the Partnership representing 49.50% of the outstanding units at September 30,
2002. A number of these units were acquired pursuant to tender offers made by
AIMCO or its affiliates. It is possible that AIMCO or its affiliates will
acquire additional units of limited partnership interest in the Partnership in
exchange for cash or a combination of cash and units in the operating
partnership of AIMCO either through private purchases or tender offers. Under
the Partnership Agreement, unitholders holding a majority of the Units are
entitled to take action with respect to a variety of matters, which would
include voting on certain amendments to the Partnership Agreement and voting to
remove the General Partner. As a result of its ownership of 49.50% of the
outstanding units, AIMCO is in a position to influence all such voting decisions
with respect to the Registrant. Although the General Partner owes fiduciary
duties to the limited partners of the Partnership, the General Partner also owes
fiduciary duties to AIMCO 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 AIMCO,
as its sole stockholder.
Critical Accounting Policies and Estimates
The financial statements are prepared in accordance with accounting principles
generally accepted in the United States which require the Partnership to make
estimates and assumptions. The Partnership believes that of its significant
accounting policies, the following may involve a higher degree of judgment and
complexity.
Impairment of Long-Lived Assets
Investment properties foreclosed upon during the third quarter of 2002 are
recorded at fair market value, less accumulated depreciation, unless considered
impaired. If events or circumstances indicate that the carrying amount of a
property may be impaired, the Partnership will make an assessment of its
recoverability by estimating the undiscounted future cash flows, excluding
interest charges, of the property. If the carrying amount exceeds the aggregate
future cash flows, the Partnership would recognize an impairment loss to the
extent the carrying amount exceeds the fair value of the property.
Real property investments are subject to varying degrees of risk. Several
factors may adversely affect the economic performance and value of the
Partnership's investment properties. These factors include changes in the
national, regional and local economic climate; local conditions, such as an
oversupply of multifamily properties; competition from other available
multifamily property owners and changes in market rental rates. Any adverse
changes in these factors could cause an impairment in the Partnership's assets.
Revenue Recognition
The Partnership generally leases apartment units for twelve-month terms or less.
Rental income attributable to leases is recognized monthly as it is earned. The
Partnership will offer rental concessions during particularly slow months or in
response to heavy competition from other similar complexes in the area.
Concessions are charged to income as incurred.
Investment in Master Loan to Affiliates and Interest Income Recognition
The investment in the Master Loan is evaluated for impairment based upon the
fair value of the collateral properties as the collateral is the sole basis of
repayment of the loan. The fair value of the remaining collateral property is
based on the cost of reconstruction which management believes approximates the
fair value. If the fair value of a collateral property increases or decreases
for other than temporary conditions, than the allowance on the Master Loan is
adjusted appropriately.
The investment in the Master Loan is considered to be impaired under Statement
of Financial Accounting Standard No. 114, "Accounting by Creditors for
Impairment of a Loan". Due to this impairment, interest income is recognized on
the cash basis of accounting.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
The Partnership is exposed to market risks associated with its Master Loan to
Affiliate ("Loan"). Receipts (interest income) on the Loan are based upon the
operations and cash flow of the underlying investment properties that
collateralize the Loan. Both the income and expenses of operating the investment
properties are subject to factors outside the Partnership's control, such as an
oversupply of similar properties resulting from overbuilding, increases in
unemployment or population shifts, reduced availability of permanent mortgage
financing, changes in zoning laws, or changes in the patterns or needs of users.
The investment properties are also susceptible to the impact of economic and
other conditions outside of the control of the Partnership as well as being
affected by current trends in the market area in which they operate. In this
regard, the General Partner of the Partnership closely monitors the performance
of the properties collateralizing the Loan.
Based upon the fact that the Loan is considered impaired under Statement of
Financial Accounting Standards No. 114, "Accounting by Creditor for Impairment
of a Loan", interest rate fluctuations do not affect the recognition of income,
as income is only recognized to the extent of cash flow. Therefore, market risk
factors do not affect the Partnership's results of operations as it relates to
the Loan.
The Partnership is exposed to market risks from adverse changes in interest
rates. In this regard, changes in U.S. interest rates affect the interest earned
on the Partnership's cash and cash equivalents as well as interest paid on its
indebtedness. As a policy, the Partnership does not engage in speculative or
leveraged transactions, nor does it hold or issue financial instruments for its
borrowing activities used to maintain liquidity and fund business operations. To
mitigate the impact of fluctuations in U.S. interest rates, the Partnership
maintains its debt as fixed rate in nature by borrowing on a long-term basis.
Based on interest rates at September 30, 2002, a 100 basis point increase or
decrease in market interest rates would impact the Partnership's net income by
approximately $160,000.
ITEM 4. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of the General
Partner, who are the equivalent of the Partnership's principal executive officer
and principal financial officer, respectively, have, within 90 days of the
filing date of this quarterly report, evaluated the effectiveness of the
Partnership's disclosure controls and procedures (as defined in Exchange Act
Rules (13a-14(c) and (15d-14(c)) and have determined that such disclosure
controls and procedures are adequate. There have been no significant changes in
the Partnership's internal controls or in other factors that could significantly
affect the Partnership's internal controls since the date of evaluation. The
Partnership does not believe any significant deficiencies or material weaknesses
exist in the Partnership's internal controls. Accordingly, no corrective actions
have been taken.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the
State of California for the County of San Mateo. The plaintiffs named as
defendants, among others, the Partnership, its General Partner and several of
their affiliated partnerships and corporate entities. The action purports to
assert claims on behalf of a class of limited partners and derivatively on
behalf of a number of limited partnerships (including the Partnership) which are
named as nominal defendants, challenging, among other things, the acquisition of
interests in certain General Partner entities by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia; past
tender offers by the Insignia affiliates to acquire limited partnership units;
management of the partnerships by the Insignia affiliates; and the series of
transactions which closed on October 1, 1998 and February 26, 1999 whereby
Insignia and Insignia Properties Trust, respectively, were merged into AIMCO.
The plaintiffs seek monetary damages and equitable relief, including judicial
dissolution of the Partnership. On June 25, 1998, the General Partner filed a
motion seeking dismissal of the action. In lieu of responding to the motion, the
plaintiffs filed an amended complaint. The General Partner filed demurrers to
the amended complaint which were heard February 1999.
Pending the ruling on such demurrers, settlement negotiations commenced. On
November 2, 1999, the parties executed and filed a Stipulation of Settlement,
settling claims, subject to court approval, on behalf of the Partnership and all
limited partners who owned units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Court, at which time
the Court set a final approval hearing for December 10, 1999. Prior to the
December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the General Partner and its affiliates terminated the
proposed settlement. In February 2000, counsel for some of the named plaintiffs
filed a motion to disqualify plaintiff's lead and liaison counsel who negotiated
the settlement. On June 27, 2000, the Court entered an order disqualifying them
from the case and an appeal was taken from the order on October 5, 2000. On
December 4, 2000, the Court appointed the law firm of Lieff Cabraser Heimann &
Bernstein LLP as new lead counsel for plaintiffs and the putative class.
Plaintiffs filed a third amended complaint on January 19, 2001. On March 2,
2001, the General Partner and its affiliates filed a demurrer to the third
amended complaint. On May 14, 2001, the Court heard the demurrer to the third
amended complaint. On July 10, 2001, the Court issued an order sustaining
defendants' demurrer on certain grounds. On July 20, 2001, Plaintiffs filed a
motion for reconsideration of the Court's July 10, 2001 order granting in part
and denying in part defendants' demurrer. On September 7, 2001, Plaintiffs filed
a fourth amended class and derivative action complaint. On September 12, 2001,
the Court denied Plaintiffs' motion for reconsideration. On October 5, 2001, the
General Partner and affiliated defendants filed a demurrer to the fourth amended
complaint, which was heard on December 11, 2001. On February 2, 2002, the Court
served its order granting in part the demurrer. The Court has dismissed without
leave to amend certain of the plaintiffs' claims. On February 11, 2002,
plaintiffs filed a motion seeking to certify a putative class comprised of all
non-affiliated persons who own or have owned units in the partnerships. The
General Partner and affiliated defendants oppose the motion. On April 29, 2002,
the Court held a hearing on plaintiffs' motion for class certification and took
the matter under submission after further briefing, as ordered by the court, was
submitted by the parties. On July 10, 2002, the Court entered an order vacating
the current trial date of January 13, 2003 (as well as the pre-trial and
discovery cut-off dates) and stayed the case in its entirety through November 7,
2002 so that the parties can have an opportunity to discuss settlement. On
October 30, 2002, the court entered an order extending the stay in effect
through January 10, 2003.
During the third quarter of 2001, a complaint (the "Heller action") was filed
against the same defendants that are named in the Nuanes action, captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended complaint. The first amended complaint in the Heller action is
brought as a purported derivative action, and asserts claims for among other
things breach of fiduciary duty; unfair competition; conversion, unjust
enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a
motion to consolidate the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed without leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the General Partner and affiliated defendants
moved to strike the first amended complaint in its entirety for violating the
Court's July 10, 2001 order granting in part and denying in part defendants'
demurrer in the Nuanes action, or alternatively, to strike certain portions of
the complaint based on the statute of limitations. Other defendants in the
action demurred to the fourth amended complaint, and, alternatively, moved to
strike the complaint. On December 11, 2001, the court heard argument on the
motions and took the matters under submission. On February 4, 2002, the Court
served notice of its order granting defendants' motion to strike the Heller
complaint as a violation of its July 10, 2001 order in the Nuanes action. On
March 27, 2002, the plaintiffs filed a notice appealing the order striking the
complaint. The parties are currently in the midst of briefing that appeal.
The General Partner does not anticipate that any costs, whether legal or
settlement costs, associated with these cases will be material to the
Partnership's overall operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 3(a), Certificates of Limited Partnership
(incorporated by reference to Registration Statement of
Partnership (File No. 2-83540) filed July 22, 1983, as amended
to date).
Exhibit 3(b), Agreement of Limited Partnership (Exhibit A to
the Prospectus of Registrant dated May 6, 1983, is
incorporated herein by reference).
Exhibit 3(c), Fourth Amendment to Amended and Restated Limited
Partnership Agreement of Consolidated Capital Institutional
Properties/2 (Exhibit 3.2 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2001, is
incorporated herein by reference).
Exhibit 99, Certification of Chief Executive Officer and Chief
Financial Officer.
b) Reports on Form 8-K filed during the quarter ended September 30,
2002:
Current Report on Form 8-K dated August 22, 2002 and filed on
September 5, 2002 disclosing the acquisition by the
Partnership through execution of deeds in lieu of foreclosure
of three properties owned by Consolidated Capital Equity
Properties/2.
Current Report on Form 8-K/A dated August 22, 2002 and filed
on November 5, 2002 disclosing Pro Forma information for the
acquisition by the Partnership through execution of deeds in
lieu of foreclosure of three properties owned by Consolidated
Capital Equity Properties/2.
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.
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
By: CONCAP EQUITIES, INC.
General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Thomas C. Novosel
Thomas C. Novosel
Senior Vice President
and Chief Accounting Officer
Date: November 14, 2002
CERTIFICATION
I, Patrick J. Foye, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Consolidated Capital
Institutional Properties/2;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
_______________________
Patrick J. Foye
Executive Vice President of Concap Equities,
Inc., equivalent of the chief executive
officer of the Partnership
CERTIFICATION
I, Paul J. McAuliffe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Consolidated Capital
Institutional Properties/2;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
_______________________
Paul J. McAuliffe
Executive Vice President and Chief Financial
Officer of ConCap Equities, Inc.,
equivalent of the chief financial officer of
the Partnership
Exhibit 99
Certification of CEO and CFO
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Consolidated Capital
Institutional Properties/2 (the "Partnership"), for the quarterly period ended
September 30, 2002 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), Patrick J. Foye, as the equivalent of the chief
executive officer of the Partnership, and Paul J. McAuliffe, as the equivalent
of the chief financial officer of the Partnership, each hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
/s/ Patrick J. Foye
Name: Patrick J. Foye
Date: November 13, 2002
/s/ Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: November 13, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Partnership for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.