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EX-32.1 - CERTIFICATION - REAL ESTATE ASSOCIATES LTD IIrea2_ex32z1.htm
EX-31.1 - CERTIFICATION - REAL ESTATE ASSOCIATES LTD IIrea2_ex31z1.htm
EX-31.2 - CERTIFICATION - REAL ESTATE ASSOCIATES LTD IIrea2_ex31z2.htm



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

Form 10-Q

(Mark One)

[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


or


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


For the transition period from __________ to __________

 

Commission file number 0-09782

 

REAL ESTATE ASSOCIATES LIMITED II

(Exact name of registrant as specified in its charter)


California

95-3547609

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

 

PO Box 91274

 

Los Angeles, California 90009

 

(Address of principal executive offices)

 

 

 

(720) 387-8135

 

(Registrant’s telephone number, including area code)


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

[X] Yes  [ ] No


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

[X] Yes  [ ] No


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


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  [X] No




PART I - FINANCIAL INFORMATION



ITEM 1.

FINANCIAL STATEMENTS



REAL ESTATE ASSOCIATES LIMITED II

BALANCE SHEETS

 (in thousands)



 

September 30,

 

December 31,

 

2015

 

2014

 

(Unaudited)

 

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

$

555 

 

$

601 

Receivable – limited partners

103 

 

103 

Total assets

$

658 

 

$

704 

 

 

 

 

LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY)

 

 

 

 

 

 

 

Liabilities:

 

 

 

Accounts payable and accrued expenses

$

17 

 

$

20 

Total liabilities

17 

 

20 

 

 

 

 

Partners' capital (deficiency):

 

 

 

General partners

(135)

 

(135)

Limited partners

776 

 

819 

Total partners’ capital (deficiency)

641 

 

684 

Total liabilities and partners’ capital (deficiency)

$

658 

 

$

704 



See Accompanying Notes to Financial Statements






1





REAL ESTATE ASSOCIATES LIMITED II

STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per interest data)



 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

Revenues:

$

-- 

 

$

-- 

 

$

-- 

 

$

-- 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

  Management fees – General Partner

 

 

 

  Administrative

 

 

20 

 

17 

  Legal and accounting

 

 

21 

 

29 

    Total operating expenses

13 

 

12 

 

47 

 

52 

 

 

 

 

 

 

 

 

Loss from partnership operations

(13)

 

(12)

 

(47)

 

(52)

 

 

 

 

 

 

 

 

Distributions in excess of investment in

  Local Limited Partnership

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(13)

 

$

(12)

 

$

(43)

 

$

(47)

 

 

 

 

 

 

 

 

Net loss allocated to general partners (1%)

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

Net loss allocated to limited partners (99%)

$

(13)

 

$

(12)

 

$

(43)

 

$

(47)

 

 

 

 

 

 

 

 

Net loss per limited partnership interest

$

(1.24)

 

$

(1.14)

 

$

(4.09)

 

$

(4.47)

 

 

 

 

 

 

 

 


See Accompanying Notes to Financial Statements






2




REAL ESTATE ASSOCIATES LIMITED II

STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIENCY)

(Unaudited)

(in thousands)





 

General

 

Limited

 

 

 

Partners

 

Partners

 

Total

Partners' capital (deficiency)

  at December 31, 2014

$

(135)

 

$

819 

 

$

684 

 

 

 

 

 

 

Net loss for the nine months

  ended September 30, 2015

 

(43)

 

(43)

 

 

 

 

 

 

Partners' capital (deficiency)

  at September 30, 2015

$

(135)

 

$

776 

 

$

641 



See Accompanying Notes to Financial Statements







3




REAL ESTATE ASSOCIATES LIMITED II

STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)





 

Nine Months Ended

 

September 30,

 

2015

 

2014

Cash flows from operating activities:

 

 

 

Net loss

$

(43)

 

$

(47)

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

 

 

 

Distributions in excess of investment in Local

Limited Partnership

(4)

 

(5)

Changes in accounts:

 

 

 

Accounts Receivable

 

(78)

Accounts payable and accrued expenses

(3)

 

Net cash provided by (used in) operating activities

(50)

 

(130)

 

 

 

 

Cash flows used in investing activities:

 

 

 

Distributions received from Local Limited Partnership

 

Net cash provided by (used in) investing activities

 

 

 

 

 

 

Net decrease in cash and cash equivalents

(46)

 

(125)

 

 

 

 

Cash and cash equivalents, beginning of period

601 

 

766 

 

 

 

 

Cash and cash equivalents, end of period

$

555 

 

$

641 



See Accompanying Notes to Financial Statements






4




REAL ESTATE ASSOCIATES LIMITED II


NOTES TO FINANCIAL STATEMENTS

(unaudited)



Note 1 - Organization and Summary of Significant Accounting Policies


General


The information contained in the following notes to the unaudited financial statements is condensed from that which would appear in the annual audited financial statements; accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and related notes thereto contained in the annual report for the fiscal year ended December 31, 2014 prepared by Real Estate Associates Limited II (the "Partnership"). Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.


In the opinion of the Partnership’s management, the accompanying unaudited financial statements contain all adjustments (consisting primarily of normal recurring items) considered necessary for a fair presentation. The balance sheet at December 31, 2014 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements.


The general partners share a one percent interest in profits and losses of the Partnership.  The limited partners share the remaining 99 percent interest which is allocated in proportion to their respective individual investments. The general partners of the Partnership are National Partnership Investments Associates, a California limited partnership, and National Partnership Investments, LLC, a California limited liability company (“NAPICO” or the “General Partner”).  The General Partner is a subsidiary of Bethesda Holdings II, LLC, a privately held real estate asset management company (“Bethesda”).


At September 30, 2015 and December 31, 2014, there were 10,507, limited partnership interests outstanding.


Basis of Presentation


The accompanying unaudited financial statements have been prepared in conformity with accounting principles generally accepted in the United States.


Method of Accounting for Investments in Local Limited Partnerships


The investments in local limited partnerships (the “Local Limited Partnerships”) are accounted for using the equity method.


Net Income (Loss) Per Limited Partnership Interest


Net income (loss) per limited partnership interest was computed by dividing the limited partners’ share of net income (loss) by the number of limited partnership interests outstanding at the beginning of the year. The number of limited partnership interests used was 10,507 for the nine months ended September 30, 2015 and 10,514 for the nine months ended September 30, 2014.




5






Note 1 - Organization and Summary of Significant Accounting Policies (continued)


Variable Interest Entities


The Partnership consolidates any variable interest entities in which the Partnership holds a variable interest and is the primary beneficiary. Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The primary beneficiary of a VIE is generally the entity that has (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.


In determining whether it is the primary beneficiary of a VIE, the Partnership considers qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of the Partnership’s investment; the obligation or likelihood for the Partnership or other investors to provide financial support; and the similarity with and significance to the business activities of the Partnership and the other investors.  Significant judgments related to these determinations include estimates about the current and future fair values and performance of real estate held by these VIEs and general market conditions.


At September 30, 2015 and December 31, 2014, the Partnership held variable interests in one VIE for which the Partnership was not the primary beneficiary. The Partnership has concluded, based on its qualitative consideration of the partnership agreement, the partnership structure and the role of the general partner in the Local Limited Partnership, that the general partner of the Local Limited Partnership is the primary beneficiary of the respective Local Limited Partnership. In making this determination, the Partnership considered the following factors:

 

·

the general partner conducts and manages the business of the Local Limited Partnership;

·

the general partner has the responsibility for and sole discretion over selecting a property management agent for the Local Limited Partnership's underlying real estate properties;

·

the general partner is responsible for approving operating and capital budgets for the properties owned by the Local Limited Partnership;

·

the general partner is obligated to fund any recourse obligations of the Local Limited Partnership;

·

the general partner is authorized to borrow funds on behalf of the Local Limited Partnership; and

·

the Partnership, as a limited partner in the Local Limited Partnership, does not have the ability to direct or otherwise significantly influence the activities of the Local Limited Partnership that most significantly impact such entity's economic performance.



The one VIE at September 30, 2015 consisted of a Local Limited Partnership that was directly engaged in the ownership and management of one apartment property with a total of 48 units.  The Partnership is involved with the VIE as a non-controlling limited partner equity holder. The Partnership’s maximum exposure to loss as a result of its involvement with the unconsolidated VIE is limited to the Partnership’s recorded investments in and receivables from this VIE, which was zero at both September 30, 2015 and December 31, 2014. The Partnership may be subject to additional losses to the extent of any financial support that the Partnership voluntarily provides in the future.




6





Note 2 - Investments in and Advances to Local Limited Partnership


As of September 30, 2015 and December 31, 2014, the Partnership held limited partnership interests in one Local Limited Partnership. As of September 30, 2015 and December 31, 2014, the Local Limited Partnership owned a residential low income rental project consisting of 48 apartment units.  The mortgage loans of this project are payable to or insured by the United States Department of Housing and Urban Development(“HUD”).  


The Partnership, as a limited partner, does not have a contractual relationship with the Local Limited Partnership or exercise control over the activities and operations, including refinancing or selling decisions, of the Local Limited Partnership that would require or allow for consolidation. Accordingly, the Partnership accounts for its investment in the Local Limited Partnership using the equity method. The Partnership is allocated profits and losses of the Local Limited Partnerships based upon its respective ownership percentage (99%). Distributions of surplus cash from operations from the Local Limited Partnership are restricted by the Local Limited Partnership's Regulatory Agreements with HUD and/or are restricted by the terms of the mortgages encumbering the Projects. These restrictions limit the distribution to a portion, generally less than 10%, of the initial invested capital. The Partnership is allocated profits and losses and receives distributions from refinancings and sales in accordance with the Local Limited Partnership's partnership agreement. This agreement limits the Partnership’s distributions to an amount substantially less than its ownership percentage in the Local Limited Partnership.


The investment is carried at cost plus the Partnership’s share of the Local Limited Partnership’s profits less the Partnership’s share of the Local Limited Partnership’s losses, distributions and impairment charges. The Partnership is not legally liable for the obligations of the Local Limited Partnership and is not otherwise committed to provide additional support to it. Therefore, it does not recognize losses once its investment in the Local Limited Partnership reaches zero. Distributions from the Local Limited Partnership are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. When the investment balance has been reduced to zero, subsequent distributions received are recognized as income in the accompanying unaudited statements of operations. Operating distributions from the Local Limited Partnership in which the Partnership’s investment in the Local Limited Partnership has been reduced to zero were approximately $4,000 and $5,000 for the nine months ended September 30, 2015 and 2014, respectively.


At times, advances are made to the Local Limited Partnership. Advances made by the Partnership to the individual Local Limited Partnership are considered part of the Partnership’s investment in the limited partnership. Advances made to Local Limited Partnership for which the investment has been reduced to zero are generally charged to expense. There were no advances made during the nine months ended September 30, 2015 and 2014.


For those investments where the Partnership has determined that the carrying value of its investments approximates the estimated fair value of those investments, the Partnership’s policy is to recognize equity in income of the Local Limited Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Limited Partnerships.  Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize.


The Partnership had no carrying value in investment in the Local Limited Partnership as of September 30, 2015 or December 31, 2014.




7




Note 2 - Investments in and Advances to Local Limited Partnership (continued)



The following are unaudited condensed combined estimated statements of operations for the three and nine months ended September 30, 2015 and 2014 for the Local Limited Partnerships in which the Partnership has invested:



 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

2015

 

2014

 

2015

 

2014

Revenues

 

 

 

 

 

 

 

Rental and other

$

75 

 

$

109 

 

$

296 

 

$

335 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

Depreciation

 

10 

 

23 

 

29 

Interest

14 

 

14 

 

43 

 

44 

Operating

79 

 

90 

 

238 

 

272 

Total expenses

100 

 

114 

 

304 

 

345 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(25)

 

$

(5)

 

$

(8)

 

$

(10)




Note 3 – Transactions with Affiliated Parties


Under the terms of the Restated Certificate and Agreement of Limited Partnership, the Partnership is liable to NAPICO for an annual management fee equal to 0.4 percent of the Partnership’s original remaining invested assets of the Local Limited Partnerships and is calculated at the beginning of each year. Invested assets are defined as the costs of acquiring project interests, including the proportionate amount of the mortgage loans related to the Partnership’s interests in the capital accounts of the respective partnerships. The fee was approximately $6,000 for the nine months ended September 30, 2015 and 2014.



Note 4 – Fair Value of Financial Instruments


Financial Accounting Standards Board Accounting Standards Codification Topic 825, “Financial Instruments”, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value is defined as the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.  The Partnership believes that the carrying amounts of other assets and liabilities reported on the balance sheet at September 30, 2015 that require such disclosure approximated their fair value due to the short-term maturity of these instruments.



Note 5 - Contingencies


The General Partner is involved in various lawsuits arising from transactions in the ordinary course of business. In the opinion of management and the General Partner, the claims will not result in any material liability to the Partnership.



Note 6 – Subsequent Event


The Partnership’s management evaluated subsequent events through the time this Quarterly Report on Form 10-Q was filed.



8





ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements in certain circumstances. Certain information included in this Quarterly Report contains or may contain information that is forward-looking within the meaning of the federal securities laws. Actual results may differ materially from those described in these forward-looking statements and, in addition, will be affected by a variety of risks and factors, some of which are beyond the Partnership’s control, including, without limitation: financing risks, including the availability and cost of financing and the risk that the Partnership’s cash flows from operations may be insufficient to meet required payments of principal and interest; national and local economic conditions, including the pace of job growth and the level of unemployment; the terms of governmental regulations that affect the Partnership and its investment in Local Limited Partnerships and interpretations of those regulations; the competitive environment in which the Partnership operates; real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for residents in such markets; litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by the limited partnerships in which the Partnership has invested. Readers should carefully review the Partnership’s financial statements and the notes thereto, as well as the other documents the Partnership files from time to time with the Securities and Exchange Commission.


The General Partner monitors developments in the area of legal and regulatory compliance.


Liquidity and Capital Resources


The Partnership's primary source of funds consists of distributions from the Local Limited Partnership in which the Partnership has invested. It is not expected that the Local Limited Partnership in which the Partnership has invested will generate cash flow from operations sufficient to provide for distributions to limited partners in any material amount. An infrequent source of funds would be funds received by the Partnership as its share of any proceeds from the sale of a property owned by a Local Limited Partnership or the Partnership’s sale of its interest in a Local Limited Partnership.


The property in which the Partnership has invested, through its investments in the Local Limited Partnership, receives one or more forms of assistance from the Federal Government. As a result, the Local Limited Partnership's ability to transfer funds either to the Partnership or among themselves in the form of distributions, loans or advances is generally restricted by these government assistance programs. These restrictions, however, are not expected to impact the Partnership’s ability to meet its cash obligations.


Distributions received from the Local Limited Partnership are accounted for as a reduction of the investment balance until the investment balance has been reduced to zero. Subsequent distributions received are recognized as income. Operating distributions from the Local Limited Partnership in which the Partnership’s investment in the Local Limited Partnership has been reduced to zero, were approximately $4,000 and $5,000 for the nine months ended September 30, 2015 and 2014, respectively.


As of September 30, 2015 and December 31, 2014, the Partnership had cash and cash equivalents of approximately $555,000 and $601,000, respectively. Cash and cash equivalents are on deposit with a financial institution.




9





Results of Operations


At September 30, 2015 and December 31, 2014, the Partnership has investments in one Local Limited Partnership, which owns a housing project that was substantially rented. The Partnership, as a limited partner, does not have a contractual relationship with the Local Limited Partnership or exercise control over the activities and operations, including refinancing or selling decisions of the Local Limited Partnership that would require or allow for consolidation. Accordingly, the Partnership accounts for its investment in the Local Limited Partnership using the equity method. Thus the individual investment is carried at cost plus the Partnership’s share of the Local Limited Partnership’s profits less the Partnership’s share of the Local Limited Partnership’s losses, distributions and impairment charges. However, since the Partnership is not legally liable for the obligations of the Local Limited Partnership, or is not otherwise committed to provide additional support to it, it does not recognize losses once its investment in the Local Limited Partnership reaches zero.  Distributions from the Local Limited Partnership are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. Subsequent distributions received are recognized as income in the statements of operations.  For those investments where the Partnership has determined that the carrying value of its investments approximates the estimated fair value of those investments, the Partnership’s policy is to recognize equity in income of the Local Limited Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Limited Partnerships. Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize. The Partnership recognized no equity in loss of limited partnerships for the nine months ended September 30, 2015 and 2014, as the Partnership’s investment in all Local Limited Partnerships had been reduced to zero prior to January 1, 2012.


At times, advances are made to the Local Limited Partnership. Advances made by the Partnership to the individual Local Limited Partnership are considered part of the Partnership’s investment in limited partnership. Advances made to Local Limited Partnership for which the investment has been reduced to zero are generally charged to expense.  There were no advances made during the nine months ended September 30, 2015 and 2014.


A recurring partnership expense is the annual management fee.  The fee is payable to the General Partner and is calculated at 0.4 percent of the Partnership's original remaining invested assets at the beginning of each year.  The management fee is paid to the General Partner for its continuing management of Partnership affairs.  Management fees were approximately $6,000 for the nine months ended September 30, 2015 and 2014 respectively and approximately $2,000 for the three months ended September 30, 2015 and 2014.


Operating expenses, other than management fees, consist of legal and accounting fees for services rendered to the Partnership and administrative expenses. Legal and accounting fees were approximately $21,000 and $29,000 for the nine months ended September 30, 2015 and 2014, respectively, and approximately $7,000 for the three months ended September 30, 2015 and 2014. The decrease in legal and accounting expense was primarily due to reduced accounting fees. General and administrative expenses were approximately $20,000 and $17,000 for the nine months ended September 30, 2015 and 2014, respectively, and approximately $4,000 and $3,000 for the three months ended September 30, 2015 and 2014. The increase in administrative expense is due to an increase in investor relations expenses.


The Partnership, as a limited partner in the Local Limited Partnerships in which it has invested, is subject to the risks incident to the construction, management, and ownership of improved real estate.  The Partnership’s investments are also subject to adverse general economic conditions, and, accordingly, the status of the national economy, including substantial unemployment, concurrent inflation and changing legislation which could increase vacancy levels, rental payment defaults, and operating expenses, which in turn, could substantially increase the risk of operating losses for the projects.




10





Off-Balance Sheet Arrangements


The Partnership owns limited partnership interests in an unconsolidated Local Limited Partnership, in which the Partnership’s ownership percentage is 99%. However, based on the provisions of the relevant partnership agreement, the Partnership, as a limited partner, does not have control or a contractual relationship with the Local Limited Partnership that would require or allow for consolidation under accounting principles generally accepted in the United States (see “Note 1 – Organization and Summary of Significant Accounting Policies” of the financial statements in “Item 1. Financial Statements”).  There are no lines of credit, side agreements or any other derivative financial instruments between the Local Limited Partnership and the Partnership.  Accordingly the Partnership’s maximum risk of loss related to this unconsolidated Local Limited Partnership is limited to the recorded investments in and receivables from the Local Limited Partnership.  See “Note 2 – Investments in and Advances to Local Limited Partnership” of the financial statements in “Item 1. Financial Statements” for additional information about the Partnership’s investments in unconsolidated Local Limited Partnership.


Other


Bethesda Holdings II, LLC ("Bethesda") and its affiliates owned 140.34 units or 280.68 limited partnership interests in the Partnership representing 2.67% of the outstanding limited partnership interests in the Partnership at September 30, 2015. It is possible that Bethesda Holdings II, LLC (“Bethesda”) or its affiliates will acquire additional limited partnership interests in the Partnership, either through private purchases or tender offers.  Pursuant to the Partnership Agreement, unitholders holding a majority of the limited partnership interests are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the General Partner. A “Unit” consists of two limited partnership interests. Additionally, Bethesda has entered into a management agreement with a holder of 870 Units or 1,740 limited partnership interests in the Partnership representing 16.56% of the outstanding limited partnership interests in the Partnership as of September 30, 2015. Pursuant to such management agreement, Bethesda manages the business of such holder in exchange for a management fee, part of which includes all payments received by such holder with respect to such holder’s ownership of limited partnership interests in the Partnership.  Although the General Partner owes fiduciary duties to the limited partners of the Partnership, the General Partner also owes fiduciary duties to Bethesda as its sole stockholder. As a result, the duties of the General Partner, as general partner, to the Partnership and its limited partners may come into conflict with the duties of the General Partner to Bethesda as its sole stockholder.


Variable Interest Entities


The Partnership consolidates any variable interest entities in which the Partnership holds a variable interest and is the primary beneficiary. Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The primary beneficiary of a VIE is generally the entity that has (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.


In determining whether it is the primary beneficiary of a VIE, the Partnership considers qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of the Partnership’s investment; the obligation or likelihood for the Partnership or other investors to provide financial support; and the similarity with and significance to the business activities of the Partnership and the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of real estate held by this VIE and general market conditions.




11




At September 30, 2015 and December 31, 2014, the Partnership held variable interests in one VIE for which the Partnership was not the primary beneficiary.  The Partnership has concluded, based on its qualitative consideration of the partnership agreement, the partnership structure and the role of the general partner in the Local Limited Partnerships, that the general partner of the Local Limited Partnership is the primary beneficiary of the respective Local Limited Partnership. In making this determination, the Partnership considered the following factors:

 

·

the general partner conducts and manages the business of the Local Limited Partnership;

·

the general partner has the responsibility for and sole discretion over selecting a property management agent for the Local Limited Partnerships’ underlying real estate properties;

·

the general partner is responsible for approving operating and capital budgets for the properties owned by the Local Limited Partnerships;

·

the general partner is obligated to fund any recourse obligations of the Local Limited Partnerships;

·

the general partner is authorized to borrow funds on behalf of the Local Limited Partnership; and

·

the Partnership, as a limited partner in the Local Limited Partnership, does not have the ability to direct or otherwise significantly influence the activities of the Local Limited Partnership that most significantly impact such entities’ economic performance.


The one VIE at September 30, 2015 consisted of a Local Limited Partnership that was directly engaged in the ownership and management of one apartment property with a total of 48 units.  The Partnership is involved with the VIE as a non-controlling limited partner equity holder. The Partnership’s maximum exposure to loss as a result of its involvement with the unconsolidated VIE is limited to the Partnership’s recorded investment in and receivables from this VIE, which was zero at both September 30, 2015 and December 31, 2014. The Partnership may be subject to additional losses to the extent of any financial support that the Partnership voluntarily provides in the future.


Critical Accounting Policies and Estimates


The financial statements are prepared in accordance with accounting principles generally accepted in the United States which require the Partnership to make estimates and assumptions. Judgments and assessments of uncertainties are required in applying the Partnership’s accounting policies in many areas. The Partnership believes that of its critical accounting policies, the following may involve a higher degree of judgment and complexity.


Method of Accounting for Investments in Local Limited Partnership


The Partnership, as a limited partner, does not have a contractual relationship with the Local Limited Partnership or exercise control over the activities and operations, including refinancing or selling decisions, of the Local Limited Partnership that would require or allow for consolidation. Accordingly, the Partnership accounts for its investment in the Local Limited Partnership using the equity method. The Partnership is allocated profits and losses of the Local Limited Partnership based upon its ownership percentage (99%). Distributions of surplus cash from operations from the Local Limited Partnership is restricted by the Local Limited Partnership's Regulatory Agreements with the United States Department of Housing and Urban Development (“HUD”) and/or are restricted by the terms of the mortgages encumbering the Project. These restrictions limit the distribution to a portion, generally less than 10%, of the initial invested capital. The excess surplus cash is deposited into a residual receipts reserve, of which the ultimate realization by the Partnership is uncertain as HUD frequently retains it upon sale or dissolution of the Local Limited Partnership. The Partnership is allocated profits and losses and receives distributions from refinancings and sales in accordance with the Local Limited Partnership's partnership agreement. This agreement limits the Partnership’s distributions to an amount substantially less than its ownership percentage in the Local Limited Partnership.

 



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The investment is carried at cost plus the Partnership’s share of the Local Limited Partnership’s profits less the Partnership’s share of the Local Limited Partnership’s losses, distributions and impairment charges. The Partnership is not legally liable for the obligations of the Local Limited Partnerships and is not otherwise committed to provide additional support to it. Therefore, it does not recognize losses once its investment in the Local Limited Partnership reaches zero.  Distributions from the Local Limited Partnership are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. When the investment balance has been reduced to zero, subsequent distributions received are recognized as income in the statements of operations.


For those investments where the Partnership has determined that the carrying value of its investments approximates the estimated fair value of those investments, the Partnership’s policy is to recognize equity in income of the Local Limited Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Limited Partnerships.  Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize.


ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not applicable.


ITEM 4.

CONTROLS AND PROCEDURES


(a)

Disclosure Controls and Procedures.


The Partnership’s management, with the participation of the Senior Managing Director and Senior VP of Finance/CFO of Bethesda, who are the equivalent of the Partnership’s principal executive officer and principal financial officer, respectively, has evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation the Senior Managing Director and VP of Finance/CFO of Bethesda, who are the equivalent of the Partnership’s principal executive officer and principal financial officer, respectively, have concluded that, as of the end of such period, the Partnership’s disclosure controls and procedures are effective.


(b)

Changes in Internal Control Over Financial Reporting.


There has been no change in the Partnership’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.




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PART II - OTHER INFORMATION



ITEM 5.

EXHIBITS


See Exhibit Index.







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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.



 

REAL ESTATE ASSOCIATES LIMITED II

 

 

 

By:

National Partnership Investments, LLC

 

      General Partner

 

 

Date: November 13, 2015

By:   /s/Brian Flaherty

 

      Brian Flaherty

 

      Title:  Senior Managing Director

 

 

Date: November 13, 2015

By:   /s/Joseph Dryden

 

      Joseph Dryden

 

      Title:  Senior V.P. of Finance/CFO






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REAL ESTATE ASSOCIATES LIMITED II

EXHIBIT INDEX




Exhibit No.

Description of Exhibit

 

 

3.1

Articles of incorporation and bylaws:  The Registrant is not incorporated. The Partnership Agreement was filed with Form S-11 #266171 which is hereby incorporated by reference.

 

 

3.2

Amendments to Restated Certificate and Agreement of Limited Partnership. Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 24, 2005.

 

 

3.3

Restated Certificate and Agreement of Limited Partnership (complete text as amended).  Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 24, 2005.

 

 

31.1

Certification of equivalent of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2

Certification of equivalent of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1

Certification of equivalent of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101

XBRL (Extensible Business Reporting Language). The following materials from Real Estate Associates Limited II’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015, formatted in XBRL: (i) balance sheets, (ii) statements of operations, (iii) statement of changes in partners’ capital (deficiency), (iv) statements of cash flows, and (v) notes to financial statements    (1)

 

 

(1)

As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.









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