UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________

 

FORM 10-Q

______________

(Mark One)

 

þ

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

 

For the quarterly period ended September 30, 2013

 

OR

 

o

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 0-13782

 

INDEPENDENCE TAX CREDIT PLUS L.P. II

(Exact name of registrant as specified in its charter)

 

Delaware		13-3646846
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
100 Church Street, New York, New York		10007
(Address of principal executive offices)		(Zip Code)

 

(212) 317-5700

Registrant’s telephone number, including area code

(Former name, former address and former fiscal year, if changed since last report)

  

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

 

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

 

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

 

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

 

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

 

 

 

PART I – Financial Information

Item 1.  Financial Statements.

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

 

		September 30,				March 31,
		2013				2013
		(Unaudited)				(Audited)
ASSETS
Operating assets
Property and equipment at cost, net of accumulated depreciation of $5,613,548 and $5,613,049, respectively		$	-			$	5,459
Cash and cash equivalents			2,424,129				2,568,335
Cash held in escrow			339,007				285,044
Deferred costs, net of accumulated amortization of $0 and $0, respectively			8,426				8,426
Other assets			40,673				65,868
Total assets		$	2,812,235			$	2,933,132
LIABILITIES AND PARTNERS’ (DEFICIT) CAPITAL
Liabilities
Mortgage notes payable		$	6,704,999			$	6,712,964
Accounts payable			45,195				79,117
Security deposit payable			62,423				59,505
Accrued interest payable			7,425,849				7,299,826
Due to local general partners and affiliates			120,000				124,796
Due to general partner and affiliates			1,834,491				1,797,203
Total liabilities			16,192,957				16,073,411
Commitments and contingencies (Note 6)
Partners’ (deficit) capital
Limited partners (58,928 BACs issued and outstanding)			(16,494,089	)			(16,257,466	)
General partner			3,599,346				3,601,736
Independence Tax Credit Plus L.P. II total			(12,894,743	)			(12,655,730	)
Noncontrolling interests			(485,979	)			(484,549	)
Total partners’ deficit			(13,380,722	)			(13,140,279	)
Total liabilities and partners’ (deficit) capital		$	2,812,235			$	2,933,132

 

See accompanying notes to consolidated financial statements.

 

 

INDEPENDENCE TAX CREDIT PLUS L.P. II

AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2013				2012				2013				2012
Revenues
Rental income		$	209,671			$	197,428			$	414,461			$	389,797
Other income			8,003				8,010				16,654				14,248
Total revenues			217,674				205,438				431,115				404,045
Expenses
General and administrative			83,639				86,351				170,541				184,680
General and administrative-related parties (Note 2)			38,996				29,600				79,044				47,739
Repairs and maintenance			66,980				58,700				107,934				97,958
Operating			29,143				25,248				53,241				52,249
Taxes			18,232				18,247				36,501				36,494
Insurance			7,975				8,850				15,950				17,700
Financial, principally interest			103,896				104,135				207,848				208,331
Depreciation and amortization			-				18,597				499				37,824
Total expenses from operations			348,861				349,728				671,558				682,975
Loss from operations			(131,187	)			(144,290	)			(240,443	)			(278,930	)
(Loss) income from discontinued operations			-				(47,837	)			-				14,902,965
Net (loss) income			(131,187	)			(192,127	)			(240,443	)			14,624,035
Net loss attributable to noncontrolling interests from operations			770				808				1,430				1,788
Net income attributable to noncontrolling interests from discontinued operations			-				(747,979	)			-				(122,391	)
Net loss (income) attributable to noncontrolling interests			770				(747,171	)			1,430				(120,603	)
Net (loss) income attributable to Independence Tax Credit Plus L.P. II		$	(130,417	)		$	(939,298	)		$	(239,013	)		$	14,503,432
Loss from operations – limited partners			(129,113	)			(142,047	)			(236,623	)			(274,370	)
(Loss) income from discontinued operations (including gain on sale of properties) – limited partners			-				(787,858	)			-				14,632,768
Net (loss) income  – limited partners		$	(129,113	)		$	(929,905	)		$	(236,623	)		$	14,358,398
Number of BACs outstanding			58,928				58,928				58,928				58,928
Loss from operations per weighted average BAC		$	(2.20	)		$	(2.41	)		$	(4.02	)		$	(4.66	)
(Loss) income from discontinued operations per weighted average BAC			-				(13.37	)			-				248.32
Net (loss) income per weighted average BAC		$	(2.20	)		$	(15.78	)		$	(4.02	)		$	243.66

 

See accompanying notes to consolidated financial statements.

 

 

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

 

						Limited				General				Noncontrolling
		Total				Partners				Partner				Interests
Partners’ (deficit) capital – April 1, 2013		$	(13,140,279	)		$	(16,257,466	)		$	3,601,736			$	(484,549	)
Net loss			(240,443	)			(236,623	)			(2,390	)			(1,430	)
Partners’ (deficit) capital – September 30, 2013		$	(13,380,722	)		$	(16,494,089	)		$	3,599,346			$	(485,979	)

 

See accompanying notes to consolidated financial statements.

 

 

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

 

		Six Months Ended
		September 30,
		2013				2012
Cash flows from operating activities:
Net (loss) income		$	(240,443	)		$	14,624,035
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Gain on sale of properties			-				(14,919,656	)
Depreciation and amortization			499				71,066
Changes in operating assets and liabilities:
(Decrease) increase in accounts payable			(33,922	)			667,595
Increase in security deposit payable			2,918				5,213
Increase in accrued interest payable			126,023				416,518
Increase in cash held in escrow			(35,530	)			(76,421	)
Decrease in other assets			25,195				87,887
Decrease in due to local general partners and affiliates			(4,796	)			-
Increase in due to general partner and affiliates			37,288				-
Total adjustments			117,675				(13,747,798	)
Net cash (used in) provided by operating activities			(122,768	)			876,237
Cash flows from investing activities:
Proceeds from sale of properties			-				141,885
Costs paid relating to sale of properties			-				(20,000	)
Dispositions (improvements) to property and equipment			4,960				(87,199	)
Increase in cash held in escrow			(18,433	)			(21,229	)
Net cash (used in) provided by investing activities			(13,473	)			13,457
Cash flows from financing activities:
Principal payments of mortgage notes			(7,965	)			(130,018	)
Net cash used in financing activities			(7,965	)			(130,018	)
Net (decrease) increase in cash and cash equivalents			(144,206	)			759,676
Cash and cash equivalents at beginning of period			2,568,335				1,948,675
Cash and cash equivalents at end of period*		$	2,424,129			$	2,708,351
Summarized below are the components of the gain on sale of properties:
Proceeds from sale of properties – net		$	-			$	(121,885	)
Property and equipment, net of accumulated depreciation			-				6,271,632
Deferred costs			-				72,307
Other assets			-				148,662
Cash held in escrow			-				1,401,559
Accounts payable and other liabilities			-				(1,343,643	)
Due to general partners and affiliates			-				(72,839	)
Due to local general partners and affiliates			-				(471,642	)
Mortgage payable			-				(9,021,807	)
Accrued interest payable			-				(11,142,386	)
Security deposits payable			-				(89,377	)
Decrease in capitalization of consolidated subsidiaries attributable to noncontrolling interests			-				(550,237	)

 

* Cash and cash equivalents at end of period, includes cash and cash equivalents from discontinued operations of $0 and $0, respectively.

 

See accompanying notes to consolidated financial statements.

 

 

INDEPENDENCE TAX CREDIT PLUS L.P. II

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 1 – General

 

The consolidated financial statements include the accounts of Independence Tax Credit Plus L.P. II (the “Partnership”) and one remaining (of an original fifteen) other limited partnership (“subsidiary partnership”, “subsidiary” or “Local Partnership”) owning leveraged apartment complexes that are eligible for the low-income housing tax credit. As of September 30, 2013, the Partnership has ownership interests in one remaining investment. The general partner of the Partnership is Related Independence Associates L.P., a Delaware limited partnership (the “General Partner”), which is managed by an affiliate of Centerline Holding Company (“Centerline”), which is the ultimate parent of the manager of the general partner of the General Partner. For information on Centerline’s unaudited balance sheet for the most recent fiscal year, see http://sec.gov. Through the rights of the Partnership and/or an affiliate of the General Partner, which affiliate has a contractual obligation to act on behalf of the Partnership, to remove the general partner of each of the subsidiary partnerships (each a “Local General Partner”) and to approve certain major operating and financial decisions, the Partnership has a controlling financial interest in the subsidiary partnerships.

 

For financial reporting purposes, the Partnership’s fiscal quarter ends September 30^th. All subsidiaries have fiscal quarters ending June 30^th. Accounts of the subsidiaries have been adjusted for intercompany transactions from July 1^st through September 30^th. The Partnership’s fiscal quarter ends September 30^th in order to allow adequate time for the subsidiaries’ financial statements to be prepared and consolidated. All intercompany accounts and transactions with the subsidiary partnerships have been eliminated in consolidation.

 

The loss (income) attributable to noncontrolling interests amounted to approximately $1,000 and $(747,000) and $1,000 and $(121,000) for the three and six months ended September 30, 2013 and 2012, respectively. The Partnership’s investment in each subsidiary is equal to the respective subsidiary’s partners’ equity less noncontrolling interest capital, if any.

 

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted or condensed. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Partnership’s Annual Report on Form 10-K for the year ended March 31, 2013.

 

The books and records of the Partnership are maintained on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. In the opinion of the General Partner of the Partnership, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Partnership as of September 30, 2013, the results of its operations for the three and six months ended September 30, 2013 and 2012 and its cash flows for the six months ended September 30, 2013 and 2012. However, the operating results and cash flows for the six months ended September 30, 2013 may not be indicative of the results for the entire year.

 

Recent Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board issued an Accounting Standards Update ("ASU") No. 2013-02 "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," requiring new disclosures for items reclassified out of accumulated other comprehensive income ("AOCI"), including (1) changes in AOCI balances by component and (2) significant items reclassified out of AOCI. The guidance does not amend any existing requirements for reporting net income or OCI in the financial statements. The standards update was effective for reporting periods beginning after December 15, 2012, to be applied prospectively. The adoption of this standard did not have a significant impact on these consolidated financial statements.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

 

NOTE 2 – Related Party Transactions

 

An affiliate of the General Partner, Independence SLP L.P., has a 0.01% interest as a special limited partner in each of the subsidiary partnerships. An affiliate of the General Partner also has a minority interest in certain local partnerships.

  

 

INDEPENDENCE TAX CREDIT PLUS L.P. II

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

A)

Other Related Party Expenses

 

The costs incurred to related parties from operations for the three and six months ended September 30, 2013 and 2012 were as follows:

 

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2013				2012				2013				2012
Partnership management fees (a)		$	16,750			$	(14,000	)		$	33,500			$	(24,229	)
Expense reimbursement (b)			5,955				28,341				13,198				42,159
Local administrative fee (c)			1,250				1,250				2,500				2,500
Total general and administrative - General Partner			23,955				15,591				49,198				20,430
Property management fees incurred to affiliates of the subsidiary partnerships’ general partners			15,041				14,009				29,846				27,309
Total general and administrative-related parties		$	38,996			$	29,600			$	79,044			$	47,739

 

The costs incurred to related parties from discontinued operations for the three and six months ended September 30, 2013 and 2012 were as follows:

 

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2013				2012				2013				2012
Property management fees incurred to affiliates of the subsidiary partnerships’ general partners		$	-			$	7,453			$	-			$	16,911
Total general and administrative-related parties		$	-			$	7,453			$	-			$	16,911

 

(a)

The General Partner is entitled to receive a partnership management fee, after payment of all Partnership expenses, which together with the annual local administrative fees will not exceed a maximum of 0.05% per annum of invested assets (as defined in the Partnership Agreement), for administering the affairs of the Partnership. Subject to the foregoing limitation, the partnership management fee will be determined by the General Partner in its sole discretion based upon its review of the Partnership’s investments. Unpaid partnership management fees for any year will be accrued without interest and will be payable from working capital reserves or to the extent of available funds after the Partnership has made distributions to the limited partners of sale or refinancing proceeds equal to their original capital contributions plus a 10% priority return thereon (to the extent not theretofore paid out of cash flow). Partnership management fees owed to the General Partner amounting to approximately $1,746,000 and $1,713,000 were accrued and unpaid as of September 30, 2013 and March 31, 2013, respectively, and are included in the line item Due to general partners and affiliates in the consolidated balance sheets. Current year partnership management fees may be paid out of operating reserves or refinancing and sales proceeds. As such, the General Partner cannot demand payment of the deferred fees except as noted above.

 

(b)

The Partnership reimburses the General Partner and its affiliates for actual Partnership operating expenses incurred by the General Partner and its affiliates on the Partnership’s behalf. The amount of reimbursement from the Partnership is limited by the provisions of the Partnership Agreement. Another affiliate of the General Partner performs asset monitoring for the Partnership. These services include site visits and evaluations of the subsidiary partnerships’ performance. Expense reimbursements and asset monitoring fees owed to the General Partner and its affiliates amounting to approximately $6,000 and $5,000 were accrued and unpaid as of September 30, 2013 and March 31, 2013, respectively. The General Partner does not intend to demand payment of the deferred payables beyond the Partnership’s ability to pay them. The Partnership anticipates that these will be paid, if at all, from working capital reserves or future sales proceeds.

 

(c)

Independence SLP L.P., a special limited partner of the subsidiary partnerships, is entitled to receive a local administrative fee of up to $5,000 per year from each subsidiary partnership. As of September 30, 2013 and March 31, 2013, the subsidiary partnerships owed approximately $82,000 and $79,000, respectively, of these fees to Independence SLP L.P. These fees have been deferred in certain cases and the Partnership anticipates that they will be paid, if at all, from working capital reserves or future sales proceeds.

 

 

INDEPENDENCE TAX CREDIT PLUS L.P. II

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

 

B) Due to Local General Partners and Affiliates
Due to local general partners and affiliates at September 30, 2013 and March 31, 2013 consists of the following:

 

		September 30,				March 31,
		2013				2013
Operating advances		$	-			$	4,796
Construction costs payable			120,000				120,000
		$	120,000			$	124,796

 

NOTE 3 – Fair Value of Financial Instruments

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments (all of which are held for nontrading purposes) for which it is practicable to estimate that value:

 

Cash and Cash Equivalents and Cash Held in Escrow

 

The carrying amount approximates fair value.

 

Accounts Payable and Other Liabilities

 

The carrying amounts approximate fair value due to their short-term nature.

 

Mortgage Notes Payable and Accrued Interest

 

The Partnership has categorized the fair value of financial assets and liabilities based upon the fair value hierarchy specified by ASC Topic 820, Fair Value Measurements (“ASC 820”). This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). This standard provides for a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

Level 1:	Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:	Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3:	Unobservable inputs that reflect the Partnership’s own assumptions.

 

The estimated fair value of mortgage notes payable has been determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

 

		At September 30, 2013								At March 31, 2013
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
LIABILITIES:
Mortgage notes		$	6,704,999			$	2,918,918			$	6,712,964			$	2,827,743

 

 

INDEPENDENCE TAX CREDIT PLUS L.P. II

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

Fair value for the mortgage notes have been estimated using Level 3 inputs.

 

For the mortgage notes, fair value is estimated using Level 3 inputs and calculated using present value cash flow models based on a discount rate. Centerline has not been active in the tender option bond market, through which these bonds have been securitized in the past. To assist in valuing these notes, the Partnership held separate discussions with various third party investment banks who are leaders in the municipal bond business. The discussions produced assumptions that were based on market conditions as well as the credit quality of the underlying property partnerships, which held the mortgage notes, to determine what discount rates to utilize.

 

Due to General Partner and Affiliates and Due to/from Local General Partners and Affiliates

 

Management believes it is not practical to estimate the fair value of due to General Partner and affiliates and due to/from Local General Partners and affiliates because market information on such obligations is not currently available.

 

NOTE 4 – Sale of Properties

 

The Partnership is in the process of disposing of all of its investments. As of September 30, 2013, the Partnership has sold its limited partnership interests in thirteen Local Partnerships and one Local Partnership sold its property and the related assets and liabilities. The Partnership is expecting to dispose of its last remaining investment within the next year; however there can be no assurance when the remaining investment will be disposed of or the amount of proceeds which may be received. However, based on the historical operating results of the remaining Local Partnership and the current economic conditions, including changes in tax laws, the proceeds from such sale received by the Partnership will not be sufficient to return to the limited partners their original investments. All gains and losses on sales are included in discontinued operations.

 

On June 28, 2012, the Partnership sold its limited partnership interest in Greene Avenue to an affiliate of the Local General Partner for a sales price of $10. The sale resulted in a gain of approximately $2,354,000 resulting from the write-off of the deficit basis in the Local Partnership of approximately $2,374,000, costs related to sale of approximately $20,000 and the $10 cash received from the sale, which was recorded during the quarter ended June 30, 2012. Adjustments to the gain of approximately $7,000 and $(4,000) were recorded during the quarter ended September 30, 2012 and March 31, 2013, respectively, resulting in an overall gain of approximately $2,357,000. In addition, the sale resulted in a noncash contribution to the Local Partnership from the General Partner of $2,000 as a result of the write-off of fees owed by the Local Partnership to an affiliate of the General Partner.

 

On June 22, 2012, the property and the related assets and liabilities of Clear Horizons Limited Partnership (“Clear Horizons”) were sold to an unaffiliated third party purchaser for a sales price of $2,100,000. The Partnership received $978,396 as distributions from this sale after the repayment of the mortgages, other liabilities, closing costs and distributions to other partners of approximately $1,122,000. The sale resulted in a gain of approximately $1,035,000 resulting from the write-off of the deficit basis in the Local Partnership of the same amount at the date of sale, which was recorded during the quarter ended June 30, 2012. Adjustments to the gain of approximately $(56,000) and $(3,000) were recorded during the quarter ended September 30, 2012 and March 31, 2013, resulting in an overall gain of approximately $976,000.

 

On May 1, 2012, the Partnership sold its limited partnership interest in United Germano-Millgate Limited Partnership (“United Germano”) to an unaffiliated third party purchaser for a sales price of $141,875. The sale resulted in a gain of approximately $11,568,000 resulting from the write-off of the deficit basis in the Local Partnership of approximately $11,426,000 and the $141,875 cash received from the sale, which was recorded during the quarter ended June 30, 2012. Adjustments to the gain of approximately $12,000 and $(67,000) were recorded during the quarter ended September 30, 2012 and March 31, 2013, respectively, resulting in an overall gain of approximately $11,513,000. In addition, the sale resulted in a noncash contribution to the Local Partnership from the General Partner of approximately $2,000 as a result of the write-off of fees owed by the Local Partnership to an affiliate of the General Partner.

 

 

INDEPENDENCE TAX CREDIT PLUS L.P. II

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 5 – Discontinued Operations

 

The following table summarizes the results of operations of the Local Partnerships that were classified as discontinued operations in the consolidated statements of operations. For the three and six months ended September 30, 2013, there were no properties classified as discontinued operations in the consolidated statements of operations. For the three and six months ended September 30, 2012, Greene Avenue, Clear Horizons and United Germano, which were sold during the quarter ended September 30, 2012, were all classified as discontinued operations in the consolidated statements of operations.

 

Consolidated Statements of Discontinued Operations:

 

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2013				2012				2013				2012
Revenues
Rental income		$	-			$	542,153			$	-			$	1,750,489
Other			-				3,495				-				9,455
(Loss) gain on sale of properties (Note 4)			-				(37,606	)			-				14,919,656
Total revenue			-				508,042				-				16,679,600
Expenses
General and administrative			-				217,722				-				652,936
General and administrative-related parties (Note 2)			-				7,453				-				16,911
Repairs and maintenance			-				131,333				-				446,489
Operating and other			-				82,340				-				227,556
Taxes			-				17,260				-				64,664
Insurance			-				17,582				-				56,023
Interest			-				78,490				-				278,814
Depreciation and amortization			-				3,699				-				33,242
Total expenses			-				555,879				-				1,776,635
(Loss) income from discontinued operations		$	-			$	(47,837	)		$	-			$	14,902,965
Noncontrolling interest in income of subsidiaries from discontinued operations			-				(747,979	)			-				(122,391	)
(Loss) income from discontinued operation – Independence Tax Credit Plus LP II		$	-			$	(795,816	)		$	-			$	14,780,574
(Loss) income – limited partners from discontinued operations		$	-			$	(787,858	)		$	-			$	14,632,768
Number of BACs outstanding			58,928				58,928				58,928				58,928
(Loss) income from discontinued operations per BAC		$	-			$	(13.37	)		$	-			$	248.32

 

 

INDEPENDENCE TAX CREDIT PLUS L.P. II

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

 

Cash Flows from Discontinued Operations:

 

		Six Months Ended
		September 30,
		2013				2012
Net cash provided by operating activities		$	-			$	422,360
Net cash provided by investing activities		$	-			$	209,703
Net cash provided by financing activities		$	-			$	638,027

  

NOTE 6 – Commitments and Contingencies

 

a)

Liquidity

 

At September 30, 2013, the Partnership’s liabilities exceeded assets by $13,380,722 and for the six months ended September 30, 2013, the Partnership had net loss of ($240,443). These factors raise substantial doubt about the Partnership’s ability to continue as a going concern. As discussed in Note 2, partnership management fees of approximately $1,746,000 will be payable out of sales or refinancing proceeds only to the extent of available funds after payments on all other Partnership liabilities have been made and after the Limited Partners have received a 10% return on their capital contributions. As such, the General Partner cannot demand payment of these deferred fees beyond the Partnership’s ability to pay them. In addition, where the Partnership has unpaid partnership management fees related to sold properties, such management fees are written off and recorded as capital contributions.

 

The mortgage payable balance of $6,704,999 and the accrued interest payable balance of $7,425,849 are of a nonrecourse nature and secured by the property. The Partnership is currently in the process of disposing of its last remaining investment. Historically, the mortgage notes and accrued interest thereon have been assumed by the buyer in instances of sales of the Partnership’s interest or have been paid off from sales proceeds in instances of sales of the property. In most instances when the Partnership’s interest was sold and liabilities were assumed, the Partnership recognized a gain from the sale. The Partnership owns the limited partner interest in its last remaining investment, and as such has no financial responsibility to fund operating losses incurred by the Local Partnership. The maximum loss the Partnership would incur is its net investment in such Local Partnership.

 

The Partnership has unconsolidated working capital reserves of approximately $2,330,000 at September 30, 2013. Such amount is considered sufficient to cover the Partnership’s day to day operating expenses, excluding fees to the General Partner, for at least the next year. The Partnership’s operating expenses, excluding the Local Partnerships’ expenses and related party expenses, amounted to approximately $52,000 for the six months ended September 30, 2013.

 

Management believes the above mitigating factors enable the Partnership to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

b)

Uninsured Cash and Cash Equivalents

 

The Partnership maintains its cash and cash equivalents in various high quality credit institutions. The accounts at each bank are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per account. At times, the balances exceed the FDIC insurance limit.

 

c)

Cash Distributions

 

Cash distributions from the remaining Local Partnership to the Partnership are restricted by the provisions of the agreement of limited partnership of the Local Partnership and/or the U.S. Department of Housing and Urban Development.

 

 

INDEPENDENCE TAX CREDIT PLUS L.P. II

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

d)

Property Management Fees

 

Property management fees incurred by the Local Partnerships amounted to $15,041 and $50,631 and $29,846 and $152,298 for the three and six months ended September 30, 2013 and 2012, respectively. Of these fees $15,041 and $21,462 and $29,846 and $44,220 were earned by affiliates of the Local General Partners for the three and six months ended September 30, 2013 and 2012, respectively, which included $0 and $7,453 and $0 and $16,911 of fees relating to discontinued operations for the three and six months ended September 30, 2013 and 2012, respectively.

 

e)

Other

 

The Partnership is subject to the risks incidental to potential losses arising from the management and ownership of improved real estate. The Partnership can also be affected by poor economic conditions generally. There are also substantial risks associated with owning properties receiving government assistance; for example, the possibility that Congress may not appropriate funds to enable HUD to make rental assistance payments. HUD also restricts annual cash distributions to partners based on operating results and a percentage of the owner’s equity contribution. The Partnership cannot sell or substantially liquidate its remaining investment during the period that the subsidy agreement is in existence without HUD’s approval. Furthermore, there may not be market demand for apartments at full market rents when the rental assistance contract expires.

 

f)

Subsequent Events

 

The Partnership evaluated all subsequent events from the date of the balance sheet through the issuance date of this report and determined that there were no events or transactions occurring during the subsequent event reporting period which require recognition or disclosure in the consolidated financial statements.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Liquidity and Capital Resources

 

The Partnership originally invested all of its net proceeds in fifteen Local Partnerships. The Partnership is in the process of disposing of all of its investments. As of September 30, 2013, the Partnership has sold its limited partnership interests in thirteen Local Partnerships and one Local Partnership sold its property and the related assets and liabilities. The Partnership is expecting to dispose of its last remaining investment within the next year; however there can be no assurance when the remaining investment will be disposed of or the amount of proceeds which may be received. However, based on the historical operating results of the remaining Local Partnership and the current economic conditions, including changes in tax laws, the proceeds from such sale received by the Partnership will not be sufficient to return to the BACs holders their original investments. All gains and losses on sales are included in discontinued operations.

 

Short-Term

 

The Partnership’s primary sources of funds include: (i) working capital reserves; (ii) interest earned on the working capital reserves; (iii) cash distributions from operations of the Local Partnerships; and (iv) sales proceeds and distributions. Such funds are available to meet the obligations of the Partnership. The Partnership does not anticipate providing cash distributions to BACs holders in circumstances other than refinancing or sales. Cash distributions received from the Local Partnerships, as well as the working capital reserves referred to above, will be used towards the future operating expenses of the Partnership. During the six months ended September 30, 2013 and 2012, the amounts received from operations of the Local Partnerships were approximately $0 and $9,000, respectively. In addition, during the six months ended September 30, 2013 and 2012, the amounts of distributions and proceeds from sales were approximately $0 and $1,120,000, respectively.

 

During the six months ended September 30, 2013, cash and cash equivalents of the Partnership and its consolidated Local Partnerships decreased approximately $144,000. This decrease was due to net cash used in operating activities ($123,000), an increase in cash held in escrow relating to investing activities ($18,000) and principal payments of mortgage notes ($8,000), offset by an increase in dispositions of property and equipment ($5,000).

 

Total expenses from operations for the three and six months ended September 30, 2013 and 2012 excluding depreciation and amortization, interest and general and administrative – related parties, totaled $205,969 and $197,396 and $384,167 and $389,081, respectively.

 

Accounts payable from operations as of September 30, 2013 and March 31, 2013 were $45,195 and $79,117, respectively. Accounts payable are short term liabilities which are expected to be paid from operating cash flows, working capital balances at the Local Partnership level, Local General Partner advances and in certain circumstances advances from the Partnership. Accrued interest payable from operations as of September 30, 2013 and March 31, 2013 was $7,425,849 and $7,299,826, respectively. Such amount represents the accrued interest on mortgage loans, which include primary and secondary loans. The secondary loans have provisions such that interest is accrued but not payable until a future date. The Partnership anticipates the payment of accrued interest on the secondary loans (which make up the majority of the accrued interest payable amount and which have been accumulating since the Partnership’s investment in the remaining Local Partnership) will be made from future refinancing or sales proceeds of such Local Partnership. In addition, the remaining Local Partnership’s mortgage notes are collateralized by its land and buildings, and are without further recourse to the Partnership. The maximum loss the Partnership would incur is its net investment in the remaining Local Partnership.

 

The Partnership has an unconsolidated working capital reserve of approximately $2,330,000 at September 30, 2013. Such amount is considered sufficient to cover the Partnership’s day to day operating expenses, excluding fees to the General Partner, for at least the next fiscal year.

 

At September 30, 2013, the Partnership’s liabilities exceeded assets by $13,380,722 and for the six months ended September 30, 2013, had net loss of ($240,443). However, because 1) the provisions of the secondary loan defer the payment of accrued interest of the remaining Local Partnership and will be made from future refinancing or sales proceeds of the remaining Local Partnership, 2) the General Partner continues to defer the payment of fees as discussed below and in Note 2 to the Financial Statements, and 3) the Partnership has sufficient unconsolidated working capital reserves to cover the Partnership’s day to day operating expenses, the Partnership (and the remaining Local Partnership) believes it has sufficient liquidity and ability to generate cash and to meet existing and known or reasonably likely future cash requirements over both the short and long term.

 

Long-Term

 

Partnership management fees owed to the General Partner amounting to approximately $1,746,000 and $1,713,000 were accrued and unpaid as of September 30, 2013 and March 31, 2013, respectively and are included in Due to General Partner and affiliates on the Consolidated Balance Sheets. Unpaid partnership management fees for any year are deferred without interest and will be payable out of sales or refinancing proceeds only to the extent of available funds after payments on all Partnership liabilities have been made other than to those owed to the General Partner and its affiliates, and after the Limited Partners have received a 10% return on their capital contributions.

 

All other amounts included in Due to General Partner and affiliates are expected to be paid, if at all, from working capital reserves. See Note 2 in Item 1 for further discussion of amounts due to the General Partner and its affiliates. The General Partner does not anticipate making any future advances of operating funds to the remaining Local Partnership in which the Partnership has invested. Even if a situation arose where the General Partner and its affiliates needed to but were not able to make operating advances in the future due to lack of funds, the only impact on the Partnership would be that it would lose its investment in such Local Partnership. The Partnership’s ability to continue its operations would not be affected.

 

The Partnership’s liquidity considerations are discussed in Note 6a in Item 1.

 

Since the maximum loss the Partnership would be liable for is its net investment in its remaining subsidiary partnership, the resolution of any contingencies is not anticipated to impact future liquidity or the financial condition of the Partnership in a material way.

 

  

Except as described above, management is not aware of any trends or events, commitments or uncertainties, which have not otherwise been disclosed, that will or are likely to impact liquidity in a material way. Management believes the only impact would be from laws that have not yet been adopted.

 

Off-Balance Sheet Arrangements

 

The Partnership has no off-balance sheet arrangements.

 

Fair Value Measurements

 

See Note 3 in Item 1 for methods and assumptions used to estimate the fair value of each class of financial instruments (all of which are held for nontrading purposes) for which it is practicable to estimate that value.

 

Critical Accounting Policies and Estimates

 

The preparation of consolidated financial statements requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of certain accounting estimates considered critical by the Partnership. The summary should be read in conjunction with the more complete discussion of the Partnership’s accounting policies included in Item 8, Note 2 to the consolidated financial statements in the Partnership’s Annual Report on Form 10-K for the year ended March 31, 2013.

 

Property and Equipment

 

Property and equipment to be held and used are carried at cost which includes the purchase price, acquisition fees and expenses, construction period interest and any other costs incurred in acquiring the Properties. The cost of property and equipment is depreciated over their estimated useful lives using accelerated and straight-line methods. Expenditures for repairs and maintenance are charged to expense as incurred; major renewals and betterments are capitalized. At the time property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the assets and accumulated depreciation accounts and the profit or loss on such disposition is reflected in earnings. The Partnership complies with ASC 360, Property, Plant and Equipment. A loss on impairment of assets is recorded when management estimates amounts recoverable through future operations and sale of the Property on an undiscounted basis are below depreciated cost. At that time, Property investments themselves are reduced to estimated fair value (using the fair market value based on comparative sales) when the Property is considered to be impaired and the depreciated cost exceeds estimated fair value.

 

At the time management commits to a plan to dispose of a specific asset, said asset is adjusted to the lower of carrying amount or fair value less costs to sell. These assets are classified as property and equipment-held for sale and are not depreciated. Property and equipment that are held for sale are included in discontinued operations. There were no assets classified as property and equipment-held for sale as of September 30, 2013.

 

During the six months ended September 30, 2013, the Partnership has not recorded any loss on impairment of assets. Through September 30, 2013, the Partnership has recorded approximately $31,906,000 as an aggregate loss on impairment of property.

 

Revenue Recognition

 

Rental income is earned primarily under standard residential operating leases and is typically due the first day of each month, but can vary by Property due to the terms of the tenant leases. Rental income is recognized when earned and charged to tenants’ accounts receivable if not received by the due date. Rental payments received in advance of the due date are deferred until earned. Rental subsidies are recognized as rental income during the month in which it is earned.

 

Other revenues are recorded when earned and consist of the following items: interest income earned on cash and cash equivalent balances and cash held in escrow balances, income from forfeited security deposits, late charges, laundry and vending income and other rental related items.

 

Income Taxes

 

The Partnership is not required to provide for, or pay, any federal income taxes. Net income or loss generated by the Partnership is passed through to the partners and is required to be reported by them. The Partnership may be subject to state and local taxes in jurisdictions in which it operates. For income tax purposes, the Partnership has a fiscal year ending December 31^st.

 

Results of Operations

 

The Partnership’s results of operations for the three and six months ended September 30, 2013 and 2012 consisted primarily of the results of the Partnership’s investment in its last remaining Local Partnership. The following discussion excludes the Partnership’s results of its discontinued operations, which are not reflected below.

 

Rental income increased approximately 6% for the three and six months ended September 30, 2013 as compared to the corresponding periods in 2012, primarily due to a slight decrease in the vacancies at the remaining Local Partnership.

 

Total expenses from operations, excluding general and administrative – related parties and depreciation and amortization, remained fairly consistent with an increase of approximately 2% and a decrease of approximately 1% for the three and six months ended September 30, 2013 as compared to the corresponding periods in 2012.

 

 

General and administrative–related parties’ expenses increased approximately $9,000 and $31,000 for the three and six months ended September 30, 2013 as compared to the corresponding periods in 2012, primarily due to an adjustment during the prior year for partnership management fees at the Partnership level.

 

Depreciation and amortization decreased approximately $19,000 and $37,000 for the three and six months ended September 30, 2013 as compared to the corresponding periods in 2012, primarily due to reduction of the property and equipment as a result of a loss on impairment of asset recorded during the year ended March 31, 2013 at the remaining Local Partnership.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

(a) Evaluation of Disclosure Controls and Procedures. The Chief Executive Officer and Chief Financial Officer of Related Independence Associates, L.P., the general partner of the Partnership, have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of the end of such period, the Partnership’s disclosure controls and procedures are effective.

 

(b) Changes in Internal Controls over Financial Reporting. During the period ended September 30, 2013, there were no changes in the Partnership’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

  

Item 1.	Legal Proceedings. – None
Item 1A.	Risk Factors. – No Changes
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds. – None
Item 3.	Defaults Upon Senior Securities. – None
Item 4.	Mine Safety Disclosures. - None
Item 5.	Other Information. - None
Item 6.	Exhibits.

 

		(3A)	Agreement of Limited Partnership of Independence Tax Credit Plus L.P. II as adopted on February 11, 1992*
		(3B)	Form of Amended and Restated Agreement of Limited Partnership of Independence Tax Credit Plus L.P. II, attached to the Prospectus as Exhibit A**
		(3C)	Certificate of Limited Partnership of Independence Tax Credit Plus L.P. II as filed on February 11, 1992*
		(10A)	Form of Subscription Agreement attached to the Prospectus as Exhibit B**
		(10B)	Escrow Agreement between Independence Tax Credit Plus L.P. II and Bankers Trust Company*
		(10C)	Form of Purchase and Sales Agreement pertaining to the Partnership’s acquisition of Local Partnership Interests*
		(10D)	Form of Amended and Restated Agreement of Limited Partnership of Local Partnerships*
		(31.1)+	Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
		(31.2)+	Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
		(32.1)+	Certification Pursuant to Section 1350 of Title 18 of the United States Code (18 U.S.C. 1350).
		(32.2)+	Certification Pursuant to Section 1350 of Title 18 of the United States Code (18 U.S.C. 1350)
		*	Incorporated herein as an exhibit by reference to exhibits filed with Post-Effective Amendment No. 4 to the Registration Statement on Form S-11 (Registration No. 33-37704).
		**	Incorporated herein as an exhibit by reference to exhibits filed with Post-Effective Amendment No. 8 to the Registration Statement on Form S-11 (Registration No. 33-37704).
		+	Filed herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

INDEPENDENCE TAX CREDIT PLUS L.P. II

(Registrant)

  

			By:	RELATED INDEPENDENCE ASSOCIATES L.P.,
				General Partner
				By:	INDEPENDENCE ASSOCIATES GP LLC,
					General Partner
Date:	November 13, 2013				By:	/s/ Robert A. Pace
						Robert A. Pace
						Chief Financial Officer and Principal Accounting Officer
Date:	November 13, 2013				By:	/s/ Robert L. Levy
						Robert L. Levy
						President and Chief Executive Officer