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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

 

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

COMMISSION FILE NUMBER: 0-19220

Inland Land Appreciation Fund II, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware   36-3664407
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

2901 Butterfield Road, Oak Brook, IL 60523

(Address of principal executive offices)(Zip Code)

630-218-8000

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Name of each exchange on which registered:

None   None

Securities registered pursuant to Section 12(g) of the Act:

Limited Partnership Units

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ¨    No  X

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  ¨    No X

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 at least the past 90 days.

Yes  X    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).     Yes  X    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  X

The registrant’s common equity is not publicly traded and therefore has no market value.

 

 

 


Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

TABLE OF CONTENTS

 

          Page  
   Part I   

Item 1.

   Business      3   

Item 1(A).

   Risk Factors      4   

Item 1(B).

   Unresolved Staff Comments      6   

Item 2.

   Properties      7   

Item 3.

   Legal Proceedings      9   

Item 4.

   RESERVED      10   
   Part II   

Item 5.

  

Market for Partnership’s Limited Partnership Units, Related Security Holder Matters and Partnership Purchases of Limited Partnership Units

     10   

Item 6.

   Selected Financial Data      10   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      11   

Item 7(A).

   Quantitative and Qualitative Disclosures About Market Risk      17   

Item 8.

   Financial Statements and Supplementary Data      18   

Item 9.

  

Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure

     35   

Item 9(A).

   Controls and Procedures      35   

Item 9(B).

   Other Information      35   
   Part III   

Item 10.

   Directors, Executive Officers and Corporate Governance      36   

Item 11.

   Executive Compensation      41   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     42   

Item 13.

   Certain Relationships and Related Transactions      42   

Item 14.

   Principal Accounting Fees and Services      43   
   Part IV   

Item 15.

   Exhibits and Financial Statement Schedules      43   
   SIGNATURES      44   

 

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Table of Contents

PART I

 

Item 1. Business

Inland Land Appreciation Fund II, L.P. was formed on June 28, 1989, to invest in undeveloped land on an all-cash basis and realize appreciation of such land upon resale. On October 25, 1989, we commenced an offering of 30,000 (subject to an increase to 60,000) limited partnership units, or units, at $1,000 per unit, pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933. On October 24, 1991, we terminated our offering of units, after we sold 50,476.17 units, at $1,000 per unit, resulting in $50,476,170 in gross offering proceeds, not including our general partner’s capital contribution of $500. All of the holders of our units were admitted to our partnership. Inland Real Estate Investment Corporation is our general partner. Our limited partners share in their portion of benefits of ownership of our real property investments according to the number of units held. Through December 31, 2011, we had repurchased a total of 408.65 units for $383,822 from various limited partners through the unit repurchase program.

We purchased on an all-cash basis, twenty-seven parcels of undeveloped land and two buildings and are engaged in the rezoning and resale of the parcels. On September 16, 2002, we completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28). All of the investments were made in the Chicago metropolitan area. The anticipated holding period of the land was approximately two to seven years from the completion of the land portfolio acquisitions. As a result of the lengthy rezoning and entitlement processes and the no growth mentality of the municipalities where the land is located, as well as the depressed real estate market, our holding period has exceeded our original estimates. Through December 31, 2011, we have had multiple sales transactions, disposing of approximately 3,571 acres of the approximately 4,530 acres originally owned. We continue to market the remaining acres for sale.

We are engaged in the business of real estate investment which management considers being a single operating segment. A presentation of information about operating segments would not be material to an understanding of our business taken as a whole.

During the year ended December 31, 2011, we had no land sales. During the year ended December 31, 2010, we received net sales proceeds of $301,321 from the sale of nine improved residential lots which equates to approximately 1.7 acres of Parcel 3/27. During 2010, three acres of park land were conveyed to the Fox Valley Park District which was required upon the acceptance of the improvements for Parcel 3/27. Other prior conveyances included the subdivision roadways to the Village of Montgomery and required conveyances to the Kendall County Forest Preserve. Parcel 3/27 consists of two contiguous parcels which are being jointly developed as two residential subdivisions. Each subdivision lies within the boundaries of both parcels. During 2010 we entered into an agreement to sell the remaining lots of Parcel 3/27 to a builder on a schedule over an 18 month period. The builder purchased the required 9 lots during June 2010. However, during 2011, the builder terminated the agreement and the related escrow funds of $57,000 were released to the Partnership. While we anticipate future lot sales of the remaining acreage of Parcel 3/27, there can be no assurance that any sales will be completed during 2012 or that a distribution will be made to the limited partners. Previously undistributed net sales proceeds will be used to fund our operations, including land improvements and land use activities. We will evaluate our cash needs throughout the year to determine any future distributions.

Parcel 18 has been zoned and planned for residential use. On March 2, 2011, a settlement agreement and mutual release with prejudice was reached with William Ryan Homes, Inc. (“Ryan”), the former builder of Parcel 18. As part of the settlement the builder transferred a residential lot to the Partnership and in return, the Partnership paid to Ryan approximately $34,000. With the suit resolved, we are actively marketing the remaining lots for sale to both homebuilders and individuals interested in acquiring lots to construct their own home. One recent report which studies Chicagoland housing market trends reports the lowest number of home closings in the first two quarters of 2011 than it has seen since 1990. Even so, builders are tentatively re-entering into the market and it is our belief that our subdivisions are located in geographically desirable locations.

We plan to enhance the value of our remaining land through pre-development activities such as rezoning, annexation and land planning. We have already been successful in, or are in the process of, pre-development activity on several of our land investments. Parcel 20 has been granted rezoning which will permit additional land to be used for development. During March 2011, approximately 3.1 acres of Parcel 20 were conveyed to the Village of Montgomery for use as part of a sanitary booster station and a storm water management basin. We continue to work with the Illinois Department of Transportation regarding their interest to acquire approximately 2.3 acres of land to facilitate road improvements to US-30 adjacent to Parcel 20.

 

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We continue to closely monitor the real estate market trends, especially within the areas where our remaining parcels are located. We have seen modest improvements in the residential resale real estate market, however, new home starts in these middle class communities remain weak. That, coupled with strict lender requirements, adversely impact sales activity, especially sales of residential lots and sales of vacant land for retail purposes. There have been reports of farm parcel sales in surrounding communities from both speculators looking to hold land until the market rebounds as well as farmers looking to increase their farming businesses. We realize it could take some time for these current trends to improve which could result in an even longer holding period. However, we believe we have taken the steps necessary to reduce costs and maintain sufficient reserves of cash and cash equivalents to cover all our costs for an extended period of time. We have farm leases in place which generate sufficient income to cover the costs of insurance expense and real estate taxes. Our remaining land is not encumbered by debt and is located in areas that we believe are in the paths of future development.

We had no employees during 2011. Accordingly, we hired no compensation consultants.

Our general partner and its affiliates provide services to us. Our general partner and its affiliates are reimbursed for salaries and expenses of employees of the general partner and its affiliates relating to the administration of the partnership. An affiliate of the general partner performs marketing and advertising services for us and is reimbursed for direct costs. An affiliate of the general partner performs land improvements, rezoning, annexation and other activities to prepare our parcels for sale and is reimbursed for salaries and direct costs.

Access to Our Information

We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (SEC). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.

We make available, free of charge, by responding to requests addressed to our Investor Services department, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. These reports are available as soon as reasonably practical after such material is electronically filed or furnished to the SEC.

Limited Partners wishing to communicate with our general partner can do so by writing to the attention of the general partner in care of our partnership at 2901 Butterfield Road, Oak Brook, IL 60523.

 

Item 1(A). Risk Factors

Real Estate Market

Currently, the depressed real estate market, coupled with strict lender requirements, continue to adversely impact sales activity, especially sales of vacant land and residential lots, as developers continue to dispose of excess inventories and have difficulty in obtaining financing for new projects. Therefore, it could take some time for these current trends to improve which could result in an even longer holding period than previously estimated.

Pre-Development Stage Land

The net proceeds of the offering were invested in pre-development stage land. An investment in such land involves a number of potential risks, which include the following:

Dependence on Governmental Zoning and Fiscal Policies. We conduct rezoning and pre-development activities with respect to our land investments. Rezoning may only be effected by appropriate city, county and/or other local authorities.

 

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There can be no assurance that our efforts to cause these authorities to change the zoning classification(s) which apply to a given parcel of land owned by the partnership will be successful. Sometimes local residents oppose our efforts. Sometimes local authorities require us to spend funds to facilitate future development of the land as a condition of rezoning. There can be no assurance that we will have sufficient funds to accomplish the required changes or that they can be accomplished in a timely fashion.

Restricted or Limited Access to Utilities and Roadways. The value of our land will be affected by ease of access to utilities and transportation. If public utility providers are not located in sufficient proximity to a parcel owned by the partnership, the cost of arranging for such utility access may be prohibitive to the partnership or a potential purchaser of the parcel, thereby reducing the value of the parcel. Delays and/or postponements in the construction of roads in areas by our parcels likely would adversely affect the value of our parcels.

Environmental Risks. Federal and state environmental laws can impose substantial liability on owners of real estate without regard to fault, even when other parties are or were responsible for the environmental impairment. Environmental liabilities could cause us to incur significant expenses, including (but not limited to) the obligation to remedy or clean up hazardous substances (such as pesticides commonly used on farmland) or other pollutants, regardless of fault. Such liabilities could require us to dispose of a property at a loss, which could be substantial.

In addition, the value of our land is affected by the drainage pattern of such land and the surrounding area, the susceptibility of such land to flooding and the possibility that such land might be classified as “wetlands” by a government agency, thereby inhibiting or precluding development of the parcel.

Nature of Farm Leases and Limited Current Income. With the exception of limited amounts of cash which may be generated from leasing the land as farmland or for other revenue-producing activities, pre-development land does not generate current income. Nevertheless, we incur ongoing expenses in connection with the ownership of such land (for example, real estate taxes). At the same time, our farm rental revenue is subject to a farm tenant’s ability to pay the contracted rent, which depends on circumstances such as fluctuations in commodity prices, bad weather, competition from other producers, changes in government farm policy (including price supports), pests and crop diseases.

Lack of Geographic Diversification. All of our land investments are located in the Chicago metropolitan area. The success of the partnership will, therefore, depend to a great extent upon the rate and amount of economic growth in the Chicago metropolitan area.

Partnership-Related Risks

Risk of Installment Sale. We may sell some land parcels on an installment basis (which means that the sale price will be received in installments during the term of the agreement). In the event we find it necessary or desirable to provide such financing upon the resale of our parcels, a liquidation of the partnership may be delayed beyond the time of disposition of the parcels until any such loans are repaid or otherwise liquidated. In the event of a default on an installment sale, we may be forced to reacquire a property.

No Market for Units. Our units are subject to certain restrictions on transferability. As a result of these restrictions, no public trading market is likely to develop for these securities, nor is one intended to develop. Purchasers of units may not, therefore, be able to liquidate their investment, and units may not be readily acceptable as collateral for a loan.

Transfer Limit. In accordance with Article XVI Section 16.1 of the Inland Land Appreciation Fund II, L.P. Partnership Agreement and Treasury Regulation Section 1.7704-1(j), we reached the maximum threshold of limited partnership units that may be transferred/assigned directly between parties during 2011. For the benefit of interested limited partners, we have a relationship with a “qualified matching service” as defined under Treasury Regulation Section 1.7704-1(g). In accordance with this Treasury Regulation and the IRS private letter ruling obtained by the “qualified matching service,” we understand that limited partnership units may be transferred or assigned through the “qualified matching service” up to a separate maximum threshold each taxable year (in addition to the maximum threshold that may be transferred or assigned directly between parties under our partnership agreement and Treasury Regulation Section 1.7704-1(j)). However, there can be no assurance that the IRS private letter ruling will apply to transfers of our units, or that any particular transfer will not violate the transfer restrictions contained in the partnership agreement or the provisions of Treasury Regulation Section 1.7704-1(g). If you have any interest in participating in a transfer/assignment of partnership

 

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units through this “qualified matching service”, please contact American Partnership Board directly at 800-736-9797. You are strongly encouraged to consult your personal legal, financial and tax advisors in connection with any such transfer/assignment.

Conflicts of Interest. We may be subject to various conflicts of interest arising out of our relationship with our general partner and its affiliates. If the general partner or its affiliates breach their fiduciary obligations to us, or do not resolve these conflicts of interest to our benefit, we could suffer consequences which we might not otherwise be subject to if such conflicts of interest did not exist.

Federal Income Tax Aspects

Potential Receipt of UBTI. The incurrence of debt in connection with our pre-development and/or sales activities could cause the gain on the sale of parcels to constitute unrelated business taxable income (“UBTI”) and affect limited partners that are tax-exempt entities.

Tax liabilities may be greater than cash distributions. Each limited partner will be required to report the limited partner’s allocable share of our taxable net income on the limited partner’s personal tax return, regardless of whether the limited partner has received any cash distributions from us. Thus, limited partners may incur taxes associated with their proportional share of our net income even though we have not distributed cash to pay the taxes.

 

Item 1(B). Unresolved Staff Comments

Not applicable.

 

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Table of Contents

Item 2. Properties

We acquired fee ownership of the following real property investments:

 

Parcel & Location

   Gross Acres
Purchased/Sold
     Remaining
Acres
     Purchase/Sales
Date
 

Parcel 1, McHenry County, Illinois

     372.7590         0         04/25/90   
     (372.7590            sold 02/23/04

Parcel 2, Kendall County, Illinois

     41.1180         0         07/06/90   
     (3.473            sold 08/29/03
     (37.645            sold 02/17/05

Parcel 3/27, Kendall County, Illinois

     120.8170         10.8328         11/06/90   
     83.5250            03/11/93   
     (3.3900            sold 05/17/05
     (31.0000            sold 07/14/05
     (74.7000            sold various 2006
     (36.8500            sold various 2007
     (6.6000            sold various 2008
     (36.1262            conveyed 2009
     (1.7230            sold 06/25/10
     (3.1200            conveyed 12/28/10

Parcel 4, Kendall County, Illinois

     299.0250         299.0250         06/28/91   

Parcel 5, Kane County, Illinois

     189.0468         0         02/28/91   
     (189.0468            sold 05/16/01

Parcel 6, Lake County, Illinois

     57.3345         0         04/16/91   
     (.2580            sold 10/01/94
     (57.0765            sold 03/22/07

Parcel 7, McHenry County, Illinois

     56.7094         0         04/22/91   
     (12.6506            sold various 1997
     (15.7041            sold various 1998
     (19.6296            sold various 1999
     (8.7251            sold various 2000

Parcel 8, Kane County, Illinois

     325.3940         181.5240         06/14/91   
     (.8700            sold 04/03/96
     (63.0000            sold 01/23/01
     (80.0000            sold 05/11/04

Parcel 9, Will County, Illinois

     9.8670         0         08/13/91   
     (9.8670            *09/16/02

Parcel 10, Will County, Illinois

     150.6600         0         08/20/91   
     (150.6600            sold 01/10/05

Parcel 11, Will County, Illinois

     138.4470         0         08/20/91   
     (138.4470            sold 05/03/93

Parcel 12, Will County, Illinois

     44.7320         0         08/20/91   
     (44.7320            *09/16/02

 

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Parcel & Location

   Gross Acres
Purchased/Sold
     Remaining
Acres
     Purchase/Sales
Date
 

Parcel 13, Will County, Illinois

     6.3420         0         09/23/91   
     (6.3420            sold 05/03/93

Parcel 14, Kendall County, Illinois

     44.4030         0         09/03/91   
     (15.3920            sold 04/16/01
     (14.2110            sold various 2002
     (13.6000            sold 04/11/03
     (1.2000            sold 02/19/04

Parcel 15, Kendall County, Illinois

     100.3640         0         09/04/91   
     (5.0000            sold 09/01/93
     (11.0000            sold 12/01/94
     (84.3640            sold 08/14/98

Parcel 16, McHenry County, Illinois

     168.9050         0         09/13/91   
     (168.9050            sold 08/03/01

Parcel 17, Kendall County, Illinois

     3.4620         0         10/30/91   
     (2.1130            sold 03/06/01
     (1.3490            sold 08/23/02

Parcel 18, McHenry County, Illinois

     139.1697         19.6788         11/07/91   
     (9.2500            sold various 2004
     (33.3197            sold various 2005
     (62.0200            sold various 2006
     (12.8800            sold various 2007
     (2.2400            sold various 2008
     .2188            settlement agreement 2011   

Parcel 19, Kane County, Illinois

     436.2360         0         12/13/91   
     (436.2360            sold 05/16/01

Parcel 20, Kane & Kendall Counties, Illinois

     400.1290         368.8825         01/31/92   
     (21.1380            sold 06/30/99
     (7.0000            conveyed 2008
     (3.1085            conveyed 2011

Parcel 21, Kendall County, Illinois

     15.0130         0         05/26/92   
     (1.0000            sold 03/16/99
     (14.0130            sold 09/06/06

Parcel 22, Kendall County, Illinois

     391.9590         28.9960         10/30/92   
     (10.0000            sold 01/06/94
     (5.5380            sold 01/05/96
     (2.4000            sold 07/27/99
     (73.3950            sold various 2001
     (136.0000            sold 08/14/02
     (34.1400            sold 05/27/03
     (101.4900            sold various 2004

Parcel 23, Kendall County, Illinois

     133.4750         0         10/30/92   
     (.2676            sold 03/16/93

 

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Parcel & Location

   Gross Acres
Purchased/Sold
     Remaining
Acres
     Purchase/Sales
Date
 
     (11.5250            donated 07/16/93
     (44.0700            sold various 1995
     (8.2500            sold various 1996
     (2.6100            sold various 1997
     (10.6624            sold various 1998
     (5.8752            sold various 1999
     (49.0120            sold various 2000
     (.2028            sold various 2001
     (1.0000            sold various 2002

Parcel 24, Kendall County, Illinois

     4.3140         0         01/21/93   
     (4.3140            sold 04/16/01

Parcel 25, Kendall County, Illinois

     656.6870         0         01/28/93   
     (656.6870            sold 10/31/95

Parcel 26, Kane County, Illinois

     89.5110         0         03/10/93   
     (2.1080            sold 12/03/99
     (34.2550            sold various 2000
     (7.8000            sold various 2001
     (29.1200            sold various 2002
     (11.3100            sold various 2003
     (4.9180            sold 01/28/04

Parcel 28, Kendall County, Illinois

     50.0000         50.0000         *09/16/02   

 

* On September 16, 2002, we completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28).

Our general partner anticipates that the land we acquired will produce sufficient income to pay real estate taxes and insurance expense. Income will be derived through leases to farmers or from other activities compatible with undeveloped land. Although the general partner believes that leasing our land will generate sufficient revenues to pay these expenses, there can be no assurance that this will in fact occur. Our general partner has agreed to make a supplemental capital contribution to us if and to the extent that real estate taxes and insurance payable with respect to our land during a given year exceed the revenue earned by us from leasing our land during such year. Any supplemental capital contribution will be repaid only after limited partners have received, over the life of our partnership, a return of their original capital plus the 15% cumulative return. A majority of the parcels purchased by us consist of land which generates revenue from farming or other leasing activities. It is not expected that we will generate cash distributions to limited partners from farm leases or other leasing activities. Through December 31, 2011, our land has generated sufficient revenues from leasing to cover real estate taxes and insurance expense.

 

Item 3. Legal Proceedings

During the first quarter of 2009, the General Partner received notice that William Ryan Homes, Inc. (“Ryan”), the homebuilder for Parcel 18, filed suit against the City of Woodstock (“Woodstock”) and ILAFII#XVIII, LLC, our wholly-owned subsidiary (“our subsidiary”) that owns that property, in the Circuit Court for the 22nd Judicial District in McHenry County, Illinois. The complaint sought damages for alleged breach of a warranty which Ryan claimed caused water seepage. The complaint claimed that a total of seven lots have been the subject of water seepage complaints. Ryan also claimed that the seepage issues have caused Woodstock to issue a stop work order causing Ryan additional damage. Woodstock filed a Motion to Dismiss the complaint as it relates to Woodstock only and on October 13, 2009, Woodstock’s motion was granted on the grounds that Ryan had failed to properly exhaust its administrative remedies. Our subsidiary appeared and filed a Motion to Dismiss which was denied by the court on January 22, 2010. Our subsidiary filed its Answer and Affirmative Defenses on February 17, 2010 denying liability for the alleged damages. On

 

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February 23, 2011, Ryan and our subsidiary entered into a Settlement Agreement and Mutual Release with prejudice regarding this matter. Pursuant to such Settlement Agreement, on March 2, 2011, the Partnership paid Ryan approximately $34,000 and in return Ryan conveyed to our subsidiary one lot (comprised of .2188 acres) of Parcel 18. On March 14, 2011, the Court entered an order agreed to by the parties and dismissed the matter with prejudice.

On or about April 8, 2010, the Partnership received notification from the attorneys for the Village of Elburn that in effect demanded completion of certain land improvements. The Partnership is a co-indemnitor of the subdivision bonds that secure completion of the land improvements on Parcels 5 and 19 of the Blackberry Subdivision in Elburn, IL. On April 22, 2010, the Partnership received notice from the bonding companies demanding completion and satisfaction of such obligations. Based on information provided by the bonding companies, the Partnership is estimating that the maximum balance of the outstanding bonds and related fees is approximately $4.3 million, however, we believe the actual costs of the remaining improvements of the subdivision are far less than the outstanding bond amounts. The Partnership has been working with a representative of the bonding companies on this matter who attended a preliminary meeting on March 31, 2011 with representatives from the Village. The goal of the meeting was to obtain a common understanding of the scope of remaining work required to be completed. The parties determined that it was necessary to hire an engineer to provide an updated punch list of required work. The Partnership has received a final updated punch list of required work and the bonding company representative is working on obtaining bids to quantify the actual cost to complete the items listed on the punch list. As the Partnership learns more information from the representative of the bonding companies, we will update this matter in future reports. At this time, it is not possible to determine what, if any, liability will be asserted against the Partnership or the materiality of any outcome.

On or about December 16, 2011, the Partnership received service of a Third Party Complaint filed by Bond Safeguard Insurance Company (“Bond”) against the Partnership and Inland Real Estate Investment Corporation along with six other third party defendants. The lawsuit has been brought in the Circuit Court of the Sixteenth Judicial Circuit in Kane County, Illinois (the “Lawsuit”). In the Lawsuit, the County of Kane (the “County”) alleges that B&B Enterprises and/or Blackberry Creek Development Corporation (collectively “B&B”) are responsible for the relocation of approximately twenty-three power poles at an alleged cost of $819,740. Alternatively, the County alleges that either Bond or Commonwealth Edison Company (“ComEd”), is responsible for the cost of the pole relocation. On November 23, 2011, Bond filed an Answer denying the County’s allegations and has pled five affirmative defenses. As alternative relief, Bond filed a Counterclaim against B&B and ComEd and a Third Party Complaint against the Partnership and four individuals (the “Individuals”) contending that, if Bond is deemed responsible for the County’s allegations, then B&B, the Partnership, and/or the Individuals bear some or all of this responsibility under a General Agreement of Indemnity purported to apply to the removal of the poles. Bond also seeks its attorneys’ fees based on such General Agreement of Indemnity. Although investigation of the claims and defenses in the Lawsuit are ongoing, the Partnership expects to file a responsive pleading vigorously denying the material allegations asserted by Bond against the Partnership.

 

Item 4. RESERVED

Part II

 

Item 5. Market for Partnership’s Limited Partnership Units, Related Security Holder Matters and Partnership Purchases of Limited Partnership Units

As of February 8, 2012, there were 4,129 holders of our units. There is no public market for units nor is it anticipated that any public market for units will develop.

 

Item 6. Selected Financial Data

Not applicable

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this annual report on Form 10-K constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward looking statements. These factors include, among other things, adverse changes in real estate, financing and general economic or local conditions; the ability to obtain annexation and zoning approvals required to develop our properties; the approval of local governing bodies to develop our properties; successful lobbying of local “no growth” or limited development homeowner groups; eminent domain proceedings; changes in the environmental conditions or changes in the environmental positions of governmental bodies; and potential conflicts of interest between us and our affiliates, including our general partner.

Critical Accounting Policies

The Securities and Exchange Commission previously issued Financial Reporting Release (FRR) or FRR No. 60 “Cautionary Advice Regarding Disclosure About Critical Accounting Policies.” A critical accounting policy is one that would materially affect our operations or financial condition, and requires management to make estimates or judgments in certain circumstances. We believe that our most critical accounting policies relate to how we value our investment properties, the allocation of costs of investment properties, mortgage loan receivable and revenue recognition. These judgments often result from the need to make estimates about the effect of matters that are inherently uncertain. The purpose of the FRR is to provide investors with an understanding of how management forms these policies. Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordance with accounting principles generally accepted in the United States of America or GAAP. GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates. The following disclosure discusses judgments known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.

Valuation of Investment Properties - On a quarterly basis, we review impairment indicators and if necessary, conduct an impairment analysis to ensure that the carrying value of each investment property does not exceed its estimated fair value. If an investment property is considered impaired, we would be required to record an impairment loss equal to the excess of carrying value over the estimated fair value.

In determining the value of an investment property and whether the property is impaired, management considers several indicators which require difficult, complex and/or subjective judgments, such as projected sales prices, capital expenditures and assessment of current economic conditions. These indicators are considered by management in determining the value of any particular property. The value of any particular property is sensitive to the actual results of any of these uncertain indicators, either individually or taken as a whole. Should the actual results differ from management’s judgment, the valuation could be negatively or positively affected.

The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management’s continuous process of analyzing each property. For the year ended December 31, 2011 and 2010, we recorded an impairment of $650,500 and $0, respectively, in regards to Parcel 18. Subsequent costs incurred above the estimated fair value for any parcels that may be deemed to be impaired will be expensed and included in land operating expenses.

Cost Allocation - We use the area method of cost allocation whereby a per acre price is used as the standard allocation method for land purchases and sales. The total cost of the parcel is divided by the total number of acres to arrive at a per acre price.

Valuation of Mortgage Loan Receivable - On a quarterly basis, we conduct an analysis to determine whether the carrying value of the mortgage loan receivable is recoverable from the obligor. If we determine that all or a portion of the receivable is not collectible, we would be required to record an allowance for doubtful accounts equal to the amount estimated to be uncollectible.

 

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In determining the value of the mortgage loan receivable, management considers projected sales proceeds available and expenses related to the property associated with the mortgage. Should the actual results differ from management’s judgment, the valuation could be negatively or positively affected.

The valuation and possible subsequent allowance for doubtful accounts is a significant estimate that can and does change based on management’s continuous process of analyzing each mortgage loan receivable. During 2009, we evaluated the mortgage loan receivable and determined that an allowance for doubtful accounts of $8,918,412 for the remaining principal was needed. As of December 31, 2011, the mortgage loan receivable is formally written off.

Revenue Recognition - We recognize income from the sale of land parcels in accordance with the full accrual method of accounting.

Assets Held for Sale - In determining whether to classify an asset as held for sale, we consider whether: (i) management has committed to a plan to sell the asset; (ii) the asset is available for immediate sale, in its present condition; (iii) we have initiated a program to locate a buyer; (iv) we believe that the sale of the asset is probable; (v) we are actively marketing the asset for sale at a price that is reasonable in relation to its current value; and (vi) actions required for us to complete the plan indicate that it is unlikely that any significant changes will be made to the plan.

If all of the above criteria are met, we classify the asset as held for sale. The assets and liabilities associated with those assets that are held for sale are classified separately on the balance sheets for the most recent reporting period. Additionally, the operations for the periods presented are classified on the statements of operations as discontinued operations for all periods presented.

From time to time, we may determine that a “held for sale property” no longer meets the criteria to continue to be classified as held for sale. If this occurs, we record the property at the lower of the carrying amount before the property was classified as held for sale or the fair value at the decision date not to sell. As of December 31, 2011, we have not classified any properties as held for sale.

Liquidity and Capital Resources

Between October 25, 1989 and October 24, 1991, we sold 50,476.17 limited partnership units to the public at $1,000 per unit resulting in $50,476,170 in gross offering proceeds, not including the general partner’s capital contribution of $500.

We used $41,314,301 of gross offering proceeds to purchase, on an all-cash basis, twenty-seven parcels of undeveloped land and two buildings. These investments include the payment of the purchase price, acquisition fees and acquisition costs of such properties. Three of the parcels were purchased during 1990, sixteen during 1991, four during 1992, and four during 1993. On September 16, 2002, we completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28). Through December 31, 2011, we have had multiple sales, exchange transactions and conveyances, disposing of the buildings and approximately 3,571 acres of the approximately 4,530 acres originally owned. Through December 31, 2011, cumulative distributions have totaled $90,332,012 to the limited partners, which is equivalent to 179% of the original capital raised, which was $50,476,170, and cumulative distributions to the general partner have totaled $13,313,195. Of the $90,332,012 distributed to the limited partners, $89,611,012 was net sales proceeds and $721,000 was from operations. Through December 31, 2011, we have used $47,350,730 of working capital for rezoning and other activities. Such amounts have been capitalized and are included in investment properties.

Our capital needs and resources will vary depending upon a number of factors, including the extent to which we conduct rezoning and other activities relating to utility access, the installation of roads, subdivision and/or annexation of land to a municipality, changes in real estate taxes affecting our land, and the amount of revenue received from farm rents. As of December 31, 2011, we own, in whole or in part, seven parcels, the majority of which are leased to local farmers and are generating sufficient cash flow from farm leases to cover real estate taxes and insurance expense. We continue to market the remaining acres for sale.

At December 31, 2011, we had cash and cash equivalents of $1,952,586 which is available to be used for our costs and liabilities, cash distributions to partners and other activities with respect to some or all of our land parcels.

 

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During the year ended December 31, 2011, we had no land sales. During the year ended December 31, 2010, we received net sales proceeds of $301,321 from the sale of nine improved residential lots which equates to approximately 1.7 acres of Parcel 3/27. During 2010, three acres of park land were conveyed to the Fox Valley Park District which was required upon the acceptance of the improvements for Parcel 3/27. Other prior conveyances included the subdivision roadways to the Village of Montgomery and required conveyances to the Kendall County Forest Preserve. Parcel 3/27 consists of two contiguous parcels which are being jointly developed as two residential subdivisions. Each subdivision lies within the boundaries of both parcels. During 2010 we entered into an agreement to sell the remaining lots of Parcel 3/27 to a builder on a schedule over an 18 month period. The builder purchased the required 9 lots during June 2010. However, during 2011, the builder terminated the agreement and the related escrow funds of $57,000 were released to the Partnership. While we anticipate future lot sales of the remaining acreage of Parcel 3/27, there can be no assurance that any sales will be completed during 2012 or that a distribution will be made to the limited partners. Previously undistributed net sales proceeds will be used to fund our operations, including land improvements and land use activities. We will evaluate our cash needs throughout the year to determine any future distributions.

Parcel 18 has been zoned and planned for residential use. On March 2, 2011, a settlement agreement and mutual release with prejudice was reached with William Ryan Homes, Inc. (“Ryan”), the former builder of Parcel 18. As part of the settlement the builder transferred a residential lot to the Partnership and in return, the Partnership paid to Ryan approximately $34,000. With the suit resolved, we are actively marketing the remaining lots for sale to both homebuilders and individuals interested in acquiring lots to construct their own home. One recent report which studies Chicagoland housing market trends reports the lowest number of home closings in the first two quarters of 2011 than it has seen since 1990. Even so, builders are tentatively re-entering into the market and it is our belief that our subdivisions are located in geographically desirable locations.

We plan to enhance the value of our remaining land through pre-development activities such as rezoning, annexation and land planning. We have already been successful in, or are in the process of, pre-development activity on several of our land investments. Parcel 20 has been granted rezoning which will permit additional land to be used for development. During March 2011, approximately 3.1 acres of Parcel 20 were conveyed to the Village of Montgomery for use as part of a sanitary booster station and a storm water management basin. We are in the preliminary stage with the Illinois Department of Transportation regarding their interest to acquire approximately 2.3 acres of land to facilitate road improvements to US-30 adjacent to Parcel 20.

We continue to closely monitor the real estate market trends, especially within the areas where our remaining parcels are located. We have seen modest improvements in the residential resale real estate market, however, new home starts in these middle class communities remain weak. That, coupled with strict lender requirements, adversely impact sales activity, especially sales of residential lots and sales of vacant land for retail purposes. There have been reports of farm parcel sales in surrounding communities from both speculators looking to hold land until the market rebounds as well as farmers looking to increase their farming businesses. We realize it could take some time for these current trends to improve which could result in an even longer holding period. However, we believe we have taken the steps necessary to reduce costs and maintain sufficient reserves of cash and cash equivalents to cover all our costs for an extended period of time. We have farm leases in place which generate sufficient income to cover the costs of insurance expense and real estate taxes. Our remaining land is not encumbered by debt and is located in areas that we believe are in the paths of future development.

Transactions with Related Parties

Our general partner and its affiliates are entitled to reimbursement for salaries and expenses of employees of the general partner and its affiliates relating to our administration. Such costs of $80,282 and $93,624 are included in professional services to affiliates and general and administrative expenses to affiliates for the years ended December 31, 2011 and 2010, respectively, of which $11,978 and $8,780 was unpaid as of December 31, 2011 and 2010, respectively.

An affiliate of our general partner performs marketing and advertising services for us and is reimbursed for direct costs. Such costs of $20,587 and $10,966 have been incurred and are included in marketing expenses to affiliates for the years ended December 31, 2011 and 2010, respectively, of which $170 and $1,286 was unpaid as of December 31, 2011 and 2010, respectively.

 

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An affiliate of our general partner performs land improvements, rezoning, annexation and other activities to prepare our investment properties for sale and is reimbursed for salaries and direct costs. For the years ended December 31, 2011 and 2010, we incurred $9,384 and $9,746, respectively, of such costs. Such costs are included in investment properties, of which $1,000 and $2,241 was unpaid as of December 31, 2011 and 2010, respectively. In addition, the costs related to Parcels 3/27 and 18 totaled $25,520 and $27,004 for the years ended December 31, 2011 and 2010, respectively, and is included in land operating expenses to affiliates, of which $2,100 and $7,333 was unpaid as of December 31, 2011 and 2010, respectively. The affiliate did not recognize a profit on any project.

As of December 31, 2011, the Partnership held all cash and cash equivalents with Inland Bank and Trust, an affiliate of the general partner.

Results of Operations

There were no land sales for the year ended December 31, 2011. The lack of sales activity for the year ended December 31, 2011 is the result of the depressed real estate market and the slowdown in the sales of vacant land and residential lots. For the year ended December 31, 2010, income from the sale of investment properties of $301,321 and the related cost of investment properties sold of $306,000 is the result of the sale of nine improved lots which equates to approximately 1.7 acres of Parcel 3/27.

During 2001, we sold 189 acres of Parcel 5 and 436 acres of Parcel 19 for $17,500,000 and recorded deferred gain of $10,203,634. We received a deferred down payment note in the amount of $1,500,000, due December 31, 2001. The note had an interest rate of 6%, however the note provided for the interest to be waived if the principal was paid in full by December 1, 2001. We received payment of the deferred down payment note on December 1, 2001 and recognized as sales revenue $875,923 of deferred gain. We also received an installment note in the amount of $16,000,000 at the time of closing. The installment note matured July 1, 2011 and had an interest rate of 6%. During the first quarter of 2008, the homebuilder who is the obligor under the mortgage loan receivable notified us that it was experiencing a slowdown in sales contracts for new homes. As a result, we agreed to temporarily suspend the 6% interest due on the mortgage loan receivable and applied payments received during 2008 toward principal. During the second quarter of 2008, based on the available information, we determined that the full collectability of the mortgage loan receivable was doubtful. As a result, we elected to reserve $3,923,062 of principal. In addition, $2,296,818 of the deferred gain relating to the mortgage loan receivable was also reserved and recorded against bad debt expense during 2008. During the third quarter of 2009, based on the available information, we determined that the collectability of the remaining mortgage receivable was doubtful. The mortgage loan receivable is subordinate to a first mortgage held by an unaffiliated lender. The holder of the first mortgage filed a complaint of foreclosure during September 2009. We filed our answer and counterclaim to the complaint to preserve our interest in the foreclosure on March 18, 2010. The holder of the first mortgage filed for summary judgment and we filed a response to that motion on August 24, 2010. On July 27, 2011, a formal judgment of foreclosure was entered. The Partnership’s mortgage loan receivable was included in the judgment of foreclosure subordinate to the first mortgage held by an unaffiliated lender. Since it was unlikely that the remaining value of the property secured by the mortgage loan receivable was in excess of the remaining balance due under the first mortgage, we elected to reserve the remaining $4,995,350 of principal as of September 30, 2009. In addition, the deferred gain of $2,913,192 relating to the mortgage loan receivable was also reserved and recorded against bad debt expense resulting in bad debt expense of $2,082,158 for the nine months ended September 30, 2009. Effective January 1, 2009, accrual of the 6% interest due on the mortgage loan receivable resumed, however, we determined that the collectability of the interest is doubtful. Since we have only received minimal payments from the obligor since January 2008, we did not accrue interest on the financial statements. As of December 31, 2011, the mortgage loan receivable is formally written off.

As of December 31, 2011, we owned seven parcels of land consisting of approximately 959 acres. Of the approximately 959 acres owned, 721 acres are tillable, leased to local farmers and generate sufficient cash flow to cover real estate taxes and insurance. Rental income was $168,571 and $159,455 for the years ended December 31, 2011 and 2010, respectively. The rental income for 2011 increased due to an increase in farm rental rates. The 2012 farm leases for our tillable land were negotiated and fully executed within the first quarter of 2012 at slightly increased rates.

Other operating income was $74,690 and $71,000 for the year ended December 31, 2011 and 2010, respectively. During 2011, we received $57,000 due to the release of escrow funds from the terminated sales agreement with the homebuilder for Parcel 3/27. In addition, we received $17,690 and $71,000 for the year ended December 31, 2011 and 2010, respectively, for reimbursements received from unused development cost escrows in regards to previously sold parcels.

 

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Professional services to affiliates and non-affiliates were $156,513 and $166,864 for the year ended December 31, 2011 and 2010, respectively. Professional services to affiliates and non-affiliates decreased due to a decrease in accounting fees and legal fees as the litigation discussed below settled during the first quarter of 2011.

General and administrative expenses to affiliates and non-affiliates were $43,520 and $46,722 for the year ended December 31, 2011 and 2010, respectively. General and administrative expenses primarily include data processing costs, postage and printing expenses. General and administrative expenses to affiliates and non-affiliates decreased primarily due to a decrease in printing and postage costs.

Marketing expenses to affiliates were $20,587 and $10,966 for the year ended December 31, 2011 and 2010, respectively. Marketing expenses to affiliates are costs incurred for preparing and marketing parcels for sale. Marketing expenses increased primarily due to approximately $7,300 in fees incurred for marketing services by an affiliate in connection with the auction for Parcel 18 held during the fourth quarter of 2011. The auction did not result in any lot sales for Parcel 18, although it did raise awareness in the real estate community for the available lots.

Land operating expenses to affiliates and non-affiliates were $139,289 and $230,871 for the years ended December 31, 2011 and 2010, respectively. These costs primarily include real estate tax expense, ground maintenance expense, insurance expense and the Partnership’s proportionate share of the homeowners association fees. The decrease in land operating expenses is due to less operating expense costs at the residential subdivisions of Parcels 3/27 and 18.

Interest income was $20,029 and $27,972 for the years ended December 31, 2011 and 2010, respectively. Interest income is primarily a result of cash available to invest on a short term basis during the year as a result of sales proceeds received. Interest income decreased due to less cash available to invest and lower interest rates.

Other income was $10,700 and $16,293 for the years ended December 31, 2011 and 2010, respectively. The decrease in 2011 is due to less transfer fee income as a result of a reduced number of completed transfer requests.

Our Partnership Agreement

Our partnership agreement prescribes the allocation of profits and losses, and the distribution priorities of available cash. If and to the extent that real estate taxes and insurance payable with respect to our land during a given year exceed our revenues, our general partner will make a supplemental capital contribution of such amount to us to ensure that we have sufficient funds to make such payments and receives a special allocation of expenses in a like amount.

Profits and losses from operations (other than capital transactions) will be allocated 99% to the limited partners and 1% to the general partner. The net gain from sales of our properties is first allocated among the partners in proportion to the negative balances, if any, in their respective capital accounts. Thereafter, except as provided below, net gain is allocated to the general partner in an amount equal to the proceeds distributed to the general partner from such sale and the balance of any net gain is allocated to the limited partners. If the amount of net gain realized from a sale is less than the amount of cash distributed to the general partner from such sale, we will allocate income or gain to the general partner in an amount equal to the excess of the cash distributed to the general partner with respect to such sale as quickly as permitted by law. Any net loss from a sale will be allocated to the limited partners.

Distributions of net sales proceeds will be allocated between the general partner and the limited partners based upon both an aggregate overall return to the limited partners and a separate return with respect to each parcel of land purchased by us.

As a general rule, net sale proceeds will be distributed 90% to the limited partners and 10% to the general partner until the limited partners have received from net sale proceeds (i) a return of their original capital plus (ii) a noncompounded cumulative preferred return of 15% of their invested capital. However, with respect to each parcel of land, the general partner’s 10% share will be subordinated until the limited partners receive a return of the original capital attributed to such parcel (“parcel capital”) plus a 6% per annum noncompounded cumulative preferred return thereon.

After the amounts described in items (i) and (ii) above and any previously subordinated distributions to the general partner have been paid, and the amount of any supplemental capital contributions have been repaid to the general partner,

 

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subsequent distributions shall be paid 75% to the limited partners and 25% to the general partner without considering parcel capital. If, after all net sale proceeds have been distributed, the general partner has received more than 25% of all net sale proceeds (exclusive of distributions made to the limited partners to return their original capital), the general partner shall contribute to us for distribution to the limited partners an amount equal to such excess.

Any distributions from net sales proceeds at a time when invested capital is greater than zero shall be deemed applied first to reduction of such invested capital before application to payment of any deficiency in the 15% cumulative preferred return.

Subsequent Events

The Partnership evaluates subsequent events occurring between the most recent balance sheet date and the date that the financial statements are available to be issued in order to determine whether the subsequent events are to be recorded in and/or disclosed in the Partnership’s financial statements and footnotes. The financial statements are considered to be available to be issued at the time that they are filed with the Securities and Exchange Commission.

During late February 2012, the Partnership received what the general partner deems to be an acceptable offer from a third party purchaser for Parcel 28 located in Kendall County, Illinois. We are negotiating a purchase and sale agreement for this transaction. Provided the buyer performs, the sale is estimated to result in net sales proceeds of approximately $748,000. Although management considers this to be an attractive offer, the Partnership would realize a potential loss on the sale of approximately $167,000.

For the year ended December 31, 2011, there are no other subsequent events to report that would have a material impact on the Partnership’s financial statements.

Other Items

In accordance with Article XVI Section 16.1 of the Inland Land Appreciation Fund II, L.P. Partnership Agreement and Treasury Regulation Section 1.7704-1(j), we reached the maximum threshold of limited partnership units that may be transferred/assigned directly between parties during 2011. For the benefit of interested limited partners, we have a relationship with a “qualified matching service” as defined under Treasury Regulation Section 1.7704-1(g). In accordance with this Treasury Regulation and the IRS private letter ruling obtained by the “qualified matching service”, we understand that limited partnership units may be transferred/assigned through the “qualified matching service” up to a separate maximum threshold each taxable year (in addition to the maximum threshold that may be transferred/assigned directly between parties discussed above). However, there can be no assurance that the IRS private letter ruling will apply to transfers of units, or that any particular transfer will not violate the transfer restrictions contained in our partnership agreement or the provisions of Treasury Regulation Section 1.7704-1(g). If you have any interest in participating in a transfer/assignment of partnership units through this “qualified matching service,” please contact American Partnership Board directly at 800-736-9797. You are strongly encouraged to consult your personal legal, financial and tax advisors in connection with any such transfer/assignment.

The Illinois Department of Revenue regulates Illinois income tax withholding requirements for nonresident partners. For the taxable years ending December 31, 2011 and 2010, respectively, there were no withholdings required. We are also required to pay a withholding tax to the Internal Revenue Service with respect to a partner’s allocable share of our taxable net income, if the partner is a foreign person. We will first pay the withholding tax from the distributions to any nonresident and/or foreign partners, and to the extent that the tax exceeds the amount of distributions withheld, or if there have been no distributions to withhold, the excess will be accounted for as a distribution to such nonresident and/or foreign partners. For the years ended December 31, 2011 and 2010, respectively, there were no withholdings paid.

Off-Balance Sheet Arrangements, Contractual Obligations, Liabilities and Contracts and Commitments

None

 

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Litigation

During the first quarter of 2009, the General Partner received notice that William Ryan Homes, Inc. (“Ryan”), the homebuilder for Parcel 18, filed suit against the City of Woodstock (“Woodstock”) and ILAFII#XVIII, LLC, our wholly-owned subsidiary (“our subsidiary”) that owns that property, in the Circuit Court for the 22nd Judicial District in McHenry County, Illinois. The complaint sought damages for alleged breach of a warranty which Ryan claimed caused water seepage. The complaint claimed that a total of seven lots have been the subject of water seepage complaints. Ryan also claimed that the seepage issues have caused Woodstock to issue a stop work order causing Ryan additional damage. Woodstock filed a Motion to Dismiss the complaint as it relates to Woodstock only and on October 13, 2009, Woodstock’s motion was granted on the grounds that Ryan had failed to properly exhaust its administrative remedies. Our subsidiary appeared and filed a Motion to Dismiss which was denied by the court on January 22, 2010. Our subsidiary filed its Answer and Affirmative Defenses on February 17, 2010 denying liability for the alleged damages. On February 23, 2011, Ryan and our subsidiary entered into a Settlement Agreement and Mutual Release with prejudice regarding this matter. Pursuant to such Settlement Agreement, on March 2, 2011, the Partnership paid Ryan approximately $34,000 and in return Ryan conveyed to our subsidiary one lot (comprised of .2188 acres) of Parcel 18. On March 14, 2011, the Court entered an order agreed to by the parties and dismissed the matter with prejudice.

On or about April 8, 2010, the Partnership received notification from the attorneys for the Village of Elburn that in effect demanded completion of certain land improvements. The Partnership is a co-indemnitor of the subdivision bonds that secure completion of the land improvements on Parcels 5 and 19 of the Blackberry Subdivision in Elburn, IL. On April 22, 2010, the Partnership received notice from the bonding companies demanding completion and satisfaction of such obligations. Based on information provided by the bonding companies, the Partnership is estimating that the maximum balance of the outstanding bonds and related fees is approximately $4.3 million, however, we believe the actual costs of the remaining improvements of the subdivision are far less than the outstanding bond amounts. The Partnership has been working with a representative of the bonding companies on this matter who attended a preliminary meeting on March 31, 2011 with representatives from the Village. The goal of the meeting was to obtain a common understanding of the scope of remaining work required to be completed. The parties determined that it was necessary to hire an engineer to provide an updated punch list of required work. The Partnership has received a final updated punch list of required work and the bonding company representative is working on obtaining bids to quantify the actual cost to complete the items listed on the punch list. As the Partnership learns more information from the representative of the bonding companies, we will update this matter in future reports. At this time, it is not possible to determine what, if any, liability will be asserted against the Partnership or the materiality of any outcome.

On or about December 16, 2011, the Partnership received service of a Third Party Complaint filed by Bond Safeguard Insurance Company (“Bond”) against the Partnership and Inland Real Estate Investment Corporation along with six other third party defendants. The lawsuit has been brought in the Circuit Court of the Sixteenth Judicial Circuit in Kane County, Illinois (the “Lawsuit”). In the Lawsuit, the County of Kane (the “County”) alleges that B&B Enterprises and/or Blackberry Creek Development Corporation (collectively “B&B”) are responsible for the relocation of approximately twenty-three power poles at an alleged cost of $819,740. Alternatively, the County alleges that either Bond or Commonwealth Edison Company (“ComEd”), is responsible for the cost of the pole relocation. On November 23, 2011, Bond filed an Answer denying the County’s allegations and has pled five affirmative defenses. As alternative relief, Bond filed a Counterclaim against B&B and ComEd and a Third Party Complaint against the Partnership and four individuals (the “Individuals”) contending that, if Bond is deemed responsible for the County’s allegations, then B&B, the Partnership, and/or the Individuals bear some or all of this responsibility under a General Agreement of Indemnity purported to apply to the removal of the poles. Bond also seeks its attorneys’ fees based on such General Agreement of Indemnity. Although investigation of the claims and defenses in the Lawsuit are ongoing, the Partnership expects to file a responsive pleading vigorously denying the material allegations asserted by Bond against the Partnership.

 

Item 7(A). Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

 

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Item 8. Financial Statements and Supplementary Data

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Index

 

     Page  

Report of Independent Registered Public Accounting Firm

     19   

Financial Statements:

  

Balance Sheets, December 31, 2011 and 2010

     20   

Statements of Operations, for the years ended December 31, 2011 and 2010

     21   

Statements of Partners’ Capital, for the years ended December 31, 2011 and 2010

     22   

Statements of Cash Flows, for the years ended December 31, 2011 and 2010

     23   

Notes to Financial Statements

     24   

Schedules not filed:

All schedules have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

 

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Report of Independent Registered Public Accounting Firm

To the Partners of

Inland Land Appreciation Fund II, L.P.

We have audited the accompanying balance sheets of Inland Land Appreciation Fund II, L.P. (a limited partnership) (“the Partnership”) as of December 31, 2011 and 2010, and the related statements of operations, partners’ capital, and cash flows for the years then ended. The financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Inland Land Appreciation Fund II, L.P. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Chicago, Illinois

March 9, 2012

 

-19-


Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Balance Sheets

December 31, 2011 and 2010

Assets

 

     2011      2010  

Current assets:

     

Cash and cash equivalents (Note 1)

   $ 1,952,586        2,119,222  

Accounts receivable

     7,682        0  
  

 

 

    

 

 

 

Total current assets

     1,960,268        2,119,222  
  

 

 

    

 

 

 

Mortgage loan receivable (net of allowance for doubtful accounts of $0 and $8,918,412 at December 31, 2011 and 2010, respectively) (Note 6)

     0        0  

Investment properties (including acquisition fees paid to affiliates of $366,275 and $369,560 at December 31, 2011 and 2010, respectively) (Note 4):

     

Land and improvements

     17,560,744        18,155,770  
  

 

 

    

 

 

 

Total assets

   $ 19,521,012        20,274,992  
  

 

 

    

 

 

 

Liabilities and Partners’ Capital

 

Current liabilities:

    

Accounts payable

   $ 19,581       27,368  

Accrued real estate taxes

     30,233       35,615  

Due to affiliates (Note 3)

     15,248       19,640  
  

 

 

   

 

 

 

Total current liabilities

     65,062       82,623  
  

 

 

   

 

 

 

Partners’ capital:

    

General Partner:

    

Capital contribution

     500       500  

Cumulative net income

     13,688,435       13,689,294  

Cumulative cash distributions

     (13,313,195     (13,313,195
  

 

 

   

 

 

 
     375,740       376,599  
  

 

 

   

 

 

 

Limited Partners:

    

Units of $1,000. Authorized 60,000 Units, 50,068 Units outstanding at December 31, 2011 and 2010, (net of offering costs of $7,532,439, of which $2,535,445 was paid to affiliates)

     42,559,909       42,559,909  

Cumulative net income

     66,852,313       67,587,873  

Cumulative cash distributions

     (90,332,012     (90,332,012
  

 

 

   

 

 

 
     19,080,210       19,815,770  
  

 

 

   

 

 

 

Total Partners’ capital

     19,455,950       20,192,369  
  

 

 

   

 

 

 

Total liabilities and Partners’ capital

   $ 19,521,012       20,274,992  
  

 

 

   

 

 

 

See accompanying notes to financial statements.

 

-20-


Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Statements of Operations

For the years ended December 31, 2011 and 2010

 

     2011     2010  

Revenues:

    

Sale of investment properties (Notes 1 and 4)

   $ 0       301,321  

Rental income (Note 5)

     168,571       159,455  

Other operating income

     74,690       71,000  
  

 

 

   

 

 

 

Total revenues

     243,261       531,776  
  

 

 

   

 

 

 

Expenses:

    

Cost of investment properties sold

     0       306,000  

Professional services to affiliates

     68,282       80,412  

Professional services to non-affiliates

     88,231       86,452  

General and administrative expenses to affiliates

     12,000       13,212  

General and administrative expenses to non-affiliates

     31,520       33,510  

Marketing expenses to affiliates

     20,587       10,966  

Land operating expenses to affiliates

     25,520       27,004  

Land operating expenses to non-affiliates

     113,769       203,867  

Impairment loss on land

     650,500       0  
  

 

 

   

 

 

 

Total expenses

     1,010,409       761,423  
  

 

 

   

 

 

 

Operating loss

     (767,148     (229,647

Interest income

     20,029       27,972  

Other income

     10,700       16,293  
  

 

 

   

 

 

 

Net loss

   $ (736,419     (185,382 )
  

 

 

   

 

 

 

Net loss allocated to (Note 2):

    

General Partner

   $ (859     (1,807

Limited Partners

     (735,560     (183,575
  

 

 

   

 

 

 

Net loss

   $ (736,419     (185,382
  

 

 

   

 

 

 

Net loss allocated to the one General Partner Unit

   $ (859     (1,807
  

 

 

   

 

 

 

Net loss per Unit allocated to Limited Partners per weighted average Limited Partnership Units (50,068 for the years ended December 31, 2011 and 2010)

   $ (14.69     (3.67
  

 

 

   

 

 

 

See accompanying notes to financial statements.

 

-21-


Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Statements of Partners’ Capital

For the years ended December 31, 2011 and 2010

 

     General
Partner
    Limited
Partners
    Total  

Balance at January 1, 2010

   $ 378,406       19,999,345       20,377,751  

Net loss (Note 2)

     (1,807     (183,575     (185,382
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

   $ 376,599       19,815,770       20,192,369  
  

 

 

   

 

 

   

 

 

 

Net loss (Note 2)

     (859     (735,560     (736,419
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ 375,740       19,080,210       19,455,950  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to financial statements.

 

-22-


Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Statements of Cash Flows

For the years ended December 31, 2011 and 2010

 

     2011     2010  

Cash flows from operating activities:

    

Net loss

   $ (736,419     (185,382

Adjustments to reconcile net loss to net cash used in operating activities:

    

Loss on sale of investment properties

     0       4,679  

Impairment loss on land

     650,500       0  

Changes in assets and liabilities:

    

Accounts receivable

     (7,682     0  

Accounts payable

     (7,787     (205,055

Accrued real estate taxes

     (5,382     (4,849

Due to affiliates

     (4,392     (16,546
  

 

 

   

 

 

 

Net cash flow used in operating activities

     (111,162     (407,153
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to investment properties

     (55,474 )     (111,848

Proceeds from sale of investment properties

     0       301,321  
  

 

 

   

 

 

 

Net cash flow provided by (used in) investing activities

     (55,474 )     189,473  
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (166,636     (217,680

Cash and cash equivalents at beginning of year

     2,119,222       2,336,902  
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 1,952,586       2,119,222  
  

 

 

   

 

 

 

See accompanying notes to financial statements.

 

-23-


Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

For the years ended December 31, 2011 and 2010

(1) Organization and Basis of Accounting

Inland Land Appreciation Fund II, L.P. (the “Partnership”) is a limited partnership formed on June 28, 1989, pursuant to the Delaware Revised Uniform Limited Partnership Act, to invest in undeveloped land on an all-cash basis and realize appreciation of such land upon resale. On October 25, 1989, the Partnership commenced an Offering of 30,000 (subject to increase to 60,000) Limited Partnership Units (“Units”) pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933. The Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) provides for Inland Real Estate Investment Corporation to be the General Partner. On October 24, 1991, the Partnership terminated its Offering of Units, with total sales of 50,476.17 Units, at $1,000 per Unit, resulting in $50,476,170 in gross offering proceeds, not including the General Partner’s capital contribution of $500. All of the holders of these Units have been admitted to the Partnership. Through December 31, 2011, the Partnership had repurchased a total of 408.65 Units for $383,822 from various Limited Partners through the Unit Repurchase Program.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Offering costs have been offset against the Limited Partners’ capital accounts.

The Partnership considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents and are carried at cost, which approximates market value. The Partnership maintains its cash and cash equivalents at a financial institution. The account balance at the financial institution periodically exceeds the Federal Depository Insurance Corporation (“FDIC”) insurance coverage of $250,000 on interest bearing accounts and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Partnership believes that the risk is not significant, and the Partnership does not anticipate the financial institution’s non-performance.

The Partnership recognizes income from the sale of land parcels in accordance with the full accrual method of accounting.

The Partnership’s escrow agent holds earnest money deposits from a prospective purchaser when an agreement for sale is executed. Generally, these funds are not the Partnership’s until the closing has occurred or the buyer under the sale agreement has committed a default which would entitle the Partnership to the earnest money.

For vacant land parcels and parcels with insignificant buildings and improvements, the Partnership uses the area method of allocation whereby a per acre price is used as the standard allocation method for land purchases and sales. The total cost of the parcel is divided by the total number of acres to arrive at a per acre price. Repair and maintenance expenses are charged to operations as incurred.

A presentation of information about operating segments would not be material to an understanding of the Partnership’s business taken as a whole as the Partnership is engaged in the business of real estate investment which management considers to be a single operating segment.

On a quarterly basis, the Partnership reviews impairment indicators and if necessary, conducts an impairment analysis to ensure that the carrying value of each investment property does not exceed its estimated fair value. If an investment property is considered impaired, the Partnership would be required to record an impairment loss equal to the excess of carrying value over the estimated fair value.

 

-24-


Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

In determining the value of an investment property and whether the property is impaired, management considers several factors which require difficult, complex and/or subjective judgments, such as projected sales prices, capital expenditures and assessment of current economic conditions. These factors are considered by management in determining the value of any particular property. The value of any particular property is sensitive to the actual results of any of these uncertain factors, either individually or taken as a whole. Should the actual results differ from management’s judgment, the valuation could be negatively or positively affected. The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management’s continuous process of analyzing each property.

The Partnership is required to pay a withholding tax to the Internal Revenue Service with respect to a Partner’s allocable share of the Partnership’s taxable net income if the Partner is a foreign person. Similarly, the Partnership is required to pay a withholding tax to the Illinois Department of Revenue for nonresident partners. The Partnership will first pay the withholding tax from the distributions to any nonresident and/or foreign partners, and to the extent that the tax exceeds the amount of distributions withheld, or if there have been no distributions to withhold, the excess will be accounted for as a distribution to such nonresident and/or foreign partners.

No provision for Federal income taxes has been made, as the liability for such taxes is that of the Partners rather than the Partnership.

The Partnership records are maintained on the accrual basis of accounting in accordance with GAAP. The Federal income tax return has been prepared from such records after making appropriate adjustments, if any, to reflect the Partnership’s accounts as adjusted for Federal income tax reporting purposes. Such adjustments are not recorded in the records of the Partnership. The net effect of these items is summarized as follows:

 

     2011     2010  
     GAAP     Tax Basis     GAAP     Tax Basis  
     Basis     (unaudited)     Basis     (unaudited)  

Total assets

   $ 19,521,012       27,053,450        20,274,992        27,807,432   

Partners’ capital:

        

General Partner

     375,740       187,827        376,599        195,191   

Limited Partners

     19,080,210       26,800,566        19,815,770        27,529,621   

Net loss allocated:

        

General Partner

     (859     (43,617     (1,807     (1,660

Limited Partners

     (735,560     (4,318,094     (183,575     (399,778

Net loss per Limited Partnership Unit

     (14.69     (86.24     (3.67     (7.98

The net loss per Unit is based upon the weighted average number of Units of 50,068 during 2011and 2010.

 

-25-


Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

(2) Partnership Agreement

The Partnership Agreement prescribes the allocation of profits and losses, and the distribution priorities of available cash. If and to the extent that real estate taxes and insurance payable with respect to the Partnership’s land during a given year exceed revenues of the Partnership, the General Partner will make a Supplemental Capital Contribution of such amount to the Partnership to ensure that it has sufficient funds to make such payments and receives a special allocation of expenses in a like amount.

Profits and losses from operations (other than capital transactions) will be allocated 99% to the Limited Partners and 1% to the General Partner. The net gain from sales of Partnership properties is first allocated among the Partners in proportion to the negative balances, if any, in their respective capital accounts. Thereafter, except as provided below, net gain is allocated to the General Partner in an amount equal to the proceeds distributed to the General Partner from such sale and the balance of any net gain is allocated to the Limited Partners. If the amount of net gain realized from a sale is less than the amount of cash distributed to the General Partner from such sale, the Partnership will allocate income or gain to the General Partner in an amount equal to the excess of the cash distributed to the General Partner with respect to such sale as quickly as permitted by law. Any net loss from a sale will be allocated to the Limited Partners.

Distributions of Net Sale Proceeds will be allocated between the General Partner and the Limited Partners based upon both an aggregate overall return to the Limited Partners and a separate return with respect to each parcel of land purchased by the Partnership.

As a general rule, Net Sale Proceeds will be distributed 90% to the Limited Partners and 10% to the General Partner until the Limited Partners have received from Net Sale Proceeds (i) a return of their Original Capital plus (ii) a noncompounded Cumulative Preferred Return of 15% of their Invested Capital. However, with respect to each parcel of land, the General Partner’s 10% share will be subordinated until the Limited Partners receive a return of the Original Capital attributed to such parcel (“Parcel Capital”) plus a 6% per annum noncompounded Cumulative Preferred Return thereon.

After the amounts described in items (i) and (ii) above and any previously subordinated distributions to the General Partner have been paid, and the amount of any Supplemental Capital Contributions have been repaid to the General Partner, subsequent distributions shall be paid 75% to the Limited Partners and 25% to the General Partner without considering Parcel Capital. If, after all Net Sale Proceeds have been distributed, the General Partner has received more than 25% of all Net Sale Proceeds (exclusive of distributions made to the Limited Partners to return their Original Capital), the General Partner shall contribute to the Partnership for distribution to the Limited Partners an amount equal to such excess.

Any distributions from Net Sales Proceeds at a time when Invested Capital is greater than zero shall be deemed applied first to the reduction of such Invested Capital before application to payment of any deficiency in the 15% Cumulative Preferred Return.

 

-26-


Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

(3) Transactions with Affiliates

The General Partner and its affiliates are entitled to reimbursement for salaries and expenses of employees of the General Partner and its affiliates relating to the administration of the Partnership. Such costs of $80,282 and $93,624 are included in professional services to affiliates and general and administrative expenses to affiliates for the years ended December 31, 2011 and 2010, respectively, of which $11,978 and $8,780 was unpaid as of December 31, 2011 and 2010, respectively.

An affiliate of the General Partner performs marketing and advertising services for the Partnership and is reimbursed (as set forth under terms of the Partnership Agreement) for direct costs. Such costs of $20,587 and $10,966 have been incurred and are included in marketing expenses to affiliates for the years ended December 31, 2011 and 2010, respectively, of which $170 and $1,286 was unpaid as of December 31, 2011 and 2010, respectively.

An affiliate of the General Partner performs land improvements, rezoning, annexation and other activities to prepare the Partnership’s investment properties for sale and is reimbursed (as set forth under terms of the Partnership Agreement) for salaries and direct costs. For the years ended December 31, 2011 and 2010, the Partnership incurred $9,384 and $9,746, respectively, of such costs. Such costs are included in investment properties, of which $1,000 and $2,241 was unpaid as of December 31, 2011 and 2010, respectively. In addition, the costs related to Parcels 3/27 and 18 totaled $25,520 and $27,004 for the years ended December 31, 2011 and 2010 and are included in land operating expenses to affiliates, of which $2,100 and $7,333 was unpaid as of December 31, 2011 and 2010, respectively. The affiliate does not recognize a profit on any project.

As of December 31, 2011 and 2010, the Partnership held all cash and cash equivalents with Inland Bank and Trust, an affiliate of the General Partner.

 

-27-


Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

(4) Investment properties

 

Parcel #

  

Illinois
County

   Gross
Acres
Purchased
(Sold)
    Purchase/
Sales
Date
    

 

Initial Costs

     Costs
Capitalized

Subsequent  to
Acquisition
     Costs of
Property
Sold/Impaired
     Total
Remaining
Costs of

Parcels at
12/31/11
     Current Year
Loss

on Sale
Recognized
 
           Original
Costs
     Acquisition
Costs
     Total
Costs
             
1    McHenry      372.7590       04/25/90       $ 2,114,295         114,070         2,228,365         630,703         2,859,068         0        0  
        (372.7590     02/23/04                        
2    Kendall      41.1180       07/06/90         549,639         43,889         593,528         75,199         668,727         0        0  
        (3.4730     08/29/03                        
        (37.6450     02/17/05                        
3/27    Kendall      120.8170       11/06/90         2,591,268         156,709         2,747,977         9,880,850         10,690,827         1,938,000         0  
        83.5250       03/11/93                        
        (3.3900     05/17/05                        
        (31.0000     07/14/05                        
        (74.7000     Var 2006                        
        (36.8500     Var 2007                        
        (6.6000     Var 2008                        
        (36.1262     Var 2009                        
        (1.7230     06/25/10                        
        (3.12     12/28/10                        
4    Kendall      299.0250       06/28/91         1,442,059         77,804         1,519,863         534,106         0        2,053,969         0  
5    Kane      189.0468       02/28/91         1,954,629         94,569         2,049,198         349,845         2,399,043         0        0  
        (189.0468     05/16/01                        
6    Lake      57.3345       04/16/91         904,337         71,199         975,536         55,628         1,031,164         0        0  
        (.2580     10/01/94                        
        (57.0765     03/22/07                        
7    McHenry      56.7094       04/22/91         680,513         44,444         724,957         3,210,451         3,935,408         0        0  
        (12.6506     Var 1997                        
        (15.7041     Var 1998                        
        (19.6296     Var 1999                        
        (8.7251     Var 2000                        
8    Kane      325.3940       06/14/91         3,496,700         262,275         3,758,975         75,245         1,909,034         1,925,186         0  
        (.8700     04/03/96                        
        (63.0000     01/23/01                        
        (80.0000     05/11/04                        

 

-28-


Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

(4) Investment properties (continued)

 

Parcel #

  

Illinois
County

   Gross
Acres
Purchased
(Sold)
    Purchase/
Sales
Date
    

 

Initial Costs

     Costs
Capitalized

Subsequent  to
Acquisition
     Costs of
Property
Sold/Impaired
     Total
Remaining
Costs of

Parcels at
12/31/11
     Current Year
Loss

on Sale
Recognized
 
           Original
Costs
     Acquisition
Costs
     Total
Costs
             

9 (c)

   Will      9.8670       08/13/91       $ 0        0        0        0        0        0        0  
        (9.8670     09/16/02                        

10

   Will      150.6600       08/20/91         1,866,716         89,333         1,956,049         23,897         1,979,946         0        0  
        (150.6600     01/10/05                        

11

   Will      138.4470       08/20/91         289,914         20,376         310,290         2,700         312,990         0        0  
        (138.4470     05/03/93                        

12 (c)

   Will      44.7320       08/20/91         0        0        0        0        0        0        0  
        (44.7320     09/16/02                        

13

   Will      6.3420       09/23/91         139,524         172         139,696         0        139,696         0        0  
        (6.3420     05/03/93                        

14

   Kendall      44.4030       09/03/91         888,060         68,210         956,270         1,259,583         2,215,853         0        0  
        (15.3920     04/16/01                        
        (14.2110     Var 2002                        
        (13.6000     04/11/03                        
        (1.2000     02/19/04                        

15

   Kendall      100.3640       09/04/91         1,050,000         52,694         1,102,694         117,829         1,220,523         0        0  
        (5.0000     09/01/93                        
        (11.0000     12/01/94                        
        (84.3640     08/14/98                        

16

   McHenry      168.9050       09/13/91         1,402,058         69,731         1,471,789         97,766         1,569,555         0        0  
        (168.9050     08/03/01                        

17

   Kendall      3.4620       10/30/91         435,000         22,326         457,326         113,135         570,461         0        0  
        (2.1130     03/06/01                        
        (1.3490     08/23/02                        

 

-29-


Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

(4) Investment properties (continued)

 

Parcel #

  

Illinois
County

   Gross Acres
Purchased
(Sold)
    Purchase/
Sales
Date
    

 

Initial Costs

     Costs
Capitalized

Subsequent
to
Acquisition
     Costs of
Property
Sold/
Impaired
     Total
Remaining
Costs of

Parcels at
12/31/11
     Current
Year Loss

on Sale
Recognized
 
           Original
Costs
     Acquisition
Costs
     Total
Costs
             

18 (d)

   McHenry      139.1697       11/07/91       $ 1,160,301         58,190         1,218,491         9,456,992         10,237,983         437,500         0  
        (9.2500     Var 2004                        
        (33.3197     Var 2005                        
        (62.0200     Var 2006                        
        (12.8800     Var 2007                        
        (2.2400     Var 2008                        
        .2188        03/02/11                        

19

   Kane      436.2360       12/13/91         4,362,360         321,250         4,683,610         187,211         4,870,821         0        0  
        (436.2360     05/16/01                        

20

   Kane & Kendall      400.1290       01/31/92         1,692,623         101,318         1,793,941         9,387,266         1,250,469         9,930,738         0  
        (21.1380     06/30/99                        
        (7.0000     07/21/08                        
        (3.1085     03/21/11                        

21

   Kendall      15.0130       05/26/92         250,000         23,844         273,844         43,063         316,907         0        0  
        (1.0000     03/16/99                        
        (14.0130     09/06/06                        

22

   Kendall      391.9590       10/30/92         3,870,000         283,186         4,153,186         1,763,629         5,556,530         360,285         0  
        (10.0000     01/06/94                        
        (5.5380     01/05/96                        
        (2.4000     07/27/99                        
        (73.3950     Var 2001                        
        (136.0000     08/14/02                        
        (34.1400     05/27/03                        
        (101.4900     01/09/04                        

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

(4) Investment properties (continued)

 

Parcel #

 

Illinois
County

  Gross
Acres
Purchased
(Sold)
    Purchase/
Sales
Date
   

 

Initial Costs

    Costs
Capitalized

Subsequent  to
Acquisition
    Costs of
Property
Sold/Impaired
    Total
Remaining
Costs of

Parcels at
12/31/11
    Current Year
Loss

on Sale
Recognized
 
        Original Costs     Acquisition
Costs
    Total
Costs
         

23

  Kendall     133.2074       10/30/92      $ 3,231,942        251,373        3,483,315        4,665,998        8,149,313        0       0  
      (11.5250     07/16/93                 
      (44.0700     Var 1995                 
      (8.2500     Var 1996                 
      (2.6100     Var 1997                 
      (10.6624     Var 1998                 
      (5.8752     Var 1999                 
      (49.0120     Var 2000                 
      (.2028     Var 2001                 
      (1.0000     Var 2002                 

23A (a)

  Kendall     .2676       10/30/92        170,072        12,641        182,713        0       182,713        0       0  
      (.2676     03/16/93                 

24

  Kendall     3.9080       01/21/93        645,000        56,316        701,316        30,436        731,752        0       0  
      (3.9080     04/16/01                 

24A (b)

  Kendall     .4060       01/21/93        155,000        13,533        168,533        0       168,533        0       0  
      (.4060     04/16/01                 

25

  Kendall     656.6870       01/28/93        1,625,000        82,536        1,707,536        22,673        1,730,209        0       0  
      (656.6870     10/31/95                 

26

  Kane     89.5110       03/10/93        1,181,555        89,312        1,270,867        5,135,895        6,406,762        0       0  
      (2.1080     Var 1999                 
      (34.2550     Var 2000                 
      (7.8000     Var 2001                 
      (29.1200     Var 2002                 
      (11.3100     Var 2003                 
      (4.9180     01/28/04                 

28 (c)

  Kendall     50.0000       09/16/02        661,460        22,976        684,436        230,630        0       915,066        0  
       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
        $ 38,810,025        2,504,276        41,314,301        47,350,730        71,104,287        17,560,744        0  
       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

(4) Investment properties (continued)

 

(a) Included in the purchase of Parcel 23 was a newly constructed 2,500 square foot house. The house was sold in March 1993.

 

(b) Included in the purchase of Parcel 24 was a 2,400 square foot office building. The building was sold in 2001.

 

(c) On September 16, 2002, the Partnership completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28).

 

(d) On a quarterly basis, the Partnership reviews impairment indicators and if necessary, conducts an impairment analysis to ensure that the carrying value of each investment property does not exceed its estimated fair value. If this were to occur, the Partnership would be required to record an impairment loss equal to the excess of the carrying value over the estimated fair value.

In determining the value of an investment property and whether the property is impaired, management considers several indicators which require difficult, complex and/or subjective judgments, such as projected sales prices, capital expenditures and assessment of current economic conditions. These indicators are considered by management in determining the value of any particular property. The value of any particular property is sensitive to the actual results of any of these uncertain indicators, either individually or taken as a whole. Should the actual results differ from management’s judgment, the valuation could be negatively or positively affected.

The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management’s continuous process of analyzing each property. For the years ended December 31, 2011 and 2010, the Partnership recorded an impairment of $650,500 and $0, respectively on land relating to Parcel 18. Based on a recent market study prepared for Parcel 18 for an auction which occurred during the fourth quarter of 2011, the remaining book value of Parcel 18 exceeds the estimated fair market value on the remaining lots and accordingly, the Partnership recorded the impairment loss to reduce the remaining book value to the estimated fair market value. As of December 31, 2011, the total accumulated gain on sale recorded in prior years, net of the impairment losses, for Parcel 18 was approximately $1,500,000.

 

(e) Reconciliation of investment properties owned:

 

     2011     2010  

Balance at January 1,

   $ 18,155,770       18,349,922  

Additions during year

     55,474       111,848  

Impairment loss on land

     (650,500     0  

Sales during year

     0       (306,000
  

 

 

   

 

 

 

Balance at December 31,

   $ 17,560,744       18,155,770  
  

 

 

   

 

 

 

 

(f) The aggregate cost of investment properties owned at December 31, 2011 for Federal income tax purposes was approximately $17,561,000 (unaudited).

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

(5) Rental Income

The Partnership has determined that all leases relating to the farm parcels are operating leases. Accordingly, rental income is reported when earned.

As of December 31, 2011, the Partnership had farm leases of generally one year in duration, for approximately 721 acres of the approximately 959 acres owned.

(6) Mortgage Loan Receivable

The mortgage loan receivable is the result of sales of parcels, in whole or in part. The Partnership recorded a deferred gain on these sales.

 

Parcel

   Maturity      Interest Rate     Principal
Balance
12/31/11
     Principal
Balance
12/31/10
     Accrued
Interest
Receivable
12/31/11
     Deferred
Gain
12/31/11
 

5 & 19

     07/01/11         6.00   $ 0        8,918,412        0        0  

Less allowance for doubtful accounts

          0         8,918,412        0        0  
       

 

 

    

 

 

    

 

 

    

 

 

 
        $ 0         0        0        0  
       

 

 

    

 

 

    

 

 

    

 

 

 

On May 16, 2001, the Partnership sold 189 acres of Parcel 5 and 436 acres of Parcel 19 for $17,500,000 and recorded deferred gain of $10,203,634. The Partnership received a deferred down payment note in the amount of $1,500,000, due December 31, 2001. The note had an interest rate of 6%, however the note provided for the interest to be waived if the principal was paid in full by December 1, 2001. The Partnership received payment of the deferred down payment note on December 1, 2001 and recognized as sales revenue $875,923 of deferred gain. The Partnership also received an installment note in the amount of $16,000,000 at the time of closing. The installment note matured July 1, 2011 and had an interest rate of 6%. The total amount of principal paid since loan inception is $8,581,588 and interest paid since loan inception is $5,449,637. During the first quarter of 2008, the homebuilder who was the obligor under the mortgage loan receivable notified the Partnership that it was experiencing a slowdown in sales contracts for new homes. The Partnership agreed to temporarily suspend the 6% interest due on the mortgage loan receivable and applied payments received during 2008 toward principal. During the second quarter of 2008, based on the available information, the Partnership determined that the full collectability of the mortgage loan receivable was doubtful. As a result, management elected to reserve $3,923,062 of principal and $2,296,818 of the deferred gain relating to the mortgage loan receivable which was recorded against bad debt expense during 2008.

During the third quarter of 2009, based on the available information, the Partnership determined that the collectability of the remaining mortgage loan receivable was doubtful. The mortgage loan receivable is subordinate to a first mortgage held by an unaffiliated lender. The holder of the first mortgage filed a complaint of foreclosure during September 2009. The Partnership filed an answer and counterclaim to the complaint to preserve its interest in the foreclosure on March 18, 2010. The holder of the first mortgage filed for summary judgment and we filed a response to that motion on August 24, 2010. On July 27, 2011, a formal judgment of foreclosure was entered. The Partnership’s mortgage loan receivable was included in the judgment of foreclosure subordinate to the first mortgage held by an unaffiliated lender. Since it was unlikely that the remaining value of the property secured by the mortgage loan receivable was in excess of the remaining balance due under the first mortgage, management elected to reserve the remaining $4,995,350 of principal as of September 30, 2009. In addition, the remaining deferred gain of $2,913,192 relating to the mortgage loan receivable was also reserved and recorded against bad debt expense. Effective January 1, 2009, accrual of the 6% interest due on the

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

mortgage loan receivable resumed, however, the Partnership determined that the collectability of the interest is also doubtful. Since the Partnership had only received minimal payments from the obligor since January 2008, the Partnership did not accrue interest on the financial statements. As of December 31, 2011, the mortgage loan receivable is formally written off.

(7) Litigation

During the first quarter of 2009, the General Partner received notice that William Ryan Homes, Inc. (“Ryan”), the homebuilder for Parcel 18, filed suit against the City of Woodstock (“Woodstock”) and ILAFII#XVIII, LLC, our wholly-owned subsidiary that owns that property, in the Circuit Court for the 22nd Judicial District in McHenry County, Illinois. The complaint sought damages for alleged breach of a warranty which Ryan claimed caused water seepage. The complaint claimed that a total of seven lots have been the subject of water seepage complaints. Ryan also claimed that the seepage issues have caused Woodstock to issue a stop work order causing Ryan additional damage. Woodstock filed a Motion to Dismiss the complaint as it relates to Woodstock only and on October 13, 2009, Woodstock’s motion was granted on the grounds that Ryan had failed to properly exhaust its administrative remedies. The Partnership’s subsidiary appeared and filed a Motion to Dismiss which was denied by the court on January 22, 2010. The Partnership’s subsidiary filed its Answer and Affirmative Defenses on February 17, 2010 denying liability for the alleged damages. On February 23, 2011, Ryan and the Partnership’s subsidiary entered into a Settlement Agreement and Mutual Release with prejudice regarding this matter. Pursuant to such Settlement Agreement, on March 2, 2011, the Partnership paid Ryan approximately $34,000 and in return Ryan conveyed to our wholly-owned subsidiary one lot (comprised of .2188 acres) of Parcel 18. On March 14, 2011, the Court entered an order agreed to by the parties and dismissed the matter with prejudice.

On or about April 8, 2010, the Partnership received notification from the attorneys for the Village of Elburn that in effect demanded completion of certain land improvements. The Partnership is a co-indemnitor of the subdivision bonds that secure completion of the land improvements on Parcels 5 and 19 of the Blackberry Subdivision in Elburn, IL. On April 22, 2010, the Partnership received notice from the bonding companies demanding completion and satisfaction of such obligations. Based on information provided by the bonding companies, the Partnership is estimating that the maximum balance of the outstanding bonds and related fees is approximately $4.3 million, however, we believe the actual costs of the remaining improvements of the subdivision are far less than the outstanding bond amounts. The Partnership has been working with a representative of the bonding companies on this matter who attended a preliminary meeting on March 31, 2011 with representatives from the Village. The goal of the meeting was to obtain a common understanding of the scope of remaining work required to be completed. The parties determined that it was necessary to hire an engineer to provide an updated punch list of required work. The Partnership has received a final updated punch list of required work and the bonding company representative is working on obtaining bids to quantify the actual cost to complete the items listed on the punch list. As the Partnership learns more information from the representative of the bonding companies, we will update this matter in future reports. At this time, it is not possible to determine what, if any, liability will be asserted against the Partnership or the materiality of any outcome.

On or about December 16, 2011, the Partnership received service of a Third Party Complaint filed by Bond Safeguard Insurance Company (“Bond”) against the Partnership and Inland Real Estate Investment Corporation along with six other third party defendants. The lawsuit has been brought in the Circuit Court of the Sixteenth Judicial Circuit in Kane County, Illinois (the “Lawsuit”). In the Lawsuit, the County of Kane (the “County”) alleges that B&B Enterprises and/or Blackberry Creek Development Corporation (collectively “B&B”) are responsible for the relocation of approximately twenty-three power poles at an alleged cost of $819,740. Alternatively, the County alleges that either Bond or Commonwealth Edison Company (“ComEd”), is responsible for the cost of the pole relocation. On November 23, 2011, Bond filed an Answer denying the County’s allegations and has pled five affirmative defenses. As alternative relief, Bond filed a Counterclaim against B&B and ComEd and a Third Party Complaint against the Partnership and four individuals (the “Individuals”) contending that, if Bond is deemed responsible for the County’s allegations, then B&B, the Partnership, and/or the Individuals bear some or all of this responsibility under a General Agreement of Indemnity

 

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purported to apply to the removal of the poles. Bond also seeks its attorneys’ fees based on such General Agreement of Indemnity. Although investigation of the claims and defenses in the Lawsuit are ongoing, the Partnership expects to file a responsive pleading vigorously denying the material allegations asserted by Bond against the Partnership.

(8) Subsequent Events

The Partnership evaluates subsequent events occurring between the most recent balance sheet date and the date that the financial statements are available to be issued in order to determine whether the subsequent events are to be recorded in and/or disclosed in the Partnership’s financial statements and footnotes. The financial statements are considered to be available to be issued at the time that they are filed with the Securities and Exchange Commission.

During late February 2012, the Partnership received what the General Partner deems to be an acceptable offer from a third party purchaser for Parcel 28 located in Kendall County, Illinois. The Partnership is negotiating a purchase and sale agreement for this transaction. Provided the buyer performs, the sale is estimated to result in net sales proceeds of approximately $748,000. Although management considers this to be an attractive offer, the Partnership would realize a potential loss on the sale of approximately $167,000.

For the year ended December 31, 2011, there are no other subsequent events to report that would have a material impact on the Partnership’s financial statements.

 

Item 9. Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure

There were no disagreements on accounting or financial disclosure matters during 2011.

 

Item 9(A). Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to us is made known to the members of senior management and the Audit Committee.

Based on management’s evaluation as of December 31, 2011, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, management concluded that our internal control over financial reporting was effective as of December 31, 2011. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.

There were no changes to our internal controls over financial reporting during the fiscal quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Item 9(B). Other Information

Not applicable.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

Our general partner, Inland Real Estate Investment Corporation (IREIC), was organized in 1984 for the purpose of acting as general partner of limited partnerships formed to acquire, own and operate real properties. The general partner is a wholly-owned subsidiary of The Inland Group, Inc. The general partner has responsibility for all aspects of our operations including risk oversight. The directors of the general partner have diverse and lengthy experience in the real estate industry and are well-qualified to guide the Partnership.

During 2004, the board of directors of our general partner formalized our audit committee. The audit committee is not independent of our general partner and consists of Catherine L. Lynch, committee chair and audit committee financial expert, Brenda G. Gujral, Roberta S. Matlin and Cathleen M. Hrtanek. The audit committee is responsible for engaging our independent registered public accounting firm, reviewing the plans and results of the audit engagement with our independent registered public accounting firm and consulting with the independent registered public accounting firm regarding the adequacy of our internal accounting controls.

Our general partner has a code of ethics that applies to all of its employees. We will provide the code of ethics free of charge upon written request to our Investor Services department in care of the general partner of our partnership at 2901 Butterfield Road, Oak Brook, IL 60523.

Officers and Directors

The officers, directors, and key employees of IREIC and its affiliates that are likely to provide services to the Partnership are as follows. Ages are listed as of January 1, 2012.

 

     Functional Title
Daniel L. Goodwin    Director of IREIC
Robert H. Baum    Director, General Counsel of IREIC
Robert D. Parks    Chairman of IREIC
Brenda G. Gujral    Director and Chief Executive Officer of IREIC and principal executive officer of the Partnership
Brian Conlon    President of IREIC
Catherine L. Lynch    Chief Financial Officer of IREIC
Roberta S. Matlin    Director and Senior Vice President of IREIC
Guadalupe Griffin    Vice President of IREIC-Asset Management
Donna Urbain    Principal Financial Officer with respect to Inland Land Appreciation Fund, L.P. and Vice President - Controller of IREIC
Cathleen M. Hrtanek    Assistant Counsel and Assistant Vice President, The Inland Real Estate Group, Inc., counsel to the Partnership

 

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DANIEL L. GOODWIN (age 68) was the founder of the Inland real estate organization in May 1968 and is currently the controlling stockholder, chairman of the board and chief executive officer of The Inland Group, Inc., a holding company that was formed in July 1982. Mr. Goodwin also serves as a director or officer of entities wholly owned or controlled by The Inland Group. In addition, Mr. Goodwin has served as the chairman of the board and chief executive officer of Inland Mortgage Investment Corporation since March 1990 and chairman and chief executive officer of Inland Bancorp, Inc., a bank holding company, since January 2001. Mr. Goodwin also has served as a director of Inland Real Estate Corporation, a publicly traded real estate investment trust, since 2001, and served as its chairman of the board from 2004 to April 2008.

Housing. Mr. Goodwin is a member of the National Association of Realtors, the Illinois Association of Realtors, and was inducted into the Hall of Fame of the Chicago Association of Realtors in 2005. He is also the author of a nationally recognized real estate reference book for the management of residential properties. Mr. Goodwin served on the Board of the Illinois State Affordable Housing Trust Fund. He served as an advisor for the Office of Housing Coordination Services of the State of Illinois, and as a member of the Seniors Housing Committee of the National Multi-Housing Council. He has served as Chairman of the DuPage County Affordable Housing Task Force. Mr. Goodwin also founded New Directions Affordable Housing Corporation, a not for profit entity.

Education. Mr. Goodwin obtained his bachelor degree from Northeastern Illinois University and his master’s degree from Northern Illinois University. Following graduation, he taught for five years in the Chicago Public Schools. Over the past twenty years, Mr. Goodwin served as a member of the Board of Governors of Illinois State Colleges and Universities, vice chairman of the Board of Trustees of Benedictine University, vice chairman of the Board of Trustees of Springfield College, and chairman of the Board of Trustees of Northeastern Illinois University.

ROBERT H. BAUM (age 68) has been a principal of the Inland real estate organization since May 1968 and is currently the vice-chairman and executive vice-president and general counsel of The Inland Group, positions he has held since July 1982. In his capacity as general counsel, Mr. Baum is responsible for supervising the legal activities of The Inland Group and its affiliates. This includes supervising the Inland Law Department and serving as liaison with outside counsel.

Following his graduation from Northwestern University School of Law in 1967, Mr. Baum took a teaching position in the Chicago Public School System where he met the three other teaching associates who together with him became the founding principals of Inland. In 1968, he began his practice of law in Chicago with Shulman and Baum, a labor law firm. In January 1973, Mr. Baum joined Inland on a full-time basis as its General Counsel, a position he has held since that time.

Mr. Baum has served as a member of the North American Securities Administrators Association Real Estate Advisory Committee and as a member of the Securities Advisory Committee to the Secretary of State of Illinois. He is a member of the American Corporation Counsel Association and The Private Company General Counsel Group. He has also been a guest lecturer for Northwestern University School of Law and the Illinois State Bar Association. Mr. Baum has been admitted to practice before the Supreme Court of the United States, as well as the bars of several federal courts of appeals and federal district courts and the State of Illinois. He is also an Illinois licensed real estate broker. He has served as a director of American National Bank of DuPage and Inland Bank & Trust and currently serves as a director of Inland Bancorp, Inc., a bank holding company.

Mr. Baum is a past member of the Men’s Council of the Museum of Contemporary Art in Chicago. He currently is a Governing Member of the Chicago Symphony Orchestra and is a Sponsor of the Civic Orchestra of Chicago. Mr. Baum also is a member of the Board of Directors of Wellness House, a charitable organization that helps cancer patients improve the quality of their lives by providing programs emphasizing emotional support and information as a vital complement to medical treatment, all for no charge. Mr. Baum received a bachelor degree from The University of Wisconsin and a juris doctor degree from The Northwestern University School of Law.

ROBERT D. PARKS (age 68) has been a principal of the Inland real estate organization since May 1968 and is currently chairman of IREIC, a position he has held since November 1984. Mr. Parks has also served as a director of Inland Investment Advisors, Inc. since June 1995. Mr. Parks served as a director of Inland Securities Corporation from August 1984 until June 2009. He served as a director of Inland Real Estate Corporation from 1994 to June 2008, and

 

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served as chairman of the board from May 1994 to May 2004 and president and chief executive officer from 1994 to April 2008. He also served as a director and chairman of the board of Inland Retail Real Estate Trust, Inc. from its inception in September 1998 to March 2006 and as chief executive officer until December 2004. Mr. Parks also has served as the chairman of the board and a director of Inland Diversified Real Estate Trust, Inc. since its inception in June 2008, chairman and director of Inland American Real Estate Trust, Inc. since its inception in October 2004 and as the chairman of the board and a director of Inland Western Retail Real Estate Trust, Inc. since its inception in March 2003. Mr. Parks is responsible for the ongoing administration of existing investment programs, corporate budgeting and administration for IREIC. He oversees and coordinates the marketing of all investments and investor relations.

He received his bachelor degree from Northeastern Illinois University, Chicago, Illinois, and his master’s degree from the University of Chicago and later taught in Chicago’s public schools. He is a member of the Real Estate Investment Association, the Financial Planning Association, the Foundation for Financial Planning and the National Association of Real Estate Investment Trusts, or “NAREIT.”

BRENDA GUJRAL (age 69) serves as chief executive officer and a director of IREIC. She served as president and a director of IREIC from July 1987 through June 1992. She was again named president and a director of IREIC upon her return to IREIC in January 1998, and served as president until January 2011. She has been a director of Inland Securities Corporation since January 1997, and served as its president and chief operating officer from January 1997 to June 2009. Additionally, Ms. Gujral has served as a director of Inland Investment Advisors, Inc. since January 2001 and has been a director of Inland Western Retail Real Estate Trust, Inc. since its inception in March 2003, serving as its chief executive officer from June 2005 until November 2007. Ms. Gujral also has served a director of Inland Diversified Real Estate Trust, Inc. since its inception in June 2008, and served as its president from June 2008 to May 2009. She has been the chairman of the board of Inland Private Capital Corporation (f/k/a Inland Real Estate Exchange Corporation) since May 2001 and a director of Inland Opportunity Business Manager & Advisor, Inc. since April 2009, and was a director of Inland Retail Real Estate Trust, Inc. from its inception in September 1998 until it was acquired in February 2007.

Ms. Gujral oversees and works closely with IREIC’s president to administer to the daily operations of IREIC, including investor relations, regulatory compliance and filings, review of asset management activities and broker-dealer marketing and communication. Ms. Gujral works with internal and outside legal counsel in structuring IREIC’s investment programs and in connection with preparing offering documents and registering the related securities with the SEC and state securities commissions.

Ms. Gujral has been with the Inland organization for thirty four years, becoming an officer in 1982. Prior to joining the Inland organization, she worked for the Land Use Planning Commission, establishing an office in Portland, Oregon, to implement land use legislation for that state. Ms. Gujral graduated from California State University. She holds Series 7, 22, 39 and 63 certifications from the Financial Industry Regulatory Authority (“FINRA”), and is a member of NAREIT, the Investment Program Association (“IPA”) and the Real Estate Investment Securities Association (“REISA”).

BRIAN M. CONLON (age 52) has served as president of IREIC since January 2011, and as director since February 2011. In these roles, Mr. Conlon oversees the company’s day-to-day operations, as well as strategic planning for all Inland-sponsored investment products. He also serves as president and as a director of Inland Securities Corporation, a wholly-owned subsidiary of IREIC. In that capacity, he directs all capital-raising activities through a national team of internal and external wholesalers. Mr. Conlon began his career with Inland in September 1999 as executive vice president for Inland Securities Corporation.

Prior to joining Inland, Mr. Conlon served as executive vice president and chief operating officer of Wells Real Estate Funds. In these roles, he was responsible for managing the day-to-day operations of the company’s real estate investments and capital-raising initiatives. Mr. Conlon received a bachelor’s degree (BBA) from Georgia State University in Atlanta, Georgia, and a master’s degree in business administration (MBA) from the University of Dallas in Dallas, Texas. Mr. Conlon has earned the Certified Financial Planner (CFP) and Certified Commercial Investment Member (CCIM) designations and holds Series 7, 24, and 63 licenses with FINRA.

Mr. Conlon is a member of the Board of Directors of the IPA and currently serves on their Non-Listed REIT Committee. In addition, he serves on the Policy Subcommittee of the NAREIT Non-Traded REIT Council and formerly served on the National Board of the Financial Planning Association (FPA).

 

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CATHERINE L. LYNCH (age 53) joined the Inland organization in 1989 and is currently the chief financial officer and secretary of IREIC and Inland Securities Corporation. Ms. Lynch had served as the treasurer and secretary of IREIC since January 1995 and as treasurer and secretary of Inland Securities Corporation since June 1995. Ms. Lynch worked for KPMG LLP from 1980 to 1989. Ms. Lynch received her bachelor degree in accounting from Illinois State University, Normal, Illinois. Ms. Lynch is a certified public accountant and a member of the American Institute of Certified Public Accountants and the Illinois CPA Society. Ms. Lynch also is registered with FINRA as a financial operations principal.

ROBERTA S. MATLIN (age 67) joined IREIC in 1984 as director of investor administration and currently serves as a director and senior vice president of IREIC, in the latter capacity directing its day-to-day internal operations. She also has served as a director and president of Inland Investment Advisors, Inc. since June 1995 and Intervest Southern Real Estate Corporation since July 1995. She served as president of Inland Securities Corporation from July 1995 to March 1997 and since July 1995 has served as a director of Inland Securities Corporation and since March 1997 has served as Inland Securities Corporation’s vice president. She has served as vice president – administration of Inland American Real Estate Trust, Inc. since its inception in October 2004. She served as president of Inland American Business Manager & Advisor, Inc. from October 2004 to January 2012. Ms. Matlin served as vice president of administration of Inland Western Retail Real Estate Trust, Inc. from 2003 until 2007, vice president of administration of Inland Retail Real Estate Trust, Inc. from 1998 until 2004, vice president of administration of Inland Real Estate Corporation from 1995 until 2000 and trustee and executive vice president of Inland Mutual Fund Trust from 2001 until 2004. Ms. Matlin also has been a vice president of Inland Institutional Capital Partners Corporation since May 2006, and a director of Pan American Bank since December 2007. Ms. Matlin is the vice president of administration of Inland Diversified Real Estate Trust, Inc. and also has served as the president of Inland Diversified Business Manager & Advisor, Inc. from June 2008 through May 2009 and is currently its vice president. Since August 2011 she has been a vice president of Inland Monthly Income Trust, Inc. and Inland Monthly Income Business Manager & Advisor, Inc. Since April 2009 she has served as president of Inland Opportunity Business Manager & Advisor, Inc.

Prior to joining IREIC, Ms. Matlin worked for the Chicago Region of the Social Security Administration of the United States Department of Health and Human Services. Ms. Matlin is a graduate of the University of Illinois in Champaign. She holds Series 7, 22, 24, 39, 63 and 65 licenses from FINRA and is a member of the Investment Program Association and the Real Estate Securities Association.

GUADALUPE GRIFFIN (age 47) joined Inland in 1994. Ms. Griffin serves as vice president of IREIC and assistant vice president of Inland Midwest Investment Corporation. Ms. Griffin is responsible for the asset management and day-to-day operations of the public and private partnerships, and limited liability companies, which include the development of operating and disposition strategies for the partnerships and investor communications. Ms. Griffin also serves as vice president of Inland Opportunity Business Manager & Advisor, Inc. since April 2009. Ms. Griffin holds an Illinois Real Estate Sales License.

DONNA URBAIN (age 49) joined Inland in 2002 and is the principal financial officer with respect to Inland Land Appreciation Fund, L.P. Ms. Urbain is responsible for the investment accounting department which includes all public partnership accounting functions along with quarterly and annual SEC filings. Ms. Urbain also serves as vice president – controller of IREIC. Prior to joining Inland, Ms. Urbain worked in the field of public accounting for KPMG LLP. Ms. Urbain is a Certified Public Accountant. She received her B.B.A. in Accounting from the University of Notre Dame in South Bend, Indiana.

CATHLEEN M. HRTANEK (age 35) joined Inland in 2005 and is an assistant counsel and assistant vice president of The Inland Real Estate Group, Inc. In her capacity as assistant counsel, Ms. Hrtanek represents many of the entities that comprise the Inland Real Estate Group of Companies on a variety of legal matters. She is also a member of the audit committee for all public partnerships sponsored by IREIC. Ms. Hrtanek also has served as the secretary of Inland Diversified Real Estate Trust, Inc. and Inland Diversified Business Manager & Advisor, Inc. since September 2008, as the secretary of Inland Opportunity Business Manager & Advisor, Inc. since April 2009, as the secretary of Inland Private Capital Corporation (f/k/a Inland Real Estate Exchange Corporation) since August 2009, and as the secretary of Inland Monthly Income Trust, Inc. and Inland Monthly Income Business Manager & Advisor since August 2011. Prior to joining Inland, Ms. Hrtanek had been employed by Wildman Harrold Allen & Dixon LLP in Chicago, Illinois since September 2001. Ms. Hrtanek has been admitted to practice law in the State of Illinois and is a licensed real estate broker. Ms. Hrtanek received her bachelor degree from the University of Notre Dame in South Bend, Indiana and her law degree from Loyola University of Chicago School of Law.

 

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires directors, executive officers and beneficial owners of more than ten percent of our partnership units to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission and to provide us with copies of such reports. Based solely on a review of the copies provided to us and written representations from such reporting persons, we believe that all applicable Section 16(a) filing requirements have been met for such reporting persons.

 

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Item 11. Executive Compensation

We do not have any employees, and none of our executive officers receives any compensation from us. Accordingly, we hired no compensation consultants.

Our general partner is entitled to receive a share of cash distributions of net sale proceeds based upon both an aggregate overall return to the limited partners and a separate return with respect to each parcel of land purchased by us.

Our partnership agreement prescribes the allocation of profits and losses, and the distribution priorities of available cash. If and to the extent that real estate taxes and insurance payable with respect to our land during a given year exceed our revenues, our general partner will make a supplemental capital contribution of such amount to us to ensure that we have sufficient funds to make such payments and receive a special allocation of expenses in a like amount.

Profits and losses from operations (other than capital transactions) will be allocated 99% to the limited partners and 1% to the general partner. The net gain from sales of our properties is first allocated among the partners in proportion to the negative balances, if any, in their respective capital accounts. Thereafter, except as provided below, net gain is allocated to the general partner in an amount equal to the proceeds distributed to the general partner from such sale and the balance of any net gain is allocated to the limited partners. If the amount of net gain realized from a sale is less than the amount of cash distributed to the general partner from such sale, we will allocate income or gain to the general partner in an amount equal to the excess of the cash distributed to the general partner with respect to such sale as quickly as permitted by law. Any net loss from a sale will be allocated to the limited partners.

Distributions of net sale proceeds will be allocated between the general partner and the limited partners based upon both an aggregate overall return to the limited partners and a separate return with respect to each parcel of land purchased by us.

As a general rule, net sale proceeds will be distributed 90% to the limited partners and 10% to the general partner until the limited partners have received from net sale proceeds (i) a return of their original capital plus (ii) a noncompounded cumulative preferred return of 15% of their invested capital. However, with respect to each parcel of land, the general partner’s 10% share will be subordinated until the limited partners receive a return of the original capital attributed to such parcel or parcel capital plus a 6% per annum noncompounded cumulative preferred return thereon.

After the amounts described in items (i) and (ii) above and any previously subordinated distributions to the general partner have been paid, and the amount of any supplemental capital contributions have been repaid to the general partner, subsequent distributions shall be paid 75% to the limited partners and 25% to the general partner without considering parcel capital. If, after all net sale proceeds have been distributed, the general partner has received more than 25% of all net sale proceeds (exclusive of distributions made to the limited partners to return their original capital), the general partner shall contribute to us for distribution to the limited partners an amount equal to such excess.

Any distributions from net sales proceeds at a time when invested capital is greater than zero shall be deemed applied first to the reduction of such invested capital before application to payment of any deficiency in the 15% cumulative preferred return.

We are permitted to engage in various transactions involving affiliates of our general partner, as described below.

Our general partner and its affiliates may be reimbursed (as set forth under terms of the partnership agreement) for its expenses or out-of-pocket costs relating to our administration. For the year ended December 31, 2011, such costs, included in general and administrative expenses to affiliates and professional services to affiliates, were $80,282, of which $11,978 was unpaid as of December 31, 2011.

An affiliate of our general partner performs marketing and advertising services for us and is reimbursed (as set forth under terms of the partnership agreement) for direct costs. For the year ended December 31, 2011, such costs were $20,587, of which $170 was unpaid as of December 31, 2011.

 

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An affiliate of our general partner performs land improvements, rezoning, annexation and other activities to prepare our investment properties for sale and is reimbursed (as set forth under terms of the partnership agreement) for salaries and direct costs. The affiliate does not recognize a profit on any project. For the year ended December 31, 2011, we incurred $9,384 of such costs, of which $1,000 was unpaid as of December 31, 2011, and which are included in investment properties. In addition, the costs related to Parcels 3/27 and 18 totaled $25,520 for the year ended December 31, 2011 and is included in land operating expenses to affiliates, of which $2,100 was unpaid as of December 31, 2011.

As of December 31, 2011 and 2010, the Partnership held all cash and cash equivalents with Inland Bank and Trust, an affiliate of the general partner.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

We do not maintain any equity compensation plans.

 

(a) No person or group is known by us to own beneficially more than 5% of the outstanding units of our partnership.

 

(b) The officers and directors of our general partner own as a group the following units of our partnership:

 

Title of Class

   Amount and Nature
of Beneficial
Ownership
     Percent
of Class
 

Limited partnership units

     184 Units, directly         Less than 1

No officer or director of our general partner possesses a right to acquire beneficial ownership of units of our partnership.

All of the outstanding shares of our general partner are owned by an affiliate or its officers and directors as set forth above in Item 10.

 

(c) There exists no arrangement, known us, the operation of which may, at a subsequent date, result in a change in our control.

 

Item 13. Certain Relationships and Related Transactions

We do not currently have written, formal policies and procedures for the review, approval or ratification of transactions with related persons, as defined by Item 404 of the SEC Regulation S-K. Our policies, however, contain provisions setting forth an ability to engage in certain transactions. Our audit committee reviews all of these transactions as well as any related party transactions.

There were no significant transactions or business relationships with the general partner, its affiliates or their management other than those described in Item 7 (Transactions with Related Parties) above. Reference is made to Note 3 of the Notes to Financial Statements (Item 8 of this Annual Report) for information regarding related party transactions.

 

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Item 14: Principal Accounting Fees and Services

Fees. Aggregate fees for professional services rendered by our principal accountant, Grant Thornton LLP, were as follows:

 

     Years ended December 31,  
     2011      2010  

Audit fees for professional services rendered for the audit of our annual financial statements and quarterly reviews of our financial statements.

   $ 51,225         50,759   

Our audit committee has reviewed and approved all of the fees charged by Grant Thornton and actively monitors the relationship between audit and non-audit services provided by Grant Thornton. The audit committee concluded that all services rendered by Grant Thornton during the years ended December 31, 2011 and 2010, respectively, were consistent with maintaining Grant Thornton’s independence.

In addition, the audit committee must pre-approve all services provided by the company’s independent registered public accounting firm and the fees charged for these services including an annual review of audit fees, audit related fees, tax fees and other fees with specific dollar value limits for each category of service.

PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

(a) The financial statements listed in the index at page 18 of this annual report are filed as part of this annual report.

 

(b) Exhibits. The following exhibits are incorporated herein by reference:

 

  3    Restated Certificate of Limited Partnership and Amended and Restated Agreement of Limited Partnership, included as Exhibits A and B of the Registration Statement on Form S-11, filed with the SEC on October 25, 1989, as amended, are incorporated herein by reference thereto.
31.1    Rule 13a-14(a)/15d-14(a) Certification by principal executive officer
31.2    Rule 13a-14(a)/15d-14(a) Certification by principal financial officer
32.1    Section 1350 Certification by principal executive officer
32.2    Section 1350 Certification by principal financial officer
101    The following financial information from our Annual Report on Form 10-K for the year ended December 31, 2011 formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Partners Capital, (iv) the Statements of Cash Flows and (v) related notes (tagged as blocks of text). This information is furnished but should not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

(c) Financial Statement Schedules:

All schedules have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

No annual report or proxy material for the year 2011 has been sent to our limited partners. An annual report will be sent to the limited partners subsequent to this filing and we will furnish copies of such report to the Commission when it is sent to the limited partners.

 

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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.

INLAND LAND APPRECIATION FUND II, L.P.

 

By:   Inland Real Estate Investment Corporation
Its:   General Partner
/s/ BRENDA G. GUJRAL
By:   Brenda G. Gujral
Its:   Principal Executive Officer
Date:   March 9, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

By:   Inland Real Estate Investment Corporation
Its:   General Partner
/s/ BRENDA G. GUJRAL
By:   Brenda G. Gujral
Its:   Chief Executive Officer and Director
Date:   March 9, 2012
/s/ GUADALUPE GRIFFIN
By:   Guadalupe Griffin
Its:   Vice President
Date:   March 9, 2012
/s/ DONNA URBAIN
By:   Donna Urbain
Its:   Principal Financial Officer with respect to Inland Land Appreciation Fund II, L.P.
Date:   March 9, 2012
/s/ ROBERT D. PARKS
By:   Robert D. Parks
Its:   Chairman
Date:   March 9, 2012
/s/ DANIEL L. GOODWIN
By:   Daniel L. Goodwin
Its:   Director
Date:   March 9, 2012

 

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