INDEPENDENCE TAX CREDIT PLUS L P II - FORM 10-Q - November 6, 2009

Attached files

file filename
EX-31.2 - CEO CERTIFICATION - INDEPENDENCE TAX CREDIT PLUS L P IIexj31-2.htm
EX-31.1 - CFO CERTIFICANTION - INDEPENDENCE TAX CREDIT PLUS L P IIexh31-1.htm
EX-32.1 - SECTION 1350 CERTIFICATION - INDEPENDENCE TAX CREDIT PLUS L P IIexh32-1.htm

 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

______________

FORM 10-Q

______________
(Mark One)

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

For the quarterly period ended September 30, 2009

OR

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


Commission File Number 0-13782

INDEPENDENCE TAX CREDIT PLUS L.P. II
(Exact name of registrant as specified in its charter)



Delaware
  
13-3646846
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
     
625 Madison Avenue, New York, New York
  
10022
(Address of principal executive offices)
  
(Zip Code)



Registrant’s telephone number, including area code (212) 317-5700


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  þ No  


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


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


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

 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No  þ
 
 


 

PART I – Financial Information

Item 1.  Financial Statements

INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Consolidated Balance Sheets




   
September 30,
2009
  
March 31,
2009
  
   
(Unaudited)
  
(Audited)
  
ASSETS
              
 
Property and equipment at cost, net of accumulated depreciation of $46,890,457 and $45,187,290, respectively
  
$
60,724,612
  
$
62,427,780
  
Cash and cash equivalents
    
1,311,643
    
1,300,092
  
Cash held in escrow
    
3,306,590
    
2,970,379
  
Deferred costs, net of accumulated amortization of $209,015 and $193,544, respectively
    
197,990
    
213,461
  
Other assets
    
465,144
    
397,259
  
 
Total assets
  
$
66,005,979
  
$
67,308,971
  
 
LIABILITIES AND PARTNERS’ DEFICIT
              
 
Liabilities:
              
Mortgage notes payable
  
$
56,616,560
  
$
56,945,695
  
Accounts payable
    
883,204
    
747,108
  
Security deposit payable
    
458,961
    
457,037
  
Accrued interest
    
23,131,876
    
22,239,687
  
Due to local general partners and affiliates
    
2,477,278
    
2,545,330
  
Due to general partner and affiliates
    
6,468,464
    
6,108,050
  
 
Total liabilities
    
90,036,343
    
89,042,907
  
 
Commitments and contingencies (Note 4)
              
 
Partners’ deficit:
              
Limited partners (58,928 BACs issued and outstanding)
    
(21,397,101
)
  
(19,369,227
)
General partner
    
(744,890
)
  
(724,890
)
 
Independence Tax Credit Plus L.P. II total
    
(22,141,991
)
  
(20,094,117
)
 
Noncontrolling interests
    
(1,888,373
)
  
(1,639,819)
  
 
Total partners’ deficit
    
(24,030,364
)
  
(21,733,936
)
 
Total liabilities and partners’ deficit
  
$
66,005,979
  
$
67,308,971
  
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
- 2 -
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)




   
Three Months Ended
September 30,
  
Six Months Ended
September 30,
  
   
2009
  
2008
  
2009
  
2008
  
                           
Revenues
                          
Rental income
  
$
2,840,173
  
$
2,674,817
  
$
5,694,910
  
$
5,355,631
  
Other income
    
73,782
    
99,573
    
145,946
    
182,941
  
 
Total revenues
    
2,913,955
    
2,774,390
    
5,840,856
    
5,538,572
  
 
Expenses
                          
General and administrative
    
636,730
    
614,803
    
1,438,198
    
1,331,393
  
General and administrative-related parties (Note 2)
    
275,137
    
261,634
    
551,119
    
525,512
  
Repairs and maintenance
    
679,748
    
738,121
    
1,370,026
    
1,453,535
  
Operating
    
335,177
    
382,528
    
756,671
    
817,110
  
Taxes
    
192,350
    
191,482
    
386,994
    
392,121
  
Insurance
    
167,482
    
167,329
    
328,266
    
339,675
  
Financial
    
680,356
    
676,890
    
1,354,738
    
1,362,341
  
Depreciation and amortization
    
863,376
    
841,867
    
1,718,638
    
1,671,309
  
 
Total expenses
    
3,830,356
    
3,874,654
    
7,904,650
    
7,892,996
  
 
Net loss
    
(916,401
)
  
(1,100,264
)
  
(2,063,794
)
  
(2,354,424
)
 
Net loss attributable to noncontrolling interests
    
6,790
    
2,616
    
15,920
    
6,054
  
 
Net loss attributable to Independence Tax Credit Plus L.P. II
  
$
(909,611
)
$
(1,097,648
)
$
(2,047,874
)
$
(2,348,370
)
 
Net loss-limited partners (BACs holders)
  
$
(900,515
)
$
(1,086,672
)
$
(2,027,395
)
$
(2,324,886
)
 
Number of BACs outstanding
    
58,928
    
58,928
    
58,928
    
58,928
  
 
Net loss per weighted average BAC
  
$
(15.28
)
$
(18.44
)
$
(34.40
)
$
(39.45
)
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 

 
- 3 -
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Consolidated Statement of Changes in
Partners’ Deficit
(Unaudited)




   
Total
  
Limited
Partners
  
General
Partner
  
Noncontrolling Interests
  
 
 
Partners’ deficit – April 1, 2009
  
$
(21,733,936
)
$
(19,369,227
)
$
(724,890
)
$
(1,639,819
)
 
Net loss
    
(2,063,794
)
  
(2,027,874
)
  
(20,000
)
  
(15,920
)
 
Distributions
    
(232,634
)
  
-
    
-
    
(232,634
)
 
Partners’ deficit – September 30, 2009
  
$
(24,030,364
)
$
(21,397,101
)
$
(744,890
)
$
(1,888,373
)
 
 
 
 
See accompanying notes to consolidated financial statements.

 
 
- 4 -

INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)




   
Six Months Ended
September 30,
  
   
2009
  
2008*
  
               
Cash flows from operating activities:
              
Net loss
  
$
(2,063,794
)
$
(2,354,424
)
Adjustments to reconcile net loss to net cash provided by operating activities:
              
Depreciation and amortization
    
1,718,638
    
1,671,309
  
Increase in accounts payable
    
136,096
    
28,098
  
Increase in security deposit payable
    
1,924
    
11,561
  
Increase in accrued interest
    
892,189
    
988,898
  
Increase in cash held in escrow
    
(215,843
)
  
(233,940
)
Increase in other assets
    
(67,885
)
  
(29,795
)
Increase in due to local general partners and affiliates
    
1,106
    
31,433
  
Decrease in due to local general partners and affiliates
    
(54,366
)
  
(9,639
)
Increase in due to general partner and affiliates
    
360,414
    
262,272
  
Total adjustments
    
2,772,273
    
2,720,197
  
 
Net cash provided by operating activities
    
708,479
    
365,773
  
 
Cash flows from investing activities:
              
Improvements to property and equipment
    
-
    
(35,745
)
Increase in cash held in escrow
    
(120,368
)
  
(120,196
)
Increase in due to local general partners and affiliates
    
-
    
47,695
  
 
Net cash used in investing activities
    
(120,368
)
  
(108,246
)
 
Cash flows from financing activities:
              
Principal payments of mortgage notes
    
(329,135
)
  
(303,098
)
(Decrease) increase in due to local general partners and affiliates
    
(14,791
)
  
1,813
  
Decrease in capitalization of consolidated subsidiaries attributable to noncontrolling interests
    
(232,634
)
  
(32,046
)
 
Net cash used in financing activities
    
(576,560
)
  
(331,331
)
 
Net increase (decrease) in cash and cash equivalents
    
11,551
    
(75,804
)
 
Cash and cash equivalents at beginning of period
    
1,300,092
    
1,085,780
  
Cash and cash equivalents at end of period
  
$
1,311,643
  
$
1,009,976
  
 
 
 
*  Reclassified for comparative purposes.
 
See accompanying notes to consolidated financial statements.

 
 
- 5 -

 
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)


NOTE 1 – General
 
The consolidated financial statements include the accounts of Independence Tax Credit Plus L.P. II (the “Partnership”) and fifteen other limited partnerships (“subsidiary partnerships”, “subsidiaries” or “Local Partnerships”) owning leveraged apartment complexes that are eligible for the low-income housing tax credit.  The general partner of the Partnership is Related Independence Associates L.P., a Delaware limited partnership (the “General Partner”).  Through the rights of the Partnership and/or an affiliate of the General Partner, which affiliate has a contractual obligation to act on behalf of the Partnership, to remove the general partner of the subsidiary partnerships (each a “Local General Partner”) and to approve certain major operating and financial decisions, the Partnership has a controlling financial interest in the subsidiary partnerships.
 
For financial reporting purposes, the Partnership’s fiscal quarter ends September 30.  The Partnership’s fiscal quarter ends September 30, in order to allow adequate time for the subsidiary partnerships’ financial statements to be prepared and consolidated.  All subsidiaries have fiscal quarters ending June 30.  Accounts of the subsidiary partnerships have been adjusted for intercompany transactions from April 1 through September 30.
 
All intercompany accounts and transactions with the subsidiary partnerships have been eliminated in consolidation.
 
The Partnership has adopted FASB ASC 810, Noncontrolling Interests in Consolidated Financial Statements, which is effective for fiscal year ends beginning after December 15, 2008.  In accordance with FASB ASC 810, losses attributable to noncontrolling interests amounted to approximately $7,000 and $16,000 for the three and six months ended September 30, 2009.  Prior to the adoption of this ASC, losses attributable to noncontrolling interests which exceeded the noncontrolling interests’ investment in a subsidiary partnership were charged to the Partnership.  Such losses aggregated approximately $7,000 and $14,000 for the three and six months ended September 30, 2008.  Increases (decreases) in the capitalization of consolidated subsidiaries attributable to noncontrolling interest arise from cash contributions from and cash distributions to the noncontrolling interest partners.  The Partnership’s investment in each subsidiary is equal to the respective subsidiary’s partners’ equity less noncontrolling interest capital, if any.
 
Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted or condensed.  These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Partnership’s Annual Report on Form 10-K for the year ended March 31, 2009.
 
The books and records of the Partnership are maintained on the accrual basis of accounting in accordance with GAAP.  In the opinion of the General Partner of the Partnership, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Partnership as of September 30, 2009, the results of operations for the three and six months ended September 30, 2009 and 2008 and its cash flows for the six months ended September 30, 2009 and 2008, respectively.  However, the operating results for the three and six months ended September 30, 2009 may not be indicative of the results for the year.
 
Recent Accounting Pronouncements
 
In June 2009, the FASB issued ASC 105-10 (formerly SFAS No. 168), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”.  The objective of this statement is to replace SFAS No. 162 and to establish the FASB Accounting Standards Codification as the source of the authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This ASC was effective for financial statements issued for interim and annual periods ending after September 15, 2009 and was adopted by the Partnership for its second quarter reporting.  The adoption did not have a significant impact on the reporting of our financial position, results of operations or cash flows.
 
 
NOTE 2 – Related Party Transactions
 
An affiliate of the General Partner has a 0.01% interest as a special limited partner in each of the Local Partnerships.
 
The costs incurred to related parties for the three and six months ended September 30, 2009 and 2008 were as follows:
 
   
Three Months Ended
September 30,
  
Six Months Ended
September 30,
  
   
2009
  
2008
  
2009
  
2008
  
                           
Partnership management fees (a)
  
$
136,500
  
$
136,500
  
$
273,000
  
$
273,000
  
Expense reimbursement (b)
    
40,269
    
32,029
    
80,539
    
64,057
  
Local administrative fee (c)
    
10,875
    
10,500
    
21,750
    
21,000
  
Total general and administrative-General Partner
    
187,644
    
179,029
    
375,289
    
358,057
  
Property management fees incurred to affiliates of the subsidiary partnerships' general partners
    
87,493
    
82,605
    
175,830
    
167,455
  
Total general and administrative-related parties
  
$
275,137
  
$
261,634
  
$
551,119
  
$
525,512
  

 
 
 
- 6 -
 

 
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)


(a)
The General Partner is entitled to receive a partnership management fee, after payment of all Partnership expenses, which together with the annual local administrative fees will not exceed a maximum of 0.5% per annum of invested assets (as defined in the Partnership’s agreement of limited partnership (the “Partnership Agreement”)), for administering the affairs of the Partnership.  Subject to the foregoing limitation, the partnership management fee will be determined by the General Partner in its sole discretion based upon its review of the Partnership’s investments.  Unpaid partnership management fees for any year have been accrued without interest and will be payable from working capital reserves or to the extent of available funds after the Partnership has made distributions to the limited partners of sale or refinancing proceeds equal to their original capital contributions plus a 10% priority return thereon (to the extent not theretofore paid out of cash flow).  Partnership management fees owed to the General Partner amounting to approximately $5,666,000 and $5,393,000 were accrued and unpaid as of September 30, 2009 and March 31, 2009, respectively.  Without the General Partner’s advances and continued accrual without payment of certain fees and expense reimbursements, the Partnership would not be in a position to meet its obligations.
 
(b)
The Partnership reimburses the General Partner and its affiliates for actual Partnership operating expenses incurred by the General Partner and its affiliates on the Partnership’s behalf.  The amount of reimbursement from the Partnership is limited by the provisions of the Partnership Agreement.  Another affiliate of the General Partner performs asset monitoring for the Partnership.  These services include site visits and evaluations of the subsidiary partnerships’ performance.
 
(c)
Independence SLP L.P., a special limited partner of the subsidiary partnerships, is entitled to receive a local administrative fee of up to $5,000 per year from each subsidiary partnership.
 
 
NOTE 3 – Fair Value of Financial Instruments
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments (all of which are held for nontrading purposes) for which it is practicable to estimate that value:
 
Cash and Cash Equivalents, Investments Available-for-Sale and Cash Held in Escrow
The carrying amount approximates fair value.
 
Mortgage Notes Payable
The Partnership adopted FASB ASC 820 – “Fair Value Measurements” for financial assets and liabilities.  ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.
 
As permitted, we chose not to elect the fair value option as prescribed by FASB SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” – Including an Amendment of FASB Statement No. 115, for our financial assets and liabilities that had not been previously carried at fair value.  Therefore, we did not elect to fair value any additional items under SFAS No. 159.
 
The estimated fair value of financial instruments has been determined using available market information or other appropriate valuation methodologies.  However, considerable judgment is required in interpreting market data to develop estimates of fair value.  Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.  The following are financial instruments for which the Partnership’s estimate of fair value differs from the carrying amounts:
 
   
At September 30, 2009
  
At March 31, 2009
  
   
Carrying
Amount
  
Fair Value
  
Carrying
Amount
  
Fair Value
  
 
LIABILITIES:
                          
Mortgage notes
  
$
56,616,560
  
$
41,074,174
  
$
56,945,695
  
$
39,563,316
  

 
For the mortgage notes, fair value is calculated using present value cash flow models based on a discount rate.  It was determined that the Tender Option Bond market, through which these bonds have been securitized in the past, continued to see a dramatic slowdown with limited liquidity and significantly reduced transaction levels.  To assist in valuing these notes, the Partnership held separate discussions with various third party investment banks who are leaders in the municipal bond business.  The discussions produced assumptions that were based on market conditions as well as the credit quality of the underlying property partnerships, which held the mortgage notes, to determine what discount rates to utilize.
 
 
NOTE 4 – Commitments and Contingencies
 
a)
Subsidiary Partnerships – Going Concern
 
Creative Choice Homes VI Ltd. (“Creative Choice”)
The Local General Partner funded approximately $142,000 to cover operating costs during the year ended 2008, and Creative Choice is in default of one of its subordinate notes.  These factors create an uncertainty about Creative Choice’s ability to continue as a going concern.  The ability of Creative Choice to continue as a going concern is dependent on the Local General Partner’s ability and willingness to continue funding operating losses.
 
 
 
 
- 7 -

 
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)


During the year ended December 31, 2005, the property incurred hurricane damage.  The total cost to bring the units back into service was approximately $1,800,000.  Creative Choice contracted with Naimisha Construction, a related party, for $1,600,000 to complete the repairs and renovations of the buildings damaged.  During 2005, emergency insurance proceeds had been received by Creative Choice to offset the cost of immediate repair work.  In 2006, Washington Mutual, the mortgage holder, received the remaining balance of the insurance proceeds which were subsequently reimbursed to Creative Choice in the amount of $1,433,817.  As of September 30, 2009, all hurricane repairs and renovations had been completed and a balance of approximately $634,500 remains payable to Naimisha Construction.
 
Creative Choice also suffered fire damage on June 20, 2006 affecting nine of its units.  As of September 30, 2009, $567,370 of its insurance proceeds had been received to cover the cost of immediate repair work and securing the location.  Naimisha Construction, a related party, has been contracted to complete the repairs for $673,889 and $206,519 remains payable as of September 30, 2009 to Naimisha Construction.
 
The above circumstances called into question the recoverability of the carrying amounts of the building.  As a result, during the year ended December 31, 2006, pursuant to ASC 360, an impairment loss of $603,733 was recognized on the building and improvements.
 
The Partnership’s investment in Creative Choice at September 30, 2009 and March 31, 2009 was reduced to zero as a result of prior years’ losses and the noncontrolling interest balance was $0 at each date.  Creative Choice’s net  income (loss) after noncontrolling interests amounted to approximately $300 and ($124,000) for the six months ended September 30, 2009 and 2008, respectively.
 
b)
Subsidiary Partnerships – Other
 
Mansion Court Associates (“Mansion Court”)
Mansion Court had a net loss of $48,366 for the six months ended September 30, 2009.  In prior years and in 2009, Mansion Court has sustained operating losses and has not generated sufficient cash flow from operations to meet its obligations, primarily payable to related parties.  The Local General Partner has provided funding in the past years; however there is no obligation to do so.  The property also has experienced a high number of vacancies due to deteriorating conditions in the area.  As of September 30, 2009, the project had 22 vacant units.  In addition, Mansion Court’s physical inspection by the Pennsylvania Housing Finance Agency (“PHFA”) noted 15 units for poor physical condition which would not meet a level of living standard.  Although the Local General Partner could make the necessary repairs to improve the units to a living standard, vacancies continue to increase due to declining conditions in the surrounding neighborhood, and the expenditure of funds at this time to make improvements would not benefit the project.  The Local General Partner is exploring options to mitigate increased crime and deteriorating neighborhood conditions.  The options include assistance from the local government housing agencies and possible transfer of ownership.
 
During the year ended March 31, 2009, in accordance with ASC 360, Property, Plant and Equipment, the Partnership deemed the building of Mansion Court further impaired and in addition to an earlier writedown of approximately $1,342,000, wrote it down to its new reduced fair value of approximately $338,000, which resulted in a further loss on impairment of approximately $463,000.  Fair value was obtained from an assessment made by the management after indications that the carrying value of the assets were not recoverable, evidenced by a history of net operating losses over the past few years as discussed above.  In addition, at September 30, 2009, Mansion Court was contingently liable in an open letter of credit issued in favor of the PHFA in the amount of $24,000.
 
The Partnership’s investment in Mansion Court at September 30, 2009 and March 31, 2009 was zero as a result of prior years’ losses and the noncontrolling interests balance was ($1,989) and ($1,500) at each date, respectively.  Mansion Court’s net loss after noncontrolling interests amounted to approximately $48,000 and $63,000 for the six months ended September 30, 2009 and 2008, respectively.
 
c)
Uninsured Cash and Cash Equivalents
 
The Partnership maintains its cash and cash equivalents in various banks.  The accounts at each bank are guaranteed by the Federal Deposit Insurance Corporation up to $250,000.
 
d)
Cash Distributions
 
Cash distributions from the Local Partnerships to the Partnership are restricted by the provisions of the respective agreements of limited partnership of the Local Partnerships and/or the U.S. Department of Housing and Urban Development.
 
e)
Property Management Fees
 
Property management fees incurred by the Local Partnerships amounted to $200,521 and $186,406 and $398,915 and $376,144 for the three and six months ended September 30, 2009 and 2008, respectively.
 
 
 
- 8 -
 

 
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)


 
f)
Other
 
The Partnership and Beneficial Assignment Certificates (“BACs”) holders began to recognize the low-income housing credit (“Tax Credit”) with respect to an apartment complex (“Property”) when the periods of the Partnership’s entitlement to claim Tax Credits for such Property commenced (for each Property, generally ten years from the date of investment or, if later, the date the Property is placed in service) (“Credit Period”).  Because of the time required for the acquisition, completion and rent-up of Properties, the amount of Tax Credits per BAC gradually increased over the first three years of the Partnership’s existence.  Tax Credits not recognized in the first three years will be recognized in the 11th through 13th years.  Once a Local Partnership has become eligible to recognize Tax Credits, it may lose such eligibility and suffer an event of “recapture” if its Property fails to remain in compliance with the Tax Credit requirements during the 15-year period commencing at the beginning of the Credit Period (“Compliance Period”).  None of the Local Partnerships in which the Partnership has acquired an interest has suffered an event of recapture.  As of December 31, 2007, all the Local Partnerships had completed their Credit Periods, and the Partnership had met its primary objective of generating Tax Credits for qualified BACs holders.  However, each Local Partnership must continue to comply with the Tax Credit requirements until the end of the Compliance Period in order to avoid recapture of the Tax Credits.  The Compliance Periods will continue through December 31, 2012 with respect to the Properties depending upon when the Compliance Period commenced.
 
g)
Subsequent Events
 
We evaluated all subsequent events from the date of the balance sheet through November 4, 2009, which represents the issuance date of these financial statements.  There were no events or transactions occurring during this subsequent event reporting period which require recognition or disclosure in the financial statements.
 
 
 
 
- 9 -

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Liquidity and Capital Resources
 
As of September 30, 2009, the Partnership has invested all of its net proceeds in fifteen Local Partnerships.  Approximately $282,000 of the purchase price remains to be paid to the Local Partnerships (including approximately $24,000 being held in escrow at the Partnership level).
 
Short-Term
 
The Partnership’s primary sources of funds include working capital reserves, interest earned on working capital reserves and distributions received from the Local Partnerships.  However, none of these sources provides a material amount of funds.
 
For the six months ended September 30, 2009, cash and cash equivalents of the Partnership and its fifteen consolidated Local Partnerships increased approximately $12,000.  This increase was provided by operating activities ($708,000), which exceeded principal payments of mortgage notes ($329,000), a decrease in capitalization of consolidated subsidiaries attributable to minority interest ($233,000), an increase in cash held in escrow relating to investing activities $(120,000) and a net decrease due to local general partners and affiliates relating to financing activities ($15,000).  Included in the adjustments to reconcile the net loss to net cash provided by operating activities is depreciation and amortization ($1,719,000).
 
At September 30, 2009, there was approximately $314,000 in the working capital reserves at the Partnership level.  For the six months ended September 30, 2009, the Partnership received approximately $103,000 in distributions from the Local Partnerships.  Management anticipates receiving additional distributions in the future, although not to a level sufficient to return to the limited partners their original investments.  These distributions, if any, as well as the working capital reserves referred to above and the deferral of fees by the General Partner referred to below, will be used to meet the operating expenses of the Partnership.
 
Total expenses for the three and six months ended September 30, 2009 and 2008, excluding depreciation and amortization, interest and general and administrative–related parties, totaled $2,011,487 and $2,094,263 and $4,280,155 and $4,333,834, respectively.
 
Accounts payable as of September 30, 2009 and March 31, 2009 were $883,204 and $747,108, respectively.  Accounts payable are short term liabilities which are expected to be paid from operating cash flows, working capital balances at the Local Partnership level, Local General Partner advances and, in certain circumstances, advances from the Partnership.  The Partnership believes it (and the applicable Local Partnerships) has sufficient liquidity and ability to generate cash and to meet existing and known or reasonably likely future cash requirements over both the short and long term.
 
Security deposits payable are offset by cash held in security deposits, which are included in “Cash held in escrow” on the financial statements.
 
Accrued interest payable as of September 30, 2009 and March 31, 2009 was $23,131,876 and $22,239,687, respectively.  Accrued interest payable represents the accrued interest on all mortgage loans, which include primary and secondary loans.  Certain secondary loans have provisions such that interest is accrued but not payable until a future date.  The Partnership anticipates the payment of accrued interest on the secondary loans (which make up the majority of the accrued interest payable amount which has been accumulating since the Partnership’s investment in the respective Local Partnership) will be made from future refinancings or sales proceeds of the respective Local Partnerships.  In addition, each Local Partnership’s mortgage notes are collateralized by the land and buildings of the respective Local Partnership, and are without further recourse to the Partnership.
 
Long-Term
 
Partnership management fees owed to the General Partner amounting to approximately $5,666,000 and $5,393,000 were accrued and unpaid as of September 30, 2009 and March 31, 2009, respectively.  Without the General Partner’s advances and continued accrual without payment of certain fees and expense reimbursements, the Partnership will not be in a position to meet its obligations.
 
For a discussion of contingencies affecting certain Local Partnerships, see Item 1, Note 4.  Since the maximum loss the Partnership would be liable for is its net investment in the respective Local Partnerships, the resolution of the existing contingencies is not anticipated to impact future results of operations, liquidity or financial condition in a material way.  However, the Partnership’s loss of its investment in a Local Partnership will eliminate the ability to generate future Tax Credits from such Local Partnership and may also result in recapture of Tax Credits, if the investment is lost before the expiration of the 15-year period commencing at the beginning of the Credit Period (“Compliance Period”).
 
The Local Partnerships are impacted by inflation in several ways.  Inflation allows for increases in rental rates generally to reflect the impact of higher operating and replacement costs.  Furthermore, inflation generally does not impact the fixed long-term financing under which real property investments were purchased.  Inflation also affects the Local Partnerships adversely by increasing operating costs, such as fuel, utilities, and labor.
 
Management is not aware of any trends or events, commitments or uncertainties which have not otherwise been disclosed that will or are likely to impact liquidity in a material way.  Management believes the only impact would be from laws that have not yet been adopted.  The portfolio is diversified by the location of the Properties around the United States so that if one area of the country is experiencing downturns in the economy, the remaining Properties in the portfolio may be experiencing upswings.  However, the geographic diversification of the portfolio may not protect against a general downturn in the national economy.  The Partnership has fully invested the proceeds of its offering in fifteen Local Partnerships, all of which have fully utilized their Tax Credits.  As of December 31, 2007, all the Local Partnerships had completed their tax credit periods, and the Partnership had met its primary objective of generating Tax Credits for qualified BACs holders.  However, each Local Partnership must continue to comply with the Tax Credit requirements until the end of the Compliance Period in order to avoid recapture of the Tax Credits.  The Compliance Periods will continue through December 31, 2012 with respect to the Properties depending upon when the Compliance Period commenced.
 
 
 
 
- 10 -
 
Off-Balance Sheet Arrangements
 
The Partnership has no off-balance sheet arrangements.
 
Tabular Disclosure of Contractual Obligations
The Partnership discloses in Item 7 of the Partnership’s Annual Report on Form 10-K for the year ended March 31, 2009, the Partnership’s commitments to make future payments under its debt agreements and other contractual obligations.  There are no material changes to such disclosure or amounts as of September 30, 2009.
 
Fair Value Measurements
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments (all of which are held for nontrading purposes) for which it is practicable to estimate that value:
 
Cash and Cash Equivalents, Investments Available-for-Sale and Cash Held in Escrow
The carrying amount approximates fair value.
 
Mortgage Notes Payable
The Partnership adopted FASB ASC 820 – “Fair Value Measurements” for financial assets and liabilities.  ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.
 
As permitted, we chose not to elect the fair value option as prescribed by FASB SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” – Including an Amendment of FASB Statement No. 115, for our financial assets and liabilities that had not been previously carried at fair value.  Therefore, we did not elect to fair value any additional items under SFAS No. 159.
 
The estimated fair value of financial instruments has been determined using available market information or other appropriate valuation methodologies.  However, considerable judgment is required in interpreting market data to develop estimates of fair value.  Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.  The following are financial instruments for which the Partnership’s estimate of fair value differs from the carrying amounts:
 
   
At September 30, 2009
  
At March 31, 2009
  
   
Carrying
Amount
  
Fair Value
  
Carrying
Amount
  
Fair Value
  
 
LIABILITIES:
                          
Mortgage notes
  
$
56,616,560
  
$
41,074,174
  
$
56,945,695
  
$
39,563,316
  
 
 
For the mortgage notes, fair value is calculated using present value cash flow models based on a discount rate. It was determined that the Tender Option Bond market, through which these bonds have been securitized in the past, continued to see a dramatic slowdown with limited liquidity and significantly reduced transaction levels.  To assist in valuing these notes, the Partnership held separate discussions with various third party investment banks who are leaders in the municipal bond business.  The discussions produced assumptions that were based on market conditions as well as the credit quality of the underlying property partnerships, which held the mortgage notes, to determine what discount rates to utilize.
 
Critical Accounting Policies and Estimates
 
The preparation of consolidated financial statements requires management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.  The following is a summary of certain accounting estimates considered critical by the Partnership.  The summary should be read in conjunction with the more complete discussion of the Partnership’s accounting policies included in Item 8, Note 2 to the consolidated financial statements in the Partnership’s Annual Report on Form 10-K for the year ended March 31, 2009.
 
Property and Equipment
 
Property and equipment to be held and used are carried at cost which includes the purchase price, acquisition fees and expenses, construction period interest and any other costs incurred in acquiring the Properties.  The cost of property and equipment is depreciated over their estimated useful lives using accelerated and straight-line methods.  Expenditures for repairs and maintenance are charged to expense as incurred; major renewals and betterments are capitalized.  At the time property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the assets and accumulated depreciation accounts and the profit or loss on such disposition is reflected in earnings.  The Partnership complies with ASC 360, Property, Plant and Equipment.  A loss on impairment of assets is recorded when management estimates amounts recoverable through future operations and sale of the Property on an undiscounted basis are below depreciated cost.  At that time, Property investments themselves are reduced to estimated fair value (generally using discounted cash flows).
 
Through September 30, 2009, the Partnership has recorded approximately $6,334,000 as an aggregate loss on impairment of assets.
 
Revenue Recognition
 
Rental income is earned primarily under standard residential operating leases and is typically due the first day of each month, but can vary by Property due to the terms of the tenant leases.  Rental income is recognized when earned and charged to tenants’ accounts receivable if not received by the due date.  Rental payments received in advance of the due date are deferred until earned.  Rental subsidies are recognized as rental income during the month in which it is earned.
 
 
 
 
- 11 -
 
Other revenues are recorded when earned and consist of the following items:  interest income earned on cash and cash equivalent balances and cash held in escrow balances, income from forfeited security deposits, late charges, laundry and vending income and other rental related items.
 
Income Taxes
 
The Partnership is not required to provide for, or pay, any federal income taxes.  Net income or loss generated by the Partnership is passed through to the partners and is required to be reported by them.  The Partnership may be subject to state and local taxes in jurisdictions in which it operates.  For income tax purposes, the Partnership has a fiscal year ending December 31.
 
Results of Operations
 
The Partnership’s results of operations for the three and six months ended September 30, 2009 and 2008 consisted primarily of the results of the Partnership’s investment in fifteen consolidated Local Partnerships.  The majority of Local Partnership income continues to be in the form of rental income with the corresponding expenses being divided among operations, depreciation and mortgage interest.
 
Rental income increased approximately 6% for the three and six months ended September 30, 2009 as compared to the corresponding periods in 2008, primarily due to decreases in vacancies at six Local Partnerships, an increase in Section 8 rental subsidy income at two Local Partnerships and increases in rental rates at several Local Partnerships.
 
Other income decreased approximately $26,000 and $37,000 for the three and six months ended September 30, 2009 as compared to the corresponding periods in 2008, primarily due to an insurance refund received in the prior year at one Local Partnership and decreases in laundry, legal, miscellaneous and interest income at a second Local Partnership.
 
Operating expenses decreased approximately $(47,000) and $(60,000) for the three and six months ended September 30, 2009 as compared to the corresponding periods in 2008, primarily due to a decrease in the purchase of gasoline in bulk at one Local Partnership and a decrease in trash removal expense at a second Local Partnership.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
The Partnership has mortgage notes that are payable in aggregate monthly installments including principal and interest at rates varying from 0% to 9.05% per annum.  The Partnership does not believe there is a material risk associated with the various interest rates associated with the mortgage notes as the majority of the Local Partnership mortgage notes have fixed rates.  The Partnership disclosed in Item 8, Note 3 to the consolidated financial statements in the Partnership’s Annual Report on Form 10-K for the year ended March 31, 2009, as well as in Item 2, the fair value of the mortgage notes payable.  There are no material changes to such disclosure or amounts as of September 30, 2009.
 
The Partnership does not have any other market risk sensitive instruments.
 
Item 4T.  Controls and Procedures
 
(a)   Evaluation of Disclosure Controls and Procedures.  The Chief Executive Officer and Chief Financial Officer of Related Independence Associates, L.P., the general partner of the Partnership, have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) as of the end of the period covered by this report.  Based on such evaluation, such officers have concluded that, as of the end of such period, the Partnership’s disclosure controls and procedures are effective.
 
(b)   Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  In evaluating the Partnership’s internal control over financial reporting, management has adopted the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring organizations of the Treadway Commission (the “COSO Framework”).  Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer of the General Partner, the Partnership conducted an evaluation of the effectiveness of its internal control over financial reporting as of March 31, 2009.  The Partnership’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.  Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the  Partnership; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Partnership are being made only in accordance with authorizations of management and directors of the Partnership; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Partnership’s assets that could have a material effect on the financial statements.  However, because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Based on management’s evaluation under the COSO Framework, it has concluded that the Partnership’s internal control over financial reporting, was, as of March 31, 2009, (1) effective at the Partnership level, in that they provide reasonable assurance that information required to be disclosed by the Partnership in the reports it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (2) ineffective at the subsidiary level due to certain deficiencies noted in the audit reports for such subsidiaries.  Management will attempt to cause the Local General Partner’s to remedy such deficiencies; however, the General Partner does not have control over the internal controls at the subsidiary level.  Management believes they have sufficient controls at the Partnership level to mitigate these deficiencies, and such deficiencies do not have a material impact on the consolidated financial statements.
 
 
 
- 12 -
 
The Partnership’s Annual Report on Form 10-K did not include an attestation report of the Partnership’s registered public accounting firm regarding internal control over financial reporting.  The Partnership’s internal control over financial reporting was not subject to attestation by the Partnership’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Partnership to provide only this report.
 
(c)    Changes in Internal Controls over Financial Reporting.  Except as noted in (b) above, during the period ended September 30, 2009, there were no changes in the Partnership’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
 
 
 
 
- 13 -
 
 
PART II.  OTHER INFORMATION



Item 1.
Legal Proceedings – None
   
Item 1A.
Risk Factors – No Changes
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds – None
   
Item 3.
Defaults Upon Senior Securities – None
   
Item 4.
Submission of Matters to a Vote of Security Holders – None
   
Item 5.
Other Information – None
   
Item 6.
Exhibits
   
 
(3A)
Agreement of Limited Partnership of Independence Tax Credit Plus L.P. II as adopted on February 11, 1992*
     
 
(3B)
Form of Amended and Restated Agreement of Limited Partnership of Independence Tax Credit Plus L.P. II, attached to the Prospectus as Exhibit A**
     
 
(3C)
Certificate of Limited Partnership of Independence Tax Credit Plus L.P. II as filed on February 11, 1992*
     
 
(10A)
Form of Subscription Agreement attached to the Prospectus as Exhibit B**
     
 
(10B)
Escrow Agreement between Independence Tax Credit Plus L.P. II and Bankers Trust Company*
     
 
(10C)
Form of Purchase and Sales Agreement pertaining to the Partnership’s acquisition of Local Partnership Interests*
     
 
(10D)
Form of Amended and Restated Agreement of Limited Partnership of Local Partnerships*
     
 
(31.1)
     
 
(31.2)
     
 
(32.1)
     
 
*
Incorporated herein as an exhibit by reference to exhibits filed with Post-Effective Amendment No. 4 to the Registration Statement on Form S-11 (Registration No. 33-37704)
     
 
**
Incorporated herein as an exhibit by reference to exhibits filed with Post-Effective Amendment No. 8 to the Registration Statement on Form S-11 (Registration No. 33-37704)
 
 
 
 
- 14 -
 
 

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



INDEPENDENCE TAX CREDIT PLUS L.P. II
(Registrant)



     
By:
RELATED INDEPENDENCE ASSOCIATES L.P.,
       
General Partner
               
               
               
       
By:
INDEPENDENCE ASSOCIATES GP LLC,
         
General Partner
               
               
               
Date:
November 6, 2009
      
By:
/s/ Robert L. Levy
  
           
Robert L. Levy
  
           
Chief Financial Officer, Principal Accounting Officer and Director
               
               
Date:
November 6, 2009
      
By:
/s/ Andrew J. Weil
  
           
Andrew J. Weil
  
           
President and Chief Executive Officer

 
 
 
 

 
 
- 15 -

 
 
 

 

INDEPENDENCE TAX CREDIT PLUS L P II Reports