Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
______________
(Mark One)
þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended December 31, 2010
OR
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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to
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Commission File Number 0-13782
INDEPENDENCE TAX CREDIT PLUS L.P. II
(Exact name of registrant as specified in its charter)
Delaware
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13-3646846
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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625 Madison Avenue, New York, New York
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10022
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(Address of principal executive offices)
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(Zip Code)
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(212) 317-5700
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Registrant’s telephone number, including area code
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(Former name, former address and former fiscal year, if changed since last report)
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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. þ Yes o 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). o Yes o 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 o
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Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
PART I – Financial Information
Item 1. Financial Statements.
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
2010
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March 31,
2010
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|||||||
(Unaudited)
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(Audited)
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|||||||
ASSETS
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||||||||
Operating assets
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||||||||
Property and equipment at cost, net of accumulated depreciation of $30,107,822 and $44,397,771, respectively
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$ | 19,804,942 | $ | 33,890,998 | ||||
Cash and cash equivalents
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1,848,530 | 1,587,016 | ||||||
Cash held in escrow
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2,396,738 | 2,923,692 | ||||||
Deferred costs, net of accumulated amortization of $70,836 and $215,000, respectively
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100,059 | 175,505 | ||||||
Other assets
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546,953 | 523,427 | ||||||
Total operating assets
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24,697,222 | 39,100,638 | ||||||
Assets from discontinued operations (Note 6)
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||||||||
Property and equipment held for sale, net of accumulated depreciation of $12,633,340 and $0, respectively
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7,521,119 | 0 | ||||||
Net assets held for sale
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694,295 | 0 | ||||||
Total assets from discontinued operations
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8,215,414 | 0 | ||||||
Total assets
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$ | 32,912,636 | $ | 39,100,638 | ||||
LIABILITIES AND PARTNERS’ DEFICIT
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||||||||
Liabilities
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||||||||
Mortgage notes payable
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$ | 26,598,243 | $ | 51,101,479 | ||||
Accounts payable
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909,012 | 781,692 | ||||||
Security deposit payable
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287,658 | 420,089 | ||||||
Accrued interest
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18,406,428 | 23,334,820 | ||||||
Due to local general partners and affiliates
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764,225 | 1,051,929 | ||||||
Due to general partner and affiliates
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6,427,314 | 6,747,079 | ||||||
Total operating liabilities
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53,392,880 | 83,437,088 | ||||||
Liabilities from discontinued operations (Note 6)
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||||||||
Mortgage notes payable of assets held for sale
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17,700,644 | 0 | ||||||
Net liabilities held for sale
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6,691,211 | 0 | ||||||
Total liabilities from discontinued operations
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24,391,855 | 0 | ||||||
Total liabilities
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77,784,735 | 83,437,088 | ||||||
Commitments and contingencies (Note 7)
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||||||||
Partners’ deficit
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||||||||
Limited partners (58,928 BACs issued and outstanding)
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(42,664,712 | ) | (41,301,465 | ) | ||||
General partner
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(931,913 | ) | (918,143 | ) | ||||
Independence Tax Credit Plus L.P. II total
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(43,596,625 | ) | (42,219,608 | ) | ||||
Noncontrolling interests
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(1,275,474 | ) | (2,116,842 | ) | ||||
Total partners’ deficit
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(44,872,099 | ) | (44,336,450 | ) | ||||
Total liabilities and partners’ deficit
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$ | 32,912,636 | $ | 39,100,638 | ||||
See accompanying notes to consolidated financial statements.
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- 2 -
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
December 31,
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Nine Months Ended
December 31,
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|||||||||||||||
2010
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2009* | 2010 | 2009* | |||||||||||||
Revenues
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||||||||||||||||
Rental income
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$ | 1,834,382 | $ | 1,903,444 | $ | 5,651,227 | $ | 5,524,184 | ||||||||
Other income
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93,152 | 99,963 | 304,333 | 312,445 | ||||||||||||
Total revenues
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1,927,534 | 2,003,407 | 5,955,560 | 5,836,629 | ||||||||||||
Expenses
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||||||||||||||||
General and administrative
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592,573 | 544,797 | 1,902,511 | 1,658,410 | ||||||||||||
General and administrative-related parties (Note 2)
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212,634 | 261,575 | 687,482 | 761,205 | ||||||||||||
Repairs and maintenance
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489,554 | 346,237 | 1,473,638 | 1,132,019 | ||||||||||||
Operating
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224,143 | 222,978 | 763,539 | 778,566 | ||||||||||||
Taxes
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80,097 | 133,162 | 324,999 | 391,344 | ||||||||||||
Insurance
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64,526 | 110,692 | 205,901 | 324,964 | ||||||||||||
Financial, principally interest
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434,704 | 441,423 | 1,316,287 | 1,315,810 | ||||||||||||
Depreciation and amortization
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353,760 | 500,081 | 1,113,039 | 1,499,423 | ||||||||||||
Total expenses from operations
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2,451,991 | 2,560,945 | 7,787,396 | 7,861,741 | ||||||||||||
Loss from operations
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(524,457 | ) | (557,538 | ) | (1,831,836 | ) | (2,025,112 | ) | ||||||||
(Loss) income from discontinued operations
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(167,140 | ) | (259,037 | ) | 1,371,187 | (855,257 | ) | |||||||||
Net loss
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(691,597 | ) | (816,575 | ) | (460,649 | ) | (2,880,369 | ) | ||||||||
Net loss attributable to noncontrolling interests from operations
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3,554 | 3,420 | 12,624 | 13,379 | ||||||||||||
Net loss (income) attributable to noncontrolling interests from discontinued operations
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1,674 | 2,586 | (928,992 | ) | 8,547 | |||||||||||
Net loss (income) attributable to noncontrolling interests
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5,228 | 6,006 | (916,368 | ) | 21,926 | |||||||||||
Net loss attributable to Independence Tax Credit Plus L.P. II
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$ | (686,369 | ) | $ | (810,569 | ) | $ | (1,377,017 | ) | $ | (2,858,443 | ) | ||||
Loss from operations – limited partners
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$ | (515,694 | ) | $ | (548,577 | ) | $ | (1,801,020 | ) | $ | (1,991,616 | ) | ||||
(Loss) income from discontinued operations (including gain on sale of properties) – limited partners
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(163,811 | ) | (253,886 | ) | 437,773 | (838,243 | ) | |||||||||
Net loss – limited partners
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$ | (679,505 | ) | $ | (802,463 | ) | $ | (1,363,247 | ) | $ | (2,829,859 | ) | ||||
Number of BACs outstanding
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58,928 | 58,928 | 58,928 | 58,928 | ||||||||||||
Loss from operations per weighted average BAC
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$ | (8.75 | ) | $ | (9.31 | ) | $ | (30.56 | ) | $ | (33.80 | ) | ||||
(Loss) income from discontinued operations per weighted average BAC
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(2.78 | ) | (4.31 | ) | 7.43 | (14.22 | ) | |||||||||
Net loss per weighted average BAC
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$ | (11.53 | ) | $ | (13.62 | ) | $ | (23.13 | ) | $ | (48.02 | ) |
* Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
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- 3 -
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Consolidated Statement of Changes in
Partners’ Deficit
(Unaudited)
Total
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Limited
Partners
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General
Partner
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Noncontrolling
Interests |
|||||||||||||
Partners’ deficit – April 1, 2010
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$ | (44,336,450 | ) | $ | (41,301,465 | ) | $ | (918,143 | ) | $ | (2,116,842 | ) | ||||
Net income (loss)
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(460,649 | ) | (1,363,247 | ) | (13,770 | ) | 916,368 | |||||||||
Distributions
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(75,000 | ) | 0 | 0 | (75,000 | ) | ||||||||||
Partners’ deficit – December 31, 2010
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$ | (44,872,099 | ) | $ | (42,664,712 | ) | $ | (931,913 | ) | $ | (1,275,474 | ) | ||||
See accompanying notes to consolidated financial statements.
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- 4 -
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
December 31,
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||||||||
2010
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2009
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|||||||
Cash flows from operating activities:
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||||||||
Net loss
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$ | (460,649 | ) | $ | (2,880,369 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
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||||||||
Gain on sale of properties
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(1,815,882 | ) | 0 | |||||
Depreciation and amortization
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1,595,335 | 2,577,365 | ||||||
Increase in accounts payable
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19,755 | 220,792 | ||||||
Increase in security deposit payable
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9,643 | 18,329 | ||||||
Increase in accrued interest
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1,391,960 | 1,369,186 | ||||||
Increase in cash held in escrow
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(116,455 | ) | (414,652 | ) | ||||
Increase in other assets
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(98,158 | ) | (142,191 | ) | ||||
Decrease in due to local general partners and affiliates
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(84,521 | ) | (60,086 | ) | ||||
(Decrease) increase in due to general partner and affiliates
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(215,414 | ) | 542,336 | |||||
Total adjustments
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686,263 | 4,111,079 | ||||||
Net cash provided by operating activities
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225,614 | 1,230,710 | ||||||
Cash flows from investing activities:
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||||||||
Proceeds from sale of properties
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1,045,822 | 0 | ||||||
Costs paid relating to sale of properties
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(2,105 | ) | 0 | |||||
Improvements to property and equipment
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(297,790 | ) | 0 | |||||
Decrease (increase) in cash held in escrow
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28,303 | (189,320 | ) | |||||
Net cash provided by (used in) investing activities
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774,230 | (189,320 | ) | |||||
Cash flows from financing activities:
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||||||||
Principal payments of mortgage notes
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(491,969 | ) | (499,701 | ) | ||||
Repayment of advances to local general partners and affiliates
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(67,660 | ) | (67,092 | ) | ||||
Decrease in capitalization of consolidated subsidiaries attributable to noncontrolling interests
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(75,000 | ) | (418,334 | ) | ||||
Net cash used in financing activities
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(634,629 | ) | (985,127 | ) | ||||
Net increase in cash and cash equivalents
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365,215 | 56,263 | ||||||
Cash and cash equivalents at beginning of period
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1,587,016 | 1,300,092 | ||||||
Cash and cash equivalents at end of period*
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$ | 1,952,231 | $ | 1,356,355 | ||||
Summarized below are the components of the gain on sale of properties:
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||||||||
Proceeds from sale of properties – net
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$ | (1,043,717 | ) | $ | 0 | |||
Property and equipment, net of accumulated depreciation
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5,285,972 | 0 | ||||||
Deferred costs
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35,534 | 0 | ||||||
Other assets
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42,363 | 0 | ||||||
Cash held in escrow
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78,112 | 0 | ||||||
Accounts payable and other liabilities
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149,395 | 0 | ||||||
Due to general partners and affiliates
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(5,726 | ) | 0 | |||||
Due to local general partners and affiliates
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22,772 | 0 | ||||||
Mortgage payable
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(6,310,623 | ) | 0 | |||||
Accrued interest
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(27,714 | ) | 0 | |||||
Security deposits
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(42,250 | ) | 0 | |||||
* Cash and cash equivalents at end of period, includes cash and cash equivalents from discontinued operations of $103,701 and $0, respectively.
See accompanying notes to consolidated financial statements.
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- 5 -
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010
(Unaudited)
NOTE 1 – General
The consolidated financial statements include the accounts of Independence Tax Credit Plus L.P. II (the “Partnership”) and fourteen 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”), which is managed by an affiliate of Centerline Holding Company (“Centerline”), which is the ultimate parent of the manager of the general partner of 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 December 31. All subsidiaries have fiscal quarters ending September 30. Accounts of the subsidiaries have been adjusted for intercompany transactions from October 1 through December 31. The Partnership’s fiscal quarter ends December 31 in order to allow adequate time for the subsidiaries’ financial statements to be prepared and consolidated. All intercompany accounts and transactions with the subsidiary partnerships have been eliminated in consolidation.
In accordance with FASB Accounting Standards Codification (“ASC”) Topic 810, Noncontrolling Interests in Consolidated Financial Statements (“ASC 810”), loss (income) attributable to noncontrolling interests amounted to approximately $5,000, $6,000, $(916,000) and $22,000 for the three and nine months ended December 31, 2010 and 2009, respectively. 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, 2010.
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 December 31, 2010, the results of operations for the three and nine months ended December 31, 2010 and 2009 and its cash flows for the nine months ended December 31, 2010 and 2009. However, the operating results and cash flows for the nine months ended December 31, 2010 may not be indicative of the results for the year.
NOTE 2 – Related Party Transactions
An affiliate of the General Partner, Independence SLP L.P., has a .01% interest as a special limited partner in each of the subsidiary partnerships. An affiliate of the General Partner also has a minority interest in certain local partnerships.
A)
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Other Related Party Expenses
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The costs incurred to related parties for the three and nine months ended December 31, 2010 and 2009 were as follows:
Three Months Ended
December 31,
|
Nine months ended
December 31,
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||||||||||||
2010
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2009*
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2010
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2009*
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||||||||||
Partnership management fees (a)
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$
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114,150
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$
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136,500
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$
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352,650
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$
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409,500
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|||||
Expense reimbursement (b)
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25,906
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53,814
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113,535
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134,353
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|||||||||
Local administrative fee (c)
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6,500
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6,500
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19,500
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19,500
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|||||||||
Total general and administrative – General Partner
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146,556
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196,814
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485,685
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563,353
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|||||||||
Property management fees incurred to affiliates of the subsidiary partnerships’ general partners
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66,078
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64,761
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201,797
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197,852
|
|||||||||
Total general and administrative – related parties
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$
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212,634
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$
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261,575
|
$
|
687,482
|
$
|
761,205
|
|||||
* Reclassified for comparative purposes.
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- 6 -
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010
(Unaudited)
The costs incurred to related parties from discontinued operations for the three and nine months ended December 31, 2010 and 2009 were as follows:
Three Months Ended
December 31,
|
Nine months ended
December 31,
|
||||||||||||
2010
|
2009*
|
2010
|
2009*
|
||||||||||
Local administrative fees (c)
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$
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1,875
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$
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4,375
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$
|
8,750
|
$
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13,125
|
|||||
Total general and administrative – General Partner
|
1,875
|
4,375
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8,750
|
13,125
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|||||||||
Property management fees incurred to affiliates of the subsidiary partnerships’ general partners
|
-
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20,697
|
43,405
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63,436
|
|||||||||
Total general and administrative-related parties
|
$
|
1,875
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$
|
25,072
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$
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52,155
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$
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76,561
|
|||||
* Reclassified for comparative purpose.
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(a)
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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 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 will be 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 $6,083,000 and $5,877,000 were accrued and unpaid as of December 31, 2010 and March 31, 2010, respectively, and are included in the line item Due to general partners and affiliates in the consolidated balance sheets. Current year partnership management fees may be paid out of operating reserves or refinancing and sales proceeds. As such, the General Partner cannot demand payment of the deferred fees except as noted above.
|
(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. Expense reimbursements and asset monitoring fees owed to the General Partner and its affiliates amounting to approximately $39,000 and $477,000 were accrued and unpaid as of December 31, 2010 and March 31, 2010, respectively. The General Partner does not intend to demand payment of the deferred payables beyond the Partnership’s ability to pay them. The Partnership anticipates that these will be paid from working capital reserves or future sales proceeds.
|
(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. As of December 31, 2010 and March 31, 2010, the subsidiary partnerships owed approximately $404,000 and $381,000, respectively, of these fees to Independence SLP L.P. These fees have been deferred in certain cases and the Partnership anticipates that they will be paid from working capital reserves or future sales proceeds.
|
B)
|
Due to Local General Partners and Affiliates
|
Due to local general partners and affiliates at December 31, 2010 and March 31, 2010 consists of the following:
December 31,
2010
|
March 31,
2010
|
|||||||
Operating advances
|
$ | 189,599 | $ | 257,259 | ||||
Development fee payable
|
0 | 258,606 | ||||||
Construction costs payable
|
382,200 | 382,200 | ||||||
Management and other operating advances
|
(44,568 | ) | (83,130 | ) | ||||
Loans payable to local general partner and affiliates (a)
|
236,994 | 236,994 | ||||||
|
$ | 764,225 | $ | 1,051,929 | ||||
(a) Affordable Green Associates, L.P. borrowed monies from affiliates of the Local General Partners while the building was being constructed. Interest was accrued at rates from 8% to 11% during the construction period. The loans are now due on demand and do not accrue interest.
|
- 7 -
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010
(Unaudited)
Due to local general partners and affiliates at December 31, 2010 and March 31, 2010 included in the discontinued liabilities consists of the following:
December 31,
2010
|
March 31,
2010
|
|||||||
Development fee payable
|
$ | 258,606 | $ | 0 | ||||
Management and other operating advances
|
(100,310 | ) | 0 | |||||
|
$ | 158,296 | $ | 0 |
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 ASC 825 – “Financial Instruments” – Including an Amendment of ASC 320 – “Investments – Debt and Equity Securities”, 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 ASC 825.
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 December 31, 2010
|
At March 31, 2010
|
|||||||||||||||
Carrying
Amount |
Fair Value
|
Carrying
Amount |
Fair Value
|
|||||||||||||
LIABILITIES:
|
||||||||||||||||
Mortgage notes
|
$ | 44,298,887 | $ | 17,098,106 | $ | 51,101,479 | $ | 22,545,093 |
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 – Sale of Properties
The Partnership is in the process of developing a plan to dispose of all of its investments. During the nine months ended December 31, 2010, the Partnership has sold its limited partnership interest in one Local Partnership. As of December 31, 2010, the Partnership sold its limited partnership interests in three Local Partnerships. In addition, as of December 31, 2010, the Partnership has entered into agreements to sell its limited partnership interests in three Local Partnerships (see Note5). There can be no assurance as to when the Partnership will dispose of its remaining investments or the amount of proceeds which may be received. However, based on the historical operating results of the Local Partnerships and the current economic conditions, including changes in tax laws, it is unlikely that the proceeds from such sales received by the Partnership will be sufficient to return to the BACs holders their original investments. All gains and losses on sales are included in discontinued operations.
On July 30, 2010, the Partnership sold its limited partnership interest in Derby Run Associates (“Derby”) to an affiliate of the Local General Partner for a sales price of $1,045,822. The Partnership received $1,043,717 after the repayment of other liabilities of approximately $2,000. The sale resulted in a gain of approximately $1,777,000 resulting from the write-off of the deficit basis in the Local Partnership of approximately $733,000 and the $1,043,717 cash received from the sale, which was recorded during the quarter ended September 30, 2010.
- 8 -
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010
(Unaudited)
On March 10, 2010, the Partnership sold its limited partnership interest in Tasker Village Associates (“Tasker”) to an affiliate of the Local General Partner for a sales price of $20,000. The Partnership did not receive any cash from this sale after the repayment of other liabilities of $20,000. The sale resulted in a gain of approximately $2,361,000, resulting from the write-off of the deficit basis in the Local Partnership of the same amount at the date of the sale, which was recorded during the year ended March 31, 2010. An adjustment to the gain of approximately $39,000 was recorded during the quarter ended June 30, 2010, resulting in an overall gain of approximately $2,400,000. In addition, the sale resulted in a non-cash contribution to the Local Partnership from (i) the General Partner of approximately $28,000 as a result of the write-off of fees owed by the Local Partnership to an affiliate of the General Partner; and (ii) the Local General Partners of approximately $99,000 as a result of the write-off of fees owed by the Local Partnership to the Local General Partner.
NOTE 5 – Assets Held for Sale
On August 23, 2010, the Partnership entered into an assignment and assumption agreement to sell its limited partnership interest in Martha Bryant Manor, L.P. (“Martha Bryant”) to an unaffiliated third party purchaser for a sales price of $15,000. During the year ended March 31, 2010, in accordance with ASC 360, the Partnership deemed the building impaired and wrote it down to its fair value, which resulted in a loss on impairment of $2,875,000. As of June 30, 2010, Martha Bryant had property and equipment, at cost, of approximately $8,920,000, accumulated depreciation of approximately $5,484,000 and mortgage debt of approximately $7,426,000. The sale is expected to be consummated during the first quarter of 2011.
On August 23, 2010, the Partnership entered into an assignment and assumption agreement to sell its limited partnership interest in NLEDC, L.P. (“Paradise Arms”) to an unaffiliated third party purchaser for a sales price of $15,000. During the year ended March 31, 2010, in accordance with ASC 360, the Partnership deemed the building impaired and wrote it down to its fair value, which resulted in a loss on impairment of $1,769,000. As of June 30, 2010, Paradise Arms had property and equipment, at cost, of approximately $4,692,000, accumulated depreciation of approximately $2,996,000 and mortgage debt of approximately $4,146,000. The sale is expected to be consummated during the first quarter of 2011.
On August 23, 2010, the Partnership entered into an assignment and assumption agreement to sell its limited partnership interest in P&P Home for the Elderly, L.P. (“P&P”) to an unaffiliated third party purchaser for a sales price of $50,000. During the year ended March 31, 2010, in accordance with ASC 360, the Partnership deemed the building impaired and wrote it down to its fair value, which resulted in a loss on impairment of $3,587,000. As of June 30, 2010, P&P had property and equipment, at cost, of approximately $6,461,00, accumulated depreciation of approximately $4,352,000 and mortgage debt of approximately $6,129,000. The sale is expected to be consummated during the first quarter of 2011.
NOTE 6 – Discontinued Operations
The following table summarizes the financial position of the Local Partnerships that are classified as discontinued operations because the respective Local Partnerships were classified as assets held for sale or were sold. As of December 31, 2010, Derby, which was sold during the nine months ended December 31, 2010, and Martha Bryant, Paradise Arms and P&P, which were classified as assets held for sale, were all classified as discontinued operations on the consolidated balance sheets. As of March 31, 2010, no properties were classified as discontinued operations on the consolidated balance sheets.
- 9 -
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010
(Unaudited)
Consolidated Balance Sheets:
December 31,
2010
|
March 31,
2010
|
|||||||
Assets
|
||||||||
Property and equipment – less accumulated depreciation of $12,633,340 and $ 0, respectively
|
$ | 7,521,119 | $ | 0 | ||||
Cash and cash equivalents
|
103,701 | 0 | ||||||
Cash held in escrow
|
536,994 | 0 | ||||||
Deferred costs, net of accumulated amortization of $198,279 and $0, respectively
|
21,331 | 0 | ||||||
Other assets
|
32,269 | 0 | ||||||
Total assets
|
$ | 8,215,414 | $ | 0 | ||||
Liabilities
|
||||||||
Mortgage notes payable
|
$ | 17,700,644 | $ | 0 | ||||
Accounts payable
|
41,828 | 0 | ||||||
Accrued interest payable
|
6,292,638 | 0 | ||||||
Security deposit payable
|
99,824 | 0 | ||||||
Due to local general partners and affiliates
|
158,296 | 0 | ||||||
Due to general partners and affiliates
|
98,625 | 0 | ||||||
Total liabilities
|
$ | 24,391,855 | $ | 0 |
- 10 -
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010
(Unaudited)
The following table summarizes the results of operations of the Local Partnerships that were classified as discontinued operations. For the three and nine months ended December 31, 2010, Tasker, which was sold on March 31, 2010, Derby, which was sold during the nine months ended December 31, 2010, and Martha Bryant, Paradise Arms and P&P, which were classified as assets held for sale, were all classified as discontinued operation in the consolidated statements of operations. For the three and nine months ended December 31, 2009, Creative Choice Homes VI, Ltd. and Tasker, which were sold during the year ended March 31, 2010, and Derby, Martha Bryant, Paradise Arms and P&P, in order to present comparable results to the nine months ended December 31, 2010, were all classified as discontinued operations in the consolidated statements of operations.
Consolidated Statements of Discontinued Operations:
Three Months Ended
December 31,
|
Nine Months Ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
||||||||||||||||
Rental income
|
$ | 453,011 | $ | 1,046,783 | $ | 2,240,882 | $ | 3,120,953 | ||||||||
Other
|
5,714 | 59,447 | 106,963 | 156,429 | ||||||||||||
Gain on sale of properties (Note 4)
|
0 | 0 | 1,815,882 | 0 | ||||||||||||
Total revenue
|
458,725 | 1,106,230 | 4,163,727 | 3,277,382 | ||||||||||||
Expenses
|
||||||||||||||||
General and administrative
|
146,312 | 251,207 | 617,912 | 807,374 | ||||||||||||
General and administrative-related parties (Note 2)
|
1,875 | 25,072 | 52,155 | 76,561 | ||||||||||||
Repairs and maintenance
|
93,980 | 189,658 | 480,858 | 542,319 | ||||||||||||
Operating and other
|
64,477 | 105,941 | 235,079 | 307,024 | ||||||||||||
Taxes
|
3,780 | 57,985 | 86,607 | 186,797 | ||||||||||||
Insurance
|
18,376 | 47,594 | 73,856 | 161,588 | ||||||||||||
Interest
|
180,861 | 329,164 | 763,777 | 973,034 | ||||||||||||
Depreciation and amortization
|
116,204 | 358,646 | 482,296 | 1,077,942 | ||||||||||||
Total expenses
|
625,865 | 1,365,267 | 2,792,540 | 4,132,639 | ||||||||||||
(Loss) income from discontinued operations
|
$ | (167,140 | ) | $ | (259,037 | ) | $ | 1,371,187 | $ | (855,257 | ) | |||||
Noncontrolling interest in loss (income) of subsidiaries from discontinued operations
|
1,674 | 2,586 | (928,992 | ) | 8,547 | |||||||||||
(Loss) income from discontinued operation – Independence Tax Credit Plus LP II
|
$ | (165,466 | ) | $ | (256,451 | ) | $ | 442,192 | $ | (846,710 | ) | |||||
Loss – limited partners from discontinued operations
|
$ | (163,811 | ) | $ | (253,886 | ) | $ | 437,773 | $ | (838,243 | ) | |||||
Number of BACs outstanding
|
58,928 | 58,928 | 58,928 | 58,928 | ||||||||||||
(Loss) income from discontinued operations per BAC
|
$ | (2.78 | ) | $ | (4.31 | ) | $ | 7.43 | $ | (14.22 | ) |
Nine Months Ended
December 31,
|
||||||||
2010
|
2009
|
|||||||
\
Cash flows from Discontinued Operations:
Net cash used in operating activities
|
$ | (894,652 | ) | $ | 0 | |||
Net cash provided by investing activities
|
$ | 1,085,266 | $ | 0 | ||||
Net cash used in financing activities
|
$ | (141,315 | ) | $ | 0 |
- 11 -
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010
(Unaudited)
NOTE 7 – Commitments and Contingencies
a)
|
Going Concern Consideration
|
At December 31, 2010, the Partnership’s liabilities exceeded assets by $44,872,099 and for the nine months ended December 31, 2010 incurred net loss of $(460,649), including gain on sale of properties of $1,815,882. These factors raise substantial doubt about the Partnership’s ability to continue as a going concern. As discussed in Note 2, partnership management fees of approximately $6,083,000 will be payable out of sales or refinancing proceeds only to the extent of available funds after payments on all other Partnership liabilities have been made and after the Limited Partners have received a 10% return on their capital contributions. As such, the General Partner cannot demand payment of these deferred fees beyond the Partnership’s ability to pay them. In addition, where the Partnership has unpaid partnership management fees related to sold properties, such management fees are written off and recorded as capital contributions.
All of the mortgage payable balance of $44,298,887 and the accrued interest payable balance of $24,699,066 is of a nonrecourse nature and secured by the respective properties. The Partnership is currently in the process of developing a plan to dispose of all of its investments. Historically, the mortgage notes and accrued interest thereon have been assumed by the buyer in instances of sales of the Partnership’s interest or have been paid off from sales proceeds in instances of sales of the property. In most instances when the Partnership’s interest was sold and liabilities were assumed, the Partnership recognized a gain from the sale. The Partnership owns the limited partner interest in all its investments, and as such has no financial responsibility to fund operating losses incurred by the Local Partnerships. The maximum loss the Partnership would incur is its net investment in the respective Local Partnerships and the potential recapture of the Tax Credits if the investment is lost before the expiration of the Compliance Period. Dispositions of any investment in a Local Partnership should not impact the future results of operations, liquidity, or financial condition of the Partnership.
The Partnership has working capital reserves of approximately $848,000 at December 31, 2010. Such amount is considered sufficient to cover the Partnership’s day to day operating expenses, excluding fees to the General Partner, for at least the next year. The Partnership’s operating expenses, excluding the Local Partnerships’ expenses and related party expenses amounted to approximately $105,000 for the nine months ended December 31, 2010.
Management believes the above mitigating factors enable the Partnership to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
b)
|
Subsidiary Partnerships – Going Concern
|
Mansion Court Associates (“Mansion Court”)
Mansion Court had a net loss of $55,994 for the nine months ended September 30, 2010. Mansion Court has sustained operating losses over the years and has not generated sufficient cash flow from operations to meet its obligations. 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 December 31, 2009, the project had 22 out of 30 vacant units. 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. These options include assistance from local government housing agencies and could include transfer of ownership.
The Partnership’s investment in Mansion Court at December 31, 2010 and March 31, 2010 was reduced to zero as a result of prior years’ losses and the noncontrolling interest balance was $69,000 at each date. Mansion Court’s net loss after noncontrolling interest amounted to approximately $55,000 and $48,000 for the nine months ended December 31, 2010 and 2009, 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 $177,672 and $200,126 and $569,249 and $599,041 for the three and nine months ended December 31, 2010 and 2009, respectively. Of these fees $66,078 and $85,458 and $245,202 and $261,288 were earned by affiliates of the Local General Partners for the three and nine months ended December 31, 2010 and 2009, respectively, which include $0 and $20,697 and $43,405 and $63,436 of fees relating to discontinued operations for the three and nine months ended December 31, 2010 and 2009, respectively.
- 12 -
INDEPENDENCE TAX CREDIT PLUS L.P. II
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010
(Unaudited)
f)
|
Other
|
The Partnership is subject to the risks incident to potential losses arising from the management and ownership of improved real estate. The Partnership can also be affected by poor economic conditions generally; however, no more than 39% of the properties are located in any single state. There are also substantial risks associated with owning properties receiving government assistance; for example, the possibility that Congress may not appropriate funds to enable HUD to make rental assistance payments. HUD also restricts annual cash distributions to partners based on operating results and a percentage of the owner’s equity contribution. The Partnership cannot sell or substantially liquidate its investments in subsidiary partnerships during the period that the subsidy agreements are in existence without HUD’s approval. Furthermore, there may not be market demand for apartments at full market rents when the rental assistance contracts expire.
The Partnership and BACs holders began to recognize Tax Credits with respect to a property when the Credit Period for such Property (generally ten years from the date of investment or, if later, the date the Property is leased to qualified tenants) commenced. 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. Tax Credits not recognized in the first three years were recognized in the 11th through 13th years. As of December 31, 2007, all the Local Partnerships had completed their Credit Periods. 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. At December 31, 2008, Mansion Court was required to recapture $190,635 of low-income housing tax credits.
g)
|
Subsequent Events
|
There were no events or transactions occurring during the subsequent event reporting period which require recognition or disclosure in the financial statements.
- 13 -
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
As of December 31, 2010, the Partnership has invested all of its net proceeds in fifteen Local Partnerships. Approximately $265,000 of the purchase price remains to be paid to the Local Partnerships (including approximately $6,000 being held in escrow at the Partnership level).
The Partnership is in the process of developing a plan to dispose of all of its investments. During the nine months ended December 31, 2010, the Partnership sold its limited partnership interest in one Local Partnership. As of December 31, 2010, the Partnership has sold its limited partnership interests in three Local Partnerships. In addition, as of December 31, 2010, the Partnership has entered into agreements to sell its limited partnership interests in three Local Partnerships (see Note 5 in Item 1). There can be no assurance as to when the Partnership will dispose of its remaining investments or the amount of proceeds which may be received. However, based on the historical operating results of the Local Partnerships and the current economic conditions, including changes in tax laws, it is unlikely that the proceeds from such sales received by the Partnership will be sufficient to return to the BACs holders their original investments. All gains and losses on sales are included in discontinued operations.
Short-Term
The Partnership’s primary sources of funds included: (i) working capital reserves; (ii) interest earned on the working capital reserves; (iii) cash distributions from operations of the Local Partnerships; and (iv) sales proceeds and distributions. Such funds are available to meet the obligations of the Partnership. The Partnership does not anticipate providing cash distributions to BACs holders in circumstances other than refinancing or sales. Cash distributions received from the Local Partnerships, as well as the working capital reserves referred to above, will be used towards the future operating expenses of the Partnership. During the nine months ended December 31, 2010 and 2009, the amounts received from operations of the Local Partnerships were approximately $15,000 and $145,000, respectively. In addition, during the nine months ended December 31, 2010 and 2009, distributions to the Partnership from sales proceeds amounted to approximately $1,046,000 and $0, respectively. The Partnership does not anticipate being able to make distributions sufficient to return to BACs holders their original capital contributions.
During the nine months ended December 31, 2010, cash and cash equivalents of the Partnership and its consolidated Local Partnerships increased approximately $365,000. This increase was due to cash provided by operating activities ($226,000), a decrease in cash held in escrow relating to investing activities ($28,000) and net proceeds from sale of properties ($1,044,000), which exceeded principal payments of mortgage notes ($492,000), purchases of property and equipment ($298,000), a decrease in capitalization of consolidated subsidiaries attributable to minority interest ($75,000) and the repayment of advances to local general partner and affiliates ($68,000). Included in the adjustment to reconcile the net loss to cash provided by operating activities is depreciation and amortization of approximately $1,595,000 and gain on sale of properties of approximately $1,816,000.
Total expenses from operations for the three and nine months ended December 31, 2010 and 2009 excluding depreciation and amortization, interest and general and administrative – related parties, totaled $1,450,893 and $1,357,866 and $4,670,588 and $4,285,303, respectively.
Accounts payable from operations as of December 31, 2010 and March 31, 2010 were $909,012 and $781,692, 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. Accounts payable from discontinued operations totaled $41,828 and $0 as of December 31, 2010 and March 31, 2010, respectively. Accrued interest payable from operations as of December 31, 2010 and March 31, 2010 was $18,406,428 and $23,334,820, respectively. Accrued interest payable from discontinued operations totaled $6,292,638 and $0 as of December 31, 2010 and March 31, 2010, respectively. Such amount 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 and which have 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.
Because the provisions of the secondary loans defer the payment of accrued interest of the respective Local Partnerships, and the General Partner continues to defer the payment of fees as discussed below and in Note 8 to the Financial Statements in Item 8, the Partnership (and the applicable Local Partnerships) believes it 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.
The Partnership has an unconsolidated working capital reserve of approximately $848,000 at December 31, 2010.
Long-Term
Partnership management fees owed to the General Partner amounting to approximately $6,083,000 and $5,877,000 were accrued and unpaid as of December 31, 2010 and March 31, 2010, respectively and are included in Due to General Partner and affiliates on the Consolidated Balance Sheets. Unpaid partnership management fees for any year are deferred without interest and will be payable out of sales or refinancing proceeds only to the extent of available funds after payments on all Partnership liabilities have been made other than to those owed to the General Partner and its affiliates, and after the Limited Partners have received a 10% return on their capital contributions.
All other amounts included in Due to General Partner and affiliates are expected to be paid, if at all, from working capital reserves. See Note 2 in Item 1 for further discussion of amounts due to the General Partner and its affiliates. The General Partner does not anticipate making any future advances of operating funds to any of the Local Partnerships in which the Partnership has invested. Even if a situation arose where the General Partner and its affiliates needed to but were not able to make operating advances in the future due to lack of funds, the only impact on the Partnership would be that it would lose its investment in that particular Local Partnership. The Partnership’s ability to continue its operations would not be affected.
- 14 -
Based on the foregoing, the Partnership’s going concern consideration is mitigated by factors as discussed in Note 6a in Item 1.
For a discussion of contingencies affecting certain Local Partnerships, see Results of Operations of Certain Local Partnerships, below. Since the maximum loss the Partnership would be liable for is its net investment in the respective subsidiary 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 may result in recapture of Tax Credits if the investment is lost before expiration of the Compliance Period.
Except as described above, 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 had originally invested the proceeds of its Offering in 15 Local Partnerships, all of which had their Tax Credits fully in place during the Credit Periods. As of December 31, 2007, all the Local Partnerships had completed their Credit Periods. 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. At December 31, 2008, Mansion Court Associates was required to recapture $190,635 of low-income housing tax credits.
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, 2010, 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 December 31, 2010.
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 ASC 825 – “Financial Instruments” – Including an Amendment of ASC 320 – “Investments – Debt and Equity Securities”, 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 ASC 825.
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 December 31, 2010
|
At March 31, 2010
|
|||||||||||||||
Carrying
Amount |
Fair Value
|
Carrying
Amount |
Fair Value
|
|||||||||||||
LIABILITIES:
|
||||||||||||||||
Mortgage notes
|
$ | 44,298,887 | $ | 17,098,106 | $ | 51,101,479 | $ | 22,545,093 |
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, 2010.
- 15 -
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) when the Property is considered to be impaired and the depreciated cost exceeds estimated fair value.
At the time management commits to a plan to dispose of a specific asset, said asset is adjusted to the lower of carrying amount or fair value less costs to sell. These assets are classified as property and equipment-held for sale and are not depreciated. Property and equipment that are held for sale are included in discontinued operations. There are three assets classified as property and equipment-held for sale as of December 31, 2010 (see Note 5 in Item 1).
During the nine months ended December 31, 2010, the Partnership has not recorded any loss on impairment of assets. Through December 31, 2010, the Partnership has recorded approximately $28,084,000 as an aggregate loss on impairment of property.
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.
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 nine months ended December 31, 2010 and 2009 consisted primarily of the results of the Partnership’s investment in Local Partnerships. The following discussion excludes the Partnership’s results of its discontinued operations, which are not reflected below.
Rental income decreased approximately 4% and increased approximately 2% for the three and nine months ended December 31, 2010, respectively, as compared to the corresponding periods in 2009. The decrease for the three month period is primarily due to an underaccrual of HAP subsidy income during the second quarter ended in 2009. The increase for the nine month period is primarily due to an increase in Section 8 rental subsidy income offset by increased vacancy and bad debt at two Local Partnerships and an increased HAP subsidy at a third Local Partnership.
General and administrative increased approximately $244,000 for the nine months ended December 31, 2010 as compared to the corresponding period in 2009, primarily due to an increase in bad debt expense, incentive management fees and payroll costs at one Local Partnership, an increase in social programs, miscellaneous administrative expenses, payroll costs and management fees at a second Local Partnership, an increase in miscellaneous administrative costs and payroll costs at a third Local Partnership and an increase in recruiting fees and other administrative costs at a fourth Local Partnership.
General and administrative-related parties decreased approximately $49,000 and $74,000 for the three and nine months ended December 31, 2010, respectively, as compared to the corresponding periods in 2009, primarily due to a decrease in partnership management fees resulting from the sale of properties and a decrease in expense reimbursements at the Partnership level.
Repairs and maintenance increased approximately $143,000 and $342,000 for the three and nine months ended December 31, 2010, respectively, as compared to the corresponding periods in 2009, primarily due to an increase in painting and boiler costs at one Local Partnership, an increase in exterminating costs, decorating costs and repair materials at a second Local Partnership, an increase in landscaping, carpet repairs, painting and roof repairs at a third Local Partnership and an increase in general repairs and maintenance at a fourth Local Partnership.
Real estate tax decreased approximately $53,000 and $66,000 for the three and nine months ended December 31, 2010, respectively, as compared to corresponding periods in 2009, primarily due to a reduction in the 2010 real estate tax assessments at two Local Partnerships.
Insurance decreased approximately $46,000 and $119,000 for the three and nine months ended December 31, 2010, respectively, as compared to the corresponding periods in 2009, primarily due to a decrease in insurance premiums at three Local Partnerships.
- 16 -
Depreciation and amortization expense decreased approximately $146,000 and $386,000 for the three and nine months ended December 31, 2010, respectively, as compared to the corresponding periods in 2009, primarily due to the reduction in carrying amounts relating to impairment of assets recorded during the year ended March 31, 2010 at six Local Partnerships.
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, 2010, 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 December 31, 2010.
The Partnership does not have any other market risk sensitive instruments.
Item 4. 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) Changes in Internal Controls over Financial Reporting. During the period ended December 31, 2010, 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.
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PART II. OTHER INFORMATION
Item 1.
|
Legal Proceedings. – None
|
|
Item 1A.
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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.
|
(Removed and reserved)
|
|
Item 5.
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Other Information. – None
|
|
Item 6.
|
Exhibits.
|
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(3A)
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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)+
|
||
(32.2)+
|
||
*
|
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). | |
+
|
Filed herewith.
|
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INDEPENDENCE TAX CREDIT PLUS L.P. II
(Registrant)
By:
|
RELATED INDEPENDENCE ASSOCIATES L.P.,
|
|||||||
General Partner
|
||||||||
By:
|
INDEPENDENCE ASSOCIATES GP LLC,
|
|||||||
General Partner
|
||||||||
Date:
|
February 8, 2011
|
By:
|
/s/ Robert A. Pace
|
|||||
Robert A. Pace
|
||||||||
Chief Financial Officer and Principal Accounting Officer
|
||||||||
Date:
|
February 8, 2011
|
By:
|
/s/ Andrew J. Weil
|
|||||
Andrew J. Weil
|
||||||||
President and Chief Executive Officer
|
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