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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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)
Registrant's telephone number
(864) 239-1000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Units
(Title of class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes ___ No X_
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rate 12b-2). Yes ___ No __X__
State the aggregate market value of the Limited Partnership Units ("Units") held
by non-affiliates computed by reference to the price at which the partnership
interests were sold, or the average bid and asked prices of such partnership
interests as of December 31, 2002. No market exists for the limited partnership
interests of the Registrant, and, therefore, no aggregate market value can be
determined.
DOCUMENTS INCORPORATED BY REFERENCE
None
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.
PART I
Item 1. Description of Business
General
Consolidated Capital Institutional Properties/2 (the "Partnership" or
"Registrant") was organized on April 12, 1983, as a limited partnership under
the California Uniform Limited Partnership Act. On July 22, 1983, the
Partnership registered with the Securities and Exchange Commission ("SEC") under
the Securities Act of 1933 (File No. 2-83540) and commenced a public offering
for the sale of Units. The Units represent equity interests in the Partnership
and entitle the holders thereof to participate in certain allocations and
distributions of the Partnership. The sale of Units terminated on July 21, 1985,
with 912,182 Units sold at $250 each, or gross proceeds of approximately $227.8
million to the Partnership. As permitted under its Partnership Agreement (the
original partnership agreement of the Partnership with all amendments shall be
referred to as the "Partnership Agreement"), the Partnership has repurchased and
retired a total of 3,048 Units for a total of $611,000. During 1999, 10.4 units
were abandoned and accordingly retired by the Partnership. The Partnership may,
at its absolute discretion, repurchase Units, but is under no obligation to do
so. Since its initial offering, the Partnership has not received, nor are
limited partners required to make, additional capital contributions.
Upon the Partnership's formation in 1983, CCEC, a Colorado corporation, was the
corporate general partner. In 1988, through a series of transactions, Southmark
Corporation ("Southmark") acquired controlling interest in CCEC. In December
1988, CCEC filed for reorganization under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11"). In 1990, as part of CCEC's reorganization plan,
ConCap Equities, Inc. ("CEI" or the "General Partner") acquired CCEC's general
partner interests in the Partnership and in 15 other affiliated public limited
partnerships (the "Affiliated Partnerships") and CEI replaced CCEC as managing
general partner in all 16 partnerships. The selection of CEI as the general
partner was approved by a majority of the limited partners in the Partnership
and in each of the Affiliated Partnerships pursuant to a solicitation of the
Limited Partners dated August 10, 1990. As part of this solicitation, the
Limited Partners also approved an amendment to the Partnership Agreement to
limit changes of control of the Partnership. The General Partner is a subsidiary
of Apartment Investment and Management Company ("AIMCO"), a publicly traded real
estate investment trust. The Partnership Agreement provides that the Partnership
is to terminate on December 31, 2013 unless terminated prior to such date.
The Partnership's primary business and only industry segment is real estate
related operations. The Partnership was formed, for the benefit of its Limited
Partners (herein so called and together with the General Partner shall be called
the "Partners"), to lend funds to Equity Partners/Two ("EP/2"), a California
general partnership in which certain of the partners were former shareholders
and former management of CCEC, the former managing general partner of the
Partnership. See "Status of Master Loan" for a description of the loan and
settlement of EP/2's bankruptcy. Through December 31, 2002, the Partnership had
advanced a total of approximately $194,233,000 to EP/2 and its successor under
the Master Loan (as defined in "Status of Master Loan"). As of December 31,
2002, the balance of the Master Loan, net of the allowance for possible losses,
was approximately $14,204,000. EP/2 used the proceeds from these loans to
acquire eleven (11) apartment buildings and ten (10) office complexes, which
collateralized the Master Loan. EP/2's successor in bankruptcy (as more fully
described in "Status of Master Loan") currently owns one (1) apartment building
that is being rebuilt, which secures the Master Loan. See "Item 8. Financial
Statements - Note A" for detailed disclosure of the Partnership's segment
reporting.
The Partnership has no employees. Management and administrative services are
performed by the General Partner and by agents of the General Partner.
Risk Factors
The real estate business in which the Partnership is engaged is highly
competitive. There are other residential properties within the market area of
the Partnership's properties. The number and quality of competitive properties,
including those which may be managed by an affiliate of the General Partner, in
such market area could have a material effect on the rental market for the
apartments at the Partnership's properties and the rents that may be charged for
such apartments. While the General Partner and its affiliates own and/or control
a significant number of apartment units in the United States, such units
represent an insignificant percentage of total apartment units in the United
States and competition for the apartments is local.
Laws benefiting disabled persons may result in the Partnership's incurrence of
unanticipated expenses. Under the Americans with Disabilities Act of 1990, or
ADA, all places intended to be used by the public are required to meet certain
Federal requirements related to access and use by disabled persons. Likewise,
the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties
first occupied after March 13, 1990 to be accessible to the handicapped. These
and other Federal, state and local laws may require modifications to the
Partnership's properties, or restrict renovations of the properties.
Noncompliance with these laws could result in the imposition of fines or an
award of damages to private litigants and also could result in an order to
correct any non-complying feature, which could result in substantial capital
expenditures. Although the General Partner believes that the Partnership's
properties are substantially in compliance with present requirements, the
Partnership may incur unanticipated expenses to comply with the ADA and the
FHAA.
Both the income and expenses of operating the properties owned by the
Partnership are subject to factors outside of the Partnership's control, such as
changes in the supply and demand for similar properties resulting from various
market conditions, increases/decreases in unemployment or population shifts,
changes in the availability of permanent mortgage financing, changes in zoning
laws, or changes in patterns or needs of users. In addition, there are risks
inherent in owning and operating residential properties because such properties
are susceptible to the impact of economic and other conditions outside of the
control of the Partnership.
There have been, and it is possible there may be other, Federal, state and local
legislation and regulations enacted relating to the protection of the
environment. The Partnership is unable to predict the extent, if any, to which
such new legislation or regulations might occur and the degree to which such
existing or new legislation or regulations might adversely affect the properties
owned by the Partnership.
The Partnership monitors its properties for evidence of pollutants, toxins and
other dangerous substances, including the presence of asbestos. In certain cases
environmental testing has been performed which resulted in no material adverse
conditions or liabilities. In no case has the Partnership received notice that
it is a potentially responsible party with respect to an environmental clean up
site.
Insurance coverage is becoming more expensive and difficult to obtain. The
current insurance market is characterized by rising premium rates, increasing
deductibles, and more restrictive coverage language. Recent developments have
resulted in significant increases in insurance premiums and have made it more
difficult to obtain certain types of insurance. As an example, many insurance
carriers are excluding mold-related risks from their policy coverages, or are
adding significant restrictions to such coverage. Continued deterioration in
insurance market place conditions may have a negative effect on the
Partnership's operating results.
A further description of the Partnership's business is included in "Management's
Discussion and Analysis or Plan of Operation" included in "Item 7" of this Form
10-K.
Status of Master Loan
Prior to 1989, the Partnership had loaned funds totaling approximately
$176,000,000 to EP/2 subject to a nonrecourse note (the "Master Loan"), pursuant
to the Master Loan Agreement dated July 22, 1983, between the Partnership and
EP/2. The Partnership secured the Master Loan with deeds of trust or mortgages
on real property purchased with the funds advanced as well as by the assignment
and pledge of promissory notes from the partners of EP/2.
During 1989, EP/2 defaulted on certain interest payments that were due under the
Master Loan. Before the Partnership could exercise its remedies for such
defaults, EP/2 filed for bankruptcy protection in a Chapter 11 reorganization
proceeding. On October 18, 1990, the bankruptcy court approved EP/2's consensual
plan of reorganization (the "Plan"). In November 1990, EP/2 and the Partnership
consummated a closing under the Plan pursuant to which, among other things, the
Partnership and EP/2 executed an amended and restated loan agreement (the "New
Master Loan Agreement"), EP/2 was converted from a California general
partnership to a California limited partnership, Consolidated Capital Equity
Partners/Two, L.P., ("CCEP/2") and CCEP/2 renewed the deeds of trust and
mortgages on all the properties collaterally securing the New Master Loan
Agreement. ConCap Holdings, Inc. ("CHI"), a Texas corporation and wholly-owned
subsidiary of CEI, is the sole general partner of CCEP/2 and an affiliate of the
Partnership. The general partners of EP/2 became limited partners in CCEP/2. CHI
has full discretion with respect to conducting CCEP/2's business, including
managing CCEP/2's properties and initiating and approving capital expenditures
and asset dispositions and refinancings. Under the new partnership agreement,
CCEP/2 is managed by CHI primarily for the benefit of the Partnership. CCEP/2's
primary objective is to conduct its business to maximize the Partnership's
recovery under the New Master Loan Agreement.
Under the terms of the New Master Loan Agreement, interest accrues at 10% and
payments are due quarterly in an amount equal to Excess Cash Flow, generally
defined in the New Master Loan Agreement as net cash flow from operations after
third-party debt service and capital improvements. 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
current accrued interest, the excess amount is applied to the principal balance
of the loan. Any net proceeds from sale or refinancing of any of CCEP/2's
properties are paid to the Partnership under the terms of the New Master Loan
Agreement.
Effective January 1, 1993, the Partnership and CCEP/2 amended the New 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 the Partnership to CCEP/2. This amendment and change in the
definition of Excess Cash Flow has the effect of reducing the Partnership's
interest income from the Master Loan by the amount of CCEP/2's capital
expenditures since such amounts were previously excluded from Excess Cash Flow.
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 year ended December 31, 2002 the Partnership assumed
responsibility for the operations of such properties.
Segments
Segment data for the years ended December 31, 2002, 2001, and 2000 is included
in "Item 8. Financial Statements - Note A" and is an integral part of the Form
10-K.
Item 2. Property
The following table sets forth the Partnership's investments in properties:
Date of
Properties Acquisition Type of Ownership Use
Canyon Crest Apartments 08/22/02 Fee ownership, subject to Apartment
Littleton, Colorado first mortgage 90 units
Highcrest Townhomes 08/22/02 Fee ownership, subject to Apartment
Wood Ridge, Illinois first mortgage 176 units
Windemere Apartments 08/28/02 Fee ownership, subject to Apartment
Houston, Texas first mortgage 257 units
During the year ended December 31, 2002, CCIP/2 foreclosed on three of the four
properties that collaterized the Master Loan (see "Item 8 - Financial Statements
and Supplementary Data - Note "B"). 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.
Schedule of Properties
Set forth below for each of the Partnership's properties is the gross carrying
value, accumulated depreciation, depreciable life, method of depreciation, and
Federal tax basis.
Gross
Carrying Accumulated Federal
Properties Value Depreciation Rate Method Tax Basis
(in thousands) (in thousands)
Canyon Crest Apartments $ 5,444 $ 50 5-40 S/L $ 5,360
Highcrest Townhomes 12,317 113 5-40 S/L 12,085
Windemere Apartments 9,443 85 5-40 S/L 9,306
Totals $27,204 $248 $26,751
See "Note A" to the financial statements included in "Item 8. Financial
Statements" for a description of the Partnership's depreciation and
capitalization policies.
Schedule of Property Indebtedness
The following table sets forth certain information relating to the loans
encumbering the Partnership's properties.
Principal Principal
Balance At Stated Balance
December 31, Interest Period Maturity Due at
Property (1) 2002 Rate Amortized Date Maturity
(in thousands) (in thousands)
Canyon Crest Apartments
1st mortgage $ 3,470 7.10% 20 yrs 01/01/11 $ 2,613
Highcrest Townhomes
1st mortgage 6,439 7.72% 20 yrs 02/01/10 4,868
Windemere Apartments
1st mortgage 5,790 7.83% 20 yrs 11/01/10 3,905
15,699
Mortgage Premium, net 781
Total $16,480 $11,386
(1) See "Item 8. Financial Statements - Note C" for information with respect
to the Partnership's ability to prepay these loans and other specific
details about these loans.
Rental Rates and Occupancy
Average annual rental rate per unit and occupancy for 2002 and 2001 for each
property:
Average Annual Average
Rental Rate Occupancy
(per unit)
Properties 2002 2001 2002 2001
Canyon Crest Apartments (1) $ 9,927 $10,223 90% 95%
Highcrest Townhomes 11,783 11,714 95% 97%
Windemere Apartments 7,728 7,726 88% 90%
(1) The General Partner attributes the decrease in occupancy to
softening of the rental market in the area.
As noted under "Item 1. Description of Business", the real estate industry is
highly competitive. All of the properties of the Partnership are subject to
competition from other residential apartment complexes in the area. The General
Partner believes that all of the properties are adequately insured. Each
property is an apartment complex which leases units for lease terms of one year
or less. No residential tenant leases 10% or more of the available rental space.
All of the properties are in good physical condition, subject to normal
depreciation and deterioration as is typical for assets of this type and age.
Real Estate Taxes and Rates
Real estate taxes and rates in 2002 for each property were:
2002 2002
Billing Rate (1)
(in thousands)
Canyon Crest Apartments $ 44 .68%
Highcrest Townhomes 234 7.13%
Windemere Apartments 220 3.07%
(1) The rates are based on the local authority's assessed value of the
investment properties.
Capital Improvements
Canyon Crest Apartments
As of December 31, 2002, the Partnership completed approximately $44,000 in
capital expenditures at Canyon Crest Apartments consisting primarily of major
landscaping, structural upgrades, and floor covering replacements. These
improvements were funded from operating cash flow. The Partnership is currently
evaluating the capital improvement needs of the property for the upcoming year
and currently expects to budget approximately $27,000. Additional improvements
may be considered in 2003 and will depend on the physical condition of the
property as well as anticipated cash flow generated by the property.
Highcrest Townhomes
As of December 31, 2002, the Partnership has completed approximately $118,000 of
capital improvements consisting primarily of plumbing fixtures, structural
upgrades, water heaters, air conditioning units, and floor covering
replacements. These improvements were funded from the Partnership's operating
cash flow. The Partnership is currently evaluating the capital improvement needs
of the property for the upcoming year and currently expects to budget
approximately $53,000. Additional improvements may be considered in 2003 and
will depend on the physical condition of the property as well as anticipated
cash flow generated by the property.
Windemere Apartments
As of December 31, 2002, the Partnership completed approximately $42,000 in
capital expenditures at Windemere Apartments consisting of structural upgrades,
appliances, and floor covering replacements. These improvements were funded from
operating cash flow. The Partnership is currently evaluating the capital
improvement needs of the property for the upcoming year and currently expects to
budget approximately $77,000. Additional improvements may be considered in 2003
and will depend on the physical condition of the property as well as anticipated
cash flow generated by the property.
The additional capital expenditures will be incurred only if cash is available
from operations and 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.
Item 3. 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 could have an opportunity to discuss settlement. On
October 30, 2002, the court entered an order extending the stay in effect
through January 10, 2003.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action described below. The Court
has scheduled the hearing on preliminary approval for April 4, 2003 and the
hearing on final approval for June 2, 2003.
In general terms, the proposed settlement provides for certification for
settlement purposes of a settlement class consisting of all limited partners in
this Partnership and others (the "Partnerships") as of December 20, 2002, the
dismissal with prejudice and release of claims in the Nuanes and Heller
litigation, payment by AIMCO of $9.9 million (which shall be distributed to
settlement class members after deduction of attorney fees and costs of class
counsel and certain costs of settlement) and up to $ 1 million toward the cost
of independent appraisals of the Partnerships' properties by a Court appointed
appraiser. An affiliate of the General Partner has also agreed to make a tender
offer to purchase all of the partnership interests in the Partnerships within
one year of final approval, if it is granted, and to provide partners with the
independent appraisals at the time of these tenders. The proposed settlement
also provides for the limitation of the allowable costs which the General
Partner or its affiliates will charge the Partnerships in connection with this
litigation and imposes limits on the class counsel fees and costs in this
litigation. If the Court grants preliminary approval of the proposed settlement
in April, a notice will be distributed to partners providing detail on the terms
of the proposed settlement.
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. Before completing briefing on the appeal, the parties stayed further
proceedings in the appeal pending the Court's review of the terms of the
proposed settlement described above.
The General Partner does not anticipate that any costs to the Partnership,
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.
Item 4. Submission of Matters to a Vote of Security Holders
On October 18, 2001, the Partnership sought the vote of the limited partners to
amend the Partnership Agreement to authorize the Partnership to acquire, own,
operate, improve, manage, lease, finance, refinance, sell and exchange any real
property acquired as a result of any transaction under the Master Loan with
CCEP/2 or any transaction involving property acquired from CCEP/2 that is
intended to qualify as a like-kind exchange under the Internal Revenue Code. As
of February 5, 2002, the requisite percent of limited partnership units voted in
favor of the Partnership Agreement Amendment. As of February 5, 2002, a total
number of 486,543.90 units had voted, including the 431,331.70 units owned by
affiliates of the General Partner, of which 458,978.50 units had voted in favor
of the amendment, 22,200.20 units voted against the amendment and 5,365.20 units
abstained.
PART II
Item 5. Market for Registrant's Units of Limited Partnership and Related
Security Holder Matters
The Partnership, a publicly-held limited partnership, offered and sold 912,182
limited partnership units aggregating $227,800,000. The Partnership currently
has 22,429 holders of record owning an aggregate of 909,123.60 Units. Affiliates
of the General Partner owned 450,969.90 units or approximately 49.60% at
December 31, 2002. No public trading market has developed for the Units, and it
is not anticipated that such a market will develop in the future.
The following table sets forth the distributions made by the Partnership for the
years ended December 31, 2000, 2001 and 2002.
Distributions
Per Limited
Aggregate Partnership Unit
01/01/00 - 12/31/00 $13,383,000 (1) $14.70
01/01/01 - 12/31/01 2,428,000 (2) 2.67
01/01/02 - 12/31/02 -- --
(1) Consists of $2,000,000 (approximately $1,980,000 to the limited partners
or $2.18 per limited partnership unit) from operations which was
distributed to all partners and $4,200,000 all to the limited partners
(approximately $4.62 per limited partnership unit) from refinancing
proceeds of Windmere Apartments and Highcrest Townhomes in CCEP/2 and
$7,183,000 (approximately $7.90 per limited partnership unit) from surplus
funds distributed all to the limited partners.
(2) Consists of approximately $1,299,000 (approximately $1.43 per limited
partnership unit) from the refinancing proceeds of Canyon Crest Apartments
in CCEP/2 and $1,129,000 (approximately $1.24 per limited partnership
unit) from surplus cash due to the receipt of interest income on the
master loan. Both distributions were distributed 100% to the limited
partners.
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 distributions to its partners
during 2003 or subsequent periods.
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 450,969.90 limited partnership units
in the Partnership representing 49.60% of the outstanding units at December 31,
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 49.60% 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.
Item 6. Selected Financial Data
The following table sets forth a summary of certain financial data for the
Partnership. This summary should be read in conjunction with the Partnership's
financial statements and notes thereto appearing in "Item 8. Financial
Statements and Supplementary Data".
FOR THE YEARS ENDED DECEMBER 31,
2002 2001 2000 1999 1998
STATEMENTS OF OPERATIONS
(in thousands, except unit data)
Total Revenues $ 5,413 $ 1,934 $ 1,520 $ 1,328 $ 15,367
Total Expenses (2,169) (513) (644) (520) (820)
Income from
continuing operations 3,244 1,421 876 808 14,547
Loss on foreclosure of (330) -- -- -- --
real estate
Net income $ 2,914 $ 1,421 $ 876 $ 808 $ 14,547
Net income per Limited
Partnership Unit $ 3.17 $ 1.55 $ 0.95 $ 0.88 $ 15.84
Distributions per Limited
Partnership Unit $ -- $ 2.67 $ 14.70 $ 41.73 $ 3.28
Limited Partnership Units
Outstanding 909,124 909,124 909,124 909,124 909,134
AS OF DECEMBER 31,
BALANCE SHEETS 2002 2001 2000 1999 1998
(in thousands)
Total assets $ 43,021 $ 11,796 $ 12,804 $ 25,323 $ 62,466
Long Term Debt $ 16,480 $ -- $ -- $ -- $ --
Comparability of the information above has been affected by the foreclosure on
the CCEP/2 properties. See "Item 1. Description of Business" for further
information.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This item should be read in conjunction with the financial statements and other
items contained elsewhere in this report.
Results of Operations
2002 Compared with 2001
The Partnership's net income for the years ended December 31, 2002 and 2001 was
approximately $2,914,000 and $1,421,000, respectively. Net income increased
primarily due to an increase in total revenues offset by the recognition of a
loss on foreclosure and an increase in total expenses. (See "Item 1. Description
of Business" for a discussion of the foreclosure of CCEP/2's assets.) 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 the operations of
the foreclosed properties and an increase in general and administrative
expenses.
General and administrative expenses increased due to an increase in the costs of
services included in the management reimbursements to the General Partner as
allowed under the Partnership Agreement. Included in general and administrative
expenses for the years ended December 31, 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.
2001 Compared with 2000
The Partnership's net income for the years ended December 31, 2001 and 2000 was
approximately $1,421,000 and $876,000, respectively. The increase in net income
is due primarily to the increase in total revenues and a decrease in total
expenses. Total revenues increased due to the increase in the reduction of
impairment loss on the investment in the Master Loan, offset by a decrease in
interest income. Interest income decreased due to a decrease in interest
payments received on the Master Loan and due to lower cash balances maintained
in interest bearing accounts. The interest payments on the Master Loan decreased
as a result of a decrease in excess cash flow payments received from CCEP/2.
The decrease in total expenses is due to a decrease in general and
administrative expenses. General and administrative expenses decreased due to a
decrease in reimbursements to the General Partner. Also included in the general
and administrative expenses 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 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 December 31, 2002, the Partnership had cash and cash equivalents of
approximately $653,000 as compared to approximately $381,000 at December 31,
2001. The net increase of approximately $272,000 is due to approximately
$739,000 of cash provided by operating activities and approximately $10,390,000
of cash provided by financing activities which was partially offset by
approximately $10,857,000 of cash used in investing activities. 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. 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.
At December 31, 2001, the Partnership had cash and cash equivalents of
approximately $381,000 as compared to approximately $2,143,000 at December 31,
2000. The net decrease of approximately $1,762,000 is due to approximately
$2,428,000 of cash used in financing activities, which was partially offset by
approximately $310,000 of cash provided by operating activities and
approximately $356,000 of cash provided by investing activities. Cash provided
by investing activities consisted of principal receipts on the Master Loan. Cash
used in financing activities consisted of distributions to partners.
During the years ended December 31, 2002, 2001, and 2000, the Partnership
received approximately $88,000, $356,000, and $7,724,000 respectively, as
principal payments on the Master Loan consisting of funds received by CCEP/2
from certain investments. These funds were required to be transferred to the
Partnership under the terms of the Master Loan.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
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" 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. The Partnership is
currently evaluating the capital improvement needs of the properties for the
upcoming year and expects to budget approximately $157,000 in capital
improvements for all of the Partnership's properties. Additional improvements
may be considered and will depend on the physical condition of the properties as
well as replacement reserves and anticipated cash flow generated by the
properties.
The Partnership's assets are thought to be sufficient for any near-term needs
(exclusive of capital improvements) of the Partnership. The mortgage
indebtedness of approximately $16,480,000 is being amortized over 240 months
with balloon payments due in 2010 and 2011. The General Partner will attempt to
refinance such indebtedness and/or sell the properties prior to such maturity
date. If the properties cannot be refinanced or sold for a sufficient amount,
the Partnership will risk losing such properties through foreclosure.
The following table sets forth the distributions made by the Partnership for the
years ended December 31, 2000, 2001, and 2002:
Distributions
Per Limited
Aggregate Partnership Unit
01/01/00 - 12/31/00 $13,383,000 (1) $14.70
01/01/01 - 12/31/01 2,428,000 (2) 2.67
01/01/02 - 12/31/02 -- --
(1) Consists of $2,000,000 (approximately $1,980,000 to the limited partners
or $2.18 per limited partnership unit) from operations which was
distributed to all partners and $4,200,000 all to the limited partners
(approximately $4.62 per limited partnership unit) from refinancing
proceeds of Windmere Apartments and Highcrest Townhomes in CCEP/2 and
$7,183,000 (approximately $7.90 per limited partnership unit) from surplus
funds distributed all to the limited partners.
(2) Consists of approximately $1,299,000 (approximately $1.43 per limited
partnership unit) from the refinancing proceeds of Canyon Crest Apartments
in CCEP/2 and $1,129,000 (approximately $1.24 per limited partnership
unit) from surplus cash due to the receipt of interest income on the
master loan. Both distributions were distributed 100% to the limited
partners.
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 distributions to its partners
during 2003 or subsequent periods.
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 450,969.90 limited partnership units
in the Partnership representing 49.60% of the outstanding units at December 31,
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 49.60% 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.
CCEP/2 Property Operations
During the year ended December 31, 2002, CCIP/2 foreclosed on three of the four
properties that collaterized the Master Loan (see "Item 8 - Financial Statements
and Supplementary Data - Note "B"). 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 nine month period from March 31, 2002 to December 31, 2002, the net
change in liabilities remained constant, but was affected by a decrease 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.
An affiliate of the General Partner received reimbursement of accountable
administrative expense amounting to approximately $171,000, $584,000, and
$172,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
Included in these amounts are fees related to construction management services
provided by an affiliate of the General Partner of approximately $25,000,
$395,000 and $70,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. The construction management service fees are calculated based on a
percentage of additions to the investment properties. For services provided in
connection with the refinancings of three of the Partnership's residential
properties during 2000, the General Partner was paid a commissions related to
the refinancings of approximately $165,000 during the year ended December 31,
2000.
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 and
$1,198,000 for the years ended December 31, 2001 and 2000, respectively. No
interest payments were made in 2002. These payments were based upon the results
of operations for CCEP/2's properties. CCEP/2 made principal payments on the
Master Loan of approximately $88,000, $356,000, and $7,724,000, for the years
ended December 31, 2002, 2001, and 2000, respectively. These funds were received
from distributions from three affiliated partnerships, excess cash from the
Partnership's investment properties, proceeds received from the sale of
commercial properties, and proceeds received from the refinancing of three of
the Partnership's residential properties. These funds were required to be
transferred to the Partnership under the terms of the Master Loan.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 145, "Recission of FASB Statements
No. 4, 44 and 64". SFAS No. 4 "Reporting Gains and Losses from Extinguishment of
Debt," required that all gains and losses from extinguishment of debt be
aggregated and, if material, classified as an extraordinary item. SFAS No. 145
rescinds SFAS No. 4, and accordingly, gains and losses from extinguishment of
debt should only be classified as extraordinary if they are unusual in nature
and occur infrequently. Neither of these criteria apply to the Partnership. SFAS
145 is effective for fiscal years beginning after May 15, 2002 with early
adoption an option. The Partnership adopted SFAS 145 effective April 1, 2002.
Accordingly, the accompanying consolidated statement of operation for 2000 has
been restated as of January 1, 2000 to reflect the loss on early extinguishment
of debt in operations rather than as an extraordinary item.
During the year ended December 31, 2000, the General Partner of CCEP/2
determined that it was in the best interest of CCEP/2 to repay the mortgage note
on Glenbridge Manor (formerly Village Brooke). Accordingly, funds which had
previously been restricted to rebuild the property were used to repay the
mortgage note which had encumbered the property of approximately $6,517,000. The
reconstruction of Glenbridge Manor began in September 2001. A loss on early
extinguishment of debt of approximately $35,000 was recognized as a result of
unamortized loan costs associated with this mortgage.
On October 3, 2000, CCEP/2 refinanced the mortgage note payable on Windmere
Apartments. The refinancing replaced mortgage indebtedness of $3,000,000 with a
new mortgage of $6,075,000. The mortgage was refinanced at a rate of 7.83%
compared to the prior rate of 7.33%. Payments of approximately $50,000 are due
on the first day of each month until the loan matures on November 1, 2010. A
balloon payment of approximately $3,905,000 is due at maturity. Capitalized loan
costs incurred for the refinancing were approximately $155,000 at December 31,
2000. Additional loan costs of approximately $7,000 were incurred during the
year ended December 31, 2001. Prepayment penalties of approximately $95,000 and
the write-off of unamortized loan costs of approximately $50,000 resulted in a
loss on early extinguishment of debt of approximately $145,000.
On October 31, 2000, CCEP/2 refinanced the mortgage note payable on Highcrest
Townhomes. The refinancing replaced mortgage indebtedness of $4,000,000 with a
new mortgage of $6,760,000. The mortgage was refinanced at a rate of 7.72%
compared to the prior rate of 7.33%. Payments of approximately $55,000 are due
on the first day of each month until the loan matures on February 1, 2010. A
balloon payment of approximately $4,868,000 is due at maturity. Capitalized loan
costs incurred for the refinancing were approximately $141,000 at December 31,
2000. Additional loan costs of approximately $10,000 were incurred during the
year ended December 31, 2001. Prepayment penalties of approximately $142,000 and
the write-off of unamortized loan costs of approximately $52,000 resulted in a
loss on early extinguishment of debt of approximately $194,000.
On December 21, 2000, CCEP/2 refinanced the mortgage note payable on Canyon
Crest Apartments. The refinancing replaced mortgage indebtedness of $2,000,000
with a new mortgage of $3,640,000. The mortgage was refinanced at a rate of
7.10% compared to the prior rate of 7.33%. Payments of approximately $28,000 are
due on the first day of each month until the loan matures on January 1, 2011. A
balloon payment of approximately $2,613,000 is due at maturity. Capitalized loan
costs incurred for the refinancing were approximately $100,000 at December 31,
2000. Additional loan costs of approximately $12,000 were incurred during the
year ended December 31, 2001. Prepayment penalties of approximately $98,000 and
the write-off of unamortized loan costs of approximately $38,000 resulted in a
loss on early extinguishment of debt of approximately $136,000.
Critical Accounting Policies and Estimates
A summary of the Partnership's significant accounting policies is included in
"Note A - Organization and Significant Accounting Policies" which is included in
the consolidated financial statements in "Item 8. Financial Statements and
Supplementary Data". The General Partner believes that the consistent
application of these policies enables the Partnership to provide readers of the
financial statements with useful and reliable information about the
Partnership's operating results and financial condition. The preparation of
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires the Partnership to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial statements as
well as reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Judgments and assessments of
uncertainties are required in applying the Partnership's accounting policies in
many areas. The following may involve a higher degree of judgment and
complexity.
Impairment of Long-Lived Assets
The Partnership's investment properties are recorded at cost, less accumulated
depreciation, unless considered impaired. If events or circumstances indicate
that the carrying amount of the 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 property. 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 and
the Partnership fully reserves all balances outstanding over 30 days. 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, then the allowance on the Master Loan is
adjusted appropriately.
The investment in the Master Loan is considered to be impaired under SFAS 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 7a. 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 property that
collateralizes the Loan. Both the income and expenses of operating the
investment properties are subject to factors outside of 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 which they operate. In this regard, the General Partner of the
Partnership closely monitors the performance of the properties collateralizing
the loans.
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. See "Item 8 - Financial Statements and Supplementary Data - Note B"
for further information.
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 December 31, 2002, a 100 basis point increase or
decrease in market interest rates would impact the Partnership's net income by
approximately $150,000.
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2, L.P.
LIST OF FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets as of December 31, 2002 and 2001
Statements of Operations for the Years ended December 31, 2002, 2001 and
2000
Statements of Changes in Partners' (Deficit) Capital for the Years ended
December 31, 2002, 2001 and 2000
Statements of Cash Flows for the Years ended December 31, 2002, 2001 and
2000
Notes to Financial Statements
Report of Ernst & Young LLP, Independent Auditors
The Partners
Consolidated Capital Institutional Properties/2
We have audited the accompanying balance sheets of Consolidated Capital
Institutional Properties/2 as of December 31, 2002 and 2001, and the related
statements of operations, changes in partners' (deficit) capital, and cash flows
for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the Partnership's management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Consolidated Capital
Institutional Properties/2 at December 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
/s/ERNST & YOUNG LLP
Greenville, South Carolina
February 14, 2003
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
BALANCE SHEETS
(in thousands, except unit data)
December 31, December 31,
2002 2001
Assets
Cash and cash equivalents $ 653 $ 381
Accounts receivable 164 100
Restricted escrows 97 --
Other assets 52 21
Investment in affiliated partnerships (Note G) 895 --
Investment properties (Notes B, C, and F)
Land 6,857 --
Buildings and related personal property 20,347 --
Accumulated depreciation (248) --
26,956 --
Investment in Master Loan to affiliate (Note B) 14,204 39,423
Less: allowance for impairment loss -- (28,129)
14,204 11,294
$ 43,021 $ 11,796
Liabilities and Partners' (Deficit) Capital
Liabilities
Accounts payable $ 42 $ --
Other liabilities 183 45
Distributions payable 141 141
Accrued property taxes 507 --
Due to affiliate (Note E) 11,040 --
Tenant security deposit liabilities 104 --
Mortgage notes payable (Note C) 16,480 --
28,497 186
Partners' (Deficit) Capital
General partner (378) (407)
Limited partners (909,123.60 units issued and
outstanding) 14,902 12,017
14,524 11,610
$ 43,021 $ 11,796
See Accompanying Notes to the Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF OPERATIONS
(in thousands, except per unit data)
Years Ended December 31,
2002 2001 2000
Revenues:
Rental income $ 1,422 $ -- $ --
Other income 191 -- --
Interest income on investments in Master
Loan (Note B) -- 904 1,198
Reduction of provision for impairment loss (Note B) 3,800 1,000 --
Interest income -- 30 322
Total revenues 5,413 1,934 1,520
Expenses:
Operating 493 -- --
General and administrative 532 513 644
Depreciation 248 -- --
Interest 683 -- --
Property taxes 213 -- --
Total expenses 2,169 513 644
Income from continuing operations 3,244 1,421 876
Loss on foreclosure of real estate (Note B) (330) -- --
Net income $ 2,914 $ 1,421 $ 876
Net income allocated to general
partner (1%) $ 29 $ 14 $ 9
Net income allocated to limited
partners (99%) 2,885 1,407 867
$ 2,914 $ 1,421 $ 876
Net income (loss) per limited partnership unit:
Income from continuing operations $ 3.53 $ 1.55 $ 0.95
Loss on foreclosure of real estate (0.36) -- --
$ 3.17 $ 1.55 $ 0.95
Distribution per limited partnership unit $ -- $ 2.67 $ 14.70
See Accompanying Notes to the Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
(in thousands, except unit data)
Total
Limited Partners
Partnership General Limited Capital
Units Partner Partners (Deficit)
Original capital contributions 912,182 $ 1 $228,046 $228,047
Partners' (deficit) capital at
December 31, 1999 909,124 $ (410) $ 25,534 $ 25,124
Distributions to partners -- (20) (13,363) (13,383)
Net income for the year ended
December 31, 2000 -- 9 867 876
Partners' (deficit) capital
at December 31, 2000 909,124 (421) 13,038 12,617
Distributions to partners -- -- (2,428) (2,428)
Net income for the year ended
December 31, 2001 -- 14 1,407 1,421
Partners' (deficit) capital at
December 31, 2001 909,124 (407) 12,017 11,610
Net income for the year ended
December 31, 2002 -- 29 2,885 2,914
Partners' (deficit) capital at
December 31, 2002 909,124 $ (378) $ 14,902 $ 14,524
See Accompanying Notes to the Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
2002 2001 2000
Cash flows from operating activities:
Net income $ 2,914 $ 1,421 $ 876
Adjustments to reconcile net income to net cash (used
provided by operating activities:
Reduction of provision for impairment loss (3,800) (1,000) --
Depreciation 248 -- --
Amortization of mortgage premium (20) -- --
Loss on foreclosure of real estate 330 -- --
Change in accounts:
Receivables and deposits 209 (100) --
Interest receivable on Master Loan -- -- 92
Other assets (30) --
(10)
Accounts payable 24 (1) 1
Accrued property taxes 232 -- --
Due to affiliates 615 --
Other liabilities 17 -- (13)
Net cash provided by operating activities 739 310 956
Cash flows from investing activities:
Advances on Master Loan (10,763) -- --
Principal receipts on Master Loan 88 356 7,724
Property improvements and replacements (204) -- --
Net deposits to restricted escrows (1) -- --
Distributions received from affiliated partnerships 23 -- --
Net cash (used in) provided by investing
activities (10,857) 356 7,724
Cash flows from financing activities:
Advances from affiliates 10,625 -- --
Principal payments on advances from affiliates (100) -- --
Distributions to partners -- (2,428) (13,383)
Principal payments on mortgage notes payable (135) -- --
Net cash provided by (used in) financing
activities 10,390 (2,428) (13,383)
Net increase (decrease) in cash and
cash equivalents 272 (1,762) (4,703)
Cash and cash equivalents at beginning of the year 381 2,143 6,846
Cash and cash equivalents at end of the year $ 653 $ 381 $ 2,143
Supplemental disclosure of cash flow information:
Cash paid for interest $ 400 $ -- $ --
See Accompanying Notes to the Financial Statements
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
Foreclosure
During the year ended December 31, 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 (in thousands):
Accounts receivable $ (373)
Master Loan 11,565
Restricted escrows (96)
Other assets (1)
Investment properties (27,000)
Investment in affiliated
partnerships (918)
Accounts payable 18
Tenant security deposit
liabilities 104
Accrued property taxes 275
Other liabilities 121
Mortgage notes payable 16,635
Loss on foreclosure of
real estate $ 330
See Accompanying Notes to the Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note A - Organization and Summary of Significant Accounting Policies
Organization: Consolidated Capital Institutional Properties/2 (the "Partnership"
or "Registrant"), a California Limited Partnership, was formed on April 12,
1983, to lend funds through non-recourse notes with participation interests (the
"Master Loan"). The loans were made to, and the real properties that secure the
Master Loan were purchased and owned by, Equity Partners/Two ("EP/2"), a
California general partnership in which certain of the partners were former
shareholders and former management of Consolidated Capital Equities Corporation
("CCEC"), the former corporate general partner of the Partnership. Through
December 31, 2002, the Partnership had advanced approximately $194,233,000 under
the Master Loan.
During 1989, EP/2 defaulted on certain interest payments that were due under the
Master Loan. Before the Partnership could exercise its remedies for such
defaults, EP/2 filed for bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code ("Chapter 11"). On October 18, 1990, the bankruptcy court
approved EP/2's consensual plan of reorganization (the "Plan"). In November
1990, EP/2 and the Partnership consummated a closing under the Plan pursuant to
which, among other things, the Partnership and EP/2 executed an amended and
restated loan agreement (the "New Master Loan Agreement"). EP/2 was converted
from a California general partnership to a California limited partnership,
Consolidated Capital Equity Partners/Two, L.P. ("CCEP/2"), and CCEP/2 renewed
the deeds of trust and mortgages on all the properties collaterally securing the
New Master Loan Agreement. ConCap Holdings, Inc. ("CHI"), a Texas corporation
and wholly-owned subsidiary of CEI, is the sole general partner of CCEP/2 and an
affiliate of the Partnership. The general partners of EP/2 became limited
partners in CCEP/2. CHI has full discretion with respect to conducting CCEP/2's
business, including managing CCEP/2's properties and initiating and approving
capital expenditures and asset dispositions and refinancings. See "Note B" for
further discussion of EP/2's bankruptcy settlement.
Upon the Partnership's formation in 1983, CCEC, a Colorado corporation, was the
corporate general partner. In December 1988, CCEC filed for reorganization under
Chapter 11. In 1990, as part of CCEC's reorganization plan, ConCap Equities,
Inc., a Delaware corporation (the "General Partner" or "CEI") acquired CCEC's
general partner interests in the Partnership and in 15 other affiliated public
limited partnerships and replaced CCEC as managing general partner in all 16
partnerships. The General Partner is a subsidiary of Apartment Investment and
Management Company ("AIMCO"). The directors and officers of the General Partner
also serve as executive officers of AIMCO. The Partnership Agreement provides
that the Partnership is to terminate on December 31, 2013 unless terminated
prior to such date. The Partnership commenced operations on July 22, 1983. The
Partnership was formed for the benefit of its Limited Partners to lend funds to
EP/2.
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 year
ended December 31, 2002 the Partnership assumed responsibility for the
operations of such properties. The results of operations of the foreclosed
properties are reflected in the statement of operations for the period September
1, 2002 through December 31, 2002.
The Partnership is the holder of a note receivable which is collateralized by
one apartment property which is currently being rebuilt. See "Note B" for
further discussion of the status of the note receivable.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand and in
banks and money market accounts. At certain times, the amount of cash deposited
at a bank may exceed the limit on insured deposits. Cash balances included
approximately $612,000 at December 31, 2002 that are maintained by the
affiliated management company on behalf of affiliated entities in cash
concentration accounts.
Investment in Master Loan: The Partnership has adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan". Under the standard, the allowance for credit losses related to loans
that are identified for evaluation in accordance with SFAS 114 is based on
discounted cash flows using the loan's initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans.
Income Taxes: No provision has been made in the financial statements for Federal
income taxes because, under current law, no Federal income taxes are paid
directly by the Partnership. The Unit holders are responsible for their
respective shares of Partnership net income or loss. The Partnership reports
certain transactions differently for tax than for financial statement purposes.
Partners' (Deficit) Capital: The Partnership Agreement provides for net income
and net losses for both financial and tax reporting purposes to be allocated 99%
to the Limited Partners and 1% to the General Partner. "Distributable Cash from
Operations", as defined in the Partnership Agreement, is to be allocated 99% to
the Limited Partners and 1% to the General Partner. Distributions of surplus
funds are to be allocated 100% to the Limited Partners.
Net Income Per Limited Partnership Unit: Net income per Limited Partnership Unit
("Unit") is computed by dividing net income allocated to the Limited Partners by
the number of Units outstanding. Per Unit information has been computed based on
909,123.60 Units outstanding in 2002, 2001, and 2000.
Depreciation: Depreciation is provided by the straight-line method over the
estimated lives of the investment properties and related personal property. For
Federal income tax purposes, the alternative depreciation system is used for
depreciation of (1) real property over 27 1/2 years and (2) personal property
additions over 5-20 years.
Investment Properties: Investment properties consist of three apartment
complexes, which are stated at fair market value. Acquisition fees are
capitalized as a cost of real estate. Expenditures in excess of $250 that
maintain an existing asset which has a useful life of more than one year are
capitalized as capital replacement expenditures and depreciated over the
estimated useful life of the asset. Expenditures for ordinary repairs,
maintenance and apartment turnover costs are expensed as incurred.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Partnership records impairment losses on long-lived
assets used in operations when events and circumstances indicate the assets
might be impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amounts of those assets. No adjustments
for impairment of value were recorded in the year ended December 31, 2002. See
"Recent Accounting Pronouncements" below.
Tenant Security Deposits: The Partnership requires security deposits from
lessees for the duration of the lease. The security deposits are refunded when
the tenant vacates, provided the tenant has not damaged the space and is current
on the rental payments.
Leases: The Partnership generally leases apartment units for twelve-month terms
or less. The Partnership recognizes income as earned on its residential leases
and fully reserves all balances outstanding over 30 days. In addition, the
General Partner's policy is to offer rental concessions during particularly slow
months or in response to heavy competition from other similar complexes in the
area. Concessions are charged against rental income as incurred.
Advertising Costs: Advertising costs of approximately $17,000 in 2002 were
charged to expense as incurred and are included in operating expenses.
Fair Value of Financial Instruments: SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments", as amended by SFAS No. 119, "Disclosures about
Derivative Financial Instruments and Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Fair value is defined in the SFAS as the amount at which
the instruments could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The Partnership believes
that the carrying amounts of its financial instruments (except for long term
debt and the Master Loan) approximate their fair value due to the short term
maturity of these instruments. The Partnership believes that the carrying amount
of its long term debt approximates its fair value due to the fact that the
mortgages on the foreclosed properties were recorded at their fair market value.
The carrying amount of the Partnership's net investment in the Master Loan
approximates fair value due to the fact that it has been valued based on the
fair value of the underlying collateral.
Allowance for Impairment Loss: Allowances to reduce the carrying cost of the
Master Loan are provided when it is probable that reasonably estimable net
realizable values are less than the recorded carrying cost of such investment.
Gains or losses that result from the ongoing periodic evaluation of the net
realizable value of the Master Loan are credited or charged, as appropriate, to
operations in the period in which they are identified. If a collateral party is
sold, CCEP/2 remains liable for any outstanding debt under the Master Loan
Agreement, however, the value of the net investment in Master Loan on the
Partnership's books would be written down to the appropriate level.
Segment Reporting: SFAS No. 131, Disclosure about Segments of an Enterprise and
Related Information established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. As defined in SFAS No. 131, the Partnership has only one reportable
segment.
Recent Accounting Pronouncements: In August 2001, the Financial Accounting
Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets". SFAS No. 144 provides accounting guidance for financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Partnership
adopted SFAS 144 effective January 1, 2002. Its adoption did not have any effect
on the financial position or results of operations of the Partnership.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Recission of FASB Statements No. 4, 44 and 64". SFAS No. 4 "Reporting Gains and
Losses from Extinguishment of Debt," required that all gains and losses from
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item. SFAS No. 145 rescinds SFAS No. 4, and accordingly, gains and
losses from extinguishment of debt should only be classified as extraordinary if
they are unusual in nature and occur infrequently. SFAS 145 is effective for
fiscal years beginning after May 15, 2002 with early adoption an option. The
Partnership adopted SFAS 145 effective April 1, 2002. Its adoption did not have
any effect on the financial position or results of operations of the
Partnership.
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 year ended December 31, 2002 the Partnership assumed
responsibility for the operations of such properties. The results of operations
of the foreclosed properties are reflected in the statement of operations for
the period September 1, 2002 through December 31, 2002.
The following table sets forth the Partnership's non-cash activities during the
year ended December 31, 2002 with respect to the foreclosure of Canyon Crest
Apartments, Highcrest Townhomes and Windemere Apartments, (in thousands):
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 (48)
Loss on foreclosure of real estate $ (330)
(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 has 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 G".
(c) Amount represents the present value of the mortgages encumbering the
investment properties discounted at an interest 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):
Years Ended December 31,
2002 2001
Revenues $4,901 $5,008
Net (loss) income (85) 130
Net (loss) income per limited partnership
Unit $(0.09) $ 0.14
At December 31, 2002, the recorded investment in the Master Loan is considered
to be impaired under "Statement of Financial Accounting Standards No. 114"
("SFAS (14"), "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. The fair value of the collateral properties was
determined using the net operating income of the collateral properties
capitalized at a rate deemed reasonable for the type of property adjusted for
market conditions, physical condition of the property and other factors, or by
obtaining an appraisal by an independent third party. This methodology has not
changed from that used in prior calculations performed by the General Partner in
determining the fair value of the collateral properties. For the years ended
December 31, 2002 and 2001, the Partnership recorded approximately $3,800,000
and $1,000,000, respectively, in income based upon an increase in the fair value
of the collateral. The increase was deemed to be attributable to major capital
improvement projects and the strong effort to complete deferred maintenance
items that have been ongoing over the past few years at the various properties.
This enabled the properties to increase their respective occupancy levels or in
some cases to maintain the properties' high occupancy levels. The vast majority
of this work was funded by cash flow from the collateral properties themselves.
Based upon the consistent increase in net realizable value of the collateral
properties, the General Partner determined the increase to be permanent in
nature and accordingly reduced the allowance for impairment loss on the master
loan during the years ended December 31, 2002 and 2001. No such income was
recorded in 2000 as the recorded value of the Master Loan approximated the fair
value of the collateral at December 31, 2000.
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 $14,204,000 and $39,423,000 at December 31, 2002 and 2001,
respectively. 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 $514,000,
$25,747,000, and $23,722,000 for the years ended December 31, 2002, 2001 and
2000, respectively. Interest income is recognized on the cash basis in
accordance with SFAS 114. At December 31, 2002 and December 31, 2001, such
cumulative unrecognized interest totaled approximately $514,000 and
$249,719,000, respectively, and was not included in the balance of the
investment in Master Loan. Cumulative unrecognized interest owed on the Master
Loan of $267,729,000 was forgiven by the Partnership for those properties which
were foreclosed on during the third quarter of 2002.
The investment in Master Loan consists of the following:
As of December 31,
2002 2001
(in thousands)
Master Loan funds advanced, at
beginning of year $39,423 $39,779
Foreclosure write off (35,894) --
Advances on Master Loan 10,763 --
Principal receipts on Master Loan (88) (356)
Master Loan funds advanced, at
end of year $14,204 $39,423
The allowance for impairment loss on Master Loan to affiliates consists of the
following:
As of December 31,
2002 2001 2000
(in thousands)
Allowance for impairment loss on Master
Loan to affiliate, beginning of year $28,129 $29,129 $29,129
Foreclosure write off (24,329) -- --
Reduction of provision for impairment loss (3,800) (1,000) --
Allowance for impairment loss on Master
Loan to affiliate, end of year $ -- $28,129 $29,129
Approximately $904,000 and $1,198,000 for the years ended December 31, 2001, and
2000, respectively was recorded as interest income on investment in the Master
Loan to an affiliate based upon cash generated as a result of improved
operations of the properties which secure the loan. No interest income was
recorded for the year ended December 31, 2002. A cash payment of $904,000 was
received from CCEP/2 during the first quarter of 2001. Of the $1,198,000
received during 2000, $853,000 was received from Glenbridge Manor as a result of
its receipt of a portion of the insurance proceeds due from the destruction of
the property (see the Financial Statements of CCEP/2 "Note C - Casualty Event",
included in these financial statements). In addition, a cash payment of $345,000
was received from CCEP/2 as an excess cash payment during 2000.
During the year ended December 31, 2002, the Partnership advanced approximately
$10,763,000 on the Master Loan to CCEP/2 to cover reconstruction costs of
Glenbridge Manor Apartments. No advances were made during 2001 and 2000.
During the years ended December 31, 2002, 2001, and 2000, the Partnership
received approximately $88,000, $356,000, and $7,724,000 respectively, in
principal payments on the Master Loan. Of these amounts, approximately $88,000,
$356,000, and $134,000 represent cash received on certain investments held by
CCEP/2 which are required to be transferred to the Partnership per the Master
Loan agreement and excess cash payments from CCEP/2 for the years ended December
31, 2002, 2001, and 2000, respectively. Of the remaining amounts, the
Partnership received during 2000 approximately $5,500,000 of net proceeds from
the refinancing of three of CCEP/2's properties and approximately $2,090,000 of
funds previously reserved associated with the destruction of Village Brook which
were released during 2000.
Terms of the New Master Loan Agreement
Under the terms of the New Master Loan Agreement, interest accrues at 10% and
payments are due quarterly in an amount equal to Excess Cash Flow, generally
defined in the New Master Loan Agreement as net cash flow after third party debt
service and capital improvements. 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 maturity.
If such Excess Cash Flow payments are greater than the current accrued 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
the Partnership under the terms of the New Master Loan Agreement.
Effective January 1, 1993, the Partnership and CCEP/2 amended the New 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 the Partnership to CCEP/2. This amendment and change in the
definition of Excess Cash Flow has the effect of reducing income on the
investment in Master Loan by the amount of CCEP/2's capital expenditures, since
such amounts were previously excluded from Excess Cash Flow.
EP/2's Bankruptcy Settlement: In November 1990, pursuant to EP/2's
reorganization plan described in "Note A", the Partnership and EP/2 consummated
a closing pursuant to which: (1) the Partnership and EP/2 executed the New
Master Loan Agreement more fully described above; (2) CCEP/2 renewed the deeds
of trust on all the collateral securing the Master Loan; (3) the Partnership
received cash of approximately $2,500,000, including $1,800,000 from the general
partners of EP/2 related to their promissory notes; (4) the Partnership accepted
assignment of certain partnership interests in affiliated partnerships (the
"Affiliated Partnership Interests"), which were valued by management of the
Partnership at approximately $2,500,000, as additional collateral securing the
Master Loan; and (5) all claims between the Partnership and EP/2's general
partners were released.
EP/2 was the holder of a note receivable secured by North Park Plaza which had
not been performing according to the note terms since 1989. In the process of
negotiating the final bankruptcy settlement discussed above, EP/2 assigned its
interest in the note receivable to the Partnership. While the Partnership
foreclosed upon and acquired North Park Plaza in July 1990, CCEP/2 is still
obligated for $6,600,000 under the Master Loan attributable to North Park Plaza
not extinguished in the foreclosure proceeding.
Note C - Mortgage Notes Payable
The principle terms of mortgage notes payable are as follows:
Principal Monthly Principal
Balance At Payment Stated Balance
December 31, Including Interest Maturity Due at
2002 Interest Rate Date Maturity
(in thousands) (in thousands)
Properties
Canyon Crest Apartments
1st mortgage $ 3,470 $ 28 7.10% 01/01/11 $ 2,613
Highcrest Townhomes
1st mortgage 6,439 55 7.72% 02/01/10 4,868
Windemere Apartments
1st mortgage 5,790 50 7.83% 11/01/10 3,905
15,699
Mortgage Premium, net 781
Total $16,480 $ 133 $11,386
The mortgage notes payable are nonrecourse and are secured by pledge of the
respective apartment properties and by pledge of revenues from the respective
apartment properties. Prepayment penalties are incurred if the notes are repaid
prior to maturity. Further, the properties may not be sold subject to existing
indebtedness. The principal balance is being amortized over 240 months with
balloon payments due in 2010 and 2011.
The carrying amount of the Partnership's long term debt approximates its fair
value due to the fact that the mortgages on the foreclosed properties were
recorded at their fair value. The fair value of the mortgages as determined
based upon the incremental borrowing rate available to the Partnership at the
time of foreclosure. The mortgage premium of approximately $781,000 is net of
accumulated amortization of approximately $20,000. The mortgage premiums are
being amortized over the remaining lives of the loans. Amortization expense is
included in interest expense on the consolidated statements of operations.
Scheduled principal payments of the mortgage notes payable subsequent to
December 31, 2002 are as follows (in thousands):
Mortgage
Note Premium Total
2003 $ 426 $ 84 $ 510
2004 459 90 549
2005 495 97 592
2006 534 103 637
2007 577 110 687
Thereafter 13,208 297 13,505
$15,699 $ 781 $16,480
Note D - Income Taxes
The Partnership has received a ruling from the Internal Revenue Service that it
will be classified as a partnership for Federal income tax purposes.
Accordingly, no provision for income taxes is made in the financial statements
of the Partnership.
Taxable income or loss of the Partnership is reported in the income tax returns
of its partners.
The following is a reconciliation of reported net income and Federal taxable
income for the years ended December 31, 2002, 2001 and 2000 (dollar amounts in
thousands, except per unit data):
2002 2001 2000
Net income as reported $ 2,914 $ 1,421 $ 876
Add (deduct):
Depreciation differences (205) -- --
Interest income -- (904) (1,198)
Valuation allowance (3,800) (1,000) --
--
Change in prepaid rental 93 -- --
Other 83 (98) 11
Loss on Foreclosure 336 -- --
Federal taxable income $ (579) $ (581) $ (311)
Federal taxable income per limited
partnership unit $ (0.63) $ (0.63) $(0.34)
The following is a reconciliation between the Partnership's reported amounts and
Federal tax basis of net assets (in thousands):
Net assets as reported $14,524
Buildings and land --
Accumulated depreciation (205)
Syndication fees 25,796
Other 46,617
Net assets - tax basis $86,732
Note E - Transaction with Affiliated Parties
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. The Partnership 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 year ended December 31, 2002, affiliates of the General Partner were
entitled to receive 5% of gross receipts from the Partnership's residential
properties for providing property management services. The Partnership paid to
such affiliates approximately $70,000 for the year ended December 31, 2002 which
is included in operating expense. No fees were paid in 2001 or 2000 because the
Partnership did not own any investment properties.
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $394,000, $349,000 and
$444,000 for the years ended December 31, 2002, 2001, and 2000, respectively,
which are included in general and administrative expenses.
The General Partner has loaned the Partnership approximately $10,625,000 during
the year ended December 31, 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 these advances, the
Partnership repaid approximately $100,000 during the year ended December 31,
2002. Interest is charged at the prime rate plus 2%. Interest expense was
approximately $299,000 for the year ended December 31, 2002.
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 450,969.90 limited partnership units
in the Partnership representing 49.60% of the outstanding units at December 31,
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 49.60% 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.
Note F - Real Estate and Accumulated Depreciation
Initial Cost
To Partnership
(in thousands)
Buildings Net Costs
and Related Capitalized
Personal Subsequent to
Description Encumbrances Land Property Acquisition
Canyon Crest Apartments $ 3,470 $ 1,242 $ 4,158 $ 44
Highcrest Townhomes 6,439 3,660 8,540 117
Windemere Apartments 5,790 1,955 7,445 43
15,699
Mortgage Premium 781
Totals $16,480 $ 6,857 $20,143 $ 204
Gross Amount At Which
Carried
At December 31, 2002
(in thousands)
Buildings
And
Related
Personal Accumulated Date of Date Depreciable
Description Land Properties Total Depreciation Construction Acquired Life-Years
Canyon Crest Apts $ 1,242 $ 4,202 $5,444 $ 50 1966 08/22/02 5-40
Highcrest 3,660 8,657 12,317 113 1968 08/22/02 5-40
Townhomes
Windemere