Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - Lease Equity Appreciation Fund II, L.P.ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - Lease Equity Appreciation Fund II, L.P.ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - Lease Equity Appreciation Fund II, L.P.ex31_1.htm
EXCEL - IDEA: XBRL DOCUMENT - Lease Equity Appreciation Fund II, L.P.Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - Lease Equity Appreciation Fund II, L.P.ex32_2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
_________________________
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

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

For the transition period from   to  
Commission file number 333-116595
 
_________________________
 
LEASE EQUITY APPRECIATION FUND II, L.P.
(Exact name of registrant as specified in its charter)
 
_________________________
 
Delaware
20-1056194
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

110 South Poplar Street, Suite 101, Wilmington Delaware 19801
(Address of principal executive offices)

(800) 819-5556
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes     ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  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. (Check one):
 
Large accelerated filer  ¨
 
Accelerated filer  
o
       
Non-accelerated filer    ¨  (Do not check if a smaller reporting company)
 
Smaller Reporting Company 
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨ Yes    x No
 
There is no public market for the Registrant’s securities.
 


 
 

 
 
LEASE EQUITY APPRECIATION FUND II, L.P.
INDEX TO ANNUAL REPORT
ON FORM 10-Q

     
PAGE
PART I
 
FINANCIAL INFORMATION
 
ITEM 1.
  3
    3
    4
    5
    6
    7
ITEM 2.
  17
ITEM 3.
  26
ITEM 4.
  27
       
PART II
 
OTHER INFORMATION
 
ITEM 6.
  28
       
30

 
2


PART1. FINANCIAL INFORMATION
 
ITEM I – FINANCIAL STATEMENTS
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)

   
September 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Cash
  $ 29     $ 239  
Restricted cash
    12,965       15,870  
Accounts receivable
    17       65  
Investment in leases and loans, net
    48,668       86,922  
Deferred financing costs, net
    1,508       2,230  
Other assets
    167       272  
Total assets
  $ 63,354     $ 105,598  
                 
LIABILITIES AND PARTNERS’ DEFICIT
               
Liabilities:
               
Debt
  $ 46,162     $ 82,637  
Note payable - related party
    7,889       7,988  
Accounts payable and accrued expenses
    456       317  
Other liabilities
    361       535  
Derivative liabilities, at fair value
    1,040       2,318  
Due to affiliates
    17,156       17,230  
Total liabilities
    73,064       111,025  
                 
Commitments and contingencies (Note 11)
               
                 
Partners’ Deficit:
               
General partner
    (593 )     (546 )
Limited partners
    (7,530 )     (2,818 )
Accumulated other comprehensive loss
    (1,587 )     (2,063 )
Total partners’ deficit
    (9,710 )     (5,427 )
Total liabilities and partners' deficit
  $ 63,354     $ 105,598  


The accompanying notes are an integral part of these consolidated financial statements.

 
3


LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except unit and per unit data)
(Unaudited)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenues:
                       
Interest on equipment financings
  $ 1,006     $ 2,411     $ 4,067     $ 8,130  
Rental income
    176       346       668       1,318  
Gains/(losses) on sale of equipment and lease dispositions, net
    (18 )     107       (288 )     (316 )
Other income
    134       315       601       1,554  
      1,298       3,179       5,048       10,686  
                                 
Expenses:
                               
Interest expense
    605       1,796       2,071       6,735  
Loss on derivative activities
    216       -       708       -  
Interest expense - related party
    203       245       672       526  
Depreciation on operating leases
    133       272       481       1,026  
Provision for credit losses
    504       1,652       3,635       6,062  
General and administrative expenses
    229       288       806       1,310  
Administrative expenses reimbursed to affiliate
    168       335       535       1,297  
Management fees to affiliate
    -       -       -       (215 )
      2,058       4,588       8,908       16,741  
Net loss
  $ (760 )   $ (1,409 )   $ (3,860 )   $ (6,055 )
Net loss allocated to limited partners
  $ (752 )   $ (1,395 )   $ (3,821 )   $ (5,994 )
                                 
Weighted average number of limited partner units outstanding during the period
    592,809       592,809       592,809       592,809  
Net loss per weighted average limited partner unit
  $ (1.27 )   $ (2.35 )   $ (6.45 )   $ (10.11 )


The accompanying notes are an integral part of these consolidated financial statements.

 
4


LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Consolidated Statement of Changes in Partners’ Deficit
(In thousands, except unit data)
(Unaudited)

   
General
Partner
   
Limited Partners
   
Accumulated
Other
Comprehensive
   
Total
Partners’
   
Comprehensive
 
   
Amount
   
Units
   
Amount
   
(Loss) Income
   
Deficit
   
(Loss) Income
 
                                     
Balance, January 1, 2011
  $ (546 )     592,809     $ (2,818 )   $ (2,063 )   $ (5,427 )      
Cash distributions
    (8 )     -       (891 )     -       (899 )      
Net loss
    (39 )     -       (3,821 )     -       (3,860 )   $ (3,860 )
Amortization of net loss on financial derivatives
    -       -       -       476       476       476  
Balance, September 30, 2011
  $ (593 )     592,809     $ (7,530 )   $ (1,587 )   $ (9,710 )   $ (3,384 )


The accompanying notes are an integral part of this consolidated financial statement.

 
5


LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss
  $ (3,860 )   $ (6,055 )
Adjustments to reconcile net loss to net cash provided by (used in) operating  activities:
               
Losses on sale of equipment and lease dispositions, net
    288       316  
Depreciation on operating leases
    481       1,026  
Provision for credit losses
    3,635       6,062  
Amortization of deferred financing costs
    802       1,145  
Net gain on derivative activities
    (802 )     (286 )
Changes in operating assets and liabilities:
               
Accounts receivable
    48       8  
Other assets
    105       591  
Accounts payable and accrued expenses, and other liabilities
    (35 )     (323 )
Due to affiliates
    (74 )     (4,342 )
Net cash provided by (used in) operating activities
    588       (1,858 )
                 
Cash flows from investing activities:
               
Purchases of leases and loans
    -       (7,777 )
Proceeds from leases and loans
    33,983       55,397  
Security deposits returned
    (133 )     (487 )
Net cash provided by investing activities
    33,850       47,133  
                 
Cash flows from financing activities:
               
Borrowings of debt
    -       6,735  
Repayment of debt
    (36,475 )     (59,198 )
Borrowings - note payable - related party
    -       8,000  
Repayments - note payable - related party
    (99 )     (8 )
Decrease in restricted cash
    2,905       2,315  
Increase in deferred financing costs
    (80 )     (905 )
Cash distributions to partners
    (899 )     (2,172 )
Net cash used in financing activities
    (34,648 )     (45,233 )
                 
(Decrease) increase in cash
    (210 )     42  
Cash, beginning of period
    239       10  
Cash, end of period
  $ 29     $ 52  


The accompanying notes are an integral part of these consolidated financial statements.

 
6


LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
September 30, 2011
(Unaudited)

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

Lease Equity Appreciation Fund II, L.P. (“LEAF II” or the “Fund”) is a Delaware limited partnership formed on March 30, 2004 by its General Partner, LEAF Financial Corporation (the “General Partner”). The General Partner manages the Fund. The General Partner is a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of October 13, 2006, the Fund raised $60.0 million by selling 600,000 of its limited partner units. It commenced operations in April 2005.

The Fund is expected to have a nine-year life, consisting of an offering period of up to two years, a five-year reinvestment period and a subsequent maturity period of two years, during which the Fund’s leases and secured loans will either mature or be sold. In the event the Fund is unable to sell its leases and secured loans during the maturity period, the Fund is expected to continue to return capital to its partners as those leases and loans mature. Substantially all of the Fund’s leases and loans mature by the end of 2014. The Fund expects to enter its maturity period beginning in October 2011. Contractually, the Fund will terminate on December 31, 2029, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement (the Partnership Agreement).

The Fund acquires diversified portfolios of equipment to finance to end users throughout the United States as well as the District of Columbia and Puerto Rico. The Fund also acquires existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily an affiliate of its General Partner. The primary objective of the Fund is to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.

As of September 30, 2011, in addition to its 1% general partnership interest, the General Partner also had invested $0.9 million for a 1.6% limited partnership interest in the Fund.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Fund and its wholly-owned subsidiaries, LEAF Fund II, LLC and LEAF II Receivables Funding, LLC.  All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited financial statements reflect all adjustments that are, in the opinion of management, of a normal and recurring nature and necessary for a fair statement of the Fund’s financial position as of September 30, 2011, and the results of its operations and cash flows for the periods presented. The results of operations for the three months ended September 30, 2011 are not necessarily indicative of results of the Fund’s operations for the 2011 calendar year. The Fund has evaluated subsequent events through the date the financial statements were issued. The financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. These interim financial statements should be read in conjunction with the Fund’s financial statements and notes thereto presented in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on April 14, 2011.

Use of Estimates

Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value and effectiveness of interest rate swaps. The Fund bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Investments in Leases and Loans

The Fund’s investments in leases and loans consist of direct financing leases, operating leases and loans.

Direct Financing Leases. Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable plus the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum lease payments plus the estimated unguaranteed residual value over the cost of the related equipment.
 
 
7

 
Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.

Operating Leases. Leases not meeting the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis. Generally, during the lease terms of existing operating leases, the Fund will not recover all of the cost and related expenses of its rental equipment and, therefore, it is prepared to remarket the equipment in future years. The Fund’s policy is to review, on a quarterly basis, the expected economic life of its rental equipment in order to determine the recoverability of its undepreciated cost. The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds such value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment. There were no write-downs of equipment during each of the nine month periods ended September 30, 2011 and 2010.

Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the related equipment. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.

Allowance for credit losses. The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends, and equipment finance portfolio characteristics, adjusted for expected recoveries. In evaluating historic performance, the Fund performs a migration analysis, which estimates the likelihood that an account will progress through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due, any remaining balance is fully-reserved less an estimated recovery amount.  Generally, the account is then charged-off and referred to our internal recovery group consisting of a team of collectors. The Fund’s policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote. Income is not recognized on leases and loans when a default on monthly payment exists for a period of 90 days or more. Income recognition resumes when a lease or loan becomes less than 90 days delinquent. Fees from delinquent payments are recognized when received and are included in other income.

Derivative Instruments

The Fund recognizes all derivatives at fair value as either assets or liabilities in the Consolidated Balance Sheets. The accounting for subsequent changes in the fair value of these derivatives depended on whether the derivative had been designated and qualified for hedge accounting treatment pursuant to U. S. GAAP.

Prior to October 1, 2010, the Fund entered into derivative contracts, including interest rate swaps, substantially all of which were accounted for as cash flow hedges.  Under hedge accounting, the effective portion of the overall gain or loss on a derivative designated as a cash flow hedge was reported in accumulated other comprehensive income on the Consolidated Balance Sheets and was then reclassified into earnings as an adjustment to loss on derivative activities over the term of the related borrowing.

Effective October 1, 2010, the Fund discontinued the use of hedge accounting. Therefore, any subsequent changes in the fair value of derivative instruments, including those that had previously been accounted for under hedge accounting, and periodic settlements of contracts, are recognized immediately in loss on derivative activities on the accompanying Consolidated Statements of Operations. While the Fund will continue to use derivative financial instruments to reduce exposure to changing interest rates, this accounting change may create volatility in the Fund’s results of operations, as the fair value of Fund’s derivative financial instruments change.
 
 
8

 
For the forecasted transactions that are probable of occurring, the derivative gain or loss remaining in accumulated other comprehensive income as of  September 30, 2011 is being reclassified into earnings as an adjustment to loss on derivative activities over the terms of the related forecasted borrowings, consistent with hedge accounting treatment. In the event that the related forecasted borrowing is no longer probable of occurring, the related gain or loss in accumulated other comprehensive income will be recognized in earnings immediately.

Recent Accounting Standards

Accounting Standards Recently Adopted

Troubled Debt Restructurings - In July 2010, the FASB issued guidance that requires the disclosure of more detailed information on the nature and extent of troubled debt restructurings and their effect on the allowance for loan and lease losses.  This guidance was effective for the Fund for the period ended September 30, 2011.  The Fund has provided the required disclosures in the notes to its consolidated financial statements.

Accounting Standards Issued But Not Yet Effective

The Financial Accounting Standards Board (“FASB”) has issued the following guidance that is not yet effective for the Fund as of September 30, 2011:

Comprehensive Income - In June 2011, the FASB issued an amendment to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. This guidance will become effective for the Fund beginning January 1, 2012.  The Fund is currently evaluating the impact this amendment will have, if any, on its financial statements.

Fair Value Measurements - In May 2011, the FASB issued an amendment to revise the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the current requirements. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements, such as specifying that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements such as specifying that, in the absence of a Level 1 input, a reporting entity should apply premiums or discounts when market participants would do so when pricing the asset or liability. This guidance will become effective for the Fund beginning January 1, 2012.  The Fund is currently evaluating the impact this amendment will have, if any, on its financial statements.
 
 
NOTE 3 – SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosure of cash flow information is as follows (in thousands):
 
 
9

 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Cash paid for:
                       
Interest
  $ 388     $ 611     $ 1,286     $ 1,945  
 
NOTE 4 – INVESTMENT IN LEASES AND LOANS

The Fund’s investment in leases and loans, net, consists of the following (in thousands):

   
September 30,
   
December 31,
 
   
2011
   
2010
 
Direct financing leases (a)
  $ 32,720     $ 63,493  
Loans (b)
    16,744       26,775  
Operating leases
    434       1,974  
      49,898       92,242  
Allowance for credit losses
    (1,230 )     (5,320 )
    $ 48,668     $ 86,922  

(a)
The Fund’s direct financing leases are for initial lease terms generally ranging from 24 to 108 months.
(b)
The interest rates on loans generally range from 6% to 14%.

The components of direct financing leases and loans are as follows (in thousands):

   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
Leases
   
Loans
   
Leases
   
Loans
 
Total future minimum lease payments
  $ 34,798     $ 18,990     $ 68,308     $ 31,010  
Unearned income
    (3,449 )     (2,128 )     (7,139 )     (4,106 )
Residuals, net of unearned residual income (a)
    2,017       -       3,080       -  
Security deposits
    (646 )     (118 )     (756 )     (129 )
    $ 32,720     $ 16,744     $ 63,493     $ 26,775  

(a)
Unguaranteed residuals for direct financing leases represent the estimated amounts recoverable at lease termination from lease extensions or disposition of the equipment.

The Fund’s investment in operating leases, net, consists of the following (in thousands):

   
September 30,
   
December 31,
 
   
2011
   
2010
 
Equipment
  $ 1,947     $ 6,714  
Accumulated depreciation
    (1,510 )     (4,760 )
Security deposits
    (3 )     20  
    $ 434     $ 1,974  

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY

The following table is an age analysis of the Fund’s receivables from leases and loans (presented gross of allowance for credit losses of $1.2 million and $5.3 million) as of September 30, 2011 and December 31, 2010, respectively (in thousands):
 
 
10

 
   
September 30, 2011
   
December 31, 2010
 
Age of receivable
 
Investment in leases and loans
   
%
   
Investment in leases and loans
   
%
 
Current
  $ 47,038       94.3 %   $ 81,739       88.6 %
Delinquent:
                               
31 to 91 days past due
    1,345       2.7 %     4,109       4.5 %
Greater than 91 days (a)
    1,515       3.0 %     6,394       6.9 %
                                 
    $ 49,898       100.0 %   $ 92,242       100.0 %
 
(a) Balances in this age category are collectivelly evaluated for impairment.
 
The Fund had $1.5 million and $6.4 million of leases and loans on nonaccrual status as of September 30, 2011 and December 31, 2010, respectively.  The credit quality of the Fund’s investment in leases and loans as of September 30, 2011 is as follows (in thousands):

   
September 30, 2011
   
December 31, 2010
 
Performing
  $ 48,383     $ 85,848  
Nonperforming
    1,515       6,394  
                 
    $ 49,898     $ 92,242  

The following table summarizes the annual activity in the allowance for credit losses (in thousands):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Allowance for credit losses, beginning of year
  $ 2,850     $ 4,760     $ 5,320     $ 11,380  
Provision for credit losses
    504       1,652       3,635       6,062  
Charge-offs
    (2,707 )     (1,433 )     (9,123 )     (12,945 )
Recoveries
    583       361       1,398       843  
Allowance for credit losses, end of period (a)
  $ 1,230     $ 5,340     $ 1,230     $ 5,340  

(a) End of period balances were collectively evaluated for impairment.

Commercial financial receivables whose terms are modified are classified as troubled debt restructurings if the Fund grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring typically involve a temporary deferral of scheduled payments, an extension of a commercial financial receivable’s stated maturity date or a reduction in interest rate. Non-accrual troubled debt restructurings can be restored to accrual status if principal and interest payments, under the modified terms, become current subsequent to the modification. Troubled debt restructurings are included in the Fund’s migration analysis when evaluating the allowance for credit losses.

The following table presents troubled debt restructurings of the Fund and troubled debt restructurings that subsequently defaulted during the period ended September 30, 2011 (in thousands):
 
 
11

 
   
Modifications as of September 30, 2011
 
Troubled debt restructurings:
 
Number of Contracts
   
Pre-modification outstanding recorded investment
   
Post-modification outstanding recorded investment
 
                   
Finance leases and loans
    31     $ 1,946     $ 1,557  
Operating leases
    -       -       -  
                         
Troubled debt restructurings that subsequently defaulted:
 
Number of Contracts
   
Recorded investment
         
                         
Finance leases and loans
    5     $ 66          
Operating leases
    -       -          

NOTE 6 – DEFERRED FINANCING COSTS

As of September 30, 2011 and December 31, 2010, deferred financing costs include $1.5 million and $2.2 million, respectively, of unamortized deferred financing costs which are being amortized over the terms of the estimated useful life of the related debt. Accumulated amortization as of September 30, 2011 and December 31, 2010 was $4.5 million and $3.8 million, respectively. Estimated amortization expense of the Fund’s existing deferred financing costs for each of the three succeeding annual periods ending September 30 are as follows (in thousands):

September 30, 2012
  $ 771  
September 30, 2013
    681  
September 30, 2014
    56  
    $ 1,508  

NOTE 7 – DEBT AND NOTE PAYABLE TO RELATED PARTY

The Fund’s debt consists of the following (in thousands):

       
September 30, 2011
       
 
Type
Maturity Date
 
Amount
Outstanding
   
Interest rate
per annum per
agreement
   
Interest rate
per annum
adjusted for
Swaps
   
December 31, 2010 Outstanding Balance
 
WestLB, AG
Revolving
June 30, 2010
  $ 30,704       (1 )     5.7 %   $ 53,174  
                                     
2007-01- Term Securitization - Class A-3 (2)
Term
July 2012
    929    
One month LIBOR + 0.20%
      5.6 %     14,934  
                                     
2007-01 Term Securitization - Class B (2)
Term
March 2015
    14,529       6.7 %     6.7 %     14,529  
                                     
        $ 46,162                     $ 82,637  

(1)
The Fund has no availability under this credit facility. Availability is subject to having eligible leases or loans (as defined in the respective agreement) to pledge as collateral, compliance with covenants and the borrowing base formula. This revolving line of credit is collateralized by specific lease receivables and related equipment, with a 1% credit reserve of the outstanding line of credit. Interest on borrowings prior to March 2009 are calculated at London Interbank Offered Rate (“LIBOR”) plus 1.20% per year. Borrowings under this facility after March 2009 are at a rate of LIBOR plus 2.50% per year. The Fund will continue to repay the principal and interest on any outstanding debt as payments are received on the underlying leases and loans pledged as collateral.  Recourse under this facility is limited to the amount of collateral pledged. As of September 30, 2011, $33.4 million of leases and loans and $2.8 million of restricted cash were pledged as collateral under this facility.
 
 
12

 
(2)
As of September 30, 2011, $16.2 million of leases and loans and $9.6 million of restricted cash were pledged as collateral under this securitization.

On April 7, 2011 the Fund was notified by WestLB that it was in default of its loan agreement due to three ongoing covenant breaches.  These breaches relate to the percentage of defaulted leases in its portfolio, as well as the percentage of defaulted leases in the overall lease portfolio serviced by the Fund’s General Partner.  As a result, the lender has advised the Fund that it has reserved, and continues to reserve, all of its rights and remedies provided for in the loan agreement including the right to (i) commence legal action to collect the obligations the Fund owes it, (ii) declare all amounts immediately due and payable; (iii) repossess the collateral pledged to it under the loan agreement; and (iv) increase the interest rate on outstanding borrowings.  If the lender chooses to repossess and sell the Fund’s collateral, such a sale of a portfolio could be at prices lower than its carrying value, which could result in losses and reduce the Fund’s income and distributions to its partners. As of September 30, 2011, the Fund was still in breach of several covenants under this facility.

Notwithstanding the foregoing, the Fund is not, nor has it been, delinquent on any monthly payments of principle and interest owed to the lender.  Moreover, while the Lender has reserved its rights, it has not initiated exercise of any of the foregoing remedies.

Note payable related party:  The Fund owes $7.9 million to Resource Capital Corporation (“RCC”) as of September 30, 2011, a related entity of the Fund through common management with RAI.  On June 3, 2011, the Fund paid a 1% fee to extend the note maturity date from March 4, 2011 to February 15, 2012 and to reduce the interest rate from 12% to 10% per year.  Monthly payments are made at approximately 0.3% of the outstanding principal and interest is payable quarterly.

Repayments:  Assuming that WestLB waives the aforementioned covenant breaches, estimated annual principal payments on the Fund’s aggregate borrowings over the next five annual periods ended September 30 are as follows (in thousands):

September 30, 2012
  $ 32,153  
September 30, 2013
    14,382  
September 30, 2014
    3,939  
September 30, 2015
    3,577  
    $ 54,051  

NOTE 8 – DERIVATIVE INSTRUMENTS

Since the Fund’s assets are structured on a fixed-rate basis, and funds borrowed through bank debt are obtained on a floating-rate basis, the Fund is exposed to interest rate risk if rates rise because it will increase the Fund’s borrowing costs. In addition, when the Fund acquires assets, it bases its pricing in part on the spread it expects to achieve between the interest rate it charges its customers and the effective interest cost the Fund will pay when it funds those loans. Increases in interest rates that increase the Fund’s permanent funding costs between the time the assets are originated and the time they are funded could narrow, eliminate or even reverse this spread.

To manage interest rate risk, the Fund employs a hedging strategy using derivative financial instruments such as interest rate swaps.  As discussed previously, effective October 1, 2010, the Fund has elected not to use hedge accounting.  The Fund does not use derivative financial instruments for trading or speculative purposes. The Fund manages the credit risk of possible counterparty default in these derivative transactions by dealing primarily with counterparties with investment grade ratings. The Fund has agreements with certain of its derivative counterparties that contain a provision where if the Fund defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Fund could also be declared in default on its derivative obligations. As of September 30, 2011, the Fund has not posted any collateral related to these agreements. If the Fund had breached any of these provisions at September 30, 2011, it could be required to settle its obligations under the agreements at their termination value of $1.1 million.
 
At September 30, 2011, the Fund has 20 interest rate swaps which terminate on various dates ranging from July 2013 to August 2015 which generally coincide with the maturity period of the portfolio of lease and loans.
 
 
13

 
In the fourth quarter of 2010, the Fund made an election to discontinue the use of hedge accounting for its derivative financial instruments resulting in an unrealized loss which is being amortized into earnings over the remaining term of the Fund’s debt. The election to discontinue hedge accounting may create future volatility in the Fund’s reported income statement results; however it is not expected to have any impact on the Fund’s future cash flows.  The following tables present the fair value of the Fund’s derivative financial instruments, as well as their classification on the consolidated balance sheet as of  September 30, 2011, and on the consolidated statement of operations for the three and nine months ended September 30, 2011 (in thousands):

   
Notional Amount
     
Fair Value
 
   
September 30,
     
September 30,
 
   
2011
 
Balance Sheet Location
 
2011
 
Derivatives not designated as hedging instruments
             
Interest rate swap contracts
  $ 30,165  
Derivative liabilities, at fair value
  $ 1,040  

   
Three Months
ended
September 30, 2011
   
Nine Months
ended
September 30, 2011
 
Amortization of loss on financial derivatives from accumulated other comphrensive income
  $ 254     $ 761  
Amortization of gain on financial derivatives from accumulated other comprehensive income
    (95 )     (285 )
Change in fair value of derivative activities
    (309 )     (1,278 )
Settlements on derivative activities
    366       1,510  
Loss on derivative activities
  $ 216       708  
 
As of September 30, 2011, $2.2 million of the unrealized loss remains in accumulated other comprehensive loss and approximately $968,000 is expected to be charged to earnings over the next 12 months.

Simultaneously with the 2007-01 term securitization, the Fund terminated the related interest rate swap agreements, resulting in a gain of $2.3 million which is being amortized as a reduction of loss on derivative activities over the original term of the terminated swap agreements. For the three months ended September 30, 2011 and 2010, $95,000, was recognized as a reduction of the loss on derivative activities. As of September 30, 2011, the unamortized gain balance of $600,000 is included in accumulated other comprehensive loss and approximately $382,000 is expected to be recorded to earnings over the next 12 months.

The following tables present the amount of loss recognized in accumulated other comprehensive income and location and amount of loss reclassified from accumulated other comprehensive income to earnings prior to the derivatives being de-designated for the three and nine month periods ending September 30, 2010:

   
Amount of Loss
 
Location and Amount of Loss Reclassified from
 
   
Recognized in OCI on Derivatives
 
Accumulated OCI into Income
 
Derivatives designated as hedging instruments
 
Three Months ended September 30, 2010
   
Nine Months ended September 30, 2010
     
Three Months ended September 30, 2010
   
Nine Months ended September 30, 2010
 
Interest rate swap contracts
  $ (506 )   $ (1,441 )
Interest expense
  $ (993 )   $ (3,640 )

NOTE 9 – FAIR VALUE MEASUREMENT

For cash, receivables and payables, the carrying amounts approximate fair values because of the short term maturity of these instruments. The carrying value of debt approximates fair market value since interest rates approximate current market rates.

It is not practicable for the Fund to estimate the fair value of the Fund’s leases and loans. They are comprised of a large number of transactions with commercial customers in different businesses, and may be secured by liens on various types of equipment and may be guaranteed by third parties and cross-collateralized. Any difference between the carrying value and fair value of each transaction would be affected by a potential buyer’s assessment of the transaction’s credit quality, collateral value, guarantees, payment history, yield, term, documents and other legal matters, and other subjective considerations. Value received in a fair market sale of a transaction would be based on the terms of the sale, the Fund’s and the buyer’s views of economic and industry conditions, the Fund’s and the buyer’s tax considerations, and other factors.
 
 
14

 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.

 
Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
 
 
 
Level 2 – Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

 
Level 3 – Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

The Fund employs a hedging strategy to manage exposure to the effects of changes in market interest rates. All derivatives are recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Because the Fund’s derivatives are not listed on an exchange, these instruments are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although the Fund has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, the Fund has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Fund has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Liabilities measured at fair value on a recurring basis included the following (in thousands):
 
   
Fair Value Measurements Using
   
Liabilities
 
   
Level 1
   
Level 2
   
Level 3
   
At Fair Value
 
Interest rate swaps at September 30, 2011
  $ -     $ (1,040 )   $ -     $ (1,040 )
Interest rate swaps at December 31, 2010
  $ -     $ (2,318 )   $ -     $ (2,318 )


NOTE 10 – CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH AFFILIATES

The Fund relies on the General Partner and its affiliates to manage the Fund’s operations and pays the General Partner or its affiliates fees to manage the Fund in accordance with the Partnership Agreement. The following is a summary of fees and costs of services and materials charged by the General Partner or its affiliates (in thousands):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Acquisition fees
  $ -     $ -     $ -     $ 153  
Management fees
    -       -       -       (215 )
Administrative expenses
    168       335       535       1,297  

Acquisition Fees: The General Partner is entitled to a fee for assisting the Fund in acquiring equipment subject to existing equipment leases equal to 2% of the purchase price the Fund pays for the equipment or portfolio of equipment subject to existing equipment financing.
 
 
15

 
Management Fees: The General Partner is entitled to a subordinated annual asset management fee equal to 4% of gross rental payments for operating leases or 2% for full payout leases, or a competitive fee, whichever is less. During the Fund’s five-year investment period, the management fees will be subordinated to the payment to the Fund’s limited partners of a cumulative annual distribution of 8.0% of their capital contributions, as adjusted by distributions deemed to be a return of capital.  Beginning December 1, 2009, the General Partner waived its asset management fees.  Effective May 1, 2009, the General Partner waived all management fees and subsequently waived all future management fees.

Administrative Expenses: The General Partner and its affiliates are reimbursed by the Fund for administrative services reasonably necessary to operate which don’t exceed the General Partner’s cost of those fees or services.

Due to Affiliates:  Due to affiliates includes amounts due to the General Partner related to acquiring and managing portfolios of equipment from its General Partner, management fees and reimbursed expenses.

Note Payable to related party:  See Note 7 for a further discussion.

NOTE 11 – COMMITMENTS AND CONTINGENCIES

The Fund is party to various legal proceeding arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Fund’s financial condition or results of operations.
 
 
16

 
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When used in this Form 10-Q, the words “believes” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in other documents filed with Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

The following discussion provides an analysis of our operating results, an overview of our liquidity and capital resources and other items related to us. The following discussion and analysis should be read in conjunction with (i) the accompanying interim financial statements and related notes and (ii) our consolidated financial statements, related notes, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2010.

As used herein, the terms “we,” “us,” or “our” refer to Lease Equity Appreciation Fund II, L.P. and Subsidiary.

Business

We are a Delaware limited partnership formed on March 30, 2004 by our General Partner, LEAF Financial Corporation (our “General Partner”), which manages us. Our General Partner is a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise, to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through our offering termination date of October 13, 2006, we raised $60.0 million by selling 600,000 of our limited partner units. We commenced operations in April 2005.

We are expected to have a nine-year life, consisting of an offering period of up to two years, a five year reinvestment period and a subsequent maturity period of two years, during which our leases and secured loans will either mature or be sold. In the event we are unable to sell our leases and secured loans during the maturity period, to the extent that there is excess cash, we expect to continue to return capital to our partners as those leases and loans mature. Substantially all of our leases and loans mature by the end of 2014. We will enter our liquidation period beginning in October 2011. We will terminate on December 31, 2029, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.
 
 
We seek to acquire a diversified portfolio of new, used or reconditioned equipment that we lease to third-parties. We also seek to acquire portfolios of equipment subject to existing leases from other equipment lessors. Our financings are typically acquired from our General Partner. In addition, we may make secured loans to end users to finance their purchase of equipment. We attempt to structure our secured loans so that, in an economic sense, there is no difference to us between a secured loan and a full payout equipment lease. We finance business-essential equipment including, but not limited to, computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focus on the small to mid-size business market, which generally includes businesses with:

 
500 or fewer employees;
 
 
$1 billion or less in total assets;
 
 
Or $100 million or less in total annual sales.

Our principal objective is to generate regular cash distributions to our limited partners.

Submission of Matters to a Vote of Security Holders

On June 8, 2011 we commenced a solicitation of our limited partners seeking their consent to amend the Limited Partnership Agreement, as discussed below.  Voting on the amendments is currently scheduled to close on December 1, 2011.   A majority of the limited partner units outstanding are required to vote in favor of the proposed amendments to enact the proposed changes.  Below is a further detailed explanation of the proposed changes.

Section 11.1(b) of our Amended and Restated Agreement of Limited Partnership (the “Limited Partnership Agreement”) provides for a period of five years (the “Reinvestment Period”) following the Final Closing Date (as such term is defined in the Limited Partnership Agreement), which was the final date of our offering period, during which we were permitted to reinvest Distributable Cash (defined below) in excess of the limited partners’ Unpaid Cumulative Return (defined below) in equipment, equipment leases and loans.  The Reinvestment Period terminates in October of 2011.  The Limited Partnership Agreement defines “Distributable Cash” generally as our gross revenue without deduction for depreciation, but after deducting cash funds used to pay all expenses, debt service, capital improvements and replacements, and less amounts allocated to reserves by our General Partner and plus amounts released from reserves by our General Partner.  The Limited Partnership Agreement defines “Unpaid Cumulative Return” as the amount of the limited partner’s Cumulative Return, reduced by aggregate distributions made to such limited partner, and defines “Cumulative Return” as an amount equal to an 8.0% annual cumulative return on the limited partner’s Adjusted Capital Contribution.  A limited partner’s “Adjusted Capital Contribution” is the aggregate initial purchase price paid for a limited partner’s units of limited partnership interest, reduced by all distributions theretofore made to a limited partner in excess of the Cumulative Return.

 
17


Section 11.1(b) was designed to enable us to maintain our portfolio of equipment leases and loans, and our distributions to limited partners, by replacing equipment leases and loans being paid down or paying off with new equipment leases and loans.  However our ability to generate sufficient cash flow to maintain our portfolio has been adversely affected by two principal trends:

 
As a result of the recession in the United States, we have experienced increased levels of default in our leases and loans.  This impacts us because when a lease or loan defaults, we do not receive the payments we anticipated, yet we still owe our financing sources the amounts borrowed to make such lease or loan.  Additionally, the losses reduce our future revenues and thus reduce cash available for future reinvestment and distribution.

 
As a result of conditions in the credit markets, the lenders under our debt facilities have increased interest rates and loan fees, thereby increasing the cost of our financing.  The lenders also reduced the loan-to-value ratio (the ratio of the amount of financing to the value of the assets being financed) upon which they are willing to make loans thereby causing reductions in the size of our lease portfolio.  The lenders took these actions not only on future loans, but also in certain instances on loans that were already outstanding.  This required additional payments to such lenders, which reduced the amount of our revenue producing assets and further decreased cash available for future reinvestment and distribution.

As a result of the foregoing, we incurred net losses of $7.4 million, $19.4 million and $7.8 million for the years ended December 31, 2008, 2009 and 2010, respectively, and a net loss of $1.5 million for the three months ended March 31, 2011.  Accordingly, we reduced distributions to limited partners from 8.0% annual cumulative return on each limited partner’s Adjusted Capital Contribution to 2.0% in August 2010.  We distributed approximately $4.8 million, $2.8 million and $2.5 million in 2008, 2009, and 2010, respectively.

As of March 31, 2011, the date of the proxy solicitation, the Unpaid Cumulative Return was an aggregate of approximately $5.4 million.  Because of the requirement under current Section 11.1(b) that the Unpaid Cumulative Return must be paid before any Distributable Cash be used for reinvestment, the existence of the Unpaid Cumulative Return means that, instead of investing any Distributable Cash we generate in new equipment, equipment leases and loans in order to increase the total return to the limited partners, it must be distributed (to the extent of the Unpaid Cumulative Return) to the limited partners.  As a result of our inability to make new investments, our lease portfolio went from $343.3 million at December 31, 2007 to $72.2 million at March 31, 2011.

Based upon our best forecasts at this time, it appears unlikely that we will ever be able to pay the full amount of the Unpaid Cumulative Return.  However, we believe that, as a result of conditions currently existing in United States’ credit markets, including a reported inability of small to medium size businesses (our targeted demographic) to obtain financing, as well as an increase in the cost of such financing, we could enhance our ability to increase our revenues, and obtain a better overall return for our partners’ investments, by reinvesting Distributable Cash we generate in new equipment, equipment leases and loans.  If we do not amend the Limited Partnership Agreement to allow us to reinvest cash into new equipment, leases and loans, we will not be able to take advantage of this opportunity.  Our General Partner, accordingly, has proposed to amend Section 11.1(b) of the Limited Partnership Agreement to permit us to reinvest Distributable Cash in new equipment, equipment leases and loans during the continuance of the Reinvestment Period without first having to pay the Unpaid Cumulative Return.  For more information, see our definitive consent solicitation statement filed on June 8, 2011.

Our General Partner believes that in order for us and our limited partners to realize the potential benefits of an ability to reinvest Distributable Cash in new equipment, equipment leases and loans before paying the Unpaid Cumulative Return, the Reinvestment Period would need to be extended.  Accordingly, our General Partner has proposed to amend the Limited Partnership Agreement to extend the Reinvestment Period for an additional two (2) years.  For more information, see our definitive consent solicitation statement filed on June 8, 2011.

General Economic Overview

During the third quarter of 2011 there was continuing erosion in both consumer and business confidence. The decline in confidence has negatively impacted an already uncertain economic outlook.  Confidence in the U.S. economy and capital markets is a key driver to overall economic health including the equipment finance industry.  When confidence improves consumers and business are likely to acquire goods and services including equipment.  When confidence declines the opposite is more likely.  Because the Fund’s portfolio is composed primarily of equipment leases and loans to small and medium size businesses’ declining consumer and business confidence can have a negative impact on our industry.  Of particular note, the Equipment Leasing & Finance Foundation Monthly Confidence Index continued to decline falling to 47.6 in September 2011, from 50.0 in August 2011 and 52.6 in June 2011.  Additional third quarter news reports on economic performance confirmed the economy continues to struggle.  A sampling of notable economic news items is presented below.

 
18


 
·
At its September 20-21 meeting, the Federal Reserve declared that there were significant downside risks to the economy and the Federal Reserve announced a new $400 billion stimulus program.

 
·
Both the Standard & Poor/Case-Shiller Home Price Index and the National Association of Realtors Housing Price Index reported declines.

 
·
Three key measures of consumer and business confidence, the University of Michigan Consumer Sentiment Index, the Conference Board Consumer Confidence Index, and the NFIB Business Optimism Index all posted declines.

 
·
FICO reported that its survey of bank risk managers shows an expectation that mortgage foreclosures will continue to rise and housing prices are unlikely to return to 2007 levels until 2020.

 
·
Experian reported that findings from its Business Benchmark Report showed that small businesses had an increase in severely delinquent accounts.

 
·
The Commerce Department reported that August 2011 sales of new homes fell for the fourth straight month and are less than half the level necessary for a sustained and healthy housing market.

The various consumer, business and equipment leasing indices demonstrate not just current conditions but also are strong predictors of the trend for the near term, and the prediction for the near term is not positive. The various national economic trends have an impact on the businesses that have financings with the LEAF Funds, and while the economy remains unsettled, the LEAF Funds portfolio performance may be affected.

 
19


Finance Receivables and Asset Quality

Information about our portfolio of leases and loans is as follows (dollars in thousands):

   
September 30,
2011
   
December 31,
2010
 
Investment in leases and loans, net
  $ 48,668     $ 86,922  
                 
Number of contracts
    9,400       13,600  
Number of individual end users (a)
    8,300       12,000  
Average original equipment cost
  $ 24.4     $ 24.8  
Average initial lease term (in months)
    65       62  
Average remaining lease term (in months)
    21       22  
States accounting for more than 10% of lease and loan portfolio:
               
California
    12 %     13 %
                 
Types of equipment accounting for more than 10% of lease and loan portfolio:
               
Industrial Equipment
    28 %     28 %
Medical Equipment
    18 %     18 %
Water Purification
    12 %     10 %
Office Equipment
    9 %     10 %
                 
Types of businesses accounting for more than 10% of lease and loan portfolio:
               
Services
    45 %     45 %
Manufacturing
    13 %     12 %
Retail Trade
    12 %     13 %

 
(a)
Located in the 50 states as well as the District of Columbia and Puerto Rico. No individual end user or single piece of equipment accounted for more than 1% of our portfolio based on original cost of the equipment.

 
20


Portfolio Performance

The table below provides information about our finance receivables including non-performing assets, which are those assets that are not accruing income due to non-performance or impairment (dollars in thousands):

   
As of and for the
 
   
Nine Months Ended September 30,
 
               
Change
 
   
2011
   
2010
    $     %  
Investment in leases and loans before allowance for credit losses
  $ 49,898     $ 109,818     $ (59,920 )     (55 )%
Less: allowance for credit losses
    1,230       5,340       (4,110 )     (77 )%
Investment in leases and loans, net
  $ 48,668     $ 104,478     $ (55,810 )     (53 )%
                                 
Weighted average investment in direct financing leases and loans before allowance for credit losses
  $ 69,260     $ 137,006     $ (67,746 )     (49 )%
Non-performing assets
  $ 1,515     $ 6,731     $ (5,216 )     (77 )%
Charge-offs, net of recoveries
  $ 7,725     $ 12,102     $ (4,377 )     (36 )%
As a percentage of finance receivables:
                               
Allowance for credit losses
    2.47 %     4.86 %                
Non-performing assets
    3.04 %     6.13 %                
As a percentage of weighted average finance receivables:
                               
Charge-offs, net of recoveries
    11.15 %     8.83 %                

Our allowance for credit losses is our estimate of losses inherent in our commercial finance receivables. The allowance is based on factors which include our historical loss experience on equipment finance portfolios we manage, an analysis of contractual delinquencies, current economic conditions and trends and equipment finance portfolio characteristics, adjusted for recoveries. In evaluating historic performance, we perform a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. Our policy is to charge-off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote. Substantially all of our assets are collateral for our debt and, therefore, significantly greater delinquencies than anticipated will have an adverse impact on our cash flow and distributions to our partners.

We focused on financing equipment used by small to mid-sized businesses. The recent economic recession in the U.S. made it more difficult for some of our customers to make payments on their financings with us on a timely basis, which adversely affected our operations in the form of higher delinquencies. These higher delinquencies may continue as the U.S. economy recovers.  Despite this, our non-performing assets as a percentage of finance receivables decreased from 6.13% at September 30, 2010 to 3.04% at September 30, 2011, reflecting an improvement in the aging of our portfolio.  Our allowance for credit losses as a percentage of our investments in leases and loans also reflects this, decreasing from 4.86% at September 30, 2010 to 2.47% at September 30, 2011.

Our net charge-offs decreased in the 2011 period compared to the 2010 period due primarily to the decrease in our portfolio balance.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value and effectiveness of interest rate swaps. We base our estimates on historical experience, current economic conditions and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 
21


For a complete discussion of our critical accounting policies and estimates, see our annual report on Form 10-K for fiscal 2010 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.” There have been no material changes to these policies through September 30, 2011.

Results of Operations

As discussed previously, the economic recession has negatively impacted our operating results primarily through increased rates of default on outstanding leases and loans and increased costs of borrowing from our lenders.  These factors have resulted in our inability to reinvest earnings in additional leases and loans, leading to a decrease in our portfolio balance and a reduction in cash generated to continue to support distributions to our limited partners.

Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010 (dollars in thousands):

         
Increase (Decrease)
 
   
2011
   
2010
    $     %  
Revenues:
                         
Interest on equipment financings
  $ 1,006     $ 2,411       (1,405 )     (58 )%
Rental income
    176       346       (170 )     (49 )%
Gains/(losses) on sale of equipment and lease dispositions, net
    (18 )     107       (125 )     -117 %
Other income
    134       315       (181 )     (57 )%
      1,298       3,179       (1,881 )     (59 )%
                                 
Expenses:
                               
Interest expense
    605       1,796       (1,191 )     (66 )%
Loss on derivative activities
    216       -       216       - %
Interest expense - related party
    203       245       (42 )     (17 )%
Depreciation on operating leases
    133       272       (139 )     (51 )%
Provision for credit losses
    504       1,652       (1,148 )     (69 )%
General and administrative expenses
    229       288       (59 )     (20 )%
Administrative expenses reimbursed to affiliate
    168       335       (167 )     (50 )%
      2,058       4,588       (2,530 )     (55 )%
Net loss
  $ (760 )   $ (1,409 )   $ 649          
Net loss allocated to limited partners
  $ (752 )   $ (1,395 )   $ 643          

The overall reductions in both revenues and expenses were caused by the significant decrease in the size of our lease and loan portfolio as well as the significant reduction in debt during the three months ended September 30, 2011 as compared to the three months ended September 30, 2010.

The decrease in total revenues was primarily attributable to the following:

 
·
A decrease in interest on equipment financings. Our weighted average net investment in financing assets decreased to $55.2 million for the three months ended September 30, 2011 as compared to $118.1 million for the three months ended September 30, 2010, a decrease of $62.9 million or 53.3%.

 
·
A decrease in rental income which was principally the result of a decrease in our investment in operating leases in the 2011 period compared to the 2010 period.

 
·
A decrease in gains on sales of equipment and lease dispositions, net.  Gains and losses on sales of equipment may vary significantly from period to period.

 
·
Other income decreased from $315,000 for the three months ended September 30, 2010 to $134,000 for the three months ended September 30, 2011, a decrease of $181,000 or 57%.  The decrease in other income is primarily related to a decrease in late fee income and collection administrative fees, which is driven by the decrease in the size of our portfolio.

The decrease in total expenses was primarily attributable to the following:

 
·
A significant decrease in interest expense primarily due to a decrease in average debt outstanding. Weighted average borrowings for three months ended September 30, 2011 were $51.9 million as compared to $109.1 million for the three months ended September 30, 2010.

 
22


As discussed in Note 8, subsequent to discontinuing hedge accounting on our interest rate swap contracts we have recorded all derivative activity through loss on derivative activities.  Cash settlements on interest rate swaps for the three month period ended September 30, 2011 were $366,000.

 
·
A decrease in depreciation on operating leases directly related to a decrease in our investment in operating leases.

 
·
A significant decrease in provision for credit losses. We provide for credit losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions. This decrease is consistent with the decline in the portfolio of equipment financed assets.

 
·
A decrease in general and administrative expenses and administrative expenses reimbursed to affiliates due to the decrease in the size of our portfolio, partially offset by increased legal costs associated with collection efforts.

The net loss per limited partner unit, after the net loss allocated to our General Partner, for the three months ended September 30, 2011 and 2010 was $(1.27) and $(2.35), respectively, based on a weighted average number of limited partner units outstanding of 592,809 for both periods.

Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010 (dollars in thousands):

         
Increase (Decrease)
 
   
2011
   
2010
    $     %  
Revenues:
                         
Interest on equipment financings
  $ 4,067     $ 8,130       (4,063 )     (50 )%
Rental income
    668       1,318       (650 )     (49 )%
Losses on sale of equipment and lease dispositions, net
    (288 )     (316 )     28       (9 )%
Other income
    601       1,554       (953 )     (61 )%
      5,048       10,686       (5,638 )     (53 )%
                                 
Expenses:
                               
Interest expense
    2,071       6,735       (4,664 )     (69 )%
Loss on derivative activities
    708       -       708       - %
Interest expense - related party
    672       526       146       28 %
Depreciation on operating leases
    481       1,026       (545 )     (53 )%
Provision for credit losses
    3,635       6,062       (2,427 )     (40 )%
General and administrative expenses
    806       1,310       (504 )     (38 )%
Administrative expenses reimbursed to affiliate
    535       1,297       (762 )     (59 )%
Management fees to affiliate
    -       (215 )     215       (100 )%
      8,908       16,741       (7,833 )     (47 )%
Net loss
  $ (3,860 )   $ (6,055 )   $ 2,195          
Net loss allocated to limited partners
  $ (3,821 )   $ (5,994 )   $ 2,173          

As discussed in more specific detail below, the overall reductions in both revenues and expenses were caused by the significant decrease in the size of the leases and loans portfolio as well as the significant reduction in debt for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010.

The decrease in total revenues was primarily attributable to the following:

 
A decrease in interest on equipment financings. Our weighted average net investment in financing assets decreased to $69.3 million for the nine months ended September 30, 2011 as compared to $137.0 million for the nine months ended September 30, 2010, a decrease of $67.7 million or 49%.

 
A decrease in rental income which was principally the result of a decrease in our investment in operating leases in the 2011 period compared to the 2010 period.

 
Other income decreased from $1.6 million for the nine months ended September 30, 2010 to $601,000 for the nine months ended September 30, 2011, a decrease of $953,000 or 61%.  The decrease in other income is primarily related to a decrease in late fee income and collection administrative fees, which is driven by the decrease in the size of our portfolio.

 
23


The decrease in total expenses was primarily attributable to the following:

 
·
A decrease in interest expense primarily due to a decrease in average debt outstanding. Weighted average borrowings for the nine months ended September 30, 2011 were $63.8 million as compared to $126.8 million for the nine months ended September 30, 2010.

As discussed in Note 8, subsequent to discontinuing hedge accounting on our interest rate swap contracts we have recorded all derivative activity through loss on derivative activities.  Cash settlements on interest rate swaps for the nine month period ended September 30, 2011 were $1.5 million.

 
·
A significant decrease in provision for credit losses. We provide for credit losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions. This decrease is consistent with the decline in the portfolio of equipment financed assets.

 
·
A decrease in depreciation on operating leases directly related to a decrease in our investment in operating leases.

 
·
Beginning on December 1, 2009, the General Partner waived the current quarter’s asset management fees and all future management fees.  Refer to ‘Liquidity and Capital Resources’ section for further discussion.

 
·
A decrease in general and administrative expenses and administrative expenses reimbursed to affiliates due to the decrease in the size of our portfolio, partially offset by increased legal costs associated with collection efforts.
 
The net loss per limited partner unit, after the net loss allocated to our General Partner, for the nine months ended September 30, 2011 and 2010 was $(6.45) and $(10.11), respectively, based on a weighted average number of limited partner units outstanding of 592,809 for both periods.

Liquidity and Capital Resources

General

Our major source of liquidity is from the collection of lease and loan payments.  Our primary cash requirements are for debt service, in addition to normal operating expenses, investment in leases and loans and distributions to partners.

We believe at this time that future net cash inflows will be sufficient to either finance operations or meet debt service payments. The following table sets forth our sources and uses of cash for the periods indicated (in thousands):
 
   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Net cash provided by (used in) operating activities
  $ 588     $ (1,858 )
Net cash provided by investing activities
    33,850       47,133  
Net cash used in financing activities
    (34,648 )     (45,233 )
(Decrease) increase in cash
  $ (210 )   $ 42  
 
During the nine months ended September 30, 2011, cash decreased by $210,000 which was primarily due to debt repayments of $36.5 million and distributions to our partners of $899,000, partially offset by net proceeds from leases and loans of $33.9 million. As a result of increased delinquencies, cash availability after debt service was reduced.

Partners’ distributions paid for the nine months ended September 30, 2011 and 2010 were $899,000 and $2.2 million, respectively.  Cumulative partners distributions paid from our inception to September 30, 2011 were $18.7 million.  To date, limited partners have received approximately 31% of their original amount invested, depending upon when the investment was made.   Management is working to maximize the amount that can be distributed to limited partners in the future. For the period August 2009 through February 2010, we suspended monthly distributions to our partners in order to increase liquidity to enable us to renew our WestLB debt agreement. We resumed the payment of monthly distributions to our partners in March of 2010 at a rate of 8.0% per year.  However, we could not continue to support the historical 8% distributions, and beginning in August 2010, distributions were lowered to 2.0%.

Future cash distributions are not guaranteed and are solely dependent on our performance and are impacted by a number of factors which include: our ability to obtain and maintain debt financing on acceptable terms to build and maintain our equipment finance portfolio; lease and loan defaults by our customers; and prevailing economic conditions. Due to the recent economic recession, we continue to see a scarcity of available debt on terms beneficial to us and higher than expected loan defaults, resulting in poorer fund performance than projected.

As discussed above, we are seeking limited partner approval to amend our Partnership Agreement so that we have the ability to maintain or increase the size of our lease and loan portfolio.  We are seeking these two amendments because the Partnership Agreement prohibits distributable cash from being used to invest in new equipment, equipment leases or loans unless distributions have been paid cumulatively at the original rate of 8.0% per year.  We are unable to make distributions at that level, so in order to invest in new assets, the amendment is necessary. In addition, to realize the potential benefits of this amendment, we are also asking the limited partners to amend the agreement to extend the reinvestment period to provide us additional time to reinvest distributable cash in new equipment and equipment leases and loans.

 
24


Maintaining or increasing our portfolio with performing leases and loans is expected to generate additional cash flow to the partnership and ultimately may increase distributions to the partners. If the Partnership Agreement is not amended it is highly unlikely distributions will increase from the current level.

Beginning December 1, 2009, our General Partner waived its asset management fee. Through September 30, 2011 the General Partner has waived $3.2 million of asset management fees, of which $908,000 related to the nine months ended September 30, 2011.

Borrowings

Our borrowing relationships each require the pledging of eligible leases and loans to secure amounts advanced. Borrowings outstanding under our credit facilities are as follows as of September 30, 2011 (in thousands):

 
Type
 
Amount Outstanding
   
Amount of
Collateral (1)
 
WestLB (2)
Revolving
  $ 30,704     $ 36,158  
Series 2007-Term Securitization (3)
Term
    15,458       25,786  
      $ 46,162     $ 61,944  

(1)
Recourse under these facilities is limited to the amount of collateral pledged.
 
(2)
We have no availability under this credit facility.  Availability is subject to having eligible leases or loans to pledge as collateral, compliance with covenants and the borrowing base formula.  The WestLB revolving line of credit is collateralized by specific lease receivables and related equipment, with a 1% credit reserve of the outstanding line of credit. Interest on the borrowings prior to March 2009 was calculated at LIBOR plus 1.20% per year. Borrowings under this facility after March 2009 are at a rate of LIBOR plus 2.50% per year. To mitigate fluctuations in interest rates, we entered into interest rate swap agreements, which terminate on various dates ranging from July 2013 to August 2015. As of September 30, 2011, the interest rate swap agreements fixed the interest rate on this facility at 5.7%. Interest and principal are due as payments are received under the financings. This credit facility expired on September 30, 2010 and there are no additional borrowings available on this facility. We will continue to repay the principal and interest on any outstanding debt as payments are received on the underlying leases and loans pledged as collateral.

(3)
The original amount borrowed at June 2007 was $276.8 million. A term note securitization is a one-time funding that pays down over time without any ability for us to draw down additional amounts. See Note 7 for a further discussion.

In addition to the borrowings discussed above, we owe $7.9 million to Resource Capital Corporation (“RCC”) as of September 30, 2011, which is a related entity of ours through common management with RAI.  On June 3, 2011, we paid a 1% fee to extend the note maturity date from March 4, 2011 to February 15, 2012 and to reduce the interest rate from 12% to 10% per year.  Monthly payments are made at approximately 0.3% of the outstanding principal and interest is payable quarterly.

On April 7, 2011 we were notified by WestLB that we were in default on its loan agreement due to three ongoing covenant breaches.  These breaches relate to the percentage of defaulted leases in its portfolio, as well as the percentage of defaulted leases in the overall lease portfolio serviced by our General Partner.  As a result, the lender has advised us that it has reserved, and continues to reserve, all of its rights and remedies provided for in the loan agreement including the right to (i) commence legal action to collect the obligations we owe it; (ii) declare all amounts immediately due and payable; (iii) repossess the collateral we have pledged to it under the loan agreement; and (iv) increase the interest rate on outstanding borrowings.  If the lender chooses to repossess and sell our collateral, such a sale of a portfolio could be at prices lower than its carrying value, which could result in losses and reduce our income and distributions to our partners. As of September 30, 2011, we were still in breach of several covenants under this facility.

Notwithstanding the foregoing, we are not, nor have we been, delinquent on any monthly payments of principle and interest owed to the lender.  Moreover, while the lender has reserved its rights, it has not initiated exercise of any of the foregoing remedies. As a result we do not expect WestLB to take any adverse steps to collect its loan balance.

Liquidity Summary

Our primary source of liquidity comes from payments on our lease and loan portfolio. Our liquidity has been and could be further adversely affected by higher than expected equipment lease defaults, which results in a loss of revenues. These losses may adversely affect our ability to make distributions to our partners and, if the level of defaults is sufficiently large, may result in our inability to fully recover our investment in the underlying equipment. As our lease portfolio ages, and if the recovery in the United States economy falters for a substantial period of time, we anticipate the need to increase our allowance for credit losses.

 
25


Our primary use of cash is for debt service. Substantially all of our leases and loans are collateral for our debt, however, all of our debt is non-recourse to the partnership which limit our financial exposure. Repayment of our debt is based on the payments we receive from our customers. If a lease or loan becomes delinquent our lender uses the excess collateral from performing leases to repay our loan, even though our customer has not paid us. Therefore, higher than expected lease and loan defaults will reduce our liquidity.

As discussed above, provided the partnership amendments are adopted and we are able to acquire new leases and loans, the tightening of credit markets has and may continue to adversely affect our liquidity, particularly our ability to obtain or renew debt financing needed to execute our investment strategies. Historically, we have utilized both revolving and term debt facilities to fund our acquisitions of equipment financings.  If we are unable to obtain new debt that will allow us to invest the repayments of existing leases and loans into new investments, then our portfolio of leases and loans will continue to decline.

Legal Proceedings

We are a party to various routine legal proceedings arising in the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures about Market Risk have been omitted as permitted under rules applicable to smaller reporting companies

 
26


ITEM 4 – CONTROLS AND PROCEDURES

Disclosure Controls

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our General Partner’s chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
27


PART II. OTHER INFORMATION
ITEM 6 – EXHIBITS
 
 
 
 
Exhibit No.
 
Description
3.1
 
Certificate of Limited Partnership for Lease Equity Appreciation Fund II, L.P. (1)
3.2
 
Amended Certificate of Limited Partnership for Lease Equity Appreciation Fund II, L.P.(2)
3.3
 
Amended and Restated Agreement of Limited Partnership for Lease Equity Appreciation Fund II, L.P. (4)
4.1
 
Forms of letters sent to limited partners confirming their investment (1)
10.1
 
Origination & Servicing Agreement among LEAF Financial Corporation, Lease Equity Appreciation Fund II, L.P. and LEAF Funding, Inc. dated April 15, 2005 (3)
10.2
 
Secured Loan Agreement dated as of June 1, 2005 with LEAF Fund II, LLC as Borrower, LEAF Funding, Inc. as Originator, Lease Equity Appreciation Fund II, L.P. as Seller, LEAF Financial Corporation as Servicer, U.S. Bank National Association, as Collateral Agent and Securities Intermediary and WestLB AG, New York Branch as Lender (3)
10.3
 
First Amendment to WestLB AG, New York Branch, Secured Loan Agreement (5)
10.4
 
Second Amendment to WestLB AG, New York Branch, Secured Loan Agreement (6)
10.5
 
Third Amendment to WestLB AG, New York Branch, Secured Loan Agreement (7)
10.6
 
Fifth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (8)
10.7
 
Sixth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (9)
10.8
 
Indenture among LEAF II Receivables Funding, LLC as issuer, and U.S. Bank National Association as trustee and custodian (9)
10.9
 
Seventh Amendment to WestLB AG, New York Branch, Secured Loan Agreement (10)
10.10
 
Eighth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (10)
10.11
 
Ninth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)
10.12
 
Tenth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)
10.13
 
Eleventh Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)
10.14
 
Twelfth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (12)
10.15
 
Thirteenth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (12)
10.16
 
Fourteenth Amendment to West LB AG, New York Branch, Secured Loan Agreement (12)
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
 
The following materials from Lease Equity Appreciation Fund II, LP’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) the Consolidated Statements of Changes in Partners’ Deficit, (iv) Consolidated Statements of Cash Flows, and (v) related financial notes.

 
(1)
Filed previously on June 17, 2004 as an exhibit to our Registration Statement and by this reference incorporated herein.
 
(2)
Filed previously on September 7, 2004 in Pre-Effective Amendment No. 1 as an exhibit to our Registration Statement and by this reference incorporated herein.
 
(3)
Filed previously as an exhibit to our Form 10-Q for the quarter ended June 30, 2005 and by this reference incorporated herein.
 
(4)
Filed previously on December 27, 2005 as Appendix A Post-Effective Amendment No. 1 to our Registration Statement and by this reference incorporated herein.

 
28


 
(5)
Filed previously as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and by this reference incorporated herein.
 
(6)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and by this reference incorporated herein.
 
(7)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2007 and by this reference incorporated herein.
 
(8)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 and by this reference incorporated herein.
 
(9)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2008 and by this reference incorporated herein.
 
(10)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and by this reference incorporated herein.
 
(11)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and by this reference incorporated herein.
 
(12)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2009 and by this reference incorporated herein.

 
29


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.
 
 
LEASE EQUITY APPRECIATION FUND II, L.P.
 
Delaware Limited Partnership
     
 
By:
LEAF Financial Corporation,  its General Partner
     
November 14, 2011
By:
/s/ CRIT S. DEMENT
   
CRIT S. DEMENT
   
Chairman and Chief Executive Officer
     
November 14, 2011
By:
/s/ ROBERT K. MOSKOVITZ
   
ROBERT K. MOSKOVITZ
   
Chief Financial Officer

 
30