Lease Equity Appreciation Fund II, L.P. - FORM 10-Q - May 13, 2013

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EX-32.1 - EXHIBIT 32.1 - Lease Equity Appreciation Fund II, L.P.ex32_1.htm
EX-31.1 - EXHIBIT 31.1 - Lease Equity Appreciation Fund II, L.P.ex31_1.htm
EX-32.2 - EXHIBIT 32.2 - Lease Equity Appreciation Fund II, L.P.ex32_2.htm
EX-31.2 - EXHIBIT 31.2 - Lease Equity Appreciation Fund II, L.P.ex31_2.htm
EXCEL - IDEA: XBRL DOCUMENT - Lease Equity Appreciation Fund II, L.P.Financial_Report.xls
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2013
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
 
Commission file number 333-116595

 
LEASE EQUITY APPRECIATION FUND II, L.P.
(Exact name of registrant as specified in its charter)
 
 
Delaware
  
20-1056194
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
110 South Poplar Street, Suite 101, Wilmington Delaware 19801
(Address of principal executive offices) (Zip Code)
 
(800) 819-5556
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes     ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes     ¨  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
¨
       
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller Reporting Company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨ Yes    x No
 
There is no public market for the Registrant’s securities.
 
 
 
 
 
LEASE EQUITY APPRECIATION FUND II, L.P.
ON FORM 10-Q
 
   
PAGE
PART I
FINANCIAL INFORMATION
  
ITEM 1.
 3
  3
  4
  5
  6
  7
  8
ITEM 2.
 18
ITEM 3.
 24
ITEM 4.
 25
     
PART II
OTHER INFORMATION
  
ITEM 6.
 26
     
28

 
2

PART1. FINANCIAL INFORMATION
 
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
(In thousands)

   
March 31,
        
   
2013
    
December 31,
  
   
(Unaudited)
    
2012
  
ASSETS
            
Cash
   $ 94     $ 249  
Restricted cash
     586       762  
Investment in leases and loans, net
     9,804       14,097  
Deferred financing costs, net
     380       521  
Other assets
     21       24  
Total assets
   $ 10,885     $ 15,653  
                 
LIABILITIES AND PARTNERS’ DEFICIT
                
Liabilities:
                
Debt
   $ 3,574     $ 6,509  
Note payable to related party
     6,289       6,754  
Accounts payable and accrued expenses
     469       428  
Other liabilities
     278       279  
Derivative liabilities, at fair value
     141       217  
Due to affiliates
     16,525       16,687  
Total liabilities
     27,276       30,874  
                 
Commitments and contingencies (Note 10)
                
                 
Partners’ Deficit:
                
General partner
     (673 )     (659 )
Limited partners
     (15,416 )     (14,020 )
Accumulated other comprehensive loss
     (302 )     (542 )
Total partners’ deficit
     (16,391 )     (15,221 )
Total liabilities and partners' deficit
   $ 10,885     $ 15,653  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
3
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
 (In thousands, except unit data)
(Unaudited)
 
   
Three Months Ended March 31,
  
   
2013
    
2012
  
Revenues:
            
Interest on equipment financings
   $ 302     $ 770  
Rental income
     21       47  
(Losses)/gains on sale of equipment and lease dispositions, net
     (17 )     47  
Other income
     78       156  
      384       1,020  
                 
Expenses:
                
Interest expense
     298       721  
Interest expense to related party
     164       198  
Depreciation on operating leases
     5       37  
Provision for credit losses
     718       359  
General and administrative expenses
     117       196  
Administrative expenses reimbursed to affiliate
     32       91  
Loss/(gain) on derivative activities
     165       (87 )
      1,499       1,515  
Net loss
   $ (1,115 )   $ (495 )
Net loss allocated to limited partners
   $ (1,104 )   $ (490 )
                 
Weighted average number of limited partner units outstanding during the period
     592,809       592,809  
Net loss per weighted average limited partner unit
   $ (1.86 )   $ (0.83 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
(In thousands)
(Unaudited)

   
Three Months Ended March 31,
  
   
2013
    
2012
  
Net loss
   $ (1,115 )   $ (495 )
Amortization of net loss on financial derivatives reclassified from accumulated other comprehensive loss
     240       85  
Comprehensive loss
   $ (875 )   $ (410 )

The accompanying notes are an integral part of these consolidated financial statements.
 
 
5
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
(In thousands, except unit data)
(Unaudited)
 
               
Accumulated
        
   
General
          
Other
    
Total
  
   
Partner
    
Limited Partners
    
Comprehensive
    
Partners’
  
   
Amount
    
Units
    
Amount
    
(Loss) Income
    
Deficit
  
                               
Balance, January 1, 2013
   $ (659 )     592,809     $ (14,020 )   $ (542 )   $ (15,221 )
Cash distributions
     (3 )     -       (292 )     -       (295 )
Net loss
     (11 )     -       (1,104 )     -       (1,115 )
Other comprehensive income
     -       -       -       240       240  
Balance, March 31, 2013
   $ (673 )     592,809     $ (15,416 )   $ (302 )   $ (16,391 )

The accompanying notes are an integral part of this consolidated financial statement.
 
 
6
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
(In thousands)
(Unaudited)

   
Three Months Ended
March 31,
  
   
2013
    
2012
  
Cash flows from operating activities:
            
Net loss
   $ (1,115 )   $ (495 )
Adjustments to reconcile net loss to net cash used in operating  activities:
                
Losses/(gains) on sale of equipment and lease dispositions, net
     17       (47 )
Depreciation on operating leases
     5       37  
Provision for credit losses
     718       359  
Amortization of deferred financing costs
     207       206  
Net loss/(gain) on derivative activities
     165       (87 )
Changes in operating assets and liabilities:
                
Other assets
     3       (41 )
Accounts payable and accrued expenses, and other liabilities
     40       33  
Due to affiliates
     (162 )     (72 )
Net cash used in operating activities
     (122 )      (107 )
                 
Cash flows from investing activities:
                
Proceeds from leases and loans
     3,605       7,623  
Security deposits returned
     (53 )     (274 )
Net cash provided by investing activities
     3,552       7,349  
                 
Cash flows from financing activities:
                
Repayment of debt
     (2,935 )     (7,595 )
Repayments of note payable to related party
     (465 )     (69 )
Decrease in restricted cash
     176       919  
Increase in deferred financing costs
     (66 )     –  
Cash distributions to partners
     (295 )     (298 )
Net cash used in financing activities
     (3,585 )     (7,043 )
                 
(Decrease) increase  in cash
     (155 )     199  
Cash, beginning of period
     249       21  
Cash, end of period
   $ 94     $ 220  
                 
Supplemental cash flow disclosure:
                
Cash paid for interest
   $ 268     $ 301  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
7
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
March 31, 2013
(Unaudited)
 
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
 
Lease Equity Appreciation Fund II, L.P. (“LEAF II” or the “Fund”) is a Delaware limited partnership formed on March 30, 2004 by its General Partner, LEAF Financial Corporation (the “General Partner”). The General Partner manages the Fund. The General Partner is a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of October 13, 2006, the Fund raised $60.0 million by selling 600,000 of its limited partner units. It commenced operations in April 2005.
 
The Fund is expected to have a minimum of a nine-year life, consisting of an offering period of up to two years, a five-year reinvestment period and a subsequent liquidation period of two years, during which the Fund’s leases and secured loans will either mature or be sold. In the event the Fund is unable to sell its leases and secured loans during the liquidation period, the Fund is expected to continue to return capital to its partners as those leases and loans mature. All of the Fund’s leases and loans mature by the end of 2029. The Fund entered its liquidation period in October 2011. Contractually, the Fund will terminate on December 31, 2029, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement (“the Partnership Agreement”).
 
Prior to entering the liquidation period, the Fund acquired diversified portfolios of equipment to finance to end users throughout the United States as well as the District of Columbia and Puerto Rico. The Fund also acquired existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily an affiliate of its General Partner. The primary objective of the Fund is to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.
 
As of March 31, 2013, in addition to its 1% general partnership interest, the General Partner also had invested $1.0 million for a 2.0% limited partnership interest in the Fund.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The consolidated financial statements include the accounts of the Fund and its wholly-owned subsidiaries, LEAF Fund II, LLC and LEAF II Receivables Funding, LLC.  All intercompany accounts and transactions have been eliminated in consolidation.
 
The accompanying unaudited financial statements reflect all adjustments that are, in the opinion of management, of a normal and recurring nature and necessary for a fair statement of the Fund’s financial position as of March 31, 2013, and the results of its operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of results of the Fund’s operations for the 2013 calendar year. The financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting.  Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. These interim financial statements should be read in conjunction with the Fund’s financial statements and notes thereto presented in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 28, 2013.
 
Reclassification
 
Certain reclassifications have been made to 2012 reported amounts to conform to the current year presentation. Amortization of accumulated other comprehensive loss on the Fund’s interest rate swaps of approximately $85,000 for the three months ended March 31, 2012 was reclassified from interest expense to loss (gain) on derivative activities. Interest rate swap payments of approximately $222,000 for the three months ended March 31, 2012 was reclassified from loss (gain) on derivative activities to interest expense.
 
Use of Estimates
 
Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, and the fair value of interest rate swaps. The Fund bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
 
 
8
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
March 31, 2013
(Unaudited)
 
Investments in Leases and Loans
 
The Fund’s investments in leases and loans consist of direct financing leases, operating leases and loans.
 
Direct Financing Leases. Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable plus the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum lease payments plus the estimated unguaranteed residual value over the cost of the related equipment.
 
Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.
 
Operating Leases. Leases not meeting any of the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis.
 
A review for impairment of operating leases is performed whenever events or changes in circumstances indicate that the carrying amount of the operating leases may not be recoverable.  The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds its fair value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment.
 
Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the related equipment. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.
 
Allowance for credit losses. The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends, and equipment finance portfolio characteristics, adjusted for expected recoveries. In evaluating historic performance, the Fund performs a migration analysis, which estimates the likelihood that an account will progress through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due, any remaining balance is fully-reserved less an estimated recovery amount.  Generally, past due accounts are referred to the Fund internal recovery group consisting of a team of credit specialists and collectors. The group utilizes several resources in an attempt to maximize recoveries on charged-off accounts including:  1) initiating litigation against the end user customer and any personal guarantor, 2) referring the account to an outside law firm or collection agency and/or 3) repossessing and remarketing the equipment through third parties. The Fund’s policy is to charge off to the allowance those financings which are in default and for which it is probable management will be unable to collect all amounts contractually owed. Income is not recognized on leases and loans when a default on monthly payment exists for a period of 90 days or more. Generally, income recognition resumes when a lease or loan becomes less than 90 days delinquent. Fees from delinquent payments are recognized when received and are included in other income.

 
9
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
March 31, 2013
(Unaudited)

Derivative Instruments

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

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

Effective October 1, 2010, the Fund discontinued the use of hedge accounting. Therefore, any subsequent changes in the fair value of derivative instruments, including those that had previously been accounted for under hedge accounting, and periodic settlements of contracts, are recognized immediately in the accompanying consolidated statements of operations. While the Fund will continue to use derivative financial instruments to reduce exposure to changing interest rates, this accounting change may create volatility in the Fund’s results of operations, as the fair value of the Fund’s derivative financial instruments change.
 
 
For the forecasted transactions that are probable of occurring, the derivative gain or loss remaining in accumulated other comprehensive loss as of  March 31, 2013 is being reclassified into earnings over the terms of the related forecasted borrowings, consistent with hedge accounting treatment. In the event that the related forecasted borrowing is no longer probable of occurring, the related gain or loss in accumulated other comprehensive loss will be recognized in earnings immediately.

Other Income

Other income includes miscellaneous fees charged by the Fund, such as late fee income, among others. The Fund recognizes late fee income as fees are collected. Late fee income was $69,000 for the three months ended March 31, 2013 and $135,000 for the three months ended March 31, 2012.
 
 
10

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
March 31, 2013
(Unaudited)
 
NOTE 3 – INVESTMENT IN LEASES AND LOANS
 
The Fund’s investment in leases and loans, net, consists of the following (in thousands):
 
   
March 31,
    
December 31,
  
   
2013
    
2012
  
Direct financing leases (a)
   $ 5,232     $ 8,286  
Loans (b)
     5,200       6,433  
Operating leases
     52       58  
      10,484       14,777  
Allowance for credit losses
     (680 )     (680 )
    $ 9,804     $ 14,097  
 
(a)
The Fund’s direct financing leases are for initial lease terms generally ranging from 24 to 124 months.
(b)
The interest rates on loans generally range from 5% to 14%.
 
The components of direct financing leases and loans are as follows (in thousands):
 
   
March 31,
    
December 31,
  
   
2013
    
2012
  
   
Leases
    
Loans
    
Leases
    
Loans
  
Total future minimum lease payments
   $ 5,263     $ 6,058     $ 8,349     $ 7,293  
Unearned income
     (400 )     (814 )     (666 )     (793 )
Residuals, net of unearned residual income
     447       -       712       -  
Security deposits
     (78 )     (44 )     (109 )     (67 )
    $ 5,232     $ 5,200     $ 8,286     $ 6,433  
 
The Fund’s investment in operating leases, net, consists of the following (in thousands):
 
   
March 31,
    
December 31,
  
   
2013
    
2012
  
Equipment
   $ 314     $ 352  
Accumulated depreciation
     (262 )     (294 )
Security deposits
     -       -  
    $ 52     $ 58  
 
 
11

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
March 31, 2013
(Unaudited)

NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY

The following table is an age analysis of the Fund’s receivables from leases and loans (presented gross of allowance for credit losses of $680,000) as of March 31, 2013 and December 31, 2012, respectively (in thousands):

   
March 31, 2013
    
December 31, 2012
  
Age of receivable
  
Investment in leases and loans
    
%
    
Investment in leases and loans
    
%
  
Current
   $ 9,614       91.7 %   $ 12,951       87.7 %
Delinquent:
                                
31 to 91 days past due
     544       5.2 %     745       5.0 %
Greater than 91 days (a)
     326       3.1 %     1,081       7.3 %
    $ 10,484       100.0 %   $ 14,777       100.0 %
 
(a)
Balances in this age category are collectively evaluated for impairment.

The Fund had $326,000 and $1.1 million of leases and loans on nonaccrual status as of March 31, 2013 and December 31, 2012, respectively.  The credit quality of the Fund’s investment in leases and loans as of March 31, 2013 is as follows (in thousands):

   
March 31,
 2013
    
December 31,
 2012
  
Performing
   $ 10,158     $ 13,696  
Nonperforming
     326       1,081  
    $ 10,484     $ 14,777  
 
The following table summarizes the activity in the allowance for credit losses (in thousands):

   
Three Months Ended March 31,
  
   
2013
    
2012
  
Allowance for credit losses, beginning of period
   $ 680     $ 760  
Provision for credit losses
     718       359  
Charge-offs
     (1,035 )     (903 )
Recoveries
     317       184  
Allowance for credit losses, end of period (a)
   $ 680     $ 400  
 
 
(a)
End of period balances were collectively evaluated for impairment.

 
12
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
March 31, 2013
(Unaudited)

NOTE 5 – DEFERRED FINANCING COSTS
 
As of March 31, 2013 and December 31, 2012, deferred financing costs include $380,000 and $521,000, respectively, of unamortized deferred financing costs which are being amortized over the terms of the estimated life of the related debt. Accumulated amortization as of March 31, 2013 and December 31, 2012 was $3.3 million and $3.1 million, respectively.
 
 NOTE 6 – DEBT AND NOTE PAYABLE TO RELATED PARTY
 
The Fund has a term loan with Portigon Financial Services (“Portigon” or the “Lender”), previously known as WestLB AG, that had $3.6 million and $6.5 million outstanding as of March 31, 2013 and December 31, 2012, respectively.  Interest on originations that were financed prior to March 2009 is calculated at London Interbank Offered Rate (“LIBOR”) plus 1.20% per year. Interest on originations financed under this facility after March 2009 are calculated at a rate of LIBOR plus 2.50% per year. As of March 31, 2013, $6.2 million of leases and loans and $565,000 of restricted cash were pledged as collateral under this facility. This facility is due in December, 2013.

On April 7, 2011 the Fund was notified by WestLB AG, which later became known as Portigon Financial Services (“Portigon” or the “Lender”), that it was in default on its loan agreement due to various ongoing covenant breaches.  These breaches relate to the percentage of defaulted leases in its portfolio, the percentage of defaulted leases in the overall lease portfolio serviced by the General Partner, and a required minimum credit support amount, among others.  On June 29, 2012, the Fund amended its agreement with the Lender whereby the Lender waived its right to pursue any of its rights or remedies on the existing covenant breaches.  Additionally, the agreement was amended to remove certain covenants from the loan agreement. Accordingly, as of March 31, 2013 the Fund was in compliance with the term facility. In exchange for the foregoing, the Fund and the parent of the Fund’s General Partner have agreed to a limited guaranty of a portion of the remaining amount due to the Lender.  The Lender has further agreed to accept a discount on the payoff of the loan, up to a maximum of $348,000, at its December 2013 maturity date in the event the natural runoff of the portfolio had not paid off the loan balance prior to such date.
 
Note payable to related party.  The Fund owed Resource Capital Corporation, Inc. (“RSO”), which is a related entity of the Fund through common management with RAI, $6.3 million and $6.8 million as of March 31, 2013 and December 31, 2012, respectively, on a note payable which bears interest at 10% per annum.  On February 15, 2012, the Fund incurred a 1% fee, or $77,000, to extend the maturity of the note payable for one year to February 15, 2013. On January 11, 2013 the Fund again extended the maturity date from February 15, 2013 to February 15, 2014 by paying a fee equal to 1% of the outstanding principal amount as of January 31, 2013, or $66,000, to RSO. Interest payments on the note payable were $164,000 and $198,000 for the three months ended March 31, 2013 and 2012, respectively.
 
 
13
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
March 31, 2013
(Unaudited)

Repayments:  Estimated annual principal payments on the Fund’s aggregate borrowings over the next two annual periods ended March 31 are as follows (in thousands):

March 31, 2014
   $ 7,839  
March 31, 2015
     2,024  
    $ 9,863  

NOTE 7 – DERIVATIVE INSTRUMENTS

Since the Fund’s assets are structured on a fixed-rate basis and funds borrowed through bank debt are obtained on a floating-rate basis, the Fund is exposed to interest rate risk if rates rise because it will increase the Fund’s borrowing costs. To manage interest rate risk, the Fund employs a hedging strategy using derivative financial instruments such as interest rate swaps.  The Fund does not use derivative financial instruments for trading or speculative purposes. The Fund manages the credit risk of possible counterparty default in these derivative transactions by dealing primarily with counterparties with investment grade ratings. The Fund has agreements with certain of its derivative counterparties that contain a provision where if the Fund defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Fund could also be declared in default on its derivative obligations. As of March 31, 2013, the Fund has not posted any collateral related to these agreements. If the Fund had breached any of these provisions at March 31, 2013, it could be required to settle its obligations under the agreements at their termination value of $151,000.
 
At March 31, 2013, the Fund has 20 interest rate swaps which terminate on various dates ranging from July 2013 to August 2015 which generally coincide with the maturity period of the portfolio of lease and loans.
 
The following tables present the fair value of the Fund’s derivative financial instruments, as well as their classification on the consolidated balance sheet as of  March 31, 2013 and December 31, 2012, and on the consolidated statement of operations for the three months ended March 31, 2013 and 2012 (dollars in thousands):
 
   
2013
    
2012
  
Fixed swaps (notional amount)
   $ 5,970     $ 8,635  
Range of receive rate
     0.20% - 0.26 %     0.21% - 0.26 %
Range of pay rate
     3.03% - 5.55 %     3.03% - 5.55 %
 
The following table indicates the fair value of the derivative contracts as of March 31, 2013 and December 31, 2012 (in thousands):

 
Balance Sheet Location
  
Derivative Assets
    
Derivative Liabilites
  
2013
Derivative liabilities, at fair value
   $ -     $ 141  
2012
Derivative liabilities, at fair value
   $ -     $ 217  

 
14

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
March 31, 2013
(Unaudited)
 
The following table summarizes the effect of the interest rate swaps on the consolidated statements of operations and other comprehensive loss for the three month periods ended March 31, 2013 and 2012 (in thousands):

 
Location of loss reclassified from OCI to the statements of operations
  
Amount of loss reclassified from OCI to the statements of operations
  
Location of loss recognized  in the statements of operations
  
Amount of loss recognized in the statements of operations
  
2013
(a)
   $ 240  
(b)
   $ 2  
2012
(a)
   $ 85  
(b)
   $ 50  
 
 
a.
Losses reclassified from accumulated other comprehensive loss were realized in loss (gain) on derivative activities on the accompanying statement of operations.
 
 
b.
Subsequent to dedesignation as cash flow hedges all changes in fair value were realized in loss (gain) on derivative activities and all cash payments on derivatives were realized in interest expense. The Fund recognized expense of $78,000 and $222,000 in interest expense for the three month periods ended March 31, 2013 and 2012, respectively, related to payments on derivatives and gains of $76,000 and $172,000 in loss (gain) on derivative activities  for the three month periods ended March 31, 2013 and 2012, respectively.
 
As of March 31, 2013, $302,000 of the remaining balance in accumulated other comprehensive loss is expected to be charged to earnings over the next 12 months.
 
NOTE 8 – FAIR VALUE MEASUREMENT
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
 
 
●
Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
 
 
●
Level 2 – Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
 
 
●
Level 3 – Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
 
The Fund employs a hedging strategy to manage exposure to the effects of changes in market interest rates. All derivatives are recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Because the Fund’s derivatives are not listed on an exchange, these instruments are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although the Fund has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, the Fund has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Fund has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
 
 
15
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
March 31, 2013
(Unaudited)
 
Liabilities measured at fair value on a recurring basis included the following (in thousands):
 
   
Fair Value Measurements Using
    
Liabilities
  
   
Level 1
    
Level 2
    
Level 3
    
At Fair  Value
  
Interest rate swaps at March 31, 2013
   $ -     $ (141 )   $ -     $ (141 )
Interest rate swaps at December 31, 2012
   $ -     $ (217 )   $ -     $ (217 )
 
The Fund is also required to disclose the fair value of financial instruments not measured at fair value for which it is practicable to estimate that value.  For cash, restricted cash, receivables, and payables, the carrying amounts approximate fair value because of the short term maturity of these instruments.
 
The Fund is also required to disclose the methods used to estimate fair value on financial instruments not measured at fair value and the level within the fair value hierarchy that those fair value measurements are categorized. The carrying value and fair value of the Fund’s debt at March 31, 2013 and December 31, 2012 is as follows:
 
         
Fair Value Measurements Using
    
Liabilities
  
   
Carrying Value
    
Level 1
    
Level 2
    
Level 3
    
At Fair
Value
  
March 31, 2013:
                              
Debt
   $ 3,574     $ -     $ 3,574     $ -     $ 3,574  
Note payable to related party
   $ 6,289     $ -     $ 6,289     $ -     $ 6,289  
                                         
December 31, 2012:
                                        
Debt
   $ 6,509     $ -     $ 6,365     $ -     $ 6,365  
Note payable to related party
   $ 6,754     $ -     $ 6,754     $ -     $ 6,754  
 
The fair value of the debt was determined using quoted prices of comparable underlying securities obtained from brokers as of the measurement date.  The fair value of the related party note payable was determined to approximate carrying value as the interest rate is comparable to current market rates.
 
NOTE 9 – CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH AFFILIATES
 
The Fund relies on the General Partner and its affiliates to manage the Fund’s operations and pays the General Partner or its affiliates fees to manage the Fund in accordance with the Partnership Agreement. The following is a summary of fees and costs of services and materials charged by the General Partner or its affiliates (in thousands):
 
   
Three Months Ended March 31,
  
   
2013
    
2012
  
Administrative expenses
   $ 32     $ 91  
 
Management Fees. The General Partner has waived all future management fees. Through March 31, 2013, the General Partner has unearned and waived management fees of $4.0 million, of which $91,000 related to the three months ended March 31, 2013.
 
Administrative Expenses. The General Partner and its affiliates are reimbursed by the Fund for administrative services reasonably necessary to operate the Fund which do not exceed the General Partner’s actual cost of those services.
 
Due to Affiliates.  Due to affiliates includes amounts due to the General Partner and its affiliates related to acquiring and managing portfolios of equipment from its General Partner, management fees and reimbursed expenses.
 
 
16
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
March 31, 2013
(Unaudited)
 
Distributions.  The General Partner owns a 1% general partner interest and a 2% limited partner interest in the Fund. The General Partner was paid cash distributions of $3,000 and $6,000, respectively, for its general partner and limited partner interests in the Fund for the three months ended March 31, 2013 and $3,000 and $6,000, respectively, for its general partner and limited partner interests in the Fund for the three months ended March 31, 2012.
 
Note Payable to related party.  See Note 6 for a further discussion.
 
NOTE 10 – COMMITMENTS AND CONTINGENCIES
 
In connection with a sale of leases and loans to a third-party in July of 2008, the Fund contractually agreed to repurchase delinquent leases up to a maximum of $2.3 million calculated as 7.5% of total proceeds received from the sale (“Repurchase Commitment”).  As of March 31, 2013, the Fund has a $150,000 remaining Repurchase Commitment of which $105,000 was recorded as a liability.
 
The Fund is party to various legal proceeding arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Fund’s financial condition or results of operations.
 
NOTE 11 – SUBSEQUENT EVENTS
 
The Fund has evaluated its March 31, 2013 financial statements for subsequent events through the date the financial statements were issued.  The Fund is not aware of any additional subsequent events which would require recognition or disclosure in the financial statements.
 
 
17

 
When used in this Form 10-Q, the words “believes” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in other documents filed with Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
 
The following discussion provides an analysis of our operating results, an overview of our liquidity and capital resources and other items related to us. The following discussion and analysis should be read in conjunction with (i) the accompanying interim financial statements and related notes and (ii) our consolidated financial statements, related notes, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.
 
As used herein, the terms “we,” “us,” or “our” refer to Lease Equity Appreciation Fund II, L.P. and its subsidiaries.
 
Business
 
We are a Delaware limited partnership formed on March 30, 2004 by our General Partner, LEAF Financial Corporation (our “General Partner”), which manages us. Our General Partner is a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise, to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through our offering termination date of October 13, 2006, we raised $60.0 million by selling 600,000 of our limited partner units. We commenced operations in April 2005.
 
We are expected to have a minimum of a nine-year life, consisting of an offering period of up to two years, a five year reinvestment period and a subsequent liquidation period of two years, during which our leases and secured loans will either mature or be sold. In the event we are unable to sell our leases and secured loans during the liquidation period, to the extent that there is excess cash, we expect to continue to return capital to our partners as those leases and loans mature. All of our leases and loans mature by the end of 2029. We entered our liquidation period in October 2011 and will terminate on December 31, 2029, unless sooner dissolved or terminated as provided in the Partnership Agreement.
 
We acquired a diversified portfolio of new, used or reconditioned equipment that we leased to third-parties. We also acquired portfolios of equipment subject to existing leases from other equipment lessors. Our financings were typically acquired from our General Partner. In addition, we made secured loans to end users to finance their purchase of equipment. We attempted to structure our secured loans so that, in an economic sense, there was no difference to us between a secured loan and a full payout equipment lease. We financed business-essential equipment including, but not limited to, computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focused on the small to mid-size business market, which generally includes businesses with:
 
 
●
500 or fewer employees;
 
 
●
$1 billion or less in total assets;
 
 
●
Or $100 million or less in total annual sales.
 
To date, limited partners have received total distributions ranging from approximately 30% to 42% of their original amount invested, depending upon when the investment was made.   Management is working to maximize the amount that can be distributed to limited partners in the future. Future cash distributions are not guaranteed and are solely dependent on our performance and are impacted by a number of factors which include lease and loan defaults by our customers, accelerated principal payments on our debt facilities required per our agreements, and prevailing economic conditions. As we entered the liquidation phase of the partnership in October 2011 we are prohibited from acquiring additional leases and loans.  Accordingly, cash flows on our existing investment in leases and loans will be used to repay our obligations and, to the extent excess cash continues to be available, support distributions to our limited partners.  The Fund is in its liquidation process which will continue until all of the leases are collected or sold and our debts are paid. Distributions to our limited partners were made in 2012 and 2011 at a rate of 2.0% of their original capital invested.

 
18

General Economic Overview

United States of America (“U.S.”) economic activity for the quarter ended March 31, 2013 was strongly influenced first by temporary relief of various tax cuts that were set to expire at the beginning of the calendar year (the “Fiscal Cliff”) that were avoided, but was quickly tempered through uncertainties surrounding automatic federal spending cuts (the “Sequestration”) that took effect and other unresolved fiscal matters including the pending approach of the U.S. debt ceiling. The overall economic activity was uneven with some sectors showing improvement and others showing decline. The quarter ended with more indications of decline or stagnation than when the quarter began. Some specific key economic indicators and reports that were released in the first quarter of 2013 and that show these trends are summarized below.

 
●
The Commerce Department reported uneven signs in the housing market.  While sales of new single family home sales in March 2013 were up 1.5 percent as compared to February 2013, building permits in March 2013 were down 3.9 percent as compared to February 2013.
 
 
●
In March 2013 the majority of the members of the Federal Reserve’s Open Market Committee judged that the highly accommodative monetary policy (QE3) was likely to be warranted over the next few years to support and spur on the sluggish economy.
 
 
●
The National Association of Realtors reported that in March 2013 existing home sales decreased 0.6 percent as compared to February 2013.  At the same time the National Association of Realtors reported some positive indications of housing activity as the length of time homes were on the market declined, and home prices increased. The biggest factor holding back further expansion in existing home sales is lack of supply.
 
 
●
The National Association of Credit Management Index declined in March 2013 as compared to February 2013 and the factors comprising the Index provided no clear signal to cause much confidence in future economic activity.
 
 
·
The National Federation of Independent Business Confidence Index level declined in March 2013 after a several month period of increases. The National Association of Independent Businesses reported that among the small business owners that participate in the survey “virtually no owners think the current period is a good time to expand.”
 
 
·
The Equipment Leasing and Finance Foundation’s Monthly Confidence Index for March 2013 declined to 58.0 from 58.7 in February 2013 reflecting a leveling off of industry participant’s optimism regarding the economic outlook.
 
As has been the case in recent quarters these indicators point to an economy that is showing signs of a slow sustained improvement in certain sectors, but also held back by significant uncertainty caused by the political climate.  With the issue to the debt ceiling pending on the near horizon and growing effects from the Sequestration, the first quarter of 2013 ended with heightened uncertainty and lack of confidence in the business sector. As this affects small businesses, this situation might affect the performance of our portfolio of leases and loans which have been largely extended to the small to medium sized business community.
 
 
19
 
Finance Receivables and Asset Quality
 
Information about our portfolio of leases and loans is as follows (dollars in thousands):

   
March 31,
2013
    
December 31,
2012
  
Investment in leases and loans, net
   $ 9,804     $ 14,097  
                 
Number of contracts
     5,300       6,200  
Number of individual end users (a)
     4,600       5,400  
Average original equipment cost
   $ 21.6     $ 20.6  
Average initial lease term (in months)
     71       70  
Average remaining lease term (in months)
     23       23  
States accounting for more than 10% of lease and loan portfolio:
                
California
     19 %     17 %
                 
Types of equipment accounting for more than 10% of lease and loan portfolio:
                
Industrial Equipment
     38 %     33 %
Medical Equipment
     25 %     23 %
                 
Types of businesses accounting for more than 10% of lease
 and loan portfolio:
                
Services
     40 %     41 %
Manufacturing
     18 %     16 %
Agriculture
     11 %     10 %
Retail Trade
     9 %     11 %
 
 
(a)
Located in the 50 states as well as the District of Columbia and Puerto Rico. No individual end user or single piece of equipment accounted for more than 7% of our portfolio based on original cost of the equipment.
 
 
20
 
Portfolio Performance
 
The table below provides information about our finance receivables including non-performing assets, which are those assets that are not accruing income due to non-performance or impairment (dollars in thousands):
 
   
As of and for the
  
   
Three Months Ended March 31,
  
               
Change
  
   
2013
    
2012
     $     %  
Investment in leases and loans before allowance for credit losses
   $ 10,484     $ 32,153     $ (21,669 )     (67 )%
Less: allowance for credit losses
     (680 )     (400 )     (280 )     70 %
Investment in leases and loans, net
   $ 9,804     $ 31,753     $ (21,949 )     (69 )%
                                 
Weighted average investment in direct financing leases and loans before allowance for credit losses
   $ 12,600     $ 36,081     $ (23,481 )     (65 )%
Non-performing assets
   $ 326     $ 824     $ (498 )     (60 )%
Charge-offs, net of recoveries
   $ 718     $ 719     $ (1 )     (0 )%
As a percentage of finance receivables:
                                
Allowance for credit losses
     6.49 %     1.24 %                
Non-performing assets
     3.11 %     2.56 %                
As a percentage of weighted average finance receivables:
                                
Charge-offs, net of recoveries
     5.70 %     1.99 %                
 
Our allowance for credit losses is our estimate of losses inherent in our commercial finance receivables, at the current time. The allowance is based on factors which include our historical loss experience on equipment finance portfolios we manage, an analysis of contractual delinquencies, current economic conditions and trends and equipment finance portfolio characteristics, adjusted for recoveries. In evaluating historic performance, we perform a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. Our policy is to charge-off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote. Substantially all of our assets are collateral for our debt and, therefore, significantly greater delinquencies than anticipated will have an adverse impact on our cash flow and distributions to our partners.
 
We focused on financing equipment used by small to mid-sized businesses. The recent economic recession made it more difficult for some of our customers to make payments on their financings with us on a timely basis, which adversely affected our operations in the form of higher delinquencies. These higher delinquencies have continued as the U.S. economy recovers, as evidenced by an increase in our non-performing assets as a percentage of finance receivables to 3.11% at March 31, 2013 compared to 2.56% at March 31, 2012 and an increase in our charge-offs (net of recoveries) as a percentage of our weighted average finance receivables to 5.70% at March 31, 2013 compared to 1.99% at March 31, 2012.  Our allowance for credit losses also reflects this, increasing as a percentage of our portfolio from 1.24% at March 31, 2012 to 6.49% at March 31, 2013.
 
Critical Accounting Policies
 
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, and the fair value of interest rate swaps. We base our estimates on historical experience, current economic conditions and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 
21
 
For a complete discussion of our critical accounting policies and estimates, see our annual report on Form 10-K for fiscal 2012 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.” There have been no material changes to these policies through March 31, 2013.

Results of Operations
 
Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012 (dollars in thousands):
 
         
Increase (Decrease)
  
   
2013
    
2012
     $     %  
Revenues:
                          
Interest on equipment financings
   $ 302     $ 770       (468 )     (61 )%
Rental income
     21       47       (26 )     (55 )%
(Losses)/gains on sale of equipment and lease dispositions, net
     (17 )     47       (64 )     (136 )%
Other income
     78       156       (78 )     (50 )%
      384       1,020       (636 )     (62 )%
                                 
Expenses:
                                
Interest expense
     298       721       (423 )     (59 )%
Interest expense to related party
     164       198       (34 )     (17 )%
Depreciation on operating leases
     5       37       (32 )     (86 )%
Provision for credit losses
     718       359       359       100 %
General and administrative expenses
     117       196       (79 )     (40 )%
Administrative expenses reimbursed to affiliate
     32       91       (59 )     (65 )%
Loss/(gain) on derivative activities
     165       (87 )      252       290 %
      1,499       1,515     $ (16 )        
Net loss
   $ (1,115 )   $ (495 )   $ (620 )        
Net loss allocated to limited partners
   $ (1,104 )   $ (490 )   $ (614 )        
 
The overall decrease in revenues is primarily a result of a decreasing lease and loan portfolio as we are in our liquidation phase whereby we are prohibited from acquiring any new leases and loans. A more specific discussion follows:
 
The decrease in total revenues was primarily attributable to the following:
 
 
●
A decrease in interest on equipment financings and rental income. Our weighted average net investment in financing assets decreased to $12.6 million for the three months ended March 31, 2013 as compared to $36.1 million for the three months ended March 31, 2012, a decrease of $23.5 million or 65.0%. As we entered our liquidation phase in October 2011 we are not permitted under the Partnership Agreement to acquire additional leases and loans. Therefore, our revenues are expected to continue to decline as our weighted average net investment in financing assets declines.
 
 
●
Losses/(gains) on the sale of equipment and lease dispositions decreased $64,000 to a loss of  $17,000 for the three month period ended March 31, 2013 compared to a net gain of $47,000 for the three month period ended March 31, 2012.  Gains and losses on sales of equipment may vary significantly from period to period.
 
 
●
Other income decreased from $156,000 for the three months ended March 31, 2012 to $78,000 for the three months ended March 31, 2013, a decrease of $78,000 or 50%.  The decrease in other income is primarily related to a decrease in late fee income, which is primarily driven by the decrease in the size of our portfolio.
 
Total expenses decreased slightly for the three month period ended March 31, 2013 as a result of the decrease in the size of our portfolio, however, were largely offset by an increase in our provision for credit losses. Our provision for credit losses increased to $718,000 for the three month period ended March 31, 2013 compared to $359,000 for the three month period end March 31, 2012. We provide for credit losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions, in addition to various qualitative factors. The increase in our provision for credit losses was offset by the following:
 
 
●
A decrease in interest expense primarily due to a decrease in average debt outstanding. Weighted average borrowings for three months ended March 31, 2013 were $5.0 million as compared to $34.4 million for the three months ended March 31, 2012.
 
 
22
 
 
●
A decrease in interest expense to related party.  Subsequent to the repayment of our 2007-1 Term Securitization in August 2012 we began to apply cash receipts on leases and loans that had been pledged as collateral on the 2007-1 Term Securitization to repayment of the related party note payable.
 
 
●
A decrease in depreciation on operating leases due to continued maturity of our lease and loan portfolio.
 
 
●
A decrease in general and administrative expenses and administrative expenses reimbursed to affiliates due to the decrease in the size of our portfolio.
 
The net loss per limited partner unit, after the net loss allocated to our General Partner, for the three months ended March 31, 2013 and 2012 was $1.86 and $0.83, respectively, based on a weighted average number of limited partner units outstanding of 592,809 for both periods.
 
Liquidity and Capital Resources
 
General
 
Our major source of liquidity is from the collection of lease and loan payments.  Our primary cash requirements are for debt service, normal operating expenses, and distributions to partners.
 
The following table sets forth our sources and uses of cash for the periods indicated (in thousands):
 
   
Three Months Ended
 March 31,
  
   
2013
    
2012
  
Net cash used in operating activities
   $ (122 )   $ (107 )
Net cash provided by investing activities
     3,552       7,349  
Net cash used in financing activities
     (3,585 )     (7,043 )
(Decrease)/increase in cash
   $ (155 )   $ 199  
 
During the three months ended March 31, 2013 cash decreased by $155,000 primarily due to debt repayments of $3.4 million, cash distributions to our partners of $295,000, and cash used in operating activities of $122,000 that exceeded our proceeds from leases and loans of $3.6 million.
 
Partners’ distributions paid for the three months ended March 31, 2013 and 2012 were $295,000 and $298,000, respectively.  Cumulative partners distributions paid from our inception to March 31, 2013 were $20.6 million.  Management is working to maximize the amount that can be distributed to limited partners in the future. Partners’ distributions were made at a rate of 2.0% per annum in 2013 and 2012.  Future cash distributions are not guaranteed and are solely dependent on our performance and are impacted by a number of factors which include lease and loan defaults by our customers, accelerated principal payments on our debt facilities required per our agreements, and prevailing economic conditions.
 
The General Partner has waived all future management fees.  Through March 31, 2013, the General Partner has unearned and waived management fees of $4.0 million, of which $91,000 related to the three months ended March 31, 2013.
 
Borrowings

We have a term loan with Portigon Financial Services (Portigon or the Lender), previously known as WestLB AG, that had $3.6 million outstanding as of March 31, 2013.  Interest on originations that were financed prior to March 2009 is calculated at London Interbank Offered Rate (“LIBOR”) plus 1.20% per year. Interest on originations financed under this facility after March 2009 are at a rate of LIBOR plus 2.50% per year. As of March 31, 2013, $6.2 million of leases and loans and $565,000 of restricted cash were pledged as collateral under this facility. This facility is due in December, 2013.
 
On April 7, 2011 we were notified by Portigon that we were in default on our loan agreement due to various ongoing covenant breaches.  These breaches relate to the percentage of defaulted leases in its portfolio, the percentage of defaulted leases in the overall lease portfolio serviced by the General Partner, and a required minimum credit support amount, among others.  On June 29, 2012, we amended our agreement with the Lender whereby the Lender waived its right to pursue any of its rights or remedies on the existing covenant breaches.  Additionally, the agreement was amended to remove certain covenants from the loan agreement. Accordingly, as of March 31, 2013 we were in compliance with the term facility. The parties also agreed that the maturity date of the loan will be December 21, 2013 unless an event of default occurs.  In exchange for the foregoing, we and RAI have agreed to a limited guaranty of a portion of the remaining amount due to the Lender.  The Lender has further agreed to accept a discount on the payoff of the loan at the maturity date, up to a maximum of $348,000, in the event the natural runoff of the portfolio had not paid off the loan balance prior to such date. We expect that the lease portfolio collateralizing this loan will be sufficient to repay the debt, but due to uncertain economic conditions this cannot be assured.
 
In addition to the borrowings discussed above, we owe $6.3 million to Resource Capital Corporation, Inc. (“RSO”) as of March 31, 2013, which is a related entity of ours through common management with RAI, on a note payable which bears interest at 10% per annum.  On February 15, 2012, we incurred a 1% fee, or $77,000, to extend the maturity of the note payable for one year to February 15, 2013. On January 11, 2013, we again extended the maturity date from February 15, 2013 to February 15, 2014 by paying a fee equal to 1% of the outstanding principal amount as of January 31, 2013 to RSO.
 
 
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On August 20, 2012 we fully repaid the 2007-1 Term Securitization, subsequent to which we began to apply cash receipts on leases and loans that had been pledged as collateral on the 2007-1 Term Securitization to repayment of the related party note payable.  Interest payments on the note payable were $164,000 for the three months ended March 31, 2013.
 
Liquidity Summary
 
Our primary source of liquidity comes from payments on our lease and loan portfolio. Our liquidity has been and could be further adversely affected by higher than expected equipment lease defaults, which results in a loss of revenues. These losses may adversely affect our ability to make distributions to our partners and, if the level of defaults is sufficiently large, may result in our inability to fully recover our investment in the underlying equipment. As our lease portfolio ages, and if the recovery in the United States economy falters for a substantial period of time, we anticipate the need to increase our allowance for credit losses.
 
Our primary use of cash is for debt service, of which substantially all of our leases and loans are pledged as collateral. Repayment of our debt is based on the payments we receive from our customers. If a lease or loan becomes delinquent our lender uses the excess collateral from performing leases to repay our loan, even though our customer has not paid us. Therefore, higher than expected lease and loan defaults will reduce our liquidity.
 
Legal Proceedings
 
We are a party to various routine legal proceedings arising in the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
 
 
Quantitative and Qualitative Disclosures about Market Risk have been omitted as permitted under rules applicable to smaller reporting companies. 

 
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Disclosure Controls
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
Under the supervision of our General Partner’s chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level discussed above.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting that occurred during the three months ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II. OTHER INFORMATION
 
 
Exhibit
No.
  
Description
3.1
  
Certificate of Limited Partnership for Lease Equity Appreciation Fund II, L.P. (1)
3.2
  
Amended Certificate of Limited Partnership for Lease Equity Appreciation Fund II, L.P.(2)
3.3
  
Amended and Restated Agreement of Limited Partnership for Lease Equity Appreciation Fund II, L.P. (4)
4.1
  
Forms of letters sent to limited partners confirming their investment (1)
10.1
  
Origination & Servicing Agreement among LEAF Financial Corporation, Lease Equity Appreciation Fund II, L.P. and LEAF Funding, Inc. dated April 15, 2005 (3)
10.2
  
Secured Loan Agreement dated as of June 1, 2005 with LEAF Fund II, LLC as Borrower, LEAF Funding, Inc. as Originator, Lease Equity Appreciation Fund II, L.P. as Seller, LEAF Financial Corporation as Servicer, U.S. Bank National Association, as Collateral Agent and Securities Intermediary and WestLB AG, New York Branch as Lender (3)
10.3
  
First Amendment to WestLB AG, New York Branch, Secured Loan Agreement (5)
10.4
  
Second Amendment to WestLB AG, New York Branch, Secured Loan Agreement (6)
10.5
  
Third Amendment to WestLB AG, New York Branch, Secured Loan Agreement (7)
10.6
  
Fifth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (8)
10.7
  
Sixth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (9)
10.8
  
Indenture among LEAF II Receivables Funding, LLC as issuer, and U.S. Bank National Association as trustee and custodian (9)
10.9
  
Seventh Amendment to WestLB AG, New York Branch, Secured Loan Agreement (10)
10.10
  
Eighth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (10)
10.11
  
Ninth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)
10.12
  
Tenth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)
10.13
  
Eleventh Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)
10.14
  
Twelfth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (12)
10.15
  
Thirteenth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (12)
10.16
  
Fourteenth Amendment to West LB AG, New York Branch, Secured Loan Agreement (12)
10.17
  
Fifteenth Amendment to West LB AG, New York Branch, Secured Loan Agreement (13)
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
  
Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at March 31, 2013 and December 31, 2012; (ii) the Consolidated Statements of  Operations for the three month periods ended March 31, 2013 and 2012; (iii) the Consolidated Statements of Comprehensive Loss for the three  month periods ended March 31, 2013 and 2012; (iv) the Consolidated Statement of Changes in Partners’ Deficit for the three month period ended March 31, 2013; (iv) the Consolidated Statements of Cash Flows for the three month periods ended March 31, 2013 and 2012; and, (iv) the Notes to Consolidated Financial Statements.
 
 
(1)
Filed previously on June 17, 2004 as an exhibit to our Registration Statement and by this reference incorporated herein.
 
(2)
Filed previously on September 7, 2004 in Pre-Effective Amendment No. 1 as an exhibit to our Registration Statement and by this reference incorporated herein.
 
 
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(3)
Filed previously as an exhibit to our Form 10-Q for the quarter ended June 30, 2005 and by this reference incorporated herein.
 
(4)
Filed previously on December 27, 2005 as Appendix A Post-Effective Amendment No. 1 to our Registration Statement and by this reference incorporated herein.
 
(5)
Filed previously as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and by this reference incorporated herein.
 
(6)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended28 June 30, 2006 and by this reference incorporated herein.
 
(7)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2007 and by this reference incorporated herein.
 
(8)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 and by this reference incorporated herein.
 
(9)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2008 and by this reference incorporated herein.
 
(10)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and by this reference incorporated herein.
 
(11)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and by this reference incorporated herein.
 
(12)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2009 and by this reference incorporated herein.
 
(13)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 and by this reference incorporated herein.

 
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  LEASE EQUITY APPRECIATION FUND II, L.P.  
  Delaware Limited Partnership  
       
 
By:
LEAF Financial Corporation,  its General Partner
  
       
May 13, 2013
By:
/s/ CRIT S. DEMENT
  
   
CRIT S. DEMENT
  
   
Chief Executive Officer
  
       
May 13, 2013
By:
/s/ ROBERT K. MOSKOVITZ
  
   
ROBERT K. MOSKOVITZ
  
   
Chief Financial Officer
  
 
 
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Lease Equity Appreciation Fund II, L.P. Reports