UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

 

X

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

 

¨

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)

 

 

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

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 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

 

 

 

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Balance Sheets

September 30, 2015 and December 31, 2014

(unaudited)

 

Assets		2015				2014
Current assets:
Cash and cash equivalents (Note 1)		$	2,231,945				2,282,333
Other assets			658				3,601
Total current assets			2,232,603				2,285,934
Investment properties at cost (including acquisition fees paid to affiliates of $221,844 at September 30, 2015 and December 31, 2014) (Note 4):
Land and improvements			11,041,042				11,038,345
Total assets		$	13,273,645				13,324,279
Liabilities and Partners’ Capital
Current liabilities:
Accounts payable		$	18,687				3,250
Accrued real estate taxes			27,687				32,902
Due to affiliates (Note 3)			4,785				11,557
Unearned income			36,941				0
Total current liabilities			88,100				47,709
Partners’ capital:
General Partner:
Capital contribution			500				500
Cumulative net income			14,072,349				14,072,791
Cumulative cash distributions			(13,713,195	)			(13,713,195	)
			359,654				360,096
Limited Partners:
Units of $1,000. Authorized 60,000 Units, 50,068 Units outstanding at September 30, 2015 and December 31, 2014, (net of offering costs of $7,532,439, of which $2,535,445 was paid to affiliates)			42,559,909				42,559,909
Cumulative net income			66,743,638				66,787,410
Cumulative cash distributions			(96,477,656	)			(96,430,845	)
			12,825,891				12,916,474
Total Partners’ capital			13,185,545				13,276,570
Total liabilities and Partners’ capital		$	13,273,645				13,324,279

 

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 three and nine months ended September 30, 2015 and 2014

(unaudited)

 

		Three months ended September 30, 2015				Three months ended September 30, 2014				Nine months ended September 30, 2015				Nine months ended September 30, 2014
Revenues:
Rental income (Note 5)		$	36,941				38,455				109,619				114,528
Total revenues			36,941				38,455				109,619				114,528
Expenses:
Professional services to affiliates			7,866				8,267				28,386				26,341
Professional services to non-affiliates			22,509				31,171				105,544				87,359
General and administrative expenses to affiliates			1,153				1,854				14,316				16,444
General and administrative expenses to non-affiliates			3,506				6,301				24,312				23,095
Marketing expenses to affiliates			0				705				0				2,567
Marketing expenses to non-affiliates			0				0				0				450
Land operating expenses to affiliates			411				460				1,144				1,520
Land operating expenses to non-affiliates			14,221				8,907				32,950				31,638
Total expenses			49,666				57,665				206,652				189,414
Operating loss			(12,725	)			(19,210	)			(97,033	)			(74,886	)
Interest income			1,397				1,482				4,169				4,472
Other income			6,900				1,195				48,650				4,845
Loss from continuing operations			(4,428	)			(16,533	)			(44,214	)			(65,569	)
Discontinued operations (Note 2):
Loss from discontinued operations			0				0				0				(605	)
Gain on sale of investment property			0				0				0				1,812,539
Income from discontinued operations			0				0				0				1,811,934
Net income (loss)		$	(4,428	)			(16,533	)			(44,214	)			1,746,365
Net income (loss) allocated to:
General Partner		$	(44	)			(166	)			(442	)			99,338
Limited Partners			(4,384	)			(16,367	)			(43,772	)			1,647,027
Net income (loss)		$	(4,428	)			(16,533	)			(44,214	)			1,746,365
Net income (loss) allocated to the one General Partner Unit		$	(44	)			(166	)			(442	)			99,338
Net income (loss) per Unit, allocated to Limited Partners per weighted average Limited Partnership Unit (50,068 units for the three and nine months ended September 30, 2015 and 2014):
Continuing operations		$	(.09	)			(.33	)			(.88	)			(1.30	)
Discontinued operations			0				0				0				34.20
		$	(.09	)			(.33	)			(.88	)			32.90

 

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 nine months ended September 30, 2015 and 2014

(unaudited)

 

		2015				2014
Cash flows from operating activities:
Net income (loss)		$	(44,214	)			1,746,365
Adjustments to reconcile net income (loss) to net cash used in operating activities (including discontinued operations):
Gain on sale of investment property			0				(1,812,539	)
Changes in assets and liabilities:
Other assets			2,943				3,625
Accounts payable			15,437				(349	)
Accrued real estate taxes			(5,215	)			(5,710	)
Due to affiliates			(6,772	)			(23,789	)
Unearned income			36,941				38,037
Net cash used in operating activities			(880	)			(54,360	)
Cash flows from investing activities:
Additions to investment properties			(2,697	)			(47,557	)
Proceeds from sale of investment property			0				3,872,152
Net cash provided by (used in) investing activities			(2,697	)			3,824,595
Cash flows from financing activities:
Distributions			(46,811	)			(4,000,000	)
Net cash used in financing activities			(46,811	)			(4,000,000	)
Net decrease in cash and cash equivalents			(50,388	)			(229,765	)
Cash and cash equivalents at beginning of period			2,282,333				2,552,882
Cash and cash equivalents at end of period		$	2,231,945				2,323,117

 

See accompanying notes to financial statements.

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INLAND LAND APPRECIATION FUND II, L.P.

(a limited partnership)

Notes to Financial Statements

September 30, 2015

(unaudited)

Readers of this quarterly report should refer to the Partnership’s audited financial statements for the fiscal year ended December 31, 2014, which are included in the Partnership’s 2014 annual report, as certain footnote disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report.

(1) Organization and Basis of Accounting

The Registrant, 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. Between October 25, 1989 and October 24, 1991, the Partnership sold 50,476.17 Limited Partnership Units (“Units”) at $1,000 per Unit resulting in gross offering proceeds of $50,476,170, not including the General Partner’s capital contribution of $500. The Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) provides for Inland Real Estate Investment Corporation to be the General Partner. Through September 30, 2015, the Partnership had repurchased a total of 408.65 Units for $383,822 from various Limited Partners through a 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.

In the opinion of management, the financial statements contain all the adjustments necessary to present fairly the financial position and results of operations for the periods presented herein. Results of interim periods are not necessarily indicative of results to be expected for the year.

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 exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance coverage of $250,000 on 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. Repairs and maintenance expenses are charged to operations as incurred.

Recently Issued Accounting Guidance

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, which includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations - that is, a major effect on the organization’s operations and financial results - should be presented as discontinued operations. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. Additionally, the ASU requires expanded disclosures about discontinued operations that will

 

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provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The guidance is effective for transactions that occur in annual periods beginning on or after December 15, 2014, and in interim periods within those years. There were no sales during the nine months ended September 30, 2015. During the nine months ended September 30, 2014, the Partnership sold Parcel 4, resulting in net sales proceeds of $3,872,152 and a gain on sale of $1,812,539. Sales that occurred within the nine months ended September 30, 2014 are included within discontinued operations. The Partnership expects the new guidance to eliminate the reporting of discontinued operations from sales of parcels on a going forward basis.

In May 2014, the FASB issued ASU 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The FASB has voted to approve a one-year deferral of the effective date to fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Partnership is currently evaluating the new guidance to determine the impact it will have on its financial statements.

(2) Discontinued Operations and Investment Property Held for Sale

During the nine months ended September 30, 2014, the Partnership sold Parcel 4, resulting in net sales proceeds of $3,872,152 and a gain on sale of $1,812,539. The operations related to Parcel 4 for the nine months ended September 30, 2014 are included in discontinued operations on the accompanying statements of operations. There were no land sales during the nine months ended September 30, 2015. As of September 30, 2015 and December 31, 2014, we have not classified any investment property as held for sale.

(3) Transactions with Affiliates

The General Partner and its affiliates are entitled to reimbursement for salaries and expenses of employees of the General Partner and its affiliates relating to the administration of the Partnership. Such costs of $42,702 and $42,785 have been incurred and are included in professional services to affiliates and general and administrative expenses to affiliates for the nine months ended September 30, 2015 and 2014, respectively. There are $4,355 and $7,726 in unpaid professional services to affiliates and general and administrative expenses to affiliates as of September 30, 2015 and December 31, 2014, respectively.

An affiliate of the General Partner performed marketing and advertising services for the Partnership and was reimbursed (as set forth under terms of the Partnership Agreement) for direct costs. Such costs of $0 and $2,567 have been incurred and are included in marketing expenses to affiliates for the nine months ended September 30, 2015 and 2014, respectively, of which $0 and $523 was unpaid as of September 30, 2015 and December 31, 2014, respectively.

An affiliate of the General Partner performed land improvements, rezoning, annexation and other activities to prepare the Partnership’s investment properties for sale and was reimbursed (as set forth under terms of the Partnership Agreement) for salaries and direct costs. Such costs of $2,656 and $13,807 have been incurred for the nine months ended September 30, 2015 and 2014, respectively. Such costs are included in investment properties, of which $430 and $3,185 was unpaid as of September 30, 2015 and December 31, 2014, respectively. Also, an affiliate of the General Partner supervises the maintenance of the parcels. Such costs of $1,144 and $1,520 are included in land operating expenses to affiliates for the nine months ended September 30, 2015 and 2014, respectively, of which $0 and $123 was unpaid as of September 30, 2015 and December 31, 2014, respectively. The affiliate does not recognize a profit on any project.

As of September 30, 2015, the Partnership held all cash and cash equivalents with Inland Bank and Trust, an affiliate of the General Partner.

(4) Investment Properties

As of September 30, 2015, the Partnership owned two parcels of land consisting of approximately 544 acres.

 

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(a)

The Partnership has taken the steps necessary to reduce costs and maintain sufficient reserves of cash and cash equivalents to cover all 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 reasonable and acceptable offers are 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 nine months ended September 30, 2015 and 2014, respectively, the Partnership had recorded no such impairment.

 

(b)	Reconciliation of investment properties owned:

 

		September 30, 2015				December 31, 2014
Balance at January 1,		$	11,038,345				13,044,616
Additions during period			2,697				53,342
Sales during period			0				(2,059,613	)
Balance at end of period,		$	11,041,042				11,038,345

(5) Rental Income

The Partnership has determined that all leases relating to the farm parcels are operating leases. Accordingly, rental income is reported when earned. Farm rent is fully collected during the first quarter. As such, a portion of the farm rent is classified as unearned income. As of September 30, 2015, unearned income was $36,941.

As of September 30, 2015, the Partnership had farm leases of generally one year in duration, for approximately 426 acres of the approximately 544 acres owned.

(6) Litigation

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

 

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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.

On April 10, 2015, following discovery, Bond filed a Motion for Summary Judgment (the “Motion”) against the County seeking the dismissal with prejudice of the sole count alleged against Bond. Dismissal of the County’s complaint against Bond would result in the dismissal of Bond’s Third Party Complaint against the Partnership, and thus, the Partnership co-filed the Motion. The Motion was granted in favor of the Partnership by written Order dated August 6, 2015 (“the Summary Judgment Order”). On September 30, 2015, at the request of Bond and the Partnership, the Court entered an Order that there is no just reason to delay the enforcement of, or the appeal from, the Summary Judgment Order, which commenced the 30-day deadline for the filing of any appeal of the Summary Judgment Order. No notice of appeal of the Summary Judgment Order has been served on the Partnership, and the deadline to file such a notice has passed.

(7) Subsequent Events

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

On November 9, 2015, the Partnership entered into a sales contract to sell Parcel 8 for $1,837,705. Provided the buyer waives its contingencies and performs pursuant to the terms of the contract, the sale will result in an approximate loss of $92,000, before selling costs and transfer taxes. The closing is expected to occur in December 2015.

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

 

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Item 2. 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 quarterly report on Form 10-Q 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.

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.

Critical Accounting Policies

The SEC 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 the remaining parcels until such time as reasonable and acceptable offers are 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 nine months ended September 30, 2015 and 2014, respectively, there were no impairments recorded. 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.

 

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

Assets Held for Sale - In determining whether to classify an asset as held for sale, we consider whether: (i) management has committed to a plan to sell the asset; (ii) the asset is available for immediate sale in its present condition; (iii) we have initiated a program to locate a buyer; (iv) we believe that the sale of the asset is probable; (v) 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.

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 September 30, 2015 and December 31, 2014, we have not classified any investment property 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 September 30, 2015, we have had multiple sales, exchange transactions, and conveyances through which we have disposed of the buildings and approximately 3,986 acres of the approximately 4,530 acres originally owned. As of September 30, 2015, cumulative distributions have totaled $96,477,656 to the limited partners, which is equivalent to 191% of the original capital raised which was $50,476,170, and $13,713,195 to the general partner. Of the $96,477,656 distributed to the limited partners, $95,756,656 was net sales proceeds and $721,000 was from operations. As of September 30, 2015, we have used $47,481,298 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 leasing. As of September 30, 2015, we own in part, two parcels, consisting of approximately 544 acres of which 426 are leased to local farmers and are generating sufficient cash flow from leases to cover real estate taxes and insurance expense.

During the nine months ended September 30, 2015, there were no land sales. During the nine months ended September 30, 2014, we sold Parcel 4, resulting in net sales proceeds of $3,872,152 and a gain on sale of $1,812,539. Net sales proceeds, including previously undistributed net sales proceeds, will be used to fund our operations including land improvements and land use activities.

At September 30, 2015, we had cash and cash equivalents of $2,231,945. The remaining cash balance is available to be used for our costs and liabilities and other activities with respect to our two remaining land parcels. We will evaluate our cash needs during the upcoming year to determine any future distributions.

The Partnership has listed Parcel 20 for sale utilizing a real estate auction platform in an effort to procure a buyer or buyers interested in purchasing property zoned for multifamily, retail and/or agricultural farm land. The auction is currently expected to occur on December 15, 2015.

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 real estate market including new construction with national homebuilders entering back into the marketplace. There have been farm parcel sales in surrounding communities

 

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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 $42,702 and $42,785 have been incurred and are included in professional services to affiliates and general and administrative expenses to affiliates for the nine months ended September 30, 2015 and 2014, respectively. There are $4,355 and $7,726 in unpaid professional services to affiliates and general and administrative expenses to affiliates as of September 30, 2015 and December 31, 2014, respectively.

An affiliate of our general partner performed marketing and advertising services for us and was reimbursed for direct costs. Such costs of $0 and $2,567 have been incurred and are included in marketing expenses to affiliates for the nine months ended September 30, 2015 and 2014, respectively, of which $0 and $523 was unpaid as of September 30, 2015 and December 31, 2014, respectively.

An affiliate of the general partner performed land improvements, rezoning, annexation and other activities to prepare the Partnership’s investment properties for sale and was reimbursed (as set forth under terms of the Partnership Agreement) for salaries and direct costs. Such costs of $2,656 and $13,807 have been incurred for the nine months ended September 30, 2015 and 2014, respectively. Such costs are included in investment properties, of which $430 and $3,185 was unpaid as of September 30, 2015 and December 31, 2014, respectively. Also, an affiliate of the general partner supervises the maintenance of the parcels. Such costs of $1,144 and $1,520 are included in land operating expenses to affiliates for the nine months ended September 30, 2015 and 2014, respectively, of which $0 and $123 was unpaid as of September 30, 2015 and December 31, 2014, respectively. The affiliate did not recognize a profit on any project.

As of September 30, 2015, the Partnership held all cash and cash equivalents with Inland Bank and Trust, an affiliate of the general partner.

Results of Operations

As of September 30, 2015, we owned two parcels of land consisting of approximately 544 acres. Of the approximately 544 acres owned, 426 acres are tillable, leased to local farmers and generate sufficient cash flow to cover real estate taxes and insurance expense. Rental income was $109,619 and $114,528 for the nine months ended September 30, 2015 and 2014, respectively. Farm rent is fully collected during the first quarter. As such, a portion of the farm rent is classified as unearned income. As of September 30, 2015, unearned income was $36,941. Rental income for 2015 decreased due to slightly lower lease rates.

Professional services to affiliates and non-affiliates were $133,930 and $113,700 for the nine months ended September 30, 2015 and 2014, respectively. Professional services to affiliates and non-affiliates include accounting and legal services. The increase is due primarily to an increase in legal fees due to the litigation described above and due to the timing of when accounting services were performed.

General and administrative expenses to affiliates and non-affiliates were $38,628 and $39,539 for the nine months ended September 30, 2015 and 2014, respectively. General and administrative expenses include data processing costs, postage, printing expenses, farm management fees and investor services.

Marketing expenses to affiliates and non-affiliates were $0 and $3,017 for the nine months ended September 30, 2015 and 2014, respectively. Marketing expenses are costs incurred for preparing and marketing parcels for sale. The marketing expenses in 2014 were due to internet advertising costs.

 

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Land operating expenses to affiliates and non-affiliates were $34,094 and $33,158 for the nine months ended September 30, 2015 and 2014, respectively. These costs primarily include real estate tax expense and insurance.

Interest income was $4,169 and $4,472 for the nine months ended September 30, 2015 and 2014, 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.

Other income was $48,650 and $4,845 for the nine months ended September 30, 2015 and 2014, respectively. Other income is due primarily to transfer fee income as a result of the number of completed unit transfers. Included in 2015 is a $45,000 refund from the Village of Montgomery for various fees paid during the development of Parcel 3/27 which was sold in prior years.

Loss from discontinued operations was $0 and $605 for the nine months ended September 30, 2015 and 2014, respectively. Included in loss from discontinued operations are the rental income, insurance, real estate taxes, and land operating expenses pertaining to sold parcels. There were no land sales for the nine months ended September 30, 2015. For the nine months ended September 30, 2014, the operations pertaining to Parcel 4 are included in loss from discontinued operations. The gain on sale of investment property for the nine months ended September 30, 2014 of $1,812,539 is due to the sale of Parcel 4 on March 14, 2014.

 

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Investment 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 nine months ended September 30, 2015.

Investment properties activity:

 

				Gross Acres				Purchase/Sales				Initial Costs												Costs Capitalized				Costs of				Total Remaining Costs of
Parcel		Illinois		Purchased								Original				Acquisition				Total				Subsequent to				Property				Parcels at
#		County		(Sold)				Date				Costs				Costs				Costs				Acquisition				Sold/Impaired				09/30/15
1		McHenry			372.7590				04/25/90			$	2,114,295				114,070				2,228,365				630,703				2,859,068			0
					(372.7590	)			02/23/04
2		Kendall			41.1180				07/06/90				549,639				43,889				593,528				75,199				668,727			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
					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				539,750				2,059,613			0
					(299.0250	)			03/14/14
5		Kane			189.0468				02/28/91				1,954,629				94,569				2,049,198				349,845				2,399,043			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
					(.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
					(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				79,248				1,909,034			1,929,189
					(.8700	)			04/03/96
					(63.0000	)			01/23/01
					(80.0000	)			05/11/04

 

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Investment properties activity (continued):

 

				Gross Acres				Purchase/Sales				Initial Costs												Costs Capitalized				Costs of				Total Remaining Costs of
Parcel		Illinois		Purchased								Original				Acquisition				Total				Subsequent to				Property				Parcels at
#		County		(Sold)				Date				Costs				Costs				Costs				Acquisition				Sold/Impaired				09/30/15
9 (c)		Will			9.8670				08/13/91			$	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
					(150.6600	)			01/10/05
11		Will			138.4470				08/20/91				289,914				20,376				310,290				2,700				312,990			0
					(138.4470	)			05/03/93
12 (c)		Will			44.7320				08/20/91				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
					(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
					(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
					(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
					(168.9050	)			08/03/01
17		Kendall			3.4620				10/30/91				435,000				22,326				457,326				113,135				570,461			0
					(2.1130	)			03/06/01
					(1.3490	)			08/23/02

 

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Investment properties activity (continued):

 

				Gross Acres				Purchase/Sales				Initial Costs												Costs Capitalized				Costs of				Total Remaining Costs of
Parcel		Illinois		Purchased								Original				Acquisition				Total				Subsequent to				Property				Parcels at
#		County		(Sold)				Date				Costs				Costs				Costs				Acquisition				Sold/Impaired				09/30/15
18		McHenry			139.1697				11/07/91			$	1,160,301				58,190				1,218,491				9,456,992				10,675,483			0
					(9.2500	)			Var 2004
					(33.3197	)			Var 2005
					(62.0200	)			Var 2006
					(12.8800	)			Var 2007
					(2.2400	)			Var 2008
					.2188				03/02/11
					(19.6788	)			11/18/13
19		Kane			436.2360				12/13/91				4,362,360				321,250				4,683,610				187,211				4,870,821			0
					(436.2360	)			05/16/01
20		Kane &
		Kendall			400.1290				01/31/92				1,692,623				101,318				1,793,941				9,508,187				2,190,275			9,111,853
					(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
					(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
					(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/Sales				Initial Costs												Costs Capitalized				Costs of				Total Remaining Costs of
Parcel		Illinois		Purchased								Original				Acquisition				Total				Subsequent to				Property				Parcels at
#		County		(Sold)				Date				Costs				Costs				Costs				Acquisition				Sold/Impaired				09/30/15
23		Kendall			133.2074				10/30/92			$	3,231,942				251,373				3,483,315				4,665,998				8,149,313			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
					(.2676	)			03/16/93
24		Kendall			3.9080				01/21/93				645,000				56,316				701,316				30,436				731,752			0
					(3.9080	)			04/16/01
24A (b)		Kendall			.4060				01/21/93				155,000				13,533				168,533				0				168,533			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
					(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
					(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
					(50.0000	)			04/17/12
												$	38,810,025				2,504,276				41,314,301				47,481,298				77,754,557			11,041,042

 

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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).

Subsequent Events

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

On November 9, 2015, the Partnership entered into a sales contract to sell Parcel 8 for $1,837,705. Provided the buyer waives its contingencies and performs pursuant to the terms of the contract, the sale will result in an approximate loss of $92,000, before selling costs and transfer taxes. The closing is expected to occur in December 2015.

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 have not reached the maximum threshold of limited partnership units that may be transferred/assigned directly between parties during 2015. Therefore, we may authorize additional sales of partnership units directly between parties during 2015. 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 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 our 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. Payment of the required withholding amount of $46,811 was made to the Illinois Department of Revenue in April 2015. 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.

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

None

Litigation

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

 

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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.

On April 10, 2015, following discovery, Bond filed a Motion for Summary Judgment (the “Motion”) against the County seeking the dismissal with prejudice of the sole count alleged against Bond. Dismissal of the County’s complaint against Bond would result in the dismissal of Bond’s Third Party Complaint against the Partnership, and thus, the Partnership co-filed the Motion. The Motion was granted in favor of the Partnership by written Order dated August 6, 2015 (“the Summary Judgment Order”). On September 30, 2015, at the request of Bond and the Partnership, the Court entered an Order that there is no just reason to delay the enforcement of, or the appeal from, the Summary Judgment Order, which commenced the 30-day deadline for the filing of any appeal of the Summary Judgment Order. No notice of appeal of the Summary Judgment Order has been served on the Partnership, and the deadline to file such a notice has passed.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 4. 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 September 30, 2015, 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 SEC’s rules and forms.

Management’s Report on Internal Control Over Financial Reporting

Our 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 (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of September 30, 2015. This quarterly 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 quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – Other Information

Item 1. Legal Proceedings

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.

On April 10, 2015, following discovery, Bond filed a Motion for Summary Judgment (the “Motion”) against the County seeking the dismissal with prejudice of the sole count alleged against Bond. Dismissal of the County’s complaint against Bond would result in the dismissal of Bond’s Third Party Complaint against the Partnership, and thus, the Partnership co-filed the Motion. The Motion was granted in favor of the Partnership by written Order dated August 6, 2015 (“the Summary Judgment Order”). On September 30, 2015, at the request of Bond and the Partnership, the Court entered an Order that there is no just reason to delay the enforcement of, or the appeal from, the Summary Judgment Order, which commenced the 30-day deadline for the filing of any appeal of the Summary Judgment Order. No notice of appeal of the Summary Judgment Order has been served on the Partnership, and the deadline to file such a notice has passed.

Items 2 through 5 are omitted because of the absence of conditions under which they are required.

Item 6. Exhibits

Exhibits:

 

		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 Quarterly Report on Form 10-Q for the nine months ended September 30, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows and (iv) related notes.

 

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SIGNATURES

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

 

 

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