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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

 

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

COMMISSION FILE NUMBER: 0-19220

Inland Land Appreciation Fund II, L.P.

(Exact name of registrant as specified in its charter)

 

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

2901 Butterfield Road, Oak Brook, IL 60523

(Address of principal executive offices) (Zip Code)

630-218-8000

(Registrant’s telephone number, including area code)

 

 

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

 

Title of each class:

 

Name of each exchange on which registered:

None   None

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

Limited Partnership Units

(Title of class)

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

Yes  ¨    No   x

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

Yes  ¨    No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.    

Yes  x    No   ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    

Yes  x    No   ¨

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

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

 

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

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

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

 

 

 


Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

TABLE OF CONTENTS

 

         Page  
  Part I   

Item 1.            

  Business      3   

Item 1(A).

  Risk Factors      4   

Item 1(B).

  Unresolved Staff Comments      6   

Item 2.

  Properties      7   

Item 3.

  Legal Proceedings      11   

Item 4.

  Mine Safety Disclosures      12   
  Part II   

Item 5.

  Market for Partnership’s Limited Partnership Units, Related Security Holder Matters and Partnership Purchases of Limited Partnership Units      12   

Item 6.

  Selected Financial Data      12   

Item 7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      13   

Item 7(A).

  Quantitative and Qualitative Disclosures About Market Risk      18   

Item 8.

  Financial Statements and Supplementary Data      19   

Item 9.

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      31   

Item 9(A).

  Controls and Procedures      31   

Item 9(B).

  Other Information      31   
  Part III   

Item 10.

  Directors, Executive Officers and Corporate Governance      32   

Item 11.

  Executive Compensation      36   

Item 12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      38   

Item 13.

  Certain Relationships and Related Transactions      38   

Item 14.

  Principal Accounting Fees and Services      39   
  Part IV   

Item 15.

  Exhibits and Financial Statement Schedules      39   
  SIGNATURES      40   

 

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Table of Contents

PART I

Item 1. Business

Inland Land Appreciation Fund II, L.P. was formed on June 28, 1989 to invest in undeveloped land on an all-cash basis and realize appreciation of such land upon resale. On October 25, 1989, we commenced an offering of 30,000 (subject to an increase to 60,000) limited partnership units, or units, at $1,000 per unit, pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933. On October 24, 1991, we terminated our offering of units, after we sold 50,476.17 units, at $1,000 per unit, resulting in $50,476,170 in gross offering proceeds, not including our general partner’s capital contribution of $500. All of the holders of our units were admitted to our partnership. Inland Real Estate Investment Corporation is our general partner. Our limited partners share in their portion of benefits of ownership of our real property investments according to the number of units held. Through December 31, 2013, we had repurchased a total of 408.65 units for $383,822 from various limited partners through the unit repurchase program.

We purchased on an all-cash basis, twenty-seven parcels of undeveloped land and two buildings and are engaged in the rezoning and resale of the parcels. On September 16, 2002, we completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28). All of the investments were made in the Chicago metropolitan area. The anticipated holding period of the land was approximately two to seven years from the completion of the land portfolio acquisitions. As a result of the lengthy rezoning and entitlement processes and the no growth mentality of the municipalities where the land is located, as well as the depressed real estate market, our holding period has exceeded our original estimates. Through December 31, 2013, we have had multiple sales transactions, disposing of approximately 3,687 acres of the approximately 4,530 acres originally owned. We continue to own the remaining acres comprising Parcels 4, 8, and 20 in Kane and Kendall Counties, Illinois. It is management’s intent to hold on to a property until such time as a reasonable and acceptable offer is received.

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

During the year ended December 31, 2013, we sold the remaining acreage of Parcel 3/27 for which we received $1,842,245 in net sales proceeds, resulting in a loss on sale of $95,755, approximately 2.3 acres of Parcel 20 for which we received $699,454 in net sales proceeds, resulting in a gain on sale of $358,117, the remaining acreage of Parcel 22 for which we received $301,137 in net sales proceeds, resulting in a loss on sale of $59,148, and the remaining acreage of Parcel 18 for which we received $623,939 in net sales proceeds, resulting in a gain on sale of $186,438. During the year ended December 31, 2012, we received net sales proceeds of $744,400 from the sale of the 50 acres comprising Parcel 28 and we received condemnation proceeds of $450,811 for 4.077 acres of Parcel 20 resulting in a loss on sale of $147,657. Net sales proceeds, including previously undistributed net sales proceeds, will be used to fund our operations including land improvements and land use activities. We will evaluate our cash needs during the upcoming year to determine any future distributions.

We plan to enhance the value of our remaining land through pre-development activities such as rezoning, annexation and land planning. We have already been successful in, or are in the process of, pre-development activity on several of our land investments. Parcel 20 has been granted rezoning which will permit additional land to be used for development.

We continue to closely monitor the real estate market trends, especially within the areas where our remaining parcels are located. We have seen continued improvements in the residential resale real estate market, and are now seeing signs of the national homebuilders entering back into the market place. There have been reports of farm parcel sales in surrounding communities from both speculators looking to hold land until the market rebounds as well as farmers looking to increase their farming businesses. We believe we have taken the steps necessary to reduce costs and maintain sufficient reserves of cash and cash equivalents to cover all our costs for an extended period of time as we continue to market the remaining parcels for sale. We have farm leases in place which generate sufficient income to cover the costs of insurance expense and real estate taxes. Our remaining land is not encumbered by debt and is located in areas that we believe are in the paths of future development. As such, the Partnership has the ability and management has the intent to hold on to the remaining parcels until such time as reasonable and acceptable offers are received.

 

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We had no employees during 2013. Accordingly, we hired no compensation consultants.

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

Access to Our Information

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

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

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

Item 1(A). Risk Factors

Real Estate Market

The slowly improving real estate market, coupled with strict lender requirements, continues to impact sales activity, especially sales of vacant land. Builders and developers today are less likely to build speculatively and are approaching new developments with caution. Any negative changes to the financial markets, real estate markets and employment numbers can have an impact on additional land sales which could result in an even longer holding period than previously estimated.

Pre-Development Stage Land

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

Dependence on Governmental Zoning and Fiscal Policies. We conduct rezoning and pre-development activities with respect to our land investments. Rezoning may only be effected by appropriate city, county and/or other local authorities. There can be no assurance that our efforts to cause these authorities to change the zoning classification(s) which apply to a given parcel of land owned by the partnership will be successful. Sometimes local residents oppose our efforts. Sometimes local authorities require us to spend funds to facilitate future development of the land as a condition of rezoning or to continue a special land use or to satisfy performance bonds required by municipalities for developments. There can be no assurance that we will have sufficient funds to accomplish the required changes or that they can be accomplished in a timely fashion.

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

 

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

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

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

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

Partnership-Related Risks

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

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

Transfer Limit. In accordance with Article XVI Section 16.1 of the Inland Land Appreciation Fund II, L.P. Partnership Agreement and Treasury Regulation Section 1.7704-1(j), we reached the maximum threshold of limited partnership units that may be transferred/assigned directly between parties during 2013. For the benefit of interested limited partners, we have a relationship with a “qualified matching service” as defined under Treasury Regulation Section 1.7704-1(g). In accordance with this Treasury Regulation and the IRS private letter ruling obtained by the “qualified matching service,” we understand that limited partnership units may be transferred or assigned through the “qualified matching service” up to a separate maximum threshold each taxable year (in addition to the maximum threshold that may be transferred or assigned directly between parties under our partnership agreement and Treasury Regulation Section 1.7704-1(j)). However, there can be no assurance that the IRS private letter ruling will apply to transfers of our units, or that any particular transfer will not violate the transfer restrictions contained in the partnership agreement or the provisions of Treasury Regulation Section 1.7704-1(g). If you have any interest in participating in a transfer/assignment of partnership units through this “qualified matching service”, please contact American Partnership Board directly at 800-736-9797. You are strongly encouraged to consult your personal legal, financial and tax advisors in connection with any such transfer/assignment.

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

 

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Table of Contents

Federal Income Tax Aspects

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

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

Item 1(B). Unresolved Staff Comments

Not applicable.

 

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Table of Contents

Item 2. Properties

We acquired fee ownership of the following real property investments. The following table summarizes the detail activity of all the parcels owned by the Partnership from the purchase date through the year ended December 31, 2013.

Investment properties activity:

 

           

Gross

Acres

    Purchase/      Initial Costs      Costs
Capitalized
           

Total

Remaining

Costs of

    

2013

Gain (Loss)

 
Parcel      Illinois    Purchased     Sales      Original      Acquisition      Total      Subsequent to      Costs of Property      Parcels at      on Sale  

    #    

    

County

   (Sold)     Date      Costs      Costs      Costs      Acquisition      Sold/Impaired      12/31/13      Recognized  
  1       McHenry      372.7590       04/25/90       $ 2,114,295        114,070        2,228,365        630,703        2,859,068        0        0  
        (372.7590     02/23/04                        
  2       Kendall      41.1180       07/06/90         549,639        43,889        593,528        75,199        668,727        0        0  
        (3.4730     08/29/03                        
        (37.6450     02/17/05                        
  3/27       Kendall      120.8170       11/06/90         2,591,268        156,709        2,747,977        9,880,850        12,628,827        0        (95,755
        83.5250       03/11/93                        
        (3.3900     05/17/05                        
        (31.0000     07/14/05                        
        (74.7000     Var 2006                        
        (36.8500     Var 2007                        
        (6.6000     Var 2008                        
        (36.1262     Var 2009                        
        (1.7230     06/25/10                        
        (3.1200     12/28/10                        
        (10.8328     06/10/13                        
  4       Kendall      299.0250       06/28/91         1,442,059        77,804        1,519,863        538,816        0        2,058,679        0  
  5       Kane      189.0468       02/28/91         1,954,629        94,569        2,049,198        349,845        2,399,043        0        0  
        (189.0468     05/16/01                        
  6       Lake      57.3345       04/16/91         904,337        71,199        975,536        55,628        1,031,164        0        0  
        (.2580     10/01/94                        
        (57.0765     03/22/07                        
  7       McHenry      56.7094       04/22/91         680,513        44,444        724,957        3,210,451        3,935,408        0        0  
        (12.6506     Var 1997                        
        (15.7041     Var 1998                        
        (19.6296     Var 1999                        
        (8.7251     Var 2000                        
  8       Kane      325.3940       06/14/91         3,496,700        262,275        3,758,975        75,595        1,909,034        1,925,536        0  
        (.8700     04/03/96                        
        (63.0000     01/23/01                        
        (80.0000     05/11/04                        

 

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Table of Contents

Investment properties activity (continued):

 

           

Gross

Acres

    Purchase/      Initial Costs      Costs
Capitalized
           

Total

Remaining

Costs of

    

2013

Gain (Loss)

 
Parcel      Illinois    Purchased     Sales      Original      Acquisition      Total      Subsequent to      Costs of Property      Parcels at      on Sale  

    #    

    

County

   (Sold)     Date      Costs      Costs      Costs      Acquisition      Sold/Impaired      12/31/13      Recognized  
  9 (c)       Will      9.8670       08/13/91       $ 0        0        0        0        0        0        0  
        (9.8670     09/16/02                        
  10       Will      150.6600       08/20/91         1,866,716        89,333        1,956,049        23,897        1,979,946        0        0  
        (150.6600     01/10/05                        
  11       Will      138.4470       08/20/91         289,914        20,376        310,290        2,700        312,990        0        0  
        (138.4470     05/03/93                        
  12 (c)       Will      44.7320       08/20/91         0        0        0        0        0        0        0  
        (44.7320     09/16/02                        
  13       Will      6.3420       09/23/91         139,524        172        139,696        0        139,696        0        0  
        (6.3420     05/03/93                        
  14       Kendall      44.4030       09/03/91         888,060        68,210        956,270        1,259,583        2,215,853        0        0  
        (15.3920     04/16/01                        
        (14.2110     Var 2002                        
        (13.6000     04/11/03                        
        (1.2000     02/19/04                        
  15       Kendall      100.3640       09/04/91         1,050,000        52,694        1,102,694        117,829        1,220,523        0        0  
        (5.0000     09/01/93                        
        (11.0000     12/01/94                        
        (84.3640     08/14/98                        
  16       McHenry      168.9050       09/13/91         1,402,058        69,731        1,471,789        97,766        1,569,555        0        0  
        (168.9050     08/03/01                        
  17       Kendall      3.4620       10/30/91         435,000        22,326        457,326        113,135        570,461        0        0  
        (2.1130     03/06/01                        
        (1.3490     08/23/02                        

 

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Table of Contents

Investment properties activity (continued):

 

           

Gross

Acres

    Purchase/      Initial Costs      Costs
Capitalized
           

Total

Remaining

Costs of

    

2013

Gain (Loss)

 
Parcel      Illinois    Purchased     Sales      Original      Acquisition      Total      Subsequent to      Costs of Property      Parcels at      on Sale  

    #    

    

County

   (Sold)     Date      Costs      Costs      Costs      Acquisition      Sold/Impaired      12/31/13      Recognized  
  18       McHenry      139.1697       11/07/91       $ 1,160,301        58,190        1,218,491        9,456,992        10,675,483        0        186,438  
        (9.2500     Var 2004                        
        (33.3197     Var 2005                        
        (62.0200     Var 2006                        
        (12.8800     Var 2007                        
        (2.2400     Var 2008                        
        .2188       03/02/11                        
        (19.6788     11/18/13                        
  19       Kane      436.2360       12/13/91         4,362,360        321,250        4,683,610        187,211        4,870,821        0        0  
        (436.2360     05/16/01                        
  20      

Kane &

Kendall

     400.1290       01/31/92         1,692,623        101,318        1,793,941        9,456,735        2,190,275        9,060,401        358,117  
        (21.1380     06/30/99                        
        (7.0000     07/21/08                        
        (3.1085     03/21/11                        
        (4.0770     09/19/12                        
        (2.3160     08/16/13                        
  21       Kendall      15.0130       05/26/92         250,000        23,844        273,844        43,063        316,907        0        0  
        (1.0000     03/16/99                        
        (14.0130     09/06/06                        
  22       Kendall      391.9590       10/30/92         3,870,000        283,186        4,153,186        1,763,629        5,916,815        0        (59,148
        (10.0000     01/06/94                        
        (5.5380     01/05/96                        
        (2.4000     07/27/99                        
        (73.3950     Var 2001                        
        (136.0000     08/14/02                        
        (34.1400     05/27/03                        
        (101.4900     01/09/04                        
        (28.9960     11/13/13                        

 

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Investment properties activity (continued):

 

           

Gross

Acres

    Purchase/      Initial Costs      Costs
Capitalized
           

Total

Remaining

Costs of

    

2013

Gain (Loss)

 
Parcel      Illinois    Purchased     Sales      Original      Acquisition      Total      Subsequent to      Costs of Property      Parcels at      on Sale  

    #    

    

County

   (Sold)     Date      Costs      Costs      Costs      Acquisition      Sold/Impaired      12/31/13      Recognized  
  23       Kendall      133.2074       10/30/92       $ 3,231,942        251,373        3,483,315        4,665,998        8,149,313        0        0  
        (11.5250     07/16/93                        
        (44.0700     Var 1995                        
        (8.2500     Var 1996                        
        (2.6100     Var 1997                        
        (10.6624     Var 1998                        
        (5.8752     Var 1999                        
        (49.0120     Var 2000                        
        (.2028     Var 2001                        
        (1.0000     Var 2002                        
  23A(a)       Kendall      .2676       10/30/92         170,072        12,641        182,713        0        182,713        0        0  
        (.2676     03/16/93                        
  24       Kendall      3.9080       01/21/93         645,000        56,316        701,316        30,436        731,752        0        0  
        (3.9080     04/16/01                        
  24A(b)       Kendall      .4060       01/21/93         155,000        13,533        168,533        0        168,533        0        0  
        (.4060     04/16/01                        
  25       Kendall      656.6870       01/28/93         1,625,000        82,536        1,707,536        22,673        1,730,209        0        0  
        (656.6870     10/31/95                        
  26       Kane      89.5110       03/10/93         1,181,555        89,312        1,270,867        5,135,895        6,406,762        0        0  
        (2.1080     Var 1999                        
        (34.2550     Var 2000                        
        (7.8000     Var 2001                        
        (29.1200     Var 2002                        
        (11.3100     Var 2003                        
        (4.9180     01/28/04                        
  28 (c)       Kendall      50.0000       09/16/02         661,460        22,976        684,436        230,630        915,066        0        0  
        (50.0000     04/17/12                        
          

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
           $ 38,810,025        2,504,276        41,314,301        47,425,259        75,694,944        13,044,616        389,652  
          

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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

 

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

Our general partner anticipates our land will produce sufficient income to pay real estate taxes and insurance expense. Income will be derived through leases to farmers or from other activities compatible with undeveloped land. Although the general partner believes that leasing our land will generate sufficient revenues to pay these expenses, there can be no assurance that this will in fact occur. Our general partner has agreed to make a supplemental capital contribution to us if and to the extent that real estate taxes and insurance payable with respect to our land during a given year exceed the revenue earned by us from leasing our land during such year. Any supplemental capital contribution will be repaid only after limited partners have received, over the life of our partnership, a return of their original capital plus the 15% cumulative return. A majority of our remaining parcels consist of land which generates revenue from farming or other leasing activities. It is not expected that we will generate cash distributions to limited partners from farm leases or other leasing activities. Through December 31, 2013, our land has generated sufficient revenues from leasing to cover real estate taxes and insurance expense.

Item 3. Legal Proceedings

On or about April 8, 2010, the Partnership received notification from the attorneys for the Village of Elburn that in effect demanded completion of certain land improvements. The Partnership is a co-indemnitor of the subdivision bonds that secure completion of the land improvements on Parcels 5 and 19 of the Blackberry Subdivision in Elburn, IL. On April 22, 2010, the Partnership received notice from the bonding companies demanding completion and satisfaction of such obligations. The actual costs of the remaining improvements of the subdivision for the work related to the called bonds are less than the outstanding bond amounts. The Partnership worked with a representative of the bonding company who had been working with the Village of Elburn on this matter. A meeting was held to obtain a common understanding of the scope of remaining work required to be completed. The parties determined that it was necessary to hire an engineer to provide an updated punch list of required work. The Partnership received a final updated punch list of required work, as well as bids for the actual cost to complete the required improvements. During the second quarter of 2013, a settlement agreement was entered into between the Partnership and the bonding company. The Partnership paid the final agreed-upon amount of $1,300,000 on May 20, 2013 and received a release from the bonding company.

On or about December 16, 2011, the Partnership received service of a Third Party Complaint filed by Bond Safeguard Insurance Company (“Bond”) against the Partnership and Inland Real Estate Investment Corporation along with six other third party defendants. The lawsuit has been brought in the Circuit Court of the Sixteenth Judicial Circuit in Kane County, Illinois (the “Lawsuit”). In the Lawsuit, the County of Kane (the “County”) alleges that B&B Enterprises and/or Blackberry Creek Development Corporation (collectively “B&B”) are responsible for the relocation of approximately twenty-three power poles at an alleged cost of $819,740. Alternatively, the County alleges that either Bond or Commonwealth Edison Company (“ComEd”) is responsible for the cost of the pole relocation. On November 23, 2011, Bond filed an Answer denying the County’s allegations and has pled five affirmative defenses. The affirmative defenses generally allege that the bond did not cover the pole relocation, that only one pole needs to be relocated at significantly less cost, and alternatively, that ComEd is responsible for any pole relocation costs. As alternative relief, Bond filed a Counterclaim against B&B and ComEd and a Third Party Complaint against the Partnership and four individuals (the “Individuals”) contending that, if Bond is deemed responsible for or settles the County’s allegations, then B&B, the Partnership, and/or the Individuals bear some or all of this responsibility under a General Agreement of Indemnity. Bond also seeks its attorneys’ fees based on such General Agreement of Indemnity.

On February 21, 2012, the Partnership filed an Answer and Affirmative Defenses denying the material allegations asserted by Bond. Bond has not replied to the Affirmative Defenses. The County has served discovery requests to B&B, Bond and ComEd. Bond has served discovery requests on the County. The County has produced a limited amount of documents and provided interrogatory responses to Bond which have been provided to us. ComEd produced limited documents and responses in March 2013 and produced additional documents in June 2013 following entry of a protective

 

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order. The matter has proceeded to deposition discovery although no dates have been requested or set by any party. The County’s counsel also has informed counsel for the other parties that between five and eight of the light poles at issue have been moved by ComEd as part of a different project. Thus, these light poles are not expected to be a continued issue in this case.

The investigation of the claims and defenses in the Lawsuit is ongoing. There has been no deposition discovery and it is not possible at this time to evaluate the likelihood of an outcome. For this same reason, any effort to estimate the range of potential loss is limited, other than $0 (based on a judgment in favor of the Partnership), to the approximately $819,740 alleged by the County in its Complaint for the relocation of the poles plus Bond’s allegations for attorneys’ fees. The Partnership filed a Motion for Summary Judgment on all claims brought against it. On February 5, 2014, this Motion was denied without prejudice. Deposition discovery will proceed in February 2014 through April 2014. The next status date is May  7, 2014.

Item 4. Mine Safety Disclosures

Not applicable

Part II

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

As of February 10, 2014, there were 4,048 holders of our units. There is no public market for units nor is it anticipated that any public market for units will develop.

In September 2013, we made a distribution totaling $2,498,833, which included $2,198,833 to the limited partners and $300,000 to the general partner. Prior years’ Illinois state withholding amounts and foreign investor withholding amounts were recovered during this distribution. We did not make any distributions to our partners in 2012. We will evaluate our cash needs during the upcoming year to determine any future distributions.

Item 6. Selected Financial Data

Not applicable

 

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

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

Critical Accounting Policies

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

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

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

The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management’s continuous process of analyzing each property. For the years ended December 31, 2013 and 2012, we did not record an impairment. Subsequent costs incurred above the estimated fair value for any parcels that may be deemed to be impaired will be expensed and included in land operating expenses.

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

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

 

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

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

From time to time, we may determine that a “held for sale property” no longer meets the criteria to continue to be classified as held for sale. If this occurs, we record the property at the lower of the carrying amount before the property was classified as held for sale or the fair value at the decision date not to sell. As of December 31, 2013 and 2012, respectively, we have not classified any properties as held for sale.

Liquidity and Capital Resources

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

We used $41,314,301 of gross offering proceeds to purchase, on an all-cash basis, twenty-seven parcels of undeveloped land and two buildings. These investments include the payment of the purchase price, acquisition fees and acquisition costs of such properties. Three of the parcels were purchased during 1990, sixteen during 1991, four during 1992, and four during 1993. On September 16, 2002, we completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28). Through December 31, 2013, we have had multiple sales, exchange transactions and conveyances, disposing of the buildings and approximately 3,687 acres of the approximately 4,530 acres originally owned. Through December 31, 2013, cumulative distributions have totaled $92,530,845 to the limited partners, which is equivalent to 183% of the original capital raised, which was $50,476,170, and cumulative distributions to the general partner have totaled $13,613,195. Of the $92,530,845 distributed to the limited partners, $91,809,845 was net sales proceeds and $721,000 was from operations. Through December 31, 2013, we have used $47,425,259 of working capital for rezoning and other activities. Such amounts have been capitalized and are included in investment properties.

Our capital needs and resources will vary depending upon a number of factors, including the extent to which we conduct rezoning and other activities relating to utility access, the installation of roads, subdivision and/or annexation of land to a municipality, changes in real estate taxes affecting our land, and the amount of revenue received from farm rents. As of December 31, 2013, we own, in whole or in part, three parcels, the majority of which are leased to local farmers and are generating sufficient cash flow from farm leases to cover real estate taxes and insurance expense. We continue to market the remaining acres for sale.

At December 31, 2013, we had cash and cash equivalents of $2,552,882 which is available to be used for our costs and liabilities, cash distributions to partners and other activities with respect to some or all of our land parcels.

During the year ended December 31, 2013, we sold the remaining acreage of Parcel 3/27 for which we received $1,842,245 in net sales proceeds, resulting in a loss on sale of $95,755, approximately 2.3 acres of Parcel 20 for which we received $699,454 in net sales proceeds, resulting in a gain on sale of $358,117, the remaining acreage of Parcel 22 for which we received $301,137 in net sales proceeds, resulting in a loss on sale of $59,148, and the remaining acreage of Parcel 18 for which we received $623,939 in net sales proceeds, resulting in a gain on sale of $186,438. During the year ended December 31, 2012, we received net sales proceeds of $744,400 from the sale of the 50 acres comprising Parcel 28 and we received condemnation proceeds of $450,811 for 4.077 acres of Parcel 20 resulting in a loss on sale of $147,657. Net sales proceeds, including previously undistributed net sales proceeds, will be used to fund our operations including land improvements and land use activities. We will evaluate our cash needs during the upcoming year to determine any future distributions.

We plan to enhance the value of our remaining land through pre-development activities such as rezoning, annexation and land planning. We have already been successful in, or are in the process of, pre-development activity on several of our land investments. Parcel 20 has been granted rezoning which will permit additional land to be used for development.

 

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We continue to closely monitor the real estate market trends, especially within the areas where our remaining parcels are located. We have seen continued improvements in the residential resale real estate market, and are now seeing signs of the national homebuilders entering back into the market place. There have been reports of farm parcel sales in surrounding communities from both speculators looking to hold land until the market rebounds as well as farmers looking to increase their farming businesses. We believe we have taken the steps necessary to reduce costs and maintain sufficient reserves of cash and cash equivalents to cover all our costs for an extended period of time as we continue to market the remaining parcels for sale. We have farm leases in place which generate sufficient income to cover the costs of insurance expense and real estate taxes. Our remaining land is not encumbered by debt and is located in areas that we believe are in the paths of future development. As such, the Partnership has the ability and management has the intent to hold on to the remaining parcels until such time as reasonable and acceptable offers are received.

Transactions with Related Parties

Our general partner and its affiliates are entitled to reimbursement for salaries and expenses of employees of the general partner and its affiliates relating to our administration. Such costs of $77,895 and $75,756 are included in professional services to affiliates and general and administrative expenses to affiliates for the years ended December 31, 2013 and 2012, respectively, of which $26,212 and $21,754 was unpaid as of December 31, 2013 and 2012, respectively.

An affiliate of our general partner performs marketing and advertising services for us and is reimbursed for direct costs. Such costs of $2,605 and $3,282 have been incurred and are included in marketing expenses to affiliates for the years ended December 31, 2013 and 2012, respectively, of which $381 and $200 was unpaid as of December 31, 2013 and 2012, respectively.

An affiliate of our general partner performs land improvements, rezoning, annexation and other activities to prepare our investment properties for sale and is reimbursed for salaries and direct costs. For the years ended December 31, 2013 and 2012, we incurred $20,011 and $24,070, respectively, of such costs. Such costs are included in investment properties, of which $4,777 and $1,800 was unpaid as of December 31, 2013 and 2012, respectively. Also, an affiliate of the general partner supervises the maintenance of the parcels. Such costs of $5,275 and $4,151 are included in land operating expenses to affiliates for the years ended December 31, 3013 and 2012, respectively. In addition, the maintenance costs related to Parcels 3/27 and 18 totaled $22,957 and $33,666 for the years ended December 31, 2013 and 2012, respectively, and are included in discontinued operations, of which $4,611 and $2,700 was unpaid as of December 31, 2013 and 2012, respectively. The affiliate did not recognize a profit on any project.

As of December 31, 2013, the Partnership held all cash and cash equivalents with Inland Bank and Trust, an affiliate of the general partner.

Results of Operations

As of December 31, 2013, we owned three parcels of land consisting of approximately 843 acres. Of the approximately 843 acres owned, approximately 652 acres are tillable, leased to local farmers and generate sufficient cash flow to cover real estate taxes and insurance. Rental income was $241,756 and $206,020 for the years ended December 31, 2013 and 2012, respectively. The rental income for 2013 increased due to an increase in farm rental rates. The 2014 farm leases for our tillable land were negotiated and fully executed within the first quarter of 2014 at increased rates.

Professional services to affiliates and non-affiliates were $174,560 and $168,874 for the years ended December 31, 2013 and 2012, respectively. Professional services to affiliates and non-affiliates increased due to an increase in accounting fees for state tax filings and XBRL filing requirements.

General and administrative expenses to affiliates and non-affiliates were $52,048 and $40,926 for the years ended December 31, 2013 and 2012, respectively. General and administrative expenses primarily include data processing costs, postage, printing, investor services expenses and farm management fees. General and administrative expenses to affiliates and non-affiliates increased primarily due to an increase in postage, printing costs, and investor services costs due to the mini-tender offer responses and the limited partner distribution.

 

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Marketing expenses to affiliates and non-affiliates were $4,525 and $5,574 for the years ended December 31, 2013 and 2012, respectively. Marketing expenses to affiliates and non-affiliates are costs incurred for preparing and marketing parcels for sale and monitoring activity at the parcels. The marketing expenses decreased in 2013 primarily due to less monitoring activity needed at the parcels and less signage expenses.

Land operating expenses to affiliates and non-affiliates were $47,011 and $1,342,181 for the years ended December 31, 2013 and 2012, respectively. These costs typically include real estate tax expense, ground maintenance expense, and insurance expense. However, for the year ended December 31, 2012, we accrued $1,300,000 for the estimated liability for the punch list of required work under the subdivision bond obligations for Parcels 5 and 19 of the Blackberry subdivision in Elburn, IL. The partnership paid the final agreed upon amount of $1,300,000 in May 2013. The remaining land operating expenses increased due to an increase in real estate taxes.

Interest income was $6,752 and $11,190 for the years ended December 31, 2013 and 2012, respectively. Interest income is primarily a result of cash available to invest on a short term basis during the year as a result of sales proceeds received. Interest income decreased due to less cash available to invest and lower interest rates.

Other income was $9,950 and $15,750 for the years ended December 31, 2013 and 2012, respectively. Other income is due primarily to transfer fee income as a result of the number of completed Unit transfers. The decrease for 2013 is due to less transfer income as a result of a decreased number of investors seeking transfers.

Loss from discontinued operations was $84,017 and $66,927 for the years ended December 31, 2013 and 2012, respectively. Included in loss from discontinued operations are the rental income, insurance and real estate taxes pertaining to Parcel 28, which was sold in 2012, and Parcel 3/27, a portion of Parcel 20, Parcel 18 and Parcel 22, all of which were sold in 2013. In addition, during the first quarter of 2012, the carrying value of Parcel 28 was reduced to its fair value of $744,400 resulting in a provision for loss on investment property held for sale of $170,666.

Our Partnership Agreement

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

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

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

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

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

 

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

Subsequent Events

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

On February 14, 2014, the Partnership entered into a sale contract with a third party purchaser to sell the remaining acreage of Parcel 4. The contract sales price is $3.8 million. Provided the buyer performs pursuant to the terms of the contract, the sale will result in the Partnership recognizing a gain of approximately $1.8 million. The closing is expected to occur in March 2014.

There are no other subsequent events to report that would have a material impact on the Partnership’s financial statements.

Other Items

In accordance with Article XVI Section 16.1 of the Inland Land Appreciation Fund II, L.P. Partnership Agreement and Treasury Regulation Section 1.7704-1(j), we reached the maximum threshold of limited partnership units that may be transferred/assigned directly between parties during 2013. For the benefit of interested limited partners, we have a relationship with a “qualified matching service” as defined under Treasury Regulation Section 1.7704-1(g). In accordance with this Treasury Regulation and the IRS private letter ruling obtained by the “qualified matching service”, we understand that limited partnership units may be transferred/assigned through the “qualified matching service” up to a separate maximum threshold each taxable year (in addition to the maximum threshold that may be transferred/assigned directly between parties discussed above). However, there can be no assurance that the IRS private letter ruling will apply to transfers of units, or that any particular transfer will not violate the transfer restrictions contained in our partnership agreement or the provisions of Treasury Regulation Section 1.7704-1(g). If you have any interest in participating in a transfer/assignment of partnership units through this “qualified matching service,” please contact American Partnership Board directly at 800-736-9797. You are strongly encouraged to consult your personal legal, financial and tax advisors in connection with any such transfer/assignment.

The Illinois Department of Revenue regulates Illinois income tax withholding requirements for nonresident partners. For the taxable years ending December 31, 2013 and 2012, respectively, there were no withholdings required. We are also required to pay a withholding tax to the Internal Revenue Service with respect to a partner’s allocable share of our taxable net income, if the partner is a foreign person. We will first pay the withholding tax from the distributions to any nonresident and/or foreign partners, and to the extent that the tax exceeds the amount of distributions withheld, or if there have been no distributions to withhold, the excess will be accounted for as a distribution to such nonresident and/or foreign partners. For the years ended December 31, 2013 and 2012, respectively, there were no withholdings paid.

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

None

Litigation

On or about April 8, 2010, the Partnership received notification from the attorneys for the Village of Elburn that in effect demanded completion of certain land improvements. The Partnership is a co-indemnitor of the subdivision bonds that secure completion of the land improvements on Parcels 5 and 19 of the Blackberry Subdivision in Elburn, IL. On April 22, 2010, the Partnership received notice from the bonding companies demanding completion and satisfaction of such obligations. The actual costs of the remaining improvements of the subdivision for the work related to the called bonds

 

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are less than the outstanding bond amounts. The Partnership worked with a representative of the bonding company who had been working with the Village of Elburn on this matter. A meeting was held to obtain a common understanding of the scope of remaining work required to be completed. The parties determined that it was necessary to hire an engineer to provide an updated punch list of required work. The Partnership received a final updated punch list of required work, as well as bids for the actual cost to complete the required improvements. During the second quarter of 2013, a settlement agreement was entered into between the Partnership and the bonding company. The Partnership paid the final agreed-upon amount of $1,300,000 on May 20, 2013 and received a release from the bonding company.

On or about December 16, 2011, the Partnership received service of a Third Party Complaint filed by Bond Safeguard Insurance Company (“Bond”) against the Partnership and Inland Real Estate Investment Corporation along with six other third party defendants. The lawsuit has been brought in the Circuit Court of the Sixteenth Judicial Circuit in Kane County, Illinois (the “Lawsuit”). In the Lawsuit, the County of Kane (the “County”) alleges that B&B Enterprises and/or Blackberry Creek Development Corporation (collectively “B&B”) are responsible for the relocation of approximately twenty-three power poles at an alleged cost of $819,740. Alternatively, the County alleges that either Bond or Commonwealth Edison Company (“ComEd”) is responsible for the cost of the pole relocation. On November 23, 2011, Bond filed an Answer denying the County’s allegations and has pled five affirmative defenses. The affirmative defenses generally allege that the bond did not cover the pole relocation, that only one pole needs to be relocated at significantly less cost, and alternatively, that ComEd is responsible for any pole relocation costs. As alternative relief, Bond filed a Counterclaim against B&B and ComEd and a Third Party Complaint against the Partnership and four individuals (the “Individuals”) contending that, if Bond is deemed responsible for or settles the County’s allegations, then B&B, the Partnership, and/or the Individuals bear some or all of this responsibility under a General Agreement of Indemnity. Bond also seeks its attorneys’ fees based on such General Agreement of Indemnity.

On February 21, 2012, the Partnership filed an Answer and Affirmative Defenses denying the material allegations asserted by Bond. Bond has not replied to the Affirmative Defenses. The County has served discovery requests to B&B, Bond and ComEd. Bond has served discovery requests on the County. The County has produced a limited amount of documents and provided interrogatory responses to Bond which have been provided to us. ComEd produced limited documents and responses in March 2013 and produced additional documents in June 2013 following entry of a protective order. The matter has proceeded to deposition discovery although no dates have been requested or set by any party. The County’s counsel also has informed counsel for the other parties that between five and eight of the light poles at issue have been moved by ComEd as part of a different project. Thus, these light poles are not expected to be a continued issue in this case.

The investigation of the claims and defenses in the Lawsuit is ongoing. There has been no deposition discovery and it is not possible at this time to evaluate the likelihood of an outcome. For this same reason, any effort to estimate the range of potential loss is limited, other than $0 (based on a judgment in favor of the Partnership), to the approximately $819,740 alleged by the County in its Complaint for the relocation of the poles plus Bond’s allegations for attorneys’ fees. The Partnership filed a Motion for Summary Judgment on all claims brought against it. On February 5, 2014, this Motion was denied without prejudice. Deposition discovery will proceed in February 2014 through April 2014. The next status date is May 7, 2014.

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

Not Applicable

 

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Item 8. Financial Statements and Supplementary Data

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Index

 

     Page  

Report of Independent Registered Public Accounting Firm

     20   

Financial Statements:

  

Balance Sheets, December 31, 2013 and 2012

     21   

Statements of Operations, for the years ended December 31, 2013 and 2012

     22   

Statements of Partners’ Capital, for the years ended December 31, 2013 and 2012

     23   

Statements of Cash Flows, for the years ended December 31, 2013 and 2012

     24   

Notes to Financial Statements

     25   

Schedules not filed:

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

 

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Report of Independent Registered Public Accounting Firm

To the Partners of

Inland Land Appreciation Fund II, L.P.

We have audited the accompanying balance sheets of Inland Land Appreciation Fund II, L.P. (a limited partnership) (“the Partnership”) as of December 31, 2013 and 2012, and the related statements of operations, partners’ capital, and cash flows for the years then ended. The financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Inland Land Appreciation Fund II, L.P. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Chicago, Illinois

March 12, 2014

 

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Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Balance Sheets

December 31, 2013 and 2012

 

     2013     2012  
Assets     

Current assets:

    

Cash and cash equivalents (Note 1)

   $ 2,552,882       3,039,229  

Other assets

     4,435       4,492  
  

 

 

   

 

 

 

Total current assets

     2,557,317       3,043,721  
  

 

 

   

 

 

 

Investment properties (including acquisition fees paid to affiliates of $284,303 and $339,956 at December 31, 2013 and 2012, respectively) (Note 5):

    

Land and improvements

     13,044,616       16,093,679  
  

 

 

   

 

 

 

Total assets

   $ 15,601,933       19,137,400  
  

 

 

   

 

 

 
Liabilities and Partners’ Capital     

Current liabilities:

    

Accounts payable

   $ 3,176       34,992  

Accrued expenses (Note 7)

     0       1,300,000  

Accrued real estate taxes

     29,555       29,849  

Due to affiliates (Note 4)

     35,981       26,454  
  

 

 

   

 

 

 

Total current liabilities

     68,712       1,391,295  
  

 

 

   

 

 

 

Partners’ capital:

    

General Partner:

    

Capital contribution

     500       500  

Cumulative net income

     13,973,483       13,674,520  

Cumulative cash distributions

     (13,613,195     (13,313,195
  

 

 

   

 

 

 
     360,788       361,825  
  

 

 

   

 

 

 

Limited Partners:

    

Units of $1,000. Authorized 60,000 Units, 50,068 Units outstanding at December 31, 2013 and 2012, (net of offering costs of $7,532,439, of which $2,535,445 was paid to affiliates)

     42,559,909       42,559,909  

Cumulative net income

     65,143,369       65,156,383  

Cumulative cash distributions

     (92,530,845     (90,332,012
  

 

 

   

 

 

 
     15,172,433       17,384,280  
  

 

 

   

 

 

 

Total Partners’ capital

     15,533,221       17,746,105  
  

 

 

   

 

 

 

Total liabilities and Partners’ capital

   $ 15,601,933       19,137,400  
  

 

 

   

 

 

 

See accompanying notes to financial statements.

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Statements of Operations

For the years ended December 31, 2013 and 2012

 

     2013     2012  

Revenues:

    

Rental income (Note 6)

   $ 241,756       206,020  
  

 

 

   

 

 

 

Total revenues

     241,756       206,020  
  

 

 

   

 

 

 

Expenses:

    

Professional services to affiliates

     63,964       62,123  

Professional services to non-affiliates

     110,596       106,751  

General and administrative expenses to affiliates

     13,931       13,633  

General and administrative expenses to non-affiliates

     38,117       27,293  

Marketing expenses to affiliates

     2,605       3,282  

Marketing expenses to non-affiliates

     1,920       2,292  

Land operating expenses to affiliates

     5,275       4,151  

Land operating expenses to non-affiliates

     41,736       1,338,030  
  

 

 

   

 

 

 

Total expenses

     278,144       1,557,555  
  

 

 

   

 

 

 

Operating loss

     (36,388     (1,351,535

Interest income

     6,752       11,190  

Other income

     9,950       15,750  
  

 

 

   

 

 

 

Loss from continuing operations

     (19,686     (1,324,595

Discontinued operations (Note 3):

    

Income (loss) from discontinued operations

     (84,017     (66,927

Provision for loss on investment property held for sale

     0       (170,666

Gain (loss) on sale of investment properties

     389,652       (147,657
  

 

 

   

 

 

 

Income (loss) from discontinued operations

     305,635       (385,250

Net income (loss)

   $ 285,949       (1,709,845
  

 

 

   

 

 

 

Net income (loss) allocated to (Note 2):

    

General Partner

   $ 298,963       (13,915

Limited Partners

     (13,014     (1,695,930
  

 

 

   

 

 

 

Net income (loss)

   $ 285,949       (1,709,845
  

 

 

   

 

 

 

Net income (loss) allocated to the one General Partner Unit

   $ 298,963       (13,915
  

 

 

   

 

 

 

Net income (loss) per Unit allocated to Limited Partners per weighted average Limited Partnership Units (50,068 for the years ended December 31, 2013 and 2012)

    

Continuing operations

   $ (.39     (26.19

Discontinued operations

     .13       (7.68
  

 

 

   

 

 

 
   $ (.26     (33.87
  

 

 

   

 

 

 

See accompanying notes to financial statements.

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Statements of Partners’ Capital

For the years ended December 31, 2013 and 2012

 

     General
Partner
    Limited
Partners
    Total  

Balance at January 1, 2012

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

Net loss (Note 2)

     (13,915     (1,695,930     (1,709,845
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

   $ 361,825       17,384,280       17,746,105  

Net income (loss) (Note 2)

     298,963       (13,014     285,949  

Distributions to Partners (Note 2)

     (300,000     (2,198,833     (2,498,833
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

   $ 360,788       15,172,433       15,533,221  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to financial statements.

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Statements of Cash Flows

For the years ended December 31, 2013 and 2012

 

     2013     2012  

Cash flows from operating activities:

    

Net income (loss)

   $ 285,949       (1,709,845

Adjustments to reconcile net income (loss) to net cash used in operating activities:

    

(Gain) loss on sale of investment properties

     (389,652     147,657  

Provision for loss on investment property held for sale

     0       170,666  

Changes in assets and liabilities:

    

Accounts receivable

     0       7,682  

Other assets

     57       (4,492

Accounts payable

     (14,640     426  

Accrued expenses

     (1,300,000     1,300,000  

Accrued real estate taxes

     (294     (384

Due to affiliates

     9,527       11,206  
  

 

 

   

 

 

 

Net cash flow used in operating activities

     (1,409,053     (77,084
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to investment properties

     (45,236     (31,484

Proceeds from sale of investment properties

     3,466,775       450,811  

Proceeds from disposition of investment property held for sale

     0       744,400  
  

 

 

   

 

 

 

Net cash flow provided by investing activities

     3,421,539       1,163,727  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Distributions

     (2,498,833     0  
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,498,833     0  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (486,347     1,086,643  

Cash and cash equivalents at beginning of year

     3,039,229       1,952,586  
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 2,552,882       3,039,229  
  

 

 

   

 

 

 

See accompanying notes to financial statements.

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

For the years ended December 31, 2013 and 2012

(1) Organization and Basis of Accounting

Inland Land Appreciation Fund II, L.P. (the “Partnership”) is a limited partnership formed on June 28, 1989, pursuant to the Delaware Revised Uniform Limited Partnership Act, to invest in undeveloped land on an all-cash basis and realize appreciation of such land upon resale. On October 25, 1989, the Partnership commenced an Offering of 30,000 (subject to increase to 60,000) Limited Partnership Units (“Units”) pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933. The Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) provides for Inland Real Estate Investment Corporation to be the General Partner. On October 24, 1991, the Partnership terminated its Offering of Units, with total sales of 50,476.17 Units, at $1,000 per Unit, resulting in $50,476,170 in gross offering proceeds, not including the General Partner’s capital contribution of $500. All of the holders of these Units have been admitted to the Partnership. Through December 31, 2013, the Partnership had repurchased a total of 408.65 Units for $383,822 from various Limited Partners through the Unit Repurchase Program.

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

Certain reclassifications, as a result of discontinued operations, have been made to the 2012 financial statements to conform to the 2013 presentation. Unless otherwise noted, all disclosures in the financial statements relate to the continuing operations of the Partnership.

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

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

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

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

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

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

The Partnership has taken the steps necessary to reduce costs and maintain sufficient reserves of cash and cash equivalents to cover all our costs for an extended period of time. We have farm leases in place which generate sufficient income to

 

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Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

cover the costs of insurance expense and real estate taxes. Our remaining land is not encumbered by debt and is located in areas that we believe are in the paths of future development. As such, the Partnership has the ability and management has the intent to hold on to the remaining parcels until such time as reasonable and acceptable offers are received. In addition, on a quarterly basis, the Partnership reviews impairment indicators and if necessary, conducts an impairment analysis to ensure that the carrying value of each investment property does not exceed its estimated fair value. If an investment property is considered impaired, the Partnership would be required to record an impairment loss equal to the excess of carrying value over the estimated fair value.

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

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

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

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

 

     2013     2012  
     GAAP     Tax Basis     GAAP     Tax Basis  
     Basis     (unaudited)     Basis     (unaudited)  

Total assets

   $ 15,601,933       23,134,372       19,137,400       26,669,840  

Partners’ capital:

        

General Partner

     360,788       171,168       361,825       172,205  

Limited Partners

     15,172,433       22,894,495       17,384,280       25,106,342  

Net income (loss) allocated:

        

General Partner

     298,963       285,963       (13,915     (915

Limited Partners

     (13,014     4,162,380       (1,695,930     (408,931

Net loss per Limited Partnership Unit

     (.26     (83.13     (33.87     (8.17

The net loss per Unit is based upon the weighted average number of Units of 50,068 during 2013 and 2012.

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

(2) Partnership Agreement

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

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

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

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

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

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

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

(3) Discontinued Operations and Investment Property Held for Sale

During the year ended December 31, 2013, the Partnership sold the remaining acreage of Parcel 3/27, Parcel 22 and Parcel 18 and also approximately 2.3 acres of Parcel 20. The $389,652 net gain on the sale of the parcels sold during 2013 is included in discontinued operations for the year ended December 31, 2013. On April 17, 2012, the Partnership sold the remaining acres of Parcel 28 resulting in net sales proceeds of $744,400. This property qualified for held for sale accounting treatment under GAAP during the first quarter of 2012. The carrying value of the investment property held for sale was reduced to its fair value of $744,400 resulting in a provision for loss on investment property held for sale of $170,666. On September 19, 2012, the condemnation proceedings initiated by the Illinois Department of Transportation concluded and the Partnership received $450,811 for approximately 4 acres of Parcel 20 resulting in a loss of $147,657. The operations related to sold parcels are included in discontinued operations on the accompanying statements of operations for the years ended December 31, 2013 and 2012, respectively. There is no investment property classified as held for sale as of December 31, 2013 and 2012, respectively.

(4) Transactions with Affiliates

The General Partner and its affiliates are entitled to reimbursement for salaries and expenses of employees of the General Partner and its affiliates relating to the administration of the Partnership. Such costs of $77,895 and $75,756 are included in professional services to affiliates and general and administrative expenses to affiliates for the years ended December 31, 2013 and 2012, respectively, of which $26,212 and $21,754 was unpaid as of December 31, 2013 and 2012, respectively.

An affiliate of the General Partner performs marketing and advertising services for the Partnership and is reimbursed (as set forth under terms of the Partnership Agreement) for direct costs. Such costs of $2,605 and $3,282 have been incurred and are included in marketing expenses to affiliates for the years ended December 31, 2013 and 2012, respectively, of which $381 and $200 was unpaid as of December 31, 2013 and 2012, respectively.

An affiliate of the General Partner performs land improvements, rezoning, annexation and other activities to prepare the Partnership’s investment properties for sale and is reimbursed (as set forth under terms of the Partnership Agreement) for salaries and direct costs. For the years ended December 31, 2013 and 2012, the Partnership incurred $20,011 and $24,070, respectively, of such costs. Such costs are included in investment properties, of which $4,777 and $1,800 was unpaid as of December 31, 2013 and 2012, respectively. Also, an affiliate of the General Partner supervises the maintenance of the parcels. Such costs of $5,275 and $4,151 are included in land operating expenses to affiliates for the years ended December 31, 3013 and 2012, respectively. In addition, the maintenance costs related to Parcels 3/27 and 18 totaled $22,957 and $33,666 for the years ended December 31, 2013 and 2012, respectively, and are included discontinued operations, of which $4,611 and $2,700 was unpaid as of December 31, 2013 and 2012, respectively. The affiliate does not recognize a profit on any project.

As of December 31, 2013 and 2012, the Partnership held all cash and cash equivalents with Inland Bank and Trust, an affiliate of the General Partner.

 

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Table of Contents

INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

(5) Investment properties

As of December 31, 2013, the Partnership owned three parcels of land consisting of approximately 843 acres.

 

(a) The Partnership has taken the steps necessary to reduce costs and maintain sufficient reserves of cash and cash equivalents to cover all our costs for an extended period of time. We have farm leases in place which generate sufficient income to cover the costs of insurance expense and real estate taxes. Our remaining land is not encumbered by debt and is located in areas that we believe are in the paths of future development. As such, the Partnership has the ability and management has the intent to hold on to the remaining parcels until such time as reasonable and acceptable offers are received. In addition, on a quarterly basis, the Partnership reviews impairment indicators and if necessary, conducts an impairment analysis to ensure that the carrying value of each investment property does not exceed its estimated fair value. If this were to occur, the Partnership would be required to record an impairment loss equal to the excess of the carrying value over the estimated fair value.

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

The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management’s continuous process of analyzing each property. For the years ended December 31, 2013 and 2012, respectively, the Partnership did not record an impairment.

 

(b) Reconciliation of investment properties owned:

 

     2013     2012  

Balance at January 1,

   $ 16,093,679       17,560,744  

Additions during year

     28,060       46,469  

Provision for loss on investment property held for sale

     0       (170,666

Sales during year

     (3,077,123     (1,342,868
  

 

 

   

 

 

 

Balance at December 31,

   $ 13,044,616       16,093,679  
  

 

 

   

 

 

 

 

(c) The aggregate cost of investment properties owned at December 31, 2013 for Federal income tax purposes was approximately $13,000,000 (unaudited).

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

 

(6) Rental Income

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

As of December 31, 2013, the Partnership had farm leases of generally one year in duration, for approximately 652 acres of the approximately 843 acres owned.

(7) Litigation

On or about April 8, 2010, the Partnership received notification from the attorneys for the Village of Elburn that in effect demanded completion of certain land improvements. The Partnership is a co-indemnitor of the subdivision bonds that secure completion of the land improvements on Parcels 5 and 19 of the Blackberry Subdivision in Elburn, IL. On April 22, 2010, the Partnership received notice from the bonding companies demanding completion and satisfaction of such obligations. The actual costs of the remaining improvements of the subdivision for the work related to the called bonds are less than the outstanding bond amounts. The Partnership worked with a representative of the bonding company who had been working with the Village of Elburn on this matter. A meeting was held to obtain a common understanding of the scope of remaining work required to be completed. The parties determined that it was necessary to hire an engineer to provide an updated punch list of required work. The Partnership received a final updated punch list of required work, as well as bids for the actual cost to complete the required improvements. During the second quarter of 2013, a settlement agreement was entered into between the Partnership and the bonding company. The Partnership paid the final agreed-upon amount of $1,300,000 on May 20, 2013 and received a release from the bonding company.

On or about December 16, 2011, the Partnership received service of a Third Party Complaint filed by Bond Safeguard Insurance Company (“Bond”) against the Partnership and Inland Real Estate Investment Corporation along with six other third party defendants. The lawsuit has been brought in the Circuit Court of the Sixteenth Judicial Circuit in Kane County, Illinois (the “Lawsuit”). In the Lawsuit, the County of Kane (the “County”) alleges that B&B Enterprises and/or Blackberry Creek Development Corporation (collectively “B&B”) are responsible for the relocation of approximately twenty-three power poles at an alleged cost of $819,740. Alternatively, the County alleges that either Bond or Commonwealth Edison Company (“ComEd”) is responsible for the cost of the pole relocation. On November 23, 2011, Bond filed an Answer denying the County’s allegations and has pled five affirmative defenses. The affirmative defenses generally allege that the bond did not cover the pole relocation, that only one pole needs to be relocated at significantly less cost, and alternatively, that ComEd is responsible for any pole relocation costs. As alternative relief, Bond filed a Counterclaim against B&B and ComEd and a Third Party Complaint against the Partnership and four individuals (the “Individuals”) contending that, if Bond is deemed responsible for or settles the County’s allegations, then B&B, the Partnership, and/or the Individuals bear some or all of this responsibility under a General Agreement of Indemnity. Bond also seeks its attorneys’ fees based on such General Agreement of Indemnity.

On February 21, 2012, the Partnership filed an Answer and Affirmative Defenses denying the material allegations asserted by Bond. Bond has not replied to the Affirmative Defenses. The County has served discovery requests to B&B, Bond and ComEd. Bond has served discovery requests on the County. The County has produced a limited amount of documents and provided interrogatory responses to Bond which have been provided to us. ComEd produced limited documents and responses in March 2013 and produced additional documents in June 2013 following entry of a protective order. The matter has proceeded to deposition discovery although no dates have been requested or set by any party. The County’s counsel also has informed counsel for the other parties that between five and eight of the light poles at issue have been moved by ComEd as part of a different project. Thus, these light poles are not expected to be a continued issue in this case.

The investigation of the claims and defenses in the Lawsuit is ongoing. There has been no deposition discovery and it is not possible at this time to evaluate the likelihood of an outcome. For this same reason, any effort to estimate the range of

 

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potential loss is limited, other than $0 (based on a judgment in favor of the Partnership), to the approximately $819,740 alleged by the County in its Complaint for the relocation of the poles plus Bond’s allegations for attorneys’ fees. The Partnership filed a Motion for Summary Judgment on all claims brought against it. On February 5, 2014, this Motion was denied without prejudice. Deposition discovery will proceed in February 2014 through April 2014. The next status date is May 7, 2014.

(8) Subsequent Events

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

On February 14, 2014, the Partnership entered into a sale contract with a third party purchaser to sell the remaining acreage of Parcel 4. The contract sales price is $3.8 million. Provided the buyer performs pursuant to the terms of the contract, the sale will result in the Partnership recognizing a gain of approximately $1.8 million. The closing is expected to occur in March 2014.

There are no other subsequent events to report that would have a material impact on the Partnership’s financial statements.

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

There were no disagreements on accounting or financial disclosure matters during 2013.

Item 9(A). Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Based on management’s evaluation as of December 31, 2013, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, management concluded that our internal control over financial reporting was effective as of December 31, 2013. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.

There were no changes to our internal controls over financial reporting during the fiscal quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Item 9(B). Other Information

Not applicable.

 

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

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

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

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

Officers and Directors

The officers, directors, and key employees of IREIC and its affiliates that are likely to provide services to the Partnership are as follows. Ages are listed as of January 1, 2014.

 

   Functional Title

Daniel L. Goodwin                

   Director of IREIC

Robert H. Baum

   Director, General Counsel of IREIC

Robert D. Parks

   Chairman of IREIC

Mitchell A. Sabshon

   Director, Chief Executive Officer and President of IREIC

Catherine L. Lynch

   Director, Chief Financial Officer of IREIC

Roberta S. Matlin

   Director and Senior Vice President of IREIC

Brenda G. Gujral

   Director of IREIC

Brian M. Conlon

   Director of IREIC

Guadalupe Griffin

   Senior Vice President of IREIC-Asset Management and Principal Executive Officer of the Partnership

Donna Urbain

   Principal Financial Officer of the Partnership and Vice President – Controller of IREIC

Cathleen M. Hrtanek

   Associate Counsel and Vice President, The Inland Real Estate Group, Inc., counsel to the Partnership

 

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DANIEL L. GOODWIN (age 70) is Chairman and CEO of The Inland Real Estate Group of Companies, Inc. headquartered on a 28-acre campus in Oak Brook, Illinois. The Inland Real Estate Group of Companies is comprised of separate real estate investment and financial companies with managed assets in excess of $20 billion, doing business nationwide with a presence in 48 states. Inland owns and manages properties in all real estate sectors, including Retail, Office, Industrial, Apartments and Hotels. With 40 years of experience in real estate investing, commercial real estate brokerage, real estate securities, land development, construction and mortgage banking and lending, Inland is one of the nation’s largest commercial real estate and finance groups.

Mr. Goodwin is the former Chairman of the Board and a current Director of Inland Real Estate Corporation (IRC), a public company listed on the NYSE. In addition, he is the founder of the Retail Properties of America REIT, which is also listed on the NYSE as RPAI. He is also Chairman of the National Association of Real Estate Trusts (NAREIT) Non-traded REIT Council.

In addition, Mr. Goodwin is Chairman of the Board of Inland Bancorp, a multi-bank holding company, and is a director of the Chicago Better Government Association.

Housing and Real Estate Development. Mr. Goodwin has been in the real estate industry for more than 40 years, and has demonstrated a lifelong interest in housing related issues. He is a member of the National Association of REALTORS® President’s Circle, the National Association of REALTORS® Hall of Fame, the Illinois Association of REALTORS® Hall of Fame, and The Chicago Association of REALTORS® Hall of Fame.

He has developed thousands of housing units in the Midwest, New England, Florida, and the Southwest. He is also the author of two nationally recognized real estate reference books for the management of multi-family residential properties. Mr. Goodwin served for 10 years on the Board of the Illinois Housing Development Authority (IHDA) Trust Fund. He was an advisor for the Office of Housing Coordination Services of the State of Illinois and was a founding member of the Illinois State Affordable Housing Conference. He also completed the definitive DuPage County affordable housing study as Chairman of the DuPage County Affordable Housing Task Force.

In 1994, Mr. Goodwin founded New Directions Housing Corporation, a not-for-profit entity that has developed affordable housing for low income residents throughout Illinois.

Education. A product of Chicago-area elementary and high schools, Mr. Goodwin obtained his Bachelor’s Degree and his Master’s Degree from Illinois state universities. Following graduation, he taught for five years in the Chicago Public Schools. He has served as a member of the Board of Governors of Illinois State Colleges and Universities, and served for 10 years as the Chairman of Northeastern Illinois University. He has been Vice Chairman of the Board of Trustees of Benedictine University for 20 years.

Mr. Goodwin continued his commitment to education through his work with the BBF Family Services’ Pilot Elementary School in Chicago, and the funding and development of the Inland Vocational Training Center for the Handicapped at Little City in Palatine, Illinois. He established an endowment for the funding of a perpetual college scholarship program for inner-city disadvantaged youth and also instituted a program to transition disabled students from school to the workplace.

Public Service. Mr. Goodwin’s passionate focus on ethics in business led to The Inland Real Estate Group of Companies winning the coveted Better Business Bureau Annual Ethics Award twice in the last four years out of 1700 nominees.

ROBERT H. BAUM (age 70) has been with The Inland Real Estate Group, Inc. and its affiliates since 1968 and is one of the four original principals. He is a Vice Chairman and Executive Vice President and General Counsel of The Inland Real Estate Group, Inc. In his capacity as General Counsel, Mr. Baum is responsible for the supervision of the legal activities of The Inland Real Estate Group, Inc. and its affiliates. This responsibility includes the supervision of the Inland Law Department and serving as liaison with outside counsel.

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

 

 

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

Mr. Baum is a member of the Board of Trustees of Window to the World Communications, Inc., Chicago’s premier public media organization that creates and presents unique content for television (WTTW, Channel 11), radio (WFMT, 98.7 FM) and digital media. Mr. Baum is currently a Lifetime Trustee and has been a member of the Board of Directors of Wellness House, a charitable organization that helps cancer patients improve the quality of their lives by providing programs emphasizing emotional support and information as a vital complement to medical treatment, all for no charge. He is also a Governing Member of the Chicago Symphony Orchestra and a Sponsor of the Civic Orchestra of Chicago. In addition, Mr. Baum was named a Paul Harris Fellow by The Rotary Foundation of Rotary International. He is also a past member of the Men’s Council of the Museum of Contemporary Art in Chicago.

ROBERT D. PARKS (age 70) has been a principal of the Inland real estate organization since May 1968 and is currently chairman of IREIC, a position he has held since November 1984. He is also a Director of Inland Private Capital Corporation. Mr. Parks has served as a director of Inland Investment Advisors, Inc. since June 1995. Mr. Parks served as a director of Inland Securities Corporation from August 1984 until June 2009. He served as a director of Inland Real Estate Corporation from 1994 to June 2008, and served as chairman of the board from May 1994 to May 2004 and president and chief executive officer from 1994 to June 2008. He also served as a director and chairman of the board of Inland Retail Real Estate Trust, Inc. from its inception in September 1998 to March 2006 and as chief executive officer until December 2004. Mr. Parks also served as the chairman of the board and a director of Inland Diversified Real Estate Trust, Inc. since its inception in June 2008, chairman and director of Inland American Real Estate Trust, Inc. since its inception in October 2004 and as the chairman of the board and a director of Inland Western Retail Real Estate Trust, Inc. since its inception in March 2003 until October 2010, and a Director of Inland Institutional Capital Partners Corporation from May 2006 until August 2012.

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

MITCHELL A. SABSHON (age 61) is a director, chief executive officer and president of IREIC, positions he has held since late 2013. Mr. Sabshon has also served as a director of Inland Private Capital Corporation since September 2013. Prior to joining IREIC in August 2013, Mr. Sabshon served as executive vice president and chief operating officer of Cole Real Estate Investments, Inc. from November 2010 to June 2013. In this role, he was responsible for finance, asset management, property management, leasing and high yield portfolio management. He also worked on a broad range of initiatives across the Cole Real Estate Investments organization, including issues pertaining to corporate and portfolio strategy, product development and systems. Prior to joining Cole Real Estate Investments in November 2010, Mr. Sabshon served as managing partner and chief investment officer of EndPoint Financial LLC, an advisory firm providing acquisition and finance advisory services to equity investors, from 2008 to 2010. Mr. Sabshon served as chief investment officer and executive vice president of GFI Capital Resources Group, Inc., a national owner-operator of multifamily properties, from 2007 to 2008. Prior to joining GFI, Mr. Sabshon served with Goldman Sachs & Company from 2004 to 2007 and from 1997 to 2002 in several key strategic roles, including president and chief executive officer of Goldman Sachs Commercial Mortgage Capital and head of the Insurance Client Development Group. From 2002 to 2004, Mr. Sabshon was executive director of the U.S. Institutional Sales Group at Morgan Stanley. Mr. Sabshon held various positions at Lehman Brothers Inc. from 1991 to 1997, including as senior vice president in the Real Estate Investment Banking Group. Prior to joining Lehman Brothers, Mr. Sabshon was an attorney in the Corporate Finance and Real Estate Structured Finance groups of Skadden, Arps, Slate, Meagher & Flom LLP. Mr. Sabshon received his J.D. from Hofstra University School of Law and a B.A. from George Washington University.

 

 

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CATHERINE L. LYNCH (age 55) joined Inland in 1989 and has been a director of The Inland Group since June 2012. She serves as the treasurer and secretary (since January 1995), the chief financial officer (since January 2011) and a director (since April 2011) of IREIC and as a director (since July 2000) and treasurer and secretary (since June 1995) of Inland Securities Corporation. Ms. Lynch also has served as a director and treasurer of Inland Investment Advisors, Inc. since June 1995, as a director and treasurer of Inland Institutional Capital Partners, Inc. since May 2006, and as a director of Inland Private Capital Corporation since May 2012. Ms. Lynch worked for KPMG Peat Marwick LLP from 1980 to 1989. Ms. Lynch received her bachelor degree in accounting from Illinois State University in Normal. Ms. Lynch is a certified public accountant and a member of the American Institute of Certified Public Accountants and the Illinois CPA Society. Ms. Lynch also is registered with FINRA as a financial operations principal.

ROBERTA S. MATLIN (age 69) joined IREIC in 1984 as director of investor administration and currently serves as a director and senior vice president of IREIC, in the latter capacity directing its day-to-day internal operations. Ms. Matlin has been a director of Inland Private Capital Corporation since May 2001, a vice president of Inland Institutional Capital Partners Corporation since May 2006 and a director since August 2012. She also served as a director and president of Inland Investment Advisors, Inc. since June 1995 and Intervest Southern Real Estate Corporation since July 1995, and a director and vice president of Inland Securities Corporation since July 1995. Since December 2007, Ms. Matlin has served as a director of Pan American Bank. Since 2008, Ms. Matlin has served as vice president of administration of Inland Diversified Real Estate Trust, Inc. and also has served as the president of Inland Diversified Business Manager & Advisor, Inc. from June 2008 through May 2009 and is currently its vice president. She has served as president of Inland Opportunity Business Manager & Advisor, Inc. since April 2009, and as vice president of administration of Inland American Real Estate Trust, Inc. since its inception in October 2004. Ms. Matlin served as president of Inland American Business Manager & Advisor, Inc. from October 2004 until December 2011, as vice president of administration of Inland Real Estate Income Trust, Inc. and IREIT Business Manager & Advisor, Inc. since August 2011, and as vice president of administration of Inland Western Retail Real Estate Trust, Inc. (n/k/a Retail Properties of America, Inc.) from 2003 until 2007. She has also served as vice president of administration of Inland Retail Real Estate Trust, Inc. from 1998 until 2004, vice president of administration of Inland Real Estate Corporation from 1995 until 2000 and trustee and executive vice president of Inland Mutual Fund Trust from 2001 until 2004.

Prior to joining Inland, Ms. Matlin worked for the Chicago Region of the Social Security Administration of the United States Department of Health and Human Services. Ms. Matlin is a graduate of the University of Illinois in Champaign. She holds Series 7, 22, 24, 39, 63 and 65 certifications from FINRA and is a member of REISA.

BRENDA G. GUJRAL (age 71) serves as a director of IREIC. Ms. Gujral served as IREIC’s president most recently from January 2013 to December 2013 and also served in that capacity from July 1987 through June 1992 and again from January 1998 through January 2011. Ms. Gujral was appointed chief executive officer of IREIC in January 2008 until February 2012. She served as a director of Inland Securities Corporation from January 1997 to August 2013, and has served as its president from January 2013 to August 2013 (and served as its president and chief operating officer from January 1997 to June 2009). Ms. Gujral was a director of Inland Western Retail Real Estate Trust, Inc. (n/k/a Retail Properties of America, Inc.) from its inception in March 2003 until May 2012 and served as its chief executive officer from June 2005 until November 2007. Ms. Gujral serves as a director of Inland American Real Estate Trust, Inc. and served as its president since its inception in October of 2004 until December of 2011. She also serves as a director of Inland Diversified Real Estate Trust, Inc. since its inception in June 2008, and served as its president from June 2008 to May 2009. She has been a director of the board of Inland Private Capital Corporation (f/k/a Inland Real Estate Exchange Corporation) since May 2001 and has served as its President since May 2012. She has been a director of Inland Opportunity Business Manager & Advisor, Inc. since April 2009, and was a director of Inland Retail Real Estate Trust, Inc. from its inception in September 1998 until it was acquired in February 2007.

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

 

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BRIAN M. CONLON (age 54) has served as a director of IREIC since August 2013 and previously in that role from February 2011 to January 2013. Mr. Conlon also served as president of IREIC from January 2011 to January 2013. He also currently serves as president and as a director of Inland Securities Corporation, a wholly-owned subsidiary of IREIC. In that capacity, he directs all capital-raising activities through a national team of internal and external wholesalers. Mr. Conlon began his career with Inland in September 1999 as executive vice president for Inland Securities Corporation.

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

GUADALUPE GRIFFIN (age 49) joined Inland in 1994. Ms. Griffin serves as principal executive officer of the Partnership (since January 2014), director of asset management and senior vice president of IREIC, and assistant vice president of Inland Midwest Investment Corporation. Ms. Griffin is responsible for investor communications, the asset management and day-to-day operations of the public and private partnerships and limited liability companies, which include the development of operating and disposition strategies. Ms. Griffin also has served as vice president of Inland Opportunity Business Manager & Advisor, Inc. since April 2009. Ms. Griffin holds an Illinois Real Estate Brokers License.

DONNA URBAIN (age 51) joined Inland in 2002 and is the principal financial officer of the Partnership. Ms. Urbain is responsible for the investment accounting department which includes all public partnership accounting functions along with quarterly and annual SEC filings. Ms. Urbain also serves as vice president – controller of IREIC. Prior to joining Inland, Ms. Urbain worked in the field of public accounting for KPMG LLP. Ms. Urbain is a Certified Public Accountant. She received her B.B.A. in Accounting from the University of Notre Dame in South Bend, Indiana.

CATHLEEN M. HRTANEK (age 37) joined Inland in 2005 and is an associate counsel and vice president of The Inland Real Estate Group, Inc. In her capacity as associate counsel, Ms. Hrtanek represents many of the entities that comprise the Inland Real Estate Group of Companies on a variety of legal matters. She is also a member of the audit committee for all public partnerships sponsored by IREIC. Ms. Hrtanek also has served as the secretary of Inland Diversified Real Estate Trust, Inc. and Inland Diversified Business Manager & Advisor, Inc. since September 2008, as the secretary of Inland Opportunity Business Manager & Advisor, Inc. since April 2009, as the secretary of Inland Private Capital Corporation since August 2009, and as the secretary of Inland Real Estate Income Trust, Inc. and IREIT Business Manager & Advisor since August 2011. Prior to joining Inland, Ms. Hrtanek had been employed by Wildman Harrold Allen & Dixon LLP in Chicago, Illinois since September 2001. Ms. Hrtanek has been admitted to practice law in the State of Illinois and is a licensed real estate broker. Ms. Hrtanek received her bachelor degree from the University of Notre Dame in South Bend, Indiana and her law degree from Loyola University of Chicago School of Law.

Section 16(a) Beneficial Ownership Reporting Compliance

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

Item 11. Executive Compensation

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

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

 

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

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

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

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

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

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

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

Our general partner and its affiliates may be reimbursed (as set forth under terms of the partnership agreement) for its expenses or out-of-pocket costs relating to our administration. For the year ended December 31, 2013, such costs, included in general and administrative expenses to affiliates and professional services to affiliates, were $77,895, of which $26,212 was unpaid as of December 31, 2013.

An affiliate of our general partner performs marketing and advertising services for us and is reimbursed (as set forth under terms of the partnership agreement) for direct costs. For the year ended December 31, 2013, such costs were $2,605, of which $381 was unpaid as of December 31, 2013.

An affiliate of our general partner performs land improvements, rezoning, annexation and other activities to prepare our investment properties for sale and is reimbursed (as set forth under terms of the partnership agreement) for salaries and direct costs. The affiliate does not recognize a profit on any project. For the year ended December 31, 2013, we incurred $20,011 of such costs, of which $4,777 was unpaid as of December 31, 2013, and are included in investment properties. Also, an affiliate of the General Partner supervises the maintenance of the parcels. Such costs of $5,275 are included in land operating expenses to affiliates for the year ended December 31, 3013, all of which was paid as of December 31, 2013. In addition, the maintenance costs related to Parcels 3/27 and 18 totaled $22,957 for the year ended December 31, 2013 and are included in discontinued operations, of which $4,611 was unpaid as of December 31, 2013.

 

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As of December 31, 2013 and 2012, the Partnership held all cash and cash equivalents with Inland Bank and Trust, an affiliate of the general partner.

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

We do not maintain any equity compensation plans.

 

  (a) The following person is a beneficial owner of more than 5% of our limited partnership units:

 

     Amount of    Percent  

Title of Class

  

Beneficial Ownership

   of Class  

Limited partner units

   Douglas R. Nash      5.63
   2150 Talman Court, Winter Park, FL 32792   
   2,841.18 Units   

The Schedule 13G/A filed by Douglas R. Nash on January 21, 2014 states that as of December 31, 2013, Douglas R. Nash beneficially owns 2,841.18 limited partner units or 5.63% of class. He has sole power to vote and dispose of 1,937.908 units. He has shared power with RTH Investments LLC (manager is Douglas R. Nash) to vote and dispose of 903.272 units.

 

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

 

     Amount and Nature     
     of Beneficial    Percent

Title of Class

  

Ownership

  

of Class

Limited partner units

   184 Units, directly    Less than 1%

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

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

 

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

Item 13. Certain Relationships and Related Transactions

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

There were no significant transactions or business relationships with the general partner, its affiliates or their management other than those described in Item 7 (Transactions with Related Parties) above. Reference is made to Note 4 of the Notes to Financial Statements (Item 8 of this Annual Report) for information regarding related party transactions.

 

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Item 14: Principal Accounting Fees and Services

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

 

     Years ended December 31,  
     2013      2012  

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

   $ 56,710        52,380   

Our audit committee has reviewed and approved all of the fees charged by Grant Thornton and actively monitors the relationship between audit and non-audit services provided by Grant Thornton. The audit committee concluded that all services rendered by Grant Thornton during the years ended December 31, 2013 and 2012, respectively, were consistent with maintaining Grant Thornton’s independence.

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

PART IV

Item 15. Exhibits and Financial Statement Schedules

 

(a) The financial statements listed in the index at page 19 of this annual report are filed as part of this annual report.

 

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

 

3    Restated Certificate of Limited Partnership and Amended and Restated Agreement of Limited Partnership, included as Exhibits A and B of the Registration Statement on Form S-11, filed with the SEC on October 25, 1989, as amended, are incorporated herein by reference thereto.
31.1    Rule 13a-14(a)/15d-14(a) Certification by principal executive officer
31.2    Rule 13a-14(a)/15d-14(a) Certification by principal financial officer
32.1    Section 1350 Certification by principal executive officer
32.2    Section 1350 Certification by principal financial officer
101    The following financial information from our Annual Report on Form 10-K for the year ended December 31, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Partners Capital, (iv) the Statements of Cash Flows and (v) related notes.

 

(c) Financial Statement Schedules:

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

No annual report or proxy material for the year 2013 has been sent to our limited partners. An annual report will be sent to the limited partners subsequent to this filing and we will furnish copies of such report to the Commission when it is sent to the limited partners.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

INLAND LAND APPRECIATION FUND II, L.P.

By:

  Inland Real Estate Investment Corporation

Its:

  General Partner

/s/

  GUADALUPE GRIFFIN
 

 

By:

  Guadalupe Griffin

Its:

  Senior Vice President and Principal Executive Officer of the Partnership

Date:

  March 12, 2014

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

 

By:

  Inland Real Estate Investment Corporation             

Its:

  General Partner

/s/

  GUADALUPE GRIFFIN
 

 

By:

  Guadalupe Griffin

Its:

  Senior Vice President and Principal Executive Officer of the Partnership

Date:

  March 12, 2014

/s/

  DONNA URBAIN
 

 

By:

  Donna Urbain

Its:

  Principal Financial Officer of the Partnership

Date:

  March 12, 2014

/s/

  CATHERINE L. LYNCH
 

 

By:

  Catherine L. Lynch

Its:

  Chief Financial Officer

Date:

  March 12, 2014

/s/

  ROBERTA S. MATLIN
 

 

By:

  Roberta S. Matlin

Its:

  Director and Senior Vice President

Date:

  March 12, 2014

/s/

  ROBERT D. PARKS
 

 

By:

  Robert D. Parks

Its:

  Chairman

Date:

  March 12, 2014

/s/

  BRENDA G. GUJRAL
 

 

By:

  Brenda G. Gujral

Its:

  Director

Date:

  March 12, 2014

/s/

  DANIEL L. GOODWIN
 

 

By:

  Daniel L. Goodwin

Its:

  Director

Date:

  March 12, 2014

 

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